IP Aspects of Business LawProfessor Sung

1. Basic forms of IP and pros/cons a. Trade secrets

i. Low cost, high risk, indefinite termii. Misappropriation

b. Copyrightsi. Low cost, low risk, 95 year term

ii. Copying & Derivative worksc. Trademarks

i. Low cost, moderate risk, indefinite termii. Consumer confusion and dilution

d. Patents i. High cost, low risk, 20 year term

ii. Infringement (high cost to enforce)2. IP assets

a. Capturing value through IP – Hokanson i. Consequences of overlooking IP issues:

1. Greatly increased expenses2. Unrecoverable loss of valuable rights

ii. Once you identify an IP right you need to protect:1. Patent

a. File provisional patenti. Be careful not to sell or show off

ii. CANNOT AMMEND at a later date so DON’T BE SLOPPY

b. Provide a full and complete written description of how to make and use the invention for which the patent is sought

2. Trademarka. Can the company adopt and use the mark in interstate

commerce without the legit assertion of rights by anotherb. Can the company get federal trademark registration for the

markc. Domain namesd. Motor City –

i. Under UTSA must:1. Be valuable by not being generally know

and not being readily ascertainable 2. Reasonable efforts to maintain secrecy

ii. Disclosure of TS to others who w/o obligation to protect confidentiality of info extinguishes property right

3. Copyrighta. Benefits are that you get statutory damages along with

attorney’s fees and costs

b. Work for hire (contract)b. How a start up can put its IP at risk – Cundiff

i. Common mistakes1. No clean break

a. Breach of fiduciary duty to employerb. May lose IP rights if starting up similar company to type

employed at2. No search

a. Begin the search early for domain names and register trademarks (and perform a search) well in advance of public announcement

3. Only thinking about the internet4. No worker agreements

a. Need a paid work contract to ensure exclusive rights to the IP developed

5. No NDA/CDAa. Make potential investors sign

6. It’s business, not personal a. Get confidentiality agreements and plan for succession/exit

of personnel early 7. Forbearance

a. Don’t go after every infringer, but can’t be a pushover 8. Ostrich behavior

a. Keep an eye out for infringerb. Have counsel respond in writing

ii. Valuation 1. Valuation of IP Assets – Hagelin

a. Cost methodi. Measures value of asset by cost to buy identical or

equivalent asset – assumes that economic value provided through life of asset is commensurate with development cost

ii. Basically = how much cost to product assetb. Market method

i. Based on comparable transactions between unrelated parties

ii. How much asset would sell for in the marketc. Income method

i. PV of net economic benefit obtained over the lifetime of the asset

ii. How much COULD the asset generate?d. Traditional 25% rule

i. Value of a license should equal 25% of gross profitse. Industry standards

i. Uses references to toyalty rates in similar past transactions

ii. Limited since by definition each IP asset is different f. Ranking

i. Often used in conjunction with industry standards approach, uses five components:

1. Scoring criteria2. System3. Scale4. Weighting factors5. Decision table

g. Surrogate measuresi. Reference to patents themselves, most common are

# of patents issued to company, payment of patent maintenance fees and prior art citations – correlating average with firm’s MV

ii. Can only be used to evaluate portfoliosh. Disaggregation methods

i. Value = apportions some fraction to total value to IP by setting value of intangible assets equal to value of firm minus firm’s money and tangible assets

ii. Income = apportion some fraction of total earnings to IP assets (tech factor method and knowledge capital score card)

iii. Monte Carlo = assign range of values w/ probability to each value as in value of disaggregation method

iv. Option method = adopt Black-Scholes to value IP as a “wait and see”

i. Competitive Advantage Valuation (CAV)i. States that IP assets have no value, all value resides

in tangible assets which incorporate them – combines the income and disaggregation approach

ii. What is the value of the asset measured against existing technology?

2. Casesa. Hughes

i. Lost profits not reasonably measuredii. Need reasonable royalty

1. Court will conduct hypothetical negotiation between licensor and willing licensee before start of infringement

2. Some profit for infringer b. Pfaff

i. On sale bar 1. Clock on securing patents runs from time

offered for sale

2. Must file w/in one year of on-sale advert – anytime a company has a sales force this becomes an issue

3. Ready for patenta. Actual reduction to practice b. Constructive reduction to practice

4. Experimental use – an acceptable use that does not start toll

ii. Often disconnect between sales people and R&D/IP department

iii. Licensing 1. Basic elements:

a. Who i. Assignability and acquisition

b. Whati. Patent right versus technology (know how)

c. When & wherei. Term and field use

d. Why i. Exploitation versus peace

e. Howi. Cross-license, patent pools

2. Negotiation of Royalties and Other Sources of Income from Licensing – Goldscheider

a. Elements that increase licensor’s assets:i. Relevant, assumable, enforceable patents

ii. Trade secrets and know-how related to subject techiii. Ancillary trade secrets, including marketing insight

and contactsiv. Established product trademarksv. Software, ad support

vi. Active and productive R&D facility vii. Pattern of successful licenses

viii. Reputation for diligence in pursuing infringersix. Reputation for protecting licensees from

independent actions from 3rd partiesb. Licensor can assume risk by agreeing to lowering licensing

rates in exchange for royalties c. Other options include lump-sum and periodic lump-sum

payments, prepaid royalties, minimum royalties, barter, equity, return sale of key ingredients to licensee, sublicensing, etc.

d. Ratesi. Comparables

ii. Success kickeriii. Revisions

iv. Most favored licenseee. Payments

i. Upfront royaltyii. Minimum royalty

f. Equity stakeiv. Trade Secrets

1. Uniform Trade Secret Act: USTA §1(4) a. “Trade Secret” means information, including formula,

pattern, compilation, program device, method, technique, or process, that:

i. Derives independent economic value, actual or potential, from not being generally known to , and not being readily ascertainable by proper means by, other person who can obtain economic value from its disclosure or use, AND

ii. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy

2. Economic Espionage Act (EEA) 18 U.S.C. §1839(3)a. Term “trade secret” means all forms and types of financial,

business, scientific, technical , economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorized physically, electronically, graphically, photographically, or in writing if –

i. The owner thereof has taken reasonable measures to keep such information secret; and

ii. The information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public.

b. $500K or 15 years in prison for individual c. $10M for companyd. Very few convictions under the EEA – Many do a deal

with the DA (who is uninterested in IP cases) while you file civil claim. Person will have to plead 5th in order not to perjure

3. 1st Res. Torts §757a. A trade secret may consist of any formula, pattern, device,

or compilation of information which is used in one’s business, and which gives him an opportunity to obtain an advantage over competitors who do not know or sue it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving material, a pattern for a machine or other device or a list of customers.

4. 3rd Res. Tortsa. A trade secret is any information that can be used in the

operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others.

5. Case application under USTAa. Learning Curve – six common law factors determine trade

secret statusi. Close to current business

ii. Known to employees and others involved in business

iii. Measures taken to guard secrecyiv. Value of concept v. Amount of time effort and money spent on

developmentvi. Ease or difficulty with which concept could be

reproduced b. Mangren – Essential ingredient misappropriated

i. Process was independently researched and developed, reasonable effort made to maintain secrecy

ii. D guilty since knew that employee would use knowledge from P

c. DeGiorgio – customer lists are trade secret, attempt was made through use of password to maintain secrecy

d. Buffets – recipes are easily discernable and no effort to protect so no trade secret

6. Case application under non-USTA jurisdictionsa. DuPont – secret was obtained through “improper means”

that violated “commercial morality” tort standard7. Case application under the Economic Espionage Act (EEA)

a. Lange – attempted trade secret theft under EEA, value was in testing

b. Martin – attempted to abscond with material and found new company based on this knowledge

i. Found to be conspiracy under EEA languagec. Pribich – worker didn’t infringe on any info that was

unknowable to the public, no conviction under EEA3. Setting up a business entity

a. Main concerns with business formationi. Ownership

ii. Controliii. Financial risk/reward allocationiv. Change/exit

b. Types of entities i. Sole Proprietorships

1. Consa. Difficult to access fundsb. Personal liability for debt and tortc. Death of owner dissolves the entity

2. Prosa. “Pass through” taxation to individual ownerb. Minimal costs in start upc. Business is freely transferabled. Ready accountinge. Personal income taxed oncef. No new legal entity

ii. Partnerships1. Cons

a. Each partner personally liable to unlimited amountb. Shared profit/control – each partner has full control –

disputes can be messyc. Dissolution/buyout messy

2. Prosa. “Pass through” taxation to partnersb. Cost depends upon complexity of agreementc. Moderate formalitiesd. Joint/several liability e. Shared profit/control

3. General/limited partnershipsa. Need to file with local state agency to establishb. Must have at least one general partner and one limited

partnerc. General partners have unlimited liability while limited

partners have limited liability at the cost of control of the business

d. Costs are higher than “regular” partnershipsiii. Corporations

1. Consa. High costb. Higher level of regulations and compliancec. Profits subject to double taxation – at corporate and

personal leveld. Officer & management financial controle. Sub S corps may be able to avoid this in some states

2. Prosa. Can create complex financial products to finance businessb. Limited liability c. Preferred structure for VC and other investors since it gives

them some control d. Officer management e. Perpetual existence

iv. LLCs1. Cons

a. Not preferred method of investment by VCs and Angles b. All members participate in management creating top-heavy

decision early onc. Entity dissolves on death, bankruptcy or withdrawal of

member2. Pros

a. Limited liability for memberb. Tax “pass through”

c. Financing i. Basic forms

1. Seed2. Angel 3. Venture4. Private Placement5. IPO

ii. Obstacles to overcome for financing1. Identifying a source of capital 2. Minimizing the cost of secured capital3. Negotiation a deal to the satisfaction of both parties4. Maintaining a stable flow of capital going forward

iii. Factors influencing structure of capital 1. The amount of capital needed2. The company’s operating history3. Company’s current financial condition4. Risks associated with company’s business

iv. Traditional sources of capital1. SBICs2. Venture lending3. Venture leasing 4. Private placements – equity or security interests

v. Primary equity 1. Personal resources2. Government programs – SBA loans, grants3. Angels

vi. Venture 1. Liquidity/staging 2. Board control3. Preferred stock (anti-dilution/convertible)4. Stockholder agreement5. Employment contracts

vii. Steps for entrepreneur to secure financing 1. Homework

a. Asset auditb. Attempt to put a value on all IP assets

c. Determine which IP assets are most fundamental to business

2. Matchmakinga. Go out on lots of dates with VCs finding one that matches

your industry and capital needs3. Courting

a. ID IP that is vital and verify ownershipb. Determine the scope of rights associated with IP and

grounds for (un)enforcablity of those rightsc. Due diligence to verify all info is accurate and up to date

4. Prenuptial phasea. Define all assumptions and expectationb. Set out expectations of R&D and product developmentc. Specify fund usaged. Provide disincentives for key employees to leave the

enterprise 5. Wedding

a. Watch for changes in laws, regulations, market conditionsb. Beware of founder’s disease – founder good at innovation

but terrible at management d. IP considerations

i. Generation/procurement ii. Licensing

iii. Freedom to operateiv. Enforcement v. Relationships

e. Case application i. In Re Peregrine - dissent among federal courts as to whether only UCC-1

filing is needed. Similar to PJ problems in International Shoeii. Farwell – Comp. A had royalty contract with comp. B. Director of

comp.B bought out comp. A and royalty payment were discontinued depriving shareholders in comp. A of royalty payments

1. Director and successor roles2. Conflicts of interests3. Fiduciary responsibility 4. Fairness

iii. Vendo – one company invests in another and the market share decrease, found that investor was in same biz and held liable for activities to undermine

1. Person was both corporate director and officer2. Loss of future opportunity3. Lost profits4. Disgorgement

iv. Henderson – Director of A does not own IP that was developed while there and cannot seek to patent that same IP in new venture

1. Person was board chair, president, and majority shareholder

2. Theft of corporate opportunity 3. Equitable relief

a. Removal from corporate positionb. Unwinding transactions

v. Rexford – still owed fiduciary duty to company he owned stock in. If feels that he was “frozen out” the appropriate remedy was available in court

1. Shareholder loyalty in closely held corporation has a duty of loyalty

2. There was a theft of corporate name3. Dealing in good faith – need a fair, honest and open manner

4. Stock sales a. Elements of fraudulent misrepresentation

i. Materiality ii. Intent

1. Recklessnessiii. Reliance

b. SEC §10(b)i. Unlawful “[t]o use or employ, in connection with the purchase or sale of

any security any manipulative or deceptive device or contrivance in contravention of [that which is] necessary or appropriate in the public interest or for the protection of investors.”

c. Rule of superior knowledgei. The entity with superior knowledge is in the best position to know

something about it – the party with superior knowledge is obliged to disclose

d. Two types of especially tricky areas of communicationi. Statements

ii. Projections1. Actionability of a disclosed prediction does not turn on whether or

not the prediction in fact proves to be accurate 2. Bespeaks caution doctrine

a. Disclosure risk factorsiii. Can be guilty of:

1. Literally false statements2. Misleading statements

a. Buried facts b. Half truths

e. Duty to disclosei. Insider trading

ii. Statutory or regulatory obligationsiii. Correction of inaccurate, incomplete, or misleading prior disclosures

f. Elements to consideri. Materiality

ii. Intentiii. Reliance (defenses)

1. P knew of false statement or omission

2. P would have made purchase/sale even had she known of false statement/omission

3. Market was not efficient4. Market price did not respond to misrepresentation5. Truth on the market

a. In an open market communication even if there is a false or misleading statement that investor might not be aware of is self-correcting -- with increased speed of information a decrease in liability. Every time there is a lawsuit or an appeal there are analysts calling lawyers attempting to extract more information. A growing issue that will absolve liability in this area

g. Case application i. Pommer

1. False statement – Medtest had a US patent to its testing process2. Truth – Medtest had only filed a patent application and its patent

counsel had informed the company that the process was patentable 3. To what extent must facts known to company about unusual

business risk or heightened version of a common business risk must be disclosed

ii. Alna1. Omission – anticipation of rejection by USPTO regarding

Chargefaster patent application2. Chargefaster significant contribution to Watsco earnings3. Reckless conduct4. Materiality legal standard – whether a reasonable investor would

have considered an omitted or misrepresented fact important in deciding whether to invest

iii. Gompper1. Complaint must allege defendants made false and misleading

statements either intentionally or with deliberate recklessness2. VISX’s “ferocious” litigation defense of its patents rebutted notion

that it believed its patents to be valid 3. The IP component exponentially complicates matters. It is never

clear until it goes to trial.iv. Nathanson

1. Misrepresented patent coverage to the company’s sole product 2. Being a corporate officer may not suffice to create an inference of

the scienter absent special circumstances (like a one product company)

v. Zirn1. Withholding patent counsel’s opinion that patent reinstatement was

likely2. Corporate directors have a fiduciary duty to disclose fully and

fairly all material information within the company’s control when it seeks stockholder action

3. Equitable fraud as a cause of action5. Ownership of IP in employment contexts

a. Default IP assignmentsi. Patents – shop rights, hired to invent

1. Shop-right – company gets rights where the thing is invented on company time regardless of the inventor. Very rare, most done by contract today.

ii. Trade Secrets – implied duty of confidentiality 1. Law must balance the policy that businesses with trade secrets

must be able to protect them with the fact that employees with knowledge of those secrets leave and seek employment elsewhere with the skills and knowledge gain from their experience.

2. Ownership in Trade Secret matters depends upon three factors:a. The nature of the work for which the employee was hiredb. The degree to which the invention is related to the

employer’s business c. The extent to which the employee used the employer’s time

and resources to develop the trade secret3. Implied duties of employees

a. When confidential trade secret information is disclosed to employees the employee must be given notice that it is secret. The employee is then under a duty to not disclose such information.

iii. Copyright – work for hire1. Usually the copyright stays with the creator. If they work for a

company, or are under a contract, of a work-for-hire type then the work that they create cannot be copyrighted by them – the copyright stays with the organization that retained their services.

b. Contractual restrictionsi. Inventor gets ownership in event of silence of assignment provision in

employment contract. ii. Covenants not to compete

1. Not enforceable in all states – CA notable exceptioniii. Post-employment contract

1. Unless sign the document, are very hard to enforce. While you are employed the provisions are easier to enforce.

iv. Invention assignments 1. Used by employers to override the shop right joint custody of IP.

a. Need to be reasonable in scope, relate to the employers business, and have a reasonable enforcement timeframe.

c. Hired to invent analysis:i. Nature of work for which employee was hired

ii. Degree to which invention is related to employer’s businessiii. Extent to which employee used employer’s time and resource to develop

the technology

d. Inevitable disclosure – jurisdiction that says a competitor may not hire an employee due to fact that even if they are ethical they will still need to

e. Case analysisi. McElmurry

1. Shop right is an implied nonexclusive, nontransferable royalty free license giving an employer the right to use an invention patented by its employee

2. Also allows “have made” foundry rights3. The Court of Appeals held that:

a. Power company acquired “shop right” in patented level detector developed by its employee at company's expense;

b. Company did not infringe patent by disseminating specifications to contractor; and

c. Company's shop right entitled it to duplicate detector and to continue using it in its business.

ii. Standard1. An employee hired to apply her inventive ability owes a duty to

assign patent rights to her employer2. When hired to “invent” those inventions will revert to employer

and inventor will not own simple shop rightiii. Wexler

1. Absent a trade secret and express agreement otherwise, an employee’s aptitude, skill, dexterity, manual and mental ability, and subjective knowledge she obtains in the course of her employment is not the employer’s property

2. An ex-employee is bound by an enforceable covenant or other confidential relationship

3. Doctrine of inevitable disclosureiv. Defler

1. Customer list2. Implied duty of confidentiality and loyalty3. Injunctive relief and disgorgement of salary already paid

v. CCNV1. Work for hire – 17 U.S.C. §101

a. Work prepared by and employee within the scope of her employment

b. Work specially order or commissioned if set forth in a written agreement

2. Hiring party right of controla. Skill requiredb. Source of tools and instrumentalitiesc. Location of workd. Duration of relationshipe. Right to assign additional projectsf. Control over when and how long to work g. Method of payment

h. Hiring an pay of assistantsi. Work relatedness to hiring parity’s normal businessj. Employee benefits and tax treatment

vi. Freedom1. Invention assignment provisions may not be open ended with

respect to time or subject matter2. Unenforceable as against public policy3. Needs to be a transition period – where transitioning to new

employer or on own4. Courts look skeptically upon employment contracts that require

employee to assign his inventions to his employer; where such contracts are open-ended with respect to time limit or subject matter, they may be considered unenforceable as against public policy.

vii. Union Pacific1. Employer sought to enjoin former employee from testifying in

suits against it, alleging that, if allowed to testify, employee would reveal employer's confidential information and trade secrets and would violate privileges

2. The Court of Appeals held that: a. Under Oregon law, parties have the power to alter a former

employee's implied duty of confidentiality; b. Resignation agreement precluding employee until a

specified date from disclosing employer information supplanted employee's implied duty of confidentiality, so that duty terminated on the specified date;

c. Employer did not establish a likelihood of success on the merits of any of its claims of privilege; and

d. Injunction was not crafted in sufficiently precise terms to identify the information being protected.

viii. Nike1. An employee’s knowledge of confidential information is sufficient

to justify enforcement of a non-compete agreement if there is substantial risk that the employee will be able to divert all or part of the employer’s business given her knowledge

2. **CA will not enforce post-employment non-compete agreementsix. Ingersoll

1. Holdover/trailer – postemployment obligation to assign2. Must be fair, reasonable, and just3. May not extend beyond any apparent protection the employer

reasonably requires4. May not prevent the inventor from seeking other employment5. May not adversely impact the public

6. Licensing a. Contracting out of the default rules

i. Exclusive and non-exclusive licenses

1. Non-exclusive licenses come with little (no) rightsii. Terms and conditions

b. Limits on private ordering i. Unreasonable restraints

ii. Against public policyc. University Licensing

i. Concerns need to watch for:ii. Role of government funding in the research

1. Government will retain a non-exclusive license to the techiii. University policies promoting the free dissemination of information

d. Trade secret licensing i. TS protection only prevents the use of disclosure of the secret by those

standing in a special relationship to the TS owner and those who utilized improper means to acquire the information

ii. TS owner has right to control the disclosure of the TS. iii. TS owner must show reasonable diligence in protecting the TS – even

when licensing, contracts should be carefully negotiated. TS protection has the potential to endure indefinitely, however once the secret becomes generally known it is no longer protected. Clause often found in royalty contracts for reduced fee when enters the public domain

e. Rights to suei. Abbot

1. Hepatitis immunity patent case2. Standing to sue3. Absent the transfer of all substantial rights an exclusive licensee

does not have standing to sue without joinder of the patent owner4. Who has standing to sue?

a. Owner of the patentb. Limited exceptions where someone can stand into your

shoes, transfer of substantial rights=standing to sue(no real example)

c. Any reservation of rights AT ALL will preclude d. Can put clause in agreement which would require joinder

by patent holdere. Really put people in position that just need to SELL

RIGHTS OUTRIGHT f. Res Judicata

i. Blonder-Tounge1. TV antenna patent case2. Claim preclusion (res judicata)3. A patentee is estopped from claiming the validity of a patent if the

plaintiff had a full and fair opportunity to litigate the claim in a prior adjudication that found the patent invalid

g. Objective - Getting around the patenti. Design around

ii. Argue that the patent you just licensed is invalid

h. Estoppel i. Lear case

1. Licensee not estopped from arguing patent invalidii. Medlmmune

1. Licensee is not required under Art III jto break or terminate its license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed

2. Art III – potential D preemptively suing for infringement iii. Potential remedies

1. Procedural mechanisms 2. Prior notification rules

iv. Brulotte1. Post patent expiration royalties 2. A public policy against collection of royalties after expiration (a

basis for killing a patent)v. Aronson

1. Unpatented, publicly disclosed product 2. No preemption 3. Tying the patent of a laser printer to the cartridge (which is

unpatented)i. Patent Exhaustion & First Sale Doctrine

i. Jazz1. Patent exhaustion after first use

ii. Quanta v LG1. The first authorized sale of a patented item exhausts the patentees

rights to that item, including methods embodying patented product2. The sale of a device that practices patent A does not by virtue of

practicing patent A, exhaust patent B. But if the device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B

j. Cross-licensing i. Texas Instruments

1. Patent cross license 2. Lump sum payment3. Sales cap termination

ii. Second TI case (p 452)1. Patent cross-license 2. No per-se patent misuse due to tying 3. TI had no market power

k. Patent pools – legal given industry structure i. Matsushita

1. 6C DVD patent pool2. Pro-competitive effects must be weighed against anti-competitive

ii. Philips 1. Package patent license to CD technology

2. Not patent misuse under rule of reason analysis iii. Warner

1. Trade secret license iv. Listerine

1. No termination provision v. Dawn

1. Trademark license2. Dawn donut sues grocery chain with store bakeries selling Dawn

products3. Trademark cancellation based on lack of systematic control over

licensees use of trademarkvi. Boosey

1. Disney Fantasia 2. Movie theater to home video3. Unforeseen use

a. A copyright license may extend to cover new uses not explicitly included in the license but which reasonably falls within the medium described by the license

7. IP Due Diligence and SEC Disclosure a. IP Due Diligence in Business Transactions – Kasselman

i. Due diligence – 1. A measure of prudence, activity or assiduity as is properly to be

expected from and ordinarily exercised by a reasonable and prudent person under particular circumstances; not measured by any absolute standard but depending upon the relevant facts of the case.

ii. Not just a tech company phenomenon – need to do IP due diligence in every business transaction

iii. Reasons for performing due diligence:1. Importance of IP within framework of deal2. Commercial advantage of company’s IP portfolio 3. Potential liabilities associated with company’s IP portfolio or in

use of IP in operation of the businessiv. Step-by-step process of IP due diligence:

1. Understand the businessa. Nature of the business with industry specific nuances (i.e.

gov’t support for aerospace research)b. The structure of the dealc. The value of the IP in relation to the deal

2. Review documentsa. Schedules of registered, applied-for, and material unregister

IP along with underlying documentationb. Licenses or other agreements granting or obtaining rights to

IPc. Assignment of IP by or to the company

d. Other agreements affecting the company’s use of IP including consulting, R&D, JV, prior acquisitions, consent to use, covenant not to sue, etc.

e. Confidentiality, non-disclosure, non-compete and employee/consulting agreements covering rights in IP (assignment of inventions, discoveries, improvements, works of authorship, etc)

f. List of proprietary and 3rd party softwareg. Summary description of subject matter held as trade secrets h. Opposition, reexamination, interferences or other

adversarial proceedings before any IP registry i. IP related claims and correspondence, including pending

and threatened claims, cease and desist letters and contacts3. Conduct searches

a. Need to conduct independent searches by scheduled IP and by company name

4. Conduct interviewsa. In-house council b. Out-side firmsc. People in the company familiar with IP related aspects of

business (i.e. R&D)5. Identify issues

a. Flaws can affect the purchase price of the interest in the company

6. Report findings7. A comprehensive report should allow the reader to ID:

a. Material IPi. Who owns it

ii. Whether it is activeiii. How it is used in the business and any other

company businessesb. Material 3rd party agreementsc. Existing and potential liabilities

i. Relating to owned or licensed IPii. With respect to the operation of the business

v. Buyer consideration upon learning status of IP:1. Whether the business remains viable w/o IP2. Whether there are alternatives to the IP3. If the IP was issued or register, whether it can be reinstated4. Whether continued use of the IP poses risks of litigation 5. Whether entry of the IP into the public domain reduces the

company’s competitive advantage vi. Common IP ownership issues

1. Company is not listed in applicable IP records as ownera. Company’s name change was never recorded b. IP is in the name of affiliated company

c. Acquisition pursuant to which company obtained rights is not recorded

d. Inventor/author never assigned rights to the companye. The company no longer owns the IP

2. There is a gap in the chain of titlevii. Encumbrances

1. IP often used as collateral with financial institutions and once debt paid a release letter is not recorded

2. Government funding requires licensing to the US government3. Exclusive licenses to 3rd parties precluding the company’s use of

IP4. Covenants not to sue

b. IP Due Diligence: A Critical Prerequisite tow Capital Investment - Hildebrand i. Include IP experts in the due diligence team

ii. Ensure the IP due diligence plan reflects the importance of IP in the dealiii. Take nothing on faith – trust but verify iv. Confirm everything – computer search need to be accompanied by further

inspection v. Understand the dynamic relationship between the documents and the core

businessvi. Foreign laws may impact the deal

c. Feit i. Focused on meaning of “Surplus surplus”

ii. Knowledge categories – level of disclosure required to perform under due diligence, balancing disclosure and diligence

1. Insider directorsa. Little if any due diligence defense

2. Outside directors and others outside parties (i.e. underwriters)a. Due diligence defense based on reasonable belief in

accuracy of disclosurei. Was it reasonable in scope?

ii. Was there smoke even if no fire?iii. Was there any indication of impropriety?

iii. Omission of material fact versus due diligence defensed. Knogo

i. Attorney-client privilege 1. Attorney-client2. Legal analysis3. No waiver – to what extent is disclosure a waiver

a. Common interest defense, not a common interest for litigation purposes

e. Staci. Impending Microsoft launch

ii. Not required to predict the nature of a 3rd party future conductiii. How to reconcile disclosure with confidential negotiations with third party

iv. Scienter is not required for liability for material misstatements or omissions in registration statement; defendants will be liable for innocent or negligent material misstatements or omissions. 

v. Section 10(b) requires scienter and covers statements made not only in the registration statement or prospectus but also in other documents and in oral communications. 

f. Sherleighi. Latin America marketing by Windmere

ii. Local laws dictating transfer of B&D trademarks1. Superior knowledge doctrine is the common-sense guide through

this area of lawiii. In order to state a false registration statement claim, a plaintiff must

demonstrate: 1. That the registration statement contained an omission or

misrepresentation, and 2. That the omission or misrepresentation was material, that is, it

would have misled a reasonable investor about the nature of his or her investment.

iv. In a false registration case that sounds in fraud, a plaintiffs must allege: 1. The precise statements, documents, or misrepresentations made; 2. The time, place, and person responsible for the statement; 3. The content and manner in which these statements misled the

plaintiffs; 4. What the defendants gained by the alleged fraud. 

v. A defendant can fully benefit from the shelter of a safe harbor of the Private Securities Litigation Reform Act (PSLRA) only when it has disclosed risk factors in a warning accompanying the forward looking statement; the cautionary language must therefore meet a threshold of specificity. 

vi. To successfully state a securities fraud claim under Rule 10b-5, a plaintiff must demonstrate:

1. A misstatement or omission; 2. Of a material fact; 3. Made with scienter; 4. On which the plaintiff justifiably relied; 5. That proximately caused the plaintiff's injury. 

g. Seachangei. Video-on-demand software

ii. Lost nCube patenth. Aliance

i. MBI stock swap in acquisitionii. Depressed value based on nondisclosure of licensing that eliminated MBI

patent infringement riskiii. Duty to update until date of sale of securitiesiv. Threshold requirement for a registration statement or prospectus

misrepresentation claim, under Securities Act, based on failure to disclose

information, is presence of affirmative statement that is made misleading by material omission. 

i. Bursteini. AET acquisition of Maynard

ii. Misstatement as to ability of Maynard to retooliii. FRCP 9(b)

1. Fraud must be pled with particularity 2. Malice, intent and knowledge may be averred generally

j. Common-Interest Doctrine and IP Due Diligencei. Allows parties to share otherwise privileged information without waiving

attorney client privilege. 1. Applicability depends upon the relationship between the parties at

the time the information was shared. 2. Views of individual courts will affect the outcome of the trial with

some taking more inclusive view with other more restrictive. ii. Companies should not transfer any sensitive information during the early

stages of negotiation. Instead they can provide a list of public documents which were prepared for a freedom-to-operate study.

iii. Exchange should always take place via outside council. iv. Companies relying on common-interest agreements must accept some

uncertainty of risk of waiver8. IP in Mergers and Acquisitions

a. Basic Terminology i. Merger –

1. Corporate transaction that joins two corporate entities. The resulting entity will bear the name of one of the prior entities and carry on in the legal continuation of that company.

ii. Consolidation – 1. Where a new corporate entity is created through the combination

of two prior corporate entities but many of the characteristics of the prior corporations

iii. Acquiring (surviving) company = corporation that continues to existiv. Target (disappearing) company = corporation that is subsumed v. Triangular merger –

1. Involves three entities, an acquiring company, its subsidiary, and a target.

2. Forward triangular merger – subsidiary stock is owned by acquiring company, where subsidiary takes over the target company

3. Reverse triangular merger – target merges with subsidiary so that target is the surviving company

vi. Factors in considering merger type:1. Keep distance for tax/regulatory reasons2. Legally advantageous to have one or the other as the surviving

entity3. Corporate and tax law considerations

vii. De facto merger – where target company sells most of its assets to acquiring company and then dissolves

b. Preemption i. Mergers governed by state law

ii. IP assignment governed by federal lawc. IP rights in connection with sale of a business unit

i. Ownership v Licensee Rights1. Sole Ownership

a. Unfettered discretion to use distribute to 3rd parties and commercially exploit the IP in any manner

b. Permanent, non-terminable rights c. Ability to solely control the enforcement of rights against

infringing or misappropriating third parties2. Joint Ownership

a. Single joint owner doesn’t always have the power to grant exclusive licenses

b. Joint owners will usually agree on whether and to what extent must account for profit realized from exploitation of IP

c. Ability of one owner to enforce IP rights may be constrained by arrangements made btwn partners

d. Protection and maintenance of jointly owned IP more complex

3. Exclusive License a. May only exercise specifically granted rightsb. If within a defined field of use an exclusive license would

be same as sole ownership in that field, except would be terminable or would be limitations on sublicensing/assignment

c. Can be given right to enforce licensed IP rights against 3rd party infringers in the field of use to which exclusivity applies (CAVEAT – Standing rules)

d. Terminable or will expire at the end of a specified terme. May not be freely assignable or sub licensable f. Usually have no role in deciding how to protect IP asset

4. Non-exclusive license a. No right to enforce licensed rights against suspected 3rd

party infringersb. No obligations to enforce IP against 3rd partiesc. No role in pending prosecution of pending patent

applications or maintenance in force of licensed patentsd. If enters bankruptcy proceedings may not be able to retain

rights – even in event of successful re-orgii. Rules of allocation in sale of business unit

1. Most often based on whether IP or other asset of the seller “primarily relates to the business” or is “used primarily in connection with the business”

2. Patent and patent applications usually reviewed on case-by-case basis, subject to seller and buyer negotiations of which ones they wish to purchase

3. General allocation rules used to specify which trade secrets and copyrights are to be transferred

4. Third party licenses generally need to be reviewed on a case by case basis

5. Generally no ability to transfer 3rd party tech licenses 6. Consent to assign to the Buyer any agreements usually required

iii. License Agreements Relating to sale of business unit1. Scope

a. Internal use rightsb. Distribution rights

i. If granted and if software then should specify if licensee party to provide only object code to its customers

ii. If software products involved then might need to create source code escrows

c. Sublicenses i. If software will need sublicensing rights to

distribute products to customersii. Not unusual for independent contractors to have

access to and use licensed IP d. Licensee party might also require broad rights when

working with partners and JV, and/or co-developmente. More problematic in case of patent license – “naked”

licensing is often not permittediv. Extent of exclusive rights

1. If seller retains IP which is used in retained business will grant exclusive license within a field of use which often supplemented by non-compete covenant

v. Improvements/New developments1. Ownership

a. Usually agreements provide that buyer will own any improvement, likewise with seller

b. Sometimes agreements provide that all improvements belong to the owner of the IP and will be reverted (LOOK FOR ANTITRUST)

c. Inclusion in license grant – could provide that periodically must update one-another on improvements made or no disclosure requirements

d. Could be different if licensor or licenseee. No requirement, but if disclosed then can be used

f. B & S may negotiate broad patent cross license or covenants not to sue that apply to all new developments

vi. Termination 1. Where no ongoing payments may prefer to have perpetual and

irrevocable licenses2. Where one side concerned about other exercising rights beyond

scope of license may want a termination for breach3. Some licensor insist on retaining right to terminate by reason of

breach of confidentiality covenant or transfer in violation of agreement

vii. Assignability 1. Generally non transferable without prior written consent of

licensing party viii. Enforcement of IP

1. If exclusive license granted then not unusual to have exec licensee granted right to enforce against infringers in the field of use

2. Often requirement that licensor join so can get standing3. In event of non-exclusive license usually licensee has no

enforcement rightsix. Licenses and mergers

1. As IP has moved to the center of business value creation so too has the importance of clarification of who owns what in any merger.

2. Lawyers advising on licensing agreements should have bankruptcy and merger issues at the forefront of their discussion. The structure of a license agreement may determine whether or not the license will survive a merger or bankruptcy event.

3. DL Corp Code §259 provides that all property rights of constituent corporation shall be vested in the corporate entity surviving or resulting from the merger.

d. Factors to determine if one business is a continuing interesti. Transfer of operating assets

ii. Inadequate consideration of paid for assets transferrediii. The continuation of business activitiesiv. Commonality of officersv. Incapability of the selling company to pay ongoing obligations

e. Assignability i. PPG

1. Surviving corporation in statutory merger did not acquire patent license rights of constituent corporations where provisions of patent license agreement against assignment and transfer did not contain exception for merger, despite arguments that licenses were not “transferred” because they passed by operation of law from constituent Ohio corporation to surviving Delaware corporation, (patent not assigned) and

2. Subsequent equipment license agreement was ineffective to modify patent license agreement and provide defense as a matter of law to claim of infringement. (contract terminated)

ii. Verson 1. Holder of nonexclusive patent license may not assign its license

unless right to assign is expressly provided for in license agreement; patent licenses are treated as personal to license holder and therefore are presumed to be not assignable

2. Presumption of non-assignability of non-exclusive licenses f. Ambiguity

i. Motorola 1. Contract ambiguity2. Parties intent3. Need to include termination clause in contract

g. Successor Liability Factors *** On Exami. Ed Peters

1. Must look at under totality-of-circumstancesa. Have assets have been transferred to successorb. Has acquiring company paid less than adequate

consideration for the assetsc. Is the acquiring company continuing the prior company’s

businessd. Do both corporations share at least one common officere. Is the divesting company left incapable of paying its

creditorsh. Conversion/Misappropriation of TS

i. TXO1. Subsidiary into parent merger2. Trade secret – state law, no preemption 3. Places a burden on contract4. The Court of Appeals held that:

a. Merger did not constitute transfer or disclosure of seismic data to third party as prohibited by confidentiality provision of subsidiary's contract with data owner, and

b. Delaware, Ohio, and Texas merger statutes authorized use of seismic data by surviving corporation after merger.

i. Transfer Issuesi. BioLife

1. Does the company have title to transfer?a. Asset transferb. Failure to deliver

j. Impact of ineffective transfer and due diligence i. Paragon

1. Spin-off2. Warranties3. Bankruptcy

9. Tax & Insurance Implications of IP a. Why tax?

i. Government revenue ii. Influence behavior

1. Curb “negative” behavior2. Encourage “positive” behavior

b. Tax and Accounting issues – Bankman & Gilson i. Employer’s tax advantage

1. Expenses of investment are deductible and produce tax saving while the gains from investment are subject to tax; investments by startups are subject to asymmetrical tax schemes.

2. Under IRS §172 a start-up may deduct expenses only against income.

a. When E-I=NOL can be carried forward 15 years and deducted against future income.

b. Companies with sources of past or present income may deduct expenses of the start-up activity that exceed start-up activity income as incurred.

c. Many start ups are never profitable, most will pay employees with some sort of stock option which leads to IRC §382 which sharply restricts the value of NOL.

c. Tax ratesi. Ordinary income taxed at 10-35%

ii. Capital Gains1. Short term at 10-35%2. Long term at 0-15%

iii. Lower rate on capital investment gains encourages long term investment d. R&D and Experimental Expenses

i. Fall under IRS §1741. Deduct expenses if receipts kept2. May be amortized over 5 years OR expensed in the expensed in

the tax year they are incurred3. All “reasonable” expenses incurred for experimental or pilot

models, a plant process, a product, formula, invention or other such property

4. Attorney’s fees paid by client to obtain patents, foreign or domestic, are also deductible

e. Start-upi. Expenses deductible against income

ii. Net operating loss in excess of current income may be carried forward for 15 years and deducted against future income

f. Capital Asset (IRC §1221)i. Term capital asset means property held by the taxpayer (whether or not

connected with his trade or business), but does not include – 1. Stock in trade of the taxpayer or other property of a kind which

would properly be included in the inventory of the taxpayer if on

hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business

2. Property used in trade or business of a character which is subject g. Capital Asset IRC §1232

i. Governs most transfers of issued patentsii. Under §1231(a)(3) total gains and losses on sales and conversions of all

depreciable property 1. Used in trade or business or 2. Converted involuntarily or by compulsion after having been held

for 1+ yeara. If there is net loss then all of the gain and losses are traded

as ordinary gains lossesb. If there is net gain

h. Depreciation of IP assetsi. All issued patents are IRC §167 depreciable property and will fall under

the provisions of IRC §1231 unless they otherwise qualify as capital assets or qualify for treatment under §1235.

ii. However, an "invention" or patent application does qualify.1. These are not depreciable assets because they have no definable

lifetime. Contracts purporting to transfer rights to patent applications, "technology," or "trade secrets" representing inventions reduced to practice therefore represent a transfer of capital assets so long as the technology transferred also passes muster under subsection (1).

i. Sale or Exchange of Patents – IRS §1235i. An exclusive license to “make, use, and sell” is considered a sale

ii. In general 1. A transfer (other than by gift, inheritance, or devise) of property

consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are –

a. Payable periodically over a period generally coterminous with the transferee's use of the patent, or

b. Contingent on the productivity, use, or disposition of the property transferred.

iii. Individual inventors received favorable long-term capital gains treatment for the sale of their patents, even if the sale was in the form of periodic royalty payments (e.g., for an exclusive license).

iv. Any sale by a "holder" of "property" that consists of "all substantial rights" to a patent, or undivided interest therein, is treated as a long term capital transfer regardless of the holding period.

v. To determine capital gains treatment:

1. Whether the property transferred is a recognized patent or capital asset

2. If so, whether the transfer constitutes a sale rather than a license arrangement and

3. If so, whether the holding period for long-term assets is meta. When all provisions met then holder is entitled to the

capital gains rate. If not then either categorized as royalty income or income derived from the sale of short-term capital assets – subject to normal income rate.

vi.j. Limitation on exchange under IRS §1235

i. Excludes assignments by employees to their employers. IRC §1235(b)(2)(A).

ii. Excludes anyone other than the actual living inventor(s). IRC §1235(b)(1).iii. Transfers by "gift, inheritance, or devise" do not qualify under this section.

IRC §1235(a).k. Capital Asset (IRC §1221)

i. For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include –

1. A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by

a. A taxpayer whose personal efforts created such property, b. In the case of a letter, memorandum, or similar property, a

taxpayer for whom such property was prepared or produced, or

c. A taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B) . . .

2. Copyrights – same standard as hired-to-invent principle by replaced by work made-for-hire where author can assign rights. Parallels the hired-to-invent principle.

l. Charitable Contributions of IPi. If a donor contributes a patent or other intellectual property to a charitable

organization, the donor's initial charitable deduction is limited to the lesser of the donor's basis in the contributed property or the fair market value of the property.

ii. The donor is allowed to deduct additional amounts in subsequent years based on a percentage of the income received by the charity with respect to the contributed property.

iii. The charity must report income received or accrued with respect to the contributed property to the IRS. The donor must obtain written confirmation from the charity regarding any income from the donated property.

iv. Special consideration given to:1. What type of donation of partial interest in IP will warrant

deductions 2. How IP interests should be valued for purposes of determination

size of deductions 3. How the potential of donated interest to produce future income

should be taken into account v. IRS suspicious of donors overvaluing IP donation in order to gain larger

tax benefit, new standards now limit deduction for IP to the donor’s tax basis in IP, with a possible additional series of deductions determined from income realized from IP by the done.

vi. New standards problematic: focus on deduction determinations on owner’s tax base in donated IP, where internal IP is donated will be production cost less portions of that cost that have already been deducted as business expenses – may involve very complicated formulas to determine.

vii. American Jobs Creation Act of 20041. Limited to the lesser of taxpayer’s basis in contributed property or

the FMV of the property, additionally taxpayer permitted to deduct certain additional amounts in the year of contribution or in subsequent tax years.

2. Based on 12 year deduction schedulem. Commercial General Liability Insurance – CGL

i. Typically used to cover slander/liableii. Right of privacy

iii. Advertising injury attempted to be used by companies to cover IP1. Trademark infringement2. Copyright infringement

iv. Protection under traditional CGL:1. Found in the advertising injury provisions of CGL policies

covering damage arising from:a. Publication of material that slanders or libels a perons or

organization or disparages a person’s or organization’s goods products or services

b. Publication of material that violates a person’s right to privacy

c. Misappropriation of advertising ideas or style of doing business or

d. Infringement of copyright slogan or title2. Two criteria MUST be met before coverage extended

a. Alleged conduct must fall within the scope of one of the enumerated offenses described as an advertising injury (and not within one of the policy’s exclusions)

b. Offense must have been committed in the course of advertising the insured’s goods products or services (NEXUS REQUIREMENT)

i. Complaint filed against injured alleges an offense covered b advertising injury provision

ii. Alleged offense occurred during term of the policyiii. Claim arose out of insure advertising activities, and iv. Offense occurred in the court of the insured’s

advertising activities v. Courts generally find that coverage present for TM infringement claims,

however courts are still splitvi. Copyrights, although explicitly mentioned in CGL coverage need to be

tied back into the advertising nexusn. IP insurance – currently two prominent forms

i. Enforcement polices – also known as pursuit, abatement or offensive coverage

1. Can be very expensive and many companies require validity opinions drafted

a. Coverage includesb. Cost of bringing suit against infringerc. Cost to defend against counterclaimsd. Cost of reexamination of insured patent in USPTOe. Cost to reissue patent

ii. Defense (liability) policies 1. Types

a. IP liabilityb. Patent infringement liability c. Warranty and representation insuranced. Technology liability insurancee. IP agreement insurancef. Media liability insuranceg. Internet professional liability insuranceh. Internet and computer network security insurancei. Errors and omissions insurance

o. Liability of Corporate Officers and Directors for Infringement of IP Interests – Bochner & Karuse

i. IP is likely to play an increasingly important role in the enterprise value and in corporate transactions such as acquisitions, corporate partnering and IPO.

ii. Directors have duty of care which boils down to two facets:1. Directors have duty to carefully consider implications of corporate

actions before permitting corporation to take them2. Board may be liable for a loss which arises from an unconsidered

failure of Board to act in circumstances in which due attention would have prevented the loss

iii. Directors face potential liability claims for breach of duty as IP management becomes more critical from a strategic, financial, and competitive point of view.

iv. Current standard of review is the “business judgment rule” essentially provides that a director shall not be liable for bad business decisions provided the director acts in good faith and in a manner the director believes to be in the best interest of the corporation and shareholders.

v. Red flags in Corporate Transactions:1. Inability of senior management to articulate the company’s IP

strategy 2. Senior management’s inability to describe the Company’s IP assets

and tie them in with core businesses3. Lack of process for determining when key patents expire and

evaluating potential impact on company4. Lack of knowledge regarding competition and industry patents5. Lack of company policy to ensure that newly hired employees do

not inadvertently bring with them or use proprietary information vi. Steps to remedy:

1. Inventory IP and know what business it is connected to 2. Develop IP strategy that addresses company’s needs both

offensively and defensively 3. Offensive should extract max value from assets4. Defensive should include monitoring of competitors patents 5. Management should make routine presentations to BoD regarding

IP management strategy, including key patents, copyrights and TS, and developments that could affect shareholder value

p. Case Lawi. Syms

1. Tax evasion 2. Sham transaction

ii. Mez1. Advertising injury asserted for Mez’s holding patent infringement2. Further - Under Insurance code section 533 an act deliberately

done for the express purpose of causing damage or intentionally performed with knowledge that damage is highly probably or substantially certain to result is not insurable.

3. Held: no coverage by Pacificiii. State farm

1. Simms architectural plans may be tangible assets subject to misappropriation

2. Court holds that a contract of insurance is construed most strongly against the insurer, particularly where insurer is denying coverage

3. But held: no coverage for White’s copyright infringementiv. American Century

1. Wrongful act of patent infringement relating to internet security and automated telephone tech

2. Need to figure out FMV of royalties and find if any “damages” were paid to patent owners.

3. License fees seen as normal costs of doing business and not covered

10. IP Antitrust Issues a. Relevant Statutory law

i. Sherman Act – 15 USC §21. In order to be monopolist need to be able to control the behavior of

the market2. Every person who shall monopolize, or attempt to monopolize, or

combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations

3. Market definition controls whether the person is a monopolista. Market power occurs where there the market definition

matches the marketb. If you have market power and price is unrelated to anything

– you are considered a monopolist4. Patents are only monopolies when the block any acceptable non-

infringing substitute 5. Just because patent creates a monopoly does not mean that can be

struck down on anti-competitive basis6. Penalties

a. Felony (3 years)b. $10MM for corporation

ii. Clayton Act 15 USC§14,181. Illegal to attach conditions of exclusivity to sale where the effect

lessens competition or tends to create a monopoly2. Companies can’t buy out the stock of a competitor where effect

would be to lessen competition 3. Section 14 – restraints placed on purchasers by sellers of products

or services4. Section 18 – deals with M&A5. Legal liability

a. “Substantially lessens competition” orb. Tends to “create a monopoly”

6. More specific than Sherman Act, so some business actionable under Sherman is not under Clayton

7. Focus was restriction on manufactures (who tended to be large) rather than retailers (who were very tiny at the time)

iii. Federal Trade Commission Act 15 USC §451. Unfair competition and unfair or deceptive business practices are

unlawful2. Established government agency that

a. Polices markets regarding unfair and deceptive trade practices

b. Focus was on protecting consumers from i. False adverts

ii. Deceptive contract termsc. Also, deals with M&A and has concurrent jdx with DoJ in

reviewing themiv. National Cooperative Research Act 15 USC §4301,4302

1. Can engaged in joint venture for basic research or testing purposes2. Can NOT exchange info amongst competitors; enter into

agreements restricting marketing, distribution, etc.3. Contracts for JV are not illegal per se; judged on the:

a. Reasonableness i. Effects on competition in properly designed

relevant research ii. Development

iii. Productiv. Process

b. Capacityb. Antitrust

i. Horizontal restraints1. Existence of restraint in parties with horizontal relationship does

not necessarily entail anticompetitive behavior 2. May actually promote integrative efficiencies (scale,

complementary R&D, production, etc)3. Evaluated under rule of reason

a. Some analysis truncated – price fixing, allocation of markets, etc.

ii. Resale price maintenance1. Illegal when commodities have passed into the channels of trade

and are owned by dealers2. Per se illegal for licensor of IP right in product to fix a licensee’s

resale price iii. Tying arrangements

1. An agreement by a party to sell one product, or agreement that will not purchase that tied product from another supplier

2. Most likely to challenge tie-in if:a. Seller has market power in the tying productb. Arrangement has an adverse effect on competition in

relevant market for tied product, andc. Efficiency justifications for arrangement do not outweigh

the anticompetitive effects3. If licenses are sold in package this may create an illegal tie-in

effectiv. Exclusive dealing

1. Occurs when license prevents the licensee form licensing, selling, distributing, or using competing tech

2. Evaluated under the rule of reason3. In evaluating reduction on competition factors include:

a. Promotes exploitation and development of licensor’s tech and

b. Anti-competitively forecloses the exploitation and development of, or otherwise constrains competition among, competing tech

4. Likelihood dealing may have anticompetitive effect a. Degree of foreclosure in relevant marketb. Duration of exclusive dealing arrangementc. Other characteristics of input and output markets

(concentration, entry, responsiveness of S&D to P changesv. Cross-licensing and pooling arrangements

1. Agreements of two or more owners of different IP creating IP pools to license to one another or 3rd parties

2. Maybe pro-competitive because:a. Integrating complementary techb. Reducing transaction costsc. Clearing blocking positionsd. Avoiding litigation

3. When have anti-competitive effects:a. Collective price or output restraintsb. Naked mechanisms to accomplish price-fixing or market

division4. When cross-licensing involves horizontal competitors must

considera. Effect of settlement diminishing competition among

entities that are actual or potential competitorsb. In absence of offsetting efficiencies may be challenged as

unlawful restraint of trade5. Exclusion from pooling arrangements is unlikely to have

anticompetitive effects unless:a. Excluded firms cannot effectively compete in the relevant

market for good incorporating licensed tech and b. Pool participants collectively possess market power in

relevant market6. Pooling may also be found anticompetitive if retarding innovation

vi. Grant-backs1. Arrangement under which licensee agrees to extend to licensor of

IP right to use the licensee’s improvements to licensed tech2. Benefits

a. Share risks and reward for further investment in innovationb. Promote subsequent licensing of results of innovation

(virtuous cycle)3. Drawbacks

a. Adversely affect competition if reduce incentives to engage in R&D

b. Limiting rivalry in innovation markets

4. Evaluated under the rule of reason – not per se unlawful5. Agency evaluates pro-competitive effects:

a. Promoting dissemination of licensees’ improvements to licensed tech

b. Increasing the licensors’ incentives to disseminate licensed tech or

c. Otherwise increasing competition and output in relevant tech or innovation market

vii. Mergers/acquisitionsc. 9 no-nos – NO LONGER IN FORCE

i. Mandatory package licensing (patent pools)ii. Tying of unpatented supplies

iii. Compulsory payments of royalties in amounts not reasonably related to sales of patented products

iv. Mandatory grant-backsv. Licensee veto power of licensor’s grant of further licenses

vi. Restrictions on sales of unpatented products made by patented productsvii. Post-sale restrictions on resale by purchasers of patented products

viii. Specifying price licensee can charge on resale of licensed productsix. Tie-outs – restrictions on licensee’s ability to sell products that compete

with licensor’s patented productsd. Two types of analysis under antitrust: **looking for this in initial analysis

i. Per Se1. Agreements among competitors to set prices2. Agreements among competitor to divide up markets by geography

ii. Rule of Reason1. All other anti-competitive behavior defined under act2. Requires court to consider benefits and harms of an agreement to

determine a section one violationa. Drug reverse payment now leading trust issue for the FTC

now. e. Unilateral refusal to deal

i. A unilateral, unconditional refusal to license a valid patent cannot, by itself, result in antitrust liability

ii. Exceptions1. Refusal prevents emergence of a new product for which consumer

demand exists2. Refusal is not justified by any objective considerations3. Refusal excludes competition in a secondary market

f. Antitrust – IP Interface (Pate Article)i. Idea of IP property

1. For competition law purposes IP should be treated in essentially the same way as other forms of real property

a. Caveat in that IP is not necessarily the same as other property

2. IP is neither particularly free from scrutiny under antitrust laws nor particularly suspect under them

3. IP licensing is generally pro-competitive ii. First Principles of US IP law and Antitrust

1. Sole focus is on specific anti-competitive behavior/actions as judged by their effects on markets and consumer welfare

a. NOT used to ensure “fairness”2. Way in which IP law favors consumer

a. Rewards innovators with exclusive rights serving as incentive to bring goods and services to market

b. Strike a balance between these rights and public access i. Fair use under copyright law

ii. Disclosure requirement and limited term of patentsc. Include fail-safe procedures under which rivals or customer

can sue to declare IP right non-infringed or unenforceable 3. IP rights only provide right to EXCLUDE others – nothing else

iii. Specific Practices and the Freedom to License1. Unilateral refusals to license tech

a. Cannot by itself be a violation of antitrust, owner can choose to license or not

b. Owner does not have right to impose conditions on licensees that would effectively extend the patent beyond the duration of patent

c. IP system rests on long term innovation – while short term results would be realized by forced licensing the incentive in innovate would be lessened

d. US strict right of refusal tempered by EU which imposes limits

i. Refusal prevents emergence of new product for which consumer demand exists

ii. Refusal is not justified by any objective considerations and

iii. Refusal excludes competition in a secondary marketiv. Excessive Royalties in Standard Setting

1. Excessive royalties without more is losing strategy 2. When complaining of excessive royalties complaint is putting cart

before horsea. Must first id some anticompetitive conduct beyond refusal

to license and attempt to charge3. Standards organizations now require reasonable and non-

discriminatory licensing (RAND)a. Difficulty is that parties later disagree about pricing b. Unique difficulties both ex-ante and ex-post

v. Compulsory licensing 1. Should be rare since enforcement agency should not impose duty

that it cannot reasonably supervise

vi. Excessive Patenting and Patent Enforceability vii. IP rights and market power

1. IP cannot be presumed to establish market power2. Rights granted though patents are not exclusive in the economic

sensea. Single patent may have dozens of close substitutes

3. Approach is to avoid rigid tests and rely on review of likely economic effects to marketplace as a whole

g. Case lawi. Microsoft

1. Monopolization of OS and browser markets2. Windows 90% of market share3. Conduct

a. Prohibited users from removing icons or using alternative browsers

b. Integration of browser making uncoupling difficult4. Tying – rule of reason analysis5. Market power in tying arrangement is typically a per se violation6. Unitary consumer demand argued by Microsoft was of Microsoft’s

own doingii. Dell

1. Standard setting USB port2. VESA standard setting organization for VL-bus card3. Dell failed to disclose but was ready to enforce patent rights

iii. Microsoft – in EU court1. EU approach – illegal tying2. Refusal to supply requested code to Sun viewed as violation 3. Denial prohibits creation of new product4. Refusal has anticompetitive effect on secondary market5. Refusal has no valid business justification

11. IP in Bankruptcy a. Bankruptcy

i. Chapter 7 = liquidationii. Chapter 11 = reorganization (this presents many more problems)

b. Executory Contracti. Licensor and licensee have ongoing obligations under the license

c. Section 362 of Bankruptcy Codei. By filing bankruptcy petition a stay of various judicial, administrative, and

other proceedings is put in place. Allows the debtor to pause ongoing or postpone prospective litigation.

d. Section 365 of Bankruptcy Codei. Executory contracts (leases and licenses) are left up to trustee to decide

how to handle the obligations. Three options available:1. Reject the contract 2. Assume the contract3. Assume and assign the contract

ii. Particular problem when debtor is licensor and licensee may be put in position of not being able to use IP.

iii. Under Section 365(n)(1) & 365(n)(2) the licensee may continue to use the IP while debtor is in bankruptcy. However, does not extent to trademarks and does not apply to the situation where licensee is debtor and elects to reject the license.

1. 365(n)(1)a. If the trustee rejects an executory contract under which the

debtor is a licensor of a right to intellectual property, the licensee under such contract may elect—

b. To treat such contract as terminated . . . ; orc. To retain its rights. . . for—

i. The duration of such contract; andii. Any period for which such contract may be

extended by the licensee2. 365(n)(2)

a. If the licensee elects to retain its rights, as described in paragraph (1)(B) of this subsection, under such contract—

i. The trustee shall allow the licensee to exercise such rights;

ii. The licensee shall make all royalty payments due under such contract for the duration of such contract and for any period described in paragraph (1)(B) of this subsection for which the licensee extends such contract

e. Two sides of the relationshipi. Debtor licensor

1. 365(n)2. Trustee rejection3. Licensee may terminate or retain rights

ii. Debtor licensee 1. 365(a)2. Licensee rejection3. Licensor may sue for breach of contract

f. IP Allocation Strategies in a JV – Laurie i. Definition of JV

1. Association of independent business entities that join for a common commercial purpose of defined scope and duration

2. Typically each partner brings something to the table – tech, capital, management expertise

ii. IP Allocation 1. Ownership v licensing of IP

a. Whether IP arose independently of the JV (background IP) or in operation of JV (foreground IP)

2. Default is joint ownership of IP developed under the JV

a. Right to exploit – absent agreement to contrary default rule is that each joint owner can exploit the patent without permission of the other and without duty to share royalties

i. Includes right to license to 3rd partiesb. Right to enforce – under patent law each joint owner must

join in suit to enforcec. International considerations – different default standards in

different countries 3. Enforceability of contract provisions

a. Against 3rd parties – usually negotiated in the contract agreement creating the JV

b. Against Joint Owners – JV agreements generally held against their creators

4. Preferred IP allocation strategies a. IP ownership: background, non-derivative Foreground and

Derivative Foreground i. Must classify IP base on nature of IP

b. Optimizing rights to use of non-IP Owning JVi. Licenses: exclusivity, field of use royalties

ii. Non-competition covenantsg. Bankruptcy Estate and the Automatic Stay – Case law

i. Not a snapshot of the estate on the day entered into bankruptcy ii. Automatic arrangements still in existence

iii. Casey1. Date of C.11 filing 2. IP not included in bankruptcy estate3. Post-filing assets acquired are include if:

a. Proceeds, products, rents, and profits from property of the estate

b. Inheritances or property settlements acquired 180 days after filing

4. Court held patent on device invented by debtor after filing of his original Chapter 11 petition, as well as any income derived from patent, were assets of debtor individually and excluded from property either of original Chapter 11 estate or from Chapter 7 estate created on subsequent conversion of case.

iv. Penick1. Trustee sought to include in bankruptcy estate patent filed three

years after C.11 filing 2. Obligation to assign existed at time of filing 3. Patent included in estate4. Holding: Patented process developed post-petition by employees

of corporate debtor-in-possession, each of whom had signed confidentiality and assignment agreements in favor of debtor, was “property of the estate,” where process was developed and tested by debtor's employees using equipment and funds included in

Chapter 11 estate, and patent application was prosecuted on behalf of estate using estate funds.

v. Simplified1. Debtor company seeks to include software copyright in bankruptcy 2. Under work for hire doctrine debtor was the copyright issue

vi. C-Tek1. C Tek debtor copyright owner2. NYSBVP security interest3. IIS created derivative work4. Software included in bankruptcy estate

vii. Checkers1. Checkers sand CVG in trademark cancellation2. CVG files for bankruptcy3. Checkers fails to file Section 8 affidavit 4. Automatic stay did not toll Checkers filing deadline5. Cannot shirk responsibilities that arise after enter bankruptcy

viii. In Re: The Singer Co.1. Singer BV and Singer Brazil 2. Dyno exclusive license to market Singer Brazil’s needles in the US3. Groz sues Dyno4. Suit violated automatic stay5. 362(a) Bankruptcy Code – requires invocation of automatic stay,

stopping virtually all collection efforts. a. Gives the debtor a breathing spell as attempts to reorganize

assets and satisfy all creditors. Stay will be lifted if:i. Creditors interest in the property of the estate is not

adequately protected by the bankruptcy proceedingii. When debtor has no equity in property that is not

necessary for successful reorganizationh. Treatment of licenses in bankruptcy and termination outside of bankruptcy

(365(n) issues)i. Cellnet

1. Schlumberger buys Cellnet IP2. BCN JV of Cellnet and Bechtel3. Cellnet files for bankruptcy and rejects BCN licenses4. BCN retains rights under 365(n)5. Royalties flow to Cellnet not Schlumberger

ii. Lubrizol1. Pre-365(n) – decision prompts creation2. Lubrizol nonexclusive licensee3. Richmond licensor files for bankruptcy and rejects Lubrizol license4. Held in favor of Richmond

iii. Pasteur1. Pasteur cross licenses patents with Cambridge2. Cambridge files for C. 11 bankruptcy and assumes licenses3. Cambridge sells to bioMerieux, Pasteur competitor

4. Assumption and reorganization upheld5. Pasteur license failed to include termination provision for change

of control6. Need to plan ahead for change of control

iv. Catapult 1. Perlman licenses patents to Catapult2. Catapult merges with MPCAT, wholly owned subsidiary of Mpath3. Catapult files for bankruptcy and assumes licenses4. Assumption upheld

v. Hapgood1. Hapgood succeeded by Hapgood Plow2. Hapgood sought transfer of Hewitt’s patent right to new company3. Hewitt’s refusal upheld4. No automatic assignment through employment agreement

vi. Pav-Savr1. Pav-Savr and Vasso partnership2. Pay-Savr dissolves3. Vasso awarded liquidated damages but Pav-Savr denied IP because

Vasso was continuing businessvii. SW

1. SW and Nutrition JV2. SW dissolves3. No trade secrecy