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.

Worth investing in: IP services

Intermediate Capital Group (ICG) has now acquired a significant minority stake in legal information and services operation CPA Gobal. The terms of the transaction are not disclosed. According to the available information,

"Founded in Jersey in 1969, originally to manage patent renewals, CPA Global has expanded over the years to become a multinational company that is the clear market leader in the global intellectual property (IP) services market and one of the world's leading providers of broader legal services outsourcing, including litigation support, document review and contract management. The legal services outsourcing sector is expected to grow rapidly over the next few years, with estimates of the potential market value in the tens of billions of dollars".

It would be lovely to know the details. Does anyone know?

Addendum: Thanks, Ron Laurie (Inflexion Point Strategy), for news that the deal is worth £400m (€443.7m), a sum that is predicted to result in windfalls for many of CPA's 230 partners.
Several other buyout firms, including LDC, are apparently interested in acquiring CPA, which is thought to be contemplating the sale of at least 25% of the group.

The Costs of Confidentiality

As previously noted by Neil Wilkof on this blog, IP is only one aspect of a company’s competitive advantage, sometimes more crucial, sometimes less crucial to the success of a company’s activities. This was highlighted in Wednesday’s edition of The Times, which reported the measures taken by Air New Zealand (ANZ) to secure a first-to-market advantage for its lie-flat bed for economy passengers. “Such was the secrecy of the programme”, the newspaper notes, “that simulated flight tests were conducted on actors sworn to silence. Aviation seating is a cut-throat business.”

However, a role for IP in ANZ’s activities is also apparent from the comment of ANZ’s long-haul boss that he expects to license the seat design to other airlines. Such a business model was the subject of the 2009 litigation between Virgin Atlantic and Premium Aircraft Interiors, first in the Patents Court for England and Wales and subsequently in the Court of Appeal. According to the Patents Court decision, Virgin were successful in licensing their “Upper Class Suite” flat-bed seat design to Air New Zealand for a “substantial fee”. Air Canada were also interested in taking a licence but found it difficult to justify the Virgin fee, buying instead an alternative “Rock” flat-bed seat design from Virgin’s seat manufacturers, Premium Aircraft Interiors. Virgin then sued Premium for infringement of patent and unregistered design rights.

The Patents Court decision provides an interesting insight into the measures taken by Premium both to maintain the confidential status of information received from third parties (in this case Virgin and its seat designer) and to prevent that confidential information from contaminating its own work for other customers such as Air Canada. Premium initially claimed that they operated a “clean room” approach that employed different teams for different projects, the design data for different projects being kept securely on different parts of Premium’s server. However, as noted by the Patents Court judge, Mr. Justice Lewison:

“The position as it eventually emerged was rather more complex. First, there are at least two kinds of design data. Design data known as CATIA, which are three dimensional modelling data, are stored in a digital file. It can be sent to a manufacturer who can use the file to make a mould or tool in order to manufacture the required component. These data can be kept securely. In addition there are two-dimensional design drawings. These could not be kept securely once UCS had gone into production in the autumn of 2003. Second, once Virgin Atlantic had entered into a licence with Air New Zealand in about June 2004, the UCS had to be modified in order to fit onto Air New Zealand's aircraft. A separate design team was created in order to deal with those modifications. That design team (as well as the original design team) had access to the UCS design data (including CATIA). Third, contrary to the pleaded case there were at least two people at Contour (Simon Allen and Bruce Gentry) who had roles to play both in UCS and Rock/Solar Eclipse. Indeed, since Contour employ a large number of short term contract designers, it has not been possible to identify all the designers and engineers who worked on the UCS project, or whether some of those short term contract staff worked on other projects within Contour. Accordingly, Contour now admit that their relevant employees had the opportunity to copy both UCS itself and also UCS design data.”

For non-IP managers, there is a temptation to view protection by trade secret/confidentiality as a cost-free option. Certainly, there are no patent office fees to pay. However, as illustrated by the cases above, the measures necessary to ensure that confidential information is properly managed are far from being without cost.

When Harry Met Sally: The Propietary/Generic Courtship Continues

I want to add a sequel to my "When Proprietary Harry Met Generic Sally" post of earlier this week, here. The bad news, for all of you who worship this movie icon, is that there is nothing in about what I am about to write that has any connection with Billy Crystal or Meg Ryan. The good news is that, quite by chance, I ran across an article in the Israel business daily, The Marker, entitled "Teva Fires 28 Employees in its Patent and Research Department", the very day after my post. This article well illustrates the dynamic and complex tension taking place at Teva Pharmaceutical Industries, the world's largest generic pharmaceutical company, in its efforts to enter the proprietary drug space.

The gist of the article is that 28 employees were being dismissed from the Teva "patent" department. Most of them were being offered reassignment within the company, with a small number being offered early retirement. A number of students working part-time for the company were also being let go. The article attributed the reason for the down-sizing of the patent department to over-hiring in 2008. More particularly, 50 new employees were added that year, 35 of whom had a Ph.D. degree, thereby doubling the number of staff in the department.

At the time, the move was described as fitting in well with the strategy of the company, "wherein Teva was meant to be increasing its outlay for R&D from 6.2% in 2007 to 7.5% in order to increase sales revenue from $5.2 billion in 2007 to $11.5 billion in 2012. But this strategic goal was, in the words of the article, "rendered irrelevant to some extent" when the company acquired Barr in December 2008 for $7.4 billion here. The result was an overlap of R&D capability between Teva and Barr, which enabled Teva to reduce its R&D budget to less than 6% in 2009. As a consequence, a portion of the R&D staff hired in 2008 "were no longer essential". Hence the downsizing of the department.

I have no special information about the state of Teva's R&D capabilities. Nevertheless, the report does suggest that the company is finding it difficult to ramp up R&D internally in a way that can deliver proprietary products in a way that meets the company's financial goals. Instead, the company seems to prefer to look elsewhere for this, either by licensing-in the technology (which was the secret of its highly successful Copaxone product), or acquiring existing R&D technology. If my observation is correct, it suggests that the transition from generic to proprietary products, as described in A. David Cohen's article, is a challenging exercise for even the most successful of pharmaceutical companies.

In this connection, I am reminded that when Pfizer acquired Wyeth in 2009 here, one of the major reasons given was that Pfizer was interested in acquiring some of Wyeth's R&D capabilities. If Pfizer, which is a proprietary drug company par excellence, sees the strategic benefit of acquiring existing R&D capabilities, what can one say of a generic drug bohemoth like Teva showing a similar tendency. Moreover, I wonder to what extent that decision to downsize has more to do about the short-term company bottom line rather than any long-term plan for sustained proprietary R&D. This consideration, magnified for public companies facing the difficulties of the current economic environment, surely needs to be taken into account whenever one seeks to understand the challenges of moving into proprietary drug activities.

Sun Tzu and the patent trolls

David Wanetick (Managing Director, IncreMental Advantage) has written a little piece for IP Finance which readers may enjoy. He explains:

"Black Operations. Scorched Earth Campaigns. Preemptive Strikes. Fomenting Internal Unrest. Coalition Defenses. Trench Warfare.

These are not terms typically used in discussing patent strategy. However, they are strategies discussed in my article entitled “How Sun Tzu Would Outflank Patent Trolls”. Other articles have postulated that patent trolls are merely an illusion of paranoid patent managers. Some authors have praised patent trolls for providing a market for inventors to monetize their inventions. Other articles have lambasted patent trolls for levying taxes on innovation. This article provides a thorough analysis of how operating companies can respond to demand letters issued by patent trolls".

Offshore IP holding companies - UK discussion document

HM Treasury has published the discussion document on the future of taxation of controlled foreign companies. Of particular interest for companies with IP are the questions (pages 15-19) on how they should treat overseas companies with IP, proposing to distinguish between those that actively manage the IP and those that passively receive it. The document is part of an ongoing process to establish tax rules that ensure UK parent companies are not taxed on the profits of IP holding subsidiaries in certain circumstances (circumstances to be defined!)

A controlled foreign company is an overseas company which is (generally) majority owned by a company in the UK and, generally, is in a location with a low tax rate. Tax authorities tend to be wary of such companies because they could be used to divert profits from a higher tax country (such as the UK). The portability of IP means that tax authorities are particularly concerned when such companies are used to hold IP and receive royalties. The introduction of a tax exemption for dividends received from overseas brought this issue into sharp focus because such companies could receive royalties, pay little tax on them, then dividend the profits to the UK company - which would not pay tax on the dividend. HM Revenue & Customs is, perhaps understandably, concerned that (without any checks in law) UK companies would simply put all profitable IP activity into non-UK companies and minimise their tax costs.

The discussion document simply asks questions at this point, rather than suggesting any particular line of thought. In particular, it seeks responses on what constitutes active management of IP - this is likely to be an interesting area of discussion, as many of the characteristics of active management would seem to reflect well-managed investment IP activities as well.

When Proprietary Harry Meets Generic Sally

I recently had lunch with a UK colleague with a distinguished background in patent litigation matters, in general, and pharmaceutical-related litigation, in particular. During the conversation he confirmed my understanding that, as far as client representation was concerned, you either represent proprietary pharmaceutical companies or generic manufacturers, but not both. The thrust of the position is that there is a type of IP Continental Divide, where the headwaters either flow in a proprietary or a generic direction, but never come together under the same corporate roof.

His comment led me to recall a chapter published over a decade ago by my late colleague, A. David Cohen, entitled "The Intellectual Property Characteristics of a Generic Company", in Intellectual Property in the Global Market Place (2nd ed. 1999), edited by M. Simensky, L.G. Bryer and (full disclosure) N.J. Wilkof. A. David Cohen served as the Manager of the IP Department at one of the world's largest companies in the generic patent protection industry.

The particular focus of the chapter was an effort by Cohen to describe how this company, despite its historical commercial raison d'etre in manufacturing and selling "plant protection chemicals initially developed by a different (usually) research-based company, but after the plant patent has expired," was in the process of evolving into a research-based plant protection company. As set out by Cohen, it is worth noting the salient differences in IP protection during each of these stages in maintaining the company's the patent protection business.

Generic Stage

1. The company focuses primarily on assessing the validity of patents to avoid infringement and assessing the extent to which use can be made of the patents.
2. If the company does file patents, it is usually for processes; only later might patents also cover formulations.
3. The company is active in oppositions of patents and will seek compulsory licences when possible.
4. The company is also involved in invalidation proceedings regarding patents that cover products that the company wants to commercialize, oftentimes with an eye towards obtaining a license.
5. The company has a strong interest in taking full advantage of the experimental use exception, if applicable, for existing patents.
6. The company vigorously challenges patent term extensions.
7. The company at a later stage of its generic-focused activities will engage in a "picket-fence" strategy to block the proprietary product beyond its basic stage (the company will run experiments "and file one or more patent applications covering either a new process to prepare the product, a new process to prepare a key intermediate, selected mixtures, new formulations and/or new uses").

When the Picket Fence Strategy is Breached

Interim Stage

1. The company faces the prospect of declining market share, as more companies enter the generic space and the larger multinationals acquire smaller generic companies.
2. To maintain sales, the company shifts from selling not only its own technical material but also its formulated material, leading to patenting of the formulations.
3. Because of the distinctive nature of agribusiness, the company obtains agricultural registration for its products on a country-by-country basis.
4. The company is less active in seeking compulsory licences, engaging in invalidation actions, or in challenging patent term extensions.
5. The company begins to view patent protection as a means for protecting its commercial interests.
6. The company strengthens its patent validity activities and the implementation of its picket fence strategy.

Proprietary Company

1. The company engages in fully-fledged R&D to develop proprietary products and/or licensing-in proprietary technology for product development.
2. The company maintains a patent registration program to protect its own proprietary products.
3. In so doing, the company must decide on whether to include in the first basic patent, as well as the product itself, all known uses, alternative processes and synergistic mixtures.
4. This requires the company to consider both patent prosecution costs and up-front research costs as well as to weigh the risk that a comprehensive patent whose filing is delayed to assure its comprehensiveness may allow a competitor to sneak in with its own prior application.
5. The company begins to find ways to counteract the picket-fence strategy of others.
6. The company actively supports patent term extensions to provide additional protection for its products.
7. The company seeks the optimal way to balance the existing generic business with the emerging proprietary emphasis and to maximize the joint revenue from both.

What arises from Cohen's discussion is the dynamic nature of these processes. In his own words,

"... the generic company's attitude toward and its experiences with intellectual property may both prepare and push it toward becoming a research-based company."

If that observation was true a decade ago, it is even more so now. Even the world leader in the generic pharmaceutical business, Teva Pharmaceutical Industries, is also an active participant in the commercialization of proprietary products.

The upshot is that the generic/proprietary divide in the pharmaceutical industry seems less and less germane, if it all. Unless, of course, you are engaged in patent litigation. There, even as your client is constantly searching for ways to achieve the right generic/proprietary mix for its own business, the approach to litigation, perhaps out of necessity, perhaps out of legacy, continue to take a Manichean view of the pharmaceutical world.