LICENSING IN JAPAN:
CURRENT ISSUES 1997
Richard H. Lilley, Jr.(1)
I. INTRODUCTION
II. LEGAL FRAMEWORK
A. Law
1. Tax Law
a. Registration and License Tax
b. Licensee Fee Payments
c. Increase in R&D Expenses
d. R&D of Basic Technologies
e. Effective Corporate Tax Rate
f. Foreign Tax Credit
2. Foreign Exchange and Foreign Trade Control Law
a. Current FEFTC Law
b. 1998 Amendment to Law
3. Anti-Monopoly Law
4. Holding companies in Japan
a. New Law Amendment Approved
b. Anti-Trust Considerations
B. Regulatory Guidelines
1. Fair Trade Commission (FTC) Guidelines
a. Patents & Licensing, Guidelines for the
Regulation of Unfair Trade Practices (1989)
b. Joint Research & Development, Anti-Monopoly Act
Guidelines (1993)
c. General Comments on Guidelines
III. RECENT LAW DEVELOPMENTS
A. Civil Procedure Reform
B. Patent Law
1. 1994 Amendments of Patent Law
a. Offer of Sale
b. Compulsory Licensing
2. JPO Patent Examination Guidelines
a. Computer Related Inventions
b. Guidelines for Biotechnology Inventions
C. Trademark Law Amendment
D. Copyright Law Amendment Proposed
E. Design Law to be Amended in 1998
IV. JUDICIAL DEVELOPMENTS
A. Parallel Import Case
B. Doctrine of Equivalents in Japan
V. ARBITRATION IN JAPAN
A. Background
B. Foreign Lawyers Now Admitted to Arbitrations
C. Arbitration IP Dispute Organization Proposed
VI. TECHNOLOGY TRANSFER INITIATIVES
A. Government Researchers to Own Portion of Patent Right
B. JPO to Encourage Use of Dormant Patents
C. Industry Technology Transfer Organization Planned
VII. ROYALTY RATE CONSIDERATIONS
A. General Observations
B. Japanese Industry IP Published Rates
C. Japanese Government (JPO) Published Rates
D. Royalty Payment Composition May Change
E. Increased Patent Damage Awards Being Considered
VIII. CONCLUSION
I. INTRODUCTION
This paper is intended to introduce various recent developments in Japan that will have an impact on the licensing practices of both the Japanese domestic and U.S. licensing professionals.
There have been many changes in the intellectual property (IP) laws of Japan over the past several years. The changes ranged in scope from the monumental 1994 Patent Law Amendments to new Japanese government-funded IP ownership policy initiatives, both of which represent major structural changes in the intellectual property landscape of Japan. Accordingly, the impact on U.S.-Japan licensing transactions should be reconsidered, in light of these recent changes.
In spite of all the political and economic discussion in Washington, D.C. regarding the $50 billion trade deficit between the U.S. and Japan, there is a fact that should be held in sharp perspective by U.S. IP licensing practitioners. Japan remains a net importer of technology from overseas. From 1986 to 1995 Japan imported more than $76 billion worth of technology, while at the same time exporting only slightly more than $35 billion worth of technology. Accordingly, the opportunities for licensing between the U.S. and Japan remain unparalleled in scope.(2)
Further, from a national policy perspective, the Japanese government has begun to adhere to an unprecedented course of encouraged innovation. In a recently published report by a Japanese Patent Office (JPO)-sponsored academic-industry commission, a sweeping combination of domestic and international efforts has been proposed to strengthen the exploitation and protection of IP within and outside of Japan.(3)
Additionally, current licensing priorities in Japan appear to be shifting away from its historic means of transferring technology, and the more recent means of IP dispute resolution, toward a mechanism for directly contributing to the profitability of Japanese corporations.
In the short-term, Japanese companies are, in fact, increasingly seeking to use the licensing of their IP assets as a revenue generating mechanism, notwithstanding the fact that Japan remains a net-importer of technology. However, the long-term goal appears to involve using licensable technology to raise the industrial standards of the world's developing countries, particularly in Asia, thereby providing a broader technological base to use the technologies of the future.(4) This two pronged effort virtually guarantees an increasingly strategic, if not pragmatic, licensing approach by Japanese licensors in coordination with the government's policies of encouraging the increased education, appreciation and stricter enforcement of international and domestic IP rights.
Accordingly, the Ministry of International Trade and Industry (MITI) has taken the lead on the long-term aspects through a range of specific initiatives and highly focused policies. Domestically, the government is committed to increasing in the ratio of collected royalty to research and development (R&D) expenditure. This ratio has generally remained below .1% for universities and government R&D institutes.(5) Internationally, the Japanese government has begun implementing its policy of assisting developing countries in implementing procedural and substantive IP reforms.(6)
Thus, based upon the reality of a modern technology interdependent world which has prompted the recent IP law amendments and policy initiatives, Japan appears to have entered a period of expanded political support and legal protection for domestic and international IP.
II. LEGAL FRAMEWORK
A. Law
1. Tax Law(7)
a. Registration and License Tax
Registration fees and license taxes are required for the official governmental recordation of the creation, acquisition or transfer of property rights. Payment of a license tax for acquisitions by merger (.6%) and sale (5.0%) is based upon the total value of the property involved. The payment of a recordation fee for the incorporation of a company is based on the capital invested: (.7%) for a stock company or a single recordation fee ($500) for a non-stock company.
b. Licensee Fee Payments
Japanese Tax Law imposes a 10% withholding tax on license fees and payments under joint venture license agreements. This includes dividend payments of joint venture stock to an overseas owner of such stock.
c. Increase in R&D Expenses
When current expenses exceed the largest expenditure over the last 30 years, 20% of such expense may be deducted from the corporate tax. The maximum deductible amount cannot exceed 10% of the total corporate tax liability.
d. R&D of Basic Technologies
The acquisition of certain specified basic technologies has a tax deductibility of 5%.(8) However, this tax credit deduction when combined with the "increase in R&D expense" tax cannot exceed a total of 13% of the total corporate tax liability.
e. Effective Corporate Tax Rate
More generally, companies with paid-in capital of more than about $1 million will have an effective tax rate in Japan of approximately 58%. Specifically, the effective rate comprises a 37% corporate tax (national), a 13% business tax (prefectural) and an 8% inhabitant tax (municipality).
f. Foreign Tax Credit
Foreign taxes levied for corporate, municipal and withholding are creditable on a worldwide aggregate basis. The rate for the first two business years is about 58% of the total tax liability, followed by an increase to about 67%. Such a tax credit is available for Japan domiciled corporations only. Additionally, Japanese domestic corporations owning not less than 25% voting shares or paid-in capital of a foreign subsidiary can receive a corresponding tax credit on the corporation tax paid on any dividends received.
2. Foreign Exchange and Foreign Trade Control
(FEFTC) Law
a. Current FEFTC Law
Joint venture investors are generally only required to file a notification report with the Bank of Japan after the conclusion of such an agreement. Although, prior approval is no longer required of licensing transactions, notification must be made within 15 days of conclusion of the agreement. However, certain technologies, notably, aircraft, weapons, explosives, atomic and space, do require three month prior notification, based upon the current FEFTC Law enacted in 1992.
Of most significant importance, there are almost no controls on remittances received overseas which are governed by licensing agreements. Thus, there are effectively no restrictions on the receipt by the foreign partner of licensee fees, royalties, dividends, proceeds of sales of shares, etc. Currently, however, such remittances are regulated in that those sent from Japan to the U.S. must be sent by way of an authorized foreign exchange institution domiciled in Japan, such as a bank. In terms of transfers from the U.S. to Japan, such payments must also be directly deposited in an authorized institution in Japan. Newly passed FEFTC law amendments will remove such requirements.
b. 1998 Amendment to Law
On May 16, 1997, the Japanese Diet approved a revised currency control measure which will allow both individuals and ordinary firms to engage in foreign currency transactions after April 1, 1998.(9) At present, only authorized financial institutions, such as banks, can engage in such transactions. Hotels can also perform very limited direct cash exchanges. Therefore, under the new scheme all types of corporations will be able to avoid paying foreign currency exchange transactions fees to banks.
Such licensing or joint venture arrangements may become increasingly complex in order to take advantage of these changes. The actual structure of licensing payment arrangements may involve direct payment within the U.S., which is currently illegal. As stated previously, U.S. to Japan remittances must be deposited directly within Japan. Accordingly, payment schemes directly involving Japanese subsidiaries resident in the U.S. may now take place. Foreign currency settlements may occur within corporate conglomerates, thus involving commercially affiliated third-party companies not directly involved in the licensing transaction.
In addition, the U.S.-based purchase and transfer of both wholly-owned Japanese company and U.S.-Japan joint venture stock of a Japan domiciled company will now take place, as such transactions will be legal. Corporations may increasingly begin to handle foreign exchange transactions by themselves which could lead to highly innovative payment and financing arrangements. Although licensing payment transactions may become more complex, they may become effectively more logical and efficient as the foreign exchange regulatory barriers and transaction costs are removed.
In the future, we can expect increasing governmental awareness of the need for regulatory foreign exchange reform. As the Japanese government seeks to maintain the competitiveness of its industries, it must increasingly allow them to structure licensing and joint venture agreements to maximize the return on expended capital and the resulting revenues generated.
3. Anti-Monopoly Law
Japanese Anti-Monopoly Law (AML), effective June 1997, no longer requires the submission of either joint venture or exclusive license agreements to the Japanese Fair Trade Commission (JFTC).(10) Nonexclusive licenses continue to not be required to be reported.
4. Holding Companies in Japan
a. New Law Amendment Approved
Japan is currently pursuing its goal of a British-styled "Big Bang", which occurred a decade ago under former Prime Minister Margaret Thatcher. Ostensibly, the aim is to substantially deregulate the Japanese financial markets by the year 2001, thereby expanding the range of activities in which banks, securities companies and insurance companies can engage.(11) Currently, each of these types of companies can only engage in each other's activities to a limited extent and only through subsidiaries.(12) However, the concept of the holding company has begun receiving prominent discussion as an element of Japanese domestic financial reform.
The Japanese Diet recently approved amendments to the AML which will remove the ban on the establishment of holding companies in Japan.(13) These companies came into existence during the Meiji Era (1868-1912), but were prohibited after World War II (WWII) by the Allied forces seeking to liberalize and deconcentrate industrial power centers.
Under the Japanese AML, a holding company is defined as one whose primary function is to control the commercial activities of a company by means of stockholding and partnership share holding. Under the current AML holding companies are totally banned, along with stockholding by large major corporations.(14)
Holding companies function to oversee the management and operations of their constituent companies by effectively exercising control over their capital assets in order to maximize the return on such assets. The sensitivity and appreciation of intellectual property as profit generating assets are growing, particularly as such issues as security interests in IP rights become more settled. Holding companies will become increasingly interested in the IP assets acquired and transferred through the licensing activities of the companies whose stock they own. Thus, licensing negotiations may come under much more scrutiny as holding companies may require additional justification from their member companies when acquiring technology and demand more favorable terms to assure a profitable return.
b. Anti-Trust Considerations
Japanese AML prohibits a company from acquiring another company's stock if it would cause a substantial restraint of competition.(15) The law specifically restricts both domestic and foreign financial institution ownership of outstanding shares.(16) Banks are limited to no more than 5%, while insurance companies have a limit of 10%. By their nature, holding companies will probably seek greater ownership shares of companies.
Therefore, holding firms could exercise greater influence over the strategic planning and operations of companies, potentially leading to de facto ownership, and thus control. Accordingly, the new law prohibits the establishment of holding companies which could exercise "[e]xcessive control of specific markets."(17) However, it has been said that the JFTC would only enforce the new AML in the event that the nation's six largest conglomerates (keiretsu) were under a single holding company.(18) Thus, future Japanese holding companies are not likely to be viewed inherently with suspicion or heightened scrutiny from the viewpoint of antitrust law.
B. Regulatory Guidelines
1. Fair Trade Commission (FTC) Guidelines
a. Patents & Licensing, Guidelines for the
Regulation of Unfair Trade Practices
(1989)(19)
The following is a summary listing of several important restrictions which may be considered unfair trade practices for licensing arrangements:
1) Restrictions on handling competitive goods.
2) Restrictions on selling patented or licensed
goods.
3) Restrictions on the export of patented or
licensed goods.
4) Restrictions on procuring raw material or
components.
5) Restrictions on use of licensed technology or a
request for paying for use after expiration of
patent.
6) Restrictions on resale prices or sale prices.
7) Requests for granting an exclusive license or
assigning the right to an improved invention.
8) Requests for informing of new knowledge or
granting a nonexclusive license on an improved
invention.
9) Requests for packaged license.
b. Joint Research & Development, Anti-Monopoly
Act Guidelines (1993)
In Japan there are several prohibitions on restrictive practices which generally do not have U.S. counterparts. The following is a summary listing of several important subjects likely to be considered unfair trade practices:
1) Restrictions on the diversion of the
technologies.(20)
2) Restrictions on introducing similar technology
during the implementation of the joint R&D.(21)
3) Restrictions on closely-related field of R&D.(22)
4) Restrictions on same field of R&D after completion of the joint R&D.(23)
5) Restrictions on use of existing technologies.
6) Restrictions on use of competing products.
7) Restrictions on future R&D on joint results.
8) Obligations to transfer improvement inventions or
to limit transfer of such to other participants.
9) Restrictions on selling resulting products.(24)
10) Restrictions on supply sources or quality
standards.(25)
c. General Comments on Guidelines
It is difficult to consider hypothetical situations because the proper application of the guidelines can be intensely fact specific. However, most of the above identified licensing rules are directly analogous to the U.S. antitrust concepts and principles and can be accordingly examined in view of U.S. practice. In contrast, the joint R&D rules identified tend to have no direct U.S. corollary. Thus, a "reasonable" standard should be generally used.
It should be noted that Japan has had an unparalleled post WWII governmental industrial policy that encouraged stable but concentrated centers of industrial decision making, if not market power. Although not characterized as monopolistic, this industrial structure and associated antitrust regulatory history differs from that of the U.S. and can only appropriately be understood by examining governmental industrial policy concerning the development and managed growth of a specific industry within a given technology sphere.
In general, both of these regulatory guidelines are viewed within Japanese industry as being helpful in providing relatively identifiable boundaries of acceptable licensing practices.
III. RECENT LAW DEVELOPMENTS
A. Civil Procedure Reform
In June 1996, the Japanese Code of Civil Procedure was amended, ushering in the first major changes in 70 years. The changes are designed to produce administrative as well as litigation efficiencies. Such changes include shorter trial time lines and, maybe most significantly, increased scope of document production (discovery).
More specifically, in terms of document production, under the old Japanese Civil Law, inclusive of Patent Law, the litigating parties are generally not required to produce documentation if it is determined by the court that "[t]he person possessing the documents have a legitimate reason for refusing to produce them."(26) The new law still maintains the "legitimate reasons" requirement, but the available categories of documents which are producible, i.e., discoverable, are expanded. In addition, broader general subject-matter document requests are now permissible, as opposed to the previously required requests of extremely high specificity. In general, such specific identifying information is simply unavailable to anyone outside of the specific organization or company in question.(27)
As a general comment on document production in Japan, it should be noted that in most cases, the types of documents sought in the U.S. are routinely determined to be too sensitive for a court ordered disclosure due to their proprietary nature. Moreover, it has been very difficult to convince a court to prevent public disclosure of any of the subject matter once it has been presented during a trial. All civil trials are open to the public. Inherently, the civil trial may lead to almost assured disclosure of company sensitive information. Therefore, the actual implementation and development of this area of civil procedure should be monitored closely as the substantive benefits of litigating licensing disputes could be markedly increased.(28)
B. Patent Law
1. 1994 Amendments of Patent Law
a. Offer of Sale
Of significance to potential licensors, the 1994 changes allow the use of an "offer for sale" as a valid cause of action for infringement. This was the result of the expansion of the definition of the term "working" of an invention to encompass offers to transfer or lend, including sale.(29) This change affects all patents in force as of July 1995.(30)
This change, when combined with the expected broadening of the "discovery" civil procedures, could facilitate the development and presentation of more persuasive legal arguments to support findings of infringement. Thus, Japan has taken an additional step toward increasing the value of licensed patented subject matter by heightening the ability of the licensor to prevent direct and ancillary infringing activity by competitors.
b. Compulsory Licensing
There is now more restricted use of compulsory licensing in Japan.(31) In Japan, the JPO has had the power to grant a compulsory license to a third party to utilize a basic patented invention.(32) In effect, the JPO must now first wait until an attendant refusal to license the basic patent is determined to be anti-competitive by either administrative or judicial proceedings or in the event the patent owner refuses to allow public noncommercial use.
Interestingly, since the inception of the modern Patent Law no compulsory licenses have been ordered. However, the extent to which the existence of such JPO power contributed to the conclusion of private licensing arrangements is not clear.(33)
2. JPO Patent Examination Guidelines
a. Computer Related Inventions
Presented in August 1996 in a draft form and finalized in February 1997, the new guidelines give a more expansive interpretation of the statutory requirements for patentability of software-related patents. Moreover, the guidelines now allow the media itself, e.g., diskette, CD-ROM, etc., to be patented. Thus, the scope of licensable subject matter supported by Japanese patents has been increased. By making the coverage of a patent available, such matters as valuation of a licensing fee become more definable. Also, less reliance on trade secrets in the computer-related fields may be observed.
b. Guidelines for Biotechnology Inventions
Under guidelines issued by the JPO in February 1997, biotechnology patent claims will be available with a broader scope of protection beyond the exact claimed sequences. Also, claims for products can now be accepted beyond their structural features, e.g., function, use or properties. Thus, patents drawn to claims such of the "product-by-process-type", so widely used in the U.S., will now become allowable. Additionally, claim language which does not even specify the sequence is now allowable. Such a shift in Japanese examination policy promotes a broader range of protectable and ostensibly licensable subject matter beyond that which previously existed in Japan.(34)
C. Trademark Law Amendment
In June 1996 the Japanese Trademark Law was amended to take effect in April 1997. The major change includes allowing more than one International Classification to be covered by a single trademark. Formal matters, renewal, assignment and expedited registration are also addressed by the new law.(35)
Of particular note to licensing professionals is the use of "consent" by a trademark owner regarding a conflicting application undergoing examination. The JPO will not accept such "consent" allowing an applicant to be awarded a trademark registration for a mark that conflicts with an existing mark. Accordingly, the applicant must now assign the trademark application to the trademark owner who can then have the mark registered. Following registration, the owner can then assign it back to the original applicant under a separate agreement between the two parties.
D. Copyright Law Amendment Proposed
It is expected that the current Copyright Law, previously amended in 1996, will be amended again to extend protection for the neighboring rights of musical works to at least 50 years, as is the case in the U.S. (author's lifetime plus 50 years for works created on or after January 1, 1928) and other countries. Currently, Japanese law only extends such protection for musical works produced after 1971. Thus, an entire body of musical works (1948-1970) will soon be available to be licensed under Japanese law by U.S. copyright holders.
As an example, "karaoke" machines which play digital recordings have become an intrinsic part of business and social life in Japan. These machines exist in both homes and restaurant/entertainment industry locations. Each machine is capable of storing hundreds and even thousands of musical selections. Although not nearly the most popular, U.S. music represents a niche category that exists on almost all machines, particularly hit songs from the 1950's and 1960's, which have ostensibly maintained a high value.
This legal change will inevitably provide a framework to negotiate additional royalty rate payments while at the same time barring the continued unrestricted use of such works.(36)
E. Design Law to be Amended in 1998
As of August 1996, the JPO began seeking public comment on enlarging the scope of protectable subject matter. The expanded coverage may be extended to cover icons, symbol marks and integral parts of articles.(37)
IV. JUDICIAL DEVELOPMENTS
A. Parallel Import Case
The Japanese Supreme Court, on July 1, 1997, upheld the Tokyo High Court's 1995 ruling in favor of the parallel importation of articles first patented in Germany and subsequently imported into Japan and sold by a party other than the parallel patent holder or licensee.(38)
There has been some fear, both internal and external to Japan, that if the Tokyo High Court decision was affirmed, it would signal the beginning of an era of unbridled importation of parallel patented goods into Japan from overseas. This general concern may or may not be well founded. Under either scenario, this case will require the reconsideration of both Japanese domestic as well as overseas licensing arrangements.
Some licensing activities, such as those concerning pharmaceuticals, may become less attractive. However, the Japanese Supreme Court has enumerated an exception to the import and resale of parallel patented products.(39) The Court will apparently allow the patent holder to bring a cause of action on the basis of patent infringement if the products are clearly labeled with a "regional" exclusion from sale in Japan. The practical implication of such labeling is far from clear and could begin to generate even more debate and anxiety among patent owners and licensing professionals alike.
In the meantime, as the implementation of the Japanese Supreme Court ruling evolves, overseas licensing agreements may need to include additional provisions which protect the interests of the parallel patent holder, as well as the domestic Japanese licensee. As for now, it seems clear that the Japanese courts will begin to examine and link the legal principles associated with contract law during their evaluation of a parallel patent owner's retention of his right to seek a judgement of patent infringement. In any event, close attention must also be given to keep such licensing agreements far afield of any domestic or foreign antitrust or anti-competition laws.(40)
B. Doctrine of Equivalents in Japan
In the pharmaceutical and biotechnology area, the Osaka High Court, in March 1996, issued its ruling charging infringement by Sumitomo Pharmaceuticals of a Genentech biotechnology patent.(41) In an unprecedented move, a Japanese court had, for the first time, explicitly used the term "equivalent" to characterize the product differences. Although, in a slightly older case in the mechanical area, ("Ball-Spline case"), the Tokyo High Court has previously ruled in favor of infringement by utilizing broad claim interpretation beyond the mere literal meaning, i.e., "broad and nonliteral".(42) Even though, the term equivalent was not recited, the court clearly enunciated a test utilizing substantial equivalence of "function and effect".
Notably, the Patent Law was also amended to add a measure of consistency in claim interpretation. The law now requires the examination of the specification itself to determine the meaning of terms used in the claims. Historically, Japan has avoided any systematic examination of the specification to determine the meaning of claim terms. This often resulted in seemingly contradictory determinations throughout Japanese patent case law, thus contributing to a growing uncertainty not only among foreign petitioners but also for potential licensors and licensees in their respective abilities to perform reliable risk analysis.
V. ARBITRATION IN JAPAN
A. Background(43)
Currently in Japan, the most relevant commercial arbitration institution is the Japan Commercial Arbitration Association, Inc. (Kokusai Shoji Chusai Kyokai). The other two arbitration groups deal with maritime and construction subject matter. Under the Japanese Civil Law, only matters which can be presented to a court of law can be arbitrated.(44) However, matters that are not subject to a compromise are not arbitrable, such as the technical scope of a patent. As an example, the scope of a patent must be referred to the JPO or a court for determination.(45)
It should be noted that overseas arbitration awards can be directly enforced in Japan without obtaining a judicial order under the Japan-American Trade Arbitration Agreement (1952).(46)
B. Foreign Lawyers Now Admitted to Arbitrations
In September 1996, the Foreign Lawyers Law was amended to allow, for the first time, foreign lawyers to represent clients in Japan during international arbitration proceedings.(47) Hopefully, this will lead to greater international accessibility and potentially increased harmonization of arbitration proceedings in Japan. The new opportunity for foreign interests to directly articulate and participate in resolving their Japan-based conflicts may well improve both legal and business advocacy within the Japanese domestic market.
C. Arbitration IP Dispute Organization Proposed
The Japan Patent Attorneys Association (JPAA) in conjunction with the Japan Federation of Bar Associations (Nichibenren) announced in a June 1996 joint statement that they would establish an organization dedicated to IP disputes. This is a result of the widely understood and longstanding desire within both the business and legal community to address the inherently long process of legal dispute resolution in Japan.
Not many IP disputes are presently settled using the formal arbitration institutions in Japan. However, an institution with a specialized competency in IP matter would have several attractive aspects.
First, it has been historically difficult, if not impossible, to maintain confidentiality of trade secret information in a formal civil proceeding in Japan.(48) As Japan currently has no "protective order" under its civil law, it is important to define the scope of the licensed technology. The courts are seen as public forums. Thus, the subject matter disclosed therein should remain accessible to the public, including market competitors. Accordingly, arbitration and dispute resolution clauses may provide the most practical and timely means of recourse in Japan upon the onset of a licensing dispute.
Second, the judicial resolution inefficiencies in the Japanese civil court system are internationally well known, sometimes requiring several years for an initial judicial determination.(49) Thus, an IP arbitration tribunal may have the ability to establish docketing and hearing procedures aimed at expediting final resolution of IP disputes.
Thus, the new amended law, in conjunction with a future IP dispute organization, could lead to the ideal situation in which U.S. legal counsel could directly arbitrate licensing disputes in Japan.
VI. TECHNOLOGY TRANSFER INITIATIVES
The Japanese government appears ready to initiate a new policy of increasing the exploitation of IP rights by academia, government and private industry.(50) This will be accomplished through a redefinition of government/inventor ownership rights in conjunction with an aggressive liaison with private industry.
A. Government Researchers to Own Portion of Patent
Right
In December 1996, the Agency of Industrial Science and Technology (AIST) announced its new policy to allow researchers at its government facilities to now own 50% of various IP rights secured by such institutions. Thus, the researchers may receive half of the royalties generated from licensing activities. Astonishingly, in an uncharacteristic effort by the Japanese government to foster an entrepreneurial spirit, these same researchers may establish independent corporations.
These programs could become a "hotbed" of cooperative licensing activity for U.S. academic institutions, as many are well versed in a cross-section of Japan-based research. Japanese government researchers routinely attend international research conferences. Additionally, many Japanese government researchers hold advanced scientific degrees from U.S. universities. Moreover, there are already extensive opportunities for U.S. university-affiliated and independent researchers to work in numerous Japanese government research facilities in Japan, such as those housed at the world renowned Tsukuba Research Center, just outside of Tokyo, Japan. The high degree of technical interaction which presently occurs between U.S. universities and Japanese government researchers provides an excellent basis for collaborative research, product development and licensing.
B. JPO to Encourage Use of Dormant Patents
The JPO announced in April 1997 that it would seek to encourage the trading of unused patents, which are estimated at more than 450,000. Of this total, 67% appear to be available for licensing from large corporations, according to the JPO. Such measures will include Internet access for application materials, related technologies and licensing terms, in both Japanese and English. Also, "patent fairs" will be held to advertise and facilitate potential partnerships. Finally, an advisory service, regionally staffed with officials trained to assist interested parties, at the local level will be provided across Japan.(51)
Thus, readily accessible information on licensable subject-matter, in addition to an identification of those seeking licensing arrangements, will be available to both domestic and international business and research communities. It may now seem improbable, but in the future there may be U.S.-Japan trade disputes relating to foreign access to licensors, e.g., Japanese government researchers, as is the case in recent trade disputes involving U.S. access to the Japanese government procurement market. Depending on how this new initiative is implemented, particularly regarding explicit restrictions on foreign participation, this initiative will hopefully become easier to monitor as time goes on.
C. Industry Technology Transfer Organization Planned
An industry panel of a consortium of at least 50 Japanese corporations assigned from a broad spectrum of industries has been established to study the formation of a "patent trading" firm. The firm will be initially capitalized at more than $8 million (one billion Yen). As of today, no country has ever established such an industry nonspecific corporation which would, in fact, receive direct guidance from a cross-section of the country's industries. Such an organization may have the capability to produce industry coordinated licensing strategies. However, less ominous and more encouraging, this organization could provide an easily identifiable point of access from which potential licensing negotiations may be entered.
Accordingly, over the next decade, these technology transfer initiatives merit close monitoring by U.S. licensing practitioners as the range of licensable technology increases. They may also provide the crucial structural elements upon which a framework of a 21st Century "capital market" of ideas could be created in Japan. Such a system could facilitate the kind of exchange of information that may encourage IP owners to "seek" the highest rate of return for their inventions.
VII. ROYALTY RATE CONSIDERATIONS
A. General Observations
As a first step in successful licensing negotiations, some believe that it is critical to develop the ability to determine what royalty rate the other side needs in order to become profitable. Others believe that the marketplace for a given technology or product is the principal determinant of the final royalty rate. Accordingly, in Japan there have been generally available rates for typical industry specific royalty rate negotiations which may be helpful in determining an acceptable rate for the licensee. Increasingly, however, the final negotiated rate may be becoming less determinative of the value of what is ultimately exchanged.
B. Japanese Industry IP Published Rates
Generally, if there is a 10% profit, then a reasonable royalty rate will range from 3% to 5% or may be lower, depending on the significance of the inventive step involved, particularly for the mechanical and electronic fields. However, in the chemical industries, accompanied by higher profit margins as a result of the requisite market exclusivity, higher royalty rate payments have become common.(52)
C. Japanese Government (JPO) Published Rates
In view of the recent government-sponsored technology transfer initiative proposals, it should be noted that the government (JPO) has previously announced guidance on reasonable patent royalty rates. The basic rate should be 2-4% of the selling price.(53) In addition to the basic rate determination, other considerations, such as the technology used, required investment prior to commercialization, potential for industrial growth, etc., may increase or decrease the actual negotiated rate.
D. Royalty Payment Composition May Change
There is an increasing trend to have the royalty payment consist of several elements. In the past, the amount was strictly a dollar amount. However, increasingly the royalty payment may consist of money, technology transfer and IP rights (assignment, grant back, improvements, etc.). This will probably be a more pronounced trend in rapidly advancing areas of technology, as in biotechnology. In such fields of technology, it may be difficult, if not impossible, to accurately determine a money payment. However, such hybrid royalty payments may provide a flexible "appropriate" means of ensuring a return on investment commensurate with a potential technological breakthrough.
Also, grant-back provisions involving future ownership or use of inventions made by the licensee have become increasingly utilized. Therefore, it will become more important to predefine the scope of improvements which are to be covered. However, caution must be exercised not to contravene the Japanese AML.(54)
These types of complex royalty payment schemes may have added advantages. Current licensing arrangements may obviously provide a strategic edge within one's own domestic or international markets. However, regarding Japan in particular, know-how related exchanges also facilitate future joint activity by providing more integrated business and personnel relationships which establish an invaluable foundation of mutual trust and reliability.
E. Increased Patent Damage Awards Being Considered
In April of this year the JPO announced that it intends to submit a bill to the Japanese Diet in 1998 which would allow for larger damage awards in patent infringement trials. At present, the number of IP related lawsuits are increasing at a higher rate than other civil lawsuits. This is in stark contrast to much lower figures reported in the early 1990's.(55) Currently, patent holders are prohibited from claiming damages in excess of lost profits, accounting for 43% of all awards, or a reasonable royalty payment, accounting for 55% of all damage awards, with the remaining 2% falling into awards based upon other case-specific considerations.(56)
In any event, if such changes are legislated, they are not expected to approach anything like the U.S. "treble" damages provided for willful infringement. Thus, the actual figure above the currently provided for "reasonable" royalty (or lost profits) award will probably be some factor significantly lower than three. Notably, "punitive" damage awards currently contravene Japanese "public policy" of maintaining social order, e.g., harmony among all involved. Therefore, these types of damages are currently outside the scope and function of civil law, i.e., regulating and compensating, not punishing. Thus, punitive damages appear quite unprecedented in Japanese jurisprudence.
There is widespread speculation in Japan that such a change in damages would result in an increase in royalty rates demanded by licensors during adversarial licensing negotiations, thereby increasing the power of licensors vis-a-vis the threat of pursuing higher infringement damages. However, others believe that such legislated causes of action may have a negligible effect on licensing negotiations as potential judicial damage awards are just one of many factors that are involved in concluding a licensing agreement. The latter logic seems particularly salient when looking at nonadversarial licensing.
VIII. CONCLUSION
It is becoming easier for foreign applicants to obtain and enforce increasingly substantive IP rights in Japan. The future licensing arrangements entered into by foreign entities will begin to be negotiated and executed in a markedly different domestic Japanese legal environment. Japan has apparently recognized that, in an increasingly technology dependent world, the scope of IP protection must be expanded. Of particular note, it should be recognized by U.S. practitioners that Japan has taken the leadership role in encouraging, actively funding and supporting the establishment and modernization of Asia's IP infrastructure.
In terms of licensing, there will be no "passing Japan"! In its global perspectives expressed through both IP policy and individual corporate licensing agreements, Japan's world-wide influence in IP licensing matters seems assured, particularly given the extensive international legal harmonization activities and domestic administrative, legislative and financial reforms that have been undertaken. The potential for increasing amounts and complexity of licensing arrangements is rapidly growing and must be recognized and understood in order to effectively negotiate and conclude future intellectual property-based transactions.
FOOTNOTES1. 1 © 1997 Richard H. Lilley, Jr. has been researching the legal issues associated with technology transfer and licensing while in Tokyo, Japan during 1996-97. He also serves as Chairman of the International Consequences of Licensing Subcommittee of the American Intellectual Property Law Association (1996-97). He is now with the DC office of Kilpatrick & Stockton.
2. See Toward the Era of Intellectual Creation: Challenges for Breakthrough, the Commission on Intellectual Property rights in the Twenty-first Century, Ministry of International Trade and Industry, Japanese Patent Office, at 6 (Apr. 7, 1997)[hereinafter Towards the Era Of Intellectual Creation].
3. Id.
4. See generally, Id. at 27-28.
5. Id. at 19.
6. Id. at 27.
7. See Corporation Tax, Access Nippon, 1997, Access Nippon, Inc., Tokyo, Japan 125-130 (1997)(citing An Outline of Japanese Taxes, Ministry of Finance, Tax Bureau, Tokyo, Japan (1997)).
8. These technologies include, new materials, biotechnology, advanced electronics, advanced robots and machinery, and certain advanced processes.
9. See Foreign Exchange Bill Wins Diet Approval, Daily Yomiuri, Tokyo, Japan (May 17, 1997).
10. See generally, Japanese Anti-Monopoly Law, Article 6 [hereinafter AML].
11. See Structural Reform of the Japanese Financial Market, Ministry of Finance, Tokyo, Japan (Jan. 1997).
12. See Financial Reform Law of Japan (1993).
13. See Bank of Japan Law Revisions OK'D, Daily Yomiuri, Tokyo, Japan (Jun. 12, 1997).
14. See Louis Ross, Reviving the Holding Company in Japan, The Journal, American Chamber of Commerce Japan, Tokyo, Japan 29, 30 (Mar. 1997).
15. See Japanese AML, Article 10.
16. Id. at Article 11.
17. See AML, supra, at note 14 (quoting AML amendment passed Jun. 11, 1997).
18. See Ross, supra note 13, at 34(quoting Mitsuo Matshushita who was the former head of a MITI-sponsored study group analyzing corporate regulation).
19. It should be noted for completeness that these guidelines are not applicable to software licensing agreements. Takashi Sawai, Japan Fair Trade Commission Rules on Licensing, Dispute Resolution in Japan, Japanese Patent Practice Prosecution/Licensing/Litigation, AIPLA 337 (Jun. 1994).
20. This type of restriction may be permissible if it is not excessive.
21. This type of restriction may be permissible if it is reasonable and for the purpose of ensuring dedication to the joint activity.
22. This type of restriction may be permissible if it is necessary to prevent future disputes over the results of joint R&D. This type of restriction does not generally exist in the U.S. See also Id.
23. This type of restriction may be permissible if it is necessary to prevent a breach of faith and is limited to a "reasonable" period of time. This type of restriction does not generally exist in the U.S.
24. This type of restriction may be permissible if it is utilized to protect know-how and ensure quality control standards over "reasonable" period of time.
25. Id.
26. Japanese Patent Law, Article 105.
27. See generally, Shoichi Okuyama, 1994 Amendment to the Patent Law and Related Laws in Japan (1996).
28. Therefore, if an IP arbitration organization is established, these types of documents may be more readily provided to an impartial body by both parties because such documents would not be subject to public disclosure, thus minimizing a perceived shortcoming in resolving legal disputes in Japan. See Section V, infra.
29. See Japanese Patent Law, Article 2(3).
30. See Okuyama, supra note 26.
31. See U.S.-Japan Exchange of Letters Agreement (Aug. 16, 1994)(This agreement was concluded by the U.S. Secretary of Commerce and the Japanese Ambassador to the United States guaranteeing certain actions to be taken by both the USPTO and the JPO).
32. In such a situation, the basic patent is an earlier issued patent that is necessary for the working of the later issued patent, which is then said to be "dependent" upon the first issued patent.
33. See generally, U.S. General Accounting Office, Intellectual Property rights: U.S. Companies' Experiences in Japan, GAO/GGD-93-126 (Jul. 1993)[hereinafter U.S. GAO Report].
34. See Shoichi Okuyama, First Draft of New Examination Guidelines on Biology-Related Inventions, Patents & Licensing, IP-L Communications, Inc., Tokyo, Japan (Oct. 1996).
35. See Shoichi Okuyama, Recent IP Developments in Japan, Patents & Licensing, IP-L Communications, Tokyo, Japan (Aug. 1996).
36. See generally, Michael Shatz, Inroads, The Journal, American Chamber of Commerce in Japan, Tokyo, Japan 52 (May 1997).
37. See Shoichi Okuyama, Recent IP Events in Japan, (presentation before U.S.-Japan Practice Group with AIPPI Japan and Japan Federation of Bar Associations, Tokyo, Japan (Apr. 9, 1997)).
38. BBS Kraftfahrzeug Technik A.G. v. KK Lacimex Japan and KK Jap-Auto Products, No. Heisei 7(wo)-1988 (Japanese Supreme Court, July 1, 1997); see also KK Lacimex Japan and KK Jap-Auto Products v. BBS Kraftfahrzeug Technik A.G., No. Heisei 6(ne)-3273 (Tokyo High Court, Mar. 23, 1995).
39. Id.
40. See generally, Japanese AML, Article 3 (prohibiting unreasonable restraints on trade).
41. See Genentech Inc. v. Sumitomo Pharmaceutical Co Ltd, H-6(ne)No. 3292, (Osaka High Court, Mar. 29, 1996).
42. See THK Co., Ltd. v. Tsubakimoto Precision Products Co., Ltd (Tsubakimoto Seiko K.K.), 91(gyo-ne)1627 (Tokyo High Court, Feb. 3, 1994).
43. See generally, Japanese Code of Civil Procedure, Articles 786-805.
44. See generally, Id., at Article 46.
45. See Japanese Patent Law, Article 71; see also Id., at Article 786; see also Teruo Doi, The Law and Practice of Int'l Commercial Arbitration in Japan, Patents & Licensing, IP-L Communications, Tokyo, Japan (Feb. 1996).
46. Supra note 40, at Article 200.
47. See Japanese Law No. 66 (amended in 1997).
48. See generally, Section III, A, supra.
49. See generally, U.S. GAO Report, supra note 31, at 43-49.
50. See Towards the Era of Creation, supra note 1, at 19.
51. See News in Brief, Patents & Licensing, IP-L Communications, Inc., Tokyo, Japan (Apr. 1997).
52. See Kenichi Nakano, Clauses in Licensing Agreements, Dispute Resolution in Japan, Japanese Patent Practice Prosecution/Licensing/Litigation, AIPLA 311, 330 (Jun. 1994)(Based upon a Japan Intellectual Property Association survey of its corporate membership).
53. Id.
54. See e.g., Section II.B.1.a., supra (JFTC Patents and Licensing Guidelines).
55. See Kazuyoshi Ohno, Background and Trends of Japanese Licensing, Dispute Resolution and Negotiation in Japan, Japanese Patent Practice Prosecution/Licensing/Litigation, AIPLA 296, 300 (Jun. 1994)(citing Daily Yomiuri Newspaper, Tokyo, Japan (Feb. 6, 1993)).
56. See Toward the Era of Intellectual Creation, supra note 1, at 17; see also Japanese Patent Law, Article 102.