Is IP Being Overloved?

I am a two minds about how to position IP in the larger business context. Does the fact that I engage in IP for mylivelihood skew my view of the role that IP plays in the business world, or do I have a distorted view of its commercial and business importance? No matter how objective one tries to be, the day-by-day exposure to a wide variety of IP matters cannot help but influence the way that I think about it. After all, who does not want to think that he is in the middle of it all (consider what Copernicus went through to disabuse earthlings of this in the cosmological sense).

Encouraged by this sense of importance, I have keenly noted that my weekly magazine of choice, The Economist, seems to giving an increasing emphasis to IP-related matters, particularly in its Business section. I observed this, not for the first time, in its August 29 issue, where all but one of the articles had some IP angle (for those of you who like to count, that means two copyright/digital articles, one patent/pharma piece, and two articles, one on US trustbusting and one on solar power in Japan, both of which demonstrably included IP as part of the analysis.) Take that, Copernicus! Whatever you had to say about the earth, moon and sun, there can be little doubt--when it comes to business and commerce, we IP types really are in the centre of the universe.

IP In the Middle?

And yet, something gnaws at me. Can it really be that, when distilling weekly the world's leading business issues into 6-8, as The Economist does, IP is so central, almost omnipresent? I recognize that this observation is a bit of an admission against interest. Still, it seems that we are now supposedly coming out the worst recession in a half-century, a perfect storm where the real economy tanked in parallel with the world financial system, and IP seems to dominate the discussion. Perhaps it is due to background of journalists who trend to write for the the quality press. After all, IP has an attraction that writing about supply chains and Baltic Dry shipping data do not. Moreover, there are readers to worry about, and the same can be said about them as well.

If I am right, then permit me to offer three thoughts.

1. The media's skewing of the role of IP filters down (or up) to the business setting. What a business person reads in the popular press can have a material effect on their decision-making. Lest you think I am being flippant here, I would love to have a $1,000 for each client that comes to me and announces that "we have to develop more IP" to improve our competitive position. If the media view IP as an elixir, then one better jump on its bandwagon. This is dysfunctional both for the company and for those of us who provide professional services.

2. If we are to be effective in our IP work, then it is no better to more-appreciated than under-appreciated. A sense of perspective is essential, if for no other reason than that a major part of any professional endeavour is to manage expectations. A failure to satisfy unrealistic expectations about what IP can, and cannot do, ultimately will come redound to the detriment of the field and the profession.

3. Oddly, both under-appreciation and over-appreciation seem to be at work at the moment. If one asks WIPO, it appears that the view is that IP is under attack. Consider also the cover story in the most recent issue of Intellectual Asset Magazine--"Brand Broken--How and Why IP Needs to Rebuild its Shattered Image." Maybe it is the case that the view of IP from inside the field is so at odds with the popular perception. If so, there is a lot work to be done on -- on both sides.

On Teaching "IP as a Cost"; "IP as a Profit Centre"

I had an interesting phone conversation this week with US colleagues who are planning to deliver a course on IP at their local business school. The discussion got me to thinking about doing some tweaking to the syllabus of my own course. In particular, I am considering how to address the issue of the "IP as an cost centre/IP as a profit centre" dialogue. One way to address the topic can be summarized by the observations set out in a September 11 Webinar entitled "The Emerging Role of the CIPO (Chief Intellectual Property Officer)" and sponsored by IAM magazine. There, distinguished IP personalities Rob Sterne, of Sterne, Kessler, Goldstein & Fox, and Ron Laurie, of Inflexion Point Strategy, presented the Webinar and the presentation concluded in part, as follows:

"*More and more companies are managing IP as a strategic business asset.

* CIPOs will be the visionary drivers for companies that are transitioning from an IP as a cost center mentality to an IP as a profit center model.

*A key success factor in an centralized IP structure is the ability to effectively manage relations with the head of each strategic business unit having a financial interest in the IP value forecast and revenue stream; the CIPO is in a unique position to master these relationships."

As I see it, (i) IP management should become a strategic concern; (ii) to do so requires re-conceiving IP as a profit rather than a cost element; (iii) a top-down approach spearheaded by the CIPO is the preferred structure to bring this about. There is bit of a 'true believer' tone to the contents of this Webinar presentation, and the idealized CIPO seems to require that he have a permanent letter "S" on his chest. Nevertheless, the points described above seem a pedagogically useful way to structure the topic, provided that they are addressed with a critical eye. Some of these criticial aspects include the following:

1. The approach seems to have a patent-centric orientation. What about trade marks and copyright? How do we fold in trade secrets to the analysis?

2. The approach is focused on a large company environment. To what extent is the approach generalizable, if at all, to small and medium companies?

3. It seems to me that IP can legitimately be a cost, as well as potential profit center, depending upon the circumstances. How do we account for both possibilities?

4. Where can we find examples to the operation of the "IP value forecast and revenue stream" at the business unit level?

Stated otherwise, how can I get my arms around the topic in an intellectually honest manner within a limited time frame in order to ensure that my treatment of the topic is not stuck at either the level of slogans or unhelpful generalizations?

Aggregate IP Data is Nice, But What About All Those Other Countries?

I guess I am a micro-man at heart, and I have never quite understood what one is to make of macro data on IP filings and registrations. Even without seeing the most recent data international data, most of us can usually predict in which countries most patents and trade marks are being filed and registered. More challenging are the implications of these data. I thought about this again in reading the blogpost of my fellow IP Finance blogger, Eva Lehnert, who brought to the readership's attention a WIPO Report on trends in intellectual property activity here. As noted, the report brings various data on filing and registration patterns for patents and utility models, trade marks and industrial designs.

Let's consider some of additional results to those previously reported in Lehnert's earlier blogpost:

1. Patent fillings were down in 2007; 59.2% of applications were filed in China, Japan, and the USA.

2. The patent offices of Japan, USA, Republic of Korea, China and the EPO accounted for 74.4% of the total patent grants.

3. There are at least 4.2 million pending patent applications, with the USA accounting for 28% of the backlog.

4. Trade mark registrations were up 6% in 2007, with the most noticeable increase being in Brazil Nearly one-fifth of trade marks were filed in China in 2007.

5. Japan, USA, France and Germany account for nearly 20% of trade marks in force. and nearly 125,000 trade marks in force were registered before 2007.

6. France accounted for the largest number of industrial designs in force in 2007.

Keeping these data in mind, I found a bit curious the statement made in the report's forward by the WIPO Director General Dr. Francis Gurry:

“History has shown … that companies and countries which continue to invest in new products and innovation during times of economic recession will be those that will be best positioned to take advantage of the recovery, when it arrives. IP statistics help us to understand the role of the IP system in stimulating and diffusing innovation, promoting markets for new products, and rewarding creativity.”

With all due respect, I do not quite see how these macro data tell us very much beyond the fact that registered IP is still the purview of the traditional filing countries plus China. If growth is what we are concerned about, then what about such countries as India, Brazil (trade marks aside), Russia, Indonesia, Taiwan, Australia, Mexico, South Africa and Singapore? Even if the aggregate filing and registration data do not approach those of larger countries, what is the rate of increase in these countries? Do we observe any relationship between IP activity, on the one hand, and innovation and economic growth, on the other, on a country by country basis?

If WIPO has made these kinds of information available to the public, I would be grateful for further guidance how to obtain them. If not, where is this kind of information available? I, for one, would find this kind of information to be of particular interest.

Woolworths’ Woolly IP Agreements Don’t Hold Value

Case Digest: Butters and others v BBC Worldwide Ltd and others [2009] EWHC 1954 (Ch), 20 August 2009

A dispute between the Woolworths administrators and the BBC, born of the failure to agree an appropriate basis to value Woolworths' shares in a Joint Venture (JV), landed both parties in the High Court recently. The dispute itself regarded the validity of a provision contained in a Master Licence Agreement (MLA) and highlights potential problems that can arise when a JV shareholder licenses intellectual property rights to a JV.

Factual Background

This case involved a Joint Venture Agreement (JVA) setting up a company called 2 Entertain Limited (2e). 2e had a subsidiary, BBC Video Limited, which was the licensee under the MLA, which in turn was conditional upon the JVA. BBC Video Limited, which the MLA protected, was a subsidiary of the JV vehicle and the licence contributed substantially to its net worth.

The MLA terminated upon the happening of an ‘Insolvency Event’. If an Insolvency Event occurred within the Woolworths Group, BBC Worldwide could serve a notice in accordance with the JVA, requiring the Woolworths’ shareholder in 2e to sell its shares in 2e to BBC Worldwide; they did just this. The result was that the MLA had terminated and the valuation was to be determined on that basis. The effect of this provision was to allow the solvent JV partner to force the other partner to transfer its shares in the JV vehicle for a price that was discounted so as to reflect the loss of the licence.

Insolvency Deprivation Principle

This common law principle is the equivalent of s.107 of the Insolvency Act 1986 and r.4.181 of the Insolvency Rules 1986. Both sections ensure that the assets of an insolvent company are dispersed in line with the shareholders’ and creditor’s share of their interests in the company. It is against public policy to permit a company to contract out of this principle in order to favour one shareholder or creditor above all the others.

The High Court held that clauses in the MLA, which terminated the MLA upon the insolvency of a member of the licensee's group, were void as a matter of public policy because their effect was to deprive the creditors of the insolvent JV partner of the value of the licence upon the occurrence of an ‘Insolvency Event’. In doing so they expressly declined to follow the decision to the contrary in Perpetual Trustee Co Ltd v BNY Corporate Trustee Services and others. [2009] EWHC 1912 (Ch).

The key lesson for IT, IP and commercial lawyers is not that automatic termination of licences upon insolvency offends the principle, but that the termination cannot be linked to any mechanism that enables the licensor to benefit as a creditor/shareholder from the fall in value in the licensee as a result of the termination of the licence.

Watch this space...

Mr Justice Peter Smith has granted permission to the Administrators to appeal and to BBC to cross-appeal in relation to the deprivation principle. Further, judgment was handed down in Perpetual Trustee Co Ltd (see above) on 28 July 2009. This case also involved the deprivation principle and has also been given permission for appeal by the Chancellor. Expect this to be a live issue over the coming months.

Growth in IP rights before economic crisis

A new WIPO report monitoring recent trends in demand for IP rights relating to patents, utility models, trademarks and industrial designs shows that before the onset of the global economic crisis, overall demand was continuing to increase.

The report shows that in 2007 (the last year for which complete worldwide statistics are available), demand for IP rights increased with 1.85 million patent (+3.7% increase over 2006), almost 3.3 million trademark (+1.6%) and approximately 0.62 million industrial design (+15.3%) applications filed worldwide in 2007.

There was a slowdown in demand in 2008 when the global economy experienced a sharp decline.

In the report’s foreword, WIPO Director General Dr. Francis Gurry says “History has shown […] that companies and countries which continue to invest in new products and innovation during times of economic recession will be those that will be best positioned to take advantage of the recovery, when it arrives. IP statistics help us to understand the role of the IP system in stimulating and diffusing innovation, promoting markets for new products, and rewarding creativity.”

IP and Innovation, in the Service of SME's

I was following the various tweets and blogs from the prodigious Duncan Bucknell of the iconic IPThinkTank blog in connection with the recent CIP Forum in Gotenberg, Sweden on the "Future of Innovation". One blogpost, entitled "The Biggest Issue in IP Management", particularly caught my attention. In it, Bucknell discusses the lack of attention given to SMEs (small to medium enterprises) as centres of IP and innovation. I quote his comments in an edited fashion below.

"The biggest pool of patents is not at Samsung, or IBM, or LG or IBM or Microsoft, it is in the SME space. We consistently hear (and at the conference, from the likes of Eli Lilly, Microsoft and Philips) that most innovation is occurring at the SME level. Clearly most IP management is occurring there as well. We have all heard about and constantly deal with IP silos within companies, managing IP as a profit centre (and not a cost centre) and communicating value to the Board. Well, the vast majority of IP management has no silos, no profit centre, no cost centre, indeed no centre at all. The vast majority of IP management is done where there is no IP function.

The challenge then, is to develop a set of principles and practices that are transportable across SMEs to large corporations. Accounting principles apply this way, as do marketing, sales, product development, indeed every other function. Large entities have a great interest in helping SMEs to achieve this. They themselves often say that this is where they look for innovation. If they are to acquire IP from SMEs, then they would much rather that it had been carefully nurtured prior to acquisition. Those of us charged with working in or with large and well resourced entities have an opportunity to make a substantial impact by leading the development of these tools."

And so--here is my question. In Bucknell's call for "the development of tools", are we talking about "transportable principles" regarding IP, innovation or some combination of the two? Law faculties now have centres for innovation, where research is carried out on how legal structures help or hinder innovation; business schools devote entire programmes on how innovation is created and exploited for profit. While we instinctively sense that the two terms are not synonymous, the boundaries between them are blurred. Even Bucknell's most interesting blog comments seem to glide between focusing on IP and on innovation.

This blurring matters, because until it is resolved, it will not be possible even to begin the task of developing the tools that Bucknell has urged. Not all IP is related to innovation, nor is all innovation simply a function of creating better IP rights. While IP and innovation may overlap, they do so only partially. IP management may facilitate the ability of an SME to innovate more effectively in its area of activity, but it might also simply enable the SME to effectively exercise its exclusionary IP rights without necessarily contributing to overall innovation. From the vantage of innovation, IP may or may not be essential to the innovative part of the SME's activities; indeed, the innovation may take place far from the concerns that occupy the IP manager.

All of the foregoing is another way of saying that if we are to go about the "development of tools" correctly called for by Bucknell, we will first need to address the prerequisite question: What is the relationship between IP and innovation? Only after we have created a structured approach to answering that question can we then proceed to the "development of tools." Tolkien enabled us to read the Lord of the Rings trilogy even if one proceeded to read The Hobbit only later, or not at all. Unfortunately, we don't have the same luxury here, if we are to move in the direction that Bucknell has urged.

UNCITRAL and security rights in IP

Last month this weblog gave advance notice of a seminar it proposed to hold in Central London on the afternoon of 14 October on UNCITRAL and Security Rights in IP. Further details are now available from the IPKat weblog here.

IP Ownership: Are We Up To The Task?

I don't know if this is a "tipping point" in the precise sense intended by Malcolm Gladwell in his 2000 bestseller--The Tipping Point: How Little Things Can Make a Big Difference. There, Gladwell argued in a rhetorically compelling fashion how there is a moment of critical mass that leads to significant sociological changes. I want to bring Gladwell's concept down to a personal level, and perhaps amend it by a metaphorical notch or two, to consider my own "tipping point" with respect to a potentially emerging problem of IP practice.

Last week, I attended a conference on patent ownership issues, including whether the invention was made in the employer-employee or otherwise (and where the highlight was a speech by my fellow IP Finance blogger Jeremy Phillips, who doubles (at least) as the blogmeister of the granddaddy of all blogs, IPKat). A constant theme of the conference was the paucity of case law on the issues considered by the speakers. Leaving the conference, a colleague noted to me that he had drafted and prosecuted hundreds, if not thousands of patents during his career, but issues of ownership, and especially what happens to ownership in the employer-employee, or contractor-inventor relationship, hardly had ever arisen. "Okay", I noted to myself, and went a about my way back to the office.

Several days later, being last Friday, I considered the most recent publication of IPKat, devoted to comments on a press release from the UK Intellectual Property Office regarding climate change. One particular part caught my attention. Thus,

"Peter Holland, International Director, IPO said: "Evidence suggests that managing and reaching agreement in IP ownership and access is difficult in all industry sectors [That, says the IPKat, is why you need IP lawyers ...]. This means that collaborative projects can take a long time to set up or simply never happen [... and we can blame that on the collaborating parties]. The provision of a framework for IP management looks to encourage and support more collaboration. It could also dramatically reduce the transaction costs involved in establishing such agreements and we hope this increases technology diffusion".

The quoted text and intertwined IPKat commentary hit me over the head. When taken in conjunction with the earlier observation of my colleague about his paucity of encounters with IP ownership matters, the question arises: How skilled are we IP lawyers in dealing with questions of IP ownership, the IP implications of the employer-employee relationship, and inventorship and ownership in the contractor situation? Perhaps I take mild issue with the IPKat on this point, but I have this sense of unease that Mr Holland's reservations are not wholly without merit.

Simply put, where exactly do we IP attorneys, especially those on the front-line of patent drafting and prosecution, obtain the reservoir of knowledge and experience to allay Mr Holland's concerns? Not being a strong believer in osmosis as a source of professional competency, I am challenged to find a compelling answer to the question. The odd conference aside, the issue seems to be neglected in in-service training, if the importance of this competency appears to be increasing apace.

The cover story in a recent issue of Business Week, "The Radical Future of R&D: It's a New World of Collaboration Across Corporate and National Boundaries", puts the issue in stark relief. The contribution of the IP professional is no less dealing with the arrangements for ownership of IP rights than with the legal creation of these IP rights. At the least, policy makers such as Mr Holland need to feel that the IP profession can handle these two aspects with equal competencies. I am not certain that the answer is an unqualified "yes."

Employer or employee; inventor or owner?

Canada gets US-flavoured update for IP licence/bankruptcy

I've just received an email circular from Paul Jones (Jones & Co, Toronto) which contains a succinct summary of the amendments of Canada’s (i) Bankruptcy and Insolvency Act and (ii) Company Creditors Arrangements Act. These amendments come into effect this Friday, 18 September. Writes Paul:

"One provision will have a significant and positive effect for the licensing of intellectual property.

The official version of the package is here. The amendments are based on the amendments made to the US Bankruptcy Code after the Lubrizol case in 1985. When a proposal for restructuring is made, Trustees in bankruptcy have the authority to disclaim (or terminate) ongoing contracts of the bankrupt entity. Lubrizol lost the right to work the technology that it had licensed from Richmond Metal Finishers and through no fault on its part. Afterwards Section 365 (n) was inserted to allow the licensee to affirm an intellectual property license that had been disclaimed by a bankruptcy trustee, and thus continue to use the technology and paying royalties. “Intellectual property” was defined to include “copyrights, patents, trade secrets and mask works.”

Canada has now decided to copy this provision, but with some differences. Here is the new provision Section 65.11 with respect to IP:

(7) If the debtor has granted a right to use intellectual property to a party to an agreement, the disclaimer or resiliation does not affect the party’s right to use the intellectual property — including the party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the party extends the agreement as of right, as long as the party continues to perform its obligations under the agreement in relation to the use of the intellectual property.

The differences are that the term “intellectual property” is not defined in the amendments or the existing legislation. Thus it can include trade-marks, something not included under the US Bankruptcy Code. Trade-marks differ from copyrights or patents in that they are indicators of source and difficult to disconnect from the original owner, in this case the bankrupt company.

Secondly the basis for the protection of trade-secrets in the US and Canada differ. In the US 41 states have laws defining and protecting trade secrets. In Canada the are no such statutes and the protection is derived from the common law, usually based on contractual obligations. Generally in Canadian law it is not as clear that trade secrets can be considered as “property.”

Parties to license agreements for the use of intellectual property in Canada should first of all be aware of these changes when dealing potentially insolvent parties. The strategic options will be different. When drafting such license agreements the obligations of the licensee should be considered and defined more carefully as these may determine the ability of the licensee to continue to use the intellectual property in the event of the licensor becoming insolvent.

And if the license agreement includes trade secrets or know-how the parties may wish to emphasis either these as contractual obligations or property depending on their interests".

Motorola, Handsets and Branding: A Cliq and a Coda

Almost by telepathy, just about the very moment on Friday that I was publishing my post--"Can Branding Save Motorola's Handset Business"--, CNET News was publishing an article written by Tom Krazit, also dated 11 September, on the same subject. Entitled "Motorola's Comeback Attempt Rests on Software", the article describes the launch of a new smartphone, called the Cliq.

What is special about the Cliq is Motoblur, "a layer of software that sits above the Android operating system and will coordinate incoming messages and news feeds on future Motorola handsets." The article goes on to say that Motoblur is "actually more than just software --Motorola is also essentially hosting an online service that will deliver Facebook updates and RSS feeds to individual phones--but it's emblematic of the shift towards software and the Internet as the main features in a mobile phone."

Motorola's choice of the Android (and Google), which was not explained in the Business Week article, is explained in the CNET report. Paraphrasing the CEO of Motorola, the company "struck up a partnership with Google and Android because it realized that Google could do a much better job of coordinating third-party software develops and application sales than Motorola could do on its own."

As stated further in the report, at the end of the day, Motorblur is the means for "Motorola's social-network marketing strategy with the Cliq." If so, the key to Motorola's plans for the Cliq is to provide a superior user experience that will tie a new generation of users to the Motorola brand and mark. Motorola's competitors will almost certainly be able to develop software that will ultimately attain similar functionality. If so, Motorola's ultimate advantage will be in the value of its brand, as embodied in the Cliq user experience, and Motorola's ability to continue to tweak that experience and thereby support the brand. That is more or less what I was trying to suggest.

Can Branding Save Motorola's Handset Business?

The handset, and more particularly, the smartphone industry, is particularly interesting from the IP point of view. I can think of no consumer hi tech industry in recent times where there is such a variety of competitors, and such an interdependency with third parties, all wrapped-up in a melange of various IP rights. "That all sounds nebulous to me", you might say. So let's try to give some focus to my thoughts, centering on a piece that appeared in the 3 August edition of Business Week entitled "Motorola Has One Bullet Left in Its Gun."

The Business Week article describes Motorola's almost desperate strategy to reinvigorate its mobile phone business. It is difficult to believe, but it was not that many years ago that the Motorola RAZR was all the rage, particularly due to the success of its slim, distinctive design. That seems to be the problem; the product was longer on design than on functionality. As the Mobile Gazette wrote on May 16, 2007 here,

"although the RAZR looked high-tech on the outside, the handset's specification was a straight copy of [models] ... which had been around since 2003. So it wasn't a very new phone underneath, even though it was still quite competitive. However other features proved to be a disappointment, such as the pretty-but-difficult keypad and the poor user interface. The RAZR also lacked an MP3 player, expandable memory or a decent camera which became more marked as the competition evolved ... and the RAZR did not."

Roughly speaking, when the design no longer conferred a market premium for the market, and with no discernible advantage in its product functionality, Motorola entered in an inexorable decline for that market.

Fast forward to 2009, and to the intensified efforts of Motorola to recapture its glory, in particular with respect to smartphones. Ah, but what a crowded field we find-- iPhones, Blackberrry, Palm Pre, HTC, Samsung, LG (have I listed them all?). These are not fungible products at the moment (although there seems to be greater convergence); so the iPhone has materially different features, and different types of users, from the Blackberry. And how will Motorola play this? According to Business Week, it has reached a strategic decision to develop a new generation of products that rely on the Google-supported Android operating system.

Remember that Android is an open source system, supported by Google, and was developed as an alternative to the proprietary operating systems available on the market. When launched, the rationale was that Android would increase search and other on-line usage on handsets for which Google could profit, while at the same time preventing anyone else from gaining proprietary control of the handset operating system. For whatever reason, perhaps cost, perhaps something else (the article does not specify), Motorola is prepared to adopt, indeed to be dependent upon Android, upon the development of a critical mass of Android-based applications (to compete with AppStore, the RIM equivalent and so on) even though the Android is itself a work in progress, and even though Android serves Google's broader business strategy, which might include direct involvement in the handset business at some future time. The harsh truth is that, while Motorola apparently has decided that it needs Google, Google scarcely needs Motorola, except as another cog in the Android network.


So what does Motorola bring to the table? It is not clear. The article states that the analysts, "briefed on Motorola's phones", are of the view that the phones are

"impressive. ... sleek touchscreen phone with qwerty keyboards that slide out of the body of the device for easier typing."

Those seem like nice features. Still, for Motorola's sake, I hope that there is meaningful protectable IP in these features. The article does not mention patents or even any indication that patent protection is part of the company's strategy with these products. As Motorola has learned, design itself won't do it and, unless Motorola obtains an exclusive IP position with respect to at least some of these features, any advantage in this direction would seem to be short-lived.

There is one ray of IP hope however--branding. Perhaps, just perhaps, Motorola might be able to successfully roll its new products out in a way that will capture the fancy of at least a commercially viable critical mass of handset users who will come to prefer the Motorola-branded products. This will then allow Motorola to be able to roll out new features on an incremental basis, rely on its burnished brand image (assuming that it can be reestablished) and thereby not have to seek some likely unattainable holy grail of IP exclusivity.

Something like that was suggested by the Apple presentation about the iPod product that took place several days ago. None of the features that Apple introduced for its iPod product seems to be a blockbuster. Indeed, some features, at least with respect to the Nano iPod, were described as common fare on many MP3 devices. No matter. The idea is that Apple is Apple, and it is enough that it continues to roll out incremental improvements for its flagship products.

Duplicating that dynamic will be ever so difficult for Motorola. The RAZR models were top of the class less than five years ago, but Motorola could not leverage that goodwill more generally, and the Motorola brand is light-years behind Apple in brand strength. But with the operating system in the hands of an open source developer community, behind which lies an 800-pound business gorilla with its own business agenda, with no apparent patents to rely on, with the awareness that designs are fleeting at best, brand development may be the last best IP hope for the company in the handset industry.

South Africa: content war continues with hunger strike

Readers may recall a story that broke a few months back describing how the content industry in South Africa formed a coalition to protest against the national broadcaster's IP and payment policies. The coalition staged an uprising which played a big part in forcing SABC board resignations and them begging for a government bail out. The story continues with a hunger strike.

"Accusations, counter-accusations, hunger strike, protests, name-calling, defiance, denialism, late payments, delayed procurement, deferrals and axing. These are just some of the fundamental characteristics of the local content ‘battle for survival' currently being fought between the SABC and the TV Industry Emergency Coalition (TVIEC). And it is turning nastier day after day." (Issa Sikiti da Silva).

People have learnt how to fight for what they think is right in RSA. Whether a hunger strike is appropriate in this situation seems inappropriate to question.

YouTube Tears Up the Play Book: High Noon or Rising Sun?

As I gear up for the fall semester of my MBA course, the pedagogical word for the moment is "tearing up the playbook". That wonderful piece of imagery, taken from the world of team sports, is particularly apt when considering the challenge of monetizing contents on the internet. In the sports world, "tearing up the playbook" evokes the sight of a coach who is forced to ignore everything that he has learned in the face of a fundamentally altered set of circumstances on the playing field.

Something like that is going on with respect to online content, where the traditional models for monetizing copyright content are proving increasingly unworkable, giving way to uncertainty, if not down right fear and trembling, about how to extract revenues. The challenge in the classroom is to explore with students how IP rights impact, and are being impacted, by the search for workable business models. The effort is very much in a work-in-progress, as we collectively tear up the play book in the teacher-student exchange.

For the print media, the current buzz word is micropayments, which seems to mean charging for discrete items of content, usually as a premium offering that complements contents that are offered for free on the internet. Micropayments can be viewed as an alternative to an ad-based or subscription model for monetizing print contents. Be it the Financial Times, The Wall Street Journal, or Scientific American, the aim is condition readers to expect to pay for at least part of the fare offered on the website. The challenge is to recondition users to pay for contents that they have been receiving (or believe that they have been receiving) for free. Will anyone pay for these contents; if not, who will be creating these contents? This dynamic is progressing apace, and we will follow it carefully.

But, for the moment, let us focus on the struggle that is taking place with respect to visual content. Here, the copyright dynamic is different, characterized by a bifurcated world of visual content creation in which the amateur (for lack of a better term) exists alongside the professional. There is no better example than YouTube, especially since its acquisition by Google in 2006. Against this backdrop, the 3 September report entitled "YouTube Moving Toward Paid Content" under the byline of Kenneth Corbin, is of particular interest. The article reports that Google is negotiating with Hollywood studios

"for a three-month trial that would see YouTube begin offering streaming movie rentals ahead of the title"s sales date, with the studios receiving 60 percent of the revenues ...."

The article goes on to mention that the arrangement, if it takes place, will follow similar arrangements reached by the studios with Amazon and iTunes.

The changing role of copyright in this proposed arrangement is fascinating. As we remember, when Google acquired YouTube, it reportedly budgeted a six-figure sum to address potential copyright infringement claims by professional copyright owners. The emphasis then seems to have been on maintaining the user-generated experience resting on the contributions of millions of amateur contributors, while fending off claims of copyright infringement that might have a materially deleterious affect on this experience. The relationship with professional contents owners was distinctively adversial.

The user-experience created an unparalled platform for capturing eyeballs interested in visual contents online. Revenues were a different story. How different can be seen by this most recent announcement. For Google, the transformation marks a potentially major shift in the way that it views the role of professional contents on the platform. No longer an adversary but a partner, the proposed arrangement underscores YouTube as a distribution platform, the value of which rests on its user base. With a reported nearly 8.95 billion (!) video sites viewed monthly on Google (read mostly YouTube), Google may be close to its High Noon monetizing moment. Are its viewers attracted by a distinct YouTuve viewer experience, or will the availability of commercially streamed contents drive users to other, more pristine sites? Stated otherwise, what will be the dynamics of the YouTube network effect when the platform creates an environment where "free" rubs up against "non-free".



For the studios, there is the realization, which has been true of all content providers since the rise of authors in 17th century England, that copyright is as much about the means of distribution as the act of creation. DVD sales appear to be in a spectacular decline, necessitating an urgent search for new means of distribution. YouTube offers one attractive possiblity, but it is not the only online platform that studios can potentially partner with to distribute their products. That suggests a certain assymetry in the content provider-distributor relationship. If YouTube proves to be a bonanza distribution platform, there will be a win-win situation. If not, content owners can presumably move on until they find a satisfactory online distribution model. In such a situation, what happens to the long-term viability of YouTube in this latter situation must be at the back of the minds of its owners, as they work on their play book for turning YouTube into a leading platform movie streaming.

The Community plant variety system: how much does it cost?

One aspect of IP finance that this weblog rarely considers is the cost of system maintenance. In this regard, the European Commission's Official Journal website has just furnished us with some interesting data. Today it features the Statement of revenue and expenditure of the Community Plant Variety Office (CPVO) for the financial year 2009 — Amending Budget No 1 (2009/690/EC). The books balance perfectly, of course: revenue and expenditure are both set to stand at 13.239 million euros, most of the revenue (11.469 million euro) being expected to come from fees.

The CPVO presumably keeps its expenses down by operating in four of the EU's official languages: English, French, German and Dutch (that's one fewer than OHIM, which has Italian and Spanish but not Dutch), but one more than the non-EU European Patent Office (English, French and German). According to the 2008 annual report, in that year the office received 3,012 new applications and the number of rights in force stood at 15,590.

What really happens to bankrupt brands?

BrandChannel today features a piece, "After the Fall: What Really Happens to Bankrupt Brands", by freelance brand consultant and author Barry Silverstein, which touches an issue of continuing interest to this weblog while also reviewing a popular piece of contemporary reading material. He writes:

"It’s easy to blame a brand bankruptcy on the economy, but it may be more complicated than that. “The brutality of this economy is not only exposing toxic assets, but poorly differentiated brands,” says John Gerzema, author of the best-selling book The Brand Bubble. “Many had a common inability to build strong brand differentiation and lead the consumer forward. Deficits that became that much more apparent in times like these” (“Bankrupt Brands,” TheBrandBubble.com, Jan. 20, 2009).

Gerzema’s point is well taken. In his book, Gerzema addresses the changing role of the consumer when it comes to assessing brands. He says consumers “are increasingly acting like investors. They have heightened expectations for brands to continuously surprise, adapt, and evolve.” Brands that go bankrupt, Gerzema says, “aren’t evolving, or aren’t different enough to begin with.” [At this level of generality, this statement is both right and wrong. It doesn't work for brands which transmit the message of constancy through change].

The most telling public proof of Gerzema’s hypothesis is probably the recent stunning bankruptcy of General Motors. With the GM bankruptcy came the demise of several of its storied automobile brands. Even prior to the bankruptcy, GM had stopped making Oldsmobile, a brand that, despite its long history, had become, well, old. [This is an example that works: whether times are good or bad, consumers expect cars to advance in terms of their technical specification and to reflect their ethos. It doesn't work for Jack Daniels though]. The bankruptcy itself, however, killed off Pontiac, a brand many car aficionados would agree was very much a part of GM’s prior success. Pontiac was the “muscle car” to Chevy’s “all-American car.” The Pontiac brand spawned songs like “Little GTO” and became an iconic symbol of the macho male. [This raises another issue. These GM brands are the epitome of the brand that is so tied into North American culture that it is impossible to leverage when opportunities for globalisation appear]. Ultimately, though, Pontiac was a brand stuck in the muddy past, unable to compete in a new, more nimble marketplace.

Bill Sowerby, a retired GM manager, says of Pontiac: “It didn’t have a focus. Back in the ’70s and ’80s, the brand had its heyday. It had a kind of gold chains, bell-bottoms and leisure suits image of its era. But then it began to lose its brand equity” (“Pontiac Closing Stirs Muscle Car Memories,” The Washington Times, April 28, 2009). Maybe the GM bankruptcy had a positive if sobering effect: beginning to cull out some of the brands that could not be relevant to contemporary car buyers.

Never mind the Pontiac -- why not bring back the Studebaker?

While the Pontiac brand will be gone by the end of 2009, other GM brands may live to see another day. Saturn, for example, was once viewed as the brand that was symbolic of a new direction for GM. When it was first introduced, Saturn’s association with GM was even downplayed. Now it too has been jettisoned by the company. But apparently Saturn will survive, because the Penske Automotive Group, the second largest dealership in the US, has agreed to purchase the brand and its 350 dealerships. In fact, Penske is in talks to “broaden Saturn’s lineup,” according to MotorAuthority.com (“Official: Penske Automotive agrees to buy Saturn,” June 5, 2009).

What is happening to Saturn is not all that unusual. Lately, it seems, just as many bankrupt brands are revived in a different life form as enter the brand graveyard. The reason: that elusive quality called brand equity. The longer a brand name exists, and the wider its exposure, the more powerful and lasting its awareness. [once again, at this level of generality the statement will be both true and false; length of exposure only tallies with brand equity if the brand conveys a positive message that reaches beyond the goods or services with which it is associated] The brand name, bankrupt or not, has built value that counts for something. Even a brand that goes bust may have the potential for a second life.

Polaroid is a classic case of a brand that failed, yet its brand equity seems too strong for the brand to die. In its day, Polaroid was a strong, well-differentiated brand inextricably connected with “instant photography.” But that unique position eventually led to its downfall, as photography evolved into a digital medium. While Polaroid attempted to reinvent itself, its association with instant photography—now archaic—couldn’t be overcome. The Polaroid Corporation went bankrupt once, sold the brand, and then the company that bought the brand went bankrupt (albeit for different reasons). [Could Polaroid have become a fashion brand, like Caterpillar? The word has a mellifluous ring to it ...]

John Gerzema says on TheBrandBubble.com that Polaroid “once was simply ‘magic’” but now it is “perceived as 35 percent less up-to-date and 23 percent less visionary than Canon.” Gerzema analyzed data from the BrandAsset Valuator, a massive brand database, to arrive at this conclusion.

Bankrupt brand or not, the brand name “Polaroid” lives on. As recently as 2009, a digital camera with a built-in printer called the Polaroid PoGo was introduced. In April 2009, the Polaroid brand was purchased by a company that intends to license the name globally.

Licensing, in fact, is one of the up–and-coming ways to extend the life of a bankrupt brand. (See the Brandchannel commentary on brand licensing.) Gerzema says, “…many troubled brands still possess enormous value. The key is to reshape a business model around the brand’s strongest points of differentiation, or invent new ways of being different.” Gerzema cites Sharper Image as a bankrupt brand that is “reemerging through a licensing business model." [at this point it's worth asking whether what is being licensed is the brand, which is indissoluble from some sort of consumer experience of goods or service, or just the name associated with the brand]

Sharper Image, along with bankrupt brand names Linens ’n Things and Bombay, has been purchased by a partnership of two liquidators, Hilco in Toronto and Gordon Brothers in Boston, for about US$ 175 million (“Brand Names Live After Stores Close,” The New York Times, April 14, 2009). The Sharper Image name is already on new merchandise that appears in Macy’s, JCPenney and Bed Bath & Beyond. Linens ’n Things is selling through a website. Bombay is expected to become a line of furniture.

The payback? Jamie Salter, chief executive of Hilco, “predicted a billion dollars a year in sales for Sharper Image and Linens ’n Things in each of the next five years,” according to The New York Times. [But how can we know what proportion of the billion bucks is attributable to the brand equity and what is attributable to price, quality, lack of competition etc?]

Other brands that have appeared to have gone out of business are still very much in business. Retailers CompUSA and Circuit City, for example, were liquidated, but the assets of both were purchased, and they still operate under their original names via online stores. The website SEOBook.com points out that keeping the Circuit City brand alive online makes good business sense: “CircuitCity.com was quickly relaunched last week to capitalize on the remaining brand strength and traffic to the website…That traffic is cheaper than AdWords, will pay for itself in less than a year, and since they are a corporation the Google rankings and traffic will stick” (“What Does $14 Million Worth of Page Range Look Like?” SEOBook.com, June 11, 2009). [The same line of thought encouraged the current owners of the Woolworths brand in the UK to buy it as a bankrupt bricks-and-mortar brand and turn it online. As yet it's too early to know if this was inspired business strategy or a waste of time and effort].

In times past, a bankrupt brand might have been abandoned. But today, bankrupt brands represent a new business opportunity for companies to acquire a well-known name for below-market value and revive it. With the expense of launching a new brand, it may in fact be cheaper to keep a bankrupt brand going, as long as it can remain viable, fresh and current.

It could be that negative associations with bankruptcies are lessening, simply because there are so many of them [Doesn't this depend on the sector? Automobile fans will tolerate any number of financial disasters for the Jaguars, MGs and Aston Martins of this world, it seems, since even the act of running a car is seen as a drain on one's finances]. Oddly enough, bankrupt brands could end up being beneficiaries of a weakened economy. After all, if a brand name lives on despite adversity, it may be regarded by consumers as a beacon in the storm".

IP Finance really enjoys reading articles like this since, love them or loathe them, they force us to think afresh about topics that we can easily take for granted. But what do readers think?

Covenant Not to Sue; Non-Exclusive Licence: Nonassertion Agreement: Do The Differences Matter?

It happens from time to time. A young lawyer working on a patent licence comes into my office and earnestly asks: What is the difference between a "non-exclusive licence", a "covenant not to sue", and a "non-assertion agreement"?Panic strikes. The notion of a non-exclusive licence is relatively straightforward; indeed, it is anchored in many national patent laws. But what do I say about a "covenant not to sue" and a "non-assertion agreement"? They have no statutory anchor. In truth, I am not certain from whence they come. Are they creatures of case law, or did they somehow, somewhere simply appear from the mists of licensing past, a bit like those wonderfully talismanic terms-- "background IP" and "foreground IP"?

The question remains: Do I mumble, dissemble, claim an in-coming call on my iPhone (hopefully she will not recall that I do not own an iPhone), or do I urge her to research the issue in the name of professional training (making certain to later erase her hours on any bill that might be sent to the client)? I choose the last alternative, the offer is accepted, and I breath a sign of temporary relief. I have managed to bite the bullet once again. In the silence and solitude of my office, door shut, blinds closed, I look into the mirror and admit--I am not really certain of the difference.

I then reach for the most recent edition of the Brunsvold and O'Reilly treatise, Drafting Patent Licensing Agreements, which states as follows:

"A patent owner may contractually agree to not assert the patent. Such an agreement, interchangeably known as a nonassertion agreement or a covenant not to sue, is used where a nonexclusive license is inappropriate or is perceived to have unacceptable consequences."

The authors go on to explain these circumstances as follows:

"The grantor of a nonexclusive license ... represents possession of the power to grant the license and necesssarily represents posession of the power to impose the equivalent of a lien on the patent. The grantor of a covenant not to sue merely promises not to use; there is no implied representation that the grantor has the power to sue. Absent an express representation of owneship of the patent in a nonassertion agreement, the grantee assumes a risk that the true patent owner may sue. [Also, a] covenant not to sue is a promise that the true patent owner may sue."

These distinctions are interesting, but their sources are not disclosed, and the extent to which there are other views on the issue is not certain. Further, I am not sure what are the full practical implications.

Some help may be on the way. A recent article, Jung and Mollo, "TransCore and Freedom of Contract", Bloomberg Law Reports, July 6 2009, has viewed the issue from a somwhat different perspective in light of new US case law. The authors noted that until recently, the perceived differences between a non-exclusive licence, on the one hand, and a covenant not to sue/nonassertion agreement, on the other, was as follows:

"[A] covenant not to sue [is] a personal, contractual commitment of the grantor to the grantee alone. A patent licensee, in contrast, was considered a grant of authority or rights under the patent that extended to downstream users of the licensed article."

The key here is the application of the exhaustion principle. Since the covenant not to sue was held only to apply to the named beneficiaries, rather to the licensed goods, the exhaustion doctrine, at least under US law, was held not to apply.

However, the U.S. Federal Circuit (TransCore LP v. Electronic Transaction Consulting Corp., 563 F3d 1271, Fed. Cir. 2009) appears to put paid to that commonly held distinction, holding that an unconditional covenant not to sue (or a nonassertion agreement) is essentially similar to a non-exclusive licence. While the court did not explicitly set out what differences, if any, remain between a non-exclusive licence and a covenant not to sue, one result is clear. Under US law, one can no longer rely on a covenant not to sue to try and avoid the application of the patent exhaustion doctrine.

I thought I could rely on the "covenant not to sue"

And so the question(s):

1. After the TransCore decision, are there any substantial differences between the two? If so, what are they?

2. Given this uncertainty, is the better position to resist the use of a "covenant not to sue"/ "nonassertion agreement" in place of (and sometimes together with) a non-exclusive license?

3. As Jung and Mollo ask, can anything be done to change existing agreements that were drafted on the basis that there was a distinction that was relevant with respect to the application of the patent exhaustion doctrine?

4. Is all of the foregoing a U.S.-centric issue? Do the notions of "covenant not to use"/"nonassertion agreement" have a significance outside of the US? If so, what is it?"

Disney bids -- but is the deal a Marvel?

Via Miri Frankel (Beanstalk) comes this link to this piece in the New York Times, "Disney to Pay $4 Billion for Comic Giant Marvel". The salient features of this deal and the background to it are as follows:

" ... the Walt Disney Company said Monday that it would acquire Spider-Man and his Marvel Entertainment cohorts for $4 billion.

Disney will pay a combination of about 60 percent cash and 40 percent stock to acquire Marvel, the comic book giant whose stable of 5,000 characters includes some of the world’s best-known superheroes: Iron Man, the X-Men, the Fantastic Four, Captain America and Thor.

... Marvel characters will pop up at Disney’s theme parks in Paris, Hong Kong and Orlando, Fla. Disney’s cable television channels will showcase Marvel, while consumer products could mark an enormous area of growth, particularly overseas where the comics company has struggled to make inroads.

... The surprise acquisition points to the film industry’s biggest issue at the moment: access to capital. Those who have it are finding opportunity; those who do not may be left behind.

Marvel had tried to finance its films with the help of a $525 million in slate financing, but found it impossible on “Iron Man” and “Hulk” to meet a condition that required it to raise a third of its cash by selling overseas distribution rights. To get around the requirement, Marvel in May told investors that it would self-finance a third of each film — something that would be much easier with Disney’s muscle behind it.

The deal instantly makes Disney a partner with Paramount Pictures, Sony Pictures Entertainment and 20th Century Fox, all of which have long-term deals to make or distribute movies based on Marvel characters. ...

... The acquisition, which has been approved by the boards of both companies but still must be approved by Marvel shareholders, got mixed marks on Wall Street. While most analysts applauded the move as bold and strategically sound, some analysts questioned the price as too steep. Disney shares fell 3 percent in afternoon trading. Marvel shares were up 25 percent.

... Marvel’s vice chairman, Peter Cuneo, in May called its comic book publishing business “the most profitable print publishing business in the world,” at an investor meeting. He said the net profit margin on that business is 40 percent or more. ...

Under the terms of the deal, Marvel shareholders will receive a $30 a share in cash plus about 0.745 Disney shares for each Marvel share they own. The deal is valued at $50 a share, a 29 percent premium on Marvel stock.

... The acquisition comes as Disney, with its vast theme park operations and television advertising business, has been struggling because of a lack of hit DVDs, soft advertising sales at ABC and drooping consumer spending at theme parks. Disney’s profit in the third quarter, which ended June 27, dropped 26 percent. Over all, Disney’s net income fell to $954 million, or 51 cents a share, from $1.28 billion, or 66 cents a share, in the year-ago period. Revenue fell 7 percent, to $8.6 billion. Earnings per share for the current quarter included a one-cent restructuring charge related to an accounting gain".

The success or failure of Disney's move, it seems, will depend as much upon the cogency of its business models as upon the appeal of its characters and their related merchandise. There is no guarantee that the "lack of hit DVDs, soft advertising sales at ABC and drooping consumer spending at theme parks" which the article mentions are going to be cured by this acquisition, unless it can be shown that they are the consequence of consumer fatigue with existing products and outlets rather than of people deserting or sharing DVDs, of advertisers finding better ways to advertise and of theme parks losing out to PlayStations and XBoxes. The combination of 60% cash and 40% stock sounds as though Disney is seeking to persuade Marvel to bet on same-again income flows to pay the balance. We watch with interest to see whether this will work out.