What are we to make of the Defensive Patent Licence?

Why has discussion on the patent troll phenomenon taken on a bit of a true-believer tone? A case in point is a recent posting on the Cyber-Prof listserv, which is captioned "Private-Ordering Approaches to Patent System Issues-and Defensive Patent License Launch - Conference". It is authored by Jennifer Urban, here, who is the Assistant Clinical Professor of Law and Co-Director, Samuelson Law, Technology & Public Policy Clinic at the University of California-Berkeley. Let me bring the readers material portions of the post accompanying this notice.

“The current patent system poses a growing threat to innovators. Broad patents of often suspect quality can cripple legitimate competitors and prevent new entrants’ access to the marketplace. Patent trolls buy these broad patents and use them to threaten everyone from large companies to start-ups to municipalities and non-profits.

The DPL Launch Conference will focus on innovative private-ordering solutions to address the patent threat issue. These solutions can go hand-in-hand with congressional or judicial reforms. … The conference will then feature and officially launch the Defensive Patent License (“DPL”). The DPL is a new legal mechanism designed to protect innovators by networking patents into powerful, mutually beneficial legal shields that are 100% committed to defending innovation and reducing patent litigation abuse....

Innovators who opt into the DPL network pledge to forgo any patent litigation against any other DPL user, except when asserting patents defensively. In return, they are eligible to receive royalty-free licenses from every other user’s portfolio. Anyone taking a license must promise to put all of her patents under the DPL. In the event that the patents are sold, DPL users must legally obligate the new owner to abide by prior DPLs. If one ceases offering one’s patents under the DPL, previous licensees keep their DPLs royalty-free, but the leaving user may have her licenses converted from royalty-free to fair, reasonable, and non-discriminatory terms (FRAND) at the discretion of the remaining licensors.

With a broad strong network of reliably defensive patents at their disposal, DPL users gain freedom to innovate. The DPL is also designed to help limit lawsuit risks from patent trolls, as trolls are unlikely to pursue acquisition and enforcement of patents that have been legally obligated to defensive use and licensed to DPL users on a royalty-free basis.”

Let’s assume that this summary represents a short-form manifesto of the current world-view that underlies the DPL initiative. On that basis, I have several questions and comments:

1. What is the empirical evidence for the assertion that “[t]he current patent system poses a growing threat to innovators”, which “cripple[s] legitimate competitors and prevent new entrants’ access to the marketplace.” Patents have always been exclusionary, which is inherent in the nature of a patent as a negative right. What is different this time? The claim seems to rest on the view that there has been a “decline” in innovation. Maybe yes, maybe no, depending upon how one defines innovation, develops a metric for measuring whether innovation is roughly increasing or decreasing, and then can successfully disentangle the ebb and flow of innovation within a normal statistical range from a statistically significant departure from this range. While there has been some empirical research in this regard, to conclude that the patent system is a “threat” to innovation seems at best premature and at worst a bit overwrought.

2. Public patent enemy number one is “broad patents of often suspect quality”, which are then exploited by the patent troll. Here, as well, I am not certain that the research is as clear as suggested. Indeed, I have encountered claims that patent trolls actually make use of patents of reasonable quality. This is assuming, of course, that it is even possible to measure patent quality objectively and point to a decline, at least in some areas, over time. The iconic words about the decline of the youth generation, as taken from the Broadway musical of a half a century ago, “Bye Bye Birdie”, here, merits attention. “Why can’t they be like we were, perfect in every way. What’s the matter with kids [read patents] today.” Perhaps we are imaging a patent past perfect that never was.

3. The connection between patents and innovation is highly nuanced and not entirely understood. As I recently suggested elsewhere, in “The Misplaced Patent Narrative”, here, there may be swathes of innovative activity for which the patent system is of limited relevance. But even if we are talking about inventions (after all, patents are about invention, which is a legal notion, and not about innovation, which is beyond the legal IP pale), something more profound may be taking place in the intellectual IP environment. Thus, if we are speaking of ebbs and flows, what may be occurring is a broader intellectual return to the anti-patent ethos that was present from the post-WWII era through the 1970s (though patents were then seen more as threats to competition to innovation). That patents fall in and out of intellectual favour may be cyclical and correspond to rises and declines in innovation (without any necessary causal connection between the two phenomena).

4. There is a sense that enforcing one’s patent borders on being an “illegitimate” use of the patent right (except for “defensive” purposes, whatever that precisely means). Indeed, the DPL seems to rest on the notion of patent altruism: that it's better to “pool” patents as a collective shield in the name of innovation than for a patentee to assert its patents against a competitor, or for an inventor to seek to monetize his invention by whatever legal means that are available. Whether such an altruistically communal view of the use of patents will in fact lead to “more” innovation” is hardly self-evident and may even be misplaced. I suggest that the DPL supporters take a close look at the kibbutz experience in Israel, here, for an illuminating example of the limits on any experiment resting on communal goodwill in the face of individual self-interest.

5. The ability of an arrangement for the defensive aggregation of patents, such as in the DPL framework, to reduce patent troll activity, also needs to be empirically established. The theory seems to be that such aggregation will serve to dry up the potential pool for patent troll-exploitable patents. Here, as well, maybe yes, maybe no. Ultimately, whether this will come to pass will depend upon whether the type of patent and patentee that seeks the services of a patent troll will be likely to enter into a DPL arrangement. Much more research is required on this point.

Don’t get me wrong. My critique is not directed at Professor Urban, who is affiliated with one of the great universities/law schools/centres of innovation in the world. My reservations rest on whether we really know enough about the connection between innovation, inventions, the patent system, altruism and collective behaviour to consider “innovative private-ordering solutions to address the patent threat issue … [that] can hand-in hand with congressional or judicial systems.” Perhaps a larger dose of humility, at least for the present, might be in order.

More on the Defensive Patent Licence and the February 2014 conference here

How the Government Can Save Money: Pirate Software

The Washington Post reported that the U.S. Army recently was sued for copyright infringement by breaching a license agreement for software—which the U.S. Army apparently did.  Okay, so that is government not at its best.  The silver lining for the U.S. Army is that the copyright owner settled for $50 million--$130 million less than it would have cost the government to license the software.   The silver lining for the copyright owner is an unexpected check for $50 million and, I would hope, a lot more business.  The nice message for the rest of us is that the U.S. government can hire folks that can create software that works well. 

Here is a portion of the complaint:

In March 2009, Apptricity inadvertently learned that the Army may have been using more Apptricity software than that for which it had procured licenses.   Apptricity employees attended a PD TIS Strategic Capabilities Planning Meeting held March 3-5, 2009 in Richmond, Virginia, where the U.S. Army Program Director stated that the Army was deploying thousands of devices with the Apptricity software.

Anyone need an auditor?

WIPO GREEN marketplace open for business

If you are concerned about how to commercialise a green technology, or about what sort of impact someone else's green technology might have on your business, you may want to take a look at the World Intellectual Property Organization's WIPO GREEN database and online marketplace.  It won't solve any of your legal problems, but it will give you a better idea of what's going on in areas in which you (or your client) may be involved.  Details are available from yesterday's WIPO media release that reads as follows:

WIPO GREEN: New Online Marketplace Seeks Environmentally Sustainable Solutions for Climate Change 

Geneva, November 28, 2013: PR/2013/749 

WIPO launched today a new online marketplace connecting a wide variety of groups seeking shared innovation and environmentally friendly technologies to address climate change.
The WIPO GREEN database and network matches owners of new technologies with individuals or companies seeking to commercialize, license or otherwise distribute a green technology. Its objective is to accelerate innovation and diffusion of green technologies and contribute to the efforts of developing countries in addressing climate change. 

This blogger wonders how long it will be before the issues faced by the ICT sector with regard to standard-setting and FRAND licences are endemic in the green technology sector too.  A big difference there is that the perceived public interest in getting businesses to use green technologies may have an impact on both the rate of royalties that a court regards as reasonable and the exercise of discretion in granting injunctive relief.  Thoughts, anyone?

Aspiration versus reality: a perspective on Scottish plans for business-friendliness

From the excellent Dr Andreas Rahmatian (Senior Lecturer, School of Law, University of Glasgow) comes the following observation:

I have started looking through the "White Paper" ("Scotland's Future. Your Guide to an Independent Scotland") on Scottish Independence which was published yesterday. It is, of course, not a White Paper, but a manifesto of the Scottish National Party (SNP) to promote independence of Scotland. Many sections are quite eerie for somebody with some knowledge of political philosophy and modern European history, not only because what it says, but also because what it leaves out.

In that document I have come across the following passage at page 102. It says:

"Intellectual property

We will ensure continuity of the legal framework for protecting intellectual property rights. Independence will also allow Scotland to offer a simpler and cheaper, more business-friendly model than the current UK system, which is bureaucratic and expensive, especially for small firms. The UK is one of the few EU countries which does not offer a scheme which covers the basics of protection. Scotland could follow, for example, the German model which protects technical innovations."

Can anybody explain to me what that means? Judicious answers are appreciated.

This blogger will start the debate.

On a simple level, the meaning of the words is clear: "Let's introduce a cheap system of second-tier legal protection for innovations that are technical because it is cheaper and more business-friendly than an IP system that lacks such a scheme". However, what it means is not just a question of parsing a verbal formula: there is a real-world dimension to it too.  What does this paragraph mean within the context of attracting innovative businesses to Scotland or inducing them not to leave that country? What does it mean in the context of a former manufacturing powerhouse that is now, like many of the first wave of industrially competent countries, now in a profoundly post-industrial phase?  What does "business-friendly" mean in a context in which, where one business is able to secure a right that is cheap to acquire and awkward to dislodge, any number of businesses that compete with it are deprived of part of their freedom to operate. The high aspirations contained in the quoted paragraph are laudable in themselves, but what they mean at ground level, to innovators, manufacturers, distributors and consumers, is what counts.

Liens over electronic data: Court of Appeal to rule

Via the PLC subscription service comes information concerning a 4 October 2013 ruling of the Court of Appeal, England and Wales, Your Response Ltd v Datateam Business Media Ltd [2013] EWCA Civ 1468, on an issue of considerable importance. The Court gave leave to appeal from a County Court judgment in which a counterclaim against a database maintenance service provider was dismissed and the defendant, a former customer, was ordered to pay money due to the provider under outstanding invoices. The proceedings were based on a service provision contract and arose partly from a dispute over the length of the notice period that had to be given to terminate the agreement.

Of particular interest is the comment of Lady Justice Arden that one issue that was worthy of further consideration by the court was whether a service provider can claim a lien over electronic data which it manages for a client. As yet there is no authority to the effect that a lien was exercisable over intangible property.

This blogger suspects that this issue will already have been considered in the United States, and wonders if our US readers can shed any light on the theory and practice of liens over electronic data.

Film funding in Europe: a new Communication

If only ...

The European Commission has now adopted a new Communication on state aid for films and other audiovisual works, to replace the Communication from the Commission to the Council, the European Parliament, the Economic and Social Committee and the Committee of the Regions on certain legal aspects relating to cinematographic and other audiovisual works (here).

The 2013 version updates the 2001 Cinema Communication by extending the scope of activities which it covers, introducing a higher maximum aid intensity level for cross-border productions and providing for the protection of and access to film heritage. A more digital-friendly, document, it also revises the rules relating to the imposition of territorial spending obligations, while continuing to allow such obligations to be imposed. The new Communication is now in force, having been published in the Official Journal.

Source: European Commission press release here.

Banking on IP? Full report now available

Thanks to Kelvin King (Valuation Consulting Co Ltd, London), we now have a link to the full and unexpurgated version of Banking on IP? The role of intellectual property and intangible assets in facilitating business finance. This is the Final report and it runs to just over 220 pages. You can check it out here. This very thorough and surprisingly readable report was commissioned from Kelvin King and Martin Brassell (Inngot) by the UK's Intellectual Property Office. The report concludes with 10 recommendations, which are worth reproducing below:

1. IP and intangibles must be identified during the financing process

If IP and intangibles are to be given any consideration within credit decision-making, tools to identify and describe the actual assets (not merely evidence of expenditure) need to be embedded within the lending process. Businesses must use them, and lenders must understand and take note of them.

This step will have the wider benefit of boosting IP awareness amongst the business community as a whole and will establish base data for the possible future use of IP as ‘full’ security.

The first steps are to provide a means for companies to identify the assets they own, and to build information on IP and intangibles into the templates companies use when presenting information to prospective funders.

2. The value in IP needs to be taken into account

Whilst immature markets mean that disposal of IP for value is not always straightforward, the most important step in harnessing IP is to acknowledge that its business value is not nil, and therefore requires active consideration within lending and investment decisions.

Robust approaches to determine the value of intangibles exist in the same way as for tangible property and are now included alongside them within the Royal Institute of Chartered Surveyors’ Red Book, regarded as a banking industry reference point.

The obstacle that must be addressed here is to demonstrate, reliably and repeatedly, how an SME’s ‘real’ IP and intangibles may deliver value which bears no relation to anything that may be called an intangible on their balance sheet; this generally only shows a sunk cost.

3. Due diligence guidelines can help to control costs

IP and intangibles that are worth something are, by definition, unique. Because the assets are not commodities, checks will be needed to create confidence that the ownership and quality of the IP and intangibles are understood, that they contribute to cashflow (particularly in the case of debt finance), and that their maturity is in line with what it would be reasonable to expect, given the development stage of the business.

These checks are unfamiliar to most lenders: investors are more practised at them, but it is clear that they too face challenges in obtaining and assessing appropriate data.

Guidelines will involve providing templates, training and/or access to professional advice at a cost lending margins can support, within a turnaround time that meets business requirements.

4. More effective charges should be part of the lending package

Once IP and intangibles are captured, assessed and verified, it becomes possible to create a proper and meaningful interest over them, beyond a simple floating charge. This is not happening at present; there is no real notice of these charges, leaving many lenders exposed to unnecessary risk.

Proper controls are an essential precondition if lenders are to place any reliance on the value inherent in IP and intangibles – which in turn benefits the borrower.

Legal templates and the resource toolkit will help lenders to achieve this at modest cost, firstly by providing appropriate wording for the instruments, and secondly by providing guidance on the procedures which must be followed when recording them to ensure their effectiveness.

5. IP markets and IP financing could be facilitated through infrastructure improvements

The development most likely to transform IP and intangibles as an asset class is the emergence of more transparent and accessible marketplaces where they can be traded. This is a domain where services must stand or fall on their commercial merits; however, the available infrastructure needs to support rather than impede their establishment. A parallel lies in the way value has been added, cost reduced and enforcement activity enhanced across a range of motoring-related services by facilitating access to data held by the Driver and Vehicle Licensing Agency.

As IP and intangibles become more clearly identified and are more freely licensed, bought and sold (together with or separate to the business), services available to register and track financial interests will need to be improved.

This is not a job for government - but solutions will require the co-operation of official registries and the establishment of administrative protocols.

6. On-going management of IP and intangibles should also be supported

IP does not stop being important once credit is granted. Despite being long established, the asset class is unfamiliar in the lending context. Businesses need to understand how to use and protect it so that risk is reduced. Financiers, too, will require assistance in motivating and monitoring appropriate activity; as examples, there could be a role for the introduction of ‘milestones’ within payment schedules (as commonly used in equity and venture debt) and periodic impairment tests.

The proposed toolkit needs to include measures to inform and encourage SMEs to adopt appropriate IP management practices.

7. Affordable risk mitigation strategies ae to be encouraged

Alongside certain guarantees, access to appropriate insurance policies to guard against unforeseen events could greatly increase banking confidence in adding further weight to IP and intangibles within the lending decision. Evidence provided to this report indicates there is private sector appetite to provide these solutions, if lenders are willing to create the demand.

More detailed dialogue on the requirements of both lenders and insurers is urgently required, to ensure that commercial sector activity is able to provide workable and affordable solutions.

8. Asset-based finance techniques should be adapted for IP and intangibles

Recent financial upheavals have triggered something of a return to first principles in lending and a greater emphasis on assets for business finance (reflected, for example, in ‘challenger’ bank activity). This greater emphasis on assets needs to be extended to include IP.

Alongside mainstream lending, where EFG is an obvious area of focus, asset-based and alternative financing methods should be prioritised for IP-backed finance interventions; these are the parts of the industry most accustomed to understanding and assessing individual assets and their value.

9. Steps to stimulate private investment need closer study

IP rights can be well suited to securitisation (patents, trade marks, registered designs and copyright portfolios). Given the successful track record of venture debt, more work is needed to understand onshore and offshore fund appetite to support investment in IP-rich companies, working with managers that have the necessary expertise.

This work fell outside the scope of the current IP and finance project, but is clearly desirable as a follow-up stage.

10. IP demands joined-up thinking

The Intellectual Property Office exists “to promote innovation by providing a clear, accessible and widely understood IP system, which enables the economy and society to benefit from knowledge and ideas”. It therefore has an important role to play in scrutinising Government and finance industry initiatives to boost lending, to ensure that the assets produced by knowledge receive appropriate consideration.

As usual, readers' thoughts and comments are warmly welcomed.