Friday 27 June 2008

Patent portfolio strategy revisited

Writing in Innovation Science, Brent Edwards ("Trolls Attack Innovation: Panic in Corporate Parks!"), left, reviews an article in the June 2008 issue of the Harvard Business Review by management professors Joachim Henkel and Markus Reitzig ("Patent Sharks: Legal strategies aren’t enough to deal with these predators of the IP world. You need to rethink your approach to R&D"). Edwards addresses the authors'recommendations which he criticises as being unrealistic in that they idealise the willingness of competing companies to cooperate with each other and to forgo competitiveness in technology development in order to protect themselves against the trolls.

The first of the professors' recommendations is "High-technology firms should move away from building huge patent portfolios for the purpose of cross-licensing with competitors". On this, Edwards comments:
"The authors correctly point out that one reason companies generate patents is to trade them for patents needed from other companies. Such trading is done because the patents behind key components in complex technical products are usually distributed across all of the major companies in an industry—no one company owns all of the patents necessary to produce a product. Because no company can produce a product solely on technology from their own patent portfolio, companies trade their patent licenses for licenses to the other companies’ patents. The cellphone industry is a typical example of this, e.g., Nokia trading patent licenses with Motorola and Samsung. The authors suggest that this strategy of building a strong portfolio and trading licenses is no longer valuable to companies and should be stopped because it doesn’t protect them from trolls. Indeed, it doesn’t—it protects them from their competitors, who are ultimately more threatening than patent trolls. Just because a patent strategy does not affect patent trolls does not mean that it isn’t worth doing. If I were Nokia, however, I would certainly try to convince Motorola to follow this advice to stop building up Motorola’s patent portfolio".
It seems to be by no means clear that one's competitors are ultimately more threatening than patent trolls. By virtue of the fact that they are in the same market -- particularly where that market is technologically complex and patent-rich -- competing players becomes increasingly reliant on one another in terms of standards-setting and cross-licensing, so each has a long-term incentive to cooperate with one another. A troll, however, is an outsider; he is not interested in cooperation or developing any relationship outside that of rentier. The more rent he receives, the better able he is to defend his patents if their validity should be challenged, and the less he does apart from collect his rent and keep it, the more focused he is on his continued role as rentier.

Thursday 26 June 2008

Prizes or patents?

Never mind the patent monopoly, go for the pot of gold! Republican candidate for the US Presidency John McCain has proposed a prize of US$300 million for the development of a vehicle battery package that has the size, capacity, cost and power to leapfrog the commercially available plug-in hybrids or electric cars. The prize winner should deliver power at 30 percent of current costs. Said McCain of the $300 million:
“That’s one dollar, one dollar, for every man, woman and child in the U.S. — a small price to pay for helping to break the back of our oil dependency".
Senator Barack Obama calls the proposal "a gimmick". Click here for further comments in the Arizona Republic, Motor Trend, Las Vegas Sun, New York Times, and TPM Cafe

The proposal presumes, on the basis of the past few decades, that the patent system offers either an insufficient incentive or an unattractive means of exploitation. What do readers of this weblog think?

Wednesday 25 June 2008

New tlds: more trouble ahead for the big brands?

Writing for Intellectual Property Watch, Monika Ermert ("Brandowners Warn Against Cybersquatting, User Confusion From New Internet Domains") reviews the current debate regarding new top level domains which is proving so controversial. Internet Corporation for Assigned Names and Numbers (ICANN) -- whose meeting in Paris triggered Ms Ermert's article -- has been criticised in some quarters for the length of time taken in introducing new top level names, while trade mark owners object that they expect large-scale infringement when those new names are launched.

The article quotes Susan Kawaguchi (eBay global domain name manager) as observing that brand owners are not prepared to provide income for the new generic TLD registries during the sunrise periods during which early name registrations can be made. The same sentiment was echoed by Jay Scott Evans (senior legal advisor, Yahoo), asking why brand owners should have to invest large sums of money to protect their brands because ICANN did not put their marks on a reserved list that could be blocked in all TLD zones.

It is easy why brand owners should object to having to commit substantial resources to defending their prize assets, either by acquiring unwanted and unnecessary domain names containing their trade marks so that cybersquatters cannot seize them or by taking action to prevent uses of such sites that might have an adverse impact on the goodwill in their brands. It would be interesting to discover whether, when the next batch of tlds goes live, they stimulate more commercial activity among legitimate businesses or among the parasites that feed off them.

Tuesday 24 June 2008

Lex Mundi commercialisation survey published

Lex Mundi's Survey on Trends for Commercializing IP: a Lex Mundi Multi-Jurisdictional Survey prepared by the Lex Mundi Intellectual Property Practice Group, current to February 2008, is featured by its compiler, Scottish firm Maclay Murry & Spens, in that firm's current In The Know newsletter. It's 132 pages long and, with no internal links, a difficult document to handle online.

The report lists first the questions posed, then the answers, and there's a handy glossary at the end. It covers more than 50 jurisdictions (including some US states and Canadian provinces). According to the Background:
"Despite the general drive towards harmonization of intellectual property laws on a worldwide scale, there remain distinct jurisdictional differences of which every practitioner should be aware. Given the nature of global commercialization and licensing trends, such awareness is becoming increasingly important.

In order to highlight and explore areas where these differences remain, the IP Practice Group thought it would be interesting and worthwhile to survey the membership of the Lex Mundi on trends for commercializing IP in their jurisdiction.
The survey was drawn up by the leadership group of the IP Practice Group and dispatched to all members of the IP Practice Group. The intention was for the survey to concentrate on particular aspects of commercialization and licensing to determine the degree of uniformity (or not) across members’ jurisdictions. ... The level of response was very positive with a large number of different jurisdictions providing responses.

... The results of the survey are not intended to represent a comprehensive guide to intellectual property law in each ... jurisdiction, but rather provide an insight into the differing trends for commercializing IP. ...".
The survey, which includes issues such as royalty payments and remittance of licence fees, uses the term 'trends' in the sense of 'global generalities drawn from aggregated specific instances' rather than in any temporal sense, since there is no attempt to describe how commercialisation is changing over a period of time -- but that sort of information is often difficult to obtain, particularly from law firms that are more likely to be executing their clients' instructions than telling them how to commercialise their IP.

Monday 23 June 2008

University research and funding: bridging the 'expectation gap'

The most recent e-news bulletin of Technology Transfer Tactics reports that early-stage biotech investor Carl Weissman (President and CEO of Seattle-based venture firm Accelerator) has been criticising both venture capitalists and university tech transfer offices their complaints that there is a lack of access to early-stage funding. The funding gap, he says, is non-existent -- but what there really is is an "expectation gap". He points to the era of easy money in the late 1990s as fomenting unrealistic expectations as to what constitutes technology worthy of funding. He comments:
"Academic investigators need to face facts. If you have a great technology, with reasonable and lucid proof-of-concept, addressing a significant unmet need, and that can be protected as proprietary; and, if -- and this is the big IF -- you have reasonable expectations in terms of valuation and risk-sharing, then you will be able to attract venture funding. Plenty of it".
Weissberg points to his own experiences and track record in support of this and adds:
"If you are an academic and you cannot get someone to back your idea, do three things: take a hard look at your technology (or even ask someone else to do so); take a hard look at your expectations; and, take a hard look in the mirror. Honest assessment in these three efforts will tell you why...".
The 'expectation gap' is a useful concept. Although it has probably always existed, it is bound to be more fully appreciated, and properly dealt with, now that it has a catchy name.

Thursday 19 June 2008

IP Valuation - the basics!

Jason Lessard put together this article for the readers of his Uroip site. It is quite a useful summary of the basics of IP Valuation. Thanks Jason.

"The growing importance of Intellectual Property Rights (IPRs) in business has created a need for equating the cost of obtaining these rights with the value they add to the business. A decision to invest or not to invest in patent protection, or indeed any IP registration, should be subjected to similar criteria as tangible assets.

However, IPR valuation is complex and the results can be meaningless if the wrong methodology is used to carry out the analysis. For this reason, all too often the decision of whether or not to file a patent application is based on intuition and experience. This is clearly not an ideal approach to decision making.

As with the evaluation of any investment, estimating the projected value of the resulting asset and comparing this estimate to the projected costs of obtaining and/or maintaining it will allow you to make more educated investment decisions. A well thought out and consistent approach to valuation will give you both an indication of value and a means for comparing the relative value of your innovations to decide how your R&D budget should be allocated.

Two of the more popular methodologies are the market approach and the income approach, each of which comes with its advantages and disadvantages.

The market approach is based on IP transactions involving similar technologies which have taken place in similar markets. This valuation method usually reflects more accurately the actual amount that a third party would be willing to pay for the asset. However, it is generally difficult to obtain accurate information as the results of such transactions are rarely published.

The income approach is based on an estimation of future income attributable to the particular IP asset in question. The relief-from-royalty method is a subset of the income approach, wherein the value of the IP asset is calculated based on notional royalties that the company is relieved from paying as a result of owning the assets. The royalty rates can be estimated based on industry standard ranges in the relevant field of technology, but these should be adjusted using pre-defined criteria indicative of, for example, the strength and/or scope of the IPR in question. This will provide more accurate and consistent results.

While this approach is somewhat superficial, the value obtained by this methodology is reasonably accurate in most cases. More importantly, it is a consistent indicator which allows you to compare relative values for decision making purposes."

US internet radio royalties hit further obstacles

In a feature carried by Lexology ("Does the Copyright Royalty Board exist? Internet radio appeal proceeds and new issues arise"), David Oxenford (Davis Wright Tremaine LLP) reviews the current role of the US Copyright Royalty Board in the light of its position on the royalties paid for the use of sound recordings by internet radio stations. In an appeal against one of its decisions the Department of Justice (which represents the Board before the Court of Appeals) maintained that the submissions of the webcasters -- who naturally wish to minimise their exposure to copyright royalties -- had provided insufficient factual basis upon which to establish that the Board's decision was arbitrary, capricious or otherwise contrary to law.

The Board's constitutional status has however now been called into question by Royalty Logic (which seeks to establish itself as an alternative collection agency to SoundExchange). If the Court of Appeals decides to hear that issue and agrees that the Board was not properly appointed, we can expect re-appointments, fresh hearings and possibly even legislative intervention, all of which seriously delays the ability of rights holders to factor their royalty income into their business plans.

Wednesday 18 June 2008

US patent licensors face $4 billion loss in Brazil

Bloomberg's Carlos Caminada reports on a situation that may be hugely adverse to the financial interests and cash-flow expectations of patent licensors and concerning which they may be quite powerless. In anticipation of the condemnation by the World Trade Organization of the subsidies paid to US cotton farmers, the Latin American cotton-growing giant proposes to retaliate by pursuing a $4 billion grab against US patents and business services. The piece reports that Brazilian officials from several ministries are already considering which patent payments to suspend and which services may face restrictions.

Viewed from Brazil's point of view, the patents are just "US patents". But each is an integral part of a business strategy that was conceived at the R&D stage in the distant past and from which the patent licensors expect a predictable royalty flow. Does any reader of this weblog know (i) what steps a licensor of technology into Brazil might take in order to minimise damage and (ii) whether patent licensors have resort to the law in the US in order to recoup any losses suffered?

Monday 16 June 2008

Will risk aversion stymie R&D into new drug development?

Risk aversion from investors is posing a serious threat to drug development according to the Biotechnology Report 2008, brought out by giant UK-based patent and trade mark attorneys Marks & Clerk under the direction of Dr Gareth Williams. The research identifies unique challenges currently facing the biotech sector which adversely affect investment, stemming in particular from growing caution in the granting of marketing approval for new drugs by the US Food and Drug Administration (FDA). This caution places added pressure on the patent life. The report suggests that drug modification or late-stage development will become increasingly popular, at the expense of genuine innovation.

The international research is based on the views of 484 executives across the biotechnology and pharmaceutical sectors, principally in the US and UK markets as well as Europe and Asia. 83 per cent of respondents feel that the pressures currently facing biotech make it less attractive in the eyes of many investors. 90 per cent believe secondary and further funding will become increasingly difficult to secure as market conditions deteriorate, and that investors will focus on less risky, latter-stage drug development in a bid to limit their exposure to risk. Correspondingly, 83 per cent think that biotech companies will themselves focus increasingly on drug modifications as well as more mature drugs in the pipeline.

Where capital is available, the terms for funding may become simply uneconomic. 80 per cent of respondents believe key investors will either take a greater equity stake, or may seek to secure their capital against the drug-makers’ IP assets. This reflects a trend gathering momentum within the industry where investors focus increasingly on the strength of IP rights. Overall, 78 per cent agree that the climate for enabling biotechnology innovation has deteriorated within the past year, and 89 per cent believe some small and/or early stage companies will either fail or be bought out at unattractive levels.

The genesis of the funding issue is not solely attributable to current economic fragility. A much more cautious attitude from regulatory bodies (specifically the FDA), is making it considerably harder for biotechs to get the marketing approval they need for drug development. This, in turn, is affecting investor sentiment. 68 per cent of respondents believe that the drug approval process must become much less risk-averse if investment levels are to be maintained, with 72 per cent viewing this as essential to the delivery of future drug pipelines.

One of the most important consequences of sluggish drug approvals is its impact on the lifetime under which a new drug is protected by its patent. 91 per cent of respondents feel that the time it now takes for drugs to get through the system is eating into the time those drugs enjoy the rewards of patent protection. 78 per cent warn that there is a danger of biotech companies bringing more "me too" drugs to market, rather than investing in real innovation, if the threshold for approving new drugs is set too high.

The patent system emerges as a key tool in overcoming the barriers faced in the current crisis. 84 per cent believe that recognising secondary patents is an important means of encouraging and rewarding drug development. This “evergreening” process helps shore up new patent protection for later modifications to an existing drug, and may cover anything from dosage to form. Extensions to the existing patent term are also advocated by 73 per cent of respondents to promote more R&D investment, whilst 88 per cent would like to see patent approvals secured more quickly.

The research finds that perceived weakness in foreign intellectual property systems and the difficulties posed by competition, are adding to concern about profit margins. Whilst 72 per cent agree that investors and biotech companies see a lot of potential coming from new super-economies, 85 per cent believe weak IP protection in the world’s largest emerging markets (China and India) is a threat to future margins.

Price reduction on a global scale is viewed as a “serious threat” as a result of parallel trading – the importing of drugs at a cheaper price from a lower-cost area. 79 per cent view parallel trading as a “significant” or “very serious” threat to the industry, with 91 per cent believing this threat will only increase as global trade continues to grow. 73 per cent think it likely biotech companies will reduce the availability of drugs in some territories if parallel trading begins to threaten profits in key, high-margin markets.

The report also finds that biotech margins are facing certain pressure as generic competition emerges among the biotechnology sector. 76 per cent of respondents believe that the enforceability of patents against generic competitors is proving much harder than in the past, although 58 per cent feel confident about the validity of patents being upheld in the courtroom. 89 per cent feel that the promotion and approval of cheaper copies of biologics, or copycats, is likely to result in more “me too” drugs coming to market. Yet 74 per cent recognise that competition will have a positive impact on drug affordability.

Copies of the report may be obtained from Marks & Clerk (London office), via Joanna Colton, +44 (0) 207 420 0000.

Sunday 15 June 2008

Audio books: is there a brave new world after DRM?

Also in World Media Law Report is an analysis by Monica P McCabe and Krista Sirola (DLA Piper US LLP, New York) of the suitability of the digital rights management (DRM) model for audio books -- a genre of recorded work which consumers have so far been more reluctant to acquire via new digital technologies than sound recordings and films.

The authors note that several major US book publishers have announced that they plan to abandon DRM as their IP exploitation model in an effort to boost consumer interest and sales. Sales of audio books have continued to rise, with downloads accounting for 14% of audio book sales in 2006. However, piracy levels are substantially lower than for recorded music and movies.

Those who write the content of audio books have commented very little on the DRM issue, though they have much to gain or lose if the business model for the exploitation of that content goes wrong. In contrast with the music industry, where performers and composers may derive less income from royalties than from other revenue streams, authors’ income is typically closely tied to the number of books sold. To this end, Random House -- which is abandoning DRM for a DRM-free business model -- promises to continue offering DRM at the request of its authors. How this will work out in practice is however open to conjecture.

Friday 13 June 2008

Levy, first-sale price or DRM? What the MBG wants

Writing in World Media Law Report this week Frank Jennings (DMH Stallard) discusses the call of the informal UK-based Music Business Group (MBG) for the government to couple format-shifting with a levy to compensate rights holders, following Denmark, France and Germany. This levy is available as an option under the EU Directive on Copyright and the Information Society, which empowers EU Member States to introduce a system that ensures fair compensation for rights holders.

Jennings reminds readers that the 2006 Gowers Review rejected the imposition of any levies for consumers on the assumption that rights holders can include in the sale price the economic cost of the right to copy. Conventional sales are however in sharp decline. UK retailer Woolworths has stopped selling CD singles altogether, pointing out that just 8 million CD singles were sold in the United Kingdom in 2007, compared with 55 million in 2000. Meanwhile in 2007 over 20 million MP3-capable portable devices were sold in the UK; additionally, over 90% of music on the average MP3 player has been copied.

Jennings predicts that a format-shifting exception is likely to be introduced in the UK in order to legitimize consumers’ existing activity, to which the music industry has already turned a blind eye (as Gowers observed). However, the proposal to introduce a levy on blank media has not found favour with the UK government. He suggests therefore that the solution lies in copy-protecting music, allowing rights holders to charge more accurately for the use of their music.

Wednesday 11 June 2008

What's wrong with hi-tech royalties?

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

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

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

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

Tuesday 10 June 2008

Radio Royalty: The Sinatras

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

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

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

Sunday 8 June 2008

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

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

Friday 6 June 2008

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

An article on the Packagingnews website of 5 June highlights the difficulties of measuring the value of designs and the perceived value to clients.
It is available at
It mentions the RODI – the “return on design investment”.
The definition of this term on the Design Council’s website (see as follows: “Similar to standard ROI (return on investment), RODI isolates the specific return on design spend. Although only one in eight businesses currently pinpoints RODI with accounting procedures, we hope that doing so will become more common.

Further information on this intriguing ROI measuring tool can be found for example at: Design Council’s Value of Design Factfinder - - “Businesses which use design perform better than their rivals.”

or at

VMSD (the “leading magazine for retail designers and store display professionals”) - - “It’s the holy grail of retail design: demonstrate the return on investment that retailers will net from the new store layouts they commission.

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

Celebrity endorsements and damages

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

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

Wednesday 4 June 2008

Account of Profits decision - HEFTY

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

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

Monday 2 June 2008

Must franchisors remit purchase benefits to their franchisees?

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

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

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