IP securitization: the new hot thing in Europe

Intellectual property securitization has had a promising history- from the initial excitement over Bowie Bonds, which securitized David Bowie's song catalog, and other early deals, followed by a recent lull, during which it was thought the idea was dead. Recently IP securitization has been revived and the heros are the financial institutions and IP merchant bankers. They are basically retail products and franchises, nowadays mostly patents and trademarks rather than copyrights. Goldman Sachs closed a $200 million IP securitization for IHOP backed by its intellectual property and franchising assets. Lehman Brothers leads an IP deal for Domino's Pizza; it aims to raise $1.85 billion. Dunkin Donuts really got the IPO ball rolling last May with its well-received deal. All of this being fueled in part by hedge funds and the liquidity they bring. We'll likely see a lot more deals. With the marketplace shifting to a more knowledge-based, or "IP-centric," economy and major investment banks testing the waters, IP securitizations are quickly changing the financing landscape and are reviving the possibility that this type of arrangement will become mainstream. Securitization normally refers to the pooling of different financial assets and the issuance of new securities backed by those assets. In principle, these assets can be any claims that have reasonably predictable cash flows, or even future receivables that are exclusive. Thus securitization is possible for future royalty payments from licensing patents or trademarks (or compositions or recording rights of a musician). At present, the markets for intellectual property asset-based securities are still rather small, as the universe of buyers and sellers is limited. But if the recent proliferation of IP as the new asset class (auctions, IP merchant bankers, and so on) then it is only a matter of time before all concerned will develop greater interest and capacity to use IP assets for financing business start-ups and expansions. As more cash flows are generated by intellectual property, more opportunities will be created for securitization. New player in the field is IPEG, Europe’s first IP merchant banking. They are in the process of developing their own IP securitization product, to be launched soon.

Japan has toughest patent system

Japan today has the toughest patent system in the world in terms of the odds of a patentee winning a patent trial against an accused infringer. Japanese trial courts hold against patentees in nearly 90 % of all cases, according to statistics released by the Japanese attorney Eiji Katayama at the “Fordham Conference”, the law school’s Fifteenth Annual Conference on International Intellectual Property Law & Policy that commenced on April 12. For the year 2006, Mr. Katayama reported that for the Tokyo and Osaka District Courts 33 out of 37 final trial decisions ended with a finding of non infringement. Of the 33 patentee losses, two-thirds were decided on the basis of invalidity (22/33) while more than 85 % of the invalidity determinations were keyed to a lack of an inventive step or obviousness (19-22).

During the panel discussion at the Fordham Conference, the point was made that on appeal, there is generally an 80% affirmance rate. Prof. Obuchi explained that many of the currently litigated patents had been granted many years ago under a much lower standard of patentability. He indicated that this was one reason for the low rate of patentee success. Mr. Katayama noted a disparity in claim construction methodologies for infringement and validity. The matter is serious enough that it was to be resolved by the Intellectual Property High Court by its Grand Panel division. But, the test case – Toshiba v. Hynix – was ultimately settled before a decision was reached.

As noted by Prof. Tetsuya Obuchi at the Fordham Conference, many Japanese patents enforced today are from an earlier era which had lower standards of patentability than today, thus in part explaining the very low success rate for patentees in their infringement suits. A helpful perspective is provided by former Deputy Commissioner Shinjiro Ono, who has been responsible much of the recent push for higher quality examination at the PTO.

prof. Hal Wegner

Is DRM dead?

Now EMI decided to deliver “DRM[1]” free music, (no limitations once the music file has been downloaded) it seems that everyone in the technology and CE space is going to take a wait-and-see attitude for the next few months. It is highly unlikely that any big player in the field like Philips will do anything in the area of encryption-based DRM in the very near future.

On the other hand, this could be a huge boon for watermarking. Check DMRC – it spiked mildly (3%) on the news, then retreated somewhat – although only a small percentage of DMRC’s revenue is media related (as opposed to government and other applications). Still, if you were to invest in individual securities, buy DMRC right now. (There are money managers who deal with this).

So we take it DRM is not dead. One fact that got lost in the recent hoopla is that DRM-ed tracks from EMI are still going to be available on iTunes. So, it’s about offering consumer choice and responding to the market, which is what DRM is supposed to be about. For companies like e.g. Intertrust that have DRM technology for all types of content, it looks that it’s not going to make much difference, though they are most likely going to have to cut their royalty rates for music devices.

However other companies may do less well, like e.g. SDC of Switzerland, because they are music only –good news for Michael Bornhaeusser because he cashed out in time (SDC was recently, and quietly, acquired by a US company called PacketVideo that makes software for media applications on handheld devices).

[1] Digital Rights Management

German Court invalidates drug dosage patent

Germany's highest court, the Bundesgerichtshof rendered its decision in the Carvedilol II case. Subject of the decision of the Federal Court of Justice was the validity of a patent claim containing a specific dosage instruction for Carvedilol, a beta blocker indicated in the treatment of congestive heart failure. The patent claim contained detailed instructions regarding the use of carvedilol as follows:

"[...]
4.1.1. administering a pharmaceutical formulation which contains either 3.125 or 6.25 mg carvedilol per day,
4.1.2. for a period of 7-28 days,
4.2.1. followed by an increase of the dosage
4.2.2. each with an interval of 14 days
4.3. administering finally a maximum dosage of 2 x 25.0 mg carvedilol per day."

The Federal Court of Justice revoked the claim and underlined that a specific dosage instruction for the use of drugs should be seen as a non-patentable method for treatment of the human body. According to the reasons of the decision the non-patentability results from the spirit and purpose of Art. 52 (4) EPC. The provision reflects the will of the legislator to protect a doctor's freedom to determine an individual therapy plan for patients, in particular to determine the dosage of drugs individually, without being restricted by opposing patent claims. Further, the court concluded from the non-patentability of such dosage instructions that these isntructions should not be considered for the question of novelty and inventiveness regarding the remaining part of the claim. Unfortunately, the court has made no clear statements regarding the question, whether claims containing such non-patentable dosage instructions are entirely invalid even though the remaining part of the claims may still be novel and inventive. While the European Patent Office assessed in several cases that such claims are invalid as a whole, the Federal Court of Justice left this question explicitly unanswered.

Nonetheless, this decision restricts the possibilities for life science companies to expand protection for their patents by simply formulating dosage instructions in their patent claims. Since it cannot be excluded that the use of specific dosage instructions may lead to the revocation of a whole claim, applicants have to draft new patent applications very carefully and should refrain from any reference to dosage instructions for the use of medicines within the claims. They should focus more on the ingredients and substance of the medicine itself.

Dr. Kaya Köklü, Simmons & Simmons, Düsseldorf

European Commission investigation into Taiwan’s CDR compulsory licences

The European Commission has launched an in-depth investigation into the WTO consistency of the granting of compulsory licenses by Taiwan for recordable compact discs (CDRs) under the Trade Barriers Regulation. This follows a complaint lodged by Philips, the electronics manufacturer which holds patents in the technology for CDRs. A compulsory license is a permission granted by a government which permits a domestic producer to use a patent without having to negotiate a licensing agreement for the use of the patent with the patent owner. The conditions for the grant and use of compulsory licenses are regulated in the WTO TRIPs (Trade Related Aspects of Intellectual Property Rights) Agreement.

EU Commissioner for Trade, Peter Mandelson said: "The proper enforcement of intellectual property rights one of the central planks of the EU's Global Europe Strategy. The allegations made in respect of the grant of these compulsory licences give ground for substantial concerns and the Commission will thoroughly investigate them. I am hopeful that we can find a means to resolve any WTO violations identified in the investigation".

The Commission is acting on the basis of a complaint lodged by Philips, the Dutch electronics manufacturer pursuant to the Trade Barriers Regulation. Philips is the inventor of some of the core technologies for CDRs and holds patents in those technologies. The complaint alleges that Taiwan granted compulsory licences inconsistently with the WTO TRIPs Agreement. In particular, it is alleged that Taiwan granted these licences where Philips had made reasonable efforts to provide its licenses on a voluntary basis by offering terms acceptable to seven of the eight main producers in Taiwan. It is also alleged that Taiwan granted the licence in full knowledge of the fact that the CDRs produced would be for export ( Taiwan produces 80% of the world's CDRs) despite the express prohibition on the use of such licences for export production in the TRIPs Agreement. The Commission is satisfied that there is sufficient prima facie evidence of a violation of the TRIPs Agreement and of adverse effects on the Community to merit an investigation.

The Trade Barriers Regulation provides EU companies and industry associations with a right to file a complaint with the Commission when they face trade barriers in third countries. Following Philips's complaint, the Commission has decided to initiate an investigation procedure. When this happens, the Commission normally has five months to decide on whether to proceed with a commercial policy measure. The investigation process involves gathering information in Taiwan, in cooperation with the Taiwanese government. Member States can assist in the fact-finding process, for instance through their local delegations. EU and Taiwanese companies will also be asked to participate in the investigation by way of questionnaires and meetings. Parties interested in participating in the investigation should consult the Notice of Initiation in the Official Journal of the European Union.

Several outcomes are possible. The Commission may find the claims unfounded and decide to terminate the procedure. The Commission may also decide that satisfactory steps are being taken by Taiwan to eliminate the barrier to trade, and may monitor developments. The Commission may seek a solution with Taiwan. The Commission may also decide to initiate international dispute settlement proceedings in the WTO against Taiwan.

FD on IPEG as Europe's first IP merchant banking group

Today, in Netherlands financial daily "Het Financieele Dagblad" an article on Europe's first IP merchant banking group, IPEG and its founder, Severin de Wit.

For English translation, click here

SanDisk Philips-Sisvel - Pumfrey J on jurisdiction

Further to our earlier post about the SanDisk vs. Philips judgement by Pumfrey J, here is a verbatim account on what the court contemplated about the question to what extent this case leaves open issues for the Court of Appeal to decide on jurisdiction

"I am of the view that if this jurisdiction needs to be worked out and if there is no substantial challenge to my approach to the cases such as they are, then this is a matter where the Court of Appeal should themselves decide is a suitable occasion for working out such principles as need to be worked out. I am not satisfied that on the materials that are available there is a reasonable prospect of success. I must acknowledge that further refinements in the statements of the law by the Court of Appeal might create a prospect of success where there is none. That possibility cannot be excluded, but it is not for me to exploit it and the application for permission must be made to the Court of Appeal.

I think, at first instance, unless one is satisfied that there is an arguable case on the present state of the authorities, one refuses leave and one leaves it to the Court of Appeal to see if they want to have to say anything about it. It may be that in fact the one point which is slightly vulnerable, maybe I do not know is Domicrest. That is a first instance decision. None of the rest can I see even them doing anything, but I am bound by it. I am certainly bound by Domicrest, and that is a matter for the Court of Appeal, whether they wish to take it or not."

Europe in 2010 will be where the US was in 1981

It has been said many times over: EU is not getting where “Lisbon” wants it to be by 2010. According to a study by Chambers– the EU organization of Chambers of Commerce – the EU lags behind the US in R&D spending. Not a new conclusion, both McKinsey and Booz Hamilton reached the alarm bell earlier. Saddest of all, Europe reaches only now the level of R&D investment per capita that the US already achieved in 1978.

So how will 2010 look like? According to this figures Europe in 2010 will look like where the US was already in 1981 (in August of that year IBM announced its first PC). We had not heard about mobile phones and US companies like Dell, Google and Cisco had yet to emerge. So are we wasting our time here in Europe? Did you sense a feel of emergency among European politicians?

European Patent Opposition Statistics for 2005

In 2005, oppositions were filed against 5.4% of granted patents, compared with a rate of 5.3% in 2004. Fewer oppositions were filed in 2005 (2,960) than in 2004 (3,100), reflecting a slight fall in the number of patents granted over the same period, see James Wilding and Andy Bridle in Managing Intellectual Property

see for full statistics

US software patents under legal scrutiny

On October 31, 2006 we blogged about the case Microsoft Corp. v. AT&T Corp. where the US Supreme Court accepted to hear a case about “extra territoriality” under US Patent Law art. 35 (USC § 271(f). On February 21, 2007, the court heard arguments in this case.
At issue the question: Is there patent infringement liability for the export of unpatented physical components of a patented combination?

In 1984, the U.S. Congress decided that US patent owners should be able to sue for infringement companies that supply from the U.S. components of a US patented invention off-shore for assembly outside the US that would infringe the patent if it occurred in the US. This rule is codified in US patent law as “Section 271(f)”.

The US and European IT industry are closely watching this case, as this might have implications in the US as well as in Europe.

Prof. Pamela Samuelson in her article, discussing this case and its implications, “Legally Speaking: Software Patents and the Metaphysics of 271(f)”, concludes:

“Because of this, it is difficult to believe that the Court would outlaw software patents altogether. But one can always hope. Based on twenty-four years of studying software intellectual property protection, I believe the software industry would be no less innovative and no less competitive in the world market if software patents disappeared tomorrow.”

This should be encouraging for those that have, for the last two years, argued that software patents should be abandoned in Europe all together as they rather stifle than stimulate innovation

SanDisk vs. Philips, mp3 litigation in the UK, J Pumfrey denies injunction

In a high profile legal battle on mp3 patents, UK Judge Pumfrey rendered its judgment in a request for interim injunction by SanDisk against Philips et al. The first four defendants (the patentees, registered in the Netherlands, France, France and Germany respectively) own a number of European patents relevant to mp3 technology. The patents have been the subject of an intensive licensing campaign carried out on behalf of the patentees by the fifth defendant, Sisvel, an Italian licensing company. Sisvel claims that five of the patents in dispute are essential for the making and/or selling of an mp3 player in the EU and that if an mp3 player complies with a particular standard, it will necessarily infringe these four “essential” patents. It seems that most of the principal manufacturers and/or sellers of mp3 players (with the exception of the claimant, SanDisk) have entered into licenses, though the terms of those licenses have not been made public. SanDisk, a US corporation, which inter alia imports and sells in the EU (unlicensed) mp3 players was offered a license, upon filing the action, relating only to the four “essential” patents but nevertheless on the standard royalty rate by Sisvel.

In February 2006, SanDisk began invalidity proceedings in the Patents Court in relation to the five patents. In March 2006, SanDisk also started proceedings for declarations relating to essentiality and non-infringement. The Patentees counterclaimed for infringement. These proceedings are ultimately due to come together for trial in February 2008. Subsequent to the start of proceedings in the UK, Sisvel sought to enforce the patents elsewhere in the EU by summary means. It obtained several Border Detention Orders and consequent infringement proceedings are pending in Germany and the Netherlands. Sisvel also sought domestic remedies in Germany and Italy, including the seizure by the Berlin Public Prosecutor of mp3 players exhibited in the SanDisk booth at a major exhibition, an action which resulted in significant publicity (among which this blog posts).

SanDisk alleged several breaches of arts. 81 and 82 EC Treaty. These were considered by Pumfrey J in relation to the jurisdiction issue but they also raised interesting substantive issues, for example whether the offer of an objectionable license could be characterized as an abuse of a dominant position (the patentees refused to grant licenses on an individual basis having agreed that all licenses would be granted by Sisvel).

Relief sought

SanDisk claims that Sisvel and the patentees enjoy a dominant position in two relevant defined markets and that their conduct constitutes harassment amounting to an abuse of that dominant position. It argued that this is actionable in the UK and also justified at least limited interlocutory relief requiring Sisvel to notify SanDisk of any further proposed complaint to the relevant administrative or prosecuting authorities. This would enable SanDisk to approach those authorities and explain to them why it believes the essentiality argument is a bad one before the authorities decided whether to act. SanDisk also complained about certain aspects of the licensing activities of Sisvel, claiming that these also amount to abuse of a dominant position. In respect of both the "harassment" allegation and the licensing allegation, Sisvel argued that there was no jurisdiction either to entertain the substantive complaint or to grant any form of interim relief in England and Wales.

Jurisdiction in the Substantive Claim

Pumfrey J held that the court had no jurisdiction to determine the substantive claim.He started by noting that Sisvel (an Italian company), against whom the greatest complaint was made, could be sued in Italy and that the Patentees could be joined to such proceedings under Article 6(1), Brussels Regulation. However, because none of the defendants were domiciled in England and Wales, SanDisk needed to establish that a special jurisdiction was available under Art 5(3).In order for the English court to possess the exceptional jurisdiction pursuant to Art 5(3) which would allow it to adjudicate upon the alleged abuses of a dominant position in the present case, either the event setting the tort in motion must have been in England and Wales or, alternatively, the claimant needed to show that it was the immediate victim of that abuse suffering direct harm in England and Wales. In addition, the scope of the two jurisdictions was different. The jurisdiction based upon the place of the harmful event was international, while the jurisdiction based upon the relevant harm was restricted to England and Wales. Pumfrey J concluded that SanDisk had not established that any of the first steps of the abuses complained of took place in the UK, nor that immediate damage was caused to SanDisk in the UK by reason of the alleged abuses. SanDisk also needed to demonstrate a good arguable case before jurisdiction would be assumed under Art 5(3). Since there were courts (for example in the Netherlands, Germany, France and Italy) which indisputably had jurisdiction over the individual defendants pursuant to Art 2, something better than a case which was merely arguable was required in order to preserve the necessarily exceptional nature of Article 5(3) jurisdiction and for the purpose of ensuring the uniform application of the Brussels Regulation. In relation to the enforcement steps taken by Sisvel in Germany and Italy (by use of criminal complaints) and in the Netherlands (and possible Germany) by the employment of Border Detention Orders, Pumfrey J noted that - assuming it was possible to invoke these administrative actions in an abusive manner, for example by relying upon a patent positively known to be invalid - the damage resulting from the abuse was plainly suffered in the Member State in which the Border Detention Order has been effected. There was no Border Detention Order in the UK. Similarly, in relation to the seizure by the Public Prosecutor in Berlin, both the act itself and the harm immediately flowing from it arose in Germany. Pumfrey J observed it could be thought that all these legal proceedings were duplicative and so potentially oppressive. However, this could not be the case. Although all the patents in question derived from the same European patent applications, the patent system meant that these matured into domestic patents in the designated contracting states and that enforcement had to be undertaken state by state. Infringement could not be litigated for all designated states in only one of them: if validity is or will come into issue, enforcement must be on a country-by-country basis (GAT vs. LuK and Roche vs. Primus).

Enforcement of patent rights as abusive conduct

Pumfrey J also considered a separate issue relating to jurisdiction under both Article 5(3) (see above) and Article 31 (see below) under the heading "Enforcement of patent rights as abusive conduct". SanDisk claimed that there was a sustained campaign of abusive and anti-competitive activity throughout Europe, including the UK. This resulted in loss by SanDisk throughout the EU and immediate damage in every country, thus giving the English court jurisdiction. The core of this argument related to the enforcement steps invoked by Sisvel in various Member States and the interim relief sought by SanDisk was targeted at enforcement measures. Assuming that the Patentees and/or Sisvel have a dominant position within a relevant market, and assuming that the effect of enforcing their intellectual property rights will consolidate that position of dominance, Pumfrey J asked in what circumstances would the law recognize that enforcement through the legal channels provided for either by Community law or by domestic law of the Member States amounted to abuse? He said that a comprehensive answer was provided by ITT Promedia NV vs. Commission (Case T-111/96), a judgment of the EU Court of First Instance. Pumfrey J concluded from this case that where there is no dispute that the patents have been granted to the patentee, the enforcement action can be considered to be merely harassing if the patent is obviously not infringed or if the patent is invalid and in either case the patentee either knows or believes that to be the case. He acknowledged that it might be argued that duplication of patent proceedings takes on a harassing aspect, but, as he had already explained, enforcement must proceed, if it proceeds at all, on a country-by-country basis. As a result, he ruled that that not only was there no arguable case for saying that immediate loss was suffered by SanDisk in England and Wales as a result of the acts complained of, but the basis upon which it can be supposed that the conduct was abusive at all was very thin indeed. In any event, the appraisal of the abusive nature of litigation or other administrative action was surely for the relevant jurisdiction to decide. Article 31, Brussels Regulation and the interim relief sought. Art 31 states that “Application may be made to the courts of a Member State for such provisional, including protective, measures as may be available under the law of that State, even if, under this Regulation, the courts of another Member State have jurisdiction as to the substance of the matter."

Conclusion

Pumfrey J concluded from the case law that jurisdiction under Article 31 is to be exercised by the court best placed to be acquainted with and to understand the effects of the provisional and protective measures which are sought. Jurisdiction was conditional, inter alia, on the existence of a real connecting link between the subject-matter of the provisional or protective measures sought and the territorial jurisdiction of the Contracting State of the court before which those measures are sought. The nature of this connection could be purely physical – there were assets within the jurisdiction – or one of control – the person who was the subject of the order was within the jurisdiction and immediately susceptible to such coercive measures to secure compliance as might be necessary. In any event, Pumfrey J ruled that there was no such connection in the present case. He also noted that none of the defendants were UK companies, that there were no Border Detention Orders in the UK and that no proceedings other than the present set of patent infringement proceedings were on foot in the UK. The courts in the Members States where Border Detention Orders had been obtained were beyond doubt in the best position to decide what, if any, measures of warning it was appropriate for Sisvel to give SanDisk, and it was plain that these courts were live to the possibility of abuse of the various measures available to Sisvel for the purpose of enforcing the patents.

Art. 31 jurisdiction

Pumfrey J noted that the scope of the relief sought was not very wide and should not cause Sisvel any difficulties. However, since the existence of the jurisdiction itself depended upon the factors outlined above, he held that there was no Art 31 jurisdiction to grant the order sought. Pumfrey J also noted that the only part of this dispute which could conceivably support the grant of interlocutory relief was, for various reasons, unarguably bad. For this reason, and also because of the extraordinary delay which had already taken place both before the issue of this application and this hearing, he would in any event have refused any form of interim relief.

see on mp3 software, for alternative padding detection algorithm, dr. Otto Witte @ http://www.ipeg.com/ipeg_institute.php

IP Enforcement Directive and Gathering Evidence in Germany

On 26 February 2007, Judge Kühnen, one of the chairmen of the regional court in Düsseldorf for patent litigation, made a speech about legal instruments to obtain evidence in patent infringement cases in Germany. In front of a large attendance of patent experts he stressed that although the IP Enforcement Directive is formally not implemented into German law yet, its application is already ensured by existing provisions in German law.

Obtaining evidence in patent disputes is often difficult, especially if the infringing conduct is not public. According to German law, the general principle is that the defendant is under no obligation to disclose evidence to its disadvantage and German civil procedure law does not know a specific procedure such as "saisie contrefacon" in France or "search order" in UK. Nonetheless, the Düsseldorf courts supported by a decision of the Federal Court of Justice achieve a similar result in line with the IP Enforcement Directive by a specific interpretation of some general provisions of the German Civil Code and the German Civil Procedure Act. According to this interpretation the defendant or any third party in the possession of relevant documents or possibly infringing products can be obliged (1) to disclose them or (2) to tolerate an expert's examination. Important to mention is that the court can order such measures by a preliminary injunction without an oral hearing. In this regard, Judge Kühnen underlined that the requirements to obtain such an order are not high, in particular if the documents or products are relevant to support the claimants position. He proposed that patentees should always take these options into account when litigating in Germany.

Surely, such a decision is subject to the principle of proportionality. Especially confidentiality interests have to be considered at this point. Parties may have a protectable interest, that information material about their business remain confidential and are not disclosed to others, in particular not to competitors. In its recent decision, the Federal Court of Justice recognized this problem and offered a pragmatic solution: confidential parts of documents should be blacken or garbled. If the court orders the expert to enter the potential infringer's premises for carrying out an experts examination, data of such examination reports can be kept confidential if the results do not indicate a likelihood of patent infringement. Is this the case, only the court, the defendant and eventually the claimant's lawyers would be informed about the outcome of the examination, but not the claimant himself.

The recent decision of the German Federal Court of Justice and the legal practice of the regional courts in Düsseldorf show that although the IP Enforcement Directive is not formally implemented into German law yet, there are already efficient options to obtain evidence in patent cases. Though not fully identical to the legal instruments under French and English law, the German legal practice now provides a well equipped and similar instrument for claimants in such litigation. Especially the practice of the regional courts in Düsseldorf leads to a further strengthening of the position of patentees litigating in Germany.

Dr. Kaya Köklü , Simmons & Simmons Düsseldorf

You thought paying Sisvel ended your license concerns?

In earlier posts, I described the mp3[1] patent area as a minefield. One big landmine has been added to the terrain, the mp3 patents of the French company Alcatel. Last Friday Alcatel won a US Federal Court Jury verdict for US$ 1.52 billion damage award for patent infringement by Microsoft. The largest patent infringement damage award ever (the last record was the Kodak damage award of approx 900 million US$). According to reports, about half of the damage award is based on foreign sales under US patent law section 271(f).

At issue is the way the Windows Media Player software from Microsoft plays audio files using mp3 compression technology. If the ruling stands, hundreds of other companies that make products that play mp3 files, including portable players, computers and software, could also face demands to pay royalties to Alcatel. That will be most likely the next big thing for consumer electronics manufacturers: Alcatel knocking on the door of companies like LG, Samsung, SanDisk, NEC, Matsushita, Nokia, Huawei, ZTE to collect the next round of royalty fees for mp3 technology.

Those companies already had their share of unpleasant surprises when they were forced to pay Sisvel, Philips’ licensing arm, for Philip’s mp3 patents. Most of them paid the license fee, adding to the manufacturing costs of consumer electronics. That made Alcatel’s attorney tell the US jury: "We invented it and everybody else is making money off of it."

What's the point?
The point to make is this. MP3 technology has been already developed as early as 1987 (EUREKA project) by Fraunhofer Institute, Germany. Only much later, basically when Apple began to popularize the use of digital audio through its iPod around 2000, mp3 became ubiquitous, a tool to be used in any digital device. That popularity provoked companies like Philips, who were running short in licensing income from their previous IP cash cows, CD and DVD technology, to look in their portfolio for patent license potentials.

Philips, through their licensing arm Sisvel (Italy) and MPEG LA (US) used their mp3 patent portfolio (basically mp2, but asserted against mp3 players) to generate their next generation licensing income. The intellectual property was developed around 1993, after the main development in mp3 was started by Fraunhofer in the late 80’, and even after BBC Research experimented with digital transmission systems in as early as 1985. Philips’ main patent in the area, EP 0 402 973 and its US counterpart, granted in 1994 for the use of “padding bits” in a digital transmission system, EP 0 599 824 (for intensity stereo encoding and decoding), and EP 0 660 540 (for a decoder) became at the heart of an impressive licensing program. Fraunhofer already launched a less aggressive licensing program –together with Thomson of France- under their mp3 patents earlier.

What normally happens when a successful product enters the market happened in the service industry (in this case IP licensing) as well: other mp3 patent holders follow suit, lured into money making licensing programs similar to the Philips/Sisvel deals.

Alcatel now uses its mp3 patent to launch its licensing program. To convince the market they need a license under Alcatel patents as well, Alcatel did what most successful licensing strategies do: you take up against a giant first, gets him on his knees, get a court order against the alleged infringer and use that outcome against others to convince them they should not fight the patent but take a license (“the giant defender already lost, so what’s the point duplicating that?”). If the patent is also part of a standard and you can assert it as an “essential” patent, as Philips and Sisvel do, than your licensing program is complete. The license fee must be against RAND (reasonable and non discriminatory) conditions, but still, when hundreds of consumer electronics companies take the license, you are in for a more then lucrative license outcome.

What are the lessons to be learned from this?
First and foremost that companies ought to get their patent portfolios in “hot” technical areas ready in a very early stage and not wait until the technology gets mainstream. That requires foresight by management and a clear intellectual property strategy to acquire the necessary IP support for that technology in an early stage. It requires participation in standard setting procedures as well as actively managing the IP surrounding that technology. Although many companies may lack the necessary R&D output necessary to back up own IP, an alternative, much underused and undervalued, is to engage IP merchant bankers to allocate and acquire that necessary IP for them.


[1] popular digital audio encoding, lossy compression format, and algorithm, designed to greatly reduce the amount of data required to represent audio, yet still sound like a faithful reproduction of the original uncompressed audio to most listeners

The UK Blackberry case RIM vs Inpro

The UK Court of Appeal handed down a judgment on Wednesday 7 February in the UK "Blackberry"case, RIM v Inpro (Inpro is a technology licensing company or, some might say, a "troll"). As expected, the Court upheld the first instance decision revoking Inpro's European patent in the UK on the grounds of obviousness. Inpro's patent claimed a system for enabling web pages to be made available to hand-held computers via proxy servers based on (amongst other things) screen size and resolution, and utilisation of a single transfer file rather than multiple HTTP-type files. The obviousness of these claimed concepts was upheld over at least 3 pieces of prior art.There appears to be no grounds for appeal to the House of Lords. Unlike NTP in the US, Inpro will obtain no licensing income from RIM as a result of this litigation.

Negative Opinion on powers of EU member states to agree individually on EPLA

When the European Parliament debated the EPLA agreement in October 2006, a resolution was adopted whereby the Legal Service of the EP was asked “to provide an interim opinion on EU-related aspects of the possible conclusion of the EPLA by the Member States in the light of overlaps between the EPLA and the “acquis communautaire”.

"Acquis Communautaires" is a French term meaning, essentially, "the EU as it is" - in other words, the rights and obligations that EU countries share. The "acquis" includes all the EU's treaties and laws, declarations and resolutions, international agreements on EU affairs and the judgments given by the Court of Justice. It also includes action that EU governments take together in the area of "justice and home affairs" and on the Common Foreign and Security Policy.

On February 1, the Legal Service produced its opinion. It creates a new hurdle for EPLA to become reality anytime soon, as it concludes:

"1) The purpose of the Agreement on the establishment of a European patent litigation system ("EPLA") is to set up the European Patent Judiciary to settle litigation concerning the infringement and validity of European patents

2) Where common rules have been adopted, the Member States of the European Community no longer have the right, acting individually or even collectively, to undertake obligations with non-member countries which affect those rules

3) Directive 2004/48/EC harmonizes national legislation on the enforcement of intellectual property rights Not only would EPLA govern matters already dealt with by this Directive, but there are also contradictions between the two instruments on a number of matters

4) EPLA aims to lay down rules in certain areas governed by Regulation 44/200 I concerning jurisdiction and the recognition and enforcement of judgments. Notwithstanding the specific provisions of EPLA governing its relations with that Regulation, the conclusion of EPLA would affect the uniform and consistent application of the Community rules on jurisdiction and the recognition and the enforcement of judgments in civil and commercial matters

5) Compliance with Article 98[1] of EPLA would prima facie constitute a breach of Article 292 EC Treaty

6) It follows that the Community's competence is exclusive for the matters governed by EPLA and Member States therefore are not entitled on their own to conclude that Agreement."


[1] Article 98 of the EPLA agreement reads:
“Disputes between Contracting States. (1) Any dispute between Contracting States concerning the interpretation or application of this Agreement which is not settled by negotiation shall be submitted, at the request of one of the States concerned, to the Administrative Committee, which shall endeavor to bring about agreement between the States concerned. (2) If such agreement is not reached, any one of the States concerned may submit the dispute to the International Court of Justice for a binding decision."

Article 292 of the EC Treaty reads:
"Member States undertake not to submit a dispute concerning the interpretation or application of this Treaty to any method of settlement other than those provided for therein."

The Impediments of the Cannots

In 2007, no doubt, we will see an increasing interest in intellectual assets as the new asset class and what it means for innovation, for R&D, for IP professionals but also for those that treat any intellectual property issue as a not-so-high-on-my-priority-list. Why many treat IP like this is remarkable, given that licensing of patents and know how has become an important channel for diffusing knowledge. Well-functioning technology markets can improve the efficiency of innovation processes by facilitating exchanges of patented inventions. Yet there are many impediments to overcome before Intellectual property will be treated as an equal to other asset classes.

In the upcoming blogs, we would like to explore what impediments exist within corporations, organizations, universities and R&D to fully appreciate intellectual property and its importance for innovation (or, again impediment for innovation). What causes IP to be always so low on the corporate priority list. Often one hears what CAN NOT be done with patents and other intellectual property rights:

• IP cannot be valuated properly
  


• IP cannot assist in improving innovation
  


• IP cannot be consistently used as a collateral in financial transactions
  


• IP cannot be appreciated by banks and financial institutions as they do not trust IP enough
  


• IP cannot be visualized like other asset classes
  


• IP cannot be easily understood
  


• IP cannot be monetized
  


• IP cannot be seen as an effective mean to contribute to recoup R&D costs
  

As we cover these “cannots” in the coming months, this blogs hopes to provoke debate, invites ideas and suggestions, so as to make 2007 the year of acknowledgment that IP is the New Asset Class and should be treated that way.

First European IP merchant banking

On February 1, 2007 Europe got its first company that will primarily focus on acquisition (and divestiture, for that matter) of intellectual property (mostly patents). IP is a new and valuable asset class. IP merchant services (also “IP merchant banking”) are widely offered for all kind of asset classes, except, intellectual property. Similar to the more widely know asset classes as real estate, precious metals, currencies and stocks, there are other assets one can trade, like permits to emit carbon dioxide and other greenhouse gasses. There are markets for aircraft leases and to buy and sell energy. Yet the buying and selling of intellectual assets, like patents, R&D outputs and knowledge in general often happens mostly outside the public eye. There is no “market place”, at least not a visible or physical one for intellectaual assets. Recently, Ocean Tomo, a Chicago based, US company started patent auctions (see our earlier posts) soon to be followed by the first Europen patent auction by a german company, IPA, to be held in Munich (see upcoming IP events on the right side of this blog) .

The new IPEG company will primarily focus on assisting companies to acquire (or divest) intellectual assets like patents. Several trends, like shortening of time-to-marketand price erosion (mainly in the consumer electronics industry), have caused R&D managers to more closely look into their intellectual property portfolios to see how investment in patents can be organized in such a way that it contributes to the financing of R&D investments, to contribute to P&L, and to provide leverage in cross licensing deals.

UK and Dutch Court differ on validity of stents patent

On January 16th the UK Court of Appeal in Angiotech Pharm., Inc. v. Conor MedSystems Inc., [2007] EWCA Civ 5 (Jacob, L.J.) affirmed an invalidity ruling of critical claim 12 of Angiotech’s patent [2006] EWHC 260 (Pat) (Pumfrey, J.), while the very next day - in counterpart litigation – the The Hague District Court in The Netherlands upheld the same claim in Conor MedSystems Inc. v. Angiotech Pharm., Inc., No. 258022/HA ZA 06-261 (judgment January 17, 2007).

The patent is about taxol as the factor to be used in a drug eluting stent. Angiotech Pharmaceuticals Inc. is the owner together with the University of British Columbia of European patent 0706376 (or “Hunter”). Boston Scientific Corporation is the licensee in the field of the cardiovascular medicine under EP 376.

Beyond providing a comparative study of obviousness on counterpart patents where both courts were obviously aware of the progress of both actions, the British decision from one of the leading common law patent jurists provides an interesting comparative framework for the soon to be decided U.S. Supreme Court KSR decision which may occur in the February session of the Court that commences February 20, 2007.

The British decision makes special note of the counterpart Dutch proceedings and an earlier Dutch decision involving different parties. See ¶ 65- ¶ 68 (pp. 24-25). Lord Justice Jacob made the following observation:

“One can, of course, postulate a different policy under which a [patent] monopoly might make sense. There are old or obvious ideas which take a lot of work, expense and time to develop and turn into something practical and successful. Without the incentive of a monopoly, people may not do that work or spend the time and money. The Fosamax case, Teva v Gentili [2003] EWHC 5 (Patent), [2003] EWCA Civ 1545, is an example of an obvious invention which cost lots to bring to market. But patent law provided no protection for all that investment because the basic invention was obvious. The courts’ job is not, however, to uphold any claim to a monopoly for an idea which requires investment and risk to bring to market, only those for ideas which are new, non-obvious and enabled.”

The British opinion also has an extensive discussion of the law of obviousness, particularly beginning at ¶ 39-¶ 60 (pp. 18-23), including extensive comparative law discussions with a quotation from Circuit Judge Rich:

“Slight reflection suggests, we think, that there is usually an element of
‘obviousness to try’ in any research endeavour that is not undertaken with
complete blindness but rather with some semblance of a chance of success, and
that patentability determinations based on that as the test would not only be
contrary to statute but result in a marked deterioration of the whole patent
system as an incentive to invest in those efforts and attempts which go by the
name of ‘research’.”

Prof. Hal Wegner, Washington D.C

Patent prosecution file history can be used in infringement case

On December 22, 2006 the Dutch Supreme Court ruled in the case Dijkstra vs. Saier that the patent prosecution file history may be invoked to prevent the patentee disclaiming an aspect of his patent monopoly in order to get a patent granted, but then reclaiming it during infringement proceedings. In Anglo American practice this is known as file wrapper estoppel, “amendment estoppel”, or “argument estoppel”. This prevents a proprietor who has narrowed his claims during prosecution in order to meet requirements of patentability from then asserting the patent against any equivalent technologies falling within the scope of a surrendered territory. The latter type of estoppel (“argument estoppel”), is similar as amendment estoppel, in that where a patentee has made statements to the Patent Office (or in the Dijksta vs. Saier case) during prosecution - namely during the opposition proceedings before the European Patent Office - with regard to the scope of a claim, he cannot subsequently assert the patent against equivalent technology in contradiction of that assertion.

The Court thus affirmed its findings in the first case on the use of prosecution file history in a patent infringement case, Ciba-Geigy vs. Oté Optics (NJ 1995/391). In that case the Dutch Supreme Court ruled that the scope of protection of a patent has to be ascertained by considering four factors: (1) in interpreting the terms of the claims, the Court is to determine the essence of the invention; in other words, consider the inventive concept behind the wording of the claims; (2) this interpretation then needs to be corrected to give a reasonable degree of certainty for third parties, which may sometimes justify a restricted, literal interpretation of the wording of the claims; (3) the skilled person may - with restraint - use the prosecution history file for the purpose of claim interpretation; (4) and all other circumstances of the case are to be taken into account, including the possible 'breakthrough' nature of an invention (justifying a broader scope). When considering factors (2) and (3), poor drafting of the patent may be construed to be patentee's disadvantage. In subsequent decisions (including Impro vs. Liko, rendered three weeks after Amgen in the UK), the Netherlands Supreme Court has expressly confirmed this approach. The approach certainly appears to be more in line with the EPC requirements, although there is a lingering feeling amongst practitioners that, underlying the approach, the Supreme Court still continues to embrace its ‘essence of the invention’ approach.

In Van Bentum vs. Kool (HR 29 maart 2002, NJ 2002/530 m nt. ChG), a clear case of non-literal infringement, the Supreme Court has clarified the approach in Ciba-Geigy vs. Oté Optics such that the skilled person is only to assume that the patentee has surrendered part of the protection (e.g. beyond the literal wording of the claims but within the full extent of the invention) if there is ‘proper ground’ for the skilled person to do so. Such “proper ground” can for example be found in the patent description or the prosecution history file. This was confirmed in the case Impro vs. Liko, HR 12 November 2004, NJ 2004, 674).

The MedImmune US Supreme Court decision and European implications

Every once in a while this blog pays attention to patent cases outside Europe, if there is an impact for Europe and European patent pratise.

Surely this is the case for the decision by the US Supreme in MedImmune, Inc. v. Genentech, Inc., No. 05-608, U.S. (2007) (Scalia, J.). The issues at stake is whether a patent can be challenged by a licensee even after taking a license under that same license. The question is whether certain US law provisions require a patent licensee to terminate or be in breach of its licenseagreement before it can seek a declaratory judgment that the underlying patent is invalid, unenforceable, or not infringed.

Many jurisdictions in Europe, among which Germany, take the view that if and someone takes a license under a patent he cannot have it both ways: buying peace and freedom from suit under the patent he takes a license under and at the same time challenge the validity. In Europe, a clause in a license agreement outright forbidding the licensee to challenge the validity is a no-go under current competition law. However, challenging the patent by the licensee, even after taking a license, gives the licensor the right to terminate the license. By allowing this termination practise by German courts, the practical result is that no licensee who has "bought patent peace" will be able to effectively challenge the patent after taking the license. To me this seems much like the situation under the "old" US law, as developped by the Court of Appeal for the Federal Circuit ("CAFC"), the Federal appeals court for patents in the US. It also gives rise to the question how effective the anti competion porvision is that a no-challenge clause is illegal under EU competition law if practically the licensor can achieve this result by simply terminating the license agreement after the licensee has taken up the gauntlets against the licensor.

Interesting is Prof Hal Wegner's comments and summary on this recent decision, as can be seen in his post, as can be found on this blog under "US Patent Law Updates by Hal Wegner" (on the right side of this blog under "IP Presentations").

See also:
Lynn E. Eccleston, "MedImmune: The Practical Implications"