Evolution of Investment Environment in Indonesia

Out of 155 economies rated in the 2006 World Bank (WB) Doing Business Report, Indonesia ranks only 115th in respect of its “ease of doing business”. Interestingly, Iraq ranks 114th which reminds that figures, in general, should be interpreted cautiously. Indonesia has in fact been steadily recovering from the turmoil of the financial crisis and is resolutely engaged in the long battle of eradicating the corruption, collusion and nepotism that had become the norms of the country’s political and economical system and brought it to its collapse.

In a few years time, through the continued implementation of prudent fiscal and monetary policies, the Indonesian Government managed to control and restore macroeconomic fundamentals. Miranda Gultom, Senior Deputy Governor of Bank Indonesia, the Indonesian Central Bank, declared on July 26, 2006 that Government could repay this year the remainder of its debt of US$ 3.74 billion to the International Monetary Fund (IMF).

The Indonesian Government succeeded also in enhancing the stability of the financial system by a continuous strengthening of the banking system: “Indonesia has a thriving banking system for the first time in its history” says German Vegarra, country manager at the International Finance Corporation (IFC) in Jakarta in the June 2006 issue of Asia Money. “Ten years ago, banks where there to lend at their whim to their cronies and, more often than not, to themselves”.

Recently, the Government gave a new impulse to its efforts to restore investment – the engine of long-term growth and employment generation – which had remained relatively weak until now. On February 27, 2006, the President issued a Policy Package for Improvement of the Investment Climate instructing individual Ministers to implement 85 precise time-bound regulatory and institutional reforms in 2006. The package focuses on five areas: general investment policies, customs, excise and duties, taxation, labour and small and medium enterprises (SMEs).

The Ministry of Trade (MoT) met the first key deadline in the package by submitting a new draft Investment Law to the Parliament on March 22. The draft law intends to unify the existing separate Domestic Capital Investment Law and Foreign Investment Law and reinforce investment protections including national treatment, the right to repatriation of profits, guarantees against nationalization and expropriation, fiscal and non-fiscal incentives and in terms of dispute settlement. In conjunction with a new investment law, the Government plans a number of other regulatory changes including a revised Government Regulation setting out “clear, simple and transparent” criteria for the Negative Investment List.

As part of the investment climate improvement package, the MoT also issued decrees simplifying application procedures and eliminating some bureaucratic requirements for eight separate trade licenses (trade business license, representative office license, surveyor business activity license, franchise business registration document, agency and distribution registration document, alcoholic beverages trade business license, multi-level sales business license and warehouse registration document). Under Indonesian law, all local companies must obtain a trade business license (SIUP) as part of the business establishment process. In a 2005 survey, the International Finance Corporation (IFC) estimated this step took companies an average of 14 days. The new decrees seek to shorten the SIUP issuance process to five days, reduce the number of documents required from six to four, and standardize fees throughout Indonesia.

Improvement in Enforcement of Intellectual Property Rights in Indonesia

The United States officially announced in April 2006 that Indonesia still remains on the Priority Watch List in 2006. This is a sad fact especially having noted how the Indonesian government has boosted its efforts in trying to eradicate Intellectual Property Rights (IPR) piracy. In fact, to be regarded as a credible member of the international community and to have a better framework for IPR, Indonesia has over the years become a participant of major IPR convention such as the Paris Convention for the Protection of Industrial Property, the Berne Convention for the Protection of Literary and Artistic Works, as well as several WIPO treaties. In addition to this Indonesia has also ratified the Agreement Establishing World Trade Organization (WTO), and thereafter the TRIPS Agreement.

The US government believes that Indonesian laws and regulations structures on IPR are in place but in fact prosecution of Intellectual Property Rights violations remains insufficient. In Indonesia, pirated optical media products (CDs, VCDs, DVDs and CD-ROMs) still dominate the local market, and 29 mass-producing optical disc plants remain in operation. On July 25, 2005 the Indonesian Minister of Industry (MoI) issued a new regulation requiring importers of optical disc machinery and optical grade polycarbonate to provide the MoI with detailed information about the origin, type, quantity and destination of these products. One MoI official said that the new regulation can help the government keeps checks on the location of optical disc factories and their production capacities. This new law was enacted in keeping in mind the problems of enforcement of IPR. The Indonesian authorities have been conducting several effective raids on retail shops selling pirated software in 2004 and 2005, resulting in the seizure and destruction of several hundreds thousand of copies of pirated software. Moreover, the Supreme Court has a very promising proven track record in giving decisions on IPR cases especially on cases involving well-known marks. The rulings by the Court together with recent systematic improvements at the Trademark Office have made it much harder for famous marks to be registered by unscrupulous third parties. Changes have also been enacted to include the enforcement of IPR and a comprehensive system to enforce trademark rights in Indonesia.

However, while Indonesia has a fairly well developed legislative framework in place, it continues to struggle with the problems of poor enforcement and dispute resolution mechanisms. The United States Trade Representative listed the problems in Indonesia as being one of “lack of effective Intellectual Property Rights enforcement, adequacy of the new regulations to reduce the production, distribution and export of pirated optical media products and … deficiencies in Indonesia’s judicial system” (Letter from the International Intellectual Property Alliance to Ms. Sybia Harrison, Special Assistant to the Section 301 Committee dated 2 December 2005).

The United States urges Indonesia to conduct more frequent raids on counterfeit factories, more frequent seizures of pirated goods, its machineries and to ensure that courts impose detention sentences for IPR crimes. However, the United States is aware of Indonesia’s effort in this field and has praised Indonesia’s improvement in IPR enforcement, especially in respect of new regulations and the establishment of a Ministerial-level national Intellectual Property Task Force. It is expected that IPR enforcement will continue improving.

Foreign Trade in the Indonesian Domestic Market

Under Government Regulation No. 36 of 1977 on the Termination of Foreign Business Activities in the Trade Sector, foreign companies and individuals were prohibited from engaging in any form of direct trade in the Indonesian domestic market, which had been allowed over the last decade. In order to spur the development of local enterprises and shift the import-substituting pattern of industrialization during the oil-boom of the early seventies to an export promoting one, foreign companies and individuals in the trade sector were restricted to either (a) appointing Indonesian Agents and/or Distributors to channel their goods and/or services and/or (b) establishing a Representative Office for trade promotion activities and exports. Similarly, the Indonesian Government began to require Government agencies, including the state-owned oil company, Pertamina, to deal through Indonesian agents when importing goods and/or services.
While the general rule remains today identical, it has been a little bit relaxed. Although the legislative framework must still be cleaned up and made intelligible, among others by revoking some clearly conflicting laws and providing comprehensive definitions of legal terms, the recent issuance by the Ministry of Trade of a set of regulations dealing with the licensing of Representative Offices and Agents/Distributors could be the sign of new impetus in that direction.

I. Presidential Decree No. 118 of 2000

In line with Government Regulation No. 36 of 1977, Presidential Decree No. 118 of 2000 (the “Negative List”), which lists in broad categories the sectors of the economy closed to FDI, stipulates that trading and trading supporting services are, as a rule, closed to investments in which a part of the shares is owned by foreign companies and/or individuals. The Negative List does, however, allow some important exceptions, such as, inter-alia, large-scale retail (malls, supermarket, department stores and shopping centers) and wholesale trading (distributors/wholesalers, exporters and importers).

The Negative List must be read in conjunction with Presidential Decree No. 127 of 2001. The latter reserves some business activities to Small-Scale Enterprises while others are opened to Medium and Large-Scale Enterprises under the condition that they enter into a Partnership (i.e., inter-alia, share participation, sub-contracting, franchising or agency) with a Small-Scale Enterprise. The obligation to enter into a Partnership applies, among others, to retail trade of large scale and other services covering modern markets such as malls, department stores, hypermarket or shopping centers.

The Negative List contradicts a higher-ranking Government Regulation No. 15 of 1998, which allows companies established under foreign capital investment in the production sector to sell their products to end-consumers through joint-ventures set up as retailers, in association with Indonesian capital. However, law-applying agencies seem to consider that the Negative List prevails over all sort of conflicting regulations and that the fact that these may not have been formally revoked yet should not constitute an obstacle.

II. Representative Offices

MoT Regulation No. 10/M-DAG/PER/3/2006 on the Provisions and Procedures for Issuing Trade Business License of Representatives of Foreign Trade Companies dated March 26, 2006 (“Decree 10”) revokes and replaces the prior MoT Decree No. 402 of 1997.

Both Indonesian and foreign citizens can be appointed by foreign trade companies as their representative in Indonesia, to undertake promotional activities, market research, and sales supervision. Representatives of foreign trade companies are prohibited from carrying trading activities and selling transactions, including submitting tenders, signing contracts or settling claims. However, they are explicitly allowed to close contracts for and on behalf of the appointing companies with companies in the country in the framework of export.

Decree 10 changes actually very little to the existing legislation. It sets a limit of three (3) years, renewable, to the period of validity of the Representative Office License (“SIUP 3A”), and hence probably increases red tape, and allows without restriction the opening of head or branch offices in capitals of regencies and cities throughout the Indonesian territory whereas the former Decree allowed such establishment only in capitals of provinces.

Decree 10 continues to categorize representatives into “selling agents”, “manufacturing agent” and “buying agents”, and thus unfortunately drags on the confusion on the term “Agent” which is used in another sense in other regulations.

III. Agents and Distributors

While under Government Regulation No. 36/1977 registration of an Indonesian Agent or Distributor with the MoT was voluntary (it was however a prerequisite for participating to Government procurements), it is now a mandatory requirement under the recent MoT Regulation No. 11/M-DAG/PER/3/2006 dealing with the licensing of Agents and Distributors of Goods and/or Services (“Decree 11”).

Decree 11 confirms that (a) foreign producers and suppliers, whether established inside or outside Indonesia, (b) foreign investment companies operating as distributors/wholesalers and (c) representative offices of foreign trade companies are required to appoint, a “National Trading Company” to act as their Agent and/or Distributor, for the “marketing” (purely promotional activities, however, can still be assigned to a local Representative) and/or sale of their products to end-users, respectively.

Although the term “National Trading Company” is not defined in the regulation, MoT officials understand it at the moment as referring strictly to wholly-Indonesian owned limited liability companies (“PMDN”).

The term “marketing” used in Decree 11 must be understood so as to cover both promotional activities (i.e., the sense in which it is used under Decree 10) and closing contracts for and on behalf of the principal.

An Agent is defined as a “National Trading Company acting as mediator to act for and on behalf of the principal on the basis of an agreement to undertake marketing without transferring rights to physic of goods and/or services owned/controlled by the appointing principal”. In other words, an Agent can both carry promotional activities and sign contracts on behalf of the principal. It cannot, however, own and/or store goods belonging to the principal and deliver these and/or services directly to the Indonesian consumer.

A Distributor is a “National Trading Company acting on the basis of an agreement with the principal to purchase, store, as well as market goods and/or services owned/controlled”.

Decree 11 provides that the principal can decide to appoint an Agent or Distributor as, respectively, sole Agent or sole Distributor and all of these can in turn appoint Sub-Agents/ Distributors, whose activities are strictly limited to undertaking marketing.

The Agent or Distributor Registration Identity (“STP”) delivered pursuant to the procedure organized in Decree 11 is valid for a period of two (2) years, renewable. Agents and Distributors are, among others, obliged to convey corporate activity reports every six (6) months to the Director of Business Development and Corporate Registration of the MoT.

Under Decree 11, the severance of an Agent or Distributor agreement is allowed by mutual consent or in the following cases: dissolution of the company, discontinuation of business, transfer or the agency or distributorship right, bankruptcy and expiration of the term of the agreement. While it can therefore still be quite difficult to get out of a bad relationship, Decree 11 provides a welcomed innovation in that in the case that a clean break cannot be achieved within three (3) months as from the date of termination of an Agent or Distributor agreement, the challenged SPT will be declared ineffective thus allowing the principal to appoint a new Agent, Sole Agent, Distributor or Sole Distributor, and preventing that the paralysis of the concerned trading activities.

While Decrees 10 and 11 may mark the beginning of a fresh new elaboration of the legislative framework for Foreign Trade in the Indonesian Domestic Market, there remain many efforts to be done in order to make it intelligible. Consistent definitions and respect of the hierarchy of norms, in particular, would be a welcome step which would secure some legal certainty and undoubtedly promote trade – if that is the intention.

Cybersquatters and Branding Technology

A. Idea!

Developing countries, including Indonesia, share with developed countries the rationale in protection Intellectual Property Rights (IPR) although they might be conflicting on the extent of the protection guaranteed as it is often developing countries which offer the market while developed countries hold the rights. It is however in the interest of, notably, Indonesia to ensure a proper protection of IPR were it only in order to bargain a better access of its own products and services to markets abroad.

B. Trademark branding vs. Internet branding

The law struggles to keep the pace of Information and Communication Technologies (ICT), such as the development of the use of domain names for branding on the Internet. The regulation of trademark branding on the market-place and domain name branding on the Internet have not been synergized yet, allowing unfair competition in the loopholes. Under Indonesian Trademark Law, the use of a trademark as a domain name is not protected unless it concerns a notorious trademark and both have been registered for the same kind of goods.

C. Media

Unlike trademark, patent and industrial design which are administered and controlled by the Government of the respective country, no Government in the world has absolute control over the Media and Forum of ICT products. National Registry Administrators are private institutions authorized to assign Internet Protocol Numbers (IPN) under the Domain Name Service (DNS) maintained by the Internet Corporation (Internic), another private institution. Besides, Unrestricted Domains are very broad.

D. Forum

Similarly, the World Intellectual Property Organization (WIPO), which, through its Arbitration and Mediation Center (WIPO Center) handles DN disputes settlement between the owner of IPR and DN infringers – the cybersquatters – does not link up to a specific country. While the WIPO Center is still in the process of asserting its stature, at this stage no Mark Law in the world is ready to prevent or solve the ramifications of cybersquatters as yet.

E. Enforcement

The organization of the Media and of the Forum does not guarantee that sanctions are effectively and equally enforceable. Cancellation of a registration by a Registry Administrator is easily enforceable. However, other types of sanctions such as compensation would depend heavily on local Courts which in many jurisdictions is still a big question mark. As a consequence, an infringer through DNS may not have much to lose.

INDONESIA: IN TRANSFORMATION After Presidential Election

(photo courtesy of hulsen.net)

A. New Slogans for Foreign Investment
The Indonesian government through the Investment Coordinating Board, locally known with the acronym “BKPM”, attempted to encourage foreign capital to invest in the country by the promotion of the year 2003 as the start of the “Investment Year” after experiencing a steady decline since 1998 (see table below) followed, thereafter, by the re-confirmation of the One-Stop Service under the coordination of BKPM by Presidential Decision No. 29/2004. This is a withdrawal of the authority on a total of at least 14 (fourteen) licenses which were once given by the Minister of Internal affairs Decree No. 130-26/2002 to the regional authorities as an implementation of the Autonomy Law No. 22/1999.

B. The Country’s Past Turmoil
Apart from the May-riot which had disrupted the country in 1998 and caused the tumble of the then reigning regime, there have been periodic episodes of several bombings which brought forward uncertainty in security. Thus, there were many factors that undermined the confidence of investors in investing in Indonesia and made the economy collapse into national crisis due to the simultaneous closures of 16 banks at the IMF’s ill-advice, the unavailability of credit even to exporters, labor lay-off, dependency on private consumption which accounts for 70% of the country’s economy etc., during these past 6 (six) years.

When under the IMF’s program, Indonesia was pressed hard to sell or divest her profitable state enterprises in order to help the country to compete with foreign players, once the oil and gas sectors are liberalized and fully open to free competition. Now that the surviving banks have somewhat recovered, budget deficit has fallen, monetary has stabilized, the country exited from IMF loan program in December 2003.

C. Indonesia at a Junction
2005 marks a crucial turning point for Indonesia which is expected to start significant political changes for Indonesia due to the forthcoming Presidential election and appointment later this year and also, simultaneously the start of significant liberalization in custom, trade, oil and gas sectors. Indonesia has no choice but to boost the confidence of potential investors. A new President will be sworn in by October 2004 and the Indonesian business community perceived it as a guarantee of a greater political stability and the return of economic growth or at the least, to strike an improvement in at least the next 5 (five) years. It is expected that all these would help rebuild the investors’ trust that had been lost following the tumble of the previous regimes.

D. The Global Liberalization’s impact
Indeed various laws and regulations have been enacted with a view to bringing security, justice, accountability, as well as business encouragement as part of the commitment of the present government in pursuing a transformation. In spite of all those, the implementation would yet depend on the political will of the forthcoming government. Logically speaking, however, having experienced prolonged economy crisis, whichever government is in office, there is no other option for them but to improve the country in all respects, especially in this era of globalization that has created global free trade zones (“FTZ”) under an ambitious liberalization by the World Trade Organization where Indonesia must, upon her ratification of Law No. 7/1994, compete with the whole world and reform or harmonize her investment in accordance with the arrangements under the Trade Related Investment Measures (TRIMs). Currently, Indonesia as a country is not able to compete even with other countries of Southeast Asian region. Even though there is a likelihood of an impasse in the liberalization due to the absence of such common position, yet Indonesia as a member of ASEAN must be prepared to step into the phases when those have been mutually agreed upon in an overall agreement which is scheduled for completion by this year. Other phases would include facilities of investment flows, mechanism for dispute settlement and the system in the registration of Intellectual Property Right (“IPR”). In regard the latter, normally the system of licensing is involved in foreign investment. Under the present local condition, it is very likely that Indonesia will, once again, become a nation which will be adversely affected by the unavoidable global trade liberalization. As a matter of fact, as a developing country, Indonesia being in the condition that still needs to impose tariff as a protection for as long as it can endure, now is obliged to make drastic tariff cuts.

E. The Investment after Crisis
In the report lastly issued by the Investment Board, the most attractive business sectors to foreign investors was trading and services, followed thereafter, with machinery and electronic industries and hospitality businesses such as hotels and restaurants. As for domestic investors, the most attractive sectors are chemical, pharmaceutical and electronic industries followed by food and textile processing. Under Indonesia’s IPR Law, Indonesia provides legal protection to both trademark as well as service mark. In order to enhance the protection system in IPR, Indonesia has ratified World Trade Organization (“WTO”) including its 3 (three) major Ehibits (GATTS, GATS and TRIPs on IPR) in 1995 and all WIPO’s criteria including PCT and the regulations under the PCT, Trademark Law Treaty and WIPO Copyright Treaty (1996-2002).

F. The Indonesian Future
Having moved away from all kind of crisis, Indonesia is now gearing towards a new agenda for, inter-alia, numerous mega projects in her state budget including 10 (ten) tenders of new blocks of oil and gas which are expected to help cope the pressure of unemployment problem and to increase economic growth up to 5% from the current 4%. (Compared to Vietnam’s expectation of 7.5% growth in 2004, 8% in 2005 and The Philippine’s 5% in 2004 and 6 % in 2005 for the next 10 years) Indonesia has since long emerged as a potentially oil and gas exporting country along with other natural resources such as coal, nickel, steel and other mining reserves. As oil is now the focus of world attention, Indonesia should be attractive as it is very much in the front rank.

As mentioned above, 10 (ten) new blocks have been on tender. Nonetheless, being in a weak economic condition, Indonesia has been pushed by developed countries and even the World Bank to open up all kind of restrictions including various restrictions in the oil and gas sectors which represent the core business of the country. Among all those are monopoly, subsidy and other protections in these business sectors by the year of 2005. Especially the needs of the United States to expand in the global trade and the needs to have cheaper prices in energy, gas or LNG, in order to maintain sustainable economy have forced them to have more access to global supply through major expansion in that Indonesia as a target area is also underway.

Evidently, foreign investors in this sector are not discouraged by the economic or security crisis in Indonesia as they have been queuing to enter into this business sector once the liberalization is to take effect in the year of 2005 which would become a giant leap to Indonesian oil sectors that shall cease the monopoly being enjoyed by her state enterprise “Pertamina” for more than 35 years. As result of its fight against a US based company, Pertamina is currently facing serious international legal actions that have resulted a monetary compensation and penalty by a Swiss arbitration award upon Pertamina and a seizure on its assets in the USA by a US court and a Hong Kong court’s decision to freeze Pertamina’s assets in Hong Kong. As result, Pertamina would have cash-flow problems. This immediate problems would be escalated by future problems of Pertamina in response to the globalization and liberalization of oil and gas which reduce the core competence which Pertamina used to be a cash-cow for having the privilege of monopoly in the past.

Indonesia has issued Natural Oil and Gas Law No. 22/2001 which makes significant changes in the operation, the ratio of production sharing and the taxation in this sector.

Nevertheless, Indonesian potentials yet depend on many factors; among others is the law and regulation. Due in large part to the wave of global liberalization, rapid changes in the legal treatment and new legislations have been enacted including the wide spectrums in the application of decentralization in Indonesia by the former centralized government have posed a complex legal understanding that reach the legal foreground of both the national and international law even wider. With the issuance of the Autonomy Law No. 22/1999 regional government officers are authorized to determine their own autonomy region on the affairs of their own region, with the exception of defense, foreign affairs, monetary and fiscal.

Other branches of law have inevitably become bound by and related to and, therefore, entangled one to the others which lead to various dimensions including contractual issues, legal relations between the industry and the transition economies, dispute solutions, local enforcement of any awards, taxation and environmental issues in the context of globalization and global dispute settlement. Not only Indonesian but in virtually all other countries in the world, the regulatory frameworks have dramatically changed or been adjusted with the new treaties, conventions and protocols now in place.

Given the above, Indonesia being now in the weak bargaining power in negotiations, makes it even more convenient for investors to come in and take advantage of it.
Although the Indonesian government should take cautious steps and make a reasonable plan, both for long term and short-term, but to date the Indonesian government has not taken a strong approach to protect the country’s interest. Having said that, Indonesia is now at the brink of issuing a new investment law. We are yet to see how this new law shall regulate foreign investment and shall combat all kind of protections. One thing is for sure that unlike as in the past where foreign investor were required to divest up to 49%, under the new Investment Law, foreign investors are no longer required to divest.

G. IPR Licensing in Foreign Investment
Talking about Foreign Investment in this new world of globalised economy, one could not avoid raising the issue on how IPR is treated, protected and valued by and between the investors where one would enjoy the other’s intellectual property right that has been gained through or after long-term invention. Indonesian laws do recognize such right. However, at present the legal protection of each IPR is still scattered in each related law specially protecting the respective type of IPR in the form of licensing arrangement where each law imposes the obligation to register the license agreement of each particular type of IPR with the Indonesian IPR office. Unfortunately, until now, no registering body has been formed. The Indonesian government is still in the process of preparing a bill that is intended to uniform the registration requirements of all kind of IPRs. It is expected that once such bill is ratified, the same registering body and the same or similar requirements would apply to all kind of IPR. Until then, the investor IPR holders shall rely on the contractual licensing agreements made internally between them and file the same with the IPR as a mere notification with an expectation that once a registering body is in place, the filings will be recognized and taken over accordingly. As for licensing contracts in the framework of fereign investment, the licensing investor and the licensee investor after entering a license agreement, would file it with the Capital Investment Board along with or as an integral part of their Joint Venture Agreement. This way, the IPR owner could expect the Investment Board to serve as a mediator should any dispute including the IPR dispute arise. Under such circumstances, the Investment Board shall use its leverage to impose and enforce any sanction that would cause the joint venture company to adhere with it.

H. Freedom of Contract in Licensing Contract and the Government’s Interference in Foreign Investment

In developing countries such as Indonesia, the government face never-ending dilemma especially in anticipation of the globalization effect where on the one hand the country is bound to apply the principle of equal treatment but on the other hand, the people would require local protection. There have been discussions among legal scholars regarding the need to apply the principle of equality (aequitas praestationis) within the corridor of the criteria of legal fairness (justum pretium) which is interpreted to mean that in spite of freedom of contract, every contract must observe the criteria of fairness. In regard to IPR licensing, the legal requirement is expected to tie up the IPR right with the obligation of implementing the transfer of technology attached to such IPR right. Under the auspice of one national treatment adopted in the globalization concept, it remains unclear whether the local government would limit both the freedom of contract under the conduct of the Indonesian Civil Code and the equal treatment adopted in the spirit of globalization, with the criteria of legal fairness which was introduced and took place after the World War II particularly in Latin American countries, by making the registration requirement instrumental to the local government terms and condition for purpose of national protection. If so, we are yet to see if under the globalization outset, it is legally possible.

CYBERSQUATTERS and BRANDING TECHNOLOGY

“A man may die, nations may rise and fall, but an idea lives on.
Ideas have endurance without death” - John F. Kennedy.

(photo courtesy of Clipart.com)

Isn’t that what intellectual property (IP) all about? If an idea is life-long and can surpass the creator is it not fair to have it protected ? The answer should be “Yes”.

Developing countries, including Indonesia, cannot understand why they have to respect IP when the IP rights owners have benefited so much from the high margins derived from a large market.

Multinational corporations (MNC) in industrialized countries, including 157 MNCs controlling the commodity economy in the USA, perceive developing countries such as Indonesia as half-hearted in the implementation of IP commitments that they have entered into legally.

According to the United States Agency for International Development (USAID), many countries have been making progress in the protection of IP rights. Indonesia, however, is considered as remaining passive in the tackling of IP issues and the agency has warned Indonesia that its market share in the world economy could consequently shrink.

A study held by the University of Indonesia states that most prominent US products have entered Indonesia at low tariffs and that the US has little interest in entering Indonesia’s markets for commodity trade deals and is more interested in providing services.

If so, Indonesia would have more to gain and less to lose in allowing its products to enter the US market. It is estimated that Indonesian businesses involved in around 50 different types of products (e.g. textiles, apparels, electronics, telecommunication appliances, furniture and some nature-related products) are eager to expand their markets in the US.

A. Trademark branding vs. Internet branding
Due to the rapid rise of inventions and developments in global technology, there are numerous areas where IP rights are not yet well protected, especially in information and communication technology (ICT).


Trademark is one of the IP rights which are protected in Indonesia, under Law No. 15/2001. This was enacted as part of Indonesia’s commitments under the Trade Related Aspects of Intellectual Property Rights (TRIPs) agreement. Indonesia also adheres to the Paris Convention for the Protection of Industrial Property (ratified in Indonesia by Presidential Decree No. 15/1997) and a Trademark Law Treaty (ratified by Law No. 17/1997). While trademark branding has evolved in the marketplace, Internet branding, particularly of domain names, is still evolving.

Given the different targets, Internet branding has developed expansively so that one name is eligible for registration by many different parties, provided that the name is connected with domain name extensions (DNE) such as ‘.com’, ‘.net’, ‘.org’, ‘.ws’ or any other DNE made available in support electronic commerce transactions (ECT).

Among other things, this includes electronic data interchanges (EDI), electronic bulletin boards (EBB) and electronic funds transfers. While historic World Trade Organization IP accords such as TRIPs have not yet dealt with this, disputes over Internet branding are usually closely related to trademark branding.

There have been many attempts to take advantage of the existing loopholes in trademark branding by registering notorious trademarks as domain names. If a trademark is registered as a domain name, it will have no difficulties if it does not involve a well-known trademark. If it does, the well-known trademark will be protected by the TRIPs agreement and local trademark laws, even though the domain name and well-known trademark are registered for different kind of goods. If, the domain name registered trademark is not related to the well-known trademark and both are registered for different kind of goods, the same trademark could be registered and used by each party as a trademark or a domain name.

B. Media
Unlike trademarks, patents and industrial designs, which are administered, managed and controlled by local governments, no government has absolute control over the media or forum of ICT products.

Under the Internet domain name service (DNS), Internet Corporation (Internic),


a private and non-profit international institution, has the authority to assign a series of Internet protocol number (IPN) to its accredited registry administration. This body acts as Internic’s agent in administering top-level domains (TLD) such as:
Ø American Registry for Internet Numbers (ARIN);
Ø Asia-Pacific Network Information Center (APNIC);
Ø Internet Corporation for Assigned Names and Numbers (ICANN) and
Ø Indonesian Domain Network Information Center (IDNIC).

The domain name registration service (DNRS) is identified according to each country code under the DNS. For example, the US uses ‘.com’, and Indonesia uses ‘.co’. Apart from the unrestricted domains, restricted domains are subject to specific local requirements, such as local presence, in order to have a domain name with that country’s extension. Nevertheless, even unrestricted domains are very broad.

Also, registry administrators vary by the individual country codes of TLDs. For example, ICANN’s registry administrator is Network Solution. For the TLDs using ‘.com’, ‘.net’, and ‘.org’, Network Solution’s accredited domain name register is Register.com. All of such administrators are private institutions authorized to assign IPNs under the DNS maintained by Internic.

C. Forum
Disputes on IP matters are traditionally handled, settled and resolved by local judiciary courts and legally enforceable by such courts with all the consequences and sanctions for any failure thereof.

DNS and DNRS are maintained on: a geographical basis, a first-to-file basis, a non-geographical basis and on the basis that it is not under the control of any government and only under the World Intellectual Property Right Organization (WIPO).
WIPO handles domain name dispute settlements between IP rights owners and domain name infringers, which are known as “cybersquatters”. After its establishment in Marakesh on April 15, 1994 WIPO adopted the Rules for Uniform Domain Name Dispute Resolution Policy on August 26, 1999 for the administration of disputes. These rules, along with the implementation documents, were approved by ICANN on October 24, 1999 through the WIPO Arbitration and Mediation Center (WIPO Center) as the dispute settlement forum, effective from December 1, 1999.
The WIPO Center forms part of WIPO’s international bureau, acting as a dispute resolution service provider and offering advisory and resolution services for disputes arising from the registration and use of Internet domain names. There are four options for settlement under the WIPO Center: mediation, arbitration, expedited arbitration or a combination of mediation and, in the absence of a settlement, arbitration.

At present there are no local trademark laws to prevent or solve the ramifications of Cybersquatting, and we have yet to see whether the WIPO Center can eliminate this. Even the TRIPs agreement has not adequately dealt with these problems, except for the settlement rules which were issued on December 1, 1999.

These rules resulted in the first settlement of a domain name on February 18, 2000 when Telstra Corporation, a well-known Australian telecommunication company and the registered holder of numerous similar domain names (i.e., telstra.com, telstra.net, telstra.com.au, telstranic.com and telstraine.com), made a claim against Nuclear Marshall, which had registered ‘telstra.org’ as a domain name with the US-based registry administrator Network Solutions.

POST-CRISIS DILEMMAS FOR FOREIGN INVESTORS AND REGULATORS

A. Regulating Foreign Investment
In response to steadily declining foreign investment since 1998 (see table), the Indonesian government, through its Capital Investment Coordinating Board (known as BKPM from its Indonesian name, Badan Koordinasi Penanaman Modal) attempted to attract foreign capital to the country in 2003, promoting it as the “ Year of Investment” . Although foreign investment continued to decline in 2003 and 2004, though not as sharply as in the previous year, BKPM was reconfirmed as the sole agency governing domestic and foreign investment activities, stipulated by Presidential Decision No. 29/2004. This represents a withdrawal of the authority on a total of at least 14 licenses governing investment previously granted by the Minister of Internal Affairs, under Decree No. 130-26/2002, to regional authorities as an implementation of the Autonomy Law No. 22/1999.

B. Indonesia at a Junction
Indonesia faces a crucial turning point in 2005. Significant political changes are expected after the Presidential election at the end of 2004. Simultaneously, a significant liberalization of the customs, trade, oil and gas sectors is expected. Indonesia has no choice but to boost the confidence of potential investors. A new President will be sworn in by October 2004 and the Indonesian business


community will perceive it as a guarantee of greater political stability and a return of economic growth, or at the least, the creation of an environment that would to economic improvements over the next five years. This would help rebuild investors’ trust that has been lost.

C. Impact of Global Liberalization
Indonesia must, upon ratification of Law No. 7/1994, compete with the whole world and reform or harmonize her investment in accordance with the arrangements under the Trade Related Investment Measures (Trims). Indonesia is a member of the Association of South East Asian Nations (ASEAN) and must comply with the phases of liberalization when they are likely agreed upon by the end of this year. Included in such phases are facilities for investment flows, mechanisms for dispute settlement and system for the registration of intellectual property rights (IPR). However, economic liberalization is likely to remain stalemated, due to the absence of a common position. Indeed, Indonesia is not able to compete even with other countries in the Southeast Asian region and such is its economic condition that its tariff protection regime will remain in place for as long as possible. Under present conditions, it is very likely that Indonesia will once again become a nation adversely affected by the unavoidable global trade liberalization.

D. Investment after the Crisis
In a report issued by BKPM, the most attractive business sectors to foreign investors were trading and services, followed by machinery, and electronics and hospitality businesses such as hotels and restaurants. As for domestic investors, the most attractive sectors are the chemical, pharmaceutical and electronic industries followed by food and textile processing. Under Indonesia’s IPR Laws, the country provides legal protection to both trademarks and service marks. In order to enhance the protection system for IPR, Indonesia ratified WTO



agreements including its three major annexes (GATTS, GATS and Trips on IPR) in 1995 and all World Intellectual Property Organization (WIPO) criteria, including PCT and the regulations under the PCT, the Trademark Law Treaty and the WIPO Copyright Treaty (1996-2002).

E. The Indonesian Future
Indonesia is hoping to leave the crisis of the past behind and gear towards a new agenda for, among other initiatives, numerous mega projects in the state budget. Among these are 10 tenders for new blocks of oil and gas exploration, which are expected to help relieve the pressure of unemployment problem and increase economic growth up to 5% from the current 4%. This compares to Vietnam’s expectation of 7.5% growth in 2004 and 8% in 2005 and The Philippine’s 5% in 2004 and 6 % in 2005. Indonesia has long emerged as a potential exporter of oil and gas along with other natural resources such as coal, nickel, steel and other mineral resources. As oil is now the focus of world attention, Indonesia should be attractive given that it is very much in the front rank of producers.

Indonesia has been pushed by developed countries and the World Bank to relax all kinds of restrictions, including various limitations in the oil and gas sectors, which represent country’s core business. Among these are lifting monopolies, subsidies and other protections in these business sectors by 2005. The United States in particular has identified Indonesia as a source of cheaper energy, particularly liquefied natural gas (LNG), in order to maintain its own stable economy.

Evidently, foreign investors in this sector are not discouraged by the economic and security crisis in Indonesia, queuing to enter the business sector once liberalization takes effect in 2005. This represents a giant leap for the Indonesian oil sector, in which the state oil company Pertamina will cease to be a monopoly


after 35 years. Compounding the development, Pertamina is facing serious international legal action as result of a dispute with a US-based company. Already, an award was made against Pertamina for monetary compesation and a penalty made by a Swiss arbitration court and a seizure on its assets in the US by a local court. Meanwhile, a Hong Kong court decided to freeze Pertamina’s assets in the territory. As a result, the company is suffering cash flow problems.

These immediate problems for Pertamina are likely to escalate in the future through globalization and liberalization of the oil and gas sector, reducing the company’s core competence of cash flow under the power of monopoly. Indonesia has issued Natural Oil and Gas Law No. 22/2001, which makes significant changes in the operation, ratio of production sharing and the taxation in this sector.

Indonesian potential still depends on many factors, among which are its law and regulations. Due in large part to the wave of global liberalization, rapid legislative changes have been enacted, including wider spectrums for application than under the former centralized government. This has posed a complex legal questions relating to both national and international law. With the issuance of the Autonomy Law No. 22/1999, regional government officials are authorized to determine the affairs of their own region, with the exception of defense, foreign affairs and monetary and fiscal issues. Other branches of law have inevitably become entangled with one another. The includes contractual issues, legal relations between industry and transition economies, dispute resolution and local enforcement of awards, taxation and environmental issues.

Not only in Indonesia but also in virtually all other countries, the regulatory frameworks have dramatically changed or been adjusted by new treaties, conventions and protocols. Given the above, Indonesia has weak bargaining power in negotiations, making it even more convenient for investors to come in


and take advantage of the country. Although the Indonesian government should take cautious steps and outline a reasonable plan, both for long and short term, it so far has done little. Having said that, Indonesia is now on the brink of issuing a new investment law. It remains to be seen how this new law will regulate foreign investment, or how it can combat various protections. Under the new Investment Law foreign investors will no longer be required to divest up to 49% of their stake.

F. IPR Licensing in Foreign Investment
Talking about Foreign Investment in the globalised economy, one could not avoid raising the issue on how IPR is treated, protected and valued. This is particularly so by and between investors where one enjoys the other’s intellectual property right that has been gained through or after long-term invention. Indonesian laws do not currently recognize such a right. At present the legal protection of each IPR is still scattered among various related laws, especially those protecting the respective types of IPR. This is in the form of licensing arrangements where each law imposes the obligation to register the license agreement of each particular type of IPR with the Indonesian IPR office. Unfortunately, no registration body has yet been formed. The Indonesian government is still in the process of preparing a bill that is intended to make uniform the registration requirements of all kind of IPR. It is expected that once such a bill is ratified, the same registration body and the same or similar requirements would apply to all kinds of IPR.

Until then, investor IPR holders must rely on the contractual licensing agreements made internally between them and file the same with the IPR as a mere notification with an expectation that once a registering body is in place, the filings will be recognized and taken over accordingly. As for licensing contracts in the framework of foreign investment, after entering a license agreement the licensing investor and the licenses investor file it with BKPM along with or as an


integral part of their joint venture agreement. This way the IPR owner can expect BKPM to serve as mediator if any dispute arises. Under such circumstances, the board would use its leverage to impose and enforce any sanction that would cause the joint venture company to adhere to it.

G. Licensing-Contract Freedom and Government Interference

In developing countries such as Indonesia, the government faces a never-ending dilemma, especially in anticipation of globalization, where on the one hand the country is bound to apply the principle of equal treatment but on the other, the people expect local protection. There have been discussions among legal scholars regarding the need to apply the principle of equality (aequitas praestationis) within the corridor of the criterion of legal fairness (justum pretium), which is interpreted to mean that in spite of freedom of contract, every contract must observe the criterion of fairness. In regard to IPR licensing, the legal requirement is expected to tie up the IPR right with the obligation of implementing the transfer of technology attached to such an IPR right.

Under the auspice of one national treatment adopted in the globalization concept, it remains unclear whether the local government would limit both the freedom of contract under the conduct of the Indonesian Civil Code and the equal treatment adopted in the spirit of globalization. With the criteria of legal fairness, which was introduced after World War II, particularly in Latin American countries, the registration requirement is instrumental to the local government in terms and condition for the purpose of national protection. As this is the case, we are yet to see the legal impact of globalization on such premises.

Indonesia’s Long Road to Effective Protection of IP Rights

Following its 1994 ratification of the Agreement Establishing World Trade Organization (WTO), including its four major agreements (GATT, GATS, TRIMS and TRIPs), Indonesia has taken steps to develop and issue new intellectual property laws, create a better framework for IP protection, and provide a more conducive environment for the development of intellectual property and inventions by intellectuals, investors , and researchers working in all fields.

As a results of such steps, many changes have been seen on Indonesia’s intellectual property landscape. In the area of patents, for example, major improvements include extending the term of patent protection to 20 years (from 14 years), implementing import restrictions on goods under protection, introducing the reversal of the burden of proof onto the defendant in IP infringement cases, broadening the definition of “novelty” and permitting the granting of patents for inventions relating to human or animal needs or consumption and for new varieties of animals and plants, including those resulting from a chemical process. Further, Indonesia now acts as both a receiving and designating office for Patent Cooperation Treaty (PCT) applications.

With respect to trade marks, recent developments include expanding the scope of registrable marks to include service marks, allowing multiple classes on a single application, recognizing well-known trade marks and developing a registry of international well-known trade marks for goods not only of the same kind, but also in different classes. There have also been developments in the areas of local use and bad faith use.

In the field of Copyright, Indonesia has, among other things, broadened the definitions relating to the holder of unknown creations and neighboring rights, extended the copyright protection period and made better provision for the granting of interim

injunctions or temporary restraining orders in limited cases.

In addition, Indonesia has broadened the protection of intellectual property in the areas of geographical indications, industrial designs, layout designs of integrated circuits, trade secrets and plant varieties.

All these amendments to intellectual law and practice took at least five years following Indonesia’s ratification of the WTO agreement in 1994.

Legal restructuring : Local, regional and international

As economies and trade become increasingly open and globalized, the Indonesia government understands that restructuring its legislation is a logical step if it wishes to enjoy the respect of the international community as a credible and dependable regional and global destination for investment. The country has had little choice but to increase its integration with other markets and adopt common international standards, not least as a way of remaining competitive as compared with other countries at a similar stage of development, particularly members of ASEAN, as regards the serious legal protection of intellectual property rights.

As a consequence of and in line with the major revisions to its domestic legislation (most notably, in 1997 and 2001), Indonesia has also moved forward with recognizing international IP agreements and treaties. Indonesia has now ratified, among others, the Paris Convention for the Protection of Industrial Property, 1883, and its 1967 Amendment (formerly only Articles 1–12 reserved) and the Berne Convention for the Protection of Literary and Artistic Works, 1886, and its 1971 Amendment (formerly on Article 33.1 reserved), as well as several WIPO treaties, including the PCT and the Regulations under the PCT, the Trademark Law Treaty and the Copyright Treaty (1996–2002). In addition, the country will soon ratify WIPO’s Rome Convention for the


Protection of Performers, Producers of Phonograms and Broadcasting Organizations. Indonesia is also the founding member of the ASEAN Framework Agreement on IP Cooperation and the ASEAN IP Association.

All these international agreements provide the basis for developing and interpreting the provisions and terminology of local IP laws. If Indonesia fails to uphold its undertakings with respect to such agreements, its attractiveness as a location for international investment will diminish, which will have serious economic consequences.

However, while Indonesia has a fairly well developed legislative framework in place, as with many other countries in Asia, it continues to struggle with the problems of poor enforcement and dispute resolution mechanisms. The structures are in place but do not yet operate satisfactorily.

Intellectual property dispute resolution

As of 2002, most intellectual property rights disputes, excluding those involving trade secrets and plant varieties,¹ are referred to the commercial court in the competent jurisdiction.

Cases will initially be heard at the commercial court in one of the five areas of jurisdiction that have been established, i.e., central Jakarta (for Jakarta and the surrounding area), Semarang (central Java), Surabaya (east Java), Medan (Sumatra) and Makasar (Sulawesi). Intellectual property dispute cases heard at the commercial courts are subject to a specific procedural law, under which submissions for and completion of each phase of the process is subject to a specific time frame. In theory , this expedites the proceedings and shortens the completion of the first hearing of the case to no more than 180 days. However, this change in proceedings is a relatively recent one, and commercial litigations have traditionally seen a large gap between procedural theory and procedural practice.

Records of legal proceedings show that a surprisingly low number of IP-related cases reached the Supreme Court in 2003. Numbering 44, mark-related disputes accounted for the largest number of cases, while only three patent suits and three
industrial design suits were filed. All were civil cases and were heard under the old procedure. It can be arguably inferred from this that many IP-related lawsuits must have been settled before reaching the Supreme Court. There are currently a few cases in process at the commercial courts which have not yet reached the Supreme Court. There are also a number of criminal cases in progress. According to records at Indonesia’s police headquarters, between 2001 and 2003 there were less than 400 copyright cases, less than 100 mark cases and less than 10 patent cases heard under criminal proceedings.

Legal enforcement of IP rights

The ultimate goal in the legal enforcement of all commercial litigations involving IPR rights is the deregistration of the illegal right or the ceasing of the illegal action. An interim injunction for a period of 30 days may be provided under the new legal process, but greater pressure may help expedite the process or provide greater incentives for disputing parties to negotiate a settlement.

In Indonesia, copyright is currently the focus of much attention as, despite the existence of a strong legal framework under which severe legal penalties for copyright infringement have been provided since 2002, effective enforcement remains a significant problem.

Serious problems with trade mark infringement in Indonesia has driven international companies including LVMH Fashion Group, International Pharmaceutical Manufactures Group (IPMG), Microsoft, Philips Electronics, Procter & Gamble, Unilever,



Sara Lee, Grundfos and Aqua Danone to establish the Indonesian Anti-Counterfeiting Society. Set up in 2003, the society functions as an alternative to pressure groups, with stated aims including greater cooperation with government bureaucrats and politicians to fight piracy and counterfeiting in the commercial sphere. The Directorate General of Intellectual Property Rights in Indonesia has undertaken play to a greater role in these efforts as problems with IP infringement become more complex.

Effective enforcement
The Indonesian government has been relatively candid with regard to acknowledging its limited ability to combat counterfeiting, piracy and other types of IP infringement. In particular, it has noted the problems of a low level of awareness of IP rights in Indonesian society, even at a government level, and the lack of adequate means and resources to facilitate the proper monitoring, protection and enforcement of IP rights.

However, while acknowledging the problems, the government has been less quick to assume some level of responsibility for the weaknesses of the current system. Government officials generally note that the legal and administrative structures are in place, but that the judiciary is failing to vigorously and consistently undertake legal enforcement without such enforcement, all legislative protections for IP rights are dead-letters.

Reference to the weaknesses of other official institutions, such as the judiciary, will not help improve protection for IP in Indonesia. More effective strategies would include, for example, facilitating a more active role for the police in the protection and enforcement of IP rights – given their powers of arrest, the greater involvement of the police may prove a more effective deterrent to potential IP infringers than the threat of a court action. However, this would entail strengthening the human resources of the police force and raising their general awareness of the importance of IP rights. Indonesia’s police force is currently overstretched and much of its efforts are therefore targeted at what it believes to be more serious crimes.

With respect to effective legal enforcement, there is still a long way to go in Indonesia. There needs to be a raising of awareness among the general population, as well as stronger political will to improve the situation by building greater synergy between judicial institutions and the government, including the police force, Customs Office, the Trade Ministry, the Justice Ministry, the Attorney General and the Supreme Court. The Indonesian government formed a task force in this regard in January 2003 but the results of its efforts are yet to be seen. Without such synergy, the present unacceptable situation will continue indefinitely.

There have, however, been some signs of positive development. Although lower courts remain unpredictable in their decisions, the Supreme Court has a better record, particularly with regard to cases involving well-known trade marks, wherein the court has generally found in favour of the trade mark owner. Disseminating more predictable, fact-based decision-making down through the court system is vital, particularly if Indonesia is to be removed from the priority watch-list of the US Trade Representative’s Special 301 Annual Review, which it re-entered in 2003 with the US claiming that IP violations in Indonesia cost US businesses at least US$253 million in 2002.

However, the Supreme Court process is not without its problems, in a dispute over the well-known trade mark owned by Davidoff of Brazil, the case was decided in the plaintiff’s favour by the Supreme Court, but the whole process took 14 years (1989-2003), even though the Indonesian registrant had never used the mark, It is high time that Indonesia legally recognized and enforced the internationally understood criteria applicable to well-known marks, as raised and discussed at the APEC-Intellectual Property Expert Group.

Challenging trade mark registrations
In 2002/2003, new applications for trade mark registration in Indonesia increased by 50% and there were more than 40,000 renewal applications. This large volume is partly a reflection of the fact that Indonesia follows the “first to file” system to establish rights over a mark. This has caused many people to file applications in the hope of retaining the mark right at the earliest possible opportunity. At present, those disputing a trade mark application or registration heavily depend on the judiciary to establish their rights over a mark, since the Appellate Commission at the Mark Office, which was established in 2001, currently functions largely to rubber stamp the decisions made by its lower agency. Thousands of appeal claims are on the wait-list of the Mark Office, waiting for examination by the Appellate Commission. The backlog, which is largely the result of government delays in establishing the commission, may partly explain the commission’s less than satisfactory functioning to date.

Under the legal framework for marks, claimants have the option to challenge rights over a mark by filing either an opposition or an appeal at the Mark Office. Further, if the supporting evidence is sufficient, a claimant may file criminal charges with the police. If the results of such action is unsatisfactory, the claimant can take its case to the Commercial Court or, in criminal cases, to the Public Prosecutor or the Attorney General, (as the case may be), and then, if necessary, to the criminal courts. Any decision by each instance of the lower court may be challenged at the Supreme Court for cassation and, thereafter, for judicial review. Thus, the whole process for obtaining a final court judgement may involve two administrative processes, including the Appellate Commission, if any, and three judiciary stages, excluding the police process. In cancellation proceedings, the court judgment must be then submitted to the Mark Office, which will use the judgement as the basis for canceling the mark registration at issue.

Endnote
¹ Disputes over trade secrets and plant varieties are treated as civil disputes and referred to the ordinary district court.