US Supreme Court ruling on exhaustion worries lots of people

An article, "US Supreme Court decision on patent exhaustion worries TTOs", appears in the August issue of the subscription-only journal Technology Transfer Tactics. It discusses the US Supreme Court decision on patent exhaustion in June in Quanta Computers, Inc. v LG Electronics, Inc. The court ruled, in essence, that the application of the doctrine of patent exhaustion meant that LG could not control the downstream use of technology that it had licensed to Intel. That technology was used in Intel chips that were later sold to Quanta and other computer manufacturers. The decision means that LG cannot seek royalty payments from Quanta or other computer makers that purchased components produced by Intel under its licensing agreement with LG. Experts agree that this decision, while not in fact earth-shattering, underscores the need for strategic thinking when formulating licensing strategy and deciding how to implement it.

"Comes with music" and other experiments

A good article in the Irish Independent by Stephen Foley reflects the tensions that underpin the relations between the music performing/recording industries on the one hand and DRM-based music delivery systems such as iTunes on the other. While there is plenty of money in the iTunes business model, the intriguing questions remain (i) whose money ultimately is it and (ii) how can recording companies claw themselves back into the market for the delivery of albums now that iTunes accounts for more than two-thirds of all paid-for downloads. In this context Foley asks: "what is the point of the iTunes store if music is free?" The point is that, between file-sharing, promotional offers and Radiohead-style business models (see earlier IP Finance post here) the means of accessing music for free keep increasing -- which makes it difficult for anyone to compete with a paid-for product. For this reason

"The value of music sales in the US and Western Europe at the start of the decade was well over $20bn a year, almost all from CDs. In 2008, that will be down to $13.1bn, of which digital music accounts for $2.7bn. In short, revenues from paid-for downloads and online subscription services are not coming close to making up for the decline in CD sales. And Screen Digest predicts they never will. The market in 2012 will be $11.6bn, it calculates, with just $4.6bn from digital sales".

Foley then cites the forthcoming Nokia "Comes With Music" initiative, which will launch before Christmas, selling phones-cum-music players that allow users to download and keep an unlimited amount of music. Universal and Sony BMG are said to be enthusiastically backing the service. Other experimental products are in the pipeline; for example, three of the four major labels are said to have signed up to support a new service by MySpace which will stream music for free on artists' pages on the social networking site, in return for sharing advertising revenues.

OPEN SOURCE: WHO IS MAKING MONEY?

The romantic lore about the open source movement sometimes hides the fact that there are business models out there attempting to cash in on the freely available (and modifiable) software programs. The iffy state of the business side of the open source world was discussed in an August 18th article that appeared on the online service of Business Week magazine. Entitled "Open Source: An Open Question for Red Hat and Others," the article discussed a variety of points worth mentioning.

Since Red Hat is widely identified with the business side of the open source world, let's begin with it. The good news is that Red Hat saw a 32% increase in quarterly sales for the most recent period, to $157 million dollars. That translates into a 7% increase in profits. So why the bearish position of Wall Street analysts about Red Hat? According to the article, the bears on the Street continue to express concern about the slowing growth rate of the company.

At least two major reasons are cited for this sluggish growth. First, companies like Red Hat are more tech-support companies rather than purveyors of must-have technology. Second, brand awareness of their products remains low, apparently even so for a company supposedly as well-known as Red Hat.


So is anyone making out like a bandit in the open source space? Surprisingly perhaps, the article suggests that the winners are the traditional high tech goliaths--such as IBM, Hewlett-Packard, Oracle and Intel. Their success is based on taking advantage of the desire of companies to make increasingly lavish (and free) use of open source products by selling these companies complementary hardware, databases and consulting services to the open source products.

For instance, IBM sells billions (yes, billions) of dollars of hardware, middleware and services that are connected with open source programs. Oracle, the database giant, has made Linux a lucrative platform for its products. And the list goes on.

The bottom line here is the painful truism that, for open-source companies, just because their products enjoy large markets does not not mean they are currently enjoying commensurately large commercial success. Linux is free, IBM software is not. Guess who wins commercially, at least for the present. Investors and Wall Street are paying careful notice.

The bears on the Street are taking notice.

Cost-based valuation: is it a live issue?

An article by Simon Rowell, "Understanding Intellectual Property Value", was published earlier this month on IPFrontline.com. Reviewing IP methodology valuations, it inevitably discusses the cost-based, market-based and income-based techniques. On the cost-based methodology it says this:

"... This method looks at the historical cost incurred to develop and create the intellectual property. ...

There are many inherent problems with the cost approach. The most significant is that it fails to reflect the earnings potential of the intellectual property. The value of intellectual property is derived from its earning potential, and not its cost. ...

If the intellectual property offers significant economic advantage in an active market, the use of the cost method is likely to understate its value. If, on the other hand, development has been inefficient or lengthy, the use of the cost method might overstate its value. Also, for many identifiable intangible assets, it may not be possible to develop a replacement, or it may not be possible to estimate the replacement cost.

In its favour, the cost approach is useful as a readily calculated bottom-line valuation".

All of this is fine. But now here comes my confession of ignorance. I have never, in my admittedly limited and subjective personal experience, seen a live example of the cost approach that has ever been used for anything to do with IP rights. Does anyone in fact use it? Or does it only exist in articles and talks on IP valuation as an example of something that isn't much use?

If readers can enlighten me, perhaps referring me to examples of active use of the cost-based approach, I'd be very grateful. If it seems that no-one does use it, can we make all articles and talks on IP valuation one paragraph shorter by dropping it?

Illegality doesn't prevent franchisor recovering sums owed under a contract

The latest Allens Arthur Robinson Focus on Franchising carries a note by Andrew Wiseman and Tim Holden on Master of Education Services Pty Ltd v Ketchell, an important decision on illegality and its effect on the ability of the parties to seek or reclaim money from one another.

In short, franchisor Master of Education sued Ketchell, the franchisee, before a local court in order to recover for money due under a franchise agreement. Ketchell claimed that since Master of Education failed to comply with clause 11 of the Australian Franchising Code, the franchise contract became unenforceable for statutory illegality. At trial the court concluded that, while Master of Education did not comply with the Code, its failure to do so did not render the receipt of the non-refundable payment illegal.

The New South Wales Court of Appeal concluded that the franchise agreement was effectively prohibited by the law; accordingly Master of Education could not recover the moneys claimed. The High Court has since unanimously upheld Master of Education's appeal, much to the great relief, presumably, of many a worried franchisor.

Effect of merger on IP licensees in the US: where state law can't be ignored

In "License to merge: special precautions may be required to preserve IP licensing rights", Cozen O’Connor lawyers Scott B.Schwartz and Justin B.Wineburgh write:

"Despite a long history of case law relating to mergers, one area remains unclear, especially in the entertainment industry: the effect of mergers on intellectual property (“IP”) licensing agreements. Recent case law contributes to this uncertainty and suggests that certain precautions may be necessary to preserve valuable IP licensing rights".

As usual -- and it seems remarkable that this warning should still need to be given -- the reader is reminded of the need for foresight [ie why not think about the risks/benefits of possible mergers before the licence is signed?] and vigilance [ie keep an eye on what goes on after the licence is signed]. The authors then focus on an annoying problem for those of us who like our licence provisions cut-and-dried, or at least predictable in terms of their outcome and effect. They explain:

"... the practice of having contracts transfer as a matter of law, even if prohibited by the express terms of the contracts without consent, may no longer be reliable in the context of transferring IP content and licenses.

While the impact of a merger on the assets of the parties to the merger is governed by state law, IP licenses are also governed by a body of statutory and judicial federal law. More recent case law points to a trend of IP law starting to impact how traditional state merger laws treat IP rights as different than that of other assets. However, the trend is neither uniform nor consistent".

In one 2004 decision-- Evolution, Inc. v Prime Rate Premium Finance Corp., Inc., 2004 U.S. Dist. LEXIS 25017 (D. Kan. 2004) -- a court has concluded that “whether a merger effectuates an automatic assignment or transfer of license rights is a matter of state law.” But other recent federal court decisions have held that the licensing agreement, rather than the applicable state merger statute, determines whether the licence can be transferred to the surviving company without the consent of the licensor. Thus unless the licence agreement clearly permits assignment of the IP rights without the licensor's consent, that licensor may well be able to challenge the right of a surviving company in a merger to operate as the licensee -- even though state merger law transfers all the rights under the licence as a matter of law.

Reading this article, I found myself wondering about the extent to which a prudent licensee -- or anyone seeking to buy his business -- should make an effort to obtain advice concerning the operation of state law as well as federal law, factoring this advice into the structuring of its business transactions.

Sources of Olympic Revenue

With the conclusion of the Beijing pyrotechnics, both on and off the field of competition, it is worth considering the breakdown in the sources of revenue for the Olympic Games. Based on figures provided to Business Week by the International Olympic Committee, as reported in the August 11 issue of that magazine, the projected revenue sources were as follows:

Broadcast rights 50%
Sponsorship 40%
Ticketing 8%
Other (including licensing) 2%

Based on estimated revenues of $3 billion, that means that some some undefined portion of $60,000,000 (I hope that I have my math right!) in revenues can be attributed to sales of licensed products in connection with the two-week event. Being a licensing person at heart, the disproportion between the amount of revenues due to sponsorships and licensing is striking indeed.

This disproportionality is especially noteworthy if the amount of the sponsorship revenues collected by the IOC will be compressed into a shortish period of time (If any readers have further information on this point, I would be delighted to be enlightened.) The $60,000,000 amount is a graphic reminder that it takes a lot of sales of licensed items to reach substantial royalty aggregates. That said, it will be fascinating to see how many post-event Olympic items will be sold, and what is the ultimate ratio between the sponsorship and licensing revenues.

Equity funds move to acquire patent royalties

A Reuters feature, "Drug royalty financing thrives in difficult market", by Toni Clarke, reports that private equity funds which specialize in healthcare royalty financing are gaining momentum as investors seek new ways to hedge risk, and companies seek new ways to raise capital. Apparently, the specialty funds are benefiting from the convergence of two things:

* in the current market, with credit tight, more cash-strapped biotechnology companies are putting their royalty streams up for sale;

* investors seeking stable returns in a volatile market have come to appreciate patent royalties as a more reliable source of income.

The leading funds in this area are named as Royalty Pharma, DRI Capital, Paul Capital and Capital Royalty, with mention being given to a new fund, Cowen Healthcare Royalty Partners, which was formed earlier this year by a team that broke away from Paul Capital. The article mentions that in April, TPG-Axon Capital, a hedge fund with more than $15 billion under management, agreed to pay CV Therapeutics up to $185 million in exchange for rights to 50 percent of its royalty on North American sales of Lexiscan, a stress agent used in the detection of coronary artery disease.

Renting shirt-space -- the reality of sponsorship

In "Does Baggies shirt saga signify Premiership slowdown?", BBC business reporter Simon Atkinson discusses the economics of shirt sponsorship -- the now well-established routine by which a sports team (in this case, an English Premier League football team) sells space on its team-members' shirts to a brand-owner who wishes to secure wider coverage and brand-familiarity among the consuming public.

Right: happier days -- when the Baggies rented shirt-space to T-Mobile

Since Premier League teams are watched by large crowds at live matches and by vast international audiences when games are televised, and their supporters advertise the same brand when they purchase replica shirts, the degree of public awareness of a brand can be greatly enhanced -- though sponsorship has its drawbacks too. One is that the sponsor's brand may be associated with an unsuccessful or unsportsmanlike team; another is that the sponsor's brand is damned by consumer enmity - a logo appearing on a Manchester United or Real Madrid shirt, for example, will not endear the brand to supporters of Manchester City or Barcelona respectively.

The article reviewed here cites the position of the West Bromwich Albion (WBA, "the Baggies") football team, which has returned to the Premier League following its relegation two seasons ago. WBA unusually has failed to obtain a shirt sponsor. The side's failure might be put down to the continuing effect of the credit crunch, or possibly because the team's relatively lowly status does not chime in with the aspirations of prospective sponsors -- or quite possibly because there is a gulf in expectations, which is yet to be bridged, between the Baggies' valuation of its shirt-space rental and what prospective sponsors are willing to pay.

For sports teams the sponsorship deal can be crucial. Deals are usually for a period of years, to enable the team to make long-term plans in terms of capital expenditure on facilities, acquisition of new players and so on -- this inevitably means that the money is budgeted for (if not actually spent) before it is received. And since the sums are so large, even big-brand corporate sponsors will finance them through bank loans rather than out of their own pockets.

Cricket media rights fetch new record prices

The game of cricket might be viewed by many as a strange minority-interest sport, though this recent article in The Guardian suggests that mass popularity and commercial value are far from synonymous. This article reports on BSkyB's successful retention of the right to televise live all England's home Test matches as part of a £300m deal. The four-year deal, struck by BSkyB and Channel Five, nets the England and Wales Cricket Board (ECB) £100m more for the sale of their media rights than the ECB notched up for the previous four-year period.

A side-effect of the successful BSkyB bid is that it means that no live games will be shown on free-to-air TV "until at least 2013" following the BBC's failure to make any formal bid. The BBC has been criticised for getting its priorities wrong, paying to win back the live TV rights to Formula One motor racing even though the level of participation in motor racing is far lower than it is for cricket.

The ECB had divided its intangible assets into 35 separate media rights packages, justifying their decision to do so in terms of scheduling and cost issues. The BBC has persistently objected to the fact that cricket is not a "listed event" to which terrestrial broadcasters must be allowed access.

WIPO Magazine to focus on IP finance issues

IP Finance has learned that the September edition of the WIPO Magazine hopes to contain several articles on different aspects of intellectual property finance. The WIPO Magazine (see current issue here) is not a dull, professional or academic tract but a handsomely-produced mass circulation title in both hard-copy and electronic versions. The 'focus on IP financing' edition is aimed to come out just before WIPO's General Assembly in late September in an attempt to raise awareness of the issues involved in IP finance, as well as the current policy developments at UNCITRAL. If English is not your language of choice, note that the WIPO Magazine is available in French and Spanish too.

This weblog will provide further information when the September issue of the magazine has been published.

Chrysalis disappoints, as new artists fail to incubate

According to The Guardian, music publisher Chrysalis has warned that its revenue from song royalties will fall this year, placing the blame on the "challenging macroeconomic environment" which has depressed sales of CDs. The advertising market downturn has also had a deleterious effect on its synchronisation revenue, which the group earns from music that is used in TV programmes, films and advertisements.

Probably more disappointingly than any of this, Chrysalis has reported that its "incubator" business Echo, which nurtures artists before they sign deals with major labels, has not justified management expectations, Echo has not upstreamed any artists to major labels during the third quarter.

The company must be feeling somewhat let down: it has not placed all its eggs in one basket but has sensibly sought to identify and exploit a variety of IP-related income streams. When the longed-for economic upturn eventually arrives, Chrysalis will be able to tell with greater confidence whether its dip in fortune coincides with the lack of buoyancy of the market on whether its malaise is more serious.

Cuil versus Google - the value of brands in the Web 2.0 economy

Cuil, an old Irish word for knowledge (pronounced COOL), purports to be “the world’s biggest search engine”, searching more pages on the Web than “anyone else” - apparently three times as many as Google and ten times as many as Microsoft. Rather than relying on “superficial popularity metrics”, Cuil searches for and ranks pages based on their content and relevance.

So will Cuil become the new Google? Patrick Carmody, an independent strategist who has worked at leading communications agencies in South Africa and the UK, writes that switching search brands is far easier (and less risky) than switching “offline” brands such as car brands or cigarette brands - and one should not count on brand loyalty when switching is made that easy as in the online world. On the Internet people are more able to show loyalty towards a product rather than a brand.

However, Carmody reckons that “Cuilmania” will pass quickly. Google’s brand strength, he assumes, will give the search leader (Google was ranked as the world's most valuable brand by Millward Brown in 2007, attaching a value of U$86bn to the brand) time to respond to its new competition, if need be.

Search users will tell which search engine will turn out to be the “cuiler” one… Check out Cuil here and Patrick Carmody’s Challenging Brand Thinking blog here.

Around the periodicals

The August 2008 issue of OUP's Journal of Intellectual Property Law & Practice (details here) contains two features of particular interest to IP Finance. The first is an article by Hidero Niioka (right), "IP in investment banking: IP in IPOs". According to the abstract

"This article looks at current IPOs, convertible bond offerings, trends of the global market, etc. In the context of this capital market trend, important legal issues arise.

Key points: The cases discussed concern IP litigation, civil procedure law, securities law, securities exchange law, and corporate law.

Practical significance: The purpose of this article is to provide a quick overview of how IP law issues can impact upon securities law issues. The article has a high practical relevance for those advising all companies that want to raise funds around the world".

The second is David Ehrlich's "Trade mark warranties in M & A transactions". According to the abstract,

"Legal context: As the credit crisis wanes and corporate liquidity becomes more available, deal making is sure to return to past levels of activity. Ask any of these dealmakers why they made their acquisitions and inevitably they will return to the ‘brand's equity’. Trade mark assets, however, are very unusual types of property which require finely tuned warranties in merger and acquisition (M & A) transactions in order to prevent costly set-backs and even litigation.

Key points:

• Both buyers and sellers in an M & A transaction have a mutual interest in accurately defining the trade mark assets included in a deal, but their interests may diverge when it comes to negotiating certain warranties.

• Buyers should seek wide ranging assurances of trade marks' validity while sellers should try to resist giving general warranties beyond their knowledge.

• Prudent negotiators should also consider the duration of warranties and negotiate limitations on breach of warranty claim amounts.

Practical significance: Many corporate deals are agreed upon in haste and neglect key trade mark issues that can cause serious problems and costly surprises years after a deal has closed. Through proper due diligence and clearly worded warranties, this risk can be reduced".

Sweet & Maxwell's Journal of Business Law (issue 6, 2008; details here) carries a feature, "Divergences of Security and Property Law in the European Union: the Need for Action", by avvocato M. Cristina di Luigi. Diappointingly (from the point of IP readers) this article makes virtually no reference to intangibles other than to recognise their existence and to concur that their position is complicated; nor does it appear to deal with UNCITRAL's work regarding the securitisation of intangibles and the specific issues regarding IP law.

Foreclosure domain + toll-free portfolio up for auction

The Fall 2008 Ocean Tomo catalogue has now been published online. Most of the IP put up for auction consists of patents, but there are also two portfolios of domain names on offer - both from Free Publication Systems, Inc.

The principal domain name portfolio on sale is 1800FORECLOSURE.COM, on which the lot summary says:

"The 1800FORECLOSURE.com offering acts as a premier online outlet to those searching for information on issues related to foreclosures, an issue currently of particular concern among U.S. households. With the U.S. housing market in turmoil, economists estimate 2.5 million homes nationwide will enter the foreclosure process this year, up from about 1.5 million in 2007. With the current economic strains affecting the housing market, foreclosures in the U.S. are a major focus for both buyers and sellers of real estate.

The 1800FORECLOSURE.com Lot offers the buyer ownership over 20 related domain names as well as the right to us the toll free phone number 1800-FORECLOSURE. This portfolio will enable the final owner to be a leading comprehensive online resource for all things real estate. These combined assets enable the winning purchaser access to the core elements necessary to build, or enhance a real estate business".

The expected value placed on this portfolio is $750,000+ , which looks like a pretty good return for whoever went to the relatively minimal trouble of obtaining the registrations in question.

New sister publication for TTT

Readers of this weblog may be familiar with Tech Transfer e-News and Technology Transfer Tactics, published by BizWorld Inc. The same company is now launching what it terms "the world's first and only monthly newsletter exclusively devoted to successful IP marketing", Intellectual Property Marketing Advisor. According to BizWorld,

"This "how to," practical periodical is written for tech transfer, research, commercialization, and licensing professionals. Its mission is to help build marketing capabilities and expertise by providing expert strategies, case studies, and best practices in IP marketing. Each article is carefully targeted to help TTOs and other organizations find and attract more licensees for their IP, bring in more revenue, and promote their efforts among researchers, administrators, and other key stakeholders. “

This monthly guidance will help spur the commercialization of innovations and other IP," said Bizworld Chairman and Publisher Leslie Norins, MD, PhD. "The need is greatest in the academic and government research sectors. Their budgets are under pressure. But they’ve got cabinets full of invention disclosures and patented innovations just gathering dust -- and bringing in no royalties. More effective, aggressive marketing is the 'missing link' in the commercialization chain that will bring in more licenses, and more royalty revenue"."

Bold claims -- but you can judge them for yourself. For details of how to obtain an inspection copy, click here.

Franchisee bankruptcy in the US

Owners of trade marks and other IP rights relating to business format franchise operations in the United States may find "Franchise Agreements in Bankruptcy: Fiasco or Fortuity" interesting. It was published on the website of law firm Baker, Donelson, Bearman, Caldwell & Berkowitz, PC earlier this month. This article focuses on the effects of bankruptcy on the franchisee and on the consequences of the IP-owning franchisor either allowing the franchise to remain in place or letting it go. It examines the concept of the "whole agreement" and gives as an example the position of a franchise contract where the same parties have also entered into a separate software licence:

"The determination of what constitutes a single executory contract or several separate ones will be governed by applicable state law, though the bankruptcy court will decide the issue. For example, where a franchisee enters into a franchise agreement and in conjunction therewith also enters into a software license agreement at the same time, those two documents, even though signed separately, will likely be deemed a single executory contract such that the debtor must assume both or reject both".

In terms of claims on the assets of the franchisee, the article states:

"If a franchise agreement is not expressly assumed, it is deemed rejected, and the franchisor has a general unsecured claim against the estate for damages. The Bankruptcy Code provides that the rejection constitutes a breach of the contract which is deemed to have occurred immediately before the filing of the petition. By rejecting the agreement, the trustee or debtor forgoes the benefits of performance by the other party but avoids the burden of performance by the estate. While the charges which accrued after the case was filed are in this context part of the prepetition claim, to the extent that the contract benefited the estate after the case was filed, a claim can also be made for payment of the charges incurred during the case as an administrative expense to be paid in full and on a higher priority than payments to general unsecured creditors".

Toolkit in prospect

MARQUES, the organisation of European trade mark owners, has just announced that its Intellectual Asset Management Team will be providing all attendees at the 22nd MARQUES Annual Conference next month with a USB Stick containing an intellectual asset management toolkit. This toolkit includes a powerpoint presentation, samples and case studies, articles and "useful catchphrases which can be used in your own practice".

I shall be attending this conference and will be putting the Toolkit through its paces: the review will be posted on this weblog.

Stars Wars case clarifies enforceability of "multiple damages"

Readers may recall headlines in local newspapers at the beginning of the Star Wars trial (see IP Finance here) reporting that Lucasfilm Ltd, Star Wars Production Ltd and Lucasfilm Entertainment Co Ltd were, amongst other claims, trying to enforce a judgement obtained in the US against Ainsworth and Shepperton Design Studios Ltd for millions in damages. After 17 days of full trial, during which rights to replica Jedi knights, witches, and princesses were scrutinised, Judge Mann held on the issue of enforceability of the US Judgement, that the judgment of the US court was not enforceable against Ainsworth. The findings on the recovery of "multiple damages" are worth noting:

There were two asserted defences to the specific claim:

(a) That Mr Ainsworth did not submit to the jurisdiction of the US courts, and did not have a sufficient presence in the US, so as to enable Lucas to rely on the judgment in an English action.

(b) If he is liable to be sued on that judgment, the Lanham Act element ($5m of the $10m sued for) cannot be relied on because of the Protection of Trading Interests Act 1980 ("PTIA").

Albeit that Mann J upheld the first defence, he went on to consider Section 5 of the PTIA which limits the recovery of "multiple damages" (damages obtained by multiplying another sum) under Section 5. For the benefit of the reader the relevant part of the formal US judgment was in the following terms:

"1. On the First Claim for Relief for copyright infringement, actual damages and profits in the amount of $5,000,000.

2. On the Second, Third and Fourth Claims for unfair competition under the Lanham Act, trademark infringement and unfair competition under State law, $5,000,000 in compensatory damages.

3. On the Second and Third Claims for unfair competition and trademark infringement under the Lanham Act, an additional $10,000,000 to treble the compensatory damages awarded on those claims."

Mann J concluded, in what appears to be a first on this specific point (see para 226 and 228), that:

*genuinely compensatory elements of an award subject to multiplication should be recoverable. In this context the split of the actual judgment contained in paragraphs 2 and 3 acquires significance. It makes it plain that the relevant head of damages does have a compensatory element and identifies it. There is a real sense in which this part of the judgment contains two separate and severable elements – the compensatory and the punitive, or exaggerated (or whatever adjective one chooses to apply to the multiplied damages). The paragraph 2 damages are not barred by the Act; only the paragraph 3 damages are.

There was no dispute on the first head of damages.

For a worthwhile review of the entire decision see IPKAT post here.

For the 60 page judgement click here.

For the wording of Section 5 PTIA see paragraph 225 of the Judgement.

Incidentally, "questions of relief [in this judgement] are due to be decided at a further hearing, for which directions can be given if necessary" - so we wait for another Star Wars episode, this time directed by the High Court it seems.

Latest IAM reviews triage techniques for patent portfolios

The most recent issue of Intellectual Asset Management (issue 31, August/September 2008) contains a very interesting piece by Scott Bechtel (President of AmiCOUR International) and his colleague, AmiCOUR Vice-President Ray Throckmorton. The thesis of this article ("Maximum cost at minimum value") is that

"One of the disincentives to drilling into a patent portfolio to search out further value-enhancing opportunities is cost. However, there are ways to save significant amounts of money – something that financial modelling will help patent owners discover".

The authors discuss the initial screening ('triage') process in its traditional and more evolved forms, looking at the logic behind patent scoring systems and the balance between objective and subjective means of evaluation. The per-unit cost of determining whether a patent merits a full licensing programme is also considered, bearing in mind the realities of the business budget as well as the potential risks and rewards.

To see the full contents of this issue click here.

Warner threatens to say "no" to games makers

The Financial Times ("Warner Music aims for video game royalties", by Andrew Edgecliffe-Johnson, New York) reports on the efforts being made by Warner Music to extract higher royalties from video games like Guitar Hero and Rock Star, as record labels and music publishers seek to avoid repeating mistakes made when MTV and the iPod came out. Warner CEO Edgar Bronfman is quoted as saying:

"The amount being paid to the music industry, even though their games are entirely dependent on the content we own and control, is far too small".

He made it plain that Warner would simply refuse to license its music to video games if royalty rates remained far below what Warner believes to be their true value.

The interesting question is whether Warner will keep its nerve, and its resolve, if other owners of music copyright portfolios seek to fill the vacuum at rates that may well be a good deal lower than those sought by Warner but still worth collecting in the hope that they may prove to be a springboard to a stronger relationship with the games makers

IP securities Down Under

Lorin Brennan has been working hard on a Commentary on the Australian Personal Property Securities Bill 2008. The IP community has until THIS FRIDAY, 15 August 2008, to submit comments and Lorin is anxious to receive comments on his commentary (he writes "identifying any errors would be most welcome").

For the record, Australia is one of the first countries to attempt to amend its secured financing law by reference to the UNCITRAL Guide on the securitisation of intangibles but without the benefit of the Annex relating to IP rights. The contents of the Commentary go like this:

"I. EXECUTIVE SUMMARY
II. Under Section 5 a Secured Creditor Should Be Treated as a Rights Holder of Intellectual Property
III. Section 21 Should Clarify Whether It Intends to Treat a Traditional Assignment of Intellectual Property as a Security Interest.
IV. Section 30 Should Not Allow a Security Interest in Tangible Property to Apply Automatically to “Related” Intellectual Property.
V. Sections 45 & 47 of the Bill Should Clarify the Law Applicable to a Security Interest in Intellectual Property.
VI. Section 69 Should Not Require a Secured Creditor To Make Continuous Filings Against Subsequent Transferees to Maintain Perfection of Its Security Interest.
VII. Sections 82 & 91 Should Not Allow A Person Who Acquires An Interest “In the Ordinary Course” To Take Free of an Intellectual Property Security Interest.
VIII. Sections 92 Should Clarify The Relationship Between The Priority Rules in the Guide with Those in the Intellectual Property Statutes.
IX. Section 116 Should Not Allow Transfers of Intellectual Property Licences Despite Contrary Licence Terms.
X. Section 113 Should Not Allow An Execution Creditor To Gain Automatic Priority Over An Unperfected Security Interest Without Registering In an Applicable Intellectual Property Registry".

If you've got some time to look at this document, peruse its contents and Lorin's comments on them, email me here and I'll send it to you a.s.a.p. Comments should be sent to Lorin here. Also, if you have any pertinent comments, I'll be happy to post them on this blog. Finally -- this blog has quite a few Australian readers: this is a great opportunity for you to take the initiative!

In Rainbows: was it worth the risk/effort?

In issue 10 of the MCPS-PRS's Economic Insight, Will Page (Chief Economist, MCPS-PRS Alliance and Eric Garland (CEO Big Champagne) provide some close analysis of Radiohead's much publicised experiment with 'pay what you want' downloads. In their article, "In Rainbows, on torrents", they explain:

"Radiohead's 'In Rainbows' ... marked a paradigm shift for the music industry. Here was an established rock band, free from its recording contract with EMI, delivering content directly to the consumer. Commencing on the 10th of October 2007 with a 'pay what you want' downloadable album, this was followed by a 'made to order' deluxe box set and then concluded with a conventional CD and iTunes release.

Whilst the project has gathered unprecedented worldwide media coverage, with much speculation on what the 'average price paid' might have been; there is another less intuitive but far more relevant question that has yet to be asked, or answered. That is, did their offer of their album 'for free' succeed in diverting traffic away from
Torrent sites, and (back) towards their own 'venue' of InRainbows.com?"

The authors conclude:

"... anyone who has made it to the end of this paper and assumes that the project was a failure has missed two critical points: firstly, lots of people bought the album in any one of its three formats and lots of people went to see the show - and the word 'lots' is robust no matter which comparative measure you use. Secondly, the wider purpose of this paper is in many ways echoing the tone of the recent article in The Economist: 'Piracy is a bad thing. But sometimes companies can use it to their advantage'. Hopefully the reader will now be able to at least ask (or ponder) how many of those torrent users signalled a willingness to fork out £50 for a concert ticket, which led to the second date being added at Victoria Park in London?

So, did the offer of their album 'for free' succeed in diverting traffic away from Torrent sites? Our answer is yes, but with a twist. ... both torrents and legal downloads would appear to be complements, not competitors. Think of the meaning of the term 'complements' in the context of popularity, where there is now a wealth of information and a poverty of attention. The challenge of achieving popularity (or attention) when the old rules of scarcity and excludability don't apply (to information goods) the way they used to, changes the monetisation game completely.

Radiohead, and their management, undoubtedly got people's attention with the information embedded in their unique offering in October, regardless of whether those people were fans or not. With that attention, came consumption - from those who were established fans, and those who were just curious. Of that latter 'curious' segment, there will be a sizeable portion who were already locked on torrents, and its plausible to suggest that it is largely this segment who didn't switch to InRainbows.com. The reverse logic is that the 'fans' will have been made aware of the project, and its intentions, through Radiohead.com and will have been more likely to have switched - but the ratio of Radiohead fans who were converted from torrents to the total number of 'curious' torrent users will be miniscule. To complete the migraine, the size of the total torrent market means that traffic which was displaced from the torrents to In Rainbows will be overshadowed by a disproportionate uplift in additional 'curious' torrent activity. ... we argue that an awful lot of curious torrent users will have downloaded 'In Rainbows' without knowing of InRainbows.com - and would not have downloaded it otherwise, had it not been for its unique media coverage and popularity.

... the band are still on a phenomenally popular global tour, which may act as a catalyst to eventually getting the conventional album sales past the two million mark - and that's not accounting for all the significant pre-2008 activity. So, hopefully, this
report will have moved the current file sharing debate away from a simple zero-sum game ('you were a pirate, and are now a law abiding citizen') to a rather more complex question of additionality and popularity in a market that's increasingly hard to define. In a digital arena, consumers go to venues where they feel comfortable, and what we've learnt from the ambitious and admirable experiments of Radiohead and Nine Inch Nails is that a large part of that comfort is the ability to stay anonymous. Is there a trade-off between gaining attention and acquiring information? Perhaps. And if we can solve that, then the question of monetisation can properly be addressed. ..."

It's refreshing to see a discussion that is based on empirical evidence -- but the big question is how far a single instance can be realistically generalised: Radiohead started off with a large following and goodwill in the band's name, which made this outcome possible. How would the same business model work for a band that was unknown?

Grit in the eye for Allergan? The Restasis licence refuses to go quietly

Via the most recent issue of Technology Transfer Tactics comes an item in the Chronicle of Higher Education ("A Raw Deal, in a Researcher's Eyes: Dispute over an invention highlights problems in technology transfer" by Goldie Blumenstyk) on the fairness or otherwise of the terms of an IP licence. According to this article the University of Georgia missed out on a chance to derive major income from its licence arrangement with Allergan Inc for the exploitation by the latter of the Restasis eyedrops, Even though the deal is expected to cost Allergan some US$70 million, former professor Renee L. Kaswan describes it as "naïve and shortsighted" because it allowed Allergan to pay for the right to reduce its royalty exposure. According to the article:

" ... The 2003 deal allowed Allergan to reduce the royalties it was obliged to pay to the university, in exchange for an upfront payment of $23 million and additional payments later.

... University leaders have said that their arrangement with Allergan guaranteed the institution a lucrative payday even if the prescription product was later found to be unsafe or was overtaken by a competing drug. ...

Allergan began selling Restasis in 2003. In the most recent quarter for which figures are available, it reported sales of $100 million, up 28 percent from the same period a year earlier. The company ... predicts sales of $375-million to $405-million in 2008.

Dr Kaswan says the deal ... also substantially shortchanges her; she is entitled to 35 percent of what the university earns from Restasis.

She contends that Allergan understated the sales potential for Restasis and overstated the possibility of long-term financial risks with the product and the patent to get the university to sign on. She also contends that the company the university hired to help it evaluate the deal did not do a good job researching the product's market potential.

Court transcripts and other evidence in the case show that board members of the University of Georgia Research Foundation decided to keep the deal secret from her — a move she calls a mistake because she understood Restasis's market potential better than they did. Faculty members who develop valuable intellectual property, she says, deserve better from their universities. "It's just not the way you treat your inventors," she says.

In April 2007, Georgia Superior Court Judge David R. Sweat ... did acknowledge that the foundation "made a bad deal"...."

Litigation continues (the article contains a great deal of further information concerning its background).

The whole episode makes depressing reading. The easy bit is that universities want a fair and reasonable return on their IP; commercial risk-takers like Allergan want the chance to milk the market when they have a winner on their hands, to compensate them for the investment cash wasted on failures; academics want recognition and reward; university administrators want a quiet and stable routine -- and everyone who is part of any decision-making process is entitled to make its decisions on the basis of the best information available both to it and to the other parties at the time negotiations take place.

While it is difficult not to feel sympathy for Dr Kaswan's position, it is equally hard to dismiss entirely the notion that the best market analysis is that which has been enriched by hindsight. We are hardly likely to reach that nirvana in which royalty rates are computed on the basis of a full exchange of all market intelligence between the parties, or fixed and varied by a third party 'wise man'. The best we can do at the moment is either to provide a mechanism for the variation of royalties that is less likely to confer a one-sided advantage than Allergan's pay-off clause, or which enables the rates to be revisited and revised on the occurrence of specified acts or events.

Music catalogues, securitisation and the credit crunch: not all bad news

The funding of copyrights from music catalogues – to finance and refinance acquisitions etc. - has traditionally been done by specialist banks and lending teams. A number of US and UK lenders have teams dedicated to this sector and capital market transactions have been popular in recent years. Securitisations in particular suited the relatively stable revenues of mature catalogues and had the advantage of providing long term debt with a low funding cost.

In the last couple of years, securitisations of music catalogue rights had become challenging. File sharing software made an impact on revenues in the industry and, while this posed a business problem for artists and labels, it caused a significant structural problem for securitisations. Securitisation structures rely on stability and predictability of income. When this became eroded in fact and in perception, some of the structures came under strain.

A move away from securitisations left traditional bank lenders as the providers of debt. Since the middle of last year though, things have become even more challenging as rights owners and funders have struggled to come to terms with the infamous credit crunch.

This is not intended to be a bad news story. There is positive news even in the current environment. At least four separate factors can be identified and together these may have a powerful effect.

1. There are significant new sources of funding. While the credit crunch has certainly had an impact on liquidity in the debt markets, its influence has been worst in the large M&A market and in the capital markets. Smaller deals can still be done and banks are looking in particular at alternative asset classes to provide them with a source of transactional revenue from fees for deals which they structure and sell. In addition, hedge funds have also entered the market. Some funds have been established specifically to invest in or lend to the sector and others have been prepared to commit smaller amounts of their capital to "non-traditional" deals to provide an interesting story for their investors.

2. A number of proposals designed to assist artists are now the subject of high profile lobbying and these may make catalogues more attractive to investors and funders. The extension of copyright protection for sound recordings from 50 years to 95 years will add value to catalogues. A suggestion that a proportion of the revenue generated from the additional 45 years should create a fund for session musicians who played on the particular tracks may extend the number of rights holders who will have an interest in how they can extract value from their rights. Another example is the interest that the EC Internal Markets Commissioner, Charlie McCreevy, is taking in a proposed private copying levy. The influential Music Business Group has suggested a licence solution and there is industry support for a Europe-wide solution. In addition, the EC is suggesting that collecting societies should begin to compete on price. While this is not popular in parts of the industry there will be benefits to other rights holders from increased revenue generation.

3. The EMI takeover, however sceptical some industry insiders may be, will be bound to drive innovation in the sector. Whether or not private equity models can be easily adapted, the desire to look at the industry and revenues in a new way must provide models to be followed elsewhere in the industry. Significantly, the size of the EMI catalogue enables large-scale funding to be achieved and the proposal for a securitisation to refinance acquisition debt will provide a very public example for others to consider aggregation models. A return of liquidity in the future will lead to a lot of activity.

4. The credit crunch will give rise to opportunities in this as in every sector. In all markets there are distressed sellers, financing structures which have become too expensive for the existing borrowers and participants who are reviewing the scope of their businesses. Over the last couple of years the basis on which catalogues are traded, a multiple of NPS (Net Publisher's Share), has made sales difficult to execute because of the levels of multiples and the cost of debt. In a more challenging market NPS multiples should fall and lead to greater deals.

There are some well-publicised reasons to be gloomy. There are, however, still reasons to be cheerful. We will see which view prevails.

Written by IP Finance's latest team member Charles Kerrigan, posted by Jeremy.

IP risk: when it's time to sue the insurer

The newsletter of US-based law firm Lewis Brisbois Bisgaard & Smith LLP carried a recent note on Raymond Manzarek, et al. v St Paul Fire & Marine Ins. Co., 519 F.3d 1025 (9th Cir. March 25, 2008).

In brief, this dispute arose after Manzarek and members of his band were liable for infringing the name, trade mark and logo of legendary band The Doors. St Paul had provided insurance cover in policies that included the following provisions:

"Advertising injury liability. We’ll pay amounts any protected person is legally required to pay as damages for covered advertising injury that:

• results from the advertising of your products, your work, or your completed work and

• is caused by an advertising injury offense committed while this agreement is in effect.

Advertising injury offense means any of the following offenses:

• Libel, or slander, in or with covered material.

• Making known to any person or organization covered material that, disparages the business, premises, products, services, work, or completed work of others.

• Making known to any person or organization covered material that violates a person’s right of privacy.

• Unauthorized use of any advertising idea or advertising material, or any slogan or title, of others in your advertising.

• Advertising means attracting the attention of others by any means for the purpose of:

• seeking customers or supporters; or

• increasing sales or business.

Advertising idea means a manner or style of advertising that others use and intend to attract attention in their advertising.

But we won’t consider information used to identify or record customers or supporters, such as a list of customers or supporters, to be an advertising idea.

Advertising material means any covered material that:

• is subject to copyright law; and

• others use and intend to attract attention in their advertising".

The St Paul policies also included a “Field of Entertainment Limitation Endorsement”, which narrowed the scope of coverage afforded by the policies. The endorsement read as follows:

"Field of Entertainment. We won’t cover personal injury or advertising injury that results from the content of, or the advertising or publicizing for, any

Properties or Programs which are within your Field of Entertainment Business.

Properties or Programs means any of your properties, products, programs, materials or other matter.

Field of Entertainment Business includes the following;

• The creation, production, publication, distribution, exploitation, exhibition, advertising and publicizing of product or material in any and all media such as motion pictures of any kind and character, television programs, commercials or industrial or educational or training films, phonograph records, audio or video tapes, CDs or CD ROMs, computer online services or Internet or Web site pages, cassettes or discs, electrical transcriptions; music in sheet or other form, live performance, books or other publications.

• The ownership, operation, maintenance or use of radio and television broadcasting stations. CATV systems, cinemas, stage productions with living actors, and any

• similar exhibition or broadcast media.

• The ownership, operation maintenance or use of merchandising programs, advertising, or publicity material, characters or ideas; whether or not on your premises or in your possession at the time of the alleged offense".

Manzarek and his band tendered the defence of the underlying lawsuits to St Paul which, relying on the endorsement, dclined to defend them against the lawsuits. Subsequently Manzarek et al filed a complaint for declaratory relief and bad faith against St Paul, which responded by removing the action to the United States District Court and filing a motion to dismiss, arguing that potential coverage was not afforded under its policies based on the endorsements.

The District Court agreed and entered judgment in favour of St Paul two years ago, but the Court of Appeals reversed this decision. In its view the endorsements did not apply to bar all potential claims against Manzarek and his band relative to the use of “The Doors” logo for advertising purposes. Further, since potential coverage was afforded under the St Paul policies to Manzarek et al for the underlying lawsuits, their claims for breach of the implied covenant of good faith and fair dealing should not have been dismissed.

Readers can draw their own conclusions regarding the strength of St Paul's legal position, but one thing is clear -- at least from a European perspective. At a time when IP liability insurance is viewed with relative caution, if not suspicion, by many would-be policy-holders, litigation between the insured and the business bearing the risk is always going to be bad business and should be avoided if it all possible.

How to get rich in just five minutes ...

The UK Intellectual Property Office (UK-IPO) has announced the launch of a free booklet which, it claims, "helps business unlock the value of innovation". It's called How Licensing Intellectual Property Can Help Your Business and it is said to provides a wide range of information on IP licensing which includes advice on how to approach and conduct a productive IP licensing deal.

This booklet, according to the press release, was

"produced by the UK-IPO-led Business-to-Business Licensing Working Group which comprises over twenty individuals with a range of expertise and experience of licensing. The B2B group was set up in response to the recent Gowers Review of Intellectual Property, which highlighted the fact that UK businesses experienced problems with IP licensing".

The twenty individuals concerned must be pretty artistic: the booklet is only 24 pages in length -- and most of it seems to be comprised of either blank space or stunning visuals. You can read it here in less than five minutes.

Anthrax suicide would have benefited financially from patents

Today's Los Angeles Times has a chilling story about the Anthrax scientist Bruce Ivins who committed suicide after the FBI closed in on him as the perpertator of the Anthrax attacks in 1991. Wikipedia has chronicled his life here.

It seems that Bruce Ivins is co-inventor on two patents relating to the production of Anthrax Vaccine: US6387665 and US6316006 (he's also listed on the Espacenet website with two further patent applications which postdate the attacks).

The LA Tsime points out that a San Francisco based company VaxGen won the rights to produce the vaccine post the attacks. Part of the revenue would have been paid to the inventors, according to the report. However VaxGen could not produce the vaccine and the contract was terminated.

It has been recently reported that VaxGen has now sold the rights to the vaccine to competitor Emergent Biosolutions for USD 2 Million plus up to USD 8 Million in milestone payments. In an unfortunate coincidence of timing Emergent Biosolutions issues a press release on 31 July 2008 stating that they had submitted a proposal in response to the US Government's RFP for the developement and procurement of a recombinant protective antigen anthrax vaccine.

Applied Micro sells patents to Qualcomm

The story is a couple of weeks old, but may still be of interest. US chipmaker Applied Micro CIrcuits has sold some patents to telecommunications company Qualcomm for USD 33 Million. Qualcomm is, of course, known for its licensing programme in the GSM/3G. There was a time in which Qualcomm actually made read end consumer products, such as handsets. These days it makes chipsets for use in mobile communications and telecommunications.

Qualcomm has been involved in a number of bun fight with the big players in the telecommunications industry, such as Nokia (see report here ). It has not been part of any licensing pool and seems to prefer to negotiate its deals. Its business model seems to be based around licensing its own developed intellectual property together with purchased-in technology.

Intellectual Ventures to raise USD 2.5 Billion

A lot has been written about Intellectual Ventures - the invention company - whom some see as a horrible patent "troll". IP Finance's friends over at IP Value Added recently compiled a report on the patents owned by IV and its myriad of subsidiaries.

Now reports suggest that IV may be raising a new investment fund with up to USD 2.5 Billion in capital (that's 2.5 Millards to those who prefer to speak Oxford English). IPVA's research suggested that to date IV had spent between USD 400 Million and USD 1 Billion on patent acquisitions. So it looks as if IV may be upping the game substantially. Why? Is this a reflection on a larger number of players entering into the marketplace - or the shear number of patent applications being filed these days.

Acacia Technologies - another regular acquirer of patent portfolios - regularly publishes press releases about its licensing deals. To date IP Finance has not yet seen anything similar from IV. Are the deals all confidential. If anyone has a tip or more information, we'd be delighted to hear from you.