Friday 25 April 2014

Fordham Report 2014: General Counsel Roundtable

The General Counsel Roundtable at this year's Fordham IP Conference was moderated by Hugh C. Hansen, the panellists being Michael D. Fricklas (Executive Vice President, General Counsel and Secretary, Viacom Inc., New York), Kimberley D. Harris (Executive Vice President and General Counsel, NBCUniversal, Inc., New York), David Hyman (General Counsel and Secretary, Netflix, Los Gatos), Mark Seeley (Senior Vice President & General Counsel, Elsevier, Boston) and -- by remote link-up -- Brad Smith (Executive Vice President and General Counsel, Legal and Corporate Affairs, Microsoft Corporation, Redmond). This session gave Hugh a chance to probe the practical realities that IP owners face.

Aside from the usual worries about lack of clarity of the current law and the difficulties of predicting future law, as well as the uncertainty as to how regulatory bodies on both sides of the Atlantic will continue to discharge their functions, there were some concerns that addressed the financial side of things.

Hugh asked about Aereo: 20 years ago, no-one would have invested or bought into such a business model. Is it not the uncertainty of existing law and the cost of copyright litigation that have encouraged such investment?  Michael Fricklas responded: so many judges don't have a handle on the new technologies and how copyright law applies to them, but they do understand the need for the law not to shackle innovation. Kimberley Harris added that it was really important, in an era of rapid innovation, for the courts to develop copyright doctrine on an incremental basis rather than make big rules -- particular, Richard observed, since new and disruptive technologies soon become the normative ones.  Some attractive business propositions have already been rejected because of the likelihood of either an adverse result in litigation or the cost of protracted negotiation to avoid it.  On this topic, Brad Smith stated, paradoxically, that the world was becoming "increasingly global" but the application of IP kept differing from place to place -- meaning, as Hugh put it, that "you are bound to be screwed in one country or another".

Brad Smith then struck out with another topic: the fundamental importance of intellectual property in every key area of industrial and commercial concern in the entire world.  There's never a year in which we can say that "nothing happened". This leads to in-house lawyers having to look creatively at business problems. "You have to be nimble to find solutions", Kimberley reminded the audience. Endorsing this, Brad emphasised the need for lawyers to retain their integrity when doing so [this blogger assumes that this is always a potential problem where lawyers engage in fast-moving industrial issues in which the risk of failure presses hard upon them]. David Hyman went further: when giving advice on the business side, try to imagine how it would look if it hit the front page of the New York Times. Don't be afraid of failure -- and be careful about advising that "there's only a 10 per cent chance of failure": it's surprising how often a 10 per cent chance of failure actually happens.

Discussion was then steered from IP to competition issues: how do IP-oriented in-house counsel deal with competition issues? Michael focused immediately on parallel importation of satellite broadcast decoding equipment, while David noted how markets and technologies change far more quickly than regulators can look at them and examine the competition issues.

Friday 18 April 2014

What happens when the employee is also the patent licensor?

Many years ago, my IP boutique office merged into a large general practice law firm. I was curious from the onset to see which of the various departments in the firm would first seek IP assistance from me. I had put my money on one of the commercial, corporate or litigation departments. I was so wrong. It turned out that I had barely arranged the pictures on the wall of my new room when I received a call from the employment group. From that moment on, I came to appreciate the unique combination of IP law, management and psychology that characterizes the issue of employer-employee rights in IP, in general, and patents, in particular. As fellow blogger Jeremy Phillips demonstrated in his pioneering research back in the late 1970s, here, few IP issues give rise to more diversity of law and practice than the matter of employee compensation for patents, ranging from the tightly drawn statutory provisions under German law to the “anything-goes” approach (by contract that is) under U.S. law.

In the main, attention is focused on how to manage the issue in the context of an employee invention, which raises a series of potentially complicated outcomes. But a recent conversation with a colleague got me to thinking about the situation where the employee brings with him independently created patent rights, which the company subsequently wishes to exploit. Consider the following hypothetical case:
E signs an employment contract with Company X. At the time that the employment agreement is signed, E discloses that he is the owner of patent no. 123456, which he invented during his free time while working for his former employer, Company Y. E satisfies Company X, his new employer, that Company Y has no claim of rights in the patent. After 18 months on the job with Company X in an R&D managerial position, Company X takes another look at patent no. 123456 and it comes to the conclusion that the patent can provide protection for a feature not currently present in the company’s flagship product. Company X has estimated that if this feature is incorporated, it will increase sales of the product by 20% while at the same time also allowing a per-unit price increase. Sales of new units of the product in the amount of several tens of thousands are predicted annually, at least for the first few years (keeping in mind that over 50,000 units of the product, sans the feature covered patent no. 123456, are already in the market). Company X anticipates that the unit price for the new feature will range from $50,000 to $100,000, depending upon the product configuration desired. Company X wants, therefore, to reach agreement with E to use patent no. 123456.
If the employment group came to me to try and help them sort out the issues involved, what would I advise? Here are some of my thoughts:
1. It can be expected that the first issue to be considered will be compensation for E. Does E “deserve” a royalty (fixed rate, sliding scale or otherwise), based on aggregate sales for the total sales price of the units, for 20% of the aggregate sales (reflecting the expected incremental contribution of the patent to sales of the product), or some other metric? If so, should this amount be capped? Or perhaps a lump-sum may be more appropriate, given that the inventor continues to be an employee of Company X.

2. Whatever the arrangement, the accountant may be necessary to help sort out the fact E will now receive payment from Company X from two sources. Are all these amounts to be considered employee compensation, or does E somehow enjoy a dual status as both an employee and a licensor contractor? Or perhaps there will be a form of set-off pursuant to some formula based on the amounts received by E for use of the patent?

3. Assuming that E and Company X reach agreement on the compensation to be paid to E, there are also managerial issues to be considered, to wit:
a. Can E continue to be effective as an R&D manager if his total compensation is many times larger than the members of his team, not to mention other seemingly equally placed R&D managers with Company X. As well, morale might be affected.

b. Perhaps it would be advisable to have E sign a specific non-disclosure undertaking. But if so, how reasonable can be to expect the information to remain confidential. And when it does leak out, the fall-out may be worse than not imposing the obligation at all.

c. What will be E’s involvement in the design and manufacture of the improved product? Even if E views himself as a typical licensor, he would expect to have some involvement, at least at the level of disclosure of certain sales and other information. In the specific circumstances, his involvement might be more intensive. But if so, any such involvement might take away from his full attention to his responsibilities as an R&D manager.
4. There is also the trick of reconciling E’s terms and conditions as an employee of X with the provisions of the licence agreement between Company X and himself. As long as the product sells well, it is presumed that there is an alignment of interest between the two parties. But if sales do not meet expectations, especially those of E, might E not seek a way to terminate the agreement as a way to enable him to look for another licensee? Such a step is not likely but not out of the realm of possibility.

5. A variation of this might arise if E becomes dissatisfied with his R&D position. How might E seek to leverage the continued validity of the licence with Company X, whether to improve his position within the company or to ”improve” the terms of the licence, or to even leave Company X altogether. Given such a possibility, Company X needs to consider whether to secure from E a favourable (and enforceable) non-compete undertaking from the outset of the licence arrangement.
I am certain that there are additional material considerations that flow from this hypothetical situation. But even limiting ourselves only to those described above, the complexity of the situation is breathtaking. Clearly, it was no accident that the employment department sought my input so soon after my arrival.

Monday 7 April 2014

HP and 3D Printing: The Next Big Thing or Paper Tiger?

If there was a heavyweight contest for what is the hottest IP-hi tech subject, the two most likely leading contenders would certainly be patent trolls/NPEs, in
one corner, and 3D printing, in the other. Without choosing between the two, permit me to focus this time around on 3D printing. I have previously considered, here, whether the current structure of the industry, dominated by 3D Systems here, and Stratasys, here, each of which is seeking to become a large tent, if not a one-stop shop, for 3D printing products (and even the materials required), would be disrupted by the entry of a major hi-tech behemoth, which would seek to leverage its overall hi-tech market position to grab a share, if not more. That would set up a potentially interesting clash of branding approaches: while 3D Systems and Stratasys will each continue to seek to carve out an identity as the 3D printing brand of choice, one or more hi-tech multinationals will attempt to extend their overall goodwill and name in the marketplace to capture at least a part of the 3D printing industry.

A material salvo in this direction was shot in this direction late last month, when HP indicated that it was about to enter the 3D printing market. Despite what appears as a bit of a public relations mis-step (it is reported that HP CEO Meg Whitman first stated that the announcement would come in June, but corrected herself a few days later in a blog post, stating that the announcement would come only by the end of the company’s fiscal year, October 2014, here), the upshot is the same—HP appears to be determined to enter the 3D printing field. Few details have been given about what HP is really up to in the run-up to its October 2014 launch. Morsels of information have focused on the claim that HP has finally solved a number of unspecified technical issues as well as a declaration that the first market of interest will be the enterprise market. Against this, a particularly interesting attempt to explain the what and why of HP’s announcement appeared on 28 March on, “Why is HP Entering the 3D Printing Industry?”, here.

According to the piece, the primary reason why HP is entering the 3D printer market "is because a host of core patents such as apparatus for producing parts by selective sintering have either expired or are expiring within a year.” Followers of the industry are aware of this and there have been various views on whether this portends a patent cliff, at least for the incumbents. From the perspective, the effect of the expiry of this first generation of patents seems to be that HP can cherry-pick the information soon to enter the public domain and to leverage its advantages to better exploit this soon-to-be freely available technology (more on this point again below), without having to commit massive R&D funds in this direction. Whether this is so, or whether the patent landscape will more be incremental than that, remain to be seen. Be that as it may, the article also suggests that, together with the expiry of these so-called core patents, HP has made significant progress in reducing the cost of consumables (it should be remembered that the materials to be used in the 3D manufacturing process, and the “razor-blade” business model that is inherent in the sales of these materials, are too often overlooked though commercially central to the 3D industry). As well, HP is reported to have progress in the quality of the additive “print” output as well reducing the printing time, which makes 3D printing less attractive for more batch-like manufacturing.

The article’s attempt to explain why HP’s announced foray in 3D printing will be good for the entire industry is interesting, if not fully convincing. First, the article argues that the mere fact that a major hi-tech multinational company will soon be entering the market “add[s] some momentum to a fledgling industry that is dominated by smaller players and could help counter criticism that the technology is still too immature for widespread consumer adoption.” This is a version of the well-established business management notion of “complementary assets”, here, whereby it is not usually the technological pioneer that ultimately succeeds commercially, but rather the company with manufacturing, marketing and distribution clout. Of course, given the fact that the first generation of patents is reaching expiry, it is a bit of an analytical stretch to refer to 3D Systems and Stratasys and their ilk as freshly-minted pioneer innovators. In any event, whether the presence of HP will give more “gravitas” to the entire industry remains uncertain.

Secondly, points to HP’s “deep pockets”, which “can easily fund any R&D to improve future processes or ink (plastic filament), which costs anywhere between $25 to $45 for a kilogram depending on the quality and manufacturer.” Here, too, whether the mere fact that HP has deeper pockets than smaller rivals such as 3D Systems and Stratasys has not heretofore enabled HP to take a lead role in the 3D printing industry. It is one thing to have the financial means to fund research, but it is quite the opposite to be certain that such R&D will translate into solid and stable national growth. Thirdly, as mentioned above, HP is placed to exploit its distributional channels and other complementary assets, at least in the enterprise space. Finally, even if materials continue to constitute a lucrative part of the 3D printing field, the ability of HP to migrate from its prominent position in the traditional 2D printing world to the quite different requirement of the 3D printing environment is also still an open question (interestingly, a recent radio interview with a fund manager devoted solely to the 3D printing industry failed to mention the HP announcement at all).

Indeed, an early indication whether the mere announcement that HP will enter the 3D printing area will be good for the entire industry can be measured by the direction of the stock price of both 3D Systems and Stratasys since the initial announcement by HP CEO Meg Whitman on 20 March 20. As can be seen from the attached, here and here, the stock prices for both companies have notably declined at the time of the original HP announcement and have wandered even a bit lower since then. Whether this decline is due to the HP announcement or to other factors remains an open question (indeed, the fund manager interviewed seemed to suggest that analysts have been down on the entire 3D printing industry lately and this has affected share prices). Still, the decline is food for thought. The ability of these companies to continue to dominate the industry in the face of HP’s announced entry will no doubt be the subject of intense continued interest for a long time to come.

Friday 4 April 2014

Tax relief for British creatives: an improving situation

Here are a couple of notes on UK IP-related tax developments.

Not quite -- but the sentiment is welcomed ...
First, according to the British government, the European Commission has now approved a UK proposal for video games tax relief, this being via a 25% repayable tax credit on qualifying production costs. The draft provisions introducing this relief were published in December 2012, ending up as law with the passage of the Finance Act 2013 (Section 36 and Schedule 17, embedding them in Part 15B of the Corporation Tax Act 2009. The new provisions came into force this Tuesday, 1 April, according to a GOV.UK news item, here.

Secondly, a consultation paper has now been published by Her Majesty's Treasury, which is seeking some feedback regarding the design of a new corporation tax relief for theatre productions (plays, musicals, dance, ballet and opera).The basic idea is that the new relief will work much the same way as existing film tax relief, providing an additional corporation tax deduction for qualifying expenditure  such as script fees, casting and rehearsing costs and a payable tax credit of 25% for qualifying touring productions, and 20% for other qualifying productions. If you want to make any comments, you have until 8 May to do so. Further details are available here.