How many times have we woken up to the smell of piping hot coffee? Flowers from the garden? The smell of mud after first rains? The smell of nature? The smell of home-cooked meals. It is small wonder then that perfumes are coveted by us. The smell of citrus, ginger, cinnamon, vanilla, exotic fruits and flowers all captured in a tiny vial that often cost heaven and earth.

Historical records indicate that the use of perfume dates back to the ancient Egyptians, Romans and the Chinese when it was used as a seduction tool, to mask odors or for other industrial functions. These days a variety of forms of fragrances can be found in the consumer market to cater to the slightest preferences. A $6 billion industry is built upon a thousand different fragrances, according to the Fragrance Foundation in New York.

The name of a perfume is usually trademarked, the packaging may be protected trade dress, the text on the box may be copyrighted, and certain synthetic olfactory elements or even the bottle could be patented. The liquid or the fragrance itself has never enjoyed any such protection and neither has the fragrance itself.

U.S. possesses the maximum number of patents in the field of perfume composition and related technology. The first U.S. patent, US patent number 1017669, was obtained in 1810 with the most recent one being granted in 2006.  A trademark for perfumes, more commonly known as smell-marks is also not inconceivable. As mentioned earlier, smell-marks have been granted to tennis balls smelling like freshly cut grass or fuel additive that smells like grape, cherry or strawberry.

The recent development in the field of intellectual property law has seen litigation for copyright protection of perfume. Netherlands Court has recently recognized copyright in perfume while French Court held that there is no skill involved in making a perfume. An uneducated statement for a $ 6 billion industry!

With respect to perfumes, is it the smell itself that is copyrighted? The smell however is intangible and according to statutes all over the world, copyright is always offered for a tangible expression. If copyright protection is sought for the composition, then we are claiming protection for naturally occurring substances, or what is essentially publici juris.

There are four points about smells that should be made. First, a smell can, in theory, be protected as a trademark. Second, as mentioned, a smell is very difficult to define in words so that people in the trade often use the proprietary names of fragrances to describe them. Third, the skin of the wearer can alter the smell of a particular perfume. Fourth, the wearers of perfumes can recognize their own favorites by the smell alone, without sight of the bottle or packaging.

In the earliest case of Bsiri-Barbir v. Haarmann & Reimer (Cour de Cassation, Paris, France [2006] E.C.D.R. 28) (where it was held that perfumes cannot be copyrighted), recourse was sought with the following provisions of the French copyright law:

Protected Work

Article L.112-1

The provisions of this Code shall protect the rights of authors in all works of the mind, whatever their kind, form of expression, merit or purpose.

Article L.112-2 of the French Copyright Act

(Act No. 94-361 of 10 May 1994 art. 2 Official Journal of 11 May 1994)

The following, in particular, shall be considered works of the mind within the meaning of this Code:

  • books, pamphlets and other literary, artistic and scientific writings;
  • cinematographic works and other works consisting of sequences of moving      images, with or without sound, together referred to as audiovisual works;
  • works of drawing, painting, architecture, sculpture, engraving and lithography;
  • graphical and typographical works;
  • photographic works and works produced by techniques analogous to  photography.

The petitioner had developed some perfumes for the defendants. She approached the Court of Appeals, Versailles (Cour d’appel de Versailles) to seek copyright protection for her work of creation. The Court of Appeals dismissed her claims stating that such works did not come under the purview of copyright.  The appellant then appealed to the Supreme Court.

The Supreme Court held that a perfume does not constitute the creation of a form of expression that can be copyrighted under the heading “work of a mind”. It is mere technical know-how. This was an unprecedented decision. France is supposed to be a pioneer of perfumes and scents since time immemorial. One would have assumed that a nation with a history rich in production and use of perfume would be aware of the intellectual property in the form of copyright vested in a perfume.

In Lancôme v. Kecofa ([2005] E.C.D.R. 5), he brief facts are that Lancôme is a French company that manufactures a perfume sold under the trademark Trésor. Kecofa, a company from Netherlands, manufactures a very similar perfume under the name Female Treasure and sells it at one tenth the price. Lancôme lost the trademark infringement case.

Issues under consideration:

  1. whether copyright subsists in a perfume;
  2. ownership of the any such copyright;
  3. which country’s national law should determine the issue of ownership; and
  4. whether any such copyright had indeed been infringed.

Our concern is mainly whether perfume can be copyrighted and how does one go about proving infringement. All other issues are not crucial and relevant to the objective of this paper.

One must start by differentiating between fragrance and scent. A scent is something associated with a specific chemical combination of substances or a particular substance or in other words it is the effluvia from a substance that affect the sense of smell. A fragrance on the other hand is a sweet or delicate odour and capable of being detected using human olfactory senses.

The main difference between scent and perfume is that scent has a wider application because it is more neutral in connotation. The decision of the court was that scent can be copyrighted while perfume is not. The reason is that a mere fragrance is too volatile and dependant on ambient factors. It is also very subjective. A scent on the other hand, depends on a particular combination of substances and is therefore considered copyrightable. A scent is considered stable and substantial enough to be copyrightable.

This is the first time a physical chemical analysis was used. A list of all the olfactory substances used in the two products was made. It was found that 24 out of the 25 substances were identical. The 25th substance used in Female Treasure was a substitute for the one used in Trésor. This is not a coincidence as three-quarters of the participants could not distinguish one scent from another.

Court held infringement on Trésor.

In a more recent case of L’Oreal SA v. Bellure NV ([2007] R.P.C. 14), this was a case primarily dealing with trademarks, imitation perfumes, trade-dress infringement. However a major issue addressed was the concept of “smell – alikes”. L’Oreal and its three brands- L’Oreal, Garnier and Lancôme, brought an infringement suit against a Belgian company for making imitation perfumes. These perfumes were sold for a very low price and this affected L’Oreal’s clientele.

A perfume that mimics the smell of a well-known perfume is a smell-alike. In theory copying a smell that is not protected under either trademark or copyright would be considered passing off, or if protected then it would constitute as infringement. However until the Lancôme case, smells or fragrances were not considered copyrightable. Therefore the question of infringement on copyright on perfume did not arise. In L’Oreal v. Bellure it was held that the look-alikes constituted trademark infringement. However smell-alikes did not have any protection. It was L’Oreal’s trademark protection that was recognized in the Bellure infringement case. In various instances the Court compared the packaging and the advertising technique that lured and deceived the customers. This case essentially means that perfume manufacturers cannot rely on their unique creations being protected but must depend upon the packaging and trademark to distinguish their products.

The quandary therefore is whether a smell should be construed as an idea or expression.

In a perfumer’s parlance, one talks about the top, middle and bottom (or dry down) notes. The top note of a fragrance is the first olfactory impression a fragrance has on a consumer. It is what the user will remember of the fragrance; and is often the only smell that they will experience. It lasts for between fifteen minutes and an hour. The middle note will last for between one and three hours. It is what other people will smell. The bottom note will last for between six and eight hours. A consumer will be particularly sensitive to changes in the top note. The differences in the longevity of the top, middle and bottom notes mean that any comparison between fragrances must include examination of the fragrance at intervals.

With such varying degrees of fragrances and the time for which they last, it would be a Herculean task to award copyright to fragrances. Added to this is the fact that perfumes derive their smell from things that already exist- thus defying the originality and creativity mandate. This was the Cours de Cassation’s rationale.

However the Dutch court’s rationale essentially discards the idea-expression dichotomy and grants protection to the originality factor in the creation. The downside of the Dutch Court’s judgment is that it awards copyright protection to a scent, not fragrance. The scent is essentially the composition of the fragrance. The Dutch court has awarded protection for the materials used in a particular combination stating that such a composition is stable and easily discernible. However a fragrance is too fleeting and ethereal to be protected. The ration behind the decision is not accurate as a fragrance is just as discernible as a scent.

The Dutch court’s decision is akin to saying a painting may not be copyrighted merely because it could possibly be viewed by a colour blind person, or as the lighting and angle of viewing changes the perception changes and therefore it is fleeting in nature.

The Cours de Cassation termed the concept of fragrance as a mere intangible idea and did not consider the creator’s (perfumer) work as original or worthy of granting protection.  The world is in need of stricter codification of laws. With the advent of technology, new concepts are seeing the light of day each day. All of these concepts taking a tangible form cannot be ignored or sidelined by invoking idea-expression dichotomy.

While it is true that each scenario, each infringement is unique and must be judged on a case-to-case basis, laws must be codified to avoid an infringer benefiting from the lack of laws. More importantly, once there is creative input, that creativity and originality must be protected.

In making a perfume, no doubt the smell is not a product of the creator’s mind. However, the fact that he identified the ability of a substance to emit a certain fragrance and the fact that the fragrance can be commercially exploited, the fact that the creator brought together a number of substances to give a particular smell must be recognized. The smell of lilies for example, or a smell resembling an older perfume cannot claim copyright. However what must be protected is the twist of originality given by the creator. Creation of a perfume is after all no lesser an art than say writing a book or painting a picture.

Today’s post is by Guest Barista Shalini Menezes of ::O.bi:t.er: D:ic.t:um.

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The ability of an intrepid inventor to strike it rich from a great idea seems to be embedded in the DNA of many Americans.  Perhaps this view emanates from the presence of patents in the US Constitution, which could create a feeling that US citizens have an “inalienable right” to use patent protection to their advantage.  Alternatively, people may perceive the occasional media reports of successful inventors and substantial patent litigation awards as a signal that patents can serve as a path to wealth for those with great ideas (certainly, this is the Hollywood view).

In truth, however, getting rich merely from a patent is a rare occurrence–maybe not as low a probability as winning the lottery, but the odds are incredibly long that any person can make money from a patented idea alone.  Think about it: if all it took was a patent to make someone wealthy, there would be a heck of a lot more rich people in this country given the huge numbers of patents that are granted by the US Patent Office every year.

There are many reasons why the idea getting rich from patenting an idea is overstated, several of which I have discussed before on this blog.  This posting will specifically address why patent litigation as a business model is a non-starter for making most inventors wealthy.

To this end, I was recently contacted by an inventor with several issued and pending patents covering an innovative solution for homeowners.   The patents and applications were well-written and, unlike many other patents I have reviewed lately, the innovation was well-covered such that it would be difficult for someone to make the same product without infringing my client’s patents.  My client had spent much money over the years on this solid patent coverage, but, due to health issues, he lost his ability to continue working on bringing the product to market.  The client believed that infringement was occurring, and he and his patent attorney were under the impression that they would be able to get an investor to fund patent infringement litigation or have an attorney take the lawsuit on a contingency basis.

Like many inventors, my client assumed that he could make money from a patented idea by suing people using his patented idea without permission.  However, this is probably the least likely way someone can make a profit from their patent.  The average patent litigation lawsuit with from $1 to $25 Million at risk costs each side more than $2.5 Million through trial. Even if the case does not go to trial, it is unlikely that the lawsuit will settle prior to completion of the pre-trial or “discovery” phase where evidence is collected, analyzed and argued in attorney briefs.  For cases that go only through this discovery phase, costs are around $1.8 Million. With most patent litigation attorneys costing upwards of $400 an hour, and patent cases generally incorporating several attorneys per side on a regular basis, I have seen patent litigation attorneys bill their clients several $100K per month starting immediately after the case is filed.  Thus, even if a case settles relatively early, both sides must expect to incur substantial attorneys fees.  Accordingly, patent owners cannot expect to generate any revenue from suing an infringer without significant cash outlays.

Assuming that the defendant’s product infringes my client’s patents and his patents stand up to the inevitable invalidity attack, what could my client expect to obtain if he wins?  Notwithstanding large damage awards reported in the press, such as the more than $600 Million ruling against the manufacturer of the BlackBerry(R), most patent damage awards are much lower.  Patent damages are awarded on the basis of how much value the defendant is obtaining as a result of its infringing activity.  As a result, damages are awarded in large part on the royalty rate the defendant would likely pay my client license to the patent at issue.  (Apologies to patent litigation experts on this broad generalization of patent damage calculations, as there certainly is vast and complex case law on how to calculate damage awards.  Certainly, much legal effort and cost is spent trying to increase or decrease the damage award in each particular lawsuit.  But, at the end of the day, most damage awards likely come down to the reasonable royalty rate in the particular industry in which the patent falls.)

So, let’s now talk about royalty measurements; that is, how much can my client expect from licensing his patent rights?  While the rate varies markedly among industries and situations, most royalties are in the relatively modest range of 4-8 % of gross sales (of course, gross sales is a broad measure, but we’re being very generous for the purposes of this discussion).  I generated this royalty rate range as a result of many discussions over the years  with fellow patent practitioners.  For more information on royalty rates, this Wikipedia entry is helpful.

Taking a very conservative patent lawsuit cost of $1 Million, my client would need to obtain $1 Million from the defendant to break even.  To obtain this amount, the total gross sales of the infringing product upon which the royalty calculation is made would have to be $25 Million for my client to recover his costs.  For an 8 % royalty, the total sales would have to be $12.5 Million to break even.  Of course, for my client to make a profit, the gross sales of the infringing product would have to be more.  The reader should also note that these hypothetical sales figures ignore sales write downs that reduce the gross sales upon which the royalty amount would be based.

Certainly, there are many products with markets of $25 Million or more.  Also, there are many technologies that are used as central aspects in a single product made by many manufacturers.  Smart phones are an example of an area where a core technology is used by several manufacturers, so a patent owner in this area could possibly generate mutliple large damage awards, settlements or licensing fees for a single patent.  However, most patents cover products that have fairly limited market potential and, as a result, there is a low probability that the patent owner will break even from patent litigation costs, let alone make a profit.  This is the case with my client’s patent rights.

For the product covered by my client’s patent rights, total market potential is probably no more than $50 million over the life of the innovation.  This is a solid number, and certainly a reason to build a business around the product.   However, the current market is small and it will grow only slowly over the next several years.  Infringement of his patent rights may be occurring today.  Nonetheless, the reality is that, even if my client could afford to bring a patent lawsuit today, the costs of bringing and maintaining the lawsuit far outweigh any financial recovery that my client could obtain by prevailing.

My client cannot fund his own litigation expenses, and was interested in identifying possible alternate sources of funding.  Given the real numbers involved in my client’s situation, it would make little sense for a lawyer to take his case on contingency.   While the case may be a “winner” in the end, the lawyer would be fronting fees and costs for my client, and he likely would be investing several years in the lawsuit only to share in a relatively modest damage award in the end.  It is therefore doubtful that any patent litigation attorney would give my client’s case a second look on a contingency basis.

It is even less likely that my client could obtain an investor to pay the costs of litigation on his behalf.  Given the risks involved in patent litigation (see these estimates where the patentee prevails only 25% of the time), as well as the time and cost involved in winning, patent litigation is a poor choice for an investor.  So, my client is out of luck in getting someone to fund his patent litigation as an investment vehicle.

In summary, even though my client owns strong patents covering a great innovation that will succeed in the market, it is doubtful that he will ever be able to generate an income by merely enforcing his patent rights.  His best hope for earning money from his innovative product is to sell his patents outright to a company that wants to make and sell the covered product.  This company will be in a much better position to build the market for the product and would likely be more motivated to police the patent rights in order to keep its competitors at bay.

In other words, by patenting an innovative product, my client obtained the right to prevent others from copying his invention, but not the means to do so.  A stark reality, certainly, but a critical thing for inventors to understand.

Today’s post is by Guest Barista Jackie Hutter, Proprietor of the IP Asset Maximizer Blog and Chief IP Strategist at The Hutter Group, LLC, and was first published on the IP Asset Maximizer Blog.

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A featured document in the Docket Report recently highlighted an Amended Opinion by Judge Cavanaugh of New Jersey:

“The court granted plaintiff’s motion for summary judgment of indirect infringement based on defendants’ use of a label containing “instructions on how to use the product in a manner that encourages acts of infringement” even though “doctors prescribe the drug for a number of non-infringing uses” and defendants used the label only because it was required by the FDA. “Here, the accused infringers will be labeling the product in a manner which encourages direct infringement by others. . . . This objective evidence is critical in determining whether intent to cause infringement exists, and such evidence is sufficient to establish Defendants’ intent.”

Eli Lilly and Co. developed and markets STRATTERA brand atomoxetine capsules.  received a patent on a method of treatment patent, which issued as U.S. Patent No. 5,658,590, entitled “Treatment of Attention-Deficit/Hyperactivity Disorder.”  The ‘590 Patent contains 16 claims. Claim 1 is the only independent claim
and it reads:

“[a] method of treating attention-deficit/hyperactivity disorder comprising administering to a patient in need of such treatment an effective amount of tomoxetine.”

Claims 2-16 recite more particular methods of treating ADHD.  The ‘590 patent does not claim tomoxetine itself.  All claims of the ‘590 Patent require tomoxetine to be administered to (1) a patient in need of treatment and (2) in a so-called “effective” dose. The  patent specification states that the dose administered to the patient “must be set by the physician in charge of the case.”

Lilly contends that each of the Defendants’ act of filing an ANDA constitutes infringement under 35 U.S.C. з 271(e)(2)(A). Lilly further contends that the Defendants intend to commercialize generic atomoxetine products defined in their ANDAs if they receive FDA approval. Lilly argues that the commercialization of generic atomoxetine before the expiration of the ‘590 Patent would constitute further infringement of the ‘590 Patent under 35 U.S.C. 271(a), (b), and/or (c). Defendants asserted that Lilly’s patent is for the treatment of patients by physicians which is something the Defendants do not do. Defendants further argued that 35 U.S.C. з 271(e)(2)(A) does not create a new or independent infringement test and that they did not and cannot infringe Lilly’s patent.

Subsection 271(e)(2)(A) of the Hatch-Waxman Act “provides an ‘artificial’ act of infringement that creates case-or-controversy jurisdiction to enable the resolution of an infringement dispute before the ANDA applicant has actually made or marketed the proposed product.” Warner-Lambert Co. v. Apotex Corp., 316 F.3d 1348, 1365 (Fed. Cir. 2003). This provision of the Act is about ripeness and establishing jurisdiction. It is well settled that “the substantive determination whether actual infringement or inducement will take place is determined by traditional patent infringement analysis, just the same as it is in other infringement suits.” Id. Thus, while filing an ANDA is sufficient to trigger an action under 35 U.S.C. 271(e)(2), this subsection “does not determine the ultimate question whether what will be sold will infringe any relevant patent.” Glaxo, Inc. v. Novopharm, Inc., 110 F.3d 1562, 1569 (Fed. Cir. 1997).

Eli Lilly and Company v. Actavis Elizabeth LLC, 2-07-cv-03770 (NJD December 31, 2009, Amended Opinion (Cavanaugh, J.).

Today’s post is by Guest Barista Amy Towell of  Docket Navigator.

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On January 13, the Federal Trade Commission (“FTC”) Chairman Jon Leibowitz held a press conference with Congressional members Chris Van Hollen (D-MD), Bobby Rush (D-IL), and Mary Jo Kilroy (D-OH) arguing that health care reform legislation should include a prohibition to the patent settlements referred to as “reverse payment settlements” or “pay-for-delay settlements”.

Reverse payment settlements occur during patent litigation between an innovator company with a drug protected by a patent exclusivity and a generic company challenging the validity of that patent.  Generally under these settlements the generic company will agree to drop its challenge to the patent and agree not to launch a generic drug during the patent exclusivity period in exchange for financial compensation from the innovator company.

On the same day as the press conference, the FTC also released a report that concluded that reverse payments delayed generic entry of drugs by 17 months and that reverse payments cost American consumers $3.5 billion per year.  The report also hinted that the FTC viewed  agreements by an innovator company not to launch an authorized generic during 180-day exclusivity period in exchange for delayed generic entry as anticompetitive.

The report also implied that FTC would have challenged more reverse payment settlements except for the fact that it did not have enough resources.  As the report states “The FTC has challenged some of these agreements [that involve restrictions on generic entry that were combined with compensation from the brand to the generic] as violating antitrust laws, but the agency lacks sufficient resources to investigate and litigate the legality of all of these agreements.”

FTC’s actions come on the same day that it was reported that competition officials from the European Commission were increasing their investigation of reverse payment settlements in Europe.

Passing health care reform legislation currently depends upon Congress’s ability to resolve the differences between the Affordable Health Care for America Act (H.R. 3962) that passed the House of Representative on November 7, 2009, and the Patient Protection and Affordable Care Act (H.R. 3590) that passed the Senate on December 24, 2009.  It has been reported that the Senate and House are planning to have informal talks to create a combined bill rather than consolidate the two bills through a formal conference committee.

How the two bills are reconciled will have a large influence over the continued survival of reverse payment settlements because the House bill generally outlawed these agreements while the Senate bill did not contain any provisions regarding reverse payment settlements.

The Affordable Health Care for America bill that passed the House of Representatives has provisions specifically dealing with reverse payment settlements (See Sec. 2573 Protecting Consumer Access to Generic Drugs Act). These provisions would generally make it unlawful:

“[F]or any person to directly or indirectly be a party to any agreement resolving or settling a patent infringement claim in which (i) an ANDA filer receives anything of value; and (ii) the ANDA filer agrees to limit or forego research, development, manufacturing, marketing, or sales, for any period of time, of the drug that is to be manufactured under the ANDA involved and is the subject of the patent infringement claim.”

The House bill does allow a patent suit to settle when the ANDA filer only receives either: (1) the right to market the drug that is the subject of the patent infringement claim before the expiration of remaining patent exclusivity or other exclusivity; and/or (2) the waiver of a patent infringement claim for damages based on prior marketing of such drug.

The House bill also gives the FTC the authority to enforce these provisions and to create exceptions through rulemaking to the general prohibition of reverse payment settlements if the FTC finds that certain agreements may be beneficial to consumers.

Because the recently passed Senate health care reform bill does not have any provisions dealing with reverse payment settlements, some Senators have already started lobbying to include a provision to outlaw reverse payment settlements in the final health care reform bill.  Recently it was reported that Senators Herb Kohl (D-WI), Amy Klobuchar (D-MN), Jeanne Shaheen (D-NH), Al Franken (D-MN) and Byron Dorgan (D-ND) wrote to Senate leaders asking them to include a provision outlawing reverse payment settlements in the final health care reform bill.  Kohl has stated that the issue of reverse payments settlements would be on the table if the two bills go to a conference committee.

Even if the final health care reform bill does not include a general ban on reverse payment settlements, Congress may take up the issue in later legislation since many Congressmen have continuously stated their open opposition to these agreements.

In the past, various Congressmen have introduced legislation independent of health care reform that would ban these reverse payments settlements (See Senate Judiciary Committee Passes Amended Bill Banning Pay-For-Delay Settlements) or ban related agreements between innovator companies and generic companies that would allow the generic company to launch an authorized generic version of the innovator drug during certain exclusivity periods (See Bill Introduced to Prohibit the Marketing of Authorized Generic Drugs).

Today’s post is by Guest Barista William Garvin, an attorney at Buchanan Ingersoll & Rooney in Washington, DC, who specializes in FDA law.

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Commentators like me frequently rail against what we view as the often unnecessarily high cost of obtaining patent protection. In truth, many patents are overpriced and provide questionable business value to their clients. Over-priced patents do not form the basis of this article, however. Instead, this is about the opposite phenomenon, i.e., under-priced patents. Specifically, in this article, I describe a company’s desire to obtain low cost patents and what such a patent strategy may reveal about its long term viability.

I was recently contacted by a large printer manufacturer (“PrinterCo” for the purposes of this discussion) to see whether I was interested in preparing patent applications for the price of $1300 each. This price seemed somewhat ridiculous to me because even the most “bargain basement” patent preparation prices that pop up on my Google sidebar advertising do not seem to dip beneath a threshold level of $2800. And, as a high level chemical patent prosecution attorney, I routinely drafted patent applications that cost $15K or more in 2005. PrinterCo’s desire to obtain patent applications for $1300 thus both surprised and intrigued me, and I wanted to learn more about what type of patent application its management sought for this price.

That PrinterCo was seeking to obtain patent drafting services at a lower price than I would expect might be explainable because many IP strategy savvy companies seek to maximize their freedom to operate by filing patent applications that they never intend to see through to issuance. This “publish and abandon” approach can effectively prevent others from obtaining patent rights that can block a company like PrinterCo from freely developing products in a particular technology area. However, because these patent applications are not drafted with the intent to issue, the filing company will not end up with enforceable rights. Nonetheless, “freedom to operate” afforded by publishing and abandoning applications addressing a relevant technology can serve as a valuable right in itself. It thus made sense to me that PrinterCo might seek to file a large number of patent applications to strategically prevent other companies from patenting in its technology space.

A “freedom to operate” patent application can certainly be prepared in about 8-10 hours by someone with a few years of experience. Therefore, $1300 would not result in a terribly low hourly rate for someone working out of his home with little or no overhead. “Freedom to operate” is all that can reasonably be expected in this time, however, because even the most experienced person requires time to understand the invention to be claimed and to properly draft claims that will avoid the prior art. Indeed, because it takes time to read prior art references, one cannot understand the relevant prior art in a total of 8-10 hours, especially in crowded areas such as printer, ink and cartridge technology relevant to PrinterCo’s business.

Fully expecting the $1300 to apply to such a freedom to operate strategy, I was quite honestly shocked to find out that PrinterCo fully intended to see patent applications drafted for this price through to issuance. Furthermore, PrinterCo’s managing patent attorney stated that he expected to obtain patents from this process that could be the subject of future litigation. After hearing this strategy, I politely declined PrinterCo’s proposal and wished the attorney farewell, as I saw no way I could ethically meet PrinterCo’s objectives.

Frankly, even if PrinterCo had wanted me to prepare “freedom to operate” patent applications for $1300, I likely would not have done so. I was actually more interested in learning about this company’s patent strategy in view of this ridiculously low price. And, now that I know, it appears clear that PrinterCo is pursuing a short-term cost reduction strategy directed toward allowing it current management to meet cost cutting goals, at the expense of the long term asset value of the company. Let me explain what I mean by this. . . .

For the last several years, printer companies have engaged in aggressive patenting strategies that effectively require printer users to purchase ink refills exclusively from them. Companies such as PrinterCo likely lose money on printers, scanners, etc., but make huge profits on patented ink cartridge refills that work only in their proprietary equipment. (In 2008, it was estimated that printer ink costs from $3K to $7K per gallon.) Moreover, these companies have undertaken expensive patent litigation directed to preventing third parties from selling “generic” printer ink refills.

Critically, such a business strategy requires any patents covering the ink and cartridge refills be skillfully drafted such that the claimed invention cannot easily be designed around without the copier also incurring of patent infringement liability. Moreover, the profit margins involved in printer ink cartridge refill sales are such that third parties will clamor to knock-off refills for any top selling printer or scanner if the underlying patent protection is weak. If PrinterCo or its competitors now abandon their aggressive patenting strategies, competitors will certainly see an opportunity to introduce knock-off ink and cartridge refills, and erosion of their profit margins will invariably occur.

Other than making PrinterCo’s current legal management look effective in cutting legal budgets in today’s economic climate, I cannot fathom why this company is trying to lower its patent application costs to the ridiculously low price of $1300. PrinterCo’s ability to maintain its profit margins depends on its obtaining strong patent rights. A substantial aspect of PrinterCo’s corporate asset value lies in its ability to prevent others from knocking off its printer cartridge ink refills. In other words, PrinterCo’s patent strategy serves as the foundation for the company’s ability to execute on its business strategy. It is thus nothing short of idiotic for PrinterCo to allow its legal managers to treat its patent application drafting processes as vehicles for cost control, where the motivation for the reduction in patent costs is certainly the legal staff’s meeting of their cost cutting objectives.

Put simply, PrinterCo’s corporate asset value is jeopardized by its legal managers self-serving objective to lower the company’s patent costs. If PrinterCo continues to pursue this low cost patent application strategy, I predict that its cartridge ink refill business will quickly become commoditized as a result of low cost, non-infringing competitive knock offs. And, since the public expects PrinterCo’s printers, scanners etc. to be low priced, there will be little ability for the company to obtain premium margins on its product lines. In short, PrinterCo quite likely might find it difficult to remain viable in the coming years due to its current short-sighted patent strategy. Hopefully, PrinterCo’s management, both legal and otherwise, are still around when shareholders realize that the company’s patent strategy has resulted in the company no longer being a viable specialty products company. I would love to see them held accountable for such mis-management.

Today’s post is by Guest Barista Jackie Hutter, Proprietor of the IP Asset Maximizer Blog and Chief IP Strategist at The Hutter Group, LLC, and was first published on the IP Asset Maximizer Blog.

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Section 292 of the Patent Act provides that a person who falsely marks an unpatented article as being patented, where the false patent marking was done with an intent to deceive the public, [s]hall be fined not more than $500 for every such offense. See 35 U.S.C. § 292(a).  The statute permits a qui tam action whereby any private citizen can sue to recover the penalty and retain for itself half of the penalty. Over the last few years, the false marking statute has gained a modicum of popularity as plaintiffs, including in some cases private patent lawyers, have brought false marking claims against defendant patentees who have marked products with expired patent numbers. Indeed, some commentators have described these plaintiffs as a new breed of troll, the marking troll. For a time the incentive to bring false marking claims was held in check by a limiting judicial construction of what constituted an offense for which the penalty could be quantitatively assessed.

Following a hundred year old decision construing the predecessor statute to § 292, London v. Everett H. Dunbar Corp., 179 F. 506, 507-09 (1st Cir. 1910), the majority of district courts addressing the issue of what is an offense under § 292 held that a continuous act of false marking, e.g., marking an entire single production run, counted as only one offense regardless of how many products were improperly marked with a patent number during the continuous act. See e.g., A. G. Design & Associates, LLC v. Trainman Lantern Co., Inc.  Consequently, the financial incentives for a plaintiff to bring a false marking suit were minimal under this construction of offense. That has now changed. The Federal Circuit‘s opinion in Forest Gp., Inc. v. Bon Tool Co., No. 2009-1044, 2009 WL 5064353 (Fed. Cir. Dec. 28, 2009), overrules these district court cases and holds that the penalty of § 292 must be assessed on a per article/product basis with the district court setting the amount of the penalty anywhere from a fraction of a penny to $500 per falsely marked article.

In Forest Group, the patentee sued an accused infringer for patent infringement based on an accused product that was described as being an exact replica of the patentee’s commercial product. The patentee had marked its product with the patent number. During the lawsuit, the accused infringer obtained a summary judgment of noninfringement. After the summary judgment was handed down the patentee commissioned another production run of its commercial product and had the newly made products marked with the patent number. The district court found that the patentee committed false marking for this new production run because it clearly knew the commercial product did not meet the patent claims. While finding a false marking violation, the district court held that there was only one continuous offense, and therefore assessed the total penalty at $500.

On appeal the Federal Circuit vacated the penalty award because the district court erred in ruling there was only one offense of false marking. Applying a de novo review of the district court‘s construction of the statute, the Federal Circuit, in an opinion penned by Judge Moore, held that the text of the statute clearly requires that each article that is falsely marked with intent to deceive constitutes an offense under 35 U.S.C. § 292. Id. at *3 . The court also noted that [u]nder the current statute, district courts have the discretion to assess the per article fine at any amount up to $500 per article. Indeed, the court explicitly instructed that [i]n the case of inexpensive mass- produced articles, a court has the discretion to determine that a fraction of a penny per article is a proper penalty. Id. at * 6. In view of this sliding scale approach to the amount of the penalty, the Federal Circuit noted that district courts have ―the discretion to strike a balance between encouraging enforcement of an important public policy [i.e., ensuring that acts of false marking do not stifle competition or innovation] and imposing disproportionately large penalties for small, inexpensive items produced in large quantities. Id.

In reaching its holding, the Federal Circuit rejected the patentee‘s arguments that the per-article standard should not be adopted because it would encourage a new cottage industry‘ of false marking litigation by plaintiffs who have not suffered any direct harm. Id. at *6.

Some courts have noted that plaintiffs asserting false marking claims must demonstrate an injury-in-fact to the government to have standing to assert a claim. Stauffer v. Brooks Bros., Inc., 2009.  Anyone can Assert Violation (discussing Stauffer and other cases limiting recovery for qui tam suits). If accepted by other courts, this injury-in-fact standard may limit the ability to assert some false marking claims.

Although acknowledging that an amicus brief was filed in th[e] case by an individual who created a holding company to bring qui tam actions in false marking cases, the Federal Circuit noted that [r]ather than discourag[ing] such activities, the false marking statute explicitly permits qui tam actions. Id. The court further justified its per-article standard by noting that [p]enalizing false marking on a per decision basis would not provide sufficient financial motivation for plaintiffs-who would share in the penalty—to bring suit. Id.

Forest Group gives a green light to opportunistic plaintiffs to assert false marking claims when they believe they can show deceptive intent or, more likely, where they believe they can at least articulate a basis to plead a claim that passes muster under Rule 11 and can survive a Rule 12(b)(6) motion to dismiss.

The Federal Circuit has yet to address whether a false marking claim, with its requirement that the false marking be done with the purpose of deceiving the public, should be subject to the heightened pleading requirements of Rule 9(b), in the same way that inequitable conduct, with its requirement to show an intent to deceive the PTO, must meet the Rule 9(b) standards. See Ferguson Beauregard/Logic Controls v. Mega Sys., LLC

The per-article standard may give hope to these plaintiffs of a big payday (albeit one they must share with the federal government) if the defendant has mass produced the alleged falsely marked product. It may also prompt more accused infringers to assert false marking claims as a routine counterclaim to an infringement suit where the patentee markets a product allegedly covered by the asserted patent.

Forest Group makes clear that district courts have discretion in setting the rate of the penalty. However, other than stating that a district court should strike a balance between encouraging enforcement of an important public policy and imposing disproportionately large penalties for small, inexpensive items produced in large quantities, Forest Group does not provide any practical frame work to guide district courts in setting the amount of the penalty. One court may determine that a penalty of one cent per article on one million falsely marked products is proper, while a second court, on the same facts, could find that one dollar is the proper rate, thereby imposing a penalty 100 times larger than the first court. Given the uncertainty in how district courts will set the penalty rate, plaintiffs may feel that they effectively have a chance to spin a false marking roulette wheel and may eagerly do so by filing questionable suits. Plaintiffs may also prey on the uncertainty defendants will face in assessing the possible financial magnitude of a penalty as a means to intimidate or harass defendants into settlements.

In addition to leaving open the question of how to set the per article penalty, the standard in Forest Group fails to address how the penalty should be assessed if the act of false marking does not involve a product that is falsely marked, but only involves an advertisement that falsely identifies the advertised product as being patented. In that scenario should the court assess the penalty on each piece of advertising distributed or broadcasted to the public, on each unmarked product allegedly sold as a result of the improper advertising, on the number of people who saw the advertisement, or some other basis? What happens if the advertising is posted on a website: does the posting count as a single advertisement, or does each click on the webpage count as its own punishable act of false marking? Courts in other legal contexts have followed a single publication rule for such web-based claims. But the single publication rule appears similar to the continuous marking rule the Federal Circuit rejected in Forest Group. These and other questions will surely arise in the near future.

Forest Group does not change the substantive aspects of proving a false marking violation. But it likely changes the financial incentives for bringing false marking claims such that plaintiffs and accused infringers will assert these claims more often in litigation. Accordingly, those who counsel clients on patent matters should become intimately familiar with § 292, and be ready to advise their clients on how to avoid violating § 292 while complying with any duty the clients may have to mark under § 287(a) or having their licensees mark.

Today’s post is by Guest Barista Robert A. Matthews, Jr., Matthews Patent-Law Consulting.and was first published in his Patent Happenings® newsletter.

 

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The Program:

FastTrac® TechVentureTM is a hands-on business development program specifically designed to assist scientists, inventors, engineers and IT developers to commercialize an innovative and scalable technology, product or service.

FastTrac® TechVenture will be presented over a six-week period beginning Tuesday, February 23, 2010.  Each week different business development and management topics will be discussed:

  • Entering and Capturing the Market
  • Financial
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  • Protecting Your Intellectual Property
  • Identifying Funding and Working With Investors
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  • Professional business coaches and mentors will then work individually with each company to incorporate that topic into the company’s business process.

The Team:

FastTrac® TechVentureTM is sponsored by BIOSTART (an Edison Incubator), Hamiliton County Business Center (an Edison Incubator) and TechSolve (an Edison Center.)

The topic presenters, coaches and mentors are high powered, local business professionals who have launched successful careers and businesses.

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Dates: 2/23 through 3/30/10
Time: 8:00 am to noon
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1776 Mentor Avenue
Conference Room 160
Cincinnati, OH 45212

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Visit biostart.org/TechVentureCincy to complete an application

For more information regarding the FastTrac® TechVentureTM program, contact any of the following:

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Bruce Vaillencourt at TechSolve
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513.948.4026

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Eastman’s divestment of its PET business in the EU to Indorama ended up in Delaware federal court as the licensor’s patent infringement action.  Eastman Chemical Company v. AlphaPet Inc. et al. (09-CV-971).  Named as defendants are the Indorama licensees, and affiliates, and a U.S. subsidiary, AlphaPet.

The complaint raises interesting problems about a licensor suing licensees for patent infringement along with a trade secret breach by the licensor’s employees. It underscores the importance of a well thought out forum selection clause that extends to all the licensees and affiliates.

The divestment included a Technology Licensing Agreement, and the transfer of assets and Eastman employees to the licensees. The license limited Indorama to making PET only in its EU facilities. Trade secrets too were licensed, and allegedly, “with a few exceptions” the use was “restricted” to the EU plants. Later, Indorama set up a plant in Alabama, where its subsidiary Alpha Pet operated a “melt-to-resin PET manufacturing process.” The Complaint alleges on “information and belief” that former Eastman employees disclosed trade secrets “relating to the manufacture of PET during the design, start-up and/or operation” of the AlphaPet plant in Alabama. These former employees allegedly knew about the licensed PET technology, as well as other un-licensed IntegRex™ technology for PET.

It is not pleaded whether the allegedly infringed patents were licensed or not, or whether any of the pleaded patents cover the Eastman IntegRex technology.  (Note: Eastman’s IntegRex™ webpage offers “licensing opportunities, patent protection and technical support on a global basis”).

When employees breach an agreement or duty of confidentiality with their employer, the claim against the receiving party, for misuse of the confidential information, can be complicated. In general, notice of the breach, or some other ‘knowing’ misconduct by the recipient, must be proven. The Uniform Trade Secrets Act refers to acquisition by one “who knows or has reason to know that the trade secret was acquired by improper means,” which it defines to include “breach of a duty to maintain secrecy.”

Sure, the employee can be sued, but taking action against the recipient involves proving “improper means.” This can be more difficult when the recipient is a licensee, since a license sometime provides a complete defense. It is part a technical problem – sorting the licensed from the unlicensed technology – and part a problem of proving different elements of distinct business torts.

A further complication arises when an issued patent discloses the alleged trade secrets, or it teaches the essential technology transferred to the licensee. What the patent makes publicly known no longer is a trade secret. Water Tech. v. Calco, 850 F.2d 660 (Fed. Cir. 1988) (“patents issued … before Gartner’s disclosure … so that the information ‘misappropriated’ could not possibly be a trade secret”). Even against a non-licensee, public disclosure can be a complete defense to a trade secret claim. See, Ultimax Cement v. CTS, 587 F.3d 1339, 1354 (Fed. Cir. 12/3/09). Again, sorting out the licensed, from the patented, from the secret technology can be difficult to do, and even harder to explain in a courtroom.

Also, the suit reminds of how important a choice of forum clause can be. The licensed Indorama defendants are in several EU countries, with a U.S. subsidiary in Alabama, and the ultimate parent IRP being a Thailand company.

The parent, IRP, was not a signatory to the license, nor was the U.S. subsidiary AlphaPet. (Alpha Pet has no connection to the 2006 film, Alpha Dog, but it too dealt with a $$$ dispute). IRP is alleged to have “affiliate status” under the terms of the license, and so maybe hooked into the Delaware forum selection clause. By foresight or happenstance, AlphaPet is a Delaware corporation.

Check the last clause you reviewed to see whether it extends to affiliates who get access to the technology from the named licensee.

Today’s post is by Guest Barista Lee Thomason, an IP strategist and former FBT-er who teaches IP law at the UK College of Law.

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