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European Observatory on Infringements of Intellectual Property Rights, RAND etc.

I have previously written about a new sub-institution established by the European Commission in the field of intellectual property enforcement – European Observatory on Counterfeiting and Piracy. In February the name was altered to the European Observatory on Infringements of Intellectual Property Rights (EOIIPR, perhaps).

This second baptism coincided with its transfer to a new home in sunny Alicante, at the Office for the Harmonization of the Internal Market (OHIM), and organisation better known for its administration of EU Community Trademarks and Designs. At birth the EOIIPR was located within the Enforcement Unit at the Internal Market directorate without much in the way of staff or money. The move to OHIM changes this and they will now have 15-20 people on an annual budget of three and half million euros. A Regulation officialising the transfer was passed by the European Parliament in February.

That this transition unfolded without any great ruckus will have been a great relief to both Commission officials and private sector lobbyists for the Trademark and Copyright industries: public commotion over the ACTA treaty raised the worry that the re-establishment of the Observatory could be sunk as collateral damage in the shit-storm.

Function of the Observatory

Once installed the EOIIPR began a consultation with interested parties to devise its programme for the next year, which was presented at its Plenary meeting in Alicante two weeks ago. I find it notable that once again the only consumer or user group present was the European Consumers Organization (European Digital Rights did make a submission as part of the consultation in July). Otherwise this has been a conclave of bureaucrats and lobbyists.

In the short term the Observatory is tasked with sourcing of data regarding piracy, counterfeiting etc which can be used to demonstrate that the Intellectual Property Rights Enforcement Directive is insufficient as stands, and thus requires some form of successor. That the Commission has already decided that this is the case is evident from its review of that legislation.

Consequently the Observatory put out a tender, and duly commissioned RAND to devise a methodology which could generate a set of figures which could be presented as objective (in contrast to the research reports bought and paid for by vested interests).

RAND Report

I was initially cynical about RAND’s involvement. So imagine how refreshing it was to discover that industry ‘stakeholders’ were not satisfied with how the work was developing. Had the research outfit gone off reservation? Decide for yourself: here is a short presentation made in Alicante, and the full report is here. If you don’t have the stomach for it, here are a few things that I gleaned:

(i) Firstly, it contains no estimates as to the size of the market in counterfeits or the impact of  file sharing – referred to as unauthorised use of protected content (UUPC) – on the relevant industries or wider economy but is focused on building a methodology. As a result they address the lack of methodological and data transparency inherent in previous reports:

“Often the lack of clarity in fully describing the methods, assumptions and data underlying them constitutes a major barrier to an independent assessment of the statistical consistency of the results. This issue was also highlighted by earlier research efforts on the topic (e.g. OECD, 2008, p.78). In other cases, in the reports that produce the estimates reviewed above, more substantial issues remain poorly addressed from a scientific point of view” (P.17)

Later they extend their criticism to the limitations of the analytical frameworks more generally:

Overall, one of the main weaknesses of some of the existing estimates of the effects of counterfeiting and piracy on macro-economic variables such as GDP and employment is the assumption of a 100 percent substitution rate between counterfeit and genuine products – see for example the OECD (2008) critique of a 2005 IDC study. In addition, one aspect that seems to be systematically excluded from existing studies is consumer surplus. Consumer surplus refers to the welfare benefit of getting access to a substitute good at a lower price, while many studies consider the negative effects of counterfeiting and piracy on consumers (unemployment and health and safety risks) and on producers (lost revenues). Huygen et al. (2009) provide an example of a comprehensive treatment of the distribution of welfare effects and of their net balance (i.e., the balance between costs and benefits) in the case of file sharing (Huygen et al.,2009). From an economics point of view, any study that neglects consumer surplus in a welfare analysis is incomplete. (p.34)

(ii) Their own model (outlined in pages 41-65 of the full report) uses of sales forecast data generated internally by companies in affected sectors. Actual sales achieved are then deducted from the forecast numbers to identify the difference. Part of this discrepancy will be explicable retrospectively due to changed market conditions (e.g.  the arrival of new competitors, foreign exchange rate variations etc.) But one part will remain, an ‘unpredicted forecasting error’ some of which will derive from the substitution of product sales by counterfeit alternatives.

The result of this first process is then object of a second analysis to try to identify the amount attributable to counterfeiting for a specific product and national market. A series of factors are used in the regression: (i) rule of law (ii) corruption (iv) government effectiveness (iv) customs (v) tourism ; relevant metrics are obtained from international organisations such as the IMF/WB. These factors are presumed to have an effect in encouraging or deterring counterfeit trade.

(iii) Their assessment is  that the model is better suited to dealing with physical rather than digital goods, principally because of the difference in the utility and reliability of sales forecast data, but also because of the ease of supply and movement of digital goods.

(iv) Few firms were willing to cooperate with them to test drive the model, largely because of fears regarding control over commercially sensitive data. No digital media companies took part. Ultimately only one physical good manufacturer (unnamed) provided a full data set. The results obtained initially diverged strongly from the firms own research which had been conducted using mystery shoppers, whereby goods are purchased and then analysed for authenticity (apparently the gold standard in this field, but expensive to operate). Once the data was cleaned of severe outliers, it tracked the mystery shopping research more closely.

Consequences?

The Commission is now in a tricky position: they’ve paid RAND at least half a million for this and cannot simply sweep the results under the carpet. RAND have designed a model for use in real markets and products, rather than simply accepting that ‘piracy and counterfeiting’  are costing ‘Europe’ trillions of euros and hundreds of thousands of jobs. My guess is that it will now be minimised. What if any effect this will have on the IPRED review, due imminently, is uncertain.

October 11, 2012 - Posted by | /, ECPO, enforcement, european union, ipred

1 Comment »

  1. I’d love to get in touch on topics relating IP and the rule of law, particularly relating to enforcement.

    Comment by Andrew | December 1, 2012 | Reply


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