IPOs in the United States Drop

According to Ernst & Young and PwC, the number of IPOs and their value in the United States have dropped significantly from the similar time period from the prior year.  Interestingly, PwC notes that China's numbers of IPOs has remained relatively strong.  Cal Matters and others report that California's number of IPOs is very weak compared to the last year.  As pointed out by commentators, it seems to make sense to wait and see in this market--if you are able.  Notably, if IPOs as an exit strategy dry up, it makes acquisitions a much more important alternative.  It will be interesting to see the direction regulators in the United States take toward acquisitions--particularly in the tech space.  

Senator Tillis' New Proposed Patent Eligible Subject Matter Legislation

Senator Thom Tillis has been busy.  He has proposed a new act to clarify patent eligibility doctrine in the United States.  This is definitely a relatively broad vision of patent eligibility.  Some work on the pricing side of pharmaceuticals/biologics would be helpful if this gets passed.  I am wondering if this may get tacked on to another piece of legislation—the timing is interesting.  The Press Release states:

U.S. Senator Thom Tillis (R-NC) introduced the Patent Eligibility Restoration Act of 2022, legislation that will restore patent eligibility to important inventions across many fields, while also resolving legitimate concerns over the patenting of mere ideas, the mere discovery of what already exists in nature, and social and cultural content that everyone agrees is beyond the scope of the patent system. This bill affirms the basic principle that the patent system is central to promoting technology-based innovation. 

“I have long said that clear, strong, and predictable patent rights are imperative to enable investments in the broad array of innovative technologies that are critical to the economic and global competitiveness of the United States, and to its national security,” said Senator Tillis. “Unfortunately, our current Supreme Court’s patent eligibility jurisprudence is undermining American innovation and allowing foreign adversaries like China to overtake us in key technology innovations. This legislation, which is the product of almost four years of consensus driven stakeholder conversations from all interested parties, maintains the existing statutory categories of eligible subject matter, which have worked well for over two centuries, and addresses concerns regarding inappropriate eligibility constraints by enumerating a specific but extensive list of excluded subject matter. I look forward to continuing to work with all interested stakeholders on this important matter. Passing patent eligibility reform remains one of my top legislative priorities during my second term.”

Background:

Unfortunately, due to a series of Supreme Court decisions, patent eligibility law in the United States has become confused, constricted, and unclear in recent years. This has led to inconsistent case decisions, uncertainty in innovation and investment communities, and unpredictable business outcomes. This has resulted in a wide range of well-documented negative impacts.

As of 2021, all 12 judges of the United States Court of Appeals for the Federal Circuit have lamented the state of the law. Witnesses and stakeholders from a wide array of industries, fields, interest groups, and academia have testified and submitted comments confirming the uncertainty and detailing the detrimental effects of patent eligibility confusion in the United States. And there is now widespread bipartisan agreement in Congress and across all recent Administrations that reforms are necessary to restore the United States to a position of global strength and leadership in key areas of technology and innovation, such as medical diagnostics, biotechnology, personalized medicine, artificial intelligence, 5G, and blockchain.

The proposed legislation states, in part:

SEC. 2. PATENT ELIGIBILITY. (a) IN GENERAL.—Chapter 10 of title 35, United 8 States Code, is amended— (1) in section 100— (A) in subsection (b), by striking ‘‘includes a new use of a known process’’ and inserting ‘‘includes a use, application, or method of manufacture of a known or naturally-occurring process’’; and (B) by adding at the end the following: ‘‘(k) The term ‘useful’ means, with respect to an invention or discovery, that the invention or discovery has a specific and practical utility from the perspective of a person of ordinary skill in the art to which the invention or discovery pertains.’’;

and (2) by amending section 101 to read as follows: ‘‘§ 101. Patent eligibility ‘‘(a) IN GENERAL.—Whoever invents or discovers any useful process, machine, manufacture, or composition of matter, or any useful improvement thereof, may obtain a patent therefor, subject only to the exclusions in sub section (b) and to the further conditions and requirements of this title.

‘‘(b) ELIGIBILITY EXCLUSIONS.— ‘‘(1) IN GENERAL.—Subject to paragraph (2), a person may not obtain a patent for any of the following, if claimed as such: ‘‘(A) A mathematical formula, apart from a useful invention or discovery. ‘‘(B) A process that— ‘‘(i) is a non-technological economic, financial, business, social, cultural, or artistic process; ‘‘(ii) is a mental process performed solely in the human mind; or ‘‘(iii) occurs in nature wholly independent of, and prior to, any human activity. ‘‘(C) An unmodified human gene, as that gene exists in the human body. ‘‘(D) An unmodified natural material, as that material exists in nature.  ‘‘(2) CONDITIONS.— ‘‘(A) CERTAIN PROCESSES.—Notwithstanding paragraph (1)(B)(i), a person may obtain a patent for a claimed invention that is a process described in such provision if that process is embodied in a machine or manufacture, unless that machine or manufacture is recited in a patent claim without integrating, beyond merely storing and executing, the steps of the process that the machine or manufacture perform. ‘‘(B) HUMAN GENES AND NATURAL MATERIALS.—For the purposes of subparagraphs (C) and (D) of paragraph (1), a human gene or natural material that is isolated, purified, enriched, or otherwise altered by human activity, or that is otherwise employed in a useful invention or discovery, shall not be considered to be unmodified.  

‘‘(c) ELIGIBILITY.—  ‘‘(1) IN GENERAL.—In determining whether, under this section, a claimed invention is eligible for a patent, eligibility shall be determined—  ‘‘(A) by considering the claimed invention as a whole and without discounting or disregarding any claim element; and ‘‘(B) without regard to— ‘‘(i) the manner in which the claimed invention was made; ‘‘(ii) whether a claim element is known, conventional, routine, or naturally occurring;  ‘‘(iii) the state of the applicable art, as of the date on which the claimed invention is invented; or ‘‘(iv) any other consideration in section 102, 103, or 112.  

‘‘(2) INFRINGEMENT ACTION.— ‘‘(A) IN GENERAL.—In an action brought for infringement under this title, the court, at any time, may determine whether an invention or discovery that is a subject of the action is eligible for a patent under this section, including on motion of a party when there are no genuine issues of material fact. ‘‘(B) LIMITED DISCOVERY.—With respect to a determination described in subparagraph (A), the court may consider limited discovery relevant only to the eligibility described in that subparagraph before ruling on a motion described in that subparagraph.’’.

US Supreme Court will hear Google v. Oracle Copyright Suit

The United States Supreme Court has just granted review of the Google v. Oracle Copyright law suit.  This is a huge case concerning copyrightability and the scope of fair use of software.  Additional information, including briefs, can be found at the SCOTUS blog, here.  Hat tip to Dmitry Karshtedt.  

Gaming Amazon Using Fake IP Claims for Competitive Advantage

CNBC has published an interesting article about fake IP claims on Amazon titled, "Amazon was Tricked by Fake Law Firm Into Removing a Hot Product, Costing This Seller $200,000."  The article alleges that competitors of sellers on Amazon are filing fake intellectual property complaints against sellers resulting in Amazon's immediate take-down of their product or service.  These claims appear to be timed before big sales days and at very profitable products.  Interestingly, part of the problem is that Amazon is overwhelmed with complaints and apparently doesn't have the time to review the claims carefully.  My guess is that the software Amazon uses to police and handle claims is not able to discern fake and legitimate complaints well.  Perhaps better software is the answer.  I am hopeful that some Internet companies that rely on software will hire more people instead to handle these complaints.  Because Amazon controls the platform and sellers make so much money using it, I doubt many sellers will push Amazon too hard.  Although continued complaints and lost sales may open the door for a competitor to Amazon, which may be a good thing.  

The Trump is Coming to Town: AIPLA Provides an IP Wish List

The Trump presidency is looming ahead, but what of intellectual property policy.  Interestingly, BNA reported that a Republican Congressional Representative from California (Issa) called on Trump to keep Michelle K. Lee as head of the United States Patent and Trademark Office.  There also have been grumblings about pushing for legislation to undermine and reverse the U.S. Supreme Court’s Alice decision on patent eligible subject matter.  Recently, the American Intellectual Property Law Association (AIPLA) sent an advice letter to Trump regarding intellectual property.  Notably, the AIPLA letter covers patent, trademark and copyright law in some relative detail, and also gives some advice regarding trade secret law, domain names and other matters. 

The copyright focus of the letter relates mostly to Copyright Office leadership choice and modernization.  The trademark focus is on consistency of decision making concerning section 2(a) on disparagement (if it is upheld by the U.S. Supreme Court), removing “deadwood” from the register, protecting U.S. consumers from confusion from U.S. uses of foreign marks well-known in the U.S., and strengthening the Madrid system. 

The patent focus is the longest part of the letter and seems to generally counsel the exercise of care in passing any more patent reform particularly directed at litigation abuse.  The message appears to be that we need to study the changes that have been made to address abuses of the system before we engage in any more changes to address litigation abuse (or at least be fully aware of the changes that have been made).  Notably, the letter states that the existing changes may not address all abuses of the system, but that we also need to consider lawful (non-abusive?) enforcement.  However, there is room for reform in, at least, two areas: the Patent Trial and Appeal Board and patent eligible subject matter.

The letter addresses the Patent Trial and Appeal Board stating:

In the first few years of the PTAB’s existence, its proceedings have been used more than anticipated, and some are concerned that the proceedings, as currently implemented, are not as fair and balanced as they should be, and that they are stacked in favor of those seeking to invalidate patents.  AIPLA believes that the proper balance can be found through targeted changes, and we look forward to working with your Administration in this effort.

And, as alluded to before, patent eligible subject matter and the Alice decision are a major concern.  The letter nicely lays the groundwork for reforming Alice based on administrative necessity and clarity:

Independent inventors, small and large businesses alike need a strong, balanced and predictable patent system to foster R&D, manufacturing and sales.  Section 101 of Title 35 sets out the categories of patent-eligible subject matter that may be entitled to patent protection.  However, recent Supreme Court decisions have created uncertainty about the kinds of innovations that are patent-eligible in certain industries, such as biotechnology and computer software.  Meanwhile, the USPTO has experienced challenges in applying the Court’s evolving interpretation of patent eligibility into its examination processes.  AIPLA believes that more clarity, whether from the courts or from the Congress, is needed in this area, and we ask that efforts to provide such clarity and predictability be supported by your Administration.

The letter concludes with a request for continued and increased enforcement of U.S. IP in foreign markets, continued strengthening of trade secret protection and enforcement given an asserted increase in hacking, and continued involvement in administering the domain name system. 

Can labor laws hollow-out software competencies: the case of Mercedes-Benz

The effect of legal provisions in enhancing or inhibiting innovation is often difficult to show. An interesting case where it may be able to

discern such a relationship was discussed in a piece that appeared recently on reuters.com. There, it was argued that German labor laws and rules may materially affect the economic viability of no less than the Mercedes-Benz car company (part of Daimler AG) to continue to maintain its software development capability in Germany, rather than outsourcing such software development activities abroad. That cars are increasingly aggregations of software to move people efficiently, safely and increasingly, enjoyably, is evident to all. As was noted in The Economist, citing Gabriel Seiberth of Accenture, in a piece last year--

“[a] high-end car, for instance, has the digital horsepower of 20 personal computers and generates 25 gigabytes of data per hour of driving ….”

These kind of data mean that software expertise is essential to the success of a Mercedes-Benz car, and that requires that the company engage leading software personnel to help keep its competitive advantage. The question is not whether the company will increase the number of software-related jobs, but how many of these software personnel will be German-based and, more broadly, whether the company can continue to foster such capabilities and know-how within Germany. The claim being made by the company is that local German labor laws are too restrictive in this regard. In particular, it is argued, in the name of the well-being of employees, German labor rules provide that a daily work shift cannot exceed 10 hours and there must be an 11-hour break before the employee’s next shift. Presumably, this requirement derived from a time when most of the skilled labor at the company was engaged in more of the heavy physical aspects of automobile production.

However, such labor rules, and the requirement that labor representatives must be informed about the extent of the company’s use of third-party contractors, make it “cumbersome” for the company to engage third-party software contractors. The claim by the company is that the processes that derive from this requirement “makes life too bureaucratic”. Not by accident, the company has approximately 3,500 R&D and IT staff located in Bangalore, India and another 200 or so in Silicon Valley. Indeed, Bangalore has become the company’s main digital engineering center, engaged in such activities as digital design and crash test simulation.

From the labor relations point of view, the tension rests between the interest in ensuring worker protection, on the one hand, and the need for more flexible work arrangements to meet the requirements of software R&D, on the other. Even taking into account the possibility that company management may be spinning the narrative to some extent to obtain worker concessions, the issue raised seems genuine. To what extent will continuing adherence to traditional models of industrial employment have a deleterious effect on the ability of a standard-bearer of German industry to maintain its competency in software and related 21st century innovation capabilities. Mercedes-Benz will find a way to obtain the necessary software skills; the question is to what extent this will take place within Germany.

The challenge so posed recalls the discussion in America in the wake of the decline of US manufacture. On the one hand, relying on China as the ultimate assembly factory certainly has resulted in less expensive products. On the other hand, some have claimed that this has led to a hollowing-out of the skills needed for the US to preserve a manufacturing presence, especially at the so-called high end. One wonders whether something like that might be over the horizon for companies such as Mercedes-Benz, where the declining presence of cutting-edge software within its German facilities might negatively affect the company’s design and manufacturing capabilities more generally. After all, software is not just another form of IP to be protected, but it is increasingly the foundation of the know-how that will, quite literally, “drive” the automobile industry.

Reducing risks in VC investments Part II: investing in software

Here's the second part of a two-part feature on venture capital, risk and investment, by Martin Callinan (Source Code Control) and Kate Andreeva (Protecode). Their first post dealt with general issues regarding due diligence. The sequel, below, focuses on the special issues facing anyone thinking of investing in innovative software.

Technology risk

Not just the software: the business
strategy must be robust too 

Following the strategy review comes a technology review. In the case of a software-driven enterprise, the focus is typically on the ability of both the software and the development team to deliver on the product roadmap in line with the investor’s timelines. There will be a detailed review of the software architecture, code quality, software engineering quality, scalability, and robustness. 

If the company is a software start-up, an expected pre-requisite is that software development leverages open source software. There may well be valid reasons why a start-up would use open source software but, in the due diligence of a deal flow, the start-up will need a clear and strong justification as to why open source software has not been used. 

The reality is that many young companies do not understand the value of intellectual property and risks that can be engineered into software applications.  The types of risks that investors will look for are: 

• Software architecture, scalability, and extensibility

• Exposure to third-party platforms

• IP value: an objective view of the software’s unique value in the market

• IP and patent evaluation – are there any patent infringements?

• Third party dependencies

• Open source software risk exposure

To identify these technology risks, typically a third party specialist will be contracted to perform a source code review. This review can be initiated by the technology organisation before seeking investment, by the VC or private equity organisation as part of the due diligence process, or both. If the organisation goes into a funding exercise without visibility of the quality of their code and associated risks, there is a good chance that investors will view the investment as risky, regardless of the functionality of the technology in question 

Why due diligence should include an independent source code review

Apart from identifying current issues in the source code, such as licensing irregularities, problematic intellectual property, or potential security vulnerabilities in software components, which typically can be remedied, reviewing the source code can identify inefficiencies and flaws in the development process.  It can also identify the need to have a proper code inspection process during the development cycle, thus eliminating problems before they arise. 

It may be appropriate to create an open source software adoption process with proper tooling, which can help lower compliance costs, not to mention minimising disruptions during key transactions. Similar to bugs in software, it is far more efficient and cost-effective to catch issues early. 

Before discussing source code reviews it is important we are clear what we mean by “source code.” 

What is source code? 

Source code is a set of programming language statements and commands a software developer creates that becomes part, or all, of the applications that use website or device runs. There are a plethora of languages used by developers such as C, C++, C#, Java, or scripting languages such as JavaScript, PERL, Python, or PHP. The source code is compiled into an executable which the target device will execute.

What is a code review or audit? 

A code review or audit should be performed by an independent third party specialist. VC and private equity firms are unlikely to have these skills in-house. A software company seeking investment is however likely to have somebody in-house with the skills needed to perform the review – but that person may not be able to produce a reliable and objective report. 

Why is a code review imperative? 

Developers today rarely code a complete application from scratch. Applications are made up of components of code from a variety of sources which are stitched together to create the finished application. This makes for dynamic and agile development, but with it comes a number of inherent risks. Each component will have a number of attributes, such as how it is licensed and its version. 

Outside of the function of the application(s), investors need to have details of the make-up and provenance of the code components in the following areas: 

• Intellectual property and licensing

• Security of the software

• How the software be maintained and supported

• The capabilities and maturity of the components being used

• Ability to integrate with other applications

• Quality of the components that make up the application

• Innovation – if the application be evolved over time

• Viability of the open source community around the components being used

Fundamentally, the review boils down to assessing the overall quality and consistency of the code. The source code is an indicator of the quality of the organisation seeking investment. Software development is a creative exercise and developers should be allowed to express their personal style and approach, but in line with the organisation’s standards which all developers should follow. 

The code audit process 

First, a non-disclosure agreement (NDA) must be in place between the reviewer and the organisation. Once the NDA is in place, the reviewer will question key stakeholders in the organisations to ensure there is a clear understanding of the reasoning behind the audit and the organisation’s environment, such as the size of the portfolio, languages, and tools in use particularly any automatic code generators. A Statement of Work is then produced and agreed upon. This includes:

• A breakdown of the software portfolio into audit segments 
• Full automated source code scanning, analysis, and reporting 
• Resolve copyrights, standard headers, and author tags discovered in the portfolio 
• Analyse, verify modules, and issue regular audit progress reports 
• Quality review and sign off of licensing and copyright attributes of every software file in the software portfolio 
• Delivery of audit report(s), review of the reports.

The report will be reviewed and signed off by the organisation's management. Once signed of the final reports will be completed and delivered to the organisation. The reports will include:

• Audit Report: a high level executive report, containing information and graphic representation of licences, copyrights, OSS projects, security vulnerabilities, and encryption content within the software portfolio.
• Overview Report and Detailed file-by-file Reports: verified machine-generated reports on the software portfolio. The overview report should be delivered in pdf format. A detailed file-by-file report should be delivered in in CSV (readable by Microsoft Excel application) format.
• Concatenated Licence List report: containing a consolidated text of all available licences within the software portfolio in pdf format.
• Security Vulnerability Report: a cross reference of all security vulnerability information as reported by the National Vulnerability Database in pdf format.
• Encryption Report: a list of open source software projects detected in the portfolio that could be subject to export control, in pdf format.

About the authors

Martin Callinan has over 20 years’ experience in the software industry with a focus of Software Asset Management, IT Governance, and risk avoidance. He is currently the director at Source Code Control. Martin contributed to Working Group 21, the group responsible for authoring Standards relating to Software Asset Management, such as ISO/IEC 19770-1. In the past, he worked for Microsoft Limited, FrontRange Solutions, Centennial Software, Snow Software, and Express Metrix Limited.

Kate Andreeva is the Director of Solutions at Protecode and has over 15 years’ experience in the technology industry as an engineer and sales professional. With a background in electrical engineering and software development, Kate has honed her skills at companies including Performance Technologies, Level Platforms, Klocwork, and Coverity.

Cloud-computing: what will be the fate of IP?

Back on 18 April 2015 The Economist published an instructive summary, “The cheap, convenient cloud”, describing the changes being wrought to the IT industry by cloud-computing services. The piece first identified the leaders in providing cloud services, with Amazon way ahead of Microsoft, IBM, Google and Salesforce. No real surprises here, except perhaps for the substantial lead that Amazon enjoys as a percentage of the overall market share, reported at nearly 30%. What was of greater interest for this blogger was the discussion that followed on the promise and the challenges facing various other actors in the cloud computing/IP space, namely (1) big users of IT services and hardware; (2) the providers of online computing; (iii) the legacy makers of IP hardware and software and (iv) purveyors of the software to the cloud-service providers. Some will win, some will lose and new faces will likely appear. Less certain is the role that IP will play.

Thus large IT users can expect to benefit from reduced direct IT costs as bits of it increasingly migrate to the cloud. As for the software providers to such users, such as SAP, the challenge is two-fold. First, much of their code will have to be rewritten so that it can be run in the cloud environment. Secondly, they face the likelihood that their business model may have to change, from payment by the customer of a substantial, upfront license to modest recurrent subscription payments. Thirdly, an even bigger challenge awaits traditional hardware computer manufacturers, such as HP and Dell. Their problem is also twofold: sales of hardware to IT users will decline as they forego maintenance of an internal IT system in favour of relying on cloud-based services and infrastructure and, while the cloud providers themselves will certainly need substantial computing power to operate their systems, there is a real likelihood that such servers will be designed by the providers themselves and made by lower-cost contract manufacturers, rather than purchased from more expensive brand-name server manufacturers. Fourthly, the software to be used on these contract manufacture-based servers is increasingly of the open source type, where no licence fees are paid.

Using a meteorological metaphor, the article concluded:

“[B]ig IT users can look forward to blue skies containing cheap, fluffy cumulus clouds. Providers of online computing may be under a grey, drizzly stratus of low profitability. And legacy makers of hardware and software should expect stormy cumulonimbus formations overhead.”

How might IP fit into all of this as potential commercial drivers? For several decades, management scholars have pondered the extent to which an entity’s IP can be said to appropriate value for its owners. Broadly speaking, unless the IP rights are strong and inclusive, i.e., they constitute a strong appropriability regime, the likelihood is that IP rights will only contribute to value to the extent that they are successfully accompanied by such so-called complementary assets as efficient distribution channels, market share, network effects or favourable manufacturing costs. Whether a powerful brand is to be viewed as constituting a strong IP appropriability regime or rather a valuable complementary asset is open to debate.

With respect to the IT space, having seen the inability of both Microsoft and Intel to repeat their success in the PC market (and even here branding and network effects helped secure market share), one is hard-pressed to find many current examples of arguably strong IP appropriability regimes. The move to the cloud only serves to extend this trend. The servers that will power the cloud service providers will be as likely to be the result of made-to-request contract manufacture as mass purchase (even at a discount) of branded devices. More and more software is available on an open-source basis, rendering proprietary copyright decreasingly relevant as a potential basis for appropriating value for its owner.

That said, branding and goodwill may play an ever-increasing role, at least for some parts of the cloud computing ecosystem. Does the current dominance of Amazon.com, Microsoft, IBM and Google as cloud service providers represent merely their ability to marshal computing heft, or does the strength of these brands assist their owners in gaining the trust of users to migrate? Will at least some proprietary software purveyors succeed, owing in part to the strength of their brand as they seek to extend their products to the cloud? Whatever the ultimate result to these questions, the potential for strong IP appropriability regimes with respect to the cloud and its services does not look to this blogger as overly promising.

The White House Moves Against "Patent Trolls"

Today the Obama Administration announced “five executive actions and seven legislative recommendations to protect innovators from frivolous litigation and ensure the highest-quality patents in our system.”  The announcement is here.  The recommendations are below.  The recommendations that seem especially interesting include: expanding challenges to computer enabled patents at the PTO; changing the standard for issuance of injunctions at the International Trade Commission; incentivizing public disclosure of demand letters; increasing efforts to identify the real parties in interest; and making new rules concerning functional claiming in the software context. 

LEGISLATIVE RECOMMENDATIONS

In that spirit, the Administration recommends that Congress pursue at least seven legislative measures that would have immediate effect on some major problems innovators face.  These measures would:

1. Require patentees and applicants to disclose the “Real Party-in-Interest,” by requiring that any party sending demand letters, filing an infringement suit or seeking PTO review of a patent to file updated ownership information, and enabling the PTO or district courts to impose sanctions for non-compliance.
2. Permit more discretion in awarding fees to prevailing parties in patent cases, providing district courts with more discretion to award attorney’s fees under 35 USC 285 as a sanction for abusive court filings (similar to the legal standard that applies in copyright infringement cases).
3. Expand the PTO’s transitional program for covered business method patents to include a broader category of computer-enabled patents and permit a wider range of challengers to petition for review of issued patents before the Patent Trial and Appeals Board (PTAB).
4. Protect off-the-shelf use by consumers and businesses by providing them with better legal protection against liability for a product being used off-the-shelf and solely for its intended use.  Also, stay judicial proceedings against such consumers when an infringement suit has also been brought against a vendor, retailer, or manufacturer.
5. Change the ITC standard for obtaining an injunction to better align it with the traditional four-factor test in eBay Inc. v. MercExchange, to enhance consistency in the standards applied at the ITC and district courts.
6. Use demand letter transparency to help curb abusive suits, incentivizing public filing of demand letters in a way that makes them accessible and searchable to the public.
7. Ensure the ITC has adequate flexibility in hiring qualified Administrative Law Judges.

EXECUTIVE ACTIONS

Today the Administration is also announcing a number of steps it is taking to help bring about greater transparency to the patent system and level the playing field for innovators.  Those steps include:

1. Making “Real Party-in-Interest” the New Default.  Patent trolls often set up shell companies to hide their activities and enable their abusive litigation and extraction of settlements.  This tactic prevents those facing litigation from knowing the full extent of the patents that their adversaries hold when negotiating settlements, or even knowing connections between multiple trolls.  Today, the PTO will begin a rulemaking process to require patent applicants and owners to regularly update ownership information when they are involved in proceedings before the PTO, specifically designating the “ultimate parent entity” in control of the patent or application.
2. Tightening Functional Claiming.  The AIA made important improvements to the examination process and overall patent quality, but stakeholders remain concerned about patents with overly broad claims — particularly in the context of software.  The PTO will provide new targeted training to its examiners on scrutiny of functional claims and will, over the next six months develop strategies to improve claim clarity, such as by use of glossaries in patent specifications to assist examiners in the software field.
3. Empowering Downstream Users.  Patent trolls are increasingly targeting Main Street retailers, consumers and other end-users of products containing patented technology — for instance, for using point-of-sale software or a particular business method.  End-users should not be subject to lawsuits for simply using a product as intended, and need an easier way to know their rights before entering into costly litigation or settlement.  Today, the PTO is announcing new education and outreach materials, including an accessible, plain-English web site offering answers to common questions by those facing demands from a possible troll.
4. Expanding Dedicated Outreach and Study.  Challenges to U.S. innovation using tools available in the patent space are particularly dynamic, and require both dedicated attention and meaningful data.  Engagement with stakeholders — including patent holders, research institutions, consumer advocates, public interest groups, and the general public — is also an important part of our work moving forward.  Roundtables and workshops that the PTO, DOJ, and FTC have held in 2012 have offered invaluable input to this process.  Today, we are announcing an expansion of our outreach efforts, including six months of high-profile events across the country to develop new ideas and consensus around updates to patent policies and laws.  We are also announcing an expansion of the PTO Edison Scholars Program, which will bring distinguished academic experts to the PTO to develop — and make available to the public — more robust data and research on the issues bearing on abusive litigation.
5. Strengthen Enforcement Process of Exclusion Orders. Once the U.S. International Trade Commission (ITC) finds a violation of Section 337 and issues an exclusion order barring the importation of infringing goods, Customs and Border Protection (CBP) and the ITC are responsible for determining whether imported articles fall within the scope of the exclusion order. Implementing these orders present unique challenges given these shared responsibilities and the complexity of making this determination, particularly in cases in which a technologically sophisticated product such as a smartphone has been successfully redesigned to not fall within the scope of the exclusion order. To address this concern, the U.S. Intellectual Property Enforcement Coordinator will launch an interagency review of existing procedures that CBP and the ITC use to evaluate the scope of exclusion orders and work to ensure the process and standards utilized during exclusion order enforcement activities are transparent, effective, and efficient.

German sublicensees enjoy protection even after termination of main licence

The German Federal Court BGH issued two decisions today aimed at protecting investors in intellectual property licences. Both decisions concerned copyright issues in which the copyright owner licensed the copyright to a licensee, but later terminated the license. The licensee had in the meantime sub-licensed the rights to others. The question in both cases was whether the sub-licensees still had a right to use the intellectual property. The court decided yes - the investments made by the sub-licensees justified the continuation of the licence. The court made it clear that its decision also applied to other IP rights, such as patents, trade marks and design rights.

The first decision concerned a software licence. The owner of the copyright had given a company its exclusive rights to a software program. The licensee in turn sub-licensed a further company to use the software. The main licence was cancelled due to non-payment of licence fees. The copyright owner sued for copyright infringement due to continued use of the software. The court decided that the termination of the main licence did not lead to a resultant termination of the sub-licence agreement. The sub-licensee had a continuing right to use the software.

The second decision concerned the rights to the jazz piece “Take Five” from Paul Desmond. The copyright owner assigned the European rights to a music publishing house, which in turn licensed these rights for Germany and Austria to a sub-licensee. The original licence was terminated in 1986 and the court was asked to rule on whether the sub-licensee still had the rights to the music in Germany and Austria. The court agreed that the rights were still in existence, despite the termination of the main licence.

The court came to its decisions by reviewing German Intellectual Property Laws relating not only to copyright, but also to trade marks, design rights and patents. It concluded that there was a principle under German law according to which licences remained in existence, even if the underlying IP right was assigned to another owner. The sub-licensee would have invested on the basis of the existence of the licence. It could normally neither influence nor foresee the termination of the main licence. It might suffer great economic damage or even be threatened in existence if the continued existence was in doubt.

The owner of the copyright (in this case) would not be adversely affected since it could usually require its former licensee to assign the proceeds from the sub-licence to the copyright owner.

Tax allowance for cost of acquiring right to use software

Via this blogger's friends on the UKSC Blog comes this link to the news of a forthcoming hearing by the United Kingdom's Supreme Court. The case is Commissioners for Her Majesty’s Revenue and Customs (Appellant) v Tower MCashback LLP and another (Respondents).  According to the UKSC Blog,

"The Supreme Court will consider ... a substantive issue (whether expenditure on the acquisition of a right to use software, which was funded by non-recourse loans from the owner of the software, can qualify for an allowance under section 45 of the Capital Allowances Act 2001 (the “CAA”))".

The two-day hearing in this case will begin on 21 February 2011.

Software: Precautions Against Supplier Insolvency

What would you do if the supplier of your critical systems went insolvent?

In times of economic uncertainty, industries associated with software and technology services are highly likely to suffer. They are heavily reliant on solvent customers themselves, and on those with a sufficient degree of disposable budget to spend on non-essential work, such as software developments and updates (as opposed to rent, bills, wages, etc...). If the software companies are vulnerable, so too are their clients; and -- like it or not -- almost every business is the client of a software company.

Computer software is commonly used and found in most businesses and for every software program there is a source code without whch the software cannot be sold. Importantly this code enables the software to be revised and maintained. Source code is mostly protected by copyright.

Software may be developed by a third party for a client exclusively, or it may be licensed. More often than not it is leased or purchased ‘off the shelf’ and not owned by the business using it. As most of a business’s software is licensed, it will not be transferable and it will probably not available for assignment by the official receiver as liquidator or trustee. Further, as discussed in my previous articles [see note on Tuesday articles in the right hand side-bar], companies should be aware that the official receiver can disclaim onerous property under the Insolvency Act 1986; and that includes licences which may be a critical part of your business.


“But wait”, I hear you say “I own the IP in my software because it was developed for me. That means I’m safe doesn’t it?”. Not necessarily; even when bespoke software is developed exclusively for a company, the software company may still own the IP rights to some or all of the code behind the product. In such circumstances the official receiver should consider the agreement entered into with the supplier in light of both restrictions on assignments and the ownership of copyright. If a software supplier has 'invented' the software for the insolvents use it is likely that they will own it and not the insolvent.

If the software has been developed within the business this may give rise to problems as the individual designing the software may be a contractor rather than an employee. If that is the case the agreements by which that contractor is engaged should be carefully examined to determine who owns any IP rights created.


As a business you should establish at a minimum: (1) who holds the IP rights for your critical software; and (2) where would you find that source code should the company that developed it go bust. Number 2 is easier said than done. The owners or creators of software should not be relied upon to provide information on the location of software they have developed for you after they have gone into liquidation and it is unlikely that the official receiver will know where to begin.

One way of ensuring you know exactly where your code is and how to get to it is to have an escrow agreement built into any software agreement you enter into. Escrow agreements allow code (and other property) to be held upon agreement of the parties by a neutral third party. Code subject to the agreement will they only be released according to the agreement upon the fulfilment of its terms.

You should ensure that the conditions which stipulate the release of source code are looked at in order to determine when and in what way they can be enforced. You should also ensure the agreement allows the beneficiary to request a third party verify the code subject to the escrow is complete and this right should be exercised! You may view verification as an unnecessary expensive, but it can be invaluable. If the escrowed code is defunct it is essentially worthless and by the time you find out it is worthless, the liquidated company may not be in a position to help you locate the correct code.

Many businesses value critical transactions and contracts by value. However, this can be fatal when reviewing your software contracts for criticality. You may find that a critical software package that controls you payment systems cost almost nothing to develop, but consider for a moment wht would happen if that software stopped working and the company which developed it went into liquidation; it may have huge knock-on consequences to your business revenue.

In fact a low value contract is likely to be related to a smaller vendor and smaller vendors are more likely to be impacted by the economic downturn and have insufficient safety mechanisms when they do. Therefore your low value contracts may be the critical ones when reviewing your software safeguards in the economic downturn.

So it is not just the criticality of your contracts that you should be managing; you should also ensure that you are aware of the financial state of your suppliers. This way you can direct your resources to deal with the suppliers controlling your critical IP that are financially exposed.

Before a company goes into liquidation, look out for the warning signs that they are in trouble. For instance, has there been a drop in service provided by the company to your business? Have their accounts and annual returns been posted late? In times of financial difficulty, the accounts department will often be distracted by other pressures and overlook accounts filing deadlines. Often when a business is getting into financial difficulty, VAT and PAYE/NIC payments are regularly made late as available cash is being used to pay suppliers to keep the business running. In such cases HMRC will often apply for a business to be wound up if crown debts are continually left unpaid. To protect your interests make sure that if you are aware your supplier of software may go bankrupt ensure you follow the company closely and involve yourself in the insolvency proceedings.

And finally, a note to those dealing with insolvent companies. It has recently been reported that former employees of Factor 5 Inc in the US, who declared Chapter 7 bankruptcy in May, are being sued by former employees for fraudulently hiding assets before declaring bankruptcy in order to avoid paying employees and other debtors. The company ran into trouble when Brash Entertainment, whom it had signed a publishing deal, fell victim to its own financial difficulties and went under, which ended funding for Factor 5's project and eventually forced it to close down as well. The suit alleges that prior to the bankruptcy, the founders of Factor 5 created a new company called Blue Harvest, to which they "fraudulently transferred assets, including source code and other intellectual property," including a partially-completed version of Star Wars: Rogue Squadron for the Wii. It is alleged in the complaint that Factor 5 and White Harvest are essentially the same company. When dealing with an insolvent's estate it may be worth checking, have the rights to code and other IP rights been transferred ‘on mass’ just prior to liquidation? This is easy enough to see when directors transfer houses to their spouses, but may not be as apparent with unregistered rights such as copyright.


Tomorrow I’ll be popping along to give a talk at Winston & Strawn’s Bootlaw Session with my colleague Ian Silcock from Hardwicke Building. It’s free of charge to attend and if you would like further details you can have a look at Bootlaw’s Meet Up page.