Ruminations on the Pfizer-Wyeth Merger

Amidst all the economic doom and gloom coming out of Washington, London and Davos (I think they had to do without Sharon Stone and Angelina Jolie this year), this week's announcement of the Pfizer-Wyeth merger was notable. If consummated, the $68 billion merger will be the largest business wedding of its kind in the pharmaceutical industry. The fact that deal is being made in the current economic climate is all the more remarkable. Based principally on a New York Times podcast of the proposed transaction, the principal reasons for the merger seem to be driven by three main factors.

First, patent protection for Pfizer's main product, LIPITOR, the cholesterol drug, is set to expire in 2011. LIPITOR is reported to constitute 25% of Pfizer's revenues. While the lapse of patent protection does not necessarily mean that sales of LIPITOR will totally then cease, it appears that Pfizer will face significant competition from generic competitors. We like our MBA students to consider that a powerful brand may enable a patented drug to successfully withstand the loss of patent protection. If the LIPITOR mark cannot accomplish this in a big way, then maybe it is time to stop relaying the story how the NutraSweet saved the post-patent day for Aspartame, since it will be no longer relevant.

Second, Pfizer seems to have relatively poor product prospects in its pipeline, so it has to look elsewhere. Much has been written during the last several years over the increasing inability of Big Pharma to come up with a new generation of products. Wyeth appears to provide a partial solution for at least two reasons.

The end of the patent pipeline?

First, Wyeth is reported to be particularly strong in the vaccine area and in biotech (where one report had the company listed as no. 3 in the industry). Second, Wyeth continues to enjoy revenues from the well-known OTC pain reliever--ADVIL. Assuming that there is no patent protection that is about the expire, it would seem that ADVIL promises a continued flow of revenues irrespective of any special IP coverage. Left unclear is whether Wyeth's patent prospects are materially better than those of Wyeth and doubts have been expressed.

Third, there is a view that economic forces are driving Big Pharma towards merger and consolidation. The rationale for this is not fully convincing. I imagine that size and resources may have advantage, at least to some extent in R&D and product development, not to mention marketing and advertising.

Bigger may not be better ...

That view is, however, not universally accepted. On August 24, 2007, an article appeared in Fortune by John Simons entitled "Why a Pfizer-Wyeth Merger is a Bad Idea." Simons concluded as follows:

"The Pfizer/Wyeth merger scenario is far-fetched, particularly because Pfizer would inherit another troubled pipeline and more big-sellers whose patents expire in the same concentrated period of 2010 and 2011. "Would the idea behind the merger be that misery loves company?" queries Standard & Poors pharma analyst, Herman Saftlas. "Most mergers in this sector haven't panned out from an earnings growth perspective. But even worse, these two companies are in the same boat."

Perhaps Simons was wrong in his analysis in 2007. If so, one wonders why the deal did not take place then. Alternatively, if Simons was correct 16 months ago, then what has changed since then, other than financial meltdown, cash flow misery, and the cratering of the real economy, that now makes the merger more compelling? The answer is not clear.

Now I'm a Believer ...

New ideas needed to cope with the global economic downturn? How about investing in talent? Sellaband and Slicethepie are financial platforms that provide fans with the option to invest in a new artist or band. These platforms enable music fans to take on an A&R role, spotting new talent and, potentially, to earn money by reviewing music tracks and providing start-up financing for their favourite tunes.

On the Dutch SellaBand site fans can support artists with as little as $10 and with this qualify as a 'Believer' in the artist. An artist has to raise $50,000 in order to record a professional album. Believers are entitled to a share in the revenues made with the album they helped to create - 50% of net revenues generated from the music recorded with SellaBand are split among the Believers of this artist, for a period of five years. Apparently already 29 artists from 12 countries have raised the full $50,000 on SellaBand and over $2,200,000 has been invested in unsigned artists.

Slicethepie, registered in London, allows artists who get the best online reviews from fans to enter into an online showcase. They have to raise a minimum of £15,000 in order to get professional album of their performances recorded. Fans can invest as little as £1 in an artist to receive free tracks and exclusive artist access. An investment of £5 or more entitles to a free digital copy of the album and the fan's name secured on the album sleeve. In addition, the fan gets the exclusive right to purchase a number of 'contracts' (a tradeable bet on the number of albums and tracks sold over a two year period from release) in respect of the artist, with one contract for every £1 invested entitling them to a return of 10 pence for every 1,000 albums/10,000 singles sold (contracts are redeemable after 2 years). These contracts can be also traded on Slicethepie's trading exchange (see here for further details)

This blog has previously reported on the collaboration of Groove Armada with Bacardi. See also The Times news report "Musicians and performers invite fans to invest in their success".

Olympus and Medical Devices: Where is the IP Aspect?

I want to change course a bit and talk about business journalism as it applies to IP. Goodness knows that the current economic turmoil has witnessed a dramatic increase in the quantity, if not necessarily the quality of business-related articles, so much so that we face the risk of stimulus overload. That said, the core sources of print business journalism (with or without a complementary on-line presence), such as the Wall Street Journal and the Financial Times, seem to be flourishing. How well are they doing with respect to IP matters?

That question ran through my mind when I read with interest an article in the December 15, 2008 issue of Business Week entitled "The Inside Track in Medical Devices", written by Arlene Weintraub. I have been a subscriber of the magazine for 30 years, so I approach it with a combination of respect and critical eye. The article in question reported on the success of Olympus in the field of medical video cameras. More particularly, Olympus is described as the first company to incorporate high-definition tv (HDTV) signals in a video camera device that enable doctors to examine the certain internal organs.

The success of the foray of Olympus into HDTV applications is attributed to a confluence of factors. First, the company exploited its technology in image-sensor chips (a key component of HDTV) with an eye towards improving its surgical cameras. Second, the company succeeded in sharpening its images by combining its HDTV technology with a technology that filters out obscuring colors, realizing a further refinement of the visual images received. Third, Olympus succeeded in adding these capabilities to a narrow (6 mm diameter) camera that could easily manoeuvre within the relevant internal portions of the human body.

Since launching the product in 2005, the company has succeeded to the extent that revenue now exceeds all other aspects of its business. Well and good?--not exactly. Danger (for Olympus) lurks, especially in the form of rivals that appear to be able to sell a competing product for 10% less. The concern is that hospitals will opt for these lower cost alternatives at the expense of the Olympus product.

Olympus--will it continue to enjoy the commanding heights?

The foregoing is all quite interesting, but I have some nagging questions. There was nothing in the article that shed any light on the role of IP in this saga. At least one major study (Allison, Lemley, Moore and Trunkey, "Valuable Patents", The Georgetown Law Journal, 92(3), 2004) concluded that there tends to be more litigation in the medical device industry than many other fields. However, nothing in the Business Week article even suggests that Olympus engaged in litigation with respect to its HDTV technology in this field, much less that it enjoys a favorable patent position vis a vis its competitors.

If true, this is strange. Either Olympus does not enjoy significant patent protection in the field, or its competitors have done such a good job at design-around that the patent position of Olympus has failed to provide it with a competitive advantage, or know-how is particularly important. Whatever the case, it would have been edifying for the Business Week article to delve a bit more into the issue.

There is also the question of why the competitors enjoy a cost advantage Is it because Olympus has tried to garner a premium based on its goodwill and reputation (an IP-related consideration), or is it due to cost and other advantages of its competitors? Here, as well, the article does not offer much insight.

Don't get make wrong. I have no complaint with the article as far as it goes. I only wish that the it had considered these IP points as well. IP and business concerns, as they come together in the world of technology and innovation, are usually a seamless web. I think that the business press needs to more fully recognize this fundamental point in its coverage of relevant developments.

GFIP 2009

As previously reported on this blog, the two-day Global Forum on Intellectual Property 2009 was held beginning of this month in Singapore.

Organised by the Intellectual Property Academy of Singapore, it covered “traditional” areas of IP (copyright and design, patents etc.) and also more recent fields, such as intellectual asset management and IP valuation. The conference program is available here.

In the panel discussion “Optimal Structures for Intellectual Assets Management in a Multi-National Group”, Dr. Gordon McConnachie (founding chairman of the IA Centre of Scotland) and Audrey Yap (managing partner at Yu Sarn Audrey & Partners), cited Alan Lung, CEO of the Asia Pacific Intellectual Capital Centre, presenting a different view of “intellectual capital” (that is, all of a company’s knowledge, both tacit and explicit, that can be used to create value).

McConnachie and Yap cited Dow Chemical, the chemicals company, as an example of how intellectual asset management can be successfully applied in practice, increasing licensing income and making use of leveraged process know-how and intellectual assets in joint ventures and sales. Dow Corporate Licensing now embodies the management of IP as a component of business strategy across the entire corporation, generating $100 million income per year.

With IP assets increasingly attracting fiscal value, companies also need to get their tax planning right. The panel discussion “Maximising Your Intellectual Assets Revenue: a Tax Perspective” included speakers Pieter de Ridder (partner at Loyens & Loeff) and Abhijit Ghosh (partner at PWC) who gave an insight of how to maximise IP revenue from a tax perspective, looking inter alia into Singapore’s fiscal landscape for R&D and IP management.

If any reader has more information about the IP finance relevant sessions of the Forum, can he or she please share it with us?

Irish film and TV programme makers get tax boost

From the most recent Media & IP Newsletter of Dublin solicitors Philip Lee comes news of what it terms "Dramatic enhancements to Ireland's Film Tax incentive". The news item reads as follows:

"Ireland’s film and television industry has received a welcome boost from the Minister for Arts, Sport and Tourism, Martin Cullen. In a press release issued on 8 December 2008, the Minister outlined significant enhancements to the Section 481 relief for investment in film and television projects. The enhancements will be brought about by the Finance Bill (No. 2) 2008 that is currently being considered by Ireland’s houses of parliament.

Section 481 is a tax relief available to Irish investors who buy shares in a special purpose film or television production company (“SPV”). Under the current scheme, each individual tax-payer may invest up to €31,750 annually in qualifying projects, 80% of which can be written off for tax purposes.

Up to 80% of a film or television project’s budget can be raised using Section 481 investments, subject to a maximum of €50 million per project. However, in order to access the investor funds it is usually necessary for the producer to set aside (using a banking mechanism known as “defeasance”) an agreed minimum return which is to be paid to the SPV on completion, delivery and acceptance of the project and which is ultimately returned to Section 481 investors. Therefore in practice the typical “net benefit” to the producer is currently about 20% of the total Section 481 funds raised.

The proposed changes will result in an increase to €50,000 in the annual investment limit for each individual tax-payer and, crucially, an increase from 80% to 100% in the amount of the investment that can be written off for tax purposes. This means that for each investor the available tax relief in cash terms will nearly double from
€10,414 to €20,500.

The net effect of the proposed changes is expected to be a large increase in the producer’s net benefit. Initial indications are that a net benefit of around 28% should be achievable in some cases, depending on various factors including project scale.

The planned enhancements require “state aid” approval from the European Commission. Once implemented, they should re-establish Ireland as one of the most attractive global locations for film and television production and are to be warmly welcomed by producers in Ireland and abroad".

Latest IAM

Issue 33 (January/February 2009) of the bimonthly Intellectual Asset Management, published by Globe White Page, has a bullishly optimistic cover story by finance editor Nigel Page -- with which this reviewer is in full agreement -- as to why global recession could be the making of the IP asset class.  Other recommended features include a couple of reviews of patent exploitation and patent information issues from China and a handy round-up of developments concerning the recent outbreak of false patent marking in the United States.

You can peruse the contents of this issue here.

Bioscience 2015 reviewed and refreshed

Anne Fairpo (an intellectual property taxation specialist with Wragge & Co and IP Tax blogmeister) brings news of the BioIndustry Association's Bioscience 2015 Review & Refresh document, which called yesterday for further tax (and other) incentives for biotechnology in the UK, noting that the original Bioscience 2015 vision (published in 2003) "looks somewhat over-optimistic". On tax in particular, the report recommends (Anne writes):

R&D
that R&D tax credits be extended through
* extension of relief to cover benefits in kind;
* relief on payments to self-employed individuals and high quality management talent at CEO and CSO level;
* removing the PAYE/NI limit on repayable credit;
* extension of the relief to rent costs and
* extension of the relief to cover IP costs.

UK R&D tax credits are currently restricted to direct staff costs,and the repayment is limited to the amount that the company has paid through the PAYE system: this discriminates against smaller companies which may only employ a handful of people, spending more on sub-contractors.

EIS/VCTs
The report also recommends extending the applicability of the Enterprise Investment Scheme (EIS) and Venture Capital Trusts (VCTs) by, for example, extending their scope to cover larger SMEs (following the definitions used for R&D tax credits). It also recommends extending the EIS and VCT scope to cover shares acquired through shareholder to shareholder transactions.

Corporate venturing
To pull more pharmaceutical activity to the UK and to facilitate collaboration with SME biotechnology companies, the report recommends:
* allow tax relief on the capital contribution made by a large company investing in an SME biotechnology company (currently, investors will usually only get relief when they finally sell the investment);
* extend group/consortium relief to allow tax losses in the investee SME to be passed to the pharmaceutical development partner to be set against its taxable income reducing the required share ownership requirements (at the moment, the partner needs to own at least 75% to fully benefit from the SME losses) and
* encourage pharmaceutical companies to locate more activity in the UK through introduction of a royalty box tax incentive, similar to those in Benelux countries.

In Belgium, the patent box incentive results in an effective tax rate on royalties of 6.8% [see Tom Swinnen's post, "Tax incentives for R&D in Belgium" on IP Finance here]; this is the lowest rate in Europe, but is only available for royalties on patents resulting from Belgian R&D activities. However, with the Belgian R&D incentive which gives a monthly cashflow boost, this presently makes Belgium very attractive for R&D. The Netherlands, Luxembourg and Spain have all recently introduced similar (albeit less generous) incentives and the UK Treasury is actively considering whether the UK should introduce a royalty box incentive. This report from the BIA should only reinforce that consideration, before the UK's R&D tax relief is substantially used by larger companies to create foreign-owned - and foreign-taxed - patents."

IRS to take a closer look at US university income

Via Tech Transfer E-News comes news that the Internal Revenue Service (IRS) in the United States is to pay increased attention to the tax status of revenue-generating activities of universities -- including income from their IP licences. It appears that

"... the U.S. Internal Revenue Service is putting universities on notice that it is going to put their finances under a magnifying glass to root out any practices or revenue-generating activities that run afoul of the institutions’ tax-exempt status.

... the first step in this process is a lengthy compliance questionnaire in which about 400 universities are being asked by the IRS to answer questions related to such financial matters as executive compensation, endowments, student demographics, and handling of “unrelated business income.”

... most experts agree the questionnaire [available here] provides an opportunity to preview the IRS’s biggest concerns and clean up any sloppy accounting practices any full-scale audits begin. ... many experts are recommending that TTOs and their parent organizations work with in-house counsel to answer the questions even if they have not received them from the feds.

... Of particular interest to TTOs are questions about unrelated business income (UBI)”.

A detailed article on the IRS questionnaire, its implications for TTOs, and guidance on preparing for further scrutiny appears in the January issue of Technology Transfer Tactics.

Brand recycling

Michael Beverland, marketing professor at RMIT University in Melbourne, writes that recycling a company’s symbolic as well as substantive value of brands can create substantial opportunities.

Brands can reinforce their brand image by using material that would otherwise end up on landfill sites. Any brand-related refuse is determined by the symbolic value of the brand. Beverland gives the example of the Morgan Motor Company which not only recycles traditional renewables (leather, steel), but also the ash frames and decades-old wood of its sports cars and turns them into “piece of history” writing instruments and accessories, such as pens and USB flash drives, complete with a wooden case and authenticity certificate.

For Morgan Motor’s recycled accessories see here. For more creative recycling ideas see here and here.

Has the Great Patent Fire-Sale Begun: Another View

Further to the January 14 comments of blogmeister Jeremy Phillips on the Bloomberg item "Cash-Strapped Technology Small-Caps Hold Patent Deals (update 3)," I have several additional thoughts. Jeremy focused on two points that were raised in his report: (i) Such a sale can raise cash and allow the erstwhile patent owner/assignor to earn cash while taking a license back to use the inventions; (ii) however, the need to raise cash by selling patents could lead to a fire-sale of valuable assets in the context of a depressed overall world economy. Jeremy suggested that one way to avoid the latter (at least from the point of view of the seller) would be to have a more multi-actor bidding market resulting in an ultimately higher purchase price.

I take all of Jeremy's points, but I remain unconvinced that the onset of the current economic crisis somehow constitutes a watershed, the result of which will be a significant uptick in the sale of patent portfolios by cash-strapped companies. Patents have and will be sold by their owners to third parties for a variety of reasons. This was true when times boomed, and it will apply as well when times are bad. The motivations for such sales may change, depending upon the underlying economic circumstances, but we lack good data to indicate what these systemic differences might be. To speak about a change in trends seems to me to be overstated.

One way to deal with a fire sale

As for the observation in the article attributed to a managing director of Ocean Tomo (a Chicago-based company that auctions off IP portfolios), to the effect that an assignment and license back arrangement can raise cash without diluting investors, while at the same time allowing the assignor to continue to use the technology ("to have their cake and eat it too"), several comments are in order.

First, assignment and license back arrangements (both for individual patents as well as have multiple patent holdings) have been around for a long time. I remain unconvinced that there is something in the current economic crisis that has increased their popularity or desirability. Second, not every sale or auction of a patent portfolio is intended to result in a license back arrangement. That does not make the sale less valuable to the seller, nor less attractive to the purchaser, whether or not the world is in an economic downturn. My hunch is that the assignment/ license-back situation is the exception and not the norm, but I would be delighted to learn to the contrary.

This is not to say that the economic downturn does not lead to a fire sales of assets. It does so , as my own practice can attest. This is especially so for companies where the technology model is to develop and exit, and a lack of resources forces the exit at a stage earlier than originally planned. But whether or not the exit is sooner or later, the sale of the patents is part of the overall sale of the company. That, however, is quite different from saying that we are now witnessing a significant increase in the number of fire-sale situations for patent portfolios of cash-strapped small-cap companies. This is so, I suggest, unless the starting point for such sales is so low that any increase becomes significant as an artifact of the data, or the underlying company is an empty shell except for the patent holdings, which case the asset sale becomes the sale of the company's patent portfolio.

I am sure that the the current recession will lead to some significant changes in the use and commercialization of patents. But I remain unconvinced that a significant increase in the sale of patent portfolios will be one of them.

Trade marks and the downturn seminar

Together with the IPKat weblog, Hardwicke Building is holding a seminar on "Trade Marks and the Downturn", in Central London on Tuesday 17 February.  The programme, which runs from 11am to 3pm, addresses the valuation of trade mark litigation and deals in the current economic environment, issues arising in relation to deceptive registrations, termination of trade mark licences and the effect of insolvency.  Speakers are Larry Cohen, IP Finance weblog team member Neil Wilkof, Stephen Reese and Mark Engelman.  The cost of the event, for which 3 CPD points are available, is £50 plus VAT per person.  The first five in-house registrants can register for free. The full programme and registration details are available here.

Trade marks as commercial indicators

IP Finance reader and long-standing IP practitioner Guy Selby-Lowndes has written in to comment on the valuable assistance that business analysts can miss if they don't pay attention to trade mark exploitation policy and official trade mark records. He writes:

"Many years ago I was prescribed a daily dose of the ACE innhibitor, perindopril. As a result I have had a personal interest in the litigation associated with it. Originally my packets were labelled COVERSYL, which is the trade mark of the then source, Les Laboratoires Servier. More recently the packets were sourced by Apotex and marked PERIDOPRIL but, after the injunction, they disappeared and COVERSYL returned. Now my packets come from various sources all marked PERINDOPRIL. However the latest packet shows the source to be Les Laboratoires Servier. It seems that the firm is following the policy "if you can't lick them join them" and is selling the drug both as a proprietary product and as a generic according to the market.

Another source of financial information that analysts do not seem to use is the UK IPO trade mark site. In January 2008 Woolworths PLC put their trade mark registration WOOLWORTHS, 1252904 in 27 classes, in hock to GMAC Commercial Finance PLC. I have some doubt as to whether this will prove a valuable security as there must be a considerable loss of associated goodwill. The mark WOOLWORTH is registered in fewer classes as a Community trade mark by the German Woolworth company. This is not associated with the UK company and, according to my son, continues to trade in Germany.

On the same site looking at the list of people who have not paid the costs awarded against them in trade mark proceedings a well known company appears more than once. More recently the financial columnists have reported that it is in trading difficulties".

Has the Great Patent Fire-Sale started?

IP Finance thanks Richard Gallafent for drawing its attention to this item on Bloomberg by Howard Mustoe, "Cash-Strapped Technology Small-Caps Hold Patent Sales (Update 1)". This feature describes how small-cap technology companies, struggling to raise enough money to survive amid the credit crisis, are selling their prized patents to stay in business. Ocean Tomo's Andrew Ramer is quoted as saying:

"They can essentially raise cash without diluting existing investors. Selling their patents and keeping a license back allows companies to have their cake and eat it, too”.

Numerous other expert opinions are cited, including that of seasoned IP lawyer Marija Danilunas (Dewey & LeBoeuf LLP), who warns:

“Watch out for venture capital buying the patents of companies that have gone bankrupt. They’ll take advantage of bargains”.

This blogger believes that the best way to stop venture capitalists buying bargain-basement patents from bankrupt businesses is to bid against them and raise the fire sale price -- but market forces dictate that this will not happen unless potential bidders (which presumably include the bankrupt business's competitors) reckon they can make more from these patents than it costs to buy them, while the elimination of a competitor may itself correspond to the elimination of any good reason to bid high for the deceased firm's IP.

Samro Annual Distribution

According to several reports, 6177 music writers and publishers shared in a R56,8m ($5.6m) payout from The Southern African Music Rights Organisation (Samro). Samro earned that amount through investing royalties that it collected in its past financial year for composers, publishers and heirs to deceased composers estates, who now qualify to share the amount. The annual payout is over and above the performing rights royalties that members receive. Royalties were held in trust by the organisation while playlist usage details were worked out and royalties attributed to the correct person.

Will Industrial Impact Fellows make an industrial impact?

Via Tech Transfer E-News comes information from Science Business that the UK's Biotechnology and Biological Sciences Research Council (BBSRC) plans to bring industrial expertise directly into research departments through a system of Industrial Impact Fellowships. Initial funding of £2 million will be used to bring professionals from industry to work in BBSRC-funded projects in order to support the translation of academic research into industrial reality. 

The potential value of the scheme is said to be its ability to enhance university knowledge transfer activity by having an Industrial Impact Fellow sitting within a research group and really immersing himself in its ongoing work, then offering the group a set of entrepreneurial skills that might not otherwise be available to it.

Double licence fee for ringtones refused

According to a 24IP Law Group News Flash last week, the German Bundesgerichtshof has ended a dispute between artists and music publishers on the one side and professional ringtone providers on the other, concerning an additional royalty for ringtone arrangements of popular music songs.

According to the most recent decision, it is usually sufficient to pay the royalty to GEMA (the Society for musical performing and mechanical reproduction rights) in order to obtain a licence to convert a musical song into a ringtone. The precedent for this is a dispute between Frank Kretschmer (composer of the Jeanette Biedermann hit single “Rock my Life”) and the German ringtone provider Telemedia. After Kretschmer demanded a separate royalty for the conversion of his song into a ringtone, Telemedia stated that it purchased a licence from GEMA in which the conversion of the song into a ringtone was included.

The Regional Court of Hamburg initially decided in favour of Kretschmer (18 January 2006, file 5 U 58/05), holding that ringtone providers were obliged to pay a separate licence fee for the conversion of musical songs into ringtones and observing that the musical compositions are shortened and digitally edited to a few beats for the use as a ringtone. The songs were thus transformed into a signal which did not include the composer’s initially intended musical and sensual experience. The Court compared the conversion of a musical song into a ringtone with a form of merchandising use that required the composer’s approval.

The recent decision of the Bundesgerichtshof has now made it clear that the amendments to the GEMA agreement of 2002, 2005 and 2007 included the assignment of rights concerning the conversion of musical compositions into ringtones and required no further assignment of rights by the composer or music publisher. The Court said it was obvious that the conversion of a musical song into a ringtone required shortening and digital editing. The musical song is transformed into a signal which is cut off by answering the phone. Furthermore it is obvious that a ringtone consists of the repetition of a small section of the respective musical song which does not necessarily need to include the beginning of that particular song. Telemedia still had to pay a royalty to Kretschmer though, since his GEMA contracting agreement was signed in 1996, before the amendments for the conversion of musical songs into ringtones were included.

This recent decision will have a tremendous financial impact on both ringtone providers and the composers and the publishing industry. Ring tone providers may seek to claim a refund of royalties already paid in respect of songs of composers who signed the GEMA agreement's 2002 version.

Branding and the Demise of Mervyn's

One of the more difficult tasks in teaching IP strategy to MBA students is explaining why trademarks are lumped together with patents, copyright and trade secrets. The way I try to accomplish this is by emphasizing the relational and symbolic nature of trademarks. Trademarks are not really about protecting words per se (not even the most renowned famous mark can enjoy blanket protection for every commercial use). Instead, they seek to protect the relationship created between and among the mark, the product, and the source and the goodwill generated by this relationship.

Now I am not kidding myself. I can't push this foray into the outer reaches of IP metaphysics for too far or too long, lest I become the object of glazed-over, or disconnected, stares. But 5-15 minutes of this exposition, Coca Cola container in hand to serve as a ready example, seem to do the job. What becomes even more difficult is when the discussion moves from trademarks to brands (there are invevitably several upwardly marketing types in each class). I am aware that yesterday's trademark manager has become today's "head of corporate branding" in many companies.

But for me, the uncertainties about setting the metes and bounds of brands and branding make the class discussion among the most challenging of the entire course. Is branding about various lines of an international cosmetics company, or is about the overall value and draw of the name of multi-faceted retail chain?

On the metaphysics of branding

I was reminded of the uncertainties regarding discussions on brands in an article that appeared in the December 8th issue of Business Week, "How Private Equity Strangled Mervyn's". The focus of the article was the bankruptcy of the U.S. chain retailer, Mervyn's. At its height, Mervyn's had 257 stores and 30,000 employees, and it was a well-known retail fixure in the U.S. West Coast. The article took the slant that the ultimate demise of the company was due to the interests of its most recent owner, a consortium of private equity investors, whose financial interests were not necessarily in the best interest of the long-term prosperity of the company and its brand.

According to the article, the new owners of the chain were more interested in reaping short-term benefit from sellling off real estate and engaging in certain sleights of hand with store leases than in attending to the nuts and bolts of trying to resucitate a declining retail brand. Indeed, the account of the actions of the chain's private equity owners is notable by the fact that the things that presumably went into building the brand--merchandise, pricing, ambience, service, and customer goodwill--are virtually unmentioned. For these owners, at least, there was more (or at least different, if only for the short term) value in the physcial assets acquired and later disposed of, than in what we would typically understand as part of the chain's brand.

In fact, the decline of the Mervyn brand began much earlier, in 1978, when the family-owned business was sold to the retail conglomerate Dayton Hudson. According to the article, Dayton Hudson preferred to use the money that was being spun off by Mervyn to strengthen its flagship franchise, the well-known U.S. retainer Target. The result was that, here as well, the kinds of things that are necessary to maintain a brand in the rough and tumble of retailing were being neglected by virtue of the diversion of cash flow from the company's parent to another (and preferred) member of the corporate retailing stable.

The demise of a brand

In recounting this story, it is clear that we have drifted far afield from a conventional understanding of branding. Will the regrettable end of Mervyn's find its way into my next MBA course? Probably not, after all, it is not really about IP strategy. That said, it too is about branding, or more precisely, what happens when branding ceases to become a primary focus of the company's operations.

Open innovation in the business world

Here's a guest feature, penned by Jordan S. Hatcher. Jordan is the Head of Research at IP strategy consultancy ipVA. A frequent author and speaker on open licensing topics. Jordan co-authored the Open Data Commons PDDL and has worked extensively on open licensing through work with Creative Commons, on JISC-funded projects, and with the Open Knowledge Foundation. You can read more of his thoughts on all things open on his blog, Opencontentlawyer.com 

"Can you tell your open source from your open innovation? Open content from open APIs?

There’s quite a bit of talk about open innovation in the business world – it’s something of a buzzword ever since Henry Chesbrough's first book on the topic in 2003. The short summary of open innovation:

 Many businesses traditionally looked only within their own companies and R&D departments for new technologies and strictly limited how they transferred their tech outside of the company.

 Open innovation means looking outside of the company for new technologies and for new opportunities to transfer out internal innovation.

It's simple from a strategy perspective: don't only look within your company as part of your innovation/business strategy. From the lawyer perspective (who get to implement this strategy), how innovation goes in and out of the companies can of course vary widely. Consider the differences between:

 Buying patents;
 Licensing in know-how;
 User generated content;
 Consortia agreements; and
 Using, and contributing to, GPL-licensed Free/Open Source software.

In each of these cases, how “open” the underlying innovation in relation to use by others varies widely, but they all come within the scope of “open innovation” as used by the business community. 

The list above flows generally from the most “closed” of open innovation practices to some of the most open:

 Buying a patent for example means a wholesale transfer of ownership, and the new owner solely determines use of the patent;
 Consortia agreements may allow innovation and information to flow only within the consortia and strictly limit members (even with relatively large memberships);
 Open source software under the GPL however allows practically anyone to use and change the underlying code providing they comply with a relatively unburdensome set of terms.

So to the IP lawyer, open innovation means transactional IP – buying, selling, licensing in, and licensing out. How these transactions get done (and under what “open” label) is where the fun starts.

Open innovation versus open licensing

The legal differences between the various flavours of open innovation, as mentioned, vary greatly, but one area in particular deserves further discussion: open licensing. Without going into great detail, open licences as often described allow for:

 Use, reuse, and redistribution; and
 Both practical and legal access to anyone willing to comply with the licence terms.

Open licensing examples include:

 FOSS licences such as the GPL and BSD licences;
 Creative Commons licences (though only 2 out of the 6 main CC licences are “open” as discussed below); and
 Open data licences such as the Open Data Commons Public Domain Dedication and Licence.

As a result, within the broader category of open innovation exists a subset of uses that may be done under open licences, but an open innovation strategy doesn’t automatically mean open licences. Nokia doesn’t get access to Motorola patents simply because they purchase a patent under an “open innovation” business strategy.

Openness even within “open licences”

It may perhaps surprise those readers not familiar with the Free Software/Open Source Software (FOSS) world how much effort has gone into defining “open” or “free” in terms of practical legal rights (typically granted by licence). One of the great accomplishments of the Open Source Initiative has been both the Open Source Definition and their list of compliant licences (as of the time of writing, 72 with the EU Public Licence pending).

As the ideas behind FOSS have moved into other areas, so too have more definitions and guides been created, such as:

 Open Standards Requirement (OSI)
 Free Cultural Works
 The Open Definition

These all try to further flesh out and define their respective terms in order to achieve some standardisation around meaning because of use on so many different types of projects. Standardisation ensures that one piece of “open” material can be combined with another piece of “open” material.

Further defining open

The above two bullet points defining open licences still have a mushy feel. That’s why I always recommend consulting the OKF’s Open Definition (perhaps also because I’m on the advisory board). It adds that access must be non-discriminatory, including (like the OSI’s definition on which it’s based) for those wanting to make commercial use. This important distinction excludes those Creative Commons licences with a non-commercial use clause that often get referred to as “open licences”. (Please consult the definition yourself for all the details.)


A tale of two maps: Google Maps and Open Street Map

Online maps are one of those services that, once used regularly, it is hard to imagine life without. Google Maps and Open Street Map are both services available free over the internet that make use of the internet to collaboratively produce material (though what varies between the two). Their IP arrangements however differ greatly:

 Use of Google Maps comes under the Google Maps Terms and Conditions, Google's Terms of Service, and the Google Maps/Google Earth APIs Terms of Service. These terms do not meet the Open Definition, noted above, particularly because they limit commercial use and limit the ability to make adaptations of the map content.
 Use of Open Street Map is under their current licence, Creative Commons Attribution Share Alike. This licence does meet the Open Definition.

One practical example: SatNav systems. If you wanted to create a device with turn-by-turn navigation using Google Maps data through their API, Clause 10.9 (a) explicitly prohibits you from doing so. With Open Street Map under the CC licence, no such prohibition exists provided you properly attribute and share any changes you make to the map database.

Open innovation and collaboration

The variety and depth of mass collaboration and distribution made possible by the internet and digital technology has revolutionised many aspects of business and society. But the legal relationships between all the collaborators, prosumers, amateur professionals, and Web 2.0 businesses are far from standard: they range from the relatively mundane patent assignments to the more esoteric and cutting edge areas of open licensing. The job of the IP lawyer is, as always, to sort and structure the various flavours of open so that they work as intended".

If you've any comments on open source and open innovation as IP business models, please post them below -- we'd love to hear from you.

"Chunking"--The Next Big Thing in Publishing and Digitization?

You have to love the way that terminology gets adopted in the digital world. My favorite term of recent vintage had been "mash" or "mashing". No more, though--I ran across an interesting little ditty in the December 8, 2008 issue of Business Week ("This Chapter is Cut Out for You") where the word of the day is "chunking". For someone who grew as a child craving for the chocolate confectionery product "Chunky" I had to make a huge effort to understand the "chunking" has nothing to do with candy and everything to do with publishing.

When chunky was chunky

According to the article, "chunking" was one of the hot issues at the recent Frankfurt Book Fair. And what, pray tell, is "chunking"? It is the "slicing up [of] books to sell the pieces". If once we talked about the salami theory of copyright--namely slicing up copyright into as many pieces as possible, "chunking seems to be taking this strategy of monetization one step further. Now, a single work is itself carved out to extract more value from it. A rough analogy might be the experience of iTunes in selling single cuts of musical works otherwise contained as part of a CD. That said, books are not CDs, and rare is the book whose price tag is as low as a CD, despite the moaning and groaning of purchasers of CDs.

Several examples of "chunking" are given in the brief article. Thus Hay House, which is a publisher of materials in the self-help and spirituality area, now uses its contents to make calendars and cards. (That said, this seems less an instance of pure "chunking" and more one of merchandising by product extension). 

More conventionally, at least in a "chunking" sense, are the efforts of McGraw Hill to sell single chapters of technical titles in the chemistry area. Even more augustly, Harvard Business Publishing is offering via Amazon single chapters of 120 of its titles, each at the amount of $6.95. Whether "chunking" will come to the rescue of the depleted Harvard endowment remains an open question.

Harvard Business School: "chunking" to the rescue?

The key business question here is whether "chunking" will augment or cannibalize book sales? The argument in favor of "chunking" takes the position that the audience of such single chapters is not likely to consist of the same persons who would otherwise purchase the entire book. I suspect that there is some truth in this, particularly for professional titles that command a three-figure price tag. As a non-fiction author, I would welcome the "chunking" of my tome into discrete chapters. Presumably, this will be lead to increased overall revenues as well greater distribution and exposure. It will be interesting to see whether this product/marketing scheme is the herald of something substantial, or just another buzz word that will come and go.

Spanish court explains calculations in adidas award

In what is apparently the first occasion on which a Spanish court has given an explanation of the basis for its calculations, the Madrid Provincial Court this September awarded €1,829,969 to adidas for infringement of its well-known ‘three-stripe’ trade mark by D Matteo Jin and three corporate defendants.

In its claim adidas sought recovery of (i) its expenses incurred in investigating the infringement; (ii) loss of profit (this being said to be the price that the infringers would have paid in order to obtain a licence) and (iii) damages for injury to the reputation of its mark as a result of the infringement. As to loss of profits, adidas's expert witness calculated the hypothetical royalty that the defendants would have had to pay to adidas based on

• a variable royalty (an average based on the total sales of infringing products) and
  
• a minimum guaranteed royalty (to be paid regardless of the total sales of infringing products).
  

The court accepted adidas’s argument that a minimum guaranteed royalty should be granted to the trademark holder regardless of the total sales of infringing goods. Considering the factors identified by the expert witness to calculate the minimum guaranteed royalty were reasonable and technically well-founded, the court granted an annual minimum guaranteed royalty of €855,568 (ie, €1,711,136 for two years of infringement), though the issue of the variable royalty was not dealt with since the amount of sales by the defendants was unknown.

The court added that this compensation was separate, cumulative and compatible with other types of compensation set forth by the law. On this basis, with regard to the damage to the reputation of the mark a further sum of €112,398 was awarded.

Source: Leticia Lloret, Grau & Angulo, Madrid, writing for the World Trademark Review.

The role of branding in the UK economy

Last month the British Brands Group announced that it had commissioned Westminster Business School to undertake a study into the economic contribution of branding to the UK, to help build understanding of the wealth it generates and to quantify the contribution it makes to the economic health of the country. This work is seen as an essential precursor to assessing whether this contribution is being maximised. Its key findings are as follows: 

• An estimated 1 million people are employed in the UK in the creation and management of brands, equivalent to 4% of all those employed;

• The value of branding to companies is well understood. The most valuable brand domiciled in the UK is HSBC ($33,742 million), followed by Vodafone ($26,688);

• Brands are simply not being counted in the UK’s measures of economic activity. The knowledge economy is not being valued, and branding is an important element of this;

• While brands are recognised as a driver of economic growth, there remain significant gaps in the evidence base;

• Approximatetly £32.55 billion is spent on building brand equity annually, or 2.3% of GDP;

• This represents some £15.8 billion investment in the UK annually. This represents around 12% of all intangible investment and 6% of all investment in the UK;

• The creation and management of brands is becoming an increasingly important component of the UK’s overseas earnings;

• The investment in building a strong trust relationship between firm and consumer yields a number of returns to the wider economy:
- providing a surety that new products, ventures or markets are “safe” for consumers;
- the quicker adoption of new technologies and ways of living and working;
- aligning business with society, allowing firms to offset side effects of consumption;
- a means of regulating large global firms with extensive influence;
- a spur to innovation as companies strive to maintain their reputational asset;
- enhancing the reputation of British products and services abroad, supporting exports.

The BBG comments that it surprising how little work has been done so far to assess the contribution of branding to the wider UK economy, which is reflected by the significant gaps that exist in the evidence base. With branding’s potential to add value, deliver competitive  advantage, commercialise innovation, protect consumers, contribute to GDP, enhance export performance and align business to societal needs, this seems at best an anomaly and at worst a significant oversight.

A full copy of this 51-page report can be downloaded here.

Forthcoming event

“Fundamentals of Intellectual Asset Management”, a three day course held at the Cranfield Management Development Centre, Cranfield University (England) from Monday 9 March to Wednesday 11 March 2009, has a programme developed by the LES (Licensing Executives Society) Britain & Ireland.  

The first day begins with an introduction to the types of IP including trade secrets, patents, trade marks, copyright and design rights. This is followed by an introduction to the basics of licensing, including exercises and a review of the important clauses of a licence. The course then goes on to cover 

* "A Business Framework for Licensing" (a review of high-level business processes for intellectual asset management and the relation of licensing to corporate strategy, 

* "The Deal" (identification and application of valuation approaches; extensive licence negotiation exercise, based on case study materials from earlier sessions); 

* "Living with the Deal" (what happens after the deal is made; construction of a strategy for IP management).

The course is said to be aimed at anyone from beginner’s level to those with up to two years’ experience in licensing.  12 CPD points are available for those attending days two and three. For further information click the LES B & I website here.

Novartis sales hit by drugs coming off-patent

This blog recently reported on the effect that the push to using more generic drugs could have on the value of research-based pharmaceutical companies (see IP finance ... where money issues meet intellectual property rights: Future President Obama and Generic Drugs and Biologics).

This issue was highlighted by a recent article on Fox Business reporting an interview that Novartis CEO gave in the Wall Street Journal. Joe Jimenze noted that sales of the drug Diovan (used for treating high-blood pressure) are expected to plunge when the drug comes off-patent in 2012. Apparently 21% of Novartis annual revenue of USD 39.8 Billion is at risk due to this and other patent expiries.