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Legal issues for U.S. companies in Japan.

An advisory on three major areas of continuing difficulty: intellectual property protection, labor relations, and distribution of products.

During the 1970s and 1980s, Japan dismantled many of its most infamous legal barriers to foreign investment. While there no longer are significant barriers to foreign investment intended to protect Japanese companies, American companies still find a number of legal and other issues complicated and confusing. In addition to the pure mechanics of incorporating a subsidiary or registering a branch office, Japan presents unique legal and non-legal challenges to U.S. companies desiring to conduct operations there.

Three major areas continue to provide difficulties to American companies doing business in Japan. They are:

1) Intellectual property protection; 2) Labor relations; and 3) Distribution of products.

While the legislature and courts in Japan have established certain legal principles relating to these issues, much of the knowledge and the practical approach to doing business in Japan involve creative methods of protecting one's intellectual property, dealing with employees, and distributing products.

For many U.S. companies, entering the Japanese market means protecting tangible and intangible property through copyright, patent, trade secret, or trademark protection. Intellectual property laws protect a company's competitive global advantage gained through expensive research and development. Accordingly, intellectual property laws have been elevated to great prominence in discussions of world trade issues, including the current Uruguay Round of GATT discussions.

In many cases the intellectual property laws of Japan and the U.S. are very similar. In other ways they are very different.


The U.S. and Japan have patent laws that are similar in their coverage. Most of the differences between the two systems involve bureaucratic and industrial practice, rather than differences in the laws as they appear on the books.

First-to-File System. Like most countries, Japan's patent system gives priority of rights to the first to file a patent application rather than the first to invent. The U.S., contrary to international practice, gives priority to the first to invent.

Slowness of Processing. The Japanese patent office is known to be extremely slow and inefficient in processing patent applications. In one extreme example, Texas Instruments Inc. received a Japanese semi-conductor patent nearly 20 years after filing. Usually it takes about twice as long to obtain a Japanese patent as it does to obtain a U.S. patent.

Publication of Application. In Japan, as in most countries, a patent application is published for public comment before it issues. This means that the publication procedure results in loss of trade secret protection for the contents of the application. This is unlike the U.S. where the contents of the patent application remain confidential until a patent issues. Japan's open process sometimes provides competitors the opportunity to patent around the U.S. invention.

Flooding. "Patent flooding" is another concern to U.S. companies. In this practice, a Japanese company applying for a patent in the U.S. or Japan separates an invention into a series of smaller inventions, each of which will be covered by a separate application. The upshot of such "flooding" is that a U.S. company filing a patent application on a "broader" invention may be subject to numerous attacks because Japanese companies have applied for multiple patents on individual components of a similar invention.

Licensing Practices. Licensing practices between the two countries vary. Until recently, U.S. companies were rather generous with their intellectual property rights, regarding royalties as incremental income that did not cost them anything. Japanese firms have been more concerned about potential competitors outselling them with Japanese technology and, therefore, have been more restrictive with their licensing practices.

Japanese companies tend to use patents as shields rather than swords; they cross-license the numerous patents that they obtain and are driven to obtain patents that they can use to block or blunt efforts by U.S. companies to sue based on patent rights.

In view of these differences in procedures, U.S. companies must carefully plan their patent or other intellectual property strategy for the Japanese market.


In the area of copyright, the laws are quite similar and both countries belong to the principal multilateral copyright treaties: the Berne Convention and the Universal Copyright Convention. As in the U.S., computer software is protected by copyright in Japan. The Japanese Copyright Act, however, specifically excludes "algorithms" and program language from copyright protection. These exclusions require somewhat greater reliance on contractual confidentiality requirements. Because of this, U.S. companies should craft their contracts with care.

Trade Secrets

Until recently, Japan had no specific law protecting trade secrets. Traditionally, Japanese employees rarely changed employers, which made trade secret protection less necessary than in the U.S.

In 1991, amendments to the Japanese Unfair Competition Law enacted by the Japanese Diet took effect, which, for the first time, provide specific protection for trade secrets. The main issue surrounding the new law is the ability of companies to enforce trade secret rights -- especially through the use of injunctions. In the U.S., a court order protecting trade secrets, in principle, can be obtained very quickly. In Japan, the use of injunctions is quite rare and therefore it is unclear how judges will deal with requests for protection of trade secrets. Several judges have indicated that the Japanese Constitution and their own internal practices may be flexible enough to privately hear arguments relating to trade secrets so that the "secret" nature of the trade secrets will not be disclosed in public hearings. Other commentators believe that this will be difficult to implement because it has not been an accepted practice in Japan.

In any event, protection of trade secrets in Japan may require even more creative planning than in the U.S.


Japanese trademark law affords priority of rights to the first to file an application, rather than the first to use a trademark. In Japan, one need not have used a trademark before applying for registration. Obviously, this system places great importance on applying promptly for trademark registration. Because of this "first-to-file" rule, U.S. companies should take care to protect their marks even if they do not plan to do business in Japan in the near future.

As of April 1, 1992, Japan abandoned its own trademark classification system in favor of international standards. Japan also began accepting applications for service mark registrations beginning April 1, 1992.

Labor Issues

Both small and large U.S. companies entering the Japanese market bemoan the shortage of qualified workers. Even when such workers are hired, how can they be retained and/or terminated?

Many Japanese labor law regulations resemble those found in the U.S. regarding employee contracts, working conditions, and payment of wages. In many areas of Japanese law, the statutory provisions often do not reflect the actual state of practice. For example, the Labor Standards Act of Japan requires the employer to give the employee 30 days termination notice; however, under court rulings, the employer must provide a "just cause" for such dismissal. This requirement of "just cause" has caused many problems for domestic as well as U.S. subsidiaries that wish to reduce their work force or terminate certain employees. Hiring and firing at will, as practiced by some U.S. employers, can be difficult in Japan.

Managerial practices also differ between Japan and the U.S. American managers acknowledge that U.S. employees basically are mobile people who may have a limited commitment to any particular employer or geographic region. The U.S. company hires to fill well-defined positions. On the other hand, Japanese managers hire people more for the skills they will acquire after joining the company, rather than for any existing skills that may be needed to fill specific slots.

Job descriptions in Japan identify the minimum which the firm expects from its employees. The Japanese company expects its managers to hire people with long-term commitments to the company who will work to improve the company. Retraining and rotation of workers in Japanese companies provide flexibility in labor costs. Large companies obtain further flexibility through using subcontracting which can be "squeezed" for output and labor costs.

American managers in Japanese subsidiaries of U.S. companies often face difficult times because of the perceived inability to fire personnel and the lack of definable goals, such as operating/profit margins or calculations of discounted cash flow in capital budgeting. Japanese companies pay less attention to quarterly profits and more to market share or becoming the most efficient providers of services or products (Akio Morita of Sony, however, recently has suggested that Japanese companies need to reprice their products and use the resulting profit increases to further the welfare of Japanese workers).

While American managers often trade memos and position papers, Japanese managers prefer consultations, frequently through many meetings, leading to consensus. Despite a seemingly similar labor law foundation, the expectations of Japanese employers and employees (minimizing conflict and emphasizing cooperation) often clash with the approach of U.S. managers who sometimes believe conflict is inevitable. As a result, American managers often complain that they find Japanese managers indecisive or even incompetent.

The Search for Employees

The more successful U.S. subsidiaries in Japan try to hire local managers or staff from other segments of the company in the U.S. that are sensitive to not only the labor law regulations but also the Japanese requirement to go beyond the regulations and take Japanese societal concerns into account.

One interesting note on Japanese corporate emphasis on retraining workers is that once a Japanese worker becomes unemployed, it is more difficult for him or her to be re-employed than it is for a worker in the U.S.

It is interesting to compare women's roles in the work force in Japan and the U.S. The percentage of employed women still is rising in the U.S. but appears to be failing slightly in Japan. One important point is that Japanese companies often do not expect "office girls" to advance beyond early entry positions. This gives Japanese companies some additional flexibility for reducing staff during slow periods. On the other hand, foreign companies are increasingly finding valuable employees in the large pool of highly educated Japanese women. Because women are not as bound by life-time employment expectations, they are more flexible in their attitudes than the traditional "salary man."

One way that U.S. companies are attempting to find qualified managerial staff in Japan is through the traditional American method of "head hunting." Japanese executive search firms often find it very difficult to locate managers for "specific slots" in Japanese subsidiaries. Unlike the relatively mobile U.S. management force, Japanese managers face major obstacles when switching jobs. There is the story that one leading company flew in an executive's mother to Tokyo to try to persuade him not to disgrace the family by moving to a relatively unknown foreign company. However, Japanese executives/managers increasingly are willing to move from domestic companies to the foreign subsidiaries, if the foreign firm has a solid reputation in Japan or abroad and the Japanese executive is given an opportunity to expand his managerial abilities.

In the case of joint venture operations, U.S. companies should take a hard look at the employees that may be shifted from the Japanese company (joint venture shareholder or partner) to the new joint venture company. The U.S. company will want to ascertain whether the manager being recommended for assignment to the joint venture company by the Japanese partner truly is the best person for the job. Because of job security, often the best employees in Japanese companies want to stay in the mainstream of the corporate headquarters and resist assignment to an uncertain fate at a new joint venture operation.

Distribution Issues

For many years the Japanese and U.S. governments have debated what the U.S. terms Japan's "inefficient" distribution system. The Japanese government defends a traditional, complicated market system involving many middle men in the wholesale/retail area. In a country with limited storage space where the customer expects a variety of products and excellent service, the old-line distribution system may have met the needs of Japanese consumers in the past. With more Japanese traveling outside of Japan, exposed to other forms of distribution and lower prices, Japanese consumers are starting to see benefits in streamlining traditional distribution practices.

To the extent that U.S. companies coming into Japan can sell products more directly to Japanese consumers, they may benefit from increased sales, faster market penetration, and less confusion about distribution channels. Avoiding traditional distribution channels, however, is not free from legal difficulties and frequently may require substantial legal planning.

For example, the laws protecting small, inefficient shopkeepers from big retailers have begun to change. The U.S. toy chain Toys R Us now has started operations in Japan, overcoming, in some respect, laws that required local shopkeepers' input in the establishment of the Toys R Us operation. This was a laborious process involving much legal planning, including resort to the full powers of the U.S. government.

Other improvements in the distribution system have been discussed but not yet fully enacted, including amendments to and enforcement of existing laws about maintaining resale prices.

Continuing pressure exists for the Japanese government -- namely through the Fair Trade Commission (FTC) -- to make greater use of existing regulations and Japan's anti-monopoly laws, used infrequently since most actions must be undertaken by the FTC, which generates complaints and opinions very slowly. Yet, there is some hope that the regulatory authorities are beginning to act with more vigor as a result of the Strategic Impediments Initiative.

There also are indications that as Japanese consumers gather more information about alternative distribution methods and pricing of Japanese goods overseas, they will resist unnecessary bureaucratic procedures "needed" to ensure product safety (including many import procedures for foreign food), will insist that the distribution system be made more transparent, and will demand that violators of existing anti-monopoly laws be prosecuted in an effort to reduce prices. These improvements should benefit foreign subsidiaries.

Donald R. Davis and Thomas R. Radcliffe practice law in the Palo Alto, Calif., office of the international law firm of Graham & James. Mr. Davis currently serves as U.S. Chairman of the Professional Committee of the Japan-Western U.S. Association and is a past President of the Japan Society of Northern California. Mr. Radcliffe lived and worked in Japan for more than four years and focuses on legal issues involving general corporate and commercial law, as well as the international protection and transfer of technology and distribution of goods with Japan.
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Title Annotation:Accessing the Japanese Market
Author:Davis, Donald R.; Radcliffe, Thomas R.
Publication:Directors & Boards
Date:Sep 22, 1992
Previous Article:Developing a joint venture.
Next Article:Negotiating and 'mind-meeting.' (differences between American and Japanese negotiation techniques) (Accessing the Japanese Market)

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