JUNE 2014 2014 SEMINAR SERIES ADVANCED PATENT & LiCENsiNg sEmiNAr JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL sEP. 29-OCT. 10, 2014 Visit bskb.com for further seminar details. All seminars are held at BSKB’s offices in Metropolitan Washington, DC. bskb.com [email protected] BSKB-'14-LES_Nouvelles_Print-f.indd 1 Client: Birch, Stewart, Kolasch & Birch, LLP (BSKB) ae: Jeff Lupisella x225 1/22/14 10:10 AM ContaCt: Hailey Lee, [email protected], 703.205.8000 PM: Jeff Lupisella x225 VeR. : 1/2 page (7” x 4-3/4”) PRojeCt: BSKB-086 ‘14 Ad Design Edits Mod. date: 01.22.14 Wed 10:09 AM Run date: Jan 2014 Pub: LES Print Ad 4CP: n n n n Size: trim size: 7”x4.75” Confidential: Information contained within this document is only intended for the recipient. Copying, distribution or communication of this document is stricly prohibited. DIAMS l l 13221 Woodland Park Rd., Suite 420, Herndon, VA 20171 tel 703.437.8018 fax 703.437.8268 vizual.com JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL 8110 Gatehouse Road, Suite 100E Falls Church, VA 22042-1248 t: +1.703.205.8000 f: +1.703.205.8050 Volume XLIX No. 2 LES NOUVELLES This two week seminar focuses on advanced topics in U.S. patent law and includes workshops and problem solving in order to illustrate the more advanced concepts with regard to prosecution, claim interpretation, and validity and infringement issues. Participants learn how to modify and determine the scope of a granted U.S. patent, as well as how to address significant licensing issues. les Nouvelles June 2014 Advancing the Business of Intellectual Property Globally Where Are We Going in High Tech? Assessing High Tech: Observations And Patterns — Part Two Annemarie Meike — Page 82 Clean Tech Trends—Intellectual Property & Transactions Ron Epperson and Myron Kassaraba — Page 84 Selected Advanced Transportation Trends, Part 1—The Giga-Factory Michael Craner — Page 96 Observations In The Aerospace And Transportation Industry William H. Pratt and Annemarie Meike — Page 103 IPRs In Least Developed Countries: A Progress Report Luc Savage — Page 111 EU State Aid Policy: A Model To Assess Intellectual Property Rights And Knowledge Dissemination In R&D Cooperation — Part 1 Mario Cisneros — Page 116 Key Amendments To The Chinese Trademark Law Zhou Zhongqi — Page 124 Superman® And Statutes: The Case For Restructuring The U.S. Legal System And Awarding Copyrights To Authors Behind Works For Hire Michael Haviland — Page 126 Australian And United States Court Decisions To Impact On Business Method Patent Licensing David Webber — 135 Promotion And Protection Of Investment In South Africa Bill, 2013—A Review Madelein Kleyn — 138 Recent U.S. Court Decisions And Developments Affecting Licensing John Paul and Brian Kacedon — Page 141 www.e-mergeglobal.com Infringement Analysis is not an information mining exercise. It is a research with Legal, Technical and Commercial Expertise. Experience the Meeting That’s Been 50 Years in the Making! Explore cutting-edge topics, from strategy to tactics, addressed by today’s thought leaders, industry experts and dealmakers. Connect with new ideas from keynote speakers Quentin Hardy, Deputy Technology Editor for The New York Times and Andrea Ingraham, Director of the Center for Advancement of Science Education, the Titans of Licensing panel and LES’s Top 10 Court Decisions of the Year Affecting Licensing workshop. Collaborate with a global community of more than 1,000 business development, technology transfer, intellectual property and licensing professionals. Patent Search Services Technology/Innovation Research White Space Analysis Claim Charting/Infringement Analysis Portfolio Analysis Patent Licensing Support Services Portfolio Management Patent Due Diligence Landscaping Studies Patent Drafting Reach us USA: 1-888-247-1618 India: +91-44-2231 0321 [email protected] Register by June 30 at www.lesannual.org for best rates! Assessing High Tech: Part Two Assessing High Tech: Observations And Patterns Part Two By Annemarie Meike T he modern business world operates on the widely held notion that by identifying and predicting patterns in the market, one can increase one’s ability to surf the waves to market success. This second of a multi-part series of papers, loosely arranged around observations and trends in the various industrial subsectors of the High Tech Sector, continues to examine insights, seek connections and identify hidden structures that may extend more globally than the original observations. We invite international contributions to all editions of this series. Part One of the High Tech Sector Trends series appeared in the December issue of les Nouvelles. It reviewed the concept of market stages as applied to the various High Tech subsectors, recognizing an Early Stage, an Emerging Market Stage, a Mainstream Market Stage and a Mature Market Stage. Three subsectors were highlighted in Part One. First, Semiconductors, arguably the most mature market of the three, used a historical perspective to forecast future trends. Second, Software offered a review of patent eligibility laws, contrasting U.S. and Canada developments, and of software applications on interactive screens, or “apps” and data privacy—two increasingly important and mutually intertwined subjects. Third, Mobile and Consumer Electronics emphasized the consequence of the convergence of technologies into a single package of increasingly smaller size. FRAND, Patent aggregators and defensive strategies that border on monopoly concerns are big in this area. A separate article about Samsung and LG took a historical and government policy view of two major Korean firms and discussed how several key decisions made by the government influenced their success. This Part Two of the High Tech Trends series examines trends in Aerospace, Transportation and Clean Tech. • For Clean Tech, an analysis of investments, deals, IPOs (Initial Public Offerings) and patents gives a sense of what is hot and what is not. In “Clean Tech Trends—Intellectual Property & Transactions,” by Ron Epperson1 and Myron Kassaraba,2 the authors and contributors predict the areas of interest in Clean Tech at the convergence of technology, climate and investment. • For Aerospace and Transportation, an examination of intellectual property terms in U.S. govern- ment contracts gives us insight into the complex world of large government contracts and the regulations behind them. In “Observations in the Aerospace and Transportation Industry,” by William H. Pratt,3 and Annemarie Meike,4 the authors and contributors explore how the laws and regulations that govern the ownership, licensing and use of IP that is developed during a U.S. Government contract dif■ Annemarie Meike, fer significantly from Lawrence Livermore those governing comNational Laboratory, mercial agreements. Business Development Executive, • For Transportation Livermore, CA, and Clean Tech, a E-mail: [email protected] discussion of electric vehicles exposes the impact of a small company on an industrial sector with a very high barrier to entry. Consequent potential changes to energy infrastructure are also examined. In “Selected Advanced Transportation Trends—Part I—The Giga-Factory,” by Michael Craner,5 connections and influences are explored in a brave new world of electrified transportation. Clean Tech, Green Tech, or Sustainable Tech as it can be called, is an odd duck of a category, focused on the desirable end result of the technology rather than an industrial sector. Clean Tech can be found in High Tech, Life Sciences and Chemical Energy and Materials. The end result is energy efficiency, low impact power generation and energy storage, low carbon footprint and water conservation. Now the Cinderellas of Clean Tech, waste stream management and pollution control are becoming popular to investors. Vinod Khosla is quoted as using the term “Main 1. Managing Director, Intellectual Energy, and Co-chair LES HTC Clean Tech Committee, [email protected]. 2. Partner, Strategic Advisory & Transactions, Pluritas, LLC, and Co-chair LES HTC Clean Tech Committee, [email protected]. 3. Partner at Finnegan, Henderson, Farabow, Garrett & Dunner, L.L.P., [email protected]. 4. Business Development Executive at Lawrence Livermore National Laboratory, [email protected]. 5. President at MediaComm Innovations, “Strategic Inventing & Analysis Services.” June 2014 82 Assessing High Tech Part Two Tech”6 for Clean Tech, seemingly from two points of view. First, he observes that to be investment worthy a Clean Tech enterprise needs to be viable on its own, without subsidy. Second, he argues that Clean Tech is changing the world. In spite of some infamous failures, Clean Tech is becoming the underpinning and the backbone of how the world works. It seems similar to the way the Internet has crept into and now is fundamental to our lives, notwithstanding the “dotcom bust.” As observed in Part One, this subsector cross-cuts such a broad range of applications that three stages of market evolution are represented: Early Stage, Emerging Markets Stage, and Mainstream Marketing Stage. Compared to Clean Tech, at first blush, we think of Aerospace and Transportation industrial subsector as a Mature Market. Distinct from many of the other High Tech subsectors with the exception of Semiconductors, Aerospace and Transportation subsector primarily consists of industry OEMs. As such it has much perspective to offer the other sectors. These large, multinational industries are more sensitive to issues of antitrust, export control and other government regulations, and issues of international law. In addition, because of these sensitivities, there may be a different perception of the balance of risk and opportunity in any specific scenario. For example, where an OEM might see risk of disclosing competition sensitive information, a service provider might see the opportunity for publicity. If we examine Aerospace alone, the difference in the observed risk-opportunity balance could be seen as part of a highly risk adverse aerospace culture, which may stem from the military associations of the industry. It also possibly stems from the nature the products themselves. One member of this group observed, “A remarkable rendition of these thoughts is the admonition: ‘You can’t guess. When you guess, people die.’ The difference in risk perception and the differences in the [types of] stakeholders leads to striking differences in topics of interest and how licensing is conducted.” On the other hand, Aerospace may be able to afford innovation for high value applications even though it must bear the burden of regulation. Upon further scrutiny, the “Transportation” part 6. http://www.forbes.com/sites/toddwoody/2012/11/27/thebig-green-opportunity-transforming-clean-tech-into-main-tech/. 83 les Nouvelles of Aerospace and Transportation might be of three major sections: Ocean, Rail, and Roadway. Roadway, in turn, might be divided into private vehicles, drayage and heavy equipment. While all of these sections are controlled by government regulations, the salient regulations differ, and the tendency for innovation in each section is moderated by different influences. For example, arguably Rail is very conservative, driven by regulation and not perceived as an innovator. Private vehicles markets are seen to be driven by cost. Drayage seems to be an interesting mix of regulation drivers and private innovation. From the perspective of a licensing professional, younger subsectors such as Nanotech and certain parts of Clean Tech can learn from the concerns of more mature industrial sectors such as aerospace or transportation. But what comes after the Mature Market Stage? Even mature sectors can learn from each other as technology and regulations converge in unique ways. Indeed, the Transportation subsector is feeling a change in the wind. New blood is entering the field where old blood has predominated when barriers to entry were far too high. Now, influenced by Clean Tech’s entrance into the mainstream, with electric vehicles on the horizon and the infrastructural shift that it portends, there are new possibilities and changes afoot. Will we see similar shifts in the Aerospace and Transportation subsector as drones, also known as UAVs (unmanned aerial vehicles), become commercially commonplace? In the last year and a half, the Aerospace and Transportation Committee has identified issues of broad interest, such as: Joint Ownership, EU Patent Unification, Recent and Emerging Changes to Defense Data Rights Regulations, IP in Bankruptcy: Addressing Licensor and Licensee Concerns, Defensive Publishing and a Quantum Leap in Prior Art Access, Virtual Patent Marking, Hybrid Patent and Trade Secret Licenses. In addition they have presented topics of interest to large multinational companies including: Mitigating Risks of IP Theft and Corruption with Global Supply Chains, Application of Game Theory to Licensing, U.S. International Tax Considerations in IP Related Transactions, Insurance/Risk Allocation Issues in Licensing. Our hope is that it stimulates discussion and more publication on the topics of interest to this important sector. ■ Clean Tech Trends Clean Tech Trends—Intellectual Property & Transactions By Ron Epperson and Myron Kassaraba I.Introduction T he clean tech market has been going through some major changes in 2013 and the beginning of 2014. Some of the signs continue to be negative such as bankruptcies and a soft initial public offering (IPO) market but there continues to be positive trends in many areas of this sector. Overall investment in clean energy continues to be substantial and the market is re-focusing on addressing the infrastructure deficiencies that are limiting the growth of certain technologies. Renewables represent the most significant dollars invested in the clean tech sector. With the increasing volume of deployment of wind & solar resources, the need for a more intelligent and integrated electricity distribution grid has become a critical path factor. This has also further reinforced the need for cost-effective grid-scale storage technologies. Some of the big stories were the commercial success of electric car company Tesla both in the consumer and financial markets, Google’s acquisition of Nest Labs, the continued growth in the domestic production of oil and affordable and abundant natural gas and significant progress in the deployment of renewable wind and solar capacity. The increasing integration of wireless and sensor intelligence into all types of devices is creating opportunities in enterprise tools around big data and analytics. This article is a collection of data and perspectives from thought leaders in the clean tech market looking back at 2013 and forward to what we can expect in the coming year. for renewable projects continue to represent significant economic potential for new technologies. Venture capital funding, though representing a small percentage of the overall investment dollars in clean energy, is a leading indicator of innovation and the development of intellectual property in the sectors where investments are being made. ■ Ron Epperson, After peaking in 2008, CLP, CPVA VC investments dipped Intellectual Energy LLC, significantly with the marManaging Director, ket decline in 2009 as Sedona, AZ, USA shown in Figures 3 and 4 from PitchBook’s 2013 E-mail: ronepperson@ intellectualenergy.net Venture Capital Clean 2 Tech report. The current ■ Myron Kassaraba, slow-down in the pace of Pluritas, LLC, investment can be largely Partner, Strategic attributed to a retreat Advisory & Transactions, from the clean tech sector by many VC firms. Cambridge, MA, USA There was a bit of a “gold Clean Tech Committee rush” in the mid-2000s E-mail: [email protected] when traditional VC’s Figure 1: New Investment in Clean Energy 2004-2013 ($BN) 21% $318 34% $262 0.6% II. Funding & Transactions Even with the declines since the peak in 2011, global investment in clean energy continues to be substantial as shown in the Figure 1 and Figure 2 from Bloomberg New Energy Finance.1 These investment dollars are dominated by project finance for wind, solar and biofuels. These large markets 17% $195 -10% $286 -11% $254 $196 44% $167 45% $116 46% $80 $55 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1. http://about.bnef.com/fact-packs/global-trends-in-clean-energy-investment-q2-2013-fact-pack/. 2. http://pitchbook.com/2013_Venture_Capital_Cleantech_Report.html. Note: Total values include estimates for undisclosed deals. Includes corporate and government R & D, and sending for digital energy and energy storage projects (not reported in quarterly statistics). Source: Bloomberg New Energy Finance June 2014 84 Clean Tech Trends Figure 2: New Investment in Clean Energy by Sector Q1 2004—Q4 2013 ($BN) 78.0 74.1 69.6 66.1 65.0 57.3 47.2 43.4 42.3 47.7 34.8 33.9 19.119.7 17.1 8.9 8.8 8.1 9.8 11.8 2004 21.8 45.6 43.0 58.3 58.1 53.4 52.7 50.7 62.1 58.3 57.5 49.1 47.3 43.6 36.7 30.5 27.3 27.1 21.8 13.8 2005 Each bar=1 Fiscal Quarter 2006 2007 Wind 2008 Solar 2009 Biofuels 2010 2012 2013 Other Note: Total values include estimates for undisclosed deals. Includes corporate and government R & D, and sending for digital energy and energy storage projects (not reported in quarterly statistics). were looking for new categories to make investments. Clean tech looked like a sector where there was money to be made. What most investors coming out of traditional tech investing have found is that the adoption of clean tech technologies has a longer time horizon, can have a high level of regulatory complexity and in many cases is much more capital intensive than traditional high tech. Many were lured by the availability of government-backed loan guarantees and co-investment, but as we have seen with the number of high-profile bankruptcies of clean tech companies, this was not a guarantee of success. There continues to exist a committed group of venture capital investors who are comfortable with the risk profile of investing in this market and are joined by strategic/corporate investors who are looking to fuel innovation from external sources. Some VC’s have narrowed their focus on categories of technology that they better understand, such as software and energy efficiency or component-level hardware technologies. 2011 Source: Bloomberg New Energy Finance for leading edge research and commercialization. The ARPAe program, established in 2007 by the America COMPETES Act passed by Congress, has just released some details about their progress.3 To date, 22 ARPA-E projects have attracted more than $625 million in private-sector follow-on funding after ARPAE’s investment of approximately $95 million. In addition, at least 24 ARPA-E project teams have formed new companies to advance their technologies, and more than 16 ARPA-E projects have partnered with other government agencies for further development. Since inception in 2009, ARPA-E has invested over $900 million across 362 projects through 18 focused programs and two open funding solicitations (OPEN 2009 and OPEN 2012). In 2013 alone, ARPA-E has launched focused programs to improve techniques to manufacture light-weight metals, develop robust battery chemistries and architectures for electric vehicles, biologically convert natural gas to liquids, create innovative semiconductor materials for improved power conversion, and use solar concentration Government Funding And Programs Government labs and universities continue to play an important role in both the development of clean tech technologies and IP, and as a source of funding 85 les Nouvelles 3. http://www.energy.gov/articles/arpa-e-projects-attract-more625-million-private-funding. Clean Tech Trends Figure 3: VC Clean Tech Deal Flow by Year 350 $5 288 300 fuels and vehicles. The database contains more than 950 technology summaries and over 18,000 patents that are available for license. Clean Tech IPO Market: In his article, “What the Strong IPO Market Means for Clean Tech 250 203 and Renewable Energy Companies”5 183 $3 200 Sahir Surmeli, a Partner in the En141 ergy & Clean Technology group at 150 109 $2 Mintz Levin, writes: 100 71 “The year 2013 was officially 64 $1 the year with the most active IPO 50 market in the United States since $0.4 $0.4 $1.3 $2.4 $4.6 $3.0 $3.8 $4.3 $3.7 $1.4 2000. There were 222 U.S. IPOs 0.0 $0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* in 2013, with a total of $55 billion raised.6 The year 2000 (over 350 Capital Invested ($B) # of Deals Closed IPOs) was the last year of a 10-year *Through Nov. 30, 2013 Source: PitchBook boom in U.S. IPOs had reached its peak in 1996 (over 650 IPOs). The strongest year for IPOs since 2000 Figure 4: VC Clean Tech Investment by Sector was (until now) 2004, with roughly 215 IPOs. 100% Other What has that meant for emerging 90% Software energy technology and renewables 80% companies that might be looking to Energy Services the capital markets? There was some 70% Commercial activity in 2013—but not much 60% Services compared to the broader market or 50% to the more traditional energy and Commercial Products oil & gas sector. 40% For a handful of larger energy Exploration, 30% tech companies that are already Production & Refining 20% public (e.g., Tesla, First Solar, Jinko Solar and SunEdison), it has meant 10% Energy follow-on offerings to bolster cash Equipment 0% for growth. These companies ac2004 2005 2006 2007 2008 2009 2010 2011 2012 2013* cessed the market over the last *Through Nov. 30, 2013 Source: PitchBook several months; Tesla (May 2013), First Solar (June 2013), SunEdison (September 2013) and Jinko Solar (September 2013). techniques for hybrid solar converters. For a couple of energy companies with renewables The U.S. Department of Energy has taken measures portfolios, it has meant IPOs for “YieldCos,” vehicles to assist in the discovery and commercialization of technologies and intellectual property that have been 4. http://techportal.eere.energy.gov/. developed in its various labs. One of those measures 5. http://bit.ly/MWUZqa. is the Energy Efficiency and Renewable Energy (EERE) 6. Please note that there will be some variance in the statis4 Innovation portal. See Figure 5. tics for IPOs generally. This is because most data sets exclude extremely small initial public offerings and uniquely structured The EERE Innovation Portal boasts innovations from offerings that don’t match up with the more commonly undertwenty seven national laboratories and universities. stood public offering for operating companies. The data above Technology summary categories range from advanced is based on information from http://bear.warrington.ufl.edu/ritter/ materials to building energy efficiency and energy IPOs2012Statistics.pdf and Renaissance Capital www.renaissancecapital.com. analysis to energy generation, industrial technology, $4 250 234 242 June 2014 86 Clean Tech Trends recently added some key people to its board of directors. Opower serves more than 90 utilities, including eight of the 10 largest in the U.S. according to its website. Sunrun Inc., headquartered in San Francisco, is a solar-power installer, and its business model is power-purchase agreements, where users pay for the electricity and lease their PV panels rather than buying them. In June, Sunrun announced it had secured financing for more than $630 million in residential solar projects. Its main competitors are SolarCity and SunPower Corp. SPWR+2.57 percent. Bloom Energy of Sunnyvale, Calif., makes solid oxide fuel cells around which it builds onsite powergeneration systems. Its star-studded customer list includes Wal-Mart, Google and AT&T, and the firm in August started a leasing program with Bank of America Merrill Lynch. MartketWatch analyst, Claudia Assis further comments that—“In the past couple of years, several clean-energy companies have filed and then withdrawn IPO applications. Any of them could, however, toss their hats back in the ring this year. Clean-energy and related companies that shelved IPO plans in the past include biofuel makers CosKata Inc. of Illinois, which halted its IPO process twice; Fulcrum Bioenergy of California; and Smith Electric Corp. of Massachusetts, a maker of commercial electric trucks and buses.” Figure 5: DOE Energy Innovation Portal that hold energy-generating assets and pay a stream of dividends, such as NRG Yield (which went public in July 2013) and Pattern Energy (which went public in September 2013).” Surmeli says that he expects to see more of these in the coming years. The Cleantech Group’s i3 Investment Monitor7 noted that “significant venture exits were also realized through IPOs as 14 VC/PE-backed clean technology companies raised a total of $1.65 billion through first-time share offerings on public markets during the year. That dollar total was 19 percent higher than the $1.4 billion recorded across the 16 VCPE-backed IPOs of 2012. Notable IPOs by sector in 2013 included Silver Spring Networks (Smart Grid), Control4 (Energy Efficiency), Marrone Bio Innovations (Agriculture), Intrexon (Biofuels & Biochemicals), and Evogene (Agriculture).” Looking forward, a recent MarketWatch.com article8 highlighted several clean tech companies that are positioning for possible IPOs in 2014. Opower Inc., which runs energy-efficiency programs for utilities, announced on February 12th that they have submitted a confidential filing for an initial public offering. The Arlington, Va. based company has been preparing its IPO since at least last year and 7. http://www.cleantech.com/2014/01/08/i3-quarterlyinvestment-monitor-reports-6-8-billion-cleantech-ventureinvestment-2013/. 87 les Nouvelles Global M&A And IPO Activity The big news in clean tech M&A was the $3.2 billion acquisition of Nest by Google9 which we take a closer look at later in the article. The Cleantech Group reported that “M&A transactions targeting venture capital/private equity-backed companies in clean technology sectors totaled 83 transactions in 8. http://www.marketwatch.com/story/3-cleantech-companiespoised-to-ipo-in-2014-2014-01-08. 9. http://www.bloomberg.com/article/2014-01-13/apgD_JZTevBg.html. Clean Tech Trends Figure 6: Global Energy & Environmental Tech M&A $ Projections* Disclosed Deals Total Deals $40 160 $35 140 $30 120 $25 100 $20 80 $15 60 $10 40 $5 20 $0 2008 2009 2010 2011 2012 2013 # Deals Billions $ Disclosed 0 Each bar=1 Fiscal Quarter *Based on average deal size in that year, with other deals removed Source: CleanTech Group, powered by Data from i3 Figure 7: Global Energy & Environmental Tech Acquisitions by Company 2012/13 Siemens GE ABB Robert Bosch Parker- Hannifin PowerSecure Emerson BASF Schlumberger Schneider Honewell Halliburton Eaton AGC Partners and Head of their Energy & Environmental Technologies practice, adds: “From an Internet of Things perspective, two recent transactions were quite interesting: Google/Nest highlights the value which comes from combining algorithms and endpoints, and Schneider/Invensys which combined with other past acquisitions gives Schneider very strong automation offerings across industrial, commercial building, data center and smart grid markets.” See Figures 6 and 7. Bankruptcy Many clean tech companies continued to struggle with reaching commercial deployment and/or revenue levels to sustain their operations—resulting in the need for additional funding. As we have seen previously in this document, the pull-back of venture 0 2 4 6 8 10 12 14 capital investors from Source: Capital IQ, CleanTech this sector made it very difficult to raise 2013 (up 15 percent compared to 2012), of which additional equity financing. In some cases, strategic totals were disclosed for 32 transactions totaling investors were able to step in and acquire these $604 billion (down 37 percent).” companies or their assets in an M&A transaction, Notable venture exits were realized in the Agriand in other cases the companies were forced to seek culture (Monsanto’s acquisition of Climate Corporabankruptcy protection. tion), Energy Efficiency (NovaLED’s acquisition by High profile bankruptcies included electric car Samsung), Transportation (Google’s acquisition of startup Fisker Automotive, thin film solar startup Waze) and Recycling & Waste (ecoATM’s acquisition Nanosolar, solar giant Suntech, solar company Soby Outerwall) sectors.”10 lopower, electric car startup Coda Automotive, and Joe Dews, a Partner at investment banking firm electric car charging company ECOtality.11 10. http://www.cleantech.com/2014/01/08/i3-quarterlyinvestment-monitor-reports-6-8-billion-cleantech-ventureinvestment-2013/. 11. http://gigaom.com/2013/12/31/13-biggest-moments-incleantech-in-2013/. June 2014 88 Clean Tech Trends Fisker’s assets were recently acquired in a bankruptcy auction by Chinese auto parts giant Wanxiang for $149 million. Wanxiang also bought up bankrupt battery maker A123 Systems in late 2012.12 These bankruptcies along with a growing number of larger companies making strategic decisions to exit markets, such as wind (UTC) and solar (BP), are creating a stockpile of orphaned technologies and IP. 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 with average time to issue in the U.S. is approximately 40 months, this can be a lagging indicator. See Figure 8 and 9. IP Checkups’ CleanTech Patent Edge,14 in their comprehensive 2013 Annual Report, did some further analysis of the patenting activity in the clean tech sector. Figure 10 provides a summary of which companies are both getting new patents issued as III.Intellectual Property well as filing new applications. Patenting Activitiy Though Panasonic is the most active company when 13 looking at both U.S., European grants and WO publiThe Clean Energy Patent Growth Index published cations, Samsung is in the top position in U.S. patent quarterly by Albany law firm Heslin Rothenberg Farley grants and application with close to 600 in each. The & Mesiti P.C., looks at where companies have been two categories where they have been most active making investments in filing patents. The Index looks are efficiency and energy storage. General Electric, at patents that have been issued in nine different with over 1,000 worldwide clean tech patents and clean energy categories. The overall Index continues applications, was most active in the renewable energy to show the strength of patents being issued, though generation and water categories. Some other findings: Figure 8: Clean Energy Patent Growth Index By Year • Over 50 percent of the Top 20 2002 - 2013 Clean Tech assignees produce 3500 consumer electronics • 20 percent of the Top 20 As3000 signees are auto manufacturers 2500 with various business divisions and a strong position in Clean 2000 Tech (likely from clean air ini1500 tiatives). In taking a closer look at the sec1000 tors representing the clean tech 500 market, Figure 11 shows where the bulk of the patent activity 0 has been occurring. Renewable Energy Generation remained the © 2014 Heslin Rothenberg Farley & Mesiti P.C. #1 clean tech sector with the most patent activity in 2013. Figure 9: All Sectors Patents By Quarter During the past 5 years, Trans2002 -2013 portation, Renewable Energy 300 Generation, Green Materials, Energy Storage, and Efficiency 250 related patent activity has risen. 200 Litigation 150 In addition the litigation between Honeywell v. Nest and BRK Brands v. Nest, which are 100 50 Each bar=1 Fiscal Quarter 89 les Nouvelles 2013 2012 2011 2010 2009 2008 2007 2006 2005 2004 2003 2002 0 © 2014 Heslin Rothenberg Farley & Mesiti P.C. 12.http://www.reuters.com/ article/2014/02/15/us-fisker-auctionidUSBREA1E04B20140215. 13. http://cepgi.typepad.com/. 14. http://www.cleantechpatentedge.com/. Clean Tech Trends Gevo-Butamax—The GevoButamax litigation was a major story of 2012 and 2013, notable U.S. App both for its size and as the first 2,000 foray of big oil into biofuels patent U.S. Grant suits.16 The ongoing patent litigaEuropean App 1,500 tion between advanced biofuels European company Gevo and BP-DuPont Grant joint venture Butamax has grown 1,000 WO to encompass at least 17 suits and Other 14 patents relating to methods of 500 producing biobutanol. The lawsuit started in Janu0 ary 2011 with Butamax’s initial complaint filed in federal court in Delaware alleging infringement of U.S. Patent No. 7,851,188 (’188 Patent), later amended to include Source: CleanTech Group, PatentEdge U.S. Patent No. 7,993,889 (’889 Patent). Gevo counterclaimed, accusing Butamax of infringing U.S. Figure 11: Worldwide Patent Documents, 2009-2013 Patent Nos. 8,017,375 (’375 Patent) and 8,017,376 (’376 Patent). Last year the court handed Gevo Water a partial victory when it granted Transportation the company’s motion for summa2009 Renewable Energy Generation ry judgment of no infringement 2010 of the ’188 and ’889 Patents unRecycling & Waste der the doctrine of equivalents. 2011 Manufacturing/Industrial Butamax subsequently notched 2012 Green Materials a win in a decision granting its 2013 motion for summary judgment Energy Storage of non-infringement of the ’375 Efficiency and ’376 Patents. As these and Air & Environment other big decisions start to come down, this very important battle Agriculture is likely to continue. Gevo and 0 5000 10000 15000 20000 25000 30000 35000 Butamax are the two main play# of Patent Documents Source: CleanTech Group, PatentEdge ers in isobutanol, which is a very good petroleum substitute and covered elsewhere in this document, there continues well-suited for both fuels and chemicals. to be active patent disputes in the various clean tech Novozymes-Danisco—There has been significant sectors—though not at the same level as we are seepatent infringement litigation between Danish bioing in smartphones and other technologies. pharm rivals Novozymes and Danisco (now owned Eric Lane, the founder and author of Green Patent by DuPont), which are both active in developing Blog15 and the Principal at Green Patent Law, a bouenzymes used in the production of biofuels. Novotique law firm dedicated to providing IP services to zymes has accused Danisco of infringing U.S. Patent the clean tech industry had provided a summary of No. 7,713,723 (’723 Patent) by selling alpha amylase what’s red hot in green patent litigation. enzymes including Danisco’s GC358 product. Pa n as o To nic Sa yot m a Ge Mi su ne thu ng ra bi l E sh lec i t Bo ric Sie sch m e Ho ns nd B A Se mi Ge Hita SF a co ne ch SE nd ra i, uc l M Lt tor d En oto . erg rs y Ni Lab ss Du an P To ont sh iba 3M IB Sh M ar p Su So m ny ito m o # of Patent Documents Figure 10: Worldwide Patent Activity Burgeoning Biofuels Battles 15. http://www.greenpatentblog.com/. 16. http://www.greenpatentblog.com/2013/08/27/butamaxavoids-infringement-of-two-gevo-patents-on-summary-judgment/. June 2014 90 Clean Tech Trends The ’723 Patent, which claims priority back to an application filed in 2000, is entitled “Alpha amylase mutants with altered properties” and relates to variants of certain alpha amylases that exhibit altered stability under high temperatures, low pH and other conditions. The patented variants can be used for starch conversion in ethanol production. The case has had a number of twists and turns with both sides using a variety of legal actions.17 After a jury found in favor of Novozymes, the trial court invalidated the patent. Novozymes appealed this final decision, and last year the U.S. Court of Appeals for the Federal Circuit affirmed that the ’723 Patent is invalid, in all likelihood ending the case. Neste-Dynamic Fuels—Neste Oil’s patent infringement suits against competitor Dynamic Fuels involve biodiesel fuels and production processes. Dynamic Fuels is a joint venture of Syntroleum and Tyson Foods that operates refineries capable of producing allegedly infringing synthetic renewable diesel fuels. The patents in suit are U.S. Patent No. 8,187,344 (’344 Patent), entitled “Fuel composition for a diesel engine” and U.S. Patent No. 8,212,094 (’094 Patent) entitled “Process for the manufacture of diesel range hydrocarbons.” The patent relates to a process for the manufacture of diesel range hydrocarbons from a biological feedstock where the feed is hydrotreated and isomerized. Both patents have been placed into reexam and the suits have been stayed pending the outcome.18 GS Cleantech—In another major biofuels case, involving corn ethanol production technology, GreenShift and its New York subsidiary, GS Cleantech (GS), brought a series of patent infringement suits against a host of ethanol producers across the Midwestern United States.19 Last year, GS fired off several new lawsuits involving its patented ethanol production processes against Aemetis Advanced Fuels, Southwest Iowa Renewable Energy, Little Sioux Corn Processors and Homeland Energy Solutions GS, and has been on an aggressive patent enforcement campaign over the last several years. Multiple actions were consolidated in the Southern District of Indiana, where the asserted patents were construed and re-construed. LED Litigation LED patent litigation continued to grow in 2013. 17. http://www.greenpatentblog.com/2013/08/23/novozymesdid-not-possess-claimed-biofuels-enzyme-and-is-dispossessed-of18-million/. 18. http://www.greenpatentblog.com/2013/07/29/another-nestebiodiesel-patent-suit-is-stayed-pending-reexam/. 19. http://www.greenpatentblog.com/2013/09/13/clean-tech-incourt-green-patent-complaint-update-19/. 91 les Nouvelles Leading the way this past year was the Trustees of Boston University, which sued dozens of defendants including AU Optronics, BlackBerry Corporation, Dell, Fujifilm, HTC, Eastman Kodak, Olympus, Sharp, and Sony. Boston University launched about 35 new suits in 2013—they are all very similar and all assert the same patent. The patent in these suits is U.S. Patent No. 5,686,738, entitled “Highly insulated monocrystalline gallium nitride thin films” and directed to gallium nitride semiconductor devices and methods of preparing highly insulating GaN single crystal films in a molecular beam epitaxial growth chamber. The accused products include digital cameras, smart phones, and other personal electronic devices. Nichia and Philips are perennial players in LED litigation, and both were active in 2013. On September 11, 2013 Nichia sued Everlight Electronics in federal court in Marshall, Texas for alleged infringement of U.S. Patent No. 7,432,589 (’589 Patent). The ’589 Patent is directed to a semiconductor device capable of preventing an adhesive for die bonding from flowing to a wire bonding area. In another action, Everlight sued Nichia seeking a declaratory judgment that two LED patents owned by its Japanese rival are not infringed, invalid, and unenforceable due to alleged inequitable conduct by Nichia before the USPTO. In a recent decision, a Michigan federal court granted Nichia’s motion to dismiss the inequitable conduct claims. The two patents at issue relate to high brightness LED technology. They are U.S. Patent No. 5,998,925, entitled “Light emitting device having a nitride compound semiconductor and phosphor containing garnet fluorescent material” (’925 Patent), and U.S. Patent No. 7,531,960, entitled “Light emitting device with blue light LED and phosphor components” (’960 Patent) (Patents-in-suit). Philips sued Altair in federal court in U.S. District Court for the Western District of Wisconsin requesting a declaratory judgment that U.S. Patent No. 7,049,761 (’761 Patent) is invalid and unenforceable and that Philips’ LED-based replacement tube products do not infringe the patent. The ’761 Patent is entitled “Light tube and power supply circuit” and directed to a light tube for a fluorescent light fixture having a plurality of light emitting diodes within the bulb. According to the complaint, Altair has been trying to get Philips to take a license to the ’761 Patent. The complaint also charges Altair with a Lanham Act violation for making false or misleading representations that the ’761 is a “foundational” patent and only companies that have licensed the patent can make LED-based replacement tubes for fluorescent Clean Tech Trends lighting fixtures. There are other active LED patent litigations involving major players such as Cree, LG, Nichia, Samsung and Seoul Semiconductor. More details about these can be found in LEDInside.20 Wind In the wind market, General Electric (GE) and Mitsubishi Heavy Industries settled their long running patent litigation in December, 2013.21 The latest wind IP litigation takes place over in Europe with two major companies in wind, Enercon and Gamesa, regarding whether Enercon’s very early patent on turbine control technology in high winds is valid and enforceable.22 GE is also being sued by an individual inventor over a wind turbine blade manufacturing patent in a matter GE has tried to keep very quiet.23 Licensing Much of today’s patent licensing falls under the category of enforcement & litigation. There are several examples of proactive licensing efforts/programs to patents relevant to clean tech market participants. Several examples of such programs are: •ISET—International Solar Electric Technology24 •Paice’s Hybrid Vehicle Patents25 •Philips LED Luminaire and Retrofit Bulb Licensing Program26 claiming over 300 licensees. •SIPCO’s Wireless Mesh Patent Portfolio Licensing Program administered by MPEG-LA27 •Terrabon28 is licensing bio-fuel technology & IP The energy efficiency market is making increasing use of wireless communications, sensors and big data technologies. As a result—there will be growing relevance of IP controlled by both traditional information technology companies as well as firms focused 20. http://www.ledinside.com/outlook/2014/1/2013_review_ led_manufacturers_full_blown_patent_disputes. 21. http://www.bloomberg.com/news/2013-12-16/mitsubishiheavy-ge-settle-wind-patent-infringement-cases.html. 22. http://www.windpowermonthly.com/article/1280923/ gamesa-loses-enercon-storm-patent. 23. http://www.greenpatentblog.com/2013/07/22/trigonometry-plus-non-conventional-steps-equals-eligible-subject-matter-inblade-assembly-patent/. 24. http://www.isetinc.com/product-services/technologylicensing/. 25. http://www.paicehybrid.com/about/our-patents/. 26. http://www.ip.philips.com/licensing/led-based-luminairesand-retrofit-bulbs/. 27. http://www.mpegla.com/main/programs/wirelessmesh/ Pages/Intro.aspx. 28. http://www.terrabon.com/. on IP licensing to product and services in the clean tech market. IV. Sector Spotlight—Wind Patents Totaro & Associates29 closely tracks the wind industry and has produced some very interesting analysis of the intellectual property landscape in this segment. The Wind Patent Landscape Report published in 2013 looks not only at the aggregate number of patents being issued to the major players in wind, it goes deeper and ranks the individual patents based on industry relevance. The chart in Figure 12 shows the leading assignees of wind patents and the color coding shows their industry relevance. The assessment of industry relevance is based on an examination of claim breadth as well as industry usage of the patent protected technology. Backward and forward citations that should have been made, but were overlooked by the inventor(s) and / or the examiner, are identified from a thorough review of the 9,300 patent families and over 35,300 global filings in this landscape. This risk score represents the possibility or likelihood of assertion on behalf of the patent holder. In many instances, the patent holder may be unaware that their IP rights are potentially being infringed, leaving monetization opportunities to go un-exploited. See Figure 14. Philip Totaro, Founder & CEO of Totaro & Associates observes “the industry relevance results indicate that only 1 percent of issued patents are a high impact on the entire industry as a whole, with another 7 percent which may become relevant in the future. The remaining 92 percent of filings are merely providing companies with basic defensive IP protection. This analysis is unique and very valuable not only for technology suppliers but also to insurers, project developers and financers who are interested in assessing their risk of getting swept into litigation because of the technologies they are deploying.” General Electric Company (GE) controls not only the largest number of patent families, but the largest percentage of all wind-related IP with over 17 percent of patent filings. All combined, the top 6 patent holders hold 49.4 percent of patent filings. Only 60 patent families out of 6,755 catalogued thus far comprise technology which is broadly applicable to products and services offered commercially within the industry worldwide. Other observations on this segment are that the general practice has been one of cross-licensing vs. litigation between the major players. There has been 29. http://www.totaro-associates.com/. June 2014 92 Clean Tech Trends Figure 12: Assignees - All Filings 1400 1200 1000 800 ©2014 Totaro & Associates. All Rights Reserved. Not For Resale 600 400 200 MOOG INC. Ingeteam Energy, S.A. Acciona Windpower, S.A. Schaeffler Technologies GmbH & Co. KG Aerodyn Engineering GmbH SSB Wind Systems GmbH & Co. KG EADS NTN Corporation Northern Power Systems, Inc. ZF FRIEDRICHSHAFEN AG American Superconductor Corporation Envision Energy Suzlon Energy GMBH Wilic S.A.R.L. SKF AB Robert Bosch GmbH Clipper Windpower LLC Xinjiang Goldwind Science ABB United Technologies Corporation Hitachi, Ltd. LM Windpower Alsom Wind S.L.U. REpower Systems SE Nordex Energy GmbH Enercon GMBH Gamesa Corporación Tecnológica Sinovell Wind Group Co. Ltd. Vestas Wind Systems A/S Mitsubishi Heavy Industries, Ltd. Siemens AG General Electric Company 0 Figure 13: Legend for Industry Relevance LOW Patent / Application is not relevant to the pervasive set of technologies and products in the industry. MEDIUM May have been relevant in the past or simply not broadly applicable. Multiple methods of design around exist. MEDIUM/HIGH Important filings which the industry needs to be cognizant of, but these can likely be avoided/mitigated. HIGH Critical filings which has been asserted, licensed or enforced, or is otherwise highly likely to be in the future due to claim breadth. Source: Totaro & Associates Figure 14: Leading Companies’ Portfolios Ranked by Industry Relevance Relevance GE No. of Patents & Apps No. of Patents & Apps Siemens % of Vestas Portfolio % of Total Industry No. of Patents & Apps % of Siemens Portfolio Mitsubishi % of Total Industry No. of Patents & Apps % of Mitsubishi Portfolio Entire Industry % of Total Industry No. of Patents & Apps % of Total Industry 0.9% High 22 1.9% 36.7% 9 1.2% 15.0% 5 0.8% 8.3% 4 0.9% 6.7% 60 Medium High 124 10.7% 25.0% 88 12.0% 17.7% 66 10.9% 13.3% 46 10.1% 9.3% 496 7.3% Medium 742 63.9% 20.3% 471 64.2% 12.9% 420 69.5% 11.5% 243 53.4% 6.6% 3,664 54.2% Low 274 23.6% 10.8% 166 22.6% 6.5% 113 18.7% 4.5% 162 35.6% 6.4% 2,535 37.5% Total 1,162 100% 17.2% 734 100% 10.9% 604 100% 9.2% 455 100% 6.7% 6,755 100% Top 4 Wind IP Holders 93 % of GE Portfolio Vestas % of Total Industry les Nouvelles Source: Totaro & Associates Clean Tech Trends an increasing trend of consolidation that has created some orphan technologies and patents. Assets for sale include over 230 patent families, with over 800 global filings, and all relate to technologies for horizontalaxis, utility scale wind. Companies with assets for sale include United Technologies Corporation, GE, Gamesa, Clipper Windpower, ChapDrive, Danotek Motion Technologies, Northstar Towers, CITCEA-UPC and Princeton Energy Group. As we have seen in the solar segment—the consolidation in this space had created more limited opportunities for the transfer/ sale of this orphaned IP. V. Case Study—Nest Labs, Inc. Nest’s recent acquisition by Google for $3.2 billion has been getting headlines; but one of the real stories about Nest has to do with their execution of a very effective patent strategy. Many start-ups are reluctant to dedicate significant time or resources to their intellectual property. Investors want their money to go for engineers to develop products and sales & marketing to gain customers and grow revenue. Spending precious money on legal expenses to rapidly build a patent portfolio or paying millions to acquire them is typically low on the list of priorities. Nest’s patent strategy was one that appears to have been very deliberate and well played. They benefited from the fact that the founding team came from Apple where patenting is an established and important part of the culture. They knew that they would be facing challenges from established incumbents so they made sure that they raised enough capital to not only create insanely great thermostats, but also to make meaningful investments in their intellectual property. Nest was founded in May 2010 and closed their A round of venture financing in September of that year. This is also when they filed their first few patent applications, which began issuing in late 2012 and 2013. They have continued to file applications at a steady pace. In February of 2012, Honeywell, an established player in the residential thermostat market, filed a complaint against Nest and retailer Best Buy claiming the Nest thermostat infringed upon seven Honeywell patents.30 In July, 2013, Nest responded by filing an inter partes review (IPR) with the patent office claiming that the Honeywell patents were invalid and requesting that they be reexamined by the USPTO. The original case brought by Honeywell was stayed pending the outcome of the IPR. The initial office ac30. http://www.reuters.com/article/2012/02/06/ idUS64069460520120206. tions in response to the IPR were favorable to Nest with the PTO finding claims in each of the patents to be disallowed.31 Honeywell has continued to respond to these findings. In looking at the status of several of the reviews they are coming close to a conclusion. It appears all but certain that the surviving Honeywell claims, if upheld, will be significantly weaker than those found in the original granted patents. In November 2013, BRK Brands, Inc., the makers of First Alert alarms, filed a complaint against Nest claiming that Nest’s newly announced CO2 detector infringed upon seven BRK patents.32 Nest is once again taking an aggressive approach in their defense. In addition to organic portfolio development, Nest had taken other strategic actions to bolster their IP holdings. In September 2013, Nest entered into a patent agreement with Intellectual Ventures (IV) that included a non-exclusive license to some of IV’s patents and the purchase of several patent families. In looking deeper into those acquired patents, one family originated from an early energy management/home networking start up called Xanboo and another group from a defunct start up called World Theatre, Inc. In November 2013, a large portfolio of over 100 issued patents and pending applications from an individual inventor named Lawrence Kates were assigned to Nest. These patents were assigned from the law firm Knobbe Martens and had been offered for sale at the ICAP auctions in 201233 by the Stapleton Group—an asset recovery firm. This acquisition by Nest did not make the news but has added some very interesting patents and applications with priority dates as early as 2000 to their portfolio. Nest has continued to invest in the prosecution of their acquired patent families. Based on a recent search (using Thomson Innovation), their current portfolio is comprised of 92 issued U.S. utility patents, 21 U.S. design patents, and 160 U.S. and foreign applications. The broad market acceptance of the Nest products and the exceptional team were clearly important factors in Google’s desire to acquire Nest, but the value of those products and the company were significantly enhanced by their thoughtful and effective execution of their IP strategy. Nest recognized the importance of patents, especially when entering established markets where there were powerful incumbents. Now the 31. http://www.greenpatentblog.com/2012/11/04/honeywellsmart-thermostat-patents-suffer-seven-setbacks-in-uspto-reexam/. 32. http://www.theverge.com/2013/11/19/5122056/smokedetector-company-sues-nest-over-voice-alerts-and-vents. 33. http://gametimeip.com/2012/03/16/is-a-lawfirm-usingicaps-patent-auction-to-recover-on-unpaid-prosecution-work/. June 2014 94 Clean Tech Trends Nest IP assets will be added to the substantial patent holdings of their well-endowed new parent Google. This is a case study that should be required reading for startup investors and management teams alike as it illustrates the importance of understanding the critical role patents play in a venture’s growth and success in today’s environment. VI.Opportunities & Conclusions The clean tech market represents a wide range of technologies. Some, such as bio-fuels, look at lot like life sciences, whereas solar and batteries are focused on materials technologies and the smart grid involves industrial controls and sophisticated software. There is massive economic value associated with the markets, such as traditional oil and gas, transportation, and energy generation and distribution. Speakers at a recent MIT Energy Conference panel agreed that one of the limiting factors on the adoption of new technologies, especially renewables, has to do with integrating these new technologies into the electricity distribution grid. There is a lot of work going on surrounding the “integrated grid” both at groups like EPRI34 and in the organizations such as the RTO’s and utilities charged with operating the grid. A recent study35 from Advanced Energy Economy shows that the category of Enabling Information and Communication Technology continues to represent the largest share of expenditures in Electricity Delivery & Management Segment with revenues of close to $30 billion. The Charging Infrastructure category, though showing investment of just over $500 million in 2013, showed the largest growth from 2011-2013 of 278 percent. This is why technologies such as stand-alone hybrid drive systems are easier to implement and bring to market than plug-in electric vehicles (EV). The integration of renewable technologies such as wind and solar had put much greater pressure on the grid to be “smarter” and also highlighted the tremendous need for grid-scale storage solutions, not just for load balancing and voltage regulation, but also for storing the energy produced by renewable sources. This demand for energy storage continues to fuel investment in various technologies such as advanced batteries. The utility-scale energy storage market will exceed U.S. $2.5 billion in revenue by the year 2023, according to forecasting by Navigant Research,35 the research arm of consultancy Navigant.36 Even with some of the recent failures in certain 34. http://www.epri.com/integratedgrid. 35. http://info.aee.net/advanced-energy-now-2014-market-report. 36. http://www.navigantresearch.com/research/advancedbatteries-for-utility-scale-energy-storage. 95 les Nouvelles markets such as solar cells, the need for more efficient sources of renewable energy generation, a more intelligent grid and smart devices, homes and cities will continue to grow. Though the global rate investment in clean tech has slowed, the patenting of intellectual property in this sector has continued to grow as had the interest from entrepreneurs and inventors. The retreat of many traditional VC’s may be filled by a growing trend of crowd-funding and angel groups at the seed stage and strategic investors looking to supplement their internal R&D. Major web and software companies such as Google and IBM are active in developing clean tech products and technologies, and large diversified multinational companies such as General Electric, Panasonic and Samsung lead the investment in new patent applications. Industry consolidation in some sectors such as wind has created opportunities for acquiring orphan IP, and new entrants will be wise to consider using Nest’s playbook to compete against incumbents in established product categories. Nest and Tesla are in the headlines, Wall Street likes solar stock such as First Solar (NASD:FSLR) and SolarCity(NASD:SCTY), and utilities are dealing with the challenges an increasing amount of renewable capacity coming online and needing to be integrated into the grid. Major opportunities remain in energy storage, energy efficiency and transportation. Though not examined in this article, the recent drought crisis in California highlights the need for progress in more intelligent use of our water resources and is a sector that is ripe for innovation. Clean tech will continue to merit attention from the Members of the Licensing Executives Society as this will continue to be an important area of focus and investment. ■ A special thanks to those who generously contributed to this article: Contributors: Claudia Assis, Analyst at Marketwatch.com Joe Dews, Partner at AGC Partners Eric Lane, Principal at Green Patent Law Annemarie Meike, Business Development Exec. at Lawrence Livermore National Laboratory Sahir Surmeli, Partner at Mintz Levin Philip Totaro, Founder & CEO of Totaro & Associates Data and charts provided by: Bloomberg New Energy Finance Cleantech Group/i3 Heslin Rothenberg Farley & Mesiti P.C. IP Checkups’ CleanTech Patent Edge Navigant Research PitchBook Data Advanced Transportation Trends Selected Advanced Transportation Trends Part 1—The Giga-Factory By Michael Craner T here are a number of important advances happening in the transportation sector—from connected cars featuring self-driving capability and collision avoidance, and spawning privacy concerns, to plug-in hybrid electric / gas /diesel / compressed air / hydrogen / fuel-cell / solar and nuclear vehicles, to roadway-embedded and microwave-beaming charging systems; not to mention fleet-management logistics systems, advanced turbo-charging systems, fuel-saving navigation systems, distributed traffic-monitoring systems, instrumented self-diagnosing roadways, energy-recovery devices and mass-transit advances. Any examination of transportation trends cannot ignore the significance of the recent reemergence of the electric vehicle, as championed by a relatively small start-up company in Silicon Valley only a few years ago. In fact, it is difficult to write a paper about electric vehicle trends without mentioning that company—Tesla Motors. Though much has been written and hyped about the company in recent times, it is instructive to examine the advanced transportation landscape by starting with Tesla Motors as the center of a relevance/entity-relationship/concept map universe as illustrated by Figure 1. This map was developed by considering press releases, published licensing documents, patent inferences, blogs, stock tips, and pure hearsay related to Tesla Motors as a starting point and by building outward from there. Though an eye chart, it still falls short of representing the complex relationships that exist in this space, which would better be represented using multiple 4D renderings. Unfortunately, such renderings are beyond the scope of the current paper. As you can see from the figure, there are direct, well-known and publicized, and somewhat current corporate relationships between Tesla Motors, Daimler Benz, Panasonic, Solar City, and Toyota, represented by solid arrows; as well as concept relationships between Tesla, “the Giga-Factory,” the “supercharger network,” “distributed power generation/storage,” “vehicle-to-grid,” “solar energy,” “autonomous vehicles,” and “the U.S. DOE” represented by the dotted-line arrows. The dotted line arrows are also used to indicate less well known or less important, perhaps, relationships, that are two or three degrees removed from Tesla Motors, but still of some interest. Note that without the representation of the 4th dimension of time, there is no indication of the relative timeframes of these relationships. For example, the influence of Nikola Tesla on the modern day Tesla Motors is a link that spans from the ■ Michael L. Craner, invention of the 3-phase MediaComm Innovations, brushless AC motor by Nikola in the late 1800s President, to its incorporation in the Chester Springs, PA, USA Tesla Motors Roadster in E-mail: [email protected] 2008. Similarly, the figure paints other events as potentially contemporaneous that are actually separated in time. Suffice it to say that most of the relationships represented in the figure reflect only 10-20 years of history and are thus relatively current. While one might view Figure 1 as a Kurt Vonnegut style Granfalloon,1 it is clear the universe starting with Tesla Motors is larger than just electric vehicles, and it is instructive to study some of these relationships in more depth. In truth, the influence of the small silicon-valley based motorcar company can’t be underestimated. The USPTO lists over 1,400 patent publications that include the keyword “Tesla Motors.” And in 2010, over one-quarter of all “electric vehicle” patents filed were filed by Tesla Motors. Yet, Tesla operates in a densely populated technology territory, with Toyota, General Motors, Ford, Honda, Hyundai and others together owning over 11,000 patents in this space. Part 1—The Giga-Factory The biggest news on the Tesla Motor’s front, aside from discussions of a potential global domination of the world electric vehicle market, is the news of the construction of a Giga-Factory for the production of lithium-ion battery cells, primarily for plug-in/hybrid/ electric-vehicle (P/H/EV) use. Many other topics re1. Kurt Vonnegut (1963), Cat’s Cradle, Holt, Rinehart and Winston, 304 pp. June 2014 96 Advanced Transportation Trends Figure 1: The Tesla Motor’s Universe lated to Tesla are getting a lot of attention, such as the recent “non-safety-recall,” featuring titanium underbody reinforcement of an already “safer than any car in history” vehicle, and Elon Musk’s redefinition of the buyer-to-vehicle relationship with the bypassing of the entrenched dealership network model. How97 les Nouvelles ever, this part-one article will focus on what is likely the most significant transportation trend associated with Tesla Motors, for its sheer potential for changing the vehicle and energy landscape, the Giga-Factory. In early 2013, Navigant Research ranked lithium ion battery suppliers based on their strategy and execu- Advanced Transportation Trends In 2009 Tesla Motors signed a yearly renewable Li-Ion battery supply deal with Panasonic. There were discussions with multiple alternative or additional potential suppliers recently, notably Followers Challengers Contenders Leaders Samsung and LG. However, in October LG Chem of 2013, Tesla signed an estimated $7B AE SC JCI update to the Panasonic supply deal arranging for two billion cells to be supPanasonic plied to Tesla over the next four years for SK Continental use by the Tesla Model S and upcoming Toshiba E-Motion Model X crossover (now scheduled for Samsung SDI BYD production in early 2015). Hitachi GS Yuasa The deal cemented Panasonic as the largest supplier in the world of EV batteries. Panasonic is also one of the anA123 Systems nounced partners for Tesla Motor’s planned Giga-Factory, a plant expected to employ over 6,500, be located somewhere in the Southwest U.S., be powered primarily by local renewable energy sources, and by the year 2020, Strategy exceed the current global production of lithium ion battery cells, supplying tion. As shown in Figure 2, AESC (who supplies the enough batteries packs to build around 500,000 EVs Nissan Leaf), LG Chem (who won the Chevy Volt supply in that timeframe, estimated to be about 50 GWh award) and Johnson Controls (supplier to BMW and of battery packs annually (See Figure 3). Mercedes-Benz) are identified as the leaders. The cost of the factory is expected to be around $5B, part of which will be supplied by Tesla through 2. Source: Navigant Research. Execution Figure 2: EV Battery Supply Leaders By Strategy And Execution 2 • • • •• • • • •• • Figure 3: The Giga-Factory June 2014 98 Advanced Transportation Trends Figure 4: Tesla Growth Roadmap From 2013 Annual Report Vehicle Marketing 2013 2014-2015 2016-2017 60 kWh EU Version APAC Version Model X Right Hand Drive All Wheel Drive Third Generation Platform EU & Asia Marketing Launches Right Hand Drive Countries Second Tier Cities Store, Service Center, and Supercharger Network Expansion 21,000 deliveries Market Share Gains & Product Extensions Higher Volume at Lower Price Point Figure 5: Gen III Sales Predictions As A Component Of Tesla’s Present Valuation DIVISION 150 Trefis % of STOCK PRICE Model S 59.4% Model X 21.2% Gen III 17.5% Electric Powertrain Sales 0.3% Development Services 0.2% Roadster 0.0% Cash (Net of Debt) 1.3% TOTAL 100% Trefis Analysts estimate a price of $150 for Tesla Motors’ stock, about 29% lower than the current market price. Model S constitutes 59% of the Trefis price estimate for Tesla Motors’ stock. a public offering worth about $2B, and the rest to be supplied by partners, notably Panasonic, who has committed $1B. So why is this important? For one thing, it lays the groundwork for economies of scale that should bring us to the sub-$30k GEN III Model E Tesla with a 200-mile range. (See Figure 4) While many would argue that the current generation of all-electric 100mile range vehicles are more than adequate for a U.S. population that drives an average of 30 miles a day, few will argue that a 200-mile range vehicle for less 99 les Nouvelles than $30k is not. Thus the Giga-Factory tangibly predicts the practical end to internal-combustion, dinosaur-fueled vehicles—an important inflection point in technology. Tesla’s stock price already reflects this future, as can be seen from the Trefis analysis of Figure 5. With the Giga-Factory driving prices lower on Li-Ion, and the Model E defining a new market for electric vehicles, the result will be an enormous influx of capital by competitors and innovators eager to gain a chunk of this burgeoning new market. This has already happened with just the introduction of the Roadster, but it can be expected to significantly increase once the price points hit mass market. Tesla Motors themselves will continue to innovate to break their own price/ performance targets, in anticipation of this outside innovation. See, for example the gull-wing design applied to a minivan Model X in Figure 6. See also Figure 7 illustrating a hybrid metal-air/non-metalair battery architecture of Tesla Motor’s patent U.S. 8,647,763, the latter with the potential to enable a low-cost 500 mile plus range vehicle via a combination of dynamics-responsive Li-Ion in combination with lower cost per kWh metal-air chemistry. Outside spurring innovation in batteries, like a good space race, the Giga-Factory also has the potential for many other interesting collateral effects outside its core focus area, for example in distributed storage and smart-grid and renewable energy enabling technology areas. More Battery Trends The history of battery technology is ripe with licensing deals and tragic fails including the claimed government-blundered investment in A123 battery company, the licensing and shelving of nickle-metal hydrid technology by oil interests and its subsequent non-pluggable use in the world’s most successful consumer electric hybrid vehicle, the Toyota Prius, and mergers and acquisitions and sell-offs a plenty. One curious licensing tale in this space is portrayed in the movie “Who Killed the Electric Car” (Sony Advanced Transportation Trends Figure 6: Gull Wings On A Minivan— Tesla Model X-Q4 2014 Figure 7: US Pat # 8,647,763 From Tesla Motors Pictures 2006) regarding the nickelmetal hydride battery patents developed by Stanford and Iris Ovshinski, the owners of Energy Conversion Devices and Ovionics Battery Corp. Without going into the controversial history of this portfolio in depth (e.g., the complex ownership changes over the years and the encumbrances imposed by various owners, the tie-in with Toyota, the Prius and related), it is interesting to note the potential for the reemergence of the NiMH battery (or at least a descendant) as a plausible competitor to today’s Li-Ion players (e.g., the Giga-Factory) in the P/H/EV market, given the relatively recent purchase of the ECD/Ovionics NiMH technology rights by the large battery manufacturer BASF. Looking a little deeper, BASF is actually positioning itself for a longterm dominance in the P/H/EV market using higher density and lower cost products beyond Li-Ion. A significant factor in the success of the GigaFactory is in fact the assumption that Li-Ion is the long-term winner in this technology space. Whether right or wrong, it is likely that the concentrated focus and sheer volume behind that technology may result in Li-Ion being the practical winner in terms of availability and low-cost. But as highlighted in BASF’s 2013 factbook:3 3. http://www.factbook.basf.com/pdfs/ basf_factbook_complete_2013.pdf. Figure 8: BASF Emerging Battery Materials Portfolio Putting all the pieces in place NiMH Acquisition of Ovonic Battery Company Electrolytes Li-ion •Acquisition of electrolyte activities of Merck •Acquisition of Novolyte Technologies •Vinylene Carbonate license from Mitsubishi Chemical Corp Cathodes •Nickel Cobalt Manganese (NCM) production plant starts up in Elyria, Ohio •Lithium Iron Phosphate (LFP) license from LiFePO4+C Licensing AG Post Li-ion Investment in Sion Power June 2014 100 Advanced Transportation Trends Figure 9: Envia System Intellectual Property Overview Core Patents Application Patents Materials Cells • Cathode - Composition - Synthesis Methods - Morphology - Nano-coating •Anode - Si-C Composite - Si-C Anode Formulations - Synthesis Methods • High Voltage Electrolyte • Formation protocol • Optimized voltage • Cell Design Packs & System • 1 P battery pack • 7 approved and 40+ pending US patents • Envia patent claims spans from materials to battery system Patent Title Number 1. High energy lithium ion secondary batteries 2. High energy lithium ion batteries with particular negative electrode compositions 3. Positive electrode materials for lithium ion batteries having a high specific discharge capacity and processes for the synthesis of these materials 4. Layer-layer lithium rich complex metal oxides with high specific capacity and excellent cycling 5. Positive electrode materials for high discharge capacity lithium ion batteries 6. Lithium doped cathode material 7. Metal oxide coated positive electrode materials for lithium-based batteries 8,187,752 8,277,974 8,389,160 8,394,534 8,465,873 8,475,959 8,535,832 Figure 10: Electric Vehicle Station Equipment For Grid-Integrated Vehicles BASF’s batter y strategy is summarized in the illustration of Figure 8. BASF expects NiMH to be used in hybrid cars today but is looking to its investment in Sion4 power to help it leapfrog current Li-Ion technology with Lithium-Sulfur technology that has a theoretical specific energy > 2500 Wh/kg. In contrast, a Chevy Volt has a 140 Wh/kg specific energy in its current LG chem based T-shaped battery pack, while Tesla’s Panasonic cells are rated at about 240 Wh/kg. GM, Envia and the Giga-Factory While apparently GM gets its current battery packs from LG Chem, it was not standing still in the capacity race when it claimed its next generation technology will be coming from Envia. A quick look at Envia (see Figure 9) shows they have a small portfolio in the Li-Ion space and lay claim to a specific energy in the 400 Wh/kg realm. This does not match the BASFSion play but it is in a more traditional chemistry. A $17M dollar investment from GM followed along with over $4M in government grants. Unfortunately in late 2013 a suit for intellectual property theft and a failure to produce promised results resulted in a cancellation of the GM deal. The Grid Tie-in In addition to supplying packs for its own automobiles, Tesla currently is working in conjunction with Solar City and UC Berkeley on behalf of 4. http://www.sionpower.com/technology.html. 101 les Nouvelles Advanced Transportation Trends quick search of the U.S. patent database through ktMINE yields nearly 60 patents referencing “vehicle to grid” V2G technology from expected EV charging infrastructure players like Coulomb and Chargepoint technologies as well as some unexpected wildcards like Alcatel-Lucent. There are also expected players like Cisco and Siemens involved. The latter companies are known for their software solutions for management in smart grid and micro-grid/charging system applications, respectively, but have obvious tie-in via their work in the “Internet of things” and distributed energy management spaces. Figure 11 shows the filings by date for V2G-related U.S. patents indicating a peak of activity in 2010 timeframe. 40 Patent Filings 30 20 10 20 12 20 11 20 10 20 09 20 08 20 07 20 06 20 05 0 the California Public Utilities Commission to develop distributed PV and storage solutions. If this project is successful, the Giga-Factory could also be supplying the distributed generation/storage market. The commercial product, in a pilot in California, Connecticut and Massachusetts, is called DemandLogic®, and provides grid “load leveling” services, helping smooth out peak demands. Similar plays are developing across the energy sector. Similar logic to that between a stand-alone battery and the grid is available between the battery within a vehicle and the grid. Known as “vehicle-to-grid” (V2G), it is being developed by many organizations, including the University of Delaware. U-Del first licensed its V2G technology to Autoport for application to fleet vehicles back in 2010. The idea is to tap into the distributed excess storage used by EVs in fleet operation and make that storage part of a massivedistributed demand-response network. Figure 10 is an excerpt from a recent University of Delaware patent application (US 20110202418) which illustrates V2G functionality. Autoport Inc. (Wilmington, DE) has been working with BMW and AC propulsion and using 100 BMW mini-E EVs for trials with V2G software. A 20 14 Quick Analytics - Activity by Date 20 13 Figure 11: Patent Filing Activity By Date Related To “Vehicle To Grid” Technology 5 Summary There are certainly numerous new trends in the transportation sector—far too many to cover in one reasonably-sized article. The Giga-Factory, proposed by Elon Musk and therefore all but guaranteed to be built one way or another, portends a future of lowcost, clean electric vehicles from Tesla Motors and competitors. It also guarantees a healthy, dynamic landscape of innovation and licensing deals amongst the incumbent traditional internal combustion vehicle manufacturers, as well as a host of start-ups with straightforward business models in advanced transportation as well as complex energy plays. Either way, the future looks so bright; it is time to invest in a good pair of shades. The author, Michael Craner, is co-chair of the Communications, Cloud and Computing Crossroads (3CX) committee under the High-Technology Sector of the Licensing Executive Society on loan to the renewable energy committee. He is also an electric-vehicle and sustainable-energy enthusiast. He has a long Tesla Motors position. ■ 5. Source: ktMINE IP, www.ktmine.com. June 2014 102 Aerospace And Transportation Industry Observations In The Aerospace And Transportation Industry By William H. Pratt and Annemarie Meike Introduction T he Aerospace and Transportation industrial subsector differs from many of the other High Tech industry subsectors in its composition: primarily industry OEMs (Original Equipment Manufacturers), and predominantly mature multinational industries. The concerns of these industry OEMs are different than smaller companies, centering around antitrust, export control and other government regulations, and issues of international law. The stakeholders involved in these processes have different requirements than those of less mature market sectors. However, sometimes the resultant solutions, though inspired by these specific circumstances, are applicable beyond them. This article examines two topics: How Intellectual Property is Handled Under U.S. Government Contracts & Licensing Agreements, and U.S. Industry and U.S. Manufacturing Requirement Preference Concepts of U.S. Government Patent Policy. Insight into How Intellectual Property is Handled Under U.S. Government Contracts and Licensing Agreements Various laws and regulations govern the ownership, use and licensing of intellectual property that is developed during or related to performance of a U.S. government contract or grant. These laws and regulations can differ significantly from the way similar issues are addressed in commercial agreements. The Aerospace and Transportation Committee assembled a panel for the LES (USA & Canada) Mid-Year Meeting in NYC to discuss laws and regulations governing how intellectual property is handled under U.S. government contracts. The panelists, Bill Elkington, Sr. Director, Intellectual Property Management, Rockwell Collins; Darin Bartholomew, Expert Attorney, Deere & Co.; Harry Lupuloff, Corporate Counsel, Northrop Grumman Corporation; and Louis (Vic) Victorino, Partner, Sheppard, Mullin, Richter & Hampton LLP; have decades of expertise in the area of government contracts. Given the heavy representation of large aerospace corporations in the LES (USA & Canada) Aerospace and Transportation committee, the panel 103 les Nouvelles emphasized procurement contracts. The Industry Government University Interface Sector, on the other hand would focus more on the collaboration contracts called Cooperative Research and Development Agreements (CRADAs). The notes below incorporate that panel’s discussion of United States Technology Transfer Legislation and Procurement Legislation as it affects intellectual property ownership and use with some additional background information. Although U.S. Federal regulations regarding intellectual property may be of only minor interest to some segments of the LESI membership, the recommendations section in this strongly regulated environment where the value and use of intellectual property is viewed in substantially different ways, has applications beyond that specific scenario, and is well worth a look. An Overview of Technology Transfer Legislation Over a period of roughly a decade, federal technology transfer legislation made key changes in ownership of inventions made with federal funding intended to provide various means for nonfederal entities to access federal laboratory developments. Some detail is presented here to show that the legislation has been evolving over time, and that all aspects of the current modus operandi did not fall neatly into place in 1980 with the Stevenson-Wydler and Bayh-Dole Act. The rationale behind the legislation is that recipients of federal funding and grants should be able to elect title to inventions they have produced through government funding in order to commercialize the inventions. Before 1980, federal research funding contracts and grants obligated inventors (wherever they worked) to assign inventions they made using federal funding to the federal government. Although they overlap, these legislative acts have a different history and evolution than the legislation governing government procurements, and are often handled by different offices within a government organization The Stevenson-Wydler Technology Innovation Act of 1980 (P.L. 96-480), specified in 15 U.S.C. 3710, deals with the dissemination of information from federal government institutions. It required laboratories to take an active role in technical coopera- Aerospace And Transportation Industry tion by mandating that a percentage of the laboratory budget be used specifically for technology transfer activities and establishing an Office of Research and Technology Applications (ORTA) within each laboratory to carry out the technology transfer function. The Bayh-Dole Act of 1980 (P.L. 96-517), codified at 94 Stat. 3015, and in 35 U.S.C. § 200-212 together with the Patent and Trademark Clarification Act of 1984 (P.L. 98-620), allowed small businesses, universities, and not-for-profit organizations to obtain title to inventions developed with federal funds. In addition, government-owned and government-operated (GOGO) laboratories were permitted to grant exclusive patent licenses to commercial organizations, without a term limit. 35 U.S.C. 202(c), provides the agreement between federal government and the entity receiving federal funds “shall require: (1) disclosure of subject inventions to government within a reasonable time after it becomes known to contractor personnel responsible for the administration of patent matters, and (2) that the government may receive title to any subject invention not disclosed to it within such time.” Federal Technology Transfer Act of 1986 (P.L. 99-502) made technology transfer an individual responsibility, stipulating that technology transfer activities are to be considered in employee performance evaluations. Among other incentives for inventors, it provided for government-employed inventors to share in royalties from patent licenses, and permission for current and former federal employees to participate in commercial development, to the extent that there is no conflict of interest. In addition, the law enabled GOGO laboratories to a) enter into CRADAs, b) exchange personnel, services, and equipment, c) grant or waive rights to laboratory inventions and intellectual property and d) negotiate licensing arrangements for patented inventions made at the laboratories among laboratories and nonfederal partners. In 1987 (52 FR 8552), the relevant provisions to that date were consolidated and published by the Department of Commerce, appearing at 37 CRF Part 401. Legislation continues to modify some of the contours of these basic regulations, but the fundamental principles remain intact and extend specifically to government owned contractor operated (GOCO) facilities as well. Key Concepts in Rights in Patents Developed Under Government Contracts Intertwined in these regulations are several concepts that are key not only to the way that the laws are carried out, but also ultimately to the assignment of intellectual property. Important elements include the scope of government use rights, the first conceived or reduced to practice trigger for Subject Inventions of a contract, and the requirement to notify government of an invention and the risk/penalty for failure to notify. The intellectual property that results from a federally funded contract is called “Subject Invention.” Subject Invention is defined as “any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement.” 1 “Conceived” can mean ■ William H. Pratt, written description or Finnegan, Henderson, Farabow, evidence of the inventor ’s invention. This Garrett & Dunner, LLC, can be an invention Partner, disclosure form or an Washington, DC, USA inventor’s notes that E-mail: [email protected] are witnessed by coworkers. “Reduced to ■ Annemarie Meike, Practice” means that a Lawrence Livermore Laboratory, working embodiment Business Development Executive, of the invention or Livermore, CA, USA process was carried out E-mail: [email protected] for the first time under the contract. Government contracts often allow the contractor to own (elect title to) any patent rights in the Subject Inventions, subject to the government’s royalty-free worldwide license to any patent rights. However, those rights are easy to lose if all of the disclosure requirements are not met. Invention reporting (disclosure) requirements apply to government grants, procurement contracts involving research and development activities, Cooperative Agreements), and other government funded agreements. Although the regulations vary in detail, Federal Acquisition Rule (FAR) 52.227-11: Patent Rights, Ownership by the Contractor, is representative of the typical patent disclosure requirements. Under FAR 52.227-11 a contractor must disclose a Subject Invention within two months after the inventor identifies it in writing to “personnel responsible for patent matters.” Furthermore, the disclosure must be in the form of a written report to government with sufficient technical detail to understand nature, purpose, operation, and the physical, chemical, biological or electrical characteristics of any invention. It must identify the contract under which invention is made, list inventors, identify any public disclosure 1. 35. U.S.C. 201(e) June 2014 104 Aerospace And Transportation Industry or on sale event related to these “Subject Inventions,” and describe submissions (if any) for publication of information related to the subject invention. If the contractor fails to disclose the Subject Invention to the government on a timely basis, the government may obtain title to the invention in which case the contractor forfeits all rights in the Subject Invention. 37 CFR 401.14(c)(1). In addition, an annual list of subject inventions made during that 12 month period of the contract must be submitted with a statement that all Subject Inventions have been disclosed to government. If there are no Subject Inventions during the 12 month period, this must be stated in writing. Deadlines can differ from agency to agency, but in almost all cases, a written final report to government is required for almost all contracts. In this final report, contractor must list subject inventions made during the entire period of the contract; If there are no subject inventions during the entire contract period, this must be stated in writing. In DFARS 252.227-7039 Patents Reporting, the deadline is within 3 months from date of completion of work under the contract. DOE Patent Rights Waiver 10 CFR 784.12 has different deadlines, for example, a six month disclosure after reduction of practice can apply. Other deadlines apply for the election of title and for the filing of a patent application. The contractor may elect title to the invention up to two years after disclosure of the invention, or any lesser period applicable no more than 60 days prior to the expiration of the one year grace period after a public disclosure or offer for sale, and must file a patent application no more than one year after election of title, or prior to any expiration of the one year grace period. As in the case of the disclosure requirements, failure to meet these deadlines can result in the loss of title, but in these instances the contractor retains a license to practice the invention. Law and Regulations Related to Technical Data and Computer Software in Federal Acquisitions This section switches focus to federal acquisition (procurements) giving an overview of regulations as they apply to different types of data for which government obtains license rights, and specifies marking requirements and risk/penalty for not marking properly vary. The statutes of note in the area of Technical Data for procurements are : 10 USC 2320. Rights in Technical Data, and 41 USC 2302. Rights in Technical Data. The appropriate regulations for federal acquisitions fall into one of two camps, depending on the type of federal agency that is making 105 les Nouvelles the procurement. Civilian Agencies use the Federal Acquisition Regulation (FAR)2 to acquire goods and services. The Department of Defense uses the FAR in conjunction with the Defense FAR Supplement (DFARS)3 for its acquisitions of goods and services. Subtle differences between regulations applying to different government agencies lead to important distinctions in the assignment of intellectual property. Listed below are some important examples: Technical Data: Under FAR, “Technical Data” is defined as recorded information (regardless of the form or method of the recording) of a scientific or technical nature (including computer databases and computer software documentation). This term does not include computer software or financial, administrative, cost or pricing, or management data or other information incidental to contract administration. The term includes recorded information of a scientific or technical nature that is included in computer databases. Under DFARS, “Technical Data” is defined as recorded information, regardless of the form or method of the recording, of a scientific or technical nature (including computer software documentation). Databases are not expressly mentioned in this definition. In addition, the term does not include computer software or data incidental to contract administration, such as financial and/or management information. Computer Software: Under FAR, “Computer Software” is defined as computer programs that comprise a series of instructions, rules, routines, or statements, regardless of the media in which recorded, that allow or cause a computer to perform a specific operation or series of operations. It includes recorded information comprising source code listings, design details, algorithms, processes, flow charts, formulas, and related material that would enable the computer program to be produced, created, or compiled. This definition excludes computer databases or computer software documentation, which is defined as Technical Data. Under DFARS, “Computer Software” is defined as computer programs, source 2. With respect to Data Rights Regulations the appropriate FAR references are: 48 CFR 52.227-14 Rights in Data— General, and 48 CFR 52.227-19 Commercial Computer Software License. 3. The appropriate DFARS references are: 48 CFR 227.7202-1 (Policy on Commercial Computer Software); 48 CFR 252.227-7013 (Rights in Technical Data—Noncommercial Items); and 48 CFR 252.227-7014 (Rights in Noncommercial Computer Software and Noncommercial Software Documentation). Aerospace And Transportation Industry code, source code listings, object code listings, design details, algorithms, processes, flow charts, formulae, and related material that would enable the software to be reproduced, recreated, or recompiled. “Computer software” does not include computer databases or computer software documentation. Developed: Under (DFARS), “Developed” has subtly different meanings depending on context. For Technical Data, “Developed” means that an item, component, or process exists and is workable. It need not be at the stage where it could be offered for sale or sold on the commercial market. Workability can be established, if tests or analysis can demonstrate to reasonable people skilled in the applicable art that there is a high probability that it will operate as intended. For Computer Software, “Developed” means that a computer program has been successfully operated in a computer and tested to the extent sufficient to demonstrate to reasonable persons skilled in the art that the program can reasonably be expected to perform its intended purpose; or that Computer Software, other than computer programs, has been tested or analyzed to the extent sufficient to demonstrate to reasonable persons skilled in the art that the software can reasonably be expected to perform its intended purpose. Another relevant term under DFARS is “Developed Exclusively at Private Expense,” meaning that Development was accomplished entirely with costs charged to indirect cost pools (i.e., IRAD and Bid and Proposal), costs not allocated to a government contract (i.e., a commercial contract), or any combination thereof. Profit is not considered a cost. Private expense determinations should be made at the lowest practicable level, i.e. component or process. Types of License Rights: Under FAR, license rights granted to the government are royalty-free, worldwide, nonexclusive, and irrevocable. The government is allocated unlimited rights, limited rights to Technical Data and restricted rights in Computer Software depending on listed criteria. The contractor retains title and the rights to use, reproduce, prepare derivative works, disclose and publish and other rights. It may be necessary to obtain Contracting Officer permission in order to assert copyright. Under DFARS, license rights granted to the government are royalty-free, worldwide, nonexclusive, and irrevocable. As with FAR, under DFARS the government can be allocated an unlimited rights license in technical data or software, a limited rights license to Technical Data or a restricted rights license in Computer Software depending on listed criteria. However, under the DFARS, the government can also be allocated a Government Purpose Rights license in either technical data or software. In addition the parties can agree, in all instances, to Specifically Negotiated Rights license, to modify the standard rights according to the needs of government and the contractor’s interest in acquiring more or fewer rights. All rights not granted to the government are retained by the contractor. For technical data and software created prior to a contract, rights to Technical Data and Computer Software must be asserted at the time of contract formation and a listing is “attached” to the contract. Deliverable items of technical data and computer software must be marked in accordance with the regulations. Failure to assert and correctly mark can result in the loss of rights. Government Ability to Authorize Contractors to Use Third Party Patents in Performance of a Government Contract: Authorization and Consent Clause Note that the government authorization of contractors to use third party patents in performance of a contract is a general authorization. It does not authorize the use of a patent specifically. Under FAR 52.227-1 Authorization and Consent: (a) The government authorizes and consents to all use and manufacture, in performing this contract or any subcontract at any tier, of any invention described in and covered by a United States patent— (1) Embodied in the structure or composition of any article the delivery of which is accepted by the government under this contract; or (2) Used in machinery, tools, or methods whose use necessarily results from compliance by the contractor or a subcontractor with (i) specifications or written provisions forming a part of this contract or (ii) specific written instructions given by the contracting officer directing the manner of performance… For those entertaining a license clause that terminates the license if intellectual property is misused, it is important to understand the Contract Disputes Act and requirement for continued performance during dispute. That is, injunctive relief is not available. If unauthorized use is detected, the remedies available to the contractor are outlined in 28 USC § 1498—Patent and Copyright Cases: (a) Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without June 2014 106 Aerospace And Transportation Industry license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture… For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the government and with the authorization or consent of the government, shall be construed as use or manufacture for the United States. (b) Hereafter, whenever the copyright in any work protected under the copyright laws of the United States shall be infringed by the United States, by a corporation owned or controlled by the United States, or by a contractor, subcontractor, or any person, firm, or corporation acting for the government and with the authorization or consent of the government, the exclusive action which may be brought for such infringement shall be an action by the copyright owner against the United States in the Court of Federal Claims for the recovery of his reasonable and entire compensation as damages for such infringement, including the minimum statutory damages as set forth in section 504 (c) of title 17, United States Code… (c) The provisions of this section shall not apply to any claim arising in a foreign country. In other words, the remedies for infringements of patents and copyrighted material are available only under an action against the United States in the Court of Federal Claims for the recovery monetary damages. Recommendations Relating to Preserving Rights in Intellectual Property Given the federal regulatory environment described above, then, what are the most important things a contractor can do to retain its intellectual property rights developed under a government procurement contract and the competitive advantage the intellectual property provides? One idea is to consider using internal investment rather than contract funds to develop commercially critical intellectual property, and not include prior developed intellectual property on the contract deliverables. However, sometimes it is not practical to develop using internal investment, and/or exclude from the contract deliverables. In that case it is important to obtain the proper classification of intellectual property, and document it appropriately in the contract and at delivery. It is also important to keep in mind that the Government is allocated sig107 les Nouvelles nificant license rights in all technical data or software developed with government funds under a contract, in light of the common misunderstanding that government isn’t allocated rights if the technical data or software is not a deliverable under the contract. In addition, the government has license rights in any invention of the contractor conceived or first actually reduced to practice in the performance of work under a funding agreement. Finally, it is most important to be aware that a contractor may forfeit its patent rights (to Subject Inventions) to the government if the invention reporting requirements are not met.4 Several best practices of note are applicable beyond the confines of government contracts. The first is a valuable teaching adopted from high tech companies who license subcontractors for specific project stages and purposes (e.g. bidding proposal, development, production, etc.). Choosing to license technology rather than execute a nondisclosure agreement to subcontractors requiring access can be useful because a license can address more issues, and in a more precise manner, than a typical nondisclosure agreement, like the potential for collaboration, or the controlled timing of license rights to intellectual property. The consensus is that once intellectual property is delivered to the government there is not much an intellectual property owner can do to help prevent misuse. However there are effective means available for monitoring misuse of intellectual property. For example it is possible to monitor FedBizOpps for solicitations/RFIs that might disclose procurements that would necessarily involve company intellectual property. Negotiation of intellectual property terms in government procurement contracts is a complicated issue with subtle variation in statutory requirements and interpretation depending on the government agency. For example, it is important to take heed of the importance of negotiating the classification of intellectual property as “commercial” when possible. Similarly, with respect to government rights in data and software deliverables, contracting officers may attempt to require government purpose rights (GPR) or unlimited rights in inappropriate situations. A current trend involves the government making a contractor’s willingness to surrender rights in technical data or software voluntarily as evaluation factor in the competitive award of a contract. Understanding the government’s needs for minimum required rights is 4. See Campbell Plastics Engineering v. Brownlee, Acting Secretary of U.S. Army, 389 F.3d 1243 (Fed. Cir. 2004). Aerospace And Transportation Industry critical to maximizing the intellectual property rights to technical data and software for the contractor. Government is often looking for freedom to operate, or usage of rights for a specific purpose and may be willing to settle for a smaller set of rights that still meets the needs. Sometimes it is useful to quote policy, such as “DOD policy is to acquire only that technical data and computer software, and the rights thereto necessary to satisfy agency needs and that is consistent with Federal procurement law,”5 as a reminder to the contracting officer. It is important to keep in mind that contracting officers may not have good understanding of what intellectual property they need to acquire. A possible tactic is to bring in the government agency’s technology transfer group for guidance. Note however, that all negotiated terms must of course remain within the relevant statutes. Situations have occurred where a contractor has negotiated favorable intellectual property rights that have subsequently been determined to be invalid based on superseding mandatory requirements set forth in statutes and regulations. With respect to valuation of commercial intellectual property deliverables in a government proposal or contract, typical commercial valuation approaches like profit split or relief from royalty are less common than a cost approach. There is a strong preference among contracting officers for the cost approach in the absence of commercial license comparables, possibly because procurement contracting officers often do not have the intellectual property background. However experience has suggested that contracting officers are open to learn other valuation methods Once again, it may be useful to bring in the government agency’s technology transfer group for assistance. U.S. Industry and U.S. Manufacturing Requirement Preference: Undefined Concepts of U.S. Government Patent Policy This section examines the application of the Preference for U.S. Industry and the U.S. Manufacturing requirements and the absence of a definition of “substantially manufacture,” a key term used in both requirements. Of note is the flexible approach taken by the U.S. Department of Energy (“DOE”) in helping industry to address these requirements in a manner that benefits both the private and public sectors. As technological challenges continue to become 5. “Acquiring and Enforcing the Government’s Rights in Technical Data and Computer Software Under Department of Defense Contracts: A Practical Handbook for Acquisition Professionals,” Third Edition, January 2011 at p. 8. more complex, we appear to depend increasingly on the pooled intellectual resources of governmental, non-profit, and for-profit entities. Over the last 34 years, there has been a tremendous rise in collaborative research efforts, especially with respect to research projects between government entities, non-profit entities, and for-profit corporations (both large and small). Public Law 96-517, Amendments to the Patent and Trademark Act of 1980 (commonly referred to as the Bayh-Dole Act (“BDA”)) is largely responsible for the extent of today’s collaborative research efforts.6 In the late 1970s and early 1980s, America stood in the throes of stagflation, high unemployment, and a general perception that America was losing its edge in technology innovation. Although there were many reasons for this state of affairs, part of the perceived problem was that, despite the government’s sizable investment in technology, inventions created with federal funding and owned by the U.S. Government were not being commercialized. Prior to the enactment of BDA, experts estimated that “only 5 percent of government-owned patents were ever used in the private sector, although a portion of the intellectual property portfolio had potential for further development, application, and marketing.”7 Out of such concerns, the BDA was passed, enabling universities, non-profits, and small businesses to retain title to any inventions that it conceived or first actually reduced to practice under federal funding (“Subject Inventions”). Eventually, via Executive Orders, this was extended, for the most part, to large for-profit companies.8 All such entities were permitted to obtain patents on their Subject Inventions and could commercialize the inventions themselves or assign/ license (including exclusively) the inventions to others. Although the BDA was successful and remains a valuable piece of legislation, the BDA’s “Preference for U.S. Industry” and the “U.S. Manufacturing” requirements (35 U.S.C. §§ 204, 209) seem problematic in today’s global business environment. It should be noted that various government entities implement the Preference for U.S. Industry and 6. William H. Pratt, “The Collaborative Research House that Bayh-Dole Built: Perfectly Constructed or in Need of Repairs?” les Nouvelles, December 2010, p. 195. 7. Wendy H. Schacht, “The Bayh-Dole Act: Selected Issues in Patent Policy and the Commercialization of Technology,” Congressional Research Service Report to Congress, February 3, 2009, p. 2. 8. The provisions of BDA were extended to large companies under President Reagan’s 1983 Memorandum on Government Patent Policy. June 2014 108 Aerospace And Transportation Industry the U.S. Manufacturing requirements and address issues arising from such implementation differently. The DOE and its National Laboratories are a focus of this section because the DOE is a title agency9 involved in an extensive array of collaborative research projects, and has, in our opinion, taken a positive, flexible approach when addressing issues raised by these requirements. Application of U.S. Industry Preference and U.S. Manufacturing Requirements. The BDA’s Preference for U.S. Industry and U.S. Manufacturing requirements are codified in 35 U.S.C. §204 and §209, respectively. These two requirements appear to have been imposed as part of a quid pro quo for allowing non-profit organizations and the private sector to retain ownership of or licenses of Subject Inventions made, in whole or in part, with federal assistance. In essence, these requirements are aimed at protecting the public interest in inventions funded in whole or in part by U.S. taxpayers. The Preference for U.S. Industry requirement applies to Subject Inventions and states: “[N]o …organization, which receives title to any subject invention and no assignee of any such … organization shall grant to any person the exclusive right to use or sell any subject inventions in the United States unless such persons agrees that any products embodying in the subject invention or produced through the use of the subject invention will be manufactured substantially in the United States.” Section 204 is implemented in various government contracting clauses relating to the ownership of Subject Inventions created in whole or in part with federal funding (e.g., 48 C.F.R. § 52.227-11, 252.2277038, 37 C.F.R. §401.14). Such language can also be found in Cooperative Research and Development Agreements (“CRADAs”) with various government organizations, such as CRADAs with DOE National Laboratories, under which no government funding is provided. The preference for U.S. Industry requirement can have far reaching implications. For example, suppose a company enters into a CRADA with a DOE National Laboratory, under which the company funds the research project 100 percent. Further assume that 9. Under the Atomic Energy Act and Federal Nonnuclear Energy Research and Development Act of 1974, the DOE has the ability to retain title to inventions conceived or first actually reduced to practice by a large business in the performance of a project funded, in whole or in part, by the government, unless title to that invention has been expressly waived. Such waivers are commonly granted. 109 les Nouvelles one of its employees solely creates an invention or reduces an existing invention to practice for the first time, in the performance of that CRADA. Despite the fact that the company has funded 100 percent of the actual project and that its own employee was the sole inventor, any subsequent assignment or exclusive licensing of that invention is subject to the “substantially manufactured” obligation set forth in 35 U.S.C. §204. Such a requirement could not only substantially affect the value of that patent, but in today’s global business environment, it could also negatively affect the company’s business plans as well. Indeed, such a requirement serves as a disincentive to private company participation in such research programs. The U.S. Manufacturing requirement set forth in Section 209, which applies to licensing of any invention owned by the U.S. Government, states, “A Federal agency shall normally grant a license … to use or sell any federally owned invention in the United States only to a licensee who agrees that any products embodying the invention or produced through the use of the invention will be manufactured substantially in the United States.” Unlike Section 204, the U.S. Manufacturing requirement set forth in 35 U.S.C. §209 encompasses both non-exclusive as well as exclusive licenses. As previously noted, when contracting with a title agency (e.g., DOE), the agency automatically retains ownership in any invention a large business conceives or first actually reduced to practice in the performance of that contract, unless the agency grants a patent rights waiver. The title agency retains such ownership even if the large business is partially or completely funding its participation in the government-sponsored research project. This commonly occurs with DOE Cooperative Agreements in which the recipient of the DOE funding teams up with a third party (Research Partner) that funds all or part of its own participation in the project, unless a waiver is granted. Patent rights waivers typically granted by DOE will contain the following provisions which are quite similar to Section 209: “The Contractor agrees that any products embodying any waived invention or produced through the use of any waived invention will be manufactured substantially in the United States unless the Contractor can show to the satisfaction of the DOE that it is not commercially feasible to do so. In the event the DOE agrees to foreign manufacture, there will be a requirement that the Government’s support of the technology be recognized in some appropriate manner, e.g., recoupment of the Aerospace And Transportation Industry Government’s investment, etc. The Contractor agrees that it will not license, assign or otherwise transfer any waived invention to any entity unless that entity agrees to these same requirements …” Although aimed at protecting U.S. jobs, in a world where companies operate globally, the aforementioned requirements can be counterproductive to commercializing new innovations aimed at addressing many of America’s policy concerns (e.g., energy conservation). And they serve as a disincentive to broad-based participation in government research programs. What exactly does “Manufactured Substantially” mean? The touchstone of both the U.S. Industry Preference and U.S. Manufacturing requirements is “manufactured substantially” in the United States. Given the scope of these requirements, how this term is interpreted is extremely important. For example, does this term extend to just the article encompassed by the invention or does it also take into account all materials and components? Does one measure “manufactured substantially” in terms of percentage of parts or is it the value of such parts? Surprisingly, the BDA does not define “Manufacture” or “Substantially” or, for that matter, provide any guidance on how to interpret such terms. Nor do the vast majority of government agencies, to my knowledge, provide any guidance as to what meets these undefined criteria. National Aeronautic and Space Administration (NASA)’s regulations covering cooperative agreements state that “manufactured substantially in the United States” means the product must have over 50 percent of its components manufactured in the United States. This requirement is met if the cost to the recipient of the components mined, produced, or manufactured in the United States exceeds 50 percent of the cost of all components required to make the product. 14 C.F. R. §1274.9111(9). But can an exclusive licensee rely on this interpretation, if the Subject Invention was funded by an agency other than NASA? The answer is that such a definition has been shown to be used successfully. However, not all commercial entities that might recognizably have “substantial U.S. manufacture” would be able to support that definition or any specific definition for that matter. Some take the position that the lack of definition allows the entities to work out a plan suitable to the business and the government. The DOE has taken an approach in addressing the concerns raised by U.S. Industry Preference and U.S. Manufacturing requirements in a manner that benefits both the private and public sectors. Although the preferred benefit to the U.S. economy, from the DOE’s perception, is creating and maintaining U.S. jobs, DOE has expressed a willingness to accept some other substantial economic benefit to the U.S. economy in lieu of the U.S. Industry Preference and U.S. Manufacturing requirements. Such benefits must, however, be expressly identified in a Net Benefit Statement approved by DOE. The DOE appears willing to grant such exceptions if the Net Benefit Statement contains a description of specific economic or other benefits to the U.S. economy which are related to the commercial use by participant(s) of the technology being funded under an agreement (e.g., CRADA) and which are commensurate with the government’s contribution to the proposed work. The content of such a statement is, of course, fact specific to the individual company seeking the exception. Although obtaining a Net Benefit Statement may be time consuming, the DOE has been tough but fair in its approach to negotiating a Net Benefit Statement. In the past, a single Net Benefit Statement can apply, under the terms of a Memorandum of Understanding with the DOE, to all future agreements with DOE and its national laboratories. Given the potentially restrictive nature of the Industry Preference and U.S. Manufacturing requirements, large businesses interested in pursuing research projects with DOE or its national laboratories may want to consider the Net Benefit Statement alternative during the initial discussions with DOE or a National Laboratory. Summary This article has explored several topics of interest to large corporations doing business internationally and within the regulatory environment of United States government contracts. The government contract and intellectual property ownership section addressed laws and regulations that govern the ownership, use and licensing of intellectual property that is developed during a government contract and how that can differ significantly from those governing commercial agreements. The final section dealt with a requirement of intellectual property often encountered in U.S. government contracts, the “U.S. preference” provision. From a more global perspective, this article emphasizes what we know to be true. Small differences, even in the definition of a single term can have big implications. In addition, it emphasizes the changing regulatory framework that we live in as the actual text of regulations change through legislation, or the legal interpretation of the text may be clarified based on court decisions. ■ June 2014 110 IPRs In Least Developed Countries IPRs In Least Developed Countries: A Progress Report By Luc Savage I n 2014 we are celebrating 20 years of the TRIPS1 agreements aimed at harmonizing the treatment of intellectual property rights in global economic trade. The Doha agreements in 2001 gave the least developed countries (LDCs) extra time for adopting the TRIPS agreements. As the agreed deadline for this implementation was extended to 31 December 2015 in November 2013, what is the future for the development of intellectual property rights in the least developed countries? It was with the aim of contributing to this discussion that economic players with experience in intellectual property management in the least developed countries met in Paris last October. This meeting organized by LES2 France and the INPI3 placed the emphasis on positive initiatives which could help to overcome the persistent challenges in order to use intellectual property rights for promoting sustainable development. The originality of the approach consisted in the points of view of players from the world of intellectual property being exchanged with those from the world of sustainable development represented by the AFD4 and the C3D.5 The subject is certainly not new. Fake medicines and the infringement of molecule patents have long been a concern for the pharmaceutical laboratories which contributed to the signing of the TRIPS agreements in 1994. The decisions regarding compulsory licences which followed one another in 2013, some1. Trade Related Aspects of Intellectual Property Rights is a multilateral agreement signed in 1994 with the aim of integrating intellectual property rights in the system of the World Trade Organization, anticipating in particular the authorization of compulsory licences in the case of public health emergencies. 2. Licensing Executive Society, an association of professionals operating in the field of intellectual property and its development in the form of licensing or transfer of technology. 3. Institut National de la Propriété Industrielle [National Industrial Property Institute]. 4. Agence Française de Développement [French Development Agency]. 5. Collège des Directeurs du Développement Durable [College of Sustainable Development Directors]. 111 les Nouvelles times in different directions, in certain countries such as India, show that the debate is ongoing in the pharmaceutical industry. However, in 2013, certain pharmaceutical companies signed licence agreements with Medicines Patent Pool in order to lower the cost of HIV treatments in around a hundred developing countries. The pharmaceutical industry therefore seems to demonstrate that new original routes are opening up to avoid conflict between respect for the rights of the patentee and sustainable development. These examples might inspire the negotiations aimed at achieving a universal climate agreement which will bring together developing and developed countries in Paris in 2015. The exchanges throughout that day identified some lessons about the positive initiatives of the past and ideas for discussion on future initiatives which we will share in this article. A Focus on the Least Developed Countries With Regard to Intellectual Property The field of sustainable development is wide if we use Brundtland’s6 definition: “development which meets the needs of the present without compromising the ability of future generations to meet their own needs.” Our discussions focussed on developing countries, using examples covering the three pillars7 of sustainable development: environmental sustainability, social fairness and economic effectiveness. The developing countries with regard to intellectual property do not correspond to any precise economic definition, but they may, as suggested by Julio Raffo,8 group together the countries outside of China, the EPO, Japan, South Korea, and the United States, which represent less than 21 percent of the patents 6. Mrs. Gro Harlem Brundtland, Norwegian Prime Minister in 1987. 7. The Rio Earth Summit in 1992 under the aegis of the United Nations made official the notion of sustainable development and that of the three environmental, social and economic pillars. 8. Julio Raffo, Senior Economic Officer, Economics and Statistics Division—World Intellectual Property Organization (WIPO). IPRs In Least Developed Countries filed in the world.9 Africa, which contains the majority of the less developed countries,10 provides many important examples on the subject. Countries such as Brazil, Russia and India, through their maturity with regard to intellectual property, constitute examples, for the developing countries, of economies which are in the course of integrating intellectual property rights. Our discussions focussed on the countries which have not yet reached that level of development of their intellectual property system, and group together the countries which certainly represent less than 10 percent of the patents filed in the world. Intellectual Property, a Reality in the Economic Development of LDCs Intellectual property is an important issue in the financing of projects in developing countries, as shown by the Agence Française du Développement. This specialist financial institution contributes to the financing of innovative projects in developing countries, with the aim of creating jobs in the beneficiary countries. Jean-Yves Grosclaude11 summarizes the issue of intellectual property as follows: can it help to create employment in developing countries? This is the question posed by its Proparco subsidiary, which specializes in the financing of operations in the private sector, for the majority of the new financing projects which are submitted to it. One of the companies supported by the AFD shows the importance of intellectual property tools in a company centered on developing countries. Nutriset is a company which was created over 25 years ago and has more than 100 staff members. In 1996, it developed a ready-to-use therapeutic food, Plumpy’Nut®, which considerably improved the treatment of malnutrition. It protected its innovations through trade marks and patents. It was therefore able to protect its research efforts from other players in developed countries, and was able to create a network of producers to which it transferred its know-how in developing countries, contributing to sustainable economic development. This company is not alone. The IRD,12 which brings together more than 800 researchers, is increasing the development 9. WIPO source 2011. 10. The Least Developed Countries are a category of countries defined by the UNO, grouping together 49 countries since 2011, with a GDP per capita usually below US$ 900. 11. Former Operations Director - Agence Française de Développement (AFD). 12. Institut de Recherche pour le Développement [Institute of Research for Development] has conducted scientific programmes for 60 years to contribute to the sustainable development of developing countries. contracts and agreements for its work with developing countries. FBIOLAK is a Moroccan start-up created in 2013 which produces bio-pesticides based on fungal spores and develops local agro-industrial by products. It belongs to a group of partners which use a technology developed in joint ownership with the IRD. The licences at the start-up’s disposal for this valuable intellectual property have helped to make it stand out to potential investors. It therefore received one of the 5 prizes awarded in 2012 by the Maghreb Start-up Initiative out of 325 ■ Luc Savage, start-up candidates. Other examples proOrange Group, mote intellectual propVP Intellectual Property and erty which is produced Licensing and LES France Board, completely locally and Paris, France has its value increased in developed countries. E-mail: [email protected] This is the case with Light Years IP, an English company which has been working with the Ethiopian government since 2004 in order to set up a trade mark licence and protection programme for Ethiopian coffee, which is known for its quality and unique taste. The intellectual property rights acquired around the trade marks Yirgacheff, Harar and Sidamo have allowed Ethiopian coffees to escape the situation of a commodity market under the pressure of the purchasers. This programme transferred the choice from the client for the trade mark to the sale negotiations centre. It has allowed the value of coffee exports from Ethiopia to grow by U.S.$ 200 million in 8 years, increasing jobs in the local coffee industry. These success stories demonstrate some collaboration principles which call into question preconceived ideas. Fairness, the Key to Sustainable Development, is Encouraged in Intellectual Property Licences The traditional approach of supporting purely philanthropic development does not seem to be sustainable in a context of economic and budgetary crisis, particularly in Europe. In this regard, the patent funds offering free exploitation do not seem to represent a sustainable business model. Emmanuel Faber, head of a large company with a long-term commitment to social innovation, and put in charge of the “Innovation and Development” project by the Deputy Minister for Development in France, promotes fairness, rather than charity, as the main theme of development policies. The link with intellectual property appears obvious. He quotes the works of Hernando de Soto June 2014 112 IPRs In Least Developed Countries Polar13 which conclude that developing countries cannot increase their wealth due to the lack of an effective system of respect for property rights. He suggests finding ways of developing intellectual property based on fairness. The “copy left” model of sharing ownership in Open Source software is a route to be considered if it is compatible with sustainable financing. The FRAND (Fair Reasonable and Non Discriminatory) patent licences required by certain standardization bodies for accepting the contributions of their members seem to make sense for promoting fair use of intellectual property in developing countries. However, Emmanuel Faber warns that the principle of fairness is not easy to implement: it requires the mobilization of innovators, particularly those in the world of agriculture and energy which constitute pillars of the economies of developing countries. How is it possible to collectively mobilize economic players in favour of this approach? IPXI14 in the USA responded by creating a market of intellectual property rights based on an exchangeable title: the ULR (Unit License Right). It uses the rules of free exchange to establish this fair and reasonable price for the intellectual property needed for the exploitation of a technology in a product. The price has to be quite low in order to deter infringers from exposing themselves to the risks of litigation, anywhere in the world. This mechanism, which makes it possible to resell unused ULRs and establish a price reflecting the interest of the market in this technology, would facilitate access to technologies and development of innovations throughout the world, including in developing countries in the long term. It was on this model that Philips chose, in 2013, to make available its OLED technology for displays. In the same spirit, Philips is offering, via an open licensing program, its technologies related to LED based luminaires and retrofit bulbs, in order to foster growth of the LED market and a faster adoption of this technology which has a great potential to reduce the global energy consumption. The IRD in France is adopting a different approach. In finding that the development of technologies in LDCs required particular skills, it created, in the scope of the Investissements d’Avenir [investments 13. Hernando de Soto is a Peruvian economist who published “The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else” in 2000. 14. IPXI, created in Chicago in 2012, is the first financial exchange for licensing and trading intellectual property rights. 113 les Nouvelles for the future] supported by the French government, a Consortium de Valorisation Thématique Sud [LDC development consortium]. It is making its network of partners from developing countries available to all the Sociétés d’Accélération de Transfert de Technologies [technology transfer acceleration companies] which develop public research in France. It is promoting a development of socio-responsible research. This is achieved through respect for the joint ownership of the patents with the partners in developing countries, but also respect for “bio-fairness” as defined in the Nagoya protocol. The aim is to achieve a rate of transfer of 20 percent of its portfolio of 800 patents. Medicines Patent Pool (MPP) finally created in Switzerland a structure for negotiating licences for medicine patents. This “alliance” was created at the request of the international community in 2010, with the support of the World Health Organization and UNITAID funds, an innovative financing mechanism. It aims to facilitate access to the best HIV treatments at affordable prices which at the same time make it possible to continue financing of research for new treatments. Totalling more than 6 agreements signed with laboratories supplying quality treatments, MPP demonstrated the effectiveness of the approach and defined a new standard for “voluntary licences” for medicines. It presents itself as a unique point of contact between the multiple proprietors of patents for medicines and the producers of generic medicines. The resulting fluidity encourages all parties to agree on fair terms with complete transparency. All of the licences are made public on MPP’s website. Fairness goes together with simplicity here. For the economist Hernando de Soto, the simplicity of the forms of ownership is a condition of development: investment is stimulated by the promotion of private ownership through simplification of the procedures for transferring this ownership and the reduction of the associated costs. This appears just as necessary with regard to intellectual property, and not just at the development stage. Practices in Search of Simplification and Effectiveness HYSTRA15 underlines that the complexity of understanding the subject is one of the main causes which lead social entrepreneurs to regard intellectual property as a problem… and only sometimes as an opportunity. Basil Kransdorff is the founder of “e-Pap,” 15. HYSTRA is a sustainable development strategy consultancy firm. IPRs In Least Developed Countries a solution for combating the effects of malnutrition in people with HIV. He refuses to protect his invention with patents, thinking that he will not have the means to defend himself. However, if he could develop the intellectual property of his inventions, he might find funds to launch new social initiatives. Intellectual property professionals sometimes offer their services to developing countries to help their entrepreneurs understand this complexity. Pedro Garcia in Peru, Diana Pombo in Colombia and Harry Jonas in South Africa are examples of these experts who train the local population in intellectual property law in order to make it more accessible if not more simple. Simplify the procedures: this is also one of the key objectives of the OMPIC16 in its strategic vision for 2015. To this end, the Office has undertaken to reform the Moroccan law in order to allow the proprietors of a patent application at the EPO17 to extend that application to Morocco when designating the countries outside the European procedure. The Moroccan examiners can therefore concentrate their resources on national patent applications and the development of the services for the clients. That takes place through training in companies and the computerization of the processing of the applications thanks to e-OMPIC. Will these initiatives inspire the countries of the African continent which has multiple national intellectual property systems and even two regional systems (OAPI, ARIPO)? In the same spirit of simplification of grants, the “Patents for Humanity” programme of the USPTO reserved accelerated processing in 2013 for patents selected according to criteria of contribution to sustainable development. The symbol is powerful: this gain in time must allow more rapid transfer of these technologies from research through to marketing. By presenting the winners with a “rapid grant” certificate, the USPTO intends to help entrepreneurs find financing for their “green technologies.” However, the acceleration of the grant periods is not only important for patents connected to sustainable development. Furthermore, there is uncertainty as to whether the “exception” of processing in favour of patents for humanity in the USA will be maintained. The editor of “waybetterpatents.com” underlines this: the future of the programme is unknown as its effectiveness regarding the acceleration of the transfer of technology 16. OMPIC: Office Marocain de la Propriété Industrielle et Commerciale [Moroccan Industrial and Commercial Property Office]. 17. EPO: European Patent Office. is not unanimously agreed on. However, the entire world agrees on the importance of the development of absorption capacities in developing countries. Spreading Innovation Depends on “Local Absorption Capacity” Analysis of patent filing practices shows the positive impact of innovative scientific work being carried out in developing countries. In fact, although the number of filings is certainly much lower in the least developed countries, it is in reality proportional to the investments in R&D. In 2009,18 the high income countries (excluding China) represented 77 percent of the global expenditure in R&D, and in 201119 the six main patent offices (including China) represented 79 percent of the global patent applications. These figures confirm the finding of several contributors: when the research work is carried out in developing countries, the patents are also filed in those countries. Yann Ménière20 confirms the trend for Low Carbon Technologies: patents promote the circulation of information if the “local absorption capacity” and the local demand are sufficiently high. In other words, the companies which benefit most from technologies patented by others are companies which carry out R&D themselves and see a local market for the technologies developed. Numerous examples of initiatives, particularly in Africa, for encouraging the spread of innovation were shared, including: • AMAPIC , the centre for training in intellec tual and commercial property of the OMPIC • Africa Techno, the forum for the exploitation of research results, with the OAPI • INNODEV, the business incubator for food technologies in Senegal • PACEIM, which supports the creation of businesses by scientific diaspora in the Mediterranean region • African Social Entrepreneur Prize in the tele- communications sector. For the leaders of these initiatives, the great success that they encounter underlines the interest and the need for continuing investment in education and research in these countries. Sustainable development does not just amount to the granting of patent licences under fair conditions. It must be accompanied by the transfer of know-how to a trained local 18. WIPO estimates of September 2011. 19. WIPO statistical database. 20. Lecturer at Mines Paris Tech. June 2014 114 IPRs In Least Developed Countries population in order to create new innovations in a sustainable manner. Conclusion: Go Beyond Preconceived Ideas and Focus Efforts on Promising Initiatives This day of discussions developed the understanding of the path that remains to be taken in order for intellectual property to come of age in developing countries. Intellectual property rights are often wrongly cited as an obstacle to sustainable development. Evidence has shown that solutions exist for intellectual property rights to be used to promote sustainable development, when the parties agree on the basis of their collaboration. The work of Mines Paris Tech therefore shows that intellectual property rights for low carbon technologies (LCT) do not constitute a barrier to their adoption by developing countries. These technologies are not patented more than others on average, and there is not an abundance of patents as in the field of information technologies, which would tend to create monopolies. The prospect of making a sustainable contribution to the econo- 115 les Nouvelles mies of developing countries, as shown, encourages accompanying the intellectual property system of emerging countries as it comes of age, by following in particular three paths towards change cited during the discussions: 1. Recognizing the value of local intellectual property by encouraging its development through investment in research and education centres in developing countries. 2. Simplifying access to intellectual property protection procedures in developing countries and promoting the quality of the titles granted. 3. Supporting the intellectual property development structures under fair licensing conditions between developed and developing countries. These avenues will be studied and explained in detail in an official report which will be produced in the next few months by the “Intellectual Property and Sustainable Development” Working Group of LES France and the INPI with the help of the AFD and the C3D. ■ EU State Aid Policy EU State Aid Policy: A Model To Assess Intellectual Property Rights And Knowledge Dissemination In R&D Cooperation Part 1 By Mario Cisneros Introduction C ooperation between research organizations (ROs) and industrial organizations facilitates the flow and use of scientific and technological knowledge. Competitiveness of the industry and the rise in the welfare of societies is increasingly connected to the incorporation of innovative technology in products and services.1 An important objective of the European Union (EU) innovation system is to convert knowledge into technology, to link technological and scientific knowledge generators with users and to generate social and economic benefits from the public investment in Research & Development (R&D). Research organizations2 play a fundamental role in this process as most of the public investments in R&D are directed to these institutions and, in most cases, the transfer of technology that was created with the use of public funds takes place through them. Increasing demand is directed to research institutions on the need to disseminate and put in use publicly funded research results to convert them into new products and services.3 In addition to guaranteeing the financial resources needed to increase the cooperation between research institutions and the industry, the EU has the responsibility to develop a legal framework that assures efficiency in collaborative research.4 1. For a discussion on the importance of technological and scientific development in the EU see, “A more research-intensive and integrated European Research Area, Science, Technology and Competitiveness,” key figures report 2008/2009, European Communities, 2008. 2. The term research organization is used herein with the same meaning as the term PRO. The definition of undertaking within the meaning of Article 107 TFEU is independent from the public or private nature of a research entity. 3. “Improving knowledge transfer between research institutions and industry across Europe,” Communication from the Commission, European Communities, 2007. 4. FP7 allocates EUR 32,413 million to the Cooperation program, a budget devoted to support cooperation between universities, industry, research centers and public authorities throughout the EU. Amended proposal for a European Parliament and Council Decision concerning the 7th Framework Programme of the European Community for research, technological development and demonstration activities (2007-2013), COM(2006) 364 final, 2006. While a good management of intellectual property rights (IPRs), knowledge protection and other intellectual property (IP) related issues are frequently indicated as a key aspect in the relationship between research organizations and industr y, the legal ■ Mario Cisneros, framework that regulates Austral University/ the subject is still under development.5 The active Maastricht University, engagement of ROs in IP Buenos Aires, Argentina management and knowlE-mail: mario.cisneros@ edge transfer is essential maastrichtuniversity.nl in order to generate the expected socio-economic benefits of public investment in R&D activities. Because of this, the EU has taken initiatives to facilitate knowledge transfer at national and community levels. Nevertheless, discrepancies between national frameworks, policies and practices in the industry can still be observed.6 Inconsistent practices in the management of IPRs within research organizations prevent the effective utilization of public resources and State aid measures in generating benefits from the resulted technology and their transfer to the industry and users. In this paper, a description of the economic foundations of State aid law for R&D activities, with special focus on the assessment of the benefits and disadvantages of State aid measures and IPRs issues in the context of R&D cooperating agreements is explored. In doing this, we address the effect of IPRs resulting from State aided R&D cooperation activities on trade between member States and competition in the internal market. 5. Latest efforts in defining a harmonized set of rules on the management of IPRs and technology transfer in European universities are limited to not binding guidelines such as Commission Recommendation on the management of intellectual property in knowledge transfer activities and Code of Practice for universities and other public research organizations, C(2008)1329, 2008. 6. Id. June 2014 116 EU State Aid Policy The current Framework for State aid for R&D10 is almost silent on how contractual agreements and IPRs issues between cooperating parties should be evaluated. While it provides a description of the basic elements that should be considered in assessing State aid measures, there is no specific description on how clauses on IPRs concern that assessment. This paper intends to fill that gap, by providing elements to evaluate how IPRs ownership allocation, knowledge disclosure, confidentiality issues and licenses may be interpreted from the perspective of the objectives of State aid law, including Article 107 TFEU11 and the related frameworks. A second objective of this paper is to explore the different available IPRs ownership, disclosure and use schemes and to show how they may affect competition in the internal market under the State aid compatibility assessment elements.12 In this regard, an analysis of the way IPRs schemes lead to a distortion of the market, particularly a distortion of competition or reduction in efficiency, is provided. More specifically, the alternative schemes of exclusive vs. non-exclusive use of the resulting technology, free publication vs. secrecy, public vs. private ownership and intermediate IPRs options is reviewed from the perspective of State aid law and its economic foundations. Ultimately, the study intends to provide inputs to the new revision of the Framework for State aid for R&D&I in the context of the State Aid Modernization initiative. The paper is structured in two parts. Part 1 includes, firstly, a discussion of dynamic efficiency and economic theories on distortion of competition. Secondly, the evaluation of different IPRs ownership choices, including shared ownership, property allocated to the research organization or property allocated to the industrial partner in the perspective of the likelihood to distort competition, including public goods associated failures, the generation of market power, the distortion of dynamic incentives and the maintenance of inefficient market structures. A further analysis of the concept of selective advantage 10. “Community Framework for State Aid for Research and Development and Innovation,” OJ, 2006/C, 323/01. Referred herein as the Framework. A new revision of the Framework is expected to be published by the EC during the second part of 2014. 11. “Consolidated Version of the Treaty on European Union,” Chapter 1 “Rules on Competition,” 2008, O.J. C, 115/47. 12. The term IPRs scheme is used herein to refer to the chosen allocation of ownership of intellectual property rights, including patents and other available protection mechanisms, know-how, disclosure, trade secrets, use, exploitation and licenses related to the technology generated in the course of an R&D cooperation project. 117 les Nouvelles and the allocation of IPRs ownership is also provided. In Part 2 the alternatives for the rules on knowledge dissemination are evaluated from the perspective of the benefits generated by knowledge spillovers, the problem of asymmetric information and coordination and network failures. Besides, the different rules to define how parties can make use of the resulting knowledge and technology are evaluated, focusing on potential effects on the market by limiting dynamic incentives and distorting competition through the enforcement of IPRs. 1. Dynamic Efficiency and Systemic Failures The European Commission (EC) paradigm of market functioning establishes that economic processes should remain free. However, it also considers that a legal framework is necessary to protect such freedom not only from governmental interference but also against private economic power.13 The approach encompasses several theoretical insights, among the most relevant, the Freiburg School of Economics and many of the original German competition law rules, where limitations of business freedom are held as virtual restrictions of competition.14 Despite this view, State aid has not been seen as a tool of industrial policy, but as a second best solution to solve failures where the free and rational decision of commercial firms should prevail.15 Under this perspective, market intervention in connection to R&D&I has been only deemed as necessary if certain conditions are found: (1) the identification of areas of the economy where the output of innovation activities is unsatisfactory, (2) the identification of a defect in market forces that produces a constrain in the quantity or quality of innovation and (3) the intervention produces a benefit that is higher than the cost of it.16 The idea that market forces produce results superior to government intervention has always relied on the assumption that rational choice theory explains the behaviour of economic actors, suggesting that markets self-correct and that rational behaviour of undertakings produces the most desirable outcomes in terms of efficiency. In the United States, the Chi13. Bishop S. and Walker M., “The Economics of EC Competition Law: Concepts, Application and Measurement,” Sweet & Maxwell, 2010, p. 49. 14. Van den Bergh R.J. and Camesasca P.D., “European Competition Law and Economics: A Comparative Perspective,” Sweet & Maxwell, London, 2006, p. 65-67. 15. Devlin A., “Antitrust in an Era of Market Failure,” Harvard Journal of Law & Public Policy, Vol. 33, 2010, pp. 557-606. 16. Edquist C., “The Systems of Innovation Approach and Innovation Policy: An account of the state of the art,” DRUID Conference, Aalborg, 2001, pp. 1–29. EU State Aid Policy cago and post-Chicago Schools of thought have placed price theory at the heart of substantive competition policy.17 Contrary to this view, the so called Harvard School of thought had until that time rejected the application of price theory and developed the idea that the performance of specific industries is dependent on the conduct of firms and the market structure of the industry under investigation.18 Contrary to the liberalization paradigm of the Chicago School, the Harvard School proposed that the government has an important role to play in order to actively stabilize economy processes.19 Both schools have long maintained a fundamental economic debate. EU competition law has not followed the U.S. move in the implementation of Chicago School thoughts. Instead, many of the Harvard School paradigms can be found in EU competition law, though the recent emphasis for a more economic approach in the design and implementation of competition rules may be changing this tradition to a pure efficiency standard.20 Static competition models, as the ones described above, are not adequate to illustrate competition where the range of products available and the methods of producing them are variable and defined by R&D actions carried out by market participants. Instead, a dynamic conception of competition where market players compete not only in prices, but also on innovation, becomes necessary as a theoretical model to evaluate the impact of State aid measures in a free market. In many of these dynamic markets, players compete by innovating to generate new products and not only in the market for the existing products, which requires to take into account the impact of aid measures before a market for such product still exists.21 For example, under a dynamic conception of competition, monopoly power generated by the commercialization of an innovative product may represent a positive and necessary element in the market 17. Posner R., “The Chicago School of Antitrust Analysis,” 127 U. PA. L. REV. 925, 1979. 18. Van den Bergh R.J. and Camesasca P.D., “European Competition Law and Economics: A Comparative Perspective,” Sweet & Maxwell, London, 2006, p. 67-68. 19. Kovacic W., “The Intellectual DNA of Modern U.S. Competition Law for Dominant Firm Conduct: The Chicago/Harvard Double Helix,” Columbia Business Law Review, 1-80, 2007. 20. Devlin A., “Antitrust in an Era of Market Failure,” Harvard Journal of Law & Public Policy, Vol. 33, 2010, pp. 557-606, pp. 557-606. 21. Bishop S. and Walker M., “The Economics of EC Competition Law: Concepts, Application and Measurement,” Sweet & Maxwell, 2010, pp. 45-48. structure, to ensure that consumers can benefit from firms investing in innovative activities. Thus, the possibility that market players are able to appropriate for a certain time the benefits of investment in R&D activities is necessary to be included in the competition models to contemplate the generation of benefits from the investment in R&D activities.22 Thus, a more evolutionary perspective of innovation could be incorporated into the new framework by taking into account the dynamic nature of the economic system in terms of ongoing variation and selection, the association and dependency of actions in the R&D process, the heterogeneity of actors in the system and their interactions.23 By taking into account this theoretical approach, the framework would be benefited by broadening the scope of the concept of market failure, incorporating the notion of infrastructural failures, institutional failures, actors interaction failures, structural inertia and earning capability failures. Taking into account these other dimensions in explaining a sub-optimal output of innovation activities, and defining industrial policy as a deliberate action by the State to shift the structure of the economy away from its static comparative advantage to a structure offering more dynamic potential, State intervention acquires new relevance. The market failure theory, as used in the current framework and derived from the static competition models, could better integrate dynamic competition by combining the functioning problems assigned to the public nature of R&D results with failures assigned to the system where the innovation takes place.24 Under this perspective, justifications for public intervention could be complemented by an evolutionary and organizational notion of innovation by focusing on systemic failures.25 22. Geroski P., “Innovation and Competitive Advantage,” OECD Economics Department Working Papers, 159, OECD Publishing, 1995. 23. Diekmann J., Som O., et al., “Analysis of Innovation Drivers and Barriers in Support of Better Policies Economic and Market Intelligence on Innovation, Organisational and Marketing Innovation—Promises and Pitfalls,” Final Report, European Commission, 2012. 24. For a description of the innovation system concept see, Lundvall, B., “Innovation as an interactive process: From userproducer interaction to the National Innovation Systems,” in Dosi, G., Freeman, C., Nelson, R.R., Silverberg, G. and Soete, L., (eds.), Technology and economic theory, London, Pinter Publishers, 1988; and Lundvall, B. (ed.), National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning, London: Pinter Publishers, 1992. 25. Id. See also, Edquist C., “The Systems of Innovation Approach and Innovation Policy: An account of the state of the art,” DRUID Conference, Aalborg, 2001. June 2014 118 EU State Aid Policy Under this approach, the innovation system concept, companies do not innovate alone. On the contrary, they are part of a network of institutions that interconnects with the aim to innovate. This network is formed by companies, research institutions, universities, governmental agencies and other social actors. By having the possibility to interact, these entities intentionally use the external resources and collaborate to reach technological or scientific objectives.26 In this systemic approach, much emphasis is given to the learning capacity of R&D actors and to the barriers they may face to cooperate. Thus, IPRs and knowledge dissemination rules agreed by the cooperating parties should be seen as a key factor defining the relationship between the actors, shaping the functioning of many aspects in a innovation system, particularly on the difficulty of access to learning capabilities and R&D resources. The current R&D&I framework does not clarify which competition model is used as the theoretical background to sustain the proposed rules, but follows the mainstream reasoning in explaining the justifications for the State aid intervention in the R&D&I field. Thus, under the mainstream thought, market failures in the area of R&D are mostly related to externalities, public goods problems and uncertainty due to lack of information. These failures are all assigned to the characteristics of the generated goods, i.e., the created scientific and technological knowledge. Policy actions departing from this perspective target the results of R&D activities, for example by creating property rights on the above mentioned intangibles. Besides, under this model, technological development creates the same marginal value no matter where the knowledge is created or by whom. No special factors as locations and actors are valued and, once created, it is assumed that the technology will be transferred and immediately used by the entity that can create most value out of it. In most cases, this view may not be adequate to model reality. In the next section, the role of IPRs in R&D cooperation and the impact that certain agreements may have on dynamic efficiency and other relevant policy determinants are discussed. 2. Ownership of Intellectual Property Rights IPRs ownership in the context of R&D cooperation refers to the manner in which parties decide on the protection and allocation of rights over the knowledge resulting from a cooperation project. Such knowledge, in most of cases related to scientific 26. Id. 119 les Nouvelles and technological information, can be protected by different means, depending on the chosen strategy and the nature of the knowledge. In most of cases, knowledge related to inventions is protected through patents, while other knowledge may be protected by secrecy, copyrights, know-how or any means that assures rights or control over the related technology. In many cases, either because the knowledge is not relevant for the interests of the parties or because there is no available protection scheme, parties decide to make the information available as public knowledge. The selected scheme to protect the results of the project and the allocation of ownership depends on the negotiation between the different parties, its negotiation power, objectives and interests. The allocation of IPRs can lead to an aid measure to fall under the definition of State aid. Within the meaning of Article 107(1) TFEU, indirect State aid to undertakings through publicly funded research organizations does not exists if ownership of IPRs is fully allocated to the research organization.27 When a research organization enters into a contract for collaborative research with an industrial undertaking, the Commission, without a notification requirement, considers that no indirect State aid is granted to the industrial partner through the research organization if the conditions set out in the Framework are fulfilled.28 In case that the results which do not give rise to intellectual property rights may be widely disseminated and any IPRs resulting from the activity of the research organization are owned by the research organization, the Commission considers that no indirect State aid is granted to the industrial partner through the research organization.29 Besides, allocation of IPRs in the contractual agreement between cooperating parties may lead to the conclusion that no State aid exists if any IPRs to the R&D results are allocated to the different partners of the collaboration adequately reflecting their respective interests, work packages, financial and other contributions to the project.30 Ownership of IPRs may also operate as a variable for the assessment of compatibility of State Aid with Article 107 TFEU. While no explicit reference is made 27. Ch. 3.2.2., The Framework. “[A]ny intellectual property rights to the R&D&I results which result from the activity of the research organisation are fully allocated to the research organisation.” “‘Full allocation’ means that the research organization enjoys the full economic benefit of those rights by retaining full disposal of them, notably the right of ownership and the right to license” fn. 28. 28. Id., Ch. 3.2.1 and 3.2.2. 29. Id. 30. Ch. 3.2.2., para. 6, The Framework. EU State Aid Policy in the current Framework on how ownership of IPRs should be used to evaluate distortions in trade or competition, other provisions provide the basis under which the Commission could assess aid proposals. By considering these elements, the mechanism through which IPRs ownership schemes selected by the parties can distort competition and affect trade between Member States can be asserted. 2.1The Leipzig Halle Case The European Court of Justice (ECJ) has recently confirmed the longstanding Commission’s approach on State aid measures for the construction of infrastructure.31 While the case is not directly related to R&D, some of the rulings developed by the Court together with the original decision of the Commission may be extrapolated to the questions discussed here. In 2006 the German authorities notified the Commission on the establishment of the European hub of DHL Group at Leipzig-Halle Airport with a capital contribution of about 350 million EUR to the Leipzig Airport for the financing of the construction of a new southern runway and the signature of a framework agreement between the Airport and DHL, which grants continuous access of the runway facilities to the company, and a series of guarantees in the case that DHL will no longer be able to operate at the airport. In 2008, the Commission declared the capital injection to be compatible with the internal market. Even though the Commission declared the aid to be compatible, the airport and the German Länder Sachsen and Sachsen-Anhalt are contesting the Commission’s finding that the measure constituted State aid. In their view, the construction of infrastructure is not economically viable and cannot, therefore, be regarded as an economic activity in the meaning of EU State aid rules. At the same time, the Commission decided that the framework agreement signed by the Airport and DHL constituted State aid, and that aid was found incompatible with the internal market. In 2011 the ECJ confirmed that the construction of airport infrastructure is part of the economic activity of operating an airport, and that public funding of infrastructure necessary for the operation of the airport alleviates the costs that the airport operator would normally have to bear, and therefore constitutes State aid.32 The Commission indicated that if an agreement grants a selective advantage, this is liable to distort competition and trade between Member 31. Commission Decision C48/06 (ex N 227/06), 2008/948/EC. 32. T-443/08 Mitteldeutsche Flughafen AG and Flughafen Leipzig-Halle GmbH v European Commission, ECR II-01311, 2011 and T-455/08. States. To the extent that such economic advantage is not financially repaid by the signing counterpart, there is unlawful State aid. Providing access to an infrastructure constitutes as such an economic activity, the public funding of which constitutes state aid.33 Consequently, charging infrastructure costs to private users seems insufficient to avoid considering providing access to an infrastructure as an economic activity. The question arises whether IPR licensing is subject to the same uncertainty, i.e., if licensing IPRs by an RO can be considered an economic activity, even when it charges market prices to avoid that State aid is passed on to the enterprise? The signature of an agreement where benefits are granted to a third party, which would had not been possible except for the use of public funding, may constitute State aid. The same ground may arise from RO-industry collaboration: the usual signature of a confidentiality agreement, providing the industrial partner the guarantee that no information will be disclosed by the RO and the consequent benefit for an exclusive exploitation of the technology by the industrial partner. In this context, the question arises whether the granting of a selective benefit by a license, secrecy or technology transfer contract signed in the context of public-private R&D cooperation is exposed to the same uncertainty? 2.2Distortion of Competition and IPRs Ownership Ownership of IPRs can distort competition in different ways. IPRs, particularly patents, are in essence anti-competitive as they grant the owner the possibility to exclude third parties from using the protected technology or an equivalent one.34 Despite this, the overall balance of establishing a patent system may lead to the development of technologies that otherwise would not be generated, even when taking into account the allocative inefficiencies that providing a temporary monopoly to an inventor can produce.35 The patent system relies on the concept that by providing a limited monopoly on an invention 33. Id. 34. While the European Patent Convention (EPC) represents a unified application and examination system, there is no unified patent system at EU level. Nevertheless, patent law from Member States usually establishes the same patent rights, as the right to exclude third parties from producing, offering, putting into circulation or using a product or process constituting the subject matter of the patent. See, Mulder 2011. 35. See, Landes William M. and Posner Richard A., “The Economic Structure of Intellectual Property Law,” Cambridge, Mass: Belknap Press of Harvard University Press, 2003; or Leveque F. and Ménière, Y., “The Economics of Patents and Copyright,” Berkeley Electronic Press, July 2004. June 2014 120 EU State Aid Policy 121 to reward the inventor for solving a technical problem the public goods problems associated to technological knowledge and intangible assets can be removed and an incentive to invest in the development of new technical inventions can be generated.36 In a certain way, the patent system and State aid measures are tools that pursue the same aim.37 The creation of patent rights represents an intention to solve market failures associated with public goods.38 In this way, the objectives of State aid measures for R&D and patent law are similar in their motivations. Both, patent law and public financing serve to generate an incentive to invest in technological developments that otherwise would not be pursued. In the following section, a description of how IPRs may lead to distortions in the market, which would be contrary in essence to the objectives of compatible State aid measures and against Article 107(1) TFEU, is provided. 2.2.1Generation of Market Power and IPRs Ownership IPRs confer the possibility to control, with certain limitations, the commercialization and use of the protected technology. By the enforcement of such rights, depending on the characteristics of the market and the nature of the technology, the IPR owner can exclude competitors and maintain control over a certain market. Such control, in case that the technology has no substitutes, can lead to the exercise of market power. Given the fact that State aid measures are assessed before the start of the project, and in many cases, even before having a preliminary notion about the potential results that can be generated by the R&D activities, it seems difficult to consider that the Commission or the grantor State is able to evaluate in detail a potential problem associated to the allocation of ownership rights. Besides, in many cases there is no market for the technology involved in the project, and no definite assessment can be made on how IPRs will influence the, yet inexistent, market.39 Other areas of EU competition law, namely the rules related to Article 101 TFEU, appear more useful in evaluating the effects caused on the market by IPRs ownership generated in R&D cooperation. Patent owners have the right to exclude third parties from making use of the technology and to profit from the exclusive exploitation of it. Even when third parties may be interested to pay for the use of the patented technology, the right owner may trace its own business strategy and decide not to license or transfer the rights. While the industrial partner is expected to make such strategic use of IPRs over competitors, IPRs ownership by the research institution would in principle not lead to the creation of market power in the product market. Universities and research institutions do not usually compete in product markets, but they compete in innovation markets. By definition, allocation of IPRs in universities and research institutions may lead to the creation of market power in innovation markets. 2.2.2Distortion of Dynamic Incentives and IPRs Ownership Allocation of IPRs may distort dynamic incentives on further innovation and technological development. In particular, in case that cooperating parties agree on clauses that assign ownership of future improvements, the possibility to further develop improvements or alternative solutions, alone or in cooperation with third parties, may be limited. These kinds of limitations may generate negative consequences for future competition in innovation, as the future investments would only take place in case the benefits generated can be at least partially appropriated by the innovator. Parties may decide that ownership of any future development on the foreground technology40 will be allocated to one of the parties. An agreement of this kind will probably produce a disincentive to invest in future developments to the party that will not be able to appropriate the IPRs generated, which would be contrary to the incentive requirement established for State aid measures. In this way, the potential benefit of having two alternative parties working on improvements of 36. Id. 37. An important difference between the two systems, besides that one provides the possibility to reward the incentive ex ante and the other reward the inventor ex post, is that while patent law target technological innovations with industrial applicability, State aid measures can also target the development of basic scientific knowledge without a direct industrial use. 38. A counterargument to the established anti-competitive nature of the patent system indicates that by granting a limited monopoly on inventions, the State is incentivizing competition in innovation between market players by providing the tool to recover investments to develop alternative technologies. 39. In these cases, focus on competition in innovation and the distortion of dynamic innovation incentives should prevail. 40. Foreground technology is defined as “the results, including information, whether or not they can be protected, which are generated by the indirect action concerned. Such results include rights related to copyright; design rights; patent rights; plant variety rights; or similar forms of protection,” Council Regulation (Euratom) No 1908/2006 of 19 December 2006 laying down the rules for the participation of undertakings, research centres and universities in action under the Seventh Framework Programme of the European Atomic Energy Community and for the dissemination of research results (2007 to 2011). les Nouvelles EU State Aid Policy the existing technology will be lost. Of course, the benefits and disadvantages based on improvements of dynamic incentives are mostly speculative and the impact of this kind of agreements seems difficult to assess and regulatory intervention on the freedom to agree on IPRs ownership does not seem appropriate. Nevertheless, State aid law does not require certainty on market distortions to consider an aid measure as incompatible, but only the possibility that the measure may cause any threat in the distortion of competition. In this perspective,41 State aid law may declare certain practices as explicitly prohibited under the course of R&D cooperation, in the same way some clauses related to IPRs are prohibited under other areas of competition law. 2.2.3Maintaining inefficient market structures and allocation of IPRs In an idealized market where an efficient allocation of resources is achieved, cooperating parties would have access to full information in order to make the most efficient allocation of IPRs.42 Even in case that the initial allocation of IPRs ownership does not lead to the best outcome in terms of efficiency, after some time IPRs would be transferred and allocated to the market player that can extract the most value from them.43 Nevertheless, parties usually negotiate IPRs ownership in an scenario of uncertainty and limited information, without certainty on the value of the generated technology and the capacity by each party to generate profits from it. Under those circumstances, ownership of IPRs is determined by factors that may lead to inefficient allocation of IPRs and, as a consequence, to the generation of inefficient market structures. For example, improvement of technology that is still at an embryonic stage may be much better controlled by a research organization instead of by the industrial partner, as it is expected that further development at a level of basic research needs to be performed before the technology is ready to be industrialized and commercialized in the market. In such case, granting ownership of related IPRs to the research organization may facilitate a more efficient development of the technology until market commercialization is ready. On the other hand, technologies that are fully developed and ready to be implemented in market products could be most efficiently allocated to the industrial partner, who is more knowledgeable 41. Aid that generates a distortion or that threatens to distort competition. 42. See, Arrow K., “Economic Welfare and the Allocation of Resources for Inventions,” The Rate and Direction of Inventive Activity: Economic and Social Factors, R.R. Nelson (ed.). Princeton, NJ, 1962, pp. 609—626. 43. Id. on the most efficient strategy at this stage. In real circumstances, allocation of IPRs is defined by the individual interest and negotiation power of each party instead of by market efficiency considerations. Inefficient market structures are an example of distorted competition and may affect trade between Member States. As such, State aid for R&D projects that lead to inefficient and distortive allocation of IPRs among cooperating parties can be found incompatible with the internal market and, as such, prohibited. Nevertheless, intervention on this point would be only reasonable in case that the regulatory authority holds better information on the most efficient allocation of IPRs ownership and the resulting market structure. State aid measures being a tool to correct market imperfections, a better addressing of public investment should consider the possibility to directly allocate IPRs to the most efficient scheme in cases where there is a clear social interest for the related technology. 2.3 Selective Advantage and IPRs Ownership To be considered State aid a measure must be specific or selective and favour only certain undertakings or the production of certain goods. The advantage must result from State resources.44 How close this link needs to be is a question that has not yet been fully clarified. There is no identity in the meaning of a matching symmetry between the advantage and the resources employed in case of indirect aid. The transfer of IPRs from a public research organization to an industrial cooperating partner during the course of a collaborating R&D project may represent a transfer of resources. IPRs can benefit the right holder by providing the capacity to exclude competition from making use of the protected technology. Such exclusion grants the IPR holder the possibility to fix prices and to define outputs according to its own interest for profit maximization. In economic literature this is referred as the monopolistic maximizing profit, by setting marginal return equal to marginal cost, which result in lower quantities being offered on the market against a higher price.45 The IPR owner can thus be clearly benefited through a transfer from the RO. Nevertheless, even when the industrial partner can be benefited by the transfer this is not sufficient to define it as a selective advantage. The Commission and Community Courts have given an extremely wide interpretation to the requirement of selectivity 44. Joined cases C-399/10 P and C-401/10, Bouygues and Bouygues Télécom v Commission and Others, Judgment of the Court (Grand Chamber), 2013. 45. See e.g. Krugman P., Wells R., “Microeconomics,” Worth Publishers; Third Edition edition, 2012.; Chapter 14. June 2014 122 EU State Aid Policy although the ECJ has ruled that a measure to be classified as selective has to be designed in accordance with a certain regulatory technique. 46Thus, except when the State aid measure includes a requirement that IPRs need to be transferred to the industrial partner under certain predefined conditions, the selective advantage could not be proved to the extent to make the measure incompatible with the internal market. In any case, the transfer of IPRs would still be an element to consider in evaluating the direct or indirect transfer of resources from the State to an undertaking. 2.4 Adverse Effects on Trade and Allocation of IPRs The incompatibility prerequisite that the State aid measure affects trade between member states has the objective to define a limit between the scope of national and EU law. State aid measures for collaborative R&D must observe EU law requirements only if the measure produces an effect outside the granting State. In this context, it is particularly important to determine whether the agreements on IPRs ownership allocation between collaborating parties can constitute a real or potential, direct or indirect threat, to the intra community trade.47 In principle, any IPRs to the resulted technology will limit access to third parties in other member states. For technologies where substitutes exist, limitation to access improved processes may represent an increase in the relative manufacturing costs and a diminished relative competitiveness. For the cases were no substitute exists, protection of the resulted technology would totally exclude competing undertakings from the possibility to commercialize or make use of the protected knowledge, product or processes at EU level. Any of these situations will visibly affect trade between member states in the case that the competing undertakings are located in different Member States. Nevertheless, the limitations in trade associated with the existing IPRs owned by the aided undertaking may still be counterbalanced by the benefits of the existence of the new technology in terms of improvements of productivity and availability of new and better products and processes, facts that should be accordingly weighted. The assessment of any negative effect in trade as a consequence of a particular scheme used by the 46. Joined cases C-106/09 P and C-107/09, Commission and Spain v Government of Gibraltar and the United Kingdom, 2009. See also Luja R., “Taxation of Intra-Group Interest, State Aid and De Facto Selectivity,” Electronic Paper, June 19, 2009. 47. C-22/78, Hugin Kassaregister AB and Hugin Cash Registers Ltd v Commission, ECR 01869, 1979. 123 les Nouvelles parties in the allocation of IPRs ownership seems to a certain extent speculative. While State aid law has interpreted the requirement rather broadly and the effect on trade does not need to be real but merely potential, the implementation of special requirements on IPRs ownership based on potential negative effects on trade does not seem to be reasonable. Besides, as State aid measures can rarely have the explicit aim to distort competition, it is not the objective but the effects that should be evaluated.48 In assessing distortion of competition in agreements between undertakings, the ECJ has proposed the use of a counter-factual test by comparing the distortion produced in competition compared to the level of competition without the existence of the agreement under evaluation.49 In applying the test, it is necessary to consider that cooperating parties are not obliged by receiving State aid to implement IPRs allocation that distorts competition. Nevertheless, taking into account the common practices between research organizations and industrial undertakings, the implementation of State aid measures without defining accompanying rules restricting these practices, may be considered as indirectly responsible for not adopting the property measures that impede market distortions. It has to be considered that R&D projects often entail substantial investment and dynamic competition may be reduced if parties are not allowed to assign ownership of IPRs in a manner beneficial for them.50 Nevertheless, provided that the aid measure already guarantees the incentives to enter into the R&D project, other incentives related to the possibility of specific allocation of IPRs are not as relevant as in cases where the project is fully supported by means of private funds. ■ 48. In connection to the assessment of anti-competitive practices between undertakings, the ECJ has indicated that “In the absence of an anticompetitive object, an agreement may be objected to only on the grounds of its effects. In that case, any anticompetitive effects must be assessed with regard to competition within the actual context in which it would occur in the absence of the agreement in dispute.” C-7/95, John Deere Ltd v Commission of the ECR I-03111, 1998. From an economic perspective, focusing on restrictions targeted to the object rather than to the effect can be inefficient. See, Bishop S. and Walker M., “The Economics of EC Competition Law: Concepts, Application and Measurement,” Sweet & Maxwell, 2010, and Van den Bergh R.J. and Camesasca P.D., “European Competition Law and Economics: A Comparative Perspective,” Sweet & Maxwell, London, 2006. 49. See C-22/71, Béguelin Import Co. v S.A.G.L. Import Export, ECR [1971] p. 00949, C-328/03, O2 GmbH & Co. OHG v. Commission, 2003. 50. C-258/78, L.C. Nungesser KG and Kurt Eisele v Commission, ECR [02015], 1982. Chinese Trademark Law Key Amendments To The Chinese Trademark Law By Zhou Zhongqi T he draft for the amendment of the Chinese Trademark Law was adopted at the 4th Session of the Standing Committee of the 12th National People’s Congress on August 30, 2013. The amended law will be implemented as of May 1, 2014. The key amendments to the Chinese Trademark Law are summarized below: knows the mark through contractual, transactional or other relationships with the prior user, if the prior user raises an opposition. A new clause is added to Article 7: Filing application for registration and use of a trademark shall comply with the principle of honesty and credibility. 1. Sound Mark Registrable Current: Any person may take opposition ac■ Zhou Zhongqi, tion against a published trademark application on CCPIT Patent & Trademark any ground. And any party Law Office, may appeal the opposiVice President, tion decision made by the Beijing, China Trademark Office to the TRAB and initiate legal E-mail: zhouzhq@ ccpit-patent.com.cn proceedings in Courts of law. Amended: Owner of prior right or interested party may take opposition action against a published trademark application on relative ground and any person may take opposition action on absolute ground. Current: Any visually perceptible sign, including words, devices, letters, numerals, three-dimensional signs, combination of colours as well as the combination of such signs are registrable. Amended: Subjects of trademark protection are extended to include sound. 2. Multi-Class Applications Current: One application is for one mark in one class. Amended: Multi-class applications are acceptable. 3. Office Actions 6. Re-Construction of Opposition Procedure Current: Office actions are available only when designated goods or services are not in compliance with the classification requirement. Amended: Upon examination, the examiner may issue an office action addressing formality or substantive issues. The applicant may present his argument Procedure or amend his application. Time-Limit Extension (month) (month) 4. Statutory Time-Limit For Examination Trademark Application 9 N/A The amended law provides statutory time limits for the Trademark Office and the TRAB to make decisions on procedures such as trademark registrations, reviews, oppositions, invalidations, and cancellations. Review On Rejection 9 3 Opposition 12 6 Review On Opposition 12 6 Invalidation On Absolute Ground 9 3 Review On Invalidation On Absolute Ground 9 3 Invalidation On Relative Ground 12 6 Cancellation 9 3 Review On Cancellation 9 3 5. Tackling Bad-Faith Applications Two clauses are added to provide more means to tackle bad-faith applications. According to newly added Paragraph 2 of Article 15, a trademark shall not be registered on identical or similar goods/services if the mark has been used by others and the applicant June 2014 124 Chinese Trademark Law If the Trademark Office makes a decision on opposition in favor of the opponent, the trademark applicant may appeal the decision to the TRAB and may initiate legal proceedings in courts. However, if a decision is made against the opponent, the opponent could not appeal the decision. The opponent may take invalidation action with the TRAB after the concerned mark is registered. 7. Well-Known Mark 1. Recognition and protection of well-known mark should follow the principles of passive protection, necessity check and case-by-case recognition: only when a dispute over registration or use of a mark occurs, does the mark owner request the Trademark Office, the TRAB or Courts of law to recognize his mark as a well-known mark. The recognized mark is not necessarily protected as a well-known mark in other disputes wherein the same mark is involved. 2. The term “well-known mark” should not be used on goods, packages or containers of goods, or in advertising, exhibition or any other business activities. 3. Violation of the stipulation of the non-publicity clause is subject to injunction and monetary penalty. 8. Right of Prior Use The concept of right of prior use is introduced: A person may continue to use his mark even after an identical or similar mark has been registered in identical or similar goods/services if he uses the mark before the application for registration of the mark is filed and that a reputation is obtained by prior use. However, the use is limited to the original scope, and the trademark registrant may ask the prior user to attach additional sign to differ goods/services provided by the two. 9. Dilution In case a registered mark has become a generic name of the designated goods or services, the mark is vulnerable to cancellation. 125 les Nouvelles 10. Renewal Current: An application for renewal of a registration shall be made within 6 months before the expiration. Amended: An application for renewal of a registration shall be made within 12 months before the expiration. 11. Co-infringer A person who intentionally provides assistance to infringer to implement infringement should be liable for infringement. 12. Repeat Infringer Infringer who implements infringement repeatedly within 5 years should receive a heavier punishment. 13. Misuse of Trademark If a registered mark, or an unregistered but wellknown mark, is used as a trade name and such use misleads the public, the Anti-unfair Competition Law can be applied. 14. Increased Damages Current: Damages for trademark infringement are assessed based on the losses suffered by the trademark owner or the profits gained by the infringer arising from infringement. If neither the losses nor the profits can be assessed, damages can be assessed with reference to the royalty of a license, if there is a license that can be referred to. If the three methods do not work, statutory damages up to RMB 0.5 million (approximately USD 82,000) can be awarded. Amended: Punitive damages up to three times the damages assessed in accordance with the methods mentioned above are possible in case the infringement is intentional and causes serious consequence. The statutory damages are increased from RMB 0.5 million to 3 million. When damages are claimed, evidence proving use in the past 3 years should be submitted if a defense of non use is presented. No damages should be awarded if the trademark registrant fails to submit such evidence, nor to prove any other losses. ■ Superman And Statutes ® Superman And Statutes: The Case For Restructuring The U.S. Legal System And Awarding Copyrights To Authors Behind Works For Hire ® By Michael Haviland I. Introduction I n the early 1800s, an author was understood as “[o]ne who produces, creates, or brings into being; as, God is the author of the universe.”1 This antiquated definition heavily emphasized an author’s creation power and remains critical when understanding the original purpose of the copyright clause.2 Early American case law and copyright statutes heavily focused on a work’s creation when determining copyright assignment, even when authors created what came to be known as works for hire.3 As Congress began passing statutes attempting to clarify what was copyrightable and who was entitled to copyrights, however, a shift began away from the original interpretation, which favored authors, and towards supporting hiring parties instead.4 From around the beginnings of the twentieth century lasting until the 1976 Copyright Act (the “1976 Act”), the copyright pendulum swung almost completely away from authors; hiring parties were frequently assigned work for hire copyrights on the presumption that copyright remained with the party commissioning the work, regardless of the hiring party’s actual involvement in the work’s creation.5 Recognizing authors’ unequal bargaining position due to the inability to initially determine a work’s true value, 1. Author, 1828 Webster’s Dictionary, http://1828.mshaffer. com/d/word/author (last visited Dec. 15, 2013)(stating author’s 1828 definition). 2. For a further discussion of the original interpretation of the copyright clause, see infra notes 10-13. 3. See, e.g., Binns v. Woodruff, 3 F. Cas. 421, 423 (C.C. Pa. 1821) (reiterating copyrights meant for individual creating work). 4. See, e.g., The 1909 Copyright Act, 35 Stat. 1075 (1909) (hereinafter “1909 Act”)(revised to 17 U.S.C. §§101-1332)(introducing work for hire). 5. Julie Katzman, Note, Joint Authorship of Commissioned Works, 89 Colum. L. Rev. 867, 867 (1989) (presuming copyright remained with hiring party under 1909 Act). 6. See Termination of transfers and licenses granted by the author, 17 U.S.C. §203 (2002)(outlining termination framework for post 1976 works); see also Duration of copyright: Subsisting copyrights, 17 U.S.C. §304(C)(2002)(outlining termination procedure for pre 1976 works). Congress created termination rights in the 1976 Act.6 While professing to protect the underpowered author, however, Congress expanded the work for hire provision in the 1976 Act, effectively undermining and disenfranchising the very authors Congress claimed ■ Michael Haviland, to protect.7 Law Student, This article argues for Villanova University restructuring the terSchool of Law, mination and work for hire frameworks to award Philadelphia, PA, USA copyrights to authors E-mail: Mhaviland@ of works for hire while law.villanova.edu granting an automatic fifty-six year exclusive copyright assignment to the hiring party following the work’s creation.8 This can be justified through both a historical and moral rights perspective, which this article argues has been both explicitly and implicitly recognized by American courts and Congress since America’s founding.9 II. History of the Works for Hire Doctrine a. Works for Hire and Early America The Constitution grants Congress the power to grant copyrights “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” (the “copyright clause”).10 Perhaps recognizing the substantive vagueness of the copyright clause, Congress passed its first copyright act in 1790 and explicitly defined what works were afforded copyright protection.11 Although 7. Definitions, 17 U.S.C. §101 (2010)(defining work for hire). 8. For a further discussion of this article’s posited work for hire framework, see infra notes 131-148 and accompanying text. 9. For a further discussion of the historical and moral rights arguments justifying this article’s posited work for hire framework, see supra notes 101-126. 10. U.S. Const. art I, § 8, cl. 8. 11. Copyright Act of 1790, 1 Statutes at Large, 124 (1790) (hereinafter “1790 Act”)(appealed and revised to 17 U.S.C. §§1011332)(qualifying substantive and procedural copyright law). June 2014 126 Superman And Statutes ® the Copyright Act of 1790 (the “1790 Act”) provided some substantive guidance, it was extremely limited in scope, as it only explicitly protected maps, charts, and books.12 Furthermore, the 1790 Act did not define who or what constituted an author and did not mention who ought to control the copyright for works for hire.13 When examining early case law interpreting the copyright clause and the 1790 Act in the context of works for hire, early courts often emphasized the insufficiency of assigning a hiring party the copyright merely for employing an author, such as in the case Binns v. Woodruff. Woodruff was decided in 1821 and involved a plaintiff paying several artists a flat fee to create and sell prints of the Declaration of Independence.15 Upon completing the work, the plaintiff deposited a copy and filed for a copyright.16 The plaintiff later sued the defendant for copyright infringement, alleging that the defendant copied the plaintiff’s work, and violated the plaintiff’s copyright.17 The Woodruff court’s threshold issue was whether the plaintiff created the print and deserved copyright protection, as Congress had intended under the 1790 Act.18 The Woodruff court analyzed the 1790 Act and concluded [t]he person then who is intended and described as a proprietor of a copyright, is one who shall not only invent and design, but who shall also engrave, etch, or work the print to which the right is claimed; or who, from his own works and inventions, shall cause the print to be designed and engrave, etched, or worked.19 The Woodruff court determined that the plaintiff was not entitled to a copyright, stating “the plaintiff did not design and invent, nor did he, from his own work and inventions, cause this print to be designed and engraved.”20 The Woodruff court’s emphasis on using copyright to protect the actual author creating 12. 1790 Act, 1 Statutes at Large, 124 §1 (limiting copyright coverage to only maps, charts, and books). 13. Id. (omitting mention of works for hire and employers for assigning copyrights). 14. See Binns v. Woodruff, 3 F. Cas. 421, 424 (C.C. Pa. 1821) (prohibiting copyright assignment to hiring party). 15. Id. at 422-23 (employing artists to create work for hire). 16. Id. at 423 (depositing work for copyright protection). 17. Id. (suing defendant for alleged copyright infringement). 18. Id. (reviewing whether plaintiff was entitled to copyright). 19. Woodruff, 3 F. Cas. at 423 (determining copyright’s intended for author). 20. Id. (finding for defendants because plaintiff himself did not create work). 127 les Nouvelles the work demonstrated a more widely recognized American vision of authorship within the nineteenth century, which heavily valued an author’s individuality and creativity.21 Early courts recognized exceptions to assigning authors copyrights in their created works, however, as shown in Wheaton v. Peters.22 In Wheaton, the plaintiff was a court reporter who compiled twelve books of Supreme Court decisions ranging from 1816 until 1827.23 The plaintiff sold the copyright to a publisher before the first reporter was compiled and the publisher subsequently filed for copyright.24 The Wheaton defendants published their own volume containing all of the Supreme Court’s decisions from its inception up until 1827 and incorporated the first volume of the plaintiff’s reports.25 The plaintiff sued, alleging that the defendant infringed on the plaintiff’s copyright.26 The Wheaton court did not address whether the plaintiff had created a work for hire, but instead focused on what the enacted copyright laws were meant to actually protect.27 The Wheaton court concluded the plaintiff did not initially have a copyright to sell, as a copyright was only created after satisfying the filing requirements, which included giving public notice and depositing a copy of the work.28 Therefore, the plaintiff could not sell the copyright before the work was actually created and the filing requirements were followed.29 The Wheaton court went a step further, concluding that “[n]o reporter of the decisions of the [S]upreme [C]ourt has, nor can he have any copyright in the written opinions delivered by the court: and the judges of the court cannot confer on any reporter any such right.”30 This reflection emphasized both 21. Catherine L. Fisk, Authors at Work: The Origins of the Work-for-Hire Doctrine, 15 Yale J.L. & Human. 1, 14 (2003)(justifying copyright protection for authors over hiring party because of author’s work and imagination). 22. Wheaton v. Peters, 33 U.S. 591, 593 (1834)(denying copyright for collected court reports). 23. Id. at 591 (compiling volumes of court reports by plaintiff). 24. Id. (selling copyright prior to compilation completion). 25. Id. at 595 (publishing by defendants of reporter including plaintiff’s reports). 26. Id. (filing suit over alleged copyright infringement). 27. Wheaton, 33 U.S. at 592 (determining copyright protects author’s property within the work). 28. Id. at 592 (acknowledging filing requirement for copyright). 29. Id. at 592-93 (declaring plaintiff’s copyright invalid for filing requirement violation). 30. Id. (declaring copyrights unavailable for Supreme Court decisions). Superman And Statutes ® preventing others from copyrighting judges’ original written decisions, a similar justification behind the Woodruff opinion, and also demonstrated a willingness to prevent authors from acquiring copyright protection in certain circumstances.31 Despite an early emphasis on assigning original authors copyrights, authors could transfer their copyrights through contract, as demonstrated by Pierpont v. Fowler.32 In Fowler, a dispute arose over whether an author assigned the renewal period when assigning the initial copyright.33 The Fowler court concluded the author had not assigned away the renewal period, emphasizing [i]t was the genius which conceived and the toil which compiled the book that is to be rewarded by even the first copyright, and no one ever dreamed that an assignee could alone take out the second or extended term, unless he has paid for it, clearly contracted for it, and in equity, rather than by any technical law, is to be protected in it.34 Determining that hiring parties were not entitled to the copyright of works by authors without an express agreement was a trend that lasted until the end of the Civil War.35 Near the end of the nineteenth century, courts began recognizing the employment relationship as a form of contract.36 This coincided with the rise of corporations as both employers and hiring parties, to whom courts began assigning copyrights.37 b. Works for Hire and the Copyright Act of 1909 By the early twentieth century, the first piece of federal copyright legislation to expressly mention works for hire was enacted: the Copyright Act of 1909 (the “1909 Act”).38 The 1909 Act stated “the word ‘author’ shall include an employer in the case 31. For a further discussion of early American emphasis on protecting original work, see supra note 21 and accompanying text. 32. Pierpont v. Fowler, 19 F. Cas. 652, 658 (C.C. Mass. 1846) (acknowledging potential copyright assignment through contract). 33. Id. at 658-59 (reviewing whether contract contained additional copyright term assignment). 34. Id. at 659-60 (concluding author had not contracted away second copyright assignment term). 35. See Catherine L. Fisk, Authors at Work: The Origins of the Work-for-Hire Doctrine, 15 Yale J.L. & Human. 1, 32 (2003)(writing no court prior to Civil War awarded employers copyrights of employees only due to employment). 36. Id. (describing evolving interpretation of employment relationship). 37. Id. (detailing rise of corporations as employers). 38. 1909 Act, 35 Stat. §23 (1909)(revised to 17 U.S.C. §§1011332)(awarding copyrights to employers in works made for hire). of works made for hire.”39 Despite expanding the definition of author to incorporate hiring parties, the 1909 Act never explicitly defined what works for hire or employers were.40 Three justifications emerged under the 1909 Act for awarding copyrights to hiring parties for works for hire: “(1) The work is produced on behalf of the employer and under his direction; (2) the employee is paid for the work; and (3) the employer, since he pays all the costs and bears all the risks of the loss, should reap any gain.”41 The first and second justifications encapsulated the two-pronged instance and expense test, which determined whether an author’s creation was a work for hire under the 1909 Act.42 Under the instance and expense test, a hiring party was entitled to an author’s copyright when “the employer induces the creation of the work and has the right to supervise the manner in which the work is carried out.”43 Instance was defined as how much power the hiring party had to supervise the author’s work.44 A hiring party’s actual creative contributions to or oversight of the work strongly indicated that the piece fell into the work for hire category.45 Satisfying the instance prong without also satisfying the expense prong was insufficient to deem the piece a work for hire.46 Under the 1909 Act, expense was regarded as the resources a hiring party invested into creating the work.47 The expense prong considered a number of factors including payment, providing tools, and providing overhead.48 Courts often focused on the payment structure for the work, with royalties 39. 1909 Act, 35 Stat. §62 (1909)(revised to 17 U.S.C. §§1011332)(extending copyright assignment to employers). 40. Id. (omitting definitions of work for hire and employer). 41. Register of Copyrights, U.S. Copyright Office, Rep., Register’s Report on the General Revision of the U.S. Copyright Law 52 (1961)(justifying work for hire doctrine). 42. For a further discussion of the instance and expense test, see supra notes 43-51 and accompanying text. 43. Martha Graham School and Dance Foundation. v. Martha Graham Center of Contemporary Dance, 380 F.3d 624, 635 (2d Cir. 2004)(outlining instance and expense test parameters). 44. Marvel Characters, Inc. v. Kirby, 726 F.3d 119, 139 (2d Cir. 2013)(interpreting instance prong of instance and expense test). 45. Id. (emphasizing hiring party’s involvement as weighing towards work for hire). 46. Id. (requiring both prongs of instance and expense test be satisfied for work for hire). 47. Id. at 139-40 (clarifying expense prong of instance and expense test). 48. Id. at 140 (listing relevant factors for expense prong). June 2014 128 Superman And Statutes ® weighing against work for hire and a flat fee weighing for a work for hire.49 If a hiring party satisfied both the instance and expense prongs, the hiring party was presumed to be the work’s author and the copyright remained with the hiring party.50 The only way an author could overcome this presumption was through a formalized agreement to the contrary.51 This shift away from traditionally emphasizing an author’s copyright in the work highlighted an implicit presumption under the 1909 Act that copyrights vested with the commissioning party.52 One case that applied the instance and expense test was Siegel v. National Periodical Publications (hereinafter “Siegel I”).53 The Siegel I plaintiffs developed Superman® in 1933 and sold the rights in 1938 to the defendant.54 The plaintiffs entered into a written agreement with the defendant transferring all rights and goodwill attached to Superman®.55 A supplemental agreement was entered into between the plaintiffs and defendants in 1939, stating the defendant had “all right of copyright and all rights to secure copyright registration in respect to all such forms of reproduction …”56 The plaintiffs later sued to annul the contracts and the court applied the instance and expense test to determine whether Superman® was a work for hire.57 The court emphasized looking at whether the motivating factor in creating the work was the hiring party.58 The court concluded Superman® could not have been created at the instance and expense of the employer, as Superman® was developed years before there was ever a relationship between the plaintiffs and defendant, 49. Marvel Characters, 726 F.3d at 140 (highlighting payment method for work for hire determination). 50. Id. (awarding copyright to hiring party for satisfying instance and expense test). 51. Id. (demanding contract to contrary if hiring party satisfied instance and expense test). 52. Julie Katzman, Note, Joint Authorship of Commissioned Works, 89 Colum. L. Rev. 867, 867 (1989)(identifying presumption copyright remained with hiring party). 53. Siegel v. National Periodical Publications, 508 F.2d 909, 914 (2d Cir. 1974)(hereinafter Siegel I)(applying instance and expense test to Superman® copyright). 54. Id. at 911 (retelling Superman®’s inception). 55. Id. (contracting to release all Superman®’s rights to defendant). 56. Id. (amending initial contract and again releasing Superman® copyright to defendant). 57. Id. at 911, 914 (suing to annul contract and ensure Superman® not work for hire). 58. Siegel I, 508 F.2d at 914 (analyzing hiring party’s involvement in Superman® creation). 129 les Nouvelles and therefore Superman® was not a work for hire.59 c. Works for Hire and the Copyright Act of 1976 Although Siegel I demonstrated an example where original authors recaptured the copyright for an alleged work for hire, the vast majority of authors creating works for hire within this time period were not as fortunate.60 In part due to recognizing the complexities of copyright and works for hire, Congress passed the 1976 Act.61 The 1976 Act was the first time Congress defined works for hire and also introduced several new tools for shifting copyright power back towards original authors and away from hiring parties.62 Under the 1976 Act, a work for hire was defined as a (1) work prepared by an employee within the scope of his or her employment; or (2) a work specially ordered or commissioned for use as a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.63 Congress further recognized the difficultly in authors effectively valuing the work to be created, putting authors in an unenviable position of negotiating over the speculative value of a work.64 As an attempt to remedy this unequal bargaining position, Congress included termination rights for authors.65 Termination rights enabled authors to reclaim their copyrights at certain points in time if their copyright was signed away to a hiring party or other individual.66 Congress stressed that termination rights were needed “be- 59. Id. (determining Superman® not created at hiring party’s instance and expense). 60. For a further explanation of Siegel I, see supra notes 53-59 and accompanying text. 61. For a further discussion of the 1976 Act, see infra notes 62-69 and accompanying text. 62. See 1976 Act, 17 U.S.C. §101 (2010) (defining work made for hire). 63. Id. (stating Congress’s work made for hire definition). 64. H.R. Rep. No. 94-1476.94th Cong. § 203 reprinted in 1976 U.S.C.C.A.N. 5659, 5740 (explaining reasoning behind including termination rights in 1976 Act). 65. For a further discussion of termination rights, see infra notes 66-69 and accompanying text. 66. See 1976 Act, 17 U.S.C. §304(c) (applying termination rights for eligible pre 1976 Act works); see also 1976 Act, 17 U.S.C. §203 (granting termination rights for post 1976 Act works). Superman And Statutes ® cause of the unequal bargaining position of authors, resulting in part from the impossibility of determining a work’s value until it has been exploited.”67 Notably, Congress retroactively applied termination rights, enabling authors to reclaim their copyrights for works created prior to the 1976 Act.68 Termination rights were not available to all authors, however; a copyright could not be reclaimed if the work was in the public domain or a work for hire.69 Despite Congress’ best efforts defining work for hire, difficulties arose when courts attempted to determine which authors were employees, as Congress never explicitly defined employee in the 1976 Act.70 The Supreme Court set factors for determining whether an author was an employee, and thus creating a work for hire, in Community for Non-Violence v. Reid.71 In Community for Non-Violence, a sculptor created a piece for a hiring party.72 The hiring party argued that the piece was a work for hire and that the hiring party was therefore entitled to the copyright on the work.73 The artist and hiring party both filed competing copyright claims over the piece, which lead to a lawsuit and the Supreme Court opining factors for employee and work for hire status.74 The Supreme Court weighed its factors and found that the Community for Non-Violence artist was an independent contractor and therefore had not created a work for hire.75 The Community for Non-Violence factors were the hiring party’s right to control the manner and means by which the product is accomplished… the source of the instrumentalities and tools; the location of the work; the duration of the relationship between the parties; whether the hiring party has the right to assign additional projects to the hired party; the extent of the hired party’s discretion over when and how long to work; the method of payment; the hired party’s role in hiring and paying assistants; whether the work is part of the regular business of the hiring party; whether the hiring party is in business; the provision of employee benefits; and the tax treatment of the hired party.76 Interestingly, the Community for Non-Violence factors bore a striking similarity to both prongs of the 1909 Act’s instance and expense test.77 The emergence of termination rights and the Community for Non-Violence factors created a wave of authors trying to terminate and reclaim copyrights.78 For example, in 2008 the Siegel estate sought to terminate the Superman® copyright, which lead to the case Siegel v. Warner Bros. Entertainment, Inc. (hereinafter “Siegel II”).79 The Siegel II court was faced with a difficult problem, however: Superman® had evolved and changed since his initial debut in 1938; an entire universe surrounding Superman® had been created within the past seventy years which expanded well beyond the initial Superman® copyright.80 Warner Brothers attempted to re-argue that Superman® was a work for hire but the court quickly dismissed the claim, stating the work for hire dispute was settled by Siegel I.81 The court did not formally apply the instance and expense test, which would have been appropriate because the contested works were created prior to the 1976 Act.82 Additionally, the Siegel II court did not apply the Community for Non-Violence factors either.83 After sorting through various Superman® related works, the Siegel II court permitted the Siegel estate to terminate the Superman® copyright but limited the termination to only the contents of the first Superman® publication.84 Siegel II was not the only example where a work was 67. H.R. Rep. No. 94-1476.94th Cong. § 203 reprinted in 1976 U.S.C.C.A.N. 5659, 5740 (justifying termination rights inclusion) 68. 1976 Act, 17 U.S.C. §304(c)(permitting authors of pre 1976 Act works to exercise termination rights). 69. See 1976 Act, 17 U.S.C. §304(c) (prohibiting termination in works for hire and public domain works); see also 1976 Act, 17 U.S.C. §203 (preventing termination rights for work for hire). 70. 1976 Act, 17 U.S.C. §203 (omitting definition of employer). 71. Community for Creative Non-Violence v. Reid, 109 S.Ct. 2166, 2178-79 (1989)(prescribing employment and work for hire factors). 72. Id. at 2167 (describing background circumstances of lawsuit). 73. Id. (arguing by plaintiff for copyright assignment because piece was work for hire). 74. Id. (outlining procedure of case prior to Supreme Court). 75. Id. at 2179 (finding for artist after weighing factors). 76. Community for Non-Violence, 109 S.Ct. at 2178-79 (listing work for hire factors). 77. For a further discussion of the instance and expense test prongs, see supra notes 47-49 and accompanying text. 78. See, e.g., Siegel v. Warner Bros. Entertainment Inc., 542 F.Supp.2d 1098, 1102 (C.D. Cal. 2008)(hereinafter Siegel II)(exerting termination rights over Superman® copyright). 79. Id. (seeking declaration for legitimate termination over Superman® grant). 80. Id. at 1110 (elaborating Superman® universe’s evolution). 81. Id. at 1127 (rearguing for Superman® work for hire status). 82. Id. at 1127-30 (omitting application of instance and expense test). 83. Siegel II, 542 F.Supp.2d at 1127-30 (overlooking Community for Non Violence factors). 84. Id. at 1130 (limiting termination to material in first Superman® issue). June 2014 130 Superman And Statutes ® created before the 1976 Act, subjected to termination rights, and lead to a work for hire dispute.85 The estate of noted comic book artist Jack Kirby (“Kirby”) sought termination for copyrights to a series of drawings and characters in the case Marvel Characters v. Kirby.86 In Marvel Characters, the plaintiffs were the children of the late comic book artist Kirby.87 Kirby was a freelancer who produced drawings and characters for the defendant, the comic book publisher Marvel Entertainment, and worked on such notable such comic book series as The Incredible Hulk®, The XMen®, and Spider-Man®.88 The plaintiffs argued that Kirby’s creations were not works for hire and thus subject to termination, permitting the plaintiffs to recapture Kirby’s copyrights.89 The court applied the instance and expense test, as Kirby’s contested works were created before the 1976 Act.90 The court analyzed the instance prong and recognized that although Kirby was a freelancer, his working relationship with the defendant was “close and continuous” when he developed the works in question.91 The court continued, stating that the defendant had the ability to reject or require alterations to Kirby’s work and that the defendant actively collaborated with Kirby in creating some of the contested works.92 The court next analyzed the expense prong, detailing how the defendant paid Kirby a flat rate for his work, which weighed in favor of a work for hire finding.93 The Marvel Characters plaintiffs argued that although Kirby was paid a flat fee, Kirby undertook substantial personal risk through supplying his own time, tools, and overhead for each of the projects without a guarantee of compensation.94 The court acknowledged Kirby’s personal and financial risk but recognized Kirby’s work “built on preexisting titles and themes that Marvel had expended resources to 85. See, e.g., Marvel Characters, Inc. v. Kirby, 726 F.3d 119, 127 (2d Cir. 2013)(claiming termination rights for pre 1976 works). 86. Id. at 124 (describing contested works). 87. Id. (elaborating on plaintiffs’ relationship to Kirby). 88. Id. at 125 (acknowledging by court of Kirby’s freelancer status). 89. Id. at 127 (outlining plaintiffs’ justification for termination) 90. Marvel Characters, 726 F.3d at 127 (chronicling Kirby’s creations). 91. Marvel Characters, Inc., 726 F.3d at 141 (applying instance element of instance and expense test). 92. Id. (describing Kirby’s work relationship to defendant). 93. Id. at 142 (analyzing expense element). 94. Id. (elaborating Kirby’s risk and freelancer status). 131 les Nouvelles establish—and in which Marvel held rights—and they required both creative contributions and production work that Marvel supplied.”95 The court ruled that Kirby’s pieces were likely works for hire and, with no agreement to the contrary, found for the defendant.96 III.Discussion a. Integrating Termination Rights Into Work for Hire When viewing Community for Non-Violence, Siegel II, and Marvel Characters together, it quickly becomes apparent that despite including termination rights to benefit authors, a great deal of confusion still exists when determining whether authors are actually entitled to termination rights.97 Simply put, authors are forced to repeatedly demonstrate that their creations were not works for hire when attempting to exercise termination rights and risk losing any copyright protection should the court decree the pieces works for hire.98 Additionally, refusing to grant copyrights for works for hire to original authors further reinforces an author’s unequal bargaining position and circumvents the purpose behind initially inserting termination rights in the 1976 Act.99 One long-term solution to these problems is restructuring the current copyright system by granting copyrights to the original authors of works for hire with an automatic assignment period to the hiring party for a flat term, which can be justified through both a historical and moral rights perspective.100 Doing so will ensure authors are adequately compensated for their work through copyright pro95. Id. at 143 (stressing defendant’s investment). 96. Marvel Characters, 726 F.3d at 143 (concluding Kirby’s pieces were works for hire). 97. For a further discussion of Community for Non-Violence, see supra notes 71-76 and accompanying text. For a further discussion of Siegel II, see supra notes 79-84 and accompanying text. For a further discussion of Marvel Characters, see supra notes 86-96 and accompanying text. 98. See, e.g., Siegel II, 542 F.Supp.2d at 1127 (rearguing Superman®’s work for hire status). See also, e.g., Marvel Characters, 726 F.3d at 143 (concluding author’s pieces works for hire despite freelancer status). 99. H.R. Rep. No. 94-1476.94th Cong. § 203 reprinted in 1976 U.S.C.C.A.N. 5659, 5740 (acknowledging authors’ unequal bargaining position). 100. For a further discussion of the historical justification for awarding authors of works for hire copyrights, see infra notes 101-109 and accompanying text. For a further discussion of the moral rights justification for awarding authors of works for hire copyrights, see infra notes 110-126 and accompanying text. Superman And Statutes ® tection, hiring parties can utilize the work to reclaim both invested resources and profits, and the original copyright clause interpretation will be served. b. Historical Justification for Awarding Copyrights to Authors in Works for Hire As previously stated, America’s founding fathers empowered Congress to confer copyrights “[t]o promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” (emphasis added).101 This early weight on awarding copyright to the original author was further emphasized when looking at the 1790 Act and early case law.102 Under the 1790 Act, American copyright law expanded to afford protection for works including maps, charts, and books.103 The first Congress recognized the importance of rewarding authors for their work and opted to omit any explicit mention of awarding copyright to a hiring party through either passing a statute or amending the copyright clause.104 Early courts further reinforced this trend of awarding original authors copyrights over hiring parties, even if the work was explicitly a work for hire, as demonstrated by Woodruff.105 Protecting original authors over hiring parties was continually demonstrated in cases like Wheaton and Fowler until the end of the nineteenth century.106 Recognizing the importance of protecting authors through awarding the original author copyright for his or her original work was a trend lasting for over a century after America’s founding.107 Favoring hiring parties over authors was a recent change in American copyright law lasting until the 1976 Act, which sought to re-balance the realities of an author’s unequal bargaining position and the hiring party’s financial risk in 101. U.S. Const. art I, § 8, cl. 8. 102. For a further discussion of the 1790 Act and early case law supporting awarding original authors copyrights, see supra notes 10-37 and accompanying text. 103. 1909 Act, 35 Stat. 1075 (1909) (revised to 17 U.S.C. §§101-1332)(limiting copyrights to only authors of books, charts, and maps). 104. Id. (omitting works for hire provision). See also U.S. Const. art I, § 8, cl. 8 (affording copyrights only to authors). 105. For a further discussion of Woodruff, see supra notes 1821 and accompanying text. 106. See Catherine L. Fisk, Authors at Work: The Origins of the Work-for-Hire Doctrine, 15 Yale J.L. & Human. 1, 32 (2003) (chronicling change in copyright emphasis). 107. See generally id. (detailing early copyright protection). employing authors.108 Despite the heavy fixation on the financial incentives in determining copyrights in works for hire, Congress and courts have recognized that financial success is not the only justification for awarding authors copyrights over the hiring party.109 c. Moral Rights Justification for Awarding Copyrights to Authors in Works for Hire In addition to justifying copyright assignment through a monetary angle, a strong argument can be made for awarding authors copyrights in works for hire over hiring parties through a moral rights perspective.110 Moral rights are defined as the right of the author to create, or not to create, to present the creation to the public in a form of his choice, or to withhold it, to dispose of this form as he alone desires, and to demand that his personality be respected in so far as it relates to his status as an author.111 Recognizing that an author maintains rights over a work after its sale or grant seems to conflict with traditional American copyright law, which tends to follow the belief that “the pecuniary or property rights flow from a created work.”112 However, American case law and legislation have implicitly and explicitly recognized the validity of moral rights claims, one example being Gilliam v. American Broadcasting Companies.113 The Gilliam plaintiffs were a comedy troupe known as Monty Python® that produced television episodes.114 The plaintiffs signed an agreement allowing the defendant to air the plaintiffs’ television episodes.115 Each episode was originally filmed as a thirty-minute segments with multiple episodes to be shown in ninety-minute programs, however the defendant shortened the ninety-minute programs by 108. See Register of Copyrights, U.S. Copyright Office, Rep., Register’s Report on the General Revision of the U.S. Copyright Law 52 (1961)(justifying work for hire under prior 1909 Act). 109. For a further discussion of moral rights, see infra notes 110-126 and accompanying text. 110. For a further discussion on the definition of moral rights, see infra note 111 and accompanying text. 111. Brian T. McCartney, Creepings and Glimmers of the Moral Rights of Artists in American Copyright Law, 6 UCLA Ent. L. Rev. 35, 37 (Fall 1998)(citing translation from Arthur S. Katz, The Doctrine of Moral Right and American Copyright Law-A Proposal, 24 S. Cal. L. Rev. 375-376 (1951)). 112. Ilhyung Lee, Toward an American Moral Rights in Copyright, 58 Wash. & Lee L. Rev. 795, 798 (Summer 2001)(describing traditional relation of property rights to work). 113. Gilliam v. American Broadcasting Companies, 538 F.2d 14, 25 (2d Cir. 1976)(concluding alterations impaired the work and author’s integrity). 114. Id. at 17 (detailing plaintiffs’ work). 115. Id. (recounting plaintiffs’ work). June 2014 132 Superman And Statutes ® 133 twenty-four minutes.116 The plaintiffs sued, alleging that the defendant impaired the integrity of their work.117 The Gilliam court found for the plaintiffs, stating “that the edited version broadcast by [the defendant] impaired the integrity of [the plaintiffs’] work and represented to the public as the product of [the plaintiffs] what was actually a mere caricature of their talents.”118 The Gilliam court heavily emphasized the need to protect authors submitting work to the public and acknowledged that the edited broadcasts significantly injured the plaintiffs’ reputation and therefore their production success.119 Furthermore, Congress recognized the existence of authors’ moral rights claims in limited instances through passing the Visual Artists Rights Act in 1990 (“VARA”).120 Under VARA, authors of visual works have both the exclusive rights afforded to copyrighted works and additional reputational based rights.121 Specifically, VARA allows authors of visual works to claim authorship of the work and restrict using the author’s name in pieces that the author did not create.122 Furthermore, authors of visual art can prohibit using his or her name if their work is distorted, mutilated, or modified in a way that would harm the author’s reputation.123 Finally, VARA empowers authors of especially notable visual works to prevent any intentional or grossly negligent destruction to the work.124 These additional VARA rights subsist for the duration of the author’s lifetime and exclude typical damage caused through the passage of time.125 When reviewing VARA and recognizing that Congress permitted moral rights claims, if the author’s work falls within the definition of visual art, a Congressional acknowledgement manifests that authors have more than a financial interest in a piece remaining long after a work is sold.126 d. Posited Works for Hire Framework As demonstrated through the growth of American copyright statutes, case law, and VARA legislation, America has a complicated relationship with affording copyright protection to authors.127 However, three themes emerge when considering these different components: authors deserve some sort of copyright protection, authors are in an unequal bargaining position, and authors have more than a simple financial interest in a work lasting beyond a work’s sale.128 Congress has effectively circumvented its own solution to these themes, i.e. termination rights, by permitting hiring parties to commission works for hire, which takes away any rights an author may have to his or her work through assigning the copyright to the hiring party.129 As this only further worsens authors’ already unequal bargaining positions, authors of works for hire ought to be afforded some sort of copyright protection for their works while also balancing the need to protect a hiring party’s investment.130 One solution is having the copyright of works for hire belong to the author but automatically and exclusively licensed with the hiring party for an extended flat period of time upon the work’s creation, such as a fifty-six year term as modeled after the two term grant under the 1909 Act.131 During this fifty-six year period, the hiring party would have exclusive use of the copyright, free from fear of the author unexpectedly exercising termination rights as shown in Marvel Characters.132 This alleviates the concern of a hiring party investing costs and taking on risk without the potential reward and profit, as the hiring party can reclaim both the initial costs and potential profit over the fifty-six year period.133 116. Id. at 17-18 (emphasizing impairment to original work). 117. Id. at 18 (suing by plaintiff for mutilating work). 118. Gilliam, 538 F.2d at 25 (elaborating work’s alteration caused substantial injury to reputation). 119. Id. at 19 (clarifying copyright law’s purpose for protecting authors). 120. Rights of certain authors to attribution and integrity, 17 U.S.C. §106(a) (2013) (hereinafter “VARA”)(proscribing moral rights claims for visual works). 121. Id. (complementing copyright claims with additional moral rights claims). 122. Id. (permitting claims over author’s name usage). 123. Id. (preventing name attribution for mutilated pieces). 124. Id. (protecting works of high regard from destruction). 125. VARA, 17 U.S.C. §106(a) (attaching moral rights for duration of author’s life). 126. For a further discussion of VARA, see supra notes 120125 and accompanying text. 127. For a further discussion of the evolution of American copyright statutes, case law, and VARA, see supra notes 101-125 and accompanying text. 128. For a further discussion of the sources behind these three themes, see supra notes 101-125 and accompanying text. 129. See H.R. Rep. No. 94-1476.94th Cong. § 203 reprinted in 1976 U.S.C.C.A.N. 5659, 5740 (explaining Congress’s termination rights rationale). 130. For a further discussion of the posited plan see infra notes 131-148 and accompanying text. 131. 1909 Act, 35 Stat. §23 (1909)(revised to 17 U.S.C. §§101-1332)(bestowing copyright for initial twenty-eight year grant and twenty-eight year renewal). 132. For a further discussion of Marvel Characters, see supra notes 87-96 and accompanying text. 133. See H.R. Rep. No. 94-1476.94th Cong. § 203 reprinted in 1976 U.S.C.C.A.N. 5659, 5740 (raising concern regarding hiring party recapping investment and profit in works for hire). les Nouvelles Superman And Statutes ® Beginning at the end of the fifty-six year grant, authors or their respective estates would have a fiveyear window to affirmatively recapture the copyright, following the model of the termination requirement under the 1976 Act.134 This puts the burden on authors to make an active effort to reclaim their copyrights, as is already the case under the 1976 Act.135 Should a work for hire author not reclaim their copyright within the five-year window after the fifty-six year time period has elapsed, the copyright would remain with the hiring party for the remainder of the copyright’s duration.136 This posited work for hire structure benefits authors because it permits enough time to pass to determine what the true value of a work actually is, a motivation behind including termination rights under the 1976 Act.137 At the end of the fifty-six year period, authors or their representatives would be empowered to renegotiate the terms of leasing the copyright if the work for hire copyright has substantially increased in value, as was the case in Marvel Characters.138 Understandably, some companies may oppose this paper’s posited work for hire restructuring, arguing that hiring parties assume large amounts of financial risk by acquiring authors’ creations and therefore ought to be rewarded with copyright ownershipsimply put, every author will not create a financial blockbuster like Superman®.139 From a basic level of fairness, however, why should a hiring party be permitted to exploit thousands of mediocre works for hire and one groundbreaking work for hire without fairly compensating the blockbuster author for the work’s true value?140 Although a hiring party accepts risk in exploiting works for hire, an author arguably accepts more risk in its creation through providing resources without any guarantee of compensation, as acknowledged by the Marvel Characters court.141 134. See 1976 Act, 17 U.S.C. §203(a)(3) (2010)(requiring termination provisions be brought within five year window). 135. See 1976 Act, 17 U.S.C. §203(a)(1)-(2) (obligating author or estate to request termination rights). 136. For a further discussion of the basis of the fifty-six year flat year period, see supra notes 131-133 and accompanying text. 137. See H.R. Rep. No. 94-1476.94th Cong. § 203 reprinted in 1976 U.S.C.C.A.N. 5659, 5740 (recognizing authors unequal bargaining position due to inability to value work). 138. For a further discussion of Marvel Characters, see supra notes 87-96 and accompanying text. 139. For a further discussion of Superman®’s creation, see supra notes 53-59 and accompanying text. 140. For a further discussion justifying renegotiation with work for hire authors, see infra notes 141-145 and accompanying text. 141. For a further discussion of Marvel Characters, see supra notes 87-96 and accompanying text. This paper’s posited framework enables hiring parties to still recapture costs sunk on thousands of mediocre works for hire and profit off the outlier blockbuster work by granting a flat fifty-six year exclusive license to the hiring party.142 When renegotiating with the author or estate of the blockbuster work, it seems likely that the hiring party has already recaptured costs and substantially profited off the blockbuster work, otherwise a hiring party would not renegotiate for the work’s copyright.143 Although this posited structure tilts the balance of renegotiating power back to the work for hire author, this should be the case in the event of an author creating a one in a thousand blockbuster, due to the inability to initially compensate the author based on a work’s true value, which is only determined over time.144 Through this framework, a hiring party will have fifty-six years to recapture costs and profit from an exclusive license for the work for hire, which was likely originally negotiated in terms strongly favoring the hiring party due to the inability to determine the work’s true value.145 Furthermore, this posited work for hire structure seamlessly integrates with the original interpretation of the copyright clause, the purpose behind including termination rights under the 1976 Act, and the rationale behind affording moral rights under VARA.146 VARA, however, is constrained to affording moral rights claims only to authors of visual works, omitting a large portion of other potentially relevant original works of authorship.147 As such, VARA ought to be expanded to afford moral rights claims to other works already afforded copyright protection under law to further keep with the original understanding of the copyright clause.148 Through affording a new copyright framework for works for hires and expanding moral rights protection provided through VARA, the American copyright system would return to the original spirit of the copyright clause while protecting both authors and hiring parties. ■ 142. For a further discussion of this paper’s posited work for hire structure, see supra notes 131-136. 143. See, e.g., Siegel II, 542 F.Supp.2d at 1112-14 (continuing to assign Superman® copyright to same publisher despite complications). 144. See id. at 1110 (acknowledging Superman®’s success). 145. For a further discussion of the fifty-six year framework, see supra notes 131-136. 146. For a further discussion of early copyright law, see supra notes 10-37 and accompanying text. 147. VARA, 17 U.S.C. §106(a) (constraining moral rights claims to visual art). 148. For a further discussion of VARA, see supra notes 120126 and accompanying text. June 2014 134 Australian And U.S. Court Decisions Australian And United States Court Decisions To Impact On Business Method Patent Licensing By David Webber I t is somewhat simplistic to say that licensing as a form of technology transfer relies heavily on intellectual property rights. When the validity of those rights is brought into question, the value of those rights as a licensable proposition diminishes. At the present time in the United States and in Australia the patentability of certain types of software patents, in particular broadly claimed business method patents, is being questioned. Although the legal basis for software patents in Australia is different from the USA, if the Courts in each jurisdiction take a restrictive view of patent eligibility, there will be consequences for existing licences involving software patents and licensing activity generally. The USA The U.S. Supreme Court has agreed to revisit the issue in Alice Corporation Pty. Ltd. v. CLS Bank International. Interestingly, at least so far as the authors are concerned, Alice Corporation is an Australian company. The U.S. Supreme Court will ultimately review a divided and inconclusive decision from the Court of Appeals for the Federal Circuit on when a patent based on software is directed to patent-eligible subject matter under U.S. law. The patent, owned by Alice Corporation, relates to a data processing system for mitigating the risk of foreign exchange settlement. CLS Bank is alleged to operate systems for doing this, and is attempting to have the patent invalidated. The market is financially enormous: foreign exchange settlements submitted to CLS Bank in October 2013 averaged about U.S. $5 trillion per day. The system which the Alice Corporation patent protects is one which establishes a settlement program for an exchange of financial instruments that eliminates the possibility that one party will renege on the agreements irrespective of when the arrangement is completed. 135 to the Supreme Court: “ Unfortunately, far from providing clearer guidance, the Federal Circuit issued six separate opinions spanning more than 125 pages, none of which reflected an approach endorsed by a majority. The court split 5-5 with respect to Alice’s claims to computer system inventions, leaving in place the district court’s original summary judgment ruling holding them non-patentable. Alice’s remaining claims were held non-patentable, although for different, and inconsistent, reasons. As a result, the legal standards that govern whether computer implemented inventions are eligible for patent protection under section 101 remain entirely unclear and utterly panel dependent. As Judge Newman put it in her separate opinion, the court below: propounded at least three incompatible standards, devoid of consensus, serving simply to add to the unreliability and cost of the system of patents as an incentive for innovation…Today’s irresolution concerning section 101 affects not only this court and the trial courts, but also the PTO examiners and agency tribunals, and all who invent and invest in new technology.” Pet. App. 100a. Australia The Court of Appeals Decision Software patents have been available in Australia for over 20 years, but recently the Australian Patent Office has adopted a negative practice towards certain types of computer implemented inventions, such as financial systems or gaming systems. The negative practice is founded on a belief that schemes or business methods do not become patent eligible subject matter just by implementing them in a computer. The practice has been the subject of two Federal Court decisions which are now both on appeal to the Full Federal Court. In the latest decision, RPL Central,1 the Federal Court reaffirmed once again that software patents are available in Australia, and that the Patent Office’s The Court of Appeals decision has been widely criticised because it consists of a number of irreconcilable judgments. As Alice Corporation said in its Petition 1. RPL Central Pty Ltd v Commissioner of Patents [2013] FCA 871 , 30 August 2013. les Nouvelles Australian And U.S. Court Decisions negative practice was incorrect and did not have a sound basis in Australian law. The Court found that an automated process for gathering evidence to assess competency did constitute patent eligible subject matter. Background to Patent Eligibility Patent eligible or patentable subject matter in Australia is inexorably linked to the High Court’s celebrated judgement in NRDC2 which has been described as a watershed.3 In RPL Central, the Federal Court confirmed NRDC made it clear any attempt to set forth prescriptive requirements is impermissible as it is necessary to be flexible to allow for excitingly unpredictable and emerging inventions to be patentable.4 NRDC considered an exact formula was not to be used, as patentable subject matter is a mere threshold consideration, particularly when any validity inquiry remains to be determined quite separately, and on different criteria,5 e.g. novelty and inventive step. RPL Central’s Invention The invention under consideration facilitated improvements in existing recognition of prior learning processes by enabling the automatic generation of a user interface to gather evidence from a prospective candidate, relevant to credit or exemption towards any qualification or unit offered across a wide range of training organisations. The evidence facilitated the assessment of the competency of the candidate.6 The Australian Federal Court’s Decision in Favour of RPL Central The Court considered and rejected all of the Commissioner of Patents’ submissions. In applying the principles of NRDC, the Court found that the invention did belong to the useful arts rather than the fine arts, and that it did have utility in practical affairs and solved a problem in the field of economic endeavour.7 The Court also made clear that there was no binding Australian authority that provides a different test for a method claim8 as opposed to a method and device claim. Significantly, the Court found that each of the 2. National Research Development Corporation v. Commissioner of Patents (1959) 102 CLR 252. 3. Supra n1, Para 64. 4. Ibid, Paras 106 and 107. 5. Ibid, Paras 108 and 109. 6. Ibid, Para 44. 7. Ibid, Para 128. 8. Ibid, Para 136. computer-effected steps of the claimed invention constituted or gave rise to a change in the state or information in a part of a machine, and therefore produced a physical effect in the sense of a concrete effect or phenomenon or manifestation or transformation, as required by the Court’s decision in Grant.9 The Court considered the statement in Grant to be a useful précis of the way in which the artificial state of affairs requirement may apply to computer programs, in accordance with the principles set out in NRDC.10 Further more, the Court emphatically re■ David Webber, jected the Commissioner’s arguments that the Davies Collision Cave, physical effect required Patent and Trade must be significant or Mark Attorneys, central to the purpose Partner, or operation of the Melbourne, Victoria, Australia claimed process. The E-mail: [email protected] Commissioner felt that this requirement was supported by earlier decisions. In fact the Commissioner has been applying the requirement to reject a number of patent applications for computer implemented inventions relating to financial systems or gaming systems. The Court made it clear that none of the earlier decisions articulated a separate or new requirement of substantiality of physical effect.11 The Court noted the Commissioner submitted that without this, or some other limiting principle, then any method operated on a computer would fulfil the artificial state of affairs requirement.12 However the Court indicated that fear is not a valid objection.13 The Commissioner also submitted that the invention could be performed without the use of a computer, and if one was to strip away the computer aspects of the claims, one would only be left with a method for performing an aspect of a business. In response the Court said one should not subtract from the invention any aspect of computer implementation, and then determine whether what remains is proper subject matter.14 The computer is an essential part of the invention claimed, as it enables the method to be performed.15 9. Ibid, Para 143. 10. Ibid, Para 144. 11. Ibid, Para 147. 12. Ibid, Para 148. 13. Ibid, Para 149. 14. Ibid, Para 157. 15. Ibid, Para 158. June 2014 136 Australian And U.S. Court Decisions Another argument advanced by the Commissioner, that the steps did not involve anything that is foreign to the normal use of computers, was also rejected by the Court as a requirement not imposed by any of the binding authorities.16 This is to be considered under the separate requirements of novelty and inventive step. The Court also distinguished its earlier decision in Research Affiliates17 on the basis that the patent applicant had accepted the only physical result generated by the method of the claimed invention was a computer file containing a generated index, and that the specification and the relevant claims did not disclose how to produce the index in question.18 In contrast, the specification and claims in issue in 16. Ibid, Para 159. 17. Research Affiliates LLC v Commissioner of Patents [2013] FCA 71. 18. Supra n1, Paras 169-171. 137 les Nouvelles this case provided significant information about how the invention is to be implemented by means of a computer and the computer was integral to the invention as claimed.19 Conclusion Practitioners are now eagerly awaiting the appeal decisions of the U.S. Supreme Court and the Australian Full Federal Court. It is hoped that the courts will finally provide some clarity as to where the line should drawn on patent eligible subject matter for computer implemented inventions. The danger is the line may be drawn across a swath of already licensed patents, and render a number of agreements moot. ■ 19. Ibid, Para. Investment Bill, 2013 Promotion And Protection Of Investment In South Africa Bill, 2013 — A Review By Dr. Madelein Kleyn O n 1 November 2013, the South African Department of Trade and Industry published the draft “Promotion and Protection of Investment Bill” (the “Draft Bill”) for comments. The Draft Bill comes shortly after South Africa decided to unilaterally terminate its bilateral investment treaties (“BITs”) with certain European states, specifically Belgium, the Netherlands, Luxemburg, Germany, Spain and Switzerland. It is argued that the Draft Bill is intended to promote investment by modernizing the current investment regime and getting investors, whether foreign or local, to achieve a balance of rights and obligations that apply to all investors when investing in South Africa. The Government has emphasised that the draft Promotion and Protection of Investment Bill contains “more than enough clarity, transparency and certainty around the domestic investment regime,” and that it provides “adequate protection to all investors, including foreign investors.” It is clear from the contents of the Bill, however, that the Bill does not provide the same standard of protection for foreign investors as provided under South Africa’s various BITs. The Bill includes provisions that are no longer in line with international best practice. It specifically includes certain provisions that are outright expropriation of property without compensation, or adequate compensation. For example: • In the event of destruction or loss of property resulting from requisition by forces or authorities of the republic, investors must be accorded restitution or appropriate compensation (s7 (3) of the bill) • In case of expropriation, investors are no longer assured of compensation at full market value, but in line with the constitution, which says compensation must be “fair and equitable” (S8 (1) of the bill). In both instances the appropriate compensation must consider market value and a range of public interest concerns, such as redress for the past. The Bill further defines that certain acts are not considered to amount to acts of expropriation: a) A measure or series of measures taken by the government of the Republic that have an incidental or indirect adverse impact on the economic value of an investment; b)A measure aimed at protecting or enhancing legitimate public welfare objectives, such as public health or safety, environmental protection ■ Dr. Madelein Kleyn, or state security; Oro Agri (Pty) Ltd and the c)The issuance of University of Stellenbosch, compulsory licences Manager, (Oro) and Associate granted in relation to intellectual property and Fellow for the Chair of IP rights, or to the revo(Stellenbosch), cation, limitation or Somerset West, Western Cape, creation of intellectual South Africa, property rights, to the E-mail: [email protected] extent that such issuance, revocation, limitation or creation is consistent with applicable international agreements on intellectual property; and d)Any measure which results in the deprivation of property, but where the State does not acquire ownership of such property provided that— i. There is no permanent destruction of the economic value of the investment; or ii. The investor’s ability to manage, use or control his or her investment in a meaningful way is not unduly impeded. The effect is that investors (both local and foreign) will not be entitled to compensation for expropriation of rights or property under the Bill if these exclusions apply. In addition, the Bill removes the obligation on the government to enter into international arbitration in the event of a dispute. Investors can ask the Department of Trade and Industry to facilitate mediation or can approach the courts for relief. Further regulations on the settlement of disputes will be drafted by the trade and industry minister. The Bill removes the provision contained in most bilateral investment treaties, namely that investors are entitled to “fair and equitable treatment.” This is June 2014 138 Investment Bill, 2013 commonly used to provide investors with an avenue to contest new legislation or regulation that alters, in a prejudicial way, the conditions under which investments are made. With specific reference to intellectual property protection, the inclusion of S8(2) in the bill appears to be a form of implementation of a catch-all for some components of the recently published South African National Intellectual Property Policy, wherein the DTI specifically addressed the introduction of compulsory licensing in the interest of public health. On the face of it S8 (2) appears to be unconstitutional. Protection of foreign investment is set out in Section 7 of the Act. The Bill specifically provides for compensation or restitution for loss or damage of property (including intellectual property) under certain circumstances and includes the provision that an investment may not be expropriated except in accordance with the Constitution and in terms of a law of general application for public purposes or in the public interest against equitable compensation in a timely manner (S8 (1)). The Bill continues into S8 (2) wherein certain acts (and there may be others as the list is non-limiting) do not amount to expropriation and as such no “just and equitable compensation” is due as these defined acts do not amount to expropriation. S8(2)(c) provides specifically that the “issuance of compulsory licences granted in relation to intellectual property rights, or to the revocation, limitation or creation of intellectual property rights, to the extent that such issuance, revocation, limitation or creation is consistent with applicable international agreements on intellectual property; and (d) any measure which results in the deprivation of property but where the State does not acquire ownership of such property provided that (i) there is no permanent destruction of the economic value of the investment; or (ii) the investor’s ability to manage, use or control his or her investment in a meaningful way that is not unduly impeded.” “The revocation, limitation or creation of intellectual property rights,” in itself is the deprivation of property, whether the state acquires ownership or not and as such “just and equitable compensation” should be paid to its rightful owners. To place this in context it is necessary to discuss a few fundamental aspects of the South African law and the flexibilities of The Agreement on Trade Related Aspects of Intellectual Property Rights (“TRIPS”). Intellectual Property Rights The rights for the different forms of intellectual 139 les Nouvelles property are defined in the national laws of each country and for members of the WTO incorporating aspects of TRIPS into national legislation. In the case of a patent, a valid right can be obtained if the invention meets the requirements of novelty, inventive step and industrial applicability (in the case of a South African patent S25 of the Patents Act). In order to be registrable, aesthetic designs must be new and original (section 14(1) (a) of the Designs Act of South Africa) and Functional designs must be new and not commonplace in the art in question (section 14(1) (b) of the Designs Act of South Africa). A patent (or design) can only be revoked if by means of application of revocation in terms of S61 (Article 31 in the Designs Act) or as a counter claim in an infringement action in terms of S65 (4) (S35 (5) of the Designs Act). With reference to the “applicable international agreements,” Article 32 of TRIPS provides that for any revocation/forfeiture of a patent, an opportunity for judicial review of any decision to revoke or forfeit a patent shall be available, and in Article 33 that the term of protection available shall not end before the expiration of a period of twenty years counted from the filing date. As such, it is submitted that the revocation (or invalidation), or limiting of an intellectual property right without legal basis as such is a deprivation and/or expropriation of property and requires to be protected by the fundamental rights as set out in the Constitution of South Africa, and the International Agreements on Intellectual property. Compulsory Licensing Compulsory licensing is the granting of a license by a government, or other jurisdictional body, by forcing the holder of a patent, copyright, or other exclusive right to grant use to the state or others. Usually, the holder does receive some royalties, either set by law or determined through some form of arbitration. TRIPS allows certain flexibilities with respect to compulsory licensing and in Article 31 of the TRIPS agreement it is stated that where WTO member states provide in their patent legislation for compulsory licences the following provisions must be made: • Each case must be decided on its own merits; • The applicant for the compulsory licence must have made efforts to take a licence from the patentee on reasonable commercial terms; • The scope and duration of the compulsory licence must be limited to the purpose for which it was granted, such that it may be Investment Bill, 2013 terminated or amended if the circumstances which led to the grant of the compulsory licence change or cease to exist; in the business unit that enjoys the compulsory licence); • The patentee must be paid adequate remuneration for use under the compulsory licence; • The decision to grant a compulsory licence and the determination of what is adequate remuneration shall be subject to judicial review; • Where a compulsory licence is granted in order to enable a second patent to be exploited, the invention claimed in the second patent must involve an important technical advance of considerable economic significance in relation to the invention claimed in the first patent and the patentee of the first patent must be entitled (on reasonable terms) to a cross-licence in respect of the second patent. In terms of South African law, we find the provisions for compulsory licensing in S21 Act No. 195 of 1993 (the Designs Act of 1993) in the event of abuse of rights, and in S56 of the Patents Act of 1978 as amended. These Acts provide that in the case of abuse of rights by the right holder, any person may apply to the court in the prescribed manner for the granting of a compulsory licence in respect of the registered design and/or patent. In determining the conditions on which any licence is granted, the court shall have regard to all relevant facts, including the risks to be undertaken by the licensee, the research and development undertaken by the registered proprietor or his predecessor, and the terms and conditions usually stipulated in similar licence agreements in respect of registered designs/patents between persons who voluntarily enter into such agreements. An abuse of rights is defined in the Act and in essence can be summarised as follows: The patent holder is abusing his/her right when the patent holder is preventing the invention from being exploited by a third party and such exploitation: • Is necessary to meet national market demands; and • Is particularly dictated by public interest considerations; and • Consumers are supplied with the product (subject of the patent) in insufficient quantity or of inadequate quality, or at excessively high prices. S8(2)(c)of the Promotion and Protection bill has the effect that the current Patents and Designs Act provisions with respect to compulsory licenses will be ignored, i.e. the process to follow as well as the form of application and the provision for compensation. It further has the direct effect of depriving the intellectual property owner of the constitutional right with respect to enjoyment of the unfettered right of property, to its creation and rightful protection is at risk of being expropriated at the choice of government. The Bill is a concern and foreign investors may be faced with not receiving any compensation at all should the deprivation of property fall within the exclusions set in Section 8 of the Bill. ■ June 2014 140 Recent U.S. Decisions Recent U.S. Court Decisions And Developments Affecting Licensing By John Paul and Brian Kacedon LifeScan Scotland, Ltd. v. Shasta Technologies Giving Away Products Embodying an Invention Triggers Patent Exhaustion and Can Prevent Patent Owners from Collecting Royalties on Those Products The doctrine of patent exhaustion limits patent owners to a single compensation for their patented products or methods by preventing them from charging additional royalties on a patented item once an authorized sale of the item occurs. In a recent case, LifeScan Scotland, Ltd. v. Shasta Technologies, No. 2013-1271 (Fed. Cir. Nov. 4, 2013), the Federal Circuit held that a patent owner’s ability to collect royalties is exhausted even when it gives away that item, if the item substantially embodies the inventive aspect of the claims. The court reversed an order granting a preliminary injunction blocking sales of consumable test strips for use in LifeScan’s meters because its distribution of meters for free likely exhausted its patent rights. We reported on the district court’s order here: http://lesusacanada.org/featuredarticles/2013/lifescan. LifeScan’s U.S. Patent No. 7,250,105 (“the ’105 patent”) describes and claims an improved method of testing blood glucose embodied in LifeScan’s meters and associated test strips for use in the meters. LifeScan provided 60 percent of its meters through distributors that gave them away and sold the remaining 40 percent at below cost. LifeScan sold test strips for use in the meters, however, and sought a preliminary injunction to exclude the manufacture and sale of the competing GenStrip. The district court considered arguments by the defendants asserting the doctrine of patent exhaustion. This doctrine holds that patent owners can profit from their patents only once. The question raised—particularly for the 60 percent of meters LifeScan distributed for free with an expectation to sell a compatible test strip—was whether it profited such that patent exhaustion applied. The district court decided that patent exhaustion did not apply because the doctrine applied only to a “sale” where the patent owner required “consideration” in exchange for the product. Because the district court held that the transfer of meters at no cost did not exhaust the patent 141 les Nouvelles owner’s rights, patent exhaustion was not available as a defense and it issued a preliminary injunction in favor of LifeScan. The Federal Circuit Decision In its decision, the Federal Circuit recognized that it had to address as a matter of first impression the question of whether patent exhaustion applies to a product distributed for free. It saw the issue differently—“in the case of an authorized and unconditional transfer of title, the absence of consideration is no barrier to the application of patent exhaustion principles.” LifeScan had relied on Supreme Court exhaustion cases describing “receipt of ‘consideration’ or ‘reward’ … as supporting exhaustion.” The court, however, explained that the Supreme Court has never confined exhaustion to that context. Thus, the Federal Circuit concluded that a patent owner may choose to secure its reward either by demanding a price or by giving the product away, with the hope of a future benefit. And where LifeScan chose to give meters away without charge in order to increase sales of its test strips, it should not be allowed to avoid patent exhaustion. The court further addressed the nature of the transfer of meters as an unconditional transfer, providing some suggestion how patent owners might avoid patent exhaustion. LifeScan’s meters were packaged with a notice that purportedly required customers to use LifeScan’s test strips and LifeScan argued it had granted only a conditional license. But LifeScan’s reliance on the notice fell short in this case because the court refused to consider such notices unless “in the form of a contractual agreement.” LifeScan raised a number of other arguments why patent exhaustion did not apply, and the court addressed and rejected each one in turn. LifeScan argued that distribution of its meters, whether by sale or gift, did not trigger exhaustion because the meters did not substantially embody the claims of the ’105 patent. The asserted claims were method claims and the issue is governed by the Supreme Court’s decision in Quanta Computer v. LG Electronics, which clarified the applicable test. In short, the item sold must substantially embody the patent, regardless of whether any additional steps needed to complete the invention are them- Recent U.S. Decisions selves inventive or noninventive. One approach to this inquiry asks whether there are reasonable and intended noninfringing uses, and here, the Federal Circuit held that LifeScan admitted it distributed the meters with the expectation and intent that they be used with its test strips. Although alternative uses might not infringe, because LifeScan did not intend those uses, the court viewed them as irrelevant to the issue of patent exhaustion. LifeScan also argued that exhaustion did not apply because the meters did not embody essential features of the ’105 patent. To identify those features, the court focused on what was inventive—what distinguished the patent claims from the prior art. And by considering the prosecution history, the court determined that the inventive nature came from the meter’s comparing function, not the particular strip configuration. So it held that the meters embodied essential features of the ’105 patent. The court noted LifeScan’s argument that the strips themselves were separately patentable. Rather than determine whether the strips would have been separately patentable, however, the court considered whether the strips embodied “the inventive features of the claims that were actually allowed by the examiner.” The examiner did allow claims directed to the strips themselves and, as discussed above, the court determined that the meter embodied the inventive aspects of the claims. While noting that the analysis would differ if a patent had actually issued on the strips, the court rejected LifeScan’s argument that exhaustion could not apply unless the strips were “standard” parts. Finally, the court noted a problem that would be created if the ’105 patent were not exhausted: LifeScan would be able to eliminate competition in the sale of strips even though the strips do not embody the claimed invention and are not themselves patentable. According to the Federal Circuit, such extension of the exclusionary right would improperly extend the patent monopoly. Strategy and Conclusions This case demonstrates that patents can be exhausted by a patent owner who authorizes the distribution of products that substantially embody the patent claims at issue even if they do not receive direct compensation for the sale of those products. As illustrated by the court’s analysis and conclusion, the issue of patent exhaustion can be complex and difficult to predict because a variety of legal and factual issues can possibly impact whether a patent owner’s rights are exhausted, including (1) the reward the patent owners expect to receive when they distribute or authorize the distribution of products; (2) the manner in which the patent owners intend the item they distribute to be used and whether this use involves additional items that did not come from an authorized sale or distribution; (3) the nature of legal rights and obligations arising from accompanying documents or understandings such as conditional licenses or binding agreements; (4) whether the products have certain functions in the market such as whether ■ John C. Paul, they are standard parts Finnegan, Henderson, Farabow, or essential features; Garrett & Dunner, LLP, and (5) patent protecAttorney, tion and prosecution Washington, D.C., USA history—whether the E-mail: [email protected] products have or could ■ D. Brian Kacedon, have patent protection, Finnegan, Henderson, Farabow, separately patented or Garrett & Dunner, LLP, separately patentable, Partner, whether the inventive Washington, D.C., USA features of the claims E-mail: brian.kacedon@ were actually allowed finnegan.com by the examiner, or whether the product embodied the inventive aspects of the claims. Further Information The Federal Circuit’s LifeScan Scotland v. Shasta Technologies decision may be found at www.finnegan.com under the publications tab. Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas The Supreme Court Makes Forum-Selection Clauses Easier to Enforce The Supreme Court recently rendered a decision that should make it easier to enforce clauses in a contract specifying in what court future contract disputes will be heard. In Atlantic Marine Construction Co. v. U.S. District Court for the Western District of Texas, it held that in deciding whether to permit a court to hear a case in a forum other than the parties’ chosen venue, the courts should consider only factors of public interest rather than reconsider the interests of the parties. Additionally, the court placed the burden of proof on the party seeking to keep a case in the forum where filed as opposed to the forum specified in the contract. The court also noted that the same considerations apply regardless of whether June 2014 142 Recent U.S. Decisions a defendant seeks transfer to another federal court under the federal transfer statute or to a state court under the inconvenient forum doctrine—forum non conveniens. The Atlantic Marine Decision The dispute between Atlantic Marine and J-Crew Management began over a construction contract in Texas. While the contract specified that disputes “shall be litigated” in the Eastern District of Virginia, J-Crew instead sued Atlantic Marine in the Western District of Texas. Atlantic Marine moved to dismiss the case under two rules that allow dismissal for “wrong” or “improper” venue, Federal Rule of Civil Procedure 12(b)(3) and 28 U.S.C. §1406(a). It alternatively moved to transfer the case under the change of venue statute, 28 U.S.C. § 1404. The district court denied both motions. The court explained that under the venue transfer statute, it must analyze both private and public factors, and that a forum-selection clause was only one factor among several. It also noted that the majority of plaintiffs’ witnesses would not be subject to compulsory processes in Virginia. The court held that Atlantic Marine had not met its burden to prove transfer “would be in the interest of justice or increase the convenience to the parties and their witnesses.” Atlantic Marine petitioned the appellate court to allow the transfer, and that court also denied relief. The Supreme Court, however, granted review and reversed the district court. Justice Alito, writing for a unanimous court, examined the motion to transfer under § 1404 and enforcement of forum-selection clauses under several alternative theories. A Motion to Transfer Under the Change of Venue Statute The court reasoned that the change of venue statute was the most appropriate mechanism to enforce Atlantic Marine’s forum-selection clause. Traditionally, courts analyze a motion to transfer under the statute by considering the “convenience of the parties and the various public-interest factors.” These factors control the decision to transfer a case from one federal court to another. But the court noted that where a contract includes a valid forum-selection clause, “[t]he calculus changes” because the clause has “controlling weight.” In particular, the court explained, such a clause eliminates the need to consider private-interest factors. If the contract represents the parties’ bargained-for interests, the plaintiff’s subsequent choice of forum carries no weight. Thus, the court concluded that district courts should consider only the public-interest factors when considering a motion for transfer that seeks to enforce a valid forum-selection clause. Un143 les Nouvelles der this rule, the District Court in Texas had erred by considering J-Crew’s private concerns, including its choice of where to file the case and the location of its witnesses. The court examined two more doctrines related to the change of venue statute. First, it addressed choice-of-law rules. Normally, a transferred case would continue to fall under the law of the original forum. For example, Atlantic Marine would have been bound by Texas law even if it had successfully transferred the case back to the contracted forum in Virginia. But the court carved out an exception for enforcing a forum selection clause. Now, the law of the target forum will apply—the law of the forum selected by contract. So if Atlantic Marine transfers, they should be in Virginia, bound by Virginia law. Second, the court held that a forum-selection clause establishes burdens for a transfer motion. The District Court had placed the burden on Atlantic Marine to prove its transfer motion appropriate. Justice Alito explained that, to the contrary, a plaintiff “acting in violation of [a] forum-selection clause… must bear the burden of showing that public-interest factors overwhelmingly disfavor a transfer.” In other words, the party challenging the contractual forum selection bears the burden. Applying these rules, the Supreme Court reversed the Court of Appeals and remanded the case for the District Court to consider public-interest factors. Other Possibilities for Enforcing ForumSelection Clauses Justice Alito considered two ways to enforce a forum-selection clause in addition to the change of venue statute. First, the court asked whether two mechanisms for dismissal, Federal Rule of Civil Procedure 12(b)(3) or § 1406(a), could dismiss J-Crew’s case for being brought in an improper venue. Second, it examined venue transfer where the contracted forum is a state or international court. The court rejected Atlantic Marine’s argument that it should be able to dismiss its case to enforce a forumselection clause. The mechanisms for dismissal apply only when venue is “wrong” or “improper” under federal venue laws. But Atlantic Marine’s venue was proper, even though the forum violated the selection clause. Thus, because venue was proper, dismissal under these mechanisms was unwarranted, regardless of the violation of the contracted clause. The court also discussed transfer where the contracted forum is a state or international court. The change of venue statute cannot move a case to state or international courts because it transfers cases only Recent U.S. Decisions between federal courts. The court advised litigants seeking transfer to a nonfederal forum to invoke the “inconvenient forum” doctrine—forum non conveniens. As the court explained, because the change of venue statute and forum non conveniens doctrine derive from the same standard, “courts should evaluate a forum-selection clause pointing to a nonfederal forum in the same way that they evaluate a forum-selection clause pointing to a federal forum.” Thus, it appears Atlantic Marine’s holding extends beyond the scope of the statute and covers transfers generally, including those under the doctrine of forum non conveniens. Strategy and Conclusion The Supreme Court’s decision makes it easier to enforce forum-selection clauses by placing the burden of proof in a forum dispute on the party seeking to stray from the contract, limiting factors that might cut against transfer, allowing parties to rely on the law relating to the forum chosen in the contract rather than the law of other forums, and ending complex choice-of-law issues. Thus, in light of this case, parties drafting licenses and contracts should now find that the chosen forum will more likely control where disputes will be heard, regardless of where suit is first filed. Further Information The Atlantic Marine decision can be found here: http://www2.bloomberglaw.com/public/desktop/document/Atlantic_Marine_Constr_Co_v_United_States_ Dist_Court_for_Western. Supreme Court in In Medtronic, Inc. v. Mirowski Family Ventures, LLC Supreme Court Rules that Patent Owners Bear the Burden of Proving Patent Infringement Even When Licensees File a Litigation Asking the Court to Declare that the Licensees Do Not Infringe the Patent In a recent decision, a unanimous Supreme Court held that a patent owner bears the burden of proving infringement in a declaratory-judgment action brought by a licensee alleging noninfringement. Reversing the Federal Circuit’s decision holding that the licensee bears the burden of proof for noninfringement in a declaratory-judgment action under the continued existence of a license, the Supreme Court in Medtronic, Inc. v. Mirowski Family Ventures, LLC, explained that the burden of proof on a substantive aspect of a claim generally rests with the patent owner and that the Declaratory Judgment Act does not affect the parties’ substantive rights. This decision may affect future ne- gotiations of license provisions outlining how licensees can challenge the licensed patents. Background In 1991, Mirowski Family Ventures LLC, which owns patents on implantable heart stimulators, entered into a license agreement with Eli Lilly & Co. As permitted under the agreement, Eli Lilly then sublicensed the patents to Medtronic, Inc., which designs, makes, and sells medical devices. The 1991 Agreement permitted Medtronic to practice certain Mirowski patents in exchange for royalty payments. If Mirowski provided notice to Medtronic that a new Medtronic device infringed a licensed patent, Medtronic could either (1) cure the nonpayment, (2) simultaneously pay royalties and challenge the validity or infringement of the patent through a declaratoryjudgment action, or (3) simply ignore the agreement and not pay royalties, whereby Mirowski could terminate the license and bring an infringement action. In 2006, the parties modified the 1991 Agreement to provide that, if Medtronic brought a declaratoryjudgment action challenging infringement, it must deposit any disputed royalties in an escrow account pending resolution of the action. In 2007, Mirowski notified Medtronic that it believed certain new Medtronic devices infringed several claims of two licensed patents. Medtronic disagreed and brought a declaratory-judgment action in district court seeking a judgment that its products did not infringe the patents and that the patents were invalid. The district court determined that Mirowski—the party asserting infringement—bore the burden of proof, and that it had not met that burden. On appeal, the Federal Circuit determined that Medtronic—the licensee and declarator yjudgment plaintiff—bore the burden. The Federal Circuit—despite acknowledging that the patentee usually bears the burden of proof and that this burden normally does not shift even where the patentee is a counterclaiming defendant in a declaratory-judgment action—believed that the “continued existence of a license” dictated a different result. The Supreme Court’s Decision In reviewing the Federal Circuit’s ruling, a unanimous Supreme Court held that the burden of proving infringement remains with the patent owner when a licensee seeks a declaratory judgment against the patent owner. Before turning to the merits, the court addressed a jurisdictional issue, finding that the Federal Circuit did not lack subject-matter jurisdiction over the dispute. According to an amicus, in the absence of a declaratory judgment, Mirowski—the declaratoryJune 2014 144 Recent U.S. Decisions judgment defendant—would have brought an action for damages for breach of contract rather than a patent-infringement action. Under this argument, Mirowski’s action would not be a “civil action arising under” an “Act of Congress relating to patents” as required by the statute conveying jurisdiction to federal courts. The Supreme Court disagreed. While the court agreed that federal courts, when determining declaratory-judgment jurisdiction, often look to the “character of the threatened action,” it disagreed with the characterization of the “threatened” action here. The court explained that if Medtronic acted on its belief about noninfringement by not paying royalties and not bringing a declaratory-judgment action, Mirowski could terminate the license agreement and sue Medtronic for infringement. Thus, according to the court, Medtronic’s declaratory-judgment action, which avoided Mirowski’s threatened patent action, “arose under” federal patent law. Turning to the merits of the case, the Supreme Court identified three legal principles and related practical considerations supporting its conclusion that the burden remained with the patentee. First, the court highlighted established case law holding that the burden of proving infringement generally rests on the patentee. Second, the court noted that the Declaratory Judgment Act’s operation is solely procedural and does not change the parties’ substantive rights. Third, the court identified the burden of proof as a substantive aspect of a claim. Taken together, the court explained, these three principles indicate that the patent owner carries the burden of proof in a licensee’s declaratory-judgment action. The Supreme Court supported its holding with several practical considerations. First, shifting the burden to the licensee could create postlitigation uncertainty about the scope of the patent. The court illustrated the burden-shifting problem with an example. If an alleged infringer lost a declaratory-judgment action because it failed to prove noninfringement because of inconclusive evidence, a patentee might then lose its subsequent action for infringement (where it would carry the burden) because of inconclusive evidence. Thus, both sides could lose on the issue of infringement, leaving the scope of the patent uncertain. The court explained that, because issue preclusion would not apply in a later suit where the burden of persuasion had shifted, this scenario could occur, thereby frustrating the purpose of the Declaratory Judgment Act. Next, shifting the burden could create unnecessary complexity because the licensee could find it difficult to identify the patentee’s theory. Because the patentee can more easily assert how and 145 les Nouvelles why a product or process allegedly infringes, the patentee should shoulder the burden. Finally, shifting the burden to the licensee conflicts with a basic purpose of the Declaratory Judgment Act in these situations—to ameliorate the dilemma faced by the licensee challenging the patent of choosing between either abandoning its right to challenge the scope of the licensed patent or ceasing royalty payments and risking an infringement suit. The Supreme Court then dismissed several arguments contrary to its decision. First, the court distinguished one of the primary decisions relied on by the Federal Circuit because that decision did not involve a declaratory-judgment action. Second, the court noted that merely because the Federal Circuit emphasized that its holding narrowly applied only where a continuous license existed, this did not, by itself, justify the rule. In fact, the court explained, this situation is often present when a licensee disputes a claim of infringement. Third, the court addressed concerns that its holding would give licensees sole discretion on whether to institute an infringement action. Citing MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118, 127 (2007), the court explained that a genuine dispute “of sufficient immediacy and reality” about the patent’s validity or application must exist before litigation can occur. Further, the court noted, Mirowski—not the licensee—initiated the dispute by accusing Medtronic of infringement. Finally, the Supreme Court considered the public interest in maintaining a stable patent system. Noting the public’s interest in challenging patent rights, the court explained that licensees are often the only individuals with enough economic incentive to make such challenges. Thus, the court found, considerations of the general public interest balanced with the ordinary rule imposing the burden of proving infringement on the patent owner regardless of whether the patent owner or the licensee initiated the litigation. Further Information The opinion can be found here: http:// www.supremecourt.gov/opinions/13pdf/12-1128_h315.pdf A.C. Aukerman Co. v. R.L. Chaides Construction Conscious Copying by an Infringer Can Undermine a Laches Defense An equitable defense, laches, bars the recovery of damages for patent infringement occurring before the date of the complaint or counterclaim. The defense is based on the principle that courts should not assist Recent U.S. Decisions patentees who have “slept” on their rights by delaying the filing of a lawsuit and, in doing so, prejudiced the accused infringer. Under the Federal Circuit’s en banc decision in A.C. Aukerman Co. v. R.L. Chaides Construction, an infringer can establish laches by proving (1) that a patentee unreasonably delayed in bringing suit and (2) that the infringer suffered economic or evidentiary prejudice as a result. If, however, the period of delay from when the patentee knew or should have known about potential infringement to the date of filing exceeds six years, the requirements for proving laches are presumed (i.e., courts assume a six-year delay is unreasonable and results in some prejudice), thereby placing on the patentee the burden of disproving laches. Because laches is equitable in nature, courts deciding whether to apply it must consider not only unreasonable delay and prejudice, but also all the relevant facts and circumstances. In a recent decision, Carnegie Mellon University v. Marvell Technology Group, a district court found the two prongs of laches satisfied, but determined that, based on the equities, laches should not apply to limit the damages award because the infringer consciously copied the patent owner’s technology. Background Carnegie Mellon University (CMU) owns two patents covering a method of detecting and addressing media-noise problems in magnetic recordings. The method was codeveloped at CMU by a professor of electrical engineering, Dr. Jose Moura, and a thendoctoral candidate, Aleksandar Kavcic. They disclosed the invention to CMU in March 1997 and filed a provisional patent application in May 1997. In the early 2000s, semiconductor chip manufacturer Marvell Semiconductor (Marvell) started developing its own media-noise detector, which Marvell engineers described as based on the “Kavcic model.” Marvell integrated this technology into its new semiconductor chips, which it began shipping in August 2002. In August 2003, CMU sent a letter to Marvell, asking it to take a license on the Kavcic patents; Marvell never responded. On March 6, 2009, almost six years after sending the letter, CMU filed suit against Marvell. After a four-week jury trial in December 2012, the jury rendered a verdict against Marvell on infringement, validity, and willfulness, and awarded CMU over $1 billion in damages. While the Court declined Marvell’s request to allow the jury to consider Marvell’s laches defense during trial, it ordered post-trial briefing on the issue. The Carnegie Mellon University Decision In a lengthy decision, the court ruled that, even though Marvell proved an unreasonable delay and material prejudice by a preponderance of the evidence, the equities demanded that laches not apply. The laches analysis began with a determination on the presumption of laches. According to Marvell, CMU waited more than six years from the time it learned about Marvell’s potential infringement, and laches should therefore be presumed. Marvell did not argue that CMU had actual knowledge of infringement before March 6, 2003, but that it had constructive knowledge based on emails and notes showing that CMU knew that Marvell was developing its own method of detecting media noise. Because that evidence did not indicate an awareness of infringement and was, in fact, created before Marvell began shipping any infringing products, the court found that the presumption did not apply. Thus, Marvell had to prove that CMU’s delay was both unreasonable and prejudicial. By April 5, 2003, Kavcic had enough information to send Moura an email stating that he had “two more independent confirmations” that Marvell and other chip manufacturers were using the patented method. At that point, because CMU “should have known” of infringement, regardless of its failure to inquire further at that time, CMU had a duty to investigate that triggered the laches “clock.” Despite receiving additional information about Marvell’s infringement over the next five years and eleven months, CMU did not conduct an infringement analysis until just before filing suit. The court found that CMU was aware of the core facts establishing its willful-infringement allegation before July 2004. And, notwithstanding the extreme complexity of Marvell’s chips and the difficulty of detecting infringement, the court found CMU’s delay unreasonable and not excused. The analysis then turned to whether Marvell had proved that it suffered material evidentiary or economic prejudice. Here, Marvell pointed to specific evidence that was lost as a result of the delay; lab notebooks were missing, emails from previous, inactive accounts were discarded over time, and witnesses’ memories had faded. Notably, the court held it against CMU, a not-for-profit institution, that it failed to take any steps to preserve evidence from between 1996 and 2000, when the technology was being developed. The court concluded that litigation was reasonably foreseeable and that CMU had a responsibility to preserve invention-related documents that may have pertained to Marvell’s invalidity defenses. Thus, the court held that Marvel proved evidentiary prejudice. Also according to Marvell, it would not have invested so heavily in its noise-detector technology had it been sued earlier. The court, however, determined that Marvell failed to establish a nexus between its June 2014 146 Recent U.S. Decisions capital expenditures in noise detection and CMU’s delay. Marvell did not prove that its investments resulted from the delay, as required under Federal Circuit precedent. Instead, Marvell made its investments despite knowledge of the patents and despite an internal report stating that its detector “turn[ed] out to be the structure that Kavcic proposed in his paper [and ensuing patents].” This evidence contradicted affidavits asserting that Marvell would not have invested in the technology had it been sued earlier. Indeed, Marvell continued to sell the infringing products and decided not to implement a design-around, even after CMU filed suit. While lacking the nexus necessary to show economic prejudice, Marvell still established laches based on CMU’s unreasonable delay and the evidentiary prejudice. Had the court’s analysis ended here, CMU would likely have lost a significant portion of its jury award. But, having completed its analysis of the laches requirements and finding them satisfied, the court then took the final step of weighing the equities to determine whether it should strip CMU of its damages award based on laches. In a relatively short discussion, the court found that “the equities clearly favor CMU.” Marvell’s conscious copying of the “Kavcic method,” as well as the evidence that its detector “turn[ed] out to be the structure that Kavcic proposed in his paper,” influenced the court to find that Marvell had “unclean hands” and engaged in “egregious misconduct.” Describing CMU as “timid” and “gun shy,” it found that CMU did not lie in wait or sit on its rights. Rather, it found that, as the bad actor, “Marvell should bear the risk of loss for egregious and illegal behavior.” Strategy and Conclusion The CMU decision illustrates important lessons about the policing of patent rights. Because the laches clock starts running from when an objective, reasonable patent owner knew or should have known of the infringement, a patent owner should not turn a blind eye to potential infringement. A patent owner should further recognize that once it makes an assertion against a potential infringer, it may forfeit its rights if it takes no further action for an extended period of time. Finally, given the equitable nature of the doctrine, a patent owner facing a potential laches defense should consider seeking evidence of conscious copying, which, if established, may tip the balance in the laches analysis. Further Information The CMU decision may be found here: http:// docs.justia.com/cases/federal/district-courts/pennsylvania/pawdce/2:2009cv00290/90950/920/0. pdf?1391259283. 147 les Nouvelles Single Touch Interactive, Inc. v. Zoove Corp. A Settlement Agreement Between Patent Litigants May Not Justify Vacating a ClaimConstruction Order Previously Issued By the Court Often times, a claim-construction decision in a patent-infringement case can significantly impact the parties’ settlement positions. For example, after an unfavorable decision, a patent owner may settle and seek to have the claim-construction decision vacated so as to mitigate or eliminate the effects of that decision in future disputes. A recent decision from the United States District Court for the Northern District of California, however, illustrates the potential dangers of waiting until after a court has construed the claims of an asserted patent to settle litigation, as the court may not be inclined to vacate its decisions based on a private settlement between the parties. The court in Single Touch Interactive, Inc. v. Zoove Corp., held that the public’s interest in decisions of the judiciary and in conservation of judicial resources outweighed the parties’ individual interests and expectations in having the order vacated. Background A few months after the court issued its claimconstruction order in, the parties settled their dispute and filed a joint motion to vacate the court’s order. In support of the motion, the parties argued that the settlement agreement “resolved all claims and counterclaims without the necessity for further proceedings” or the possibility of requests for additional review and reconsideration. In other words, the parties asserted that the claim-construction order was no longer necessary because no controversy existed between them. In addition, they asserted that vacatur would not affect the public interest because public policy favors settlement and claim-construction orders are interlocutory (i.e., nonfinal). Further, the parties asserted that public policy favoring settlement would be served by vacating the claim-construction order because the proposed vacatur was a “significant factor” in the resolution of the litigation. The Single Touch Decision Citing Supreme Court precedent, the district court denied the motion, noting that “[j]udicial precedents are presumptively correct and… and should stand unless a court concludes that the public interest would be served by a vacatur.” (Quoting U.S. Bancorp Mortgage Co. v. Bonner Mall Partnership, 513 U.S. 18, 29 (1994)). Although denying the motion might frustrate the parties’ individual settlement expectations in this particular situation, the court stated, in Recent U.S. Decisions general, “permitting parties to vacate interlocutory decisions may discourage earlier settlement and instead incentivize parties to take cases through the entire Markman process, or other non-dispositive rulings, in order to test their positions, knowing they could effectively ‘erase’ that decision through settlement later.” Relying on the reasoning in Bonner Mall, the court also concluded that “judicial decisions are not the property of the private litigants, but are ‘valuable to the legal community as a whole.’” In particular, the court observed, even if the claim-construction order were not final, “other courts may consider it for its persuasive value, particularly when construing the terms of the patents at issue…” Finally, the court stated that the value of the “substantial [judicial] resources” required to reach the decisions in the claim-construction order would be diminished if the order were vacated, “increasing the possibility that other courts would be called upon to expend their resources to construe the[] same terms in the future.” In sum, the court held that the public’s interest in decisions of the judiciary and in conservation of judicial resources outweighed the parties’ individual interests and expectations in having the order vacated. Consequently, the court denied the parties’ motion. Strategy and Conclusion This case demonstrates that parties and, in particular, patent owners should not expect to erase unfavorable claim-construction orders through later settlement and a joint motion for vacating the order. Although a court’s refusal to vacate a claimconstruction order may not affect settling defendants, patent onwers should thoroughly evaluate settlement options before receiving a claim-construction order to avoid the possibility of a previous order being used as persuasive authority on the construction of a previously asserted patent. Further Information The Single Touch decision can be found here: http:// law.justia.com/cases/federal/district-courts/california/ candce/4:2012cv00831/252406/79 Wi-LAN v. Alcatel-Lucent USA Inc. A Licensing Entity’s Business Model of Litigating to Secure Patent Licenses Does Not, by Itself, Support an Award of Attorneys’ Fees Under § 285 of the Patent Act, courts may award reasonable attorneys’ fees to the prevailing party in “exceptional cases.” As a threshold matter, the pre- vailing party must show, by clear and convincing evidence, that the case is exceptional. Certain conduct by the losing party may alone satisfy this requirement: willful infringement, fraud or inequitable conduct in procuring the patent, litigation misconduct, vexatious or unjustified litigation, or conduct that violates Fed. R. Civ. P. 11. Under current precedent, absent such conduct, a case may be considered exceptional only if the prevailing party proves that the litigation (1) was brought in subjective bad faith, and (2) was objectively baseless. A Texas court recently found that a patent assertion entity’s policy of repeatedly using litigation to secure patent licenses did not constitute clear and convincing evidence of vexatious litigation conduct. Wi-LAN v. Alcatel-Lucent USA Inc., the Eastern District of Texas denied the defendants’ posttrial motion for attorney’s fees because they could not show that, in this instance, the plaintiff had vexatiously sought licenses of its patented technology. While additional legislation directed at patent assertion entities continues to be introduced at both the state and federal levels, this decision illustrates the burden of proof imposed by one district court on an accused infringer who attempts to show they are entitled to have their attorney fees paid by a patent assertion entity that uses litigation as a business model to obtain licenses and royalties. Background In October 2010, Wi-LAN, Inc. sued multiple defendants, alleging infringement of four patents generally related to wireless telecommunications systems. Several defendants were dismissed before trial. After trial, the jury found that the remaining defendants did not infringe any asserted claims. Further, it found that several asserted claims were invalid due to obviousness and anticipation. Later, several additional defendants were dismissed and did not participate in post-trial motions. The remaining defendants asked the court to declare the case exceptional and award attorneys’ fees because, according to them, Wi-LAN unfairly engaged in serial litigation intended to force settlements and extract licensing fees. The Wi-LAN Decision In its decision, the court denied the motion for attorneys’ fees. In the defendants’ view, the case was exceptional because of Wi-LAN’s vexatious litigation conduct, and because Wi-LAN brought the action in subjective bad faith and its claims were objectively baseless. First, the defendants asserted, “[that] Wi-LAN’s business model is based on serial litigation intended June 2014 148 Recent U.S. Decisions to extract licensing fees below the cost of defending litigation, that Wi-LAN’s trial strategy relied on the flawed testimony of noncredible expert witnesses, and that Wi-LAN unnecessarily increased the costs of defending” litigation. Wi-LAN responded that the defendants misrepresented its business model and that generating revenue by licensing intellectual property sometimes required litigation. The court explained that although the defendants may have disagreed with Wi-LAN’s alleged licensing framework, they did not “show that it had been used vexatiously against” them. According to the court, “sound business practice counsels considering litigation costs during [license] negotiations, whether explicitly or implicitly.” Regarding Wi-LAN’s experts, the court noted, the defendants had successfully used more appropriate tools than a motion for attorneys’ fees, such as successfully challenging part of one expert’s opinion with a Daubert motion as well as effectively using cross-examination and rebuttal evidence. Moreover, mere disagreement with an expert opinion did not render the expert so unreliable as to constitute litigation misconduct. Accordingly, the defendants failed to provide clear and convincing evidence that Wi-LAN engaged in litigation misconduct, which would justify an award of attorneys’ fees. Second, the defendants asserted that Wi-LAN brought the action in subjective bad faith because of its policy of serial litigation to force settlements and licensing fees. Further, Wi-LAN’s claims were 149 les Nouvelles objectively baseless because it read out certain limitations in the asserted claims. Although the court warily acknowledged “troubling evidence that Wi-LAN had a policy of using repeated and vexatious litigation to secure patent licenses,” it held that the defendants could not demonstrate that “Wi-LAN acted in subjective bad faith by actually implementing that policy” against them. Further, the court rejected the defendants’ assertions that Wi-LAN’s claims were objectively baseless. Rather, the court explained, both sides accused the other of misinterpreting the claims and distorting the claim elements, and, notably, the supposedly baseless claims all survived to reach trial and a jury verdict. Thus, the court held, Wi-LAN did not institute an objectively baseless litigation in subjective bad faith. Strategy and Conclusion This court decision illustrates the high burden of proof imposed on an accused infringer who seeks to have its attorney’s fees paid after being unsuccessfully sued by a patent owner. Although patent-assertion entities continue to attract attention in Congress and elsewhere, this court decision demonstrates that having a business model of using litigation repeatedly to obtain licenses and royalties may not, on its own, warrant awarding attorney fees. Further Information The Wi-LAN decision can be found here: http:// docs.justia.com/cases/federal/district-courts/texas/txedc e/6:2010cv00521/125700/529/0.pdf?1390989438. ■ Notes Notes: June 2014 LES International Officers President President-Elect Past-President Vice-President ® Vice-President Vice-President Vice-President Secretary Treasurer Counsel Counsel Yvonne Chua Arnaud Michel Kevin Nachtrab Mark Horsburgh Kenneth McKay Fiona Nicolson Christian Osterrieth François Painchaud Jim Sobieraj Michael Lechter Audrey Yap les Nouvelles Editorial Review Board Chair: Rodney DeBoos, Melbourne, Australia Lex van Wijk, Amersfoort, Netherlands Heinz Goddar, Munich, Germany Norm Jacobs, Boca Raton, Florida, U.S.A. Sun-Ryung Kim, Seoul, Korea Masato Kobayashi, Tokyo, Japan Kenneth D. McKay, Toronto, Canada Thomas Bereuter, Vienna, Austria Eduardo C.A. de Mello e Souza, Rio de Janeiro, Brazil Larry Plonsker, Editor 10580 Northgreen Dr., Wellington, FL 33449 Tel: +1-561-432-8814 E-mail: [email protected] Carla J. Blackman, Design Interface Inc. Design & Production les Nouvelles Volume XLIX Number 2 (ISSN 0270-174X) les Nouvelles is published quarterly by the Licensing Executives Society International (LESI). LESI is an association of 32 National and Regional Societies, each composed of individual members who are engaged in the profession of licensing and other aspects of transferring or profiting from intellectual property. Subscription to the journal is included in the membership dues paid by all members. Subscription for the print publication is available to nonmembers for US$200/year. Please contact the Editor for further details. The articles published in les Nouvelles reflect the views of the authors and not of the Society as an association or its officers. 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Nachtrab Copyright Licensing Dispute Resolution Industry/University Government Transactions Patent & Tech Licensing Trademarks IP Valuation Regional Americas Africa and Middle East Asia Pacific European Michael Lechter Tom Filarski Claire Driscoll Pauline Khor Martin Schneider Dwight Olson Marcela Trigo de Souza Mohammed Al-Ansari Kevin Dam Audrey Yap Junko Sugimura Bruno Vandermeulen Ad Hoc Committees Business Forums Global Technology Impact Forum Bill Elkington Young Members Congress IP Strategy Tilman Mueller-Stoy Subramaniam Vutha Hector Chagoya Martin Schneider June 2014 Notes Notes: les Nouvelles www.e-mergeglobal.com Infringement Analysis is not an information mining exercise. It is a research with Legal, Technical and Commercial Expertise. Experience the Meeting That’s Been 50 Years in the Making! Explore cutting-edge topics, from strategy to tactics, addressed by today’s thought leaders, industry experts and dealmakers. 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DIAMS l l 13221 Woodland Park Rd., Suite 420, Herndon, VA 20171 tel 703.437.8018 fax 703.437.8268 vizual.com JOURNAL OF THE LICENSING EXECUTIVES SOCIETY INTERNATIONAL 8110 Gatehouse Road, Suite 100E Falls Church, VA 22042-1248 t: +1.703.205.8000 f: +1.703.205.8050 Volume XLIX No. 2 LES NOUVELLES This two week seminar focuses on advanced topics in U.S. patent law and includes workshops and problem solving in order to illustrate the more advanced concepts with regard to prosecution, claim interpretation, and validity and infringement issues. Participants learn how to modify and determine the scope of a granted U.S. patent, as well as how to address significant licensing issues. les Nouvelles June 2014 Advancing the Business of Intellectual Property Globally Where Are We Going in High Tech? Assessing High Tech: Observations And Patterns — Part Two Annemarie Meike — Page 82 Clean Tech Trends—Intellectual Property & Transactions Ron Epperson and Myron Kassaraba — Page 84 Selected Advanced Transportation Trends, Part 1—The Giga-Factory Michael Craner — Page 96 Observations In The Aerospace And Transportation Industry William H. 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