Monthly Archives: May 2011

IP Exchanges: will they work?

Unitisation of IP?

I learnt several new words last Wednesday:  ‘monetizing’ IP which I think means selling IP; ‘commoditising’ IP which I think means turning IP into an asset you can sell; and, ‘unitising’ IP which I think means finding a way of quantifying IP such that you can define how a single use of the IP leads to a single end product.

[MSA note: another one is 'valorisation', which I thought was a French word, but is nowadays seen in English language materials, and means something like "value creation".  Apparently the concept originates from Karl Marx; an example of use in an IP context appears here (but with plenty of scope for double entendres); the Hargreaves Report uses the term on page 87.]

I went to a talk given by Gerard Pannekoek, the CEO of IPXI, an IP exchange recently founded in Chicago, which demonstrated how IP can be traded as an asset.  On the basis that people have been exploiting IP for centuries, I expected to see the next set of the Emperor’s new clothes.  In fact, I think the model is different and new and will work well in some situations.

There is a great deal of detail about the IPXI model here and the ULR FAQs here are especially interesting.

My (dangerously brief) summary of the model and the thinking behind it is as follows:

These days, IP is seen as an asset rather than merely a collection of rights that can be used as a means of preventing other people from doing things.  Increasingly, IP is the carrot that makes deals happen.  The natural progression from this view is to find a market place in which IP can be traded like any other commodity.  IP shifts from being a right that brings a competitive advantage (ie freedom to operate) towards being a saleable asset that derives revenue.

The normal licensing model has shortcomings.  Identifying a potential licensee and then negotiating a successful deal is slow and resource intensive.  It is also an opaque system.  The rest of the market has no clear idea of the value of the IP nor of the quality of the IP nor of its take up in the market.

The IPXI exchange model addresses these problems.  IP is submitted to the exchange for review and assessment and, if approved is offered for sale.  Sales are made in terms of Unit License Rights.  A ULR is a standard form contract that is publicly available and grants the purchaser a non-exclusive right to use a pre-established unit of the IP.  So, for example, buy 50,000 ULRs and you can make 50,000 widgets that incorporate the patented technology. ULRs are tradable commodities in themselves and the exchange publishes price and sales details giving transparency and a market based valuation of the IP.  The exchange model promotes efficiency as it removes the need for time- consuming bilateral negotiations.  The exchange itself conducts a due diligence process before accepting any IP that is submitted and purchasers have no need to perform their own checks or to negotiate terms.  The model allows IP owners to outsource the marketing, auditing and enforcement activities.
The parallel is the open market element of a stock market.  Rather than trading in shares, the trade is in ULRs.

Pannekoek does not expect the exchange model to supplant in-house licensing functions. He freely admitted that the model works best for a certain sort of IP: it must be ‘unitisable’ IP; ideally, the offering needs a value of at least $25million; the IP needs a history of observable use and a significant number (meaning 20 plus) of potential licensees.  To give you a sense of the scales he has in mind, all the examples he gave in his talk related to the automotive industry.  My own feeling was that the model works best for patented products that are sold and used in bulk – what you might describe as ‘dumb’ technology.

Leaving aside the fact that I think that ‘monetizing’, ‘commoditising’ and ‘unitising’ are all ugly words, I do have reservations about this new model.  Although IPXI suggest that it is well suited to commercialising university technology, I am not sure how attractive it is for universities.  True, the financial and valuation side makes sense.  Avoiding the slow and expensive negotiations in bilateral licensing will be a bonus. But it seems to me that the ULR approach does not allow for exclusivity.  Many of those who take on university technology are looking for exclusivity to give them a market advantage.  Equally, many of them do not want transparency so that they have a chance to exploit that market advantage.  And university technology will often be too early stage to demonstrate the track record that the model seems to rely on as part of the internal validation process.

Even with these reservations, I think the model is here to stay.  Pannekoek set up the Chicago Climate Exchange which gave rise to the European Climate Exchange and carbon trading is now well established.  He reports that significant players in the US are joining IPXI and that these players include three universities (he didn’t say who) so the IPXI is one to watch.

I’d be curious to know if our readers share my reservations about the IPXI or whether our readers are more enlightened….?

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Undefined wording in contracts: the cream tea debate

IP Draughts’ friendly colleague Ken Adams has an interesting blog item here about undefined wording in contracts, which includes a link to a recent, New Mexico appeal case on the difficulties of interpreting the phrase “private garage” in a restrictive covenant on land.

shillingford bridge hotel

This prompts me to raise another restrictive-covenant question.  There is a restrictive covenant on our house, not to run a hotel or “temperance hotel” from the site.  The expression “temperance hotel” is not defined in the covenant, and therefore probably carries its everyday meaning.  But the term has fallen into disuse, so what does it mean?

It is also not clear to me who is the beneficiary of this covenant, which dates back to when the land was purchased in the late nineteenth century.  I suspect the beneficiary may be the Shillingford Bridge Hotel, which is a few hundred yards downstream from us on the River Thames, and may be the successor in title to the original seller.

Temperance hotels were mostly a nineteenth century phenomenom in the UK, encouraged by the temperance movement.  One of the movement’s cousins in the US was the Anti-Saloon League, which was influential in the passing of the Eighteenth Amendment to the US Constitution.

A good site for a cream tea shop?

So my (purely hypothetical!) question is: how would a covenant not to run a temperance hotel from the site be construed today?  Would it prevent me from selling cream teas to passing river traffic, in competition with the Shillingford Bridge Hotel?

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Drafting contracts using a terrible template

Last week, we were asked to draft an equipment lease agreement.  The equipment consists of hand-held testing devices, which are used to test whether a product contains a chemical additive.  Our client’s main business is the supply of the additive, but he also provides the device to his distributors, to enable them to test whether products in the market contain the additive.

We had previously advised the client on a contract with the manufacturer of the devices, and on distribution agreements for the additive.  The client now wanted a straightforward leasing agreement, for relatively low value equipment, and with no special requirements.

A simple task, you might think.  Find a decent template agreement for an equipment lease, tailor it to the circumstances of the product and the parties, and Bob’s your uncle.  Sorted.

However, it turned into a nightmare task.  The problem, as you may have guessed from the title of this posting, was finding a suitable template.  We didn’t have anything suitable from our own resources, so we used a published template from a reputable source as a starting point.

Unfortunately, the template was written in very old-fashioned language, and required a great deal of work to turn into something that I was prepared to send to a client.  Here is an example of wording from the template:

3.3.7 To obtain, effect and keep effective all permissions, licences and permits and to pay all rates, rents, taxes and charges which may from time to time be required in connection with the business of the Lessee, the Goods and their use, the premises where they are from time to time situated or kept, this agreement and the purchase, ownership, delivery, leasing, possession, operation, import to or export from any country, any return or other disposition of the Goods, or upon the rentals, receipts or earnings arising from them, including interest and penalties (other than corporation tax charged on the profits or taxable gains of the Lessor) and to comply with all statutory and other obligations of all kinds in relation to the Goods and the use of them and at its own expense to add to or install with the Goods any safety or other equipment required by any applicable law or regulation to be so added or installed for the use or operation of the Goods and to protect the Goods against distress, execution or seizure [(or in Scotland any form of diligence)] and to indemnify the Lessor against all losses, charges and damages however incurred by the Lessor by reason of failure by the Lessee to comply with any of the above terms of this clause

Eagle-eyed readers will notice that the above clause isn’t even a sentence.  Several pages earlier in the document, the words “The Hirer agrees” appear at the start of a main clause (clause 3), and the above sub-clause hangs off those words.  Ugh!

There are so many other drafting horrors in the wording quoted above, that it is difficult to know where to start in describing them.  The problems include:

  • too many words in a single sentence (assuming that “the Hirer agrees” is added to make it into a sentence).  222 words in a sentence is far too many
  • convoluted phrasing, where the sense of the obligation is buried in a sea of words
  • long lists of words that mean the same thing
  • use of legal terminology that will mean little to the overseas distributor, eg “distress, execution or seizure”
  • using the term “Lessee” when the defined term for that party elsewhere in the agreement is “Hirer” – a straightforward drafting error

The draft that we have prepared looks very different from the original template.  We cut out large swathes of text.  The clause that came closest to some of the above wording reads as follows:

4.7        The Hirer shall at its own expense:

4.7.1.       comply with all statutory and other obligations of all kinds in relation to the Equipment and its keeping, transportation and use; and

4.7.2.       add to or install with the Equipment any safety or other equipment required by any applicable law or regulation to be added or installed.

Some further work needs to be done on this wording, but at least it is now possible to see what the clause is trying to say.  For example, I see there is an inconsistency in referring to “statutory and other obligations” in the first part, and “law or regulation” in the second part.  This inconsistency appeared in the original.

Further suggestions on drafting techniques may be found in our book, Drafting and Negotiating Commercial Contracts.

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IP threats provisions: time to abolish them?

As reported in IPKat today, the English Court of Appeal has issued its decision in the case of Best Buy Co. Inc (and another) v Worldwide Sales Corporation Espana S.L.   [2011] EWCA Civ 618.  Best Buy appealed against a decision of Floyd J, to the effect that a threat of trade mark litigation was not actionable under section 21 of the Trade Marks Act 1994, where it was made in the course of without prejudice correspondence.  In the Court of Appeal, Lord Neuberger MR, delivering the unanimous decision of the court, was of the view that (a) the letter in question probably wasn’t a genuine, without prejudice communication, and (b) even if it was, this didn’t prevent it being used as evidence of a threat.

The IP threats provisions (there are similar provisions in patent and designs law, but not in copyright) are intended to stop an IP owner (eg a large company) from intimidating potential defendants (eg a small company) into submission, prior to starting litigation. Put like this, they may seem a good thing.  Our understanding is that the English IP judges favour their retention.  But there are a number of problems:

  • do the provisions really help to achieve their public policy objective?  In the words of the authors of Modern Law of Trade Marks (3rd edn, LexisNexis, page 349): “the threats provisions offer little practical protection to the weak and poor.  It is likely to be as expensive and inconvenient to bring threats proceedings as it would be to defend trade mark infringement proceedings.”
  • the provisions operate equally to allow a large company that is infringing IP to sue an under-resourced SME that owns the IP; the public policy objective of the threats provisions in this situation is more difficult to see.
  • the provisions can be a trap for the unwary.  Ill-advised parties fall into the trap, by being too honest and open about their intentions to sue if a deal cannot be reached.  Well-advised parties tip-toe around saying anything that could be interpreted as a threat, and become unclear and obscure in their communications as a result (except to other well-advised parties, who know what they really meant to say).  An elaborate game is played by people ‘in the know’, which risks bringing the law into disrepute.  Business people and consumers are no longer willing to tolerate the law being an arcane mystery, that only the experts can navigate.
  • in practice, as in the Best Buy case, the threats provisions are used as part of the legal armoury of substantial companies in commercial disputes.  They are just another weapon that is used in a commercial war, no better or worse on public policy grounds than any other legal weapon.
  • the threats provisions apply to some types of IP but not others.  In the latter category falls copyright.  If we need threats provisions at all, why are they not consistent between IP types?
  • the threats provisions are in direct conflict with modern dispute resolution practice, which encourages parties to be open and forthcoming about their intentions, as in the following two examples.

1. The Civil Procedure Rules

The Practice Direction for Pre-Action Conduct, part of the Civil Procedure Rules for England and Wales, encourages parties to exchange information about the issues of their dispute before they commence litigation.  The Practice Direction “describes the conduct the court will normally expect of the prospective parties prior to the start of proceedings” (paragraph 2.1).  Where there is no applicable Pre-Action Protocol (and there is no such protocol for IP litigation), paragraph 6.1 states:

The principles that should govern the conduct of the parties are that, unless the circumstances make it inappropriate, before starting proceedings the parties should –

(1) exchange sufficient information about the matter to allow them to understand each other’s position and make informed decisions about settlement and how to proceed;

(2) make appropriate attempts to resolve the matter without starting proceedings, and in particular consider the use of an appropriate form of ADR in order to do so.

It seems inconsistent with the requirement under sub-paragraph (1) (ie to be open and exchange information) that a party risks an action for unjustified threats if he informs the other party that he has IP rights, and that he may elect to bring proceedings for infringement of those rights if a settlement cannot be reached.

2. Problem-solving approaches to dispute resolution

Sub-paragraph (2) of paragraph 6.1, quoted above, requires the parties to consider alternative dispute resolution (ADR) before starting proceedings.  The most common form of ADR is mediation.  The mediation techniques taught by WIPO (see our earlier blog posting) include identifying the advantages of reaching a settlement.  One of those advantages is to avoid litigation.  It is difficult to see how parties can engage in an ADR process without disclosing the fact that they have a legal case, that they may choose to bring proceedings, and that this is a relevant factor in weighing up any proposals for settlement of the dispute.

This blogger has heard some prominent IP solicitors say that the best thing to do, in light of the threats provisions, is to start proceedings before commencing settlement negotiations (because once this is done, the threats provisions no longer bite).  This may well be the best route to avoid threats claims, but it is not consistent with the general approach of the Civil Procedure Rules nor is it consistent with best practice in dispute resolution.

As the law presently stands, we think Lord Neuberger MR was right to reject Floyd J’s creative attempt to neutralise the threats provisions by saying that they didn’t apply in without prejudice correspondence.  However, we think the threats provisions should be repealed at the earliest opportunity.

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Filed under Intellectual Property, Legal policy