• 30,626 civil cases related to IPR at first instance were received by the China national court system in 2009, up 25.49%
• Of the 2009 IP cases counted, 4,422 involved patent infringement, 6,906 involved trademarks, 15,302 involved copyrights, 747 involved technical contracts, and 1,282 involved unfair competition

While a direct comparison to U.S. IP cases is not available (I’m not aware of any such released statistics), the IAM Blog reports that PWC released a report that, in 2008, 2,896 patent infringement cases were filed in U.S. courts. 

An interesting comment to the IAM post was made by Michael Martin which asserts that, while these numbers are quite interesting (but not surprising), the best indicator of an effective IP system and IP value, rather than the number of IP cases filed, is “the cash being paid to patent owners for use of patented products and processes.”  I tend to agree. 

While I personally don’t have any basis for this fact, the IAM blog reports that “the vast majority of IP disputes in China are between Chinese companies and involve very small sums of money.”  If this is so, then the number of IP cases litigated don’t tell us much about the quality of Chinese patents or the effectiveness of its IP legal regime.  After all, the quality of IP increases as the level of protection readily afforded to that IP increases.  And of course, as the quality of IP increases (measured by the monopoly power deployed, and therefore the competitive advantage it creates), the value of that IP increases.  If the “vast majority” of this large number of IP cases in China are returning multi-million-dollar verdicts, or if licenses in China are being granted for great sums of money, then we will know that China’s IP legal regime has reached its potential.

(Pictured here is the underground “refrigerator” at the famous Concha Y Toro vineyard and winery in Santiago, Chile, where I visited with my family in December.  The seemingly unending row of barrels could represent the seemingly unending amount of IP cases the future holds for China . . .)

“On news of the Federal Circuit ruling TiVo stock immediately surged ahead well over $5, up over 50%. Within less than 1 hour TiVo stock when from trading just over $10 a share, trading at $10.31 at 11:06 am EST, to trading at $16.07 at 11:42 am EST, hitting an intra-day high at 1:18pm EST at $16.36, and establishing a trading range plus or minus $15.65, where it is at as of 2:46pm EST.”

And the sun rises again on the benefits of patent litigation . . .

Speaking of new sunrises, pictured here is a sunrise over the International Airport in Santiago, Chile.  I visited Chile in December with my family for my sister’s wedding.  She married a Chilean man whom she met in college here in the United States.  While this picture is fantastic in its own right, it has new meaning - a metaphor that the sun will still rise in Chile, and there will be a better day just around the corner.

(On another note, I have decided to start using the photography of my sister, an extremely talented photographer, for pictures on this site.  She has taken amazing photographs from all over the world, and I would like to share them with the IP Prospective readers.  I hope you enjoy them as much as I do.  For her entire catalog, see her site at Captured by Leslie.)

Admirers of Mr. Myhrvold, the scientist who led Microsoft’s technology development in the 1990s, see an innovator seeking to elevate the economic role and financial rewards for inventors whose patented ideas are often used without compensation by big technology companies. His detractors see a cynical operator deploying his bulging patent trove as a powerful bargaining chip, along with the implied threat of costly litigation, to prod high-tech companies to pay him lucrative fees. They call his company “Intellectual Vultures.”

What was most intriguing to me was the recognition of the larger issues - the core discussion in funding litigation and the efficiencies of NPE business models - as the article identified: “The issues surrounding Intellectual Ventures, viewed broadly, are the ground rules and incentives for innovation.”  Does patent hoarding incentivize innovation?  Does it strangle the very usefulness of patents and the competitive advantages they create for companies?  Or does it provide otherwise lacking and deserved economic relief for those that actually create - to innovate and invent?  Despite the fact that some might say Intellectual Ventures’ business model depends on the $5 Billion it has solicited in investments, it actually depends on the very patent legal system it capitalizes on - the right to enforce is the teeth to IV’s bite.  But what if the right to enforce a patent was conditioned upon the capability to use?  Or, the actual use?  Domain name owners must actually use the domain name to enforce their ownership, and cannot squat on it, or else that domain name can be taken out from under them and transfered by an arbitration judge.  This creates efficiencies in the internet space. 

The most efficient property rights theory is that property will go to those that value those rights the most.  But what if that value was not based on the price one might pay for the property in dollars, but the work one is willing to put into the property to add value to it?  Under Locke’s Labor Theory, the ownership of property should be completely tied to the exertion of labor upon that property.  One perceptive outsider might suppose, then, that under Locke’s theory, an NPE should own nothing. 

Be that as it may, dollars talk and when dollars are combined with the right to enforce a legal right, mountains can be moved.  And Myhrvold recognizes this.  Still, Intellectual Ventures can be seen in a different light - one that could capitalize on its intelligently crafted business model while also adding transparency and efficiencies to the market by providing the supply and demand sides of intellectual property with a common place to go to find/monetize intellectual property.  I emphasize could because of the very first sentence of this post - a quote from Myhrvold - displaying the mindset which cuts off the efficiencies that could be created.

Another interesting quote from the article is as follows:

[Myhrvold] calls patents “the next software,” noting that software did not become a market on its own until the 1980s, spurred by innovators and the enforcement of intellectual property laws. “I’m trying to get inventions that kind of respect as an economic entity,” he said.

To this end, and from this perspective, the work of Intellectual Ventures has been successful, and fascinating.  It has, after all, moved intellectual property forward in the minds of business persons as an asset class or commodity to be reckoned with.  If it all wasn’t done at the expense of operating company dollars and the patent system’s true purpose, maybe this feat would be recognized with less disdain.  The use of 1,100 secret shell companies and the little Intellectual Ventures does to add transparency to the IP licensing market also doesn’t help.  Therefore, while the value-added measurement of IV’s work to the IP market and to inventors should not go unnoticed, it will continue to be questioned - partly from curiosity, and partly from frustration.  I still believe that the true realization of the value of IV’s business model to the IP market has yet to occur - and forthcoming transparency initiatives will have a lot to do with that.

For some of Myhrvold’s own words on Intellectual Venture’s business model, its importance to the inventor community, and its value to the IP market, see this article in the Harvard Business Review, titled “The Big Idea: Funding Eureka!”   (Very enlightening).

(1)  In the case of a technology or other patentable subject matter, a patent must be assigned from the employee to an employer (since it is statutory that the applicant for a patent application be a person (in the US) and not a legal entity).  This can be enforced as a result of an employment contract, which may state that all inventions in the scope of employment must be assigned to the employer, or it may state that all inventions in the scope of employment “are hereby assigned”.  Remember to use present tense language, i.e., “I assign all rights to inventions now existing or created during the term of my employment.”   A mere agreement that inventions will be assigned may not be enforceable (especially true for copyrights that are not within the “work for hire” provision of the copyright law that require a written assignment.)

 (2)  A copyrightable work product created by an employee within the scope of employment may be owned by the employer, whether or not anything is signed at all. But this shouldn’t be assumed. In such a circumstance, the employer is not only the owner of the copyright, but deemed the author as well. In other words, if the employee wanted to own these works, the employer would have to assign them to the employee. However, if the employer wishes to own work product that may not be created within the scope of employment (works that are created by the employee but which he or she is not paid for - a non-essential function of the employment relationship), or if the employer/employee relationship is an independent contractor relationship (or could be interpreted to be one), the safe thing to do is agree, in writing, expressly stating that the work will be “a work made for hire.” I can’t emphasize the need to use this language enough. You probably shouldn’t assume that your employee handbook, which states that copyrights are owned by the employer, and which is signed by the employee, is enough to effectuate the result you desire. If the employee handbook does not expressly use the term “work made for hire”, it may not be sufficient under Community for Creative Non-Violence v. Reid, 490 U.S. 730 [1989], which states that, if the employee is an independent contractor (based on agency principles), a work can be a work made for hire only if both of the following conditions are met: (1) it comes within one of the nine categories of works listed in part 2 of the definition under Section 101, and (2) there is a written agreement between the parties “specifying that the work is a work made for hire.”

(3) Deal with ownership of intangible assets, and non-compete issues, up front, ex ante, before something of importance to your business is created by an “employee” and you are stuck holding the remote control with no T.V.

I became more acutely interested in the way that Lebron James manages his brand after reading a press release today from Home Furnishings Business about a brand license deal that Lebron James recently struck with American Signature, Inc., of the the nation’s largest furniture retailers and manufacturers.  I was directed to Lebron James’ brand marketing company, LRMR Marketing.

I had known about LRMR Marketing for some time.  It was started by Lebron and two of his best friends with one giant asset already on the roster to use as leverage: the brand of Lebron James.  Capitalizing on the value of this brand, the company has entered into numerous outsourcing licensing deals with a certain focused initiative that most celebrity athletes don’t exercise to full potential.  The business model, without reading further, may seem very Jerry McGuire-ish and written off as just another talent agency or sports agency.  But after following Lebron’s business moves over the past few years and studying the deals that have been made, it appears that LRMR, and Lebron James, understands the potential in using intellectual property and trademark branding as a business asset to create a profit center with little operating cost. 

On LRMR’s website, an informational piece caught my eye under the heading “The Methodology”, which read: ”To create partnerships that are greater than the sum of their parts.”  At first glance, this seems like a glaze-over tag line.  But in reality, this is exactly what the focus of a trademark or brand license should be.  The licensee (American Signature, Inc.) desires to create a competitive advantage which cannot be attained with the resources currently owned or used, and so it seeks to create the advantage through the use of a trademark which creates inherent market demand.  The licensor, LRMR, seeks to monetize its intangible asset, the Lebron James brand, without having to spend to manufacture or produce its own products using the brand.  The brand license, therefore, creates a business partnership between the entities, the result of which is economically greater than the sum of each entity’s respective assets doing business separately.  Below the line just mentioned is the following line: “Strategically construct integrated programs that will leverage the assets of both parties.”  Exactly.  (Should Lebron James be in the IAM 250?)

The company names its “approach” to brand management “Open Architecture”.  As the firm states on its site, “Creativity is born from Communication.”  After reading further about the services offered, and researching the deals struck by LRMR, it seems to me that there is not a far stretch in equating their “Open Architecture” approach in brand management to “Open Innovation” in the patent and software management space. 

“Open innovation is a paradigm that assumes that firms can and should use external ideas as well as internal ideas, and internal and external paths to market, as the firms look to advance their technology.”  (Chesbrough, H.W. , 2003, Open Innovation: The new imperative for creating and profiting from technology.  Boston: Harvard Business School Press, p. xxiv)   In essence, companies are better served by sharing and transfering assets and resources to fit needs, rather than relying solely on internal research.  In the brand management space, LRMR’s “Open Architecture” approach seems to emphasize leveraging intangible assets to fit gaps needed by other companies that recognize that it is economically more efficient to license those already valuable brands rather than attempt to create them. 

Along these lines, it is apparent that sports and celebrity brand management benefits, and is benefitted by, many industries and markets.  To the extent that brand managers such as LRMR seek to exploit brands and brand marks as assets through licensing opportunities and open innovation platforms, instead of as a talent agency, these brand assets will be utilized more closely to their full potential (See Lebron James).

(Added after publication as an afterthought): As one added benefit to brand licensing in the sports brand management context, the risk of dilution is not as great. Lebron James is a brand, but the value of that brand is completely contingent on two things: (1) his basketball credentials, and (2) his personal credentials. The value has not been built on products which use his name (at least not to a great extent). Therefore, in determining the value of a Lebron James brand license, the potential for diluting the value of the Lebron James brand because of an inferior product is not great. With that said, to the extent LRMR chooses quality products and brands to partner with the Lebron James brand, it can only increase the Lebron James brand value.

The Duncan Bucknell Company, and of course, Duncan Bucknell, is a true IP Strategist outfit.   Take the tag line from its website to be sure:

Using intellectual property to inform and leverage business strategy, globally; creating and capturing value; using intellectual assets in more ways more effectively;
out-smarting your competition; winning disputes; driving collaboration and innovation; turning threats into opportunities and opportunities into reality.

 The firm offers services from commercialization efforts to global branding methods.

For a wonderful and central place for IP information and IP-focused current events, check the IP Think Tank.  If you don’t have such a healthy fascination with IP as I do, but you wish to stay abreast of IP topics in industries such as Pharma & Biotech, get the weekly updates.  If you don’t desire to check every IP blog on the internet daily, as I do, just check IP Think Tank’s Global Week in Review for a roundup of the best IP articles across the internet.

Ocean Tomo was asked by Bloomberg Business Week to use their PatentRatings platform to rank the 25 most inventive companies in the world. OT’s patented program ranked companies based on the most valuable patent portfolios. Read more about the rankings and the results at Ocean Tomo’s press release.

A good James Malackowski quote from the release: “The ultimate value of a patent portfolio is not the rating or even licensing income; both are indirect effects.  The ultimate measure of value is the portfolio’s effect on
earnings and stock price. Our rating system has proven to be a forward looking indication of stock value with proven out-performance over a sustained period of time.” 

”We need a patent system that encourages innovation and doesn’t lock in big monopolies from trying to get another 10 years on a patent that prevents new products into the system,” Obama said.

The president said he would like to broaden the global scope of patents and extend patent rights to foreign countries.

”We have insufficient protection for intellectual property rights,” he said.

Obama said more protection is needed for things like bootleg DVDs and sophisticated software.

”There is nothing wrong with others using our technology as long as it’s licensed and we get paid for it,” Obama said.

It seems the president takes two directions here, stating that he would like to limit domestic patent rights in duration, but broaden patent rights in scope.  One important takeaway, however, is that the President understand’s the link between the amount of exclusivity in IP rights and the optimal amount of innovation.

I highlight “for the given situation” because, after doing a few of these deals lately and reflecting on the different prices paid by different companies to use the same marks, I have realized that there may be a fundamental flaw in the valuation of a trademark license.  It has become evident to me that three of the major factors in setting such a trademark license price are (1) reputation of the licensor brand, (2) price willing to be paid by the licensee  in a cost vs. sales-increase analysis, and (3) the risk to the licensor in diluting its brand’s reputation.  It is in the third factor that I have identified a problem that may incorrectly scew the agreed price one way or another.  Because I must neglect to use real companies’ names and prices paid, I will use hypothetical companies and prices to explain the issue.

Company A has a well respected domestic brand.  Company A has placed a minimum value on a license to use this brand mark at $100,000.  This is factor (1), above, and a starting place for negotiations.

Company B is a lesser known local brand in a similar - but not identical - market to Company A, and would like to sell a new line of its products in expanded areas - this product is not currently sold by Company A.  Company B estimates that it will sell 2 million units of this product if it can use Company A’s brand mark to market the product.  After production costs and other expenses, profits to Company B would be $500,000. 

Company C is a well respected international brand in a completely different market than Company A.  Company C would like to enter a new market with completely new products.  Company A does not sell products in this market, but consumers in this market would be more familiar with Company A’s brand than it would be with Company C’s.  Company C estimates it would sell 10 million units of the new product using Company A’s brand name, and after costs and other expenses, profits would be $4 Million.

Based on the above factor (2), it would make economic* sense for Company B to license Company A’s brand mark for anything under $500,000, and for Company C to license Company A’s brand mark for anything under $4 million.  (*Note - I am boiling this discussion down to economics and price setting, with all other factors equal.  Obviously, other factors influence the decision to license or not to license.)  Therefore, based on factors (1) and (2), a price between $100,000 and $500,000, or $100,000 and $4 Million, should be negotiated for Company’s B and C respectively. 

The third factor is generally the weight ont he scale.  The problem I come up with, however, is how to measure the weight.  Both of these scenarios don’t involve serious risks of market share dilution, as both Company B and C are offering new products in different markets than Company A.  Therefore, the main risk of dilution to be considered is that of goodwill - the risk of either company producing a “lemon” that could potentially decrease the goodwill in Company A’s brand reputation.  Do you measure this risk in the number of products that will be produced and on the market, thereby increasing the chance a lemon is produced or that quality standards will be diminshed by mass production?  On the other hand, do you measure this risk simply by the track record and reputation of the licensee for quality standards, thereby decreasing this risk if the company is well reputed in its own right?  Of course, there are provisions to be included in every trademark license agreement to account for controlling or checking quality standards to make sure they are being met, which somewhat mitigates this risk.  However, I believe that this factor does, and should, influence the settled price to be paid for the license.

Take Company C.  Company A could reasonably increase its price to Company C at a larger percentage increase than to Company B simply because Company C will be producing 1.5 million more products associated with Company A’s mark - increasing the opportunity for goodwill dilution.  The increase, of course, would be the estimated market value for this risk.  Company A could also increase its price to Company B at a larger percentage increase than to Company C simply because Company B is only locally known, and does not have Company C’s international track record to alleviate Company A’s fears that it always meets quality standards. 

This is an important measurement because this risk is one of the largest determents of trademark licensing, and should influence the agreed upon price of a brand license.  Furthermore, because this risk increases or decreases with each different licensee, there cannot be one set price for any brand mark license.

I would love comments.  Please note that this discussion is purely about setting a trademark license price, and not about the reasons for or against licensing.  That is a whole other conversation - and a later post.