Meet the Trademark Troll

We have patent trolls and copyright trolls (especially in jurisdictions that provide for statutory damages). Now it is the turn of the trademark troll.

Consider the following situation. You file a trademark application on behalf of a client (when you filed, you remember well the client's instructions--"no need to do a clearance search prior to filing"). The jurisdiction in which the appliction has been filed only examines the mark on absolute grounds, i.e. whether or not the mark is too descriptive to be registrable. The mark sails through examination and it is published for opposition.

Days before the end of the opposition period, you receive a Notice of Opposition. You examine the grounds for the opposition and you conclude that the Opponent has a strong, indeed a very strong, case. One year has passed since the application was filed. During that time, your client has been using the mark on the branded product bearing the mark, supported by substantial marketing and advertising. The client is pleased with the commercial results of the product and believes that the mark has acquired brand equity. The opponent is not in the business of using the mark, but rather warehouses registrations and applications and then waits for an opposition opportunity -- such as yours.

The question is how to advise my client. Having particular regard to the inevitable "compare and contrast" with the patent troll situation, here are my first thoughts:

1. The operative assumption is that the opponent's basic goal is to extract payment in exchange for agreement to withdraw the opposition and to agree to allow the applicant to use the mark in an unimpeded fashion.

2. That said, the circumstances described above only involve the right of registration. Even if the applicant fails to register the mark, any challenge by the opponent to use of the mark must be separately brought in a civil action. In most jurisdictions, it is relatively inexpensive to maintain an opposition proceeding. To the contrary, an infringement action will likely be substantially more costly (for both parties). Unless the jurisdiction allows an award of costs, each party will have to bear its own costs with no likelihood of recovery.

3. The threat of an injunction, if an infringment action should ultimately be filed, may well less potent than in the patent troll situation (even after the "eBay" case in the U.S.). In principle, there are an infinite number of words and signs that one can choose as a mark for a given product. Unlike a patent suit, where there may not be any viable alternative if the defendant is enjoined from using the invention, an injunction regarding trademark use merely requires the defendant to choose another mark. In most situations, this will not mean that end of the product.

All of this brings me back to situation described above. I assume that neither my client nor the opponent wishes to reach the litigation stage. My client wants to continue to use the mark while the opponent seeks payment of a sum of money. However, the opponent also knows that if my client chooses to withdraw the application, the value of the mark for my client (and hence any payment to the opponent) will become zero. The challenge, therefore, is for the parties to find a way of reaching an agreement, especially where the threat of a zero payment hangs credibly over the head of the opponent.

In particular, the sum cannot exceed the amount that the applicant will reasonably be required to expend, should it choose to withdraw the application and to adopt a new mark. This is the rub -- how can we come up with a rough metric to quantify this amount? The following comes to mind:

(i) The easier part is to calculate how much has been directly spent on creating, protecting and promoting the mark. (ii) But what about indirect costs and the amount of the brand equity, if any, that might be lost if the marked is discontinued? (iii) And what about the time value of money, as the negotiations trundle forward against the backdrop of continuing costs, both direct and indirect, in connection with the use of the mark?

At least with respect to the applicant, the information that might enable it to come up with an amount that is presumably within its knowledge and control. What about the troll? True, the troll should be able to quantify its expected costs, both for the opposition and any infringement action. But unlike its patent cousin, this troll must always be fearful of the "nuclear option" of withdrawal and presumably ascribe a discounted value to reflect this risk. All of this would seem to make the trademark troll situation more uncertain than its patent counterpart.

Rolls-Royce - patent suit follows engine failure

There was mild interest in the engineering press in August on the news that aero engine manufacturer Rolls-Royce had launched a patent infringement action in the Eastern District of Virginia against US rival Pratt & Whitney. RR’s share price rose by around 1% whilst that of P&W’s owner, United Technologies, barely changed.

This has turned into headline news in the mainstream press with the announcement on Friday that Pratt & Whitney has retaliated with actions before the US International Trade Commission and the England and Wales Patent Court. The fact that the Trent 900 engine complained of had recently failed on a Quantas A380 aircraft doubtless contributed to newsworthiness of the item. Bloomberg reported a 4.9% fall in the RR share price, with UT’s share price rising just under 1%.

This case has some interesting ingredients: even if the Patents Court action fails to halt manufacture of the Trent in the UK, Bloomberg notes that the ITC action could prevent RR from shipping Trent engines to Boeing for use in their new Dreamliner aircraft. The RR patent has already been the subject of protracted interference proceedings. Of more interest still are the underlying commercial conditions that have driven the two companies to litigate despite them already being joint venture partners in International Aero Engines AG. Hopefully the actions will shed more light.

India: a follow-up

Just when you thought it couldn’t get more confusing … Following on from the previous post on the Microsoft shrink-wrap case, I came across a Advance Ruling given to GeoQuest Systems BV (a Dutch company) by the Indian authorities in August.

Remember that the Delhi Tax Appeal Tribunal pretty much held that all software payments are royalties, and withholding tax needs to be deducted from payments, even if for shrink-wrap boxed software? Well, the GeoQuest Advance Ruling concludes that a payment for the licensing of special purpose software does not constitute a royalty – so no withholding tax on payments made from India.

The customer was granted an exclusive, but non-transferable, right to use the software and the associated proprietary information. but no rights to modify the source code, make copies or transfer the software to any other person. The software had to be returned at the end of the licence period.

The Advance Ruling confirmed that:

• unless the right to directly exploit copyright in the software (by copying it, amending it or similar) is granted to the payer, the payment should not be considered a royalty under Indian domestic law; and


• a payment for the use of a product that has an embedded copyright is not the same thing as a payment for the use of the copyright.

Now, see, these points make sense. The Advance Ruling makes it clear that income from a supply of software constitutes business profits rather than a royalty, so that no withholding tax should apply. Now, could they just explain this to the Tax Appeal Tribunal?

Beware withholding taxes on software to India

In an early start to the pantomime season, the earlier sensible decision on shrink-wrap software of the Bangalore Tax Appeal Tribunal appears to have been thoroughly ignored by the Delhi Tax Appeal Tribunal, which has held that payments received by Microsoft from end users in India through distributors for sale of Microsoft off-the-shelf, shrink-wrap, software are taxable as royalties (and so are subject to Indian withholding taxes).

Ok, so this only applied to payments made before January 1, 1999, while Microsoft had direct arrangements withIndian distributors for the software sale, on a principal-to-principal basis. But it still holds good for other companies' sales of software now. In effect, the decision means that any sale of software to India should have tax withheld from the payment, no matter what form the software actually takes - that's going to make quite a difference to some profit margins.

The reason it doesn't apply to Microsoft's sales since January 1, 1999, is that since then Microsoft software has been manufactured and distributed in India by Gracemac Corporation (a US company) under an exclusive licence. The Tax Appeal Tribunal also held that payments for software licensing should be treated as royalties for tax purposes, which makes a little more sense than their decision on shrink-wrap given that Gracemac is actually exploiting the intellectual property by manufacturing the CDs (not a lot more, assuming that the licence doesn't actually allow Gracemac to change, adapt or otherwise directly use the intellectual property).

There was also some outrageous comments on the ability of Indian domestic law to override tax treaties - that's not IP specific, but it's got international tax lawyers choking.

More R&D tax relief claims needed!

HMRC has published the latest set of details on the number and value of R&D tax relief and R&D tax credit claims, covering claims in 2008-9. There is an increase in the number and value of claims, but it is surprisingly small considering that 2008-9 was the catch-up deadline to get in claims for relief on expenditure over the previous six years (the relief now has to be claimed in the company tax return or amended return, so companies have a much shorter time limit to claim).

The total number of companies claiming the relief was 8,350 in 2008-9, an increase of just 10% in a catch-up year that was well-publicised - that seems a very low number, and it may make the tax relief vulnerable to change/removal in the upcoming consultation on how IP is taxed in the UK.

Operation Smoking Dragon

There is often discussion about whether product counterfeiting supports terrorism and drug trafficking. Westlaw News reports the latest example of counterfeiters also dabbling in both terrorism and illegal drug importation. A California jury recently convicted a man of trafficking millions of dollars worth of counterfeit Marlboro cigarettes and illegal drugs. He also attempted to import counterfeit US Dollars allegedly printed in North Korea. As if that wasn't enough, he and his partner attempted to sell Chinese surface-to-air missiles to undercover FBI agents as part of a sting operation called Operation Smoking Dragon. More and more frequently, agents investigating potential counterfeit shipments discover connections to narcotics dealers and terrorists.


Though there are already enough reasons for brands to be vigilant in their anti-counterfeiting efforts, the possibility of finding counterfeit products bearing their trademarks amidst a shipment of narcotics or weapons is yet one more.

Zynga: Social Media Games In, Computer Games Out?

The headline in the October 26, 2010 edition of Bloomberg.com here speaks for itself: "Zynga's Value Tops Electronic Arts As Virtual-Goods Sales Surge." In a word, according to SharesPost.Inc. here, in an exchange for shares of privately held companies, the estimated worth of Zynga Games Networks Inc., the maker of such social network games as FarmVille and FrontierVille, is valued at $5.51 billion dollars. By comparison, Electronic Arts, the second largest publisher of video games, including such icons as "The Sims" and "Madden NFL", is valued at $5.22 billion on NASDAQ.

For those of you who might not be familiar, Zynga's earns its revenues primarily from selling virtual goods to players of social media games; these goods enable the players to progress in the game. Zynga uses Facebook to distribute its games and it has become the largest maker of games on Facebook. It is reported that Zynga owns six of the 10 most popular game apps on Facebook and that its games have 57.6 million users. Zynga shares with Facebook the income received from the sale of the viritual goods.

For sure, one needs to treat these kinds of valuations with a bit of caution. They are, after all, just informed guesses about a company's worth. (As one informed interviewee noted on a Bloomberg podcast several days ago, if you want to know about a company's position--"follow the cash"). Still, the ascendency of Zynga's social network games is noteworthy. Zynga is not a platform with zillions of users and lacks any proven monetizing model. Rather, Zynga runs a real business with what appears to be real revenues, estimated at about one-third of the $1.6 billion market for (expected to increase to $3.6 billion in three years). The company has raised $350 million in private capital, made six acquisitions since the spring and has increased its workforce in the last quarter (!) by one-third to 1,2000 employees.

Compare that with the recent fate of Electronic Arts, which has cut its staff and is looking to make acquisitions presumably to bolt-on to its current activities. True, contrasting rates of growth between well-entrenched and recently-established companies can sometimes be misleading, but the trends of these respective companies cannot be ignored.

Zynga seems to be engaged in asserting its competitive position across two different axes. Success on both axes will be critical for Zynga's continued flourishing.

First, there is competition with the makers of game products intended for use on computers and consoles (what the article calls the "shrink-wrapped program" business). Electronic Arts, reaching back to its 1982 establishment, has been a leader in the industry. Its speciality is in producing creative contents of a certain kind. But the industry seems to be plagued with high game development costs, a decline in the number of new blockbuster offerings, and a preference for the social media gaming experience (although Electronic Arts is trying to enter the social media space). Zynga provides an enjoyable user experience while leveraging its contents to sell virtual goods to users. The contents are the means for the monetizing, rather than the object of the monetizing itself.

Second, there is the multi-faceted relationship between Zynga, which provides the content apps, and Facebook, which provides the distribution platform for the apps. Zynga must no doubt be grateful for being able to take advantage of the distributional reach of Facebook, but it no doubt also frets about becoming over-dependent on that single disribution channel, hence the attempt to expand its channels. It is no surprise, therefore, that Zynga is seeking to create its own website and diversify its distribution platforms to include, e.g., sites run by Microsoft and Yahoo.

There is nothing wrong, if you are Facebook, from enjoying a revenue share with Zynga, but the greater portion of such revenues will presumably stay with the app owner rather than go to the platform owner. If you are Facebook, you can try to increase that share if you have a commanding distribution postion. But when other channels of distribution are available for the distribution of the app, the ability of Facebook to increase its share may well plateau, perhaps sooner than later.

"I Got A Distinct Look" - Or Do I?

The most popular Halloween costumes in the U.S. this year will be costumes based on three members of the MTV reality show Jersey Shore: Snooki, The Situation, and DJ Pauly D.

If you think those names sound more like cartoon characters than real people, you aren't far off the mark. Jersey Shore centers around a group of 20-something-year-olds who are or who portray (depending on your opinion of how "real" reality TV shows are) the stereotypical Italian American New Jersey resident. Jersey Shore has become one of MTV's most popular shows, and slang first uttered by the show's cast members have quickly entered the American lexicon (rather unfortunately, in my opinion).

The Wall Street Journal recently reported that MTV has partnered with Rubie's Costume Co. to create an official line of costumes based on the most memorable members of the Jersey Shore cast - apparently because of their "standout characteristics," which include a very short skirt and poofy wig for Snooki, flesh colored foam abdominal for The Situation, and a combed-up hair piece for DJ Pauly D. (No word on whether the Snooki costume packaging will include a warning that the wearer might experience "wardrobe malfunctions because of how short [Snooki] likes her dresses.")

However, The WSJ article notes that costume shops that are out of stock of the MTV-licensed costumes have been selling their own versions of Snooki costumes that include short skirts and unsold inventory of Amy Winehouse beehive-style wigs. Presumably, these stores aren't touting their offerings as official Snooki costumes. But the ease with which they have put together costumes that evoke the Jersey Shore character suggests that perhaps the costumes are rather generic at their core. Without the MTV and Jersey Shore logos on the packaging, what MTV-owned IP remains in the bag?

ARM and IP royalty rates

One of the most confusing terms in the semiconductor industry is the term "IP". IP lawyers and patent agents, like this blogger, will often think of intellectual property in terms of patent rights. IT administrators will think of an Internet Protocol. Semiconductor designers will normally think in terms of IP blocks which are designs for semiconductor circuits and which can be incorporated into much larger circuits. The rise of the "fabless" semiconductor model over the past few years has increased the importance of IP blocks.

The fabless model of semiconductors involves the separation of the design and sale of hardware devices and semiconductor chips from the manufacture of the chips. The production is done by specialised semiconductor foundries.

One of the most successful fabless companies is UK-based ARM Holdings, based in Cambridge, UK, with a number of development centers around the world. ARM's business model is based on producing the IP blocks and then licensing these out to companies such as Intel and the mobile telephone manufacturers. These manufacturers incorporate ARM's designs into their own chips. The revenue model is based on a royalty received for each chip sold which incorporates ARM's designs.

It's difficult to find out how much ARM is receiving as a royalty rate. However, intriguingly a report in EE TImes on an analyst's telephone conference in 2009 reported that Tim Score, ARM's CFO, stated that ARM had been able to raise its royalty rate on its newer Cortex processor cores from 1.1 to 1.2% and that this royalty rate was higher than that for older products. That raise may not sound much but of course does represent a revenue increase on the newer designs of 10%. Given that much of the work in designing the IP blocks has probably been incurred by the time that the royalties are received, this probably represents pure profit. The other message is that older products have a lower royalty rate (? <1%)

There are, of course, a number of other companies manufacturing IP blocks and so it must be a fine line at ARM trying to work out what is the correct royalty rate. To have raised the royalty rate in the recession-hit year of 2009 suggests that its newer processor cores must be in demand.

It's intriguing to actually look into ARM's IP rights (as opposed to IP blocks). The company has a large patent portfolio (the ThomsonInnovation database notes 1099 patent families, but that may be incomplete). However it's intriguing to bear in mind that many of the patents relate to product which ARM themselves do not make - they just sell the IP blocks as (copyright-protected) software to other companies to manufacture the products. It's actually ARM's customers who make the end products/circuits which are patent protected.

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