Asian
Survey
Software rights and Japan’s shift to an information
society
The 1993-1994 copyright
revision process
Joel
West
Japan’s abortive 1993-94 efforts to reduce
intellectual property protection for computer software
highlight a tension between two visions of a technologically
based Japanese economy: its industrialized past versus a
postulated future “information society.” The
postwar era was characterized by largely successful Japanese
efforts to catch up to Western levels of industrial
technology in order to achieve national autonomy. These
efforts created world-class competitors and major exporters
in a number of key industrial sectors, such as automobiles
and electronics, which generated employment and technology
spillover benefits throughout the economy. But Japanese
firms have been less successful in developing computer
software, the essential building block for the
“information society” long postulated for 21 st
century Japan. Recent discussions of “information
highways” and “multimedia revolutions” have
given such information change (joho-ka) an added
sense of urgency for Japan’s government and business
leaders.
The revision in computer software copyrights proposed in
1993 - allowing competitors to legally glean the key
technical secrets of successful products through a process
known as “decompilation” - was widely understood
to be designed to help Japanese firms “catch up”
once again in a technologically important industry with high
spillover potential. At the same time, however, the
long-term growth and success of indigenous software
producers depend on strong intellectual property rights;
compared to smokestack or even traditional high-tech
industries, the development of these new information
industries is far more dependent on the property rights
regime assigned by the government.
The copyright revision process highlights a number of
conflicts between Japan’s technological past and
future. One is the tension between hardware producers and
users, who want software easily imitated, and software
developers, who want to preserve their unique designs;
another is between those in government and industry who are
focusing on “catch up” with U.S. software
companies, and a few successful Japanese firms who are
fighting the efforts of others (sometimes U.S. firms) to
catch up with them. These conflicting interests did not play
an important part in Japanese public discussion of the 1993
revision effort, which was dwarfed by a more familiar
controversy - the vociferous intervention by the U.S.
government and computer industry that eventually stalled the
proposal in 1994. That it was shelved without clear
resolution suggests that key economic and political issues
inherent in joho-ka are also far from being
resolved.
Software and an Information
Economy
The most visible reason for abandonment of Japan’s
contemplated copyright revision was the heated opposition by
key U.S. companies, soon joined by U.S. trade
representatives. This is not surprising, since the
development and sale of prepackaged computer software remain
one of the few high-technology areas where American firms
are dominant, with an estimated 74% of the $72 billion
annually in worldwide sales.(1) But this success is being
challenged by other countries who note the industry’s
12% annual growth rate, its strategic importance in other
industries, and the high ratio of labor to capital
investment in software R&D.(2) As elsewhere in the
computer sector, the Japanese are among the largest
competitors to U.S. firms. Of the world’s ten largest
suppliers of software, six are based in the U.S., one in
Germany, and three in Japan.(3) Sales by Japanese producers
have been primarily limited to their domestic market, but
that was also the case in the early stages of other
industries where Japan now enjoys a trade surplus with the
U.S. and Europe.
American software producers have mobilized political
support as part of overall U.S. efforts to protect
copyrights and patents. There are two reasons why
intellectual property protection has become a major trade
issue for the United States. First, the sale and licensing
of intellectual property is one of the few areas in which
the U.S. has an advantage in the balance of payments,
particularly with East Asia. Such industries account for
more than $200 billion in GDP, five million jobs, and $39
billion in total export sales.(4) Second, products such as
software, books, and compact disks have become more
vulnerable in the last decade through technological
developments in the products and their means of
reproduction.
Intellectual property creators have fought to insulate
themselves from two types of competition: exact duplication
and imitation. For software products, the unauthorized
production of exact duplicates is extremely easy - unlike
computer hardware, the manufacturing process provides no
barrier to competition. Like audio and video tapes, software
is unusually vulnerable because a single copy of the product
contains all the information needed for a “pirate”
to make unauthorized copies, and these can be made using
standard consumer equipment. This capability has been
identified as a major U.S. trade concern for the past 10
years, as a 1987 GAO report noted:
Intellectual property pirates are often in a
better position than legitimate producers to satisfy
demand in newly industrialized countries since they
generally enjoy lower production costs. Because pirates
merely copy products rather than developing their own,
their design and/or research and development costs are
often minimal. . . . Moreover, because they copy only
products with proven market success, pirates escape the
cost of developing products that turn out to be market
failures.(5)
The same advantages also apply to imitative products,
which are usually constructed using reverse engineering
techniques such as decompilation, and legal prohibitions
against such imitation are neither widely accepted, readily
defined, nor easily enforced.
Software’s economic role is by no means limited to
direct sales of software packages; it has also gained a
pervasive enabling role in our high-tech society. In the
computer, electronics, and communications sectors, software
linkages are crucial to the success of not only products but
entire industries. The importance of state-of-the-art
software to such industries cannot be overestimated, and
when unobtainable by legitimate means, it is often stolen.
When that is sanctioned by foreign governments, either by
explicit governmental policy or through lax enforcement of
nominal protections, Washington has held such competition to
be an unfair trade practice and has used threats of trade
sanctions to enact, strengthen, and enforce laws protecting
copyrights and patents. The major focus of such efforts in
the past decade has been in East Asia, where, according to
one American industry estimate, 1994 U.S. trade losses due
to unauthorized duplication totaled $4.4 billion, with $2.2
billion of that in software.(6)
Most countries have had to amend existing laws (usually
copyright) to cover software specifically, although software
has been covered in a few countries by judicial
interpretation of existing laws. Adjusting the treatment of
software under intellectual property laws is an important
part of a nation’s technology policy, because these
laws determine the right to profit from investment in
developing a product, which in turn determines what products
a company can afford to develop. Such policies are crucially
important in the future direction of industrialized
economies, particularly for Japan; the inevitability of an
information society revolution has been postulated in Japan
for more than 25 years, and elsewhere for nearly as long.
Futurists have claimed that the switch from industry to
information is as unstoppable as the shift from farms to
factories two centuries ago. But such a shift assumes a
property-rights regime that assigns private returns for the
nontangible inventions sufficient to reward those who
develop them; that assumption - made by neo-classical
economists - is hardly borne out by history. As Douglass
North noted, “Throughout history there has almost
always been an immense gap between the private and the
social returns to invention and innovation. . . . It has
been more difficult to devise property rights over
technological development than over products or resource
inputs. The difficulty of measuring the dimensions of
intellectual property and innovations and of enforcing any
such property rights has been a basic reason for the
divergence between private and social benefits.”(7)
While the state’s interest is in generating the benefit
to overall society, failure to assign adequate private
returns means there will be few innovations - and thus few
returns to allocate between public and private
interests.
Globalization of Intellectual Property
Issues
Years ago, the state’s allocation of social and
private returns could be made within a national economy
whose boundaries coincided with the state. But in
today’s global economy, such a simplification is no
longer valid. The most vivid example is the recent
U.S.-China conflict over the copying of American products.
The Clinton administration charged that the Chinese
government ignored 29 factories producing 75 million
counterfeit copies of American music, movies, and software,
and with 95% of the output exported to other countries; in
response to the estimated $1 billion in losses to U.S.
firms, the administration threatened a like amount in
punitive tariffs on Chinese goods.
Among the counterfeit products are a CD-ROM containing
Microsoft Windows and more than 60 of the top application
software packages, all sold in Hong Kong for about $15.
But despite the U.S’s leading role in pushing
intellectual property trade issues, it is far from the only
nation hurt by the absence of enforcement. The Nikkei Weekly
reported that “Japanese firms are faring no better than
U.S. firms in battling the problem of piracy of
intellectual-property rights. From CDs to superhero dolls,
Japanese companies are watching copycat operations walk away
with millions in stolen profits.”(8) Japanese policy,
however, has been more equivocal. Like Sega with video game
players, Nintendo faced a serious problem with Chinese
counterfeit manufacture of its game machines, but the
Japanese government was reluctant to confront Beijing for
fear of jeopardizing trade. Instead, Nintendo asked for help
from the U.S. trade representative via its American
subsidiary. At the same time that the United States was
threatening sanctions to protect new-style information
industries (including Nintendo), the president of Toyota
visited China in hopes that the trade conflict would give
his firm an advantage over U.S. rivals. Conflict over
counterfeit entertainment and software is only the
forerunner of a new style of trade conflict that will be
common in the information century. And it may not be limited
to trade: if military conflict in the 20th century could
start over the nationalization of manufacturing or mining
interests, the 21 st century could see it start over the
unilateral nationalization of intellectual property.
Forms of legal protection. To protect their
interests, intellectual property producers lobby for both
strong laws and enforcement of laws against all forms of
imitative products. As the dominant producers worldwide,
U.S. software companies generally favor laws to restrict the
development of such products, and regard the absence of such
laws virtually as a form of theft. Discussions of software
intellectual property laws usually focus on the types of
restriction, usually one of three: (1) trade secrets,
typically enforced by employment agreements and litigation
against direct competitors; (2) copyright restrictions on
software as a creative work, with protection of both the
actual work itself and specific elements of its expression;
and (3) patents, the most controversial mechanism for
software legal protection, since it forbids differing
expressions of the same fundamental idea. But such
mechanisms reflect the precedents of Western-based legal
systems, not inherent requirements per se for the protection
of computer software; also, focusing on mechanisms misses
the consequences of the success or failure of such
restrictions. More important is the consideration of
restrictions in terms of the various forms of imitation:
- unauthorized duplication (piracy) - making
exact copies of the original product.(9) From a legal
standpoint, it is relatively easy to establish piracy and
set a value for damages; in the United States, it is
usually covered by copyright law.
- imitative implementation (cloning) - the
construction of another (often competing) product by
analyzing the characteristics of the original and then
reimplementing them in the imitation. To defend against
this, software source code is tightly held as a trade
secret, while copyright restrictions are used to control
the use of reverse engineering.
- imitation of fundamental concepts - a producer
restricting a competitor from making a similar product,
although this remains controversial even in the U.S.
Examples of such restrictions are software patents and
interface copyrights.
Reverse Engineering in Software
Development
While software piracy limits revenues to producers, it
can create brand loyalty so that the market share among
pirated software sometimes translates into additional sales
of legal copies. However, cloning also produces products
that compete with an existing product. Successful cloning by
rival developers reduces the market share of an existing
developer, often reducing prices and increasing sales to the
benefit of consumers. For software, such cloning is normally
achieved by “reverse engineering” an existing
product.
Because of the role of formal and de facto standards, the
incentive for cloning software is stronger than for most
other types of intellectual property. Although many products
are distinguished by their newness, closely imitative
computer products have an advantage in terms of
interoperability with existing products, ease of user
training, and compatibility with existing data. This
interoperability provides strong incentives for imitation,
often resulting in near-duplicates (clones) of popular
products, particularly in national markets where domestic
innovation is weak and there is a well-established market
leader. Such cloning can be encouraged by companies seeking
to establish a computer architecture as a widely accepted
standard. For example, IBM established its PC as an open
standard, allowing the creation of companies such as Compaq
and Dell to manufacture rival PC clones; in 1994 the
worldwide sales of one such clone (Compaq) even surpassed
those of the original standard-setter. Where cloning is not
sanctioned and encouraged, competitors may instead design
their products by reverse engineering the existing product.
This is common practice in software, although U.S. statutes
and court rulings have held such practices to be illegal in
some cases.
Reverse Engineering and Decompilation
If engineering is the process of turning a product design
into an actual product, then reverse engineering means
taking the actual product and deducing from it as much as
possible about the original design. In software development,
the most significant (and controversial) form of reverse
engineering is decompilation or disassembly.(10) A
commercially distributed version of the product is taken to
recreate an approximation of the original source code. The
role of source code and decompilation in software
engineering can be better understood by way of analogy.
Imagine a software product as a non-tangible machine,
deriving value from taking inputs and producing outputs; the
relationship between those inputs and outputs corresponds to
a utilitarian pattern of value to a consumer - e.g.,
aggregating individual sales transactions to produce total
sales and cost of goods. This machine is referred to in
software law as “binary software,” i.e., the
pattern of binary 1s and 0s interpreted by a computer as
instructions that determine the operation of the program.
Such binary software is not produced directly by programmers
but instead is written in algorithmic pseudo-languages that
use typewriter symbols to represent program rules in a
quasi-human readable form. This textual representation is
known as “source code,” akin to the plans used to
build a machine. The job of a good programmer, therefore, is
to craft a comprehensive and accurate plan for the machine
(software product) within the limitations provided.
An unusual quality of software is that its plan is
endogenous and complete. The translation from source code to
binary software (compilation) is entirely automatic, by
means of the computer. Hand any good programmer the source
code to Microsoft’s best-selling product, and by the
end of the week he or she will be producing machines
(software products) that are just like Microsoft’s. A
second software characteristic is that plans can be deduced
from the original machine - i.e., a source code can be
decompiled from the binary software. This translation is
incomplete and lacks much of the context that makes the
original source code so valuable, but the tools for
preparing such decompilation have gotten progressively
better.(11) The practical effect is that a skilled
microcomputer programmer can go into a computer store, pay
$400 for an original copy of a software product, and usually
within a day or two describe some of the innermost secrets
that the program’s authors took years to develop.(12)
The process is essentially identical for all software-based
products, even when the software is embedded as part of an
electronics product, whether it be a mainframe computer,
video game cartridge, or communications device.
Competing and Compatible Products
For a popular product, imitative software is quite
common, and absent some protection of fundamental concepts,
legal. Even if not legal, decompilation is often used to
reduce the time needed to bring a product to market. It is
usually possible to build competing products without
decompilation, but the rate of change in the industry is so
rapid that such products will fail if they take too long to
develop. This distinction - whether it is technically (or
practically) possible to make a product without
decompilation - has been held by courts to be important in
determining whether decompilation should be allowed. A
distinction is usually drawn between two types of products
developed using decompilation: (1) competing, or clone
products, which are intended to supplant the existing
product, and (2) compatible products, which supplement the
existing products.
Although the decompilation process and usage are the same
in both cases, the economic impact on the copyright owner is
different. The clone will take sales away from the copyright
owner, while the compatible product will not, and will
sometimes help sales. This distinction has been held to be
legally important, particularly where decompilation is
justified as a fair use under U.S. copyright law. The
practical differences are also significant. Decompilation is
quite common in the U.S. software industry, where poorly
documented operating system interfaces are understood by
decompiling their implementation. When such decompilation is
used to produce complementary products, it is usually in the
business interests of the copyright owner to look the other
way because such products benefit the copyright holder.
However, where the decompilation produces competing
products, such decompilation is often the basis for
litigation against the competitor.
Existing Precedents
In the 1993-1994 Japanese copyright revision, three major
legal precedents were cited by both sides of the issue:
- In 1991, the European Community (EC) issued its
“Directive for the Legal Protection for Computer
Programs,” unifying software law throughout the EC.
This directive explicitly permits decompilation to
achieve interoperability.
- In 1992, the 9th Circuit Court of Appeals in the U.S.
ruled in Sega v. Accolade that despite a presumption that
for-profit copying is an unfair use, Accolade could
incorporate 25 bytes of decompiled Sega code in its games
to make them compatible with Sega’s player.
- Also in 1992, the U.S. Federal Circuit Court of
Appeals argued in Atari v. Nintendo that some forms of
decompilation constitute fair use; however, this
precedent is generally considered less binding because it
was decided against the company doing the reverse
engineering (Atari) on other grounds.(13)
The status of these precedents and the lack of a
“bright line” test for infringement suggest that
this is an evolving area of law worldwide subject to future
legislation and judicial interpretation.
Japan: Catching Up in Software
Despite early identification of information industries as
an essential part of the country’s future, and numerous
government efforts to promote such a shift, Japan has failed
to establish a position in the world software industry
commensurate with its leading role in other high-tech
fields. The phrase joho-ka - usually translated by
the quasi-English word “informatization” and
denoting change to an information-oriented society (joho
shakai) - has been a slogan of Japanese government
policy for more than two decades even though its actual
effect has been minimal. In the early 1960s, the phrase
“information industry” (joho sangyo) was
popularized by Tadao Umesao, while the later joho-ka
is credited to Yujiro Hayashi of the Economic Planning
Agency. The terms corresponded to the vision of a
“post-industrial society” promoted in the United
States by Daniel Bell, and resulted in an early information
society boom in the late 1960s and early 1970s.
In his history of the Ministry of International Trade and
Industry (MITI) Chalmers Johnson attributes a shift in the
ministry’s policies away from heavy industries to its
realization after the 1960s pollution crises that Japan
could not continue its resource-intensive, high-speed growth
indefinitely; software neither requires precious metals nor
produces the toxic byproducts associated with electronics
components and subassemblies. In May 1971, MITI formally
amended its criteria for targeting industries to include an
“overcrowding and environmental standard” and a
“labor content standard.” The oil shock of 1973-74
brought home the country’s vulnerability as a
resource-poor industrial nation, and Johnson places
MITI’s first detailed vision of a
“knowledge-intensive industrial structure” in
November 1974. Certainly from the 1980s onward, Japan’s
shift to an information society was repeatedly cited as a
national goal, evident in Prime Minister Nakasone’s
speech opening the Diet in February 1984, and it became the
subject of various books, articles, and television
programs.(14)
Lags in Packaged Software Development
Despite the desirability to shift from producing tangible
(hard) to intangible (soft) goods, Japan’s role in the
global information technology market has remained primarily
in electronics components and peripherals, with a limited
role in complete computer systems and a negligible role in
software; by one calculation, the size of the information
industry increased only from 3.1% to 4.0% of GDP in the
period 1975-85.(15) Public policy debates on information
technology are still dominated by considerations of
manufacturing and selling hardware; this disproportionate
political influence of the largest electronics hardware
companies over smaller software-only firms would figure
prominently in the 1993-94 copyright debate. In fact, Baba
et al. note that most of the top software firms in Japan are
spin-offs of computer makers or larger user companies (e.g.,
steelmakers, banks) and are still controlled by their parent
companies, with independent firms holding less than 25%
market share of the top 100 firms.(16)
Many of these captive firms focus on custom software
development, targeted at their parent company’s
specific needs, rather than general-purpose software
products that can be sold to many firms. Nakahara attributes
this to large variations in corporate business procedures,
the scarcity of software engineers skilled enough to design
general-purpose software, and the demand for custom
solutions from Japanese mainframe computer makers.(17) Such
reliance on custom software has hindered the widespread
adoption of the software products - so called
“packaged” or “shrink wrap” software -
that have fueled the explosive worldwide growth of computer
usage, particularly of personal computers. Meanwhile,
personal computer acceptance in Japan still remains low (in
1993 per capita usage in Japan was 97 computers per 1,000
vs. 287 in the U.S., and even 125 in Singapore),(18) further
limiting the largest potential market for packaged software.
Only with the 1995 collapse of the dollar would Japan’s
largest packaged software firm, JUST Systems, make it on a
list of the world’s top 10 PC software companies as
measured by sales volume.
Cottrell argues that fragmented PC standards made it less
profitable for Japanese firms to develop packaged software.
He attributes such fragmentation largely to Japanese
language processing difficulties, slow sales of PCs that
delayed pressures toward a single standard, and the
dominance of mainframe computer companies that prevented the
entry of entrepreneurial PC computer makers.(19) Various
barriers to entrepreneurial firms in Japan must be
considered in any evaluation of the Japanese software
industry, as the largest PC and software firms in the U.S.
began as entrepreneurial start-ups in the 1970s and 1980s.
Cultural barriers to entrepreneurship include risk aversion.
Hofstede lists Japan as the most risk-averse country among
39 studied, while the United States was among the least,
ranking 35th out of 39.(20) This, in turn, is linked to the
institution of lifetime employment for selected employees of
major Japanese corporations, thus diminishing the talent
pool of would-be entrepreneurs and their employees. Finally,
the various obstacles to financing a company through bank
loans, venture capital, or stock offerings make it more
difficult for a new company to compete with established
Japanese firms or start-ups in other countries.
Efforts to catch up with U.S. software technology.
Japanese software industry development has thus been a
major priority for the past two decades, stemming from two
basic MITI goals: the shift in the early 1970s to
“information” industries and MITI’s interest
in enabling technologies. MITI-sponsored software R&D
projects have included Sigma, TRON, and the Fifth Generation
project, with total government funding during the 1980s of
¥84 billion. Software is also a key enabling technology
for the computer and other industries. Software design
skills are essential components in designing successful
computer architecture (such as Microsoft Windows) that can
accrue billions of dollars of profits to its owner over the
course of a decade. Okimoto argues that MITI will be
unwilling to concede U.S. dominance in computers because the
industry holds the key to competitiveness in a wide range of
industrial sectors, including automobiles,
telecommunications, banking, and chemicals. Software has
even been a factor in Japan’s security policy, delaying
completion of its FS-X fighter. In the past two years,
efforts to develop indigenous software technology have
become more urgent as part of the drive to build
Japan’s information highway.(21)
But MITI’s attempts to incubate the Japanese
software industry as it did with consumer electronics and
mainframe computers have been far less successful. The
inability of the Japanese software industry to develop
innovative new products has left its primary focus on
understanding and imitating rival American software
products. American companies alleged that such imitation
sometimes involved illegal activities and, when such
activities were discovered, efforts were made to change
Japanese law to make them legal.
U.S.-Japan Conflict Over Software
Intellectual Property Rights
The 1993-94 software copyright revision process, its
potential impact on U.S. suppliers, and the intervention of
American industry and government interests must be
considered in the overall context of U.S.-Japan trade
relations in regard to computer software. Computer software
has been a trade issue only for the past two decades, and a
major issue for half that. Significant sources of friction
have included end-user software piracy, the means used by
Japanese companies to design IBM-compatible mainframes, and
the 1983-85 revision of copyright law to include computer
software.
Japan’s Intellectual Property
Philosophy
The U.S.-Japan conflict over software rights must be
examined in the context of differences between the U.S. and
the Japanese philosophy on intellectual property rights,
often cited by Japanese government and industry
representatives. For example, Swinyard et al. argue that
Asian culture, as evidenced by the imitation inherent in
Japanese calligraphy, is less supportive of proprietary
copyright. In Japan, Womack notes that intellectual property
law provides a comparatively narrow scope of protection,
i.e., an imitative product can be more similar than under
the U.S. system:
As a result, marketplace competition among
Japanese firms is based on speed-to-market, finesse, and
scale in production, and strong distribution systems,
rather than knowledge creation.
This system meshes nicely with the Japanese
philosophic premise that knowledge should be shared
widely across industry to maximize social utility. It
also fits the structure of the Japanese enterprise
system, consisting of a few giant players in every sector
supported by elaborate production and distribution
networks.(22)
Since actual manufacturing (disk duplication and
printing) is rarely a source of competitive advantage in
software, such advantage comes down to a system of R&D
vs. distribution strengths. In addition to the marketing
investment common to all products, computer products usually
require a high-cost training and support network. Recently,
the trend has been to high-volume, low-cost distribution
with even wider reach. For foreign firms selling to the
Japanese computer market, this requires partnering with a
Japanese firm - often one that manufactures competing
products - for some or all of the distribution
infrastructure. As Teece notes, firms that contract out for
complementary assets run the risk that the “partner may
imitate the innovator’s technology and attempt to
compete with the innovator.(23) Facing such barriers to
market entry, a foreign software developer usually has only
the advantage of technological innovation; if that
innovation is easily imitated, then the other disadvantages
will assure failure. The only way that a foreign software
product can successfully participate in a market is through
intellectual property restrictions against imitative
products, and with such restrictions determined by
government policy, not the market. If government policy
makers favor the interests of domestic producers over
consumers - as has often been the case in Japan(24) - then
foreign software producers are doubly disadvantaged.
Software Piracy in Japan
One source of ongoing U.S.-Japan trade friction has been
the high rate of software piracy in Japan, primarily the
unauthorized duplication by end-users. By one industry
estimate, the Japanese piracy rate has been dropping, but at
67% was the highest of the G-7 nations in 1994. The industry
estimate of $2 billion annually in lost software sales in
Japan was second only to the $2.9 billion losses in the much
larger U.S. market, where the piracy rate is only 35%.(25)
Of such unauthorized copies, $1.1 billion in Japan
represents one year’s losses by American software
producers,(26) large enough to attract the attention of U.S.
trade representatives. This piracy also diminishes the
economic incentive for Japanese software producers to
develop new products, particularly for the vast majority of
firms developing only for the domestic market. Because of
such copying and the proposed decompilation copyright
revision, a coalition of U.S. copyright interests in early
1994 nominated Japan for “Priority Watch List”
status under Special 301 legislation. No sanctions were
imposed, but the Japanese agency responsible for
administering copyright law responded with a public
education plan “to try to shake Japan’s growing
reputation as a software pirates’
paradise.”(27)
IBM’s Software and Industrial Espionage
The most notorious form of software imitation figuring in
U.S.-Japan trade relations centers around the technology of
IBM’s long-dominant mainframe computer product line.
For years, Japanese makers of IBM-compatible mainframe
computers purchased new IBM computers and reverse engineered
the hardware and software in order to make better clones.
Apparently, such reverse engineering was not enough because
in 1982 two firms - Hitachi, Ltd., and Mitsubishi Electric
Corporation - were caught in a joint IBM-FBI sting operation
seeking to buy the secrets of IBM’s mainframe computer
architecture. After admitting that it had agreed to pay more
than $500,000 for confidential IBM information, Hitachi pied
guilty in a U.S. district court to a charge of conspiring to
transport stolen IBM computer secrets, and both companies
settled with IBM. The largest IBM-compatible vendor, Fujitsu
Ltd., was not a party to the industrial espionage suit
because it obtained information through its long-standing
investment in the largest American IBM-compatible maker,
Amdahl Corp. But after settling with the other Japanese
firms, IBM threatened Fujitsu with a copyright violation
lawsuit over use of similar technology, so Fujitsu entered
into a licensing agreement with IBM for the same
technology.(28)
The IBM supai jiken (spy incident) was extremely
controversial. American observers viewed it as industrial
espionage; the Japanese reaction was initially that Hitachi
and Mitsubishi had violated no laws, and once a guilty plea
was stipulated, that such violations were due in part to
ignorance of U.S. laws. But a contemporaneous Japanese
report said the three companies “cannot ignore the
possibility that such software may be in violation of
relevant American copyright law and therefore, till now,
IBM-compatible computer makers have refrained from marketing
their operating systems in the United States.”(29)
In 1985 IBM’s settlement with Fujitsu fell apart,
and by mutual agreement, resolution of their differences
over IBM’s intellectual property rights was assigned to
the American Arbitration Association. In 1988 a
two-arbitrator panel required Fujitsu to pay IBM a lump-sum
payment of $833 million. Fujitsu secured the right to obtain
future IBM operating system software secrets (under tightly
controlled conditions) in exchange for an additional annual
license fee, initially set at $25-$51 million, depending on
the information desired.(30) Although it obtained access to
a wide range of compatibility information, Fujitsu
nonetheless began a long-term campaign to reduce copyright
restrictions on reverse engineering. This campaign included
1989 legal briefs in the European Community’s
aforementioned efforts to unify its software laws. According
to the account of an opposing IBM attorney, “Fujitsu
had advised the EC officials that in addition to
strengthening the interface exceptions that already appeared
in the directive, a new exception should be added: the
directive should explicitly permit ’reverse
engineering’ of software. Here was a notion worthy of
the preeminent software clone.”(31) Fujitsu won allies
among a number of European and American companies, including
Bull, Olivetti, NCR, and Unisys, forming a trade association
called the European Committee for Interoperable Systems
(ECIS) to push for a reverse engineering exception in the
new copyright law.
The 1983-1985 Revision
Two American consultants who studied the IBM charge that
the supai jiken was not an aberration but part of a
pattern of stealing American software concluded:
[The Japanese] subjected all the larger
American firms to massive intellectual property theft.
The sordid dark-of-night stealing from IBM by Hitachi and
Mitsubishi is only the most egregious example .... In an
extraordinary exercise in cynicism, in 1984, after the
exposure of widespread Japanese intellectual property
theft, MITI introduced legislation that effectively
legalized stealing from foreigners.(32)
This perceived tie-in with Japanese reverse engineering
of IBM’s software is but one of the similarities
between the 1983-85 and 1993-94 revisions of software
copyright law. Other similarities include conflict between
MITI and Ministry of Education objectives, complaints by
U.S. trade officials over lack of openness in the
policy-making process, and a stated goal of reducing the
development costs for software imitators.
In the early 1980s, Japan’s copyright laws did not
specifically mention computer programs. However, an advisory
committee to the Agency for Cultural Affairs (ACA) had
concluded in 1973 that computer programs were works of
authorship entitled to copyright protection, and several
Japanese video game manufacturers brought successful
copyright infringement lawsuits against counterfeiters from
1982 to 1984. In 1983 MITI introduced plans for a unique
“Program Rights Law” that would control legal
protection of software without using copyright law. MITI
began its push to revise software laws by consulting with
its Industrial Structure Council advisory board - a month
after the arrests in the Hitachi/Mitsubishi supai
jiken. The link between the two events was made in the
Japanese press:
A trial in the United States involving
Japan’s Hitachi Ltd. accused of purchasing stolen
International Business Machines (IBM) documents has
produced an acute need for some sort of measures to
legally protect software, although the ministry publicly
disavows any relationship between the new law and the IBM
espionage case.(33)
MITI’s proposal provided 15 years of protection, as
compared to the 50 years in effect under the Berne Copyright
Convention (which Japan adheres to) and 75 years for
software protected under U.S. copyright law. MITI’s
1984 software plans were in line with those of the large,
export-oriented companies, which include major customers for
computer software systems as well as manufacturers of
electronics equipment who depend on the availability of
software. Its most controversial provision provided for
compulsory licensing of software when “it is necessary
for public interest or when it is not properly
worked”(34) - referring to software that is written
outside Japan but not freely licensed within the country.
MITI’s plans were protested by U.S. officials, and the
ACA within Japan’s Ministry of Education proposed a
plan more favorable to the interests of Japanese and foreign
software authors by amending copyright law to protect
software for 50 years and without compulsory licensing. In
the face of international pressure and threatened U.S.
sanctions, MITI dropped its plan in March 1985, and the ACA
plan prevailed.
The 1993-1994 Copyright Revision
Eight years later, many of the same issues reappeared
when the Japanese government reexamined software copyright
law. One key issue was the annual royalties paid by Fujitsu
to IBM. In July 1993 Fujitsu announced it would not renew
its annual license for compatibility data from IBM’s
mainframe operating system, even though Fujitsu had felt
that such information was worth millions of dollars in the
past; industry analysts predicted this would hurt
Fujitsu’s sales. The announcement came four weeks after
published reports said the ACA planned a major revision of
software copyright law, including studies of EC and U.S.
laws. Fujitsu’s chairman later stated, “We want
the government to allow us to pick up ideas from the
software so we can develop products compatible with the
other firm’s standards.”(35) Fujitsu was
represented in both the ACA’s 16-member shingikai
(collaborators’ council) and in an influential
subcommittee of Keidanren (Federation of economic
organizations).
Keidanren’s Proposed Changes and
Shingikai Deliberations
Of concern to American companies was a report submitted
to the ACA shingikai by the “Working Group on Legal
Protection of Computer Programs,” a Keidanren standing
subcommittee. Its 11-members included officials from the
four major Japanese computer companies - Fujitsu, NEC,
Hitachi, and Toshiba; IBM Japan; and representatives of
large Japanese companies that are major computer users. In
September the subcommittee considered software copyright and
drafted a confidential proposal to the ACA, which was
subsequently leaked to the public and widely distributed in
both Japanese and an unofficial English translation. The
proposal listed a series of majority and minority opinions,
the latter assumed to be that of IBM Japan, and included
three split recommendations regarding software
decompilation: (1) copying and adaptation of computer
programs for decompilation should be permitted; (2)
decompilation should be made compulsory to prevent it from
being restricted by software license terms; and (3) unlike
the EC directive, copying and adapting programs for
decompilation should not be limited to achieving
interoperability, but should be allowed regardless of
purpose to prevent the author from obstructing reverse
engineering. Among the reasons cited for the provisions was
the societal benefit of “preventing redundant
investments in similar technologies.” This is similar
to the 1983-85 revision in which the Information Industry
Committee of the Industrial Structure Council “called
on the government to promote software development and expand
utilization of software by avoiding overlapping investment
and promoting software distribution.”(36)
Throughout the 1993-94 revision process, the Keidanren
proposal was used as the starting point for discussion by
proponents and opponents of changing Japanese software law.
An ACA official denied that the report was ever the proposal
of his agency or its shingikai: instead, the ACA had
initiated the revision to address legally the issue of
“reverse engineering or decompilation,” citing the
European and U.S. cases mentioned earlier.(37) As with the
1983-85 revision, rival factions clashed over conflicting
goals. In the earlier revision, MITI pushed proposals aimed
at promoting its constituents (Japanese high-tech companies)
over foreign rivals, while the Ministry of Education (ACA)
was more closely allied with the interests of its
constituency (software authors); these factions were again
represented in the 1993-94 process. The shingikai’s
stated goal was to develop a final public report for the
ACA; after receiving comments from the various ministries
the agency would propose legislation for approval by the
Diet. The shingikai was characterized by two of the traits
considered typical for such deliberative councils: the use
of a public-private discussion group to build consensus for
the ministry and informalism (what trade rivals call
nontransparency) to arrive at consensus. As with other
shingikai, the informalism was manifested by nonpublic
deliberations that allow clearance of controversial
positions behind the scenes prior to any public commitment
to a particular position.(38)
But such secret deliberations were a major source of
friction with the U.S., and Commerce Secretary Ron Brown and
Trade Representative Mickey Kantor drafted a November 2
letter to the ministers of education and foreign affairs
expressing concern over the lack of U.S. input in the
revision process. In response to U.S. protests, the
shingikai held an unusual heating December 13 to take
testimony from a series of speakers from American firms
opposed to the proposed change, later supported by an
attorney from the U.S. Patent and Trademark Office
authorized to speak on behalf of the Clinton administration.
Also testifying were two American industry representatives
who favored the Keidanren proposal and sought to discredit
the views of the other Americans.
American Opposition and Support
IBM led the opposition to the Keidanren proposals along
with an industry group called the “Alliance to Promote
Software Innovation” (APSI), which had been formed in
1991 to fight against decompilation in the European
Commission proposal and is closely aligned with another
industry association, the Business Software Alliance. For
the APSI allies, innovation is the rallying cry to protect
the lead held by a number of dominant suppliers of computer
software and hardware. On IBM’s side were five of the
six largest U.S. microcomputer software companies, as well
as the leading developers of proprietary operating systems
(IBM, Apple, Microsoft, DEC) and two major vendors of
proprietary semiconductors (TI, Motorola). The APSI members
said that allowing decompilation would eventually result in
reduced financial rewards for innovation. They also claimed
that reverse engineering could be used to construct less
detectable copies of popular programs so that decompiled,
modified, and recompiled code would become a common form of
disguised plagiarism by competitors.
In addition to the letter by Brown and Kantor, the
American opponents of decompilation were supported by visits
from Ambassador Walter Mondale and patent and trademark
officials. Testifying in support of the APSI position at the
December heating, Christopher A. Meyer, a senior U.S. Patent
and Trademark Office copyright attorney, argued that under
U.S. law, the fair use copyright exception for decompilation
would not be applicable to for-profit development of a
directly competing product.
The Keidanren proposal, however, was supported by
American interests organized as the American Committee for
Interoperable Systems (ACIS) led by Sun Microsystems.(39) On
Sun’s side were IBM’s mainframe competitors (NCR,
Bull, Amdahl), peripherals companies (Emulex, Storage
Technology, Seagate, Western Digital), semiconductor
companies (AMD, Chips & Technologies, Phoenix), and
three software companies (Accolade, Broderbund, and
Informix). Sun’s leadership (and hence its role in
AcIs) is driven by the philosophical zeal of its chair and
cofounder, Scott McNealy, for so-called “open
systems” - the idea that computer architectures should
have open specifications allowing access by all vendors
rather than proprietary specifications, which provide an
advantage to the developer of that architecture. But just as
many of the APSI members have a business interest in
preventing imitative products, most of the ACIS members have
a business interest in using reverse engineering to build
such products. For example, Amdahl is one of the two leading
U.S. providers of IBM clone mainframes and is part-owned by
Fujitsu. Meanwhile, AMD is the most aggressive developer of
substitute chips for Intel microprocessors, and Chips &
Technologies and Phoenix sell chips and firmware for IBM PC
clones. Accolade was the defendant in the case involving
Sega-compatible video games.
ACIS argued that first-comers will lack incentive to
innovate if they are protected from competition. Instead,
consumer choice is threatened by “lock-in” to a
product that wins market dominance because alternatives
(clones) cannot be legally developed. If innovation is the
mantra of APSI, interoperability is what drives ACIS. Such
interoperability is defined both in its customary sense -
complementary products such as application and peripherals -
but also to include competing products that replace the
original, the same position adopted by the Keidanren panel.
Because the U.S. government intervened against the ACIS
position, ACIS in turn sought to undercut whatever influence
Washington might have with Tokyo. Thus, in testimony before
the shingikai, the ACIS representative said that
“decompilation is not properly a U.S.-Japan trade
issue” and also argued that Meyer was not authorized to
represent the U.S. government.
The presumption has been that, because U.S. firms
generally lead their Japanese competitors in software
development, all Japanese firms would favor loosening
copyright restrictions. But this does not allow for those
cases where a Japanese company with a strong product in its
home market has more to lose at the hands of its domestic
competitors than it has to gain against American ones. It
also does not allow for those Japanese firms that dominate
markets, such as the video game companies Nintendo and Sega.
The two firms sued to prevent American firms from using
decompilation to make unlicensed video games that compete
with licensed games and those developed by Nintendo and
Sega. Despite vigorous arguments in the United States
against decompilation, both firms were conspicuously absent
from the 1993-94 revision process, unwilling to publicly
cross the position of MITI and the large electronics firms.
Also absent from the discussion were representatives of the
European Union, whose difficulties in dealing with the
earlier APSI vs. ECIS duel over its own software directive
made it unlikely that they would revisit the issue within
Europe, let alone seek a common position in the Japanese
debate.
Is Japan Ready for the Information
Century?
Unable to agree on how computer software copyright law
should be changed, the shingikai concluded its work in May
1994 with a series of options rather than specific
recommendations. This led Fujitsu’s chairman to charge
that “the Cultural Affairs Agency surrendered to
pressure from the U.S.”(40) However, given Japan’s
recent ability to say “no” to U.S. trade demands,
one must also conclude that pro-copyright sentiments among
Japanese panelists allied with the ACA played a significant
role. The inconclusive ending to this revision effort
suggests that Japan is far from resolving both the narrow
issue - reverse engineering of computer software - and the
broader political and economic changes inherent in its
long-contemplated shift to an information economy. Such a
shift is crucial to Japan’s technological
competitiveness in the 21st century in which information
technologies will play a role comparable to that of steam
engines and railroads in the 19th century.
But despite the rhetoric of joho-ka, information
technology policy continues to be dominated by the major
Keidanren firms that want cheap software - that is, big
electronics firms that use it to promote computer sales and
large manufacturers who are the major users. The smaller,
innovative software-only firms in Japan have yet to reach
the influence of their U.S. cousins. Thus, in the near term
Japan’s information technology policies will reflect a
continuing “catch up” mentality, as evidenced by
MITI’s abortive efforts in 1995 to create ISO-9000
quality certification procedures for packaged software. If
such policies reduce intellectual property rights for
software - more characteristic of a developing nation than
the world’s second-largest economy - they will spark
continuing trade conflict with the United States and with
other nations largely sitting on the sidelines. Such an
approach might be justified if it successfully inculcates a
domestic information industry, but it also inherently
carries the seeds of destruction of that industry. Societal
attitudes toward intellectual property are less easily
changed than a mere regulation, and enforcement of
intellectual property rights depends as much on moral
legitimacy as the enforceability of legal sanctions. An
attitude that dismisses intellectual property rights within
Japan would make it difficult for Japanese films to
appropriate adequate domestic returns to support the
technological innovation necessary for global
competitiveness. At the same time, the experience of
Japanese firms in China demonstrates that the export of
Japan’s intellectual property depends on the global
acceptance of such property rights, rights that the Japanese
will be unable to promote until they are unequivocally
established in their own country.
[Notes]
1. U.S. Department of Commerce, U.S. Industrial
Outlook 1994, pp. 27-5.
2. The software industry has the highest rate of R&D
spending (compared to sales) of all U.S. industries,
according to an annual survey. See “What’s the
Word in the Lab? Collaborate,” Business Week,
June 27, 1994, pp. 78-103.
3. U.S. Industrial Outlook 1994. Note that the non-U.S.
firms are all computer makers rather than software-only
companies.
4. “Special 301 Report to U.S. Trade
Representative,”
International Intellectual Property Alliance (IIPA),
February 13, 1995.
5. International Trade: Strengthening Worldwide
Protection of Intellectual Property Rights,
GAO/NSIAD-87-65 (Washington, D.C.: U.S. General Accounting
Office, April 1987), p. 9.
6. “Special 301 Report,” February 13, 1995.
7. Douglass C. North, Structure and Change in Economic
History (New York: Norton, 1981), p. 16.
8. “At the Mercy of China’s Pirates,”
Nikkei Weekly, February 6, 1995.
9. The word “piracy” has judgmental
connotations not present with “unauthorized
duplication” but it is the most common term, even used
by governments of countries where such duplication is
common.
10. An “assembler” is a program that translates
primitive, human-readable assembly-language computer
programs into binary form, while a “compiler”
translates more sophisticated higher-level languages (e.g.,
c++) into the same binary form. Thus a
“dis-assembler” and a “de-compiler” are
functionally equivalent, differing only in degree.
11. This refers to commercially sold tools, internal
tools have existed a lot longer, and because of the obvious
intellectual property issues, are unlikely to be publicly
acknowledged.
12. This highly simplified discussion does not consider
steps that a program author can consciously take to disguise
program structure, not the practical problems of dealing
with imperfect decompilations of 100,000 lines of code. The
process should be compared to cryptography - as the
technology gets better for creating ciphers, so, too does
the technology for decoding them. The difference is that a
primary purpose of a cipher is to subvert analysis, while
for most software products, this is a secondary
consideration.
13. See Charles McManis, “Intellectual Property
Protection and Reverse Engineering of Computer Programs in
the United States and the European Community,” High
Technology Law Journal, 8:1; Sega Enterprises Ltd. v.
Accolade, Inc., 977 F.2d 1520 (9th Cir., 1992); Atari Games
Corp. v. Nintendo of America, Inc., 975 F.2d 832 (Fed. Cir.,
1992).
14. Chalmers Johnson, MITI and the Japanese
Miracle (Stanford, Calif.: Stanford University Press,
1982), pp. 289-301; Tessa Morris-Suzuki, Beyond
Computopia: Information, Automation, and Democracy in
Japan (London: Kegan Paul, 1988), p. 28.
15. Takeshi Hiromatsu and Gosei Ohira, “Information
Technology and Japanese Economy: An Empirical Analysis on
the Size of the Information Economy,” Working Paper no.
19 (Tokyo: University of Tokyo, Komaba Department of Social
and International Relations, 1991), p. 2.
16. Yasunori Baba, Shinji Takai, and Yuji Mizuta,
“The User-Driven Evolution of Japanese Software
Industry: The Case of Customized Software for
Mainframes,” in The International Computer Software
Industry: Structure and Evolution, David Mowery, ed.
(London: Oxford University Press, forthcoming).
17. Tetsushi Nakahara, The Industrial Organization and
Information Structure of the Software Industry: A U.S.-Japan
Comparison (Stanford, Calif.: Center for Economic Policy
Research, 1993.)
18. Egil Juliussen and Karen Petska-Juliussen,
Computer Industry 1994-95 Almanac (Austin Tex.:
Reference Press, 1994), pp. 393-95.
19. Tom Cottrell, “Fragmented Standards and the
Development of Japan’s Microcomputer Software
Industry,” Research Policy, 23 (March 1994), pp.
143-74.
20. Geert Hofstede, Culture’s Consequences,
abridged ed. (Newbury Park, Calif.: Sage, 1984), p. 122.
21. See Charles R. Morris and Charles H. Ferguson,
“How Architecture Wins Technology Wars,”
Harvard Business Review, March-April 1993, pp. 86-96;
D.I. Okimoto, Between MITI and the Market (Stanford:
Stanford University Press, 1989), pp. 28-29; Richard
Samuels, Rich Nation, Strong Army: National Security and
the Technological Transformation of Japan (Ithaca, N.Y.:
Cornell University Press, 1994), p. 244; Joel West,
“Building
Japan’s Information Superhighway,” JPRI
working paper no. 7 (Cardiff, Calif.: Japan Policy Research
Institute, February 1995.)
22. James P. Womack, “Competing with Japan in
Intellectual Property: A Strategic Overview”
(Cambridge, Mass.: MIT, Japan Program, MITJP 92-02), p.
7.
23. David J. Teece, “Profiting from Technological
Innovation: Implications for Integration, Collaboration,
Licensing, and Public Policy,” in The Competitive
Challenge: Strategies for Industrial Innovation and Renewal
(Cambridge, Mass.: Ballinger, 1987), p. 201.
24. E.g., Japanese companies forced by MITI to buy
inferior Japanese mainframe computers in the 1960s, as noted
in Made Anchordoguy, Computers Inc.: Japan’s
Challenge to IBM (Cambridge, Mass.: Harvard University
Press, 1989), p. 33.
25. Piracy rates and losses as reported by the Business
Software Alliance, April 1995. Another industry group,
the Software Publishers
Association, estimated 1994 piracy losses of business
software at $1.3 billion for Japan but only $1 billion for
the U.S., and piracy rates of 56% and 25%, respectively.
26. See IIPA, 1995.
27. “Culture Agency Issues School Guideline in Hope
of Slowing Software Piracy,” Japan Digest, April
13, 1994.
28. Anchordoguy, p. 113; “Fujitsu Chief Is Confident
of IBM-Compatible Computers,” Nihon Keizai
Shimbun, December 6, 1993, p. 20.
29. Nihon Keizai Shimbun, editorial: “Trade
Espionage,” November 1, 1993, p. 6; “Computer Spy
Cases Ended but Problems Remain on Software,” JIJI
Press Ticker Service, October 27, 1993.
30. Ilyse Barkan and Joseph L. Badaracco, Jr., “The
IBM-Fujitsu Settlement,” Case 9-391-149 (Boston:
Harvard Business School, 1991, revised 1/15/92); Anthony
Lawrence Clapes, Software, Copyright, and Competition
(New York: Quorum Books, 1989), p. 172.
31. Clapes, Softwars: The Legal Battles for Control of
the Global Software Industry (Westport, Conn.: Quorum
Books, 1993), pp. 127-28.
32. Charles H. Ferguson and Charles R. Morris,
Computer Wars: The Fall of IBM and the Future of Global
Technology (New York: Random House, 1994), paperback
ed., p. 155.
33. “Japan to Enact Program Law to Protect Computer
Software,” Kyodo News Service, December 9, 1983.
34. Teruo Doi, “The Role of Intellectual Property
Law in Bilateral Licensing Transactions Between Japan and
the United States,” in Law and Trade Issues of the
Japanese Economy, Gary R. Saxonhouse and Kozo Yamamura,
eds. (Seattle: University of Washington Press, 1986), p.
177.
35. “Agency to Overhaul Law Covering Software
Copying,” Kyodo News Service, June 22, 1993;
“Tokyo Hit for Copyright Law
‘Surrender’,” Nikkei Weekly, June 6,
1994.
36. “Japan to Enact Program Law to Protect Computer
Software,” Kyodo News Service, December 9, 1983.
37. Interview with Misato Kitani, director of the
International Copyright Office of the Agency for Cultural
Affairs, January 12, 1994.
38. Frank Upham, Law and Social Change in Postwar
Japan (Cambridge, Mass.: Harvard University Press,
1987), p. 168; David Litt et al., “Politics,
Bureaucracies, and Financial Markets,” University of
Pennsylvania Law Review, 139 (1990), pp. 370-71.
39. The hardware companies included Bull, NCR, and Unisys
- all members of the aforementioned ECIS - as well as
Amdahl.
40. “Tokyo Hit for Copyright Law
‘Surrender’,” Nikkei Weekly, June 6,
1994.
Joel West is a
doctoral student at the Graduate
School of Management, University
of California at Irvine. The author wishes to thank
Jason Dedrick and Steven Vogel for helpful comments on an
earlier version of this article.
© 1995 by The Regents of the University of
California
Citation: West, Joel, “Software
rights and Japan’s shift to an information society:
the 1993-1994 copyright revision process,” Asian
Survey 35, 12 (Dec. 1995): 1118-1139
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