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JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL

Volume XLV No. 2 June 2010

Advancing the Business of Intellectual Property Globally

How Sun Tzu Would Outflank Patent Trolls David Wanetick — Page 75

Establishing An Effective International Withholding Tax

Program For Patent Licensing Victoria Tai — Page 82

Heightened Due Diligence By Licensees?

Kei Konishi — Page 85

Patent Dispute Resolution System In India Balwant Rawat — Page 87

Software Valuation Of Open Source Software (OSS)—It’s Not All Free Beer!

Dwight Olson — Page 92

The Research-Oriented Approach To University IP: A Reinvention Of University IP Management Away

From A Focus On Licensing To A Focus On Research Michael A. Cohen — Page 97

Compulsory Licensing For Pharmaceutical Patents In Ecuador: A Primer

Sasha Mandakovic Falconi — Page 103

Evaluating The Value Of A Patent Mark Horsburgh, Alan Lewis, Ned Barlas and Richard DuNham — Page 105

Recent U.S. Decisions And Developments Affecting Licensing

Brian Brunsvold and John C. Paul — Page 108

International

Licensing and

Technology Transfer:

Practice and the Law

Edited by: Adam Liberman,

Peter Chrocziel, Russell Levine

Includes CD-ROM! International Licensing and Technology Transfer: Practice and the Law

Contains all model

provides an authoritative, single-source commentary on licensing in an

agreements international context. The publication is written by practitioners for

practitioners, and provides many useful insights into both the law and

and sample clauses!

practice involved in international licensing.

Only International Licensing and Technology Transfer: Practice and the Law delivers: ■ A Master Agreement to be used as a patent license template by parties entering into a licensor/licensee relationship ■ Clause-by-clause commentary, both generic and on a country-by-country basis ■ Insights into how clauses will likely be interpreted under the systems of the world’s key jurisdictions ■ An overview of the legislation, rules and policies regarding and affecting licensing on a country-by-country basis ■ Step-by-step explanations of the stages involved in preparing to enter into and negotiating a license agreement,

including an in-depth discussion of both licensor and licensee due diligence ■ Methods for determining or reliably estimating the value of the intellectual property being licensed ■ Coverage of the tax considerations associated with the structuring of an international license ■ Insights into antitrust issues that licensing professionals need to take into account when drafting and

negotiating an international license agreement

Review "This book will serve as an excellent resource for licensing practitioners. Although it is international in scope, it will still be useful for practitioners who only license domestically. By the highlighting of the differences so succinctly, the reader can better understand the fundamental principles underlying practice in the reader's own jurisdiction." "The editors have achieved the unusual- a book that flows relatively seamlessly from one contributor to another. Some clauses are shown to be licensee friendly and some are steps towards a licensor's position and some are designed for the licensor's position. This is very helpful. When the clauses are not so identified, often the commentary will provide insight into the differing positions. Here the strong editorial control has resulted in a highly integrated practical book which will be used continually by practitioners who strive for best practices.This book fills a serious gap in our literature. It will be a highly value resource for the experienced practitioner, for whom there is far to little material available. The strong editorial control has produced a very practical book and makes available complex material in a readily available manner." By John T. Ramsay in Les Nouvelles, September 2008 JURISDICTIONS COVERED: Mainwork 2008: Australia, Germany and USA Supplement 1 2009: Canada, China, Denmark, Norway Supplement 2 2009: Italy, France, Spain and UK Jurisdiction coverage of Brazil, Peru, Mexico, Chile, India & Japan - and more - coming in future updates!

Purchaser Information: International Licensing and Technology Transfer: Practice and the Law March 2008, looseleaf, ISBN: 9789041125019

Price: EUR 330.00 / USD 445.00 / GBP 264.00

HOW TO ORDER: Online: www.kluwerlaw.com. Or contact our Sales Departments at: sales@kluwerlaw.com

Available now at www.kluwerlaw.com

Patent Trolls

How Sun Tzu Would Outflank Patent Trolls By David Wanetick

Much has been written about strategies em-ployed by patent trolls. Many have opined about the tax they represent to operating

companies. Others have lauded trolls for providing markets where inventors can sell their patents for reasonable returns. This article will focus on strate-gies—many from Sun Tzu, the ancient Chinese military strategist—that operating companies can utilize to outflank patent trolls. Threat Assessment. PatentFreedom reports that as of December 1, 2009, there were over 315 distinct patent trolls lurking around the world. Since 1985, these trolls have been involved in litigation with nearly 4,500 different operating companies in over 3,100 distinct actions. Much of this litigation is taking place before ju-

ries—who are generally sympathetic to patentees— rather than before judges. According to research conducted by PricewaterhouseCoopers, where juries decided 22 percent of the patent cases with damages awards in the 1990s, the 2000s have seen juries decide 43 percent of the patent cases with damages awards. The success rates for plaintiffs in jury trials have consistently and significantly outperformed plaintiff success rates in bench trials every year from 1997 until at least 2007.

Furthermore, the median jury award has been shown to be significantly greater than the median bench award. In the 1990s, the median damage award by juries was $2.6 million as compared to $8.6 million in the 2000s. Finally, as jury awards have risen, the composition of damages has also changed. Over the last decade, reasonable royalties have overtaken lost profits as the basis of damages awards in patent cases. Two-Pronged Master Strategy. In assessing the factors underlying the success of the surge in Iraq, Generals David Petraeus and Raymond Odierno point to kinetic operations (in which the enemy was engaged) and non-kinetic missions (which were undertaken with the aim of shifting the fealty of the local populace from the insurgents to coalition forces). So too in tackling patent trolls, operating companies must be prepared to engage kinetically and non-kinetically. Kinetic operations include preemptive strikes,

deflecting attacks, conducting counter-intelligence, probing missions and selecting the battlefield. Non-kinetic activities include employing the media,

industry associations, legislators and the judiciary to promulgate legislation and issue rulings aimed at defanging patent trolls. Launch a Preemptive Strike. Sun Tsu wrote, “The supreme art of war is to subdue the enemy without fighting.” Individual companies or patent purchasing groups such as Allied Security Trust (AST) acquire patents so that they will not fall into the hands of a patent troll. Highest on the patent purchasing groups’ tar-get list are patents that have the potential to be widely asserted against members of the patent purchasing group. The Achilles Heel of such preemptive purchasing strate-gies is that it is prohibitively expensive for operating companies to acquire all of the patents that could be asserted against them. Also, the fees for induc-tion into AST are outside the range of affordability for many companies: Allied Security Trust charges a membership fee of $250,000 and requires mem-bers to deposit $5 million in escrow to fund patent purchases. Deflect the Attack. This tactic entails shifting the threat of patent assertion upstream. This permutation of preemptive action calls for the operating companies to secure an indemnification provision in the licensing agreement from the technology vendor. Alternatively, licensing agreements can be drafted to stipulate that the vendor will take the lead in litigating on behalf of its customers.

Another variation of deflecting the attack is to convince the patent troll that your firm does not represent a high value target. This may be because little revenue is being generated from products in question, their claims do not read on the technology you practice, or your ease of designing around conten-tious technologies. Alleged infringers can also argue that under the principle of apportionment in damages assessments, the asserter would only receive royalties based on a fraction of the revenues generated by the product in question. Moreover, Matthew Fawcett, SVP and General Counsel of JDS Uniphase, believes that such arguments are more likely to persuade trolls to cease an assertion than arguing that the troll’s

June 2010 75

■ David Wanetick, IncreMental Advantage, Managing Director, Princeton, NJ, USA

E-mail: dwanetick@ incrementaladvantage.com

Patent Trolls patents are invalid or not infringed. Rapid Force Mobilization. Companies should establish practices and procedures for quickly re-sponding to threats from patent trolls. For instance, demand letters addressed to division leaders or licens-ing professionals should be immediately forwarded to the firm’s chief patent counsel. While there is an argument for ignoring demand letters (see below), companies should not stumble upon this stance as a matter of negligence. There is a debate as to whether the leaders of the

business unit accused of infringement or the corpo-rate counsel should lead the organization’s response. Knowing that litigation costs and settlement payments will be charged to their units, business division lead-ers may refuse to settle. However, once litigation gets underway, they and their colleagues often despise the time and annoyance associated with depositions and discovery. The related aggravation often causes division leaders to moderate their intransigence and become more dilatory in handling the related legal intricacies. Therefore, there is merit in establishing a policy whereby infringement issues are managed by a centralized corporate legal team. While corporate counselors should realize that

business people and research professionals were not hired (and are not compensated) for their ability to participate in legal processes, the corporate lawyers can better establish a consistent firm-wide policy of contending with patent trolls. Such policy should be designed to minimize the incidence of stranded litigation expenditures. Minimize Collateral Damage. Forward thinking organizations should take measures that would—at a minimum—reduce the risk of sustaining treble dam-age. Being able to demonstrate that a rigorous survey of the landscape—conducted before encountering charges of infringement—revealed no risk of patent infringement should reduce the risk of incurring treble damages. It is thus advisable for companies to conduct reasonable searches when patents are to be incorporated into commercial ready products. Opinion letters from outside lawyers are another

shield that can protect a firm from treble damages. Despite the protective layer that opinion letters provide, there are two caveats. First, while failing to obtain an opinion letter could expose a company to shareholder lawsuits if its infringement was proved, the Seagate case holds that there should be no ad-verse inferences if a company elected not to obtain an opinion letter. Second, if companies choose to brandish opinion letters while defending their con-tention of no infringing behavior, they must waive

attorney client privilege with respect to that issue. Thus, practices of shopping around for favorable opinion letters would be revealed. Counterintelligence Activities. Sun Tzu teaches us that, “If you know the enemy and know yourself you need not fear the results of a hundred battles.” In the early days of trolling, information was asym-metric: the trolls had far more intel on the operating companies they targeted than the operating compa-nies gathered on the trolls. Today, information can be much more symmetrical. When served with a demand letter, operating companies should conduct a threat assessment by learning as much as possible about their opponents. The first step is to review the demand letter to

determine the degree of the trolls’ professionalism and investment in their assertion. Demand letters that reference which of the operating company’s products are believed to be violating which of the troll’s claims accompanied by a DVD demonstrating such contentions are more convincing than demand letters that contain a variety of alleged infringers sprinkled throughout as a result of sloppy cutting and pasting. A similar analysis should be conducted with regard to the level of granularity associated with trolls’ complaints. By relying on sources such as PatentFreedom

and IP Law 360 targeted companies can piece together answers to questions such as those below to deter-mine the lethality of the threats. • Is the target company the sole target of a specific troll, or one of a thousand?

• What are the sources of—and the extent of—funding the trolls receive?

• Which patents are owned or controlled by the trolls?

• How often have the trolls asserted their patents and against whom?

• What percentage of the trolls’ complaints proceeded to trial? What is their settlement history? How long, on average, do trolls pursue infringers before reaching settlement?

• Is the troll a rational or irrational actor? • Which law firms are retained? Joseph O’Shea, Director of Open Innovation at

Danaher Corporation, points out that latent seman-tic filtering searches are much more effective in detecting prior art than traditional bullion (keyword) searches. The former technology was developed in the aftermath of the terror of September 11, 2001 to detect coded threats that exist in electronic com-

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Patent Trolls munications. Latent semantic filtering is designed to read on the some 300 methods that the brain uses to make associations. The importance of latent semantic filtering for purposes of digging up prior art is that a patentee may use one word (kettle) in some cases and (teapot) in other cases to mean the same thing. Or a given word could be defined to mean one thing in that patent while it has a different meaning in every other context. Coalition Defense. Companies accused of patent infringement do not have to defend themselves in-dividually. Rather they can participate in a collective defense via coalitions. Benefits of coalitions include work can be consolidated, prior art shared and costs reduced. Some joint defense groups use one law firm for an entire litigation effort which results in tremendous costs savings compared to each of 30 or 40 defendants using their own litigation firms. Ron Laurie, CEO of Inflection Point Strategy,

points out that joint defense agreements work best when they are trying to invalidate a patent as opposed to proving non-infringement. The reason is that non-infringement addresses a wide array of products which the members of the joint defense often do not feel comfortable discussing in the presence of their competitors as a host of trade secret and anti-trust issues are at risk of arising. A crucial determinant of joint defense groups’

success is their cohesiveness. Among the common denominators shared by the more enduring joint defense groups are: • Members are from the same industry. • The members have large stakes in the relevant businesses.

• The participants share similar exposures. • The business profiles of the members are relatively homogenous.

• The industry is relatively concentrated. • They are managed by steering committees. • Timothy R. Croll, Division IP Counsel at LSI Corporation, indicated that another important factor is the involvement of CEOs who are adamant about defeating the trolls. Furthermore, CEOs who are also founders of the member companies take personal umbrage at the accusations lobbed by patent trolls and thus become highly dedicated to defeating the patent trolls.

In addition to the difficulty associated with herding any group of companies into one amalgamated force, the risks associated with joint defense groups are that

all of the players must agree on one invalidity argu-ment. This itself can cause friction within the group and represents significant risk of misidentifying the most promising invalidity claims. A further concern is that one of the members may elect to settle early. A new permutation of patent defense coalitions is a

company called RPX. RPX will buy (or license in) patents that are being asserted against its members and then sub-licenses the patents back to its mem-bers. Finally, while not formal joint defense groups, standards setting bodies raise the level of difficulty for trolls to exert patents against their standards since it becomes nearly impossible to have claims that read on such expansive standards. Foment Internal Unrest. As all insurrectionists know, there are advantages in fomenting tension among members of the target entity. One means of accomplishing this is to marginalize a troll’s in-house lawyers by attacking their attorney-client privilege. Shredding an in-house lawyer’s attorney-client privi-lege would emasculate these lawyers and call into question their value to the organization, not to men-tion the percentage of any settlements they would be rightfully entitled to.

As far as piercing in-house lawyers’ attorney-client privilege, one can make the argument that the advice that the lawyer is rendering is business advice, not legal advice. An aftershock of punching through the attorney-client privilege is that discovery may reveal that the troll was talking down the licensing potential in its discussions to acquire the patent so as to pay less. Such disclosures would be damaging in future litigation.

It is important to realize that there is an excessive amount of ego resident at multi-member trolling organizations. Each partner believes that he contrib-utes far more to the troll than the other partners. This seems to be one root cause of the internecine dissention currently plaguing iPotential. Thus, when communicating with trolls, operating companies should ask questions revolving around the roles and responsibilities of the players on the trolling organiza-tion. Comments such as, “So you do all of the heavy lifting and John just collects the royalty checks,” can begin to create fissures within the enemy. (Never un-derestimate the power of verbal slights: The Shin Bet, Israel’s internal security organization, is said to have spread jokes about Yasser Arafat to trivialize him.) Divide and Conquer. Napoleon once said, “God is on the side of the heaviest artillery.” Therefore, operating companies should try to reduce patent trolls’ access to outside legal counsel while ensuring that the operating companies can procure more legal

June 2010 77

Patent Trolls services in a cost-effective manner. Patent assertion has been a nearly cost-free, zero-

risk exercise for patent trolls. Outside lawyers who represent trolls on a contingency basis are accesso-ries to trolls’ aggressive behavior. Thus, one strategy would be to sever the ties between contingency fee law firms and patent trolls. This strategy is reminis-cent of General Colin Powell’s “First you cut it off. Then you kill it,” remarks about Iraqi forces at the outset of the first Persian Gulf War. An initiative aimed at cutting the trolls’ supply

lines to their lawyers is for operating companies to cease doing any business with law firms that represent trolls. Law firms are impacted by the recession and are sensitive to losing any sizable clients. The poten-tial conflicts that could arise with a lawyer asserting patents that he owns has resulted in the dismissal of such lawyers from their firms. I believe the domino theory applies to law firm

eco-nomics: A law firm loses a few clients which results in a few key partners leaving the firm. Then a few more partners leave a firm. Some law firms have covenants with their banks requiring law firms to retain a cer-tain percentage of their partners as a condition for maintaining their credit lines. Should law firms lose too many partners, their credit lines could be frozen and the entire firm could implode. (Should banks and professional liability insurers restrict credit and raise premiums on law firms that expect to receive a high percentage of their revenues from contingency fees, access to contingency lawyers by patent trolls could be further limited.) While the above measures could make it more

costly for patent trolls to retain law firms, operating companies should benefit from lower legal defense expenditures. As law firms are pinched, they are more willing to serve clients on a fixed fee basis or through another alternative fee structure. They are also more inclined to offer volume discounts in return for becoming a preferred provider. Operating companies can launch psychological

warfare—perhaps by proxy—by planting seeds of distrust in the minds of trolls about their relation-ships with contingency law firms by broaching the following scenarios:

• Not all law firms are financially strong enough to fund years of patent litigation on a contingency basis. Trolls’ litigation efforts could be jeopardized if their law firm implodes a few years into the trial.

• Patent holders should evaluate the law firm’s partner compensation structure. Contingency fee lawyers may not produce billable hours for

extended periods of time. However, these lawyers will need to earn some income during this time and their partners must be willing to pay them salaries. On the other hand, when the contingency fee lawyers win a large case and bring tens of millions of dollars to the firm, there should be an understanding as to how such enormous fees should be shared among the partners. If these understandings are not pre-ordained, the law firm could blow apart during the patent litigation.

• The scope of the representation. For example, it must be determined at the outset how settlements achieved by litigating counterclaims will be allocated.

• There could be discrepancies relative to how the legal fees will be calculated. Should they be calculated based on the gross or net verdicts? How are legal fees to be determined if business opportunities—such as an acquisition—arise out of the litigation? As per litigation between Patriot Scientific and its law firms, disputes between trolls and their lawyers arise when the case is thrown out of court or a law firm has been disqualified from representing a client in a specific jurisdiction.

The Silent Treatment. Sun Tzu counsels us, “Be extremely subtle, even to the point of formless-ness. Be extremely mysterious, even to the point of soundlessness. Thereby you can be the director of the opponent’s fate.” Indeed, there are merits with ignoring demand letters from trolls. A troll that lacks experience or resources may implode before litigation can be initiated. Further, the silent treatment may be an effective strategy if you believe your firm is at the end of a long list of targets. If a company at the front of the list invalidates the patent or acquires it, they would remove the threat. However, Anthony K. Sebro, Jr. of PCT

Companies points out that stalling is risky because it increases the licensor’s investment in their assertion efforts. Costs expended in patent assertion demark a troll’s minimum acceptable level of recovery. Also, should the case proceed to trial, initial stonewalling on the part of a defendant could annoy a jury. Walled City Defense. As Karl von Clausewitz, a more recent disciple of Sun Tsu, teaches us, “If you entrench yourself behind strong fortifications, you compel the enemy seek a solution elsewhere.” The Walled City Defense occurs when a company—as a matter of firm-wide policy—refuses to settle with patent trolls. For very large companies this could be a sound policy as failure to mount a strident defense would result in such firms being targeted for stick licens-

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Patent Trolls ing agreements in an ever-growing number of cases. Probing Mission. An operating company accused of infringing a troll’s patent can embark on a probing mission by initiating litigation until Markman hear-ings occur. As these hearings usually occur about one year into the litigation, the majority of a defendant’s resources can be preserved. If the judge favors the operating company’s claims construction, the settle-ment value of the case is reduced. Trench Warfare. This all-out litigation strategy is extremely expensive and will typically last several years. It occurs when both parties are certain of their claims analysis, optimistic about eventual damages awards, and are convinced that they hold the moral high ground. Much of the proceedings revolve around invalidating the patent or proving non-infringement (discussed elsewhere in this article). Sun Tzu said, “What is of supreme importance in

war is to attack the enemy’s strategy.” Non-conven-tional weapons that can be unsheathed during trench warfare to derail the trolls’ strategy include: • Raising the issue of champerty to create a

wedge between the actual patent owner and mercenary trolls. Champerty holds that parties are prohibited from entering into a contract that requires them to litigate. (However, many states do not recognize champerty.)

• Request the court to sanction the troll under Federal Rule of Civil Procedure 11, which prohibits filing claims that are “frivolous.” John M. Caracappa and Grace Parke Fremlin, Partners with Steptoe & Johnson, wrote in a memo that in Eon-Net L.P. v. Flagstar Bancorp Inc., the court reasoned that more substantive evidence or argument is needed.

• Mr. Fawcett believes that in addition to Rule 11 sanctions, there is merit in considering affirmative tort-based claims (such as malicious prosecution or tortious interference) against patent trolls in some circumstances.

• One final measure that has been taken to combat the patent trolls occurred when IBM and Hallibur-ton filled separate business methods patents on the business of running patent trolls.

Scorched Earth Campaign. This form of trench warfare consists of trying to invalidate the patent which is the source of the assertion. Standard mecha-nisms for achieving this objective include: • Producing prior art, perhaps by unearthing defensive publications.

• Pointing to chinks in the chain of ownership (such discovering that a previous Board of

Directors did not approve the sale of a patent) and deficiencies in assignments.

• Proving that non-essential inventors were listed as inventors on the patent.

• Providing evidence that there were premature discussions of—and efforts to derive commer-cial benefits from—the invention.

• Demonstrating inequitable conduct such as intent to deceive, failure to disclose interests and inconsistent positions with co-pending applications.

• Illustrating how the best mode disclosures were insufficient.

• Petition for a re-examination hearing with the U.S. Patent Office. Organizations suppor-tive of filing such requests include the Electronic Frontier Foundation and the Public Patent Foundation. The major advantages of re-exams are that these procedures are much less expensive than litigation. According to Eric Kirsch, a Partner with Cooper & Dunham, “in only 25 percent of ex-parte re-exams are all claims confirmed valid; in 64 percent of ex-parte re-exams, one or more claims are amended; and, in 11 percent of ex-parte re-exams all claims are cancelled as invalid. The risk with re-exams is that the U.S. Patent Office only gives you one bullet to try to shoot down the patent. Moreover, if the elite patent examiners in the re-exam division can not find prior art, most judges will doubt that they will uncover additional prior art.

Agent Provocateur a.k.a. Black Ops. Defen-dants in patent litigation may be tempted to hire a private investigator to search for dirt that would discredit members of a trolling organization. (Indeed, Karl von Clausewitz said, “Principles and rules are only intended to provide a thinking man with a frame of reference.”) However, this is not a judicious course of action. First, any dirt that is discovered is often not admissible in court. Second, even if such dirt were admissible, the presentation of it could backfire. The troll would have a good chance of engendering sympa-thy with the jury as the narrative would become “not only does this large company refuse to pay the patent owner but they are digging for irrelevant information in his garbage.” (The adverse publicity is so potentially damaging that some of the largest companies in the U.S. require the approval of the firm’s chief counsel to authorize the retention of private investigators.) In i4i v. Microsoft, Judge Davis assessed Microsoft

with a $40 million penalty which was, in part, due June 2010 79

Patent Trolls to Microsoft’s counsel acting improperly. One of the offending comments arose when Microsoft’s outside defense counsel equated i4i’s infringement case with the national banking crisis implying that i4i was a banker seeking a “bailout.” Selecting the Battlefield. Sun Tzu emphasized never to fight on the enemy’s chosen ground. Ira Levy, Partner with Goodwin Procter, reports that the Federal Circuit is more receptive to petitions of forum non conveniens which are granted when the court believes there is a more appropriate forum to hear the case. Under this legal doctrine, at least three cases have been transferred out of the Eastern District Court of Texas over the past 6 months. (However, when trolls file against a large number of defendants, the Federal Circuit often takes the position that the Eastern District Court of Texas is as good a venue as any.) Mr. Levy explains that another method to exert

some control over the venue is to file a declaratory judgment (DJ) in a venue that is favorable to the potential licensee. These DJ actions can be filed as soon as an operating company believes it is being targeted by a patent troll. Even third party reports that a given troll may target a particular industry may be sufficient grounds to file a DJ action. In addition to enabling the operating company to have its case tried in a more favorable forum, DJ actions enable the operating company to select the timing of the court proceedings. Accordingly, DJ actions allow the petitioner to orchestrate the legal strategy.

Directing litigation between an operating company and a patent troll to the International Trade Commis-sion (ITC) is a double-edged sword. Trolls may not have standing before the ITC if they have no licensing agreements in place. Litigation before the ITC is often expensive and the agency only has the power to award an exclusion order on the importation of infringing goods into the U.S., not the monetary damages that non-practicing entities typically seek.

However, trolls can obtain injunctions quickly at the ITC. Companies that file complaints at the ITC see 85 percent of their cases go to trial and 15 percent settling. Complainants tend to have a higher success rate before the ITC than district courts. When cases were adjudicated, complainants at the ITC won cases 58 percent of the time, whereas plaintiffs in district court only won 35 percent of the time, according to research by Colleen V. Chien, an assistant professor at Santa Clara University Law School.

A respondent also has a more difficult time trying to stay an ITC case while a patent is being re-examined compared to a district court case. Trolls may be at-

tracted to the ITC because they can have resolution of a case long before the re-exam is concluded. Battle for Hearts and Minds. Trying to win the hearts and minds of key figures in legislatures and on benches is a form of non-kinetic activity. Operating companies should actively file amicus curiae briefs in court cases that could have a material impact on their businesses. Much is already being done in this regard: there were 24 amicus briefs—some filed by multiple parties—in connection with the Bilski case. Indeed, cases such as eBay v. Mercexchange and Medimmune v. Genentech have done quite a bit in terms of declawing patent trolls.

Operating companies concerned about their vulner-ability to patent trolls should participate in lobbying efforts in support of issues such as having the U.S. Patent and Trademark Office hire more examiners and adopt policies that prevent granting patents with overly broad claims. Some have suggested that the American Bar Association and the American Intel-lectual Property Lawyers Association should take an official stance against their members accepting trolls’ cases. Adopting the European practice of the losing party paying at least some of the winning party’s legal fees could retard the proliferation of trolls. Another approach is for intellectual property in-

surance, and certainly general liability policies, to expressly exclude coverage for the defense of troll-like litigation. The intent is to prevent trolls from pursu-ing deep insurance pockets and thereby deter the behavior. (This idea will be hard to jump start as the initial defendants would be highly exposed to claims of infringement.) Mr. Fawcett believes that the power imbalance

can be reset by making these thousands of private disputes more public. The largest victims of patent trolls could lead the way by publishing all of the de-mand letters they receive in public forums. This in turn may increase pressure for legislation anathema to the interests of patent trolls. Détente. Israeli President Shimon Peres rhetorically pondered, “If we make friends with our enemies, have we not thereby eliminated our foes?” As bewildering as it may seem, many in-house patent lawyers har-bor deep-seeded admiration for patent trolls. Some corporate lawyers respect the trolls’ pluck. Others realize that large operating companies assert patents that they do not practice. Many others understand that they owe their jobs in no small part to patent trolls. For these reasons, operating companies are increasingly willing to more amiably settle disputes with trolls.

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Patent Trolls Patent trolls are overwhelmingly interested in

capturing licensing revenues. Nevertheless, in some cases, operating companies can reduce their pay-ments to trolls by providing validation of the troll’s patents, for instance through the issuance of a press release. If you believe the troll has a target rich li-censee list, you can generate momentum for the troll by settling quickly. In this scenario, the operating company would in essence be a willing accelerant of the trolls’ future cash flow streams and should be rewarded for that by receiving a lower royalty rate. (The first companies to settle could request a most favored nation provision in their license agreement with the troll, but such MFN clauses are easy to draft around.) However, the patent validation for reduced royalty

rate gambit doesn’t always work out for either party.

The operating company might value not receiving publicity for its settlement so as to avoid marking itself as easy prey for further assertion. The troll may make the determination that the patent validation for reduced royalty rate gambit runs the risk of backfiring since a discounted royalty would be disclosed in litiga-tion and factored into future damages calculations. Another potential bargaining chip is rapid settle-

ment in return for a broad covenant not to sue and/ or grant-back rights for the operating company. Collaboration. Politics is not the only place where strange bedfellows are made. Several companies are coming to the realization that patent trolls can be used as revenue enhancement vehicles. Thus, some operating companies are selling patents—or licensing art—to trolls. Others are participating in recoveries that trolls generate from assertion. ■

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International Withholding Tax Program

Establishing An Effective International Withholding Tax Program For Patent Licensing

By Victoria Tai Abstract International withholding tax poses a unique chal-

lenge for innovators who desire broad global distri-bution of patented technologies. Different types of licensing arrangements, from cross licensing to direct licensing to patent pools, call for different approaches to international tax withholding requirements and these must be taken into consideration when deter-mining the most suitable way to license patents. This article explores the challenges and benefits presented by the various approaches, from reporting require-ments, timing, to compliance with local laws and other external business issues, and will serve as a resource to patent holders as they decide how best to undertake licensing activities.

Increased innovation and technology in various industries from electronics to automotive to medical and pharmaceuticals mean an abundance of new patents

and inventions are entering the inter- national stage each day. Many global companies and international entities that are building new products and services may desire access to this valuable intel-lectual property. While the legal implications of licens-ing patents internationally are apparent, a complex set of international tax ramifications accompany global patent licensing efforts as well. Depending upon the licensing structure selected, the tax situation for patent licensing can play a significant role in helping invention owners determine the most equitable way of distributing their patents to global innovators. To a large extent, the way in which patent owners decide how to address international tax requirements can have a great impact on the acceptance and success of a patent licensing effort. Types of Programs to Address International Licensing There are various ways companies can license

pat-ents. The three most common licensing structures include: • Bi-lateral, or direct licensing; • Sublicensing through an administrative service provider or licensee with sublicensing rights; or

• Licensing through an administrative service provider acting as an agent.

The tax implications to the patent owner are different under each scenario. Bi-lateral, or Direct Licensing, Agreement The most common way that companies license

patents is directly to another company. In these cir-cumstances the withholding tax is calculated using the tax treaty rate between the country of the licensor and the country of the licensee (the party obtaining the license). For example, if a company from Japan licenses its patents to a company in Korea, when the Korean company pays the Japanese patent owner for the use of these patents, the Korean licensee would withhold 10 percent tax based on the tax treaty on royalties between Japan and Korea. The Korean licensee would remit the net payment to the licen-sor, and the tax amount to the Korean tax office on behalf of the licensor. A patent owner can license their patents to another

party under nearly any mutually agreeable set of terms as defined in an applicable license agreement. In these situations, the license agreement may stipulate, for example, that the licensor is granting the patent rights in exchange for a promise not to pursue legal action, for monetary payment or for a license to the other party’s patents in the same technology or another technology. Ultimately in direct licensing arrangements, there

are many ways in which companies can agree about how to establish the value of a patent or portfolio of patents, and conclude a license. Another type of ar-rangement is a form similar to a barter transaction, where one party will agree to license certain patents royalty- free in exchange for the right to practice certain patents of the other party. An important con-sideration to note is that in most countries a barter transaction is taxable. Therefore, even if no money changes hands, the companies would still have to report the value of goods and report and pay taxes. Taxes may include income tax, sales tax, and/or value added tax (VAT). Regardless of the type of direct licensing arrange-

ment selected, an issue with bi-lateral arrangements in general is determining the fair market value of the transaction, if this is not clearly defined in the agreement. When a bi-lateral agreement is between

82 les Nouvelles

International Withholding Tax Program parties in different countries, international taxes may apply. When the transaction is between parties in the same country, VAT tax may apply, even if no money is exchanged. Additionally, because some products or processes

may require dozens of patents to be licensed and these patents may be owned by more than one company, the process of direct licensing can be time and resource intensive from a legal, reporting, and especially tax collection/payment perspective when multiple licensors in multiple countries are involved, imposing a myriad of international tax and reporting requirements. In these cases, companies may explore licensing through a license administrator who will manage many aspects of a licensing program, includ-ing the tax withholding and reporting requirements, for a service fee. Licensing Through an Administrator or Patent Pool

Companies often find it is more cost effective or more efficient to hire an independent third party administrator to act as an agent and handle the out-bound licensing of their patents. The administrator will normally handle the drafting of agreements, nego-tiating licenses with licensees within the boundaries established by the patent owner(s), collecting royalty reports from licensees, receiving license fee payments and remitting the payments to the patent owner(s). A license administrator could license a single company’s patents, or if there is a related patent pool, a patent holder may be able to join the pool as a licensor and take advantage of the services of a license administra-tor in a joint patent licensing program. License administrator service providers are set-

up in one of two ways. Companies may engage a third-party license administrator to act as an agent on their behalf in order to license their patents. Alternatively they could license their patents to an administrator and give the administrator the right to sublicense to others.

When an administrator acts as a service provider licensing on behalf of the patent owners, the royalties collected will go to the patent owners as the recipient, regardless of whether the actual payment is made to the administrator or to the patent owner directly. Taxes are calculated using the international treaty rate on royalties between each licensee’s country and each licensor’s country. For example, the admin-istrator may be in the United States, the licensor in Japan, and the licensee in Korea; when the Korean licensee pays the administrator for royalties owed, the payment will be the net of taxes calculated based

on the treaty rate between Japan and Korea, not the rate between Korea and the United States, where the administrator is located. The patent owner can claim taxes paid overseas against its income.

In the case of a license administrator with subli-censing rights, the patent owner has licensed their patent(s) to the administrator who licenses them out to the market. The administrator would pay a license fee to the patent owner(s), and in turn, the licensees pay license fees to the administrator. Taxes could be imposed on both transactions, when the licensees pay the administrator and when the administrator pays the patent owner(s). Following the example above, when the Korean licensee pays the admin-istrator in the United States, they withhold 15 percent tax (the Korea-U.S. treaty rate), and when the administrator pays the patent owner in Japan, the current U.S.-Japan treaty rate of 0 percent would be imposed. In some cases, patent owners could, effectively, be taxed twice, once when the licensee pays the ad-ministrator, and once, depending on the treaty rates between the countries involved, when the adminis-trator pays the patent owner. In this case, the patent owner(s) cannot claim taxes paid overseas against their income (the tax withheld when payment is made to the administrator), however, the administrator can make that claim. The patent owner(s) can claim taxes withheld by the administrator against their income.

Licensors must work with the administrator to make sure all applicable local taxes, such as JCT (Japa-nese Consumption Tax) or VAT (Value Added Tax), are considered and, if applicable, that the process for the collection and disbursement of these taxes is estab-lished. JCT/VAT usually applies to companies from the same country doing business with each other, and it could apply to goods purchased or to services. For example, JCT applies to Japanese licensees and licensors. Licensees make payments to the licensors and licensors file the returns and remit payment to the tax office. However, in some cases, non-Japanese companies with a permanent establishment in Japan may also be subject to JCT. Therefore, it is very impor-tant for licensor companies to review and work with the patent administrators and perform tax planning before licensing activities begin. Tax Forms, Timing, Reporting, and Claiming of Foreign Tax Paid by Licensors When companies license their patents through

June 2010 83

■ Victoria Tai,

Via Licensing Corporation, Controller, San Francisco, CA, USA

E-mail: victoria.t@ vialicensing.com

International Withholding Tax Program a third- party administrator, there are several tax-related considerations to plan for. First, the timing difference between when the licensees report to the administrator and when the administrator pays out to the patent owner(s), as well as timing of making claims for foreign taxes paid. Depending on the terms of the agreement between the patent owner(s) and the administrator, it may be six months or more between the time licensees report to the administrator and when the patent owner(s) receive payment from the administrator.

Second, a patent pool may present special con-siderations with regard to the level of detail about licensee payments that can be shared with licensors. Antitrust guidelines argue for isolating the pool licen-sors from the detailed data reported by licensees. Unfortunately, this separation is often in conflict with a licensor’s need to fulfill their obligations to tax authorities. Once again, individual licensor companies will need to work with the license administrator in order to address their particular circumstances.

Lastly, the administrator will have to manage the gathering, tracking and disbursing of withholding tax certificates from the licensees to the licensors. This is complicated by varying requirements in different countries with regard to filing dates. For example, in Japan licensees can obtain the withholding tax certifi-cates on a quarterly basis, as they remit payments to licensors and the tax authorities. U.S.-based licensees only file taxes and receive certificates between Janu-ary 1 and March 15 of each year. Other Business Issues Related to Administering Patent Licensing Programs There are other issues related to administering

in-ternational patent licensing programs such as multiple currencies and governing language issues. With regards to currency, the patent owner(s) and

the license administrator will need to decide the cur-rency for the patent licensing program and manage the foreign exchange (Fx) gain or loss accordingly. If the administrator’s financial statement is in a differ-ent currency than the currency which some or all of the licensees report and pay, managing Fx gain/loss, and determining who (licensor(s) or administrator) will absorb the gains/losses, becomes an important issue, as does currency hedging. The license administrator must make sure the

language of the license agreement is clear enough as to the administrator’s role as well as the flow of royalty revenue. Ambiguity will create confusion for the licensee’s local tax office which will in turn impact the tax withholding on royalty payments. International Tax Benefits of Administering Patents Through a Patent Pool

In general, licensing through a license administrator is more beneficial to a patent owner when dealing with certain direct licensing arrangements or in the context of a patent pool. This is because an admin-istrator will allow licensors to leverage infrastruc-ture already set-up by the administrator, such as IT systems, accounting processes, contracts and legal expertise. Administrative work that would otherwise be handled by the patent owner’s corporate office will be outsourced to the administrator, providing overall cost savings and increased efficiency. In today’s business environment, as many com-

panies continue to innovate under new market conditions or embark on new avenues to monetize intellectual property, establishing licensing programs through a license administrator can provide many benefits. It is easy to understand the benefits in terms of resource expenditure and time, but also significant is help to navigate the maze of interna-tional tax regulations which govern the licensing of intellectual property. ■

84 les Nouvelles

Due Diligence

Heightened Due Diligence By Licensees?

A Misconception About A Licensed Patent May Not Nullify The License Agreement By Kei Konishi

Many companies are well aware of the value of patent licensing. The exclusivity of patents requires companies that want

to produce or sell their products which are covered by another’s patent to obtain patent licenses from the patentees. It is, however, not surprising for a li-censed patent to later be found to be irrelevant to the licensee’s product, which raises a dispute between the licensee and the licensor. What if a licensed pat-ent is invalidated or a licensee’s product is found to be outside the scope of the licensed patent in later years? May a licensee seek monetary relief when a licensed patent is later found useless for operating its business? The Intellectual Property High Court (IP High Court) recently rendered a landmark decision addressing these issues in favor of not licensees but licensors in the “Pebble Bed Bath” Case, 2008 (Ne) No. 10070 (decided on January 28, 2009). Key Facts in the “Pebble Bed Bath” Case

At issue in this case was a patent directed to a certain construction of a “pebble bed bath” which has a flat surface made up of pebbles that are heated by hot water from underneath. By lying down or sitting on the top pebble layer of the bath, a user could enjoy relaxation and therapeutic effects. The patentee/licensor, a small business operating a public bath, granted a statutory exclusive license (the Pat-ent Act, Art. 77) within certain areas of Japan to a small start-up business (“Licensee 1”). Licensee 1 paid royalties of 30 million JPY to the licensor. Prior to their license agreement, the licensor and a non-exclusive licensee, a small business that had already started a pebble bed bath business together with the licensor (“Licensee 2”), explained to Licensee 1 that his product was the embodiment of the patent, and therefore, within the scope of the patent. They thus persuaded Licensee 1 to obtain a license for the pur-pose of producing and selling the pebble bed bath that was identical to Licensee 2’s product. Believing that the patent license was crucial to his new business, Licensee 1 entered into a patent license agreement with the licensor and then, as a franchisee, launched in the market his pebble bed bath product, which was identical to Licensee 2’s product. In fact, however,

Licensee 1’s product, as well as Licensee 2’s product, was outside the scope of the licensed patent. It is noted that the patent license agreement contained a “non-restitution” clause that forbade Licensee 1 to assert restitution of a royalty payment “under any circum-stances.” Since then, due to another dispute, the licensor terminated the non-exclusive pat-ent license agreement with Licensee 2 and then filed a patent infringement lawsuit against Licensee 1. In response, the defendant (Licensee 1) filed a petition for invalidation of the licensed patent before the Japan Patent Office, and the licensed patent was conclusively determined to be invalid. Upon the licensed patent being invalidated, Licensee 1 sued the licensor claiming restitution of the already paid license royalties. A Licensee’s Misconception and Nullity of a License Agreement

Under the Japanese Patent Act, Art. 125, where a conclusive decision of patent invalidity is made bind-ing, the invalidated patent is retroactively deemed never to have existed. A license agreement based on an invalidated patent between parties, however, does not automatically become null or cancellable as a matter of course according to precedents in Japan. A licensee can assert nullity of a license agreement and thus assert restitution of the already paid license royalties because the paid royalties turn into unjust enrichment, provided that the licensee’s misconcep-tion that brought him into the license agreement falls into a statutory “mistake in any element of the juristic act” (the Civil Code, Art. 95) that renders the license agreement null retroactively. According to the Civil Code, Art. 95, however, a licensee with a misconception may not assert nullity of the license agreement if he/she acted with gross negligence. A key issue involved in the “Pebble Bed Bath” case was whether or not Licensee 1’s misconceptions (i.e., that the patent was valid and Licensee 1’s product was

June 2010 85

■ Kei Konishi, Nichi-ei International Patent Firm, Partner, Patent Attorney, Tokyo, Japan

E-mail: konishi@p-nic.com

Due Diligence within the scope of the patent) fell into a statutory “mistake” under the Civil Code, Art. 95, which would lead to nullity of the patent license agreement and allow restitution of the already paid license royalties. The Tokyo District Court Decision Affirming Restitution

In interpreting the “non-restitution” clause in the patent license agreement at issue, the Tokyo District Court held that the clause was to be construed as an agreement that the licensor had no duty to make restitution of the already paid license royalties in case the patent was conclusively invalidated at a later date. Accordingly, the District Court declined Licensee 1’s assertion for restitution of the already paid royalties based on his misconception that the patent was valid. On the other hand, the District Court held that the

“non-restitution” clause did not preclude Licensee 1 from asserting restitution of the royalties in the case of a statutory “mistake” concerning the license agreement. Accordingly, reasoning that Licensee 1 would not have entered into the license agreement if he had known that in fact his pebble bed bath product was outside the scope of the licensed patent, the District Court found statutory “mistake” in the fact that Licensee 1 came to believe that his product was within the scope of the patent as a result of the licensor’s explanation. The District Court therefore ordered the licensor to restitute the already paid license royalties of 30 million JPY. Reversal Decision at the IP High Court On appeal, the IP High Court reversed the Tokyo

District Court decision in part, ruling that commer-cial companies must pay due care in considering the

patent to be licensed when entering into a patent license agreement. In particular, the IP High Court required that companies comprehensively consider, for example, the breadth of the patent at issue, the likelihood of future invalidation of the patent, and the degree of usefulness of the patent to contribute to the licensee’s business by means of, for example, an expert opinion. In light of the above higher stan-dards, the IP High Court denied finding a statutory “mistake” in the fact that Licensee 1 came to believe that his product was within the scope of the patent as a result of the licensor’s explanation. Further, the IP High Court stated that even if Licensee 1 was under a misconception concerning the license agreement in some respects, his gross negligence would forbid him from asserting the nullity of the license agreement. Ultimately, the IP High Court reversed the District Court’s order for restitution of paid royalties and de-clined all assertions brought by Licensee 1. Licensee 1, who relied solely on the story from the licensor, conclusively lost the case. Due Diligence Required for Possible Licensees From a licensee’s perspective, in light of the above

IP High Court’s precedent favoring the licensor, a licensee should conduct due diligence on a patent to be licensed when entering into a license agreement, in particular on the breadth and validity of the pat-ent, and the correlation between the patent and the licensee’s product, even if the licensor gives certain assurances of the patent to be licensed. In that sense, to obtain an expert opinion might be helpful. Further, in negotiating terms and conditions of the license agreement, it is advisable to clarify the scope and limitations of the “non-restitution” clause. ■

86 les Nouvelles

Patent Dispute Resolution

Patent Dispute Resolution System In India By Balwant Rawat Introduction

New Delhi, India, November/December 2009: After opening its economy for foreign direct investment in the early 1990s, India has become an important destination for multinational companies (MNCs). The population of over 1.2 billion not only makes India an

attractive market, but also provides a vast educated talent pool. Consequently, many companies have set up

their research and de- velopment centres in the country. Where there is talent, there is innovation. India is

fast emerging as an innovation hub primarily in sectors such as pharmaceuticals, automotive and information technology (IT) . Innovation involves investment, which needs to be safeguarded using Intellectual Property (IP) protection in various forms, such as patents, trademarks, and copyrights. India joined the World Trade Organization (WTO) in 1995, and since then India’s patent system has undergone three amendments to ensure conformity with the requirements of the WTO’s TRIPS agreement. The Indian Patent Office (IPO) has been modernised and is digitising its patent information. [1] New patent examiners are being recruited and trained to handle the surge in patent application filings at the IPO. Recently, India was designated as an International Search Authority (ISA) and as an International Pre-liminary Examination Authority (IPEA), making India the only English-speaking Asian country to be granted this privilege.

During the past six years, the number of patent applications filed at the IPO has increased threefold. [2] MNCs have been the major filers, contributing more than 80 percent of the filings. Although a ma-jority of the filings are made by MNCs that seek a market here, or by their R&D arms, Indian companies are increasingly becoming aware of the importance of investing in IP assets and are embracing IP as a crucial component of their business strategy. The growing awareness to protect one’s IP is reflected in the number of litigation cases. In India, the number of litigations are on the rise, and they involve both Indian and foreign companies. These litigations have put to test the patent dispute resolution platform in India. Litigations on the Rise More than 75 patent infringement cases were

pending in the Delhi High Court, and several others are pending in other Indian courts. [3] Two cases

worth mentioning are TVS Motors vs Bajaj Auto and Roche vs Cipla. The first one is a conflict between two domestic corporations in the automobile sector, and the second one includes a multinational corporation and a domestic manufacturer. TVS Motors vs. Bajaj Auto

Bajaj Auto, a manufacturer of two wheelers, se- cured patent protection for its ‘digital twin-spark ignition’ (DTSI) tech-nology in July 2005. Bajaj sued TVS Motors, another big automotive company, for using the ignition technology in TVS 125 ML motorcycle ‘Flame.’ Subsequently, TVS Motors filed a revocation suit in the IP Appellate Board, a newly formed judicial body equivalent to the Indian high courts and similar to U.S. federal courts. Revocation is probably the most common defence in an infringement suit. In addition to the revocation, TVS filed separate lawsuits in Madras and Bombay High Courts claiming defamation and pre-empting efforts by Bajaj Auto to stall the introduction of its ‘Flame’ motorcycle. The case is still sub-judice and its final outcome

will definitely set a precedent on many aspects of patent grant and enforcement in India. However, an initial judgement of the Madras High Court on 16 February 2008 was ruled in favour of Bajaj Auto, and restrained TVS Motors from manufacturing, marketing, selling and exporting automobiles based on the technology claimed in Bajaj’s patent. Due to the court’s decision, TVS Motors incurred a production and sales loss of INR 1 billion (~USD 23 million), loss of goodwill and fall in share value. [4] Roche vs. Cipla Another fiercely fought legal battle was between

Cipla and Roche. The IPO granted a patent to Roche for Tarceva, an anti-cancer drug. Cipla, an Indian pharmaceutical company, opposed the grant of the patent but was refused by the IPO. Roche, on the strength of its patent, sought an injunction from the Delhi High Court against the sale of a similar drug marketed by Cipla. The Delhi High Court denied the injunction on the grounds of ‘public interest’ because Cipla was selling the drug at one-third of the price

June 2010 87

■ Balwant Rawat,

Evalueserve,

General Manager, IP

& Legal Services

Gurgaon, India

E-mail: balwant.rawat@ evalueserve.com

Patent Dispute Resolution

set by Roche. Startled by the denial of an injunction tion. In this regard, knowledge of the Indian patent

for a patented drug, Roche appealed to the Appellate dispute resolution system will be helpful for adopting

Bench of the Delhi High Court. The division bench, the correct strategy.

however, upheld the judgement of the trial court Patent Dispute Resolution System in India

on the grounds of lack of prima facie evidence and

There are four dispute resolution platforms in India

imposed a fine of INR 5 lakh (~USD 10,850). [5] The

with the following responsibilities:

courts found that Roche had concealed information

• Indian Patent Office (IPO): The IPO examines

regarding an earlier application that was rejected by

patent applications and grants them if they

the IPO. The ruling of the division bench was rather

conform to Indian patent laws. It also keeps

technical in nature and the validity of the patent was

records of renewal and working of patents.

questioned and argued by both parties.

The IPO participates in resolving disputes

The proceedings in these litigation cases are an indi-

related to pre- and post-grant oppositions.

cation that enterprises in India have started entering

The administrative functions of the IPO

the patent game in a big way. Corporations are actively

include formulating and implementing rules

approaching courts to settle patent-related disputes.

and procedures.

Challenges for MNCs

• IP Appellate Board (IPAB): The IPAB became

It is evident that the patent litigation process in

operational in April 2007 to hear patent-

India is getting better by the day aided by the rising

related disputes in the country. It is equivalent

patent awareness in India and many constructive

to the Indian high courts. It hears revocation

changes in the patent system. There still are a few

proceedings and the appeals arising out of

challenges that need to be mitigated in order to have

decisions of the controller of patents. The

an effective IP strategy in India.

IPAB has technical and legal experts to handle

• How to track competitors’ patents?

IP matters.

Tracking competitors’ patents is an essential activity • District courts and high courts: The Indian

to assess the risk of infringement. Unlike other major district courts are the first platform to be

patent offices, the IPO does not have searchable full- approached for enforcing patent rights by

text databases of all patents and patent applications. filing the infringement suits. The Indian high

The database on the IPO Web site provides limited courts hear the appeals arising out of the

information and has limited search functionality. decisions of the district courts.

Performing a manual search on patents at the four • Supreme Court: The Supreme Court of India

IPO branches is a time-consuming and tedious task.

hears appeals against the decisions of the

• What constitutes infringement under Indian IPAB and the high courts. Being an apex body

laws, and what are the next steps after recognis- of the Indian judicial system, the decision of

ing infringement? the Supreme Court is not appealable. However,

the Supreme Court can review its own decision.

Although it is not easy to establish an in-

fringement case, if a patent holder identifies Figure 1. Patent Dispute Resolution System In India

any one of the following instances, further

investigations and necessary actions should

be initiated:

Patent Dispute Resolution System

• The colourable imitation of an invention

• Immaterial variation in the invention

• Mechanical equivalents

Supreme Court

• Imitation of essential features of the

invention.

All the acts above often overlap each other

when an infringement of a patent or process IP Appellate High Court

occurs. [6]

Board

As soon as a patent holder discovers that

his/her rights in a patent is being violated, the Patent Office District Court

patent holder should immediately approach (4 Branches)

the relevant authority to take necessary ac-

88 les Nouvelles

Patent Dispute Resolution Detect and Protect Similar to other major jurisdictions, India has

definite and unambiguous patent laws, along with an efficient administrative and judicial framework to enforce and resolve any dispute arising before or after the grant of patents. Knowledge of such laws and procedures can help an organisation protect itself from the risks of potentially harmful patents and defend its interests in the event of infringe-ment of its patents. The relevant procedures for this purpose are pre- and post-grant oppositions, suit for infringement, suit for revocation and related appeals. Corporations should watch and detect contentious

subject matter in a patent application (or a granted patent) at an early stage and use the appropriate instrument by preventing others from claiming undue monopoly. The corporations should keep an eye on the publication to facilitate timely detection of contentious matter. If a patent is wrongly ap-proved for grant, the corporation should file a suit for revocation. If a patent holder finds that someone is using, selling or making his/her patented product or process, a suit for infringement should be filed in an appropriate court. Figure 2 illustrates the various stages of patent

life cycle, disputes therein and platforms used for dispute resolution (mentioned above).

Pre-Grant and Post-Grant Opposition Pre-grant opposition is a distinctive feature of the

Indian patent system. The feature allows third parties (any person) to oppose any patent application after its publication, when it is under examination. The applicant and the opponent are called for a hearing, if requested and considered necessary by the patent office. According to Section 25 of the Indian Patent Act, post-grant opposition can be filed by any inter-ested person (a person engaged in selling or research of the technology in question) within one year of the post-grant publication. The grounds for both oppositions are the same,

as listed below: • The invention was wrongfully obtained by

the applicant from the first and true inventor. • The invention was published before

the priority date of the application. • The invention was claimed in an

application filed previously in India. • The invention was publicly known/used in

India before the priority date of the claimed invention.

• The invention is obvious and involves no inventive step in light of the already published patents/non-patent documents.

Figure 2. Patent Dispute Resolution Platforms

Stage Type of Dispute Platform

Pre-Grant Opposition Patent Office

Patent Prosecution Post-Grant Opposition Patent Office

Challenging Decisions of Patent Office Appellate Board

Challenging Decisions of Appellate Board Supreme Court

Appellate Board

Patent Revocations Patent Invalidation

High Court

Patent Enforcement Patent Infringement Courts

June 2010 89

Patent Dispute Resolution

• The invention is not patentable under Indian if the same subject matter is contended in two courts,

patent laws (Section 3 of the Indian Patent Act). the case is transferred to the Superior Court.

• The invention is not sufficiently described. A suit for infringement can be instituted only after

• The applicant failed to present the required the patent has been sealed. The patent owner cannot

file a suit for infringement during the post-grant op-

information relating to the corresponding

position period. However, damages incurred due to

applications filed in other countries to the

the infringement during this period may be claimed

Indian Patent Office.

in a separate suit; a separate suit for damages and not

Figure 3 represents the timelines for pre-grant and

a suit for infringement. A patent holder can file an

post-grant oppositions.

infringement suit within three years from the date

Suit for Revocation of Patents

of infringement. The burden of proof to provide the

A suit for revocation of a granted patent can be

evidence of infringement is on the plaintiff (patent

filed with either the IPAB or a high court. According

owner). Reversal of burden of proof to defendant

to Section 64 of the Indian Patent Act, the applicable

(infringer) is applicable in a process patent as per the

grounds for filing a revocation include the grounds for

TRIPS requirements. Generally, the duration of an

opposition, along with the following:

infringement case in India is two to four years.

• The applicant contravened any secrecy direction

Conclusion

• The patent was obtained on a false suggestion

India is emerging as a big powerhouse in the global

or representation

economy with a rapidly expanding market and hub for

• The invention was secretly used in India before

research and development. The patent enforcement

the priority date of the claim.

system in India is undergoing rapid changes due to

Suit for Infringement

the surge in patent filings and reforms initiated by the

A patent owner can file a suit for patent infringement government. Patent litigations are on the rise, involv-

in either a district court or a high court. Typically, pat- ing both domestic and multinational corporations.

ent infringement suits are heard by the high courts Therefore, it becomes essential to understand the

because the defendants invariably file counter-claims patent dispute resolution platforms and procedures

for revocation of the subject patent. As a general rule, to efficiently deal with patent disputes. Armed with

this knowledge, a

Figure 3. Timelines For Pre- And Post-Grant Oppositions In India

corporation can

proactively as-

Patent sess IP risks and

Application

opportunities in

18 months or India. Corpora-

Publication tions should be

watchful during

Representation

(After publication, till grant) the publication

Examination

Representation Rejection

of patent appli-

cations, and op-

Pre- Accepted

Representation

pose them early,

if needed, using

Grant opposition or re-

vocation mecha-

Publication of Grant nisms. Further,

they should be

<12

alert in the event

Notice of Opposition

Post-grant

of potential in-

Opposition Opposition fringement of

Proceedings their patents,

Opposition Patent Valid and approach the

courts after con-

Patent

ducting proper

Revoked

due diligence. ■

90 les Nouvelles

Patent Dispute Resolution References

1. Eleventh Five-year Plan Scheme of Modernisation and Strengthening of Intellectual Property Offices– http://dipp.nic.in/scheme_ipo_18082008.pdf. 2. Patenting Landscape in India. http://www.

evalueserve.com/Media-And-Reports/EVSDownload. aspx?p1=w&p2=144&p3=EVS_Article_Patent-ing_Landscape_in_India_May_23_2008.pdf.

3. SpicyIP Tidbit: Trends in Indian Patent Litigation –http://spicyipindia.blogspot.com/2008/07/spicyip-tidbit-trends-in-indian-patent.html. 4. TVS Incurs Rs 100 cr Loss on Bajaj Litigation–

http://www.financialexpress.com/news/TVS-incurs-Rs-100-cr-loss-on-Bajaj-litigation/298141/. 5. Cipla Gets HC Relief in Tarceva Case. http://

www.financialexpress.com/news/cipla-gets-hc-relief-in-tarceva-case/450858/0. 6. Patent Infringement Law in India–http://

ezinearticles.com/?Patent-Infringement-Law-in-India&id=1478510.

June 2010 91

Software Valuation

Software Valuation Of Open Source Software (OSS) — It’s Not All Free Beer! By Dwight Olson

How do you put a value on free? That’s the question facing investors in and business owners of

open source software today. Few doubt that open source and open collaboration are

reshaping the business landscape. Many believe there is only one open source landscape and it is “free beer” for everyone. However, those who believe that there is only one model called free beer, miss some very important aspects of value in the open source movement. It is very important to remember OSS (open source software) is not FOSS (free open source software) and they should not be confused with each other. For any information on FOSS, the reader may wish to surf the Internet with the key word “FOSS” and “free open source software.” In OSS when there is no direct revenue or income

from the OSS product, valuations are undoubtedly a new challenge. Plus, current valuation methods and principles may or may not be the best method or principles to determine the value of any poten-tial OSS investment transaction. Companies and individuals looking to have their OSS acquired or to be funded through venture investment must be familiar with current practices of valuation as well as possible new OSS methodologies and principles. It will be especially important for the OSS owner to be prepared to defend new asset value discussions and OSS monetization models. One common OSS model is the corporate en-

terprise directed open source development. This is where a corporate America company (European or pick a region) invests in open source software development to achieve its business objective. One could suggest this business model is based on selling proprietary complements to free software. This OSS model is quite proprietary and any characterization as ‘nonproprietary’ is certainly surprising. For example, IBM uses this model to sell IBM hardware, ancillary software and service to the open source software and generates billions of dollars of revenue and is most assuredly proprietary. Another common model is the “open-source-

hybrid” model where companies have “tweaked” their business models to provide certain software free (including the source), but other software available only as part of a payment scheme. For example, a

pc-based single user version may be “free beer” but access to the enterprise version is only available when you pay. This “open-source-hybrid” model also offers a similar and efficient model to the “proprietary” free trial before buying. There are many reasons why an enterprise would

opt for an open source model or collaboration and forego the possibility of making or investing in the old model of the proprietary licensing route. As men-tioned earlier, some OSS companies gain profits in other ways than direct revenue license gains. Others suggest the reasons include cost savings, in terms of zero investment on seeking patent protection in various jurisdictions, productivity gains, as more and more people will be able to access and try the usage, brand building, since more and more people will be-come aware of the product in the markets and, most importantly, an expanded user base.

As the market expands, revenues from sales, one-off licenses, dual licensing, and complementary products and services may be enough to offset the opportunity cost of open source. IBM has used this approach very successfully. Today, many companies use some type of open source software, and many have plans to pilot it in the future. Utility and telecommunications firms, media companies, and public sector bodies lead en-terprise adoption by a wide margin. European firms have been actively adopting open source solutions over the past four years. Today, almost 40 percent of companies already use some type of open source software. Forty-five percent of the firms using open source have deployed it in mission-critical environ-ments, although the vast majority (70 percent) use it for non-key applications.1

Traditionally, copyright owners sold their copyright-ed material in exchange for money. The lack of money changing hands in open source licensing should not be presumed to mean that there is no monetary or economic consideration. There are substantial ben-efits, including monetary benefits, to the creation and distribution of copyrighted works under public licenses that range far beyond traditional license

1. Is Open Source Gaining Adoption In Europe? Forrester, Manuel Ángel Méndez.

92 les Nouvelles

Software Valuation royalties. Even for an individual program creator who may generate market share by providing certain com-ponents free of charge. Similarly, a programmer may increase his/her national or international reputation by incubating open source projects. The clear language of the Artistic License2 creates

conditions to protect the economic rights at issue in the granting of a public license. These conditions govern the rights to modify and distribute the com-puter programs and files included in the downloadable software package. The attribution and modification transparency requirements directly serve to drive traffic to the open source incubation page and to inform downstream users of the project, which is a significant economic goal of the copyright holder that the law will enforce. Through this controlled spread of information, the copyright holder gains creative collaborators to the open source project; by requiring that changes made by downstream users be visible to the copyright holder and others, the copyright holder learns about the uses for his software and gains oth-ers knowledge that can be used to advance future software releases.3

The terms of the Artistic License 1.0 were at issue in a 2007 federal district court decision in the U.S. which was criticized by some for suggesting that FOSS-like licenses could only be enforced through contract law rather than through copyright law, in contexts where contract damages would be difficult to establish. On appeal, a federal appellate court “determined that the terms of the Artistic License are enforceable copyright conditions.”4 The case was remanded to the District Court which did not apply the superior court’s criteria (on the grounds that in the interim, the Supreme Court had changed the applicable law). Regarding legal OSS enforceability issues, as has been widely publicized in the industry, legal and even mainstream media, on August 13, 2008, the U.S. Court of Appeals for the Federal Cir-cuit (CAFC) issued its decision in the closely watched case of Jacobsen v. Katzer. In its decision, the CAFC confirmed one of the core legal assumptions upon which the entire open source world is based—namely

2. The Artistic License refers most commonly to a software license used for certain free and open source software packages. The name of the license is a reference to the concept of artistic license. See http://en.wikipedia.org/wiki/Artistic_License.

3. United States Court of Appeals for the Federal Circuit, 2008-1001, Robert Jacobsen, Plaintiff-Appellant, Matthew Katzer, Defendants-Appellees, case no. 06-CV-1905, Judge Jef-frey S. White.

4. ibid.

that open source licenses are legally enforceable as licenses under U.S. copyright law.5 Thus, free as well as open source has economic value.

OSS owners, investors, and the software valuation industry should be looking at alternative principles and methods for software valuation to augment exist-ing mechanisms as we move into this new information economy. With the fact that OSS and collaboration software is a reality, and alternative principles and methods which might prove quite useful as ever-more-complex investment decisions in the OSS in- formation economy are considered. Valuation Using Past OSS Acquisitions

Augmenting any dis-cussion of value with alternative principles may be a good idea, but, where do you start? Cer-tainly, similar market ac- quisitions. If we look at some open source investment and acquisitions, Yahoo acquired Zimbra, an open source email and communications suite provider, for $350 million. Yet, Zimbra only received funding from Benchmark Partners, Redpoint Ventures and Accell Partners, raising $30.5 million with three rounds of investment funding. What prompted Yahoo to pay $350 million? Another acquisition was BuzzTracker, a tiny news aggregation site, for between $2 to $5 million. Then, Sun Microsystems became the owner of MySQL, the pioneering open source database sys-tem. Sun paid about $800 million in cash in exchange for all of MySQL stock and assumed another $200 million in options as part of the deal. Being aware of OSS acquisitions and transaction values may be a start, but with many believing OSS is another Dot Com bust, more than just market acquisition similari-ties may be required. Maybe the number of users of the open source software might prove worthy? Then maybe the OSS inventory, too? Another Principle Might be to Look at the OSS Inventory Software as well as open source software (OSS) is

a complex bundle of assets and can consist of both Intellectual Property (IP) and Intellectual Asset (IA) components. One could consider the components

5. United States Court of Appeals for the Federal Circuit, 2008-1001, Robert Jacobsen, Plaintiff-Appellant, Matthew Katzer, Defendants-Appellees, case no. 06-CV-1905, Judge Jef-frey S. White.

June 2010 93

■ Dwight Olson,

V3Data, Principal,

San Diego, CA, USA

E-mail: dcolson@ ix.netcom.com

Software Valuation

of intellectual property (IP) to comprise patents, open source and collaboration activities! For example,

trademarks, copyrights and industrial designs because to date there are over 180,000 open source projects

these four intellectual properties have legislation to available in just the Sourceforge9 alone.

govern, protect, and value propositions for the legal In commercialization of the open source software

owners.6 The other components or intellectual assets

product, the effort involved produces quantities of

(IA) would then be considered to include domain

digital asset components. Some of the components

names, trade secrets (non-provided source code)

will be provided under the OSS license and down-

and know-how (other design digital assets), and the

loadable from the OSS forge (such as Sourceforge)

codified, tangible descriptions of specific knowledge

and other digital assets will not be provided under

which a software business uses to support commer-

the OSS, but retained by the company/individual

cialization (use). Software as well as OSS, by virtue

for proprietary or other monetary purposes. The

of its component inventory7 (or software inventory),

owner(s) will make the decision of which compo-

can be the subject of various valuation strategies and

nents are open and which are closed, see Table 1

discussions.

and 2. Many software experts agree that in product OSS Software Inventory

commercialization, all project components need to

It is in OSS software commercialization (making it be identified and governed, just as all other “hard”

assets. No one would ever think of “not managing”

usable) where software takes on a software product

inventory, buildings, or machines, yet for software

shape (see Table 3). There is often confusion as to

some think a black hole is acceptable.

what software IP or IA to value and then how to

value each type. For example, if there are patents or Software governance is asset-based and has value.

trademarks involved then the statutory rights granted Software development, as well as for OSS, produce

can be used to value a given market monopoly (if one component assets; each component comes into ex-

exists), to generate monopolistic income via a license istence for a purpose. Someone determines that the

program or to allow strategic value activities such as component was/is needed to achieve “use” of the

cross licensing, or to perform an investment IP man- OSS software product just as for proprietary software.

agement analysis.8 Some believe that OSS should be Sweat, in some cases paid sweat, went into their pro-

valued only under patent or trademark. For those that duction. Of critical issue is whether these inventory

do, are these the only value principles for OSS? What component assets are development errors and not

if there are no patents or trademarks? Does it mean needed for use, or they are in fact digital assets in the

that if there is no intent to maintain a monopoly, brand sense that the stakeholders need to receive information

the product, or modify the GPL to include trademark concerning their use and ultimate value. If so, then the

restrictions, then there is no monetary value? Whoa! component has, as a minimum, a replacement value.

Maybe in some areas of technology, but

certainly not open source software and Table 1. Owner Software OSS Components

open collobration. There is a big world of

Trademarks Trade Secrets and Know How

6. Intellectual Asset Identification, The First Step Marketing collateral Design documentation

in an Intellectual Property Management Program, Patent(s) Other source code such as DRM

Dave Tyrrell and Gary Floyd, Vertex Intellectual

Property Strategies Inc. Defensive if present Client databases

7. See Tables 1 and 2 below.

OSS Copyrights Process know how

8. See http://intellectualassetsinc.com/client-

services/ma-analysis/. Executable code Operating platforms

9. SourceForge.net is a source code repository

User documentation Forge manufacturing instructions

and acts as a centralized location for software

developers to control and manage open source soft- Source code Configuration data

ware development. SourceForge.net is operated by

Sourceforge, Inc. (formerly VA Software) and runs Build instructions QA test and procedures

a version of the SourceForge software, forked from

the last open-source version available. As of August Domain Name(s) if no forge 3rd party software

2008, SourceForge.net hosts more than 180,000

Licenses

projects and more than 1.9 million registered users

although it does contain many dormant or single-

Use and restrictions

user projects.

94 les Nouvelles

Software Valuation

for software valuation as well

Table 2. OSS Software—Intangible Asset Inventory

as OSS is that software does

not have physical depreciation

Marketing and Sales

License Management

as does the tangible hardware

Marketing plans and collateral DRM and license controls upon which it resides. Software

should be looked at in terms of

Client Support Systems Back office system

technology feasibility (which

Installation and training R&D Systems should include functional obso-

lesce) not depreciation. Meth-

User documentation and help Internal design documentation

ods used to depreciate tangibles

Client databases Source code with comments as well as intangibles are based

on the assumption that the

QA and Testing

Source code control with comments

goods being valued lose value

Bug/support system ASP databases over time. Such depreciation

schedules are based on wear,

Testing code and data QA test and procedures

the loss of value due to obsoles-

Manufacturing System 3rd Party software cence, or changes in customer

preferences.12 However, well-

Specific build guides Open Source & Strategy

maintained software in active

Monetization Strategy Client databases use does not wear out, and is

likely to gain value.13

Product plan (release and updates)

Current thinking regarding

Replacement Based Valuation for

software life cycle analysis is from the current ac-

OSS Consideration counting standard based upon the waterfall model

An OSS replacement valuation model must focus first described by Winston Royce in 1970, ironically

as an example of a flawed model for software devel-

on the costs to reproduce the intellectual asset, not

opment. The waterfall model is a sequential process,

the historical costs. There is a value of the asset

in which the life cycle is seen as flowing steadily

that is tied to the cost to recreate or acquire the

downwards like a waterfall through the phases of

ownership of the asset. Remember, possession is not

Conception, Initiation, Analysis, Design, Construc-

ownership. In software asset valuations it is important

tion, Testing, [Delivery], [Support], Maintenance14

to identify and value all software components, see

and then Obsolescence. Today, as probably for the

Table 1 and 2. Appropriate costing models as well as

past ten years, OSS software is almost always put

historical or typical budgeting costs should be used

into use with only partial functional requirements

with reasonableness equations to bias all results or

fulfilled, and then evolves over time; frequently

10 Many modeling variables

typical budgeted costs.

over very long times as the software is enhanced,

associated with developing software, such as the

customized, adapted as new technical requirements

number of lines of new and modified code, were

and standards are discovered and changed.15 One of

found to be useful in developing reasonableness

the greatest inherent values of OSS software is its

11 A basic concern when considering any

equations.

ability to evolve and adapt to new challenges through

cost is its reasonableness. A statistical examination

modifications, revisions, continuous improvement

should be conducted, to develop a central value and

through open collaboration.

an acceptable range of values for a software product

Important Physical Principles from VC’s

replacement cost estimate.

In valuation of hardware IP, such as a computer Any business owner today developing software or a

hardware patent, one normally takes into account the business unit that develops software including some

physical depreciation and functional obsolescence

of the hardware technology represented by the

patent in calculating the replacement cost. At issue 12. What is your software worth?, Gio Wiederhold, Commu-

nication of the ACM, September 2006.

13. Spolsky, J. Joel on Software. Apress, 2004.

10. Software Valuation Part 2, les Nouvelles, December 2008. 14. Wikipedia reference for “waterfall model,” http://

11. R. W. Wolverton, “The Cost of Developing Large-Scale en.wikipedia.org/wiki/Waterfall_model.

15. Software Valuation Part 2, les Nouvelles, December 2008.

Software,” IEEE Trans. On Computers, June 1974.

June 2010 95

Software Valuation

aspect of OSS and expects to

Table 3. Software Product Components

find equity or debt money for

as Intellectual Property

financing from any venture

capital investor should be Software Copyright

Trademarks Patents

Trade

aware of the current ways

Component Secrets

they invest in a potential busi-

GUIs � �

ness, and this will most assur-

edly include OSS situations. Source code �

�

�

�

Venture capitalists evaluate Object code �

their investment opportuni-

Business processes � �

� �

ties based on certain criteria.

It is widely accepted that the Data �

�

three key investment deci-

Table structures � �

sion criteria are management

team, market projections Documentation internal � �

�

design and external use

and product. 16 In addition,

venture capitalists have pref-

exit value of a company? The methods fall into four

erences—like venture’s stage of development, its

categories:

location, its industry or technology, and size of the

1) Liquidation value asset based methods,

investment required vary between one another. This

criteria and preferences are related “to evaluation of 2) Discounted cash flow based methods,

an investment opportunity: does the venture have

3) Options based valuation methods, and

potential, is it worth our time and money, and does

4) Rule of thumb valuation methods (comparator

it fit our investment strategy?”17 Venture capitalists

valuations).

base their evaluation on business plan, meetings with

Companies and individuals looking for venture

the entrepreneurial team, and various researches.

investment must be familiar with these current situ-

Valuation of high-tech companies by Venture

ation and valuation methodologies.

Capitalists has been theoretically studied extensively.

Undoubtedly for OSS VC valuations where there

The value of a new venture is derived by discounting

is no revenue or income from the OSS, then such

predicted future cash flows to the present.18 The dis-

methods may or may not be the best method to de-

counting factor depends on the probability of returns.

termine the value of the situation, but the business

Even if an enterprise has significant potential future

owner must be prepared to defend other asset value cash flows, the risk of failure decreases its net present

discussions. If not, then the business owner beware,

value. Different methodologies exist in the valuation,

the value will typically be based on real property and/

but all aim at answering the same question: what

or real income. A far cry for the current OSS informa-

is the present value of expected future earnings or

tion asset! ■

16. Tyebjee & Bruno 1981, 1984; MacMillan, Siegel & Nara-simha 1985.

17. ibid. 18. Frontiers of E-business research, 2005 Evaluation and

Valu-ation of Open Source Software Companies: A Venture Capitalist Perspective.

96 les Nouvelles

University IP

The Research-Oriented Approach To University IP: A Reinvention Of University IP Management Away From A Focus On Licensing To A Focus On Research By Michael A. Cohen Introduction

Offices that manage intellectual property (IP) at universities are scorned by some compa-nies, venture capitalists, and even faculty

at an IP office’s own university. These disapproving companies and investors criticize university IP offices as overly focused on licensing, and correspondingly extracting money from ventures that could other-wise use that money for the virtuous but challenging endeavor of trying to commercialize university inno-vations. These companies and investors are further irritated because many university innovations result from research funded by industry or public taxpayer dollars (via federal and state governments). To ex-emplify the extent of this criticism, one R&D VP at a leading U.S. technology company has characterized

the “synergistic” relationship between U.S. univer-sities and industry as “under siege” due to a “focus on licensing” and the resulting “antagonism.” The VP even relates the licensing focus of U.S. universi- ties to issues with U.S. innovation and competi-tiveness in the global economy! Likewise, some fac-

ulty members view uni-versity IP offices as the agents of policies that excessively restrict fac-ulty discretion as well as consulting and en- trepreneurial opportunities. These disapproving fac-

Figure 1. Mindset Of Research-Oriented vs

License-Oriented Approaches

IP Activity Licensor-Oriented Mindset Researcher-Oriented Mindset Comments

• If the PI rejects sponsor’s

IP proposal, then sponsor

Establishing IP terms Control IP terms especially Partner with PI by prioritizing can’t criticize IP office as

unreasonable

the goal of getting the research

of sponsored research with regard to maximizing

sponsored (not getting license • Use informed consent

agreements potential licensing revenue

revenue)

agreements with research

team regarding any IP

limitations

• Absconding with IP is very

different from putting IP in

Police (and possibly audit) Advise researchers about the public domain

Disclosing innovations the IP terms of their univer- • Manage inappropriate use researchers to enforce their

developed by researchers sity employment & research

of IP via research & faculty disclosure of innovations

agreements

chain of management as

well as conflict of interest

committee

• When company knows

Treat innovators as that innovators want their IP

Assume innovators have licensed, then company can’t

disinterested or conflicted

criticize IP office for licensing

Developing IP strategy insights or preferences &

& consequently exclude

for disclosed innovations therefore confer with them • Including in formulation of

them from formulating

in formulating IP strategy

IP strategy is very different

IP strategy

from including in negotiation

of terms

June 2010 97

■ Michael A. Cohen,

UC Berkeley, Office of IP & Ind Res Alliances Director, Acting

Berkeley, CA, USA

E-mail: mcohen@berkeley.edu

University IP ulty members see IP offices as largely bureaucratic policy police, and not surprisingly, they view their relationship with their IP office as adversarial. However, some university IP managers have been

frustrated with these criticisms from faculty, companies and investors. These IP managers don’t think that their activities have to be adversarial or impediments. Instead, they want to show that they are reasonable stewards of university IP, and accordingly can help catalyze university-driven in-novation, economic development, prosperity and quality-of-life. In response to these criticisms, pro-gressive IP managers have been evolving their prac-tices. Over the years, these cumulative improve-ments can be seen as culminating in a reinvention of university IP management. In contrast to the stereotypical, license-oriented approach to IP, this reinvention can be characterized as a research-ori-ented approach to IP. This reinvented approach to IP is evident in Figure

1’s comparison of the mindset of the research-ori-ented approach to the mindset of the license-orient-ed approach with regard to three major university IP activities: (1) establishing IP provisions of research agreements, (2) disclosing innovations developed by researchers, and (3) developing IP strategy for dis-closed innovations. The contrasting mindsets show how the research-oriented approach can transform

an IP office’s relationship with faculty, sponsors and licensees from frequently acrimonious, to consis-tently cooperative and constructive. The research-oriented approach to IP has many

facets, but from the perspective of faculty, spon-sors and licensees, the key manifestation of this approach is that it enables university researchers, and principal investigators (PIs) in particular, to help determine: (1) the IP provisions for their industry-sponsored research agreements; and (2) the IP strategy for their disclosed innovations. This article codifies these two aspects of the research-oriented approach to IP as well as this approach’s perspective on the disclosure of innovations to universities. Establishing IP Provisions in Industry-Spon-sored Research Agreements Under the research-oriented IP approach, IP

managers work as partners with PIs on sponsored research agreements—not as bureaucratic arbiters of IP terms (based on their impact on licensing po-tential). This partnership increases the IP manager’s credibility with sponsors as well as PIs. Accordingly, when a sponsor proposes IP provisions in a research agreement that limit the university’s flexibility on how to manage IP that results from the research, then the research-oriented IP manager first confers with the PI of the project.

As shown in the upper right side of Figure 2, if

Figure 2. Research-Oriented Approach To IP For Research Agreements

Continuum of Principal Investigator (PI) Perspective on IP

Flexible • Confer with PI on implications

(or indifferent) • If (1) acceptable to PI, (2) consistent

or reconcilable with university policy,

& (3) implementable by campus.

• Then (1) agree with sponsor, & (2)

Acceptable to

implement via Informed Consent

of Researchers

Wants All Parties

University

to Pursue • Confer with PI on implications

Patent &

• If unacceptable to PI, then seek

License

compromise with sponsor

Potential

Restrictive

Wants First Right to License IP Wants Gratis Wants IP from

from Sponsored Research Non-Exclusive Sponsored Research

including possible exclusive rights License to IP from in Public Domain

(this is the conventional provision) Sponsored Research

Continuum of Sponsor’s IP Proposal

98 les Nouvelles

University IP Figure 3. Research-Oriented Approach To IP For Disclosing Innovation

d

Do,

Acn

owle

dged

O

ccur

s

To

Advi

sed

That

But

Not

Ada

man

tly

Aga

inst

• Disclose to university

• Obligation to sponsor & employer • Publish at researcher’s discretion

• Not disclose to university, but... • Publish & disseminate

(sponsor might require temp hold) • Many don’t know what is an invention • Many disclose to sponsor via reports

• Not disclose to university, and... • File patent without univ assignment

(Conflicting use of univ resources for private gain) Innovations resulting from research

funded via univ, using univ resources, or part of univ activities

Advi

sed

Con

done

d,

offic

e

IP

by

Polic

ed

or

Advi

sed

Not

Not

But

• Disclose to university

Use normal disclosure form Use preliminary disclosure form

After filing provisional patent • Not disclose to university • Not policed by IP office

• Managed by faculty chain of

management

Innovations developed independently, or as part of consulting

(consulting agreement should acknowledge

university employment obligations) the sponsor’s restrictive IP provisions are: (1) ac-ceptable to the PI, (2) not in conflict with university IP policies, and (3) manageable by the campus, then the research-oriented IP manager complies with the company’s proposal (and has the university PI and research team sign informed consent agreements re-garding the restrictive IP terms). In other words, the IP manager doesn’t impose a license-oriented addi-tional level of control or bureaucratic approval.

If the sponsor’s restrictive IP provisions are accept-able to the PI, and manageable by the campus, but in conflict with university IP policies, then the research-oriented IP manager seeks a compromise with the sponsor, but also is open to the possibility of pursuing the approval of a policy exception by the university. If the PI rejects the sponsor’s IP proposal, then the

research-oriented IP manager pursues a counter-pro-posal with the sponsor. Moreover, due the PI’s rejec-tion of the proposal, the sponsor can’t criticize the IP manager’s response as unreasonable. Disclosing Innovations to Universities Under the research-oriented IP approach, IP man-

agers act as advisors to university innovators—not as police officers. Accordingly, IP managers counsel their university’s personnel to adhere to the terms of their employment agreement—and that typically includes disclosing to the university patentable in-

ventions and copyrightable software that employees develop. Research-oriented IP managers further em-phasize the importance of disclosing innovations to the university when this disclosure is a requirement of the research agreement that funded the work that led to the innovation.

In practice, research-oriented IP managers have come to acknowledge that many campus employees don’t realize when they’ve developed a patentable in-vention (and in many cases, the IP office itself doesn’t know whether a disclosure is patentable). Moreover, research-oriented IP managers have come to under-stand that many PIs prefer to communicate the results of their research via publications and corresponding reports to the research sponsor. If the research re-sulted in an innovation, then this scenario forgoes a formal disclosure to the university (and sponsor). While research-oriented IP managers don’t condone this scenario, they acknowledge that it occurs. Fur-thermore, they don’t view their role as policing re-searchers to limit this scenario from occurring; and they also realize that some experts question whether this scenario violates the Bayh-Dole laws associated with U.S. government-funded research.

While the scenario described above can circumvent a formal disclosure to the university, it is somewhat mitigated by the emphasis on the timely publication

June 2010 99

University IP of research results, not patenting any inventions, and thereby putting any innovations in the public domain. In contrast, the scenario described below can be very problematic for universities and their research sponsors. In order to discourage (1) potential breach of re-

search agreements (including the Bayh-Dole laws associated with U.S. government funding), as well as (2) conflicts of interests (and especially the use of university resources for private gain), research-oriented IP managers urge employees not to pursue the scenario of: (1) not disclosing an innovation to the university, (2) participating (as an inventor) in the filing of a patent application, and (3) assigning the patent ownership to an entity other than the uni-versity. This scenario can be considered absconding with university property, and accordingly research-oriented IP managers are adamantly against this sce-nario. However, they don’t think that it is their role to oversee (or audit) researchers. Instead, the optimal way to manage against this type of potential IP theft and conflict-of-interest is via the research and faculty chain of management (i.e. department chairs, college deans, vice chancellors of research, etc.) as well as the university conflict of interest committee. Formulating Strategy for University IP Under the research-oriented IP approach, IP

managers view university inventors and software

authors as individuals with possible IP insights and preferences—not as generic suppliers of innova-tions that are disinterested or have conflicts of in-terest. Accordingly, when patentable inventions and copyrightable software are disclosed to the campus IP office, then the research-oriented IP manager first confers with those innovators to help establish a strategy for the IP. As shown on the far right side of Figure 4, if the

innovators want the university to pursue IP protec-tion and licensing for a particular disclosure, and that preference doesn’t conflict with the IP provi-sions of any associated research agreement, then re-search-oriented IP managers explore the patent and licensing potential. If an IP manager can justify the patenting and licensing opportunity, then that strat-egy is pursued. Note that when a potential licensee knows that the university researchers want the IP office to license their innovation, then the potential licensee is usually more cooperative with university IP office staff. Moving one step to left on the horizontal con-

tinuum in Figure 4, if the innovators are indiffer-ent or uncertain about what to do with the IP for a disclosure, and the associated research agree-ment doesn’t dictate what to do with the IP, then research-oriented IP managers explore whether pat-enting and licensing the IP could help catalyze the

Figure 4. Research-Oriented Approach To IP For Licensing Strategy

• Explore IP Potential • Can We Catalyze Commercialization? • Confer with Innovators on Potential & Cost

• Can We Catalyze Commercialization? • Confer with Innovators

• If U.S. GOV Funded, Then Explain Protocol • Discuss Alternatives (i.e. Field-of-Use Strategy) • Usually Accommodate Innovators

• Check for Use of Univ Funds or Resources • Confirm Relationship to University Activity • Get Concurrence from Department Chair • Usually Accommodate Innovators

• Check for Obligations to Sponsors, etc.

• Confer with Innovators & Consider Particular Circumstances

Wants Univ to Wants IP to be Indifferent or Wants Univ to

Waive or Disclaim Open & Gratis, Uncertain About Explore IP Ownership of IP or in Public Domain What to Do with IP License Potential

Continuum of Inventor’s/Author’s Perspective on IP

100 les Nouvelles

University IP broad, expeditious application of the innovation. As shown in Figures 5a and 5b, this catalyst can occur when companies (and start- ups in particular) want to obtain exclusive rights to the IP in order to improve their business plans and thereby improve their ability to attract the risky investment capital necessary to try to commercialize the innovation. If an IP manager can identify a catalyzing opportu-nity, then the appropriate patenting and licensing strategies are pursued. Continuing another step to left on the horizon-tal

continuum in Figure 4, if the innovators prefer that the university make any resulting IP available for commercial use without remuneration, (i.e. no license fees, earned royalties, and patent cost re-imbursements), and if that preference, (1) doesn’t conflict with the research agreement that led to the innovation, or (2) doesn’t eliminate an extraor-dinary (and rare) licensing opportunity to fund re-search and education, then the research-oriented IP manager typically complies with the innovators’ requests. If the innovation is a patentable inven-tion, then the IP office complies by not filing a patent; and if the innovation is copyrightable soft-ware, then the office complies by making the soft-

ware available via a gratis, open source license such as the BSD license. Summary After a history of ridicule from some companies,

venture capitalists and even faculty, progressive university IP managers have been evolving their practices toward a research-oriented approach to IP that is more inclusive and responsive than the stereotypical, license-oriented approach to manag-ing IP. Under this research-oriented IP approach, IP managers: (1) work as partners (not as bureau-cratic arbiters) with PIs to get research sponsored, (2) act as advisors (not police officers) to univer-sity researchers regarding the IP-related provisions of employment and research agreements, and (3) treat inventors and software authors as individual clients with insights and preferences (not as ge-neric, disinterested or conflicted suppliers of in-novation). This research-oriented approach is rein-venting the IP office relationship with companies, investors and faculty from frequently antagonistic to consistently cooperative and constructive. ■ Required disclaimer: The views expressed in this

article should not be attributed to the University of California, or the UC Berkeley Office of Technology Licensing.

Figure 5a. Catalyzing Commercialization: Orphaned Innovations

Potential RETURN on Investment

High

Low

* Note that some technologies can be applied to multiple

markets that each have their own risk/return profile

Commercialized • ••

University

Innovations

•

•

•

• • • •

• • Orphaned

• • • •

• University

• Innovations •

•• •

Low RISK High

of Investment Required to

Try to Commercialize Technology

June 2010 101

University IP

Figure 5b. Catalyzing Commercialization Not Transferring Technology

Potential RETURN

on Investment

High License to

REWARD RESEARCHERS

• Can motivate researchers to continue innovating

• Exclusive or non-exclusive with or without field-of-use demarcations

License to •

REMOVE RESTRAINTS

• Non-exclusive, royalty free

• Public domain

• Open software• License• to

• RAISE RETURNS

• Improve biz plan & attract investment

• Power to exclude competitors

Low • Freedom to operate without infringement

Low RISK High

of Investment Required to

Try to Commercialize Technology

102 les Nouvelles

Pharmaceutical Patent in Ecuador

Compulsory Licensing For Pharmaceutical Patents In Ecuador: A Primer By Sasha Mandakovic Falconi Introduction

Following a public announcement on TV a few weeks ago by Ecuadorian President Rafael

Correa,1 an executive decree was issued on October 23, 2009.2 The decree establishes access to medicines that are used for the treatment of pri-ority diseases that affect the Ecuadorian population as a

matter of public interest. More specifically, it enables access by compulsory licenses that will be issued

when pharmaceuticals needed for treatment are protected by a patent.

While the decree does not indicate which diseases are priorities, it does indicate that cosmetic, aesthetic, hygienic and other medicines not used for the treat-ment of diseases are not public health priorities. Background of the Executive Decree Establishing the grant of compulsory licenses of

pharmaceutical patents has the clear public policy purpose of driving down the prices of medicines. The government’s initiative was coordinated with the Ecuadorian Intellectual Property Institute—IEPI- (the IEPI is the Ecuadorian Patent, Trademark and Copy-right Office) and relies on international agreements to which Ecuador is a signatory. Particular emphasis was given to the Word Trade

Organization’s (WTO) “Declaration on the TRIPS agreement and public health,”3 which recognizes the gravity of public health problems that affect developing countries (such as Ecuador). According to the declaration, the TRIPS Agreement should be interpreted and implemented in a manner to promote access to medicines for all (paragraph 4). The above includes the right of Member States to

grant compulsory licenses and the freedom to de-termine the grounds upon which those licenses are

1. The announcement was made on October 17, 2009 and it is available in Spanish at http://www.ecuadorenvivo. com/2009101739292/sociedad/gobierno_impondra_licencias_ obligatorias_a_farmaceuticas.html.

2. The executive decree No. 118 is available in Spanish at http://www.sigob.gov.ec/decretos/.

3. This part of the DOHA Ministerial Declaration is available at http://www.wto.org/english/thewto_e/minist_e/min01_e/ mindecl_trips_e.htm.

granted (paragraph 5b), including determining what constitutes a national emergency or other circum-stances of extreme urgency, which affords granting compulsory licenses (paragraph 5c). The Ecuadorian Pharmaceutical Market

The Ecuadorian pharmaceutical market has sales of approximately U.S. $720 million a year.4 The 66 local laboratories that manufacture ge-nerics and local brands (most active ingredients are imported and not produced locally due to technology constraints) constitute about 18 per- cent of sales, while the lion’s share of 82 percent of the market is generated by international laboratories. The potential growth in sales for local

laboratories through compulsory licenses is huge. Therefore, without a doubt, local laboratories will seek to obtain as many compulsory licenses as possible for profit-able medicines. Initially, it is most likely that compulsory licenses

will be sought on the medicines which are covered by one of the about 500 pharmaceutical patents that are in force in Ecuador. A second step might involve obtaining compulsory licenses on patents which do issue on approximately 2,500 pending applications. Legal Framework for Compulsory Licensing To grant compulsory license applications, the IEPI

will apply Article 31 of the TRIPS Agreement,5 as well as the procedure established in Andean Community Decision 486 Articles 61 to 69.6

The process will start with an application to the IEPI filed by an interested local laboratory, requesting a

4. According to a non-official study made by “Intercontinental Marketing Services.”

5. Available at http://www.wto.org/english/tratop_e/trips_e/t_ agm3c_e.htm#5.

6. Available at http://www.comunidadandina.org/ingles/nor-mativa/D486e.htm.

June 2010 103

■ Sasha Mandakovic Falconi, Falconi Puig Abogados, Partner, Quito, Ecuador

E-mail: smandakovic@ falconipuig.com

Pharmaceutical Patent in Ecuador compulsory license for a particular granted patent.7 The IEPI will notify the patent owner, so that it may file any arguments it deems appropriate, and will request the Ministry of Public Health to indicate if the disease is a public priority. While the media has reported that the Ministry of

Public Health intends to issue a list of priority diseases, this seems unlikely. It is more probable that the IEPI will consult with the Ministry on a case by case basis when it receives an application. HIV/ AIDS, tuberculosis, malaria and other epidemics are expected to be priorities because they are expressly recognized in the “Declaration on the TRIPS Agree-ment and Public Health.” Cancer will surely be con-sidered a priority as well. If the Ministry of Public Health does not consider

a particular disease as a public priority, the compulsory license application will be rejected. However, if the disease is a priority, the IEPI will process the applica-tion and decide the terms on which the compulsory license is granted. Terms of a compulsory license should establish the time frame, conditions for eco-nomic compensation, production / importation limits, if any, among others. The criteria that will used be for a compulsory

license has not been reported yet, but sources inside the IEPI suggest that the time frame for licenses will be concurrent with the expiration of the patent and royalties will vary anywhere from 0.5 percent to 5 percent of the price at which the patented drug is sold to the consumer. Characteristics of a Granted Compulsory License The principal characteristics of compulsory

licenses will be: • Non-exclusive. • No sublicensing permitted. • Licenses cannot be assigned without the

underlying business. • Revocable. • Must establish royalties for the patent owner. • Must be used in the Ecuadorian market.

Revoking a Granted Compulsory License When a compulsory license is issued, an appeal

may be filed both at the PTO and in the courts to have it revoked. The appeal process however does not stay a granted license.

A cause for revocation may be a change in the circumstances that originated the license (e.g., the price of the drug is not prohibitive; the disease is not part of public policy; royalties are not being paid; etc.) Final Comments and Recommendations

The Ecuadorian government’s public policy decision to authorize compulsory licenses in order to deal with public health problems will make it difficult for patent owners to prevent their patents from being forcibly licensed unless they substantially reduce prices. If a patent owner is notified about a compulsory

license application, we recommend that efforts be primarily directed to obtaining a fair compensatory royalty. We also suggest attention to the potential impact of compulsory licenses on advertising and trademark use. For example: Will compulsory license holders advertise their products using the name of the active ingredient? Will they indicate that their products are equivalents or bioequivalents to X brand product? There are still many issues “hanging in the air”

regarding compulsory licensing in Ecuador. What is clear is that active monitoring of both the situation and of pharmaceutical/health related patent portfolios is essential. ■ Disclaimer: Opinions in this primer are solely the

author’s and are not meant to provide advice on a particular case to existing or potential clients.

7. It is not clear yet if compulsory licenses will be applicable to pending applications. Decision 486 permits granting voluntary licenses even for pending patent applications.

104 les Nouvelles

Value Of A Patent

Evaluating The Value Of A Patent By Ned Barlas, Richard Dunham, Mark Horsburgh and Alan Lewis There are various models available to help establish

the value of intellectual property; but do they truly evaluate the IP’s value, or do they merely provide a somewhat arbitrary dollar value? This article examines the parallels between the development of IP transac-tion models and real estate transaction models.

W hat is the value of a patent? There are vari-ous financial models available, the most popular of which is discounted cash flow;

but do they evaluate the patent or merely provide a somewhat arbitrary dollar value? Does the focus on a dollar value distract us from a wider evaluation of the benefits associated with a patent, or indeed any other form of intellectual property? The focus on dollar value presupposes a buy/sell transaction as the primary medium for value exchange; but is this relevant today when we see a diverse range of IP transactions that are outside the traditional buy/ sell model? These questions were addressed at the annual

meeting of the Licensing Executives Society Inter-national held in Manila earlier this year. The author displayed parallels between the development of IP transaction models compared to real property trans-action models.

Table 1. The Development Of IP Transaction Models Compared To Real Property Transaction Models

Real Property Intellectual Property

Position Technology

Size Scope

Occupy Work

Sell Assignment

Rent License

Auction Auction

Swap Cross-license

The table above shows how many of the concepts

of real property transactions are directly comparable with intellectual property transactions. The thesis is that the future development of intellectual property markets may be predictable from a consideration of the history of real property markets.

Technology, Technology, Technology For instance, the most important factors in select-

ing real property are position, position and position. The corollary for intellectual property is technology, technology and technology. It is just as true that a good invention in the wrong technology space will be devalued as a great house on a bad street will be devalued. When looking at IP transac-tions due regard must be given to the position-ing of the technology, trademark, etc. It is also true that a poor house in a great position will attract a better price. Similarly, a patent in a hot technology space can command a higher price even if there may be some validity issues. Another example is

the comparison be-tween size of a house and scope of IP protec-tion. Anyone who has bought a house will know that the number of rooms is a key con-sideration. It does not matter how good the price is, a two bedroom house will not sell to someone looking for four bedrooms. In the same way, a licensing deal will not proceed if the patent simply does not cover the scope of protection that is desired by the licensee or if a trademark is only registered in some of the classes that cover the products to be sold. Of course, someone seeking a two bedroom house may buy a four bedroom house if the price is right. In the same way a broader scope of protection will seldom deter an investor if an agreeable price is negotiated. If we accept that there are evaluation parallels

between real property and intellectual property, can we find parallels in transaction models? Historically real property was constructed to be occupied. In the

June 2010 105

■ Ned Barlas, Akin Gumo

Strauss Hauer & Feld LLP, Senior Counsel, Philadelphia, PA, USA E-mail: nbarlas@akingump.com

■ Richard Dunham, TAEUS, International Business Development, Charlotte, NC, USA

E-mail: rdunham@taeus.com

■ Mark Horsburgh, Fisher Adams Kelly,

Patent Attorneys, Managing Partner, Brisbane, Australia E-mail: mhorsburgh@fak.com.au

■ Alan Lewis, Adams & Adams, Patent Attorney,

Johannesburg, South Africa

E-mail: al@adamsadams.co.za

Value Of A Patent

same way, intellectual property was invented to be actively promote IP for sale in exchange for a com-

used. A student of history will know of the guilds of mission. This does happen to a minor extent now,

the middle ages that were formed, in part, to jealously but perhaps will be far more common in the future.

guard their intellectual property. It is an interesting Another example is the parallel between renting

fact that many of these guilds relied upon a grant of

real property and licensing intellectual property.

letters patent from the monarch to maintain their mo-

The global licensing market is worth billions of dol-

nopoly, which is the origin of our patent system today.

lars and is growing yearly. There is every likelihood

At some time, lost in antiquity, someone had the that licensing markets and licensing exchanges will

bright idea of building a house for the sole purpose become almost as prolific in the business world

of selling it for someone else to live in. This was as property rentals are in the general community. We

not like the craftsmen who were commissioned to have already seen proposals from groups like Ocean

complete a structure, rather it was an enterprising Tomo to develop markets to trade bundles of licence

craftsman building on speculation, or perhaps build- rights. For instance, see the article at http://www.secu-

ing with the purpose of occupancy but grasping the ritiesindustry.com/issues/19_101/-23772-1.html which

opportunity of sale when it came along. Much more says in part, “The ULR (Unit Licence Right) system will

recently, the holders of patents realised that income work much like a securitized bond offering or IPO:

could be generated by transferring ownership of Companies with portfolios of patents will issue the

their monopoly to someone else. As shown in the ULRs, which are simply standardized patent licenses,

table we call this ‘assignment,’ but it is selling the via IPXI to multiple buyers. Each ULR contains at least

intellectual property in the same way as selling real one issued patent for buyers to use for a prescribed

property. The difference is that IP agents are not technology or service they need or seek to run their

as prolific as real estate agents, but how long will business. IPXI monitors and enforces licensing usage

that remain the case? A reasonable conclusion from rules; meaning compliance is essentially outsourced

a study of real estate is that the market for intel- to the exchange. Royalty-free cross-licensing, in which

lectual property could develop to be as abundant companies often trade their technology for free, could

in a hundred years or so and that sales agents will be eliminated by the system, Malackowski says. And,

buyers which do not use

Table 2. Evaluation Factors For The

all of their ULRs can seek

to resell them to others

Intellectual Property Markets

needing them over the

system in a secondary

Technical Factors Legal Factors Commercial Factors

market.”

Influence of the

Is the patent in a

Enforceability Developments such

technology in the field desirable industry?

as the Ocean Tomo ULR

Scientific basis for Strength relative to Is the industry emerging, concept seem radical,

the technology other patents declining, mature? but it is not very different

Originality of the Breadth Can the patent from property trusts that

have been operating in

technology generate revenue?

the real property markets

Can the patent protect

Generality of the for many years.

Novelty a revenue generating

technology

Patent Auctions

position?

Relevance/obsolescence Claim, scope Is the invention Another innovation

borrowed from real prop-

of the technology and breadth significant or trivial?

erty markets are patent

Degree of technical Confidence in the Can an infringement

auctions. Ocean Tomo

importance to the

validity of the patent be easily detected?

has been leading the way

business

in this space, although

Difficulty of

Enforceability Is the inventor involved? not alone. The offering

manufacturing

of intellectual property

Number of existing Ability to detect Has there been

for sale by auction is a

alternative solutions infringement publication?

relatively recent devel-

106 les Nouvelles

Value Of A Patent opment, whereas real property auctions have been operating for hundreds of years, although it is only within the last 50 years or so that they have become popular for house sales. Some markets have seen a decline in the popularity of auctions, so perhaps we can predict a rise and fall in the popularity of patent auctions as well.

A more recent development in the real property markets is property swaps. A house owner in one loca-tion (say the mountains) swaps houses with someone in another location (say the beach). One person gets a sea change and the other gets a tree change. The swap may be short term, medium term or permanent. Can we expect to see similar IP transactions in the future? The history of real property markets and the close parallels we can see in intellectual property markets strongly indicate that a market in swaps will develop. The workshop concluded that many lessons can be

learned from real property markets to chart the future of intellectual property markets. Existing valuation models that place a dollar value on the worth of a

patent are likely to give way to more sophisticated evaluation models that seek to take into account a broad range of evaluation factors and recognise a wider range of markets than currently exist. These factors can be loosely grouped into technical fac-tors, legal factors and commercial factors. Financial valuation is merely one element in the commercial factors. By way of example the table shows some considerations in each factor group. Interestingly, a study in 1977 (Weiss, D. E., in

“From Stump-Jump Plough to Interscan: A Review of Invention and Innovation in Australia / Papers Deliv-ered at a Meeting of the Science and Industry Forum of the Australian Academy of Science,” Australian Academy of Science, Canberra, 1977) identified 17 factors common to successful new product launches and grouped these into commercial factors, technical factors and human factors. It is not surprising that intellectual property evaluation should look at similar groups of properties. Perhaps the only surprise is that it has taken 40 years to get there. ■

June 2010 107

Recent U.S. Decisions

Recent U.S. Decisions And Developments

Affecting Licensing

By Brian Brunsvold and John C. Paul REASONABLE ROYALTY AWARD CANNOT BE UPWARDLY ADJUSTED BASED ON LICENSES UNRELATED TO CLAIMED INVENTION As a remedy for infringement, U.S. patent law al-

lows patentees to receive damages that are not less than a reasonable royalty for the use of the invention by the infringer. Courts derive the reasonable royalty from a hypothetical negotiation between the patentee and the infringer at a time when the infringement began. Many factors, called Georgia- Pacific factors after a case of the same name, apply to the hypotheti-cal negotiation. The first factor requires considering past and present royalties that the patentee received from licensing the patent in suit. In ResQNet.com Inc. v. Lansa Inc., Nos. 2008-1365, -1366, 2009-1030 (Fed. Cir. Feb. 5, 2010), the United States Court of Appeals for the Federal Circuit held that it is improper for courts to consider licenses with no relationship to the patented invention to determine the reasonable royalty. ResQNet.com, Inc. (“ResQNet”), a software devel-

opment company, owned patents related to screen recognition and terminal emulation processes to display information on personal computer screens. Lansa, Inc., also a software development company, distributed a terminal emulator program called “New-Look,” developed by an Australian company, in the United States. ResQNet charged Lansa with patent infringement for this program.

After finding infringement, the district court awarded ResQNet damages of $506,305 for past in-fringement based on a hypothetical reasonable royalty of 12.5 percent. The court also imposed a 12.5 per-cent ongoing royalty for future infringement. Lansa appealed the damages award to the Federal Circuit. On appeal, the Federal Circuit reviewed the district

court’s application of the Georgia-Pacific factors for the hypothetical negotiation. Particularly, the court considered the propriety of applying certain past licenses to the first Georgia-Pacific factor. Building on its recent decision in Lucent Technologies, Inc. v. Gateway, 580 F.3d 1301, 1327-28 (Fed. Cir. 2009), the court determined that the district court improp-erly relied on licenses with no relationship to the patented invention, resulting in a speculative and

unreliable basis for the award. As it did in Lucent, the court determined that “some of the license agree-ments [were] radically different from the hypothetical agreement under consideration and the court was unable to ascertain from the evidence presented the subject matter of the agreements.”

The district court relied on two types of existing li-censes to reach the 12.5 percent royalty rate. The first type included two straight-royalty based licenses for the claimed invention. Both of these licenses resulted from litigation settlements for the patents in suit. One was a lump-sum payment of stock, which could not be analogized to a royalty rate. The other was for a royalty rate, but at much less than 12.5 percent. The second type included five re-bundling licenses at royalty rates between 25-40 percent. These licenses had no relation to the patented invention. Instead of licensing the patent, they licensed software products, software code, and support services. Nonetheless, the district court used the re-bundling licenses to upwardly adjust the straight-royalty based licenses to 12.5 percent. The district court noted that the 12.5 percent rate was “somewhere in the middle” of the two types of licenses. The Federal Circuit faulted the district court for

relying on the re-bundling licenses because they were unrelated to the patented technology. It found two parts of the analysis particularly troubling. First, the court took issue with the “extremely high rates” in the re-bundling licenses. The district court did not convincingly set out how to analogize a rate for the patented technology, when these licenses covered a much broader scope. Second, the court found little evidence in the record linking the re-bundling licenses to the patented technology. The hypothetical negotiation requires a link between the past license agreements and the patent in suit. The court was not satisfied that a link was established. Without legally sufficient evidence to support the 12.5 percent roy-alty award, the court vacated the decision. In dissent, Judge Newman argued that the panel

majority created a new rule “whereby no licenses involving the patented technology can be consid-ered, in determining the value of infringement, if the patents themselves are not directly licensed or if the licenses include subject matter in addition to that which was infringed by the defendant…” In her

108 les Nouvelles

Recent U.S. Decisions view, the district court took into account the varying facts between the two types of licensing agreements and logically reached the 12.5 percent royalty rate. Rather than mere speculation, she found ample evidence in the record to conclude that the district court made a reasoned decision. She concluded that the majority’s new rule essentially allows an infringer to do no worse than the lowest previously accepted royalty rate. Judge Newman contrasted Lucent because the

award here was smaller than the average award in the re-bundling licenses. In Lucent the award was higher than the average award in the unrelated li-cense agreements. Moreover, the court made clear in Lucent that the unrelated licenses could not support the damages award, as a matter of law. Rather, the court determined that the district court’s analysis was not logical and thorough, as she believed it was in this case. PRIOR LICENSE OF AN INFRINGED PATENT DOES NOT BAR PERMANENT INJUNCTION

In 2006, the Supreme Court confirmed that the traditional four-factor test for permanent injunctive relief applies in patent infringement cases. Under this test, before a court may grant a permanent injunction, a patent owner must show that: (1) it has suffered an irreparable injury; (2) remedies available at law (i.e., monetary damages) are inadequate; (3) the balance of the hardships favors the party seeking an injunction; and (4) a permanent injunction would not disserve the public interest. Since the essential attribute of a patent is the “right to exclude” others from infring-ing the patent, the Federal Circuit has stated that infringement may cause a patent owner irreparable harm that cannot be remedied by a reasonable royalty.

In Innovention Toys, LLC., v. MGA Entertainment, Inc., No. 07- 6510 (E.D. La. Jan. 13, 2010), the United States District Court for the Eastern District of Louisiana granted the patent owner’s motion for permanent injunction following the court’s judg-ment of patent infringement. This case involves laser board games. A three-man company, Innoven-tion Toys, is the assignee of a patent directed to a light-reflecting board game, and the company’s sole product is Khet: The Laser Game, which practices the patent -in-suit. MGA Entertainment is a large toy and game manufacturer that makes, among other things, a game called Laser Battle. Both parties sell their product nationwide, but recently, Wal-Mart and Toys “R” Us, co-defendants in this case, have decided to only stock one laser board game and both chose to stock MGA’s game. Prior to filing suit, Innoven-tion had licensed the asserted patent to a third party

to develop a video game based on the Khet game.

Innovention filed a suit for patent infringement, and the district court found that Innovention’s patent was valid and infringed by MGA’s game. Shortly thereafter Innovention requested the district court permanently enjoin all the defendants from selling the MGA game found to be infringing. Innovention argued that its injury could not be compensated by a reasonable royalty or other monetary damages alone. The record before the court showed that Innovention’s primary business is practicing the patent-in-suit, that the much- larger MGA was its direct com-petitor, and that both Wal-Mart and Toys “R” Us had decided to stock only MGA’s game and not Inno-vention’s game. I n n o v e n t i o n further argued that anything less than a full permanent in-junction would force a compul- sory license on Innovention against its direct competitor when that competitor kept Innovention from a signifi-cant share of the market with its infringing product. MGA countered that an injunction was inappropri-

ate in this case because Innovention had previously licensed its patent, suggesting that monetary dam-ages are adequate. Innovention stated that this was not actually a patent license, but rather a software development license. In addition, MGA pointed out that another retailer, Target, sold both games. In finding for Innovention, the Court disagreed

with MGA, holding that because the parties are direct competitors and the retailer defendants stock only MGA’s game and no others, Innovention had shown irreparable injury for which no adequate remedy at law exists. The existence of other license agreements is just one factor for the court to consider, and in certain circumstances, adding a new competitor to the market may create an irreparable harm that the prior licenses did not. Thus, following the Federal Circuit precedent, the district court found that this single prior patent license was not sufficient per se to establish a lack of irreparable harm if MGA were licensed. Moreover, the district court found that the fact that defendant could point to one major retailer that sold both games did not ameliorate the

June 2010 109

■ Brian Brunsvold, Finnegan, Henderson, Farabow, Garrett & Dunner, LLP,

Attorney, Washington, D.C., USA

E-mail: brian.brunsvold@ finnegan.com

■ John C. Paul,

Finnegan, Henderson, Farabow, Garrett & Dunner, LLP,

Attorney, Washington, D.C., USA

E-mail: john.paul@finnegan.com

Recent U.S. Decisions patent owner’s irreparable harm, where two other major retailers are only selling MGA’s game. In as-sessing the relative hardships of enjoining MGA’s product, the court considered that Innovention is a small company and its sole product practices the patent -in-suit, whereas MGA’s Laser Battle is but one of many of its products. The district court found that allowing MGA to continue to infringe would restrict the market for Innovention’s game, but even with an injunction, MGA, the much larger company, would be able to stay in business while it develops a workaround game. Finally, while this case entailed no major health or safety issue, the court found that the public, nonetheless, has an interest in maintaining a strong patent system and that the public has no compelling need for more than one patented laser game. Thus, having considered the four-factor test for injunctive relief, the district court granted the patent owner a permanent injunction. JOINT PATENT OWNER’S CONTROL OVERRIDDEN BY AGREEMENT BETWEEN THE JOINT OWNERS A patent may be owned by more than one party,

termed “joint owners.” Under the Patent Act, joint owners of a patent may make, use, offer to sell, or sell the patented invention within the United States or license the patented invention to a third party without the consent of the other owners and without sharing the proceeds with the other owners. The statute, however, provides that a joint owner may give up these rights by entering into an “agreement to the contrary” with the other co-owners. Thus, the general rule controls unless there is an agreement between the co-owners to the contrary. In Wisconsin Alumni Research Foundation v. Xe-

non Pharmaceuticals, Inc., No. 08- 1351, 06-3901 (7th Cir. Jan. 5, 2010), the United States Court of Appeals for the Seventh Circuit held, among other things, that the agreement between the plaintiff Wis-consin Alumni Research Foundation (“WARF”) and Xenon constituted an “agreement to the contrary” under the Patent Act. Thus, the Seventh Circuit found that co-owner Xenon had breached its agree-ment with WARF when it failed to share royalties on the revenues from a licensing agreement for their shared patent and assigned the license to a third party without WARF’s consent. This case involves a series of agreements between

WARF (part of the University of Wisconsin) and Xenon, a Canadian pharmaceutical company. The parties jointly sponsored certain research related to a cholesterol-lowering enzyme and eventually

received a method patent on this work. Shortly thereafter, Xenon exercised an option in the par-ties’ joint agreement to take an exclusive license to make, use, and sell products arising from the patent and in exchange agreed to pay WARF a percentage of proceeds, including any royalties received from sublicensing the patent to another party. Xenon used the patented method to develop a set of com-pounds. Later, Xenon signed a license agreement with a third party purporting to transfer ownership of those compounds. After learning of this agree-ment, WARF demanded its share of the sublicense fees and Xenon refused, claiming it had a right to license its interest in the co- owned patent without being subject to the parties’ license agreement. Consequently, WARF filed a lawsuit claiming Xe-

non breached the parties’ exclusive license agree-ment and Xenon should pay WARF a percentage of the royalties received from the third party. The district court found that the parties had “an agree-ment to contrary,” and therefore, the general rule for co -owners did not apply. Accordingly, the district court found that Xenon had breached the agreement by failing to pay royalties, awarding WARF $300,000 in damages. Xenon appealed.

On appeal, Xenon argued that nothing in its agree-ment with WARF explicitly revoked its statutory rights to license its interests in the co- owned patent freely. The Seventh Circuit noted that this was true, but also found that the agreement required Xenon to pay WARF a share of the fees derived from any subli-cense, which plainly undermined Xenon’s argument that it had retained its statutory rights unfettered. In addition, the agreement prohibited assignment of the exclusive license between the parties without WARF’s consent. The Seventh Circuit explained that WARF agreed to forego its right to separately license the patent in exchange for receiving a share of the profits from Xenon’s commercialization of the technology, either directly or from a sublicense to a third party. Accordingly, Xenon received a signifi-cant benefit from the agreement and should not be allowed to avoid paying royalties or sublicense fees to WARF simply by labeling the transaction with the third party a “license” rather than a “sublicense.” Thus, the Seventh Circuit affirmed the district court’s holding, including the damages award. PENALTIES FOR FALSE MARKING AS-SESSED ON A PER-ARTICLE BASIS, NOT A PER-DECISION BASIS Qui tam actions authorize private individuals to file

suit on behalf of the government for fraud committed against it. In the United States, the government au-

110 les Nouvelles

Recent U.S. Decisions thorizes actions by private individuals against parties that falsely mark products with patent numbers under 35 U.S.C. § 292. In these false marking qui tam ac-tions, the challenger must prove that a party marked an unpatented article and had intent to deceive the public. If the challenger prevails, the false marker must pay a penalty of up to $500. The challenger splits the penalty with the government. In Forest Group, Inc. v. Bon Tool Co., No. 2009-

1044 (Fed. Cir. Dec. 28, 2009), the United States Court of Appeals for the Federal Circuit held, among other things, that the penalty for false marking is on a per-article basis, not a per-decision basis. That is, the false marker must pay the statutory penalty for each article falsely marked, not for a decision to falsely mark all articles. The Federal Circuit affirmed a deci-sion of the district court that Forest falsely marked its products, but it vacated the district court’s decision imposing only a single $500 penalty.

This case involved a patent directed to a spring-loaded parallelogram stilt, commonly used in con-struction. Forest, which manufactured stilts and owned the patent-in-suit, sued Bon Tool, a competitor, for infringement. Bon Tool had originally purchased stilts from a co -owner of the patent, but started pur-chasing from a foreign supplier, which manufactured identical replicas without a license from Forest. After Forest filed suit, Bon Tool counterclaimed alleging false marking by Forest. The patent required infringing devices to include a

“resiliently lined yoke,” which was understood to mean “a yoke or clamp lined with a material that is capable of being elastically or reversibly deformed.” In a parallel litigation in a different court for infringe-ment of the same patent, the defendant was granted summary judgment of non-infringement on Novem-ber 15, 2007 because they did not have this feature. Interestingly, Forest’s own stilts did not have this feature either, and as a result, would not be covered by Forest’s own patent By the time of the November 15, 2007, decision,

Forest had hired new patent counsel, who advised Forest to modify its stilts to include a resilient lin-ing. Forest, however, placed at least one order to its manufacturer for marked with the patent number.

The district court here concluded that Forest had the requisite intent to deceive as of November 15, 2007—the date of summary judgment in the parallel litigation. Forest knew its stilts where not covered by the patent at that time. Thus, the district court granted summary judgment on Bon Tool’s counterclaim of false marking, fining Forest $500 for a single offense.

Bon Tool appealed the district court’s judgment

on false marking for two reasons. First, it argued that Forest had intent to deceive before November 15, 2007. Second, it argued that false marking should be charged on a per-article basis. Forest Group did not appeal. The Federal Circuit held that the district court

did not clearly err in finding that Forest lacked the requisite intent to deceive before November 15, 2007. The evidence supported the district court’s conclusion that Forest genuinely believed its stilts were covered by the patent before that date. The inventors of the patent and owners of the patent were not well-versed in patent law. They had hired experienced patent counsel to draft their application using an exemplar of their stilt. The court cautioned, however, that it did not suggest that multiple claim constructions or summary judgments are necessary before the requisite knowledge of false marking can be found. On the second issue, the Federal Circuit agreed

with Bon Tool that the false marking statute required penalties on a per-article basis. The court started with the plain language of the statute, which states in relevant part:

Whoever marks upon, or affixes to, or uses in advertising in connection with any unpatented article, the word “patent” or any word or num-ber importing that the same is patented, for the purpose of deceiving the public… Shall be fined not more than $500 for every such offense.

35 U.S.C. § 292. The court concluded that the phrases “any patented article” and “every such of-fense” clearly require that each article that is falsely marked with intent to deceive is an offense.

Forest relied on a century old case from First Circuit, London v. Everett H. Dunbar Corp., 179 F. 506 (1st Cir. 1910), which held that false marking carries only a single fine. The London court held that the statute must only impose a fine for a single offense because a penalty for each article would be disproportionate for false marking of small and inex-pensive articles. But the Federal Circuit dismissed the argument, for the statute in London was materially different to the current statute. The previous stat-ute imposed a fine of “not less than $100” for false marking. Under the current statute, district courts have discretion to assess the per-article fine at “not more than $500.” Because district courts can impose small fines for false marking of small and inexpensive articles, the current statute eliminates the policy concern expressed by the London court.

June 2010 111

Recent U.S. Decisions The Federal Circuit also noted that policy consid-

erations support a per-article interpretation of the statute. False marking deters innovation and stifles competition. Potential competitors may be dissuaded from entering the market or incur expensive design-around costs. They may also incur costs to analyze the validity or enforceability of patent marked on a product with which they would like to compete. False marks could also deter scientific research when an inventor foregoes continued research to avoid pos-sible infringement. These injuries occur each time an article is falsely marked, not one time when a party decides to falsely mark. Moreover, imposing only a single fine, would be insufficient to deter nearly all cases. Congress intended to encourage third parties to bring qui tam suits. Having only a single fine would discourage the suits. The Federal Circuit acknowledged that its

holding would encourage “a new cottage industry” of false marking litigation by plaintiffs who have not suffered any direct harm and lead to a possible rise of “marking trolls.” The court noted, however, that the statute explicitly allows that outcome. The statute permits qui tam actions, providing a monetary incentive for parties to sue on behalf of the government to deter false marking. The Federal Circuit remanded the case back to

the district court so that it could determine the number of articles Forest falsely marked and the amount of the penalty for each article. DELIBERATIVE INDIFFERENCE SUFFICIENT TO PROVE KNOWLEDGE OF PATENT FOR INDUCED INFRINGEMENT The U.S. patent laws allow a patentee to recover

damages for inducement of infringement. That is, a party who actively induces another to infringe is liable as an infringer. In DSU Medical Corp v. JMS Co., 471 F.3d 1293, 13 (Fed. Cir. 2006) (en banc), the United States Court of Appeals for the Federal Circuit held that inducement requires showing of “specific intent to encourage another’s infringement.” Thus, to prove this form of indirect infringement, the patentee must show that the alleged infringer knew or should have that his actions would have induced another to infringe. The requirement necessarily includes that requirement that the alleged infringer knew of the patent. The court in DSU Medical did not, however, define

the knowledge-of-the-patent requirement. Following up on DSU Medical, the Federal Circuit held, among other things, in SEB S.A. v. Montgomery Ward & Co., Nos. 2009-1099, -1108, -1119 that “deliberative

indifference” of a patent is sufficient to show knowl-edge of the patent. The court affirmed a decision of the district court finding Pentalpha Enterprises, Ltd., induced infringement of SEB S.A.’s patent. The case involved a patent directed to a deep fryer

with an insulated, inexpensive plastic outer shell, or skirt. SEB, a front company that specializes in home-cooking appliances, manufactured deep fryers with the patented technology, called “cool touch.” Pentalpha manufactured competing fryers, which it sold to other companies, including Montgomery Ward. These companies sold deep fryers with their own trademarks. In developing its deep fryer, Pentalpha purchased

an SEB fryer in Hong Kong and copied its “cool touch” features. Pentalpha hired an attorney to conduct a “right-to-use study.” The attorney analyzed 28 patents and concluded that none read on Pentalpha’s deep fryer. Pentalpha did not tell the attorney that it had copied an SEB fryer. SEB accused Pentalpha of inducing Sunbeam, who

purchased Pentalpha deep fryers and sold under its own trademarks, to infringe. During trial, Pentalpha argued that it could not have induced infringement because it did not have “any knowledge whatsoever with respect to the existence of the patent.” SEB argued that a jury could infer Pentalpha’s knowledge of the patent, and thus specific intent, through Pen-talpha’s actions in copying SEB’s deep fryer and fail-ing to disclose that to its attorney. The district court agreed with SEB and allowed the jury to decide the inducement claim. The jury found, among other things, that Pentalpha

induced others to infringe the patent. Pentalpha ap-pealed this and other findings to the Federal Circuit. As for inducement, Pentalpha argued that the district court erred because actual knowledge of the patent is required. Pentalpha contended that the district court applied a “knew or should have known of the pat-ent” standard, alleging that it was inconsistent with the Federal Circuit’s decision in DSU Medical. That decision explicitly states that the accused infringer “knew of the patent.” The Federal Circuit rejected Pentalpha’s conten-

tions and affirmed the district court. It acknowl-edged that a showing of specific intent is required but stated that specific intent in a civil context is not so narrow as to allow an accused infringer to deliberatively ignore a patent. The court stated that deliberate indifference is not the same as a “should have known” standard. Deliberate indifference may require a subjective determination that the defendant knew of and disregarded an overt risk. “Should have

112 les Nouvelles

Recent U.S. Decisions known” implies a solely objective test. An accused infringer may defeat a showing of subjective deliber-ate indifference of a patent where it was genuinely unaware of even an obvious risk. More importantly, the court noted that deliberate indifference is not different from actual knowledge, but is a form of actual knowledge. In this case, the Federal Circuit held that adequate

evidence supported the jury’s conclusion that Pen-talpha deliberatively disregarded the risk that SEB’s product was patented. Evidence showed that Pental-pha purchased and copied SEB’s deep fryer. Pental-pha failed to inform its attorney about the copying. Evidence also showed that Pentalpha’s president was well versed in U.S. patent law. In contrast, Pentalpha did not produce any exculpa-

tory evidence to prove it genuinely believed a patent did not exist. Pentalpha made no argument that it actually believed no SEB patent existed. The Federal Circuit rejected Pentalpha’s argument that it should be excused because the fryer it bought was not marked. The court stated that such an argument lacks credibility because Pentalpha provided no explanation for why one would expect a product purchased in Hong Kong to have U.S. patent markings. To conclude its decision, the Federal Circuit noted

that it was not setting the outer limits of the type of knowledge needed for inducement. Thus, whether other forms of knowledge, e.g., constructive knowl-edge with persuasive evidence of disregard for clear patent markings, are sufficient for the knowledge-of-the-patent requirement, is still an open question. ■

June 2010 113

Notes

Notes: les Nouvelles

•Patent and Technology Licensing June 2010

•LES International Societies

•www.LESI.org

les News Licensing Executives Society International

Education Gives Purpose

In This Issue: • LES Turkey, Page 2 • LES Japan, Page 3 • Book Review, Page 4 • EU Trademark System, Page 6

• Recent Court Decisions, Page 12

• Graduate Student Business Plan Competition, Page 13

• LES (USA & Canada) Annual Meeting, Page 15

• LES New Members, Pages 14

Call For Papers Suitable papers for publica-tion in future issues of les Nouvelles are being sought. Members or non-members who have presented papers at conferences or created original works are invited to submit their work. Submit in electronic form via e-mail or disk (MS Word or text-only format) to:

Larry Plonsker Editor, les Nouvelles 10580 Northgreen Dr. Wellington, FL 33449 E-

mail: editor@LESI.org

By D. Patrick O’Reilley, President, LES International

The stated purposes of LES are summa-rized by the phrase “education and

networking.” LES emphasizes and pro-vides both, but education is the greater of

the two. To many members the phrase refers to les

Nouvelles and the member directory. Certainly our journal provides education; it is a unique source of scholarly and practical information on the many aspects of commercializing intellectual property. For members who use it, the directory provides a valuable resource—knowledge-able contacts worldwide who are generally willing to assist any member who asks.

For members who have attended meet-ings or programs offered by Member Societies or LES International, the phrase “education and networking” means much more. It refers to numerous plenary presentations, workshops and courses providing education at all levels of so-phistication. Such meetings also provide formal and informal opportunities to meet and socialize with others in attendance.

In my travels as president, I have had the pleasure of participating in several Member Society programs which confirm for me that the Society and its members are truly focused on education. In No-vember, LES Korea held its bi-annual conference at which several hundred heard presentations on various aspects of intellectual property transactions. In January, our newest society, LES Turkey, held a well- attended, two-day program in Istanbul. Topics addressed included IP as financial assets, intellectual assets as a strategic corporate tool, venture capital funding, and competition law. In February, LES Israel held a meeting in Tel Aviv at which over 50 members and non-members actively discussed concepts of open innovation and its implementation. In April, LES Australia & New Zealand held its annual meeting in Adelaide where top-

ics ranged from the development and com-mercialization of WIFI to commercialization of university technology.

Of course, in April, the LESI Annual Meeting was held in Sandton, South Africa. The educational content was remarkable. Before the meeting officially began, the basic course, IAM 100, was offered as well as add-on programs that were well attended. During the following three days, nearly 400 in attendance from over 50 countries gained from a stimulating and eclectic plenary pro-gram and numerous challenging workshops. Those in attendance learned about FIFA’s li-censing program for the World Cup, the pros and cons of treating traditional knowledge as IP, programs on publicly funded research around the world, the UNCITRAL proposal for treatment of secured IP transactions, and minerals R&D in various African countries.

I have mentioned these particular pro-grams because I was there and was able to observe the interest and enthusiasm of those present. As I continue to attend LES meetings, I am sure I will observe the same standard of education and the same interest and enthusiasm. Presently I am scheduled to participate in a joint LES Singapore-LES Philippines program in Manila, a day-long program organized by LES Malaysia, the LES (USA & Canada) Spring meeting in Boston, the Pan-European Conference in Budapest, a joint meeting of LES China, LES Hong Kong Chapter and LES Chinese Taipei in Singapore, the Americas Tour starting in Chile, and the LES (USA & Canada) meeting in Chicago.

Each of these meetings illustrates two fundamental characteristics of LES mem-bers. First, like all professionals, they contin-ually seek education. It is remarkable how many of those attending LES meetings have years of experience and, in many instances, could teach the material they are listen-ing to. No matter their experience level, these members know they do not know everything. They are continually seeking knowledge; they are continually pursuing

See President, continued on Page 11 1

les News—Your Link to LES International LES Turkey (LES TR) First International Event Held In Istanbul By Omer Hiziroglu

LES International’s newest member LES Turkey (LES TR) just held its first international two-day annual event in Istanbul on January 28-29, 2010. The event was organized

by LES TR’s Meetings Committee and was held in conjunction with LESI’s Winter Meeting at

Istanbul Intercontinental Hotel. The program was sponsored by IAM magazine, LES

Germany, Inovent Corp and Enterprise Europe Network (EEN). EEN organized a brokerage event in parallel with the conference that brought about a hundred Turkish and European SMEs in quest of strategic partners.

This event was the culmination of two years of efforts by former ATLET (Association of Technology Licensing Executives Turkey) members to insure entry into the LES community. ATLET had started its bid to become LES Turkey under the tutelage of Heinz Goddar and LES Germany in 2007. Throughout the years ATLET had held several organizations that boasted speakers, such as Heinz Goddar, Peter Chrocziel, Jochen Schaefer and Markus Jacobi.

ATLET had been presented as a candidate for full membership by Adam Liberman during the Manila con-ference in the Philippines. The candidacy of Turkey was voted on during the delegates meeting in San Francisco in September of 2009.

The idea of holding a major event was proposed by then President-Elect Patrick O’Reilley in February of 2009 when he informed the ATLET’s Board of Directors of his choice of Istanbul as a possible venue for LESI’s Winter Meeting.

The plans and the program of the conference were outlined during a meeting between Pat O’Reilley and ATLET’s General Secretary during the Manila Confer-ence, and the proverbial ball started to roll.

LES Turkey did benefit from exceptional support from Patrick O’Reilley, in particular, and LESI Board Members as well as various members of national societies across the world. Nigel Jones, President of LES Britain & Ire-land, LESI immediate Past President Adam Liberman, and Pat O’Reilley were among the very first to commit to the program as speakers.

The two-day program was designed to celebrate the launch of LES Turkey and to attract new membership with an exceptional lineup of international speakers.

The organizers also wanted to emphasize one of LES Turkey’s broader goals to promote technological innova-tion through the efficient management of intellectual assets and the creation of a sustainable and foreseeable local ecosystem. Thus, the event was organized under the theme of “Strategies of Intellectual Property Man-agement: Technological Innovation in Turkey and Global Ecosystem.”

The program focused on the critical importance in setting up and eventually implementing legal and busi-ness infrastructures and the efficient use of technology transfer tools, such as license agreements, to achieve strategic business goals.

Keynote address was presented by one of LES Turkey’s greatest champions, Heinz Goddar. Professor Goddar and another long time friend of LES Turkey, Jochen Schaefer, were recognized for their efforts for the creation of a national society in Turkey and were presented with commemorative plates by the Organization Committee.

Speakers touched upon issues such as the role of IP in creating a competitive advantage for SMEs, IP as an alternative asset, University technologies as well as alternative financing tools for developing early stage technologies.

Jochen Schaefer outlined various strategies for SME’s to acquire technology while James Malackowski focused on alternative mechanisms for monetizing IP. Haluk Zon-tul from Turkish Technology Investments, Jose Romano from European Investment Fund and LESI’s president elect Alan Lewis provided a general vision of the ven-

Plenary lecture by Prof. Dr. Heinz Goddar.

LES Turkey President Ersin Dereligil and LES Turkey Del-egate Omer Hiziroglu, presented plaques recognizing the efforts of Prof. Goddar, LES Germany, and Jochen Schaefer, LES Germany, in bringing LES Turkey to fruition.

2 Licensing Executives Society International

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events, see www.lesi.org.

ture funds, corporate risk capital and early stage financing mechanisms in Turkey and elsewhere.

A particularly interactive session was led by Nigel Jones and Dr. Cem Bozkurt on Health and Life Sciences in Turkey and abroad.

Kevin Nachtrab’s patent maps led an attentive audi-ence to scribble furiously in their notebooks while Ada Nielsen’s talk on efficient utilization of intellectual assets in corporations was widely reported as one of the most engaging presentations.

Halfway through the program, LESI President Patrick O’Reilley presented LES Turkey’s President Ersin Dereligil with the LES flag and then joined immediate Past President Adam Liberman in expounding the legal side of licensing and cooperation agreements. Erdem Türkekul from Turkey provided a general picture of the Turkish competition law and its application with a few recent decisions of Turkish courts.

John Walker and Paul Germeraad touched respectively on the complex issues of managing intellectual assets of public research organizations and universities while Linda Chao led the audience through an engaging summary of best practices for university technology commercializa-tion mechanisms with specific examples from Stanford University.

Omer Hiziroglu reported on the state and challenges of technology commercialization in Turkish universities while Selcuk Karaata provided a detailed picture of the landscape of innovative activities in Turkey.

Despite the snow and adverse weather conditions about 130 registered participants from 20 different countries followed the two-day event.

The program was concluded by a lively cocktail social that also marked the beginning of LESI’s Winter Meeting, held over the weekend. ■ Presenting the LES flag to LES Turkey—Pat O’Reilley, LESI President; Ersin Dereligil, LES Turkey National President; Prof. Heinz Goddar, LES Germany; and Omer Hiziroglu, International Delegate for LES Turkey.

LES Japan

New Officers Elected

At the Annual Meeting held on February 17, 2010, LES Japan elected Junichi Yamazaki as President, Kat-sumi Harashima as President Elect, Junko Sugimura, Tora-hiko Maki, Hiroyuki Hirayama, Takao Yagi, Masahiro Esa-ki,

Ichiro Nakatomi, Yuji Ohmagari and Toshinari Tsuruhara as Vice-Presidents, Sadaji Sugiyama as Secretary, and 23 other

Board Members for the year 2010, the Immediate Past President being Masau Takayangi.

Junichi Yamazaki is an attorney-at-law/patent attorney, partner of Miyake & Yamazaki. He is a Vice-Chair of Long Range Planning Committee of LESI. Katsumi Harashima is Executive Director of Business Development of Taiyo, Nakajima & Kato Intellectual Property Law, and a member of Meetings Committee of LESI.

At present, LES Japan has 633 members and is engaged in a wide range of regular as well as ad hoc activities including Annual Conferences in various places in Japan, 10 monthly lecture meetings both in Tokyo and Osaka, Licensing Courses (Basic & Practical courses) also both in Tokyo and Osaka. Its 14 Working Groups are work-ing on such selective subjects as Economic Valuation of Intellectual Property (Tokyo and Osaka), Anti-Monopoly Law, USA Issues, East Asia, Asia Issues Studies, Case Law Studies (Tokyo and Osaka), Trade Secrets, Corporate Law/ IP Management, Healthcare, Network Business, Licensing and Management and Group Studies.

This year, the Annual Conference will be held on July 9 and 10 in Fukuoka (Hakata District), Kyushu and expects around 200 attendees who will be offered lectures, Work-ing Group presentations, dinner, golf and sightseeing. ■ March Article Correction

In the March 2010 issue of les Nouvelles on page 8, “What

Makes For Good Patent Due Diligence?” by Jeff Miller,

Mickey Minhas, Natasha Radovsky and Michael Thumm,

the following chart was missing arrows.

Figure 1. Levels Of Due Diligence

Targeted

•Advanced

•Intermediate

•Basic

General

Low High

Deal Value

June 2010 3

les News—Your Link to LES International

Book Review | By Dr. M Rashid Khan Conquering Innovation Fatigue: Overcoming The Barriers To Personal And Corporate Success By Jeffrey Lindsay, Cheryl A. Perkins, and Mukund Karanjikar Wiley, ISBN-10: 0470460075

Introduction innovation” as a radical way

his well-written book by Dr. Jeffrey Lindsay, Director solve difficult problems.

Tof Solution Development at Innovationedge, Cheryl The three major fatigue

Perkins, founder and President of Innovationedge, and factors identified in the

Dr. Mukund Karanjikar, a consultant, reveal nine major book can be simplified

“fatigue factors” that can block the path to innovation the three Ps in this

success. They also recommended solutions to energize reviewer’s opinion. These

innovation. Original advances in innovation practices three Ps are People, Pro-

and new case studies were applied to guide users in con- cess (Organization Culture/

quering innovation fatigue. Strategy) and Public (Exter-

Innovation fatigue has been experienced by nearly all nal Sources).

organizations in one way or another, and some were suc- People factors relate to

cessful in overcoming the fatigue. For example, Scottish personal flaws of individual

Higher Education in 1998 acknowledged that schools inventors. The book also

were suffering what they called “innovation fatigue” fac- challenges the notion that

tors and took appropriate actions to address the issues. only the gifted genius has the monopoly on significant

The result of addressing the fatigue was that Scotland innovations. People fatigue means that the way people

led Europe with high-speed broadband networks allow- act is based on their perceptions. For example, theft of IP

ing interactive multimedia links among higher education can result from individual greed. Excessive demand and

institutions in various regions.1 expectation from inventors can block the innovation pro-

The authors highlight the fact that the road to innova- cess. Arrogance and too much demand from the internal

corporate innovators can also serve as a fatigue factor:

tion fatigue is paved with good intentions embodied in

laws, regulations, and even corporate policies. Therefore, 1. Idea theft, lack of trust: Theft of invention and

organizational leaders must be aware of unintended exploitation of inventors.

consequences that may follow from their good intentions 2. Innovator deficiencies including unreasonable ex-

that end up “killing innovation.” My preferred view is

pectations, impatience and unhealthy pride. Systematic

that innovation happens easily when we deal with our

flaw in understanding the innovation process.

real needs and passions solving a practical problem and

The “Not Invented Here” (NIH) syndrome: Arrogance

seeking a solution that yet does not exist.2, 3 Much talk

and excessive pride can shutdown opportunities. A lot

about championing innovation is not always effective in

of innovation fatigue can be overcome in relatively small

all cases. The fatigue in internal innovation process could

steps. Would-be innovators face some very dangerous

have been the positive forces for organizations to look

streets that must be crossed, and steps can be dangerous.

into new ideas to overcome the barriers of innovation.

Months of progress can be erased when an innovator is

“Open innovation” or “challenged-based innovation,”

hit by “Don’t Understand Innovation” (DUI) syndrome

which created dramatic changes in many companies

with a momentary exposure to an “innovation fatigue”

and businesses, are in a way fighting the fatigue of in-

event. Theft of an invention, corporate NIH syndrome,

novation experienced by many. As an example, P&G is

painful process with IP processes or regulations, and

one of many companies who embraced the concepts of

other factors can stand in the way of success.

open innovation. Others discovered “challenged based

The “Black Hole” of the patent office was identi-

fied as a source of people fatigue. When patents are

1. Wojtas, Olga, Innovation Fatigue, Published on 29 De- not protected in a cost-effective, proactive and timely

manner, the innovators are discouraged. The example

cember 1995, www.timeshighereducation.co.uk/story.asp?sto

cited in the book was not only a unique case for Boise,

ryCode=96537&sectioncode=26 (Extracted on Dec. 8, 2009).

Idaho, where HP computer employees faced a wall of

2. Khan, M. Rashid, Innovation, Intellectual Properties for

fatigue because the changes in which the patents were

Business Development, ISBN13 (TP) 978-1-4363-4778-5,

managed in a centralized command and control man-

www2.xlibris.com/books/webimages/wd/48328/book.htm.

3 . Khan, M . Rashid, www. triz - jour nal . com/ar - ner, but the situation is relevant in many organizations

chives/2005/01/02.pdf. around the world.

4 Licensing Executives Society International

For global member directory, news and les News—Your Link to LES International

events, see www.lesi.org.

Process or Organizational Factors

Major fatigue factors identified in the area of process include: (a) Breaking the will to share because of loss of trust in the company process (loss of trust); (b) Flaws in decision-making and vision are also fatigues related to open innovation. These fatigue factors are not only reflections of human nature, but a reflection of a culture that prevails in many corporations, or even government. This includes organizational strategy and culture.

These fatigues arise from strategies, policies and cul-tures in an organization. Poor decision making process, weak Performance Management Process (PMP), weak incentives, stricter or matrices in valuating opportuni-ties contribute to the fatigue factors. Large corpora-tions can pose a huge barrier to creativity to individuals who “think differently” from the prevailing corporate cultures. Immigrants and minorities can be categorized in this class, despite lip service by the management on diversity. The authors categorized these factors into the following categories: 1. Breaking the will to share and loss of trust; 2. Flaws in decision making and vision–means

failure to engage creative people into decision; and 3. Fatigues related to open innovation–corporate

bar-riers to external innovation and collaboration. Public (External) Fatigue sources include the Laws

and Regulations: 1. Patent pains and barriers to IP protection; 2. Regulatory pain and challenges in policy

regulations, and law; and 3. University industry barriers. Although the barriers of innovation were intended to

be external sources and external regulators outside the area of scope or organizations, many of the barriers can be organizational as well—such as patent pain. In many companies, patent processing is not only slowed by the patent office backlog, but also because Lawyers, rather than IP professionals, with little experience in innovation and product development are running the patenting business, a point the authors failed to include. The authors highlight that conquering innovation fatigue is vital in avoiding many pitfalls.

The book identifies the factors that lead to innova-tion fatigue in many organizations, and recommend cost-effective solutions including guidance on intel-lectual assets, dealing with disruptive innovation, and driving innovation using the “Horn of Innovation” and “Circuit of Innovation” models. An interesting view of DaVinci, as an engine of open innovation was presented. Throughout the book, a unique aspect is exploring the voyage of innovators, including corporate employees

and entrepreneurs, at the often overlooked personal level using the image of immigrants in a strange land to identify barriers and solutions. Concluding Remarks

To achieve innovation success in the corporations or organizations, one needs to better understand the nine major innovation fatigue factors and their variations. Once these factors are understood, innovation managers can then work around the factors identified and discover energizing factors that can overcome the fatigue.

Innovation can be risky and often very hard work, even when one knows what is expected. Although, navigating the path of innovation blindly without a map or GPS, or without knowing the risks and what to look for can cause a painful DUI encounter that can erase all those steps previously taken. Sometimes, small steps are no longer appropriate, and one needs to take a “giant leap forward,” to carry over an accident-prone crossing. The book can be a guide in taking that giant leap forward.

According to the authors, the factors that drive some companies to become great can also become a barrier to innovation. Large companies tend to implement complex processes with good intentions and grow a culture of barriers that impede innovation, often without know-ing. Changing culture can be a very painful experience. The authors correctly cite that the first step must be to recognize that a problem exist in a corporate innovation process.

Many innovative leaders recognized the fact that problems may have crept into their innovation process and many have been visionary enough to implement a major cultural shift. Shifting the culture and chang-ing the behavior of the management and employees is not easy—and often requires some major stimulus for change. The U.S. success in space industry and science and technology was triggered by former soviet “Sputnik” challenges. Faced by crisis, many stagnant corporations around the world are in need of such a “Sputnik mo-ment.” Rather than responding to crisis by facing hard reality, many resorted to cost cutting, firing very innova-tive people that would otherwise reinvigorate the engine of growth by cultivating innovation into the corporate culture. In the world economy today, organizations cannot afford not to innovate. Conquering “innovation fatigue” is an urgent and serious imperative in today’s world and the book highlights some very useful insights toward the cause. ■ The view expressed is that of the author, Dr. Rashid

Khan, and does not reflect that of his employer. About the reviewer: Dr. M Rashid Khan is Leader,

Corporate Innovation at Saudi Aramco, e-mail: Rashid. khan.1@aramco.com

June 2010 5

les News—Your Link to LES International LESI Highlight LESI Contributes To The EU Commissioned Study On The Overall Functioning Of The European Trademark System By Jean-Christophe Troussel, European Committee; Martin Schneider and Elisabeth Logeais, Trademark Committee

The Licensing Executives Society International (LESI) wel-comes the launch of the study on the trademark system in Europe, to be performed by the Max Planck Institute

which has invited several trademark user organizations to present their views by responding to the questionnaire in the Commission’s tender.

Indeed, after 15 years of coexistence of national trademark systems and the extremely successful CTM introduced in 1994, in a European Union which comprises now 27 Member States, it is the right time to take stock of the efficiency of the two-tier current system and to identify areas of improvements, taking into consideration users’ feedback.

The approach of LESI at this stage of the process was to select a set of relevant questions on which its members were most likely to voice an experienced and value-adding view-point, bearing in mind the impact of the European trademark system on licensing practices, which is a main focus of LESI.

The enclosed responses to the selected set of questions come from various LES national chapters, members of which do business in the EU and use the EU trademark system, in particular the CTM. Yet, due to time considerations which have limited the number of responses at this stage, these preliminary comments will focus more on providing an over-all feedback on the assessment of the efficiency of the CTM and interaction with national trademark systems harmonised by the Directive 2008/95 EC of 22 October 2008 (formerly Directive n° 89/104 of 21 December 1988). Background to LES International

The Licensing Executives International (LESI) is a global, not-for-profit, professional association made up of 33 national and regional societies, representing 94 countries. The national LES societies count altogether 12,000 individual members (including 3,500 in Europe) involved in the licensing, trans-fer and management of intellectual property rights. It is the largest professional organisation in the intellectual property field. Its aims include:

• setting and promoting consistent, high professional standards for licensing executives on a global basis; and

• informing and interacting with global organisations and policy concerning the economic significance and impor-tance of licensing and other transfer of technology and intellectual property rights.

LES members come mainly from business, ranging from large multi-national organisations to SMEs but also from universities, the public sector, consultants and law firms and patent attor-neys. LESI therefore occupies a unique position in representing such a wide variety of interests rather than the special interest nature of many other industry and professional organisations.

It is important in particular to note that LESI does not ex-ist to

advance the interests of a particular sector, but rather seeks to promote greater innovation through research and development, as well as to optimise the use of creative signs and works, such as trademark and designs, to carry business in a secured environment providing fair and balanced IP pro-tection, with a view to promote a properly functioning system of intellectual property protection, including trademarks.

Within LESI are various working groups composed of experts in their particular areas. Two of these groups are the European Committee and the Trademark Committee. LESI, through the national LES national societies, includes members which business requires the efficient registration, protection, licensing, valuation, enforcement and defence of trademarks. The European Union, forming a single market of now 27 Member States, is a primary geographical zone of investment and business for enterprises worldwide. Thus, the functioning of the TM system in Europe is a necessary concern for most of LES members. Accordingly, LESI hereby wishes to report the general views expressed by a number of societies, and to reflect faithfully the diversity of opinions. Summary of Comments 1. Global satisfaction on the coexistence of the CTM and national trademark systems

Businesses need to have a choice between national versus CTM registrations, depending on their size and on their current and prospective area of activities which may cover a small or significant number of Member States.

Also, the definition of rights conferred upon trademark owners is found overall to be satisfactory.

Yet a few drawbacks have been highlighted: • a CTM registration, which is duly registered but is not

used, may compel a potential applicant of a later national trademark to seek first cancellation of the CTM for lack of use, which is an onerous legal action;

• the possibility, in case of an opposition, to convert the CTM application to a distinct national application is welcome but the conversion solution is expensive and requires examination de novo by the concerned national offices;

• the inconsistent approaches among national trademark offices and OHIM regarding inherent registrability (ab-solute grounds, new forms of trademarks).

3. Need to enhance coordination and improve consisten-cy of postures of national trademark offices and OHIM:

Businesses need to rely on harmonised, coordinated and consistent approaches within Europe. In that respect, they ex-perience a need for improvement mainly in the following areas:

6 Licensing Executives Society International

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events, see www.lesi.org.

- searchability of CTMs, national and international trade-marks designating EU Member States through a widely accessible global database;

- coherent assessment of some sensitive issues like dis-tinctiveness, interpretation of the scope of products/ services classification, similarities, and cross-similari-ties, risk of confusion, genuine use.1

Answers to Selected Questions 1.1 Registration 1. Definition of signs of which a trademark may

consist (Article 2 TMD, 4 CTMR) To what extent is the required capability of being repre-

sented graphically still a relevant and appropriate require-ment for a sign to qualify as a trademark with regard to non-traditional trademarks? What could be appropriate alternative requirements to establish instead of it?

Some members (from Germany) are in favour of a reg-istration of new forms of trademarks by national PTOs, provided they can be represented (but not necessarily in a graphical manner). In this respect, sound marks should be eligible for trademark registration, subject to detailed description and provision of samples. Under the U.S. trademark system graphic representation is not required, and yet clarity is achieved with respect to registration of non-traditional trademarks, so the U.S. members of LESI favour the registration of trademarks which can be described with a sufficient level of specificity to enable identification, without such description amounting per se to a requirement of graphic representation.

Other members (from Benelux, Canada and UK) in-sist that the representation must be an unambiguous representation of the mark that is easily understood in a non-technical language and that can be easily searched. Others, for instance from Czech Republic, prefer to stick to the traditional concept of visually perceptible signs (as opposed to smells, touch marks, etc.) because of the im-possibility to search these new forms in databases unless further classification system similar to Vienna is introduced. Some other members (from Austria) are happy with the current practice. 2. Classification To what extent does OHIM’s practice of encouraging list

of goods and services corresponding to the headings of the Nice classification system meet the business needs of applicants with a view to the objective of avoiding un-necessarily broad specifications of goods and services?

There is a general consensus of members who answered this question to reject OHIM’s practice that encourages the designation of lists of goods and services corresponding

1. Sample decisions showing an unfortunate discrepancy in the approaches of the OHIM and the German PTO : Case 2870/2000 of 29.11.2000 RONDO; case R 0082/2002-4 (-1) EVIAN/REVIAN ; case C-2006/04 SIR-ZIRH

to the headings of the Nice classification. Filing for wide ranges of goods and services impedes the application of trademark for more precise goods/services (at least for 5 years), increases risks of non use or of contestation based on similarity of goods/services and brings into question the bona fide intent of the applicant to use its trademark for the whole range of goods/services that are designated.

Conversely, the use of definitions of specific goods and services (even tailor-made, some members advocate) is rec-ommended, with a harmonisation of national approaches.

In this respect, the EuroClass project launched by OHIM and calling for the cooperation of the national PTOs, which aims at creating a common harmonised trademark classifica-tion database for goods and services, should be encouraged. 3. Claiming priority (Article 30 CTMR) To what extent should priority claims be verified by

the OHIM in future? (Simple recording to substantive examining of such claims?)

It is generally considered that verification by OHIM should be minimal because most of national PTOs provide reliable online database and records of priorities. 4. Seniority claims To what extent does the option of claiming seniority

of a national trademark still match the needs of users? (There are very few seniority claims: Answers should es-tablish the reasons why).

This option is not in wide use and many owners of national trademarks are not well informed on the option of claiming seniority. Several LES members do not see its interest, especially because (i) restoration of national trade-marks is not possible in case of invalidation of the CTM and (ii) national laws are silent or not explicit on the status of seniority claims and clarification should be introduced in national laws in that respect. The U.S. perspective is that claiming old national registration remains important to the CTM system in terms of reducing the need to maintain national registration and associated costs. To what extent should seniority claims be verified by

the OHIM in future? (Simple recording of claim or full examination.)

Some respondent-LES members have advocated a system of substantive examination and others prefer a system of simple recording with OHIM. 5. Examination process and reliability

(a) Access to trademark protection To what extent are users satisfied with the granted

level of access to trademark protection? (The reply to this question should establish to what

extent users are satisfied with the registration practice at EU level and to what extent they consider this practice either too liberal or too strict. The related results of the EBTP survey should be taken into account.)

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There is an overall satisfaction about the current practice of OHIM and the CJ. Yet, some members find that OHIM and the CJ are too strict regarding registrability of “lauda-tory” marks (Germany), whilst some other members (from UK) expressed the opinion that OHIM’s practice is too liberal, allowing marks which should have been refused on absolute grounds.

(b) Quality of examination To what extent does the examination practice of

OHIM meet users’ expectations of providing for certainty that the resulting CTM registrations are entitled to a presump-tion of validity?

(The reply to this question should not only establish the level of users’ satisfaction on this point but also analyse the relevance and efficiency of pertinent quality standards and quality control mechanism established by the OHIM to ensure the required high quality.)

The general feedback is that the service quality is good. It is felt by some EU members that absolute grounds ex-amination does not appear to be always consistent, thus undermining the degree of certainty of the validity of the registration. It has also been highlighted that the absence of examination by OHIM of potential conflicting earlier rights (relative grounds) also contributes to undermine this presumption of validity.

By contrast, non EU members are satisfied with the de-gree of consistency which they experience as higher than in their national countries.

For some members (from Germany), it would be useful to extend the internal guidelines on absolute grounds, even better to issue a general user guideline on current OHIM practice and case law. Also, continued training of OHIM’s staff and increased possibilities to search the OHIM’s data-bases would be welcome, for instance on case law updates.

To what extent does the examination practice of OHIM meet users’ expectations of consistency in examination for formal deficiencies, such as classification, or in examina-tion for absolute and relative grounds, at the various levels of OHIM activity (examination, opposition, cancellation, appeal)?

The response to points a, b and c is overall a satisfaction with the current practice of OHIM. Some drift on respon-siveness have however been noted in some complex cases. 6. Searches (Article 39 CTMR)

(a) Optional search for national rights To what extent has the recently introduced optional

search system for national rights proved to be effective and efficient for users?

The general position is that the search is not perceived to be of much practical use. The searches are viewed as a nice add-on at competitive prices, but will not replace professional availability searches, where required. Some of our members have expressed the view that they would not miss the optional search system if it were abolished and

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some highlighted that it is not much used by trademark owners anyway.

(b) Mandatory search in the CTM Register To what extent has the mandatory search in the CTM

Register proved to be effective and efficient for users? Again, such searches are considered to be of limited

value (only for information purposes). They do not replace profes-sional availability searches. As the search is quite narrow in scope, limited to essentially an “exact mark” search, also from the U.S. and Canadian perspective, these searches are experienced as being of limited utility. This being said, some members (from Austria) would like to keep the search mandatory and not optional.

(c) Demand for additional or different services Would users like the OHIM to offer different or ad-

ditional search services? The position of our respondents, LES members, is

somehow divided on this issue. As a principle and gener-ally speaking, most are in favour of additional services, such as a pre-filing search reports. In this regard some LES respondents suggest that OHIM’s surplus funds currently available could partly be used to fund a cost-effective and efficient service to determine earlier CTM rights.

A discussion on the possibility of OHIM providing pre-filing search reports implies a discussion on the extent to which the OHIM would be bound by such searches, in case of opposition proceedings for instance. The Czech LES respondents-members favour the OHIM to assess the relevance of local earlier rights. Members from LES Austria would welcome pre-filing searches and qualified reports assessing the relevance of identified earlier rights. This is also the U.S. perspective which favours a system similar to theirs with a belief that the value of a CTM registration would be enhanced by the availability of a comprehensive EU-wide search system. Others, e.g. LES Germany members-respondents fear that offering such services would finally mean a first step towards ex-officio examination which would generally not be desirable. With regard to a pre-filing search system they believe it would be reliable only, if and where the OHIM would accept a liability with regard to the conclusions drawn and assess-ments made (which would be unlikely to happen). They and LES respondents-members from other countries are of the opinion that such searches and related assessments are a core element of legal advice which should be left for the attorney service market.

(a) Optional search for national rights To what extent has the recently introduced optional

search system for national rights proved to be effective and efficient for users?

(The reply to this question should establish the degree of user satisfaction with the optional search system for national rights (including price).)

(b) Mandatory search in the CTM Register

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To what extent has the mandatory search in the CTM

Register proved to be effective and efficient for users? (The reply to this question should establish the degree

of user satisfaction with the mandatory search in the CTM Register and consult with users whether this search should become optional as well.)

(c) Demand for additional or different services Would users like the OHIM to offer different or ad-

ditional search services? (The reply should establish to which extent (potential) users would be interested in being provided with other or additional services in the area of searching, such as, for example, pre -filing searches, or qualified search reports which do not only list possible conflicting earlier rights but also assess the relevance of these hints.) 2.2 Scope of protection afforded 1. Rights conferred; sanctions (Article 5 TMD, Article 9 CTMR) Does the definition of the rights conferred upon propri-

etors in case of infringements still satisfy current need? Is there a need to align the customs seizure sanctions

with the civil sanctions, in particular in case of import, export, and transit transactions?

Should the CTMR include the same sanctions, in accor-dance with the Directive 2004/84/EC on the enforcement of IP rights, as are made available for the infringement of national IP rights?

The general position is that the current definition of rights conferred upon trademark owners satisfies the pres-ent needs. It has been suggested that famous non-registered CTMs should also be protected under Art. 9 CTMR against use for dissimilar goods or services in the same fashion as provided for by Art. 5 point 5 of the harmonization EU Directive no. 2008/95/EC.

Different views have been expressed regarding align-ing customs seizure sanctions with civil sanctions, some members being favourable and some others leaving it to national laws which have been harmonized on this aspect of remedies through the EU Directive 2004/48/EC. 2. Use questions To what extent is the territorial requirement for a

CTM to be genuinely used “in the Community” (Art. 15 CTMR), as interpreted in the related Joint Statement by the Council and the Commission of 20 December 1993, still appropri-ate in view of a Community market now comprising 27 Member States? To what extent has the current system with regard to

the user requirement, including the 5 years grace period proved to be efficient and effective to reduce the total number of trademarks protected in the Community, and, consequently, the number of conflicts which arise between them? (Art.15 CTMR)

Generally, use in a single Member State of the EU, is still perceived as a reasonable requirement to protect the CTM against cancellation for non use. However if the CTM is used only in a small Member State like Malta or Cyprus, the perception is that it is insufficient to qualify as a genuine “use in the Community”. Token use should be avoided and to this effect, some LES respondents-members suggest to take into consideration the geographic expansion of the trademark’s use and the public addressed by such use. Some others consider that a substantial use in one to three Member States should be sufficient to protect against revocation for non use. There is a shared concern that the CTM should not be an obstacle to local registrations in Member States where the CTM would not be used ever.

However, because of the unitary nature of the CTM and the goal of a single market, some LES respondents-members want that commercial use in one Member State be con-sidered as a genuine use, otherwise legal uncertainty on the risk of cancellation of the CTM for non use may lead businesses to prefer filing national applications.

There is a keen desire to maintain the five-year grace period to account for (i) the business hope of the widest development possible in the EU, (ii) the investments made for new trademarks and (iii) the length of regulatory delays in the pharmaceutical industry. However, to limit the nega-tive effect of freezing national registrations in Member States where the registered CTM is unlikely to be used, a shorter grace period of three years has been suggested by some respondents-members of LES UK and LES Austria. 3. Territory of acquired distinctiveness (Article 7(3) CTMR) Is there a need for clarifying the territorial scope in

respect of which acquired distinctiveness must be shown and, if yes, what would be an appropriate solution?

It is indeed generally felt that the territorial requirement to show acquired distinctiveness should be clarified. The onus of establishing acquired distinctiveness in all 27 Mem-ber States to avoid a risk of refusal on absolute grounds is particularly heavy and most of the time, it is impossible to adduce such evidence.

A proposal was made by members from the Czech Re-public pursuant to which where descriptiveness depends on a language issue, then acquired distinctiveness should be proven in all countries having at least one official lan-guage being the language of descriptiveness and where descriptiveness does not depend on a language issue, then acquired distinctiveness must be established in all Member States. Another proposal from LES Germany respondents-members was that showing acquired distinctiveness in more than 40% of the Community population would be enough. By contrast, members from LES Austria wish that acquired distinctiveness in one country should be considered as being sufficient. 4. Feedback on grounds for refusal 4.1 Bad faith as additional absolute ground for refusal

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Should bad faith be added to the list of absolute grounds for refusal?

(The reply should analyse the usefulness and added value of bad faith constituting also an absolute ground in the reg-istration procedure.)

There is some questioning as to the capacity of the OHIM to appreciate bad faith which entails some interference of a private party with a third party’s interests and relies on a specific case-by-case analysis. Also, the OHIM examiner would have to resolve two issues:

• If he/she relies on observations made by third parties (art. 69 CTMR) who are not parties to the examination process and in case said observations would be insuf-ficient, how would the examiner complete evidence?

• What would be the criteria of assessment of bad faith and the means to collect evidence?

If for these reasons, it may not be reasonable to add bad faith as an absolute ground for refusal, an alternative approach is to include bad faith as a relative ground for refusal which can be claimed more usefully in opposition proceedings rather than in cancellation procedure. Based upon experience in the U.S., the U.S. feedback is that determination of bad faith should be left to the courts rather than any registration body. Members from Austria are in favour of including bad faith as an absolute ground for refusal. 4.2 Examination of relative grounds (Article 8 CTMR)

(a) No ex-officio examination To what extent has the examination of relative grounds

only upon opposition, i.e. not ex officio, proved to be effec-tive and efficient to deal with conflicting earlier trademark rights?

Because it is actually impossible for OHIM to examine ex officio relative grounds, the current system is found satisfac-tory. In any event, it is not advisable to have an ex-officio examination which will inevitably prolong proceedings and associated costs and will reduce the reliability of issued registrations.

(b) Introduction of “accelerated registration” procedure To what extent is there support for introducing an op-

tion for requesting the accelerated registration of a CTM application against the payment of a higher fee and with opposition occurring thereafter?

There is not a common view on the opportunity of an ac-celerated registration procedure. Some members are satisfied with the current improvements in the speed of processing, others are of the opinion that all CTMs applications should be treated in the same fashion, some others are favourable to a fast track service upon payment of a higher fee or are against registration issuing prior to opposition. 5. Opposition procedure (Art. 42 CTMR)

(a) Pre-registration opposition system To what extent has in the users’ view the providing of op-

position proceedings before registration (‘pre-registration 10 Licensing Executives Society International

opposition system’) proved to be effective and efficient to best accommodate the interests of both CTM applicants and holders of earlier rights compared to a post-registration opposition system?

The pre-registration opposition system is globally found efficient, not overly expensive and it allows prevention of infringements. Trademark registration should be a reliable title and to this effect, it is advisable to have a pre-registration opposition system.

(b) Well known and reputation marks (Art. 8(2)(c) and Art. 8(5) CTMR) Is there a need for clarifying the difference between or

the common features of well-known trademarks and those with reputation?

Several members would welcome a clarification of the meaning of the two terms, i.e. whether and to which extent they differ or whether they should be used interchangeably (see in this respect in Case C-487/07, 10 February 2009, L’Oréal SA vs. Bellure NV the opinion of the Advocate General Mengozzi). The general feeling is that no distinction should be made and the two categories should be unified.

Some members have highlighted that, whilst art 6bis of the Paris Convention seems to refer to protection of unregistered trademarks, the EU Harmonization Directive and the CTM Regulation seem to refer to an already registered well-known trademark or trademark with a reputation. Also, respondents-members from Germany expressed the view that the common and distinct features between well-known trademarks and those with a reputation is well enough handled and that the concept of art. 8(4) CTMR is at least as much interesting as the concept of well-known trademarks under Art. 8(2)(c) and Art. 8(5) CTMR

(c) Appropriate relative grounds To what extent have the relative grounds under Article

8(3) and (4) CTMR proved to be appropriate subject matter to be dealt with in opposition proceedings with a view to their legal and evidentiary complexity?

Generally speaking, Art. 8(4) CTMR is found very relevant and may be more useful than Art. 8(3) CTMR.

Members have highlighted that both provisions have proved to be very useful due to their ability to cover special aspects of bad faith despite their evidentiary complexity. For instance these provisions allow to deal with cases where an agent or representative of a trademark owner applies for registration in his own name without the consent of the trademark owner, as well as cases where prior national non-registered trademarks or other signs used in the course of trade can be invoked in opposition proceedings.

Of course the evidentiary complexity is significant and in this respect the guidelines at OHIM regarding the respective national practices are found to be a useful tool and it is sug-gested that these guidelines develop guidance on this topic and include respective national statutory provisions and be regularly updated.

(d) Opposition period

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To what extent does the period of three months to file

an opposition still meet the interests of users? The three-month term is globally found adequate,

enabling pre-opposition settlement negotiations. Members from UK suggested that like in the UK, the opposition period could be two months with an option for extending it by a further month. To balance the interests of the applicant and those of the opponent, some members suggest a reduced one month period, extendible (members from the U.S. and Austria for instance). To what extent does the providing of an additional two

month period for filing the grounds of appeal still meet the needs and interests of users?

Some members find that an additional two-month period is not excessive considering the overall length of the proceed-ings and the need for the appellant to collect information and instruct its counsels. Some others would rather welcome the abandonment of this additional period with a view to avoid long opposition proceedings. Conclusion

LESI will continue to seek feedback from the national LES societies and their members and to follow up the next steps of development of this Study on the Overall Functioning of the Trademark System in Europe.

LESI would like to highlight that many issues listed in the questionnaire have a substantial impact on the licensing of trademarks in Europe and that training of practitioners and businesses active in Europe is essential to enable a better use of both national and CTM systems. To this effect, guidance on criteria applied to assess similarity of goods and services, risk of confusion, genuine use and trademark use in relation to the functions of trademarks would increase consistency and legal certainty.

Also, further information and access to databases should be seriously contemplated, especially regarding searchability of prior rights, national regulations relevant for Art 8(4) and (5), statistics on the number and effects of transformation of CTMs in national trademarks, the number of CTMS revoked by national courts versus by the OHIM in infringement pro-ceedings where the nullity of the CTM is counterclaimed, comparative approaches of the risk of confusion in the member states.

LESI’s main statements at this stage are the following: 1. Development of electronic tools for faster filing and searchability of national and CTM databases must be continued and enhanced;

2. Harmonization should be pursued regarding the con-cepts of well-known trademarks/trademarks with a reputation and functions of trademarks;

3. The impact of other regulations or kindred issues regard-ing CTMs and national trademark system in Europe (such as bankruptcy laws, customs regulations, application of exhaustion of rights) could also be conjured up in the Study in order to verify whether guidance is further needed on these aspects as well. ■

President, continued from Page 1 professional development. The spectrum of educational content offered at LES meetings and through LES courses serves not only to educate those new to the profession, but also to provide experienced members the opportunity for professional development.

The second characteristic of LES members is a willing-ness, indeed a passion, for sharing their experiences to educate others. Many of the speakers at LES meetings are LES members who volunteer their time and experience to educate others. The courses offered by LES worldwide are taught by LES members who, with some training, use their experiences to illustrate and explain the principles outlined in the curriculum.

LES members also give back to their profession in numer-ous other ways. They write many of articles for les Nouvelles. They grade and comment on business plans submitted by students in the LES Business Plan Competition; the students often distinguish the LES competition from others because of the valuable, practical, experienced-based feedback they receive from LES members. They mentor new LES members both in the dynamics of the LES organization and of the licensing profession.

Education by LES members extends outside the organiza-tion. LES members in the European Committee volunteer their time and experience to educate policy makers in the European Commission and other EU entities on the practi-cal realities of the IP business and on the potential impact of their policy decisions. LES members in the External Relations Committee not only educate members of inter-national organizations such as WIPO and WTO on how the technology marketplace functions, but also educate new licensing professionals in developing countries through programs of such international organizations. LES members in most LESI Committees serve an educational function, from designing and presenting workshops at meetings to developing standards for transnational contracts and for valuation of IP assets.

If you step back and view LES from an outside vantage point, it is really an organization of professionals who value continuing education and who volunteer their time and ex-perience to provide education to others. While networking is important, it comes naturally. Education is the principal reason for LES and its greatest value to its members and to the profession.

You can contribute to the education offered by LES. You can write an article for les Nouvelles. You can participate in a meeting by chairing a workshop. If you cannot attend meetings, you can grade student business plans on line or participate in on-line programming. For example, LES (USA & Canada) periodically offers webinars over the Internet; anyone can contribute to that education without travelling.

LES provides education based on the experiences of its members. Your experience is valuable. If you want to con-tribute to the LES education program, let me know. There are many options and opportunities. ■

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Is Reed Elsevier vs. Muchnick A Settlement Between Publishers And Freelance Authors? By Richard Michaud & Elizabeth Galletta

The U.S. Supreme Court’s decision in Reed Elsevier, Inc. et al. v. Muchnick et al. 599 U.S. ____ (2010) will un-

doubtedly be seen by many as approval of an $18M settle-ment agreement reached between publishers and freelance

authors. However, it is not. In Reed Elsevier, the U.S. Supreme Court specifically

“express[es] no opinion on the settlement’s merits.” Id. published opinion at 16. Rather, the Court reverses the U.S. Court of Appeals for the Second Circuit conclusion that a federal district court lacks subject matter jurisdiction over infringement claims involving unregistered copyrights, thereby reviving the settlement of copyright suits that began over ten years ago.

The $18M settlement followed the Supreme Court’s 2001 decision in New York Times Co. v. Tasini, which held that the Federal Copyright Act does not permit publishers to reproduce works authored by freelance authors without specific permission from the authors. 533 U.S. 483 (2001).

Sandton, South Africa LESI Conference 2010

In April, 2010 the LESI Annual Meeting was held in Sandton, South Africa. Pictured above is Johan Du Preez, chairman of the organizing committee, addressing the conference. Nearly 400 people in at-tendance from over 50 countries gained from a stimu-lating and eclectic plenary program and numerous challenging workshops. Those in attendance learned about FIFA’s licensing program for the World Cup, the pros and cons of treating traditional knowledge as IP, programs on publicly funded research around the world, and minerals R&D in various African countries.

After Tasini, several copyright infringement cases, which involved both registered and unregistered copyrights, were consolidated in federal district court, where eventually a class action and subsequent settlement was certified. Ten freelance authors objected to the settlement and the case was appealed to the Second Circuit.

The Second Circuit, sua sponte, raised the question of whether a federal court had subject matter jurisdiction over infringement claims concerning unregistered copyrights. While “all parties filed briefs asserting that the District Court had subject-matter jurisdiction to approve the settlement agreement even though it included unregistered works,” the Second Circuit “concluded that the District Court lacked jurisdiction to certify a class of claims arising from the in-fringement of unregistered works, and also lacked jurisdiction to approve a settlement with respect to those claims.” Reed Elsevier, published opinion at 4.

The case before the Supreme Court concerned the require-ments of 17 USCA §411(a) and “whether §411(a) deprives federal courts of subject-matter jurisdiction to adjudicate infringement claims involving unregistered works.” Id. at 2. Section 411(a) “provides, inter alia and with certain excep-tions, that ‘no civil action for infringement of the copyright in any United States work shall be instituted until preregis-tration or registration of the copyright claim has been made in accordance with this title.’” Id., published opinion at p.2, citing 17 USCA §411(a).

In concluding that §411(a) does not restrict a federal court’s subject matter jurisdiction over copyright infringe-ment claims involving unregistered works, the Court states that §411(a) does not clearly state that the registration requirement is jurisdictional, and any jurisdictional cast al-leged by Amicus arguing in support of the Second Circuit is not valid since §411(a):

(1) “imposes a precondition to filing a claim that is not clearly labeled jurisdictional;”

(2) “is not located in a jurisdiction-granting provision;” and (3) “admits of congressionally authorized exceptions.” Id. published opinion at 11. Having now determined that failure to comply with the

registration requirements of §411(a) does not restrict a fed-eral court’s subject-matter jurisdiction over claims involving unregistered copyrights, the case will now return to the Second Circuit, where the issues raised on appeal will be addressed. ■ Authors: Elizabeth Galletta, Patent Attorney, Michaud-Kinney Group, e-mail: galetta@mkgip.com and Richard Michaud, Managing Partner, Michaud-Kinney Group, e-mail: michaud@mkgip.com

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