Worth investing in: IP services

Intermediate Capital Group (ICG) has now acquired a significant minority stake in legal information and services operation CPA Gobal. The terms of the transaction are not disclosed. According to the available information,

"Founded in Jersey in 1969, originally to manage patent renewals, CPA Global has expanded over the years to become a multinational company that is the clear market leader in the global intellectual property (IP) services market and one of the world's leading providers of broader legal services outsourcing, including litigation support, document review and contract management. The legal services outsourcing sector is expected to grow rapidly over the next few years, with estimates of the potential market value in the tens of billions of dollars".

It would be lovely to know the details. Does anyone know?

Addendum: Thanks, Ron Laurie (Inflexion Point Strategy), for news that the deal is worth £400m (€443.7m), a sum that is predicted to result in windfalls for many of CPA's 230 partners.
Several other buyout firms, including LDC, are apparently interested in acquiring CPA, which is thought to be contemplating the sale of at least 25% of the group.

The Costs of Confidentiality

As previously noted by Neil Wilkof on this blog, IP is only one aspect of a company’s competitive advantage, sometimes more crucial, sometimes less crucial to the success of a company’s activities. This was highlighted in Wednesday’s edition of The Times, which reported the measures taken by Air New Zealand (ANZ) to secure a first-to-market advantage for its lie-flat bed for economy passengers. “Such was the secrecy of the programme”, the newspaper notes, “that simulated flight tests were conducted on actors sworn to silence. Aviation seating is a cut-throat business.”

However, a role for IP in ANZ’s activities is also apparent from the comment of ANZ’s long-haul boss that he expects to license the seat design to other airlines. Such a business model was the subject of the 2009 litigation between Virgin Atlantic and Premium Aircraft Interiors, first in the Patents Court for England and Wales and subsequently in the Court of Appeal. According to the Patents Court decision, Virgin were successful in licensing their “Upper Class Suite” flat-bed seat design to Air New Zealand for a “substantial fee”. Air Canada were also interested in taking a licence but found it difficult to justify the Virgin fee, buying instead an alternative “Rock” flat-bed seat design from Virgin’s seat manufacturers, Premium Aircraft Interiors. Virgin then sued Premium for infringement of patent and unregistered design rights.

The Patents Court decision provides an interesting insight into the measures taken by Premium both to maintain the confidential status of information received from third parties (in this case Virgin and its seat designer) and to prevent that confidential information from contaminating its own work for other customers such as Air Canada. Premium initially claimed that they operated a “clean room” approach that employed different teams for different projects, the design data for different projects being kept securely on different parts of Premium’s server. However, as noted by the Patents Court judge, Mr. Justice Lewison:

“The position as it eventually emerged was rather more complex. First, there are at least two kinds of design data. Design data known as CATIA, which are three dimensional modelling data, are stored in a digital file. It can be sent to a manufacturer who can use the file to make a mould or tool in order to manufacture the required component. These data can be kept securely. In addition there are two-dimensional design drawings. These could not be kept securely once UCS had gone into production in the autumn of 2003. Second, once Virgin Atlantic had entered into a licence with Air New Zealand in about June 2004, the UCS had to be modified in order to fit onto Air New Zealand's aircraft. A separate design team was created in order to deal with those modifications. That design team (as well as the original design team) had access to the UCS design data (including CATIA). Third, contrary to the pleaded case there were at least two people at Contour (Simon Allen and Bruce Gentry) who had roles to play both in UCS and Rock/Solar Eclipse. Indeed, since Contour employ a large number of short term contract designers, it has not been possible to identify all the designers and engineers who worked on the UCS project, or whether some of those short term contract staff worked on other projects within Contour. Accordingly, Contour now admit that their relevant employees had the opportunity to copy both UCS itself and also UCS design data.”

For non-IP managers, there is a temptation to view protection by trade secret/confidentiality as a cost-free option. Certainly, there are no patent office fees to pay. However, as illustrated by the cases above, the measures necessary to ensure that confidential information is properly managed are far from being without cost.

When Harry Met Sally: The Propietary/Generic Courtship Continues

I want to add a sequel to my "When Proprietary Harry Met Generic Sally" post of earlier this week, here. The bad news, for all of you who worship this movie icon, is that there is nothing in about what I am about to write that has any connection with Billy Crystal or Meg Ryan. The good news is that, quite by chance, I ran across an article in the Israel business daily, The Marker, entitled "Teva Fires 28 Employees in its Patent and Research Department", the very day after my post. This article well illustrates the dynamic and complex tension taking place at Teva Pharmaceutical Industries, the world's largest generic pharmaceutical company, in its efforts to enter the proprietary drug space.

The gist of the article is that 28 employees were being dismissed from the Teva "patent" department. Most of them were being offered reassignment within the company, with a small number being offered early retirement. A number of students working part-time for the company were also being let go. The article attributed the reason for the down-sizing of the patent department to over-hiring in 2008. More particularly, 50 new employees were added that year, 35 of whom had a Ph.D. degree, thereby doubling the number of staff in the department.

At the time, the move was described as fitting in well with the strategy of the company, "wherein Teva was meant to be increasing its outlay for R&D from 6.2% in 2007 to 7.5% in order to increase sales revenue from $5.2 billion in 2007 to $11.5 billion in 2012. But this strategic goal was, in the words of the article, "rendered irrelevant to some extent" when the company acquired Barr in December 2008 for $7.4 billion here. The result was an overlap of R&D capability between Teva and Barr, which enabled Teva to reduce its R&D budget to less than 6% in 2009. As a consequence, a portion of the R&D staff hired in 2008 "were no longer essential". Hence the downsizing of the department.

I have no special information about the state of Teva's R&D capabilities. Nevertheless, the report does suggest that the company is finding it difficult to ramp up R&D internally in a way that can deliver proprietary products in a way that meets the company's financial goals. Instead, the company seems to prefer to look elsewhere for this, either by licensing-in the technology (which was the secret of its highly successful Copaxone product), or acquiring existing R&D technology. If my observation is correct, it suggests that the transition from generic to proprietary products, as described in A. David Cohen's article, is a challenging exercise for even the most successful of pharmaceutical companies.

In this connection, I am reminded that when Pfizer acquired Wyeth in 2009 here, one of the major reasons given was that Pfizer was interested in acquiring some of Wyeth's R&D capabilities. If Pfizer, which is a proprietary drug company par excellence, sees the strategic benefit of acquiring existing R&D capabilities, what can one say of a generic drug bohemoth like Teva showing a similar tendency. Moreover, I wonder to what extent that decision to downsize has more to do about the short-term company bottom line rather than any long-term plan for sustained proprietary R&D. This consideration, magnified for public companies facing the difficulties of the current economic environment, surely needs to be taken into account whenever one seeks to understand the challenges of moving into proprietary drug activities.

Sun Tzu and the patent trolls

David Wanetick (Managing Director, IncreMental Advantage) has written a little piece for IP Finance which readers may enjoy. He explains:

"Black Operations. Scorched Earth Campaigns. Preemptive Strikes. Fomenting Internal Unrest. Coalition Defenses. Trench Warfare.

These are not terms typically used in discussing patent strategy. However, they are strategies discussed in my article entitled “How Sun Tzu Would Outflank Patent Trolls”. Other articles have postulated that patent trolls are merely an illusion of paranoid patent managers. Some authors have praised patent trolls for providing a market for inventors to monetize their inventions. Other articles have lambasted patent trolls for levying taxes on innovation. This article provides a thorough analysis of how operating companies can respond to demand letters issued by patent trolls".

Offshore IP holding companies - UK discussion document

HM Treasury has published the discussion document on the future of taxation of controlled foreign companies. Of particular interest for companies with IP are the questions (pages 15-19) on how they should treat overseas companies with IP, proposing to distinguish between those that actively manage the IP and those that passively receive it. The document is part of an ongoing process to establish tax rules that ensure UK parent companies are not taxed on the profits of IP holding subsidiaries in certain circumstances (circumstances to be defined!)

A controlled foreign company is an overseas company which is (generally) majority owned by a company in the UK and, generally, is in a location with a low tax rate. Tax authorities tend to be wary of such companies because they could be used to divert profits from a higher tax country (such as the UK). The portability of IP means that tax authorities are particularly concerned when such companies are used to hold IP and receive royalties. The introduction of a tax exemption for dividends received from overseas brought this issue into sharp focus because such companies could receive royalties, pay little tax on them, then dividend the profits to the UK company - which would not pay tax on the dividend. HM Revenue & Customs is, perhaps understandably, concerned that (without any checks in law) UK companies would simply put all profitable IP activity into non-UK companies and minimise their tax costs.

The discussion document simply asks questions at this point, rather than suggesting any particular line of thought. In particular, it seeks responses on what constitutes active management of IP - this is likely to be an interesting area of discussion, as many of the characteristics of active management would seem to reflect well-managed investment IP activities as well.

When Proprietary Harry Meets Generic Sally

I recently had lunch with a UK colleague with a distinguished background in patent litigation matters, in general, and pharmaceutical-related litigation, in particular. During the conversation he confirmed my understanding that, as far as client representation was concerned, you either represent proprietary pharmaceutical companies or generic manufacturers, but not both. The thrust of the position is that there is a type of IP Continental Divide, where the headwaters either flow in a proprietary or a generic direction, but never come together under the same corporate roof.

His comment led me to recall a chapter published over a decade ago by my late colleague, A. David Cohen, entitled "The Intellectual Property Characteristics of a Generic Company", in Intellectual Property in the Global Market Place (2nd ed. 1999), edited by M. Simensky, L.G. Bryer and (full disclosure) N.J. Wilkof. A. David Cohen served as the Manager of the IP Department at one of the world's largest companies in the generic patent protection industry.

The particular focus of the chapter was an effort by Cohen to describe how this company, despite its historical commercial raison d'etre in manufacturing and selling "plant protection chemicals initially developed by a different (usually) research-based company, but after the plant patent has expired," was in the process of evolving into a research-based plant protection company. As set out by Cohen, it is worth noting the salient differences in IP protection during each of these stages in maintaining the company's the patent protection business.

Generic Stage

1. The company focuses primarily on assessing the validity of patents to avoid infringement and assessing the extent to which use can be made of the patents.
2. If the company does file patents, it is usually for processes; only later might patents also cover formulations.
3. The company is active in oppositions of patents and will seek compulsory licences when possible.
4. The company is also involved in invalidation proceedings regarding patents that cover products that the company wants to commercialize, oftentimes with an eye towards obtaining a license.
5. The company has a strong interest in taking full advantage of the experimental use exception, if applicable, for existing patents.
6. The company vigorously challenges patent term extensions.
7. The company at a later stage of its generic-focused activities will engage in a "picket-fence" strategy to block the proprietary product beyond its basic stage (the company will run experiments "and file one or more patent applications covering either a new process to prepare the product, a new process to prepare a key intermediate, selected mixtures, new formulations and/or new uses").

When the Picket Fence Strategy is Breached

Interim Stage

1. The company faces the prospect of declining market share, as more companies enter the generic space and the larger multinationals acquire smaller generic companies.
2. To maintain sales, the company shifts from selling not only its own technical material but also its formulated material, leading to patenting of the formulations.
3. Because of the distinctive nature of agribusiness, the company obtains agricultural registration for its products on a country-by-country basis.
4. The company is less active in seeking compulsory licences, engaging in invalidation actions, or in challenging patent term extensions.
5. The company begins to view patent protection as a means for protecting its commercial interests.
6. The company strengthens its patent validity activities and the implementation of its picket fence strategy.

Proprietary Company

1. The company engages in fully-fledged R&D to develop proprietary products and/or licensing-in proprietary technology for product development.
2. The company maintains a patent registration program to protect its own proprietary products.
3. In so doing, the company must decide on whether to include in the first basic patent, as well as the product itself, all known uses, alternative processes and synergistic mixtures.
4. This requires the company to consider both patent prosecution costs and up-front research costs as well as to weigh the risk that a comprehensive patent whose filing is delayed to assure its comprehensiveness may allow a competitor to sneak in with its own prior application.
5. The company begins to find ways to counteract the picket-fence strategy of others.
6. The company actively supports patent term extensions to provide additional protection for its products.
7. The company seeks the optimal way to balance the existing generic business with the emerging proprietary emphasis and to maximize the joint revenue from both.

What arises from Cohen's discussion is the dynamic nature of these processes. In his own words,

"... the generic company's attitude toward and its experiences with intellectual property may both prepare and push it toward becoming a research-based company."

If that observation was true a decade ago, it is even more so now. Even the world leader in the generic pharmaceutical business, Teva Pharmaceutical Industries, is also an active participant in the commercialization of proprietary products.

The upshot is that the generic/proprietary divide in the pharmaceutical industry seems less and less germane, if it all. Unless, of course, you are engaged in patent litigation. There, even as your client is constantly searching for ways to achieve the right generic/proprietary mix for its own business, the approach to litigation, perhaps out of necessity, perhaps out of legacy, continue to take a Manichean view of the pharmaceutical world.

Collaboration and IP Rights: But What About Those Transaction Costs?

Surely one of the main themes of the past decade has been the rise of collaboration in R&D and innovation. Whatever one's slogan--"You collectively is smarter than you individually" or "No more 'not invented here'", both popular and and academic literature are replete with accounts of the challenges and rewards of collaboration as opposed to go-it-alone development. Aided by the universal reach of online communications and infrastructure, as well as the global movement of ideas, resources and manpower, collaboration is championed on both substantial and process grounds.

Against the almost epiphanic adulation in favour of such collaboration, however, there remains a dirty little secret: it is often times devilishly difficult to find a workable arrangement for the allocation of IP rights in such circumstances. Just one example --the mind-numbing exercise of distinguishing between "Background IP" and "Foreground IP" has become a common nightmarish staple in fashioning collaboration agreements. More generally, the challenge of establishing a workable framework for determining ownership of IP rights, both individually and jointly, is daunting under the best of circumstances and is a potential show-stopper in less favourable situations.

It is against this backdrop that I recently read an account in the December 7, 2009 issue of Business Week ("Can Roche Leave Genentech Alone?") of the efforts by Roche to implement its acquisition of the 44% of Genentech that Roche did not previously own (in early 2009, we discussed the Roche-Genentech acquisition on this blog here.) One comment in the piece particularly caught my attention: the observation that the acquistion will finally allow the two companies to work together in an effective manner on what is termed "personalized medicine", with the goal of developing "diagnostics", namely the development of the technologies used by doctors to ascertain better which drugs work with which patients.

What exactly was the reason that the development of these "diagnostics" did not take place before the acquisition, even though Roche already owned over 50% of Genentech? According to the article, the reason centred on the issue of IP rights. "When they were separate, Genentech and Roche rarely tried to codevelop diagnostics, because it took too long to work out patent rights and other legal logistics. 'Now there's no intellectual property discussion, there's no negotiation -- we're the same! ... You wouldn't believe how much easier it is.' "

At first glance, this observation seems to be a testimony to the frictions created by transaction costs with respect to IP rights in collaboration arrangements. In particular, as noted by Wikipedia, "Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on." Here, the argument seems to be that the bargaining costs in arranging for the disposition of IP rights in a collaborative relationship were, at least with respect to the Roche-Genentech relationship before the full acquisition, prohibitive. The result was that wide collaboration regarding diagnostics did not appear to take place.

There is something disturbing in all of this. Can it be that the transaction costs in bargaining the disposition of IP rights in a collaborative arrangement between two separate parties are so daunting that the only feasible solution is for the two parties to merge, thereby eliminating the friction in the contractual bargaining? Think about it: If the answer is "yes", then it calls into question the ability of lawyers to fashion arrangements for collaboration, other than an outright acquisition of one party by the other (was not Oliver Williamson the co-recipient of the 2090 Nobel Prize in Economics for studying this kind of thing?)

Surely (at least I would like to think "surely"), however, lawyers and their clients engage all the time in reaching an arrangement for the disposition of IP rights in collaboration agreements in situations other than an outright acquisition. Sometimes the negotiations over which party will own what IP rights in a collaboration are less rocky, sometimes more so. As the report on Roche and Genentech indicate, sometimes the collaboration dies a legal stillbirth.


Given this range of possibilities, it seems to me that the better question is how we should understand the parameters for effectively bargaining this disposition of rights in the more typical collaboration arrangement, when acquisition of one party by the other is not on the table. Against this background, we can then perhaps better understand what were the particular factors in the pre-acquisition relationship between Roche and Genentech that seem to have paralyzed any effective bargaining of IP rights between them, at least with respect to diagnostics. There may be an interesting MBA case study here to explore these questions. Any takers?

How do you quantify loss of goodwill in the right to use a generic term?

What happens when the owner of a well-established brand (SMIRNOFF) as used in relation to a generic product (vodka) succeeds in an 'extended passing-off'' action against a defendant whose product is branded (VODKAT) in such a way as to cause confusion with and erode the distinctiveness of the generic product? How are damages to be assessed? We may soon find out, now that Mr Justice Arnold has held this morning in Diageo v Intercontinental Brands [2010] EWHC 17 (Ch) that Diageo had indeed suffered such a loss. Said the judge (at paras 231-235):

"The third main issue I have to decide is whether Diageo have suffered, or are likely to suffer, damage as a result of the misrepresentation. Diageo contend that they have suffered, or are likely to suffer, damage under two heads. The first is loss of sales of SMIRNOFF. The second is erosion of the distinctiveness of the term "vodka".

Loss of sales

Diageo accept that: (i) sales lost due to mere competition between VODKAT and vodka, as opposed to sales lost due to confusion, are irrelevant; (ii) most sales lost due to confusion will be sales of brands of vodka other than SMIRNOFF; and (iii) Diageo cannot rely upon lost sales of other brands. Nevertheless, Diageo contend that they have lost some sales of SMIRNOFF to VODKAT due to confusion.

In the on-trade something like 85% of the vodka sold on Optics is SMIRNOFF. ... VODKAT could have a significant effect on the sales of SMIRNOFF in this sector. The majority of these losses must be discounted as being due merely to competition from a cheaper product. Nevertheless, I am satisfied that there will have been some sales lost due to confusion. What I have in mind in particular is the scenario where a pub or bar stocks SMIRNOFF as its main vodka and VODKAT as the "house double" vodka. A customer who is confused will accept the VODKAT, whereas a customer who is not confused may well insist on the real thing.

As to sales through off-licences, no doubt most lost sales will be of other brands. Nevertheless in 2007 A.C. Nielsen estimated that 3% of VODKAT sales were made at the expense of SMIRNOFF. Again, some of these will be due to mere competition, but I am satisfied that others will be due to confusion. This is particularly so in convenience stores where the price differential is often much less than in supermarkets. Even where there is a price differential, ... consumers may decide to buy two bottles of VODKAT rather than one bottle of SMIRNOFF. This is particularly likely in the case of consumers who are under the impression that VODKAT is a weaker version of vodka.

Erosion of distinctiveness

Even if there was no evidence of lost sales, I consider that it is clear that ICB's marketing of VODKAT is likely to erode the distinctiveness of the term "vodka". It will cease to be a term reserved for 37.5% ABV spirits, and will come to be seen as a term applicable to lower strength products which include fermented alcohol. Indeed, I think there is some evidence that this is already starting to happen. The advent of the me-too products like VODKOVA is likely to accelerate this trend if it is not checked".

HMRC on the attack on image rights?

IP Finance thanks Angus Bujalski (Michael Simkins LLP) for the following post:

Amid the general outcry over Manchester United’s proposed £500 million bond issue, one of the many risk factors listed seems to have received undeservingly scant attention. The club noted that it was under investigation by Her Majesty's Revenue & Customs (HMRC) for payments made in relation to players’ image rights. These structures, common in top-flight football, typically involve a player assigning all rights in the exploitation of his image to a company, often offshore. Unlike most civil law jurisdictions, since there is no single concept of an “image right” in English law, the agreements typically include a broad assignment of all rights to use a player’s name, image, likeness, voice, even shirt number, and so on. The club then pays a licence fee to the company for the right to exploit these rights.

Crucially, the clubs argue that these payments should be viewed as capital sums, and therefore not taxed as income, since the payments are made under genuine arm’s length transactions under which the club gets real value for the money paid to the players. HMRC’s position, however, is quite the opposite, arguing that image right structures are artificial schemes designed to avoid tax. Specifically, payments made in this way are not subject to UK income tax or national insurance in the hands of the player, so the clubs can therefore incur less expense to ensure the player receives the same net amount as if the payments were paid as wages. Second, it means the club does not incur the National Insurance costs on the payments it would have to make, were the payments made as wages.

The legality of image rights structures has long been problematic even after the courts first ruled such payments legal in the cases involving Dennis Bergkamp and David Platt. It has been suggested that HMRC have been aching for the opportunity to bring a case to court as a means of overturning these decisions. Indeed, the fear of the courts reversing the Bergkamp decision is one reason why several Premier League clubs do not use these structures.

Now, with public finances stretched, it may be that HMRC are more actively pursuing this opportunity. Any judgment overturning the Bergkamp decision would have serious consequences for many Premier League clubs. The prospectus for Manchester United’s proposed bond issue suggests that the club could be liable for up to £5.3 million in past National Insurance contributions. Of greater concern to clubs, however, would be the increased wage costs, since there is little doubt that players would request their wages be grossed up to leave them in the same net position, particularly as they will be subject to the new higher rate income tax of 50%.

Coincidentally, it was reported last week that the annual profits of Beckham Brand Limited, the company set up to exploit the image rights of David and Victoria Beckham, grew 60% after his first season with the LA Galaxy. Beckham’s return to Manchester United with AC Milan in the Champions League will no doubt serve as a reminder of the real value of the rights to a high profile player’s image.