Archive for January, 2010

Fashion Licensing Corner: Japanese Designers Need to Protect, Monetize Their Ideas

Sunday, January 31st, 2010

日本語訳:日本の時代を先取りする創作性の高いファッションデサインは世界の注目を集めても、海外でコピーされ、販売されるせいで、日本のファッション業界は多くの利益とビジネスチャンスを失っているということです。ビジネス戦略には知的財産の保護と海外で展開を含めるべきです。

In the United States, we tend to think of Japan as a high-tech, exporting powerhouse.

That is certainly true in the automotive and consumer electronics industries, where company size and manufacturing prowess are indispensable.

It is not as true for small and medium sized companies, where ideas and creativity, not industrial manufacturing, are the predominant ingredients in the value added mix.

Exhibit A: an interesting New York Times article, which notes that Japan is home to some of the most creative, cutting edge fashion brands in the world, but those small companies do not have the know-how or infrastructure to export.  Rather, Western retail chains “buy up bagfuls of the latest hits. The designs are then whisked overseas to be reworked, resized, stitched together and sold under Western labels.”

Japan earned a mere $416 million from clothing and apparel related exports in 2008, compared to $3.68 billion for US apparel companies, and a staggering $113 billion for Chinese clothing exports.

According to experts quoted in the Times article, in order to turn the situation around, “Japan’s fashion industry needs…more concrete help in marketing and setting up shop overseas….The government could also play a larger role helping Japanese labels protect their intellectual property rights, they say.”

In my opinion, the most effective means for Japanese fashion labels to protect their IP would be to negotiate license and/or distribution agreements with partners in foreign countries.  Copyright law is usually not an effective means to protect against copying fashion designs, and trademark law would not help unless the labels were already selling in the foreign markets.

Exhibit B: a failure to protect intellectual property rights has had a severe economic impact on another field where Japan is a global creative leader—animation or “anime” (アニメ in Japanese).  Anime enjoys growing worldwide popularity for its complex, creative art and storytelling, but a combination of absurdly high prices for legitimate DVDs and a failure to challenge massive Internet piracy has had a devastating economic impact not only on foreign distributors of authorized anime, but on the Japanese anime studios as well.

Japan’s automotive and consumer electronics industries have thrived in part because they learned how to export and how to protect their intellectual property in foreign markets. (Japanese companies are the largest foreign filers of US patent applications.)  Small and medium Japanese IP companies can follow their example and prosper.

Coming soon: an article explaining how small and medium foreign businesses can start doing business in the United States.

Research Licensing Corner: License Agreement Trumps Patent Law

Monday, January 25th, 2010

If patent law says that a joint owner of a patent does not have to pay royalties to its co-owners, but a license agreement says it does, who wins?

The license agreement, according to the federal Seventh Circuit Court of Appeals. (Original decision available here by entering case number 08-1351.) It recently affirmed a trial court’s order for Xenon Pharmaceuticals to pay $300,000 in royalties to the Wisconsin Alumni Research Foundation (“WARF”).

Xenon and WARF had jointly filed for a patent on a cholesterol-lowering enzyme called Stearoyl CoA Desaturase (“SCD”). WARF made Xenon an exclusive licensee of WARF’s patent rights, and in exchange, Xenon promised to commercially develop SCD and pay WARF a percentage of any product sales, royalties, or sublicenses under the WARF license.

Xenon then entered a sublicense with Novartis, but tried to get clever on WARF by saying that under the rule of concurrent ownership in Section 262 of Title 35 of the US Code, it did not have to pay any royalties to WARF, because Section 262 said, “each of the joint owners of a patent may make, use, offer to sell, or sell the patented invention… without the consent of and without accounting to the other owners.”

WARF then sued Xenon, and replied that Section 262 was prefaced by the phrase, “In the absence of any agreement to the contrary…” which the license agreement obviously was.

The trial and appellate courts both agreed that Xenon’s argument was too clever by half, and ordered Xenon to pay WARF $300,000 in royalties on Xenon’s revenues from the Novartis sublicense.

An interesting sidelight in this case: Xenon also claimed sole ownership of a set of therapeutic compounds arising from SCD, claiming that the WARF researcher who worked on the project had assigned his rights to Xenon via an invention assignment agreement. However, unlike Stanford’s invention assignment agreement, WARF’s assignment agreement had beaten Xenon to the punch, successfully transferring its researcher’s patent rights to WARF, so there was nothing left for him to assign to Xenon.

Takeaway: in a collaborative research arrangement that may result in a patentable invention, it is critical for the parties to draft a license or other agreement addressing development rights and revenue sharing, or else Section 262 will allow every party to strike its own separate deal.

Google vs. China: Heavyweight, Middle Class Bout of the Century

Wednesday, January 20th, 2010

Ready, Aim, Firewall!


Whether it is a political race, a business battle, or a heavyweight boxing match, every great fight should feature a match of skilled, powerful, opponents, but also an interesting back story.

The Google vs. China contest features both in abundance.

In this corner, we have China, a nation of 1.3 billion people, with 384 million Internet users and a 10% economic growth rate (“only” 8.7% during 2009, when most other economies shrank), which has already become the “world’s factory,” and is looking to move up the economic value added chain through a combination of hard work and cyberespionage. It is the champion of closed source, closed systems, and top-down economic growth.

In this corner, we have Google, the world’s most innovative, most profitable, new economy company, which has brought libraries worth of free knowledge and information to the doorstep of the poorest villager in the poorest country in the world, as long as he has an Internet connection. It is the champion of open source, open systems, and bottom-up economic growth through the power of networking.

The elements of the back story in this battle—intellectual property, economic growth, scientific progress, and individual freedom—are the issues that get us excited here at The Licensing Law Blog. And the winner of this contest just may determine the course of the early 21st Century. (more…)

Is Paris’ (Food) Burning?

Tuesday, January 5th, 2010

Hallmark, you've been like served

Having served as Paris Hilton’s licensing attorney in a previous life, I am obligated to preserve the confidences of my former client.

So please understand if I report the following case without editorial comment and/or sarcastic innuendo about “intellectual property.”  No, I will leave that to others.

To wit, Paris prevailed before a federal appeals court in her claim that Hallmark Cards may have misappropriated her right of publicity with a birthday card titled “Paris’s First Day as a Waitress” that featured a photograph of the hotel heiress’ head on a cartoon figure of a waitress, delivering a plate of food to a customer with her catchphrase “That’s Hot.”

Under the law of California and most other states, commercial use of a person’s image without permission is normally a violation of her right of publicity.  But Hallmark had argued successfully to the trial court that the claim should be dismissed, because its cartoon figure sketch of Paris had added sufficient original content such that it qualified under the “transformative use” doctrine in California, so that the First Amendment trumped the California right of publicity claim.

However, the appeals court sided with Paris. The court did not have to rule on the merits of the issue, but ruled that the birthday card was not transformative enough under California law to automatically qualify for First Amendment protection, at least not without a much closer look by the trial court.  For that reason, it reinstated the claim and sent it back to the trial court to decide whether it had sufficiently transformed Paris Hilton’s image, or was mainly free-riding on her fame.

Takeaway: tread very carefully when using a celebrity look-alike or sound-alike in any non-news, commercial context.  The use may qualify for First Amendment protection, because it is a parody or has been “transformed” by sufficient original content, but it is often difficult to predict how a court will rule on these issues.  The case law on “transformative use,” especially, is all over the map, as Hallmark’s lawyers discovered.

Awesome.

Why IP Assignment Agreements Matter, Part 2

Tuesday, January 5th, 2010

Beat on the Bratz, Beat on the Bratz...

A cautionary tale for start-ups, or any company that deals in intellectual property, is offered up by the Barbie versus Bratz tussle, otherwise known as Mattel v. MGA Entertainment in federal District Court in Riverside, California.

If you have a pre-teen daughter, you can skip this paragraph, because you already know that Bratz are the pouty-lipped, multi-ethnic, high attitude, high fashion rivals to Mattel’s perennial favorite leggy California beach blonde. Sales of the Bratz line have have topped $3.1 billion since their 2001 launch, and have also spawned several movies, a television series, video games, and even a line of diamond jewelry.

The crux of the case was Mattel’s allegation that Bratz designer Carter Bryant came up with the idea, name, and many of the original Bratz sketches while he was still employed as a Barbie designer at Mattel. Mattel claimed that (like most companies that create intellectual property) it requires employees to sign agreements assigning all their rights to any IP created during their employment to Mattel, that Bryant had signed such an agreement, and that Bryant had created Bratz while under Mattel’s employment.

Unfortunately for MGA, Mattel proved its allegations, which meant that not only did MGA lose the case, it lost its entire multi-billion dollar product line! Trial judge Stephen Larson entered orders which among other things:

  • transferred ownership of the Bratz dolls and their molds to Mattel
  • required MGA to withdraw infringing product from retail shelves
  • appointed a receiver to monitor MGA’s finances and collect royalties from sales of Bratz products pending full transfer of ownership to Mattel

In short, a devastating turn of events for the once flush MGA. Now the Bratz dolls really have something to pout about. They got a legal b*-slapping from Barbie.

The transfer of ownership was supposed to occur this month, but an eleventh hour ruling from the the federal Ninth Circuit Court of Appeals put a hold on the transfer until it completes a full review of the trial court’s orders.

Takeaway: when accepting contributions of intellectual property, especially from independent contractors and new employees, know who originally created it and where it really came from, and back it up with documentation.

Why IP Assignment Agreements Matter, Part 1

Tuesday, January 5th, 2010

Clients often ask their attorneys why they spend so much time arguing about seemingly trivial differences in contract wording.  Isn’t it just interchangeable generic boilerplate gobbledygook?

And attorneys often reply that slightly different wording in even basic legal agreements can yield radically different real world results.

Stanford University found that out the hard way when the Federal Circuit Court of Appeals in Stanford v. Roche dismissed its $200 million patent infringement lawsuit against Roche Molecular Systems because of sloppy wording in a Stanford researcher’s invention assignment agreement.

Patent rights initially belong to the inventor, which is why all companies engaged in research and development should require employees and independent contractors to sign written agreements assigning all intellectual property rights in their work product immediately upon invention.

Stanford’s agreement stated, “I agree to assign or confirm in writing to Stanford and/or Sponsors that right, title and interest in … such inventions as required by Contracts or Grants.”  Which looks okay at first glance, but if you read it again, you realize that the employee has only agreed to assign ownership of the invention at some time in the future.

Mark Holodniy, one of the researchers on a Stanford project to use polymerase chain reactions (PCR) to measure HIV concentration in blood plasma, signed that agreement.  Holodniy worked with researchers at biotech company Cetus to learn more about PCR, but Cetus required him to sign a non-disclosure agreement that said he, “will assign and do[es] hereby assign to CETUS, [his] right, title and interest in each of the ideas, inventions, and improvements” that he developed, “as a consequence of” his work at Cetus.

Since Holodniy had not yet actually assigned his rights to Stanford via the invention assignment agreement, he wound up assigning them to Cetus via the non-disclosure agreement, which was worded in the present tense.

The PCR hit the fan when Stanford sued Roche (which had acquired Cetus’ PCR business) for infringement of its PCR patents.  The court ruled that Roche could not infringe what it already owned, and threw out the lawsuit.

Takeaway: A lot of folks DIY basic contracts like employment agreements by cutting and pasting poorly drafted templates from the Internet.  A lot of other folks sign non-disclosure and similar basic agreements without a glance at the actual contents.  This case shows why neither is a good idea.

Update, 11/9/10: The Supreme Court has decided to grant certiorari and hear Stanford’s appeal of the decision. We will continue to follow this case of great importance to the university research community.

Entertainment Licensing Corner: Licensing and the Music Business

Monday, January 4th, 2010

Chili #1: "We shoulda licensed..." Chili #2: "Now you tell me?!"

The music business has been hard hit.

Total revenue for US music sales in all formats has decreased from a high of $14.6 billion in 1999 to $10.4 billion in 2008 to a forecasted $9.2 billion in 2013.

The most profitable part of the music industry is no longer the sale of music, but what were once considered ancillary parts of it—concerts and music publishing.

But the music industry has largely overlooked another important revenue-generating tool—licensing.  Not just licensing the band name, which is common, but for smart bands, licensing album and song names as well.

The extent to which this is not done is shocking.  UK law firm Pinsent Masons has found that none of the album titles in Rolling Stone’s Top 10 Greatest Albums of All Time have been registered as trademarks in either the US or the UK by the artists or their record companies.

But there are registrations galore from third parties capitalizing on famous album and song names, from the silly (“Sgt. Peppers Only Hot Dog Stand”) to the enormously lucrative (“Ruby Tuesdays”).

To explain how and why this matters, a little brush-up on IP law is in order.

Trademarks are symbols that communicate the source and quality of goods and services.  So in the usual case, a band’s name and associated logo serve as a trademark for its music and live performances.  It is highly advisable for the band to formally protect its trademark with a trademark registration, but some degree of legal protection exists even without a registration via the doctrine of common law trademark.

So far, so good.  So what’s the problem?

1) Even a registered trademark on a band name won’t prevent someone else from using the same mark for goods other than music or for services other than live performances, because you only get trademark rights for the goods or services that you sell or license.

2) Even a registered trademark on a band name won’t protect others from using album or song names that have enormous public recognition and good will, because you only get trademark rights in symbols that represent source indicators for goods or services that you sell or license.

Are you beginning to notice a trend here?

The Red Hot Chili Peppers learned both lessons the hard way when Showtime broadcast the popular series “Californication,” which also happened to be the name of the Chilis’ most popular album, but the show didn’t take a license from the band.  (The series also contained several other references to Chilis’ song titles and lyrics to remove any doubt that they were drawing on the album’s name for the series name.)  The Chilis sued Showtime for trademark infringement in November, 2007, but the network replied that there was no infringement because (among other reasons) Californication the show was a different category of product than the musical recordings on Californication the album, and that the Chilis had never used Californication in a trademark sense, to indicate the source and quality of goods or services.  At this writing, the case is still pending, but most experts don’t give the Chilis good odds of winning the whole enchilada, errr, winning anything more than a token settlement.

What the Chilis and other bands should do is a bit of brand extension.  First, license not only the band name, but also popular album and song names to manufacturers in fields like apparel, eyewear, jewelry, leather goods, and food products, who will pay the band for the right.  Second, follow up by applying for trademark registrations covering these categories.  (Or this could be the first step if the band files an intent to use application.)  Third, if the band skipped the first two steps, and someone has started cashing in on its band’s album or song names, then it should file a trademark registration application before the interloper.  The Chilis didn’t, but the Sex Pistols did when an ice cream company started marketing “God Save the Cream,” a conscious play on the Pistols’ notorious song, “God Save the Queen” (“God save the Queen/ She ain’t no human bein’.”)

Takeaway: with the music industry hurting and bands starving, licensing is a smart strategy.

モノ作りと知恵作りとライセンシング

Sunday, January 3rd, 2010

Making Things, Making Knowledge, and Licensing >> English translation

「日本が今大不況になっている。その大きな理由はモノ作りにこだわったことなんですよ。やはり日本は新しい知恵作りに入らなきゃいけない。」

元経済企画庁長官の堺屋太一さんは最近、文化放送の大竹メインデッシュというラジオ番組でそう語った。

堺屋さんによると、現代のグローバルな時代には、付加価値の高い製品はひとつの国だけで開発されるのではなく、むしろ様々な国の専門分野を生かして分業開発されているということです。

例えば、ある先端技術製品を作る時に、ビジネスモデルはアメリカ、デザインはフランス、技術開発はドイツ、部品製造は中国、組み立ては台湾、販売戦術・マーケティングはロンドン、金融はシンガポールでやるなど。国境がなくなって、東京と中国の境は東京と神奈川の境と同様になっているということです。

グローバル時代には、製造の部分は中国・インドなど低い賃金の国にアウトソースを余儀なくされるので、先進国の経済成長を促進するためには、モノ作りじゃなくて、付加価値の知恵作りの方が大事になるというわけです。

堺屋さんによると、日本は昔からモノ作りと産業技術の重要さを強調しているけれど、それだけでは不十分です。大竹アナウンサーの日本の会社の技術へのこだわりこそは日本経済の成功の鍵という意見に対し、堺屋さんは日本の会社が素晴らしい性能を多く備えた携帯電話とパソコンを製造しても、日本以外には、あまり売れていない事を指摘し、世界の消費者は必ずしもそんな技術に凝った機械を必要としない。日本の会社は技術へのこだわりのせいでそういう事実に気付いていないと言っています.それはガラパゴス現象といわれています。

その代わりに、日本は知恵作りに焦点を当て、グローバル化の工程分業を利用し、技術をテコとして使い、グローバルビジネスの本社のような役割を演じるというわけです。

私は堺屋さんの意見に賛成です。日本の高い教育水準と労働意欲をバックに、知恵作り・マネジメントを強調することによって、グローバル経済のリーダーの役割を続けることができると思います。

例えば、前の携帯電話の例で言うと、アップル社のヒット製品であるI-Phoneはそのよい例です。デザイン・ソフト・マーケティングはアメリカで考案・展開され、部品は日本、中国などアジアの国で購入され、組み立ては台湾で行われ、など。ハードの技術と製品の性能の面だけで見れば、I-Phoneは普通の日本製の携帯電話より劣っていますが、優雅的、直感的な操作性においてはすごく魅力があります。どうしてかというと、アップルは製品の性能だけではなくて、ビジネスモデルと情報とデサインの知恵に基づいて製品を着想したからです。

そのおかげで、I-Phoneの最新型が売り出された際、欧米の消費者はもとより、日本の消費者も行列を作って買いました。実際は、I-Phoneのおかげで、ソフトバンク社が二年連続携帯電話市場の首位をキープしました。たぶん堺屋さんは日本の会社がアップル社のようなやり方を目指すことを期待しています。

堺屋さんは触れませんでしたが、知恵作りに不可欠となるのがライセンシングやその他の契約書です。契約書を通して、技術、金融など、産業の資源は国境を安全で容易に移動します。中国やインドにたくさんの低い賃金の労働力があっても、そういう戦略を実行することにより、日本は不況を乗り越え、経済競争に必ず勝つと思います。

Dealing With a Licensee’s Bankruptcy

Saturday, January 2nd, 2010

The envelope arrives from the bankruptcy court.  You open it and realize with a shock that your licensee has filed for bankruptcy, and listed you as a creditor.  Over the last year, it has become an increasingly common event.

But from a licensor’s point of view, a licensee bankruptcy is not automatically the disaster it might appear to be.  There is a Very Good Scenario as well as a Very Bad Scenario for licensors dealing with a licensee’s bankruptcy.

First, some background on bankruptcy law.  Bankruptcy is a process for adjusting the debts of a debtor as set forth in the federal Bankruptcy Code.

The two main categories of business bankruptcy are Chapter 7 and Chapter 11.  Chapter 7 is a so-called liquidation bankruptcy, in which the debtor is carved up, its assets sold, and the proceeds distributed to creditors according to a formula contained in the Bankruptcy Code.  Chapter 11 is a so-called reorganization bankruptcy, in which the debtor survives, and pays off creditors a portion of what it owes them, usually from a combination of loans, selected asset sales, and current revenues.

The Chapter 11 is carried out according to a plan that must be voted on and approved by the creditors.  Chapter 11s sometimes fail, and convert to Chapter 7 liquidations.

The important thing to know about licenses in bankruptcy is that they are normally treated as a kind of asset called an “executory contract,” which is fancy way of saying that the contract is still active.

When licensees go bankrupt, the Bankruptcy Code requires them to choose whether to “assume” the license (accept it in full according to its original terms) or “reject” it (just what the name implies).

As a licensor, normally you would want the licensee to assume—this is the Very Good Scenario.  The reason is that in order to assume, the Bankruptcy Code requires the licensee to promptly come current on royalties and all other contractual obligations, and prove it has the means to stay current in the future.  Which means that if the licensee is in arrears – which bankrupt licensees always are – it will need to quickly come current and stay current, and follow all other terms of the license as originally drafted, just like your very best licensee.  If your license is drafted correctly, you can even require the assuming licensee to pay your bankruptcy court attorney’s fees as part of the assumption process.  Nice!

Why would a licensee decide to assume?  The licensee may have determined that the license is a revenue producer that is critical to its Chapter 11 reorganization efforts, or may have decided to sell that license to a third party as part of either a Chapter 11 or Chapter 7 asset sale.

But what if you do not want the licensee to assume, or assume and assign (sell) the license, despite the obvious financial benefits? You may be able to veto the licensee’s attempt to assume and/or assign, but the answer can vary widely depending on the kind of license and the court that decides the issue, so it is important to consult with a bankruptcy attorney on this issue.

On the other hand, if the licensee decides to reject the license, that is the Very Bad Scenario, and you the licensor will be lucky to get the proverbial ten cents on the dollar, often many months or years later.  In fact, you will normally need to file a claim with the bankruptcy court to receive even the ten cents.

There is one more layer to the bankruptcy cake, which is that the assumption/rejection rules only apply to the licensee’s debts as of the date of the bankruptcy filing.  There is a whole different set of rules that governs payments of royalties on sales made after the date of the bankruptcy filing—and yes, absent a bankruptcy court order, the licensee is normally allowed to continue exercising the license after the bankruptcy filing, even if the license says that it automatically terminates upon the licensee’s filing for bankruptcy.  Such so-called “ipso facto” clauses are automatically invalid under bankruptcy law.  A Chapter 11 licensee may pay you the full royalties on the regular schedule for post-filing use of the license, or you may need to have your attorney file a motion with the bankruptcy court for an “administrative expense claim,” which normally gets paid at more than ten cents on the dollar, but with no guarantee of a hundred cents on the dollar.

So, licensors, after the initial shock of the licensee’s bankruptcy wears off, remember that so far from being an automatic disaster, a licensee bankruptcy may put you in an even better position than you were before.  But whether you stand to realize ten cents or a hundred cents on the dollar, in order to maximize your recovery, make sure you have an attorney knowledgeable about bankruptcy law to guide you through an arcane and specialized process.

Welcome

Friday, January 1st, 2010

Welcome, and Happy New Year.

In 1975, tangible assets accounted for 83% of the value of the market capitalization of the S&P 500 corporations, and intangible assets only 17%.

By 2005, the ratio had flipped, and intangible assets – patents, copyrights, trademarks, research and development, sales and marketing information, commercial databases, etc. – composed 80% of the S&P 500 market cap, and tangible assets only 20%.

Intangible assets power the economies of the United States and most of the economically developed countries of the world.

Meanwhile, traditional industrial manufacturing suffered more body blows in 2009, symbolized by the bankruptcies of the once mighty General Motors and Chrysler. Basic manufacturing continues to be outsourced to low cost factories in China, basic services to low cost service centers in India.

But broadly speaking, intangible assets have no existence and little value apart from what the law says they have. You can put a fence around your house, but it is very difficult to define and protect your economically valuable ideas without reference to the laws of patents, copyrights, trademarks, etc. So to understand the economy of the 21st century, it helps to understand intellectual property law.

And the means of doing business in the information economy have become more abstract and legalistic as well. The modern vessels of trade are not the clipper ships of the mercantile era or the iron horses of the heavy industrial era, but legal documents that define, protect, and transfer legal rights to intellectual property.

Specifically, intellectual property contracts, and especially license agreements.

This blog is an attempt to follow and make sense of the fascinating interplay among licenses, intellectual property law, and the global economy in a straightforward, non-technical, and (hopefully) humorous way.

It will take excursions into related areas of interest, such as bankruptcy. Capitalism has been described as “creative destruction”—the new and efficient destroying the old and inefficient, mixing progress and wealth with failure, dislocation, and unemployment. The information economy has if anything accelerated this process. If licenses are facilitators of the creative side of information economy, then bankruptcy is a facilitator of the destructive side, recycling assets of destroyed businesses to more efficient uses.

Another area of interest is Japan. The world’s second most advanced economy after the United States, Japan has often fashioned completely different yet equally successful solutions to social and economic problems faced by both nations. My interest in Japan has fuelled a 30 year study of Japanese language and culture, and by publishing some posts in Japanese, I hope to get feedback and ideas from Japanese friends and friends-to-be.

So let’s get started.