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. 

Apple’s Victory is One for Pioneering Designers

As reported by The Wall Street Journal, Apple won its long-anticipated jury trial against Samsung on Thursday and was awarded $1.05 billion in damages by a jury. I think it is highly unlikely that the decision will be overturned on appeal, so the case is likely to establish an important precedent, as I anticipated in an earlier post I wrote in 2011. My prediction then, however, was that Apple would win through a private settlement instead of a jury verdict.

I predicted a private settlement because of the high stakes involved and the risks open to both companies if the issue ultimately was taken to a jury. Apple’s risk was that the jury would invalidate some or all of the patents it had asserted, a defensive maneuver that Samsung adopted during litigation. Samsung’s risk was that it would be found to have infringed Apple’s patents by copying user interfaces and other design aspects of Apple’s products. In the end, and to the surprise of many, both companies rolled the die and Apple came out on top.

The $1.05 billion verdict is a big coup, not just for Apple, but for product designers in general. For a long time, product design was perceived in industry and in legal policy-making circles as an intellectual property and strategic backwater. That has changed, however, due to consumers’ increasing aesthetic sophistication and a crowded global marketplace.

Design is starting to play an essential role in product differentiation and branding. An empirical study I conducted with two marketing scholars in 2009, published in The Journal of Marketing, found a positive association between trademark ownership and financial performance. This link between the two suggests that companies which pay attention to the legal aspects of branding through trademark registration reap greater rewards.

Elsewhere, I have written about the rare capability within firms that generates product shape trademarks. Product shape and packaging trademarks, often referred to as “trade dress,” were among the arrows in Apple’s legal quiver in the Samsung trial. I believe the Apple-Samsung case signals that product design and trademarks will be increasingly applied during new product development and asserted during litigation among companies across industries.

I make a career of teaching legal studies to business students. In my lectures, I invariably cover the subject of intellectual property management and strategy. Had Samsung won at trial against Apple, I would have cynically advocated what I perceived as Samsung’s business and intellectual property strategy. That is, I would have advocated in favor of free-riding from an industry leader to quickly gain a foothold and increase market share. Had Samsung won, this strategy would be effective, since the risks of infringement and damages would have been minimal. Once the fast follower and design imitator establishes their foothold, they can then compete against the innovator based on a cost advantage. From a business perspective, this clearly would have been an effective tactic.

Given Apple’s victory, however, Samsung’s strategy is no longer risk free or optimal. Instead, a better strategy is to be aware of competitor’s intellectual property rights and embrace innovation. This will require investing in design capabilities to distinguish products, which is how Apple secured its leadership position.

A copycat strategy may still be adopted by firms that want to quickly enter a technology market, such as mobile devices. After the Apple-Samsung case, however, that strategy became significantly riskier, much to to the benefit of pioneering innovators everywhere.

Bookman’s Alley

Borges would approve. Stack upon stack of used books. A labyrinth tucked inside an alley. You enter and see a Tiffany lamp cast shadows on the dark wooden stacks. An older gentleman peers over his book.  Ancient maps, esoteric histories, musty Persian rugs and philosophical tracts. A vintage chair invites you to sit.

Those are the fragments of my recollection of Bookman’s Alley bookstore in Evanston, Illinois.

During my Northwestern days, I would occasionally stroll into to that singular bookstore.  One day, I walked in and picked up a copy of History of the Yale Law School: The Tercentenary Lectures  Little did I know that this obscure book (as randomly obtained as can be obtained by any stochastic process) would re-shape my entire outlook on the law as a subject rich in realism and experience.

I was sad to learn that Bookman’s Alley, as reported by Chicago Today, is scheduled to close in July.

Apple’s iPad Design Patent Enforced

This past Tuesday, Apple obtained a preliminary injunction preventing Samsung from selling its Galaxy Tab tablet. A preliminary injunction was granted before the trial was concluded since Apple demonstrated that it would suffer probable success on the merits and irreparable harm. Interestingly, the basis for the injunction was a design patent (D504889) that Apple obtained for its iPad tablet.

USD504889

Design patents only secure ornamental product attributes, so the patent term is somewhat of a misnomer since utility patents, issued for working inventions, are much more prevalent and are typically what comes to mind when the term patent is used.

For some time design patents were seen as offering little protection to their owners. The Cout of Appeals for the Federal Circuit’s decision in the Apple case, however, breathes new life into design patents.

Since design plays a large role in certain consumer product markets, for example, autos, jewelry, fashion, and consumer electronics, it seems like the courts are more willing to extend property rights to aesthetic innovations. In some markets, design is an important if not essential element of the consumer’s purchase criteria, a source of differentiation from competitors, and an important element of branding and goodwill.

Resorting to the legal system to protect designs, however, as anyone within Apple can attest, remains a lengthy, expensive and uncertain process. Apple first requested the injunction on July 2011 and only recently obtained the order to prevent Samsung from free-riding on Apple’s investments in design-based innovations.

Another important design-related intellectual property case that will be decided soon on appeal is the Louboutin red sole trademark case. This case is currently on appeal at a federal appellate court which will review the New York trial court’s decision to revoke Louboutin’s trademark for its famous and distinctive red sole. Trademarks have a dual purpose to protect consumers from confusion and to protect the property attributes of designs that have become sources of differentiation among consumers. If the New York appellate courts follow the logic of the appellate court in the Apple case, they will reverse the trial court judge and affirm Louboutin’s red sole as a validly procured property right.

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.

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.

Supreme Court Issues Wal-Mart vs. Dukes Ruling

Today, the Supreme Court issued its much anticipated Wal-Mart v. Dukes ruling. In a few days, I’ll post a more in depth analysis of the decision, particularly as it applies to the Court’s dismissal of the plaintiffs’ central sociological theory, which alleged that Wal-Mart’s corporate culture promoted employment discrimination. The Court ultimately held that this theory was procedurally insufficient to certify 1.5 million women in a class action.

Take a look at the Court’s opinion here.

Research Spotlight: Empirically Testing Scotchmer’s Theory of Sex-Based Risk Aversion

This post will inaugurate a new feature of this blog. At times, whenever I come across a paper or research talk that poses an interesting legal finding or issue, I’ll profile it as a research spotlight. To kick off this feature, I’ll discuss a paper written by a colleague at Florida State University.

Today I attended a talk at the FSU Law School at which Professor Dino Falaschetti presented his paper: “A Difficulty in the Concept of Affirmative Action: Evidence from Females in Legislatures”. The paper empirically tests Suzanne Scotchmer’s theory, which posits that: “(1) winner-take-all games (e.g., promotions in hierarchies) favor inherently risk-taking males, but (2) successful females maintain greater skill on average and (3) see this skill-advantage depreciate with repeated play.”

The paper makes a contribution since the theory has rarely ever been empirically tested. A clever experiment was designed using elections in legislatures in both majoritarian (winner take all) vs. proportional election systems. The U.S. follows the majoritarian electoral system, where the candidate who garners the majority (> 50%) votes wins. Many, if not most, countries follow a proportional system whereby parties and their candidates obtain representation in proportion to the votes they obtain.

The article’s findings suggest a statistically significant result that demonstrates a negative correlation between elected female legislators and winner take all (majoritiarian) electoral systems across time and 130 countries . Ultimately, the author positions these findings as challenging the outcomes of affirmative action programs, since gender may ultimately lead to unintentional results due to the outcomes generated by risk preferences unique to gender type.  I think the paper may also raise some interesting questions related to institutional economics, given that similar outcomes were seen across a broad spectrum of societies and cultures

The link to the article on SSRN is here.

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”.

A perspective on contract terms

After teaching contracts for several years, I’m fairly convinced that the following axiom applies whenever anyone enters into a contract:

Any agreed upon and legally binding contract terms will either work in your favor, or against you.

Contrary to popular belief, contract terms are never neutral. Instead, they will either further your goals and interests, or they will not. In ideal situations, the contract terms benefit everyone. In the worst situations, they detriment you and benefit the person or entity sitting across the negotiating table. In the vast majority of cases, some clauses further your interests and others do not, yet the bargain as a whole is worth entering into for both parties.

Each particular word, or clause, however, will have a variable impact on the outcome or value of the bargain. That value, however, as deduced from the contract axiom will always either be positive or negative. The sign (positive or negative) and the size of the quantified outcome will largely depend on things like: information, bargaining power, experience, legal knowledge and negotiating prowess.

Starting this term, I’ll start using the contract axiom whenever I introduce the subject of contracts to business students.