Is IP Good for Industrial Clusters?

Small-firm clustering has been championed as a strategy for enabling such companies in the aggregate to compete successfully against rivals in emerging markets. The idea is that these companies can tap the pool of manpower and resources in a local area for their collective benefit of the participants. Perhaps the most heralded example of this strategy are the many local artisan and manufacturing industries that are found in Italy. Whether it is eyeware, recycled wool, or furniture, or hundreds of other products, these clusters of industrial activity have served as a model for Italian competitive advantage.

If this be so, then an article in the October 17 issue of The Economist surely makes depressing reading for anyone with an interest in the future of the Italian economy. Entitled "Sinking Together: Italy's Business Clusters", the article describes the difficulties facing these fabled industrial clusters. As described in the article, clustering is especially important in Italy, "where firms are generally makers of traditional consumer goods, small or medium-sized, family-owned, dependent--directly or indirectly--on exports and, for reasons of geography and history, clustered together." Whether a casualty of the world economic meltdown, or due to larger factors of the rearranged industrial balance between developed and emerging economies, the situation appears to be the same: the clusters are in trouble.

Against this gloomy backdrop, can the Italian clustering model survive? The view of Giacomo Vaciago, of the Catholic University of Milan, is that it can, if it adopts the following model, as described in the piece--"... transform themselves into districts where new ideas are dreamed up, designs developed and goods finished, with most production taking place in cheaper spots abroad." If Professor Vaciago is correct, the question then arises: What is the role of IP in this remade form of Italian industrial clustering"?

Find the Design Clusters

The immediate instinctive response is to argue that focusing the activities of the clusters on creation and design must certainly mean that IP protection will become even more important. After all, creation and design must be protected to realize their full value. Not so fast, however. An argument can be made that what is needed--IP-wise--for these clusters to flourish is actually less IP protection and more the encouragement of copying and imitation. What possibly can I mean here?

There is a developing body of research that points to norm-based systems of "IP" creation and enforcement that lie outside the traditional IP framework. One notable example is the work of Von Hippel and Fauchart ("Norms-Based Intellectual Property Systems: The Case of French Chefs", 2006) here. Another example, more germane for our topic, is that work of Raustiala and Sprigman, "The Piracy Paradox: Innovation and Intellectual Property in Fashion Design", Virginia Law Review (2006), on the nature of the U.S. fashion industry.

There the argument is made that copying and imitation are forms of signaling, which alert industry participants to ratchet up their creative activities to find the next new successful fashion. Given the short-time line of fashion cyclicality, traditional IP protection and enforcement is of lesser importance. In this context, IP litigation is all about fighting the last war rather than readying the design troops to prevail in the battle for capturing the next successful fashion design. Of course, there are limits, such as blatant counterfeiting and straight-on trade mark infringement. Short of that, however, copying and imitation should be encouraged, not discouraged.

If this view is correct, it suggests that Italian clustering will succeed only if traditional IP principles do not get in the way of exploiting the advantage offered by enhanced collective copying and imitation. Secrecy will still be important--I do not assume that all of the members of the cluster will share their creative thoughts and plans on the front page of La Stampa. That said, the enhanced focusing of design and creation as the raison d'etre of the Italian cluster industry poses a fundamental challenge: How to allow pro-competitive copying and imitation, without undermining the foundations of IP protection that are the behavioural norm in the broader competitive landscape? At least in part, the vibrancy of the Italian economy may rely on its outcome.

Inspiration or Imitation?

IP securitisation in Italy

This note has been kindly provided for IP Finance by Chiara Ortolani, an Erasmus Scholar from the University of Bologna who is at present in residence at the London office of Olswang:

"When considering the intangible nature of intellectual property, perhaps it is not surprising that securitisations in this field have not become everyday, well-publicised transactions. Each type of intellectual property comes with its own peculiar set of complexities and unknown risks that are not common to commercial ventures involving tangible property" K. W. Medansky and A. D. Dalinka

As of March 2009, no public information has been made available about IP securitisation in the Italian market. However, given that the transparency of financial markets is only one species of capitalist utopia and that IP securitisations are less publicised than other kinds of transaction, we can assume that IP securitisation is a process which is extremely rare (if it has ever happened) in the Italian market.

Why hasn't a traditionally illiquid and bank-oriented market like that of Italy discovered IP securitisation? There are at least two answers: first, the Italian rules on securitisation date from 1999: even though some securitisations had been arranged since 1990 using foreign vehicles, uncertainty about the protection of the investors and the conflict between laws slowed the development of this financial process, which in the same period was already used in the US and UK markets.

Secondly, the Italian market has a very peculiar composition: a large proportion of economic operators are represented by small or medium family-owned businesses which are unable to bear the costs involved by securitisation. Furthermore, since the banks have never shown a real interest in IP securitisation, this can be considered a relevant factor, if not a proper reason, in our analysis.

Focusing on the Italian rules about securitisation, provided by Act 130/1999, they statute a wide definition of the assets which the originator can pool and sell to a special purpose vehicle (SPV), simply specifying that the assets have to be pecuniary credits, already existing or existing in the future (Art. 1). This means that every kind of asset, including IP assets, can be pooled and sold to the SPV to start off a securitisation. The Italian rules are at the same time careful to protect investors, stipulating that the rules for public offerings of financial instruments are to be applied to some phases of the process of securitization (Art. 2), that the SPV has to meet strict requirements to do this activity (Art. 3) and prescribing that some of the rules of banking and financial transactions are to be applied to securitisations (Articles 4 and 5).

There are still many live issues concerning this Act: in particular, the function of Italian SPVs is completely different from the role of US and UK SPVs, because the Italian ones are businesses which can manage assets from different originators (they have been defined "multi-seller" for that reason), with a high risk of conflict of interests. Furthermore, the Act doesn't provide any definition of the financial instruments which the SPV will use to obtain funds from the investors and doesn’t specify if they are shares, bonds, credit derivatives or hybrid securities. This omission leads to huge problems in applying the protection to investors. However, some authors say the Act on securitisation can only provide a legislative framework but does not cover all the issues which securitisation raises.

The Italian rules neither forbid nor limit IP securitisation, but the key issue is whether the characteristics of the Italian market can stop the development of this financial process, which is actually one the most affected by the financial crisis. Predictions as to the survival of IP securitisation in the financial markets are pessimistic because of the decreasing answer of securities, the pressure put on banks by the recession and the prohibitive costs of assets on the secondary market. No predictions can be offered where unpredictability is the rule, but one may focus on the "set of complexities and unknown risks" of IP securitization to understand if there are opportunities for the diffusion of this instrument in the Italian market.

In general the two main problems involved in the diffusion of IP securitisation are the lack of common and widely accepted valuation methodologies for IP assets and the volatility of the IP market. The effective degree of success of a film or of a song, as well as the degree of use of a trade mark or of a design, is unpredictable in the absence of a specific framework for evaluation and the value of these intangible assets; further, the rating of financial products used to obtain funds definitely relies on the prediction of successful diffusion of the IP assets (copyrights, trade marks, designs, patents). For that reason the valuation of IP assets made by banks and financial institutions needs a generally accepted methodology, able to ensure to businesses a global assessment of their securitisation plans, not solely based on the reputation of the originator or of his brand.

There are some trans-national challenges to overcome in the process of development and diffusion of IP securitisation. This process can't succeed without a generally accepted framework for valuation of IP assets, new international rules which allow IP owners to gain access to affordable credit through specific procedures and a strong awareness of the potentiality of this finance process between the economic and legal operators. Some domestic challenges face the Italian market and its players: IP securitisation is a not completely explored field and, for that reason, new solutions can be found to enable the Italian market to take advantage of IP securitisation. There is no evidence that this kind of securitisation can't work in a bank-oriented financial system -- the challenge is understanding how.

After bankruptcy: what happens to the Italian business format franchise?

Although, once a business format is successfully trialled, a franchise contract runs a heavily reduced risk of encountering an episode of bankruptcy on either side, this event can still occur. The Italian Bankruptcy Law (267/1942) divides business contracts into three categories:

* contracts that terminate on an adjudication of bankruptcy;

* contracts to which the bankruptcy trustee automatically succeeds the bankrupt because continued performance is to the creditors' advantage;

* contracts that are suspended until the bankruptcy trustee decides whether to terminate or continue them.

Franchise agreements, despite their ubiquity, are not however mentioned -- an oversight that was not addressed when the Franchising Law was revised in 2004. This means that their regulation on bankruptcy must be handled by analogising them to one of the three categories mentioned above.

In intellectual property terms, franchise agreements can span a number of elements of the contractual relationship:

* the use of trade marks and other signs belonging to the franchisor;

* the transfer of the franchisor's know-how to the franchisee;

* the sale by the franchisee of products and services and

* the payment by the franchisee of agreed royalties or fees.

The diverse nature of these provisions makes franchise agreements comparable to several types of contract, such as licence, agency, distribution, supply and commission agreements.

Some commentators consider the franchise relationship to be one of personal trust, which automatically terminates in the event of either party's bankruptcy, in the same manner as agency and commission agreements. Case law from the Court of Turin in January 1995 however construed the franchise as a supply agreement in which the franchisor supplied services, rather than goods. On this basis it was regulated by the provisions of the Bankruptcy Law that provide for the suspension of performance of mutual obligations until the bankruptcy trustee decides whether to terminate or continue the contract. This ruling has however been questioned on practical grounds.

Ultimately each case will be decided on its own facts and its own merits. Parties are advised to stipulate the consequences of bankruptcy in advance, to avoid undertainties and undesired consequences [source: Marco De Leo and Beatrice Masi, of Rinaldi e Associati, writing in International Law Office].