Is the U.S. changing its focus on Chinese recognition and enforcement of IP?

China and the U.S. are in the midst of their annual bilateral talks against the backdrop of accusations and counter-accusations regarding cyber theft or worse. The high profile nature of these bi-lateral accusations (in truth, initiated by the U.S., but with a notable rhetorical parry by China) regarding cyber-theft point to an interesting, if subtle,  shift that may be taking place in the nature of the U.S. position regarding alleged Chinese misappropriation of U.S. intellectual property. Where once the focus was more on allegations of counterfeiting and brazen infringement of IP rights subject to long-time international treaties—mainly copyright, trade marks and patents, today the focus of the IP narrative may be tilting increasingly in the direction of trade secrets and confidential information.

Think about it for a moment—over several decades, U.S. trade policy has aggressively centred on the alleged Chinese penchant for copying things and processes for which they do not have rights. Whether it was a CD or computer software, food or medicine, the refrain was loud and consistent: too large a percentage of U.S. goods protected by copyright or trade marks were being misappropriated in China, leading to large commercial losses for the U.S. rights owners. When food and medicine were involved, health and public safety were added to the list of grievances. Indeed, alleged Chinese violations of IP rights were invariably listed as one of the top trade issues between the countries.

Compare that with recent utterances, especially in light of the bilateral meeting taking place. Permit me to offer two examples. The first was an interview heard on a Bloomberg podcast with the head of a leading US-China trade association. What was interesting in the interview was that the interviewee did not mention IP as a pressing issue. Instead, he pointed to the continuing requirement that foreign investors cannot hold a majority interest in a Chinese joint venture as the biggest single commercial issue from the US side.

The second example is taken from an article under the byline of Paul Eckert that appeared on July 9th in Reuters.com ("Snowden affair blunts U.S. push for China to curb cyber theft"), here. The clear focus of the article are U.S. accusations of what the article calls "state-sponsored IP theft", where the intention are "thefts of trade secrets" or, as stated elsewhere in the piece, "[c]yber theft of industrial designs, business strategies and trade secrets". The previous litany of accusations about wholesale copying products and their trade marks seems to be missing. While I cannot warrant that these two exchanges are conclusive evidence, they do tantalizingly suggest that there is a changing narrative from the traditional issues of IP counterfeiting and infringement in favour of an emphasis on trade secrets and confidential information.

If this shift is indeed occurring, then there may well be material implications about the way that the U.S. will have to deal with the situation. Perhaps the best way to comprehend this difference is by considering the distinction, attributed to Donald Rumsfeld, who served as the Secretary of Defense in the cabinet of President George W. Bush. Thus, it is said that Rumsfeld distinguished between "known unknowns" and "unknown unknowns". Applying this to alleged Chinese violations of IP, one can view claims of misappropriation of patents, copyright and trade marks as "known unknowns." By this I mean that the object of the infringement could be identified (a CD, computer software and the like). The unknown was the extent to which rights holders could locate all of the infringing items and whether the Chinese administrative and judicial systems were enforcing these rights. As said, such infringement and enforcement is a "known unknown."

Much different is the situation of trade secrets and confidential information. By their nature, the very subject matter is difficult to objectify (as any lawyer who has ever tried to prepare a schedule covering trade secrets to an agreement). Thus not only is enforcement of the right in the realm of the "unknown", but so is the very object of the enforcement. Accordingly the claim is that, when trade secrets are involved, they are a form of "unknown unknown." Without the luxury of being easily able to objectify and identify the right, enforcement becomes that much more difficult.

Add to this that trade secrets are only uneasily recognized as a form of IP. (See Mark Lemley, "The Surprising Virtues of Treating Trade Secrets as IP Rights", here (SSRN version)). In that connection, I recall a recent meeting with a client who was seeking to make an investment. I was called upon to discuss the IP position of the target. I explained that the bulk of the company's IP was in the form of trade secrets. The client continued to look at me in a quizzical fashion, before he finally said—"So what you are telling me is that the company doesn't have much IP." In his view, IP did not include trade secrets. Add further to this that, when claims of trade secret misappropriation are intertwined with claims of mutual cyber-theft, the legal high ground that the US was able to take with respect to infringement of traditional IP disappears. Rhetorical ambiguity follows.

If, in fact, to the extent that the U.S. is altering its focus with respect to Chinese enforcement of foreign IP rights, by emphasizing trade secrets at the expense of patents, copyright, and trade marks, the challenge of making IP a compelling trade issue will be that much more difficult. Rumsfeld warned us about the difficulties of dealing with "unknown unknowns" in connection with defence and national security. The challenge may be no less daunting with respect to trade secret-driven IP.

Biotech Hopping at Wall Street and Biotech Patenting on an Upswing--More Patenting to Come?

The Wall Street Journal reports that there have been 16 biotech IPOs (it is unclear what is defined as biotech) since the beginning of this year raising over $1.1 billion.  (for more on venture capital backed IPOs generally see here)  To put that in context, in 2004 there were 25 IPOs bringing in close to $1.17 billion.  In the last ten years, at this point, this year would be tied for the second best year and the future looks bright for more biotech IPOs.  The Wall Street Journal also speculates that the rise in IPOs along with their general success is attributable to R&D and clinical trial successes.  For example, the article states that: “Last year, the Food and Drug Administration approved 39 new drugs, according to the agency, a figure not reached since 1997. This year, the agency has approved 13 new drugs.”  With the supposed dried up pipeline of Big Pharma, this is welcome news.  Also, the surge in IPOs with more funding may mean more money for patenting efforts in the biotech space with more investors looking to biotech.

On the patenting side, Nature Biotechnology’s Bioentreprenuer reports on statistics on biotech patenting provided by IP Checkups.  It is also unclear what is defined as “biotech,” but the numbers are interesting.  There is a general upswing in biotech patents granted since 2008 from 657 to 850 in 2012 in the United States.  Interestingly, the article also notes the average number of biotech patents by university.  (it is unclear whether these numbers are for granted patents or for patent applications—or full applications or provisional--but it is more likely applications or some of the other numbers don't add up).  If you add up the average number of patents per year between 2008 and 2012 for U.S. universities listed (not all U.S. universities apparently), you get around 880 patents in the United States per year.  The article also has the numbers for patenting at the EPO.  The patenting in the United States is quite a bit higher than the patenting at the EPO.  This could be, in part, because of cost.  Any opinions on the data?   

Will dreams come true for True Drinks?

The following piece is written by IP Finance team member Neil, but posted by Jeremy for purely technical reasons.

Trade mark professionals tend to have only a partial sense of the commercial role that trade marks play. Within the context of prosecution and registration, this perception is shaped by the bedrock legal proposition of the trade mark world, viz. that a trade mark is a source indicator. This is true, but approaching trade marks in this way is likely to miss the overall picture: how do trade marks work within the broader commercial setting?  For that reason, I was  intrigued by a UScompany called True Drinks, Inc. (a NASDAQ-listed company). True Drinks describes its company mission as helping parents make intelligent choices about the selection of beverages for their families (and especially their children). Think soft drinks without a harmful sweetener and containing no artificial ingredients, but appealing enough in taste and container appearance to attract the most demanding young consumer. As the company declares, "True Drinks is a natural healthy beverage company focused on improving the health and wellness of our lives…"

 Let's assume that the company has met this product challenge and that it has come up with a drink that meets these requirements.  Enter the cold blast of commercial reality. How does the company successfully distribute and market its products when shelf space is restricted and competition is fierce?  The company can sing its own praises on its website under "About Us", here, and it can hope that readers will find their way to their product ("build it and they will come").  Or it can seek to use trade marks, both their own and those of third parties, to get its message out in a compact and effective way.  It seems to me that True Drinks has done a fascinating job in carrying out a trade mark-based strategy.

Consider the company's home page, here. Splashed across the upper portion are moving images of the stylized trade marks (not simply the company name)  of Disney, Marvel (the comic book and media company acquired by Disney), Safeway (a major US grocery chain), Rite Aid (a leading U.S. pharmacy chain) and the one and only Walmart. Above these moving marks is graphics highlighting the company's flagship product—known as AquaBall, all of this under the company name itself (True Drinks). What do we learn from the use of this collection of trade marks?

First, take the company's name and house mark. True Drinks is a clever selection, just distinctive enough to take it out of the descriptive camp while at the same time sending the message that there is something "genuine and honest" about  the company's products. But  reliance on "True Drinks" on its own will not get the company shelf space and distribution clout: enter Disney and Marvel, which have agreed to license proprietary characters for use on the company's products (presumably these characters will change over time). The products now benefit from the widespread visual recognition that these characters enjoy (in a manner as, I think, Professor Jessica Litman coined the phrase—"Breakfast with Batman").

Not only that, but the stylized Disney and Marvel tradevmarks (not merely the word mark) are prominently splashed on the home page of the company's website, serving at least two marketing purposes. First,  the use of the marks signals that the Disney/Marvel brands are willing to be associated with True Drinks. Moreover, according to  CEO Lance Leonard in a recent Bloomberg radio interview, the company was selected as a licensee by Disney/Marvel precisely because the company has met their rigorous product standards. Disney/Marvel is not only about glitz, glamour  and excitement: it is also about trust. As we are often told, at the end of the day, a successful brand is one that inculcates consumer  trust in its products. While Disney/Marvel are not themselves the purveyor of the products, their association with True Drinks succeeds in conveying the coveted notion of trust to customers.

The company then seeks to exploit its distribution network for branding purposes. As Leonard noted,  unless a company such as True Drinks can succeed in distributing its product, it has no chance at commercial success. Based on the presence of the stylized Safeway, Rite Aid and Walmart marks on the website, the message sent to customers is that the True Drinks products can be purchased at all the right places.  Moreover, the company enjoys  positive association with  well-known third-party distributors.  The company also seeks to take advantage of the prior affiliations of its management, such as Nestle and Pepsico.  The message here is again one of trust, tinged with experience and the wisdom that comes with it. A "start up" of sorts, yes, but one with solid roots in its industry.

Against this backdrop, the company also attends to  the branding of its products, such as its naturally flavoured water drink product—which it calls AcquaBall. Disney/Marvell and Safeway/Rite Aid/Walmat can only take the company so far. Also, Disney/Marvel may not be around forever as a commercial partner and so the company needs to develop product goodwill on its own.

There we have it—the use of multiple marks, each of which serves a distinct role in sending a specific message to customers in furtherance of the company's overall branding goals. The very complexity of this branding structure shows just how difficult it is for a company to enter the drinks market successfully, even at a niche level. "Difficult', but not impossible.  

Royalties in publishing agreements: when expectation leads to litigation

In Morse v Eaglemoss Publications Ltd [2013] EWHC 1507 (Ch), a Chancery Division (England and Wales) decision of Mrs Justice Proudman last month, the judge who kickstarted the whole Meltwater controversy in the UK over internet browsing and copyright infringement (see various blog posts here and here) found herself once again dealing with a copyright-flavoured issue, this time involving royalties.

In short, Morse was claiming royalties from Eaglemoss, basing his claim on publishing agreements which concerned a series of illustrated wildlife publications for the Reader's Digest magazine. In effect, the agreements let Eaglemoss make use of Morse's published work, Wildlife in Britain, by packaging a series for licensed publication and mail order sale by Reader's Digest.

Morse's first contention was that there had been a binding contract even before the agreements had been entered into; this was rejected, even though the parties had been co-operating on the basis of trust and informality. Morse however had better luck with the publishing agreements themselves: on their correct construction there was a licence between the parties which entitled Morse to a proportion of the royalties in the strict sense -- but not to any elements of the fixed payments from the Reader's Digest to Eaglemoss. According to Proudman J, Eaglemoss was, on the true construction of the licence, entitled to deduct the  cost of paying third party owners of copyright in the pictures from these royalty payments, even though Morse was entitled to an account of the sums expended on them. Finally, the pleas of Morse that the agreements should be rectified for unilateral mistake or that Eaglemoss owed him fiduciary duties and should have disclosed that it would be receiving the fixed payments from Reader's Digest were also dismissed.

This is one of those curiously old-fashioned cases in which the judge actually had to decide the case on the facts before her, rather than engaging in detailed analyses of the legal principles involved.  If any moral can be extracted from this action, it is contained in the fact that, wherever money is expected by one party from another, it is best to concretise that expectation in clear and unassailable terms from the outset -- however embarrassing it may seem at the time.  Understandings and expectations based on trust and mutual respect are all very well, but in the long run they so often lead to tears.

Money for Nothing (?) and the IP for Free: Crowdfunding Science

Inside Higher Ed recently published an article about several entities with websites which allow crowdfunding for scientific research projects, most by academics, in Kickstarter style.  Here are a few: Petridish.org; Microryza.com; and Fundageek.com.   Do the funders obtain IP rights?  I suppose they could as an incentive for funding depending on the rules of the entity.  Although travelling with a researcher to Perumay be more fun!

Fundageek.com is thoughtful about protecting the IP of the submitters of research.  Here is a link to their IP site and they have a “special IP guidelines document” by Daniel L. Dawes.   Clearly, employers of researchers will want to know if they have researchers submitting proposals to these types of sites.

The Inside Higher Ed article also highlights the launch of the University of Virginia’s own crowdfunding site—great idea!  Here is the site.  And, they’ve already started getting funding!  Know of any other similar sites?

New service from Brandstrike targets internet losses

This blogger has just been informed of an interesting new service being offered by brand protection services Brandstrike. According to a media release from Brandstrike's Damian Croker:

Businesses frustrated with an inability to pinpoint websites responsible for revenue and reputation loss will get a helping hand this month as brand protection services company, Brandstrike launches its revolutionary Revenue and Reputation Risk Index™ (RRRI™). 

The patent pending technology behind Brandstrike’s RRR is the first of its kind to give rights holders the information they need to be able to focus on those websites that are actually causing real revenue and reputation loss. It transforms the current approach, which calls for a mass targeting of thousands of sites in the hope of catching the culprits in the net, with a seamless, integrated and speedy solution. 

Part of Brandstrike’s new IPCurator online brand protection solution, the ... RRI does all of the hard work for the rights holder, working out which infringing sites are getting the most traffic and then ranking them accordingly. It assigns a number to each website based on their search engine ranking results, making it possible to identify which infringing web sites are being visited by the largest number of consumers. This means enforcement resources can be appropriately and quickly directed at the offenders. 

Damian Croker, CEO of Brandstrike said: 

“... Counterfeiters that sell on the Internet have developed very good SEO skills and can register a domain name one week and be on the first page of a large search engine, such as Google, the next. Those counterfeiters are increasingly moving away from .com top-level domains (TLDs) and are now moving to country-code TLDs (ccTLDs) such as .co.uk, making monitoring and enforcement on generic TLDs (gTLDs), such as .com registrations, only a part of the challenge.” 

Performing a search using a local search engine does not reveal which websites are appearing in the search results of consumers in other countries, because search results are specific to the geography of the searcher.  Therefore, the counterfeit web sites that a brand owner is able to remove or force to a lower rank on a given search engine are not necessarily the ones causing lost revenue and reputation in other parts of the world. 

Current online brand protection solutions are mostly based on ranking engines, such as Alexa, coupled with search results from a single search engine such as Google.  Some might employ algorithms that include other factors, but until Brandstrike’s RRRI, none could accurately identify which websites are receiving the most visitors around the world and are therefore the ones causing the most revenue and reputation loss....

The basic idea sounds logical enough, but it will be even better when we can get some examples of actual or estimated savings. And will the those targeted be able to take steps to avoid or mitigate its effectiveness?  IP Finance will watch with interest.

Federal Trade Commission to Seek Information about “Patent Trolls”

The White House continues to move against the “patent trolls”.  The chairwoman of the Federal Trade Commission (FTC), Edith Ramirez, announced that the FTC would gather information concerning “patent trolls” and their practices.   Back in April, Google, Blackberry, Red Hat and Earthlink (collectively, Google) submitted comments to the FTC and Department of Justice requesting the inquiry.  In the comments, Google provided some potential questions for “trolls”:

How prevalent is outsourcing of patent enforcement by operating companies to PAEs?

What types of arrangement have PAEs and operating companies consummated? 

What motivates these arrangements?

What are the likely competitive harms and benefits of outsourcing?

What are the competitive implications of the secrecy with which many PAEs conduct their operations?

Do the particular terms of outsourcing arrangements indicate that operating companies are employing PAE proxies as competitive weapons?

The comments are well worth a read.  From the reports on the chairwoman’s comments (unfortunately, I could not find a copy of the comments--if you have access to them, please let me know and I'll post them), it appears that the inquiry may be broader than the questions posed by Google, but it appears those questions will be addressed (here, here, here and here).  More information about "patent trolls" and their practices is welcome.  The National Retail Federation, the Food Marketing Institute and the National Restaurant Association announced they are supportive of the FTC’s efforts.