Pirates of the South China Seas

Since when does the right to manufacture cheap compact discs constitute a national emergency?

By Andrew Leonard
Published January 18, 2007 7:40PM (EST)

A few choice passages from Financial Times reporter Kathryn Hille's article on a patent dispute between Amsterdam's Philips Electronics and GigaStorage, a Taiwanese CD-ROM manufacturer, give a pretty good idea of how the story is being spun:

The move aims to force Taipei to respond to growing discontent among foreign businesses with the island's attitude towards protecting intellectual property rights...

Taipei earned praise after its WTO accession in 2002 for improving copyright protection through legal amendments and stricter prosecution of infringements, efforts that helped it get off the U.S. Trade Representative's priority watchlist of violators of intellectual property rights in 2005.

But foreign investors and legal experts claim the island has changed course. "The picture has been pretty grim over the past year and a half," said John Eastwood, a lawyer at Wenger & Vieli and co-chair of the Intellectual Property Rights Committee of the European Chamber of Commerce, Taipei.

At issue: Taiwan's decision to allow GigaStorage a compulsory license to manufacture, without paying royalties, recordable CDs incorporating Philips' patented technology.

Compulsory licenses are a popular topic here at How the World Works. Usually, the context is public health. A developing nation breaks a drug company patent in order to provide cheaper generic drugs to its population. Taiwan, incidentally, was one of the first countries to issue a compulsory license, as it is permitted to do under the terms of the World Trade Organization's TRIPs agreement, so as to ensure it had adequate stockpiles of Tamiflu, in case of an outbreak of bird flu. More recently, Thailand has shaken up the global pharmaceutical status quo by issuing a compulsory license to produce a generic version of the HIV drug Efavirenz.

But compulsory licenses to manufacture recordable CDs? How can the right to pump out millions of compact discs be considered the kind of national emergency that sanctions patent busting? If your only source of information on the topic was Hille's report, you'd be likely to nod your head in agreement with Philips & Co. Intellectual property piracy in Taiwan is clearly out of control!

Luckily, we have the Web, so we are not confined to Hille's summation. It took about 15 seconds to find an informative legal analysis of the long-running dispute posted at the Web site of Finnegan-Henderson, a law firm that has a huge China/Taiwan business. The details make for an interesting story.

In the 1990s, Philips and two Japanese companies, Sony and Taiyo Yuden, pooled together a group of patents relating to CD-R technology and licensed them to Taiwanese manufacturers, including GigaStorage. But as the price of CD-Rs plummeted, it became more and more difficult for the manufacturers to eke out a profit. Unable to reach a satisfactory renegotiation of the license royalty rate, in 1999 GigaStorage and other manufacturers made a bold move: They stopped paying the license fees and filed a complaint against Philips et al. with Taiwan's Fair Trade Commission, alleging "that the patentees violated the Fair Trade Act because through their patent pool they had a monopoly on the CD-R market, abused that monopoly power by demanding allegedly excessive royalties, colluded with each other to set prices, and tied non-essential patents to essential patents."

Since then, the legal dispute has been conducted in a variety of venues, and over a wide-ranging array of issues. The Taiwanese courts and the U.S. International Trade Commission have, for the most part, agreed with GigaStorage. But in the U.S. Philips appealed the ITC judgment and had it overturned by the United States Court of Appeals for the Federal Circuit. Now, Philips is preparing to go to the highest possible authority, a WTO arbitration panel, seeking affirmation that Taiwan's compulsory license breaks WTO rules.

Maybe it does, maybe it doesn't -- I'm certainly not qualified to judge, and you can always find lawyers who will argue, equally effectively, either side. The lack of a compelling public health issue also means that there isn't a moral aspect to the case that would likely sway my opinion in favor of the patent busters. But I think it does make a big difference when the case is framed as an issue of abuse of monopoly power, instead of as another instance of "grim" intellectual property piracy.

Now, every single time I write a post that defends some aspect of compulsory licensing, an outraged correspondent sneers that I am a socialist revolutionary making a bogus rationalization for "theft." And while this does help balance out the other correspondents who are convinced that I am a corporate prostitute sellout, I am still always struck by the ahistorical nature of such claims. Unless one takes the absolute hardcore stance that the creator of intellectual property owns that property for all time, in every possible manifestation, in every possible universe, the "theft" argument just doesn't hold water.

Societies have historically limited the term of patents and copyright, because courts and governments have deemed it in the public interest to do so. Innovation flourishes when access to new technology is broadly disseminated. Consumers benefit from lower prices and more choice when monopolies are broken up and competition is fostered. Lawyers, economists and politicians can and do squabble endlessly as to where precisely to draw the line. If you're like me, you believe that corporate interests have subverted the political process and are successfully redrawing the line to their advantage at the expense of the general welfare. But I'm at least willing to entertain the proposition that this isn't true in every case, and I'm certainly not willing to go man the barricades to ensure the lowest possible price for the recordable CD on which I'm burning mixes for my friends. But I'm also sympathetic to the argument that those with power screw those who don't have any, and I look forward, if the Philips case does go through the WTO arbitration process, to following how Taiwan defends itself.


Andrew Leonard

Andrew Leonard is a staff writer at Salon. On Twitter, @koxinga21.

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