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https://sanctionsnews.bakermckenzie.com/russia-adopts-zero-compensation-to-patent-owners-from-unfriendly-countries/

The Russian Government has adopted a decree[1] which will allow local companies and individuals to use inventions, utility models and industrial designs held by owners from “unfriendly countries” without their consent and without paying any compensation.

The decree relies on the provisions in the Russian Civil Code which give the government the right, in case of extreme necessity associated with supporting the defense and safety of the state, the protection of citizens’ life and health, to allow the use of inventions, utility models or industrial designs without a patent owner’s consent at short notice and for “proportional” compensation. The decree envisages compensation in the amount of 0% of the revenue of the person using a patent, payable to patent owners connected with foreign countries which perform unfriendly actions in relation to Russian legal entities and individuals, including:

What prevents foreign companies from setting up business in Russia so as to not pay any compensation to patent owners from the West? I am thinking there are a system of laws that punish and discourage companies from setting up a business like a offshoot of a company or some other entities to avoid paying money to foreign companies. However, I am not sure what they are exactly and how strong the incentives are to dissuade companies from profiting off this. I am guessing small companies might do this and the laws aren't strong enough to dissuade anyone but the big multinational companies.

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8 Answers 8

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It depends where the sales market is. Certainly, it would be good business for a foreign producer to move production into Russia in order to sell the output in Russia.

But you wouldn't be able to export from Russia and sell back into the Western market, and you might end up on a Western sanctions list yourself for trying.

And later, when the war is done, the rules might change back to enforcing Western patents, and invalidate the business model henceforth.

There's probably a bit of a grey area in terms of countries that might be broadly sympathetic to Russian exports, but most countries sympathetic to Russia haven't gone as far themselves as ceasing to enforce Western patents.

All in all, releasing producers from patent costs may be an opportunity for Russian businessmen, but it's not as strong an opportunity for foreign businessmen currently outside Russia, who might wish also to serve markets outside Russia from anything they would produce patent-free in Russia.

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    "It would be good business" as long as you don't mind the domestic backlash. Generally speaking, companies at least here in Europe seem more intend on (very publicly) doing the opposite (ceasing operations in Russia), because anything else will look real bad in the public eye and potentially even run afoul of western sanctions. I don't think saving a bit on patent payments makes up for this very easily.
    – xLeitix
    Aug 17, 2023 at 14:39
  • @xLeitix, I agree mostly, although aside from sanctions I think businesses are more afraid of powerful liberal backlash (including what they can do to attack a company with their media), than they are concerned about the views of the public at large. When I talked of a company possibly "moving into Russia", I meant relocating their operation exclusively to there, not simply creating a foreign subsidiary - such straddling would obviously leave them open to attack by sanctions. The problem is that such a Russia-based operation can't easily get goods back out into the West.
    – Steve
    Aug 17, 2023 at 14:53
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    At least here in Europe it's not just "liberals", almost any political fraction outside of the far right would not take a relocation to Russia well at the moment. Anyway, we are in agreement, I was mostly reacting to your formulation "it would be good business".
    – xLeitix
    Aug 17, 2023 at 14:57
  • The countries that are on the no-fly list and are almost certainly already doing this. So who cares. If you're willing to move to Russia but you just don't want to pay taxes, see also, Delaware, South Dakota, Nevada, and Wyoming.
    – Mazura
    Aug 18, 2023 at 1:06
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Suppose I want to sell widgets in my country, but my widget design infringes a patent held by someone else. Because of this, I cannot manufacture these widgets in my country, but I also cannot sell them in my country. Therefore, the fact that I could manufacture them in Russia is of little use to me: to sell the widgets, I still need to pay a fee to the patent holder.

For example, 35 USC 271(a):

(a) Except as otherwise provided in this title, whoever without authority makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefor, infringes the patent.

Note the inclusion of the verbs offers to sell, sells, and imports.

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    @AgnishomChattopadhyay What's the chance that the savings in patent licensing costs would offset all the lost business outside Russia?
    – Barmar
    Aug 17, 2023 at 14:50
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    @AgnishomChattopadhyay At that point, "your own country" seizes the money to pay for the patent infringement lawsuit that was filed and won in "your own country". If you're going to take advantage of this rule, you're going to have to be located in and sell only to Russia and Russia-friendly countries.
    – ceejayoz
    Aug 17, 2023 at 15:04
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    China, Russia, five others make US property rights blacklist apnews.com/article/…
    – paulj
    Aug 17, 2023 at 19:39
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    @AgnishomChattopadhyay are you sure about the "make money" step? Have you seen the ruble lately? Aug 17, 2023 at 22:03
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    @Mazura The five other countries are listed in the linked article, which is only four sentences long.
    – user47152
    Aug 18, 2023 at 7:45
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Because patents are only a small fraction of costs

Any product you manufacture will have numerous costs:

  1. Labor
  2. Marketing/advertising
  3. Renting physical space
  4. Taxes (and sometimes, bribes to local officials)
  5. Electricity
  6. Manufacturing inputs
  7. Transportation costs

... and the list goes on and on. Being able to ignore patent costs is nice in theory but it would only pay off if all the other costs are equal or lower in Russia. That's unlikely to be the case for the vast majority of products, as Russia isn't exactly known for being a country where it's easy to run a business. So even if you were able to convince Western countries to let you sell Russian-manufactured products there, it's still questionable whether or not this would be more profitable than starting a company in China and paying a fee to the patent holder.

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What prevents foreign companies from setting up business in Russia so as to not pay any compensation to patent owners from the West?

Common sense and ability co calculate the risks.

You probably can do the same in other amazing countries with strong economies like Somali and North Korea (I doubt they will enforce patents from US/Europe). But patents are not the only thing the company cares about. Here are a few problems you will face:

  • to build any sort of production you need to invest non-trivial amount of money and will need years to even break even on this investment. During all this time you need to have at least some belief that your investment will not be destroyed or confiscated. In Russia you never know when your company will be passed around to a relative of warlord or will be accused of not paying lip service to the government (supporting the war) enthusiastically enough or when someone in FSB might decide that they will lead your business better than you or when Wagner (or something similar) will decide to do the next march of justice.
  • Let's assume you have the money and ignored previous issues. You need to buy equipment. The biggest country in the word can produce almost nothing nonetheless enormous amount of money was spent on import substitution. You will have to pay more money on everything and probably you will not be even able to buy needed equipment
  • Let's assume you somehow were able to buy/sneak in equipment. You will need to have more or less qualified personnel to do the work. Maybe you even will need to spend time on teaching people. Of course in the best country whom every European country envies the salaries are extremely cheap, but the issue is that the government works hard on throwing them to the frontline so there is a shortage of potential workers and you might need to pay premium.
  • Let's assume you managed to have personnel, they were not mobilized and have not stole your equipment and produced some product. Then you will need to sell it. The only place you will be able to sell it is Russia, which by itself is not a big market and that market does not have much buying power (due to low salaries). You will not be able to export your product in any normal country (even legit companies have troubles, so company which breaks the rules will not be able to do this for sure).
  • Let's assume you somehow sold your stuff and even generated profit. This profit will be in the strongest and most stable currency in the entire world. You never know whether next week it will lose 10% of value or whether it will collapse 3x in a year. You will have troubles exchanging your strongest currency into dirty useless dollars or euros and never know when you will not be able to do. Without doing this you will be forced to spend it the most stable country in the world.
  • Let's assume that you still somehow was able to convert your rur to another currency. Just because one country allowed you to bypass the law (by infringing patent), does not mean that others will do this. You still probably will be arrested somewhere else or will be forced to enjoy Sochi for the rest of your life.
  • You never know when will the whole regime collapse. As once it will collapse, you will not be safe. Even if you believe that it will collapse after your end of life, you never know when will the course change.

I showed only some small chain of risks that people have to think of. So in my opinion this is only for internal use of opportunistic wanna-be businessmen.

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The core hint to the answer is in your question:

in case of extreme necessity associated with supporting the defense and safety of the state...

If it was possible for someone to patent breathing, and then refuse it to everyone in one country, they wouldn't hold their collective breaths. More likely, the government would declare the patent unenforceable.

This is a way to do so, while preserving IP rights per se. In a number of countries, including Russia, companies that have their business blocked by a patent can apply for a court or government exemption. In this case, if the government decides that their business is vital to defense or safety, they can get such exemption for a percentage if their revenue.

This fee would normally be paid to the patent holder, sort of a forced license (and an expensive one, % of revenue is brutal). For now, it's temporarily reduced to 0 for countries sanctioning Russia.

All the mechanics remain. You still have to apply for a license from the government. Should the sanctions be lifted, they can change the fee back to normal or drop the exemption altogether. And the sanctions are what prevents companies from profiting from this activity as is.

Moving business to Russia just replaces your dependence on the patent owner's will with a dependence on the Russian government's will. The latter isn't necessarily more reliable or less expensive.

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Just as an example, US patents and US law state that products imported into the USA need a patent license. You will find the same in many countries. You would be limited mostly to building and selling in Russia.

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The same things that prevent you from doing it in your own or another country. Patent protections don't just depend on the country that is making the item to enforce it. Issues that they could run in include (but not limited to);

  • Unable to sell the patented item or items that use it in countries that honor the patent
  • Unable to sell any items in those countries
  • Fines from governments until you pay the required fees
  • Lawsuits by the patent holders
  • potential criminal charges
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Nothing prevents it. That is why one can go to NYC and buy dozens of Chinese knock-off brands. If the eye of sauro...Justice Department gets a nudge to go after your business because some corporation made a donation to somebody important, then all bets are off. Otherwise, free and clear.

https://apnews.com/article/russia-ukraine-technology-business-europe-economy-1d273298f24f90f4255ebe589bf9f5c2

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    You don't need to make donations to protect your patents
    – Joe W
    Aug 17, 2023 at 22:12

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