Memo on some UNCITRAL issues now available

Ahead of tomorrow's seminar on the UNCITRAL proposals on secured interests in intellectual property rights (details here), a memorandum has been prepared which addresses some of the issues that are thought to cause concern or reflect practical problems and which are likely to raised in the course of the afternoon. While this document is being sent to all registrants for the seminar, it can also be downloaded by IP Finance readers here.

If everyone turns up, there will be over 90 people present -- an amazing number for what until recently was seen as an obscure, uninteresting and almost irrelevant issue for many businesses. There's still room for a few more participants: email Sandra Holloway here if you'd like to come. There is no charge for registration.

Can Luxury Goods Survive in the Online Environment?

Finding business models that work for the on-line sale of goods continues to be work-in-progress. Perhaps the best-known attempt to propose an appropriate model is Chris Anderson's (editor of Wired magazine) notion of "the long tail." As set out in his book of the same name, the idea is that bricks-and-mortar distribution is characterized by severe limitations on space and the like -- such as a limited shelf space -- that have the effect of limiting the number of goods that can be reasonably offered. Liberated from the physical restriction of space, niche products -- the long tail -- can enjoy commercial success via online sale and distribution.

Different views have been expressed on just how generalizable is the notion of the long tail. I thought about this question in reading an article entitled "When Cheap is exclusive: Selling designer goods online, "that appeared in the September 5th issue of The Economist. The gist of the article is that a number of online sites have sprung up (in the current jargon--"e-tailers") devoted to the sale of so-called luxury goods online at discount prices. While the bricks-and-mortar luxury good stores, such as Bloomingdale's and Sax Fifth Avenue, are finding themselves stuck with increasingly large stock of unsold merchandise, the e-tail business for luxury is thriving, in large part as a discount price distribution alternative to dispose of this unsold inventory.

What is interesting is that the attraction of these sites (such Gilt Groupe, HauteLook, Rue La La and Vente-privee.com) is in fact a combination of discounted prices together with a customer structure that seeks to preserve the sense of exclusivity that is so important for the sale of luxury goods. Thus these sites may be used only by members, who themselves have been asked to join only another member. As well, the sites frequently run 24-hour sales on a frequent basis, thereby attempting to maintain a high level of interest by customer members.

According to the article, the same designers and purveyors of luxury goods who would resist widescale discounting of their luxury products in the traditional stores are prepared to do so in an online environment. The key to success of an e-tailer site selling luxury goods is how well the site creates a "theatrical environment", despite the discounting of the luxury brand.

So what is one to make of this development? Several thoughts come to mind.

1. A major ingredient of the sale of luxury items in a bricks and mortar world is the ability to manage selective distribution of the product, which thereby serves to support a premium price level. Customer exclusivity is a function of the drawing power of the luxury goods being sold, and of the ability of the brand owner to get the customer to pay the premium price.

2. However, selective distribution seems light years from this approach to selling luxury goods online. In the e-tailing experience described in the article, exclusivity becomes a direct function of limited access to membership at the site. This sense of customer exclusivity is reinforced by the fact that the goods at sale bear luxury labels, even if these goods are being discounted. This is no minor accomplishment. Try to count the number of discount retailers that you know where exclusivity is accompanied by material price discounting of luxury goods.

3. Given this seemingly unnatural combination of exclusivity, luxury goods, and price discounting, how will the discounting affect the long-term aura of the luxury brand? It is difficult to believe that a luxury good can maintain its upscale reputation in the face of a continuing public perception that the luxury product is being sold at a discount.

4. It is true that customer exclusivity could have the effect of softening any such blow, because the relevant public is thereby limited in scope. Nevertheless, assuming that the on-line customer base is roughly similar to the typical customer for the luxury product in the bricks and mortar environment, the word will get out to the relevant consumer population. This cannot be a very positive result for the brand owner.

5. Assuming that e-tailing of luxury goods online threatens the long-term value of the brand, perhaps the answer to the question raised in (3) is that the luxury goods industry is prepared to tolerate the discounting of its products online only for a limited period of time. Under this view, these e-tailer sellers of luxury goods serve to provide another channel of sales only as long as the economy remains sluggish and the exuberance of customers to pay a premium price for luxury goods is diminished. Once the economy recovers, the luxury goods industry will take dead aim at these online distributors.

The upshot is that the long-term relationship between luxury goods and the online environment remains unclear, whether long tail, no tail, or fairy tail. It is a saga worth following.

Pray for the Luxury Good

Securitisation: two items

1. Dr Aaradhana Sadasivam (KhattarWong Singapore) has in recent months been working on an article, "Securitizing Rights Over A Patent and Balancing the Securing Interests of Each Party to the Transaction". While her practice base is Singapore, the article is not geographically limited in its perspective and draws on US case law and some international developments as well as local provisions. If you'd like to take a look at this draft and let Aradhana have your comments, the article (currently just over 5,600 words long) is here and you can email Aaradhana here.

Right: For some, security is a blanket to stroke -- but it takes more to comfort lending institutions who lend on the strength of IP rights

2. The seminar scheduled for next Wednesday afternoon, 14 October, on the UNCITRAL proposals on the securitisation of IP rights (full details of the seminar are here) has now got well over 70 registrants. There's still room for a few more. To secure your place, email Sandra Holloway here and tell her you're coming. The event's free.

What Happens to a Sublicence When the Main License Comes to an End?

We once again delve into that most murky of IP licensing topics--sublicensing. When one considers the number of trees, if not entire groves, that have been felled to provide the paper needed for books and articles on licensing, then a mere tree or two is all that has been required to publish the entire corpus on sublicensing (full disclosure--at least one or two branches have been devoted to my own publications on the topic).

Perhaps the most interesting legal issue that arises out of sublicensing is the question of what happens to the validity of a sublicence if the main licence comes to an end. After all, while the IP rights being sublicensed derive from the licensor and not from the licensee/sublicensor, the sublicence agreement itself is between the sublicensor and sublicensee; as a contractual matter, the licensor is absent.

I remember that when I first began to examine the question, I asked a local colleague--who stated, with complete confidence, that the sublicence must come to an end with the termination of the main license. I then contacted a distinguished IP colleague abroad, who opined with absolute assurance that the termination of the main licence had no affect on the validity of the sublicence. Neither pointed me to any case law that has dealt with the issue on a principled basis. More to the point, surely both cannot be right. So what are the points for and against each of these contrary positions?

Sublicense Terminates with the Termination of the Main Licence

1. If the sublicensee is assumed to take rights of use in the IP through its agreement with the licensee, and the scope of the sublicence is bounded by the scope of the main licence, then when the main licence comes to an end, the basis for the grant of sublicence no longer exists. If that is the case, then the sublicensee is in breach of its use of the IP rights that were with the subject of the sublicence. The licensor can chose not to exercise its negative right against the "unauthorized" use of its IP rights; but, if it does choose to exercise its rights against the sublicensee, the sublicensee has no defence based on the erstwhile sublicence.

Comments

The parties can attempt to avoid this result by agreement. Thus the sublicence agreement can include a provision that the sublicence survives the termination of the main license. Query: does the licensor also need to be a signatory or otherwise to express its consent to such a clause?
Sublicence Does Not Terminate

1. It has been argued that when a sublicensee has lived up to the terms of its sublicence, then it would be inequitable that the sublicence be deemed to have been revoked, especially when the sublicensee has invested materially in the performance of the sublicence (see Ellis, Patent Licenses (3d ed. 1958).

2. The sublicence is in essence an agreement between the licensor and sublicensee, the validity of which is unaffected by the status of the main licence (see Brunsvold and O'Reilly, Drafting Patent License Agreements, 4th ed.)

Comments

i. The difficulty with the first point is that its appeal to equitable principles may be limited to common law jurisdictions. Also, it requires a case-by-case determination,which makes it unsatisfactory as a basis to support the general proposition.

ii. As for the second point, there is no compelling basis to support the conclusion that the default position is that the fundamental relationship is between the sublicensee and licensor.

iii. With respect to a trade mark licence governed by the law of a jurisdiction where quality control is required, the licensor may have relied upon the licensee to carry out the quality control function. If so, the licensor may not be in a position to ensure continuing quality control if the licensee is no longer tied contractually to the licensee.

The upshot of the foregoing is that there does not appear to be any single position on the question that can be viewed as being the better one. In such a circumstance, the sublicensee that wishes to protect itself is advised to cover the issue in its sublicence agreement, it being recognized that, unless the licensor also explicitly agrees to this result, the ultimate enforceability of such a provision cannot be assured.

What Are Valuable Patents: Does The Question Matter?

David Wanetick (Incremental Advantage) has shared with IP Finance his latest paper, entitled "How Patent Vulnerability Impacts Valuation". A copy of the full text can be found here. Wanetick considers four principal topics: (i) What makes a patent vulnerable? (ii) The impact of uncertainty on patent valuation; (iii) What makes a patent valuable? and (iv) Strategic considerations. I found of particular interest the factors listed by Wanetick that inter alia make a patent valuable. The list can be summarized as follows:

1. Anticipated licensing revenues:
2. Ability to trigger sales of end products:
3. Ability to generate add-on sales;
4. Ability to generate sales in new markets;
5. Stage of development of commercialization (the earlier the stage, the more risky the enterprise and the less valuable the patent);
6. Quality of law firm (e.g., measured by the degree of success of the law firm in sustaining an invalidity challenge;
7. Quality of patent examiner (an examiner with a longer tenure and a record of granting patents that withstand an invalidity challenge);
8. Size of portfolio being sold (a patent family is most valuable when the portfolio includes between 25 and 76 patent families).

Some of these factors are "real economy" considerations, namely, patents that facilitate commercial exploitation are more valuable. Other factors are more in the vein of indicia. After all, e.g., there is nothing inherently valuable in a patent that has been examined and granted by a more senior examiner, unless such a patent is connected with activities that have "real economy" value. The relationship between these two types of factors is not explicitly spelled out in the paper.

In comparison, there is the view of Allison, Lemley, Moore and Trunkey in their oft-cited article, “Valuable Patents” (The Georgetown Law Journal, vol. 92, n. 3, March 2004). Here, the authors distinguish between why a patent is filed and what is the indicium of a valuable patent. In a word, some patents are worth more than others because the patent has greater commercial value. And what is the proxy for determining this class of more valuable patents? According to the authors, the best indicium of a valuable patent, as so characterized, is that it is litigated. The article then goes on to discuss various characteristics of litigated patents.

While some patents are commercially more valuable than others, and the best proxy for determining a valuable patent is whether or not it is litigated, the authors do recognize that there are a variety of factors that may give rise to a patent filing. Thus

1. Patentees are simply irrational in their filing and registration practice;
2. Valuable patents are overlooked by their owners (the "Rembrandts in the Attic" syndrome);
3. Patents are licensed without the need to resort to litigation;
4. Patents are used as signals to consumers, competitors, and the like;
5. Patents are used defensively to protect against third parties with their own patents;
6. Patents are a form of lottery where a small number of patents account for the lion's share of the payoff for registration.

I am not quite certain about what the ultimate payoff is in this kind of analysis. Both studies agree that the most valuable patents are those with superior commercial value. They depart in their consideration of the indicia of such patents. What one ultimately does with this information is not totally clear, especially when indicia do not imply causality. That said, the question becomes whether it is worthwhile engaging in an analysis to determine what is a valuable patent. Perhaps the readers can shed further light on the answer to this question.

The Search for the Valuable Patent

Diamonds are…

For those interested in IP rights behind jewellery, PRWeb reports that tomorrow is the bid deadline for the auction of the Friedman's Jewelers and Crescent Jewelers' intellectual property. The auction will take place on 9 October.

According to PRWeb, intellectual asset management consulting firm CONSOR has identified “a myriad intangible assets in the Friedman's estate, including the valuable trademark ‘Say it with Diamonds’”. When Friedman's Inc. purchased Crescent Jewelers in 2006 they together became the leading US operator of jewelry stores with over 475 stores, generating over US$435 million in annual revenue.

For more information on the IP asset portfolio for sale see here. For more information on the recent acquisition of Whitehall Jewelers’ IP by Bidz.com see here.

Calculating lost profits: a monster of our own making?

Technology Transfer Tactics is currently advertising Calculating Lost Profit in IP and Patent Infringement Cases by Nancy J. Fannon ASA, CPA-ABV, MCBA. Published by Business Valuation Resources, this book is reportedly a 690 page hardback that will set you back US$329 + S&H if you buy it in the next ten days, whereupon the price rises to US$379. According to the promotional literature,

"Calculating Lost Profits in IP and Patent Infringement Cases brings together the comprehensive body of knowledge on lost profits damages and delivers a definitive resource for IP professionals, tech transfer execs, financial experts, and attorneys. Written by Nancy Fannon, owner of Fannon Valuation Group, and other industry leading experts, Calculating Lost Profits delivers a thorough analysis of current case law and valuation methodology that form the basis of damage awards in IP and patent infringement cases. It comes with 24/7 access to the online edition, which includes the full text of relevant court opinions, a searchable PDF version of the book, plus bonus content and updates as they are released".

I'm not familiar with this book (which, I'm sure, is very worthy) but can't help feeling that, if we've created a web of issues that take nearly 700 pages to expound, we have unleashed a monster of our own making. And how much of the lost profits are related to the cost of calculating how much profit has been lost? More seriously, we live in an era in which patents are commercially exploited -- and infringed -- on an international or global basis. Differentials in calculation as between major markets might lead to interesting forum-shopping questions. But if this book captures the necessary principles and approaches for calculation of lost profit in the US, where are its equivalents in other markets?