As with any form of property right, the value of a firm’s intellectual property (“IP”) rights will generally depend upon a number of different factors. For example, the value of a patent as a device for excluding others from practicing a specified process or invention will depend upon the breadth of its claims. Also, the strength, and attendant value, of a trademark varies with the type of mark and the perceptions regarding the product or service to which the mark is related that are created in the minds of consumers. Moreover, as with other property rights, there may be “clouds” on the firm’s title to a specific IP right, particularly in those cases where the underlying invention or work was created by more than one person.
Intellectual property rights can be put to a variety of uses. The rights can be sold or assigned to a third party in return for cash or other consideration or can be used as a capital contribution to a new business venture which might be formed to exploit the rights. Intellectual property rights can be pledged as security for the obligations of the owner, such as when a loan is needed to finance the machinery necessary for the owner of a patent to manufacture the products that are covered by the patent rights. Finally, and perhaps most importantly, an intellectual property right can be loaned, or “licensed” to one or more third parties, thereby, giving the third party a limited right to use the “property” for purposes determined by the owner of the rights. The potential business uses of intellectual property rights can be illustrated by the following examples:
- The owner of a patent can grant licenses to others which allow them to make, use, or sell the patented invention in specified markets. The patent owner will receive compensation, in the form of “royalties”, based on the efforts of the licensees in using the rights embodied in the patent.
- The owner of patents and trade secrets covering the products of basic research can use the intellectual property rights as an inducement to secure funding from third parties to permit further research on the basic technology in order to develop commercial products. The owner may then license the products to the funding party in return for royalties.
- Intellectual property rights can be licensed to third parties for use in the manufacture of products that can then be sold by the licensor. This strategy can be very effective when the licensee is able to produce the products at costs which are significantly lower than those that would be incurred by the licensor.
- A manufacturer can license third-party distributors in various markets to facilitate the sale of the products through the licensee’s established marketing channels. This strategy allows the manufacturer to penetrate new markets without the expense of building its own direct sales and marketing functions.
- IP rights can be assigned, sold, or licensed to a joint venture or other separate business entity for use in building a multifunctional firm that is capable of developing, producing, and distributing products embodying the technology that is covered by the rights.
In order to harvest the most value from the company’s intellectual property rights, steps must be taken to develop an overall intellectual property rights strategy and establish a compliance program that ensures that valuable technology and the associated intellectual property rights are identified, protected, maintained and enforced. Key principles that need to be understood in putting together intellectual property rights strategies and compliance programs include the following:
- Establish the “tone at the top” by having the board of directors and members of the executive team prepare, discuss and approve an overall technology and intellectual property rights strategy for the company.
- Identify the role that intellectual property rights are expected to play in the company’s overall business strategies and ensure that the priorities of the intellectual property rights strategy are aligned with that role. For example, a business strategy based on excluding competitors will generally need to be supported by a robust portfolio of patents covering the company’s products.
- Establish an intellectual property compliance committee to oversee the company’s intellectual property compliance program, make day-to-day decisions about intellectual property issues, implement the company’s intellectual property rights strategy and provide guidance to managers and employees throughout the organization.
- Identify the intellectual property that the company develops or otherwise uses in order to create and market its products and services and carefully analyze each step of the product development and commercialization process for intellectual property issues: submission and consideration of ideas, basic research and development, potential influences of technology and products owned by competitors, manufacturing processes and sales and marketing activities.
- Consider technological trends in the industries and markets in which the company competes and the intellectual property portfolios of the company’s current and projected competitors. Market and competitive factors, including product life cycles and existing intellectual property rights of competitors, will determine the investment that the company will need to make in perfecting and protecting its intellectual property rights and can also be a predictor of the likelihood of protracted and expensive intellectual property litigation.
- Conduct an intellectual property rights audit to understand how the company is already protecting its intellectual property rights and areas where there are significant shortcomings in the company’s compliance activities. Key areas include employee agreements, nondisclosure agreements with third parties, procedures for identifying and analyzing potential intellectual property rights and security procedures.
- Determine how the company intends to use its intellectual property rights to compete effectively in the marketplace. Possibilities include excluding others from the market in order to secure market share, generating a steady stream of royalty revenues from licensing arrangements and licensing, entering new markets in foreign countries and building the value of the company to attract investors or potential buyers.
- Build awareness throughout the company of the benefits of intellectual property and the dangers of not paying attention to the steps that should be taken to protect those rights. It is important to have the active support of everyone in the company for the program and this means integrating training and education into the program, beginning with the board of directors and senior executives and then going beyond to include everyone whose assistance will be needed.
- Create an intellectual property management structure, including a compliance committee overseen by a person designated as the chief compliance official, that ensures that all existing intellectual property rights are identified, all potential intellectual property rights are brought to the attention of the legal department and others in order to make decisions about how best to protect them and audits of the effectiveness of the compliance program are performed regularly.
- Set aside resources to proactively enforce their rights in the event a third party is engaged in activities that are infringing on the company’s statutory intellectual property rights (i.e., patents, copyrights or trademarks) or which involve misappropriation of the company’s trade secrets. Enforcement, which often involves litigation, can be a costly activity and procedures should be put in place to carefully weigh the benefits and costs.
- Recognize that the intellectual property compliance program is as important part of the company’s overall risk management system. One very important risk to consider is avoiding intentional or inadvertent infringement of the intellectual property rights of third parties and the program should incorporate procedures such as monitoring patent activities of competitors; carefully analyzing the elements of proposed products before substantial time is spent on development and marketing to determine if any infringement issues are likely to be encountered; and conducting a similar search for potential trademark and copyright issues before launching marketing and advertising campaigns.
- Extend the principles implemented in the intellectual property compliance program to proposed acquisitions in order to assess of the value of the intellectual property rights of the target and the risks that the target’s products or services infringe the rights of third parties (a potential liability that the company would succeed to if the transaction is completed).
Helpful tools to assist you in advising clients on IP matters and protection of IP rights have been included in this month’s update to Business Transactions Solution on WESTLAW:
- Executive summary for clients regarding intellectual property rights (§ 206:43)
- Executive summary for clients regarding intellectual property audits (§ 206:44)
For technology-based companies the most significant asset is generally their intellectual property rights—patents, copyrights, trade secrets, and trademarks—and there is a real and substantial risk to those companies if they fail to take the necessary steps to preserve the value of these assets. In order to analyze the legal risks in this area, and take appropriate steps to minimize and manage those risks, companies should conduct regular audits that focus upon the creation of the assets and ownership rights therein; the procedures used to perfect and maintain all legal rights in the asset; and the risk that the use of the assets might infringe upon the valid legal claims or the contractual rights of others. In order to assist you in preparing your clients for an intellectual property audit, this month’s update to Business Transactions Solution on WESTLAW includes an executive summary for clients regarding intellectual property audits (§202:71).
As part of the audit process, the company should provide a list, along with copies, of all agreements to which it may be a party relating to the ownership and use of intellectual property assets which may be material to the conduct of the company’s business. The scope of the inquiry extends beyond intellectual property rights which are owned by the company to include any technology or legal rights which may have licensed from a third party. Examples of some of the technology rights agreements which may be uncovered in the investigation include:
- Licensing agreements to which the company is a party, either as a licensor or as a licensee. As to licenses given by the company, attention should be given to “cross-referencing” the subject matter to the description of statutory rights and trade secrets provided by the company.
- Agreements purporting to assign any intellectual property rights to the company, which must be reviewed to ensure that all requirements for a valid transfer have been satisfied.
- Joint venture and development agreements which involve the use and/or development of technology.
- Research agreements with government agencies which call for government funding of the company’s research activities. The terms of the grant should be reviewed to see whether or not the government, or some agency thereof, has maintained some form of ownership interest in the products of the funded research activities.
When reviewing the various technology agreements special consideration should be certain provisions and issues. For example, it is almost certain that some of the agreements will have arbitration clauses or other procedures for alternative dispute resolution (“ADR”) techniques. While such provisions are commonly used, there is no universal consensus on the desirability of binding arbitration clauses in technology agreements, nor is their agreement on how to conduct ADR short of binding arbitration. One of the outcomes of the intellectual property rights investigation should be gaining an understanding of the potential impact of ADR on the company’s technology rights portfolio and creating guidelines for future agreements that set out the company’s preferred negotiating position.
Another common topic for technology agreements is the provisions relating to identification and protection of confidential information, an important element of preserving trade secret status. Not surprisingly, this is a subject that often consumes a good deal of negotiation time and resources, and the company may want to consider something more than just the traditional assortment of forms, such as a somewhat loose form for receiving confidential information; a rather restrictive form for giving out confidential information; and a more reasonable form for exchanges between parties with relatively equal bargaining positions. Some companies have moved away from this approach to the establishment of a single form that is designed to protect minimum interests. These companies maintain that such forms avoid considerable discussion and negotiation. The main thrust in terms of the intellectual property investigation and forms is that, while the company is collecting all the forms in use, it should evaluate whether the forms and the assortment of procedures for their use are optimal.
When the review turns to licensing agreements, consideration must be given to antitrust issues that may be raised regardless of the intellectual property rights that are the primary subject of the agreement. For purposes of the investigation, senior management of the company certainly needs to be made aware of any provisions in a license that may run afoul of the guidelines for the licensing of intellectual property promulgated by the federal Department of Justice (“DOJ”) and/or the guidelines of the states’ attorneys general or private plaintiffs (or the courts hearing cases brought by them). Distribution agreements may also raise antitrust issues and should be reviewed to determine how they impact the company’s trademark rights and whether they constitute a “franchise” that will be subject to federal and state regulation.
Any company that publishes an advertisement containing false claims about its own products or the products of a competitor is in violation of the trademark law, and any company that believes it is damaged by that false statement can bring a private suit for damages. The following elements are necessary to state a cause of action foe false advertising under the Lanham Act, the federal law regulating trademarks:
- In its advertisements, defendant made false statements of fact about the products or services of itself, plaintiff or another;
- These advertisements actually deceived or have the tendency to deceive a substantial segment of their audience;
- Such deception is material in that it is likely to influence the purchasing decision;
- Defendant caused its false advertisements to enter interstate commerce; and
- Plaintiff has been or is likely to be injured as the result of the foregoing either by changes in sales or goodwill regarding the products or services at issue.
The Lanham Act prohibits the use of false statements made in the context of “advertising or promotion.” Neither the Lanham Act nor its legislative history define “advertising or promotion,” but courts generally consider certain criteria for determining whether a representation is considered “advertising or promotion” under the Lanham Act. Generally, the plaintiff company must show that there was
- Commercial speech;
- By a company that is competing with the plaintiff company;
- For the purpose of influencing customers to buy the defendant company’s goods or services;
- By representations that are sufficiently disseminated to the relevant purchasing public to constitute “advertising” or “promotion” within that industry.
When a company’s advertisements are literally or explicitly false, as evidenced by expert testimony or survey evidence, the court may grant relief with a presumption that consumers were deceived by the false advertisements. However, in a situation involving misleading statements and subjective determinations regarding whether the message in an advertisement is deceptive, proof is required that consumers were misled or likely to be misled by the false advertising.
Courts are particularly sensitive to claims that imply surveys or studies to bolster their claims, such as “[s]urveys indicate that doctors prefer our brand ten to one.” The advertising tactic known as puffing—general, laudatory statements about the superiority of one’s own product—is usually not considered actionable as false advertising under the Lanham Act. The theory is that consumers are accustomed to this type of talk and will not take it literally, and will, therefore, not be harmed by any false or misleading statements.
Another action related to false advertising is called “false designation of origin.” The key element in a false designation of origin action is the creation of a likelihood of confusion by the public as to the source of goods. The issue may arise in cases where the seller implies endorsement or sponsorship of its product by another company or in cases where the seller “copies” another product’s characteristics, and then uses the name of the copied product in its advertising. False designation of origin cases may also involve a false designation of geographic origin. In a comparative advertisement where one company uses the other company’s trade name in its advertisement, the distinction between a false designation of origin claim and a trademark infringement claim is not always clear. While the likelihood of confusion is the key element in a trademark infringement case, that element may or may not be present in a comparative advertising case.
A company that proves a violation of the Lanham Act is entitled to an injunction prohibiting the offensive conduct in the future. Generally, a plaintiff seeking injunctive relief in a false advertising case under § 43(a) must establish a “reasonable likelihood of success” on the five elements of false advertising and a risk of irreparable harm. In the comparative advertisement context, most courts presume irreparable harm in determining whether to grant injunctive relief. The court may also award lost profits, damages caused to the plaintiff’s goodwill by the false advertising, and corrective advertising. If the false advertisement, false statement of origin, or trademark infringement has occurred during telemarketing calls, plaintiff also has a civil cause of action pursuant to the Telemarketing and Consumer Fraud and Abuse Prevention Act, codified at 15 U.S.C.A. §§ 6101 to 6108. See Medline Industries, Inc. v. Strategic Commercial Solutions, Inc., 553 F. Supp. 2d 979, 88 U.S.P.Q.2d 1839 (N.D. Ill. 2008).
Consideration should also be given to vicarious liability for false advertising. Vicarious liability for tortious actions is a well-established common-law doctrine based on the concept of respondent superior. See, e.g., Dobbs’ Law of Torts § 425. Vicarious liability for false advertising extends beyond an employer’s liability for the actions of an employee taken within the scope of the employee’s employment duties to include vicarious liability for defendants when the defendant and the infringer have an actual or apparent partnership, have authority to bind one another in transactions, or exercise joint ownership or control over the infringing product. Grubbs v. Sheakley Group, Inc., 807 F.3d 785, 117 U.S.P.Q.2d 1209, R.I.C.O. Bus. Disp. Guide (CCH) P 12673, 2015-2 Trade Cas. (CCH) ¶ 79380 (6th Cir. 2015).
In addition, the Eleventh Circuit has recognized the existence of a Lanham Act claim for contributory false advertising. In 2015 it held that a plaintiff who wished to state a claim for contributory false advertising (per the Lanham Act) would need to allege both that (i) a third party in fact directly engaged in false advertising that injured the plaintiff, and (ii) the defendant contributed to that conduct either by knowingly inducing or causing the conduct, or by materially participating in it. To contribute to the conduct found to be false advertising, the defendant would be required to have the requisite state of mind either by intending to participate in that conduct or actually knowing about the false advertising. “Contributing” also requires that the defendant actively and materially further the unlawful conduct—either by inducing it, causing it, or in some other way working to bring it about. See Duty Free Americas, Inc. v. Estee Lauder Companies, Inc., 797 F.3d 1248, 1277–78, 2015-2 Trade Cas. (CCH) ¶ 79257 (11th Cir. 2015).
For further discussion, see Trademarks (§§198.1 et seq.) in Business Transactions Solution on WESTLAW.
If a patentee prevails in a suit for infringement, he or she will be entitled to damages in an amount that is deemed adequate to compensate him or her for the infringement but in no event less than a reasonable royalty for the use of the invention by the infringer, together with interest and costs as fixed by the court. 35 U.S.C.A. § 284. It should be noted, however, that monetary damages for infringement cannot be recovered unless and until the infringer has been put on notice about the infringement and notice may be provided by actually notifying the infringer, filing an action for infringement, or marking the product (or its packaging where marking the product is impractical) with the word “patent” or the abbreviation “pat.,” together with the patent number. 35 U.S.C.A. § 287(a). The concept of “marking” does not apply to methods since there is generally nothing that can be marked. American Medical Systems, Inc. v. Medical Engineering Corp., 6 F.3d 1523, 1538, 28 U.S.P.Q.2d 1321 (Fed. Cir. 1993) (note that products can often be claimed as methods). Software can be marked in the software code and accompanying documentation, and websites are “tangible items” that also can, and therefore must, be marked to provide the notice required by the marking statute. Soverain Software LLC v. Amazon.com, Inc., 383 F. Supp. 2d 904, 79 U.S.P.Q.2d 1208 (E.D. Tex. 2005). Any person is allowed to assert an action for “false marking,” including falsely marking or indicating in advertising in connection with any article that a patent application is pending; however, a finding of liability requires a purpose of deceiving the public. A fine of not more than $500 is provided for “every such offense.” 35 U.S.C.A. § 292.
The measure of damages in an infringement action will be determined with reference to the lost profits of the patentee. Lost profits in an infringement action may take three different forms: lost profits from potential sales which were lost to actual sales made by the infringer; lost profits from price reductions which the patentee was forced to make in response to competition from the infringer; and lost profits from any projected lost sales, including the inability of the patentee to raise its prices due to competition from the infringer and a reduction in the rate of the patentee’s sales growth after the initial infringement. Lam Inc. v. Johns-Manville Corp., 718 F.2d 1056, 1065-68 (Fed. Cir. 1983). An award of projected lost profits is proper and not speculative in a two-supplier market if the patent owner can show its sales growth rate decreased during the infringement period and that it had a higher growth rate before and after the infringement period. Lam Inc. v. Johns-Manville, 718 F.2d at 1067.
Additionally, a finding of “willful infringement” allows award of both reasonable attorney’s fees and enhanced damages to the plaintiff. See e.g., Minks v. Polaris Industries, Inc., 546 F.3d 1364, 89 U.S.P.Q.2d 1102 (Fed. Cir. 2008). Actual damages may be assessed either by judge or jury. In either case, if infringement was willful, the judge may enhance the damages award to an amount up to three times the actual damages. See 35 U.S.C.A. § 284; Minks v. Polaris Industries, Inc., 546 F.3d 1364, 89 U.S.P.Q.2d 1102 (Fed. Cir. 2008).
In Liquid Dynamics Corp. v. Vaughan Co., Inc., 449 F.3d 1209, 79 U.S.P.Q.2d 1094, 70 Fed. R. Evid. Serv. 315 (Fed. Cir. 2006), the court set out the standard for determining willful patent infringement as follows:
“A finding of willful infringement is made after considering the totality of the circumstances … Courts consider several factors when determining whether an infringer has acted in bad faith and whether damages should be increased. They include: “(1) whether the infringer deliberately copies the ideas or designs of another; (2) whether the infringer, when he knew of the other’s patent protection, investigated the scope of the patent and formed a good-faith belief that it was invalid or that it was not infringed; … (3) the infringer’s behavior as a party to the litigation”; (4) “defendant’s size and financial condition”; (5) “closeness of the case”; (6) “duration of defendant’s misconduct”; (7) “remedial action by the defendant”; (8) “defendant’s motivation for harm”; (9) “whether defendant attempted to conceal its misconduct.” … Good faith may normally be shown by obtaining the advice of legal counsel as to infringement or patent validity. … If counsel’s opinion is found to be incompetent, however, a fact finder may discount its usefulness in determining a party’s good faith. [Citations omitted by author.]”
On August 20, 2007, in a unanimous en banc opinion In re Seagate Technology, LLC, 497 F.3d 1360, 83 U.S.P.Q.2d 1865 (Fed. Cir. 2007), the Court of Appeals for the Federal Circuit overruled its 1983 decision in Underwater Devices Inc. v. Morrison-Knudsen Co., Inc., 717 F.2d 1380, 219 U.S.P.Q. 569 (Fed. Cir. 1983) (overruled by, In re Seagate Technology, LLC, 497 F.3d 1360, 83 U.S.P.Q.2d 1865 (Fed. Cir. 2007)) and established a new standard of proof for demonstrating willful patent infringement. In reaching its decision, the Federal Circuit reviewed the “affirmative duty of due care” standard established in Underwater that required that once a party had notice of a patentee’s rights the party had an affirmative duty of care to avoid infringing the patent. In order to comply with this duty many companies sought and obtained an opinion of counsel that the patent was either invalid or not infringed. In the Seagate case, however, the Federal Circuit adopted a new rule that calls for a showing of “objective recklessness” in order to prove willful infringement. Specifically, the Federal Circuit stated that “a patentee must show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent” and that “the patentee must also demonstrate that the objectively-defined risk was either known or so obvious that it should have been known to the accused infringer.”
At the same time, the Federal Circuit held that when an accused infringer offers an opinion of counsel as part of a defense against a claim of infringement, there would be a waiver of the attorney-client privilege and work product protection as to the counsel rendering the opinion but not as to the trial counsel of the accused counsel so long as trial counsel is different. Interestingly, the Federal Circuit noted that since it was abandoning the “affirmative duty of due care” an accused infringer no longer had an affirmative obligation to obtain an opinion of counsel regarding the infringement issue.
The U.S. Supreme Court disapproved the Federal Circuit’s teaching regarding enhanced damages awards for willful infringement in Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923, 118 U.S.P.Q.2d 1761 (2016). The Court explained that pursuant to In re Seagate Technology, LLC, 497 F.3d 1360, 83 U.S.P.Q.2d 1865 (Fed. Cir. 2007) (abrogated by, Halo Electronics, Inc. v. Pulse Electronics, Inc., 136 S. Ct. 1923, 118 U.S.P.Q.2d 1761 (2016)) (en banc), “a patent owner must first show by clear and convincing evidence that the infringer acted despite an objectively high likelihood that its actions constituted infringement of a valid patent…. Second, the patentee must demonstrate, again by clear and convincing evidence, that the risk of infringement was either known or so obvious that it should have been known to the accused infringer.” Halo, 2016 WL 3221515. The Court explained that the Federal Circuit’s structured formula imposed a rigidity Congress had not chosen. Additionally, the statute did not specify the requirement of proof by clear and convincing evidence. Therefore, the Federal Circuit’s formula prevented trial courts from enhancing damages in some of the most egregious cases. The U.S. Supreme Court instructed that enhanced damages were to be granted on facts shown by a preponderance of the evidence pursuant to the trial courts’ discretion. Trial courts must explain their reasoning, but that was to be reviewed for an abuse of discretion.
For further discussion, see Patents (§§196.1 et seq.) in Business Transactions Solution on WESTLAW.
After a patent has been issued, any person, including the patentee, may request reexamination of the patent by the Patent and Trademark Office in order to verify its validity. In addition, reexamination can be ordered by the Patent Office itself. Reexamination can be a valuable procedure when one wants to test the validity of a patent prior to bringing an action for infringement, or before taking some action (e.g., commencing use of a similar process or machine) which might precipitate an infringement action by the patentee. However, post-grant review has often proven to be quite complex and controversial and a number of attempts have previously been made to make the process more efficient, including multiple efforts to reform the reexamination process which often proved to be quite costly and time-consuming given that the initial decision of patent examiners was almost invariably appealed to the Patent Board.
Recognizing these problems, the America Invents Act, which came into effect in September of 2011, amended ex parte and inter partes reexamination. Under the amended ex parte reexamination procedures, the Director is allowed to institute a reexamination on the Director’s own initiative if a substantial new question of patentability is raised by patents or publications. The America Invents Act also converts inter partes reexamination from an examinational to an adjudicative proceeding and renamed the proceeding “inter partes review.” The Act raised the standard a petitioner must meet before the Director institutes inter partes review. Specifically, the petitioner must show “that there is reasonable likelihood that the petitioner would prevail with respect to at least one of the claims challenged.” The Director’s refusal to institute a review is unappealable. A petition may attack a patent only on the basis of a defect under 35 U.S.C.A. §§ 102 and 103; the defect must be supported by “prior art consisting of patents or printed publications.” 35 U.S.C.A. § 311. The U.S. Supreme Court considered the inter partes review procedure in Cuozzo Speed Technologies, LLC v. Lee, 136 S. Ct. 2131, 119 U.S.P.Q.2d 1065 (2016) and supported the right of Patent Office to set legal standards for use in constructing patents within review proceedings.
The America Invents Act also created a new post-grant opposition procedure that can be utilized during the first nine months after the grant of a patent or issue of a reissue patent. Unlike reexamination proceedings, which provide only a limited basis on which to consider whether a patent should have issued, the post-grant review proceeding permits a challenge on any ground related to invalidity under section 282 of Title 35; however, the petition must include detailed explanation and support and the petition must be made available to the public promptly after filing. The patent-holder has the right to file a preliminary response stating why a reexamination proceeding is unwarranted. The Director may only institute a reexamination proceeding if one of two standards is met. First, the information in the petition (if not rebutted) “would demonstrate that it is more likely than not that at least 1 of the claims challenged in the petition is unpatentable.” Second, “the petition raises a novel or unsettled legal question that is important to other patents or patent applications.” 35 U.S.C.A. § 324. The Director’s decision not to institute such a proceeding is not appealable. The intent of the post-grant review process is to enable early challenges to patents, while still protecting the rights of inventors and patent owners against new patent challenges unbounded in time and scope. In utilizing the post-grant review process, petitioners, real parties in interest, and their privies are precluded from improperly mounting multiple challenges to a patent, or initiating challenges after filing a civil action challenging the validity a claim in the patent. Further, a final decision in a post-grant review process will prevent the petitioner, a real party in interest, or its privy from challenging any patent claim on a ground that was raised in the post-grant review process. The post-grant review procedure is not intended, however, to inhibit patent owners from pursuing the various avenues of enforcement of their rights under a patent, and the amendment makes clear that the filing or institution of a post-grant review proceeding does not limit a patent owner from commencing such actions. Given the short time period available for initiating post-grant opposition procedures, it is incumbent for companies to carefully monitor the patent activities of competitors and the record of patent grants.
The America Invents Act also made several other anticipated improvements to “inter parties” review. For example, prior to the enactment of the America Invents Act, if the new references were found to be more relevant than the references previously cited by the examiner and presented “a significant new question of patentability,” a reexamination proceeding was conducted in the Patent Office similar to the original examination. However, the America Invents Act raised the threshold for initiating such a review from “a substantial new question of patentability” to “a reasonable likelihood that the requestor would prevail” with respect to at least one of the challenged claims.
During the reexamination proceeding, the patent owner has the right to file a statement arguing the new question of patentability and to amend the claims to further distinguish them from the new references. The reexamination procedure enables a patent infringer or any other interested party to contest the validity of a patent without litigation. Within the request for reexamination the infringer or other third party may present arguments of why the claims of the patent are invalid or unpatentable over the new references and may reply to the patent owner’s statement. However, after the reexamination proceeding begins, the third party cannot participate further, such as by responding to amendments or attending interviews with the examiner. However, the third party is sent copies of all office actions and amendments.
The America Invents Act expanded the category of documents that may be cited in a reexamination proceeding to include written statements of the patent owner that have been filed in a proceeding before a federal court or the Patent Office regarding the scope of claims. This addition counteracts the ability of patent owners to offer differing interpretations of prior art in different proceedings. These written statements, which include documents, pleadings or evidence from proceedings that address the patent owner’s statements, cannot be considered for any purpose other than to determine the proper meaning of the claims that are the subject of the request in a proceeding.
The America Invents Act included provisions estopping a party from raising, in a subsequent Patent Office proceeding, any issue that it raised or reasonably could have raised in the inter partes review. In addition, the America Invents Act imposed on petitioners the burden of proving that a patent is invalid by a preponderance of the evidence in inter partes review and also imposed time limits on litigation and permits limited discovery. Under the America Invents Act, inter partes review must be completed within one year of when the proceeding is instituted, except that the Patent Office can extend this deadline by six months for good cause. The results of any reexamination will be set out by the Patent Office in a certificate, which describes the new content of the patent. For further discussion, see Patents (§§196.1 et seq.) in Business Transactions Solution on WESTLAW.
Capital raising through a public offering of securities is strictly regulated by the provisions of the federal Securities Act of 1933 (“Securities Act”) and the Exchange Act of 1934 (“Exchange Act”). The focus of the Securities Act is the disclosures and liabilities involved in the offer and sale of securities to the investment community, in both private and public offerings. Under Section 5 of the Securities Act, offers and sales of securities must be registered with the federal Securities and Exchange Commission (“SEC”) unless one of the exemptions from registration included in Sections 3 and 4 of the Securities Act is available. Disclosures in the registration statement are intended to include all of the material information regarding the issuer and the terms of the offering and the Securities Act contains provisions designed to insure that the information is disseminated to the investment community before the offering is completed. The SEC has no authority to rule upon the merits of an offering and lacks the resources necessary to conduct an independent review of all of the facts and statements contained in the registration statement. However, the SEC can prevent the securities from being distributed where such disclosure requirements are not fully met by preventing or suspending the effectiveness of the registration statement.
The basic purposes of the Exchange Act are to regulate securities exchanges and the securities market; to make available to persons who buy and sell securities information relating to the issuers of such securities; to prevent fraud in securities trading and manipulation of markets; and to control the amount of credit which may be used in the securities market. The provisions of the Exchange Act relate primarily to the activities of issuers and their affiliates after their securities have been distributed into the public market. The Exchange Act requires the registration of each class of an issuer’s publicly traded securities with the SEC, as well as the filing of periodic and other reports with the SEC and securities exchanges by those issuers and its officers, directors and controlling shareholders. The Exchange Act also regulates the solicitation of proxies with respect to registered issuers, as well as tender offers and other specified transactions. Finally, the Exchange Act establishes a number of rules relating to the creation and operation of the securities markets, including requirements applicable to broker-dealers, stock exchanges, clearing agencies and transfer agents.
This month’s update to Business Transactions Solution on WESTLAW includes new Business Counselor’s Training Materials for public offerings and public company status (see §288:162) that covers the applicable regulatory framework; considerations in selecting public financing; advantages and disadvantages of public company status; disclosure requirements; underwriting and distribution arrangements; exchange listings and secondary trading and public company status.
While much of the capital raised by closely-held businesses from outside investors in the private placement market comes in the form of an equity investment, consideration should also be given to the use of debt securities. Debt securities without conversion rights can provide companies with an opportunity to secure additional capital for the business without diluting the ownership interests of the holders of equity securities. Convertible debt securities can be used to attract capital from those investors looking for more downside protection in the event the business is unable to meet its financial and business objectives. While debt securities have different rights, preferences, and privileges than equity securities, the process for completing a debt financing is very similar to the steps that need to be completed for an equity investment.
Larger companies, including many public companies, have taken to issuing debt securities to take advantage of favorable credit terms, including low interest rates, and to avoid the uncertainties of attempting to sell new securities in the equity markets. The debt securities issued by public companies are quite sophisticated and limited only by the imagination of a company’s financial officers and investment bankers. Traditionally, debt securities in privately-held businesses were issued only to friends and family of the founding group at the time the company was formed and to institutional investors as the company matured. Debt securities issued to friends and family usually were converted into common stock upon completion of the first round of outside funding from venture capitalists or other professional investors. Debt securities issued to the institutional investors were typically scheduled for conversion within 12–18 months in some form of liquidity event, such as an initial public offering or acquisition. However, debt investment financings have been much more common as companies struggled to stay afloat after their initial equity investment capital evaporated. For example, the so-called “bridge loan” is a transaction in which current investors provide the company with a limited amount of funds, in the form of a loan, to keep the company going until a new round of equity financing can be closed. Upon closing of the new equity financing, the bridge loan is either repaid or converted into the securities issued in the new financing. Investors participating in the bridge loan are rewarded for the increased risk through warrants and options, as well as preferred terms on conversion of the loan amounts in the equity financing.
Counsel for the issuer and counsel for the lender-investor in a debt financing transaction perform many of the same functions that must be completed in connection with an equity transaction; however, the nature of the instrument will dictate a slightly different emphasis, as well as the need for specialized experience that might not be part of the skills normally offered by counsel primarily engaged in equity offerings. For example, company counsel needs to be conversant with laws and procedures relating to secured transactions, as well the impact of the strict loan covenants and restrictions on the company’s business. Investors’ counsel needs to be able to advise the client regarding the rights of creditors under secured transactions and bankruptcy laws, particularly when the investors also hold company equity securities. In addition, the company will generally prepare, with the assistance of counsel and any finder/broker, offering documents that not only comply with applicable securities law requirements, but which also serve as a powerful marketing tool for the company in its search for investment capital. The offering documents in a debt financing should include a detailed description of the proposed terms of the debt securities; the projected cash flow over the term of the instrument; and a legal discussion touching on creditors’ rights and the covenants and restrictions that will be put in place to allow holders of the debt securities to monitor the use of their funds. To learn more about helping your clients with debt financings, see the new Business Counselor’s Training Materials on the subject (see §155:287) and the new slide deck presentation on debt financing (see §155:286), both available in Business Transactions Solution on WESTLAW.
The federal Defend Trade Secrets Act of 2016 (“DTSA”), which came into effect on May 11, 2016 as Public Law No. 114-153, amended the federal criminal code to create a private civil cause of action for trade secret misappropriation. Specifically, a trade secret owner may file a civil action in a U.S. district court seeking relief for trade secret misappropriation related to a product or service in interstate or foreign commerce (18 U.S.C.A. § 1836(b)(1)). The DTSA established remedies including injunctive relief, compensatory damages, and attorney’s fees, and set a three-year statute of limitation from the date of discovery of the misappropriation (18 U.S.C.A. § 1836(b)(3)). The DTSA does not preempt state law, which means that trade secret owners may continue to pursue remedies in state courts while taking advantage of the provisions in the DTSA.
Under the DTSA (18 U.S.C.A. § 1836(b)(2)), a trade secret owner may apply for and a court may grant, in extraordinary circumstances, an ex parte seizure order (i.e.,, seizure without prior notice to the person against whom seizure is ordered), such as an employee whom an employer suspects may be prepared to leave the U.S. with the employer’s valuable trade secrets) to prevent dissemination of a trade secret if the court makes specific findings, including that: (1) a temporary restraining order or another form of equitable relief is inadequate, (2) an immediate and irreparable injury will occur if seizure is not ordered, and (3) the person against whom seizure would be ordered has actual possession of the trade secret and any property to be seized. A court must take custody of and secure seized materials and hold a seizure hearing within seven days. An interested party may file a motion to encrypt seized material. It should be noted, however, that the DTSA allows individuals or companies who believe they have been subjected to wrongful or excessive seizure to pursue a cause of action for damages including lost profits, costs of materials, loss of goodwill and punitive damages if the seizure was sought in bad faith.
The DTSA amended certain definitions in 18 U.S.C.A. § 1839 and added the following definitions of “misappropriation” and “improper means”:
“(5) the term ‘misappropriation’ means—
“(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or
“(B) disclosure or use of a trade secret of another without express or implied consent by a person who—
“(i) used improper means to acquire knowledge of the trade secret;
“(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—
“(I) derived from or through a person who had used improper means to acquire the trade secret;
“(II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or
“(III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or
“(iii) before a material change of the position of the person, knew or had reason to know that—
“(I) the trade secret was a trade secret; and
“(II) knowledge of the trade secret had been acquired by accident or mistake;
“(6) the term ‘improper means’—
“(A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and
“(B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition”
The DTSA provides immunity from civil and criminal liability for an individual who discloses a trade secret: (1) to a government official or attorney in confidence to report or investigate a violation of law, or (2) in a legal complaint or filing under seal. See 18 U.S.C.A. § 1833(b). It is important for employers to be aware that they are required to provide notice of the DTSA immunity in any contract or agreement with an employee that governs the use of a trade secret or other confidential information, which notice requirement may be satisfied by providing a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law. Failure to comply with the notice requirement will prevent employers from be awarding certain exemplary damages or attorney fees under 18 U.S.C.A. § 1836(b)(3). The notice requirements apply to contracts and agreements entered into or updated after the effective date of the DTSA (May 11, 2016). It is recommended that notice language track the statute, such as the following:
“Notwithstanding the foregoing nondisclosure obligations, 18 USC § 1833(b)(1) added by the U.S. Defend Trade Secrets Act of 2016 (“DTSA”) provides that an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made: (1) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, and solely for the purpose of reporting or investigating a suspected violation of law; or (2) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal. In addition, the DTSA provides that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (1) files any document containing the trade secret under seal; and (2) does not disclose the trade secret, except pursuant to court order.”
For examples of how the notice should be placed into a full agreement, see the chapter on Employee Confidentiality and Innovations Assignment Agreements (§§167:1 et seq.) in Business Transaction Solutions on Westlaw.
Sustainable investors are concerned not only with what companies are striving to accomplish, but also with the way in which those companies intend to operate and the values and methods that will be used by the principals of the companies. Specifically, sustainable investors look for individuals and companies that value and exhibit transparency and honesty and candor in communications among stakeholders; define economic success by social and ecological impact, not just financial results; have an entrepreneurial spirit and culture that encourages and fosters innovation and continuous improvement; and which are truly pioneers in their areas interested in building the fields in which they operate through collaboration and “open sourcing” of methods and ideas. Sustainable investors also tend to be particularly interested in developing and maintaining close, long-term relationships with their investees and providing them with appropriate support and resources throughout the investment period. One way this is accomplished is by matching entrepreneurs with local investors from the same community to develop a sense of shared responsibility and facilitate face-to-face interaction. Enterprises seeking financing from social venture capital funds and other sustainable investors need to understand the criteria that these types of investors use when evaluating potential portfolio companies, a topic that is discussed in a new executive summary in Business Transactions Solution on WESTLAW for clients regarding investment criteria of sustainable investors.
Historically, the management of most law firm had surprisingly little to do with what is really the primary business of the firm: the timely and effective delivery of high quality and valuable legal services to clients. As law firms grew from relatively small enterprises of a few partners and associates to somewhat larger organizations with professional staffs, most found it useful to designate one of their partners as a part-time Administrative Partner. The functions of such an Administrative Partner were largely logistical—seeing to the needs of the firm for office space, secretaries, library resources, basic bookkeeping, etc. The job had almost nothing to do with the practices in which the firm was engaged, the clients that the firm served, or the ways in which legal services were delivered.
As firms grew, the functions of the Administrative Partner were often expanded to include supervision of the non-legal staff, financial planning and budgeting, technology and infrastructure planning, and a variety of other “ministerial” functions. Still, however, firm management had very little to do with the activities of lawyers in their practices. Even when Administrative Partners evolved into full-time Managing Partners and Management Committees were created to assist in running the administrative side of firms, there was only limited nexus between the activities of the firm’s central management and the real work of its lawyers.
This illogical split has begun to disappear in recent years as more and more firms—responding to the dramatic changes that have occurred in the U.S. legal market—have realized the need for strategic focus and have come to view practice management as the essential mechanism for implementing their strategic objectives. As a consequence, at least in larger firms, there has evolved a close alignment of central management with the operation of the firms’ primary business units: their practice groups.
Firm management now typically appoints and exercises oversight for practice group leaders, reviews and approves practice group business plans, relies on practice leaders for input in advancement and compensation decisions, and depends on practice groups for implementation of essential elements of firm strategic objectives. In short, in many firms today, practice management is an integral part of the overall management function, and practice groups are the primary vehicles through with the firms are positioning themselves in the market.
At the same time that law firms have become more focused on practice management, the governance and management structures of firms have become more centralized and more corporate in their look and feel. Today, key strategic and management decisions tend to be concentrated in relatively few hands. Persons holding jobs as “Managing Partners” or “Chairs” of their firms increasingly function like CEOs; Policy or Management Committees increasingly function like corporate boards of directors; and the number and range of decisions reserved for action by the full partnership have been reduced considerably. Additionally, law firms now routinely hire experienced non-lawyers in a variety of key management positions—from Executive Director (or COO) to CFO and from CIO to Director of Human Resources. These non-lawyers are increasingly being vested with authority to manage the affairs of the firm—including, in many important ways, the activities of the lawyers themselves. Moreover, senior non-lawyers are now often included as full voting members of Management or Policy Committees. In short, law firms increasingly look and function like the significant and complex businesses that they are.
Law firm management has long since blossomed beyond being the orphaned after–thought of busy lawyers and a task assigned to lawyers perceived as lacking business generation skills. It is now clearer than ever that a competitive marketplace, and a turbulent overall economic climate, demands careful planning and deliberate action by law firm leadership. This is certainly true for those law firms that have grown to become complex, sprawling global organizations; however, skills for law firm management are essential for leaders of smaller law firms also. In fact, statistics compiled by the American Bar Association indicate that approximately 70% of attorneys in the private sector practice in firms with 20 or fewer attorneys and these attorneys and their firms have consistently been ignored in conversations regarding the development and implementation of effective management practices.
Business Transactions Solution was recently updated to include a new chapter on Law Firm Management (§§4:1 et seq.) that discusses the basic business skills that law firm leaders must have in order to successfully guide their firms including an understanding of effective management and leadership styles and practices, strategic planning techniques, organizational design concepts, organizational culture and technology management. In addition, the chapter also covers a number of the core functions and activities of law firms including operations policies and governance, practice management and support, human resources, finance and accounting, facilities and equipment, supplies, compensation, professional development and training, marketing, risk management and insurance, information technology, office systems and procedures, ancillary businesses and pro bono activities. The chapter also includes checklists for formulating and implementing a law firm strategic plan, duties of law firm executive team members, steps in marketing strategy process, positioning in professional services, marketing roles and activities, topics for law firm marketing training programs and elements of an effective law firm risk management program; a slide deck presentation on leading the small law firm prepared to be used for law firm training purposes; and a selection of articles on various topics relating to law firm management. A fuller discussion of many of the topics mentioned above can also be found in various chapters of A. Gutterman (Ed.), Hildebrandt Handbook of Law Firm Management (Eagan, MN: Thomson Reuters), §§1:1 et seq.