Thursday, 30 September 2010

Monetizing Social Media

These days, nearly every major brand and celebrity personality has some presence in the world of social media, whether a page (or multiple pages) on Facebook, a Twitter feed, blog or interactive section of their corporate or personal webpage. While it is relatively easy to gain a social media presence, it is decidedly more difficult for many brands to develop a cohesive strategy for leveraging social media. Questions like, “which social media outlets should we utilize?” are often overlooked in favor of a “quick, let’s get on all the social media platforms so consumers can see we’re on board!”

Finding ways to use social media to generate revenue has been even more difficult. New York Magazine had a cover story last week called “Inventing Facebook” about the upcoming movie The Social Network. Though mainly an overview of how The Social Network was developed, written and filmed, there is, in particular, this well-made point by author Mark Harris:

“The idea [of a movie about Facebook] captured the industry’s attention immediately. Hollywood has had the same kind of love-hate-fear-resignation relationship with Facebook that it’s had with almost every other Internet innovation – a downward spiral of enthusiasm from ‘We can exploit this to sell our movies!’ to ‘We can’t figure out how to exploit this to sell our movies!’ to “Has anybody else figured out how to exploit this to sell their movies?’ to ‘Let’s just post a link to the trailer and call it a day.’ But the possibility of bringing to the screen a brand with a fan base of half a billion was irresistible.”

A tongue-in-cheek e-card from poking fun at Facebook's dismay with The Social Network, right.

For many companies, a presence on Facebook is indispensable. They recognize the value of social media in building brand awareness, consumer interaction, and (if done right) consumer trust. However, some companies have also come up with innovative ideas for monetizing their presence on platforms such as Facebook. Back in June, Disney created a Facebook application called Disney Tickets Together that allowed users to purchase tickets to Toy Story 3 and invite their friends along to the same show (read about it here). It was an interesting and creative idea, though Disney does not seem to have used the app to promote any other movies, despite having a new feature film, Secretariat, set for release in the U.S. next week. Other companies sell (hopefully) large quantities of branded virtual goods for small amounts of money, known as microtransactions. These items, often purchased for about $1 each can be displayed on a user’s page within the applicable social media platform. In this regard, it not only generates some revenue, but also exhibits the user’s support of the brand and creates brand impressions with people within the user’s network.

Merely using social media to build brand awareness and consumer brand impressions is certainly valuable. Finding innovative ways to monetize the brand’s offerings through social media is invaluable. The Disney Tickets Together app seemed a natural extension of a key feature of Facebook: telling Friends what you are doing and inviting them along. Consumers are wary of efforts that don’t feel genuine. Regardless of the social media platform a brand chooses to leverage, the key to success is maintaining an organic feel to the program.

Wednesday, 29 September 2010

Premium VOD--Have Studios Found the Answer?

I am about to show my age. When I was a child, the movie business was a simple matter. Studios made movies and people like my brother and I went every weekend afternoon to one of the three movie theaters in the smallish industrial town in the U.S. in which we grew up. There were no other distribution platforms for the studios to screen their products (my son tells me there is at least one movie theater in Kolkata that still fits this bill.) Indeed, I suppose that the special Saturday matinee fare was the closest to thing there was to out-in-front marketing (get the kids into the habit of periodic movie-watching and you then own them for life when they are able to pay full fare).

As for the present--au contraire! If anyone needed to be reminded of that fact, the article by Brooks Barnes, "In This War, Movie Studios are Siding with Your Couch that appeared in the September 25, 2010 edition of the New York Times here graphically demonstates this point. The focus of the article is the "explosion in the movie business" that is expected to take place in the next few months.

The catalyst was a ruling issued by the U.S. Federal Communications Commisison in May 2010 that movie studios are permitted to activate technology that has the effect of preventing the copying of films sold though video-on-demand (VOD) systems. As a result, it is expected that the studios will soon launch a so-called premium VOD service. The article describes this service as "the [movie] industry's best hope of restoring itself to health." What, pray tell, is going here?

The most pressing challenge to the studios is that the bottom has fallen out of DVD sales. It is reported that such sales have declined 30% since 2004 (although how much of the decline is due to structural factors and how much is due to the cyclical downturn is not clear.) The proposed remedy is to adopt the premium VOD service.

Under the current system, the movie theaters enjoy a 120-day exclusivity period within which to screen movies. Only after the expiry of that period are the movies made available on a VOD basis, at an approximate price of $4.99. The proposed premium VOD service will shorten the exclusivity period to 45 days. After that time, movies will be made available on a VOD basis at an approximate price of $24.99.

The studios apparently believe that there is a sufficient mass of couch potatoes prepared to shell out nearly $25 for a movie that they can watch at home reasonably soon after the initial release of the movie in the local theater. When one factors in the fact that the studios earn up to 80% of the revenues from DVD rentals, the attraction of a premium VOD is clear. On a subsidiary level, the shortened exclusivity period promises to reduce the amount of promotional and advertisement costs as well as to attract viewers more generally to the concept of VOD services.

So how do we see the various actors in the celluloid melodrama faring under an premium VOD regime? Here are some of my thoughts.

1. Studios--They see this opportunity as a way to exploit new platforms of content delivery with the hope that it will make up for the decline in the DVD market, which has been a major driver of profits in recent years.

2. Cable and satellite producers--Their interest is two-fold: (i) another revenue stream; and (ii) a potential differentiater of their services vis-à-vis content delivery competitors.

3. Retailers of DVDs--Behemoths such as Wal-Mart have owned the DVD market and they appear to be dead set against the premium DVD service, which they fear will further cut into their DVD sales.

4. Movie theaters--In a word, it is reported that they are prepared to declare "war" on the studios' plans to launch the premium DVD service. Their reasoning is simple: reducing the exclusivity period to 45 days will cut into sales of theater tickets without any compensation for these lost ticket sales. In addition, they warn that the so-called anti-copying technology will sooner or later be cracked, meaning unlawful distribution at an early stage of the movie screening time-line.

5. Symbiosis--That said, there is a form of symbiosis here beween the movie theaters and the studios because the most desired television networks--such as HBO--pay the studios in part on the basis of domestic box-office revenue. This means that, if there is less revenue at the box office, the studio will receive a lower fee from these television outlets. Moreover, it is doubtful that any other distribution channel has the (current) ability of the movie theater to provide the catalyst for viral buzz about a new movie release.

Let me venture two final comments.

First, the potential dispute over premium VOD highlights the continuing debate over the importance of the viewing experience. A good deal of the cost differential to watch a movie in a theater is connected to the total ambience of the viewer experience. Home viewing offers a totally different ambience and price structure. The studios seem to be betting that they can narrow the price differential between theater and home viewing, despite this stark difference in the two viewer experiences.

Second despite the intimation of the New York Times article, I have my doubts that premium VOD my itself will mark a strategic rebalancing within the movie industry. At the most, it will mark another tactical move that may both enhance the revenues of at least of the dramatis personae in the industry as well as create a nuanced (or not so nuanced) reshifting of relationships. At the end of the may, we may look back at this move as one more of the "thousand cuts" that the industry is experiencing as it seeks to find more appropriate business models in an era of changing content delivery platforms.

Tuesday, 28 September 2010

Australia's new personal property securities regime affects IP from next May

In May 2008 the IP Finance weblog noted proposals for reform of the law relating to personal property securities and intellectual property in Australia. A recent piece, "Personal property securities reforms and intellectual property", by the Allens Arthur Robinson team of Diccon Loxton, Tim Golder, Rebecca Sadleir and Robyn Chatwood, brings the topic up to date, summarising the impact of new rules that come into effect in May 2011. You can read it in full here.

The new law is to be found in the Personal Property Securities Act 2009 (Cth), which establishes a single national law governing security interests and similar transactions with respect to almost  all tangible and intangible assets -- not just IP -- and is fairly similar to the law applicable in New Zealand. It will make it easier to securitise IP assets when raising funds, providing a single register of security interests for all registered IP rights. Among the many points to note is that existing transactions raising finance against projected licensing royalties or franchise fees will be affected by the reforms and will therefore need review.

Monday, 27 September 2010

Internet referencing... with a twist of squash.

When it comes to the field of online advertising services, Yahoo Search Marketing is not considered as a big player by media and advertising companies and neither is it seen as the main offender by trademark owners fed up with the unauthorized use of their trademark as keywords. Indeed with only 6% on the search engine market Yahoo rarely makes the headlines and its search engine marketing (or S.E.M) techniques are not carefully scrutinized by marketers and trademark owners compared to its competitor Google and its famous paid referencing service AdWords. However World Trademark Review reporter Adam Smith posted a very interesting blog item last week that will probably catch the attention of marketers and trademark owners alike and might even upset many of them. This blog post might also cast a light on a company that seems to be acting freely behind the shadow of a giant, which has been taking most blows for the whole internet referencing sector mostly given its hyper-dominance on the market.

According to Smith, who relayed an article originally published in 2007 by Yahoo! on its research webpage, the company developed of a method to “inject more competition” in Yahoo’s keyword auction system by handicapping users of their service whose ad click probability (otherwise known as Clickthrough Rate) is very high. At that stage the actual deployment of this method called “squashing” invented by Yahoo! Microeconomics research group into Yahoo’s paid referencing system remained unknown. However Yahoo! Chief Economist Preston McAfee admitted its use very recently in an interview given to the Register and stated that: "When someone has a really high ad click probability, they're very hard to beat, so it's not a really competitive auction. (…)So that they don't just win [every auction], we do squashing.”
It must be noted that whereas scientists of Yahoo Microeconomics research group were mentioning the idea of a better experience for users and advertisers as second underlying motive for the implementation of this squashing algorithm – "the idea is to explore other mechanisms to help us maximize our own revenue as well as maximize the value we provide to advertisers and users" as David Pennock, a Yahoo! Research scientist in the microeconomics group explained, Preston McAfee did not explicitly referred to user’s experience improvement as reason behind its implementation besides its proclaimed objective of increasing Yahoo’s revenue. He notably mentioned that "the bidders respond by bidding higher. The one who was destined to lose is now back in the race, so they bid higher trying to displace the number one, and the number one is trying to fend them off so they bid higher too. (…) We can make the competition a bit more fierce using squashing, even on keywords where there's not much bidding."

With his declarations Preston MacAfee might have open something of a Pandora’s Box, which could have some serious consequences for all the players of the market – with Google in first line – if were proved that sponsored links are not appearing in an order resulting from the strict application of a fair and neutral algorithm. Finally this twist of squash might not been appreciated by trademark owners already appalled by the use of their trademarks as keywords by competitors, which has been authorised by the ECJ in the famous Joined Cases C-236/08 to C-238/08 Google France and others v. Louis Vuitton and others. Squashing or not, the forthcoming developments of this story will be juicy.

For some orange squash: click here
For a crazy squash point : click here

Tuesday, 21 September 2010

Juries and IP damages: a random and unsettling factor?

In "Don Johnson profit payout doubled to $51.2m", the BBC reported last week on the decision of a Los Angeles court to increase -- by a factor of rather more than two -- the quantum of damages awarded to actor Don Johnson for his contribution as intellectual originator and actor in all 122 episodes of US police TV drama Nash Bridges. The original award, a paltry $23.2, was ordered after jurors confirmed Johnson's claim that he owned 50% of the show's copyright.  The defendants are reportedly going to appeal.

Contra Costa Times adds some further detail.  Documents filed by attorneys for defendant Rysher Entertainment say that the judge and not the jury should have interpreted the copyright ownership contract which, they maintain, entitled Johnson to half the show's profits only after deductions were made for distribution, production and other costs. More disturbingly for those of us who are not used to the way things are done in the United States:
"According to a sworn declaration by trial juror Jason Scardamalia, the panel originally decided to give Johnson $15 million. However, the majority of the jurors agreed with one panel member's suggestion that Johnson deserved interest because he had not had access to the money for many years, Scardamalia said".
"I disagreed and said that I did not know why we were calculating interest," Scardamalia stated.
After pondering an additional 10 percent interest, 11 of the 12 jurors finally settled on adding an annual 5 percent to the $15 million from 2001 - the year the show ended - until 2010, Scardamalia stated".
The notion of leaving either the construction of contract terms or the calculation of an award of damages to a jury is alien to most other jurisdictions.  Interpreting a contract is not so serious, since the range of options available to a jury is relatively close to the sort of things a trained judge might come up with.  However, the assessment of damages in US IP litigation appears to have a degree of randomness to it which, this writer respectfully suggests, must surely make it more difficult for the parties to assess best- and worst-case scenarios when considering whether and, if so, how, to settle without recourse to a court decision.

Friday, 17 September 2010

IP and Finance conference: a reminder!

Intellectual Property and Finance 2010: exploring and explaining the financial dimensions of IPRs is the title of a one-day conference, organised by CLT Conferences and scheduled to be held in Central London on 20 October. The day is chaired by IP Finance blogmeister Jeremy, and the speakers include three IP Finance team members past and present -- Anne Fairpo ("Taxation of IP: where do I start?"), Ian Hartwell ("Risk Management in IPR Ventures") and Louise O'Callaghan ("Insolvency: what does it mean for IP owners and those who do business with them?").

As is so often the custom these days, there's a competition attached to this conference, the first prize being complimentary admission to the conference, inclusive of a tasty lunch (thus saving you the trouble of forking out £495 + VAT for registration).

The competition is a simple one. We all receive scam emails Some are from people purporting to be in possession of funds which can only be released once the recipient has himself paid some cash over to the scammer, or which require the recipient to part with his confidential online login and password details. Your task, in entering this competition, is to compose a plausible scam email which seeks to entice recipients to invest money in an imaginary IP-protected business venture of your choosing. Entries should not exceed 500 words unless they're very good ...

Entries should be emailed to Jeremy here, with the subject line "IP begging letter". The competition ends at close of play on Sunday 3 October and the winning entry will be published on this weblog shortly thereafter.

You can read the conference programme in full here.

Wednesday, 15 September 2010

How nuts!

Many of you have written to blogger Jeremy about the recent article in the New York Times, "The Peanut Solution". The article describes an item that, by all accounts, is an easy-to-manufacture and easy-to-administer wonder treatment for malnutrition: a paste made of crushed peanuts and vitamins.

The vitamin-loaded peanut paste described as “the peanut solution” is the subject of various patents (in 38 countries) held by a French company called Nutriset. Nutriset also holds registered trademarks for the product name Plumpy’nut. The New York Times article recounts the creation and development of Plumpy’nut, as well as its successes in numerous poverty-stricken countries where childhood death rates soar in large part due to severe malnutrition.

The article also provides an interesting view of the struggles among Nutriset, humanitarian aid groups seeking more affordable and/or locally-produced alternatives to Nutriset’s Plumpy’nut, and numerous companies that would like to manufacture similar peanut-based pastes as humanitarian aid without running afoul of Nutriset’s patents. The food manufacturers that would like to produce competing “ready-to-use therapeutic foods” argue that Nutriset’s patent is overbroad, foreclosing the production of any nut-based pastes for nutritional uses. However, the fact that nuts are high in natural fats, proteins and vitamins, coupled with their ready (and inexpensive) availability in vast quantities throughout many countries, is precisely why they make such an attractive, and practical, base for a nutritional supplement to treat malnutrition. These would-be competing manufacturers are hoping to succeed in challenging the validity of Nutriset’s patents so they can begin distributing their own paste formulae.

With this information in mind, I’d like to pose a question as, ahem, food for thought: Should the patents protecting humanitarian developments such as Plumpy’nut be more easily subject to compulsory licenses in order to ensure that such products are available at cost-effective prices and able to reach those that need them most? Some countries’ governments may be able to satisfy the TRIPS requirements for compulsory licensing (see the requirements here). However, it doesn’t seem that this opportunity has been exercised in any country. Certain countries that would seemingly satisfy the TRIPS requirements may not have the manufacturing capabilities needed for local production. On the other hand, there are interested manufacturers in other countries, like the United States, that would probably not satisfy the current TRIPS terms (for example, that the license be used predominantly to supply the domestic market). But such manufacturers, given the opportunity, could help supply treatments to many more children in need in numerous countries.

Unlike other pharmaceutical inventions, Plumpy’nut is an example of a product that is truly humanitarian in nature. It wasn’t created to treat a condition that happens to afflict people regardless of socio-economic status despite being most prevalent in developing countries (for example, AIDS drugs, which are the subject of heated debates regarding their cost, and thus availability, in the developing world). And it is not the type of treatment that some of the affected patients can afford though some cannot. It is a treatment that was created purely to address a problem that plagues only the poorest communities, mostly in developing countries. In fact,

“[o]ne element of genius in Briend’s recipe was precisely its easy replicability: it could be made by poor people, for poor people, to the benefit of patients and farmers alike. Most of the world’s peanuts are grown in developing countries, where allergies to them are relatively uncommon, and the rest of the concoction is simple to prepare. On a visit to Malawi, [pediatrician and Plumpy’nut inventor André] Briend whipped up a batch in a blender to prove that Plumpy’nut could be made just about anywhere.”

And yet, two months of malnutrition treatment with Plumpy’nut costs $60 per child. Such a simple remedy made from ingredients that are readily available in the areas where the treatment is most needed remains cost prohibitive for many would-be recipients of Plumpy’nut – and for the governmental and non-government organizations that purchase Plumpy’nut and other medicines to include in humanitarian aid supply deliveries.

Surely if there is a product most appropriate for compulsory licensing it would be Plumpy’nut, which was developed by a humanitarian medical worker to treat the neediest among us. Navyn Salem, Nutriset’s exclusive United States-based Plumpy’nut manufacturer, put it best: “We’re trying to put ourselves out of business. That would be the best-case scenario.” If it were possible for other companies to supplement Nutriset’s output by distributing as many units of similar malnutrition treatments as they can manufacture, that seems like the best-case scenario to me. Or is that thought just nutty? Feel free to share opinions as comments to this post.

Monday, 13 September 2010

A Riff on Brands: Black Swans, Perrier and Benoit Mandelbrot

It is my worst nightmare. After a multi-day celebration of the New Year holiday, I seem to have come down with with a bout of that most dreaded of maladies--writer's block. So many ideas swirling around my head, and all I can seem to export on to the computer screen are jumbled thoughts.

And still--there is a passage in the book of my weekend reading about the notion of brands and branding that continues to grab my attention. The passage is from The Black Swan, Nassim Taleb's world-wide best seller that does for the Gaussian distribution what Copernicus did for Ptolemaic astronomy. For those who love irreverence, you can't beat Nassim Taleb (although I prefer his earlier book, Fooled by Randomness --more focused, a clearer message, a bit less splenetic).

One passage in the book particularly grabbed by IP sensibilities. In a gushing description of Benoit Mandelbrot's development of fractals (more on fractals here), Taleb wrote (on p. 256 of the paperback edition) as follows:
"... [I]t was Mandelbrot who (a) connected dots, (b) linked randomness to geometry (and a special brand at that), and (c) took the subject to its natural conclusion.... "I had to invent my predecessors, so people take me seriously", he once told me and he used the credibility of big guns as a rhetorical device. One can almost always ferret out predecessors for any thought. You can always find someone who worked on a part of your argument and use his contribution as your backup. The scientific association with a big idea, the "brand name', goes to the one who connects the dots, not the one who makes a casual observation -- even Charles Darwin, whom uncultured scientists clain "invented" the survival of the fittest, was not the first to mention it. ...In the end it is those derive consequences and seize the importance of of the ideas, seeing their real value, who win the day. They are the ones who can talk about the subject."
What is striking is Taleb's use of the imagery of the language of "branding" to describe (popular) success in promoting new scientific thought. This is so, given that there is no single, agreed-upon definition of what we mean by "branding." IP types take various stabs at characterizing its elements. Consider this definition by Jeffrey Belson, author of the treatise Certification Marks:
Brand Equity--"The interest in the economic value of brands as corporate assets that creates wealth for the stakeholders in a corporation." Brand equity embraces brand-name awareness, brand loyalty, perceived brand quality and positive subjective associations. This leads to the proposition that brands are a form of intangible property which may be protected by the trade mark, copyright and patent laws, and by common law principles of passing off" (Belson, "Brand Protection in the Age of the Internet" [1999] EIPR 481).
The creative types, where "brands" are actually formulated, use language such as

that that was quoted in connection with recent Ogilvie & Mather Paris-inspired interactive mini-site, "PerrierbyDita" here, featuring the iconoclastic dancer and model Dita Von Teese here to promote Perrier products. Of the site, a representative of the ad agency was quoted as follows (26 July 2010, under the by-line of Simon Fuller):
"The aim was for Perrier to propose a unique experience to the consumer and generate conversations around the brand. The risque is part of Perrier's DNA: Perrier has always been daring in communication but always remains subtle and elegant. Perrier is not a shy brand, she tends to to be on the edge, and that is what alsays helped generate conversations around all Perrier communications."
 So, to use Taleb's term, if we try to connect all the dots connected to the meaning of branding, what do we find? Belson's understanding seems a galaxy away from that Ogilvey & Mather and Dita Von Teese. Are they talking about two aspects of the same overarching subject-matter, or do they use the same term for fundamentally different phenomena?

As for Taleb himself, the "brand" appears to be his way describing the force of authority that certain scientists enjoy in bringing "big ideas" to market. Whether his view of the "scientist as brand" is intended as a counterview to Thomas Kuhn's notion of the "paradigm shift" in scientific advancement, or merely a form literary metaphor to describe how scientists succeed, is not clear.

Whatever one's view on that is, however, there is an aspect of the "scientist as brand" that seems closer to the Belson formulation of the term. Under this view, the scientist as "superbrand" also carries with it the potential for collateral commercial success. After all, I understand that the image of Albert Einstein is one of the most successfully licensed IP-like properties around. Taleb's description of Mandelbrot and fractals suggest something vaguely similar. If so, Taleb's use of "brands' is not simply a metaphor, but reflects an awareness of the broad scope that the notion of brands can play in contemporary commercial space, embracing science and scientists as well.

Reasonable royalty or bubbles through a straw?

Ignacio Marques of the excellent Class 46 (which I understand meets this week in Berlin) reports that the Court of Appeals in Madrid has explored the concept of a “reasonable royalty” and how it can be calculated. According to his note:

"The case involved two Spanish companies acting in the field of alcoholic beverages, more specifically in the trade of “cava” (sparkling wine, but not to be confused with champagne!). The respondent was found liable of infringement as it misused the claimant’s 3D marks over a certain shape of a bottle. The Court ruled that, failing the claimant of a licensing policy (in fact, it has proven it never granted a license), it was admissible to construe a “reasonable royalty rate” consisting in the sum of three different parameters:

a) an “entrance fee” (calculated by the Court in Euro.- 40.000, whilst the expertise brought by claimant appraised it in Euro.- 150.000). It is interesting to note that respondent (infringer) unsuccessfully alleged that these types of fees are applicable to franchise agreements, but not to trademark licenses.
b) an annual fixed fee (calculated in Euro.- 12.000), plus
c) a variable annual fee over sales. "
There are not many cases that deal with the assessment of reasonable royalties in trade mark cases. Very often the assessment itself is too costly an exercise to undertake in relation to the value of the return. Brand owners also tend to accept the injunction and move on or otherwise trade "damages" during settlement negotiations for more favourable co-existence arrangements. In some jurisdictions, there is also the option of an account of profits. Consequently, this Spanish case is welcomed.

Right: Light headed - assessing royalties or bubbles through a straw?

Turning to the three "different parameters" and conceding that I may lose something in translation, that this may be an interim decision and also that the different parameters could be specific to this industry (and hence not capable of general application), the "entrance fee" is more familiar to me as a "signature fee" which is often described as payment for the privilege of the licence (by more arrogant licensors) but is often motivated as a payment for the benefit of joining as a licensee (eg marketing support, licensee networks etc).

Fixed annual fees sound more like a guaranteed minimum royalty and in some countries, like South Africa, are likely to be a stumbling block for getting exchange control approval for the remission of royalties and may render the agreement enforceable (see note here). The annual fee could also be linked to minimum sales targets.

The variable annual fee over sales is likely to be similar to a typical royalty rate over sales or FOB purchases. Whilst the principle of this "parameter" is easy to understand there is often much debate and significant importance over how the "sales" element is calculated. For example, does it include promotional give-aways, is it net of taxes, how does it deal with intra licensee supply sales etc. The actual rate may also create something of difficulty especially in this instance where the case deals with a 3d shape mark which may have little empirical support from benchmarking forums. It is also not clear whether the rate is exclusive and non exclusive but perhaps that is for a later inquiry affecting the parties.

Sunday, 12 September 2010

The New Zealand sting: after-the-event revisiting of honeytech fees

The most recent IP newsletter of New Zealand law firm Simpson Grierson carries an article, "Honey, I Over-Valued the IP! - WaikatoLink Ltd v Comvita New Zealand Ltd". The case, heard before the High Court, arose from a failed intellectual property agreement which the University of Waikato's commercialisation and technology transfer company WaikatoLink struck with honey-based healthcare product manufacturer Comvita. The question to determine was whether WaikatoLink was barred from receiving payment under the  agreement by virtue of it having made false representations regarding the imminence of discovery of the "Unique Manuka Factor" or UMF -- the ingredient of manuka honey with known curative properties -- and the technology used in isolating and extracting it. Comvita said it was induced into agreeing to pay too much. The sad reality was that the compound had already been discovered a year before by an Italian and was found to be carcinogenic.

 The court considered that, while WaikatoLink had made a false representation, Comvita had not relied on it: despite being well represented professionally the company did not seek to exclude the objected-to representations from the list of representations relied upon in the Entire Agreement Clause (EAC). This still left the court with the task of assessing how much should be paid by Comvita under the regime of New Zealand's Fair Trading Act 1986, through what the judge described as that Act's "discretionary and thus problematic compensatory regime". According to the note:
"... the Court considered the overall value of the IP under the agreement as well as the benefit derived by Comvita despite WaikatoLink's inaccurate claims. In addition to patents relating to the UMF discovery, the agreement assigned ownership of certain other patents (eg for a "honey gel") which were also the subject of negotiations. Since settlement, Comvita had licensed these patents to a third party, asserted rights to the IP, and enjoyed related tax benefits.
The connection between the benefit already derived by Comvita and the false or misleading statements made by WaikatoLink was seen to be minimal. Despite the nominal $1 formally ascribed to the patents, Comvita was held to have received adequate value for the $1.5m already paid under the agreement. However, the further $2m WaikatoLink claimed to be owed was seen as sufficiently linked to the misleading/deceptive statements to be the subject of a relief assessment. Under the FTA, the portion of the remaining $2m that Comvita would be required to pay depended on a number of discretionary factors.
The discretion allowed in the relief assessment enabled the Court to take into account that the UMF compound, as discovered by a third-party, was actually less valuable by its very nature. As well as potentially being capable of causing cancer and diabetes, the compound was not patentable. Comvita was aware of these risks. It followed that the true value of the IP agreement was not necessarily tied to the claimed breakthrough.
The Court then considered the material objectives of the arrangement, including: to prevent competitors from obtaining the potential benefit; and to secure an ongoing relationship with the researcher in question. Neither of these were affected by the false claim.
Finally, Comvita's contribution to its loss was considered. As well as failing to heed the advice of its own sceptical scientist, Comvita also failed to limit the EAC. This undermined the reasonableness of Comvita's reliance.

The Court held that, while the misleading statements assisted in inducing Comvita to enter into the IP agreement, Comvita's own conduct contributed materially to its loss. Therefore Comvita was held liable for 50% of the $2m still payable under the agreement".
The notion of the Fair Trading Act imposing criteria which regulate a contractual payment after the event is one which has potentially unsettling for any intellectual property transactions in which the inherent nature of the IP and its likely market impact are mis-stated or wrongly assessed.  This contract is interesting because one might have assumed that, with WaikatoLink being a research-to-manufacture operation and Comvita being a significant company with a strong international presence, it was the former that would be more commercially naive and therefore more likely to need legal protection against the latter.

The authors of the note conclude with the following warning
"...  IP owners must be careful not to overstate the nature or value of IP. Even if not intending to mislead, owners must consider whether their representations may cause the other party to over-value the IP"
but finish in a fairly humorous vein:
"... In this case, the combination of WaikatoLink's misleading statements and Comvita's contribution to its own loss led to a resolution a lot like Manuka honey itself - a relatively sweet end to a sticky situation for both parties, but a remedy that was less therapeutic than the parties had hoped for".
You can read this note in full here.

Sunday, 5 September 2010

The Wither and Whether of VCs and IP

When you practise in a hi-tech epicentre, as I do, you cannot help but follow the every move of the venture capital ("VC") industry. For that reason, the caption in the 31 August issue of the San Jose Mercury News caught my rapt attention. In "Grim Numbers point to the End of the Venture Capital Era" here, author Chris O'Brien chronicles the increasingly parlous state of the VC industry.

Writing from the "ground zero" of the VC world--San Jose, California--O'Brien focuses on the implications of the recent report from the National Venture Capital Association ("NCVA"), which concluded "that 10-year returns on venture capital investments had turned negative at the end of 2009, and nose-dived during the first quarter of 2010." Stated otherwise, "venture capital funds returned 25.8 percent for the quarter ending March 2009. For the quarter ending March 2010, that return had fallen to minus 3.9 percent. That spectacular dip is due to the outsize gains of the dot-com boom finally washing out of the official 10-year benchmark."

In a word, the business model that has depended on a critical mass of successful initial public offerings of stock (or in VC-speak--"IPO's") has largely become unstruck for most of the past decade. We had previously reported here on the structural change in the VC world, from patient family-based funding in the 1980s to "in and out" institutional funding beginning the 1990s.

Seen in this light, riding the end of a long-term bull stock market that had begun its course in the mid-1980s, the dot-com boom now appears to have been an aberration rather than the harbinger of a business model for the VC world. The belief was that VC funding would marry smart funding in world-beating technology with a willing public willing to buy equities in companies, many of which were long on potential but short on actual returns. The performance of the past decade has largely "put paid" to this panglossian view of the potential of the IPO.

The result is a continuing decline and contraction of the VC industry, as companies that would appear to be the most attractive for an IPO--such as Facebook, LinkIn and Zynga--eschew that route. They seem to have concluded for the moment, at least, that the funds to be received from such a move do not warrant the ceding of control that accompanies taking a company public.

The heart of O'Brien's downbeat report is the followng:

"Some will argue that at least in the area of Web startups, companies can be

launched on the cheap, and growing numbers of angel investors -- those wealthy individuals who invest at the earliest stages -- are stepping in to give these companies a boost. True, but that kind of funding doesn't work as well for biotechnology, medical devices or cleantech. And these angel-backed companies are small and lean, and don't create large numbers of jobs.
It's not just fewer startups, though. When companies don't go public, they don't generate the same number of jobs in their later stages. Heesen [the president of the NCVA] said the cash raised from an IPO usually triggers an explosion in hiring. "The real job creation starts far down the road, after they go public," Heesen said.
Instead of going public, the companies that do show potential now get gobbled up by the Googles and Facebooks of the world. At the same time, valley giants like Hewlett-Packard, Oracle, Intel and Cisco Systems continue their acquisitions of larger tech companies, a consolidation trend that more often than not is accompanied by big job cuts. So we're seeing fewer startups and sweeping consolidation. Tie those trends together, and you've got a drag on job creation that could weigh down the valley for years to come."
From the vantage of IP, I have several comments to O'Brien's observations:
1. For some time now, there have been rumblings about the diminishing role of IP (most notably patents) in the Sillicon Valley landscape. Under this view, the Valley is increasingly becoming the bastion of social media and related user apps, and decreasingly a centre for developing "the next big technological thing." The reference to Facebook, LinkedIn and Zynga as the most attractive candidates for an IPO would seem to offer some confirmation of this view. Further, the kind of investment required for cleantech, medical devices and biotech seems to be ill suited for the less form of VC funding that has become the business norm for nearly 20 years.
2. If this be true, even in part, the question becomes what impact the decline of the VC industry, and the arguably changing nature of the types of technological innovation being carried out, will have on the nature of high tech IP practice. Will it mean that there will be less patent filing activity, due to presumably fewer VC-funded start-ups, or will patent activity simply be increasingly centred on the companies that acquire the start-up technologies, rather than the VC-funded start-ups themselves?
3. Alternatively, it might also be the case that the nature of IP services required for certain kinds of high-tech companies, whether start-ups or otherwise, will also need to undergo at least a partial transformation. Under this view, there might be greater reliance on trade secrets and copyright as major sources of legal protection, and less emphasis on traditional patent protection. Afteer all, when one thinks of Apple, one thinks more of the functioning of the Apple ecosystem, which seeks to integrate hardware, software, contents and branding, rather than a dominant patent portfolio.

Take me to the IPO Exhibition

Thursday, 2 September 2010

The shoes are original - it’s just the brands that are fake

Readers of this blog are likely well aware of the proliferation of knockoffs produced in countries that lack robust anti-counterfeiting laws or enforcement procedures (or both) and making their way to consumers worldwide, but may not be aware of how the counterfeit process actually works. The New York Times gives us the inside scoop into life in Putian, China, one of the most notorious of global locations for counterfeiting. In fact, it has built its economy on producing and selling counterfeit goods, especially footwear.

Initially, shoe manufacturing facilities were built in clusters in Putian. They secured manufacturing contracts with major footwear brands, including Nike, Adidas, Puma and Reebok. Other manufacturing facilities saw the immense demand for products from such globally-recognized and trusted brands. They used bribery, even espionage tactics, to acquire official product samples from the authorized manufacturers, then deconstructed the samples, created nearly identical molds and manufacturing tools, and began churning out fairly high quality fakes at low prices. Retailers around the world purchased the fakes, perhaps some unknowingly, but many knowingly.

These days, as brand owners have taken steps to quell the flow of counterfeits from unauthorized manufacturers to retailers and consumers, they have required their authorized manufacturers to improve security measures. Instead of bribery and espionage, the “fakers” merely buy the real product in-store for use in their manufacturing process.

In Putian, this cottage counterfeit industry is not at all hidden from view:
Putian’s counterfeit-sneaker industry operates in the open. Just type “Putian Nike” into any Internet search engine, and hundreds of results immediately turn up, directing you to Putian-based Web sites selling fake shoes. (Putian’s counterfeit-sneaker business has become so renowned that, an online marketplace, offers a page warning buyers to exercise caution when dealing with suppliers from Putian.) “People who make the product and sell the product are no longer secret,” says Harley Lewin, an intellectual-property lawyer at the firm McCarter & English. “Where sellers in the past were unwilling to disclose who they were, these days it’s a piece of cake” to find them.

Student Street in downtown Putian is a leafy, two-lane road lined with stores stocked with nothing but fake tennis shoes. I spent an afternoon browsing their wares. Like the products inside, the stores varied in quality. One resembled an Urban Outfitters — exposed brick and ductwork, sunlight beaming through a windowed facade, down-tempo electronica playing in the background — but the majority of the stores appeared to value enterprise over aesthetics, with storefronts made of metal shutters left ajar to indicate they were open for business. I ducked into one and discovered a single room with two opposing walls covered in sneakers shrink-wrapped in clear plastic: Air Jordans, the latest LeBron James models, Vibram FiveFingers and more. It was like a Foot Locker for fakes.

I pulled a pair of black Nike Frees from the rack, spun them in my hands, folded the sole back and forth, tugged at the stitching and sniffed the glue; every budding aficionado has their tasting routine. (I never could detect the smell of “bad” glue.) The shoes, which cost about $12 at the Student Street shops, seemed indistinguishable from the pair my wife bought for $85 in the United States. “I don’t know if I could tell a [fake] shoe right off the bat,” [J. Scott] Ballman, the deputy director of the National Intellectual Property Rights Coordination Center, told me. If someone who specialized in intellectual-property-rights enforcement most of his career wasn’t sure he could tell the difference, how could I? (Ballman said the key was that fake shoes have a “heavy” glue smell.) As one Chinese salesman selling counterfeits in Beijing told me: “The shoes are original. It’s just the brands that are fake.”
In a sense, the salesman is right. The products are nearly indistinguishable from the original products on which they are modeled. They may as well be products made by the authorized manufacturer and sold out of the warehouse’s back door, for all the difference customers can tell. But regardless of a consumer’s ability to distinguish them from the real thing, the counterfeit products hurt the brands they imitate and support criminal activities around the world.
Managing a fake-shoe factory puts Lin in the middle of a multibillion-dollar transnational enterprise that produces, distributes and sells counterfeits. Of course, like coca farmers in Bolivia and opium croppers in Afghanistan, Lin doesn’t make the big money; that’s for the networks running importation and distribution. Last year, for example, the F.B.I. arrested several people of Balkan origin in New York and New Jersey for their suspected roles in “the importation of large amounts of cocaine, heroin, marijuana, oxycodone, anabolic steroids, over a million pills of Ecstasy and counterfeit sneakers.” Dean Phillips, the chief of the F.B.I.’s Asian/African Criminal Enterprise Unit, describes counterfeiting as a “smart play” for criminals. The profits are high while the penalties are low. An Interpol analyst added: “If they get caught with a container of counterfeit sneakers, they lose their goods and get a mark on their customs records. But if they get caught with three kilos of coke, they’re going down for four to six years. That’s why you diversify.”
But how do you stop the flow of counterfeit goods in a place where officials disagree on what constitutes counterfeiting? In China, there are frequent disputes about whether certain counterfeits are truly illegal infringements or acceptable “shanzhai” imitations that are pride-worthy. Shanzhai, which literally means “mountain stronghold,” traditionally referred to strongholds of bandits far from official control. It later became applied as a slang descriptor for factories that manufactured low-end unbranded products. Those “shanzhai factories” found success by tinkering with popular branded designs to create shanzhai products – imitations, or counterfeits, as the case may be. Liu Binjie, of the National Copyright Administration in China, explained to the New York Times, “Shanzhai shows the cultural creativity of the common people. It fits a market need, and people like it. We have to guide shanzhai culture and regulate it.” Despite the shanzhai culture, China does have intellectual property laws and enforcement procedures. However, enforcement methods only work when the enforcement agents have clear directives as to what activity is illegal and how much authority they have to investigate and stop the illegal activity. In many instances, agents overlook counterfeiting by labeling the counterfeit activities as shanzhai manufacturing.

With such significant levels of counterfeit production, what can be done? With the economy in a slump, government enforcement resources are limited. Brands may have to take matters into their own hands, perhaps by focusing on education. Only by educating employees, retailers and consumers can such companies hope to stem the massive tide of counterfeit goods. At a conference this Spring, a well-known intellectual property lawyer recounted a meeting between the chief lawyers for two famous luxury brands. The general counsel of Brand 1 complained that the Brand 2 briefcase he purchased was falling apart at the seams after only a short period of use. Brand 2’s general counsel inspected the item and recognized it as a fake. It turned out that an ill-intentioned shopper purchased a counterfeit briefcase that looked very nearly identical to the real branded product, brought it into the Brand Store, and exchanged it for a new, authentic item. Brand 2, as we were told, underwent a significant investment in educating all of its employees – from the CEO to the shop clerks and assistants – on how to recognize the most minute differences between the authentic Brand product and the high quality counterfeit products that persist in the market today.

What about legal measures? Enforcing current anti-counterfeit laws against the distributors and sellers of fake goods isn’t working; the manufacturing and selling of counterfeit goods continue unabated. ‘“You’re not going to arrest your way out of this,” Bob Barchiesi, president of the International Anticounterfeiting Coalition, told [Nicholas Schmidle of the New York Times] in a despairing tone this past spring. As long as there is a demand, he insisted, there will be supply.’ Would criminalizing the purchasing of counterfeit products lead to higher success in stemming the tide of such product sales? Earlier this week, blogger Jeremy posted this item on IPKat about whether fake goods hurt or benefit the consumer market. His piece makes brief note that certain countries criminalize the purchase, in addition to the sale, of fake goods. Consumers might not purchase counterfeit products in such massive quantities as they do today if they risked heavy fines (after all, why pay a high government fine when you can spend the money buying the genuine article?), not to mention the embarrassment of getting caught purchasing a fake to pass off as the real thing.

Perhaps overhauling enforcement systems to include purchases of counterfeit goods would be the most effective, but from the brand point-of-view, I think education is key. It is within a brand’s means to teach its employees, distributors, retailers and consumers about the features that make its products authentic. Consumers who buy fake goods often do so hoping that people around them will mistake the fake for the real thing. There is little “payoff” then, if those around them can spot the knockoff.