les Nouvelles - September 2011

  • les Nouvelles - September 2011 - Full Issue
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  • The Classic 25% Rule And The Art Of Intellectual Property Licensing
  • Robert Goldscheider
    Fifty years ago, Robert Goldscheider helped pioneer the use of a methodology known as “the 25% Rule,” a tool for determining reasonable royalties in intellectual property licensing negotiations. The Rule holds that licensees of intellectual property normally deserve the lion’s share of the profit because they usually bear the bulk of the business risk associated with bringing the intellectual property to market. Experts familiar with the art of intellectual property licensing frequently rely on the 25% Rule to rationally determine reasonable royalties in litigation and transactional settings. The Rule’s prominence has been accompanied by unfortunate misunderstandings about its form and substance. It is not, as some suggest, intended to be a simple shortcut to determine patent royalties. Rather, it was developed as, and remains, a meticulous methodology inspired by significant private transactions and ultimately refined by brilliant judicial interpretation. As such, it is inappropriate to condescendingly diminish it to a mere “rule of thumb.” When properly understood and applied, the Classic 25% Rule is an effective discipline that achieves the high standards of reliability demanded by the U.S. Supreme Court in the Daubert and Kumho Tire cases. On January 4, 2011, the Federal Circuit, in Uniloc v.Microsoft, held that “the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation.” This decision is problematic for a variety of reasons: (1) it assumes that the 25% Rule, as it is classically understood, is a rule of thumb; (2) district courts could interpret it as prohibiting damages experts from applying the Classic 25% Rule as a tool for determining a baseline royalty rate, because of the court’s confusion between a baseline royalty rate and a “reasonable royalty” under § 284 of the Patent Act; and (3) it could denigrate the skills of true experts who have utilized, and continue to utilize, the Classic 25% Rule in a way that otherwise meets the admissibility standards of the Federal Rules of Evidence. This article attempts to correct these misunderstandings in the hope of restoring some certainty in an area of jurisprudence that, unfortunately, has become an unpredictable area of the law.
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  • Managing Software Intellectual Assets In Cloud Computing Part 1
  • Dwight Olson and Stephan Peters
    Stephan Peters, LES Germany, and Dwight Olson, LES (USA & Canada), discuss how technology escrow, a common technique for avoiding quarrels between licensor‘s and licensee’s of software, is morphing and getting global attention to help make win-win situations in the cloud! This is the first article in a two part series on the emerging issues of having software and data in the cloud. These two articles begin to address the inherent complexity of managing the risk of software assets including data in the cloud. Part one will look at software programs and systems, then part two will focus on data. This article assumes the reader is generally familiar with classical software escrow and cloud computing concepts including SAAS, PAAS and IAAS.
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  • Drafting Of Royalty Clauses: 30 Ways To Head For Windfall Or Pitfall
  • Erik Verbraeken
    After a lengthy and difficult commercial negotiation, licensor and licensee have finally succeeded in finding an agreement. They have agreed on the business principles that are to govern the exclusive license that the licensor will grant to the licensee with respect to a very promising “green drilling” technology with burgeoning market perspectives. Under the agreement the licensee accepts to pay the licensor a percentage royalty on net sales of the licensed product. The next step will be for the Legal Division of licensor to draft a contractual document under which this gentleman’s agreement is to be translated and converted into a legally enforceable commitment. A one out of a dozen exercise, isn’t it? However, the proof of every pudding is in the eating, and your royalty clause may leave you with either a sweet or bitter aftertaste when the latter has to be reduced to practice on the operational battleground: oh so sweet when you have adopted a meticulous drafting approach that has taken heed to the particulars of the business deal and that is tailor-made to face the various accounting and legal implications of the royalty structure that has been agreed upon; oh so bitter when you have resorted to the dreadful drafting approach where the royalty clause is copied from the first source available on the Internet without caring to adapt and relocate the latter in its proper context, and for which John Ramsay has already provided multiple examples in this journal. Depending on your pudding recipe, and taking the liberty of a little exaggeration, you may find out that your royalty clause has either become the source of a business windfall, or has laid the pillars for a business pitfall. The present article provides an illustration of 30 business items that, when inappropriately converted into contractual language, may give rise to the creation of a fundamental gap between business expectations and business realities.
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  • Recent Entire Market Value Rule Opinions Impact Patent Valuation
  • Drew Voth and David H. Binney
    Mega-damages jury awards in patent infringement cases are piling up: Lucent is awarded $358 million in a matter against Microsoft and others; Uniloc is awarded $388 million in a matter against Microsoft; Cornell University is awarded $184 million in a matter against Hewlett-Packard; and LaserDynamics is awarded $57 million against Quanta Computer. Yet as quickly as the damages awards have piled up, they have been reduced or reversed by the Court of Appeals for the Federal Circuit (CAFC) and other courts for lack of sufficient evidence. The Lucent case was remanded for a new damages trial, a conditional new trial on damages was ordered in the Uniloc case, the Cornell award was slashed to $53 million, and the LaserDynamics award was reduced to $6.2 million. An important part of the value of a patent is how large a royalty it can command. These recent cases showed that one way, and in reality sometimes the only way, to generate a significant royalty stream is through litigation. These decisions may force patent owners to re-examine what their patent protection is really worth based on the allocation of earnings between the patented and unpatented components of products. Perhaps the central damages issue in these cases is how to apportion value to the patents at issue. The CAFC is sending a message to the district courts that they must apply a stricter evidentiary standard for patent damages, especially as it relates to the so-called Entire Market Value Rule (EMVR). These rulings highlight the need for companies, counsel and damages experts to analyze apportionment issues carefully, both in and out of litigation, in assessing patent value.
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  • Intellectual Property Valuation Approaches And Methods
  • Robert F. Reilly
    There are numerous reasons to value an owner/operator’s intellectual property. All of these reasons may be generally grouped into the following categories: transactions, financings, taxation, regulatory, bankruptcy, accounting, litigation, and strategic planning. Valuation analysts are often asked to value intellectual property for these various reasons. Valuation analysts may also assist the intellectual property owner/operator in structuring transactions, performing due diligence, complying with taxation and accounting requirements, negotiating and arranging for financings, providing litigation support, and defending and commercializing the intellectual property. The owner/operator is often involved in the process of: identifying the intellectual property, performing some due diligence procedures, interviewing and selecting the valuation analyst, defining the valuation analyst’s assignment, assembling valuation-related data and documents, reviewing and questioning the valuation work product, and relying on the intellectual property valuation report. First, this discussion summarizes many of the reasons to conduct an intellectual property valuation. Many of these reasons relate to intellectual property transactions other than licenses between arm’s-length parties. In addition, this discussion describes and illustrates the three generally accepted intellectual property valuation approaches, specifically: cost approach valuation methods, market approach valuation methods, and income approach valuation methods. Most license participants are familiar with the market approach valuation methods, of course. However, many licensees and licensors are not particularly familiar with the income approach or cost approach valuation methods. Finally, this discussion will summarize the intellectual property valuation synthesis and conclusion process.
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  • A Simple Method For Calculating A “Fair” Royalty Rate
  • Damien Salauze
    During a licensing deal (i.e. license of a patent protecting a product), several methods are commonly used to determine what is intended to be a “fair” royalty rate. It is even recommended to combine several methods in order to cross-check that there is no discrepancy between one method and another. These methods fall into three typical groups [1-4]: (i) comparison with previous similar deals done by others, (ii) alignment with industry or internal practice, and (iii) calculation. In light of a common experience, it appears that comparison with previous similar deals is always questionable because, even if data are extracted from a reliable database, negotiators have the feeling that no deal is really similar to the deal they are currently discussing. Alignment with industry or internal practice is generally frustrating when one of the parties does not belong to the industry (i.e. an academic institution), or when one of the parties has limited bargaining power. Therefore, sentences such as “we have always done it like that,” or “there is no way that the rate should be out of this usual range,” are very unlikely to create a “win-win” feeling. Calculation is often felt to be more rational. However, calculation may rapidly become complex, especially if one takes into account probabilities and wishes to introduce options, and relies heavily on the assumptions that are introduced [4]. In addition, calculation-based methods usually do not take into account the amount of money to be invested by the licensee to license and its subsequent associated risk. At Institut Curie, which is an academic research institution, we have introduced a relatively simple calculation-based method which allows sharing the “benefit” made by the licensee and which – very important - takes into account both the amount of money to be invested by the licensee further to license, and its subsequent associated risk. This method is so far satisfactorily used, in the sense that its outcome is felt by parties to be both rational and fair. This method is applicable to any kind of business, although Institut Curie is primarily involved in life sciences (it is a Paris-based Comprehensive Cancer Center created one century ago by Marie Curie when she received her second Nobel Prize).
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  • License Compliance Issues For Biopharmaceuticals: Special Challenges For Negotiations Between Companies And Non-Profit Research Institutions
  • Todd A. Ponzio, Hans Feindt, and Steven Ferguson
    Biopharmaceuticals are therapeutic products based on biotechnology. They are manufactured by or from living organisms and are the most complex of all commercial medicines to develop, manufacture and qualify for regulatory approval. In recent years biopharmaceuticals have rapidly increased in number and importance with over 4001 already marketed in the U.S. and European markets alone. Many companies throughout the world are now ramping up investments in biopharmaceutical R&D and expanding their portfolios through licensing of early-stage biotechnologies from universities and other non-profit research institutions, and there is an increasing number of license agreements for biopharmaceutical product development relative to traditional small molecule drug compounds. This trend will only continue as large numbers of biosimilars and biogenerics enter the market. A primary goal of technology transfer offices associated with publicly-funded, non-profit research institutions is to establish patent protection for inventions deemed to have commercial potential and license them for product development. Such licenses help stimulate economic development and job creation, bring a stream of royalty revenue to the institution and, hopefully, advance the public good or public health by bringing new and useful products to market. In the course of applying for such licenses, a commercial development plan is usually put forth by the license applicant. This plan indicates the path the applicant expects to follow to bring the licensed invention to market. In the case of small molecule drug compounds, there exists a widely-recognized series of clinical development steps, dictated by regulatory requirements, that must be met to bring a new drug to market, such as completion of preclinical toxicology, Phase 1, 2 and 3 testing and product approvals. These steps often become the milestone/benchmark schedule incorporated into license agreements which technology transfer offices use to monitor the licensee’s diligence and progress; most exclusive licenses include a commercial development plan, with penalties, financial or even revocation of the license, if the plan is not followed, e.g., the license falls too far behind. This study examines whether developmental milestone schedules based on a small molecule drug development model are useful and realistic in setting expectations for biopharmaceutical product development. We reviewed the monitoring records of all exclusive Public Health Service (PHS) commercial development license agreements for small molecule drugs or therapeutics based on biotechnology (biopharmaceuticals) executed by the National Institutes of Health (NIH) Office of Technology Transfer (OTT) between 2003 and 2009. We found that most biopharmaceutical development license agreements required amending because developmental milestones in the negotiated schedule could not be met by the licensee. This was in stark contrast with license agreements for small molecule chemical compounds which rarely needed changes to their developmental milestone schedules. As commercial development licenses for biopharmaceuticals make up the vast majority of NIH’s exclusive license agreements, there is clearly a need to: 1) more closely examine how these benchmark schedules are formed, 2) try to understand the particular risk factors contributing to benchmark schedule non-compliance, and 3) devise alternatives to the current license benchmark schedule structural model. Schedules that properly weigh the most relevant risk factors such as technology classification (e.g., vaccine vs recombinant antibody vs gene therapy), likelihood of unforeseen regulatory issues, and company size/structure may help assure compliance with original license benchmark schedules. This understanding, coupled with a modified approach to the license negotiation process that makes use of a clear and comprehensive term sheet to minimize ambiguities should result in a more realistic benchmark schedule.
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  • IPR-Codes And Guidelines In Europe Facilitating Collaboration Of Publicly Funded Research Organizations (PROs) With Businesses Part 1
  • Thomas L. Bereuter, David Jerolitsch, and Peter G. Heimerl
    Effective and efficient technology transfer by collaborative R&D between universities or other publicly-funded organizations and businesses is rewarding and necessary, but a challenge. Negotiation of the terms for the collaboration often proves to be hampered by different cultures and missions, conflicts-of-interest, legal requirements and the divergent perception of value of IP. Voluntary codes of practice as well as guidelines on IPR ownership and exploitation on supranational and national basis play an important role in overcoming the aforementioned challenges by providing common ground for the stakeholders of collaborative R&D. Furthermore, nearly all codes define recommendations for measures like awareness creation, education and training, share of good practices, development of policies, procedures and services for IPR, and collaboration management at PROs.
    PDF, 286.09 KB
  • The Project For A Uniform European Union (EU) Patent And A Unified Patent Litigation System Within The EU: Closer Than Ever, But With Some Detractors
  • José Miguel Lissén and Sergio Poza
    In Europe, patent protection granted by the national patent systems through an application filed with the national patent office coexists with the protection granted by the so-called European Patent System through an application filed with the European Patent Office (hereinafter, “EPO”). Each State has its own patent office before which any applicant can file his or her invention to have it protected as a national patent. The protection granted is limited to the territory of the state in question. In order to grant a national patent, the national patent office checks only if the requirements set forth by the relevant national laws have been met. At the same time, the inventor may choose to obtain protection for his invention within the so-called European Patent System. The EPO is an intergovernmental office of the European Patent Organization. Said organization is formed by 38 states (all the EU member states plus 11 other countries).
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  • Bridging The Gap For Public Good: A Study On The Mission Statements Of U.S. University Technology Transfer Programs
  • Seok-Ho Kim and Alan S. Paau
    The year 2010 marks the thirtieth anniversary of the passage of the Bayh-Dole Act of 1980 (the “Act”), which later became part of the U.S. patent Law (35 United States Code). The Act allows U.S. institutions to elect ownership of inventions that arise from work funded by the U.S. national government. The major goal of this seminal legislation is to promote usage of such inventions for the benefit of the public. As a result of such rights and associated obligations (e.g. reporting, patenting and sharing of benefits with the inventors) under the Act, many U.S. academic institutions set up specialized professional units within or in affiliated foundations to manage their inventions.
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  • Incentives For Generating More IP Commercialization Opportunities
  • Henry Fradkin
    I don’t think I have to belabor the point… this is really a tough economy. Based on at least what I am seeing and echoed by others in the IP and technology commercialization business, it appears that most “licensing” deals are the result of successful patent assertions rather than what is called “carrot” licensing. That’s not to say that deals that are friendly aren’t happening and hopefully will grow in the future as the global economy improves. So, to prepare others for a return to the environment of friendly deal making many of us enjoyed in the past, I thought it would be helpful if I jotted down some tactical actions to generate new or more commercialization opportunities…and that is the purpose of this article. To start, a company or organization (and I will use “company” to cover both a company and an organization from this point on) needs to appreciate that virtually all of its technologies and business methods can be commercialized; e.g., through licensing, sale, joint ventures, etc. The only qualifier is how this commercialization fits into the company’s policies and strategies. Thus, licensing executives need to work to understand their company’s entire knowledge portfolio… ranging from intellectual property (patents, copyrights, etc.) to intellectual assets (specifications, processes, etc.) to intellectual capital (human capital… the knowledge employees have in their heads, networks, relationships, etc.).
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  • A Review Of The Global BioPharmaceutical Royalty Rates And Deal Terms Survey: Licensing Executives Society (U.S.A. And Canada), Inc. And Licensing Executives Society International (LESI)
  • James A. McCarthy and Ben Bonifant
    Licensing thrives within the life sciences industry. Each year, thousands of transactions transferring intellectual property rights are negotiated among hundreds of parties. These deals support a system in which organizations with vastly different resources, missions, skills, and ownership structures contribute to advance innovations from initial scientific insight to practical therapeutics for the treatment of human diseases. Through licensing deals, an academic institution founded on a research and educational mission can transfer the value of early understanding of a new therapeutic to a biotech company that is designed to take on high risk clinical development programs that require modest levels of investment. The same product may be transferred again once proof of concept has been established and further development depends on large-scale clinical trial processes, commercial skills, and access to higher levels of investment. At that point, a large pharmaceutical company may be the appropriate organization to move the project forward (Diagram 1). Such transition reflects an industry very dependent on licensing as a core modus operandi. These deals create thresholds that reward one organization for overcoming one set of risks and facilitate a transfer of ownership to an organization that may be better positioned to take on the next set of challenges. The terms for these deals reflect expectations for the value of the technology, the scarcity of similar programs, the remaining uncertainty and risks associated with the program, and the level of differentiation of the skills and capabilities of the licensing organization. They reflect the critical resources and competencies required to advance an opportunity through each level of development and to commercial execution.
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