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Russian IP Animus Fuels Risk, Uncertainty as Firms Recalibrate

March 21, 2022, 8:45 AM

Western entities trying to protect everything from drug patents to cartoon trademarks in Russia worry IP protection there may become unfeasible as instability increases over Moscow’s war in Ukraine.

Russia’s response to sanctions was to say that intellectual property of companies from countries it deems unfriendly won’t get protected. As a result, Russia could become awash with counterfeits that also could be exported to other markets, attorneys say.

The business and legal uncertainty also makes it difficult for companies to invest in starting or maintaining operations as indications emerge that Russia’s IP regime could collapse, at least with respect to foreign entities.

“It’s going to be terrible,” said attorney Dan Harris of Harris Bricken Sliwoski LLP, who helps companies do business in emerging markets. “There will be no IP protection in Russia.”

Heightened Risk

Russia issued a March 6 order allowing use of patented inventions owned by many foreign companies without compensation. Days earlier, a Russian court tossed a lawsuit aimed at protecting Peppa Pig trademarks because the cartoon character’s rightsholder is based in the U.K., which is on the list of unfriendly countries.

It’s unclear how long the patent order will remain in effect. But Russia’s treatment of IP heightens the risk for many companies considering that market in the future, attorneys say.

Companies “are going to be loath to go back in and go back to business as usual,” said Kory Christensen, a patent attorney at Polsinelli PC who works with international companies.

Short-term, attorneys are advising clients to examine their inventory of Russian patents. Businesses have to decide whether to continue paying fees required to maintain those patents, in hopes the March 6 order is rescinded before the patents expire.

“These clients have put in a significant amount financially and through the research and development in these filings,” patent attorney Vadim Cherkasov at McCarter & English LLP said. “For them to take a step back and give up on these patents is a hard thing to do.”

The patent order hurts efforts to promote innovation, Cherkasov said.

About a third of roughly 35,000 patent applications filed in 2020 with the Russian intellectual property agency Rospatent came from non-residents, according to World Intellectual Property Organization data. By comparison, the U.S. had 600,000 applications that year.

“Even if this is just a temporary situation, it creates a lot of instability and it shows to these companies that there’s potential for more instability in the future,” Cherkasov said.

Trademark Trouble

Trademark attorney Mary L. Grieco of Olshan Frome Wolosky LLP said Russia hadn’t been a problematic country for IP rights in the past 10 to 15 years before the war.

Grieco, who manages international portfolios, said she’d still generally advise clients to “at least go through the motions” of obtaining and updating registrations, while letting them know there’s a chance their rights may not be enforced.

“Russia is a first-to-file country rather than first-to-use, so without registrations there’s nothing to protect,” she said. “We don’t know what it’s going to look like two years from now, 10 years from now.”

Grieco also noted that trademark laws are fundamentally consumer protection laws, so Russia’s actions targeting foreign companies can ultimately hurt Russian consumers. Along with car parts, food and personal care products could carry safety implications if consumers are misled as to their origin and contents, she said.

Russian trademark attorney Anastasia Skovpen, who works for Nestle in Moscow, said in an email she believed the publicized dismissal of the Peppa Pig trademark would be reversed, though she didn’t rule out it starting a trend.

She added that it was unclear how recent Russian actions toward foreign businesses would affect trademark rights. But it’s unlikely the government will ease cancellation of trademarks or shorten the three-year non-use period that results in abandonment, she said.

The invasion-spurred isolation could encourage more counterfeiting, attorneys said.

Harris said Russian manufacturers likely would try to make knock-off car parts and medicine, along with fast food like Big Macs.

Russians have already registered marks indicating as much.

McDonald’s pulled out, and Russia suggested deserted businesses could be nationalized. Shortly after, a Russian fast food chain filed for a trademark incorporating the McDonald’s golden arches, sideways, into a new “Uncle Vanya” logo. A Starbucks trademark application was also filed.

Svitlana Lebedenko, a legal researcher at the European University Institute, said Russians registering such marks harkening to departed companies may be franchisees looking to continue running the business.

Before the War

In 2020, Russia was one of 10 countries the Office of the United States Trade Representative put on a watch list, citing a “lack of robust enforcement of IP rights” and calling Russia a thriving market for counterfeit goods.

But Lebedenko said IP in Russia is more complicated. Adopting Western IP rules failed to foster innovation in Russia, because patent rights in the hands of “crony capitalists can magnify the social harms of the patent system leading to high concentration of ownership of knowledge,” she argued in a paper published by the EUI in January.

She said despite shortcomings the Soviet state-run research and development system led to rapid industrialization, innovation, and self-sufficient industries, including in pharmaceuticals. When the state collapsed, potential Russian innovators faced high royalties that created major barriers to entry, she said.

“Western IP rules, originating from the WTO TRIPS Agreement, have not lived up to their expectations in Russia,” Lebedenko said. “Innovation in Russia has now become more of a black box than under the Soviet system.”

Irene Calbolli, a law professor at Texas A&M University, said IP in Russia was “kind of a Wild West” before the invasion, but that the country had been moving in the right direction.

She noted that Russia joined a number of international agreements on intellectual property, creating obligations to adhere to global standards.

“Now they’ve completely gone the other direction,” said Calboli, whose focus is international trade and comparative law. “Now they’re saying they might want to legally take away the law so they can do what they want.”

—With assistance from Matthew Bultman.

To contact the reporter on this story: Kyle Jahner in Washington at kjahner@bloomberglaw.com

To contact the editors responsible for this story: Renee Schoof at rschoof@bloombergindustry.com; Jay-Anne B. Casuga at jcasuga@bloomberglaw.com