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