Glaxo SCC dealt with an issue that has quickly become the subject of much international scrutiny:  the setting of transfer prices in the context of contractual and intangible property rights.

Put simply, transfer prices are the prices set between related entities in different jurisdictions to charge each other for products or services provided to one another. As the parties are related, they are able to exercise their control to set prices that may or may not be reflective of market realities – in the absence of regulation, such a scheme can be easily used to shift earned income from a high tax jurisdiction to a low tax jurisdiction.

This decision of the Supreme Court of Canada is of particular relevance to the IP Osgoode community as it directly considers the valuation of intellectual property rights and benefits that may be bundled into a transaction – this specific transaction bundled patent and trademark rights, among intangible rights such as marketing support and access to further supply.

In two recent cases, , 2011 TCC 232 and Glaxo SCC, the taxpayers attempted to adduce valuation evidence to demonstrate that the intangibles that were provided along with the property increased their value and should be considered in a determination of an appropriate transfer price under the “arm’s length principle”.

The CRA has taken an aggressive approach to valuation that systematically ignored valuation evidence regarding intangibles adduced in support of the taxpayers’ arguments that transfer prices were comparable to the arm’s length price. The aggressiveness of this approach was noted by the Tax Court in Alberta Printed Circuits, which affirmed the ruling in Glaxo FCA, noting that in Alberta Printed Circuits, the CRA simply ignored the taxpayer’s valuation evidence and “dropped the ball”.

Between 1990 to 1993, Glaxo Canada paid related entities within the Glaxo Group between $1,512 and $1,651 per kilogram for the active ingredient in Zantac, ranitidine, while at the same time, generic pharmaceutical companies in Canada were purchasing ranitidine for $194 to $304 per kilogram.  Glaxo Canada would then package the ranitidine into a drug delivery system for distribution in Canada.

Based on a simple division between the midpoints of these ranges ($1581.5 and $249, respectively), Glaxo Canada was being charged approximately 6.35 times the price paid by the generics for ranitidine by the Glaxo Group related entities.

The transfer pricing scheme utilized by GlaxoSmithKline revolved around two agreements between Glaxo Canada and Glaxo Group (the parent of other Glaxo companies which discovered, developed, manufactured and marketed branded pharmaceutical products).  These two agreements conferred certain rights and benefits to Glaxo Canada from the Glaxo Group, including patent and trade-mark rights, among others. The transfer price was set by the “re-sale price method”, which effectively set the price as 40% of the in-market price for the finished ranitidine product, resulting in the $1,512 to $1,651 per kilogram prices. It is important to note that Glaxo Canada was contractually bound and could not purchase ranitidine from non-Glaxo approved sources.

As noted under paragraph 18 of their factum, the CRA took a dim view of this strategy, alleging that “the tax strategy of [Glaxo] was to make as much profit in Singapore, tax free, and then the remainder of the Glaxo group’s [sic] profit in the United Kingdom.” The CRA also noted that transfer pricing is an international problem and pointed out Canada’s obligation as a member of the OECD to deem a “reasonable arm’s length price” as the transfer price.

The CRA reassessed Glaxo Canada for these years and increased its income by approximately $51 million dollars.

The Tax Court’s Ruling

The Tax Court affirmed the reassessment, finding (1) that the rights and benefits under the license agreement were not relevant in determining the appropriate arm’s length price for the supply of ranitidine, and (2) that the prices paid by the generic companies were appropriate comparators for Glaxo’s transaction.

The FCA’s Ruling

The FCA, in a unanimous decision, found that the phrase “reasonable in the circumstances” required the Tax Court to consider “all relevant circumstances which an arm’s length purchaser would have had to consider”.  The FCA applied a “reasonable business person test” and found that the license agreement was central to Glaxo Canada’s business reality and thus was a circumstance that had to be taken into account when determining if the prices were reasonable. The FCA did not determine whether the prices were reasonable, remitting this back to the Tax Court for consideration.

Analysis of the SCC’s Ruling

The Supreme Court of Canada, in a unanimous decision, found that the CRA is required to consider all “economically relevant characteristics” in determining the arm’s length price for the property including the rights and benefits that are linked to the price paid for the property. The SCC affirmed the FCA’s decision and dismissed the transaction-by-transaction approach adopted by the CRA and the Tax Court.

The SCC found that these features of the license agreement and the requirement to purchase from a Glaxo-approved source add value to the ranitidine that Glaxo Canada purchased over and above the value of generic ranitidine without the rights and benefits.

The SCC further noted that there is a difference between the generic ranitidine and the ranitidine of an innovator pharmaceutical company, considering the “degree of comfort” that presumably allows Zantac to be priced higher than the generic products. As such, the comparators were not identical in all material respects and the SCC found that “some leeway must be allowed in the determination of the reasonable amount”.

Given that the value of intangible assets, including intellectual property rights, make up a significant proportion of the net asset value of most corporations, this ruling opens the door towards using valuations of intangible assets to justify the pricing utilized in transactions between related entities. This includes valuations of intellectual property assets, which have traditionally been difficult to value due to the characteristics of their potential income streams and lack of similar comparator transactions (an issue that occurs due to the inherent novelty, originality or distinctiveness requirements for intellectual property rights).

Further, the adoption of rigorous valuation approaches may have secondary benefits beyond tax considerations. Developing a consistent approach to valuation would assist corporations in understanding the value of their intangible assets in the broader context of their overall business strategies.

Background: Tax Issues with Transfer Pricing

Transfer prices are used to reflect the allocation of costs incurred between related parties for goods, services or the use of property. For example, if Ford Canada manufactures cars designed by Ford USA, Ford Canada could pay a transfer fee to Ford USA for the design and marketing work conducted in the United States. Where used legitimately in such a manner, transfer prices are used to efficiently allocate costs and resources across the international subsidiaries of a large organization.

However, these transfer prices are also subject to aggressive tax planning strategies: in transactions between related parties, a multi-national company could inflate transfer prices beyond those that can be legitimately allocated for the purpose of distorting the recognition of earned income and reducing tax liabilities.  By inflating transfer prices beyond their fair value, a multi-national company can shift non-related income earned in a higher income tax jurisdiction to be recognized as income in a lower income tax jurisdiction. In doing so, the multi-national company reduces their overall tax payable.

In the absence of regulation, this would be a trivial exercise for related entities. The company could exercise its control over both entities to determine the price as between the parties, regardless of market realities.

The “arm’s length principle” is set out under Article 9 of the OECD Model Tax Convention and has been widely adopted by tax authorities worldwide to ensure that the price charged (“transfer prices”) between non-arm’s length entities (such as subsidiaries and similar controlled entities) accurately and fairly reflects that would have occurred had the parties themselves not been related.

Canada has adopted the “arm’s length principle” under s. 247(2) of the Income Tax Act, providing a deeming provision that readjusts the transfer prices paid on non-arm’s length transactions to what the CRA considers would have been the price in a comparable arm’s length transaction (with a further 10% penalty under 247(3) in certain circumstances). This adoption is supported by the CRA’s information circular 87-2R and transfer pricing memoranda, which consider in more depth the application of the “arm’s length principle”.

The “arm’s length principle” is conceptually simple, but challenging to implement in practice, particularly where the underlying assets include intangible assets. Intangible assets comprise of the majority of the assets in today’s companies, but they are difficult to value without involving a great deal of valuer subjectivity and financial modeling assumptions. To further complicate the issue, traditional methods of valuing tangible assets are limited in their application to intangible assets. This is due to a lack of comparable transactions, often unpredictable income streams and difficulty in defining clear substitutes for the asset.

Transfer pricing has been a “hot button” issue for tax authorities around the world. While estimates vary, the magnitude of the trade distortions is immense – theUnited States estimates that it alone loses $100 billion USD per year through offshore tax evasion.

In 2006, the IRS settled with GSK over a transfer pricing dispute, whereby GSK paid the IRS approximately $3.4 billion as part of an agreement to settle a dispute for the tax years of 1989 to 2005. At the time, this payment was the single largest payment to the IRS to resolve a tax dispute.

The CRA’s position is unenviable – the CRA is tasked with protecting the outflow of taxable income from illegitimate transfer pricing schemes, but has great difficulty in adducing pricing data for comparable transactions.

Background: Glaxo’s Transaction

GlaxoSmithKline is a multinational pharmaceutical company that was selling branded pharmaceutical drugs in Canada through its Canadian affiliate, Glaxo Canada. GlaxoSmithKline’s business model comprised of two stages: the first stage was the primary manufacturing of the active ingredient and the second stage was the packaging of the active ingredient in a drug delivery mechanism.

The first stage was conducted by GlaxoSmithKline’s affiliated subsidiaries in Singapore and the United Kingdom. These manufactured drugs were then sold to GlaxoSmithKline’s clearing companies, who then sold the drug to Glaxo Canada. Glaxo Canada conducted the second stage, where it would package the drugs with a delivery mechanism, market and sell it under a GlaxoSmithKline trademark. In this case, the trademark was Zantac.

Glaxo Canada had two agreements; a license agreement and a supply agreement, which provided Glaxo Canada with the intellectual property, product support to package and sell Zantac, and the active pharmaceutical ingredient (API). The specific rights included involved:

• The right to manufacture, use and sell the entire existing and future portfolio of Glaxo world products;
• The right to use the trademarks owned by the Glaxo Group (including Zantac);
• The right to receive technical assistance for secondary manufacturing of the products;
• The use of registration materials prepared by Glaxo Group;
• Access to new products and improvements in drugs;
• The right to have a Glaxo World company sell Glaxo Canada any raw materials;
• Marketing support; and
• Indemnification against damages arising from patent infringement actions.

Further, Glaxo Canada was contractually prohibited from buying ranitidine from the open market, namely non-GlaxoSmithKline approved sources.

In Canada, there was a compulsory licensing scheme (now repealed) that permitted generic drug companies to sell generic versions of pharmaceutical products under patent protection if the generic drug companies paid a 4% royalty to the patent owner. In the taxation years, ranitidine was sold under the ambit of this compulsory licensing scheme at prices substantially lower than those paid by Glaxo Canada for its ranitidine.

Brian Chau is a graduate of Osgoode Hall Law School.

The post Canada v. GSK - Intellectual Property Rights and the Arm's Length Principle appeared first on IPOsgoode.

Background

Re-examination provides a summary means of challenging a patent, limited to certain grounds supported by affidavit evidence. If the requester is able to demonstrate that there is a 'substantial new question of patentability', a re-examination proceeds akin to the initial examination of the patent during application. (This standard has recently changed in respect of one of the methods of re-examination in the United States but the change is not material for the purposes of this article) A examiner re-examines the patent and the examiner's decision may be appealed by the patent owner to the Board of Patent Appeals and Interferences (the Board). The decision of the Board can then be appealed to the Federal Circuit.

Invalidity proceedings, on the other hand, are initiated as a part of court actions and generally involve a full trial process. Litigants have the benefit of oral evidence, discovery and a hearing before the Court but the process is also more expensive and longer in duration.

Given their differences, challengers are left with a tactical decision that is based upon the particular circumstances of the case and their strategy. In certain situations, one is clearly superior to the other, but what happens when both re-examination and invalidity proceedings are used together?

In a recent case, (Baxter), the United States Court of Appeals for the Federal Circuit considered this issue, grappling with a conflict between administrative and judicial decision-makers, the potential for abuses of process and the importance of consistency and finality in Court decisions.

Baxter concerned a dispute regarding Baxter International’s patent for a “Method and Apparatus for Kidney Dialysis”, U.S. Patent 5,247,434 (the ‘434 patent). The particular claims in question related to the means and interface used for the control of certain functions of the dialysis machine.

One of Baxter’s competitors, Fresenius, challenged Baxter’s claims through both an invalidity proceeding and a subsequent re-examination. Fresenius’ initial action failed as a matter of law to show clear and convincing evidence and this outcome was . The Federal Circuit noted that “Fresenius failed to present any evidence-let alone substantial evidence-that the structure corresponding to the means for delivering dialysate limitation.... existed in the prior art”.

In parallel with the litigation, Fresenius initiated a re-examination of the ‘434 patent. Fresenius relied upon references that were not raised in the action and the examiner found that these references rendered obvious the claims in question.

The examiner’s conclusion was appealed to the Board and the Director of the PTO ordered the Board to consider the Federal Circuit’s decision in the Fresenius litigation. The Board affirmed the examiner’s rejections and noted that “a lower standard of proof and the broadest reasonable interpretation standard of claim construction apply at the PTO and therefore the agency is not bound by the court’s determination”.

The Decision of the Federal Circuit

Baxter appealed the decision of the Board to affirm the examiner’s rejection of the claims to the Federal Circuit. On first glance, this appears to be a dilemma: the Federal Circuit, in the Fresenius litigation, has ruled in favour of the validity of the claims but the Board and the PTO has decided against the validity of the claims in question.

In this peculiar situation, the majority decision of the Federal Circuit reviewed the evidence and the possible conflict between the invalidity proceeding and re-examination. The majority was sensitive to the potential for conflicting outcomes and noted that “when a party who has lost in a court proceeding challenging a patent...provokes a re-examination in the PTO, using the same presentations and arguments, even with a more lenient standard of proof, the PTO ideally should not arrive at a different conclusion”. The majority found that in this case, the examiner’s rejections were based on references that were “not squarely at issue during the trial on the invalidity issues”, and therefore relied upon new prior art. The majority upheld the rejections but commented the tactical nature of Fresenius’ in obiter: “Why Fresenius did not present that prior art before the district court we do not know”.

Newman J., in her minority decision, dissented. Newman J. was primarily concerned with the erosion of judicial supremacy by an administrative decision maker. She noting that upholding the administrative decision effectively violated the constitutional authority of the Courts and the rules of estoppel and preclusion. She argued that the principles of judicial finality should have applied “in all forums” and thus should have precluded Fresenius from raising the matter again on the issues of fact and law based on the logic that they had “one good bite at the apple and should not be given a second”.

She was concerned about the fairness of the process, leading to the potential harassment of patent owners through multiple lawsuits that end up wasting judicial resources and incurring unwarranted costs to the parties. She supported re-examination as an ‘efficient and economical alternative to litigation’ as a part of the ‘tactical armory’ of litigators but stressed that its purpose should not distorted to enable administrative agencies to override the final decisions of the Courts.

Analysis

This case is reminiscent of an earlier case in the Federal Circuit, , where a similar fact situation arose. In CEC, the re-examination was conducted years after the litigation confirmed the validity of the claims and applied the same references in a different manner. The decision in CEC was also similar: the majority upheld the rejection of the claims with Newman J. providing a strongly worded dissent raising the same issues as in Baxter, namely arguing for preclusion, finality and concerns about the overstepping of administrative authority.

Both the majority and Newman J. have valid arguments: while re-examination is designed to further the purpose of patent law by removing deadwood claims from the Patent Register, it is important to ensure that the overall process is still fair to both the patent owners and the patent challengers.

Extrapolating from the majority decisions in both Baxter and CEC, a challenger would be able to use re-examination to effectively obtain a ‘second chance’ to challenge the validity of the claims using the same references, so long as the arguments utilize the references in a different manner from that in the original invalidity proceeding.

To resolve some of the concerns that were raised in this decision, this editor recommends that further guidance be provided through the following legislative amendments:

1. Where concurrent invalidity proceedings and re-examinations have been initiated and not yet resolved, either party should be entitled to request a stay of the later of the proceedings or re-examination absent a reason to the contrary;

2. Where a claim has been challenged by a prior re-examination or invalidity proceeding, the subsequent judge or examiner must consider the prior decision in coming to their own decision regarding the validity of the claim; and

3. Where a claim has been challenged by a prior re-examination or invalidity proceeding, the challenging party should be precluded from doing so unless they indicate the reasons that (a) the new arguments are substantially different than the earlier arguments and (b) why the new arguments were not raised earlier.

The goal of these amendments would be to provide judges and examiners a better framework to deal with the co-existence of the different provisions. A level of discretion is required to ensure that there is the necessary latitude to prevent abuses of process while at the same time allowing for the consideration of new arguments that have merit.

Further, the stipulations that the challenger provide reasons if the validity had been upheld in a prior re-examination / invalidity proceeding are designed to provide decision makers with more information that they can use to decide whether the new argument is bona fide or if it should be precluded on grounds of abuse of process.

Brian Chau is a recent graduate of Osgoode Hall Law School.

Editor's note (19/12/12): A more detailed version of this piece has been published in the Intellectual Property Journal (IPJ), "Re-Visiting Patent Re-Examination under Sections 48.1-48.5", 24 I.P.J. 279.

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The student, Richard O’Dwyer, is a 23 year old British citizen who ran a small website, TVShack.net, which allowed visitors to the site to access videos located on third party servers. Notably, unlike a cyber-locker such as Megaupload, TVShack did not actually host any files for streaming or downloads but only acted as a directory of sorts to websites that did. TVShack was also a relatively small operation – with approximately 185,500 page views a month, dwarfed in comparison with the 20 million users of The Pirate Bay. The website did not charge its users but rather generated an income stream through the display of advertisements, apparently earning in the range of £15,000 per month.

In his defence, Mr. O’Dwyer’s counsel raised three main arguments; namely that: (1) the complaints did not reach a dual criminality requirement; (2) it would be unjust or oppressive due to the passage of time; and (3), it would be disproportionate to order extradition and it would in breach of his human rights. District Judge Quentin Purdy rejected all three arguments raised by the defendant’s counsel.

With respect to argument (1), he found that it would also be an offence under UK criminal law, and noted that a provision in the that would exempt the criminal penalties for “mere conduits” did not apply in this case. The Judge noted that regardless of the fact that no recordings were actually stored on the website, Mr. O’Dwyer acted as more than a “mere conduit” given his level of control over the website, lack of attempts to prevent copyright, and the existence of a sign up / vetting procedure for users to use TVShack. This must be noted in light of the TV-Links , where TV-Links was able to successfully argue this defence.

With respect to argument, (2), the Judge found that enforcement of criminal justice operates across borders, the evidence is still available and current. With respect to argument (3), he found that the defendant’s convention rights would be safeguarded to the Court’s satisfaction if on trial in the United States.

Regarding the outcome of this case, there have been several concerns raised by several civil liberty groups about the 2003 US-UK Extradition treaty: it does not provide any provision for judges to consider whether the forum is appropriate in the circumstances. In this situation, this could have been an argument worth considering – the servers were not located in the US, Mr. O’Dwyer has not been in the United States since he was five years old and it appears that the only link was that the infringement was with regards to copyrighted materials owned by from companies in the United States. In this situation, it may have been better to have heard the case in the UK courts instead.

Mr. O’Dwyer has initiated an appeal to this decision.

Brian Chau is a JD Candidate at Osgoode Hall Law School.

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Until recently, Canada did not recognize protection for invasion of personal privacy per se between individuals. This position was seen in the Ontario Superior Court of Justice decision in , where Whitaker J. found that a freestanding tort of the invasion of privacy did not exist in Ontario. Jones v. Tsige was a case where the defendant improperly accessed the plaintiff's private banking information in an attempt to confirm whether the plaintiff was receiving child support payments. The Superior Court of Justice noted that Canadian courts were reluctant to recognize a separate right in light of the Ontario Court of Appeal’s decision in , where the court noted that there is no "free standing right" to dignity and privacy under the charter, and dismissed the plaintiff’s claim on the basis that Ontario law did not recognize a tort of breach of privacy. This position was criticized by many academics and even under IP Osgoode in by David Vaver.

This position was reversed by the  in a decision two weeks ago, whereby Sharpe J.A. recognized a new tort, “intrusion upon seclusion”, finding that aggrieved parties should have recourse for violations of their privacy, especially in an age where vast amounts of private information is generated and stored. Summary judgement was granted in Jones' favour, with damages amounting to $10,000.

A similar case was decided in the England and Wales High Court, , where a dispute between two directors of a company led to supposedly private conversations being used in a malicious way to make false allegations about the health of one of the directors. The director, Mr. Cooper, was having a private discussion with another director, whereby he disclosed certain health issues he was facing in a manner that was explicitly confidential. The CEO, Mr. Turrell, had the room “bugged”, and made public allegations about Cooper’s health on both his blog and Twitter account, embedding the transcript and the recording of the discussion. In coming to his decision, Tugendhat J., granted a permanent injunction for the plaintiff and a rather large sum of damages to Mr. Cooper: £50,000 for libel, an additional £30,000 for misuse of private information. It was also noted in obiter that had there been only misuse of private information, he would have given £40,000 in damages.

These cases demonstrate a growing trend around the world towards extending the common law to provide legal protection where one member of the public misuses the private information of another. In the ever-evolving reality of technological advances, it has become trivially easy for a malicious party to capture the personal and private information of an individual, and it is a welcome sight to see the Courts starting to take an active role in demonstrating that this form of behavior is not acceptable in today’s society.

Brian Chau is a JD candidate at Osgoode Hall Law School.

The post Is Anyone Listening? appeared first on IPOsgoode.

A recent case, , came through the US Court of Appeals, Federal Circuit, which highlighted potential conflicts between findings of validity that arise from re-examination on the one hand and an invalidity action on the other. This case appeared to be rather odd: the Federal Circuit confirmed the validity of certain patent claims in a matter in 1998, and then under subsequent re-examination, found that the same claims were invalid due to issues of obviousness 9 years later. The re-examination was appealed to the Federal Circuit.

On first glance, this is problematic: the same issues seem to be re-litigated, with a different result – was this simply the re-litigation of an issue that was already litigated to finality in prior judicial proceedings? Would this be a situation where the PTO overstepped its authority during the re-examination and ignored a final judgement of the Court? If so, should the principles of res judicata or abuse of process prevent the reconsideration of these issues?

For those of us unfamiliar with re-examination proceedings (they are seldom applied in Canada, but the more popular ex parte re-examination in the United States is very similar to the Canadian re-examination), re-examination is a relatively summary and expedient proceeding whereby a party files a request to the USPTO to re-examine an already-granted patent. The re-examination is limited in focus, only considering anticipation and obviousness challenges based upon published documentation, patents and patent applications that should have been considered during the initial examination of the patent prior to granting. This is in contrast to determinations of patent validity in full-blown court actions, where parties may challenge patent claims on a broader range of grounds, undergo discovery and the Court conducts hearings where the evidence is subject to examination and cross-examination. The majority decision was very short and is silent about the prior invalidity action and the potential for an issue of res judicata or abuse of process, upholding the finding by the Board of Patent Appeals and Interferences (BPAI) that the patent claims were obvious.

However, a fiery dissent was lodged by Newman J. who considered the case to be one where the principles of res judicata and issue preclusion should have prevented Powerscreen from requesting re-examination. In her dissent, she considered the various policy reasons involved: the public interest in finality, the conservation of scarce judicial resources, and the ability of an administrative agency to override a judicial adjudication.

These are all valid concerns – but let’s look carefully to see whether this situation should trigger these principles. Here, the same prior art is cited against the same patent, and the challenge is also on obviousness grounds. However, there is a key difference: The prior art, while considered previously, was applied in a different way than in the previous litigation in an obviousness challenge. In light of these circumstances, it may be interpreted as Newman J. proposing that, in the interests of finality, where prior art has been raised in prior proceedings, it should not be open to re-litigation. As Professer Vaver notes in his book, this line of thinking is similar to the current English rule and thus, similarly fails to take into consideration the countervailing public interest in intellectual property litigation.

As such, instead of applying a res judicata in this situation, it may be better to consider the abuse of process doctrine when determining when an issue is open to reconsideration. The abuse of process doctrine is, similar to res judicata, designed to provide finality in litigation and is a broader remedy where a court will preclude re-consideration of an issue where not only is there re-litigation but also an additional serious element where it is shown that the process which is to serve justice is being abused to work an injustice.

In this scenario, there is a strong public interest in ensuring that patentees are not granted exclusive rights against the public where their patent claims were either obvious or anticipated. If we accept the reasoning in Newman J.’s dissent, in the interests of finality, the patent system could reward unworthy claimants and penalize defendants who did not or could not exhaustively investigate their assertions. As such, while Newman J. does have some strong policy concerns, a more nuanced approach should be taken rather than instituting a complete bar on re-litigating on already-considered prior art.

There are certain situations where the courts should refuse to re-litigate, but these should only apply where there is a clear abuse of process, for example, where the parties are attempting to re-litigate on exactly the same issues, with arguments that do not provide any more merit than those already argued. While this may open the doors to some overlapping arguments in litigation, a less mechanistic approach to re-litigation would nonetheless help ensure that strong invalidity arguments are not unnecessarily barred simply because the prior art had already been considered in another light. Given the facts of this case, it appears that the balance is in favour of re-considering these issues.

Details of the Case

The original invalidity action and subsequent re-examination proceedings concerned US patent 5,234,564, a patent owned by the Construction Equipment Company (CEC) concerning a vehicle for screening rocks and plant matter (among other things).

In 1998, CEC sued Powerscreen for infringement. The Federal Circuit court confirmed the validity and corresponding willful infringement of certain claims in the ‘564 patent.

In 2007, a third party requester (possibly Powerscreen) requested an ex parte re-examination of the ‘564 patent, raising questions of patentability based upon previously considered prior art from the 1998 decision, applying the prior art in a different way than was alleged in 1998 (citing the same references and additional references, but placing strongest reliance on the same references that had been cited in the litigation). The PTO began a re-examination, finding that the request raised a substantial new question and in spite of amendments and submissions by CEC, the examiner rejected all the claims as obvious. CEC then appealed to the BPAI, who upheld the decision of the PTO. CEC then appealed to the Federal Circuit.

The post Re-litigating Patent Validity In Re Construction Equipment Company appeared first on IPOsgoode.

Apple commenced legal action in the WIPO against several domain names with obvious similarities to Apple products that host pornography instead of Apple-approved content. The domains in question are iphonecamforce.com, iphonecam4s.com, iphonesex4s.com, iphonexxxforce.com, iphone4s.com and porn4iphones.com, as reported by . To succeed, Apple will likely have to demonstrate that it has the trade-mark (and that the trade-mark is identical or confusingly similar), that the registrant has no legitimate interest in the domain and that the domain name was registered in bad faith.

These types of cases raise interesting questions as the internet becomes ubiquitous in how companies market and sell their products. Given the universal importance of domain names as addresses in cyberspace, the legal identity of a domain name registration has not been clear. Are they property? Are they an extension of trade-mark? How should they be regulated? Should companies be able to register domain names corresponding to valuable trade-marks with the intention to either extort the companies to buy the domain names back from them or to free-ride off the goodwill developed by the trade-mark?

It appears that the worst of these offenders is iphone4s.com, which uses exactly the same brand name as Apple’s latest generation handset. An innocent customer may be misled when the customer accidentally types in the address, and gets a rather shocking surprise upon loading the webpage. There have been several recent cases at WIPO with similar facts where the administrative panel decided to transfer the domain name registration to the trade-mark owner after deliberating on the matter ().

However, for the other domain registrations, it may not be as simple for Apple to require the owners to transfer the registrations. Simply because a domain name registration is found by a company to be offensive to the particular brand strategy associated with their product might not be sufficient grounds to demonstrate bad faith by the registrant. For example, porn4iphones.com unsurprisingly redirects to a pornography site. Would Apple be justified in requesting a transfer, saying that the domain registration would dilute the goodwill associated with their iPhone product line? Would the situation be different if the domain owner used the website for a pornography website specifically targeted towards the iPhone market?

What is interesting about this particular situation is the relatively high profile of the dispute – the mere fact that it is Apple initiating the complaint has generated a large amount of discussion among the internet-using public. As such, it provides a good opportunity to take a look at comments and concerns raised from consumers who may not have a deep understanding of the underlying legal framework. In a cursory review of the and  forums, I found several comments that I thought covered some rather cogent points:

• “Apple knew what they want to name their phones a long time ahead and could have registered that domain a long time ago… Apple has the same rights and this is a first come first serve service. Porn business might not be the most liked business but people invest money and expect returns. Buying or registering popular domains is a key feature of their business. For this reason, I absolutely disagree with what Apple is doing.” (Mad-B-One, Macrumors.com)
• “I'm sorry, but this is pretty hilarious... I feel bad for innocent folk who've gone to some of the more safe domain names, only to get a big surprise” (Sackvillenb, Macrumors.com)
• “Obviously Apple wants to do this because they are planning to launch their own porn site for iOS. That's why they are so adamant about no porn on the app store .. because they are planning their own porn newsstand app or perhaps Fap Store?” (HelveticaNeue, Macrumors.com)
• “So if you register a domain before some company copyrights the words...who wins?” (ZipZap, Macrumors.com)
• “They absolutely mislead the user. A lot of users are not Internet savvy. If they type "iPhone4s.com" into their browser...what do you think they expect to see? People can register domains - but if they register using someone else's brand/trademark then they are infringing. They are using Apples global brand presence to attract traffic to their sites… When a domain name has no meaning/relevance to the content or products and services on the site...this is classed as being registered in bad faith under UDRP.” (fleggy, Macrumors.com)
• “Can't Apple just buy the domain name from the current owners? It was registered 3 years ago, an although they are obviously trolls nothing stopped Apple from registering the address in advance.” (saa rek, Appleinsider.com)
• “Why pay the market price when you can take the average joe to court, beat him down with legal costs, and force him to give it up for much less.” (airnerd, Appleinsider.com)
• “Because Apple does not want the iPhone name linked with porn venders who are clearly using the popularity of the brand to lure in people who may have no need or interest for porn. Apple has every right to keep it's name clean and not associated with porn which is a controversial subject that they need no part of…” (Rtapps, Appleinsider.com)

It appears that there is public support for both sides of the coin but also some confusion with regards to the purpose of domain name dispute resolution mechanisms. Are they designed to protect innocent brand owners from market confusion and dilution of their brands, or is it a tool for brand owners to oppress domain name registrations that they find morally repugnant? Maybe by reading about high-profile matters like these, the average internet user will learn what constitutes “bad faith” and also what principles these domain name decisions are based on.

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, a teaching fellow at Stanford Law School, conducted an empirical analysis of litigation by various classes of patentees in a randomly selected sample of 1,143 patents issued from May 11, 1993 to May 10, 1994. The draft paper, entitled considers the time from filing in which a patent owner asserted their rights in an infringement action. His results indicated a drastic disparity between entities primarily acting as “product companies” and “non-practicing entities” (NPEs).

NPEs were broadly identified in a 10 class classification system adopted from work by Mark Lemley and Nathan Myhrvold. Generally speaking, any non-product producing company was identified as an NPE in this paper; what may be colloquially referred to as a patent troll.

For a product producing company, the exclusive rights granted by a patent are important to aid the company in recouping its substantial investment into research and development. The rights are significant – they prevent a competitor from free-riding while the company develops the market for its product. While there are some strategic incentives for engaging in litigation in the early years of protection, litigation in the later years of protection may have serious repercussions. Litigation against established competitors may spark a cycle of counter-litigation or could potentially damage the goodwill and reputation of the company. Further, product companies may not have the capabilities to assess the potential value of their exclusive rights – litigation is not a primary source of revenue and product companies not specialists in the business of patent litigation.

For a NPE, the exclusive rights granted by a patent are more lucrative once an alleged infringer has developed a market incorporating the technology described within the patent. An NPE can free-ride on the success and the accumulated value of such a market, extracting a lucrative settlement or licensing agreement. It would make financial sense to wait until the market is most ripe prior to initiating litigation which is generally the latter years of patent protection. Further, NPEs are in the business of asserting patent rights and likely employ teams of specialists who identify and monitor potential infringement. As such, they are better positioned than product companies to engage in litigation. This is especially true for NPEs whose sole source of revenue is through litigation and licensing agreements – if they weren’t good at enforcing their rights, then they would be quickly out of business.

Mr. Love found that the average product company patent was asserted in the early years of protection and the average NPE patent was asserted in the final years of protection. In particular, his results indicated that product companies begin litigating their patents on average more than 12 years before patent expiration and finish with an average of more than 9 years of patent life remaining. NPEs on the other hand begin litigating their patents less than 9 years prior to patent expiration and finish with an average of 4.5 years remaining. He also found that the traditional belief that NPEs assert an outsized number of high tech patents holds true - possibly due to the short technology lifecycles and the ease of obtaining broad patents rights.

The results are not startling – a rational actor would litigate based upon the particular business objectives in mind. However, the results provides light into two arguments raised by Mr. Love: (1) Serious doubt should be cast upon the final years of the patent term and; (2) Congress should act to increase the frequency and magnitude of maintenance fees in the latter half of the patent term.

With respect to his first argument regarding the length of protection, there are international law obligations that may make this change infeasible without a great deal of international cooperation. Under GATT/TRIPs, signatories are required to give patent owners 20 years of protection following filing. Such a change would be difficult at best to push through without serious trade ramifications. However, I do believe that additional research in this direction is merited, given that the acceleration of technological change especially as related to high-tech fields.

The results beg the question as to whether the existing balance between exclusive rights and the public interest is appropriate. Let’s consider the cellular phone space, for example. Interpolating on recent history, every few years a paradigm-changing technology is introduced which renders old technology obsolete. Does it make sense to give a patentee 20 years of patent protection in these circumstances? Perhaps as Mr. Love argues, shortening the protection period may have a beneficial effect on innovation by reducing rent-seeking behaviour by NPEs while minimally deterring innovators.

With respect to the second argument, increasing the amount of maintenance fees in the latter half of the patent term may prove to be a good idea – the years of protection that is arguably more important to product producing companies would be left intact, and the latter years of protection would only be maintained where a patent has a foreseeable value above the costs of maintenance. An increase of maintenance fee would require entities to be more judicious in determining which patents to maintain and which to lapse, as it could become financially infeasible to maintain large patent portfolios of dubious patents.

An Empirical Study of Patent Litigation Timing: Could a Patent Term Reduction Decimate Trolls Without Harming Innovators?

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In Canada and the United States, copyright owners may elect to recover an award of statutory damages for each work infringed instead of actual damages and profits. A wide range of statutory damages is possible and this has led to a series of troubling cases in the United States, where large damage awards were given and then substantially reduced in downstream court proceedings.  is indicative of the problems facing the current system as it relates to file-sharing.

The amount of statutory damages is set at a minimum of $500 to a maximum of $20,000 in Canada, and similarly from $750 to $30,000 in the United States. The determination of the exact number is set at an amount that the court considers “just”.

The range of damages is particularly troubling as it lends an air of uncertainty to every actor potentially affected by copyright law: for owners of copyright, the requirement to go through an expensive trial to recover damages which may or may not cover litigation costs; and for the public, not knowing whether one’s infringing actions would lead to a mere slap on the wrist, or in the worst case scenario, becoming bankrupt by a particularly large judgment from the Court.

In , a large statutory damage award was given at the trial level, reduced at the District Court level, and finally the reduction was overturned in the Court of Appeal only to be reconsidered again by the District Court.

Most recently, on September 16, 2011, the US Court of Appeals, First Circuit, reinstated a rather large award of $675,000 in statutory damages with respect to illegal usage of various peer to peer (P2P) file sharing networks to download and distribute 30 songs whose copyrights were owned by the plaintiffs in question.

Judge Nancy Gertner for the Federal District Court found the award was so “oppressive” that it was unconstitutional, and reduced it ten-fold to $67,500. The Court of Appeals overturned this decision and found that the district court erred by not considering the procedural issue of remittur (a ruling to reduce a jury-awarded amount of damages) before considering the issue of constitutionality. While the Court of Appeal did not discuss the specific constitutional issues raised, the Court found that the District Court should have first used the remittur process and ordered the District Court to reconsider this case with remittur in mind. In a remittur, the District Court considers the evidence and decides the maximum amount that the jury could have awarded under the facts presented. If the maximum amount is lower than the amount awarded by the jury, the District Court reduces the damage award and the plaintiffs would be able to elect whether they would (1) accept the reduced damages, or (2) request a new trial.

The challenges faced by the Court of Appeal and the District Court in this matter highlight significant issues with the current regime of statutory damages in the United States, a provision that is largely mirrored in Canadian law except in respect to the damage ranges. On Page 5 of its decision, the Court of Appeal noted that the case “raised concerns about the application of the Copyright Act which congress may wish to examine”.

It is this author’s opinion that this case, along with several others, is a clarion call for Parliament or the Cabinet to revisit the regime of statutory damages. The myriad of poly-centric concerns (economic, proprietary, authors, public) are beyond the expertise of the judicial branch - specific guidance is necessary from either the legislative or executive branches to outline the extent of liability for file-sharing, taking into account the particular interests of the affected stakeholders and the Canadian public.  The newly re-introduced Bill C-11 attempts to do this.

The current regime is broken – having judges and juries interpret statutory damage provisions with such a wide range of discretion comes at a significant deadweight cost to all parties involved, be they the general public or copyright owners. The mixed jurisprudence provides little to no guidance: an award of statutory damages ranges from mere slaps on the wrist to penalties so oppressively large that in most practical situations it will bankrupt the defendants.

Both of these scenarios are obviously undesirable: the music industry is not in the business of bankrupting potential customers, but conversely, without some form of legal protection, significant investments in the creative arts will not be supported by sound business sense. These issues are further compounded with the prohibitive costs, uncertainty and delays of litigation.

Either Parliament or the Cabinet needs to provide the judiciary with the necessary tools to decide these cases in a consistent and just manner. In my opinion, there are two approaches in which could be accomplished: (1) statutory reform of the Copyright Act, namely to provide for less discretion in the size of awards and enumerated considerations which may serve to vary damages in particularly egregious situations (Bill C-11 does not include such guidance); and/or (2) the establishment of an expedited / simplified process with specialized expertise similar to the CDRP procedure used by the CIRA to resolve domain name disputes. While this latter avenue requires further research, one possibility may be that a system analogous to traffic court should be implemented, borrowing the concept of graduated fines, non-monetary penalties such as suspension of service, mandated courses and/or a streamlined court process.

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The Conservative majority government has placed a new copyright reform bill, “An Act to amend the Copyright Act” on the earlier today. This new bill is expected to be introduced tomorrow.

For those unfamiliar with parliamentary publications, the Notice Paper provides matters which may be raised for consideration by the House of Commons. Once the notice period has expired, items on the Notice Paper typically move on to the Order Paper (the agenda of items of business to be considered by the House).

Several reports (, , ) have commented on this development with the general expectation that the new bill will be substantially similar to the controversial . Bill C-32 passed the second reading in the Parliament, but fell as a result of the dissolution of the Canadian parliament during the Spring 2011 re-election.

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In a recent , Christopher J. Buccafusco and Christopher Jon Sprigman consider whether IP transactions are subject to “endowment effects”. The endowment effect is a human behavioural phenomenon in which an individual’s perceived value of an object they own is greater than the value prescribed by an objective third party.

This bias was demonstrated in held in 1990 by Kahneman, Knetsch and Thaler, who found that randomly assigned owners of a mug required significantly more money to part with their possession than randomly assigned buyers were willing to pay to acquire it. The endowment effect is important because it sheds light on a hidden transaction cost that exists in the market: the valuation asymmetry between buyers and sellers has a significantly detrimental effect on overall market efficiency, especially in markets where participants have few guideposts to rely upon.

IP is very different than the traditional cases of the endowment effect – as an intangible creation of statute, it exists without physical substance, and there is a general lack of well-defined methods for determining value. Given IP’s growing role in many of the world’s largest and most powerful companies, an understanding of the endowment effect is necessary in helping to guide the evolution of IP rights, laws and licensing.

The study reports on an experiment considering a possible valuation asymmetry between authors of poems and potential purchasers of them, in the context of an IP licensing system. The study focuses on property that was both created by the owners, and non rival (consumption by one person does not prevent the consumption by another). In particular, an analysis was conducted on the prices that buyers were willing to pay (WTP) and sellers were willing to accept (WTA).

The results of the study indicated that there exists a statistically significant difference between the WTP and WTA, suggesting that high transaction costs exist due to cognitive biases. These transaction costs in turn lead to suboptimal levels of market activity, as a gap exists where potential buyers and potential sellers are unable to arrive at a price that satisfies both parties.

The Experiment

The authors tested their hypotheses using a set of experiments with three parties participating: Authors, Owners and Bidders. The demographic consisted of a group of 287 paid participants with a mean age of 24.

(1) The Contest “Eyes Closed” Method – Authors were invited to the lab to write haikus in a competition, where they were told that following a selection process (the writer of the best poem would receive $50), ten potential bidders would be given the opportunity to buy the chance of winning the the $50 prize. The Author indicated a price they were willing to accept (WTA) for their poem.

Next, Bidders were brought to the lab where they were told that they could buy the rights of the poem to the contest for a price, if the bid they entered (WTP) was greater than the Author’s WTA for that particular poem.

Finally, Owners were brought to the lab where they were assigned a poem written by an Author. For each of these poems, the Owners were told that they owned the rights to the prize money ($50), provided that their poem won the competition. They were placed in similar shoes as the Authors – they indicated the price they were willing to accept (WTA) for the rights to the potential winnings.

In all these cases the Authors, Bidders and Owners were provided additional follow-up questions to understand their motivations.

(2) The Contest “Eyes Open” Method – A variation of the contest where the Authors, Bidders and Owners were all shown the ten poems in the competition, including their own. The intention of the experimenters was to understand whether additional information would change the outcome of the contest.

(3) The Contest “Blind” Method- A variation of the contest where the Authors, Bidders and Owners were told that the poems would be selected at random for the prize.

The Findings

Contest 1

WTA difference between Owners and Authors not significant - The average WTA of the Owners and Authors was $21.23 and $22.90 respectively - not a statistically significant difference.

The WTA-WTP difference between Bidders and Owners/Authors was significant - On the other hand, the Bidders average WTP was $10.38, lending itself to quite a large gap (more than 2-1).

Contest 2

WTA difference between Owners and Authors not significant - The average WTA of the Owners and Authors was $23.45 and $20.05 respectively – again, not a statistically significant difference.

The WTA-WTP difference between Bidders and Owners/Authors was significant - On the other hand, the Bidders average WTP was $9.21, lending itself to quite a large gap (again, more than 2-1).

Contest 3

The WTA-WTP difference between Bidders and Owners/Authors was significant – Authors assigned a value of $18.92, Owners $15.98, and Buyers $5.60.

Overall

Between Contest 1 and Contest 2, additional information did not significantly affect results. Both illustrated a significant gap (more than 2-1) between the WTA of Authors and Buyers compared to the TB of the Buyers.

Between Contest 3 and the other Contests, the WTA/WTP gap is even larger – almost 3-1.

Impacts

The study results point toward an endowment effect where owners and authors have placed a strong, and rationally unsupported bias in the valuation of the rights associated with their IP. Even where subjects were presented with different amounts of information (per Contest 1, 2 and 3), the endowment effect persisted.

As such, care must be placed when developing the complex set of rules and regulations that govern IP and their role in the market – beyond simple rational rules, policy makers must take into account the potential transaction costs instituted by the human bias resulting from the endowment effect. The authors suggest that this is even more pronounced due to the fact that in general, inventors are not well positioned to exploit their work.

Given these gaps, the authors propose several policy alternatives that may indeed mitigate the endowment effect (e.g. royalty structures, different breach remedies, patent maintenance fees). Further research is required to understand the endowment effect in more complex situations, such as where there is more substantial investment in creative effort.

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