Before-the-event IP litigation insurance

The IP Finance blog has received information concerning what has been described as "an innovative solution to the intellectual property protection requirements of small and medium sized enterprises", following cooperation between McDaniel & Co Solicitors and FirstAssist Legal Protection.  According to the information received,

"The Patents County Court reforms [in England and Wales] are likely to create a forum for the resolution of IP disputes which will improve access to justice by limiting and controlling the costs of litigation. The reforms will undermine litigation which currently uses a conditional fee agreement and an after-the-event legal expenses insurance policy in line with wider challenges regarding recovery of the success fee and insurance premium.

The difficulty with IP litigation at present is the absence of clear rules or guidance on whether an action will proceed in the Patents County Court, where costs are tightly controlled, or the High Court where additional liabilities are potentially recoverable in full from the opponent.

Before-the-event legal expenses insurance is available which will indemnify an IP owner’s legal costs when it is necessary to pursue an infringer. This type of insurance demonstrates that the custodians of a company have made an assessment of litigation risk and obviates the need to hold large cash reserves or seek finance to pay legal fees.

The legal protection available to clients of McDaniel & Co is a before-the-event legal expenses policy in respect of which a premium is payable annually. If a matter proceeds in the Patents County Court, the policy will, subject to terms and conditions, indemnify the costs incurred by McDaniel & Co for bringing the action and any costs awarded to the opponent. In the event the matter needs to proceed in the High Court the policy will indemnify a proportion of McDaniel & Co’s costs and the IP owner’s disbursements such as counsel’s and experts’ fees and can be used to support other funding arrangements.

The McDaniel & Co/FirstAssist Legal Protection solution allows IP owners to factor into their risk management equation the reduction to the overall costs of IP litigation brought in by the introduction of the Patents County Court costs regime. ... Clients of McDaniel & Co can also opt for FirstAssist’s standard before-the-event intellectual property legal expenses policy which can provide cover in jurisdictions throughout the world. ..."

The IP Finance weblog is always keen to receive readers' comments -- particularly from SMEs, since the viability and profitability of insurance schemes such as this one depends on making them sufficiently attractive and well-priced to persuade them to buy into them.

The Patent Cliff: A Coda

As a coda to today's post, attention is drawn to the attached article here that appeared on Bloomberg with a by-line date of April 15th ("Drugmakers Posed to Report Biggest Decline Since 2006"). The losses are attribute the fact that "the companies cope with record patent losses in 2011."

And so the challenge to Pharma becomes increasingly immediate and increasingly substantial.

What To Do in the Face of a Patent Cliff: A View from Medium Pharma

Once again, a potential substantial takeover in the pharma business has hit the headlines. And once again, the motivations for the proposed acquisition raise questions about how Big (and Medium) Pharma see the future of their industry. This time the parties are Canada's Valeant Pharmaceuticals International, Inc. and the target of their hostile offer, Cephalon, Inc. a U.S. rival. As reported at the end of March, Valeant made an all-cash offer for all of Valeant's shares, based on a valuation of $5.7 billion. This amounts to nearly a 25% premium over the closing price of Cephalon at the eve of the offering. Funding will be provided by Goldman Sachs. Valeant has also indicated that it intends to replace replace Cephalon's board if the acqusition takes place.

The motivation for the the transaction, as described in a March 30, 2011 report in wsj.com, is as follows (here):

"The offer suggests just how much the anticipated loss of revenue from patent expirations on key products is re-shaping the pharmaceutical industry. As drugs lose patent protection in coming years, drug makers stand to lose hundreds of millions of dollars of revenue and are searching for growth through acquisitions that plug those expected holes and allow companies to cut costs."

My interest is less in the dynamics of the hostile offer itself (I leave that to my M&A colleagues down the hall) and more on the commercial thinking that was reported to lie behind Valeant's offer. The following points are noted: 1. Cephalon faces a patent cliff in 2012, especially for its Provigil-branded narcolepsy product, with the expected concomitant loss in revenue that will follow such loss of patent protection. 2. The two companies share branded generic businesses in Europe and the acquisition will enable Cephalon to achieve cost-cutting in this area. This will help the company make up at least a part of these projected revenue losses.

Lying behind these two considerations are two quite different views of how Pharma should address the challenge of declining revenues in the face of a patent cliff. Cephalon's position seems to be that the company has acquired several promising compounds and it is confident that its development activities with these compounds will bear fruit in the coming years.

By contrast, the CEO of Valeant, J. Michael Pearson (a former McKinsey consultant),is said to view the matter more from the vantage of "financial engineering". In particular, Mr Pearson emphasized that he would focus on acheiving cost-cutting efficiencies, especially in the marketing of Provogil and other drugs when they come off patent protection. Moreover, he would spend less on R&D in favour of entering into partnerships to develop commpounds. In the spirit of financial engineering, Mr. Pearson also noted in a letter that since Cephalon has itself recently made two offers for acquiring companies, this will "... reduce your cash on hand by over $400 million dollars, which makes Cephalon a less attractive acquisition from our standpoint."

These two views reflect the quite different histories of the two companies. Cephalon was established in 1987 and it focuses on drugs in the area of central nervous system disorders, pain and cancer treatment. Its founder, Frank Baldino Jr., passed away in December 2010 after being in charge of the company for more than 20 years. While the company faces an imminent patent cliff next year, it remains fixed, it seems, on a strategy based of continued R&D to develop new products.

Valeant deals in both branded and generic drugs and it has a particularly interesting past. A former CEO, Milan Panic (and also a former prime minister of Yugoslavia) disposed of $1.24 million in stock, only thereafter disclosing that a major drug lacked regulatory approval. The present company itself is the product of the merger of several pharmaecutical companies. If Mr Pearson's announced intention to deemphasize R&D on the part of Cephalon is an indication of the company's general view on the issue, R&D would seem to be taking a back seat to more downstream development and commercialization.

All of this raises the larger question: whence will come the drivers for the next generation of patented drugs? The belief is sometimes expressed that nimble start-ups (like Cephalon) are a prime source for future dynamic R&D. The trend of Big Pharma to seek to acquire companies, rather than to invest these amounts in internal R&D, supports this view, at least in part. On the other hand, Valeant is hardly Big Pharma, and its announced strategy lying behind the proposed acquisition is hardly a vote of confidence for the ability of a one-time start-up such as Cephalon to continue to be a source of fruitful R&D, at least not on its own.

And so the question remains: whence will come the drivers for the next generation of patented drugs?

Vodafone in Africa - a red footprint

Vodacom, RSA’s market leader in the cellular network space with a market share of 58% and 23 million customers (Wikipedia), is undergoing a major re-brand from its traditional blue/green to red. If you live in RSA, you cannot miss it - it is just as well that you do not have to stop your car on the way to work, every time a billboard goes red. However, it is worth pausing, even if the colour is red and not orange.


The rebrand is not just a marketing tinker. It is the much-talked about and delayed alignment of Vodacom’s branding with its parent company in the UK, Vodafone. It’s really a partial re-brand for the time being; Vodafone’s red and "apostrophe" are now evident but the name Vodacom remains, revealing a measure of caution and for good reason too.

Red is a primary, powerful colour but the colour also has other connotations. A fight breaks out during a school rugby derby between an English school that plays in red and an Afrikaans school playing in brown. The headlines the next day refer to the Anglo-Boer war and the annual fixture is subsequently cancelled. It’s a knee jerk reaction but powerful if the colour connotation sticks. Vodafone are looking to spread their influence over Africa where anti-colonial feelings can be very strong. Using red has obvious risks for the UK giant.

Locally, Vodacom sponsors the Blue Bulls rugby team based in Pretoria, where the company has a significant subscriber base. The Lions rugby team who play in a red/white strip are based in nearby Johannesburg. Does Vodacom reconsider the sponsorship and risk marginalising the Blue Bull faithful or retain it, with all the mixed messages the dual branding could provoke? Vodacom’s sensitivity to this is illustrated in some of its re-branding adverts where the only blue that is retained on screen, depicts the Blue Bulls.

If anyone doubted the ability of a single colour to act as a badge of quality and origin ie function as a trade mark, this re-brand and Vodacom’s obvious advertising spend on educating customers to their new look should convert you. There are even rumours that Vodacom paid off competitor Cell C (whose branding had included red) not to enforce any residual rights they could prove in the colour, against them.

It is difficult to imagine the rumour being true although the RSA telecoms space is no stranger to brand wars over colours. Afro-IP has reported on a number of them, mainly over the colour orange (stop here! for more information on Neotel, Iburst and Orange Telecoms’ fight over the colour, and the difficulties protecting single colours). Now look around at local competitor Cell C and their new advertising campaign. It’s directed straight at Vodacom’s new branding and provoked Vodacom into lodging a complaint before the Advertising Standards Authority that the campaign is disparaging to their brand. Is it…or is it [also] just more exposure for both Cell C and Vodacom? [Please visit the site for links to Cell C's adverts]

Taiwan to defend its tech companies by setting up an IP bank

Taiwan is planning to set up an intellectual property bank in light of the constant suing of Taiwan-based companies by foreign firms for patent infringement, according to that country's Ministry of Economic Affairs (MOEA), according to this report in Focus Taiwan; accusing competitors of stealing patents has become a normal way for international companies to compete with each other these days and large-scale Taiwan-based firms have been the constant targets of foreign competitors, the MOEA says.

In the light of this, Kingsley Egbuonu (Queen Mary, University of London) has put together this list of key facts and recent developments:

* TSMC (a Taiwan-based company) is the world's largest semiconductor foundry; 

* "We know it's coming": HTC joins defensive patent pool in December 2009; 

* Apple sues HTC for patent infringement in March 2010; 

* HTC sues Apple in May 2010; 

* "Let's not sue one another" Microsoft agrees with HTC, April 2010; 

* HTC inks patent pact with Myhrvold's Intellectual Ventures - Licensing, Nov 2010; 

* Taiwan lets mainland invest in technology; 

* Taiwan Patent Court a Concern for U.S. Tech Firms (U.S companies losing patent infringement cases in Taiwan’s new IP court, February 2011;

Kingsley has a few questions and comments based on this:

1. With the recent news of Google attempting to sweep up millions of dollars’ worth of patent portfolio and the ever growing concern about the so-called patent trolls, will this state-led interventionist approach help Taiwanese companies fend off competitors? 

2. Why can't companies be left alone to fight it out with one another without government help?

3. Can the "IP bank" fail like our normal retail or investment banks and what would be the ramifications? 

4. Is it not ideal for the State to focus on developing innovative competition policies to police the monopoly it grants, rather than get involved in litigation between undertakings? 

5. Is this the new game or arms race in our 21st century patent world?

Premium Brands and Private Label Products: The Inflation Challenge

Certainly one of the ongoing point/counterpoint narratives in the world of brands is the competition between premium brands and their private label product rivals. For premium brands to flourish, they prefer a robust economy that will more easily support their pricing differential. Conversely, private labels presumably benefit on a relative basis in an economic downturn with low or no inflation, where diminished consumer purchasing power puts pricing pressure on premium brands.

Assume that the foregoing is correct and describes what occurred during the darkest days of the world-wide (or nearly so) Great Recession. What happens to the relative position of premium brands and private level competitors when the Great Recession gives way to a sub-par economy recovery, under unusual credit and interest rate circumstances, and low inflation suddenly gives way to inflationary pressures in commodities?

One possible answer can be found in an article that appeared in the March 21st issue of Bloomberg Businessweek. Entitled "Nestlé's Recipe for Juggling Volatile Commodity Costs,", the article describes the response of the Swiss food giant to spiking commodity prices in an economic climate of tepid growth, especially in the developed world. There is likely no company in the food industry more exposed to commodity price changes than Nestlé. As the article points out, the company spends over $30 billion yearly on raw materials, which includes purchasing nerly 10% of the coffee crop worldwide, 12 million metric tons of milk and more than 300,000 tons of cocoa. The interesting question is how the company's dependence on commodity prices affects its strategy in promotimg its premium brands.

According to the article, the company has made a strategic assumption that commodity pries will not decline anytime soon. Instead, Nestlé is banking on squeezing cost efficiencies from operations, seeking to raise prices as well, to launch what are described as "more upscale, higher margin products in which raw material costs account for a smaller portion of the retail price." For instance,the company has made a great push into upscale coffee through the sale of single-serve capsules for the Nespresso coffee machines (aided by commercials featuring George Clooney). Whatever the increased cost of the coffee might be, the pricing for these capsules enjoys a price that is 10 times (!) the price that rivals command per cup for unground beans. Additional examples include Mövenpick, a gourmet ice cream with exotic tastes, which is sold in smallish portions that are equivalent to about $15 per quart.

Also noteworthy is the company's high-margin bottled water product--PURE LIFE-- described as the world's largest bottled water brand. The upshot is, according to Nestlé, that being able to command premium prices for its brands makes it easier for the company to swallow increased world commodity prices. In the words of the Nestlé CEO Paul Bulche, "[p]rivate label is raw material cost with a mark up. As the raw material cost incrasesm they are much harder hit than branded products."

The examples brought in the article neither support or refute Bulche's claim. The single-serve capsules for the Nespresso coffee machines, and the measured, pricy portions of Mövenpick gourmet ice cream seem to me to be only niche products. There is nothing in the article that explains why a mainstream product like Taster's Choice coffee enjoys the same pricing power in the face of increasing raw coffee prices. As for PURE LIFE bottled water, it is a non-commodity-based product. The article only hints that this brand has continued to enjoy oversized profits and to successfully compete against private label competitors.

The upshot is that the article provides only some tantalizing morsels of information about how Nestlé plans to compete against private label competitors in the current unsettled economic climate. In truth, given the size of the company, Nestlé's response may depend on what product is involved, making any one-size-fits-all product solution to the challenge of private label competitors inappropiate. To the extent that information on this will be publicly available, it will be interesting to follow this topic, which will have major implications for a broad array of consumer product categories.

Residual Knowledge Clauses and Neural Prosthetics

David Wanetick (Managing Director, IncreMental Advantage) is no stranger to this weblog (see earlier posts here, here and here). Well, he's back again with "Residual Knowledge Clauses and Neural Prosthetics".  As David explains:

"IP Licensors are often reluctant to divulge their inventions to potential licensees for fear of misuse of their inventions. Licensees, on the other hand, do not want such disclosures to preclude their ability to commercialize their research in the same field. 

Thus Residual Knowledge Clauses are often used as a bridge to allow individuals who have been exposed to the other side’s knowledge to use what is in their memories in a non-mission directed manner when practicing their field of research. This is fair to the engineers and scientists (as well as their employers) who attend meetings in which the other side discloses their inventions. If it were not for Residual Knowledge Clauses these researchers would be precluded from utilizing their talents which would be to the detriment of their careers and their companies’ competitive positions. 

This sounds all well and good. But, my question is, “What happens to Residual Knowledge Clauses when neural prosthetics turn the human memory into a reservoir of photostatic recollections?” In the not-so-distant future, a researcher who witnesses a computer simulation or reviews technical drawings will effortlessly retain all of the details in his memory for years to come. Moreover, New York University Professor Gary Marcus postulates that neural prosthetics will eventually incorporate Google-like master maps, allowing people to search their memories with the efficiency and reliability of a computer search engine. 

This issue is not a matter of science fiction. Rather, already for several years, research has been conducted to harness technology to boost memory capabilities all over the world. In Canada and Israel, deep brain stimulation (in which electrodes are implanted in the brain) is being tested to activate a patient's memory circuits, thus enhancing memory performance over a long period of time. Experiments demonstrating that memories can be replaced with microchips have been conducted in rats at the University of Southern California. In the United Kingdom, the Department of Business, Innovation and Skills commissioned a report that concluded that one new job of the future will be memory augmentation surgeons. 

Perhaps Residual Knowledge Clauses will have to include language such as, “Researchers may practice art that is retained in employees’ unaided human memories.”".

David welcomes our readers' comments on this issue.  So do we.