Cybersecurity Book Review: Perlroth

Nicole Perlroth's "This is How They Tell Me the World Ends" is a very engaging and entertaining book of around 470 pages concerning cybersecurity.  Ms. Perlroth is a New York Times reporter who covers cybersecurity issues.  This book is a whirlwind tour of why we are where we are at with respect to cybersecurity--at least in part.  She points to the development of the market for zero day vulnerabilities and the participation in that market by the United States government as well as other governments.  The book is based on many interviews and she effectively ties them together to make a compelling story that reads very much like a fast moving Tom Clancy book.  She does not pull many punches and takes a few shots at various U.S. presidential administrations, including finishing up on the Trump administration.  It is selling well and one would hope may lead to some people taking cybersecurity a bit more seriously.  

U.S. National Security Commission on Artificial Intelligence Report: Patent Eligible Subject Matter Reform on the Horizon

The U.S. National Security Commission, chaired by Eric Schmidt, has released its final report, over 750 pages, titled, National Security Commission on Artificial Intelligence.  The Report outlines how the United States may be falling behind on certain artificial intelligence research, particularly compared to China.  The opening letter from the Chair states:

The AI competition is also a values competition. China’s domestic use of AI is a chilling precedent for anyone around the world who cherishes individual liberty. Its employment of AI as a tool of repression and surveillance—at home and, increasingly, abroad—is a powerful counterpoint to how we believe AI should be used. The AI future can be democratic, but we have learned enough about the power of technology to strengthen authoritarianism abroad and fuel extremism at home to know that we must not take for granted that future technology trends will reinforce rather than erode democracy. We must work with fellow democracies and the private sector to build privacy-protecting standards into AI technologies and advance democratic norms to guide AI uses so that democracies can responsibly use AI tools for national security purposes.

The Chair’s letter further provides numerous proposals for the United States, including White House level leadership, talent pipelines and chip manufacturing in the United States.  Surprisingly to me ,the Report only calls for a $40 billion investment initially in Artificial Intelligence research.  I wonder why the number is so low.  The Chair’s letter does note that they envision hundreds of billions of dollars of investment in the future.  Notably, the Executive Summary points to a significant issue with United States policy:

Implement comprehensive intellectual property (IP) policies and regimes. The United States must recognize IP policy as a national security priority critical for preserving America’s leadership in AI and emerging technologies. This is especially important in light of China’s efforts to leverage and exploit IP policies. The United States lacks the comprehensive IP policies it needs for the AI era and is hindered by legal uncertainties in current U.S. patent eligibility and patentability doctrine. The U.S. government needs a plan to reform IP policies and regimes in ways that are designed to further national security priorities.

Chapter 12 is dedicated to intellectual property policy.  Some hot button issues for reform include: patent eligible subject matter, IP protection for data and the standard essential patent process.  Trade secrets may not do the job--especially with weak cybersecurity.  The Report also notes: “Lastly, as further evidence that China views IP as essential in its domestic economic development, China continues to pervasively steal American IP-protected technological advances through varied means like cyber hacking of businesses and research institutes, technological espionage, blackmail, and illicit technology transfer.”  The report also points to the need for cybersecurity improvements.  

WIPO Intellectual Property Indicators Released

The World Intellectual Property Organization (WIPO) recently released its World Intellectual Property Indicators information for 2017.  Global intellectual property filings are at an all-time high with patent filings up 5.8% from the prior year.  Notably, patent filings in China have increased substantially both by Chinese citizens and foreign residents.  U.S. patent filers continue to lead globally.  Concerning patents, WIPO notes:

China’s IP office received the highest number of patent applications in 2017, a record total of 1.38 million. China in 2017 refined its method for compiling statistics for patents and industrial designs applications, counting only those for which application fees have been paid. China’s IP office was followed by the offices of the United States of America (U.S.; 606,956), Japan (318,479), the Republic of Korea (204,775) and the European Patent Office (EPO; 166,585).

The top five offices accounted for 84.5% of the world total. Among these offices, China (+14.2%) and the EPO (+4.5%) saw strong growth in filings, while Japan (+0.03%) and the U.S. (+0.2%) saw negligible growth. The Republic of Korea (-1.9%) received fewer applications in 2017 than in 2016.

Germany (67,712), India (46,582), the Russian Federation (36,883), Canada (35,022) and Australia (28,906) also featured among the top 10 offices. Australia (+1.8%), Canada (+0.8%) and India (+3.4%) saw growth in filings, while Germany (-0.3%) and the Russian Federation (-11.3%) experienced a decline in filings.

. . .

Asia going strong

Asia has strengthened its position as the region with the greatest activity in patent filings. Offices located in Asia received 65.1% of all applications filed worldwide in 2017 – a considerable increase from 49.7% in 2007 - primarily driven by growth in China.

Offices located in North America accounted for 20.3% of the 2017 world total – six percentage points below its 2007 share. Europe’s share declined from 18.1% in 2007 to 11.2% in 2017. The combined share of Africa, Latin America and the Caribbean, and Oceania was 3.4% in 2017.

Patenting activity beyond borders

In filing abroad, which is an indication of a desire to expand in new markets, U.S. residents continue to lead with 230,931 equivalent patent applications filed abroad in 2017. The U.S. was followed by Japan (200,370), Germany (102,890), the Republic of Korea (67,484) and China (60,310).

Among these five origins, China reported a 15% growth in filings abroad, which is far above that of Japan (+2.1%) and the U.S. (+2%). Both Germany (-0.6%) and the Republic of Korea (-4.1%) had fewer filings abroad in 2017 than in 2016.

Patents in force worldwide grew by 5.7% to reach 13.7 million in 2017. Around 2.98 million patents were in force in the U.S., while China (2.09 million) and Japan (2.01 million) each had around 2 million.

WIPO has also released data concerning trademarks, plant variety applications, industrial design and geographical indications, available here.  For the first time, WIPO has collected and released data on the creative economy:

Revenue generated by the three sectors (trade, educational and scientific, technical and medical) of the publishing industry of 11 countries amounted to USD 248 billion. China reported the largest net revenue (USD 202.4 billion), followed by the U.S. (USD 25.9 billion), Germany (USD 5.8 billion) and the U.K. (USD 4.7 billion)[3].

Digital editions generated 28.3% of the total trade sector revenue in China, 23.5% in Japan, 18.4% in Sweden, 13.2% in Finland and 12.9% in the U.S.

The U.S. sold 2,693 million copies of published titles in 2017, followed by the U.K. (647 million), Brazil (617 million) and France (430 million).

The Issue with China and the United States: What to do about the theft of industrial trade secrets?

The Washington Post Editorial Board recently published an opinion piece, titled “The U.S. must take action to stop Chinese industrial espionage,” which strongly condemns China’s alleged theft of trade secrets.  The Editorial Board pointed to the recent indictment concerning DRAM trade secrets allegedly stolen from Micron, a U.S. based company.  The piece notes that a worker from Micron joined a state-supported Chinese company along with other employees--carrying with them trade secrets.  The editorial ends with the statement that, “In the end, China will only respond to compulsion.”  This is a powerful indictment of China from one of the leading newspapers in the United States.  The editorial can be found, here.  

The question is what are the next steps to exercise “compulsion."  This situation is somewhat different than the Chinese government requiring the disclosure of trade secrets for essentially market access to China. Indeed, even for non-state owned Chinese companies, my understanding is that the Chinese government is involved in technology development even in early stages and exercises a veto power over the direction of technology development. Recently, the Chinese government announced a ban on all new computer games in China.  As I've mentioned in a prior post, this could be a case of rogue Chinese employees attempting to become wealthy who may not be acting with express approval of the Chinese government; although perhaps with tacit approval of the government or willful blindness of the government.  Of course, this ultimately is to the great benefit of China.  However, what is our response?  That is the very difficult question the editorial does not address.  We all know there is an issue.  

Moreover, the problem with trade secrets is that once they are disclosed it is very hard if not impossible to put them back in the box.  Once we've lost it; it's likely lost irrevocably.  And, I don't think putting a few people in prison is going to provide much general deterrence to similar behavior.  Will we start seizing assets--does it matter from whom?  That seems unlikely to be smart--our interests are so intertwined now.  As I've mentioned before, will we attempt to ban all Chinese citizens from working or studying in the United States?  Is that in the best interest of our country?  That may not stop the bleeding of information through cybertheft.  More tariffs?  Does that work?

University Endowment Size and Patenting

The National Association of Colleges and University Business Officers has released its report concerning U.S. University Endowment Size in 2016.  The top 10 in endowment size, include: 1) Harvard ($34,541,893,000); 2) Yale ($25,408,600,000); 3) University of Texas System ($24,203,213,000); 4) Stanford ($22,398,130,000); 5) Princeton ($22,152,580,000); 6) MIT ($13,181,515,000); 7) University of Pennsylvania ($10,715,364,000); 8) Texas A&M University System ($10,539,526,000); 9) University of Michigan ($9,743,461,000); and 10) Northwestern ($9,648,497,000).  I recently reported on top universities for patenting in the U.S. in 2016. The top 10 of the list includes: 1) The Regents of the University of California: 505 patents; 2) MIT: 278; 3) Stanford: 244; 4) Cal Tech: 201; 5) Tsinghua University/Graduate School at Shenzen: 181; 6) Wisconsin Alumni Research Foundation: 168; 7) John Hopkins: 167; 8) University of Texas: 162; 9) University of Michigan: 142; and 10) Columbia University: 118. There is some overlap on the list, including, MIT, Stanford, University of Texas and University of Michigan.  Interestingly, the endowment of Cal Tech is ranked at 39^th at $2,106,724,000 and the University of Wisconsin is at 23^rd at $2,419,161,000.  Additionally, universities in the University of California System have separate endowments which appear to be different from the overarching University of California endowment, which is 13^th in endowment size at $8,341,072,000. 

Did Motorola breach its good faith obligation to offer RAND licences to its patents in good faith?

IP Finance welcomes the following guest post from Kevin Winters on a recent US decision that has attracted a good deal of attention among IP strategists and investors. Here's the story:

Did Motorola breach its good faith obligation to offer RAND licences to its patents in good faith? 

This question was recently determined in Microsoft Corp. v Motorola, Inc (here) by the United States Court of Appeals for the Ninth Circuit.  In her judgement for the court Judge Berzon affirmed the judgment of the district court in favour of Microsoft that Motorola had breached its obligation to offer RAND licences to its patents in good faith.

The background

In late 2010 both Motorola and Microsoft sued in the U.S. International Trade Commission (ITC) and the Western District Court of Washington, alleging infringement of smartphone patents.  During this litigation the parties entered into discussions about a cross-licensing agreement that would grant Motorola licences to Microsoft’s smartphones in exchange for licences to any of Motorola’s patents Microsoft’s products may have been infringing. 

In late October Motorola provided Microsoft with letters offering to license two patent portfolios, 802.11 and H.264 HEP, at 2.25% of the price of the end product incorporating the patens, regardless of the manufacturer: Microsoft was to pay Motorola 2.25% of the sale price of an Xbox game console or of any computer using Microsoft Windows.  Both letters which were identical in material terms represented that the offer was in-keeping with Motorola’s reasonable and non-discriminatory (RAND) commitments.  After Microsoft received the letters it filed a diversity action in the Western District of Washington, alleging that Motorola had breached its RAND commitments to the IEEE and ITU.  It alleged that Motorola’s letters constituted a refusal to license Motorola’s standards-essential patents (SEPs) on RAND terms.  The next day Motorola filed suit against Microsoft in an attempt to enjoin Microsoft from using its H.264 patents.  The cases were consolidated in the Western District of Washington.

Motorola also filed patent-enforcement suits with the ITC, seeking an exclusion order against importing Microsoft’s Xbox products into the USA, and with a German court, seeking an injunction against sales of Microsoft’s H.264-compliant products.  To avoid the economic loss it would suffer if an injunction against the use of Motorola’s two German H.264 patents was granted – Microsoft’s European distribution centre for Windows and Xbox products was in Germany – Microsoft moved its distribution operations to the Netherlands.  It also obtained an anti-suit injunction barring Motorola enforcing any injunction it might obtain in a German court against Microsoft’s use of Motorola’s 1h.264 SEPs until the district court could decide whether an injunction was an appropriate remedy for Motorola to seek.  The Court of Appeals upheld the anti-suit injunction in 2012, while the German court ruled that Motorola was entitled to an injunction.

In the district court Microsoft altered its complaint to allege that Motorla’s filing of injunctive actions constituted a breach of contract, owing to the fact that the obligation to offer RAND licences to all seekers prohibited Motorola from seeking injunctive relief for violations of patents subject to that obligation.  In response the court granted a joint motion to stay all patent-infringement claims in the consolidated cases until the RAND issues were resolved.

The district court issued a range of orders that, among other things, recognised that RAND commitments create enforceable obligations between Motorola and the SSO concerned and that Microsoft – as a standard user – could enforce those contracts as third-party beneficiary.  It also issued orders that Motorola’s commitments to the ITU and IEEE required initial offers by Motorola to license its SEPs to be offered in good faith, but needn’t be on RAND terms provided a RAND licence is eventually issued.  Furthermore the court decided that Motorola was not entitled to an inunction on its H.264 or 802.11 patents.

In November 2012 the district court conducted a bench trial to determine a RAND rate and range for Motorola’s H.264 and 802.11 patents.  It concluded that the RAND royalty for Motorola’s H.264 portfolio was .555 per cent end-product unit, with an upper bound of 16.389 cents per unit, and the 802.11 portfolio was 3.71 cents per unit, with a range of .8 cents to 19.5 cents.

The case was then the subject of a jury trial on the breach of contract claim.  While Motorola objected, Microsoft introduced the RAND rate’s determined at bench trial, along with testimony that Motorola and its parent company, Google Inc, had previously been investigated for failing to licence patents relating to smartphones, tablets and videogame systems on RAND terms.  Microsoft sought damages in the form of attorneys’ fees, costs in defending the injunction actions that Motorola had raised and in relocating the distribution centre from Germany to the Netherlands.  

In September 2013 the jury returned a verdict in favour of Microsoft for the amount of $14.52 million.  The verdict form asked jurors the general question of whether Motorola “breached its contractual commitment[s]” to the IEEE and ITU and, the specific question, in determining damages, whether Motorola’s “conduct in seeking injunctive relief, apart from Motorola’s general course of conduct,  violated Motorola’s dut[ies] of good faith and fair dealing with respect to Motorola’s contractual commitment[s].”  The jury answered “yes” to all questions unanimously. 

Motorola sought judgement as a matter of law both at the close of evidence and at the close of Microsoft’s case-in-chief.  Having heard the jury’s verdict, the court denied Motorola’s motions concluding that (i) the evidence was enough for the jury reasonably to conclude that Motorola breached its duty of good faith and fair dealing by seeking injunctions against Microsoft, and (ii) the damages award was proper.  Microsoft’s motion for entry of final judgement on the breach of contract jury verdict was granted. 

Motorola appealed the judgement on the breach of contract claim to the Federal Circuit which, on Microsoft’s motion, transferred the appeal to the Court of Appeals for the Ninth Circuit.

The decision

After having dealt with claims that the Court of Appeals lacked the jurisdiction to hear the appeal, the court moved to consider the substantive challenges to the district court’s judgement:

1. The district court lacked the legal authority to decide the RAND rate issue in a bench trial, severing it from the ultimate breach of contract issue tried to the jury.

The Court of Appeals was not persuaded by this argument.  In its judgment the Court of Appeals pointed out that Motorola expressly consented to a bench trial on the RAND rate at a status conference on 14 June 2012.  During those proceedings, Motorola’s counsel was identified as having informed the court that “…the court [will] decide all the material terms of the RAND license.”  Despite Motorola’s counsel repeating this statement after Microsoft’s counsel confirmed the agreement, Motorola argued that its counsel’s statements were “taken out of context” and didn’t amount to consent.  Motorola’s counsel on appeal argued:

“We agreed that the court could set the terms of a [RAND] license.  The court later abandoned the quest to set the terms of the license…[H]e changed the basis on which he was finding the RAND rate.  He said , ‘I’m not going to set a license; I now think it’s necessary for the fact-finder to know the true RAND rate in order for us to decide breach.’  That is a change of litigation parameters.  We are no longer setting a license, which is all we conceivably could have agreed to.” 

The Court of Appeals was not persuaded of this version of events.  First it pointed out that there was no evidence that Motorola had been misled regarding the connection between the determination of the RAND rate and the breach of contract trial, nor did Motorola restrict its consent to licence-setting.  It was found that there were several instances prior to the status conference on 14 June 2012, where the parties were reminded that a resolution of the RAND rate would be used “as guidance” in deciding the breach of contract claim.  Secondly the court took the argument that Motorola only agreed to the determination of RAND for a court-created licence to be opposite to what it had argued before the district court. 

Based on this the Court of Appeals found no evidence that Motorola was ever unaware that the RAND determination would be used in order to facilitate a breach of contract trial.  Further it was not convinced that Motorola ever withdrew is willingness to engage in a bench trial to do so, and was satisfied that the district court had the authority to determine the RAND rate.

2. The district court’s legal analysis in determining the RAND rate was not in-keeping with Federal Circuit precedent.

It was the view of the Court of Appeal that the district court had not erred in its determination of the RAND rate.  Motorola argued that the district court had failed to observe US patent law under the Patent Act, 25 U.S.C 25 U.S.C. § 284, which provides that a court shall award damages “adequate to compensate for the infringement, but in no event less than a reasonable royalty rate for the use made of the invention by the infringer.”  Motorola also cited Federal Circuit jurisprudence where damages were calculated under that provision. 

The Court pointed out that the matter before it was not a patent law action, but conceded that the Federal Circuit’s approach to patent law was useful in contract cases involving issues of patent valuation.  Motorola’s challenge was on the district court’s interpretation of Georgia-Pacific Corp. v U.S. Plywood Corp (here) where a ‘hypothetical agreement framework’ for calculating infringement damages had been endorsed by the Federal Circuit.  Georgia-Pacific provided fifteen factors for the courts to consider in calculating the royalty rate that parties could have agreed on in a hypothetical negotiation.  Motorola argued that the district court failed to follow factor fifteen of Georgia-Pacific which guides courts to view the hypothetical negotiation at “the time the infringement began”.  The Court of Appeal acknowledged that certain components of the district court’s judgment had regard for the present day value of the patents.  However this was not sufficient for the Court to find the district court’s RAND calculation invalid given that, amongst other things:

1. There was no evidence that the Federal Circuit deemed the Georgia-Pacific factors as “…a talisman for royalty rate calculations.”  Furthermore the Court cited evidence that certain factors, including factor fifteen would need to be adapted in the context of RAND contracts.  The Court of Appeal agreed with the district court’s use of the present day value of the patent in determining the RAND rate-and-range for use in the breach of contract proceedings, considering that Motorola was breach of its obligations was ongoing;

2. Motorola did not specify the date that the district court was to employ in its calculations.  The Court of Appeals acknowledged that Georgia-Pacific  framework pointed to the date of a manufacturer’s unlicensed use of patented technology.  However the case before the court was one where the “infringement” was Motorola’s breach of contract and not Microsoft’s use of Motorola’s patents.  The court commented that Motorola’s suggesting that the date when it sent the offer letters, or the time before Microsoft began proceedings of the first patent infringement were of little use, as it did not mention either of them in presenting its hypothetical negotiation analysis to the court.  The court took the view that a jury could find a breach of contract either based on Motorola’s letters; its seeking various injunctions; or from its overall conduct; and

3. Motorola hadn’t shown – or argued – that it was prejudiced by the district court’s analysis.  The Court of Appeals described the job of the hypothetical agreement approach as being to “…take account of the situation of the parties and of the value each places on the patents in question.”  The court could find little that had changed in the parties’ positions since the dispute began.  Furthermore the district court acknowledged the fact that Google had acquired Motorola in 2012, and consideration was given to both Motorola’s and Google’s commercial interests in determining the benefits from inclusion in the patent pools – as part of its RAND-rate analysis.  Motorola was even shown, on arguments made by Microsoft, to have benefited from the courts treatment.

3. The district court gave too much consideration to the rates charged by two patents pools as indicators of the RAND rate, and too little of Motorola’s licences. 

The Court of Appeals took the view that the district court was not wrong in its approach to determining the RAND rate.  It agreed that there is authority that the royalties a patent owner enjoys in licensing agreements for patents can be useful in calculating a hypothetical royalty agreement.  However it was not convinced that the district court had acted erroneously in dismissing Motorola’s past licences as “…too contextually dissimilar” to be of use in determining the RAND rate:

1. Motorola’s licence with VTech communications was not probative of a RAND rate for the 802.11 and H.624 patents as they were licensed as part of a broader agreement for settling infringement claims Motorola held against VTech .  The licence was found to be a mechanism to avoid a potential infringement suit, resulting in Vtech paying ‘trivial’ royalties to VTech.  The Court of Appeals agreed with the district court that these licences were not reliable indicators of the RAND royalty rate;

2. Motorola’s Rim agreement for the 802.11 and H.624 patents included a royalty rate, but this was a “…blended rate for all the Motorola patents included in RIM products…”  The Court of Appeals pointed the impracticality of attempting to apportion the value of the two specific patents at issue; and

3. The licence agreements Motorola had with Symbol Technologies were not relevant.  The court pointed out that two agreements had been formed under the threat of litigation, whose licences would have expired before Motorola’s and Microsoft’s hypothetical agreement would have arose.  Further, the court pointed out that the third agreement concerned patents that expired prior to the end of October 2010 which required a total payment that was less than what Motorola would have obtained in pursuing a 2.25% royalty rate from Microsoft.      

4. The district court erred in denying Motorola’s motions for judgment as a matter of law on the breach of contract issue.

In considering the denial of a motion for judgement, the Court of Appeals reviewed the judgement afresh, but pointed out that it had to affirm where there was significant evidence to support a  verdict “…in favour of the non-moving party.” 

The Court of Appeals was of the view that there was substantial evidence on which the jury in the district court could have based a verdict in favouring Microsoft:

1. The jury in the district court was told that an injunction against Microsoft’s use of Motorola’s patents would have severe consequences as no customer would buy a smartphone lacking Wi-Fi, or a computer that could not play high-definition video;

2. The time that Motorola sought injunctions was also found to be demonstrative of bad faith.  The Court of Appeals agreed with the argument that because Motorola sought injunctions immediately following the expiry of the acceptance period provided in its letters to Microsoft, this was merely a prelude to a suit;

3. There was evidence that Motorola knew that by pursuing injunctive action it could breach its good faith and fair dealing obligations.  The court drew attention to the fact that Motorola had been investigated by the FTC, who found some of its activities to be questionable in respect of allowing an SEP holder to obtain an exclusion order against a license seeker as inconsistent with RAND commitments.

5. The district court erred in awarding Microsoft attorneys’ fees as damages in connection with Motorola’s pursuit of injunctions against infringement

Motorola argued that the Noerr-Pennington doctrine precluded the district court from awarding attorney’s fees and litigation costs to Microsoft, and that Washington law more generally prevented the recovery of attorney’s fees for defending a separate lawsuit as a component of damages. 

The Court of Appeals was not convinced on either front of Motorola’s argument.  In respect of the Noerr-Pennington doctrine, the court acknowledged that it shields individuals from liability for engaging in litigation.  However it pointed out that the doctrine does not protect parties from actions for a breach of contract.  Moreover the court highlighted the fact that, based on the ruling in Apple, Inc. v Motorola Mobility, Inc (here), the Noerr-Pennington doctrine does not protect a patent holder from liability for pursuing infringement actions that violate its promise to negotiate with a RAND-rate licence seeker.  It commented:

“Enforcing a contractual commitment to refrain from litigation does not violate the First Amendment; if it did, every settlement of a lawsuit would be unenforceable as a Noerr-Pennington violation.”

Turning to the recovery of attorney’s fees under Washington law, the Court of Appeals acknowledged that Washington courts only permit the recovery of attorney’s fees in limited circumstances.  However the court did point out that amongst other things, the fees at issue were incurred not in the breach of contract action, but in defending the action for injunction which was found to violate the RAND agreement.  The court added:

“As losses independent of the current litigation and triggered by the contract-breaching conduct, they are best characterised as recoverable consequential contract damages…”

6. The district court abused its discretion in two contested evidentiary rulings

In determining whether or not the district court abused its discretion in admitting evidence, the Court of Appeals had to be satisfied by Microsoft “that it [was] more probable than not that the jury would have reached the same verdict.” Motorola argued that the district court had abused its discretion in admitting findings from its RAND order, on the basis that those findings were not relevant, prejudicial and a violation of the Seventh Amendment right to a jury trial. 

The Court of Appeals was not convinced by Motorola’s reasoning.  It pointed out that Motorola had waived its right to a jury trial on the RAND determination: it did not qualify its involvement in the bench trial.  Furthermore the court was not persuaded by Motorola’s argument that the jury would determine the underlying facts of the bench trial:

“The parties agreed to a bench trial in order to spare the jury from becoming entangled in complicated technical minutiae…”

Motorola also argued that the decision of the district court to allow Microsoft to admit evidence of a settled investigation between the FTC and Motorola – which did not constitute an admission of a violation of the law – was wrong. Specifically Motorola pointed to Federal Evidence Rules 403 and 408.  The Court of Appeals acknowledged the exclusionary power of Rule 403 in respect of evidence “if its probative value is substantially outweighed by a danger of…unfair prejudice.”  However the court pointed out that the inclusion of the evidence regarding the FTC investigation while potentially prejudicial did not outweigh its probative value: it was admitted merely to demonstrate that Motorola was aware that the FTC and Microsoft found its actions questionable, not to evidence any conclusions the FTC made in respect of Motorola’s activities.  The Court of Appeals also pointed out that Motorola’s reliance of Federal Evidence Rule 408 is subject to exceptions, namely to demonstrate notice or knowledge. 

Alice in Valueland

There's been a lot of comment in the blogsphere over the past few days about the US Supreme Court decision in Alice Corp vs CLS Bank. It's not the purpose of this piece to review the points made by the justices. This has been done excellently over in the Scotus Blog by David Kappos, former Director of the US PTO, in his analysis here and over on the Patenlyo Blog here. The court's decision can be found here.

Given that many of the IP transactions over the past years have related to patents that might be broadly considered to be software patents, it's interesting to look at how this latest decision might affect valuation of intellectual property. As most commentators seem to have noted, the Supreme Court rejected clearly the opportunity to declare software unpatentable. The justices affirmed the revocation of Alice's patent, but they did so not on a basic principle that software is unpatentable. On the contrary, they repeated in essence their previous position set out in the Bilski case that abstract ideas are not patentable. The court repeated the test set out in Mayo in which they first looked at the elements of the claims to see whether these were directed to a patent-ineligible abstract idea and then whether the claims as written transformed the abstract idea into a patent-eligible invention. The court concluded that was not the case for Alice Corp's patent.

This is clearly good news for intellectual property holding companies. There was always a risk that the Supreme Court might chose to go further in rejecting the concept of software patents - and indeed some amicus curae briefs submitted to the court advocated that the court do exactly that. Any valuation of IP in the last few months has needed to take this uncertainty into account. The fact that the court chose not to do this - and indeed issued a decision which is entirely consistent with their previous positions - means that the validity of many patents relating to computer-implemented inventions has been confirmed. At least one risk factor can be eliminated. Indeed the impact of the decision is probably more wide-ranging since the court has concluded, at least implicitly, that a patent couched in software terms is no different from one that is implemented using traditional mechanics. There is nothing inherently different (or even "wrong") in claiming an invention that is implemented in software. This may even encourage more such patents to be filed.

One further factor that will also affect the valuation of the patent is the court's comments that the claims "did not purport to improve the functioning of the computer itself", nor "do they effect an improvement in any other technology or technical field". This language is consistent with the European Patent Office's standard rejections for computer-implemented inventions that are deemed not to meet the EPO's tests for patentability. We seem to be seeing a convergence in thinking on what constitutes an acceptable patent for a computer-implemented invention in the US and in Europe. Another uncertainty factor in valuing software patents is being eliminated. The debate probably is not yet over. No doubt the legislatures in Europe and in the United States will be called upon "to take action" and "defend our rights". That will require greater hurdles than persuading nine judges to declare a whole gamut of ip rights to be null and void.

Technorati Tags: US Supreme Court, Software Patents

Benchmarking of employee inventor awards and incentives:a survey is launched

Great invention-- but what does he receive
in addition to his basic salary ...?

According to a media release that it has just been published, "ipPerformance Group Initiates Inventor Rewards and Recognitions Study", a concerted attempt is being made to benchmark employee inventor benefits in the United States -- a jurisdiction that has no statutory schemes relating to the allocation of patent rights as between inventor and employer and no statutory guidelines relating to how much, in terms of money and non-financial benefits, an employee inventor might be entitled to receive. The media release reads as follows, in relevant part:

"ipPerformance ... announces a study on Inventor Rewards and Recognitions Program Best Practices. ipPerformance Group is conducting this study to better understand new trends and best practices in inventor reward and recognition programs. It will cover a range of topics, including financial and non-financial awards, program management and communications, award effectiveness, key objectives and performance metrics.

Information for the study will be gathered via an online survey, which is open to corporate organizations [it would be great if a parallel survey could be opened to employee inventors, as a reality check -- but this would be a very different type of survey, requiring a very different methodology, even if its findings did open up new opportunities to market one's consultancy skills in this field]. The final report will examine the following areas: which program elements have the greatest impact in increasing innovation ideas and patents; methods of managing and rewarding inventors in locations with inventor remuneration laws; and the drivers, impediments, benefits and trends in inventor rewards and recognition programs. The survey ... takes about 25 minutes to complete. Says Robert Williamson, president of ipPerformance Group:

"... We know from previous ipPerformance Group benchmark studies, and from our own extensive experience with implementing effective inventor reward programs, that global inventor reward programs are evolving [given that some countries in which US corporations operate and do R&D have compulsory statutory schemes, it would be good to know what "global" means in this contect]. The major reasons for incentivizing inventors are to maintain inventor interest, increase volume of invention disclosures, and gain better cooperation and responsiveness to patent questions. The aim of this study is to gain insights on which rewards are working well for businesses, where there is room for improvement, methods for handling inventor remunerations in countries that have inventor remuneration laws and what practices are the most effective in improving the impact of incentive programs."

The study investigates the types of recognition and actual financial amounts being used for invention disclosure, initial patent filings, patent grants, design patents, trade secrets, publications, provisional patent applications and licensed-in technology".

The results of this study should be of interest not only to business employing inventors, but to other businesses that might be contemplating a merger or acquisition and which need to get a clear handle on the target company's assets and liabilities, whether because inventor pay-outs might be a deal-breaker or because they need to know how much to borrow to complete the transaction.

To participate in the study, click here. The study closes on 15 July 2014.

What Kind of Damages Does an NPE Deserve?

With all of the media attention that has been given the $1.05 billion dollar verdict in the Apple suit against Samsung, it is a bit surprising that there has been relatively less coverage of the $1.17 billion dollar verdict given on December 26, 2012 in favour of Carnegie-Mellon University (CMU) in its patent infringement action against Marvell Technology Group. The jury verdict, if it stands (and not surprisingly Marvell has sought to overturn it), ranks as one of the largest such awards ever given.

The case is now back in the headlines, following the court filing made by CMU this week, requesting that the court award it up to three times the jury award (so-called treble damages) on the ground that Marvell was a willful infringer of the CMU patents here. Under U.S. law, a court may make an award of three times the amount of damages for infringement in such circumstances. Also, CMU is seeking $321 million in pre-judgment interest. The patents in question were issued in 2001 and 2002 and the case was filed only in 2009. The claim is that Marvell, a major chip maker, has sold without CMU's permission billion of chips that incorporate the patented technology.

The court award and CMU's most recent court filing raise once again several related questions in connection with the current state of patent litigation in the U.S. The first is how to calculate damages when the plaintiff is a non-practising entity (NPE). While few would call CMU a patent troll per se, it being a major university engaged in high level research and teaching, the fact remains that CMU is not primarily in the business of creating technology for purposes of tech transfer and commercialization. True, the school seeks commercial opportunities for such transfer and commercialization, but this is certainly ancillary to its educational function. Moreover, whatever the place of such commercial activities within CMU, they do not include manufacture of products made under the university's patents. And so the question—should a special standard be applied for assessing damages be applied when the plaintiff is an NPE of the CMU type?

Second, what should we make of CMU's request for treble damages? Even for a PE-type of plaintiff, the issue of treble damages raises policy issues. In particular, does an award of treble damages provide any realistic deterrent against "willful infringement"? After all, the award is made from one private party to another. In a sense, the private party plaintiff is awarded a windfall in the name of the public interest in future deterrence of patent infringement. Unless there is some good evidence that deterrence does in fact take place, the argument for treble damages seems flimsy. This is especially so, given the sometimes legal hyper-technical nature of what constitutes willful infringement.

A fortiori, should an award of treble damages to an NPE of the CMU type ever be justified? True, as a private university, CMU can use every dollar that it can in maintaining the university (who can't). Still, do we really want CMU (or indeed any NPE) fully engaged in the same manner as Apple and Samsung over the issue of treble damages?

Geography Matters for Funding of the Creation of IP? The Most Inventive States and the Most Entrepreneurial States.

The University of Nebraska-Lincoln Bureau of Business Research has published the 2011 rankings (here and here) for the most inventive states in the United States as well as rankings for the most entrepreneurial states. CNN recently reported on the inventiveness rankings (here) and the CNN article includes some interesting information about the drivers of patenting in each state.

The most inventive states are ranked by number of patents per thousand people. The leading state? Not California, but Vermont—the home of a large IBM plant as well as the University of Vermont. Vermont has a whopping 3.51 patents per thousand people. Vermont also likely benefits from its proximity to Massachusetts, the 2^nd ranked state, which is home to Harvard University and MIT. Other highly ranked states close to Massachusetts include New Hampshire (8^th) and Connecticut (9^th). Delaware (10^th) is home to DuPont. California, the home of Stanford, Cal Tech and the University of California system, is 3^rdand the nearby top ten states include Washington (5^th) and Oregon (7^th). Notably, Washington boasts the patentee Microsoft. The states that are perhaps not as close to Massachusetts and California that rank in the top 10 are Minnesota (4^th) and Idaho (6^th). Minnesota hosts 3M and Idaho is home to Micron Technology. States that have well known technology sectors that are not in the top 10 are Texas (21^st) and North Carolina (22^nd). The states at the bottom are Alaska (50^th), Mississippi (49^th) and West Virginia (48^th).

The State Entrepreneurship Index ranks states by the following factors: “Percent growth in employer establishments; Percent growth in employer establishments per person; Business formation rate (i.e, establishment births per person); Patents per thousand persons; Average income per non-farm proprietor.” The top ten entrepreneurship states are: 1. Massachusetts; 2. North Dakota; 3. California; 4. New York; 5. Minnesota; 6. Oregon; 7. New Jersey; 8. Texas; 9. Illinois; 10. New Hampshire. The states at the bottom are Louisiana (50^th), Michigan (49^th) and South Carolina (48^th).

IP in the economy: how many jobs does it support?

The United States Patent and Trademark Office recently issued a report, Intellectual Property and the U.S. Economy: Industries in Focus, by Peggy Garvin. According to the press release which accompanied its launch, the report:

"... finds that intellectual property (IP)-intensive industries support at least 40 million jobs and contribute more than $5 trillion dollars to, or 34.8 percent of, U.S. gross domestic product (GDP). 

While IP is used in virtually every segment of the U.S. economy, the report identifies the 75 industries that use patent, copyright, or trademark protections most extensively. These “IP-intensive industries” are the source – directly or indirectly – of 40 million jobs. That’s more than a quarter of all the jobs in this country. Some of the most IP-intensive industries include: Computer and peripheral equipment, audio and video equipment manufacturing, newspaper and book publishers, Pharmaceutical and medicines, Semiconductor and other electronic components, and the Medical equipment space".

I always have some reservations about exercises, since the are always going to be problems in measurement.  In the first place, if IP is construed in wide enough terms, there's scarcely a business of any size that isn't supported by it. Lists of customers and suppliers, licensed software, business and trading names are pretty well ubiquitous. There's also the question of causation: how many of the jobs in question are specifically related to the existence of IP, how many to the provision of a service or the supply of goods that would have generated employment even if it had been generic and devoid of IP protection?

You can access the full (62-page) report here.

Thanks are due to Chris Torrero for the link.

Private and Social Costs of Patent Trolls

Patent Troll T-shirts are
available here

Thanks go to Chris Torrero for spotting, via beSpacific, "The Private and Social Costs of Patent Trolls", a research paper by James E. Bessen, Michael J. Meurer and Jennifer Laurissa Ford (September 19, 2011). Boston University School of Law, Law and Economics Research Paper No. 11-45.  According to the abstract:

"In the past, non-practicing entities (NPEs) - firms that license patents without producing goods - have facilitated technology markets and increased rents for small inventors. Is this also true for today’s NPEs? Or are they “patent trolls” who opportunistically litigate over software patents with unpredictable boundaries? Using stock market event studies around patent lawsuit filings, we find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010, mostly from technology companies. Moreover, very little of this loss represents a transfer to small inventors. Instead, it implies reduced innovation incentives".

This 33-page paper can be accessed via SSRN here.

The paper appears well-researched and is quite persuasive -- but this blogger is not economically gifted and he wonders how it appears to other economists.  Also, he wonders why all the debate, and apparently all the numbers-based research, seems to be related to the United States. How does the troll model which is used here fare when measured against, for example, European patent litigation patterns? Can anyone help? This blog is happy to host reviews and comments on this paper.

Adieu 25% rule? At least in US litigation

Licensing and litigation experts are well acquainted with the 25% rule for calculating a reasonably royalty which a licensee might be prepared to pay to the patent proprietor when licensing a patent. The rule has had a long genesis and was apparently originally formulated by Robert Goldscheider's analysis of patent licensing rates made by a Swiss subsidiary of a US company to around 18 companies licensees throughout the world ("Use of the 25% rule in valuing IP", 37 les Nouvelles 123, 123 December 2002). A number of other empirical studies have appeared to confirm the general applicability of the rule - and many licensing executives use the rule when establishing their baseline for negotiations.

The underlying assumption is that a licensee should maintain a majority - say 75% - of the profits of a patented product because the licensee has undertaken substantial development, operational and commercialisation risks. The other 25% should go to the patent holder as a licence fee. The 25% rule can be used for calculating a reasonable, running royalty rate by first of all estimating the licensee's profits for the product incorporating the patent and then dividing the total profit by the total cost of sales. This gives a profit rate - of which 25% is the running royalty rate. This rate is then applied going forward for licensing deals - or backwards for calculating damages in litigation

The Court of Appeals for the Federal Circuit (CAFC) - the Appeals court in US patent cases - looked into the validity of the rule in a case Uniloc v Microsoft Corp. and concluded that the rule was - for the purposes of the calculation of damages in litigation - fundamentally flawed. The CAFC noted that the court (and lower courts) had accepted the rule in the past because it had never been effectively challenged. The CAFC noted that there had been a number of criticisms of the rule over the years:

• The rule failed to take into account the unique relationship between a patent and an accused (allegedly infringing) product
  
  
• The rule failed to take into account the unique relationship between the parties in the litigation
  
  
• The rule was essentially arbitrary

The CAFC pointed out that patent proprietor has to prove the level of damages and that any arguments regarding the level of damages must be tied to the facts of the case. Citing a whole raft of case law, the CAFC concluded that the 25% rule of thumb was an abstract and theoretical concept. The 25% rule failed to provide any basis for the hypothetical negotiation between the two parties regarding the level of the royalty or offer any evidence regarding usual royalty rates for a particular technology, industry or party. In other words - the CAFC was not prepared to accept a royalty rate which it considered purely arbitrary and wanted to see comparative figures produced.

The implications for litigation are tremendous. Calculation of damages will rely on the ability to produce comparable figures from other sources - such as stock exchange filings or the annual LES royalty surveys. Licensing executives may not need to be so worried. The concept of the reasonable royalty based on a negotiation between parties is generally one that is practiced in reality. The 25% rule is often used as a starting point for the negotiation and is just one data point. Other data points include similar licensing agreements made with other companies and also publicly available data from sources such as SEC filings. It is unlikely that a court would attempt to change royalty rates in an agreement made entered into freely by two parties, merely because the royalty rate calculation was based on the (unapproved) 25% rule. Only in the unlikely event that one of the parties was put under duress to accept the royalty rate based on the 25% rule would a court be likely to overrule the calculation.

Copy of Goldscheider's article is available here.

Description of Route 25 here

Technorati Tags:
Royalty, Microsoft, Uniloc

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.

$20 million award to Versace: any details?

News broke last week of a damages award of $US20 million to Italian fashion house Versace by a court in Los Angeles in a vast counterfeiting and trade mark case in the United States.

According to Versace, investigators moved in on 72 retail stores in southern California and Arizona in 2003 and charged 110 people with selling counterfeit goods bearing brand names owned by the company. The company said the compensation was "the highest ever obtained by an Italian company in a case brought abroad in defence of their brand name".

I've received emails asking me if I know any more about this case and about the make-up of the huge cash award (which I don't). Do any readers have anything to add, since all the news items on the internet seem to be based on the same press release.

Fair use generated $4.7 trillion in 2007, says "imprecise" CCIA study

Thank you Jeanine Rizzo (Fenech & Fenech Advocates) for drawing our attention to an Ars Technica article, "Fair use" generates trillions in the US alone", which discusses the quantification in dollar-and-cent terms of the value of the fair use exception to copyright infringement to the US economy. According to this article,

"... Fair use and other limitations on copyright themselves generate significant economic activity—$4.7 trillion in 2007.

The Computer and Communications Industry Association (CCIA), which counts Google and Microsoft among its members, today rolled out a report (PDF) on the value of fair use, one that tries to answer the question: "What contribution is made to our economy by industries that depend on the limitations to copyright protection when engaged in commerce?"

The method is similar to that used in several prominent piracy studies; in this case, the "fair use" industries are divided into "core" and "non-core" companies, depending on how important fair use is to their very existence. Economic activity and payroll numbers can then be crunched from this data, offering a rebuttal to any view of fair use that sees it as a mere afterthought in copyright law, one good for protecting YouTube parodies but not much more.

The CCIA report's numbers are staggering. The "fair use economy" accounted for 23 percent of all US real economic growth between 2002 and 2007. Fair use industries (core and non-core combined) generated $4.7 trillion in 2007. And "about one out of every eight workers in the United States is employed in an industry that benefits from the protection afforded by fair use. ..."

While it is conceded that analyses of this nature are "notoriously imprecise, in some cases amounting to little more than guesswork", the article suggests that the evidence-based approach offers a "useful corrective to simplistic views" on strengthening IP law.

IRS to take a closer look at US university income

Via Tech Transfer E-News comes news that the Internal Revenue Service (IRS) in the United States is to pay increased attention to the tax status of revenue-generating activities of universities -- including income from their IP licences. It appears that

"... the U.S. Internal Revenue Service is putting universities on notice that it is going to put their finances under a magnifying glass to root out any practices or revenue-generating activities that run afoul of the institutions’ tax-exempt status.

... the first step in this process is a lengthy compliance questionnaire in which about 400 universities are being asked by the IRS to answer questions related to such financial matters as executive compensation, endowments, student demographics, and handling of “unrelated business income.”

... most experts agree the questionnaire [available here] provides an opportunity to preview the IRS’s biggest concerns and clean up any sloppy accounting practices any full-scale audits begin. ... many experts are recommending that TTOs and their parent organizations work with in-house counsel to answer the questions even if they have not received them from the feds.

... Of particular interest to TTOs are questions about unrelated business income (UBI)”.

A detailed article on the IRS questionnaire, its implications for TTOs, and guidance on preparing for further scrutiny appears in the January issue of Technology Transfer Tactics.

Effect of merger on IP licensees in the US: where state law can't be ignored

In "License to merge: special precautions may be required to preserve IP licensing rights", Cozen O’Connor lawyers Scott B.Schwartz and Justin B.Wineburgh write:

"Despite a long history of case law relating to mergers, one area remains unclear, especially in the entertainment industry: the effect of mergers on intellectual property (“IP”) licensing agreements. Recent case law contributes to this uncertainty and suggests that certain precautions may be necessary to preserve valuable IP licensing rights".

As usual -- and it seems remarkable that this warning should still need to be given -- the reader is reminded of the need for foresight [ie why not think about the risks/benefits of possible mergers before the licence is signed?] and vigilance [ie keep an eye on what goes on after the licence is signed]. The authors then focus on an annoying problem for those of us who like our licence provisions cut-and-dried, or at least predictable in terms of their outcome and effect. They explain:

"... the practice of having contracts transfer as a matter of law, even if prohibited by the express terms of the contracts without consent, may no longer be reliable in the context of transferring IP content and licenses.

While the impact of a merger on the assets of the parties to the merger is governed by state law, IP licenses are also governed by a body of statutory and judicial federal law. More recent case law points to a trend of IP law starting to impact how traditional state merger laws treat IP rights as different than that of other assets. However, the trend is neither uniform nor consistent".

In one 2004 decision-- Evolution, Inc. v Prime Rate Premium Finance Corp., Inc., 2004 U.S. Dist. LEXIS 25017 (D. Kan. 2004) -- a court has concluded that “whether a merger effectuates an automatic assignment or transfer of license rights is a matter of state law.” But other recent federal court decisions have held that the licensing agreement, rather than the applicable state merger statute, determines whether the licence can be transferred to the surviving company without the consent of the licensor. Thus unless the licence agreement clearly permits assignment of the IP rights without the licensor's consent, that licensor may well be able to challenge the right of a surviving company in a merger to operate as the licensee -- even though state merger law transfers all the rights under the licence as a matter of law.

Reading this article, I found myself wondering about the extent to which a prudent licensee -- or anyone seeking to buy his business -- should make an effort to obtain advice concerning the operation of state law as well as federal law, factoring this advice into the structuring of its business transactions.

Franchisee bankruptcy in the US

Owners of trade marks and other IP rights relating to business format franchise operations in the United States may find "Franchise Agreements in Bankruptcy: Fiasco or Fortuity" interesting. It was published on the website of law firm Baker, Donelson, Bearman, Caldwell & Berkowitz, PC earlier this month. This article focuses on the effects of bankruptcy on the franchisee and on the consequences of the IP-owning franchisor either allowing the franchise to remain in place or letting it go. It examines the concept of the "whole agreement" and gives as an example the position of a franchise contract where the same parties have also entered into a separate software licence:

"The determination of what constitutes a single executory contract or several separate ones will be governed by applicable state law, though the bankruptcy court will decide the issue. For example, where a franchisee enters into a franchise agreement and in conjunction therewith also enters into a software license agreement at the same time, those two documents, even though signed separately, will likely be deemed a single executory contract such that the debtor must assume both or reject both".

In terms of claims on the assets of the franchisee, the article states:

"If a franchise agreement is not expressly assumed, it is deemed rejected, and the franchisor has a general unsecured claim against the estate for damages. The Bankruptcy Code provides that the rejection constitutes a breach of the contract which is deemed to have occurred immediately before the filing of the petition. By rejecting the agreement, the trustee or debtor forgoes the benefits of performance by the other party but avoids the burden of performance by the estate. While the charges which accrued after the case was filed are in this context part of the prepetition claim, to the extent that the contract benefited the estate after the case was filed, a claim can also be made for payment of the charges incurred during the case as an administrative expense to be paid in full and on a higher priority than payments to general unsecured creditors".