Can There Be Too Much IP Within the Organization?

How much IP awareness should there be in a company? It is all the rage these days to argue in favor of IP empowerment, whereby the goal is spread IP awareness throughout the organization. But is this vision of IP penetration as desirable as it might seem at first glance? Consider the following two examples.

In an article entitled "Understanding and Unifying Diverse IP Strategies", which appeared in the January/February 2009 issue of Intellectual Asset Management, John Cronin and Paul DiGiammarino argue that proper IP strategy is based on "extracting the definition of each stakeholder's IP strategy", as opposed to simply deciding "what inventions to file as patents and in what countries to file them." The endgame is to develop and overarching IP strategy. And who are these stakeholders? The authors list the following: (i) patent counsel; (ii) engineers and inventors: (iii) product and technical managers; (iv) executive management: (v) business development; (vi) commercialization and marketing; and (vii) CTO.

More recently, Mark Blaxill and Ralph Eckardt argued in their article, "Putting the IAM Function at the Heart of Corporate Strategy," published in the July/August 2009 issue of Intellectual Asset Management (to be read in tandem with their 2009 book, The Invisible Edge: Taking Your Strategy to the Next Level Using Intellectual Property), that "IP has become the principle source of competitive advantage." And what is the mechanism for realizing this strategy? The author explain that the goal is to "break out of IP's organizational silo ... IP executives must push for deeper integration of IP management into the business, where it can have its greatest and strategic impact."

The common thread of these two articles is that IP management needs to be released from the organization's patent department, whereby everyone with a material interest in IP within the company will presumably have some influence over the company's IP policy. The problem is this: the persons most likely to "benefit" from this view may in fact be skeptical about its efficacy. My MBA students tend to be culled from middle management across a range of departments and are overwhelmingly employed in hi-tech companies.One would think that this would be an ideal cohort to embrace the view that IP should be the province of multiple stakeholders within their companies. However, their reaction to these proposals was largely one of skepticism.

There appear to be two reasons for this skepticism. The first was a sense that these authors have overstated the importance of IP (at least in most of their companies). That is not to say that they do not recognize the potential importance of IP, but rather to say that, having regard to the multiple managerial requirements that they face, overstating the centrality of IP is no more helpful than understating it.

The second was a feeling that the authors have confused IP strategy with IP awareness. Not every department within a company is, nor should be engaged, in fashioning or implementing IP strategy. For some departments IP may be more important; for others, less so. While consideration of the role of IP within a given corporate department is not the same thing as consideration of IP strategy, the company is organized for strategy and IP is a part of that overarching organizational structure, not some stand-alone body of information and decisions.

What the students wanted, and what is missing in these two articles, is not strategic empowerment, but rather a heightened awareness of what IP is, and how it may be expressed in their daily activities. Stated otherwise, both articles seem to take as a given exactly what students view as a form of unknown, namely a greater understanding of IP with the larger commercial and managerial context. Unfortunately, how this appreciation of IP is spread throughout the organization remains largely untouched, not just in the two articles but most of the managerial literature. That is a pity, because it is here that IP can have the greatest impact throughout an organization.

IP at the Corporate Periphery?

ICAP Ocean Tomo Auction Sees Record Bidding

It's good to see that Patent Auctions are apparently back up running again. ICAP OceanTomo issued a press release yesterday to highlight the USD 11.43 Million received in their 11th auction.

The press release highlights two sets of lots. An exclusive licence to a group of patents owned by the University of Southern California on a multimedia architecture went for USD 7.7 Million in a pre-auction sale.

A set of patents owned by Walker Digital LLC for which Ocean Tomo is the exclusive sales agent, according to this report. The bidding for this group started at USD 50 Million according to the press release, and stopped at USD 350 Million without reaching the reserve price. No doubt post-auction bidding will be continuing by some parties to access the portfolio. Indeed ICAP OceanTomo Managing Director Dean Becker clearly states that he plans to finish work on this lot within weeks.

Patent auctions have been criticised for allowing patents to fall into the hands of "trolls" who then exploit them. They do provide a means, however, for researchers and universities to monetarise their assets and allow the generation of cash which can be ploughed back into research and development, as the deal with the University of Southern California clearly shows.

Technorati Tags:
Patent Auction, ICAP Ocean Tomo, Walker Digital

Photo Credits: Dean Becker from www.oceantomo.com and Jay Walker from Inventors Digest (www.inventorsdigest.com)

Two new articles

The March 2010 issue of Informa Law's Copyright World has now been published. This issue is of particular interest to readers of this weblog since it contains two articles on transactions involving virtual assets.

In "Buying Virtual Assets", a short piece by Rob Hawley, a partner at Mathys & Squire, the challenges of buying virtual assets are examined in light of the purchase earlier this year of the Crystal Palace space station -- an asset which exists only within the context of the MMORPG Planet Calypso. Also, in the somewhat longer “Virtual Worlds, Real Risks, Real Money” Linklaters’ Christian W. Liedtke discusses both the business benefits and the legal framework of user-generated online content.

Further details of this issue can be seen here.

Monsanto's Patent Strategy: Less Today May Be More Tomorrow

I have been under (blog)water for the better part of the last two weeks but, with the trial over, it's great to be able to comment once again. What grabbed my immediate attention is an article that appeared in the February 1 & 8 issue of Bloomberg Business Week, entitled "Monsanto Sets a Soybean Free."

Monsanto may be the world's largest seed company, and seeds are a desirable commodity to be selling. Still, circumstances have not been kind to the company. Genetically modified crops, with which it is closed identified, have been viewed in some circles as a Frankenstein with roots. As well, the U.S. Justice Department has been carrying on a civil investigation of whether the company has been liable for anti-competitive practices with respect to the soybean business. Further, DuPont -- no shrinking violet in the business, being number 2 behind Monsanto -- has sued Monsanto, claiming an abuse of its market position in the soybeans space, where Monsanto is reported to have a 93% (!) market share of the U.S. soybean crop via its first generation biotech seed. Monsanto is entitled to feel somewhat unloved both in the U.S. and abroad.

Against this backdrop, it is interesting to consider the recent moves taken by Monsanto with respect to its patent position. According to the article, the company will allow its current patents for bio-engineered farm seeds to "expire without a fight", starting with the patent on its soybean market leader, Roundup Ready, with an expiration date in 2014. As a result, competitors will be able to manufacture copycat products, presumably at a lower price. Also, farmers will be able to plant seed taken from the farmers' own harvests, without the threat of legal action by Monsanto.

While Monsanto might have some interest in enjoying the positive publicity that surrounds such a move, the primary motivation appears to be a decision to refocus its strategic focus with respect to its patent portfolio from the first generation of bio-engineered seeds, which are close to expiration, in favor of promoting new versions of gene-modified products. It has already begun to sell new versions of herbicide-resistant soybeans and corn, and it plans to launch additional genetically modified seed products in 2011. Interestingly, Monsanto is also relying on licences granted to other producers to extend the reach of these new generation seed products.

The strategy contained in these moves was described in the article as follows: "Grant [being Hugh Grant, the CEO of the company] is betting that sales of these higher-priced, second-generation seeds will more than offset the loss of sales of earlier versions as their patents expire. 'Growers will decide, do I go with the old 1996 material or do I go with some of these new varieties?' Grant says. "I am fine with that setup.'"

I meant the other Hugh Grant

Stepping back from Grant's comment, this is an interesting strategic move on Monsanto's part. Monsanto seems prepared to de-emphasize its current product line, and the IP enforcement that goes with it, in favour of promoting a new generation of products, backed up by a determination to enforce its patent rights in these new products. Further, Monsanto seems to be betting on the strength of its brand awareness, which will to allow it sell a higher-priced seed to an "installed base" of farmers who have already become accustomed to Monsanto-based genetically modified products.

In so doing, Monsanto seems to be providing a partial answer to the perennial question that bedevils a patent owner who is faced with the ultimate expiry of his patent: "What do I do the day after?" The answer is to try and make certain that there is no perceptible "day after", but rather to provide a continuous branded product stream, where today's product is able to command a premium price, backed by an explicit commitment to enforce its IP rights in the new products.

If so, the question is whether such a strategy is different in context from the incremental development strategy that has been an issue in the pharmaceutical industry. Most notably, Indian patent law contains the controversial section 3(d), which makes it much more difficult for a patent owner to enjoy continued patent protection in pharmaceuticals for incremental development (and thereby, it is argued, make it easier for the generic pharmaceutical industry in India to operate).

With respect to Monsanto's bio-engineered new generation of seeds, the issue then becomes whether we are talking about material improvements in product or "mere" incrementalism backed by the threat of enforcement of patent rights. If the former, Monsanto's effort to extract a higher price will seem reasonable. If the latter, however, one can foresee a time in the not-too-distant future where Monsanto's current patent munificence will be viewed as a Trojan horse intended simply to accelerate (unjustified?) price increases in its seed products.

Find the Seeds?

UK Budget - quick review of IP-related announcements

Three main points - plus some more investment in green technology, but that's not specifically aimed at new IP.

Following consultation on design, the Government will introduce a tax relief for the UK video games industry, subject to state aid approval from the European Commission. No more detail than that, but it will presumably be similar to the film/sound recordings reliefs.

The Government is creating a £270 million Higher Education Modernisation Fund in 2010-11. This fund will enable universities to identify and drive efficiencies in the sector and fund an extra 20,000 undergraduates on courses starting in September 2010, with priority given to key subjects like science, technology, engineering and mathematics.

A little more news on the patent box announced in the 2009 Pre-Budget Report:
The Government will work with business to design a practical and competitive regime for patents to support the UK's strengths in innovative industries. This will include looking at how to identify and value embedded patent income and how to give relief to acquired patents. In addition to patents granted after legislation is passed in 2011, the consultation will also consider how to include patents not yet commercialised at that point, and how the regime will apply to equivalent overseas patents held by UK companies. The Government will be consulting with business over the summer.

More details to follow if I find any on digging through the press releases ..

"Film" includes the copyright in it for tax purposes, says Court of Appeal

Last week the Court of Appeal, England and Wales, in Micro Fusion 2004-1 LLP v Revenue & Customs Commissioners [2010] EWCA Civ 260 (not yet on BAILII, but noted on Lawtel), had to consider the meaning of the word "film" for the purposes of the Finance (No. 2) Act 1992, section 42 -- the film in question being Mrs Henderson Presents.

This was an appeal by Micro Fusion against a decision relating to the deduction of film production costs. In its tax return for the year ended 5 April 2005 Micro Fusion had sought to deduct from its profits and gains from trade or business the costs it incurred in the production of a film, under the Finance (No. 2) Act 1992 section 42 and the Finance (No. 2) Act 1997 section 48. The commissioners rejected this claim on the grounds that Micro Fusion's trade or business did not consist of or include "the exploitation of films" for the purposes of section 42 and that, even if it did, the film in question constituted "trading stock" as defined in the Income and Corporation Taxes Act 1988 section 100(2).

Micro Fusion appealed and the commissioners raised an additional ground: that the Finance Act 2005 section 60 reduced the amount of any relief to which Micro Fusion was otherwise entitled. The commissioners submitted that the concept of "films" in section 42 comprised only the physical record on or in which the sequence of images was embodied and that the substance and effect of a distribution and commissioning agreement (DCA) entered into by Micro Fusion was that it had sold the master negative of the film for at least a 21 year period. This being so, it was not exploiting the film. Micro Fusion disagreed, arguing that a "film" included the intellectual property rights in it and that, by entering into the DCA, under which it retained a residual or reversionary interest in the master negative, Micro Fusion had exploited its interest in the rights it held in the film.

The Court of Appeal (Sir Andrew Morritt, Lords Justices Rimer and Etherton) allowed Micro Fusion's appeal. In its view,

* the word "film" in section 42 was to be construed in accordance with the definition of the same word in the Films Act 1985 Sch.1 para.1. In that context "film" was not confined to the master disc, negative or tape and included the intellectual property rights -- it was a compendious word and its meaning was not confined to, and did not require, the inclusion of ownership of the original physical record;

* it was self-evident that the value in a film susceptible of exploitation lay in the copyright, not in the physical embodiment of the sequence of images.

* it was not the case that the intellectual property rights could only be exploited through ownership of the original physical record.

* Micro Fusion did exploit the film under the DCA since the concept of exploitation did not exclude an outright disposal.

* whatever the position in respect of the master negative, under the DCA Micro Fusion had not made an outright disposal of the copyright and exploitation of the film was its trade or business within the meaning of section 42(1).

* the film was not actually "trading stock" because Micro Fusion retained the copyright in it, and the only disposals were a 21-year licence under the copyright and an option to buy it at the expiration of the term of the licence. Accordingly section 42 did not operate so as to preclude the deduction of expenditure from the profits of Micro Fusion's trade or business.

Update on the UNCITRAL secured transaction project

It has been a while since we last reported on where things stand with the proposed IP Supplement to the 2007 UNCITRAL Legislative Guide on Secured Transactions setting out recommendations for a uniform legal regime for secured financing. The following is an update on this project since our last update in October.

Working Group session in Vienna, November 2009

Following the London seminar of 14 October 2009 on IP rights and the UNCITRAL secured transaction project, the Working Group (“WG”) session in Vienna last November improved the language of the IP Supplement considerably, adding some helpful explanations regarding a number of points that were discussed at the seminar. The improved wording concerns in particular the issues of automatic termination clauses and acceleration clauses in licence agreements, as well as the integrity of licence agreement provisions and the secured creditor’s inability to acquire greater rights in an encumbered asset than the rights the grantor has. However, the WG did not reach agreement on two remaining issues of concern that were also discussed at the October seminar: 1) the issue of “ordinary course of business” exceptions, and 2) the choice of law question.

Working Group session in New York, February 2010

This session – the final WG session where the IP Supplement was scheduled for discussion on substance - was mainly about finding a solution on the two key remaining issues:

Issue # 1: Ordinary course of business: the “ordinary course of business” exception (an exception unknown under IP law) on the purchase of IP, intended for consumers to take copyrighted software free of any security interests that the vendor might have granted in the IP.

At this session, the WG was able to resolve this issue fairly quickly, agreeing on compromise wording to replace the previous, rather detailed recommendation focusing on software (included in doc. no. A/CN.9/WG.VI/WP.42/Add.4 dated 26 November 2009), as follows:

"The law should provide that the rule in Recommendation 81(c) applies to the rights and remedies of a secured credit under this law and does not affect the rights and remedies the secured creditor may have under the law relating to intellectual property."

The Guide in Recommendation 81, subparagraph (c) provides that an ordinary course licensee takes its rights unaffected by a security right previously granted by the licensor. The effect of this rule is that in the case of enforcement of the security right by the licensor’s secured creditor, the secured creditor cannot terminate the “ordinary course” licensee, as long as the licensee performs the terms of the licence agreement. All the secured creditor can do is to continue to collect royalties owed by the licensee to the licensor.

The new compromise wording essentially refers matters to the Guide’s Recommendation 4(b) - the overall rule clarifying that where the Guide is inconsistent with IP law, it does not apply. IP commentators have noted that this constitutes an acceptable compromise as it leaves the secured creditor with the possibility to sue the licensee in case of infringement of the IP right in question – with the important proviso that the underlying financing agreement must be drafted in a way that allows the secured creditor to do so.

Issue # 2: Choice of law: the question of which law is to apply, the law of the state(s) in which the IP is protected or the law of the state where the grantor of the security interest is located, which could create problems with chain of title searches and debtor allocation where there are multiple rightholders and/or creditors in different countries.

The WG could reach no consensus on this issue and a decision was made to defer the matter for further consideration to the UNCITRAL Commission which is to make a final decision at its next meeting in June/July when the IP Supplement is scheduled for finalisation and adoption. At the WG session a total of 6 different options to deal with the issue were discussed. All options would apply a different mix of lex protectionis and the grantor’s location law for the different proprietary matters the Guide deals with (the law applicable to the creation; effectiveness against third parties; priority as against the rights of competing claimants; and enforcement of a security right). Some of the options would also differentiate between registered and unregistered IP rights. Out of the 6 options discussed, the WG agreed that 4 options (with one option entailing two different versions) should be presented to the Commission.

Spring time at UNCITRAL ?

It will be interesting to see how the Commission will deal with this impasse. At the WG session it was noted that it is important to reach agreement on one option only, as otherwise a different rule would apply depending on the conflict-of-laws rule of the forum state, a situation which would perpetuate the currently prevailing uncertainty. If no agreement can be reached on an IP-specific recommendation, the general recommendations of the Guide as to the law applicable to security rights in intangible assets would apply - see recommendations 208 and 218, subparagraph (b) of the Guide.