The following are highlights from my recent presentation on “The Patent Marketplace: Past and Present,” at the National Bar Association’s 85^th Annual Convention in New Orleans, LA on August 11, 2010.

I have previously written that independent research, conducted by Ned Davis Research, Inc. in 2005, has demonstrated that as much as 80% of the value of a U.S. publicly-traded company comes from intangible assets. This is an inversion from 35 years ago when less than 20% of a company’s value came from intangible assets, and is significant because the largest component (or subset) of intangibles is intellectual property (IP).  This data has now been updated, and as of 2008, as much as 75% of the value of S&P 500® companies comes from intangible assets such as IP.  While I am not sure what to make of this 5% drop from 2005, the fact remains that IP remains important to the success of publicly-traded companies.  Further, data showing that small businesses generate 13-14 more patents per employee than large firms would empirically suggest that this observations applies, if not more so, to smaller (and private) companies as well.

Recognizing the importance of IP to the success of companies competing in the present-day economy, and despite the rise of several IP-related intermediary business models, IP is still a highly-illiquid asset class with a very inefficient marketplace.  That is, potential sellers of IP rights historically have been unable to access a large quantity of buyers who are willing to pay a predictable price under an agreed-upon set of conditions.  Furthermore, IP transactions are characterized by difficult acquirer identification, long periods of negotiations and endless due diligence activities.  Such transactions are also hampered by the lack of widely-accepted valuation models and independent valuation organizations.

So, what is one to do when faced with the need to engage in an IP-related transaction?  Well, here are some (often sobering) facts presented in Q&A fashion and compiled from a variety of sources[1] to assist with setting expectations when entering into IP-related transactions:

• Who Owns U.S. Intellectual property?  Approx. 56% of Corporate U.S. Patent Assignees are Asian firms, 44% of those being Japanese.

• Are U.S. Patent Applications down along with the U.S. economy?  There were approximately 11,000 less U.S. utility patent applications in FY2009 as compared to FY2008, and approximately 9,000 less U.S. provisional patent applications during the same period.

• What is the value of U.S. intellectual property?  In 2005, the value of U.S. intellectual property was measured at $5.5T, which is more than the nominal gross domestic product (GDP) of any other country.

• Is there a measure of IP-related exports?  60% of total U.S. exports come from “IP-intensive” industries from 2000-07, rising from $665 billion in 2000 to $910 billion in 2007.

• Has Intellectual Ventures (IV) – presumably the largest of the Non Practicing Entities (NPEs) – generated any licensing income from their portfolio?  It is estimated that IV has generated a total of $1B in licensing revenues from their acquired patents as of 2009.

• What is the median patent infringement damages award?  The annual median patent damages award, observed from 1995-2009, is $4.4M.

• Is there a difference between the patent damages won by NPEs versus practicing entities?  Since 1995, patent damages won by NPEs have averaged more than double those for practicing entities.

• Do NPEs fair better than practicing entities in patent infringement litigation?  NPEs, in patent litigation, have been successful 29% of the time overall, versus 41% for practicing entities.

• Who are the top NPE targets?  Between 2004-2009, the top five NPE targets were Apple (56 law suits), Sony (55), Dell (50), Microsoft (49) and HP / Samsung (48).

• What is the median sales price for a patent or patent family?  The median sales price for a transaction (i.e., a single patent or patent family sold in a single transaction) was approximately $25K in 2006, over $100K in 2007 and over $150K in 2008.

• Are there any summary patent licensing data available with respect to royalty rates and up-front license fees?  From 1990 to 2009, the following data has been observed:
  65% of the licensing transactions had royalty rates of 5% or less

  
  90% of the licensing transactions had royalty rates of 10% or less
  
  Only 20% of all the licensing transactions included running royalties and up-front license fees as part of the compensation terms to licensors; Up-front payments can take the form of cash, stock or a combination of cash and stock
  
  The average cash-only license fee was over $2M

  61% of up-front fees were $500,000 or less

In sum, it is clear to me that the economic downturn has lessened the appetite for companies to engage in any type of “bulk” patent filing strategies.  The continued importance of patent rights in a 21^st century, knowledge economy, however, dictates that individual inventors and small and medium enterprises (SMEs) continue to find capital to file for patents relating to their truly innovative products and services.  Such individual inventors and SMEs, however, must understand the economic reality of the above-presented data to help set expectations when entering into patent-related transactions.  Further, individual inventors and SMEs looking to transact their IP as NPEs should be aware that, in the current environment: (a) truly innovative/cutting-edge IP will always sell or be licensable in “carrot licensing”-type transactions[2]; and (b) “stick licensing”-type transaction[3] plays, however, are extremely difficult to consummate or receive financing absent sound legal analysis (i.e., claim carts comparing issued patent claims to one or more infringing products’ features) and market analysis (i.e., data reflecting actual marketplace sales).

[1] Sources for the following are: USPTO, FY 2009 Performance and Accountability Report; H. Wegner, The 2009 U.S. Patent Grants: Who’s Getting the Patents; The Seattle Times; PriceWaterhouseCoopers, 2009 Patent Litigation Study; www.ipresearch.com; www.patentfreedom.com; and www.theglobalipcenter.com.

[2] “Carrot licensing” describes a friendly and voluntary process in which an IP holder convinces a potential licensee of the technical and economic benefits of licensing an IP asset. In such cases, the two parties are in agreement that a license is desirable and mutually beneficial, and the negotiation often serves as the beginning of a long-term business relationship.

[3] “Stick licensing” refers to the process of trying to obtain payment from a prospective licensee who is believed to be committing patent infringement by producing and marketing technology encompassed by the IP at issue.  It is an adversarial process and often a prelude to litigation.

In the last decade, software and so-called “business method” patents have been the subject of numerous lawsuits, academic debates, articles, economic impact studies, and Congressional hearings.  Yesterday, the U.S. Supreme Court finally weighed in on the issue with its decision that: “the Patent Act leaves open the possibility that there are at least some processes that can be fairly described as business methods that are within patentable subject matter.” Bilski v. Kappos (No. 08-964, June 28, 2010).  So, what does that mean?

First, some legal background.  U.S. Patent Law recognizes four broad categories of inventions eligible for patent protection: processes; machines; article of manufacture; and compositions of matter.  See 35 U.S.C. § 101.  The U.S. Supreme Court, however, has long recognized that there are three specific exceptions to Section 101’s four broad patent-eligibility categories: laws of nature; physical phenomena; and abstract ideas.

Second, while so-called “business method patents” have been filed and obtained by software, insurance, Wall Street and e-commerce firms, there is no precise definition of what exactly is a  business method patent. Thus, I offer the following definition to frame the discussion below: “A (software or manual) process employed in an entity’s business model in order to perform services related to insurance, securities trading, health care management, reservation systems, electronic shopping, auction systems, catalog systems, incentive programs, redemption of coupons, banking, billing, point of sale systems, accounting, inventory management and the like.”

Thus, the question which the Supreme Court addressed in the Bilski case was whether business methods are eligible for patent protection as a “process” under Section 101 and, if so, what is the test?

In Bilski, the applicants sought to patent the following claim:

“A method for managing the consumption risk costs of a commodity sold by a commodity provider at a fixed price comprising the steps of:

(a) initiating a series of transactions between said commodity provider and consumers of said commodity wherein said consumers purchase said commodity at a fixed rate based upon historical averages, said fixed rate corresponding to a risk position of said consumer;

(b) identifying market participants for said commodity having a counter-risk position to said consumers; and

(c) initiating a series of transactions between said commodity provider and said market participants at a second fixed rate such that said series of market participant transactions balances the risk position of said series of consumer transactions.”

The U.S. Patent and Trademark Office (USPTO) and the U.S. Court of Appeals for the Federal Circuit (CAFC) both rejected the Bilski application as being directed to a non-patentable process under Section 101 using the “machine-or-transformation” test.  Under this test, a claimed process is patent-eligible under Section 101 only if: “(1) it is tied to a particular machine or apparatus; or (2) it transforms a particular article into a different state or thing.”

The Supreme Court, however, ruled that: “[T]he machine-or-transformation test is a useful and important clue, an investigative tool, for determining whether some claimed inventions are processes under [Section] 101. The machine-or-transformation test is not the sole test for deciding whether an invention is a patent-eligible ‘process.’”  The Supreme Court also ruled that Section 101 “precludes the broad contention that the term ‘process’ categorically excludes business methods.”

The Supreme Court reasoned that Section 101 is a “dynamic provision designed to encompass new and unforeseen inventions.”  “[T]he machine-or-transformation test would create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.  … As a result, in deciding whether previously unforeseen inventions qualify as patentable ‘process[es],’ it may not make sense to require courts to confine themselves to asking the questions posed by the machine-or-transformation test.”  Thus, the Supreme Court encouraged the CAFC to develop “other limiting criteria that further the purposes of the Patent Act and are not inconsistent with its text.”

In the specific claims at issue in Bilski, the Supreme Court affirmed the USPTO and CAFC’s rejection of the Bilski patent application because: “[Bilski seeks] to patent both the concept of hedging risk and the application of that concept to energy markets. Rather than adopting categorical rules that might have wide-ranging and unforeseen impacts, the Court resolves this case narrowly on the basis … that [Bilski’s] claims are not patentable processes because they are attempts to patent abstract ideas.”

In conclusion, we will have to wait and see how the USPTO and CAFC implement the Bilski decision.  I do know now, however, that the decision will benefit applicants seeking business methods because no categorically exclusion of such patents was endorsed by the Supreme Court.  Also, business method applicants will no longer have to show that their claims are tied to a particular machine or involve the transformation of a particular article.  Such applicants, however, may still want to ensure that their claims meet the machine-or-transformation test – when possible – so as to insure they do not run afoul of the abstract idea, law of nature, or mathematical formula exceptions.

There has been a lot of recent talk, blog posts, articles, court activity and even proposed legislation in Congress around the issue of “False Patent Marking.”  What does it all mean and why should small- and medium-sized enterprises (SMEs) care!?  Well, I present answers, in brief, to these questions below.

The first thing to know is that the U.S. Patent Laws allow patent owners to give notice to the public by affixing a notice to the patented product (or its packaging if marking the product is not practical or possible) such as “Protected by U.S. Patent No. 3,141,592”  See 35 U.S.C. § 287(a).  This is colloquially known as the “patent marking” statute.  Absent such a marking, in most cases, a patent owner cannot recover damages for patent infringement unless they can prove the infringer was notified of the infringement.

Second, we know that affixing a patent notice to a product (or its packaging) not only acts as a deterrent to competitors by putting them on notice, but it also has some marketing cache!  Thus, that is why it is common to see not only actual patent number notices, but also notices of “patent pending” on many products.

Third, there is also what is known as the “false marking” statute which prohibits anyone from marking a product (or its packaging) with: (a) an expired patent number, (b) a false patent number or (c) with the words “patent applied for” or “patent pending” when no application for patent has been made or is no longer pending, respectively.  See 35 U.S.C. § 292.  Each of these three false marking offenses, however, must be shown to have been done “for the purpose of deceiving the public,” and not merely done as a result a good faith mistake.

What makes the false marking statute interesting is that it contains a whistleblower-type provision.  That is, any private citizen can sue the manufacturer of a product they believe has been falsely marked to recover “not more than $500 for every such offense.”  Thus, one can imagine that if a company produces 1,000,000 units of a product that in some way was falsely marked, a $500M lawsuit becomes very attractive for anyone with the time and the right contingency law firm behind them.  See Forest Group, Inc. v. Bon Tool Co., 590 F.3d 1295 (Fed. Cir. 2009).  In fact, over 150 of these types of lawsuits have been filed in the last several months alone!  The only drawback is that 50% of any recovery must go to the federal government.  (Thus, the private citizen in my example can keep only $250M of the possible recoveries – still not too shabby!)

On June 10, 2010, a federal court of appeals, interpreting the false marking statute, ruled that “the combination of a false [patent marking] and knowledge that the [patent marking] was false creates a rebuttable presumption of intent to deceive the public.”  See Pequignot v. Solo Cup Co., Case No. 2009-1547 (Fed. Cir.).  A defendant in one of these false marking suits can successfully defend itself by showing via “a clear preponderance of the evidence that it did not have the requisite purpose to deceive.”  For example, the defendant in the Solo Cup case successfully obtained a dismissal of the suit by explaining that they knew the patent number on their products had expired but it was prohibitively expensive and disruptive to the business to prematurely replace the manufacturing molds which contained the now-expired patent numbers.

So, what should SMEs glean from all this hoopla?  Well, four things: (1) If your enterprise manufactures no products covered by U.S. patents, ignore it; (2) If your company has no patents that cover a specific product, do not “fake it until you make it” by marking it with one or more non-existent patent numbers; (3) If your company has not applied for any patents that cover a specific product, do not use the words “patent pending” in an attempt to obtain marketing cache for such product; and (4) If any of your competitors are manufacturing products which you suspect are falsely marked with an intent to deceive the public, consult a plaintiff’s lawyer!

Last month, I had the honor of being one of five speakers at a seminar in San Francisco sponsored by the Global Innovation Forum and ACT’s Innovators Network where invited guests included Bay Area senior executives from clean technology companies and principals from the investment community.  The seminar, titled “Delivering Value for Clean Technology Innovation Through Intellectual Property,” considered the role of intellectual property (IP) within the clean-tech SME community for business valuation, attracting private equity investment and winning public partnerships with the U.S. Government.  The seminar’s panel of speakers included the Deputy Chief IP Counsel for the U.S. Department of Energy, a leader in the Silicon Valley private equity community, a senior clean-tech IP attorney, and a senior officer from Stanford University’s Office of Technology Licensing.

I now share with you my “Top 5” IP-focused insights from the seminar:

1. The more things change, the more they stay the same! That is, we have seen a boom in biotech in the 1980’s, followed by software/e-commerce in the 1990’s, and now clean-tech in the early part of the new millennium.  Protecting innovation through the diligent pursuit of IP rights, however, remains fundamental to an SME’s long-term success.  Thus, the use of non-disclosure agreements, the use of employee and consulting agreements with IP assignment clauses, the filing of patent applications early and often, and the other good IP-related advice that you’ve heard in the past are still applicable today.
2. Prepare before you speak. Further to my first point above, SMEs in the clean-tech space should take care to get their “IP house in order” before seeking joint venture partners, consultants, board members, financiers and other outside help.  That is, an SME would not seek to enter the clean-tech space if they did not have an idea for a better product or service.  The hard work of taking that idea and turning it into a prototype or a fully-baked plan should be protected by at least a provisional patent application fully describing how to make and use the invention – the filing fee is currently a mere $110 – before approaching any outsiders for financial or any other help.
3. The genre is not well-defined.  “Clean-tech” can come in many different forms and can include inventions in power generation, alternative fuels, carbon sequestration, environmental technology, transportation, IT systems to store and distribute energy, and even business methods to facilitate emissions trading and the like.  Thus, SMEs seeking government or private funding, participation in innovation contests or the like specifically aimed at “clean tech” should broadly define their innovations to ease the determination of eligibility.
4. Reconsider where you go abroad. After applying and/or securing patent and other IP rights in the United States, SMEs should think globally.  After all, the problem of reducing carbon emissions and the adoption of clean technologies is more serious in the developing world as those increasing populations seek more sources of energy to fuel their expanding economies.  Thus, the decision process of where to foreign file for U.S.-originated clean-tech innovations must be based on the where such innovations would have the most potential sales.  Countries such as India, Brazil and China – where in the previous e-commerce/software boom would be unheard of to file for IP rights – must now be considered for foreign filing.  SMEs must work with their U.S.-based IP counsel to understand the domestic IP laws in such jurisdictions and the budgets for the costs associated with such filings, such as government filing fees and translations.
5. Know your KSR. In 2007, the U.S. Supreme Court decided a case titled KSR Int’l Co. v. Teleflex Inc., which raised the bar for inventions to clear the “obviousness” hurdle in order to be granted a patent.  This is relevant because many experts agree that the clean-tech space is one where IP value will lie in incremental improvements over the prior art.  This is because many clean tech innovations are based on well-known, prior inventions. This is distinguished from the pharma space where there are many billion-dollar, blockbuster drug patents!  The KSR case allows the Patent Office to reject a patent application on obviousness grounds if the claimed invention is no more than the predictable use of prior art elements according to their established functions.  Thus, SMEs working with their patent attorneys should take care to draft patent applications that contain as much anti-obviousness evidence as possible knowing that the U.S. Patent Office will look at interrelated teachings of multiple patents, the effects of demands known to the design community or present in the marketplace, and the background knowledge possessed by a person having ordinary skill in the art, all in order to determine whether there was an apparent reason to combine the known prior art elements in the fashion claimed by the patent at issue.

Although the software business model taxonomy is neither perfect nor universal, most high-tech entrepreneurs recognize the existence of (and difference between) the “proprietary” and the “open source” software business models.[1]

The proprietary or “closed source” software model is one where a software program is distributed solely in object code form (i.e., only computer-readable form where the human-readable code is withheld) and legally protected by copyright, patent, trade secret and/or contract law (in the form of a restrictive license).  An enterprise participating in such a business model derives a majority of its revenue from licensing – as opposed to selling – software programs to users in the form of per-user or enterprise-wide fees.  This business model has been recognized as creating significant value for a firm because the intellectual property inherent in the programs remain under the control of the originating enterprise.

On the other hand, the open source software model is one where the source code of a software program is liberally licensed such that users have the right to view, change and improve the code’s design.  An enterprise participating in such a business model may license its software programs for free or for a nominal fee, but derives a majority of its revenues from selling complimentary goods and services such as servers, complimentary proprietary software programs, consulting and software customization services.  This business model has been recognized as promoting innovation due to the potential efforts of a large developer community.

Despite the philosophical clashes between these two models, the closed source and open source business models are not mutually exclusive.  That is, a high-tech enterprise need not make a black-or-white choice with respect to a particular program’s or the enterprise-wide’s distribution model.  There is a hybrid “mixed source” model where both open source and proprietary software code are combined in a single software program distribution.  In this business model, development costs and times may be reduced through the use of certain open source components in the single software program distribution.  Thus, an enterprise must decide which components of its product should be closed source versus open source (e.g., using open source for “commodity” components, using closed source for “differentiating” components and deciding on a case-by-case basis for “baseline” components).  [See Englefriet, IAM, pp. 37-41 (Aug./Sept. 2006), which discusses in-depth these choices and one commercially successful implementation.]  Of course, for such mixed source design to work and generate revenue in a predictable manner, an enterprise must manage the different open source licenses under which the utilized components were obtained, because the open source and closed source components may have complex interactions requiring intellectual property legal consultations at the early software design phase.

Another variety to the mixed source model is when an enterprise releases an open source version of its formerly proprietary program and then sells proprietary complimentary code along with the open source program.  This may be in addition to other proprietary products and services the enterprise offers.  Some observers point to Oracle’s 2009 acquisition of Sun Microsystems as a good example of an enterprise implementing a mixed source model.  Oracle’s proprietary database and middleware products can be sold and otherwise leveraged along with Sun Microsystem’s open source Java programming language and Solaris operating system.  [See Casadesus-Masanell et al., HBS Working Paper 10-022 (Sept. 2009), which provides an in-depth analysis of the mixed source business model and a framework for capturing value through its implementation.]  In such a mixed source business model, a profit-seeking enterprise needs to consider which of its software products should be open and which should remain proprietary.  That is, should the “core” software be open sourced or just the “extensions”?

In sum, the marketplace is filled with examples of profitable firms which have opted to implement one of the two above-described mixed source business models.  Such success will come, however, only after careful business planning given the product segment, and the relative levels of innovation and competition in the marketplace.  And, the careful business planning must include intellectual property legal consultation as early in the process as possible!

A case decided a last month by eleven judges of the U.S. Court of Appeals for the Federal Circuit[1] — the “Supreme Court of Patent Law” as it is often called – illustrates a fatal mistake that can be made while preparing a patent application (especially in chemical- and biological-related technologies).  The case involved Ariad Pharmaceuticals accusing Eli Lilly’s Evista® and Xigris® pharmaceuticals products of infringing one of its patents.

U.S. patent law requires that a patent application contain: “[1] a written description of the invention, and [2] of the manner and process of making and using [the invention so] as to enable any person skilled in the art to which it pertains … to make and use the same.”[2] The first requirement is often referred to as the “written description” requirement, and the second requirement is often referred to as the “enablement” requirement.

The purpose of the written description requirement, as explained by the court, is to: “ensure that the scope of the right to exclude, as set forth in the claims, does not overreach the scope of the inventor’s contribution to the field of art as described in the patent specification. It is part of the quid pro quo of the patent grant and ensures that the public receives a meaningful disclosure in exchange for being excluded from practicing an invention for a period of time.”[3]

What is the test for meeting the written description requirement?  Well, there are no bright-line rules.  The level of detail required to satisfy the requirement varies depending on the nature and scope of the claims, and on the complexity and predictability of the relevant technology, including such factors as “the existing knowledge in the particular field, the extent and content of the prior art, the maturity of the science or technology, [and] the predictability of the aspect at issue.”[4]

In the Ariad case, after a trial, a jury found that Eli Lily’s products did infringe Ariad’s patent.  The appeals court, however, overturned the verdict.  It found that Ariad’s patent claimed methods encompassing a genus of materials achieving a stated useful result, but the specification did not disclose a variety of species that accomplish the result. Thus, the patent was invalid for failing to meet the written description requirement by describing only a generic invention that it purports to claim – even though the enablement requirement was met. So, how can one fall into this trap?  After all, how can your chemical- and biological-related patent application enable any person skilled in the art to which it pertains to make and use the invention, but not have a written description of the invention!?

With respect to the chemical arts, the court explained that “a generic claim may define the boundaries of a vast genus of chemical compounds, and yet the question may still remain whether the specification demonstrates that the applicant has invented species sufficient to support a claim to a genus. The problem is especially acute with genus claims that use functional language to define the boundaries of a claimed genus. In such a case, the functional claim may simply claim a desired result, and may do so without describing species that achieve that result.”[5]

With respect to the biological arts, the court explained, that there can be a case where the specification discusses only compound A. This might very well enable one skilled in the art to make and use compounds B and C. Any claims to compounds B and C, however, would be invalid for lack of written description.  This is because the requirement ensures that when a patent claims a genus by its function or result, the specification recites sufficient materials to accomplish that function.

This brings us to the rationale for the somewhat harsh result in Ariad?  The court answered that: “a patent is not a hunting license. It is not a reward for the search, but compensation for its successful conclusion.  Requiring a written description of the invention limits patent protection to those who actually perform the difficult work of ‘invention’—that is, conceive of the complete and final invention with all its claimed limitations—and disclose the fruits of that effort to the public.”[6]

Thus, the lesson for small and medium enterprises (SMEs) – especially those working in the biological and chemical-related technologies – is to work closely with your patent attorney to make sure that your submitted patent application not only enables someone in your field to “get it,” but that you do not cut corners while rushing to file on-the-cheap and actually fail to have a written description of what you invented.  Otherwise, years later, that issued patent will end up being just an expensive piece of useless paper!

[2] 35 U.S.C. § 112, ¶ 1.

[3] Id. at 29 (internal citations omitted).

[4] Id. at 24 (internal citations omitted).

[5] Id. at 20 (internal citations omitted).

[6] Id. at 28 (internal citations omitted).

No. 5: You Call Your IP Attorney Too Late!

My last of the top five is an easy one to comprehend: Call your IP lawyer sooner, rather than later! And “sooner” means before signing a contract, engaging an independent contractor, hiring a technical employee, entering into a joint development arrangement with another company, commercializing a product, launching a website, or undertaking any similar activities that potentially affect your firm’s IP rights. A VERY common example of this mistake is the entrepreneurial firm, in a rush to launch a new product or service, calling their attorney to file a patent application covering the new product or service more than one year after the launch date. Such a firm would quickly find out that they have lost their ability to apply for a patent (in every jurisdiction in the world) due to the passage of the one-year time period! (Think of this rule as a “one-year patent statute of limitations.”) Thus, in most situations, a quick consultation at the “sooner” point in time will not only prevent the loss of potential IP rights, but save a lot of time and money as well. I often use the following analogy to drive this point home to my clients: You want your IP attorney to be a fire marshal that prevents fires, rather than a firefighter that has to put out fires (presumably after some damage has already been done).

Conclusion

The  five common IP-related mistakes (described in five different posts on this site) are but a few that I have observed over the years, and some of them can be very costly. Of course, as mentioned above, my list assumes a company is paying attention to IP in the first place. So, given that IP accounts for a vast majority of a small high-tech enterprise’s value and is the key to any such enterprise’s exit strategy, entrepreneurs should remember that ignoring IP altogether is the biggest mistake of them all.

Entering into a corporate transaction without a careful review of the intellectual property (IP) involved can have negative consequences on your enterprise’s future IP strategy.  This is especially true when IP owners do not adequately supervise their corporate attorneys who may not appreciate or be aware of the unintended consequences of the language typically employed in merger, acquisition, joint venture, financing and other corporate transactional agreements.  A case decided a few months ago by the U.S. Court of Appeals for the Federal Circuit[1] illustrates the above concern.

The fact pattern of the case was as follows:

• Company A enters into a limited partnership with Company B
• As part of the transaction, Company A transfers tangible and intangible assets to Company B via a “Contribution Agreement”
• The Contribution Agreement defined the transferred assets as including patents, except “any and all patents and patent applications related to any pending litigations involving Company A.”
• Section 4.21 of the Contribution Agreement then stated that “there are no actions pending or threatened by or against, or involving Company A except as set forth in Schedule 4.21.”
• Five years later, Company B sought to enforce certain patents they assumed were obtained from Company A (purportedly via the Contribution Agreement) against Company C.

So, in the lawsuit, Company C used the defense that Company B did not own the patents-in-suit and thus cannot enforce them!  Thus, Company B had to prove the patents-in-suit they sought to enforce were indeed transferred by the Contribution Agreement, and were not part of the exception (i.e., the patents did not fall into the exception of “any and all patents and patent applications related to any pending litigations involving Company A”).   Seems easy, right?  Wrong!  Schedule 4.21 was never completed and there was no record of what actual litigations Company A was involved in five years earlier when the Contribution Agreement was signed!  Even if there was a record of what litigations were active five years earlier, the phrase “related to” was not defined in the Contribution Agreement!

Given these facts, the trial court was forced to dismiss the lawsuit and the appeals court affirmed that decision. Moral of the story: there are no routine IP provisions in corporate transactional documents to affect a transaction.  Care must be taken to make sure that the IP that is transferred (or licensed, exempted, etc.) is clearly identified and no unintended consequences result with respect to the involved parties’ future IP strategy.

In a Part 1 of this post, I stated that engaging in competitive intelligence is not the same as, or synonymous with, engaging in economic or industrial espionage or the misappropriation of trade secrets.  That is, gathering competitive intelligence should not involve the intentional gathering of competitor’s confidential information or trade secrets.  To the extent that confidential information or trade secrets are obtained, a firm should only utilize such intelligence if they were not obtained by theft, misrepresentation or deception.

I also mentioned that, as a relatively new discipline, there are few standards for competitive intelligence professionals to follow.  Well, here are some “do’s” and don’ts”:

Do’s:

• Publicly available information may be freely gathered using any channels through which it is offered to the public.
• Competitive intelligence professionals should examine published information sources, conduct interviews, and use other legal and ethical methods to collect competitive intelligence information, using deductive reasoning to fill in any gaps in such information to create an analysis of a competitor’s product or marketing strategy.
• Competitive intelligence professionals can contact competitors directly to obtain publicly-available information.
• Competitive information disclosed to a firm or its agents can be used for the benefit of the firm if the information is not subject to a restriction of confidentiality or is a trade secret.
• Contractors employed by a firm to collect competitive information must accurately identify themselves, stating their name and the name of their company.  However, unless the firm otherwise agrees, the contractors do not need to identify the firm by name, even if the subject requests the name of the contractor’s client.
• Competitive intelligence professionals should attempt to make contact at the manager level or above, and should not contact lower level employees of an organization.

Don’ts:

• Competitive intelligence professionals should never purposefully seek to obtain the trade secrets or non-public/competitively sensitive information of other companies.
• Competitive intelligence professionals should never attempt to induce a third party to violate their confidentiality obligations to another party.
• Direct contact with a competitor for the purpose of competitive intelligence activities should be avoided.
• If a vendor performs work for a competitor, any information obtained as a result of such engagement of the vendor should not be shared with your firm or used by such vendor on your firm’s behalf without authorization from such competitor, except for general “know-how,” skills or industry knowledge.
• Former employees of a competitor now working for your firm, or current or former employees of a competitor who have a personal relationship with one of your firm’s (or its third-party vendor’s) employees should not be exploited in order to obtain information about the competitor.
• Employees (current and former) have a duty to their employer not to disclose confidential information or trade secrets they received during their employment.
• Employees and third party vendors conducting competitive intelligence gathering on behalf of your firm should not misrepresent their identity or intent in gathering competitive intelligence information.
• Misrepresentation of one’s identity and misrepresentation of intent are unethical and improper means of gathering competitive sensitive information and can interfere with an employee’s duty to their employer.

Traditionally, companies gather information on their competitor’s marketing activities,  advertising strategies and organizational structure, or perform some form of industry-wide benchmarking.  Recently, however, companies have started to engage in more formal competitive intelligence activities.  “Competitive intelligence” is the process whereby a firm monitors its competitors (and the marketplace as a whole) by collecting information, analyzing the information and then disseminating the information to decision makers within the firm.  The widespread use of formal competitive intelligence departments and employees dedicated to such monitoring is probably less than two decades old.

Engaging in competitive intelligence is not the same as, or synonymous with, engaging in economic or industrial espionage or the misappropriation of trade secrets.  (As a review, a “trade secret” is information that an owner has taken reasonable steps to keep secret, and from which the owner derives economic value as a result of the information not being generally known by the public.  “Confidential information,” on the other hand, simply refers to information that an owner has taken reasonable steps to keep confidential.)

As a relatively new discipline, there are few standards for competitive intelligence professionals to follow.  The following general types of activities, however, raise potential ethical and legal concerns and should be avoided in the course of performing competitive intelligence activities:

• Misrepresentation of Identity – when an information gatherer or competitive intelligence professional is asked their identity and they do not correctly and fully reveal their identity.
• Misrepresentation of  Intent – when an information gatherer or competitive intelligence professional misrepresents their intent to a target in the course of gathering competitive intelligence.
• Inducement –when an information gatherer offers inappropriate benefits in return for information from others in possession of confidential or trade secret information.
• Covert Information Gathering – when information is being gathered while the targeted person/firm is unaware of its collection and such person/firm would have to develop elaborate defenses to protect its confidential or trade secret information.
• Unsolicited Information – when confidential or trade secret information is received by an information gatherer that is not actively seeking it.

Engaging in the general types of activities listed above can have serious legal consequences for a firm and even the individual employee who obtains any competitor’s confidential information or trade secrets.  Such negative consequences include liability under the federal Uniform Trade Secrets Act and applicable state statutes protecting trade secrets and unfair competition, susceptibility to  breach of contract claims, and running afoul of the Economic Espionage Act of 1996.