Branded Generics; did The Economist Get It Right?

Once again the quality press seems uncertain about intellectual property, and in particular the role of trade marks in the drug business. This time it is The Economist. In an article from its August 8 issue, entitled “Friends for Life: Big Drugs Firms Embrace Generics”, the magazine described the intertwining of Big Pharma with generic manufacturers as the impending expiry of blockbuster-protected patents and apparently thin patent pipeline for drugs are forcing both sides to rethink the nature of their relationship/interrelationship.

What caught my attention was the discussion in the article about the issue of “branded” versions of drug products that are being sold by Big Pharma after patent protection has expired. So is this a good or bad thing? It is a difficult to fathom from the article. Let’s consider how the issue is treated. First, the article observes as follows: In order to combat the expected decline in revenues, Big Pharma is “peddling “branded” (but not patented) versions of their original drugs for higher prices than unbranded equivalents. Illogical though it may seem, such is the power of brand loyalty and inertia among doctors and patients ….”

Here we find Big Pharma as “peddlers” of generic brands, and both doctors and patients as acting in an “illogical” manner. Nothing is seemingly new about the negative tone given to the role of trade marks. From the debates in Parliament 150 years ago at the dawn of the first English trade mark law, through the skepticism towards trade marks expressed by the US Justice Department and others prior to the enactment of the Lanham Act in the 1940s, and up to Naomi Klein's polemic No Logo here, there has been a view that trade marks have the power to compel people to buy at a premium what they rationally would not purchase, i.e. a branded product.

But the article then seems to change direction. Moving on, it later observes that “[t]he real action now is in branded generics, which command a premium in many emerging markets due in part to the fear that unknown products might be fake or of dubious quality.” Note that here trade marks serve a potentially useful purpose for “emerging markets” (not the developed world, who presumably know better) in assuring that the drug products are genuine. I must confess that I don’t quite understand the point here. If I want to sell a counterfeit drug product, it seems to me that I will simply imitate the proprietary brand. As a policy matter, if I want to prevent the counterfeiting of drugs, it seems that the better way is to ban the use of the mark after the expiry of the patent protection period. In this way, the counterfeiter cannot exploit the name recognition and goodwill developed in connection with the drug during its proprietary period.

But all is not lost for Big Pharma, even in developed countries. The article concludes by referring to Charles-Andre Brouwers of the Boston Consulting Group, who notes as follows: “[B]rand loyalty laziness--or laziness--is something drug marketers can tap to keep a premium in their prices." As he puts it: ‘The secret about this industry is that patients taking a red pill don’t really like switching to a blue pill’. “While consumers are no longer “illogical”, they are “lazy”, and this consumer slothfulness can be exploited to the commercial advantage of Big Pharma.

Not too much doubt here: except for developing countries (even the basis for the argument is questionable), branded generics [read: trade marks] are cast in a negative light. However, before we condemn “branded” generics” to the Dark Side, we might consider the following observation by Nassim Nicholas Taleb in his irreverent best-seller, Fooled by Randomness here (fooled you if you were expecting The Black Swan).

In discussing what he calls “the path dependence of beliefs”, and what economists call, in a somewhat different context, the "endowment effect”, Taleb observes “[t]hat there are reasons to believe, for evolutionary purposes, we may be programmed to build a loyalty to ideas in which we have invested time…. Researchers found that purely rational behavior on the part of humans can come from a defect in the amygdale that blocks the emotions of attachment, meaning the subject is, literally, a psychopath.”

If these observations can be applied to trade marks, perhaps “branded” generics are an expression of evolutionary make-up. Instead of being "illogical", a sign of "laziness", or worse, the relationship of doctors and consumers to branded generics reaches deep into our human psyche. At the least, it suggests that the issue of trademarks in connection with branded generics is far more textured than the article suggests. In truth, when one thinks about trade marks, that is not such a surprising, or radical conclusion--is it?

Who owns Unix? SCO rises like a phoenix out of the ashes of the Appeal Court

Theres a fascinating report over at ComputerWorld which re-opens the argument about who owns the copyright to the Unix code. The whole case is many moons old - and seemed to have been settled by a 2007 decision that the copyright in the code was owned by Novell. The 10th circuit court of Appeals has now concluded that in fact SCO owns the code.

What struck me most in the report is that the case is clearly being funded by a private equity company, Stephen Norris Capital Partners, who have invested in the company according to the ComputerWorld story. SCO - according to the same report - is obliged to aggressively continue its litigation against Novell, IBM and Autozone.

Somewhat confusingly - but maybe somebody can provide some answers here - SCO is still in bankruptcy, according to the SEC filing on 3 August 2009. It seems that the investiment in the company by Stephen Norris Capital Partners may have only paid for the on-going trial. The remainder is at a high interest rate - which SCO could presumable now draw on to move the cases against IBM, Novel and Autozone ahead. Fascinating - do we now have a copyright troll on the loose?

Typical Licence Fees in Germany

My attention has just been drawn to an interesting article published in the German-language IP journal "Mitteilung der deutschen Patentanwälte" by Michael Trimborn of Osborne Clarke in Cologne. Prof. Trimborn has reviewed published German court decisions and arbitration awards relating to patented products since 1995 and produced a table which has been published in the journal.

The article can be purchased here.

One point that needs to be made is the difference in the manner in which the awards are calculated. One set of figures relates to awards made against infringers. Another set is based on compensation made to inventors under the German Law on Empolyee Inventions (for more details see the German Wikipedia article).

Securitization of IP: Urban Legend, or Playing Soon in a Theatre Near You?

Probably no word in the finance world has taken on a less flattering connotation in recent times that the word "securitization" (unless it is the word "leverage", but the two go hand in hand). With the collapse of the sub-prime securitization market, and the financial carnage that followed, the term has come to represent, rightly or wrongly, the nefarious excess of financial alchemy running amok in the name of pure greed.

I am too far-removed from the daily life of Wall Street and the like to have any reliable clue to what extent the securitization of assets will play as the financial world climbs out of its current economic malaise Against that backdrop, I read with interest a piece that appeared on July 31, 2009, in iddmagazine.com. Entitled "A Starring Role for IP", the article addresses the issue, as set forth in the caption preceeding the text of the article, of whether,

"[a]s the securitization market comes back to life, [and] private-equity firms are finding deal flow in intellectual property, [w]ill the structured finance market support IP deals"?

The heart of the article is expressed in the following paragraph from the article:

"The predictable income streams derived from song royalties, paid year after year, along with licensing fees collected from the use of trademarked brands, underpin private equity interest in IP. Beyond the scope of capitalizaing on regular streams of income, IP also offers another incentive for financial buyers. It has the potential to be securitized or packaged into bonds that are backed by royalty payments as collateral. The bonds can then be used to refinance existing debt of portfolio companies--an attractive option for overleveraged private-equity-owned-companies--or conversely as acquisition financing."

The article discusses in some detail what is described as the succcessful securitization of the Dunkin' Brands in 2006 (pre-the Great Recession, I note). By sucesssful I assume means that the financial arrangements secured by the IP (read: trade marks, not donuts) were more favourable to the borrower than the other financial alternatives that were considered. In truth, however, the article reaches back and forth in time to bring merely a few examples of successful securitization of IP rights, with no reference to even the legendary Bowie bonds. The impression one receives is that this is still a marginal activity.

Spot the Securitized Asset

And so to the question: will we see an uptick in IP securitization as a sanitized alternative to the media-discredited investments in sub-prime mortgages and the like? From where this simple-minded IP practitioner sits, I am skeptical. The article suggests at least two interrelated reasons. First, the likelihood of getting a triple-A rating "without a monoline wrap" (I think that means a default swap or some other form of insurance) is not high, which means that the borrower will have to pay a higher interest rate for its bonds, thereby defeating the purpose of the exercise. Second is the "esoteric" and sui generis nature of IP rights. Valuation, both for the present and over the life of the bond, poses difficult problems, and the ability to assign a market value for the IP assets must certainly be a daunting challenge.

IP Securitization Made Simple

That said, I wonder whether there is some further room for interaction between the finance and IP worlds in exploring the potential for securitization of IP assets. When I spoke last month in India on trade mark valuation, one of the co-speakers on the programme represented the accountancy-valuation side of the profession. I came away with the feeling that I had too little an appreciation for the accountancy-valuation side, and my colleague had too little an appreciation for the IP-legal perspective.

There are two possibilities here. Either it does not really matter for valuation that our perspectives are so unconnected, because the IP-legal side has so little to offer, or it does matter, with the result that valuation is not being carried out as well as it might be. If the latter is true, then what is needed is a hightened dialogue to take advantage of the potential cross-fertization between the financial and IP-legal worlds. Something similar might well apply in connection with IP securitization. Investment houses, private equity funds, and banks--are you listening and are you interested?

National IP Office in RSA implicated in identity theft

A quick warning to all those with investment interests in South Africa. Two recent developments mean that investors need to ask their local advisors to audit the company names register to check a.) if their identity has not been stolen through fraudulent changes to directors of local companies by alleged corrupt officials and b.) that their brand has not been diluted or used to form so-called "counterfeit companies" which are then used for a variety of criminal activities. Afro-IP has produced a summary of the worrying developments here. This blogger received further information late yesterday from an Afro-IP subscriber that CIPRO (the RSA Company and Registration Office) is taking the situation very seriously and is doing a thorough internal investigation. Let's hope so.

If an NDA is Not a Licence, Then What Is It?

I have been doing IP licensing for over 25 years and perhaps the most elusive part of the practice for me is trade secrets. My uncertainty is well-captured by the sub-title of an article by my learned colleague and friend John Hull entitled "Trade Secret Licensing: The Art of the Possible" (Journal of Intellectual Law and Practice, 4 (3) 2009). In the article, the following sub-title appears "Is a Non-disclosure Agreement a Trade Secret"? Hull frames the question as follows: "Broadly speaking, making available one's trade secrets takes one of two commonly adopted forms--non-disclosure agreement (sometimes called a confidential disclosure agreement"

Hull goes on to explain the difference thus:

"A non-disclosure agreement has few of the characteristics of a license. The scope and purpose of disclosure is usually limited. It seems reasonably safe to assert that the intention of most parties to a non-disclosure agreement is not to engage in a licensing transaction."

To further support this claim, Hull brings a form of clause which is frequently found in a non-disclosure agreement as follows:

" No licence is granted to the Recipient hereunder and no licence shall be deemed to have arisen or be implied by virtue of the parties entering into the Agreement."

In truth, it is this clause, in its various forms, which continues to perplex me and I have never really understood it. If a non-disclosure agreement is not a licence, then what is it? Granted, the classic understanding of an IP licence does not easily apply to the grant (read: disclosure) of one's trade secret to a third party. After all, a trade secret is not a negative right, such that a trade secret licence is not the grant by the disclosing party of a right of use, in the absence of which the disclosed party would be in breach. As we all know, it is the negative right aspect of IP rights that constitute the basis for IP licensing.

But if that is true, then the observation should apply in equal measure to both a non-disclosure agreement and to a so-called "real" trade secret licence. Neither is a licence in the classical sense. Few, if any, however, seem willing to stake out such a radical position. In its stead, two possibilities suggest themselves. The first is that both the non-disclosure agreement and the "real" licence are both licences of a sui generis kind. Both rest on the willing disclosure by the trade secret to a third party, even though the terms, scope, purpose, and consideration will likely differ. That seems to me to be the more natural interpretation.

But that appears to be the minority position. More commonly, it seems, a distinction is made, whereby the non-disclosure agreement is deemed not to be a licence, and the contractual provision set out above is intended to give explicit effect to that distinction. However, no effort is made to explain exactly (i) what is the legal nature of the non-disclosure agreement, if it is not a licence, or (ii) what are the implications of this "non-licence" status. After all, the fact that an agreement sets forth a declaration--such as that no licence is created--does not necessarily resolve the issue. It is the relationship between the parties, and not a mere contractual declaration, that is ultimately determinative. And so the question remains: If a non-disclosure agreement is not a licence, then what exactly is it?

NDA- I Found It, But What Is It?

A new Chapter, but not for the readers

As an IP-driven business model, Reader's Digest once looked as though it was assured of eternal success. But times are tough, readers' habits mutate and technology is unforgiving. Now Reader's Digest US has filed for Chapter 11 bankruptcy protection. Says the Reader's Digest Association, the deal will protect its US business and reduce its $2.2bn debt. In doing so, it buys itself a 30-day grace period to continue discussions with its lenders over its debt restructuring plan.

While the filing does not apply to Reader's Digest operations in Canada, Latin America, Europe, Africa, Asia and Australasia ("international operations are expected to have "adequate funding" to continue publishing"), the news will do little to encourage advertisers, or indeed contributors, that its homey blend of stories of courage and bravery, practical lifestyle tips and victimless humour has a future.

IP Finance suspects that RD is facing problems on all fronts. Online advertising is more focused and increasingly reckoned to be more effective by many spenders; sales of all printed media are dented by free, instant and largely relevant reader-selected online material; also, the lower-to--middle-class family oriented readership which was its home territory is itself eroded by the forces of social and cultural change.

The question is, can RD pull itself up again? An internationally well-known and instantly recognised trade mark is only an asset where its goodwill brings in customers, and it's not immediately apparent where brand extensions might avail the title. The subscribers' database is probably worth a great deal more -- but with a diminishing interest in the title it is natural that this asset will be shrinking too.

When Nostagia Meets Business Reality: The Case of Baseball Cards

What happens when the nostalgia of youth is refracted by the lens of legal and commercial reality? I recently had occasion to confront this question after a London colleague drew my attention to an article that appeared on nytimes.com on 6 August. Entitled "Topps Gets Exclusive Deal with Baseball, Landing a Blow to Upper Deck," the article reported that the Topps Company will next year become the exclusive maker of trading cards for Major League Baseball in the US. As a result, Upper Deck, will apparently no longer be able to compete with Topps in this business.

For a baby boomer like me growing up in the American Midwest in the 1950s, the very mention of Topps and baseball cards evoke memories that go the very heart of my boyhood experience. In those days, Topps was the only purveyor of such cards. We would take our weekly allowance (5 or 10 cents, I don't remember), sneak out of the house, race to the corner confectionery store, and buy a new packet of cards, anchored in its wrapping by a slab of rigid chewing gum whose main role, I assume, was to protect the cards in the packet until it was opened. I don't remember how many cards there were in each packet. No matter--we would eagerly open the packet, quickly view the new the player cards, compare them with the cards already in my collection, and then plot my trading moves for the week.

For some of us, fascinated by baseball numbers, there was also the studied inspection of the back side of the card, which contained valuable information about the player not readily accessible in other fashion. (I have heard that Ben Bernanke, the Chairman of the US Fed, when not trying to save the financial world, is a great fan of baseball statistics. Perhaps this interest also was fuelled by his boyhood exposure to baseball cards).

Another Satisfied Baseball Card Fan?

The frequency of the cards available in the packages was apparently rationed by Topps so that in the aggregate there were a small number of cards containing the genuine superstars (such as Mickey Mantle, Willie Mays, and Stan Musial, if the reader remembers), and a seeming endless supply of copies of forgotten players (like Willie Miranda and Hal Griggs, who have been consigned to the most arcane of baseball trivia). The name of the game was to wheel and deal with your friends, to induce them to part with that card of Willie Mays for some combination of the near great, the merely average and the already forgotten.

The cards were about the thrill of the deal, the joy of having a piece of the persona of the player embodied in the card, and the challenge of committing yet another set of data to memory. Sometime during the late 1950's, my interest in baseball cards waned, and I gave no more thought to all of the time and money I had invested in maintaining my collection--no more thought, that is, until I was sent the link to the New York Times article. Nostalgia is irreparable, even it is vulnerable. Nevertheless, I decided to take a dispassionate look at the baseball card industry once again, through the prism of the deal reported between Topps and Major League Baseball. And here is what I found.

1. IP--One key to the new arrangement is exactly who has the right to use what intellectual property rights. Upper Deck is reported to have renewed its licence agreement with the Major League Baseball Players Association. Presumably, this licence is for rights of personality and the like. This means that Upper Deck can use the likeness (and name) of the ball players. (I do not know if the Players Association merely represents the rights of personality of the individual players, or somehow takes a proprietary interest, itself an interesting question.)

But this licence does grant any right in the names , logo, or other marks of the baseball teams themselves, which appears be controlled by the Major League Baseball, meaning the clubs themselves. As the article notes, it is Major League Baseball that has entered into the agreement with Topps. How this dual set of licences will work out is not clear.

2. Competition and Exclusivity--Major League Baseball has enjoyed a privileged position under the U.S. antitrust laws for nearly 90 years. The question is whether the grant of exclusivity to Topps is anticompetitive. The article points out that Major League Baseball has entered into a number of exclusivity arrangements. Thus, there is an official car (Chevrolet-- although it is a good thing that the US government bailed out GM to keep this arrangement in tact); credit card (MasterCard--does that mean I cannot use my Visa card to buy a pricey tee-shirt for my grandson?); soft drink (Pepsi--and not the other guy); and cap (New Era--does anyone really care who brands the cap?)

To the best of my knowledge, none of these exclusivity arrangements has been challenged on competition grounds. The question is whether the arrangement with Topps should be treated any differently? If nostalgia is a valid consideration, then the anwer is clearly "no". Exclusivity is what made collecting baseball cards so special 50 years ago. Exclusivity and the Golden Age seem to go hand in hand.

And so the adult in me, the IP lawyer and blogger in me, says, let's wait and see how these IP and competition issues play out, whether or not it is back to the future.

Find the Exclusivity Vectors

Oh, I almost forgot the mention: The current owner of Topps is Michael Eisner, the legendary CEO of the Disney company. What drove Eisner to acquire Topps and to seek to recapture its glory days of the past? In Eisner's own words:

"This is redirecting the entire category towards kids ....Topps has been making cards for 60 years, the last 30 in a non-exclusive world that has confusion to the kid who walks into a Wal-Mart or a hobby store. It's also difficult to promote cards as unique and original."

Eisner is about my age, I think, so I suspect his interest is a combination of nostalgia and business. At a certain level, that is not much different from mine.

Want to create a mega-research project? Call ERIC

The text of the Regulation 723/2009 setting out the Community legal framework for a European Research Infrastructure Consortium (ERIC) was published earlier this month on the website of the Official Journal of the European Union.

Right: in case the European Commission is feeling mischievous, here's someone else's logo for it to use ...

The Regulation, wehich comes into force on 28 August 2009, follows the European Commission's 2008 proposal which explained that the need for a new type of entity arose as existing legal structures are inadequate to deal with the complexity of large-scale research projects involving contributions from several different countries. While the text of the Regulation largely follows that of the proposal, there are some differences.

* the ERIC was originally going to be an ERI (European Research Infrastructure).
* Anyone wishing to set up an ERIC must include a declaration from the host member state that it will recognise the ERIC as an international body in the sense of the directives on VAT and excise duties.
* Member States are no longer required to give ERICs the most extensive exemption from other taxes.

By Article 7(2) of the Regulation,

"An ERIC shall have in each Member State the most extensive legal capacity accorded to legal entities under the law of that Member State. It may, in particular, acquire, own and dispose of movable, immovable and intellectual property, conclude contracts and be a party to legal proceedings".

Article 10(g) requires the statutes governing each individual ERIC to include

"the basic principles covering:
(i) the access policy for users;
(ii) the scientific evaluation policy;
(iii) the dissemination policy;
(iv) the intellectual property rights policy;
(v) the employment policy, including equal opportunities;
(vi) the procurement policy respecting the principles of transparency, non-discrimination and competition;
(vii) a decommissioning, if relevant;
(viii) the data policy".

IP Finance watches with interest. Will ERIC be a dynamic entity for harnessing the continent's research resources and for arrangeing their effective deployment, or will it be a stately European-law-sanitised patent troll?