‘Different Sectoral Contexts’ approach is vital for IAM

… noted Jeremy in the last post to IP Finance. SMEs in the automotive sector may be interested in a recently completed study which maps the IP business models behind ten cases of US patent, trade secret and trade mark litigation brought by the most prolific US patent applicants in the field of braking technology. The study’s author runs the Engineering Intellectual Property Research Unit at Cranfield University’s School of Engineering.

The study shows that the predominant IP monetisation mechanism in the field of braking is that of “monopoly provision”, i.e. using IP to exclude competing suppliers. There is only one instance of a patent licensing relationship, that being with a company already related to the patentee, suggesting that SME developers of braking technology may struggle to license into prolific US patent applicant companies.

As regards the IP mix that such SME developers might employ, the study confirms that trade secret protection is not used above raw material / component-level manufacture. It also illustrates the risk of third party patent infringement associated with trade secret protection.

The greatest threat of infringement litigation appears to come from competitors at a similar level on the value chain, the study also showing that neither the small size of an SME nor the large size of a company’s patent portfolio can guarantee immunity from suit.

Consumable IP

Some OEMs derive a significant proportion of their profits from the sale of consumables (a recent article in The Times recalled the 2002 assertion by the Consumers Association that the ink in Hewlett-Packard’s printers “was more expensive, per millilitre, than Dom Perignon champagne”). Others make no attempt to prevent aftermarket suppliers, instead making their profit on the sale of original equipment.

Now there would appear to be a third way: in the field of aircraft brakes, Nasco has announced an “innovative alternative” approach to providing [corporate] customers with new brake designs involving a fixed-price design, development and production contract that includes re-procurement data rights. Such data are believed to include manufacturing drawings and material specifications.

According to Nasco’s website, “customers pay the development costs up front but reap the long-term benefits of lower cost spare parts through competitive sourcing.” Contrast this with the use of trade secrets in manufacturing drawings and material specifications to exclude competitors as previously reported here.

Life's good for BMW and Audi in Korea?

As recently reported e.g. in the Guardian, Korean electronics company LG has sued German car companies BMW and Audi for importation into Korea of cars incorporating LED lights that allegedly infringe LG's patents.

The LED lights in question are made by Osram, which itself is reported to have sued LG and Samsung in the Korean courts for infringement of patents relating to the technology used to make white LEDs.

It would be interesting to know the commercial logic behind LG’s move: although BMW is the most popular imported car brand in Korea, the Guardian article notes that imported cars account for less than 10 percent of the Korean market. Moreover, the 16,579 BMW cars reported as being sold in Korea in the first eight months of this year are a small fraction of the 1,021,927 sales reported on the BMW website for a similar period.

Balancing this is the significantly lower cost to LG of litigating on their home turf. The Korean litigation would also appear to have generated publicity that has reached far beyond Korea’s borders. Is this publicity a signal of LG's willingness to litigate in more significant markets if a settlement is not reached?

Green auto IP in joint venture

EVO Electric, a spin-out from Imperial College London previously referred to here and here, has recently set up a joint venture company with GKN Driveline, the world’s leading supplier of automotive driveline components.

Press releases suggest that EVO has licensed its IP to the joint venture company while GKN has contributed financing, engineering and commercial resources. The new company aims to capture a share of the rapidly growing market for hybrid and electric vehicle systems and, in the words of EVO CEO David Latimer, “will be pivotal in establishing EVO as a key player in the fast-growing global market for electric drive components”.

It will be interesting to see how much value EVO realises through this joint venture manufacturing business model. Company documentation suggests that EVO could simply sell its share in the joint venture company to GKN at some point in the future: EVO has already sold 25% of its own shares to GKN as part of the deal, GKN indicating the total value of its investment at closing to be £5 million consideration in cash.

Coca Cola and Air Brakes

The recipe for Coca Cola has famously been kept confidential since its initial formulation in 1886. An example of the long-term value of confidential information in engineering comes from a recent dispute between Faiveley and Wabtec in the field of air brakes for trains on the New York subway.

In the 1970s, Swedish company SAB Wabco developed a brake system for trains and, nearly two decades later in 1993, granted a licence to its US sister company, Wabco, to use its patents and confidential manufacturing drawings to supply brake systems for trains on the New York subway.

Ten years later, SAB Wabco was acquired by French company Faiveley which decided not to renew the licence with Wabco (since renamed “Wabtec”) but which instead sought to have itself substituted for Wabtec in a contract with the New York City Transit Authority for overhaul of subway trains.

When the Transit Authority refused to transfer the contract, Faiveley launched a legal action in the US courts, alleging that Wabtec was continuing to (mis)use the confidential manufacturing drawings provided under the now terminated licence. Faiveley sought an injunction preventing Wabtec from using the drawings in the overhaul contract together with financial compensation.

On 29th July this year, nearly forty years after the brake system was first conceived and long after the expiry of any patents, Faiveley were awarded damages of nearly $20 million.

As an aside, this matter previously went to appeal in 2008 where it inspired one of the judges to note in his decision that:

To the parties in this case, subway brakes are known as “Brake Friction Cylinder Tread Break Units” (“BFC TBU”). For the rest of us, BFC TBU are “that loud squeaking, sparking braking system that so reliably stops the New York City Transit subway system.” ... Twenty-four hours a day and 365 days a year, the City’s subway cars safely stop at 468 passenger stations—and, as any straphanger knows, many times in between—depositing riders of all classes and descriptions at homes, workplaces, ballparks, and every other destination imaginable. See generally MacWade v. Kelly, 460 F.3d 260, 264 (2d Cir. 2006) (“The New York City subway system … is an icon of the City’s culture and history, an engine of its colossal economy, a subterranean repository of its art and music, and, most often, the place where millions of diverse New Yorkers and visitors stand elbow to elbow as they traverse the metropolis.”). The subway is an indelible feature of the City’s culture. Its legend and lore fascinate locals and visitors alike. See, e.g., Carrie Melago, It’s the Rail Thing: Subway Ride Record is Official, N.Y. Daily News, Aug. 8, 2007, at 24 (reporting that six alumni of Regis High School set a new world record for stopping at all 468 stations on a single fare: 24 hours, 54 minutes, and 3 seconds). A point of personal pride for many New Yorkers, the City’s subterranean transit has appeared in song, on stage and screen. See, e.g., Leonard Bernstein, et al., “New York, New York,” from On the Town (“New York, New York—a helluva town, / The Bronx is up but the Battery’s down, / And the people ride in a hole in the ground; / New York, New York—It’s a helluva town[!]”), as quoted in The Oxford Dictionary of Humorous Quotations 329 (Ned Sherrin, ed., 1995) (attributed to Betty Comden and Adolph Green, lyricists). The subway’s rhythm and sound have also rumbled into the canon of American literature. See, e.g., Tom Wolfe, The Bonfire of the Vanities 36 (Farrar Straus Giroux 1998) (1987) (“On the subway, the D train, heading for the Bronx, Kramer stood in the aisle holding on to a stainless-steel pole while the car bucked and lurched and screamed.”). Moving forward, our next stop is the trade secret dispute concerning the distinctive brakes used by the New York City subway system.

Licensee buys Licensor in advance of IPO

New Year’s Day finally saw the acquisition of Smith Electric Vehicles UK by its US counterpart and licensee, Smith Electric Vehicles US (SEVUS). Founded in the 1920’s, Smith UK is the world’s largest manufacturer of commercial electric vehicles, producing the world’s largest battery powered truck, the Newton.

The acquisition offer was originally made in March 2010, a press release explaining that “the transaction includes the purchase of all of the Smith US common stock currently held by Tanfield (Smith UK’s parent company), as well as the License Agreement by and between Tanfield and Smith US, and the intellectual property necessary to allow the combined businesses to operate globally.” According to the FT, SEVUS was offering £37m plus a £33.3 m stake in the enlarged company if it was able to float before September 2015.

However, by the time Heads of Terms were signed in August 2010, a press release indicated that Tanfield “expected to retain a significant interest in the combined entity and share in its future growth and opportunity”, noting that “SEVUS's plans include a possible public offering of its equity securities on the US NASDAQ exchange, which could be as early as the first half of 2011.” According to GigaOM, quoting SEVUS CEO Bryan Hansel, “the revised agreement calls for Smith U.S. to buy an agreement under which Tanfield licenses its electric vehicle technology to Smith for a 1-percent-per-vehicle royalty fee, as well as all the assets of SEV UK and the intellectual property necessary to allow the combined businesses to operate globally.”

The final deal, according to a December press release, gives Tanfield $15m, split into twenty monthly payments, and a 49% holding in the enlarged SEVUS business. Thus Tanfield would appear to have sacrificed jam today in expectation of much more jam on the floatation of SEVUS in 2011. But are the stock markets ready for another Electric Vehicle IPO? GigaOM notes the successful IPO by Tesla Motors in 2010 but observes that:

“aside from their shared focus on electric vehicles, Smith US and Tesla could hardly be more different. Tesla has its carefully crafted high-profile, glitzy brand, consisting of luxury vehicles priced for a sliver of wealthy consumers (although lower-priced models are set to launch in the coming years). Smith U.S., on the other hand, has kept a low profile building electric trucks for unglamorous commercial fleets.”

It will be interesting to see how the markets decide.

IP and Business Growth

In 1999, the London-based Equity Research Unit of investment bank Credit Suisse First Boston issued a report entitled “Technology Licensing – Intellectual Property Rights and Wrongs”. The report considered the prospects for long-term growth of five small IP licensing companies listed on the London Stock Exchange.

A recent working paper from the Engineering Intellectual Property Research Unit at Cranfield University considers the progress of one of the companies, Xaar plc, in the ten years since the report was written. Using information from public annual reports, the paper investigates the extent to which IP has contributed to Xaar's income and the significance of other, non-IP factors (see Neil Wilkof’s recent post in this regard).

A full copy of the paper is available here.

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.