Universita’ Commerciale L. BocconiInnovation in Low-IPR Regimes
Andrew King, Giada Di Stefano, Gianmario Verona
Teaching note
Protecting Innovation in Low-IPR Regimes: The Case of Fine Fashion (A) and (B)
Abstract
The main focus of this case is the fashion industry, with its peculiarities and contradictions. With its reliance on seasonal collections, continuous innovations, search for new shapes, colors and forms of expression, this industry undoubtedly represents a unique environment in which innovation is diffused across firms and represents the essence of the entrepreneurial success formula. However, the environment in which such innovative spurs ferment is characterized by scant IPR protection and pervasive counterfeiting and piracy at both the trademark and design level.
Substantive issues
The case is divided into two parts.
Starting from the alarming data on the diffusion of counterfeiting phenomena, Part A describes the fashion industry as characterized by a weak appropriability regime: not only are fashion productseasily subject to reverse engineering, but also fashion innovations are poorly protected by classical IPRs. However, contrary to the prediction at the basis of IP laws, innovation is pervasive. As a consequence, fashion is described as a low-IP equilibrium in which “the existence of identifiable trends is itself a product of pervasive design copying and that the creation and accelerated extinction of these trends help to sell fashion”.[1] Despite this general explanation, there are two main threats to this equilibrium that are emerging besides the increase in counterfeiting. First, the emergence of fast fashion is accelerating the diffusion of trends. Second, changes in the distribution formats, and particularly the emergence of designer outlets, are diluting the seasonal characterization of trends and creating confusion in the market with the opening of outlet boutiques that sell original fashion garments out of season.
Part B is a brief follow-up to Part A, briefly describing the strategies adopted by the major industry players in response to the changing competitive scenario.
Pedagogical objective
By describing innovation in the fashion industry and its related problems, this case aims to achieve two objectives.
First, starting by investigating an empirical context characterized by a weak appropriability regime, the complexity tied to the relationship between innovation and appropriability regimes is discussed, and the theory equating strong appropriability regimes to the provision of incentives to innovation is challenged.
Second, despite the rehabilitation of weak appropriability regimes as a cradle for innovation under some environmental conditions, the emergence of new competitive dynamics is described in order to highlight the limitations of the low-IP equilibrium in the current context. In this way, the long-term sustainability of the low-IP equilibrium is called into question, and students are challenged to suggest a possible set of competitive measures that fine fashion firms should take in order to preserve their competitive advantage and profitability.
Positioning and use
The case is central to completing the formative offer of the course in Technology and Innovation Strategy, Master of Science in Economics and Management of Innovation (EMIT), code 8337. More generally, it could be used in courses in which it is important to take into consideration the issue of innovation in low-tech competitive contexts. The issue is particularly coherent with the objective and structure of the EMIT Master of Science, given the relevance of the industry at the international level and its focus on innovation. The case can also be used in other courses dealing with the issue of innovation in the Master of Science in Management and Marketing Management.
Suggested questions
Part A
1)What are the particular features of the fashion industry/products that limit the applicability of IPRs?
2)What are the main features of the appropriability regime of the fashion industry?
3)Are these features endogenous to the industry and instrumental to the survival and growth of the industry itself? [This question opens the class discussion on whether only strong appropriability regimes are characterized by pervasive innovation, and what characteristics of the fashion industry can explain the existence of the so-called “piracy paradox”.]
4)What are the threats to the sustainability of the low-IP equilibrium in fashion?
5)How can fine fashion producers respond to these threats? What activities can fashion firms engage in to ensure long-term sustainability to their innovation strategies? [This question requires students suggest a set of possible solutions to the threats posed by the emerging competitive dynamics described in the case.]
Part B
1)What are the pros and cons of the solutions suggested by the case, compared to the solutions discussed in Part A?
2)Do you think that the challenges now faced by fine fashion firms require profound rethinking of the entire business model or do you think that this business model is indeed so endogenous to the industry that it represents a source of competitive advantage even in such a changing environment? [This question attempts to open up the discussion to a comparison between the innovation-related solutions and the more radical solutions that might have emerged in the discussion of Part A.]
Hypothetical teaching plan
The time devoted to discussing the case should be 90 minutes, divided into 60 minutes for Part A, 15 minutes for reading Part B and 15 minutes for commenting Part B plus a general wrap-up. The two parts of the case help reconstruct the intriguing puzzle that seems to characterize the fashion industry: indeed, the industry context and its peculiarities are presented in Part A that also questions the long-term sustainability of the resulting equilibrium. Part B summarizes the possible solutions that fine fashion firms have suggested in dealing with the phenomena causing shakeups. The two parts should therefore be discussed in sequence. The 60 minutes devoted to Part A should summarize the main characteristics of IPRs and, in particular, the case of fashion. It should also answer the suggested questions in order to illustrate the peculiar case of the fashion industry. Finally, by building on the reading of Part B, the instructor should encourage the students to discuss the pros and cons of the solutions proposed compared to the solutions that emerged during the class discussion. The teaching plan should be as follows:
Part A (60 minutes)
1)Summarize the main characteristics of IPRs in general (5 minutes);
2)Illustrate the peculiar case of IPRs in the fashion industry (15 minutes);
3)Introduce the concept of low-IP equilibrium (10 minutes);
4)Summarize the main threats to the sustainability of the low IP-equilibrium (10 minutes);
5)Discuss the solutions that the fashion industry could implement to respond to these threats (20 minutes).
Reading of Part B (in class, 15 minutes)
Part B (15 minutes)
1)Discuss the solutions defined in the follow-up and compare them to the ones that emerged during the previous discussion (10 minutes);
2)Takeouts (5 minutes).
Case overview
Part A (60 minutes)
1)Summarize the main characteristics of IPRs in general (5 minutes)
The first intellectual property rights were patents, originating from the Latin “litterae patentes”, open letters used by the sovereign to confer monopolies to the person introducing an innovation. Even if the first appearance of patents traditionally dates back to the Republic of Venice in Renaissance Italy, the first recorded patent was granted in England in 1449.With this patent, King Henry VI of England conferred a 20-year monopoly to the Flemish John of Utynam for a novel glass manufacturing process in exchange for teaching this process to other English manufacturers. After having been applied to excess for decades not only to common goods such as salt but also to a number of industries such as publishing, in 1624 the English Parliament approved the Statute of Monopolies, restricting the domain of application of patents in order to protect the rights of inventors for a limited number of years. Moreover, as reaction to the printing monopoly the first forms of copyright protection were introduced in Great Britain in the seventeenth century. The first appearance of the term “intellectual property” dates back to 1845 in the United States, defined as the labor of the mind, productions and interests.
According to the World Intellectual Property Organization (WIPO), a dedicated agency of the United Nations, the term Intellectual Property (IP) refers to all the creations of the mind used in commerce, including “rights relating to: literary, artistic and scientific works; performances of performing artists, phonograms and broadcasts; inventions in all fields of human endeavor; scientific discoveries; industrial designs; trademarks, service marks and commercial names and designations; protection against unfair competition; and all other rights resulting from intellectual activity in the industrial, scientific, literary or artistic fields” (Stockholm Act (1967) of the Paris Convention, Article 2 viii). Intellectual property law aims at protecting the holder of the IP legal entitlement by means of time-limited rights to control the use made of those creations. Such laws are usually justified by their capability both to encourage the pursuit of innovations, allowing the inventors to exclusively exploit them for a limited time span, and to benefit society as a whole thanks to the disclosure of the innovation-related knowledge.
The debate on the effects, in terms of benefits and costs, of IPRs on firms and consumers, as well as on the society as a whole, has therefore focused on these two elements: provision of incentives to innovation and knowledge disclosure. Incentives to innovation are provided by the effect of IPRs not only on the absolute returns to innovation, generated by the reduction of the threat of expropriation, but also on the relative returns to cooperation, generated by the facilitation of the market for ideas[2]. Indeed, although the assignment of IPRs allows holders of the entitlement to extract consumer surplus and temporally reduces dissemination of knowledge and access for third parties[3], the overall informational effect of IPRs is clearly positive: they act as signaling devices, helping identify relevant knowledge and favoring transactions in the markets for technological knowledge[4]. More generally, imitation efforts are hampered, and innovation is, in turn, favored, by a strong appropriability regime, granting protection to innovators through legal mechanisms, such as IPRs, and natural barriers to imitation, such as difficulty to reverse engineer and tacitness of the technology[5].
2)Illustrate the peculiar case of IPRs in the fashion industry (15 minutes)
Traditionally, IP is grouped in two main branches: industrial property, including patents, industrial designs and trademarks; and copyright, for original works of authorship.
(A) Patents, industrial designs and utility models
A patent is a document, issued upon application, granting inventors the right to exclude others from the commercial exploitation of their inventions for a limited period of time, usually 20 years. Commercial exploitation means manufacturing, using, selling or importing the patented invention. In order to be patented, an invention must possess three characteristics, namely: novelty (i.e. the invention must show some characteristic that is new with respect to knowledge in the field), non-obviousness (i.e. the invention must show the involvement of an inventive step that could not be deduced by a knowledgeable person in the field) and utility (i.e. the invention must show practical use or industrial applicability).
By definition, industrial designs can be protected if they have visual appeal, perform their function efficiently, and can be reproduced by industrial means. Moreover, they must be new or original. Their registration grants the exclusive right to make, import, sell, hire or offer for sale articles to which the design is applied or in which the design is embodied for a period ranging between 10 and 25 years.
Some countries also offer protection to utility models, also referred to as petty patents or innovation patents because they are similar to patents, except for some characteristics that make them more suitable for incremental inventions. Utility models differ from patents in two respects. First, they may meet in a less stringent way, or not at all, the requirement of non-obviousness required for invention patents. Second, the term of protection is shorter, generally from 7 to 10 years, without the possibility of extension or renewal.
Consistent with their aim and their definition, in fashion patents are used in the case of inventions aimed at solving technical problems, as in the case of seamless clothing. Industrial design rights are also available to protect original designs as long as they are new and not simple re-workings of existing designs. Even utility models can be applied to fashion products as long as they meet the registration requirements. However, all these forms of protection tend to be used only in some special cases (such as textile drawings) because of the lengthy and costly examination process required. This process is quite costly given the continuously changing competitive landscape and might take even longer than the life cycle of the design itself.
(B) Trademarks
A trademark is any sign that identifies the goods of firms and distinguishes them from their competitors. Trademarks can be words, letters and numerals, devices, combinations of these elements in logos and labels, colored marks, three-dimensional signs, audible signs, olfactory marks, and other invisible signs, such as those recognized by touch. Since the function of indicating the source of the sign and the distinguishing function are really interdependent in practice, a trademark can simply be defined as “any visible sign capable of distinguishing the goods or services of an enterprise from those of other enterprises.” (WIPO Draft Industrial Property Act, Section 22 (1)) A trademark can be protected either through use or registration, so that the protection lasts as long as qualified use continues.
Trademarks are commonly used and protected by fashion firms, but trademarks protect only certain product configurations, identifying the producer, rather then the design as such. In fact, trademark counterfeiting is not the only threat to the originality and uniqueness of fashion products. Fashion products are also subject to two other specific threats, namely, design piracy, and trademark and design counterfeiting. Design piracy refers to the illegal use of a design, as in the case of products that, without expressively using a trademark, look-alike products of another brand, thus causing confusion in customers. Trademark and design counterfeiting occurs when both the trademark and the design are reproduced without permission, as in the case of reproductions of fashion products of famous brands. Unlike the case of trademark counterfeiting that is legally punishable due to the definition of trademark protection, current legislation does not provide protection against design piracy and trademark and design counterfeiting.
(C) Copyrights
While industrial IPRs accord exclusive rights to prevent unauthorized commercial exploitation, copyright accords the right to prevent the unauthorized copying of original works of authorship – that is, original intellectual creations in the literary, scientific and artistic domain, whatever the mode or form of expression. In this case, the aspect of intellectual creations is more prominent, compared to industrial property where the object of protection is typically characterized as transmitting information to consumers. Copyright protects only the form of expression of the original work, rather than the subject matter of the work itself, and lasts throughout the life of the author plus another seventy years, or, in the case of corporations, for ninety-five years from first publication or one hundred and twenty years from first creation.
Copyright protection is very limited for fashion designs: the sketch of a fashion design is protected by copyright as it represents a pictorial work, whereas the garment produced from that sketch is protected by copyright only if its artistic and expressive value is separable from its useful function. Design can be protected by copyright law “only if, and only to the extent that, such design incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article” (17 U.S.C. § 101). This test for separability makes it possible to distinguish copyrightable works from un-copyrighted works of industrial design, even if cumulation is possible, in the sense that can receive protection under the law of both industrial designs and copyright. In 1998 the European Union adopted a Directive on the legal protection of designs, extending copyright protection to industrial design works presenting a creative feature and an artistic value (EU Directive 1998/71, art.17). Still, observers report both a scant use of such regulation granting copyright protection and the absence of “any appreciable effect on the conduct of the fashion industry, which continues to freely engage in design copying. […]The law in Europe has had little or no effect on copying or on innovation in the industry. While the E.U. prohibits fashion design copying, the industry continues to behave as it always has – copying and making derivative works.”[6] In the United States, H.R. 5055, that would extend design protection to fashion designs, is still under discussion, after being introduced on 3/30/2006. H.R. 5055 would extend design protection to fashion designs, meaning the appearance as a whole of an article of apparel, including its ornamentation. The term of protection would be three years because of the short life cycle of such designs.
These first two points (summarize the main characteristics of IPRs in general; and illustrate the specific case of IPRs in the fashion industry) can be discussed by gradually completing or discussing a slide/transparency of Exhibit 1, summarizing the characteristics of the primary rights and their applicability to fashion.
3)Introduce the concept of low-IP equilibrium (10 minutes)
The fashion industry is clearly characterized by a weak appropriability regime: not only are fashion products easily subject to reverse engineering, even fashion innovations are poorly protected by classic IPRs.
Literature on the topic has advanced two alternative hypothesis of protection for contexts characterized by weak appropriability regimes. On the one hand, it has been suggested that weak appropriability regimes do not impede firms from capturing returns from innovation, but dictate reliance on other value capturing mechanisms, such as the creation of complementary assets, like manufacturing facilities and sales networks that “would earn a return even if the innovation itself didn’t”[7]. On the other hand, research has documented the use of a norm-based IP system working within specific (and elite) communities, such as the one of French chefs[8]. In these cases, members of the community share social norms that specify the nature and extent of rights, procedures for claiming them and sanctions in case of infringement.