By David Cronin for Intellectual Property Watch
BRUSSELS – The European Union has demanded that Taiwan change its intellectual property law within two months following a probe into how the East Asian island overruled patents on recordable CDs (CD-Rs).

Philips, the Dutch electronics giant which holds patents for the core technologies used in CD-Rs, filed a complaint with the EU in early 2007 over the activities of a Taiwan-based company Gigastorage.

Since the 1990s, Philips had given licences to use technology for which it held patent rights to several companies in Taiwan. These firms went on to supply about 80 percent of the global market in CD-Rs by the early part of this decade.

While Gigastorage was one of the firms with which Philips had a licence agreement, this accord was scrapped in 2001. Gigastorage subsequently asked the Taiwanese national authorities to enable it to continue making the discs by issuing a compulsory licence. Its request was granted in 2004.

After investigating Philips’ complaint, the EU’s executive, the European Commission, warned on 30 January that it could start dispute proceedings against Taiwan in the World Trade Organization unless its patent law is swiftly amended.

The Commission has objected to a provision in the Taiwanese law allowing national authorities to grant a compulsory licence if a rights-holder has refused a voluntary one. EU officials believe this clause is not compatible with the WTO Agreement on Trade-Related Intellectual Property Rights (TRIPS), as it permits patent-holders to withhold licences in most situations. It also suggested compulsory licences should be limited to products intended primarily for the domestic market, and that it was not the case.

“The EU fully supports the use of compulsory licensing in specific circumstances, in particular to facilitate access to medicines,” said Peter Mandelson, the European commissioner for trade. “However, we cannot accept the abuse of this system. I hope that the Taiwanese authorities will move quickly to bring their law and practice into line with WTO rules. I cannot rule out seeking WTO dispute settlement if they do not.”

The Commission said that it is challenging Taiwan’s patent law as part of its overall efforts to remove barriers to trade encountered by European firms doing business abroad. In a 2006 strategy paper titled Global Europe, the Commission argued that the protection of European patent rights outside the EU’s borders is essential to guarantee the competitiveness of European industry.

A report prepared by EU officials who examined the Philips’ complaint concludes that “circumstantial evidence” has been found to suggest the Taiwanese authorities are willing to use compulsory licensing as an industrial policy instrument, rather than as a limited exception to patent rights.

It suggests that a compulsory licence was issued in this case to pressurise Philips into lowering the royalty rates it charged to all CD-R manufacturers in Taiwan. None of the other CD-R manufacturers in Taiwan opposed the advantages given to Gigastorage, it noted.

According to the Commission, the case sets a “terribly dangerous precedent of an industrial policy built on violation of the TRIPS agreement.”

A Taiwanese diplomat familiar with the case said that producers on the island had encountered a “dramatic change” because the international price of CD-Rs has fallen considerably in recent years. Although the Taiwanese authorities had asked Philips to reassess the royalty rates it was charging to reflect this situation, the Dutch firm declined to do so, the diplomat said.

“It might seem odd that the Commission wants us to change the law within two months,” the diplomat continued. “Maybe it just wants to send out a signal not just to Taiwan but to others that it will vigorously safeguard Europe’s intellectual property concerns.”

Despite the Commission’s warning, a preliminary settlement was reached between Philips and Gigastorage in October 2007. The settlement followed a ruling in Philips’ favour, delivered by the US International Trade Commission earlier in the year. The Commission said its aim is a change to Taiwanese law.

The amount of compensation being paid as a result of the settlement has not been disclosed.

David Cronin may be reached at info@ip-watch.ch.