Czech Republic: Licensing and intellectual property
(EIU Viewswire Via Thomson Dialog NewsEdge)COUNTRY BRIEFING
FROM THE ECONOMIST INTELLIGENCE UNIT
Licensing as a way to enter the Czech market has all but disappeared since 1997, although franchising remains a healthy alternative (see below). Banks, hard hit by bad debts in the late 1990s, became stricter with their lending practices in 1999, a trend that showed signs of easing in 2004 and in the first three quarters of 2005, but only gradually, despite substantially lower financing costs. Foreign firms are reluctant to license the transfer of technology and know-how because of fears that much of the production will end up on the black market, since the intellectual property laws that are in place lack enforcement mechanisms.
In addition, investment-incentive programmes encourage firms that might consider a licensing agreement to set up their own operations. Many Czech firms that were producing under licence agreements have abandoned this strategy in favour of making their own goods and not paying licensing fees. For example, Elitex Machinery dropped its licensing agreement with Volkmann (Germany) in September 1999 and now produces textile machinery on its own.
Licensing is used most often for household goods, food and beverages, and motorcars. The government is keen to develop environmental and power-generating technologies, and it welcomes technology transfer in these industries. In most areas, however, authorities tend to favour direct investment and joint-equity ventures over licensing arrangements. One of the few sectors to continue to use licensing is the brewery sector. Interbrew, the Belgian owner of several Czech breweries, began using one of its facilities in Prague to brew Amstel, a Dutch beer, under licence. Interbrew had already been brewing Asahi, a Japanese brand, in Prague, taking advantage of unused production capacity.
Although licensing has slowed, franchising has taken off, especially in retail operations. There were 90 foreign franchises operating in the Czech Republic at end-2004, and around two dozen local Czech franchise operations were operating as well, according to the Czech Association of Franchises (CAF). The CAF reports that 1,450 franchise stores were operating in the Czech Republic in November 2005, up from just 130 in 1999. Dominating the scene are big multinationals such as McDonalds, KFC, Bauhaus, Tesco, OBI and Baumax. The CAF expects the market to grow to about 300 franchisesa number similar to neighbouring Austriaby 2009. The CAF says that on average, franchising contracts in the Czech Republic run 22.5 years, with the initial investment by the franchisee ranging from as little as Kc10,000 to Kc15m. In the extreme case of OBI, a German do-it-yourself retailer, that cost can rise to Kc200m. Once the operation is up and running, franchise fees usually run 17% of a stores annual sales.
Although the major franchisers are dominant, smaller operations are catching on and finding their place in the market. Coffeeheaven International, a British operator of coffee and sandwich`bars, opened its first two coffee bars in Prague in 2004, and another in 2005. The firm has plans to expand to at least 18 outlets in the Czech Republic by the end of 2007, and it could increase that number after securing 6.26m in funding through an equity placement in October 2005. The companys main competitors in the Czech Republic are franchises of Paneria (a local bakery chain) and JavaKava (UK). Debenhams, a department store retailer based in the UK, ended a long search in the first half of 2002 for a franchising partner; it signed a deal with TIPCO (a local textile and retail firm) to start operations, and opened its first store in the first quarter of 2004. Though it discussed further expansion, it opened no new stores in 2005. Subway, a US sandwich maker that is one of the worlds biggest franchise operations, opened its first outlet in Prague in 2003. Although company officials say that Subway has expansion plans, it had only had two franchises in the Czech Republic by December 2005, both in Prague. One of the newest franchises to locate in the Czech Republic is RE/MAX, a real-property agency, which opened its first franchise in 2005. This is expected to be an explosive area for franchises given the real-property boom in the Czech Republic.
Initially, many franchises were corporate-operated, because of the lack of domestic capital. For example, only two of the 50 McDonalds (US) restaurants were franchise-operated at the end of 1999. That pattern has changed with economic recovery. The fast-food giant fell short of its goal of having more than 100 Czech outlets by the end of 2005; only 71 outlets were operating. McDonalds has plans for at least 25% of its restaurants to be franchise-operated. Of the 71 restaurants in operation in 2005, 60% were independently owned and operated.
To push the sector even further, Komercni Banka, the countrys third-largest lender, started a programme in mid-2003 that offers tailor-made loans to franchises. Under the programme, a potential client must be a member of the CAF and agree to follow the EU franchising ethical code, as well as being financially strong. Komercni Banka offers financing of the purchase of a franchise, supplies and premises. Clients may choose short-, medium- or long-term loans, depending on their needs. No other banks in November 2005 offered a service specifically for franchising, though all the other major banks said franchisees could seek funding through regular small- and medium-sized business-loan channels.
Some companies based in the Czech Republic seized on the franchising route to expand their operations across the country. The most successful of these is Delta-owned Paneria bakeries. Paneria opened nine franchise stores between the beginning of 2001 and July 2002, and had 22 outlets countrywide by November 2004, though a consolidation of some stores saw that number dip to 18 by November 2005. But the company still plans further expansion, based solely on franchising, in the coming years. Another company to have developed franchises is the Staropramen brewery, which has opened a chain of some 15 franchised restaurants across the country.
There is no specific legal framework covering franchising in the Czech Republic. Hence, success lies in selecting an appropriate local partner. The CAF provides detailed information on franchising opportunities.
The communist regime deposed in 1989 did not accord sufficient rights to private property; hence, protection of intellectual property is a relatively new concept in the Czech Republic. Nevertheless, the communist regimes successor quickly drafted legislation to protect patents and industrial designs and models (the Law on Patents, Industrial Models and Process Innovations, Law 527/1990). Legislation providing trademark protection was implemented in 1988 (Law 174/1988) and tightened in 1990. A law adopted at end-1995 (Law 1371/1995) provides for registration and protection of marks that differentiate goods or services of one producer from those of another that are not already registered as trademarks in the Czech Republic. Under the act, foreign marks have the same rights and obligations as Czech trademarks to the extent that reciprocity is provided to Czech trademarks in the foreign marks country. The law was amended again during the first half of 2000 to extend copyright protection from 50 to 70 years.
The amendments also align Czech law more closely with EU norms. In late 2002 parliament approved an amendment to the anti-piracy law that gives customs officers the authority to provide information on distributors or forgers of video and audio cassettes and compact discs to those entities that were harmed by the piracy. The new law gives copyright owners a more effective tool to fight counterfeiters in civilian disputes. From July1st 2002 the Czech Republic also became a party to the European Patent Convention. Hence, firms can designate the Czech Republic in the European patent application as a country where the European patent should be effective.
Western companies are largely satisfied with the laws (though not with their execution) on patent and trademark protection, which generally conform to EU and US norms. Pharmaceuticals producers should note that Czech patent law recognises and protects chemical substances.
In late April 2001 the US Office of the Trade Representative removed the Czech Republic from its list of countries with insufficient protection of intellectual property, a result of the March 2000 legislative changes (see below).
Licensers can obtain an injunction to halt an alleged abuse and can sue infringers, and a licensee also can sue an infringer. However, the amount of time involved is excessive. The commercial courts are crowded, and the backlog of cases runs 1218 months. Moreover, legal experts say that with appeals and motions, most cases last more than two years. Penalties for infringement typically include a fine. Because of the backlog of court cases, however, most firms prefer to deal directly with the transgressor and settle out of court.
After heavy criticism from many sides about inadequate protection of intellectual property (IP) rights, parliament passed amendments to the copyright law in March 2000. As a result, the Czech Retail Inspection Office (COI) received more power to act against those selling fake items. Part of the legislation approved in late 2002 also established guidelines for creating a special police unit for IP issues, especially counterfeiting. Though slow in being formed, the unit was at last created in early 2004; moreover, the office confiscated some 1.1m pieces of fake goods with a value of Kc1.8bn between September 2002 and end-2003. The COI almost doubled this total in 2004 alone, confiscating Kc944m worth of goods, after nearly doubling the number of inspections to 2,007. The COI said audio- and video-recording counterfeits accounted for almost half of all goods seized, a decline from around two-thirds in 2003. Textiles raised their share from about one-third to nearly half.
The government has also employed other methods to reduce abuses of IP rights. The police sent letters in May 2002 to some 350,000 businesses in the country warning against the use of illegal software. The first civil raid against illegal computer software took place in June 2002 as part of a campaign against software piracy. A civil court takes the decision to conduct such a raid, which is carried out with police assistance and without prior warning. In June 2001 the Ministry of the Interior (Ministerstvo vnitra) created a page on its website (www.mvcr.cz) devoted to the protection of IP rights for software.
The actions appear to be making headway, and the EU has applauded the Czechs on tackling IP theft, especially of illegal software. The estimated share of illegal software in the country stood at 66% nearly a decade ago, but that was down to an estimated 41% by end-2004, according to the 2005 IDC/Business Software Alliance annual report. That puts the Czechs just outside the top 20 countries with the lowest software-piracy rate, and it is also the lowest among the Central and Eastern European countries. In terms of losses, however, the country is among those exceeding US$100m, at an estimated US$132m in 2004. Police statistics also show that the number of illegal software criminal acts fell sharply, to just 127 in 2004, down from 598 in 2003 and 919 in 2002. Police said they concentrated more on illegal-software dealers than on end-users, which takes more time and resources for investigation and could explain the drop. For the year, 75 criminal cases were against end-users and 52 against dealers. But as illegal software has declined as a share of the whole software market, piracy of music, film and books remains a problem. The International Federation of the Phonographic Industry said in October 2005 that music sales in the Czech Republic were down by more than 15%, with much of the blame falling on the unlawful copying of music, either through counterfeiters or those downloading songs illegally over the Internet.
The penalty for using unlicensed software programmes runs up to five years in jail and/or a fine of up to Kc5m. The full penalty has never been meted out, though in the first quarter of 2004 one convicted pirate received a two-and-a-half-year jail sentence. More often than not, police confiscate computer equipment.
Conventions. Paris Agreement, 1883; Brussels Agreement, 1900; Washington Convention, 1911; The Hague Agreement, 1925; Paris Convention, 1928; Arrangement of Madrid (trademarks); Lisbon Convention (trademark registration); London Convention, 1934; Arrangement of Nice, 1957 (trademarks); Stockholm Agreement, 1967; The Hague Convention, 1984 (industrial designs); Leipzig Agreement; Havana Agreement; Moscow Agreement.
Basic laws. Act 527 of 1990 on Patents, Industrial Models and Process Innovations; Act 174 of 1988 on Trademarks.
Types and duration. Czech law distinguishes between product and process patents. Final patents are valid for 20 years following the day of application.
Novelty. Defined as lack of public access through printed media or common practice.
Unpatentable. Scientific theories and mathematical methods; changes in external appearance of products; software programs; simple information processing; inventions related to medical prevention and disease diagnosis; food products for sustaining human beings or animals; items prohibited by public morality, order or law; previously patented items.
Fees. Application, Kc1,200; complete examination, Kc600. There is also an annual fee of Kc200.
Compulsory licensing. If within four years of the application date or within three years of the patent-granting date the patent has not been used in an appropriate way in the national economy and no preparation for such use has been made, then licensing to a domestic enterprise is compulsory and holds until the patent expires. If a fee cannot be agreed between the patentee and the licensee, the court will determine it. Moreover, the government may license any patent at will for purposes of national defence.
Industrial designs and models
Protection for industrial designs and models is granted for an initial five years, renewable for another five years maximum.
Types and duration. Trademarks last for ten years from the date of application, renewable for ten-year periods thereafter. Although Czech law has no special provision for service or collective marks, local attorneys note that in practice a mark can be protected if it meets generally accepted trademark criteria.
Legal effect. Registered trademarks confer exclusive rights of use to their holders. Unregistered trademarks also receive protection under Czech law.
Not registrable. Commonly known marks, flags, emblems and official seals.
Fees. Kc1,000 for the first ten years.
Types and duration. Copyright protection applies to literary and other published works; computer software; and artistic works such as video and musical recordings, photography, cinematographic works, choreography, mime and architecture. Written work is subject to copyright for the authors lifetime plus 70 years. Artistic works are covered for the lifetime of the originator plus ten years. Since 1990, computer software has been granted the same protection as written work.
Legal effect. Protection for the above categories is automatic from inception; no registration is required.
Patent applicants must submit a written application, description and other supplementary items, such as drawings, to the Industrial Property Office. The office will conduct only a formal examination of the application unless a special request is made for a complete examination. The application lapses if a complete examination is not requested within four years of the application. The patent application is made public after 18 months and, assuming no public objection is upheld, the patentee then receives protection. The same application process applies to industrial models and designs.
Trademark applications must be made to the patent office in writing, accompanied by the appropriate fee. Applications generally take 812 months to process.
Fees for both patent and trademark protection are low.
Although copyright protection commences automatically with the creation of the work and there are no registration requirements, it is advisable to deposit a copy of the work with a lawyer.
The number of full-fledged licensing agreements in the Czech Republic has declined since 1997. The brewing sector is one of the few in recent years to take advantage of licensing in the Czech Republic. In 2004 Interbrew of Belgium began using one of its facilities in Prague to brew Amstel, a Dutch beer, under licence. That followed a similar move by Interbrew in 2003 to produce Asahi beer, a Japanese brand, taking advantage of unused production capacity at its Prague Breweries plant.
One of the few licensing deals in 2005 was announced in July, when Burda Praha, a Czech publisher, said it would begin to publish Joy (a womens magazine) under licence from Marquard Medien, a Swiss firm. The magazine, which was launched in the Czech Republic in the autumn of 2005, is aimed at women aged 1839. It is already published in Germany, Hungary, Romania, and Serbia and Montenegro under similar agreements.
Although licensing has lagged, franchising has been on the rise. Franchising is seen as a good opportunity in the Czech Republic because it offers easy market access while limiting risk. The leading franchise is McDonalds (US), with some 71 outlets in the country. McDonalds plans to add as many as 20 more franchises in the coming years, though it had previously targeted 100 by the end of 2005. Instead, several outlets were consolidated this year. Sixty percent of the McDonalds restaurants are independently owned and operated, up from about one-third in 2002, as the company begins to sell off restaurants it held, because of improving economic and ownership conditions. Other fast-food rcompanies with outlets include KFC, Little Caesars and TGI Fridays (all of the US). Subway (a US chain of sandwich shops, which is the largest franchise operation in the world) opened its first outlet in Prague in September 2003; it plans to open several more stores in the Czech Republic in the coming years. It had opened a second outlet by December 2005, and local company officials said they were working on further expansion.
But its not just the big playersor foreign playerswho are coming to market. Smaller franchisers and domestic franchises also are creating waves. Coffeeheaven International, a British operator of coffee and sandwich bars, opened its first two coffee bars in Prague in 2004, and it plans to increase that number to at least 18 outlets by the end of 2007. The firm has stiff competition from two local franchises that are growing rapidly. Paneria, a local bakery chain, had some 18 outlets in November 2005. Although the stores management once boldly aimed to have at least one outlet in every Czech city and town with more than 20,000 inhabitants, a handful of stores were shut in 2005 because of consolidation of nearby outlets. International franchise JavaKava (based in the UK) has also burst on to the scene.
RE/MAX, a US real-property firm, was a newcomer to Czech franchising in 2005. With the real-property market taking off, analysts say other franchises in the sector, such as Century 21, could follow soon. After starting up operations at the beginning of the year, RE/MAX had ten branches in the Czech Republic by November 2005 and plans for two more to open in the early months of 2006.
There is no central licensing agency. Companies seeking a prospective licensing partner should consult official information sources, including CzechInvest and the relevant ministries. Royalty and fee levels vary widely, and given the low levels of licensing in recent years, there is a dearth of reliable comparative information. Licensing terms vary by industry and product.
There are no official approval or registration requirements for licences or technical-assistance agreements. Nospecial restrictions apply to licence termsincluding duration, compensation provisions, tie-in clauses, type ofproperty or know-how involved, limits on the licensees sales by region or use, or control of the licensees innovations. No special controls apply to agreements between a local subsidiary and a foreign parent, though the tax authorities scrutinise any related tax deductions. There are no limits on transfers of royalties and fees. Licence fees paid to non-residents are subject to a 25% withholding tax.
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