Tuesday, 30 November 2010

A Mini Case Study: The Matter of Skyhook Wireless

I face a constant challenge in trying to find case study materials that are appropriate for my MBA course on IP Management and Strategy. Rarely to never do I find materials that are ideally suited for my teaching needs. Against that backdrop, let me share my toughts about an item that appeared in the September 27 issue of Bloomberg Business Week here and its potential value in building materials of this kind.

The article is entitled "Don't Be Evil (or Commit Tortious Interfence)". It recounts the story of Skyhook Wireless and its suit against Google, filed on September 15 in a state court in Massachusetts. The background to the suit was a deal between Skyhook and Motorola, whereby Motorola would use Skyhook's software, designed to pinpoint the location of Motorola smartphones, instead of adopting Google's version of this technology. It is noted that Motorola makes use of Google's Android operating system in its smartphones.

By using Skyhook's technology, Skyhook, and not Google, would be able to take advantage of data on the location of users. In principle, Google makes the Android available without cost in order to reap the benefits of such services as providing users on ads geared to the user's location. Under Skyhook's arrangement with Motorola, Google would presumably be deprived of this business opportunity.

According to Skyhook, senior persons at the Android unit of Google advised Motorola that the Skyhook technology raised issues of compatability with Android, a claim that Skyhook alleges had never been raised previously. Skyhook alleges that Google advised Motorola that a Motorola smartphone phone using Android also had to contain Google's location technology. Ultimately, it appears, Motorola sold the smartphones without any Skyhook code. Skyhook followed with an action for tortious interference. It also filed an action for patent infringement in a federal court.

I have no idea whether or not Skyhook has valid claims against Google, as described in the article.What is interesting for my purposes is a series of IP-related questions that arise based on this account, whatever the result of the litigation.

1. The role of Android as an open system-- Let us assume that the attraction of Android, as an open system, is that any person may make use of the operating system to develop compatible products. But Skyhook claims that Google has sought to exploit the system to promote its own products and services. This raises the issue of potentially multiple flavors of open source platforms from the commercial point of view.

Questions-(i) What should the potential user of an open source program for application development purposes consider, when choosing to adopt an open source platform? (ii) What happens if the purveyor of the open source program is also a commercial actor, even a potential competitor, in related applications? (iii) Does this differ from the position of an open source purveyor such as Linux? (iv) What happens with the licensed availability of open source under the copyright laws runs up against private or semi-private arrangements for compatability and specifications?

2. How far can superior technology take you?--Skyhook, since 2003, has developed a means for identifying the location of a phone by reference to proximity to Wi-Fi hot spots. Skyhook claims to have built a database of 250 million hotspots world-wide. Wi-Fi, and not GPA tracking, is apparently the superior technology for dense urban settings. It is mentioned that Google and Skyhook discussed a possible licensing deal, but ultimately Google developed its own technology. Skyhook charges 50 cents per device (and claims that the cost reflects certain technological advantages for its product), while Google gives its product away for free. Further, while Skyhook has contracts with Dell, Hewlett-Packard and Samsung, it has recently lost its major client, Apple, which also has developed a tracking technology of its own.

The CEO of Skyhook laments that "entrepeneurs are taught to pick something important to focus on. But maybe we chose something too important." Perhaps. But perhaps the real issue is the recurring phenomenon whereby the pioneer of a technology fails to reap long-term commercial benefits. As David Teece explained nearly 25 years ago, it is only where the pioneer's IP is so strong that it allows no viable imitators will the IP itself confer a decisive competitive advantage. Otherwise, superior manufacturing, marketing, distribution and the like (so-called "complementary assets") may ultimately prove to be more important.

Questions--(i) Did Skyhook properly evaluate the strength of its IP and technology as the source of its competitive advantage? (ii) How easy is it for the functionality of Skyhook's technology to be imitated without running the risk that any claim by Skyhook for patent infringement would effectively block competitors? (iii) Would Skyhook have been better off seeking to keep confidential more of its technology (if feasible)? (iv) Or should Skyhook have sought to partner its technology with someone who could who parlay Skyhook's technology with competitive capabilities in the relevant complementary assets?

In short, an interesting series of questions, focused on various aspects of IP, are raised in these events. They might well serve as a fruitful basis for discussion.

Monday, 29 November 2010

IP departments feel pressure of economic downturn

The in-house patent team wished they'd asked for new computers instead of a pay rise
It presumably isn't a big surprise, but it's good to know that someone is quantifying it: according to US metrics men ipPerformance
"IP Operations have been dramatically affected by the economic downturn and as a result, companies are reporting staff, professional personnel, outside services, and fee expenditure cuts. These are some of the findings revealed in Intellectual Property (IP) Law Department Operations and Metrics Benchmark Report, a survey conducted by ipPerformance Group, an intellectual property management advisory and benchmarking firm that conducts research on intellectual property operations best practices.

The study reports on feedback from intellectual property leaders from 50 companies, representing 11 major industry sectors.

“Our study confirms that while companies’ IP departments – which include attorneys and staff – have stabilized, the workload has slightly increased,” reports Rob Williamson, president, ipPerformance Group. “With continued economic pressures, IP Departments are continuously evaluating their operation costs, practices, staffing for efficiency and effectiveness improvements.”

Survey participants were questioned on a range of topics including department expenses, professional and non-professional staffing, patent attorney workload, outside counsel trends including costs, and usage of innovation driven companies.

Among the findings that emerged from this research are the following:

* Patent attorneys experienced an increased workload. In this study, companies reported a 21% increase in the median research and development expenses to patent attorneys.

* Outside counsel spending in proportion to all IP Expenses was down 23%. The median company spent $40 million on IP expenses.

* Nearly half of the companies indicated that they are filing patent applications on less than half of the submitted invention disclosures.

* While there is a reduction in overall patenting activity in the past two years, the use of law firms versus in-house attorneys for patent application preparation and prosecution did not change significantly from 2009.

* The median average salary for Patent Attorneys is $180,000 and additional bonus is $15,025.

* The median number of Patent Attorneys in-house is 3 [The Departmental Christmas party must be fun ...]".
A full report of the survey findings is available from ipPerformance Group here.

UK: reform of IP taxation - consultation underway

HM Treasury have published the consultation document on IP tax reform, including R&D tax credits – quick thoughts below, more details when I get back from the US next week.

There are some interesting points around the proposal that the patent box will cover “embedded” royalties in the profits from products manufactured using patents. How the Govt proposes to define those is a good question – they are suggesting using a formula, but that seems to have the potential to be riddled with problems.

The patent box will also apply to net profits, after expenses (so that these, in effect, get relief at 10% and not 28%/24%)- including “pre-commercialisation expenses” but not, apparently, including R&D tax relief qualifying expenses (as there’s a commitment to retaining full rate relief there) which seem to remain deductible from regular rate profits rather than patent profits. How this is all supposed to work is a bit of a mystery – businesses wanting the patent box rate are going to have to keep very detailed records if they want to ensure that they get full rate relief for certain expenses. I’m not surprised that the patent box will be optional – the cost of compliance is not going to be cheap, as far as I can see.

The Govt has speeded up access to the patent box – it only applies to profits earned after 1 April 2013, but the proposal is that it wiull apply to patents commercialised (another definition nightmare) after today (Nov 29th) rather than patents granted after Royal Assent 2011 (the original proposal).

The focus is very much on patents – they are registrable and clear (copyright/trademarks etc are more nebulous and easier to acquire) – so this will be rather limited by comparison to (eg) Luxembourg and the Netherlands. Interesting, given that the UK has a good film/sound recording/video game industry. We are already well ahead with pharmaceuticals, which seems to be one of the main beneficiaries of this approach. It’s questionable whether encouraging specialisation like this is all that helpful.
There will be the usual anti-avoidance – the patent box seems unlikely to apply to passive IP holding structures. This may be tied to a requirement to have ongoing R&D, for example, or manufacturing activities.

Otherwise it all seems a bit early stages to tell. Vaccine research relief may be for the chop – only 10 companies a year claim it (presumably the same 10 each year).

R&D tax relief does not seem to be for the chop, though – that had been rumoured to be in the firing line, but there is a statement that the Govt “is committed to retained full rate relief – not just patent box rate relief – for the additional deduction available from the R&D tax credit regime”. There are requests for ideas for structural changes to make the scheme more attractive (without, presumably, costing anything).

On CFCs and IP, the idea to introduce an earn-out charge on exports of IP has – thankfully – been dropped. The CFC rules appear to be focussing on what the Govt considers to be three high-risk areas:

1. IP developed in the UK and then transferred to a low-tax jurisdiction
2. IP held offshore but actively managed in the UK (or further developed in the UK)
3. IP developed with UK funds, where the UK doesn’t get a return on the investment

#2 seems to be the most contentious aspect of this: where UK activity increases the value of IP held overseas. There could be transaction scenarios where this may be an issue, which are not an attempt to divert profits overseas.

There’s also whiff of retrospection about the idea that IP affected by changes to the CFC rules could include IP that has been transferred out of the UK in the past decade - if carried through, this will not be helpful for those who have undertaken reorganisations and restructuring.

"User" basis available for assessment of trade mark damages

A week or so ago IP Finance reviewed a Scottish decision on assessment of damages inflicted on a brand ("Damages for damaging a brand: Tullis Russell v Inveresk", here). Now here's news of another brand damages assessment exercise, this time from England and Wales, in National Guild of Removers & Storers Ltd v Silveria (t/a C S Movers) [2010] EWPCC 15 (12 November 2010), a Patents County Court decision of Judge Birss QC.

In this case, a trade association sought damages for trade mark infringement by four defendants in separate actions, which were joined on the issue of an inquiry into damages.  According to the judge, there was no reason in principle why damages should not be available, calculated on a "user" basis for trade mark infringement and for passing off, as they were for patent infringement.  It was unnecessary for a trade association to show that it had suffered any lost sales. In reaching a fair assessment of the damages awarded against each of the defendants, including one which had never been a member of the Guild, the judge looked at the post-termination provisions in the Guild's rules which applied at the time of the infringement.  Taking them into account, he considered that a fair assessment was that each defendant should pay £200 per week for the unauthorised use of the Guild's marks (this figure was slightly lower for one defendant, where different versions of the rules were applicable).

Judge Birss QC set out the legal basis for his reasoning as follows:
"In General Tire v Firestone [1976] RPC 197 Lord Wilberforce set out two essential principles in valuing a claim for damages for patent infringement, first that the claimant has the burden of proving its loss and second that the defendants being wrongdoers, damages should be liberally assessed but that the object is to compensate the claimant and not punish the defendants ... Plainly these principles apply to registered trade mark infringement and passing off.

In each of the four cases before me the infringement consists of the unauthorised use by the defendant of the claimant's name and/or one or more of the claimant's marks or logos. In many trade mark cases the infringer's use of the infringing mark will lead to sales of the relevant goods which are lost to the claimant. In such a case damages can be calculated by assessing the profit lost as a result of losing those sales. In these cases however the claimant's business does not work in that way and the defendants have not caused that sort of loss to the claimant.

The kind of damage suffered by the claimant in these cases in financial terms can be regarded as the loss of the royalty which they should have been paid in return for use of their trade marks by the defendants. This remains so even though the defendants' use did not result in any lost sales of goods to the claimant. As a preliminary matter I need to decide whether such damages are recoverable in a trade mark and passing off case. ...

In patent cases there is no doubt that such damages can be claimed .... Such damages have been described as being assessed on a "user" principle, i.e. as a reasonable royalty for the unlawful use of the claimant's property even though there has been no sale lost to the claimant. In Dormueil Freres v Feraglow [1990] RPC 449 Knox J was unwilling to award an interim payment in respect of damages calculated on this basis in a case of trade mark infringement and Knox J's decision is cited by the authors of Kerly's Law of Trade Marks and Trade Names (14th Ed, paragraph 19-133) for the proposition that it has been doubted that the user principle is applicable to trade marks. The authors point out however that Knox J did not decide that such damages were not available at all, he simply refused them on an application for an interim payment.

In the copyright case Blayney v Clogau St Davids Gold Mines [2002] EWCA Civ 1007, [2003] FSR 19 (see pp 369-370) the Vice-Chancellor (Sir Andrew Morritt) (with whom Rix and Jonathan Parker LJJ agreed) rejected the submission that damages on the user principle could not be extended from patents to other forms of intellectual property. The Vice-Chancellor dealt with Dormueil Freres on the basis that Knox J's reluctance to apply the principle in a trade mark case was understandable given the nature of the application before him.

Finally in Irvine v Talksport [2003] EWCA Civ 423 [2003] FSR 35 the Court of Appeal consisting of Jonathan Parker LJ (with whom Schiemann and Brooke LJJ agreed) considered a passing off case about celebrity endorsement. The claimant was a famous motor racing driver who earned substantial sums endorsing various products and services. The Court of Appeal upheld the judgment of Laddie J that the defendant had falsely represented that the claimant had endorsed its radio station by using the claimant's image and thereby committed acts of passing off. The Court of Appeal also dealt with damages, holding that the principles in the patent cases General Tire, Meters and also A.G. fur Autogene Aluminium Schweissung v London Aluminium Co Ltd (No. 2) (1923) 40 RPC 107)) were applicable (paragraphs 97-104) such that the damages represented a reasonable endorsement fee on the facts of the case, assessed by asking what was the fee which the defendant would have had to pay in order to obtain lawfully that which in fact it obtained unlawfully. ... It is notable that Dormueil Freres does not appear to have been cited to the Court of Appeal in Irvine v Talksport but it seems to be to me absolutely plain that if it had been, the Court of Appeal would have come to the same conclusion. It would be wholly bizarre to find that unlicensed celebrity endorsement of the kind arising in that case was indeed an act of passing off but to then find that no damages were available for it, when an endorsement fee was precisely how the claimant operated his business in this respect. Moreover to say that the lost fee for the endorsement depended on whether the action was about a lost sale (i.e. a lost endorsement which the claimant would have accepted (for a fee)) and that no damages would be payable at all if Eddie Irvine would never have endorsed the radio station (so no lost sale of an endorsement) seems to me to be unreal.

In my judgment, as a matter of principle, where a defendant uses a mark without permission and thereby infringes a registered trade mark or commits an act of passing off, that act is capable of damaging the claimant's property in the mark (see s14(2) of the Trade Marks Act 1994) or property in the goodwill attaching to his business. That is so whether or not a lost sale has taken place. It is the same kind of damage as the damage to a patent monopoly caused by an infringing sale which is not a lost sale to the patentee and for which a reasonable royalty is payable. It is an invasion of a (lawful) monopoly. Thus there is no reason in principle why damages should not be available, calculated on a "user" basis for trade mark infringement and for passing off. Of course it will be a question of fact in any given case to decide the amount of such damages".

Sunday, 28 November 2010

Brand valuation ISO

The International Organisation for Standardisation, comprised of the National Standards Institutes of 163 countries, has now developed a new international standard for brand valuation. ISO 10668. This was published on 30 September 2010 after a three-year consultation period. According to Florian Traub, Hammonds LLP ("New international standard for brand valuation introduced"), World Trademark Review (here):
"The new standard will not only help trademark owners to measure and monitor the value of their brands as an important intangible asset, it is also likely to have a significant impact on the practice of trademark monetisation (eg, measuring the price of a licence or in IP transactions). In addition, the new standard also appears to be a useful instrument for calculating damages in trademark infringement proceedings. ...
The new international standard provides a consistent, reliable approach to brand valuation, including financial, behavioural and legal aspects. It provides a framework for brand valuation, including objectives, bases of valuation, approaches to valuation, methods of valuation and sourcing of quality data and assumptions. It also specifies methods of reporting valuation results. ISO 10668 is a summary of existing brand valuation methods and intentionally avoids detailed methodological work steps and requirements. The standard can be applied to all existing brand valuation approaches, as long as they follow the fundamental requirements specified in this new meta standard".

Monday, 22 November 2010

The goods are fake, but the tax is real

Here's some news from Sweden, a jurisdiction which is known to have had a most enthusiastic view of reaping a healthy tax harvest where possible. The Administrative Court of Appeal, upholding a decision of the Administrative Court, has held that a couple who sold counterfeit goods via the internet were liable to pay Value Added tax (VAT) on all their sales.  The couple first sold fakes over the internet in 2003 as a sideline; their counterfeit stock was later seized and confiscated by the Swedish police under a joint complaint by several trade mark owners, and they were banned from selling goods on Tradera, Sweden's largest online auction site (owned by eBay).

The couple argued that they were not obliged to pay VAT on the sale counterfeit goods in Sweden since it was illegal to sell them.  After all, it was wrong for the Swedish state to profit from illegal transactions [There's a problem here: either the State profits from the transactions by taxing them or the infringers profit from them by entering into VAT-free transactions]. The Administrative Court disagreed: under Swedish case law, income derived from criminal activity must be taxable if it is part of a legal activity. Apart from their illegal activities, the couple also generated a profit from the trade of legal goods. VAT was thus payable on all income derived from the sales.  This decision has since been affirmed on appeal.

Source: article, "Online sales of counterfeit goods held to be subject to VAT", by Tom Kronhöffer and Linda Petersson (MAQS Law Firm, Stockholm) for World Trademark Review.

Sunday, 21 November 2010

Frugal Innovation: Two Titillating Tales

Perhaps the hottest notion floating through international management circles is the idea of "reverse", or "frugal" innovation.  Roughly speaking, the notion is that the time-honoured direction of innovation, namely from West to East/from developed world to developing world, is giving way to a more multi-directional approach. In particular, the idea focuses on emerging markets, such as China and especially India: these markets increasingly have the ability to hone "frugal" innovations intended for the local market, placing a premium on stripping costs while satisfying essential requirements and functionality. The best of these frugal innovations are then ripe for transfer to mature markets as well.

The notion became a particular focus of business school parlour talk after the publication of an article, "How GE is Disrupting Itself", in the Harvard Business Review here, late in 2009, by Jeffrey R. Immelt, Vijay Govindarajan and Chris Trimble. Imeldt is the CEO of GE and Govindarajan, professor at the Tuck Business School at Dartmouth College, is a leading proponent of the "reverse innovation" concept. We ourselves had an early inkling about the potential potency of this concept and already wrote about it on this blog site with great favour in the spring of 2009, here and here.

It is against this backdrop that two recent items drew my intention. The first is a
brief report in the November 13 issue of The Economist, "Tata's Nano: Nah, no." To remind the reader, the Nano is the much-heralded compact car, intended to cost around the equivalent of $2,500 plus taxes, which is meant to address the vehicular needs of the massive emerging middle class in India and elsewhere. I seem to recall that over 100 patent applications were filed in connection with the development of the Nano, which sought to merge world-beating technology in the service of producing frugal innovation at its best. Indeed, the Nano was lauded as a prime example of frugal innovation.

The problem is that there have been relatively few buyers for the car. Cumulative sales to date for 2009 are 40,467 (which seems to me the number of cars struggling to advance at a given moment at any major intersection in Mumbai). Sluggish sales are attributed to the fact that the car is marketed in only a few places in India, the higher-than-expected actual costs, and some early technological glitches in the vehicle. Whatever the reasons, and without discounting the possibility that the Nano might yet become a big success and a bell-wether for frugal innovation in the passenger car industry, its post-natal difficulties point to the dififculties that confront efforts to commercialize the fruits of frugal innovation, first in local markets, such as India, and thereafter to other emerging (and even developed) markets.

The second item was a brief report published on November 18 on Bloomberg.com and written by the prolific Scott Anthony. Entitled "Three Innovation Lessons from the Gillette Guard", it discussed one part of a webinar that will appear as part of an article in the January 2011 issue of "Havard Business Review". Anthony's article describes the efforts of Procter & Gamble to develop a double-edged razor for the Indian market that will meet the requirements of its Indian customers, but which will retail at the price of 15 rupees (about $0.33), with refill cartridges to cost five rupees (about $0.11).

Unlike a previous attempt by P&G in this area, which apparently used MIT graduate students from India, comfortably ensconsed in their Cambridge, Massachusetts surroundings, as its focus group, this time P&G seems to have reached out to actual consumers in the target market to come up with a potentially successful product. As well, P&G appears to have adopted distinctive forms of manufacturing, distribution and promotion for the product. In so doing, according to Anthony, P&G parlayed three fundamental features of product development appropriate for the Indian market: (i) go the source, (ii) delight, don't dilute and (iii) match the model to the market.

What is notable here is that frugal innovation may not be solely the purview of innovators in the emerging market. In this case, the frugal innovation seems to have been carried out by a standard-bearer of the mature market world. The interesting question is whether any of the features adopted by P&G for its Indian-focused market can be repatriated to Western markets. Paying $0.33 for a razor with limited, but satisfactory functionality, and $0.11 for replacement cartridges, sounds like something to which the Western consumer might also be attracted. Or are the economic and cultural demands of the two markets so different that there is nothing that P&G can bring back to its Western markets in connection with this product? And what happens to the P&G brand if there are substantial price differentials, based on the locus of the market, for products of the same category?

Thursday, 18 November 2010

Damages for damaging a brand: Tullis Russell v Inveresk

Thanks are due to Susan Sneddon (an IP & IT Associate with the leading Scottish firm of Maclay Murray & Spens LLP) for sending IP Finance this note on the very recent Scottish decision in
Tullis Russell Papermakers Limited v Inveresk Limited [2010] CSOH 148. Susan writes:
"The Court of Session in Scotland has recently ruled that the purchaser of a brand was entitled to recover 40% of the purchase price from the seller due to the seller’s failure to take steps to maintain the value of the brand during an agreed service period after the sale. The parties to the dispute were two Scottish paper manufacturers, Tullis Russell (the pursuer/claimant) and Inveresk (the defender). Both companies produced high quality board for use in applications such as greetings cards, phone cards and packaging.

Tullis purchased Inveresk's Gemini brand and customer information in June 2005, based on the strength of and goodwill in the Gemini brand.

For a service period of five months after the acquisition, Inveresk continued to manufacture and distribute Gemini products under licence. Tullis paid Inveresk £5m for the acquisition and a further £5m for Inveresk’s services during the service period. The judge held that, on a proper construction of the contracts and the deal, the full £10 million was paid for the Gemini brand.

Inveresk agreed to waiver contractual obligations during the service period aimed at preserving the goodwill, including:

• To use all reasonable endeavours to protect the Gemini brand, maintain existing levels of customer service and promote a successful integration of the Gemini brand into Tullis; and
• Not to sell any Gemini products which failed to comply with defined quality standards and to comply with all relevant statutory and regulatory requirements;

The judge considered that the purpose of these obligations was to protect the integrity and value of the Gemini brand.

During the service period the Gemini products manufactured by Inveresk contained a much higher number of defects than usual (3 ½ times the historic average). In addition, Inveresk began dealing with customer complaints directly, without including Tullis, and adopted an antagonistic attitude towards customers who complained about Gemini products during that period.

Lord Drummond Young accepted that, in the paper industry, a certain number of quality complaints were inevitable since paper and board are largely natural products. As such, essential components of any such business were (i) a good quality control procedure; and (ii) a good complaints handling procedure.

Inveresk were held to be in breach of contract. The value of the brand and its goodwill lay in the likelihood that those who had purchased or considered purchasing the Gemini brand would do so again in future. In failing to manufacture goods of a satisfactory quality, and then dealing with customer complaints poorly, Inveresk damaged the brand and caused loss of over £4m to Tullis.

The decision demonstrates that the Scottish Court will strictly enforce measures designed to preserve goodwill and brand value. Ultimately, this may be a pyrrhic victory for Tullis, as it is reported that Inveresk has gone into receivership.
This case provides a really fascinating insight into what is in effect an assessment of the diminution of the value of a brand.  The judgment is vast (319 paragraphs), but that should not detract from its value. Of particular interest is the judge's lengthy and careful consideration of whether damage to Tullis should be assessed by taking into consideration the impact of Inveresk's breaches on either the entire portfolio of customers as a whole or by aggregating their impact of their consequences upon individual customers.

Monday, 15 November 2010

New IP Strategists' Association being formed

Readers may already know of plans to establish the International Intellectual Property Strategists Association (INTIPSA), which are now well advanced. According to the association's LinkedIn page,
Those leading the establishment of the association are UK-based IP professionals who were named in the first edition of the IAM Strategy 250: Jon Calvert; Matthew Dixon; Simon Edwards; Ben Goodger; Jackie Maguire; Ian Harvey; John Pryor; and Mark Thompson. Anyone who has a demonstrable expertise in IP strategy will be eligible to join.

INTIPSA's aims are to:

• Establish and integrate the role and function of IP strategy within business, education and government.

• Promote excellence in the provision of strategic IP business advice.

• Serve as a means for business to locate qualified IP strategists.

• Promote best practice and act as a mechanism to share this.

• Act as a focal point for enhancing the IP capabilities of the UK economy and UK businesses.

• Share market knowledge and act as a network to members of INTIPSA.

• Provide long term IP strategic perspective.

• Provide opinion in relation to national policy.
Readers are invited to join the LinkedIn group if they want to be kept up to date with progress in the formation of INTIPSA and would eventually like to become members.

Sunday, 14 November 2010

Software Patents: Are They the Real Threat to the Smart-Phone Industrry?

It is seldom that I focus on a Letter to the Editor. But I cannot resist the letter from Joshua Bloch, who is identified as Chief Java architect at Google, which was published in the November 6 issue of The Economist. The background to Mr Bloch's letter was an article that appeared in the October 23 issue of the same magazine. Entitled "The Great Patent War: Smart-Phone Lawsuits", here, the article discussed the various strands of the increasing reliance on patent litigation by the various actors in the smart-phone industry. So first a word about the article.

The article pointed to the change of the composition of patent litigants in this space, changing from patent trolls and patent owners from other industries (e.g., Kodak) to the handset manufacturers and developers of software for the smart-phone industry (e.g., Microsoft, Nokia, Apple and HTC). If all the various patentees with a possible claim with respect to the smart-phone industry check in with a lawsuit, we could reach the situation described by sometimes IP- skeptic professor Josh Lerner of the Harvard Business School, whereby '[i]f 50 people [each] want 2% of a device's value, we have a problem."

Not for the first time, Google's position would appear to be idiosyncratic, because its business model focuses on making its Android software available to manfaucturers for free, and then garnering revenues through advertising activities by users of the smart-phones. As such, Google may be a less appropriate object for suit because, in the words of the article, Google "will be hard to pin down. Google does not earn any money with Android, which makes it difficult to calculate any potential damage awards and patent royalties" -- although, as also noted, Oracle has filed suit against Google regarding the use of Java by the Android system (for more on this lawsuit, see here and here .)

My immediate interest is not to comment on the article itself, but to focus on the letter from Mr. Bloch, who wrote as follows:
"Your article on the patent wars in the smart-phone market left out one key player: the consumer ("The great patent battle", October 23). The flourishing competition among mobile platforms, devices and applications directly benefits consumers. In contrast, exploiting vague software patents to try and block open-source innovation neither helps consumers nor promotes the development of new technologies.
Innovation and competition, not ligitation, are the keys to providing the new generation of products and services that is changing the lives of billions of people around the globe."
So what do we make of these comments? Let me suggest the following:

1. Mr. Bloch's comments refer only to software patents. I am bit puzzled about this.
If Google's interest is promoting "innovation and competition [that] are the keys to providing a new generation of products and services" on behalf of consumers, should not his concern be with the applicability of the patent system generally in the context of a product and eco-system such as the smart-phone industry? After all, to recall Prof. Lerner's concern, it does not matter what party of the smart-phone device--hardware or software--is subject to the "50 times 2%" nightmare. Lockup is lockup, and 100% is 100%, whatever the source.

2. Indeed, judged by his silence, Bloch's implication seems to be that that patents are okay, and may even contribute to innovation, unless they are being employed against open-source (read Android) software. After all, doesn't Google also own patents in various areas? As long as the patent owners are suing the makers of smart-phone manufacturers and, presumably, developers of proprietary operating software for smart-phones, such as Microsoft, innovation and competition are fine. It is only when "vague software patents" are brought to bear against the open-source community that there is reason for concern.

3. We understand why Google is better off if no one person controls the smart-phone operating system in the manner in which Microsoft controlled the operating system for the PC world. With no single person able to control the operating system, the source of profts in the smart-phone industry can be enjoyed by others, including Google, it as the leading purveyor of online advertisements.

4. There is nothing wrong with Google, or any other person, earning profits in the smart-phone space. What is a bit troubling, however, is the attempt is to couch one's business model within an appeal to consumer welfare, competition and innovation. After all, even if we solve Google's problem and free its operating software from the threat of software patents, we still have the proverbial 50 other patentees, each still seeking to obtain its 2% interest in the device. If Google really wants to contribute to consumer welfare, competition and innovation in this industry, it should offer a solution for that problem.

Friday, 12 November 2010

RSA's TIA - the resurrector of innovation

South Africa's new Technology Innovation Agency (TIA), which has been formed to support the commercialisation of local research and development, was formally launched at the end of October with a budget of R410million (approx GPB 43mill) according to this report in Creamer Media's Engineering News. The news is hot off the heels of the enactment of RSA's legislation designed to commercialise innovation from public funding.

TIA chairperson Dr Mamphela Ramphele said that the agency would strive to turn "the valley of death" between research and product commercialisation into one of "resurrection"

The legislation and TIA have high ideals but borrowing from Tennyson's account of the famous doomed charge does sound ominous:

 Half a league, half a league,

  Half a league onward,

All in the valley of Death

  Rode the six hundred.

'Forward, the Light Brigade!

Charge for the guns' he said:

Into the valley of Death

  Rode the six hundred....

Thursday, 11 November 2010

Groggle for Google

Google has entered into a settlement agreement to stop an alcohol price comparison website from setting up as Groggle. The soon-to-be-launched Australian site will locate cheap alcohol based on a post code search. Last September, it filed an Australian trade mark registration for Groggle, which Google opposed in April.

As part of the settlement, the name Groggle has been abandoned in favour of Drinkle. Further details of the settlement are unknown, but one thing can be seen - Drinkle has had six months of publicity beside one of the world’s most valuable brands. While the company said it did not have the financial backing to fight a legal battle, it may not have got bad value out of this dispute.

Wednesday, 10 November 2010

Product placement: the case of short-termism versus longevity

Those who believe that product placement is the gold standard for subtle brand promotion may have been alarmed to read in Brandchannel this week that Dreamworks Animation has backed out of placements. In "'Megamind' Confirms Dreamworks Animation Has Abandoned Product Placement", Abe Sauer writes, in relevant part:
"The Dreamworks Animation studio's box office hit Megamind took it to the bank this weekend, taking in close to $50 million and contributing to setting a first weekend of November box office record.

Megamind also represents a landmark in product placement for animated films. Not because Megamind is chock full of product placement; but because the film is almost completely free of recognizable products. In fact, the only brand name that can be found in the whole film (Jean Paul Gaultier) is spoken in a passing joke about men's cologne.

What's more, Megamind also has no product placement "jokes," the likes of which were so prevalent in the Shrek series. That is, until the most recent Shrek film, another brand-less children's film that signaled the trend that Megamind now confirms. Product placement in animated children's films might be dead.

The last decade of Dreamworks Animation films is a perfect case study of how the popularity of product placement in children's films has waned and brought the studio back to where it began.

None too subtle: product placement in Tommy Boy (1995)
In 2001, the studio's first film, Shrek, featured zero brands. There were a few jokes about Disney, but mostly the film was clear of product placement. Three years later, that all changed with the release of the studio's blockbusters Shark Tale and Shrek 2. Both films featured only a few real product mentions, yet were packed to the gills with product placement jokes. For example, both spoofed versions of Burger King ("Burger Prince," "Fish King") and Old Navy ("Old Knavery," "Old Wavy"). Shark Tale, a movie that takes place underwater, features an improbable product placement joke about the donut brand Krispy Kreme ("Kruppy Kreme") Parents began to grumble. A year later, Dreamworks' Madagascar featured over 20 product placements, including the real Krispy Kreme. Only the "Spalding" joke on Castaway's "Wilson" was forgivable. ...

But then in 2008, something started to change. The studio released two films (Madagascar: Escape 2 Africa and Kung Fu Panda) that between them only featured one branded product (Apple). This trend continued a year later with the Dreamworks' film Monsters and Aliens with only one visible product.

Now, 2010, where all three of Dreamworks Animation studio's blockbusters, Shrek: Forever After, How to Train Your Dragon, and Megamind, share but a single product placement amongst them. Next year will prove once and for all if Dreamworks Animation has gone product-free as the studio will release both Kung Fu Panda 2 and Shrek-offshoot Puss in Boots.

Dreamworks may have transitioned its films to remove product placement as an answer to parent criticism. But there is a practical reason to keep animated films free of product placement too: Longevity.

In fact, when it comes to product placement, Dreamworks Animation's films are beginning to resemble those of the market leader, Pixar. ... Pixar's undersea film, Finding Nemo, remains a children's favorite, while Shark Tale loses relevance with each passing year ...".
There's an interesting trade-off here.  Product placement = money on the table before the movie is launched and is therefore certain income.  In the case of animations, the movie's commercial success, and therefore the value of the placement, is likely to be higher than in the hit-and-miss market for films aimed at general release or for the adult market.  By not cashing in on product placement opportunities, a studio "buys" the prospect of longevity, but income from longevity depends on the ability to keep on cashing in on sales, broadcasting and other mainly traditional business models that are struggling to deliver the cash in the new digital environment.

One technically feasible solution, if longevity is sought, is to ensure that the movie is not rendered stale by the products placed within it.  How about short-term product placements, renewable only if the placed brand fulfils criteria laid down by the studio when the film is first made?  Come to think of it, why not segment the market and release the same movie with different branded products to suit the cultural and commercial preferences of local audiences?

Monday, 8 November 2010

Meet the Trademark Troll

We have patent trolls and copyright trolls (especially in jurisdictions that provide for statutory damages). Now it is the turn of the trademark troll.

Consider the following situation. You file a trademark application on behalf of a client (when you filed, you remember well the client's instructions--"no need to do a clearance search prior to filing"). The jurisdiction in which the appliction has been filed only examines the mark on absolute grounds, i.e. whether or not the mark is too descriptive to be registrable. The mark sails through examination and it is published for opposition.

Days before the end of the opposition period, you receive a Notice of Opposition. You examine the grounds for the opposition and you conclude that the Opponent has a strong, indeed a very strong, case. One year has passed since the application was filed. During that time, your client has been using the mark on the branded product bearing the mark, supported by substantial marketing and advertising. The client is pleased with the commercial results of the product and believes that the mark has acquired brand equity. The opponent is not in the business of using the mark, but rather warehouses registrations and applications and then waits for an opposition opportunity -- such as yours.

The question is how to advise my client. Having particular regard to the inevitable "compare and contrast" with the patent troll situation, here are my first thoughts:

1. The operative assumption is that the opponent's basic goal is to extract payment in exchange for agreement to withdraw the opposition and to agree to allow the applicant to use the mark in an unimpeded fashion.

2. That said, the circumstances described above only involve the right of registration. Even if the applicant fails to register the mark, any challenge by the opponent to use of the mark must be separately brought in a civil action. In most jurisdictions, it is relatively inexpensive to maintain an opposition proceeding. To the contrary, an infringement action will likely be substantially more costly (for both parties). Unless the jurisdiction allows an award of costs, each party will have to bear its own costs with no likelihood of recovery.

3. The threat of an injunction, if an infringment action should ultimately be filed, may well less potent than in the patent troll situation (even after the "eBay" case in the U.S.). In principle, there are an infinite number of words and signs that one can choose as a mark for a given product. Unlike a patent suit, where there may not be any viable alternative if the defendant is enjoined from using the invention, an injunction regarding trademark use merely requires the defendant to choose another mark. In most situations, this will not mean that end of the product.
All of this brings me back to situation described above. I assume that neither my client nor the opponent wishes to reach the litigation stage. My client wants to continue to use the mark while the opponent seeks payment of a sum of money. However, the opponent also knows that if my client chooses to withdraw the application, the value of the mark for my client (and hence any payment to the opponent) will become zero. The challenge, therefore, is for the parties to find a way of reaching an agreement, especially where the threat of a zero payment hangs credibly over the head of the opponent.

In particular, the sum cannot exceed the amount that the applicant will reasonably be required to expend, should it choose to withdraw the application and to adopt a new mark. This is the rub -- how can we come up with a rough metric to quantify this amount? The following comes to mind:

(i) The easier part is to calculate how much has been directly spent on creating, protecting and promoting the mark. (ii) But what about indirect costs and the amount of the brand equity, if any, that might be lost if the marked is discontinued? (iii) And what about the time value of money, as the negotiations trundle forward against the backdrop of continuing costs, both direct and indirect, in connection with the use of the mark?

At least with respect to the applicant, the information that might enable it to come up with an amount that is presumably within its knowledge and control. What about the troll? True, the troll should be able to quantify its expected costs, both for the opposition and any infringement action. But unlike its patent cousin, this troll must always be fearful of the "nuclear option" of withdrawal and presumably ascribe a discounted value to reflect this risk. All of this would seem to make the trademark troll situation more uncertain than its patent counterpart.

Sunday, 7 November 2010

Rolls-Royce - patent suit follows engine failure

There was mild interest in the engineering press in August on the news that aero engine manufacturer Rolls-Royce had launched a patent infringement action in the Eastern District of Virginia against US rival Pratt & Whitney. RR’s share price rose by around 1% whilst that of P&W’s owner, United Technologies, barely changed.

This has turned into headline news in the mainstream press with the announcement on Friday that Pratt & Whitney has retaliated with actions before the US International Trade Commission and the England and Wales Patent Court. The fact that the Trent 900 engine complained of had recently failed on a Quantas A380 aircraft doubtless contributed to newsworthiness of the item. Bloomberg reported a 4.9% fall in the RR share price, with UT’s share price rising just under 1%.

This case has some interesting ingredients: even if the Patents Court action fails to halt manufacture of the Trent in the UK, Bloomberg notes that the ITC action could prevent RR from shipping Trent engines to Boeing for use in their new Dreamliner aircraft. The RR patent has already been the subject of protracted interference proceedings. Of more interest still are the underlying commercial conditions that have driven the two companies to litigate despite them already being joint venture partners in International Aero Engines AG. Hopefully the actions will shed more light.

Friday, 5 November 2010

India: a follow-up

Just when you thought it couldn’t get more confusing … Following on from the previous post on the Microsoft shrink-wrap case, I came across a Advance Ruling given to GeoQuest Systems BV (a Dutch company) by the Indian authorities in August.

Remember that the Delhi Tax Appeal Tribunal pretty much held that all software payments are royalties, and withholding tax needs to be deducted from payments, even if for shrink-wrap boxed software? Well, the GeoQuest Advance Ruling concludes that a payment for the licensing of special purpose software does not constitute a royalty – so no withholding tax on payments made from India.

The customer was granted an exclusive, but non-transferable, right to use the software and the associated proprietary information. but no rights to modify the source code, make copies or transfer the software to any other person. The software had to be returned at the end of the licence period.

The Advance Ruling confirmed that:

  • unless the right to directly exploit copyright in the software (by copying it, amending it or similar) is granted to the payer, the payment should not be considered a royalty under Indian domestic law; and

  • a payment for the use of a product that has an embedded copyright is not the same thing as a payment for the use of the copyright.

Now, see, these points make sense. The Advance Ruling makes it clear that income from a supply of software constitutes business profits rather than a royalty, so that no withholding tax should apply. Now, could they just explain this to the Tax Appeal Tribunal?

Thursday, 4 November 2010

Beware withholding taxes on software to India

In an early start to the pantomime season, the earlier sensible decision on shrink-wrap software of the Bangalore Tax Appeal Tribunal appears to have been thoroughly ignored by the Delhi Tax Appeal Tribunal, which has held that payments received by Microsoft from end users in India through distributors for sale of Microsoft off-the-shelf, shrink-wrap, software are taxable as royalties (and so are subject to Indian withholding taxes).

Ok, so this only applied to payments made before January 1, 1999, while Microsoft had direct arrangements withIndian distributors for the software sale, on a principal-to-principal basis. But it still holds good for other companies' sales of software now. In effect, the decision means that any sale of software to India should have tax withheld from the payment, no matter what form the software actually takes - that's going to make quite a difference to some profit margins.

The reason it doesn't apply to Microsoft's sales since January 1, 1999, is that since then Microsoft software has been manufactured and distributed in India by Gracemac Corporation (a US company) under an exclusive licence. The Tax Appeal Tribunal also held that payments for software licensing should be treated as royalties for tax purposes, which makes a little more sense than their decision on shrink-wrap given that Gracemac is actually exploiting the intellectual property by manufacturing the CDs (not a lot more, assuming that the licence doesn't actually allow Gracemac to change, adapt or otherwise directly use the intellectual property).

There was also some outrageous comments on the ability of Indian domestic law to override tax treaties - that's not IP specific, but it's got international tax lawyers choking.

More R&D tax relief claims needed!

HMRC has published the latest set of details on the number and value of R&D tax relief and R&D tax credit claims, covering claims in 2008-9. There is an increase in the number and value of claims, but it is surprisingly small considering that 2008-9 was the catch-up deadline to get in claims for relief on expenditure over the previous six years (the relief now has to be claimed in the company tax return or amended return, so companies have a much shorter time limit to claim).

The total number of companies claiming the relief was 8,350 in 2008-9, an increase of just 10% in a catch-up year that was well-publicised - that seems a very low number, and it may make the tax relief vulnerable to change/removal in the upcoming consultation on how IP is taxed in the UK.

Wednesday, 3 November 2010

Operation Smoking Dragon

There is often discussion about whether product counterfeiting supports terrorism and drug trafficking. Westlaw News reports the latest example of counterfeiters also dabbling in both terrorism and illegal drug importation. A California jury recently convicted a man of trafficking millions of dollars worth of counterfeit Marlboro cigarettes and illegal drugs. He also attempted to import counterfeit US Dollars allegedly printed in North Korea. As if that wasn't enough, he and his partner attempted to sell Chinese surface-to-air missiles to undercover FBI agents as part of a sting operation called Operation Smoking Dragon. More and more frequently, agents investigating potential counterfeit shipments discover connections to narcotics dealers and terrorists.

Though there are already enough reasons for brands to be vigilant in their anti-counterfeiting efforts, the possibility of finding counterfeit products bearing their trademarks amidst a shipment of narcotics or weapons is yet one more.