IP Aspects of Business Law Professor Sung 1. Basic forms of IP and pros/cons a. Trade secrets i.

Low cost, high risk, indefinite term ii. Misappropriation b. Copyrights i. Low cost, low risk, 95 year term ii. Copying & Derivative works c. Trademarks i. Low cost, moderate risk, indefinite term ii. Consumer confusion and dilution d. Patents i. High cost, low risk, 20 year term ii. Infringement (high cost to enforce) 2. IP assets a. Capturing value through IP Hokanson i. Consequences of overlooking IP issues: 1. Greatly increased expenses 2. Unrecoverable loss of valuable rights ii. Once you identify an IP right you need to protect: 1. Patent a. File provisional patent i. Be careful not to sell or show off ii. CANNOT AMMEND at a later date so DONT BE SLOPPY b. Provide a full and complete written description of how to make and use the invention for which the patent is sought 2. Trademark a. Can the company adopt and use the mark in interstate commerce without the legit assertion of rights by another b. Can the company get federal trademark registration for the mark c. Domain names d. Motor City i. Under UTSA must: 1. Be valuable by not being generally know and not being readily ascertainable 2. Reasonable efforts to maintain secrecy ii. Disclosure of TS to others who w/o obligation to protect confidentiality of info extinguishes property right 3. Copyright a. Benefits are that you get statutory damages along with attorneys fees and costs

b. Work for hire (contract) b. How a start up can put its IP at risk Cundiff i. Common mistakes 1. No clean break a. Breach of fiduciary duty to employer b. May lose IP rights if starting up similar company to type employed at 2. No search a. Begin the search early for domain names and register trademarks (and perform a search) well in advance of public announcement 3. Only thinking about the internet 4. No worker agreements a. Need a paid work contract to ensure exclusive rights to the IP developed 5. No NDA/CDA a. Make potential investors sign 6. Its business, not personal a. Get confidentiality agreements and plan for succession/exit of personnel early 7. Forbearance a. Dont go after every infringer, but cant be a pushover 8. Ostrich behavior a. Keep an eye out for infringer b. Have counsel respond in writing ii. Valuation 1. Valuation of IP Assets Hagelin a. Cost method i. Measures value of asset by cost to buy identical or equivalent asset assumes that economic value provided through life of asset is commensurate with development cost ii. Basically = how much cost to product asset b. Market method i. Based on comparable transactions between unrelated parties ii. How much asset would sell for in the market c. Income method i. PV of net economic benefit obtained over the lifetime of the asset ii. How much COULD the asset generate? d. Traditional 25% rule i. Value of a license should equal 25% of gross profits e. Industry standards i. Uses references to toyalty rates in similar past transactions

f.

g.

h.

i.

ii. Limited since by definition each IP asset is different Ranking i. Often used in conjunction with industry standards approach, uses five components: 1. Scoring criteria 2. System 3. Scale 4. Weighting factors 5. Decision table Surrogate measures i. Reference to patents themselves, most common are # of patents issued to company, payment of patent maintenance fees and prior art citations correlating average with firms MV ii. Can only be used to evaluate portfolios Disaggregation methods i. Value = apportions some fraction to total value to IP by setting value of intangible assets equal to value of firm minus firms money and tangible assets ii. Income = apportion some fraction of total earnings to IP assets (tech factor method and knowledge capital score card) iii. Monte Carlo = assign range of values w/ probability to each value as in value of disaggregation method iv. Option method = adopt Black-Scholes to value IP as a wait and see Competitive Advantage Valuation (CAV) i. States that IP assets have no value, all value resides in tangible assets which incorporate them combines the income and disaggregation approach ii. What is the value of the asset measured against existing technology?

2. Cases a. Hughes i. Lost profits not reasonably measured ii. Need reasonable royalty 1. Court will conduct hypothetical negotiation between licensor and willing licensee before start of infringement 2. Some profit for infringer b. Pfaff i. On sale bar 1. Clock on securing patents runs from time offered for sale

2. Must file w/in one year of on-sale advert anytime a company has a sales force this becomes an issue 3. Ready for patent a. Actual reduction to practice b. Constructive reduction to practice 4. Experimental use an acceptable use that does not start toll ii. Often disconnect between sales people and R&D/IP department iii. Licensing 1. Basic elements: a. Who i. Assignability and acquisition b. What i. Patent right versus technology (know how) c. When & where i. Term and field use d. Why i. Exploitation versus peace e. How i. Cross-license, patent pools 2. Negotiation of Royalties and Other Sources of Income from Licensing Goldscheider a. Elements that increase licensors assets: i. Relevant, assumable, enforceable patents ii. Trade secrets and know-how related to subject tech iii. Ancillary trade secrets, including marketing insight and contacts iv. Established product trademarks v. Software, ad support vi. Active and productive R&D facility vii. Pattern of successful licenses viii. Reputation for diligence in pursuing infringers ix. Reputation for protecting licensees from independent actions from 3rd parties b. Licensor can assume risk by agreeing to lowering licensing rates in exchange for royalties c. Other options include lump-sum and periodic lump-sum payments, prepaid royalties, minimum royalties, barter, equity, return sale of key ingredients to licensee, sublicensing, etc. d. Rates i. Comparables ii. Success kicker iii. Revisions

iv. Most favored licensee e. Payments i. Upfront royalty ii. Minimum royalty f. Equity stake iv. Trade Secrets 1. Uniform Trade Secret Act: USTA 1(4) a. Trade Secret means information, including formula, pattern, compilation, program device, method, technique, or process, that: i. Derives independent economic value, actual or potential, from not being generally known to , and not being readily ascertainable by proper means by, other person who can obtain economic value from its disclosure or use, AND ii. Is the subject of efforts that are reasonable under the circumstances to maintain its secrecy 2. Economic Espionage Act (EEA) 18 U.S.C. 1839(3) a. Term trade secret means all forms and types of financial, business, scientific, technical , economic, or engineering information, including patterns, plans, compilations, program devices, formulas, designs, prototypes, methods, techniques, processes, procedures, programs, or codes, whether tangible or intangible, and whether or how stored, compiled, or memorized physically, electronically, graphically, photographically, or in writing if i. The owner thereof has taken reasonable measures to keep such information secret; and ii. The information derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable through proper means by, the public. b. $500K or 15 years in prison for individual c. $10M for company d. Very few convictions under the EEA Many do a deal with the DA (who is uninterested in IP cases) while you file civil claim. Person will have to plead 5th in order not to perjure 3. 1st Res. Torts 757 a. A trade secret may consist of any formula, pattern, device, or compilation of information which is used in ones business, and which gives him an opportunity to obtain an advantage over competitors who do not know or sue it. It may be a formula for a chemical compound, a process of manufacturing, treating or preserving material, a pattern for a machine or other device or a list of customers.

4. 3rd Res. Torts a. A trade secret is any information that can be used in the operation of a business or other enterprise and that is sufficiently valuable and secret to afford an actual or potential economic advantage over others. 5. Case application under USTA a. Learning Curve six common law factors determine trade secret status i. Close to current business ii. Known to employees and others involved in business iii. Measures taken to guard secrecy iv. Value of concept v. Amount of time effort and money spent on development vi. Ease or difficulty with which concept could be reproduced b. Mangren Essential ingredient misappropriated i. Process was independently researched and developed, reasonable effort made to maintain secrecy ii. D guilty since knew that employee would use knowledge from P c. DeGiorgio customer lists are trade secret, attempt was made through use of password to maintain secrecy d. Buffets recipes are easily discernable and no effort to protect so no trade secret 6. Case application under non-USTA jurisdictions a. DuPont secret was obtained through improper means that violated commercial morality tort standard 7. Case application under the Economic Espionage Act (EEA) a. Lange attempted trade secret theft under EEA, value was in testing b. Martin attempted to abscond with material and found new company based on this knowledge i. Found to be conspiracy under EEA language c. Pribich worker didnt infringe on any info that was unknowable to the public, no conviction under EEA 3. Setting up a business entity a. Main concerns with business formation i. Ownership ii. Control iii. Financial risk/reward allocation iv. Change/exit b. Types of entities i. Sole Proprietorships

Each partner personally liable to unlimited amount Shared profit/control each partner has full control disputes can be messy c. Dissolution/buyout messy 2. Pros a. Pass through taxation to partners b. Cost depends upon complexity of agreement c. Moderate formalities d. Joint/several liability e. Shared profit/control 3. General/limited partnerships a. Need to file with local state agency to establish b. Must have at least one general partner and one limited partner c. General partners have unlimited liability while limited partners have limited liability at the cost of control of the business d. Costs are higher than regular partnerships iii. Corporations 1. Cons a. High cost b. Higher level of regulations and compliance c. Profits subject to double taxation at corporate and personal level d. Officer & management financial control e. Sub S corps may be able to avoid this in some states 2. Pros a. Can create complex financial products to finance business b. Limited liability c. Preferred structure for VC and other investors since it gives them some control d. Officer management e. Perpetual existence

1. Cons a. b. c. 2. Pros a. b. c. d. e. f. ii. Partnerships 1. Cons a. b.

Difficult to access funds Personal liability for debt and tort Death of owner dissolves the entity Pass through taxation to individual owner Minimal costs in start up Business is freely transferable Ready accounting Personal income taxed once No new legal entity

iv. LLCs 1. Cons a. Not preferred method of investment by VCs and Angles b. All members participate in management creating top-heavy decision early on c. Entity dissolves on death, bankruptcy or withdrawal of member 2. Pros a. Limited liability for member b. Tax pass through c. Financing i. Basic forms 1. Seed 2. Angel 3. Venture 4. Private Placement 5. IPO ii. Obstacles to overcome for financing 1. Identifying a source of capital 2. Minimizing the cost of secured capital 3. Negotiation a deal to the satisfaction of both parties 4. Maintaining a stable flow of capital going forward iii. Factors influencing structure of capital 1. The amount of capital needed 2. The companys operating history 3. Companys current financial condition 4. Risks associated with companys business iv. Traditional sources of capital 1. SBICs 2. Venture lending 3. Venture leasing 4. Private placements equity or security interests v. Primary equity 1. Personal resources 2. Government programs SBA loans, grants 3. Angels vi. Venture 1. Liquidity/staging 2. Board control 3. Preferred stock (anti-dilution/convertible) 4. Stockholder agreement 5. Employment contracts vii. Steps for entrepreneur to secure financing 1. Homework a. Asset audit b. Attempt to put a value on all IP assets

c. Determine which IP assets are most fundamental to business 2. Matchmaking a. Go out on lots of dates with VCs finding one that matches your industry and capital needs 3. Courting a. ID IP that is vital and verify ownership b. Determine the scope of rights associated with IP and grounds for (un)enforcablity of those rights c. Due diligence to verify all info is accurate and up to date 4. Prenuptial phase a. Define all assumptions and expectation b. Set out expectations of R&D and product development c. Specify fund usage d. Provide disincentives for key employees to leave the enterprise 5. Wedding a. Watch for changes in laws, regulations, market conditions b. Beware of founders disease founder good at innovation but terrible at management d. IP considerations i. Generation/procurement ii. Licensing iii. Freedom to operate iv. Enforcement v. Relationships e. Case application i. In Re Peregrine - dissent among federal courts as to whether only UCC-1 filing is needed. Similar to PJ problems in International Shoe ii. Farwell Comp. A had royalty contract with comp. B. Director of comp.B bought out comp. A and royalty payment were discontinued depriving shareholders in comp. A of royalty payments 1. Director and successor roles 2. Conflicts of interests 3. Fiduciary responsibility 4. Fairness iii. Vendo one company invests in another and the market share decrease, found that investor was in same biz and held liable for activities to undermine 1. Person was both corporate director and officer 2. Loss of future opportunity 3. Lost profits 4. Disgorgement iv. Henderson Director of A does not own IP that was developed while there and cannot seek to patent that same IP in new venture 1. Person was board chair, president, and majority shareholder

2. Theft of corporate opportunity 3. Equitable relief a. Removal from corporate position b. Unwinding transactions v. Rexford still owed fiduciary duty to company he owned stock in. If feels that he was frozen out the appropriate remedy was available in court 1. Shareholder loyalty in closely held corporation has a duty of loyalty 2. There was a theft of corporate name 3. Dealing in good faith need a fair, honest and open manner 4. Stock sales a. Elements of fraudulent misrepresentation i. Materiality ii. Intent 1. Recklessness iii. Reliance b. SEC 10(b) i. Unlawful [t]o use or employ, in connection with the purchase or sale of any security any manipulative or deceptive device or contrivance in contravention of [that which is] necessary or appropriate in the public interest or for the protection of investors. c. Rule of superior knowledge i. The entity with superior knowledge is in the best position to know something about it the party with superior knowledge is obliged to disclose d. Two types of especially tricky areas of communication i. Statements ii. Projections 1. Actionability of a disclosed prediction does not turn on whether or not the prediction in fact proves to be accurate 2. Bespeaks caution doctrine a. Disclosure risk factors iii. Can be guilty of: 1. Literally false statements 2. Misleading statements a. Buried facts b. Half truths e. Duty to disclose i. Insider trading ii. Statutory or regulatory obligations iii. Correction of inaccurate, incomplete, or misleading prior disclosures f. Elements to consider i. Materiality ii. Intent iii. Reliance (defenses) 1. P knew of false statement or omission

2. P would have made purchase/sale even had she known of false statement/omission 3. Market was not efficient 4. Market price did not respond to misrepresentation 5. Truth on the market a. In an open market communication even if there is a false or misleading statement that investor might not be aware of is self-correcting -- with increased speed of information a decrease in liability. Every time there is a lawsuit or an appeal there are analysts calling lawyers attempting to extract more information. A growing issue that will absolve liability in this area g. Case application i. Pommer 1. False statement Medtest had a US patent to its testing process 2. Truth Medtest had only filed a patent application and its patent counsel had informed the company that the process was patentable 3. To what extent must facts known to company about unusual business risk or heightened version of a common business risk must be disclosed ii. Alna 1. Omission anticipation of rejection by USPTO regarding Chargefaster patent application 2. Chargefaster significant contribution to Watsco earnings 3. Reckless conduct 4. Materiality legal standard whether a reasonable investor would have considered an omitted or misrepresented fact important in deciding whether to invest iii. Gompper 1. Complaint must allege defendants made false and misleading statements either intentionally or with deliberate recklessness 2. VISXs ferocious litigation defense of its patents rebutted notion that it believed its patents to be valid 3. The IP component exponentially complicates matters. It is never clear until it goes to trial. iv. Nathanson 1. Misrepresented patent coverage to the companys sole product 2. Being a corporate officer may not suffice to create an inference of the scienter absent special circumstances (like a one product company) v. Zirn 1. Withholding patent counsels opinion that patent reinstatement was likely 2. Corporate directors have a fiduciary duty to disclose fully and fairly all material information within the companys control when it seeks stockholder action

3. Equitable fraud as a cause of action 5. Ownership of IP in employment contexts a. Default IP assignments i. Patents shop rights, hired to invent 1. Shop-right company gets rights where the thing is invented on company time regardless of the inventor. Very rare, most done by contract today. ii. Trade Secrets implied duty of confidentiality 1. Law must balance the policy that businesses with trade secrets must be able to protect them with the fact that employees with knowledge of those secrets leave and seek employment elsewhere with the skills and knowledge gain from their experience. 2. Ownership in Trade Secret matters depends upon three factors: a. The nature of the work for which the employee was hired b. The degree to which the invention is related to the employers business c. The extent to which the employee used the employers time and resources to develop the trade secret 3. Implied duties of employees a. When confidential trade secret information is disclosed to employees the employee must be given notice that it is secret. The employee is then under a duty to not disclose such information. iii. Copyright work for hire 1. Usually the copyright stays with the creator. If they work for a company, or are under a contract, of a work-for-hire type then the work that they create cannot be copyrighted by them the copyright stays with the organization that retained their services. b. Contractual restrictions i. Inventor gets ownership in event of silence of assignment provision in employment contract. ii. Covenants not to compete 1. Not enforceable in all states CA notable exception iii. Post-employment contract 1. Unless sign the document, are very hard to enforce. While you are employed the provisions are easier to enforce. iv. Invention assignments 1. Used by employers to override the shop right joint custody of IP. a. Need to be reasonable in scope, relate to the employers business, and have a reasonable enforcement timeframe. c. Hired to invent analysis: i. Nature of work for which employee was hired ii. Degree to which invention is related to employers business iii. Extent to which employee used employers time and resource to develop the technology

d. Inevitable disclosure jurisdiction that says a competitor may not hire an employee due to fact that even if they are ethical they will still need to e. Case analysis i. McElmurry 1. Shop right is an implied nonexclusive, nontransferable royalty free license giving an employer the right to use an invention patented by its employee 2. Also allows have made foundry rights 3. The Court of Appeals held that: a. Power company acquired shop right in patented level detector developed by its employee at company's expense; b. Company did not infringe patent by disseminating specifications to contractor; and c. Company's shop right entitled it to duplicate detector and to continue using it in its business. ii. Standard 1. An employee hired to apply her inventive ability owes a duty to assign patent rights to her employer 2. When hired to invent those inventions will revert to employer and inventor will not own simple shop right iii. Wexler 1. Absent a trade secret and express agreement otherwise, an employees aptitude, skill, dexterity, manual and mental ability, and subjective knowledge she obtains in the course of her employment is not the employers property 2. An ex-employee is bound by an enforceable covenant or other confidential relationship 3. Doctrine of inevitable disclosure iv. Defler 1. Customer list 2. Implied duty of confidentiality and loyalty 3. Injunctive relief and disgorgement of salary already paid v. CCNV 1. Work for hire 17 U.S.C. 101 a. Work prepared by and employee within the scope of her employment b. Work specially order or commissioned if set forth in a written agreement 2. Hiring party right of control a. Skill required b. Source of tools and instrumentalities c. Location of work d. Duration of relationship e. Right to assign additional projects f. Control over when and how long to work g. Method of payment

h. Hiring an pay of assistants i. Work relatedness to hiring paritys normal business j. Employee benefits and tax treatment vi. Freedom 1. Invention assignment provisions may not be open ended with respect to time or subject matter 2. Unenforceable as against public policy 3. Needs to be a transition period where transitioning to new employer or on own 4. Courts look skeptically upon employment contracts that require employee to assign his inventions to his employer; where such contracts are open-ended with respect to time limit or subject matter, they may be considered unenforceable as against public policy. vii. Union Pacific 1. Employer sought to enjoin former employee from testifying in suits against it, alleging that, if allowed to testify, employee would reveal employer's confidential information and trade secrets and would violate privileges 2. The Court of Appeals held that: a. Under Oregon law, parties have the power to alter a former employee's implied duty of confidentiality; b. Resignation agreement precluding employee until a specified date from disclosing employer information supplanted employee's implied duty of confidentiality, so that duty terminated on the specified date; c. Employer did not establish a likelihood of success on the merits of any of its claims of privilege; and d. Injunction was not crafted in sufficiently precise terms to identify the information being protected. viii. Nike 1. An employees knowledge of confidential information is sufficient to justify enforcement of a non-compete agreement if there is substantial risk that the employee will be able to divert all or part of the employers business given her knowledge 2. **CA will not enforce post-employment non-compete agreements ix. Ingersoll 1. Holdover/trailer postemployment obligation to assign 2. Must be fair, reasonable, and just 3. May not extend beyond any apparent protection the employer reasonably requires 4. May not prevent the inventor from seeking other employment 5. May not adversely impact the public 6. Licensing a. Contracting out of the default rules i. Exclusive and non-exclusive licenses

b.

c.

d.

e.

f.

g.

1. Non-exclusive licenses come with little (no) rights ii. Terms and conditions Limits on private ordering i. Unreasonable restraints ii. Against public policy University Licensing i. Concerns need to watch for: ii. Role of government funding in the research 1. Government will retain a non-exclusive license to the tech iii. University policies promoting the free dissemination of information Trade secret licensing i. TS protection only prevents the use of disclosure of the secret by those standing in a special relationship to the TS owner and those who utilized improper means to acquire the information ii. TS owner has right to control the disclosure of the TS. iii. TS owner must show reasonable diligence in protecting the TS even when licensing, contracts should be carefully negotiated. TS protection has the potential to endure indefinitely, however once the secret becomes generally known it is no longer protected. Clause often found in royalty contracts for reduced fee when enters the public domain Rights to sue i. Abbot 1. Hepatitis immunity patent case 2. Standing to sue 3. Absent the transfer of all substantial rights an exclusive licensee does not have standing to sue without joinder of the patent owner 4. Who has standing to sue? a. Owner of the patent b. Limited exceptions where someone can stand into your shoes, transfer of substantial rights=standing to sue(no real example) c. Any reservation of rights AT ALL will preclude d. Can put clause in agreement which would require joinder by patent holder e. Really put people in position that just need to SELL RIGHTS OUTRIGHT Res Judicata i. Blonder-Tounge 1. TV antenna patent case 2. Claim preclusion (res judicata) 3. A patentee is estopped from claiming the validity of a patent if the plaintiff had a full and fair opportunity to litigate the claim in a prior adjudication that found the patent invalid Objective - Getting around the patent i. Design around ii. Argue that the patent you just licensed is invalid

h. Estoppel i. Lear case 1. Licensee not estopped from arguing patent invalid ii. Medlmmune 1. Licensee is not required under Art III jto break or terminate its license agreement before seeking a declaratory judgment in federal court that the underlying patent is invalid, unenforceable, or not infringed 2. Art III potential D preemptively suing for infringement iii. Potential remedies 1. Procedural mechanisms 2. Prior notification rules iv. Brulotte 1. Post patent expiration royalties 2. A public policy against collection of royalties after expiration (a basis for killing a patent) v. Aronson 1. Unpatented, publicly disclosed product 2. No preemption 3. Tying the patent of a laser printer to the cartridge (which is unpatented) i. Patent Exhaustion & First Sale Doctrine i. Jazz 1. Patent exhaustion after first use ii. Quanta v LG 1. The first authorized sale of a patented item exhausts the patentees rights to that item, including methods embodying patented product 2. The sale of a device that practices patent A does not by virtue of practicing patent A, exhaust patent B. But if the device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B j. Cross-licensing i. Texas Instruments 1. Patent cross license 2. Lump sum payment 3. Sales cap termination ii. Second TI case (p 452) 1. Patent cross-license 2. No per-se patent misuse due to tying 3. TI had no market power k. Patent pools legal given industry structure i. Matsushita 1. 6C DVD patent pool 2. Pro-competitive effects must be weighed against anti-competitive ii. Philips 1. Package patent license to CD technology

2. Not patent misuse under rule of reason analysis iii. Warner 1. Trade secret license iv. Listerine 1. No termination provision v. Dawn 1. Trademark license 2. Dawn donut sues grocery chain with store bakeries selling Dawn products 3. Trademark cancellation based on lack of systematic control over licensees use of trademark vi. Boosey 1. Disney Fantasia 2. Movie theater to home video 3. Unforeseen use a. A copyright license may extend to cover new uses not explicitly included in the license but which reasonably falls within the medium described by the license 7. IP Due Diligence and SEC Disclosure a. IP Due Diligence in Business Transactions Kasselman i. Due diligence 1. A measure of prudence, activity or assiduity as is properly to be expected from and ordinarily exercised by a reasonable and prudent person under particular circumstances; not measured by any absolute standard but depending upon the relevant facts of the case. ii. Not just a tech company phenomenon need to do IP due diligence in every business transaction iii. Reasons for performing due diligence: 1. Importance of IP within framework of deal 2. Commercial advantage of companys IP portfolio 3. Potential liabilities associated with companys IP portfolio or in use of IP in operation of the business iv. Step-by-step process of IP due diligence: 1. Understand the business a. Nature of the business with industry specific nuances (i.e. govt support for aerospace research) b. The structure of the deal c. The value of the IP in relation to the deal 2. Review documents a. Schedules of registered, applied-for, and material unregister IP along with underlying documentation b. Licenses or other agreements granting or obtaining rights to IP c. Assignment of IP by or to the company

d. Other agreements affecting the companys use of IP including consulting, R&D, JV, prior acquisitions, consent to use, covenant not to sue, etc. e. Confidentiality, non-disclosure, non-compete and employee/consulting agreements covering rights in IP (assignment of inventions, discoveries, improvements, works of authorship, etc) f. List of proprietary and 3rd party software g. Summary description of subject matter held as trade secrets h. Opposition, reexamination, interferences or other adversarial proceedings before any IP registry i. IP related claims and correspondence, including pending and threatened claims, cease and desist letters and contacts 3. Conduct searches a. Need to conduct independent searches by scheduled IP and by company name 4. Conduct interviews a. In-house council b. Out-side firms c. People in the company familiar with IP related aspects of business (i.e. R&D) 5. Identify issues a. Flaws can affect the purchase price of the interest in the company 6. Report findings 7. A comprehensive report should allow the reader to ID: a. Material IP i. Who owns it ii. Whether it is active iii. How it is used in the business and any other company businesses b. Material 3rd party agreements c. Existing and potential liabilities i. Relating to owned or licensed IP ii. With respect to the operation of the business v. Buyer consideration upon learning status of IP: 1. Whether the business remains viable w/o IP 2. Whether there are alternatives to the IP 3. If the IP was issued or register, whether it can be reinstated 4. Whether continued use of the IP poses risks of litigation 5. Whether entry of the IP into the public domain reduces the companys competitive advantage vi. Common IP ownership issues 1. Company is not listed in applicable IP records as owner a. Companys name change was never recorded b. IP is in the name of affiliated company

b.

c.

d.

e.

c. Acquisition pursuant to which company obtained rights is not recorded d. Inventor/author never assigned rights to the company e. The company no longer owns the IP 2. There is a gap in the chain of title vii. Encumbrances 1. IP often used as collateral with financial institutions and once debt paid a release letter is not recorded 2. Government funding requires licensing to the US government 3. Exclusive licenses to 3rd parties precluding the companys use of IP 4. Covenants not to sue IP Due Diligence: A Critical Prerequisite tow Capital Investment - Hildebrand i. Include IP experts in the due diligence team ii. Ensure the IP due diligence plan reflects the importance of IP in the deal iii. Take nothing on faith trust but verify iv. Confirm everything computer search need to be accompanied by further inspection v. Understand the dynamic relationship between the documents and the core business vi. Foreign laws may impact the deal Feit i. Focused on meaning of Surplus surplus ii. Knowledge categories level of disclosure required to perform under due diligence, balancing disclosure and diligence 1. Insider directors a. Little if any due diligence defense 2. Outside directors and others outside parties (i.e. underwriters) a. Due diligence defense based on reasonable belief in accuracy of disclosure i. Was it reasonable in scope? ii. Was there smoke even if no fire? iii. Was there any indication of impropriety? iii. Omission of material fact versus due diligence defense Knogo i. Attorney-client privilege 1. Attorney-client 2. Legal analysis 3. No waiver to what extent is disclosure a waiver a. Common interest defense, not a common interest for litigation purposes Stac i. Impending Microsoft launch ii. Not required to predict the nature of a 3rd party future conduct iii. How to reconcile disclosure with confidential negotiations with third party

iv. Scienter is not required for liability for material misstatements or omissions in registration statement; defendants will be liable for innocent or negligent material misstatements or omissions. v. Section 10(b) requires scienter and covers statements made not only in the registration statement or prospectus but also in other documents and in oral communications. f. Sherleigh i. Latin America marketing by Windmere ii. Local laws dictating transfer of B&D trademarks 1. Superior knowledge doctrine is the common-sense guide through this area of law iii. In order to state a false registration statement claim, a plaintiff must demonstrate: 1. That the registration statement contained an omission or misrepresentation, and 2. That the omission or misrepresentation was material, that is, it would have misled a reasonable investor about the nature of his or her investment. iv. In a false registration case that sounds in fraud, a plaintiffs must allege: 1. The precise statements, documents, or misrepresentations made; 2. The time, place, and person responsible for the statement; 3. The content and manner in which these statements misled the plaintiffs; 4. What the defendants gained by the alleged fraud. v. A defendant can fully benefit from the shelter of a safe harbor of the Private Securities Litigation Reform Act (PSLRA) only when it has disclosed risk factors in a warning accompanying the forward looking statement; the cautionary language must therefore meet a threshold of specificity. vi. To successfully state a securities fraud claim under Rule 10b-5, a plaintiff must demonstrate: 1. A misstatement or omission; 2. Of a material fact; 3. Made with scienter; 4. On which the plaintiff justifiably relied; 5. That proximately caused the plaintiff's injury. g. Seachange i. Video-on-demand software ii. Lost nCube patent h. Aliance i. MBI stock swap in acquisition ii. Depressed value based on nondisclosure of licensing that eliminated MBI patent infringement risk iii. Duty to update until date of sale of securities iv. Threshold requirement for a registration statement or prospectus misrepresentation claim, under Securities Act, based on failure to disclose

information, is presence of affirmative statement that is made misleading by material omission. i. Burstein i. AET acquisition of Maynard ii. Misstatement as to ability of Maynard to retool iii. FRCP 9(b) 1. Fraud must be pled with particularity 2. Malice, intent and knowledge may be averred generally j. Common-Interest Doctrine and IP Due Diligence i. Allows parties to share otherwise privileged information without waiving attorney client privilege. 1. Applicability depends upon the relationship between the parties at the time the information was shared. 2. Views of individual courts will affect the outcome of the trial with some taking more inclusive view with other more restrictive. ii. Companies should not transfer any sensitive information during the early stages of negotiation. Instead they can provide a list of public documents which were prepared for a freedom-to-operate study. iii. Exchange should always take place via outside council. iv. Companies relying on common-interest agreements must accept some uncertainty of risk of waiver 8. IP in Mergers and Acquisitions a. Basic Terminology i. Merger 1. Corporate transaction that joins two corporate entities. The resulting entity will bear the name of one of the prior entities and carry on in the legal continuation of that company. ii. Consolidation 1. Where a new corporate entity is created through the combination of two prior corporate entities but many of the characteristics of the prior corporations iii. Acquiring (surviving) company = corporation that continues to exist iv. Target (disappearing) company = corporation that is subsumed v. Triangular merger 1. Involves three entities, an acquiring company, its subsidiary, and a target. 2. Forward triangular merger subsidiary stock is owned by acquiring company, where subsidiary takes over the target company 3. Reverse triangular merger target merges with subsidiary so that target is the surviving company vi. Factors in considering merger type: 1. Keep distance for tax/regulatory reasons 2. Legally advantageous to have one or the other as the surviving entity 3. Corporate and tax law considerations

vii. De facto merger where target company sells most of its assets to acquiring company and then dissolves b. Preemption i. Mergers governed by state law ii. IP assignment governed by federal law c. IP rights in connection with sale of a business unit i. Ownership v Licensee Rights 1. Sole Ownership a. Unfettered discretion to use distribute to 3rd parties and commercially exploit the IP in any manner b. Permanent, non-terminable rights c. Ability to solely control the enforcement of rights against infringing or misappropriating third parties 2. Joint Ownership a. Single joint owner doesnt always have the power to grant exclusive licenses b. Joint owners will usually agree on whether and to what extent must account for profit realized from exploitation of IP c. Ability of one owner to enforce IP rights may be constrained by arrangements made btwn partners d. Protection and maintenance of jointly owned IP more complex 3. Exclusive License a. May only exercise specifically granted rights b. If within a defined field of use an exclusive license would be same as sole ownership in that field, except would be terminable or would be limitations on sublicensing/assignment c. Can be given right to enforce licensed IP rights against 3rd party infringers in the field of use to which exclusivity applies (CAVEAT Standing rules) d. Terminable or will expire at the end of a specified term e. May not be freely assignable or sub licensable f. Usually have no role in deciding how to protect IP asset 4. Non-exclusive license a. No right to enforce licensed rights against suspected 3rd party infringers b. No obligations to enforce IP against 3rd parties c. No role in pending prosecution of pending patent applications or maintenance in force of licensed patents d. If enters bankruptcy proceedings may not be able to retain rights even in event of successful re-org ii. Rules of allocation in sale of business unit

1. Most often based on whether IP or other asset of the seller primarily relates to the business or is used primarily in connection with the business 2. Patent and patent applications usually reviewed on case-by-case basis, subject to seller and buyer negotiations of which ones they wish to purchase 3. General allocation rules used to specify which trade secrets and copyrights are to be transferred 4. Third party licenses generally need to be reviewed on a case by case basis 5. Generally no ability to transfer 3rd party tech licenses 6. Consent to assign to the Buyer any agreements usually required iii. License Agreements Relating to sale of business unit 1. Scope a. Internal use rights b. Distribution rights i. If granted and if software then should specify if licensee party to provide only object code to its customers ii. If software products involved then might need to create source code escrows c. Sublicenses i. If software will need sublicensing rights to distribute products to customers ii. Not unusual for independent contractors to have access to and use licensed IP d. Licensee party might also require broad rights when working with partners and JV, and/or co-development e. More problematic in case of patent license naked licensing is often not permitted iv. Extent of exclusive rights 1. If seller retains IP which is used in retained business will grant exclusive license within a field of use which often supplemented by non-compete covenant v. Improvements/New developments 1. Ownership a. Usually agreements provide that buyer will own any improvement, likewise with seller b. Sometimes agreements provide that all improvements belong to the owner of the IP and will be reverted (LOOK FOR ANTITRUST) c. Inclusion in license grant could provide that periodically must update one-another on improvements made or no disclosure requirements d. Could be different if licensor or licensee e. No requirement, but if disclosed then can be used

f. B & S may negotiate broad patent cross license or covenants not to sue that apply to all new developments vi. Termination 1. Where no ongoing payments may prefer to have perpetual and irrevocable licenses 2. Where one side concerned about other exercising rights beyond scope of license may want a termination for breach 3. Some licensor insist on retaining right to terminate by reason of breach of confidentiality covenant or transfer in violation of agreement vii. Assignability 1. Generally non transferable without prior written consent of licensing party viii. Enforcement of IP 1. If exclusive license granted then not unusual to have exec licensee granted right to enforce against infringers in the field of use 2. Often requirement that licensor join so can get standing 3. In event of non-exclusive license usually licensee has no enforcement rights ix. Licenses and mergers 1. As IP has moved to the center of business value creation so too has the importance of clarification of who owns what in any merger. 2. Lawyers advising on licensing agreements should have bankruptcy and merger issues at the forefront of their discussion. The structure of a license agreement may determine whether or not the license will survive a merger or bankruptcy event. 3. DL Corp Code 259 provides that all property rights of constituent corporation shall be vested in the corporate entity surviving or resulting from the merger. d. Factors to determine if one business is a continuing interest i. Transfer of operating assets ii. Inadequate consideration of paid for assets transferred iii. The continuation of business activities iv. Commonality of officers v. Incapability of the selling company to pay ongoing obligations e. Assignability i. PPG 1. Surviving corporation in statutory merger did not acquire patent license rights of constituent corporations where provisions of patent license agreement against assignment and transfer did not contain exception for merger, despite arguments that licenses were not transferred because they passed by operation of law from constituent Ohio corporation to surviving Delaware corporation, (patent not assigned) and

f.

g.

h.

i.

j.

2. Subsequent equipment license agreement was ineffective to modify patent license agreement and provide defense as a matter of law to claim of infringement. (contract terminated) ii. Verson 1. Holder of nonexclusive patent license may not assign its license unless right to assign is expressly provided for in license agreement; patent licenses are treated as personal to license holder and therefore are presumed to be not assignable 2. Presumption of non-assignability of non-exclusive licenses Ambiguity i. Motorola 1. Contract ambiguity 2. Parties intent 3. Need to include termination clause in contract Successor Liability Factors *** On Exam i. Ed Peters 1. Must look at under totality-of-circumstances a. Have assets have been transferred to successor b. Has acquiring company paid less than adequate consideration for the assets c. Is the acquiring company continuing the prior companys business d. Do both corporations share at least one common officer e. Is the divesting company left incapable of paying its creditors Conversion/Misappropriation of TS i. TXO 1. Subsidiary into parent merger 2. Trade secret state law, no preemption 3. Places a burden on contract 4. The Court of Appeals held that: a. Merger did not constitute transfer or disclosure of seismic data to third party as prohibited by confidentiality provision of subsidiary's contract with data owner, and b. Delaware, Ohio, and Texas merger statutes authorized use of seismic data by surviving corporation after merger. Transfer Issues i. BioLife 1. Does the company have title to transfer? a. Asset transfer b. Failure to deliver Impact of ineffective transfer and due diligence i. Paragon 1. Spin-off 2. Warranties 3. Bankruptcy

9. Tax & Insurance Implications of IP a. Why tax? i. Government revenue ii. Influence behavior 1. Curb negative behavior 2. Encourage positive behavior b. Tax and Accounting issues Bankman & Gilson i. Employers tax advantage 1. Expenses of investment are deductible and produce tax saving while the gains from investment are subject to tax; investments by startups are subject to asymmetrical tax schemes. 2. Under IRS 172 a start-up may deduct expenses only against income. a. When E-I=NOL can be carried forward 15 years and deducted against future income. b. Companies with sources of past or present income may deduct expenses of the start-up activity that exceed start-up activity income as incurred. c. Many start ups are never profitable, most will pay employees with some sort of stock option which leads to IRC 382 which sharply restricts the value of NOL. c. Tax rates i. Ordinary income taxed at 10-35% ii. Capital Gains 1. Short term at 10-35% 2. Long term at 0-15% iii. Lower rate on capital investment gains encourages long term investment d. R&D and Experimental Expenses i. Fall under IRS 174 1. Deduct expenses if receipts kept 2. May be amortized over 5 years OR expensed in the expensed in the tax year they are incurred 3. All reasonable expenses incurred for experimental or pilot models, a plant process, a product, formula, invention or other such property 4. Attorneys fees paid by client to obtain patents, foreign or domestic, are also deductible e. Start-up i. Expenses deductible against income ii. Net operating loss in excess of current income may be carried forward for 15 years and deducted against future income f. Capital Asset (IRC 1221) i. Term capital asset means property held by the taxpayer (whether or not connected with his trade or business), but does not include 1. Stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on

hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business 2. Property used in trade or business of a character which is subject g. Capital Asset IRC 1232 i. Governs most transfers of issued patents ii. Under 1231(a)(3) total gains and losses on sales and conversions of all depreciable property 1. Used in trade or business or 2. Converted involuntarily or by compulsion after having been held for 1+ year a. If there is net loss then all of the gain and losses are traded as ordinary gains losses b. If there is net gain h. Depreciation of IP assets i. All issued patents are IRC 167 depreciable property and will fall under the provisions of IRC 1231 unless they otherwise qualify as capital assets or qualify for treatment under 1235. ii. However, an "invention" or patent application does qualify. 1. These are not depreciable assets because they have no definable lifetime. Contracts purporting to transfer rights to patent applications, "technology," or "trade secrets" representing inventions reduced to practice therefore represent a transfer of capital assets so long as the technology transferred also passes muster under subsection (1). i. Sale or Exchange of Patents IRS 1235 i. An exclusive license to make, use, and sell is considered a sale ii. In general 1. A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are a. Payable periodically over a period generally coterminous with the transferee's use of the patent, or b. Contingent on the productivity, use, or disposition of the property transferred. iii. Individual inventors received favorable long-term capital gains treatment for the sale of their patents, even if the sale was in the form of periodic royalty payments (e.g., for an exclusive license). iv. Any sale by a "holder" of "property" that consists of "all substantial rights" to a patent, or undivided interest therein, is treated as a long term capital transfer regardless of the holding period. v. To determine capital gains treatment:

1. Whether the property transferred is a recognized patent or capital asset 2. If so, whether the transfer constitutes a sale rather than a license arrangement and 3. If so, whether the holding period for long-term assets is met a. When all provisions met then holder is entitled to the capital gains rate. If not then either categorized as royalty income or income derived from the sale of short-term capital assets subject to normal income rate. vi. j. Limitation on exchange under IRS 1235 i. Excludes assignments by employees to their employers. IRC 1235(b)(2)(A). ii. Excludes anyone other than the actual living inventor(s). IRC 1235(b)(1). iii. Transfers by "gift, inheritance, or devise" do not qualify under this section. IRC 1235(a). k. Capital Asset (IRC 1221) i. For purposes of this subtitle, the term "capital asset" means property held by the taxpayer (whether or not connected with his trade or business), but does not include 1. A copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by a. A taxpayer whose personal efforts created such property, b. In the case of a letter, memorandum, or similar property, a taxpayer for whom such property was prepared or produced, or c. A taxpayer in whose hands the basis of such property is determined, for purposes of determining gain from a sale or exchange, in whole or part by reference to the basis of such property in the hands of a taxpayer described in subparagraph (A) or (B) . . . 2. Copyrights same standard as hired-to-invent principle by replaced by work made-for-hire where author can assign rights. Parallels the hired-to-invent principle. l. Charitable Contributions of IP i. If a donor contributes a patent or other intellectual property to a charitable organization, the donor's initial charitable deduction is limited to the lesser of the donor's basis in the contributed property or the fair market value of the property. ii. The donor is allowed to deduct additional amounts in subsequent years based on a percentage of the income received by the charity with respect to the contributed property. iii. The charity must report income received or accrued with respect to the contributed property to the IRS. The donor must obtain written confirmation from the charity regarding any income from the donated property.

iv. Special consideration given to: 1. What type of donation of partial interest in IP will warrant deductions 2. How IP interests should be valued for purposes of determination size of deductions 3. How the potential of donated interest to produce future income should be taken into account v. IRS suspicious of donors overvaluing IP donation in order to gain larger tax benefit, new standards now limit deduction for IP to the donors tax basis in IP, with a possible additional series of deductions determined from income realized from IP by the done. vi. New standards problematic: focus on deduction determinations on owners tax base in donated IP, where internal IP is donated will be production cost less portions of that cost that have already been deducted as business expenses may involve very complicated formulas to determine. vii. American Jobs Creation Act of 2004 1. Limited to the lesser of taxpayers basis in contributed property or the FMV of the property, additionally taxpayer permitted to deduct certain additional amounts in the year of contribution or in subsequent tax years. 2. Based on 12 year deduction schedule m. Commercial General Liability Insurance CGL i. Typically used to cover slander/liable ii. Right of privacy iii. Advertising injury attempted to be used by companies to cover IP 1. Trademark infringement 2. Copyright infringement iv. Protection under traditional CGL: 1. Found in the advertising injury provisions of CGL policies covering damage arising from: a. Publication of material that slanders or libels a perons or organization or disparages a persons or organizations goods products or services b. Publication of material that violates a persons right to privacy c. Misappropriation of advertising ideas or style of doing business or d. Infringement of copyright slogan or title 2. Two criteria MUST be met before coverage extended a. Alleged conduct must fall within the scope of one of the enumerated offenses described as an advertising injury (and not within one of the policys exclusions) b. Offense must have been committed in the course of advertising the insureds goods products or services (NEXUS REQUIREMENT)

i. Complaint filed against injured alleges an offense covered b advertising injury provision ii. Alleged offense occurred during term of the policy iii. Claim arose out of insure advertising activities, and iv. Offense occurred in the court of the insureds advertising activities v. Courts generally find that coverage present for TM infringement claims, however courts are still split vi. Copyrights, although explicitly mentioned in CGL coverage need to be tied back into the advertising nexus n. IP insurance currently two prominent forms i. Enforcement polices also known as pursuit, abatement or offensive coverage 1. Can be very expensive and many companies require validity opinions drafted a. Coverage includes b. Cost of bringing suit against infringer c. Cost to defend against counterclaims d. Cost of reexamination of insured patent in USPTO e. Cost to reissue patent ii. Defense (liability) policies 1. Types a. IP liability b. Patent infringement liability c. Warranty and representation insurance d. Technology liability insurance e. IP agreement insurance f. Media liability insurance g. Internet professional liability insurance h. Internet and computer network security insurance i. Errors and omissions insurance o. Liability of Corporate Officers and Directors for Infringement of IP Interests Bochner & Karuse i. IP is likely to play an increasingly important role in the enterprise value and in corporate transactions such as acquisitions, corporate partnering and IPO. ii. Directors have duty of care which boils down to two facets: 1. Directors have duty to carefully consider implications of corporate actions before permitting corporation to take them 2. Board may be liable for a loss which arises from an unconsidered failure of Board to act in circumstances in which due attention would have prevented the loss iii. Directors face potential liability claims for breach of duty as IP management becomes more critical from a strategic, financial, and competitive point of view.

iv. Current standard of review is the business judgment rule essentially provides that a director shall not be liable for bad business decisions provided the director acts in good faith and in a manner the director believes to be in the best interest of the corporation and shareholders. v. Red flags in Corporate Transactions: 1. Inability of senior management to articulate the companys IP strategy 2. Senior managements inability to describe the Companys IP assets and tie them in with core businesses 3. Lack of process for determining when key patents expire and evaluating potential impact on company 4. Lack of knowledge regarding competition and industry patents 5. Lack of company policy to ensure that newly hired employees do not inadvertently bring with them or use proprietary information vi. Steps to remedy: 1. Inventory IP and know what business it is connected to 2. Develop IP strategy that addresses companys needs both offensively and defensively 3. Offensive should extract max value from assets 4. Defensive should include monitoring of competitors patents 5. Management should make routine presentations to BoD regarding IP management strategy, including key patents, copyrights and TS, and developments that could affect shareholder value p. Case Law i. Syms 1. Tax evasion 2. Sham transaction ii. Mez 1. Advertising injury asserted for Mezs holding patent infringement 2. Further - Under Insurance code section 533 an act deliberately done for the express purpose of causing damage or intentionally performed with knowledge that damage is highly probably or substantially certain to result is not insurable. 3. Held: no coverage by Pacific iii. State farm 1. Simms architectural plans may be tangible assets subject to misappropriation 2. Court holds that a contract of insurance is construed most strongly against the insurer, particularly where insurer is denying coverage 3. But held: no coverage for Whites copyright infringement iv. American Century 1. Wrongful act of patent infringement relating to internet security and automated telephone tech 2. Need to figure out FMV of royalties and find if any damages were paid to patent owners.

3. License fees seen as normal costs of doing business and not covered 10. IP Antitrust Issues a. Relevant Statutory law i. Sherman Act 15 USC 2 1. In order to be monopolist need to be able to control the behavior of the market 2. Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations 3. Market definition controls whether the person is a monopolist a. Market power occurs where there the market definition matches the market b. If you have market power and price is unrelated to anything you are considered a monopolist 4. Patents are only monopolies when the block any acceptable noninfringing substitute 5. Just because patent creates a monopoly does not mean that can be struck down on anti-competitive basis 6. Penalties a. Felony (3 years) b. $10MM for corporation ii. Clayton Act 15 USC14,18 1. Illegal to attach conditions of exclusivity to sale where the effect lessens competition or tends to create a monopoly 2. Companies cant buy out the stock of a competitor where effect would be to lessen competition 3. Section 14 restraints placed on purchasers by sellers of products or services 4. Section 18 deals with M&A 5. Legal liability a. Substantially lessens competition or b. Tends to create a monopoly 6. More specific than Sherman Act, so some business actionable under Sherman is not under Clayton 7. Focus was restriction on manufactures (who tended to be large) rather than retailers (who were very tiny at the time) iii. Federal Trade Commission Act 15 USC 45 1. Unfair competition and unfair or deceptive business practices are unlawful 2. Established government agency that a. Polices markets regarding unfair and deceptive trade practices b. Focus was on protecting consumers from i. False adverts

ii. Deceptive contract terms c. Also, deals with M&A and has concurrent jdx with DoJ in reviewing them iv. National Cooperative Research Act 15 USC 4301,4302 1. Can engaged in joint venture for basic research or testing purposes 2. Can NOT exchange info amongst competitors; enter into agreements restricting marketing, distribution, etc. 3. Contracts for JV are not illegal per se; judged on the: a. Reasonableness i. Effects on competition in properly designed relevant research ii. Development iii. Product iv. Process b. Capacity b. Antitrust i. Horizontal restraints 1. Existence of restraint in parties with horizontal relationship does not necessarily entail anticompetitive behavior 2. May actually promote integrative efficiencies (scale, complementary R&D, production, etc) 3. Evaluated under rule of reason a. Some analysis truncated price fixing, allocation of markets, etc. ii. Resale price maintenance 1. Illegal when commodities have passed into the channels of trade and are owned by dealers 2. Per se illegal for licensor of IP right in product to fix a licensees resale price iii. Tying arrangements 1. An agreement by a party to sell one product, or agreement that will not purchase that tied product from another supplier 2. Most likely to challenge tie-in if: a. Seller has market power in the tying product b. Arrangement has an adverse effect on competition in relevant market for tied product, and c. Efficiency justifications for arrangement do not outweigh the anticompetitive effects 3. If licenses are sold in package this may create an illegal tie-in effect iv. Exclusive dealing 1. Occurs when license prevents the licensee form licensing, selling, distributing, or using competing tech 2. Evaluated under the rule of reason 3. In evaluating reduction on competition factors include:

a. Promotes exploitation and development of licensors tech and b. Anti-competitively forecloses the exploitation and development of, or otherwise constrains competition among, competing tech 4. Likelihood dealing may have anticompetitive effect a. Degree of foreclosure in relevant market b. Duration of exclusive dealing arrangement c. Other characteristics of input and output markets (concentration, entry, responsiveness of S&D to P changes v. Cross-licensing and pooling arrangements 1. Agreements of two or more owners of different IP creating IP pools to license to one another or 3rd parties 2. Maybe pro-competitive because: a. Integrating complementary tech b. Reducing transaction costs c. Clearing blocking positions d. Avoiding litigation 3. When have anti-competitive effects: a. Collective price or output restraints b. Naked mechanisms to accomplish price-fixing or market division 4. When cross-licensing involves horizontal competitors must consider a. Effect of settlement diminishing competition among entities that are actual or potential competitors b. In absence of offsetting efficiencies may be challenged as unlawful restraint of trade 5. Exclusion from pooling arrangements is unlikely to have anticompetitive effects unless: a. Excluded firms cannot effectively compete in the relevant market for good incorporating licensed tech and b. Pool participants collectively possess market power in relevant market 6. Pooling may also be found anticompetitive if retarding innovation vi. Grant-backs 1. Arrangement under which licensee agrees to extend to licensor of IP right to use the licensees improvements to licensed tech 2. Benefits a. Share risks and reward for further investment in innovation b. Promote subsequent licensing of results of innovation (virtuous cycle) 3. Drawbacks a. Adversely affect competition if reduce incentives to engage in R&D b. Limiting rivalry in innovation markets

c.

d.

e.

f.

4. Evaluated under the rule of reason not per se unlawful 5. Agency evaluates pro-competitive effects: a. Promoting dissemination of licensees improvements to licensed tech b. Increasing the licensors incentives to disseminate licensed tech or c. Otherwise increasing competition and output in relevant tech or innovation market vii. Mergers/acquisitions 9 no-nos NO LONGER IN FORCE i. Mandatory package licensing (patent pools) ii. Tying of unpatented supplies iii. Compulsory payments of royalties in amounts not reasonably related to sales of patented products iv. Mandatory grant-backs v. Licensee veto power of licensors grant of further licenses vi. Restrictions on sales of unpatented products made by patented products vii. Post-sale restrictions on resale by purchasers of patented products viii. Specifying price licensee can charge on resale of licensed products ix. Tie-outs restrictions on licensees ability to sell products that compete with licensors patented products Two types of analysis under antitrust: **looking for this in initial analysis i. Per Se 1. Agreements among competitors to set prices 2. Agreements among competitor to divide up markets by geography ii. Rule of Reason 1. All other anti-competitive behavior defined under act 2. Requires court to consider benefits and harms of an agreement to determine a section one violation a. Drug reverse payment now leading trust issue for the FTC now. Unilateral refusal to deal i. A unilateral, unconditional refusal to license a valid patent cannot, by itself, result in antitrust liability ii. Exceptions 1. Refusal prevents emergence of a new product for which consumer demand exists 2. Refusal is not justified by any objective considerations 3. Refusal excludes competition in a secondary market Antitrust IP Interface (Pate Article) i. Idea of IP property 1. For competition law purposes IP should be treated in essentially the same way as other forms of real property a. Caveat in that IP is not necessarily the same as other property

ii.

iii.

iv.

v.

2. IP is neither particularly free from scrutiny under antitrust laws nor particularly suspect under them 3. IP licensing is generally pro-competitive First Principles of US IP law and Antitrust 1. Sole focus is on specific anti-competitive behavior/actions as judged by their effects on markets and consumer welfare a. NOT used to ensure fairness 2. Way in which IP law favors consumer a. Rewards innovators with exclusive rights serving as incentive to bring goods and services to market b. Strike a balance between these rights and public access i. Fair use under copyright law ii. Disclosure requirement and limited term of patents c. Include fail-safe procedures under which rivals or customer can sue to declare IP right non-infringed or unenforceable 3. IP rights only provide right to EXCLUDE others nothing else Specific Practices and the Freedom to License 1. Unilateral refusals to license tech a. Cannot by itself be a violation of antitrust, owner can choose to license or not b. Owner does not have right to impose conditions on licensees that would effectively extend the patent beyond the duration of patent c. IP system rests on long term innovation while short term results would be realized by forced licensing the incentive in innovate would be lessened d. US strict right of refusal tempered by EU which imposes limits i. Refusal prevents emergence of new product for which consumer demand exists ii. Refusal is not justified by any objective considerations and iii. Refusal excludes competition in a secondary market Excessive Royalties in Standard Setting 1. Excessive royalties without more is losing strategy 2. When complaining of excessive royalties complaint is putting cart before horse a. Must first id some anticompetitive conduct beyond refusal to license and attempt to charge 3. Standards organizations now require reasonable and nondiscriminatory licensing (RAND) a. Difficulty is that parties later disagree about pricing b. Unique difficulties both ex-ante and ex-post Compulsory licensing 1. Should be rare since enforcement agency should not impose duty that it cannot reasonably supervise

vi. Excessive Patenting and Patent Enforceability vii. IP rights and market power 1. IP cannot be presumed to establish market power 2. Rights granted though patents are not exclusive in the economic sense a. Single patent may have dozens of close substitutes 3. Approach is to avoid rigid tests and rely on review of likely economic effects to marketplace as a whole g. Case law i. Microsoft 1. Monopolization of OS and browser markets 2. Windows 90% of market share 3. Conduct a. Prohibited users from removing icons or using alternative browsers b. Integration of browser making uncoupling difficult 4. Tying rule of reason analysis 5. Market power in tying arrangement is typically a per se violation 6. Unitary consumer demand argued by Microsoft was of Microsofts own doing ii. Dell 1. Standard setting USB port 2. VESA standard setting organization for VL-bus card 3. Dell failed to disclose but was ready to enforce patent rights iii. Microsoft in EU court 1. EU approach illegal tying 2. Refusal to supply requested code to Sun viewed as violation 3. Denial prohibits creation of new product 4. Refusal has anticompetitive effect on secondary market 5. Refusal has no valid business justification 11. IP in Bankruptcy a. Bankruptcy i. Chapter 7 = liquidation ii. Chapter 11 = reorganization (this presents many more problems) b. Executory Contract i. Licensor and licensee have ongoing obligations under the license c. Section 362 of Bankruptcy Code i. By filing bankruptcy petition a stay of various judicial, administrative, and other proceedings is put in place. Allows the debtor to pause ongoing or postpone prospective litigation. d. Section 365 of Bankruptcy Code i. Executory contracts (leases and licenses) are left up to trustee to decide how to handle the obligations. Three options available: 1. Reject the contract 2. Assume the contract 3. Assume and assign the contract

ii. Particular problem when debtor is licensor and licensee may be put in position of not being able to use IP. iii. Under Section 365(n)(1) & 365(n)(2) the licensee may continue to use the IP while debtor is in bankruptcy. However, does not extent to trademarks and does not apply to the situation where licensee is debtor and elects to reject the license. 1. 365(n)(1) a. If the trustee rejects an executory contract under which the debtor is a licensor of a right to intellectual property, the licensee under such contract may elect b. To treat such contract as terminated . . . ; or c. To retain its rights. . . for i. The duration of such contract; and ii. Any period for which such contract may be extended by the licensee 2. 365(n)(2) a. If the licensee elects to retain its rights, as described in paragraph (1)(B) of this subsection, under such contract i. The trustee shall allow the licensee to exercise such rights; ii. The licensee shall make all royalty payments due under such contract for the duration of such contract and for any period described in paragraph (1)(B) of this subsection for which the licensee extends such contract e. Two sides of the relationship i. Debtor licensor 1. 365(n) 2. Trustee rejection 3. Licensee may terminate or retain rights ii. Debtor licensee 1. 365(a) 2. Licensee rejection 3. Licensor may sue for breach of contract f. IP Allocation Strategies in a JV Laurie i. Definition of JV 1. Association of independent business entities that join for a common commercial purpose of defined scope and duration 2. Typically each partner brings something to the table tech, capital, management expertise ii. IP Allocation 1. Ownership v licensing of IP a. Whether IP arose independently of the JV (background IP) or in operation of JV (foreground IP) 2. Default is joint ownership of IP developed under the JV

a. Right to exploit absent agreement to contrary default rule is that each joint owner can exploit the patent without permission of the other and without duty to share royalties i. Includes right to license to 3rd parties b. Right to enforce under patent law each joint owner must join in suit to enforce c. International considerations different default standards in different countries 3. Enforceability of contract provisions a. Against 3rd parties usually negotiated in the contract agreement creating the JV b. Against Joint Owners JV agreements generally held against their creators 4. Preferred IP allocation strategies a. IP ownership: background, non-derivative Foreground and Derivative Foreground i. Must classify IP base on nature of IP b. Optimizing rights to use of non-IP Owning JV i. Licenses: exclusivity, field of use royalties ii. Non-competition covenants g. Bankruptcy Estate and the Automatic Stay Case law i. Not a snapshot of the estate on the day entered into bankruptcy ii. Automatic arrangements still in existence iii. Casey 1. Date of C.11 filing 2. IP not included in bankruptcy estate 3. Post-filing assets acquired are include if: a. Proceeds, products, rents, and profits from property of the estate b. Inheritances or property settlements acquired 180 days after filing 4. Court held patent on device invented by debtor after filing of his original Chapter 11 petition, as well as any income derived from patent, were assets of debtor individually and excluded from property either of original Chapter 11 estate or from Chapter 7 estate created on subsequent conversion of case. iv. Penick 1. Trustee sought to include in bankruptcy estate patent filed three years after C.11 filing 2. Obligation to assign existed at time of filing 3. Patent included in estate 4. Holding: Patented process developed post-petition by employees of corporate debtor-in-possession, each of whom had signed confidentiality and assignment agreements in favor of debtor, was property of the estate, where process was developed and tested by debtor's employees using equipment and funds included in

Chapter 11 estate, and patent application was prosecuted on behalf of estate using estate funds. v. Simplified 1. Debtor company seeks to include software copyright in bankruptcy 2. Under work for hire doctrine debtor was the copyright issue vi. C-Tek 1. C Tek debtor copyright owner 2. NYSBVP security interest 3. IIS created derivative work 4. Software included in bankruptcy estate vii. Checkers 1. Checkers sand CVG in trademark cancellation 2. CVG files for bankruptcy 3. Checkers fails to file Section 8 affidavit 4. Automatic stay did not toll Checkers filing deadline 5. Cannot shirk responsibilities that arise after enter bankruptcy viii. In Re: The Singer Co. 1. Singer BV and Singer Brazil 2. Dyno exclusive license to market Singer Brazils needles in the US 3. Groz sues Dyno 4. Suit violated automatic stay 5. 362(a) Bankruptcy Code requires invocation of automatic stay, stopping virtually all collection efforts. a. Gives the debtor a breathing spell as attempts to reorganize assets and satisfy all creditors. Stay will be lifted if: i. Creditors interest in the property of the estate is not adequately protected by the bankruptcy proceeding ii. When debtor has no equity in property that is not necessary for successful reorganization h. Treatment of licenses in bankruptcy and termination outside of bankruptcy (365(n) issues) i. Cellnet 1. Schlumberger buys Cellnet IP 2. BCN JV of Cellnet and Bechtel 3. Cellnet files for bankruptcy and rejects BCN licenses 4. BCN retains rights under 365(n) 5. Royalties flow to Cellnet not Schlumberger ii. Lubrizol 1. Pre-365(n) decision prompts creation 2. Lubrizol nonexclusive licensee 3. Richmond licensor files for bankruptcy and rejects Lubrizol license 4. Held in favor of Richmond iii. Pasteur 1. Pasteur cross licenses patents with Cambridge 2. Cambridge files for C. 11 bankruptcy and assumes licenses 3. Cambridge sells to bioMerieux, Pasteur competitor

iv.

v.

vi.

vii.

4. Assumption and reorganization upheld 5. Pasteur license failed to include termination provision for change of control 6. Need to plan ahead for change of control Catapult 1. Perlman licenses patents to Catapult 2. Catapult merges with MPCAT, wholly owned subsidiary of Mpath 3. Catapult files for bankruptcy and assumes licenses 4. Assumption upheld Hapgood 1. Hapgood succeeded by Hapgood Plow 2. Hapgood sought transfer of Hewitts patent right to new company 3. Hewitts refusal upheld 4. No automatic assignment through employment agreement Pav-Savr 1. Pav-Savr and Vasso partnership 2. Pay-Savr dissolves 3. Vasso awarded liquidated damages but Pav-Savr denied IP because Vasso was continuing business SW 1. SW and Nutrition JV 2. SW dissolves 3. No trade secrecy