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March, 2010

Protecting Intellectual Property

By Julian Dowling
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In January, following two years of debate, Congress finally passed a bill that increases protection for intellectual property and complies with Chile’s main obligations in its free trade agreement with the United States, but its success will depend on how effectively it is enforced.

What looks and tastes like Coca Cola but isn’t Coca Cola? Counterfeit Coke. That’s the conclusion reached by Patricio Bascuñan, the chief of Chile’s special intellectual property crimes unit, BRIDEPI, after his unit confiscated 40,000 bottles of falsified soft drink imported from China last year.

And it’s not just soft drinks that are giving Bascuñan’s unit a headache. Everything from brand name toys to clothes, DVDs, CDs and books are for sale on Santiago’s streets, or on the Internet, at a fraction of the original’s price because they are pirated.

“We’re going after the masterminds, the importers and distributors, and we’re catching many of them… intellectual property is better protected in Chile thanks to us,” said Bascuñan.

BRIDEPI, which was created in 2008, is the first police unit specialized in intellectual property in Latin America. Last year, it confiscated falsified products worth around US$6 million and arrested 113 people involved in importing these products.

But despite the efforts of Bascuñan’s team, Chile’s reputation as a copycat country remains intact. Its failure to effectively protect intellectual property, on the street and online, is the reason the International Intellectual Property Alliance (IIPA) has recommended Chile remain on the Priority Watch List of the U.S. Trade Representative’s Office this year for a fourth consecutive year.

Others on the list include Canada, China and Russia, but for a country often held aloft as an economic example, piracy remains a thorn in Chile’s side. The software industry alone estimates losses at US$200 million annually, which does not include job losses, lost investment or the negative impact on the country’s image abroad.

“The copyright industries remain very concerned about the twin problems of inadequate legal reform and high piracy levels in Chile,” said the IIPA in its 2010 Special 301 Report.

Seven years ago, Chile was the first South American country to sign a Free Trade Agreement with the U.S., which included high level copyright and enforcement obligations. But the deadlines have passed and Chile has not implemented many of these obligations.

"The U.S. government recognizes Chile's recent steps forward on protecting intellectual property… However, we remain concerned that Chile still has not fully implemented its intellectual property commitments under the Free Trade Agreement,” said Paul Watzlavick, a spokesperson for the U.S. embassy in Chile.

It’s true, Chile has made progress in catching those who import and distribute counterfeit products. “We are working with the public and private sectors, including the World Intellectual Property Organization and the national customs agency, to increase protection for intellectual property,” said Bascuñan.

But Bascuñan admits more resources are needed, especially to fight Internet piracy. Thousands of websites distribute music and images illegally, but taking them down and punishing those responsible is tricky.
“We always need better technology to stay a step ahead of the criminals,” he said.

Stiffer sentences are also needed. Under Chile’s intellectual property framework law passed in 1970, most of those charged with selling counterfeit goods got off with a slap on the wrist since judges used a loophole in the law to avoid handing out stiffer penalties.

But that will change under the new law, which imposes stiff sentences on those found guilty of importing or distributing copyrighted materials illegally.

“More than increasing the quantity of cases, this law will improve the quality of sentences handed out,” says Daniel Alvarez, the bill’s architect and legal advisor to the Culture Minister in the Michelle Bachelet government.

For the first time in Chile, the law also addresses the issue of Internet piracy directly, limiting the responsibility of Internet Service Providers but giving copyright holders more legal options and improving the efficiency of the court system.

Representatives of the film and music recording industries will still need an injunction to block websites distributing their property without permission, but the process should take a few days instead of weeks or months, said Alvarez.

“It is a better, more efficient system that protects intellectual property and should become a model for the rest of Latin America… the challenge now is to implement the law,” says Alvarez.

Fair use exceptions

The law does not just protect intellectual property, it also guarantees free access to copyrighted material for non-profit purposes including education, research and development, through a list of so-called fair use exceptions.

In the past, photocopying a library book was a crime in Chile though one that usually went unpunished, but today excerpts of books, music, films and software can be legally copied in special cases.

“These exceptions ensure access to culture for students, teachers, researchers and others who shouldn’t have to pay for it,” said Alvarez.

Another exception, known as reverse engineering, allows local software developers to see the source code of copyrighted software. At first glance, this exception seems to facilitate software piracy, which is already a big problem in Chile.

According to a study by the Business Software Alliance, 67% of software running on computers in Chilean homes and offices is illegal, which is double the average rate in OECD countries.

And the piracy problem is hurting investment in research and development. “If companies don’t feel their intellectual property is protected, they will simply not invest,” said Microsoft Chile legal advisor, Alex Pessó.

The original bill presented to Congress was too broad in its exceptions, says Pessó, but the final wording ensures that source code can only be viewed to ensure locally developed software is compatible with other programs, such as Microsoft Windows.

“The law balances the rights of copyright holders with access to cultural works, but the system of intellectual property protection is failing because there is no effective enforcement,” said Pessó.

Policing the Internet

Chile has one of the highest broadband penetrations in the region with over 8.36 million Internet users, or 50.4% of the population, but the growth of broadband capacity facilitates illegal downloading, including peer-to-peer (P2P) file-sharing.

The music recording industry reports that Internet piracy is its biggest problem in Chile, with over 400 million songs downloaded annually. Websites like Chilewarez, which allow users to post and exchange music files for free, are hurting legitimate music stores that are suffering from falling sales.

But shutting down these sites, or blocking their content, requires the cooperation of Internet Service Providers (ISPs), which allow pirates to use their services but do not have the right to censor content without a court order.

Chile is not the first country to try to protect intellectual property from online piracy. The U.S. passed the Digital Millennium Copyright Act (DMCA) in 1998, which obligates ISPs to take down websites immediately when notified of a copyright infringement. But similar legislation in Canada and the United Kingdom has been scuppered by fears such regulation could be used for censorship.

As with the DMCA, Chile’s law limits the legal responsibility of ISPs but copyright holders must seek an injunction to take down illegal websites, which can be a time-consuming and costly process.

ISPs are now obliged to forward infringement notices to users, which should result, in most cases, with the illegal content being removed by the user voluntarily, said Claudio Magliona, a partner in the Santiago law firm García Magliona & Cia.

If that fails, copyright holders must go to court. “The possibility of censorship is eliminated because there is a court in the middle, it’s a system that protects freedom of speech as well as intellectual property,” said Magliona.

But the law strikes a false note, according to the International Federation of the Phonographic Industry (IFPI), which represents the music recording industry worldwide.

“The law is flawed… we are very disappointed, you can’t protect access to culture at the cost of cheating the creators out of their rightful compensation,” said Fernando Silva, a lawyer representing IFPI in Chile.

According to Silva, the law fails to comply with Article 17 of the Chile-U.S. Free Trade Agreement which calls for “legal incentives so that ISPs cooperate with copyright holders to dissuade the illegal storing or sharing of copyrighted material.”

Without the cooperation of ISPs applying criminal sanctions will be difficult in cases of online piracy because the burden is on copyright holders to prove the amount of damages, said Silva.

“This law doesn’t protect us… we don’t have the resources to hire hundreds of lawyers,” he said.

Enforcement and education

Artists and their local representatives like Silva are disappointed with the new system which they say fails to protect their rights adequately, but legal experts say the law is well-balanced.

“The law strikes an adequate balance between fair use exceptions and the protection of intellectual property rights,” said Alvaro Arevalo, a lawyer at the Santiago law firm Federico Villaseca.

But tougher sentences mean little if they are not enforced. The police unit BRIDEPI is catching many of those who traffic in intellectual property, but the court system must be strengthened to make sure these criminals are punished.

Better enforcement will also improve relations between Chile and the U.S., says AmCham’s president, Ricardo García.
“These steps to strengthen institutions are necessary and very positive, but they are not the end of Chile’s work… the missing ingredient is the will to comply with the legal framework with strength and determination,” said García.
Arevalo agrees that legislation alone is not enough. “A good law is not worth anything if the resources are not there to implement it properly.”

But even with political will, protecting intellectual property will be a difficult task while demand for pirated goods remains high.

According to a recent IFPI study, nearly all Chileans consider buying pirated music a crime, but 55% said they had bought pirated music in the past six months.

“This is not a problem you can resolve with laws, it requires education,” said Claudio Ossa, the head of Intellectual Property Rights at the government’s Museums, Libraries and Archives Council (DIBAM).

Better education would help Chileans appreciate the value of art as a legitimate occupation, said Ossa. “Artists have the right to earn a living from their work and paying for art benefits the whole community and the economy.”

Chile’s cultural production, including the music, publishing and audiovisual industries, represents 1.3% of GDP, but it has the potential to grow with more investment, said Ossa.

And intellectual property protection doesn’t just benefit foreign artists, it also benefits Chilean artists who want to export their creations. DIBAM is doing its part by digitalizing original music recordings and books, which makes it easier for artists to transfer ownership and receive compensation.

There are still some legal issues to be worked out, for example clear rules are needed to govern ‘orphan works’ which are those works whose owners cannot be found, but the law should increase certainty for investors, said Ossa.

The legislation is still awaiting approval by Chile’s Constitutional Court before it can be signed by the President, but April 26 is World Intellectual Property Day which Chile could celebrate with a new law.

After all, it’s not just Chile’s reputation that’s at stake – the country’s development is closely linked to its capacity to produce intellectual property and, most importantly, protect it.

Julian Dowling, is Editor of bUSiness CHILE