Venture Capital; Up or Down? (And What about IP?)

"Venture Capital"-- The words (and their anthropomorphic derivative,"the VC") are virtuously synonymous with start-ups, entrepreneurship,and innovation. According to the common wisdom, the US has done well because of its VCs, Europe less so. Whatever you think about the winners and losers in the VC race, careful attention should be directed to the current state of Venture Capital, lest past perfect, at least with start-ups, fail to achieve the future perfect that so much depends upon for future growth and development and, for IP professionals, the engine for continued good fortunes.

Against that backdrop, I took another look at an interesting column that was published in what may have been the last free-standing issue of BusinessWeek magazine (it is now called Bloomberg Business Week, after its acquisition by the eponymous media giant late last year). The article, entitled "How Venture Capital Lost Its Way", and authored by Carl Schramm and Harold Bradley, appeared in the November 30, 2009 issue.

First a word about the authors and their affiliation. Schramm is president and Bradley is the chief investment officer of the Ewing Marion Kauffman Foundation. Located in the American heartland of Kansas City, the Foundation is reported to be the largest foundation dedicated to the promotion of entrepreneurship. It has tended to focus its activities on the U.S. (which be a function of its mandate), but its influence extends beyond North America. Attention should be paid whenever the Kauffman Foundation opines on weighty issues concerning entrepreneurship.

The gist of the article is as follows:

1. Venture capital has been a critical component of innovation. However, venture capital seems to be on the wane. The amounts funded and the number of companies supported by such funding continue to decline. The industries most requiring VC funding, clean tech and biotech, are being shunned in favor of info tech, which have much less need for substantial capital investment.

2. The root of the problem is the VC financial model, most notably the "2 and 20 rule", where fund managers charged an annual 2% management fee and took 20% of the proceeds of an IPO or sale. Historically (that means the 1980's), VC types were structured as partnerships, where the funds invested mostly came from wealthy individuals. This allowed them to maintain a patient capital outlook for their investments. Choose your companies carefully, and permit yourself a time horizon of 10 years or more for the success of your investment, were the defining characteristics of VC investing in those days.

3. However, when institutions entered the VC game, the dynamics changed. Able to aggregate larger sums than even the most well-heeled private investors, the focus changed from nurturing growth to increasing fees based on ever-larger investment pools. The result is that the venture capital industry has aped the business model private equity, namely the short-term "flip." To keep their investors happy, in the words of the article, "VC funds are ...going for maximum liquidity, creating early payoffs via premature "exits" ...."

4. The result is that investment capital is no longer being put to work for long-term use, including for such capital-starved industries as clean tech and high tech. Moreover, the investors themselves are not reaping appropriate return on their investment (over the decade, "an investor would have done better in a small-cap Russell 2000 index than in VC").

5. Schramm and Bradley offer several suggestions to ameliorate the situation: (i) tie management fees to a budget rather than the size of the fund: (ii) pay investors a guaranteed amount before the fund can claim its 20% share; (iii) require the VC fund itself to put more its own funds in the companies in which it invests.

I am hardly the person to evaluate how successful these suggestions for change might be. In a world of "short-termism", I reckon that the problem is deeper than altering the arrangments for the VC investment community. That said, from a more modest perspective, I wonder how the changes in the VC world described by Schramm and Bradly has, or might in the future, affect IP practice. The following questions immediately leap to mind:

1. Are more patents being filed early on, whatever their quality, mainly in order to "improve" the position of the company for an early exit?

2. If so, does this affect the compensation arrangements for patent drafting and prosecution?

3. Do changing VC patterns affect the staffing requirements of patent law practices?

4. What is the role, if any, in providing strategic IP advice to companies funded by VC's?

5. Do trade secrets or branding matter in such a world?

6. I guess that the overarching question is this: If Schramm and Bradley are correct, and the VC ship is not righted, will the IP profession be better or worse off at the end of the decade?

Patent Term Adjustment

I am indebted to my friend, Steve Yoder, now CEO of German Biotech Company Pieris AG for pointing out to me the financial implications of the recent US decision on patent term adjustments involving Wyeth. . The Amerikat over at our partner blog IP Kat has already covered the legal aspects of the case and can be read in more detail here.

The concept of the patent term adjustment is – as far as I know – unique to the United States and is governed by the provisions of the US Patent Code 35 U.S.C. 154.. This provision provides that a patent term (lifetime) will be extended if one of three situations occurs:

i) The US PTO fails to issue a first office action within fourteen months after filing or respond to a reply (or appeal) within four months from filing the reply (or issuing the patent within four months if the issue fee is paid). This is referred to as the A-delay.

ii) The US PTO fails to issue the patent within three years after filing. This is the B-delay.

iii) The patent is subject to an interference proceedings, secrecy order or appeal. This is the C-delay (and played no role in the decision).


The two most common reasons for a possible extension of the patent term beyond the statutory twenty years are the failure to respond to a reply in a timely manner and failing to issue the patent within three years.

In the past the US PTO took the view that only the longer of the A or the B delay was relevant. The US Court of Appeals for the Federal Circuit disagreed in an opinion issued on 7 January 2010. There can be no "double counting" of delay days. However there could be an accumulation of delay. A patent holder - in this case Wyeth - could be entitled to both an extension based on an A-delay and an extension based on a B-delay, less any "double counted days" in which there was both a delay under A and B (which would represent delay days in responding to a reply to an office action after the three year period has expired. So, if the US PTO takes more than three years in granting the patent and then takes an additional length of time to issue the patent, the patent holder is entitled to an additional three years plus additional time of lifetime of its patent.

This may not seem so important since many (most) patents are terminated before the end of the twenty year lifetime. However, in some technologies even an extra month’s protection may be significant. Suppose the patent protects a "blockbuster"drug. The US PTO takes over three years to grant the patent and also delays issuing office actions. The extra patent time granted can add significantly to the profits made as generics may be delayed from enterin the market.

The European Union in its pharmaceutical sector enquiry defined a block buster drug as being one with global revenues of over USD 1 billion in revenues (see Executive Summary, page 3) worldwide. Patent Term Extensions are only available in the US. The pharmaceutical sector enquiry's final report noted that the US market represented 42% of prescription drug sales (see report, page 27, Fig. 3- So, if we assume that the US makes up 42% of the market (i.e. USD 420 million in revenues), then every extra month of extension is worth USD 35 million in revenues in US sales alone. The final report goes on to state that a rather conservative estimate suggests that 30% of the turnover is profit (see paragraph 68 on page 28) which means that every extra month of extension represents a profit of USD 10.5 million.

Technorati Tags:
Patent Term Adjustment, Wyeth

Verizon borrows Intellectual Venture's IP

The Tangible IP blog recently reviewed the Economist's article on Intellectual Ventures (see here for the review). Head on the tails of the article follows a report that US telecommunications giant Verizon has exploited its USD 350 Million investment in Intellectual Ventures by having US Patent 5,410,344 assigned to it and then countersuing TiVo in its ongoing patent infringement suit (Verizon also allege in their counterclaim that TiVo infringe the following US Patents: 5,635,979, 5,973,684, 7,561,214, 6,367,078 which were already held by Verizon). The Assignment has not yet been recorded on the US PTO website which still lists an Intellectual Ventures subsidiary as the Assignee.

Intellectual Ventures has always maintained that it was not a "trolling" operation and here we have an example of the investment made by Verizon presumably paying off.

In another patent infringement dispute with Echostar, TiVo have been awarded damages of USD 200 million (down from the USD 1 billion claims by TiVo). The decision is being appealed according to a statement made by EchoStar. This was based on an assumed royalty rate of USD 1.25 per month per subscriber (according to the 10 Nov 2009 10-Q filing made by TiVo) Now I'm not certain of the market share of Verizon, but given it's size and reputation it may well be that the USD 350 million investment in Intellectual Ventures could easily pay off if the counterclaim against TiVo succeeds

MG Rover's IP lives on

The reporting of MG Rover’s demise in 2005 was notable for its considerable discussion of intellectual property. According to The Times of 26 July 2005, Nanjing Automobile Corporation acquired the MG marque and intellectual property associated with the MG variants of the Rover 25, 45, 75 and the MG TF sports car. Sources suggest a price tag of £50 million, which included the MG Rover assembly lines, engine plant and R&D capabilities.

If the significance of IP went over the heads of the general public at the time, this may change with the recent decision of the High Court in Nanjing Automobile (Group) Corporation & ors v MG Sports and Racing Europe Ltd & anr. [2010] EWHC 270 (Ch) (available on Lawtel).

The decision relates to the efforts of an English company to continue using the trademark “MG” in its name. The fact that a co-defendant is William Riley, great-grandson of the founder of the iconic Riley Motor Company, lends further interest. Both defendants base their entitlement to continue on the purchase in 2007 of certain assets from the liquidators of MG Rover Group and MG Sport and Racing Limited. Unfortunately for both defendants, judge Sir William Blackburne found them liable, ordering them to change their company name to one which does not include the letters MG and to transfer to Nanjing any domain names including the mark “MG”.

Rights in the “Rover” mark were never sold to the Chinese or indeed to their predecessors Phoenix. Rather, they were retained by the even earlier owners, BMW, before being sold to Ford as part of their acquisition of Jaguar and Land Rover in 2006. It is presumably for this reason that the vehicles now manufactured by Nanjing are sold under the name “Roewe”.

Boycott in Wonderland: now you see it, now you don't

Via The Globe & Mail (eagerly spotted by friend and blogger Nikos Prentoulis) comes this news of a settlement of the publicity-rich spat (or is it a marketing ploy?) between leading European theatre chain Odeon and Disney over its threatened boycott. Says the report:

"A top European theatre chain said Thursday it will show Walt Disney Co's “Alice In Wonderland,” after threatening to boycott it in some countries to protest Disney's plans to release the DVD early.

Odeon's reversal on Thursday in signing a deal with Disney came the same day the chain hosted a London premiere for the movie at its Leicester Square theatre.

Odeon's concession follows similar deals by the UK's Cineworld Cinemas and Vue Entertainment chains, which were also initially reluctant to show “Alice,” but have relented and reached deals with Disney in recent days.

Odeon said in a statement it reached an “enduring agreement” with Disney “encompassing all the different aspects of both companies' commercial relationship.”

The statement did not offer details on the agreement. A Disney spokesman also declined to give specifics. [IP Finance offers a small prize to whoever (i) comes up with details of the agreement before they hit the public, and (ii) whoever comes up with the best explanation of the effect of the agreement on the short- and long-term financial implications for Disney's rights management policy]

... Disney has upset theatre owners with its plan to shorten by about a month the standard 17-week [that's four months, a hell of a long time for parents to put up with kids' nagging] window between the film's theatre debut and its DVD release, in part to spark disc sales.

The chains grumbled that audiences would skip going to theaters, and wait to see the movie on DVD. [None, of course, would dream of filling in the gap -- whether 12/13 weeks or 17 -- by practising a little P2P. Even with really slow connection times, it won't take that long!]

Odeon & UCI Cinemas Group, owned by London-based private equity firm Terra Firma, said earlier this week that it would not show “Alice” at its UK, Irish and Italian theaters.

Odeon's 110 theaters in the UK make it the largest chain in that country".

Someone has to lose. If Disney pushes out the DVD on or around the launch date, theatres suffer and so do some of the traditional pirates, those who trade in hard copies. If the DVDs come out later, the theatres get some advantage (unless the movie flops) but the window for pre-legitimate-DVD piracy and file-sharing at a time when there simply is no legitimate product can seem gapingly long. There are other items to factor into the equation: how much merchandise is being tied in, how close to Christmas, and so on. This time round, the excitement about Alice being a 3D movie might just have given the theatres the edge. But next time ...?

The Smarter Business Model

The Smarter Legal Model: more from less is the title of a book by Trevor Faure (Global General Counsel and Partner, Ernst & Young Global), published this month by Practical Law Company. According to the promotional literature

"The legal profession is under fundamental examination as a result of the unprecedented impacts of globalization, financial pressures, trans-territorial laws and instantaneous global communications, amongst others. The imperatives to perform as both commercial and compliance leaders have never been higher.

The Smarter Legal Model is a practical "toolbox" of complementary methodologies which have been applied on a multi-million dollar scale and proven to:
- Increase legal coverage by maximizing individual potential
- Reduce legal costs
- Improve both compliance and client satisfaction at the same time
- Replace the traditional law firm-client tension with a mutually-profitable partnership

The Smarter Legal Model applies world-class business and behavioral principles such as six Sigma, return on invested capital, zero-sum game theory and neuro-linguistic programming to the practice of law for the first time with tangible results. Recently reported benefits of the Model include a 27% reduction in legal fees, a 60% reduction in litigation volume and demonstrable improvements in client satisfaction. The Smarter Legal Model will be of use to in-house lawyers, private practitioners and even professionals from non-legal disciplines. It is being taught at Harvard Law School as part of its program on the legal profession and was also the subject of two Harvard Law School case studies in 2009".

I have not yet had a chance to read and review this book, but will do so with great interest since its author is not without familiarity with the cost of the legal system as it applies to intellectual property rights enforcement and management, having spent some years gaining practical experience in the field of copyright in the recording industry before changing the direction of his career.

The Sale of Polaroid's Collection: The End of a Photography Era

The art market is one of those esoteric worlds that I can only appreciate from afar, if at all. It takes on a particular curiosity when intertwined with bankruptcy and court-ordered sales of multiple works of renowned artists. All of this will come together on June 21st and 22nd, when numerous instant photographs taken by such famous artists as Andy Wharhol and Chuck Close, as well as prints from such photo masters as landscape photographer Ansel Adams, will be sold at a controversial public sale at Sotheby's in New York City.

According to a recent news report by Lindsay Pollack on Bloomberg.com, entitled "Controversial Auction Sells Wharhols from Polaroid's Collection", the sale is part of the bankruptcy of Polaroid, the leader in the once instant camera business. The tale of the Polaroid demise is itself a riveting tale of a company that once dominated a technology that was later superseded and then went through two bankruptcy proceedings during the past decade, the second time as a result of an alleged Ponzi scheme by its then owner, Petters Group Worldwide.

As a result of the bankruptcy, the Polaroid name and assets were acquired last year for approximately $88 million dollars. However, the company's photo collection was not part of the previous sale, and it the auction at Sotheby's is expected to fetch between $7.5 million to $11.5 million dollars. The collection was amassed in the 1970's is one what is described as an "acquisition and barter" arrangement. The company offered artists free cameras, film and studio time; in exchange, the company received free prints, which ultimately numbered over 16,000 works.

So where is the controversy? It appears that the problem arises not in the instant camera photographs assembled in the 1970s under the acquisition and barter" arrangement, but rather the photographs assembled for Polaroid 20 years before by the legendary Ansel Adams at the request of Polaroid's founder, Edwin Land. Adams apparently purchased a large number of works from famous photographers of the time, including Edward Weston, Margaret Bourke-White and Dorothea Lange (whose photo from the Depression era--"Migrant Mother, Nipomo, California"--is valued at $80,000).

And here is the rub. According to photography critic A.D. Coleman, "[t]he collection is going to be dispersed, which is against promises made to the photographers." Coleman claims that the photographers would remain together, primarily for the purpose of enabling the public to view and study them. Coleman also claimed, in the words of the article, that "the artists were promised access to the images for copyright infringement and subsidiary right licensing--all of which would be difficult if the prints are sold to anonymous buyers." Coleman says that the photographs were in fact never really "sold" to Polaroid. Rather, in his words, "[t]his was permanent custodianship for Polaroid,with visitation rights for the photographers."

I am not certain what to make of Coleman's comments. It would be an interesting legal question if permanent custodianship by Polaroid was a bailment over rather than a transfer of ownership of the works. However, the article does not mention that any of the photographers involved are challenging the sale of their works. One photographer, Neal Slavin, simply lamented that it is "a disservice to a piece of history," but he does not suggest that a legal claim will be mounted against the sale", where the individual works "will go out into the ether."

Moreover, while there may be cultural and aesthetic reasons to claim that a collection can take on a collective identity of its own, it is difficult to see how that can translate into a legal argument in favour of maintaining it intact. So I guess the sale will go on as planned. Still, if I find myself in New York City around the time of the summer solstice, maybe I will try to gain access to the sale--just to observe, of course.

RSA Budget Speech - some IP implications

Yesterday, RSA's new finance minister - Pravin Gordhan - delivered his 2010 Budget Speech. With the help of a useful summary of the speech from Moneyweb, this blogger considers some of the IP implications below:

• Exchange control reforms are proposed: the proposed reforms do not appear to impact the continuing effect of this form of protectionism on the international technology transfer market and IP licensing requirements (which include intra group brand licenses) where RSA residents are involved. There is renewed talk of promoting RSA as a gateway to Africa and for dropping some of the controls to encourage this development.
• Tax on a pack of cigarettes to increase by R1.24 from R7.70 to R8.94. Beer to increase by 6c a can and wine by 16c a litre. The impact is likely to squeeze profits on these goods. Branding may become even more important to retain customers, and those with smaller ad spends are likely to suffer. Counterfeit goods may increase to meet the addictive demands associated with these products.
• Congestion, pollution and landfill taxes are considered. The need for alternative solutions is likely to continue spur innovation in this area. Of course, it is going to be even more difficult for any trade mark lawyer to secure rights over the colour "green".
• Real public spending growth limited to +- 2% per annum, lower than preceding three years. Meanwhile the public sector wage bill almost doubled in five years. This blogger hopes that CIPRO is/has been in the front of the queue for funding and wage increases.
• Economic growth of 2.3% projected for 2010, increasing to 3.6% by 2012. Modest by recent RSA standards but may positively impact on local IP filings which declined (especially trade marks) remarkably in 2009

• 2010 FIFA World Cup to contribute 0.5% of GDP in 2010. Perhaps the compensation for the vice like control FIFA has over the tournament and all advertising around it. It is worth considering too that "so far, government has spent R33bn preparing for the soccer games."
• R8.4bn for fighting HIV/Aids with antiretroviral therapy. This spending is likely to spur the ongoing discussion about costs and the economic role of IP in fostering innovation and/or restricting access to ARVs and related infrastructure.

Why use experts? An expert explains

At last week's IP Finance-supported seminar on Funding and the Fortunes of Intellectual Property, hosted and organised by Hardwicke, I asked speaker Elizabeth Gutteridge (Partner, Forensic & Dispute Services, Deloitte LLP) if she could give any pointers to SMEs --which are notoriously reluctant to engage the services of financial consultancies if they can avoid having to do so -- which might either demystify some of the challenges of quantum assessments and/or give SMEs (and others) some degree of reassurance that engaging an expert doesn't have to be scary and/or expensive. Elizabeth has responded by producing some headings that correspond areas in which experts operate. This is what she says:

"1 Lost profits: If you're considering claiming for damages, be realistic as to how the infringement has affected your business. Dig out contemporaneous documents which show how your plans changed as a result of market developments and try to pinpoint the effect of the infringer's behaviour.

2 Royalties: A fall-back option will be assessing a reasonable royalty: consider how you would have responded if the infringer had approached you to take a licence instead of infringing. How have you treated other licensees? What benefits would you/they have expected to realise were a licence to have been granted? How does this compare with the licensing practice of other industry competitors?

3 Account of profits: How well do you know the infringer's business? Really? Can you tell how much they will have profited from infringing? Have they competed directly with you or would you actually have struggled to make the sales they have?"

If a business knows the answers to these questions already, it presumably won't need expert advice. However, in the vast majority of situations, the information or intuition of an SME needs to be supplemented if it is to be credible and reliable, and that's where experts come in. Thanks, Elizabeth, for your thoughts.

Champerty and litigation funding

Following last week's IP Finance-backed seminar "Funding and the Fortunes of Intellectual Property", hosted by Hardwicke, Lincoln's Inn, this blog is pleased to be able to post the PowerPoints from the presentation by barrister Mark Engelman. This presentation covers the following topics:

* Recent Developments in Champerty

* Third Party Funding Arrangements

* Contingency Fees after the Jackson Report.

You can access them by clicking here.

Soros Sells Back Film Rights to Viacom: Did I Get It Right?

Whenever I read a news summary of a transaction involving material IP assets, I try to understand the commercial and financial interests lying behind the deal. This is especially so in the motion picture business, where the artistic and financial aspects are particularly intertwined in ways that are not always clear to the outside observer. For that reason, the responsibility of the business press to present a full picture of the context in which it reports a material transaction is especially challenging.

Against that backdrop, I read with interest a report that first appeared on Bloomberg.com yesterday titled "Viacom Acquires Soros Stake in Films for $400 Million" here. [The report actually addressed two issues. The first was the Viacom-Soros deal, while the second described bidding for other film companies, namely MGM, Overture Films and the Miramax division of Disney. We will focus on the Viacom-Soros deal.] According to the report, "Viacom Inc. bought back a majority stake in the DreamWorks SKG film library from billionaire investor George Soros, taking on $400 million in debt to regain rights to movies such as “Gladiator.” The purchase of Soros’s 51 percent stake in 59 titles, including “Saving Private Ryan,” was completed on Feb. 8 ...."

Here is where the report gets a bit murky. It stated that Viacom had agreed in 2006 to sell to Soros the film library in a deal valued at $900 million, with Viacom retaining a 49% interest in the films. Soros, who received broadcast and home sales rights, agreed at the time to sell his stake back after five years. Viacom had sold the library in connection with its acquisition in 2006 of DreamWorks, the film house founded by the legendary Hollywood trio of Steven Spielberg, Jeffrey Katzenberg and David Geffen, for $1.6 billion. With the sale of the 51% interest to Soros, the net purchase price of DreamWorks at the time was approximately $600 million.

What's murky in the report are at least the following points:

1 What does it mean that Viacom retained a 49% interest in the films?
2. What does it mean that Soros received broadcast and home sales rights?
3. If the agreement was for Soros to sell back his interest in five years, i..e, in 2011,why did he do so now?

After doing a bit of internet digging on the subject, I found a March 16, 2006 AP item that appeared on nytimes.com. Entitled "Viacom to Sell DreamWorks Film Library", the AP report noted the following:

1. The buyers on behalf of Soros were Soros Strategic Partners and Dune Entertainment II. The Soros group would acquire the entire list of 59 DreamWorks live action films released until September 15, 2005.

2. The films would be distributed through an exclusive five-year distribution agreement with Paramount, which is owned by Viacom.

3. Viacom would retain "ownership" in music publishing and some other rights in connection with the film library, most notably sequel and merchandising rights.

So, if I understand this correctly, Viacom was at the time assured an income stream through distribution as well as exercising certain secondary rights in the library, while the Soros group would enjoy the benefits broadcasting and home entertainment.That leaves the question: Why did Soros sell back his 51% interest in the film library (there does not seem to be any question that the sell-back was within the legal ambit of the agreement)? Two comments that appeared in the news item above are relevant here.

The first appeared in the 2006 AP report here. There, Harold Vogel, a media analysis and author, observed that it was likely that the Soros Group intended to see the return on its investment through licensing fees for DVD's as well as cable and television broadcasting.
In this connection, Vogel observed that"[t]hey'll project how much each film can generate. The difficulty is, probably only the top 10 films generate 80 percent of the income."

The second observation appeared in the Bloomberg report of yesterday. As stated by David Davis, managing partner of Arpeggio Partners, "[l]ibrary values have clearly come down. And it's because of the decline in DVD sales in the industry."

A Drought in DVD Sales?

It we set the Vogel comment against that of Davis, we discern a sea-change in the underlying premise on which the transaction seems to have been based. In 2006, the bet was that the megahits in the library would provide the income stream projected for the deal. The emphasis was a bet on the quality of the movie contents, not on the platform(s) that would distribute the contents and generate the income. In 2010, the bet seems to have failed, but not for the reasons anticipated in 2006. Rather, there was a secular change in the efficacy of at least part of the distribution platforms themselves, namely DVD sales.

If I have understood this correctly, a misjudgment was made in 2006 regarding the commercial future of the DVD sales business. Whether this misjudgment was due to changing circumstances that could not have been foreseen at the time is an open question, at least for me.

Who pays when a copyright claim is dropped?

Far Out Productions Inc v Unilever UK & CN Holdings Ltd and others [2009] EWHC 3484 (Ch), a Chancery Division decision last December 2009 from Nicholas Strauss QC, sitting as a deputy judge, dealt with an interesting question relating to costs in IP litigation.

Far Out, a substantial Californian corporation, brought proceedings alleging that music production company Water Music (the fourth defendant) deliberately infringed its copyright and deliberately concealed that infringement. As it turned out, Far Out -- which brought no significant evidence in support of its claim -- knew that Water Music was a small family company with an excellent reputation, which would inevitably be subjected to great pressure by litigation involving detailed investigation into a routine piece of business which had been conducted over ten years earlier. Far Out was also responsible for considerable delays, which resulted in the proceedings, and the consequent pressure on Water Music, extending over a period of more than four years before Far Out eventually dropped the claim. This occurred shortly after mediation but before the service of Water Music's witness statements. Appealing to the fact that it was so good as to drop its action, Far Out then applied to the court to be relieved from the usual consequence in costs of discontinuing its action and arguing that it had been necessary to bring proceedings, and to join Water Music in the proceedings, because the first to third defendants (part of the Unilever group) had failed to make a reasonable offer. Accordingly, Far Out submitted, Water Music should pay Far Out's costs and try to get them back against the other defendants -- either that or no costs order should be made.

Nicholas Strauss QC dismissed Far Out's application. In his view the Civil Procedure Rules (CPR 38.6) provided that, unless the court ordered otherwise, a claimant who discontinued an action was liable for the costs which a defendant, against whom the claimant discontinued, incurred on or before the date on which notice of discontinuance was served on the defendant. This rule would apply unless there were a valid reason for departing from it, and it was for the party seeking to vary that rule to bear the burden of proving that it should not apply. If Far Out had properly evaluated its prospects of success on deliberate infringement against any of the defendants, it would have come to the conclusion that its case was inherently improbable. He added:

"The claimant [submits] that the 4th defendant should pay the claimant's costs, and be responsible for its own. I reject this out of hand. It is not easy to imagine circumstances in which a defendant against whom proceedings have been discontinued should nevertheless pay the costs. There may be circumstances in which such an order would be appropriate, but it is certainly not appropriate in this case".

The Super Bowl and the Changing Nature of Brand Advertisements

As most Americans probably know, the most viewed sporting event in the U.S. of the year took place on Sunday. We are of course speaking of the Super Bowl, the finals of the National Football League to determine the champion for the 2009 regular season. This year the game matched the Indianapolis Colts and the New Orleans Saints. The game set a new record for viewers, with an estimated 106 million couch potatoes glued to their tv seats.

The Super Bowl is not just a football event, however. In some circles, no less important than the outcome of the football game are the advertisements that are interlaced into the game during the three-plus hour broadcast. The most expensive ad time per minute on U.S. television, these advertisements are discussed and studied long after the match is over (the initial review of this year's ads seems to be that they were "uninspiring"). Be that as it may, the power of the Super Bowl advertisement to build brands has become a marketing legend in its own right.

That said, observers have noted a marked shift in emphasis that seems to have taken place with respect to Super Bowl advertising. In particular, attention has been directed to the fact that the role of advertisements of the game has changed from brand-building as part of a long-term branding strategy to advertisements intended to achieve a quick upward bounce in sales of the goods, services or company promoted.

The classic example of the Super Bowl as a platform for brand development is the legendary 1984 advertisement that launched the Macintosh for Apple. A great description of the advertisement is set out in the following, which is taken from a paper delivered in 1997 by Ted Friedman titled: "Apple's 1984: The Introduction of the Macintosh in the Cultural History of Personal Computers", as follows:

"In the third quarter of the 1984 Super Bowl, a strange and disorienting advertisement appeared on the TV screens of the millions of viewers tuned in to the yearly ritual. The ad opens on a gray network of futuristic tubes connecting blank, ominous buildings. Inside the tubes, we see cowed subjects marching towards a cavernous auditorium, where they bow before a Big Brother figure pontificating from a giant TV screen. But one lone woman remains unbroken. Chased by storm troopers, she runs up to the screen, hurls a hammer with a heroic grunt, and shatters the TV image. As the screen explodes, bathing the stunned audience in the light of freedom, a voice-over announces, "On January 24, Apple Computer will introduce the Macintosh. And you'll see why 1984 won't be like "1984."

This commercial, designed by the advertising agency Chiat/Day to introduce Apple's Macintosh computer and directed by Ridley Scott fresh off his science fiction classic Blade Runner, has never run again since that Super Bowl spot. But few commercials have ever been more influential. Advertising Age named it the 1980s' Commercial of the Decade. You can still see its echoes today in futuristic ads for technology and telecommunications multinationals such as AT&T, MCI, and Intel.

The 1984 commercial was a critical moment in the development of the American public's conception of the proper uses and cultural implications of personal computers. PCs were introduced in the 1970s as tools - utilitarian objects designed to facilitate specific tasks. In the 1980s, they became full-fledged commodities - shiny consumer products defined not just by their use value, but by the collection of meanings, hopes, and ideals attached to them through advertising, promotion, and cultural circulation. With the 1984 ad, Apple identified the Macintosh with an ideology of "empowerment" - a vision of the PC as a tool for combating conformity and asserting individuality."

The advertisement here is credited with no less than creating the Mac as an iconic challenger to the IBM-driven desk top computer, and it set the tone for the Super Bowl as a platform by which brands could literally be created. Not every advertisement could be this successful, but over the years, companies such as General Motors and Federal Express used the Super Bowl as a vehicle for maintaining the visibility of their brands before a broadly-based U.S. viewership.

This seems, however, to no longer be the case. GM and FedEx were apparently nowhere to be found in this year's fare of Super Bowl advertisements. Instead of advertisements aimed at sustaining brands to a mass market population, more and more advertisements were apparently directed intentionally to only a sub-population of the viewers.

Perhaps the most discussed example was an advertisement featuring Tim Tebow, who just completed a successful four-year career playing football for the University of Florida. The advertisement was a veiled promotion in favor the pro-life position that stands as one of the most divisive issues in U.S. society. If Super Bowl advertisements were once viewed a bringing the viewers together around a broadly conceived brand carefully nurtured over a long period of time, the most recent Super Bow advertisements seem more and more to be directed towards segmentation and short-term gain.

This change in the nature of Super Bowl advertisements raises the larger question of how one can build and sustain a broadly-based brand in an era of hundreds of cable channels and tens of thousands thousands of websites. This is especially so when the drive is for immediate results and longer term brand development tends to be shunted to the sideline. This is another way of saying that we may never see the likes of the Mac advertisement again, with the attendant challenge of finding other ways to create and sustain a brand.

Oh--for those who prefer to focus on the game itself rather than the advertisements. The final score: New Orleans 31, Indianapolis 17.

AP-Yahoo Deal: A New Beginning or More of the Same?

An end-of-year discussion in the December 19th-January 1st issue of The Economist ("Newspapers and Technology") contained a useful summary of the challenges facing the newspaper business. First the good news from the summary (at least from 39,000 feet) : "The internet may kill newspapers; but is not clear if that matters. For society, what matters is that people should have access to news, not that it should be delivered through any particular medium; and, for the consumer, the faster it travels, the better."

Now for the less good news (from ground level): "The trouble is that nobody knows how to make money in the new environment. That raises questions about how much news will be gathered."

Staying at ground level, there was an interesting announcement on Monday, February 1st, regarding an agreement that had been reached by Associated Press and Yahoo regarding the licensing terms by which Yahoo will pay AP for the right to continue to post AP contents on the Yahoo site.The terms of the arrangement were not revealed. AP has yet to reach a parallel licensing agreement with either Microsoft or Google,and it appears that Google has for the moment suspended posting new AP contents on its site, pending the conclusion of a renewed licensing arrangement with AP.

First a word about AP itself. In its own words:

"AP operates as a not-for-profit cooperative with more than 4,000 employees working in more than 240 worldwide bureaus. AP is owned by its 1,500 U.S. daily newspaper members. They elect a board of directors that directs the cooperative. AP supplies a steady stream of news around the clock to its domestic members, international subscribers and commercial customers. It has the industry's most sophisticated digital photo network, a 24-hour continuously updated online news service, a state-of-the-art television news service and one of the largest radio networks in the United States. It also has a commercial digital photo archive, a photo library housing more than 10 million images."

The most useful summary of the new AP-Yahoo deal that I found is the news report ("Yahoo Keep AP in its Contents Corner with New Deal) provided on February 1st by AP itself. The following points made are worth mentioning:

The Background-- Yahoo, rather than Google or Microsoft, has the largest Internet audience for news (as opposed to social networking or Internet search). AP has providing contents for Yahoo since 1998. That said, AP is the not the sole source of news contents for Yahoo, which also makes use of contents from Reuters as well as from Yahoo's own news staff. Nevertheless, in the words of the AP report, "[t]he formula has worked well for Yahoo...."

The Challenge-- The problem for AP is that a material portion of its revenues has come from the print media and broadcasting. AP has yet to find the financial structure that can compensate for the loss of revenue from these traditional sources of income in an age of the migration of news to various on-line platforms. Hence, the importance of reaching financially satisfactory licensing arrangements with the leading on-line platforms for the distribution of AP-generated contents (in the words of the report, finding ways to "pump..." internet companies for more money"). That said, Yahoo is less financially robust than either Google or Microsoft.

The (Partial) Solution--While the details of the license were not made available, the report did mention the following:

1. In addition to receiving increased revenues, AP wants "greater cooperation" to ensure that its contents are not being used in an unauthorized manner. In this connection, it is reported that AP is working on a tracking system to determine where its contents are being read. Yahoo, for its part, "has pledged to enforce "the strictest standards" to protect AP's contents."

2. AP is contemplating a multi-tiered arrangement (at least in the future) whereby stories containing exclusive contents might charged more than news items, the contents of which are available from other sources as well. Nevertheless, the word is that the agreement reached with Yahoo does not include such a tier-pricing arrangement.

3. Separately, Yahoo has reached agreement with U.S. newspapers that own AP in an arrangement to sell more advertising.

And Then There is Google --The AP report ends with an interesting juxtaposition. On the one hand, the report quotes a statement from Yahoo that the company "... has always recognized the value and importance of original, authoritative news. We are pleased Yahoo and AP will continue that valued relationship."

On the other hand, the report concludes with the following comments about Google: (i) "[M]any publishers believe Google has profited unfairly from their newspapers by drawing upon snippets of their stories to draw traffic ... so it can sell more of its ads ..."; (ii) AP and Google quarrelled for several years about the way that Google summarized AP news items; and (iii) Google believes that it in fact drives traffic to newspaper sites. Reaching agreement with Yahoo is one thing, reaching an arrangement with Google may be quite another.

Final Word-- This is just the beginning for AP, as it fights a declining print media and a challenging online environment as well as sorting its relationship to Google, while Yahoo (with some help from Microsoft) itself seeks to carve out a role for itself in a (still) Google-dominated world. I expect that there will be further posts on this blog that will follow these developments.

So How Much Do Questions about IP Assignments Really Matter?

I am going to talk about"plumbing" in this blog post. I don't meet the system of pipes, valves and fixtures that always seem to leak up at exactly the wrong time. Rather, I am referring to the nuts and bolts of IP due diligence that can seem so prosaic. In particular, I want to address the issue of assignments of IP rights by a contractor or employee, especially when the target is a start-up.

Let's set the scene, which is no doubt familiar to many of you. The start-up is a few years old. While the founder(s), and perhaps several other key personnel, have been with the company from the outset, other R&D types have moved in and out of the company; and/or have worked seriatim as employee and then contractor, or vice versa; and/or have provided services to the start-up through their own separate company. Inventions have been made, patent or other applications of IP rights have been filed, software may have been created, but the company cannot produce all of the relevant assignment documents.

The R&D activities of the company take place both at the parent and a dedicated R&D facility located in lower-cost jurisdictions. As well, registation of IP rights has been sought in a number of countries. It's now crunch time, and the client asks for your assessment of the ownership postition. In trying to make sense of the question of IP ownership, the following points come to mind.

Operation of law-- Do the rights in the employee's invention or creation belong to the employer by operation of law? If so, is the matter determined by the general employment laws of the jurisdiction, or does the law of the specific IP right govern the issue? How do we fold the invention or creation of a contractor into this analysis; indeed, how do we distinguish between an employee and a contractor?

Writing--Here, the question is whether the an assignment must be in writing to be effective, or is a written assignment merely evidentiary, meaning that the assignment can be proved by other means (such as by the conduct of the parties). By way of example, the U.S. seems to adopt the former position, while the Supreme Court of Israel has held the latter position.

Recordal--Similarly, the question is whether the recordal of the assignment is mandatory to give effect to the assignment, or whether it is merely a form of public notice. What has always tantalized me in this regard is the connection between the issues of writing and recordal. Assuming that the jurisdiction does not require the assignment be in writing to be valid, can the parties to an unwritten assignment still take steps to record the assignment?

Equitable Assignment/Implied Licence-- There is the recurring nightmare of a work created by a contractor, say protected by copyright, where the commissioning party pays a hefty sum for the creation, but neglects to arrange for an assignment. Will the jurisdiction allow a claim that under the circumstances, either an equitable assignment has taken place, or that an implied licence (maybe exclusive, maybe non-exlcusive) has been granted? These are wonderful questions for your litigation partner, but can they be effectively addressed within the context of a due diligence exercise?

What Does All of this Mean?--The puzzle for me has been that while the documentation of IP assignments is often inadequate, and the considerations mentioned above allow for a complex matrix of possible outcomes in the absence of satisfactory documentation, there does not appear to be the quantity of litigation that one might expect. Well, maybe it is not such a puzzle.

First, the potential purchaser may be decide not to continue with the transaction, so the issue of a possible problem with the assignment of IP rights is not pursued. Second, if problems are identified, they are rectified during the course of the transaction. Third, the IP rights in question may be of secondary importance, so the risk of any challenge, even if successful, is outweighed by the perceived overall value of the transaction. Fourth, the costs of litigation may serve to dissuade a potential claimant from seeking to enforce its rights in court.

Be that as it may, neverthless, there is a tension in the process that never seems to quite go away in this context. The purchaser almost invariably instructs the lawyers to focus "on high-level issues". But what exactly is a "high level" issue when potential problems are encountered regarding the adequacy of the assignments and the ownership of the IP rights? How do one reconcile the inclination of the lawyer to approach the problem in a manner which tries to provide as much legal certainty as possible with the inclination of the purchaser to pursue a cost-benefit analysis throughout the transaction? This tension, never far from the surface in the best of economic times, takes on particular significance in an era where the traditional arrangements for the pricing of legal services is being called into question.