Category: Policy

Legal strategy: The driver of legal change

Patent reform is back in the news as both the House and Senate have proposed their own versions of legislation in this complex legal area. The aim of patent reform is to further curtail the activities of the so-called patent trolls, which are companies that own patents, do not make any products and use patent law to sue large companies to collect jury verdicts or settlements. 

Since technology and innovation are growing in importance as drivers of wealth creation, it is natural that patent law would rise in importance. Since the economic stakes have increased, so have the stakes in the political and legal arenas. This could all be predicted by anyone who observes how powerful parties try to alter the legal and political system for their own advantage. From an academic standpoint, this was marvelously theorized and explained by the pioneers in the field of non-market strategy, who deduced the importance of engaging the legal, regulatory and legislative system as a form of strategic behavior. 

My recent writings in legal strategy support the view that law can be used to achieve competitive advantage. My most recent work addresses the abusive aspects of this practice and ways that can limit what I call “strategic legal bullying.”

What’s fascinating to me is that legal strategy is indirectly driving some important political wrangling in the current iteration of patent reform. From press accounts I’ve read, a hedge fund manager is using a transformative legal strategy to exploit a process to challenge drug patents while betting against the drug companies’ stock. Now, the drug companies want a legislative carve-out in place that would shield them from these administrative challenges. Their reaction to the hedge fund manager’s legal strategy is to change the law as it applies to their industry. 

What I’m starting to realize is that legal strategy has often been the agent of legal change, for better or worse. Think of Sony, Napster, Aerio, Uber, Tesla and the “patent trolls.” Their business models are closely tied to legal strategy. In some cases they successfully enacted legal change, and in other cases the status quo prevailed. The systems where this strategic behavior takes place is complex, consisting of companies, courts, administrative agencies, the media, and the legislature. Legal strategy lies at the core of the process and helps parties re-write the rules of the game, or at least try to do that. 

by Categories: Patents, Policy, Research, Strategy, UncategorizedTags: 3 Comments

Terroir and the curious path to geographic indication. 

This week I was honored and pleased to participate in the “Sub-regional workshop on geographical indications/ origin-linked products in Kingston, Jamaica. The event was coordinated by various governmental and international trade organizations including: WIPO, CEDA, EU-Caricom, IDB and JIPO.

A geographic indicator (GI) is a specific product name that has trademark-like protection and exclusivity as long as the product characteristics, or reputation is due to its place of origin. This idea of place has great importance and is referred to as “terroir” in Europe. A clear and scientific connection between product and place of origin and its connection to culture, tradition, heritage and processes are all linked to this interesting concept in international trade and IP law.

This legal issue has great commercial relevance since the market for GIs is estimated at more than $50 billion. Some of the most popular GIs include Champagne, Port (the oldest GI), Roquefort, Tequila, and Darjeeling.

The aim of the workshop was to build capacities in the Caribbean for the registration of GIs in the area, connect stakeholders and raise awareness.

Registering a GI is a three step process:

1. Form a producer group/ association, e.g. Co-op farmers from Belize were present to discuss efforts to develop a GI for cocoa from the Toledo region (terroir) in that country.

2. Develop a scientific product specification with verified protocols and standards. Elements may include: production methods, livestock regimes, plant varieties, traditional practices. The terroir must be described in detail. Boundaries and unique territorial aspects should be included, e.g some coffee must be grown at certain elevations and with certain soil conditions. The link between product and terroir must be scientifically established to establish uniqueness and source origin.

3.  Control production to guarantee customers of origin and authenticity.

Once these are all established a producer group may reap the benefits of a GI system and enjoy market exclusivity and higher margins for their unique products. Consumers can enjoy consuming the product knowing that the product is sustainably sourced from a legitimate producer group with strong historical and cultural connections to the terroir.

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Research Spotlight: Administrative Patent Levers

My most recent article, Administrative Patent Levers was accepted for publication in the Penn State Law Review. This article looks at the U.S. Patent and Trademark Office (PTO) and how they implement rules that are technology-specific and policy-oriented. This is a major departure from the PTO’s prior role since they have historically been limited to procedural rule making by the courts. The PTO’s implementation of administrative patent levers signals a potential new era of greater policy making by the PTO.

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Judge Rakoff Holds Bank and Regulator to a Higher Standard

The Wall Street Journal just ran a noteworthy article on Judge Jed Rakoff’s path-breaking judicial opinion.  Judge Rakoff, a federal trial court judge who sits in the Southern District of New York, recently refused to approve a settlement between the Securities and Exchange Commission (SEC) and Citibank because the settlement omits any facts that would justify its approval as one that furthers the public interest. Judge Rakoff makes known his views on the public policy implications of the case when he discusses “the transparency of financial markets whose gyrations have so depressed our economy and debilitated our lives.”

Refusing to approve the settlement would either compel the defendant to admit wrongdoing, or force the SEC to drop the case, or litigate it. By failing to approve a settlement reached willingly by both parties as a matter of public interest, Judge Rakoff has departed from a customary practice. If the decision is sustained on appeal, it might create an important legal precedent that could curtail the harmful practices that are committed by some professionals in the financial industry.

Strategically, Citibank would likely refrain from appealing the case to avoid creating binding future precedent that would apply to itself and others in the financial industry. One might think that the SEC, as a public institution charged with protecting consumers, would be more inclined to appeal the matter to actually establish the precedent.

As the Wall Street Journal article suggests, however, the SEC often has settled cases with defendants in the financial industry as a practical compromise to avoid risks and expense. It is clear, based on Judge Rakoff’s ruling, that he believes practicality and expedience were not enough to warrant subverting the public interest.

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Research Spotlight: Friends of the court: Using Amicus Briefs to Identify Corporate Advocacy Positions in Supreme Court Patent Litigation

Northwestern University’s Kellogg School of Management profiled my recent publication, co-authored with Kellogg faculty member James Conley. This work examines amicus (friend of the court) briefs submitted during U.S. Supreme Court patent litigation, and published in the University of Illinois Journal of Law, Technology & Policy.

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The Rule of Law

The unrest in the Middle East illustrates what happens in societies where those in power deprive citizens of the rule of law. Absent the rule of law, there is no room for property, markets, freedom or progress.

I was first exposed to the concept of the rule of law in a civil liberties course during my undergraduate studies at New York University. The professor for this singular course was Dr. Peter V. Rajsingh. During an initial lecture dealing with law and philosophy, Professor Rajsingh mentioned that a critical concept sustaining any liberal democracy is the rule of law.

It was initially puzzling to think of a society being “ruled” by something as abstract as the law. In my mind, we were ruled by politicians, judges and the other individuals with authority and power. But then Professor Rajsingh provided an analogy that has stayed with me since. He said that the rule of law can be analogized to a game of chess.

There are rules to chess, which are necessary for the game to proceed. Similarly, Professor Rajsingh explained, a liberal democracy needs rules to work, and those rules are defined by a well functioning and impartial legal system. Without the rule of law, those in government would not be constrained by principles or the will of the people. The antithesis to the rule of law is repression, autocracy, arbitrariness and unprincipled application.

Perhaps John Adams captured the idea best when he drafted the Massachusetts Constitution: “To the end it may be a government of laws and not of men”.

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Letter or Spirit?

Business Insider posted a story recently about Facebook and the news the company has made working with Goldman Sachs to obtain significant capital investment without going public.

The story boils down to Facebook wanting to trade stock for a capital infusion. There is no shortage of people wanting to invest in Facebook stock. A thorny issue arises, however, if the number of Facebook stock owners of record increase to 500 or more individuals. If that is the case, Facebook must comply with the Securities and Exchange Commission (SEC) disclosure laws, which are expensive to comply with and  reveal sensitive financial and strategic information. Facebook is not quite ready for that step and has enlisted the financial experts at Goldman Sachs to engineer a special purpose entity that would buy up to $1.5 billion in Facebook stock and become the owner of record.

The rub lies in the fact that Goldman Sachs would then sell the shares to potentially hundreds of private client investors. The Business Insider story discusses that Facebook and Goldman Sachs may have legal grounds under the SEC rules to argue that the transaction does not increase shareholders beyond a single owner, the special purpose entity. The rule, however, may prove to be a sword of Damocles, since the SEC rule does not allow the transaction if the stock issuer knows, or has reason to know, that the special purpose entity is used primarily to circumvent the rule concerning 500 shareholders or more. By engaging in the transaction, Facebook may be heading for going public and complying with the SEC disclosure laws without listing on a major stock exchange.

As a professor, I found this to be a good case to discuss in class, not just because many students enjoy hearing about Facebook. The case also illustrates an important point about a bigger issue facing business and legal regulation. The point is whether a business should strive to comply with the letter of the law, or go beyond this and seek to comply with its spirit. The SEC rule mentioned above has a built-in provision that guides enforcement of the law’s spirit. Many other important regulations lack this type of provision, however.

Ultimately, the whole issue of compliance with the SEC’s disclosure rules triggered by reaching 500 shareholders or more may amount to little more than a smokescreen for Facebook. The transaction with Goldman Sachs using the special-purpose vehicle places a much higher value on Facebook stock. Those who invested in Facebook prior to this transaction just saw their paper net worth increase substantially. Also, at the time of Facebook’s inevitable public offering and listing on a stock exchange, whoever is the lead book runner and investment banker to the transaction (Goldman Sachs?) will have strong precedent and argument to sell the stock to the public (the rest of of us) for at least as much as it was valued during this most recent transaction.

As with most legal issues involving Facebook, this is a case worth watching.

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Independent Designers: Here’s a Powerful Tool to Combat Knock-Offs

I’m always troubled when I hear stories about independent designers who are ripped off by knock-off artists, large retail chains and unscrupulous exporters who take advantage of low-cost manufacturing costs to catch a free ride from a designer’s work.

Reporter Christina Binkley wrote an interesting article on this very topic in The Wall Street Journal on April 29. The article discusses how the small, independent makers of the popular Shashi bracelet saw their unique fashion accessory imitated and sold for a fraction of the cost by a large corporate retailer shortly after the product gained mass appeal.

Innovators often fall victim to this type of intellectual property theft as free riders imitate a design and exploit a cost-based advantage that erodes the original design’s exclusivity, leading to brand erosion and foregone sales. From numerous articles I have read, it seems that this happens all too often to designers, and that all they can do is throw their arms up and accept this sorry state of affairs. As The Wall Street Journal article reports, most designers believe that the only response is to keep designing and hope their new creations will keep them above water.

I’d like to offer designers another solution based on strategic knowledge of intellectual property. Designers can register and protect their designs as numerous forms of intellectual property (IP), including trademarks, design patents, copyrights and trade dress. The Wall Street Journal article mentions this fact and discusses how these IP assets rarely prevent the flood of copycats.

The Wall Street Journal article, however, does not discuss a little-known procedure that IP owners can initiate that could offer them a powerful shield in their arsenal. The procedure is IP recordation with the U.S. Customs and Border Enforcement Authorities.

The process is actually quite simple. After you have registered your IP as a trademark, design patent, copyright or trade dress, all you need to do is file a short form with Customs and pay a $190 fee. The form is extremely simple and asks the IP owner to provide a registration number, describe the intellectual property, list parties authorized to use the mark, and provide an image of the intellectual property.

To access a screen shot of the actual form, click here.

Once your IP is recorded with Customs, you may then notify the office of any suspected parties that may be importing goods that infringe your IP. Customs may then decide to seize and impound the knock-off goods at any U.S. port while it conducts an infringement assessment. Impoundment creates a difficult scenario for the alleged infringers, including the foreign manufacturer and the domestic importers, which may include distributors and retailers. The procedure creates a cost for all these parties, buys the designer precious time to retain exclusivity for their designs (especially important when the design in question ties into a current fashion trend), and sends a clear signal that the designer means business.

The Wall Street Journal article mentions that designers may send cease-and-desist letters, and this is an important weapon in the independent designer’s arsenal. However, large companies tend not to respect these letters as much as when a big corporation with deep pockets is behind the letter. For an up-and-coming designer, having knock-off goods impounded is a much stronger weapon, especially when many companies that sell imposters have those items manufactured in China or other locations overseas.

Customs provides statistics on what types of goods have been seized under this impoundment procedure. In 2009, it conducted 14,841 separate IP-related seizures with confiscations worth $260.7 million. To view the statistics, click here.

To learn more about the impoundment procedure and how you can take advantage of it to protect your intellectual property, visit the Customs website here.

Designers, please consider using this legal tactic to protect your hard work and creativity under a system of fair trade for everyone.

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Judge Sotomayor has strong intellectual property background

President Obama’s Supreme Court Justice nominee, Judge Sonia Sotomayor, has ruled on important intellectual property cases in the past. This is a good thing, since the U.S. Supreme Court has recently re-shaped intellectual property law, and adding an Justice with experience in this area is important for future cases dealing with the law of innovation.

Judge Sotomayor wrote an opinion in 2002 that created a strong precedent for cases involving license contracts involving software downloads. That case was Specht vs. Netscape, where Judge Sotomayor ruled that Netscape’s software license terms were not binding on individuals who clicked the prominent download button at the top of the screen before scrolling down to click on the link that opened the license terms.

As a result of this decision, companies now routinely require users to manifest their acceptance of the license terms by clicking on a check box before downloading software.

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