Séminaire d'Économie Publique - Centre d'Économie de la Sorbonne

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Séminaire d'Économie Publique - Centre d'Économie de la Sorbonne

These solutions seem unrealistic, they appear to be a back in the past. While dual technologyuse is a way to release defence budget constraint, it is not possible to increase defence publicfunds or to stop the financing of the research which is an important contribution to theeconomic growth. The two following ideas are more plausible: to strengthen exportationcontrols and/or to keep watch on edge-cutting technology through the entire world, even tospy.The control of the production and the trade of weapons and edge-cutting technology arewarranted by administrative structures: the Arms Export Control Act and the ExportAdministration Act in USA, and this task is devolved upon the Prime Minister by the WarMaterials Export Study Inter-ministerial Commission in France. A problem underlined byHagelin (1998) is that these controls don’t worry about dual product exportation, as it’s thecase in France, or are biased in favour of economic interests, as it’s the case in USA.Another way to focus economic interests and military sovereignty is to keep watch onedge-cutting technology. All the ministries of defence have a technological watch office.These offices are in charge to watch edge-cutting technology to allow an understanding topermit a technology oriented investment strategy to be put in place and to allow a more indepthappreciation of what the civil world is doing in certain areas of technology (Robets2001). We understand that this strategy is called technological watch in the case of civilsector, and can be called spying in the case of military technology. 1We add another way of reconciliation of this dilemma: defence secret label has to bemade incentive to innovate.3/ The IP rights in defence sector.Since public military sector faced to an important decrease of theirs budgets, intellectualproperty rights matter. Also, both private research publicly financed and dual-technology useforce defence administration to re-think the management of innovations and intellectualproperty rights. In other words, at the end of the cold war, public defence administration hasto incite private firms to collaborate. For this, new agreements of contractual incentives had tobe found because commercial contractors often have a variety of reasons for not wanting tocontract with the government given its IP rights management (USGAO 2002).1 Bruneau (2001) asks if the intelligence production has to be a civilian or a military task.6

3.1/ History and prerogatives of defence IP offices.It is in the USA that we can find a first literature about the management of IP rights ofpublic financed research. Yet, Weidenbaum (1961) underlined the surge of the military R&Dmarket and highlighted the links between public research institutes and private sector.Weidenbaum emphasized that over fifty per cent of all R&D performed by private industrywas financed by the federal government. Given the importance of this financing, theownership of innovations resulting from R&D publicly funded mattered. Principally, twoownership policies existed: a title policy and a license policy. For example, the AtomicEnergy Commission followed a title policy, it took ownership and allowed the invention to beutilized without charge by industry as a whole. AEC was authorized to waive its rights to thecontractor, but has seldom done so, as Lambright (1968) underlines it. On the contrary, theDepartment of Defence adhered to a license policy. It customarily allowed its privatecontractor to keep government-financed patents for commercial development. As Lambright(1968) notes, this diversity in patent policy was principally due to the unique internaldynamics and history of the semi autonomous administrative subsystems involved in thepartnership. This diversity of patent policy and its potential consequences on economicgrowth was hardly debated (see Preston 1963, Letters HBR 1964).Since 1996, the intellectual property of the French Ministry of Defence is managed bythe Intellectual Property Office, within the DGA. This IP office manages 180 french patentsand near 460 foreign patents. It runs 1400 free licences too. The IPO’s missions are to definepatent and licence policies of DGA and to warrant the secret protection on inventionsconcerning the defence interests. According to the cahier des clauses généralesadministratives (CCAG/PI and CCAG/MI), the office of IP gets and manages the freelicences issue from contracts between DGA and private firms. The IPO can advice DGAdepartments on the clauses related to artistic and literary property in the contracts betweenDGA and firms. It should be stressed that this advice do not deal with the industrial propertybecause this latter are formulated into the CCAG and not the formers.3.2/ Incentive contractual agreements.The departments of defence of countries need to outsource, to collaborate with privatesector. For this, incentive contracts have to be written and the intellectual property rights areoften a key factor of these contracts. As the General Accounting Office of U. S. (2002)7

underlines, the management of IP rights in the public/private contractual relationship isdeciding in the government’s ability to acquire the latest technologies. To understand IP rightsas an incentive factor, we discuss the current potential agreements.With a title policy, the ownership is owned by the government. In this context, the firmsare not incited to participate with the government. In fact, the issue of title policy is that theinnovation becomes public and is knew (and could be used) by the competitor of the privatecontractor. We can understand, in this case, that the firms are not incited to deal with thepublic contractor even if financed. Without the full ownership of the innovation, as a patent,firms can’t have the monopoly of their invention. Therefore, an exclusive license can be givento the private contractor. Nevertheless, the incentive matter is to know if the public contractordoesn’t license the innovation to other competitors.In a case of license policy, the situation is reversed: the private contractor owns theinnovation. Then the incentives to collaborate are higher than with a title policy. But, in termsof economic efficiency, this policy doesn’t seem efficient. Effectively, if an innovation isavailable to all users, both the stock of knowledge and the technical progress increase,inversely, a patent owned by an innovator creates monopoly distortions. More, in this case,the patent of the innovation owned by the private contractor is issue from a public financedresearch, and then some commentators argue that the taxpayers are twice involved (HBR1964). Obviously, these contracts are not so strictly and public contractor can have anexclusive license.The third case is the co-ownership of the innovation. This contract is the most commonused in the French R&D agreements between State and private contractors (DGA 2002).Therefore, this contractual mode needs a “patent co-ownership statutory” defining the rulesfor licensing or exploiting the innovation. Finally, we can say that this solution focus to titleor license policy according to the choice of the clause A, B or C of the CCAG/PI. The clauseA gives the ownership of the innovation to the public administration while clause B and C arein favour of the ownership of the private partner.The latest form of contract is more flexible. It is based on the “Other TransactionAuthority” of the DoD. OT Authority enables DoD to contract with firms traditionally notinclined to deal with it. To produce these incentives, OT types look like to a license policywhich the benefits are greater, in term of ownership of the innovation, than the othertraditional contracts. This OT solution is a way to increase the civilian-military integration, asunderlined by Guichard (2003), and it is a solution to solve the high-tech US governmentcontracting crisis (Block and McEwen 2002).8

Nevertheless, all these contracts dealing with IP rights bargaining rule out the secretdefence label. Does it mean that defence secret as an intellectual property rights does notconfer incentives to collaborate in public research financed? We propose in the next sectionsome solutions allowing to re-design defence secret label in order to make it incentive toinnovate.4/ The defence secret as an intellectual property right.The defence secret can be considered as an intellectual property rights. Therefore, thisintellectual property rights as a “social” trade secret does not incite firms to innovate inpublic-financed research. Then, an area exits where defence secret is necessary and only issuefrom a public outcome, that is the public research that is labelled secret defence is essential.4.1/ A social trade secret.The system of intellectual property rights gives to individual some incentives toinnovate. Allowing protecting ideas and inventions, it confers incentives to both creators andinventors to exploit commercially theirs skills. Patent system is obviously the main juridicalsystem to protect inventions but it exists the possibility to innovators to keep secret theirsinventions enjoying a juridical protection too, namely the trade secret.Since Kitch (1977) grounding the economic analysis of patent system and underlyingthe benefits of it, a debate about the superiority between the patent system and the trade secretsurged. Does the absence of monopoly distortions of the trade secret system make it moreefficient than the patent system? Cheung (1982) emphasizes that in absence of patentprotection, the inventor could choose to not invent at all. Therefore, he underlines that themain advantage of the patent system is the diffusion of knowledge it allows and that’s why,Cheung concludes, patents are “superior” to trade secret. Patent system seems sociallysuperior to trade secret, nevertheless it’s not true at an individual level. Trade secret iscommonly used by the firms (Arundel 2001). Friedman and alii (2001) highlight threetheoretical cases where an innovator prefers trade secret to patent. Inventors can choose tradesecret protection when patent protection is too costly, when the reward issue from anexploitation of the patent is less than the benefit of the invention or when the invention is notpatentable or the length of time of patent protection is insufficient. Taking into account the9

second and the third reason of a trade secret protection choose, we can interpret the defencesecret as a “social trade secret”.Defence secret label cannot be as patents: intrinsically, the diffusion of the knowledgeisn’t the main characteristic of a secret. Defence secret is not as trade secret because its maingoal is not only economic benefits but military supremacy too. But, it looks like trade secretin the way where the information must not be diffused. That’s why, in this sense, we describedefence secret as “social trade secret”.Legally, the defence secret is an “intellectual property right” covered by three lawsystem. As Wasfurel (1995) underlines it, the defence secret is found in the patent law. In theFrench patent law, the ministry of defence has the power to examine all the patent filesconcerning “inventions interesting national defence”. In some cases, the ministry of defencecan keep secret and expropriate the inventions presenting a great military interest. Obviously,defence secret is present in the criminal law. The spying, the treason, and the sale ofinventions labelled defence secret to foreign country is penalized by the law. At last, in theEuropean Community, all the states can argue the purpose of defence secret face tocommunity institutions. In some cases, the defence secret is a matter of national sovereigntyand not a community matter one.Defence secret is a national property right and it has no value only the militarysupremacy it allows. Compared to trade secret and patent, its economic value can beunderstood only in the competitive advantage it gives to the nation in term of militarysuperiority and it can be considered as an element of peace. Effectively, if we consider theequilibrium of forces between democracies resulting from nation’s military innovationdynamics, given that democracies are the nations the more inventive, defence secret can beseen as an element of deterrence and then as a essential structure of peace. Next, if weconsider only the military competitive advantage, an innovating country can fight and winwar, or in others words it can win market share.4.2/ The defence secret: an efficient property right?Private firms are not incited to innovate under a defence secret protection. Three reasonscan be advanced. The benefits issue from the purchase of the innovation by the public sectorcan be less than a commercialization on a free competitive market. No brand name effect isallowed under a defence secret protection, recall that criminal law manage strictly thediffusion of military information. Finally, a defence secret protection is very costly to enforce,10

perhaps even more than a trade secret. Then how can we make defence secret incentive toinnovate?A reform of the patent law. Novelty requirement is a strict criterion to patent. Anefficient contractual way to make the defence secret label incentive to innovate would be toauthorize the innovator to file a patent for the invention even if this latter was labelled defencesecret for a more or less long time, or in other words as soon as this invention does not servethe interests of the nation. Here, the proposition would be simply to allow to an innovation tobenefit from a patent even if this innovation was knew before. Effectively, this invention wasknew but in the same time it was secret, then normally, even the patent expert of patentoffices did not know that this invention existed. Then in this case, the innovator can contractand profit from the purchase of the defence public sector next he can patent his invention andcommercialize it on a free competitive market, even a civil one.The second way to make secret defence attractive would be to finance R&D in the antireverse engineering. Effectively, the loss of a trade secret or a defence secret is possible bythe reverse engineering made by the competitors or the other nations. Thus, in a case where aninnovation would be classified top secret, public administration could help the innovator tomake his innovation more secure facing the reverse engineering. Special funds could beallocate to the innovator in order that his innovation not be easily imitate and improve. It mustbe note that, in french public contract, only the private partner bears the cost of protection ofthe secrecy (Art. 7.3 of CCAG/PI and Art. 7.2.c of CCAG/MI). Continuously, the innovatorcould benefit from the help and the experience of military forces to protect his secrecy. Itcould be a both human and technological help as, for instance, counter-spying, dataencoding….Finally, in order to deter spying, tort law could be threatened towards industrial andmilitary spying. Effectively, as underlined by Friedman and alii (1991), in the case ofindustrial spying, i.e. in the case of trade secret theft, the law considers only the theft as a tort.Sanctions and fines are applied only for the theft but not for the loss of the secret. Thus cartheft and trade secret theft are the same infractions. Threatening sanctions and fines on tradesecret theft could deter spying and could make defence secret more attractive.11

ConclusionThe use of dual-technologies and PPP in defence sector can be the source of a loss ofmilitary sovereignty. Allowing easily technological transfers between firms and nations,patent and licence system is at the base of this possibility of military sovereignty loss. In fact,to incite private firms to collaborate with defense public sector, contractual agreementsbetween public administration and firms are more in more in favor of the ownership ofinnovations for private firms. These contracts don’t make the defence secret label incite tocollaborate while defence secret label could allow to economic interest of firms and militarysovereignty to converge. A reform of patent law and a threatening of tort law on industrialspying can be view but we can envisage to reform some clauses of the public Market Law too.ReferencesArundel A. (2001), The Relative Effectiveness of Patents and Secrecy forAppropriation, Research Policy, 30, 611-624.Bloch D. and McEwen J. (2002), « Other Transactions » with Uncle Sam : A Solution tothe High-Tech Government Contracting Crisis, Texas Intellectual Property Law journal,10(2), 195-322.Cheung S. (1982), Property Rights in Trade Secrets, Economic Inquiry, 20, 40-53.Friedman D., Landes W. and Posner R. (1991), Some Economics of Trade Secret Law,Journal of Economic Perspectives, 5(1), 61-72.Guichard R. (2003), How Can Intellectual Property Rights Be Incentives for Civilian-Military Integration?, Paper presented to the conference on “Innovation en Europe:Dynamics, Institutions and Values”, Roskilde University, Denmark, 8 th -9 th May, 2003.Hagelin T. M. (1998), National Security in an Era of Global Technology Markets:DoD’s Dual-Use Dilemna, in The Defense Industry in the post-Cold War Era, Susman G. I.and O’Keefe S. (eds), Pergamon, 77-88.Kitch E. W. (1977), The Nature and Function of the Patent System, Journal of Law andEconomics, 20, 265-290.Lambright W. (1968), Government, Industry, and the Research Partnership: the Case ofPatent Policy, Public Administration Review, May/June, 214-221.OECD (2002), Background draft report of the Expert workshop on the strategic use ofIPRs by public research organizations, October.12

OST (1997), les contrats publics de RD civils et militaires : une analyse en termes depotentiel industriel de recherche et de technologie.Preston L. (1963), Patent Rights Under Federal R&D Contracts, Harvard BusinessReview, Sept/ Oct.Robets D. (2001), Managing Synergy Between Civil and Defense Research in theUnited Kingdom, L’Armement, 76, 130-141.Sachwald F. (1999), Defence Industry Restructuring: The End of an EconomicException, les notes de l’IFRI n° 15, série transaltantique, IFRI, 61 pages.United States General Accounting Office (2002), Industry and Agency Concerns OverIntellectual Property Rights, GAO-02-723T.Warusfel B. (1995), Dimension juridique de la reconversion des industries de défense,in Reconversion des industries d’armement, De Penanros R. (ed), La DocumentationFrançaise, 195-217.Weidenbaum M. (1961), The military Research-and-Development Market, Journal ofMarketing, 25(4), 38-42.13

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