First Standing Committee

on European Community Documents


Thursday 12 February 1987



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The Committee consisted of the following Members:


Batiste, Mr. Spencer (Elmet)

Bowden, Mr. Gerald (Dulwich)

Browne, Mr. John (Winchester)

Butcher, Mr. John (Parliamentary Under-Secretary of State for Trade and Industry)

Carter-Jones, Mr. Lewis (Eccles)

Clay, Mr. Bob (Sunderland, North)

Davis, Mr. Terry (Birmingham, Hodge Hill)

Deakins, Mr. Eric (Walthamstow)

Dykes, Mr. Hugh (Harrow, East)

Jackson, Mr. Robert (Wantage)

Lightbown, Mr. David (Staffordshire, South-East)

O'Brien, Mr. William (Normanton)

Spearing, Mr. Nigel (Newham, South)

Speller, Mr. Tony (Devon, North)

Spicer, Mr. Jim (Dorset, South)

Thornton, Mr. Malcolm (Crosby)

Wilkinson, Mr. John (Ruislip-Northwood)

Wrigglesworth, Mr. Ian (Stockton, South)

Mr. D. R. Lloyd, Committee Clerk.

3 First Standing Committee on European Community Documents Thursday 12 February 1987

[Mr. MICHAEL SHERSBY in the Chair]


10.30 am

The Chairman: I have selected the amendments in the name of Mr. Terry Davis.

10.31 am

The Parliamentary Under-Secretary of State for Trade and Industry (Mr. John Butcher): I beg to move, That this Committee takes note of European Community Document No. 4133/86 on the legal protection of original topographies of semi-conductor products, and the Department of Trade and Industry's un-numbered Explanatory Memorandum of 22nd October 1986; endorses the importance attached to the protection of topographies; recognises the need for early decisions to ensure continued protection in the important American market; and supports the Government's decision to agree to the adoption of this instrument in the light of the undertaking by the European Commission that it will keep under review developments on reverse engineering and make proposals for further legislation as a matter of urgency as necessary. The motion concerns the European Council directive on the legal protection of original topographies of semiconductor products. The document referred to in the motion—4133/86—is the Commission's original proposal, which has been changed somewhat in the negotiations in Brussels. The Government's memorandum of 22nd October was unnumbered because at that stage we were expecting the Commission to submit a revised proposal. However, the Commission did not submit such a revised proposal because a number of points—mostly technical—were still in a state of flux. Consequently, the formal document is out of date so I took steps to ensure that copies of the directive in the form in which it was formally adopted were made available to hon. Members for this debate.

Mr. Terry Davis (Birmingham, Hodge Hill): As I said privately to the Minister before the sitting, the document was not made available to members of the Committee. I have made frequent approaches to the Vote Office and have been unable to obtain a copy of the amended draft directive, which has now become a directive. I have made inquiries several times, including as recently as yesterday afternoon, and went especially to the EEC Vote Office in the Norman Shaw North building where I went through documents. I had been supplied with the original draft directive, reference 4133/86, of more than a year ago and it was clear from the proceedings of the Select Committee on European Legislation that there has been a revised or amended draft directive. It has not been available to members of this Committee so we have been unable to consider it and table amendments. Although the Minister may have made every possible effort, it is not good enough. People must ensure that such documents are available to all members of the Committee so that we may consider them. I understand that you were able to obtain a copy this morning from the Vote Office, Mr. Shersby, but I asssure you that it was not available yesterday. We are supposed to prepare for debates and consider the possibility of 4 amendments. All members of the Committee have been put at a great disadvantage by the failure of the Government to ensure that the documents were available. I have made frequent inquiries of all parts of the Vote Office.

Mr. Butcher: Obviously I should welcome your guidance, Mr. Shersby, on how the House would proceed if there were a problem in the Vote Office. I assure the Committee that the final document went in the Official Journal on 27th January. I have also asked my officials whether they have placed the documents in the hands of the appropriate bodies in the House. At this stage I cannot, of course, answer the hon. Gentleman's question about what may have happened within the filing system of the Vote Office. If he wished to pursue his point, I assume that it would be a matter for the House authorities. I accept that if the documents have not been available, it has not helped our debate, but for the time being I am satisatisfied that the usual procedures and practices were adopted by officials of the Department of Trade and Industry. If, subsequently, the hon. Gentleman has had difficulty obtaining the final documents, I suspect that the House officials would wish to investigate.

The Chairman: Order. It is my understanding that the document to which the hon. Member for Birmingham, Hodge Hill (Mr. Davis) referred is a copy of the version finally agreed. Its terms were fully described in the successive documents, explanatory memoranda and ministerial letters sent to the Scrutiny Committee and reported by them to the House. It is not a matter for the Chair. I would only add that when I picked up my papers from the Vote Office this morning, all the relevant papers appeared to be available.

Mr. Terry Davis: I accept that the amended directive is described in some detail and a number of points are referred to in the explanatory memorandum from the Department of Trade and Industry. That was how I knew such a document existed and why I pursued my inquiries so 5 diligently and frequently at the Vote Office. I kept insisting that I was not being given all the papers and I even went to the Clerk to the Select Committee because I was so worried about the lack of information. I kept being given document 4133/86. Greater care should be taken over such complicated matters. If we are to discuss draft directives from the Community which affect British law, we should be given all the papers. The documents should be readily available to all Committee Members; we should not have to contact the Minister's office for them. I told the Minister an hour ago about the difficulty that I was having. I do not know when the documents reached the Vote Office. It is not good enough merely to have the documents mentioned in explanatory memoranda or in Select Committee reports. We should be able to see the originals, as they might contain matters other than those mentioned, to which we would take exception.

Mr. Butcher: As I said earlier, I shall look into the matter and, if the difficulty arose because there was only a short period after the documents originated from my Department, I shall come back to the hon. Gentleman about it. I shall discharge any obligation on me, as Under-Secretary of State for Trade and Industry, to see that my Department sends documents to the appropriate places in the House so that they are available to hon. Members. The directive requires all member states to enact national laws to protect original designs for the internal layout of semi-conductor integrated circuits against unauthorised copying. Thus, it seeks to protect the considerable investment that is put into the design of microchips. Microchips are an increasingly important feature of modern life. They are found in a vast range of products— not just in high-tech products, such as radar systems and computers, but in more mundane domestic items such as washing machines and televisions. In an increasingly complex and competitive field the investment needed to design a new microchip is extremely high. Those who undertake that important and expensive work should have protection from those who would steal the fruits of their labour. Although the directive will have effect only in Europe, it has its origins in a similar measure that was enacted in the USA. One consequence of the American Act was that the European Community needed to adopt the directive quickly. In its second report in the Session of 1986–87, the Select Committee on European Legislation accepted that need, subject to certain safeguards to which the Government also attached importance. I shall return to those in a moment. Accordingly, the directive was formally adopted by the Council of Ministers on 16th December 1986. Speed is important because the American Act extends protection to foreign chip designs only if the country concerned also protects United States chip designs and it sets a deadline of 7th November 1987 for that protection to be in place. It provides interim protection for countries which satisfy certain conditions. The American Act therefore confronted us with a deadline by which we must have national legislation in place if United Kingdom chip designs are not to become 6 prey to copying in the vast and important American market. Certainly Japan has taken no chances—it already has a comparable measure on the statute book. The Government decided that it was necessary to adopt the directive without delay, but we also considered that it was important before agreeing to it to secure certain safeguards on what is known in the jargon as "reverse engineering". Reverse engineering is, to some degree, standard industry practice; microchips are commonly designed by taking a competitor's chip apart and using the knowledge gained to design a new chip. The point at issue was how far the new design could copy the existing design. The directive seemed to require us to allow copying where the later design simply incorporated minor changes or additions to the earlier design. The Government believed that this would take too much away from the rights in existing designs. We therefore favoured a stronger text to give greater protection to existing designs. However, set against that need was the need—to which our European partners attached particular significance and which we recognised—to match the corresponding American provisions. The difficulty is that no one, including the Americans, can be sure at this stage precisely how those provisions would apply in practice. We suggested a more open, flexible provision, while our partners preferred to have the present, relatively precise text which they believed closely matched the American provisions. I am pleased to say that it proved possible to reconcile those objectives without undermining the protection given to the United Kingdom's manufacturers. We insisted that the European Commission should keep the position under review and propose urgent changes if it became clear that the provisions differed from those in the United States, or if there was evidence that copying was harming the industry. The Commission readily agreed to do that and offered to enter a statement in the Council minutes to that effect. We have been in touch with our industry throughout the progress of the directive. We consulted the industry and decided that, with this assurance, we could agree to the existing form of the directive. I am happy to be able to say that in its report, the Select Committee on European Legislation said that it took the same view. I need hardly add that we shall stay in close touch with our industry. Should there be any difficulties over reverse engineering we shall make urgent representation to the European Committee on behalf of our industry, as the British entry in the text now permits us to do. However, it would be wrong to dwell too much on that potential problem. I am sure that the directive will have a positive and beneficial effect. It is an important and welcome measure. It will ensure that British designs of integrated circuits will be protected throughout the Community and will help us to ensure continuing protection in the United States. Therefore, under the provisions of the European Communities Act 1972, the Government will introduce secondary legislation to give effect to the directive.

10.43 am

Mr. Terry Davis (Birmingham, Hodge Hill): I beg to move amendment (a), in line 4, leave out 7 "recognises the need for early decisions to ensure continued protection in the important American market.

The Chairman: With this it may be convenient to take amendment (b), in line 9, at end add "and provided that the words 'other than those referred to in Article 2(2)' are deleted from Article 9".

Mr. Davis: Yes, that is convenient, but a quick perusal of the document—which was made available to us only this morning—shows that at least one of the amendments cannot be moved. It refers to deletion of words in article 9. However, that article appeared in one form in the original draft directive and has been completely transformed in the amended draft directive, which has not been made available in the Vote Office. No doubt the Minister, who has had access to the documents for longer than I have, will be able to advise us whether the words appear in another place in the directive. If he does, perhaps you, Mr. Shersby, will then accept a manuscript amendment. We shall pursue that matter outside the committee, via the usual channels. The Opposition agree entirely with the Minister's comments about the need to protect people who have designed semi-conductors from having the fruits of their labour stolen. We support the principle of copyright for semi-conductors. Companies that spend large amounts of money on development should be treated fairly. They should be protected against those who wish to take their designs and produce them to make money without any regard for the work done by the companies that developed them, often in other countries. I also agree with the Minister about the need to protect reverse engineering. I am not sure why it is called that. The term "reverse engineering" suggests that one takes the design and recedes. I should have thought that one would take the design and proceed to make it better. I accept that much can be learnt from dismantling an existing design, but I am not sure why such product development is called reverse. Nevertheless, the Opposition agree with the Minister about the need to afford maximum protection to manufacturers of semi-conductors. Although I have agreed with the Minister on several important matters, I am disappointed about the lack of information in his explanation about the reason for the directive. It is necessary to begin by looking at the industry that we are discussing. The Minister gave no information for us to consider about the size of the market, about information technology or semi-conductors in particular, about the British and world markets, or about the British share of the market and the effect of the document on it. The Government frequently tell us that we must recognise that old industries such as shipbuilding, steel, coal and engineering are in decline and that we must look to the new industries of the future, such as information technology. However, British information technology and semi-conductors in particular have a constantly declining share of the world market and our own market. The Minister should explain to the Committee the effect that the directive will have on the industry and on our share of the market, because he notably failed to give us any information on that. 8 Definitions are notoriously difficult, but, however the words "information technology" are defined, the United Kingdom has a trading deficit. If we accept the narrow definition used by the National Economic Development Committee, the United Kingdom deficit in information technology has increased from £89 million in 1980 to £800 million in 1983. If we accept the broad definition that is used by Mr. Christopher Barclay of the House of Commons Library in his work on information technology, the United Kingdom deficit was £384 million in 1980 and has risen to about £2 billion in 1983–85. The figures for semi-conductors show a similar picture. There is a large and rapidly growing market for those goods. It has grown during the last decade to five times its original size. The world market is estimated to be about £18 billion, but the British share of that world market is only 2 per cent. In Britain, we use about £700 million worth of semi-conductors each year, but we make only one third of that quantity. We have a trade defict of £500 million in semi-conductors alone. Those estimates have been made by people within the industry and I cannot vouch for their accuracy. However, they are clearly correct in showing that the deficit is about two thirds of the semi-conductors that are used in the United Kingdom. In the last 10 years the Japanese have taken an increasing share of the growing market and yet the Minister did not refer to Japanese manufacturers or the impact on their activities of directives that protect semiconductors. The Minister may have made a passing reference to that, but the Committee is entitled to ask about the effect of the directive on the international market for semi-conductors and its effect on the British industry in particular. The Minister referred to the American market and his motion refers specifically to the American market. It "recognises the need for early decisions to ensure continued protection in the important American market". The Minister owes it to the Committee to be more precise about the present British share of the important American market and about how the directive will increase or protect the British share, if it can, which I doubt. The Labour party is in favour of protecting the British share of the American market, and any other market, in semi-conductors. However, the Minister must tell us how great that share is and how the draft directive will increase protection for British manufacturers who are either already selling or will be selling into the American market. At present, British manufacturers are protected. Indeed, according to the explanatory memorandum, they are better protected now than they will be as a result of the directive and the Government's change in the law. The Minister spoke of what would happen later this year if the directive had not been promulgated by the European Council of Ministers. I appreciate that there could be difficulties for some of our European partners who, apparently, have done nothing to protect their industries in the past. Against a general background of successful methods of protection of industry in France, Germany and Italy, I find it difficult to believe that they have no adequate protection for semi-conductors. Nevertheless, we are told that they have no means of protection, while our protection is especially strong. 9 What would have happened to British manufacturers if the directive had not been agreed? Why is it important for British manufacturers to be protected in America on a reciprocal basis under this directive, rather than under the arrangements that applied previously under British law? Because America was concerned to put pressure only on those countries without any existing protection for copyright of designs of semi-conductors, surely it would have been possible for British manufacturers to continue to be protected on a reciprocal basis? I have no objection to helping our EEC partners to protect their industries and their sales of semi-conductors in the important American market, but why must the protection given to British manufacturers be reduced in the process of helping our European partners? That is what the directive will mean. I am particularly intrigued, because in the explanatory memorandum dated 4th February 1986, the Government took the same attitude that I am taking now. They said that they proposed to seek the deletion of the words in article 9 of the draft directive other than those referred to in article 2(2). A quick perusal of the directive shows that they may achieve that end. But that was not what they sought by 22nd October, when their subsequent explanatory memorandum was published. According to that memorandum and the Select Committee report, the Government had changed their mind. In fact, they changed course between February and April, when their White Paper on intellectual property was published, in which it was proposed to reduce the protection given to British manufacturers in this respect. If other European countries want protection in America, but want a lower level of protection in their own countries than we have, or have had until now, it is up to them. I can think of at least one good reason why they should want a lower level of protection. However, if they legislated to provide less protection—with or without the directive—we could discuss harmonisation, a process to which I do not object in this case. Such harmonisation would increase their protection rather than reducing ours. That would be the attitude of a Labour Government. It was the attitude of this Government a year ago and I should like the Minister to explain why they have since changed their mind. In the White Paper published last April, the Government said that they intended to change the law in any case. But this is not the way to do it. To change the law, the Government should put a Bill before Parliament, instead of changing the Copyright Act 1956 by an Order in Council under the European Community. That seems to be the method by which the Government will change the law to reduce the protection given to British industry. I hope that the Minister will also deal with some detailed points arising from the explanatory memorandum dated 22 October 1986. It gives notes on several changes in what is referred to as the revised draft directive—now the directive under discussion. Why was the specific reference to article 113 of the EEC treaty dropped? Which EEC member states have a difficulty which requires further discussion about mixed competence between the Community and individual states? Finally, will the Minister explain the reference to confidentiality in article 4? I suspect that that is a late change; it was not in the original draft directive, but a change may have been made in the past year. How can 10 there be provision for confidentiality if there is to be a system of registration and deposited material? The amended directive has not been available to Ministers who have been trying to obtain the papers and understand this complicated, but interesting, subject over the past few weeks.

The Chairman: On reflection, and in response to the point made by the hon. Member for Birmingham, Hodge Hill (Mr. Davis), I think that it would be for the convenience of the Committee to take the amendments separately.

10.56 am

Mr. Butcher I must advise the Committee to reject the amendment. What the hon. Member for Birmingham, Hodge Hill (Mr. Davis) seeks in the amendment is already covered in the order. I thank the hon. Gentleman for his endorsement of the objective of ensuring that British designs are not ripped off in the American market. That is the purpose of the order. There are two major issues, and I shall give the hon. Gentleman some of the background. First, it is common practice within the industry for one chip to be analysed by another designer to see which sub-routines or parts of that chip should be incorporated in it to produce another chip. We in Britain accept that standard practice as a time-honoured part of the development of the whole industry: Sub-routines and various parts of chips have been incorporated in others to provide a new capability. The difficulty is that a distinction has to be made between someone who simply lifts one chip and makes only a minor change to it in order to mass produce, and someone who is genuinely concerned to enhance the capability of the chip significantly. The hon. Member for Hodge Hill asked why British manufacturers are so worried. Our particular strength happens to be in the design of large numbers of chips which, although not of massive and broad application in the customised chip area, in the uncommitted logic array area, amount to about 1,500 designs per annum. The total turnover across the product range is worth about £350 million in sales to the United Kingdom. I think that those figures go part of the way towards answering the hon. Gentleman's other question about our position in the market as a whole. As he rightly stresses, we are not a major mass volume producer in the overall market, but, because our manufacturers have built up specialist areas involving a high design input for specialised chips with customised applications, we feel that it was right that the British stance was rigorous. The hon. Member for Hodge Hill also asked why the present position is unsatisfactory and whether we are diluting it. The answer is that the existing protection in America lasts only until 7 November 1987, and it is unlikely that it will be continued on the present basis. Our law is too protective, providing protection for the life of the designer, plus 50 years. That is normal copyright practice, and there is no exemption in for reverse engineering. The Americans find that unacceptable, so we welcomed the statement by the Commission on articles 4, 5, 6 and 9, declaring that it will keep under review the developments concerning reverse engineering, including developments in the member states, in third states and in the World Intellectual Property 11 Organisation, and will make appropriate proposals for further legislation as a matter of urgency should it appear necessary. As the market develops and trends emerge, there may be blatant ripping off in the United States or elsewhere and the Commission's current directive may be too tightly worded to tackle any problem. For example, chips may be lifted and tiny amendments made, resulting in mass production of designs originating in the United Kingdom. If that major problem is not tackled by the directive, we will have the right to advise the Commission—the word "urgent" is in the text—to amend its position.

Mr. Terry Davis: The Minister and I share the same objective. The difference between us is whether the directive is good enough. Will the Minister tell us whether the protection afforded to British manufacturers against being ripped off in the American market will be stronger or weaker as a result of this directive compared with the previous position under the Copyright Act 1956? As to timing, the Minister says that there will be no protection after the end of this year unless we accept the directive. That is a powerful argument. The Minister may be unable to persuade our European partners to strengthen the directive. They may be acting as a drag on us in that respect. If that is so, why does the Minister say that we would lose at the end of this year? He says that if we do not have this directive we shall lose the existing protection. I accept that the order that has been made by the President of the United States expires in October or November 1987. However, according to the notes provided by the Commission of the European Community: "protection can also be extended to citizens of countries which the President finds extend protection to United States nationals either on substantially the same basis as such countries protect their own citizens or on substantially the same basis as the United States law." My understanding of the present situation in the United Kingdom is that American nationals are protected in exactly the same way as British nationals. Therefore, it would be open to the British Government to approach the American Government, our allies in North America, to ask for a presidential decision that as this protection is given to American citizens in this country, there is no reason why British citizens should not be protected in the United States. Why do we have to settle for a weaker form of protection under the EEC?

Mr. Butcher: The hon. Gentleman is unnecessarily labouring his point. If we do not implement this directive, we shall shortly have no protection for our designs. Do we go for protection now with imperfect wording, even though it may not be as rigorous as we would like, in order to avoid that possibility? Our judgment is that we must have that protection, even though it is not the total package that we would require. We entered our words into the text because we must have the right to go back to the Commission and the Council of M inisters if, in our developing experience, we find an abuse, particularly under the reverse engineering proposals, and say that as a matter of urgency we should consider making quick amendments to the appropriate legislation. I hope that the hon. Gentleman will agree that we are in an excruciating dilemma. We must make a judgment. The protection might not be perfect, but at least we will have the 12 right to go back and make it as perfect as we need it for the pertaining market conditions. We cannot simply leave the industry high and dry.

Mr. Terry Davis: I am not saying that.

Mr. Butcher: As the Select Committee on European Legislation is aware, we have consulted the major trade associations within the industry and we are in no doubt that they wish us to move quickly on this basis. I thought that we had an all-party commitment. I was asked whether a manuscript amendment to amendment (b), would be acceptable. The short answer is no, because the words in the amendment no longer appear in the directive. The amendment refers to an early draft of the Commission's proposals for the directive. We discussed that earlier. I have agreed to discharge any obligations that may be placed on me concerning the timing of the availability of papers and subsequent access to those papers. I must also advise the Committee to reject amendment (a). Continued protection in the United States is vital to our industry. The American market is highly significant and it was necessary to adopt the directive quickly if we were to have sufficient time to legislate before the American deadline expired. The words that the amendment seeks to delete are no more than a recognition of the position that we have already recognised.

Mr. Terry Davis: The Minister has not responded to the point. He merely accused me of belabouring it, so I shall do so. The Minister said that if the directive is not accepted, British industry will not be protected after this year. He made that assertion, but did not give any reason. He did not respond to my quotation from the Commission's proposal for a directive. The Commission stated: "The protection is made available to United States nationals and domiciliaries as well as to foreign citizens whose States have entered into a treaty affording protection to mask works"— That is the American phrase for semi-conductors—"to which the United States is a party." I accept that this country cannot enter into a treaty because we are members of the EEC. The Commission went on to state: "However, by Presidential proclamation, protection can also be extended to citizens of countries which the President finds extend protection to United States nationals either on substantially the same basis as such countries protect their own citizens or on substantially the same basis as the United States law:" We satisfy those criteria. We have already accepted one order that provides temporary protection. The Minister has not explained why it is impossible for the British Government to ask the American Government for permanent protection. The Minister simply says that that is not possible, without giving any explanations. The Minister and I share a common objective but I find his explanation unsatisfactory. We shall watch developments with great interest. If we find, as we suspect that we shall, that the Government have surrendered to the Common Market, therby weakening the protection for British industry, we shall return to the matter on the Floor of the House. 13 I beg to ask leave to withdraw from the amendment. Amendment, by leave, withdrawn.

Question put and agreed to.

Resolved, That this Committee takes note of the European Community Document No. 4133/86 on the legal protection of original topographies of semi-conductor products, and the Department of 14 Trade and Industry's un-numbered Explanatory Memorandum of 22nd October 1986; endorses the importance attached to the protection of topographies; recognises the need for early decisions to ensure continued protection in the important American market; and supports the Government's decision to agree to the adoption of this instrument in the light of the undertaking by the European Commission that it will keep under review developments on reverse engineering and make proposals for further legislation as a matter of urgency as necessary.

Committee rose at nine minutes past Eleven o'clock.


Shersby, Mr. Michael (Chairman)

Batiste, Mr.

Bowden, Mr. Gerald

Butcher, Mr.

Davis, Mr. Terry

Dykes, Mr.

Lightbown, Mr.

O'Brien, Mr.

Spearing, Mr.

Speller, Mr.

Spicer, Mr.

Tim Thornton, Mr.