IP in IT

FOCUS SESSION

Swapna Sundar, CEO, IP DOME

2 categories of computer software

(vis à vis ownership, use patterns and possibilities,

and IPimplications)

(a) Proprietary software: owned as private property by

a company or individual software developer

(b) FLOSS (Free / Libre / Open Source Software)

1. Free Software2.Open Source Software.

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Proprietary software licensed under End User License

Agreement.

• cannot be copied, shared, modified, redistributed,

or reverse engineered by other software

developers or users.

• Their business model permits use of the software

on only 1 computer and/or require extra fees for

each additional computer or work station

Recommend application programmes which are

compatible with the code found in the operating system.

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FLOSS• users must have open access to the source code

over which no ownership is exercised

Free software (Copyleft Principle)

Use the software however they wish

fit it to their needs

Redistribute it to other users for free, or at a

charge, not fixed beforehand, who could themselves

use it according to their own needs.

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Open Source Initiative (OSI) principles:

1. No royalty or other fee

2. Availability of the source code.

3. Right to modify and create derivative works.

4. May require modified versions to be distributed as

the original version plus patches.

7. All rights granted must flow through to/with

redistributed versions.

8. The license applies to the program as a whole and

each of its components.

9. The license permits the distribution of open source

and closed source software together.

OS allows ownership of contribution.11/25/2012 (c) swapna sundar, 2012 5

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Do You Want an Open Source License At All?

When you release s/w under OSS, you have no control over who get to use it or how it is used. Even if you sell it, your customer can redistribute it.

Do you want to give the right to proprietary forks - an new line of development, independent of your own efforts. Not permitted under GPL

Do you have to keep track of who is using the s/w for license fee?

Is the license you are currently using compatible with the OSS you want?

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Do you want contributors? Then you must pick a recognizable license.

You can write your own license too.

Do you want to make a lot of money from a small pool of users?

ISSUES

Difficult to say what is a derivative work

s/w once released under OSS license cannot be taken back even though © belongs to you

Attribution notices must be meticulously followed

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JACOBSEN Vs. KATZER

Robert Jacobsen is a member of the Java Model Railroad Interface (JMRI) Project, and Matthew Katzer, is the owner of a proprietary vendor of model train software called KAMIND associates.

Katzer incorporated code written by Jacobsen into Katzer's software, and deleted the copyright notices included in that software in the process. From the F/OSS perspective, one of the most important questions involved whether a developer of software that made its code available for free - which, like most open source projects the JMRI Project did - can collect damages for copyright infringement.

F/OSS licences include obligation of a commercial developer to "give back" its own changes to the code for the benefit of others and an obligation to acknowledge the authorship of those that had created the earlier code.

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The court found in favour of Jacobsen on three key points:

1. The code in question was sufficiently original to be entitled to copyright protection. While not unique to F/OSS code, this was a legal issue on which Jacobsen had to prevail in order to assert claims under copyright law.

2. While the JMRI Project made its code available for free, there was "evidence in the record attributing a monetary value for the actual work performed by the contributors to the JMRI project," thus laying the basis for monetary damages.

3. The removal of the copyright and authorship data contained in the pirated code was a violation of the Digital Millennium Copyright Act, thus providing a basis for suit for that action in violation of the JMRI license.

Katzer settled paying Jacobsen US$100,000. 11/25/2012 (c) swapna sundar, 2012 10

Layout designs (topographies) of integrated circuits are protected under sui generis Law. India has the Semiconductor Integrated Circuits Layout Design Act, 2000 to project unique novel and original Semiconductor Integrated Circuit. Term: 10 years from date of filing or date of first exploitation(two years).

Defined as a product having transistors and other circuitry elements, which are inseparably formed on a semiconductor material or an insulating material or inside the semiconductor material and designed to perform an electronic circuitry function.

Semiconductor intellectual property core, or IP block - a reusable unit of logic, cell, or chip layout design may be licensed to another party or can be owned and used by a single party alone.

There are also providers of open source cores. OpenCores.org offers a wide variety of designs.

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A database right is considered to be a property right in EU and UK, comparable to but distinct from copyright, to recognise the investment made in compiling a database, even when this does not involve the 'creative' aspect. TERM: 15 years.

Protection for databases in India which provided under the traditional copyright regime which includes under section 2 (o) …compilations including computer databases. Term: 60 years

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In India, a person is entitled to a patent if

1. He is the owner of the invention2. the invention is the proper subject matter for a patent, and 3. the invention is "useful", "new", and “inventive“4. The invention should not have been published with some narrow exceptions

In India, s/w per se is not a patentable subject matter

In re Bilsky: "the invention is not implemented on a specific apparatus and merely manipulates [an] abstract idea and solves a purely mathematical problem without any limitation to a practical application, therefore, the invention is not directed to the technological arts."

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- Mathematical algorithms

- Algorithms that are expressed as mathematical formulas

- algorithms which appear to replicate human decision-making skills

Computer algorithms unrelated to mathematics

Computer algorithms that pertain to the operations of the hardware

or apparatus that use computer programs as a component

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Software copyright is not essentially different from any other sort of copyright. Specifically, it is unlawful for anyone other than the owner of the rights to run the program, copy the program, modify the program or distribute the program, except with the permission of the rights owner.

No registration, copyright notice, or other such formality is needed to establish copyright. Copyright protection is automatic.

Copyright protects only the computer program itself, and not the ideas behind the program. That is to say, it is perfectly permissible to take a computer program written by someone else, and write another that does the same thing.

Ownership: Employer/Programmer; Moral rights: Programmer

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Wholly unlicensed use: for example, copying a piece of software from a friend, or over the Internet, etc., where the licence for the software does not explicitly permit this.

Overuse: for example, buying a piece of software licensed for one computer, and installing it on two.

Failure to have a licence assigned, or to relicense: if you acquire hardware second-hand, this does not necessarily transfer all software licenses, and you must take steps to ensure that your use is lawful.

Shareware abuse: where software is licensed "for evaluation purposes only" or the like, it is copyright infringement to exceed these terms.

Obtaining software fraudulently: for example, getting a reduced rate by pretending that your business is a educational institution.11/25/2012 (c) swapna sundar, 2012 16

"Warez" copyright infringement: making warez copies, running warez sites, and the people who download and use warez copies are all copyright infringers.

Illicit "special offers" from hardware vendors: a hardware vendor sells a computer with unlicensed software installed.

Making an unlawful copy of software on a burnable CD-ROM, or the like, for the purpose of giving it to someone else. Making a back-up copy is usually lawful.

Counterfeiting: this is the making of unlawful copies of software on burnable CD-ROM, or the like, on a commercial scale, and having them sold under the pretence that they are lawful copies (by putting them in deceptive packaging, etc.)

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Lockheed Martin forced Turbo Squid a 3D graphics stock image site to remove 3D illustrations of World War II bomber aircrafts on the grounds that it infringed their copyright and Trademark. What do you think?

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Use of HEAVY DESIGN ELEMENTS SUCH AS FLASH PRESENTATIONS slow loading of a website. If a visitor to your site has to wait between 5 and 15 seconds for a page to load, they are more likely to leave.

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Law

MarketLab

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technological knowledge

Organisation 1 Organisation 2

GoodsAnimal organismsPeopleOrganisationTechnical docstraining

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technological knowledge

Organisation 1 Organisation 2

GoodsAnimal organismsPeopleOrganisationTechnical docstraining

ROYALTY (agreed payment or fee)

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Rs.

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© Linda Katehi, University of California, 201011/25/2012 (c) swapna sundar, 2012 31

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IP IMPACT OF VALUATION TRANSLATION

PATENT Lose value over time Sustainable competitiveadvantage

TRADEMARKS Gain value over time Sustainable market advantage

TRADESECRETS Gain value over time Limits probability of derivation

COPYRIGHTS Lose value over time Allow derivation of technology

PLANT BREEDERS RIGHTS Lose value over time Sustainable competitive advantage

GEOGRAPHICAL INDICATION Gain value over time Sustainable market advantage

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The Valuation Purpose refers to the primary usage of the valuation analysis.

Transaction Strategy: A strategic purpose for valuing IP is when one is considering buying, selling, or transferring the asset in a licensing arrangement or acquisition. Usually, the transaction strategy end-purpose is a ‘go versus no go’ recommendation. That is, at what price am I willing to enter into this proposed transaction?

Financial Reporting: Valuing IP and other prescribed intangible assets for reporting on public financial statements. The end deliverable is usually a report specifying the value and change in value of the subject assets.

Litigation: A high-profile purpose of intellectual property valuation is to compute damage awards in an infringement lawsuit.

Bankruptcy: During a corporate bankruptcy and reorganization, often the most valuable assets remaining are IP-related. Valuation is required by the Bankruptcy Court to properly dispose of the assets and reorganize the company, if necessary.

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The Foundation of IP valuation analysis consists of four building blocks, each with an associated question:•Purpose – Why are we valuing the asset?•Description – What is the asset?•Premise – How will the asset be used?•Standard – Who is the assumed buyer of the asset?

1. For instance, a litigation matter requires complete and thorough documentation whereas for a technology transfer valuation, a lower level of documentation will suffice, generally.

2. understanding these foundational questions will ensure that the valuation will address all relevant considerations.

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Methods for the Valuation of Intangibles

- market based, - cost based, or - based on estimates of past and future economic benefits.

Challenges in determining market value: the search for a comparable market transaction becomes almost futile.

This is not only due to lack of compatibility,

sales are usually only a small part of a larger transaction and details are kept extremely confidential.

There are other impediments that limit the usefulness of this method, namely, special purchasers, different negotiating skills, and the distorting effects of the peaks and troughs of economic cycles. Cost-based methodologies, such as the “cost to create” or the “cost to replace” a given asset, assume that there is some relationship between cost and value and the approach has very little to commend itself other than ease of use. The method ignores changes in the time value of money and ignores maintenance.

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The methods of valuation flowing from an estimate of past and future economic benefits/income methods

1. The capitalization of historic profits arrives at the value of IPR’s by multiplying the maintainable historic profitability of the asset by a multiple arrived at after assessing a brand in the light of factors such as leadership, stability, market share, internationality, trend of profitability, marketing and advertising support and protection. This capitalization process pays little regard to the future.

2. Gross profit differential methods are often associated with trade mark and brand valuation. These methods look at the differences in sale prices, adjusted for differences in marketing costs. That is the difference between the margin of the branded and/or patented product and an unbranded or generic product.

3. The excess profits method looks at the current value of the net tangible assets employed as the benchmark for an estimated rate of return. This is used to calculate the profits that are required in order to induce investors to invest into those net tangible assets. Any return over and above those profits required in order to induce investment is considered to be the excess return attributable to the IPRs.

4. Relief from royalty considers what the purchaser could afford, or would be willing to pay, for a licence of similar IPR. The royalty stream is then capitalized reflecting the risk and return relationship of investing in the asset.

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Discounted cash flow (“DCF”) analysis sits across the last three methodologies and is probably the most comprehensive of appraisal techniques. Potential profits and cash flows need to be assessed carefully and then restated to present value through use of a discount rate, or rates. DCF mathematical modelling allows for the fact that 1 Rupee in your pocket today is worth more than 1 Rupee next year. The time value of money is calculated by adjusting expected future returns to today’s monetary values using a discount rate. The discount rate is used to calculate economic value and includes compensation for risk and for expected rates of inflation.The operating environment of the asset is to be considered to determine the potential for market revenue growth. The projection of market revenues will be a critical step in the valuation. The potential will need to be assessed by reference to the enduring nature of the asset, and its marketability, and this must subsume consideration of expenses together with an estimate of residual value or terminal value, if any. The discount rate to be applied to the cashflows can be derived from a number of different models, including common sense, build-up method, dividend growth models and the Capital Asset Pricing Model utilising a weighted average cost of capital. The latter will probably be the preferred option.

These processes must quantify remaining useful life and decay rates: physical, functional, technological, economic and legal. It is often not credible to forecast beyond say 4 to 5 years. When undertaking an IPR valuation, the context is all-important, and the valuer will need to take it into consideration to assign a realistic value to the asset.

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IP STRATEGY ADVISORS

At the intersection of the Law, the Lab and the Market

No. 7/8 Flowers III Lane

Chennai 600084

Phone: 0091 44 26430474

Mobile: 09841282396

Email: swapna@ipdome.in

www.ipdome.in

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