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JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL

les Nouvellesles NouvellesVolume XLVI No. 2 June 2011


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Advancing the Business of Intellectual Property Globally

Socially Responsible Licensing Of Health Technologies: Policy And Practice In South Africa

Rabogajane busang, KaRine boisjoly-letouRneau, beRnaRd FouRie, Michelle MuldeR, and haRRy thangaRaj — Page 69

Propagating Green Technology: A Japan Intellectual Property Association Proposal

naoto Kuji and cynthia cannady — Page 78

Patent Application Prioritization And Resource Allocation StrategyKelce s. Wilson and claudia tapia gaRcia — Page 87

Profit And Common Good: Friend Or Foe In Technology Transfer?luKas Madl — Page 92

Intangible Assets Valuation By License Market And Stock Market:Cross-Industry Analysis Based On Royalty Rate And Tobin’s Q

jiaqing lu — 00

The Technological Comparability Of Patent License Agreementsjohn elMoRe — Page 115

You Can’t Push A Rope Or Legislate Innovation, So What Has Bayh-Dole Done For Me Lately?

daniel i. jaMison iV — Page 122

Invention Licensing Agreement: Belarusian VersiondaRya lando and VeRaniKa shypitsa — Page 130

The Continued Evolution Of Patent Damages LawchRis baRRy, alex johnston, Ronen aRad, daVid stainbacK,

landan ansell and MiKe aRnold — Page 134

Rules Of The Road: Valuing Commercialized Software-Based TechnologydaVid dReWs and dWight olson — Page 145

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June 2011 69

Health Technologies: South Africa

Socially Responsible Licensing Of Health Technologies: Policy And Practice In South AfricaBy Rabogajane Busang, Karine Boisjoly-Letourneau, Bernard Fourie, Michelle Mulder, and Harry Thangaraj

Introductionhe objectives of Socially Responsible Licensing (SRL) are mainly to ensure that licensing of intellectual assets is negotiated and transacted

in a manner conducive to providing access to essential medicines and other life enhancing innovations. The goals of SRL are to make available to society globally, but in particular to developing countries, such tech-nologies at affordable prices1 and to make proprietary research tools widely available for the advancement of knowledge. This can be achieved by adopting licensing practices which add a dimension of social responsibility to the pursuit of economic objectives, without necessarily compromising the latter. This approach does not affect business transactions in developed countries where significant profits can still be achieved2 but ensures access for the least developed countries, which are often disregarded in commercialization strategies due to perceived low profitability.

Although SRL has been a topic of discussion in many publications and seminars, there has been very little practical implementation in most of the developing countries to date and SRL remains largely a theoretical issue. This paper seeks to pro-vide background on recent developments in South Africa relating to SRL practices, specifically the newly enacted legislation on intellectual property (IP) emanating from publicly funded research, and some practical South African case studies showing how SRL strategies can be implemented to address health needs in developing countries.The Need for Socially Responsible Licensing

The benefits of socially responsible licensing have

been extensively discussed in the literature. By in-cluding SRL clauses in an agreement, the IP owner will ensure that the license does not impede public access to essential technologies, such as health technologies, agricultural technologies, “green” or “renewable” tech-nologies with local and global environmental benefits, etc., and that the transactions lead to a lasting social ben-efit. IP owners should ensure that their licens-ing policy and practices promote access to es-sential healthcare tech-nologies for developing countries. Countries with financial and in-tellectual resources should help those that are relatively resource poor. From a moral and ethical perspec-tive, publicly funded and non-profit organi-zations need to ensure that their proprietary knowledge benefits underprivileged popu-lations, since support derives from generous taxpayer contributions and philanthropic fund-ing, unlike shareholder driven imperatives in the corporate sector. SRL practices will also contribute significantly to the alleviation of the burden of disease in the developing countries, especially with regard to neglected diseases. There are many more benefits of SRL and in-

T

1. Mimura Carol, Technology Licensing For The Benefit Of The Developing World: Uc Berkeley’s Socially Responsible Licens-ing Program, p.16. Online: http://www.autm.net/AM/Template.cfm?Section=Global_Health&Template=/CM/ContentDisplay.cfm&ContentID=3718.

2. Yale has earned between 1994 and 2000 over $261mil-lion in royalties from Zerit® sales, DEMENET Philippe, The High Cost of Living. Online: Le Monde Diplomatic http://mondediplo.com/2002/02/04stavudine.

■ Rabogajane Busang, South African Medical Research Council, Division Manager, Technology Transfer Cape Town, South Africa E-mail: [email protected]

■ Karine Boisjoly-Letourneau, Université de Sherbrooke, Sherbrooke, Québec, Canada E-mail: [email protected]

■ Dr. Bernard Fourie, Medicine in Need South Africa (Pty) Ltd., Director of Medicine, Pretoria, South Africa E-mail: [email protected]

■ Michelle Mulder, South African Medical Research Council, Manager IP and Business Development, Cape Town, South Africa E-mail: [email protected]

■ Dr. Harry Thangaraj, Infections and Immunity Research Centre, St George’s University London, London, United Kingdom E-mail: [email protected]

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stitutions need to start adopting SRL practices as part of standard licensing policy and practice. Background on Socially Responsible Licensing

The need for facilitated access to essential medi-cines for developing countries has not always been prioritized by university licensing practices. Prior to the Zerit® case, the main objective when licensing new technologies was the pursuit of profit. Since the Zerit® case, much attention has been directed towards the impact of exclusive licensing on access to the products of university research, particularly in the medical field.

In 2001 Médecins Sans Frontiers (MSF) approached Yale University, the owners of the patent relating to the drug Zerit® (stavudine), a drug which forms part of the “triple cocktail” effective in the treatment of HIV/AIDS, and asked if they would allow generic ver-sions of the drug to be imported into South Africa to provide treatment free of charge to people living with HIV/AIDS and unable to afford it. Yale answered that it could not respond to that request because it had issued an exclusive license to Bristol-Myers-Squibb (BMS) and hence their approval was necessary. This generated much controversy and criticism towards the licensing practices of the university whose technology transfer objectives included the benefit of society in general. In June 2001 BMS signed an agreement not to sue with Aspen Pharmacare, a generics company in South Africa, allowing them to produce stavudine.3 This case raised awareness amongst universities and private companies on the need for SRL practices, and the adoption of broader policy within their technology transfer frameworks to enable such practices. The case also demonstrated the need for affordable medicines for diseases such as HIV/AIDS in developing countries like South Africa and the importance of embracing SRL to address the burden of disease in these countries.

Although South Africa has relatively limited manu-facturing capacity with regard to pharmaceuticals, it is increasingly becoming involved in drug develop-ment, testing and commercialization. Thus South Africa plays a dual role in the SRL arena, being both a recipient country requiring access to drugs for diseases such as HIV/AIDS and tuberculosis (as demonstrated by the Zerit® case), and a developer of IP on new drugs required in developing coun-tries. By embracing SRL practices, South Africa can play an important role in addressing the need

for affordable drugs in developing countries. Some institutions in South Africa have already started adopt-ing SRL practices when carrying out IP transactions, driven largely by their institutional policy, type of disease addressed by the invention and the willing-ness of a licensee to make concessions with regard to developing countries. The incorporation of SRL clauses in IP transactions has been at the discretion of the IP holder and motivated by a moral obligation to ensure broad and affordable access to essential medicines. With the enactment of the Intellectual Property Rights from Publicly Financed Research and Development Act4 (IPPFRD Act), passed in December 2008 but brought into effect in August 2010 with the proclamation of the associated regulations, it has now become compulsory for institutions that develop IP from publicly funded research to ensure that the IP is protected and commercialized for the good of the people of South Africa, i.e. to incorporate SRL practices in all such IP transactions.

In other parts of the world, there have been a lot of developments on SRL practices. Universities, mainly in the United States, have developed guidelines for the implementation of SRL. In their article, “Using Academic License Agreements to Promote Global Social Responsibility,”5 authors Ashley Stevens and April Effort from the Office of Technology Transfer at Boston University discuss frameworks intended to guide licensing policy and practices in universities. Their eight main recommendations include:

(i) Require developing country developments with milestones to ensure this goal is reached; (ii) Require developing country developments and specify pricing structure (i.e. at cost or cost plus pricing) also accompanied by milestones; (iii) Include desired outcome (i.e. humanitarian purpose) in the license agreement and reserve march-in rights if desired outcome is not met;

(iv) Exclude developing countries from license; (v) Grant non-exclusive rights in developing countries; (vi) Grant license but exclude right to patent in developing countries;

(vii) allow mandatory sub-licensing/ march-in rights if humanitarian objectives are not met; and

3. Supra note 2.

4. Intellectual Property Rights from Publicly Financed Research and Development Act 2008, No. 51 of 2008.

5. Supra note 1.

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(viii) include non-assertion of patent rights in developing countries. The IPPFRD Act, which is discussed below, contains some lements which are similar to these recommendations and guidelines developed by universities around the world.

The New Legislation in South Africa: Intellectual Property Rights from Publicly Financed Research and Development Act6 (IPPFRD Act) of 2008

As mentioned above, the IPPFRD Act contains a number of conditions relating to SRL policy and practices. This becomes clear at the beginning of the Act in section 2, which outlines the object of the Act, which is to make provision that IP emanating from publicly funded R&D is identified, protected, utilized and commercialized for the benefit of the people of South Africa, whether it is for a social, economic, military or any other benefit. In terms of section 2, the Act also seeks, amongst others, to ensure that

i) the recipient of public funds assesses, records and reports on the benefit for society of publicly financed R&D; ii) the IP emanating from publicly financed R&D is protected and made available to the people of the republic; and iii) the people of the Republic, particularly small enterprises and broad based black economic empowerment (BBBEE) entities, have preferential access to opportunities arising from the production of knowledge from publicly financed R&D and the resultant IP. The emphasis on small enterprises and BBBEE

entities seeks to promote local economic growth and redress the economic imbalances of the past by ensuring that black empowered companies benefit from publicly financed R&D.

According to section 11 of the Act, the recipient of public funds must take the following conditions into account when carrying out IP transactions,

i) preference must be given to non-exclusive licensing, ii) preference must be given to BBBEE entities and small enterprises, iii) preference must be given to parties that seek to use the IP in ways that provide

optimal benefits to the economy and quality of life of South Africans, and iv) exclusive licence holders must undertake, where feasible, to manufacture, process and otherwise commercialize in the country. The Act goes further in terms of ensuring maxi-

mum public benefit by stipulating in section 11(1)(e) that the State should be granted an irrevocable and royalty-free licence authorizing the State to use or have the IP used throughout the world for the health, security and emerging needs of the Republic and, in section 11(1) (f)—(h), that if the holder of an exclusive license is unable to continue with com-mercialization of the IP in the Republic, the recipient of public funds for research (the licensor) should provide the National IP Management Office (NIPMO) with full reasons for retaining exclusivity, should they wish to do so. NIPMO may request that the exclusive license be converted to a non-exclusive license if the recipient fails to furnish reasons or if NIPMO is not satisfied with the reasons.

Section 11(2) should be read together with section 14, which provides for the State march-in-rights. Section 11(2) provides that each IP transaction must contain a condition to the effect that, should a party fail to commercialize the IP to the benefit of the people of the Republic, the State is entitled to exercise the rights contemplated in section 14. Section 14 requires NIPMO to conduct reviews on non-commercialized IP and, should the review indi-cate that the IP in question can be commercialized, NIPMO must engage with the recipient of public funds to ensure that the IP is commercialized. NIPMO may require the recipient to grant a licence to any person on reasonable terms if such IP is still not commercialized or no agreement can be reached with the recipient. Section 15 provides further conditions with regard to exclusive licensing and public benefit. In terms of Section 15(1), a private entity may be-come an exclusive licensee of intellectual property emanating from publicly financed R&D if such private entity has the capacity to manage and commercialize the intellectual property in a manner which benefits the Republic. Section 15(3) provides that, should the private entity mentioned in section 15(1) not commercialize the IP, the State march-in-rights of Section 14 will apply. Private companies wishing to obtain an exclusive license for IP from publicly funded research will, therefore, have to ensure that they commercialize such intellectual property to the benefit of the Republic.

In section 11(3), the Act provides that each IP transaction involving an assignment of IP by the

6. South Africa’s National Research and Development Strategy 2002: http://www.info.gov.za/otherdocs/2002/rd_strat.pdf (ac-cessed 25 May 2010).

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recipient of public funds to a small enterprise must contain a condition that the IP will revert back to the recipient in the event of the liquidation of that small enterprise. This will ensure that the conditions of the Act will continue to apply to such IP and that the ownership of the IP will not fall into the hands of other parties who might not commercialize the IP for the benefit of society.

In addition to the already existing foreign exchange regulations, the IPPFRD Act places further require-ments on offshore IP transactions with regard to IP resulting from publicly funded research. In terms of the Act, the recipient of public funds must inform NIPMO of its intentions to enter into an offshore IP transaction and such a transaction should be in line with the guidelines to be developed by NIPMO on transactions involving non-South African entities or persons. According to section 12(2) of the Act, a recipient of public funds wishing to undertake an offshore IP transaction in the form of an assignment or exclusive license must satisfy NIPMO that, i) there is insufficient capacity in the republic to develop or commercialize the IP locally, and that ii) the Republic will benefit from such offshore transactions. The inclusion of this section in the Act further empha-sizes the necessity for recipients of public funds to first consider developing and/or commercializing IP emanating from publicly funded research within the Republic or to ensure that, if such IP is developed and/or commercialized outside the Republic, the benefits to the Republic are clearly visible from the agreement governing the IP transfer.

It is clear from the sections mentioned above as to how the IPPFRD Act aims to ensure that technologies developed through public funding, including health-care technologies, are accessible to the public. Since the Act has been recently enacted and has only just come into force, it will be some time before the impact of the Act on licensing practices and, more importantly, on the economy and quality of life of the people of South Africa can be determined. The IPPFRD Act described above demonstrates clearly that the South African Government is perhaps the first amongst many policy makers in attempts to balance the financial imperatives of licensing activity versus social objectives within public funded research insti-tutions. Next we describe specific case studies of SRL practice conducted within South Africa.SAAVI Case Study

The South African AIDS Vaccine Initiative (SAAVI) was formed in 1999 as a Lead Programme of the South African Medical Research Council (MRC).

SAAVI is coordinating the research, development and testing in South Africa of safe, affordable, effec-tive and locally relevant preventative candidate HIV vaccines. SAAVI was initially funded primarily by the National Departments of Health and Science and Technology and the Eskom Development Foundation Limited, with additional funds received from the Euro-pean Union, Transnet, and Impala Platinum. Indirect support has also been received from the United States National Institutes of Health (NIH) for manufacturing and clinical trials.

SAAVI has over the last 10 years involved over 200 researchers, clinicians, ethicists, human rights law-yers, information and communications specialists, community educators, contract attorneys, business managers, and advisors working towards a common goal: developing and testing an effective HIV vac-cine that will benefit the populations in need. This goal can only be achieved by ensuring that product development and licensing pursue social and hu-manitarian objectives. Intellectual Property Management

One of SAAVI’s key responsibilities to its funders and partners is the effective management of IP devel-oped using SAAVI funds for the good of the people of South Africa. The MRC’s Innovation Centre (IC) has been tasked specifically with the identification, protection, management and exploitation of IP arising from SAAVI-funded research and manages the SAAVI IP portfolio on its behalf.

In 2007 SAAVI developed a formal IP Strategy to provide a framework and procedures for the effec-tive and efficient management of IP developed using SAAVI funding. The strategy is based on the follow-ing guiding principles: IP developed through SAAVI funding is managed for public good; SAAVI will, as far as possible, retain at least partial co-ownership of and commercialization rights to IP developed using SAAVI funding in order to:

(i) ensure “freedom to operate,” (ii) leverage/ facilitate the development of collaborations and partnerships with external parties, and (iii) ensure social responsibility in the exercise of IP ownership and commercialization rights to candidate vaccines, i.e. promotion of developing country access and benefits; and SAAVI recognizes and respects the IP rights of others. Third party IP is licensed in as required for the de-

velopment, testing, manufacture and commercializa-

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tion of safe, affordable, effective and locally relevant preventative candidate HIV vaccines.

The primary aim of SAAVI’s IP management strategy is not to benefit financially or to prevent other parties from using SAAVI’s intellectual property, information, know-how and materials (intellectual assets), but rather to ensure that SAAVI has control over their use so that the initiative and its partners can:

(i) provide the intellectual assets to third parties; (ii) prevent misuse of the intellectual assets; (iii) gain access to results and improvements obtained from research on SAAVI’s informa-

tion, know-how and materials; (iv) ensure that SAAVI’s contribution is recognized and acknowledged; (v) ensure affordable access to any vaccine developed in SA and elsewhere with the use of SAAVI’s intellectual assets; and (vi) share equitably in any resulting benefits.SAAVI strives to find a balance between sharing

of its IP, materials and information for scientific advancement and public good and the protection of SAAVI’s interests in IP ownership and commercial-ization rights. SAAVI does not restrict the use of its patented materials and methods by third parties for research purposes, but ensures that an agreement is in place to protect its interests. While SAAVI promotes the widespread use of its IP, materials and information for social benefit, it does not condone the unauthorized use of such materials by third par-ties for commercial purposes.Partnerships and Socially Responsible Licensing

It is well known that significant levels of scientific collaboration will be required to develop a success-ful vaccine against HIV/AIDS in the shortest possible time. It is also a fact that not all of the required technology or capacity for vaccine development, production and testing is available within SAAVI or in South Africa. Therefore, international collaboration and partnerships form a crucial aspect of SAAVI’s approach.

SAAVI currently holds patents (some still pend-ing) on HIV-1 subtype C sequences that are repre-sentative of circulating strains in Southern Africa and are therefore ideal candidates for the develop-ment of a subtype C HIV vaccine relevant to the region. The patents have been used very success-fully by SAAVI to date to leverage partnerships with institutions and private companies (predominantly

international) in order to gain access to essential technologies and know-how required to develop and manufacture HIV vaccine candidates.

Most of these partnerships involve the develop-ment of novel HIV subtype C vaccine candidates, using the SAAVI genes as antigens together with the vector/vaccine platform provided by the partner. In all cases, SAAVI has endeavoured to include in the agreements clauses pertaining to social responsibility in the downstream commercialization of any resulting vaccines. Some examples of clauses that have been included in these agreements to ensure affordability and access are as follows. Note that the partner details have been removed to protect confidentiality. Company A, 2001

–MRC hereby grants to Company A (i) a royalty-free, non-exclusive license to make, have made, use and sell HIV Collaboration Vaccine and/or Cocktail Vaccine to the Public Sector in Developing Coun-tries, and (ii) a royalty-bearing non-exclusive license to make, have made, use and sell HIV Collaboration Vaccine and/or Cocktail Vaccine to other than the Public Sector in Developing Countries. For the avoidance of any doubt this includes Private Sector in Developing Countries and both Public and Private Sector in Developed Countries.

Company B, 2002 –Company B hereby grants to MRC an exclusive perpetual fully-paid up license to make, use and sell products within the continent of Africa, without the right to export such products from Africa, that are covered under any Company B Background Invention and/or any Joint Invention that is utilized with any MRC nucleotide sequences in the Study with the right to sub-license such rights (Company B retains the right of first refusal and the first right to negotiate an exclusive license for North America and Europe).

Institution C, 2002–Institution C grants the MRC a non-exclusive license under any and all of its intellectual property rights in vector X to manufacture and distribute HIV vaccine which incorporates the said vector or parts thereof together with the MRC HIV gene sequences. –The license shall be world-wide and royalty-free for Developing Countries (list provided from World Bank classification) for the term of this Agreement.–For Developed Countries (list provided from World Bank classification) the license granted to MRC shall for the term of this Agreement be world-wide and

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provide a royalty to Institution C (the royalty is only payable once the MRC has recovered all its reason-able direct costs expended on the development, manufacture and distribution of the HIV vaccine).

Company D, 2003–Upon the MRC’s written request, Company D will,

as promptly as commercially reasonable, manufacture and deliver to the MRC up to a maximum of five thousand (5,000) doses (the “Doses”) of Vaccine for use solely in clinical trials. The total amount payable to Company D for manufacture and delivery of such Vaccine shall be equal to Company D’s Manufactur-ing Cost (defined) of the Doses plus ten percent (10%). If Company D declines to supply Commercial Product to the MRC (for use in the Territory) on the terms set forth in the term sheet, then the MRC shall be permitted to enter into an agreement with a Third Party on the terms set forth in the term sheet and such other terms and conditions as are commercially reasonable under the circumstances… Company D shall enter into an agreement with such Third Party Manufacturer pursuant to which Company D will grant a license and transfer its technology to such Third Party (with royalty provision) as required to enable such Third Party Manufacturer to manufacture and supply Vaccine to the MRC… Company D shall make seed stock of the Vaccine available to the MRC and Third Party Manufacturer and the Third Party Manufacturer shall be permitted to use such seed stock to manufacture and supply Vaccine to the MRC (or its nominated distributor) for use solely within the Territory.

–Territory shall mean the sub-Saharan African countries listed in the exhibit (48 countries).

These clauses thus incorporate some of the main socially responsible licensing strategies, including:

• Market segmentation and differential pricing;• Non-exclusive licensing;• Manufacturing price limitations on product destined for developing countries;• Absence of or reductions in royalty payable on product destined for developing countries (especially the public sector);• Requirements for a license and technology transfer to a third party manufacturer if supply cannot be met; and• Retention of rights in developing countries by the MRC, thus allowing the MRC to ensure affordability and access.

Implementation of Social Responsibility ClausesAlthough SAAVI currently has two vaccine can-

didates in clinical trials, it is still many years from

having a clinically proven HIV vaccine ready for roll out. Thus, it will be some time before any of the social responsibility clauses are actually put to the test and implemented. While some of the clauses are very specific, others provide only general guidelines and will need to be unpacked further before com-mercialization to really define what is meant and how practically they will be implemented.

It is noteworthy that all of these agreements were concluded more than six years ago at a time when socially responsible licensing was receiving a lot less attention and emphasis than it is today. However, the readiness of the various partner companies and institutions to include social responsibility clauses in the SAAVI agreements is probably more a reflection of the emotive field in which the collaborations are taking place, i.e. HIV, than a general acceptance by such partners of these types of clauses. It is antici-pated that similar agreements involving diseases that affect predominantly developed country populations may be more difficult to negotiate.

It must be noted that many of the partnerships mentioned above are no longer in place, either due to the partner no longer being in business or the vac-cine candidates no longer being pursued. However, as SAAVI continues its efforts towards developing, testing and commercializing a locally relevant HIV vaccine, it will continue to put the good of the people of South Africa and other developing countries before any economic motive in all of its interactions with external parties. Case Study: Inhalable Vaccines and Thera-peutics Developed by MEND

MEND (Medicines in Need), headquartered in Cambridge USA, is a not-for-profit organisation supported primarily by the Bill and Melinda Gates Foundation (BMGH), and is devoted to manufacture of effective vaccines and therapies for diseases in a manner consistent with the unique needs of the developing world—which include the reformula-tion of existing drugs and vaccines so that they do not require refrigeration, or do not require needles for delivery. We illustrate here MEND’s strategy of developing and commercialising novel particulate inhalable formulations of drugs and vaccines targeting tuberculosis (TB). Two lead products are currently given priority for development: an inhaled dry powder version of capreomycin7 for treatment of multi-drug-

7. “Inhaled Large Porous Particles of Capreomycin for Treat-ment of Tuberculosis in a Guinea Pig Model,” (2007) L. Garcia-Contreras, J. Fiegel, M. J. Telko, K. Elbert, A. Hawi, M. Thomas, J. VerBerkmoes,W. A. Germishuizen, P. B. Fourie, A. J. Hick-ey, and D. Edwards. Animicrobial Agents And Chemotherapy, Aug. 2007, p. 2830–2836 Vol. 51, No. 8.

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resistant TB (MDR-TB) and an inhaled form of the TB vaccine, BCG.8 Proof of concept of the efficacy of both interventions has been obtained from animal studies together with other appropriate data such as pharmacokinetics, particle characterisation and opti-misation, and development of processes for scale up. The underlying patented technology behind both9,10 has been licensed from David Edwards’ laboratory at Harvard University, and Edwards is also one of the co-founders of MEND. While the vaccine is in pre-clinical stages of testing, the drug has entered phase I of clinical testing.

The underlying research and development activities for the two projects are supported by grants from the National Institutes of Health, USA and the BMGH. MEND has subsidiaries elsewhere, of which the South African (Pretoria) subsidiary plays an important role in translational R&D relevant to its core technologies. It provides a stable base of operations for cGLP and cGMP manufacturing sites, and the conduct of clinical trials through regional networks in Africa. Through MEND, networks of biotech laboratories operate on a not-for-profit basis, and a well networked community of pharmaceutical scientists, engineers, and research-ers from industry and academia has been established to develop and implement advanced delivery tech-nologies for the critical needs of developing world vaccines and therapies. The overall business model of MEND is to yield products or processes that can be licensed by global or developing world pharmaceutical companies for development and commercialisation.

Both products have the potential to solve prob-lems and fulfil unmet needs in developing countries. Intramuscularly administered capreomycin is used for treatment of MDR-TB, however its therapeutic value is limited due to a number of factors, primarily the need for daily injections which are painful and associated with serious side effects in patients who are chronically ill and severely emaciated. Inhaled capreomycin, developed by Harvard and MEND in the form of Large Porous Particles (LPP) has the potential to replace current therapy as a needle-free

solution wherein the drug is delivered locally into the lung where the primary pathology is present in high therapeutic concentrations, while at the same time reducing systemic exposure, thus decreasing the side effects. The inhaled form of BCG also constitutes needle-free immunisation, and the benefits are obvi-ous since the subjects for immunisations are usually infants. In addition, animal models of immunisation strongly suggest that the aerosolised vaccine is more effective than the standard vaccine administered by injection. Both products can potentially be trans-ported and stored without the need for refrigeration.

MEND intends both products to be ultimately manufactured in South Africa. This is not only due to cost structures, but also because South Africa provides a gateway to the large numbers of TB and MDR-TB sufferers in sub-Saharan Africa, the availabil-ity of good infrastructure and manufacturing capacity, and stable economy and political landscape compared to other African countries. In the long term MEND will also establish partnerships to ensure products also reach other parts of the world.

Harvard has granted MEND a royalty-free license for use of products in the developing world. MEND will also pursue commercial markets in the developed world solely to support its charitable objectives11 (press release). MEND will pay royalties from profits in commercial markets to Harvard, however under a gift-back mechanism much of this will be donated back to MEND to support its development activities for products targeting diseases of poverty.

Worthy of note is that the fundamental technolo-gies underlying novel particulate formulations and delivery systems are potentially applicable to a variety of diseases in the form of both vaccines and therapeu-tics. The various academics, primarily at Harvard, and also MEND continue in the process of development of products and processes for both poverty-related and developed country indications. MEND expects to generate further IP as it continues the development process and reserves the right to protect and use it in a manner conducive to its charitable purpose.

This is a good example of projects that are developed and licensed in a socially responsible manner and have the potential to be self sustaining through profits developed through a market-segmentation approach.

11. Butkus Ben, Inhaled TB Vaccine Developed by Harvard, MEND Scientists May Enter Clinic Next Year (26 march 2008), Online: Genomeweb http://www.genomeweb.com/biotechtrans-ferweek/inhaled-tb-vaccine-developed-harvard-mend-scientists-may-enter-clinic-next-year.

8. “Immunization by a Bacterial Aerosol,” (2008) Garcia-Contreras L., Wong Y.L., Muttil P., Padilla D., Sadoff J., Der-ousse J., Germishuizen W.A., Goonesekera S., Elbert K., Bloom B.R., Miller R., Fourie P.B., Hickey A., Edwards D., Proceedings of the National Academy of Sciences of the USA. 2008 Mar. 25;105(12):4656-60. Epub 2008 Mar 14.

9. Edwards, D.A., et. al. Porous Particles for Deep Lung Deliv-ery, U.S. Patent No. 6,254,854. Granted July 3, 2001.

10. Methods and Compositions of Dry Cellular Forms, (Euro-pean Patent Application EP1913127; WIPO Patent Application WO/2007/022053.

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ConclusionsIn conclusion, it is important for public institutions,

primarily universities, as they are the main recipients of public funding, to implement SRL practices. IP rights are not valuable to investors only but to the public sector as well.12 We have already mentioned the eight different SRL strategies discussed in the literature for facilitating and promoting access to new and essential technologies, and introduce some variations of these from South African case studies. Adopting practices compliant with SRL within public institutions will require the participation of several departments: the technology transfer office (TTO), legal department, research departments, finance department and heads of institutions, to name a few. It will also require a change in traditional profit-driven IP management to allow incorporation of social considerations.

The starting point to incorporating SRL is adapting the actual licensing policies in place. As licensing agreements are bilateral contracts, the licensor and licensee are obligated to fulfill their respective engage-ments. Hence, including clauses for social responsibil-ity within the agreement will ensure that the licensee will take the appropriate measures to guarantee, as far as possible, that the demands of the developing world are met. Several different approaches, as illustrated in the SRL strategies discussed and applied in the case studies above, can help achieve this goal. Uni-versities outside of South Africa should also consider incorporating the recommendations of section 11 of the IPPFRD Act or any equivalent in their policies, as far as is practical. They should also ensure that an emphasis on social benefit is included in their objec-tives. In doing so public institutions will ensure that social impact is pursued as strongly as profit when licensing their technologies.13 Some may argue that companies will find SRL policies less appealing and be less willing to agree to such terms; however the actual financial impact is negligible if there are dual markets in developed and developing countries. The approach for licensing technologies will be different in each market. In developed countries, where the pharmaceutical industry earns the vast majority of its profits, patent protection will ensure high-income. In developing countries generic competition will promote accessibility and affordability.14

Facilitating access to essential medicines in the developing world is critical, as is ensuring patented inventions are available for further development. Adopting consistent and widespread IP policies within public institutions on these issues will help raise awareness and hopefully make companies more accepting of SRL clauses.15

Governments of developing countries have been aware of the effects of strengthened IP rights result-ing from the application of the TRIPS agreement. As demonstrated in the Zerit® case, access to patented essential drugs has proven difficult for low or middle income countries.16 Access to generic versions of these drugs is subject to strict compulsory licensing rules17 which are often difficult to implement and thus hinders availability. The burden of TRIPS lies on the developing world which suffers the consequences18 of this regime. But, by promoting socially responsible licensing strategies, Governments can improve access to essential drugs without the added difficulties of obtaining compulsory licenses. The South African government has taken steps in the right direction by putting into place the IPPFRD Act, which seeks to ensure IP emanating from publicly funded research is commercialized to the benefit of the public. However, this Act applies only to local publicly funded institu-tions and has no direct impact on IP developed at foreign universities.

Neglected diseases affecting the developing world are often disregarded in commercial development of products because the populations they affect generate negligible revenues. The drugs needed to treat these diseases rarely make it past fundamental research stages because pharmaceutical companies are not willing to invest in non-profit drug development. This

12. Mahoney, R. A. Pablos-Mendez, S. Ramachandran, “The Introduction Of New Vaccines Into Developing Countries: III. The Role Of Intellectual Property,” Vaccine, 2004. 22(5-6): p. 786-92.

13. Supra note 1. 14. Dave A. Chokshi, Improving Access to Medicines in Poor

Countries: the Role of Universities, Online: http://www.ncbi.nlm.nih.gov/sites/ppmc/articles/PMC1435781/.

15. Lita Nelsen and Anatole Krattiger, “Ensuring Developing-Country Access to New Inventions: The Role of Patents and Power of Public Sector Research Institutions,” Intellectual Prop-erty Management Health and Agricultural Innovation: A Hand-book of Best Practices, Volume 1, Ch. 1.4, p. 23.

16. Supra note 2. 17. Trade-Related Aspects of Intellectual Property Rights, an-

nex 1C of the Marrakesh Agreement establishing the World Trade Organization, 15 April 1994, art.31.

18. Since the adoption of the TRIPS agreement, develop-ing countries’ perception on its benefits has shifted dramati-cally. Much needed resources are siphoned off to pay royalties to developed countries. This issue is at the core of the North/South division. Tana Pistorius, “The Impact of Intellectual Prop-erty Law and Policy on Sustainable Development,” South Afri-can Year Book of International Law, Volume 32, 2007, p. 381. Online: http://www.heinonline.org.ezproxy.usherbrooke.ca/HOL/Page?handle=hein.intyb/sayrbk0032&id=1&size=2&collection=intyb&index=intyb/sayrbk#386.

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creates a gap, preventing effective treatment from reaching those who need it most. Socially responsible licensing coupled with public-private product develop-ment partnerships (PDPs) can go a long way towards ensuring these drugs are produced. Involvement in PDPs will reflect well on private companies and may actually encourage new and profitable alliances. The Medicines for Malaria Venture (MMV) is a successful example of a PDP helping to bridge the gap of access to essential medicines.19 PDPs ensure socially respon-sible licensing practices can be profitable for both the developing world and for the thriving pharmaceutical industry of developed countries.

It must be recognized that SRL practices are not on their own going to solve all issues of access to es-sential medicines in developing countries. There are many factors that influence access beyond the rights to use the IP. These include adequate infrastructure and distribution networks, human resources capacity, and political will, to name a few. These are beyond the control of publicly funded institutions; however, these institutions have the power to reduce one of the significant barriers to access, i.e. IP rights relat-ing new health solutions. Thus, by promoting more

19. “Medicines for Malaria,” Product Development Partner-ship Model. Online: http://www.mmv.org/partnering/pdp-mod-el (accessed 14 May 2010).

socially responsible licensing practices, Governments and publicly financed institutions can fulfill their com-mitment of social welfare and stimulate a competitive economy, which will benefit all. ■

Acknowledgements: This work was funded by a European Union FP7

grant 241839 entitled “Access to Pharmaceuticals.”Internet References

• http://www.grandchallenges.org/Improve Vaccines/Challenges/NeedleFreeDelivery/ Pages/Aerosols.aspx.• http://www.medicineinneed.org/research- directions.html.• http://www.medicineinneed.org/mend- biotech-development.html.• http://www.biotech360.com/biotechArticle Display.jsp?biotechArticleId=100019.• http://www.sciencedaily.com/ releases/2008/03/080312154835.htm.• http://www.nanotech-now.com/news.cgi? story_id=28494.

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Propagating Green Technology: A Japan Intellectual Property Association ProposalBy Naoto Kuji and Cynthia Cannady

Introductionhis article describes a new voluntary licensing initiative for sustainable energy and environ-mental technologies launched by the Japan

Intellectual Property Association (JIPA).1 The program is called the Green Technology Package Program (GTPP). Its objective is international dissemination and implementation of sustainable energy and en-vironmental technologies (“green technologies”).2 Green technology is an umbrella term that includes, but is not limited to, solar, wind, wave, current, tidal, biofuel and biomass, waste to gas, smart grid and other IT, transport (electric vehicles, hybrid, diesel, natural gas, liquefied natural gas (LNG), hydrogen, vehicle to grid, train), geothermal, hydrogen fuel cells, new materials, thin film, construction, glass, aviation fuel and efficiency, storage (batteries), water filtration, desalination, purification, membranes, toxic remediation, carbon sequestration, and hybrid system technologies.

GTPP is in furtherance of commitments under the United Nations Framework Convention on Climate Change (UNFCCC) and its subsequent protocols and agreements.

GTPP works as follows. Owners of IP in green tech-nology will select and propose specific technologies that they are willing to license. The target licensees are businesses and research institutions in developing

countries, however licensees from any country will be eligible. The special value of GTPP is that licensors will offer an enabling package of both IP licenses and services, including, where appropriate, consulting and training, that will help the licensee to implement the technology in practical form.

The terms of each GTPP agreement will vary de-pending on the needs of the licensee and licensor. Arrangements for payment of consideration will vary: in some cases licensees will pay initial fees and/or royalties, in others, the parties will seek development assistance from governments and development banks to subsidize or guarantee project costs and licensor compensation. In some cases, projects will qualify for credits and/or assistance under the Clean Develop-ment Mechanism (CDM) of the UNFCCC.

Before providing a detailed description of GTPP and its operation (section 5), it is important to place the program in the context of climate change facts (sec-tion 1), the global response to climate change (section 2), relevant international legal commitments (section 3), and the opportunities and challenges presented by technology transfer (section 4). 1. Climate Change Facts

There is scientific consensus that the Earth’s eco-system and climate are changing, that these changes are anthropogenic,3 and that the effects of climate change will be dangerous for humans and other earth residents.4 Respected mainstream scientists predict that these effects will include:

• Temperature increases from 1.1 to 6.4 °C (2.0 -11.5 °F) during the 21st century;• Melt down of polar and glacier ice with some projections showing that late-summer sea ice

T

1. GTPP was published by JIPA as a position paper on March 15, 2010. See: http://www.jipa.or.jp/english/index.html.

2. In this article, we use the term “green technology” as a shorthand for sustainable energy technologies, environmental technologies, clean technologies, and environmentally sound technologies (as that term is used in the UNFCCC, see text at note below) although these terms have distinct meanings and connotations. Energy technologies are different than en-vironmental technologies in some cases, for example: waste remediation is an environmental technology but not necessarily a sustainable energy technology. Waste to gas can be both an environmental technology (because it disposes of landfill) and a new energy technology (because it generates heat, syngas and electricity). Desalination technology is environmental technol-ogy because it offers clean water, but is not necessarily clean energy technology unless it is accomplished in an energy ef-ficient manner. Smart grid and other information technologies are sustainable energy technologies, but are not necessarily en-vironmental technologies, and so on.

3. Human activity is largely responsible for climate change, with the chances that non-human activity is causing climate change estimated at less than 5 percent. “It is well established through formal attribution studies that the global warming of the past 50 years is due primarily to human-induced increases in heat-trapping gases.” Karl and Meehl, Weather and Climate Extremes in a Changing Climate, Findings and Summary of the U.S. Climate Change Science Program Synthesis and Assess-ment Report 3.3.

4. Id.

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will disappear almost entirely by the late 21st century; • Sea level rise resulting in flooding of coastal cities;6

• Disappearance of coral reefs and reef sea life by 2040-50 because of ocean acidification from carbon dioxide entering ocean water;7 • Intense heat waves that will make life un- pleasant and unhealthy in many currently populated areas;• Heavy rain and snow;• Intensification of the power of cyclones and hurricanes.8 These dangers, combined with growing pollution

and toxicity, increasing population, water scarcity, and economic changes paint a dismal picture of the future. Many of us are inured to predictions of doom and gloom, but are awakened by the stunning news that these changes will occur, not in the distant future, but during our lifetimes and those of our children and grandchildren. We also know that it is still possible, by our conduct, to avoid catastrophic climate change and mitigate the effects of inevitable climate change.9 2. The Global Response to Climate Change

At the same time that climate change threatens us,

diverse nations, economies and cultures are being brought closer together. Globalization and technology are the twin forces that bring disparate cultures to-gether in a world where citizens of Peru can speak to citizens of Japan by cell phone, and Singaporeans can videoconference with Abu Dhabi. Emerging econo-mies like Brazil, India, China, Turkey, and Malaysia are on the rise and are leveling the global technology playing field. Developing country universities and research institutions are entering international IP markets and linking their technology transfer offices with international counterparts.10 Abu Dhabi and Saudi Arabia are trading and de-veloping new en-ergy and water technologies with Ge r many and Australia. Today, the world is flat.11 However, by the mid 21st century the world will be, in another mem-orable Thomas Friedman phrase, “hot, flat and crowded.”12 Global responses to climate change and its dangers are taking many forms and are increasingly urgent.

5. “Safeguarding our Oceans in a Warming World,” Natural Resources Defense Council, February 2009.

6. “Scientists predict that by the time atmospheric CO2

reaches 560 parts per million, a level which could happen by mid-century; we are currently nearing 400 ppm; coral reefs growth will slow and even begin to dissolve.” Natural Resourc-es Defense Council fact sheet on Ocean Acidification, 2009. www.nrdc.org/acidtest.

7. IPCC Fourth Assessment Report: Climate Change 2007: Working Group I: The Physical Science Basis. See: http://www.ipcc.ch/publications_and_data/ar4/wg1/en/spmsspm-projec-tions-of.html.

8. “There is still time to avoid the worst impacts of climate change, if we take strong action now.” The seminal and compre-hensive work on mitigation is the report by Sir Nicholas Stern to the UK government, “The Stern Review: The Economics of Climate Change” (2008). See: http://webarchive.nationalar-chives.gov.uk/+/http://www.hm-treasury.gov.uk/stern_review_report.htm.

9. The term “emerging economy” has recently entered wide-spread usage to refer to Brazil, India, China as well as Abu Dhabi, Indonesia, Malaysia, Mexico, Nigeria, Qatar and other nations that are experiencing strong economic growth. Throughout this paper, for simplicity, we will usually refer to “developing coun-tries,” which refers to the countries and other parties referred to as the “the developed country Parties and other developed Parties included in Annex II” in the UNFCCC.

10. For example, the University of the West Indies has filed multiple patent applications in the United States for inventions from endogenous research with legal support from a United States patent law firm, Wilmer, Hale. Brazil’s national technol-ogy transfer organization, which recently celebrated its 4th an-niversary, represents more than 20 Brazilian universities and links to European and US technology transfer organizations.

11. Friedman, Thomas, The World is Flat, Farrar Strauss, 2007, Friedman’s thesis in this groundbreaking work is that there has been a fundamental transformation brought about by communication technology, among other causes, that results in new types of competition, faster trade and a more level playing field among economic actors.

12. Friedman, Thomas, Hot, Flat and Crowded, MacMillan (2008).13. The UNFCCC is a treaty that was introduced at the Earth

Summit held in Rio de Janeiro in 1992 as a non-binding state-ment of commitment, entered into force in 1994, and that is implemented by binding protocols, particularly the Kyoto Proto-col (1997). The parties to the UNFCCC have met at successive Conferences of the Parties (“COPs”) the most recent of which was held in December 2009 in Copenhagen Denmark (COP 15), which did not produce a protocol, but rather an accord of some of the parties outside of the formal processes of the COP. The next COP16 will be in Cancun, Mexico from November 29 to December 10, 2010.

■ Naoto Kuji, Honda Motor Co. Ltd., General Manager IP Division, Tokyo, Japan E-mail: [email protected]

■ Cynthia Cannady, IP*SEVA, Intellectual Property for Sustainable Energy Ventures, Founder, Los Angeles, CA, USAE-mail: [email protected]

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The United Nations Framework Convention on Climate Change (UNFCCC)13 is an international treaty that came into force in 1992 and now has 192 member states.14 It contains binding provisions (“commitments”) but also serves as an umbrella (“framework”) for future protocols and agreements.15

Its stated objective is “stabilization of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic interference with the climate system.”16

The UNFCCC attacks climate change on multiple fronts:

• Expert study, analysis, and measurement; • National policies to restrict carbon emissions; • International “mechanisms” to reduce carbon emissions;• Forest conservation;• Measures to mitigate climate change effects; • Measures to help member states, particularly developing country member states, adapt to climate change; and• Development and dissemination of “environmentally sound technologies” (EST’s).17

Technology development and dissemination is “central to mitigating climate change and to increase resilience to climate change impacts.”18 Recycling, changing habits of consumption, and protecting and growing forests, are important, but will not be suf-ficient to stabilize greenhouse gases. Carbon emission reduction necessarily means reducing use of fossil fuels and relying on green energy technologies as substitutes for fossil fuel. Widespread use of green technology is also necessary for toxic remediation, water purification, landfill/waste clean up and other environmental priorities.

The UNFCCC recognizes that climate change is not a problem of the developed countries only. Develop-ing countries, especially the emerging economies, are

the locus of contemporary economic growth,19 and so must be included in any serious and effective climate change battle plan. Developing countries will be in-cluded in the solution to the climate change problem in two ways: by agreeing to limit carbon emissions, and by becoming active participants in technological problem solving. International technology collabora-tion—including south-south collaboration—is critical to the success of the UNFCCC’s objectives:

Technology cooperation between developed and developing countries, and increasingly between developing countries, will be needed on an unprec-edented scale (emphasis supplied).20 The word “unprecedented” indicates that the level

of international technology collaboration must be quantitatively and qualitatively greater than it has ever been before. Practical initiatives will be necessary in order to increase the flow of green technology trade and collaboration. As will be explained further in this article, GTPP recognizes that voluntary IP licensing is a proven and effective means to stimulate inter-national collaboration and disseminate technology. 3. Relevant International Legal Commit-ments Regarding Climate Change

Article 4 of the UNFCCC sets forth a series of bind-ing “commitments” including a commitment to adopt national policies and measures to limit greenhouse gas emissions. Article 4.5 sets forth a technology transfer obligation, a commitment for developed country parties to:

[T]ake all practicable steps to promote, facilitate, and finance, as appropriate, the transfer of, or ac-cess to, environmentally sound technologies and know-how to other parties, particularly developing country Parties, to enable them to implement the provisions of the Convention. In this process, the developed country Parties shall support the devel-opment and enhancement of endogenous capacities and technologies of developing country Parties. (emphasis supplied)In other words, for the developed country mem-

ber states of the UNFCCC, technology transfer21 (or “TOT”) of green technologies to developing coun-tries is a legal commitment. Supporting developing countries in growing endogenous capacity in green

14. Although the United States did not adopt the Kyoto Pro-tocol to the UNFCCC, it is an active member of the Convention.

15. United Nations Framework Convention on Climate Change, Article 2, FCCC/INFORMAL/84, GE.05-6222-(E) 200705 (1992).

16. Note that we use the term environmentally sound tech-nology as synonymous with green technology, see note 3 above.

17. UNFCCC Fact Sheet: “Why Technology is Important,” http://UNFCCCc.int/press/fact_sheets/items/4989.php.

18. See eg. http://industry.bnet.com/financial-servic-es/10003669/emerging-economies-to-lead-global-economic-growth/.

19. http://UNFCCCc.int/press/fact_sheets/items/4989.php

20. The UNFCCC defines transfer of technology (TOT) gen-erally, as “a broad set of processes covering the flows of know-how, experience and equipment for mitigating and adapting to climate change among different stakeholders.”

21. The United States signed the Kyoto Protocol in 2005 but has not ratified it.

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technologies is also a legal commitment. The Kyoto Protocol to the UNFCCC, which was

adopted in 1997 and came into force in 2005, pro-vides more specific rules governing regulation of greenhouse gas emissions by signatories.22 Article 3 of the Kyoto Protocol imposes binding carbon emissions limits for 37 industrialized nations and the European Union (states listed in Annex I to the Protocol and therefore referred to as the “Annex I” states), and thereby instituted trading in carbon credits to offset these limits.

Article 12 of the Protocol introduced the Clean Development Mechanism (CDM), a program to incent the Annex I countries to undertake projects that have the effect of reducing emissions in “non-Annex I” states (countries not listed in Annex 1, including primarily developing countries, but also wealthy emerging economies like Brazil, China, South Korea, Malaysia, Qatar and the United Arab Emirates). Such “clean developments,” if approved by the developing country’s Designated National Authorities (DNA), and then the CDM Executive Board, give rise to “Certified Emission Reduction” (CER) credits.23 The industrialized country party can use the CERs in trade (selling credits to another company or a broker) or to offset its own carbon emissions in its home industrialized country.24

The Kyoto Protocol, like its mother treaty, the UNFCCC, emphasizes the roles of technology and developing countries in responding to climate change. CDM is supposed to result in technology transfer to developing countries. “Although the CDM does not have an explicit technology transfer mandate and is not identified as a means of fulfilling the technology transfer objectives of the Protocol, it may contribute to technology transfer by financing emission reduc-tion projects that use technologies currently not

available in the host countries.”25 Operational since the beginning of 2006, the mechanism has already registered more than 1,000 projects and is anticipated to produce CERs amounting to more than 2.7 billion tons of CO2 equivalent in the first commitment period of the Kyoto Protocol, 2008–2012.26

What is interesting about the Kyoto Protocol, from the perspective of IP and licensing professionals, is that TOT is not defined. It includes imports of equip-ment and informal knowledge transfers; in fact about 1/3 of projects that claim technology transfer involve only equipment imports.27 In the examples provided on the CDM Web site, there is no explicit reference to an IP license as an element of any technology transfer to developing countries, although some equipment sales agreements may also have terms that effectively create know-how licenses.

The legal obligation of developed countries to transfer technology to developing countries did not begin with the UNFCCC or the Kyoto Protocol. The international treaty known as TRIPs (Agreement on Trade Related Aspects of Intellectual Property) was ne-gotiated as part of the bargain between developed and developing countries; the quid pro quo for adherence to developed country intellectual property norms and laws was the promise that developed countries would transfer technology to developing countries and less developed countries (LDCs).28 Under TRIPs, technol-ogy transfer to developing countries is supposed to occur as a result of enhanced trade relations and IP protection. Technology transfer to LDCs is explicitly provided for in Art. 66.2 of the TRIPs agreement, which requires developed countries to create incen-tives for private parties to transfer technology to developing countries.

Post-TRIPs discussions during the first decade of the 21st century have focused on TOT related to pharmaceutical inventions and access to medicines. The TOT debate continues and now includes a new domain, ESTs, in the context of UNFCCC and international climate change negotiations. At the Co-penhagen COP15, developing countries maintained their position that TOT of green technologies has not worked well, that developed countries must transfer

22. Each CER is supposed to be equivalent to one tonne of CO2. The metrics and methodology for measuring such equiva-lence and also for certifying the effect of a clean development project are arguably subjective, subject to manipulation, and are therefore the topic of continuing discussion.

23. An example of a CDM project is Ormat’s Amatitlan Geo-thermal Project in Guatemala which was expected to offset emissions of approximately 83,000 tons of CO2 per year. With Amatitlan registered under the CDM, the project will be eligible to receive certified emission reduction credits, each equivalent to one ton of carbon dioxide, which can be traded or sold. The project has a long-term contract to sell all of its emission reduc-tion credits to a European buyer.

24. Seres, Stephen, “Analysis of Technology Transfer in CDM Projects,” November 2009. http://www.sciencedirect.com/sci-ence/journal/03014215.

25. See: http://cdm.unfccc.int/about/index.html.

26. Seres, p. 10.27. Less developed countries or LDCs are a special United

Nations category that refers to the poorest of developing coun-tries. TRIPs adopted the LDC term.

28. In addition to the UNFCCC and the Kyoto Protocol, nu-merous publications and documents under the Conference of the Parties (COP) process have reiterated the role of technology collaboration and developing nations.

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green technologies to developing countries, and that governments and society must provide financial sup-port to fund such transfers. The question of how to promote green technology transfer has now become an important issue in the context of negotiations in Conferences of the Parties of the UNFCCCC (COP).

As in the TRIPs negotiations, developing countries say that technology transfer is a quid pro quo for adherence to international standards; in TRIPs the standards were IP laws, while in UNFCCC and its pro-tocols, the standards are carbon emissions limits. The parallels are striking: in both TRIPS and UNFCCC, developing countries see international standards and restrictions as limiting their capacity for economic growth while not providing concrete benefits. In both cases, developed countries argue that accept-ing limitations will lead to measurable benefits from technology transfer that outweigh the limitations.

The global response to the challenge of climate change recognizes the importance of international collaboration, technology development, and devel-oping countries as markets for, and generators of, new technologies.29 At the same time, practical ac-complishment of accelerated technology transfer and diffusion requires practical mechanisms that work. Voluntary licensing of IP is a practical and effective way to disseminate green technologies and promote international collaboration against the dangers of climate change. Further, constructive initiatives by developed country parties that demonstrate practical benefits from green technology transfer —based on voluntary licensing—are essential to the success of the UNFCCC.4. Opportunities and Challenges in Green Technology Transfer

The world community has responded energetically to the need for climate change activism, proposing and implementing various creative initiatives. Cur-rently, we can name the following initiatives, designed to help parties in selecting patented technologies owned by companies in Japan and other developed countries and that are available for licensing:

• the Eco-Patent Commons led by “World Business Council for Sustainable Development (WBCSD)”;

• Japanese State-of-the-art Alliance for Smart Energy Products & Technologies 2009-2010 by “Japa-nese Business Alliance for Smart Energy Worldwide (JASE-W)”; and

• The United Kingdom Green Patent Database (a recent initiative consisting of publishing patents that have been processed and issued under the UK’s fast track “Green Channel.”30

However, there seems to be no initiative that clearly shows how to transfer green technologies to developing country partners, as a practical matter. In case of the Eco-Patent Commons and the Patent Licensing Database referred above, only patents are listed to view as the subjects of licenses. But imple-menting patented technologies requires a certain level of technological capability and infrastructure and therefore a limited number of developing coun-try parties can implement the licensed technology on their own. Thus, it seems difficult to use the patent lists themselves as tools for facilitating the subject technologies in developing countries. Also, for the other initiatives referred above, it may be presumed that the environmental technologies will be provided by means of supplying products and services using such technologies and it can hardly be said that these initiatives function as tools for facilitating technology transfer in the sense of licens-ing of intellectual properties.

Despite the logic of green technology transfer and voluntary licensing, a number of challenges prevent these effective tools from becoming as widespread as they should be, both in developed countries and in re-lations between developing and developed countries.

First, the negotiation process itself presents chal-lenges. IP licensing tends to be handled based on the individual judgment of each IP owner. Consequently, in case a developing country party desires a license to IP in a green technology, a license agreement(s) must be entered into between the owner/licensor and the prospective licensee. In such licensing negotiations, there are challenges related to the difficulty of con-tract negotiation itself, concerns about the licensee’s capability to pay license fees, and the certainty of fulfillment of contract obligations. In some cases, licensors fear that intellectual property infringement or lack of control over trade secrets will put their technology investment at risk.

Some IP owners are hesitant to consider open li-censing of technologies they have invested in. Some companies in developed countries have been slow to accept licensing out of proprietary technologies

29. http://www.ipo.gov.uk/about/press/press-release/press-release-2010/press-release-20100604.htm.

30. See Cannady, Cynthia (2009). Access to Climate Change Technology by Developing Countries: A Practical Strategy, ICTSD’s Programme on IPRs and Sustainable Development, Is-sue Paper No. 25, International Centre for Trade and Sustain-able Development, Geneva, Switzerland.

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as well as licensing in of technologies not invented in the company itself (“open innovation”) in general, not only in the context of proposed transactions with developing country parties. A closed innovation model has prevented many companies from licensing out technologies, despite the success that some strategic IP owners have enjoyed because of their willingness to license out IP. Licensing-out can bring many benefits to companies including expanded market access, tech-nology collaboration and synergy, establishment of a de-facto standard or “platform,” increased profits from royalties, and many other benefits. The benefits of a licensing strategy must always be balanced against the risk of “cannibalism” (licensing to a competitor who can sell products less expensively), loss of technology control (facilitating infringement or legal imitation), and loss of technology leadership (sacrificing a valu-able patent monopoly and its competitive advantages without maintaining R&D superiority). Still many companies strategically assess the pros and cons of licensing and arrive at a sophisticated approach that permits sharing of IP while retaining competitive advantages and sound profits.

There are also challenges related to the licensee’s capacity to absorb the technology. In order that licensee may implement the licensed technologies, certain technological capabilities are required. The conditions for serious technology absorption include technical education, skilled workforce, and infra-structure. Another variable is the type of technology to be transferred; not all technology requires large numbers of highly expert personnel and advanced infrastructure.

In many cases, developed country IP owners in small to medium sized enterprises (SMEs) may not know how to identify and contact potential developing country partners that have the requisite technology capacity because the developed country company’s usual business channels and networks do not include developing country parties. In other cases, the bottleneck is management attitude: an insularity that dismisses the economic potential in emerging markets.

Finally and significantly, there are challenges re-lated to the developing countries’ acceptance of IP and licensing as business practices. Some developing countries claim that the ownership of the intellec-tual property rights related to green technologies obstructs dissemination of these technologies. Some further argue that the intellectual properties should be placed in the public domain in order to “free up dissemination,” not realizing that dedication of technology to the public domain destroys economic

incentives to invest in and commercialize technology. With UNFCCC, as with TRIPs, intellectual property

is sometimes treated as the villain in the story, while many of the discussants have limited practical knowl-edge of how technology transfer occurs in IP licenses.

For all of these reasons, there are a number of challenges facing voluntary licensing of green tech-nologies both in the developed-developing country context and in the developed-developed country con-text. Emerging economies that were once considered “developing,” but have now gained economic power, are changing the economic landscape. Parties in all nations have missed and continue to miss practical opportunities to use international voluntary licens-ing of green technologies as a tool for “win-win” cooperation.31 The emphasis of the UNFCCC on green technology transfer and outreach to develop-ing countries is an invitation for the international community to act.

To remedy this situation, JIPA studied possibilities for establishing a new framework which enables the private sector to promote green technology transfer to developing countries, that is, a new framework which may (i) secure both the developed countries and the developing countries in each role of provid-ing and receiving green technologies, and (ii) facili-tate various technology transfer transactions. GTPP was the result of the JIPA study and is described in detail below. 5. Detailed Description of the GTPP

GTPP is a program to promote voluntary licensing of green technologies by IP owners and related devel-opment collaboration projects. JIPA’s objective is to encourage broad dissemination and implementation of green technologies and to make sure that IP is not a barrier but rather a facilitator of global green technology collaboration. GTPP will have several components.

Green Technology Packages will include, to the extent agreeable by the licensor, licenses to the necessary patents, patent applications, copyright works (e.g. documentation and software), and trade secrets. The package may also include non-IP that will be helpful to the licensee in commercializing the technology, including services, public domain instruc-tions and documentation, materials, and training for licensee personnel, in accordance with the licensee’s

31. Henry Etzkowitz in his pioneering work on innovation has argued that: “The university is the generative principle in knowl-edge based societies…,” The Triple Helix: University-Industry-Government Innovation in Action, 2008, Routledge Press.

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capability. As mentioned above, a patent license alone may not be sufficient for the licensee to implement a technology in a practical form. GTPP will facilitate utilization and dissemination of green technology in developing countries by licensing not merely patents but also relevant know how as well as by providing technical assistance, consulting services, and training oriented to develop a successful business case, parts and materials not easily obtainable and supports in building the infrastructure for business operations.

GTPP is not an initiative to encourage patent own-ers to seek pure patent licenses and royalties based on portfolio strength and opportunity for royalty income.

Licensors. Licensors will include any companies that own IP related to green technologies and are willing to offer IP licenses. The initial licensors are expected to be JIPA member companies, but the program is not restricted to JIPA and will include licensors from many countries.

Licensees. Licensees will include businesses or research institutions that have the capacity to imple-ment or further develop the licensed technology by manufacturing, reproducing, modifying, improving, selling, and/or distributing it. The target licensees for GTPP are businesses and research institutions in developing countries and emerging economies, but developed countries parties are also welcome to participate.

Universities and Research Institutions. GTPP par-ties may include a research institution such as a uni-versity with engineering or other scientific faculties, possibly in three-party development collaboration agreements including the licensor, a private business licensee and a university licensee. In many cases, uni-versities in developing countries are necessary parties if the objective is to fully engage the participation of scientists and technologists in developing countries in evolving green technologies.

Small to Medium Sized Enterprises. GTPP may offer important benefits for small and medium sized business enterprises (SMEs). Even if they have tech-nologies available for transferring to the developing countries, they may have difficulty transferring the technologies due to their limited experience in effec-tive business negotiations with emerging economy or developing countries partners. GTPP can be of great help to SMEs in expanding to international markets.

Less Developed Countries. GTPP can work for licensees and collaborations with Less Developed Countries (LDCs). As each GTPP agreement will be different, it is not possible to generalize and conclude that LDCs lack sufficient infrastructure or technology

capacity. In fact, in many cases, LDCs with strong government commitment and traditional research universities may be excellent candidates for partner-ships to adapt, localize, manufacture or distribute green technologies.

Development collaborations. The licensor may also propose a development collaboration agreement whereby the parties will work together on a project basis over a period of 1 or 2 years to implement, com-plete, improve, or localize the licensed technology. Such a project may qualify for CDM treatment. The parties may also agree to conduct pilot and evalua-tion projects in order to test a longer-term project and assess feasibility.

License grants will be flexible and depend on what the licensor is willing to permit and what the licensee needs in order to implement the technology in a product or project. One license may be limited to manufacturing of a component in a green technol-ogy product (e.g. an automotive part or an element of a solar panel). Another license may be broader and be part of a joint research and development col-laboration to improve a technology (e.g. an initiative to improve a thin film by improving its function in humid environments).

Principles of Voluntary Participation and Mutual Benefit. GTPP is a voluntary program. There is no convention or accord that participants must sign. The terms and conditions of any GTPP transaction will be determined by the parties and may be confidential to the parties. Suggested term sheets and form contracts may be proposed and offered as useful tools, but none will be mandated. Licensors engaging with developing country licensees will endeavor to keep financial con-sideration appropriate to the licensee and its market but will not be committed to any particular financial scheme or limitations. Overly structuring transactions in the abstract and out of the context of the parties’ business objectives could have the perverse effect of reducing the attractiveness of the program.

Licensors will not be required to license packages to all interested parties. Licensors will use their discretion to select licensees strategically based on a number of criteria including but not limited to geographic location, technological capacity, licensee infrastructure, licensee physical and intellectual property assets, government commitment, market opportunities, etc. Mutual benefit is the basis for collaboration under GTPP.

Licensor benefits include: new or expanded market for the licensor’s technology, initial payments and roy-alties, publicity and marketing, technology enhance-

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ment from licensee partner, technology synergies from R&D and technologies offered by the licensee, access to project funding, guarantees and insurance from international organizations, governments, and development banks.

Licensee benefits include: access to new green technologies, potential for start up company or research collaboration, potential project financing, classical technology transfer permitting develop-ment of new business, training in business, legal and technology skills.

Financial terms and conditions will be determined by the parties in negotiation. Initial license fees or lump sum payments may be charged by the licen-sor. Royalties are a means to defer payment until the project generates revenue and are therefore a good tool for licensees and licensors alike. Develop-ment banks and country development assistance, as well as CDM funding, are potential sources of funding. The developing countries’ contribution to R&D would necessarily be taken into account in determining what consideration should be due to the licensor. In some cases, cross licensing may oc-cur either in the initial GTPP agreement, or in the context of a development collaboration agreement where both parties license each other the rights to exploit foreground technology.

GTPP Database. In order for the licensee to understand benefits of the use of the technology, GTPP will present a searchable database concerning available green technologies including: features of each technology, granted patents and pending patent applications, the countries where patent protection exists or is sought, other intellectual property that affects the technology (e.g. copyright works such as software and documentation, design patents, trade-marks), comparisons with other technologies, the terms and conditions of provision of the technologies and examples of model agreements. The licensor may, at its own discretion, determine the scope of its information provided on a database and may require a separate confidential agreement for the provision of certain information. JIPA is currently in collaboration with the World Intellectual Property Organization (WIPO) concerning the development and operation of the GTPP database.

Agreements where the relevant patents are not protected in the developing country partner. There may be cases where a potential licensor is contacted by a potential partner resident in a country where the patents in issue have not been filed and are thus in the public domain. The purpose of GTPP is not to cause such a partner to accept contractual limitations

that are greater than those imposed by law. The par-ties may however negotiate a license agreement for non-patent IP (e.g. trade secrets, works of authorship like technical documentation).

Pro Bono or reduced fee services will be solic-ited from law firms to assist developing country par-ties in negotiating contracts where local attorneys do not have expertise in IP contract negotiations. WIPO currently offers training in licensing negotiation, and these sessions may assist developing country par-ties and their legal representatives in determining their negotiating positions and seeking a mutually beneficial terms and conditions. Rather than offer a “cookie-cutter agreement,” a one size fits all form, GTPP licensors may publish a proposed term sheet. Rather than rely on form agreements, the concept is that developing country parties should be empow-ered to evaluate proposed terms and conditions and negotiate on their behalf.

Role of Licensing and Technology Transfer Professionals. GTPP transactions will need skilled professionals to develop deal points, negotiate and draft agreements on behalf of both parties. It is expected that professional organizations like the Licensing Executives Society International (LESI), the Association of University Technology Managers (AUTM), the Fórum Nacional de Gestores de Inovao e Transferência de Tecnologia (FORTEC), and other national and international organizations will lend their assistance to facilitating GTPP transactions.

Partnership Formation and Matching Needs. It often is difficult for developing countries to inves-tigate possibilities of introduction of the environ-mental technologies without expertise information concerning licenses, such as details of the technology, information on the technology owner, differences between the licensed technology and other similar technologies, availability and effectiveness of the technology in the Licensee’s country, the terms and the conditions of the license and availability of related technical assistances. However, the owners of the technologies in the developed countries normally manage each owner’s technology independently. Therefore, it may be said that the information needed for green technology projects is often hidden, even in our contemporary information society. In order for the developing countries to find the right informa-tion, the framework in which a neutral third party selects and presents information on available and useful environmental technologies owned by the developed countries to the developing countries may be valid and functional. WIPO has agreed to support GTPP by developing and maintaining an international

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database to list GTPP offerings and providing a global forum for networking and discussion.

GTPP Advisory Service. The GTPP may offer a third party advisory service to act as an independent advisor between licensors and licensees by facilitat-ing introductions, bridging negotiations, and advising with a view to progressing negotiations for licensing or other business transactions. The advisory service would assist both licensor and licensee in:

(i) offering of CDM credits for businesses operated under the license; (ii) acquisition of carbon credits by the licensor and application of any available tax deduc- tions in return therefore; (iii) researching and applying for grants or loans from development banks or Official Devel- opment Assistance (ODA); and

(iv) assisting in applying for exemption of license restrictions to governments or competent authorities of each Licensee country. The GTPP advisory service could offered by a sub-

sidiary of the UNFCCC or by a United Nations agency. Alternatively, advisory services could be offered by private parties who would be compensated by one or both parties. Conclusion

Climate change can be slowed and its dangerous effects can be mitigated. This will require prudent and courageous governmental policies, as well as private sector development and pervasive imple-mentation of green technologies. Slight efforts and modest improvements will likely not be sufficient. In the next decade, we must wage nothing less than a war on climate change. Developing countries and emerging economies are necessarily a part of this struggle. Global deployment of green technologies is essential to our victory, and IP licensing is a proven

and practical way to drive technologies into markets. GTPP will be one means to spread green technologies and promote international collaborations in green technology. It turns out that the licensing profession has a critical role to play in the great Climate Change War of the 21st century. ■

Glossary of Abbreviations:BRIC–Brazil, Russia, India, ChinaCDM–Clean Development Mechanism of the UNFCCCCER–Certified Emission Reduction CreditsCOP–Conference of the Parties of the UNFCCCEST–Environmentally Sound Technologies, a UNFCCC term used in this article as equivalent to the term green technologiesGTPP–Green Technology Package Program IP–Intellectual PropertyJASE-W–Japanese Business Alliance for Smart Energy WorldwideJIPA–Japan Intellectual Property AssociationINPIT–National Center for Industrial Property Infor-mation and TrainingLDC–Less Developed CountriesLES–Licensing Executives SocietyNEDO–New Energy and Industrial Technology Development OrganizationODA–Official Development AssistanceSME–Small to medium sized enterpriseTOT–Transfer of Technology TRIPs–Agreement on Trade Related Aspects of Intel-lectual PropertyUNFCCC–United Nations Framework Convention on Climate ChangeWBCSD–World Business Council for Sustainable Development

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Patent Application Prioritization And Resource Allocation StrategyBy Kelce S. Wilson and Claudia Tapia Garcia

■ Kelce S. Wilson, Research In Motion, Technical Director, Standards & Licensing, Dallas TX, USA E-mail: [email protected]

■ Claudia Tapia Garcia, Research In Motion, IPR Counsel, Munich, GermanyE-mail: [email protected]

single page, poster style chart accompanies this article, and provides an “at-a-glance” overview of a suggested strategy for priori-

tizing patent application efforts and resources. The chart, along with this explanation, incorporates the philosophy that a one-size-fits-all process for protect-ing Intellectual Property (IP) is far from ideal. Instead, what is suggested here is that inventions be stratified according to predicted economic value, so that effort and resource allocation can be prioritized. Addition-ally, this stratification should follow the invention through the patent application prosecution process.

The strategy leverages a convenient coincidence that there are three primary uses for patents and also three common levels of patent prosecution qual-ity available in the legal services market. The three primary uses for patents, in the view of the authors, are (1) asserting in order to protect market share or to maintain product differentiation; (2) overwhelm-ing a competitor’s or a legal opponent’s ability to fully analyze your portfolio for threats against them, thereby deterring litigation; and (3) obtaining brag-ging rights to a large portfolio, in order to enhance licensing opportunities. The three common levels of patent prosecution quality, which often correspond to general expense levels, are (1) highly-skilled legal work having expert-level technical accuracy and de-tail, that is typically available from large law firms and IP boutique firms that specialize in a limited industry area; (2) competent legal work having adequate—but not stellar—technical accuracy and detail, that is typically available from mid-sized laws firms offering lower rates than the large firms; and (3) lowest bidder work, for which the price is more important than the identity of the drafting agent, and for which quality may be severely curtailed by the drafting agent’s time budget or technical expertise.

Fortunately, there is a serendipitous correlation between what is required for each of the three pat-ent use classes and the three levels of legal service quality. So upon evaluating the potential value for each invention idea, a prosecution resource level can be selected for each separate invention. With this system, sufficient resources are allocated to those inventions having the greatest likelihood of significant payback, while a patent portfolio can still

grow reasonably large, because costs are kept low for lesser inventions.

The chart provides a decision process flow for evaluat-ing a single invention at a time. Managing a portfolio of multiple inventions is a far more complex task, which includes setting a significant budget. Some comments from the au-thors on the budgeting aspect of an IP protection strategy are provided in [i]. There are five deci-sion points in the at-tached chart, which will be addressed in detail in individual sections below. The decision points are (1) trade secret; (2) top-tier patent; (3) middle-tier patent; (4) low-tier patent; and (5) public disclosure to prevent another from obtaining a patent on a similar idea. Trade Secret

The first question should actually be whether to even apply for a patent, or whether keeping the invention as a trade secret is a preferable option. In the U.S., patenting requires public disclosure no later than the date of patent grant, although there is a po-tential that the 18-month post-filing publication date may become mandatory in the U.S., as it is currently in Europe and for PCT applications. Since obtaining a patent requires informing the entire world (or at least everyone having an internet connection) how to build your invention, a patent might give away too much. However, trade secrecy decisions can be exceptionally complex, and some technologies introduce additional factors to consider, as indicated in [ii].

Describing an effective trade secret decision pro-cess can fill several books. Rather than attempting such an ambitious task, a quick checklist is provided here. The basic criteria include (1) whether exclusive use of the invention provides a competitive advantage; (2) how likely is it that the same idea will be indepen-dently discovered by others, quickly enough to degrade the value of the secrecy, when considering how rapidly technology changes in the specific market; (3) whether

A

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the invention can be discovered by reverse engineer-ing your products; and (4) whether secrecy provides more value than the best likely patent rights, plus publicity benefits.

Secrecy can be lost through accident, industrial espionage, or other events. This risk should be a non-trivial part of the consideration. Additionally, it is often more expensive to maintain secrecy than is typically recognized, because there is no easy way to account for the costs. Although few activities are directly associated with maintaining secrecy for accounting purposes, the true costs can become significant. Many collaboration opportunities can be lost, and restrictions on the flow of information can introduce inefficiency in design and production. These costs are real, even if there is no easy way to identify and allocate them.

Because the value of secrecy must be compared with the value of the patenting options, likely allow-able patent claims must be ascertained in this part of the process. Thus, this first step may actually be the most challenging. Fortunately, much of the work done here can likely be reused in the later process steps. Also note that secrecy prevents open publica-tion, thereby precluding publicity benefits that could potentially attract top-quality labor and generate industry respect. Further, secrecy might enable a competitor to obtain a patent on a similar idea.

However, if the decision is not made to keep an invention as a trade secret, the specific tier levels of patents should be evaluated from the top, working downward. Top-Tier: Business Builder Patent

A Business Builder Patent is one that may be relied upon to protect market share or to maintain product differentiation through enforcement, and thus should have sufficient novelty and prosecution quality to withstand litigation attacks. Evaluation criteria in-clude (1) whether the invention is likely to be built or sold where it is patented; (2) whether the royalty rate times the number of units provides a significant royalty amount; (3) whether the likely assertion target is an entity within your industry; and (4) whether infringement is easily detectable.

Since patent protection is local, if funds are not available to patent with sufficient geographic cover-age, investing a lot of money in only a few jurisdictions might not be the optimum course. Factors that affect the likelihood of an invention being copied include the desirability of its features, and the feasibility of a design-around. If even blatant infringement will produce a negligible royalty stream, an expensive

patent might not be a wise investment. Detectability is something that should be evaluated

for every invention, and included in the patenting decision analysis. One suggested method is to classify an invention according to five levels: (1) Implementa-tion of the invention can be detected, even without possessing an accused device. (2) Implementation of the invention can be detected easily with typical consumer use of an accused device. (3) Detecting implementation of the invention within an accused device requires commonly available test equipment and technicians, but no significant expense. (4) Detecting implementation of the invention within an accused device requires specialized, uncommon test equipment or inordinately expensive procedures. (5) Implementation of the invention cannot be in-dependently detected with reasonable efforts, but instead requires an admission by an accused infringer. Enforcement of a patent is a considerable risk of re-sources, if you won’t know for certain whether your patent is being infringed until reaching the discovery phase of litigation.

The relationship between a patenting decision and the bounds of your specific industry primarily involves focus and expertise. Even if an invention is relevant only for a different industry sector, but there are suf-ficient time and money resources to pursue a patent, the resulting patent can potentially have real value. Any good invention can be licensed or sold, even if it is only relevant outside your industry. However, for inventions outside your specific industry, it is less likely that your engineers will have invented some-thing truly novel, or that they will know the state of the art sufficiently to reliably prioritize resources. Additionally, time spent working on patents outside your industry can distract your engineers from more relevant tasks. Still, if you stumble upon a really good invention, then the fact that you won’t build it should not derail its evaluation for possible patenting.

High scores are needed for all of the above criteria to qualify an invention for consideration as a potential Business Builder Patent. Note that the evaluation criteria are applied to the expected allowable patent claims, rather than the market value of a product that uses the invention. If a Business Builder Patent is selected, use a spiral development process for the patent application. After the inventor has described the invention, and it is provided to a patent expert for evaluation, a neutral third party should review, to provide suggestions for improving the invention and application. These suggestions should go back to the inventor for incorporation, and then through the pat-ent expert and neutral reviewer again. Alternatively,

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the flow can go in the opposite direction. Initially, the quality and potential coverage of the

application should improve each cycle, although eventually the significance of the improvements will begin tapering off. When this happens, the application is ready for filing. This process is expensive, can be time-consuming, and it also delays filing. However, if the invention is important enough that any resulting patent will be far more likely to be asserted than most other patents, the investment in time and money can pay off. The budget for prosecution costs should be fairly generous, and the application should be drafted by one of the better agents who is available.

However, if an invention does not qualify for treat-ment as a Business Builder Patent, then it should be considered for the next lower tier. Middle-Tier: Cross Licensing Bulk Patents

The evaluation criteria for a Cross Licensing Bulk Patent are the same as for a Business Builder Patent, but with relaxed scoring needs. Moderate scores are acceptable for each of the criteria. This tier level offers potential savings by using a “throw it over the fence” patent application process, in which a reasonably competent patent prosecutor can produce a decent patent with reduced inventor involvement and on a tighter budget.

Cross Licensing Bulk Patents should primarily be relied upon to overwhelm opponents’ resources, and such patents are probably not attractive for full-fledged litigation. Some assertion is possible, but primarily as a bluff. If this or the next lower tier is selected then, prior to agreeing to a budget and pro-cess that will foreseeably reduce patent quality, the drafting agent might need assurance that a malprac-tice lawsuit isn’t lurking. Ethical rules may prevent the drafting agent from requesting such assurance, so be prepared to offer what is necessary, without receiving a request.

Essentially, what happens here is that the inventor provides descriptive material to the patent application drafting agent, who operates fairly autonomously, until the inventor is needed to verify the content of the patent application for filing. The expenses of the spiral development process are avoided, and the drafting budget can be significantly lower. Only enough expense is needed for these patents that a potential licensee believes that it cannot risk being dismissive of the entire patent portfolio, and a litiga-tion opponent expend must expend non-trivial effort to plan defensive contingencies.

The claims need to look fairly threatening upon ini-tial examination by a litigation opponent or a potential

licensee, but the claims do not need to withstand determined attacks on validity or construction, if the patent is not intended to actually go to trial. The mere threat posed by several of these patents might provide sufficient deterrence value for the owner, that a moderate per-invention investment is warranted.

However, if the invention does not merit even this level of effort, there may yet be another chance for patenting. Low-Tier: Souvenir Patents

Souvenir Patents can leverage an interesting phe-nomenon: When patent portfolios are large enough, even if composed of predominantly low quality patents, potential licensees might not pay royalties for any patents that they have seen, but rather they may pay for patents that they have not seen—out of fear that one of the unseen patents might present significant liability.

Evaluation criteria for Souvenir Patents differ con-siderably from Business Builder Patents and Cross Licensing Bulk Patents. In fact, the top-tier and middle-tier criteria have drastically reduced impor-tance in this analysis. The reason for this is that, with Souvenir Patents, quantity is valued over quality, and the proposed low-tier process provides an inexpensive way to rapidly increase patent count.

The criteria are (1) costs will be low from drafting up through allowance; (2) there is a high likelihood of at least one claim issuing; and (3) funds are avail-able to play a “numbers game.” Narrow claims can keep prosecution costs low and help obtain a rapid allowance, although you may struggle with many patent prosecutors’ blind adherence to a “make it broad” philosophy. That philosophy often serves to enhance billable attorney hours by inviting a series of unnecessary rejections over irrelevant prior art. However, because even Souvenir Patents require a non-trivial investment, and they primarily provide a true benefit in significant numbers, activity in this tier level may be best reserved for larger, well-established companies having a fairly sizeable IP budget.

Many companies use patent portfolio size as a form of bragging right, which can have beneficial effects in securing investment and maintaining industry reputa-tion. See [iii] for a more in-depth discussion on the topic of leveraging patent portfolios.

It is important though, that not all of your patents fall into this lowest tier, as your entire portfolio risks being dismissed by your competitors. At least some of your patents should be in the higher tiers. However, even if an invention that is being evaluated for this tier fails to qualify, there is yet another decision to be made.

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Preventing a Competitor from PatentingA competitor might be willing to patent an idea that

is very similar to one for which you have decided to forego patenting. This could be because the competi-tor has a larger IP budget, or else a lower threshold for deciding to apply for a patent.

Thus, there is a risk that your engineers have an idea first, you did not patent it, and then a competi-tor patents a very similar invention at a later time. If this happens, the competitor might obtain an advantageous revenue stream from licensing to third parties—even if the patent has such low quality that it earns only nuisance level royalties. This revenue stream, if large enough, can finance new product development or enable price reductions for current products, thereby possibly increasing that competi-tor’s market share. Publicizing inventions, that you do not select for patenting, can reduce the likelihood of this situation occurring.

This strategy is more likely to work if you select a publication venue that puts your ideas in front of PTO Examiners who are searching prior art while ex-amining your competitors’ patent applications. Some options for public disclosure include (1) academic publications, such as trade journals and conference proceedings; (2) defensive publication services; and (3) including the disclosure of the invention, but not expending effort to properly claim it, in a patent appli-

cation that has at least somewhat similar technology. For this final option, when you file a patent application for another invention that did merit patenting, a few paragraphs of disclosure regarding the non-selected idea, and perhaps a few figures, can provide the ba-sis for a 35 U.S.C. § 102 or § 103 rejection of your competitor’s later-filed patent application. Spending Resources Elsewhere

If none of the above criteria are met, the inven-tion idea might provide entertaining small talk at the company picnic, but probably isn’t worth pursuing. So spend your limited resources on other inventions. ■ Disclaimer

The opinions expressed herein are those of the authors, and do not necessarily reflect the views of Research In Motion. References

[i] Wilson, Kelce and Tapia Garcia, Claudia, “How Much Should You Invest In Patents?,” les Nouvelles, pp. 47-55, March 2010.

[ii] Wilson, Kelce, “Patenting Computer Security Systems,” Intellectual Property Today, pg. 34, Febru-ary 2008.

[iii] Tapia Garcia, Claudia, “Industrial Property Rights, Technical Standards and Licensing Practices (FRAND) in the Telecommunications Industry,” Ed. Carl Heymanns (2010), p.11 et seq.

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Patent Application Prioritization And Resource Allocation Strategy

Best plan is to keep it secret?

Invention Conceived

Potential to be a top-tier patent?

Value in preventinganother’s patent?

Resources are better spent elsewhere

Potential to be a middle-tier patent?

Potential to be a low-tier patent?

N

N

N

N

N

Y

Y

Y

Y

Y

From the up coming book:

The Inventor’s Guide to Effective PatentsBy Kelce S. Wilson

Evaluation Criteria for Trade Secrets:1. Exclusive use provides a competitive advantage;2. Unlikely to be independently discovered by others within a period of reasonable length for the market;3. Not easily discoverable by reverse engineering; AND4. Secrecy, even with risk of disclosure, is more valuable than the best likely patent rights, plus publicity benefits.

Keep as a Trade Secret

Use spiral development process to improve application quality

Select one or more:1. Academic publication;2. Defensive publication; and 3. Including disclosure, but not claiming the invention, in another patent application having similar technology

Secrecy can be more expensive than is typically recognized, due to inefficient information flow and resource use, and also lost collaboration opportunities.

Evaluation Criteria for “Business Builder Patents”:1. Likely to be built or sold where patented (Does it have desirable features? How feasible is a design-around?);2. In large numbers or with a high royalty base;3. By an entity in your industry (market relevant); AND4. Infringement is easily detectable.

High scores are needed for all of these criteria to qualify.

Evaluate expected allowable patent claims, rather than the market value of a product that uses the invention.

A “Business Builder Patent” should have sufficient novelty and prosecution quality to withstand litigation.

OK to draft application with a“throw it over the fence” process

Use a low cost drafting agent andnarrow scope to speed allowance

Evaluation Criteria for “Cross Licensing Bulk Patents” is the same as for a “Business Builder Patent,” but with relaxed scoring needs. Moderate scores are acceptable for each.

“Cross Licensing Bulk Patents” should not be relied upon for litigation, but rather to overwhelm opponents’ resources.

Only enough expense is needed for these patents that:1. A potential licensee believes that it cannot risk being dismissive of the entire patent portfolio; AND2. A litigation opponent expends non-trivial effort planning defense contingencies.

Evaluation Criteria for “Souvenir Patents:”

1. Low expected cost from drafting up through allowance;2. High likelihood of at least one claim issuing; AND3. Funds are available to play a “numbers game.”

“Souvenir Patents” provide an inexpensive way to increase patent numbers. When patent portfolios are large enough,even with low quality patents, licensees pay royalties for unseen patents, out of fear that one or more of them might present significant liability. The top-tier and middle-tier criteria have reduced importance in this analysis.

A competitor, patenting a similar idea, might obtain an advantageous revenue stream form licensing to third parties—even if the patent has such low quality that it earns only nuisance level royalties. The revenue stream, if large enough, can finance new product development or enable price reductions for current products, thereby possibly increasing that competitor’s market share.

Publicizing ideas that are not selected for patenting can reduce the likelihood of the is situation. Select a publica-tion venue that puts your ideas in front of PTO examin-ers who are searching prior art against competitors’ applications.

Neutral Reviewer

Inventor Patent Expert

Application qualityimproves each cycle

Inventor Patent Expert

narrow claims = low prosecution costs, & rapid allowance

Quantity valued over Quality

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Profit And Common Good: Friend Or Foe In Technology Transfer?By Lukas Madl

Abstractany Technology Transfer Organizations have been implemented around the world in re-cent years. What is their purpose? Usually

a dual scope is defined, namely to increase economic value and social value by ensuring the fullest use of the R&D results. This raises some essential questions. Does society per se benefit from an accelerated in-novation process? How are the economic values and social values interconnected, how do they imply each other? What does benefit to people mean? To ap-proach some possible answers to those questions, we take a closer look at two major problems humanity has to face—the ecological crisis and the extreme poverty on earth—and we investigate what part Technology Transfer could play to help.

The views expressed in this paper are the author’s alone and do not necessarily represent the views of Tecnet Equity Technologiemanagement GmbH. What is Technology Transfer Good for?The Grand Endeavor

It was about 1.5 million years ago when early hu-mans learned to control the use of fire. Since then, human history has unfolded a never ending story of discoveries in new ways to use nature’s forces and materials to improve living conditions. The humans invented stone tools, made clothes out of hides, painted caves and buried their dead in artifacts. As time went by, the complexity of the tools and the knowledge increased. Sophisticated hunting techniques were developed; humans learned how to cultivate the earth and even how to domesticate wolves. They adorned themselves with jewelry made out of gold; they learned to build shelters, forts and cities, roads, streets and the internet.

It was the tireless activity of the human spirit through all the ages which has led to this huge prog-ress in cultures, technologies and arts, in sciences and humanities—an enormous endeavor. In our time, the efforts to explore the secrets of the material universe and to apply the gained knowledge in practical innova-tions are un-precedentedly successful.

Innovations—the introduction of new or signifi-cantly improved technologies, methods or products

and their wide adoption by society—have accompa-nied human history from the beginning. However, their pace, their vital implication for economy, their political relevance, and their impact on our daily life have never been so high as today. And the importance of innovations will still increase in the near future. Where do the reasons for that development lie? Innovation to Strengthen Economy and Tackle Global Problems

There were times when companies were famous for their well-known products which had not been changed for a long time and yet, the market demands were satisfied. Nowadays, this is hardly possible. The reasons for that are manifold: proceeding globaliza-tion, boosting competition, continuous technology changes, changed lifestyles and increased customer demands to name but a few. Thus, many companies and whole industries find themselves under increas-ing pressure to develop innovative products in ever shorter cycle times. Today, the life of a new computer model is for example measured in months, complex products such as motor cars take less than three years to be developed. A successful innovation strategy and the regular launch of new products play a vital role in the economic performance of modern companies. Innovators are more than ever the winners in the market. If a company is not capable of launching continuously new products, its long-term survival is doubtful.

Today, the world societies face severe economic challenges. The recent economic downturn has led to rising unemployment and soaring public debt. To recover from the crisis, companies and countries need to find new and sustainable sources of growth. Innovation is seen as one of the key ingredients to generate jobs, to regain economic growth and to keep the gained wealth. Hence, measures to increase innovation performance of market participants have a very high priority on the political agenda of many countries and regions of the world today.

This applies more and more also for the emerging economies. The international innovation landscape shifts massively to new players. The rapid economic growth in China has been accompanied by a dramatic increase in R&D expenditure, a vital prerequisite

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for innovation. China alone accounted for almost a third of the global increase in R&D between 2001 and 2006, as much as Japan and the EU together. Brazil, India and others are also following rapidly on the global innovation landscape.

Moreover, the very poor regions of the world start to adopt this concept, too. Very recently, in June 2010, the second Science with Africa conference, entitled Science, Innovation and Entrepreneurship, explored policies, measures and mechanisms to meet Africa’s development goals and aspirations by harnessing the potential of entrepreneurship and innovation to transform ideas and technologies into new or improved products, processes and business.

However, strengthening the economy is only one of many reasons why so much hope and trust is put into innovation. The economic challenges come together with enormous social and ecological challenges. Ev-ery day, thousands of children die from waterborne diseases, more than a billion people starve and more than one thousand women die in pregnancy and childbirth. At the same time, future generations will face huge ecological threats. Meeting these inter-linked global challenges of poverty reduction, social justice and environmental sustainability are the great imperatives of our time. Science, technology and in-novation of many kinds play essential roles in finding appropriate solutions. For example, climate change mitigation will depend on the creation and on rapid implementation of a range of eco-efficient technolo-gies and innovations all across the globe.Technology Transfer to Enable Innovation

But where should all those concepts, technologies and innovations to help economy and to address global challenges come from?

Traditionally, innovation was regarded as a linear process: from basic research to technology develop-ment on to prototyping, deployment, commercial-ization and ultimately, market penetration—and if successful, it will result in market saturation, obso-lescence and finally replacement. Human and social factors, like the needs and desires of customers, played only a marginal role in the innovation process.

Today, this has changed completely. Users and consumers play an important role for companies which involve them in the innovation process in order to better satisfy their needs. Companies recognize this as a way to explore new growth opportunities at lower risk and to offer greater flexibility without necessarily incurring high costs. User’s experiences with products can help future innovations.

Whether innovation is mainly “supply-pushed“

(based on new inventions and technical possibilities) or “demand-led“ (based on user needs and market requirements) is a hotly debated topic. However, most successful innovation projects require a sensible conjunction of those two complementary factors. It depends on the type of innovation which factor will be more focused on. “Technology push” strategies strive for “breakthrough” or “radical” innovations through their massive R&D investments, which are usually involved. Conversely, a “market pull” approach leads to more incremental innovations, based on the existing product range. Therefore the length of the innovation process may be quite dif-ferent from those two strategies. A “technology push” innovation can en-compass a time period of over ten years, whereas a “market pull” project is generally more a short-term activity due to its higher market focus. Obstacles In the Way

Thus, science and research still lie at the heart of most innovation processes and will continue to be essential elements. Scientific findings are seen as an everlasting resource for new ideas and technological concepts which can nurture the value chain of in-novation if channeled properly. Then, concepts are transferred into inventions, inventions into useful real-world applications and those are finally trans-ferred into eligible products and services. However, converting research results into the marketplace is not easy. An invention is by far not an innovation. Frequently, good ideas and inventions fail to become commercial reality. The way from the lab to a suc-cessful product is long, demanding and rife with significant roadblocks—so severe that it is called “the valley of death.”

One major obstacle is certainly a gap in funding. Often, financing is not sufficiently available to take new inventions out of basic research and transform them into commercial products; therefore, many in-novation projects will shrivel half the way. Even if new technologies explicitly address market needs, a level of risk remains around their implementation, which can prevent industry partners from participating. Today, investors usually demand relatively low-risk opportunities and require proof-of-concept before they are willing to sign on.

■ Lukas Madl, Tecnet Equity NÖ Technolo-giebeteiligungs-Invest GmbH, Technology Transfer Manager, Sankt Pölten, Austria E-mail: [email protected]

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Another major obstacle in the transition from lab to market is the deficiency in knowledge and awareness of how to bridge the two disparate worlds of science and business. Research is the vital starting point but innovation encompasses much more. Additional skills and complementary activities are needed to facilitate the transfer process—no matter if it is in the field of marketing, product development, testing, proto-typing, business development or also expertise in legal, financial and patent issues. Innovation needs a dense interaction and collaboration across a diverse network of stakeholders, institutions, companies and potential users, which all have to be initiated and managed.

As the efforts to convert scientific findings to real-world application have often failed and society has shown concerns about the convenience of public

money invested in basic and applied research, it has become obvious that there is a need to focus on the transfer process itself. Thus, there has been a marked increase of organizations specialized on this purpose in recent years. Today, many universities, research institutes and even international companies have implemented a “Technology Transfer Office” (TTO). The TTOs may work on behalf of research institutions and governments or act independently. Many more TTOs will be established in the years to come—also in the emerging and developing countries.

TTOs are dedicated to identify research results which have potential applications and develop strategies for transferring them to the market—or explained in an allegory: TT professionals are like gardeners. They choose a healthy, but still vulner-able seedling (identify embryonic inventions) from the controlled conditions of the greenhouse (the research lab) and may transfer it to a hotbed (proof of concept study) with the intention to acclimatize the young plant stepwise to the harsh environmental conditions (markets). They try to understand which

potential the little plants have already got (technical features), why they would sustain against other spe-cies (USP), which kind of nutrition they would need (financing) and what kind of care the plants need to grow best (product development). The goal is to sell the plant to a garden friend (interested company), that it develops strongly in the new environment, flourishes (market launch) and yields many fruits (financial return).

Dual Scope of Technology TransferHow to measure the performance of Technology

Transfer activities? Some people think that generat-ing profit is the only sensible metric for TTOs. In the book “Making Money Out of Technology,” the authors state quite strictly, “Technology exploita-tion is not about creating companies, nor jobs, nor “benefits for mankind,” nor even short-term income for the University—it is about creating commercial value and ultimately, is measured in money.” Other people, including the author of this paper, believe that the role of TTOs in society is broader. Apart from generating economic value, they think that TTOs should generate social value by aiming to facilitate innovations which are responding to the urgent social and ecological needs. In fact, many TTOs have both goals defined in their mission, namely to increase the economic value and the social value by ensuring the fullest use of the R&D results.Some Examples:

• The mission of the TTO from the Johns Hopkins University (U.S.) is to “…bring the benefits of discovery to the world…by moving university inventions into the marketplace where they can be developed into useful products for the public good…”; • The TTO of California Institute of Technology, U.S. states that “the primary mission of the Office of Technology Transfer is to promote and facilitate the transfer of useful technologies to the commercial sector so that the public can directly benefit from the ingenuity and creativity of our outstanding researchers…”;• The Association of University Technology Manag-ers (AUTM), an international nonprofit membership organization, launched the Better World Project in 2005 to “…promote public understanding of how academic research and technology transfer benefits you, your community and millions of people around the world. It contributes to a stronger economy, supports new research and encourages tomorrow’s breakthroughs”;• And also the African Technology Development

Figure 1. The Dual Model Of Technology Transfer

Research Results

Technology Transfer

New Products

Market Pull

Technology Push

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and Transfer Network aims to “generate economic and social value” from R&D outputs.The fact of the dual scope of Technology Trans-

fer—and innovation in general—raises some es-sential questions. Does society per se benefit from an accelerated innovation process? How are the economic values and social values interconnected, how do they imply each other? What does benefit to people imply? How can the benefit be measured? Which innovations benefit society and which not? How to differentiate?

To approach some possible answers to those ques-tions, we take a closer look at two major problems humanity has to face—the ecological crisis and the extreme poverty on earth—and we investigate what part Technology Transfer could play to help. It is obvious that solutions cannot come from technology alone. It will rather need new and strong partnerships between policy, business and civil society—a global solidarity—to facilitate effective efforts in protect-ing the ecosphere and promoting an integral human development. However, within the context of this paper, we focus on the question how—or if—the innovation business could contribute to solutions. Innovation and the Ecological ChallengeThe Problem

The ecological crisis is severe. Problems such as cli-mate change, desertification, the loss of productivity in vast agricultural areas, the pollution of rivers and aquifers, the loss of biodiversity and the deforestation of equatorial and tropical regions are a reality. The Millennium Ecosystem Assessment found out that 15 of the 24 evaluated ecosystems had been degraded over the past half century. A rapid and continuing rise in the use of fossil fuel-based energy and an ac-celerating use of natural resources are continuing to affect key ecosystems threatening supplies of food, freshwater, wood fiber and fish. Severe weather disasters, droughts and famines are also impacting communities around the world. Our world is on a

dangerously unsustainable track today. If we continue on the business-as-usual path we are on, we will consume the resources of 2.3 earths in 2050! The current pace of environmental exploitation is seriously endangering the supply of certain natural resources not only for the present genera-tion, but also for future generations.How Can Technology Transfer Help?

We have to call upon the human intelli-gence in scientific research, in technology development and in innovation to tackle

the ecological challenge. A variety of scientific devel-opments and innovative approaches are quite promis-ing in providing satisfactory and balanced solutions to some of the problems. Encouragement needs to be given to research into effective ways of exploit-ing the immense potential of solar energy. Similar attention also must be paid to the worldwide water problem and to the global water cycle system, which is of prime importance for life on earth and whose stability could be seriously jeopardized by climate change. Suitable strategies for rural development centered on small farmers and their families should be explored, as well as the implementation of appropri-ate policies for the management of forests, for waste disposal and for strengthening the linkage between combating climate change and overcoming poverty. There is a high need to encourage research into and utilization of forms of energy with lower impact on the environment and a world-wide redistribution of energy resources, so that countries lacking those resources can have access to them.

Where there is a challenge, there is an opportunity. The indispensable transformation process ahead represents vast opportunities in a broad range of business segments. The global challenges of growth, urbanization, scarcity and environmental change can become the key strategic drivers for business in the coming decades. Opportunities range from developing and maintaining low-carbon technologies, zero-waste cities, mobility and infrastructures with lower impact on the environment, technological and structural improvements in the use of resources and materials and many more.

Rather than being late followers, business should be part of the spearhead in the transformation process by doing what business does best: creating cost-effective solutions that people need and want. The difference is that new solutions will be based on a global and local market place with “true values and costs,” the “truth” being established by the planet’s limits. When using natural resources, we should be concerned for

Research Results

Technology Transfer

New Products

and Technologies

Profit

Common Good

Figure 2. The Dual Goal Of Technology Transfer

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their protection and consider the cost entailed—envi-ronmentally and socially—as an essential part of the overall expenses incurred.

The economic growth has to be de-coupled from ecosystem destruction and material consumption, and re-coupled with a sustainable economic development and societal well-being. We need a model of growth and progress that is based on a balanced use of renew-able resources and recycling those that are not. At the same time, it is evident that the environmental problems challenge us to examine our lifestyle and the prevailing models of consumption and production, which are often unsustainable from a social, environ-mental and even economic point of view. We have to reconsider the notion of prosperity and successful lifestyles, as well as progress and value creation to include more long-term and holistic considerations such as common good and environmental impacts. If taken seriously enough, the ecological crisis offers an historic opportunity to develop a common and holistic plan of action aimed towards greater respect of natural environment including the application of advanced technologies. Innovation and the Societal ChallengeThe Problem

Many areas of the globe have considerably evolved in recent decades, thereby taking their place among the strong economic powers destined to play impor-tant roles in the future. However, extreme poverty continues to exist; some studies report that it still increasing today. Poverty and the unequal distribu-tion of wealth are one of the most severe problems humanity has to face. Although global wealth has almost doubled since 1990 to an average GDP per capita of US$6,000, almost 90 percent of the world’s wealth is held in the OECD countries. Since the world’s population is projected to reach nine billion by 2050 and the developing world will be home to over 85 percent of people, the scale of the growing inequity is dramatic. Social Entrepreneurs

What can business and innovation contribute to rescue people from hunger, deprivation, endemic dis-eases and illiteracy? What can be done to enable a life in dignity to everyone? The most radical innovation is the understanding that low-income communities can be business partners, customers and workforce. The poor are not any more considered as a “burden” but as a resource, even from a purely economic point of view. After all, these are often considered as the growth markets of tomorrow.

Today, innovative business models are developed

around human and social needs that have not been addressed by governments or companies in the past. Those inclusive business models aim to be profitable and serve the needs of the low-income communities at the same time. Companies try to find synergies between development goals and the company’s core business operations. Therefore, they deliver higher socio-economic value for communities while open-ing new avenues for growth for the company. The World Business Council for sustainable development reports that by now, some 60 member companies and regional network partners have embarked on this journey.

We are just at the beginning of a process in which those needs-oriented business models are evolving. Some experiences from such companies from around the world are very encouraging. These companies’ important innovations are still young, many more experiences have to be made to test and improve them. Nevertheless, the enthusiasm and the profes-sionalism that many business leaders around the world are showing towards this new business model is very promising. It shows not just a theoretical ap-proach but a practical way through which companies can help people and society to solve some of their most pressing problems.

Playing a more active role in narrowing the gap between rich and poor will ensure their long-term success for companies. Success will depend, as Pra-halad writes in the book “The Fortune at the Bottom of the Pyramid,” on their ability to “nurture local markets and cultures, leverage local solutions, and generate wealth as the lowest level of the pyramid. To do these companies must combine their advanced technologies with deep local insight. New business models must not disrupt local cultures and lifestyles. An effective combination of local and global knowledge is needed, not a Western system.”Technology Transfer Contribution to Social Development

If the poor are the market for the future, it is vital to ensure that the products offered truly meet the people needs and contribute to the local develop-ment. The goal is not to sell only cheap products to poor communities—this has already been done. The innovation challenge is to offer products with better value for money. This will be more widely accepted among low-income communities. One may see the different characteristics of low-income markets as a negative restriction for product development. How-ever, quite contrary, the history of innovation has shown that limitations of the past have led to many

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of today’s innovations. Some bold changes in products and also distribution methods that are required for addressing low-income markets may bear solutions of “disruptive innovations,” which may change the rules of the game also in other markets.

Focusing on functionality to increase the product value will be an additional approach to recognize the specific need of low-income customers. The main task is not to find the best product to sell but rather to find out what problems a new product can solve. Dedicated R&D programs can provide answers to functionality questions such as: How are the needs currently satisfied? Can the product operate in the environment given; e.g. fluctuating electricity, high moisture, dust? Can it be easily maintained? Can it be operated by an unskilled person? By responding to these questions, companies can take the lead in developing innovative and affordable products and services that improve the overall quality of life in low-income countries. Business can also take a leading operational role in the provision of basic needs such as water, sanitation, energy, housing, health care and communication services. Finally, business can work with others to improve the investment climate, root out corruption and improve overall health and educa-tion levels in the developing world. Profit Embedded

“Our vision is a world where science and technol-ogy work more directly for social justice, poverty alleviation and the environment”–STEPS Centre; Innovation, Sustainability, Development: A New Manifesto

We have asked how the dual scope of Technology Transfer initiatives—increase in economic value and in social value by promoting innovation—fit together. Do both goals point into the same direction? Do they overlap each other? The answer is: it depends.

Change and innovation are not desirable ends in themselves, but depend on an overall goal in which they are embedded. Innovation can be the key—on the one hand—for employment generation, but can also—on the other hand—lead to substantial job losses if not embedded in well-functioning labor mar-kets. Innovation can be—on the one hand—a power-ful engine for addressing social and global challenges but can—on the other hand—even further threaten the environment if guided purely by short-sighted economic interests.

Therefore an array of questions should be addressed quite from the beginning of innovation processes: What is the innovation for? Which kind of innovation is it? Along which way will it disseminate into society,

towards what long-term goals? As the new OECD report on innovation also states: “The objective of innovation policy should not be innovation as such, but its application to make life better for individuals and society at large.” Meeting human and societal needs does not happen automatically or incidentally.

According to the author, however, the goal of common good can be aligned with economic goals of Technology Transfer Organizations if it is ingrained in their strategy and respected from the outset as the commercialization process unfolds. In that vision, Technology Transfer works like normal business, based on entrepreneurial drive and with an economic goal—the generation of economic value. Yet, profit is not the only motivation. What comes first and foremost is the overall goal of common good in which profit is embedded. Profit is not an end in itself, but is considered as means for achieving human and social goals.

How can this vision be realized? Considering the following aspects may help on the way. Technology Transfer Mission

Technology Transfer can enable both economic and social value when the responsibility towards society is perceived and anchored as core dimension of the business strategy. By that, Technology Transfer will solve social problems as well as provide great business opportunities. Technology Transfer organiza-tions implementing thoughtful measures will become relevant societal actors for potential customers and so they will develop tomorrow’s markets. However, if social responsibility is purely understood as a means to enhance corporate reputation but will not be ingrained in the essence of the mission, it becomes a dispos-able dimension. However, by integrating social and environmental objectives within the company’s goals, TTOs will also aim to sustain long-term company value.Long-Term Goal

The comprehensive and long-term goal of technol-

ProfitCommon

Good

New Products

and Technologies

Figure 3. Profit Embedded

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ogy transfer activities should be real growth in an integrated sense—including all aspects of human needs and all social ranks. That means the innovation output should be a benefit to everyone and genuinely sustainable. Thus, responsible Technology Transfer cannot ignore future generations. The overall goal has to be marked by solidarity and inter-generational justice. We must recognize our grave duty to pass the earth on to future generations in such condi-tions that they can worthily live on it and continue to cultivate it, too.Partnerships

Technology Transfer initiatives could expand their existing relationships with science, business and governments and engage in collaboration with civil society groups and all stakeholders of innovation with the goal to foster systemic thinking and explore solutions for a desirable and sustainable world. The different aspects of the global problems, e.g. the financial crisis, the unregulated exploitation of the earth’s resources, the poverty, the large-scale migra-tion of people, the technical forces in play etc. are increasingly interconnected and imply each other. Thus, its solutions—measures with a decisive impact upon the present and future good of humanity—re-quire new efforts of holistic understanding and a new humanistic synthesis. Tools

New does not mean good. It will be important to develop evaluation metrics which help for a better understanding of the long-term impact of technology transfer projects on society. How to differentiate between constructive and potentially destructive innovations? Which criteria have to be considered? Also the newest Ministerial report on the OECD in-novation strategy from 2010 proposes to “promote the measurement of innovation for social goals and of social impacts of innovation. The current measure-ment framework fails to measure the social impacts of innovation. The development of measures that provide an assessment of the impact of innovations on well-being, or their contributions to achieving social goals, needs to be promoted. This includes better measure-ment of the people dimension of innovation.” Ethics

Most people of our time marvel at the huge variety of technological achievements and have at the same time the urgent wish that progress will be oriented towards the true good of humanity of today and tomorrow. The spheres of science, innovation and economy are not ethically neutral. They are part of the human endeavor and therefore, they should be

structured and guided in an ethical manner. Our present crises—be they economic, food-related, environmental or social crisis—are ultimately also ethical crises, and all of them are interrelated. They want us to rethink the path on which we are on: What can we do, what should we do and how should we do it to solve pressing problems of today? Technology Transfer and Cultures

It is true that the export of investments and the transfer of skills, know-how and technologies can benefit the populations of receiving regions. Labor and technical knowledge are valuable and univer-sal goods. However, we should be cautious not to oversimplify reality in artificial ways, but objectively explore the full human dimension of the problems. The picture of development has many aspects which stand in connection with each other. The actors and the causes in both underdevelopment and develop-ment are manifold, the faults and the merits are different. We should realize that innovations and economic activity alone cannot solve all social prob-lems through the simple application of commercial logic. This needs to be directed towards the pursuit of common good. Innovations may supply the mate-rial for human advance but is powerless to achieve it by itself. If cultures are reduced to the technological dimension, even if it may favor short-term profits, in long terms, it will impede reciprocal enrichment and the dynamics of cooperation. Human-Driven Innovation

Men and women are the essence of innovation. It is mankind who is inspired by visions, who generate ideas and who reach decisions along the value chain. It is mankind who gains knowledge and applies it on technologies, products and services. It is mankind who will use the technology as customer at work places and in leisure time.

People are the cause, the meaning and the scope of innovation. An innovation model should be developed and promoted in which the integral development of the single human person, of society and whole hu-manity stands at the center. This will serve the para-mount needs of humans, including the economic, social, cultural and spiritual aspects.

When we search deeper for what people need, we come to an underlying question which has accompa-nied the way of men and women from the beginning: “What is the human being?” This question gains new importance in our time because of the multitude of challenges we have to face and the momentous decisions we have to take. Our relation to nature, to economy, to technology, and to ethics will rely on the answer. ■

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The author welcomes any kind of comments and contribution to discussion regarding the outlined top-ics of this paper.

ReferencesArtley et al (2003): Making Money out of Technol-

ogy; Best Practice in Technology Exploitation from Academic Sources.

Compendium of the social doctrine of the church (2006).

ICEP (2008): Business and Poverty: Innovative strat-egies for global CSR, the global CRS book.

Ministerial report on the OECD innovation strategy (2010): Innovation to strengthen growth and address global and social challenge, key findings.

Pope Benedict XVI (2009): Encyclical letter, Caritas in Veritate.

Pope Benedict XVI (2009): Message for World Day of Peace 2010.

Prahalad & Hart (2002): The Fortune at the Bottom of the Pyramid.

Quotations from mission statements of Technol-ogy Transfer Offices are taken from the various internet pages.

STEPS centre (2010): Innovation, sustainability, development: a new manifesto.

World Business Council for Sustainable Develop-ment WBCSD (2010): Vision 2050, the new agenda for business.

Featured article published July 20, 2010 on the In-ternet Portal—Beyond the First World: Global News & Best Practices for Managers of Innovation and Intellectual Property

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Intangible Assets Valuation

Intangible Assets Valuation By License Market And Stock Market:

By Jiaqing “Jack” Lu

Abstracthere has been no previous research on the link between the license market and the stock market. Are the two markets integrated or

coupled such that the valuation of the same portfolio of intangible assets is consistent across markets? This study tries to fill the research gap. Based on the data of royalty rate and Tobin’s q across 14 industries, the analysis demonstrates that the two markets are partially integrated, and that the valuations of intan-gible assets by the two markets are highly related, after a dummy variable is introduced to control two outlying sectors.

This paper moves to test whether the partial integration between the two markets is caused by some random factors, or actually reflects more fun-damental differences between the pricing behaviors of the markets. Two sets of regression analysis are conducted to associate royalty rate and Tobin’s q with three fundamental indicators including R&D intensity, the relative size of intangible assets book value, and price markup. Several important conclusions are reached from the analysis. First and foremost, the stock of intangible assets carried on book is found to contribute significantly to royalty rate pricing in the license market, but essentially irrelevant in the stock market valuation. Most likely, the stock market actually discounts the book value of intangible assets.

Second, the stock market values R&D intensity or the flow of the R&D efforts significantly, and con-sistently across all industries studied. By contrast, license market positively prices R&D intensity only when the book value of intangible assets is included in the analysis. As a result, the book value of recog-nized intangible assets becomes the most important discriminator that differentiates the pricing behav-iors of the two markets. This manifests that while both the license market and the stock market are forward-looking, the pricing in license market is backward-looking and path-dependent as well, i.e., it does impound the information embedded in the accumulated stock of intangible assets carried on book. Finally, three valuation models for the license

market are developed, and the one with the highest explanatory power indicates that royalty pricing is mostly determined by the book value of intangible assets and price markup.1. Introduction

Royalty payments represents the license market’s valuation of technology and other intangible assets. Presumably, royalty pricing is forward-looking, and re-flects the expected profitability and value-generating capacity of the product and services embedding the innovations and other intellectual properties. For example, if a technology is expected to generate higher profit margin, while at the same time requires less capital investment in complementary assets, the parties in a negotiation will agree on a high royalty payment, with all other factors being equal.

On the other hand, economists have been using the difference or ratio of market value and replace-ment cost of a company’s assets, especially Tobin’s q, to measure and quantify the intangible assets. The stock market, by its nature, is forward-looking, and stock price shall reflect the present value of the future stream of cash flows generated by a company’s operating assets. The various measures used by econo-mists, including Tobin’s q, are supposed to measure the contribution to market value by a company’s intangible assets, including innovations in technology, marketing, and organization, among other intangible factors that create and sustain a company’s market power and competitive edge.

Then, an interesting question is, are the stock mar-ket and the license market integrated or coupled, such that the valuation of the same portfolio of intangible assets is consistent across markets? Furthermore, if the markets are proven to be coupled and the valu-ation consistent, what fundamental economic and financial factors underlie such integration and con-sistency? Or if proven to be otherwise, what causes the de-coupling and inconsistency? This paper is set to answer these questions.

There has been no previous research on the link between the license and the stock market. Relevant literature on stock market valuation and intangible

T

Cross-Industry Analysis based on Royalty Rate and Tobin’s q

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assets spreads widely among several research areas in economics, finance, and accounting. Separately, research on license market valuation generally and royalty rate specifically has been very sporadic, ex-cept for the economic studies in theoretical models of licensing strategies and behaviors. Section Two of the paper offers a brief review of the literature. Due to the numerous pieces of relevant literature, the review has to be very brief.

The empirical studies in this paper try to fill the research gap and contribute to the understanding of the relationship between the license market and the stock market. Section Three associates royalty rates with Tobin’s q, in an effort to reveal any consistency, or the lack of it, between the valuations of intangible assets by the two markets. Section Four takes a fur-ther step and explores the fundamental differences in pricing behaviors of the license market and the stock market. Finally, Section Five summarizes the major conclusions of the paper, and highlights some topics for further research.2. Valuations of Innovation by License Market and Stock Market: A Brief Review of Literature2.1 Pricing and Valuation Studies in License Market

As is widely acknowledged among licensing prac-titioners, royalty payment in the license market is determined by the expected profitability and value-generating capacity of the products and services embedding the licensed intangibles such as tech-nologies, software, brand names, trademarks, among many others. There are numerous books and papers discussing methods and approaches to calculate various measures in expected revenue, cost saving, profit, cash flow, and return for royalty determina-tion.1 The following review takes a step back, and tries to address two fundamental issues. First, is there any theoretical justification that royalty pricing in license market reflects the fundamental economic and financial factors? Second, are there any empirical evidences that royalty payments are actually associ-ated with such factors?2

Theoretical Studies in Licensing Strategy and Royalty Pricing

The literature in theoretical studies focuses on the interactive dynamics of the process in royalty setting. Since Arrow’s seminal paper in 1962, economists have applied industry organization theory and game theory to model licensing strategy, compare various methods, and determine fee structure such as fixed fee, running royalty and auction. (Katz and Shapiro, 1985, 1986; Kamien and Tauman, 1986). For a com-prehensive review of the research, please refer to Kamien (1992).3 A c c o r d i n g t o these studies, the process of licens-ing strategy-mak-ing and royalty determination is essentially a se-ries of forward-looking decision making, and depends on numerous factors including the following:

1) Patentee status: An incumbent in product and service market, or an outsider such as a university, research institution, or federal agency;2) Technology innovativeness: Cost reduction vs. new product; modest improvement vs. drastic in-novation;3) Relevant market: The nature of the product and service market such as competitive, monopolistic, or oligopolistic;4) Product and service characteristics: The charac-teristics of the product and service incorporating the licensed technology, such as homogeneous product and service, or highly differentiated ones;5) Royalty payment method and structure: Includ-ing auction, fixed fee or lump-sum payment, per unit royalty, or a mix of fixed fee and royalty.By theoretically investigating the issues of strategic

interaction among a patentee, licensees, and non-licensees, economists derive the optimal number of licenses, royalty structure, and payment methods, as well as private value and social welfare of a licens-ing strategy, all under a specific set of assumptions with the factors listed above. The formulas of royalty

■ Jiaqing “Jack” Lu, Applied Economics Consulting Group, Director for Economic Analysis, Austin, TX, USA E-mail: [email protected].

1. For a detailed review, please refer to Battersby and Grimes (1999), Razgaitis (1999), Reilly and Schweihs (1999 and 2004), and Smith and Parr (2000 and 2004), as well as numerous pa-pers and articles in les Nouvelles such as Jousma (2005) and Degan and Horton (2002).

2. As a result, the review will not cover the numerous books and papers that discuss or introduce methods of royalty determi-nation, nor those only publishing and analyzing royalty surveys and statistics.

3. Many new studies have been added to the pool since then, including Watanabe and Tauman (2004), Sen and Tauman (2007), and Kishimoto and Muto (2009). However, the general approach has not changed substantially.

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payment and a patentee’s maximum profit are math-ematically complicated. For example, a typical royalty payment formula would depend on how many firms would license among all of the firms, market demand function, cost function, the nature of technology such as drastic or incremental innovation, and market structure, among many others. As a result, directly applying such models in practice still depends on data availability, and requires further work in soft-ware development as well. However, these studies do offer theoretical justification that license market is forward-looking and reflects certain economic and financial factors.Empirical Studies in Pricing and Valuation in Licensing Market

Until very recently, empirical studies on the li-cense market focused mainly on licensing behavior, industry characteristics, and agreement features.4 The recent efforts in seeking empirical evidence in the relationship between royalty and economic indicators were actually spearheaded by the inter-est in verifying the 25 percent rule. Goldscheider et al (2002) is one of the earliest studies that linked royalty rate to profitability data. Although their work confirmed the 25 percent rule, it stopped short of exploring a more intrinsic relationship between royalty rates and profit margin.

Nagaoka (2004), on the other hand, first associated the royalty rate with economic indicators such as R&D intensity, and also discussed the link between royalty rate and agreement features such as initial payments, exclusivity, cross-licensing, and IP protection. One of the most important conclusions from his regression analysis is that R&D-intensive industries usually have higher incidence of high royalty rates, by which he defined as royalty rate above 8 percent. The study also demonstrated that IP protection and the share of exclusive contracts have a significant positive impact on the incidence of high-royalty contracts.

Inspired by the earlier studies, a series of studies have been published recently to further investigate various issues in royalty pricing, focusing on profit-ability, market power, and market performance. Bor-shell and Dawkes (2009), for example, examined the potential role of the 25 percent rule played in royalty

determination in the pharmaceutical industry, using both corporate EBITDA margins and project profit margins. While the conclusions seemed to disapprove the role of 25 percent rule,5 their use of project profit margins certainly marked a new breakthrough. Kem-merer and Lu (2008) found that royalty rates were positively related to various profitability measures, and that royalty rates across industries tended to fall between 25 percent of gross profit margins and 25 percent of operating profit margins. When pro forma profitability measures were used, according to Lu (2010), it was reasonable for royalty negotiation to start with 25 percent of EBITDA margin or 33 percent of EBIT margin. Finally, Becker and Lu (2009) dem-onstrated that royalty rates were positively related to price markup and technology intensiveness, and negatively associated with two traditional measures of barriers to entry.2.2 Stock Market Valuation of Intangible Assets: Theories and Empirical EvidenceTobin’s q: Theory and Early Evidence

Tobin created q (Tobin, 1969) as the ratio between the market value of a firm and its replacement cost to explore capital investment behavior and to analyze investment decision making. Theoretically, q shall be unity in the long term. In the short term, however, q can deviate from 1, which would motivate firms to invest or divest in corporate assets. Tobin and Brain-ard (1977) further highlighted several factors that might cause q deviating from one, including market power, heterogeneity of capital goods, technological progress, and costs of adjustment.

Lindenberg and Ross (1981) first introduced Tobin’s q into industry organization research, and interpreted it as a measure of the aggregate Ricard-ian and monopoly rents accruing to a firm’s operat-ing assets. Accordingly, Tobin’s q would reflect two major intangible factors on which a firm earns rent, the company-specific factors such as geographic convenience, and certain particular factors in barri-ers to the entry such as patents or scale economies. They found that industries with highest q values included firms that successfully marketed differenti-ated products or had strong patent protection, such as those in drugs, chemicals, machineries, and oil and gas equipment industries. The research offered

4. Typical examples of such studies include Anand and Khanna (2000), Bessen and Maskin (1999), Kim and Vonortas (2006), and Benoit et al. (2000). Two typical examples of the issues dis-cussed by these studies include cross-licensing and exclusivity across various industries.

5. Actually, if the profit margins in Borshell and Dawkes (2009) were adjusted as suggested in Lu (2010), their data may well confirm the role of 25 percent rule on average. Please refer to Lu (2010) for detailed comments.

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the earliest cross-industry evidence on the relation-ship between Tobin’s q and intangible assets such as patent rights.Recent Empirical Studies in Tobin’s q and Intangibles Assets

Under the efficient market hypothesis, the equity market shall reflect the intrinsic value of a firm, which is the present value of the expected cash flow generated by a firm’s assets. Assuming that a firm’s assets can be divided into two categories, tangible assets and intangible assets, economists developed two sets of literature in using Tobin’s q to quantify intangible assets.

The first set of literature was pioneered by Robert Hall of Stanford University. Based on the assumption above, he developed a procedure, which inferred the value of intangibles by subtracting from market valua-tion the rents due to the costs of adjustment and value of tangible assets. For details, please refer to R. Hall (2000, 2001a and 2001b). Based on the significant rises of Tobin’s q over the periods since WWII, he concluded that the net value of intangible assets in nonfarm, nonfinancial corporations as percentage of GDP could be as high as 30 percent in the late 1960s and early 1970s, and might reach nearly 100 percent in the late 1990s. However, the procedure failed to explain the negative intangible assets derived for the 1970s, nor the rapid build-up and the sharp decline in the inferred intangibles in the 1995-2001 period.6

The second approach based on Tobin’s q was initially proposed by Griliches (1981) and over the years developed by Bronwyn Hall of the University of California at Berkeley and her colleagues. Instead of referring the quantity and value of intangibles from market valuation, the Griliches-Hall approach con-structed certain measures of intangible assets using data from financial statements, and then studied if such measures were reflected by the stock market.7 While the specifications of valuation models may differ slightly across the literature, a typical one would have Tobin’s q as a dependent variable, with

independent variables including items such as R&D capital, patent counts, brand value, or other measures in intangibles, in addition to ordinary physical assets.8

Conclusions from studies taking the Griliches-Hall approach generally confirmed that the stock market valued the various measures of intangibles constructed, although the market might weigh such measures differently across industries. However, the interpretation of the coefficients associated with the measures is not very intuitive. In most of the stud-ies, the quantitative impact on the market value of each measure such as R&D stock and patent stock or citations was assessed through an elasticity mea-sure calculated from the estimated coefficients. For example, B. Hall et al (2005) reported that an extra patent per million dollar of R&D would boost market value by 2 percent.

Bessen (2009) developed certain estimable speci-fications that were similar to the models above, but the coefficients of the patent stock variable can be interpreted as the upper bound of the mean rent per patent. For example, he estimated that the mean rent per patent may be around $300,000 to $400,000, with the mean rent per patent in large pharmaceutical companies being as high as $7,177,000.9 Value Relevance Research in Market Valuation of Intangibles

The value relevance research in accounting eco-nomics also includes intangible assets as one of its major topics. In contrast to the studies based on Tobin’s q, value relevance research does not assume market to be efficient, nor rely on the new classic value maximization model. Actually this approach does not even intend to develop fundamental valu-ation models. The focus is to test whether certain selected variables contain the information that is actually impounded by the stock market.

The models in these studies are usually specified as or inspired by Ohlson model. Ohlson model was origi-nally developed by Ohlson (1995) and Feltham and Ohlson (1995), in which they creatively used Clean Surplus Relationship as the linchpin to integrate two valuation approaches, i.e., the mainstream valuation assumption that equity value reflects the expected

6. For other studies by R. Hall and similar works, please re-fer to R. Hall (2002 and 2005), Eliades and Weeken (2004), and McGrattan and Prescott (2000). For critiques on R. Hall approach, please see LeRoy (2004), Bond and Cummins (2000), and several chapters in Corrado et al (2005).

7. Please refer to B. Hall (1993a, 1993b, and1998), B. Hall and Kim (2000), B. Hall et al (2005), B. Hall and MacGarvie (2009), and Grandi et al (2008).

8. Such models are essentially hedonic models. As a result, coefficients are not structural parameters, and reflect only the current equilibrium price of a particular intangible assets at a point of time. They are shadow prices of the various measures of intangible assets, and will not be stable across time or sector.

9. A similar approach was taken by Brynjolfsson and his coau-thors, by which they divided corporate assets into three catego-ries including computer, physical assets, and other assets. Their regression analysis indicated that $1 investment in computer would generate nearly $10 of market value, which they inter-preted as the clear evidence of the presence of intangible assets and adjustment costs, etc. Please see Brynjolfsson et al (2002), Brynjolfsson and Yang (1994) and Brynjolfsson and Hitt (2005).

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earnings, and the accounting approach that market value is a function of balance sheet. In these studies, an econometrically estimable model typically takes a form of equity price as a linear function of book value, abnormal earnings, and various measures of intangible assets such as R&D intensity or capital and count or value of brand name etc. They generally found that the measures of intangible assets were statistically significant. In other words, investors do value the information as reflected by such measures.10

Finally, stock market return has also been used as dependent variable for econometric analysis, and model specifications vary depending on the particu-lar approach taken. For example, in Aboody and Lev (1998), Deng and Lev (1998), and Lev and Zarowin (2008), the set of independent variables was similar to a typical model in value relevance research. By contrast, the research on brand name value in Mad-den et al (2002) and on R&D expenses in Chan et al (2001) took a Fama-French approach.3. Are Licensing Market And Stock Market Integrated? 3.1 Research Scope and Data Description

The conclusion that stock market values R&D capital, patents, brand names, trademarks and other intangibles is not surprising. Although the GAAP rules require that companies expense R&D and advertising costs when incurred, the outcome from R&D and advertising activities last much longer beyond the current accounting period, and affects a company’s operational advantages and competitive edge for years down the road. The stock market reflects the values of innovation and other intangibles, simply because a forward-looking stock market captures what the GAAP rules have been missing.

Intellectual property rights and other intangible assets are transacted in the license market, and their values are mainly reflected by royalty payments. As discussed at the beginning of the paper, the license market and royalty pricing are presumably forward-looking, and should reflect the expected profitability and value-generating capacity of the product and ser-vices embedding the intangibles. Now the question is, are the valuations consistent across the two markets? Or more broadly speaking, are the two markets actu-ally integrated or coupled, such that they value the same portfolio of intangible assets of a company or an industry in a reasonably consistent way?

No research has ever been done to link the license market and the stock market, nor to associate the stock market’s valuation with the license market’s. The only study close to what this paper tries to do is Gu and Lev (2004), in which they related royalty income to stock market valuation. Using the data of 198 firms from the period of 1990 to 1998, they re-gressed market return to net income, royalty income, and R&D expenditure. The analysis indicated that not only the stock market valued royalty income, it actu-ally believed that $1 of royalty income is three times as valuable as $1 of net income. More interestingly, the study reported that, with the presence of royalty income, the stock market actually valued R&D expen-diture more than when royalty income was absent. In other words, royalty income provided investors with signals regarding the quality and prospects of R&D expenditure, and therefore, reduced uncertainty and increased investors’ confidence.

This paper takes a different approach. Instead of relating aggregate royalty income to market valuation of a company, the analysis focuses mainly on the pricing behaviors of the two markets in intangible assets valuation. Intangible assets is broadly defined in this paper, including not only those recognized and carried on book as required by the GAAP rules, but more importantly, those unrecognized ones such as innovations in technology, marketing, and organiza-tion, among other intangible factors that create and sustain market power and competitive advantage.11

It is further assumed that each company has a port-folio of intangible assets, and that an industry has a much larger portfolio of intangible assets that consists of all intangible assets owned by the companies in the industry. Royalty rate, expressed as a percentage of sales, is designated as the price of intangible assets in the license market. For a specific industry, the average royalty rate is used as the license market’s valuation of the portfolio of intangible assets in the industry. Tobin’s q is adopted as the valuation or price of a company’s intangible assets in stock market, fol-lowing the literature reviewed above.12 At industry

10. Please see Sougiannis (1994), Deng and Lev (1998), Barth et al (2001), Barth et al (2003), Guo et al (2004), Lev et al (2005), Kallapur and Kwan (2002), Barth and Clinch (1998), and Lev and Radhakrishnan (2005).

11. The value of such broadly-defined intangible assets can be better captured by Tobin’s q, while royalty rate reflects mainly the valuation of those assets transacted in license market, such as patents, know-how, software, contents and subscription list. However, under the efficient market hypothesis, the license market presumably factors in the value of all intangible assets existing in an industry to determine a reasonable average roy-alty rate for the industry.

12. For more detailed discussions about using Tobin’s q to measure intangible assets, please refer to Lang and Stulz (1994) and Villalonga (2004).

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level, the stock market’s valuation of the portfolio of intangible assets in an industry is measured by the average of Tobin’s q of all companies in the industry.

As in Kemmerer and Lu (2008), the royalty rate data for 14 industries studied in this paper is from the December 2007 issue of the Licensing Econom-ics Review (LER), published by RoyaltySource.13 For details of the royalty rate calculation, please refer to the December 2007 issue of LER. It is worth pointing out that the royalty rate data as collected by Royalty-Source covers a wide variety of intangibles, including patents, know-hows, trade-secrets, software, and even contents and customer lists.

Tobin’q is approximated by the ratio of market capitalization to book value of a company’s assets car-ried on balance sheets. It is calculated based on the data retrieved from the CompuStat Research Insight CD-ROM, for the year ending December 31, 2007. The average of Tobin’s q in an industry is computed as an arithmetic mean of the ratios of all companies with data available.

Finally, but not less importantly, RoyaltySource has its own proprietary industry classification system, which is different from SIC- or NAIC-based systems

used by most financial data vendors including Compu-Stat. This study adopts RoyaltySource’s classification system, and then maps companies in the SIC-based industries onto the RoyaltySource system,14 as shown in Table 1. After such an exercise, a total of 3,887 companies were mapped onto 14 industries. For de-tailed description of industrial classifications, royalty rates, and CompuStat data, please refer to Kemmerer and Lu (2008).3.2 Data Analysis

Linear regression analysis is conducted to test whether royalty rate is associated with Tobin’s q. The average royalty rates of 14 industries are regressed against the 14 average ratios of Tobin’s q, and the results are shown in row (1) of Table 2. Obviously, although the coefficient of Tobin’s q has the expected positive sign, it is not statistically significant. Further-more, R2 of the regression is very low, indicating that Tobin’s q explains less than 2.5 percent of the variation in the royalty rates.

A scatter chart is plotted with royalty rates and Tobin’s q across 14 industries, as shown in Chart 1. It appears that two outliers, media and internet/software, essentially annihilate the linearity between royalty

Table 1. Industry Classification: RoyaltySource System vs. SIC Code

RoyaltySource Classification 4-Digit SIC CodesNumber of Companies

Automotive 3710-3716 96

Chemicals 2800-2824 2840-3089 316

Computer and Office Equipment 3570-3579 155

Consumer goods, Retail and Leisure 2300-2399 2500-2519 3100-3199 3630-3639 3650-3652 3900-3999 204

Electrical and Electronics 3600 3640-3648 3670-3671 3675-3699 126

Energy and Environment 1200-1389 3510-3519 3533 3610-3629 395

Food Processing 2000-2099 154

Internet and Software 7370-7375 712

Machines and Tools 3500 3520-3532 3534-3569 3580-3599 3800-3829 3860-3873 380

Media and Entertainment 2710-2741 4830-4841 7810-7819 157

Medical and Health Products 3840-3851 245

Pharmaceuticals and Biotechnology 2830-2836 555

Semiconductors 3672-3674 206

Telecom (excluding Media) 3660-3669 186

Grand Total 3887

13. Actually, LER reported royalty rates for 15 industries, but internet and software sectors were combined for the analysis in this paper. Please see footnote 2 of Kemmerer and Lu (2008).

14. I do want to repeat my appreciation to Mr. David Weiler of AUS Consultants for helping me understand RoyaltySource’s in-dustrial classifications. However, any errors or mistakes in match-ing the companies with RoyaltySource classification are mine.

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rate and Tobin’s q. The two sectors have royalty rates that are almost double of the majority of its peers, and nearly two thirds higher than that of pharmaceutical industry. In other words, the license market values the intangible assets in these two sectors much higher than it does to all other sectors. However, the stock market seems to have a different opinion than license market’s, and actually gives the two sectors a very average mark.

Based on what Chart 1 reveals, a dummy variable is introduced into regression analysis, which is equal to 1 for the two outlying sectors, and 0 for all others. The results from the new regression analysis are reported in row (2) of Table 2. With the two sectors being controlled by dummy variable, R2 is now nearly 96 percent, meaning that Tobin’s q and the dummy variable together account for nearly 96 percent of the variation in the royalty rates. Also, the coefficient of Tobin’s q becomes highly

statistically significant. On average, a one unit of increase in Tobin’s q would lift an industry’s average royalty rate by 0.36 percentage point.

Final ly but most importantly, the coef-ficient of dummy vari-able is also statistically significant, confirming that the two sectors have caused the non-linearity in the regres-sion analysis shown in row (1) of Table 2. Evidently, the license market and the stock market disagree over the valuation on intan-gible assets in media and internet/software industries. Actually, the intangibles assets in the two sectors are granted a 7.4 percent premium by the license market, compared to the av-erage royalty rate as determined by the re-gression line. However, in the stock market, their intangible assets perform fairly average.

The license market premium of media and internet/software industries was first documented in one of my earlier studies (see Becker and Lu, 2009). There, we hypothesized that technology-intensiveness and IP-richness may be two important features that distinguish the two sectors from all others. Nagaoka (2004) actually offered pre-liminary empirical support to the hypothesis. His study found that technology transfer contracts accompanied by the license of IPs such as patent, brand name, and know-how usually had higher incidence of high-royalty.

On the other hand, a most recent research in B. Hall and MacGarvie (2009) proved the absence of a stock market premium for software patents and software companies.15 They concluded that based

Chart 1. License Market vs. Stock MarketValuations Across Industries As Reflected by

Royalty Rate and Tobin’s q

14.00%

12.00%

10.00%

8.00%

6.00%

3.00%

2.00%

0.00%0 2 4 6 8 10 12

Media Internet & Software

Pharm

E & EChemFood

AutoEnergySemicon

TelecomConsumer

Mach./ToolComp/Equip

Medical

Tobin’s q

Roya

lty R

ate

Table 2. Regression of Royalty Rate Against Tobin’s q

Model Specification

R2 Intercept Tobin’s qIndustry Dummy

(1) 0.0245 Coefficient

P Value0.05371.86%

0.002459.27%


P Value0.03810.00%

0.00360.34%

0.07440.00%

15. An earlier and relevant study is Deng and Lev (1998), in which they examined the value relevance of intangible assets in acquisition pricing, and found that software companies did not have a premium.

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on the invention quality measured by patent cita-tions per dollar of R&D capital, stock market valued software patents similarly to how it did with other patents, and there was no premium associated with software patent.16 More importantly, when software firms were compared across industries with other firms in machinery, electrical machinery, instruments, and telecommunications industries, software patent stocks and citations did not enjoy any premium in the stock market.

Obviously, while there are sporadic empirical evidences that corroborate the observations made from the dummy variable regression above, such previous studies concerned only one of the two markets disconnectedly. No research efforts had ever tried to cover both markets simultaneously, needless to say, explaining or reconciling the dif-ferences in the valuations of intangible assets by the markets.

To summarize, the analysis indicates that the license market and the stock market are partially integrated or coupled. The license market’s valuation on an in-dustry’s intangible assets is highly positively related to the stock market’s valuation on the same portfolio of intangible assets in the industry, except in two sectors, media and internet/software, in which the stock market and l the license market disagree over the valuation. 4. Pricing Behaviors of Licensing Market and Stock Market4.1 Model Specifications and Data Description

The dummy variable analysis above singles out me-dia and internet/software industry from their peers, and demonstrates that the valuations of intangible asses in all other sectors are fairly consistent cross market. However, what we do not know is whether such a pattern has been caused by some random fac-tors, or actually reflected more fundamental differ-ences in the intrinsic pricing behaviors between the two markets. In other words, if the license market and the stock market are not completely integrated, what would have caused the coupling in some sectors and decoupling in others? What fundamental factors, both economic and financial, underlie the similarities

and dissimilarities between the pricing behaviors of the two markets?

As always, there are certain ad hoc and intuitive explanations. For example, stock market valuations on media and internet/software might have been caused by current accounting rules stipulated in GAAP. Both sectors rely heavily on software technology to con-duct their business. According to SFAS 86, a company can capitalize its R&D costs for software development when technology feasibility is established. As a result, these companies may have relatively lower R&D costs reported on income statements, and higher assets on balance sheets. Higher reported assets would lower Tobin’s q with such companies.

While the capitalization of software development costs may well inflate the book value of reported assets and hence deflate the value of Tobin’s q, the magnitude of the effect is not sufficient to explain the performance in Tobin’s q of the two sectors. For example, a quick estimate shows that the capitalized software development costs accounted for only about 8 percent to 10 percent of the reported total assets of internet and software companies in 2007. This is consistent with the analysis of capitalization intensity, or capitalized R&D cost as percentage of total R&D cost, in Aboody and Lev (1998). According to their research, capitalization intensity declined to about 10 percent by the middle of 1990s from its peak of more than 30 percent in the late 1980s, due mainly to the kick-in of the offsetting effect between the positive earning effect from capitalization and the negative earning effect from amortization.

Obviously, a more systematic or comprehensive approach is needed to address the issue raised at the beginning of this section. Fundamental economic and financial factors need to be identified and applied to assess the underlying pricing behaviors that deter-mine the valuations of intangible assets by the license market and the stock market. Based on the literature review and my research on various economic and financial indicators, three of them are selected for econometric analysis.

R&D intensity. R&D intensity is defined as the per-centage of R&D cost to total sales revenue. Compared to the R&D capital measures used in most studies reviewed above, R&D intensity reflects the continu-ous, or the flow of, R&D efforts. The use of this flow measure of R&D efforts instead of the stock measure of R&D capital is based mainly on two considerations. First, R&D cost as percentage of sales is fairly stable historically for most companies. Second, such ratio is subject to less accounting manipulation. For example,

16. B. Hall and MacGarvie (2009) did show that software patent stock enjoyed a premium. However, because the coef-ficients of the entire patent stock were negative and statistically significant, and because software patents were included in the entire patent stock, the positive premium with software patents are hard to interpret.

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capital stock measure of R&D capital is usually calculated with an arbitrary depreciation rate of 15 percent. More importantly, for the software-intensive companies, SFAS 86 offers a wide range of discretions in applying the rules, and generates additional accounting uncertainty.

Relative size of intangible assets carried on book. This relative measure is defined as the histor-ical-cost-based value of intangible assets recognized and carried on book, scaled by total assets.17 The ratio presumably reflects the stock of accumulated intangible assets that a company acquired over the course of doing business. The book value of intan-gible assets is based on the data item Intangibles in CompuStat Research Insight, which includes a list of 21 intangible assets or properties that can be categorized into three groups:

1) Intellectual properties, such as patents, copy rights, trademarks or trade names, and computer software patents;2) Know-how and proprietary operating assets, including blueprints, distribution rights, engineering drawings, franchise, import quotas, licenses, operating rights, and subscription lists;3) Goodwill and other cost related items, such as design cost, franchise fees, and lease costs.

Price Markup or Markup. Markup is defined as the ratio of sales revenue to cost of goods sold, and used to measure competitive advantage and market power. Economists use mainly two indicators to as-sess market power. The first one is the Lerner Index, which is the difference between price and marginal cost as a share of price. The other one is the ratio of the difference between price and marginal cost to marginal cost. A variant of such index is simply the ratio of price to marginal cost. Due to the difficulty in measuring marginal costs, most empirical studies use a measure of average cost as a proxy of marginal cost when calculating the Lerner Index and marginal cost markup variables. Cost of goods sold is used to calculate price markup in this paper.

The data source of royalty rates and the calculation of Tobin’s q have been discussed in Section 3.1. As with Tobin’s q, the raw data is retrieved from Com-puStat CD-ROM, as of the end of 2007, to calculate R&D intensity, relative size of the book value of intangible assets, and markup ratio. The relative size of recognized intangible assets and markup ratio are calculated as the arithmetic mean of the ratios of all companies with data available in an industry. The R&D intensity of an industry is calculated as the value weighted industry average, as in Barth et al (2001).4.2 Findings and Discussions

Two separate sets of regression analysis were con-ducted to examine how royalty rate and Tobin’s q price the three indicators above, and the results are reported in Tables 3 and 4.

Table 3. Regression Analysis on Royalty Rate

Model Specification

R2 InterceptR&D/Sales

Intangibles/Total Assets

MarkupIndustry Dummy


P Value0.0579 0.07%

0.0848 58.49%


P Value0.0446 0.00%

0.1242 0.33%

0.0744 0.00%


P Value0.0208 12.50%

0.2561 0.29%


P Value0.0583 0.00%

-0.0354 53.13%

0.0793 0.00%


P Value-0.0002 99.10%

0.2120 4.48%

0.2957 0.06%


P Value0.0414 0.03%

0.1308 0.55%

0.0197 64.50%

0.0710 0.00%


P Value-0.0268 6.24%

0.2309 0.02%

0.0249 0.08%

17. In the rest of this paper, the ratio is simply referred as the book value of intangible assets, or recognized intangible assets, for the briefness of presentation.

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Royalty Rate Regression and Major FindingsIn the first set of regression analysis, royalty rates

are regressed against various combinations of the three fundamental indicators, in addition to a dummy variable that equals one for media and internet/software sectors, and 0 for all others. As shown in row (1) of Table 3, before the two outlying sectors are controlled by the dummy variable, R&D intensity and royalty rate are not significantly related. After the dummy variable is introduced, both the dummy variable and R&D intensity become highly positively related to royalty rate, and the pair explains nearly 96 percent of the variations in royalty rates.

Apparently, the license market grants the two outliers a premium beyond what their R&D intensity would imply. A tentative explanation is that although companies in the two sectors reported less R&D spending because of the requirements by SFAS 86, the license market is sufficiently efficient and fully aware of the accounting scheme. Therefore, it values their R&D efforts more than those of the peer sectors. However, in a separate regression analysis that is not reported in Table 3, the interactive effect between dummy variable and R&D intensity on royalty rate is negative with a marginally statistical significance, which, to say the least, means that the license market did not value the R&D efforts in the outlying sectors more than those in others. Evidently, their premiums must have been elicited from some other sources.

Row (3) of Table 3 shows that the book value of intangible assets alone explains more than half of the variation in royalty rates, and its coefficient is significantly positive. In other words, the more intan-

gible assets a sector carries on book, the higher the royalty rate. This new conclusion complements and completes Kim and Vonortras (2006), in which they concluded that technology stock, prior exposure to licensing, and industry patent intensity were among the major determinants of licensing propensity.

When a dummy variable is introduced, however, it dominates the regression analysis, essentially canni-balizing the effect of the intangible assets recognized on book, as shown in row (4). The same cannibaliza-tion effect is also shown in row (5) and (6). When R&D intensity and recognized intangible assets are the only regressors, both of them are statistically significant. However, when the dummy variable is added, it completely depresses the significance of recognized intangible assets, but leaves R&D inten-sity’s effect intact.

This leads to the first important conclusion from the analysis, that is, to a great extent, the dummy variable and the book value of intangible assets are substitutable in license market regression. Essentially, what the dummy variable reflects is mainly the effect of the accumulated stock of intangible assets car-ried on book. For example, compare row (2) where regressors are R&D intensity and the dummy variable with row (5) where the dummy variable is replaced by recognized intangible assets. The specification (5) commands more than 70 percent of the explanatory power the specification (2) has. The conclusion en-

Table 4. Regression Analysis on Tobin’s q

Model Specification

R2 Intercept R&D/SalesIntangibles/Total Assets

MarkupIndustry Dummy


P Value2.4198 0.11%

25.7239 0.23%


P Value2.4401 0.23%

25.6636 0.37%

-0.1140 91.26%


P Value5.2449 0.07%

-6.4603 32.67%


P Value6.2653 0.26%

-14.4056 20.96%

2.1615 38.27%


P Value2.7729 2.92%

24.9505 0.55%

-1.7974 71.36%


P Value3.1331 7.61%

24.2465 1.14%

-4.1903 64.25%

0.6152 74.66%


P Value2.5219 17.93%

-7.9001 19.69%

1.4213 7.97%

18. The average relative size of recognized intangible assets in media and internet/software sectors is 40 percent and 24 percent, respectively, compared to the average of 14 percent among their peers.

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ables an explanation about the premiums of the two outliers in license market, that is, the premiums rep-resent mainly the values created by their substantially higher stock of intangible assets carried on book.18

The second important conclusion is that R&D inten-sity and the book value of intangible assets account for 68 percent of the variation in royalty rates across industries, and that both coefficients are statistically significant and highly positive, as shown in row (5) of Table 3. The specification serves as this paper’s first valuation model for the license market:

Royalty Rate = -0.0002 + 0.2120*R&D/Sales + 0.2957*Recognized Intangible Assets (1)R2 = 0.6842, P = 4.48 percent P = 0.06 percent

As defined above, R&D intensity captures the continuous, or the flow of, R&D efforts, while the recognized intangible assets reflects the accumulated stock of intangible assets generated from innovative activities such as R&D, advertising, organizational and managerial innovation. The analysis clearly demonstrates that the license market values both the flow and stock of innovative efforts when assessing the market value of the portfolio of intangible assets possessed by an industry.

Finally, in an effort to capture the competitive advantage generated by the portfolio of intangible assets held by an industry, price markup is introduced as an explanatory variable to represent the market power of an industry. Obviously, R&D intensity does not capture all of the flow of innovative efforts in technology, marketing, organization and operation.19 As shown in row (7) of Table 3, recognized intangible assets and markup ratio together explain as much as 84 percent of the variation of the royalty rates across 14 industries. This effectively proves that the difference in royalty rates across industries is largely determined by market power and by the accumulated stock of intangible assets carried on book. The more market power an industry has, the bigger stock of accumulated intangible assets, the higher the royalty rate. The analysis brings forth the second valuation model for license market:

Royalty Rate = -0.0268 + 0.0249*Markup + 0.2309*Recognized Intangible Assets (2)R2 = 0.8414, P = 0.08 percent P = 0.02 percent

Tobin’s q Regression and Major FindingsTable 4 contains the results from regressing To-

bin’s q against R&D intensity, recognized intangible assets, price markup, as well as the dummy variable as defined above.

R&D intensity. Across various model specifica-tions in Table 4, R&D intensity is highly positively related to Tobin’s q, indicating that stock market values the flow of R&D efforts, and attaches a higher price mark to the portfolio of intangible assets in an industry that maintains a larger flow of R&D ef-forts. The conclusion remains true with or without the presence of dummy variables or recognized intangible assets.

Relative size of intangible assets carried on book. In stark contrast to the royalty rate regres-sion, the book value of intangible assets is not statistically significantly associated with Tobin’s q across the specifications, regardless of the dummy variable. In other words, the stock market does not value the accumulated stock of intangible assets carried on book, even for the sectors that have significant amount of such assets, including media and internet/software. More interestingly, while statistically insignificant, the coefficients of recognized intangible assets all have an unexpected negative sign, implying that the stock market tends to discount the recognized intangible assets carried on book.

Economic and financial theories can justify either a value-relevant or—irrelevant argument for the book value of intangible assets recognized, and hence do not offer much guide to interpret this con-clusion. Other empirical studies generally yielded mixed conclusions, depending mainly on the model specifications, or precisely, on whether R&D, adver-tising, and other intangible-assets-creating activities are controlled. Choi et al (2006), for example, did not include any measures in R&D and advertising

19. In a separate regression analysis not shown in Table 3, it is proved that R&D intensity contributes to markup ratio with a marginally statistical significance, but accounts for less than a quarter of the variation of the ratio. By contrast, the book value of intangible assets and markup are found not related.

20. A relevant study is Deng and Lev (1998), in which they showed that in-process R&D was priced in acquisition price, but goodwill was not.

21. Barth and Clinch (1999) found that the value relevance of cost-based intangible assets actually depends on firm size or analyst coverage, and varies across industries. For example, among non-financial firms, the cost-based intangible assets of small firms are significantly positive related to market value and stock return, while those of big firms or with analyst coverage are not. This conclusion was further corroborated by Barth et al (2001), in which recognized intangible assets were negatively associated with analyst coverage, although analysts generally expend more efforts in covering companies and industries with high recognized intangible assets.

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efforts, and found that book value of intangible as-sets contributed significantly to market to book ratio. By contrast, Villalonga (2004) controlled R&D and advertising activities, and showed that book value of intangible assets were not significant.20, 21

However, Table 4 seems to offer preliminary evi-dence that the stock market either does not price the book value of intangible assets, or more likely, dis-counts the value of such assets. More importantly, this remains consistently true across all industries, with or without R&D intensity being controlled. There are two possible reasons. First, due to the discretion and uncertainty with accounting rules, the stock market is highly suspicious about the value of the intangible assets recognized according to such rules. Second and more likely, the stock market may believe that such historical-cost-based book value of intangible assets is irrelevant, because all information embedded in the intangible assets accounted this way has already been known to the public and factored into pricing in the past. This is consistent with Pattikawa and Commandeur (2005), in which they showed that in the pharmaceutical industry, the stock market valued much higher the new to market product innovation than the incremental ones, and actually discounted the imitation products.

Price Markup. While markup and the book value of intangible assets account for more than 84 percent of the variation in royalty rates, only less than a third of the variation in Tobin’s q can be justified by the pair, with recognized intangible assets actually becoming irrelevant. Market power as measured by markup is proved to be positively associated with Tobin’s q, though the statistical significance is only marginal. This finding offers empirical support to Itami (1987), and is in conformity with the analysis on Tobin’s q and Lerner Index in Lindenberg and Ross (1981). Revisit the Regression on the Integration of Two Markets

Finally, the analysis above demonstrates that what the dummy variable reflects is mainly the effect of the accumulated stock of intangible assets carried on book, and that the book value of intangible as-sets serves as the most important discriminator that differentiates the pricing behavior of the license market from that of the stock market. In an effort to test the validity of the conclusions, the regression analysis on the integration of the license market and the stock market, shown in Table 2, is revisited here. The dummy variable in row (2) of Table 2 is replaced by the book value of recognized intangible assets. This new regression specification leads to the third

valuation model of the license market generated in this study. As shown below, the coefficients of both Tobin’s q and the book value of intangible assets are positive and statistically significant, and the two regressors account for 68 percent of the variation in royalty rates across industries.

Royalty Rate = -0.011 + 0.0061*Tobin’s q + 0.2952*Recognized Intangible Assets (3)R2 = 0.6813, P = 4.75 percent P = 0.06 percentConsequently, the valuations on an industry’s

portfolio of intangible assets by the two markets are concordant when the book value of intangible assets is introduced. In other words, while both the license market and the stock market are forward-looking, the pricing in the license market seems to be backward-looking and path-dependent as well, i.e., it does impound the information embedded in the accumulated stock of intangible assets carried on book at historical cost. 5. Conclusions and Topics for Further Research

There has been no previous research on the link between the license market and the stock market. Are the two markets integrated or coupled such that the valuation of the same portfolio of intangible assets is consistent cross market? This study tries to fill the research gap, and contribute to the understanding of the relationship between the license market and the stock market. The analysis indicates that the two markets are partially integrated or coupled, and that valuations by the two markets on intangible assets are highly correlated, after two outlier sectors, me-dia and software/internet, are controlled by dummy variable. In other words, the license market and the stock market seem to disagree over the valuation of the intangible assets in the two sectors.

This paper moves to test whether the partial integration between the two markets is caused by some random factors, or actually reflects more fun-damental differences between the pricing behaviors of the markets. Two sets of regression analysis are conducted to associate royalty rate and Tobin’s q with three fundamental indicators including R&D intensity, the relative size of intangible assets book value, and price markup.

Several important conclusions are reached from the analysis. First and foremost, the stock of intangible assets carried on book is found to contribute signifi-cantly to royalty rate pricing in the license market, but essentially irrelevant in stock market valuation. Most likely, stock market actually discounts the book value of intangible assets.

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Second, stock market values R&D intensity or the flow of the R&D efforts significantly, and consistently across all industries studied. By contrast, the license market positively prices R&D intensity only when the book value of intangible assets is included in the analysis.

As a result, the book value of recognized intangible assets becomes the most important discriminator that differentiates the pricing behaviors of the two markets. The validity of this conclusion is confirmed by a revisit to the regression analysis on the integra-tion of the two markets. The revisit manifests that while both the license market and the stock market are forward-looking, royalty determination in the license market seems to be backward-looking and path-dependent as well, and impounds the informa-tion embedded the accumulated stock of intangible assets carried on book at historical cost.

Finally, three valuation models for the license mar-ket are developed from the analysis in this paper, all based on industry level data. Their predictor variables and explanatory powers are: i) Tobin’s q and the book value of intangible assets, 68 percent; ii) R&D intensity and the book value of intangible assets , 68 percent; and iii) Markup ratio and the book value of intangible assets, 84 percent. By contrast, the pair of markup and recognized intangible assets accounts for less than a third of the variation in Tobin’s q, and the book value of intangible assets actually is insignificant.

Three important issues merit further research ef-forts. First, the approach taken in this paper should be applied to a much larger number of industry sec-tors, ideally, to a fairly large number of companies across various industries. Data collecting can still be very challenging, though. Second, in addition to the flow measure of R&D efforts used in this paper, other intangible-assets-generating efforts such as advertising, training and customer soliciting should be added to the analysis. Finally and of course, with more industries or companies included, and more intangible-assets-generating activities added, more research may be needed to refine the economic and financial indicators used in this paper, and to identify the new ones if necessitated. ■

The views expressed in this essay are the author’s, not those of the Applied Economics Consulting Group, Inc. or the data vendors.

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Patent License Agreements

The Technological Comparability Of Patent License AgreementsBy John Elmore

■ John Elmore, Duff and Phelps, LLC, Vice President, Atlanta, GA, USA E-mail: [email protected]

ou are a master at strategy. The cards in your hand show it. With a smile, you lay down your winning formula. “Gin!” you declare trium-

phantly. Your adversaries around the card table stare in disbelief. After a pause, one of them utters, ”But we’re playing poker, not gin rummy.”

Imagine now that you are at trial presenting damages to the jury. You explain that a common approach used to determine a reasonable royalty in patent infringement litigation employs a “hypotheti-cal negotiation” construct whereby a willing patent owner and a willing potential licensee enter into an arms-length negotiation.1 You explain further that one of the means used to arrive at the outcome of the hypothetical negotiation is where the jury, typically assisted by experts, considers patent license agree-ments that are comparable to the hypothetical license at issue.2 You then carefully lay out your supporting license agreements like a winning hand of cards. At that point, you do not want the court to be like your poker friends and tell you that you have been playing the wrong game by relying on non-comparable license agreements.

So what do the courts have to say about comparabil-ity? The Federal Circuit maintains: “This court has long required district courts performing reasonable royalty calculations to exercise vigilance when con-sidering past licenses to technologies other than the patent in suit.”3 Yet case law until recently has pro-vided very little detail on the issue of comparability.

In the wake of recent legislative patent reform efforts and the U.S. Supreme Court’s criticism of the Federal Circuit’s handling of patent infringe-ment issues over the past few years, the courts are exercising more scrutiny with respect to economic

damages and the comparability of patent license agreements. Last year, the Federal Circuit vacated a $358 million award of reasonable royalty damages in the case of Lucent Technologies, Inc. v. Gateway, Inc. et al. because, in part, it found that the license agree-ments presented as evi-dence in support of the damages award were not comparable.4 Six months later, the Feder-al Circuit, citing Lucent, vacated the damages award in ResQNet.com, Inc., et al. v. Lansa, Inc. on the same grounds.5

While the courts recognize a number of factors in assessing comparability, the most often cited mea-sure in case law is technological comparability. In Lucent, the Federal Circuit noted “it was Lucent’s burden to prove that the licenses relied upon were sufficiently comparable” and that the “damages award cannot stand solely on evidence which amounts to little more than a recitation of royalty numbers… particularly when it is doubtful that the technology of those license agreements is in any way similar to the technology being litigated here.”6

Lucent’s patent described a software-based method to enter information on a computer screen without using a keyboard (for instance, using a mouse). Lu-cent contended that Microsoft’s use of a graphical drop-down calendar to select dates in its Outlook and Money products infringed Lucent’s patent. In support of reasonable royalty damages, Lucent presented four patent license agreements.7 The Federal Circuit dismissed the agreements, stating, “Lucent’s brief

Y

1. The hypothetical negotiation construct is based on Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970), aff ’d, 446 F.2d 295 (2d Cir.), cert denied, 404 U.S. 870 (1971).

2. Consideration of patent license agreements stem from the fifteen factors to consider in determining a reasonable royalty as introduced in Georgia-Pacific Corp. v. U.S. Plywood Corp., 318 F.Supp. 1116 (S.D.N.Y. 1970), aff ’d, 446 F.2d 295 (2d Cir.), cert denied, 404 U.S. 870 (1971).

3. ResQNet.com, Inc. et al. v. Lansa, Inc., 2010 U.S. App. LEXIS 2453, 2474 (Fed. Cir. 2010).

4. Lucent Technologies, Inc. v. Gateway, Inc., Gateway Coun-try Stores LLC, Gateway Companies, Inc., Cowabunga Enterpris-es, Inc. and Gateway Manufacturing LLC, 580 F.3d 1301, 1329, 1340 (Fed. Cir. 2009).

5. ResQNet.com, 2010 U.S. App. LEXIS at 2483, 2484.6. Lucent, 580 F.3d at 1329, 1332.7. Lucent presented eight license agreements of which four

were dismissed by the Federal Circuit as not comparable be-cause they provided for a running royalty rather than a lump-sum royalty, leaving four agreements that the Federal Circuit considered on the merits of technological comparability. See Lucent, 580 F.3d at 1327, 1328.

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describes the four agreements as ‘PC-related patents,’ as if personal computer kinship imparts enough com-parability to support the damages award.”8

The Lucent opinion suggests that the Federal Cir-cuit’s definition of comparability is not commensurate with broad technology categories (e.g. PC-related). The court’s opinion discourages comparisons of loosely related technologies. And the opinion would seem to diminish the usefulness of industry-based royalty rate studies, such as those published by Rob-ert Goldscheider and Russell Parr,9 in which license agreements comprising various technologies and economic circumstances are aggregated into industry groupings like pharmaceuticals, telecommunications, and semiconductors.

The Federal Circuit’s opinion begs the question: how does a licensing professional determine whether proposed comparable license agreements involve similar technology? Herein is a discussion of a frame-work for evaluating the technological comparability of patent license agreements. Identification of Patented Technology

An important initial question in evaluating a license agreement for technological comparability is whether the agreement involves patented technology. This may seem obvious, but some licenses convey only the rights to use a developed technology or software that may appear similar to a patent license agreement yet convey no patent rights. The Federal Circuit vacated the damages award in ResQNet.com because the plaintiff’s damages expert based his reasonable royalty opinion in part on a set of licenses that provided “re-bundled” software products and source code, among other things, but no patent rights. The Federal Circuit noted that the expert had “misunderstood (or worse, misrepresented) the re-bundling licenses as somehow amounting to ‘patent plus software’ licenses when, in fact, the record shows no use in these licenses of ResQNet’s claimed invention.”10 Generally, an agreement must state that the licensee enjoys certain patent rights; an agreement conveys no patent rights merely because it licenses software or other devel-oped technology embodying a patented feature.11

Even where an agreement provides for a patent license, the agreement may convey benefits broader in scope than the patent rights commensurate to a patent-in-suit. The courts have identified a number of these non-patent benefits as: (1) the use of trade-marks and other non-patent intellectual property,12 (2) know-how,13 (3) technical assistance,14 (4) marketing assistance,15 and (5) indemnification.16 Moreover, the courts have found that patent rights may be too broad in scope where a license involving multiple patents is compared to a license for a single patent, particularly where those patents cover a broad range of technologies.17 Thus, case law cautions that patent license agreements providing substantial non-patent benefits or multiple patents may not be comparable to a “straight” patent license.First Factor: Technical Attributes as a Measure of Similarity

In comparing patented technologies, a first factor to consider is “attribute-oriented” similarity, which is the similarity of the technology based on a com-parison of relevant technical attributes. A technical expert can be helpful in identifying the relevant technical attributes of a patented technology to be considered. The United States Patent and Trade-mark Office (USPTO) is also a helpful resource. The USPTO organizes patents utilizing a subject matter classification system wherein classes generally are defined according to relevant technical attributes.18

8. Lucent, 580 F.3d at 1328.9. Goldscheider, Jarosz, and Mulhern, “Use of the 25 Per

Cent Rule in Valuing IP,” les Nouvelles, December 2002, 123-133; “Industry Royalty Rate Data Summary,” Licensing Econom-ics Review, Vol. 6, December 2007, 6-7; and Parr, Russell L., Royalty Rates for Licensing Intellectual Property, John Wiley and Sons, Inc., Hoboken, NJ, 2007.

10. ResQNet.com, 2010 U.S. App. LEXIS at 2477.

11. A patent comprises a bundle of rights, including the right to make, use and sell the invention. A license is formed by the transfer of some of those rights from the party in possession of them to another. See e.g. Vaupel Textilmaschinen KG and Vaupel North America v. Meccanica Euro It Alia S.P.A. and American Trim Products, Inc., 944 F.2d 870, 873, 874 (Fed. Cir. 1991).

12. See e.g. Stratoflex, Inc. v. Aeroquip Corp., 713 F.2d 1530, 1539 (Fed. Cir. 1983).

13. See e.g. Mobile Oil Corp. v. Amoco Chemicals Corp., 915 F.Supp. 1333, 1345 (D. Delaware 1995).

14. Id.15. See e.g. ResQNet.com, 2010 U.S. App. LEXIS at 2475.16. See e.g. Mobile Oil, 915 F.Supp. at 1345.17. See e.g. Anders E. Trell v. Marlee Electronics Corp, 912

F.2d 1443 (Fed. Cir. 1990); Lucent, 580 F.3d at 1328.18. An exception may be the classification of patents by the

USPTO on the basis of the industry employing the patented technology. Such classification may group patents with little or no relevant technical attributes merely on the basis of industry affiliation. This approach does not appear to have been used much in the modern era but several classes based on it still exist today (e.g. Butchering and Bee Culture). See “Handbook of Classification,” United States Patent and Trademark Office (USPTO), available at http://www.uspto.gov/web/offices/opc/documents/handbook.pdf, p. 3.

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It maintains over 400 classes under which a patent can be categorized. Classes are further broken down by subclasses that have hierarchical associations. (For example, class 710 entitled “Electrical Computers and Digital Data Processing Systems: Input/Output” embodies the attributes of electrical power, computa-tion capability, and transmission of digital data, among others. Class 710 features subclass 100 entitled “In-trasystem Connection,” which is further comprised of subclasses associated with computer bus connections and transactions.) The USPTO assigns each patent to a “primary” class and it may further assign a patent to one or more “secondary” classes or to a subclass.

Due to the wide variety of technologies represented by the USPTO’s classification system, the USPTO has employed a variety of approaches to classify patents.19 A first approach classifies patents on the basis of a patented technology’s fundamental, necessary or direct function. For example, heat exchange devices (e.g. drink coolers, radiators, etc.) are grouped into a single classification and further subdivided into features essential to such devices. A second approach classifies patented technology into industrial or trade groupings based on the result produced, whether tangible (e.g. the product of a manufacturing process) or intangible (e.g. the communication of sound at a distance). This approach tends to be used for com-plex processes or structures requiring a number of successive activities (e.g. telephone system). A third approach classifies patented technology on the basis of structural configuration or physical makeup. It is employed generally for patented technology that lacks an apparent functional characteristic. For example, a classification of a material may be made on the basis of its chemical compounds and their arrangement ir-respective of the material’s utility or function. Finally, a fourth approach classifies patented technology ac-cording to two or more very different attributes. It is particularly suited to patented technologies that take more than one form (e.g. a process and a structure). For example, class 588 covers processes that detoxify waste products. Subclasses further define this class into two its two forms: the process steps used in de-toxification and the toxic materials being processed.

As a general principal, patents assigned by the USPTO to the same class are more similar than those assigned to other classes because they embody simi-lar relevant attributes. Patents assigned to the same primary class are more similar to patents assigned to the same secondary class. And patents assigned to the same subclass are more similar than patents assigned to the same class but different subclass.

Second Factor: Relationship to Product as a Measure of Similarity

A second factor to consider in comparing patented technologies is the relationship of the patented technologies formed via the products they embody. This “product-oriented” similarity factor stresses the commercial relationship of the technologies, an aspect central to licensing, over similarity of at-tributes. A product can form the relationship of two patented technologies A and B by incorporating them as components.

Product-oriented similarity can hinge on how “product” is defined. Generally speaking, a product can be strictly defined as a particular good or it can be more broadly defined as a market of related goods. The Federal Circuit has recognized at least four defini-tions of product, which are illustrated as concentric rings in Figure 1. Each ring expands the scope of the product definition as one moves outward from the center. Starting in the center, the first ring focuses on the infringing products and represents the strongest form of product-oriented similarity. In the Lucent case, this included Microsoft’s Outlook and Money. The second ring represents substitutes—products comparable to the infringing products, particularly with respect to price and quality.20 The third ring rep-resents the general market, including both substitutes and non-substitutes for the infringing products. And the fourth ring, the weakest form of product-oriented similarity, represents products from different general markets that operate together as a functional unit.21 In the Lucent case, this included the PC system that hosts Outlook and Money. Both belong to different

19. Id., pp. 3-5.20. Bic Leisure Products v. Windsurfing International, 1 F.3d

1214, 1219 (Fed. Cir. 1995) (to qualify as an acceptable sub-stitute “to the infringer’s customers in an elastic market, the alleged alternative ‘must not have a disparately higher price or than or possess characteristics significantly different from the patented product”).

21. The Federal Circuit has recognized that a product incor-porating a patented technology may itself be comprised of dif-ferent, separable products that are functionally related and sold as a single unit. See e.g. Rite-Hite Corp. v. Kelley Company Inc., 56 F.3d 1538 (Fed. Cir. 1995) (employing the “functional unit test” as a means of defining a product). In Lucent, the Federal Circuit endorsed the use of the “entire market value rule” / “functional unit test” to determine a reasonable royalty, stating that “sophisticated parties routinely enter into license agree-ments that base the value of the patented inventions on as a percentage of the commercial products’ sales price” and that “even when the patented invention is a small component of a much larger commercial product, awarding a reasonable royalty based on either sale price of number of units sold can be eco-nomically justified.” Lucent, 580 F.3d at 1339.

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general markets (i.e. email applications versus money management applications) but are functionally related as PC software.

To minimize confusion, the product definitions for all but the center ring in Figure 1 are referred to as metaproducts. This terminology is intended to distinguish the particular infringing products from the more abstract product definitions. In Lucent, for example, the infringing products are Outlook and Money and the metaproduct is PC software.22 The metaproducts should not be confused with the royalty base despite parallels in their determination. In some cases, depending on the facts and circum-stances involved, the royalty base may be equivalent to the metaproduct, as it appears to be in Lucent.23

But in other cases, it may reflect only the infringing products. The metaproduct concept, as discussed in this paper, is intended to aid the licensing professional in determining what products embodying patented technologies are comparable.

The metaproduct definition in Lucent is illustrated by the shaded area in Figure 1. This area dissects the outer ring, marking the Lucent court’s hardware/software distinction. It is premised on the court’s apparent view that comparability extended to PC software products beyond the infringing products but not to PC hardware products (i.e. the functional relationship between hardware and software alone was insufficient to warrant an extension).

A key issue for determining the reasonable royalty in Lucent involved the product definition: whether it was the entire PC system—hardware and software—or only the software. In its argument to the district court regarding the royalty base, Lucent asserted the patent-in-suit related to the entire PC system because software requires hardware in order to operate, thus forming a single functional unit.24 In ruling against Lucent on this issue, but allowing Lucent to present reasonable royalty damages based on only the PC software component of the system, the district court made a distinction between a PC hardware product and a PC software product.25 The ruling signals cau-tion against relying on overly broad relationships, even where a functional relationship exists.

While the district court did not elaborate further, one plausible interpretation of the ruling is that the hardware and software components of the PC system were distinguishable because they were subject to significantly different drivers of customer demand and were available for sale as separate products. Lucent’s patent related to a feature of Outlook and Money which were marketed as software products usable on a variety of computer systems (i.e. not dependent on any particular computer hardware).

As a practical matter, the move toward even nar-rower definitions appears constrained by evidentiary considerations. For example, the task of identifying comparable patent license agreements becomes increasingly difficult with each step toward the cen-

Figure 1.

4 - Products Related as a Functional Unit

3 - General Market

2 - Substitutes

1 - Infringing Products

OutlookMoney

PC software

PC hardware

22. Neither the district court nor the Federal Circuit in Lucent explicitly defined the scope of what products associated with pro-posed third-party patent license agreements were comparable to the patent-in-suit and the infringing products. However, the defi-nition of metaproduct as “PC software” in the Lucent case may be inferred by (1) the Federal Circuit’s ruling that Lucent failed to show that its proposed third-party patent license agreements related to an entire PC system were comparable to the patent-in-suit juxtaposed with (2) the district court’s allowance of PC soft-ware as the royalty base. It would be incongruous for either court to allow the royalty rate to be applied to PC software but not also consider third-party patent license agreements associated with PC software to be comparable to the patent-in-suit.

23. A determination of the royalty base typically depends on the consideration of methodologies such as Georgia-Pacific factor analysis. In some cases, depending on the methodology employed and the facts and circumstances involved, the outcome of a hypo-thetical negotiation would have resulted in a royalty base larger than an infringing product specifically addressed in a lawsuit.

24. Lucent and Multimedia Patent Trust’s Opposition to Dell’s Motion in Limine No. 2 to Exclude the Testimony of Roger Smith Regarding Royalty Rates and Royalty Base, filed January 28, 2008, Lucent Technologies, Inc. v. Gateway, Inc., Gateway Country Stores LLC, Gateway Companies, Inc., Cowabunga En-terprises, Inc. and Gateway Manufacturing LLC, Civil Case No. 07-CV-2000-H (CAB).

25. Lucent, 580 F.3d at 1338.

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ter ring of Figure 1. The Federal Circuit in Lucent opined that calls by legal commentators for further narrowing “ignores the realities of patent licensing and the flexibility needed in transferring intellectual property rights.”26

The Federal Circuit appears to have recognized this practical limitation in prior opinions as well. In Bic Leisure Products v. Windsurfing International, for example, the court’s opinion reflected a dichotomy between the determination of lost profits and reason-able royalty damages with respect to the definition of product.27 The court found that certain higher-priced, higher-quality sailboards sold by patent-holder Wind-surfing were not substitutes for infringer Bic Leisure Products’ lower-priced, lower-quality sailboards and should not have been included in determining lost profits, so the lost damages award was vacated.28 Yet the Federal Circuit allowed those same higher-priced, higher-quality sailboards to be included in the royalty base for determining a reasonable royalty. While the court noted that “Windsurfing itself set the value of its patent rights by licensing its technology to nearly every company supplying sailboards in the United States without competing itself in most sailboard submarkets,”29 it affirmed the reasonable royalty damages based on those patent license agreements.30 Thus, the court accepted the metaproduct definition of “sailboards”—incorporating both infringing and non-infringing products in the general market—for the purpose of comparing patent licenses and deter-mining a reasonable royalty, while it vacated the lost profits award on the premise that lost profits should be restricted to the particular infringing products. Third Factor: The Relative Improvement Over the Prior Art

A third factor to consider in comparing two pat-ented technologies is their relative improvement over the prior art. According to a study by Degnan and Horton, a patented technology can be classified as a minor, major or revolutionary improvement.31 A minor improvement represents an incremental improvement

over the prior art in an existing industry,32 meaning that a similar next-best alternative exists, curbing the economic value of the improvement. A major improvement represents a significant improvement over the prior art in an existing industry which en-hances the superiority of products in that industry. And lastly, a revolutionary improvement represents a great leap forward over the prior art, often leading to the creation of a new industry.

These three degrees of improvement can either enhance or diminish technological comparability. As a general premise, comparability is enhanced where two patented technologies being compared, X and Y, provide an equivalent degree of improvement. Con-versely, comparability is diminished where the two technologies provide a dissimilar degree of improve-ment. Figure 2 represents a comparison matrix for X and Y suggesting the effect on comparability. The comparison of a revolutionary patented technology with one providing minor improvement represents the widest chasm and, therefore, could warrant a sub-stantial diminishment of comparability. Revolutionary patents, by their nature, are relatively rare and likely less comparable to other patents.33

The Federal Circuit in Lucent echoed the distinc-tion between a major and a minor improvement when it criticized Lucent’s damages expert for failing to consider in certain license agreements “whether the patented technology is essential to the licensed product being sold, or whether the patented inven-

Figure 2.

XMinor Major Revolutionary

YMinor + – – –

Major – + –

Revolutionary – – – +

Key: Enhances comparabilityDiminishes comparabilitySubstantially diminishes comparability

+–

– –

26. Lucent, 580 F.3d at 1339.27. A plaintiff proving infringement under U.S. patent law

will receive at least a reasonable royalty but may recover lost profits under certain circumstances. See 35 U.S. §1117. The Federal Circuit provided a four-part test for determining the eligibility of lost profits in Panduit Corp. v. Stahlin Bros. Fibre Works, Inc., 575 F2d 1152 (6th Cir. 1978).

28. Kaufman Company Inc. v. Lantech Inc., 926 F.2d 1136, 1142, 17 U.S.PQ.2d 1828 (Fed. Cir. 1991).

29. Id.30. Id.

31. Stephan Degnan and Corwin Horton, A Survey of License Royalties, les Nouvelles, June 1997, p. 107.

32. See, generally, Stephan Degnan and Corwin Horton, A Survey of License Royalties, les Nouvelles, June 1997.

33. See e.g. Brunswick Corp. v. U.S., 36 Fed. Cl. 204, 212 (1996) (“The patent at issue is a pioneer patent, and therefore, there are no exactly comparable patent licenses and royalty rates from which to draw wisdom.”)

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tion is only a small component or feature of the licensed product…”34 The court further opined that “the infringing use of Outlook’s date-picker feature is a minor aspect of a much larger software pro-gram…”35 As a minor improvement, it would diminish any technological comparability between Lucent’s patented technology and the “PC-related” licensed technologies, which included major improvements.36 The Spectrum of Technological Comparability

Both attribute-oriented similarity and product-oriented similarity influence the comparability of pat-

ented technologies. Generally speaking, the interplay of these two factors can be viewed as a spectrum from “less comparable” to “more comparable,”37 as shown in Figure 3. The more comparable technologies are those that exhibit both attribute and product-oriented similarity. The less comparable technologies exhibit neither. Those that exhibit one or the other fall in-between the ends of the spectrum. The third factor, the relative improvement of the patented technolo-gies over the prior art, can enhance or diminish the comparability established by the first two factors.

Figure 3.

Neither Attribute Nor Product Oriented

Similarity

Example: Two patents with few similar attributes in different metaproducts.

Example: Two patents with a substantial number of similar

attributes in different metaproducts.

Example: Two patents with few similar

attributes associated with the same metaproduct.

Example: Two patents with a substantial number of similar

attributes associated with the same infringing

product.

Attribute-Oriented Similarity

Product-Oriented Similarity

Less Comparable More Comparable

Attribute and Product Oriented Similarity

Patent Class Class Description

A 710 Electrical Computers and Digital Data Processing Systems: Input/Output

B 381 Communications: Electrical: Electrical Audio Signal Processing Systems and Devices

C 700 Data Processing: Generic Control Systems or Specific Applications

X 700 Data Processing: Generic Control Systems or Specific Applications

To illustrate further, consider four PC-related patents classified by the USPTO as follows:

37. This spectrum is intended to provide general guidance and is not intended to establish a bright-line rule for compara-bility. Whether two patented technologies are comparable will depend on the particular facts and circumstances of each case. Further, a determination of attribute-oriented similarity may in-volve more than a count of similar attributes; for instance, the relevance of each attribute may be taken into account and some attributes may be given more weight than others when consid-ering them. And a determination of product-oriented similarity may involve factors not discussed such as substitute products.

34. Lucent, 580 F.3d at 1330 -1331. 35. Lucent, 580 F.3d at 1333.36. The court noted that the “PC-related” licensed technolo-

gies included the entirety of IBM’s patent portfolio related to personal computers. Lucent, 580 F.3d at 1328-1329. IBM, it is widely known, was a pioneer in the development of the per-sonal computer.

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Assume patent X is the patent-at-issue and the other patents are represented by third-party licenses. Further assume patents A and B relate to technolo-gies incorporated into the hardware of a PC. Patent X relates to a graphical drop-down calendar feature, and patent C relates to another software graphical menu feature. The relationship of these patented technologies to the products is shown in Figure 4(a). If the product incorporating patent X is defined as PC software, then patents A and B exhibit little, if any, attribute or product-oriented similarity with patent X, which positions them toward the less comparable end of the spectrum. This result appears to comport with the Federal Circuit’s finding in Lucent that the proposed “PC-related” patent technologies were not shown to be comparable to the patent-in-suit.

On the other hand, patent X exhibits both attribute and product-oriented similarity with patent C, as each are software graphical interface features that belong

to the same USPTO classification and are functionally related to the same product. This suggests the two patents are positioned toward the more comparable end of the spectrum in Figure 3. It also suggests that Lucent’s damages expert may have had more success in defending his position had he focused on third-party patent licenses related to PC software and demonstrated a meaningful similarity in attributes of those patented technologies to the patent-in-suit.

Now consider a second product—a television set—comprised of the same patents A and B, as shown in Figure 4(b). Again, patent X is the patent-at-issue.

Figure 4.

A B

X

Television SetA B

CX

PC Hardware

PC Software

(a) (b)

Unlike the PC system in Figure 4(a), however, no distinction is made here between a hardware product and a software product, though the television set is comprised of both hardware and software compo-nents. Why? Because unlike the infringing products in Lucent, the television set’s software is not available to consumers as a separate product; it is embedded into the circuitry of the television to which consumers ordinarily have no access. The drivers of demand for the software features serve to drive demand for the television set as a whole. In this example, the hard-ware and software components could be considered part of the same product, resulting in the patents A and B exhibiting product-oriented similarity to patent X unlike in Figure 4(a).

The patents in Figure 4(b), however, exhibit little or no attribute-oriented similarity to patent X. They do not belong to the same technology classification or otherwise exhibit relevant technical attributes

that are similar to patent X. For this reason, these patents fall somewhere in the middle of the comparability spectrum in Figure 3, depending on the strength of their product-oriented similarity.ConclusionTo win in court, as well as poker, you

must follow the rules of the game. Pat-ent license agreements, the courts say, must be technologically comparable to the patent in suit if they are to be part of a winning hand. In assessing whether proposed comparable license agreements involve similar technology, a licensing professional should consider three fac-tors: (1) attribute-oriented similarity based on a comparison of relevant techni-

cal attributes; (2) product-oriented similarity based on the relationship of the patented technologies formed via the products they embody; and (3) the relative im-provement of the patented technologies over the prior art, which can enhance or diminish the comparability established by the first two factors. These three factors influence technological comparability on a spectrum ranging from less comparable to more comparable depending on their combination and strength. Using these factors to evaluate potential license agreements, the licensing professional will be in a better position to know when to hold ‘em or when to fold ‘em. ■

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What Has Bayh-Dole Done?

You Can’t Push a Rope or Legislate Innovation, So What Has Bayh-Dole Done For Me Lately?1

By Daniel I. Jamison IV

s a practitioner of intellectual property based business development, I am a firm believer that “amateurs study tactics; professionals study

logistics.”2 I recently attended the LES Spring Meet-ing in Boston (“IP for Entrepreneurs and Universities, Commercializing Early Stage Technologies”) where one of the plenary speakers opined that patents just aren’t that important to certain fields of early stage technology development. Intrigued by this seemingly counterintuitive observation, I began to hear the same or similar statements from presenters and audi-ence participants, and during the networking events. As I researched this paper, I began to find evidence of this same observation throughout the macro-environment in which we, as licensing professionals, perform or contribute our services. If patents are not important to the development of early stage technology, why have we focused our attention on increasing the number of patents filed on early stage technologies and why do we credit this increase in patenting with the growth of the economy since the Bayh-Dole act became law in 1980? We find our profession at the confluence of many policies, goals, objectives and schools of thought that have their roots as far back as the beginning of the United States of America, and as recent as the latest judi-cial interpretation of our work. We are influenced by history, legislation, the regulatory environment and public policy, behavioral psychology, even the taxonomy and semantic interpretation of the lan-guage used in our field. We often face a multiplicity of stakeholders in our engagements, each of which has a different goal or objective, and each of which participates in and responds to our interaction using the same lens, but a different perspective and focal length. I would respectfully suggest that in order to be successful in our future endeavors, we must begin with the end in mind, and then proceed with the beginning in mind. Where are we, what do we

have, and where do we need to get it to. Logistics.3

It has been thirty years since the Bayh-Dole Act (1980) first (ostensibly) allowed universities (as well as small businesses and not-for-profits) to pat-ent the results of U.S. government funded research in their own name. For much of this period, it has been generally accepted that this piece of legisla-tion single-handedly “unleashed the previously untapped potential of university inventions” and “had much to do with the miraculous restoration of U.S. competitiveness in the 1980s.”4 That somewhat self-serving braggadocio by one of the bill’s authors notwithstanding, most would argue that the “High Performance Computing and Communication Act of 1991” (HPCA) (Al Gore’s famously misquoted as “I invented the Internet” legislation) had much more to do with the free flow of information that accelerated the growth of the economy during the latter part of this 30 years than did the Bayh-Dole act. However, not hindering commercialization is not the same as unleashing inventions. More importantly, unleashing inventions should not be the goal. Innovation is much more important than invention because it puts the invention into an economically attractive vehicle that will be more likely to achieve the goal of benefitting society through the forces of a free market. Despite alternate theories, necessity is usually the mother of invention,5 but innovation can only occur when you combine “…the understanding of science and

A

1. The views, opinions, positions or strategies expressed by the author do not necessarily reflect those of Synaptics Incor-porated.

2. van Creveld, Martin. Supplying War, Cambridge University Press, 1977. Sometimes attributed to Omar Bradley.

3. Logistics (n) (functioning as singular or plural) (1) (Mili-tary) The science of the movement, supplying, and maintenance of military forces in the field. (2) (Economics) The management of materials flow through an organization, from raw materials through to finished goods. (3) The detailed planning and organi-zation of any large complex operation. Collins English Diction-ary—Complete and Unabridged ©, HarperCollins Publishers 1991, 1994, 1998, 2000, 2003.

4. Bayh, Birch, Joseph P. Allen, and Howard W. Bremer. “Uni-versities, Inventors, and the Bayh-Dole Act.” Life Sciences Law & Industry Report. 3.24 (2009): Print.

5. …although it may have been fathered by Professor Har-old Hill (“The Music Man”). Bayh-Dole are at best godparents, uncles, or Statler and Waldorf, the two guys in the balcony in the Muppet Show mumbling something about “…the most in-spired piece of legislation to be enacted in America over the past half-century…” (“Innovations Golden Goose,” The Economist Technology Quarterly (editorial), 14 Dec. 2002).

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technology with market knowledge, leadership, risk taking, financing, manufacturing and more in a new, commercially useful way.”6

Professor of Law J. H. Reichman at Duke University takes a historical perspective on the logistics of mov-ing early stage technologies into the public domain where innovation is more likely to occur. Reichman points out that American universities always tended to balance practical and theoretical research, and that a natural (and productive) interaction between university and industry occurred throughout the history of the United States.7 University research results tended to make their way into industry as graduates were hired by industry and continued to develop their body of work, or as research results were published, presented at conferences, or through consulting work performed by faculty. Reichman gives much more credit for the increased involvement of universities in patenting and licensing to the expan-sion of patentable subject matter that resulted from Diamond v. Chakrabarty 447 U.S. 303 (1980), as well as the creation of the United States Court of Appeals for the Federal Circuit (CAFC) in 1982. This shift towards broader, stronger, better defined, and more enforceable intellectual property rights caused the marked increase in university patenting and licens-ing, and he refers to a conclusion reached by David Mowery et al., that Bayh-Dole was “an effect, not a cause” of this surge.8

But can innovation be legislated or codified? Pro-ponents of Bayh-Dole would appear to claim that you can, but Bayh-Dole focuses on inventions, patents, and licensing, not innovation. Publicly funded “think-tank” approaches to inventing increased during the middle part of the last century, particularly in health and defense initiatives. These approaches were very successful at generating inventions but not neces-sarily very adept at implementing them beyond the immediate scope of the research. After World War II, Senator Kilgore proposed using technology transfer (and retention of the ownership of the patents by the federal government underlying the technology) to ef-

fect a greater good from federally funded research. He proposed to place the patents in the public domain to avoid a “give-away of the fruits of taxpayer-funded research.”9 This ironic tautology was addressed ear-lier by Frederick Cottrell in 1912 when he said “…what is everybody’s business is nobody’s business.”10 Vannevar Bush, who had been the director of the Of-fice of Scientific Research and Development during World War II, held an opposing view, pushing for the ownership of the patents by the contractors who had received federal funding (with a royalty free license to “Government.”)11 Bush’s belief was that market and economic forces and incentives acting on these contractors pro-vided the most efficient way to migrate research and development results into the public domain and foster the innova-tion required for the early stage technology to achieve commercial success and widespread adoption.

Unfortunately, during the ensuing thirty years the U.S. government became much more active in its attempt to “manage” markets and market forces than they were in actually understanding how these forces efficiently transformed inventions into innovation. Federal “watchdogs,” never a fan of organization, alignment and efficiency, often branded such activi-ties as “monopolistic,” in a sort of “McCarthyistic” fire branding of the “guilty” party. The breakup of AT&T was a classic example of this. Most of us are aware that AT&T was broken up into “Baby Bells,” but many of us don’t realize that the government efforts to do so were actually begun in 1949, just 2 years after the invention of the transistor at Bell Labs. Invention in the Bell System was cross subsi-dized by the service “monopoly” which did, in fact, charge users much more for the delivery of basic telecommunications service than those services cost to deliver. What escaped the ever watchful eye of regulators was that this “excessive cost” was actually the cost of a chain of activities which started with

■ Daniel I. Jamison IV, Synaptics, Inc., Sr. Director of Corp. Development, Partnerships and M&A Santa Clara, CA, USA E-mail: [email protected]

6. De Beers, F. (2005). “Commercialising And Marketing Your IP TO Optimize Your ROI.” les Nouvelles, Volume XL, No. 4, December 2005, pp. 165-171.

7. Reichman, J. H. “University-Industry Collaboration: The United States Experience.” WIPO Conference Paper. 2005: p.2. http://www.wipo.int/academy/en/meetings/iped_sym_05/papers/pdf/reichman_paper.pdf.

8. Mowery, David, Richard R. Nelson, Bharen N. Sampat, and Arvid A. Ziedonis. Ivory Tower and Industrial Innovation. Stan-ford University Press, 2004: p.97 Print.

9. Mowery 86.10. Cottrell, Frederick G. “The Research Corporation, an Ex-

periment in the Public Administration of Patent Rights.” Journal of Industrial and Engineering Chemistry 1912 Volume 4: P. 865.

11. Bush, Vannevar. “The Kilgore Bill.” Science 1943 Volume 98: P. 571-577.

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basic research, from which inventions were derived, and from which innovative solutions emerged that benefitted the consumer of telecommunication services. Inventing was a recognized requirement of this value chain (at least by AT&T) for AT&T to remain in business in a rapidly evolving technology market and a rapidly expanding user base. The transistor, for example, was developed to improve the performance of vacuum tubes that were then in use to amplify signals in delivering long distance service so that many more users could be served over greater and greater distances and receive better call quality. In 1956, a consent decree signed by AT&T forced them to put the transistor patent into the public domain (in alignment with the earlier objectives of Senator Kilgore) rather than profiting from an invention that was created with “public” money.12 By breaking the return path whereby inventions might cross-subsidize service delivery, government intervention sowed the seeds for the same decline in creating inventions and innovation it then claimed to reverse in Bayh-Dole. Ironically, Bell Labs intellectual property continues to earn its current owners hundreds of millions of dollars every year, long after the protracted demise of the efficient system that created it. In an interesting side note, during World War II, Western Electric (the manufacturing arm of AT&T) received $130M (1996 dollars) through the Office of Scientific Research and Development while MIT received $886M (1996 dol-lars).13 I wonder what the university landscape might look like if regulators had decided to break up MIT!

There is also a behavioral element to how we have come to believe that we can create value from early stage technology, and that the spark of innovation can somehow be coerced. The behavior of children is believed by B. F. Skinner and Behavioral psycholo-gists to be a cumulative response to external and internal stimuli, some of which can be observed, some of which can be abstracted, and some of which is never observed or abstracted (but nonetheless has influenced the behavior of the child). Similarly, the intellectual property macro-environment, inventing behavior, the patent system, and our professional responses as licensing professionals are also strongly influenced by classical conditioning (think Pavlov’s

canine experiment with stimulus/response), and operant conditioning (modification of behavior by reward and punishment). The way we work and respond to situations in our profession is impacted by each and every case that is heard, every license that is inked, and every successful implementation and dissemination of intellectual property for the greater good. Treble damages, injunctive relief, the work of the ITC, the processes that surround the examination and reexamination of patents, and multi-million dollar settlements or license agreements all drive the behaviors of inventors, infringers, investors, innovators, licensing professionals and myriad other stakeholders throughout the entire continuum of each technology’s lifecycle.

Semantically, we all agree that developing, dissemi-nating and implementing science and technology is a good thing, and that promoting “the useful arts” by patenting, licensing, technology transfer, and commercialization will somehow enhance economic development objectives and otherwise benefit soci-ety. Beyond this basic (and fuzzy) feeling of general well-being that these words elicit, however, lies a confusingly interchangeable taxonomy which is used to describe elements and influencers of the process involved in and used to achieve unclear objectives. There is no standard way to measure progress at any point in the process, or to measure the impact of the achievement of the goal (should we be so fortunate as to actually have defined one!) We all cringe when we hear invention, innovation, and technology used interchangeably to describe the subject matter of our profession. Each of these terms is distinctly different from the other, and arguably each term exists in a hierarchy that should preclude their interchangeable use. Similarly, technology transfer, technology com-mercialization, patenting and licensing are often used interchangeably to describe the process of creating value using the invention, innovation, or technology. Perhaps most problematic is that our goals are often unclear as a result of the inappropriate selection of the terms “economic development” or “economic growth” to describe the goal of our work, without recognizing the intermediate requirement for a commercial incentive acting on an interested party to effect this goal. It is our failure to recognize and forge this crucial link in the value chain that is the greatest impediment to realizing the full potential of research and early stage technology.

As a result of these ambiguities, unrealistic ex-pectations, and misaligned behaviors which we have learned, most of our attempts to realize value from early stage research or early stage technology follow

12. Postley, John. “How AT&T Works.” HowStuffWorks.com. Discovery Communications, n.d. Web. 19 Apr 2010. http://com-munication.howstuffworks.com/att4.htm.

13. Mowery 22 (From Pursell, C. “Science Agencies in World War II: The OSRD and its Challengers.” The Sciences in the American Context: New Perspectives. Smithsonian Institution Press 1979 P. 364).

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the curve of disillusionment or “Hype Cycle,”14 the phases of which are:

1. The “Technology Trigger.” The first phase of the hype cycle, in which a research result, invention, breakthrough, product launch or other event gener-ates significant press and interest.2. The “Peak of Inflated Expectations.” The second phase, in which a frenzy of publicity from phase one typically generates over-enthusiasm and unre-alistic expectations. There may be some successful applications of a technology, but there are typically more failures.3. The “Trough of Disillusionment.” The third phase, in which technologies which have failed to meet the unrealistic expectations of the second phase quickly become unfashionable. Conse-quently, the press usually abandons the topic and the technology.4. The “Slope of Enlightenment.” The fourth phase, in which some practitioners continue to experi-ment, develop and enhance their understanding of the benefits and practical applications of the technology.5. The “Plateau of Productivity.” The fifth and final phase, in which the technology becomes widely demonstrated and accepted. The technology be-comes increasingly stable and evolves in second and third generations. The final height of the pla-teau varies according to whether the technology is broadly applicable or benefits only a niche market.15 In our careers, we have all experienced phases

one through three in every early stage technology

commercialization case study, and yet we continue to persist in our thinking that early is better with respect to achieving big financial results from patenting and licensing early stage technology. This is simply not the case. The role of a patent is to stop others from practicing the invention for a period of time,16 not to convey knowledge, so it seems like an odd vehicle to use to effect the transfer of technology into the commercial domain and thereby benefit society. Pat-ents do need to teach/enable one skilled in the art, but they stop short of providing the whole recipe, so they are not really suited for technology transfer in and of themselves. A patent is a tool used to defend the market share of a risk-taking investor for a fair period of time required to recoup the development investment and to make a fair profit for taking the risk of innovation based on the invention. The provisions for transferability of patent rights by the inventor to a third party are also a clear indication that it was recognized that this investment might not be made by the inventor.

There is plenty of evidence that indicates that if we can port technology to an innovator, steps four and five will follow, but we consistently adhere to policies and procedures that make it virtually impossible to attract an investor/innovator/market maker. To create value from early stage technology or research results it is important to understand the entire value chain. Vannevar Bush described the end points of this value chain in 1945 when he stated that basic research was the ultimate source of economic growth.17 But invention, disclosure, patenting and licensing are elements of a process to achieve this economic

growth, they are not the goals or even in some cases necessary to achieve it. Michael A. Cohen at UC Berkeley refers to this attitude as a “Licensor-Oriented Mindset” and proposes to supplant it with a “Researcher-Oriented Mindset,”

14. The term was coined by Gartner Group analyst Jackie Fenn in a 1995 report titled “When to Leap on the Hype Cycle.”

15. Fenn, Jackie. “Hype Cycle.” Wikipedia. Wikimedia Organization, 3 May 2010. Web. 26 May 2010. http://en.wikipedia.org/wiki/Hype_cy-cle.

16. Article 1, Section 8, Clause 8 of the U.S. Constitution gives Congress the authority to “…promote the progress of science and the useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.”

17. Bush, Vannevar. Science: The Endless Frontier. U.S. Government Printing Office 1945.

Figure 1. Hype Cycle

Peak of Inflated Expectations

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Trough of Disillusionment

Technology Trigger

Peak of Productivity

http://en.wikipedia.org/wiki/Hype_cycle

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one that is “more inclusive and responsive than the stereotypical, license-oriented IP approach.”18 Niels Reimers, the founding director of Stanford University’s Office of Technology Licensing figured this out between 1968 and 1970 when he focused his efforts on understanding the technology and the market applications for it instead of focusing on the management of patents. And yet, decade’s later key performance metrics continue to focus on licensing patents to industry as a proxy for university technol-ogy transfer success. Steven DenBaars of UCSB, who did work in the field of Gallium Nitride laser and mi-crowave transistors recounted his experience trying to license his work to industry as having met with little success. In defining his objective as technology transfer, he explained (in 2000) that “…students are the most important resource we have. I’d say they’re much more valuable than the patents.”19

In the early stages of a technology, it is a fairly common practice to make assumptions and formulate strategies like blind men attempting to describe an el-ephant in a room.20 Then, based on these assumptions we try to determine what to do with the elephant. We can disclose the existence of the elephant to the research sponsor, and then quickly try to push the elephant out of the room (where hopefully it will be harnessed and productive and not crush its trainer) in ac-cordance with the pro-visions of Bayh-Dole, or we can take a more complicated path to try to determine what to do with the elephant to create at the very least some public benefit,

but preferably economic growth.In Figure 2, the elephant in the room is the Inven-

tion/Discovery or Technology Trigger of the Hype Cycle. Although a patent on the elephant is virtu-ally un-licensable at this stage it should be attained nonetheless to protect the future market for the acquirer and implementer of the technology un-derlying (or succeeding) the invention. But if early stage technology development does not benefit from patenting the underlying inventions (as the plenary speaker at the LES meeting opined), why do it? Because, as Wayne Gretzky once said, “Good players go where the puck is; great ones go where the puck is going to be.” Patents are essential to protect market share and create barriers to entry if and when the technology gets to market and can be reproduced by unlicensed entrants. Creating a patent can also help “containerize” a series of inven-tions and investments that may subsequently form the basis of someone else’s innovation.

Traditional early stage efforts to realize value at this point in time first drive, then are driven by the Expecta-tion Curve, often resulting in ineffective or inappropri-ate licensing efforts21 and the ultimate withdrawal of all but a few interested potential market participants.

18. Cohen, Michael A. “The Research-Oriented Ap-proach To University IP: A Reinvention Of University IP Management Away From A Focus On Licensing To A Focus On Research.” les Nouvelles. XLV.2 (2010): 97-102. Print.

19. Mowery 162-165.20. This parable has been attributed to the Sufis, Jainists,

Buddhists and Hindus. It describes how multiple blind men in a room with an elephant attempt to describe the entire ani-mal based on a very local observation (and limited perspective). http://en.wikipedia.org/wiki/Blind_men_and_an_elephant.

Figure 2. Typical Early Stage Technology Economic Growth Model

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Peak of Inflated Expectations

Plateau of Productivity

Slope of Enlightenment

Trough of Disillusionment

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Economic Growth

Public Benefit

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Innovator Investment Innovator Benefit

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vestment

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21. The use of the word “inappropriate” in this context is not meant to indicate malicious intent on the part of the licensor. It is used to describe licenses that may ultimately retard, impede or otherwise reduce the public benefit that might have resulted from the technology.

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Figure 2 shows that, although there is a dramatic pullback ultimately ending in the Trough of Disillu-sionment, the Public Benefit has actually increased as a result of what the remaining potential market participants have learned about the technology and its potential applications during this period. Armed with this knowledge, at least one party needs to combine the “…technology with market knowledge, leadership, risk taking, financing, manufacturing and more in a new, commercially useful way.”22 Developing a vehicle that will create the greatest Public Benefit (and possibly Economic Growth) from early stage technology requires Innovation and Innovator Invest-ment to create an alignment of the Innovation with the emerging market opportunity, in return for which the Innovator (and the Innovators investors) should expect to receive some benefit. Richard N. Foster provides a glimpse into the motivational psychology of the investor in Innovation as follows: “…the Limited earned an average annual return to shareholders of 52 percent for the 15 years after 1974. If you invested $10,000 in 1974, you would have walked away with $4.6 million 15 years later. It was new and it created a lot of wealth, and those are the two determinants of innovation as far as I'm concerned. If it creates a lot of wealth but it isn't new, you wouldn't call it an innovation, and if it's very new but it doesn't create any wealth, then I'm not interested.”23

Early stage technology without the potential for Innovator Benefit is not innovation it is still Basic Research; it is an answer looking for a question.24 At this stage of development, technology transfer and a license to the underlying intellectual property rights may catalyze the efforts of the Innovator and build some of the momentum required to climb the Slope of Enlightenment. However, while it has been my observation that technology transfer can be very easy (leave your lab unlocked and unattended at lunch, and leave your notebooks on a desk near the door), technology transfer in the context of providing a Public Benefit is significantly more difficult. Simply

moving the piano from your living room to the stage of your local theater does not inherently create value unless you are able to procure the services of an ac-complished pianist. In the case of creating a Public Benefit, the qualifications of the Innovator, access to funding, the agglomeration of ancillary intellectual property, development resources and “the spark” all need to align at the right time and place, and in suf-ficient quantities to have any hope of hearing more than a performance of the scales by the piano movers.

As the technology proceeds up the Slope of En-lightenment, driven by the Innovator Investment, the Public Benefit increases and the Innovator begins to benefit from his investment. Enlightened own-ers of intellectual property know that it is usually necessary to grow an industry in order to maximize their own benefit, and to that end they will begin to license to industry partners with greater resources or established distribution channels to accelerate this process. If done correctly, the Innovator Benefit and the Industry Benefit will drive up the Public Benefit until such time as they are both proximate to an intersection with the Plateau of Productivity curve, after which the marginal growth of the Industry Benefit (either through expanding markets or new market entrants) drives Economic Growth. If a sturdy intellectual property protection platform has not been built during the earlier stages of development, how-ever, the Innovator Benefit may be eroded in favor of the Industry Benefit as new entrants to the market bypass the Innovator. Conversely, if the owner of the underlying intellectual property begins to aggressively assert its rights against entrants into the industry, thereby overly restricting the number of industry participants, the Public Benefit curve will remain below the Plateau of Productivity until the expira-tion (or other termination) of the underlying patent rights, after which the Public Benefit may achieve its full potential, albeit without any additional Economic Growth due to price erosion and the emergence of substitute goods.

Sometimes I like to channel my inner economist and profess to believe in the existence of an efficient market for innovation based on the rational expecta-tions of its participants. After all, we have centuries of examples of successful innovation across a great diversity of technology, better access to information than those who innovated before us, and a communi-cations infrastructure that has all but eliminated the concept of distance. Then I hear another voice (my inner multivariate statistics conscience) that reminds me that behavior is best predicted when you are able to identify ALL of the variables that have an effect

22. De Beers.23. Wolfe, Josh. “Richard N. Foster's Innovation Recipe.”

Forbes/Wolfe Emerging Tech Report 15 Feb. 2009: Web. 26 May 2010. http://www.forbes.com/2009/02/15/innovation-creative-disruption-leadership-clayton-christensen_0215_clayton_chris-tensen.html.

24. William D. Michalerya, Associate Vice President, Gov-ernment Relations & Economic Development Lehigh University gave me some great advice in this regard when I first started working with intellectual property at Lehigh University. “Dan,” he said, “don’t be the guy who turns down a disclosure for cut-ting grass with fishing line.”

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on the behavior of the participants in this process. In the case of predicting the behavior of Innovators, if you exclude the influence of non-practicing entities (not just trolls, but other research exempt organiza-tions as well as those government entities (and their beneficiaries) that enjoy a license to practice an invention by virtue of the “march-in” provisions of the Bayh-Dole Act) from the calculation, either the behavior of the Innovator changes, or the result of their behavior becomes less valuable. If non-practicing entities develop, protect and enforce intellectual property rights that compete with or supersede those in the control of the Innovator, then the market value of the Innovators intellectual property will decrease, and some other entity will be enticed (by economic reward) to acquire and assert these rights for eco-nomic gain, to the detriment of the Innovators Ben-efit, Public Benefit, Industry Benefit, and ultimately Economic Growth. This is known as the tragedy of the anticommons,25 which is a condition resulting from the misaligned objectives of patent holders, each of whom is actually acting rationally in their own self interest. The relationship between Research Corpora-tion and MIT was terminated in 1962 as a result of a fundamental misalignment between the licensing

objectives of Research Corporation and the research goals of MIT (and the risk this misalignment created with respect to MIT’s research funding by industry research sponsors like IBM.)26 This conflict persists today in compartmentalized university licensing of-fices that use financial metrics to evaluate program effectiveness. The Kaufmann foundations “Free Agency” model does little to address this, and may actually exacerbate it by adding one additional layer of parochial interest.

Perhaps an “Innovation Agency” model might be a better approach to the development of collaborative cohorts that would then be better aligned to maxi-mize the Public Benefit from Basic Research. I would propose that Public Investment should be restricted (in peacetime) to Basic Research. Applied Research should be funded by Industry, and Inventions/Dis-coveries arising from this Applied Research can be developed by funding from the Innovator.27 Assigning the Invention/Discovery to the Innovator would ef-fect the benefit that the patent system was designed to provide; creating an incentive on the part of the Innovator to assume the risk, cost and trouble to take an invention to market and create a Public Benefit. Figure 3 illustrates this approach.

25. This term was coined by Michael A. Heller, when he was the Assistant Professor of Law at the University of Michigan Law School.

Figure 3. No-Hype Investment Model

Economic

Growth

Public Benefit

Public InvestmentMarket AcceptanceIndustry Expansion

Innovator Investment

Invention/Discovery Innovation

Applied Research

Basic Research

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26. Mowery 72. 27. This can be by “right of first refusal” so that in the event

that Industry does not choose to protect the invention, the right to do so will vest in the Research partner.

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This approach is different than the model that served this country until the 1990’s. The United States did not start with a blank slate with respect to technology. Metallurgy, agriculture and other art and science was already in place and widely practiced by the indigenous populations, and additional inventions were subsequently imported (arguably by the misap-propriation of intellectual property) by some of the original and later immigrants to this country. Mowery and Reichmann observe that our university system and its research activities developed in alignment with the needs of proximate populations, creating a unique basic, yet applied approach to discovery and development, teaching, researching and inventing in response to local economic, industrial and agrarian micro-environments. Unlike academic institutions in other parts of the world, “U.S. universities…were not primarily training graduates for governmental service.”28 They were unique in the efficiency with which they transferred their research results to industry by publishing these results and disseminat-ing graduates into industry that would be skilled in these arts. Aligned with these academic institutions were the greatest industrial innovators of all ages in the form of companies like AT&T (Bell Labs), RCA (RCA Labs), Xerox (Parc), and IBM. These companies directly funded Basic Research (and the facilities and equipment required to do so.) Pressure from the financial markets, however, forced these companies to optimize their financial performance for a much shorter time horizon, resulting in the elimination of this activity in its entirety by the close of the century.

If we must focus on a tool to use to grow our economies, then, it stands to reason that we should select logistics rather than patenting. If we can ap-ply the right amount of funding to the appropriately incentivized individual or organization during each

specific phase of the development cycle, we will accomplish our goals of maximizing Public Benefit, Industry Benefit, Innovator Benefit, and Economic Growth. Government funding historically went to government agencies (DARPA, NASA, NIH, NSF, DOD, DOE, USDA) that then funded their research agenda in select academic institutions. Federally funded academic research grew from 24 percent of total academic R&D in 1935 to 58 percent in 2000.29 During this period the majority of the funding was from the DOD and NIH. Today there is virtually no Basic Research (relative to the previous century) and arguably much of this shift to Applied Research may have been the unintended result of the Bayh-Dole focus on patenting and licensing.30 To restart the practice of Basic Research, we need the sponsorship of a government entity with a long time horizon (at least 20 years or more) and a Public Benefit/Economic Growth agenda. Funding for Applied Research on select results of the aforementioned Basic Research will naturally transition to a sponsor with a shorter horizon (5 years) and a more fully formed problem statement or hypothesis. This is most likely our In-novator. From Applied Research will issue Inventions and Discoveries that will be protected in the name of the Innovator, and from this the Innovator will license to other Industry Investors that are better able to accelerate the roll-out of the Innovation by virtue of their existing market channels or manufacturing capabilities. The Innovators Benefit will combine with the Industry Benefit to raise the Public Benefit, and when the Innovation is accepted, implemented or becomes a standard practice, Economic Growth will result. As long as the Innovator does not seek to restrict the Industry Benefit in order to augment the Innovator Benefit, the potential sum of benefits will approach the theoretical maximum benefit the Innovation is capable of generating. ■

28. Reichmann 2.29. Mowery 24.

30. Kanarfogel, David A. “Rectifying The Missing Costs Of University Patent Practices: Addressing Bayh-Dole Criticisms Through Faculty Involvement.” Cardozo Arts and Entertainment Law Journal. 27.2 (2009): 533-554. Print.

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Invention Licensing Agreement

Invention Licensing Agreement: Belarusian VersionBy Darya Lando and Veranika Shypitsa

aking a license agreement for an invention allows the patentee not only to exercise his exclusive rights to this subject of industrial

property, but also to find an optimal way of profit earning. In the Republic of Belarus any natural or legal person interested in use of the invention must conclude an agreement of grant of the right to use it with the patentee (license agreement).

According to Article 985 of the Civil Code of the Republic of Belarus, under a license agreement one party being the owner of the exclusive right to use a subject of intellectual property (licensor) grants the other party (licensee) a permission to use this subject. According to the license agreement the licensee may be granted:

1. The right to use the subject, while the licensor retains the right to use it himself and the right to grant licenses to other persons (ordinary, non-exclusive license);2. The right to use the subject, while the licensor retains the right to use it himself in part that is not granted to the licensee, but does not have the right to grant licenses to third persons (exclusive license);3. Other types of licenses, which are legislatively allowable. But at the moment the Belarusian legis-lation does not provide for other types of licenses except for exclusive and non-exclusive.Unless otherwise provided in the agreement, the

license is presumed to be an ordinary one.In the European Union law and the legislation of

some foreign countries, three types of licenses are traditionally distinguished: non-exclusive, sole, and exclusive license. Non-exclusive license is a type of license which may be granted to an unlimited number of licensees, and at the same time the licensor retains the right to use the licensed invention himself. An exclusive license, on the contrary, is a license granted to a single licensee, while the licensor does not retain any right to use the licensed invention himself. Under the agreement of an exclusive license the licensor is left with the formal right and title in the licensed patent, but he can neither develop his own activities with respect to the patented invention, nor license it to any third person. A sole license, which is some-times confused with the exclusive license, is a license granted to a single licensee, while the licensor retains the right to use the licensed invention himself, but

cannot grant further licenses to it.If we try to compare this classification of licenses

with the one used in Belarus, we will see there is a unified approach to definition of the non-exclusive license. As for the exclusive license in Belarus, it is significant that the licensor retains the right to use the licensed invention himself in part that is not granted to the licensee. It means that the exclusive license under the Belarusian law leaves the licensor with a broader scope of rights as compared to the exclusive license under the laws of foreign countries, where the licensor keeps the title of patentee only. The Belarusian exclusive license is, to some extent, close to a sole license, according to which the licensor retains the right to use the licensed subject himself without any restrictions. So, the exclusive license, as it is defined in the Belarusian legislation, stands in between traditional “exclusive” and “sole” licenses. Correlation between the types of licenses, depending on the scope of rights left to the licensor, is shown in the diagram.

Along with the scope of rights granted, contract price is one of the main terms of the license agree-ment. According to Article 985 of the Civil Code, a license agreement is presumed to be onerous. In other words, it is a general rule that the licensor

M

Right to grant further licenses

Right to use invention

Right to use the invention in part that has not been granted

to the licensee

Title of patentee

Non-exclusive

Sole

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Types of Licenses Depending on the Scope of Rights left to the Licensor

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is remunerated for the grant of permission to use his intellectual property, but it may otherwise be provided by the legislation or agreement. Does it mean that any persons may in any case conclude a gratuitous license agreement? Here we should refer to Article 546 of the Civil Code, which prohibits gifts between profit making organizations, except for ordinary gifts in the value of not more then 5 basic units (as of August 2010—approximately 60 USD). In our opinion, it is not absolutely correct to equate license agreement and gift agreement. But there is an opposite theoretical viewpoint, and it was indirectly supported by the Supreme Court’s deci-sion No. 12-01/4-2008 of February 15, 2008 having declared that the gratuitous trademark assignment contract between two profit making organizations void as a gift agreement. The opinion that gratuitous license agreements between profit making organiza-tions are not allowed is also expressed in the article “Registration of Licenses and Assignments.”1

To fix an adequate license fee it is necessary to first evaluate the licensed invention. In Belarus this can be done with the help of qualified appraisers of intellectual property. Evaluation methods that they use are set forth in the Belarusian legislation. There is the President’s Decree on Appraisal of Subjects of Civil Rights, and Methodic Recommendations on Appraisal and Accounting of Intellectual Property, approved by several branch ministries. The latter document contains inter alia statistically average royalty rates for specific industries and types of products, which may be very useful for the parties who are not very experienced in licensing.

Another important clause of the license contract is the liability of the parties. In Belarus all disputes related to conclusion, execution and violation of a license agreement, as well as all disputes coming from property and personal non-property relation-ships in course of creation, protection and use of intellectual property, are considered by the Intel-lectual Property Chamber of the Supreme Court of the Republic of Belarus, regardless of the parties involved. This specialized chamber is the only court in Belarus that is empowered to consider civil cases in the field of intellectual property. Its decisions come into effect immediately on pronouncement and are not subject to cessation.2

In addition to the content requirements, Belaru-sian legislation specifies the requirements to registra-tion of the license agreement. According to Article 36 of the Law of the Republic of Belarus on Patents for Inventions, Utility Models, Industrial Designs (the Patent Law), patent licensing agreement shall be registered with the Patent Office; without such a registration it shall be considered void. Rules of this compulsory registration were approved in the year 2009 by the Council of Ministers and the State Com-mittee on Science and Technology of the Republic of Belarus.

The Patent Of-fice (the National Center of Intel-lectual Property) shall accomplish the registration within one month from the date of filing of the corre-sponding request. The official fee for registration of the license agree-ment with respect to one invention amounts to 200 USD. Besides the document confirming payment of the fee, the following documents are to be submitted to the Patent Office:

• Two originals and one certified copy of the license agreement;• Two copies of translation of the agreement into the Belarusian or Russian language;• a power of attorney, if the party wishes to be represented by a patent attorney of the Republic of Belarus (request for registration of the license agreement may be filed on behalf of each of its parties. A patent attorney may

■ Darya Lando, Lexpatent, LLC, Legal Advisor, Minsk, BelarusE-mail: [email protected]

■ Veranika Shypitsa, Lexpatent, LLC, Legal Advisor, Minsk, Belarus E-mail: [email protected]

1. Industrial and Commercial Law, 2009/No. 3 (82), p. 34.

2. Intellectual Property Chamber’s jurisdiction also covers patent infringement cases. In the course of hearing such cases defendants usually attack the validity of the patent in ques-tion—and this is in line with the practice of most countries—by filing with the Appeal Board of the National Center of Intel-lectual Property (NCIP) opposition against grant of the patent. According to Article 160 of the Civil Procedural Code of the Republic of Belarus, court is obliged to stay proceedings in a case if it is impossible to consider the case until another civil, criminal or administrative case is resolved. So, the Chamber suspends the patent infringement case until the Appeal Board’s decision on the opposition against grant of the patent comes into force. The number of oppositions that may be filed with the Appeal Board and, consequently, suspensions of the court proceedings is not legally constrained, and this is often used by unfair defendants.

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also previously examine the draft of the license agreement for its compliance with the Belaru- sian legislation).According to the Eurasian Patent Convention of

1994 and Patent Regulations under the Eurasian Patent Convention license agreements, Eurasian patents valid in Belarus shall also be registered with the Belarusian Patent Office.

The number of license agreements registered with the Patent Office of the Republic of Belarus tends to grow. In the year 2009 the number of registered non-exclusive licenses with respect to all subjects of industrial property grew by 76.3 percent in comparison with year 2008 and amounted to 358 agreements. Non-exclusive licenses constituted 91.3 percent of all the registered license agreements. The number of registered exclusive licenses grew by 30.8 percent and amounted to 34 agreements; their rate in total amount of registered licenses constituted 8.7 percent.3 As for invention licensing agreements, 31 of them were registered in the year 2009; 28 agree-ments were non-exclusive licenses, and three were exclusive ones. As of June 30, 2010, five invention licensing agreements have been registered; all granted licenses are non-exclusive.4 These figures show that the rate of exclusive licenses tends to decline, while the rate of non-exclusive licenses increases. In our opinion, one of the reasons for this trend is a growing circumspection of the patentees.

The Belarusian legislation provides the patentees with an additional opportunity to find persons inter-ested in use of their inventions. The patentee may request the Patent Office to publish his proposition to grant a non-exclusive license to any interested person (open license). In this case annual patent fee shall be reduced by 50 percent starting from the year, which follows the year of publication of such a proposition. A person interested in use of the inven-tion has a right to call on the patentee to conclude a license agreement on the published terms. Number of open licenses proposed with respect to inventions is not big. In the year 2009 two propositions were published, which relate to:

• Patent No. 11302 for the invention “Method of production of seeding of long-pincered cray- fish Astacus leptodactylus Esch”; and

• Patent No. 11303 for the invention “Method of growing marketable freshwater prawn Macrobrachium nipponense (de Han) in tem- perate climatic zone.”As of June 30, 2010 one more open license has

been proposed—it relates to the patent No. 7660 for the invention “Device for removal of horizontal deformations of dentitions.”5

As a general rule, relationships between patentee and probable licensee are based on a principle of freedom of contract. It means that the parties are free and independent to decide whether to conclude a license agreement, as well as to choose the con-tractor and the terms of license. Still, the legislation of the Republic of Belarus—like legislations of most countries—provides for the granting of compulsory licenses for inventions. According to Article 38 of the Patent Law, in case of non-use or insufficient use of the invention by the patentee within five years from the date of grant of the patent any person willing and ready to use the patented invention, may, in case of refusal of the patentee to conclude a license contract, file an application with the court for granting him a compulsory non-exclusive license. If the patentee fails to prove that non-use or insufficient use of the invention is justified by goods reasons, the court shall grant the said license and fix the scope of use, the amount of license fees, the terms and the manner of payment thereof.

Until now the Intellectual Property Chamber of the Supreme Court of the Republic of Belarus has considered only one compulsory license case.6 The patent attorneys of our company advised the patentee in this case. In this article we give the facts of the case and the court’s conclusion.

A well-known pharmaceutical company, being the holder of the Belarusian patent for a specific chemi-cal compound which was the active component of a medicine for treatment of schizophrenia and bipolar affective disorders, knew that an Indian pharmaceuti-cal company had registered in Belarus the pharma-ceutical containing the patented compound, and was delivering it to the country. The patentee forwarded to the Indian company a claim letter demanding to stop infringement of the patent in force. In their response to the letter the Indian company assured the patentee of the immediate termination of sup-

3. NCIP Annual Report 2009 http://www.belgospatent.org.by/files/Report_2009.pdf.

4. Official NCIP Bulletins “Inventions. Utility Models. Indus-trial Designs,” No. 1 (66), 2009–No. 3 (74), 2010.

5. Official NCIP Bulletins “Inventions. Utility Models. Indus-trial Designs,” No. 1 (66), 2009–No. 3 (74), 2010.

6. Case No. 12-01/5-2008.

June 2011 133


plies of the medicine to Belarus, and proposed to discuss the issue of concluding a license agreement with respect to the corresponding invention. The patentee informed the Indian company that conclud-ing the license contracts concerning original medical products was not in line with the company policy, and considered the incident settled.

But after a while the patentee received a subpoena from the Intellectual Property Chamber of the Su-preme Court, summoning him as a defendant in the case for granting a compulsory license for the use of the invention under his own patent. The claim had been filed by the same Indian company. Referring to Article 38 of the Patent Law the plaintiff asked to grant him a non-exclusive license for the use of the patented invention, since:

• in plaintiff’s opinion, the patentee was not actually using the invention in the Republic of Belarus;• the patentee had refused to conclude a license agreement under the terms proposed by the plaintiff;• the plaintiff had obtained the marketing authorization of the Ministry of Public Health of the Republic of Belarus for the medicine containing the patented compound, and was willing and ready to supply it to Belarus;• the price of the Indian medicine was much lower than the price of the similar medicine produced by the defendant, that made it more accessible to the persons suffering from mental diseases, and thus better meeting the interests of the Republic of Belarus.In the defensive pleading, the patentee stated that

he had taken all the necessary steps for registration of the original medicine containing the patented compound in Belarus, the medicine had received the marketing authorization and was being supplied to the Republic of Belarus. The fact and the volumes of supplies were proven by the letters from the State Customs Committee, the Ministry of Public Health, and specialized medical establishments.

The submitted evidence related to the use of the invention before the expiry of the 5-year term from the date of grant of the patent, which is mentioned in Article 38 of the Patent Law. In the course of the trial it was established that the date of grant of the

patent shall be the date of receipt of the letters pat-ent by the patentee or the patent attorney acting on his behalf. Since this date coincides neither with the date of registration of the invention in the State Register of Inventions of the Republic of Belarus, nor with the date of publication of the patent data in the official bulletin of the Patent Office, and since the plaintiff usually is not aware of the exact date when the patentee received the letters patent, it seems that “the date of grant of the patent” is not a proper way to define the start of a grace period of non-use of the invention. That is why, following the trial of this case, the amendments to the Patent Law were introduced. These amendments, which come in force on February 3, 2011, replace “the date of grant of the patent” with “the date of publication of the patent data.”

The defendant also proved that in the Republic of Belarus his medicine was not a unique or exclusive preparation developed for treatment of schizophrenia and bipolar disorders. It could just be selected among other medications for treatment of these diseases, available in Belarus.

Having considered all arguments and evidence the court established that the defendant had registered in Belarus the pharmaceutical containing the patented compound as an active component, and had been delivering the pharmaceutical to medical establish-ments and a drug-store chain. That is, the patentee had taken all the necessary steps for the use of the patented invention, sufficiently used it and was ready to increase the volume of use should it be necessary. So, since there was no non-use or insufficient use of the invention without valid reasons, the plaintiff was refused a grant of a compulsory license. The court also specified in its decision that the plaintiff’s argu-ment about a substantial difference in prices of the medicines produced by the plaintiff and the defendant had no legal effect in that case.

Profit earning is one of the main objectives of intellectual property management. Summing up the aforesaid, we can state that in Belarus, where the legislation thoroughly regulates the procedure of granting patent licenses and provides for a proper protection of both sides of the license agreement, the conditions for effectiveness of such a management are created. ■

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2010 Patent Litigation Study

The Continued Evolution Of Patent Damages Law

By Chris Barry, Alex Johnston, Ronen Arad, David Stainback, Landan Ansell and Mike Arnold

The Heart of the MatterThe Impact of Recent Court Decisions on Patent Damages Law

s the world’s largest corporations face in-creased threats of patent litigation from their competitors and from nonpracticing entities

(NPEs), the debate over U.S. patent reform continues. In each of the last five Congressional sessions, vari-ants of a Patent Reform Act have been introduced, yet none have become law. One of the most widely discussed topics in the patent reform debate has been the issue of damages. Some view recent case law as unfairly limiting a patentee’s ability to recover adequate compensation, whereas others believe the current law frequently results in excessive jury awards.

While the legislative process has slowly taken its course, the courts continue to address the link be-tween patent damages and the value of the patented feature. Several recent court opinions have focused on the tension between apportionment arguments and the entire market value rule, the latter allow-ing for the recovery of damages based on an entire product’s sales value even when the patented feature is only one component of that product.

Two cases are particularly illustrative. First, in a March 2009 opinion in Cornell University v. Hewlett-Packard, the Court reduced damages to $53 million from $184 million, finding that the royalty base on which damages were calculated was overstated, as the patented element was but one of many compo-nents within other layers of components, all eventu-ally embodied in servers and workstations. Then in September 2009, the U.S. Court of Appeals for the Federal Circuit (CAFC) vacated a lower court’s $368 million damages award in Lucent Technologies v. Gateway, remanding the case for a new trial on dam-ages. The royalties originally awarded to Lucent were framed as a percent of the entire value of software sales, although the patented technology involved only one arguably minor feature (the date-picker calendar function) among numerous functionalities within Microsoft Outlook™. In both cases the courts de-

termined that the entire market value rule had been improperly applied because the patented features did not drive demand for the entire product.

In addition, in the Lucent matter the CAFC placed increased emphasis on the comparability of licenses used in determining reasonable royalty damages, find-ing that the licenses used to calculate royalty damages were too different from any license that the parties would have negotiated, in both licensing terms and subject matter. In February 2010, the CAFC followed the Lucent decision with ResQNet.com v. Lansa, in which the damages award was reversed because the licenses used in determining damages were not rea-sonably related to the infringed technology.

Whether discussing the appropriateness of applying the entire market value rule or the reliance on histori-cal licensing information in determining royalty rates, these decisions over the last year and a half indicate that courts are demonstrating an increased focus on linking damages awards to appropriate evidence regarding the economic value contributed by the patented technology. Interestingly, even without the passage of patent reform, these decisions suggest that courts can effectively serve as “gatekeepers” regard-ing damages calculations that are presented at trial.An In-Depth DiscussionAn Analysis of Trends in Patent LitigationSummary of Key Observations

• Reflecting on these developments, Pricewater-houseCoopers (PwC) has compiled and maintained a thorough database of patent damages awards (from 1980 through 2009), collecting information about patent holder success rates, time-to-trial statistics, and practicing versus nonpracticing entity statistics (all from 1995 through 2009). Based on this study, several observations can be made to help executives, legislators, and litigators assess their patent enforcement strategies, as well as the impact of NPEs.• Annual median damages (in 2009 dollars) award has ranged from $2.4 million to $10.5 million be-tween 1995 and 2009, with no discernable trend.

A

Patent litigation trends 1995-2009 and the impact of recent court decisions on damages

June 2011 135


• Damages awards for NPEs have averaged more than triple those for practicing entities since 2001.• The disparity between jury and bench awards continues to widen and is likely the contributing factor in the significant increase in use of juries since 1995.• Reasonable royalties continue to be the predomi-nant measure of damages awards.• NPEs have been successful 31 percent of the time overall versus 40 percent for practicing enti-ties, due to the relative lack of success for NPEs at summary judgment. However, both have about a 2/3 win rate at trial.• Win rates of alleged infringers increase when they are the plaintiff. However, the increase is only significant when the patent holder is an NPE.• While the median time-to-trial has remained fairly constant since 1995, significant variations exist between jurisdictions.• Certain federal district courts (particularly Virginia Eastern, Delaware and Texas Eastern) continue to be more favorable to patent holders, with shorter time-to-trial, higher success rates and higher median damages awards.• Five federal district courts accounted for 36 percent of all identified decisions involving an NPE as the patent holder.

2009 Saw a Decrease in Patent Actions FiledAs Chart 1 illustrates, since 1991 the annual num-

ber of patent actions filed has increased at an overall compound annual growth rate (CAGR) of 4.8 percent.

Meanwhile, the number of patents granted by the USPTO has also grown steadily, increasing at a CAGR

of 3.5 percent since 1991. However, in 2009, while the number of patents granted by the PTO continued to rise, the number of patent actions filed actually dropped to 2,744, a decrease of over six percent from 2008. This broke a three-year trend of growth in case filings, since the last drop in 2005.Awards for NPEs are More Than Triple Those for Practicing Entities

Adjusting for inflation using the Consumer Price Index (CPI), the annual median damages award has ranged from $2.4 million to $10.5 million between 1995 and 2009, with an overall median award of $5.2 million over the last 15 years. In the aggregate, however, there is no discernable trend over the total time period.

That said, as shown in Chart 2b, a wide vari-ance exists in the dam-ages awarded to NPEs as compared to practicing entities since 2001. The median damages award for NPE patent holders was more than triple the award for practicing en-tities over the last eight years. Between 2002 and 2009, the median was $12.9 million for NPEs and $3.9 million

■ Christopher C. Barry, PricewaterhouseCoopers,Partner, Boston, MAE-mail: [email protected]

■ Alex Johnston, PricewaterhouseCoopers, Director, Atlanta, GA E-mail: [email protected]

■ Ronen Arad, PricewaterhouseCoopers, Director, Atlanta, GA E-mail: [email protected]

■ David Stainback, PricewaterhouseCoopers, Director, Atlanta, GA E-mail: [email protected]

■ Landan Ansell, Pricewaterhouse-Coopers, Senior Associate, Atlanta, GA E-mail: [email protected]

■ Mike Arnold, Pricewaterhouse-Coopers, Senior Associate, Boston, MA E-mail: [email protected]

1995

1994

1993

1992

1991

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

3,500

3,000

2,500

2,000

1,500

1,000

Patents granted Patent cases

Pate

nt c

ases

file

d

200,000180,000160,000140,000120,000100,00080,00060,00040,00020,0000

Pate

nts

gran

ted

Years are based on June year-end. Sources: US Patent and Trademark Office: Performance & Accountability Report and US Courts: Judicial Facts & Figures.

Chart 1. Patent Case Filings and Grants

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for practicing entities. In contrast, from 1995 to 2001, the median damages award was approximately 20 percent higher for practicing entities, in the $5-6 million range.

Massive damages awards continue to make corporate management keenly aware of the risks of potential infringe-ment, as well as the rewards of enforcing patent rights. Chart 2c below displays the top ten damages awards in federal district court decisions identified since 1995. Interestingly, three of the top ten largest initial awards identified since 1995 occurred in 2009.

It is important to note that the awards reflected in Chart 2c are as of initial adjudication—some of these awards have since been vacated, remanded or reduced, and some are still in the appel-late process.Wide Disparity Between Jury and Bench Awards

The disparity between jury and bench awards has widened and is likely a con-tributing factor to the significant increase in the use of juries over the last decade.

A significant trend toward jury trials has emerged since the 1980’s, with the shift becoming more evident over the last decade. As shown in Chart 3a, juries de-cided only 14 percent of cases during the 1980’s and 24 percent during the 1990’s. In this decade, juries have decided 53 percent of cases.

As reflected in Chart 3b, in 2009, jury trials represented almost 70 percent of total identified cases, indicating that, in the most recent years, juries have clearly become the preferred trier of fact.

A number of factors contribute to the in-creased use of juries as the preferred forum for patent cases. Trial success rates for patent holders are much higher when decided by juries as com-pared to bench trials. In

Chart 2A. Patent Holder Median Damages Awarded: 1995–2009

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

$12

$10

$8

$6

$4

$2

$0

Median damages are adjusted for inflation and represented in 2009 US dollars.

Med

ian

dam

ages

aw

arde

d (M

M)

Chart 2B. Patent Holder Median Damages Awarded: Nonpracticing Entities vs. Practicing Entities

$12.9

$5.2$3.9

$6.3

Nonpracticing entities Practicing entities

1995–2001 2002–2009

$14

$12

$10

$8

$6

$4

$2

$0Med

ian

dam

ages

aw

arde

d (M

M)

Chart 2C. Top 10 Largest Initial Adjudicated Damages Awards: 1995–2009

Year Plaintiff Defendant TechnologyAward

(MM)

2009 Centocor Ortho Biotech Inc. Abbott Laboratories Arthritis drugs $1,848

2007 Lucent Microsoft Corp. MP3 technology 1,538

2003 Eolas Technologies Microsoft Corp. Internet browser 521

2008 Bruce N. Saffran M.D. Boston Scientific Corp. Drug-eluting stents 432

2009 Uniloc U.S.A. Inc. Microsoft Corp. Software licensing technology 388

2008 Lucent Gateway Data entry technology 368

2006 Rambus Hynix Memory chips 307

2009 i4i Limited Partnership Microsoft Corp.Electronic document manipulation technology

277

2008 Medtronic Boston Scientific Balloon-dilation catheters 250

2007 DePuy Spine Medtronic Spinal implant devices 226

June 2011 137


fact, jury success rates have consistently outperformed their bench counterparts every year since 1995, as shown in Chart 3c. Furthermore, juries’ lead over the bench in trial success rates broadened dramatically in 2009, to about 37 per-cent higher for juries.

As shown in Chart 3d, the increase in litigation involving NPEs over the last decade may be affecting the increased use of juries. Since 1995, 56 percent of trials involving NPEs have been jury trials, as compared to only 43 percent of trials involving practicing entities. Furthermore, recent awards by juries have been significantly greater, run-ning several multiples of the amounts awarded by judges. Chart 3e shows the discrepancy in median damages awards over the last three decades. While jury awards have risen sharply, the median bench award has decreased significantly since the beginning of 2000. A number of reasons may account for the increase in median jury damages awards.

The increase in damages awarded by juries in patent cases may be due to juries’ reduced sensitivity to large dol-lar awards with public disclosures of larger profits and net worth from major company defendants. Greater outrage at a finding of liability to punish the in-fringer rather than merely compensate the patent holder may also be a factor in increased damages awards. Self-selection bias could also play a part, as plaintiffs may believe juries will look more favor-ably upon them than judges, especially when seeking large monetary awards.

Chart 3f indicates that regardless of whether an entity practices its patent(s), damages awarded from juries are much greater than those awarded from bench trials. The premiums in jury awards for NPEs are even higher than those for practicing entities.Reasonable Royalties are the Pre-dominant Measure of Damages

As shown in Chart 4, reasonable royalties are the most frequent basis of damages awards in patent cases and com-prise a greater share with each passing year. Section 284 of the Federal Code,

85.6%

75.9%

24.1%

47.2%52.8%

14.4%

JuryBench

1980s 1990s 2000s

60%

80%

70%

90%

50%

40%

30%

20%

10%

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Chart 3A. Use Of Bench vs. Jury Trials By Decade

2001

2002

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2006

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2009

JuryBench70%

60%

50%

40%

30%

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10%

0%

Chart 3B. Use Of Bench vs. Jury Trials: 2001–2009

1995

1996

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2001

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2003

2004

2005

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2007

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2009

100%90%80%70%60%50%40%30%20%10%

0%

JuryBench

Chart 3C. Comparison of Trial Success Rates: 2001–2009

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governing equitable compensation, sets a reasonable royalty as the minimum level of compensation due to the patent holder from an infringer. While Chart 4 includes all identified decisions with damages, NPEs are generally not entitled to lost profits. Consequently, if NPE results are excluded from Chart 4, the proportion of damages awarded through reasonable royalties would decrease by about 6 percent.Lost profits damages are not as prevalent for several reasons:• The increased proportion of patent actions brought by NPEs, which are generally ineligible for lost profits dam-ages because they do not make products/services embodying their patents.• Even in circumstances where the patentee may be eligible for lost profits awards, it may elect to seek recovery through the royalty approach. The complexity and cost of the analysis for determining lost profits is greater than for reasonable royalties. Lost profits may be quantified based upon specific sales taken by the infringer from the patent holder or upon an assessment of particular facts and circumstances in a “but for” situation. This assessment examines whether there is demand for the product tied to the patent’s claims; there is an absence of acceptable alter-nate substitutes; the patent holder has adequate manufacturing and market-ing capabilities; and there is sufficient financial information to complete the quantification. Also, market share data is often required to allocate the infringer’s sales if the market consists of more than two participants. Patent holders often find the process of supporting such analy-sis distracting to their core operations, or they do not want to risk disclosing proprietary cost and profit information.• Lost profits can be more difficult to prove. The proliferation of competition in each U.S. market sector from U.S. and foreign based businesses provides greater access to substitute products. The presence of these alternatives means that even without an infringer’s products

Chart 3E. Bench vs. Jury Trials: Median Damages Awarded By Decade

$0.9$1.3

$10.9

$8.3

JuryBench

Practicing entities Nonpracticing entities

$12

$10

$8

$6

$4

$2

$0Med

ian

dam

ages

aw

arde

d (M

M)

Chart 3F. Bench vs. Jury Trials: Median Damages By Entity Type: 1995–2009

43.6%

57.2%56.4%

42.8%

JuryBench


70%

60%

50%

40%

30%

20%

10%

0%

Chart 3D. Bench vs. Jury Trials For Practicing & Nonpracticing Entities: 2001–2009

$0.9

$3.4

$0.7$1.1

$5.5

$10.7

JuryBench

1980’s 1990’s 2000’s

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$0Med

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June 2011 139


in the market, consumers may not automatically buy the patent holder’s products. Furthermore, the growing use of specialized distribution chan-nels for reaching a specific consumer demographic increasingly supports an infringer’s contention that its custom-ers are separate and distinct from those of the patent holder.

NPE Success Rates as Compared to Practicing Entities

To understand patent holder success rates for NPEs versus practicing entities since 1995, PwC studied 1,587 final decisions issued at two stages of the litigation process: summary judgment (843 decisions) and trial (668 decisions). Dismissals that did not occur at trial or summary judgment are not included in this breakdown. Chart 5a demonstrates that, overall, NPEs were successful 31 percent of the time versus 40 percent for practicing entities. This difference can be attributed to the relative lack of success for NPEs at summary judgment, as compared to practicing entities. In instances when a final decision is made at summary judgment, NPEs are successful only 13 percent of the time, as opposed to 20 percent for practicing entities. The trial success rates are nearly identical for NPEs and practicing entities.

While practicing entities seem to have a higher overall historical success rate since 1995 when compared to NPEs, Chart 5b depicts an interesting trend in success rates since 2005. Although success rates for practicing entities and NPEs were relatively close in the early part of this decade, NPEs have become more successful in recent years, winning 48 percent of the time in 2009, up from a decade-low of 23 percent in 2005. Meanwhile, practicing entities have seen their win rates decrease at a steady rate, from a decade-high of 54 percent in 2005 to a decade-low of 34 percent in 2009.

Studying trial success rates for bench versus jury trials sheds further light. Chart 5c illustrates that since 1995, while both practicing entities and NPEs have been more successful with jury than

Chart 5A. Patent Holder Success Rates: 1995–2009

30.8%

13.1%

68.6%

39.8%

19.5%

65.7%

Practicing entitiesNonpracticing entities

Overall Summary Judgment Trial

60%

70%

80%

50%

40%

30%

20%

10%

0%

7.0% 4.5%

39.4%

28.1%

74.6% 77.9%

Lost profits Reasonable royaltyPrice erosion

1995–2001 2002–2009

60%

80%

70%

90%

50%

40%

30%

20%

10%

0%

Chart 4. Composition Of Damages Awards To All Entities

2001

2002

2003

2004

2005

2006

2007

2008

2009

Nonpracticing entities Practicing entities60%

50%

40%

30%

20%

10%

0%

Chart 5B. Patent Holder Success Rates: 2001–2009

les Nouvelles140


bench trials, practicing entities enjoy a slightly higher success rate than NPEs with the bench.

Another interesting finding is that a greater percentage of NPE cases are decided or concluded at summary judgment than cases involving practic-ing entities. Chart 5d shows that 60 percent of NPE final decisions occur at summary judgment versus 52 percent for practicing entities. Because success rates at summary judgment are much lower than at trial, NPEs tend to experi-ence a lower overall success rate than practicing entities, when the total mix of summary judgment and trial deci-sions are considered.Win Rates of Alleged Infringers In-crease When They are the Plaintiff

Declaratory judgments (where al-leged infringer asserts the patents are invalid, unenforceable, or not infringed by its products) represent 9 percent of all cases identified. Chart 6 suggests that since 1995, alleged infringers have had more success in declaratory judgment actions against NPEs than versus practicing entities (55 percent versus 43 percent). Alleged infringers have also been somewhat more suc-cessful at trial in their more normal posture as defendants against NPEs than practicing entities (46 percent versus 41 percent). In summary, it appears that alleged infringers benefit from filing declaratory actions, how-ever that benefit is only significant against NPEs (55 percent win rate as plaintiff against NPE versus 46 percent win rate as defendant against NPE).Significant Variations in Median Time-To-Trial Exist by Jurisdiction

Data for time-to-trial was obtained for 540 trials in 68 districts, using the court dockets for each matter. Time-to-trial was calculated from the complaint date to the first day of trial for each case. In Chart 7a, the distribution of overall time-to-trial indicates that 69 percent of cases reached trial within three years from the filing date of the initial complaint. Overall no major changes


70%

60%

50%

40%

30%

20%

10%

0%

59.4%

51.6%

Chart 5D. Percent Of Decisions At Summary Judgment: 1995–2009

52.3%

80.7%

55.7%

79.3%

Practicing entitiesNonpracticing entities

Bench Jury

90%

60%

70%

80%

50%

40%

30%

20%

10%

0%

Chart 5C. Patent Holder Success Rates At Trial: 1995–2009

Infringer as plaintiff Infringer as defendant

60%

50%

40%

30%

20%

10%

0%

42.6% 40.5%

54.5%

45.6%

Win

rate

Versus nonpracticing entitiesVersus practicing entities

Chart 6. Alleged Infringer Win Rate At Trial From 1995–2009

June 2011 141


in time-to-trial are noted since 1998. Chart 7b shows that after a decline from 1995 to 1998, median time-to-trial has maintained a fairly steady duration at just over two years from the complaint date to trial, even as the volume of cases has increased substantially over this time. As reflected in Chart 7b, the number of cases going to trial has hov-ered around fifty-five to sixty-five cases per year in the last four years, up from twenty to forty cases per year in the preceding decade.

Not surprisingly, the median damages award increases with time-to-trial. Chart 7c reflects the median damages award depending on the number of years to trial. Several factors may be responsible for this relationship, including the fact that cases involving higher potential damages awards are more complex and thus take longer to reach trial. In addi-tion, the longer time-to-trial provides a longer period over which damages may be calculated, thereby increasing the potential damages base.

Since 1995, however, significant variations have occurred in the median of time-to-trial across jurisdictions. To assess the lead time, PwC focused on the most active districts. Among these courts, Chart 7d summarizes the median time-to-trial from 1995 to 2009. Based upon the cases identified, Virginia Eastern and Wisconsin Western districts have the shortest time-to-trial. The median time-to-trial increased by 0.16 years from our prior study, caused by an average time-to-trial of 2.4 years for cases coming to trial in 2009. Certain Federal District Courts are More Favorable to Patent Holders

Considering median time-to-trial, median damages awarded, and trial win rates, certain jurisdictions (particularly Virginia Eastern, Delaware and Texas Eastern) emerge as being more favorable venues for patent holders, with shorter time-to-trial, higher success rates and higher median damages awards. Chart 8a presents the top 15 districts based on an equally weighted average of their

< 1 ye

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Chart 7A. Time-To-Trial Distribution of Cases: 1995–2009

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0 0.0

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Chart 7B. Median Time-To-Trial: 1995–2009

0–2

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(MM

)

Chart 7C. Median Damages Based On Time-To-Trial: 1995–2009

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respective categorical rankings for each of the three statistical measures mentioned above for decisions from 1995 to 2009.

In combining summary judgment and trial deci-sions, Charts 8b and 8c include those districts with greater than 20 cases and rank them according to overall success rates. 36 Percent of NPE Decisions Were Concentrated in Five Federal District Courts.As depicted in Chart 9, cases with an NPE as the patent holder were concentrated in a relatively small number of key districts. The top five districts with the most identified decisions accounted for 36 percent of all identified NPE cases. The top 10 districts accounted for 52 percent of all identified NPE decisions. Of particular interest is the fact that the two districts with the most identified NPE decisions, Illinois Northern and Texas Eastern, present a dichotomy in relative NPE success rates. Illinois Northern ranks seventh-lowest in terms of NPE success rates, whereas Texas Eastern ranks third-highest. Meanwhile, Delaware, which has the lowest percentage of identified decisions where the patent holder is an NPE, has an overall success

rate for NPEs of 63 percent, trailing only Florida Middle with an overall success rate of 67 percent.What This Means For Your BusinessUnderstanding the Dy-namics of Patent Litiga-tion is Critical to Success

In light of the findings in this study, and despite the current debate over pat-ent reform, patent litigation continues to be utilized as a protection and monetiza-tion path for patent holders. Both the number of patents granted by the USPTO and in-fringement actions filed con-tinue to be significant, while the median damages award in 2009 was near its all-time high at about $9 million. This suggests that IP will continue to play an important role in the economy, and represent an important competitive advantage for companies to realize value.

Although recent court decisions and future leg-islation may influence patenting activities and the litigation process, for now the courts continue to reward patent holders by upholding the validity, en-forceability, and infringement of their patents. With U.S. patent trial success rates near their highest level in history, patent holders are winning considerable awards of damages. The largest ever patent damages award of over $1.8 billion was awarded in 2009, al-though that case is not yet through the appeals phase.

The forum and venue of a case can have a substan-tial influence on the outcome and should be carefully considered. Trials before juries, particularly in certain notable districts, tend to produce substantially higher success rates and awards. Potential litigants should consider the choice of venue and trier of fact when strategizing how and where to respond to alleged / suspected infringements.

Patent litigation brought by NPEs has been partially responsible for the increased calls for patent reform. While median awards for NPEs have been significantly higher than for practicing entities, NPEs’ overall success rates have been significantly lower. NPEs

Only includes the 15 most active districts for which time-to-trial data was available.

Chart 7D. Median Time-To-Trial By District: 1995–2009

Rank District

Total # of identified

decisions with time-to-trial data In years

1 Virginia Eastern District Court 13 0.93

2 Wisconsin Western District Court 9 1.07

3 Florida Middle District Court 12 1.71

4 Delaware District Court 91 1.89

5 Texas Southern District/Bankruptcy Courts 10 2.00

6 Texas Eastern District Court 57 2.04

7 Florida Southern District Court 11 2.27

8 California Central District Court 24 2.28

9 Texas Northern District Court 17 2.42

10 Minnesota District Court 10 2.45

11 New York Southern District Court 34 2.50

12 New Jersey District Court 13 2.71

13 California Northern District Court 31 2.95

14 Illinois Northern District Court 34 3.42

15 Massachusetts District Court 23 3.64

Overall (all decisions identified) 2.27

June 2011


143

will continue to be frequent participants in patent litigation, having been involved in almost 20 percent of reported decisions since 1995.Methodology

To study the trends related to patent decisions, PricewaterhouseCoopers identified final decisions at summary judgment and at trial recorded in two West-Law databases, Federal Intellectual Property–Cases (FIPCS) and Combined Jury Verdicts and Settlements

(JV-ALL), as well as in corresponding PACER records. The study focuses on 1,587 district court patent deci-sions issued since 1995. Key definitions for certain terms used throughout the study are listed below:

• Cases decided at summary judgment included those district court patent infringement cases where a response to a motion that could affect the final decision on infringement (patent invalidity or non-infringement) was decided by a judge.

• Cases decided at trial included those district court patent infringe-ment cases where an opinion was rendered by a judge or jury at trial.• A “success” included instances where a liability and damages (if included) decision was made in fa-vor of the patent holder. Chart 6 only defines suc-cess from the alleged infringer’s perspective.

Chart 8A. District Court Rankings: 1995–2009

Overall Rank District

Median time

to trial (years) Rank

Overall success

rate Rank

Median damages awarded Rank

1 Virginia Eastern District Court 0.93 1 45.9% 5 $30,331,418 1

2 Delaware District Court 1.89 4 47.3% 3 $21,640,580 2

3 Texas Eastern District Court 2.04 6 55.3% 2 $19,722,995 3

4 Florida Middle District Court 1.71 3 59.1% 1 $398,406 15

5 California Central District Court 2.28 8 47.0% 4 $6,417,074 8

6 Texas Southern District/Bankruptcy Courts 1.99 5 32.4% 12 $10,531,957 5

7 Wisconsin Western District Court 1.07 2 32.4% 12 $4,511,181 10

8 California Northern District Court 2.95 13 33.0% 10 $7,462,530 6

8 Texas Northern District Court 2.42 9 45.2% 6 $1,675,470 14

10 Illinois Northern District Court 3.42 14 34.6% 9 $7,416,732 7

10 Minnesota District Court 2.45 10 35.0% 8 $2,261,103 12

10 New Jersey District Court 2.71 12 32.2% 14 $16,601,427 4

13 Massachusetts District Court 3.64 15 39.1% 7 $5,057,511 9

14 New York Southern District Court 2.50 11 32.7% 11 $3,117,994 11

15 Florida Southern District Court 2.27 7 26.5% 15 $2,061,851 13

Overall (all decisions identified) 2.27 38.1% $5,229,497

Median damages are adjusted for inflation and represented in 2009 US dollars. The ranking for these courts are based on their relative ranking for each of the remaining statistical measures.

Chart 8B. Top 5 Districts By Overall Success Ranking: 1995–2009

Top 5 Districts Overall Success Rate Trial Success Rate

1 Florida Middle District Court 59.1% 80.0%

2 Texas Eastern District Court 55.3% 66.7%

3 Delaware District Court 47.3% 64.5%

4 California Central District Court 47.0% 72.4%

5 Virginia Eastern District Court 45.9% 70.6%

Overall (all decisions identified) 38.1% 66.0%

les Nouvelles


144

• Time-to-trial” was calculated from the complaint date to the first day of either the bench or jury trial for each case.• A “nonpracticing entity” is defined as an entity that does not have the capabilities to design, manu-facture, or distribute products that have features protected by the patent. ■

©2010 PricewaterhouseCoopers LLP. All rights reserved. “PricewaterhouseCoopers” refers to Price-waterhouseCoopers LLP, a Delaware limited liability partnership, or, as the context requires, the Pricewa-terhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity.

Chart 8C. Bottom 5 Districts By Overall Success Ranking: 1995–2009

Top 5 Districts Overall Success Rate Trial Success Rate

1 Florida Southern District Court 26.5% 42.9%

2 New Jersey District Court 32.2% 57.9%

3 Texas Southern District/Bankruptcy Courts 32.4% 66.7%

3 Wisconsin Western District Court 32.4% 70.0%

5 California Northern District Court 33.0% 71.1 %

Overall (all decisions identified) 38.1% 66.0%

Chart 9. District Courts With Most ldentified Decisions With NPE As Patent Holder: 1995–2009

DistrictDecisions

Involving NPEsTotal Identified

DecisionsNPE % of Total

DecisionsNPE Success

Rate

Illinois Northern District Court 27 130 20.8% 18.5%

Texas Eastern District Court 27 85 31 .8% 55.6%

New York Southern District Court 25 113 22.1 % 16.0%

California Northern District Court 16 109 14.7% 25.0%

Delaware District Court 16 146 11.0% 62.5%

Massachusetts District Court 13 64 20.3% 30.8%

Florida Southern District Court 11 34 32.4% 27.3%

California Central District Court 10 66 15.2% 50.0%

Minnesota District Court 8 40 20.0% 50.0%

Pennsylvania Eastern District Court 8 34 23.5% 12.5%

DC District Court 7 17 41.2% 28.6%

Kansas District Court 7 15 46.7% 14.3%

Florida Middle District Court 6 22 27.3% 66.7%

Texas Northern District Court 6 31 19.4% 33.3%

Virginia Eastern District Court 6 37 16.2% 50.0%

Wisconsin Western District Court 6 34 17.6% 0.0%

Colorado District Court 5 17 29.4% 40.0%

Connecticut District Court 5 20 25.0% 0.0%

Michigan Eastern District Court 5 33 15.2% 0.0%

All Identified Decisions 308 1,587 19.4% 30.8%

June 2011 145

Valuing Commercialized Software

Rules Of The Road: Valuing Commercialized Software-Based TechnologyBy David Drews and Dwight Olson

■ David Drews, IP Metrics, LLC, Principal,San Diego, CA, USAE-mail: [email protected]

■ Dwight Olson, V3Data, Principal, San Diego, CA, USA E-mail: [email protected]

ompanies that develop and own software often have the need to communicate the business value of their software in a meaning-

ful way. The question “what’s your software worth” often arises in many different contexts, such as when acquirers/investors are interested in assessing their options, licensees desire a reasonable exclusive roy-alty/license price, or stockholders look to measure the company’s management performance, to name just a few. When considering the value context of software, it is important to include all appropriate elements of value in the assessment and include all the software product components.1

There are numerous methods for determining the value of commercialized software. These include general valuation methods, such as the well-known market or income approaches to intellectual prop-erty valuation, and software specific methods, such as the Constructive Cost Model (COCOMO and COCOMO II), the Software Lifecycle Management model (SLIM) and other cost-estimating techniques that focus on the efforts needed to replicate the functionality of the software in question.

All of these methods may be utilized throughout the developmental life of a software product, from conception and initial development to commercial launch and thereafter. This article discusses certain important elements associated with the application of these methods to software that may be miscon-strued or incorrectly implemented. It is essentially a citation of the “rules of the road” when considering both the context and value of software, and points out elements of software value not usually considered in a typical IP valuation exercise.

This article discusses the integration of concepts from the Total Software Value-Ownership Value as-sessment [TSV(OV)]2 analysis with other valuation techniques to provide a more comprehensive depic-tion of the values of software. While the TSV(OV) provides an estimate of the value of the software product from a replacement point of view, which is important in buy vs. build decisions, it also incorpo-

rates additional investments made to advance the software to the next stage of development/version, as well as identifying the additional software products infrastructure necessary to support the software for use. When combined with other valuation tech-niques, such as the In-come Approach, which measures the potential value resulting from such efforts as licens-ing of the software, a comprehensive picture of the value of the soft-ware from many differ-ent perspectives will emerge. When valuing software, it is important to recognize all aspects of the asset in the analysis, including several that may be unique to software.

The net present value of software is typically based on the potential income from future licensing cash flows. Historically, the user fees to license software are essentially independent of the cost and effort to create the software, and for PC software, this prob-ably always will be the case. Otherwise, how can a few brilliant lines of code have a very high license fee in some applications, whereas a million lines of code that simply generate a report have a low license fee in other applications? A software product can be “squishy” in terms of the source of its value genera-tion, and using traditional valuation methods, even those applied to other intellectual property such as trademarks, patents, and music copyrights, may give misleading results.

In general, the “Rules of the Road” for software valuation also include the following:

•Investorsmaking decisions about the potentialacquisition of a software company know that invest-ments always have risk. So what are the unique risks associated with software? One risk is not compensat-ing for the fact that software costs tend to grow over time, and therefore present novel issues not seen in other intangibles. For example, support costs to sustain software effectiveness occur throughout the lifespan of the software, and over time these costs

C

1. “Software & Valuation in the Information Society Part 3 TSV(OV),” les Nouvelle, June 2009.2. Ibid.

les Nouvelles146


may be many multiples of the original version de-velopment cost. In comparison, the maintenance costs for trademarks and other forms of patents and copyrights are seldom even close.•Softwarelicensees(orpotentialexclusivelicens-ees) need to consider the costs represented by the opposing options of building competing software vs. licensing-in software. From economic theory, we understand that an investor will not pay more for a product than it would cost him or her to produce internally. As long as the revenue projections are accurate and the cost-to-build analysis encompasses all obsolescence and opportunity cost factors, and associated head-start risks are mitigated, the deci-sion should be fairly straightforward. However, there are other, less obvious, costs and risks with the licensing-in option that need to be considered. For example, it may be necessary to implement cus-tom modifications to a standard software product. These additional costs and time delays need to be part of the equation. As mentioned above, obtaining maintenance and support services for the software may be a significant cost exposure going forward, thereby reducing anticipated profit margins.While some decisions may be based on cost, an understanding of the in-house capabilities for man-aging and mitigating these costs and risks is also important. We know that software maintenance and support is critical but how does one mitigate the risk of not overpaying the licensor for his con-tributions? What is the value of a future version vs. a current version? Who owns any modifications (and associated inventions) made to the software? A thorough understanding of all potential risks, costs and opportunities is vital to reaching the correct decision.Also, any time that future cash flows and investment options are an important aspect of an analysis, one needs to consider the opportunity costs associated with any delay in bringing the product to market. In the most straightforward situations, these may include the interest lost on the funds invested in the development of the software. In addition, it may include current and near-term profits foregone on these products due to the decision to develop some aspect of the software in-house, which takes time, rather than licensing that capability from a third party, which could be implemented much sooner. If that additional development time pushes the launch of the product back six to twelve months, that lost time in the marketplace needs to be quantified and included in the overall value figure. This is another example of value in the form of avoided costs ac-

cruing to the owner of previously commercialized software due to its relatively advanced stage of development.•Thevalueofanexistingcustomerbaseshouldnot be dismissed. First, depending on the type of software, the expenses necessary to create aware-ness of the software among the target market have already been invested for the most part. As that awareness grows and other elements begin to have an impact, such as word-of-mouth and positive reviews, the cost of each new additional customer drops dramatically. This reduced per-customer expenditure indicates that a larger percentage of future cash flows will fall to the bottom line. Also, as with the reduction in development costs, any expense that does not have to be paid points to an existing source of value for the owner in the form of higher retained cash flows.•Duringanacquisitionor investment involvingsoftware, how much of the property is disclosed via patents and copyrights, and how much is not disclosed in the form of trade secrets and other know-how in the transaction documents? The due diligence undertaken must include all valuable software components, know how, and intellectual assets. An important idiosyncrasy of software is that one must have access to both a physical manifestation of all of the components of a software product and the underlying rights to it in order to exploit it. Of course we have seen the emergence of technology escrow to begin to mitigate some risk but most often the escrow is not verified, validated, and valued. Thus many lenders and investors are attempting to mitigate short falls after the fact, oftentimes in the context of bankruptcy proceedings.3 •Companiesthattransfertheownershipofsoft-ware assets to their foreign subsidiaries or contrac-tors are oftentimes unaware of the value and extent of assets being transferred. Was it limited to the software patents listed in the re-assignment? What about the know-how, software tools, trade secrets, and unregistered copyrights that were likely key components of the transfer? When the valuation is related to a transaction, one must ensure that all assets necessary for the proper utilization of the target software product have been contemplated and included.A major context of intellectual property and intel-

lectual asset value is typically the present value of

3. “Leveraging Software via the Capital Markets,” les Nouvelles, March 2008.

June 2011 147


the income it will generate over its lifetime. This simple rule is the basis for most investment valuations (famous artworks being the classic exception), and estimating that future income is a major concern in investment decision making. It is certainly true that any method that requires predictions of future outcomes will never be precise, but having some consistency in defining the risk factors associated with the income stream may help in understanding the valuation analysis outcome. For example, before an investor should accept a software company’s busi-ness plan financials, he or she should understand the following:

1) The size, cost and duration of future revenues and expenses associated with the development and commercialization of the software.2) Size and nature of the market; competitive environment.3) The various risk factors that will affect the like-lihood of achieving the forecasted revenues and expenses.For software, the size, cost and duration of future

cash flows depends on many factors, including the revenues and expenses associated with licensing, maintenance and support. For licensing revenue, it could be as simple as the license price times the number of licenses. For maintenance and support, it could be a percentage of the current base paying for these annual services.

As for the impact of costs, consider this: when a new version of a software product is ready for release, selling licenses of the prior version will most likely be a money-losing activity. While the costs of copying and distributing software are typically very low, there is no benefit in continuing to license old versions. This is because supporting old versions of software will usually create a huge, ongoing cost burden for the owner.

Purchasing older versions of software does not make sense for the licensee either. It is likely to create huge expenses in adapting a prior version of software to the licensee’s newer computer systems.

When determining the duration for future pat-ent revenue, it can be as simple as determining the

remaining life of the patent, although obsolescence and competitive factors need to be considered. For software, it is never that easy. The remaining useful life of software is typically quite complex. The main concern will be the life cycle of the technology and its ability to transfer from, say, one Intel chip to an-other Intel chip, or from one version of an operating system to another. Also, the software technology’s ability to scale from one user to millions will be an important factor.

For software, the size and nature of the market can be staggering or insignificant. In the U.S. alone, software licensed to users amounted to about $120 billion in year 2000, about half of which was prepack-aged software and the other half custom software. A good understanding of the market niche is required for applications that will compete against entrenched competitors. In addition, the number of potential computer-based systems upon which software will operate, be they mobile, server or desktop, is indeed staggering. For example there are over 1.4 billion PCs installed worldwide with a growth rate of just under 12 percent annually. PCs will likely surpass 2 billion units by early 2014.4

When discussing software, it is important to un-derstand the risk factors that will discount the soft-ware’s present value. Successful software products may have many versions and long lifetimes, but with corresponding high maintenance cost ratios over their lifetime. Some experts calculate the average software lifetime to be 10 to 15 years.5 Many also believe that this average lifetime is likely to increase. For example, the UNIX operating system is over 40 years old and is still being used in many different versions, such as Red Hat. Some experts believe that the rate of software version update frequency is determined in part by the tolerance of users having to implement upgrades.

In the world of commercialization, all of these fac-tors will have an impact on the valuation of software as well as software based patents. A comprehensive valuation analysis will, at a minimum, contemplate these issues, and will need to incorporate them if they are relevant to the subject situation. ■

4. Personal Computing, Mike Hanlon, July 1, 2008.5. Valuation of Intellectual Property and Intangible Assets, 3rd edition; Gordon Smith and Russell Parr, Wiley, 2000, (p. 304).

Notes

Notes:

les Nouvelles

les News Licensing Executives Society International

•Patent and Technology Licensing •LES International Societies •www.LESI.org

1

June 2011

Licensing Professionals Across The Globe Celebrate World IP Day

Fellow LESI members your Society is pre-mised on the existence of IP, its enforce-

ability and value. Without IP there would be no LESI. Accordingly, it was extremely gratifying that IP is deemed sufficiently im-portant to justify having a day on the yearly calendar allocated to it.

26 April was celebrated across the world as World IP Day. This was initiated in 2000 by the World Intellectual Property Office (WIPO), with which we have very close ties, to raise public awareness about the role of IP in daily life, and to celebrate the contribu-tion made by innovators and creators to the development of societies across the globe. World IP Day is celebrated annually on this date, when the Convention establishing WIPO entered into force in 1970.

The Licensing Executives Society Inter-national, as the world’s leader in advancing the business of IP globally, has joined forces with WIPO to celebrate the occasion. Last year the LES International project “Around the World with LES” was initiated with great success and this year LES Societies cel-ebrated under the banner of, “One Day, One IP Community, One Celebration.” Thus,

events took place across five continents in Argentina, Australia, Austria, Brazil, Britain, Chile, Czech Republic, France, Hungary, Ireland, Israel, Italy, Jordan, Korea, Mexico, New Zealand, Philippines, Spain, Taiwan, Turkey, and in about 30 locations in the USA and Canada. These were all most successful and productive events.

Not only is Intellectual Property of major commercial importance to the world, the value of international trade in IP being in the region of US$500 trillion annually, but it is also of inestimable value in improving our efficiency of use of the world’s scarce and dwindling resources and improving the living standards and conditions of people around the world.

On behalf of LES International I thank the organisers of all the functions, and the LESI Around The World team, who spent many hours in coordinating, publicising and organising these events and I look forward to your participation in future LESI events.

My best personal wishes, Alan Lewis. ■

Call For PapersSuitable papers for publica-tion in future issues of les Nouvelles are being sought. Members or non-members who have presented papers at conferences or created original works are invited to submit their work. Submit in electronic form via e-mail or disk (MS Word or text-only format) to:

Larry Plonsker E-mail: [email protected]

In This Issue:

•WorldIPDayActivities, Pages 1-6

•LESAustria,Page6

•LESSingapore,Page7

•LESScandinavia, Pages 8 & 31

•LESBenelux, Page 8

•LESIsrael, Page 9

•FoundationFinalists, Pages 10

•BookandMovieReviews, Pages 14–15

•RecentCourtDecisions, Pages 16–31

•NewMembers,Page32

First Patent Granted in Americas

IP day was celebrated by LES México with a conference lunch at the University Club. Dr. Manuel Márquez was the speaker, as LES México President, and his topic was “The First Patent granted in México and America–August 21, 1573.” According to his research at the Indians Archives in Sevilla, Spain. (Oct. 2010), the Viceroy of New Spain, Don Martín Enríquez, gave recognition to the inventors Lords Don

Fernando de Portugal and Don Leonardo Fragoso for their invention consisting of the separation with minor loss of two metals, silver and Quicksilver, and they were the only ones to use it for 15 years, only in the New Spain territory.

This is the First Patent Granted in America (as a Continent) as there is no evidence of a previous one, and this is also the first patent granted in the New Spain (now México). ■

By Manuel Márquez

By Alan Lewis, President, LES International

LES Mexico—World IP Day

les News—Your Link to LES International

Licensing Executives Society International2

Trade Secret Protection And Technology Transfer Contracts In Chemical, Pharmaceutical & Biotech

The day was carried out with the invaluable assistance of the firm Cuatrecasas, Gonçalves Pereira, who sought an

environment and an organization in every way magnificent. Let us first thank this firm for it, and also FEIQUE and ASE-BIO for their cooperation and the contribution of two of the speakers. The au-dience was di-verse, about fifty people of vari-ous professional p ro f i l e s , who showed their in-terest during the presentations, round table and lively cafes.

First four presentations were made by Jorge Llevat, José Miguel Lissen, Josep Castells and Cristina González. Jorge’s presentation was on anti-trust prosecution of technology trans-fer contracts; he started by contextualizing the topic, focusing afterwards on how European Community rules in Articles 102 and, especially, 101, and its implementing regulations deal with this issue, and explaining what would be a safe mo-dus operandi for companies that conduct tech-nology transfer and may be af-fected by this regulation. José Miguel focused on the defini-tion and use of trade secret as a protection and technology transfer instrument. He emphasized that patent protection is the strongest way of protection, the one to be pursued in the event that the protected object is a product, reserving secret protection to procedures or improvements. He also stressed the need to accurately identify, the informa-tion to be protected as trade secrets and legal and technical measures to avoid disclosure. Josep Castells introduced his company and the association EuropaBio IUCT. Subsequently, he elaborated on the idea that biotechnology is not a sector, but a technology that allows innovations in different sectors.

Thus, one can speak of red biotechnology, which falls within the sphere of health, green biotechnology in the environment, and white biotechnology in industrial. He presented in detail the particularities of the technology transfer process in each of these sectors, largely determined by the different negotiating power of different actors in each of them and the regulatory and other type barriers to the introduction of products on the market. Finally, Cristina Gonzalez presented FEIQUE and the technology platform SUSCHEM, presenting the various activities undertaken to facilitate the transfer of technology in the chemical and pharmaceutical industries.

Roundtable: Open Innovation and Technology Transfer

The day ended with a panel discussion on “Open Inno-vation and Technology Transfer.” This was to contrast the meaning that for each of the speakers had the paradigm of open innovation and the role that technology transfer and its professionals plays or should play in it. Then the discussion was opened to the audience.

The debate was interesting and gave as a first result, per-haps not surprisingly, that the open innovation paradigm was conceived differently by those who took the floor.

There was a g e n e r a l ag reement t h a t t h e paradigm is manifested d i f ferent ly in different sectors, and

therefore there is no “right way” to put it into practice. Prob-ably, it is even a very young concept and is not developed to its full potential. This led us to another interesting finding: technology transfer plays an important role in this paradigm, but concepts, or rather how to implement and work with the instruments of this activity, must be re-invented and adapted to environments in which the relationship between agents goes beyond the mere purchase and sale. Now it's come to achieving “win-win” situations, that allows for as stable as possible or desirable relationships, using with a “new grace” the mechanisms and instruments of technology transfer; it’s come to the ability of tech transfer professionals to be creative, innovative!

By Gómez-Acebo & Pombo Abogados

LES Spain & Portugal, continued on Page 3

LES Spain & Portugal IP Day—Barcelona, April 5, 2011


June 2011

For global member directory, news and events, see www.lesi.org.

3

IAM 100 Course Held In Moscow

L ES Russia contributed to celebration of the World IP Day on 26 April by holding the LESI IAM100 Course “Com-

mercializing Technology Through the Power of IP Licensing,” which took place the same day in Moscow.

We were happy to meet the team of brilliant teachers. Hayley French, Apitope Technology Ltd., UK and Thomas Bereuter, ValIP Ltd. & CoKG, Austria who created the perfect full day performance.

This was a very good meeting which attracted 27 partici-pants the majority of which were young, fluent in English and very interactive.

We think the best words to express the spirit of the event were said by Hayley French in her message to the LESI Board, “I just got back from Moscow and I want to congratulate LES Russia for organising and hosting a very successful IAM100

one day course. Thomas and I taught the course to an en-thusiastic, interactive class who delivered great results in the licensing game. I believe there is a good foundation for offering further courses and increasing membership.”

This is the first time the course has been offered in Russia and I would especially like to thank LES Russia for the excel-lent organisation that went into the event.”

Hopefully the photos will give some impression of the positive atmosphere.

On behalf of LES Russia we would like to thank Hayley and Thomas for the great job. We sincerely hope to repeat the course in Russia in future. ■

The team of teachers at the LES Russia World IP Day, (left)Tom Bereuter, Sergey Dorofeev, President of LES Russia, and Hayley French.

There was also agreement that in this new paradigm, where companies play the leading role, deciding whether to adopt open innovation or other forms of organizing innovation, the position of “responsible for open innovation” must be very high in the organization chart; to a large extent, this profes-sional will determine the strategic positioning of the company, since he or she will be very deeply involved in defining what is core to its business, the possible diversification of the busi-ness and the potential income generation by the intellectual property that is not considered strategic. In this context, it became clear that the value proposition that an association such as LES can and should do, is acting as a meeting and discussion forum among all professionals involved in the process of open innovation, that allows us to generate these new ways to act, to negotiate, to engage, and project them into society and its agents; either through training projects, or by generating qualified opinion, advice, etc. ■

LES Spain and Portugal, continued from Page 2

Joint Event Draws IP Pros and Inventors

By Katerina Hartichova

The LES Czech Republic co-

organized a joint event with the Czech IPO and the Czech As-sociation of In-ventors within the framework of ATW. LESI provided two speakers, giving presentations on IP Commercialization and on Copyright Protection of Software. The attendance was around 60 people, including patent attorneys, lawyers, entrepreneurs, IP specialists from universities and companies. ■

LES Russia—World IP Day

Speaker Stepan Kratena addresses copyright protection of software at the LES Czech World IP Day event.

Hayley French and Tom Bereuter take the microphones.

LES Czech Republic—World IP Day



LESI, ABPI And ABAPI Celebrate World IP Day

Approximately 75 people attended a reception hosted in Brazil by LES Brazil, ABPI (Brazilian IP Association)

and ABAPI (Brazilian IP Agents Association).

By Rodolfo H. Martinez y Pell Jr.

Groups Create High Profile Event With IP Updates

On the morning of April 27, LES Hungary organized a meeting in the conference room of the Hungarian Intel-

lectual Property Office (HIPO) with a program that started at 9:00 and finished at 12:30 p.m.

The conference was advertised and co-organized with the Hungarian Association for the Industrial Property and Copyright (MIE), the Hungarian Trademark Association and the HIPO.

It was a well-attended event with over 75 persons, exceeding the membership number of LES Hungary.

There were four presentations on behalf of LES Hungary:1. The Effects of Know-how on Patent and Trademark License Agreements by Michael Lantos, President LES Hungary.2. A report on the recent changes concerning the plans for introducing the Unitary European Patents and potential changes in the CTM system, by Mihaly Ficsor, Vice President of the HIPO.3. How to Utilize Intellectual Property as Collateral in Finan-cial Dealing of the Owners of Rights by Dr. Katalin Szamosi, Vice President of the Hungarian Trademark Association.4. The Miracles of Biotech Patents, Understanding the Boundaries of What Can and Cannot be Protected by Dr. Arpad Petho, Managing Director of the MIE.The event was a big success, there were many discussions

with the speakers and the presentations are published on the Web sites of the organizing associations.

Through this event we celebrated WIP day a second time. This has created a high profile professional event that must be repeated each year. ■

By Michael Lantos

LES Hungary—World IP Day

LES Brazil—World IP Day

Joint Celebration Offers Online, Interactive Educational Program

For World IP day, LES Turkey engaged AIPPI Turkey in having a joint celebration on April 26th. We organized an online,

live, interactive educational program consisting of six one-hour modules throughout the day. The program consisted of: 1) How to Protect Your Inventions: Patent Procedures; 2) How to Protect Your Trademark; 3) Introduction to Licensing; 4) IP Matters in Information Technologies; 5) Patent Enforcement and Legal Proceedings in Turkey; 6) Trademark Enforcement and Legal Proceedings in Turkey.

LES and AIPPI contributed three speakers each for the pro-gram that was supported by the Enterprise Europe Network (EEN). The program went beyond a basic webinar program as it was on www.sordu.com. Sordu is a live interactive platform that allows access to the webinar from any computer with an internet connection. Sordu allows full real-time interaction (including camera time and the ability to ask questions of pre-senters) among all attendees. We had over 100 subscriptions, mostly from SME representatives from all over the country. Most presentations started with a short introduction to the topic followed by a lengthy Q&A session.

The program was very well received by all attendees and the presenters were highly graded by the attendees placing the program on the top of sordu.com’s most preferred programs. Following the success of our event, LES and AIPPI intend to cooperate with sordu.com on future country-wide events. ■

By Omer Hiziroglu

LES Turkey—World IP Day

Photo from left to right, Jorge Avila, President of the Brazil-ian Patent and Trademark Office, Luiz Henrique Oliveira Amaral President of the Brazilian IP Association (ABPI), Rodolfo H. Martinez y Pell Jr., President of LES Brazil, and Fabiano de bem da Rocha President of the Brazilian IP Agents Association (ABAPI).

les News—Your Link to LES InternationalFor global member directory, news and events, see www.lesi.org.

June 2011 5

Facebook Sends IP Message, Answers To Puzzle

We have created a group on Facebook. We posted a message on 28 March 2011, approximately one month

before the 11th World IP Day, on the wall of the World IP Day Facebook group in both English and Chinese. The purpose of the message is to remind those who have joined this Facebook page of the theme and date for the 11th World IP Day, as well as urging them to ask their family and friends to join the Facebook group and learn more about intellectual property.We then sent another reminder through the Facebook page.

On 26 April 2011, to celebrate the 11th World IP Day in a more enjoyable and interactive way, apart from posting a

By Rosita Li

LES China-HK—World IP Day

message, we also uploaded an intellectual property cross-word puzzle onto the wall of the Facebook group. A copy of the crossword puzzle is shown below. The crossword puzzle was also sent via email to people who did not join the Facebook group or do not have a Facebook account. As we envisaged that not everyone could finish the crossword puzzle, answers were uploaded onto the wall of the Face-book group shortly afterwards.

293 people have joined our Facebook page. The link is http://facebook.com/group.php?gid=109077045778697. You are still welcome to join this page! ■

Across1. Abbreviation for “The Agreement on Trade-Related Aspects of Intellectual Property Rights.”2. Find one to help you protect or enforce your intellectual prop-erty rights!3. In some situations, infringement of copyright in Hong Kong will attract both civil and ______ liability.4. Misleading the public into believing that your products are as-sociated with another brand, therefore damaging other’s business (Hint: 2 words, the latter consisting of 3 letters only!).5. You should register for this to protect your inventions!6. The term used for illegal manufacture of optical discs without a proper license.7. Duration of copyright in a literary work in Hong Kong is the life of the author plus ______ years.8. Theme of the 2011 World IP Day: “_____ing the Future.”

Down1. Which year was the 1st World IP Day held?2. One of the most widespread forms of IP rights infringement is illegal ______ from the internet.3. China has 4.6 million of this IP right validly registered at the end of December 2010, ranking no. 1 in the world! (Hint: what does “TM” stand for?)4. Abbreviation of Hong Kong’s arbitration centre, which is also the only domain name dispute resolution centre in Hong Kong.5. This international organisation created the World IP Day.6. An IP right that does not require registration in Hong Kong because it arises automatically (Hint: ©)7. Fake goods/illegal imitations of genuine products.8. A permission/authorisation granted by an IP right owner to another for the use of certain IP rights.



LES Austria

On January 28, LES Austria held its annual meeting in Vienna. This year, the meeting was followed by an expert

panel. Issue of the panel was a comparison of contributory pat-ent infringement in the main industrial countries. The central part of the panel was a speech by Dr. Klaus Dieter Langfinger, board member of LES Germany and patent attorney of the patent firm Boehmert & Boehmert in Frankfurt. He explained, in an excellent way, the similarities and the differences of the rules concerning contributory patent infringement in the different countries. Afterwards, the participants of the panel discussed open questions and then had the opportunity to spend a nice evening with delicious food and wines.

The panel was attended, not only by participants of the LES annual meeting, but also by several other people who were

Contributory Patent Infringement Explained In Expert Panel With Dr. Langfinger By Thomas Adocker

Participants at the LES Austria annual meeting.

interested in getting more information about contributory patent infringement, especially representatives of companies in various industrial branches.

The panel was not the only successful event of LES Austria in the last months. As reported at the annual meeting, also a panel concerning economical and legal parameters of licenses held at the Technical University Vienna on World IP Day on 26 April 2010 was a great success. Therefore, LES Austria plans to hold another panel in Spring 2011 to continue the series of IP events and to further increase the interest especially of representatives of small and middle size companies for IP matters.

For more information contact: [email protected]. ■

Dr. Langfinger speaks at the meeting in Vienna.

IP Competition To Award Best Young Writer

As part of “Around the World with LES,” LES Italy has organized an IP Competition to award three study grants

to the best essays by young writers relating to intellectual property. The first prize award is €2,000.

The IP Competition is open to all candidates under the age of 35 who are willing to submit their unpublished article or essay relating to intellectual property.

The official announcement opening the IP Competition was made on April, 26 at the occasion of the World IP Day 2011. All essays must be submitted before September 15 and the grants will be officially awarded in October 2011 during the

By Federica Brotto

Annual General Meeting of LES Italia.

We hope to receive a lot of good essays and we would like to submit to les Nouvelles the most noteworthy ones.

We are promoting the IP Competition among the major Italian Uni-versities and Associa-tions. In addition to the promotion made by LESI, the study grant is also listed on the LES Italy web page: www.les-italy.org ■

LES Italy—World IP Day


June 2011 7

LES Singapore

Seminar Highlights Intellectual Property In The Marketplace, Includes Networking EventBy Audrey Yap

A joint seminar on “Intellectual Property in the Market-place” was organised by LES Singapore in association

with the Agency for Science, Technology and Research (A*Star) in Singapore on 4 April 2011 and held at Biopolis Singapore. The event was well attended by over 70 partici-pants from the areas of business, science, technology as well as by legal and IP practitioners. Two talks were presented at the seminar on “Dirty Negotiating Tricks” by Alan Lewis, President of LES International and Partner of Adams & Ad-ams South Africa; and “Patent Harvesting” by Dr. Robert Harrison (European Patent and Trade Mark Attorney with the 24IP Law Group).

Chiew Yu Sarn, President of LES Singapore and Founding Partner of IP Boutique practice Yu Sarn Audrey & Partners, extended thanks to Mr. Lewis and Dr. Harrison and wel-comed participants to the seminar and outlined the benefits of becoming an LES member, as part of the larger family un-der the LESI network. Mr. Lewis’ talk was aimed at teaching participants how to conduct themselves in a proper LES manner and how to identify and respond to really dirty tricks

in the world of IP. Dr. Harrison’s talk described the tech-niques used to es-tablish a patent harvesting session and illustrated some of the tools available to identi-fy the most com-mercially relevant ideas. Both talks were well received and was followed by an interactive question & answer session.

B i o S i n g a p o r e was a supporting organisation for the seminar and co-organiser of the Networking event held after. BioSin-gapore was estab-lished in May 2004 as an industry asso-ciation for life sci-

ences businesses in Singapore with the support of the Eco-nomic Development Board of Singapore and was formally launched on 12 October 2004 at Biomedical Asia 2004. This is the first of such collaboration with LES Singapore, al-though Pat O’Reiley, immediate past President of LESI had been a guest speaker at their Bio Breakfast talk when he visited last year in 2010. LES Singapore hopes to co-organise many more focussed biotech and pharma IP & licensing events with BioSingapore in the future.

The Networking Event, following the seminar, was held at the Hog’s Breath, a local pub in the city. It was also well at-tended by 30 participants from various fields. It was a lively affair and Dr. Harrison delivered a brief talk on the need for patent harvesting sessions to focus on goals but, at the same time, encouraging a free flow of ideas. The Networking Event was both educational and interesting and gave partici-pants an informal forum to network with others from differ-ent industries.

Both events were supported by CIArb and marketed to their members. CIArb or The Chartered Institute of Arbitra-tors is a not-for-profit, UK registered organisation working in the public interest through an international network of branches It has a global membership of around 12,000 indi-viduals who have professional training in private dispute resolution. ■

▲

Alan Lewis opens the seminar in Singapore with "Dirty Negotiating Tricks."

Dr. Robert Harrison speaking on Patent Harvesting.

John Bowler, former president of LES Britain

and Ireland and a founder member of the society, died recently at the age of 92. He contributed several ar-ticles to les Nouvelles in the 1970s, but remained active in LES educational activities until the early years of this century. Professionally, his career culminated in being licensing manager for the whole GKN group portfolio. We send our condolences to his son, two daughters and five grandchildren. ■

Obituary—John E. Bowler1918-2010



LES Benelux

Licensing Course To Be Held In Kijkduin, The Netherlands

Jonas Gulliksson was named Honorary mem-

ber of the LES Scandinavia and his nomination was announced at the Annual Conference on September 6, 2010 in Stockholm. Jo-nas has been a member of LES Scandinavia almost 40 years; he has been Presi-dent of LES Scandinavia twice and has also been President of LES International in 2004. His activities, development work, presentations and large international networking have been important both to LES Scandinavia and LESI as well as to the whole licensing society. LES Scandinavia’s other honorary members are Hans Billberg, Bengt Karlzen and Leif Kolster.

In his speech at the conference Jonas described many memories from his long career in licensing and IPR as well. He highlighted many phases of LES Scandinavia during the 40 years. He was also happy to welcome the new and young members into the licensing societies and business. Jonas continues on the Board as Past President. ■

Jonas Gulliksson Receives Honorary Member Status

In the Annual General Meeting of LES Scandinavia on Sep-tember 7, 2010 in Stockholm, Morten Balle from Norway

was elected as the new President of LES Scandinavia for a two year term of 2010-2012. Kaisa Fahllund from Finland was elected as President-elect. Adam Brandt from Sweden and Anne Cathrin Östebö were re-elected to the Board for two years and Markku Rajala from Finland was elected as a new member, also for two years.

Continuing on the Board are Martin Draeby Ganzhorn and Peter Cordsen from Denmark, Niklas Östman from Finland, Arne Tillerli from Norway and Per Ericsson from Sweden as well as Jonas Gulliksson as Past-President.

The auditors are Bengt Eliasson from Sweden and Marja Hanski from Finland. The nominating committee consists of Kari Sipilä, Finland; Leif Nielsen, Denmark; Sindre-Jacob Bostad, Norway and Göran Bergqvist, Sweden.

The next Annual Meeting will be held in Oslo, Norway dur-ing the next Annual Conference on September 4-6, 2011. ■

Morten Balle Elected President of LES Scandinavia

LES Scandinavia

T he 10th edition of the LES Benelux Licensing Course will be held on 14 and 15 November 2011 in Kijkduin

near The Hague in the Netherlands.The course is designed to take you from start to finish

of an agreement and will include presentations relating to key aspects of Licensing Practice such as IP Basics, Due Diligence, Valuation and Competition Law as well as participative workshops on negotiation, IP strategy and agreement drafting.

We have also been able to maintain the affordability of this event at last year's prices between € 400 and € 500, depending on status, as well as an additional early bird discount.

To put your name on the mailing list for receiving the in-vitation including the programme, additional information and registration form, just send your name and e-mail ad-dress to [email protected] and the information will arrive in your mailbox as soon as it becomes available.

Testimonials“Attending the LES Benelux Licensing Course 2010

required some hard work, both with the preliminary exercises as well as during the course. But it was beyond doubt worth it! Not only due to the knowledge and hints

Hotel NH Atlantic Kijkduin—location of the Licensing Course 2011. Nestled in the expansive rural dunes of Kijk-duin, NH Atlantic The Hague provides guests with a unique blend of coastal charm and luxury. The natural beauty and tranquillity of this seaside resort's surroundings make it the ideal spot for seminars like the Licensing Course 2011.

See Benelux, continued on Page 11

See Board Photo, Page 31


June 2011 9

O n the morning of March 1, 2011 about 20 LES Israel members gathered in Tel Aviv to listen to Claude Stern,

from the firm Quinn Emanuel Urquhart & Sullivan, LLP speak on the topic of “Evaluating the IP Case and Negotiating Settle-ment Agreements and Licenses.”

Claude, a pleasant and fluent speaker, started by quoting 2009 AIPLA report to provide cost litigation statistics for different types of intellectual property. These vary from less than $1

LES Israel

Stern Speaks On Negotiating Settlement Agreements And Licenses

By Hananel Kvatinsky

IP Seminar Focuses On IP Protection And Enforcement In The U.S.

A one-day conference titled “What Israeli Companies Really Need to Know About IP Protection and Enforce-

ment in the U.S.” organized by the offices of Sanford T. Colb (Israel) and Fish & Richardson (U.S.) attracted more than 100 participants on January 2, 2011. The conference took

By Hananel Kvatinsky

Claude Stern with Hana-nel Kvatinsky.

Attendees discuss IP disputes with Claude Stern.

place in the Hilton Tel Aviv hotel.Morning panels dealt with several aspects of intellectual

property including:•ReviewofKeyPatentDecisionsin2010•ValuationofPatentsFromAnEnforcementPerspective•Draftingbetterpatentswithguidanceandadvicefromleading patent attorneysThe second panel titled “Valuation of Patents from An

Enforcement Perspective” was led by Adv. David Barkan from Fish & Richardson and was also attended by Lisa Greenwald-Swire & Thad Kodish from the same office as well as Dan Shamgar from Meitar Liquornik law firm, Shai Shermeister from SAP (Israel) Hananel Kvatinsky, President of LES Israel (and Orbotech Ltd).

The main message, conveyed by the industrial partners, was valuation is not just estimating how much in damages you may collect if you win, but also whether you can carry the burden of litigation (work-load-wise and financially).

The afternoon session was dedicated to a demonstration of a Markman Hearing and the damages aspect of US litiga-tion, based on a real case tried by Fish & Richardson. ■

million for trade mark litiga-tion to $3.5 million in patent infringement litigation.

The talk then went to charac-terizing the types of partners in litigation (kid's league, amateur and professional) and discuss-ing their different approaches in IP dispute and trial.

Mr. Stern then presented a way to build a “likely out-

come” of an IP dispute, which sometimes allows you to evaluate whether or not you want to settle. Then he went to the primary goal of the meeting—main points to be agreed upon, when you negotiate a settlement of an infringement trial.

These points include, to name a few, scope of release and license (and of course, license terms), license sur-vival of M&A and confidentiality vs. press release issues.

With a handful of good hints and points to consider, the participants left to continue their work. Hopefully, making good use of what they had learned. ■

Participants at the IP Seminar held in Tel Aviv.



• Lund University, Sweden: ShieldHeart offers a func-tioning organ protection device platform to protect vital organs from potential complications that have been associated with Negative Pressure Wound Therapy systems, such as rupture and bleeding.• Saint Petersburg State University, Russia: Com-puter Vision Tech offers a computer application to be integrated with existing hosted video surveillance solutions. It provides real-time intelligent video analysis, notifications/alarms set up and quick search through identified events.•University of Arkansas, USA: cycleWood Plastics, LLC offers the XyloBag, a patent protected lignin-based biode-gradable single-use shopping bag, which will reduce landfill waste and the negative environmental impact of conventional single-use plastic shopping bags. • University of South Australia, Australia: leapin.com.au is web-based software for Tourist Accommodation and other uses which enables hotel guests to leap past the check-in desk and go straight from the web to their room.•University of Wisconsin-Madison, USA: Imbed Bio-sciences develops nanotechnol-ogy-based advanced functional materials which enable fabrica-tion of multifunctional wound dressings that are ‘easy on skin and hard on bacteria.’ •Washington University-St. Louis, USA: NanoMed, LLC offers a nanotechnologi-cal platform for fabricating

World’s Top Graduate Student Entrepreneurs Compete In London To Win LES Foundation

Business Plan Competition

advanced biomaterials and synthetic surgical meshes such as the DuraStar™ Dural Substitute, a novel nano-fiber mesh utilized to repair the protective membrane surrounding the brain/spinal cord during neurosurgical procedures.

The LES Foundation Competition specifically focuses on graduate students and postdoctoral scholars interested in intellectual property (IP) and licensing issues. Entrants submit a comprehensive business plan that includes an overview of its IP assets and how these IP assets will be commercialized to achieve business goals. The LES Founda-tion will host its Final Round of competition at the LESI Annual Conference in London, England. This is the first time the Finals will be held outside of North America.

“This year we received 78 strong submissions from entrepreneurially-minded students across the globe. That’s a far cry from the handful we received when we launched the Competition 9 years ago,” said Linda Chao, Senior Licensing Associate, Stanford University and Chair of the LES Foundation Competition. “We simply could not have achieved this kind of success without the support of LES (USA & Canada), LESI, and the hundreds of member volun-teers who have generously supported us over the years.”

The 2011 finalist teams will receive all-expenses paid trips to London, England where they have the opportunity to:

•CompeteonJune4,2011towinthe$10,000GrandPrize. These teams also vie for the $5,000 LES Interna-tional Global Award. Runner-up teams receive $1,000.

•Selectfromapoolofin-kindprizes.

•AttendtheLESInternationalAnnualConference(June5-8, 2011), participate in educational sessions, and net-work with global intellectual property leaders.

We congratulate all of the outstanding teams that partici-pated in the 2011 Competition!

The LES Foundation, along with LES International and LES (USA & Canada), is pleased to announce the finalist teams for its 2011 International Graduate Student Business Plan Competition. They are:


June 2011


11

Participating Schools in 2011Argentina Instituto Tecnologico de Buenos Aires Universidad de Buenos AiresAustralia RMIT University Swinburne University of Technology University of Adelaide University of South AustraliaAustria University of Natural Resources and Life ScienceCanada McMaster University Saint Mary's University University of Waterloo University of Western OntarioChina The Chinese University of Hong KongIndia ABV Indian Institute of Information Technology and Management IIT Kharagpur ITM University Mumbai UniversityIsrael Beer Sheva University Jerusalem University Technion UniversityMexico U of Texas-IC2-CIMAVNetherlands Delft University of TechnologyRussia Saint Petersburg State UniversitySweden Chalmers University of Technology Lund UniversityUK Queen's University Belfast Univ. of London Interna- tional ProgramUSA Arizona State University Brigham Young University Carnegie Mellon University Case Western Reserve University Duke University Emory University Georgia Institute of Technology Harvard University Illinois State University

Indiana University International Technological University Indiana University–Purdue University Fort Wayne Johns Hopkins University Massachusetts Institute of Technology Northwestern University The Ohio State University Purdue University Rochester Institute of Technology Rutgers University Salt Lake Community College Stanford University Temple University Tulane University University of Arizona University of Arkansas University of California, Berkeley University of Delaware University of Hawaii University of Idaho University of Illinois at Chicago

provided by the lecturers but also due to the network generated during the days and evenings.”

Markku Rajala, Beneq and member LES Scandinavia“The research institutes of Wageningen UR (University & Research

Center) have a close link with industry and are contributing significantly to the quality of life. One of the very important means to bring value to knowledge is licensing IP. The LES Benelux Licensing Course 2010 gave me additional valuable insight in how to cope with several technicalities on this topic. Very knowledgeable and good trainers. Great content!”

Frans Pingen, Wageningen UR and member LES Benelux“The course was accompanied by a really good team with profound

knowledge. Especially helpful was the good introduction and supporting materials around term sheets, as a basic instrument for licence contract negotiation.”

Gerhard Stelzer, Tecnet Equity Nö and member LES Austria. ■

LES Benelux, continued from Page 8

University of Illinois at Urbana- Champaign University of Michigan University of North Dakota University of Notre Dame University of Oklahoma University of Pittsburgh University of South Carolina University of Southern California University of Texas at Dallas University of Texas at Austin University of Utah University of Wisconsin, Madison University of Wisconsin, Stout Washington State University Washington University in St. Louis Yale University

Visit the LES Foundation Web site (www.lesfoundation.org) for the latest information on the 2011 Competition.

USA, continued USA, continued



In 2012, we’ll be saving the world– will you join us?

LESI2012Auckland, New Zealand

Commercialising Innovation to Save the World

Hosted by LESANZ

Sir Ray Avery GNZM, Pharmaceutical ScientistSir Ray Avery GNZM is a founding member of the Auckland University School of Medicine, Department of Clinical Pharmacology and former Technical Director of Douglas Pharmaceuticals who, over the past thirty years, has made a major contribution in the development of New Zealand’s Pharmaceutical industry.

It is estimated that 30 million people by 2020 will benefi t from Sir Ray’s development of intraocular lenses implanted into the eyes of those suffering cataract blindness.

A scientist, inventor and social entrepreneur, Sir Ray was announced New Zealander of the Year in 2010. The award recognises Kiwis who make a major contribution to the nation and inspire through their achievements.

In January 2011 Sir Ray was appointed a Knight Grand Companion of the New Zealand Order of Merit which is the highest order of the New Zealand knighthood honours.

KEYNOTE SPEAKER:

By then, the world’s population will hit 7 billion, the Kyoto Protocol will expire and the global licensing world will descend on Auckland, New Zealand to explore how innovation might be commercialised to “save the world” from threats such as disease, poverty, food shortages, over-population, terrorism and environmental destruction.

The LESI International Delegates Meeting and Annual Conference 2012 (LESI2012) will be held in Auckland,New Zealand, Saturday 30 March – Wednesday 4 April 2012.

For more information about the conference please refer to our website: www.lesi2012.org

New Zealanders (affectionately known as Kiwis) are famous for their ingenuity. It is said that Kiwis can create amazing things – all they need is ‘a piece of Number 8 wire’. Number 8 wire is a gauge of wire that was popular for use as fencing wire around New Zealand. Because Number 8 wire was widely available and used for a variety of tasks, it has become a symbol of Kiwi adaptability.

Les Nouvelle Ad Update final new size.indd 1 20/04/11 10:58 AM


13June 2011



Book Review

Book Review | By Luciano Daffarra*

International Copyright: Principles, Laws and Practice

Paul Goldstein and Bernt Hugenholtz, Second Edition, Oxford University Press, 2010, p. 565 with Appendix, Bibliography and Index.ISBN: 978-0-19-973710-9

Once you begin reading the Second Edition of this text (“Book”), updated at the onset of 2010, you realize

that this a comprehensive work, encompassing both a keen study and a proper use of multiple sources of information. This 400 page Book is well coordinated and clearly written by the authors, who have instilled to the text their extensive knowledge and experience in the copyright frameworks of both civil and common law jurisdictions.

The result is quite surprising: whether you are an expert in current (and past) copyright issues, or you just commenced in piercing this multi-layered veil of substantive and proce-dural rules, you will find simple and neat answers to most of the general topics debated in the arena of the protection of authors, producers and even consumers, of the so called “media world.”

In this respect, this Book, far from becoming—like it often happens in a paperless world—a reduction of the available space in your library, may well be your reading companion any time you need to understand the cur, quomodo, quando, of a certain piece of legislation regarding copyright protection in both the U.S. and Europe. Moreover, this Book gives you a clear glance at the rationale behind the adoption of interna-tional Treaties and Agreements that rule the existence, dura-tion and boundaries of the safeguard of intellectual creations falling within the meaning of the term “copyright.”

The pattern followed by Goldstein and Hugenholtz is smooth and consistent all over the text: each topic includes the history as well as the political reasons for the adoption, in each given time, of norms aimed at regulating the most controversial issues which might foster discriminations among countries or legal systems in place. In most cases, the Authors offer an objective explanation of the reason, structure and substance of the pivotal international treaties and norms shaping the world of copyrighted works.

A rather new perspective of the possible balance to be stricken between the concepts of “copyright” (a word belong-ing to common law systems) and of “authors’ right” (dwelling in civil law countries), is offered by the authors having in mind the current convergence of the economic interests to which protected works are bound, so to reduce the need of enforcing moral rights (as a part of the authors’ rights). This is especially true in the digital environment.

In several occasions, with reference to “moral rights,” this

Book clearly explains (and this could be extended to several other topics) the reason why the United States waited up to March 1, 1989 before ratifying the Berne Convention, which entails, among others, the rec-ognition of both “moral rights” (including the right to oppose any unauthorized distortion, mutilation or modification of protected works) and the ab-sence of any formalities, other than the creation itself, for the grant of copyright protection within the signatory States.

In summarizing the content and the structure of the inter-national norms applicable to copyright protection, this Book gives the reader a progressive view of the various stages which brought to the current enforceable international legislative system. In doing so, the authors stress each legislative passage, from the original text to the subsequent piece of legislation, through a succinct but precise depiction of the reasons that fos-tered those changes. Looking at the seven European Directives dealing with copyright and related matters (beginning with the Software Directive 91/250/EC, up to the Directive 2001/29/EC on the Harmonization of Copyright in the Information Society), the authors do not limit their analysis to the content and effects of the applicable norms, but they envisage whether and why those norms are/were consistent with the legislation in place in common law countries such as the United States.

In this respect, the remarks made by the authors in evi-dencing that the so-called EU Software Directive (91/250/EC) was disappointing for those who were in support of the protection of the extensive American databases resulting from the “sweat of brows” doctrine, since it granted the producers only a limited right under the sui generis provisions, are very well balanced. In fact, as stated by the Authors, the seven Directives on copyright adopted by the European Union, in many cases, “exceed the minimum standards of the Berne and Rome Conventions and the TRIPs Agreements.”

When progressing through reading the Book, one of the areas that deserves particular attention is Chapter 4, concerning “Territoriality, National Treatment, Jurisdiction and Conflicts of Law.” Despite the complexity and extent of the delicate topics dealt by the authors, the fifty-two pages devoted to them are among the easiest to understand and digest by both

See Book Review, continued on Page 15


June 2011 15

copyright experts and newcomers. The reasons supporting the adoption of territoriality principles, while the Internet has eliminated any boundary and distance among users who makes available copyrighted works from and to any point of the world, are addressed very thoroughly by the authors. Goldstein and Hugenholtz—in turn—are capable of analyz-ing the “hard cases” in which copyright infringements might occur in more than one country or when different elements of infringement are coexistent in two or more different States, suggesting to the reader one or more possible solu-tions to each problem.

Moreover, under the perspective of the solutions pro-posed by the authors in order to face transnational copyright violations, the Book remains consistent with the conclu-sions reached by the most regarded scholars and established judicial decisions, which are together seen as a file-rouge leading to a reasonable interpretation of their principles in light of new and unforeseen facts.

Another quite interesting perspective of the legal instru-ments created by the international legislator for the protec-tion of copyrighted works is given by the authors in their extensive analysis of the most important treaties aimed at the protection of intellectual works and their “points of attachment” (or “connecting factor”) to the national leg-islation, both in the countries of common and civil law. In this remarkable effort, Goldstein and Hugenholtz identify which conditions apply to the existence and protection of copyright in each State where the various treaties were adopted, in light of the rights conceded, as well as the scope and duration of said protection.

A final note should be made in reference to Part II of the Book, which deals with Substantive Copyright Law. Al-though it does not include a particularly sophisticated or ar-ticulated exposition of the—always accurate—information and succinct analysis provided to the readers, this portion of the work offers a vast array of references to recent and non-obvious judicial decisions and doctrinal interpretations. This is quite useful in focusing on controversial issues such as the “making available rights,” the “public performance rights” and the “neighboring rights.”

In conclusion, the extensive comparative work of the authors, which gave birth to this Book over twenty years ago upon suggestion of late Professor Lewis Flacks, shows their competence in the subject. Indeed, this has been accrued by fruitfully using the vast resources of informa-tion available and though their capability in sharing their knowledge in Copyrights, while demonstrating true passion for their work. ■

*Founding Partner of Daffarra, d'Adio & Partners, Milano, Italy, luciano.daffarra@daffarrapartners.

Book Review, continued from Page 14

Movie Review

Movie Review | By Richard Nicholas Brown

Lover Come BackStarring: Doris Day/Rock Hudson/Tony Randall Directed by Delbert MannProduced by Universal, 1961

Readers of les Nouvelles may be interested in renting a clas-sic movie that stars the VIP trade mark and Rock Hudson

playing an irresistible lady-killer. The VIP trademark exists in a vacuum as there is no product or service connected with it.

Lover Come Back was made in the mid 1950’s and thus many readers may have missed this classic Doris Day/Rock Hudson/Tony Randall comedy. The setting is that of MAD MEN New York ad agency in the 50’s but as a romantic comedy.

The plot gives the VIP trade mark a leading role. The VIP mark has been inadvertently advertised in a saturation TV campaign by Tony Randall. Randall plays the inept owner of the ad agency where Rock Hudson is the macho, womanizing heel who lands major accounts by discovering what the prospec-tive client's weaknesses are. Rock Hudson’s idea of research includes finding out the prospective clients favorite brands of liquor and whether they prefer blondes or red-heads. He worms his way out being brought up before the Advertising Council on ethical charges by telling the redhead, who was going to testify against him, that she will be the VIP girl for the new VIP campaign if she changes her story. VIP is a trademark that is invented on the spur of the moment by Rock Hudson. The lady changes her story and Rock Hudson has commercials for VIP shot starring the redhead. Rock Hudson had no plans for airing the commercials. Tony Randall, however, decides to follow his shrink's advice to be decisive and airs the VIP com-mercials with amusing consequences. An enormous demand for VIP is created but no product is available so the search for a product–any product–is underway. Although this is the reverse of the normal procedure there is a certain logic to it. Lover Come Back offers a novel solution to avoiding product failure see if the trademark sells and then develop a product.

Doris Day is the wide eyed innocent from Nebraska who wants to play fair. Her idea of client research is to prepare better copy and improve the appearance of the product. She finds out about Rock Hudson’s wild parties and files charges against him with the Advertising Council. She ends up falling in love with the square, sincere, tweedy Nobel Prize, winning Professor Linus Tyler who is supposed to have invented VIP, but is not who or what he seems to be.

Neither, it turned out, was Rock Hudson what he seemed to be—there is a very amusing bit where he wears a ladies fur coat as a wink to his then secret sexual orientation.

Lover Come Back provides no surprises, but stars a trade mark and supplies laughs and an amusing caricature of Madison Avenue in the 50’s. We highly recommend it to all students of trademark. ■

© Richard Nicholas Brown, 1991. The author is a partner of De Sola Pate & Brown, Caracas, Venezuela. This review first ap-peared in Managing Intellectual Property March 1992, page 36.



Recent U.S. Decisions And Developments Affecting LicensingBy Brian Brunsvold and John C. Paul

LICENSORS SHOULD EXPLICITLY RESTRICT USE IN LICENSE AND PRESERVE EVIDENCE OF NEGOTIATIONS TO PREVENT UNLICENSED USESSummary

A licensor who fails to explicitly restrict uses of licensed data or other technology in the terms of a license agree-ment may later be unable to claim that its licensee’s use was restricted. If a licensor wants to rely on its standard licensing practices to prove restrictions on use of licensed technology or compensation for use of the licensed technol-ogy, it should document and preserve evidence of its nego-tiations and its negotiating protocol.Detailed Discussion

The licensing of data relating to the genetic code of various organisms has become an increasingly important aspect of biotechnology research. Given the complexity of developing this data, it is often cost and time-prohibitive for scientists to develop this data anew when they wish to re-search certain organisms. In contrast, by licensing the data, researchers and scientists can save time and focus their re-sources on applying their discoveries.

These licenses, however, often include restrictions that are not fully appreciated by the scientists and researchers. Providers of genome sequencing data often restrict how a licensee can use the genetic data. For example, because commercial use may be more profitable than academic use, a provider may restrict a researcher to academic purposes but also charge a lower rate than it would a commercial re-searcher. In Integrated Genomics, Inc. v. Gerngross, No. 09-3718 (7th Cir. Feb. 24, 2011), the Court of Appeals for the Seventh Circuit addressed the issue of whether one such license clearly prevented commercial use. In finding that the agreement did not prevent such use, the court provided guidance for those who practice in this area. The Genetic Transaction

In 2000, Tilman Gerngross, a faculty member at Dart-mouth College formed a private corporation, GlycoFi, with a fellow faculty member, with the aim of genetically modi-fying yeast to produce human proteins. Gerngross sought to modify a particular species of yeast and approached Integrated Genomics, Inc. (“IG”)—which had previously mapped the genome for that species—to acquire a license to its data.

IG ultimately agreed to license Gerngross its data for $5,000, but Gerngross refused to sign any written agree-ment. During negotiations, IG conveyed to Gerngross that it was concerned about devaluing the data by making it publicly available. Gerngross agreed to restrict his pub-

lication of the data and drafted a letter to that end. The letter became the sole writing evidencing any agreement between the parties. Following these negotiations, IG sent Gerngross the data.

In December 2002, GlycoFi opened its own facility sep-arate from Dartmouth and Gerngross loaded IG’s data on GlycoFi’s computers. Around the same time, IG became aware of Gerngross’s affiliation with GlycoFi but did not raise its rates, which were typically lower for academic licensees than for commercial licensees. Moreover, in April or May 2003, Gerngross contacted IG to get updated data. Although IG had no files documenting the Gerngross transaction, IG supplied the data without further restric-tions or compensation.

In May 2006, Merck purchased GlycoFi for $400 million. A few months later, IG demanded that Merck compensate IG, alleging that Gerngross used IG’s data for commercial pur-poses. After Merck refused, IG filed suit against Gerngross, alleging that he fraudulently misrepresented his status and breached his written agreement not to publish the data.

At trial, the district court weighed the conflicting evi-dence of whether Gengross disclosed his commercial affili-ation with GlycoFi, and found that he had not. One of IG’s witnesses stated that IG would have charged Gerngross more if it had known of his commercial affiliation, how-ever, IG had not inquired whether Gerngross had a com-mercial affiliation. The district court held that the data was not “published” within its common and ordinary meaning and that although Gerngross may have deceived IG by not clarifying his end use, IG had not convincingly shown that it would have charged a higher rate for the data. IG ap-pealed the decision. The Integrated Genomics Decision

On appeal, the Seventh Circuit affirmed the decision of the district court. It first held that the correct meaning of the term “publication” in the agreement between Gerngross and IG was its plain and ordinary meaning, i.e., disclosure to the public. The court stated that there was no evidence or precedent to support IG’s definition of “publication,” which included disclosure to another individual or corporation within the context of a business or professional relationship.

The Seventh Circuit also held that IG did not provide clear and convincing evidence that Gerngross fraudulently misrepresented his academic affiliation. While the evidence showed Gerngross did not disclose his commercial use of the data, IG had not proven that it would have necessar-ily charged a higher fee had it known. Although some evi-dence showed that IG typically charged more for commer-cial use, other evidence supported the opposite conclusion. The appeals court would not undermine the district court’s


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conclusion that IG had not shown it would have acted dif-ferently based on this balance of evidence.

First, the appeals court found that IG did not prohibit Gerngross from making commercial use of the data, only from publishing the data. Second, IG’s interactions with Gerngross showed that it did not take care in determin-ing if Gerngross intended commercial uses of the data. The court reasoned that if IG was concerned about commercial use it would have pursued the issue further. The court also reasoned that IG would not have turned over the updat-ed data in 2003 because by that time it was on notice of Gerngross’s commercial affiliation. Third, Gerngross was neither seeking an exclusive license or customized work by IG. These facts cut against IG’s argument that it would have charged a higher price for the data. Finally, IG was in financial distress when it licensed the data to Gerngross. That evidence showed that it was more important to make a sale than to get a higher rate from Gerngross.Strategy and Conclusion

IG failed to be able to prove that its licensee’s use of the licensed technology was limited by agreement and to obtain compensation at a higher rate for that use of the licensed technology for two reasons: First, it did not clearly limit Gerngross’s use of the data in a written agreement. Second, it did not use consistent practices or properly document its standard procedures with either academic licensees or com-mercial licensees regarding rate differences.

To avoid the same pitfalls as IG, licensors who wish to re-strict how licensees use licensed data or other information should clearly specify such terms in the license agreement, to the extent they have the bargaining power to include such terms in the agreement. Licensors should also follow consistent practices when dealing with certain categories of potential licensees, and document negotiations to preserve evidence of the parties’ communications and understand-ings in case a dispute ever arises.

A MERE PROMISE FROM THE PATENT OWNER TO ASSIGN PATENT RIGHTS IN THE FUTURE DOES NOT GIVE AN ASSIGNEE STANDING TO BRING A PATENT INFRINGEMENT SUITSummary

To file a patent infringement lawsuit, a plaintiff must have standing, which requires having legal title to the asserted patents. Merely having a promise from the patent owner to transfer the patent rights in the future is insufficient, and a lack of standing at the time of filing the lawsuit cannot be cured by a subsequent purchase of an interest in the patents.Detailed Discussion

To file a lawsuit, the United States constitution requires a plaintiff to have standing at the time of filing the initial complaint. In patent cases, standing requires the plaintiff to have legal title to the asserted patents. Patent rights initially vest in the inventors, and those rights may be assigned to

others. For example, it is common for inventors to assign their patent rights to their employers, and companies often assign their rights to other companies. To enforce those pat-ent rights, companies must ensure there is a proper transfer of legal title to the patent prior to filing a patent infringe-ment suit, or they may find their lawsuits dismissed. In a recent case, the Federal Circuit found that the plaintiff, Abraxis Bioscience, did not have standing to file a lawsuit because the contractual language in the patent assignment agreements did not transfer legal title in the patents-in-suit before Abraxis filed the initial complaint.

The Abraxis DecisionAbraxis markets the drug Naropin® for use in surgery and

for acute pain management. In November 2006, Navinta filed an ANDA for a generic version of Naropin®, and Abrax-is subsequently filed suit in the United States District Court for the District of New Jersey against Navinta alleging that the generic drug infringed three patents. The inventor of first patent had assigned his rights to Astra Lakemedel Ak-tieboag (“Astra L”) in 1986, and the inventor of the other two patents assigned his rights to AB Astra in 1994. AB Astra later merged with AstraZeneca AB (“AZ-AB”) and as-signed those two patents to AZ-AB.

In April 2006, Abraxis entered into an Asset Purchase Agreement (“APA”) with AstraZeneca (“AZ-UK”), which stat-ed that AZ-UK “shall or shall cause one or more of its Affili-ates to, Transfer to the Purchaser, and the Purchaser shall purchase an accept from the Seller or its Affiliates, as appli-cable, all of the right, title and interests of the Seller and its Affiliates in” the three patents-in-suit. In June 2006, Abrax-is and AZ-UK executed an Intellectual Property Assignment Agreement (“IP Assignment Agreement”) with a “Further Assurances” provision stating that “Seller will…execute…any and all further…assignments…as necessary to…vest in Buyer any of the Transferred Intellectual Property.” On the same day Abraxis filed suit against Navinta, March 15, 2007, Astra L and AZ-AB assigned their respective patents to AZ-UK, and in November 2007, AZ-UK “confirm[ed] the sale, assignment, conveyance and transfer to Abraxis” of the three patents-in-suit in a document entitled “Intellec-tual Property Assignment Agreement.”

Navinta filed a motion to dismiss the case for lack of standing because Abraxis merely had a promise to transfer patent rights in the future, and thus did not own the pat-ents-in-suit, at the time the complaint was filed. The New Jersey district court held that the “intent” of the related Astra entities was sufficient to imply a nunc pro tunc assign-ment based on the relationship between the corporate enti-ties, and gave the March 15, 2007 assignments nunc pro tunc effect based on the June 2006 IP Assignment Agree-ment between AZ-UK and Abraxis. On appeal, the Federal Circuit reversed the district court’s decision.

Generally, state law applies to contract interpretation, but the Federal Circuit has held that the question of wheth-er a patent assignment clause creates an automatic assign-



ment or merely an obligation to assign is treated as a matter of federal law because it is bound up with the question of standing in patent cases. The contractual language of the APA between AZ-UK and Abraxis indicated that the transfer of patent rights was to occur in the future by means of a separate IP Assignment Agreement. AZ-UK and Abraxis ex-ecuted the IP Assignment Agreement, but that agreement’s Further Assurances provision also indicated a future trans-fer of patent rights. In addition, in June 2006 when the IP Assignment Agreement was executed, AZ-UK had no legal title to assign. The legal title remained with Astra L and AZ-AB until March 15, 2007, and thus, Abraxis did not possess title until November 2007, when AZ-UK finally assigned the patents-in-suit to Abraxis, seven months after filing suit.

According to the Federal Circuit, “if the original plaintiff lacked Article III initial standing, the suit must be dismissed, and the jurisdiction defect cannot be cured by…the subse-quent purchase of an interest in the patent in suit.” Thus, because Abraxis could not retroactively meet the require-ment of having legal title to the patents on the day it filed the complaint, the Federal Circuit found that Abraxis lacked standing. The Federal Circuit also noted that Abraxis lacked standing to sue for past infringement. A party may sue for infringement occurring before it acquired legal title, but only if the assignment expressly grants the party a right to do so. AZ-UK had not granted Abraxis such a right.Strategy and Conclusion

This case can provide several insights for assignees and parties to a patent infringement litigation:

1. Plaintiffs should ensure they have legal title to the as-serted patents before filing an infringement action, which requires ensuring that prior assignors had legal title of the patents-at-issue at the time the rights were transferred. A defective legal title at the time of filing cannot be cured retroactively by a later transfer of patent rights.2. When drafting an agreement, assignees should consider whether the assignment of patent rights is automatic or merely a promise to assign. If the agreement expressly con-veys rights in future inventions, the transfer of title occurs by operation of law once an invention comes into being. In contrast, an agreement that merely obligates the owner to grant rights in the future does not vest legal title to the patents in the assignee, and future action is required.3. Assignees that want to seek damages for infringement committed before the assignment should ensure the as-signment expressly grants them the right to do so.

LICENSEES CAN SUE IN FEDERAL COURT TO RESOLVE ISSUES REGARDING THE SCOPE OF A LICENSE AGREEMENT UNDER STATE LAWSummary

Disputes regarding license agreements typically are resolved in state court because the agreements are cre-ated under state contract law and the disputes have had no basis for federal jurisdiction. However, if possible, some

litigants would prefer to have patent disputes resolved by federal courts for a variety of reasons, including a percep-tion that federal courts are more familiar with patents. The Federal Circuit has now held that a federal court can have jurisdiction over a patent license agreement dispute turning on a question of state law contract interpretation, when the issue is raised in a declaratory judgment action for non-infringement.

Detailed DiscussionIt is not uncommon for parties to a license agreement to

find themselves in a dispute regarding the meaning of the terms of that agreement. Questions often arise, however, as to when a party can go to court to resolve such a dispute and what court can properly hear the dispute. For example, if a licensor accuses a licensee of acting outside the scope of the license, must the licensee wait for the licensor to take some action or can the licensee take the initiative and ask a court to decide? Similarly, since license agreements are typically creatures of state law, must those disputes be heard in state court or can they be brought in federal court because the agreements involve federal patent rights?

The United States Court of Appeal for the Federal Cir-cuit recently had the opportunity to address these issues in ABB Inc., v. Cooper Indus., LLC, No. 2010-1227 (February 17, 2011). In that case, the Federal Circuit determined that a licensee accused of acting outside the scope of a patent license, and thus infringing the patent, could take the ini-tiative and seek relief in federal court by filing a declaratory judgment action and requesting that the court declare that the licensee’s activities did not infringe the patent.

The ABB DecisionCooper Industries had previously sued ABB Industries for

patent infringement. The parties settled, entering into a settlement and license agreement where Cooper granted ABB a non-exclusive license under the relevant patents to make, have made, use, have used, offer to sell, export, or have exported ABB’s accused “BIOTEMP” product. Despite the apparent grant of “have made” rights, the agreement also explicitly stated that third parties could not make BIO-TEMP. After settling the previous litigation, ABB began outsourcing the manufacture of BIOTEMP to Dow Chemi-cals, agreeing to indemnify Dow against any infringement claims by Cooper.

The Denial En Banc DenialCooper subsequently sent a letter to Dow and ABB regard-

ing Dow’s manufacture of BIOTEMP. According to Cooper, the “have made” provision of the license agreement did not cover Dow’s manufacture of BIOTEMP. In addition, Cooper argued that any attempt by ABB to outsource the manufac-ture of BIOTEMP would be a material breach of contract, against which Cooper would “vigorously” defend.

ABB then sued Cooper in the U.S. District Court for the Southern District of Texas, seeking a declaration that its ac-tivities were authorized under the license agreement and did


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not infringe any claim of the relevant patents. Cooper moved to dismiss this declaratory judgment complaint for lack of subject matter jurisdiction on two grounds. First, Cooper ar-gued that there was not an actual controversy surrounding infringement, but rather a dispute only about contract inter-pretation. Second, Cooper argued that because ABB’s only defense to infringement was a state law defense regarding an interpretation of the license agreement, the federal court lacked jurisdiction to hear the case. The district court agreed with Cooper and dismissed the complaint.

On appeal, the Federal Circuit reversed the lower court decision, rejecting both of Cooper’s arguments. First, the court found that there was a controversy of “sufficient im-mediacy and reality” surrounding patent infringement to warrant issuance of a declaratory judgment. Specifically, if ABB were acting outside its license, as Cooper alleged, ABB’s liability would have been based on a claim of patent infringement, not breach of contract. The determination of such liability would turn on federal patent law, not state contract law. Thus, an actual controversy existed between the parties regarding question of federal patent law. More-over, the statements contained in Cooper’s letters made the threat of litigation sufficiently immediate so as to warrant declaratory judgment.

Second, the court rejected Cooper’s argument that be-cause ABB’s only defense to patent infringement was based in state contract law, the controversy did not create a federal question appropriate for federal courts. The Fed-eral Circuit explained that whether a party can rely on a federal question for federal subject matter jurisdiction in a declaratory judgment situation turns on the declaratory judgment defendant’s hypothetical cause of action, even if the only defense to that hypothetical cause of action would be rooted in state law. Here, Cooper’s hypothetical cause of action was patent infringement, a classic federal question. The subject matter jurisdiction for a declaratory judgment complaint depends only on whether federal law creates the hypothetical cause of action, not whether an issue of fed-eral law would necessarily be the focus of the case.Strategy and Conclusion

This case can provide insights for patent licensors, patent licensees, and those who draft their agreements:

1. Licensees may ask the federal courts to decide whether they are within the scope of their license agreements. 2. Licensees may sue first and need not wait for the li-censor to sue for breach of contract. A licensor’s threat of action against the licensee for breach of contract may create sufficient controversy to establish jurisdiction in the federal courts.3. Licensors should use care in alleging that the licensees breached their agreement. The Supreme Court’s decision in Medimmune v. Genentech provided that licensees need not breach their license agreement to challenge the valid-ity of the licensed patent. Licensees have similar freedom

when it comes to allegations of infringement relating to the scope of the license.4. Agreement drafters should consider the potential ben-efit of a forum selection clause. Rather than taking the time to resolve their disputes amicably, parties may rush to file an action for declaratory judgment on their dis-putes when they want to obtain a preferable venue. This may generate a secondary dispute over which court is ap-propriate. These situations might be avoided by specify-ing the venue in advance.

COMMERCIAL ACTIVITIES OTHER THAN MANUFACTURING, SUCH AS LICENSING, MAY BE SUFFICIENT TO DEMONSTRATE IRREPARABLE INJURY TO SUPPORT A PER-MANENT INJUNCTIONSummary

Following eBay, patent holders that do not practice their patented invention have had a difficult time establishing irreparable injury to acquire a permanent injunction. A showing of other commercial activities—such as licens-ing and offering the patents for sale—can be sufficient to overcome this deficiency, allowing non-manufacturing pat-entees increased access to injunctive relief.Detailed Discussion

Since the Supreme Court’s watershed decision in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), trial courts have become less likely to issue a permanent in-junction after finding validity and infringement, especially when the plaintiff could be considered a non-practicing en-tity (“NPE”). Such plaintiffs typically cannot establish the first prong of eBay’s four-factor inquiry: “that [the plaintiff] has suffered irreparable injury.” Id. at 393. Because these plaintiffs often do not manufacture or practice the patent themselves, they will not be irreparably harmed in the ab-sence of an injunction.

Some NPE plaintiffs, however, have attempted to over-come this deficiency by licensing the patent, often to com-petitors in the accused infringer’s field. This strategy has been met with only marginal success, particularly when the plaintiff merely grants boilerplate licenses to any inter-ested party. In such cases, permitting the licensed infring-er—holding a compulsory license or otherwise—to remain in the market would not irreparably harm the plaintiff. In contrast, Harris Corp. v. Federal Express Corp., No. 6:07-cv-1819 (M.D. Fla. Feb. 28, 2011) presents licensing activities engaged in by a non-manufacturing plaintiff, which were sufficient to support a finding of irreparable injury, and con-sequently, issuance of a permanent injunction. The Harris Decision

In Harris, the plaintiff, Harris Corporation (“Harris”), sued Federal Express Corporation (“FedEx”) for infringing several patents related to aircraft flight data communica-tion. The patented systems collect and store flight perfor-



mance data recorded during flight and wirelessly transmit it when the aircraft is parked on the ground. Following a jury trial, a special verdict found that FedEx infringed all asserted claims, that those claims were not invalid, and that the infringement was willful. Harris then moved for a permanent injunction.

In ruling on Harris’s motion, the court noted that patent holders no longer enjoy a rebuttable presumption that an injunction should automatically issue following a showing of infringement. Rather, the decision of whether to grant an injunction rests in the equitable discretion of the court, to be exercised consistent with traditional principles of eq-uity. These principles are captured in eBay’s four-factor in-quiry where the plaintiff must demonstrate “(1) that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a perma-nent injunction.” 547 U.S. at 393.

The court devoted most of its attention to the first fac-tor: whether Harris has suffered an irreparable injury. Con-trary to FedEx’s assertions, the court found that Harris’s decision to license its patents rather than manufacture a product embodying the claims does not preclude a finding that Harris suffered irreparable injury. The court observed that while Harris and FedEx were not direct competitors, FedEx’s systems were in direct competition with Harris’s licensees thereby interfering with Harris’s licensing oppor-tunities. Important to the court was the fact that Harris pursued various commercial activities with its patent port-folio, including endeavoring (but ultimately choosing not) to manufacture products embodying the claims, soliciting purchase offers for the patents, and granting licenses to certain entities but not others.

The court distinguished this case from ones where the plaintiff routinely grants boilerplate licenses to any interest-ed party because allowing the accused infringer to remain in the market would not irreparably harm such a plaintiff. Har-ris had not entered into any such licenses and even refused to license certain other parties. Ultimately, the court concluded that continuing to permit FedEx’s infringing systems to re-main in the market competing with Harris’s licensees cre-ated a risk of irreparable harm. A contrary conclusion would have meant that Harris’s loss of the right to exclude would have impacted its licensing opportunities.

Turning to the other eBay factors briefly, the court held that money damages would be inadequate to compensate Harris, the balance of the hardships favored Harris, and an injunction protecting Harris’s patent rights would serve the public interest. Concerning the balancing of the hard-ships, the court found that Harris had invested over $20 million developing the patented technology and allowing FedEx to remain in the market would hinder Harris’s ef-forts to recoup that investment. In light of these facts,

the court permanently enjoined FedEx’s systems that in-fringed Harris’s patents. Strategy and Conclusion

(1) Non-practicing entities are not categorically precluded from obtaining an injunction. While a pat-ent holder that manufactures its patented invention and competes directly in the same market as the accused in-fringer has the strongest case for irreparable injury, a NPE can show irreparable harm by relying on other commercial activities. For example, attempting to manufacture the pat-ented equipment, soliciting purchase offers for the patents, granting licenses to some entities, and declining to grant licenses to others were all found to be relevant in Harris. Thus, in the absence of manufacturing, other commercial activities can support irreparable injury, and consequently, an injunction.

(2) Granting boilerplate licenses to any interested party may be insufficient to demonstrate irreparable injury. When a NPE attempts to demonstrate irreparable injury by citing boilerplate licenses granted to any inter-ested party, such evidence is inadequate as a matter of law. Rather, a NPE seeking to protect its patent(s) with an in-junction should actively and selectively license its patent-ed technology. It is immaterial whether the NPE directly competes with the accused infringer, so long as the NPE’s licensees compete in the relevant market.

INTERNATIONAL ARBITRATION PROVISIONS ALLOW STATE COURT LITIGATION ON IN-TERNATIONAL AGREEMENTS TO BE MOVED TO U.S. FEDERAL COURTS Summary

When negotiating international IP contracts, companies should consider including an arbitration provision under the New York Convention. In addition to helping avoid costly litigation, an arbitration provision may allow defendants to move litigation relating to the provision from state court to federal district court. This is particularly valuable to out-of-state defendants seeking to litigate under a more uniform set of federal rules or to lessen any “home-court” advantage that would otherwise be enjoyed by a local plaintiff.Detailed Discussion

Companies increasingly enter into license agreements that are international in nature. While this expanding global marketplace brings new opportunities, it also raises significant legal issues, such as how to resolve disputes aris-ing out of these agreements. In an international deal, the parties may have some aversion to agreeing to litigate dis-putes in the country of the other party. For example, many foreign entities view the prospect of U.S. litigation with some trepidation due to the expansive discovery rules in U.S. litigation.

The most common alternative to litigating disputes is the use of some form of alternative dispute resolution, such as arbitration. In an arbitration, the parties can agree in ad-


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vance on the location of the trial, the rules and language that will apply, and how a decision will be rendered. This often allows the parties to choose a forum and mechanism that both parties agree is somewhat neutral. Agreeing to arbitrate disputes, however, is only one of the hurdles in international dispute resolution. Another is the ability to go to a court and enforce an award made by an arbitrator.

Courts in the United States generally approve of and en-force foreign arbitration awards. In addition, many foreign courts enforce US arbitration awards under international conventions, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, also known as the New York Convention. The Supreme Court of the United States has explained that the purpose of the Con-vention is “to encourage the recognition and enforcement of commercial arbitration agreements in international con-tracts and to unify the standards by which agreements to arbitrate are observed and arbitral awards are enforced in the signatory countries.” Scherk v. Alberto-Culver Co., 417 U.S. 506, 520 n.15 (1974).

Actions brought under the New York Convention are deemed to arise under the laws and treaties of the United States, which allows them to be brought in a US federal district court. See, e.g., Invista S.à.r.l. v. Rhodia, S.A., 625 F.3d 75, 84 (3d Cir. 2010) (citing 9 U.S.C. § 203). This is significant as contract disputes are often considered state law issues and thus, are often heard in state courts. In a recent case, Infuturia Global Ltd. v. Sequus Pharmaceuticals, Inc., No. 09-16378 (9th Cir. Feb. 7, 2011), the United States Court of Appeals for the Ninth Circuit held that a defendant could remove an action from U.S. state court to U.S. federal district court when the defendant raised an affirmative de-fense that “related to” an arbitration agreement or award falling under the New York Convention. Thus, at least in this instance, including an arbitration provision in an in-ternational IP licensing agreement created a future path for removing a state court action to federal court.The Infuturia Decision

In Infuturia, a dispute over licensing rights arose be-tween two companies, Infuturia Global Ltd. (“Infuturia”) from the British Virgin Islands and Sequus Pharmaceuticals, Inc. (“Sequus”) from California. Infuturia had entered into a license agreement with Yissum Research and Development Co. (“Yissum”) giving Infuturia exclusive worldwide rights to certain patents. The agreement included an arbitration provision that required arbitration of any dispute “connected in any way to the implementation of [the] Agreement.” Years later, Sequus entered into its own license agreement with Yissum for rights to Yissum’s technology. Infuturia then sued Sequus in California state court for tortious inference, alleg-ing that Sequus had encouraged Yissum to license technol-ogy to which Infuturia already had exclusive rights.

Given that its agreement with Infuturia was implicated by the dispute, Yissum initiated an arbitration with Infu-turia in Israel to resolve the issue of whether Yissum had

breached its agreement by licensing Sequus. In addition, although not a party to the California proceedings, Yissum won a stay of that case pending the result of that arbitration. The arbitrator determined that Yissum had not breached the Infuturia license and that Infuturia did not have rights to any patents and products relating to the Sequus license.

Given the arbitration decision, the California court lifted the stay in the California proceeding. At that time, Sequus successfully sought removal of the case to federal court. The federal district court determined that removal was proper because the litigation “relates to” the arbitration provision and the arbitration provision falls under the New York Convention. In particular, Sequus was asserting that the issues raised in the pending lawsuit had already been resolved against Infuturia in the Israeli arbitration. The dis-trict court subsequently granted Sequus’ motion to dismiss the case, agreeing that these issues had been resolved in the prior arbitration.

On appeal, Infuturia asserted, among other things, that removal of the case from state court to federal court was im-proper. Infuturia argued a state court action can be removed to federal court only if the parties in the case have entered into an arbitration agreement and the action relates to that agreement. Thus, according to Infuturia, its action against Sequus could not be removed because the two companies did not have an arbitration agreement. The Court disagreed, finding that an affirmative defense relating to an arbitration agreement or award that falls under the New York Conven-tion gives the federal district court removal jurisdiction.Strategy and Conclusion

The court’s findings in Infuturia emphasize the impor-tance of considering an arbitration clause when negotiating and drafting international contracts for IP rights. An arbitra-tion provision under the New York Convention offers a way to potentially avoid costly litigation should a dispute arise. And as Infuturia demonstrates, it can also ensure that even collateral litigation relating to the agreement will at least take place in federal court.

There are a number of reasons why this might be favor-able. Federal courts are often viewed as being more neutral to out-of-state parties than state courts. In addition, Federal Courts have a more uniform set of rules across jurisdictions and often offer a faster pace that allows the parties to re-solve their disputes more quickly.

PATENT OWNERS CAN MORE EASILY EN-JOIN INFRINGERS BY USING THE ITC RATH-ER THAN FEDERAL DISTRICT COURTS Summary

Patent owners enforcing rights can more easily enjoin in-fringers by using the U.S. International Trade Commission than Federal District Courts. A recent Federal Circuit deci-sion indicated that the traditional test for injunctive relief does not apply to the ITC. For that reason, non-practicing entities may see added value in pursuing infringing import-



ers by using the ITC rather than Federal District courts. Detailed Discussion

For patent owners, the ability to obtain an injunction often provides a great deal of leverage in license negotia-tions. Historically, the grant of an injunction was seen as a foregone conclusion following a finding of infringement. But the Supreme Court’s decision in eBay v. MercExchange altered that equation by making injunctions more difficult to obtain, particularly for non-practicing patent owners, who do not make and sell products covered by the patents. As a result, many patent owners have turned to the U.S. International Trade Commission (“ITC”) as an alternative to U.S. District Courts for prosecuting infringement suits.

The ITC permits a patent owner to enforce its rights against an entity that imports allegedly infringing products in the United States. And like a U.S. District Court, the ITC also has the power to issue injunctions, called “exclusion orders,” to stop infringing products from being imported into the U.S.

There was a question as to whether the standard for in-junctive relief at the ITC is the same as that for a U.S. Dis-trict Court. And in Spansion v. Int’l Trade Comm’n, Nos. 2009-1460, 1461, 1462, 1465 (Fed. Cir. Dec. 21, 2010), the Federal Circuit recently answered this question in the negative. Specifically, the court held that the statutes ap-plicable to the ITC’s grant of an exclusion order do not re-quire the application of the same standard used by U.S. District Courts to enter injunctions. Moreover, while the ITC is required to consider certain “public interest” factors, those factors are not the same as those considered by a U.S. District Court. The Traditional Test

Federal district courts have discretion to grant injunc-tive relief to patent owners in accordance with principles of equity. In eBay Inc. v. MercExchange, L.L.C., 547 U.S. 338, 391 (2006), the Supreme Court held that courts must apply the traditional four-part test for injunctive relief used in other areas of law. The test requires the patent owner to demonstrate: (1) that it has suffered an irreparable harm; (2) that remedies available at law are inadequate to com-pensate for that harm; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. A public inter-est factor commonly asserted by infringers to argue against issuing an injunction is the public trust in reliable patent laws and valid patents.The ITC Test

In contrast, the ITC test does not require a showing of the first factor, irreparable harm to the patent owner. Be-cause the ITC cannot grant monetary relief, the ITC also does not consider the second factor. Moreover, the ITC, by statute, only considers four enumerated public interest factors: (1) the public health and welfare; (2) competitive

conditions in the United States economy; (3) the produc-tion of like or directly competitive articles in the United States; and (4) United States consumers. In addition, the ITC requires proof of the existence of a domestic industry.The Spansion Decision

In Spansion, the patent owner, Tessera, Inc., filed a com-plaint in the ITC alleging that Spansion, Inc. and various other respondent companies infringed Tessera’s patent rights through the importation and sale of certain semi-conductor chips or products containing such chips. Tes-sera’s patents cover semiconductor chip packages that ac-commodate movement caused by heating and cooling of semiconductors. This feature reduces the stress on the chips caused by cyclic heating and cooling, decreasing the occurrence of failure and improving the reliability of elec-trical devices containing the packages.

The presiding ITC judge held Tessera’s patent claims invalid and not infringed. Unlike in a district court, the initial determination of an ITC judge may be reviewed by the full Commission before it can be appealed to the Federal Circuit. On review, the Commission reversed the judge’s initial determination, finding the patent claims not invalid and infringed, and issued a limited exclusion or-der preventing the respondents from importing and selling infringing goods into the United States. The respondents appealed the Commission’s findings and argued that the claims were indefinite, anticipated, and not infringed. The Federal Circuit upheld the Commission’s decision, reject-ing the respondents’ arguments.

Spansion, on its own, had also appealed the Commis-sion’s grant of injunctive relief. Spansion argued that the Commission should have used the same four-factor test required by eBay. To that end, Spansion argued that the Commission should have considered that the PTO rejected some of the claims in a reexamination during the pendency of the ITC investigation and that Tessera, as a non-practic-ing licensor, could be made whole by monetary damages.

The Federal Circuit, however, rejected Spansion’s argu-ment and upheld the Commission’s exclusion order, hold-ing that eBay does not apply to ITC determinations. Spe-cifically, the Federal Circuit found that the Commission only needed to consider the enumerated public interest factors in section 337, not the traditional four-factor test for injunctive relief. Because injunctive relief in the ITC and injunctive relief in district courts come from different statutes, the factors that must be considered are not the same. Section 283, governing injunctive relief in district courts, is based on equitable principles, while section 337 is based on the long-standing principle that importation is treated differently than domestic activity. Moreover, the enumerated factors in section 337 are intended to prevent deprivation of products vital to public health or welfare. Examples include energy efficient automobiles, basic scien-tific research, and hospital equipment.

For these reasons, the Federal Circuit held that the Com-


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mission did not err in giving the PTO reexamination limited weight. Such a proceeding is not an explicitly listed public interest factor and Tessara could still appeal the PTO reex-amination decision. Moreover, even if deprivation of semi-conductor packages was important to health or welfare, the public would not be deprived of semiconductor packages because Tessera’s licensees could still produce chips.

The Federal Circuit also held that the legislative history was clear that irreparable harm was not a required show-ing for injunctive relief. When Congress amended section 337 to eliminate a monetary remedy, it explicitly removed the requirement to prove injury to the domestic market. For that reason, a patent owner that proves infringement in the ITC need not prove irreparable harm to get a per-manent injunction. Moreover, without a monetary remedy, the patentee need not show that monetary damages would not make it whole.Strategy and Conclusion

Patent owners who wish to assert rights against manufac-turers or distributors that either import infringing products or import infringing components to use in products and who can meet the requirement of showing of a domestic industry should consider the benefits of filing a complaint in the ITC. This is especially important for non-practicing entities that do not make or sell products covered by the patents. There is a lower hurdle to receive injunctive re-lief because the patent owner need not show irreparable harm and the public interest inquiry is limited to four enumerated factors. The ITC has found the public inter-est outweighed the need for injunctive relief in only three patent investigations. For that reason, patent owners are more likely to obtain injunctive relief in the ITC, giving them more leverage for license negotiations with potential licensees and infringers.

DEFENDANTS CAN MORE EASILY TRANS-FER LITIGATIONS TO MORE CONVENIENT LOCATIONS FROM LOCATIONS CHOSEN BY THE PLAINTIFF HAVING LITTLE CON-NECTION TO THE LITIGATION Summary

For the past decade, the Eastern District of Texas has been the court of choice for many patent owners to bring suit regardless of whether the suit had any connection to Texas. Historically, defendants have met with little success, how-ever, in transferring these cases to courts with a greater con-nection to the dispute. But recent Federal Circuit decisions have now changed this dynamic. Over the last few years, the Federal Circuit has issued decisions mandating trans-fer in seven separate cases. Following the Federal Circuit’s rulings, the Texas courts have now also begun transferring cases with greater frequency. This has made the Motion to Transfer an increasingly potent weapon for defendants who have been sued in Texas or another inconvenient location to move the litigation to a more convenient location.

Detailed DiscussionOver the past decade, the Eastern District of Texas has

become a popular venue for patent owners to bring patent infringement lawsuits based, at least in part, on the famil-iarity of that court with patent issues, the relatively fast time to trial, and a perception that juries in the district tend to be more favorable to patent owners. For these reasons, many suits have been brought in Texas even when the cases have little to no connection to that district. This, in turn, has led to increased efforts by defendants to transfer cases from Texas to other forums. Historically though, it has been difficult to obtain such a transfer.

Over the last few years, however, the Federal Circuit has become increasingly involved in this issue, reversing sev-eral Texas decisions denying such transfers, starting with In re TS Tech USA Corp., 551 F.3d 1315 (Fed. Cir. 2008), and continuing, most recently, with In re Acer America Cor-poration, Misc. Docket No. 942 (Fed. Cir. Dec. 3, 2010).

The court in the Eastern District of Texas has begun to follow this lead and is transferring cases out of Texas with greater frequency, as illustrated by the recent case of MGM Well Services, Inc. v. Production Control Services, Inc., 6:10-cv-088 (E.D. Tex., Nov. 22, 2010). In that case, the Texas court, following recent Federal Circuit precedent, trans-ferred a case out of their district based on considerations of judicial economy. The net result of these decisions is that Motions to Transfer are becoming an increasingly impor-tant weapon in the arsenal of defendants, helping to level the playing field and provide more balance in selecting the forum for litigation. Decisions Leading Up to the MGM Well Ser-vices Decision

Since December 2008, the Federal Circuit has reversed denials of motions to transfer in six of the seven such cases appealed from the Texas court: In re TS Tech USA Corp., 551 F.3d 1315 (Fed. Cir. 2008), In re Genentec, Inc., 566 F.3d 1338 (Fed. Cir. 2009), In re Hoffmann-La Roche Inc., 587 F.3d 1333 (Fed. Cir. 2009), In re Nintendo Co., 589 F. 3d 1194 (Fed Cir. 2009), In re Zimmer Holdings, Inc., NO. 2010-M938 (Fed. Cir. 2010) and In re Acer Am. Corp. The Court affirmed a denial of transfer in In re Volkswagen of Am., Inc., 566 F.3d 1349 (Fed. Cir. 2009).

Although Federal Circuit law applies to patent issues, the law of each regional circuit applies to motions to transfer. The Fifth Circuit is the regional circuit for Texas courts and its law allows for a court of appeals to issue a mandamus writ to a trial court to correct a clearly erroneous denial of transfer. This lets a defendant appeal such a denial immedi-ately to the Federal Circuit instead of having to wait until a final judgment in the case. Under Fifth Circuit law, a mo-tion to transfer venue to another court should be granted upon a showing that the new venue is “clearly more conve-nient” than the venue chosen by the patent owner.

The Fifth Circuit applies “private” and “public” factors



when deciding a § 1404(a) venue transfer question. The “pri-vate” factors include: (1) the relative ease of access to sources of proof; (2) the availability of compulsory process to secure the attendance of witnesses; (3) the cost of attendance for willing witnesses; and (4) all other practical problems that make a trial easy, expeditious, and inexpensive. The “pub-lic” factors include: (1) the administrative difficulties flow-ing from court congestion; (2) the local interest in having localized interests decided at home; (3) the familiarity of the forum with the law that will govern the case; and (4) the avoidance of unnecessary problems of conflicts of laws or in the application of foreign law. What follows is a brief analysis of how the Federal Circuit has analyzed these factors in its recent decisions.

The TS Tech CaseIn TS Tech, the Federal Circuit reversed a denial of trans-

fer due to the disregard of four principles set forth in Fifth Circuit precedent.

First, the court gave too much weight to the patent own-er’s choice of venue. This is not a distinct factor in the § 1404(a) venue transfer analysis, but rather, it corresponds to the fact that the moving party has the burden to show that the transferee venue is “clearly more convenient.”

Second, the Fifth Circuit has established a “100-mile” rule, which requires that, when the distance between the existing venue and the venue sought for transfer is more than 100 miles, the factor of inconvenience to witnesses in-creases in direct relationship to the additional distance to be traveled. In this case, the court failed to account for the fact that most of travel to Texas for the majority of the witnesses would be significantly greater than travel to the proposed transferee forum.

Third, the court did not give enough weight to the fact that the physical evidence was all closer to the transferee venue.

Finally, there is a public interest in having localized in-terests decided at home, namely, the jurisdiction involving the vast majority of the identified witnesses, evidence, and events leading to the lawsuit.

The Fifth Circuit has explicitly rejected the notion that Texas had a “substantial interest” in having the case tried locally because of products sold there, where those products were also sold throughout the United States.

The Genentec CaseIn Genentec, the Federal Circuit determined that the at-

tendance-of-witnesses factor favors transfer to the Northern District of California, where ten witnesses were located in that district, two witnesses were outside that district but in-side California, and no witnesses resided in Texas. Although the district court stated that Northern California would be less convenient than Texas for some witnesses located in Europe, the Federal Circuit found that those witnesses will be required to travel a significant distance no matter where they testify.

Two other factors in favor of transfer were that a sub-stantial number of witnesses would be within the sub-poena power of the Northern District of California while no witnesses were within the subpoena power of Texas, and some of the evidence was located in the Northern District of California while no evidence was located in Texas. The court also found that several factors do not weigh against the transfer, including the possibility of a lack of personal jurisdiction over the patent owner in the transferee venue and the fact that the defendant filed a prior, unrelated suit in Texas.The Hoffmann-LaRoche Case

In Hoffmann-LaRoche, the only connection between the case and Texas was that the patent owner transferred 75,000 pages of documents in electronic format to its counsel’s office in Texas in anticipation of litigation. The Federal Circuit found the assertion that these documents were “Texas” documents to be a “fiction” created to manip-ulate the propriety of venue. On the other hand, the Court recognized that the accused product was developed and tested in the venue to which transfer was sought, the East-ern District of North Carolina, sources of proof remained in North Carolina, North Carolina had a local interest in the case because it involved several individuals residing in or near the district, at least four non-party witnesses resided within 100 miles of North Carolina, and North Carolina’s less congested docket suggested that it may be able to resolve the dispute more quickly.The Nintendo Case

In Nintendo, the Federal Circuit recognized that, as in TS Tech, Genentech, and Hoffman-La Roche, the case present-ed “a stark contrast in relevance, convenience, and fairness between the two venues.” The Court found that the cost of attendance for witnesses clearly favored transfer to the Western District of Washington, where four Japanese wit-nesses would have to each travel an additional 1,756 miles or 7 hours by plane to Texas compared to Washington State, and the average travel for the remaining six identi-fied witnesses to Texas was approximately 700 miles more than to Washington. In addition, most evidence resided in Washington or Japan with none in Texas. The Federal Cir-cuit concluded that a transfer should be granted when the case involves “most witnesses and evidence closer to the transferee venue with few or no convenience factors favor-ing the venue chosen by the patent owner.”The Volkswagen Case

In Volkswagen, the Federal Circuit agreed that transfer should be denied because two other lawsuits were pending in Texas involving the same patents. One of the two cases had already been transferred to Texas from the Michigan to avoid wasting judicial resources and the risk of incon-sistent rulings on the patents. Thus, the Court found that judicial economy was better served by trying the cases to-gether in Texas.


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The Zimmer Case In Zimmer, the patent owner, MedIdea, transferred copies

of its patent prosecution files from Michigan to its Texas of-fice space, which it shared with another of its trial counsel’s clients, before filing the suit. The Federal Circuit compared this situation to the “Texas” documents in Hoffmann-LaRoche and found that MedIdea’s principal-place-of-business claim was “an artifact of litigation” and “a legal fiction.” Addition-ally, the Court found substantial conveniences for trying the case in the Northern District of Indiana. The district court assigned substantial weight to the fact that MedIdea filed suit against another defendant in Texas. The Federal Circuit disagreed, however, and distinguished this case from Volk-swagen because MedIdea’s cases involved different products and only one overlapping patent, making it likely these cases would result in significantly different discovery, evidence, proceedings, and trial. Accordingly, the Court ordered the case to be transferred to Indiana.The Acer Case

Finally, in Acer, the patent owner attempted to show that Texas was the appropriate forum in part because one of the defendants was headquartered near Texas. However, five of the twelve defendants resided in California, and, like in Nin-tendo, the expense of the witnesses travel was a substantial factor in the Federal Circuits decision to transfer the case out of Texas. The MGM Well Services Case

In MGM Well Services, after the reversals, the Eastern Dis-trict of Texas district court considered each of the factors dis-cussed in the prior Federal Circuit opinions and transferred the case to the Southern District of Texas. Quoting Volkswa-gen, the court found that judicial economy was a “paramount consideration when determining whether a transfer was in the interest of justice.” A major factor in the court’s decision was that the patent owner had previously brought a patent infringement case in Southern District involving some but not all of the patents in the Eastern District case. The court found that the new patents were overwhelmingly similar to the patents in the previous Southern District suit. Because Southern District was intimately familiar with the technol-ogy at issues, the patents-in-suit, and one of the parties, the court determined that judicial economy was a factor that weighed heavily in favor of transfer.Conclusion

These cases serve as a guide to patent owners trying to avoid transfer and defendants seeking transfer from courts in Texas as well as other states. And they illustrate that de-fendants can more easily transfer a litigation that have little connection to a location chosen by the plantiff.

1. A patent owner will not be able to rely as strongly as before on its choice of venue as a substantial factor in the court’s analysis of whether the litigation will remain at the plaintiff’s choice of venue or be transferred to a location more convenient to the defendants.

2. Evidence moved to Texas in anticipation of litigation will be considered a “legal fiction” and will not be given much weight in establishing a connection to Texas. 3. In view of the importance placed on judicial economy, prior litigations brought in Texas may weigh against trans-ferring, but only to the extent there is significant overlap. 4. The 100-mile rule for witnesses can be used to deter-mine whether significant additional travel is required of the identified witnesses to Texas opposed to other pos-sible forums.

LICENSEE BREACHES LICENSE AGREEMENT BY ALLOWING ITS LAW FIRM ACCESS TO THE LICENSED TECHNOLOGY Summary

Licensees do not necessarily have the right to provide third parties with access to licensed technology even if the third party’s use of that technology was only on behalf of, and for the benefit of the licensee. Detailed Discussion

In some states, absent express limitations, a licensee is considered authorized to permit third parties to utilize the licensed technology on their behalf. The Fifth Circuit Court of Appeals recently addressed the interpretation of provisions with such limitations in Compliance Source, Inc. v. GreenPoint Mortgage Funding, Inc., No. 09-10726 (Oct. 18, 2010). The Compliance Source Decision

Compliance Source and Data Docs developed mortgage financing forms and computer software that allow mort-gagees to merge their own transaction-specific informa-tion with the proprietary forms and prepare customized loan documents. GreenPoint Mortgage Funding became a licensee of this technology, entering into a license agree-ment that expressly limited uses of the licensed software technology to those explicitly permitted by the agreement and expressly granted rights to provide access to third par-ties in several specific situations.

GreenPoint provided its attorneys access to the licensed software in order to prepare loan packages. When accused of breaching the license agreement, GreenPoint argued that such access should be permissible because its attorneys’ use of the software was on its behalf and for its benefit as the licensee of that technology. The lower court agreed and held that GreenPoint’s allowing its attorneys access to the licensed technology did not breach the license agreement.

On appeal, the Fifth Circuit reversed the lower court’s decision, finding that the access and use of the licensed technology by GreenPoint’s attorneys was prohibited by the license agreement. The court noted that such third-party access was effectively barred by the express prohibition of activities not otherwise expressly permitted in the licens-ing agreement combined with provisions expressly permit-ting other specific third party technology uses and thereby implying other third-party access was not permitted.



In conclusion, the court found that to read into the license agreement a general right to grant third-party access when such access would be on behalf of or for the benefit of the licensee, would be to render the license agreement’s specific and limited grants of access superfluous. Therefore, even if licensees can generally allow third parties to use licensed software on their behalf, this general rule should not be permitted to outweigh the express and implicit terms of a license agreement. Strategy and Conclusion

This case serves as a guide for licensees that use or antici-pate using the assistance of their attorneys or other service providers in practicing the licensed technology.

(1) Licensors and licensees should understand whether and to what extent the licensee needs to and expects to involve third parties when utilizing the licensed technol-ogy, and should draft license agreements that clearly and explicitly express the metes and bounds of permissible third party access to the licensed technology. (2) Prior to providing access to licensed technology to a third party working on its behalf, a licensee should see whether the license agreement permits such access—even if the third party consists of attorneys working on its behalf.(3) Contract interpretation—even for patent licensing agreements—is governed by state law, which can vary from state to state. Therefore, when drafting and negoti-ating licensing agreements, determine which state’s con-tract law governs and consult that law.

AN ACCUSED INFRINGER MAY BE PREVENT-ED FROM PREEMPTIVELY CHALLENGING THE VALIDITY OF A PATENT OWNED BY A STATE UNIVERSITY EVEN IF THE UNIVERSI-TY GRANTED AN EXCLUSIVE FIELD OF USE LICENSE TO A PRIVATE PARTYSummary

An accused infringer who files suit to have a patent de-clared invalid must sue the patent owner as well as a licens-ing entity authorized to grant licenses under the patents, if the licensing entity has received less than all substantial rights in the patent. When the patent owner is a state univer-sity, however, sovereign immunity may prevent that univer-sity from being sued, thereby effectively preventing any such lawsuit from proceeding. As a result, a licensing entity whose patents are owned by a university may be able to shield itself from being preemptively sued for declaratory judgment in an unfavorable forum by an accused infringer. This can be a significant basis for licensors to avoid unwanted preemptive litigation during licensing negotiations, particularly in view of recent cases making it generally easier for accused infring-ers to file such preemptive litigation.Detailed Discussion

When patent owners license their patents to companies

who commercialize the technology and assert the patents, the patent owner may be required to join any patent in-fringement lawsuit brought by the company. Specifically, if the license transfers less than all substantial rights in a patent (such as in an exclusive field of use license), the patent owner will need to join any infringement action be-fore that action may continue to proceed. The same is also true when an accused infringer wishes to preemptively file a suit to have a patent declared invalid or not infringed. Thus, even if an exclusive licensee alone makes an in-fringement allegation, the accused infringer may still be required to sue both the licensee and the university patent owner in its action for patent invalidity.

When the patent owner is a state university, the situa-tion becomes more complicated. The Eleventh Amendment to the U.S. Constitution grants state universities, like any other state agency, immunity from suit in Federal Court. This immunity may, in effect, prevent an accused infringer from filing an action for patent invalidity when the patent is owned by a state university even where the exclusive licensee of that patent has made an explicit infringement allegations against it.

Just such a situation arose in A123 Systems, Inc. v. Hydro-Quebec, No. 2010-1059 (Fed. Cir. Nov. 20, 2010). In that case, the Federal Circuit decided that the University of Texas (“UT”) was a necessary and indispensable party to an action to declare a patent invalid that it owned but had exclusively licensed to a private party. UT, however, could not be joined as a party because it was entitled to sovereign immunity. Therefore, to the court dismissed the action to invalidate the patent because all necessary and indispen-sible parties could not be joined.The A123 Systems Decision

UT owned and licensed two patents to Hydro-Quebec (“HQ”) in an exclusive field-of-use license. A123 Systems, Inc. (“A123”) filed suit in Massachusetts seeking a declara-tion of noninfringement and invalidity of the UT patents. HQ moved to dismiss the suit arguing that UT was a neces-sary and indispensable party but could not be joined be-cause it had not waived sovereign immunity. HQ and UT then jointly sued A123 in Texas, claiming infringement of the same two patents.

A123 stayed the Texas action following successful re-quests for reexamination of both patents. In Massachu-setts, the court dismissed A123’s declaratory judgment suit without prejudice to either party to reopen within thirty days following the termination of the reexamina-tion. When the reexamination was concluded, A123 moved to reopen the Massachusetts actions. The district court de-nied A123’s motion, however, because, in the court’s view, if the case were reopened, it would be subject to dismissal for failure to join UT, a necessary party.

On appeal, A123 argued that the district court erred in finding that UT was a necessary party to the litigation. First, A123 argued that UT had transferred all substantial


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rights in the patents in suit to HQ by virtue of the exclusive license. As evidence to support its argument, A123 relied on HQ’s representations that UT had transferred all sub-stantial rights in the patents in suit to HQ. Specifically, in a previous lawsuit, HQ held itself out as an exclusive licensee of the same patents. In addition, HQ attempted to enforce the patents without joining UT in that case. The Federal Circuit, however, rejected A123’s argument, explaining that the actual transfer of rights, not labels given by the parties, controls the analysis. In this case, because the li-cense was only an exclusive field of use license, HQ could not have all substantial rights.

A123 also argued that the district court erred by finding that UT could not be joined because of sovereign immunity. A123 did not dispute that UT is an arm of the State of Texas, and therefore entitled to sovereign immunity. Instead, A123 argued that UT waived its immunity in the Massachusetts action when it filed suit against A123 for infringement of the same patents in Texas. HQ countered that UT’s voluntary participation in the Texas action did not constitute a retroac-tive waiver of immunity in the Massachusetts action. The Federal Circuit agreed with HQ, noting that waiver of im-munity in one action does not extend to an entirely separate lawsuit, even one involving the same subject matter and the same parties. Thus, UT’s waiver of immunity in the Texas action did not result in a waiver of immunity in the Mas-sachusetts action.

Finally, A123 argued that the district court abused its dis-cretion by failing to expressly determine whether UT, even if a necessary party, was also an “indispensable party.” Un-der the applicable Federal Rule of Civil Procedure, if a court deems a party “necessary” but that party cannot be joined, the court must consider whether that party is “indispens-able,” thereby making dismissal appropriate. Although the Massachusetts court did not undertake a full indispensabil-ity analysis in denying A123’s motion to reopen the case, the court did state that it chose to exercise its discretion because A123’s action would be subject to imminent dismissal for failure to join a necessary party. The Federal Circuit deter-mined that this statement made an indispensability analysis necessary. But because the Massachusetts court had made sufficient factual findings to enable the Federal Circuit to make such a determination, the Federal Circuit, chose to decide the issue in the first instance on appeal.

In determining whether a party is indispensible, a court considers four factors: (1) the extent to which a judgment rendered in the person’s absence might prejudice that per-son or the existing parties; (2) the extent to which any preju-dice could be lessened or avoided…; (3) whether a judgment rendered in the person’s absence would be adequate; and (4) whether the plaintiff would have an adequate remedy if the action were dismissed for nonjoinder. In its decision, the district court addressed the first factor in an indispensability analysis. Specifically, the district court found that maintain-ing jurisdiction over A123’s declaratory judgment suit posed a significant risk of prejudicing UT’s interests in the patents because, were the court to reinstate the action and declare

the patents invalid, UT would lose all patent rights despite the fact that it had no opportunity to defend its interests in litigation. Agreeing with the district court’s analysis, the Federal Circuit noted that HQ and UT’s interests in the pat-ents were overlapping but not identical.

Regarding the second factor, the Federal Circuit briefly noted that A123 had not suggested any alternative that would reduce the prejudice to UT. Turning to the third factor, the Federal Circuit agreed with the district court that a judgment rendered without UT would be inadequate because it would create the risk of multiple lawsuits and inconsistent relief. Finally, addressing the fourth factor, the district court had noted A123’s interest in having a forum to litigate its defenses to claims of infringement and found that because UT had waived immunity to suit in Texas, A123 may assert counterclaims for a declaration of nonin-fringement and invalidity there. The Federal Circuit agreed with this assessment and found that three of the four fac-tors weigh in favor of holding UT to be an indispensable party. Accordingly, the Federal Circuit found that UT was not only necessary but also indispensable, and therefore that it appropriate to dismiss the lawsuit.Strategy and Conclusion

(1) Isolating Licensors from Litigation: By licensing less than all substantial rights to a patent, a licensor may open itself to future litigation because it remains a nec-essary party to an infringement suit. Therefore, to best isolate itself from litigation, a patent owner should grant all substantial rights to a patent. (2) Avoiding the Filing of Unsustainable Litigation: An entity who is accused of infringement should determine if the entity who has made the infringement allegation is the owner of the patent or merely a licensee. If only a licensee, the accused company should determine who the owner is and whether such owner would need to be joined in any action for invalidity or non-infringment before initiating any litigation. If the owner is a state agency such as a state university, the accused entity should further recognize that it may be unable to sue the university and therefore may be unable to sustain the action at all. (3) Preventing Preemptive Lawsuits: When the patent owner is a state university, sovereign immunity may pre-vent that university from being sued without its consent. As a result, a licensing entity whose patents are owned by a university may be able to shield itself from being preemptively sued for declaratory judgment in an unfa-vorable forum by an accused infringer if the university agrees not to join the lawsuit.

EXCLUSIVE PATENT LICENSEES MAY HAVE STANDING TO SUE FOR INFRINGEMENT EVEN IF OTHERS HAVE THE RIGHT TO LI-CENSE THE PATENTSummary

A patent licensee has the ability to sue for infringement if the licensee possesses an exclusionary right in the asserted



patent, i.e., an exclusive license. A licensee does not lack exclusionary rights, however, simply because others have a right to license the patent at issue. Rather, as long as the licensee is the only party with the right to license the par-ticular defendant being sued for infringement, the licensee has the right to exclude and therefore sue that defendant. Detailed Discussion

A U.S. patent provides a statutory right to exclude others from practicing the invention claimed in that patent. Gener-ally, only the owner of a patent has the ability (or “stand-ing”) to sue to enforce that exclusionary right. U.S. courts have recognized, however, that when a patent owner grants a licensee those exclusionary rights, that licensee may also have the ability to sue to enforce that right. Thus, an exclu-sive licensee by virtue of being granted exclusivity under the patent will typically have the right to sue to protect that exclusivity. A non-exclusive licensee, however, will not have the right to sue because it has been granted only a waiver from suit without any exclusionary rights.

Confusion regarding the ability to sue, however, often arises when a patent holder licenses its patent rights to one or more entities in a manner that makes it unclear whether the licensee is truly an exclusive licensee. In such situations, where a licensee possesses some, but not all, of the rights in a patent, a court must determine whether a licensee possesses enough rights in a patent such that infringement causes sufficient injury to warrant the licens-ee’s involvement in the suit. Determining this boundary, however, can often be difficult. In WiAV Solutions LLC v. Motorola, Inc., No. 2010-1266 (Fed. Cir. Dec. 22, 2010), the Federal Circuit clarified the boundary between exclu-sive and bare licensees in holding that a licensee can be an exclusive licensee under a patent even if other entities also have limited rights to license those patents.The WiAV Solutions Decision

In WiAV Solutions, the plaintiff, WiAV Solutions Inc. (“WiAV”), was a patent licensee possessing several valu-able rights in the patents-in-suit, such as the exclusive right to practice the patented inventions, to sue, and to grant future licenses. Prior to receiving its license, how-ever, several licenses under the patents-in-suit had been granted to other entities besides WiAV (the “non-WiAV li-censees”) granting those entities the right to practice the invention, as well as limited future assignment rights and licensing rights. Under the limited assignment and licens-ing rights, the non-WiAV licensees could only grant future assignments and licenses to closely-related entities such as affiliates, subsidiaries, spinoffs, and joint-development partners of the non-WiAV licensees.

On appeal, the defendant, Motorola, argued that WiAV could not be an exclusive licensee because other entities retained the right to license the patents-in-suit. To support its argument, Motorola relied on a prior Federal Circuit deci-sion, Textile Productions, Inc. v. Mead Corp. No. 1997-1245 (Fed. Cir. Jan. 28, 1998), in which the court stated: “if a

patentee-licensor is free to grant licenses to others, licens-ees under that patent are not exclusive licensees . . . To qualify as an exclusive licensee, an agreement must clearly manifest the patentee’s promise to refrain from granting to anyone else a license in the area of exclusivity.”

On appeal, the Federal Circuit held that the non-WiAV licensees’ future assignment and licensing rights did not prevent WiAV from qualifying as an exclusive licensee. The court disagreed with Motorola’s reliance on Textile Produc-tions noting that in that case the licensee had not been ex-plicitly granted any exclusionary rights under the patents and that the facts did not support an interpretation that such rights were intended to be granted. Thus, the case did not stand for the proposition that a licensee needed to be the “only” licensee to qualify as an exclusive licensee.

Instead, the Federal Circuit held that whether an entity has the ability to sue turns on whether the entity possesses an exclusionary right created by the Patent Act. Thus, the relevant inquiry is not whether the licensee has the right to exclude all other entities, but rather whether the licens-ee has the right to exclude the defendants at issue. In this case, despite the complex licensing framework underlying the patents asserted by WiAV, no scenario existed where a defendant could obtain a license to one of the patents. As a result, WiAV had the right to exclude each defendant from practicing the patents at issue, thereby qualifying it as an exclusive licensee with standing to sue.

The Federal Circuit also explained that the standing anal-ysis for licensees must be conducted on a party-by-party ba-sis. In other words, an exclusive licensee may have standing to sue some parties, but not others. For example, an exclu-sive licensee lacks standing to sue a party for infringement if that party already has the right to practice the invention or could obtain such a right in the future (likely through another party’s right to grant a future license). Strategy and Conclusion

(1) A future right to license no longer automatical-ly prevents standing. The WiAV Solutions case could eliminate certain standing issues for patent licensees fil-ing cases in federal court. Before this case, a defendant could comb through the licenses relating to the asserted patents in search of another entity’s right to grant future licenses. If identified, some federal district courts would rely on this future right, regardless of how limited, to deny the plaintiff standing. The WiAV Solutions case made it more difficult for defendants to prevent stand-ing by holding that a future licensing right only destroys standing if it can be used to license one of the defen-dants under the asserted patents. (2) Join all co-owners of the asserted patents. Wheth-er a licensee qualifies as exclusive or bare is only half of the standing analysis. The other half, called the “pruden-tial standing analysis,” requires that the plaintiff joins all co-owners of the asserted patents (the parties did not dispute this issue in WiAV Solutions). This rule protects


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defendants from having the same patents asserted against the same products at different times. Therefore, for an ex-clusive licensee to properly perfect standing, it must iden-tify, and join, all co-owners of the asserted patents.(3) Prevent others in the licensing family from hav-ing broad future licensing rights. A licensee wanting to sue should attempt to prevent another entity in the li-cense family from obtaining either of the following rights in the asserted patents: (i) the right to license any party, or (ii) the right to license any infringer. With either of those rights, a defendant could obtain the right to practice the invention from that other entity, which would destroy standing under WiAV Solutions.

PATENT DAMAGES MAY NOT BE CALCU-LATED USING THE 25% RULE OF THUMBSummary

The 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate and may not be used in the calculation of patent damages.Detailed Discussion

Disrupting the status quo, the Federal Circuit recently struck down the 25 percent rule of thumb that had long been used to help determine a baseline royalty rate for cal-culating patent infringement damages. The Federal Circuit reasoned that a baseline royalty rate must be sufficiently tied to the facts of the particular case and should not be calcu-lated based on abstract and theoretical constructs.

An entity demonstrating that their patent rights have been infringed is entitled to at least a reasonable royalty rate, which is often established from an analysis known as a “hypothetical negotiation,” which attempts to ascertain the royalty rate upon which the parties would have agreed had they successfully negotiated an agreement before infringe-ment began. The 25 percent rule—discussed in the oft-cited article by Robert Goldscheider, John Jarosz and Carla Mul-hern titled “Use Of The 25 Per Cent Rule in Valuing IP” (37 les Nouvelles 123, 123 (Dec. 2002))—had been used as a tool to approximate the reasonable royalty rate that the manu-facturer of a patented invention would be willing to pay the patentee. The rule assumed that a manufacturer would re-tain a majority of the profits because of the costs to develop and produce the product as well as the assumption of various business risks.

Until the recent Federal Circuit decision in Uniloc USA, Inc. v. Microsoft Corp., No. 2010-1035, 1055 (January 4, 2011), the 25 percent rule was widely accepted by federal courts as part of the reasonable royalty analysis. The Uniloc decision, however, explicitly banned the use of this rule and effectively disqualified any expert testimony predicated upon it. The Federal Circuit held that the 25 percent rule was not an appropriate tool for the calculation of a reason-able royalty, because a proper damages calculation must be more adequately based on the facts of a particular case. The court further held it improper to compare the amount of

damages determined by a reasonable royalty analysis with the total revenue for a product unless the entire market value of the infringing product is directly attributable to the patented feature.The Uniloc Decision

In Uniloc, the jury awarded damages of $388 million, based on predicated on the testimony of Uniloc’s expert who had opined that damages based on a reasonable royal-ty should be over $564 million. The expert’s analysis be-gan with the 25 percent rule’s assumption that 25 percent of the product revenue would go to Uniloc, the patentee, and the remaining 75 percent would go to Microsoft, the manufacturer. The expert then considered several other factors frequently relied upon in patent damages calcula-tions (a subset of the factors set forth in Georgia-Pacific Corp. v. United States Plywood Corp., 318 F. Supp. 1116, 1119-20 (S.D.N.Y. 1970), modified and aff’d, 446 F.2d 295 (2d Cir. 1971)), and found the 25 percent rate acceptable. Concluding his analysis, the expert performed a “check,” comparing the $564 million sought to Microsoft’s total revenue of $19 billion, thus determining the amount sought to be reasonable.

The district court denied Microsoft’s pre-trial motion to exclude the testimony and analysis based on the 25 per-cent rule, which the court found to be widely accepted. The district court did, however, grant a new trial on dam-ages based on the “check” comparing the amount sought to Microsoft’s total revenue, noting that the jury may have been tainted by the $19 billion figure.

Although the Federal Circuit admitted that the 25 per-cent rule had been tacitly approved by a number of courts, including itself when the issue was not dispositive, the Fed-eral Circuit held that the rule was fundamentally flawed and that evidence based upon it was henceforth inadmis-sable. The court, agreeing with many critics, reasoned that the 25 percent rule ignored several subtleties accounted for in any actual license negotiation. First, the rule failed to account for the unique relationship between the patent and the accused product. Second, the rule failed to account for the unique relationship between the parties. And third, the rule was arbitrary and did not fit within the model of hypothetical negotiations.

The court found this decision in line with its recent opinions holding that a patentee could not rely on license agreements that were radically different from the hypo-thetical negotiation under consideration to determine a reasonable royalty. For any reasonable royalty rate analy-sis, there must be a sufficient factual basis that cannot be satisfied by abstract and theoretical constructs like the 25 percent rule. That Uniloc’s expert later reviewed the rate using legitimate factors did not redress the fundamental flaw underlying the analysis. Use of the 25 percent rule was ultimately arbitrary, unreliable, and irrelevant, taint-ing the jury’s damages calculation.

The Federal Circuit also addressed the expert’s use of a



“check” against Microsoft’s total revenue. The entire market value rule allows a patentee to assess damages based on the entire market value of the accused product when the pat-ented feature forms the basis for customer demand of the in-fringing product. Here, it was undisputed that the patented feature did not create the basis for customer demand or the value of the component parts. Despite this admission, Uniloc argued that their expert’s reliance on the entire market val-ue rule was not misplaced because he only used it to “check” the reasonableness of his calculation. The Federal Circuit found this a clear derogation of the entire market value rule. The error was not harmless because it potentially tainted the jury’s deliberation with the $19 billion figure. Even as a mere “check,” the $19 billion figure improperly lent legitimacy to the smaller award sought.Strategy and Conclusion

(1) Emphasize the connection between the patented feature and the demand for the infringing product. This case marks a fundamental change in the calculation of patent damages, abolishing the widely adopted 25 per-cent rule used in reasonable royalty analyses. In abolish-ing the 25 percent rule, the Federal Circuit re-emphasized the importance of tying damages calculations to the facts of a particular case. Specifically, a reasonable royalty anal-ysis based on a hypothetical negotiation must set forth suf-ficient details regarding the parties, their relationship, and evidence that demand for the patented feature, at least in part, drove sales of the infringing product. (2) Avoid references to an infringing party’s revenues as a “check” on the reasonableness of a damages figure. Similarly, the entire market value rule may only be used where the patented feature forms the basis for consumer demand or the value of component parts. The entire mar-ket value may not be used as a check against an award ab-sent satisfaction of those criteria. The reasonable royalty sought much be predicated in fact, not on hypothetical or abstract constructs.

PREVENTING LOSS OF STANDING TO SUE WHEN CORPORATE STATUS CHANGESSummary

Companies undergoing corporate-entity changes should take measures to ensure that their patents track the chain of ownership, such as updating boilerplate and employer-employ-ee patent-assignment documents, and drafting new assign-ments with specific language contemplating future corporate change. Such measures would reduce exposure to challenges to standing to sue due to an imperfect chain of ownership. Detailed Discussion

When corporations undergo changes in corporate form, structure, or state of incorporation, enforcement problems may occur if the chain of title of patents owned by the origi-nal corporation is overlooked. Specifically, if the chain of ti-tle is broken, a successor company intended to be the patent owner may be unable establish that it is the proper owner of

the patent, and a court may find that it does not have stand-ing to sue and enforce that patent. In Tri-Star Electronics Int’l, Inc. v. Preci-Dip Durtal SA, No. 2009-1337 (Fed. Cir. Sept. 9, 2010), the United States Court of Appeals for the Federal Circuit addressed the issue of a plaintiff with poten-tial chain of title problems due to a corporate reorganization.The Tri-Star Decision

In Tri-Star, the asserted patent was initially assigned by the inventor through an employment contract to his employer, Tri-Star Electronics International, Inc., and its “successors, legal representatives, and assigns.” This as-signment document, executed in 1999, stated that Tri-Star Electronics International, Inc. was an Ohio corpora-tion. Four years before the execution of this assignment, however, Tri-Star Electronics International, Inc. (“Tri-Star Ohio”), merged into a newly created California corporation with the same name (“Tri-Star California”). This meant that Tri-Star Ohio technically did not exist when the inven-tor assigned the asserted patent to it. In 2005, after both the assignment and the merger, Tri-Star California merged into a newly created Delaware corporation with the same name (“Tri-Star Delaware”). This new entity initiated the lawsuit mentioned above, asserting the patent assigned by the inventor to Tri-Star Ohio in 1999.

During the lawsuit, the defendant argued that Tri-Star Delaware lacked sufficient ownership in the patent to have standing to sue. Specifically, the defendant argued that the chain of ownership in the asserted patent broke when the inventor assigned it to Tri-Star Ohio, which did not exist at the time of the assignment. The plaintiff responded by asserting that the initial assignment document not only as-signed the invention to Tri-Star Ohio, but also to that en-tity’s successors and assigns. And since Tri-Star California was a successor to Tri-Star Ohio, the asserted patent was properly transferred to Tri-Star California before ultimately transferring to Tri-Star Delaware via merger.

The Federal Circuit ruled for the plaintiff, holding that Tri-Star Delaware obtained ownership in the patent and had standing to sue. In reaching this conclusion, the court provided the following reasoning:

(1) An assignment of a patent is interpreted in accordance with state contract law. The laws of Ohio endeavor to give effect to every provision of the contract, if possible. In this case, upholding the assignment from the inventor to Tri-Star Ohio would result in maintaining the validity of every contract provision in the document.(2) Under Ohio state contract law, the intent of the con-tracting parties is critical in determining whether an assignment occurred. The inventor and Tri-Star Dela-ware agreed during litigation that Tri-Star California, as a successor to Tri-Star Ohio, was the intended re-cipient of the ownership rights at the time the parties executed the agreement.(3) The language of the assignment allowed for Tri-Star California to obtain ownership rights, since the grant


31June 2011

was to Tri-Star Ohio, its successors, legal representatives, and assigns. As mentioned, Tri-Star California was a suc-cessor to Tri-Star Ohio.

(4) The assignment complied with Ohio statutory law, which permits an entity eliminated during a merger to survive for purposes of transferring its property rights in the newly formed entity.

Strategy and ConclusionCompanies undergoing changes in corporate structure

(such as mergers, spin-offs, buyouts, etc.) should take steps to ensure that their intellectual property assignments track the proper corporate chain of ownership.

1. For assignments already existing at the time of the change in structure, companies should draft new assign-ment documents transferring ownership of its patents to the new entity.

2. The new entity should then file assignment documents at the United States Patent and Trademark Office to serve as evidence that a change in ownership has occurred.

3. The filing should occur within three months of the as-signment’s execution to provide the patent owner with ad-ditional protections from a federal statute. See 35 U.S.C. § 261. This statute protects the patent owner in the event that, after the assignment, another entity claims it ob-tained ownership of the patent.

4. So future assignments proceed to the new entity, companies should amend any form documents govern-ing employer-employee patent assignments to list the name of the new entity. These documents, often pri-marily boilerplate, are easily overlooked and can be-come outdated quickly. 5. Assignment documents should contain language stat-ing that the assignment applies not only to the assignee, but to any of its “successors, legal representatives, and assigns.” In Tri-Star, the Federal Circuit relied on this lan-guage in upholding the assignment.6. While the Federal Circuit in Tri-Star focused on the in-tent of the parties in confirming that an assignment oc-curred, companies should not leave it to a district court or the Federal Circuit to discern the intent of the parties and conclude that this intent supports an assignment. Such a situation is unpredictable and costly to litigate, and the law on the issue can vary from state to state. Further, sec-tion 261 of Title 35 of the United States Code (mentioned above) requires that a patent assignment be “in writing.” This may limit the extent to which a court can rely on the intent of the parties that is not expressed in writing.In conclusion, companies undergoing changes in corpo-

rate structure can use these suggestions to limit the risk of breaks in chain-of-ownership and standing challenges in future patent litigation that would limit the ability to en-force their patents. ■

From left to right: Jonas Gulliksson, Niklas Östman, Per Ericsson, Kaisa Fahlund, Morten Balle, Anne Cathrin Østebø, Martin Dræby Gantzhorn, Markku Juhani Rajala, Peter Cordsen and Arne Tillerli. Adam Brandt was not present.

THE LES SCANDINAVIA BOARD 2010-2011



MacKie, SheilahBlake LapthornNew Kings CourtTollgate Chander's FordEastleigh SO53 3LGPhone: +02 38 085 7039Email: [email protected]

Marchant, RonTY Heol, Thae LandingsPentwynPontypool NP4 7TLPhone: +01 49 572 5102Email: [email protected]

McClelland, JayneAstrazeneca UK Ltd20F4 MeresideAlderley ParkMacclesfieldCheshire SK10 4TGPhone: +07 58 490 9571Email: [email protected]

McCluskey, SineadDITHothouse Technology TransferDublin Institute of TechnologyAungier StreetDublin 2 IrelandPhone: +08 79 367 947Email: [email protected]

Meldrum, DavidD. Young & Co. LLP120 HolbornLondon EC1N 2DYPhone: +02 07 269 8550Email: [email protected]

Peel, JamesBarker Brettell LLP10 - 12 Priests BridgeBarnesLondon SW15 5JEPhone: +02 08 392 2234Fax: +02 08 392 1858Email: [email protected]

Sheils, LoretoUnilever R&DColworth Science ParkSharnbrookBedford MK44 1LQPhone: +01 23 422 2313Email: [email protected]

Slattery, DavidWilson Gunn5th Floor, Blackfriars HouseThe ParsonageManchester M3 2JA

Sint-Martens-Latem, BelgiumPhone: +32 9 280 23 40Fax: +32 9 280 23 45Email: [email protected]

Rijnswou, Sander vanDeltapatents B.V.Fellenoord 370, NL-5711 ZL Eindhoven, The NetherlandsPhone: +31 40 787 60 49Fax: +31 40 236 67 08Email [email protected]

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Beecroft, RebeccaDLA Piper UK LLPPrinces ExchangePrinces SquareLeeds LS1 4BYPhone: +01 13 369 2205Fax: +01 13 369 2999Email: [email protected]

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Brady, ClaireEdinburgh Research & Innovation1–7 Roxburgh StreetEdinburgh EH8 9TAPhone: +01 31 651 4280Email: [email protected]

Hashim, YasmineCleveland40 - 43 Chancery LaneLondon WC2A 1JQPhone: +02 07 405 5875Fax: +02 07 831 0749Email: [email protected]

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Ajuwon, Larry Genzyme Europe B.V.Gooimeer 10, NL-1411 DD Naarden The NetherlandsPhone: +31 35 699 86 95Email: [email protected]

Braak, Marlou van deHoyng Monegier LLPRembrandt Tower, Amstelplein 1, NL-1096 HA Amsterdam The NetherlandsPhone: +31 20 591 44 11Fax: +31 20 463 72 96Email [email protected]

Don, Micheline NautaDutilhP.O. Box 7113, NL-1007 JC Amsterdam, The NetherlandsPhone: +31 20 717 14 60Fax: +31 20 717 13 35Email [email protected]

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LES ScandinaviaBirkeholm Munk, Kasper Danish Technological InstituteGregersensvej 1F, DK-2630 Taastrup, DenmarkPhone: +45 72 20 28 05; fax Email: [email protected]

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Toivola, Martta Culmination InnovationOG LtdTekniikantie 12, FI-02150 Espoo, FinlandPhone: +358 40 565 1067Email: [email protected]

Wert, Joshua Seppo Laine OyItamerenkatu 3 B, FI-00180 Helsinki, FinlandPhone: +358 9 68 59 560; fax Email: [email protected]

June 2011

Notes

Notes:

Notes

Notes:

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les NouvellesVolume XLVI Number 2

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1986 L. Mackey1987 P. Hug1988 D. Ryan1989 K. Payne1990 J. Portier1991 F. Noetinger1992 A. Mifune1993 L. Evans1994 O. Axster1995 N. Jacobs1996 J. Brown1997 S. Layton Jr.

1998 R. DeBoos1999 P. Mandros2000 H. Goddar2001 E. Shalloway2002 T. Sueur2003 M. Jager2004 J. Gulliksson2005 W. Manfroy2006 P. Chrocziel2007 R. Grudziecki2008 C. Fukuda2009 A. Liberman2010 P. O’Reilley

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Advancing the Business of Intellectual Property Globally

Socially Responsible Licensing Of Health Technologies: Policy And Practice In South Africa

RABOGAJANE BUSANG, KARINE BOISJOLY-LETOURNEAU, BERNARD FOURIE, MICHELLE MULDER, AND HARRY THANGARAJ — Page 69

Propagating Green Technology: A Japan Intellectual Property Association Proposal

NAOTO KUJI AND CYNTHIA CANNADY — Page 78

Patent Application Prioritization And Resource Allocation StrategyKELCE S. WILSON AND CLAUDIA TAPIA GARCIA — Page 87

Profit And Common Good: Friend Or Foe In Technology Transfer?LUKAS MADL — Page 94

Intangible Assets Valuation By License Market And Stock Market:Cross-Industry Analysis Based On Royalty Rate And Tobin’s Q

JIAQING LU — Page 102

The Technological Comparability Of Patent License AgreementsJOHN ELMORE — Page 117

You Can’t Push A Rope Or Legislate Innovation, So What Has Bayh-Dole Done For Me Lately?

DANIEL I. JAMISON IV — Page 124

Invention Licensing Agreement: Belarusian VersionDARYA LANDO AND VERANIKA SHYPITSA — Page 132

The Continued Evolution Of Patent Damages LawCHRIS BARRY, ALEX JOHNSTON, RONEN ARAD, DAVID STAINBACK,

LANDAN ANSELL AND MIKE ARNOLD — Page 136

Rules Of The Road: Valuing Commercialized Software-Based TechnologyDAVID DREWS AND DWIGHT OLSON — Page 147

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