The US Senate has been grappling with a proposed reform of patent law for many years – hence the various proposed bills such as the Patent Reform Act of 2007, the The Patent Reform Act of 2009 and The Patent Reform Act of 2011. Last week the US Senate passed S.23, the America Invents Act [PDF] with broad bipartisan support. The bill now goes to the U.S. House of Representatives. This Senate bill has not yet become law, and the ultimate outcome depends on the text of the corresponding House bill (which has not yet been unveiled) and the process of reconciling the two bills if there are differences.  However, if it does become law, it would represent the biggest shift in US patent law in half a century.  Among the changes are the switch to patent priority from the present first-to-invent system to a first-to-file system, as we have in Canada.

Calgary – 07:00 MT

 

In March 2010, a U.S. district court’s ruling that isolated DNA and inventions that use isolated DNA are not eligible for patent protection sent shockwaves through the biotech and life sciences sector in Canada and the US. Association for Molecular Pathology v USPTO, 09 Civ. 4515 (Link courtesy of Genomics Law Report) resulted from a lawsuit against Myriad Genetics, a company that patented the BRAC1 and BRAC2 genes, genes associated with increased risk of breast cancer and ovarian cancer.  The court overturned the patents on the basis that inventions that use isolated DNA are not markedly different from “products of nature”.  The decision is currently under appeal to the US Federal Circuit and a decision is expected in 2011. 

BioBusiness Magazine has interviewed Richard Stobbe on this topic in its current issue: The Myriad Decision: What does the patent dispute mean to Canadian biotech? 

Calgary – 07:00 MST

 

We’ve all agreed to releases and waivers. We do it on paper, before bungee jumping, skiing or attending a kids’ birthday party. Or we agree online, before booking an event, ordering a product or downloading software. This is the fine print that essentially says that the operator or vendor has no liability or limited liability for any injury, damages or loss. Do these hold up in court?

In a recent case (Loychuk v. Cougar Mountain Adventures Ltd., 2011 BCSC 193) the BC Supreme Court had to consider this question in connection with an injury from ziplining. Prior to booking the activity online, the participants were advised on the website that a waiver of liability was required in order to participate in the activity. It was a one-pager entitled “RELEASE OF LIABILITY, WAIVER OF CLAIMS AND ASSUMPTION OF RISK AGREEMENT”. The participants signed a paper copy of the release before ziplining, and an injury occurred. The court dismissed the personal injury lawsuit on the basis of the release, confirming a long line of cases upholding such clauses.

Vendors and operators who wish to make use of such clauses in their online agreements should take care in drafting and implementing the terms. 

 

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Answer: Forum Selection.  The concept of “forum selection” can be summed up as follows: where 2 parties are entering into a contract and they are located in different jurisdictions (different countries, provinces or states), then they can choose the “forum” or the location where their disputes will be settled. This choice usually covers both law and location – for example, the law of Alberta and the courts located in Calgary. Or the law of B.C. and arbitration in Vancouver. These clauses are also referred to as “mandatory jurisdiction” or “choice of law” clauses. There are subtle differences between them, but generally they all serve the same purpose.  As an online consumer, you may have agreed to be bound by the laws of Washington State (Microsoft), California (Apple) and Ontario (BlackBerry).

In the US, forum selection clauses are respected by the courts: a recent decision (Evans v. Linden Research, Inc., E.D. Pa. Feb. 3, 2011) upheld the provisions of the Second Life online user agreement, confirming California as the proper venue pursuant to the forum selection clause.

In Canada, courts will generally hold the parties to their contract, which includes their choice of law and forum. So these clauses will be upheld, unless there is “strong cause” or convincing evidence to satisfy the court there is a really good reason not to uphold the forum selection clause. Sounds a bit circular – (courts will uphold the clause…unless they won’t) – but this gives Canadian courts the flexibility to weigh the surrounding circumstances. In the recent case of Hudye Farms Inc. V. Canadian Wheat Board, 2011 SKQB 29 (CanLII), an online sign-up process for a Canadian Wheat Board grain-handling contract incorporated certain standard terms. These standard terms specified that disputes would be governed by the courts of Manitoba and the application of Manitoba law.  Although no-one actually signed those terms, the court agreed that they were binding on the parties through a series of agreements and click-through screens.  The clause was upheld, and the lawsuit transferred to Manitoba.

Related Reading: E-Commerce & Internet Jurisdiction

Calgary – 07:00 MST

 

In our earlier posts, we reviewed the recent Uniloc decision in the US that effectively disposed of the 25% Rule of calculating patent damages. Has this rule been used in Canada?

To a certain extent, yes. Here are 2 leading cases: In Alliedsignal Inc. v. du Pont Canada Inc., 1998 CanLII 7464 (F.C.), the Court stated that a reasonable royalty for patented technology was between 25% and 33% of the plaintiff’s profits and applied a series of 13 factors that could tend to increase or decrease the royalty within the range. For example, if the parties to the litigation were direct competitors, that would tend to increase the royalty rate.

In Jay-Lor International Inc. v. Penta Farm Systems Ltd., 2007 FC 358 (CanLII), the anticipated profits approach was used, and the court assessed the 13 factors that were used in Alliedsignal.  This analysis was used to determine where the royalty should fall within the range of 25% to 33% of profits. These are part of the “hypothetical negotiation” that courts construct to determine the appropriate royalty. The factors include things such as:

• Exclusivity - whether the license would have been exclusive or not
• Territorial restrictions – whether the license would have been restricted geographically
• Risk of market success of the patented invention, whether it was a proven technology
• R&D – whether the inventor incurred high research and development costs to bring the product to market

Courts in the US have looked at similar factors.  The Uniloc decision in the US is likely to impact Canadian assessments of patent damages, but will not cause a significant change in the court’s approach.  The factors used by Canadian courts allow a measured, flexible approach, which won’t be up-ended by the demise of the 25% Rule in the US. 

Related Event: March 17, 2011 -  Field Law is hosting the Licensing Executives Society on the topic of “IP Valuation in 2011” presented by Robert Doran, KPMG. Link to Register

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While the Canadian “business method patent” debate continues by means of the Amazon appeal, the debate is also continuing in the US. South of the border, courts are applying the US Supreme Court’s reasoning in the infamous Bilski case.  A recent court decision out of Texas (a popular jurisdiction for patent infringement lawsuits, including cases against Canadian companies) has interpreted another business method patent claim.

H&R Block Tax Services, Inc. v. Jackson Hewitt Tax Service, Inc.[PDF], 6-08-cv-00037 (E.D. Tex., February 2, 2011) involved a dispute over a patent for an abstract intellectual concept – the processing of collateralized loans. You may recall Bilski also involved a method patent for financial services – in that case it was a risk management tool and the invention was ultimately found to be unpatentable. In this case, the court upheld the patent, even though it failed the machine-or-transformation test. In the US, the Supreme Court was clear that the machine-or-transformation test is not the exclusive or determinative test for patentability. Here, the business method claims were subject to meaningful and reasonable limitations which convinced the court that the invention was patentable. 

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How do we value IP?

In a patent infringement case, a plaintiff (the patent holder, whose patent is infringed) can get 2 types of remedies: either damages or an accounting of profits.  If the plaintiff proves infringement, then it can elect only one of these 2 remedies. While the goal of each remedy is the same, the underlying principles are very different:

Damages seek to compensate the plaintiff for losses suffered by the plaintiff as a result of the infringement. Whether the infringing party actually earned any profits is irrelevant.

On the other hand, an accounting of profits aims to calculate the profits that the infringer made through the improper use of the patented technology. The infringer disgorges those profits on the basis that the money rightly belongs to the plaintiff. The infringer is only required to disgorge those profits earned from the infringement of the plaintiff’s patent.

It’s up to the plaintiff to prove damages. Where the patent owner actually sells its patented product (as opposed to licensing the patent), it is entitled to the profits on the sales it would have made if the infringing product had not been on the market. Otherwise, the plaintiff is entitled to a “reasonable royalty”.  Which brings us to the critical question: what is a “reasonable royalty”? Many courts in Canada have calculated a reasonable royalty according to what the infringer would have paid if it had entered into a legitimate licensing agreement with the patent holder. Put another way: what rate would result from negotiations between a willing licensor and a willing licensee. This is where the difficult task of IP valuation really gets tricky.  In the US, the “25% Rule” was often used as a guide for determining the royalty that two parties would have hypothetically negotiated. That rule has been tossed by the US Federal Court of Appeal. Is that rule used in Canada?

In Part 3, we’ll examine that question and look at one of the leading cases in Canada.

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What is intellectual property worth?

It is notoriously difficult to ascertain damages for patent infringement.  In the US, the “25% Rule” has been used as a rule of thumb in countless cases and negotiations, as a way of determining fair compensation for infringement of a patent. The 25% Rule suggests that a licensee should pay a royalty rate equal to 25% of its expected profits for use of the licensed IP.  As recently as September, an article was published proclaiming “The 25% Rule Lives On“, IP Law 360, Sept. 8, 2010. In a decision that sent waves through the patent litigation world on January 4, 2011, the US Court of Appeals for the Federal Circuit in Uniloc USA, Inc. et al v Microsoft Corporation [PDF], has thrown out this rule as a method of measuring patent damages:

This court now holds as a matter of Federal Circuit law that the 25 percent rule of thumb is a fundamentally flawed tool for determining a baseline royalty rate in a hypothetical negotiation. Evidence relying on the 25 percent rule of thumb is thus inadmissible under Daubert and the Federal Rules of Evidence, because it fails to tie a reasonable royalty base to the facts of the case at issue.

In Canada, a patent owner whose patent has been infringed may elect, as a remedy, either an accounting of profits or an award in damages. In next week’s post, we review this in more detail.

Related Event: March 17, 2011 -  The Licensing Executives Society – Meeting of the Calgary Chapter on the topic of “IP Valuation in 2011” presented by Robert Doran, KPMG. Link to Register

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Since 2009, developing countries (including Canada) have moved in the exact opposite direction – by fast-tracking cleantech patent applications to remain competitive in the international marketplace (See: Update: Green Technology Patents in Canada).

Prof. Guaragna argues that patent reform is unlikely to strip away patent rights in the near future, but “open-source” licensing can provide a solution that functions within the existing patent regime. Open source licensing is well known in the software industry, but is in its infancy in other fields such as climate change and life sciences.  Patent pooling can be used as an open source licensing tool:

• Patent pooling has been successful in commercial applications – for example the DVD licensing pool licenses the dozens of patents for DVD technology – DVD-ROM drives, players, decoders, and discs; a similar pool was established for RFID technology.  
• Patent pooling is typically voluntary but has also been put to effective use by the US government when it mandated pooling of aircraft patents in 1917 as the US entered the First World War.
• The Medicines Patent Pool has been established by the international community to deal with HIV treatment in the developing world.
• Can a CleanTech Patent Pool be next? The Eco-Patent Commons is the closest thing so far… but Canada is not a contributor.

Related Reading:

1. Open Source Resources
2. WIPO review of CleanTech patent pools [PDF]

The relationship between China and Canadian business is a complex one. Rising wages and a swelling Chinese middle class will fuel demand for Canadian products and commodities. However, rising wages in China’s manufacturing sector and increased fuel costs will also increase the price of Chinese imports for Canadian companies who have outsourced their manufacturing to one of Guangdong’s many factories.  That puts pressure on Canadian importers and retailers.

In either case – whether exporting consumer goods to China or outsourcing manufacturing to China – intellectual property rights (IPR) are critical for Canadian companies.  Recent reports suggest an encouraging trend:

The “Intellectual Property Tribunal” of the Supreme People’s Court of the P.R.C. has seen a surge in IPR cases in recent years. In 2010, over 1,000 foreign-related cases of IPR infringement were heard, but this number is a small fraction of the 40,000 IPR cases involving Chinese entities. IPR cases involving foreign companies appear to have success rates of about 50%. And 2010 statistics also show an increase in efficiency in handling IPR cases despite the surge in filings. All this is likely driven by the government’s high-profile campaign against IPR violations, including against online piracy. This suggests two things:

• The government (for its own purposes) is encouraging IPR enforcement, and domestic entities are taking advantage of the legal system in increasing numbers for IPR enforcement. Domestic entities wouldn’t be rushing to the local IP Tribunal unless they had some confidence that the process was worth pursuing. 
• Foreign entities don’t appear to be suffering any disadvantage or enjoying any advantage. Their claims are being processed along with those of their domestic counterparts – which is how a dispassionate legal system should work. 

IPR enforcement in China has come a long way, but it still has a long way to go. If you are doing business in China, get access to experienced legal counsel – in both Canada and the PRC – for trade-mark protection, trade-secret and patent protection, licensing agreements and manufacturing agreements.

Calgary – 07:00 MST

 

We have compiled a few recent open-source software (OSS) stories:

• GPL in the App Store: A recent article on ZDNet reviews the differences in treatment of apps subject to the General Public License (GPL) in Apple’s App Store compared with Google’s Android Market. It argues that Apple’s closed system is incompatible with the GPL and so apps built from open-source kernels can’t be sold through Apple’s store, whereas the Google marketplace is compatible with GPL-licensed apps. When Apple pulled the VLC player last year, OSS enthusiasts complained that iPhone users would be deprived of OSS apps like GNU Go and the VLC media player (See: App Law Update – Part 2: Breach of GPL).  However, it’s worth remembering that the apps were pulled because of complaints from the OSS community, who levelled copyright infringement allegations at Apple. It was in response to those complaints that the apps were pulled.  It should be noted that the GPL is merely one of many species of OSS licenses, and other forms of OSS license will not necessarily be incompatible with Apple’s App Store terms.
• OSS and M&A: Lexology has a review of the OSS issues to consider in the context of mergers and acquisitions. In particular, when buying IT assets, business owners should work closely with legal counsel to review the software issues and the risks, and arrive at a practical way of mitigating those risks. Depending on the scope of the transaction, this may involve everything from simple representations and disclosure schedules in the asset purchase agreement, to detailed code-reviews by technical advisors. A “fear” of OSS need not kill an otherwise sensible transaction, as this article points out.
• Enforceability of the GPL: This story from the UK articulates an interesting argument about the enforceability of the GPL. It’s worth a read.

 

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Here is the last case in our trio:

MLS Database – As a follow-up to our earlier post ( Data Mining Decision), you may recall the story of a real estate broker who tried to repackage the MLS listings controlled by the Toronto Real Estate Board (TREB).  The TREB controls the database for residential resale listings (the MLS database) for its approximately 25,000 member real estate agents and brokers.  Fraser Beach was one such broker who developed a workaround to pull the data from TREB’s database, and then redisplay it to the public through his own site.  The TREB cut off his access and Mr. Beach sued the TREB. The court agreed that the TREB was justified in terminating access since this “end-run” violated the authorized use terms that Mr. Beach had agreed to as a member of the TREB. In Fraser Beach v. Toronto Real Estate Board, 2010 ONCA 883, decided in December 2010, the Ontario Court of Appeal upheld this decision. 

Lessons for business? The TREB’s well-drafted Authorized User Agreement specified that use of the database was permitted “for the purposes expressly specified in this Agreement and for the exclusive and internal use by Authorized User“. This was critical to the court’s conclusion that Mr. Beach’s use was a violation of these terms. Companies in the business of licensing database access should take care to have their licenses and authorized use terms reviewed to keep up with technological advances and new methods of obtaining unauthorized access to the data.

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Here is the next case in our trio:

BlackBerry – Consider the problems faced by Canada’s world-leader in mobile devices. You open an app store to compete with Apple, so the little guys can develop interesting apps. The problem is, little guys keep developing interesting apps. In Research in Motion Ltd. v Kik Interactive Inc. [Statement of Claim available here], filed in November, RIM sued Kik, an upstart messaging service that had grown wildly popular in the previous several weeks (over 2 million Kik users reportedly signed up within the space of a month). In its suit, RIM alleges patent and trade-mark infringement as well as misuse of confidential information – (the principal of Kik is a former employee of RIM) – and privacy violations.  This shows the difficulty of controlling ex-employees and independent developers, and RIM is not alone. Apple has booted apps that mimic its own core services or threaten the bottom-line (most famously, Google’s VOIP apps). 

Moving to India, RIM faces another challenge in the form of Bharatberry, an app created by an independent Indian developer that provides an “India-compliant solution to the existing users of the BlackBerry® service in India”, and appears to piggy-back on BlackBerry hardware to run a parallel email and messaging service through its own servers, rather than through RIM servers.  This service was developed in the wake of concerns that the BlackBerry service would be disrupted in India if RIM did not solve the Indian government’s demands to have access to RIM’s encrypted e-mail traffic.

 

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We’ll review a trio of cases that illustrate the line drawn by the law when software users try to do an end-run around a software owner:

World of Warcraft (WoW) – Blizzard is the publisher of the popular WoW multiplayer game. MDY sold an autopilot bot marketed as “Glider“ that automatically played the lower levels of WoW, to enable a player to graduate to higher levels and earn points.  In a fascinating case (MDY Industries v. Blizzard Entertainment), Blizzard sued MDY for sales of this “Glider” bot. In the course of the cat-and-mouse tactics between Blizzard and MDY, Blizzard prohibited the use of bots in its Terms of Use, and then deployed bot-detection software to block Glider-users. The US Court of Appeals for the 9th Circuit said that the antibot provisions were covenants rather than conditions. “A Glider user violates the covenants with Blizzard, but does not thereby commit copyright infringement because Glider does not infringe any of Blizzard’s exclusive rights. For instance, the use does not alter or copy WoW software.” Thus, Blizzard failed in its copyright claims. 

However, the court decided that MDY was liable for a DMCA violation with respect to WoW’s “dynamic non-literal elements”. The term “dynamic non-literal elements” refers to the copyright-protected elements of the game other than the written code that are created in the course of dynamic play by user. The court upheld the permanent injunction against MDY.

Lessons for business? In Canada, we don’t have an equivalent of the DMCA, though the proposed changes to the Canadian Copyright Act contain anti-circumvention rules of the type that caught MDY in the WoW case. Software publishers and vendors should ensure that their end-user terms or acceptable use policies are well-drafted and up-to-date to guard against this type of indirect access. This may not allow a software vendor to access copyright infringement remedies, but will provide a contractual remedy.

Cases 2 and 3 up next. 

Calgary – 07:00 MST

 

Can intellectual property theft or infringement lead to jail time?

• An employee can walk out the door with all kinds of interesting information. Customer lists, business methods, intellectual property of all descriptions. Last week a US jury convicted an ex-employee of Goldman Sachs of trade-secret violations arising out of his theft of software code.  Mr. Aleynikov, a computer programmer, violated the employer’s confidentiality policy when he purloined portions of the company’s code and then quit to join a rival firm. The algorithms in such code provides a critical edge in such a competitive industry as high-frequency stock trading. The charges flow from the Economic Espionage Act dealing with trade-secret protection, a US law that doesn’t have an exact equivalent in Canada. Mr. Aleyniko faces up to 10 years in prison when he is sentenced in March, 2011.
• In Canada, we don’t have trade-secret protection legislation, and jail-time is extremely rare for white-collar theft of trade secrets or intellectual property. Under the criminal remedies section of the Copyright Act (Section 42), imprisonment is a possible punishment, but is rarely used in practice.  In R. v. Borg, [2007] O.J. No. 3287, a company was convicted of eight offences under the Copyright Act relating to importation and sale of forged copies of software.  The person who operated the company was convicted of two offences and the individual was sentenced to 60 days in jail.  However, that sentence was deleted on appeal.
• In the recent case of R. v. Hirani (2010), 2010 BCPC 205 (B.C. Prov. Ct.), the Canadian Border Services Agency intercepted shipping containers which contained knock-offs of Chanel, Prada and Gucci bags. Undercover officers later attended at the store to which the goods were destined and nabbed the perpetrator.  The accused pled guilty and was fined $4,000, but avoided anything more serious. Jail time was technically part of the sentence, but was served in the community.

Related Reading:

• Copyright Infringer Hit with Fine  
• First Conviction Under Anti-Camcording Law

Calgary – 08:00

 

My article on the Legal Implications of App Development [Download Copy of Article (2MB PDF)] is published in the November 19th edition of The Lawyers Weekly. It discusses “app law“ issues such as end-user licensing, copyright disputes, app-related trade-mark issues, trade-secrets, privacy and app development agreements.  [Link here for a preview of the digital edition]

Calgary – 09:00 MST 

In our post last month [Business Method Patents in Canada ], we noted the groundbreaking decision that upheld Amazon’s 1-click patent, and established that business methods are patentable in Canada. It now appears the Commissioner of Patents has decided to appeal that decision. The uncertainty is back. Businesses will have to wait until the outcome of this appeal to determine the scope of patentability of business methods in Canada.

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Here are two more interesting cases involving apps for sale through the App Store. These cases arise from an alleged breach of open source software licenses. In this case, the open source code was licensed under the terms of the GPL. When GPL-licensed code is used or embedded in an iPhone app, does the licensing of that app through Apple’s iTunes terms and conditions result in a breach of the terms of the GPL? 

• In the first case, relating to an OSS application known as “GNU Go”, the Free Software Foundation complained that the licensing of the iPhone version through the App Store was a violation of Section 6 of the GPL. In response to the complaint, Apple simply removed the app. the FSF complains that Apple’s remedy is to “disappear” the app (as though they are a military junta… some might take that view), rather than licensing the app under the GPL.
• The second case involves the VLC Media Player, an OSS application ported to the iOS platform. Again, there was a complaint and an allegation of copyright infringement against Apple, on the basis that the GPL was breached. This app is (as of early November) still available in the App Store. 

Apple is not blind to the issue. In fact, Apple’s agreement with its developers is clear that apps should not violate the terms of any open-source licenses, and the developer will be liable for any such violation. One idea is for developers to invoke their contractual ability to use their own end-user terms, and insert the GPL at that juncture, subject of course to the mandatory terms imposed by Apple, that all end-user licenses must contain.  This would be up to the developer to implement, not Apple.

Calgary – 08:00 MT

Today the Canadian Intellectual Property Office (CIPO) closed its 30-day comment period on proposed changes allowing for fast-tracking of clean tech patent applications. CIPO currently permits expedited examination of a patent application upon request and payment of a fee. The Patent Rules will be amended to expand the existing criteria to allow accelerated examination of patent applications relating to “green technologies.”  There is no definition of “green technologies”. To take advantage of the fast-track program, applicants must submit a declaration as to the technology’s ability to “resolve or mitigate environmental impacts or conserve the natural environment and resources if commercialized.” No additional fee would be required.  It will be interesting to see how the process will ultimately be implemented, how declarations will be scrutinized, and how much quicker examination will take place. No additional CIPO resources have been committed to this program, so it remains to be seen whether success in expediting a high volume of green technology inventions will draw resources away from routine examinations.

With comments closed, the changes to the Patent Rules can proceed to the next stage. Canada will then join the US, Australia, Israel, Japan, South Korea and the UK in a fast-track program for cleantech patents.  The USPTO is also planning to extend and expand its own “Green Technology Pilot Program“.

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It’s not that far-fetched. Companies who sign a contract can agree in advance to resolve their disputes through arbitration.  The law that governs that arbitration, and even the place of arbitration, can all be determined in a “dispute resolution clause”. These kinds of clauses are often overlooked while the parties focus on the business points – such as price, delivery, and deadlines. However, a dispute resolution clause will suddenly be front-and-centre when the parties start squabbling, and one of them wants to get a remedy in Canada. For example, in one recent Alberta case (PetroKazakhstan Inc. v. Lukoil Overseas Kumkol B.V.), arbitration was triggered by one of the parties, and the Alberta Court decided that the breach of contract questions fell within the scope of the arbitration under the law of Kazakhstan.

What about intellectual property licensing agreements?  The same idea holds true. Canadian courts will uphold arbitration clauses. When negotiating your license, spend some time considering the dispute resolution clauses and the potential advantages of arbitration: for example, confidentiality, neutrality, and a resolution process that can be – compared to litigation – relatively quick and inexpensive.  In Bad Ass Coffee Co. of Hawaii Inc. v. Bad Ass Enterprises Inc., a Canadian licensee was held to a clause that compelled arbitration in Utah. The Canadian Court refused to grant a remedy and the licensee was bound by the decision of the US arbitrator.

Related Event: November 4, 2010 – The Licensing Executives Society – Meeting of the Calgary Chapter on the topic of “Arbitration and ADR Clauses in International License Agreements” Presented by Stephen Burns, Bennett Jones and Jim McCartney, McCartney ADR; panel moderated by Richard Stobbe: Link to Register

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