Is Patent Exhaustion the Big New Thing?

It can be no coincidence that both in the US as well as in Europe “patent exhaustion” has been brought in the legal limelight. Last week in the US the US Supreme Court allowed certiorari in a case Quanta Computer Inc. v. LG Electronics Inc., 06-937.

At the same time in Europe Nokia alleges in German (Mannheim) and Dutch (The Hague) courts that Qualcomm’s patent(s) are “exhausted” in respect of chipsets supplied by Texas Instruments which have been sold on the European Union market with a Qualcomm license. If Nokia’s claim succeeds, Qualcomm would be prevented in Europe from enforcing its respective patents in relation to Nokia handsets. The reason why the case has been brought in The Netherlands, a relatively small market for handsets, is that TI chips used by Nokia are initially supplied to The Netherlands (Rotterdam biggest port of entry in the EU, the Netherlands being an important EU wide distribution country) and subsequently shipped to plants in Finland Germany and Hungary.

TI and Qualcomm are publicly known to have entered into a so called Patent Portfolio License (CDMA/WCDMA license) in 2000 , which expired April 2007. While Nokia is believed to have the option to extend the license under the same terms till December 2008, it is trying to renegotiate better terms with Qualcomm under a renewed license. The inability of parties to agree on new terms caused the current patent struggle in Europe.

The US Quanta-LG case in the US must have inspired Nokia that “exhaustion” is a pretty powerful tool in the negotiations so it must have chosen to use this weapon in its struggle with Qualcomm for better licensing terms. A finding by a Dutch court that patent have been “exhausted” could have a serious impact on Qualcomm’s position as the leading company holding CDMA/WCDMA intellectual property. This effect would be felt by Qualcomm EU-wide (and so not just in The Netherlands). When the goods imported from TI into Netherlands for further distribution in Europe are “patent”- free, or exhausted, this has the immediate that any goods delivered by TI to Nokia are no longer subject to infringement claims anywhere in Europe, as the goods are brought on the EU market with the “consent” of the patent holder and can therefore be “freely” traded on the whole EU market. Quite a smart way of gaining negotiating power as a “normal” infringement or invalidity case would under the current patent rules have only national ( as opposed to EU wide) effects.

One wonders why Nokia paid under this license until April 2007 if it was of the opinion that the patents were exhausted because of Qualcomm’s license to TI, the maker of the chipsets used by Nokia in its handsets. If you think of the consequences of a finding of “exhaustion” for Nokia themselves one cannot but conclude that Nokia has all the reasons in the world not to let it come to any court decision. Nokia themselves would most likely be ripped of their ability to enforce many of its own patents when confronted with infringement. Like the discussion of patent disclosure and standards, these issues work both ways. Once the finding of “exhaustion” is being supported in court is works both ways, Nokia will on the short run found a way out of paying much lower a price for any Qualcomm license, however it will seriously impound their enforcement capability of enforcing their own patents against other mighty players in this highly competitive IP market.

The judgement by the Dutch court is expected to be delivered on October 31.

EU access to the Hague system on international designs

On 24th September, the European Union submitted its instrument of accession to the Geneva Act of the Hague Agreement to the World Intellectual Property Organization. The Geneva Act of the Hague Agreement establishes a system for the international registration of industrial designs. After joining it, economic actors will have the possibility to use a single application to obtain protection of a design not only throughout the EU with the Community Design, but also in the countries that are members of the Geneva Act. This will simplify procedures, reduce the costs for international protection and make administration easier.

The new system will enter into force on 1st January 2008, and it is believed that it will simplify administration procedures and lower the costs of obtaining protection.

Philips defeated on JPEG patent after non-disclosure to standard setting bodies

One of the "hot" issues in the electronics industry (and earlier on in the semiconductor business) is the relationship between standards and patents. Recent examples of clever standard setting policies and the enforcement of patents that come to mind are the way Sisvel enforced Philips’ mp3 patents, reading on an international audio compression standard. Here the comfortable position Philips was in to enforce patents that seem to read on that audio standard. It the reminds me of a saying by the English judge Mr Justice Pumfrey: “Nothing would be pleasanter for a patentee than to participate in the setting of a standard compliance with which would inevitably involve infringement of his patent.” That’s exactly what Philips made all the mp3 manufacturers as well as the Courts in Germany believe: simply comparing all mp3 products with the relevant standard, rather then the patent, by saying: “you - trader in mp3 players- are bringing to practice the specs the standard requires for any mp3 player to work and as it happens to be, I, Philips have those – “padding bits” - patent that exactly read on that standard, so there is my evidence of patent infringement”.

A carefully crafted strategy that worked well and made wonders to Philips and its co-owners of the mp3 patents at stake, making them hundreds of millions of licensing income. So why not using the same trick for compression of camera images on mobile phones, known as the “Baseline” method which is the subject of a JPEG standard discussed by study groups of the International Telegraph en Telephone Consultative Committee (CCITT), The International Standards Organization (ISO) en de British Standards Institution? O, Lucky Me, Philips must have thought as they are the owner of European patent EP 0 260 748, also knows as “Vogel” (named after the inventor).

So, Philips sued LG Electronics in the Netherlands over the use of its Vogel patent – covering the JPEG compression standard - in a large number of its mobile handsets. After the Sisvel miracle this sounded like a done deal. Apparently, that was exactly what happened, as the Dutch court impressed - as the German courts were at the time of the mp3 “padding bit” patent - by Philips’ thoughtful enforcement of the Vogel patent against LG who admitted to have used (no choice, remember, it’s a standard!) the Baseline method, covered by the JPEG standard for that method. LG’s attempts to invalidate the patent were doomed to fail (knowing Philips clever use of study group en engineers outcome of standard meetings to subsequently draft - and redraft if necessary - claims covering that standard setting meeting results).

No surprise then that LG lost its patent infringement case. Philips obtained an infringement injunction against LG in April 2007. The court found infringement on a valid Philips patent (be it a little bit helped by the court in redrafting the claims in a way that made it novel and inventive over the prior art). So far, so good, Philips must have thought.

However, LG had the feel that Philips must have played the standard setting procedure a little too clever, and alleged that Philips had taken part in the engineers and study group meetings and had failed to declare the Vogel patent to the relevant standard setting body (with the result that they could still sue under the patent which they would not have been entitled to do would the Vogel patent be declared prior or pending the standard setting meetings. In that case Philips could only claim licenses (monetary relief, no injunction) under the Standard Setting Rules to license against RAND conditions).

LG sued Philips for that same The Hague District Court, asking in preliminary proceedings (“kort geding”) to order Philips not to enforce the injunction it obtained in April against LG. It succeeded. LG was finally able to deliver evidence that Philips did participate in the Standard committee meetings. Philips tried to save its face by trying to convince the court that the “disclosure rules” are only for “proposers” (parties who provide technical proposals in the committees). It made the Court – in a humorous snub against Philips – say it should have been aware of the disclosure requirement “as a listener”. It added that, had the court known about the convincing evidence that Philips did participate (contrary to what Philips made the court belief in the earlier court case) it would not have rendered the infringement injunction against Philips in the first place.

Interesting to note that in a similar case in the US in 2003 - Rambus Inc. v. Infineon Technologies, 318 F.3d 1081 (Fed. Cir. 2003), the US Court of Appeal for the Federal Circuit (CAFC) said although the JEDEC policy itself (presumably the written policy) did not specify when to disclose patent that read on a standard it took from testimony of witnesses, that the actual practice required that disclosure be made at the time of “formal balloting” with respect to the standard. The question then arose whether JEDEC’s disclosure requirements applied to a member’s intentions or attempts to file patent applications covering the proposed standard? The CAFC found that a member’s subjective beliefs, hopes and desires are irrelevant. Philips beliefs –being not a “proposer” - would in CAFC’s view be irrelevant, the same result as the Dutch court, be it along different lines.

Philips must hope it will not be under the same scrutiny as Rambus has been - and still is – over its standard setting policies, but it will ring the alarm bells in Eindhoven, no doubt.


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The following is a Korean translation of the above blog post: "Philips defeated on JPEG patent after non-disclosure to standard setting bodies"


규격 기준 기관에 비공개로 인해 JPEG 특허 건에서 패한 Philips

전자제품 업계(또한, 최근의 반도체 업계)내에서 “뜨거운” 이슈 중의 하나는 규격 기준과 특허간의 관계이다. 최근의 한 예로 Sisvel이 Philips의 mp3 특허를 국제 오디오 압축 규격에 적용하게 한 예가 기억에 남는다. 이 경우, Philips는 오디오 규격을 적용하는데 별 문제가 없었던 걸로 보인다. 영국의 판사, Mr. Pumfrey J가 말했듯이, “특허를 가진 사람에게는 별 문제 없이 규격기준을 적용하는 것이 어쩔 수 없이 특허권을 침해해야 하는 경우보다 더 좋은 것이 없을 것이다.” Mp3 제작자를 비롯한 독일의 법원도 Phillips에 의해 위의 글을 적용하여 mp3 플레이어들을 특허가 아닌, 적당한 규격과 비교하게 되었으며 또 말하길, “mp3 플레이어 거래인들은 mp3 플레이어 규격에 맞는 성능을 갖춘 기종을 업계에 소개 하는데, Philips가 그 규격에 꼭 맞는 특허를 가지고 있으므로 위의 mp3 플레이어들은 특허권 침해의 증거가 된다.”

심사 숙고해서 짜인 전략은 Philips와 mp3 특허 공동소유자에게 수억의 라이센스 수입을 가져다 주었다. 그렇다면, 연구 그룹 International Telegraph Telephone Consultative Committee (CCITT)와 The International Standards Organization (ISO) 그리고 British Standards Institution (BSI)의 JPEG 규격의 토론으로 떠올랐던 “Baseline”이라 불리는 휴대폰 카메라 이미지 압축 방법에 관해서도, 동일한 전략을 쓰면 되지 않는가? Philips는 자신들이 유럽 특허 EP 0 260 748, “Vogel”(발명가의 이름)의 소유권자라고 생각했던가.

그런 이유로, Philips는 네덜란드 LG 전자를 상대로 Vogel특허의 –JPEG 압축 규격 기준을 포함한–많은 휴대폰에 적용했다는 사실에 소송을 제기했다. Sisvel 기적 이 후, 충분히 가능한 일이라고 믿었다. 실제로 네덜란드 법정은 Baseline 방법을 사용했다고 인정한 (표준 규격이기 때문에!) LG를 상대로 Philips의 영리한 집행에 감명받았다. –독일 법정이 mp3 “padding bits” 특허의 소송시기에 그랬던 것처럼–. LG의 특허를 무효로 만들려는 시도는 실패로 돌아갈 것이 예상되었다. (Philips의 엔지니어들의 규격 기준의 영리한 연구에 따라서 소송내용을 수정하거나 보류할 것으로 알았기 때문이다.)

이변 없이 LG는 특허 침해 건을 지고 말았다. Philips는 LG를 상대로 2007년 4월에 침해 금지명령을 얻었다. 법정은 Philips의 유효한 특허에 대한 LG의 침해라고 결정했다. (이것은 소송내용을 수정 함으로 약간의 법정의 도움을 받은 것이라고도 할 수 있겠다). 여기까지 Philips는 모든 것이 잘 풀렸다고 믿었다.

그러나, LG는 Philips가 규격기준의 결정 행로를 자신들에게 유리한 쪽으로 몰아갔다고 믿어, Philips는 엔지니어들과 연구 그룹들의 미팅에 참여했고, Vegel 특허를 적절한 규격 기준 기관에 신고하지 않았다고 주장했다. (그 결과를 가지고 Vogel이 아닌 다른 특허에 한해서, Vogel특허가 규격 기준 미팅에 신고되기 전이나 보류되었을 경우 소송을 제기할 여지가 남아있었다. 그 경우엔 Philips는 RAND conditions에 대한 규격 지준 지정 법에 한해 라이센스만 요구할 수 있다. (금지 명령이 아닌 금전상의 보상)

LG는 같은 The Hague District Court에 Philips를 상대로 Philips가 4월에 얻은 금지명령을 이행하지 못하도록 preliminary proceedings 을 신청하였다. 그리고 성공하였다. LG는 Philips가 규격 기준 위원회 미팅에 참여했던 것을 밝혀내었다. 이에 Philips는 “disclosure rules”는 “proposers”(기술적인 제안을 위원회에게 제공한 쪽)에게만 적용됨을 법정에 납득시키려 했다. 법정은 공개 요구조건을 “청취자의 입장에서” 인식하고 있어야 했음을 표했다. 또, 법정이 Philips가 미팅에 참여했다는 확고한 증거를 알고 있었다면 (Philips가 전의 케이스에서 법정을 설득시킨 것과는 달리) 특허침해라는 결정은 처음부터 없었을 것임을 더했다.

흥미로운 부분은 2003년에 미국에서 비슷한 케이스 -Rambus Inc. v. Infineon Technologies, 318 F.3d 1081 (Fed. Cir. 2003) 의 경우, the US Court of Appeal for the Federal Circuit (CAFC)가 말하길 JEDEC 정책은 증인에 의해 언제 특허가 공개되었는지는 지정하지 않고 있고, 실제로 규격에 관련된 공개가 “formal balloting”의 시기에 행해지는 것이 요구된다고 밝혔다. 그렇다면 의문이 생기는 부분은 JEDEC의 공개 요구사항이 멤버의 의도, 또는 제시된 기준을 포함하는 특허 신청서를 제기하려는 시도에 적용되었는지 다. CAFC는 멤버의 신념, 바램, 그리고 욕구는 무관계 하다고 밝혔다. Philips의 신념 – “proposer”가 아닌 – 은 CAFC의 관점에서 무관계 한 것이었고, 네덜란드 법정에서도 동일하게 적용되었다.

Philips는 Rambus가 그랬던 것처럼 (아직도 그렇듯이) 기준 지정 정책으로 인한 엄격한 감시가 있지 않기를 바래야 할 것이다.

Will US Patent Reform pass Congress in September?

Will the US Congress pass Patent Reform legislation this month?

IPO vs. Professor Crouch: In a rare attack on an academic’s view, IPO notes the pronouncement by Professor Dennis Crouch that the legislation will not be enacted by Congress, Congressional Patent Reform is Dead; Long Live Administrative Patent Reform, Patently O (August 30, 2007). Prof. Crouch reminded his readers that several months ago he had --
"declared that new patent legislation [to be] effectively blocked within Congress.…[L]egislative reform is, for the most part, a sideshow as the executive and judicial branches are still running with the ball."

IPO patronizingly notes that "a majority of lobbyists in Washington, who talk to members of Congress every day for and against the legislation, are convinced that some form of it will pass this year or next." (IPO Daily News).

It would be good to take a deep, deep breath, step back, and see just why there are entrenched interests that will be big losers if the current patent reform proposals are enacted, which is precisely why Professor Crouch will be vindicated at the end of the day as patent reform legislation ultimately stalls in the United States Senate.

Hal Wegner, Washington

Statistics, European Patent Filings 2006 now published

The European Patent Office (EPO) published statistics on European patents and patent applications during 2006. It’s a shame that on the EPO site one cannot easily get a comparison with Patent data of 2005 and so follow the development an grow in patent applications nor compare the listings of the companies that are the largest “users” of the EP system.

The results show again that Germany leads as the EU country with the highest number of patent applications filed, not much different than the figures analyzed and published in 2007 by EuroStat, EU's Statistics Bureau, for 2000.

Worldwide patent applications are growing at an average rate of 4.7% per year. WIPO Director General Dr Kamil Idris considers this as “clearly one indicator of the level of inventiveness and innovation that is occurring around the world and signals those areas in which technological development is most pronounced." This is a hightly contested view. Innovation measuring by numbers of patents is in my view (and that of many others) flawed. A debate in economics about how best to measure innovation is going on for quite a while. Most economists are well aware of the shortcomings of patent data as a measure of innovativeness.



On firm-level, as one would expect, common-sense dictates that not input to the innovation process (employess, money) or byproducts (patents) but rather final output and success is the most useful measure of innovation

"The three metrics that executives consider most valuable are time to market,
new product sales, and return on investment in innovation." (Boston Consulting
Group "Innovation Metrics Survey", 2006)

Only Half of Dutch Top 10 Innovative Companies file patent

BIZZ, the blog and magazine for small and medium sized enterprises (SMEs) in The Netherlands, published by Reed Business provides a shortlist of the 100 most innovative companies in Holland for 2007, the “Innovatie Top 100” (“Innovation Top 100”). We wonder how many of the 10 most innovative companies have filed one or more patents for their invention. The - preliminary results - are at best scanty, at worst: troubling. We checked the data, using the database for the German Patent Office (Depatisnet) and Espacenet (of the EPO).

For five out of the ten “most innovative” SMEs in The Netherlands we were unable to find one or more patent filed. If this trend would be true for all of the 100 most innovative companies, only 50% applies for a patent. So basically half of Netherlands most innovative companies simply ignore intellectual property or have decided not to use IP for their companies.

Here are the top 10 of BIZZ's "Most Innovative" SMEs, out of the 100 as published by BIZZ:

1. Mampaey Offshore Industries - Dyamic Oval Towing System
One patent filed, (“Sleepboot met ovale ring”, inventor Gerard Mampaeij NL1027414)

2. Bouwbedrijf Kooi - Het 1-2-3 Huis
One patent filed (by “1-2-3 Huis B.V”) , inventor Jaap Kooi NL1029449

3. Claves - Novulo
No patents, nor any (published) application

4. EVOLVE & Vriezema Betonprodukten - Lichtgewicht beton
No patents, nor any (published) application

5. E.V.A .Products - Dieselmotorcycle De Track
No patents, nor any (published) application

6. Wilmink Product Ontwikkeling - Dynamische gehoorbescherming
Two patent applications (“Gehoorbeschermer”), inventor Engbert Wilmink (originator of the patents is TNO), EP 1682059 and EP 1527761

7. SENZ Umbrellas - Stormvaste paraplu
One (Dutch) patent nr. NL1029225, inventor Gerrit Hoogendoorn, pending applications for other countries

8. Van Ruysdael - Isolerend enkelglas voor de restauratie
Two (Dutch) patents NL1020845 and NL1024339, inventor Michel Trompert. One European patent application EP-A-1388413 which is in limbo for years now, does not seem to lead to a patent anytime soon.

9. PayDutch - Veilige online koop/verkoop methode
No patents, nor any (published) application

10. LSB Groep - Kunststof steigerplanken
No patents, nor any (published) application

So, 50% has a patent, 50% has none. Is the glass half empty or half full? Half empty is the right answer. Remember, we are talking about the best innovations by Dutch SMEs. What does it tell us? A faulty view on what IP can do for your company? Maybe management thought they could keep the product characteristics secret? Isn’t that naïve? Worst of all: all these innovations can be easily copied and used without any compensation to the originators of these innovative ideas. Is that what innovation is all about? Is that where Europe spends millions of euros on, to stimulate new inventive products and services which can be copied by anyone doing some reverse engineering?

Netherlands politicians: go do your homework and start thinking how to improve this lack of use of IP and lack of full understanding of what IP can do for the SMEs.

Patent professionals: get finally out of your professional cocoons and start telling and educating the politicians and policymakers as well as SMES what patents can do for you.

Academic world: start educating the students at (technical) universities what patents are, how they can be strategically used, what the difference is between freedom-to-operate and patents as a strategic tool.

Universities and Business Schools: start promoting academic research into the exact role of patent in the innovation process.

This should be a wake-up call for all those involved in the innovation process.

German EU Presidency ends with Patent Seminar

Today starts, in Munich, a two day Symposium: “The Future of European Patent Jurisdiction” organised by the German Federal Patent Court, in consultation with the Federal Ministry of Justice, The meeting is expected to bring together 200-250 participants from all over Europe who are actively engaged with this issue in their work as judges and lawyers, as members of the business or scientific communities, or as decision-makers in EU Member State governments and the European Commission. Federal Minister of Justice Brigitte Zypries will attend the symposium and deliver the opening speech.

If only Germany could be as effective in brokering a EU Treaty consensus as they can be on reaching a common view on EPLA, wouldn't that be what the European patent community is waiting for too long?

We hope to be able to get you news from the conference later today.

EPO is not eager to receive EU political oversight

Joff Wild reported on his blog (June 19) of an internal memo of the EPO (European Patent Office) reporting on the attitude of staff to the way in which the EPO is being run. Almost simultaneously, the head of legal affairs at the EPO stated that it is now too easy to obtain patents and there needs to be a shift towards fewer, but higher-quality, rights.
Joff wrote: “And to add a certain spice to the situation, as well as handing valuable ammunition to the EPO’s opponent’s, Wim Van der Eijk, Principal Director of the International Legal Affairs and Patent Law Department, was last week quoted as saying: “Patents are granted too easily … We need to have a more critical look, and steer policy in the direction of less, but stronger patents.” Now I don’t know in what context he was talking and if he was referring to the EPO or not, but it strikes me that at a time when the EPO is awarding more patents than it ever has before, this was not a particularly clever thing to say.”

Another view is possible. The criticism makes sense when one reads in the internal memo:

“There is a strong belief amongst staff that the financial benefits to the
Member States arising from the renewal fees motivate the Administrative
Council, and consequently the EPO administration, to focus on the quantity
rather than the quality of the granted patents.”

My guess is that Wim van der Eijk, assuming he is being quoted correctly, was adding to the criticism (which the internal memo signals is being shared internally at the EPO) that the national patent offices, by means of their representation in the Administrative Council of the EPO, have a natural tendency of promoting volume over quality of patents (more patents means more income for the member states). That policy, when adopted by the EPO Examiners, would result in more not better patents, which in turn would mean that quality will suffer. Put otherwise, we are not so sure that all EPO principals are really happy with the rise in patent numbers and are concerned that quality issues may soon result in additional political pressure by (e.g.) the European Parliament to force the EPO to be subject to some new Policy Review Oversight. We can see why no one in the EPO would be particularly happy with such a development.

Mobile, mobile, mobile

Tony Fish of AMF Ventures commented in his blog on Eric Schmidt, the CEO of Google, who spoke about “mobile, mobile, mobile” as the next opportunity at the O’Reilly Web2Expo in San Francisco last month.

It’s funny – you could pretty easily find the same types of things said about Web 1.0 during Bubble 1.0. For example, this is what the book Net Gain: Expanding Markets through Virtual Communities by two McKinsey guys in 1997 was about. Another book that discussed all this was Esther Dyson’s Release 2.0 from the same year. Plus ça change…..

There are two big problems: “Assuming privacy laws and big brother objections can be overcome” (see Tony' blog) is one. The other is how you can give average consumers control of that information in any meaningful way – it’s just way too complex and confusing. The issues are the same whether the device is a PC or a mobile whatchamacallit. We can see the latter problem being somewhat solved over a long period of time by increasing consumer comfort level with technology, but we don’t see how the former one goes away. By the way if you solve the “privacy police” problem, then DRM becomes a whole lot easier.

Bill Rosenblatt, New York

Time for a Reverse Patent Troll to seek invalidation of Sisvel mp3 patents?

Philips c.s. mp3 patent litigation by Sisvel has mostly come to an end in Europe and the US, as most bigger players in the electronics space have settled with Sisvel (on behalf of the patent holders Philips, France Telecom, IRT and TDF). When Sisvel settled with most vendors of mp3 consumer goods they did that after seizing goods at consumer fairs, starting patent infringement cases, using the European Border Detention Regulation 1383/2003 for blocking incoming mp3 enabled consumer goods from Hong Kong and China and other Asian countries. Many companies were basically forced into license deals, despite the fact that they had very good validity challenges to the patent. This blog has access to prior art that has been found that only a very limited number of companies have been able to get access to. The prior art is extremely powerful and valuable against anyone wanting to challenge the Philips mp3 patents being asserted by Sisvel.

Although many companies agreed to pay substantive royalties for the lifetime of the patent, no one is seeking invalidity. Why would any company not challenge the validity of the patent after signing the license thus saving substantial future royalty fees? The answer is quite simple. In the settlement agreement Sisvel included a clause giving them the right to terminate the license if the licensee challenges the validity of the patent. The clause reads:

“10.03 Audio MPEG and SISVEL shall have the right to jointly or independently terminate this Agreement forthwith or to revoke the license respectively granted under any of the US Patents and Non-US Patents in the event that LICENSEE or any of its Controlled Companies, directly or indirectly (e.g. via its customers and/or suppliers) brings a lawsuit or other proceeding to contest the validity or enforceability of any of the US Patents and/or Non-US Patents.”

Most US companies and those European companies with substantial US exposure refrain from even looking into the possibility of seeking invalidity as this could result in a termination of the license something they do not want to get into, endangering the continuous supply of phones, handheld or other consumer goods with their mp3 functionality. Most US attorneys advise their clients not to be part of any attempt, by whomever, to challenge the Philips/Sisvel patents, despite the very powerful prior art available, wary of the risk of termination and subsequent further business disruption. Besides who cares anymore when everyone pays the license which is in all cases been passed on to the end consumer?

Earlier we pointed out that a direct non-challenge clause is contrary to almost every antitrust legislation in the world. So how come Sisvel can get away with this quasi no-challenge clause? Strictly speaking clause 10.3 above is not a no-challenge clause. The licensee is still allowed to challenge the underlying patents in any court. However, doing so gives Sisvel under this challenge-clause (see above) the right to terminate the license agreement. Under previously held US law, a licensee cannot have it both ways: and getting patent peace by obtaining a license from the patent holder and at the same time challenging the patent’s invalidity while enjoying the license (as that would prevent the patent owner from seeking an injunction to use the patent pending the license) . However the US Supreme Court changed that in MedImmune vs. Genentech. According to the US Supreme Court, language promising to pay royalties on patents that have not been held invalid "does not amount to a promise not to seek a holding of their invalidity."

Although one would expect a challenge to the clause 10.3 in the Sisvel license (settlement) agreement, we do not know of any.

Reverse Patent Troll
Both the public in general as well as al the mp3 electronics consumers that now pay the price for the Sisvel licenses need to have a “Reverse Patent Troll” act against the Sisvel patents, seeking invalidation of the Philips c.s. patents. The Reverse Patent Troll can then use prior art that has only been used by two companies in their EU proceedings (which were subsequently withdrawn after settlement with Sisvel) which is very convincing, very powerful and not yet publicly known, so useful as it cannot be used by everyone to invalidate the Sisvel patents, making the Reverse Patent Troll a very attractive one.

Prior Art
Prior Art has been found that is unique and a powerful tool against the Sisvel patents. For further information, contact bonanza@ipeg.com.

IP as trade barrier

Interested in the use of Intellectual Property as a trade barrier? Listen to an interview on China Radio international with Jasper Helder, of Simmons & Simmons at http://english.cri.cn/4026/2007/06/06/1241@235394.htm

Patent Auctions, Where Are the Buyers?

When the first patent auction by Ocean Tomo was held in San Francisco, it caused a huge media hype in the US. It looks that the next one, in London on June 1, will receive the same attention from European media (if by then, we do not have an overdose of hype already because of the Michael Jackson auction on Wednesday and Thursday). The reason it will is, no doubt, because of the esoteric nature of the goods being auctioned. We can imagine old cars, antique books, art, wines and other “tangible” goods being sold on an auction. Even 3G wireless licenses. But patents?

Trading products of the mind, like an invention embedded in a patent, or “intellectual assets” (or “intangible assets”) are much harder to imagine when it comes to putting value on it. “Value” makes most intangible assets indeterminate. But how come we can value 3G wireless licenses (be it too high) but we have trouble valuing patents? There are over 100 methods of putting a value on patents[1]. What is the “value” of a patent, or more broadly, value of intangible assets? In case of the 3G the value must have been driven by market (and profit) expectations. But what profit can be made from patents?

These and other problematic issues make the auction of a patent a daring event. Or are we too much of an iconoclast to take issue with conventional wisdom that a patent is by itself and stripped from its application of the patented invention has no value at all?

Intangibles represent “immaterial” value, such as relationships of companies with its business partners, and its ability to innovate (R&D capital). Stripped from its context, however, the “value” of a patent is nothing but a assertion of a right to an invention, a monopoly right granted by the government for an innovation that is both new, inventive and contributes to the “art”. It is a long way from a “right” to “value”. For some the sole right to exclude others to use the same invention for which a patent has been obtained is what the real value of a patent is. Contrary to this view, licensing officers, business development and financial people interested in monetizing IP, see the real value of patent in its potential to add value to the organization (e.g. by shorten its own R&D time), or by establishing relationships in open innovation projects or by using it to realize financial value (e.g. lowering the cost of capital by securitization the license income stream that (some) patents generate.

So a smart buyer will ask himself some tough questions. Am I really interested in buying a right without the product that is the result of the patented invention, or the certainty that what is being described in the patent actually works for you? What is the value of that (paper) right that is being auctioned? Is it the right it conveys to exclude others and how sure can you be of that (have you not misread the claim, do you have a full overview on the closest prior art and did you do your due diligence on validity of what is being claimed? Or, do I buy to enlarge my own portfolio and to what extent? Does the offered patent grant me access to other players in the market by leveraging this new patent against the rights other companies have whose cooperation I seek? Although patents are meant to be useful, studies show that almost 95% of all patents have never been used in any product and have created no economic value. They are being filed as a guarantee (actually rather an expectation) that it deters competitors from copying the invention. Patent as a “freedom to operate” mechanism. But how does that confer value to any other party than the originator of the invention?

So, one wonders, who is interested in a patent without some proof attached to it that the invention has potential applications or is capable of rendering a commercially viable product? Yes surely patents are being traded, actually in quite large numbers. These patents are being traded (either sold or exclusively licensed) after detailed negotiations and careful due diligence on behalf of the buyer, in private dealing rooms.

But how about auctions? Tim Harford, in the Financial Times Magazine (“Under the hammer”) cites economist Paul Klemperer, Europe’s best known auction expert, who showed that trivial seeming features of an auction can have big (and sometimes disastrous) effects by repelling bidders. Take the question whether there should be an open or secret reserve. Auction theory offers an argument that a secret reserve price is better (IPA did that during the Munich patent auction, however, no bidders). The idea behind it is that bidders, confronted with gradually ascending bids will draw confidence that a bidder is not alone in valuing the item, even if the bids are too low to reach the reserve. In 2001 Katkar and Reily put this theory to the test by selling 50 matched pairs of collectible cards, 50% open and 50% secret reserve of the same level. They concluded that secret reserve is counterproductive. Far from stimulating interest they seem to put off bidders, fearing that a secret reserve is secret because it is far too high.

A further misconception is that small inventors or SMEs when seeing the figures for which patents in total have been auctioned (as Ocean Tomo did), might be lured into thinking that having a patent will make them rich. As we wrote earlier, there is a lot more needed to make money out of a patent than selling it on an auction.

In that respect IP auctions will not be the value driver of IP that some will make you belief it is.

[1] Relief from royalty, Excess profits or notional maximum royalty payable, Capitalization of earnings, Net present value of incremental cash flows, Gross profit differential, Premium sales price , Comparable market transactions, Cost based, etc. etc

Patent auction in Munich, success or failure?

Was the first IP auction in Munich, yesterday at Kempinski hotel, a success? Well, it depends how you define “success”. Certainly the German organizers, Intellectual Property Auctions GmbH (IPA) did a great job. You must be courageous to organize an auction in Europe, where the notion of selling and buying patents is still in its infancy and general IP awareness is at minimal levels. So yes, it was a success in the sense that IPA has been the first one to create greater awareness that patents are more than rights you acquire to then shelve them.

In terms of proceeds, no, the auction was a washout. Out of the 81 lots of patent(families) covering 12 fields of technology as well as one (!) trademark, the highest bid – 50K euros, by an absentee bidder – was for a patent on a reduced light scattering ultra phobic material, owned by a German company. Most sellers were, by the way German companies and institutions, among which Fraunhofer. Fraunhofer did relatively the best business, out of 11 patents auctioned, 10 were sold, be it for an average of an abysmal 17K euros, for a total of 188K euros. The lowest amount for which a patent was sold was for 5K (can you imagine, that’s not even 1/100th of the costs for an average European patent application covering 5 countries).

There were some exotic patents as well. A patent for making leather out of fish skin, wouldn’t that be great to support Europe’s fishing industry’s competitive edge? No bids however, an inevitable fate for most lots as it was clear from the start that, again, more tyre kickers than buyers frequented the auction. Or a patent offered for sale by a German patent attorneys firm for wound treatment, asking price 80K, no bids.

The only trademark auctioned was NUTRI-CARE of BASF, sold for 14K, after a (telephone) bidding with increments of 1,000 euro. Not a bad result though for a trademark if you compare it to the results for patents were (almost exclusively telephone) bidders did not want to pay more for any patent than a paltry 15k-17K euros. The only bid that was made on a certain patent from the audience was - guess what – from Ocean Tomo, the US auction organizer, who will have its first European action on June 1 in London. The bid failed as it was overturned by a telephone bid. How sad can it be?

What can we learn from this first auction?
First and foremost that a successful sale of patents is still the terrain of the patent brokers and IP merchant bankers, rather than the auction houses. Secondly, that the big issue that need to be overcome is: where are the buyers? In that respect it does not help that the organizers have waited too long before making the auction catalogue available on the internet free of charge (only after filling in forms, paying entry fees, etc). How else would a potential buyer know about what is being offered, leaving sufficient time for due diligence? Instead, IPA was much too secretive and restrictive about who is selling what, for what price and what details could be provided for any interested party to get him to bid. Thirdly, crucial details in the catalogue were missing, price indication, value estimators, valuation analysis that IPA must have done before accepting the lots, etc.

Let us wait how Ocean Tomo does the London auction before giving the final verdict.

Europe's First IP auction in Munich

If a newly identified work of Vincent van Gogh would be auctioned, would it be noticed by the bloggers, the press, any attention at all? Probably only when a new record is being set by the auctioned price. No the picture for this blog does not represent the proceeds of one of the patents auctioned today in Munich. The auction is organized by IP Auctions GmbH, a German IP valuation group. It is very much modeled after the Ocean Tomo auction, held in San Francisco, Chicago and New York. It was announced that next to patents, also trademarks and licenses would be auctioned. The appetite for trademarks seems to be low, as only trademark, “Nutri-Care” will be under the hammer. The auction, held today at 2:00 p.m in Kempinski hotel, will be both an English and a Dutch auction, the latter known from the first auction of flowers, whereby the auctioneer starts to call the object at the highest price, slowly lowering it until the first bidder raises it hand.
What is striking about the auction is that the sellers are predominantly German companies, including Fraunhofer, Germany’s top technological research institute, comparable to TNO in the Netherlands, ABB Group, Merck Patent GmbH, the German Rolls Royce company, some German academics and the University of Saarland (also Germany). Volkswagen AG offers one non-exclusive license under a European patent for the manufacturing of a plastic autopart. One of the few non-German sellers is (I presume) a Spaniard, Salvador Perez, offering a patent “Pay-as-you-drive” as it is described, filed in 1994 (so with a limited lifetime left) “for evaluating the risk of a motor vehicle”. No details of the patent are being given, expect a link to a website where some unclear references are made in a rather clumsy way, to anything to do with car insurance. Hardly the sort of patents, one would expect to raise great interest for.

The other non-German sellers include an interesting Dutch invention of a Netherlands based electro technical company, Wolters Engineering, for a reuse of paper waste. And belief it or not, who thought Chinese only copy are mistaken, a real Chinese patent is being sold for pharmaceutical wastewater treatment. Sounds like something the Chinese seller could license in China quite successfully (aren’t we hearing about massive pollution issues in China?). Why buying, if even the Chinese patent owner rather sells his patent than to enforce its own invention nationwide?

To be continued after the actual auctions has taken place

On the Munich auction, see also Frontrunner, a technology blog by Bert van Dijk, editor for Het Financieele Dagblad, Netherlands largest financial daily.

IPEG –European Merchant banking, now also in Korean & Japanese

Europe’s first Intellectual Property merchant banking, delivering services to monetize IP, whether it are patents, trademarks or copyrights, has its corporate website now in Korean and Japanese, see http://www.ipeg.com/

특허, 상표, 저작권을 막론한 지적재산의 경제적 효용을 위한 서비스를 제공하는 유럽 최초의 지적 재산 상업 은행, IPEG가 한국어와 일본어 웹사이트를 개설하였습니다. http://www.ipeg.com/을 방문해 보세요.

特許、商標、著作権を問わず、知的財産の経済的効用のためのサービスを提供するヨーロッパ初の知的財産商業銀行、IPEGが韓国語と日本語のウェブサイトを開設しました。http://www.ipeg.com/　を訪問してみて下さい。

Obviousness in the US and what patents do for innovation

“We build and create by bringing to the tangible and palpable reality around us new works based on instinct, simple logic, ordinary inferences, extraordinary ideas, and sometimes even genius.” A citation from the opinion of the US Supreme Court in KSR vs. Teleflex of April 30, 2007. The court gave its opinion in a closely watched case on “obviousness”. It is the fifth patent case in the past two years in which the Supreme Court has reversed the Federal Circuit, all of them unanimous or near unanimous decisions. The Supreme Court not only rejected the Federal Circuit’s test for obviousness, it proceeded to apply the correct test that it had just enunciated to the facts of the case before it and rule for the defendant below rather than remanding to the Federal Circuit and allowing it to apply the Supreme Court’s test to the case. The Court’s opinion suggests that patents which are based on new combinations of elements or components already known in a technical field are quite likely to be found obvious under its view of the correct analysis – a development that will likely lead to many more patents being found obvious in the electronics field but should have less impact in the life sciences field. The Court explicitly rejected the Federal Circuit’s longstanding view that a patent cannot be proved obvious merely by showing that the combination of elements was “obvious to try.” Again, this holding may have more impact on patents in the electronics field than in the life sciences technologies.

Many comments have already been published on patent blogs. See for Hal Wegner’s comments on the case his column on the right side of this blog.

For European practice the decision may not be very important other than that it gives additional ammunition in the current debate in Europe whether patents are granted too easily leading to low quality and stifling of innovation. The Supreme Court uses the word “innovation” eight times in its opinion:

“These advances, once part of our shared knowledge, define a new threshold from
which innovation starts once more. And as progress beginning from higher levels
of achievement is expected in the nor-mal course, the results of ordinary
innovation are not the subject of exclusive rights under the patent laws. Were
it otherwise patents might stifle, rather than promote, the progress of useful
arts.”

(…)

“Granting patent protection to advances that would occur in the ordinary course
without real innovation retards progress and may, for patents combining
previously known elements, deprive prior inventions of their value or utility.
Since the TSM test was devised, the Federal Circuit doubtless has applied it in
accord with these principles in many cases. There is no necessary inconsistency
between the test and the Graham analysis. But a court errs where, as here, it
transforms general principle into a rigid rule limiting the obviousness
inquiry.”

(…)

“When there is a design need or market pressure to solve a problem and there are
a finite number of identified, predictable solutions, a person of ordinary skill
in the art has good reason to pursue the known options within his or her
technical grasp. If this leads to the anticipated success, it is likely the
product not of innovation but of ordinary skill and common sense.”

(…)

“Although common sense directs one to look with care at a patent application
that claims as innovation the combination of two known devices according to
their established functions, it can be important to identify a reason that would
have prompted a person of ordinary skill in the relevant field to combine the
elements in the way the claimed new invention does. This is so because
inventions in most, if not all, instances rely upon building blocks long since
uncovered, and claimed discoveries almost of necessity will be combinations of
what, in some sense, is already known.”

(…)

“If this leads to the anticipated success, it is likely the product not of
innovation but of ordinary skill and common sense. In that instance the fact
that a combination was obvious to try might show that it was obvious under
§103.”

(…)

“These advances, once part of our shared knowledge, define a new threshold from
which innovation starts once more. And as progress beginning from higher levels
of achievement is expected in the normal course, the results of ordinary
innovation are not the subject of exclusive rights under the patent laws.”

and by far the best:

"A person of ordinary skill is also a person of ordinary creativity, not an automaton. [page 17]

IP securitization: the new hot thing in Europe

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

Japan has toughest patent system

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

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

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

prof. Hal Wegner

Is DRM dead?

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

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

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

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

[1] Digital Rights Management

German Court invalidates drug dosage patent

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

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

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

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

Dr. Kaya Köklü, Simmons & Simmons, Düsseldorf