What's wrong with hi-tech royalties?

According to the Antitrust Hotch Potch weblog Dutch scholar and Howrey partner Damien Geradin (right) has presented a paper, "What's wrong with royalties in high technology industries" at the George Mason University School of Law and Microsoft Corporation’s second annual conference on The Law and Economics of Innovation: "Patents and the Commercialization of Innovation" last month in Arlington, Virginia. According to the abstract,

"Over the past few years, there has been an unprecedented degree of interest among competition authorities, scholars, Standard-Setting Organizations (hereafter, SSOs) and trade associations with respect to the level of royalties that are charged by holders of intellectual property rights (IPRs). For instance, in the past two years, the US Department of Justice (DoJ) granted business letter clearance to two SSOs - VITA and IEEE - to implement new IPR policies designed to control the IPR costs. In April 2007, the DoJ and the Federal Trade Commission (FTC) jointly released a report on Antitrust Enforcement and Intellectual Property Rights. But the interest is not limited to the United States. The European Commission is currently investigating the compatibility of certain licensing regimes and conduct within SSOs against EC competition law. Reflecting the debate at the policy level, scholars have produced a large body of legal and economic literature on IPR and standardization issues, including patent hold-up (where the patent holder exploits ill-gotten market power in excessive licensing fees) and royalty stacking (where multiple patents must be licensed and thus the royalty rates stack up to excessive amounts).

Against this background, this paper addresses the issue of whether something has gone wrong with royalties in high technology industries. This paper seeks to answer this question first by looking at a number of concrete scenarios where firms holding IPRs seek to obtain a return on their patent portfolios by licensing them. As will be seen, the behaviour of these firms essentially depends on whether they are vertically-integrated or non vertically-integrated. Vertically-integrated firms engage in research and development activities, patenting at least some of their inventions, and also manufacturing products based on their own innovations and the innovations produced by others. Non vertically-integrated firms, in contrast specialize in one or the other layers of production. Pure upstream firms conduct research and development activities and patent their innovations, but they do not engage in manufacturing. Downstream firms specialize in manufacturing, but do not engage in R&D".

Link to SSRN here [thank you Kristof Neefs of Laga, Belgium, for this item].

Radio Royalty: The Sinatras

In 1988, Frank Sinatra pushed for legislation instituting a performance royalty, and his daughter is expected to do the same almost two decades later during a US congressional hearing on the Fair Performance Right on Radio legislation, according to the MusicFirst Coalition.

A number of musical performers plan to make their voices heard on Wednesday as well. Rock guitarist Dave Navarro, hip-hop groups Sugarhill Gang and Whodini, and pop singer Kristine W are among the artists in D.C. supporting the bill.

The Copyright Alliance, a broad-based copyright industry group, also is planning a push for the IP-PRO bill that sets up a "copyright czar" and is scheduled for a Senate Judiciary Committee hearing June 17. For more on copyright czars click here and tsars here.

Film finance tax advisers face four-week trial, £22m claim

Accountancy Age reports that business advisers and auditors Baker Tilly are facing a negligence claim of around £22m in respect of advice given about the availability of tax relief on investments in film finance schemes. A total of 75 claimants have brought the claim, filed in the High Court in 2006, against Baker Tilly and IP-and-tax specialist Adrian Shipwright (Pump Court Tax Chambers). Following the breakdown of settlement negotiations the case is set to go to trial for four weeks at the end of June.

The value of designs - "Design can deal a winning hand"

An article on the Packagingnews website of 5 June highlights the difficulties of measuring the value of designs and the perceived value to clients.
It is available at http://www.packagingnews.co.uk/news/814874/Design-deal-winning-hand.
It mentions the RODI – the “return on design investment”.
The definition of this term on the Design Council’s website (see http://195.157.47.227:8080/design-council/showGlossary.do#g17)reads as follows: “Similar to standard ROI (return on investment), RODI isolates the specific return on design spend. Although only one in eight businesses currently pinpoints RODI with accounting procedures, we hope that doing so will become more common.”

Further information on this intriguing ROI measuring tool can be found for example at: Design Council’s Value of Design Factfinder - http://www.designcouncil.org.uk/en/About-Design/Research/Value-of-Design-Factfinder/ - “Businesses which use design perform better than their rivals.”

or at

VMSD (the “leading magazine for retail designers and store display professionals”) - http://www.visualstore.com/index.php/channel/62/id/12874 - “It’s the holy grail of retail design: demonstrate the return on investment that retailers will net from the new store layouts they commission.”

And this is a link to the UK’s Design Business Association’s Design Effectiveness Awards page which explains the judging process of the Award: http://www.dba.org.uk/awards/judging.asp. It sets out details of how the Award judges assess the commercial impact of a design.
Unfortunately we have just missed the entry deadline for 2008 – next time lucky in 2009.

Celebrity endorsements and damages

From Manatt Phelps & Phillips LLP's website comes a note ("Uma Thurman sues Lancôme for using her face in ads") that sparks off some interesting issues at the IP/finance cusp. The note reports that actress Uma Thurman has sued L’Oréal SA’s Lancôme for $5 million in a Manhattan federal court, complaining that the latter was continuing to use her likeness when marketing its products even years after the expiration of the licensing agreement (September 2004 for Europe, December 2004 for the rest of the world). Lancôme maintains, among other things, that the licensing agreement excuses it from liability if third parties continue to use Thurman’s image after the expiration of the contract.

Among the interesting issues raised by situations such as this, the question arises as to the extent to which damages for loss of licensing opportunity are available to a celebrity. Any continued unauthorised use of celebrity names and likenesses can be viewed as a sort of involuntary licence, the terms of the existing licence giving at least a clue as to the commercial worth, or 'going rate', which that use is worth -- but the same continued unauthorised use may have the result of delaying or even preventing the celebrity securing a subsequent endorsement contract in the same or another sector. In the UK, the notion of "damages for loss of opportunity to enter a contract" has never been warmly endorsed in general tort law, though the Court of Appeal in Gerber v Lectra seemed to accept it as a possible head of damages in respect of patent infringement. Where do other countries stand on this? Any comments or suggestions?

Account of Profits decision - HEFTY

Decisions on Account of Profits are quite rare and so it is interesting to note Kate Duckworth's (Baldwins) report in World Trade Mark Report that the Auckland High Court (In Intellectual Property Development Corporation Pty Ltd (IPDC) v Primary Distributors New Zealand (CIV-2006-404-4695, April 24 2008)) has allowed in part a claim for an account of profits for the unlawful sale of products bearing the trademark HEFTY. Primary Distributors admitted to an infringement of the HEFTY mark but but objected to the account of profits remedy sought by IPDC. Primary Distributors claimed that as IPDC had known that it was selling HEFTY marked goods and had let it do so, it was not entitled to an account of profits. The court agreed that a plaintiff cannot permit a defendant to make profits over a period of years and subsequently expect to claim those profits. Primary Distributors went on to argue that acquiescence, waiver and laches prevented IPDC from claiming an account of profits at all. The court ruled that IPDC's actions were a mere delay and not assent; therefore, acquiescence was not made out. The court also held that the delay was not long enough to amount to laches and that IPDC had not waived its rights. The court left it to the parties to calculate the account of profits, with leave to return to court if they could not resolve the issue between themselves.

This case arose in quite specific circumstances and involves a legitimate licensee (Primary Distributors) continuing to sell licensed products notwithstanding termination of the licence, in circumstances where the licensor went bankrupt and the rights were subsequently sold on (notwithstanding a formal bid for the rights by the licensee that was apparently never formally rejected). Given that the licensee seems to have admitted to the infringement and was no doubt aware that their bid to purchase the trade mark rights had not been accepted (even if it had not been rejected) one cannot help but feel that Primary Distributors knew they were taking a chance when selling the products and were enriched (unjustly) in doing so, notwithstanding the delay by the Licensor.

Must franchisors remit purchase benefits to their franchisees?

Writing in International Law Office, Karsten Metzlaff and Karl Rauser (Nörr Stiefenhofer Lutz) discuss some significant implications for the passing back to franchisees of benefits obtained by franchisors ("Purchasing Benefits in Franchise Systems: The Praktiker Case", 20 May 2008). The authors explain that, under earlier case law of the German Bundesgerichtshof (Supreme Court), franchisors were not obliged to pass benefits to franchisees, whose entitlement depended solely on the existence of contract provisions to that effect. However, a Federal Cartel Office decision on the repayment systems of the Praktiker of do-it-yourself franchise almost exactly two years ago appeared to have changed the position. In this decision the Office ruled that a refusal to pass on to franchisees purchasing benefits which were linked to the franchisees' obligation to purchase all goods for the franchise system from specified suppliers constituted an "inequitable, and therefore forbidden, impediment to dependent companies" under Section 20(1) of the Act against Restrictions on Competition.

Praktiker's appeal has since been allowed by the Dusseldorf Higher Regional Court, but the matter awaits the further attention of the Bundesgerichtshof .

Comment: presumably most business format franchisors seek to leverage the maximum purchasing power from their brands so that, by further advertising their franchised brands, they will stimulate further consumer commitment to them. Praktiker have more to gain by reinvesting their savings in further marketing since their profits come ultimately from cash flow from their franchisees, not from the gains they can make in sales to their franchisees.