journal of the licensing executives society international

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DECEMBER 2013
JOURNAL
JOURNAL OF
OF THE
THE LICENSING
LICENSING EXECUTIVES
EXECUTIVES SOCIETY
SOCIETY INTERNATIONAL
INTERNATIONAL
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Volume XLVIII No. 4
LES NOUVELLES
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les Nouvelles
December 2013
Advancing the Business of Intellectual Property Globally
Where Are We Going in High Tech?
Assessing High Tech: Observations And Patterns
Annemarie Meike — Page 214
Trends And Opportunities In Semiconductor Licensing
Stefan Tamme, Stephen Schott, Dogan Gunes, Jeffrey Wallace,
Richard Boadway, Frank Razavi and Marc Pépin — Page 216
Trends And Observations In Software
Susan O. Goldsmith, Ian G. DiBernardo, Frank L. Bernstein, Scott Smedresman,
Michael Gulliford AND Richard P.W. Stobbe — Page 229
Trends In Mobile And Consumer Electronics
Ram Menon and Kevin Spivak — Page 238
Samsung And LG: From Also-Rans To Dominance In Consumer Electronics
Robert A. Myers— Page 246
Licensing-In From The First-To-File:
The Strategy Of Filing Early Concepts As Incomplete Patent Applications
James Anglehart — Page 253
Kirtsaeng v. Wiley Incentivizes Digital Distribution
Ilaria Maggioni — Page 260
Introduction: The Growing Risk From Australian IP Licensing
Amalia Stone — Page 263
Evolving Intellectual Property Regimes In Turkey And University Inventions:
The New Article 6 Of The Patent Law And Its Impact On University Inventions
Omer HIZIROGLU and Iclal ARGUC — Page 268
Phases Of Growth In University Technology Transfer
Tom Hockaday — Page 275
Recent U.S. Court Decisions And Developments Affecting Licensing
John Paul and Brian Kacedon — Page 280
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Assessing High Tech
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 of market success.
Hence the LES (USA & Canada) High Tech Sector
(HTS) has launched a multi-part series of papers on
trends in its various industrial subsectors. This is just
the beginning. We invite contributions internationally
to the next edition of this series.
A purpose of the Licensing Executives Society (LES)
is to turn our collective awareness into useful content
for our profession. It seeks connections and hidden
structures. LES has taken a broad view of “High
Tech,” beyond the traditional bounds of electronics,
software, and systems. The rationale is that in today’s
world, “High Tech” now extends to life science, agriculture, chemical and energy industries, and beyond.
Currently HTS recognizes technical subsector committees in: Aerospace & Transportation; Mobile &
Consumer Electronics; Clean Tech; Cloud, Content
& Communications (3CX); Gaming IP & Technology;
Nanotechnology; Semiconductors; and Software.
This is not a comprehensive representation of all
that could be considered High Tech. However, these
self-assembling groups of industries within High Tech
serve to identify and focus on internally important
market dynamics that would be lost when generalized
at sector scale. For example, the advance of technology has rendered digital content inextricable from
the manner in which it is transmitted and stored.
Similarly, telecommunications has taken on new
meanings, and “the cloud” which has been discussed
within many subsector committees, is spontaneously
generating an intellectual property life of its own.
Other technology convergences have led subsector
committees to collaborate with each other to discuss
topics of mutual interest. Such subsector level interaction has led to meaningful international outreach in
aerospace and transportation, software/copyright and
M&CE (mobile and consumer electronics). Increased
resolution also puts trends into context.
At a macro-scale, one can identify standard IP and
licensing issues that are recognized across industries
and sectors. However, at the more granular subsector
level, different issues emerge and dominate trends
at different times. An appealing and useful construct
for comparing and learning across such diversity was
presented in a Clean Tech panel discussion1 at the LES
(USA & Canada) 2012 Winter Meeting.2 Clean Tech
represents a broad enough spectrum of markets so
that three stages of market evolution emerge.
•Early Stage: behaviors focus on IP filings, “land-
grab” and M&A activity.
Questions that often surface are: IP filing strategy–What is being displaced ■ Annemarie Meike,
by the business? 2012-2013 LES (USA & Canada)
What could displace High Tech Sector Chair;
the business? What Lawrence Livermore
businesses control a National Laboratory,
key aspect of the Business Development Executive,
supply chain, price Livermore, CA,
point, take to mar-
ket strategy, and E-mail: [email protected]
traction gaining strategy?
•Emerging Markets Stage: behaviors such as
technology transfers and IP licensing can
be observed.
Questions that arise are: integration and
systems—What inventions will end up where? How will standardization impact product line
and IP portfolio? What are the licensing
opportunities and threats?
•Mainstream Marketing Stage: behaviors focus on IP licensing, IP sales, IP enforcement, and
NPE (non-practicing entity) activity.
Questions deal with: strengthening portfolios, aggregation of patents, NPE activity, and
focusing activity on sales versus enforcement.
The above stages can be discerned across sectors
and across national boundaries. For example, some
High Tech subsectors such as Semiconductors represent well-established industries, while others, such as
Nanotechnology are filled with start-up ventures that
1. Joe Jennings, Drakes Bay Company, LLC.
2. Anaheim, California http://www.lesusacanada.org/meetings/
prior-meetings/2012-winter-meeting.
December 2013
214
Assessing High Tech
are yet to establish the field. A final stage completes
the picture:
•Mature Market Stage: behaviors continue
to focus on IP licensing, IP sales, IP enforce ment and NPE activity. However, a decreasing number of companies share the market,
and similarly chances for successful start-up companies decrease.
Questions focus similarly to: the Main Stream Marketing Stage, strengthening portfolios, aggregation of patents, NPE activity, and
focusing activity on sales versus enforcement. However, the answers to these questions can shift with the realities of the Mature Market.
With such an evolutionary overlay one can compare trends between subsectors. As a consequence
it is possible not only to refine the ability to predict
change, but also to ask such questions as: How much
can one predict? How much is 20/20 hindsight? And,
how much depends on a submarine trend that we do
not recognize until after it passes? For example, what
about government policy that can affect a trend at any
stage? Or perhaps more subtly, can cultural trends
and choices be perceived? These articles represent
the sophisticated analysis of many people with their
fingers on the pulse of their industries. Perhaps looking through these many lenses will provide insight
and perspective. This first of a series of papers loosely
arranged around observations and trends in High Tech
provides an engrossing view:
•For Semiconductors, arguably the most mature
market of the three, a historical view leads to the best sense of future trends. In “Trends
and Opportunities in Semiconductor Licensing,” Stefan Tamme,3 Stephen Schott,4 Dogan
Gunes,5 Jeffrey Wallace,6 Richard Boadway,7
Frank Razavi,8 and Marc Pépin,9 discuss the
3. Rambus.
4. Schott Law Office.
5. Skyworks Solutions.
6. University of Illinois at Urbana-Champaign.
7. River Ventures.
8. Purdue Research Foundation.
9. Global Intellectual Strategies.
215
les Nouvelles
low incidence of start-up companies, merger
and acquisition activity, and the increasing
concentration of market share.
•The Mobile and Consumer Electronics Paper
“An Outline of Trends in Mobile and Consumer
Electronics,” by Ram Menon10 and Kevin Spivak11 emphasizes the consequence of the con-
vergence 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.
•The Software paper, “Trends and Observations
in Software,” by Susan O. Goldsmith,12 Ian G.
DiBernardo,13 Frank L. Bernstein,14 Scott
Smedresman,1 Michael Gulliford,15 Richard P.W. Stobbe16 focuses on patent eligibility laws, con-
trasting U.S. and Canada developments, and then on software applications on interactive screens, or “apps” and data privacy, two
increasingly important and mutually
intertwined subjects.
And finally,
•In “Samsung and LG: From Also-Rans to
Dominance in Consumer Electronics,”
Robert A. Myers17 takes a historical and govern-
ment policy view of two major Korean firms and discusses how several key decisions
made by the government influenced their
success.
The High Tech Sector Trends and Opportunities
Series presents diverse approaches and visions in that
time honored quest for meaningful market trends. It
offers an opportunity to develop and share our collective knowledge, which is greater than the sum of its
parts. Test your best ideas regarding trends in high tech
industries and contribute to the next of this series. ■
10. BlackBerry.
11. Greenblum & Bernstein, P.L.C.
12. Sorin Rand LLP.
13. Stroock & Stroock & Lavan LLP.
14. Kenyon & Kenyon LLP.
15. Sorin IP Group, LLC.
16. Field LLP.
17. Fairfield Resources International, Inc., and Columbia
Business School.
Semiconductor Licensing Trends
Trends And Opportunities In
Semiconductor Licensing
By Stefan Tamme, Stephen Schott, Dogan Gunes, Jeffrey Wallace,
Richard Boadway, Frank Razavi, and Marc Pépin
Summary
The following article examines the impact of current business, technology, and international trends
in the semiconductor industry, and anticipates future
challenges and opportunities for intellectual property
licensing in this market. The working team brought
to bear many decades of work experience in different parts of the semiconductor business to illustrate
relevant topics from a business, technical and legal
perspective, which are required disciplines to formulate and execute comprehensive intellectual property
strategies and execute successful licensing programs.
This paper does not attempt to describe every development in detail, but provides pointers for further study
by interested readers.
I. Semiconductor Industry and Business Trends
The Semiconductor Industry is Maturing
he semiconductor industry is a diverse industry that has grown tremendously over the
past several decades as integrated circuits (IC)
have penetrated virtually all aspects of people’s lives:
computers, communication systems, consumer goods,
and cars, to name a few. In the 1960s and 1970s, the
market was driven by military and mainframe applications. In the 1980s, the PC revolution took over, and
in the 1990s, the explosive growth of the Internet
and mobile communications became the market’s
main driving force. Since the year 2000, continued
expansion of all these markets, plus increasing penetration into other new product categories—such
as digital TVs, mobile phones, and all types of other
smart devices—have become new growth engines.
However, as the semiconductor industry exceeded
$300B in annual sales for the first time in 2010, the
rate of growth has slowed from high double digits in
the early years, to about 13 percent on average during
the 1990s and about 8 percent since 2000.1 While
new applications continue to arise and be addressed,
the market will continue to mature, and the growth
rate will slowly moderate toward world GDP growth,
T
1. WSTS statistics: http://www.wsts.org/Teaser-Left/HistoricalBillings-Report.
which has averaged 3.4
percent since 1980.2 The
semiconductor industry
remains a market of discrete sub-markets though,
where some market segments still show high
growth, but at a macro
level this is offset by lower
growth in other segments.
For example, ICs for smart
phones are still showing
strong growth rates, while
the desktop PC market has
been stagnating. Other
segments, such as the
DRAM memory market,
have shown significant cyclicality in the past, alternating between periods of
strong positive and negative growth. This dynamic
has been based on the undifferentiated, commodity nature of the DRAM
products, combined with
cycles of demand for increased DR AM in PCs
and other devices. Due to
these factors, the number
of DRAM producers has
been reduced through
M&A transactions and
business exits from about
20 in 19953 to only three
2. IMF World Economic
Outlook database: http://
www.imf.org/external/pubs/
ft/weo/2013/01/weodata/index.aspx.
3. A Study of the DR AM
industr y: http://dspace.
mit.edu/bitstream/handle/1721.1/59138/659514510.
pdf.
■ Stefan Tamme,
Rambus Inc.,
Vice President of IP Strategy,
Sunnyvale, CA E-mail: [email protected]
■ Stephen Schott,
Schott Law Office,
Attorney,
San Mateo, CA
E-mail: [email protected]
■ Dogan Gunes,
Skyworks Solutions, Inc.,
Sr. Manager,
Woburn, MA
E-mail: dogan.gunes@
skyworksinc.com
■ Jeffrey Wallace,
University of Illinois,
Senior Technology Manager,
Urbana, IL
■ Richard Boadway,
River Ventures Inc.,
President and CEO,
Brockville, Ontario, Canada
E-mail: rboadway@
riverventures.ca
■ Frank Razavi,
Purdue Research Foundation/
Office of Technology
Commercialization,
Senior Project and
Licensing Manager,
West Lafayette, IN
■ Marc Pépin,
Global Intellectual Strategies,
Director, IP and Engineering,
Stittsville, ON, Canada
December 2013
216
majors by 2013 (Samsung, SK
Hynix, and Micron). In such competitive segments and other such
commodity markets, chip suppliers often lack pricing power,
resulting in pressure to reduce
their costs and those of their
suppliers, including IP suppliers
and licensors.
Semiconductor companies are
classified as either integrated
device manufacturers (IDM)
that own their own fabrication
facilities (e.g. Intel, Samsung),
or as fabless semiconductor
companies (e.g. Qualcomm,
Broadcom, nVidia) that contract
their device manufacturing to
third party foundries like TSMC
or Global Foundries. Many former IDM’s such as Freescale,
STMicroelectronics, Fujitsu,
and others have been adopting
a hybrid model—often referred
to as “fab-lite”—over the past
decade. In this model, companies maintain some of their
own fabs, often for specialty
devices, while they outsource
much of their advanced process
capacity needs to foundries. In
addition to semiconductor ICs
or components, related markets
in the semiconductor ecosystem
include foundry fabrication services, processing equipment,
IC design tools, semiconductor
intellectual property, and semiconductor materials.
Figures 1 to 3 show breakdowns of semiconductor sales
by end application, geographic
region, and device type respectively as reported by IHS/ISuppli.4
Figure 2 shows that 57 percent
of the roughly $300B in semiconductor sales were first made
to companies in the Asia-Pacific
region, excluding Japan. The vast
4. IHS iSuppli Competitive Landscaping Tool, 2013.
217
les Nouvelles
Figure 1. Major Markets By Application4
Automotive
and Industrial
18%
Data Processing
(Computing)
34%
Consumer
Electronics
Categories
18%
Wired & Wireless
Communication
30%
Figure 2. Regional Sales Distribution4
EMEA
11%
Asia-Pacific
57%
Japan
15%
Americas
17%
Figure 3. Major Device Categories4
Analog IC
15%
Memory IC
17%
Microcomponent IC
20%
Optical
Semiconductor
10%
Discretes,
Sensors &
Actuators
9%
Logic IC
29%
majority of these sales were in the People’s Republic
of China (PRC), where a large part of electronics
manufacturing is done by so called contract manufacturing companies like Hon-Hai (Foxconn), Flextronics,
and others.
Starting a new semiconductor company, even in a
fabless model, has become increasingly expensive,
with typical investments now ranging between 10
million to well over 100 million dollars,5 depending on
the complexity of the chip development and the nature of its end market. At the same time, the number
of successful semiconductor IPOs in the United States
and EMEA has been shrinking since the late 1990s,
while there has been higher activity in Asia, mostly
in China and Taiwan. The pie chart in Figure 4 shows
that only 6 percent of semiconductor exits between
Figure 4. Semiconductor Exits
From 2002-20116
Out of Business
19%
IPO
6%
M&A
75%
2002 and 2011 were IPOs, while the vast majority
of exits (75 percent) were mergers or acquisitions.
M&A activity has partly compensated for less buoyant public markets, but M&A valuations are generally
lower than public market valuations. This, in combination with the increasing capital requirements
for start-ups, has caused a reduction in (venture)
capital investments into early-stage semiconductor
companies as shown in Figure 5, and has resulted
in fewer startups being created. Over the long term,
this dynamic will result in more concentration of
chip supply.
While the two largest semiconductor companies,8
Intel and Samsung, have grown market share over the
past two decades, the top 20 chip makers’ combined
market share has actually declined from about 75
percent in 1990 to 65 percent by 2010.9 While this
trend, at a first glance, appears counter intuitive, it
was at least, in part, enabled by the emergence of
the foundry and fabless semiconductor model during
the 1990s, which permitted new entrants into the
field without the need for massive capital spending to
build their own fabrication facilities. Going forward
however, consolidation is expected to continue, as
fewer new companies enter the market and existing
ones get acquired by larger established companies.
To mitigate the immense costs of developing and
introducing new technologies, even for established
5. How to raise seed investments for a hardware startup:
http://sktainnopartners.com/how-to-raise-seed-investments-fora-hardware-startup/.
6. Pagemill Partners Study in GSA Capital Lite Business Model:
http://www.gsaglobal.org/wp-content/uploads/2012/10/Capital_Lite_Report_2012.pdf.
Figure 5. Early Stage Semiconductor Venture Funding
7. GSA Capital Lite
Business Model: http://
From 2000-20117
www.gsaglobal.org/wp$492
content/uploads/2012/10/
$500
$466
Capital_Lite_ReTotal Series A/Seed Funding
port_2012.pdf.
$397
$400
8. Top 25 2012 Semiconductor Supplier Ranking: http://www.icinsights.
$300
com/news/bulletins/
PurePlay-Foundries-And$208 $197
$183 $190
Fabless-Suppliers-Are$200
$153
Star-Performers-In-Top25-2012-Semiconductor$100
$78
Supplier-Ranking/.
9. The Semiconduc$25 $14
$21
tor Top 20: http://www.
$0
lithoguru.com/scientist/
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
SemiTop20.html.
$M
(n = 487)
December 2013
218
semiconductor companies, various consortia have
grown in importance. Consortia established to share
the cost of technology developments such as EUV,
(extreme ultraviolet) 450mm wafers, or sub 10nm
process technologies, including the Center for
Semiconductor Research at the State University of
New York, ITRI in Taiwan, IMEC in Belgium, and the
Institute of Microelectronics in Singapore. It remains
to be seen whether such consortia will be able to
effectively sustain the level of innovation required
to propel the industry forward and to provide the
requisite intellectual property for the successful
development of new market opportunities.
Intellectual Property (IP) Licensing in the Semiconductor Business
With millions or even billions of transistors, today’s
ICs often integrate dozens of different functions, and
practice tens of thousands of patented inventions.
The value of this IP needs to be priced into the cost
of goods for these devices, but the low target price
points for consumer devices and the number of functions embodied, can cause pressure on royalty rates
and the license fees customers are willing and able
to pay for each function.
Licensing has a long tradition in the semiconductor business, including process/technology licensing, patent licensing—which can include cross
licensing—and more recently, design IP licensing.
This dynamic has been driven by the complexity of
chip development and manufacture and the myriad
talents and inputs required to make increasingly
complex semiconductors. As chip designs continue
to grow in complexity, the need for licensing IP
to address capability gaps and accelerate time-tomarket will be reinforced.
In addition to third-party design IP suppliers (e.g.
ARM, Synopsys, etc.), several semiconductor companies have also started licensing their design IP
to others for integration into SoC (system on chip)
designs as more functions that used to be standalone
chips become features in those devices. Examples
include various types of interface functions, such as
Ethernet, HDMI, or even complex blocks like processor cores and GPUs offered by IBM and nVidia. This
licensing approach can yield cashflow to offset other
development and licensing costs for the licensor
semiconductor company.
Design IP business models generally use some
combination of upfront license fees, re-use fees, support fees, and running royalties to generate revenues
back to the licensor. The market size for design IP is
largely based on the number of design starts, license
219
les Nouvelles
fees associated with these new designs, and the unit
volumes for each design start, which drive royalty
revenues. The total design IP market in 2012 was
about $2B,10 or less than 1 percent of total semiconductor sales, but it is projected to continue growing
faster than the industry, at over 10 percent CAGR
(compound annual growth rate). Larger licensing
companies are trying to consolidate more IP blocks
into their product lines to provide more of a one-stop
shop and capture a larger share of the market.
Over time, many semiconductor companies
have started patent licensing campaigns to license
or cross-license certain competitors, and also to
monetize their substantial IP holdings by licensing
companies in adjacent markets. Some early pioneers
in this field include Texas Instruments11 and IBM,12
who both generated billions of dollars from licensing their vast patent portfolios to competitors. More
recent examples of companies pursuing this strategy
include Qualcomm, Micron, and Sandisk who have
embarked on licensing programs or have partnered
with licensing companies to monetize their extensive
patent portfolios.
Based on a more sophisticated assessment of how
much IP is ‘enough’ for the defense of their core products and markets, divestitures of non-core patents
have created an active patent market over the past
decade.13 This market was further fueled by a number
of semiconductor startups from the late 1990s and
early 2000s which have begun selling or licensing
their patent portfolios to liquidate the business or to
generate cash for expansion. These trends will likely
continue for a while, but with fewer startups being
created, activity of that type will likely be decreasing
over time.
With more companies monetizing their patent
portfolios, a stagnating number of larger potential
licensees, and a trend toward weaker patent enforcement, at least in the United States, there is price
pressure on royalty rates and license fees. While
the chip suppliers may continue to consolidate to
improve their competitive position in terms of cost
10. Synopsys, Imagination make gains in semi IP ranking; http://
www.eetimes.com/document.asp?doc_id=1280825.
11. Patents, Standards, and Licensing Working (Well) Together
at Texas Instruments; http://www2.aipla.org/html/mw/2010/
papers/Bassuk_Paper.pdf.
12. IBM’s Patent/Licensing Connection; http://www.industryweek.com/product-development/ibms-patentlicensing-connection.
13. Turning the Spotlight on the Brokered Patent Market;
http://www.iam-magazine.com/blog/detail.aspx?g=1e58b1bc0a55-4ce6-8741-b874495dd9e2.
of manufacture and negotiating position with their
end customers, such consolidation will likely have an
adverse impact on IP suppliers and licensors of these
chip suppliers as their potential licensees are gaining
more buying power.
II. Semiconductor Technology Trends
The semiconductor industry is one of the most
knowledge and technology intensive industries.14
Some of the vast array of technological developments
in this field, and their impact on industry licensing
activity, will be highlighted here. As more complex
technologies and designs are developed, which generally generate more patented inventions, the result
is the generation of more patent licensing activity.
Figure 6 displays a count of U.S. patents issued with
class codes16 representative of the semiconductor industry. The class codes represent the patents’ primary
technology areas determined by the PTO. One significant observation is the near 50 percent jump in issued
patents between 2009 and 2010. While the PTO has
reduced the average pendency period from about
38 months in 2009 to about 30 months today, the
continued high numbers in 2011 and 2012 indicate
that the patent issuance jump was not caused solely
by the PTO’s efficiency improvements, but also from
sustained patenting activity in the technology space.
One might surmise from Figure 6 that the industry
has increased its focus on obtaining patents and has
acknowledged the business value of the intellectual
property produced.
For conventional silicon-based semiconductor ICs,
the industry is still driving to increase performance
while reducing cost/size/power consumption of the
transistor at the rate established by Moore’s law.17
However, the implementation of the latest semiconductor process nodes at 20 nm and below requires
the investment of billions of dollars due to rising fab
costs, which makes it the domain of large established
companies with the ability, resources, and scale to
conduct the necessary development. While it is unlikely that start-ups will secure the resources to fund
implementation of process nodes beyond 20 nm,
their efforts could still result in the next incremental
improvement or an entirely disruptive technology.
The transition to mass production will likely require
some type of partnership and transfer of IP between
the inventors and large companies.
Disruptive Opportunities Through Revolutionary
Technologies Still Exist
Key technology is being developed in support of
next generation silicon technologies and the developers usually strive to protect their inventions by obtaining relevant IP rights. Expected to be commercialized
after 2015, some significant developments include
the move to extreme ultraviolet (EUV) providing
lithography at 13.5 nm wavelength, and the move to
Figure 6. U.S. Patents by Class Code Issued from 2002-201215
30000
25000
257
438
20000
713
15000
712
711
10000
710
5000
709
708
0
2002
2003
2004
2005
2006
2007
14. NSF: Science and Engineering Indicators, Ch. 4: http://
www.nsf.gov/statistics/seind12/.
15. Source: U.S.P.T.O.
2008
2009
2010
2011
2012
16. 257 - relates to Active Solid State Devices; 438–Semiconductor Device Manufacturing; 709–Electrical Computers and
Digital Processing Systems.
17. Moore’s Law and Intel Innovation: http://www.intel.com/
content/www/us/en/history/museum-gordon-moore-law.html.
December 2013
220
450 mm wafers. Another significant development,
which started over a decade ago and has begun entering mass production recently, is the transition to 3D
transistors (e.g. FinFETs) from planar CMOS devices
which will be necessary for future process nodes.
These disruptive technologies, along with earlier
innovations such as Hi-K metal gate (HKMG) technology, are extending the continuous scaling of devices
following Moore’s law. FinFET manufacturing is now
being more broadly adopted for devices like mobile
application processors and is likely to result in major
changes to the process flow, equipment, electronic
design automation, IP, and design methodology.
In the memory market, primarily consisting of
DRAM and Flash memory, major technology transitions are on the horizon as scaling of legacy technologies is becoming harder and harder. New memory
technologies, expected to enable continued density
increases and cost reductions, include 3D Flash, Resistive RAM, and STT-MRAM. Other technologies, such
as phase change memory, ferromagnetic memory,
and optical storage are under development as well.
As evident, there are many technology options and
there are no clear winners at this point.
Another innovative segment that has shown significant growth is micro electro-mechanical systems
(MEMS) technology for applications such as gyroscopes, accelerometers, microphones, and pressure
sensors. MEMS can be built using many of the same
established silicon processes, which have been an
area of active patenting during the last decade. The
MEMS sector grew another 10 percent to become
an $11B business in 2012 and analysts expect a 1213 percent CAGR through 2018 to create a $22.5B
MEMS market.18
Beyond silicon, there are significant IP developments in organic semiconductors (OTFTs, OLEDs, and
polymer solar cells), LEDs for lighting applications,
solar PV cells, gallium nitride (GaN) and silicon carbide (SiC for high power applications, and GaN for
RF and mm-wave applications). Additional examples
of technologies still under development include graphene transistors and amorphous silicon transistors
(on flexible plastic substrates). Nanostructures may
find their way into semiconductors in the form of
carbon-nanotubes, quantum dots, and nano-wires.
New application areas include millimeter-wave
imaging, 60 GHz RF transceivers, very low power
circuits for portable and battery-less systems (such as
sensors), and energy harvesting circuits. Performance
18. Yole Developement: http://www.yole.fr/.
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les Nouvelles
per watt is starting to replace performance per dollar
as a key metric in many applications.
In the device fabrication and packaging area, the
trend is to achieve further size reductions by 2.5D
and 3D stacking, thru silicon vias (TSV), silicon
interposers, and wafer level chip scale packaging.
Integration of multifunctional devices enabled by 3D
interconnect is expected to bring increased performance and functionality along with cost reductions. In
addition, the SEMATECH Forum has been promoting
3D Interconnect Standards Development. As a result,
adoption of 3D integration is rapidly spreading to a
wide variety of companies across the semiconductor
and MEMS industries. The massive investments required to commercialize new disruptive technologies
opens up opportunities for licensing of technology
and patented inventions in these new areas.
Implications for Licensing
Specialization/Outsourcing of IP Blocks
Modern system-on-chips (SoCs) and field-programmable gate array (FPGA) devices allow, and for many
applications require, the integration of many system
functions, combined with substantial amounts of
firmware, embedded software, and even complete
operating systems. Developing this functionality all
from scratch is too costly and slow even for companies that have all the necessary skillsets in-house.
As stated earlier, this force has helped to create the
$2B+ design intellectual property market over the
past two decades and is continuing to drive it. Design IP allows SoC designs to be constructed using
pre-qualified hardware blocks known as intellectual
property IP cores and software modules known as
software IP blocks. Negotiating and managing licensing agreements with the various IP suppliers
and tracking the IP usage and compliance with such
licenses across large corporations with many end
products, represents a formidable challenge. As a
result, novel IP licensing schemes are being proposed.
In one example, a pay-per-use licensing scheme is
proposed for IP cores in which a third party runs a
metering service to monitor use.19
For third party patent holders that seek to monetize
their patented technologies, this provides a range of
licensing opportunities. For example, if a particular
IP core is implemented in a number of SoCs from different suppliers, a third party patent holder may have
19. Roel Maes, Dries Schellenkens, and Ingrid Verbauwhede,
“A Pay-per-Use Licensing Scheme for Hardware IP Cores in Recent
SRAM-Based FPGAs”, IEEE Transaction On Information Forensics
And Security, Vol. 7, No. 1, February 2012.
a choice as to whether to sign a licensing agreement
with the IP core provider, with each SoC supplier integrating the core, or even with the system companies
using the SoCs with those cores in their products.
Choosing the optimal licensing strategy depends on a
number of factors, including the geographic coverage
of the patents relative to the location where products
are manufactured, sold, or used.
Detectability of Patented Technologies
The detection of patented technologies in the semiconductor industry poses ever-increasing challenges.
The shrinking feature sizes of modern semiconductor
fabrication processes require more advanced analysis
tools circuit detection/extraction. As feature sizes are
reaching the limits of existing imaging capabilities,
new technologies will have to be developed. In addition, the distance between the different layers of
metallization is also decreasing, thereby driving the
need for more complex delayering techniques for
exposing the various layers of circuitry within an IC.
As more SoC functionality is being implemented in
software, software reverse engineering is now commonly used to investigate the functionality of SoCs.
Software reverse engineering adds yet another level
of complexity and also requires a completely different skill set for analysis. Public access to decompiled
code is rare and in most cases requires code extraction from a working device, decompression, and then
decompiling of the code. This entire process is complex and costly with a substantial risk of failure. The
level of risk is exacerbated by the fact that protective
measures, such as removal of ASCII characters in the
code and encryption, are increasingly used to prevent
reverse engineering of the software.
The added challenges in detecting patented technologies have a direct impact on licensing activities
and on the value of patent portfolios. Patents claiming subject matter that is too difficult and/or costprohibitive to detect are much less attractive and may
not provide much licensing value.
Patent Protection for Software
With the increasing shift of development effort
from hardware to software, appropriate software protection must become an integral part of IP strategies.
When considering licensing opportunities, a major
concern is the ability to enforce IP rights. While still
evolving, the current level of patent protection for
software varies from one country to another, and in
some cases protection is limited or not available at all.
This limits the ability to enforce software IP and can
diminish the relative IP protection of semiconductor
devices that have substantial software content.
Ecosystem Complexities
The semiconductor supply chain ecosystem is complex and globally dispersed and many semiconductor
companies serve the same system customers and use
the same suppliers for their manufacturing, equipment, tools, and design IP needs. These relationships
add complexity to licensing agreements as companies
desire to gain license coverage that includes their suppliers, customers, and affiliates. As a result, licenses
or covenants may be granted to cover intermediaries (e.g. retailers, wholesalers, distributors, dealers,
resellers, importers, and exporters) or suppliers (e.g.
foundries, contractors, assembly and test facilities
etc.). Any licensor needs to carefully consider the
trade-offs of providing upstream and downstream
coverage in a license agreement to not inadvertently
license much more of the market than intended or
meaning within the economic parameters of a given
transaction. A further complicating factor is the
evolving law around patent exhaustion, injunctions,
and other rights and remedies. This makes patent
licensing complex and mandates detailed planning
for any licensing campaign to make sure that it can
accomplish its strategic objectives.
Managing the Cost of IP
Methods used to manage intellectual property and
its related costs vary widely. Considering the investment in research to develop a technology and the
costs of securing and maintaining patents in multiple
countries, it becomes critical for companies to gain
a deep understanding of their patent portfolio, and
how it generates business value. It is not uncommon
for a single patent family with multiple international
filings and continuations to generate lifetime costs
well in excess of $100,000. Selecting and executing
appropriate international filing strategies, aligned
with business objectives, thus is another critical element of IP strategies.
IP-savvy companies manage their portfolios by
understanding the technical and business value of
individual patents, building portfolios around strategic
technologies and searching externally for complementary IP to strengthen these portfolios. Such a
portfolio approach entails the scoring of patents on
various criteria to identify the patents that are most
valuable and relevant to the company’s business
strategy. High-value patents with high relevance to
business objectives should be actively developed in
all important geographic markets. Patents that do not
align with business objectives can be sold or abanDecember 2013
222
doned to manage maintenance expenses. There are a
number of tools and consultants that have developed
proprietary patent valuation methods, which can help
evaluate and classify a portfolio. These techniques
can also be used to identify areas of vulnerability,
where identified third party patents may be acquired
to fill the gaps.
Since the invention of the transistor and later, the
integrated circuit, the United States has been a leader
in semiconductor development and manufacturing.
Over time however, other regions such as Europe,
Japan, and more recently, Taiwan, South Korea, and
China have developed substantial semiconductor
design and manufacturing capabilities. While India
has attracted many IC design centers, the country has
not yet developed a significant manufacturing base
for either semiconductors or electronics.
The broad availability of the process of discovery,
well-developed statutes and jurisprudence, comparatively high damages awards, and a large market
make the United States a favored country for patent
enforcement. However, the changing geographic
distribution and economics of semiconductor device
manufacturing, packaging and their assembly into
finished products has had and will continue to have
substantial impacts on the protection and enforcement strategies for semiconductor related intellectual
property rights.
There are significant differences in the legal systems and IP protections afforded in other countries
compared to the United States, including licensing
and enforcement regulations and practices. If a
company intends to engage in licensing outside of
the United States, it has to ensure that the licensed
technologies are backed up by patents, trademarks,
copyrights, and applicable intellectual/industrial
property rights in these countries.
While the United States is still one of the major
electronics markets, its relative importance decreases
as emerging markets continue to expand. The trend
towards non-U.S. manufacturing of semiconductors
and electronics also continues. Although there have
been a few instances of electronic product assembly
moving back the United States,20 the vast majority of
such assembly remains outside the country. A typical
IC might be manufactured in a foundry in Taiwan or
the People’s Republic of China, packaged in Malaysia,
the Philippines, or the PRC and then assembled into
a final product in the PRC. Such semiconductors may
then enter the United States incorporated into such a
final product or perhaps never even enter the country.
Although a lawsuit in a U.S. district court or a proceeding before the U.S. International Trade Commission against the importer of the final product may be
legally possible, for patents owned by a semiconductor manufacturer, the importer’s market power as a
potential or actual customer may make such enforcement economically impossible. Consequently, assertion against a competitor in other countries would be
preferable, but not always practical, given the wide
range of IP protection available around the world. A
growing number of semiconductor manufacturers
and research entities have the economic power to
insist that the laws of their own country govern any
agreement, and that any dispute be resolved before
the courts of their country.
Entities whose business consists of asserting patents may not be subject to the market power of an
importer. However, some entities license know-how
or non-patent intellectual property in addition to
patents. For those “value-added” licensing entities,
the party to whom they can add the greatest value
may be semiconductor manufacturers. This may make
importers a less appropriate licensee. Naturally, this
will depend, among other factors, on the relative
value of the patents versus know-how and other
While these economic and geographic trends may
not be specific to semiconductors, they are certainly
highly relevant here due to the complex global nature
of the semiconductor supply and value chains. These
trends increase the importance of filing, licensing, and
enforcing intellectual property in key semiconductor
manufacturing and consuming countries. As intellectual property rights in other countries have grown in
importance, companies need to actively monitor the
legal and regulatory developments in those regions.
Below is a summary of a number of recent changes
in key countries collected from practitioners in each
of the markets.
People’s Republic of China (PRC)
From 2003 to 2011, China’s share of the worldwide semiconductor consumption market has grown
from less than 19 percent to over 47 percent.21 This
makes the country the biggest geographic market.
20. Moto X: First U.S.-Made Smartphone Just as Cheap to
Produce as Others: http://techland.time.com/2013/08/28/motox-first-u-s-made-smartphone-just-as-cheap-to-produce-as-others/.
21. China’s impact on the semiconductor industry: 2012
update: http://www.pwc.com/gx/en/technology/chinas-impact-onsemiconductor-industry/download-the-report.jhtml.
III. International Trends
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While over 60 percent of these semiconductors are
still assembled into goods for export, the domestic
market has been rapidly growing at a CAGR of 24
percent since 2003 and it now represents about 20
percent of the worldwide total. Even though there
are now over 500 indigenous IC design companies
in China (about 30 of which are publicly listed) the
market is still dominated by global players led by Intel
and Samsung. Combined, the top-10 international
suppliers represent about 45 percent of the market
and no Chinese company has made it into the top-35
suppliers yet.
In the PRC, a recent trend has been toward bolstering the interim remedies available to patent owners
and the evidence preservation mechanisms. Matthew
Laight, who practices in Bird & Bird LLP’s Hong Kong
office, indicated that the 2012 amendments to the
Civil Procedure Law allow a party to seek an evidence
or asset preservation order before filing a court action.
The pre-action evidence preservation order is useful
where there is a risk that evidence may be destroyed
if the defendant becomes aware of the lawsuit. The
pre-action asset preservation order may be important
in dealing with smaller entities and in the case of
counterfeit or diverted semiconductor products. It
may be less important against large alleged infringers
with substantial assets. Laight also reported that the
2010 amendments to the Patent Law clarified the
procedure for the grant of a preliminary injunction,
and codified evidence preservation laws. He believes
that these amendments will benefit patent owners.
Due to the lack of discovery in PRC civil litigation,
damages can be difficult to prove, and damages fixed
by statute are often awarded. These statutory damages have been doubled, from RMB 500,000 to RMB
1,000,000 (about US$ 150,000). Although likely to
be viewed as a step in the right direction by patent
owners, the impact of such increased damages on
semiconductor IP strategy may be limited.
Taiwan
TSMC remains the major force in the Taiwanese
semiconductor industry, and combined with UMC
represents over 50 percent of the global foundry market that is fueling fabless semiconductor companies.
While TSMC and MediaTek, the largest domestic fabless company, have shown significant growth recently,
other parts of the Taiwanese industry have struggled,
exemplified by the dwindling number of local DRAM
companies, and some of the smaller fabless companies
with a focus on the PC market.22 However, Taiwan’s
semiconductor industry remains well positioned to
benefit from the continued expansion of the Chinese
market; its broad established base of design houses
and manufacturing companies; and the level of government support.
In Taiwan, the low enforcement success rate of
patent owners since the 2008 creation of a dedicated
IP court may be addressed by a complete revision
of patent law taking effect in 2013 and new regulations from the Taiwan Intellectual Property Office.
Yu-Lan Kuo of Formosa Transnational Attorneys at
Law reports that patent owners will be permitted to
correct claims by incorporating features described in
the specification to clarify the meaning of the existing
claims. This opportunity to alter claims in the midst
of a court proceeding could substantially increase a
patent owner’s odds of successful enforcement. Up
until this year, if a single claim in a Taiwan patent was
found to be invalid during an invalidation action, the
entire patent became invalid. This was changed so
that only the invalidated claims are invalidated. In
addition, corrections to translation errors are now
permitted. This will be of particular importance to
the owners of patents first filed in another language.
All of these changes should serve to improve patent owners’ odds of successful enforcement. These
changes seem likely to make it more attractive to
file and enforce patents in Taiwan for all intellectual
property owners, including those working in semiconductor technology. Kuo also commented that Taiwan’s
semiconductor companies have become much more
sophisticated in dealing with intellectual property,
adding that they have become much more proactive
in patent filing, prosecution, and licensing.
It is interesting to note that Taiwan is undertaking
reforms to address the issue of poorly translated patents. Because of the economics of patent prosecution
and the tight budget to which prosecutors are often
held, it is highly likely that translation errors are a
common problem in other countries as well. Any
entity filing for patents, including any entity filing
for semiconductor patents, would be well served to
monitor the quality of its foreign filings.
Japan
In the late 1980s, half of the top-20 semiconductor
companies were Japanese, including the top three
in 1989.23 Fast forward to the year 2012, and only
five Japanese companies are listed in the top-20, the
22. Taiwan semiconductor industry undergoing structural
shift: http://www.pwc.tw/en/challenges/industry-trends/industrytrends-20120924.jhtml.
23. Semiconductor sales leaders by year: http://en.wikipedia.
org/wiki/Semiconductor_sales_leaders_by_year.
December 2013
224
biggest in fifth rank. This illustrates the tremendous
change and consolidation the industry has gone
through over the past two decades, a process that is
still in play, as evidenced by the recent bankruptcy
of Elpida Memory and near-bankruptcy of Renesas
Electronics. The industry has been slowly adopting
fab-lite business models and several companies have
also started monetizing their substantial IP portfolios through licensing campaigns, partnerships,
and divestitures. As manufacturing of consumer
electronics, mobile phones, and PCs has shifted to
China, Japanese companies faced tough competition
from Taiwanese and South Korean semiconductor
competitors. As a result, Japanese chip makers have
been looking for new markets better aligned with
their domestic industrial base, such as automotive,
industrial, medical, and new energy applications.
Some have argued that litigation in Japan is biased
against the patent holder.24 Possibly in response to
this perception, Japan amended a number of aspects
of its patent law effective in 2012.25 Previously, if a
non-exclusive license to patents was not registered
with the Japan Patent Office (JPO), the license would
not have effect against third parties. If a patent covered by an unregistered license was transferred to a
third party, the third party could assert that patent
against the licensee. JPO reported that the system for
registering non-exclusive licenses had been “scarcely
utilized,” and under the amendments, non-exclusive
patent licenses will now remain in effect even without
registration. However, the laws for the registration of
exclusive licenses remained unchanged.
Other changes include a new procedure for transferring patents granted to one party to a joint development
agreement to the other party, when that agreement
provided it should be granted to the other party. Previously, there was a procedure to invalidate a patent
granted to a party who was not the rightful owner, but
not to transfer it. In addition, there were a number of
procedural changes to coordinate the invalidity proceedings that could take place before the JPO and the
trial court. Among other things, these changes were
intended to prevent the patent owner from transferring a proceeding back and forth between the JPO and
the IP High Court.
Although not specific to semiconductors, these
changes may be of particular importance to the
semiconductor industry. The increased protection
24. “Is Japan a Hostile Environment for Patents,” by Masahiro
Samejima, Intellectual Asset Management, January/February
2010.
25. Japan Patent Office Annual Report 2011, Part 2.
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les Nouvelles
for licensees may make licensing in IP blocks more
attractive, and strengthen trends for the outsourcing
of those IP blocks that are already present in the semiconductor industry. Because of the increasing expense
of developing IP for semiconductors, the existence of
laws providing for the transfer of IP developed under
a JDA (joint development agreement) to the rightful
owner may make such collaboration more attractive.
South Korea
While there are a number of smaller semiconductor companies, the South Korean semiconductor
industry26 today is dominated by Samsung Electronics
and SK Hynix, which ranked number two and seven
globally in 2012. These two companies represent
over 60 percent of the global DRAM and over 40
percent of the NAND Flash market and are expected
to maintain their strengths in these areas while they
branch out into other segments, such as the foundry
services offered by Samsung. Korea has long been a
net payer of IP-related royalties,27 and is attempting
to shrink this imbalance through the creation of a
government backed patent investment fund28 that
would aggregate and license patents to international
companies. This idea has also gained traction in Japan,
Taiwan, China, and also in Europe.29
According to Byeongmo Lee, a South Korean patent
attorney, the Korea Fair Trade Commission published
the“Review Guidelines on Unfair Intellectual Property
Rights” in 2010. These guidelines make the following
practices, amongst others, subject to possible review:
markedly unreasonable royalty rates; refusal to license; limits on trade volume, territory, or duration
and other restrictions that are unjust; limits on who
can purchase a licensed good; and restrictions on the
price of licensed products. Lee also reported that in
in 2012 the Korea Fair Trade Commission published
the “Guidelines for Fair Patent License Agreements,”
under which practices subject to review included
imposition of disadvantageous terms on a party to a
license that had an inferior bargaining position and
causing a party to a license to misunderstand the
license terms or the relevant patent. Lee indicated
that the Korea Fair Trade Commission also issued the
26. Korea Semiconductor Industry Association: http://www.
ksia.or.kr.
27. Royalties Paid Overseas Hit Record High: http://www.koreatimes.co.kr/www/news/biz/2013/05/123_55104.html.
28. Inside Asia’s patent funds, Intellectual Asset Management
Magazine, July/August 2012.
29. New rivals for Apple and Google in patent fight: South
Korea and France: http://www.mercurynews.com/ci_22831761/
new-rivals-apple-and-google-patent-fight-south.
“Model Operating Guidelines for Standard Setting
Organizations for Voluntary Compliance” with the
Monopoly Regulation and Fair Trade Act in 2012.
The publication of these three guidelines may be a
move toward a more proactive role for the Fair Trade
Commission. Semiconductor companies licensing
intellectual property that may have an impact on the
Korean market should consider these guidelines in
drafting their agreements. David Hunjoon Kim, from
the YOU ME Patent & Law Firm located in Seoul,
Korea, reports that he has observed an increase in
the selection of arbitration as a means for dispute
resolution. This may make settling any dispute arising under a license quicker and more efficient. In
addition, Kim reports that from the beginning of this
year, eight Korean banks have begun allowing their
borrowers to use intellectual property portfolios as
collateral, which may provide a new source of financing for entities whose primary asset is intellectual
property. Because of this change, Mr. Kim expects
to see an increase in the purchase and licensing of
intellectual property portfolios. The impact of this
trend on semiconductor enforcement and licensing
may be to give smaller companies financing to help
realize the value of their intellectual property.
Europe
The most visible semiconductor European semiconductor companies are STMicrolectronics, Infineon
Technologies, and NXP Semiconductors, who have
lost 30 percent global market share in the last six
years,30 not counting the 2009 demise of Qimonda,
Europe’s last remaining DRAM company. However,
there are a number of smaller specialized firms addressing markets like automotive, industrial, and
medical applications with diverse products such as
power electronics, analog ICs, and MEMS products.
Global Foundries maintains the biggest foundry
operation in Europe, but there are several other
smaller mixed signal foundries as well, such as X-fab,
LFoundry, and others.31
Europe increasingly builds on the (IPR) Enforcement Directive 2004/48/EC according to Alexander
Duisberg of Bird & Bird LLP’s Munich office. He
indicates that although the (IPR) Enforcement Directive’s full impact is difficult to assess at this time,
the frequency at which the procedural changes have
been implemented in the civil law country courts is
increasing. The (IPR) Enforcement Directive, once the
court practice has been more broadly developed, has
30. Profile: European semiconductor industry: Public Service
Review: Europe, Issue 25, 16 April 2013.
31. Semiconductor Industry Leaders Contemplate Region’s
Future at ISS Europe 2013: http://www.semi.org/en/node/44966.
the potential to cause European countries to provide
more timely court proceedings for IP cases, stronger
IP enforcement, and to increase IP owner’s access to
evidence of infringement and to interlocutory injunctions. Duisberg also indicated that he has observed
a gradual increase in the use of alternative dispute
resolution in contracts, including license agreements.
Duisberg stated that in his experience, “mediation has
proven a very powerful tool in many situations where
parties have reached a dead-lock and are hesitant to
go to court.”
Strategic Recommendations
Many of the economic and legal changes described
for countries in the Asia Pacific region have the potential to strengthen the enforceability of intellectual
property rights. In response to this trend, and the
continuing growth of semiconductor-related activities
in Asia, companies should consider increasing their
patent filings in that region. The graph in Figure 7
would suggest that such a shift is already taking place.
In preparing the chart, data on patent applications
by technology was not available from WIPO. Patent
application publications were selected instead of
patent grants, because applications may be abandoned after publication but before grant, therefore
patent application publication data provides a better
measure of patent filing activity. As is clear from the
graph, the rate of semiconductor patent application
publication has grown at the most rapid pace in the
PRC and Korea. Although the United States has seen
a four-fold increase in semiconductor patent application publication, and has the second highest rate, its
rate of increase has not been nearly as great as for the
PRC and Korea. Although the growth rate of patents
from Europe and Japan has not kept pace with those
of the PRC or Korea, or even the United States, Japan
remains the country in which the most semiconductor patent applications are published.
As always, the relative proportions of patent filings
or acquisitions in each country must be customized
for the particular needs of the patent filer or acquirer.
The usual issues of limited budgets, investment time
frame, and location of manufacturers and markets
continue to apply. However, it has become even
more important for patent owners to anticipate
against whom and where they are likely to enforce
their patents. A non-practicing entity may decide
on a different proportion between United States
and international patent filings than a semiconductor manufacturer whose customers import finished
products into the country.
Business
All indications are that the amount of licensing in
December 2013
226
The development of industry-sponsored patent
aggregators is an example
of a preemptive method
for mitigation of assertion
risks. Traditional patent
pools like MPEG-LA have
been complemented by
joint licensing programs,
and more recently, by
subscription based or
one-by-one aggregation
schemes such as provided by RPX or AST.
Companies should take
a more proactive stance
to secure key IP that
can provide bargaining
power during licensing
negotiations and thus
help to counter assertion
2007
2009
2011
risks and ensure freedom
to operate.
Korea
US
Technology
With the increased
patenting activity, organizations will have a challenge carving out attractive technology positions
solely using internal resources and will increasingly
need to work with third parties to gain access to
developing technologies. Concepts like “Open
Innovation”33 and “Want-Find-Get-Manage”34 are
approaches that may be useful to organizations for
leveraging third party technologies as part of their
innovation process. Patent search tools continue to
develop and enable analysts to understand and identify organizations that are leading the development
of certain technologies, as well as identify potential
competitors or licensees. Improved search tools
combined with patent valuation techniques allow
the mining of patent portfolios of national labs and
universities. Companies can use that data to license
patents that complement internal innovation or to
engage organizations which may be practicing a
particular technology.
Figure 7. Published Semiconductor Patent Applications
By Country From 1997-201132
Semiconductor Patent Applications Published
25000
20000
15000
10000
5000
0
1997
1999
2001
2003
2005
Year
PRC
Europe
Japan
the semiconductor industry will likely continue to
increase over time, driven by the growing complexity of the chips and embedded software, rising R&D
costs, the greater number of parties who seek to extract licensing revenues from such chip development
activity, as well as the growing sophistication of the
licensing parties in extracting returns from their IP.
As the semiconductor industry’s growth keeps
moderating toward world GDP growth rates, there
will be downward pressure on royalty rates or settlement amounts associated with the licensing or crosslicensing of IP. For patent licensing, this trend could
further accelerate if the enforcement regime in the
United States or other major geographies such as the
European union would be weakened. To counter this
type of price erosion, licensing companies need to
improve their offerings and provide more IP value to
their customers, whether in form of broader design
IP offerings or larger and stronger patent portfolios.
Regulatory changes, judicial action, and economic
shifts in manufacturing centers—relative to product
end markets—may impact the way licenses are being
structured, but the fundamental need for licensing
at all levels will remain. In addition, having the appropriate infrastructure to ensure compliance with
such license agreements will continue to be important
for any semiconductor company.
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les Nouvelles
32. World Intellectual Property Organization IP Statistics Data
Center: http://ipstatsdb.wipo.org/ipstatv2/ipstats/patentsSearch;
data obtained on September 15, 2013.
33. http://www.openinnovation.net/.
34. Good Practices In Open Innovation: http://www.iriweb.org/
Public_Site/RTM/free/Good_Practices_in_Open_Innovation.aspx.
With a shift towards a greater proportion of software contributing to functionality of end products,
it is becoming more important to consider where
technology will be implemented and used given the
different level of software patent protection from
one country to another. This can have an important
impact on the decision to patent and license certain
technologies. However, with software playing an increasingly important role, the IP community will be
asked to provide adequate IP protection for software
related inventions. As such, patenting software related inventions continues to be important and should
be considered as part of comprehensive IP strategies.
Although detectability of patented technology in the
semiconductor industry is increasingly challenging,
new methodologies are continually being developed
and the testing and the reverse engineering industry
continues to flourish. However, it is important to understand and consider the level of difficulty and cost
involved in detecting evidence-of-use for technologies
when pursuing patent protection.
International
With the changes that are occurring in the geographic distribution of semiconductor activity, as well
as frequent changes in U.S. and international patent
law, portfolio development strategies need to be
continuously evaluated and refined to effectively support business objectives. Working with experienced
practitioners in each relevant region for business
and legal advice will inform decision making and allow companies to capitalize on opportunities while
minimizing risks.
With any cross-border licensing transaction, the parties need to agree on what country’s laws will control
and how and where any disputes will be resolved.
Even if the parties agree on U.S. law with disputes
resolved within the country’s court system, pitfalls
may remain. Treaties providing for enforcement of
foreign court decisions do not exist among all countries, and even where they exist, in some countries
the provisions of those treaties may be enforced in
unexpected ways.
As more large companies in the semiconductor
value chain are scattered around the globe, bigger
players gain leverage to demand that the laws and
courts of their own country govern licensing transactions. Companies without experienced countryspecific in-house legal and IP resources should seek
the advice of local counsel. Although obtaining such
advice could add to the cost and time required for a
transaction, it can help avoid unexpected outcomes
in the future.
Conclusions
The semiconductor industry has a long history of
IP licensing activities and remains a hotbed of activity. This article has outlined some of the challenges
and opportunities facing companies in this evolving
landscape. Exciting opportunities result from the
increased integration of more functionality into and
on top of semiconductor products, e.g. in the form
of firmware or software. New disruptive technologies
continue to emerge, along with new geographic markets and companies based in those markets. Changes
in the economic, legislative and political environment
have to be carefully tracked given the importance
of IP and the long lead times to develop high-value
portfolios. Companies both large and small have
to constantly evaluate and adjust their intellectual
property strategies to stay relevant and benefit from
these developments. ■
December 2013
228
Software Trends
By Susan O. Goldsmith, Ian G. DiBernardo, Frank L. Bernstein, Scott Smedresman,
Michael Gulliford, Richard P.W. Stobbe
I. Introduction and Background
E
ven for those who experienced IBM 80 column
punch card formats, it is becoming difficult to
remember the days before smartphones and
tablet computers. In fact the iPhone® launched in
2007 and the iPad® just a few years ago in 2010,
each taking advantage of new hardware capabilities
and spawning an entire new industry.
We only thought software was ubiquitous before
2007. Now we find software applications (“apps”) on
the interactive screens, which are rapidly replacing
passive view-only sets. Current trends in the software
industry are heavy development of apps, and related
implementations of cloud computing, particularly for
smartphones and other mobile devices. This paper
does not attempt to address all aspects of this evolution in detail, but focuses on a few critical items of
case law and its implications for software app technology intellectual property and licensing. We conclude
this paper by itemizing four trends that we feel are
key to this arena.
Apps are being developed and used in a variety of
ways and across industries, not merely in consumerfacing applications, but also in industry and retail.
These trends are driven, at least in part, by:
1. The desire for increased productivity and flex-
ibility, particularly in light of the still strug gling economy;
2. Response to our mobile society and workforce;
3. Low cost of entry and availability of enabling technology (e.g., mobile communications
with robust broadband service);
4. Value of collected data and concommittant privacy issues;
5. Value for brand owners; and
6. Changes in patent monetization.
Here we focus on a few of these issues, namely
uncertainty and risk related to the current state of
case law and privacy.
A. Uncertainty/Risks to the Industry
1. United States: Navigating the Software Patent
Eligibility Minefield in the U.S.: From Alappat to
Ultramercial II
The landscape for patent-eligible software patents
229
les Nouvelles
under 35 U.S.C. § 101 has changed dramatically since
the Federal Circuit’s 1994 decision, In re Alappat.1 In
Alappat, arguably the Federal Circuit’s broadest holding, the court stated that a general purpose computer,
programmed with specific software, becomes a special purpose computer, a new machine for purposes of
patentability.2 Patent practitioners were able to write
their specifications and claims fairly straightforwardly
for years after Alappat.
More recently, however, a number of Federal Circuit decisions, with Supreme Court decisions, such
as In re Bilski, sprinkled among them, have obscured
the seemingly clean, broad definition of software
patent eligibility. Patent practitioners have had to
consider algorithm-related issues that seem to periodically disappear, then reappear. Litigants asserting
software patents that have issued during this time
must navigate the same issues.
The Federal Circuit’s recent en banc decision, CLS
Bank Int’l v. Alice Corp. Pty,3 did not help as much as
hoped. Judge Lourie, who wrote the plurality opinion
in CLS Bank, stated in that opinion that reliance on
Alappat was a fallacy.4 The Federal Circuit’s ruling in
Ultramercial, Inc. v. Hulu LLC (Ultramercial II)5 suggests a potential return to Alappat, if only because
Chief Judge Rader, who cited Alappat in a partial
concurrence in CLS Bank, relied on Alappat in the
unanimous holding in Ultramercial II.6
The above recent decisions require patent practitioners to flesh out computerized methods and
hardware, both in the claims and specification, to a
substantial extent. Algorithm-based steps or elements
need to be ever more detailed. Ultimately, this may
be the appropriate approach from the standpoint
1. 33 F.3d 1526 (Fed. Cir. 1994).
2. Id. at 1545.
3. 2013 WL 1920941 (Fed. Cir. 2013).
4. 2013 WL 1920941 at 20.
5. 2013 WL 3111303 (Fed. Cir. 2013) (Re-issued opinion;
original at 657 F.3d 1323 (Fed. Cir. 2011), vacated, 132 S. Ct.
2431 (2012)).
6. Judge Lourie, also on the panel in Ultramercial II, wrote a
concurring opinion, but squared the decision with his own approach rather than endorse Alappat.
Software Trends
of novelty and non-obviousness. However, despite
judicial protestations to the contrary, the path to
obtaining and enforcing software patents must go
through patent-eligibility.
In CLS Bank, the Federal Circuit held method, computer readable medium, and system claims, relating to
a computerized trading platform used for conducting
financial transactions, to be patent-ineligible. Judge
Lourie’s plurality opinion, which received the most
support, stated that none of the claims in question
should be patent-eligible because the claims—even
the system claims—were co-extensive with the
abstract idea they embodied.7 The Lourie plurality
reasoned that, while claims to computers and computer hardware were and still are eligible for patent
protection, “in current times, we are not examining
the patent eligibility of computers or computer hardware as such, but computers that have routinely been
adapted by software consisting of abstract ideas, and
claimed as such, to do all sorts of tasks that formerly
were performed by humans.”8 Ultimately, in holding
the claims not to be patent-eligible, Judge Lourie cited
the broad functional nature of the claims, even of the
system claims, and their “striking level of generality.”9
In their partial concurring opinion, Chief Judge
Rader and Judge Moore agreed that the computer
readable medium and method claims should not be
patent-eligible, focusing on whether the claimed steps
were “inherently” required in a way “that anyone
wanting to use the natural law would necessarily
use those steps.”10 In contrast, the judges, citing
Alappat with approval, said that the system claims
should be patent-eligible, stating that the reasoning
in Alappat was completely consistent with Supreme
Court precedent.11
In Ultramercial II, the Federal Circuit held method
claims relating to the use of advertising as currency
in media content websites to be patent-eligible. Although the method claims did not recite structure,
the court found that many of the steps would require
intricate and complex computer programming since
they required implementation through a cyber environment.12 The court referred to Alappat’s discussion of programming of a general purpose computer
to create, in effect, a special purpose computer to
7. Id.
8. Id. at 19.
9. Id. at 18.
10. Id. at 37-39.
11. Id. at 43.
12. 2013 WL 3111303 at 15.
perform particular functions.13 Moreover, although
the patent in question did not specify a particular
mechanism for delivering media content (e.g. FTP,
email or real-time streaming) this breadth and lack of
specificity did not render the claimed subject matter
impermissibly abstract.14 Accordingly, the court held
the claims at issue to be patent-eligible.
In a concurring opinion, Judge Lourie did not address the applicability of Alappat. Instead, going back
to the plurality opinion in CLS Bank, the judge noted
that the patent in question had, at its heart, the
■ Susan O. Goldsmith,
abstract idea of using adSorinRand LLP
vertising as an exchange
Partner
or currency.15 However,
East Brunswick, NJ
Judge Lourie also noted
E-mail: sgoldsmith@
that additional limitasorinrand.com
tions in the claims, reciting how that idea is
■ Ian G. DiBernardo,
implemented, “narrow,
Strook & Strook & Lavan LLP, confine, or otherwise
Partner, IP and
tie down the claim so
Technology Group,
that, in practical terms,
New York, NY
it does not cover the full
abstract idea itself.” 16
■ Frank L. Bernstein,
On this basis, Judge
Kenyon
& Kenyon LLP
Lourie was able to join
Partner
in the holding.
Palo Alto, CA, USA
These two recent deE-mail: [email protected]
cisions leave the Fed■ Scott Smedresman,
eral Circuit’s reliance
SorinRand LLP,
on Alappat unclear, but
Senior Associate,
appear to provide parEast Brunswick, NJ
allel paths to subject
E-mail: ssmedresman@
matter eligibility, even
sorinrand.com
of method claims in
software patents. Guid■ Michael Gulliford,
ance still is lacking as
Soryn IP Group LLC,
to how detailed a claim
CEO/Managing Member,
must be, relative to the
Jersey City, NJ
abstract idea it employs
E-mail: mgulliford@sorynipgroup
or implements, in order
■ Richard P.W. Stobbe,
to define patent eligible
Field
Law,
subject matter, or to difSenior
Associate,
ferentiate helpfully beCalgary,
Alberta, Canada
tween meaningful and
13. Id. at 13.
14. Id. at 16.
15. Id. at 18.
16. Id.
December 2013
230
Software Trends
meaningless hardware limitations, whether express
or inherent. The court in CLS Bank does not indicate
the type or number of substantive limitations in a
patent claim which would add “significantly more” to
a basic principle or abstract idea, so that the claim is
patent-eligible.17 Instead, the court only indicates that
an implied requirement for computer implementation
does not suffice.18 The court in Ultramercial II admits
that it does not define the level of programming
complexity necessary for a computer-implemented
method to be patent-eligible.19
CLS Bank and Ultramercial II are difficult to reconcile. On the one hand, CLS Bank seems to say that
sufficiently detailed algorithmic recitation in claims
can be enough for patent-eligibility. On the other
hand, Ultramercial II seems to say that extensive requirement, express or implied, for computer involvement can be enough. Overall, though, the safest way
of achieving patent eligibility seems to be through
increased algorithmic specificity in the claims, with
corresponding ties to hardware in the specification.
In the claims, reciting algorithms in more detail will
be more likely to provide the “meaningful limitations”
that the Federal Circuit seems to be looking for. In
the specification, strong ties between the inventive
concept and hardware can help counter the notion
that a claim preempts an abstract idea. In this regard,
a common theme among the several opinions in CLS
Bank was reliance on the specification.
Although certain judicial opinions conflate patent
eligibility under 35 U.S.C. § 101 with patentability
under 35 U.S.C. §§ 102 and 103, others maintain
them as separate hurdles to patent validity. The latter approach would seemingly make software patents
subject to the same statutory scheme as other patents
and would likely simplify the analysis for both patent
applicants and patent litigants—both patentees and
accused infringers. Regardless of which approach
ultimately prevails, patent practitioners would be
prudent to include relatively more algorithmic detail
in the claims.
2. Canada: A Developing Standard for Software
Patent Eligibility
In Canada, patent eligibility of software is also
in need of some clarification. On the face of it,
computer-implemented inventions are patent eligible
according to the Canadian Federal Court of Appeal in
17. 2013 WL 1920941 at 8.
18. Id. at 15.
19. 2013 WL 3111303 at 16.
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les Nouvelles
Canada (Attorney General) v. Amazon.com, Inc.20 and
according to the Commissioner’s published guidance
on this topic. In the Amazon decision, the Court
sent Amazon’s application for its “one-click method
of Internet shopping” back to the Commissioner for
examination based on purposive construction. The
Commissioner had flatly refused to grant patents for
any business methods; however, there is no Canadian
jurisprudence that determines conclusively that a
business method is patent ineligible. The Court in
Amazon also clarified that business methods may be
patentable, though a “mere scientific principle or
abstract theorem” cannot be the subject of a patent
under the Patent Act (Canada). Lastly, Amazon clarified that there is no strict physicality requirement,
but an applicant must show something more than
mere “practical application” for the application to
be granted.
A revised version of Chapter 16 of the Manual
of Patent Office Practice (MOPOP)21 dealing with
Computer-Implemented Inventions was published in
October 2010, before the guidance of the Court in
Amazon. In March 2013, the Canadian Patent Office
published an Examination Practice Notice relating to
Computer-Implemented Inventions22 to incorporate
the Amazon principles. The guidelines contained in
the Practice Notice do guide examiners but it is safe
to say that the guidelines are not universally accepted
by practitioners as a correct or complete statement
of the current law in this area. Therefore, applicants
in Canada should exercise caution when relying on
MOPOP Chapter 16 and the latest examination
guidelines. For example, the guidelines state that “A
good indicator that a claim is directed to statutory
subject-matter is that it provides a technical solution to a technical problem.” However, the Court in
Amazon rejected the “technological nature” test as
being an “unhelpful distraction.”
In conclusion, applicants in Canada should bear in
mind not only the published examination guidelines
of the Patent Office, but also the Court’s directions
in Amazon, as well as the Supreme Court of Canada
decisions relating to purposive patent construction in
20. 2011 FCA 328.
21. The Manual of Patent Office Practice (MOPOP) is a guide
published by the Canadian Patent Office for patent examiners,
applicants, and practitioners regarding the examination practices
of the office.
22. PN 2013-03 [http://www.cipo.ic.gc.ca/eic/site/cipointernetinternetopic.nsf/vwapj/PN2013-03-eng.pdf/$file/PN2013-03-eng.
pdf ].
Software Trends
Free World Trust v. Électro-Santé Inc.23 and Whirlpool
Corp. v. Camco Inc.24
Computer-implemented and software inventions
face hurdles—and some uncertainty—outside the
U.S. and Canada, too. For example, technical character is a fundamental requirement for the grant of
a European patent. To have technical character an
invention generally must relate to a technical field,
be concerned with a technical problem and have
technical features. “Technicality” in this context is not
always clear, clouding the issue of patent-eligibility.
Exacerbating the problem with the uncertainty surrounding technicality, when assessing inventive step,
the European Patent Office applies the so-called
“problem-solution” approach. In general, this approach involves identifying each of the technical and
non-technical features of a claim. Only those features
that contribute to the technical character of the claim,
either independently or in combination with other
features, are considered when assessing the technical
solution of a technical problem for inventive step.
In the face of this global uncertainty, one thing
is certain: applicants filing for patent protection in
multiple jurisdictions must strive to harmonize the
various standards, preparing both robust disclosures
and claims specifically tailored to address each of
the standards.
B. Mobile App Data Privacy
1. A Look at Canada
In Canada, privacy is governed by a matrix of
Federal and Provincial laws which govern personal
information handling by government, business,
non-profits as well as sector-specific laws applicable
to personal health information. Generally speaking,
the enforcement process is complaints-driven. Affected individuals may initiate complaints with one
of the Provincial or Federal privacy commissioners.
However, as in the United States, mobile app privacy
issues are drawing the attention of regulators who
are actively pursuing violators through their own investigative powers, rather than waiting for a specific
consumer complaint to be filed.
Earlier this year, the Office of the Privacy Commissioner of Canada initiated a complaint against
WhatsApp Inc. (“WhatsApp”), a California corporation, pursuant to subsection 11(2) of the Personal
23. 2000 SCC 66 (CanLII), 2000 SCC 66, [2000] 2 S.C.R.
1024.
24. 2000 SCC 67 (CanLII), 2000 SCC 67, [2000] 2 S.C.R.
1067.
Information Protection and Electronic Documents
Act (Canada). The resulting report25 shows the extent
to which the Comissioner’s office cooperated with
Dutch privacy authorities to investigate the owner of
the popular “WhatsApp Messenger,” a cloud-based
cross-platform mobile messaging app allowing the exchange of messages for iOS, Blackberry, and Android
platforms. The Commissioner in Canada launched
an exhaustive review of the privacy aspects of this
service including the company’s information-handling
procedures, the collection of more information than
was necessary, the potential for privacy breaches, and
the lack of encryption. WhatsApp did work with the
Commissioner’s office to resolve many of the privacy
concerns. This investigation also shows the extent
to which international privacy watchdogs will work
together to launch an investigation that concerns personal information that crosses international borders.
Last year, the Office of the Information and Privacy
Commissioner of Alberta, the Federal Privacy Commissioner and the Office of the Information and
Privacy Commissioner for British Columbia jointly
issued a publication directed to mobile app developers
entitled “Seizing Opportunity: Good Privacy Practices for Developing Mobile Apps” (October 2012).26
Earlier in 2013, a group of 19 privacy enforcement
authorities—including the Privacy Commissioner
of Canada—engaged in a so-called “international
Internet Privacy Sweep” to assess the transparency
and clarity of online privacy policies. In its published
findings, the Commissioner did not shy away from
shaming Canadian companies whose online privacy
policies fell below the Commissioner’s standards.
These developments signal a continuing trend towards regulators’ interest and vigilance in this area.
2. A Look at the United States
Unlike Canada and many other jurisdictions, the
United States has no comprehensive national data
privacy laws applicable to businesses.27 National
industry-specific regulations exist, but there is no
omnibus federal law governing how businesses collect, secure and use data, or even on how businesses
tell the public about their data practices.
25. PIPEDA Report of Findings #2013-001 [ http://www.priv.
gc.ca/cf-dc/2013/2013_001_0115_e.asp ].
26. [http://www.priv.gc.ca/information/pub/gd_app_201210_e.
pdf ].
27. Laws and regulations applicable to government law
enforcement and other agencies are outside the scope of this
white paper.
December 2013
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Software Trends
Historically, this minimally regulated area did not
attract much public attention. If they exist at all, the
privacy policies currently on mobile apps and websites
are commonly presented in dense legal jargon. Without regulations or even clear guidelines, presentation
of these policies has become fragmented, and they
are challenging for consumers to understand.
With the rise of the app economy and public attention being drawn to the increased prominence
of mobile apps in everyday life, things have started
to change. The U.S. privacy regulations that are on
the books, such as the California Online Privacy
Protection Act (CalOPPA), are starting to be enforced
by more aggressive regulators. New legislation governing data collection by apps is being debated in
Congress. As discussed below, identifying this as an
area of need, stakeholders in the app marketplace, in
cooperation with federal policymakers, have released
a set of voluntary guidelines intended to simplify app
privacy policies and provide clearer, more understandable disclosures to consumers.
As the app economy continues to rapidly expand,
this trend in increased attention to mobile privacy is
only likely to increase.
a.) Privacy Regulations and Practices in the
United States
National privacy regulations applicable to
companies in the United States are generally
industry-specific. The Children’s Online Privacy
Protection Act of 1998 (COPPA) governs how
firms may collect, use and share data on children
under the age of 13. The Health Insurance Portability and Accountability Act of 1996 (HIPPA)
governs medical data. The Gramm-Leach Bliley
Act governs financial institutions. Although
some regulations require firms to publish these
policies in public documents, the scope of these
laws are limited, and apply only to a small set
of mobile apps.
Aside from this patchwork of federal laws, state
privacy laws also govern how apps collect and
use data. Effective as of July 1, 2004, CalOPPA
requires the operator of an online business that
collects personal information about California
residents to post a privacy policy documenting
certain information collection practices.
The federal laws are limited in applicability,
and while CalOPPA applies to a broad array of
websites and apps, a study conducted by TRUSTe
found that only 5 percent of apps actually had
privacy policies.
b.) Increased Enforcement and Attention
Despite this historic lack of attention in the
233
les Nouvelles
U.S. to privacy regulations, things have been
changing. Consumer awareness of data collection practices has increased, and the attention
of regulators has followed.
Although the law passed in California in 2003,
CalOPPA had not been widely enforced. However, commencing in 2012, the California
Attorney General Kamala Harris has taken an
active role in raising the prominence of mobile
privacy issues and in enforcing California’s law.
In February of 2012, Ms. Harris’ office announced that it had reached an agreement with
the major app marketplaces—Apple, Google,
Amazon, Hewlett-Packard, Research in Motion
(Blackberry) and Microsoft—to include a requirement on their platforms for apps to submit
or identify their privacy policies. The platforms
also agreed to facilitate reports from users on
apps that do not identify their privacy policies,
and to implement a process for the platforms
to respond to instances of non-compliance.
Facebook subsequently agreed to this program.
In June of 2012, Attorney General Harris announced the creation of a Privacy and Enforcement Protection Unit within the Attorney
General’s office, and in October of 2012 letters
were sent to approximately 100 top apps, alleging non-compliance with CalOPPA. Under the
letter, the companies were given 30 days to
conspicuously post an app privacy policy. Then,
in December of 2012, the Attorney General
filed a lawsuit against Delta Airlines (Delta),
claiming that Delta’s app did not comply with
CalOPPA, and that Delta failed to remedy this
non-compliance after receipt of a warning letter.
The case against Delta was ultimately dismissed,
as the court held that the application of CalOPPA’s to the airline industry was pre-empted by
federal aviation laws; however, the lawsuit was
the first ever brought by the Attorney General
under CalOPPA, and signals a greater attention
by that office to software privacy issues.
The New Jersey Attorney General has also
become involved in enforcing software privacy,
recently reaching a one million dollar settlement in a case against PulsePoint for allegedly
circumventing controls and placing cookies on
users’ computers after the users had elected to
block cookies in their browser’s settings.
In addition to state-level enforcement, the Federal Trade Commission (FTC) has been similarly
active in policing software privacy. Over the
Software Trends
years, the FTC has brought numerous cases for
violations of COPPA, some resulting in heavy
fines. However, the FTC has expanded its role
beyond enforcing industr y specific regulations and into the broader mobile software
marketplace.
The FTC is charged with protecting consumers against deceptive acts and practices, and it
has used this authority to take an active role
in bringing legal action against firms that did
not live up to their own privacy policies, based
on the claim that such a failure is a deceptive
consumer practice. Companies like Google,
Facebook and Path have faced lawsuits from the
FTC, all based on the claim that these companies
did not follow their own privacy policies.
In addition to these enforcement actions, the
FTC has issued guidelines for mobile app developers on how to address the FTC’s privacy
concerns. In March of 2012, the FTC released
a report titled “Protecting Consumer Privacy in
an Era of Rapid Change: Recommendations for
Businesses and Policymakers.” In the report,
the FTC laid out the concept of “privacy by
design”—a process where developers consider
data collection, use and sharing at each stage
of the development process. According to the
FTC, following these guidelines helps privacy
concerns stay prominent during development,
assists in the preparation of appropriate privacy policies and better ensures data security
in final mobile apps. In its first enforcement
action based on these principles, the FTC
brought suit against HTC America, claiming
that the company failed to take reasonable
steps to secure the software it developed for
its mobile devices. In a first, HTC’s settlement
with the FTC required the release of a software
security patch to address the issues identified
by the FTC.
Congress has also turned its attention to mobile
software privacy. Introduced in May of 2013,
the proposed Application Privacy, Protection,
and Security Act of 2013 (APPS Act) would
require mobile apps that collect personal data
to provide notice to users of the app’s privacy
policy, and would require the app to obtain
consent to the notice prior to the collection of
data. The proposed APPS Act would empower
the FTC to issue more precise regulations on
how notice and consent would be effectuated,
and the FTC would be charged with enforcing
the law against those who do not comply.
c.) Multistakeholder Consensus on
App Transparency
In addition to the attention of these regulators
and Congress, stakeholders in the app industry
have focused on compliance with the current
legal framework while simplifying privacy policies and enhancing consumer understanding.
It is generally agreed that even when apps have
privacy policies, they are difficult for consumers
to understand, and the visual aspects of their
implementation varies greatly from app to app.
In a process hosted by the National Telecommunications & Information Administration (NTIA)
of the U.S. Department of Commerce, industry
players recently reached an agreement on a
voluntary code of conduct for mobile software
privacy policies. These stakeholders included
the Application Developers Alliance, which represents more than 20,000 developers, as well
as the Computer and Communications Industry
Association, CTIA-The Wireless Association, the
Online Publishers Association, the Software and
Information Industry Association, the Marketing
Research Association, the Internet Commerce
Coalition, Intuit, Lookout, TRUSTe, Verizon,
and AT&T.
The final guidelines were issued on June 24,
2013. Although voluntary, these guidelines lay
the foundation for the first nationally recognized
convention on the implementation and formatting of app privacy policies.
Under the newly issued code, apps would identify which categories of information the app
is collecting from a standard list that includes
biometrics, browser history, phone or text logs,
contacts, financial information, health information, location, and user files. The app would
also identify the categories of third parties with
whom the information is shared, referring to a
standard list that includes advertising networks,
carriers, data resellers, data analytics providers,
government entities, operating systems and
platforms, other apps and social networks.
All of the categories on each list would be identified in the app, with a “yes” or “no” designation
next to each category, meant to identify whether
or not the app is collecting or sharing that particular category. The long-form policy would also be
identified in the suggested visualization.
Several participants suggested visual user
interfaces for this proposed framework. The
interface below, introduced by the Future of
December 2013
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Software Trends
Privacy Forum, implements the code by grayingout the categories of data not being collected, as
well as the categories of third-parties with whom
information is not shared. A link to the full privacy
policy appears at the bottom of the interface.
This code is not intended to replace long-form
policies which may be required under laws like
CalOPPA; however, the short-form notices are
intended to enhance and simplify the disclosures that these apps are already making.
With the approval of this voluntary industry
guideline, the mobile marketplace has its first
nationally recognized convention for presenting
privacy policies to consumers. These guidelines
will be rolled out to the industry in the coming
months, and are expected to gain wide adoption.
d.) A Look at the Future
The attention being received by mobile privacy
issues is increasing. As more and more consumers rely on mobile apps for their everyday needs,
regulators will continue to give this issue their
attention. State and federal legislation will likely
continue to be introduced in the months and
years ahead, but consensus in these forums can
be elusive. During this time, the app industry
will be encouraging developers to implement
the new Code of Conduct issued by the NTIA,
and continue to foster an environment of selfregulation among industry participants.
II. Predictions for the Software Industry
App development in general raises many intellectual property and licensing issues, including:
• Whether the software should be proprietary or licensed from a third party
•Customization and control or access to source code, source code escrows
235
les Nouvelles
•Royalty structures
•Maintenance obligations
•Use of Software as a Service (SaaS), Platform
as a Service (PaaS) and/or Infrastructure as
a Service (IaaS)
•Information security
•Place of development and law applying to
developer team
•Copyright ownership, registration and
enforcement
•Trademark ownership, cross-licensing, brand penetration and brand extensions
•Terms of use and customer data privacy policies
•Obligations imposed on vendors offering
programs through proprietary platforms
(often on-line stores).
A. The Future of Software Patent Monetization:
Trends & Predictions
With the topic of “patent monetization” now making routine appearances in the popular press, it is easy
to forget that the practice has only recently gained
widespread traction. Whereas the patent monetizers
of old were billion dollar corporations keen on extracting value from their vast patent portfolios, the new
faces of patent monetization—inventors, universities, small/mid-cap companies and non-practicing
entities—are vast and varied. At base, however, is
the understanding that patents are no longer just
trophies from the United States Patent & Trademark
office (“USPTO”). Rather, they are liquid assets of
enormous potential value.
A key weapon in the arsenal of many patent monetizers is the software patent, for several reasons. For
one, several Federal Circuit decisions in the 1990s
upholding the patentability of software led to the
USPTO issuing significantly more software patents—a
trend that has continued. Based on a recent survey of
patents issued in 2012, alone, 40,000 such patents
related to software. Another reason that software
patents are frequently a monetizer’s instrument of
choice is that they are infringed on a scale unlike
any other patent subject matter class. While patents
covering (for example) medical devices or pharmaceuticals are typically only infringed by other medical
device or pharmaceutical companies, software patent
infringement usually spans industries. The owner of a
software patent for managing inventory, for instance,
could attempt to license that patent to nearly every
size company, in every industry, with an inventory
management system. Such licensing fees can easily
total in the tens of millions.
Software Trends
And so it is that software patent holders—particularly holders of software patents related to business
methods—have turned to monetizing their patents
on a scale not seen before now. With the growing
outcry over “patent trolls” and their alleged abuse of
the patent system gaining steam, what does the future
of patent monetization hold for software patents? We
offer several predictions.
1. Trend Number 1: Monetizing Software Patents
in Court will be More Difficult and Less Profitable
Than it was Once
While other countries have banned software patents
entirely, it is doubtful such a far reaching ban will be
adopted in the United States. What appears certain,
however, is that monetizing software patents will be
more difficult and less profitable than it once was.
Why? Because the America Invents Act (“AIA”) and
uncertain climate surrounding software patentability are disrupting the patent monetizer’s preferred
business model: hiring contingency counsel and
extracting substantial settlements from defendants
facing substantial damages exposure and staggering
defense costs.
a.) The AIA Will Make Litigation-Based Monetization Campaigns More Difficult and Less Profitable
Fully implemented as of March 16, 2013, the
AIA introduced sweeping changes to our nation’s patent laws, including several provisions
that will undoubtedly make it more difficult to
successfully monetize patents in district court.
In addition to greatly expanding the universe of
prior art that defendants may use to invalidate a
patent, the AIA gave defendants a powerful new
tool: several “post-grant” proceedings known as
Post Grant Review (“PGR”), Inter Partes Review
(“IPR”) and Covered Business Method Review
(“CBMR”). Each of these are trial-like proceedings
that a defendant sued for patent infringement
can institute in the USPTO, where the relaxed
standard of proof makes it easier to prove invalidity than in district Court. Proving the power
of these proceedings, the first CBMR decision
invalidated a business method patent that, prior
to the decision, had been ruled infringed to the
tune of more than $390 million.
But perhaps more significant from the perspective
of the software patent monetizer, the AIA will
undoubtedly make litigation-based patent monetization less profitable. Although the anti-joinder
provisions of the AIA (which prohibit one patent
holder from suing a large group of defendants
in one court and in one case, with the payment
of a single filing fee) have received much attention, the more significant game changer may be
the introduction of PGR, IPR and CBMR. These
proceedings are expensive, and if instituted by
a defendant, introduce substantial costs that a
patent monetizer pursuing litigation has never
before had to consider or absorb. The result is
undoubtedly a dent to the bottom line, either
directly, through significantly enhanced litigation
costs, or indirectly, through increased contingency fees that counsel or litigation funders will no
doubt require to include the costs of post-grant
proceedings within their retainer agreements.
b.) The Uncertainties Specific To Software Patents Will Make Litigation-Based Monetization
Campaigns Less Profitable
Beyond the general effects of the AIA, the software patent monetizer must also confront growing uncertainties as to software patentability, and
the effects that these uncertainties will have on
the bottom line. Indeed, the inability of courts to
articulate clear rules for determining whether a
software invention constitutes patent-eligible subject matter means that the validity of many software patents cannot be known with any certainty
until a court decides the issue. And if the Federal
Circuit’s CLS Bank decision has taught anything,
it is that the line between patentable software
and a non-patentable abstract idea is substantially
blurred even among our nation’s judges.
In the end, these developments will mean reduced profits for many software patent monetizers, with drastic reductions in some instances.
This is because defendants will succeed with
increasing frequency in invalidating software
patents in post-grant proceedings, and also because new economic considerations will pinch
the software monetizer. That is, in today’s market, the majority of patent monetizers rely on (a)
contingency counsel, willing to incur some or
all of the hard costs of the litigation, and/or (b)
litigation funders, willing to fund patent cases
for a percentage of the recovery. But to account
for the increased costs of asserting patents in
the post-AIA world, and also the significant
uncertainties surrounding software patentability, reputable contingency counsel or litigation
funders are likely going to demand a significantly
higher percentage of a case’s potential recovery,
resulting in far less profits to the patent holder.
In the case of software patent holders, this is
not good news.
December 2013
236
Software Trends
2. Trend Number 2: It will be Harder and Less
Profitable to Sell Many Software Patents
Of course not all monetizers desire to assert their
patent portfolios. A great percentage of monetizers also seek to sell. While valuable patents still
command a premium at sale or auction, the same
likely cannot be said about many software patents,
particularly business method patents. Although
there are obviously exceptions to the rule, the uncertainties regarding software patent validity and
the increased costs and difficulties asserting such
patents, are destined to make selling such patents
more difficult. And where purchasers are interested,
it is to be expected that significant discounts will
be required to consummate any sale.
3. Trend Number 3: The Rise of the
Super Monetizer
Perhaps counterintuitive considering the forecast
discussed above, all is not lost for the software patent monetizer with deep pockets and substantial,
higher-quality portfolios. We will call that entity a
“super monetizer.” In the post-AIA world, the “super
monetizer” will create leverage by asserting three
or four patents in each case filed, potentially even
discouraging defendants from filing post-grant proceedings in light of the substantial costs required
to litigate several such proceedings simultaneously.
This leverage may be increased where the super monetizer has been able to acquire a patent portfolio that
includes patents in several jurisdictions. The “super
monetizer” has deep pockets, so it will also hire the
best counsel to litigate post-grant proceedings without turning over significant contingencies in exchange
for representation. And by bettering the odds of overcoming the post-grant proceeding hurdle, the “super
monetizer” gains significant leverage to extract high
value settlements from defendants. Whereas it may
make economic sense for defendants to refuse large
settlement offers from monetizers before the institution and conclusion of a post-grant proceeding, the
same often cannot be said with respect to the patent
monetizer who has emerged from such a proceeding
with their patent’s validity intact. Thus, as the more
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les Nouvelles
typical variety of monetizer finds that litigation may
not be the best option (as discussed below), we can
expect to see an uptick in suits brought by “super
monetizers.”
4. Trend Number 4: The Rise of Nuisance
Campaigns
On the other end of the spectrum is the garden
variety of software patent monetizer—the owner of
one or two patents, without significant funding, who
relies on contingency counsel or litigation funders to
finance their monetization campaigns. These monetizers will be most impacted by the increased contingencies that the lawyers and litigation funders can
be expected to demand in light of the uncertainties
that now must be confronted when asserting software
patents in court. How will these monetizers confront
this new reality? Likely, by turning with increased frequency to out of court campaigns designed to extract
smaller sums from large pools of defendants. Such
tactics will be borne from necessity—as contingency
counsel becomes much more selective in picking
cases in the post-AIA world—and considerations of
profitability—as monetizers not enthusiastic about
leaving their profits in the pockets of attorneys and
litigation funders focus instead on out-of-court licensing campaigns. While it surely was not the goal of the
AIA or Congress to increase the frequency of these
“nuisance campaigns,” that ironically very well may
be the result.
III. Concluding Remarks
App development is becoming a huge industry
which is increasingly necessary as websites and formerly off-line functions go mobile. Some issues and
concerns are common to all software development
projects, but the need for constant refreshment and
upgrading puts additional pressure on the team.
Data security (on the one hand) and privacy policy
transparency for users (on the other) are getting increasing scrutiny. Finally, the patentability of many
software programs is still uncertain. That fundamental
question, coupled with provisions of the AIA making
it harder to bring claims, brings new challenges to
monetization of the inventions. ■
Mobile and Consumer Electronics
By Ram Menon and Kevin Spivak
I. Mobile Industry & Business Trends
T
he wide adoption of smartphones and tablets
in recent years is undeniable. In the second
quarter of 2013, the total global install base
of smartphones and tablets is predicted to exceed
those of PCs.1 Mobile is more than just the latest
fad in tech innovation; it is fundamentally reshaping
marketplaces, business models and operating models. This year, Yankee Group values the market for
mobile and connected devices at U.S. $485 billion.2
By 2017, that number will have increased to surpass
U.S. $919 billion—growing at a much quicker pace
than previously thought.3 Mobile communication is
continuing to replace traditional fixed communications across the world.4 This is evidenced by the fact
that as of December 2012, 13 percent of all Internet
traffic originated from mobile devices.5 Every business
is largely embracing a variety of mobile initiatives
1. See Mary Meeker, 2012 Internet Trends, http://kpcb.com/
insights/2012-internet-trends (May 30, 2012), Slideshare.
2. See Boris Metodiev et al., Yankee Group’s Market Vision
Report. Mobile and Connected Devices: A Market Moving at the
Speed of Light, July 9, 2013.
3. Yankee Group predicts “the drivers of growth during the next
two to three years will include exploding machine-to-machine
opportunities, new entrants in the mobile OS wars, surging
popularity of tablets, OEMs recognizing the potential of emerging markets and enterprise service providers working to solve
the Bring Your Own Device (BYOD) puzzle. See Yankee Group’s
Market Vision Report titled “Mobile and Connected Devices: A
Market Moving at the Speed of Light,” July 9, 2013.
4. Google’s YouTube is now delivering 25 percent of its content
to mobile devices and the figure is likely to rise in tandem with
mobile broadband subscriptions. In Korea, for example, which
has 91 mobile broadband subscribers for every 100 people, YouTube’s mobile delivery is closer to 50 percent, according to Shiva
Rajaraman, YouTube’s director of product management. See Tofel,
K., Future of mobile: 5 takeaways from Mobilize 2012. Retrieved
September 7, 2013 from http://gigaom.com/2012/09/24/futureof-mobile-5-takeaways-from-mobilize-2012/.
5. See Mary Meeker, 2012 Internet Trends, http://kpcb.com/
insights/2012-internet-trends (May 30, 2012), Slideshare.
6. As of September 2012, Square is processing $8 billion on
an annualized basis, up from $1 billion a year ago; and 35 million
Americans have completed purchases using Square. See Tofel,
K., Future of mobile: 5 takeaways from Mobilize 2012. Retrieved
September 7, 2013 from http://gigaom.com/2012/09/24/futureof-mobile-5-takeaways-from-mobilize-2012/.
that allows for increased productivity and effective
engagement of customers.6
The introduction of LTE services along with the
availability of improved video compression technologies have begun to address the bandwidth and image
quality concerns to run advanced high-definition
video applications on mobile devices. In addition, as
the cost of Bluetooth and WiFi chipsets continues to
drop, devices that typically did not have much
■ Ram Menon,
intelligence have sudBlackberry,
denly become capable of
Senior Licensing Counsel,
being networked through
wireless means. FurtherRolling Meadows, IL
more, several natural user
interfaces such as voice
■ Kevin Spivak,
and gesture are also creGreenblum and Bernstein PLC,
ating new modes of user
engagement. Society in
Of Counsel
general is trending toReston, VA
wards connectivity everyE-mail: [email protected]
where and some form of
computing embedded in
every device around us.
Mike Brinker and Shehryar Khan of Deloitte Consulting LLP, in a recent report, have identified four
forces that are taking shape, defining the new face
of mobile: Convergence, Ubiquity, Transparency, and
Extending Reality. Convergence implies having a
centralized, connected, always-with-us hub for services, information, entertainment, and convenience
across our personal and professional lives. Ubiquity
means virtually everything and everyone we interact
with will most likely soon have the potential to be
wired by containing embedded sensors and mobile
technologies that allow new and advanced tracking
of and interaction with physical things. Transparency
involves unlocking new use cases for commerce,
back-office, and personal lives by making different
operations a user-free interaction. Extending reality
involves moving out of games, military and scientific
environments into the mainstream—meaning being
able to read, hear or feel being delivered based on
how you gesture, move, and talk that is sensitive to
location and context, with information you need or
want in a format that can adapt to the environment
December 2013
238
at hand.7 Although, the concept of “Extending Reality” has been around for a little over a decade now,
it sure seems that it has started rapidly approaching
a tipping point in the last few years.
II. IP Strategy Concerns for a Converged
Mobile Space
Smartphones, tablets and other mobile devices
have essentially come to the market due to the convergence of different technologies including various
radio standards (such 3G, 4G, LTE, etc.), audio and
video codecs, low power processors and transceivers,
media players, Liquid Crystal Display (LCD), digital
camera modules and a plethora of mobile applications
that are capable of running on such mobile computing
platforms. Condensing various complex technologies
into a small form factor device leads to making the
device open to a greater number of infringement
claims from IP owners of individual technologies.
This is further evidenced by the increased patent
litigation that the mobile and consumer electronics
industry has seen in recent years. Additionally, the
landscape of the various parties involved in high-tech
patent licensing and litigation has also changed.
A. Offensive Patent Aggregators & Patent
Privateering
Recently, we have seen a rise in the number of
offensive aggregation entities formed by patent
privateers. In the current patent ecosystem, large
operating companies accumulate patents in part for
defensive purposes. These companies are typically
unwilling to use their patents in certain strategic
fashions because they fear that the same will be done
to them. These patent portfolios help assure patent
peace because they assure that any strategic conduct
will be met with a similar response—often known
as “mutually assured destruction.” However, more
recently operating companies have begun to look at
a so-called privateering model to monetize their patent portfolio without directly engaging their patents
against other operating companies. According to
David Balto8 an antitrust attorney, “Privateering is the
practice by which established operating companies
arm trolls with patents and deploy them to engage
in expensive, incessant litigation against competitors. This Trojan horse approach allows companies
to accrue the benefits of the egregious troll conduct
without incurring any of the risks. And more often
than not it is used as a competitive weapon to try
7. See Brinkler, M and Khan, S. Mobile Only (and beyond),
2013 Technology Trends–Disruptors. Retrieved September 8,
2013 from https://documents.deloitte.com/techtrends2013.
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les Nouvelles
to raise costs and dampen competition from rival
operating companies.”
Some legal scholars have argued that outsourcing
of patent litigation might “form part of a scheme to
maintain or obtain monopoly power” in violation of
Section 2 of the Sherman Act which prohibits monopolization.9 A plaintiff would have to prove that
transfers to patent trolls are a part of an exclusionary
strategy to obtain or maintain monopoly power by
raising rivals costs.10 The first part of the strategy is
to create patent-holdup by making FRAND commitments to get patents into a standard and then evading those FRAND commitments through transfers
to patent trolls. The second part of the strategy is to
raise licensing fees by arming patent trolls that have
no incentive to negotiate license rates because they
have no risk of patent counter-suits or injury to their
reputation. If proven, a private plaintiff could receive
an award of treble damages and the government can
secure injunctive relief.11
Privateering allows operating companies to evade
reputational constraints to raising rivals’ costs and
FRAND or other licensing commitments, and provides
a method to strategically outsource to Patent Assertion Entities (PAEs) as a hindrance to rivals. Some
of the recent examples include the patent transfers
from Nokia and Microsoft to MOSAID and that
from Ericsson to Unwired Planet. In the MOSAID
transaction, Microsoft and Nokia orchestrated a
transfer of 2,000 of Nokia’s patents, 1,200 of which
were standards essential patents (SEPs) with FRAND
commitments, to MOSAID for a nominal fee. Nokia
also later transferred portions of its SEP portfolio to
PAEs such as Sisvel and Vringo. Transfers like these
typically lead to a royalty stacking problem to rivals
of such transferors.
B. Defensive Patent Aggregators & Patent Defense
Service Providers
Several defensive entities that enable operating
companies to mitigate patent risk from Non-Practicing
Entities (NPEs) and Patent Assertion Entities (PAEs)
have formed over the last few years. Some examples
8. David Balto is a former policy director of the Federal Trade
Commission, attorney-adviser to Chairman Robert Pitofsky, and
antitrust lawyer at the U.S. Department of Justice.
9. See http://www.abajournal.com/mobile/mag_article/small_
companies_pick_up_the_cost_of_patent_privateering_litigation.
10. See http://www.patentlyo.com/patent/2013/06/guest-poston-using-the-antitrust-laws-to-police-patent-privateering.html.
11. See http://www.ropesgray.com/~/media/Files/articles/2013/04/Antitrust-Attacks-on-Patent-Assertion-Entities.pdf).
of such entities include the following:
Rational Patent Exchange (RPX):12 RPX launched in
2008 has grown to over 150 member companies and
provides risk mitigation and cost reduction for any
company experiencing NPE litigation. RPX members
pay an annual fee (scaled to reflect the size of the
member company) that is used to acquire and clear
high-risk patents from the open markets and remove
members from active litigations.
Allied Security Trust (AST):13 AST, launched in
2007, allows member companies to monitor for high
technology patents available in the secondary market
and provides a system for collaborative purchasing of
such assets.
Open Innovation Network (OIN):14 OIN, launched
in 2005, provides a fully paid-up royalty free license
to OIN’s defensive patent pool in exchange for a
commitment to forbear litigation around Linux and to
cross-license its own patents to other members. OIN
holds over 400 U.S. patents and applications and has
nearly 600 licensees that are part of its growing community of entities committed to patent non-aggression
in open source and Linux.
Unified Patents:15 Unified Patents, launched in early
2013, reduces the risk and cost of NPEs on behalf
of companies in specific technology areas and uses
annual subscription fees to proactively defend against
NPE activity through purchase and re-examination of
patents. Rather than encourage NPEs through settlement, Unified deters or eliminates future NPE activity,
thereby reducing NPE risk and cost.
Syndicated Patent Acquisition Corp (SynPat):16 SynPat, launched in early 2013, provides a patent acquisition syndication mechanism that allows companies
to acquire licenses to high-risk-patents. License cost
to client is SynPat’s purchase price divided by the
number of clients in each buying group. SynPat does
not have a membership requirement and as a result
any operating company can take part in a syndicated
acquisition of patents.
Patronus:17 Patronus, launched in 2012, provides IPrelated services to operating companies, particularly
those subject to lawsuits from NPEs. Patronus seeks
to combine the latest developments in data analyt12. http://www.rpxcorp.com/.
13. http://www.alliedsecuritytrust.com/.
14. http://www.openinventionnetwork.com/.
15. http://unifiedpatents.com/.
16. http://synpat.com/.
17. http://gary-gerttula.squarespace.com/about/.
ics with new opportunities created by the America
Invents Act. Patronus Patent Tracking Service, which
is currently in beta testing, uses advanced analytics
to identify those patents and applications most likely
to be litigated and licensed.
III. Legislation Against Trolls
In the United States, patent litigation that is traditionally governed by federal law has become quite a
nuisance in some instances that state officials have
started looking for ways to address the problem.
Recently, Vermont and Nebraska have begun using
state law to shield local businesses from frivolous
lawsuits by patent holders who engage in “baseless
harassment” that ends up being costly and destructive litigation. Vermont, a state having a history of
political activism by companies, has emerged as a
hotbed of anti-troll activism. Vermont’s legislation
provides the recipient of a “bad faith” accusation of
patent infringement the right to counter-sue in state
court. The legal theory being that such bad faith
accusations are a violation of Vermont’s consumer
protection laws.18
Although currently no specific definition of bad
faith is offered, the law offers several criteria that
a judge can use to determine whether a threat was
made in bad faith. Some of the possible signs of bad
faith include a lack of specificity about an alleged
infringement, demands for excessive licensing fees,
and unreasonably short deadlines for payment. Firms
that do not themselves use the technology claimed
by the patent are likely to be more vulnerable to accusations of bad-faith litigation.
Critics may argue that the legislative push against
patent trolls will fail due to preemption, the legal
principle that bars states from interfering with the
enforcement of federal law. However, this might not
be entirely true because federal courts have generally
allowed states to police bad-faith patent assertions,
but only if the state courts apply the same legal standards that would apply in federal courts. If a patent
is obviously invalid or plainly not infringed, then an
accusation of bad faith is likely to prevail against the
patent holder. However, in situations where the patent is stronger in terms of validity and a clearer case
of infringement is shown, then the stricter federal
standards may work in the patent holder’s favor.
The idea of using state consumer protection
law against patent trolls could spread to additional
18. See http://www.leg.state.vt.us/docs/2014/Acts/ACT044.pdf.
December 2013
240
states in the coming months. If the other forty-eight
states follow Vermont and Nebraska’s lead, it could
make the legal system much less hospitable to nonpracticing entities (NPEs).
IV.U.S. Courts are Addressing FRAND
Related Issues
A. Microsoft v. Motorola (W.D. Wash, No. C10-1823)
This is an important case because it is the first decision that sets a framework for determining “fair, reasonable, and non-discriminatory” (FRAND) royalty;
and provides guidance for calculating the value of a
Standards Essential Patent (SEP), affecting (1) SEP
holders and potential licensees negotiating FRAND
licenses; and (2) patent holders deciding whether to
declare a patent essential to a standard.
The case involved Motorola’s patents covering
IEEE’s 802.11 (WiFi) standards and ISO/IEC’s and
ITU’s H.264 video codec standards. Motorola offered
to license patents to Microsoft at a proposed royalty of
2.25 percent of the end product (i.e., each Xbox 360,
PC/laptop or smartphone implementing the standard).
Microsoft did not take a license, sought declaratory
relief that Motorola breached its FRAND obligations
to the Standards Development Organizations (SDOs),
and Motorola sued Microsoft for patent infringement.
On April 25, 2013, Judge James L. Robart issued a
207 page opinion. The Judge stated that to decide
whether Motorola’s opening offers were in good faith,
a fact-finder must be able to compare them with a
reasonable RAND royalty rate and because more than
one rate could conceivably be RAND, a reasonable
royalty range (Order p. 5). A bench trial was held
from November 13, 2012‑November 20, 2012 to
determine (1) a RAND royalty range for Motorola’s
Standards Essential Patents (SEPs) and (2) a specific
RAND royalty rate for Motorola’s SEPs. Testimony
from 18 witnesses was taken.
The Court’s analysis is separated into six parts:
•First, the court introduces the parties and
their relation to one another;
•Second, the court provides background on
standards, SSOs and the RAND commitment;
•Third, the court develops a framework for
assessing RAND terms;
•Fourth, the court analyzes the H.264
Standard and Motorola’s H.264 SEPs and their importance to Microsoft’s standard-using
products;
•Fifth, the court analyzes the 802.11 Standard and Motorola’s 802.11 SEPs and their impor-
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les Nouvelles
tance to Microsoft’s standard-using products; and
•Sixth, determines the appropriate RAND
royalty rate for Motorola’s SEPs.
The Court applied a modified Georgia–Pacific analysis to account for the purpose of the RAND commitment. The court stated that the owner of an SEP is
under the obligation to license its patents on RAND
terms, whereas the owner of a patent uncommitted
to RAND has monopoly power over its patent and may
choose to withhold licensing. The court stated further
that the hypothetical negotiation almost certainly
will not take place in a vacuum: the implementer of
a standard will understand that it must take a license
from many SEP owners, not just one, before it will
be in compliance with its licensing obligations and
able to fully implement the standard. This methodology is based on a conventional Georgia-Pacific patent
royalty analysis, as modified to give substantial weight
to royalty stacking, relative value and public interest
considerations.
“Economic Guideposts” for assessing RAND
terms: Beyond the actual RAND royalty rate determinations, this order is also important for the precedent
it sets in how to determine RAND terms for a patent
portfolio. Judge Robart lays out what he terms several
“economic guideposts”:
• A RAND royalty should be set at a level
consistent with the SSOs’ goal of promoting widespread adoption of their standards.
• In the context of a dispute concerning
whether or not a given royalty is RAND,
a proper methodology used to determine
a RAND royalty should therefore recognize
and seek to mitigate the risk of patent hold up that RAND commitments are intended
to avoid.
• Likewise, a proper methodology for deter mining a RAND royalty should address the
risk of royalty stacking by considering the
aggregate royalties that would apply if other
SEP holders made royalty demands of the
implementer.
• At the same time, a RAND royalty should be
set with the understanding that SSOs
include technology intended to create
valuable standards... . To induce the creation
of valuable standards, the RAND commitment must guarantee that holders of valuable
intellectual property will receive reasonable royalties on that property.
• From an economic perspective, a RAND
commitment should be interpreted to
limit a patent holder to a reasonable royalty on the economic value of its patented tech nology itself, apart from the value associated
with incorporation of the patented tech nology into the standard.
The court examined the importance of Motorola’s
H264 SEPs to the H.264 Standard and to Microsoft’s
products. Court concluded that 14 of the 16 Motorola
H.264 SEPs are directed only to interlaced video. The
court concluded that (1) interlaced video is becoming
less prevalent in the marketplace; (2) little evidence
suggests that Microsoft products often encounter
interlaced video; (3) and Motorola demonstrated
that support for interlaced video in coding tools
is important to Microsoft so that its products will
seamlessly play any video encountered by users. The
court determined that Motorola’s H264 SEPs provide
only minor importance to the overall functionality of
Microsoft’s Windows product. The court determined
that Motorola’s H264 SEPs provide only minor importance to the overall functionality of Microsoft’s
Xbox product. The court examined the importance
of Motorola’s 802.11 SEPs to the 802.11 Standard
and to Microsoft’s products.
Calculating the RAND royalties, the Court held:
• The RAND royalty rate for Motorola’s H.264
SEP portfolio is 0.555 cents per unit; the
upper bound of a RAND royalty range for
Motorola’s H.264 SEP portfolio is 16.389 cents per unit; and the lower bound is 0.555 cents per unit. This rate and this range are applicable to both Microsoft Windows and Xbox products. For all other Microsoft
products using the H.264 Standard, the
royalty rate will be the lower bound of
0.555 cents.
• The RAND royalty rate for Motorola’s
802.11 SEP portfolio is 3.471 cents per
unit; the upper bound of a RAND royalty range for Motorola’s 802.11 SEP portfolio
is 19.5 cents per unit; and the lower bound
is 0.8 cents per unit. This rate and this range are applicable to Microsoft Xbox products.
For all other Microsoft products using
the 802.11 Standard, the royalty rate will
be the low bound of 0.8 cents.
Royalty rate estimated: Initially, Motorola had
sought from Microsoft as much as $4 billion a year
for use of its standard, essential wireless and video
patents, while Microsoft argued its rival deserved
about $1 million a year. Judge Robart decided that
appropriate payment was about $1.8 million.19
B. Apple v. Motorola (N.D. Illinois, Eastern
Division, No. 1:11-cv-08540)
The parties filed patent infringement lawsuits
in October 2010 after prior licensing negotiations
failed. Some of these infringement actions were
consolidated in a case before Judge Posner. Apple
asserted Motorola infringed claims of four nonstandard-essential patents, while Motorola asserted
Apple infringed claims of one patent that was essential to the Universal Mobile Telecommunications
Standard (UMTS, a 3G cellular standard). As the
trial date approached, Judge Posner excluded all of
the parties’ respective expert testimony on damages.
Since neither party could prove an entitlement to
damages, Judge Posner tentatively canceled the jury
trial, finding that it would make little sense to hold
a jury trial on infringement liability if a party could
not receive relief. However, he allowed the parties
to submit further briefing, including relating to the
potential for equitable remedies such as injunctive
relief. Because Motorola asserted an SEP that was encumbered by a FRAND licensing commitment, Judge
Posner specifically requested that Motorola address
the bearing of FRAND on the injunction analysis.20
In his opinion, Judge Posner found that neither
Motorola nor Apple was entitled to damages or an
injunction, and dismissed the case with prejudice. In
addressing Motorola’s damages claims, he set forth a
clear opinion of what he considers to be the proper
way to determine a reasonable royalty for SEPs:
“The proper method of computing a FRAND royalty starts with what the cost to the licensee would
have been of obtaining, just before the patented
invention was declared essential to compliance with
the industry standard, a license for the function performed by the patent. That cost would be a measure
of the value of the patent qua patent. But once a
patent becomes essential to a standard, the patentee’s bargaining power surges because a prospective
licensee has no alternative to licensing the patent;
he is at the patentee’s mercy. The purpose of the
FRAND requirements, the validity of which Motorola
doesn’t question, is to confine the patentee’s royalty
demand to the value conferred by the patent itself
19. “Microsoft gets upper hand in first Google patent trial.”
See http://www.reuters.com/article/2013/04/26/us-microsoftgoogle-trial-idUSBRE93P0BA20130426.
20. See http://essentialpatentblog.com/wp-content/
uploads/2012/12/12.06.22-D.E.-1038-Order-and-Opinion-ofJune-22-2012.pdf.
December 2013
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243
as distinct from the additional value—the hold-up
value—conferred by the patent’s being designated
as standard-essential.”
Judge Posner ruled that Motorola could not obtain
damages for any infringement of its asserted standardessential patent because Motorola did not provide
evidence for calculating a royalty consistent with the
above framework.
Additionally, with regard to injunctive relief, Judge
Posner similarly found that Motorola’s FRAND commitment precluded such relief:
“I don’t see how, given FRAND, I would be justified in enjoining Apple from infringing the ‘898
unless Apple refuses to pay a royalty that meets the
FRAND requirement. By committing to license its
patents on FRAND terms, Motorola committed to
license the ‘898 to anyone willing to pay a FRAND
royalty and thus implicitly acknowledged that a royalty
is adequate compensation for a license to use that
patent. How could it do otherwise? How could it be
permitted to enjoin Apple from using an invention
that it contends Apple must use if it wants to make a
cell phone with UMTS telecommunications capability—without which it would not be a cell phone?”
Apple and Motorola have appealed Judge Posner’s
dismissal of their respective cases to the Federal
Circuit (Docket Nos. 2012-1548, -1549). As this case
and similar cases go through the appeals process,
more to using SEPS to obtain an injunctive relief,
as well as finding a methodology for calculation of a
reasonable royalty.
In re Innovatio IP Ventures, LLC21
Plaintiff and patent-owner Innovatio IP Ventures,
LLC (“Innovatio”) had sued a number of entities
including coffee shops, restaurants, hotels, supermarkets, large retailers, transportation companies, and
other commercial users of wireless internet technology located throughout the United States. Innovatio
alleged that the users provide wireless internet access to their customers or use it to manage internal
processes, and by doing so infringe various claims
of twenty-three patents owned by Innovatio. Judge
James F. Holderman in Chicago (Northern District
of Illinois) largely adopted Judge Robart’s approach,
and in at least one respect—the royalty base—he
actually took a licensee-friendlier approach, focusing
completely on the price of WiFi chipsets because the
patent holder failed to convince him of a royalty based
on the price of an entire end product.22
Numerically, Innovatio IP Ventures, LLC, a patent
assertion entity that has sued numerous defendants
throughout the United States, is deemed entitled to
a per-unit royalty of “9.56 cents for each Wi-Fi chip
used or sold by the Manufacturers in the United
States, subject to the terms of the patents, the
applicable statute of limitations, and a finding of infringement for a license to its portfolio of 19 patents
essential to the IEEE 802.11 (WiFi) standard. This
is a victory for the manufacturers whose products
are actually at issue in this case, such as, Cisco Systems, Motorola Solutions, SonicWALL, Netgear, and
Hewlett-Packard. According to the order, “Innovatio’s
proposed method, for example, would have resulted
in royalties on average of approximately $3.39 per access point, $4.72 per laptop, up to $16.17 per tablet,
and up to $36.90 per inventory tracking device (such
as a bar code scanners).” Based on the non-weighted
average of those four examples of $15.30, this means
Innovatio got 1 percent less of what it wanted.
Toward the end, Judge Holderman’s ruling explains
why the 9.56 cents per unit Innovatio is (subject to
the conditions quoted further above) entitled to “is
approximately three times Judge Robart’s [F]RAND
rate of 3.471 cents per unit.” There’s a reason for this
difference. Judge Robart concluded that Motorola’s
patents were only of minimal value to the standard,
[...] whereas the court here has found that Innovatio’s
patents are of moderate to moderate-high importance to the standard. A multiplier of about three is
a reasonable difference between the two royalties
to account for the greater importance of lnnovatio’s
patents to the 802.11 standard.”
There’s a clear and strong trend in U.S. courts
toward rationality in connection with SEP royalty
rates. Conversely, irrational demands fail consistently
these days.
Impact of these decisions—With standardization
of increasingly complex technology becoming more
widespread in mobile and consumer electronics,
decisions regarding current and potential standardessential patents will be increasingly important to
a company’s intellectual property strategy. Judge
Robart’s decision sets forth the first ever framework
to setting a FRAND royalty. Only time will tell if
other courts approve of and adopt Judge Robart’s
framework. For patents already declared standard es-
21. See http://www.scribd.com/doc/173132403/13-10-03-Innovatio-v-Mult-Def-WiFi-Patents-FRAND-Determination.
22. See http://www.fosspatents.com/2013/10/federal-judgedetermines-19-wifi.html.
les Nouvelles
sential, the patent holder and potential licensees can
refer to Judge Robart’s analysis when making initial license offers and negotiating FRAND licenses. Finally,
companies holding patents that could potentially be
declared standard essential can look to the court’s
decision to guide their decision-making process when
determining whether to declare them essential and
subjecting them to a FRAND obligation.
V. U.S. President Vetoes ITC Decision
On August 3, 2013, the White House invoked a
‘veto’ perogative and overturned a decision by the
International Trade Commission that would have
barred Apple Inc. from importing some older iPhone
and iPad models.23
In his letter, the U.S. Trade Representative (USTR)
told the ITC Chairman that he had substantial concerns about owners of standard-essential patents,
such as Samsung Electronics, in this case, using the
ITC to engage in ‘hold up’ obtaining a higher price for
use of a patent because of the inclusion of its related
technology in the standard.
The last time that this reversal option was invoked
under Section 19 U.S.C. §1337(j),24 was under President Ronald Reagan.
The Patent, Trademark and Copyright Journal (PTCJ)
correctly notes that the president’s reversal in cases
similar to this could be a serious blow to SEP holders’
access to injunctions, after two highly publicized court
cases have concluded that monetary damages are the
more appropriate—and perhaps now the sole remedy.
The letter did not go so far as to suggest that the
ITC should not hear such cases or that it should
be faulted for hearing this case. Instead, the letter
provides examples of circumstances where an ITC
exclusion order might be appropriate, and called on
the ITC to investigate ‘relevant factors’ early in its
review in future cases. One such factor is ‘hold-out,’
the prospective licensee’s refusal to negotiate a reasonable royalty with the SEP holder.
The letter from U.S. Trade Representative disagreed with the position taken by the ITC and cited
the relevance of the public interest factors to SEP
and FRAND analysis, without either endorsing or
criticizing the rest of the commission’s judgments.
The letter relied extensively on the January 8 joint
policy statement issued by the Department of Justice’s
Anti-trust Division and the U.S. Patent and Trademark
23. See http://online.wsj.com/article/SB10001424127887324
136204578646192008412934.html.
24. See http://www.justice.gov/civil/docs_for ms/CIP_19usc1337.pdf.
Office. According to USTR, this “Policy Statement
on Remedies for Standards-Essential Patents Subject
to Voluntar y FR AND Commitments”: expresses
substantial concerns which I strongly share, about
the potential harms that can result from owners of
[SEPs] who have made a voluntary commitment to
offer license SEP’s on [FRAND] terms…, gaining
undue leverage and engaging in patent ‘hold-up,’ i.e.,
asserting the patent to exclude an implementer of the
standard from a market to obtain a higher price for use
of the patent than would have been possible before
the standard was set, when alternative strategies
could have been chose. At the same time, technology
implementers also can cause potential harm by, for
example, engaging in ‘reverse hold-up’ (‘hold-out’),
e.g., by constructive refusal to negotiate a FRAND
license with the SEP owner or refusal to pay what has
been determined to be a FRAND royalty.
Nevertheless, the Trade Representative went on
to state that an exclusion order may still be an appropriate remedy as well when a putative licensee is
not subject to the jurisdiction of a court that could
award damages. He urged that the commission in the
future develop a factual record from the onset of each
proceeding involving SEP on “the presence or absence
of patent hold-up or reverse hold-up.”
VI. Mobile Patent Wars Have Gone Global
Over the past decade, patent infringement suits
and countersuits are no longer being initiated solely
in U.S. district courts or the U.S. International Trade
Commission (ITC). Instead, they are also simultaneously being brought in forums across Europe and
Asia. This is typified by the so-called “smartphone
patent wars,” including, most recently, Apple’s ongoing worldwide battle with Samsung over the parties’
competing smartphones and tablets.25
Filing patent infringement suits against an alleged
infringer in more than one jurisdiction provides the
patentee with major strategic advantages. However, a
successful global patent litigation campaign requires
the careful selection of intellectual property (IP) to
use, as well as complex strategic planning that takes
into account the differences between key jurisdictions in timing, procedure and substantive patent law.
Foreign patent infringement awards tend to be
much smaller than that available in the U.S. Enhanced damages are not common outside of the
U.S. and are not available in some key jurisdictions,
25. See http://www.economist.com/blogs/babbage/2011/12/
intellectual-property-and-mobile-devices.
December 2013
244
such as Germany and Japan. Injunctive relief that
can ban imports or sales in a given country is also
available as a remedy across jurisdictions. Moreover, although this practice is controversial and may
be curtailed in the future, the Dutch courts have
historically issued cross-border injunctions in IP
cases. This greatly broadens the potential impact
of an infringement decision in the Netherlands.
European customs proceedings can also be used
as a powerful and cost-efficient tool for patentees
to block infringing goods from the European Union.
In 1999, the European regulations were broadened
to include patents as a class of IP that the patentee
can use to block importation of infringing products.26 However, the utility of customs proceedings
is limited, because the detained goods’ owner can
obtain their release by paying a security sufficient
to protect the patent owner’s interests. ■
26. See http://www.arelaw.com/downloads/ARElaw_PatLit_
Mapping_PracticeNote.pdf.
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Samsung And LG Electronics
Samsung And LG: From Also-Rans To
Dominance In Consumer Electronics
By Robert A. Myers
Abstract
Today, Samsung is the world leader in flat screen TV
and smartphone sales. LG is second in TV sales, fifth in
cell phones. Samsung fabricated its first LCD screen in
1995, well after such screens already dominated laptop
computers, and had shipped its first cell phone only
in 1988. LG wasn’t even founded until 1958 when it
started its development of the first Korean-made radios.
By 1982 it shipped its first color TV—made in the
USA. In this time frame, not even twenty years ago,
TV shipments were dominated by Japanese consumer
manufacturers and cell phones were led by Motorola
and Nokia. This paper explores possible sources of
the secret to the Koreans’ success and finds that the
usual metrics—in particular patents, R&D investment,
and low cost labor—don’t explain it. We speculate
that “industrial policy” measures of the South Korean
government may have been decisive.
Historical Context
I
n 1945, World War II ended. Japan was devastated,
with most of its cities in ruins and its economy
literally a “basket case.” Korea was almost as bad,
as a former Japanese colony, and about to get worse
with the North Korean invasion, followed by the UN
“Police Action” and the subsequent Chinese invasion.
Ironically, the Korean War was a catalyst for Japan’s
recovery, as Japan became the pillar of the American
war effort. As Japan revived, South Korea was ravaged
by war. By the middle fifties, Korea was in no better
shape than Japan had been ten years earlier, except it
was further troubled by a series of autocratic dictatorships. Japan further benefitted from being viewed by
the U.S. as an anticommunist bastion, on which aid
and other benefits were lavished.1 Korea, in contrast,
was a footnote in the cold war, mostly characterized
by the continued armed confrontation at the 38th
parallel. It was a virtual stepchild of American foreign
and economic policy.
1. See, for example, http://www.history.navy.mil/photos/events/
kowar/log-sup/log-sup.htm and http://www.history.navy.mil/photos/
events/kowar/log-sup/japan.htm.
The advances discussed below are all in the
context of recovery from the destruction of these
wars. The Korean War, did not “end” until 1953,
while Japan had surrendered only eight years earlier.
With that head start and the U.S. investment during
the Korean War the Japanese electronics industry
was able to charge into
the post-war 20th cen■ Robert A. Myers,
tury with few obstacles.
Fairfield Resources
Not only did Korea start
International and Columbia
later, but the Korean
U. Business School,
economy was smaller
Senior Vice President
and less advanced than
the Japanese—of which
and Adjunct Professor,
it had, of course, been
New York, NY
a part until 1945. The
European and U.S. electronics makers, being the
winners, were not driven by the same necessity to
overcome adversity.
Evolution of the TV Industry
In 2013 sales of TV sets—now, virtually all liquid
cr ystal technology—are dominated by Samsung
and LG, Korean companies who until this century were bit players in the world of consumer
electronics. Twenty-five years ago one would have
been forgiven if they had not noticed these now
electronics giants. In those years the leading TV
makers—then, of course, using cathode ray tube
(CRT) technology—were in Japan, a magnet for
“out-sourced manufacturing” thanks to their skill
at high volume low cost techniques. Sony, with
what we would now recognize as an Apple-like
reputation for quality (and prices), Sanyo, Panasonic, Toshiba and Hitachi, conglomerates selling
everything from nuclear reactors to washing machines, and Sharp, which was about to bet the farm
and its whole business on liquid crystal TV sets.
Loitering in the wings were the surviving European
makers, Philips, Telefunken, Siemens and others,
barely more than brands even then. Perhaps the
most striking change was the recent announcement
that Samsung will “invest” in Sharp, one of its key
suppliers—essentially a bailout. And Sharp is not
December 2013
246
alone, with some industry experts suggesting that
Japan just say “sayonara to TV manufacturing.”2
And the U.S.? Already a hollow giant, with many
famous brands like RCA attached to foreign-made
boxes thanks to the lower costs promised in the Far
East, where “the foothills of the Himalayas” were
already a major source of anything with significant
labor content. The Americans had evidently gambled
that they could survive with their knowledge-based
engineering talent, oblivious to the near certainty
that there were plenty of smart engineers in China
(as there had been in Japan decades earlier) who
would, sooner or later, take over the higher valueadded parts of the value chain and leave the U.S.
to sell and service the machines that the ships from
China were busy unloading.
Was this transition inevitable? How, in fact, did it
happen? Here are some thoughts, starting with LCD
flat panel TV sets.
Evolution of TV Technology
Television itself is, conceptually, at least, 100 years
old, with the first U.S. commercial broadcasts (for
minimal audiences, of course) transmitted shortly
before World War II. However, “The first commercially
made electronic television sets with cathode ray tubes
were manufactured by Telefunken in Germany in
1934, followed by other makers in France (1936),
Britain (1936), and America (1938). The cheapest of
the pre-World War II factory-made American sets, a
1938 image-only model with a 3-inch (8 cm) screen,
cost $125, the equivalent of $1,863 in 2007. The
cheapest model with a 12-inch (30 cm) screen was
$445 ($6,633).”3 The war interrupted the growth of
commercial TV, but the technology itself was rapidly
accelerated by the military need for reliable electronics and (as in radar and sonar) high quality displays.
The basics of a CRT TV set are relatively simple for
an engineer to master (“not rocket science”) and
apart from incremental enhancements a TV set was
little more than a commodity, distinguished from its
competitors by cost, quality, industrial design, and
brand recognition.
Although the military need for advanced technology did not diminish after 1945—indeed, the Cold
War provided a continuing source of development
2. http://www.eetimes.com/electronics-news/4373507/WillJapan--Inc--say-Sayonara-to-TV-manufacture.
3. http://en.wikipedia.org/wiki/Histor y_of_
television#Television_sets.
247
les Nouvelles
money—TV technology was energized in the 1960s.
After RCA had made the then-daring gamble to introduce color TV, teletype-based computer terminals
were rapidly replaced by CRT terminals. This was
an application which the U.S. TV makers appear to
have completely missed. IBM, the industry leader,
developed and manufactured its own displays (eventually moving both development and manufacturing
to Japan by the 1980s). This was partly because in
those years IBM did everything in-house and partly
because TV technology was not mature enough to
deliver the needed quality for a computer display,
in spite of their superficial similarities. The move to
manufacturing in Japan was, again, motivated by the
allure of high-volume, low-cost manufacturing.
However, the computer display business had an
important side effect. Not being dominated by the
traditional consumer electronics brands, any company
could dive in and develop a line of “plug-compatible”
monitors. Limited by their fragmented computer
industry, no Japanese computer company had the
volume, much less the vision, to dominate the field.
What they did have was cadres of engineers who
spent a great deal of energy researching alternatives
to CRT-based TV sets. Although liquid crystal displays
were slowly emerging, if only in displays more suited
to watches and calculators, what initially appeared
to be the major technology candidate to replace the
CRT was the AC plasma display, originally invented at
the University of Illinois in 1964 and seriously commercialized in the early 1970s by IBM in a banking
terminal display.4
The plasma display technology had a good run,
greatly extended when engineers were able to
produce a full color display by adding phosphors to
the panel’s cells. Not an easy technology to master,
the major protagonist was Panasonic (Matsushita)
which appears to be ready to throw in the towel and
leave the field in 2014.5 Most of the other Japanese
TV makers avoided major investments into this new
technology, although Samsung and LG did invest, and
look like they will be the only survivors for a few more
years.6 Other alternatives did not fare nearly as well,
although clever engineers regularly showcased the
newest technology at the annual “Display Week” show
4. http://en.wikipedia.org/wiki/Plasma_display.
5. See, for example http://www.avsforum.com/t/1463886/
panasonic-may-end-plasma-production-in-2014 and http://mashable.com/2012/05/11/panasonic-plasma-tv/.
6. Information Display, Mar/Apr 2013, page 3.
of the Society for Information Display. Faced with the
barrier of a potentially huge investment if they were
to compete with the LCDs, however, each of these
hot technologies soon faded, like a roman candle.
What has become the ubiquitous TV display technology—indeed, virtually the only viable contemporary
TV display technology—is the digital liquid crystal
display.7 LC-based displays first emerged—slowly—in
the 1960s when RCA (!), which led the way, demonstrated mini LC displays, using new materials from
the German Merck.8 The first RCA patent [3,322,485]
was filed in 1962 and issued in 1967. By the early
1980s, virtually every Japanese consumer electronics
maker had a group dabbling in the technology. One
can speculate that LG did, too—Samsung hadn’t
even filed a patent and only released its first (B&W)
TV set in 1980. Even IBM kept its hand in. By 1985,
prototypes with a diagonal measurement of the order
of 10 inches—not competitive for a TV, but perfect
for a portable (laptop) computer—were being shown
at the SID meetings. By the early 1990s, the IBMToshiba partnership, Display Technologies, Inc., was
one of the top three makers of liquid crystal displays.
Even as late as 1993, the first issue of Information
Display, the Journal of the Society for Information
Display (SID), had several articles on advances in CRT
technology, along with articles on various LCD competitors such as ferroelectrics in addition to several
papers on LCD technology.9 The field was open even
then, although the articles reporting advances in LC
technology strongly indicated where the industry
was headed.
The technology involved was intrinsically far more
complex than CRTs. The devices were in fact far
more like giant integrated circuits than TV sets and
the manufacturing skills involved were a challenge
to everyone—but well suited to companies that had
been making ICs. Making displays at a competitive
cost involved processing a large plate of glass (actually anticipated by the glass used at the start of a
plasma display line) with the transistors that drive
the pixels of the display deposited by expensive tools
in a production line that would soon cost billions of
dollars. Today’s LCD manufacturing lines process
7. http://en.wikipedia.org/wiki/Liquid_crystal_display.
8. [See, for example, “History Crystallized: A First-Person
Account of the Development of Matrix-Addressed LCDs for
Television at RCA in the 1960s” http://www.informationdisplay.
org/article.cfm?year=2008&issue=01&file=art7.].
9 . h t t p : / / o n l i n e l i b r a r y. w i l e y. c o m / d o i / 1 0 . 1 0 0 2 /
jsid.1993.1.issue-1/issuetoc.
plates of glass the size of a garage door. Few people
can afford one of these giant panels, but the key to a
competitive cost structure is processing the largest
possible sheet of glass, from which smaller panels
can be cut. This was long seen as the key to reducing
semiconductor cost, in that the larger a wafer being
processed, the more chips could be produced in a
single process. Recognition of this truism, however,
was not enough—management had to take the risk
of making multibillion dollar investments. Samsung
and LG did.
As challenging as the LCD technology was, it had
one virtue in comparison with CRT-based TVs. No
one had a head start on building the factory or the
displays. The Japanese, of course, had extensive experience in IC manufacturing, greatly facilitated by
the government’s catch-up industry policy stimulus,10
and all the Japanese computer makers had IC manufacturing capability with large and growing patent
portfolios. Sooner or later, they all developed in-house
LCD capability, with Sharp making the most aggressive strategic choice in the early 1990s. Samsung was
also well positioned to make LCD’s, as it was already
the world’s leading maker of DRAMs.
Samsung and LG
Although founded in 1938, it was not until the
late 1960s that the Samsung Group entered into
the electronics industry when it formed several
electronics-related divisions. Its first TV product was
a black-and-white television set. In 1980 Samsung
entered the telecommunications hardware industry
with telephone switchboards and Samsung Electronics began to invest heavily in research and development, investments that were evidently key in pushing
the company to leadership of the global electronics
industry. Samsung became the largest producer
of memory chips in the world in 1992, and is the
world’s second-largest chipmaker after Intel.11 Not
until 1995 did it create its first liquid-crystal display
screen. The field was already dominated by patented
technologies, almost none of which were Samsung’s.
Ten years later, Samsung had grown to be the world’s
largest manufacturer of liquid-crystal display panels.
Indeed, its current share exceeds that of the three
leading Japanese brands combined.
Samsung had earlier made a strategic decision to
go into the DRAM business—even then almost a
10. http://en.wikipedia.org/wiki/Industrial_policy_of_Japan.
11. Worldwide Top 20 Semiconductor Market Share Ranking
Year by Year, http://en.wikipedia.org/wiki/Worldwide_Top_20_
Semiconductor_Market_Share_Ranking_Year_by_Year.
December 2013
248
commodity12—and by 1992 Samsung was already the
world leader in the manufacture of memory chips.13
This success in the face of even stronger adverse
patent positions no doubt encouraged Samsung to
challenge other technologies where it would have
to make substantial payments for needed patent
licenses. Staked by a government eager to catch up
with and surpass the Japanese, capital was not a problem14 and the Korean home market was protected as
the Japanese market had been earlier. Even patents
were brushed off. When sued for infringement,
Samsung just paid—but, meanwhile, making huge
R&D investments so that the next time around they
would have enough patents of their own to reduce
or eliminate royalty payments.
Samsung had followed the DRAM path when it
moved into making hard disk drives, again paying for
the many needed patent licenses until its internal
R&D gave it patent parity. By 2010 it had achieved a
10 percent global market share but, reflecting a focus
on the bottom line, sold the disk business to Seagate
for $1.4B in 2011.15 The model clearly worked, and
it is not hard to see the logic in adopting it to move
into LCDs—particularly since the LCD technology
in the late 1990s was still emerging, and leadership
was still in contention.
The government’s deep pockets no doubt made
building factories easy—and they didn’t have to worry
about public investors complaining about return on
investment, at least in the U.S., since Samsung is still
not listed on a U.S. exchange. In contrast, IBM and
Toshiba abandoned their ambitions to become major
LCD makers circa 1993 when the price tag for the
next generation fab16 approached $2B.17 Samsung
gained the #1 position worldwide in 2007.
By 2012 Samsung led worldwide sales with a
dominant 26 percent share; LG was second with a
14.6 percent share and Sony third with a 9.5 percent
share. Surprisingly, the sales of “U.S.—based” Vizio18
12. http://en.wikipedia.org/wiki/Samsung.
13. http://en.wikipedia.org/wiki/Worldwide_Top_20_Semiconductor_Market_Share_Ranking_Year_by_Year.
14. Samsung continues to invest at an industry-leading rate,
“will invest $18 billion in its memory-chip and display businesses
this year,” http://www.bloomberg.com/news/2013-07-25/samsungmisses-estimates-as-high-end-smartphones-near-saturation.html.
15. http://en.wikipedia.org/wiki/Samsung_Electronics.
16. Industry term for manufacturing facility.
17. They (separately) sold their know-how to different Taiwanese display makers.
18. http://en.wikipedia.org/wiki/Vizio.
249
les Nouvelles
virtually equaled Samsung in the U.S. However,
Vizio is hardly a U.S. manufacturer, other than its
headquarters and a South Dakota call center: “Vizio’s
major partner in the consumer electronics arena is
AmTran Technology, a Taiwan-based OEM/ODM that
manufactures more than half of the televisions sold
by Vizio and owns a 23 percent stake in the company.
Vizio also manufactures its products in Mexico and
China under agreements with ODM assemblers in
those countries.”
LG was originally established in 1958 as GoldStar,
producing radios, TVs, refrigerators, washing machines, and air conditioners. In 1999 LG acquired
100 percent of the bankrupt U.S. Zenith, having
purchased a 50 percent interest in 1995. Zenith at the
time had over 900 issued U.S. patents. Although the
patents strongly emphasized about-to-be-obsoleted
analog and CRT-based,19, 20 television and related
technologies, it also included valuable patents on
vestigial sideband modulation which were essential
to emerging digital TV standards. Royalties of $5 per
TV set resulted in total payments of $25M in 2006
and $50M in 2007 and still are continuing.21 What
the Zenith purchase also provided, in addition to a
competent engineering team (even now generating
patents for LG), was a brand that still appealed to a
U.S. consumer.
I believe that LG saw that Samsung’s “invest, pay
royalties, develop internal technology, invest some
more” would work and—possibly also backed by the
government22 or, at least, the chaebols23—saw an
opening and moved aggressively. Unlike Samsung,
LG Display has been listed on the NYSE since 2004,
but well after it had started investing in LCD fabs.
Already by 1998, four years after LG’s first CD-ROM
drive, LG had achieved worldwide #1 ranking in sales
of CD-ROMs—yet another technology dominated by
third party patents—and is now the world’s second-
19. “Zenith was acquired by LG… mostly for its DTV patents.”
http://displaydaily.com/2012/01/30/last-one-out-please-turn-offthe-lights/.
20. Even their handful of “flat panel” applications covered CRT
flat panel displays which still had some attractions to engineers
who had been brought up on CRTs.
21. LG Electronics 50-Year History, Vol. 04, English Edition
(1958), p. 48.
22. The Korean government announced the electronic industry development plan in 1966 and, in 1969, the ‘Electronic
industry 8-year development project.’ LG Electronics 50-year
History, Vol. 04, 2008, English Edition.
23. Large Korean family-controlled corporate groups. In Japan,
zaibatsu.
largest television manufacturer (after Samsung),[1] and
the world’s fifth-largest mobile phone maker by unit
sales since the second quarter of 2012.
In comparison with Japanese makers, the Koreans had the advantage of lower labor costs (even if
they initially had to buy their manufacturing tools
from Japan), lower cost of capital, and little need to
conform to Wall Street investment measurements.
In retrospect, it is not hard to see the logic of their
approach even if they now are close to the bind originally faced by the CRT TV makers. There is industry
over-capacity, profit margins are fading, and—as the
LCD technology becomes commoditized—lower cost
Chinese (and other Asian) newcomers are undercutting the leaders on cost and price. As we see from
the technology literature, the reaction is to search for
new technologies, like organic light emitting devices
(OLEDs), quantum dots, LED backlights, three-D,
ultra-resolution… Only time will tell if any of these
initiatives can maintain the industry, or whether some
still incipient replacement will come to dominate.
It should not be surprising to note that Samsung
and LG have followed the same path into leadership in sales of cell phones and smartphones, so
that Samsung—using phones powered by Google’s
Android—has become such a force that, in spite of a
billion dollar jury damage award to Apple,24 they are
now the 500-pound gorilla in the smartphone arena,
ranking number one in cell phone and smartphone
sales since 2012. Samsung’s mobile initiative started
rather late, in 1983, and its first successful handset
didn’t ship until 1988. As in LCDs, they surged to a
leadership position in spite of having a thin portfolio
of relevant wireless patents, almost none of which
were “standards essential.” LG has been less successful, but still achieved fifth ranking in worldwide
handset unit sales.25 Now, thanks to their broad and
deep patent portfolios, they are in a strong defensive
position, even when they choose to enter a new field,
as few manufacturers would want to risk infringing a
large number of Samsung’s or LG’s many thousands
of patents.
Patents and Success
The development of the Samsung and LG portfolios
of U.S. patents parallels their technology development. LG first filed its two issued U.S. patents in
1984. Six more issued from applications filed in 1985
and 27 issued from applications filed in 1986. In 1987
24. http://www.foxnews.com/tech/2012/08/24/jury-reachesverdict-in-apple-vs-samsung-case/.
25. http://www.gartner.com/newsroom/id/2335616.
LG filed for 95 later-issued U.S. patents while Samsung, just getting started, had two patents issued from
1987 files, 26 filed in 1988 and 189 filed in 1989
(passing LG’s 99). By 1990 both had high triple-digit
filings that later issued. In short, until 1988-1989,
neither LG nor Samsung was a significant patentee in
the U.S. (or anywhere else, except possibly in Korea).
Patents and R&D investment are two popular proxy
measurements for business success. However, they
are hardly decisive. Patents and success are certainly
correlated, but causality is not obvious. Microsoft
was already a raging success before it earned its first
twenty U.S. patents, in 1995; its first (three!) U.S.
patent applications were only filed at the end of 1992.
And Apple, that paragon of innovation, had received
only a total of 61 U.S. patents by 1990, when it had
already achieved iconic “innovativeness” status. In
contrast, IBM and AT&T had made patenting a key
element in their development strategy, and they fed
the patent process with leading R&D investments for
decades. More recently, IBM has continued to lead
in the number of U.S. patents awarded for the last
twenty years along with its continuing major R&D
investments. Samsung, from a standing start has leapt
to the forefront of patent recipients, ironically joining
Canon, Sony, Matsushita, Toshiba and other Japanese
brands in the top ten. Clearly, there is more to success
than accumulating certificates from the U.S. patent
office. To borrow a metaphor from criminal law, a good
patent attorney can get a patent on a ham sandwich.
Apple offers yet another example of the limited
value of using a patent portfolio as a predictor of
success. In spite of its huge infringement win over
Samsung, the Apple portfolio until very recently has
been unimpressive, numbering less than 100 patents
per year (in comparison with Samsung’s and LG’s—
and Canon’s, Sony’s and Toshiba’s—thousands). In
addition to the royalties it may (but doesn’t automatically) generate,26 a strong patent portfolio serves to
insulate the company’s products from infringement
suits by providing the currency for cross licenses.
However, as we have seen in the above discussion, a
company determined to compete can buy its way in if
it has enough ready money to pay for licenses and to
invest in the R&D needed to generate its own patents.
See the Appendix for a table comparing the leading
recipients of U.S. patents over the last 20 years.
Nevertheless, it only takes one really good patent to
make a company, or a university, or an individual inventor rich. For example, one patent—US3,789,832,
26. IBM’s income from its patent portfolio has been as high
as $1.5B, and still exceeds $1B.
December 2013
250
Apparatus and method for detecting cancer in tissue,
issued 2-5-1974, filed 3-17-1972, by Raymond Damadian—underlies the entire MRI imaging industry.
Other Possible Success Factors
R&D investment, while a somewhat better indicator of future success, often fails, as well. Consider
the dot-com billionaires whose R&D was carried out
in a dorm room. This is consistent with the intuitive
feeling, confirmed by data, that patents and R&D are
closely correlated, while the number of patents and
industrial success are less so.27
Another argument often advanced relates to the
availability of low cost labor. Indeed, that was an
early rationale for IBM building its presence in Japan
in the 1970s and 80s (obviously before the great
Japanese bubble). It is still an obvious factor in the
dominance of Chinese contract manufacturers such
as Foxconn, as well as the U.S.–based Flextronics
which does most of its contract assembly in China.
Nevertheless, the fields in which Samsung and LG
have carved out leadership—DRAMs, hard disks,
smartphones and LCDs—are capital intensive industries, with much of the production performed in
automated factories, now costing billions of dollars
each. These are products where the cost of capital
is far more significant than the cost of labor.
As noted earlier, even in the mid-nineties the cost
of a competitive TFT-LCD manufacturing facility was
approaching several billion USD. Five years ago it was
already $3B28 and is now more than twice that as the
size of the glass processed has grown. As J.P. Morgan
is said to have replied when questioned about the cost
of a yacht, “If you have to ask the price, you can’t
afford it.”29 Since the Korean government controlled
access to capital,30 much as Japan had done earlier, it
is likely that the government copied the successful
Japanese industrial policy by enabling access to low
cost capital for Samsung and LG, providing them
with a significant competitive advantage. Moreover,
27. “Applied Econometrics and International Development.”
AEID. Vol. 5/4 (2005), Prodan, Igor. Influence Of Research And
Development Expenditures On Number Of Patent Applications:
Selected Case Studies In Oecd Countries And Central Europe,
1981-2001.
28. Craig Addison, SEMI Dazzling Display Issues: LCD Market
Growth, Glass Size, Fab Cost, and OLEDs, at http://www.semi.
org/en/P044084.
29. Business Education World, Vol. 42. Gregg Publishing
Company,1961, p. 32.
30. See, for example, Kang-Kook Lee (Ritsumeikan University), Economic Growth Controlling Capital: focusing on the
1960s’ experience in Korea, www.ritsumei.ac.jp/~leekk/study/
lee-ko60cc-ss.doc.
251
les Nouvelles
these were not public companies while they were
aggressively building up their manufacturing capacity,
so they were not troubled by Wall Street’s fixation
on return on capital. They could afford to focus on
the numerator, and ignore the denominator. So,
although we must look elsewhere than to labor cost
for factors that have led to the success of Samsung
and, in a lesser way, LG, the cost and availability of
capital are an important factor in their success in
comparison with their fading Japanese competitors.
And, as a colleague of mine reminded me, we have
to look fast before other unknowns rise up and knock
today’s leaders off their pedestals.
What Happened to the Japanese Makers?
The Japanese consumer electronics giants do not
appear to have made egregious errors. After the
Plaza Accords bubble burst in the 1990s, they were
victims of a high yen and a deflationary economy,
limiting their ability to invest and export. In a narrow sense, they also paid a penalty for being too
early with innovation: Japan’s national broadcasting company NHK led the world with satellite and
high definition TV broadcasts into the 1990s. It’s
possible that this nascent leadership opportunity
led the Japanese makers astray by their need to
concentrate on analog technology in order to satisfy
their domestic market, thus missing the tide favoring
digital TV, so astutely exploited by LG in its purchase
of Zenith. Another misstep was costly investments
in plasma TV, notably by Panasonic (Matsushita), but
that didn’t seem to have troubled Samsung and LG.
The TV makers continued to invest in R&D and pile
up patents and even to invest in bigger and bigger
fabs until fairly recently. And, as noted above, they
may not have had access to the low cost capital available in Korea, greatly limiting their ability to invest
profitably in building new LCD fabs. Finally, no one
would argue that Korean engineers were smarter
than Japanese engineers but it seems likely that they
worked harder and longer in a nationalistic drive to
outdo their former colonial masters.
One last possible source of the Japanese loss of
leadership would be in the executive suites, where
Korean management appears to have been much
less risk averse. An exploration of this possibility is
beyond the scope of this brief analysis.
The Verdict
Samsung and LG appear to have been the beneficiaries of shrewd industrial policies of the South
Korean government and superior senior management
choices coupled with the determination of their staff,
somewhat enhanced by misjudgments by Japanese TV
consumer electronics makers’ top management. ■
Appendix 1 – Some Leading Recipients of U.S. Patents31
IBM32
Samsung
LG33
Matsushita
Canon
2012
6478
5081
3101
2011
6148
4968
2873
2533
Sony
Toshiba
3174
3032
2447
2818
2265
2451
Hitachi
1455
Panasonic
Apple
Microsoft
2769
1303
2613
825
2309
Intel
2010
5866
4518
2763
2443
2551
2130
2212
741
3086
1652
2009
4887
3592
2014
1759
2200
1656
1669
416
2901
1534
2008
4169
3502
1720
1469
2107
1461
1575
272
2026
1772
2007
3125
2723
1456
1910
1983
1455
1519
166
1637
1864
2006
3621
2451
1364
2229
2366
1771
2005
2941
1641
975
1688
1828
2004
3248
1604
1012
1934
1805
1305
1514
133
1601
2003
3415
1313
779
1786
1992
1311
1893
108
1592
2002
3288
1328
655
1544
1893
1434
1601
101
2001
3411
1450
496
1440
2000
2886
1441
579
1672
1732
141
1959
1258
1271
104
1549
1310
1877
1363
1890
1385
1232
1271
117
136
1999
2756
1545
650
1795
1410
1200
1998
2657
1304
576
1928
1316
1170
1094
268
189
1997
1724
1381
859
862
903
236
731
411
1996
591
323
1995
504
298
1994
486
252
33 Zenith
78
1993
435
175
All but
129 Zenith
78
1992
305
156
All but
95 Zenith
56
1991
205
135
All but
77 Zenith
42
1990
82
126
All but
67 Zenith
38
1989
47
96
All but
36 Zenith
12
1988
15
119
All but
39 Zenith
13
1987
11
111
All but
18 Zenith
12
1986
9
70
Zenith
10
1985
3
59
Zenith
6
277
Zenith
19801984
188
138
31. Note that not all primary sources agree! http://en.wikipedia.
org/wiki/List_of_top_United_States_patent_recipients.
32. For 2012 data, see http://www.lotempiolaw.com/2013/02/
articles/patents/top-10-companies-issued-us-patents-in-2012.
33. www.delphion.com tabulated by the author.
December 2013
252
The Strategy Of Filing Early
The Strategy Of Filing Early Concepts
As Incomplete Patent Applications
By James Anglehart
This is an executive summary of this important
topic, and is not a complete review. Business decisions should not be made based only on information
given here, but in consultation with your Intellectual
Property (IP) professional. In reading this summary,
you should understand the framework of patent application priority and the first-inventor-to-file system,
as well as the importance of including such issues in
managing your business.
Patent Application Priority
I
n 1883, the Paris Convention1 was established
to allow a patent applicant to gain access to patent rights outside the home country with the
same rights as the home country. The Convention
established that a patent applicant would have twelve
months to file the corresponding patent applications
in other countries, while keeping the benefit of the
filing date of the first-filed home application. This
was an important milestone since the filing date is a
critical element to the validity of a patent application.
Today, most countries require that a patent application for an invention be filed before the invention is
disclosed publicly, and such countries are known as
“absolute novelty” countries.
The Paris Convention and the rules for awarding a
priority date have evolved considerably since 1883.
Today the Paris Convention forms part of the WTO’s
Trade Related Aspects of Intellectual Property Rights
(TRIPs)2 with all WTO member countries as subscribers. The effective filing date is not given to a patent
application as a whole, but is given on a patent claim
by claim basis. Furthermore, a patent application can
claim priority dates from two or more earlier patent
applications. The priority rights of a patent application
is limited to the subject matter disclosed in a valid
1. http://www.wipo.int/treaties/en/ip/paris/trtdocs_wo020.html.
2. http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm,
Article 2.
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les Nouvelles
priority document. Any new matter not part of the
priority document is not entitled to the priority date.
This is called partial priority.3
Different Standards
The PCT International Search and Preliminary
Examination Guidelines4 prepared by the World Intellectual Property Organization (WIPO), that administers the Patent Cooperation Treaty (PCT), sets out in
Section 6.09 the basic test to determine whether a
claim is entitled to the date of a priority document.
The test is the same as the test of whether an amendment to an application satisfies the requirement of
PCT Article 34(2), namely the requirement that no
new descriptive subject matter can be introduced by
way of an amendment. Section 6.09 goes on to add
that, for the priority date to be allowed, the subject
matter of the claim must be explicitly or inherently
disclosed in the priority document, including any features implicit to a person skilled in the art. Under the
PCT guidelines, when it comes to assessing priority
based on an earlier-filed patent application, priority is
not granted when the earlier-filed patent application
contains only a mere mention of an invention with
sketchy details.5
The issue of new matter being introduced to an application as a result of claim amendments is handled
differently in some countries. In the USA and Canada,
for example, the policy is quite generous to patent
3. This follows from Paris Convention Article 4F that permits
an application to claim multiple priorities or to claim priority of
an earlier patent application while describing further elements
not in the earlier application. Priority is thus based on elements
of the application, and claims to different elements can have
different priorities.
4. www.wipo.int/pct/en/texts/pdf/ispe.pdf.
5. This also follows from Paris Convention Article 4F that
introduces the notion that priority relates to the “elements…
included in the application whose priority is claimed” as well as
Article 4H (see below note) that requires specific disclosure of
the elements claimed.
applicants. A way of defining or characterizing an invention, that was not expressed in the originally-filed
application, but that defines operable embodiments
disclosed in the original application will generally
be accepted in newly presented or amended claims.
For example, when a patent application described an
apparatus having elements A+B+C in combination,
it will likely be accepted to present a claim to the
combination of elements A+C, even if there was no
implicit or explicit description of the exclusion of
element B, as long as the reader would understand
how to make the combination operate in the absence
of element B.
In the European Patent Office (EPO), a claim
amendment would not be permitted to claim a subcombination of a disclosed combination, unless the
omitted element was inherently understood from
the original description as being optional. In general,
the characterization of the invention formulated
in a claim must be found in the patent application
description or claims as originally filed. Even if there
is no requirement for claims in a valid priority patent application,6 its reader should have understood
the scope of the invention to be claimed. China’s
SIPO is typically even more strict than the EPO on
the point of amendments that add new matter or
go “beyond the scope” of the original application.
New Zealand is a country that exceptionally is
more generous than the PCT guidelines cited above
in that it is possible to base a priority claim when
the priority document describes the same inventive
concept, but fails to enable the invention as claimed.
Bicycle Brake Example
Imagine that the bicycle rim brake was a new invention, and a first patent
application describes
the side-pull rim brake
as shown in Figure 1.
This device is described
as allowing the pulling
action on the cable to
bring the rubber pads
against the metal rim
of the bicycle wheel for
braking. The cylinder Figure 1
6. Paris Convention Article 4H reads, “Priority may not be
refused on the ground that certain elements of the invention
for which priority is claimed do not appear among the claims
formulated in the application in the country of origin, provided
that the application documents as a whole specifically disclose
such elements.”
24 on the cable sheath is described as an adjusting
barrel for compensating for cable stretch.
There are two questions that follow concerning
priority rights based on such a description: (1)
can a claim define a sub-combination of what was
described and (2) can a claim cover more than the
embodiment described in the priority application?
Specifically, can a claim omit the adjusting barrel?
And, can a claim cover equivalents, such as the
center-pull shown in Figure 2.
In most countries,
including the European
Patent Office (EPO)
■ James Anglehart,
states and China (SIPO),
Anglehart et al,
priority is to be given to
an earlier-filed patent
Owner/Patent Agent,
application when there
Montreal, Canada
is clear support for the
E-mail: james.anglehart@
characterization of the
anglehart.et-al.ca
invention as claimed. If
there was no mention
in the priority document that the adjusting barrel was optional, likely
the patentee will not be allowed to benefit from
the filing date of the priority patent application for
a claim that omits this feature. Likewise, a generic
claim to the cable actuating at least one brake lever,
without including the feature that the sheath is
mounted to one lever, while the cable end is connected to the other lever, will likely not be accepted
in Europe or China.
However, in the U.S. or Canada, such a generic
claim covering the center-pull equivalent will likely
be considered valid when
supported by the description of the side-pull brake.
In this context, the
reader will appreciate the
significant gap between
U.S. and EPO practices.
Special care is required to
ensure that patent applications describe variants
to be covered and what
the essential components
of an invention are. Even
when not including claims,
there must be clear description of the invention
essentially the equivalent
to well-thought-out claims.
To define such features,
Figure 2
December 2013
254
typically a patent search is done before filing a priority application.
The First-to-File System
In this article, a distinction is made between Firstto-File outside the U.S., and First-Inventor-to-File
in the U.S. In First-to-File systems throughout the
world, when two patent applicants file for the same
invention, the patent is awarded to the applicant
having the earliest priority date. Because patent
applications are published at 18 months from their
priority date, the existence of the first-filed patent
application is discovered later, typically in examination by the Patent Office.
The patent applicant with the later priority date,
namely the “second-to-file” applicant, must exclude
from her claims whatever could be claimed in the
first-filed application. This is what is called “citable
for novelty only.”7 When the second-to-file applicant
files after the first-filed application is published or
the first-to-file applicant otherwise publishes the
invention, the published material can be combined
with the state of the art to invalidate the second-filed
patent application.
If the second-filed patent application were to
describe the center-pull bicycle brake, while the
first-filed application only the side-pull, then the
second-to-file applicant might enjoy exclusive rights
to his brake because the first-filed application failed
to describe it.
Furthermore, if the first-filed patent application
failed to support a generic claim to the equivalent
described in the second-filed patent application, then
the second-to-file may be free to commercialize their
brake without account to the first-to-file.
If the second-to-file applicant successfully defined
the generic claim to the bicycle brake while the firstto-file applicant failed to do so, then the second-to-file
applicant can claim any such bicycle brake with the
explicit exception of the brake as described by the
first-filed patent application. This is how things work
outside the U.S.
7. The exclusion of earlier-filed patent applications from being
cited for obviousness is defined by Article 56 EPC that states, “If
the state of the art also includes documents within the meaning
of Article 54, paragraph 3 (i.e. earlier-filed patent applications),
these documents shall not be considered in deciding whether
there has been an inventive step.” In Canada, third party earlierfiled patent applications are novelty-destroying under Section
28.2(c),(d) and the definition of information that may be relied
on for considering obviousness under Section 28.3 excludes the
prior art of Section 28.2(c),(d).
255
les Nouvelles
Thus, preparing a good patent application with support for accurate claims can be just as important as
being the first-to-file, as there is very good potential to
gain valuable patent rights as long as one files before
publication of the first-to-file applicant’s invention.
U.S. First-Inventor-to-File
The “Leahy-Smith America Invents Act” (AIA) came
into effect on March 16, 2013. It changed the U.S.
from being a first-to-invent system to a first-to-file
system with unique characteristics like none other
in the world.
The difference in the U.S. system is that the firstfiled application is prior art combinable with the
whole state of the art.8 In the above example, the
central pulling cable bicycle brake would have to be
inventive over the side-pull brake to be patentable.
The second-to-file applicant does not have nearly the
same opportunity to obtain valuable patent protection for differences between what each applicant
described. For example, the cable tension release
lever and mechanism shown in association with the
cable mount would have to be non-obvious over the
side-pull brake patent application description and
other prior art references to be patentable.
Earlier-filed patent applications were combinable
with other prior art in U.S. first-to-invent patent law,
however, such earlier-filed patent applications were
able to be overcome as a reference if the second-filer
could show a date of invention prior to the filing date
of the earlier-filed patent application.9 The ability
to establish a date of invention for overcoming any
reference has been abolished with AIA.
The net effect is that U.S. first-to-file rules are punitive to those who are second-to-file in comparison
with the first-to-file systems around the world.
Leveling the Playing Field in the U.S.
With the distinct system in the U.S., a distinct
approach is called for. In the rest of the world, it is
important to be the first-to-file a patent application
that can support future claims, as discussed above.
Such patent applications can be called “complete
8. 35USC§102(a) includes earlier-filed patent applications
from another inventor as prior art. 35USC§102(c) defines
“another inventor” to extend to other applicants. 35USC§103
requires a claimed invention to be nonobvious in view of the prior
art as defined in 35USC§102 without exception.
9. Under 35USC§102(e) prior to AIA, an earlier-filed patent application was prior art if it was filed before the inventor made his
invention. 37CFR1.131 allowed for an affidavit of prior invention
to be submitted to dismiss as prior art a 35USC§102(e) reference.
priority applications.” These applications require a
full understanding of the invention, its variants, the
prior art and of the desired claim scope. Accordingly,
a patent applicant cannot be ready to file a complete
priority application as soon as the concept for the
invention is available.
However, because a U.S. patent application is combinable with the state of the art in the U.S., its prior
art effect is much greater than in other countries.
This makes it worthwhile to file a patent application
much earlier, even if such a patent application fails to
meet the standard of a complete priority application.
If a patent application is filed as early as possible,
based for example on early concepts related to an
invention, it will not necessarily be a direct benefit
to the applicant’s priority rights, but instead it will
serve as a tool to compromise the scope of potential
claims of a later filer’s U.S. patent application.10 Patent applications that are not prepared to necessarily
contain full enablement, description of variants and
of claim scope can be called “rough provisional patent applications.”
Bicycle Brake Example—Initial Concept
The initial concept
related to the centerpull brake was to use
a pair of levers or arms
to move rim-engaging
pads. Let’s assume that
the details of implementation were not
fully understood when
the initial concept was
made. Only after making a prototype and
testing was done, did
Figure 3
the inventor fully understand the details (including the addition of the
cable tension release mechanism). For the sake of
the example, let’s presume that the initial conceptual
drawing was provided as shown in Figure 3, namely
without describing how the cable is mounted with
respect to the brake, and without such mounting
10. MPEP 2121.01 cites Beckman Instruments v. LKB Produkter AB, 892 F.2d 1547, 1551, 13 USPQ2d 1301, 1304 (Fed. Cir.
1989) as stating “Even if a reference discloses an inoperative
device, it is prior art for all that it teaches.” And further cites
Symbol Techs. Inc. v. Opticon Inc., 935 F.2d 1569, 1578, 19
USPQ2d 1241, 1247 (Fed. Cir. 1991) as stating “A non-enabling
reference may qualify as prior art for the purpose of determining
obviousness under 35 U.S.C. 103.”
being implicit11 (there are variety of ways to actuate
the brake).
If the future claim to the bicycle rim brake recites
the cable mount and connection to the brake (and
this is an essential component for operation, and thus
a reasonable limitation to include), the description
of the initial concept in a rough provisional patent
application cannot support the claim according to the
PCT standard of awarding priority.
When products are more complex than a bicycle
brake, developing the invention can take even more
time. However, as soon as an R&D team identifies
interest in a new technology or product, a review
should be made to see if any concepts related to the
technology or product should be made the subject
of one or more rough provisional patent applications.
U.S. patent applicants have traditionally relied on
establishing dates of invention in lab books or other
internal communications resulting from early work
in developing a complete understanding and readiness to file a priority patent application. These dates
of invention were useful for overcoming as prior art
the patent applications filed by others in obviousness
rejections. A similar type of effect can be achieved by
filing rough provisional patent applications to early
concepts of an invention being developed.
While a rough provisional patent application may be
considered to be weak on details or premature and
may serve little or no useful priority purpose outside
of the U.S., for the reasons given above, a rough provisional can and should be filed once the concept is
made and before engaging the R&D process.
Non-Convention PCT Option
If there is any reason to believe that a rough provisional could support a claim to the invention, and an
applicant wants to postpone the filing of the complete
patent application, for example because of an ongoing
R&D effort to properly and fully define the invention,
the complete application could be filed directly as a
PCT application with no priority claim to the rough
provisional. This approach avoids the consideration
of whether a priority claim based on a second patent
11. In this simple mechanical example, it might have been
fully possible to have identified and specified the cable mount
and its operation, such that a full priority would have been
established. This would be beneficial to the applicant to obtain
the earliest priority date. The author assumes that the elements
omitted from the rough provisional were not readily available to
the applicant, and would have required the effort of R&D over a
number of weeks or months.
December 2013
256
application can be fully effective, however, it requires
filing the PCT application a year earlier than when
relying on an earlier priority application.
Managing Rough Provisionals
The goal is to gain sufficient understanding of an
invention so as to be able to file a complete priority
application. When such an application is ready, the
previously-filed rough provisional can be studied to
see if it can serve as a basis for priority. If it cannot,
then its priority value is zero for the U.S. and particularly for other countries. The complete priority
application can then be filed as the priority document
for the invention as it will be claimed.
Separate from the question of priority is whether
the rough provisional could be useful as prior art in
the U.S. only against a competitor who might have
filed between the filing date of the rough provisional
and the filing of the complete priority application.
This utility can be determined if one or more claims in
the complete patent application could be considered
obvious in light of the rough provisional.
abstract but no substantive new subject matter. The
objective is to keep the date of the rough provisional
for the subject matter disclosed.
It can be effective in this case to request nonpublication13 of the rough nonprovisional as it will only be
filed in the U.S. A request for nonpublication can be
done on filing, as long as the applicant declares that
the application has not also been filed in a country
with automatic 18-month publication. There is little
to gain by showing the public the content of a rough
provisional that is not able to support a claim in the
complete priority application. And there is another
advantage to be gained by keeping the rough nonprovisional secret, namely it will not become prior
art until the applicant chooses to have it published.
Review Early R&D Efforts
File U.S. Provisional Patent
Application for Concepts
and Early-Stage
Inventions (Rough
Provisional)
Rough Nonprovisionals
When a rough provisional is shown to have sufficient description of the invention to support one
or more claims in the complete patent application,
then its priority is claimed. The rough provisional will
thus become, in the U.S., prior art as of its filing date
combinable with other prior art once the complete
patent application is published in the U.S.
An earlier-filed patent application is prior art against
the same applicant’s later-filed patent application
(unless priority is claimed) in most countries, but not
in the U.S., where the same applicant’s earlier-filed
patent applications are not prior art unless they were
published more than one year12 before the filing of
the later-filed application. The rough nonprovisional
can only serve as prior art against third parties, and
not against the applicant herself.
When a rough provisional is shown to be insufficient to support a claim (as in the example of the
brake concept), but sufficient when combined with
the state of the art to render obvious a claim in the
complete priority application (this would be the case
in the example if cable actuator mounts are known in
the art), the rough provisional can be maintained as a
U.S. patent application separately from the complete
priority patent application. This application can be
called a rough nonprovisional, as it will be a formalized version of the rough provisional with a claim and
12. 35USC§102(b)
257
les Nouvelles
Is a Claim in Complete
Priority Patent Application Obvious in Light of
Combination of Rough
Provisional and Stateof-the-Art?
no
yes
Abandon Rough
Nonprovisional
Review Final R&D Efforts
Prepare Complete Priority
Patent Application
no
Does Rough Provisional
Support a Claim in
Complete Priority Patent
Application?
yes
File Rough U.S.
Nonprovisional with
Nonpublication Request
Is a Claim in Competitor’s Patent Application
Obvious in View of Rough
Nonprovisional?
yes
Claim Priority to Rough
Provisional in Complete
Patent Application
No Priority Claim to
Rough Provisional
13. 35USC§122(b)(2)(B)(i)
no-no action
License-In from
Competitor
Abandon Rough
Nonprovisional to
Prevent
Publication
Rough
provisional
filed
Company A
Company B
Idea for
Product C is
conceived
Idea for
Product C is
conceived
Prototype of
Product C is
tested under
CDA
Product C is
Developed
Product C is
developed
B’s patent application is cited for obviousness in U.S.—
A has no claims allowable in USA’s application
patentable outside of U.S. with claims to A’s way of
making C more effective
Complete
patent
application
is filed for C
Complete
patent
application
is filed for C
The duration of secrecy of the rough nonprovisional is limited to its pendency. Most U.S. patent
applications are examined within two years of their
nonprovisional filing date. This time period is about
3 years from the filing date of the rough provisional.
This should be ample time to discover the presence
of any competitor’s application filed prior to the
complete priority application. If a longer pendency
period is required for the rough nonprovisional, a
continuation application can be filed with a further
request for nonpublication.
Abandonment of an unpublished rough nonprovisional can be done by not responding to an office
action, not paying an issue fee, or by filing a request
for express abandonment under 37CFR1.138.
When a U.S. patent application is subject to a
request for nonpublication, publication in a foreign
patent application of the invention will cause the U.S.
patent application to be considered to be abandoned.14
While there is a risk of an argument that the filing of
the complete priority application in other countries
should be considered an application directed to the
invention disclosed in the rough nonprovisional, the
consequence of such an argument would be the abandonment of the rough nonprovisional. The validity
of the complete priority application in the U.S., not
14. 35USC§122(b)(2)(B)(iii) states “An applicant who has made
a request under clause (i) but who subsequently files, in a foreign
country or under a multilateral international agreement specified
in clause (i), an application directed to the invention disclosed
in the application filed in the Patent and Trademark Office, shall
notify the Director of such filing not later than 45 days after the
date of the filing of such foreign or international application. A
failure of the applicant to provide such notice within the prescribed period shall result in the application being regarded as
abandoned, unless it is shown to the satisfaction of the Director
that the delay in submitting the notice was unintentional.”
Rough nonprovisional
filed
A negotiates with B in-license of broad
rights to C in exchange for abandonment of rough nonprovisional
B’s application is allowable over public prior art,
but compromised by potential prior art of A’s
rough nonprovisional
subject to a nonpublication request, is not in question as a result of the nonpublication request made
in the rough nonprovisional.
If the rough nonprovisional is filed without making
a nonpublication request, it will be published at 18
months. This will make the prior art effect automatic
in the U.S. The rough nonprovisional will not serve
as prior art against the applicant’s own complete
priority application in the U.S. as mentioned above.
In other countries, the complete priority application
must be filed before publication of the rough nonprovisional and the rough nonprovisional must not
be able to support a claim in the complete priority
application. In this way, the Paris Convention priority
rights established by the complete priority application
are whole and unharmed.
In the above timeline example, Company A diligently pursues its development of Product C, while their
competitor, Company B does the same. Company A
takes a bit more time in its R&D than does Company
B; and Company B files its patent application before
Company A who files a few months after Company
B, and before there is any public disclosure of the
invention by either party.
This scenario would normally leave Company A
with some patent rights outside of the U.S., and
likely very little or no rights in the U.S. However,
Company A files a very rough provisional describing
some concepts related to Product C, as soon as was
possible. When Company A has sufficient understanding of Product C, a patent application is filed, although
in hindsight shortly after B filed. Patent counsel for
Company A determined that the rough provisional
could not support a claim in the complete priority
patent application. No priority is claimed to the rough
provisional in the complete patent application for
Product C. However, it is decided by counsel that the
December 2013
258
disclosure of the rough provisional would, in combination with other prior art, render obvious claims to
the invention in Product C. A nonprovisional of the
rough provisional is therefore filed in the U.S. with
a nonpublication request.
Licensing-In From the First-to-File
If during U.S. examination of one’s complete priority patent application, or as otherwise revealed by
a patent search, a competitor’s patent application
having an earlier filing date is discovered, the loss
of patent scope in the U.S. due to the earlier-filed
application will likely be more severe than in other
countries. If the rough provisional pre-dates the filing
of the earlier-filed application—meaning that work on
the invention by one’s inventor’s had started before
the competitor was able to file a patent application
for the invention—then the consequences of being
second-to-file need not be so severe in the U.S.
The analysis that concluded that the rough provisional should be filed as a rough nonprovisional can
be repeated for the competitor’s patent application.
The claims in the competitor’s application can be
studied to determine if they are vulnerable to an
obviousness rejection on the basis of the rough provisional’s teachings and the whole prior art. If this is
the case, then the rough nonprovisional has value. If
it is unpublished, then the rough nonprovisional is a
negotiation tool. If it was published, then it can be
cited against the competitor’s patent application.15
The applicant of the unpublished rough nonprovisional has control over its publication,16 and its ability
to be cited as prior art against the competitor’s patent
application. If the rough nonprovisional is never published, it never becomes prior art and never impacts
on the validity of the competitor’s future patent.17
Disclosure of the unpublished rough nonprovisional
to the competitor does not create any negative consequence, as for example a duty to disclose it as prior
art to the USPTO, since it is not prior art yet. The
competitor can take the required time to consider the
potential prior art effect of the rough nonprovisional,
and the value of its never becoming prior art.
15. 35USC§122(e) allows for a published patent application to
be submitted by a third party if it is done within 6 months from
publication or prior to a first office action on the merits. A third
party can provide prior art directly to the applicant or her patent
attorney with the expectation that it will be brought to the attention of the USPTO under the duty to disclose of 37CFR1.56.
16. 35USC§122(b)(2)(B)(iv) allows for the applicant to rescind
the nonpublication request.
17. Publication under 35USC§122 is a requirement for an
earlier-filed application to be prior art under 35USC§102(a)(2).
259
les Nouvelles
In the example of the bicycle brake, let’s presume
the inventor of the side-pull brake was first to file a
complete application and the inventor of the centerpull brake was first to conceive the brake. Let’s also
presume the inventor of the center-pull brake files a
rough provisional before the side-pull brake patent
application is filed, and then files a complete patent
application after the side-pull application. In this
scenario, the inventor of the center-pull brake will
enjoy certain rights outside the USA, but could see
the claims granted outside the USA be rejected for
obviousness in light of the side-pull application in
the USA. However, the rough nonprovisional has the
power to invalidate the side-pull patent application
in the USA if it were published. The rough concept
of the rim brake described in the rough provisional
could, in combination with other prior art, render
obvious the invention described and claimed in the
side-pull brake application. Control over this publication is the bargaining chip that the inventor of
the center-pull brake has over the inventor of the
side-pull brake.
While no one is ever pleased to offer the competition a license to one’s patent, avoiding the prior art
effect of the rough nonprovisional, and possibly the
invalidity of one’s broad patent claims, is a strong
incentive to license. When two applicants are close
in filing patent applications for the same or similar
inventions, the second-to-file applicant regularly
obtains partial patent rights in First-to-File countries
(outside the U.S.), and the competitor might already
have accepted that the second-to-file enjoys certain
patent rights for the invention. The objective of a
license can be to enjoy the same effective rights
as in other countries, or to enjoy a full license to
competitor’s patent. The ability to negotiate will
depend on the potential prior art effect of the rough
nonprovisional. If the potential prior art effect of the
rough nonprovisional is the likely unpatentability of all
meaningfully broad claims, a royalty-free, transferable
license might be warranted.
There is a good opportunity in the above-described
scenario to negotiate a license or settlement amount
for the abandonment of the rough nonprovisional. In
the case that a competitor was the first-to-file a complete patent application for an invention, the goal of
the license would be to give a second-to-file applicant
(who filed an earlier rough provisional, followed up
by an unpublished, rough nonprovisional) access to
rights equal to, or better than, those offered in other
jurisdictions. Licensing can become an integral part of
patent procurement in the AIA framework! ■
Impact Of Kirtsaeng v. Wiley
Kirtsaeng v. Wiley Incentivizes
Digital Distribution
1
By Ilaria Maggioni
I
n Kirtsaeng v. Wiley,2 the Supreme Court ruled
that once a copyrighted work has been sold by
its owner anywhere in the world, it is free to
be resold—including by importation into the U.S.
itself. Hence, under U.S. copyright law a doctrine of
“worldwide exhaustion of rights” now applies.
1) The Supreme Court’s Decision
The Supreme Court relied on narrow statutoryinterpretative grounds to reach its conclusion that
Kirtsaeng’s resale in the U.S. of books manufactured
abroad did not infringe Wiley’s copyright under the
first-sale doctrine.3 The Court held that the copies
sold by Kirtsaeng were “lawfully made” under the
Copyright Act and so they are subject to the first-sale
exception to copyright infringement.
The Supreme Court overruled the Court of Appeal
for the Second Circuit’s more conventional ruling that
the statutory language “lawfully made under this title”
means that the first-sale doctrine does not apply to
copies of American-copyrighted works manufactured
abroad.4 This conventional territorial view was urged
by Wiley’s geographical reading of that language essentially so that the exception would apply only to
copies “made in the U.S.”; being as the “title” is in
fact the copyright law of the U.S., not the world.
The Supreme Court favored Kirtsaeng’s reading
of the relevant language as “…imposing the nongeographical limitation made ‘in accordance with’
or ‘in compliance with’ the Copyright Act, which
would permit the doctrine to apply to copies manu1. Previously published as—“Kirtsaeng v. Wiley Incentivizes
Digital Distribution,” Mealey’s Litigation Report: Cyber Tech &
E-Commerce, Vol. 15, #4 June 2013.
2. Kirtsaeng v. Wiley, 133 S.Ct. 1351 (2013).
3. The “first-sale” exception to copyright infringement is
provided by the Copyright Act, 17 US.C. §109(a). See also
Kirtsaeng v. Wiley at 1352 (2013) (“… the owner of a particular copy or phonorecord lawfully made under this title . . . is
entitled, without the authority of the copyright owner, to sell
or otherwise dispose of the possession of that copy or phonorecord, §109(a). Importing a copy made abroad without the
copyright owner’s permission is an infringement of §106(3)”).
4. Id. at 1352.
factured abroad with the copyright owner’s permission”—as were the Wiley books at issue in this case
(emphasis added).5
An extensive dissenting opinion by J. Ginsburg
points out that the majority’s ruling is a bold departure from “…Congress’
aim to protect copyright
owners against the un■ Ilaria Maggioni,
authorized importation
of low-priced, foreign
RKunstadtPC,
made copies of their copyIP Attorney,
righted works…”; and is
New York, NY
“all the more stunning,
for it places the United
States at the vanguard
of the movement for ‘international exhaustion’
of copyrights—a movement the United States has
steadfastly resisted on the world stage.”6
While the Wiley decision was saluted by some
commentators as a welcome victory for consumers,
it does not likely represent a game-changing paradigm
outside of the print universe. Online retail of digital
content should not be affected, due to its narrow
reasoning and its focus on print publications. The
shift to digital content, already well underway, should
get a boost.
2) Digital Music
The decision’s inapplicability to digital content is
exemplified in a recent decision about music files. In
the market for digital resale of copyrighted works, the
Wiley decision had generated concern that a similar
exhaustion of copyrights would be forthcoming for
digital music files. In that case, a legitimate second
market for digital files would be free to flourish after
first sale—with revenues migrating out of the hands
of original copyright owners (mostly publishers and
record labels, or in some cases established independent musicians) and right into the hands of reselling
websites and original first purchasers. Advocating
5. Kirtsaeng v. Wiley at 1352-1353 (2013).
6. Id. at 1373.
December 2013
260
for this shift are new comers like the digital cloudbased reseller website ReDigi; and established online
retailers such as Amazon; and self-styled consumer
organizations.
However, in March 2013, shortly after the Supreme
Court’s Wiley decision, the District Court for the
Southern District of New York (SDNY) issued a ruling
in the case Capitol Records LLC v. ReDigi Inc. holding
that there is no copyright exhaustion by “first-sale”
of digital music files.7
Hence, increased reliance on digital distribution
may be viewed as a direct—although perhaps unintended—consequence of the Supreme Court’s Wiley
decision. Since publishers no longer have control of
print publications after first sale (not only made in the
U.S., but now under Wiley also if made abroad), the
natural market response after Wiley would be for publishers to turn to digital distribution, where publishers
may retain full control under prevailing digital licensing models. The SDNY in ReDigi confirms that result
for digital music. Since digital works are traditionally
brought to market under non-transferable personaluse licenses—not “sold,” the first-sale doctrine so far
has been held inapplicable to licensed digital works.
In 2010, in the Autodesk case8 a similar issue in
respect of resale of software was decided (on appeal)
substantially the same way as ReDigi. The Autodesk
case even dealt with a physical tangible medium (CD
embodying the software) originally sold under license,
resold to a third-party who in turn resold them on
eBay. Supporters of exhaustion of copyrights in digital
resale hoped that the Wiley decision would lead to a
different ruling in ReDigi, but Wiley did not and could
not effect that shift.
The fundamental difference between a physical and
digital product is the nature of the legal transaction
that is used to handle digital versus non-digital works.
That is at the core of most of these cases because
normally title in non-digital works is transferred,
meaning there is an actual sale, and the sale triggers
the first-sale doctrine. Non-digital works are most
frequently not transferred. They are provided to consumers based on a limited license which contractually
restricts use and re-distribution of the work.
7. Capitol Records LLC v. ReDigi Inc., _F.Supp2d_, 2013 WL
1286134 at *9-10 (SDNY 2013). The author expected that
result—as discussed in an interview with U.K. “I.P. Magazine.”
“Brought to book,” I.P. Magazine (April 2013) (Copyright © I.P.
Magazine 2013).
8. Vernor v. Autodesk Inc., 621 F3d 1102 (9th Cir. 2010).
261
les Nouvelles
In 2010, in Vernor v. Autodesk, the Court of Appeals for the Ninth Circuit, overruled the District
Court’s finding that a digital resale of Autodesk’s
AutoCAD software by a third-party, who legitimately
purchased it from the original buyer, was permitted
by the first-sale doctrine. The Ninth Circuit agreed
with Autodesk that its software was sold under a
non-transferable license and so it was not subject to
the first-sale doctrine.9
The Autodesk decision and now the ReDigi decision,
still pose a substantial obstacle for companies looking
to resell digital content.10 Apple and Amazon recently
sought patent protection for cloud-based reselling
models applicable to second-hand digital content.
Obtaining such patents does not mean that the patent
owner would be able to use them, without infringing the copyright owner’s digital content. Under the
current legal framework, Amazon, Apple, ReDigi
and the like, do not have much to counter with. The
legal authority over copyrighted digital products still
remains within the copyright owner’s control because
the copyright owner retains the copyright over digital
property sold under strict personal-use licenses.
From a practical perspective, copyright owners may
be expected to adjust to circumstances and find ways
of making products that cannot easily be re-distributed after they leave the manufacturer. Copyrighted
digital content might not be re-salable in practical
terms. Copyright owners can add password protection
and other security mechanisms, which are illegal to
circumvent under the Digital Millennium Copyright
Act, or that make the products unmarketable because
they are no longer usable on other devices; or without
periodic payment of subscription fees. For example,
Adobe recently transitioned to a subscription-fee
based distribution model.
9. Id. at 1103-1104 (“Autodesk distributes Release 14 pursuant to a limited license agreement in which it reserves title
to the software copies and imposes significant use and transfer
restrictions on its customers. We determine that Autodesk’s
direct customers are licensees of their copies of the software
rather than owners, which has two ramifications. Because
Vernor did not purchase the Release 14 copies from an owner,
he may not invoke the first sale doctrine, and he also may not
assert an essential step defense on behalf of his customers.”)
10. E.g., Ricardo Bilton, Apple and Amazon want to let you
resell your digital stuff (if that even makes sense), VentureBeat MediaBeat Section, March 8, 2013 (http://venturebeat.
com/2013/03/08/apple-amazon-resell/); and Darrell Etherington, Apple Patents A System For The Resale And Transfer Of
‘Used’ Digital Goods, TechCrunch, March 7, 2013(http://techcrunch.com/2013/03/07/apple-patents-a-system-for-the-resaleand-transfer-of-used-digital-goods/).
3) Possible Effects on Exhaustion of
Trademarks and Patents
The Wiley decision declaring international exhaustion of copyrights may foreshadow similar exhaustion
for trademarks (e.g., legitimizing pharmaceutical
gray imports). The decision incentivizes publishers
to phase out print publications in favor of digital
distribution. Since digital works are traditionally
brought to market under non-transferable personal-
use licenses—not “sold,” the “first-sale” doctrine so
far has not been applied to licensed digital works.
While some commentators speculate that this
decision may also lead to worldwide exhaustion of
patent rights,11 the principle of territoriality of patents
seems to have been more securely established over
the years than for trademarks, which have long been
the subject of controversy over the legality of “gray
imports” from abroad. ■
11. E.g., John Rothchild, The Exhaustive Consequences
of Kirtsaeng, JURIST - Forum, April 29, 2013 (http://jurist.
org/forum/2013/04/john-rothchild-kirtsaeng.php); and Dennis
Crouch, First-Sale Doctrine: Authorized Foreign Sales Exhaust
U.S. Copyrights [and US Patents], PatentlyO, March 19, 2013
(http://www.patentlyo.com/patent/2013/03/first-sale-doctrineauthorized-foreign-sales-exhaust-us-copyrights-and-us-patents.
html).
December 2013
262
Australian IP Licensing
Introduction: The Growing Risk From
By Amalia Stone
1. Introduction: The Growing Risk From
This article seeks to examine the risk a licensor of
IP may face when licensing IP in Australia, in ways
that the licensor may not have anticipated. The article
first examines why the risk may exist, and then looks
at how Australian courts have treated the risk in relation to brand licences, copyright licences and finally
patent licences. Finally, some steps are suggested to
assist licensors to mitigate these risks when licensing
in Australia.
One of the key questions in determining a commercial strategy by which to assess your IP assets can be
to ask the following question: is your business best
placed to commercialise the IP asset itself, or is a
third party better positioned to do so under a licence?
A series of recent Australian cases has thrown into
stark relief the risk a licensor is exposed to when
licensing its IP in Australia, to the extent that the
licensor is involved in those licensed activities. Should
this change how you assess your IP assets?
In this article, we look:
(a) At how the risk may arise for an IP licensor in Australia in a range of situations, some of
which are obvious, some of which are less so;
(b) At how this issue has been treated in
Australian copyright cases;
(c) At how this issue has been treated in
Australian patent cases, including some
factors that may mean an IP licensor is at
a higher risk of being found to have been
involved in infringement as a joint tortfeasor,
or for being liable for having authorised
infringement by its licensee; and
(d) At how this issue has been treated in
Australian trade mark cases, including in
particular some factors which may place
intra-group licence arrangements at risk.
Finally, we suggest some mitigation strategies to
assist IP licensors in managing this risk, if you choose
to license your IP into Australia.
2. Why Would An IP Licensor Be At Risk?
2.1 Licensing 101—What is an IP Licence?
At the heart of an intellectual property right is the
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les Nouvelles
ability to exclude others from the use of that intellectual property—a sword to prevent, rather than
a shield to defend the IP owner against third party
infringement claims.1
Practically speaking, although you may own an IP
right, you may be unable to use that right without
infringing the rights of third parties.
An IP licence is in essence an agreement by the IP
owner not to take action against the licensee for acts
that would otherwise infringe the owner’s IP right.
If silent, a licensee may argue that the licensor has
given an implied warranty that use of the relevant
invention or right will not infringe third party rights.
A licence is not usually viewed as carrying with it
(unless expressly agreed) a positive commitment by
the IP owner to protect the licensee against claims
from third parties.
2.2 Involvement in Infringement
There are licences, and then there are licences that
come with many strings attached. For instance, an IP
licence may be:
• A simple agreement by a software company that a particular piece of software can be
used internally within a business;
• A brand licence that requires a licensee to comply with trade mark guidelines, and
quality standards in relation to supply chains;
• A franchise agreement that allows a licensee to use a brand, coupled with a business
system, subject to compliance with operating manuals, and multiple guidelines that control
in almost every way how the licensee may
behave;
• A covenant not to sue a licensee for acts that would otherwise infringe a patent;
• A patent licence, coupled with quality
standard compliance obligations, and a right to use a dossier in relation to a pharmaceuti-
cal substance, with controls over where
active pharmaceutical ingredients may be
purchased and from whom; or
1. Although registration of trade marks gives a statutory defence
to an infringement action (s 23, 122(1)(e) Trademarks Act 1995
(Cth)).
• An agreement that permits a third party to reproduce or communicate copyright material.
It becomes obvious in the above examples that an
IP licensor may have varying degrees of involvement
or control over how the licensee may behave. That
involvement or control may be legally important (as
in trade marks) in order for the licensor to maintain
its IP rights,2 or commercially significant to the licensor in maintaining its reputation, or important from
a regulatory sense.3 But it is also that same extent
of involvement and control which has the potential
to expose the licensor to liability arising from the
licensee’s activities in its use of the relevant IP right.
The main areas for concern for a licensor are
whether the licensor has authorised the licensee
committing the infringing act, or whether the licensor and licensee are involved in an enterprise pursuant to a common design in the course of which the
infringement occurred.
Recent cases which we discuss below have been
helpful in outlining what level of involvement a licensor must have to be exposed to this liability, but the
lines are still not clear. The main factors boil down to:
(a) The nature of any relationship existing
between the licensor, and the licensee who did the infringing act;
(b) The extent (if any) of the licensor’s power to prevent the doing of the infringing act; and
(c) Whether the licensor took any reasonable
steps to prevent or avoid the doing of the infringing act.
2.3 Statutory Issues
If there is an obligation on the licensee to offer
products or services under the licensor’s brand or
name, the licensor may also be exposed to liability
in relation to the nature or suitability of the products
themselves.
This risk arises under the ‘deemed manufacturer’
provisions of the Competition and Consumer Act
2010 (Cth).4
2. For instance, to avoid trade mark registrations becoming
vulnerable to removal for non-use, where the only use has been by
the licensee, and that use has not been controlled (either control
financially over the licensee, or quality control over the branded
goods or services) under section 92 Trade Marks Act 1995 (Cth),
or removal on the basis that the use of such trade mark has become
likely to deceive or cause confusion under s 99(c) of the Trade
Marks Act, because the trade mark has become associated with
the licensee rather than the licensor.
3. For instance, in relation to the requirements under the
Therapeutic Goods Act 1989 (Cth) for control over supply chain,
issues around master drug files, the role of a sponsor.
4. s7 Australian Consumer Law.
3. Copyright Licences—Areas To Watch
A copyright creator is in the best position to know
whether a work or other subject matter is original
and has not been copied from a third party work.
However, the assessment is not always a simple one
for a copyright licensor. For instance, in the case of
content aggregators, publishers,5 software licensors
(where software code has been written over a number
of years), and entities who provide facilities for copying or communication of third party copyright works
and subject matter, or
for persons providing
access to data derived
■ Amalia Stone,
from social media sources, there are multiple
Herbert Smith Freehills,
sources of copyright
Senior Associate,
rights in play.
Sydney, NSW, Australia
For instance, in the
6
recent Larrikin case,
the defendants—EMI
group companies—did
not themselves create
the song “Down Under”—nor did EMI, of their
own volition, include in the song the beautiful flute
riff that was found to infringe Larrikin’s copyright in
“Kookaburra Sits In The Old Gumtree.” The infringing act was done by the copyright creator of “Down
Under,” namely the band Men At Work and two of
its songwriting members.
In the recent iiNet appeal,7 the High Court emphasised that whether or not an entity has ‘authorised’
infringement is a question to be determined based
on the facts of the particular situation.
In order to minimise the potential for actions to be
brought on the basis of primary copyright infringement and secondary copyright infringement for
authorisation,8 persons who license copyright works
or other subject matter will need to ensure that they
are in a position to demonstrate that they:
1. Own all copyright in that material, or
2. Have a licence to use that material in the way that
it is being used, and have taken steps to prohibit
5. For instance, as in Corby v Allen & Unwin Pty Limited [2013]
FCA 370.
6. Larrikin Music Publishing Pty Ltd v EMI Songs Australia Pty
Limited [2010] FCA 29 (4 February 2010).
7. Roadshow Films Pty Ltd v iiNet Ltd [2012] HCA 16 (20 April
2012).
8. Under s101 of the Copyright Act 1968 (Cth), authorising
infringement by another person is itself a secondary act of copyright infringement.
December 2013
264
or otherwise prevent the licensee from using the
material in any other way.
Copyright licensors need to take steps to assess
whether they are exposed as secondary infringers due
to the behaviour of their licensees, with reference to
the factors discussed in Section 3 above.
4. Patent Licences—Areas To Watch
Patent cases have followed similar reasoning to
copyright cases in their assessment of whether a
licensor has authorised infringement by a licensee.
However, perhaps because of the more industrial
application of patent rights, these patent cases have
focused on whether the infringement has arisen in
the course of an enterprise in relation to which the
licensor and licensee have shared in a common design,
such that the licensor and licensee are ‘joint tortfeasors’ (persons who together commit a wrongful act,
either by intent or negligence).
A starting point is to examine the extent to which
the licensor has been involved in the licensee’s business in which the patent rights were exercised, and
through which the infringement arose.
4.1 TGA Approval—Earlier Consideration
In Apotex Pty Ltd v Les Laboratoires Servier,9 Bennett J found at an interlocutory level that there was
sufficient evidence to find that there had been a ‘common design’. The party being joined was held to have
manufactured the active ingredient for the product
being sold by the primary infringer, and played an active and significant role in obtaining and maintaining
Australian Therapeutic Goods Administration (TGA)
approval for the product.
4.2 Sales of Product to Licensee
The Apotex case referred to Unilever PLC v Gillette (UK) Ltd.10 which found that an overseas parent
company could be joined to an infringement action
against the local company where the parent company:
1. Wholly owned the local company;
2. Sold the allegedly infringing product to the local company;
3. Was aware of the patent claimed to be infringed;
4. Was party to a know how agreement with the local company;
5. Exercised a worldwide right to veto products to be marketed by the local company (and
other subsidiaries); and
9. (No 4) [2010] FCA 1202.
10. [1989] RPC 583.
265
les Nouvelles
6. Benefited from sales through direct profits
and royalties payable under the know how
and licence agreement.
4.3 Not Enough to Manufacture or be Involved in
TGA Approval?
In Apotex Pty Ltd. v Les Laboratoires Servier,11 Bennett J stated that:
“to show infringement by common design, it is
necessary to demonstrate some act in furtherance
of the common design’, and that it was insufficient,
by itself, to show that there is a close relationship
between two companies, or that a company group
is ‘vertically integrated’...
the fact that Apotex P...is itself the manufacturer,
or directs the manufacture of the PAI, or provides
information to the TGA for the Apotex Product is
not sufficient to make out a prima facie case of
authorisation of infringement or of joint tortfeasance by common design to infringe.”
However, Bennett J was prepared to find that there
may be a prima facie case (that is, a case that appears
to have merit on first review) of ‘common design’
considering those elements, and others, together,
although no tort was found to which the Apotex party
may have been the joint tortfeasor (that is, a party who
together with another has caused the tort or injury).
Bennett J considered authorisation separately, in
relation to which she commented that “neither mere
facilitation nor mere indifference may be sufficient
to constitute authorisation…knowledge that infringement is likely to occur does not necessarily amount
to authorisation.”
4.4 Global Development and Manufacture
Most recently in Bayer Pharma Aktiengesellschaft v
Genentech Inc,12 Bennett J was prepared to find that
there was a prima facie case of joint tortfeasorship on
facts where the overseas licensor, Regeneron:
1. Was party to a license and collaboration
agreement with the local party;
2. Announced that the parties were collabo rating in relation to global development;
3. Manufactured the licensed product;
4. Shared development costs and profits from
sales worldwide (other than USA);
5. Jointly owned copyright in promotional
materials;
11. (No 2) [2012] FCA 748.
12. [2012] FCS 1467 (interlocutory).
6. Had a right to review and comment on major promotional materials; and
7. Had processes around exchange of informa tion to comply with regulatory obligations.
Because Bennett J found that there was a prima
facie case that Regeneron was a joint tortfeasor with
Bayer, she did not go on to make a determination
about authorisation.
4.5 Some Risk Factors
From the above cases, the lesson for patent licensors is that a patent licensor may increase the risk of
secondary liability for patent infringement through
its licensee’s acts if certain factors are present, for
example:
a. The licensor is aware of the patent that may
be infringed by the licensee. This may be
relevant in pharmaceutical licensing. In tech nology licensing, the licensor may be less
likely to be aware.
b. The licensor makes and sells to the licensee
the product or process that allegedly in fringes. This may be relevant in pharmaceut ical licensing and some technology licences.
c. The licensor characterises the relationship
as ‘collaboration’ or as part of a general
development/commercialisation plan by the licensor (e.g. local partner). This may be
relevant in some pharmaceutical licences
and some software licences.
d. The licensor is the parent company of the licensee (or otherwise above the licensee in
a company group ownership structure).
e. The licensor shares know how with the licen see, or acts in joint effort to develop the
product or process which allegedly infringes. Often licences include an initial period in
which the licensor shares know how with
the licensee. Sometimes there is an ongoing
obligation for both parties to share improve-
ments or know how. Sometimes, for
relationship purposes, the parties even
describe a licence as a ‘collaboration’. In
other matters, parties are actually partici pating in a project to develop, or collaborate in
a centre or consortium, and the agreement contains the outlines of commercialisation rights for each party—without dealing com-
pletely with liability.
f. The licensor controls the way in which the
allegedly infringing product or process is
promoted.
g. The licensor is actively involved in seeking
TGA (or other regulatory approval) for a
TGA regulated product or process. This is particularly relevant for pharmaceuticals
and other therapeutic goods, where licensors licence dossiers and are actively involved
as sponsor or otherwise in the TGA application.
h. The licensor benefits from sales of the
allegedly infringing product or process. This
is usually the case.
A patent licensor may also run the risk of authorising infringing acts (although the factors to support
liability have not been as well specified in the cases)
if the licensor:
• Was aware of the patent likely to be infringed; and
• Had the power to stop the licensee’s allegedly infringing activities; and
• Did not require the licensee to take reason able steps to avoid the infringement.
5. Brand Licences—Areas To Watch
There are not many Australian cases that focus on
the relationship between trade mark licensors and
licensees, but a recent case has shown that the same
principles come into play in the trade mark arena, as
for copyright and patents.
In SMA Solar Technology AG v Beyond Building
Systems Pty Ltd.,13 SMA sued not only the user of
the allegedly infringing trade mark (BBS), but also
Ipevo, the licensor.
Ipevo was held liable for the infringement on two
grounds:
(a) Knowing involvement in the infringement. Ipevo shared a common director with BBS,
who executed the licence agreement be tween BBS and Ipevo on behalf of both
companies. The court was prepared to find that that person must have been aware of
the infringement, and therefore that Ipevo
as licensor was knowingly involved in the infringement by licensing the infringing
mark to BBS.
(b) Ipevo’s joint tortfeasorship with BBS as
acting in concert with BBS in the infringe-
ment. Unfortunately, the decision did not
go into detail as to what would be required
in order to show that in the brand
13. (No 5) [2012] FCA 1483.
December 2013
266
context “two or more people …had acted
in concert in committing the tort.”14
This raises alarm bells for any intra-group trade
mark licence, where there is a relationship between
the licensor and licensee, such that knowledge of
the licensee as to the local brand landscape may be
imputed to the licensor.
6. Accepting The Inevitable—Next Steps
So, the lesson across the board is that any sort of
licensing of IP may expose a licensor to liability for
infringement arising from its licensee’s activities.
It is likely that this risk is present to a greater or
lesser extent for IP licensors in other jurisdictions
(such as the UK15 and the USA16) with similar jurisprudence, in particular in situations where there is
a company relationship in place between licensor
and licensee.
How then is a licensor to deal with that risk? Some
mitigation strategies include:
a. Patent and trade mark searches. Licensors could
conduct infringement searches in each relevant
jurisdiction where it intends to use the technology
or brand or to license a third party. This would
give the licensor a better view of what the possible liability may be in practice. Of course, no
infringement search can ever be definitive.
b. Copyright clearance. Licensors could seek to
research the history behind the work or subject
matter to confirm that they have all necessary assignments or licences for the desired use.
c. Technological protection measures (in relation
to digital copyright products). Licensors could
seek to block any unlicensed uses (for instance,
DRMs). However, what can be developed by one
smart person can be worked around by another,
and this will never provide complete or continual
protection against unlicensed use.
d. Indemnity. If a licensor licenses a third party
14. It appears that this was not disputed, rather that Ipevo
sought to establish that BBS’s acts had not been licensed by Ipevo.
The court referred to Thompson v Australian Capital Television
Pty Ltd [1996] HCA 38, (1996) 186 CLR 574 in establishing the
necessary test.
15. Unilever PLC v Gillette (UK) Ltd, see note 10.
16. For instance, see “New Concerns Over Product Liability Risk
for Trade mark Licensors”, Lee J Eulgen Neal Gerber & Eisenberg,
http://www.ngelaw.com/alert/product-liability-risk-for-trademarklicensors/.
267
les Nouvelles
to use or commercialise, it could seek to include
an appropriate indemnity, and requirements on
the licensee to obtain appropriate professional
indemnity insurance to support the indemnity.
However, there will be a risk that an intellectual property infringement suit will exceed the
licensee’s ability to indemnify, or the amount of
insurance taken out.
e. Exclusion of warranties. If the licensor licenses
a third party to use or to commercialise, it could
do so on a no warranties, no representation basis,
in order to support that the licensee undertakes
the activities at its risk.
f. No training / know how / marketing input /
branding/supply of licensed product / shared development or commercialisation plan. If the licensor
licenses a third party to use or commercialise, it
could seek to do so as a bare licence. The licence
would not include assistance obligations on the
licensor, and would structure fees so that it is
clear that the licensor is not participating in the
commercialisation activity other than licensing the
patent to the licensee.
While this will not prevent a third party from
bringing an action against the licensee, structuring
the licence in this way would seek to support that
there is no ‘common design’ between the parties.
However, this may not match the commercial relationship between the parties in practice. A court
will look behind the written terms of the licence
to see whether those elements are present—the
absence of them from the licence agreement itself
will not be conclusive.
There is no avoiding the risk that licensing your
IP may bring, unless you choose not to license your
IP assets. Licensing your IP assets in Australia may
still be a sound commercial strategy, provided that
you take steps to manage and mitigate the associated risks. ■
Evolving IP In Turkey
Evolving Intellectual Property Regimes
In Turkey And University Inventions:
The New Article 6 Of The Patent Law And Its Impact On
University Inventions
By Omer Hiziroglu and Iclal Arguc
W
hen it comes to technology transfer activities Turkey is really not on the map, yet.
Lately, Turkey’s dynamic economy is attracting a lot of international attention with a financial
sector that is stronger than ever in a Europe that
is struggling with economic crises. Nevertheless,
delays in the judicial and legislative processes, weak
intellectual property protection and low R&D spending may impede the Turkish government’s ambitious
target to take place among the top 10 economies in
the world by the year 2023. Recently, Turkish government has become aware that in order to build a long
term sustainable growth and build its competitive
edge, technology is a must. Thus, among other government driven initiatives some key measures have
been taken to strengthen university research and the
current laws on intellectual property. However, these
initiatives while worthwhile and necessary do have
some shortcomings and present a few challenges for
technology transfer and IP professionals.
In leading knowledge-based economies, universities
have been an important source of new, innovative
technologies and products. While whether universities should stray from basic research and education
to applied research and commercialization avenues is
an ongoing debate, the fact is that universities contribute a great deal to technological innovation and
to new products hitting the market via their spinoff
or licensing activities. Some well known examples
coming out of university research1 that changed the
market range from Gatorade, CAT scan, LCDs, to your
run of the mill large multinational powerhouses such
as Google and Yahoo.
In 2011, U.S. universities took the first four places
of the top five among universities with the most
PCT applications published, with 583 applications
in total. Incidentally, the fifth university is the Korea
Advanced Institute of Science and Technology with
103 applications.2
Turkey is currently considerably behind with regards to university originated inventions being
■ Omer Hiziroglu,
commercialized. Change,
Inovent,
however, is on the horiGeneral Manager,
zon for those stakeholdIstanbul, Turkey
ers with some vision and
E-mail: omer.hiziroglu@
patience. Three governinovent.com.tr
ment incentives in particular should be noted:
the revision of the De■ Iclal Arguc,
cree Law 551 (“DL 551”)
Sabanci University,
on patents that contains
Technology Transfer Specialist, important changes reIstanbul, Turkey
garding inventions made
within universities, TUBITAK’s (The Scientific and
Technological Research
Council of Turkey) new grant 1513 to promote the
creation of technology transfer offices (“TTO”) within
universities, PROs and research or technology parks,
and finally the publication of Turkey’s top innovative
and entrepreneurial universities index by Ministry of
Science, Industry and Technology (“MSIT”).
Currently, out of 170 or so universities in Turkey,
less than a handful have a dedicated technology transfer office (“TTO”). Of those, Sabanci University is
leading the pack, having been engaged in technology
transfer and commercialization activities since 2005.
We should also note the substantial advances made
in the recent years by other universities, in particular
METU (Middle East Technical University), a public
university leveraging its huge academic resources
and the know how of its academicians, coming up
with very interesting inventions and the efforts of
1. http://www.ipadvocate.org/pdfs/Uni%20Inventions%20
Changed%20the%20World.pdf.
2 . h t t p : / / w w w. u n i v e r s i t y w o r l d n e w s . c o m / a r t i c l e .
php?story=20120309132555536.
December 2013
268
its TTO to commercialize resulting patents are to be
recommended. Bosphorus University and Ege University (EBILTEM Program) have also made substantial
progress in this regard. A relatively younger university,
Özye University has also made an important impact
in a very short time span, not so much in technology
transfer space, but in its focus on entrepreneurship
with the launch of very successful “Startup Factory”
within the university supporting early stage entrepreneurship. Those other universities with a dedicated
TTO are engaged more in project management and
industry liaison type activities: trying to build a more
robust industry sponsored project portfolio, often
leveraging government or EU grants. While these
efforts are worthwhile, technology transfer in the
sense of licensing university technology to industry
is almost non-existent and certainly not the priority
for most university administrators or for that matter
industrial partners. At the risk of oversimplifying the
issue, we can point to two main reasons: i) universities, for the reasons to be explained below, have no IP
portfolios that can be monetized by way of licensing;
and ii) industry has yet to see Turkish universities
as a potentially important and viable source of core
commercial technologies.
While there is no verifiable data, it is not surprising that Sabanci University is the only Turkish
university, known to the authors that has licensed
technologies to industrial partners that are in fact
generating royalties.
This general picture is, however, grossly misleading
regarding the innovative potential of Turkish universities. Indeed, while most universities are not engaged
in TTO activities, there are an unknown number of
patent applications filed by professors independently
from their universities. One reason for this is that
current DL 551 still has what is known as “professor’s
privilege” in its article 41, referring to an exception
to employee inventions principle that allocates the
ownership rights of employee inventions to the employers, provided that such inventions were a result
of the employee-employer relationship. Thus, until
the new draft on the DL 551 is adopted, inventions
made within universities belong to the professors
and not to the university. The other reason for almost
non-existent patent portfolios within universities or
commercialized university originated products is that
IP rights have never been a strategic consideration for
most universities, especially within state universities,
despite considerable accumulation of knowledge and
brain power that these universities can rely upon to
launch a very successful technology transfer activity.
269
les Nouvelles
Three separate government initiatives that will impact commercialization activities within universities
are elaborated more in detail below.
1). Revisions to the Patent Law
(Decree Law 551)
The new draft patent law has been in the pipeline
for a long time and does indeed contain important
revisions (thus cause for debate) most of which are
beyond the scope of this paper. The text is currently
in front of the Turkish Parliament and is expected to
pass this summer.
Among the most critical changes contained in the
text is the removal of the exception to employee inventions for academic inventions at the universities
(the so called “Professor’s privilege”), modifying the
current article 41 of the DL 551.
New article 6 in the draft text states in its pertinent part that for inventions resulting from scientific
research at higher education institutions shall be subject to the provisions regarding employee inventions.
The inventor is required to submit an invention
disclosure form to the university and the university
has to elect in a timely manner (as specified in a
separate regulation) whether to retain ownership
rights on the invention. In the event the university
elects to retain the rights, the university has to file
for a patent protection. If the university elects not
to retain ownership rights or does not file for protection within the term specified by the regulation, the
invention then becomes a free invention and inventor
is free to apply for a patent protection in his or her
name. If, at the time inventor submits the invention
disclosure form, a patent application has already been
filed by the inventor, the university can ask Turkish
Patent Institute to be registered as the applicant.
The university may elect not to claim ownership
rights and propose to assign the application or the
patent to the inventor. In such an event, university
may choose to reserve a licensed right to use and
exploit the invention. This license, however, cannot
be exclusive and the university is required to pay the
inventor a reasonable license fee.
The new article 6 also touches upon the potential
revenues generated by the invention in the event of
successful commercialization of the invention by the
university. The university is required to allocate at
least 1/3 of the total revenues to the inventor. What
is considered “revenue” is however not defined by the
lawmaker. It is also not clear whether the university
takes into account patent prosecution cost before
determining the net revenue generated. This begs
to question on what will happen if the university’s
TTO elects to pursue alternative methods of revenue
generation such as cross licensing or receiving equity
from a startup in consideration for the license. The
issue may be even more complicated in the event
that the university chooses to monetize by litigation
and to legally enforce the patent against a third party
infringer. If, after what is bound to be a very expensive
process, the university receives a settlement or damages, should the university allocate to the inventor
1/3 of the total monies awarded or the net amount
after discounting litigation costs? We can assume that
some of these questions will be addressed later on as
issues arise through actual practice.
A corollary issue that may challenge the TTOs is
whether this article requires maximizing the potential
financial returns on a patent that can often be at odds
with the university’s overall strategies, policies or cultural approach, not to mention difficult to ascertain.
Unlike the current article 41 that dealt specifically
with “academic staff” (professors, paid post-docs,
etc—a term defined by the Law on Higher Education,
2547, 1981) the current article 6 is not as precise
and refers in determining its scope to “inventor” for
inventions made within higher education institutions.
While the issue may be dealt with in a separate regulation, without further qualification, one question is
whether undergraduate and graduate students as well
as other university personnel are subject to article 6.
The article 6 however specifies, by reference to law
on Higher Education, ownership rights for research
conducted under specific research agreements with
public or private institutions by adjunct faculty,
interns, teaching assistants and students shall be
determined by an agreement between the parties,
arguably the university and the institution, party to
the research agreement.
A particularly disturbing paragraph in article 6 is
the university’s obligation to indemnify the inventor
in the event the application or the patent right “ends
for whatever reason.” First issue is why the university
has to indemnify the inventor if the university is the
rightful holder of property interests on the patent
(as in the case of employee inventions). It is unclear
whether the law maker intended, erroneously, to reserve a conditional retroactive ownership right in the
inventor. The second issue that law maker has clearly
not considered is the extreme difficulty in evaluating
early stage technologies. Arguably such an evaluation
will be the basis of the indemnification and Turkish
courts are presently ill equipped to handle patent
valuation exercises. In the event there is mysterious
formula to accurately evaluate early stage technologies that is not known to this author, the corollary
question is in which national markets we will try to
evaluate the potential value of the patent application?
The potential value is likely to be very different in
Turkey, in Europe or worldwide. What will happen
if a national application is granted but the PCT application succeeds in countries A and B, but fails
in countries C and D? In addition, does the TTO’s
mandate indirectly include implementing an international protection strategy (with the required market
research and considerable in house and out-sourced
costs) to maximize value? What happens if the TTO
files for a national protection, unaware or ignoring
foreign commercial potential, that turns into a national patent that has little or no commercial value
in the national market? Did the law maker consider
the fact that one can modify claim structures in the
application by considerably narrowing the scope of
the protection in order to have an issued patent
(thus avoiding the indemnification obligation) that
does not provide a real useful protection on what
was initially expected?
What about if the application fails due to prior
art hurdles, as a result of invalidation action (costly
to defend) or because of patent attorneys’ malpractice? Who bears the liability if patent attorneys
drop the ball?
All in all, these two lines of the article 6 are ill
considered and may create new form of “ambulance
chasing” lawyers flirting with professors waiting for
an opportunity to sue universities. Thus a type of
patent troll can rise trying to build a portfolio of disgruntled professors ready to pounce on unsuspecting
TTOs. The end result is that universities, naturally
risk averse, will be pushed to not claim ownership
of university borne technologies, thus defeating the
main purpose of article 6, that is to push universities
to build a patent portfolio, increase their technology
transfer activities, creating a functioning and sustainable TTO to contribute to knowledge dissemination,
job creation and creating financial and non-financial
impact in society.
2). Publication of University IP and
Innovation Index
This year, the Ministry of Science, Industry and
Technology published for the second time an index
ranking Turkish universities based on their entrepreneurial and innovative activities. Of the 170
universities in Turkey, Sabanci University had come
on top of this index for the first year with 84 points
while METU (ODTU) was in the second place with
December 2013
270
83 points. For the second year, METU is placed first
with 86 points (an increase of 3 points) and Sabanci
University is trailing on the second place by a mere 0.2
points with a total score of 85.8 points The 2013 index
has just been recently published on July 8th, 2013.
Table 1 shows the ranking of ten universities in
the entrepreneurial and innovative universities index
2012 and 2013 and Table 2 presents how the index
takes into account 20 odd factors grouped under 5
main categories.
1. Scientific and research capacity: This category
has a weight of 20 percent on the overall ranking
and takes into account factors such as scientific
publications and citations, as well as R&D projects
that have received national or international grants
and number of PhD students.
2. IP Portfolio: This category has a weight of 15
percent and takes into consideration number of
patents, patent applications (including utility
model applications) and PCT applications.
Table 1. The Entrepreneurial And
Innovative University Index 2012
No.
University
Total
Scientific &
Technological
Research
Competence
Intellectual
Property Pool
Cooperation
& Interaction
1
Sabanci University
84
19,2
9,2
25,0
12,5
18,3
2
Orta Dogu Teknik
University
83
18,9
10,6
22,2
12,2
18,8
3
Ihsan Dogramaci
University
70
18,3
6,5
22,8
4,5
18,2
4
Ozyegin University
69
13,3
6,5
19,3
10,9
18,8
Entrepreneurship
Economic
& Innovation
Impact &
Culture
Commercialization
5
Istanbul Teknik University
67
15,9
7,8
20,1
7,4
15,9
6
Bogazici University
65
19,0
0,9
24,2
3,4
17,1
7
Izmir Yuksek University
58
18,8
1,8
18,1
3,3
16,2
8
Koc University
57
17,2
5,9
22,2
9,9
2,2
9
Gebze Yuksek Institute of
Technology
57
18,4
3,8
17,5
6,3
11,1
10
TOBB Ekonomi ve
Teknoloji University
54
16,1
0,0
19,2
6,8
12,2
Table 1.1 The Entrepreneurial And
Innovative University Index 2013
271
No.
University
Total
Scientific &
Technological
Research
Competence
1
Orta Dogu Teknik
University
86,0
19,2
11,2
22,9
15,0
18,8
2
Sabanci University
85,8
20,0
10,1
25,0
13,4
17,3
3
Ihsan Dogramaci
University
82,7
19,9
9,6
23,3
11,9
18,0
Intellectual
Property Pool
Cooperation
& Interaction
Entrepreneurship
Economic
& Innovation
Impact &
Culture
Commercialization
4
Bogazici University
76,3
20,0
7,3
22,8
11,1
15,1
5
Istanbul Teknik University
72,5
16,2
7,7
20,9
9,2
18,5
6
Izmir Yuksek University
68,1
19,8
3,8
22,0
5,8
16,9
7
Ozyegin University
67,4
11,9
3,8
22,0
13,7
17,1
8
Koc University
61,7
17,1
7,5
23,8
9,6
3,6
9
TOBB Ekonomi ve
Teknoloji University
57,0
16,7
3,8
19,7
2,3
14,6
10
Hacettepe University
56,7
14,8
6,3
16,2
9,4
10,0
les Nouvelles
Table 2. Extent of the Entrepreneurial & Innovative University Index
Dimension 1: Scientific and Technological Research
Competence Ratio (Weight Ratio: 20%)
• Number of Scientific Publications
• Number of Citations
• Number of Projects Taken from R&D and Innovation
Support Programs
• Fund Sum Taken from R&D and Innovation Support
Programs
• Number of National and International Science
Awards
• Number of PhD Graduates
Dimension 2: Intellectual Property Pool
(Weight Ratio: 15%)
• Number of Patent Applications
• Number of Patent Documents
• Number of Useful Model/Industrial Design
Documents
• Number of International Patent Applications
Dimension 3: Cooperation and Interaction
(Weight Ratio: 25%)
Dimension 4: Entrepreneurship and
Innovation Culture (Weight Ratio: 15%)
• Number of R&D and Innovation Projects Carried
Out in the University-Industry Cooperation
• Fund Sum Taken from the Projects Carried Out in
the University-Industry Cooperation
• Number of R&D and Innovation Projects Carried
Out with International Cooperation
• Fund Sum Acquired from the International R&D and
Innovation Cooperations
• Number of Students/Academic Members in
Exchange
• Number of Entrepreneurship, Technology
Management and Innovation Management Courses
on Undergraduate and Graduate Level
• Number of Full-time Employees Working in
Technology Transfer
• The Existence of Technology Transfer Office
Structuring
• Fund Sum Acquired from the International R&D and
Innovation Cooperations
• Number of Entrepreneurship, Technology
Management and Innovation Management
Training/Certificate Programs Intended for Outside
Universities
Dimension 5: Economic Impact and Commercialization (Weight Ratio: 25%)
• Number of Active Firms Where the Academicians are Shareholders or Owners in Technoparks,
Incubation Centers and TEKMERs
• Number of Active Firms where the University Students or the Graduates of the Last Five Years are
Shareholders or Owners in Technoparks, Incubation Centers and TEKMERs
• Number of Employees in the Firms where the Academicians are Shareholders or Owners in
Technoparks, Incubation Centers and TEKMERs
• Number of Licensed Patented/Useful Model/Industrial Designs
3. University-Industry relations and collaborative
projects: This category has a weight of 25 percent
and takes into considerations factors such as R&D
projects in the context of University-Industry
collaborations, amount of grants received and
number of students and professors involved in
exchange programs.
4. Entrepreneurship and innovative culture
(weight of 15 percent): This category takes into
consideration undergraduate and graduate level
entrepreneurship courses, whether the university
has a TTO (including number of full time TTO
staff) as well the number of workshops and training programs conducted outside the university
on entrepreneurship, technology and innovation
management.
5. Economic impact and commercialization: This
category has a weight of 25 percent and takes into
account the number of startups in technology
parks and technology development zones where
professors and/or students (or recent graduates)
hold equity, jobs created by these startups as well
as number of licensed patents, utility models and
industrial design rights by universities.
December 2013
272
This index, while positive, has a few shortcomings:
1. With regards to IP portfolio size, the index
takes into account the number of applications
and registered patents (including utility models)
not taking into account whether the patents
were issued or the portfolio represents a commercial value. Arguably the fact that commercial
value generated is not being taken into account
is balanced to a certain extent in the number
of licenses (again numbers and not the value of
the license), the index nevertheless follows the
erroneous “quantity has a quality of its own” approach, motivating universities to patent even
the most frivolous inventions.
2. While this index does not presume to quantify
the best academic institutions in Turkey, based
on public perception it does present a strong and
persuasive tool for universities to market themselves to attract the best students. Competing
for the best students is, in itself, not wrong but
the fairness and the accuracy of these metrics
may be misleading.
3. Universities may, in trying to acquire a larger
patent portfolio start pressing academicians for
a greater number of invention disclosures, the
same way the academicians often find themselves
pressured to publish scientific articles (at the very
basic level these two requirements, if not well
managed by a TTO may be mutually exclusive).
It is also important that senior university administrators understand that an increased number
of invention disclosures is often the result of an
increased research budget. Expecting a larger
number of disclosures without creating the research means to do so will also lead to, what at
best can be described as, useless patents. In addition, the pressure to file invention disclosures
will be felt more by academicians in engineering
departments as opposed to faculty in the social
sciences. The pressure will also be felt differently
by scientists focused on basic and theoretical
sciences. Finally, universities who are strong on
social sciences will have a harder time to aim for
higher ranks within the index.
4. Finally, while important, one can question
whether patents on their own are a valid indicator of scientific output or innovative capacity.3
3. Richard Gold: http://www.universityworldnews.com/article.
php?story=20120309132555536.
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les Nouvelles
3). Government Funding for Technology
Transfer Offices
This year TUBITAK has announced a comprehensive
and substantial grant program to support universities
in setting up technology transfer activities (1513
grants). Only the universities ranking in the top 50 of
the innovation and entrepreneurship index (described
above) were eligible for the grant. From those eligible,
only 10 universities received the grant this year. The
grant is substantial: 1 million Turkish Liras (about
USD 650.000) per year for 5 years with an option
to extend for another 5 years at TUBITAK’s election.
The grant is anchored around 5 modules:
1. Awareness building activities on IP rights, technology transfer, grant management, etc.
2. Building infrastructure to manage grant
programs.
3. Project creation activities and management (sponsored research and industrial liaisons
in the context of industry—university
collaboration).
4. Technology transfer office activities,
licensing and IP rights/portfolio management.
5. Entrepreneurship and startup creation.
This grant call will be renewed every year, thus
more and more universities will have an incentive to
set up their own TTOs. Note that, of the five modules
for which grant can be sought, only two are directly
related to a TTO functions.
One very positive mid-term impact of the grant is
to put, the often ignored IP rights and technology
transfer activities, on the map for senior university
administrators.
A few parting comments: technology transfer
requires professionals with a very specific skill set
and such professionals are still very few in Turkey.
University leaders and stake holders also have to
manage their expectations with regards to expected
impact of successful TTOs. I believe two facts can be
taken as given: i) building a successful TTO takes a
long time and TTO activities depend a great deal on
the internal and external ecosystem (i.e.: availability
of risk/angel capital, industrial partners willingness
to engage universities, etc.), ii) a TTO that is under
pressure to show profits is likely to be very unsuccessful, thus care should be taken not to benchmark
Turkish TTOs performances with AUTM’s heavy
hitters who are able to generate very large sums of
licensing income.
One negative and immediate impact of this grant
program was the proliferation of so-called technology
transfer and IP portfolio management “experts” (often
patent agent spinoffs with absolutely no experience in
technology transfer) hoping to get a piece of the pie
by selling their “expertise” flooding universities with
their service offers. Such an opportunistic approach
will only serve the cloud that is the already not-thatclear IP and technology transfer ecosystem in Turkey.
In summary, Turkey has made incredible progress
within the last five year regarding the importance of
IP rights, role of universities in technology creation
and overall awareness creation. The efforts, in particular those of the MSIT, TUBITAK and Turkish Patent
Institute are worthwhile and should be encouraged.
Better and increased collaboration between government actors, NGOs (such as LES), universities and
private sector, including qualified service providers is
still much needed. Thus to answer a child’s favorite
question, “Are we there yet?”; my answer is not yet,
but at least the journey has started. ■
December 2013
274
University Technology Transfer
Phases Of Growth In University
Technology Transfer
By Tom Hockaday
Introduction
T
his paper describes phases that university technology transfer activities have passed through
up to the present day, and suggests possible
future developments. One of the conclusions is
that some technology transfer offices may close,
but only in universities that do not appreciate the
non-commercial benefits that come from pursuing
the commercial route for transferring technologies
from a university.
The Phases Identified Can Be
Labelled As Followed:
Phase 1
The ‘old days’
Up to late 1980s
Phase 2
The ‘heydays’
Mid 1990s to
late 2000s
Phase 3
The ‘winds of change’
Early 2010s
Phase 4
Economic pressures
Nowadays
Phase 5
Impacts of Impact
Looking ahead
primarily related to interactions between university
researchers and people in industry.
In this phase there were a small number of small
scale interactions between researchers and industry. These were often based on contacts between
university researchers and their past-students now
working in industry.
In addition, there were a small number of large
scale connections where industry was funding a
substantial programme of research in a university
department. The research funding environment was
far more straightforward than it is today. Research
was funded one way or another, by various units of
government, research and grants councils.
University technology transfer offices (TTO’s) did
not exist. Universities were developing industrial
liaison offices of one sort or another, often staffed
by university researchers who were interested in
engaging with industry. These ‘ILO’s’ were involved
in supporting a vast array of university industry interactions: industry research funding arrangements,
academic consulting, intellectual property licensing.
Phase 2—The ‘Heydays’
The paper and the phases most closely follow the
development of activities and chronology in the UK,
although also draw on experience and observations
over many years from many universities in
many countries. The phases are described in
sequence, with reference to accompanying
slides, and followed by a discussion of some
of the possible consequences.
As university researchers interacted more with
industry they began to realise the value of the intellectual property arising from their research activities.
The growing interest shown by industry in the ideas,
technologies and expertise in universities helped
universities recognise the value of what they had.
Phase 1—The ‘Old Days’
The university is shown with a porous,
flexible boundary. Universities are constantly
changing size and shape, how they position
themselves in the world and how the world
perceives them. The line is porous as there
is constant interaction in and out of universities between students, staff and people from
industry, government, financiers, philanthropists, press, all walks of life. This paper is
275
les Nouvelles
University,
Researchers
Phase 1—The ‘Old Days’
Research just got funded somehow,
anyway, by government?
Occasional interactions with industry,
ex-students
Industry
In the UK, this was coupled with the high profile
example of UK universities and industry failing to
capture substantial value from monoclonal antibody
technology first developed in Cambridge in the
early 1980s. This in turn rekindled memory of the
wealth generated outside of Britain from the Oxforddeveloped penicillin.
Universities began to set up their own technology
transfer offices, and government encouraged this.
Oxford University set up Isis Innovation Ltd as its
wholly owned technology transfer company in 1988.
This was relatively early; by the early 2000s most UK
universities had started a technology transfer office
of one sort or another.
UK experience lagged U.S. experience by a few
years. The U.S. equivalent of the 1985 UK legislation
that allowed university driven technology transfer,
was the 1980 Bayh-Dole legislation.
The TTO’s played a role in managing an increasing
number, but never all, of a university’s interactions
with industry. TTO’s that tried to dominate and police
interactions with industry usually struggled against
the understandable resistance from researchers
who did not need looking after in the way the TTO
envisaged. The wise TTO’s realised that the key to
success was ‘to help researchers who wanted help
commercialising the results of their research’ (an Isis
motto since the late 1990s).
University TTO’s grew in size, learning what to
count and how to present it as evidence of good
things happening, in their universities and in local
and national economies. Governments liked what
they saw, in their minds converting numbers of
patent filings and new
companies into direct
■ Tom Hockaday,
evidence of sustainable economic growth.
Isis Innovation Ltd.,
Governments provided
Managing Director,
grants and TTO’s grew
Oxford, United Kingdom
further.
E-mail: tom.hockaday@
Phase 3—The ‘Winds
isis.ox.ac.uk
of Change’
University TTO’s matured, developing more
organised and professional project management processes and staff learning and development programmes.
Understanding and satisfying the objecPhase 2—The ‘Heydays’
tives of TTO’s is a complicated subject.
Some see TTO’s as a quick route to financial
Increasing interactions with industry,
riches. If University A is making a hundred
technology companies, 2-way flows.
million dollars a year in technology transfer
Recognition of value of IP, creation of TTOs.
patent royalties (almost inevitably from a
life sciences blockbuster), and the senior
administrators at University B think they are
Technology
University,
Industry
Transfer
better, then they expect substantial financial
Researchers
Office
success through royalties as well.
Others understand the reality that: it takes
a very long time to establish a successful
technology transfer programme in a university; success is as much about connecting
university technologies with industry as
making money. The activity is called techPhase 3—The ‘Winds Of Change’
nology transfer; it is all about transferring
TTO’s mature, some thrive, many struggle.
technology; TTO’s are not called ‘get rich
Research collaborations with Industry become
quick’ offices.
far more important to researchers [why? weak
economy, pressure from government].
The debate settled into an understanding
of TTO’s having two main objectives: primarily to transfer technologies to industry
Technology
University,
Industry
Transfer
so the technologies receive the investment
Researchers
Office
required to deliver better products and services to people in society; and secondarily
to generate financial returns for the host
university and its researchers.
Researchers now view IP differently, as a
Nevertheless, many TTO’s struggled to
means to research funding, not only TT deals.
break even after a number of years, and
December 2013
276
their universities questioned the best approach. Some
more flexible models and approaches to satisfy the
changing ways researchers view the use of IP.
universities in the UK passed the challenge over to
the private sector, contracting or partnering with
In industry, a number of companies in various
suppliers of technology transfer services. However,
industry sectors were changing their models of busithis does not change the fact that it is a rare blend
ness, not least in terms of opening up to open innovaof the right science, the right business management
tion [see Henry Chesbrough—Open Innovation, 2003
competencies, and the right marketplace that leads
and Onwards]. Companies reviewed their models of
to success taking a new technology to market.
interacting with universities, a number wanting to
You can only measure the measureable. TTO’s conestablish long-term collaborative partnerships with
tinued to measure and count disclosures, patents,
selected universities; with the plans for commerspin-outs, income. In many ways the availability of
cialising the IP being tied down in research funding
things to count held back an understanding of what
agreements at the start, not technology licences after
technology transfer is really about for universities
the research is done. Other companies have moved
and society. TTO’s need to count these things for
in an opposite direction, becoming less innovative,
internal management purposes; and people paying
relying on technologies at higher ‘technology readithe bills want evidence that things are happening.
ness levels’, expanding the gap between university
But it took a while for the real story to become about
research and industry.
the stories that affect everybody’s daily lives—betThere is a general shift from viewing all companies
ter medicines, diagnostics, cleaner technologies,
in the broad category of industry, and that being
safer materials, better mobile phones, even comsomething the TTO dealt with; towards recogniputer games—and demonstrating one aspect of
tion amongst researchers that companies should
how important universities are to society and how
be viewed in different ways. Is the opportunity for
universities can add to sustainable economic growth
‘research funding now’ rather than ‘licence and wait’?
to satisfy government interests.
Researchers continue to want help from the experts
There was another big change taking place as
in
the TTO but in new ways. TTO’s are asked to spend
well. Research collaborations with industry were
more
time supporting research funding applications,
becoming far more important to researchers than
either
because they involve IP negotiations in research
in the past. The ’global financial crisis’ of 2008 and
funding
discussions with industry, or because govonwards cut research funding from public sector
ernment/not-for-profit
research funders want more
sources and from not-for-profits dependent upon
evidence
of
how
their
money will see ideas reach
public donation and endowment investment returns.
through
to
the
end-use
(consumer
or patient).
Researchers were encouraged by need, and governSuccessful TTO’s are run as businesses, staffed by
ment, to develop research funding partnerships
business-minded people. They will leave if the busiinvolving industry. The existing and potential IP
ness elements of the job disappear. The university
was seen as an important carrot to attract industry
is then not well-placed to provide a professional
research money. This had the direct effect that
technology transfer function when the need arises.
researchers were less interested in retaining their
IP freedoms to explore the commercial
routes through the TTO; which in turn
Phase 4—Economic Pressures
has the outcome, in theory at least, there
TTO’s need to adopt more flexible models, to satisfy
is less IP to transfer out through the TTO.
changing ways researchers view the use of IP, and
However, managing the IP is not separable
changing industry models, ‘Open Innovation.’
from managing the research funding; TTO’s
Licensees
have the expertise to help researchers use
their IP to win research funding.
Technology
University,
Spin-Outs
Transfer
Researchers
The scale of university–industry interacOffice
tions not involving the TTO grew in imporResearch
tance. What is the TTO to do?
Phase 4—Economic pressures
This brings us to the present day. In the
face of these changes, TTO’s need to adopt
277
les Nouvelles
Collaborators
Universities need to modify its expectations of
the TTO. Will character of TTO’s change...?
Phase 5—Impacts of Impact
Universities in the UK are preparing to submit data
to the Research Excellence Framework (the latest
version of the government exercise every few years
to assess the quality of research in every department
in every university). Other countries are watching
with interest; some are already planning to adopt a
similar approach.
For the first time, this exercise involves points being awarded for ‘Impact’. The government defines
Impact in some detail; it can broadly be summarised
as benefits to society. The Impact case studies are
important: 20 percent of the points awarded relate
to the strength of impact that a department can demonstrate. And points mean prizes—billions of pounds
of government funding will be allocated over many
years based on REF scores.
The impact issue started with demands from government for evidence of economic return as a direct
‘return on investment’ from government funding of
universities. Universities were quick to object that
there is far more to it to than economic impact; to
which UK government responded that when they
say economic impact what they actually mean is
economic social and policy impact; peace restored,
well not really, why don’t we just call it impact then,
and here we are today.
Many researchers embrace this, many will fight it
well into their pensions. One outcome already has
been that universities are becoming far better at
telling the stories of how their activities touch and
benefit people’s lives around the world. Universities
really are a good thing.
The challenge for the TTO is that it is now a smaller
part of a bigger picture. Researchers are motivated to
see their research transferred out from the university
to society (as always for some, an entirely alien concept for others); and are learning how to describe the
success of this arising from the traditional activities of
academic publication, public lecturing, policy advice,
consulting, and not only through the commercial
route of the TTO. So what are the implications?
Implications
There are potentially serious implications for a
number of people and organisations in this area.
For Technology Transfer Offices
TTO’s may disappear in universities where the
university sees no economic value in the IP arising
from its research activities and does not understand
the non-commercial benefits of the commercial route;
this is a bad thing for everyone involved. As the TTO
becomes a smaller part of a bigger picture, decisions
may be made to subsume its activities into other
university administrative functions, for its resources
to be dispersed across the university, and for its activities to become re-directed towards other university
activities, for example helping researchers prepare
research funding proposals. This is bad because universities (and society) will lose the non-commercial
benefits of the commercial route.
TTO’s therefore need to continue, constantly, to
explain to the university the non-commercial benefits of the commercial route through the TTO. In
this way the university will support and appreciate
its TTO for the twin reasons of the commercial and
non-commercial benefits it brings.
For Universities
If a university reduces the scale of its TTO activities,
then it risks losing the non-commercial benefits of
the commercial route. These non-commercial benefits
are: demonstrating the university as part of the local
community in which it resides; generating stories to
show the application of its research to soPhase 5—Impacts Of Impact
ciety; promoting entrepreneurship amongst
staff and students; attracting new staff who
Universities respond to pressure for Impact, become
far better at explaining benefits from public investment,
are keen on commercial technology transfer.
TT Impact diluted.
The university will then later complain,
and
be the subject of criticism and comPolicy
plaints, if it misses out on the commercial
Technology
University,
benefits of a blockbuster because it had
Industry
Transfer
Researchers
Office
insufficient and unskilled TT resource.
Universities may wish to consider the
Society
funding models they have put in place for
their TTO’s. As the environment changes,
University views TTO as smaller part of a
are the funding mechanisms (often for
bigger picture.
example retention of a share of royalties)
December 2013
278
recognising and motivating what the university thinks
it wants from the TTO?
For Government
Governments need to beware of the ‘commercialisation effect’ by which pushing hard for the commercial, economic returns has the opposite effect of
reducing them. This is because those being pushed
often react against the desired activity. This point is
well described in What Money Can’t Buy, M. Sandel,
2012 and Social Limits to Growth, F. Hirsch, 1978.
If governments wish to push universities to create more economic impact, they are advised to put
substantial effort into helping universities understand
why the commercial route is good for them, for the
non-commercial reasons; rather than relying on the
‘stick’ of financial penalties. In this way universities
will continue to promote and support their TTO’s,
transferring technologies from universities to business, where business delivers better products and
sustainable economic development.
For Industry
The implications for industry, if universities reduce
the effectiveness of their TTO’s, are perhaps the
most complex. On the one hand, companies may
gain access to more unprotected ideas and technologies which they can use in open competition with
their competitors (in this scenario technology is
normalised, and business success is down to ‘brand
and smarts’). On the other hand, if the IP is not
protected, companies may miss out on accessing
protected technologies which give the company the
comfort to justify the investment to take the early
stage research outputs through to market for the
benefit of customers, clients, and patients.
‘The World is Getting More Global’
Former U.S. President George Bush coined this
phrase and it did not take long for former UK Prime
Minister Tony Blair to copy it. The serious point be-
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les Nouvelles
ing that universities and governments in emerging
economies are now actively exploring how best to
develop their own technology transfer models. This
paper references mainly western, developed nation
approaches to university technology transfer. Universities and governments in recently emerged and
emerging economies have looked at the old ‘heydays’
models and recognised the shortcomings and lack
of relevance to their own circumstances. Whilst
technology transfer and IP activities are considered
as significant indicators in university and national
worldwide league tables, universities occupy different
places in society around the world. The opportunities
for promoting local entrepreneurship may be far more
relevant than international patent applications. The
new model of combining technology transfer with
student entrepreneurship, and with local business
interactions is most appealing in many places.
Conclusion
Everything changes, nothing stays the same. University technology transfer offices have evolved and
grown over the last 30 years, as have the universities
they serve and the expectations placed on universities. Current pressures on university researchers to
secure research funding and promote the benefits
derived from the research outputs in the short term,
may distract researchers from considering the longer
term value (in commercial and non-commercial terms)
of protecting and marketing their research outputs
with their university’s TTO.
The smart university will continue to invest in its
technology transfer office to protect its long term
interests in realising the potential and returns from
its research-based intellectual property. ■
Author’s Note
I am grateful to a number of Isis colleagues for their
comments and suggestions on this paper.
Recent U.S. Decisions
Recent U.S. Court Decisions And Developments
Affecting Licensing
By John Paul and Brian Kacedon
Calico Brand, Inc. v. Ameritek Imports, Inc.
Failure to Establish that Lost Sales Were
a Direct Result of the Infringing Product
Precludes Recovery of Lost Profits
To recover damages for lost profits, a patent owner
must show causation in fact, establishing that, but
for the infringement, the patent owner would have
made additional profits. The patent owner typically
seeks to prove causation in fact using the four Panduit
factors: (1) a demand for the patented product, (2) an
absence of acceptable noninfringing substitutes, (3)
the manufacturing and marketing capability to exploit
the demand, and (4) the amount of profit the patent
owner would have made. In a recent decision, the
Federal Circuit considered whether a patent owner
could satisfy the first two Panduit factors with gross
sales data for a patented product when the owner
failed to establish that lost sales were a direct result
of the infringing product. Reversing the district court’s
holding that lost profits damages were available, the
Federal Circuit found that the gross sales data alone
was insufficient in this case to establish consumer demand and a that failure to establish that lost sales were
a direct result of the infringing product precluded the
recovery of damages for lost profits.
In Calico Brand, Inc. v. Ameritek Imports, Inc.,
Calico sued Acme, claiming willful infringement of
its patents directed to safety features in a lighter.
The jury found that Acme willfully infringed Calico’s
patents and that Calico was entitled to lost profits as
compensation for that infringement. But after posttrial motions, the court held that Acme’s infringement was not willful. On appeal, Calico claimed
that the district court should not have set aside the
jury verdict of willfulness. Acme cross-appealed,
arguing that the jury’s award of lost profits should
have been overturned.
First addressing willful infringement, the Federal
Circuit held that the record showed that when Acme
learned of its potential liability for infringement, it
immediately demanded assurances from its supplier
that the products did not infringe. Acme stated that it
would, and in fact did, return its inventory of accused
products to the supplier. Calico argued, however,
that a document showed Acme had sold four lots of
product days after learning of Calico’s patents. After
reviewing the record, the Federal Circuit concluded
that the document lacked detail regarding the nature of the products and that the jury had not been
presented the document. Without evidence that
the jury had relied on the document and that the
document could in fact prove sales of infringing
products, the court did not give it weight. Because
Acme’s actions showed that it had not proceeded
with infringement after notice of the patents, the
Federal Circuit affirmed
the district court’s hold■ John C. Paul,
ing that the infringement
Finnegan, Henderson, Farabow,
was not willful.
Garrett & Dunner, LLP,
Regarding lost profAttorney,
its, the Federal Circuit
Washington, D.C., USA
focused its analysis on
two Panduit factors: (1)
a demand for the pat■ D. Brian Kacedon,
ented product, and (2)
Finnegan, Henderson, Farabow,
an absence of acceptable
Garrett & Dunner, LLP,
noninfringing substitutes.
Partner,
As to the first factor, the
Washington, D.C., USA
Federal Circuit held that,
in this case, gross sales
E-mail: brian.kacedon@
data alone could not esfinnegan.com
tablish consumer demand
based on the patented
invention. Calico had not elicited any testimony regarding the commercial value of the patented features
or distinguishing between the value of the patented
and unpatented features. Moreover, the evidence
indicated that the price of the accused products drove
customer demand, not the patented safety features.
For the second factor—an absence of acceptable
noninfringing substitutes—the Federal Circuit held
that Calico failed to demonstrate a reasonable probability that, in the absence of the infringing product,
Acme or its customers would have purchased Calico’s
products rather than one of the many competitors’
noninfringing alternatives. Calico’s failure to establish that its lost sales were a direct result of Acme’s
infringing sales rather than other noninfringing sales
precluded the recovery of lost profits. Reversing the
district court’s conclusion that, under a market-share
theory, Calico would have captured profits “but for”
Acme’s infringement, the Federal Circuit vacated
the award of lost profits and remanded for entry of
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280
judgment reflecting the jury’s award of damages in
the form of a reasonable royalty.
Strategy and Conclusion
This case illustrates potential pitfalls in satisfying
the first two Panduit factors. For the first factor—
demand for the patented product—courts may look
for testimony distinguishing between the value of
the patented and unpatented features. Additionally,
the second factor—an absence of acceptable noninfringing substitutes—may be difficult to satisfy
in a diverse market. Patent holders need to be able
to establish a reasonable probability that, in the
absence of the infringing product, customers would
have purchased the patented product rather than
the noninfringing alternatives.
Hamilton Beach and Sunbeam
Offers or Agreements with Suppliers to Manufacture Patented Products Before Applying for
Patent Protection Can Be an Offer for Sale that
Bars Patentability
Hamilton Beach and Sunbeam sell competing slow
cookers—large electric pots for cooking food for a long
duration. Hamilton Beach owns a patent for a slow
cooker, which covers a product it sells as the “Stay or
Go” cooker. Hamilton Beach’s first patent application
for the Stay or Go was filed on March 1, 2006.
In response to Hamilton Beach’s apparent success in the market with the Stay or Go, Sunbeam
developed a competing slow cooker, called the
“Cook & Carry.” Instead of mounting sealing clips
on the body of the slow cooker, as required by the
claims in Hamilton Beach’s patent, Sunbeam’s Cook
& Carry included sealing clips mounted on the lid
of the slow cooker. In response to Sunbeam’s introduction of the Cook & Carry, on June 4, 2010,
Hamilton Beach filed another patent application
based on its first application, now claiming a slow
cooker with sealing clips mounted on the lid. The
USPTO granted a patent on Hamilton Beach’s new
application, and Hamilton Beach sued Sunbeam,
alleging infringement by the Cook & Carry.
In district court, Sunbeam moved for summary
judgment, arguing that Hamilton Beach offered its
Stay or Go slow cooker for sale more than one year
before March 1, 2006, thereby rendering the claims
in Hamilton Beach’s later-issued patent invalid. The
district court granted Sunbeam’s motion, finding that
Hamilton Beach made invalidating commercial offers
to sell the Stay or Go more than one year before
March 1, 2006.
Decision
On appeal, the Federal Circuit explained the “on281
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sale bar” underlying the district court’s decision
that a commercial offer for sale invalidated Hamilton
Beach’s patent. Under Supreme Court precedent, the
on-sale bar applies when, before the critical date (i.e.,
one year before the date of application for patent in
the U.S.), the claimed invention was the subject of a
commercial offer for sale and was ready for patenting.
Any attempt to sell is sufficient for a “commercial offer for sale” as long as it is sufficiently definite that
another party could make a binding contract by simple
acceptance. Additionally, an invention is “ready for
patenting” when, before the critical date, the invention is reduced to practice, depicted in drawings, or
described in writings that enable a person of ordinary
skill in the art to practice the invention.
Because the filing date of Hamilton Beach’s first
patent application for the Stay or Go slow cooker was
March 1, 2006, the critical date in this dispute was
one year earlier, or March 1, 2005. Sunbeam argued
that Hamilton Beach’s foreign supplier offered to sell
the Stay or Go before that critical date. Specifically,
Hamilton Beach issued a purchase order for nearly
2,000 Stay or Go slow cookers to its foreign supplier on February 8, 2005. Hamilton Beach listed
its Tennessee facility as the shipping address for the
merchandise and its Virginia office as the billing address. The supplier confirmed receipt of the purchase
order on February 25, 2005, and responded that it
would begin manufacturing the slow cookers once it
received Hamilton Beach’s release.
As a result of these facts, the Federal Circuit agreed
with the district court’s conclusion that there was a
commercial offer for sale. At the outset, the Federal
Circuit noted that there is no “supplier exception”
to the on-sale bar. Thus, the Court found it was of
no moment that the alleged offer for sale was made
by Hamilton Beach’s supplier. Next, the Court noted
that after Hamilton Beach sent the purchase order
to its foreign supplier on February 8, 2005, the supplier responded on February 25, 2005, that it had
received and was ready to fulfill the order. This response from the supplier was significant, the Federal
Circuit explained, not because it formed a binding
contract, but rather because it was an offer to sell
Stay or Go slow cookers that could form a binding
contract upon Hamilton Beach’s “release.” This was
sufficient to satisfy the Supreme Court’s first prong
requiring a commercial offer for sale, according to
the Federal Circuit.
Next considering the “ready for patenting” prong of
the Supreme Court’s test, the Federal Circuit agreed
with the district court that the Stay or Go slow cooker
was ready for patenting before the critical date. In
reaching its decision, the district court considered
evidence of Hamilton Beach’s meetings with retail
customers before the critical date. At these meetings,
Hamilton Beach presented formal drawings showing
the Stay or Go with all of the elements claimed in
both of Hamilton Beach’s patents. Moreover, Hamilton Beach conceded that, by February 2005, it had
at least one product sample and a successful working
prototype of the Stay or Go that operated as claimed
in its later patent. The Federal Circuit stated that
even if some of the prototypes did not work quite as
intended, fine-tuning an invention after the critical
date does not mean that the invention was not “ready
for patenting.” Because Hamilton Beach’s invention
claimed in its patent was both the subject of a commercial offer for sale and ready for patenting before
the critical date of March 1, 2005, the Federal Circuit
affirmed the district court’s decision that the asserted
claims were invalid.
In a dissenting opinion, Judge Reyna argued that the
majority failed to decide whether the offer for sale
was commercial in nature or for purely experimental
purposes, thereby extending the no “supplier exception” rule to even experimental uses. According to
Judge Reyna, there was no “commercial” offer for
sale here because at the time of the purchase order,
the lid on Hamilton Beach’s slow cooker could not
prevent leakage of foodstuffs from the interior of the
container. Therefore, the dissent concluded, Hamilton
Beach was entitled to perfect its slow cooker under
the experimental-use exception to the on-sale bar.
This case demonstrates the importance of filing patent applications covering commercial embodiments
of an invention as early as possible. When timing is
crucial, applicants might consider filing provisional
applications, which may offer an inexpensive and
useful tool to obtain the earliest possible filing date.
This case also shows the need for potential patentees
to be cautious when dealing with suppliers, including
overseas suppliers, as those dealings may trigger the
on-sale bar.
Mr. Kimble and Marvel
Royalty Payments for Hybrid Patent and
Technology Rights Should Decrease After
The Patents Expire Or Be Shown Not To Be
Subject To Patent Leverage
Inventor Stephen Kimble invented a Spider-Man toy
that allowed a user to “role play” as Spider-Man by
mimicking Spider-Man’s web-shooting abilities with
foam string. Mr. Kimble got a patent on this toy, which
expired in May 2010. In late 1990, Mr. Kimble met
with the president of Marvel’s predecessor to discuss
his idea, which was covered by the then-pending
application for what would become Mr. Kimble’s
patent. According to Mr. Kimble, Marvel agreed that
it would pay him if it used any of his ideas. Later,
Marvel told Mr. Kimble that it was not interested in
his ideas. Nevertheless, Marvel then started making
a toy similar Mr. Kimble’s idea, which it called the
“Web Blaster.”
In 1997, Mr. Kimble sued Marvel for patent infringement and breach of contract, claiming that
Marvel had used his ideas to develop the Web Blaster
without paying him. The court granted Marvel’s motion for summary judgment of noninfringement on
the patent claim, but the case went to trial on the
contract claim. The jury sided with Mr. Kimble, and
the court awarded him 3.5 percent of past, present,
and future Web Blaster net sales. Kimble appealed on
the patent-infringement claim, and Marvel appealed
on the contract claim.
In 2001, while the appeals were still pending, the
parties agreed to settle the case. Marvel agreed to buy
the patent from Mr. Kimble. The parties also agreed
to a release, under which Mr. Kimble released Marvel
except for Marvel’s obligations under the settlement
agreement itself, and except for those obligations
under the alleged verbal agreement that was the
subject of the action. The settlement agreement had
no expiration date and did not include any specific
time limit on Marvel’s obligation to pay 3 percent of
net product sales.
The parties coexisted for several years without any
significant disagreement. Web Blaster sales were significant and Marvel paid over $6 million in royalties
to Mr. Kimble. Then, in 2006, disagreements arose
between Marvel and Mr. Kimble over the royalties,
including the calculation of the royalty payments
for subsequent iterations of the Web Blaster that
included additional functions or that were packaged
with other role-play toys.
Mr. Kimble sued again, and Marvel counterclaimed,
seeking a declaration that it was no longer obligated
to pay Kimble under the settlement agreement
based on the sales of products after the expiration
of Mr. Kimble’s patent. The district court referred
the summary-judgment motions to a magistrate
judge, who found that under Brulotte, Mr. Kimble
could not recover royalties under the settlement
agreement beyond the expiration date of the patent.
The magistrate judge reasoned that the settlement
agreement transferred patent rights and that it was
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less clear that it transferred any nonpatent rights. He
observed that the release clause suggested that Mr.
Kimble reserved the nonpatent rights from the verbal agreement and did not transfer them to Marvel.
Alternatively, he found that Brulotte applied because
the settlement agreement was a “hybrid” agreement
transferring inseparable patent and nonpatent rights,
and because the patent rights were used as leverage to negotiate the agreement. Over Mr. Kimble’s
objection, the district court adopted the magistrate’s
recommendation. Specifically, the district court found
that the agreement did not distinguish between royalties for patent and nonpatent rights and therefore the
agreement was a “hybrid” and that the royalties had to
end when the patent expired. The parties appealed.
Decision
On appeal, the Ninth Circuit began its analysis by
reviewing Brulotte. In Brulotte, the Supreme Court
held that a patentee’s use of a royalty agreement
projecting beyond the expiration date of the patent is
unlawful per se, explaining that Congress had granted
inventors the exclusive rights to their discoveries
for a limited time, after which the rights become
public property. According to the Court, any attempt
to reserve or continue the patent monopoly after
expiration runs counter to the policy and purpose
of the patent laws, regardless of what legal device is
employed. But in a later decision, Aronson, the Supreme Court found that patent law did not preclude
the enforcement of an agreement to provide royalty
payments indefinitely where no patent had issued. In
Aronson, a company had agreed to pay a 5 percent
royalty to an inventor for the exclusive right to sell
her invention, but if the patent application was not
allowed within five years, the company would pay
2.5 percent to the inventor as long as it continued
to sell the invention. A patent never issued on the
application, and the company ultimately sued, seeking a declaration that the contract for the 2.5 percent
royalty was preempted by patent law. The Court
found that the agreement was not inconsistent with
patent-law principles because it did not withdraw any
idea from the public domain. The Court noted that
the inventor had disclosed the design to the party
in confidence and, had the party tried to exploit the
design in breach of that confidence, it would have
risked legal liability. The Court also accepted that if
the inventor had obtained the patent, she would have
received a 5 percent royalty only on sales during the
life of the patent.
The distinction between the contracts in Brulotte
and Aronson rested, according to the Supreme Court,
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on the fact that the extended-royalty term in Aronson
was not negotiated with the leverage of a patent but
rested on the contingency that no patent would issue
within five years.
Because of these decisions, according to the Ninth
Circuit in Marvel, several other circuits have applied
the Brulotte rule to preclude payment of royalties
beyond the expiration date of patents under so-called
hybrid agreements encompassing inseparable patent
and nonpatent rights. The Ninth Circuit phrased
the rule as “a license for inseparable patent and
nonpatent rights involving royalty payments that extends beyond a patent term is unenforceable for the
post-expiration period unless the agreement provides
a discount for the nonpatent rights from the patentprotected rate.”
Applying this rule to the situation between Mr.
Kimble and Marvel, the Ninth Circuit upheld the
district court’s finding that the settlement agreement
was a hybrid and that the royalties had to end when
the patent expired. Specifically, the court noted that
the agreement plainly involved one royalty rate for
both patent and nonpatent rights, with no discount
or other clear indication that the Web Blaster royalties were not subject to patent leverage. At the time
the parties negotiated the agreement, the patentinfringement claim was not definitively resolved. The
district court had found that the Web Blaster did not
infringe the patent, but Mr. Kimble was appealing that
decision. Because the infringement claim remained
disputed, the parties could resolve their dispute only
by including Web Blaster sales in a patent license.
In addition, the settlement agreement did not include a discounted rate for the nonpatent rights. As
the court explained, the point of requiring a discount
from the patent-protected rate is that it shows that
the royalty at issue was not subject to patent leverage. The court found that even though a discounted
rate may not be necessary to avoid Brulotte in every
case, in the absence of a discounted rate, some other
clear indication must show that the royalty was in no
way subject to patent leverage.
The Ninth Circuit noted that it did not necessarily
agree with the conclusion but that it was bound to
follow Supreme Court precedent and that it was also
guided by the “particularly strong national uniformity
concerns” present in patent cases.
This case demonstrates the value of drafting settlement agreements that separate the compensation
for patent rights and nonpatent rights. To the extent
nonpatent rights are involved, it is useful to be able
to show that those rights are not subject to patent
leverage if the patentee intends to maintain rights to
compensation after the patents expire.
Beriont v. GTE Labs, Inc.
A Defense to Patent Infringement under the
Shop-Rights Doctrine Should Be Supported
by Factual Findings on the Conception of
the Invention and the Scope of the Allegedly
Infringing Use
The shop-rights doctrine is a defense to patent infringement that may be raised by an employer when
an employee sues an employer based on a patented
invention that was created using the employer’s
resources. While the contours of the doctrine are
not clearly defined, it generally protects only an employer’s internal uses rather than sales to an unrelated
third-party.
In Beriont v. GTE Labs, Inc., the Federal Circuit
reviewed the trial court’s ruling that GTE could rely
on shop rights to absolve it of any infringement claims
occurring before GTE acquired ownership of the relevant patent. The court also reviewed the trial court’s
finding that a settlement agreement reached between
the parties absolved GTE of liability for infringement
occurring after the date of the settlement. Noting that
the district court failed to make many relevant factual
and legal findings, the Federal Circuit reversed the
district court’s decision regarding GTE’s shop-right
defense and remanded for factual findings relating
to infringement during this time.
Background
GTE hired Walter Beriont as an engineer and, during his employment, he conceived of an invention
relating to television-network power distribution. He
disclosed this invention to GTE and a coworker, Alfred
Bellows. Mr. Beriont and Mr. Bellows jointly filed a
patent application through GTE’s counsel. The patent
that issued was assigned on its face to GTE and listed
Mr. Beriont and Mr. Bellows as coinventors. Following
the issuance of the patent, Mr. Beriont questioned
the assignment and joint inventorship, so he filed suit
in the federal district court seeking a declaration that
he was the sole inventor, removal of Mr. Bellows as
a coinventor, removal of GTE as an assignee, and a
judgment of patent infringement against GTE.
Separate from these federal-court claims, the
parties were also litigating some state-court claims
related to issues in the federal-court claims. As a
result, the district court stayed the case pending
the state-court actions. The state-court claims were
ultimately dismissed because of an oral settlement
agreement the parties presented to the state court.
With the state-court claims dismissed, the federal
case resumed.
During a pretrial conference in the federal case,
the parties agreed on certain terms of the oral settlement agreement from the state-court claims. One of
those agreed-upon terms established that the parties
jointly owned the patent. Because of this, the district
court entered final judgment that the patent is jointly
owned by Mr. Beriont and GTE. This joint ownership,
according to the district court, absolved GTE of liability for infringement occurring after the agreement,
and the shop-rights doctrine absolved GTE of liability
for infringement occurring before the agreement. Mr.
Beriont appealed the district court’s decision, claiming, among other things, that GTE was liable as an
infringer for activities occurring before the settlement
agreement because the joint-ownership agreement
was not retroactive and the shop-rights doctrine did
not protect GTE for its acts during that time.
The Beriont Decision
While agreeing with the district court that GTE
was not liable for infringement occurring after the
settlement agreement was reached, the Federal
Circuit remanded the case back to the district court
to further develop the record on infringement occurring before the settlement agreement was reached.
The Federal Circuit found the district court’s factual
record inadequate to support the shop-rights doctrine and directed the district court to address Mr.
Beriont’s inventorship claim.
First, the Federal Circuit rejected Mr. Beriont’s
argument that he did not contemplate full joint
ownership (i.e., a 50/50 split) when negotiating the
settlement agreement. Citing the default rule of joint
ownership—that in the absence of an agreement to
the contrary, joint owners of a patent may use the
patent without the other owners’ consent—the Federal Circuit found nothing in the agreement departing
from the rule. Instead, because he conceded that in
the settlement agreement GTE is a joint owner, Mr.
Beriont would have, at most, a state-law contract
claim that the profits were to be shared disproportionately, according to the court.
Regarding the infringement occurring before the
settlement agreement was reached, the Federal Circuit discussed the shop-rights doctrine—a defense
to patent infringement based on a judicially created
theory of an implied license. It allows an employer
to practice an invention internally when the invention belongs to an employee who created it with the
employer’s resources. Mr. Beriont alleged that GTE
manufactured and sold the invention, an activity the
Federal Circuit recognized as outside the scope of the
doctrine. Furthermore, the district court received no
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briefing on the shop-rights doctrine and did not make
the factual findings necessary to place GTE’s actions
within the boundaries of the doctrine. As a result,
the court concluded that remand to the district court
was necessary to develop the record.
The Federal Circuit also mentioned alternative
grounds that might support a finding that GTE was
not liable for infringement prior to the agreement.
First, the agreement, which is governed by state law,
may have had retroactive effect. Second, even if not
retroactive, GTE may have benefited from a separate
assignment agreement from Mr. Beriont that predated the conception of the invention. Apparently,
the parties did not address this agreement in either
stage of the case in the federal courts, although it was
important to the state-court decision. Finally, the U.S.
Patent and Trademark Office has an executed assignment recorded and entered in 2002, apparently as a
result of a judgment regarding assignment, that the
parties also did not address.
In dissent, Judge Lourie explained that he would
not remand the case to further consider whether
GTE was liable for infringement occurring before the
settlement agreement was reached. In his view, the
record contained sufficient evidence—specifically
the assignment agreements—to find that GTE had
ownership rights to the patent and was therefore
free to practice the patent.
In Beriont, the Federal Circuit required a more
complete record of the underlying facts before allowing a party to rely on shop rights as a defense to infringement. Although the contours of the shop-rights
doctrine may remain uncertain, it can be helpful for
parties facing issues relating to ownership and assignment in the employer–employee context to consider
potential implications of the shop-rights doctrine
and establish a record of the facts surrounding the
employment, conception of the invention, and the
scope of the defendant’s use of the invention.
Innovatio IP Ventures, LLC Patent Litigation
Court Finds Patent Claims Essential to Wi-Fi
Standard Because They Cover Technology
Required by the Standard and There Are No
Commercially or Technically Feasible Noninfringing Alternatives
Courts have increasingly found themselves facing
issues related to patents essential to standards and
the associated obligations imposed by standardssetting organizations. One such standards-setting
organization is the IEEE, which established the
802.11 standard for wireless networks. Devices that
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comply with the 802.11 standard can easily communicate with each other in any WLAN. To comply,
devices must use the technology described in the
standard. This requirement can provide significant
benefits to companies owning patents covering the
standards-essential technology. To curb potential
market manipulation, the IEEE requires that owners
of standards-essential patents offer licenses to those
patents on reasonable and nondiscriminatory terms
(often referred to as “RAND”). In re Innovatio IP
Ventures, LLC Patent Litigation the court held that
a patent claim was essential to the 802.11 standard
if (1) there is no commercially or technically feasible
way to avoid infringing the claim and (2) the patent
claim describes technology explicitly required by
the standard.
Innovatio had purchased 23 patents for wireless
technology. As the 802.11 standard was finalized, the
previous owners of Innovatio’s patents sent letters to
the IEEE, agreeing to license any standards-essential
technology covered by their patents on RAND terms.
Anticipating a patent-infringement suit, a group of
manufacturers of 802.11-compliant devices filed a
declaratory-judgment action against Innovatio, seeking a declaration of noninfringement and invalidity.
Innovatio countersued, alleging infringement. At the
outset, the parties and the district court agreed to
first determine the potential damages available to
Innovatio. The manufacturers argued that Innovatio’s patents contain claims essential to the 802.11
standard and, therefore, that Innovatio must honor
the previous patent owners’ commitments to license
those patents on RAND terms. Further, the manufacturers argued, this RAND obligation necessarily
limited Innovatio’s potential recovery to no more
than a RAND royalty.
The Innovatio Decision
The district court relied on the IEEE Bylaws and
Federal Circuit law to resolve the dispute. Noting
the IEEE Bylaws, the district court reiterated that
a patentee is obligated to license only individual
standards-essential claims, not entire patents, on
RAND terms. Analogizing a RAND obligation to
a license (a contractual commitment limiting the
liability of an infringer), the district court further
stated that alleged infringers bear the burden of
showing that a RAND obligation exists—namely
that a claim is standards-essential. According to
the court, “the alternative would be to assume in
patent litigation that every potentially standardessential claim is subject to RAND until the patent
owner demonstrates otherwise, a rule that would
be overly burdensome for patent owners.” Thus, this
case turned on whether the disputed claims were
essential to the 802.11 standard.
The parties agreed that the IEEE Bylaws dictate
the meaning of an “essential patent claim.” According to the Bylaws, an essential patent claim includes
any claim “the use of which was necessary to create
compliant implementation,” so long as there is “no
commercially and technically feasible non-infringing
alternative.” The Bylaws include an exception: an
essential patent claim does not include any claim
“essential only for Enabling Technology.” Enabling
Technology is any technology necessary for, but not
explicitly required by, the standard. Construing the
Bylaws to avoid rendering any provision superfluous,
the district court concluded:
If a patent claim recites only technology that is
necessary to implement the standard, but that is
not explicitly required by or expressly set forth
in the standard, then the claim is not standardessential, even though it is “necessary” within
the meaning of the first sentence. By negative
implication, however, a claim directed to both
Enabling Technology and to explicit steps of the
standard is essential.
The manufacturers argued that, in addition to the
court’s definition, “a compliant implementation” requires a compliant device (such as a laptop, an access
point, or a barcode reader) and not just a standardized
feature. Accordingly, they suggested that a claim is
standards-essential if any compliant device infringes
the patent claim. The district court disagreed, noting “one does not usually speak of ‘implementing’ a
device… . Instead one ‘implements’ a standardized
feature.” Moreover, the Bylaws specifically refer to
“a compliant implementation of either mandatory or
optional portions.”
Determining Whether Claims Are Essential
to a Standard
Having defined the contours of a standards-essential
claim, the court analyzed different groups of asserted
claims to determine whether each of these groups
was standards-essential.
Many of the claims the court examined recited features or functions necessary to implement an optional
portion or an optional mode of the standard. The use
of those functions or features defined in the standard
would infringe the claims and, as a result, the court
found those claims standards-essential.
For some of the other claims, Innovatio had
proposed noninfringing alternatives, which were
intended to show that the claims are non-standards-
essential because the standard can be implemented
without infringing the claims. But the court found
that Innovatio’s proposed noninfringing alternatives
either still infringed or were not technically or commercially feasible. For example, one of Innovatio’s
proposed noninfringing alternatives would slow communication and cause data to be lost, which made that
proposed noninfringing alternative not technically
feasible. As a result, the court found these claims
standards-essential.
For other claims, the court found that although the
claimed technology was not technically part of the
standard, the industry had coalesced around using
the claimed technology, noting that Innovatio was not
able to identify any devices on the market lacking the
claimed technology. Thus, there was no commercially
feasible alternative to using the claimed technology
to implement the standard, which led the court to
find that those claims too were standards-essential.
The court also looked at some dependent claims
that added a single element to other standardsessential independent claims. But this additional
element—such as a keyboard or a processor—the
court noted, was too basic. The court rejected
Innovatio’s argument that the dependent claims
were non-standards-essential because, as the court
explained, allowing a dependent claim that adds
a basic additional element to be non-standardsessential would render the RAND obligation meaningless. In other words, a company could agree to
license the standards-essential independent claim
but then avoid that obligation by simply adding a
dependent claim that adds a basic additional element (such as a keyboard).
In discussing this issue, the court also addressed
“Enabling Technology” as defined by the IEEE. Innovatio argued that the additional element in the
dependent claim did not recite Enabling Technology
because it was not necessary to make or use something that complies with the standard. The court
likewise rejected this argument, explaining that it
would permit companies to avoid RAND obligations
by claiming a subset of Enabling Technology (for example, a keyboard rather than a data-input device) and
then arguing that the unclaimed subset of Enabling
Technology provided a noninfringing alternative. For
these reasons, the court found that the dependent
claims that added basic limitations to standardsessential claims were likewise standards-essential.
In short, then, the court found all of Innovatio’s
claims to be standards-essential, for the various reasons listed above. Because the court determined that
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the claims are standards-essential, it subjected those
claims to Innovatio’s RAND obligations.
The bylaws and other rules of a standard setting
organization form a starting point to determine
whether patents relating to standardized technology
carry potential obligations to license the patents
under reasonable and non-discriminatory conditions.
Depending on the particular standards-setting organization, standards-essential claims could potentially
include claims that read on optional features of the
standard, dependent claims that add basic elements
to standards-essential claims, and claims that are not
necessarily required by the standard but that the
industry has nevertheless coalesced around.
Helferich Patent Licensing, LLC v. New
York Times Co.
District Court Holds that a License for Only
Certain Claims of a Patent May Nonetheless
Result in Exhaustion of All the Claims of
the Patent
Under the doctrine of patent exhaustion, a patent
holder’s ability to control the further use and resale
of a patented product typically ends after the first
authorized sale of that product. Exhaustion can occur
whether the patented product is sold by the patent
owner or by someone authorized by the patent owner,
such as licensee. Often, patent owners attempt to
craft their licenses in a manner intended to limit the
scope of patent exhaustion that occurs when their
licensees sell products under the license.
In Helferich Patent Licensing, LLC v. New York
Times Co., a district court in the Northern District of
Illinois addressed one such situation where a patent
owner attempted to license only certain claims of its
patents, while preserving others as unlicensed and
thus, nonexhausted. After discussing the policy rationale underlying the doctrine of patent exhaustion,
the court determined that allowing such a licensing
agreement would improperly allow multiple royalties
from the same patents for a single sale and effectively
vitiate the patent-exhaustion doctrine.
Background
Helferich Patent Licensing, LLC (“HPL”) owns a
large portfolio of patents that relate to mobile communication devices and methods of providing content
to those devices. At a high level, the claims relate to
sending to a device an identifier of content, which
the device may use to request delivery of the content
when desired. Helferich has commonly asserted the
claims against SMS messages (mobile-phone text
287
les Nouvelles
messages) that contain hyperlinks to Web content.
As Helferich has widely publicized, it has licensed its
patents to the entire industry of cell-phone manufacturers. The licenses include a provision that HPL will
not assert any claim against a third party; but some
agreements ostensibly withhold certain claims from
this clause.
HPL also sought to license its patents to content
providers. While some of them took a license, others (including the defendants in this case) declined.
As a result, HPL filed suit, alleging that the content
providers who did not take a license infringe HPL’s
patents. The parties filed cross motions for summary
judgment on the issue of patent exhaustion.
The Helferich Decision
Ruling on the motions for summary judgment, the
court granted the defendants’ motion and dismissed
HPL’s claims of patent infringement. Applying Quanta
Computer v. LG Electronics, the court held that a
license agreement may not be used to avoid patent exhaustion by licensing only certain claims of a patent.
The court began with a discussion of the rule established in Quanta, concluding that “[t]he focus of
Quanta is that the sale of the product results in the
exhaustion of the patent in its entirety, rather than the
exhaustion of certain claims.” HPL contended that its
patents were distinguishable from those in Quanta,
because they had “handset” (i.e., cell phone) claims,
which were distinct from the patents’ “content”
claims. It argued that the licenses granted to the
cell-phone manufacturers included only the handset
claims, whereas the defendants’ activities infringed
the nonlicensed content claims.
In opposition, the defendants argued that a patent
owner cannot license only a portion of a patent in
order to collect multiple royalties on the same patent for one use or sale. They supported this view by
noting that a patent covers only the totality of the
elements in the claim.
The court found no genuine issue of material fact
regarding the fact that HPL licensed its patents to the
entire cell-phone industry. By HPL’s own admission,
every manufacturer of cell phones had a license to
practice, without limitation, any and all inventions
in the licensed patents. As a result, every cell phone
has been licensed to practice the inventions in HPL’s
patents. The court concluded that because every
cell phone had been licensed, none could infringe
those patents.
Next, the court turned to the question of whether
or not the cell phones sufficiently embodied the
patents-in-suit because, to trigger patent exhaustion,
the item sold needs only to sufficiently embody the
patent rather than completely practice the patent
by itself. In this case, the cell phones practiced the
claims of the patent when used as designed, so the
court found no genuine issue of material fact that the
cell phones sufficiently embodied the patents-in-suit.
Finally, the court considered HPL’s attempts to
carve out rights from the handset licenses. The
license agreements sought to reserve causes of action against third parties for the “withheld claims.”
The court, however, rejected this reservation and
held that such attempts to avoid patent exhaustion
must fail in light of Quanta. Under Quanta, the court
pointed out, “[t]he right of Defendants and other
third parties here to practice HPL’s patents is based
on exhaustion, not on an implied license from a covenant in other agreements.” The court determined
that HPL’s attempt to reserve causes of action on some
claims would restrict postsale activities of third parties, therefore violating the principles underlying patent exhaustion. Thus, the court concluded that HPL’s
carve-out provision could not prevent exhaustion.
The district court granted the defendants’ motion
for summary judgment and held that HPL exhausted
its patent rights when it licensed the portfolio to
the cellular-handset manufacturers. Accordingly, it
dismissed HPL’s claims of patent infringement against
the defendant content providers.
While this decision is likely to be appealed, licensors should be aware that some courts may view
license agreements that seek to license only some
claims of a patent as exhausting rights in the entire
patent. In its decision, the Helferich court stated that
a patent owner wishing to avoid this result would
need to obtain separate patents for those claims it
wishes to withhold from the license. This suggests
that an alternative strategy for licensing a broad
portfolio might start with patent prosecution, clearly
separating families of patents that could then be
separately licensed to different industries. ■
The authors acknowledge with appreciation the
assistance of Doug Meier and Jason Melvin.
This article is for informational purposes and does
not constitute legal advice. The views expressed do
not necessarily reflect the views of LES or Finnegan.
December 2013
288
Notes
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Advancing the Business of Intellectual Property Globally
Where Are We Going in High Tech?
Annemarie Meike — Page 214
Trends And Opportunities In Semiconductor Licensing
Stefan Tamme, Stephen Schott, Dogan Gunes, Jeffrey Wallace,
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Ram Menon and Kevin Spivak — Page 238
Samsung And LG: From Also-Rans To Dominance In Consumer Electronics
Robert A. Myers— Page 246
The Strategy Of Filing Early Concepts As Incomplete Patent Applications
James Anglehart — Page 253
Kirtsaeng v. Wiley Incentivizes Digital Distribution
Ilaria Maggioni — Page 260
Introduction: The Growing Risk From Australian IP Licensing
Amalia Stone — Page 263
Evolving Intellectual Property Regimes In Turkey And University Inventions:
The New Article 6 Of The Patent Law And Its Impact On University Inventions
Omer HIZIROGLU and Iclal ARGUC — Page 268
Phases Of Growth In University Technology Transfer
Tom Hockaday — Page 275
Recent U.S. Court Decisions And Developments Affecting Licensing
John Paul and Brian Kacedon — Page 280

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