Silicon Valley IP Licensing Law Blog Silicon Valley’s Resource to Intellectual Property Licensing

I recently sat down with TheSciTechLawyer’s Clara Cottrell to discuss some of the challenges of starting a law firm and my advice for other lawyers starting firms or just trying to maintain their practices during the current recession. I wanted to share the article with readers of this blog.

Click here to view the full article.

I recently sat down with IP Society’s Patrick Reilly to talk about my firm’s intellectual property licensing practice. The video interview is now posted for viewing.

Click here to view video.

I wanted to share with blog readers an interview that I recently had with Technology Transfer Tactics on the issue of whether poster presentations jeopardize a tech transfer office’s commercialization offices. While the issue does not have much application to the business world and is really very specific to intellectual property which is developed by universities, I believe it may be of interest to some blog readers.

Click here to view the article.

I just spent about five hours on the phone with multiple clients over the last few weeks explaining to them the ins and outs of exclusively licensing joint intellectual property, so I was pleased to see the decision of the Seventh Circuit Court of Appeals in the Wisconsin Alumni Research Foundation v. Xenon Pharmaceuticals, Appeal No. 08-1351 (7th Cir. 2010), which affirmed the licensor’s rights in an exclusive license to joint intellectual property.

In this case, as in my various clients’ cases, the parties had entered into a collaboration in which they agreed to jointly pursue research. The agreement provided Xenon an exclusive option to license any resulting technology, which again is often typical in collaboration agreements, particularly with universities. The parties filed a joint patent application deriving from the provisional application that the Wisconsin Alumni Research Foundation (”WARF”) filed before the collaboration began. Xenon exercised its option to exclusively license the technology, which gave Xenon the exclusive right to make, use and sell patented products under the joint patent application within the field of human healthcare. In exchange, Xenon agreed to pay the Foundation a percentage of any product sales, royalties or sublicense fees it received.

Xenon then went on to sign a license agreement with NovartisPharma AG (”Novartis”), which gave Novartis a license to the technology covered by the same joint patent application it had exclusive licensed from WARF. WARF demanded sublicensing royalty fees under the terms of the exclusive license, which Xenon refused, claiming it had the right to license its interest in the joint patent application. WARF sued Xenon, claiming that it had breached the terms of the exclusive license. The district court judge held in favor of WARF, ruling that Xenon breached the exclusive license agreement by granting a sublicense to Novartis without notifying WARF or conforming the sublicense to the terms of the exclusive license agreement. The judge held that Xenon owed WARF license fees, and that given Xenon’s breach, WARF had the right to terminate the exclusive license.

At the same time the district court judge ruled in Xenon’s favor on several issues:

• He dismissed as moot the Foundation’s claim that Xenon breached its duty of good faith by failing to abide by the terms of the license agreement.
• He held that the Foundation had not given Xenon proper notice or opportunity to cure before invoking its right to terminate the exclusive license agreement.
• It denied the Foundation’s claims to a compound that had been discovered by a University researcher who had entered into a consulting agreement with Xenon.

In a subsequent ruling, the court vacated its earlier decision regarding the WARF’s right to terminate the license agreement. The case went to a jury on the damages issue and the jury awarded $1 million, which was later reduced by the court to $300,000.00.

So, that’s the background.  The Seventh Circuit ruled exactly as I would have expected, and agreed that Xenon breached its exclusive license by granting a sublicense on the joint patent without paying WARF’s  sublicense fees.  The Seventh Circuit also agreed that the breach triggered WARF’s right to terminate the agreement.  The Seventh Circuit also found that WARF owned the compound in dispute as well.

What did the Seventh Circuit find compelling here?

First, the terms of the exclusive license on the joint patent contemplated sublicenses and said that they were permitted upon the payment of a royalty/sublicense fee but specifically prohibited assignments without consent. So, even though Xenon before the agreement had the right to commercialize the patent independently of WARF, it gave up that right when it entered into the exclusive license. The Novartis license provided that Xenon would grant Novartis an exclusive license to all Xenon technology in the field of human and animal healthcare, which effectively was a sublicense to Xenon’s exclusive rights in the joint patent.

Second, the terms of the license require that Xenon was to pay WARF

(1) a royalty for direct sales by Xenon, which would be earned on the date that the product was sold, the date the invoice was sent on the sale of the product, or the date the product was transferred to a third party for promotional reasons, whichever came first; and

(2) “a percentage of any license fees, milestones, and royalty payments received by Xenon as consideration for the sublicense granted. . . .the percentage shall remain fixed at a rate of ten percent (10%) for years (1) and two (2) of this Agreement and seven and one-half percent (7.5%) thereafter until this agreement was terminated.”

In the second possibility, Xenon tried to argue that because the clause began with “for all Products sold by Xenon sublicensees” that it didn’t owe Novartis any money until such time that Novartis brought products to market at sold them. However, the court dismissed that interpretation, saying that in both the direct sales and sublicensing possibilities, the paragraphs began with “for all products sold” and that this phrase was just intended to distinguish direct commercialization from when a sublicensee commercialized the technology, and in the latter case, any compensation received triggered a payment obligation on Xenon’s part to WARF.

Third, on the damages issue, the Seventh Circuit found that the evidence was sufficient to sustain a damages award and that the issue of damages was not beyond the understanding of a lay juror and did not require the use of expert testimony.

Fourth, the Seventh Circuit dismissed the argument that because the agreement had a 90 day notice and opportunity to cure a material breach clause, that WARF’s decision to file suit during that 90 day period meant that it could not terminate the agreement for material breach until the court found Xenon in breach. The Seventh Circuit found that the ability to terminate the license was completely separate from the right to sue for breach of the contract, and that WARF had the right to sue after giving notice and had the right to terminate for breach after the 90 day period had lapsed.

Fifth, on the compound issue, the researcher assigned his rights to the compounds to the Foundation, and the fact that his work was conducted in part under the sponsorship did not change the ownership of the rights in the compounds.

All in all, this decision is a clear affirmation of the licensor’s rights in an exclusive license to jointly owned intellectual property. Parties looking to collaborate on the development of intellectual property and who have questions about how this all works from a practical perspective should look to this case as a reference.

At the same time, I think this case provides some good lessons to potential collaborators. You need to be very precise about what remains joint intellectual property and what will potentially be exclusively licensed intellectual property. If you do not intend to exclusively license all of the joint intellectual property, the agreement needs to be clear on this and it needs to be clear on what rights the parties jointly retain after the exclusive license is entered into.

You also need to be clear on what triggers payments to the licensor–in this case, the dispute was in part over a clause “on all sales of products”. The compensation language was obviously imprecise enough to provide fodder for a dispute. The parties clearly could have made a better choice on words.

As I have stressed to my clients, it is very important to think through all of the issues in a collaboration before you just draft and sign the agreement. This case is a good example of why that is so important.

The Federal Trade Commission (”FTC”) just filed suit against Intel this week, on the grounds that Intel’s “anti-competitive tactics have stifled innovation and harmed consumers.”

The FTC’s press release on the suit states as follows:

“The FTC’s administrative complaint charges that Intel carried out its anti-competitive campaign using threats and rewards aimed at the world’s largest computer manufacturers, including Dell, Hewlett-Packard, and IBM, to coerce them not to buy rival computer CPU chips. Intel also used this practice, known as exclusive or restrictive dealing, to prevent computer makers from marketing any machines with non-Intel computer chips.

In addition, allegedly, Intel secretly redesigned key software, known as a compiler, in a way that deliberately stunted the performance of competitors’ CPU chips. Intel told its customers and the public that software performed better on Intel CPUs than on competitor’s CPUs, but the company deceived them by failing to disclose that these differences were due largely or entirely to Intel’s compiler design. . . .

[Intel has now embarked] on a similar anti-competitive strategy, which aims to preserve its CPU monopoly by smothering potential competition from GPU chips such as those made by Nvidia, the FTC Complaint charges. As part of this latest campaign, Intel missed and deceived potential customers in order to protect its monopoly. The complain alleges that there also is a dangerous probability that Intel’s unfair methods of competition could allow it to extend its monopoly into the GPU chip markets.

According to the FTC’s complaint, Intel’s anti-competitive tactics violate Section 5 of the FTC Act, which is broader than the antitrust laws and prohibits unfair methods of competition, and deceptive acts and practices in commerce. . . . The complaint also alleges that Intel engaged in illegal monopolization, attempted monopolization and monopoly maintenance, also in violation of Section 5 of the FTC Act. ”

So, what is this suit all about?

Based on some of the commentary, it appears that the crux of the argument is as follows: Intel pressured computer companies into exclusive deals and manipulated data to make its chips appear better than its rivals. As a result, Intel kept the prices higher than they would have otherwise been if the rivals had been able to compete in the space.

I am not an antitrust expert, so it’s unclear to me at the moment how strong the FTC’s case is against Intel, but I think the more interesting question is what the FTC’s action means to the Silicon Valley.

A Marketwatch story today looked at the issue, and quoted several Silicon Valley commentators who had concerns about the potential impact of FTC action on innovation in the Silicon Valley.

I think the article raises some interesting points, but I wonder if the concerns about the impact of this one case aren’t a little exaggerated. It is hard to accept that any one suit could have such a detrimental impact on Silicon Valley innovation. After all, we have a tremendous amount of talent in the high tech industry here, and no single case can just turn that talent off.

On the other hand, certainly, everyone in the Valley will be watching to see whether or not the FTC prevails and what the consequences are for Intel, in order to gauge what this one action means for how Silicon Valley companies can operate in the future. Obviously, there were likely patents on all this technology, which would give Intel as the patent owner the right to license out its technology. The question will be how the two bodies of law intersect here: patent, which gives monopolies, and antitrust, which tries to prevent monopolies.

As for Intel itself, this case adds one more antitrust suit to its plate, in addition to the antitrust legal troubles it already had in Europe, Korea, and in New York State, by its attorney general. I am sure this is not what Intel needed in a bad economy which has hit both the Silicon Valley and the technology industry in general hard.

We will keep you posted at the Silicon Valley IP Licensing Law Blog on the developments in this case as they arise.

The Prinz Law Office is pleased to announce the launch of its new on-demand webstore at The Prinz Law Store.

To see the press release on our launch, please click here.

We continue today with our series on the new American Law Institute Principles of the Law of Software Contracts with a discussion of what software companies need to know about the Principles’ treatment of warranties.

Again, for any of you who have not read our earlier postings on this subject, the importance of the Principles is that they may be used by courts to interpret and rule on disputes regarding software contracts in the future. Thus, software companies may want to take the time now to review their form agreements in anticipation of the possibility that the Principles may be used to interpret those agreements down the road.

So, what do you as a software company need to know about the Principles’ treatment of warranties?

Well, for the non-lawyers reading this blogposting : contracts can have express warranties, which are warranties that have to be spelled out very conspicuously in a contract to apply, and implied warranties, which are warranties which are read into an agreement. So, in talking about this subject, we are addressing what the new Principles say about the language that has to be in an express warranty to be valid, as well as what implied warranties will be read into a software contract, regardless whether the contract specifically talks about those warranties or not. We are also addressing what the Principles say about a party’s ability to disclaim certain warranties.

On the issue of express warranties, the Principles adopt the standard Uniform Commerical Code (”UCC”) view of express warranty, but interestingly enough do not require use of the words “warrant” or “guarantee” to constitute an express warranty. Also, the Principles clarify that distributors or dealers cannot be liable for breach of a software developer’s warranty, provided that they merely “transfer” the warranty provided by the developer but do not “adopt” that warranty themselves. The Principles provide that disclaimers of express warranties are unenforceable only if a reasonable party would not expect the exclusion or modification.While the position on disclaimers is a little unexpected, the Principle’s position on express warranties is bascially in line with what we as attorneys would expect.

On the issue of implied warranties, the Principles largely take the UCC position, allowing for an implied warranty of merchantability and an implied warranty of fitness for a particular purpose, and allowing both warranties to be disclaimed. However, the Principles do take a few noteworthy positions on the issue of implied warranties. First of all, the Principles take the position that one warranty cannot be disclaimed: the warranty that the software contains no material hidden defects of which the party was aware at the time of transfer. Also, the Principles say that this warranty does not take the place of any action for misrepresentation or any remedies. Second, the Principles take the position, that no implied warranty regarding material hidden defects that will be read into an agreement, where the purchaser of the software has tested the software in advance as fully as desired or unreasonably has refused to test it, provided that the warranties are with respect to defects that a test should or would have revealed. The position advocated by the Principles suggests that, if software companies are not already offering free trials or evaluation licenses to potential customers, it may be in their best interest to start doing so, in order to ensure that an implied warranty regarding hidden defects is not read into their software contracts.

In addition to addressing express and implied warranties, the Principles also take the position that these warranties automatically extend to certain third party beneficiaries such as immediate family, household members, and guests, and any other person who uses the software in a manner contemplated or that should have been contemplated by the software company. However, the Principles clarify that any disclaimers that would be effective against the purchaser are also effective against third party beneficiaries, so the Principles do not require the inclusion of any express disclaimer against third party beneficiaries.

What should you take away from this posting? Well, the important take-away point is that the Principles read in an implied warranty that there are no material hidden defects that cannot be disclaimed, but that this burden on the part of a software company may be negated by ensuring that the purchaser thoroughly tests the software in advance. So, if you are software company and you are not already taking steps to ensure software purchasers test the product in advance, you may want to implement policies now to ensure that this happens in the future.

Other related postings:

American Law Institute Approves Principles of the Law of Software Contracts
Series on ALI Software Contract Principles: Changes Default Rule from Implied Warranty to Implied Indemnification Against Infringement

The Electronic Frontier Foundation (”EFF”) has just launched a new website to track companies’ modifications to their terms and conditions: TOSback.org.

According to an explanation on the website, TOSbackup.org was launched with the intention of increasing public awareness about online terms of service, and to help the public monitor changes to the terms of service for the websites they are using. The launch follows the recent uproar on the blogosphere over changes to the Facebook terms and conditions, and the controversy over the terms and conditions for the Amazon Kindle’s new beta product for blogs.

So far, the website is tracking twenty (20) companies’ online terms, including but not limited to Google, Twitter, Apple, Ebay, Myspace, and YouTube. The website is equipped with RSS feeds, so users can easily track updates as they are posted to the Internet.

The launching of Tosbackup.org is an exciting development, which is likely to a huge impact over the Internet. While in the past companies could make daily revisions to their terms and conditions and those revisions could go almost unnoticed, Tosbackup.org is now going to make it possible for the blogosphere to have daily and direct oversight over corporate terms and condition changes. It is inevitable that this is going to change the dynamic between companies and website users and perhaps make them a little more reluctant to modify their terms and conditions–at least to the extent that the modifications are at all controversial. In my opinion, it levels the playing field significantly between companies, who typically establish that they have the right to amend their terms at any time without prior notice, and consumers, who generally seek predictable terms which are also fair and reasonable.

Related blogpostings:
Facebook Licensing Controversy Prompts Public to Take Closer Look at Social Networking Site Terms and Conditions
Facebook Reverses Decision and Announces Temporary Return to Prior Terms and Conditions
Facebook Adopts Townhall Format to Allow Users to Comment and Vote on New Statement of Rights and Responsibilities
Blogosphere Reacts to Licensing Terms for Amazon’s New Kindle Publishing for Blogs

The Supreme Court agreed this week to hear the Bilski Case. Given the issues at the heart of Bilski, this case will be closely watched by the Silicon Valley business community, since any decision could have a far-reaching impact on the patentability of intellectual property developed by Silicon Valley businesses.

What are the issues to be looked at in Bilski?

First, the Court will look at whether the Federal Circuit erred in its holding that a process must be tied to a particular machine or apparatus, or that it must transform a particular article into a different state or thing to be eligible for patent protection (also known as the “Machine or Transformation Test”). Second, the Court will look at whether or not the Machine or Transformation Test, which effectively denies patent protection to many business methods, contradicts clear Congressional intent.

The outcome of this case will likely determine whether or not many business methods are patentable, including many software patents.

In case you have not been following the Bilski case, the facts behind the ruling are as follows:

The patent application was filed in April, 1997 to protect a method of hedging risk in the field of commodities trading. The patent examiner rejected the claims on the basis that the invention was not directed to the technological arts. The rejection was appealed, and the Board found that the examiner was wrong to use the “technological arts” test but that the invention was still not eligible for patent protection due to the fact that the claims did not involve any patent eligible transformation and only claimed an abstract idea ineligible for patent protection. Also, the Board found that the process did not produce a useful, concrete or tangible result.

The Federal Circuit’s decision looked at two earlier Supreme Court decisions: Benson and Diehr. Both Diehr and Benson involved software programs, and looked at whether claims involving a particular mathematical equation were patentable. Benson basically established that a mathematical formula in itself was not patentable. In contrast, Diehr established that a distinction existed between patenting mathematical formulas and patenting specific applications of mathematical formulas. The Federal Circuit used these precedents and later decisions upholding those precedents as the basis for determining that its “Machine or Transformation Test” applied to determine whether a particular process is in fact patentable. It is expected that the Supreme Court may revisit these decisions as part of its consideration of this case.

So, the importance of the Supreme Court taking Bilski is that the Supreme Court is expected to clarify what the test should be for the patentability of method claims. This clarification will inevitably have widespread implications for the technology industry, since it may affect the validity of existing method patents as well as the future patentability of method inventions.
From a licensing perspective: this decision could potentially limit what can be commercialized through patent licensing. More importantly, the decision could call into question the validity of a number of existing patent licenses.

Needless to say, this case is one that the Silicon Valley will be closely watching. The Silicon Valley IP Licensing Law Blog will continue to keep you posted on any developments as they arise.

As the Silicon Valley IP Licensing Blog has been reporting, the Associated Press has already initiated an effort to impose its view of what constitutes fair use on the blogosphere. However, I came across today an interesting interview by Ars Technica, which offers some insight on how the Associated Press plans to go about policing the blogosphere.

What is the plan? According to Ars Technica, it seems that the Associated Press plans to deploy some sort of “mysterious new misappropriation heat-seeking system” technology over the web to track down material taken from Associated Press articles.

Now interestingly enough, the interview seemed to suggest that the Associated Press plans to take a somewhat softer stance on blogosphere quotes than they seemed to indicate this past year. Ars Technica spoke with AP news editor Ted Bridis, who promised that the main concern of the Associated Press was “wholesale theft” and not bloggers who “excerpt a relevant passage, and then derive some commentary.”

Did the outrage in the blogosphere cause a change of heart at the Associated Press? One can hope. While such a continued assault would provide for some very interesting blogging and legal commentary on my part, I personally think it would prove to be a bad business move on the part of the Associated Press. Also, I think it could have a detrimental effect on the blogosphere as well.

Somehow, however, I am not convinced, as it is just very hard to reconcile this new, kinder and more gentle Associated Press approach described in the interview with previous quotes and prior actions taken by the Associated Press — particularly with respect to the Drudge Retort.

Apparently, Drudge Retort Publisher Rogers Cadenhead agrees, warning Ars Technica, “If AP’s guidelines end up like the ones they shared with me, we’re headed for a Napster-style battle on the issue of fair use.”

The Silicon Valley IP Licensing Law Blog will continue to follow this issue as it unfolds.

Related Blog Postings:
Blogosphere Reacts to Associated Press Assault on Fair Use Doctrine
Blog Content Licensing: Is there a market for it?
Should the Blogosphere Adopt the Creative Commons Licensing Model?