Zorba Parer

International Protections for Intellectual Property

References
A. WIPO Copyright Treaty (WCT) (1996)
B. Australian - Copyright Amendment (Digital Agenda) Act 2000
C. The Philosophy of Intellectual Property. John Hughes
D. International Trade, Economic Growth and Intellectual Property Rights: A
Panel Data Study of Developed and Developing Countries. Patricia Higino
Schneider
E. Berne Convention
F. Intangible Asset and Intellectual Property Valuation: A multidisciplinary
Perspective. Paul Flignor and David Orozco
G. Copyright Act (1968), amendment for inclusion of software protections.
H. Monopsony vs Monopoly – New ways of thinking and acting. Henry Ergas
and Flavio Menezes
I. Blue water ships: consolidating past achievements. Australian
Parliamentary Committee report.
(www.aph.gov.au/senate/committee/FADT_CTTE/completed
_inquiries/2004-07/shipping/report/index.htm)
J. Intellectual Property Principles for Australian Government Agencies
(www.ag.gov.au/www/agd/agd.nsf/Page/Copyright_CommonwealthCopyrig
htAdministration_StatementofIPPrinciplesforAustralianGovernmentAgencie
s)
K. Defence Intellectual Property Policy 2008
(www.defence.gov.au/dmo/gc/ip/IP_Policy_2008.pdf)
L. The Impact of Free Trade Agreements on Intellectual Property Standards in
a Post-Trips World. Rafael Pastor.
(www.bilaterals.org/article.php3?id_article=4311)
M. Australia-US Free Trade Agreement
(www.dfat.gov.au/trade/negotiations/us_fta/final-text/)

Introduction and Assumptions

This paper answers the questions presented as an assignment for LAWS6261.
The assignment is to outline he five biggest challenges in the International
Protection of Intellectual Property (IP) and to detail on specific challenge.

Whilst this paper relates to international protections, I will refer mainly to the
affect treaties have had on the Australian national legislation, policy, and
outcomes. This is done on the basis that I have chosen to detail the challenges
relating to the acquisition of defence materials and the IP considerations
necessary in these types of acquisitions.
In this Paper I present a brief discussion of how these a few new technologies
and factors are challenging the IP system, and where the critical areas for
resolution exist.

By examining the challenges presented to IP on a global scale with relation to the

Australian context and in particular defence related issues, I will demonstrate the
knowledge gained through attending LAWS6261 and the research undertaken to
develop this discussion paper.

It is my hope that this paper will accurately relate the challenges in IP in a global
context, the relationship to international protections provided by treaties, the
Australian national legal context, and provide a basis for defence acquisition
personnel to fully appreciate the issues for their particular acquisition.

Where possible I have included internet links to referenced material. Should you
require a copy of referenced material please request it via email, and I shall
attempt to provide.

New developments and challenges

The development of industrial machines, computers, genetic sequencing
machines, network technology, satellites, rocketry, aircraft, and other modern
gadgetry has seen a well spring of new agencies and corporations focused on
research and development. It has required a massive undertaking in the legal
world to define and understand what constitutes IP and how to protect and
encourage its development. Many of these new technologies have revolutionised
our world and dissolved the perception of national boundaries, creating global
market places and requiring an international approach to IP. The formation of the
World Intellectual Property Organisation in the 1960’s and the movement of IP
issues to context of foreign trade relations, by implementing the TRIPS
agreement within the WTO, created additional leverage for negotiating treaties
and normalising the international community’s understanding of IP.

Computers brought about new chapters in the lexicon of technology with code
languages, compilers, and other software artefacts giving rise to decades of legal
discussions on what to protect and how it should be protected. The conclusions
reached in these discussions resulted in many national laws, and international
treaties, with far reaching consequences for the value and management of
software. International treaties (ergo Reference A) were drawn up to form a
common global understanding of new terms (compiler, language, source code,
etc), types of property (source code, executables, hardware, etc), methods of
transfer (licensing, caching, temporary storage, etc), and issues (form, function,
feel, interoperability, decompiling, etc) from which nations developed
amendments to their national laws (reference B).

During the early years of computer technology (1940-1960) little consideration

was given to the legal implications of computers, beyond the patenting of
hardware devices. The development of computers was largely driven by
governments, research corporations, universities, and other large institutions
which were more concerned with obtaining critical technological advantages for
strategic purposes, than with protecting those technologies. Computers and
related technology was large, expensive, difficult to understand, and
cumbersome to operate.

With the development of personal computers in the mid 1970s came the major
legal debate over computers and in particular software. Multiple terms used to
explain the seemingly mystical world of computer technology flooded into the
courts. Judges with no technical background where required to consider the very
nature of what made computers function, and what in that context represented a
protectable piece of property. Legislation developed over hundreds of years to
protect tangible objects and commonsense intangibles, was woefully inadequate
to handle computers, software, source code, silicon chips, applications, features,
operating systems, widgets, GUIs, languages, etc.

Protection of source code as a literary object, within the auspices of existing

copyright protections, was a key milestone in the development of the legal frame
work for computers and was first codified Internationally within the Berne
convention (reference E), and then later by reference within the WCT (reference
A). The fact that features such as the look and feel of graphical user interfaces
were not protected was abhorred by many technologists, and has led to many IP
owners seeking protections under design legislation.

As the first treaties and national amendments to legislation started to flow

through the international community, a new challenge to the legal world
emerged; the Internet.

The internet, like the printing press which drove initial copyright protections,
redefined the way information was disseminated and used. The legal framework
has been slow (in computer terms) to adapt to these challenges, and has been
overtaken in many ways by IP developers in providing protections and
mechanisms for profiting from IP development. Business models for wealth
generation from IP have found alternatives to legal protections in order to profit
from the efforts of IP developers.

The internet provided a new way of thinking about information, web interfaces;
web applications, social networks, and the like have developed new and unique
legal challenges in understanding and defining IP which should be protected and
to what extent. Users exercise market power in defining the web space and
protections, launching global online protests when website owners modify a
system to change the layout or functionality of user generated content sites.

Genetic research challenged the basic premise of what it is to own one’s own
body, the very basis for Lockes philosophy of personal ownership (reference C).
The moral implications of genetic modification and the right to ownership of new
genetic material continue to be the centre of much legal discourse. Does a tribe,
or race, have ownership in their genetic code which should be remunerated if it
has a particularly valuable medical application? How would such remuneration
be valued and distributed? Genetics is another key recent technological advent
which has provided a challenge to the classical IP protection system. It is perhaps
the most challenging of modern technological debates because it is inseparable
from the way we understand what it is to be human, and our relationship to life,
the universe, and everything. The debate ranges from the moral to the technical,
and encompasses sensitive philosophical beliefs and pragmatic medical
necessities.

The philosopher John Locke is seen by many as the father of personal ownership
(reference C). His thoughts changed the way people considered their relationship
to their governments, each other, and themselves. We intrinsically own ourselves
according to Locke. But do we really? Genetics research has changed the way we
think about what we are, where we come from, and who actually owns what
makes us the way we are. We owe what we are in totality to our ancestors, with
each generation of life adding to the core genetic code which has given rise to
our existence. What is the value of this effort; encompassing millions of years of
life and death consequences, with the thin chain of DNA the path which life has
been forced to follow in order to survive.

The questions relating to IP and genetics forces us to consider what it is we own

in ourselves, and how to encourage research in the field through appropriate
protections, whilst respecting the very nature of being human.

Globalisation began with colonialism, was accelerated by the advent of global air
transport, and has reached a tipping point with the implementation of the
Internet. People around the world are able to access information instantly,
exacerbating IP legal issues. This understanding drives a desire for the good
things available to other nations. Whether it is medicines, manufacturing
capabilities, military equipment, literary material, technologies, or philosophies,
globalisation has driven access and understanding of these things to peoples
everywhere. This challenge presents a unique set of questions relating to the
fundamental way in which IP should be protected, exploited, and made available.
Studies have been made which seem to indicate that there is a major economic
benefit to providing national protections for IP (reference D). The strongest
counterpoint to protection is the moral imperative of protecting human life
through the distribution of generic medicines and other life saving technologies.

Major Challenges in the Field of International Protection

of IP
5 major challenges
1 – Emergent Technologies
New technologies change the way we think about IP and the fundamental
principles which govern the protections and consideration granted for IP. The
emergence of global communications enables instant transfer of ideas and
knowledge across what were previously difficult geographic boundaries. The
Internet has further exacerbated the issue by enabling transfer of detailed
images, instructions for making novel technologies, books, movies, and other
forms of IP.
IP protections were developed with consideration for the difficulty in importing or
producing new works, within a given National geographic, socio-developmental,
context. In the modern context the assumption that knowledge is difficult to
import is no longer valid. The vast array of medium available for the transfer of
works and technology, make it a simple task to transfer information globally. The
difficulty presented in creating some types of new technologies and creative
works has become more difficult. Movies can cost hundreds of millions of dollars,
and new technologies can cost billions of dollars.

Emergent technology such as computers, the internet, and genetics, further

challenges our thinking by presenting new paradigms in knowledge creation, and
new types of IP. The challenge to the International IP legal system is how to
remain adaptive to new types of knowledge, and new forms of understanding
emergent technology. As the global community grows and pools it’s collective
creative capacity, it is certain to create new forms of IP. Distilling a set of legal
principles and developing a framework which is adaptive to these new IP forms,
is the major challenge to the international protection of IP.

2 – Internationalisation of Knowledge
Knowledge transfer has become a global reality. This has far reaching effects for
intellectual property developers, owners, and users. Nation states have created
IP laws which suit their perspectives, interests, and needs. The ability for
knowledge to transfer across national boundaries with the click of a button has
changed the way users can exploit IP. The ease of knowledge transfer challenges
both our concept of national IP protection and the very basis of the nation state.

The development of a cohesive international framework for balancing the IP

scales of encouraging development through economic protection, and promoting
dissemination of knowledge for the benefit of the global common good is at a
tipping point in the current International IP system. It is a major driver in the
globalisation of our legal systems, developing new ways of creating a global
common law, without the direct power of a distinct Sovereign global government.

3 – IP Valuation
Valuation of IP is critical in defining how we collectively manage knowledge, and
incentivizes innovation. Reference F proposes a framework for the valuation of IP
which looks at the context of each type of IP and the legal, financial, and market
realities of that information.

IP is a varied product, ranging from artistic to industrial, having application in the

realms of human expression and our ability to mould the world around us. This
plethora of applications is made more difficult by the need to consider each
national market for these products, and the needs of that national society for the
technology.

In a global environment with new technologies constantly emerging, it is critical

to ensure that IP is accurately valued to ensure that developers are given proper
consideration for their efforts, and users are able to access the benefits of that IP
at a reasonable price. Fair trade, national strategic interests, and humanitarian
considerations to name a few issues, make it imperative that IP be accurately
and fairly valued.

4 – Prior Art and Traditional Knowledge

Defining the Prior Art is a key element of a Patent application, in that the Prior Art
is considered common knowledge and is public domain or otherwise previously
protected. In the western context the prior art includes folklore, fairy tales,
traditional crafts, and other such items which in a aboriginal or native peoples
context would possibly be considered protectable Traditional Knowledge.

The philosopher Locke approached the principles of ownership by beginning with

an assumption that we own our bodies and minds as a matter of natural law.
Philosophically this position is challenged by our modern understanding of
genetics. It presents particular challenges when approaching the ownership of
genetic sequences. Should protection be granted over a particular individual’s
genetic sequence which makes them resistant to cancer? If a corporation isolates
the sequence and patents that sequence, should the protection extend to
preventing that person from passing on the genetic sequence to offspring? In a
tribal context; do we as a genetic tribe sharing common genetic heritage own
our genetic sequences? Or does the tribe which has given rise to the common
genetics have claim?

Where a product of traditional practices is commercialised outside its original

owners, how are they to be compensated? How do you value the product of
millennia of traditional development? If compensation is considered appropriate,
then to whom is it awarded?

Development of a cohesive set of regulatory guidance for the protection of

Traditional Knowledge is the subject of on-going debate within the international
community. While the results of this debate are unlikely to have a major impact
on IP laws in general, they will provide additional moral substance to the
international IP norms.

5 – Fair Trading in the IP Balance

Whilst Nations have an interest in protecting their investment in IP development,
there is also a need for humans to help each other in times of distress and
disaster. The net productive ability of humanity is increased when peoples are
relieved of immediate threats to their well being and existence. Therefore there
is a moral imperative to ensure protection of IP does not kill people who would
otherwise have lived through access to that information.

Least Developed Countries and some developing countries, replicate socio-

political realities of 16th century Europe. In this context a large disparity in
developed nations and developing nation’s intellectual potential leads to a social
incentive to transfer the new technology. This leads to compulsory licences for
products and processes which should be under the protection of the TRIPS and
other agreements and protections. This loss of value through territorial
publications of commercially valuable intellectual assets, in a global
marketplace, causes political impetus for governments to intervene.
There comes a point of abuse of these exclusionary clauses which is unfair to the
industry where the injury or lack of right to enjoy the positive outcomes of the IP
is felt. Within the WTO framework, the IP owner is not the receiver of
remuneration of the WTO decision; it flows to the Sovereign accounts. There is
no requirement for the nations to pass those onto the affected area.

The counterpoint is the exhaustion or abuse of technology licences beyond the

potential benefit reasonably expected by the IP owner. The abuse of market
power by IP owners occurs and becomes the subject of national Anti-trust or Fair
Trade regulations.

General Conclusions
The way in which we consider protection of IP in a legal context is being
surpassed by the technological drivers which are largely under that same
protection. There are two forms of change to any system, rebellion and
revolution.

In the global community a revolution in the way we provide legal protections for
IP is underway. This can be observed in that large corporations rely on non-
disclosure of complex systems to provide protection, software developers are
trying to give away their rights to ensure that their contributions assist them in
developing better tools, artists are abandoning traditional distribution systems
and developing new ways of creating wealth from their artistic endeavours, and
treaties are being overcome by non-enforcement of right holders which they
protect.

This revolution of the International IP legal system is key component in the

globalisation of our governments, and will in time be recognised as one of the
major forces in creating a cohesive global common law which supersedes
national sovereignty, by the will of the people creating new knowledge.

Valuation in Monopsony (sole user) and Monopoly (sole

provider) Markets
The Challenge
The challenge presented here is to describe the relationship between
international protections, Australian national protections, Australian national
policy directives, and military program management needs. In understanding
these relationships and exploring a framework for valuation of this type of IP in
the Australian context, program managers can better manage IP issues relating
to the platforms they are mandated to supply and support.

Background
Key strategic assets, in particular military assets, present a unique challenge in
the IP domain (references H and I). They involve both economic and strategic
considerations. A large amount of capital investment is required to develop new
military systems. The capital investment is primarily required to support Non-
Recurring Engineering (NRE) to produce the designs for these systems. These
designs are typically government funded, although not always. These designs fall
under additional scrutiny with regards to arms control, non-proliferation, and
support to allied states. Large corporations also have a significant interest in
these designs, which are almost exclusively protected under the auspices of
Trade Secrets.

Nations which import these systems have a need to access certain elements of
the IP relating to the weapon system designs. They require sufficient information
to support and operate the platforms. Support of platforms can include
developing new articles to interface with the weapon platform, including self
protection devices such as flares and chaff, secure communication systems, and
enhanced weapons capabilities (reference H).

Significant leverage is available to acquiring nations during the tendering phase

of contracting (reference H), where companies are quick to agree to IP clauses in
order to obtain contract signature. Once the contracts are signed, the incentive
to be cooperative with regards to IP changes, and a new tension arises. The
companies seek to limit the IP dilution in the target nation, in order to win follow
on contracts to support the platforms. The level of protection argued by
companies is usually only overcome when nations pursue a fair trading
perspective to the platform IP.

The Australian national implementation of the TRIPS agreement can be observed

by reviewing the legislative changes to Australian Law and the government
policy on IP (reference J). This federal policy directive is carried into government
agencies, and importantly for this discussion, the defence acquisition policy
(reference K).

Undisclosed IP is protected in the TRIPS agreement under paragraph section 7,

article 39. Undisclosed information does not have a term limit, and is protected
by making efforts to ensure the information remains secret. Within national
legislature there are additional protections for military information, such as the
USA International Trade in Arms Regulations, which requires permission from the
State Department prior to the transfer of Arms related IP to foreign nationals.

The market for military arms is a global, as the national markets for arms are
typically restricted to the sole use of the government. The added complication
with trading information on arms technology is the imperative governments have
for self reliance and self protection, giving rise to incentives for governments to
reverse engineer, or otherwise acquire IP, without giving consideration to the
developers.

TRIPS – Protection of Undisclosed Information

Section 7, Article 39 of the TRIPS agreement provides protection for undisclosed
information. While it has primarily been used as a mechanism to ensure that
government agencies are required to ensure non-disclosure of undisclosed
information relating to pharmaceutical and agricultural products provided in
support of ensuring that they are safe and effective for the purposes of
Governments authorising use of pharmaceuticals within their national health
systems, it has affect on military platforms in interpreting section 2 of Article 39.
2. Natural and legal persons shall have the possibility of preventing information
lawfully within their control from being disclosed to, acquired by, or used by
others without their consent in a manner contrary to honest commercial
practices ((10) For the purpose of this provision, “a manner contrary to honest
commercial practices” shall mean at least practices such as breach of contract, breach of
confidence and inducement to breach, and includes the acquisition of undisclosed
information by third parties who knew, or were grossly negligent in failing to know, that
such practices were involved in the acquisition) so long as such information:

(a) is secret in the sense that it is not, as a body or in the precise configuration
and assembly of its components, generally known among or readily accessible to
persons within the circles that normally deal with the kind of information in
question;

(b) has commercial value because it is secret; and

(C) has been subject to reasonable steps under the circumstances, by the person
lawfully in control of the information, to keep it secret.

It is in the clarification of “honest commercial practices” that the crux and

tension of military IP acquisition can be found. Companies seeking contracts with
Australia for the purchase of military IP will claim that disclosure of design
information relating to weapon platforms for follow on development or
acquisition of interfacing articles is not permitted under the terms of conditions
relating to IP within the acquisition contracts. In this way the companies seek to
ensure that they maintain a monopoly position with regards to any equipment
associated with their platforms.

Free Trade Agreements

The United States of America and Australia enjoy a key strategic alliance in the
Asia-Pacific region. This relationship is codified in a number of bi-lateral
agreements, in particular free trade agreements. The USA is a major stakeholder
in the IP domain as a leading developer and owner of IP. It is actively engaged in
the international protection of IP, using free trade agreements as a primary
mechanism of forcing governments to increase protections to IP owners
(reference L), in excess of those provided within the TRIPS agreement. Australia
acquires approximately 50% of its’ advanced military supplies from the USA.
Given the nature of this relationship I have chosen to examine the Australian-US
relationship in the exploration of this subject matter.

Australia and the USA have recently (2004) concluded a round of free trade
agreements which includes specific reference to military supplies and support,
arms trading, and IP. This agreement (reference M) has led to new federal
policies regarding government agencies approach to IP. This policy brings the
Australian government approach to IP more fully in line with the US IP
protections, however it does not provide explicit guidance on the management of
IP.

Within the Australia US FTA chapter 15 relates to Government procurement,

however weapons and weapon systems are excluded under Annex 15-A due to
“essential security” provisions of the FTA. Where protections and terms of the
FTA would otherwise provide some protection for IP in relation to Government
Acquisition of weapon platforms, essential security considerations regarding
weapons systems nullify the necessity for the nations to abide by these
agreements.

Chapter 17 of the Australia-US FTA covers the agreement between the two
nations with relation to IP Rights. Given the provisions of the most favoured
nation of the TRIPS agreement, this imparts those rights on all other members of
that Union. Whilst this chapter covers many contemporary issues with relation to
IP, the only section which talks to undisclosed information relates to
pharmaceuticals and agricultural products. The chapter seems void of any useful
agreements as it relates to undisclosed information regarding weapons systems.

The issue of military platform IP is excluded in the Reference M.

Australian IP Policy
The IP policy (reference H) provides 15 guidelines for government agencies to
enact. This policy is reflected in the Australian Defence Material Organisation
(DMO) (responsible for providing supplies and support to the Australian Defence
Force (ADF)) policy on IP. This policy reflects the 15 guidelines directed in
Reference H. This guidance is however non-prescriptive and is requires
consideration of issues generally outlined in a parliamentary review of naval
acquisitions (reference J) which considered IP issues in the defence context in
chapter 8.

The 15 Principles documented in Reference H are as follows:

General Principles:

1 – Australian Government agencies are responsible for managing IP in their

control or custody in an effective, efficient and ethical manner.

2 – Agencies should periodically evaluate the overall effectiveness; including

cost, risks, and benefits of the policies and practices they have in place for the
management and use of IP.

Corporate Framework

3 – Each agency should have an IP management policy which reflects its

objectives and these IP Principles.

4 – Implementation of the IP management policy should be supported by

appropriate training and resources, including access to expert advice.

5 – Agencies should maintain appropriate systems and processes to identify and

record IP.

6 – Agencies should have strategies and guidelines to ensure that IP is protected

in an appropriate manner.
7 – Agencies should have procedures in place to reduce the risk of infringement
of the IP rights of others.

Creating and Acquiring IP

8 – Agencies should maintain a flexible approach in considering options for

ownership, management and use of IP.

9 – Agencies should recognise innovation and creativity in the development of IP

in an appropriate manner which is consistent with agency objectives.

10 – Contracts and other agreements must address IP issues where relevant.

Sharing, Commercialisation, Disposal, and Public Access to IP

11 – Agencies should encourage public use and easy access to copyright

material that has been published for the purpose of:

– Informing and advising the public of government policy and activities;

– Providing information that will enable the public and organisations to
understand their own obligations and responsibilities to Government;
– Enabling the public and organisations to understand their entitlements
to government assistance;
– Facilitating access to government services; or
– Complying with public accountability requirements.

12 – Australian Government agencies should be mindful of opportunities to share

IP for which they are responsible with other agencies.

13 – Agencies should be responsive to opportunities for commercial use and

exploitation of IP, including by the public sector.

14 – Unless commercial activities are required as an integral part of an agency’s

objectives, commercialisation of IP by an agency should be no more than an
ancillary part of its activities and should not become a core business activity.

15 – Where IP is commercialised or disposed of, agencies must do so in an

accountable manner consistent with Australian Government legislation, policies
and guidelines.

These principles align with the general theory that IP is valuable, can be owned
by the Government, and agencies should seek to recognise the efforts of
developers and protect the Public interest by the establishment of fair practices
for handling IP.

Defence IP policy reflects these principles almost word for word, and so is not
reproduced here. Suffice to say that the DMO and ADF have implemented these
policy directives at the high level. Within DMO contract policy there is a standard
set of terms and conditions, this is known as the AUSDEFCON template. It
includes IP provisions which allow the DMO the flexibility in contracting to either
own military platform related IP, or to licence some part of the IP.
In principle this policy and the AUSDEFCON template terms and conditions
provide sufficient guidance to DMO in order for them to effectively, efficiently,
and ethically manage IP. This frequently becomes a more difficult matter in the
exercise of these contracts and enforcement of IP rights. Licence provisions are
frequently the subject of debate as contractors, once in contract, seek to limit
the scope of use. This then forces the DMO to negotiate additional rights at very
high rates, or to award follow on contracts to IP owners as a sole source provider.

Arms control considerations

The trade in arms is a sensitive issue for many different reasons. In the
Australian context it mainly relates to ensuring that military arms and related
information is prevented from proliferating to states which would use that
information against the originating state.

The USA Federal, International Trade in Arms Regulations (ITAR) provides

extremely restrictive clauses for the export of US arms. The breach of these
regulations has enormous cost implications for the companies developing these
systems (100 million US dollar penalty against Night Vision Goggles
manufacturer for exporting without State Department permission in 2008). It also
carries provisions for jail terms under certain circumstances. The export
permissions provided under the ITAR provide additional confusion in the
valuation of defence related IP. These licences can be drafted in such a way as to
restrict the fair exploitation of national markets, enabling US companies to
essentially dictate which sub-contractors may be used by importing nations.

General Conclusions
Given that essential security provisions essentially exclude military platforms
from a serious mention in the Australian-US FTA, it is not surprising that IP issues
in defence acquisition provides considerable consternation for the managers of
those acquisitions.

The Australian policy regarding IP requires that agencies manage IP in an

efficient, effective, and ethical manner. This becomes an extremely difficult task
for military platform acquirers given that they have a responsibility to expense
government monies within the context of the Financial Management and
Accountability Act (1997), and with no specific IP regulations with regards to
weapons due to their essential security provisions.

Military acquirers find themselves with limited legal guidance due to the
nebulous nature of weapon system regulations, aggressive negotiators sent from
weapons system providers with the goal of restricting access and distribution of
IP, policy guidance which directs them to play nicely with regards to IP, and
contract provisions which rapidly become nugatory due to the lack of regulatory
definition around mandatory and exclusionary provisions relating to IP.

In this nebulous context military acquirers are required to make determinations

of fair valuation of IP. They are typically technical or military experts with little
experience or knowledge of IP, are loathe to expose themselves to the political
risks of approaching a third party for mediation and determination, and are
generally quick to tuck IP issues into the too-hard basket, preferring to use sole
source acquisition methods in order to avoid wrangling over the value of
disclosing military IP to third parties for tendering and production of support or
interfacing materials.

Valuation
Methodology
The valuation methodology described in reference F is used here to attempt to
define the variables of valuation in this type of market. It also provides a
framework for discussion of the issues in the hope that military acquirers and
suppliers may establish a fair remuneration basis for military IP.

For the purpose of this exercise I will reference the C-130J Hercules aircraft
produced by Lockheed-Martin Aeronautics.

Valuation Purpose
The purpose of attempting this valuation is in the acquisition of capital
equipment for government use in a military context.

Within the methodology described at reference F this may equate to a

“transaction strategy” when determining the fair value for IP within a contract
under negotiation, or it may be “litigation” where contract terms are not clear
and negotiations ensue with regards to the value of IP or extended IP rights
within an existing contract.

Description
The assets are typically designs, technical documents, operational information,
software source code, and other published and undisclosed information
necessary for the operation, maintenance, and development of weapon
platforms. As such the information would be typically classified as a Trade Secret
in accordance with Table 1 of reference F.

A weapon platform is a functional piece of equipment (airplane, helicopter, ships,

etc) and all the associated equipment (supply chains, spares, tools, training,
personnel, simulators, etc) required to make it operational. The IP associated
with an aircraft or other equipment is fundamentally a component of the weapon
platform as it would be impossible to operate and maintain without some degree
of IP licence.

Premise
The use of weapon platforms for national defence requires their use in the
country of acquisition. For global engagement and protection of national
interests abroad they are used globally. The IP will be used as is, and typically as
the understanding of the platform, and gaps in the capability are understood, the
role is expanded, with additional equipment developed to support its use.

The government is typically the only end user of such equipment, however there
are normally numerous suppliers in the market to support, sustain, and develop
such platforms. These local suppliers may be direct competitors to the original
equipment manufacturer. For example; Lockheed Martin builds the C-130J
Hercules, and Boeing Australia recently sought to win the contract to support
that platform in Australia. Given that Boeing and LM are direct competitors in the
USA market, LM has a strong interest in preventing the IP associated with the C-
130J from falling into the hands of Boeing.

For the purpose of this valuation it is assumed that IP relating to the C-130J
would be used to operate, maintain, support, and sustain the existing product
and provide additional modifications, interfacing articles, and ancillary
equipment such as simulators, support equipment, and test equipment.

Standard
The assumed buyer of this type of equipment is governments, and major
corporations supporting government goals. Given that fair market value is
impossible to assess in a sole buyer market the standard for valuation should be
fair value. It is also highly likely that the Government and the supplier are
unlikely to agree on what fair market value is, the valuation process is likely to
end in arbitration of value in a compulsory licence case.

The Profile

Legal Profile
The nature of weapon systems means that they come under strict trade
regulations. The export of arms from one country to another typically requires an
arms export licence from the originating country, and strict import controls by
the acquiring country. Companies will attempt to use these controls to
commercial advantage and governments will attempt to use them for both
domestic and international political advantage.

The legal right to own and use weapons is typically reserved for governments.
Within any given national jurisdiction there is typically only one user permitted
under the national legislation, that being the government itself.

The large capital nature of new platform development means that they are
usually funded by government grants and contracts. The IP rights claimed by
companies are frequently haunted by the fact that the IP has been developed
under government funding. This is true for the C-130 series of aircraft. In
attempting to break this cycle, LM developed the C-130J model (versus the
earlier C-130A, B, C, E, K, H) under their own financing. LM claim that all IP
associated with the C-130J vests in LM because of this strategic approach. The
fact that the C-130J shares about 80% in common with the earlier government
funded models dilutes this claim significantly.

Additionally LM claim any further government funded developments as their IP

on the basis that they required the background IP and that LM produce the
modifications.

The probability that reverse engineering would be successful in securing a

technically feasible solution in any follow on work, or creation of interfacing
articles, is likely.
Business Profile
While some weapon systems (ergo Large Aircraft Infrared Counter Measure
(LAIRCM)) are unique in the market, many do have competitors. The decision to
buy one platform, C-130J, versus the competing platform, A400, has a binary
effect on the value of the associated IP. The government decision to purchase the
C130J causes the IP to have value in the national market, if they decided to
acquire the A400, the LM IP would not have any value at all.

The acquisition by governments of complex weapons platforms introduces a

complex web of commercial and trade considerations (reference H). One of the
key variables in any consideration is the value of an IP item in the territorial
region of the acquiring government. Where weapons platform use and operation
is nationally restricted to government, valuation is binary. If the government does
not acquire the platform then there is no market, due to national weapon use
restrictions, and therefore territorial value of IP is purely in the context of
advancement of the prior art. If the government does purchase the platform it
associated IP value is enormous as follow on supply of parts and services for the
life of the platform, is typically billions of dollars in additional ongoing
maintenance and upgrades programs.

The useful life of a typical aerospace platform is around 30 years, so long as

upgrades occur to maintain the platforms tactical edge. The C-130J entered
service in 1999, and it is assumed here that it will retire from service somewhere
around 2030.

The value chain for the C-130J includes development of modifications, support
contracts, spares, training and training material, engineering support,
maintenance, deployed support, and national integration with other related
platforms (ergo network centric battle space systems).

Financial Profile
The financial profile for a military platform is difficult to assess, however it would
be safe to say that in the case of the C-130J access to the associated IP would
enable the acquirer to generate income from supporting, modifying, and
upgrading the Australian fleet to the tune of hundreds of millions of dollars. The
cost of supporting and upgrading military platforms over their lifetime, in general
can be accessed from examining awarded contracts for existing military
platforms. Some difficulty is presented in equating different types of platforms,
i.e. naval platforms versus aircraft platforms, fight aircraft versus transport
aircraft.

Australian support contracts for military platforms are typically subject to both
confidentiality agreements and Financial Management and Accountability Act
disclosure regulations. As such for the purpose of this assessment the impact to
the value chain for the C-130J will be assumed as one billion Australian dollars
cost to government to support. In this figure there is a significant amount of
procurement cost, that is to say purchasing of spares, support facilities,
personnel, etc. The profit on this billion dollars is assumed here at around 5%.
Therefore the corporate profit available by the exercise of the IP is around fifty
million Australian dollars.

Short Valuation
In considering the above variables, with regards to the C-130J, a combination of
the transactional, income and replacement cost methods described at reference
F provides us with a reasonable result as to the value of the C-130J IP. The values
here are all subjective, however for a serious evaluation it is assumed that
government accounting agencies would have more accurate values available.

Assuming the value chain of the IP is approximately one billion dollars, with an
available profit of fifty million dollars. The income is not available from any other
competing product, branding or other intangibles do not add value. Given that
the C-130J will remain a fairly fixed product with some limited modifications to
enable it to remain tactically relevant, the discount rate applied should be low,
approximately 10% over the 30 year life of the platform. The cost of reverse
engineering the IP and creating a replacement IP for the system in order to
support the value chain is assumed to be approximately thirty million dollars.
The legal protections available under undisclosed information protections are
weak.

Therefore we obtain the following variables in the valuation:

P = Profit Available = 50,000,000

D = Discount rate = 10% = 0.1

R = Replacement cost = 30,000,000

Re = Probability that a replacement could be reverse engineered = 55% = 0.55

V = Value of IP = P * (1 – D) – R * Re = 50,000,000 * 0.9 – 30,000,000 * 0.55 =

$28.5 Million

Closing Remarks
In the realm of military aviation platforms the IP issues are the source of major
contract wrangling, with little independent expert advice available, particularly in
the domain of software which enables the full integration of aircraft systems. The
decompiling and use of source code without express permission is institutional
impossible given the dearth of specific regulations or prescriptive policies.

Whilst the Commonwealth of Australia is the sole permitted user of the weapons
platforms, a question arises regarding assumed transfer of total rights, and full
exhaustion of the importers rights. The valuation in contract negotiations is
rarely subject to detailed examination, and certainly, independent global market
valuation studies are not conducted.

The lack of decisions and guidance in this arena leaves the military, and in
particular software dimensions, realm of IP open to abuse and institutional
incompetency. WIPO guidance on interpretation of software IP regulations, as it
relates to major capital acquisitions by States, would be useful. An explicit
finding with regards to minimum implied rights on sale of equipment in a sole
buyer national market would facilitate contract negotiations by anchoring a
starting point for dialogue.

At the very least guidance from government should be provided to acquisition

managers and contract negotiators in order to ensure fair valuation of IP
associated with military platforms, with due regard to the essential security and
political implications relating to these unique systems.