Saving the silver bullet: protecting intellectual property is the secret weapon to ensuring global competitiveness.

ON THE NINE-INCH, FLICKERING BLACK-AND-WHITE TELEVISIONS OF THE 1950s, the Lone Ranger and his trusted sidekick Tonto kept desperadoes at bay in the Wild West by using mythical silver bullets that rarely missed their marks. Today, intellectual property is the silver bullet that enables companies to maintain their competitive advantage--and in some cases survive cutthroat competition--by protecting their technologies and valuable business information. This is particularly true for American companies doing business internationally.

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Twenty-five years ago, less than 2 percent of American companies accounted for more than 80 percent of America's international trade activity. Today, about one third of American companies have foreign operations in place or are regularly involved in some aspect of international trade via importing or exporting. I predict that during the next five to seven years, more than half of all U.S. companies will either establish foreign operations or become involved at some level in international business activities.

Unfortunately, too few companies recognize that protecting intellectual property overseas is a critical priority. Trade associations, however, can help their members by monitoring the potential risks facing those engaged in business overseas. For example, American technology is at greater risk of theft and unauthorized use internationally than ever before. And foreign competition is a serious and growing threat to the viability of American companies. Trade associations must actively enhance the competitiveness of their members, while counseling them on the risks involved in overseas business. What follows is an overview of three significant challenges to a company's intellectual property overseas and six strategies that trade associations can adopt to help level the international playing field for their members.

What is intellectual property?

Intellectual property refers to individual and business creations such as technologies, ideas, and valuable business information that must be insulated from theft or misappropriation. Four basic components make up intellectual property:

* Patents allow an inventor to prevent others from manufacturing, using, selling, and importing a protected invention for a number of years. A patent protects a product (e.g., a unique alloy or machine); a process (e.g., the process involved in producing a pharmaceutical); a machine; a compound; an ornamental design; or certain plants.

* Copyrights protect against the unauthorized copying, public display, or use of works of authorship (e.g., books, recordable music, art, movie or television scripts, and various forms of creative works).

* Trademarks and servicemarks, on the other hand, protect the use of a unique word, name, symbol, device, or picture with goods (e.g., Nike) or services (e.g., CNN) that is used to indicate and distinguish the source of the goods or services.

* Trade secrets are valuable pieces of business information that companies take specific steps to keep confidential (e.g., the secret formula for Coca-Cola; customer lists; nonpublic financial information; non-patented manufacturing processes).

What are the challenges?

Companies operating internationally are likely to face three major challenges to their intellectual property.

1. A lawless land. At home, a comprehensive body of intellectual property laws protects American companies. However, except for most of the European Union and Japan, intellectual property protection outside of the United States is generally abysmal, particularly as it relates to trade-secrets laws, which many countries do not even recognize. This is significant given that as much as 80 percent of the information that an American company views as important to its survival, such as client lists, can only be protected by trade-secrets laws and procedures (not patents, copyrights, or trademarks).

Japan, which started seriously enforcing its patent, trademark, and copyright laws in the 1960s, passed its first trade-secrets law only 13 years ago. China, now a major target market for many U.S. companies, has no effective laws in place to protect the trade secrets of foreign companies operating within its borders. Even the World Trade Organization, which has members from most countries around the world, offers few meaningful mechanisms for trade-secret protection.

The Internet, of course, complicates matters in the lawless land, since a company's trademark, patented technology, or valuable corporate trade secret can become instantly accessible worldwide with the click of a mouse.

2. I'll see you in court. Having laws that protect a company's intellectual property is great. Having a court system that enforces the laws is better. Foreign courts represent another serious challenge to American companies overseas. Most legal observers would agree that the United States possesses the world's most nonbiased and independent system of courts. Even those who believe that the European Union's judicial system is on par with the United States (as well as Japan) will admit that elsewhere the road to justice is filled with landmines. Even in a best-case scenario, foreign courts in a purely commercial dispute tend to favor their nationals as opposed to the interests of foreign businesses. Thus, a company should assess the court systems of foreign countries in which it might want to do business before going there. If the court system is unreliable, the company may want to rethink its plans.

3. Partnership perils. When doing business outside the United States, U.S. companies often enter into a joint venture or establish a strategic alliance with a company in the foreign land. This is an increasingly high-risk proposition. Overseas partners or foreign companies are quite sophisticated in their methods of extracting confidential corporate information or sensitive technologies from unsuspecting American companies both during the negotiating process and afterward. In France, for instance, electronic surveillance is quite common. U.S. companies must become more attuned to these types of risks before jumping into partnerships. It takes more than a personal relationship between two CEOs to make a joint venture succeed.

How can associations help?

For those trade associations willing to assume a more active role in protecting the technologies and valuable business information of their members, the six strategies that follow are worth thinking about.

1. Look at geography. Identify the specific geographic areas where you expect your members to be operating during the next decade. From that list, isolate those countries where the risks are potentially most acute. Retaining an independent consultant to take a global look at the general membership and the international involvement of your members is a good way to do this. The analysis should cover three points: 1) which countries currently represent the greatest intellectual property threat to association members; 2) what technologies or trade secrets are most at risk; and 3) what role foreign governments play in the process. An initial study can be completed in a few months for $50,000-$100,000. The results will provide the basis for developing a long-term strategy for member programs and briefings. Even if your association's leadership thinks that it knows the answers already, it is still wise to conduct an independent study. Too often, a few powerful association members--who may not have kept up with the times or who may have personal agendas--influence thinking. An independent evaluation ensures that you start out with a clean slate.

2. Put China on the map. If China is not on your members' radar screen, it should be. Because of its sheer size, China represents the single largest challenge to proprietary information held by American companies. Doing business in China is like doing business nowhere else. With the Chinese economy expanding by 9-13 percent per year across the last 25 years, China promises to be the world's largest economy within 30 years if growth continues at this rate. However, China has a poorly structured legal system that does little to protect the technologies of foreign investors. One reason for this is that the Chinese government is either directly or indirectly involved in most of the business agreements between Chinese companies and their foreign counterparts. This has great implications for the safety of a company's intellectual property. Do everything you can to make sure your members are aware of the potential pitfalls of doing business there. (For more on this, see sidebar, "Doing Business in China.")

3. Explain international joint ventures. When American companies expand their activities overseas, it is not uncommon to find them involved in a joint venture. While a joint venture in America is simply a contract between two companies, most foreign countries have specific laws covering the creation and operation of such partnerships. As a result, U.S. companies can find themselves tied up in a relationship that they never anticipated or wanted. Trade associations can help. Prepare written materials for your members that describe the legal, structural, operational, tax, and accounting aspects of an international joint venture. An important aspect of such documents is how companies can protect their proprietary information during joint-venture negotiations. Your materials should, of course, be industry-specific. And I recommend that you supplement the written materials with briefings or seminars covering the information. For instance, a major presentation at an annual meeting with periodic updates would be a natural way to begin the process. Be sure to bring in outside experts who are not association members to provide real-world examples of what can go wrong and how to react.

4. Follow the outsourcing trend. The offshoring, or outsourcing, of U.S. jobs and technologies overseas is now and will continue to be a hot political issue. This trend is likely to affect many trade association members and their intellectual property assets. (See the "Leader at Large" column on page 19 for further discussion of the offshoring of American jobs.) In situations where overseas outsourcing is a potential problem for your members, I recommend setting up an ongoing, internal committee devoted to analyzing how outsourcing will affect members in the short-, mid-, and long-term. The committee's mandate should include determining the economic implications of outsourcing and outlining what steps the association will take to counter unwanted effects. I recommend that the association's chief staff executive take a highprofile role in the committee's operation, demonstrating his or her personal commitment to the effort.

5. Develop outsourcing guidance. Many U.S. companies are now hiring or contracting with foreign-based workers and consultants who may have unrestricted access to their intellectual property and trade secrets. As the trade association representing the industry, you can draft guidelines and procedures for your members to follow when hiring and using foreign workers. Such guidelines could include model secrecy or confidentiality agreements and a list of suggested countries in which the agreements may be enforceable. You may also encourage your members to conduct a formal, comprehensive intellectual property audit to evaluate any vulnerabilities.

6. Work on legislative remedies. On an annual basis, the U.S. government and the U.S. Trade Representative Office are mandated by Congress to evaluate the fairness of the trade policies of all of America's competitors around the world. To the extent that you judge that existing U.S. government policies are not protecting your members well enough, an active and continuous action plan for legislative help is essential. This means more than annual member walk-by meetings with legislators. Leaders of various trade associations, for example, could consider banding together--with appropriate advice from counsel--to influence this developing area.

What do I do now?

Now that you understand the intellectual property traps awaiting your members should they choose to do business overseas, now is the time to act. Unlike on The Lone Ranger, no silver bullet exists to right all wrongs. The steps discussed here, however, are ones that you can adopt to help your members deal with increasingly intense and brutal international competition. Now is the time to act--before the window of opportunity closes for many American companies and their workers.

Want more information on this topic? Check out the "Outtakes and Exclusives" and "Link to Learn" areas at www.amonline.org.

RELATED ARTICLE: Doing Business in China

Much has already been written and more will be written soon (look for a December 2004 ASSOCIATION MANAGEMENT article on this topic) on doing business in China. Following are five things that a trade association can do to help its members conduct fruitful business there.

1. Summarize existing laws and regulations regarding the protection of foreign-based intellectual property, including trade secrets. Update this summary regularly, as the laws change from time to time.

2. Outline techniques for protecting intellectual property in a joint venture and detail what steps to take with the partner and outsiders should a theft occur.

3. Help members compare the advantages of using a wholly owned subsidiary in China versus a joint-venture vehicle.

4. Conduct training on the types of contract provisions members should seek or avoid. For example, U.S. companies doing business in China should insist on majority control in a joint venture. And contracts should include a clause requiring that disputes between the parties be resolved only by arbitration in Hong Kong under the rules and authority of the Hong Kong International Arbitration Centre or another internationally recognized body.

5. Inform members of the risks that Chinese workers may pose for foreign-based companies doing business in China, particularly those members who have technology that may be at risk.

Dennis Unkovic is a partner at Meyer, Unkovic & Scott, LLP, Pittsburgh. E-mail: [e-mail].