Intellectual Property Law and Policy Volume 12 9781474200073, 9781849460576

Citation preview

Foreword This volume is an edited version of the formal presentations and colloquies from the Fordham University School of Law Seventeenth Annual Conference on Intellectual Property Law and Policy held at Cambridge University on April 15 and 16, 2009. Starting with Volume 10, published in 2008, we have resumed the practice during our first nine years of the Conference of publishing the conference proceedings. In light of the eminence of conference participants, the importance of the subject matter, and astonishing candor of the exchanges, we hope and expect that the ideas and analyses presented in this volume will make a valuable contribution to worldwide discussions of intellectual property law and policy. The entire series provides an exceptional historical record of the development of this vital area; pinpointing the issues, ideas, and personalities behind new legal and policy initiatives. For both practitioners and scholars, we have strived to make the conference and these volumes an accessible, comprehensive, and unbiased forum for the best thinking and analysis in this important and often contentious area. Hugh C. Hansen Editor

Acknowledgements

Many people and organizations have helped make the Conference and this volume possible. First and foremost are our conference sponsors. The support of thirty-five organizations, listed at the beginning of this volume, has been crucial to the conference’s success and continued existence. We have benefited as much from their active interest in, and profound knowledge of intellectual property law, as from their generosity. In this regard, we wish to thank in particular Brad Smith, Microsoft Senior Vice President, General Counsel, Corporate Secretary, Legal and Corporate Affairs, for his personal and professional support, as well as the Microsoft Corporation itself, which has provided very generous support for the conference and for the publication of this volume. We are also grateful to the many representatives of our sponsors, as well as friends of the conference, who participated in the numerous group teleconferences and individual telephone calls that helped us determine which topics would be of most interest and relevance as we put together the program. Of course, any conference is only as good as its faculty. Our distinguished speakers were from the private sector, government and academia; from across town and across the globe, in fact numbering 157 from 31 countries, and 6 continents. They are truly the crème de la crème. They came together in a lively, collegial spirit to offer presentations, discussion and commentary of the highest caliber. Also, as will be apparent to even the most casual reader of this volume, those attending the conference asked some of the most incisive questions, and made some of the most telling observations. I have often said that we could switch the speakers and the audience without any diminution in the quality of the proceedings. William M. Treanor, Dean of the Fordham University School of Law, has from the very start of his nine-year tenure given the conference and intellectual property law at Fordham his full support, for which we are very grateful. Alice Wong, Associate Director of our Office of Public Programs, was there in every step of the long arduous task from August through March of organizing the administrative details of conference which, with its three concurrent sessions, is equivalent to a five and one-half day conference. And Anthony Rizzo, a Fordham Law student, provided indispensable support throughout the two days of the conference in Cambridge. Jason Lunardi, a Fordham Law graduate former Managing Editor of our IPLJ, is the Editorial and Research Fellow at our Fordham Intellectual Property Law Institute. Jason was the managing editor of this volume, guiding the book through to publication, and overseeing all of the technical editing, fact checking, and comprehensive annotation of the conference transcripts. His meticulous attention to detail, organizational skills, and patient perseverance kept this immense project on course. Assisting Jason were two diligent research assistants, Paolo Merieles and Keiyana Fordham, both third-year Fordham Law students, who provided expert review of the manuscript. They were able to locate even the most obscure citations and correct the array of errors that always creep into the citations of every manuscript. Sandra Sherman, Assistant Director of the Fordham Intellectual Property Law Institute, along with Sharon Hammer, President of Verbatim Transceedings, Inc., assembled all of this volume’s material and were vital in organizing the substantial task of collecting author revisions. Their ability to track down a missing presentation or a stray but crucial submission is

viii  acknowledgements extraordinary, and often saved the day when we had nowhere else to turn. Sharon also managed the recording and transcription of the conference sessions. The accuracy and attention to detail of Verbatim’s transcription and manuscript services are second to none. Finally, we are very pleased with our association with our publishing partner, Hart Publishing of Oxford, England. Richard Hart and his colleagues have done a wonderful job in putting this volume together. In particular, Richard and Rachel have been very professional, agreeable, patient and supportive in a way that I do not think any other publisher could be, or even would want to be. Hart Publishing is in a class by itself. Hugh C. Hansen Editor

2009 Conference Sponsors Berwin Leighton Paisner LLP Bristows Cleary, Gottlieb, Steen & Hamilton LLP Clarke, Modet & Co Cooper & Dunham LLP Covington & Burling LLP Darby & Darby P.C. Fitzpatrick, Cella, Harper & Scinto Foley & Lardner LLP Freshfields Bruckhaus Deringer Gómez-Acebo & Pombo, Abogados, S.L. Greenberg Traurig LLP Howrey LLP International Chamber of Commerce (ICC) Jones Day Kenyon & Kenyon LLP Ladas & Parry LLP Linklaters LLP McDermott Will & Emery Microsoft Corporation Milbank, Tweed, Hadley & McCloy LLP Mitchell, Silberberg & Knupp LLP Morgan & Finnegan, LLP Morgan, Lewis & Bockius LLP Nokia Corporation Paul, Weiss, Rifkind, Wharton & Garrison LLP Ropes & Gray LLP Entertainment Software Association Time Warner Inc. Transperfect Trevisan & Cuonzo Bird & Bird Unilever Vossius & Partner Weil, Gotshal & Manges LLP White & Case LLP Winston & Strawn LLP

FORDHAM UNIVERSITY SCHOOL OF LAW SEVENTEENTH ANNUAL CONFERENCE INTERNATIONAL INTELLECTUAL PROPERTY LAW & POLICY Cambridge, England, April 15–16, 2009 WELCOMING & OPENING REMARKS In Memoriam: Sir Hugh Laddie Rt. Hon. Lord Justice Jacob

Court of Appeal, Royal Courts of Justice (London) PROF. HANSEN: Good morning. Welcome to the Seventeenth Annual Fordham IP Conference. We are delighted to be in the U.K., and particularly here at Cambridge. I want to thank Professor Lionel Bently and the people at the Faculty of Laws and the University for their assistance in providing this wonderful venue for the Conference. They have been tremendously helpful and have made this event possible. We start off with a very sad and serious moment—a remembrance of Sir Hugh Laddie. I will ask Robin Jacob to say some more. Robin. RT. HON. LORD JUSTICE JACOB: Before the Seventeenth Fordham IP Conference gets underway, it is right that we should all remember one of its great contributors, Hugh Laddie, Mr. Justice Laddie, Professor Laddie. Many of you will have known him personally. Others will have seen him perform — the right word for Hugh — at Fordham and other conferences. Nearly everyone else will have read his writings and his judgments, and anyone who hasn’t, hasn’t got down to their IP properly. It is just under half a year since Hugh died. Many of us are still struggling to cope. If you ask me what I miss most about him, I would give different answers at different times. His enormous sense of fun perhaps comes first to mind. Never was he without a joke. But then, you remember his insight. You could always ask him for advice, and his answer would be quick and perceptive. And then you’d say “No. What about his giant sense of justice? Or then, his love of humanity, of all nations and races?” And finally, perhaps, and the thing I am missing most now, is his wisdom. That was the most extraordinary. His support for good intellectual property and his hostility to bad, particularly over-extensive intellectual property, was passionate. As you will all know, in the early 1990s and the early part of this century the great pendulum of intellectual property law swung far out and further out in favor of protectionism. Hugh was one of the first to see that it was swinging too far. He spoke out against it, including at this Conference. I remember he returned from one of these Fordham conferences and said, “They’ve all gone mad. They think intellectual property law can solve everything; so there will be lots more of it.” Today the pendulum is busily swinging back, as Hugh’s wisdom well in advance saw that it should.

xvi  WELCOMING & OPENING REMARKS What he had to say about this subject will remain a constant guide to rational intellectual property law and its rational and balanced interpretation. In his intellectual property work, what he did will live on for a long time. In his personal life, in his close and warm family, which he put first in his life, he will live on also in what he gave them. He would, of course, have been at this Conference in his old university town, and this Conference will be that much less alive without him. We can’t but mourn his passing. One thing we can do is to create the Hugh Laddie Chair at University College London. There are a number of brochures here, which people can take and use for giving. The project is to create a chair in his name. His old Chambers expect to provide £100,000 as a start. For now, I want you to all stand for a minute in remembrance. [Moment of Silence observed] Thank you. PROF. HANSEN: Thank you very much, Robin. The profession has lost one of its brightest stars. Many of us here today and in fact throughout the world feel a strong sense of loss. This is the second year in a row that we have suffered a terrible loss. Last year it was Sir Nicholas Pumfrey. I fondly remember wonderful times with both Hugh and Nick, and all our memories of them fortunately will remain with us.

Chapter I

Ip Policy & The European Union Moderator Prof. Hugh C. Hansen

Fordham University School of Law (New York) Speaker Margot Fröhlinger

Director, DG Internal Market and Services Commission, European Commission (Brussels) Panelists Prof. Dr. Reto Hilty

Hon. Paul Maier

Director, Max Planck Institute for Intellectual Property, Competition and Tax Law (Munich)

President of the Boards of Appeal, OHIM (Alicante)

Ted Shapiro

Tilman Lüder

Senior Vice President, General Counsel and Deputy Managing Director, EMEA, Motion Picture Association (Brussels)

Head of Unit, Copyright and Knowledge Based Economy, DG Internal Market & Services, European Commission (Brussels)

Prof. Dr. Peter Meier-Beck

Patents Chamber, German Federal Supreme Court, Karlsruhe PROF. HANSEN: We’d like to get started. Thank you. Our next session is IP Policy and the European Union. Our speaker is Margot Fröhlinger, who is a Director, DG Internal Market, and in charge of at least the three units that deal with intellectual property. She is now going to give us an overview of EU policy in this area, and then I think we’ll have another interesting discussion.

2  CHAPTER I: IP POLICY & THE EUROPEAN UNION MS. FRöHLINGER: Good morning, ladies and gentlemen.

Yesterday night I understood from you that speakers today have two major tasks. The first is to rigorously respect the time limit imposed by you and monitored by the killer software—and yes, put it right there so that I cannot pretend not to see it. This will be particularly difficult for me, given the broad range of topics which I will have to cover. I have to be very brief on each of them and leave it to the discussion to look at them in more detail. The second task is, as I understood, to provide you with some fun. Now, that seems even more difficult to me. I have always considered intellectual property rights as an area of law which is very technical, very dry, and not particularly fun-like. But this may be the view of somebody who is considering herself still as a relative newcomer to the field. But I will limit myself to the facts and I will leave it to you and all of you to make fun out of them later. Now, I will limit myself to domestic internal EU policy initiatives, given that international external work has been covered by the previous session. I will also limit myself to policy initiatives and not deal with the application of antitrust rules, which will be the subject of a separate session. I will go through major initiatives in the fields of copyright, trademarks, patents, and enforcement. To start with copyright, one ongoing initiative is a proposal for a directive aiming at extending the term of protection for producers of phonograms and performing artists to ninetyfive years.1 We know that there is a lot of criticism and skepticism concerning this initiative, in particular in the academic world. I am looking at Professor Hilty here, who will certainly use this opportunity to criticize our proposal. But we think it is a good proposal. It aligns the term of protection in Europe with the protection in the United States, where, after all, we also have ninety-five years.2 And, in addition, the extension of the term of protection is combined with a number of measures aiming at strengthening the rights of performing artists including the creation of a fund from which session musicians will get additional revenues.3 This is something totally new, to some extent revolutionary, and it is not surprising that therefore the proposal has found the support not only from record companies but also from the artists community and in the European Parliament. We are quite confident that the proposal can be adopted very soon. It will be a compromise. It will look somewhat different from our original proposal. Maybe the term of extension will not be ninety-five but rather seventy years. But we think there are good chances for us to get it through. The second ongoing initiative is a consultation process launched by a Green Paper on Copyright in the Knowledge Based Economy.4 This initiative is dealing with problems about the digitization of protected works and their making available by libraries and online service provides. There are a number of different issues here. I can touch on them only very, very briefly. One issue is the exemptions and limitations of copyright, which are the subject also, as we have heard, of ongoing work in WIPO.5 I am talking here in particular about exemptions 1 See Proposal for a European Parliament and Council Directive amending Directive 2006/116/EC of the European Parliament and of the Council on the term of protection of copyright and related rights, SEC (2008) 2287 [hereinafter EU Copyright Term Proposal]. Subsequent to the conference, the European Parliament did pass a copyright term extension directive. See Press Release, “European Commission, Commission Welcomes Parliament Vote on Copyright Term” (Apr. 23, 2009), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/09/627. 2 Copyright Term Extension Act (CTEA) of 1998, Pub. L. No. 105-298, 112 Stat. 2827 (1998) (codified at 17 U.S.C. §§ 108, 203(a)(2), 301(c), 302, 303, 304(c)(2)) (extending the term of U.S. copyright protection for a work under corporate ownership from 75 years to 95 years). 3 “The creation of a fund for session musicians would be beneficial to that group and would ensure that they are included in the financial benefits of a term extension, which they would otherwise be largely excluded from under their ‘buy out’ contracts.” EU Copyright Term Proposal, supra note 1. 4 Green Paper on Copyright in the Knowledge Based Economy, COM (2008) 466/3, available at http://ec.europa.eu/ internal_market/copyright/docs/copyright-infso/greenpaper_en.pdf. 5 See Chapter V.C, “Rethinking Exceptions & Limitations”, infra this volume.

CHAPTER I: IP POLICY & THE EUROPEAN UNION  3

for research and education, which many feel are too narrowly drafted in our 2001 Copyright Directive6 and which some people fear are hampering distance learning and research as concerns the use of protected works. We are also looking into issues such as orphan works, for instance, or issues such as the making available of excerpts of protected works, newspaper articles, but also books, by search engines or news aggregators. There again the question is whether the current legal framework is appropriate or whether it needs adaptation. The issue here will be how to reconcile the rights of publishers and their interest to get a fair return on their investments and the interest of the research and education community and the public at large to get easier access to knowledge, information, and works on the Internet. Not surprisingly, the consultation has met with some anxiety among publishers, who are struggling on the one hand to defend their traditional brick-and-mortar business and at the same time launching new online business models, but who feel that overall the whole exercise could lead to a weakening of their protection. This should in our understanding not be the case. As I have said, we should reconcile the different interests. We are currently analyzing the replies, and this could result in new policy initiatives in the course of the next year, including an initiative on orphan works. The third ongoing initiative in the area of copyright is a stakeholder dialogue on copyright levies. Now, most of our Member States impose levies as a means of fair compensation for the private copying exemption, which most of our Member States have in place.7 Levies, however, differ very much in terms of, for instance, what devices are levied, what tariffs have to be paid, who has to pay them, and also in terms of treatment of cross-border trade. This causes problems not only for cross-border trade. In some cases levies could be considered as being excessive, especially on multi-functional devices, and they could hamper the technological development and the taking up of some new electronic equipment or some new services. Given the controversy and the extreme sensitivity of the levies and the private copying issue, we think it would, at this stage, not be realistic to address these issues by a legislative proposal at the European level. We are therefore trying to bring together stakeholders, producers of equipment on the one hand, rights holders on the other hand, and reach some consensus on the most thorny issues, such as which devices should be levied, how should the rates be calculated, how should cross-border trade be facilitated, etc. For the time being, we feel that discussions are going reasonably well and we are still optimistic to reach an inter-industry agreement, which could result in some joint recommendations to policymakers, before the end of the year. With this I leave the area of copyright and I come to trademarks. On trademarks, first of all, I have to report a major success story. We have two weeks ago reduced the fees for the application and registration of a Community Trademark by around 44 percent. The registration fee has been put to zero. The application fee, which will be the only fee to be paid by the applicant, will be €1,050 for paper applications and €900 for electronic applications. This is quite a significant achievement. There are two major reasons for this: on the one hand, the continuous increase in revenues of the OHIM in Alicante resulting from a continuous rise in applications;8 and on the other hand, a continuous decrease in costs resulting from efficiency gains and productivity gains achieved by the Office. This has made it possible to provide for such a significant fee reduction. That is very good news, we think, for European business. Council Directive 2001/29, Copyright Directive, 2001 O.J. (L 167) 10 (EC). See DG Internal Market & Services, Stakeholder Consultation on Copyright Levies in a Converging World 5 (June 2006), available at http://ec.europa.eu/internal_market/copyright/docs/levy_reform/stakeholder_consultation_en.pdf. 8 See John Batho, “Escaping the Money Trap”, World Trademark Rev., Sept./Oct., 2008, at 25–30. 6 7

4  CHAPTER I: IP POLICY & THE EUROPEAN UNION Secondly, we have also launched a major evaluation of the Community Trademark system,9 which could result in a proposal for a review of the Community Trademark Regulation in the course of next year. So there are a number of issues which need to be addressed, such as: • The relationship between the national trademark systems and the Community Trademark; • A need for more harmonization between the national systems and the Community Trademark system; For instance, the use of the Community Trademark—should it remain sufficient that the Community Trademark is used in one single Member State, such as Malta or Lithuania, to have a Community Trademark valid in the whole of the territory of the Community? All these are difficult questions. They need to be properly analysed and discussed. They could be the subject of a review. Leaving the field of trademarks and coming to patents. Patents is an area where I am particularly not sure whether this is fun or whether it is a permanent source of frustration. I have to recall that this patent file is older than the European Union.10 It seems more difficult to create a Community patent or a unified litigation system than to create the European Union itself with all its achievements, including the Euro. Sometimes companies are asking me: “Mrs. Fröhlinger, can you explain to us why the creation of the Community Patent is not possible? We have managed to create the Euro, after all. Why can we not have a Euro-patent?” Well, there are a variety of reasons. Given the [panel timing] software which is all the time blinking at me, I cannot go into these reasons. [Laughter] But we are, despite all the frustration, despite the long history of failure,11 trying to give the creation of a Community patent and a unified patent litigation system a new (and presumably the last) hard push. And we are giving it a new push because we think it is of such importance for European business, and in particular for European business startups, for innovative European SMEs. 9 See INTA, Community Trade Mark, http://www.inta.org/index.php?option=com_content&task=view& id=189&Itemid=59&getcontent=1 (“The Community Trade Mark (CTM) offers the opportunity to protect a trademark in all of the countries of the European Union (EU) by filing a single application. The countries covered are Austria, Benelux (Belgium, the Netherlands and Luxembourg), Bulgaria, Cyprus, the Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Malta, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and the United Kingdom.”). 10 The first drafts of the European Patent Convention (EPC) date back to the 1950s, which was contemporary to the first attempts at creating the European Community itself. See Vincenzo Di Cataldo, “From the European Patent to a Community Patent”, 8 Colum. J. Eur. L. 19, 19 (2002); J. B. Van Benthem, “The European Patent System and European Integration”, 24 Int’l Rev. of Indus. Prop. & Copyright L. 435–45 (1993). The European Patent Convention (EPC) (also known as the Munich Convention), 1065 U.N.T.S. 199, was signed in Munich, Germany, on October 5, 1973 and became effective on October 7, 1977. The EPC was only supposed to provide a first step, with the goal of implementing a second step, the Community Patent Convention (CPC), 1989 O.J. (L 401) 1. The CPC, also known as the Luxembourg Convention, or the Convention for the European Patent for the Common Market, was signed in Luxembourg on December 15, 1975. See Di Cataldo, supra, at 19. While the EPC itself has accomplished its own goals, and has prompted significant harmonization of patent laws across European states, the CPC never became effective, leaving the original planned system of two interacting Conventions unfulfilled. “[The] European Commission thought the CPC would be able to accomplish these goals, when in fact, the CPC has proved not at all fit for this task.” Di Cataldo, supra, at 19. 11 In 2000, the Commission proposed the creation of a Community Patent to give inventors the option of obtaining a single patent which is legally valid throughout the EU. See Proposal for a Council Regulation on the Community patent, COM (2000) 412 final (Aug. 1, 2000). On March 3, 2003, the Council reached agreement on a Common Political Approach for the key elements of the proposed Community Patent, including a centralized Community Patent Court, however, stakeholders criticized it for the high costs of patent translation arrangements and having too centralized a jurisdictional system. See Proposal for a Council Decision conferring jurisdiction on the Court of Justice in disputes relating to the Community Patent, COM (2003) 827; Axel H. Horns, “A Unified European Patent System, The Historical Perspective”, IP Jur Blog, Feb. 18, 2010, http://www.ipjur.com/blog2/index.php?/archives/138-AUnified-European-Patent-System-The-Historical-Perspective.html#extended. On January 16, 2006 the European Commission “launched a public consultation on how future action in patent policy to create an EU-wide system of protection can best take account of stakeholders’ needs.” See Press Release, European Commission, Internal Market,

CHAPTER I: IP POLICY & THE EUROPEAN UNION  5

Now there are two separate but related files on the table. One is the Community patent. The Community patent would be a single title for the whole of the European Union, which would increase legal security for companies, but which would most of all result in a significant reduction of costs. What we have currently is that after grant you have to validate your patent with national offices, with resulting complexity and very significant transactional costs—fees to be paid to national offices, fees to be paid to patent attorneys; and on top of this the absolutely unnecessary but horrendously expensive translation costs. Therefore, what we are proposing is something very simple: one single title valid in all our Member States without any validation with national offices and without any translations to be provided by companies. There would be only machine translations available by a central system and for information purposes only, without any legal value. Not surprisingly, this proposal has met with the support of large parts of the business community, and in particular from all associations in Europe representing small and mediumsized companies. But, not surprisingly also, it has not met with the support of all of our Member States. There is one Member State in particular, which I do not need to name, which has fundamental problems with this file over the language issue. Problems can sometimes be overcome by trading them against something else. Or otherwise we will have to consider how to create a Community Patent not with twenty-seven but with twenty-six, twenty-five, or twenty-four Member States. The second file is the creation of a unified patent litigation system. In the course of last year, there has been intensive work with our Member States, on the one hand, and, on the other hand, with experts from the user community, with business representatives, with judges, lawyers, and patent attorneys. Many of these experts are here in the room today. This intensive work has resulted in a draft proposal,12 a draft agreement on the creation of a unified patent court both for European patents, which are already existing, and for future Community patents, if we manage to create the latter. This draft agreement would be concluded between the European Union, its Member States, and those third countries who are members of the European Patent Convention and who would like to join the system. There are some of them who have already shown interest, in particular, some major patent countries. This court system would consist of a first instance, with a central division and local and regional divisions established in the Member States and one single appeal instance. It would be totally independent from the European Court of Justice—this is the major distinction compared to the Commission’s own original proposal from 2003.13 The European Court of Justice would be limited to give preliminary rulings on questions referred to it by the patent court concerning the interpretation of Community law. There are still some areas where there are divergences among Member States or divergences among the users also. There is still a need for some improvement and fine-tuning. But there is broad consensus concerning the general architecture and the approach. This has led the European Commission to now formally adopt a proposal for a negotiation mandate which would also allow the European Commission to negotiate the conclusion of such an agreement with our Member States and those third countries which would like to join. This mandate has been adopted last month. It is publicly available over the Internet.14 Commission asks industry and other stakeholders for their views on future patent policy (Jan. 16 2006), http://europa. eu/rapid/pressReleasesAction.do?reference=IP/06/38. See EPO, European Patent Litigation Agreement, http://www.epo.org/patents/law/legislative-initiatives/epla.html. See Proposal for a Council Decision conferring jurisdiction on the Court of Justice in disputes relating to the Community Patent, COM (2003) 827. 14 Commission Recommendation, to authorise the Commission to open negotiations for the adoption of an Agreement creating a Unified Patent Litigation System, SEC (2009) 330 final (adopted Mar. 20, 2009), available at http://ec.europa.eu/internal_market/indprop/docs/patent/recommendation_sec09-330_en.pdf. 12

13

6  CHAPTER I: IP POLICY & THE EUROPEAN UNION Some of our Member States still have legal doubts concerning the creation of this system. Once the European Court of Justice, hopefully, will have given a positive opinion, we hope that then also these legal doubts will disappear and Member States will at least not have any more a possibility to advance legal arguments but will have to come to the table and negotiate politically. Here I leave the area of patents. I have still a number of minutes to talk about enforcement. We have in Europe a legal framework, the Enforcement Directive,15 which deals, however, only with civil measures. Unfortunately, a proposal for a directive dealing with criminal sanctions is blocked in the Council and we do not know what the prospects for final adoption of the criminal sanctions directives are. But as far as civil measures are concerned, we have the Enforcement Directive, which is functioning quite well. We are now trying to do is to focus on practical measures which will complete the Enforcement Directive and which are aiming at improving enforcement on the ground. The first of these measures is the creation of a European observatory on counterfeiting and piracy, which has been launched two weeks ago.16 The objective of this observatory is to systematically collect, compile, analyze, and present data on the economic and societal implications of counterfeiting and piracy. We hope with such comprehensive documentation and information to achieve a major change of mindset with policymakers and in the public opinion. We here in this room are all part of the Internet community, we all know what counterfeiting and piracy does, that it puts at risk competitiveness and innovation, that it results in job losses, that it contributes to financing of international crime and international terrorism, that it facilitates the exploitation of children in the Third World. We all know this. But we have to get the message across outside with the public opinion and with policymakers. If we show the implications of counterfeiting and piracy in a clearer way, we are also confident that policymakers will understand that counterfeiting and piracy is serious crime and that it requires also criminal sanctions. Furthermore, we have launched a stakeholder dialogue in the area of counterfeiting and piracy, this time on the sale of counterfeit products over the Internet. Again, very much like with the stakeholder dialogue on copyright levies, we think that, given the controversies and the sensitivity, given also the rapid changes in technology and in market developments, the right approach would not seem to be a legislative approach. The right approach would be rather a “soft law” type approach, based on bringing together stakeholders from different parts of the industry, Internet platforms, and auction houses, on the one hand, and rights holders, on the other hand, with the aim of trying to reach inter-industry cooperation agreements. If we can reach such inter-industry cooperation agreements, they could of course operate not only at European level; they could also operate at international level, and that would be very effective, since counterfeiting and piracy is not something which stops at national, nor even at European, borders but is an international phenomenon. Given the quite promising first discussions we had with the group of stakeholders working on counterfeiting, which is limited to the selling of physical goods over the Internet, we are intending now to launch a second dialogue, this time dealing with illegal downloading over the Internet, i.e., the phenomenon of Internet piracy, again with the aim and the objective to broker an inter-industry cooperation agreement. I have managed to stay within my time. I will wrap up here. I hope that there was enough food not only for thought but also for an interesting discussion and for some fun to be animated by you. Thank you very much for your attention. 15 Council Directive 2004/48, of 29 April 2004 on the enforcement of intellectual property rights, 2004 O.J. (L 195) 16 (EC). 16 See European Commission, Internal Market, The European Observatory on Counterfeiting and Piracy, http:// ec.europa.eu/internal_market/iprenforcement/observatory/index_en.htm.

CHAPTER I: IP POLICY & THE EUROPEAN UNION  7 PROF. HANSEN: Thank you very much. Well, that was a lot in a short amount of time. You finished early, and there’s a special place in heaven for speakers who finish early. Just another incentive. Let me ask you this, Margot: How much in terms of IP policy do you talk to Luc, do you talk to the people at DG Competition, because what they do can have an impact on success of the overall project? MS. FRöHLINGER: Well, you would be surprised, but we talk a lot. There is sometimes the impression in the outside world that one department of the Commission doesn’t know what the other one is doing and that we are not speaking with one voice. As a matter of fact, in the area of IPR we are trying very much to speak with one voice and to have a coordinated approach. Luc would certainly agree it works very well, and those people who are really insiders would also agree it works rather well. Therefore, I would like to say something here which some of you may not want to hear. There has been recently a request to President Barroso from industry representatives to nominate at the level of the European Commission an “IP czar,” following the example of the United States.17 In my personal view this is not necessary. What we need is very close, very informal, and very regular upstream coordination in the Commission. That works. We do not need to create another administrative structure and a new level of bureaucracy. PROF. HANSEN: You talked about Luc, but DG Competition. You must think they are kind of out of control. MS. FRöHLINGER: We do talk a lot to DG Competition also. I don’t know whether my colleague Cecilio [Madero Villarejo] is already here today. He would confirm that we talk to each other. There was also the perception in the outside world that there is continuous conflict between DG Market, on the one hand, trying to protect as much as possible intellectual property rights, and DG Competition, on the other hand, trying to weaken as much as possible intellectual property rights. This perception is wrong. Just look at a piece of paper, which we have published last year, which I didn’t mention because of a lack of time, which is the Communication on an Industrial Property Rights Strategy for Europe.18 There is a whole chapter on the relationship between intellectual property rights and competition law, agreed between DG Market and DG Competition. It clearly states that intellectual property rights as such, their registration, their use, their enforcement, their litigation, are as such not anticompetitive. Only in exceptional circumstances, but these exceptional circumstances must be proved, there is an issue for the application of competition rules. PROF. HANSEN: Are you happy with the DG Comp’s inquiry into pharma? MS. FRöHLINGER: I would say this is an unfair question. [Laughter] It would be premature for me to say whether we are happy or not, because the final result of the inquiry in the pharma sector is not yet known. All we have currently is an interim 17 The position of Intellectual Property Enforcement Coordinator (or “IP Czar”) was mandated by Sec. 301 of the Prioritizing Resources and Organization for Intellectual Property Act of 2008 (PRO-IP Act), Pub. L. No. 110-403, 122 Stat. 4256 (2008). Subsequent to the conference, in Sept. 2009, President Obama nominated Victoria Espinel to serve as the first United States Intellectual Property Enforcement Coordinator. She was confirmed by the U.S. Senate on Dec. 4, 2009. See “Public Knowledge Congratulates Espinel on Confirmation”, http://www.publicknowledge.org/ node/2800. A group of associations wrote in April 2009 to Mr. Barroso, President of the Commission, to plead for the appointment of a high-level IP coordinator such as exists in the U.S., who would lead the overall EU Intellectual Property protection. See European Commission, DG Trade, Final Report, Evaluation of the Intellectual Property Rights Enforcement Strategy in Third Countries at 54 (Nov. 2010), available at http://trade.ec.europa.eu/doclib/ docs/2011/october/tradoc_148284.pdf. 18 European Commission, Communication, An Industrial Property Rights Strategy for Europe, COM (2008) 465/3, available at http://ec.europa.eu/internal_market/indprop/docs/rights/communication_en.pdf.

8  CHAPTER I: IP POLICY & THE EUROPEAN UNION report.19 This interim report has been the subject of consultation. We do not know yet the final product, which will reflect the result of the consultation. Only once the final product is on the table we can say whether we are happy or not. And not only we, but we think also the industry and people in the outside world should judge on the final product and not on an interim stage. PROF. HANSEN: You should be in the diplomatic corps really, Margot. Did someone raise their hand? What is this, sort of an empowerment thing here, or what? We have the whole panel. Tilman finally came. Thank you, Tilman. Good to see you over there. Giulia, you want to say something? QUESTION [Giulia DiTommaso]: Yes, with permission. PROF. HANSEN: Normally, because it’s so crowded and we have little time, we usually don’t have time unfortunately for audience questions. QUESTIONER [Giulia DiTommaso]: I’m sorry, Hugh, but it’s your fault. I couldn’t resist. I want to thank the Commission actually, DG Market and DG Trade, to realize that there is such powerful coordination now, also magical power, to look into the future, because we in industry haven’t even seen the final letter to Barroso. So I’d like very much to know how they are also looking into people’s minds. PROF. HANSEN: Is that a question? Is that just floating around or is someone going to answer this? QUESTIONER [Guilia DiTommaso]: This is a question to Mrs. Fröhlinger, and to the Commission. There have been discussions around this letter and I would like to know if it has been received by the Commission and what the Commission intends to respond. MS. FRöHLINGER: Well, there is some confusion surrounding this letter. But I can tell you we have received a letter which has been sent to President Barroso by industry representatives. But there seem to be people who think that this letter has not yet been finalized and not yet been sent. But I can confirm that the letter has been already sent. PROF. HANSEN: Okay. Let me introduce the rest of the panel, another distinguished panel: Reto Hilty, Director at Max Planck—obviously, everyone knows Max Planck, especially in the IP area, a major player; Tilman Lüder, at the end, Head of the Copyright and Knowledge-based Economy Unit; Paul Maier, President of the Boards of Appeal of OHIM, the Community Trademark and Design Office; Judge Peter Meier-Beck, German Federal Supreme Court Patents Chamber; Ted Shapiro, who is Senior Vice President, General Counsel, and Deputy Managing Director of EMEA, Motion Picture Association, Brussels. Paul, let’s start with some easy questions. Margot said there have been a lot of successes in trademark and very positive. Are you as positive about the current state in trademark law? MR. MAIER: It’s never black and white. A number of very good things have been done. There have been a lot of improvements of efficiency of the trademark system in Europe in general. But if you look at our own figures that we publish on the quality of decisions of the opposition divisions,20 for example, there still is a major problem there that we have to address. We are very keen to look into the results of the study, which Margot talked about briefly. We expect a lot of input from all interested circles but also a lot of trouble when we see the results, and eventually even a lot of disappointment. This exercise should generate many debates and we will see what we can do about the results. There is still a lot to do. 19 See DG Comp., Pharmaceutical Sector Inquiry Preliminary Report (DG Competition Staff Working Paper, Nov. 28, 2008), available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/preliminary_report.pdf. 20 See OHIM, Statistics, http://oami.europa.eu/ows/rw/pages/OHIM/statistics.en.do.

CHAPTER I: IP POLICY & THE EUROPEAN UNION  9 PROF. HANSEN: Let me ask a question. You are like the United States’ Patent and Trademark Office, and every country has one. To what extent is the interaction you have—you have Court of First Instance (CFI), you have European Court of Justice (ECJ), you have Member States doing law—to what extent do you try to be consistent with what is going on in other places? First of all, Court of First Instance and European Court of Justice: if you have a Court of First Instance decision, just one comes down, do you immediately all throw out OHIM and the Boards of Appeal follow that one, or do you see if it has traction, if another panel still does it? And the European Court of Justice can be inconsistent; what do you do when that happens? How do you manage all this and still have examiners who can do their day-to-day job and boards of appeal that themselves don’t conflict with each other? MR. MAIER: The first thing that we try to do is to intent to remain or be as consistent as we can among ourselves. You pointed to the fact that, of course, between the CFI, the various chambers, and of course also in the Court of Justice, there is, I would say, room for interpretation of the judgments. We have more than 400 decisions of the CFI in total in trademark matters. We have 100 of the ECJ in trademark matters plus seventy others in intellectual property. Obviously, over time things have gone a bit left and right and things are not necessarily always very consistent. We do, of course, look at the judgments. I, for example, mainly look at the judgments where the decision of the Boards of Appeal is annulled, to know what happened, why the CFI would not confirm us. By the way, they do confirm us in 80 percent of the cases, so that shows that there is some consistency in the system. We do have a Department of Intellectual Property Policy, which is in charge of looking into all this. If there is a decision of the Court of First Instance or the Court of Justice that requires, I would say, transposition in our everyday work of examiners, opposition divisions, and so on, they would issue an instruction, and, if there is a need, also even a communication to the public, like we did after Libertel,21 on the seven criteria for the registration (graphical representation) of a trademark. So this is what we do. There are various levels of discussions internally. Obviously, the Boards of Appeal members are independent; they make their decisions. We have our internal review of the jurisprudence, which is circulated to our members. Through that you know the broad lines, where it goes. There is no absolute consistency. It is not achievable anyway. But obviously, there are some judgments of the Court and the CFI that we prefer to others. PROF. HANSEN: You do it day-in and day-out, examiners do it day-in and day-out, and everyone else is sort of dipping their toes in every once in a while to do it. Do you have the feeling that basically they shouldn’t be interfering with what you are doing? MR. MAIER: There are certainly people who think that the review that the CFI does of our decisions at the Boards of Appeal should be on the pure basis of a control of legality and not actually what the action is in most of the cases, a complete review. Lately, we have had decisions of the CFI where they actually counted the number of letters of one trademark and compared it to the number of letters and the sequences of the other trademark. Obviously, we in the Boards of Appeal must do that. This is our job. The fact that the CFI does it on its own is a bit strange, because they should basically say whether the way we did it corresponds to legality or not rather than simply redo it. This is what makes the case law, I think, a bit heavy and sometimes difficult to follow. PROF. HANSEN: So to some degree these courts above you should be deferring to expertise. Is that a fair statement or an unfair statement? MR. MAIER: Well, that’s your statement. 21

Case C-104/01, Libertel Groep BV v. Benelux-Merkenbureau, 2003 E.C.R. I-03793.

10  CHAPTER I: IP POLICY & THE EUROPEAN UNION PROF. HANSEN: Which makes it unfair, I know.

[Laughter]

MR. MAIER: I was trying to be diplomatic. The truth is there are no trademark specialists in the CFI, neither are there trademark specialists, or if any, very few in the ECJ. They know about intellectual property but not necessarily in depth. That is true. But that does not mean that they cannot produce consistent and good judgments. Now, whether this is what they achieve is for everyone to consider and look into. PROF. HANSEN: He should be in the diplomatic corps as well. Margot, you wanted to respond? MS. FRöHLINGER: Well, we are aware of problems concerning the jurisprudence of the Court of First Instance and the ECJ in the area of trademarks. We think that should not be a reproach to the Court of First Instance and to the European Court of Justice. They are not trademark specialists and they have no vocation to be trademark specialists. But that is also the reason why we support requests from industry and from patent judges and lawyers not to confer patent litigation to the ECJ, but to create an independent and specialized patent court and to limit the role of the ECJ to preliminary rulings concerning the interpretation of Community law. PROF. HANSEN: Okay. Peter, how do you react to Margot’s review of the current patent situation? PROF. DR. MEIER-BECK: I think we have a very good draft agreement on a European and Community patent court.22 It is almost a perfect solution—not in the sense that the Commission makes a proposal to establish a theoretically ideal court, but a court which will be able to deal with the practical needs, to ensure harmonized judicial practice in patent law, and cope with the enormous workload this court will have to bear once it is established. The solution is to a certain extent to build the new system on the existing national structures, to use the expertise of the national judges, to use the national languages, and in this way to decide the huge numbers of cases, and on second instance to have an appeal court with a real multinational composition which can ensure a uniform practice and can decide the questions as to how to extend the scope of patent protection, how to assess inventive step, and so on. I think if it is possible to conclude this agreement which has been proposed by the Commission that would be a really good solution. PROF. HANSEN: I was surprised to hear Margot’s comment that if a certain country doesn’t get into line it might just go ahead with twenty-four, twenty-five, twenty-six countries, rather than twenty-seven. I can’t imagine who Margot is talking about. That’s pretty radical stuff, isn’t it? PROF. DR. MEIER-BECK: I am not an expert in EU law and I cannot answer the question whether it will be possible to adopt a solution which is not accepted by all Member States. But if that is possible, of course we should do it. PROF. HANSEN: But it does show that Margot means business, doesn’t it, which is good? In the copyright area, we actually have three people who deal with that. One of the issues with exceptions—and we are going to have a whole bunch of stuff in copyright on exceptions and the same people here are going to be speaking there,23 so we don’t have to go through all of it—but is it possible that rather than having specific exceptions and limitations the European Union just goes to a fair use system, which then it lets courts in their wisdom, case by case, build up a body of law which is flexible for the future and not tied to something which would have to be changed statutorily every certain amount of years? 22 See EPO, Working Party on Litigation, Draft Statute of the European Patent Court (Feb. 16, 2004), available at http://documents.epo.org/projects/babylon/eponet.nsf/0/885CCB85F5CC33ABC125723D004B15F9/$File/statute_ draft_en.pdf. 23 See Chapter V.C, “Rethinking Exceptions & Limitations”, infra this volume.

CHAPTER I: IP POLICY & THE EUROPEAN UNION  11

Reta, what do you think of that idea?

PROF. DR. HILTY: Up to now we have not moved to fair uses because we have a limited

catalog of limitations in the Directive. As long as we do not open this Directive, we certainly will not have fair use. What we could do is, of course, interpret the existing limitations in a broad way, or we could introduce new limitations in a new directive. But as far as I understood it, nobody is talking of a fair-use approach in Europe. PROF. HANSEN: Margot? MS. FRöHLINGER: It is certainly true we are not talking about a fair-use approach in Europe right now. But this is something which we may have to consider in the future. It is true our lawmaking process in Europe is extremely slow and complicated, and it is getting ever more slow and complicated with twenty-seven (soon now thirty) Member States. The legislative cycle takes at least six years from the starting of the preparation of a proposal, adoption of a proposal by the Commission, negotiation in the Council and in the European Parliament, and its implementation into the law of our Member States. This legislative process is more and more inept to keep in tune with rapid technological development. Therefore, we may need more flexible rules in the future which may be more apt to adaptation outside of the legislative circle. PROF. DR. HILTY: But you have to go one step back, because the history of the Directive is that the European Community wanted to have harmonization of all limitations within Europe. They could not agree. That is the reason why they collected all the existing limitations in the European countries. They, at the end, they said, “These are the limitations; we cannot go beyond that.” This is Recital 32.24 You have to abolish this Recital, if you want more flexibility. You may come back to the Member States and you may say: “You need more flexibility. You must be able to react in a situation in which you have to react.” Maybe we don’t have to need full harmonization. PROF. HANSEN: Ted, your situation as representing content providers, owners, authors, the current state in the European Union is optimistic, pessimistic, same old thing? What’s going on? MR. SHAPIRO: We’re very optimistic. PROF. HANSEN: You don’t really mean that. We’re going to have a lie detector test up here. [Laughter] MR. SHAPIRO: In the current climate, which is not very favorable to intellectual property, particularly in the European Parliament, the notion of opening up the Directive to deal even with the limited issue of exceptions is highly problematic in my view. And in any event, as Margot says, it will take years. But it takes even a longer time to develop the case law and doctrine that underpins the fairuse principle in the United States. It will simply not work in the European Union, and it is not necessary because of the three-step test which is implemented in EU law,25 and indeed in most Member States. So it is not necessary. 24 See Copyright Directive, supra note 6, recital 32 (“This Directive provides for an exhaustive enumeration of exceptions and limitations to the reproduction right and the right of communication to the public. Some exceptions or limitations only apply to the reproduction right, where appropriate. This list takes due account of the different legal traditions in Member States, while, at the same time, aiming to ensure a functioning internal market. Member States should arrive at a coherent application of these exceptions and limitations, which will be assessed when reviewing implementing legislation in the future.”). 25 At the 1967 Stockholm Conference, the so-called “three-step test” contained in article 9(2) of the Berne Convention was introduced in international copyright law as a companion to the formal recognition of the general right of reproduction in article 9(1) of the Berne Convention. See Berne Convention for the Protection of Literary and Artistic Works, Arts. 9(1) & (2), Sept. 9, 1886, 168 Parry’s T.S. 185, revised Nov. 13, 1908, 1 L.N.T.S. 218, revised June 2, 1928, 123 L.J.T.S. 233, revised June 26, 1948, 331 U.N.T.S. 217, revised July 14, 1967, 102 Stat. 2853, 828 U.N.T.S. 221.

12  CHAPTER I: IP POLICY & THE EUROPEAN UNION And the current system is flexible enough. As Reto said, there are well over twenty exceptions because every Member State came with their own in their back pocket and threw them on the table during the negotiation for the Directive. There is plenty of flexibility built into there. There is plenty of room for a European Google, or whatever. Don’t open up the Directive. They’re having enough trouble with the term extension before the Parliament at the moment. PROF. HANSEN: Do you think anyone takes the three-step test seriously? MR. SHAPIRO: Well, I take it very, very seriously, and I can point to lots of national decisions where it has been used. It is the last line of defense for rights holders. It operates in a similar manner, I suppose, as the fair use test:26 you take an exception, you apply it to a certain set of facts, and you find out whether that exception is being applied too broadly or too narrowly. PROF. HANSEN: Well, you know, one of the problems with these exceptions and all is some of them are too narrow. Critics then say, “Look, this can’t be done, this can’t be done.” What you get is a public reaction that copyright overall is not in a healthy situation and is too restrictive. So the idea that everything is okay now with the way it is—I think you’re getting public reaction that’s negative, and you are certainly getting negative reaction from the Copyleft community27—of course, properly you disregard that. But it fuels the fire that things that should be allowed are not allowed, and especially when you throw in the three-step test—if you take that seriously, very few things are going to be allowed—is not problematic. The three-step test reappeared in TRIPs Art. 13, which provides that member States shall confine limitations and exceptions to: (1) “certain special cases,” (2) “which do not conflict with a normal exploitation of the work,” and (3) “do not unreasonably prejudice the legitimate interests of the right holder.” Agreement on Trade-Related Aspects of Intellectual Property Rights, Art. 13, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPs], available at http://www.wto.org/english/tratop_e/ trips_e/t_agm0_e.htm. The three-step test also appeared in the WCT Art. 10: “Contracting Parties may, in their national legislation, provide for limitations of or exceptions to the rights granted to authors of literary and artistic works under this Treaty in certain special cases that do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the author.” WIPO Copyright Treaty (WCT), Art. 10, Dec. 20, 1996, S. Treaty Doc. No. 105-17, 2186 U.N.T.S. 121, 36 I.L.M. 65); see also WIPO Performances and Phonograms Treaty (WPPT), Art. 16(1), Dec. 20, 1996, 2186 U.N.T.S. 245 (“Contracting Parties may, in their national legislation, provide for the same kinds of limitations or exceptions with regard to the protection of performers and producers of phonograms as they provide for, in their national legislation, in connection with the protection of copyright in literary and artistic works”). The three-step test has subsequently found its way, via WCT Art. 10, into Art. 5(5) of the European Copyright (Information Society) Directive of 2001, and from there into the national laws of some EU states. See Directive 2001/29, Information Society Directive, O.J. (L 167) 10 (EC), Art. 5.5 (“The exceptions and limitations provided for in paragraphs 1, 2, 3, and 4 shall only be applied in certain special cases which do not conflict with a normal exploitation of the work or other subject-matter and do not unreasonably prejudice the legitimate interests of the rightholder.”). 26 See 17 U.S.C. § 107. Section 107 does not define “fair use,” but enumerates four broadly worded factors that courts shall consider in determining whether a use is “fair” and thus uninfringing: Notwithstanding the provisions of sections 106 [Exclusive rights in copyrighted works] and 106A [Rights of certain authors to attribution and integrity], the fair use of a copyrighted work, including such use by reproduction in copies or phono records or by any other means specified by that section, for the purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include— (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use on the potential market for or value of the copyrighted work. The fact that a work is published shall not itself bar a finding of fair use if such a finding is made upon consideration of all the above factors. Id. 27 For a discussion of the criticisms of copyright exceptions, see Robert Burrell & Allison Coleman, Copyright Exceptions: The Digital Impact (Cambridge University Press, 2005).

CHAPTER I: IP POLICY & THE EUROPEAN UNION  13 MR. SHAPIRO: As someone said this morning in the first session, something that we need to focus on is definitely education.28 In the realm of exceptions, there is a lot of room for agreements between rights holders and affected groups. Indeed, the Directive with respect to the interplay with technological measures anticipates that. So the publishers meet with groups from the blind—in the film industry we have agreements with archives and things like that— to facilitate exceptions. A lot of work was done at the European level on orphan works, for example, to deal with these issues. So there are ways to move it forward. The various dialogues that Margot referred to are very, very useful in this regard. We just have to make sure that all the right people are around the table so the input is coming from the rights holders, the ISPs, the platforms, and Jamie Love. PROF. HANSEN: Tilman seems to be quiet at the end of the table. Tilman, are you okay? MR. LüDER: I feel a bit ill because everybody said they are opening directives as if it was live surgery. It sounds really horrible. It made me just a bit ill. PROF. HANSEN: All right. In terms of the future in copyright specifically, what is actually going to happen in the next five years? Could you map out what you think your Unit or the Commission is going to be doing over the next five years? MR. LüDER: I think stakeholder dialogue is fine and they’re a lot of fun, and they are basically bringing together people who never talked before, and that in itself is a good thing. I am not sure that stakeholder dialogue ultimately will supplant or substitute for legislation. I think the Parliament won’t allow that. There is an issue that if we meet with the stakeholders behind closed doors and discuss technical issues that they might be okay with that, but if the technical issues evolve into some major policy arena, then I think the Parliament would want to be involved. I actually think that is a good idea, that the Parliament and the lawmakers are involved and that policy is not made in a closed-room environment with a couple of stakeholders, although we have a very great variety of stakeholders in the room and we have consumer bodies. If Jamie Love wants to come by and visit our levy stakeholder dialogue, he is very welcome to do so. He will then quickly, of course, realize that this isn’t exciting at all and then he will go back to WIPO. So what is going to happen, I think, is that we are going to have a fair amount of these stakeholder fora but we are not going to give up legislating. So when you talk about opening directives, as if you were kind of cutting open a live animal and doing experiments—I think sometimes directives do need to be changed; sometimes legislative change has to occur if there is a societal change. I think that possibly something will happen in the future about the reproduction right. We are having a panel.29 Ted will talk about the Premier League case.30 There is an American case that basically touches upon the reproduction right as well.31 The broad interpretation of the reproduction right, the entire issue of what happens inside the machine—is that all kind of copyright is relevant, what happens inside of your computers? I think that we will see quite a bit of jurisprudence on that. And, as legislation in the European scenario usually is a follow-up to jurisprudence, you might actually see some legislative effort then to codify what I would call a reasonable approach to the reproduction right.

See Chapter VII.A, “Multilateral & Bilateral Relations”, infra this volume. See Chapter V.B, “Information Society Directive, DRM, Private Copy Levies, Secondary Liability & Copyright Territoriality”, infra this volume. 30 Football Ass’n Premier League Ltd v. QC Leisure, [2008] EWHC 1411 (Ch). 31 Cartoon Network LP v. CSC Holdings, Inc., 536 F.3d 121 (2d Cir. 2008). 28 29

14  CHAPTER I: IP POLICY & THE EUROPEAN UNION Machine copies—all of these issues is quite an open field. I think that Ted has mentioned that he thinks that the three-step test and the fair-use doctrine are basically the same. There are a lot of people in the Green Paper consultation who want us to write interpretative guidelines on the three-step test. I leave it to you whether that is a good idea. But my conclusion is: Is the issuing of interpretative guidelines, of brokering agreements, ultimately all that is going to happen at the European front, is that all that we are ever going to do; or are we not going to bite the bullet at some stage and legislate either on a standalone basis or by—oh horror!—opening a directive? PROF. HANSEN: Thank you. We have time for one question from the audience. Do we have a question? No, not Howard. Anyone else? All right, Howard. QUESTION [Howard Knopf]: I guess the question is directed to either or both Tilman and Margot. Unfortunately, Bernt Hugenholtz is not here. He did an excellent study that was commissioned by the European Union a few years ago on term extension.32 He recommended against it. He had a lot of analysis and evidence. How come you have disregarded this and the work of all of the independent academics and basically reversed course on where it seemed that you were going on this rather controversial topic? PROF. HANSEN: I think that was a question to Tilman. MR. LüDER: Because I never do what Bernt Hugenholtz says on substance. I think we have good reasons for doing what we are doing. I think Margot summarized perfectly well that there might be an intermediate outcome that puts the term extension more in the realm of the expected lifetime of a performing artist. I do think that we have the support of the European Parliament, which is very important. I think that this proposal did allow the Commission, in the institutional sphere at least, to actually build a very solid alliance with the main legislator in the European Union, which is the Parliament. If the Parliament goes along with us, that in itself is a major success. So it cannot be all wrong. PROF. HANSEN: With that we are going to say thank you to a really outstanding panel.

32 Natali Helberger, Nicole Dufft, Stef van Gompel & Bernt Hugenholtz, “Never Forever: Why Extending the Term of Protection for Sound Recordings is a Bad Idea”, [2008-5] E.I.P.R. 174–81, available at http://www.ivir.nl/publications/ helberger/EIPR_2008_5.pdf.

Chapter II

The Judiciary & IP policy part A: Europe Moderator Prof. Hugh C. Hansen

Fordham University School of Law (New York) Speaker Lord Hoffmann

Law Lord, House of Lords, Parliament (London) Panelists Dr. Klaus Grabinski

Presiding Judge, District Court (Düsseldorf) Josh Holmes

Barrister, Monckton Chambers (London) Hon. Alice Pezard

Chief Justice, Cour de Cassation, French Commercial Court (Paris)

Rt. Hon. Lord Justice Jacob

Court of Appeal, Royal Courts of Justice (London) Hon. Robert van Peursem

Vice President, District Court, The Hague (Netherlands) William Robinson

Freshfields Bruckhaus Deringer (London)

PROF. HANSEN: This is our seventeenth year. It has been a great experience. This is a particularly exciting this year for the Fordham IP Conference. We have many people who have never attended before. Likewise we have a good number of people who have never spoken before. The Conference should be better on both counts. I’d like to thank our sponsors who from the beginning have made the conference possible. Particularly in these tough economic times we appreciate your support. And this year we have the most sponsors ever for the Conference.

16  CHAPTER II: THE JUDICIARY & IP POLICY Please let’s have a round of applause for our sponsors. [Applause] There are a few who have been here all seventeen years: Cooper and Dunham with John White, Ladas and Parry with John Richards, Kenyon & Kenyon, Ropes & Gray from the old Fish & Neave, and Time Warner. I just want the people from those sponsors to stand now, if you’re here. Let’s have a round of applause for our charter sponsors. [Applause] Now we are going to have what is always an interesting session: The Judiciary and IP Policy. We are going to have a European panel and then a U.S. panel.1 This, as you can tell, is the European panel. We are very fortunate to have as our principal speaker Lord Hoffmann, who is well known throughout the world. I think this is Lennie’s last talk as an active Law Lord as he retires next week. It will be a tremendous loss professionally to the legal community here and also abroad. In any case, I’m very glad that Lennie is here and is going to speak about IP policy and some of his experiences in the past and the future. Let’s welcome him. [Applause] LORD HOFFMANN: Well, Hugh’s got together a panel which includes five judges to talk about the Judiciary and IP policy. Speaking as a judge—or at any rate until Tuesday—the short answer is: What does the one got to do with the other? I think not long ago that would have been the end of the session. Judges tend to feel rather uncomfortable about saying that they decide cases on grounds of policy. That may be what the commentators, or even other judges, sometimes say they have done. But on the whole a judge prefers to present his decision as the inevitable outcome of statutory language or previous authorities. To decide a case on grounds of policy means that you have chosen a rule because you think it is better for society than some alternative rule, and that looks like legislation, and that lies outside the judge’s constitutional role. And if I think that, then I’m sure that my colleagues who come from civilian systems of law think so even more strongly. Well, it is different if one can appeal to a policy which is derived from the statute itself, from a general policy embodied in what Parliament or whatever the legislature has been trying to do. In England, for example, our Patent Act of 19772 was passed in order to give effect to the European Patent Convention.3 Now, the British parliamentary draftsmen, who are a strange race of people, tend to believe that they can improve on the language of a convention to which we have agreed. So the Act of 1977 isn’t exactly in the same language as the Convention, but it has a general provision saying it should be interpreted as if it was. What the reason for this peculiar method is I don’t know. But we have treated the Act as sharing a general policy of unifying, or trying to unify, the patent law of Europe. Because, as Margot was explaining to you earlier, the Convention omitted to provide for a single European patent court, and all her efforts and all the king’s horses and all the king’s men haven’t been able to do so since, because it omitted that, and there can therefore be no single authoritative interpretation of the Convention, it has not been an easy matter to try to unify the patent law of Europe. That means that the nearest we have to such a court in the European Union is the European Patent Office in Munich. That, as you know, deals with applications and grants of patents from all Member States. It has built up a solid jurisprudence on the interpretation of the Convention. See Chapter II.B, “The Judiciary and IP Policy, United States”, infra this volume. Patents Act 1977, c. 37 (U.K.). 3 European Patent Convention, Oct. 5, 1973, 1065 U.N.T.S. 199 (as amended Nov. 29, 2000). 1 2

PART A: EUROPE  17

So, so far as it is possible, we try to keep in line with the European Patent Office. I suppose you can call that an internationalist European policy which judges follow. We don’t inevitably follow their reasoning. There has been the odd spat between the EPO and our court, for example, on how you decide whether an invention which includes a computer program is patentable, but on the whole we have tried to avoid the situation in which the EPO grants a patent and then we in England, or wherever, say it is actually invalid. We also keep a close watch on what the courts in other Member States are doing. Very recently, the House of Lords had a case in which the English Court of Appeal had said that a patent was invalid and a Dutch court had said that the same patent was valid.4 In fact, as it happens, both of the judges who gave those two decisions are on the panel here this morning. We, as the final U.K. court of appeal, actually preferred the Dutch decision and said they were right and allowed the appeal. I am told that the two gentlemen in question happened to be at the time together giving talks at a conference in China when the news came through. I gather it was as though the Netherlands had beaten England at football. [Laughter] Now, of course, in the absence of a European patent court, we have to interpret the Convention conscientiously, as we think it right, and occasionally this does produce different answers, but more often, I think, different reasons for coming to the same answer from that which was given by the European patent court or by the court of another Member State. Even then, what we try to do is to set up some sort of dialogue in respect of judgments between us and the other court. We explain why we have been unable to follow their reasoning precisely. They answer back saying either they think we’ve got them altogether wrong, or they see perhaps they could modify their position in some way. We try to find some form of compromise. Now, you may say that is judges engaging in policy decisions in a form of international judicial politics. That, I think, is the kind of policy decision with which judges feel most comfortable, which can be openly confessed, and which is derived from a legislative intention as well as the obvious desirability of the outcome to have a Europe in which the same patent is not valid in one country and is valid in another. But there is another kind of policy which tends to be less openly stated and which is based really on a judge’s view about whether the extension of some form of intellectual property is desirable or not. We are all familiar with examples in various branches of intellectual property in which we happen to have an interest—patents for computer programs, business methods, dilution of trademarks, moral rights, all that kind of thing. People have views on whether they think this is a good thing or not. This is the area in which judges are, not only for constitutional reasons but probably for reasons of experience as well, least qualified to make choices, because the underlying issues involved are pragmatic; they are economic rather than raising questions of legal principle. There is, of course, also a constitutional question as to whether judges should impose their views on that sort of policy or whether it should be decided by the elected branches of government. It is difficult for judges to avoid being influenced by their opinions on the proper scope of intellectual property law. The freedom with which judges feel able to give effect to their own views on these matters differs according to the constitutional traditions in which they are working. In the United Kingdom, we are used to a system in which it is relatively easy for a government which is persuaded that it is a good idea to have certain legislation to get it through Parliament and bring it into legislative force. So we are used to saying that if there is going to be an 4

See Conor Medsystems, Inc. v. Angiotech Pharms. Inc., [2008] UKHL 49, on appeal from [2007] EWCA (Civ) 5.

18  CHAPTER II: THE JUDICIARY & IP POLICY expansion of this branch of intellectual property in order to cover the case which is before us, let Parliament decide it; we as judges do not feel really competent to do so. In the European Union, on the other hand, as you heard this morning, the adoption of a new directive or regulation is a much more difficult process.5 I think Margot told us it takes at least six years to get from inception through to the legislative stage. I don’t think anyone would describe the procedure by which it is adopted as democratic. It often involves a great deal of horse trading between Member States—you know, the tomato quota for the languages on the Trademark Regulation—and they often have, as you can see, little to do with the merits of the proposal. The result is, therefore, that the European courts, the European Court of Justice, the Court of First Instance, feel much more free to develop their own policies for the expansion of intellectual property, if that is what they think desirable, than a British court would feel able to do. You can see some of this in the tension which has existed for some years between the English and the European courts over the proper function of a trademark and the inherent registrability of marks, the English courts, particularly the late Sir Hugh Laddie, consistently taking the narrower view of what sort of things can be registered and what amounts to infringement. Of course, it is not only that the English courts feel more inhibited about the legitimacy of taking an expansive view of trademark protection. It is also that the judges in the United Kingdom see not just one aspect of intellectual property (for example, trademarks); they see it as part of a general system for regulating competition between traders, manufacturers, and so forth, which includes passing off, malicious falsehood, all kinds of other aspects of the law which fit together, which interlock. Whereas the European judges tend to see only those—well, naturally—aspects of the law of which there is a European dimension, like the Trademark Regulation,6 that they see in isolation. Also, as was pointed out in the earlier session this morning, they tend to be from very diverse backgrounds, not necessarily trained in intellectual property law. There is, I think, a general tendency in international courts of that kind—and in this I include, for example, the European Court of Human Rights in Strasbourg—that if you are not familiar with the principles, or if you are actually not very trained in dealing with principles, you tend to decide cases on the facts and you then leave it to other people to try and work out what the principle was which that case lays down. Now, one of the problems about being a judge, speaking from all that experience that I’ve now had, is that in an individual case it is pretty easy to get the right answer. Most people can do that. The real problem is to give reasons which don’t mess things up for the next case. That is the difficulty, I think, which both the Court of First Instance and the European Court of Justice have had. But in the end, I’m afraid, it is going to be impossible to eradicate the bottom line for judges where policy creeps into it, and that is their gut instinct for what they think intellectual property law ought to be doing, how far it ought to be going. That is the unspoken element in their judgments. When they have choices to make, that is in the end where they will decide. PROF. HANSEN: Thank you very much. And now for some discussion of Lennie’s talk and beyond. Let me introduce our panel. We have Klaus Grabinski, Presiding Judge, District Court, Düsseldorf; the Rt. Hon. Lord Justice Jacob; Hon. Robert van Peursem, Vice President, District Court, The Hague, The Netherlands; Hon. Alice Pezard, Chief Justice of the French See Chapter I, “IP Policy & the European Union”, supra this volume. Council Regulation 40/94/EC, of 20 December 1993 on the Community Trade Mark, 1994 O.J. (L 11) 1, codified at Council Regulation 207/2009/EC, of 26 February 2009 on the Community Trade Mark, 2009 O.J. (L 78) 1. 5 6

PART A: EUROPE  19

Commercial Court in Paris; William Robinson, an early friend of the Fordham Conference and a partner in Freshfields; and Josh Holmes, a barrister in Monckton Chambers. We have some time and we have a whole array of different people to address some interesting issues. Lennie, isn’t it possible that the British view of trademark law and the ECJ view of trademark law, whatever you want to call it, is really just a policy difference, that you have a view that it should perform a certain function, they have a view that it performs a function that may be broader than just source indication, maybe have some goodwill protection. In short, you just have a flat-out policy difference? Isn’t that possible? LORD HOFFMANN: That’s the impression I get, having personally participated in this particular route. Perhaps the question is better directed to Robin Jacob. But that is certainly the impression I get. PROF. HANSEN: Robin “policy” Jacob? LORD HOFFMANN: Exactly. Robin “prejudice” Jacob. [Laughter] PROF. HANSEN: Robin, do you care to address that issue? LORD JUSTICE JACOB: Not awfully, but I will. I think there is some truth in that, although I actually think that the Court of Justice is to some extent doing exactly what Lennie said—they are sort of deciding it on-the-hoof, and although they take a long time to produce their answers, it might be fair to say that when they come it’s not entirely clear that we know what the answers were. We have had two cases in our court where the parties have come back, each of them saying that they have won as a result of the reference and the answer to the reference. I don’t believe that it is just our court that is having that difficulty either. The gentlemen on my right, we don’t agree about everything—for example, the Conor case7—but we do agree that what comes out of the Court of Justice is something which I regret to say we don’t understand. PROF. HANSEN: Robert, do you agree with that? JUDGE VAN PEURSEM: Quite often that is the problem, indeed. I don’t know whether this has something to do with policy. It is more with tradition. But that is a word game, I think. Trademark law developed in Europe along different lines. Broadly speaking, you had the Benelux line, which was very liberal to trademark owners, and you had the British line, which was more restrictive. There is a melting pot in Luxembourg—and in Alicante, of course, but I’m talking about Luxembourg now. If you see what comes out—I mean after the Biomild case8 I lost track. If “Biomild” is not a trademark for yogurt, then I am lost. It might be seen a bit differently nowadays, and it was reversed after that, I know, but that was the first sign that something was happening. We just had difficulties understanding. If you take the recent Intel case,9 I think most judges in the Community trademark courts have difficulties understanding it because they mix up two concepts. There you go. That’s what Lenny said about mixing up for the next case, and we Community trademark judges have to decide the next case. PROF. HANSEN: Do you have trouble understanding it, or do you just disagree with it? JUDGE VAN PEURSEM: Again I am polite and I am saying I have trouble understanding it. PROF. HANSEN: If you have trouble understanding it, that gives you a free rein just to go your own way, then. Conor Medsystems Inc., v. Angiotech Pharms. Inc., [2008] UKHL 49. Case C-265/00, Campina Melkunie BV v. Benelux-Merkenbureau, 2004 E.C.R. I-1699. 9 Case C-252/07, Intel Corp Inc. v. CPM United Kingdom Ltd, 2008 E.C.R. I-8823. 7 8

20  CHAPTER II: THE JUDICIARY & IP POLICY JUDGE VAN PEURSEM: Well, as Paul Maier said, there is room for interpretation, and we

take that route.

PROF. HANSEN: Why don’t we bring in our two practitioners, who both were référendaires in the European Court of Justice. They have been on the inside of the Court of Justice, and now out in the real world as a solicitor and a barrister. William Robinson, référendaire with Judge David Edward, and now partner with Freshfields—why don’t you go first. What is your scorecard on the Court of Justice in IP? MR. ROBINSON: Not brilliant, but it is doing the job it is assigned to do. But it is faced with very difficult circumstances. So I’m not going to apologize for the quality of some of the judgments, but let me put a little bit of context in the job that it has to do. Two points: Firstly, there was a question about whether the ECJ has a freedom, or feels a freedom, to engage in policy. I would also ask the question whether or not there are circumstances when it is actually necessary for it to engage in policy, given the legislation it has been given to interpret. So, for example, the differences between the Benelux system and other systems of trademark law were attempted to be reconciled in the Directive.10 There were huge tensions in what was written. The legislators decided simply to omit various other types of policy questions because no agreement could be reached. Now, in those circumstances, it seems to me to be a fair question to ask whether or not it is a freedom to engage in policy or in fact it is a necessity to engage in those policy debates and resolve various tensions in the legislation, which have simply been put there in the legislation because they couldn’t be resolved by the legislators. The second point is really just to put into context the caseload and the working practices of the European Court. Last year there were 567 cases decided by the ECJ by essentially twenty-six judges, because the president doesn’t take on cases as rapporteur. That would mean each judge rapporteur deciding twenty-one cases where he is judge rapporteur, plus sitting in about 110 other cases. That is a vast caseload for anyone to take on. There were about twenty decisions in IP as a whole last year from the ECJ, which would mean that would be roughly one case per judge a year out of the 120-odd that they are sitting on. Now, as I said, this is just a context. This is not an excuse why the judgments aren’t better. It is simply to put it in context of judges dealing with a vast caseload in an enormously varied area. PROF. HANSEN: Good points, William. Josh Holmes is a former référendaire with British Advocate General Francis Jacobs, and now is a barrister with Monckton Chambers. What do you think? MR. HOLMES: Well, first of all, I would agree with William that we need to cut the European Court of Justice some slack in its current decisional practice. It has to deal with open-textured rules, conflicting national traditions, and into that mix you then throw the overriding objectives of the European Community legal order, and in particular the importance of securing the free movement of goods, services, and the factors of production. That leads to an inevitably enlarged role for policy. What I think is cause for regret, however, is the reluctance to engage upon a program of institutional reform of the European Community legal/judicial infrastructure which might address that problem. Because of the importance of policy, there is a reluctance on the part of some within the European Community judiciary to allow questions to be focused on specialist bodies, both preliminary rulings under Article 234,11 which the European Court of Justice has so far clutched very tightly and has refused to contemplate the delegation to the Court of First 10 Council Directive 89/104, of 21 December 1988, to Approximate the Laws of the Member States Relating to Trade Marks, 1989 O.J. (L 40) 1 (EEC). 11 Treaty Establishing the European Community, Art. 234, Nov. 10, 1997, 2002 O.J. (C 325) 1, 127.

PART A: EUROPE  21

Instance; and secondly, within the Court of First Instance to delegate to specialist bodies at the level below. Now, while that was understandable in the early stages of the European Community legal order, where you needed to focus the policymaking process within the judiciary on a few judges who had an oversight of the whole of the Community legal order, it may be less necessary now, where we have so many of the principles in place and where we are now dealing with ever more detailed and specific questions, and where the generalist courts, the Court of First Instance and the European Court of Justice, may not be well placed to develop within them specialized individual judges who can carry the burden. It would be better, I think, now to allow, first of all, preliminary reference questions in specialized areas, like antitrust and intellectual property, to go to the Court of First Instance, which has developed a very specific knowledge base in those two areas, and it would also be appropriate to establish specialist bodies to handle appeals below the level of the Court of First Instance, with the European Court of Justice fulfilling more of an appellate function than it currently does. That would take the load off the European Court of Justice, which, as William has said, is currently deluged with cases. That makes it difficult for individual judges and advocates general to develop specialism, keep a broader perspective. I have to say I am skeptical about whether that reform will come any time soon, but it is noteworthy that the current Treaty framework provides the power for such reform. It’s simply that they have so far not been used. PROF. HANSEN: Josh, continuing on this, the Court of Justice in the beginning did what you are recommending, in that they had Francis Jacobs, who was the informally designated Advocate General for trademark cases, and Judge Claus Gulmann from Denmark who was the designated judge rapporteur for trademark cases. And they did develop expertise and were fairly consistent. I think it can be fairly said that their decisions were better than what happened since, when the cases were spread around the members of the Court of Justice. So couldn’t they have just continued that? MR. HOLMES: I agree there is certainly scope for ad hoc specialization, if you like, both at the level of judges and advocates general, but also, and importantly, within the cabinets of those advocates general and judges, at the level of référendaires who can assist the judges in research and can help them to keep abreast of current developments across the piece. But the scope of that is inevitably limited. You might find particular advocates general and judges coming to the fore for particular periods, but it doesn’t have the kind of institutionalized specialization which I think would guarantee the development of specialist knowledge and a more coherent body of case law. PROF. HANSEN: If you look at the Court of First Instance, actually I think in the beginning they nominated two chambers to do trademark, correct? MR. HOLMES: Yes. PROF. HANSEN: Those two chambers reached opposite results on the same issues. Even when the Court of Justice came down with a ruling, they seemed to persist in doing what they did before the ECJ decision. Doesn’t that indicate that they had different policy views about trademarks and they persisted in them? So are we ever going to get away from this ghost in the machine, which is policy? MR. HOLMES: No, of course not. Policy is unavoidable in IP. I think we’re telling ourselves fairy tales to think otherwise. The important thing is to try to develop coherent administrable rules on the basis of a consistent framework of policy. For that you need a small and focused body of people with continuity over time, which can develop that kind of consistency.

22  CHAPTER II: THE JUDICIARY & IP POLICY It may not be such a bad thing, I should say, at the lower levels of judicial infrastructure to have some differences emerging between different chambers. I mean we are all familiar with the laboratory effect idea of the U.S. legal circuits.12 But I’m not sure that the Court of First Instance is the right level for that to emerge. That already seems to me very high up within the Community legal architecture. PROF. HANSEN: Klaus, do you have any views you want to share with us on this? JUDGE GRABINSKI: I have to apologize. I lost part of my voice in the Swiss Alps, so excuse me for this. Trademarks are out of my jurisdiction, so I am not able to make any comments in this regard. But I want to make a short comment with regard to patents. All of us know that at the moment patent law has almost no European dimension. There are some parts, but generally it is at least not Community law. It is mainly based on the European Patent Convention. Imagining the future, think of what Margot presented on the last panel. Think about a future European patent judiciary. There were some in the Union who advocated the ECJ to be a cour de cassation.13 Well, trademark is already quite difficult. I would say patent law is a bit more difficult. Just imagine having the ECJ as a kind of cour de cassation. This would be a really horrible picture. I am very glad that we now are in a position, or at least in the Draft Regulation,14 where we have a scheme where sets forth that the patent court of appeal will only refer cases with a Community law dimension to the ECJ. I personally would like to get even less, completely without the ECJ, but probably this is not possible under Community law, so we have to accept this. But I think this should be it and we should not get back to the route where the ECJ was a kind of cour de cassation. PROF. HANSEN: I think you view is shared by many for good reasons. But there might something else at work here as well. Klaus, isn’t it true that patent people look down on nonpatent people and non-patent judges, maybe just a little bit? [Laughter] JUDGE GRABINSKI: No. PROF. HANSEN: William, you wanted to respond to something, I think. MR. ROBINSON: Well, Hugh, I’m going to try to break your monopoly on asking questions. I wonder whether I could ask a question to the judges on the panel, which is whether you would be happy for the ECJ to introduce some sort of docket control so that it had a bit more control over its own caseload both generally but also in respect of IP cases, even if that meant that they rejected some of your references? PROF. HANSEN: Lennie, do you want to respond? LORD HOFFMANN: This is something I have been arguing for a long time, that is, that the ECJ should not be a court which simply accepts a reference which is sent to it from any lower court throughout the European Union but should be, like the Supreme Court of the United States, a court which grants leave to come to it in cases which it thinks raise questions of European importance. It seems to me if that court had control over its own docket that would go a long way to solve some of the problems we’ve been hearing. 12 This term originates from Justice Brandeis’s dissent in New State Ice Co. v. Liebmann, 285 U.S. 262 (1932), that it is “one of the happy incidents of the federal system that a single courageous State may … serve as a laboratory.” Id. at 311 (Brandeis, J., dissenting). The Supreme Court may use a circuit split as a “test” before making important constitutional decisions regarding sensitive questions of law, where it can study the legal arguments and implications in the “laboratory” of states and circuits. See Elizabeth Vicens, “Application of the Federal Death Penalty Act to Puerto Rico: A New Test for the Locally Inapplicable Standard”, 80 N.Y.U. L. Rev. 350 (2005). 13 Cour de cassation is the highest national court in France—the French equivalent of the U.S. Supreme Court, able to harmonize the law in the event of circuit splits. 14 See Draft Agreement on the Establishment of a European Patent Litigation System, Feb. 16, 2004.

PART A: EUROPE  23 PROF. HANSEN: Do you think politically that’s possible? LORD HOFFMANN: I’m not in a position to say that. MR. ROBINSON: I have no idea. LORD JUSTICE JACOB: It may be that it’s got to get worse before it gets better, that

there comes a point where this court is falling further and further behind, as indeed it is, that ultimately the politicians say, “We’ve got to do something like that.” PROF. HANSEN: Right. I’m going to ask Alice a question, and then I think she has a comment on something else. But I’ll ask the question first. Alice, in terms of centralizing/specializing patent litigation, what happens at the national level? Is it consistent country to country, and what effect does this have on enforcement of patents? JUDGE PEZARD: Thank you. I apologize for my English, like all French people. I would like to comment on the previous question, because in France, for instance, now we have two laws, we have national law and we have European law, on IP. It is not compatible sometimes. For the judges it is very difficult. In the Supreme Court, we decided to use—we didn’t talk about that this morning—the preliminary question. It is confusing, because now we have three interpretations—national law, the European law, and the results of ECJ. That is to say that in the Supreme Court when we decide IP cases we have a choice of three solutions. It’s nice, but it seems to me that three is too much; Maybe two. One is enough. The reason why we wait for the European Court and this transition—of course we need a centralized court, as Margot explained this morning very well. We are waiting for that because it will be the solution of almost all problems now. Maybe our non-European colleagues have heard about the preliminary question, but all the national countries in Europe have now focused on these preliminary questions. That is Europe. All important IP issues are decided through preliminary questions. Judges are well-trained in IP in the national courts and the European Court of Justice rulings are written by not welltrained IP judges. It seems a very important paradox. PROF. HANSEN: It is a problem. Thank you very much. LORD JUSTICE JACOB: I would like to say one other thing. This is a sort of sub-proposal about limiting the number of cases. People have referred to the problem of the different panels. For reasons that entirely escape me, a number of European institutions—the European Patent Office, the European Court of First Instance, and indeed the full Court—sit in the same panels all the time. It must be impossible to go to work and find you’ve got the same two people with you day in, day out. JUDGE GRABINSKI: One of the panelists mentioned the number of cases and the number of judges. If I recollect it rightly, it was 567 cases and twenty-six judges all in all. You have to have in mind these are not trials, these are only deciding on questions of law, and the decisions normally do not tend to be very long. There is more a French style of judgment. At the Düsseldorf court, which is a trial court, we are dealing with patents; we are not dealing with trademarks—we had more than 600 cases last year. We are in all eight judges. The judgments in length maybe on average are at least about the same. So to my mind I think they could also deal with a few more cases in shorter time. [Applause] PROF. HANSEN: I think the answer, if I may give an answer to that, is that the internal procedures adopted by the Court of Justice in a simpler time with relatively few cases and judges now greatly increase the time it takes to decide a case. As you know there are no published dissents. This by itself is not a huge problem but it is made worse by the fact that the dissenters after a vote is taken, are kept in the discussions and the majority tries to obtain a consensus with them which, of course, is very difficult and time consuming. Second, they

24  CHAPTER II: THE JUDICIARY & IP POLICY talk rather than write. In U.S. courts the favored method of communication among judges it the written memo. In the ECJ cases are talked through to the end. This is made more time consuming by the fact that the strict working language of the Court is French. That was fine in the old days with a small largely Francophone EC but now many judges come from countries where French even among the elites is rare. Some judges, especially new ones, are not always comfortable with French, particularly legal French. Thus, communication and consensus are naturally more difficult because some judges can’t easily understand what the others are saying. In any case, the whole process is time consuming. I used to go around in the Court of Justice to talk with the judges. Time after time I’d be sitting past the appointed time waiting because the judge was still in a session with other judges discussing a case. So I think one way to speed up the decision making is to change the internal procedures. At the least cut out the dissenters from the continuing discussions of the majority. This might also help the coherence of the judgments. When people complain why a paragraph is in the judgment seeming at odds with the rest of the judgment, it is probably because it came from the majority wanting to accommodate the dissenters. I don’t think there is much chance of any change happening soon. Adhering to internal tradition in ECJ I am told is very important. Well, we are just about out of time, but we can clap for forty-two seconds. Thank you to Lord Hoffmann, and our panel. [APPLAUSE.]

Chapter II

The Judiciary & IP policy part B: United States Moderator Prof. Hugh C. Hansen

Fordham University School of Law (New York) Speaker Hon. Randall R. Rader

U.S. Court of Appeals for the Federal Circuit (Washington, D.C.) Panelists Andrew Bridges

Winston & Strawn (San Francisco)

Hon. Jed S. Rakoff

U.S. District Court, Southern District of New York

Hon. William E. Kovacic

Commissioner, Federal Trade Commission (Washington, D.C.) James Toupin

General Counsel, U.S. Patent and Trademark Office (Alexandria, VA)

PROF. HANSEN: I think we are ready to resume with part Part II of The Judiciary and IP Policy. We are very fortunate to have Judge Rader here with us. I particularly want to thank him for making the trip over here. The Federal Circuit is running a conference starting on Sunday for U.S. and international judges. We lost one or two people from the Federal Circuit because of this but Judge Rader hung in there. I very much appreciate that. So welcome. JUDGE RADER: Thanks. [Applause] JUDGE RADER: You clap too soon. I’m going to test your I.Q. By the authority vested in me, I appoint you all Federal Circuit judges. See, I just reduced your I.Q. Here’s your situation, and you have to vote on it. You have to vote. You’re a judge.

26  CHAPTER II: THE JUDICIARY & IP POLICY You are in a very procedural position of handling the motions for this month and you have received a writ of mandamus. Let me explain to you quickly the arcane procedure of mandamus by saying simply in the thirty-year history of the Federal Circuit perhaps two or three have been granted. It requires a great showing of proof to compel by mandamus a district judge to do something that they have authority to do. You also must show, because Congress has given that judge authority over his docket and his procedures, a vast abuse of discretion before you can issue this writ of mandamus. You must show he has really overstepped the bounds of propriety. How you doing? Getting it so far? We are just getting the context now of this case. Now you receive the writ of mandamus and it requests you to transfer a patent case from the Eastern District of Texas to Illinois. The parties are automobile companies. They are located in the Midwest area of Detroit and Chicago, but of course they do business in Texas. In context, you would say the district judge has authority to adjudicate that case, since business is done in his district, and it is very unusual, again, to use a writ of mandamus to require him to transfer his case back to the Midwest. Yet, you are also aware of a good many policy considerations. The Eastern District of Texas is chosen by patent owners as a perfectly wonderful place to sue foreign litigants. The juries there are predisposed to rule in favor of the domestic patent owner against the Korean or the Japanese or the German, even the English. And so that has become the leading district in the United States for the number of cases filed there. I have suggested to you that there are very few facts that tie this particular case about automobile companies to Texas, but they do do business there. Mandamus is a very rare procedure. You must prove he abused his discretion to move it. Are you ready to vote? (The district court judge, by the way, is a magnificent judge, a gentleman and good friend.) How many of you would vote to leave it in the Eastern District of Texas? [Show of hands] Okay. How many of you would transfer it? [Show of hands] We’re about split down the middle. But now let me ask you a question. Those of you who voted to transfer, should I file an impeachment motion against them for taking policy into consideration in making their decision? Perhaps you recognize that I have just described for you the TS Tech case.1 Indeed, the Federal Circuit did issue a writ of mandamus, did transfer the case out of the Eastern District of Texas, and the judge who would have to be impeached, should that be a policy decision, is standing here. PROF. HANSEN: That’s long overdue anyway. [Laughter] JUDGE RADER: Did you take policy into consideration on either side of the equation when you voted? The answer I think would have to be yes. Even if you voted to leave it in the Eastern District of Texas, you were considering the policy implications of that and weighing them against the strong procedural considerations of permitting the judge to handle his own docket. If you voted on the other side, of course, you were probably very much thinking in terms of the implications not only for this case but for future cases and for the way that litigation should occur in the United States to preclude—shall I use the word?—forum shopping. 1

In re TS Tech USA Corp., 551 F.3d 1315 (Fed. Cir. 2008).

PART B: UNITED STATES  27

Now, let me ease your conscience a little bit by saying isn’t it appropriate whenever you consider the meaning of statutory language to put it in proper context? Isn’t that the only way to construe claim language and a term is in context? Without too much taxing of that I.Q. that I asked you to exercise, you can see that the context of an entire case is indispensable to its resolution, and isn’t part of the context of the case its policy setting, and doesn’t the court have to be aware of the implications of its ruling as it rules? So I have just eased your conscience a little bit for voting on either side of that equation with some policy understanding and awareness. Let me now step back and give you the danger, however. The danger, of course, of policy considerations is that it can short-circuit thinking and it can cause you to look past the proper interpretation and implementation of the law. Let me give you an example, and I’ll even pick a tough one, eBay.2 The Supreme Court, worried about the patent troll problem,3 wades in and makes a decision, decidedly on policy grounds, that has to be one of the worst decisions in decades at the Supreme Court. Now, just look at it. The majority opinion says: “Patent law is property but we are not going to treat it that way.” The reason, they say, is because the statute includes the word “may” give an injunction after a finding of infringement.4 And of course, at that point you can say, “Ah, they’ve got a hook. They can reach the policy result they want.” They jump. But, see, that’s short-circuiting the thinking because there is a reason for the “may” that was never discussed, considered, or rationalized. The reason for the “may” is quite simple: I have a patent on a pacemaker in Hugh’s heart; it’s infringing; I hereby enjoin its operation. Of course not. That was, of course, always law in every jurisdiction, that health and safety must be considered in any final injunction setting. Therefore, the “may” had to be in the statute to prevent danger in the implementation of property rights. But, see, that didn’t give wholesale authority to disregard property rights beyond that circumstance, and that didn’t get treated one way or the other in the Supreme Court’s policy analysis. And then, of course, the two concurrences—three that say “leave everything the way it is”5 and three that address the patent troll problem without identifying the proper problem.6 The Kennedy concurrence talks in terms of non-practicing entities.7 Well, that is absolutely incorrect. Every patent owner probably in the nation and in the world is a non-practicing entity. Every corporation has vast numbers of patents that it does not practice. Every university, of course, cannot practice. None of those are trolls as we consider them. They are non-practicing entities. But the problem with the troll problem is the proper recognition of it, and the proper recognition is to realize that anyone is a troll who tries to exercise minimal patent rights for maximal value. It’s a value equation. It should have been a damages consideration. The way you deal with it is to make sure that a patent worth $20 gets no more than $20 of damages, not that a patent worth $20 can be asserted for millions. But, see, the short-circuited thinking on a policy level is what can do great damage in the judicial system, a failure to consider the legal implications. That is the great danger of introducing any level of policy thinking into the judicial process. eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006). For a description of the patent troll problem see Mark Lemley, “Are Universities Patent Trolls?”, 18 Fordham Intell. Prop. Media & Ent. L.J. 611 (2008). 4 eBay Inc., 547 U.S. at 391–92. 5 Id. at 394 (Roberts, C.J., concurring). 6 Id. at 395 (Kennedy, J., concurring). 7 Id. at 396 (Kennedy, J., concurring) (“An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.”). 2 3

28  CHAPTER II: THE JUDICIARY & IP POLICY Let me just conclude by saying I have now spoken on both sides. I have given you the argument that you can’t decide a case without its context, and the context includes the policy. I have given you the consideration that if you introduce policy into the equation you are inevitably inviting error and automatically allowing unintended consequences. There is no way any single judicial officer or judicial body—as bright as all of us may be as Federal Circuit judges, we cannot anticipate all the implications. So what is the answer? Well, the answer is we’ve got to make a decision. The decision will inevitably require some consideration of policy but must not be allowed to short-circuit the thinking, if at all possible. One final comment. I should write speeches in advance. But as I was sitting here trying to think of what I would say to you, I wrote down a list of some of the policy decisions I personally have made in the last two or three years. You can see it’s a long list: willfulness, damages, injunctions, inequitable conduct, inventive step in biotechnology, product-by-process, intent, and inducement. It is inevitable as part of the judicial function that you must make decisions. Those decisions will have policy implications. You cannot be blind to them, but you must be incredibly aware of your limitations as you dive into those deep waters. Thank you. PROF. HANSEN: Well done. Thank you very much. A lot of food for thought there. (We’ll give that list to the impeachment committee.) Let me introduce the panel. We have Andrew Bridges from Winston and Strawn in San Francisco, a practitioner and copyright expert; Bill Kovacic, Commissioner of the FTC and for a number of years the Chairman; Jed Rakoff, District Court Judge in the Southern District of New York; and Jim Toupin, the General Counsel of the U.S. Patent and Trademark Office. There are many interesting issues to discuss the use of policy is one that Lord Hoffmann and Judge Rader have addressed. Another is the subject of specialized courts in IP. We almost take it for granted that in Europe patent cases are going to go before a specialized court in the first instance, and even on appeal in most instances. That is unusual in the United States. We didn’t have that for appeals until 1982 when the Federal Circuit came into being.8 The first question is for Randy. Do you want to expand that to copyright and trademarks, or keep it just for patents? JUDGE RADER: I think it makes great sense to expand into copyright. Trademarks has the difficulty of involving state common law as well as the federal rights, and Congress determined that the mix of the state with the federal rights might be better left in the regional circuits. But I think it makes sense for the federal copyright law to come. PROF. HANSEN: Jed, our other judge on the panel, what’s your view on that? JUDGE RAKOFF: I have a somewhat different view. I would abolish the Federal Circuit. [Laughter] I am concerned. I know that there are a lot of good reasons for specialized courts, but I think they tend in the long run to be captured by the narrow specialists who practice before them and they have a view of the law that is much too narrow and that doesn’t take account of the broader societal implications of what they are deciding. In the United States, patent cases are decided in the first instance by courts of general jurisdiction, our federal district courts. The Federal Circuit reverses the district courts about 40 percent of the time.9 That is much higher than in any other area of law. Now, that might be a Federal Courts Improvement Act of 1982, Pub. L. No. 97-164, 96 Stat. 25 (1982). At least one researcher found that “a closer look at the Federal Circuit’s performance over the last 10 Terms reveals that the reversal rate for patent-related cases is about 92.3%.” See Roy E. Hofer, “Supreme Court Reversal Rates: Evaluating the Federal Courts of Appeals”, 2 (No. 3) Landslide 8, 8–9, 1 (ABA, Jan./Feb. 2010), available at http://www. americanbar.org/content/dam/aba/migrated/intelprop/magazine/LandslideJan2010_Hofer.authcheckdam.pdf. 8 9

PART B: UNITED STATES  29

good argument for specialized courts. It shows perhaps how dumb we are down in the district courts—we can’t even figure out a simple patent. But another possibility is that we take a broader view of the implications of these cases that go beyond some of the more narrow legal niceties. I take some solace, with great apologies to Judge Rader, in the fact that— JUDGE RADER: Your stuff comes to me. [Laughter] JUDGE RAKOFF: —the Supreme Court has reversed the Federal Circuit about 100 percent of the time.10 So I’ll take my chances. [Laughter] PROF. HANSEN: Let me say something. First, for many years the Supreme Court rarely took patent cases from the Federal Circuit.11 So until fairly recently the Court deferred to the Federal Circuit. We should remember why we have the Federal Circuit. The reason was many district court and court of appeals federal judges who were applying largely populist, anti-patent policies were finding in overwhelming percentage of patent cases the patent to be invalid. In the pre-Federal Circuit era this came to be viewed as a threat to a proper innovation system. Congress, even Senator Ted Kennedy, who then was probably the most liberal person in the Senate, were strongly in favor of the bill to establish the Federal Circuit.12 Jed, do you have any views on this? JUDGE RAKOFF: Yes. That is certainly the view I would expect Hugh to take. There is no doubt that there were serious problems that led to the creation of the Federal Circuit, and to ignore that would be to ignore history. But I think there are problems going the other way. For example, the one that in his very excellent talk Judge Rader referred to, forum shopping. Forum shopping is not limited to patent cases. Forum shopping is a very serious problem in the United States. But it is true in tort cases, it is true in a vast number of securities cases, it is true in a lot of areas. It shouldn’t be dealt with on a piecemeal basis. In New York State, which is where I am from, they have specialized courts for everything. They have surrogates court, they have a landlord-tenant court, they have a criminal court, and the result is not a good result. The landlord-tenant court has been captured by the landlords. The criminal court has been captured by the prosecutors. This is the reality. There are dangers in these specialized courts is really what I am saying. I don’t want to ignore, though, the real problems that you correctly advert to. PROF. HANSEN: The other thing I have to say is Judge Rakoff is probably one of the best, if not the best, district court judge in the country. It is one thing to have him think about the various policies that should be applied to patent cases. It might be a different issue if all of the district court judges in the country are also free to apply various policies that they think appropriate to patent cases particularly if they are not as a adept at doing this as Jed. But getting back to copyright, I think, generally speaking, most people in the IP world, and particularly in the copyright world, would say the Federal Circuit should not have exclusive appellate jurisdiction over copyright cases for the very public policy views that Jed has identified, particularly, where there is no need for technical expertise. There is the additional view that that Josh Holmes referred to in the first session about the so-called “laboratory” effect of many courts considering an issue which is thought to aid the development of the law Id. The first patent case to be heard by the Federal Circuit and granted certiorari from the United States Supreme Court was Christianson v. Colt Industries Operating Corp., 486 U.S. 800 (1988). See generally Roy E. Hofer, supra note 9, at 10–11, n.13 (2010). 12 In 1979, Senator Kennedy unsuccessfully introduced Senate bills 677 and 678 which embodied the Federal Courts Improvement Act. S.677, 96th Cong. (1979); S.678, 96th Cong (1979). The Senate passed the Act in the following Congress (97th Cong.) as the Federal Courts Improvement Act of 1982, Pub. L. No. 97-164, 96 Stat. 25 (1982). 10 11

30  CHAPTER II: THE JUDICIARY & IP POLICY over time. There is, in effect a marketplace of ideas where hopefully the best will prevail or at least the Supreme Court will able to choose from a number of different views. Jim Toupin is the General Counsel of the PTO. The PTO, of course, has developed expertise in both patents and trademarks. It is an agency given important responsibilities by Congress including rule-making ability. There is recent interesting and important litigation on its patent rule making13 that I am sure Jim will address.14 Jim, to what extent should a specialized court like the Federal Circuit, or for that matter any other court, defer to the PTO on its decisions and rule making, or should appellate review be all de novo with no deference? MR. TOUPIN: I’ve got to say I thought it was wonderful to hear the British Law Lord saying that they defer to the EPO. My heart was warmed. [Laughter] We have had recent litigation, Judge Rader dissenting, on the issue of the extent of the PTO’s rule-making authority.15 Rule-making authority is one of the grounds for deference in the U.S. system by the courts to the agencies when there are two reasonable interpretations of a particular provision or the scope of action is at issue. The FTC has taken a position that the PTO should be deferred to on the substance of the law. We have not taken that position. We tend to take Federal Circuit decisions and write them into our Manual of Patent Examining Procedures16 and try to follow them. Under the U.S. Supreme Court precedents, the courts defer to an agency’s interpretation of ambiguous statutory language if the issue is within the agency’s delegation as reflected in a grant of rulemaking authority or some other indicia.17 The USPTO’s most general rulemaking authority is to govern the conduct of proceedings before it. The Federal Circuit has held that, as a result, the Office is not delegated authority to promulgate substantive rules, and so does not grant ‘reasonableness’ deference to its interpretation of substantive provisions of the Patent Act.18 The Court also does not defer to decisions of the Board of Patent Appeals and Interferences, although here the law is a little less categorical, because there is court of appeals precedent deferring to the Office’s Trademark Trial and Appeal Board on interpretation of the Lanham Trademark Act.19 13 In 2007, the United States Patent and Trademark Office (PTO) implemented new rules in part to address the enormous backlog of patent applications at the PTO. See U.S. Patent & Trademark Off., Changes to Practice for Continued Examination Filings, Patent Applications Containing Patently Indistinct Claims, and Examination of Claims in Patent Applications, 72 Fed. Reg. 46,716–813 (Aug. 21, 2007). The new rules were intended to streamline the patent application system, for instance, by placing limits on the number of continuations and claims an applicant could file, one of the main concerns for critics of the PTO. See, e.g., Mark Lemley & Kimberly Moore, “Ending Abuse of Patent Continuations”, 84 B.U. L. Rev. 63, 64 (2004). 14 See Tafas v. Dudas, 541 F. Supp. 2d 805 (E.D. Va. 2008) (granting summary judgment that the promulgated rules issued by the USPTO exceed the scope of the USPTO’s rulemaking authority, and enjoining their implementation), aff’d in part, vacated in part by Tafas v. Doll, 559 F.3d 1345 (Fed. Cir. 2009), reh’g en banc granted, vacated by Tafas v. Doll, 328 Fed. App’x 658 (Fed. Cir. 2009). 15 Tafas v. Doll, 559 F.3d 1345 (Fed. Cir. 2009) (reversing the district court holdings as to most of the PTO rules in question, and remanding), reh’g en banc granted, vacated by Tafas v. Doll, 328 Fed. App’x 658 (Fed. Cir. 2009). In his dissent, Judge Rader took the position that the Final Rules are not merely incidental inconveniences, but rather, drastically change existing law and alter an inventor’s rights and obligations under the Patent Act. Therefore, Judge Rader agreed with the district court that the USPTO exceeded its statutory authority under 35 U.S.C. § 2(b)(2)). See id. at 1368–74 (Rader, J., dissenting in part). 16 See U.S. Pat. & Trademark Off., Manual of Patent Examining Procedure (8th ed. 2001, rev. ed. July 2008), available at http://www.uspto.gov/web/offices/pac/mpep/mpep.htm. 17 See United States v. Mead Corp., 533 U.S. 218 (2001). 18 See Merck & Co. v. Kessler, 80 F.3d 1543 (Fed. Cir. 1996). 19 See Eastman Kodak Co. v. Bell & Howell Document Mgmt. Prods. Co., 994 F.2d 1569, 1571 (Fed. Cir. 1993); In re Hacot-Colombier, 105 F.3d 616, 618 (Fed. Cir. 1997).

PART B: UNITED STATES  31

There are advantages and disadvantages to this regime. On the plus side, the incentives provided by a property right are furthered by stability in the law. With the agency having a limited role in legal interpretation, patent law is less at risk of significant course corrections, at least if the Federal Circuit adheres to the Supreme Court’s guidance. On the minus side, case law development elicits public participation less well than administrative rulemaking. A court, in interpreting the law in a case between two parties, may not have as full a view of the consequences of its interpretation as an agency that has solicited views through the notice and comment process. Nor does the Federal Circuit’s exclusive jurisdiction necessarily give it a comprehensive picture of the consequences of its decisions for the patenting process. With respect to grounds for patentability, the USPTO receives over 400,000 applications a year, but fewer than one percent become appeals that reach the Board and fewer than one percent of Board decisions are appealed to the Federal Circuit.20 Although it does not engage in substantive rulemaking, the USPTO has reached out for public participation in developing policies where the Federal Circuit has not spoken. To its credit, the Court has rewarded that effort to gain a broader view, typically finding the agency’s interpretation persuasive when it was informed by such outreach.21 More recently, the question of deference has arisen in the context of rules that the agency regarded as not being substantive —most particularly, concerning a rule under which the Office would require additional information from applicants submitting applications with large numbers of claims. The district court held that this was a substantive rule beyond the agency’s authority.22 Recently, a divided panel of the Federal Circuit held that it was within the agency’s rulemaking authority, holding that how a party presents itself and its information to the agency was within the Office’s authority to govern the conduct or proceedings before it.23 It held that, so long as the rule did not change the examiner’s burden to establish unpatentability based on the full record, the rule was not ultra vires. Judge Rader, dissenting, would have found the rule requiring additional submissions for applications with large numbers of claims to constitute so significant a change in process as to be substantive.24 The court unanimously struck down another rule, which would have created a burden to show a need for additional continuations after a certain number, as contrary to the statute.25 Another concern that arises from the lack of deference to the agency administering issuance of patents is how long it can take from the time the USPTO adopts a substantive approach to the time the courts either affirm or reject it. Only rejections of applications are appealable to the Federal Circuit. Policies that lead to patents being issued may await invalidity challenges to issued patents in the context of infringement suits to become settled law. This dynamic may change, however, if current proposals for post-grant review of patents by third parties immediately after issuance pass Congress. If I may go back to the previous discussion, I think what we have seen with respect to the Federal Circuit, going back to the last discussion, is a transition over time. It began as a court which needed to resolve a whole series of disputes among the regional circuits and create a uniform law in the United States. In that period the Supreme Court basically left it alone. 20 As of midyear FY 2009, the Board of Patent Appeals had issued over 4,000 decisions; fewer than 40 cases had been appealed to the Federal Circuit. 21 See, e.g., In re Fisher, 421 F.3d 1365 (Fed. Cir. 2005); Enzo Biochem, Inc. v. Gen-Probe Inc., 323 F.3d 956 (Fed. Cir. 2002). 22 Tafas v. Dudas, 541 F. Supp. 2d 805 (E.D. Va. 20008), aff’d in part, vacated in part by Tafas v. Doll, 559 F.3d 1345 (Fed. Cir. 2009), reh’g en banc granted, vacated by Tafas v. Doll, 328 Fed. App’x 658 (Fed. Cir. 2009). 23 Tafas v. Doll, 559 F.3d 1345 (Fed. Cir. 2009), reh’g en banc granted, vacated by Tafas v. Doll, 328 Fed. App’x 658 (Fed. Cir. 2009). 24 See id. at 1368. 25 Id. at 1360–62.

32  CHAPTER II: THE JUDICIARY & IP POLICY What we have now, in the last seven or eight years, is a period in which some of the unexpected consequences that Judge Rader talked about, which judges deciding cases couldn’t foresee, then become settled law because the Federal Circuit keeps following them, and there needs to be a number of safety valves. One safety valve, of course, is legislation. We have in the last couple of years seen controversial lines of authority from the Federal Circuit become the subject of legislative proposals. Some have then dropped out of the mix as the Federal Circuit has sat en banc to correct problematic precedents. Indeed, recently, we have seen a Senator, though unsuccessfully, request that a committee not vote on a patent reform bill until the Federal Circuit decided a particular case.26 Another major safety valve has been to the Supreme Court. Interestingly enough, in that context, one of the two principal bases for the Supreme Court under its Rule 10 to take jurisdictions over cases is a split in the circuits.27 When you have an exclusive court of appeals there is no split in the circuit. Effectively, what the Supreme Court has done is to make the Executive Branch the other circuit, because it has routinely asked the Solicitor General for the United States his views as to whether to take the case, his views on the grant of cert.28 What that has meant is that Bill Kovacic’s agency (the FTC), my agency, other agencies, get together in a room in the Solicitor General’s Office in the Justice Department on Pennsylvania Avenue and decide how to advise. So one of the unexpected consequences of unified jurisdiction of appellate courts has been at that level an increase in the Executive Branch’s influence, but not an increase specifically in the Patent and Trademark Office’s influence, because those are going to be consensus views of the different agencies within the government. PROF. HANSEN: Excellent, Jim. I would love to be around that table when the Supreme Court cases are discussed. PROF. HANSEN: Bill Kovacic is an FTC Commissioner but also is an academic on leave from George Washington Law School. One thing great about this conference is that we have so many stars. Bill, at the FTC you have administrative judges and there is a form of appellate review by the five FTC Commissioners who make the final decision. To what extent do you defer to administrative judges? To what extent do you think courts should defer to the five Commissioners when they make a decision? What are your thoughts? COMMISSIONER KOVACIC: To the first, when they’re right. To the second, always. I think that Jim’s comment and some of the discussions here do point to a consequence of having specialization. You are all familiar with principles of deference that say an administrative body is entitled to a margin of discretion in its choices about policy interpretation of the law. My experience generally is that federal court of appeals judges don’t suffer from a weak self-image. I have not encountered many who wake up in the morning and say, “I don’t think I have what it takes” and pull the bed covers back over their head and go back to sleep. 26 Letter, from Ranking Member, Senate Judiciary Committee, Arlen Specter, to Chairman, Senate Judiciary Committee, Patrick Leahy (March 3, 2009), available at http://inventivestep.files.wordpress.com/2009/03/specterletter.pdf (noting “the symbiotic relationship between the judicial and legislative branches with regard to changes to the patent system.”). 27 Sup. Ct. R. 10(a), available at http://www.supremecourt.gov/ctrules/2010RulesoftheCourt.pdf (Supreme Court Rule 10 includes as a “compelling reason” to grant a petition that “a United States court of appeals has entered a decision in conflict with the decision of another United States court of appeals on the same important matter” or “a state court of last resort has decided an important federal question in a way that conflicts with the decision of another state court of last resort or of a United States court of appeals . . . .”). 28 See Rebecca S. Eisenberg, “The Supreme Court and the Federal Circuit: Visitation and Custody of Patent Law”, 106 Mich. L. Rev. First Impressions 28, 29 (2007), available at http://www.michiganlawreview.org/assets/fi/106/ eisenberg.pdf.

PART B: UNITED STATES  33

We deal frequently with the U.S. Court of Appeals for the District of Columbia Circuit, which is a particularly good court. One general phenomenon is that the more expert the court is, the less inclined they are going to be to defer automatically to any administrative body. The principle of deference is inherently elastic and subject to variation in application. That is, I think all of us who have been on the receiving end of those decisions know what the opinion is going to say. One thing it can say is, “We could have done different things, we could have chosen differently, but of course that’s not our choice here. We’re supposed to defer.” Then you know you’ve won. On the other hand, if the opinion starts, “Well, naturally we’re supposed to defer, but that deference isn’t unbounded,” you know you are going to lose. I think generally the better the court, the more expert the court—and our court of appeals is extremely expert in fields of administrative law and regulation—I think we get the deference we earn day in and day out. I don’t think the deference standard matters in many cases. Think of what happens if you have an appellate court that is specialized by design. That is, they are not just bright folks, because that’s the screening process by which appellate judges are selected in the US. They are capable and they are singled out to be specialists. So you have expertise and capabilities squared. How much deference are they going to give to an administrative tribunal in that circumstance? I think a general consequence is that the answer is going to be probably nothing more than what the administrative body earns. I think the implication for the administrative tribunal, the administrative body, is you have to work especially hard, in effect, to convince the reviewing court that you know what you are talking about. PROF. HANSEN: Bill, how much deference would you give to the other four Commissioners? COMMISSIONER KOVACIC: If they agree with me, enormous deference. PROF. HANSEN: As would I. COMMISSIONER KOVACIC: I wrote an article before I went to the Federal Trade Commission in which I said it was a shame that over its ninety-year history not enough good people had been appointed to serve as commissioners.29 In a separate interview, I said that three of the existing sitting Commissioners ought not to have been appointed. This statement did not anticipate that I would become the head of legal services. For that appointment, I was interviewed by all three of commissioners whose appointment I had questioned. They said, “Can you explain what you meant here?” I said, “Academics say all kinds of things. You just can’t imagine.” In the case of my newspaper interview, the specific phrase I had used was that it was a “national disgrace” that people with better backgrounds had not been appointed. I didn’t say it was an international disgrace. So I could plead that my comments were somewhat qualified. PROF. HANSEN: Bill, you do have a way with words. Let me ask Andrew Bridges, a leading copyright practitioner and expert, a question. We only have about three and a half minutes left. The Supreme Court—making major decisions, policy decisions, certainly in copyright—and they are there without expertise. A number of them are interested in copyright and might even consider themselves well-versed in it, which as Bill Kovacic has indicated makes them less likely to defer to agencies lower courts, etc. The Court normally has many conflicting amici curiae briefs and, to boot, the government is in there with its views. Is it possible in that flood of opinions for the Court to be able to easily figure out the case and the policies? And if so which policy or policies to apply? And, as Randy indicated, what will be the real-world implications of their decision? 29 William E. Kovacic, “The Quality of Appointments and the Capability of the Federal Trade Commission”, 49 Admin. L. Rev. 915, 930–39 (1997).

34  CHAPTER II: THE JUDICIARY & IP POLICY MR. BRIDGES: Well, I think it varies. I personally have been somewhat concerned by the extent to which the Supreme Court in the Grokster case30 actually overturned the Betamax decision,31 but not on the substantive principle. If you go back and read the Supreme Court’s decision on contributory infringement liability in the Betamax case it recognized a new form of liability and said, “But we draw the line there. If you want more, you must go to Congress.”32 It used the words “Congress” and “congressional” many times throughout the opinion. In the Grokster decision there was an effort by the plaintiffs to bring a new theory to the Supreme Court. In fact, they brought a theory that Congress had failed to enact in the INDUCE Act,33 and Senators Hatch and Leahy in an amicus brief argued to the Supreme Court, “Never mind that we couldn’t get this through the Congress. Why don’t you do it, Supreme Court?”34 In the Grokster case the Supreme Court answered, “Yes, we will. We will do this.” The Supreme Court never once in the Grokster case referred to Congress’s role in creating copyright policy. But the Constitution places copyright policy squarely in the province of Congress, not that of the courts.35 I like Lord Hoffmann’s distinction earlier. I think it was very instructive. Maybe there is an asymmetry here, that where there is a policy decision to expand liability, or to expand IP rights, it is the constitutional function of the legislature. It is, however, a proper judicial function to exercise restraint in the application of principles. It is a natural role of equity courts, going back to concepts of equity from Aristotle, who said that equity is a restraining force,36 it is a form of justice that is better than the law when a court says, “There are times we don’t enforce this.” That’s why the fair use doctrine is appropriately a judge-made doctrine and not specifically legislated. So there is an appropriate asymmetry in the role of courts there. I think it is important that courts defer to Congress on expansion, but they do have a proper role in restraint. PROF. HANSEN: Thank you, Andrew. I think you have raised some interesting issues that I wish we had more time to discuss but, unfortunately, we have run out of time. Thanks for raising them and they will be food for thought for those reading this. And thanks so much to our panel—our speaker Judge Rader and our four outstanding panelists, Jed Rakoff, Jim Toupin, Bill Kovacic and Andrew Bridges. [Applause.]

Metro-Goldwyn-Mayer Studios v. Grokster, 545 U.S. 913 (2005). Sony Corp. v. Universal City Studios (“Betamax”), 464 U.S. 417 (1984). 32 Id. at 431. 33 Grokster, 545 U.S. at 936–37. 34 Brief of Amici Curiae of United States Senator Patrick Leahy and United States Senator Orrin G. Hatch in Support of Neither Party, Grokster, 545 U.S. 913 (2005) (No. 04-480). 35 U.S. Const. Art. I, § 8, cl. 8. 36 See generally Aristotle, Nicomachean Ethics (Hippocrates G. Apostle trans., Peripatetic Press 1984) (350 B.C.E.). 30 31

Chapter III

Corporations & IP in a Challenging World General Counsel Roundtable Moderator Prof. Hugh C. Hansen

Fordham University School of Law (New York) Panelists Paul T. Cappuccio

Executive Vice-President and General Counsel, Time Warner (New York, N.Y.) Michael Fricklas

Executive Vice-President, General Counsel, and Secretary, Viacom (New York, N.Y.)

Richard Cotton

Executive Vice-President and General Counsel, NBC Universal (New York, N.Y.) Lawrence A. Jacobs

Senior Executive Vice-President and Group General Counsel, News Corp. (New York, N.Y.)

Louise Pentland

General Counsel, Nokia Corporation (Helsinki) PROF. HANSEN: We are going to start our concluding panel for the morning Plenary Session. I’m very pleased to have the panel we have today. Everyone is important, but these people have demands on them for time that I think exceed maybe perhaps other people because of the broader reach of their responsibilities and the people who are wanting them to do things within their own organizations. But they have made time to come here today, which I’m very, very appreciative of. Our panel is Paul Cappuccio, Executive Vice-President and General Counsel of Time Warner; Rick Cotton, Executive Vice-President and General Counsel of NBC Universal; Mike Fricklas, Executive Vice-President, General Counsel, and Secretary of Viacom; Lon Jacobs, Senior Executive Vice-President and Group General Counsel, News Corp; and Louise Pentland, who is the Senior Vice-President and Chief Legal Officer, Nokia Corporation. She is in Helsinski, which is a town a little north of Helsinki.

36  CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD The first broad question I’d like anyone or all in the panel to address is: Is the IP system as we presently have it really fit for the 21st century digital knowledge and innovation economy? Fairly broad. Just a broad answer. We are going to get more specifics as we go along, but anyone or everyone who would like to do that. Louise, do you want to start on that? MS. PENTLAND: I’d like to start on this one. I guess my overall comment is that the IP system works pretty well. I think it is going to take us into the 21st century. I don’t think there is anything majorly broken, it can largely be left to self-regulation and the market, but I think there are certainly areas that we have to pay attention to as we move into new technologies, and encourage new business models. I think, as Hugh says, we’ll come into these later in the discussion, or even later in the day— in the copyright area I am thinking of things like private copy levies, which in my mind are completely outdated in a digital world, a hang-over from analog; and also in the area of standards and essential patents—I am thinking about the FRAND licensing regime1 and the evolution of that into the 21st century to ensure it remains balanced and achieves its fundamental objective of ensuring access to patents in standards at reasonable cost. So that would be my opening comment, Hugh. PROF. HANSEN: Anyone else? MR. COTTON: I think I would say two things. I would say one is that we have an enormous enforcement problem. I mean the reality is that there is a tidal wave of physical-product counterfeiting. The retired head of the World Customs Organization characterized it as the second industrial revolution.2 I think we have the same thing in terms of a flood of pirated content in the digital world. I think the challenge in both of those is to significantly move up the public policy enforcement priority and, secondly, to work out the responsibility broadly of distribution intermediaries in both the physical-product world and the digital world to be part of the solution and not part of the problem. PROF. HANSEN: What’s the practical reality of some of these things happening? MR. COTTON: I think it’s entirely possible. I’m an optimist. I think you saw in the United States the Congress pass a major IP enforcement bill3—we could get into the details of that— with a broad business-labor coalition supporting it in October and its implementational roll-out in the future. And, I guess, I would cite the experience with the video-sharing sites in the West, in terms of the implementation of filtering technology, which I think has dramatically reduced and changed the entire streaming environment. It has enabled Hulu, which is a joint venture between NBC and Fox, to become the second-largest video site, certainly the primary access point for professionally produced video, TV video, in the United States.4 It demonstrates that technology in terms of the emerging digital distribution system can solve or significantly reduce the illegal file sharing. 1 Granting licenses on “fair, reasonable and non-discriminatory” (FRAND) terms. For an analysis see Mathias Dewatripont & Patrick Legros, “‘Essential’ Patents, FRAND Royalties and Technological Standards” (ECORE, Working Paper No. 2008/26, Apr. 9, 2008), available at http://www.ecore.be/DPs/dp_1207816380.pdf. 2 Michel Danet, Sec’y Gen., World Customs Org., Speech on the Occasion of the Second Global Congress on Combating Counterfeiting and Piracy (Nov. 14, 2005), available at www.ccapcongress.net/archives/Lyon/files/ Danet%20Eng.pdf (“They have created a systemized means of copying, producing, marketing, transporting and distributing counterfeits that amounts to a second industrial revolution.”). 3 Prioritizing Resources and Organization for Intellectual Property Act of 2008, Pub. L. No. 110-403, 122 Stat. 4256 (codified as amended in scattered sections of the U.S.C.). 4 “According to Nielsen NetRating’s April Report (2008), Hulu leads all network sites in total video streams and overall engagement time: monthly streams have increased to more than 63 million, and users are viewing more than two hours of content each month.” Marissa Gluck & Meritxell Roca Sales, Norman Lear Center, Univ. S. Cal., “The Future of TV? Advertising, Technology and the Pursuit of Audiences” 44 (Sept. 2008), available at http://www. learcenter.org/pdf/FutureofTV.pdf.

CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD  37 PROF. HANSEN: Lon? MR. JACOBS: I would just like to add that one of the problems we face is a problem of

perception. Unfortunately, we are not winning that fight. I think we need to redouble our efforts to convince people that theft is theft, and that we need to sway public opinion, and we need to do a better job than we have done so far. PROF. HANSEN: Mike? MR. FRICKLAS: I do think that one of the things that has changed is that the battlefield has moved from a lot of important debates around the periphery of copyright—how far does it extend, to what extent to new uses—result in payments to the creator under those new uses available without negotiation to the public or to third parties who want to make a profit on those new uses. Those debates are still there, but I think it has become more apparent to those who think about it, including the people in this room, that there is a core battle that is being fought about the very core of businesses that are dependent on exploiting the works of artists. I think that the scale of piracy and theft on the Internet, using electronic networks and using electronic means, has grown to the point where people are realizing it is a fundamental and critical public policy issue, where I think before many of these issues were more on the periphery of the consciousness of legislators and regulators. I agree completely with Rick and others here that the issue is not so much with the law as it is with the enforcement of the law as the behavior becomes more commonplace, and the political will to make sure that they are enforcing these rights and understanding the importance of them. PROF. HANSEN: Paul? MR. CAPPUCCIO: I was just going to add I think we’re making pretty decent progress, albeit with kind of baby steps, and there are a lot of challenges. But if you think back five or six or seven years ago and you remember the company Napster, I think it really was open to question whether any of it was wrong, and that was fairly well established. And then, kind of at the next stage, after we established that it was wrong to steal stuff,5 the question was: Well, could you set up a site and then just look the other way? With Grokster and others, that progressed I think the right way.6 The principles all sort of worked themselves out. And then YouTube comes along, and eventually, with a little help from Mike’s lawsuit,7 I think people realized that in fact you have to take some steps to make sure you are being responsible. We are fortunate the enforcement technology finally is beginning to catch up with the stealing technology, which is a nice thing. So I think we are making some baby-step progress. I think the next logical step is as we continue to make those improvements we also on our side—and I think we are doing this— need to find a way to continue to make this stuff available in a convenient way for consumers who are actually dealing with it legitimately and paying in one form or another, whether it be through some subscription or through advertising, to have it be available. So we have moved the enforcement thing as much as we can, and technology is helping, and now we’ve got to push on the other side. But I think we are actually beginning to get some traction. PROF. HANSEN: What about the economic crisis? Is that helpful in the sense that all governments now want consumers buying, they want revenue, they want jobs? Whereas before the consumer interest perceived by some was getting things at lower prices, less restrictions, now it may be that people think the consumers actually need to be buying things to get this horrible See A&M Records, Inc. v. Napster, Inc., 114 F. Supp. 2d 896 (N.D.Cal. 2000). Metro-Goldwyn-Mayer Studios v. Grokster, 259 F. Supp. 2d 1029 (C.D.Cal. 2003); In re Aimster Copyright Litig., 334 F.3d 643 (7th Cir. 2003). 7 See Viacom Int’l Inc. v. YouTube, Inc., 540 F. Supp. 2d 461 (S.D.N.Y. 2008). 5 6

38  CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD economic worldwide crisis going, and IP would be one of the first things maybe governments would focus on, to get people to pay rather than get it for nothing. Anything on that? MR. FRICKLAS: I think that it’s absolutely right that every industry is always looking for help and every industry is always looking for improvement in their regulatory environment. I think that what a lot of people were saying was viewed as, if you will, whining about things around the edges and whining about wanting more. That all of a sudden now has become very real and very tangible and observable. I think the plight of the newspapers, the shutting down of major daily newspapers in the United States that matter to a lot of Congress people and senators, has really highlighted the extent of the crisis in IP. I think you are seeing radio stations that are uneconomic, you are seeing television stations that are uneconomic in some cases, on the verge of being uneconomic in other cases. I think these things are at least now giving a high degree of visibility to people in almost every district of the issues that may have only been observable or important to people who were really focused on the debate. PROF. HANSEN: In terms of that, we have had technology come in in all different ways that has changed what is viable, what’s not viable. Containers threw longshoremen out of work. I mean all along the line. So the question now is: are newspapers not viable because they shouldn’t be viable in our new information age and they’re really a dinosaur, or is there something that can correct them, and is that correction, for instance, making Google and all these aggregators pay for this situation? Yes it’s wonderful, but why should people get it for free? Rick? MR. COTTON: I guess I wouldn’t characterize it as newspapers. The point is it’s newsgathering capability and it’s the providing of news and information to society. It may be that print is no longer viable for a variety of reasons, but the question is: What is in fact going to generate revenue to support news gathering, which I think both as a social good people want and politicians are particularly attuned to? We saw the Associated Press ten days ago come out and say that they don’t see themselves as viable going forward if they can’t protect what it is they are gathering.8 I think where that leads is directly to IP and IP protection and how do you wind up with news gathering being protected in a digital world if that is going to be the primary delivery mechanism. MR. JACOBS: I wrote down a quote from a brilliant newspaper executive that I wanted to share with everybody that I think says it very nicely: “Companies that aggregate mainstream media content without paying a fee are the parasites or tech tapeworms in the intestines of the Internet and will soon be challenged.”9 MR. FRICKLAS: I do want to point to one thing you mentioned which I do think is important here, which is a lot of the language that gets used in our industries in terms of copyright protection gets couched as “we’re trying to protect a business model,” if you will. I hear that concept baked into your question about newspapers. I think conventionally, if you take away the specifics, people think of IP, and property generally, as something which encourages innovation. If you own something, you are more likely to invest in it, more likely to exploit it. It encourages the investment in the first place. It actually encourages the destruction of the old businesses by people who want to own the product of their innovation. That is what we are all about and that’s what property rights should be about. Staci D. Kramer, “AP Launching News Industry Campaign to ‘Protect’ News Content”, Paid Content, Apr. 6, 2009. Jane Schulze, “Google Dubbed Internet Parasite by WSJ Editor”, Australian, Apr. 6, 2009, http://www. theaustralian.com.au/business/media/google-dubbed-internet-parasite/story-e6frg996-1225696931547. 8 9

CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD  39

What you’re hearing, though, is that in this particular one if you create the news and you make that investment in news you no longer own the way that that news gets to the public. So the people who are doing the aggregation are collecting the fees from consumers and from intermediaries, not the people who are doing the collecting. As a result, that investment doesn’t get made in the collection in the first place. That is destroying news organizations around the world, and that’s Rick’s point. I can’t say we’re not completely about, but I will say this issue shouldn’t be about protecting the business model. It should be about protecting people’s ability to be innovators and profit from the innovation that they bring, whether the innovation is news collection or information that they have gathered or other kinds of business models. It’s about encouraging them to build and maintain those organizations that collect this information, and doing that by allowing them to transact safely with the people who want to consumer it. PROF. HANSEN: Okay. MS. PENTLAND: I think a couple of points. I come from the sort of technology angle and my colleagues on the panel have more the content-driven angle. I think it has to be a balance. I think everybody is unanimous on the panel in terms of everybody wants the rights owners to be protected, to be fairly compensated. But when we talk about compensating private copying, we have to be very careful in terms of how we create and implement that and how that evolves so that we don’t create double dipping, so that if the consumer pays directly the technology manufacturers aren’t also paying, so we don’t get this double dip, because then ultimately the consumer will pay twice. But we also need to be flexible in terms of how the content is compensated. There isn’t necessarily “one size fits all.” We need to, I think, allow and encourage different models, to go to what my colleagues on the panel are saying, to allow that compensation model to take effect. So one static model, which we’ve seen perhaps in the era of analog technology, may not be what we need to evolve to in terms of what we are talking about here, in the digital world. PROF. HANSEN: Paul? MR. CAPPUCCIO: I was just going to add—my company doesn’t own newspapers, but I think the plight of the newspapers is a wonderful example—and this is kind of Mike’s point—of the important social good of IP protection, not for just protecting but for protecting social good. Without IP protection for the news-gathering and monetizing function, what are you left with? You are essentially left with amateur, unreliable, confusing misinformation blogs. I’m not dumping on all blogs—we have ours too. But the reliability in the process of news gathering, the responsibility, is what is expensive and what costs money. We see a beautiful example of this as the newspapers are eroding. I find this myself. It’s more and more difficult to go online and know whether what you are reading has any degree of reliability or trustworthiness or care behind it. That is because we’ve been a little bit loose in protecting the rights of the content owners who put that time and effort and responsibility into collecting it. PROF. HANSEN: Lon? MR. JACOBS: I would add to that, bringing this back to your original question, which was how does the economy impact this, I think that there are a lot of companies that were hoping against hope that advertising revenue would continue to increase dramatically, which it did in the beginning, from a very small base. With the economic problems that we are facing now, I think the reality is that advertising is not going to be sufficient. I get very tired of hearing people say, “Well, once you have given it away for free you can never charge again.” I don’t think that’s true. But I also think it’s incumbent on us to come up with a model that works.

40  CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD There are a number of models that are being looked at. Some of these models we could use help from regulators to allow us to come up with something that may have antitrust implications that, because the newspaper industry is in such dire straits, should be lightened or even eliminated. PROF. HANSEN: What we are going to do now is periodically in the time remaining, which is about half an hour, take questions from the audience, then go back to the panel, then questions from the audience. A question over there? Wait for the microphone, please. QUESTION: Thank you, Hugh. Thomas Vinje, Clifford Chance, Brussels. I would expect that the vast majority of people in the room would agree with everything that has been said about the unfortunate demise of newspapers. But I have not exactly heard why a lack of intellectual property protection is the culprit there. What is it with respect to some lack of intellectual property protection that in that particular instance is causing the demise of newspapers and depriving them of the incentives to gather information? I guess I would ask: Isn’t the problem faced by newspapers really that advertising is moving online? MR. COTTON: I guess what I would say is that I think the demise of newspapers is symbolic in this sense, which is that the industries or businesses which bring to the table value in the form of creativity or invention—and that’s the fundamental building block of their business— as with many other businesses, and certainly in the economic crisis those businesses have simply come under pressure, and at the point at which they are under pressure to the extent that some of them start to fail. I would also say if you also look at the fact that organized labor in many countries has now actually begun to speak up in terms of the need to reduce the amount of counterfeiting and piracy, it really goes to the fact that the economics, the survival, for the politicians and as a public policy matter—the question of whether you can reap sufficient economic reward to continue to incentivize you, to actually be able to invest in any of these businesses is really front and center. And so the question as you start to look at newspapers, but you also start to look at the creation of very expensive television product or very expensive film or very expensive—really any product which rests on a lot of people being willing to invest both human time and energy in terms of invention and creation and dollars in terms of production, that it is important that that not be undermined by widespread counterfeiting and widespread piracy. So what I would say in terms of the failure is that it is really bringing home the fact that this isn’t fun and games anymore. It’s not playing around the edges. It’s not a luxury. In better times it might have been a luxury that collectively we could afford, but I think what is coming home to people is that this really is about the vibrancy both in terms of jobs and in terms of providing a lot of social goods going forward. That is really the tenor of the debate that changed. PROF. HANSEN: Let me add something about technology. One of the things we always have to worry about is, is it going to thwart technology; is over-restrictive use going to thwart technology that can be used beneficially to the public and also be part of the scheme in which you have rights? I think in the United States basically court-driven policy has been new technologies with a new revenue stream get a break in the beginning—whether it’s player piano rolls,10 whether it’s cable television,11 whatever—and then they are absorbed in later on after the technology has some maturity. 10 See White-Smith Music Pub. Co. v. Apollo Co., 209 U.S. 1 (1908) (holding that piano rolls are not copies of the author’s song). 11 The Supreme Court held early on that cable systems were not engaged in a “performance,” as defined under the terms of the copyright act, when they retransmitted television signals. See Fortnightly Corp. v. United Artists Television Inc., 392 U.S. 390 (1968); Teleprompter Corp. v. Columbia Broad. Sys. Inc., 415 U.S. 394 (1974).

CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD  41

But technology which threatens the core business—and that’s the situation with radio, which threatened both records and music publishers—in Buck v. Jewell-LaSalle12 the Court, rather than saying, “No, it’s free, we can’t bring it back,” created—this is Justice Brandeis— the multiple-performance doctrine, which caused everyone (the radio stations, the hotels, the restaurants) all to have to get a license, brought this back in because the technology was threatening the core of the industry. In fact people did pay after that through ASCAP and BMI and all these things going after radio stations, going after restaurants. So it’s not that once it’s out there and there’s a new technology and you let it go for a while it can never be corrected. But it takes effort, and it takes concerted effort, I think. Lon. MR. JACOBS: Just to answer the question, I think that we are anticipating the IP issue when it comes to charging online. We think that Google has already floated the fair use doctrine.13 That is really the issue that has been teed up. I also need to say that we at News Corp. don’t think that newspapers are on the road to extinction. Our newspapers continue to do very well in this country. What we’re doing, unlike most other newspaper companies, is as the revenue is reduced, they are reducing their costs, they are reducing the quality of their products, so they lose reader and they lose more money and they’re in a vicious downward spiral, we are preparing for when the economy comes up again. We are continuing to invest in our papers. We are continuing to invest in journalists. We are increasing the number of journalists that we have at The Wall Street Journal. Our philosophy is we’ll be the last man standing. We do think that there is a place for newspapers, and especially without newspapers there is no investigative journalism. I don’t know what you do with that. PROF. HANSEN: Lon, when will you be the last man standing? MR. JACOBS: It depends on our competitors, when they finally throw in the towel. PROF. HANSEN: Let me ask one question about rhetoric. We have rhetoric on the Copy-Left side, on the public side, “The record companies are horrible, horrible, horrible.” I don’t think that helps the debate. That just widens people along. Then we have rhetoric on the other side, that news aggregators are—I forget what it was— like worms in the intestine, or something along those lines.14 MR. JACOBS: Tapeworms. PROF. HANSEN: I’m not sure that helps the debate. I mean basically isn’t that actually driving us apart, rather than trying to think how can we solve this? Google I think is an interesting animal. It is almost like an alien from a different world that is now here and it just does whatever it wants, a lot of it great and a lot of it it doesn’t care. So there is good and there is bad. I think the book settlement was a situation where people sort of worked it out, “Okay, you can.” Now, they had to sue to do that.15 If we weren’t so at odds, maybe that could have been worked out some other way. But I’m just saying maybe the rhetoric on both sides is actually hindering the process of finding solutions. I’m just throwing that out. Do you have any view on that? 12 Buck v. Jewell-LaSalle Realty Co., 283 U. S. 191 (1931) (holding that using public speakers to play copyrighted musical compositions throughout a hotel that were received from a radio broadcast was a “performance” under the Copyright Act); see Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 8.18 (A) (“Under certain circumstances a single rendition of a work may give rise to more than one performance under the Copyright Act.”). 13 17 U.S.C. § 107; see, e.g., Anick Jesdanun, “News Agency Sues Google, Testing Fair Use”, USA Today, Mar. 23, 2005, http://www.usatoday.com/money/industries/technology/2005-03-23-afp-google-suit_x.htm. 14 Schulze, supra note 9. 15 See The Authors Guild, Inc. v. Google Inc., No. 05 CV 8136 (DC), 2009 WL 5576331 (S.D.N.Y. Nov. 19, 2009). On Nov. 19, 2009, the Court preliminarily approved an Amended Settlement Agreement, which is available at http:// www.googlebooksettlement.com/r/view_settlement_agreement.

42  CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD MR. FRICKLAS: I’ll talk about that for a second. We actually have been spending a lot of time talking to people on all sides of the debate, trying to understand the areas where we have common interests and where we have differences of interests. I actually think an awful lot of the time what people are upset about are issues that we care much less about and some of the issues that are core to us are things that the people on the opposite side of the copyright debate are willing, at least in a private room, and sometimes even in a public room, to say that we are right about. The anti-copyright forces, if you will, what you call the copy-left, don’t see a lot of value in transmitting a perfect copy of a copyrighted work for free. They see a lot of value in issues of people being able to reuse material for creative purposes.16 We’ve had a lot of interesting conversations with Fred von Lohmann at the Electronic Frontier Foundation in the early days of our YouTube lawsuit about making the right distinctions between things that even could arguably be fair use versus our desire to make sure that if you wanted to actually get the content that was created by our artists that you would do that in a legitimate sort of fashion, and came to a set of principles that we both more or less agreed about. There are legitimate issues being made by people who are criticizing the farthest reaches of copyright, or even some things that aren’t such far reaches, that we can learn from and that we have to have a conversation with. At the same time, people on the other side of the debate have to understand that these things that we are talking about are markets that are important not just because they are large but because they are fundamental to the ability of artists to exploit their works, and that in thinking about the criticisms they have to think about the balance, about the need for people who use works to be responsible in part for the theft and the abuse of their networks that go on, the abuse of their sites that go on, for people to think about the freedoms that they care about also in the context of understanding the extent to which some of those freedoms may make enforcement difficult or impossible, and that allowing for robust markets in copyrighted work is in everybody’s interest. So I do think you can have that conversation at that level. I think it is an important one to have. PROF. HANSEN: Okay. Louise, is that an indication you want to speak? MS. PENTLAND: Yes. Actually, I was just going to add it is about balance—I agree with that point—between market forces and stakeholders. I think we do have to, as I said before, evolve the thinking. I think, Hugh, you made the example of the multiple performance doctrine for licensing radios and hotels, etc.17 We have to evolve models that may have been fine in the old order—the analog world, and find the balance we need to strike in the digital Internet world. I strongly support copyright owners or creators being compensated for their work. But it needs to be a balance—fair for rights holders and licensees—like I said, it can’t be double dipping. PROF. HANSEN: Dick? MR. COTTON: I want to say one thing very quickly. I think the dialogue is possible. My big problem in terms of many of the issues that get put forward, like fair use, is that when they are put forward they are put forward in the service of saying that there should be no action taken and that no enforcement is possible, or a block entirely to enforcement. And so, on the one hand, I think that’s just intellectually dishonest, when they are used as a tool essentially in the service of the no-action option. 16 17

See, e.g., Lawrence Lessig, Remix (2008); Yochai Benkler, The Wealth of Networks (2006). Buck v. Jewell-LaSalle Realty Co., 283 U. S. 191 (1931).

CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD  43

On the other hand, I think from the point of view of content owners and rights holders we ought to be prepared to engage in reasonable debates really focused on the issue, like fair use again as an example. I think there has to be some flexibility. But I think the big problem in terms of when, as you say, Hugh, we just butt heads, then those issues are raised in a way that just—it can’t work in terms of the conclusion being that you can’t do anything about wholesale piracy and wholesale counterfeiting. PROF. HANSEN: By the way, I just want to tell you we did invite the dual-headed general counsel situation in Google and the general counsel of Apple to come today. It wasn’t that we were just going to have a group that seems to share some views about evil. We did try to have some other people here. Let’s open up to the audience for a question. In the back. QUESTION: I’m David from the Serious Organized Crime Agency in the United Kingdom. Thank you. We’ve heard about the importance of value in IP in the current economic conditions. We are starting to see in the United Kingdom a reduction in funding for anti-counterfeit organizations. Is that the start of a trend? Are we going to see more decreases in funding for anti-counterfeit organizations as a result of the current economic conditions? MR. COTTON: I guess I would just say, if I speak in terms of what I know most about, which is the situation in the United States, the consequence of the legislation that was passed in October is that we are going to see—and it’s only half, really, of the pending legislative agenda—increased funding at the level of our FBI in terms of the prosecutors within the Justice Department and funding for state and local IP enforcement units. The appropriations process is working right now, but in the Untied States we will see a significant increase in public funding devoted to those enforcement activities, and we are working on legislation and funding that would increase IP enforcement within our Customs and border patrol. I have to say, if you just look at the debate in the United Kingdom and France and to some extent in Spain on the digital piracy issue,18 that has certainly moved up the public policy agenda. I’m not quite familiar with the spending, but certainly in the United States it is increasing at the current time. PROF. HANSEN: One question? Anyone who hasn’t asked a question? QUESTION: Thanks a lot. I’m David Sweeney from the European Video Game Association. Just listening to the views of the panel earlier on, I noticed the mention of the term “perception,” there was a perception battle. I think that’s the case. The situation at the moment is that we are living with the greatest innovation probably of our lifetime, the Internet, and people want to use it whatever way they can. Copyright has to adapt to that. But certainly the experience of those of us who have lobbied in Europe over the last ten, fifteen years in recent weeks and months is that it’s clear there is a change in attitude both at the national and the European level. We saw, about a week or so ago, two votes in the French Parliament that didn’t go according to plan.19 So it’s all very well to craft the legislation and to get it on the floor of the chambers, but getting it passed is another thing. 18 Dep’t for Culture, Media & Sport, Digital Britain Final Report (2009), available at http://www.culture.gov.uk/ images/publications/digitalbritain-finalreport-jun09.pdf; Creation and Internet Law is commonly referred to as the HADOPI law. Loi Favorisant la Diffusion et la Protection de la Création sur Internet (“Law Favoring the Diffusion and Protection of Creation on Internet”), Law No. 2009-669 of June 12, 2009, Journal Officiel de la République Française [J.O.] [Official Gazette of France], June 13, 2009, p. 9666; Eric Pfanner, “Spanish Anti-Piracy Measure Under Fire”, N.Y. Times, Dec. 3, 2009; see also Chapters V.A & V.B, infra this volume. 19 The French Parliament rejected the bill, 21-15, on April 9, 2009. Eric Pfanner, “France Rejects Plan to Curb Internet Piracy”, N. Y. Times,Apr. 9, 2009, http://www.nytimes.com/2009/04/10/technology/internet/10net.html?ref=technology; Richard Wray, “French Anti-Filesharing Law Overturned”, The Guardian (U.K.), June 10, 2009; Eric Pfanner, “France Approves Crackdown on Internet Piracy”, N.Y. Times, May 12, 2009, http://www.nytimes.com/2009/05/13/technology/ internet/13net.html.

44  CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD I would just like to know how the panel feels about the perception issue, because I think that’s the greatest battle. PROF. HANSEN: One of the things that enforcement of counterfeiting will always have is the public perception that they are not concerned, or actually they are taking part in it at various times and want it to be free for them. There doesn’t seem to be a groundswell in public opinion that, “Boy, this is really a big problem; we’ve got to do something about it.” That seeps into the legislator, who has to get reelected, even though the Executive has the view. And the same thing with Obama. He probably is going to have a view that is more protective of IP than maybe some of the people in Congress. How do you address that? MR. CAPPUCCIO: Well, I think the importance is to make sure you’re on the right side of the perception thing. We’ve been cornered in the past between consumers not being able to get things and getting them for free. That’s a false choice. If that’s the way we let the perception be phrased, which is all incorrect, that IP somehow stifles innovation rather than promotes it, which it in fact does—but so long as we let it look like either people can’t get this or they steal it, then that’s wrong. So what we need to do—and we are doing this, everybody sure—I’m not sure about Nokia— we are all working on ways to make sure people can see our content when they want to see it, where they want to see it, and how they want to see it. We have a thing that we talk about in the United States called “TV everywhere,” where the idea is if you are paying for our content in any form, for example you subscribe to cable or you subscribe to satellite or you subscribe to high-speed DSL, then you will be authenticated and able to get that same content when you want it on the Internet, probably where you want it. We’ll all work on our own terms; different people will do it different ways. But it is important that we put out a model where the choice that policymakers see is not the choice between not getting it and stealing it, but the choice between stealing it and getting it in a legitimate way for a legitimate price. That’s the key to winning the perception thing. I think we are doing better. We are certainly doing better than the music guys do. That’s not hard. MR. COTTON: Could I amplify that with just two real-life examples? The two real-life examples I am going to use are from “Saturday Night Live” in the United States and our experience with the Olympics, very quickly. If you go back two and a half years to the launch of YouTube, the first viral video on it was a “Saturday Night Live” clip called “Lazy Sunday,” where there were north of 7 million views on YouTube within about ten days.20 If you then fast-forward to last fall’s election and Tina Fey’s impersonation of Sarah Palin, there were online more than 10 million views of each one of those skits, but they were on Hulu.com or NBC.com and not on YouTube, and there were not riots in the streets. The reason is because the Internet users are very sophisticated. When technology blocked their ability to find those skits on YouTube but they were easily available on legitimate sites, by the tens of millions people moved. I would say the same thing in terms of NBC’s experience with the Olympics, which is that the Chinese government cooperated. There was no video on the Chinese UGC sites, not on other sites around the world, largely due to filtering technology. NBColympics.com had 75 million individual users and hundreds of millions of video downloads. Now, the only point about that is that it is about technology. We have basically had an Internet generation grow up with no technological blocks and no cues that accessing material illegally is wrong. Kids just draw the easy conclusion that if it’s so easy it can’t be wrong. If 20 Nate Anderson, “Did ‘Lazy Sunday’ Make YouTube’s $1.5 Billion Sale Possible?”, Ars Technica, Nov. 23, 2008, http://arstechnica.com/old/content/2008/11/did-lazy-sunday-make-youtubes-1-5-billion-sale-possible.ars.

CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD  45

we build in technology and it is clearly communicated that there are certain sites where it is legitimate to go and others where it is not, this generation, the Internet community, will move. It’s really Paul’s point. If it’s available legitimately and the technology says that it’s hard at least to get to the illegitimate sites, it’s not that there won’t be hackers, but the vast majority of the community will move. PROF. HANSEN: Okay. Right here, a question? You’re next, and then Howard. QUESTION: Tralitime [phonetic] from Oracle here. I think that the panel is really pointing out that the content industry has challenges with the Internet. But I do not think that the challenge is with the specific companies that may or may not be on the panel or not. I also don’t think that when the content industry is joining a platform that is a tremendous source of innovation that has taken thirty years to build it is fair to discuss this as if the rules have to change on the platform because one business model is joining a new platform. I think the discussion is a little bit wider than that, because the risks, if we talk about this as if this is a case of consumers who don’t realize that they are infringing on content and they have to be taught, we are missing the perspective—and I’m not saying that anything that has been said here is wrong, because I think fundamentally it is very important to protect content—but it is wrong not to take the perspective that the Internet took thirty years to build. It is something that a lot of e-commerce, a lot of innovation, has been based on. So when we do put in place new rules we should remember those standards and the ideals that they were built on and the collaborative effort that has built that infrastructure. If that is not the perspective of this debate, then I think we are going in the wrong direction. Please respond to that. MR. FRICKLAS: I’d love to start on that. Look, not only is the Internet not going away, but it is a tremendous opportunity for everybody. We are not suggesting that it isn’t. It will dramatically change distribution costs. It does give us an opportunity to interact with consumers, to provide them with customized experiences. A whole host of businesses that five years ago didn’t exist now exist because the network is there. At the same time, the next evolution of Internet or network electronic commerce transactions depend upon being able to do it in a way that is secure. I think that there is a tremendous amount of activity that goes on in the networks today that is highly secure, transactions in banking and securities and all kinds of other things that take place on a public infrastructure but nevertheless are very secure. At some level—and that’s what we are talking about now—transactions in intellectual property protected materials to consumers need to be done in a way that is more secure. That security is going to take place, in part, by ISPs helping to prevent theft from going on in the network, and it is going to come in the sense of transactions that are done in a variety of secure ways. Rick is talking very much correctly about legal advertising-supported platforms. But if the full advantage of the Internet is going to be recognized, then transactions that are not readily going to compete with free also need to occur on the Internet. You know, 99-cent songs might compete well with free music, although even there the vast majority of music is not paid for. Twenty-five-dollar DVD transactions or $10 movie ticket transactions or $500 or $5,000 transactions in software that your company engages in and million-dollar transactions ought to be able to take place there in a secure fashion as well. And so, recognizing that connection with the openness of the Internet, there needs to be a place where the Internet is free from viruses and hackers and all kinds of theft of all kinds of stripes is really to me taking the network now to the next level. I’m not suggesting that people are trying to roll it back. PROF. HANSEN: Okay. Lon?

46  CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD MR. JACOBS: I just want to go back. I don’t really think we are answering the question about perception. We are doing a lot of good things technologically and we are coming up with business models, but I don’t think that we are winning the perception war. We have a movie coming out in May, called “Wolverine,” and it has been hacked and downloaded over a million times.21 For that kind of theft there is no business model that you can come up with. That is over a million people who think it is okay to steal that movie. We need to redouble our efforts, I think, to convince people that that’s theft. PROF. HANSEN: Question? QUESTION: Jochim Barmick, Munich. We heard from Judge Rader this morning that the eBay decision22 was the worst decision of the century. Is industry agreeing with this statement? MS. PENTLAND: I don’t agree with that. I think eBay came at the right time. I think the pendulum was swinging perhaps too far in the other direction. As you’ve heard me say a few times this morning, I think it is about balance. I think the eBay decision did help redress the balance that was needed to be brought back into this industry. PROF. HANSEN: Howard? QUESTION: Howard Knopf, Ottawa. Hugh, you may be upset, but actually for once I actually agree with something you said, which is that rhetoric— PROF. HANSEN: Then you’re going to make me rethink everything I’ve said, Howard. QUESTIONER [Howard Knopf]: Times are changing. But speaking of rhetoric, we are used to hearing—and we heard from you guys last year, and we’ve heard from countless people for many years—about all of these things you are doing that some people like and some people don’t like are for the benefit of creators and artists, you’re doing it for them, which I don’t think anybody believes, but you keep on saying that. Anyway, we’ll look forward to hearing it again. But here’s something new we just heard, the quote from one of Rupert Murdoch’s executives about tapeworms,23 which if it had a little more class would almost be in the same league as Jack Valenti’s quote about the Boston Strangler.24 But I don’t think it’s quite up there yet. He’ll have to work on it. But in all seriousness, all kidding aside, I am an addict of Google News. It’s an aggregator. Without Google News I would never click on to the San Francisco Chronicle or San Jose Mercury or lots of other wonderful papers, maybe even Fox newspapers. These newspapers are not forced to put their papers online. They do so because they can make money. My question is very specific: How does Google providing a link to these various papers— you know, an airplane crash, so I can choose any one of twenty or forty or 100 or sometimes 10,000 stories to check out, which I could never find on my own but Google helps me find them—harm newspapers? I may just land on yours and you will get money from that if I click on some of the ads. How does that hurt you? PROF. HANSEN: Okay, we got it. Howard, we got it. 21 Tatiana Siegel, “Fox’s ‘Wolverine’ Leaks Online”, Variety, Apr. 1, 2009, available at http://www.variety.com/ article/VR1118001984.html?categoryid=13&cs=1. 22 eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006); see also Chapter II.B, The Judiciary & IP Law, United States, supra this volume. 23 Jason Kirby & Katie Engelhart, “Rupert Murdoch vs. The Internet”, Macleans (Canada), Jan. 8, 2010, http:// www2.macleans.ca/2010/01/08/rupert-murdoch-vs-the-internet/. 24 Home Recording of Copyrighted Works: Hearing on H.R. 4783, H.R. 4794, H.R. 4808, H.R. 5250, H.R. 5488 and H.R. 5705 Before the Subcomm. on Courts, Civil Liberties, and the Admin. of Justice of the H. Comm. on the Judiciary, 97th Cong. (1983) (statement of Jack Valenti, President, Motion Picture Association of America, Inc.) (“I say to you that the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.”).

CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD  47 QUESTIONER [Howard Knopf]: The question is: How is that copyright infringement? There’s no copyright infringement there. PROF. HANSEN: Hold on. Hold on. Let me respond to the first thing. They put it online. I would never—in fact, the same thing was said about radio. In fact, you should be happy they’re putting your music on because they’ll buy more, and in fact they wouldn’t even know about it if it wasn’t for radio. But it was going to destroy the industry. So the Supreme Court, Louis Brandeis, an anti-IP person, creates, Andrew, the multi-performance doctrine,25 which greatly expanded what people could do at that time. So the idea that yes, you should be thankful for it—“we are going to define your business model for you; if you don’t like it we are going to destroy you”—I’m not sure that that is a policy-driven thing that courts in the United States today or Congress will accept. But, because there is so little time, the panel will just start seething here if they had to deal with this. [Laughter] We have one more question. QUESTIONER [Howard Knopf]: Let them answer the question. PROF. HANSEN: No. [Laughter] Andrew, okay, a colleague. MR. BRIDGES: We have here Viacom, NBC Universal, Time Warner, News Corp. telling us there is a perception problem. [Applause] Is this a technology problem or is it a message problem? MR. COTTON: I’ll answer that. I’ll step up. I think one of the things you learn—and it is in fact what you are responding to—is that the messenger is as important as the message. In terms of people saying that they look at this panel and don’t believe, it’s because these are all large corporations. What I would tell you in terms of the debate in the United States over the legislation, which passed overwhelmingly,26 is that by far the most important voice was that of organized labor. I think that the reality in terms of the fact that, “Well, these may be big corporations. We have tends of thousands of employees and the production community that in fact gets supported, just in terms of our relatively narrow set of IP businesses but which then extends to the games business and music and a lot of others—broadly speaking, in the United States it is at least 12 percent of the GDP.27 We’re sitting in the United Kingdom, where the creative industries are extremely important as employers. That is, I think, where the traction comes from. I think you are right in terms of saying that the message when it is carried by big companies gets discounted, because people assume that it is purely profit-driven. But what is changing, particularly in the economic crisis and particularly with labor coming to the table, is that the message is begin received at least within elected official circles much more intensely because of the recognition that these are large, large portions of the economic activity in many, many countries. 25 Buck v. Jewell-LaSalle Realty Co., 283 U. S. 191, 197–98 (1931) (“[N]othing in the act circumscribes the meaning to be attributed to the term ‘performance,’ or prevents a single rendition of a copyrighted selection from resulting in more than one public performance for profit.”). 26 Prioritizing Resources and Organization for Intellectual Property Act of 2008, Pub. L. No. 110-403, 122 Stat. 4256 (codified as amended in scattered sections of the U.S.C.); Austin Modine, “U.S. Congress Rubberstamps IP Enforcement Bill”, Register (U.K.), Sept. 29, 2008, http://www.theregister.co.uk/2008/09/29/us_congress_passes_ip_ piracy_bill (The Senate unanimously passed the bill). 27 U.S. Chamber of Commerce, Protecting Intellectual Property, http://www.theregister.co.uk/2008/09/29/ us_congress_passes_ip_piracy_bill (“U.S. intellectual property is worth between $5 trillion and $5.5 trillion—more than the nominal gross domestic product (GDP) of any other country (USA for Innovation).”).

48  CHAPTER III: CORPORATIONS & IP IN A CHALLENGING WORLD PROF. HANSEN: You can see that a little bit in the European Union with the sound recording term extension,28 the fact that labor and the collecting societies on behalf of the performers actually have had some impact on that debate.29 But in any case, I think this has been wonderful. Thanks so much to the panel. We’re all going to lunch. It is at Robinson College. We have people out there will show you how to get there. We are going to start again at 2:30. Thank you.

28 Subsequent to the Conference, the European Parliament voted to extend the term of copyright protection. See Commission Proposal for a European Parliament and Council Directive Amending Directive 2006/116/EC of the European Parliament and of the Council on the Term of Protection of Copyright and Related Rights, COM (2008) 0464 final (July 16, 2008). 29 For background on the debate and opposing arguments see Susanna Monseau, “‘Fit for Purpose’: Why the European Union Should Not Extend the Term of Related Rights Protection in Europe”, 19 Fordham Intell. Prop. Media & Ent. L.J. 629 (2009).

Chapter IV

Patent Law Part A: An Overview of U.S. Patent Law Developments Moderator Prof. Martin Adelman

George Washington University Law School (Washington, D.C.) Speaker Dimitrios Drivas

White & Case (New York) Panelists

Eric Kirsch

Cooper & Dunham (New York) William J. McCabe

Ropes & Gray (New York)

Brian P. Murphy

Morgan Lewis (New York)

Hon. Randall R. Rader

U.S. Court of Appeals for the Federal Circuit (Washington, D.C.)

PROF. ADELMAN: We are going to get going now. I’m Marty Adelman. I’m the moderator. We have a very distinguished speaker from White & Case, Mr. Drivas, who will introduce the simple subject of U.S. developments for the past year. I have written down a whole slew of them. We’ll see which ones he picks out. After he talks, the panelists will come back with questions. We have Eric Kirsch from Cooper & Dunham, which I found out today is a sponsor that has always been there for the seventeen years. We have Bill McCabe, who used to be at Fish & Neave until it was absorbed by Ropes & Gray, and now he is at Ropes & Gray. We have Brian Murphy, who used to be at Hopgood Calimafde until it was absorbed by Morgan Lewis. And, of course, we have Judge Rader, who used to be on the Court of Claims until he was absorbed by the Court of Appeals for the Federal Circuit. We will be talking about some of his decisions either in the talk to follow or we’ll pepper him as well as the other panelists with some questions. So without further ado let’s start.

50  CHAPTER IV: PATENT LAW MR. DRIVAS: Good afternoon.

We’ll go back further than a year and go back to 1982, with the beginning of the Federal Circuit, and the twenty-five years or more since then with the strengthening of the U.S. patent system and building up of U.S. patent rights. What we are starting to see now is a bit of a trend back to weaken the U.S. patent rights, and there are a number of reasons for that. So what are they? First of all, we have seen the expansion of patentable subject matter. A lot of that had to do with Federal Circuit decisions, like State Street,1 but probably a lot of it was also due to the evolution of our economy—a growing financial services industry, this new interest in business method patents, people chasing patentable subject matter in areas where they never chased it before. We have also seen an evolution in using patents and other IP as assets, for the first time really in a significant way, divorcing the IP right from the underlying business. That is the nonpracticing entities, what are otherwise known as patent trolls,2 people enforcing patent rights for reasons other than protecting their business and their products. It has also created a large market, or a growing market, in IP as assets, whether they are being sold, auctioned, licensed, or disposed of in other ways. We have seen a great increase in patent litigation cost, threat of enhanced damages due to willful infringement, and all of this coupled with inefficiencies in the Patent Office, where the quality of patents may have gone down, especially as the subject matter expands as to what is patentable, and there is a growing public outcry in the United States for some reform to the patent system. Now, why type of reform have we seen? • Well, first of all, for the first time in many years, the Supreme Court has become very active. We heard some of that this morning, where for twenty-five years the Federal Circuit, as the only circuit that rules on U.S. patent law, develops a body of law, and now the Supreme Court comes in and starts putting its view on where the patent law should go. • We see the Federal Circuit now following the Supreme Court lead, taking an active stance in order to change its own precedent as it sees things change. We heard some discussion of policy this morning. • We see the IP marketplace evolving. I just mentioned how the financial services industry and others are using patents as assets. • We see the PTO attempting reforms, trying to amend its own rules. We have some litigation on that that we can discuss. • And now we see again the Federal Trade Commission stepping in, holding conferences, some in the latter part of last year, trying to evaluate where we, the U.S. economy, should go with our patent reform. • And last but not least, we have seen Congress, in the past Congress in previous years, trying to bring forward legislation to reform our patent laws. And even, surprisingly, in this 111th Congress there have been a number of bills already introduced to reform our patent laws. Given that we have many problems in the United States that Congress needs to address, patent law reform, surprisingly, is at the forefront. So why don’t we start with the Supreme Court? There are five Supreme Court decisions in the last two years which are quite significant. This is unprecedented in our history, as far as I know, that the Supreme Court has become this active. PROF. ADELMAN: They got one out of five right. State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). For a description of the patent troll problem see Mark Lemley, “Are Universities Patent Trolls?”, 18 Fordham Intell. Prop. Media & Ent. L.J. 611 (2008). 1 2

PART A: AN OVERVIEW OF U.S. PATENT LAW DEVELOPMENTS  51 MR. DRIVAS: We’ll get there. And I’m not going to pick it. I’m not going to pick which one. PROF. ADELMAN: It’s pretty obvious, isn’t it? MR. DRIVAS: I don’t know. We’ll see.

What is significant is in each one of these cases the Federal Circuit was reversed by the Supreme Court. They are on the issues of injunctions, declaratory judgment actions, obviousness, patent exhaustion, and the extraterritorial application of the U.S. patent laws. I would say two of these decisions are extremely important for a patent practitioner. They are injunctions under eBay3 and the obviousness decision under KSR.4 Now, whether you agree with these decisions—and we heard some discussion this morning whether eBay was the worst case or the best case; and we’ll talk about obviousness in a minute—what they do change is for the playing practitioner the playing field has changed. The way you approach trials as a patent trial lawyer has changed. The evidence that you have to seek and put on at trial has changed. Let’s just talk about that briefly. 1. eBay

It used to be that under Federal Circuit law that if you were the successful patent plaintiff an injunction would issue and it was the defendant’s burden to show why an injunction should not issue. Well, that has changed. Now, the Supreme Court tells us, patents are subject to the four-part equitable test that every other equitable injunction is subject to.5 So as a plaintiff, even if you win, you now have to show that you will be irreparably harmed if an injunction does not issue; you have to show that monetary damages are not enough to compensate for the infringement; you have to balance the hardships between the plaintiff and defendant; and you also have to show that the issuance of an injunction will not harm the public good. The burden is now on the patent plaintiff to go forward and show why an injunction must issue. That changes the whole strategy in a patent litigation. You have a lot more work to do as a patent plaintiff. It doesn’t mean you don’t have work to do as a defendant, but your strategy and the evidence that you have to marshal for your trial is quite different than it was just a year or two ago. 2. KSR The other key decision which is having a real impact is the one on obviousness. In KSR the Supreme Court essentially said: We cannot adhere to formalistic tests, like the teachingsuggestion-motivation test that the Federal Circuit was applying, and there has to be a broadbased analysis of what is obvious, what is obvious to a person of ordinary skill in the art.6 That has created uncertainty among certain people in the patent community. Let me just go back a second and say in all this talk of patent reform there are really two industries that are on opposite sides. There is the high-technology industry, where the time to market is relatively short, where products can be relatively complex and may be impacted by many different patents and patent families, and where you see a threat of damages from patent trolls and others that has focused the industry on reducing the patent right. And on the far other extreme is the pharmaceutical and life science industry, which is highly regulated, where the time to market is very long because you have to pass regulatory hurdles, eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398 (2007). 5 eBay, 547 U.S. at 388. 6 KSR, 550 U.S. at 419–21. 3 4

52  CHAPTER IV: PATENT LAW where you have significant investments before you can get to market, and where patents are probably stronger and more controlling of a single product and that one patent may make a difference. There you want to see a strengthening of the patent right. You don’t want to see an erosion of injunctive relief. You want to have a strong damages position because you are out there to enforce patents and protect your longstanding investment. KSR left open, at least in some minds, whether the strict application of a formalistic test and taking that away would still apply to the unpredictable arts like chemistry or pharmaceutical sciences. We’ll get to that in a minute with the Federal Circuit, where I think the question is starting to be answered. But there was uncertainty, and now we are starting to see certainty in the test coming from the Federal Circuit. 3. Federal Circuit So what has the Federal Circuit done? I believe the Federal Circuit has also received the message from the Supreme Court that they may have gone too far in strengthening the patent right. I think the Federal Circuit is pulling back, reconsidering its own precedent. Chief Judge Michel has actively spoken in a number of conferences inviting litigants to bring certain issues up on appeal—for example, damages awards and others. We have seen the Federal Circuit also take its own initiative—for example, on willful infringement in the Seagate Technology case;7 certainly in the In re Bilski case8 on patentable subject matter; and on the venue decision, which Judge Rader told us about this morning,9 which was on a writ of mandamus, they took the initiative on venue. And we have seen actually the Eastern District of Texas paying mind to the Federal Circuit, and they themselves have on their own transferred some cases out recently as a result of the TS Tech decision.10 4. In Re Bilski Now, what about Bilski? Is Bilski over with? When you read the Federal Circuit decision, it is clear that the Federal Circuit is not completely on-board, or all the judges are not on-board, with where patentable subject matter lies. Bilski introduced this machine or transformation-of-matter test, that a method claim in order to be patentable subject matter had to either encompass a particular machine, like a computer, or transform one type of matter into another.11 The claims in Bilski had to do with a commodity risk trading system. Those claims were found to be unpatentable.12 Now, in Bilski there is a petition of writ of certiorari to the Supreme Court,13 which is an application to the Supreme Court to take on this case so that the Supreme Court can decide it. We have seen from some of the Supreme Court decisions which we outlined before that there are Justices on the Supreme Court who are not happy with the business method patents14 and the scope of patentable subject matter.15 So it remains to be seen whether this case will go up to the Supreme Court. In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc). In re Bilski, 545 F.3d 943 (Fed. Cir. 2008). 9 See Chapter II.B, “The Judiciary & IP Policy, United States”, supra this volume. 10 In re TS Tech USA Corp., 551 F.3d 1315 (Fed. Cir. 2008). 11 In re Bilski, 545 F.3d at 959. 12 Id. at 966. 13 Subsequent to this conference, the U.S. Supreme Court granted cert., reported in Bilski v. Doll, 129 S. Ct. 2735 (June 1, 2009) (No. 08-964). 14 See, e.g., eBay, Inc. v. MercExchange, LLC, 547 U.S. 388, 397 (2006) (“The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test.”). 15 See, e.g., KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398 (2007). 7 8

PART A: AN OVERVIEW OF U.S. PATENT LAW DEVELOPMENTS  53

But we also see that the Federal Circuit is starting to have other cases come up, primarily through the Patent Office on the Board of Appeals, where patentable subject matter is still an issue. 5. In re Kubin & Goodman Most importantly, in a recent decision in In re Kubin & Goodman,16 which is not reported here, which just came out on April 3, which had to do with a life sciences case, a DNA obviousness question, the court was explicit in that we should not apply a formulaic obviousness test to any type of technology, that we should not make separate tests for different scientific disciplines, that they all should be subject to the same obviousness determination because it is a question of patent law. The court overruled its in re Deuel precedent17 on obviousness to try.18 It is clear now that obviousness to try, which was in the past not the test for obviousness, can now be the first step in the test for obviousness, whether an invention is obvious or not, and that the real question is: Would a person of ordinary skill in the art have reasonable expectations if it were obvious to try that this result would likely ensue (that is, the patent of the claimed invention)? So the obviousness standard is now a more flexible standard. It’s a broader analysis. As a practical matter, as one who tries patent cases, your job is much harder. Maybe not a bad thing, probably a good thing. However, for all patent practitioners, and for anybody I would suggest, obviousness is the toughest conceptual thing that you have to do, whether you are prosecuting patent applications or trying cases as a judge or for a trial lawyer. It is the hardest thing that we have to present evidence on and which a court has to decide. That is where the work comes in, because the test is not formulaic, it is open to evidentiary and expert testimony, factual testimony, which will support a decision on obviousness. 6. Patent & Trademark Office Now, the PTO also knows it has to reform. We have a severe backlog of patent applications.19 The quality of patents is not there, or not what we expect. The PTO has a hard time keeping examiners because they are attracted to other jobs in private industry. So the PTO, about two years ago, took it upon itself to change some of its rules.20 Those rules addressed the number of claims in applications, how many continuing applications you can file, so on and so forth. An inventor and GlaxoSmithKline sued the Patent and Trademark Office in order to obtain an injunction to prevent the rules from coming into force.21 They were successful, first, on a preliminary injunction;22 and then, based on the preliminary injunction in which the District Court of the Eastern District of Virginia enjoined the PTO from implementing its rules, granted summary judgment and a permanent injunction;23 and then it was appealed to the Federal Circuit.24 In re Kubin, 561 F.3d 1351 (Fed. Cir. 2009). In re Deuel, 51 F.3d 1552 (Fed. Cir. 1995). In re Kubin, 561 F.3d at 1358-59. 19 See Chapter IV.D, “Work Sharing”, infra this volume. 20 Changes to Practice for Continued Examination Filings, Patent Applications Containing Patentably Indistinct Claims, and Examination of Claims in Patent Applications. 37 C.F.R. § 1.75, 1.142(c), 1.265 (2007); Claims and Continuations Practice- Final Rule, USPTO, http://www.uspto.gov/patents/law/exam/presentation/clmcontfinalrule.jsp. 21 Tafas v. Dudas, 541 F. Supp. 2d 805 (E.D. Va. 2008). 22 Tafas v. Dudas, 511 F. Supp. 2d 652 (E.D. Va. 2007). 23 Tafas v. Dudas, 541 F. Supp. 2d at 817. 24 Tafas v. Doll, 559 F.3d 1345 (Fed. Cir. 2009). 16 17 18

54  CHAPTER IV: PATENT LAW Now, the question was whether these rules made by the PTO were within its rule-making authority. Were they procedural rules, which the PTO has the ability under statute to do; or were they substantive rules, which effectively changed the law? The district court held that they were substantive rules.25 The Federal Circuit on appeal, in a split, said that there was one rule which was substantive because it affected the number of continuation applications and it was contrary to Rule 120,26 in that it imposed conditions on continuation applications which were contrary to the statute, but that the other rules were within its rule-making authority.27 Now, where it stands now is it has been remanded down to the court in Virginia in order to determine whether these rules meet other standards, whether they are ambiguous or vague, and so on and so forth.28 So we don’t have the end to it. Of course, Judge Rader had a dissent in that case, agreeing with the district court that the rules were substantive changes.29 I am not going to go into what makes up the review of administrative decisions, such as Patent Office preliminary rules, but be that as it may, I am sure the panel will pick that up. 7. Congress Now, in the 111th Congress, which has only been around for a few months, there have been a number of bills introduced to reform our patent laws.30 The initial patent reform debate was about the United States going to a first-to-file system.31 These proposed bills do pick up the harmonization aspect and going to first-to-file, with also the accompanying post-grant opposition proceedings, other reexamination proceedings, and submission of prior art prior to issuance. That is common to all of these bills in one form or another.32 But they go much further. They also try to amend the damages aspects of our patent laws, tying the damage award to the contribution of the intention to the art. They also go on willful infringement, taking up the Federal Circuit’s Seagate decision33 and trying to take it further. They have provisions on inequitable conduct, whether that should be within the ambit of the PTO or the courts. So on and so forth. So they go beyond harmonization. The question then becomes: Under our system in the United States, should this type of patent reform be left to the courts or should it be left to the legislation to decide? I’m sure that is something our panel will take up. The other thing that has been submitted as part of the legislative reform is biosimilars.34 Now, biosimilars is not really a patent issue; it is a regulatory issue. However, it affects the patent rights. 25 See Tafas v. Dudas, 541 F. Supp. 2d at 811 (“[T]he Court finds that the Final Rules are substantive in nature and exceed the scope of the USPTO’s rulemaking authority under 35 U.S.C. § 2(b)(2).”). 26 See 35 U.S.C. § 120 (describing under what circumstances an applicant’s current application or amended application may benefit from the date of an earlier filed patent application). 27 See Tafas v. Doll, 559 F.3d 1345, 1360, 1364 (Fed. Cir. 2009) (holding “that Final Rule 78 conflicts with 35 U.S.C. § 120 and is thus invalid.”). 28 See Tafas v. Doll, 328 Fed. App’x 658 (Fed. Cir. 2009); Tafas v. Dudas, 541 F. Supp. 2d 805 (E.D. Va. 2008), appeal dismissed by Tafas v. Kappos, 586 F.3d 1369 (Fed. Cir. 2009). 29 See Tafas v. Doll, 559 F.3d at 1368 (Rader, J., dissenting). 30 See Patent Reform Act of 2009, S. 515, 111th Cong. (2009). 31 See generally Brad Pedersen & Vadim Braginsky, “The Rush to a First-to-File Patent System in the United States: Is a Globally Standardized Patent Reward System Really Beneficial to Patent Quality and Administrative Efficiency”, 7 Minn. J.L. Sci. & Tech. 757 (2006). 32 See, e.g., Patent Reform Act of 2005, H.R. 2795, 109th Cong. (2005). 33 In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc). 34 See To Provide Affordable, Quality Health Care for All Americans and Reduce the Growth in Health Care Spending, and for Other Purposes, H.R. 3962, 111th Cong. (2009); Patient Protection and Affordable Care Act, H.R. 3590, 111th Cong. (2009).

PART A: AN OVERVIEW OF U.S. PATENT LAW DEVELOPMENTS  55

Biological drugs are not subject to the Hatch-Waxman Act,35 which covers small-molecule drugs. Now the effort is in Congress to bring those under a similar sort of statutory scheme. Again, this is not what you would call patent reform, but it is something that affects patented rights in how they can be asserted and how they can be defended against, bringing again the distinction between the life sciences industry and the high-technology industry and the different balance that they each have, and should patent reform be on a scientific basis or an industry basis, or should that be divorced from patent reform totally and that dealt with in the regulatory framework, like Hatch-Waxman? So I leave you with these questions. That is for the moderator to address: • Is there a consensus as to what areas will benefit from patent reform in the United States? • Have the recent rulings of the Supreme Court and the Federal Circuit addressed many of the major concerns that people were complaining about? • Should we leave it to our courts—for example, on the damages issue—to decide what the law should be and leave it to our common-law system in order to work out the kinks, or should it be by legislative reform? PROF. ADELMAN: Dimitrios has thrown out a great deal of material for our discussion. But I think there are a few other things that perhaps ought to be mentioned as we begin our discussion. There was a very important decision on inequitable conduct after what I thought was perhaps the worst decision that the Federal Circuit made in Aventis.36 Star Scientific37 laid out a pretty difficult path for one to prove inequitable conduct, again, perhaps, the Federal Circuit working to get the law right. We ought to toss that out. Of course, they also worked en banc on design patents in a very important design patent case.38 The In re Kubin case39 is more than just an obviousness to try. It changes the In re Deuel doctrine,40 which essentially made all gene patents patentable, effectively writing out obviousness, and it actually reinserted the test that is applied in Europe and in Japan. Quite an important decision that ought to be thought about in terms of the work of the Federal Circuit. I could mention a few more. Perhaps, at least, I’ll mention one more. In terms of money, the most important case was the Plavix case,41 upholding the patent on Plavix. I think it is correct. I’ll debate that with anybody. The Federal Circuit again got that right. We might then talk, if we are talking about the Supreme Court, which generally gets things wrong—generally; they’ve had a couple of successes—compared to the Federal Circuit, my money is on the Federal Circuit, in spite of what a wrongheaded district judge said this morning. Well, let’s start off. Brian, do you want to make some comments, and then we can go down the line? MR. MURPHY: Sure, Marty. Maybe two opening comments. I’ll try to keep it brief and move back and forth. On patent reform, the issue that killed the legislation last year was the fight between pharma and the microelectronics industries over damages. The microelectronic industries wanted to pass legislation incorporating into the statute a specific method for calculating damages that would value a patented invention based on its perceived incremental value or improvement over what was already known in the prior art, an incredibly difficult standard. Pub. L. No. 98-417, 98 Stat. 1585 (codified as amended at 35 U.S.C. § 156) (1984). Aventis Pharma Deutschland GmbH v. Lupin, Ltd., 499 F.3d 1293 (Fed. Cir. 2007). 37 Star Scientific, Inc. v. R.J. Reynolds Tobacco Co., 537 F.3d 1357 (Fed. Cir. 2008). 38 Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir. 2008) (en banc) (modifying design patent infringement analysis). 39 In re Kubin, 561 F.3d 1351 (Fed. Cir. 2009). 40 In re Deuel, 51 F.3d 1552 (Fed. Cir. 1995). 41 Sanofi-Synthelabo v. Apotex, Inc., 550 F.3d 1075 (Fed. Cir. 2008). 35 36

56  CHAPTER IV: PATENT LAW I am happy to say—I have been following the legislative debate pretty closely—there seems to be some renewed optimism and momentum for the legislation. The Senate Judiciary Committee has taken it up actively, with some powerful senators who have forged what I believe is the right consensus on the issue, which is why they have called it the “gatekeeper function.”42 What does that mean? It means they are doing away with this proposed standard on reasonable royalty damages and they are proposing that the judge be the gatekeeper, as the trial judge always has been, for what evidence comes in on the damages question. If you can make a case that there is substantial evidence that it is not speculative, that the expert’s theory is reliable, the evidence will come in, you can make whatever damage you wish. That seems to have resolved politically that problem, although we’ll see if the momentum holds and we actually have legislation. Second point. In re Kubin43 is an incredibly important decision. Because Judge Rader drafted the decision, on this panel today I think we should discuss that in more detail. I think the key is, the way I read the decision, Judge Rader was very careful to point out that the claim was a genus claim for a DNA sequence that coded for a protein. The protein was identified and known in the prior art. The protein’s importance—it was a target protein on an antigen—was known in stimulating the immune response. There was nothing in the patent specification or the claims that suggested that the manner of isolating and sequencing the DNA was in any way new, improved, or different. It was isolated in sequence by “conventional methods.”44 On that basis, this was, I think, one of the first, if not the first, Federal Circuit applications of obvious-to-try doctrine since KSR,45 and it is certainly a seminal case in the biotechnology space that changes the landscape for everyone drafting patents and for trying to enforce and protect those kinds of claims. PROF. ADELMAN: Well, it’s funny you should say that this is unique, although it was unique. But U.S. law has been an outliner. That’s exactly how the European Patent Office or the Japanese Patent Office looked at the problem: how did you find the gene; was there something inventive? Indeed, even in the most famous case in the Federal Circuit which upheld the patent for EPO and made Amgen a multibillion-dollar company46—right or wrong, you could argue—the obviousness turned on the method of finding the gene. So Deuel went off the reservation. I have to say in front of Judge Rader he brilliantly took it— JUDGE RADER: That means he agrees with me. It has nothing to do with whether I was right or not. PROF. ADELMAN: In my world it does. Anyhow, maybe we’ll have some more questions. I do agree that that’s terribly important. And mentioning damages, Judge Rader—I don’t want Judge Rader to be the total focus— just sat as a trial judge and dealt very effectively with a damage issue in a trial court opinion. You’re saying that Congress is really suggesting that is the way to go? MR. MURPHY: Absolutely. It was an explicit deal that was resolved to put this language in the patent that essentially just says: “Look, your trial judge is your gatekeeper. In the pretrial motions in limine, Daubert motions,47 if you want to challenge an expert’s theory, you can See generally S. Rep. No. 111-18, pt. 1, at n.41 (2009). In re Kubin, 561 F.3d 1351 (Fed. Cir. 2009). 44 Id. at 1356 45 KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398 (2007). 46 Amgen Inc. v. Hoechst Marion Roussel, Inc., 457 F.3d 1293 (Fed. Cir. 2006). 47 The “Daubert Trilogy” of cases, Daubert v. Merrell Dow Pharmaceuticals, Inc., 509 U.S. 579 (1993), General Electric Co. v. Joiner, 522 U.S. 136 (1997), and Kumho Tire Co. v. Carmichael, 526 U.S. 137 (1999), codified in Fed. R. Evid. 702, together establish rules for the admissibility of expert testimony. “Daubert motions, typically presented in motions in limine, are usually initiated by defendants to exclude expert testimony that would be proffered at trial by plaintiffs.” Elizabeth M. Schneider, “The Changing Shape of Federal Civil Pretrial Practice: The Disparate Impact 42 43

PART A: AN OVERVIEW OF U.S. PATENT LAW DEVELOPMENTS  57

challenge it through the normal course and the judge will decide what damages theories get tried and which damages theories don’t have substantial evidence to support them or are too speculative.”48 The important point of that decision is it seems to have unblocked the major problem with getting harmonization and patent reform legislation passed last year. That was clearly the roadblock. It conceptually seems to have been unblocked. I’m not a Capitol Hill insider, so I don’t know the realities of what that means. I do know, as Dimitrios said, there are several competing bills, which may gum up the works, and senators can inhibit progress on a bill like that if they wish. It would be unfortunate, because I think, by and large, there is bipartisan support for most of the provisions in that bill. S.515 is the bill I’m speaking of specifically.49 PROF. ADELMAN: Brian, is there anything in the bill that is needed? MR. MURPHY: Well, the harmonization provisions, certainly, first to file. Doing away with obviously the interference practice is affecting a lot of people, but I think everyone is in support of that. It is long overdue. No one disagrees with that. Post-grant review is a good thing, although of course we in the States need to have our discovery. I think what that means is if it were to pass the PTO is going to have to set up a new system that will be an awful lot like the ITC, if you’re familiar with the International Trade Commission proceedings.50 It’s a “rocket docket” proceeding. It all has to be done and decided, final determination, within one year. That is going to be very hard for the Patent Office to manage. So those are absolutely needed, and I think important. The rest of Dimitrios’s other points I think are useful in the legislation. PROF. ADELMAN: Eric, some comments? MR. KIRSCH: My comment really has to do mostly with Bilski. I recently read an amicus brief in support of certiorari for Bilski. It was very interesting. It was written by the Boston Patent Law Society.51 One of the things they pointed out was they went back and they took a look at a number of very important inventions, and they took a look at the claims and realized, “Hey, wait a minute. These don’t pass the machine-or-transformation test.” I just thought that that was really very interesting. I wanted to share that with the group here. For example, one of the claims was “a method for modulating the frequency of electromagnetic radiation.” It’s not a machine, it doesn’t transform an article, so that doesn’t pass. They pointed out a number of examples. A famous vaccinologist, Hillman, a number of his inventions also didn’t pass muster under the machine-or-transformation test. So I guess it surprises me that this new rule has created something where very famous and useful inventions fall off the table, and yet there is nothing on the legislative front to counter that. PROF. ADELMAN: That’s fascinating. So one of the briefs is actually pointing out that this language, at least interpreted narrowly, knocks out a lot of great inventions. MR. KIRSCH: Yes, exactly. I guess perhaps I differ with you, that I don’t think that the machine-or-transformation test as set forth in this amicus brief—and I can send you a copy—I don’t think that they construed the machine-or-transformation test narrowly. I think they just sort of gave it a very straightforward, literal interpretation. on Civil Rights and Employment Discrimination Cases”, 158 U. Pa. L. Rev. 517, 551 (2010). For a discussion of the Daubert Trilogy of cases, see generally David E. Bernstein & Jeffrey D. Jackson, “The Daubert Trilogy in the States”, 44 Jurimetrics J. 351 (2004). See S. Rep. No. 111-18, pt. 1, at n.41 (2009). S. 515, 111th Cong. (2009). 50 See generally U.S. Int’l Trade Comm., Guidelines for Hearings, available at http://www.usitc.gov/secretary/ hearings/PUB3183.pdf. 51 Brief for Boston Patent Law Association as Amici Curiae Supporting Petitioners, Bilski v. Doll, 129 S. Ct. 2735 (2009) (No. 08-964), 2008 WL 1842278. 48 49

58  CHAPTER IV: PATENT LAW PROF. ADELMAN: Fine. I like this.

Do you think the Supreme Court would be influenced by the fact that important inventions would become unpatentable? MR. KIRSCH: I hope so. PROF. ADELMAN: Our Supreme Court? MR. KIRSCH: I hope so. PROF. ADELMAN: You’re an optimist. [Laughter] Bill? MR. McCABE: What I was thinking about, sitting here, in terms of trying patent cases, is just how level is the playing field and what’s on each side? On the plaintiff’s side or the patent holder’s side, we have the presumption of validity and willfulness,52 and on the defendant’s side inequitable conduct.53 Those are just some of the things I was thinking about. With the presumption of validity, we have this fiction in the United States that the patent examiner actually reads the material that is submitted to the Patent Office. I know Marty has talked a lot about this, in terms of the vast volumes of material. Sometimes you’ll see a patent that there might be a handful of references on. Other times the references, just the listing, could go on for pages and it’s the equivalent of boxes and boxes of material. There is this presumption that the examiner has actually read all of that, which is great when you are the patentee and you come into court with the gold seal, and you hold it up and say, “Well, it’s presumed valid, clear and convincing evidence,” and you want to say that over and over again. And now, something like KSR comes down.54 KSR doesn’t impact the fiction whether the examiner has read that material, but maybe it will impact the presumption when it comes to obviousness that the standard that the examiner applied, because presumably the examiner was doing the right thing—so the examiner was applying the pre-KSR standard—so maybe that presumption is not as great, or maybe it shouldn’t be there anymore. I have been looking to see has if that come up in the cases, and I haven’t seen that yet. But I think that is something that should be addressed by the courts, that when it comes to obviousness for a patent that was examined pre-KSR we should rethink the presumption. On the willfulness side of the world, I think the Seagate decision is a good decision in terms of really putting a standard to willfulness,55 although even with that decision I think that willfulness is found probably about as often as it was pre-Seagate. If you looked in the fall in terms of jury instructions, when juries would rule on willfulness, the instructions were all over the map. Some actually followed Seagate. Some followed the old law. The results were just about the same pre-Seagate and post-Seagate. So I think that still needs some time to percolate through to level that playing field. On inequitable conduct, the Star Scientific case56 was mentioned. My recollection of that case was it pointed to the inference of intent, saying that if you are going to infer intent it has to be the single most reasonable inference. Again, I guess the pendulum is swinging, because we started way back when with it can’t be gross negligence to fail to disclose some material information.57 52 See generally Joshua D. Sarnoff, “Bilcare, KSR, Presumption of Validity, Preliminary Relief, and Obviousness in Patent Law”, 25 Cardozo Arts & Ent. L.J. 995 (2008). 53 See generally Monica A. De La Paz, “Inequitable Conduct: Overview and Current Concepts”, 22 No. 2 Intell. Prop. & Tech. L.J. 12 (2010). 54 KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398 (2007). 55 In re Seagate Tech., LLC, 497 F.3d 1360, 1370–72 (Fed. Cir. 2007) (en banc). 56 Star Scientific, Inc. v. R.J. Reynolds Tobacco Co., 537 F.3d 1357 (Fed. Cir. 2008). 57 See Kingsdown Med. Consultants, Ltd. v. Hollister Inc., 863 F.2d 867 (Fed. Cir. 1988).

PART A: AN OVERVIEW OF U.S. PATENT LAW DEVELOPMENTS  59

Then it got to “known or should have known,”58 so moving down. Now it’s “the single most reasonable inference,”59 which may be okay, but I think people need to realize that there needs to be some balance and that we are asking people to make disclosures to the Patent Office and to behave in a certain way and that they know what the consequences are. While it is often written that inequitable conduct is a plague, I would argue that willfulness is kind of the plague that balances that, that the patentee has this opportunity to come at you for enhanced damages, and it’s nice when the defendant has an opportunity to stop the patentee and perhaps recover attorney’s fees. Since, probably like all of these guys, we are on both sides of the fence on probably every case, where there are patents going both ways, I wouldn’t have any problem arguing the other side of any of that. But I think that it is good to see the playing field somewhat leveled with the various cases. PROF. ADELMAN: Judge Rader? JUDGE RADER: Just a few quick comments and then we can discuss. I don’t think the Federal Circuit would feel that its test was reversed in KSR.60 As a matter of fact, it has since in at least a half-dozen opinions reaffirmed the use of the TSM test as in fact nothing more than a very broad statement of the requirement that you must have evidence from before the time of invention in order to analyze invention properly.61 I think the Federal Circuit would perceive that the Supreme Court condemned a rigid application of the obviousness doctrine but that the Federal Circuit had in general been using a very flexible test anyway, and that its standard was essentially adopted by the Supreme Court, with the interesting exception of the biotechnology area, where the Federal Circuit did see that it required the United States to conform with the world standards on biotechnology. It’s interesting, because I think our speaker does a lot of work with the life sciences. I’d be interested in hearing if he thinks that is going to upset expectations in the life sciences area. MR. DRIVAS: I think there is a great concern in that industry as to what the obviousness test is and whether many of these inventions can meet it now. JUDGE RADER: Can I ask another question? MR. DRIVAS: Sure. JUDGE RADER: If it is reasonably expected that you would get to the result, the claimed invention, by the application of known biotechnological methods, why would that be upsetting to the biotech/life sciences area? MR. DRIVAS: It’s more unpredictable. There are many close cases, let’s say a prima facie case of obviousness, and then you are coming back with your secondary considerations. It is going to be weighing expert testimony on each side. It makes a trial much riskier. JUDGE RADER: Isn’t that, though, pretty standard in all other areas of obviousness law? MR. DRIVAS: It should be standard everywhere. I’m just saying perception and reality are sometimes two different things. JUDGE RADER: Whereas before they had kind of an automatic pass, pass the obviousness test, now they have to worry about it. Is that your point? See Critikon, Inc. v. Becton Dickinson Vascular Access, Inc., 120 F.3d 1253 (Fed. Cir. 1997). Star Scientific, 537 F.3d at 1366. 60 KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398, 400 (2007) (“The Federal Circuit addressed the obviousness question in a narrow, rigid manner that is inconsistent with § 103 and this Court’s precedents.”). 61 See, e.g., Cordis Corp. v. Medtronic Ave, Inc., 511 F.3d 1157, 1172 (Fed. Cir. 2008) (citing Takeda Chemical Indus. v. Alphapharm Pry., Ltd., 492 F.3d 1350, 1357 (Fed. Cir. 2007) (“As long as the [TSM] test is not applied as a ‘rigid and mandatory’ formula, that test can provide ‘helpful insight’ to an obviousness inquiry.”)); Takeda Chemical Indus., Ltd. v. Alphapharm Pty., Ltd., 492 F.3d 1350, 1359 (Fed. Cir. 2007) (the court’s reasoning is compatible with the TSM test as it required a specific reason as to why a certain option was “obvious to try”). See generally Emer Simic, “The TSM Test is Dead! Long Live the TSM Test! The Aftermath of KSR, What Was All the Fuss About?”, 37 AIPLA Q.J. 227 (2009). 58 59

60  CHAPTER IV: PATENT LAW MR. DRIVAS: I guess so. JUDGE RADER: No, you don’t have to tell me. MR. DRIVAS: There’s a lot of uncertainty out there as to how you try these cases. A lot of

these inventions are narrow advancements over the prior art, small-molecule drugs or whatever, but there is a lot riding on them. So it has just created an apprehension that the test has changed and that the courts are going to be applying a different standard than they have in the past. JUDGE RADER: But another observation which I would urge you to take a look at in Federal Circuit law is that the Federal Circuit seems to have shifted a great deal of attention to the secondary considerations and the objective criteria. It may be that it is a little harder, a little more uncertainty, in the area of the prima facie test after Kubin,62 but with a strong set of secondary considerations you might be able to overcome that uncertainty. MR. DRIVAS: I think that’s right. And I think trial lawyers will have to focus on—I wouldn’t even call them secondary considerations, because they are objective evidence of nonobviousness—and focus on that part of the case. It’s sort of a burden shift—not really—but as a trial lawyer you’ve got to consider it a burden shift that you’ve go to come forward with that evidence and you have to persuade the trier of fact and law as to what the evidence really shows on balance. That’s a challenge in many instances. JUDGE RADER: That’s a revealing exchange. On Bilski,63 the comment there is that is very much a question of going back to the future, to use a Hollywood allusion there. The test of machine-or-transformation is not a new test. It was used by the Supreme Court as early as the early 1970s in the Benson case.64 The Federal Circuit and its predecessor, the Court of Customs and Patent Appeals, labored for about twenty years to make sense of the machine-or-transformation test. We had dozens of opinions going one way or another on trying to decide how much transformation was sufficient, how much of a link to a machine was necessary. You are going to see a replay of all that. If I were a prophet, I would say ten years from now we will once again look at it and say: “It hasn’t worked for a second time,” and so we’ll go back to back to the future and probably have something that is more like the State Street Bank case,65 which was really meant to solve the problem of the machine-or-transformation test. But, of course, we are in the middle of that process, not at the end. On Tafas,66 the only comment there is the one part of the rules which was struck down may have been the most important one. It allows unlimited continuations.67 With unlimited continuations, you can probably write as many claims as you need to, thus eliminating the limitation on claims, and you probably have opportunities to supplement your record often enough that you can avoid some of the disclosure requirements. The one part of the test which the Federal Circuit struck down probably leaves the PTO without much of a change at all in their procedural rules. I have spoken to two of the three major candidates to replace the PTO Director, and those two at least would pull down the rules as soon as they come into power because they don’t make much sense with the unlimited continuations in place. The Federal Circuit has already established that. Well, we could talk about all the different reform provisions. I have watched the Hill process. I agree that what the Senate has done is try to conform as close as it can to the bill that the House passed last time, and they are in pretty close proximity. So there is a better-than-even chance that we will have a patent reform bill by the end of the year. In re Kubin, 561 F.3d 1351 (Fed. Cir. 2009). In re Bilski, 545 F.3d 943 (Fed. Cir. 2008). 64 Gottschalk v. Benson, 409 U.S. 63 (1972). 65 State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). 66 Tafas v. Doll, 559 F.3d 1345 (Fed. Cir. 2009). 67 See id. at 1367–68 (Fed. Cir. 2009). 62 63

PART A: AN OVERVIEW OF U.S. PATENT LAW DEVELOPMENTS  61

That’s enough maybe to get us going.

PROF. ADELMAN: We will have another session on Bilski and the European equivalents and

attempts to deal with these patents tomorrow morning at 8:30.68 I have already talked to the speakers there. It is going to be a very good session. Let me ask Dimitrios one question, when he throws up his hands with the biotech industry saying, “Oh, we now have to deal with real patent issues; before we had a pass.” What did they do in Europe, what did they do in Japan, where you have the rules now that the United States is finally adopting? MR. DRIVAS: I don’t know what they do in Europe and Japan. Let me just say this. From a trial lawyer’s standpoint, any time there seems to be a change in the rule, whether it is an actual change or not, you have the judiciaries that read these decisions, and it has to go one way or another. So now you’ve got to focus your trial on bringing in whatever evidence you can, where you might just have done your case a little differently before. I think, in response to Judge Rader’s question, the objective evidence becomes much more important, because you can have a battle of the experts sitting there as to what is obvious and what is not obvious. How do you really drive that point home, that something is obvious or not? It is always a tough question. PROF. ADELMAN: Yes. But the question then is: Have I really made a contribution or not? MR. DRIVAS: I’m not saying that. It’s just a perception within the industry that KSR69 changed the game for them. Whether it’s true or not I don’t know, but that’s the perception. MR. MURPHY: Marty, may I make one comment, please? PROF. ADELMAN: Absolutely. Go ahead, Brian. MR. MURPHY: Just on the observation in the obviousness content, particularly in the pharmaceutical industry and the biotechnology industry, I agree that proof of objective indicia of nonobviousness—whether it’s commercial success, unexpected results, synergistic results, establishment of a long-felt need—are critically important if you are the patentee. I would like to put my view forward. Sometimes it’s my impression, particularly in the pharmaceutical cases, that perhaps the courts do not give enough deference to objective evidence of secondary indicia. I would like to reinforce the comments and Judge Rader’s comment that it really should be given greater deference more consistently both in the district courts and also at the Court of Appeals among the different panels, because sometimes I detect that there is, particularly in commercial success, unless it’s the basic molecule, if it is a secondary patent on a method of treatment or a formulation, it seems to me things like commercial success can be overlooked. JUDGE RADER: Brian, that is the weakest of the objective criteria. Remember you have a nexus test whereby you must concretely link your objective evidence to the claimed invention.70 Commercial success is attributable to so many market factors and sales campaigns and advertising that separates it from the claimed invention and makes commercial success probably the weakest of the seven acknowledged objective criteria. MR. MURPHY: I don’t disagree. Although I will say that there are cases where a particular inventive formulation is crucial to delivering the drug effectively and safely that satisfies, or could satisfy, the nexus test and become the basis for commercial success. PROF. ADELMAN: Brian, you’ll be happy to read Robin Jacob’s latest effort in the court of appeal. I think we have about ten minutes left. I want to throw questions open to the audience. See Chapter IV.F, “Subject Matter, ‘Intangible’ Patents”, infra this volume. KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398 (2007). 70 See, e.g., Demaco Corp. v. F. Von Langsdorff Licensing Ltd., 851 F.2d 1387 (Fed. Cir. 1988). See generally Edward P. Walker, “Objective Evidence of Nonobviousness: The Elusive Nexus Requirement (Part I)”, 69 J. Pat. & Trademark Off. Soc’y 175, 182–83 (1987). 68 69

62  CHAPTER IV: PATENT LAW QUESTION: John Richards, Ladas & Parry.

We’ve been hearing about objective criteria for patentability from the litigator’s point of view. I am a prosecutor, and objective criteria don’t get you too far most of the time in the PTO; and, if they do, they finish up with a very narrow claim because they say that’s all that you have established your objective criteria for. I think this is actually beginning to become a serious problem following KSR.71 That was really just an observation, but I think that’s the way we are going. PROF. ADELMAN: Do you want somebody to answer, John, or is that just a comment? QUESTIONER [Mr. Richards]: It’s reality. MR. DRIVAS: I agree, because often the objective evidence doesn’t come into being for years and years after, commercial success being one, but many others—synergism or whatever else it might be, the mechanism of action or something else—that shows that your invention is different. JUDGE RADER: But your long-felt need and your unexpected results, probably the best two, are known at the time of the invention, aren’t they? MR. DRIVAS: Some of them. Some of them you don’t know you have a long-felt need until you figure out what it is a few years later. QUESTIONER [John Richards]: But even if you’ve got those, the Patent Office is going to constrain you in a way that they wouldn’t do previously. MR. DRIVAS: Right. And not only that, the examiner will not have had the benefit of that evidence in front of him or her when they allow the claims, or so on and so forth. MR. McCABE: But that’s the Patent Office’s job, right, to narrow the claims, whereas the court has just to decide whether the claims as written are valid or not? QUESTIONER [John Richards]: But, surely, it is the objective of all of us to make sure that good inventions get solid patents. PROF. ADELMAN: Heinz? QUESTION: Thank you, Marty. With regard to the amendments of the U.S. patent law, which should also take into consideration the efforts of international harmonization of patent law, it surprises me only that one important point in your country is left out, the point which is used as a stumble-stone for further harmonization in the world. This is the stipulation in your country that when you file first the patent application and declare not to file abroad you must not have that application published after eighteen months. The usual early publication after eighteen months does not take place in these very few cases, which are for big industry of no interest at all because they probably come mainly from smaller industries or individual inventors. But this matter is used by European big industry to kill further harmonization, because they say, “As long as the Americans don’t amend their law and go to 100 percent early publication after eighteen months, we cannot agree to improvements of the law of harmonization, period.” This is what surprises me. I cannot imagine that this little piece in your law that prevents early publication after eighteen months is so important for the rest that you give up—and that is a fact, you give up—thereby the full harmonization of the world which is killed— JUDGE RADER: Okay, we’ve got your point, Heinz. The point that I would respond is we are changing our ancient first-to-invent standard to first-to-file. It’s your turn. You move next. QUESTIONER: Okay, that’s great. JUDGE RADER: We have taken the largest step unilaterally. It’s your turn. May I suggest that you adopt a grace period? 71

KSR, 550 U.S. 398.

PART A: AN OVERVIEW OF U.S. PATENT LAW DEVELOPMENTS  63 QUESTIONER: We cannot do that, because in order to— JUDGE RADER: That’s the next step. It’s your turn. We took our step. You take yours. QUESTIONER: The fact is that the big European industries use your stipulation not to

publish after eighteen months as a stumble-stone. PROF. ADELMAN: But, Heinz, they’ll use any argument. JUDGE RADER: We have political problems too. But the point is we are taking a step unilaterally. Now you take one. QUESTIONER: But you are the loser, because you lose many, many patents in Europe because your people publish earlier and when they come to Europe they are very astonished that they see we have no grace period. JUDGE RADER: I agree with you. QUESTIONER: You could immediately change that situation with this little step. It is a bad situation for your industries. I am really surprised that there is no effort to put that little piece in your amendment of the law to have 100 percent publication after eighteen months. JUDGE RADER: Only two comments. It is a very little piece, so it isn’t worth the angst that it is given, which tells you that the real problem is not with us changing a little piece; the real problem is that Europe won’t meet us halfway. We are getting rid of first-to-invent. It’s your turn to meet us half-way. PROF. ADELMAN: Joachim? QUESTION: I have two questions. First of all, which was the Supreme Court opinion that was correct? JUDGE RADER: Microsoft v. AT&T.72 PROF. ADELMAN: That one is clear, Microsoft v. AT&T. In fact, they have taken en banc another one that involved a method, which also totally prejudices U.S. manufacturers vis-àvis foreign competitors. That, of course, in my definition is madness, to pass a patent law that screws your own companies. So I’m sure the Federal Circuit will fix that en banc. But it took the Supreme Court to fix the same issue when it involved a computer program that was shipped abroad. Now, again, you must have brought this up because you know that Justice Ginsburg in her opinion essentially copied the Rader dissent. In a key portion she just quoted from it.73 But that’s the substance of it. QUESTIONER: I have a second question on willfulness. Is there still the rule that if in the first instance the action for infringement is dismissed, so the first instance court says, “No infringement,” and then you go to the CAFC and the CAFC says, “No, no, no, there is infringement, and not only is there infringement, there is willful infringement”—is that still possible in your court? If a judge at first instance regards something, which probably has the same reasoning as what the— JUDGE RADER: I can’t imagine a circumstance where it would be. Willfulness is a factual finding of deliberate intent. You couldn’t make that factual finding on appeal without an underlying finding of— MR. MURPHY: Under Seagate,74 I would think if you applied Seagate to that set of facts, you would say as defendant that “objectively the district court thought the patent was either invalid or not infringed, so how could I possibly be willful?” QUESTIONER: But I think there are decisions, earlier ones, where such a situation could have happened. My question is: If you take a first instance judge as a consultant for the Microsoft Corp. v. AT&T Corp., 550 U.S. 437 (2007). Id. at 453 (“Judge Rader, dissenting, noted that ‘supplying’ is ordinarily understood to mean an activity separate and distinct from any subsequent ‘copying, replicating, or reproducing-in effect manufacturing.’” (quoting AT&T Corp. v. Microsoft Corp., 414 F.3d 1366, 1372–73 (Fed. Cir. 2005) (Rader, J., dissenting))). 74 In re Seagate Tech., LLC, 497 F.3d 1360 (Fed. Cir. 2007) (en banc). 72 73

64  CHAPTER IV: PATENT LAW defendant, for the alleged infringer, and he tells you, “No, no, there is no infringement,” and then you come to your court, Randy, and you say, “Oh, I don’t care what the first instance court said because I know better, and not only that, you are a willful infringer because you should have known”—is that still a possibility? JUDGE RADER: I don’t think so. PROF. ADELMAN: We’ve got two minutes. Any further questions from the audience? QUESTION: Rich Jaworski with Cooper Dunham. This is for Judge Rader. I have a question regarding Bilski.75 It seemed to leave open a lot of questions as far as “is a computer considered a particular machine,” and also regarding Beauregard claims.76 I understand there was a recent California case that knocked down a bunch of Beauregard claims. If you could comment? JUDGE RADER: Not on those specific cases, of course—they are on their way. But I think there is a significant question as to whether the Alappat rule,77 which is that you can show adequate transformation just by recognizing that electrons have been moved from one data structure to another—I think that’s in question again. And so we are going to have to work these things out through a series of cases such as the ones that you say are on their way to the Federal Circuit. Yes, the Beauregard claims are in question now. PROF. ADELMAN: One more quick question? If not, let me thank our speaker and our panelists.

In re Bilski, 545 F.3d 943 (Fed. Cir. 2008). Beauregard claims involve a computer-readable medium such as a floppy disk or CD-ROM, containing a set of instructions that causes a computer to perform a process. See Victor Siber & Marilyn S. Dawkins, “Claiming Computer-Related Inventions as Articles of Manufacture”, 35 IDEA 13 (1994). The Beauregard case was a test case brought by Victor Siber, IBM’s chief patent lawyer at the time, to test the legal theories advanced in his IDEA article. See In re Beauregard, 53 F.3d 1583 (Fed. Cir. 1995). 77 In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994). 75 76

Chapter IV

Patent Law Part B: Patent Law Developments in Japan Moderator John Michael Richardson

Attorney, AAA Arbitrator (New York, N.Y.) Speakers

Hon. Sumiko Sekine

Prof. Kazuo Makino

Judge, Tokyo District Court, Intellectual Property Division

Omiya Law School (Tokyo)

Shimako Kato

Abe, Ikubo & Katayama (Tokyo) Panelists Lord Hoffman

House of Lords, Parliament (London)

John Richards

Ladas & Parry (New York, N.Y.)

Prof. Dr. Peter Meieir-Beck

Patents Chamber, German Federal Supreme Court (Karlsruhe) MR. RICHARDSON: I am John Richardson. My badge says “State of New York.” I have nothing to do with the State of New York other than living there, so I have crossed it out. I was born in the United Kingdom, but I have lived in New York for forty years. Let me introduce our distinguished speakers. We have Sumiko Sekine, who is a Judge in the Tokyo District Court. We have Shimako Kato, who is a practitioner with Abe, Ikubo. We have Professor Kazuo Makino from the Omiya Law School in Tokyo. Our panelists are Lord Hoffmann, who needs no introduction; Professor Meier-Beck from the German Supreme Court; and John Richards.

66  CHAPTER IV: PATENT LAW Just a few introductory remarks. My preparation for this has left two impressions on me. One is the high failure rate for patents in Japan when you take into account findings of noninfringement or findings of invalidity. It is a country known for high volume of applications, but clearly it is not easy to get a patent found valid and infringed. The second point I take away is that in the Angiotech Taxol case1 they came to a different result than in the Netherlands2 or in the United Kingdom.3 That is, the patent was found invalid for obviousness. My career started some time ago, and in those days Japan was characterized as having a German-influenced system. You had a publication pre-grant for opposition. You had infringement decided by the courts but validity decided by the opposition proceeding or by the invalidation trial by the Patent Office. You had employee inventions. Now, I can’t describe any of these things in Japanese, but I guess I could show off to Meier-Beck about arbeitnehmers and auslegeschrifts and all that, but we won’t even bother. Japan was characterized also by a strict rule, a strict and easy rule to understand, that you had to have a technical application of the law of nature, but you had fairly limited claims, an aversion to litigation, and a huge volume of applications, both utility models and regular utility applications. There has been a change, and we are going to have some discussion of the change. The pre-grant went to post-grant opposition, and then the opposition was eliminated, and we now have the invalidation trial in its own right as the means of dealing with validity in the Patent Office. The courts started to open the door to considering arguments about invalidity and infringement proceedings. That has now been essentially codified by the Japanese Patent Law in Section 104-3,4 so we now have what I think is going to be referred to as a dual-track system: You can go after the patent in the Patent Office or you can go after the patent in the court. The volume of applications is still high for utility patents, but the utility model system is essentially, it seems to me, being phased out. On employee inventions, there has now been legislation to try to make it satisfy the demands of employees for better compensation or a better way of determining compensation, but also try to preserve some certainty for the employers. With that, I will ask Judge Sekine to start off. JUDGE SEKINE: Thank you. [Slide] I sit in Tokyo District Court, which is one of the two courts which hear patent infringement lawsuits. Patent infringement lawsuits are heard in Tokyo and Osaka District Courts, and then an appeal goes to the IP High Court, and the final appeal goes to the Supreme Court. [Slide] On the other hand, there is the patent invalidation procedure. The patent invalidation procedure commences with a request for a trial for invalidation to JPO. If unsatisfied with the trial decision, an action against that decision to the IP High Court may be instituted. Its appeal, which is the only appeal, goes to the Supreme Court. So we have dual tracks of patent litigation. [Slide] As to the question whether invalidity of patents can be determined in an infringement suit, it has been our jurisprudence that the validity of a patent cannot be determined in an infringement suit for about 100 years. However, such jurisprudence was overturned by the judgment of the Supreme Court in the so-called “Kilby” case in 2000, which held the court Angiotech Pharms. Inc. v. JPO; Decision on November 22, 2007 by the IP High Court. Conor Medsystems Inc. v Angiotech Pharms. Inc., Case no. 258022 / HA ZA 06-261 (The Hague District Court, Jan. 17, 2007), available at http://www.ipeg.com/_UPLOAD%20BLOG/Conor_Angiotech%2017jan07%20ENG. pdf. 3 Conor Medsystems Inc. v Angiotech Pharms. Inc., [2008] UKHL 49, [2008] R.P.C. 28. 4 Japan Patent Law, Law No. 121 of Apr. 13, 1959 (as amended), available at http://www.wipo.int/clea/docs_new/ pdf/ en/jp/jp006en.pdf. 1 2

PART B: PATENT LAW DEVELOPMENTS IN JAPAN  67

hearing a patent infringement suit can determine whether it is obvious that the patent has a ground for invalidation.5 Then, in 2004, Article 104-3 was enacted. It was effective as of April 1, 2005.6 [Slide] Paragraph (1) of Article 104-5 states: “Where, in litigation concerning the infringement of a patent right or an exclusive license, the said patent is recognized as one that should be invalidated by a trial for patent invalidation, the rights of the patentee or exclusive licensee may not be exercised against the adverse party.” This means an allegation of invalidity may be advanced without waiting for a trial decision finding invalidity of the patent to be made final and binding through the trial procedure for invalidation. [Slide] Paragraph (2) of the Article (Restriction on exercise of rights of patentee, etc.) states: “Where the court considers that the materials used for an allegation of defense under the preceding paragraph are submitted for the purpose of unreasonably delaying the proceedings, the court may, upon a motion or ex officio, render a ruling to the effect that the allegation or the defense is to be dismissed.” [Slide] Since the “Kilby” judgment, allegations of invalidity are being advanced quite often in infringement suits. A statistic of the private sector shows that an allegation of invalidity was advanced in nearly 80 percent of all cases terminated by judgment in the years 2005 and 2006. [Slide] Although it is not required to file a request for trial for invalidation to advance an allegation of invalidity in an infringement suit, it is often the case that a defendant alleges invalidity of the patent and also files a request for a trial for invalidation. So invalidity is determined in both the infringement suit track and the JPO track. [Slide] When a trial for invalidation is filed, the patentee may request for a correction of claims to restrict the scope of claims during the trial, or when a trial decision for a patent invalidation is made, the patentee may file a trial for correction of claims within ninety days from the day an action against a trial decision in the trial for invalidation is instituted. [Slide] If it is possible to avoid the patent being invalidated by restricting the scope of claims by correction, the patent shall not be recognized as one that should be invalidated by a trial for invalidation, as stated in Article 104-3. If the accused product falls within the technical scope of the invention defined by corrected claims, the patentee is entitled to exercise his patent right. [Slide] Actually, the “Kilby” judgment indicated when a special circumstance, such as correction of claims, exists in the case, exercise of the patent rights will not be restricted. It became the practice of lower court since the “Kilby” judgment to determine correction of claims as a special circumstance. Although Article 104-3 did not stipulate correction of claims as a counter-allegation, there are several judgments of lower courts which adopted allegation of claims as counterallegations, even after 104-3 was enacted. [Slide] So in our current practice we consider whether there is infringement or not and then the invalidity of the patent. When the patent is found invalid, we next consider whether there is a correction of claim. When there is a correction of the claim, then the invalidity and infringement issue comes up again. [Slide] I cited some of the relevant articles, which I will skip. [Slide] The court of infringement suit rarely stays the case until the trial decision or a judgment against the trial decision is made. However, that does not mean the infringement court proceeds with its case regardless of the outcome of the invalidation procedure, because 5 Texas Instruments Inc. v. Fujitsu Ltd. (“Kilby” case), Case 1998(O)No. 364 (Japanese Supreme Ct., April 11, 2000), English translation available at http://www.softic.or.jp/en/cases/Texas_Inst_v_Fujitsu.html. 6 Japan Patent Law, Law No. 121 of Apr. 13, 1959 (as amended), Art. 104-3 (Restriction on exercise of rights of patentee) (effective April 1, 2005).

68  CHAPTER IV: PATENT LAW when a decision to invalidate the patent becomes final and binding, the patent will be publicly invalidated. The same applies to a trial decision to restrict the scope of claims by correction. So the court, in fact, sometimes waits for the outcome of the invalidation procedure. Another problem is there is no limitation of time for requesting a trial for invalidation. [Slide] Now I would like to introduce a Supreme Court judgment.7 This is the first judgment by the Supreme Court regarding the allegation of invalidity after enactment of 104-3. The facts are as follows. Patentee X sued Y, seeking an injunction and damages, alleging the product by Y fell within the scope of Invention 5, which was written in Claim 5, and Y alleged the patent concerning Invention 5 is invalid. The judgment at first instance adopted the allegation of invalidity and dismissed the claim of X. [Slide] Then X filed an appeal and X also filed a request for a trial for correction with regard to Claim 5. Y also alleged invalidity in the second instance as well. Then, X withdrew the first request and filed a second request for a trial for correction. [Slide] The trial examiner made a trial decision to the effect that a second request for a trial for correction cannot be filed. X withdrew the second request. Meanwhile, the court of second instance concluded its oral argument. X filed a third request for a trial for correction with regard to Claim 5. Then, in the infringement suit, the court of second instance dismissed X’s appeal. X filed a final appeal. X withdrew the third request and filed the fourth request for the correction. Then X withdrew the fourth request and filed the fifth request. The trial examiner made a trial decision to the effect that the claim should be corrected according to the fifth request. So the question here is the court of second instance rendered a judgment to dismiss the claim of X by adopting Y’s allegation of invalidity. After that, a trial decision to allow a correction for the purpose of restricting the scope of claims came out and it became final and binding. So X now challenges the determination of the court of second instance that there is a ground for retrial. [Slide] The Supreme Court judgment determined that where the court of second instance rendered a judgment to dismiss the claim for damages, etc., for infringement of a patent right by adopting an allegation of invalidity and then a trial decision to allow correction for the purpose of restricting the scope of claims became final and binding, it is impermissible, in light of the purpose of 104-3 of the Patent Act, to challenge by arguing there exist grounds for retrial. [Slide] The basic idea of the Supreme Court is shown in the reason that the purpose of 104-3 is “to solve disputes on infringement of patent rights within the procedures for patent infringement suit to the greatest possible extent, thereby achieving prompt solution to such disputes.” Also, that Paragraph (2) is to be construed “to prevent a delay in court proceedings that would occur when the court conducts examination and determination on an allegation of invalidity.” [Slide] The Supreme Court clarified that in light of such purport of the provision of paragraph (2) of said Article, the court may dismiss an allegation advanced to deny or overturn 7

See Minshu Vol. 62, No. 5.

PART B: PATENT LAW DEVELOPMENTS IN JAPAN  69

an allegation of invalidity (“counter-allegation”) if it is found to have been advanced for the purpose of unreasonably delaying the proceedings. I think I still have some time left, but I will finish my presentation now. Thank you very much. MR. RICHARDSON: Thank you very much. MS. KATO: Good morning. It is my pleasure to be here today and to present recent IP developments in Japan. [Slide] My presentation today will focus on a recent decision regarding pharmaceutical patents in Japan. [Slide] There have been many lawsuits involving medical patents in Japan. That is partly because there are many kinds of medical patents. Actually, many lawsuits involving medical patents are regarding a medical use, a polymorph or forms. [Slide] There are also many points of dispute. A claim construction is the main issue in many cases, but coverage of medical use patents, prior use, exhaustion, or validity are often argued by the parties. [Slide] The famotidine case is one of the famous cases in Japan.8 Famotidine is a kind of H2 blocker and also a pharmacopeial medicine. The patent in question is directed to the Form “B” of famotidine, which is defined by the three physical characteristics described in the slide. [Slide] Taiyo, the alleged infringer, also sells famotidine. However, there is another type of famotidine, which is called Form “A” of famotidine. Taiyo argued that even if Taiyo’s products satisfied all three characteristics as described in the claim, their products didn’t fall within the claim because their products contained at least 5 percent of Form “A” of famotidine. [Slide] In this case, the court found non infringement. The main reason was the court interpreted the Form “B” of famotidine in the claim as the pure Form “B” of famotidine, and the Taiyo’s products contained at least 5 percent of Form “A” of famotidine. [Slide] Another famous polymorph case is the cefdninr case.9 The patent in question here is directed to the “A” type crystal of cefdinir, which is defined by the peaks of its X-ray diffraction patterns. [Slide] Astellas, the patentee, provides an “A” type crystal of cefdinir as a pharmacopeial standard material. Taiyo, here also the alleged infringer, manufactures and sells cefdinir as a pharmacopeial medicine.The main issue in this case was the validity of the patent. [Slide] Taiyo argued that the type “A” of cefdinir is inherently anticipated by example 16 in the prior art, but there is no description about the “A” Type crystal of cefdinir. Taiyo tried to prove it by experiments. [Slide] But Taiyo failed in that. Both the district court and the IP High Court found infringement of the patent and also the validity of the patent. The main reason was that experimental procedure and the experimental conditions adopted by the Taiyo experiments did not follow the description in the prior art. [Slide] In this case the court permitted the cease-and-desist order for the capsular product. But the outcomes were more than that. There were another two lawsuits between the parties. One was a lawsuit over fine granule products. The other was the lawsuit claiming damage for the devaluation of the drug price stemming from the illegal acts. But after the decision about the capsular product, the parties reached a settlement. In the end, Taiyo stopped producing and selling all products related to the patent in question and compensated for the devaluation. 8 9

Richter Gedeon Vegyeszeit Gyar R.T v. Taiyo Pharm. Indus. Co., Ltd. (Tokyo High Court, Apr. 28, 2004). Astellas Pharma Inc. v. Taiyo Pharm. Indus. Co., Ltd. (IP High Court, Sept. 19, 2007).

70  CHAPTER IV: PATENT LAW [Slide] The next case concerns a medical use.10 The patent in question here is a preventive drug for allergic asthma. But before amendment in the prosecution history, it covered both preventive drugs and treatment drugs. [Slide] Kyowa, the alleged infringer, also tried to sell the pharmaceutical preparation described in the claim. But their drug’s package insert stated that their product is a curative used to treat bronchial asthma. [Slide] In this case, the court permitted the injunction against the use of treatment drugs. The reason was the drug package insert of the defendant’s products stated: “Be aware that this medicine is not for relieving asthma attacks.” The court also stated that unless the use of a preventive medicine is not eliminated, the injunction of the product as treatment drug is unavoidable. In this case, the medical use which was not described in the claim was also permitted. But such a ruling may not be applicable in all cases. A current influential opinion about the medical coverage is different from this case. The opinion says, in cases in which a chemical substance X is open to the public and its medical use A is already known and a new medical use B is invented by a patentee, it would not likely be possible to stop the sale of products of other companies which are sold in a manner that makes medical uses A and B possible. So you have to be aware of it. [Slide] The final point is the most important. It is invalidity. The invalidity arguments are often powerful as defense in the infringement lawsuits. Actually, patentees have lost many infringement cases, including medical cases, because the courts found invalidity of their patents. It is said the reason why patens are found to be invalid in many cases is the high criteria to find patentability, especially inventiveness. [Slide] Talking about inventiveness, I cannot help presenting this stent case.11 It is a relevant case of the very famous case in Europe which is known as the Angiotech v. Conor case.12 That stent case was also examined in Japan. The parties were different from Europe,13 but the claim was almost the same as in the European cases, and much of the prior art was also identical to the European round, which meant Wolff and Kopia were the main prior arts. [Slide] The Board of Appeals found non inventiveness based on Wolff and Kopia, but I will skip a detailed reasoning. [Slide] Then, the case was heard by the IP High Court. The IP High Court upheld the Board of Appeals decision based on different reasoning. The court said the claim should be interpreted as “a stent coated with taxol to prevent stenosis of stent.” Also, the court stated that the anti-angiogenic effect of taxol needs not to be taken into consideration, because the claim is directed to the stent. [Slide] Further, the court stated that one skilled in the art is easily motivated to apply taxol, described as one of the effective antiproliferative agents in Kopia to the stent as described in the Wolff (obvious to try approach). [Slide] As you know, the House of Lords overturned the decision of the Court of Appeals in the United Kingdom.14 In this regards, you may understand that the criteria here to find inventiveness are very rigid in Japan. It appears so, because the IP High Court applied a similar approach to that done by the Court of Appeals in the United Kingdom. Also the IP High Court applied the “obvious to try” approach. In my view, it was not appropriate for the IP High Court to apply the “obvious to try” approach in this case. Sandoz AG v. Kyowa Pharm. Indus. Co., Ltd. (Tokyo High Court, Oct. 23, 1992). Angiotech Pharms. Inc. v. JPO; Decision on November 22, 2007 by the IP High Court. 12 Conor Medsystems Inc. v Angiotech Pharms. Inc., [2008] UKHL 49, [2008] R.P.C. 28. 13 Termo Corp. v. Angiotech Pharms, Inc. (Japan). 14 [2008] UKHL 49 (July 9, 2008) (decision of the Court of Appeal). 10 11

PART B: PATENT LAW DEVELOPMENTS IN JAPAN  71

However the IP High Court did attempt to consider a balance of the description between the present patent and the prior arts. I think, in that sense, the approach of the IP High Court is not appropriate and the standard has not deviated from other countries. Here the most difficult point was determining how the CAM assay should be assessed. Such fact finding provides the main ground for the difference in result. In that sense, the Japanese criteria per se are not so different from the other countries. [Slide] I conclude my speech by saying that patentees can still win infringement suits involving medical patents in Japan. On the other hand, however, the patentees must bear in mind that there is always the risk of the alleged infringer mounting an invalidity defense. Thank you very much for your kind attention. PROF. MAKINO: Good morning. My name is Kazuo Makino. I am teaching copyright law and patent law at Omiya Law School, in Japan. It is my great pleasure to be able to speak here, especially at Cambridge. This is my revisit to U.K. Twenty years ago, when I was a little kid—this is joking—when I was thirty years old, I was working at General Motors/Vauxhall Motors in Luton. So it is my great pleasure. [Slide] I would like to point out recent issues in Japan patent law arising from the “double track” system, which Judge Sekine already explained before. We have a couple of issues arising from this dual-track system. [Slide] Please look at this figure. Twenty-four percent—what is this? The patentee winning rate in patent infringement litigation in Japan for the previous three years, from 2006–2008. Another is 76 percent for patentees losing the infringement cases in Japan for the same period. [Slide] Another figure is 49 percent—what is this? Patent invalidated rate in patent infringement litigation for the previous three years, out of 125 court decisions in 2006–2008. Another figure is 65 percent—what is this? The patent invalidated rate out of patentee lost cases for the previous three years. So, in general, patentees can win only one out of four infringement cases while it can lose three out of four infringement cases. [Slide] So in Japan recently patent holders are losing incentive or motivation to initiate patent infringement litigation in Japan. As a result, the number of new infringement cases has slightly decreased—not greatly, slightly decreased—a 30 percent decrease comparing to 2004 and 2007. [Slide] Why this is occurring? What is the background? From my own observation I try to explain several reasons. • The first big reason is our dual-track system. • The new Patent Act Section 104-3—newly added, effective as of April 2005, four years ago. • Patent holder is not entitled to enforce its patent right against the infringer to the extent such patent is invalid. • The Court may decide invalidity of a patent by adopting this new Section 104-3 of the Patent Act. This created as a result the court track, and finally double track. So the patentee has to win in both tracks, in the court infringement cases and also in the Japan Patent Office Appellate Board. They have to win in both cases. So it has lead to the lower winning rate by the patentees in Japan. [Slide] Now the background. This is my very personal observation, but maybe this is true. • Globally sharing of prior art database, including Internet search, is one development. • It is more easy to find prior art by using a well-accumulated database. • This is a global trend. The court and the Patent Office are adopting more strict standards to determine inventive step—inventiveness, in other words.

72  CHAPTER IV: PATENT LAW [Slide] Let me observe: What should be the solution for the relatively lower winning rate of the patentees in Japan? As you know, the Japanese government started a pro-patent national policy, national strategy, back in 2002. So the patentees should win more to motivate patentees to create more useful inventions. If the patentees may lose, they would have no motivation. [Slide] What are the solutions? • So one of the solutions that is discussed is the revival of objection procedures. • Previously, we had two methods to cancel the patent in the Japan Patent Office procedures. • Anyone may object to the granting of a patent within six months after the publication of the patent. • Another is patent cancellation procedures by interested parties. • Because of the duplication of the patent cancellation system, this objection procedure has been repealed in 2003. But many specialists have said these procedures increase the quality of the patents because competitors in the same industry will object within this period. • Finally, reject poor-quality patents. To obtain high-quality patents by reviving this objection process is one of the solutions. [Slide] Other solutions: • Court judgment should have priority over Japan Patent Office decisions. So we have two alternatives: (1) If the court judgment in an infringement case is fixed, it will not be affected by the subsequent Japan Patent Office decisions. This is one of the solutions. (2) Another solution is to set up some deadline for initiating Patent Office Appellate Board procedures for patent invalidation. As Judge Sekine explained, the Supreme Court’s judgment in April last year indicates this method is effective.15 [Slide] Finally, solution number 3. This is also my personal observation: • Shorten the average court review period from initiation of the litigation until the judgment. The review period by the court for the first instance has become shorter and shorter. This is a very enthusiastic effort by the court. It is currently about fourteen months in average. It has become much shorter than compared to ten years ago, when it was twenty-eight months, i.e., two and a half years long. But currently it is approximately one year. • To shorten the court review period may favor patentees? This is my question to the distinguished audience or other speakers on the panel. If the court review period is very limited, it is very difficult for the defendant to find prior art or other defensive methods. So to shorten the court review period may finally favor the patentees. This is just my personal observation. Thank you for your kind attention. This is the end of my presentation. Thank you very much. MR. RICHARDSON: It seems to me that Japan may be showing the way a little bit. The statistics on the fate of the patent in litigation in non-infringement and invalidity are quite surprising. But maybe that is the way it should be. When I started practice, the senior partners in my firm said that they had never seen a patent they couldn’t invalidate. I think when I left the firm the senior people would be saying, “I’ve never seen anything I couldn’t get a patent on.” So in a generation there was a change. Before I go to our panelists, I just had one question, however. We have talked about how there was an opposition system pre-grant, then post-grant, and then it has been abolished. There is an invalidation trial system now. Kazuo talked about a period of time, six months, to object to a patent, or something like that. 15 See Texas Instruments Inc. v. Fujitsu Ltd. (“Kilby” case), Case 1998 (O) No. 364 (Japanese Supreme Ct., April 11, 2000), English translation available at http://www.softic.or.jp/en/cases/Texas_Inst_v_Fujitsu.html.

PART B: PATENT LAW DEVELOPMENTS IN JAPAN  73

My question to the speakers is: Does it make a difference which one of these proceedings you have as to who in the Patent Office gets the case, because if you go back to the person who granted the patent, it seems to me there is always a chance of this cognitive dissonance, as we call it, that people do not want to undo the work that they have done? I find personally that the post-grant opposition system in Japan seemed to me to be a dismal failure for anybody wanting to attack the patent, whereas it was better in the pre-grant stage. But I’m just curious. Does a different section of the Patent Office deal with invalidity claims or not? MS. KATO: Your concern may be that the judgment about the invalidation trial is in favor of the previous decision done by the Patent Office. It doesn’t happen. Invalidation trials are examined by the Board of Appeals in the Japan Patent Office, and appeal cases seeking cancellation of examiners decisions are also examined by them. They treat all cases very fair. Of course, the invalidation trials are examined and found very fair. We have also statistics about the results in district courts and also the boards of appeal in Japan regarding the same cases. In most cases they reached the same result. That means if the court finds a patent invalid, the board of appeals also finds it invalid. That also shows fair examination of invalidation trials by the JPO. MR. RICHARDSON: Thank you, Shimako. I would like to turn to our distinguished panelists. I will start with Lord Hoffmann, if you have some comments you wish to make. LORD HOFFMANN: I am not going to make any comment on the Angiotech case16 because I haven’t read the judgment. I will leave it to Robin Jacob to praise the Japanese because he doesn’t need to read the judgment. But I was rather interested in the developments under Article 104-3 of the Patent Act, because they do seem to show the way in which sometimes procedure takes precedence over substance. Looking at it from an English, or I think I can probably say Anglo-Saxon, point of view, what you are concerned with in litigation is to get all the matters in dispute between the parties decided as quickly and economically as possible. That is exactly what the Japanese Supreme Court said of Article 104-3: “to solve disputes on infringement within the procedures for patent infringement, to the greatest possible extent achieving prompt solution to such disputes.” Well, if you come before an English court, we would say: “What is in dispute between the parties?” “He says I’m not infringing.” That may be a matter of construction of the contract. It may be to do with what you are actually doing. He says, “Your patent is invalid.” They said, “Well, if it is invalid I would like to amend it,” and so on, and the question is whether you can amend it. You get all of the issues laid out and you then decide, simply as a matter of case management, what is the best order, the most economical order, in which to decide those. It may be that the best way is to try to construe the patent first, and once you have done that, the other issues may solve themselves. For example, you may have what’s called the “classic squeeze,” in which the one side is saying, “If the patent means what he says it means, then it is invalid because it is much too broad; whereas if it means what I say it means, then I am not infringing because I don’t fall within it.” Once you have construed the patent, then you have answered that question. The other thing is that we do not have what seems to be an entirely doctrinaire view, that somebody who is used to deciding on the validity of patents because he is working in the Patent Office is incompetent to decide whether there has been an infringement or not; or vice-versa, because he is dealing with infringement in the ordinary courts he is incompetent to decide whether the patent is valid or not. We simply run the two together. This is a longstanding 16

Angiotech Pharms. Inc. v. JPO; Decision on November 22, 2007 by the IP High Court.

74  CHAPTER IV: PATENT LAW argument that we have, even with our German colleagues here, as to how these things are best arranged. But what you’ve got under the jurisprudence that developed in Japan under Section 104-3 is an attempt to arrive at that kind of solution but within the constraints which are imposed by having it as a question of rules laid down in the Code, which then have to be interpreted, rather than, as we would do it, simply leaving it to the judge’s discretion to manage the case as seems best on the particular facts which have come before him. That perhaps is a psychological difference between systems which are based on civilian law codes and so forth, codes of procedure, and the Anglo-Saxon view, which leaves a great deal more to the discretion of the judge. MR. RICHARDSON: Thank you. Peter Meier-Beck? PROF. DR. MEIER-BECK: In Germany we have, as the audience may know, separate proceedings concerning infringement and validity, while other countries have systems where the questions of validity and infringement are dealt with in the same proceedings. It is interesting to see that obviously Japan now has both possibilities in the same system. Japan has the separation, it has separate validity proceedings, but on the other hand the Supreme Court established an invalidity defense in infringement proceedings which now has a statutory basis. I wonder whether this is the final solution of the problem, how to do it best, or does it have the disadvantages of both solutions? So the question is: Why do we have separate proceedings? Obviously—and I am sure that Lenny will agree with me—it comes with disadvantages to separate these proceedings, especially because in both proceedings the judge has to interpret or construe the claim before deciding as to whether the claim is infringed or valid. If the claim is not construed properly, you can decide neither the question of infringement nor the question of validity of the claim. So why separate both proceedings? The reason is you can have more specific proceedings and you can have civil litigation, on the one hand, when it comes to the question of infringement, and different proceedings where the patent is examined ex officio for validity. So the revocation court has to consider not only what the parties bring before the court, but everything that the court considers to be relevant regarding the question of validity of the patent, i.e., an exclusive right which has to be observed by everybody. That is the difference in the proceedings. Obviously, you can staff the courts differently. You can have one centralized court to deal with the question of validity and you can have technical judges there. That is more or less what Europe and many countries do in opposition proceedings, where they have a centralized procedure at the Patent Office and independent Boards of Appeal that have to decide the question of revocation and consist of technical judges who are competent in their respective fields of technology. That is much different to the organization of infringement proceedings, at least if a lot of local courts are competent to deal with these proceedings. That may not be such a big problem in Japan because you have only two courts dealing with infringement cases, Tokyo and Osaka. But China used to have the same system as we have in Germany, and now they are going to allow a kind of invalidity defense. That may be difficult to organize because it is a huge country and an enormous number of different courts have to deal with these questions. I am not sure that it is wise to leave it to all these different courts to find out what relevant prior art is and what the various pieces of prior art mean for the question of validity. But now Japan has got both ways to deal with the question of validity. I wonder, is it reasonable to have both? Is it quicker, does it allow faster decisions? It may be very complicated when you have proceedings where the claim is amended and other proceedings where the claim is not amended. It doesn’t look like a really practical solution in my view, but I may be wrong.

PART B: PATENT LAW DEVELOPMENTS IN JAPAN  75 PROF. MAKINO: Do you have a similar issue in Germany? PROF. DR. MEIER-BECK: It may happen in utility model proceedings because the court

is competent to examine the question of validity. But we have only a small number of such proceedings, so I cannot say anything about a significant effect of this possibility. MR. RICHARDSON: Thank you, Peter. We have six minutes left. John Richards, who is the last of the panelists. MR. RICHARDS: I’m not really quite sure why I am on this panel. I am not a litigator and we have been basically discussing litigation. But I was struck by the statistics. I would be interested in my Japanese colleagues’ comments on my observation as a practitioner as to what has happened in terms of getting applications through the Japanese Patent Office over the last twenty years. For a while it seemed to be quite easy. For the last I would say four or five years, my impression is that the Japanese Patent Office has become much stricter on questions of having a special degree of creativity—I forget what the exact language of Section 2 of the Patent Law is—in order to get a patent allowed.17 I am wondering whether the statistics we are seeing now of large numbers of patents being invalidated are on patents which have been granted since my perception of a harder standard of patentability in the Patent Office or whether they are in fact old patents which were granted prior to my perceived idea that the standard has been increased. MR. RICHARDSON: Shimako, can you answer that? MS. KATO: Partly yes, I think so. The very rigid criteria to find patentability, especially inventiveness, is based on the change of the Examination Guidelines. It is more easy to find no inventiveness according to the criteria described in the Examination Guidelines. But my feeling is different. Now the tendency has changed a little bit from several years ago. The criteria for inventiveness are not so hard compared to several years ago. So now the Japanese Patent Office tries more carefully to find validity of the patent. On the other hand, when it comes to the description or the specifications, for example enablement or supporting requirements, it is becoming harder. So that is the tendency in Japan, yes. MR. RICHARDSON: We have three and a half minutes left. Any questions from the audience? Justice Jacob? QUESTION [Mr. Justice Jacob]: I was very interested in the procedural provision to the effect that if a defendant is mucking around by raising all sorts of extra points, in effect too many points, he is going to get struck out for that reason alone. I believe we need such a thing in other countries. I don’t know how well that is working in Japan. It looks to me as though the same thing could be done in the European Patent Office, where you have somebody who puts in fifty citations and hopes the Patent Office will find something amongst them, and the like. The biggest problem, or one of the biggest problems, in patent litigation is the number of points which people can take. You seem to have hit upon a procedural device in Japan which says “You’re not going to do that, and if you do, you are going to have them all knocked out.” Is that working well? JUDGE SEKINE: No. I wish we could do that. I totally agree with you that is one of the most major problems we are facing. The Supreme Court judgment which I explained is about a very irregular case of repeatedly filing and withdrawing requests for the correction of claim. But if we emphasize what the Supreme Court judgment said as the reason to restrict such allegations, maybe you could say that you can restrict the defendant from raising many, many prior arts. In our practice, we ask defendants to limit the number of prior arts to very important ones. 17

Angiotech Pharms. Inc. v. JPO; Decision on Nov. 22, 2007 by the IP High Court.

76  CHAPTER IV: PATENT LAW I now have an infringement case in which the defendant is submitting many, many prior arts. Then, after the procedure continued for almost one year, the defendant filed a trial for invalidation to the JPO. If the patent gets invalidated in the JPO, then the plaintiff may file a correction of claim. So it may cause much delay in the procedure of the infringement suit. That is one of the problems caused by having dual tracks. MR. RICHARDSON: Our time is up. I would like to thank these excellent speakers and the distinguished panelists. Maybe we can all give them a round of applause.

Chapter IV

Patent Law Part C: Cross-Border Patent Infringement: A Comparative Analysis Moderator David Perkins

Milbank (London) Speakers

Brian Cordery

Dr. Frank-Erich Hufnagel

Bristows (London)

Freshfields Bruckhaus Deringer (Düsseldorf) Gabriel Cuonzo

Trevisan & Cuonzo (Milan) Panelists Dr. Klaus Grabinski

John Lane

Presiding Judge, District Court (Düsseldorf)

Frommer Lawrence & Haug

Marleen van den Horst

BarentsKrans (The Hague)

MR. PERKINS: We are almost now in the final strait. At this late time in the day we have four new panelists whom I don’t think I have seen before. Going from left to right we have: Brian Cordery, Frank-Erich Hufnagel, and Gabriel Cuonzo, three practitioners, with only one judge to keep us in order in this session. You have all been introduced to Klaus before. You’ve met Marleen before. At the far end, the voice of sanity from across the Atlantic, John Lane. I am going to hand over to Brian in just one second. He is going to talk about direct and indirect infringement.

78  CHAPTER IV: PATENT LAW Before I read their papers, I was under the impression that in all Member States, all Contracting States of the EPO, we derived our infringement provisions from the Community Patent Convention.1 So I’ve actually learned something, which is good. Off you go, Brian. I will move out of the way. MR. CORDERY: Thank you very much for that introduction, David. As has been mentioned already, the topic which Frank-Erich, Gabriel, and myself would like to cover this afternoon is patent infringement in the cross-border situation. As David has already alluded, you could be forgiven for thinking that, given we are all based on the European Patent Convention2 and the Community Patent Convention, you would think that there would be a high degree of harmonization between the laws of the various Member States as regards transnational patent infringement. You’d actually be wrong. [Slide] Let me first set the scene. I wasn’t proposing to cover the scenarios postulated above by reading out As and Bs and Xs because it all gets confusing very, very quickly. Let me simply just say what we are looking at here is when and how can you bring a foreign company into national proceedings in your country, whether it is for the purposes of disclosure or for the purposes of financial relief, injunctive relief, whatever. [Slide] I do a lot of work in the life sciences field. These are three scenarios that we often encounter: • Importation from the place where they manufacture generic products, usually China or India, directly into the United Kingdom. • More likely, you will find the product has been formulated somewhere just outside the European Union, so an EFTA3 country like Iceland. • More commonly these days you will see products going from Iceland to Malta and then from Malta into the larger EU Member States. Why Malta? The population of Malta is 400,000, so roughly four times the size of Cambridge during term time. So why do they use it? The Maltese government has openly declared itself to be anti-counterfeit but pro-generic. Why has the Maltese government done that? Well, could it be that 2,000 employees of Actavis are based in Malta? I suspect that could provide an answer to that question. So looking at it again, why and how can we bring a foreign defendant into litigation in the United Kingdom, and also Germany and Italy, to be covered by the next speakers? [Slide] In the United Kingdom there are three situations you can look at: direct infringement, indirect infringement, and perhaps most interestingly for today, infringement under principles of common design and joint tortfeasorship, which have been developed really under the common law of the United Kingdom. [Slide] Direct infringement, of course, Section 60(1) of the U.K. Patents Act.4 I am not intending to go into that in any detail at all. Just note the word “imports” in relation to products and processes is there in the statute. [Slide] So when might this foreign company based in India or China have actually imported into the United Kingdom? Well, you might find, if you get lucky, the terms of carriage are such that A was the owner and when the goods entered the United Kingdom, if they were delivered duty-paid or cost-insured freight, then A could be the owner. 1 Convention for the European Patent for the Common Market (Community Patent Convention), 1976 O.J. (L 17) (EC) [hereinafter CPC]. The Community Patent Convention never entered into force, but was later reintroduced. Agreement Relating to Community Patents, 1989 O.J. (L 401) (EC). The Agreement has also not entered into force. 2 Convention on the Grant of European Patents (European Patent Convention), Oct. 5, 1973, 1065 U.N.T.S. 199, available at http://www.epo.org/patents/law/legal-texts/html/epc/1973/e/ma1.html. 3 European Free Trade Association (EFTA), http://www.efta.int. 4 The Patents Act 1977, c. 37, § 60(1) (U.K.) [hereinafter U.K. Patents Act].

PART C: CROSS-BORDER PATENT INFRINGEMENT: A COMPARATIVE ANALYSIS  79

Perhaps slightly more subtly, in the Philips v. Princo case5 the Taiwanese company had cleverly put a reservation of title clause into its contract. Unfortunately for it, that meant, because the U.K. distributor hadn’t actually paid for the goods when they entered, it owned title and was found to have imported and kept on that basis. So a kind of clever idea that backfired. But a case that I think we need to look in some detail, and I will do that later on, is the SABAF v. Meneghetti case.6 It was clear that arranging importation itself—here the Italian company had booked the lorries, although the goods were owned by NFI when they left Italy—that was held by the Court of Appeal not to be importation. We’ll look at SABAF in more detail a bit later on. [Slide] Turning to indirect infringement, again I thought this had been implemented across Europe, but apparently, as David observed, it hasn’t. Note the 115-word sentence of our U.K. Patents Act—the draftsmen had a field day there—a single sentence which basically says that if you offer to supply in the United Kingdom with any means essential, then you can be liable if the means are intended to put the invention into effect in the United Kingdom.7 [Slide] Given the very short amount of time that we’ve got this afternoon, I am not going to go into the Menashe v. William Hill case8 in much detail. You can all read it if you wish to. But the key finding of this case as regards the law is that there is this double territorial requirement. The offer for sale or sale has to be in the United Kingdom and the invention also has to be put into effect in the United Kingdom. Mr. Justice Jacob, as he then was, looked at the effect of where the invention was felt, but that was held to be wrong. He was perhaps keen to find for the patent holder and looked for a hook on which to hang that finding. When it came to the Court of Appeal, the more sanguine Lord Justice Aldous said: “No, no. In fact you have to have this double territorial requirement.” But then he found in favor of the patentee anyway. [Slide] I want to now look at the principal topic for this afternoon, joint tortfeasorship in common design. Now, regardless of any direct or indirect infringement, under U.K. law it is theoretically possible for an overseas company to be brought into U.K. litigation without having done anything in the United Kingdom. However—and here is where I think the United Kingdom diverges from our colleagues in continental Europe—facilitation of an act is not joint tortfeasance; procurement is. To take an example from the copyright area, which I’m sure all the English practitioners are familiar with, CBS v. Amstrad.9 Alan Sugar’s company, Amstrad, was one of the first companies to provide twin-deck tape machines, so you could record from one tape to another. CBS said that would inevitably be used to infringe copyright by making a home recording. But the House of Lords said “No.” Amstrad had taken steps to say, “Please don’t infringe copyright,” on their machines. They basically didn’t care what the machine was used for. They just wanted to sell the machines. That was facilitation, not procurement, and no joint tortfeasance.

Princo Corp. Ltd. v. Koninklijke Philips Elecs., 3213/07, Apr. 18, 2007 Court of Genoa. Sabaf SpA v. Meneghetti SpA, [2002] EWCA Civ. 976, [2003] R.P.C. 14 (Eng.). 7 U.K. Patents Act, supra note 4, § 60(2) (“[A] person (other than the proprietor of the patent) also infringes a patent for an invention if, while the patent is in force and without the consent of the proprietor, he supplies or offers to supply in the United Kingdom … and are intended to put, the invention into effect in the United Kingdom.”). 8 Menashe Bus. Mercantile Ltd. v. William Hill Org. Ltd., [2002] EWCA Civ. 1702, [2003] R.P.C. 31 (Eng.). 9 CBS Songs Ltd. v. Amstrad Consumer Elecs. PLC, [1988] UKHL 15, [1988] A.C. 1013 (U.K.). 5 6

80  CHAPTER IV: PATENT LAW [Slide] A case I think we need to look at in maybe just two minutes is SABAF v. Meneghetti.10 I mentioned it very briefly earlier with regard to the act of arranging important. Let’s look a little more closely at the facts here. Meneghetti manufactured burners for gas hobs. That was done in Italy. They were then imported into the United Kingdom and were alleged to infringe SABAF’s U.K. patent. The U.K. company MFI imported the burners into the United Kingdom. They were sold ex works. So there was no act of importation from Meneghetti. But Meneghetti were nevertheless aware that the goods were being sold in the United Kingdom and provided booklets in English and did various other things to facilitate that act. [Slide] It was held that was insufficient to amount to joint tortfeasance. I will just read a very short quote from Mr. Justice Laddie, if I may: “It is apparent that Meneghetti was content that its burners were used and sold by MFI in England, just as, no doubt, it was content that its products were sold in a very large number of other countries … it was prepared to help its customers [such as MFI], for example by supplying them with instruction booklets in the language of the market … But this does not demonstrate a common design. Meneghetti assisted its customers and facilitated the latter’s business, but … the sale and use of the burners in the English market was solely the commercial venture of MFI.”11 So not enough to establish joint tortfeasance there. [Slide] All these cases are very fact-specific and you can’t draw too much from them. But I thought I would just give you three quick examples on either side of the fence. Let me pick one from each list, given that time is running short. A case from the life sciences field, Generics v. Lundbeck.12 As all of you in this room I’m sure know, if you want to sell a medicine in the United Kingdom and every other sophisticated country in the world, you have to get a license from the health care authority. Company X, based in India—I guess it was Matrix, but history does not record—had supplied documents to the local health care authority on which Generics, the U.K. company, based its application for marketing authorization. That was insufficient to establish an arguable case of joint tortfeasance. So that is the sort of level of interaction you can have. Looking at the other side of the fence, let me pick a case, Puschner v. Palmer,13 which was Mr. Justice Aldous as he then was. Here there was a joint venture between the actual foreign company and the U.K. company. They supplied financial support, they gave marketing literature, and so on. That was enough. So you can see that there are cases on either side of the line. [Slide] Before I hand over to Frank-Erich, just let me deal briefly with two situations which are currently outstanding. I’m pleased to say that Mr. Justice Arnold is no longer here, because he was sitting there in the earlier talk, and I thought I might say something controversial. Mr. Justice Arnold last month heard the L’Oreal v. eBay decision,14 about whether when eBay allows people to sell goods on its site, sometimes they are counterfeit, whether and to what extent eBay can be liable as a joint tortfeasor. I don’t think he is going to hand down his decision this afternoon because he is here, but very soon we are going to get a decision on that. I suspect probably we will get an ECJ reference. The most interesting aspect of that is, I think, Article 11 of the IP Enforcement Directive,15 which actually provides for people who provide platforms to be injuncted. We don’t know Sabaf SpA v. Meneghetti SpA, [2002] EWCA Civ. 976, [2003] R.P.C. 14 (Eng.). Id. at para. 43. 12 Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2009] UKHL 12, [2009] R.P.C. 13 (Eng.). 13 Puschner v. Tom Palmer (Scotland) Ltd., [1989] R.P.C. 430 (Eng.). 14 L’Oréal SA v. eBay Int’l AG, [2009] EWHC 1094 [2009] R.P.C. 21 (Eng.). 15 Council Directive 2004/48, The Enforcement of Intellectual Property Rights, Art. 11, O.J. (L 157) (EC) [hereinafter IP Enforcement Directive] (“Member States shall also ensure that right holders are in a position to 10 11

PART C: CROSS-BORDER PATENT INFRINGEMENT: A COMPARATIVE ANALYSIS  81

the exact extent to which, if you obtain the local marketing authorization and passed it on to someone else, whether that would be joint tortfeasance or not. We’ll have to wait and see. I’ll stop there and I’ll hand over to Frank‑Erich. MR. HUFNAGEL: I will try to match your fast speaking record and will briefly look at the German perspective on basically the same scenario here. As David has said in the beginning, I think our answers are slightly different from the answers that we have seen in the United Kingdom. [Slide] The basic scenarios that we look at Brian has already explained. [Slide] I will have a look at how the German courts would probably assess the same situations under the concept of direct infringement. That is the scenario in which the infringing product itself is supplied by the Icelandic company via Malta or directly into Germany, and under the concept of indirect infringement, where only a means for the use of the invention is supplied. [Slide] Looking at direct infringement, this is the long sentence of the German Patent Act, Section 9.16 Pretty much the same as the language in the United Kingdom. Nevertheless, we apply it slightly differently. What are the basic principles here? Of course, we do have, when we look at direct infringement, the inherent territoriality principle governing Section 9 of our Patent Act as well. So the question basically is: When does the supplier, the company A in Iceland, actually commit an act of placing a product on the market or importing the product into Germany? The answer we have been given by our Federal Supreme Court to that, in a very brief decision, the Funkuhr decision,17 because apparently the Federal Supreme Court did not see that as a major problem, is quite clear. That answer is based on a fairly broad concept of tort liability under German law, according to which any participation in an unlawful act that is knowingly committed triggers tort liability. Applying that concept to direct patent infringement, that means that a foreign company, such as this Icelandic company, is infringing a German patent even if it supplies the product in the foreign country, as long as it knows that there is a patent and as long as it knows that the final destination of the product will be Germany. [Slide] What does that mean for our case in the scenario looked at here? Well, the answer is quite clear: The delivery of the infringing product from Iceland to the German customer is an act of direct patent infringement. The interesting difference to the United Kingdom, I think, is that this is irrespective of the terms of delivery. So even if you have contractually stipulated that title to the product passes before the product actually enters Germany, even if you have contractually stipulated that delivery takes place ex works, that means the German importer picks up the product in Iceland and brings it with its own lorry—well, with a lorry it would probably be difficult to get it from Iceland to Germany—but brings it physically into Germany, nevertheless the Icelandic company is liable for direct patent infringement. That has been made very clear in the Funkuhr decision and by the Landgericht Düsseldorf in the decision that I put here as well. The same is even true if the Icelandic manufacturer uses an intermediate distributor; that is, the scenario where the product comes from Iceland to Malta first and is sold to a different company in Malta and that different company then goes on to sell the product into Germany. Nevertheless, the original supplier in Iceland is liable for direct patent infringement in Germany apply for an injunction against intermediaries whose services are used by a third party to infringe an intellectual property right … .”). 16 Patentgesetz [German Patent Act], Dec. 16, 1980, BGBL. I at § 9 (F.R.G.). For an English translation see http:// www.wipo.int/clea/en/text_html.jsp?lang=en&id=984. 17 Funkuhr, 2002 MITT, 416 (BGH).

82  CHAPTER IV: PATENT LAW if it knows that the final destination of the product was Germany. That is a very broad and farreaching cross-border liability here. [Slide] This all applies to the delivery of the product, the actual physical supply. An interesting side question I have asked myself is whether this applies also to the offer of the product. Why is that an interesting question? Just very briefly, we learned from our Federal Supreme Court that all infringing acts, be it offering, manufacturing, placing on the market, are equal, in the sense that each of these infringing activities is an infringing activity in itself. That means that you infringe a patent by offering a product irrespective of that offer ultimately resulting in a delivery of it. That concept has led the Federal Supreme Court in its famous Simvastatin decision18 to rule that if you offer a product and you make it clear that you will not deliver the product before the patent has expired, but nevertheless you offer it at a time at which the patent has not yet expired, this offer in itself is an infringing act. If you apply the Simvastatin concept, which was not a cross-border case, and put it together so to speak with the Funkuhr scenario, the question would be whether if the Icelandic company only offered the product for sale in Germany before the expiry of the patent with a clear proviso that it would not deliver the product until after the expiry of the patent, such offer would also trigger liability for patent infringement in Germany? I think there are reasons to say that it would. That could be a very problematic conclusion for, for example, the generic industry, because if you want to place a product on the market as of day one after patent expiry, you can’t possibly do that without entering into contracts before, without offering the product before. If these activities already trigger liability for patent infringement in Germany, even if you do it abroad, then you have a very, very far-reaching scope of the German patent courts. But that is an issue that perhaps we can look at further in our discussion. [Slide] Let me turn to the second scenario, indirect infringement. In this case, our Icelandic manufacturer does not supply the infringing product but it supplies a means that relates to an essential element of the invention and is intended to be used in the invention. In this scenario, our Section 10 of the Patent Act applies.19 I have not counted the words, but I suppose the sentence is almost as long as in the U.K. This Section looks pretty much the same. In particular, it also contains the double territorial requirement, according to which both the supply or the offer of the product, of the means here, must take place in Germany and the invention itself must be put into effect in Germany. This double territorial requirement is explicitly in the statute. [Slide] What that means has been looked at by the Federal Supreme Court in the Funkuhr II decision,20 which was another cross-border case in which the court looked at it a bit from the other side. In that scenario, you had a German company that produced a component for this famous radio signal clock. The German company exported this component to a third country. The customer in that third country took the component, assembled the entire radio clock, and imported it back into Germany. So the question is: Was the initial supply of the component an indirect infringement under Germany law? Well, if you apply the double territoriality requirement here, the first requirement was certainly met, because by sending the component from Germany abroad, at least part of this activity took place in Germany. The question was: Was the second requirement met as well, exploiting the invention also in Germany? At first sight that was not the case, because the clock was assembled in a foreign 2007 GRUR, 221 (BGH). German Patent Act, supra note 17, § 10. 20 2007 GRUR, 313 (BGH). 18 19

PART C: CROSS-BORDER PATENT INFRINGEMENT: A COMPARATIVE ANALYSIS  83

country. But, the Federal Supreme Court said, if it was clear from the outset that the clock was to be assembled for re-import into Germany, then the original German supplier of the component could be liable for indirect infringement. [Slide] What does that mean for our case? Well, I think the result in the scenario presented by Brian is a bit surprising. If the Icelandic manufacturer only delivers a means, rather than the product, all of a sudden the terms of delivery are important. Because of the double territoriality requirement, you can only commit an indirect infringement if the supply itself took place in Germany, and that is only the case if, according to the terms of delivery, the Icelandic supplier has itself committed an act in Germany. So it may make all of a sudden a difference whether you deliver ex works or not. Also, the answer becomes different if you have an intermediary here. If you supply the product which is only a means for the invention from Iceland via Malta to Germany, that is not an indirect infringement, according to the Mannheim District Court.21 [Slide] So you see in Germany, to sum up very briefly, we have a very far-reaching concept of direct infringement, whereas we have a more restrictive concept of indirect infringement. I understand that this is pretty much the opposite of what I just heard from Brian. It will be interesting to debate why this is the case. Thank you. MR. PERKINS: I think you get nine and a half out of ten on timing for that one. A very wellbehaved panel so far. Now Gabriel. MR. CUONZO: My presentation is slightly different from the previous ones because I thought it would be interesting to provide a broader Italian perspective on issues of European cross-border patent litigation, including the famous or infamous “Italian torpedo.”22 The principles applied by the Italian Courts in defining direct infringement, are similar to the German ones. Direct infringement is a very broad concept in Italy. It occurs in all cases where a foreign company is actively involved in the act of making, using, selling or importing the infringing product in Italy.23 In case of process claims the patent owner has the right to prohibit unauthorized uses of the process in Italy or the placing on the market or importing the product directly obtained by that process. As far as importation is concerned a foreign entity commits patent infringement in all cases where importation is carried out by the foreign entity irrespective of whether their goods are sold ex works. Unlike the situation in the U.K., it is irrelevant that the foreign entity is the proprietor of the imported goods: what counts is the fact that the foreign entity has played an active role in the actual importation. In applying the ECJ,24 Italian courts—generally deny infringement in cases of “external transit.”25 Arranging importation equals importation. I am not sure whether facilitating importation would be considered by an Italian court as an act of infringement. We don’t have specific case law. But Italian courts tend to be extremely generous in assessing the scope of liability in this respect. Also because the Italian courts not only rely on Article 66 of the Italian Patent Law,26 but also they tend to use Article 2055 of the Civil Code, which regulates civil liabilities in general of third parties involved in unlawful acts of another party.27 Laufkranz, 2006 GRUR, 837 (BGH). See Mario Franzosi, “Worldwide Patent Litigation and the Italian Torpedo”, 7 E.I.P.R. 382 (1997). 23 Industrial Property Code, Art. 66, Decree-Law No. 80/05 of May 14, 2005. 24 Case C-281/05, Montex Holdings Ltd. v. Diesel SpA, 2006 E.C.R. I-10881. 25 Philips v. Princo, Court of Bari, 15 Jan. 2007. 26 Law on Patents for Inventions, Royal Decree 1127, June 29, 1939. 27 Codice Civile [C.c.] Art. 2055 (Italy), translated in 3 The Italian Civil Code and Complementary Legislation 4 (Mario Beltramo et al. trans., 2007) [hereinafter “Italian Civil Code”]. 21 22

84  CHAPTER IV: PATENT LAW [Slide] As far as contributory infringement is concerned, Italy has not implemented Article 30 of the Luxembourg Convention.28 But the Italian Supreme Court in several decisions has introduced the concept of indirect infringement, which is again a broad concept. The supply or the offer to supply by a third party of a component on material operators for the use in the patented process is contributory infringement if the component constitutes a material part of the invention and the supplier was aware of the infringing use. We have very few cases. Among them the Southwire case decided by our Supreme Court in 1994. I was involved in this case. It is interesting because the Supreme Court reached the conclusion that the U.S. company, Southwire, was responsible for contributory infringement for having licensed its technology to a totally unrelated German company which had subsequently used this technology in a plant in Italy. Southwire was found to have committed contributory infringement in Italy. The Courts used the general provision on joint tortfeasorship, which is Article 2055 of the Italian Civil Code. Article 2055 states that if an act causing damage can be attributed to more than one person, all are joint and severally liable for the damages.29 In a much more recent case30 the test used by the Genoa court in injunction proceedings brought by Philips, was whether Princo, which had delivered compact disks to several intermediate companies that had eventually imported them into Italy, was aware of final destination of the infringing goods. The court answer was yes. [Slide] The court used a number of elements to base its decision. The most important factual consideration was that, according to the Court, Princo—being is a very large business based in Taiwan but operating on an international scale—knew perfectly well the end markets where its products were sold and could have avoided the importation of its unlicensed CD’s into “patent” countries like Italy. Based on the Philips v. Princo case the following elements are relevant to substantiate awareness of a foreign manufacturer not involved in the importation of infringing goods: 1) solid relations between the manufacturer and the importer; 2) Existence of subsidiaries in Italy of the Manufacturer; 3) presence of substantial amounts of infringing products of the foreign entity on the Italian market; 4) previous infringement proceedings against the foreign entity before Italian courts; 5) Use of Italian language on packaging, user manuals, etc. After this brief summary on direct and indirect infringement in Italy, I would like to say a few words on Italy as a forum for patent infringement. There are a few things which are improving. We have twelve specialized courts, although the majority of the cases are heard in Milan, Turin, and Rome. So, three courts are the major courts. It offers a number of interesting tools (apart from the Torpedos) also in cross-border litigations. We do have very effective ex parte search orders, which are extremely useful. Also it is possible to obtain permanent injunctions in six-to-eight months also in complex patent cases, i.e., not necessarily limited to clear cut ones. [Slide] Now, some final remarks on the “Italian torpedoes.” Although I am not proud of this, because torpedoes are not a nice thing. My firm obtained the Windmoeller decision from the Supreme Court, which declared that Italian courts had no jurisdiction in torpedo cases.31 We also obtained other judgments from the lower courts confirming the approach of the Supreme Court. In the last five years all the Italian courts that have dealt with torpedoes claims have dismissed them. CPC, supra note 1, Art. 30. Italian Civil Code, supra note 26, Art. 2055. 30 Princo Corp. Ltd. v. Koninklijke Philips Elecs., No. 3213/07 (Court of Genoa, Apr. 18, 2007). 31 Windmoeller & Holscher/B.L. Macchine Automatiche, Riv. Dir. Ind., 2, 2004. 28 29

PART C: CROSS-BORDER PATENT INFRINGEMENT: A COMPARATIVE ANALYSIS  85

However, torpedoes are still around. They are declaratory judgment proceedings before an Italian court seeking a declaration of non-infringement, not only of Italian patents but also of in-Italian European patents. [Slide] We still have a number of torpedoes being filed. I am currently involved in at least three torpedo actions and they are all large cases with an international dimension. [Slide] The reason of the endurance of the torpedoes is very simple: [Slide] Although Italian Courts regularly dismiss these types of actions, they are still effective, as the German Courts still stay proceedings if torpedo actions are timely and the claim is accurately drafted. I had an interesting conversation with Dr. Grabinski this morning. Perhaps we can have a contribution from Dr. Grabinski on this subject. [Slide] Torpedoes are still popular because they can be effective. In the Visto v. RIM case,32 which is probably the latest case heard by an Italian Court, we had the judgment of the first instance by the Milan court in April 2008. Please note that the torpedo was filed in December 2006 and the case is still pending before the Milan court of appeal! [Slide] In the same case, the Düsseldorf court said, very correctly—from a German perspective, I understand, and also based on accurate interpretation of the law—that in this type of cases they have to wait until there is a final decision by the Italian courts, which means the Supreme Court, meaning another three or four years. [Slide] Torpedos are mainly a German-Italian issue. We think there are two ways of resolving this: An exchange of information between the national courts, and fast-track proceedings in Italy. MR. PERKINS: Thank you very much. I think this calls for some explanation from the court in Düsseldorf, Klaus. Could you explain to us this question of delay until the domestic court in Italy has finished? JUDGE GRABINSKI: Yes. This is going back to the Brussels Regulation33 which replaced the Brussels Convention.34 The regulation provides that in a situation where two litigations involving the same cause of action are brought to two different courts in two different member states it is for the first court to decide whether it has international jurisdiction on the case and the second court has to stay proceedings until this has been decided by the first court. This rule has been applied in patent litigations when first an action for the determination of a non-infringement was brought to one court und later an infringement action with regard to the same patent and the same attacked embodiment was brought to a second court in another member state. In this kind of situation (which is called a torpedo situation) the court to which the infringement litigation was brought later has to stay proceedings until the first court has decided on whether it has jurisdiction on the case. This has been confirmed in general (no patent cases) by the ECJ in several decisions. Even though I personally am not very convinced by this case law of the ECJ, of course as a court we are bound by this and we will follow this. But perhaps there is one possibility to evade this. We had another recent case, which we decided in Düsseldorf two years ago. This case did not concern the Italian torpedo but the Belgian torpedo.35 Research In Motion U.K. Ltd. v. Visto Corp., [2008] EWHC (Pat) 335, [2008] Bus. L.R. D 89 (Eng.). Council Regulation 44/2001, Jurisdiction and the Recognition and Enforcement of Judgments in Civil and Commercial Matters, 2001 O.J. (L 12) (EC) [hereinafter Brussels Regulation]. 34 Brussels Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, Sept. 27, 1968, 1972 O.J. (L 299) (EC). 35 See Philippe de Jong, “The Belgian Torpedo: From Self-Propelled Armament to Jaded Sandwich”, 27 E.I.P.R. 75 (2005). 32 33

86  CHAPTER IV: PATENT LAW In this case, one company, which was the first owner of the patent, was sued by a company with a possible patent-infringing product in Belgium for, among others, infringing the German part of the European Patent. The Belgian courts did their best to decide that they were not competent to decide on the infringement of the German part of the European Patent. The first instance court in Belgium decided they were not competent. Then the claimant in Belgium appealed. They also decided that they were not competent. But it seems to be the same as in Italy. They have the possibility to appeal for legal reasons to the Supreme Court in Belgium. At this point in time we had our hearing in Düsseldorf. But there was one difference. The claimant in Düsseldorf was not the defendant in Belgium. It was another company that was linked to the defendant in Belgium but was not the same. What had happened? They transferred the patent in between from the former patent owner to the new patent owner, who was the claimant in Germany. The claimant in Germany only sought for injunction and damages from the point of time when the transfer of the patent took place, not for the previous time. Of course, the parties in Germany had different views on whether the German court had jurisdiction or whether they had to stay and wait for the final decision in the Belgian proceedings. The Düsseldorf District Court decided that they had jurisdiction and they did not have to wait for the Belgian court, even though there was still the proceeding pending, because it was a different subject matter. They had to decide on injunction, which could no longer concern the Belgian proceeding. They had to decide damages, but only from the point of time from the transfer of the patent. But in the end it did not help the claimant before the Düsseldorf court very much because they dismissed the claim for other reasons. Then the case was appealed and it went to the Court of Appeal, and then later it was settled. So we will never know what the Düsseldorf Court of Appeal would think about it. MR. PERKINS: Thank you. I was just going to ask, Gabriel, is there no way of getting expedition of that appeal? What is your average time to appeal on something like this, or does it vary from court to court? MR. CUONZO: In this case, we asked for a fast track. The court of Milan, the first instance, accepted that issued a decision in four months. The first decision was actually obtained in four months. But then the Court of Appeal did not understand our request. They said that the best they could do was, I think, a year. So we will have a decision now, which is the standard decision of dismissal. However they need a year as they have other cases. Then there is the Supreme Court. It appears that the new reform of the Procedure Code will create a filter to the Supreme Court. So perhaps we will have the possibility of reducing time. The overall time would be three years anyway, in any case. It is very difficult. MR. PERKINS: So, the torpedo is only dead in the water—it’s not quite belly up. MR. CUONZO: We are actually still fighting. MR. PERKINS:  Marleen, I think you have something to contribute on cross-border torpedoing. MS. VAN DEN HORST: Yes. Thank you, David. First, a few remarks in respect of the presentations of the others, to just position the Netherlands in light of Germany, Italy, and the United Kingdom. We don’t go so far as Germany. We know, of course, the concept of direct infringement, which is quite strictly applied. It is a definition which is almost the same, I think, in all EPC countries. I believe that the definitions we have heard do not differ so much, but the interpretation given by the courts.

PART C: CROSS-BORDER PATENT INFRINGEMENT: A COMPARATIVE ANALYSIS  87

Now, on indirect infringement, the Netherlands also knows the principle of the two territorial elements there. The indirect infringer provides essential parts of protected products in the Netherlands for use or application in the Netherlands. The concept of indirect infringement is also not very widely applied. So if the extraordinary cases which we heard today are presented to Dutch courts, I would believe that maybe some general concept of tort would be of assistance, not the concept of indirect or direct infringement. But that would, of course, very much depend on the facts and circumstances of the case. But the examples did teach me something, especially the German interpretation. I heard Frank-Erich saying that the German courts have quite far-reaching powers, if you look at how they construe infringement and indirect infringement. That brings me to the ECJ case Roche v. Primus,36 where one of the considerations for the decision was based on the fact that the interpretation of infringement differs from country to country. Now, these developments show in fact that it is true, because your courts did not take extra-jurisdictional measures, which I would think and consider the essence of the term “crossborder actions”—and I will come to that in a minute—but the courts enlarged the concept of what they consider (in)direct infringement on national German patent law. We can now come to the conclusion that there are large differences among countries, which indeed supports the considerations of the European Court of Justice that the general concepts of infringement differ. Now, I come to what I consider cross-border actions. When I was preparing for this session I was thinking of the proceedings in a certain country where the judge, e.g., in The Netherlands, is asked to give a preliminary or a final injunction for acts constituting infringement of foreign IP rights. So, an injunction with cross border effect, e.g., in Germany and so on. There I might have a few nice things to share with you from the Dutch perspective. After the ECJ cases of Roche v. Primus37 and GAT v. Luk,38 we had a few cases in the Netherlands— two preliminary cases to be specific—in which the court did issue cross-border injunctions. In these cases, Dutch parties were sued in the Netherlands for patent infringement not only in the Netherlands but also in Germany. There, the court held that a cross border injunction could still be awarded by way of preliminary measures, despite the fact that an invalidity defense was brought, as the court felt that it was possible to give a preliminary assessment on the invalidity and decide the case. One of these cases, Ezendam v. Lommers,39 was decided very recently, 30 March this year, so two weeks ago. One of these cases, Bettacare/H3,40 was following the proceedings on the merits. That decision was rendered in July 2008. There the court was asked in final relief proceedings to look again at the claim for a cross-border injunction, and again the invalidity defense was brought forward. Then the court decided to stay the proceedings, until the case in Germany on the invalidity of the patent would be decided. But the interesting thing here was, that at the time the court was asked to give this judgment, there was no invalidity proceeding pending. There was nothing. So it was the defence of the defendant saying that the patent was likely to be invalid, but there was no action necessary on the defendant’s part. So the claimants in that case tried to get applied by the Dutch court what is known as the Swiss Case C-539/03, Roche Nederland B.V. v. Frederick Primus, 2006 E.C.R. I-6535. Id. 38 Case C-4/03, Gesellschaft fur Antriebstechnik mbH & Co. KG (GAT) v. Lamellen und Kupplungsbau Beteiligungs KG (LuK), 2006 E.C.R. I-6509. 39 Ezendam v. Lommers, B9 7758 (District Court of The Hague, Mar. 30, 2009). 40 Bettacare Ltd. v. H3 Prods. B.V., No. 279433 / HA ZA 07-41, IEPT20080716, Rb Den Haag (District Court of The Hague, Jul. 16, 2008), available at http://www.iept.nl/files/2008/IEPT20080716_Rb_Den_Haag_Bettacare_v_ H3_Products.pdf. 36 37

88  CHAPTER IV: PATENT LAW method, which apparently means that you ask the court to issue an order to force the defendant, who doesn’t claim the invalidity but only argues the invalidity by way of defence, to institute invalidity proceedings within a certain period of time. The Dutch court refused to apply the Swiss method, as this is not known to Dutch law. So there you can find yourself in the position that you ask for an injunction, the proceedings are stayed, and nothing is going to happen. I would think that the only measure to be taken by the patentee would then be to ask for a declaration of validity in Germany, if that is at all possible. So that is an update of Dutch cross-border practice. MR. PERKINS: Thank you, Marleen. Now John, you’ve come an awful long way. You’ve heard all these Europeans talking about this. I know you have had experience of our practice over here. But within the States what forum-shopping opportunities are there? We heard Judge Rader say that he is handing out orders of mandamus to take cases away from the court in Marshall, Texas.41 MR. LANE: Within the States, with the Federal Circuit’s recent mandamus decision,42 I think it has tightened up the forum-shopping aspect of it. What was happening in the Eastern District of Texas was a situation where a judge, a very powerful personality, could push cases through fast. I stress a strong personality because the way you would need to try to transfer a case for forum non conveniens or bad venue, you’d have to make that application to that judge. Apparently, he would react very strongly against that. So if you were litigating a case before him, it wasn’t necessarily a great idea. I think what the Federal Circuit did was right, because I think it was getting quite abusive in terms of the exercise of long arm jurisdiction based on the minimum contacts, personal jurisdiction policies and venue policies at play in the Eastern District of Texas. It is interesting, because forum shopping in the United States was more of a problem before the Federal Circuit was created.43 There will always be some kind of gaming. Each litigation I have had, they’re like your kids—they’re somewhat similar but they are very distinct in a lot of ways. We know this is a chess game, it’s a strange chess game, and so you find ways to win for your client. The thing about the United States, with things like the policies talked about here, contributory infringement and inducement, are similar in order to bring in foreign-based companies that are doing partial activity or presumed infringing activity. But of course you have the personal jurisdiction test and minimum contacts tests to deal with in the United States. But the thing that I really was preparing to discuss since I have a lot of experience in multinational litigation was the international aspect of cross border litigation. I trained as a barrister as part of my legal training, so I’ve got experience before the U.K. courts. For clients I have been more of a consumer, if you will, or a client, in representing U.S. clients before German courts and Italian courts with respect to multinational patent litigation, where I have direct experience with an Italian torpedo. The interesting thing about that is—well, I had a sort of “Dr. Strangelove” experience with a torpedo action, in other words, how I learned to stop worrying and to love the Italian torpedo. I certainly got to know Milan a lot better, which was very enjoyable. We litigated a case and we succeeded, and I think it was the right decision. The case is OptiGen v. Marchon & Eschenbach.44 We represented Marchon. Eschenbach was the exclusive See Chapter II.B, “The Judiciary & IP Policy, United States”, supra this volume. In re TS Tech. USA Corp., 551 F.3d 1315 (Fed. Cir. 2008). 43 See S. REP. No. 97-275, at 5 (1981), reprinted in 1982 U.S.C.C.A.N. 11, 15 (explaining that the Federal Circuit was created to promote uniformity and decrease forum-shopping). 44 Optigen S.r.l v. Marchon Eyewear Inc. & Eschenbach Optik GmbH (District Court of Milan, Mar. 28, 2002). 41 42

PART C: CROSS-BORDER PATENT INFRINGEMENT: A COMPARATIVE ANALYSIS  89

European licensee. We were torpedoed in the Milan court. The correct result was reached by the Milan court, I think, which was that the court decided that it did not have jurisdiction to deal with the non-Italian portion of the European Patent, which would otherwise prevent us from bringing a case in other countries, and that was upheld. I think the plaintiff decided not to appeal it. The point made by the court in our case is I think that the torpedo has no place at all, unless there is a more cross border notion of patent enforcement in Europe. The policy of a torpedo action seems to be based on a first-to-file notion. The way I see what has happened with European jurisprudence, and when I see GAT v. Luk and Roche v. Primus,45 is that there has been a tightening up of the notion of enforcement of national or sovereign patent rights. In other words, the patent case is supposed to be dealt with by the national courts of that country. It seems to have tightened up a bit. I applaud the Dutch courts for sticking their necks out and issuing cross-border injunctions and things like that. Whether you think that is legally right or wrong, I think it presses a button that sometimes there is a need. It is addressing a need. I think the need is to have a more harmonious litigation process across Europe. Unless you have that, there is really no place for the torpedo, unless you can go to one court, if you’re DJ’ed in one court, and that decision on infringement or validity will hold true in other jurisdictions, that’s fine. But until that happens there really is no place for the torpedo. There is a U.S. case, too, that’s interesting and forward-thinking, if you want me to mention that. MR. PERKINS: Can you stop there? The time is chasing us. I think Klaus wants to come back to you on one of the comments you just made. We will do that, and then we may have time for one question. There’s one question up there. JUDGE GRABINSKI: I’d like to come back to the two example cases of Brian and FrankErich. The first case, direct infringement, cross-border dimension. There we have to differentiate. We have two players. The first player is the company that is marketing the product in the country. Then we have the second person that is somehow delivering the product, bringing it to this person outside the country. This question, how far this second person can be held liable for contributing to what the first person does in the country, is not regulated by harmonized law. We only have provisions on what is direct infringement. We do not have provisions on what is contributory infringement. So, from the German perspective, the courts applied the rules they always applied in these kinds of situations. According to the German law, in criminal law we differentiate between tortfeasor or co-tortfeasors and assistants—someone who is only assisting a tort. With regard to civil law, in particular with regard to IP law, we don’t have this difference. Therefore, just contributing to the act of infringement in some way, as long as you know that this meant to be a contributory act to the infringement, in Germany is sufficient. This is the general concept in Germany. What I take from this panel is that, obviously, the traditional concept in the United Kingdom is different. MR. CORDERY: It is, yes. JUDGE GRABINSKI: With regard to indirect infringement, there we have a provision. So I am a bit surprised that we still have differences there, because there we have harmonized law. We should at least avoid having differences with regard to indirect infringement. MR. PERKINS: Thanks. 45 Case C-4/03, Gesellschaft fur Antriebstechnik mbH & Co. KG (GAT) v. Lamellen und Kupplungsbau Beteiligungs KG (LuK), 2006 E.C.R. I-6509; Case C-539/03, Roche Nederland BV v. Frederick Primus, 2006 E.C.R. I-6535.

90  CHAPTER IV: PATENT LAW We have one question, if we are allowed to go on for a couple of minutes. QUESTION: Thank you. [Inaudible—maybe Harmsen or Rodiger?], Bird & Bird, Düsseldorf. I would like to come back exactly to the point Klaus just mentioned, this chain of contribution from Iceland to Malta to Europe. In most of the cases, the one supplying from Iceland to Malta knows exactly that all his products end up here, in Germany or in the United Kingdom or wherever. So it sells a whole set of products knowing that some of them most likely will end up in that one country. This is fine, as we learned today, for committing infringing acts. But what about damages and accounting? What should the guy who is held liable for infringement in Iceland account for, the products he provided to Malta not knowing how much of them ended up in Germany? And how should he know, because he is not the one exporting to Germany. It’s the guy in Malta who buys the products from him. So this is one other point. I entirely support this case law, but this is another point of criticism I would have. Maybe someone on the panel has a view on that. MR. PERKINS: But at least you’ve got your injunction, which is probably the main thing. Do you want to come back on that, Klaus, very quickly? JUDGE GRABINSKI: Yes. The first point is if he is good friend of the guy in Malta, then he can ask him and he will of course provide the information. If he is not a good friend to him, then he might even force him to do so, if that is a possibility, because he is now in trouble, and maybe they have some contractual basis for an action to get the information necessary. At least he has to do something. If he can’t do anything about this, then you cannot be asked to do something which you cannot do. But at least you have to do something and show that you have at least tried everything possible to get the information. MR. PERKINS: So I think the take-away message from this session is if we ever get a harmonized litigation procedure in Europe, it may help to cure the perceived abuses from the Pharmaceutical Sector Report46 the European Commission sees, that will take a lot of fun toys away from the practitioners here, and I think from the judiciary as well. Thank you all very much.

46 European Comm’n, Pharmaceutical Sector Inquiry Preliminary Report (2008), available at http://ec.europa.eu/ competition/sectors/pharmaceuticals/inquiry/index.html.

Chapter IV

Patent Law Part D: Work Sharing Patent Offices: IP5 Group (Consisting of USPTO, JPO, SIPO, KIPO and EPO) Strategy for Work Sharing and Related Foundation Projects Moderator John Richards

Ladas & Parry (New York, N.Y.) Speakers

Alison Brimelow

President, European Patent Office (Munich)

Shintaro Takahara

Director, Multilateral Policy Office, International Affairs Division, Japan Patent Office

Charles R. Eloshway

Deputy Director, Office of International Policy and Enforcement, U.S. Patent and Trademark Office (Alexandria, VA) Kaz Kazenske

Senior Director, Patent Prosecution, Microsoft Corporation (Virginia)

Commentators Heinz Bardehle

Pushmann & Borchert (Oberhaching, Germany)

Dan Ravicher

Executive Director, Public Patent Foundation; Lecturer in Law, Intellectual Property Law Program, Benjamin N. Cardozo School of Law (New York, N.Y.)

MR. RICHARDS: Our next session is an important one, although we have competition with the “Pharma and the European Commission” session, so I guess some people have wandered off.

92  CHAPTER IV: PATENT LAW The strains which patent offices are suffering and the need to develop some way in which those loads are dealt with more effectively and more efficiently is a very important issue. The five major patent offices—USPTO, Japan, Korea, China—have now started to work towards cooperation. We have cooperation already in the form of the Patent Prosecution Highway,1 in the form of Triway,2 in the form of the New Route between the United States and Japan,3 all of which are very helpful. We have, starting the beginning of this year, supplementary search out of PCT, where we should be able to get searches done in Russia as well as in other countries as a supplemental search on PCT. My own personal view is that the most useful thing that could be done to make the patent system worldwide more efficient is to provide some means by which we can search the U.S., European, Russian, and East Asian art before we have to commit to a claim. Of course, that raises the question of how do you know what to search on before you have committed to a claim. That is a dynamic which sometime we are going to have to work out. But I think if we could do that everything would be much more effective. But that’s just me spouting off. Our first speaker is Alison Brimelow, who is President of the European Patent Office. We also have Charles Eloshway, who is Deputy Director of the USPTO. We have Shintaro Takahara from the JPO; Kaz Kazenske, who is now with Microsoft but was for a long time with the USPTO; then Heinz Bardehle, who is the doyenne, if I can call him that, of the German patent profession; and Dan Ravicher, who is Executive Director of the Public Patent Foundation at Benjamin Cardozo School of Law in New York. With that, I turn you over to Alison Brimelow. MS. BRIMELOW: Thank you for that introduction. Good afternoon, ladies and gentlemen. One can’t really compete with the sexy subject of the pharma sector inquiry. But, as ever, I’ve got a rather sharp eye on the future, which is why I am glad to talk about what we are getting up to within the “Big Five” offices, or possibly more as time goes by. The question of managing workload is something that has been on my mind for ten years. It is ten years since I became chief executive of what was then “the Patent Office,” now the UKIPO, and I have been banging this drum, not necessarily very effectively, ever since, because I think we have a structural problem which needs to be managed, and if we don’t manage it I think we are putting the system at risk. Yes indeed, patent application numbers have been rising over the last quarter-century. That means more work, which in one sense is fine. Jon Dudas was in the habit of saying that he ran a Ponzi scheme. I run a Ponzi scheme as well, which means so long as we get patent applications we sort of stay solvent, but if they dry up we are at risk. But workload, per se, has been quite useful. 1 See USPTO, Patent Prosecution Highway (PPH)—Fast Track Examination of Applications, http://www.uspto. gov/patents/init_events/pph/index.jsp (“Under the Patent Prosecution Highway (PPH), an applicant receiving a ruling from the Office of First Filing (OFF) that at least one claim in an application filed in the OFF is patentable may request that the Office of Second Filing (OSF) fast track the examination of corresponding claims in corresponding applications filed in the OSF.” The USPTO has PPH agreements with intellectual property offices in the following countries: Australia, Canada, Denmark, EPO, Finland, Germany, Japan, Korea, Singapore, U.K.). 2 See Press Release, Jon Dudas, USPTO, Triway Pilot Programme Between the United States Patent and Trademark Office, the European Patent Office, and the Japan Patent Office (Jul. 14, 2008), available at http://www.uspto.gov/ web/offices/pac/dapp/opla/preognotice/triway_pilot_07152008.pdf; see also O.J. EPO (2008) 481, available at http:// www.european-patent-office.org/epo/pubs/oj008/10_08/10_4818.pdf. 3 See John Doll, Commissioner for Patents, USPTO, New Route Pilot Project Between the United States Patent and Trademark Office and the Japan Patent Office, Jan. 24, 2008, available at http://www.uspto.gov/web/offices/pac/ dapp/opla/preognotice/new_route_pilot_012008.pdf (“Under the New Route framework, a filing in one office that is a party to this arrangement would be deemed a filing in all member offices.”); see also Japan Patent Office, Outline of the New Route Proposal for Applications Abroad (Nov. 2005), available at http://www.jpo.go.jp/torikumi/kokusai/ kokusai3/pdf/3kyoku_200511_munich/file.pdf.

PART D: WORK SHARING  93

What has been less useful has been growing backlogs, at least in terms of the integrity of the system. I’ve got comparative figures for 2007, which show that at the end of 2007 the pending backlog at the EPO was nearly 500,000, 470,000, 880 at the JPO, and 1.1 million at the USPTO.4 That is an awful lot of darkness and uncertainty. Our expectation is that those numbers will continue to go up, though we may get a breather out of the economic slowdown, or the recession, or whatever you want to call it. My concern is a public policy concern. Areas of darkness are the antithesis of the patent, and the making open, which is the key justification of our system.5 I perfectly accept that backlogs and delays offer plenty of opportunity for making money. That’s fine. But that is not really what the patent system is for, and that is why I am concerned. The other thing I think which we need to recognize is that these volumes do not necessarily map precisely on to genuine innovation. What you have there is replication and duplication of applications. It seems to me that there again there has to be a pretty strong push for getting offices to recognize that and adapt accordingly. Now, working together has a respectable tradition, certainly between the USPTO, the JPO, and the EPO. The Trilateral is almost as old as the EPO itself.6 We have a history of what I would call civilized and intelligent projects, but they do proceed rather slowly. I think that this has always been cooperation around the edges rather than in the heart of the matter. But, for whatever reason, in the last year or so not only the Trilateral offices but also the Chinese and the Korean offices—and between us we are the “Large Five,” and Europe, having been number 3 now sits at number 5—have recognized that really matters are getting quite pressing and we are having another shove at the question of better cooperation in the matter of workload. Certainly, we think that what we call unnecessary duplication—please note the diplomatic language—between the office of first filing and the office of second filing should be eliminated and we need to find ways of making that work. We also said, of course, that it meant that the work done in the office of first filing should be timely. That’s a sine qua non. We have got together and we have launched a large process, possibly a long process, but a very important process, of taking forward what we call ten Foundation Projects. They are wide ranging and they are the building blocks, in my view the basic building blocks, for a coherent, consistent global system. They range from classification and machine translation through to support tools, common application format, a common approach to examination practice and to the training of examiners. That is actually quite revolutionary but, taken in bite-size chunks, should begin to deliver the approximation that we need. We have also said something else which I think is very, very important, and that is, to put it in a demotic paraphrase, “It’s the PCT, stupid.” The five of us recognize that the PCT7 is the real foundation for a global patent system and that we need to work together to ensure that 4 See WIPO, World Patent Report—A Statistical Review 2008, at 8–9 (2008), available at http://www.wipo.int/ export/sites/www/ipstats/en/statistics/patents/pdf/wipo_pub_931.pdf [hereinafter World Patent Report 2008]. 5 In the U.S., there are “twin purposes” to the patent system: “encouraging new inventions” and “adding knowledge to the public domain.” Eldred v. Ashcroft, 537 U.S. 186, 226­­–27 (2003) (Stevens, J., dissenting). The latter purpose is accomplished via a statutory requirement to provide a description in “full, clear, concise, and exact terms” of the invention’s manufacture and use. See 35 U.S.C. § 112 (2000). 6 “The Trilateral Co-operation was set up in 1983 between the European Patent Office (EPO), the Japan Patent Office (JPO), and the United States Patent and Trademark Office (USPTO).” Trilateral Co-operation Website, http:// www.trilateral.net/index.html (last visited Jan. 23, 2010). The EPO came into being as a result of the European Patent Convention, Oct. 5, 1973, 13 I.L.M. 268 (in force 1977). See EPO, History, http://www.epo.org/about-us/office/ history.html (last visited Jan. 23, 2010). 7 Patent Cooperation Treaty, June 19, 1970, 28 U.S.T. 7645, 1160 U.N.T.S. 231; see also World Patent Report 2008, supra note 4, at 12.

94  CHAPTER IV: PATENT LAW the PCT functions effectively, more effectively, and that we should not be diverting effort and energy too far away from it. But—and there is always a but—patent offices faced with this problem are also being inventive. I suppose that shows that we can learn. There are a number of parallel things going on which may or may not be helpful to the underlying principle of “It’s the PCT, stupid.” The most important of those is, I think, the Patent Prosecution Highway (PPH). Indeed, the EPO is participating in the Patent Prosecution Highway.8 Though my notes say it may be six cases now, so far we seem to have had five cases, which in the context of my workload is not exactly significant. Though I am told by participating offices that this is very helpful, this is very useful, this is really what it is all about, the numbers don’t quite support that case. I think we need to be realistic about it. Certainly, though I am told by users that PPH has its uses in certain circumstances, nobody is being killed in the rush to use it. I certainly am concerned that by putting effort into that we may be taking effort out of the PCT and out of an existing plurilateral system that really has quite a lot going for it. So I am strongly supportive of Francis Gurry’s initiative with a roadmap for taking forward the development of the PCT.9 That is where the weight and energy of the EPO will be going. Meanwhile, within the European ever-growing family of the EPO organization, we have been trying to practice what we preach as well with something called the Utilization Pilot Project (UPP),10 which I can best describe as a confidence-building measure. The language is from the language of disarmament. It is actually a very, very important concept, because even within the distinguished family of the EPO we don’t exactly regard each other as competent, we don’t necessarily trust each other fully. The UPP was designed to show—and indeed I think it did—that we could make use of searches undertaken within the European family in order to improve the process within the EPO Office itself. What we were looking at was work carried out during the priority year within some national offices. It showed that this could be used to support the quality process before the EPO. So we are now moving to a permanent utilization system. But there again, when we left it up to applicants, they weren’t terribly interested, and we needed to intervene to get the files moving around Europe. We are now going to propose an amendment to our implementing regulations under which we will be inviting applicants to let the EPO have a copy of any search report or first-office action established by an office of first filing as soon as possible. I think this is very, very important, because unless we can actually walk the talk ourselves within the EPO, how the hell are we going to export that process more globally? I think we have to recognize that this process is never really going to be applicant-driven. I said at the start I saw the hazard as a public policy hazard, and it is very clear that people can make money out of delay, and making money is quite important. But I do think that we have to find ways of building confidence, and the best way to do that is simply to ensure that the exchanges take place and the information is used. 8 See USPTO, The Patent Prosecution Highway in Conjunction with the European Patent Office, http://www.uspto. gov/web/patents/pph/pph_epo.html (last visited Jan. 23, 2010). 9 See Memorandum of Francis Gurry, Director General, WIPO, “The Future of the PTC”, appx. I, PCT/MIA/16/9 (Mar. 5, 2009), available at http://www.wipo.int/edocs/mdocs/pct/en/pct_mia_16/pct_mia_16_9.pdf (presented to the 16th session of the Meeting of International Authorities, Seoul, Mar. 16­­–18, 2009). 10 See EPO, European Patent Network, http://www.epo.org/about-us/european-patent-network.html (last visited Jan. 23, 2010) (“Completed in December 2008, the Utilisation Pilot Project enabled EPO examiners processing European patent applications that claim priority from a first filing to make appropriate use of work already carried out by national patent offices on national filings.”).

PART D: WORK SHARING  95

In that context, though, and as part of being consistent, I think we need to recognize that [International Searching Authorities] need to conform with their PCT obligations—and even the EPO doesn’t quite—so sorting that out is a priority, and we will be moving to supplementary international search11 as of July 2010. I wish it was sooner. I have three priorities this year: One of them is balancing the budget; the second is industrial peace; and the third is the IP5 process. I hope that in pursuit of balancing my budget in hard times I will still find the resources to do this work. It is a very clear commitment on our part. I recognize that the ten projects will be slowed down by concern about resources and shortage of resources, but I also think that in a sense this is a last chance for us to show that we can run this system more rationally, that we can put into place the real building blocks of cooperation, and that we can demonstrate quite clearly that we can trust each other and take that unnecessary duplication out of the system. That is all I have to say. MR. RICHARDS: Thank you. Charles. MR. ELOSHWAY: Thank you. I am going to inevitably cover some of the same ground that President Brimelow did, and I have a feeling that my colleague Shintaro will as well. The three of us have all been deeply involved with this issue of work sharing for the last several years, both in the Trilateral and in the IP5 process. I am going to give a bit of background on why work sharing is important for us at the USPTO, talk about a few work-sharing-related initiatives, a bit about the IP5 Foundation Projects, and then segue into a discussion about PCT issues. [Slide] A picture is often worth 1,000 words. In this instance I think the picture is worth a few thousand applications. This diagram shows the number of cross-filings on an annual basis. This was from 2006 and was compiled, I believe, by my colleagues at JPO, so many thanks to them for this work. It shows the number of cross-filed applications among the “Big Five” offices in 2006. You can see the sheer volume has a great potential for unlocking a lot of efficiency gains if we are able to somehow capitalize on the work that has already been done in another office on the corresponding application. This is the essence of work sharing: How can one office exploit work already done on the same application in another office? We have been exploring a number of work-sharing options in the Trilateral over the last few years. Some have gotten further than others. From the USPTO perspective, we have tried to maintain an open mind as much as possible with regard to at least trying out projects to see what results we can obtain, what lessons we can learn, and then how we might be able to feed both the results and those lessons learned into perhaps a more comprehensive work-sharing scheme. One of the key projects that we have been engaged in for the last two, two and a half, years or so is the Patent Prosecution Highway. The basic idea behind the Patent Prosecution Highway is that when there is a commonly filed application to two offices and the first office finds claims allowable, the applicant can request expedited prosecution of claims of corresponding scope in the second office.12 In turn, the applicant has to make available to the second office some additional documentation, which then the office of second filing can use in exploiting the work done by the first office. 11 See Regulations under the Patent Cooperation Treaty, Rule 45bis, available at http://www.wipo.int/pct/en/texts/ rules/r45bis.htm (Supplementary International Searches). 12 See USPTO, Patent Prosecution Highway (PPH)—Fast Track Examination of Applications, http://www.uspto. gov/patents/init_events/pph/index.jsp.

96  CHAPTER IV: PATENT LAW The linkage here with claims already determined allowable is significant in a couple of different ways: • Number one, in working with partner offices in whom we have a high degree of confidence in the work product, the narrowing down of the scope of claims to those found allowable by one office should greatly simplify the work done in the second office. I am going to show some statistics that bear that out in a few minutes. • Importantly for the USPTO, one of the big benefits that we have seen from the Patent Prosecution Highway is a significant reduction in the number of claims that we would otherwise have to examine, somewhere in the order of 20 percent. This is, in part, due to the very liberal claiming practice that we already have at the USPTO vis-à-vis other offices. So we began the pilot Prosecution Highway with the JPO in 2006.13 That was converted to a full-time implementation in 2008.14 We also began full implementation following a pilot with the Korean Office in January of 2009.15 We currently have pilots with a number of other offices, including the EPO, and we are in discussions with the German and the Finnish offices to launch pilots a bit later this year. Now, one other interesting development is that we have put together a plurilateral group. This is made up of offices participating in bilateral Patent Prosecution Highways. We had our first meeting in Copenhagen in February 2009.16 We are planning a follow-up working group in Tokyo in May. The point of this exercise is to try to rationalize and stabilize the framework so that applicants can have a reliable system going from office to office to office rather than just a series of bilateral arrangements that may have some differences in procedures. Let me just give you some stats here in five different categories. As President Brimelow pointed out, the number of requests so far certainly as a percentage of the total number of filings that we at the USPTO receive on an annual basis is not that high. I would characterize it as fairly modest. However, the usage is trending upward fairly substantially, notwithstanding the relatively low number of participating applications. This number we believe is going to continue to grow both as a function of adding additional offices to the framework and through other efforts that we plan to undertake in the plurilateral framework, perhaps also on a bilateral basis in terms of advertising and outreach. In that respect I would direct your attention to the copies of Managing Intellectual Property that are available on the table outside the conference rooms here. There is an excellent article in there about the Patent Prosecution Highway, some of the pluses and minuses and some recommendations for possible change.17 But it has a lot of additional information regarding the PPH that I am not going to go into here for lack of time. Now, some of the significant benefits of the Patent Prosecution Highway: • There is a significant reduction in pendency in many areas, in particular the high pendency areas at USPTO. On average, for non-PPH applications, pendency is about twenty-five months from filing to first office action.18 Under the PPH, we are working on a two-to-three-month 13 See Press Release, USPTO, U.S. and Japan to Pilot Patent Prosecution Highway (May 24, 2006), available at http://www.uspto.gov/patents/init_events/pph/pph_news.jsp. 14 See Press Release, USPTO, USPTO and JPO to Implement Patent Prosecution Highway on Full-Time Basis (Dec. 21, 2007), available at http://www.uspto.gov/news/pr/2007/07-50.jsp (announcing that the full-time PPH will begin Jan. 4, 2008). 15 See Press Release, USPTO, USPTO and KIPO to Implement Patent Prosecution Highway on Full-Time Basis (Jan. 28, 2009), available at http://www.uspto.gov/news/pr/2009/09_01.jsp. 16 See Summary of the Plurilateral Patent Prosecution Highway Meeting held at the DKPTO (Feb. 19–20, 2009), available at http://www.dkpto.dk/media/121166/summary_plurilateral_pph-meeting.pdf. 17 John M Carson, Alan Kessler & Hugh Dunlop, “A Practical Guide to the Patent Prosecution Highway”, Managing Intell. Prop., Apr. 2009, at 24–29, available at http://www.managingip.com/Article.aspx?ArticleID=2167622. 18 See WIPO, World Intellectual Property Indicators 45 (2009), available at http://www.wipo.int/export/sites/ www/ipstats/en/statistics/patents/pdf/wipo_pub_941.pdf (charting average pendency time by patent office).

PART D: WORK SHARING  97

turnaround time from the grant of the request for the PPH to a first action being issued.19 The actual pendency savings, though, depends in large part on how long a particular application had already been sitting in the examination queue. But we have seen savings of about eighteen months in some areas, and these tend to be the high-tech areas. • Significantly, the allowance rate for PPH applications—this data is just drawn from the USPTO-JPO PPH because that is where we have the most data points—is double the ordinary allowance rate for other applications at USPTO. That is the overall rate. • Significantly, the first action allowance rate is also about double the non-PPH first action allowance rate. We are also working on an initiative called SHARE, which stands for Strategic Handling of Applications for Rapid Examination.20 The basic idea in SHARE is that each office would prioritize or give search-and-examination priority to applications for which it was the office of first filing. The idea here is that by advancing the search and examination of those applications we would be able to make more first office work product available in a timely fashion for the second offices to exploit. Importantly here—SHARE and PPH are complementary in this respect—if through SHARE you can make more work product available prior to examination beginning in the second office, that would increase the number of potentially applicable PPH requests in the second office. We began the Trilateral pilot in September 2008.21 This was mainly for the USPTO benefit. The EPO and the JPO already have in place their own version of the SHARE concept. At USPTO we have a number of complicating factors, both in terms of practice and in terms of law, that we have to resolve. So that work is continuing. We are also planning on starting a pilot with the Korean Office to test the same concept. [Slide] President Brimelow referred to the work in the IP5 regarding Foundation Projects. Here I have listed each of the ten Foundation Projects and which office has the lead for which project.22 As was stated earlier, the basic premise here is that these ten projects are generally viewed as the foundation, the building blocks, for effective and optimal cooperation among the offices in the area of work sharing. Now, an interesting thing happened on the way to the PPH Forum, which is that the work that we had done on the PPH engendered a whole lot of concern with regard to whether we were somehow ignoring the PCT. That is not at all the case. However, we do take it that the work on PPH, notwithstanding the number of applications involved thus far has been relatively small, has provoked a significant amount of concern with regard to potential for competition with PCT, that PCT reform has now been reinvigorated. 19 See Four Office Statistics Report 2008, at 19, available at http://www.trilateral.net/statistics/ tsr/statisticsreport/fullreport.pdf (“The patent filings examined through the Accelerated Examination Program rose by 173 percent over its introduction last year and maintained a 12-month or less pendency for every application in the program with an average time to final action or allowance of 186 days or just over six months.”). 20 See Trilateral Co-operation, Strategic Handling of Applications for Rapid Examination—SHARE, http://www. trilateral.net/projects/worksharing/share.html. 21 See Press Release, Jon Dudas, USPTO, Triway Pilot Programme Between the United States Patent and Trademark Office, the European Patent Office, and the Japan Patent Office (Jul. 14, 2008), available at http://www.uspto.gov/ web/offices/pac/dapp/opla/preognotice/triway_pilot_07152008.pdf; 22 See Johnson Kong, “IP5 Announces International Work-sharing”, Securing Innovation, Nov. 7, 2008, http:// www.securinginnovation.com/2008/11/articles/patents/ip5-announces-international-worksharing/print.html (the ten foundation projects are: (1) Common Documentation Database (lead: EPO), (2) Common Approach for a Hybrid Classification (lead: EPO), (3) Common Application Format (lead: JPO), (4) Common Access to Search and Examination Results (lead: JPO), (5) Common Training Policy (lead: KIPO), (6) Mutual Machine Translation (lead: KIPO), (7) Common Rules for Examination Practice and Quality Control (lead: SIPO), (8) Common Statistical Parameter System for Examination (lead: SIPO), (9) Common Approach to Sharing and Documenting Search Strategies (lead: USPTO), (10) Common Search and Examination Support Tools (lead: USPTO)).

98  CHAPTER IV: PATENT LAW Now, just in terms of some things at the USPTO, many of you already know that almost all the PCT Chapter 1 searches that USPTO is responsible for is outsourced to domestic contractors.23 We have recently also implemented a new PCT quality management plan that subsumes the quality review function for PCT applications that are outsourced into the ordinary quality review department. [Slide] Now, our outsourcing has had a lot of significant benefits. In terms of timeliness of PCT handling, this chart shows the significant improvement we made, from about 2 or 3 percent timeliness to upwards of around 60 percent, which I think is actually very competitive with any of the other larger authorities. PCT reform is also making its way through the system. The idea is to put together a helpful roadmap for PCT reform that is going to serve as the basis for further work. The idea here is to focus on work sharing. Three common themes have emerged: collaboration, third-party participation, and perhaps a reengagement with PCT Chapter 2 examinations, with a focus on higher quality and better work sharing. Thank you very much. MR. RICHARDS: Shintaro Takahara. MR. TAKAHARA: Thank you. Today I would like to introduce to you the activities of the JPO for the promotion of global work sharing. [Slide] The total number of worldwide patent filings has been increasing. The number of patent applications filed worldwide in 2005 was 1.6 million.24 It should be noted that 40 percent of those applications are filed by non-residents. [Slide] I think this is the same chart Charles just showed, so I will skip this. [Slide] This shows three types of work-sharing frameworks corresponding to the stages of patent prosecution from filing to grant. The three types of work sharing are based on the utilization of (1) search results, (2) first office action, and (3) final examination results. [Slide] An example of the utilization of search results is the International Search Report (ISR) in PCT. I would make a couple of points in this regard. [Slide] There is a good number of Paris route applications,25 and we have to think of a work-sharing scheme for that Paris route. In some cases, the reliability of ISR is not sufficient. Third, the ISR is not always effectively utilized in cases where amendments are made only in the national phase. [Slide] An example of that utilization of first office action result is the JP First scheme by us. Our first office action results can be machine-translated and obtainable through the Internet. This type of work sharing is applicable to a large number of PCT and Paris route applications but does not utilize the final examination result, which potentially offers the most highly tuned information. [Slide] Finally, an example of the utilization in the final examination is the Patent Prosecution Highway (PPH). The range of the utilization is limited to the application for which the request 23 “Chapter I and Chapter II … are different in a technical aspect that is fundamental: Chapter I refers to an International Search (known by its initial ISR), while Chapter II is referenced to a so-called International Preliminary Examination (IPE).” Luis C. Schmidt & Cesar Ramos, “An Introduction to the PCT”, IPFrontline, Dec. 28, 2006, http://www.ipfrontline.com/depts/article.asp?id=13779&deptid=6. 24 See World Patent Report 2008, supra note 4, at 7. 25 The Paris Route, or Direct Application is an alternative to the PTC route. See generally Japan Patent Office, Outline of the New Route Proposal for Applications Abroad, available at http://www.aipla.org/Content/Microsites152/ IP_Practice_in_Japan/Committee_Meetings/Presentations10/Presentations9/10C-Shimizu-Outline-of-New-RouteProposal.doc (“Under the Paris route, an applicant has to file plural applications each of which is separately prosecuted in each country/region for which the applicant wishes obtain the patent protection for his invention. The applicant has to file the second set of applications within 12 months from the first filing date (priority date).”).

PART D: WORK SHARING  99

has been made. That has the advantages that an examiner in the second office can know the direction that the examiner in the first office took as well as the granted claims. The JPO is pursuing the benefits of work sharing at every stage. [Slide] First, I would like to introduce the JP First program. This is a scheme in which the JPO as the office of first filing (OFF) unilaterally offers quick information of first office actions online. The office of second filing, the OSF, can decide whether or not and to what extent the information given by the JPO should be cited or used. [Slide] The office of first filing, the JPO, prioritizes examination of applications in which the request for examination has been made within two years from JPO filing. These are the applications, we believe, that the applicants want to have processed quickly. [Slide] The first office actions are made and the results are accessible to the OSF. This makes examination more efficient in the OSF. The JPO provides examination results after machine translation through the AIPN system to thirty-two offices around the world. [Slide] This shows the result of analysis of the JP First program from April 2008 to February 2009. Over 9,000 applications satisfying the conditions were examined in this period. The OSF can utilize the JPO’s FA results in most cases at the time of their substantive examination. [Slide] Next, I would like to explain the PPH. The PPH is the framework in which an application determined to be patentable in the OFF with a simple procedure upon an applicant’s request, and with the proviso that the claims in the two office correspond, is eligible to have an accelerated examination in the OSF. Under the PPH, applicants can speed up the examination and establish patent rights abroad. [Slide] This shows the record of PPH requests in which the JPO serves as the office of second filing. [Slide] As shown in this graph, the number of PPH requests has been gradually but steadily increasing. [Slide] The PPH provides many advantages over the normal examination procedure. These figures show the results of an analysis of the JP-US PPH. The figures indicate shortening of pendency from first action to final action. This is perhaps because the examinations have been finished in the OFF, and therefore the number of office actions needed to shape the claims to be a patentable form are reduced. [Slide] The applications that are on the PPH enjoy higher grant rates in the office of second filing compared to applications processed in the normal procedure. This is perhaps because the grant in the OFF offers the prospect of actions to be made and the predicted outcome in the OSF. [Slide] Since the launch of the PPH pilot program between the USPTO and JPO in July 2006, the PPH, as expected, is an adequate work-sharing method. Various patent offices have participated in the PPH scheme. As of April 2009, eleven offices have been participating in the programs and fourteen bilateral PPH programs exist.26 [Slide] Another effect that the PPH seems to have is the confidence-building effect between OFF examiners and OSF examiners. When the PPH application is examined in the OSF, the OSF examiner will re‑experience the examination process in the OFF. The OSF examiner will know not only the documents the OFF examiner cites, but also the direction the examiner took, as well as the granted claims in the OSF. This enables the OSF examiner to compare search and examination results with those of the OFF examiner. By repeating such comparisons, it becomes easier for the OSF examiner to understand the examination strategy of the OFF examiner. As a result, mutual confidence between the OFF and OSF examiners is built. 26 See USPTO, Patent Prosecution Highway (PPH)—Fast Track Examination of Applications, http://www.uspto. gov/patents/init_events/pph/index.jsp.

100  CHAPTER IV: PATENT LAW [Slide] The PPH started as a scheme to enhance work sharing for Paris route applications, but now, as we grow convinced of its confidence-building effect, we start to wonder if the scheme can work to promote further utilization of the ISR. This is our present hypothesis: When an examiner in one office can understand the examination strategy of another office and build mutual confidence, it becomes easier for the examiner to predict which examination strategy could be used effectively and to foresee the outcome of applications with a smaller amount of information perhaps from office actions made by other offices. The same can be said of PCT applications in the national phase for which an ISR has been drafted by the other office. In other words, an examiner may become skilled enough to effectively predict the examination strategy and foresee the outcome of the application from the information in the ISR, which is one of the earliest stages of patent prosecution. We believe this promotes utilization of ISR. However, there is still one missing link to this hypothesis. The range of international search in terms of so-called secret prior art must be completed for the ISR. In the routine procedure, the ISR usually is established sometime before the international publication at eighteen months, creating a pocket of secret prior art consisting of patent applications filed before the present application and made known to the public after the ISR drafting. This leads to the JPO’s PCT reform proposal to further utilize PCT ISR. One of the proposals is the establishment of ISR after the international publication. This eliminates the secret prior art pocket. Another proposal is the introduction of a system for filing of third-party observations. Through the reinforcement of the ISR, we believe the confidence-building effect of worksharing schemes like PPH could further enhance the utilization of ISR information, and thus benefit the offices as well as the users of the global patent community. Thank you very much. MR. RICHARDS: Kaz? MR. KAZENSKI: It is a real privilege to be here. I am going to take a little different stand on this, without showing my age a whole lot here. [Slide] I am going to put a quote up here. I’m not going to read it, but I find the last part of this quote, which says, “In a universal network of mechanized information storage and retrieval systems, the first part is a universal patent respected throughout the world.”27 This was written in 1966 in a report to the President of the United States. I wasn’t involved in that. But I find that as meaningful today as it was then, in 1966. This was an elaborate report in the United States that was really looking at the global patent system of that time and a series of recommendations that came out of that report. [Slide] I have a list of frameworks here. This will show my age a little bit. I have been involved in every one of these, except maybe the latter, the IP5, and only at the peripheral. You can go through TRIPs,28 patent globalization, PCT, Trilateral, Patent Law Treaty forums in WIPO,29 the Group B-Plus meetings,30 now PPH and IP5. 27 See President’s Comm’n on the Patent Sys., To Promote the Progress of … Useful Arts in an Age of Exploding Technology (1966). 28 Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197, available at http://www.wto.org/english/ tratop_e/trips_e/t_agm0_e.htm. 29 See, e.g., Standing Committee on the Law of Patents, http://www.wipo.int/patent-law/en/scp.htm. 30 The “Group B+” refers to “the developed country grouping at the World Intellectual Property Organization (WIPO) plus additional countries represented in the European Patent Office (EPO).” Tove Iren S. Gerhardsen, “Developed Countries Speed Up Patent Harmonisation Outside WIPO”, Intell. Prop. Watch, Nov. 6, 2006, http:// www.ip-watch.org/weblog/2006/11/06/developed-countries-speed-up-patent-harmonisation-outside-wipo.

PART D: WORK SHARING  101

I think there is a theme in all of these, and that is to eliminate work and to try to get uniformity of work around the world on the patent systems. I think it deals with examination efficiencies, examination quality. But I think a lot of these discussions are at a very high policy level. You hear first-to-file, grace period, secret prior art—all of these things being thrown out here.31 I will say, though, that I would say TRIPs and PCT have certainly made major breakthroughs in the global patent system. Those two, I think, are out in the forefront, at least in my mind, out of that. I do question, though, a little bit—and it might be my failure on this also—but I think it is a fair question to ask. We have had PCT for thirty years and we are still in this forum. But I do think the PCT has very strong foundations, and I do commend Francis for re-looking at PCT here in a different light and where it can play those roles out of this. When you look at that, though, we have used PPH, we are a company using PPH, and we use PCT. I think there are things that might be learned from PPH and how can those be put into PCT and what have we learned on search about that. Having examined one of the first PCT cases in the United States, I think if you are a patent examiner, which I was many years ago, to have people say they use PCT for a glorified extension of time of thirty-two months doesn’t make an examiner feel warm and fuzzy of what work they are doing down the road on those cases. Are those important or not important? And I don’t think we should be on that. I think in some way we’ve got to address that there is importance to these cases, and we can’t convey that. Those types of conveyances have impacts on these systems. I think the globalization of the world, IT, the Web, I think all of those have put tremendous operating pressures—and you heard from these distinguished guests from these patent offices—on all of these offices today in the work loads they are facing and the backlogs they are facing. There is no doubt about that. I really like this IP5 concept, though. I think this is something that they have put forward in these ten projects and something we are very supportive of, of trying to bring this work together on that. I do think, though, since IP5 started they are facing another experience that they didn’t have since they started that, and that’s the economic downturn of the global economy and what impact that has on IP5. I think some people are saying, “Boy, that puts a dark cloud on some of these.” I’d turn that around. I say this might be the best opportunity they ever had to do cooperation because of the economic downturn, because of the issue of fee revenue for these offices, and the pressures that that is going to create on these offices as they move forward on this. As you look at all of these things, though—and I’ll jump through these slides here in view of the time limit—in the patent harmonization issues, as I said earlier, you deal with a lot of policy issues. I mean everybody knows in the United States the first-to-file,32 or if you go to Europe the friction over grace period,33 or you bring up other issues. These are all very important issues and they have to be talked about. 31 The Group B+ has advocated global patent law harmonization in the areas of first-to-file, grace period, and secret prior art. See, e.g., William New & Tove Iren S. Gerhardsen, “Group B+ Draft Patent Harmonisation Treaty Emerges”, Intell. Prop. Watch, Nov. 7, 2006 http://www.ip-watch.org/weblog/2006/11/07/group-b-draft-patent-harmonisationtreaty-emerges. 32 See, e.g., Mark A. Lemley & Colleen V. Chien, “Are the U.S. Patent Priority Rules Really Necessary?”, 54 Hastings L.J. 1299 (2003) (discussing the merits of “first to file” systems, such as the one in the U.S., in contrast to “first to invent” systems found in Europe). 33 See, e.g., Margo A. Bagley, “The Need for Speed (and Grace): Issues In a First-Inventor-To-File World”, 23 Berkeley Tech. L.J. 1035, 1055 (2008) (“For several years there has been a vigorous debate over the introduction of a meaningful grace period in Europe.”); see also Jan E. M. Galama, “European Patent Organisation, Expert Opinion on the Case for and Against the Introduction of a Grace Period in Europe” 23 (2002), available at http://documents.epo. org/projects/babylon/eponet.nsf/0/07243101217E59B3C125723D00570374/$File/galama_en.pdf.

102  CHAPTER IV: PATENT LAW But if you ask a patent examiner, just go ask a patent examiner anywhere in the world— and I’ve talked to lots of them, whether at the JPO or the EPO or the Korean Office—do they really care about some of these issues? I think some do. But when you talk to patent examiners, what do they say? “Do I understand the case in front of me? Do I know the technology I’m working on? If not, whom do I talk to so I can understand it better? Where is the best prior art out there? How do I get to it? How do I read it? Can I talk to somebody else to help me find it?” This is a system that is built on interaction, it just is. Even in a single office examiners go next-door to another examiner and say, “Did you ever see something like this before?” I mean it’s a system built on that. If I could put a couple things out, I think IP5 and all of these issues—in these times, a focus on three issues that I think are important. I raise those because they are not unique, and I’ll tell you that in a minute. • One is kind of a common database structure. Everybody has the same art, the same technologies, the same issues in front of them. • Two, there is some type of translation tool for these examiners so (1) that they can communicate with each other and (2) that they have some semblance that they can read the prior art in front of them. It doesn’t have to be perfect. You can get a perfect translation later. But you’ve got to be able to read some of it. • The third thing is there needs to be a desktop kind of communication. We live in the day of Facebook, Twitter. Examiners can talk to other examiners. You may say, “Well, they don’t speak the same language.” I don’t want to support unique technology, but you can put a bot on your email today and read it in your preferred language from any other email you want out there. These are not startling technology breakthroughs. We need examiners around the world talking to the same technologists as examiners in other parts of the world. I see an advantage to that in another aspect. It brings all patent offices together, not just the substantial patent offices of the world. You bring a lot of other offices into the fold here. I am bringing these forward because I don’t think those three things are unique to a patent office. When I was in the Patent Office I thought they were maybe, but I’m not sure they are. Any business today that is out doing research—I don’t care if you are looking for artificial intelligence or I want to know where my next vacation is, or whatever—you want to get on there, you want to get wherever the information is. You don’t care if that database is anywhere in the world. You don’t care what language it is in, as long as you can read it, if you want to go somewhere on vacation. These are things that I think the world is dealing with in normal life today. I’m not saying they are perfect, but there are issues that are just being addressed constantly by the tech firms: How do you build better communications? How do you transcend languages? How do you search databases for anybody? These are not patent issues specifically in and of themselves. There are unique aspects in this system, I think. If I had a fourth preference to add down here—and this goes back to my own bias—I think I would mandate that all patent applications need to be in digital form. From a practitioner point of view that may not be a big starting point. They don’t like that a lot. It causes much extra work. But to have these tools work you need a digital application. Without a digital application some of these tools are very difficult to work with. I just want to leave with one aspect of this. I think in the last couple years, with these other projects—WIPO opening up the future of PCT—I think we have come a long way in really getting down to nuts and bolts, how do we get real work efficiencies from this system, and kind of stepping back to the nuts-and-bolts issues.

PART D: WORK SHARING  103

I hope some of these ideas that are expressed here today and questions that are brought out help bring that together. I don’t see it subsiding, let’s say, if there’s a decline by individual companies. The problem in the system, I think, is there are many more companies entering the system. So as one company may not do as much in it because of the downturn, you are going to see lots of companies come from other parts of the world. Not just Europe—you’re going to see Brazil and India and China and all these other ones bring a myriad of applications to the forefront, which only exacerbates the system more. I bring these out because of the language issue, because some of those will not be in these traditional forms we are used to dealing with, and we are going to have to deal with them. I leave that saying let’s try to move ahead of the curve a little bit. These are my personal observations on this. I hope we can all move forward. Thank you. MR. RICHARDS: Heinz, any comments? Go right ahead. MR. BARDEHLE: What would you like to hear now first, supporting what the speakers have said, or criticizing that it is not enough? Let me go a middle way. First, a statement. The large patent offices of the world have each a backlog of much more than 1 million pending unexamined patent applications.34 That is a figure which is so incredible. A million applications. Do you have a feeling of what a million patent applications is? It is a lot. It is a big, big backlog. That backlog gets bigger and bigger and bigger. Fortunately, the EPO is not in that bad a position, but I think more or less you have 500,000 in that area somewhere.35 But it doesn’t matter whether it is 100,000 more or less. It is in any case a big, big burden. That has to be reduced—this is my view—as soon as possible because the backlog is raising and raising and raising. It leads to a situation that applicants are waiting and waiting. They can’t have the protection which they urgently need. Particularly, medium-sized industries, they file, and I for my clients file, a patent application, and the next day after the filing date the product is on the market. They need urgently in many areas protection. There is a different area, the big chemical industry, that is happy with those backlogs because that is an automatic deferred examination system. They wait for years. I have understanding for that. When they file a patent application, they need early priority, and then they wait for years until they find out whether that product works and whether it is allowed. Maybe it is not allowed. That may take years. Would it make sense to examine all those patent applications of which maybe 70 percent are later on lost because of no use or no possibility of use? Does that make sense? We have also to recognize that. That is another aspect of the problem of the big backlog. Now, what can we do? I think what we have here at the end is many authorities and organizations which make this—PPH, IP-Plus, and PCT, and all these organizations—that are working hard on how in the future to reduce the backlog. But this takes time. My firm was at many meetings of the IP-Plus where we tried to go ahead with the patent harmonization, which is a very important matter for reducing the backlog, better harmonizing the work between the patent offices. But that has stopped now. All these things take time. What we have to do is think what we can do immediately. On the PPH, I must say I have my doubts, because when you see the figures, that depends on the request of the applicant. Not all the applicants want PPH, for good reasons I think. I am representing also applicants, and I would have to take into consideration, “Shall I use that, yes or no, because of one effect, which I think is difficult, namely the inclusion of the final decision of the first office?” Do we accept all that? Is that really the best way from the very beginning, to accept the final decision of the earlier first patent office in other patent offices? That is a difficulty in my view. 34 35

See World Intellectual Property Indicators, supra note 18, at 45. See id.

104  CHAPTER IV: PATENT LAW But one point could be done very soon, namely to take over the search of an earlier patent office. We file altogether many, many applications with priorities. We have usually as the first office an office where the search is made. Wouldn’t it be quicker possibly to give the search of the office of the first search to the following offices and they may then recognize that in order to avoid unnecessary work searching again? The biggest amount of work for the examiner is the search. About 60–70 percent of his work time is searching. If this burden is taken away from him with regard to second filings, that would be a great reduction of his work and he could then more concentrate on different filings in his own office. But this is not done. Why? It must also be taken into consideration. I spoke with examiners in many countries and also with the authorities there. Interestingly, we have trade unions of examiners in several patent offices. They are very strong. They don’t want to accept the search of another office. They reject that very strictly. I do not understand that. I am happy when I can have a search from somebody else and I have not the obligation to make it myself. But the examiners think in a different direction. There is no reason to think that they may lose their job when they take the search from other ones. They have enough to do. So that is not the reason. But that is very strange, in my view, their feeling that searching is the most important work of examiners, and they must do that, and we cannot take that away. But taking the search from an earlier office does not mean that they have no search anymore at all. They search all the first filings in any case. That remains. It is just a reduction of work. This is what I think could be done very soon and quickly in order to reduce the backlog. But even that is obviously not possible. We all praise the PPH, and that’s wonderful. But the use of the PPH is not so overwhelming that we can say it will really have an important effect on reducing the backlog. What is personally my view is only to convince examiners in the various patent offices that they can, and they are obliged more or less to, accept the search from an earlier office in order to reduce the workload. That is something which I think can be done very soon and we have not to wait for years and years until all these many organizations which are urgently working on harmonization, this and that—but when does it come to a result? That takes years. The harmonization process started years ago, many, many years ago, and we have nothing. Thank you very much. That is what I wanted to say. MR. RICHARDS: Dan Ravicher. MR. RAVICHER: As the quasi-radical conservative, the thought of big government scares me, and the thought of many big governments working together to do something really scares me. So I have many concerns that I am going to point out about this idea. First, I want to challenge the assumption or the presumption that a backlog of applications is a problem and not instead a symptom of other problems. If it is just a symptom of other problems, trying to cure the symptom will not actually fix the system. I also want to challenge the assumption that work sharing or greater efficiency in the processing of applications will actually achieve a fix to any problem. The first thing I want to say is when I want a coffee I go by Starbucks. There is a long line out the door. I don’t really want the coffee that bad, so I walk by. If there was a shorter line, I would get in line. So the worker at Starbucks doesn’t really have much of an incentive for processing the customers in line much faster because there is always a steady stream of people walking by who would get in line if the line was shorter. What I mean to say by this example is the backlog itself may produce a very positive function of weeding out applicants of less merit-based applications. They may say, “The cost in both time and effort of applying for a patent, because there is a backlog, is too high for me

PART D: WORK SHARING  105

to apply. If the Patent Office was ready, willing, and able to accept my application today and process it, I may apply for something that I readily recognize isn’t that important.” So actually trying to reduce the number of people in line may never actually reduce the total amount of line you have because there are always more people ready to get in the line, waiting for it. With respect to the sharing of information between patent offices, I am worried about a political realist effect, which is that, because of the desire of nations to not be seen as disrespecting each other, there will be political pressure to accept the decisions of other patent offices. So if one patent office has granted a patent, how dare we disagree with that decision? How dare we insult them by saying, “They made an error by granting this application.” That is a concern I have, that although there is the appearance that the second office will come at it with a fresh view and a fresh perspective, I am worried there will be a bias to support the process and be a politically good player and actually just issue the patent. That relates to another concern I have, which is this is all a system about increasing the granting of patents, it is not a system about increasing the rejection of patents. Now, I think the ultimate customers of the patent system are not patent applicants. The customer of the patent system is the general public, who should ultimately at the end of the day have an advanced public domain, and who should never have the freedoms which they have provided by today’s public domain ripped from them by the granting of undeserved patents. So any system that makes it easier for government to take away freedom (by granting patents) but doesn’t make it easier to at the same time to protect freedom (by preventing undeserved patents from being issued) causes concerns for me. I also have a concern that this system would harm small inventors, because large inventors who have the financial resources to apply internationally will figure out which of the five offices can process their application quickest, they will apply there first, they will scheme the system, then apply in all the other countries, and they will get to skip the line. So the large multinational well-funded applicants get to skip all the small inventors in line, and the small inventors, just as they think they have moved to the front of the queue, like when I try to go to a nightclub in New York and I don’t have any inside access, then this big group of people come in and go in front of me and now I am pushed back. I think this is harmful to small inventors. I would also just like to say that uniformity sounds great when you beleive that uniformity would be the adoption of your own ideas. When uniformity comes to having to adopt someone else’s ideas with which I disagree, the process for uniformity seems to splinter. I am not a European, but I have heard rumors that sometimes in the European Union this type of behavior happens. Now, if we really want to talk about the problem of ensuring good patent quality, at least in the United States, the source of the problem, instead of its symptoms, are unlimited continuations which do not provide an “up-or-out” process for applicants—instead it allows for applicants to stay in line as long as they want until they get what they want. Also, the incentives on examiners and the limitations on the amount of time they can spend on an application are two problems that should be addressed, whereas I think the backlog is merely just a symptom of the problem. Thank you for your time. MR. RICHARD: Thank you very much indeed. Before I throw it open, I am going to just make a couple comments myself. Firstly, on PPH, there have been concerns about why PPH has not taken off. We must remember that when PCT came in it didn’t take off either. It took five years before people started to feel comfortable with PCT.

106  CHAPTER IV: PATENT LAW But I think one of the problems that I am seeing with my clients is that you have gone through the examination in one country, they have already forced you to limit your claims, and then you are then coming up to another examiner who is going to feel that it is essential that he does something, is seen to do something, so you are going to be forced to limit down even more than you were in dealing with the office of first filing. There is a concern about that. I have clients who have very different claims in Europe and the United States. There is a large consumer company that I do quite a lot of work for. They very, very frequently have a different set of claims in Europe from the United States because they distinguish the art differently and they are taking a different starting point. They are concerned about if they had an application examined in Europe and then they come to the United States that they are going to have a further set of limitations put on top of them beyond what the EPO did, or vice versa. Secondly, on continuations, I don’t think that is really the problem. At the end of the day you’ve got to convince the examiner that what you have is patentable. Some examiners are obtuse and some examiners are not. In many cases, the number of continuations you get is the result of poor examination rather than from somebody playing games. That certainly is my personal experience. Sometimes people do play games. Any system that we have is going to be gamed by somebody at some point. MR. RAVICHER: If the examiner is being obstinate, then you can just take an appeal to the BPAI and they will reverse the examiner.36 MR. RICHARDS: That has been speeding up now a little bit, but for the last few years that has been a long process. It goes to sleep for three years. Has anybody else on the panel got any comments that they want to make on anything that anybody else has said? MR. KAZENSKE: Very short. On your second assumption, you obviously have not been talking to patent examiners about their own view of how they examine, because there is not that—I wish there was more actually; I’m on the other side—but there is a lot of personal pride in the examination of it, more so, as Heinz was saying, not respecting the examiner of the second office out of that. So I don’t think that is the issue today, on your second point. MR. RICHARDS: Charles? MR. ELOSHWAY: I just wanted to respond to a couple points that were raised. I think they were good points. One is the question whether or not the backlog actually is creating a problem. We can address the issue about whether it is symptomatic or a problem in and of itself separately. This is one of the difficulties with trying to administer the patent system, is that there simply is not an effective “one size fits all” approach. You are going to have applicants that seem to benefit from delays in examination. You have other applicants that may want rights very quickly. Trying to administer a system that accounts for both yet also addresses issues about uncertainty for third-party competitors in the marketplace, issues about public domain, and things like that—there are so many moving parts here that about the best that you can do is try to walk the middle of the road. That doesn’t seem to satisfy anybody. So the problem that we are left with is the system that we’ve got. What we have been trying to do is to make more efficient use of our examining resources and the way that we administer our offices to minimize the impact that some of these issues are creating. 36 “The Board of Patent Appeals and Interferences [BPAI] shall, on written appeal of an applicant, review adverse decisions of examiners upon applications for patents and shall determine priority and patentability of invention in interferences …” 35 U.S.C. § 6(b).

PART D: WORK SHARING  107

The point is well taken, but I think that you need to understand it from the more systematic view that nothing is going to be an easy fix, legislatively or administratively. MR. RICHARDS: Do you want to reply? MR. RAVICHER: I was hoping everyone saw my overarching theme, which is I think patent offices are doing a very good job and the problems are not theirs to be fixed but are the problems of statutory language or other political parts of the process. So patent offices to feel like “It’s our burden to do a better job of processing applications,” I don’t think that is necessarily an accurate description of what is going on these days, in my opinion. MS. BRIMELOW: I disagree very strongly, particularly in the matter of the negative effect of the backlog. “That’s the backlog” can be convenient, as I have said I recognize, but I do perceive very clearly a public policy problem there. I don’t think the analogy with going for coffee, or not for coffee because the queue is too long, actually helps us very much, not least because what’s on sale at a patent office is really rather different, not necessarily replaceable with a glass of water or no coffee. I think we have a system which is structured on certain premises, the continental bargain which you see there, which is you do get a right in return for disclosure. Waiting a very, very long time for disclosure seems to me to be a failure in the public policy context. I don’t mind if you revisit what you want from public policy, but while the rules are set to be as they are, we are not respecting them, and I regard that as a failure of public administration, and I am not comfortable with that at all. MR. RAVICHER: There has actually been a lot of academic literature about what is the average value of an average patent. So few of them, at least in the United States, actually get litigated and turn out to be valuable. They are somewhere between $1,000 and $5,000, if you were to pay a price for the average patent. So I don’t really know if my analogy to a cup of coffee, especially with inflation these days, is that off. And the backlog actually impedes those valuable inventions from getting through because there is so much noise in the system that the signal has a hard time being heard and respected. MR. RICHARDS: Not every valuable patent gets litigated, so some of those statistics are a little bit off sometimes. There was a question. QUESTION: Robert DeBerardine, Sanofi Aventis. I just want to point out that part of the issue with the backlog—and Charles touched upon this—is that certainty when you are advising business leaders is very important. So if it is something that needs a lot of development and you are not sure if you are going to get protection for that development, and that development is very expensive, society may suffer because you may decide the uncertainty is not such that I am going to actually develop this because I may not have the appropriate protection. On the flip side, if there is an application out there that may cover what you are going to do, you may think it is an inappropriate patent, whatever, but it’s an application that is there. There is uncertainty from that application pending. This goes to the point of what is the value of patents. That application may be out there, it may never be litigated, it may actually never issue, but a lot of people may decide not to do things because that application is actually sitting there and pending. That has a large effect on society. MS. BRIMELOW: Yes. MR. RICHARDS: It’s like in the old days before we had publication at eighteen months in the United States. If you are a small inventor, your best way to basically license it was to take it around without the claims and say, “This may cover what you are going to do. Take a license.” Which was not good for the system. It was good for some clients. But that is precisely the problem which we have with not knowing what the final form of claim is as early as we can.

108  CHAPTER IV: PATENT LAW MR. RAVICHER: I don’t think anyone is opposed to legitimate patents being granted instantly. I am in favor of legitimate inventors being awarded the patents they deserve immediately. What I meant to say was addressing the backlog itself—there’s an opportunity cost to each of these well-respected individuals taking the time and effort to think about this way of solving the problem. I am merely suggesting that because of the opportunity cost of taking the time and effort to implement this type of a solution to solve the problem—if it’s not really the problem, if it is just a symptom of other problems—itwould be better for society so patentees can get the patents they deserve quicker, to focus our efforts and limited resources on the actual cause of the problem. MR. RICHARDS: Heinz? MR. BARDEHLE: Thank you. The purely academic view, to say that the measure of the value of patents is based on the question of how many patents are litigated, that is completely wrong. When I consider the situation of my clients—and I have been in the big industry for many, many years, and I represent now many, many smaller clients—I know that the legal uncertainty because of early publication, which we want to have, and waiting and waiting for years and years until the Patent Office makes a decision whether there is a patent or not, and then they have to observe the protection of other ones, they must make investment for the future—this legal uncertainty is what worries applicants very much. That cannot be seen from the academic point of view. You must see that from the point of view of those who really work every day in patent matters with applicants, who file patent applications, and who have to observe foreign patent applications. The legal uncertainty which is given because of the very lengthy time until we have to wait for a final decision, this is what worries many, many, many clients all the time. This might not be not bad for the profession, by the way, because I have to do very often reports or give opinions about possible protection under a pending patent application. And that is done by many, many competitors for one particular patent application. Whereas if the Patent Office in a central way makes a very early decision on that, that removes that legal uncertainty which has very long existed, but is really a burden particularly for middle-size industries. MR. RICHARDS: Of course, early publication itself was to remove even more uncertainty of having unpublished applications sitting out there and coming out seven years later. So we have taken a half-step to solving that problem. MR. RAVICHER: I just point out there is also economic harm from the issuing of patents that aren’t deserved because they preclude otherwise socially desirable activity. So there is social harm from errors on both sides, I completely agree, and the goal of the system should be to eliminate all of that social waste. MS. BRIMELOW: Yes. One of the things that we are trying to do within Europe is to ensure that if there has been drift from the gold standard of what is patentable, that we drift back to where it ought to be. We call it raising the bar. I am happy to report, not in financial terms, that our negative rate has now gone to 51 percent. MR. RICHARDS: As somebody who makes a living prosecuting patent applications, I’m not sure a negative rate of 51 percent is necessarily the objective to aim at. In the EPO it is now becoming more difficult to get a patent on something which is inventive. Those of us who have been in the profession for a long time tend to have a bit of a gut feeling about what is real and what is not real from our clients. We don’t tell you that, obviously. But there is beginning to be more difficulty in my experience to get things through the EPO where I feel they’ve got a real invention. MS. BRIMELOW: I would hope that we aren’t drifting too far in that direction, because I entirely agree. We have to grant what is grantable. But I also note the extent to which there is quite a lot of public criticism about the growth

PART D: WORK SHARING  109

of soft patenting and so on. I think every patent office has to take the quality issue very, very seriously. That’s all we’re trying to do. I would be quite worried, I think, if we saw ourselves drifting much beyond 50-something percent negative, because that would say either that we were getting an awful lot of crap applications or that we had possibly lifted the bar too high. Neither of those is a particularly happy outcome. “Why don’t you just apply the EPC” is a very common remark, “and make sure that you get it right?” That is what we are trying to do. MR. ELOSHWAY: I would have to say from the USPTO perspective we certainly share the concern that we should only be issuing patents on inventions that are patentable, that meet the standards for patentability. On the other hand, if you focus more on the result and outcome in terms of what is viewed to be an appropriate target allowance rate, I think that creates distortions of its own and has ripple effects in terms of other undesirable behaviors that I think maybe at USPTO we are realizing in some respects. So I think that it is not so much a matter of saying that a 50 percent rate is optimal or not. I would hope that we could actually get to a point where 100 percent of the applications that are filed are patentable because everybody is submitting applications that have patentable inventions in them. That is the most optimal world. But we are not there. Short of that, I think that trying to fix a proportion that satisfies some perception of what an appropriate allowance standard should be ought not to be the goal. MS. BRIMELOW: I strongly agree. MR. RICHARDS: To enable us to file patent applications that are going to be allowable, we need somehow to have a worldwide search before we have to commit to our final form of claim. If the system can give us that, then we can write an application which is patentable. There is a question up there. QUESTION: Fred Hamble from Warren Pharmaceuticals. In the part of the discussion regarding the efforts by the patent offices, it was expressed that the economy may assist in weeding out some of the applicants that we’re seeing now, and perhaps the patents. I was just wondering whether or not the patent offices have considered also their current fee systems as a way of discouraging certain behaviors. There was mention of the continuations and the fact that there are constant continuations until the patentees see what they want. Have the patent offices as a whole considered how increases in fees may provide them with the buffer that they are looking for to work through some of those backlogs? MR. RICHARDS: I think Alison Brimelow should answer that question. MS. BRIMELOW: Yes. Of course, one of the things you bump into when you start fiddling with fees—I’ll come on to not fiddling with fees in a moment—is the law of unintended consequences. In the case of claims fees for the EPO, that drove a 40 million hole into my budget—thank you very much, Member States. That was an alternative to my original proposal. We will have to sort that one out, I’m afraid. I haven’t got 40 million to spare. But yes, we obviously talk about it. I think that you need to be very, very careful—just as you do with being careful about what you measure, because what you measure gets done—that applicant behavior moves in directions in response to what you do, and it may not be quite what you intended to have happen. That’s how you get minus 40 million. More generally, Europe has embarked on what I hope will be quite a profound and not very fast process of thinking about how we want to ensure the sustainable funding of the system. The reason for that is (1) the fact that I’m afraid it is very clear that I am running a Ponzi scheme now, which is not entirely comfortable, certainly not respectable either, and (2) there is a widening delta between what it costs to do what we do and what we can earn. Now, some

110  CHAPTER IV: PATENT LAW of that is just pull your finger out and become more efficient, but actually the restructuralists use that as well. Traditionally, we have relied on successful patents to bridge the funding gap, and that looks as though it is going to be unreliable looking ahead. So there is an interesting running debate within Europe about what you can or should charge at what point in the process, bearing in mind your various stakeholders, not least SMEs, who are going to find it difficult to contemplate higher fees. And there is the question too of how little money we make in handling oppositions and appeals and the question of funding access to justice. So yes, it is a running debate. It is an open debate. We started in March. We have some way to go. MR. RICHARDS: Is there any suggestion that you should get more of the renewal fees on patents which come out of the EPO? MS. BRIMELOW: You mean the national renewal fees? MR. RICHARDS: Yes. MS. BRIMELOW: Yes, it’s suggested all the time. My comment to that is, “Dream on.” What I would like member states to consider, and some of them are, is rather than revisiting the distribution key, which is currently 50 percent to them and 50 percent to us—and it does produce some interesting remarks from some Member States along the lines, “Why don’t you grant more? We need the money.” The interesting discussion there is, rather than touching the distribution key, could we get them to guarantee a certain income level regardless of what happens to the grant rate, that we have a floor level? That might be helpful for planning purposes. But frankly, my answer is don’t even think about the distribution key because what you will get is something that you don’t like. But at the moment this bridging money, the maintenance fees from national offices, I have no control over. They can be abolished overnight, as they were in Italy a few years ago—a hole of 20 million in my budget just like that, no consultation, no nothing. For an organization with a budget of 1.2 billion, the capacity to lose overnight something, either by an accidental change of national policy or a deliberate change of policy over which you have no control and on right to comment, seems to me to be unsatisfactory, and I would like to change that. MR. RICHARDS: Does somebody else want to make a comment? MR. ELOSHWAY: I wanted to kind of give a bit of a picture what is going on at USPTO. On the issue of fees, many of you may know, some of you may not, that many of the fees that we have at USPTO are set by statute. So Congress determines what the fee is going to be for a particular thing. These are mainly things like filing fees and maintenance fees and things like that. The way that those statutory fees are structured is that—and this relates to the Ponzi scheme that we seem to all be running—the maintenance fees subsidize the low-cost-of-entry filing fees. So the successful patentees subsidize 50 percent of the dropouts and everybody else. This creates a real problem if your allowance rate goes from, say, 60-some percent to 44 percent in the span of about a year and a half at the same time that you are caught in an economic crisis which is driving filings down somewhere around—I think we are right now about 7 percent off from projection. That creates a real pinch. I would say the magnitude of the shortfall that that creates makes it very difficult to try and account for the difference in terms of charging higher fees for other things that we are allowed to adjust fees for, non-statutory fees, like requests for continuing examination, for instance. We can only set those fees at whatever the recovery cost for the work done is, which makes it very difficult to set them at a really high rate when there’s no justification necessarily for it.

PART D: WORK SHARING  111

So we are kind of hamstrung with the current fee structure that we have. I would like to think that the economic situation may help to mitigate some of the things, like help applicants make a more focused decision about weeding things out of the backlog, but I don’t know if that is actually going to be the case. It actually brought a smile to my face a bit when Dan mentioned that maybe a big backlog would be beneficial for encouraging further dropouts. Using his Starbucks coffee line analogy, the problem we’ve got at the USPTO is not only will people stand in line, they will actually pay for the privilege of standing in line for days to get that damn cup of coffee. So the backlog is not resolving problems at USPTO. It is actually creating more. MR. RICHARDS: Kaz? MR. KAZENSKE: I just want to comment on what was just said about the USPTO. But I go back to Alison, watch out for your unintended consequences. When you have that backlog, at least in the United States, and they should petition to drop from that backlog, they may request a refund of that money, which will be another outlay from the Office on top of not having the income to pay that. It might be like the state of California—you get an I.O.U. for your taxes— but you’d still have that liability. I raise that because companies are looking at that and saying, “If I am going to do that, then I want my money back.” MR. ELOSHWAY: Absolutely. MR. KAZENSKE: That will put a bigger strain on the current fee structure of these offices. The other point I’d like to make about that is—and I’m not saying it’s us or anybody, a lot of my contemporaries—with this allowance rate, there is a lot of discussion in corporate now, because of not getting patents, “May I use other mechanisms, trade secrets or otherwise?”— which have all kinds of consequences behind that. But companies are looking at that today because of what they feel they should be getting and they are not. Driven by what Chuck said may be an artificial number, that certainly does not necessarily lead to disclosures and openness of technology and building on that. It leads to keeping it inside, holding it back, and figuring out—and a lot of energy holding it back, of “How do we keep something a trade secret? How may we do that?” I don’t think that moves things forward necessarily because of that. MR. RICHARDS: The other thing on abandonment and dropping out, people either abandon early and ask for their money back or they wait until the examiner has done their job and say, “Aw, it’s not worth the effort of paying the attorney’s fees to push this through,” which doesn’t help the Patent Office at all. On maintenance fees, as the maintenance fees go up, with my clients the first thing that happened when the economic downturn started is we started seeing abandonment of granted patents. “Is this really worth spending this money on? Either we have established ourselves in the market and nobody is going to challenge us for the next few years anyway, or it’s not worth it.” MS. BRIMELOW: In policy terms, abandonment has to be fine. But let me say that my demand is down 7 percent as well, taking me to 2007 levels, but my money is 4 percent below 2007 money. So that’s exactly what we are seeing. But I, at least, am allowed to run a deficit, which you are not. MR. ELOSHWAY: We can run an immediate deficit, but we can’t run it from year to year, which is the problem. MR. RICHARDS: There was a question there. QUESTION: Thank you. Venetia Kent. I am from Rohm & Hass, or rather we have been acquired by Dow very recently, but I speak for Rohm & Haas, and really from the European point of view.

112  CHAPTER IV: PATENT LAW We are really not that bothered about the backlog that we have in Europe. If we have a problem with any particular application, we will request acceleration. I am not aware that my counterparts in other companies, at least in the chemical industry, are requesting acceleration on all their cases, so I assume they are not too bothered about it either. Let me just say I would far rather have an excellent quality search and examination when it does happen than anything quick and dirty earlier on. In terms of the Patent Prosecution Highway, we should be classic customers. We are a classic candidate for a customer or user of that system. We don’t file PCTs often. But what concerns me about it is the need to stick to whatever set of amendments you have agreed with the office of first filing. Amendments themselves are just differently considered in the different offices. The EPO is so, so strict in relation to added subject matter. Other offices, at least the United States, is not quite as strict or would consider a slightly different amendment would be more appropriate to solve any particular problem. So whereas I commend your efforts, the scheme just doesn’t really work for us because of the need to stick to whatever amendments you have agreed. Of course, if your application has gone through without touching the sides, as it were, without any sort of comment from the examiner, you probably drafted it too narrowly. Thank you for all your efforts, and I do applaud them. But the scheme is not for us, for the reasons of having to stick to your first set of amendments. Thank you. MR. RICHARDS: Anything else? One more question or comment. MR. TAKAHARA: Thank you. I will make a comment briefly. As far as the PPH issue, I think it may be misunderstood. It is an applicant-driven scheme. Applicants in a sense are not compelled to take that option. But having said that, from my experiences, the domestic users are very interested in and have much confidence in that scheme. So we would like to proceed with that scheme between the like-minded users or offices. In this context, we have prepared leaflets, in cooperation with the USPTO, and we have been engaged actively in public awareness activities also. MR. RICHARDS: Thank you all very much. Have a good lunch.

Chapter IV

Patent Law Part E: Obviousness/Inventive Step Moderator John White

Cooper & Dunham (New York, N.Y.) Speakers John Richards

Alistair McCulloch

William Chandler

Prof. Dr. Peter Meier-Beck

Ladas & Parry (New York, N.Y.)

Jones Day (London)

Member, Boards of Appeal, European Patent Office (Munich)

Patents Chamber, German Federal Supreme Court (Karlsruhe)

Prof. Martin Adelman

George Washington University Law School (Washington, D.C.) Panelists Hon. Robert van Peursem

Vice President, District Court, The Hague, The Netherlands

James Toupin

General Counsel, U.S. Patent and Trademark Office (Alexandria) Eiji Katayama

Abe, Ikubo & Katayama (Tokyo) MR. WHITE: Ladies and gentlemen, we’ll try to get started. We are the last session of the day, and I’m sure all of us are getting tired and need to finish up.

114  CHAPTER IV: PATENT LAW My name is John White. I’ll be your moderator. I’d like to introduce the speakers and panelists in this session, which will concern obviousness or inventive step and the comparison between the two, recent developments and implications. Our first speaker will be Mr. John Richards, who is with Ladas & Parry. He will be followed by Professor Meier-Beck from the German Federal Supreme Court, Mr. William Chandler from the Board of Appeal of the European Patent Office will speak after that, then Alistair McCulloch of Jones Day, and Professor Martin Adelman from George Washington University. We also have three distinguished panelists, Mr. Eiji Katayama, Jude van Peursem from the Netherlands, and Mr. James Toupin, who is the General Counsel of the U.S. Patent Office, who will be leading discussion after the presentations. If I could, I would like to get John to come up. He is going to set the stage for our discussion here today. MR. RICHARDS: Thank you, John. All I really want to do is just touch upon the way in which things are going in the EPO, England, and the United States, and see whether we are getting any closer together or whether we are in fact getting further apart. There are two big issues as I see it, which may be theoretical rather than practical at the moment. One is the KSR decision in the United States, which said what is obviously absolutely correct, that if something which falls within the scope of the claim is obvious, for whatever reason, then that claim is obvious and bad.1 And then, the European Patent Office, which says that when you are approaching the question of obviousness you start from the closest prior art seeking to solve the same problem and then look to see what bridges the gap between that closest prior art seeking to solve the same problem and what is claimed.2 Perfectly logical from the inventor’s point of view. They nevertheless can come to a different answer from “anything within the scope of claim obvious—then the claim is bad.” Now, I appreciate that the problem-solution approach in the European Patent Office is not absolutely always the only way to assess obviousness. But there are very few Board of Appeals decisions which have done anything else. The other point where are having some difference is what we were discussing earlier on this afternoon, where the idea that the invention needs to be plausible as part of the concept of inventive step is again, I think, something which is dealt with in other ways in the United States. Those are sort of the big points. It’s interesting to note that on the EPO’s Web site it says that “The word ‘obvious’ comes from the Latin term for ‘upon the road’ (ob via), and in the sense of inventions it means something that would be the next logical step along your path from the problem to the solution.”3 Clearly underpinning that is the idea that you’ve got a particular goal that you are trying to reach and that you start from the closest attempt to solve that same problem. 1 See KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398, 416 (2007) (“The combination of familiar elements according to known methods is likely to be obvious when it does no more than yield predictable results.”).  2 See European Patent Office (EPO), Guidelines for Examination in the European Patent Office (Apr. 2009), Ch. IV, § 11.7, available at http://www.epo.org/patents/law/legal-texts/guidelines.html [hereinafter EPO, Guidelines] (“In practice, in order to assess inventive step in an objective and predictable manner, the examiner should normally apply the so-called ‘problem-and-solution approach.’”). In the problem-and-solution approach, there are three main stages: (i) determining the “closest prior art,” (ii) establishing the “objective technical problem” to be solved, and (iii) considering whether or not the claimed invention, starting from the closest prior art and the objective technical problem, would have been obvious to the skilled person. Id. 3 EPO, Is the Idea ‘Obvious’?, http://www.epo.org/topics/innovation-and-economy/handbook/novelty/idea.html.

PART E: OBVIOUSNESS/INVENTIVE STEP  115

So what is the “closest prior art”? The case law I cite is T-1203/97: “According to the established case law of the Boards of Appeal, the closest prior art for purposes of objectively assessing inventive step is generally that which corresponds to a similar use or purpose and relates to the same or a similar technical problem as the claimed invention.”4 The Guidelines set it out saying: “In selecting the closest prior art, the first consideration is that it should be directed to a similar purpose or effect as the invention or at least belong to the same or a closely related technical field as the claimed invention. In practice, the closest prior art is generally that which corresponds to a similar use and requires minimum of structural and functional modifications to arrive at the claimed invention.”5 Again looking at what is the problem to be solved. I think I will skip the other parts of the European approach, which I’ve got in the paper.6 It is in the materials. Just, however, to note something which is a little bit surprising to some people, in the United States, although there is U.S. case law—I think Richardson-Vicks v. Upjohn says something similar7—the question of when you have some surprising properties, whether they necessarily always establish non-obviousness, taken from the Guidelines. Surprising technical advantage, unexpected technical effect, unless it is merely a bonus, in situations where development was in a one-way street—for example, where there was a lack of alternatives—are points which indicate the non-obviousness or the presence of an inventive step in dealing with the problem. But this concept of a one-way street is one which I think we will see in due course become more important. The Agrevo case8 was mentioned by Lord Hoffmann and Mr. Justice Kitchin earlier this afternoon.9 It remains something of a bedrock in EPO law, basically saying that if you have a broad claim and your technical result does not extend across the scope of that claim, then the claims to which that technical effect does not apply are themselves to be found as being obvious, and therefore the claim is bad. That ties in a little bit with the KSR approach in the United States, but it doesn’t get all the way, because we are still focusing on a particular problem. Hopkins,10 again mentioned earlier this afternoon,11 adds this requirement that in order to establish an inventive step, what you are claiming must be plausible, and comes back to this whole question of what is the fair protection to be given to some particular technical contribution and how do we get to dealing with that problem in the various systems. We discussed that earlier. That is basically where we are in the EPO. I will go very quickly over the current situation in England for the non-English here.

4 T-1203/97, Recotech Heatex AB v. Menerga Apparatebau GmbH, at para. 4.1 (May 9, 2000), available at http:// legal.european-patent-office.org/dg3/pdf/t971203eu1.pdf. 5 See EPO, Guidelines supra note 2, Ch. IV, § 11.7.1. 6 See John Richards, Obviousness and Inventive Step—New Differences? (unpublished manuscript on file with author 2009), available at http://www.fordhamipinstitute.com/ip_conference/documents/John_Richards_Obviousness_and_ Inventive_Step_New_Differences.pdf. 7 Richardson-Vicks Inc. v. Upjohn Co., 122 F.3d 1476, 1483 (“Evidence of secondary considerations, including evidence of unexpected results and commercial success, are but a part of the ‘totality of the evidence’ that is used to reach the ultimate conclusion of obviousness”). 8 T-0939/92, AGREVO (Sept. 12, 1995). 9 See Chapter IV.G, “Biotech & IP”, infra this volume. 10 T-1329/04, Factor9/Johns Hopkins (Jun. 28, 2005). 11 See Chapter IV.G, “Biotech & IP”, infra this volume.

116  CHAPTER IV: PATENT LAW The Windsurfing case basically sets out the test.12 That was modified by Pozozoli v. BDMO.13 I set out in the materials the version of that test which is used by the U.K. Manual of Patent Practice: First, identify the notional “person skilled in the art”; identify the relevant common general knowledge of that person; identify the inventive concept; identify what, if any, of the differences between the matter cited as forming part of the “state of the art” and the inventive concept; and viewed without any knowledge of the alleged invention as claimed, do these constitute different steps which would have been obvious to the person skilled in the art or do they require any degree of invention?14 I think the important and strange thing to most of the rest of us about the English approach— and I speak as somebody who now lives in North America, despite the accent that I bring to this conference—is that you’ve got to look at the prior art twice: first to decide what is the prior art that you are using to start off your attack of obviousness; and then you’ve got to look and see what constitutes part of the common general knowledge, which can be used basically to augment that to reach your conclusion of obviousness. Now, it is made clear by Lord Hoffmann in a couple of confirmations of statements made by Mr. Justice Kitchin, who was with us earlier,15 in Genetics v. Lundbeck,16 a case which we talked about at some length, that: The question of obviousness must be considered on the facts of each case. The court must consider the weight to be attached to any particular factor in the light of all the relevant circumstances. These may include such matters as the motive to find a solution to the problem the patent addresses [again, the solution to the problem the patent addresses], the number and extent of the possible avenues of research [it goes to the question a little bit of obvious to try], the effort involved in pursuing them.17

What constitutes “common general knowledge”? Both Mr. Justice Kitchin and Mr. Justice Floyd, who was here yesterday, have emphasized that “the common general knowledge does not include knowledge which does not inform the skilled person’s approach from the outset.” That is Mr. Justice Floyd.18 Windsurfing Int’l Inc. v. Tabur Marine (GB) Ltd., [1985] R.P.C. 59, at [73]–[74] (Oliver, L.J.). Pozzoli Spa v. BDMO SA, [2007] EWCA Civ 588. Pozzoli made minor changes to the long-standing Windsurfing test, resulting in the current formulation by Mr. Justice Kitchin: (1) The first step is to identify the inventive concept embodied in the patent in suit. (2) Thereafter, the court has to assume the mantle of the normally skilled but unimaginative addressee in the art at the priority date and to impute to him what was, at that date, common general knowledge in the art in question. (3) The third step is to identify what, if any, differences exist between the matter cited as being “known or used” and the alleged invention. (4) Finally, the court has to ask itself whether, viewed without any knowledge of the alleged invention, those differences constitute steps which would have been obvious to the skilled man or whether they require any degree of invention. Pozzoli, at [14]. 14 U.K. Intell. Prop. Off., U.K. Manual of Patent Practice, Inventive Step, § 3.13, available at http://www.ipo.gov. uk/practice-sec-003.pdf. 15 See Chapter IV.G, “Biotech & IP”, infra this volume. 16 See Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2007] EWHC 1040 (Pat), [2007] R.P.C. 32 (Kitchin, J.). 17 Id. at [72]. 18 Ratiopharm GMBH v. NAPP Pharm. Holdings Ltd [2008] EWHC 3070 (Pat) (Dec. 16, 2008) (Floyd, J.) (“Finally, the common general knowledge does not include knowledge which does not inform the skilled person’s approach from the outset.”). Mr. Justice Floyd then quoted Mr. Justice Kitchin from Generics (UK) v Daiichi Pharmaceutical, [2008] EWHC 2413 (Pat) (Oct. 15, 2008), at [40]: I can readily accept that, faced with a disclosure which forms part of the state of the art, it may be obvious for the skilled person to seek to acquire further information before he embarks on the problem to which the patent provides a solution. But that does not make all such information part of the common general knowledge. The distinction is a fine one but it may be important. If information is part of the common general knowledge then it forms part of the stock of knowledge which will inform and guide the skilled person’s approach to the problem from the outset. It may, for example, affect the steps it will be obvious for him to take, including the nature and extent of any literature search. 12 13

PART E: OBVIOUSNESS/INVENTIVE STEP  117

Mr. Justice Kitchin: “If information is part of the common general knowledge, then it forms part of the stock of knowledge which will inform and guide the skilled person’s approach to the problem from the outset.”19 Again, remote pieces of prior art do not form part of the common general knowledge. It is something which is there which is in the forefront of the expert’s mind, or the person skilled in the art’s mind, when seeking to solve the problem which has been set. So far as the plausibility issue is concerned, Mr. Justice Kitchin, in Eli Lilly v. Human Genome Sciences, said: “The specification contains no more than speculation as to how Neutrokine-a might be useful. It does not teach the person skilled in the art how to solve any technical problem and its teaching as to the range of applications is implausible.”20 So you have to have something which will point towards solving the technical problem and make it plausible that you can solve the technical problem. Again, that ties back to the EPO’s problemand-solution approach to establish lack of inventive step. In the United States, the practical impact of KSR at the Patent Office level is the examiners have become more difficult to deal with.21 On our side, the first thing which you do is you change your old argument, in which you said there was teaching, suggesting, or motivation to do whatever it is that the examiner alleges to be obvious. You now say there is no rational underpinning to the way in which the examiner is saying that your invention is obvious, because the Supreme Court says you’ve got to have a rational underpinning for any allegation of obviousness. But as a practical matter, the examiners seem in my experience—I don’t know, John, if you agree—to be getting more obdurate a lot of the time. The place where I think that we have seen a real change in the law in the United States is on “obvious to try”, where the Supreme Court basically said that this has got to be treated more seriously.22 In the Kubin case,23 which came down last week or the week before, the Federal Circuit basically has gone back in its statement from “obvious to try” to the tests which were set out in In re O’Farrell back fifteen years or so ago,24 basically saying that you only can take Generics (UK) v Daiichi Pharmaceutical, [2008] EWHC 2413 (Pat), at [40]. Eli Lilly & Co. v. Human Genome Sci. Inc., [2008] EWHC 1903 (Pat). 21 USPTO director John Dudas stated, “The [KSR] decision gives our examiners more flexibility to use their considerable technical skills to reject obvious changes to existing technology.” Dowd, KSR International Co. v. Teleflex Inc., 4 Nanotechnology L. & Bus. 293, 300 (2007) (quoting Joan Biskupic, “Ruling Toughens Patent Process”, USA Today, May 1, 2007). 22 According to the Supreme Court: “Under § 103, the scope and content of the prior art are to be determined; differences between the prior art and the claims at issue are to be ascertained; and the level of ordinary skill in the pertinent art resolved. Against this background the obviousness of nonobviousness of the subject matter is determined.” KSR Int’l Co. v. Teleflex, Inc., 550 U.S. 398, 416 (2007) (citing Graham v. John Deere Co., 383 U.S. 1, 17 (1966)). The origins of the “obvious to try” doctrine in the U.S. can be traced back to two decisions by in the Court of Customs and Patent Appeals (C.C.P.A.), the precursor court to the Federal Circuit Court of Appeals, where Judge Rich rejected the Patent Office solicitor’s argument that “obvious to try” should be a standard for determining patentability: Application of Alan B. Huellmantel, 324 F.2d 998 (C.C.P.A. 1963), and Application of Arthur R. Tomlinson, Harry H. Hall & William F. Geigle, 363 F.2d 928 (C.C.PA. 1966). The Supreme Court in KSR v. Teleflex rejected the Federal Circuit’s rigid application of the “TSM test” for determining obviousness, a test that also had its origins in the C.C.P.A case law. See, e.g., Application of Bergel, 292 F.2d 955, 956–957 (C.C.P.A. 1961) (“The mere fact that it is possible to find two isolated disclosures which might be combined in such a way to produce a new compound does not necessarily render such production obvious unless the art also contains something to suggest the desirability of the proposed combination”). See generally, e.g., Anna C. Chau & Irving N. Feit, “The Obvious to Try Doctrine, Its Use, Misuse, and Abuse”, 91 J. Pat. Trademark Soc’y 89 (2009) (tracing the history of the “obvious to try” doctrine in the U.S. from its emergence in the 1960s through KSR v. Teleflex case in the Supreme Court in 2007 and its effects on cases that followed); Scott T. Weingaertner & Adam M. Conrad, “Rendezvous with Obviousness: US Supreme Court Reckons with Patentability Standard in KSR International Co v Teleflex Inc and Lower Courts React”, [2008] E.I.P.R. 294. 23 In re Kubin , 561 F.3d 1351 (Fed. Cir. 2009) (“Under KSR, it’s now apparent “obvious to try” may be an appropriate test in more situations than we previously contemplated.”). 24 In re O’Farrell, 853 F.2d 894, 903 (Fed. Cir. 1988) (Judge Rich opined, “Any invention that would in fact have been obvious under Sec. 103 would also have been, in a sense, obvious to try. The question is: when is an invention that was obvious to try nevertheless nonobvious?”). 19 20

118  CHAPTER IV: PATENT LAW the view that obvious to try is not an indicium of obviousness in certain limited circumstances; otherwise, we have a partially revived obvious to try test. In the chemical field, the Federal Circuit has basically said that in order to find something obvious there are two issues which have got to be addressed: firstly, whether it is obvious to choose whatever is chosen as the starting material or the starting point for the analysis was obvious; and then, when it is obvious, to make the changes that have been made. There are cases where they have decided non-obviousness both on the fact that you wouldn’t have chosen that particular starting point for your attempt to solve the—again, we get back to saying, “What are you trying to do?”—but you wouldn’t have used that as a starting point for whatever it is that you are trying to do. In other cases, they have said that there would be no reason to make any change from the starting point compound, for example, because to make a change from the starting point compound would have resulted in detriment to the compound itself for the purpose for which it had originally been described and patented. In Translogic,25 Judge Rader, who was here earlier, basically made a number of points about KSR. I think I will just leave you with these thoughts. KSR “featured rather simple technology—an adjustable throttle pedal.”26 “On one level, KSR corrected a rather straightforward error” of the panel decision, where it had held a piece of prior art irrelevant as being related to a different problem.27 As now noted by Judge Rader, “This approach overlooked the fundamental proposition that obvious variants of prior art references are themselves part of the public domain.”28 The Supreme Court criticized the Federal Circuit’s “‘rigid and mandatory’ application of the motivation to combine test. . . . Instead, the Supreme Court advised that ‘common sense’ would extend the use of customary knowledge in the obviousness equation.”29 In particular, the Supreme Court had noted that “a person of ordinary skill is also a person of ordinary creativity, not an automaton.”30 That brings us back to the question of who is the person skilled in the art, how do we determine who is the person skilled in the art? The case law tells us a lot about how much education, how much knowledge a person skilled in the art should have, but tells us very little about what the actual level of skill somebody skilled in the art must have. With that note, I will leave it for others to pick it up and pull me apart. MR. WHITE: Peter Meier-Beck. PROF. DR. MEIER-BECK: For many years, the German patent courts have developed a very broad concept of disclosure, which contradicted the more photographic approach of the European Patent Office.31 In particular, in the chemical field the Fluorane decision of the Bundesgerichtshof, the Federal Court of Justice barred applicants from validly claiming selections made from a general chemical formula.32 According to this decision, each and every In re Translogic Tech., Inc., 504 F.3d 1249 (Fed. Cir. 2007). Id. at 1259. 27 Id. (“The objective of the ’565 patent was to design a smaller, less complex, and less expensive electronic pedal assembly. The Asano patent, on the other hand, was directed at solving the ‘constant ratio problem.’”). 28 Id. 29 Id. at 1260. 30 KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398, 421 (2007). 31 The German Patent Office Guidelines state that “when considering novelty, it is not correct to interpret the teaching of a document as embracing well-known equivalents which are not disclosed in the document: this is a matter for obviousness.” Guideline C-IV, 7.2; see also Mario Franzosi, Novelty and Non-obviousness, the Relevant Prior Art, No. 7, CASRIP Publication Series: Reconciling Int’l Intellectual Property, at 77–78 (2001), available at http://www. law.washington.edu/casrip/symposium/Number7/2B-Franzosi.pdf (“[I]t should be noted that the concept of novelty in the practice of the European Patent Office is narrower than the one accepted by the German Patent Office.”). 32 Fluorane, 1988 GRUR, 447. The Federal Court of Justice held that a general formula can disclose and deprive a certain individual fluorane compound, even if the formula has four variable substituents, approximately covering 3000 25 26

PART E: OBVIOUSNESS/INVENTIVE STEP  119

compound falling under a general formula was regarded to be disclosed to the public, provided only that the skilled person was capable of preparing the compound concerned. At least in this respect, the German case law was the diametrical opposite of the position of the European Patent Office and most other European countries. [Slide] The basis of this adjudication was another decision, Electric Clock Connection, which said “the disclosure of a prior art document when interpreted as a whole on its technical context is not limited to the literal wording but also encompasses such information which is readily apparent to a person skilled in the art upon careful study of the document.”33 This decision was meant to ensure that the whole content of a prior art document is taken into consideration when examining the question of novelty. But it turned out that the concept was sometimes used as a leverage to broaden the content of a document by, at least partially, including equivalents or the results of further considerations of the skilled person made on the basis of his general technical knowledge. This changed, I may say, dramatically with the decision Olanzapine, rendered last December 16th.34 Olanzapine was a famous case even before it was decided by the Federal Court of Justice because the Federal Patent Court had declared the patent invalid because of lack of novelty.35 [Slide] Nevertheless, the Court of Appeal in Düsseldorf has granted injunctive relief, saying that the Federal Patent Court was wrong assuming that the patent was invalid and it was sure that the Federal Court of Justice would decide the case otherwise.36 Well, the Court of Appeal was right saying so, because that is what we finally did. The Bundesgerichtshof said, “The evaluation as to whether the subject matter of a patent is not novel in light of the disclosure of a prior art document requires the determination of the entire document of said disclosure.” That was said in Electric Clock in this connection before.37 It means that the full content of the technical information disclosed to the skilled person is decisive, but that does not mean anything else than what is meant by the concept of disclosure elsewhere in patent law. [Slide] From this it follows that it is true that “subject matter not explicitly mentioned in the patent claims or the description may also be disclosed if it is self-evident for a skilled person for carrying out the invention and does not require specific individual disclosure to the skilled person, but is read into the document”—is mitgelesen in German. single compounds. See Dr. Thorsten Bausch, “The Olanzapine Case and Its Implications for Novelty of ChemicalSubstance Patents in Europe”, China Intell. Prop., Oct. 2010 (Issue 39), available at http://www.chinaipmagazine. com/en/journal-show.asp?id=659. Elektrische Steckverbindungen (Electric Clock Connection), GRUR 1995, 330. Olanzapine, BGH (X ZR 89/07), GRUR 2009, 382f (Federal Court of Justice decision of Dec. 16, 2008), available at http://www.bettinger.de/fileadmin/mediapool/downloads/Rechtsdatenbank/Patent/Urteile/BGH_X_ZR_ 89-07_Olanzapin.pdf. 35 See Olanzapine, BPatG, decision of June 4 2007, 3 Ni 21 41/06, NJOZ 2007, 4786 (Federal Patent Court invalidity proceedings) (patent invalidated in first instance for lacking novelty). After the Federal Patent Court invalidity decision, the patentee requested a preliminary injunction in an infringement court, and was denied. Olanzapine, OLG Düsseldorf Mitt 2008, 327, 329ff. The patentee appealed and won an injunction at the Higher Regional Court Düsseldorf (the second-instance Appeal Court)—where for the first time the “non-technical” judges found the Patent Court’s decision to be obviously incorrect and reversed as to patent validity. Olanzapine, BGH GRUR 2009, 382 (Higher Regional Court Düsseldorf) (patent upheld in second instance). See generally Gerhard Barth & Dr. Franz-Josef Zimmer, “The Olanzapine Patent Dispute: German Court Grants a Preliminary Injunction on a Patent Invalidated by the First-Instance Federal Patent Court”, 27 Biotech. L. Report 532–36 (Dec. 2008) [hereinafter Barth & Zimmer, The Olanzapine Patent Dispute]. 36 Olanzapine, OLG Düsseldorf 29.05.2008; Court of Appeals Düsseldorf Mitt. 96, 87; Court of Appeals Frankfurt, GRUR-RR 2003, 263. 37 Elektrische Steckverbindungen (Electric Clock Connection), GRUR 1995, 330; see Barth & Zimmer, The Olanzapine Patent Dispute. 33 34

120  CHAPTER IV: PATENT LAW “But the incorporation of self-evident facts does not allow supplementation of the disclosure by general knowledge, but merely serves the function of fully determining the content of disclosure, that is the technical information given, the technical information which the skilled person derives from the source, from the document, against the background of his general knowledge.” [Slide] As a result that means for the disclosure, for the content of a structural formula: “In principle a structural formula does not disclose the individual chemical compounds falling under its scope.” That is the reason why David Neuberger was right saying the German approach was different. But it is wrong when it comes to describe the current German position. Now there is more space for selection patents. That is why I mention this decision, although my topic is inventive step, not novelty. [Slide] A few remarks on inventive step itself. I think one thing is crucial. What do we have to examine for patentability? We do not examine inventiveness, but we do it just the other way around, we examine obviousness. This is a negative examination, a very important point because we have to avoid hindsight. Hindsight is difficult to avoid because when we examine for inventive step we know the invention, and we cannot blank out that we know it. But nevertheless, because we cannot blank it out, that is why we have to ask, “Was it obvious?” That means that we have to look for promptings, for aspects which induced the skilled person to the invention. I have said it a bit provocatively, “promptings” instead of “normal creativity.” The latter is what the U.S. Supreme Court said; the skilled person is also “a person of normal creativity, not an automaton.”38 This is obviously true. But I am not sure that it is a criterion we can handle. We cannot ask, “Is that as the result of normal creativity or extraordinary and abnormal creativity?” Instead of this, we have to ask, “What were the promptings that could lead the skilled person to the invention?” and we have to rely on these objective criteria instead of the skilled person’s capacity to use his normal creativity. For this reason we examine prior art instead of the genesis of the invention. For this we have to ask: What is the pertinent art?—John has just mentioned this: Who is the skilled person? What is the skilled person’s education and experience? Finally, would the skilled person have made the invention? That is the approach of the European Patent Office. We will hear some more on this approach, so I can leave it to the next speaker. The term “could-would” approach may be a bit misleading because it gives the impression that it could be proven whether the skilled person would have made an invention. Obviously, that is not the case. We have to ask, as I said: What are the promptings? A final remark: We have to avoid trusting on the logic of the invention and considering it easy to find a way, because going this way is so logical. The logic of the invention is no substitute for obviousness. Obvious to try, on the contrary, may be a sufficient prompting. Unexpected results may indicate non-obviousness. But they are not sufficient if the solution is obvious for other reasons, the so-called “bonus effect.” And, as the Supreme Court of the United States has said, a different technical problem may result in the same solution and make the invention obvious. Thank you very much. MR. WHITE: Our next speaker is Mr. William Chandler of the EPO Boards of Appeal. MR. CHANDLER: Hopefully, I’ll have some slides soon. But before they come, I’ll first apologize for subjecting you to problem-and-solution at such a late stage on the last day, plus the fact it is going to be in ten minutes or even less. 38 KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398, 421 (2007); see Amy L. Landers, “Ordinary Creativity in Patent Law: The Artist Within the Scientist”, 75 Mo. L. Rev. 1 (2010) (tracing the development of the creativity standard in patent law and the “ordinary person” test).

PART E: OBVIOUSNESS/INVENTIVE STEP  121

Since John has explained quite a lot of the general principles, I will try to concentrate on a few aspects that I think are particularly interesting. [Slide] The title of the talk is “The Problem-and-Solution Approach—Fixed Dogma or Focused Debate?” The reason I chose this title is because there has been some criticism— and there was always criticism of the problem-and-solution approach—that it’s too rigid, it’s artificial, not based on the EPC, all sorts of things you hear. I’d like to just explain the principles behind it and some of its advantages. [Slide] I think that some of the criticism is due to the fact that the approach is not always fully understood. In principle, you can read the Guidelines39 and you know what the approach is. But to actually use it effectively is not quite so easy. It is not really a freeform thing. You can’t come in and start waving your hands, talking about obviousness. To use the approach properly you have to be in a structured framework. If you are not within the framework you can have some problems. So in that respect I’d certainly call it an objective approach. But it has subjective elements. It’s not that you are in this structured approach and you can’t do anything, there’s no room for discussion. There is quite a lot of room for discussion, for example, in posing the problem and arguing what the skilled person may or may not have done. So I don’t think it is as rigid as some people make out. Also, I think the results are fairly reproducible. If you give the same set of facts to different people using the problem-and-solution approach, they tend to come to the same conclusion. I also note that if you apply the approach to certain other cases from other national jurisdictions, you tend to get similar results, especially possibly now in the U.S. after the KSR decision,40 which I think will tend to raise the level of inventive step a bit more towards what we are used to in Europe. I come from the field of electronics, and there the inventive step is actually relatively high, I would say. There is a big difference between electricity/mechanics and chemistry, because in electricity and mechanics you can generally derive an effect from the distinguishing features, because there is a causal link between the features and their effect. I think that this does tend to lead to a higher level of inventive step, because you are not bound to the problem posed in the application, which might be too general, which we may see if I have time to go through that. [Slide] Briefly—the background to the problem-and-solution approach. As John said, it is the preferred tool. It is used in most Board of Appeal decisions. It was used from the earliest days of the EPO, so it has been used for over twenty years, and it essentially hasn’t changed in that time. I must say, this is in contrast to many of the tests we have been hearing about this week in other areas of patent law! So I think people should really have understood it by now. It actually did originally aim to cover different national approaches. The fundamental difference, compared to some national approaches, is the fact that there is a “problem” in there, because the EPC demands that the invention provides a technical solution to a technical problem.41 That is why the application should contain some technical problem that the inventor thinks he is trying to solve. [Slide] However, in the problem-and-solution approach we try to imagine an objective problem, because what the applicant says he solved is not necessarily what has actually been solved starting from the closest prior art. If you always only use the problem in the application, it can be manipulated by citing less relevant prior art. See EPO, Guidelines, supra note 2, Ch. IV, § 11.7. KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007). 41 Rule 42 EPC; see also T 641/00—COMVIK, at para. 5. 39 40

122  CHAPTER IV: PATENT LAW So the idea in the problem-and-solution approach is that you start from the closest prior art and you look at the difference between it and the invention. That is an objective gap. You formulate the problem based on that gap and then you try to argue what the skilled person would have done to solve that problem. The idea is that it avoids hindsight by going from the prior art to the invention rather than the other way around. Obviously, this discussion is always with hindsight—you need to know what the invention is before you can set the problem—but nevertheless, once you have set the problem up, it should have no aspects of the solution, and you should end up with an objective discussion. [Slide] I won’t go over the steps in much detail since most people know them. Firstly, determine the closest prior art. Then, evaluate the objective technical problem. Here, there are actually three steps: determine the distinguishing features, the effect of the features, and the objective technical problem. Some people wonder why this effect step comes in. The effect step and the problem step are very similar, but the effect step is important because if you formulate the problem from the effect (i.e., how to achieve this effect), it tends to avoid including elements of the solution in the problem. Finally, considering whether, starting from that closest prior art, trying to solve the objective technical problem, the claimed solution would have been obvious to the skilled person. [Slide] I’d like to say something about the closest prior art. It is a slight misnomer. It doesn’t necessarily have to be the closest prior art in the negative case when you are trying to prove a lack of inventive step. In this case, it doesn’t really matter whether the document you start from is the closest one or not, providing that the invention is obvious starting from it.42 Sometimes we see creeping into the approach a new argument. The Board, or examiner or opponent may say, “Starting from this document the invention is obvious.” The applicant or patentee may say, “No, this other document is closer prior art. When you start from this document, you don’t get to the invention.” But verifying that a document is really the closest prior art is not a step in the problem-and-solution approach. The concept of the closest prior art is really what you need in the positive case when you are trying to prove the presence of inventive step, to avoid having to verify that the invention is not obvious over all combinations of documents. I think “starting point” is the best term. You may need to try several possibilities to find out which is the most suitable starting point. But, as John said, it’s usually a reference in the same field with most features in common. By the way, often people say, especially applicants or patentees, “Starting from this document you get an artificial problem.” But if you do have an artificial problem, you usually find that it is not obvious to solve it. So if the invention is a bicycle tire, and you start from a tire for a lorry, which has some similarities, as the closest prior art, you may end up with a problem something like “how to turn a lorry tire into a bicycle tire,” for which you usually will not find an indication in the prior art, and therefore you wouldn’t come to the invention anyway. So the artificial problem argument really comes down to common sense and obviousness.43 [Slide] The objective problem should be the problem that the skilled person having access to all the known prior art would have had to solve to arrive at the invention. • It must not contain elements of the solution.44 That’s why you derive it via the effect. • It must be a realistic problem,45 but if it’s not, you usually will not arrive at the invention. T 967/97, at para. 3.2; see also BpatG, 2004 GRUR, 317. T 644/97, at para. 2.6.4. 44 T-229/85, at para. 5. 45 T-495/91, at para. 4.2. 42 43

PART E: OBVIOUSNESS/INVENTIVE STEP  123

• It must actually be solved.46 This is connected with what I was talking about earlier. In inventions with a mixture of technical and non-technical features, it is quite often the case that when the applicant reformulates the problem in an attempt to come up with something technical, he ends up with a problem that is not actually solved. So, for example, the problem solved by the invention is suddenly not really providing a new way of on-line gambling, but providing a way of reducing the bandwidth over the network, or something like that. This is often not derivable from the application and not solved either. Such problems also tend to arise from over-ambitious claims and unclear or incomplete applications. [Slide] The treatment of non-technical features is, of course, a very hot topic in connection with exclusions from patentability. But it is connected with inventive step because it follows from the requirement that an invention must be a technical solution to a technical problem that features with no technical effect do not contribute to the solution of any technical problem47. According to Comvik,48 an aim in a non-technical field may appear as part of the framework of the technical problem. This is often quoted as “You put the solution in the problem.” But that’s not what it is. It is actually recognizing that these non-technical features aren’t contributing to inventive step so that their inclusion in the problem does not affect the judgment of inventive step. They are actually part of the conditions for making the invention, just like, for example, other implicit conditions that are never mentioned, such as cost and economics, but which are always precursors to an invention.49 [Slide] We see certain common situations for inventions with a mixture of technical and non-technical features. For example, standard hardware with a non-technical effect, such as a computer with a new business method.50 Here the problem is often just in the business method. We say it doesn’t contribute, so there is no inventive step. Or a game with new rules, or a graphic user interface with new display—these are all the things that we have been discussing this week in connection with the computer-implemented invention subject. But the more difficult situations that we see, which haven’t really been touched on in many of the other jurisdictions, concern new hardware with a non-technical effect. This is what is coming up most of the time at the EPO. This is where there is a technical difference and a non-technical difference. These cases are much more difficult to decide because you need to, according to our approach, work out which features actually contribute to the solution of a technical problem. For example, a new business method running over a new computer network, or a new personal organiser display that displays the schedule in a better way. [Slide] What about novelty when the only distinguishing feature relates to non-technical aspects? This basically comes down to photographic versus technical novelty. There have been a few decisions that relate to this.51 I’ll just put them up here in case anybody is interested in writing them down. These are the only ones I could find. Most of these decisions skirt around the issue, so that you could say that it hasn’t really been decided yet. The point is largely academic though because the non-technical features would not contribute to an inventive step anyway. It’s only really of interest for conflicting European applications where the prior art cannot be used for inventive step. But then again the applicant could easily get round the problem by adding a trivial distinguishing feature to establish novelty. As I’ve been reminded, I better stop. Thank you for listening. T-1329/04, at para. 10. T-641/00—COMVIK, at para. 6; T 154/04, at para. 15. 48 T-641/00—COMVIK, at para. 7; see also T 154/04, at para. 16. 49 T-1284/06 & T 764/02, at para. 11. 50 See, e.g., T-154/04. 51 T-208/84—VICOM, T-1177/97, T-619/98, T-959/98, T-553/02, T-234/03, G-2/88, T-154/04, T-688/05. 46 47

124  CHAPTER IV: PATENT LAW Coming back to the objective problem. It might simply be the provision of an alternative.52 It may not be based on alleged advantages,53 or knowledge acquired after the filing date.54 Finally, if there is no technical problem, there is no invention under Article 52 EPC.55 As I said earlier, there is scope for discussion when it comes to formulating the objective technical problem. Apart from the technical part which I mentioned before, there is what I would call the generality of the problem. The problem must be derived from the effects of the distinguishing features; no more and no less. If not all the features of the prior art are considered, the problem may be too general. It is often harder to argue that a given solution to a general problem is obvious.56 On the other hand, if the problem contains elements of the solution, it is too specific and will be more easily found obvious. In decisions of the EPO, the definition of the skilled person is often assumed and not disputed in straightforward cases so there is not always an explicit definition. Also, since the Board contains technically qualified members, usually specialized in the area of the case, the Board tends to assume the role of the skilled person. However when a definition is required, the skilled person is an ordinary practitioner who has access to the state of the art, has common general knowledge and is capable of routine work and experimentation in the relevant field.57 If a problem prompts the skilled person to look for a solution in another technical area, the specialist in that field is the skilled person.58 In complicated applications, the skilled person could be a team of experts from different technical areas.59 Solutions of general technical problems in non-specific fields are considered to be part of the common general knowledge.60 A major area of discussion is of course whether the solution would be obvious to the skilled person. This discussion tends to take a forensic approach analyzing what the skilled person would have actually done faced with the objective technical problem. Various scenarios are commonly considered. Is there a solution to the same or similar problems in the same, neighboring or broader fields?61 Here there is often a discussion of whether the skilled person could abstract or otherwise derive that another disclosure solves the problem in question. There is often a question of whether the solution involves common general knowledge. Frequently, there is a discussion of whether the solution involves routine design steps or the simple choice amongst known possibilities, which the Board may assert in clear cut cases. Solutions are often found to be obvious trade-offs, having no surprising effect, between known conflicting parameters. I would like now to apply the approach briefly in a simplistic way to the facts of the KSR case62 to give you a flavor of how it works in practice. In KSR, the field of the invention was accelerator pedals for vehicles with computercontrolled throttles. The invention was an adjustable pedal with an electronic sensor mounted at a fixed pivot point. The candidates for the closest prior art were: Asno: Adjustable pedal with fixed pivot point. Redding: Adjustable pedal with moving pivot point. ’936: Pedal with electronic sensor at pivot point. Stating that it was preferable to detect pedal position in pedal. T-92/92, point 4.5. T-20/81, point 3; T 355/97, point 2.6. 54 T-268/89, point 5. 55 T-26/81, point 9. 56 T-1019/99, point 3.3. 57 See EPO, Guidelines, supra note 2, Ch. IV, § 11.3. 58 T-32/81. 59 T-99/89, at para. 4.3. 60 T-195/84, at para. 8. 61 T-176/84, at para. 5.3.1. 62 KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007). 52 53

PART E: OBVIOUSNESS/INVENTIVE STEP  125

Smith: Pedal with sensor on fixed part of pedal assembly. Stating that this prevented wires chafing. Rixon: Adjustable pedal with sensor in pedal footpad. Known to suffer from chafing. Assuming that we start from a mechanical pedal (not the only possibility, but, as mentioned earlier, sufficient if it leads to the invention), this means Asno, Redding or Rixon because they are in the same field of adjustable pedals. But Asno also has a fixed pivot point and so looks like a more promising starting point. The pedal of the invention differs from Asno in that it has a sensor on the fixed pivot. What problem does this solve? This is interesting because there are several possibilities. Let’s start with the beginner’s blunder, not unheard of in real life, “find a place to mount the sensor.” Oops! This includes the sensor from the solution. What about “improve the pedal?” This could be too general. For a more precise problem, we could check what the effect of having a sensor on the pivot is. It is to enable the pedal to be used with a computer-controlled throttle. So, the problem could be “adapt the pedal for use with a computer controlled throttle,” which is incidentally the problem that the inventors were actually trying to solve. One argument against this problem is that it is rather specific and assumes that one would want to use this pedal with a computer-controlled throttle. However, it would have probably been obvious to consider this problem in the light of the trend in the industry to use engines with computercontrolled throttles. Now we have an objective technical problem that the skilled person would have tried (and actually did try) to solve. To solve this problem, we need a forensic analysis of what the skilled person would have done—as the Supreme Court put it, “Often, it will be necessary for a court to look at interrelated teachings of multiple patents.”63 For example, first of all, it was a known and obvious possibility to use a sensor to control an electronic throttle. The question would then arise where to put the sensor on the pedal. This is a typical situation where after solving the first part of the problem, here, providing a sensor, the skilled person is faced with a problem of implementation. After solving one problem of implementation, another may crop up that must also be solved. The Board often takes the approach that such successive steps are not indicators of inventive step, but necessary steps in the design process that the skilled person must solve in order to complete the implementation.64 In this case one argument could be that Smith suggests putting it on the fixed part of assembly to prevent chafing of the wires (confirmed by Rixon). The pivot is an obvious candidate for a fixed part. Thus, using the problem-and-solution approach one would probably come to the same result as the Supreme Court. In conclusion, I hope that I have given some insight into the structured, objective nature of the problem-and-solution approach. It is not merely an automated procedure and there is indeed room for discussion of the subjective analysis, especially in formulating the problem and determining what the skilled person would have done to solve it. Finally, although it is a fictitious analysis, it is based on common sense and is not a purely formal exercise. MR. WHITE: Mr. Alistair McCulloch. MR. McCULLOCH: Thank you, John. I am going to say a few comments about the U.K. inventive step. Obviously, John has given an overview and I’ll try to avoid repeating any of that to avoid making the late session go even slower than otherwise it might. 63 KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007) (“Often, it will be necessary for a court to look to interrelated teachings of multiple patents; the effects of demands known to the design community or present in the marketplace; and the background knowledge possessed by a person having ordinary skill in the art, all in order to determine whether there was an apparent reason to combine the known elements in the fashion claimed by the patent at issue.”). 64 T-623/97, at para. 4.4; T 1030/06, point 20.

126  CHAPTER IV: PATENT LAW I’m going to talk about three specific issues: the basic test in the United Kingdom that we are currently applying, the Pozzoli questions;65 common general knowledge; and thirdly, obvious to try. To the basic test. John set out that four-stage test.66 I won’t repeat it here. I think it is worth just noting in passing that Lord Hoffmann mentioned yesterday that the United Kingdom’s legislative draftsmen often reword bits of legislation when they are implementing it, and that can lead to problems. They actually did a fairly good job on importing over Article 56 of the EPC,67 and that came across in a pretty good way. What that means is it’s even more surprising in many ways that we have now ended up with a test that is so far different from the problem-and-solution test that is being applied in the EPO. Going back to what Lord Hoffmann said yesterday and how he was stressing that the English courts are trying to seek consistency with the EPO and other European courts,68 and how that has also been backed up with the judgments of the English court over the last five years, I think it is worth comparing that with Lord Neuberger’s comments earlier today regarding the Lundbeck decision.69 I think it is worth considering whether the English courts will, if the suitable opportunity does arise for them, actually decide to move over from the Pozzoli questions to the problem-and-solution approach. The drivers are not that strong, but it is certainly open to them to do it. If you look at how the problem-and-solution approach arose in the EPO, that was derived from Rule 42 under the EPC, which requires that the specification must disclose both the technical problem and the solution.70 In the United Kingdom, we don’t have anything either in the Patents Act or in the Patent Rules which is equivalent to that. So there is no driver coming from that end. The second point on that is that there is no strong groundswell feeling that the Pozzoli questions are leading to different results than if we were using a problem-solution approach. I’m not saying we always get the same results, but I think in many cases that is more due to the different procedures and the more in-depth analysis which is leading to different evidence being considered by the U.K. courts, rather than the actual test itself. In any event, whether the English courts do decide to move over, this may be something that gets forced on them in the next couple of years. If, as we’ve heard about, a common enforcement court does come into being over the next few years, it is inevitable that there will have to be a common approach to assessing obviousness. Many English people, I’m sure, would like to persuade the rest of Europe to adopt the Pozzoli questions, but I’m sure that won’t actually happen, and it is far more likely that we will end up with a problem-solution approach to that. I just wanted to say a few comments about common general knowledge, primarily because whilst common general knowledge is important in the EPO and it is important in the United Kingdom, it tends to be a much more significant issue and a significant part of the case in the United Kingdom. Common general knowledge covers all that information that is generally known and accepted by most of those people in the art. John mentioned a couple of recent cases that have See Pozzoli Spa v. BDMO SA, [2007] EWCA Civ 588 (June 22, 2007). See supra note 13 and accompanying text (detailing the 4-part Windsurfing test, as modified by Pozzoli). 67 European Patent Convention (EPC), Art. 56, Oct. 5, 1973, 1065 U.N.T.S. 199 (as amended Nov. 29, 2000) (“An invention shall be considered as involving an inventive step if, having regard to the state of the art, it is not obvious to a person skilled in the art. If the state of the art also includes documents within the meaning of Article 54, paragraph 3, these documents are not to be considered in deciding whether there has been an inventive step.”). 68 See Chapter II.A, “The Judiciary & IP Policy, Europe”, supra this volume. 69 See Chapter IV.F, “Subject Matter, ‘Intangible’ Patents”, infra this volume. 70 EPC Rule 42(1)(c), available at http://www.epo.org/law-practice/legal-texts/html/epc/2010/e/r42.html (“[D] isclose the invention, as claimed, in such terms that the technical problem, even if not expressly stated as such, and its solution can be understood, and state any advantageous effects of the invention with reference to the background art”); See decisions of the Enlarged Board of Appeal G 1/03, G 2/03 (Annex I). 65 66

PART E: OBVIOUSNESS/INVENTIVE STEP  127

squashed attempts to expand the scope of that, the Ratiopharm v. Napp case71 and the Generics v. Daiichi case.72 It certainly does not include all the information that would arise out of inquiries that would be taken at the start. As John said, it is solely limited to what is known to inform the approach from the outset. Anything after that is more a question for obviousness, rather than a matter of common general knowledge. So why is it a more significant issue in the United Kingdom? I think a lot of that goes to the approach of the test in the different procedures. If you look at the EPO approach and you are working your way through the problem-andsolution test, you may at some point want to add in a particular piece of common general knowledge—it may be a prejudice or something like that—and then you will support that with a couple of bits of evidence. But it tends to be a very focused approach to common general knowledge added in on the route through the test. That is very different from the United Kingdom, where we are under the Pozzoli questions. Once you’ve identified your skilled person, you then identify the common general knowledge with a detailed expert report. What the court ends up with is a very detailed overview of the technology and the background for the common general knowledge. So it tends to be a much larger and more significant issue in the United Kingdom. Now I will come on to obvious to try. The previous leading case was one that came from the 1960s, Johns-Manville,73 which held that something would be obvious if the expectation of success warranted a trial. Now, this has been recently considered further in the Conor case,74 which we have heard about from David Kitchin earlier this afternoon, and indeed from John as well.75 In the Conor case, the Court of Appeal had tried to distinguish the Johns-Manville type of obvious-to-try cases on the basis that the patent did not demonstrate that the invention worked. That was something that Lord Hoffmann came down on very strongly and said, “No, that’s not the approach for it. There is no need for any demonstration that the invention works. All you need is a question of plausibility.”76 It is also necessary that it be something more than speculation. I think that is something quite interesting from the earlier session today, when David Kitchin was commenting on the case and was clearly unhappy with it.77 He clearly regards the Conor case as one which in his view would be one of speculation. But when you look at what Lord Hoffmann said, he approached the issue by saying that you do need something more than speculation, and in his mind the Conor situation was something more than speculation. So maybe something to discuss later on is how do we actually define speculation. Maybe that’s the difference between David’s view and Lord Hoffmann’s view on that. Going forward, once you achieve your plausibility threshold, then it is just a question of back to the claims as they are set out and assessing the obviousness of the invention as set out in the claims. That is something that the House of Lords held that neither the first instance nor the Court of Appeal had done. Ratiopharm GMBH v. NAPP Pharm. Holdings Ltd. [2008] EWHC 3070 (Pat). Generics (UK) v Daiichi, Court of Appeal, London, U.K., July 2, 2009, [2009] EWCA Civ 646. 73 Johns-Manville Corp.’s Patent, [1967] R.P.C. 479. 74 Conor Medsystems Inc. v. Angiotech Pharms. Inc., [2008] UKHL 49 (House of Lords), available at http://www. publications.parliament.uk/pa/ld200708/ldjudgmt/jd080709/conor-1.htm. 75 See Chapter IV.G, “Biotech & IP”, infra this volume. 76 See Conor, [2008] UKHL 49, at [43] (“Jacob LJ rejected this approach (at paragraph 48) on the grounds that ‘this is not an obvious to try case of the Johns-Manville type’ because ‘the patent has not in any way demonstrated that taxol actually works to prevent restenosis.’ I agree with the Dutch court that patent law does not require such a demonstration. It was not a sufficient reason for not applying the ordinary principles of obviousness to the claimed invention. I would therefore allow the appeal.”). 77 See Chapter IV.G, “Biotech & IP”, infra this volume. 71 72

128  CHAPTER IV: PATENT LAW One final point on the Conor case. That is, I think what you can take from it is that there is no special rules or special approach to obvious-to-try type situations. Indeed, John read out the quote that Lord Hoffmann had included from David Kitchin in that case.78 That is a very general quote and a very general approach to the assessing of obviousness, linking in a whole number of issues of which expectation of success was just one of those. That quote from David Kitchin has been not only endorsed by Lord Hoffmann in the Conor case, but Christopher Floyd has also cited and approved that at the end of last year as well.79 So I think that is very much a comment that is in vogue in the United Kingdom at the moment and one that we should all pay attention to. Thanks very much. MR. WHITE: Next we are going to hear from Professor Adelman. PROF. ADELMAN: I just want to start out by emphasizing what Professor Meier-Beck said about the Olanzapine case.80 You know, I often think: What’s the most important patent case of the year that goes around the world? I vote for Olanzapine as the most important case. A lot of reasons for that. If you look at the facts, they were set out and dealt with by Judge Rader’s opinion of a little over a year ago in the U.S. Olanzapine litigation.81 We are talking about a hugely important drug. The patent was held valid. Then, coming over to England, Mr. Justice Floyd followed that approach, very similar to Judge Rader.82 Then, all the fireworks in Germany ensued. If you want to read a hot opinion, which was reviewed by Professor Meier-Beck, read the English translation on the Web of the Court of Appeal decision that was affirmed by the German Federal Court.83 It’s an extraordinary read. Again, though, the technical analysis was very similar to Mr. Justice Floyd, Judge Rader, etc. I can’t read German and all I have seen is the German version of the case. But from what we heard today, it seems to be quite similar to these other cases. I think that is an extremely important development. In the few minutes that I’m keeping you from drinking we go back to Lundbeck. We started this afternoon with Mr. Justice Kitchin’s84 and then Lord Hoffmann’s opinion85 in Lundbeck. I think it is pretty clear, if you stand back, that Mr. Justice Kitchin was right, Lord Hoffmann was wrong, he followed European law—he’s just plainly wrong. There’s a reason for that: the patent system has to have public acceptance. If you eat more than you have killed, which is the European rule now, that is not acceptable. It’s clearly not acceptable to Mr. Justice Kitchin. It’s simply not acceptable. People will not accept that an inventor gets more than the inventor has actually contributed. We might debate things, but in Lundbeck there wasn’t much of a debate about it. This was an enantiomer. People know about enantiomers. People know they exist. The prior art had been sold. It was a successful drug. But the enantiomer was much better. In fact, if you read Mr. 78 See Conor, [2008] UKHL 49, at [42] (“The question of obviousness must be considered on the facts of each case. The court must consider the weight to be attached to any particular factor in the light of all the relevant circumstances. These may include such matters as the motive to find a solution to the problem the patent addresses, the number and extent of the possible avenues of research, the effort involved in pursuing them and the expectation of success.” (quoting Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2007] R.P.C. 32, at [72] (Kitchin, J.))). 79 See Ratiopharm GMBH v. NAPP Pharm. Holdings Ltd., [2008] EWHC 3070 (Pat) (High Court (Chancery Division) Dec. 16, 2008). 80 Olanzapine, BGH (X ZR 89/07), GRUR 2009, 382f (Federal Court of Justice decision of Dec. 16, 2008). 81 Eli Lilly & Co. v. Zenith Goldline Pharms. Inc. USA, 471 F.3d 1369 (Fed. Cir. 2006) (Rader, J.). 82 Dr. Reddy’s Labs. (U.K.) Ltd. v. Eli Lilly & Co. Ltd., [2008] EWHC 2345 (Floyd, J.). Subsequent to the conference, the decision was affirmed in the Court of Appeal. Dr. Reddy’s Labs. (U.K.) Ltd. v. Eli Lilly & Co. Ltd., [2009] EWCA Civ 1362 (Dec. 18, 2009) (Jacob, L.J.). 83 Olanzapine, BGH (X ZR 89/07), GRUR 2009, 382f (Federal Court of Justice decision of Dec. 16, 2008). 84 See Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2007] EWHC 1040 (Pat), [2007] R.P.C. 32 (Kitchin, J.). 85 See H. Lundbeck A/S v. Generics (U.K.) Ltd., [2008] R.P.C. 19, [2008] EWCA Civ 311 (Lord Hoffman sitting with the Court of Appeal).

PART E: OBVIOUSNESS/INVENTIVE STEP  129

Justice Kitchin’s opinion, which he forgot because it wasn’t his focus, you see that this had remarkable results that were not expected. He then goes through an analysis of why he was throwing that out and he was going to hold this compound obvious: (1) because it wasn’t all discussed in the specification, because it all hadn’t been worked out, it was being worked on at the time; the specification said this is much better, but the most surprising results were not yet developed; and (2) he said: By the way, we have this bonus idea—it’s like something is obvious and if you discover that it does something else, that’s a bonus.86 That’s a dangerous idea. And he said: We’ve got this in the European patent cases. Well, if you actually read what the European Patent Office says, it is a very limited thing. It says it’s a one-way street; in other words, if everybody taking the citalopram drug would say, “We’ve got to find the enantiomer. That’s obviously going to be a more successful drug. Let’s do it. That’s the only way to go.” There are thousands of ways you can take apart a prior art chemical and change it and maybe improve it. Everybody knows that. This is just one way. So the bonus idea is a disaster. And it is plainly unfair. It is taking what the inventor contributed, and now the public is what I consider stealing it for nothing. So in Lundbeck the beauty of it is that two wrongs do make a right. In other words, Lord Hoffmann was wrong, Mr. Justice Kitchin was wrong, but adding up their wrongs they got it right. Now they should work on thinking about whether this bonus idea, whether it is right to simply require that everything in a drug development be in the patent specification—which is plain madness. The work is going on. In the United States there is an opinion of Judge Rader87 and other opinions where you just take this evidence in as a matter of course and then you judge whether it is obvious. If we want to use the problem-solution approach, I can do that too. I say the problem is developing a drug with all the nice properties of the enantiomer in Lundbeck. If that’s the problem, here is the solution: Clearly patentable. I’m not sure that helps us. We are just making this up. But I can do that. So in my paper,88 although I misspelled Mr. Justice Kitchin’s name—and I do know how to spell it, so I think the spell-checker just corrected it, didn’t know about this Kitchin with an “I,” and therefore made it a Kitchen with an “e” and got the spelling wrong—everything is just fine and dandy. That is really all I want to say about it. We really ought to think about the use of the bonus idea and only use it when it is a true bonus—that is, the only way to go is this way, it’s obvious that we want certain improvements, and there is a bonus. That isn’t going to come up very often. It may not come up at all. So we shouldn’t have to worry about bonus. Thank you very much. MR. WHITE: Perhaps to get us started in our discussion I’d like to ask Mr. Katayama if he would perhaps comment on the Japanese perspective about these issues of obviousness and inventive step which we heard the speakers address. MR. KATAYAMA: The Japanese approach is not much different from other jurisdictions. The approach is to identify basic prior art and find the difference, and then the second prior art, and determine the combination of these will lead to this invention or not. It is called in Japan the logical approach, whether you can find the right logic or not. Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2007] EWHC 1040 (Pat), [2007] R.P.C. 32 (Kitchin, J.). Eli Lilly & Co. v. Zenith Goldline Pharms. Inc. USA, 471 F.3d 1369 (Fed. Cir. 2006) (Rader, J.). 88 Martin J. Adelman, Lundbeck and Chemical Product Inventions (Essay submitted as supplementary materials for the 2009 Fordham International Intellectual Property Law & Policy Conference, Cambridge U.K.), available at http://fordhamipconference.com/wp-content/uploads/2010/08/Martin_Adelman_Lundbeck_and_Chemical_Product_ Inventions.pdf [hereinafter Adelman, Lundbeck paper]. 86 87

130  CHAPTER IV: PATENT LAW Several years ago the Japanese industry people criticized the level of inventive step of the Japanese Patent Office as too low. They feel as if there is no provision of obviousness in the Japanese Patent Law. In that way the Japanese Patent Office changed its Examination Guidelines.89 Thereafter the level of examination became much stricter than before. Nowadays it is about 40 percent of all applications that are patented. The Japanese Patent Office now set up a certain board for reviewing the guidelines for examination.90 I am one of the board members there. Recently they held a session to reexamine the standard, whether that the present standard is right or not. The Patent Attorneys Association said that it should be much lower than the current one, that the current one is too strict. The Japanese industry association said, “No.” Some companies are saying that it should be higher than the present one and some are saying, “The present one is just right.” The committee agreed that on this kind of matter, if you change a lot in a short period, the stability of the standard will be lost and that is probably worse than changing. This is the tentative conclusion of the board. I saw a certain tendency in the United States after KSR.91 The patentability percentage went very steeply down. I think now it is around 40 percent. It is a little bit lower than the Japanese level. The European one is a little bit higher, I think between 40 and 50 percent. Again, here you have a certain problem if you stand in the users’ position. If you have a different standard timeline-wise and worldwide, if you are playing as an industry company, you have a problem. So much harmonization in the sense of not only the worldwide geography but also a timeline sense is very much necessary. It is not a theory or logic, but that kind of a result is quite important. MR. WHITE: Thank you very much for those comments. I wonder, Judge van Peursem, if you might comment on this European inventive step, particularly as it is applied in the Netherlands. Whatever you’d like to comment, but I think people would particularly like to hear how it is applied in the Netherlands. JUDGE VAN PEURSEM: We try to follow as closely as possible the problem-solution approach. It nearly always works as a tool to avoid hindsight. Only with problem inventions and with combination inventions do you have a big problem. Like William already said, it is not that simple. If you work with it on a daily basis, it is an intellectual challenge to get into this problem-solution decently. And if you do it decently, our experience is that in nearly all the cases in parallel litigation you get about the same result as with the Windsurfing test.92 It is not all that different. There are some exceptions, but it is not all that different. What I would like to comment really upon is Martin Adelman’s story on Lundbeck.93 You can throw away this paper, because last week we handed down a judgment, and there is an informal translation into English, that it is rather obvious to get this enantiomer.94 Why is it obvious? Because we had new evidence after the English litigation that to classically 89 See Japan Patent Office, Draft Revision of Examination Guidelines for “Part VII, Chapter 3: Medicinal Inventions” (Provisional Translation) (Aug. 6, 2009), available at http://www.jpo.go.jp/iken_e/pdf/comments_iryou/02.pdf. 90 See Japan Patent Office, Intellectual Property Policy Committee, Committee on Examination Standards, Case Study on Inventive Step (Feb. 2010), available at http://www.jpo.go.jp/shiryou/kijun/kijun2/pdf/tukujitu_casestudy/ progre_en.pdf. 91 KSR Int’l Co. v. Teleflex Inc., 550 U.S. 398 (2007). 92 See supra note 13 and accompanying text. 93 See Adelman, Lundbeck paper, supra note 88. 94 The Hague District Court (Rb. te ‘s-Gravenhage) of 08.04.2009, Ratiopharm, Tiefenbacher & Centrafarm et al. v. Lundbeck, available at http://archive.epo.org/epo/pubs/oj012/02_12/12_spe0.pdf.

PART E: OBVIOUSNESS/INVENTIVE STEP  131

resolve this racemate you had three ways. As to the first method, we had new evidence, fresh evidence, from an independent laboratory that once the skilled person pursued the first thing that came to mind—and there are no “thousands of ways” to resolve this racemate; there are only three for the skilled person at the priority date, our evidence showed us—you get it. And even if that was not enough, the third way to do it is to switch one step back in the synthesis to go to a precursor and have that stereotypically resolved, the so-called diol-route; then you also get it. We had the same English experts as were in the English trial at our hearing battling like mad, two Oxford professors, in English and “cross-examined” Dutch style in English, and this was the result. But the story goes on. At the next Fordham Conference no doubt we will talk about Lundbeck again because it is not the end of the story at all. PROF. ADELMAN: But don’t throw my paper away. I don’t care about what he just said, since he should uphold the patent on the basis of the unobvious, unexpected properties. JUDGE VAN PEURSEM: You know what the problem is. The problem-solution approach you just did before us, you did it completely wrong. PROF. ADELMAN: Then the problem-solution approach is completely wrong. If you’re telling me— JUDGE VAN PEURSEM: That could be, but it is our law. PROF. ADELMAN: No, it is not your law. You make it up. JUDGE VAN PEURSEM: It is our law. PROF. ADELMAN: Your law is inventive step. When somebody makes an invention, and this was clearly an invention, you just go through all of the unexpected properties of that compound. They were there. They are all in Mr. Justice Kitchin’s opinion. JUDGE VAN PEURSEM: That is tainted with hindsight. PROF. ADELMAN: It is not. JUDGE VAN PEURSEM: Don’t make a test “was it a smart idea?” Something like that is not what we want. PROF. ADELMAN: You don’t think you want to reward unexpected results? You do want to reward unexpected results. JUDGE VAN PEURSEM: It wasn’t unexpected. PROF. ADELMAN: It was unexpected. You show me the piece of prior art. JUDGE VAN PEURSEM: I will show you the piece of prior art. PROF. ADELMAN: Okay. That shows that Mr. Justice Kitchin was wrong. JUDGE VAN PEURSEM: Right—in retrospect, if you want to phrase it like that. PROF. ADELMAN: You may have that. If you have that piece of prior art I will eat it, and we will do it at the next Fordham Conference. JUDGE VAN PEURSEM: Fine with me. MR. WHITE: Mr. Toupin, perhaps I could ask you to comment on— MR. TOUPIN: Unfortunately, I haven’t read the case in particular. MR. WHITE: On something else. PROF. ADELMAN: Any of the cases. MR. WHITE: I know that the U.S. Patent Office put out some guidelines after KSR about how to apply it.95 Of course, we have had a number of CAFC cases since then. I don’t know if there is any further guidelines or guidance. MR. TOUPIN: No. We put out initial guidelines. We have not put out further guidelines since. 95 Examination Guidelines for Determining Obviousness Under 35 U.S.C. 103 in View of the Supreme Court Decision in KSR International, 57 Fed. Reg. 57526 (Oct. 10, 2007).

132  CHAPTER IV: PATENT LAW I am going to commend Judge Rader’s recent decision in Kubin.96 The Solicitor’s Office at the Court of Appeals advocated the revival of O’Farrell,97 which was not specifically mentioned in the Board decision.98 So I am hoping the Board is pleased. I think there are some tensions and some unresolved issues that remain following KSR. The Supreme Court decision, I think, tends to break down an inquiry simply limited to prior references in one’s own art. The Supreme Court regarded the TSM test, which the judges in the Federal Circuit had always realized had a range of whether you apply it strictly or loosely, as having become too rigid. There are decisions from the Federal Circuit addressing the possible range of use of the TSM approach going back to exchanges between Judge Nies and Judge Newman in the 1980s.99 There are passages in the Supreme Court’s decision that tend to regard TSM as a tool but not as an exclusive test.100 The PTO’s Guidelines pick up on that language. I think the Federal Circuit is tending to say, “Oh gee, we just weren’t applying the TSM test quite right. We can just apply it right and then we will be okay under KSR.” I don’t know whether that will in the long term be a source of tension or not. My guess is that the Federal Circuit can take some of the notions of the Supreme Court about market trends and so forth and fold them into the motivation element of TSM. It is not in our Guidelines, I’m just guessing, that over time application practice will change so that more information about unexpected results and particular technical problems, and trying to demonstrate that not only were they individual problems of a particular inventor’s but problems in the art, will go more in the written description of the application itself rather than coming out only in response to Office actions. I think that is going to be a migration in applicant behavior over time. Just by way of a little background, to the extent that examiners may be regarding themselves as more empowered, that is probably not accidental. After the Zurko case,101 there were some Federal Circuit decisions that basically said, “You need specific evidence, PTO, and you can’t rely on common sense.”102 The Board was kicking back a lot of examiner rejections. The Deputy Commissioner for Patent Examination Policy went to the FTC hearings and said, “This is a bad thing that’s happening.” That got into the FTC report103 and was cited to the Supreme Court. So we’re in the midst of an evolution. Exactly where we will settle out on all these points remains to be seen, but it is developing. MR. WHITE: I wonder, particularly if it is okay with the speakers, if we could give the audience a chance to ask a couple of questions. We are coming to the end of our time, but I’d like to at least see if there is someone who would like to ask something. If not, maybe I’ll come back to the speakers and the other panelists and see if they want to add anything. No takes out in the audience. Mr. Katayama, do you have another comment you’d like to make? MR. KATAYAMA: Since I have personal experience working in the pharmaceutical industry, I have a certain view about especially this kind of an effect or result of a certain product. In re Kubin, 561 F.3d 1351 (Fed. Cir. 2009). In re O’Farrell, 853 F.2d 894 (Fed. Cir. 1988). 98 Ex Parte Kubin, 83 U.S.P.Q.2c (B.P.A.I. 2007). 99 See In re Oetiker, 977 F.2d 1443 (decision for the court by Newman, J.; concurring opinion by Nies, C.J.). 100 See Steven J. Lee & Jeffrey M. Butler, “Teaching, Suggestion and Motivation: KSR v. Teleflex and the Chemical Arts”, 17 Fordham Intell. Prop. Media & Ent. L.J. 915, 916–17 (2007). 101 Dickinson v. Zurko, 527 U.S. 150 (1999) (holding the Federal Circuit erred in reviewing Patent and Trademark Office decisions under the “clearly erroneous” standard). 102 See In re Lee, 277 F.3d 1338 (Fed. Cir. 2002). 103 See Fed. Trade Comm’n, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, Ch. 4, at 11–12 (summarizing Kunin testimony), at 15 (FTC recommendation) (Oct. 2003). 96 97

PART E: OBVIOUSNESS/INVENTIVE STEP  133

I feel that in that industry the patent law is probably a little bit different from the usual machinery industry, for example. The most important thing is the result, what kind of effect the compound has. So the first person to find it—it is not really an invention from the traditional meaning. It is kind of a discovery. The pharmaceutical industry people will be probably okay what Marty is saying is right. If a certain enantiomer was found that has a very good effect, then that is patented. It is a kind of common understanding. What I am trying to say is that from industry to industry this kind of level of feeling about the patentability under obviousness varies very much. I feel that the lawyers probably had better leave it to kind of the common sense of the industry. If you are too much—I might be wrong—bound by the theory of the general patent law, that might lead us sometimes to mistakes. MR. WHITE: John? MR. RICHARDS: Just a thought on chemistry and whether it is the same as everything else or not. We have for years taken the view that chemistry and biochemistry are unpredictable and, therefore, predictability tests may not apply. I think that has worked pretty well for the last century. I’m not sure whether it is going to keep on working, as increased knowledge of the way in which molecules interact, computer programs, computer modeling for new compounds, and so on, kick in—computer modeling now for proteins and how those are shaped. What the effect of that is going to be, I don’t know. We still need some form of protection in order to provide for the investment which is needed to bring something which may be obvious under those circumstances to market. Exactly what protection we provide for that I think is going to be a very interesting question to be developed over the next few years. MR. TOUPIN: Judge Rader’s decision in Kubin speaks to that somewhat. Part of the argument made was that although we have a pointer to a species of this genus and we had a method described, it was unpredictable whether we could get it. I think quite rightly, he said, “Well, that doesn’t mean that you didn’t have a reasonable expectation of success.”104 I think that is probably a trend that we are going to see, a less rigid distinction between the so-called unpredictable arts and other arts. MR. RICHARDS: Doyle may have been right on its facts at the time when Doyle was decided. But you had Wallach since then, even before we got to Kubin, saying that “industry has moved on, technology has moved on; therefore, we’re not going to follow it.” I think we are going to see more of this industry and technology moving on and getting to more predictability in the chemical area. So we are going to be kicked back into these predictable arts tests, which Mr. Katayama feels are dangers. And I think they may be dangerous as well, because if we do not get patents on these things which are going to be very useful, how else are we going to take the investment? MR. TOUPIN: I think that is in part why I say applicants will tend to work into the application the specific technical problem, rather than relying on general unpredictability. MR. RICHARDS: But then somebody comes along and says, “Not all of your compounds solve the problem that you have set out; therefore, you are invalid for some other reason.” MR. TOUPIN: It was the problem in KSR. They claimed too broadly. In KSR the specific technical problem that faced the inventors was how to get a brake into a small space that Ford had left its supplier. Although other claims in the patent were directed to the solution of that problem, the claim that was at issue had nothing to do it. MR. WHITE: Let’s thank all of the speakers and panelists. 104

In re Kubin, 561 F.3d at 1360.

Chapter IV

Patent Law Part F: Subject Matter: “Intangible” Patents — Business Methods, Software, “Soft” Patents, Second Medical Uses Moderator Prof. Martin Adelman

George Washington University Law School (Washington, D.C.) Speakers Kaz Kazenske

Lord Neuberger

Senior Director, Patent Prosecution, Microsoft Corporation (Virginia)

Law Lord, House of Lords, Parliament (London)

Dr. Myles Jelf

Ian Karet

Bristows (London)

Linklaters (London)

Panelists Alison Brimelow

Prof. John M. Golden

President, European Patent Office (Munich)

University of Texas School of Law (Austin)

Prof. Johanna Gibson

Prof. Dr. Peter Meier-Beck

Director, Queen Mary Intellectual Property Research Institute (QMIPRI)

Patents Chamber, German Federal Supreme Court (Karlsruhe)

Shimako Kato

Abe, Ikubo & Katayama (Tokyo)

136  CHAPTER IV: PATENT LAW PROF. ADELMAN: This is the session on patent law, the important subject, not trade law. Anybody interested in trade law is sent to a small room next to the boiler upstairs. We have a lot of work to do, so I am going to start now. We have an amazing array of glitterati for this session this morning. We have four speakers and we have a series of very distinguished panelists. We have Lord Neuberger as one of our speakers, very well known to all and needs no further introduction. We have Kaz Kazenske from Microsoft. That company is known, so we will move on. Ian Karet from Linklaters, a firm—I haven’t checked to see how many people they have let off, but apparently not him yet. And we have Myles Jelf from Bristows. Then our panelists. Of course everyone knows Alison Brimelow, holding the most important position as President of the European Patent Office. We have Professor Johanna Gibson, who is the Herchel Smith Chair at Queen Mary Intellectual Property Research Institute. Some time you can get me aside and I’ll tell you about Herchel Smith. He is the only man I know of who made hundreds of millions of dollars off patents who actually gave some money for education of patent solicitors, a man who ought to be greatly honored for this, as well as creating the birth control pill. But that’s another story. Professor John Golden from Texas, a brilliant young professor at an American university of great note. Shimako Kato from the leading law firm of Abe, Ikubo & Katayama. Katayama is constantly speaking at conferences. They are a law firm that is probably the best-run law firm in the world. They only do two things: intellectual property and insolvency. I don’t have to tell you that they are not insolvent. And finally, someone we all know, a leading figure in the German patent firmament, Judge Peter Meier-Beck, or Professor Dr. Peter Meier-Beck. With that, we are going to go to our speakers first and then we are going to have many comments. Kaz, could you start off? MR. KAZENSKE: Thank you, Marty. I’m glad to be here and in this room with such an important group of individuals from the IP community. Each of us on the panel have a short amount of time, so I thought I would focus on software and business methods issues in the United States. In doing so, I think there are two seminal cases in the United States everybody is talking about today. One is In re Bilski,1 and the second is In re Comiskey.2 The Bilski case, for those who may not be familiar, was directed to a set of claims drawn to a method of managing risk in trading commodities. No machine was recited in the claims. The second case was the Comiskey case. That case has now been remanded by the Court of Appeals for the Federal Circuit (CAFC) back to the U.S. Patent and Trademark Office (USPTO).3 This case had two sets of claims. One set were drawn to method claims dealing with a method of arbitration on contracts. This set of claims did not recite any machine in the claims. But, it did have a second set of claims drawn to a system, and it referred a registration module in the claims. The CAFC did look at that limitation as a machine or machine element. 1 545 F.3d 943 (Fed. Cir. 2008). [Editor’s Note: Prior to this volume being published, the Supreme Court issued its opinion in the case, affirming the Federal Circuit’s decision rejecting the patent application (a method of hedging losses in one segment of the energy industry by making investments in other segments of that industry), and holding that the “machine-or-transformation test” is not the sole test of patentability for intangible subject matter. See Bilski v. Kappos, 130 S. Ct. 3218 (Jun. 28, 2010).] 2 499 F.3d. 1365 (Fed. Cir. 2007), superseded by 554 F.3d 967 (Fed. Cir. 2009). 3 See In re Comiskey, 554 F.3d 967, 981–82 (Fed. Cir. 2009).

Part F: Subject Matter: “Intangible” Patents  137

However, that issue has been remanded back to the USPTO for consideration of the system claims and the claiming of a machine. These are the two big cases in the forefront of this issue in the United States. There are a whole series of other cases—and I will get to some of them in a minute—that have been decided by the USPTO Board of Appeals and in several District Courts since the Bilski and Comiskey decisions. [Slide] I put this quote in the slide by Judge Moore from the Federal Circuit. I thought it was very appropriate. There was a petition for an en banc hearing on the Comiskey case, which was dismissed, but she dissented in that petition. Her comment I think is very much on point: The issue here in Comiskey dealing with patentable subject matter is “one of the broadest, most sweeping issues in patent law” in the United States today.4 I think she was much on point. Let us first focus on Bilski. I know I have limited time so I am going to go very quickly through some of the issues. Bilski basically affirmed the principle that business methods are patentable subject matter.5 They didn’t reverse that issue as set forth in the State Street case.6 But they certainly reversed the test for patentability that was set forth by State Street. The Court rejected two things: (1) is there a technological arts test (they were very specific and said no);7 and (2) the “useful, tangible, concrete results” test was rejected, which came out of the State Street case.8 They really reverted back to a trilogy of Supreme Court cases from around 1980 that tied patent eligibility to either (1) is the claimed invention tied to a particular machine or apparatus, or (2) transforms a particular article into a different state or thing (the “machine-or-transformation test”). I think in looking at the Bilski case, what I found interesting is there were thirty-eight amicus briefs filed in this case from a whole array of entities commenting on patentable subject matter in the United States.9 In the famous KSR case10 on obviousness in the United States, there were only three on the petition for cert. at that time. When you have thirty-eight amicus briefs being filed, you can see the focus of this case and issue in the United States. But, I found certain facts very interesting in what the Court said, and I think it gives us some insight into the Court. Here they commented on a case, called Alappat,11 briefly in this case. They found that the claims in that process really met the “machine-or-transformation test.” But when you look at this Alappat case, which they commented on, the invention is— and I have it here on the screen—“data transformed [by a machine] served by a series of mathematical calculations to display a smooth waveform on an oscilloscope.”12 What it did is smoothed out the waveform on the oscilloscope. The Court commented very specifically on this case in Bilski,13 which I think gives somewhat of an insight to the thinking of the Court. In this case, though, I find—these are my personal views—the situation very interesting. In the United States we have a single court, the Court of Appeals for the Federal Circuit, dealing with patent issues. I think in this case there were three dissents in the en banc decision from 4 See Order Denying Rehearing En Banc, In re Comiskey, No. 2006-1286, at *4 n.2 (Fed. Cir. Jan. 13, 2009) (Moore, J., dissenting), available at http://www.cafc.uscourts.gov/images/stories/opinions-orders/06-1286o.pdf. 5 See Bilski, 545 F.3d at 960 (“We further reject calls for categorical exclusions beyond those for fundamental principles already identified by the Supreme Court. We rejected … an exclusion in State Street, noting that the socalled ‘business method exception’ was unlawful … . We reaffirm this conclusion.”). 6 State Street Bank & Trust Co. v. Signature Fin. Group, Inc., 149 F.3d 1368 (Fed. Cir. 1998). 7 See Bilski, 545 F.3d at 960. 8 See id. at 959–60; State Street Bank, 149 F.3d at 1373. 9 Even more amicus briefs were filed in anticipation of the Supreme Court hearing of Bilski v. Kappos. A list is available at http://www.abanet.org/publiced/preview/briefs/nov09.shtml#bilski. 10 KSR Int’l Co. v. Teleflex., 550 U.S. 398 (2007). 11 In re Alappat, 33 F.3d 1526 (Fed. Cir. 1994). 12 See id. at 1537 (describing Alappat’s invention) [Note: quote in text is paraphrased]. 13 See In re Bilski, 554 F.3d 967, 959–60 (Fed. Cir. 2009) (discussing Alappat).

138  CHAPTER IV: PATENT LAW the nine-member majority opinion.14 When you have that, I think you’ve got about as close to a split circuit as you would on other cases in the United States, because that is about as close as you are going to come to a split in the circuits, I think, commenting on this subject matter. Others may disagree on that, but I find that quite interesting. This “machine-or-transformation test,” however, I think opens a whole new set of questions. I don’t have the answers to some of these. I think they are open for debate. I will quickly get to a few decisions that try to address some of these questions. The question is: Is the recitation of a general-purpose computer with a programmed processor sufficient to meet the “machine-or-transformation test”? I think that is a question out there, if you have a general recitation of a computer. The Bilski case didn’t elaborate on the machine test at all. That test now is part of the Comiskey case,15 which has been remanded to the PTO. Another question that I think is coming to the forefront: What type of transformation is sufficient to meet this test? There is a whole growing concern now in the medical/pharma industry in the United States on transformation, particularly a medical process dealing with a diagnostic discovery. What is transformed in a diagnostic discovery of something? There is a whole question about what impact that is bringing to the forefront. Another question is: What does the Supreme Court think? I view this as a little bit of another bright-line test, and certainly that was dismissed by the Supreme Court in a series of cases, including the KSR case on obviousness. There are more issues here. Will they uphold this type of bright-line test? The one issue I think is interesting is the fact that this decision is predicated on three cases that are almost thirty years old. You have the decision of Benson,16 the decision of Flook,17 and the decision of Diehr by the Supreme Court.18 All of those were decided between 1979 and 1981. I ask each of you to sit back and think of your life thirty years ago. I see everybody has a laptop or a PDA device. If we were in this meeting thirty years ago, would these devices be here? There would be a board outside with pieces of paper having your name and a telephone number to call. My view is you’ve got a thirty-year-old precedent living in the 21st century. The Supreme Court had a couple of opportunities to really address this, and they didn’t. The famous State Street19 and the AT&T v. Excel20 cases, in 1999 they denied cert. However, I do think there is an interest by some of the Justices wanting to address this issue. In LabCorp v. Metabolite21 there was a comment in a dissent: Justice Breyer noted that the Supreme Court never commented on the “useful, concrete and tangible result” test that was brought forth in State Street.22 So there was an interest there in LabCorp. And I think in the eBay case23 there was another by Justice Kennedy, who criticized the vagueness of business methods. 14 Moore, Newman, and Rader, J.J., dissenting. See Order Denying Rehearing En Banc, In re Comiskey, No. 20061286 (Fed. Cir. Jan. 13, 2009), available at http://www.cafc.uscourts.gov/images/stories/opinions-orders/06-1286o.pdf. 15 See In re Comiskey, 554 F.3d 967, 979 (Fed. Cir. 2009) (“[A] claim that involves both a mental process and one of the other categories of statutory subject matter (i.e., a machine, manufacture, or composition) may be patentable under § 101.”). 16 Gottschalk v. Benson, 409 U.S. 63, 64 (1972). 17 Parker v. Flook, 437 U.S. 584, 593 (1978). 18 Diamond v. Diehr, 450 U.S. 175, 188 (1981). 19 State Street Bank & Trust Co. v. Signature Fin.Group, Inc., 525 U.S. 1093 (1999) (denying cert.). 20 Excel Commc’ns, Inc. v. AT&T Corp., 528 U.S. 946 (denying cert.). 21 Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., 548 U.S. 124 (2006). 22 Id. at 136 (Breyer, J. dissenting) (“That case does say that a process is patentable if it produces a “‘useful, concrete and tangible result.’” But this Court has never made such a statement and, if taken literally, the statement would cover instances where this Court has held the contrary.” (citing State Street Bank, 149 F.3d at 1373)). 23 eBay Inc. v, MercExchange, L.L.C., 547 U.S. 388 (2006).

Part F: Subject Matter: “Intangible” Patents  139

I think the Justices have some view. Whether this case of Bilski will make it to the Supreme Court, personally I don’t think so, but it could. I don’t think they will grant a cert. on the Bilski case.24 The PTO has put out a very short memorandum to the examiners post Bilski.25 I have it here in the slides. I am not going to read it. Basically, it just recites what is in Bilski. I wouldn’t call it guidelines to have thousands of examiners properly interpret Bilski. What are the definitive guidelines for the examiners at the USPTO post Bilski? I just have a few minutes here. I wanted to put up a few cases post Bilski. I think In re Cornea-Hasegan is very interesting.26 In this case the USPTO Board of Appeals rejected a method claim under the Bilski standard. But what I think is interesting in this case is there was a set of CRM claims that were also rejected. Now there is a corollary case, I believe called CyberSource,27 out of the Northern District of California that has also rejected CRM (computer-readable medium) claims that have been patentable for years under the case of Beauregard28 in the United States. There are two other cases that have been decided by the USPTO Board of Appeals that are of particular interest. One case to note is Bo Li29 which is totally 180 degrees from Cornea where the Board of Appeals upheld a CRM claim. So you have these decisions and you have these various views. Since I only have a few seconds left, I think there is a long way to go on this issue of patentable subject matter. The door is open now, not closed, by Bilski. But as you look back at what this is all about, I think we have a system that is designed to try to encourage things that are unknown, things that are new, things that have not been seen. I hesitate a minute that these type of decisions might not be moving that yet unknown innovation forward and actually may be encumbering its evolution. The patent system is really a vehicle structured to help advance the unknown, not just facilitate the known. I am concerned a little bit that the direction now being taken by the Courts may be pushing the door closed. With that, my time is up and I will pass on the baton. Thank you. PROF. ADELMAN: Go right ahead. MR. JELF: I am going to start before the clock gets going actually. I have the lucky task this morning of talking about the EPO approach to the tangled issue of intangible patents. I am going to jump straight into this. In some way, I think our task is a lot easier than our U.S. colleagues because we actually have a statutory basis for what we can and cannot grant patents for in the European Patent Convention countries. [Slide] I put up Article 52 of the EPC there.30 It says what we can grant patents for are inventions that are industrially applicable which involve an inventive step—all very straightforward—and then there is a nice shiny list of all the things that you cannot grant patents for. So what’s not to like? It all seems terribly straightforward. The sting comes, of course, in the rider to Article 52, which is 52(3), at the bottom there, which says that innovations are only going to be excluded if they fall into the excluded category 24 Subsequent to the conference, cert. was in fact granted, Bilski v. Doll, 129 S. Ct. 2735 (Jun. 1, 2009), and decided on Jun. 28, 2010. See Bilski v. Kappos, 130 S. Ct. 3218 (2010). 25 See Memorandum of John J. Love, Deputy Commissioner for Patent Examination Policy, USPTO, Guidance for Examining Process Claims in view of In re Bilski (Jan. 7, 2009), available at http://www.uspto.gov/web/offices/pac/ dapp/opla/documents/bilski_guidance_memo.pdf. 26 Ex parte Cornea-Hasegan, 89 U.S.P.Q. 2d (BNA) 1557, 1560 (B.P.A.I. 2009). 27 Cybersource Corp. v. Retail Decisions, Inc.. 620 F. Supp. 2d 1068 (N.D. Cal. 2009). 28 In re Beauregard, 53 F.3d 1583 (Fed. Cir.1995). 29 Ex parte Bo Li, Appeal 2008-1213 (BPAI 2008). 30 European Patent Convention, Art. 52, Oct. 5, 1973, 13 I.L.M. 268, available at http://www.epo.org/patents/law/ legal-texts/html/epc/2000/e/ar52.html.

140  CHAPTER IV: PATENT LAW as such.31 So whilst we have the shiny list—and it says computer programs, it says ways of doing business, discoveries, mathematical methods, etc.—those things are only excluded if it is a business method as such that is claimed. So if somebody simply writes a business method and says, “There’s a claim, can I have it?”―that’s straightforward—the answer is “No.” The difficulty comes when you have a mixed case, where there is some kind of innovation that has some aspects or some elements that are arguably business methods or mathematical methods but other aspects that are not, that are conventional patentable material. So the difficulty comes in deciding the cases where you have that mixture of features. So how has the EPO dealt with that? Because we are somewhat pressed on time, I have very simply done the analysis in two parts: firstly, an earlier line of cases, which I say are typified by the Vicom decision;32 and then, a later line of cases typified by the Hitachi decision.33 Under the earlier line, the approach was that you look at what the distinction is between what is claimed in a patent and what the state of the art is, and then you evaluate whether that distinction amounts to a “technical contribution.”34 So you ask whether that contribution is in some way technical or is it purely within one of the excluded categories. If it is technical, you can have a patent. If it is within the excluded categories, you cannot. That approach is what the United Kingdom has continued to build upon. Lord Neuberger is going to talk about that. So in that earlier approach and there is a technical contribution, you ask whether it is within the excluded categories or not. And that is what the United Kingdom still applies to some extent. The EPO has moved away from that approach, however, because of a kind of philosophical objection, as I see it, that if you use that approach whether things are excluded or not is a moving feast, which depends on what the state of the art is. So things can move in and out of being excluded innovations depending on what is happening in the rest of the world. The EPO says: “Well, you look at the EPC and it looks like there are fixed, firm categories. It should be an absolute analysis. Either something is excluded or it is not. That should hold good for all time.” Because of that concern, they have replaced the Vicom approach with the more recent Hitachi line of reasoning, which is very attractive inasmuch as it is a nice, straightforward test to apply. Hitachi goes back to looking at what do we mean by “an invention,” what actually is an invention. It says the word “invention” should be construed as “subject matter having technical character.”35 So inventions are all about some technical aspect. Under Hitachi, when you are deciding on the excluded matter question, all you do is look at the overall invention and say: Is there some technical character there? If there is, you are in. That has somewhat unflatteringly been described as the “any hardware test.” But I can see why people describe it that way. Now, obviously, that is a relatively low hurdle, and most patent attorneys are going to be able to move around that fairly readily. But Hitachi itself appreciates that. It says: “We realize that’s a broad test and all kinds of things can be said to have technical character. Even writing with a pen could be an exercise described as having technical character. So we need to do more than that to avoid somebody circumventing the exclusions by simply saying, ‘I’ve got a business method, I’m implementing it in a technical way, there you go, can I have my patent?’”36 Id. Art. 52(3). Case T 208/84, VICOM, O.J. EPO 1987, 14 (Board of Appeal, EPO, Jul. 15, 1986), available at http://www.epo. org/law-practice/case-law-appeals/recent/t840208ep1.html. 33 Case T-258/03, Auction Method/HITACHI, [2004] O.J. EPO 575 (Board of Appeal, EPO, Apr. 21, 2004), available at http://www.epo.org/law-practice/case-law-appeals/recent/t030258ex1.html. 34 Case T-208/84, VICOM, Reason 16. 35 Case T-258/03, Auction Method/HITACHI, Reason 3.1. 36 The Board in Hitachi said, “[a] mix of technical and non-technical features may be regarded as an invention within the meaning of 52(1) EPC and that the prior art should not be considered when deciding whether the claimed subject matter is such an invention.” Id. at [2004] O.J. EPO 582. 31 32

Part F: Subject Matter: “Intangible” Patents  141

How that is achieved is a balancing exercise, by making the subsequent stages of your analysis deal specifically with that question. So what they say is: It’s fine, we’ll let it through the patentability stage; but before you can have a patent it still has to be novel and inventive. So what we are going to do is we are going to say if an invention is something having technical character, we are going to impose that requirement on the novelty and inventive step stages. So only things that have a technical functionality, only technical features, can contribute to novelty and inventive step. Looking at that in the way that the EPO conventionally assesses inventive step, with the problem/solution approach—there you identify what problem the patent purports to answer, you look at the solution it puts forward, and you decide is that solution obvious or not in light of the prior art. When you are conducting that analysis in a mixed case, what you do is you say, “We are going to strip out anything that is non-technical and that is not allowed to contribute to the inventive step.” So, in a sense, you take the problem, you strip out the non-technical bits, see what technical problem is left, look at the technical solution that is proposed to solve that, and say: Is that purely technical bit inventive or not? What the EPO feels is that that overall approach comes to the same place, the same end results, as the earlier technical contribution cases but is more logical and more philosophically justifiable. There is quite an open debate as to whether the two approaches are or are not the same thing and whether they do result in differences. There have been some pretty sharp exchanges of words, particularly between the U.K. courts and the EPO. The U.K. courts have in the past said that the EPO approach is intellectually dishonest because effectively what you are doing is you are fictionalizing prior art; you are saying “this excluded matter, I am not going to let that count to the inventive step.” So it is almost like pretending as though that is in the prior art when in reality it was not. In response, the EPO has said that the United Kingdom’s approach is not a good-faith implementation of the EPC, and again, that is because of this idea that when you make the assessment of something being excluded or not it should be an absolute test, not this relative test. But under both approaches I think what is clear is that the technical aspects of the invention are key. That is particularly difficult when you are looking at a software case, because for a computer program there is an inherent technical aspect. The computer program arrives with a technical gloss already applied. So it is no surprise that in the particular area of software patents we now have a set of questions from the President of the EPO, here with us today, to the Enlarged Board of Appeal addressing particular issues to do with software patents.37 37 See Referral by Alison Brimelow, EPO President, under Art. 112(1)(b) EPC of October 22, 2008, Case G 3/08. Question 1: Can a computer program only be excluded as a computer program as such if it is explicitly claimed as a computer program? Question 2: (A) Can a claim in the area of computer programs avoid exclusion under Article 52(2) (C) and (3) merely by explicitly mentioning the use of a computer or a computer-readable data storage medium? (B) If Question 2 (A) is answered in the negative, is a further technical effect necessary to avoid exclusion, said effect going beyond those effects inherent in the use of a computer or data storage medium to respectively execute or store a computer program? Question 3: (A) Must a claimed feature cause a technical effect on a physical entity in the real world in order to contribute to the technical character of the claim? (B) If Question 3 (A) is answered in the positive, is it sufficient that the physical entity be an unspecified computer? (C) If Question 3 (A) is answered in the negative, can features contribute to the technical character of the claim if the only effects to which they contribute are independent of any particular hardware that may be used? Question 4: (A) Does the activity of programming a computer necessarily involve technical considerations? (B) If Question 4 (A) is answered in the positive, do all features resulting from programming thus contribute to the technical character of a claim? (C) If Question 4 (A) is answered in the negative, can features resulting from programming contribute to the technical character of a claim only when they contribute to a further technical effect when the program is executed?

142  CHAPTER IV: PATENT LAW I am not going to set the questions out in detail because of the time we have, but there are nine questions. They are in four groups. There is a certain amount of repetition within those questions, which is I think in a way sensible, because you wouldn’t want the answers to be targeted to some particular linguistic quirk in one particular question. What I have done is try to bring out the essence of what I think the questions are all about. Firstly, is the computer program exclusion a question of form or substance? Should you be able to get around it by saying, “Fine, I’m not claiming a computer program, I am claiming a sophisticated piece of hardware with all kinds of complex circuits upon which I run a certain set of instructions”? Should you be able to get around it that way? I think that’s a fairly easy question to answer. But if you go beyond there and say, “Fine, it has nothing to do with form, it is to do with substance,” then you have to identify what is it that makes one computer program patentable and another excluded. What is this magic ingredient that takes you outside the “as such” exclusion? Looking at the case law we have, it must be something to do with technical effect. But again, what technical effect? How do we quantify what the technical effect is that goes beyond what is inherent in running any computer program? Once we have identified what we mean by “technical effect,” I think a further aspect is: Where must that technical effect be manifested? It’s easy to see if you have an overall invention that happens to involve a computer—it’s a production line, it’s a conveyor belt—the computer is having an effect on the real world, changing the production line processes, that is a clear technical effect. If you shrink down to it’s just the normal hardware that comes with a computer—it’s the VDU, it’s the disks, it’s the printer, etc.—if you are achieving a technical effect on those within the world of the computer, is that sufficient? And then, shrinking down yet further, how about a technical effect that is purely within the computer itself? That question is one that is addressed by the recent Simian decision that Lord Neuberger will be talking about.38 I mention that just to say that, interestingly, that was found to be patentable under both the EPO and the U.K. practices. That’s what the core of the questions is about. I think what I found in trying to answer those questions is it throws up why computer programs, in particular, are such a difficult issue. I am only going to touch on this briefly because there is not a huge amount of time left. I think the reason they have come to the fore so strongly is, firstly, that there is such a growing ubiquity of computerized devices in our lives. There are many conventional spheres of industry which we have had no problem granting patents in respect of twenty or thirty years ago, which now increasingly involve computers. The easiest example of that to see is the mobile telephone world. Telephone patents in the 1950s, no problem at all—it’s all about circuits and wires; we can grant those. These days the telephone in your pocket is actually a very powerful microcomputer. Something that you would have been proud to have in your home ten or fifteen years ago is now in your pocket. I also think that what I regard as a hardware/software convergence drives a lot of issues here. We have always had no problem granting patents for a novel arrangement of circuits. These days the effect of a novel arrangement of circuits can be replicated purely in software. Does that mean that that essential invention should no longer be patentable? It seems to me there is an argument, at least, that when you run a computer program and you run software, what you are actually doing is creating a transient pattern of circuitry on a silicon chip. Now, if you recreated that exercise with diodes and resistors and heavy conventional circuitry, you’d need a large room, but it would clearly be patentable. Now for that transient second it is happening on the processor, we are arguing that it is no longer patentable. 38 Symbian Ltd v. Comptroller General of Patents, [2008] EWCA Civ 1066 (Oct. 8, 2008) (Neuberger, J.), available at http://www.bailii.org/ew/cases/EWCA/Civ/2008/1066.html.

Part F: Subject Matter: “Intangible” Patents  143

I think in answering those questions what we need to come to is: What is the point of a computer program exclusion? Again, I know this is something that Lord Neuberger is going to expand upon, so I will just touch very quickly on it. Are we saying that we want to avoid double protection? Are we saying that software patents are going to restrain innovation because software moves very fast? If that is the case, I don’t see why the argument shouldn’t also apply to the hardware world, because these days any given hardware arrangement, any given PC, is only actually in the shops for something like six weeks before it is taken off the shelves and replaced with a faster-moving product. PROF. ADELMAN: We’ll do this afterwards. DR. JELF: So to conclude, my main point is without some consensus about what the computer program exclusion is all about―what’s the point of it, the rationale―it is very difficult to obtain any kind of consistency between jurisdictions, or indeed even within a jurisdiction between different tribunals. Thank you very much. LORD NEUBERGER: Good morning. [Slide] Why are computer programs excluded? A number of reasons have been identified. I would mention three and, no doubt, others can be thought of, but none of them is very satisfactory. • The possibility of stifling innovation. • They are, of course, protected by copyright. • Too difficult to search for. I suspect that the exclusion may in fact be based on an out-of-date notion of computers; most us can remember the mainframe computer with programs based on cards with holes punched in them. Now, as Mr. Justice Patten said in an English case, Symbian at first instance, advances in technology mean that most improvements to a computer can be affected via a software program.39 We are in a different world. [Slide] Now, whatever the purpose behind the computer program exception, we have to give effect to it. It’s in Article 52(2)(c), which excludes, among other things, computer programs, and Article 52(3) uses that wonderful expression, to the effect that they are excluded “only as such.”40 It is difficult to discern any policy, as I have already mentioned, particularly when one looks at the ragbag of items contained in Article 52(2).41 As Lord Hoffmann reminded us yesterday, courts have to be careful of applying or inventing a policy, so it would have been helpful if we could have found one. Nonetheless, we have to make do with what we’ve got. In two Court of Appeal decisions in England, Aerotel42 and Symbian,43 we tried to set out the court of appeals’ approach. Robin Jacob and I sat on both cases, so they were bound to lead to confusion and controversy. 39 Symbian Ltd. v. Comptroller General of Patents, [2008] EWHC 518 (Pat), at [26] (Mar. 18, 2008) (Patten, J.), available at http://www.bailii.org/ew/cases/EWHC/Patents/2008/518.html (“Advances in technology mean that most improvements to a computer or computer-based device can be effected via a software program.”). 40 “Paragraph 2 shall exclude the patentability of the subject-matter or activities referred to therein only to the extent to which a European patent application or European patent relates to such subject-matter or activities as such.” EPC Art. 52(3); see European Patent Office, Patents for Software?, http://www.epo.org/news-issues/issues/computers/software. html (“According to this patent law, a program for a computer is not patentable if it does not have the potential to cause a ‘further technical effect’ which must go beyond the inherent technical interactions between hardware and software.”). 41 Article 52(2) excludes a list of inventions from being patentable subject matter, with Art. 52(2)(c) specifically excluding computer programs. See EPC Art. 52(2) (excluded from patentable inventions are “(a) discoveries, scientific theories and mathematical methods; (b) aesthetic creations; (c) schemes, rules and methods for performing mental acts, playing games or doing business, and programs for computers; (d) presentations of information.”). 42 Aerotel Ltd. v. Telco Holdings Ltd., [2006] EWCA Civ 1371 (Oct. 27, 2006) (Jacob, J.), available at http://www. bailii.org/ew/cases/EWCA/Civ/2006/1371.html. 43 Symbian Ltd v. Comptroller General of Patents, [2008] EWCA Civ 1066 (Oct. 8, 2008) (Neuberger, J.), available at http://www.bailii.org/ew/cases/EWCA/Civ/2008/1066.html.

144  CHAPTER IV: PATENT LAW Famously, in Robin’s judgment in Aerotel a four-stage approach was proposed: you first construe the claim properly; you then identify the actual contribution to the art; next, you ask what falls solely within the excluded subject matter; and, finally, you check whether the actual or alleged contribution is actually technical in nature.44 Now, we are quite familiar with stage tests in IP cases. We have the Windsurfing questions45 and we have the Improver questions.46 Normally, there is ultimately only one question that matters, and it is the last. What is special about the Aerotel four-stage approach is that the last question is two questions, three and four, but they ultimately, I think, amount to the same question. But because of previous authority, we felt constrained to have both questions there. Now, the Aerotel approach is, I suggest, consistent with the main thrust of previous English jurisprudence. Nobody knew more about the law of patents and nobody knew more about computers than the late and much lamented Nicholas Pumfrey. He described the approach in a case before either of these two cases, Symbian or Aerotel, as well established. He said in a case called Shopalotto: You take the claimed programmed computer, you ask what it contributes to the art over and above the fact that it covers a programmed computer, and if, and only if, there is a contribution outside the list of excluded matters—that of course is in Article 52(2)—then the invention is patentable.47 On the face of it at any rate, the Aerotel approach seems, at least arguably, workable and sensible. If you read the subsequent decisions of the English courts of first instance, where a number of judges, many of them here today, have tried to follow the Aerotel approach, it seems to work and make sense. But I think that it is fair to say, from talking to the judges concerned, that the Aerotel approach is not as easy to apply as it seems. And as you have heard already from Myles Jelf, to put it mildly, it was not wholeheartedly welcomed in the European Patent Office. However, it is to be noted that the EPO approach was initially the same: look at the contribution and see if it fell within the Article 52(2) exceptions. That was established in the famous case of Vicom,48 now more than twenty years old. But the approach has subsequently 44 Aerotel Ltd., at [40] (“(1) properly construe the claim; (2) identify the actual contribution; (3) ask whether it falls solely within the excluded subject matter; (4) check whether the actual or alleged contribution is actually technical in nature.”). 45 Windsurfing Int’l Inc. v. Tabur Marine (Great Britain) Ltd., [1985] EWHC FSR 59, at [73]. In Pozzoli SPA v. (1) BDMO SA, the Court of Appeal restated the test as follows: 1. (a) Identify the notional “person skilled in the art”; (b) Identify the relevant common general knowledge of that person; 2. Identify the inventive concept of the claim in question or if that cannot readily be done, construe it; 3. Identify what, if any, differences exist between the matter cited as forming part of the “state of the art” and the inventive concept of the claim or the claim as construed; 4. Viewed without any knowledge of the alleged invention as claimed, do those differences constitute steps which would have been obvious to the person skilled in the art or do they require any degree of invention? 46 Improver Corp. v. Remington Consumer Prods. Ltd., [1990] FSR 181 (Hoffmann, J.). The “Improver questions” are: (i) Does the variant have a material effect upon the way the invention works? If yes, the variant falls outside the claim. If no:(ii) Would this fact (ie that the variant has no material effect) have been obvious to the skilled person at the date of publication of the patent? If no, the variant falls outside the claim. If yes:(iii) Would the reader skilled in the art nevertheless have understood from the language of the claim that the patentee intended that strict compliance with the primary meaning was an essential requirement of the invention? If yes, the variant is outside the claim. If no, then the variant falls within the scope of the claim. In Wheatley v Drillsafe Ltd., [2001] RPC 7, the Improver questions were re-named by the Court of Appeal, the “Protocol questions”. 47 In re Shopalotto.com Ltd. Application, [2005] EWHC 2416 (Pat) (Nov. 7, 2005) (Pumfrey, J.), available at http:// www.bailii.org/ew/cases/EWHC/Patents/2005/2416.html. 48 Case T 208/84, VICOM, O.J. EPO 1987, 14 (Board of Appeal, EPO, Jul. 15, 1986), available at http://www.epo. org/law-practice/case-law-appeals/recent/t840208ep1.html.

Part F: Subject Matter: “Intangible” Patents  145

changed so that it has become, at least in the main, the “any hardware” approach, as Robin I think christened it in Aerotel.49 That has certainly become the dominant position taken by the European Patent Office through the Technical Board of Appeals. The spat between the European Patent Office and the Court of Appeal was the subject of an attempted smoothing by the Court of Appeal in the subsequent case of Symbian. The court there suggested that the two approaches, that of the European Patent Office and that of the Court of Appeal, would almost always produce the same outcome.50 Myles and I, and I dare say others, have been trying to think of cases where perhaps they wouldn’t produce the same outcome, and it is difficult to come up with such a case. It is perhaps typical of the present obsession in all parts of the establishment, with process over outcome that the issue should be seen to be so important. In the end, the important thing is that the European Patent Office and the national courts march together in terms of result. If they have their own different ways of getting the same result, it doesn’t matter. Or at least it doesn’t matter nearly as much as the fact that they get the same results. Nonetheless, there is force in the point that it is important that national courts should normally follow the European Patent Office’s guidance and approach to any legal problems that arise under the European Patent Convention.51 That has been said by the House of Lords in a number of cases, most recently in Conor,52 frequently, as was the case yesterday, by Lord Hoffmann.53 As Benjamin Franklin, just to introduce an American component here, said: “We must all hang together or assuredly we shall all hang separately.”54 In an increasingly international competitive world, it is unfortunate that all that we have achieved in Europe is to add an extra layer to the multiplicity of courts, rather than having a single court. So long as we have that, it is a struggle. But we do have to try and work together. Having said that, where the European Patent Office has not got an absolutely clear and consistent approach, as I suggest is the position here (although it is fair to say that the “any hardware” approach has become dominant) then the English courts, the national courts, have a difficult decision: Do they follow a not-set-in-stone approach of the Technical Board of Appeal and junk their previous approach, or do they say: it is better to be consistent by sticking with our previous approach and sending out a message that “at least if you come to the U.K. this is how we are going to approach things,” until there is an absolutely clear steer from the European Patent Office? We took this latter view in Aerotel and then in Symbian we decided that we should stick with our view until we had a clear steer from the EPO. And it is why in Aerotel we suggested that the issue of the proper approach be referred to the Enlarged Board.55 49 Aerotel Ltd. v. Telco Holdings Ltd., [2006] EWCA Civ 1371, at [26], available at http://www.bailii.org/ew/ cases/EWCA/Civ/2006/1371.html (Jacob, L.J., describing the “any hardware” approach, said “Ask whether the claim involves the use of or is to a piece of physical hardware, however mundane (whether a computer or a pencil and paper). If yes, Art.52(2) does not apply. This approach was adopted in three cases, Pension Benefits, Hitachi and Microsoft/ Data transfer (the ‘trio’). It was specifically rejected by this Court in Gale.”). 50 Symbian Ltd v. Comptroller General of Patents, [2008] EWCA Civ 1066, at [12] (Neuberger, J.), available at http://www.bailii.org/ew/cases/EWCA/Civ/2008/1066.html (“As is clear from [47] of Aerotel, and as Kitchin J said in Astron Clinica Ltd, [49], the approach laid down in Aerotel ‘should produce the same result as did the [approach before that decision]’, as this court ‘was doing no more than applying a re-ordering of the Merrill Lynch test, and that it was bound by Merrill Lynch, Gale and Fujitsu’.”). 51 European Patent Convention (EPC), Oct. 5, 1973, 1065 U.N.T.S. 199. 52 Conor Medsystems Inc. v. Angiotech Pharms. Inc., [2008] UKHL 49 (House of Lords), available at http://www. publications.parliament.uk/pa/ld200708/ldjudgmt/jd080709/conor-1.htm. 53 See Chapter IV.G, “Biotech & IP”, infra this volume. 54 See Wolfgang Mieder, Stewart A. Kingsbury, Kelsie B. Harder, A Dictionary of American Proverbs 451 (Oxford Univ. Press, 1992). 55 See Aerotel Ltd. v. Telco Holdings Ltd., [2006] EWCA Civ 1371 at [75] (“It is formally no business of ours to define questions to be asked of an Enlarged Board of Appeal. What we say now is only put forward in case the President of the EPO finds it helpful. If he thinks it pointless or arrogant of us to go this far, he is of course entirely

146  CHAPTER IV: PATENT LAW Now, the duty on the national court to follow the approach of the European Patent Office carries with it, I would suggest with respect, concomitant duties on the European Patent Office. First, there is a duty of internal consistency. It is unfortunate if different TBAs, different Technical Boards of Appeal, take different approaches to the same issues. Unanimity of approach being expected from individual countries’ courts seems to me to require, a fortiori, unanimity of approach in the TBAs. Secondly, I think that we would hope that TBAs would pay attention to our views in the same way as we pay attention to theirs. It is a dialogue. Thirdly, if we take a different view, or even criticize the TBAs’ approach, the TBAs shouldn’t take offense. And, of course, I accept if they criticize us we shouldn’t take offense. Finally, there should be perhaps greater preparedness to refer issues to the Enlarged Board for authoritative guidance. I would like to say that I very much appreciate the fact that Alison Brimelow did refer these questions—no doubt despite rather than because of our suggestion— to the Enlarged Board. I suggest that the U.K. approach has advantages, in that it doesn’t always require the obviousness question to be raised when Article 52 is potentially engaged. The trouble with the obviousness question in this sort of case is that (a) the concept of obviousness has to be recharacterized as it is rather different from its normal nature in the field of patents, as explained by Myles Jelf; and (b) there are liable to be greater differences of outcome because obviousness is so much a question of fact for the individual court. Turning to Symbian itself,56 I would describe my judgment as a hangover judgment. It was a judgment that I enjoyed and was very pleased with at the time, but reading it now I am not so sure. The patent in suit claimed a program which improved the reliability of the faster of two systems which linked a stored function to an application program. It was said, “As a matter of reality, there is much more than just a better program. There is a faster and better computer.”57 That sounds very good. That’s a technical effect. But when you think about it these days, that could be said about almost any program. And what about the rejected claim in a much earlier authoritative case in England, in the Court of Appeal, Gale?58 That involved a new and better algorithm for finding square roots. It was rejected because it did not solve “a technical problem lying within the computer.”59 But free to ignore all we say. Nonetheless in the hope that there is a spirit of co-operation between national courts and the EPO we ventured to ask the parties what questions might be posed by the President of an Enlarged Board pursuant to Art.112.”). A referral to the enlarged board was made in 2008. See Case G-3/08, Referral under Article 112(1)(b) of the EPC to the European Patent Office Enlarged Board of Appeal (Oct. 22, 2008). An answer to the referral came in 2010. See Case G-3/08, Programs for Computers, [2010] O.J.E.P.O 17 (Enlarged Bd. Appeal, May 12, 2010), available at http://archive.epo.org/epo/pubs/oj01l/01_11/01_0101.pdf. 56 Symbian Ltd. v. Comptroller General of Patents, [2008] EWCA Civ 1066 (Oct. 8, 2008) (Neuberger, L.J.), available at http://www.bailii.org/ew/cases/EWCA/Civ/2008/1066.html. 57 Id. at [56] (“Putting it another way, a computer with this program operates better than a similar prior art computer. To say ‘oh but that is only because it is a better program—the computer itself is unchanged’ gives no credit to the practical reality of what is achieved by the program. As a matter of such reality there is more than just a ‘better program’, there is a faster and more reliable computer.”). 58 In re Gale’s Application, [1991] R.P.C. 305, 317 (holding patent was for a mathematical method and computer program as such). 59 Id. at 327–28. The attraction of Mr. Gale’s case lies in the simple approach that, as claimed, he has found an improved means of carrying out an everyday function of computers. To that extent, and in that respect, his program makes a more efficient use of a computer’s  resources. A  computer, including a pocket calculator with a square root function, will be a better computer when programmed with Mr. Gale’s instructions. So it may. But the instructions do not embody a technical process which exists outside the computer. Nor, as I understand the case as presented to us, do the instructions solve a “technical” problem lying within the computer, as happened with patent applications such as IBM Corp./Computer-related invention (Decision T 115/85) [1990] E.P.O.R. 107 and IBM Corp./Data processor network (Decision T 06/83), [1990] E.P.O.R. 91. Id.

Part F: Subject Matter: “Intangible” Patents  147

it did make the computer work better. It is quite difficult to articulate in a wholly convincing way why, on the one hand, the Symbian patent was granted, whereas the Gale patent was refused. In the most recent case in England, AT&T,60 a first instance decision, Mr. Justice Lewison had to grapple with this problem. He suggested that if the program consisted of some generally applicable method of operating a computer, it would be patentable, whereas it would not be patentable if it was a way of handling particular types of information.61 That sounds good and may well be a fair analysis. But, in a sense, are they not two ways of putting the same thing? The House of Lords has not dealt with this issue, considering it, I think, better to wait to see what the Enlarged Board has to say. Thank you very much indeed. PROF. ADELMAN: We have just had three talks on, broadly, software, computer-related inventions. For the moment we are going to turn to another subject, second medical use. But I want to throw out at this point what I think is the most important issue, not that these issues are not important, the United States going back thirty years and looking at old and some badly reasoned cases, if there is a conflict between the European Patent Office and the English courts. But the importance of diagnostic inventions is actually driving what is happening in Bilski.62 Bilski is the direct result of this claim in a very important patent, U.S. Patent 4940653. Claim 13 of this patent involves this invention.63 I want to know whether it is patentable in Europe and I want to talk about it, and whether it is patentable in the United States after Bilski. This is a very important invention. It is “a method for detecting a deficiency of cobalamin or folate”—(cobalamin is Vitamin B12; if you have a deficiency, pernicious anemia, you die)— “in warm-blooded animals comprising the steps of assaying a body fluid for an elevated level of total homocysteine”—just measure the homocysteine—“and correlating the elevated level of total homocysteine in said body fluid with a deficiency of cobalamin or folate.” That’s it.64 It was the discussion of Mr. Justice Breyer and Mr. Justice Stevens and Mr. Justice Souter in the LabCorp case65 over this claim that has driven the Federal Circuit in its panic to do Bilski and, I think, raises a terribly important issue, the patentability really of diagnostic inventions. Ian, I have now set you up. MR. KARET: Thank you. So are medical inventions easier or harder than software inventions? Well, the simple view is that they are much easier because they only involve medicine and not software. But I think, as we will see, the medical invention exceptions are in fact laid on top of all of the exceptions that we have just discussed. Article 53 of the Patent Convention excludes at Article (c) “methods of treatment, diagnosis, and surgery.”66 But Article 53 follows Article 52, that you can only have a medical 60 In re AT&T Knowledge Ventures LP, [2009] EWHC 343 (Pat), available at http://www.bailii.org/cgi-bin/markup. cgi?doc=/ew/cases/EWHC/Patents/2009/343.html. 61 See id. at [33]. 62 In re Bilski, 545 F.3d 943 (Fed. Cir. 2008). [Note: Subsequent to this conference, the U.S. Supreme Court granted cert., reported in Bilski v. Doll, 129 S. Ct. 2735 (June 1, 2009) (No. 08-964)]. 63 U.S. Patent No. 4940653, Claim 13: “A method for detecting a deficiency of cobalamin or folate in warm-blooded animals comprising the steps of: assaying a body fluid for an elevated level of total homocysteine; and correlating an elevated level of total homocysteine in said body fluid with a deficiency of cobalamin or folate.” Supp. App. 30. 64 Id. 65 Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., 548 U.S. 124 (2006) (Justice Breyer, with whom Justice Stevens and Justice Souter join, dissenting as to the denial of certiorari). 66 European Patent Convention (EPC), Art. 53(c) Oct. 5, 1973, 1065 U.N.T.S. 199 (Excluding from patentability “methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practised on the human or animal body; this provision shall not apply to products, in particular substances or compositions, for use in any of these methods.”).

148  CHAPTER IV: PATENT LAW invention so long as you do not have a mental act or a program for a computer in the first place.67 So, swiftly, to answer the homocysteine question, even if it were a method of diagnosis outside the human body, which in the United Kingdom and Europe ought to be patentable, there is a good question as to whether or not that kind of diagnosis at that kind of basic level wouldn’t simply be a mental act. In fact, that is what doctors are by their nature trained to do—well, half of doctors, the half that diagnoses as opposed to the half that cut. So we do have a problem here. It is not at all clear why we have these medical exclusions in the first place. Why should they be exclusions to patentability rather than exclusions to infringement, as in the United States? So Article 53 of the European Patent Convention gives us exclusions.68 Article 54 at (4) and (5) allows us to bring back in certain substances and the use of substances for treatment.69 Now, before the EPC 2000,70 the removal of patentability was dealt with by a fiction that these inventions were not industrially applicable. It is now this new scheme that sets out slightly more clearly what it is that we have, although some people are saying that there is no change in the law. In the United Kingdom there are actually a lot of things that can be brought up to allow the use of a medical invention. First, we have Crown use,71 not much invoked, although the use of drugs in the NHS has been held to be Crown use. The NHS for those from over the water is our socialized medical system for which we all pay by taxes. There is also a private medical system for which you can pay privately, which presumably would not be Crown use. But Article 55 is not much used, and there is very little case law about it. If our Section 55 isn’t much used, I don’t think Section 59 has ever been used.72 At least the textbooks don’t quote a lot of cases that go that way. And national emergency allows us to do pretty much anything we want, under Article 55 or otherwise, for the “essential life of the community” or the “essential well-being of the 67 See id. Art. 52(2) (“The following in particular shall not be regarded as inventions within the meaning of paragraph 1: … (c) schemes, rules and methods for performing mental acts, playing games or doing business, and programs for computers”). 68 See id. Art. 53 (Exceptions to patentability). European patents shall not be granted in respect of: (a) inventions the commercial exploitation of which would be contrary to “ordre public” or morality; such exploitation shall not be deemed to be so contrary merely because it is prohibited by law or regulation in some or all of the Contracting States; (b) plant or animal varieties or essentially biological processes for the production of plants or animals; this provision shall not apply to microbiological processes or the products thereof; (c) methods for treatment of the human or animal body by surgery or therapy and diagnostic methods practised on the human or animal body; this provision shall not apply to products, in particular substances or compositions, for use in any of these methods. Id. 69 See id. Art. 54 (Novelty). (4) Paragraphs 2 and 3 shall not exclude the patentability of any substance or composition, comprised in the state of the art, for use in a method referred to in Article 53(c), provided that its use for any such method is not comprised in the state of the art. (5) Paragraphs 2 and 3 shall also not exclude the patentability of any substance or composition referred to in paragraph 4 for any specific use in a method referred to in Article 53(c), provided that such use is not comprised in the state of the art. Id. 70 EPC2000, a revised version of the European Patent Convention (EPC), entered into force on December 13, 2007. See Marco Tom Connor, “European Patents: What’s New in 2008 for the Applicants?”, 90 J. Pat. & Trademark Off. Soc’y 587, 590 (2008). 71 The “Crown Use” provisions in the Patents Act 1977 allow any government department and any other authorised persons to carry out acts which would otherwise be infringing without the consent of the patent proprietor. See Patents Act 1977 (U.K.) § 55(1). 72 See id. § 59 (Special provisions as to Crown use during emergency).

Part F: Subject Matter: “Intangible” Patents  149

community.”73 I’m not quite sure what the difference is between life and well-being, but for these purposes they are different. Those provisions are quite generous in affording the courts the right to remove from the patentee the right to stop people from doing things. Now, Section 60 gives us the meaning of infringement. There too we have exceptions that can go to medical inventions: things which are not commercial, things which are done for experimental purpose, and pharmaceutical preparations.74 It does strike you as somewhat odd that there should be a special exception for pharmaceutical preparations but not for surgery, therapy, or diagnosis. So a lot of effort has gone on in the European Patent Office and in national courts into establishing three things: • First, what constitutes therapy, surgery, and diagnosis; • Secondly, what form of claims may be allowable if we are going to have inventions in this field; and • Thirdly, the merits of particular inventions in those fields. The basic scope of the exception, the first question, is now fairly clear, and I think the U.K. courts and the EPO are pretty much agreed. In BMS v. Baker Norton75 the court said that actual use by practitioners when treating patients should not be the subject of a patent monopoly. The difficulty is to decide whether the restraint concerns a method of treatment as opposed to that which is available for treatment. In Eisai the Enlarged Board of Appeal said that the purpose of Article 52(4) was “only to free from restraint non-commercial and non-industrial medical and veterinary activities.”76 So the scope excludes surgery, which is the treatment of the body; diagnosis, the determination of a medical condition; or therapy, which is cure, alleviation, and/ or prevention. So that is the first question. The second question concerns the form of what you are allowed to claim or not to claim. This raises a standard form-and-substance question. The first medical use can be claimed in one way but not another (Question: Is there really any difference between them?) and, similarly, a second medical use first had to be claimed in the Swiss form, now under EPC 2000 may be claimed in another way (Question: Is it really any different to the form which we know is now allowed?) The case law may not be as mind-bending as the case law for software, but there are certain difficulties, partly because the claims are often very long. So in Bristol-Myers (Taxol),77 this was the claim which the English Court of Appeal had to deal with. The first four elements of the claim were known, but the fifth element had not been disclosed. The court held that the claim lacked novelty, and I think that all the courts that looked at this claim held that it lacked novelty, both in the United Kingdom and in the Netherlands. The English Court of Appeal, however, said that this was no more than a claim for a method of treatment, and as such that it wasn’t susceptible to industrial application. That follows from, I think, the range of administration in limb 3 of the claim. The Dutch court, however, when faced with the same claim, did not find that it was a method of treatment.78 73 See id. § 59(1)(b) (“for the maintenance of supplies and services essential to the life of the community”); id. § 59(1)(c) (“for securing a sufficiency of supplies and services essential to the well-being of the community”). 74 See id. § 59(5) (listing exceptions including: “(a) it is done privately and for purposes which are not commercial” and “(b) it is done for experimental purposes relating to the subject-matter of the invention”). 75 Bristol-Myers Squibb Co. v. Baker Norton Pharms. Inc., [2000] EWCA Civ 169 (May 23, 2000). 76 Eisai, G 5/83, [1985] OJ EPO 064 (where the Enlarged Board had regard to a decision of the Bundesgerichtshof (the “BGH”), the Supreme Court of Germany). 77 Bristol-Myers Squibb Co. v. Baker Norton Pharms. Inc., [2000] EWCA Civ 169 (May 23, 2000). 78 Bristol-Myers Squibb v. Yew Tree Pharms. [Netherlands], (2000) ENPR 26.

150  CHAPTER IV: PATENT LAW In Genentech79—and I apologize for the length of the claim, but it is Genentech’s and not mine—the Technical Board of Appeal said that the Swiss form claim was enough to confer on this claim the status of not being a method of treatment and that the approach was correctly to look at it as a matter of form over substance and then examine the substance by looking at novelty and inventive step in the usual way. So it is the dosage that really causes the difficulty. The possibility of a movable dosage allows in the question of treatment, even once you are within the medicament that has been made. Now, there is no reason in principle why dosage should not be novel and inventive. Both the European Patent Office in Genentech and the U.K. courts in Actavis accept that those claims may be obvious and it may be routine to investigate doses.80 But even if the claim survives those considerations, there are still considerations which have to be considered. The form may be problematic, partly because of the question of choices to be made at the time of administration. And also there may be a question about how the dose is given and when, which is what the Enlarged Board of Appeal would consider in Kos Life Sciences.81 I personally have a difficulty with “once a day prior to sleep” because I am no longer sure when sleep may come, usually early rather than late in my case. Doubtless there will be other problems with claims like this. There is a unifying feature here with software and business methods, and that is the problem of intuition. There is often a feeling when you look at a claim that it shouldn’t be patentable. It may be allied to the feeling that we have when we read claims that the thing damn well ought to be obvious or couldn’t possibly be new. Those intuitions are unhelpful. So we deal with them by setting ourselves tests. But those tests don’t often provide all the answers. There is also possibly a convergence coming our way with medical inventions and software, particularly in the field of diagnostics. As our genomes become public property and stored in Google or elsewhere, we tailor personal treatments, where my dosage is not the same as your dosage because I am in some way different to you, and therefore somebody tries to deliver me a specific therapy which suits me but nobody else. So although at the outset these exclusions may seem to be in slightly different baskets, I suspect that in the future they may have to come to be taken together. PROF. ADELMAN: Thank you very much, Ian. Of course, coming from across the Atlantic, I understand the motivation for the exclusion of medical methods, living with a doctor who got quite upset when somebody got a patent on a stitch doing a cataract operation. But when you think about it, I’m not sure there are any solid policy reasons. So it is up to lawyers to figure out ways to get around badly-thought-out exclusions. At least that may be the cynical view—or maybe it’s the sound view—for lawyers. We have a very distinguished panel, as you know, so let’s have comments from all of them. Given the subject matter, I think it is appropriate to start with Alison. MS. BRIMELOW: Thank you very much. I have taken due note of comments about the need for consistency, listening to national courts. Don’t take umbrage and be ready to refer. I take very careful note. But I want briefly to touch on something rather different because there is an elephant in this room. I leap straight from elephant to another animal. I got an email yesterday that said “Damage by pigs on the Isartor site”—Isartor site is the headquarters of the EPO—and I had better clarify at once that the pigs in question had four legs. 79 Case T-1020/03, Genentech/method of administration of IFG-I, [2006] EPOR 9 (Decision of Technical Board of Appeal 3.3.04, Oct. 29, 2004), available at http://www.epo.org/law-practice/case-law-appeals/pdf/t031020ep1.pdf. 80 See id.; Actavis U.K. Ltd. v. Merck & Co. Inc., [2008] EWCA Civ 444 (Ward, Jacob, Rimer, JJ.). The Court of Appeal followed the EPO precedent in Genentech approving a pharmaceutical use claim. 81 Case T-1319/04, Kos Life Sciences, Inc./Dosage regimen (EPO Boards of Appeal, Apr. 22, 2008).

Part F: Subject Matter: “Intangible” Patents  151

There was a demonstration yesterday at which these porkers appear to have been let loose and dug up our garden. This being Germany, I am assured that the police have evidence and the farmer will be sent a bill. Is this the interface between patents and insolvency when he refuses to pay? I am not sure. But I think that is part of the backdrop to the uncertainty and unclarity which affect, if not bedevil, the operation of the patent system within Europe, and to Europe’s detriment. In my case I think that is very clear. We lack, for whatever reason, a sense of political direction and commitment about what we want the patent system to do. We operate under a Convention which we finally managed to agree to amend in 2000 and implemented the changes at the end of 2007. The political responsiveness, or slowness, of our system in Europe—and I offer no comment on whether it is better or worse than across the Atlantic—is I think extremely damaging. It is why we see direct action. It is why we found ourselves thinking we were going to get a bit of clarity on computerimplemented inventions, and the European Parliament decided very clearly otherwise, taking a lot of people by surprise, because what was proposed was remarkably conservative. What we suffer from—and I’m afraid it does seep into our bones—is a sense of uncertainty at times about the public policy context which we are meant to be working in. I see this very clearly as detrimental for Europe. I don’t have an obvious answer to it. But I think that one of our problems is that though we may consider in comfortable, likeminded—is Fordham like-minded? Not entirely, but it’s safe space—like-minded gatherings like this, this will be rational, this is where we have to go, we are not actually persuading the elephant in the room that this is right, and the elephant is capable of direct action which probably pushes us quite a long way backwards. So my comment is that it is immensely difficult. I have no obvious solution. We look to the judges sometimes to clarify, and that was discussed yesterday, the interaction of judges and policy. It is a substitute, it seems to me, for a clear contribution from the legislature. But the speed at which we can move, whether in the courts, including my beloved Boards of Appeal, or whether it is in the legislative context, is too slow for technology and somehow steps around public will. I regard that as a significant handicap, but it is a very, very real problem. Solutions on a postcard, please. PROF. ADELMAN: Thank you very much for that comment. It is obviously a serious problem, I think, on both sides of the Atlantic. Johanna, carrying the title of a great inventor, I want to hear your comments. PROF. GIBSON: Thank you. It is actually very interesting, and prompts quite a few questions, especially when listening to what Myles was saying and listening to what Alison has just said. Myles referred to a growing problem with what can be patented, particularly with respect to the ubiquity of certain types of technology in our lives. Indeed, the telephone is a very good example, because it has gone from something that is a chattel in our home that is shared by everyone to something that is literally a prosthetic device, something that has this kind of personal attachment. That affinity with the technology, I think, is something that Alison has just described. Although perhaps “affinity” is the wrong word when you are talking about a pig demonstration! Nevertheless, the patent debate has taken on the kind of momentum that perhaps we have seen very much so in copyright circles. There is no longer the sense that this is something that is a technical discussion and people cannot get involved. So yes, this nature of direct action is, I think, incredibly important in Europe. Indeed, the EPO’s Scenarios Project I think really brought out this relationship between public policy and patent policy.82 82 See European Patent Office (EPO), Scenarios for the Future — How Might IP Regimes Evolve by 2025? What Global Legitimacy Might Such Regimes Have? (2007), available at http://www.epo.org/topics/patent-system/ scenarios-for-the-future.html.

152  CHAPTER IV: PATENT LAW Like Lord Neuberger, although technology completely rules my life and I do have a prosthetic device attached to my hand most of the time, I also have no affinity with understanding what is going on. But I am very much interested in Ian’s presentation on diagnostic methods. Indeed, we are waiting on a referral in the Enlarged Board of Appeal on methods of treatment by surgery,83 which I think will clarify some of these questions that have been raised. PROF. ADELMAN: Is there any policy reason why a diagnostic method, such as this method for determining pernicious anemia—what if we had a diagnostic method for early pancreatic cancer, which would save 30,000 people? Would we throw up our hands and say, “Well, that’s not technology”? PROF. GIBSON: That is exactly the kind of question I think might be partly addressed by the Enlarged Board. Is it a diagnostic method that leads to an immediate decision regarding a course of treatment? Is it something that is addressing the maintenance of life and an immediate question of health, or is it something that is simply, as you were saying, not in that direct relationship and therefore not within the ambit of the exclusion? It is a complicated question in fact, much more complicated. PROF. ADELMAN: Would a good lawyer then find all important diagnostic methods somehow not within that exclusion? PROF. GIBSON: Absolutely! It’s interesting also what you say about the rationale. I think Myles was saying, and Alison too, that in fact this tension is really about the lack of consistency when it comes to policy. In a way, this has also plagued the progress of a European Patent Court. A lot of it is about these different cultural policy questions, and therefore there isn’t that consistency. So if you do have that emphasis on the rationale, in fact you are addressing some of those more complicated cultural and political questions. PROF. ADELMAN: Let’s switch just for a moment to the United States. I want to hear John’s comments. PROF. GOLDEN: In relation to these questions about what the policy is here, one of the interesting aspects of this debate in the United States is it has largely been ceded to the courts by Congress. And yet the courts in the United States do not like to admit that they are making policy, or that they are making decisions based on policy considerations. If we look back at Supreme Court opinions that Bilski has cited, we see a Court that, at least in more recent decades, likes to deny that it is making any policy decisions and likes to refuse, at least on the face of things, to consider questions of policy. Modern United States courts commonly characterize such policy questions as something that should be left to Congress. If you go back to the Chakrabarty case,84 for example, both the dissent and the majority said that important policy questions should be left to one or both of the other branches of government, Congress and the Executive Branch. The majority and the dissenters just had different views, apparently, as to what the default rule should be when the courts mean to leave a policy question to others. But obviously, what the courts are doing has important policy implications. So although Justice Breyer may be an exception to this, in the sense that he tends to like to work policy considerations into opinions, you tend not to see the debate, at least openly made and acknowledged, by the courts in the United States. Now, with respect to the diagnostic methods, of course Justice Breyer was very concerned about these as a question of policy, concerned that they seemed to be patents on something 83 84

Referral to the Enlarged Board of Appeal regarding surgical methods G 1/07 (Apr. 23, 2007). Diamond v. Chakrabarty, 447 U.S. 303 (1980).

Part F: Subject Matter: “Intangible” Patents  153

which he viewed as just really knowledge of natural phenomena, which would tend to be the kind of thing he might view as within some of the judge-made exclusions within U.S. law.85 I think for me it would be interesting to know how the actual market for technology works here. If these types of diagnostic techniques tend to be the sort of thing that comes about through basic research in university laboratories, you might believe this is the kind of advance, like the development of an equation like E = mc2 or something like that, that should be supported in another way than the patent system. But my suspicion is that that might very well not be the case with regard to this type of advance, even though it looks often quite comparable to something like an observation of natural phenomena through basic scientific research. I think one thing that is going to have to happen in the United States is the courts are going to have to grapple more openly with the question of whether your understanding of what the invention is should really affect the patentable subject matter outcome. We have seen in Europe, particularly in the way the United Kingdom is structuring the analysis, that you really look for where the technical contribution is there. In the United States, under Bilski, now we have the sense that a required machine or transformation of matter cannot be merely confined to “insignificant extra-solution activity,”86 whatever that means. It seems that this ultimately has to require an inquiry along the lines of “Well, what do you think is the real invention here, and does this machine or transformation of matter really have nothing to do with that?” Perhaps partly because the courts don’t want to seem to be engaging in point of novelty analysis, how to evaluate the “insignificant extrasolution activity” question does not appear to have been extensively explained. But I think the U.S. courts are going to have to grapple with that. PROF. ADELMAN: Maybe you can’t explain this, John, but it strikes me that Mr. Justice Breyer and his colleagues do not understand the fundamental principle that if I come up with a new scientific discovery and then make an obvious development, which we would agree is an invention, from that scientific discovery, that is patentable. That is what a great deal of patents are about. PROF. GOLDEN: I am not going to defend necessarily the particular legal analysis in Justice Breyer’s opinion. On the other hand, as a minor point of correction, I have to say the Justices in the United States were called “Mr. Justice” before the early 1980s. Then we switched to calling them “Justices” after Justice O’Connor was appointed to the Supreme Court, apparently because it was felt that referring to her as “Mr. Justice O’Connor” wasn’t going to work. I actually clerked for Justice Breyer. PROF. ADELMAN: You can explain his mind then, or his lack of understanding. He has a Ph.D. in physics. I don’t know that it qualifies him in psychology. PROF. GOLDEN: I think an important point is that he was writing a dissent from a dismissal of the case as improvidently granted, so he was writing an opinion that was going to have no precedential effect. PROF. ADELMAN: It drove the Federal Circuit crazy and it brought on Bilski, and he knew that. Don’t tell me that. PROF. GOLDEN: Well, I think he would be happy that it has had some effect. But I don’t think you necessarily have to expect a dissent from a dismissal of a case in that context to be an opinion that necessarily has to be as well put together as you would hope that a precedential Bilski v. Kappos, 130 S. Ct. 3218, 3257–58 (2010) (Breyer, J., concurring). “[T]he prohibition against patenting abstract ideas ‘cannot be circumvented by attempting to limit the use of the formula to a particular technological environment’ or adding ‘insignificant postsolution activity.’” Bilski, 130 S. Ct. at 3230 (citing Diamond v. Diehr, 450 U.S. 175, 191–92 (1981). 85 86

154  CHAPTER IV: PATENT LAW opinion would be, although the Supreme Court doesn’t necessarily have a great record with precedential opinions in the patent law context either. But regarding the aftermath of Justice Breyer’s opinion, I think I would differ with Marty. I do actually think that it is good that United States courts are trying to look at patentable subject matter a little more closely than before. On the other hand, when I read Lab. Corp.,87 I thought that, from a patent lawyer’s perspective, Justice Breyer’s opinion actually confirmed that the Supreme Court made the right decision to dismiss the case because if they weren’t going to have their reasoning much better put together than that, it really could have created even more of a mess for us than some might believe Bilski has. PROF. ADELMAN: With that modest attack on three Justices who I think are clueless, let’s move on to Japan and find out how they are doing in this area. Shimako, you want to make some comments? MS. KATO: I will make a brief comment on the Japanese perspective. The Japanese Patent Act provides a definition of “invention.” It is defined as “the highly advanced creation of technical ideas by which a law of nature is utilized.”88 This provision is very relevant to finding eligibility. Because of the provision, mathematical methods or mental activities are not considered to be an invention. Historically, where the proposed invention utilizes a law of nature or not has been one of the main points of dispute in Japan. Sometimes the JPO and the courts examine it rather rigidly. However, last year our IP High Court rendered a decision and showed a new criteria to find eligibility. This case was the so-called “method for consulting bilingual dictionary of English and other language having a phoneme index multi-element matrix structure.”89 Here the court used a new test. The test focused on whether the creation of a technical idea utilizing the law of nature was shown as a main means to solve the problem. It seems similar to the situation in Europe, which focuses on the technical contribution. But the court also stated that not only the claim as a whole but all the specifications should be taken into consideration where the creation of technical ideas utilizing law of nature is an issue. Also when it comes to the computer software-related inventions, it is also comparatively hard to assess its eligibility. Our Examination Guidelines show the criteria to find eligibility for computer inventions. Here the criteria are a little bit confusing: “where information processing by software is concretely realized by the using hardware resources.”90 This is very difficult to understand and it is not so helpful for the test. It is sometimes criticized in Japan. I will give some comments about medical use. In Japan, several years ago the Examination Guidelines made it clear about the pharmaceutical patents. A pharmaceutical patent that is defined as “a certain administration or a dosage” can be patentable subject matter. On the other hand, however, if an invention is described as an “administrative method,” it cannot be patentable because it constitutes a kind of treatment for human beings and not industry applicable. 87 Lab. Corp. of Am. Holdings v. Metabolite Labs., Inc., 548 U.S. 124 (2006) (Justice Breyer, with whom Justice Stevens and Justice Souter join, dissenting as to the denial of certiorari). 88 Tokkyo Ho [Japanese Patent Act], Law No. 121 of 1959, Art. 2(1), translation available at http://www.cas.go.jp/ jp/seisaku/hourei/data/PA.pdf (“‘Invention’ in this Act means the highly advanced creation of technical ideas utilizing the laws of nature.”). 89 Decision on September 26, 2006 by the Intellectual Property High Court (Case No. 2005 (ghô-ke) 10698) (JP). 90 Japan Patent Office (JPO), Examination Guidelines, Part VII, Ch.1, Computer Software-related Inventions, translation available at http://www.jpo.go.jp/tetuzuki_e/t_tokkyo_e/Guidelines/7_1.pdf.

Part F: Subject Matter: “Intangible” Patents  155

Going back to the general idea of eligibility, now courts try to find more appropriate and clear criteria to find eligibility in Japan. Such a tendency may affect proceedings in the JPO and also judgments by the JPO Board of Appeals. Thank you very much. PROF. ADELMAN: Thank you, Shimako. Peter? PROF. DR. MEIER-BECK: German courts are often expected to apply a different approach, different from the doctrine of the European Patent Office. But when it comes to computerimplemented inventions, I think there is only a slight difference. Of course, it may be a bit harsh to apply the “any hardware” test. According to the German jurisprudence, that is not enough. We think that a more specific technical problem is necessary to be solved by a technical means. It is not sufficient that you implement a computer program and have the program running on the computer. But we absolutely agree that the decisive point is the inventive step. As the Technical Board of Appeals has said, “non-technical features, to the extent that they do not interact with the technical subject matter of the claim for solving a technical problem … are thus ignored in assessing novelty and inventive step.”91 That is more or less the same as what the Federal Court of Justice said some years ago in Electronic Payment System: “Instructions that do not lie within the field of technology, especially when they are restricted to paraphrasing what the computer is supposed to be used for, are generally not sufficient. They are only of importance to the extent to which they have an effect on the solution to the technical problem by technical means.”92 That is the decisive point. Just two weeks ago, we had a wonderful case to deal with, “a European patent system for dispensing coupons having selectively printed borders.”93 It is basically about a rebate scheme, a very long claim, for use in a retail store, with a point-of-sale system having a terminal at a customer checkout, central computer, and so on. A discount scheme is to be implemented by pre-selecting a product for which a discount coupon is to be printed and pre-selecting another triggering product the purchase of which, or the failure to purchase of which, is intended to initiate the printing of this discount coupon. That is the business concept behind the claim. And then it comes to the technical aspects. It is to avoid that the discount coupon is copied by a person who is not entitled to get such a coupon. For this purpose the last feature of the claim is “automatically printing the discount coupon characterized by having a colored border printed by the printer for the discounted product,”94 and of course the coupons should be based on the details of the coupon deal as implemented in the computer system. The decisive point is the technical aspect: how to generate a discount coupon which cannot easily be copied by anybody. The technical solution is to have a printer which automatically generates this coupon with this colored border. Obviously, it was not really difficult to decide the question whether this involved an inventive step. Having heard my introduction to the case, unfortunately, the appellant decided to withdraw.95 So I cannot present you the decision of the Bundesgerichtshof. 91 T 154/04, Duns Licensing Associates L.P., [2008] O.J. EPO 46, at reason 5.F (Technical Board of Appeals, Nov. 15, 2006), available at http://www.epo.org/law-practice/case-law-appeals/pdf/t040154ep1.pdf. 92 Electronic Payment System (Elektrnoscher Zahlungsverkehr), Case No. X ZB 20/03, (2005) 36 IIC 2, 242–49 (May 24, 2004). 93 EP1060086 (B1) (Oct. 30, 2002), System and apparatus for dispensing coupons having selectively printed borders around preferred products. 94 See id. at claim 21(f) (“[A]utomatically printing a coupon or incentive having a border for the product or service, based on the details of the transaction and without the intervention or participation of the customer other than being a party to the transaction, wherein the step of automatically printing the coupon or incentive automatically prints the border of the coupon in the color red.”). 95 See Press Release, Arcado Technologies AG, Acardo Wins Patent Case, as Catalina Drops Patent Infringement Charges (Mar. 31, 2009) (“According to information from the Federal Court of Justice (FCJ) in the hearing on 2009-03-

156  CHAPTER IV: PATENT LAW But I hope the approach is very clear. That is just what the Boards of Appeal are doing. I think that we get good results with this approach, and I am not sure that we need any political guidance. Having regard to the former attempts to give us political guidance on computerimplemented inventions, I would prefer to find a solution with our conventional judicial means. PROF. ADELMAN: Peter, if I understood, if that had been a brilliant technical solution, which you would have said “Oh, that’s inventive,” you would have given the patent. PROF. DR. MEIER-BECK: We would have given the patent, yes. And it was very clear that it was not excluded from patentability from the very beginning because it involved a lot technical stuff, but nothing that was involved in the inventive step. PROF. ADELMAN: It was just obvious. We have about ten minutes to fire questions at either our speakers or our panelists from the audience. Can we start? Justice Kitchin. QUESTION: My name is David Kitchin. I am a judge in the High Court. From my perspective, picking up on Peter Meier-Beck’s comments, the really difficult question that we have to grapple with is this: What is the technical effect which takes you outside the scope of the exclusion? What I would like to ask the panel is this: Does it really come down to really quite a simple question, which is to consider whether or not all you are doing is implementing in a program something which has been done before or is obvious, in which case it’s out; or if you are implementing in a computer program something which is excluded by one of the other exceptions, such as a business method, and if so you are out; but otherwise it’s permissible and you can have your patent? PROF. ADELMAN: Before we start, what about a brilliant technical implementation of a business method? I thought your question was ambiguous that you posed. QUESTIONER [Mr. Justice Kitchin]: If you are simply implementing in a program a business method. PROF. ADELMAN: But that is obvious. QUESTIONER [Mr. Justice Kitchin]: Then it is excluded. PROF. ADELMAN: But how is it not obvious? Why do we need that anyhow? QUESTIONER [Mr. Justice Kitchin]: It may be a nonobvious business method. It may be a business method which is highly inventive. PROF. ADELMAN: The business method is creative, not the technology of implementing it. QUESTIONER [Mr. Justice Kitchin]: Yes. Assume the business method is inventive and what you are doing is simply implementing it in a computer program. Then you are excluded by the business method exclusion or the computer program as such. PROF. ADELMAN: Got it. QUESTIONER [Mr. Justice Kitchin]: But if your contribution, if that’s what we want to call it—I want to avoid the word “technical”—if your contribution is neither old nor obvious and not excluded by one of the other exceptions, then in practice, I ask the panel, would it make a technical contribution and accordingly be patentable LORD NEUBERGER: I think this is probably where we are going. But I come back to the Gale case,96 where you could say all the program embodied was a mathematical method, and therefore it was out, which was the reasoning of the Court of 26, Catalina Marketing withdrew the appeal against the verdict of the Federal Patent Court on 2007-01-09. … Acardo’s opinion that the patient has no imaginative quality, was confirmed by the chairman of the senate that is responsible for patent rights, Prof. Dr. Meier-Beck, in his introduction to the hearing.”), available at http://www.prnewswire.com/newsreleases/acardo-wins-patent-case-as-catalina-drops-patent-infringement-charges-61993222.html. 96 In re Gale’s Application, [1991] R.P.C. 305, 317 (holding patent was for a mathematical method and computer program as such).

Part F: Subject Matter: “Intangible” Patents  157

Appeal in Gale. But the truth of the matter is that finding a quicker way and more efficient way of getting square roots fundamentally affects the working of a computer in practice because square roots are used for many applications. You could argue, therefore, that if you install the program in the computer it makes a more reliable, faster computer. Is it patentable on that basis? Or do you say, as the Court of Appeal said in Gale, that it embodies a mathematical method, and therefore you’ve got two naughts: you’ve got a computer program, that’s out; you’ve got a mathematical method, that’s out. But the other argument the other way is: well, it has a technical effect. QUESTIONER [Mr. Justice Kitchin]: Is the analysis this: Is it actually, truly simply a better mathematical method, in which case it is out because it is still a mathematical method, albeit a better one; or is it truly something more than that, which is a clever technical way of implementing that in a computer format, in which case you have got something beyond the mathematical method, and therefore you have got a technical contribution, which makes it patentable? Does it come back to Peter’s analysis, which is you really have to root out what it is that the patentee has done and consider whether it is something which is, first of all, new; secondly, not obvious over what has been done before; and third, not simply a better mathematical method or a better business method, albeit a highly creative one, and accordingly, because it is a computer program and implemented on a computer, it will necessarily have a technical effect, which would make it patentable? LORD NEUBERGER: But the trouble is, it seems to me, that, as so often is the case, it depends how you put it, how you characterize it. A computer program designer—and I am so far away from being that that—might characterize it as a mathematical method which produces a technical result. I probably have to go far more deeply into the workings of computers than I must confess I have ever had to do to see whether there is a bright dividing line. I suspect that, wherever one goes and however one approaches the issue, there is no absolutely bright line. There are always going to be fuzzy edges. But I suspect that your analysis is the way that, albeit adopting slightly different approaches, everyone is going at the moment. PROF. ADELMAN: Doesn’t it bother you that a mathematical method is like a scientific theory, and the obvious implementation of a new one that I invented should be patentable? PROF. DR. MEIER-BECK: No, it does not bother us, Marty, I think. If I’ve got it right, if the improved or different mathematical method results in a, let’s say, faster computer, I think— PROF. ADELMAN: Which is Gale as I now understand. PROF. DR. MEIER-BECK: I think that it is enough for granting patent protection. Then we have an improved technical result, and it was not obvious, and I think that’s it. PROF. ADELMAN: So in Germany do you see this as patentable? PROF. DR. MEIER-BECK: It is patentable, yes. PROF. ADELMAN: So maybe Gale is simply wrong. [Laughter] I know how it could be fixed. A question in the back. QUESTION: This is a question for Lord Neuberger and Alison Brimelow. I am Barbara Cookson. I am a patent attorney. I say this in great humility in this austere environment. But I want to question why we don’t go further back in history to look for this underlying policy for these things that are not patent-eligible. The common thread, it seems to me, is that you could pass on the information in all these excluded subject matters without the need for any investment. It is word-of-mouth teaching. And I take some encouragement from your wife, sir, because she was shocked because she couldn’t use something in her work that she could be taught so easily to use without needing personal investment.

158  CHAPTER IV: PATENT LAW I think we need to go back to the history. We can’t just hide behind “judges can’t make policy.” I think the judges should look for the policy. PROF. ADELMAN: Any comments? LORD NEUBERGER: The short answer is we tried to look for the policy. Robin Jacob in Aerotel97 did go to the travaux préparatoires and couldn’t find a good reason there. There was a very detailed article—indeed, a book I think—on how the Article 52 and how the whole Convention came to be drafted. There was nothing that was, to use Lord Steyn’s expression, a “bull’s eye”98 so far as identifying the purpose. Alison may be able to add more to that. MS. BRIMELOW: No, I can’t. In a sense, Barbara, your question is perfectly rational, and I sympathize also with the emotion which it contains. But that does slightly assume that the founding fathers—and they were all fathers—took a comprehensive view and that what was then enacted was a perfect reflection of that departure point of principle. I’m not sure you can be certain of it. And certainly, if you can’t find it in the travaux préparatoires,99 it was unlikely to have been an explicit part of the thinking going into the system. But can I offer a second point? Much as I value the thread of history and the logical evolution of our thinking and the underpinning of our policies, the EPC is, in terms of its thinking, jolly nearly half a century old now.100 It took a lot of travail propriétaire to get us to the EPC itself. The other question, I think—and I’m afraid I am showing my policymaking origins very clearly here; that’s how I started, as a civil servant; the management bit came later—I think that you have to reckon sometimes that your policy needs a rethink and that it is perfectly legitimate to say “that was then and this is now, and what we’ve got is no longer fit for purpose,” or at least to ask that question, because if you don’t, somebody else will ask it for you and then probably give you a mighty shove, possibly in the wrong direction. 97 Aerotel Ltd. v. Telco Holdings Ltd., [2006] EWCA Civ 1371 (Oct. 27, 2006) (Jacob, J.), available at http://www. bailii.org/ew/cases/EWCA/Civ/2006/1371.html. 98 See Effort Shipping Co. Ltd. v. Linden Mgm’t SA, [1998] A.C. 605 at 623E–F (“I would be quite prepared, in an appropriate case involving truly feasible alternative interpretations of a convention, to allow the evidence contained in the travaux préparatoires to be determinative of the question of construction. But that is only possible where the court is satisfied that the travaux préparatoires clearly and indisputably point to a definite legal intention. Only a bull’s-eye counts. Nothing less will do.’’ (internal citations omitted)). 99 The travaux préparatoires (French: “preparatory works”) are the official record of negotiations. The EPO negotiations leading to the revisions of the EPC consist of, among other things, more than 80 documents prepared by the EPO, national delegatations and user groups, and the minutes of the meetings of the Administrative Council and the Committee on Patent Law. See EPO, Travaux préparatoires, http://www.epo.org/law-practice/legal-texts/ archive/documentation/travaux-preparatoires.html. The most important reference material is the Basic proposal for the revision of the EPC (MR/2/00), which lists all of the relevant preparatory documents for each proposed amendment. See Basic proposal for the revision of the EPC (MR/2/00), available at http://documents.epo.org/ projects/babylon/eponet.nsf/0/43F40380331CE97CC125727A0039243C/$File/00002a_en.pdf. 100 The first drafts of the European Patent Convention (EPC) date back to the 1950s, which was contemporary to the first attempts at creating the European Community itself. See Vincenzo Di Cataldo, “From the European Patent to a Community Patent”, 8 Colum. J. Eur. L. 19, 19 (2002); J. B. Van Benthem, “The European Patent System and European Integration”, 24 Int’l Rev. of Indus. Prop. & Copyright L. 435–45 (1993). The European Patent Convention (EPC) (also known as the Munich Convention), 1065 U.N.T.S. 199, was signed in Munich, Germany, on October 5, 1973 and became effective on October 7, 1977. The EPC was only supposed to provide a first step, with the goal of implementing a second step, the Community Patent Convention (CPC), 1989 O.J. (L 401) 1. The CPC, also known as the Luxembourg Convention, or the Convention for the European Patent for the Common Market, was signed in Luxembourg on December 15, 1975. See Di Cataldo, supra, at 19. While the EPC itself has accomplished its own goals, and has prompted significant harmonization of patent laws across European states, the CPC never became effective, leaving the original planned system of two interacting Conventions unfulfilled. “[The] European Commission thought the CPC would be able to accomplish these goals, when in fact, the CPC has proved not at all fit for this task.” Di Cataldo, supra, at 19.

Part F: Subject Matter: “Intangible” Patents  159

So all of that is a need for checking. I mean intellectual coherence is fine, but coherence with what, and is it still fit for purpose? So you may well be right, Barbara, but I have a basic rule in patenting, which is you can’t go backwards. PROF. ADELMAN: With that, I want to thank our speakers and panelists and the audience for the questions.

APPENDIX A

Lundbeck and Chemical Product Inventions Martin J. Adelman1 The English courts in Generics (UK) Ltd. v. H. Lundbeck A/S2 arguably decided each of the two issues raised in the case incorrectly, but the end result demonstrates that two wrongs do make a right. At its core Lundbeck raises an old but perplexing conundrum. When should an inventor of a new chemical product receive full product patent protection for his invention? The European patent3 in Lundbeck claims escitalopram, the hugely successful SSRI4 sold in the United States as Lexapro®. Escitalopram is one of the two enantiomers of the racemate citalopram. Lundbeck obtained its escitalopram patent over the closest prior art, citalopram itself.5 Citalopram is sold in the United States as Celexa®. Mr. Justice Kitchin in his first instance opinion concluded that escitalopram’s properties when compared to those of citalopram were truly unexpected. But then he said that was irrelevant on the issue of inventive step. He explained: Professor Montgomery carried out a review of escitalopram for the Current Medicine Group, the second edition of which he re-wrote in 2005. He concluded that in vitro and in vivo studies had shown escitalopram to be a more potent SSRI than citalopram and that the (-) enantiomer is practically devoid of activity. This, of course, is described in the Patent. However, he also explained in his review and his evidence to me that a further surprising finding was that studies with some animal models had shown an earlier response to escitalopram compared to citalopram. Further, the role of the (-) enantiomer had been investigated in a series of preclinical studies, which had shown that that the (-) enantiomer reduces or delays the effect of the (+) enantiomer. Data supporting these conclusions came from experiments carried out on rats by Mork et al… . Surprisingly, when 2mg/kg escitalopram was compared to 4mg/kg citalopram, escitalopram elicited an increase in brain serotonin levels that was about twice that with citalopram. Further, when escitalopram was administered together with twice or four times as much (-) citalopram, the (-) enantiomer significantly inhibited the (+) enantiomer induced increase in serotonin level in a dosedependent manner. Professor Montgomery considered that these ratios of (+) to (-) enantiomers are clinically relevant because, in humans, the two enantiomers are metabolised at different rates, the (-) enantiomer being metabolised more slowly that the (+) enantiomer. The results showed, in his opinion, that escitalopram alone is more effective at increasing extra-cellular serotonin levels in the brain than an equivalent dose of citalopram, and that the (-) enantiomer counteracts the activity of the (+) enantiomer in vivo. Thus escitalopram is not only more potent than citalopram, but also more 1 Theodore and James Pedas Family Professor of Intellectual Property and Technology Law; Co-Director of the Intellectual Property Law Program; Co-Director of the Dean Dinwoodey Center for Intellectual Property Studies; George Washington University Law School. 2 [2007] EWHC 1040, rev’d in part, [2008] EWCA (Civ) 311, affirmed, [2009] UKHL 12. 3 Eur. Pat. No. 0,347,066. 4 Selective serotonin reuptake inhibitors (SSRIs) are a class of antidepressants that increase the extracellular level of the neurotransmitter serotonin by inhibiting its reuptake into the presynaptic cell, thereby increasing the level of serotonin available to bind to the postsynaptic receptor. 5 Citalopram is sold in the United States as Celexa®.

162  CHAPTER IV: PATENT LAW efficacious. I did not understand there to be any serious challenge to this analysis of the work by Mork, and I accept it. Professor Montgomery also considered the binding mechanism of escitalopram. He noted that there were at least two binding sites for citalopram on the serotonin transporter: a primary high affinity binding site that mediates the inhibition of serotonin reuptake and a secondary low affinity allosteric site. He explained that work published in 2005 had shown that escitalopram increased the stabilisation of the binding to the serotonin transporter via the allosteric mechanism compared to other SSRIs and venlafaxine, and this went a long way to explaining the obvious clinical superiority of escitalopram as an antidepressant and anxiolytic. Once again, I accept this analysis of the binding action of escitalopram. I turn now to consider the clinical data said to show the superior efficacy of escitalopram.

He then analyzed clinical data regarding escitalopram which clearly demonstrated its unexpected efficacy. Nevertheless he explained that Lundbeck cannot rely on these unexpected benefits to prove nonobviousness because they are a bonus6 or a “gratis effect”7 and in addition the unexpected efficacy was not set forth in the specification: As I have found, escitalopram does have unexpected benefits which could not have been predicted from a simple consideration that it was likely that one enantiomer was primarily responsible for the action of citalopram. But there is one other material matter I must take into consideration. There is no suggestion of such surprising benefits in the Patent itself, as Professor Montgomery accepted. It reports that the inventors have found that the (-) enantiomer is essentially ineffective and that the (+) enantiomer is about twice as effective as the racemate—in fact it needs slightly more than half a unit dose of the (+) racemate to produce the same effect as a unit dose of the racemate. This is what the skilled person would expect of a racemate where the activity lies in one of the two enantiomers. The data in the Patent does not indicate the greater efficacy found in practice. There is no doubt that a surprising technical benefit can be regarded as an indication of inventive step. But whether it does so or not depends upon all the circumstances. For example, if it is found that the claimed invention is obvious for one purpose then it is not saved because it is found to have added benefits: Hallen v. Brabantia … at 216. Likewise, I do not believe it is permissible to take into account surprising technical benefits which are not described or foreshadowed in the specification. In Richardson-Vicks Inc.’s Patent …, the alleged invention related to mixtures of a non narcotic analgesic with one or more of an antihistamine, a decongestant, an expectorant and a cough suppressant, to be sold for the treatment of coughs and flu. The patentee argued that the combination had an unexpected advantage resulting from synergy between its components. Jacob J said at 581: “Formally I think the experiments were irrelevant. Curiously Mr. Thorley, for the purpose of his argument before me, accepted this. Whether or not there was synergy demonstrated by experiments conducted after the date of the patent cannot help show obviousness or non-obviousness. Nor can the amended claim be better if only the components of the amended claim (as opposed to the unamended claim) can be shown to demonstrate synergy. The patent does not draw any such distinction and it would be quite wrong for later acquired knowledge to be used to justify the amended claim.” 235. In Glaxo Group Ltd.’s Patent… , Pumfrey J took much the same line. The patent related to an inhaler that administered simultaneous doses of two drugs, salmeterol and fluticasone propionate. The specification taught that they should be administered together but gave no data to support any assertion that they were particularly compatible or complementary in their activity. The patentee sought to rely upon evidence to show synergy between the elements of the combination but ultimately abandoned any attempt to rely upon synergy per se. The judge explained at [113]: 6 The leading English case discussing the idea that the so-called bonus is not credited to the inventor, but instead can be claimed by the public is Hallen Co. v. Brabantia (U.K.) Ltd., [1991] R.P.C. 195 (Ct. App.). 7 See infra note 8.

APPENDIX A: Lundbeck and Chemical Product Inventions  163

It is sometimes thought that a patent may be saved from a finding of obviousness if a combination otherwise obvious has some unexpected advantage, and, in particular, an advantage caused by an unpredictable co-operation between the elements of the combination. I do not consider that such an approach is in general justified. There is a limited class of cases in which the patentee has identified an advantageous feature possessed by some members only of a class otherwise old or obvious, has described the advantageous effect in his specification and has limited his claim to the members of the class possessing this advantageous feature. Such a claim may be justified on the basis of what is called selection. Unexpected bonus effects not described in the specification cannot form the basis for a valid claim of this kind. 236. After referring to the passage from Richardson-Vicks cited above, he continued at [114]: “If a synergistic effect is to be relied on, it must be possessed by everything covered by the claim, and it must be described in the specification. No effect is described in the present specification that is not the natural prediction from the properties of the two components of the combination.” 237. Both of these cases were concerned with synergy. But it seems to me that the logic behind them is not limited to such cases. A patentee cannot seek to bolster the inventive nature of his monopoly by relying on a discovery which he had not made at the time of the patent. That is the position here. At the date of the Patent, Lundbeck had not found that escitalopram was more efficacious or was effective in treating more patients than citalopram. Those discoveries were not made until some time later. They are nowhere hinted at in the specification and could not have been predicted from what is described.

In these circumstances I do not believe that it is legitimate for Lundbeck to rely upon them in support of the alleged invention. The implication of Mr. Justice Kitchin’s reasoning is that the invention was not made as of the filing date because separating the two enantiomers of citalopram and testing them to show which was the active one, but not as yet determining that the inactive enantiomer was actually inhibiting the efficacy of citalopram, was all for naught. The inventors had filed too early. They should have waiting until they learned of the actual role of the inactive enantiomer. There was no reason to believe before they did their work that one of the enantiomers would be a better SSRI than numerous other possible modifications of citalopram. It turned out that escitalopram was remarkably good, but to deny Lundbeck a patent on the basis that it really didn’t appreciate at the time just how good escitalopram really is, is simply unfair and bad public policy. In two recent EPO Board of Appeal decisions,8 the respective boards also disregarded certain properties of the claimed compounds because these properties are mere “gratis effects.” For example in T 0215/01 which involved a specific new use of methylene blue, the Board explained: Since, for the above, reasons, the skilled person would automatically first have envisaged the use of the methylene blue without the exercise of inventive ingenuity, any additional advantage (e.g. high activity, different mechanism of action), even if it was unexpected, could only be considered as a gratis effect which would inevitably have resulted from the skilled person’s non-inventive activity.9

The obvious problem with this way of thinking is that the problem solution approach to the question of inventive step depends on how the problem is defined. If the problem includes the unexpected features including the “gratis effect” such as saying that the problem with respect to the escitalopram patent is finding a compound that is similar to citalopram, but having the features that were ultimately found to be unexpected, then going from citalopram to escitalopram involves an inventive step. Of course if the problem is simply to find the best enantiomer of the two enantiomers of citalopram, then the unexpected features are a 8 T 1212/01, Pfizer Ltd. v. Vivus Inc. (EPO Bds. of Appeal, Feb. 3, 2005); T 0215/01, Ok. Med. Research Found. v. Blutspendedienst der Landesverbände des DRK Niedersachsen (EPO Bds. of Appeal, Apr. 7, 2005), available at http://legal.european-patent-office.org/dg3/pdf/t010215eu1.pdf. 9 T 0215/01, Ok. Med. Research Found., ¶ 4.3.5.

164  CHAPTER IV: PATENT LAW bonus or “gratis effect” and hence going from one to the other did not involve an inventive step. In short, the problem solution approach adds nothing of value to the policy question of when a product claim involves an inventive step. The better approach and the one adopted in the United States is to credit the inventor with all of the properties of the product which he creates.10 An inventor should be given credit for what he in fact contributes to the art whether it is due to good luck or innate inventive genius or just sheer hard work. Society should not slice and dice the contribution as is done under the bonus or “gratis effect” doctrine. The appropriate battle regarding product protection for new compounds is whether the inventor of a new chemical product along with a use for that product should receive a use patent or a product patent. There are arguments for both points of view each based on the proposition that an inventor should receive protection commensurate with what he contributes to society. The leading case in the United States arguing for use protection only is Carter-Wallace, Inv. v. Davis-Edwards Pharmacal Corp.,11 but its arguments have been generally rejected both in the United States and elsewhere on the theory that the inventor has both brought forth a new chemical product and discovered a nonobvious use for it. Thus this approach is consistent with the general notion that an inventor is entitled to a claim covering what he or she contributed. Hence the inventors in Lundbeck contributed escitalopram and its unexpected properties. That should have been sufficient for Mr. Justice Kitchin to have awarded Lundbeck product patent protection. Ironically Mr. Justice Kitchin, after deciding that the properties of escitalopram would not support patentability, pivoted to the question of whether the disclosed enantiomer separation method was itself nonobvious and if so whether this disclosure was sufficient to support a pure product claim. He decided that the answer was that it was not sufficient since such a claim would cover a newly discovered method for separating the enantiomers that was not literally covered by the claims to the disclosed nonobvious method or an equivalent thereof . He supported his decision by referencing the landmark case of Biogen Inc. v. Medeva plc,12 as its product claims were essentially treated as process claims and the inventors were not given control over other future methods of making the claimed antigens. Mr Justice Kitchin explained his reading of Biogen with reference to the priority disclosure known as Biogen I: Lord Hoffmann then turned to consider whether Biogen I contained an enabling disclosure which supported the claims of the patent. He accepted that the teaching of Biogen I enabled the skilled man to produce both HBcAg and HBsAg in any cells and, in that sense, to produce products across the scope of the claim. However that was not the end of the matter. At pages 50–51 he said: But the fact that the skilled man following the teaching of Biogen 1 would have been able to make HBcAg and HBsAg in bacterial cells, or indeed in any cells, does not conclude the matter. I think that in concentrating upon the question of whether Professor Murray’s invention could, so to speak, deliver the goods across the full width of the patent or priority document, the courts and the E.P.O. allowed their attention to be diverted from what seems to me in this particular case the critical issue. It is not whether the claimed invention could deliver the goods, but whether the claims cover other ways in which they might be delivered: ways which owe nothing to the teaching of the patent or any principle which it disclosed. It will be remembered that in Genentech I/Polypeptide expression the Technical Board spoke of the need for the patent to give protection against other ways of achieving the same effect “in a manner which could not have been envisaged without the invention.” This shows that there is more than one way in which the breadth of a claim may exceed the technical contribution to the art embodied in 10 Application of Papesch, 315 F.2d 381 (C.C.P.A. 1963); Comm’n of Patents v. Deutsche Gold-Und SilberScheideanstalt Vormals Roessler, 397 F.2d 656 (D.C. Cir. 1968). 11 341 F. Supp. 1303 (E.D.N.Y. 1972). 12 [1997] R.P.C. 1 (H.L.).

APPENDIX A: Lundbeck and Chemical Product Inventions  165

the invention. The patent may claim results which it does not enable, such as making a wide class of products when it enables only one of those products and discloses no principle which would enable others to be made. Or it may claim every way of achieving a result when it enables only one way and it is possible to envisage other ways of achieving that result which make no use of the invention. One example of an excessive claim of the latter kind is the famous case of O’Reilly v. Morse13 in the Supreme Court of the United States. Samuel Morse was the first person to discover a practical method of electric telegraphy and took out a patent in which he claimed any use of electricity for “making or printing intelligible characters, signs, or letter, at any distances.” The Supreme Court rejected the claim as too broad.

Professor Chisum, in his book on Patents (vol. 1, § 1.03[2]) summarises the decision as follows: Before Morse’s invention, the scientific community saw the possibility of achieving communication by the galvanic current but did not know any means of achieving that result. Morse discovered one means and attempted to claim all others.

A similar English case is British United Shoe Machinery Co. Ltd. v. Simon Collier Ltd.14 The patentee invented a piece of machinery for automatically trimming the soles of boots and shoes by means of a cam. One of the claims was in general terms for automatic means of trimming soles. Parker J. said, at pages 49-50: [T]he problem was simply how to do automatically what could already be done by the skill of the workman. On the other hand, the principle which the inventor applies for the solution of the problem is the capacity of a cam to vary the relative positions of two parts of a machine while the machine is running. Assuming this principle to be new, it might be possible for the inventor, having shown one method of applying it to the solution of the problem, to protect himself during the life of his patent from any other method of applying it for the same purpose, but I do not think that the novelty of the principle applied would enable him to make a valid claim for all means of solving the problem whether the same or a different principle were applied to its solution.

Applying these principles to the facts of the case before him, Lord Hoffmann concluded that the technical contribution made by Professor Murray did not justify a claim to a monopoly of any recombinant method of making the antigens. Its excessive breadth was not due to an inability to produce all the claimed results, but due to the fact that the same results could be achieved by different means. Professor Murray had established no new principle which all his successors had to follow if they were to produce the same results. It was not enough that Professor Murray had showed by his invention that the expression of Dane particle DNA in a host cell could be done. As Lord Hoffmann explained at page 52: [C]are was needed not to stifle further research and healthy competition by allowing the first person who has found a way of achieving an obviously desirable goal to monopolise every other way of doing so.

Finally, Lord Hoffmann confirmed that the reasoning by which he had come to the conclusion that the patent was not entitled to the claimed priority also led to the conclusion it was insufficient. In this case Lundbeck submitted that the technical contribution of the Patent was the discovery and realisation of a new and non obvious compound, the (+) enantiomer. It was not an obvious goal. No one had produced or tested it before the priority date. Further, Lundbeck had shown a way of making it and so the Patent was sufficient. I accept that if a patentee describes a new and non obvious compound which has a beneficial effect and describes a way by which it can be made then he is entitled to a patent for the 13 14

(1854) 56 U.S. (15 How.) 62. [1908] 26 R.P.C. 21.

166  CHAPTER IV: PATENT LAW compound. This is made clear in the passage from the speech of Lord Hoffmann which I have cited in paragraph [260] above. In such a case the technical contribution lies in the provision of the new and useful compound. Others might find different ways of producing it. But this does not render the original patent insufficient because in each case they are making use of the technical contribution—the knowledge they are making the new and useful compound. In my judgment this is not such a case. For the reasons I have set out at length earlier in this judgment I am satisfied that medicinal chemists working in the field of SSRIs at the priority date considered it obviously desirable to separate out and test the enantiomers of active racemates. True it is that in the case of citalopram no one knew the activity would lie in the (+) enantiomer. However it was entirely obvious that the activity might lie primarily in one enantiomer rather than the other. Further, once the enantiomers had been separated the tests which the inventors carried out to determine where the activity lay were routine and straightforward, as were the steps necessary to formulate the (+) enantiomer into a pharmaceutical composition. The inventive step taken by the inventors of the Patent was not deciding to separate the enantiomers of citalopram but finding a way it could be done. The technical contribution they made was the discovery that the diol intermediate could be resolved and then the enantiomers of the diol converted into the enantiomers of citalopram whilst preserving their stereochemistry. Claims 1 and 3 of the Patent cover all ways of making the (+) enantiomer of citalopram. For example, they cover resolving citalopram on a preparative chiral HPLC column. Does this method of resolution owe anything to the teaching of the Patent or any principle it discloses? In my judgment it does not. By June 1988 the preparation of the individual enantiomers of citalopram was an obviously desirably goal and their testing was trivial. There is no teaching in the Patent as to how that goal is to be achieved other than by the use of the diol intermediate. Just as in Biogen, it not enough to say that the inventors showed that resolution could be done and that they found the activity lay in the (+) enantiomer. The first person to find a way of achieving an obviously desirable goal is not permitted to monopolise every other way of doing so. Claims 1 and 3 are too broad. They extend beyond any technical contribution made by Lundbeck. The discussion above is fascinating because it is true that the function of both enablement and obviousness is to align the contribution of the inventor with the scope of the monopoly grant. Enablement does this by insuring that everything except dependent inventions covered by any valid claim is given to the public without undue experimentation and obviousness performs its function by insuring that everything covered by any valid claim except dependent inventions are not obvious. In short everything but dependent inventions must be put in the hands of the public by the disclosure (enabled) and everything covered by the claims must be nonobvious. Lord Hoffmann’s speech in Biogen was based on this proposition for the patented genes for the antigens were discovered by a process that was primitive, a process that would no doubt be superceded in a few months as it truly was by methods of probing gene libraries. Thus Lord Hoffmann reasoned that the inventors were entitled only to antigens made from genes found by the primitive process disclosed in Biogen I even though the claims were drafted in the form of product claims. To put this in raw terms well-known to lawyers in law firms, inventors are only to eat what they kill. In Lundbeck, however, the question was not the scope of the claim, but whether an obvious product is patentable if there is no known obvious method of making it. The product must be consider obvious because the special properties beyond those expected of one enantiomer of a racemate were not considered by the court. Giving the inventor of an obvious product a patent on that product because of the invention of a nonobvious process for making it arguably overcompensates the inventor as it puts the inventor in a position to control all methods of making the obvious product as well as provide control over all discoveries of new uses of the

APPENDIX A: Lundbeck and Chemical Product Inventions  167

product. Why this apparent overcompensation of the inventor? Why this failure to align the invention with the reward? Why this ability to eat more than you killed? In the famous case of In re Hoeksema,15 the Court of Customs and Patents Appeals did not directly answer any of these questions. Neither did Lord Hoffmann16 when Lundbeck reached the Court of Appeal for all Lord Hoffmann did in his opinion is correctly point out that the claim in Lundbeck was enabled as it surely was and that the claims in Biogen were really a special form of method claims albeit seemingly product claims. As for granting product protection for an obvious product, Lord Hoffmann simply said that was the law applicable in the European Patent Office (EPO) and the UK courts should follow the lead of the EPO. Lord Justice Jacob, another leading patent jurist, went further and tried to rationalize the result. He explained: 53. Where then, lay the Judge’s error? He reasoned thus: that the (+) enantiomer existed was known. So all that Lundbeck “invented”—contributed to the art—was a particular way of making it. So its patent claim should be correspondingly limited. Were it otherwise, Lundbeck would effectively get a monopoly to any way of making the (+) enantiomer—ways which it had not invented. Hence the claim was insufficient. 1. 54. But any product claim is apt to give the patentee “more than he has invented”—and in two ways. Firstly such a claim will have the effect of covering all ways of making the product including ways which may be inventive and quite different from the patentee’s route. Secondly it will give him a monopoly over all uses of the patented compound, including uses he has never thought of. 2. 55. I elaborate on the second point a little. A patent can only be granted for a novel substance if the patentee specifies a use for it (absent this he has simply not made an invention at all—has added nothing to human knowledge). But once he has specified a use, his claim to the substance will cover any use. For instance he may invent a new glue, specified in his claim by its chemical composition. If that glue turns out to be useful for some entirely different purpose, e.g. as a plasticiser, he has a monopoly over that too—more than he “invented.” 3. 56. It works the other way round too. If a substance is old, it may not be repatented as such just because the later inventor has found an entirely different use. An old but good example of this is Shell v Esso17 where the prior art disclosed a fuel with an additive for preventing corrosion of fuel tanks and the patentee wanted a claim to a fuel with the same additive for the quite different purpose of increasing octane rating and prevention of fouling of plugs and valves. The patentee had to disclaim those parts of his claimed range with overlapped with the prior art range. (It now may be possible for a patentee to do somewhat better by the use of the kind of claim approved by the Enlarged Board in MOBIL III/Friction reducing additive,18 namely “the use of that compound in a composition for a particular purpose”). 4. 57. The fact that compound claims may give a patentee “more than he deserves” has not in practice proved to be much of a problem. Their certainty and pragmatic value has proved itself over the years. What matters for present purposes is that the concept “that the patentee should not have more than he deserves” does not form part of the statutory test for sufficiency. 5. 58. The other consideration which moved the judge was this: that the claim was to a desired compound. He thought the position would be different if the technical contribution lay in “the provision of the new and useful compound.” Here, that the compound would be useful was already known, so the monopoly should not extend to it. 59. It is of course the case that, as the Technical Board of Appeal said in Exxon/Fuel Oils:19 “The extent of the patent monopoly, as defined by the claims, should correspond to the technical contribution to the art in order for it to be supported or justified.” In the context of substance 399 F.2d 269 (C.C.P.A. 1968). Sitting in the Court of Appeal. 17 [1960] R.P.C. 35. 18 G 2/88, available at http://legal.european-patent-office.org/dg3/biblio/g880002ep1.htm. 19 T 409/91, 1994 O.J. EPO 653, at 3.3. 15 16

168  CHAPTER IV: PATENT LAW claims the technical contribution includes provision of the substance itself—one that could not be provided before. Merely because it was wanted before does not diminish the technical contribution. 6. 60. Some careful thinking is called for in considering claims to desirable ends. There are different sorts of these. I quite agree that a patentee may not normally frame his claim simply by reference to known desirable properties of a product—what is sometimes called a “free beer” claim.

The Guidelines for Examination at the EPO put it this way: 4.1 The area defined by the claims must be as precise as the invention allows. As a general rule, claims which attempt to define the invention by a result to be achieved should not be allowed, in particular if they only amount to claiming the underlying technical problem.

and: 4.10 Result to be achieved The area defined by the claims must be as precise as the invention allows. As a general rule, claims which attempt to define the invention by a result to be achieved should not be allowed, in particular if they only amount to claiming the underlying technical problem. However, they may be allowed if the invention either can only be defined in such terms or cannot otherwise be defined more precisely without unduly restricting the scope of the claims and if the result is one which can be directly and positively verified by tests or procedures adequately specified in the description or known to the person skilled in the art and which do not require undue experimentation.20 1. 61. So, for example, if a man finds a particular way of making a new substance which is 10 times harder than diamond, he cannot just claim “a substance which is 10 times harder than diamond.” He can claim his particular method and he can claim the actual new substance produced by his method, either by specifying its composition and structure or, if that cannot be done, by reference to the method21 but no more. The reason he cannot claim more is that he has not enabled more—he has claimed the entire class of products which have the known desirable properties yet he has only enabled one member of that class. Such a case is to be contrasted with the present where the desirable end is indeed fully enabled—that which makes it desirable forms no part of the claim limitation. 2. 62. Those examples form two extremes—there may be cases in between where the invention may lie in appreciating that a particular combination of desirable properties is of special value. The validity of that sort of claim will be particularly sensitive to the context of the teaching of the patent and the prior art. 3. 63. Finally I should say a word about Biogen. I can well understand that certain passages, taken out of context, can be read as supporting the Judge’s decision. But none of them was concerned with a case like this: a novel, non-obvious and enabled product claim. In the end one comes back to the short answer with which I started this topic. Founded as it is on the plain words of the statute I do not see how it can be refuted.

The speeches by the law lords also failed to answer this fundamental question. Hence while all of the appellate judges departed from the principle that aligns the reward with the invention, they apparently did so because of the position of the EPO, an approach which is in line with Hoeksema, a case which has been followed in the United States in important cases such as Amgen, Inc. v. Chugai Pharmaceutical Co.22 and Scripps Clinic & Research Foundation v. Genentech, Inc.23 In Hoeksema the key issue was the patentability of N-psicofuranoside compounds where the prior art disclosed a compound having an amino group at the 6-position of the purine ring system. The claimed compounds defined over this compound by having the following groups See T 68/85, 1987 O.J. EPO 228, at 6. See Kirin-Amgen Inc v. Hoechst Marion Roussel Ltd., [2004] UKHL 46, at [90]–[91]). 22 927 F.2d 1200 (Fed. Cir. 1991). 23 927 F.2d 1565 (Fed. Cir. 1991). 20 21

APPENDIX A: Lundbeck and Chemical Product Inventions  169

at the 6-position of the purine ring system, hydrogen, the group -XR where XR includes many groups including substituted amines, but of course excluding the amino group itself. The CCPA considered that the claims defined obvious compounds, but the method of positioning such groups at the 6-position of the purine ring system was very difficult once the amino group was excluded. Nevertheless the CCPA held the claims in Hoeksema’s application to be patentable explaining: (1) Appellant will admit his compounds are obvious and unpatentable if an obvious process is available to make them. Does it follow then that appellant’s compounds are unobvious and patentable if an obvious process is not available to make them? Within this context, appellant simplifies that question to: Is process obviousness relevant in deciding compound obviousness? We think appellant really means to say that the question is whether a claimed compound may be said to be legally obvious when no process for making that compound is shown in the prior art relied upon to establish legal obviousness under section 103. The solicitor responds to the latter characterization of the question in the affirmative, pointing out that the first question bears on the principle implicit in In re Brown, supra, that claimed compounds not distinguished in their properties over closely related prior art compounds are unpatentable thereover where the claimed compounds would be “in possession of the public” in that a process for preparing them would be obvious to those of ordinary skill in the art. In addition, the solicitor now refers to our prior opinion in which we noted that the facts in this case are closely analogous to those of In re Riden, …, where we stated that the fact that the method of making the claimed compound is relevant, … . A recurring problem of analysis which confronted us as we prepared our previous opinion, and which still confronts us after the rehearing, has its genesis in a proper understanding of the issue as framed by appellant. In effect, appellant agrees that since the claimed product is a homolog of a known compound, it would be prima facie “obvious” under 35 U.S.C. 103. But this agreement is conditioned on the proviso that there is in the prior art an “obvious” process by which to make that compound. In the context of section 103, we are not permitted to fragment a claimed invention in applying that section. The clear mandate of the statute which governs our analysis requires that we consider the invention as a whole in making the determination. Thus, as we apply the statute to the present invention, we must ask first, what is the invention as a whole? Necessarily, by elementary patent law principle, it is the claimed compound, but, so considered, unless there is some known or obvious way to make the compound, the invention is nothing more than a mental concept expressed in chemical terms and formulae on a paper. We are certain, however, that the invention as a whole is the claimed compound and a way to produce it, wherefore appellant’s argument has substance. There has been no showing by the Patent Office in this record that the claimed compound can exist because there is no showing of a known or obvious way to manufacture it; hence, it seems to us that the “invention as a whole,” which section 103 demands that we consider, is not obvious from the prior art of record. While there are valid reasons based in public policy as to why this defect in the prior art precludes a finding of obviousness under section 103, In re Brown, supra, its immediate significance in the present inquiry is that it poses yet another difference between the claimed invention and the prior art which must be considered in the context of section 103. So considered, we think the differences between appellant’s invention as a whole and the prior art are such that the claimed invention would not be obvious within the contemplation of 35 U.S.C. 103. While 35 U.S.C. 102 is not directly involved in the issue on review, the conditions for patentability, novelty and loss of right to patent, there stated, may have relevance as to the disclosure which must be found in the prior art to find obviousness of an invention under section 103. In determining that quantum of prior art disclosure which is necessary to declare an applicant’s invention “not novel” or “anticipated” within section 102, the stated test is whether a reference contains an “enabling disclosure,” in the present context, a process by which the claimed compound could be made. In In re Le Grice, …, we observed that the resolution of this issue required us to determine whether, as a matter of law, a reference without such a disclosure constituted a statutory time bar to an applicant’s right to a

170  CHAPTER IV: PATENT LAW patent. There, the issue was founded on 35 U.S.C. 102(b), not 103, but our conclusions have a certain pertinence here. We concluded, …: We think it is sound law, consistent with the public policy underlying our patent law, that before any publication can amount to a statutory bar to the grant of a patent, its disclosure must be such that a skilled artisan could take its teachings in combination with his own knowledge of the particular art and be in possession of the invention. … Thus, upon careful reconsideration it is our view that if the prior art of record fails to disclose or render obvious a method for making a claimed compound, at the time the invention was made, it may not be legally concluded that the compound itself is in the possession of the public. In this context, we say that the absence of a known or obvious process for making the claimed compounds overcomes a presumption that the compounds are obvious, based on close relationships between their structures and those of prior art compounds.24

It is also noteworthy that in the corresponding case to Lundbeck in the United States, Forest Lab. Holdings, Inc. v. Ivax Pharma., Inc.25 the Federal Circuit upheld the following arguments of Forest Laboratories showing that the Federal Circuit relied on both the unexpected properties and the nonobvious method to support its decision that escitalopram is patentable over citalopram: In response, Forest argues that any prima facie obviousness based on racemic citalopram was rebutted by the evidence demonstrating the difficulty of separating the enantiomers and the unexpected properties of (+)-citalopram. Forest argues that it was unexpected that all of the therapeutic benefit of citalopram would reside in the (+)­enantiomer, resulting in escitalopram having twice the potency of racemic citalopram. Forest also argues that the district court was entitled to credit evidence that a person of ordinary skill in the art would not easily have turned to the diol intermediate to attempt resolution of racemic citalopram both because of the uncertainty involved and because Wilen and Jacobus describe compounds less complex than those necessary here to resolve the diol intermediate and then convert the (-)-diol enantiomer to escitalopram.26

Turning now to what is perhaps the most important and soundly based application of the Hoeksema Lundbeck approach, gene inventions covering naturally occurring proteins where at least everywhere but in the United States the patentability of such a gene is judged by the obviousness or nonobviousness of the method for isolating it. In the United States under In re Deuel27 all such gene inventions are considered nonobvious so it is not necessary to look at the obviousness of the method of its isolation. However, Deuel is being challenged under KSR v. Teleflex28 in the appeal to the Federal Circuit of Ex parte Kubin.29 Kubin took the approach that the law applied in the rest of the world should also apply in the United States with respect to gene patents. I submit that the patent system has no choice but to give product protection to gene patents where the invention is a nonobvious method of isolating the gene as that method will never be used again once the gene is isolated so a method claim to what is essentially a method invention would be worthless. The law then has the choice of overcompensating the inventor under the Hoeksema Lundbeck approach or giving the inventor a claim on what he actually invented, which in the special case of genes covering natural products is valueless. Given this choice, overcompensation makes good sense. The same may be true for a nonobvious method of purification where the purification leads to the discovery of the chemical formula which In re Hoeksema, 399 F.2d 269, 272–74. 501 F.3d 1263 (Fed. Cir. 2007). 26 Id. at 1269. 27 51 F.3d 1552 (Fed. Cir. 1995). 28 127 S. Ct. 1721 (2007). 29 83 U.S.P.Q.2d 1410 (B.P.A.I. 2007). 24 25

APPENDIX A: Lundbeck and Chemical Product Inventions  171

in turn leads to a synthetic method for making the purified product. However, in the usual situation where the method will be practiced over and over again why should it matter that one day inventor A files a patent application with a disclosure of an obvious product X and a process to make X that is not obvious. However, a few days earlier a close friend of B who works as an independent inventor told B that he was just about to publish an article describing a new discovery of his and that he was keeping the discovery secret until publication. B immediately realizes that based on this discovery he could quickly develop an obvious process for making X and he promptly did just that. B then filed a patent application covering X believing that X is not obvious as B is not familiar with all of the available prior art. Setting aside issues of priority, does it make sense that A would be able to get a patent on X, but B would not? Hoeksema and Lundbeck say that the answer is “yes.”

Chapter IV

Patent Law Part G: The Interface Between Biotech & IP Moderator Nicholas Groombridge

Weil, Gotshal & Manges (New York, N.Y.) Speakers

Hon. Mr. Justice Kitchin

John Richards

Patents Court, High Court of Justice (London)

Ladas & Parry (New York, N.Y.)

Dr. Donald W. Pfaff

Professor, Head of Laboratory of Neurobiology and Behavior, Rockefeller University (New York, N.Y.) Panelists Prof. Martin Adelman

Robert DeBerardine

George Washington University (Washington, D.C.) Lord Neuberger

Chief Patent Counsel, Sanofi-Aventis (Paris)

Law Lord, House of Lords, Parliament (London)

Hon. Randall R. Rader

U.S. Court of Appeals for the Fed. Circuit (Washington, D.C.)

Tony Rollins

Managing Counsel, European Patents, Merck Sharp & Dohme (United Kingdom) MR. GROOMBRIDGE: Hello, everyone. Welcome back from lunch.

I’m Nick Groombridge. I get the easiest job here, which is to moderate this panel. We have a very illustrious group here, whom I will introduce. I see we have a late-breaking addition at the far end there adding to the star power. We have David Kitchin from the

174  CHAPTER IV: PATENT LAW High Court; Donald Pfaff, who is a Professor at Rockefeller and a real life scientist, to help counterbalance the effect of having too many lawyers in one place; John Richards from the Ladas & Parry firm in New York; Robert DeBerardine, who is Chief Patent Counsel for Sanofi-Aventis, based in Paris; Tony Rollins, who is the head of European Patents for Merck Sharp & Dohme; Lord Neuberger from the House of Lords; Judge Rader; and Professor Adelman from George Washington. The subject of this panel is “How Much for How Little?”—the “how much” being how much patent protection and the “how little” being how little did you actually invent. What we are really going to focus on with this panel is the relationship between the scope of protection as compared with what was invented, the practical contribution to the art. Now, it would seem there is probably a fairly uncontroversial proposition that there should be some relationship between those two things. The focus of the panel is going to be: What is the appropriate legal mechanism, or mechanisms, for putting that into play and ensuring that there is such a correlation; what is the right way to do it and how do we do it without gutting innovation incentives? We will look at enablement; sufficiency or its cognate, which may or may not exist in U.S. law, written description. I think, inevitably, it will lead to some questions of what are the bounds of patenting natural phenomena. With that, I am going to finish ahead of my time allocation and hand over to David, who will lead off with his presentation. MR. JUSTICE KITCHIN: Thank you very much. I suggested the title, “How Much for How Little?” to Hugh Hansen at the turn of the year, following the decision of the Court of Appeal in the Lundbeck case1 and before the decision of the House of Lords this February.2 Now, the title may be thought a little bit provocative, but it highlights an issue which I think is of some importance, and that is this: To what extent is it permissible or right to take into consideration the nature of the inventive step and the technical contribution in deciding the scope of the monopoly to which the patentee is entitled? There are, of course, certain core principles which are indisputable: An invention must be new and a non-obvious advance on the prior art;3 it must be enabling, in the sense that the skilled person can make products across the scope of the claim and perform any methods claimed;4 and it must be capable of industrial application.5 I am not concerned with any of these. In fact, in general, I am going to assume these requirements are satisfied. The question I would like to consider, and which has arisen in a number of recent cases in the United Kingdom, is this: In circumstances where those requirements are satisfied, how wide a monopoly can the patentee secure? In case that seems a rather abstract concept, I think it is helpful to consider it by reference to a number of real-life illustrations with which the courts in the United Kingdom have had to grapple, and which I am going to pose to you as a series of questions. I hope, after a very good lunch, you will stay with me, because it is going to be something of a whistle-stop tour. H. Lundbeck A/S v. Generics (U.K.) Ltd., [2008] EWCA Civ 311 (Court of Appeal). Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2009] UKHL 12 (Feb. 25, 2009) (upholding Lundbeck’s patent). 3 See Structural Rubber Prods. Co. v. Park Rubber Co., 749 F. 2d 707, 714 (Fed. Cir. 1984) (“Validity encompasses three ‘separate tests of patentability’: novelty, utility and nonobviousness.”); see also CJS Patents § 14 (requirements for patentability). 4 See Process Control Corp. v. HydReclaim Corp., 190 F. 3d 1350, 1358 (Fed. Cir. 1999) (“The enablement requirement of 35 U.S.C. § 112, ¶ 1 requires that the specification adequately discloses to one skilled in the relevant art how to make, or in the case of a process, how to carry out, the claimed invention without undue experimentation.”), cert. denied, 120 S. Ct. 1531 (2000). 5 See Fujikawa v. Wattanasin, 93 F.3d 1559, 1563 (Fed. Cir. 1996) (“[I]t is well established that a patent may not be granted to an invention unless substantial or practical utility for the invention has been discovered and disclosed.”). 1 2

Part G: THE INTERFACE BETWEEN BIOTECH & IP  175

The first and second illustrations are those which gave rise to the title. Imagine at the outset a particularly nasty disease known to be caused by a tiny particle. That particle consists of DNA surrounded by a protein core which is itself surrounded by a protein coat. The protein core and coat contain two antigens, a core and a surface antigen. Doctors want to get their hands on both of them, for very good reasons—they want to make vaccines and the like—and they think it is a good idea to do it by genetic engineering. But they face two problems. The first is that the DNA is genomic and the proteins are eukaryotic, so they contain a lot of what are generally described as junk sequences, known as introns. The second problem is that the only host cells which the biotechnologists have access to are prokaryotic host cells, which do not have the machinery for cutting out those introns. So nobody thinks expression is going to work. Now, along comes a clever fellow and he says, “I don’t care about all that. I’m going to give it a go anyway. I’m going to give it a shot and see what happens.” So he cuts up his DNA into very large pieces, shoves it into a prokaryotic host cell, and looks to see what happens. Bingo, to his surprise, he finds that both the core and the surface antigens are in fact expressed. So what he does is to pop round to the Patent Office and there he gets a claim to recombinant DNA encoding core and surface antigens of this nasty particle. Now, shortly afterwards the DNA is sequenced. To everybody’s surprise, it is found that it doesn’t contain introns after all. At that point, the exercise that this clever fellow went through becomes entirely redundant. It is known there are no introns, so all those in the art have to do is to cut out the genes, whack them into prokaryotic cells, and they can express the proteins. But the claim which the inventor has got is to DNA products, whatever recombinant technique has been used to make them. So that claim will catch everyone who makes recombinant DNA which encodes those core and surface antigens. The question that gives rise to is this: Is the claim too broad? Well, you might say no. He was the first to make the DNA products, so they are new, they were non obvious, and the technique which he described worked. So you could make products across the scope of the claim. Well, that case came before the House of Lords in Biogen.6 The House of Lords held that the patent was nevertheless insufficient. “Why?” you might ask. The reasons given were these. The contribution made by the inventor did not justify a claim to a monopoly of all ways making antigens by recombinant means. It was too wide, not because it claimed products which could not be made, but because it claimed products which could be made in ways which owed nothing to what the inventor had done. A rather subtle sort of insufficiency. Now I am going to take you to the second scenario. Picture this. Pay close attention. Scientists have been trying to make a particular compound for a number of years. It is an entirely obvious goal. But nobody has managed to do it. Then, one team finds a way of getting there. Shortly afterwards, other teams also manage to make that product, and they so by techniques which are quite different to those of the first team. Now, what is the scope of the monopoly to which the first team is entitled? Is it entitled to a monopoly over the product however it is made, which will in practice also give a monopoly over all ways of making it, and so allow it to sue the second team for infringement? Or should it have a monopoly limited to the particular technique which it invented of making that obvious goal? My challenge to you all is: Can you see a material distinction between this case and the first one? 6

Biogen Inc. v. Medeva Plc, [1997] R.P.C. 1 (H.L. 1996).

176  CHAPTER IV: PATENT LAW Following Biogen and the principles articulated by the EPO in Exxon,7 there was certainly a popular school of thought in England that a claim to the product as such would be too wide; it would extend beyond the technical contribution made by the inventors because it would cover ways in which the invention might be performed which owed nothing to any teaching in the specification. Now, if I appear a little sensitive, it is because those were the facts in Lundbeck,8 I was the judge, and I was a member of that school. But the Court of Appeal took a different view. It distinguished the Biogen case as concerning a product by process claim, and it held that an inventor who finds a way of making a new product is entitled to a product claim even if its properties could have been fully specified in advance and the desirability of making it was obvious.9 Lord Hoffmann, who is sitting just in front of me, said, “It’s too late to have regrets about the breadth of monopoly which such claims confer.”10 Lord Justice Jacob, who I think has departed, said, “The concept the patentee should not have more than he deserves does not form part of the statutory test for insufficiency.”11 In February of this year the House of Lords upheld that decision.12 In the paper which you’ve got in those which Hugh has distributed,13 I have explored the reasoning in the Lundbeck case. Time doesn’t permit me to go into it now. I think it is a valuable exercise for commentators to engage in, not least to see where the boundaries of those two decisions lie. But I would pose a question, which I think is ultimately one of policy, to you today, and that is this: In the current age, where new preparative and analytical techniques are constantly evolving, does the Lundbeck approach strike the right balance between encouraging innovation, on the one hand, and inhibiting research and competition, on the other? Or, more contentiously, does it sacrifice fairness at the altar of certainty? The third illustration is what I like to call the “each way bet.” Suppose a team working in a particular field thinks it is possible that a number of different avenues of research are worth investigating with a view to seeing whether they might work. What it does is to file an application, or indeed a series of applications, describing and claiming all of them. Then it carries out a certain amount of work and it finds that only one of them does work. So it narrows down its application by amendment to that particular product. Or, if it has filed a number of applications, it abandons those to the products which it has found do not work. How is obviousness to be determined in such a case? Should it be assessed by reference to the contribution to the art disclosed in the specification? In other words, is it permissible to ask whether it was obvious to investigate those avenues with a view to seeing whether they might work and be safe, which is of course what the inventor had done? Or is to be asked by reference to the claimed invention itself, which is to say: Was it obvious to make the particular product which was ultimately claimed? In Conor the trial judge and the Court of Appeal considered that the former was the correct approach, you should consider what the inventor had actually done.14 But the House of Lords T-409/91, Fuel Oils/EXXON, [1994] O.J. EPO 653. See Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2007] EWHC 1040 (Pat), [2007] R.P.C. 32 (Kitchin, J.). 9 See H. Lundbeck A/S v. Generics (U.K.) Ltd., [2008] R.P.C. 19, [2008] EWCA Civ 311. 10 Id. at [46] (Lord Hoffman sitting with the Court of Appeal). 11 Id. at [57] (“What matters for present purposes is that the concept ‘that the patentee should not have more than he deserves’ does not form part of the statutory test for sufficiency.”). 12 See Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2009] UKHL 12 (Feb. 25, 2009). 13 See Hon. Mr. Justice Kitchin, How Much for How Little? (unpublished 2009), available at http://www. fordhamipinstitute.com/ip_conference/documents/David_Kitchin_How_Much_for_How_Little.pdf. 14 Conor Medsystems Inc. v. Angiotech Pharms. Inc., [2006] EWHC 260 (Pat) (trial court) (Pumfrey, J.); [2007] EWCA Civ 5 (Court of Appeal) (Jacob, L.J.). 7 8

Part G: THE INTERFACE BETWEEN BIOTECH & IP  177

and the Dutch court reached the opposite conclusion:15 provided it is plausible, obviousness must be assessed by reference to the invention actually found in the claim. I consider this is a very interesting decision, because it may fairly be said that the patentee in that Conor case would not have invested money, time, and effort in carrying out its further work in developing a product without the protection of a patent. But, on the other hand, you might ask: Is that actually a reward for successful innovation; or is it a rather different sort of protection, and one which provides an umbrella under which research, which may or may not lead to an invention, can take place? The fourth illustration which I would like to consider with you is what I have called “quick off the mark.” It raises questions of particular importance in the life sciences. Suppose a naturally occurring protein has been identified and characterized. What does an inventor have to disclose by way of a use for it? In the HGS case16 I addressed that question and said he does have to disclose a use for it; and if he doesn’t, then the patent is bad for—and wait for it —lack of industrial application and insufficiency and obviousness, because it has made no technical contribution. But, since that case is going on appeal, I better say no more about it. What I would, however, like to do is to pose some questions to you which may arise in such cases. Suppose the inventor discloses one use for it. Is he entitled to claim all uses? Now, it is a very different situation to the inventor of a machine which has been built to carry out a particular process, because naturally occurring proteins commonly have multiple functions. So is a person who finds one use entitled to claim the protein in a pharmaceutical composition, which is a very commonly found claim in these pharma cases, and which will inevitably cover all uses? On the present state on the law in the United Kingdom, I feel he would be in a strong position to contend that he is. Now I am going to present to you the scholarship question. Suppose that protein has been found in the first instance without invention and the invention lies only in finding the first use. Can the patentee then claim the product is a pharmaceutical composition? He has found a use for it, it’s got industrial application, the composition is new, it was certainly not obvious, it was inventive to find that use. But, in practice, that monopoly will give him a de facto monopoly over all uses. These are questions which have at their heart the same fundamental dilemma: Where is the balance to be drawn between certainty, on the one hand, and fairness, on the other? How we as the courts answer these questions will depend on how robust an approach we think it is permissible and right to take. As you have seen from the illustrations that I have given you, I think it is fair to say that our approach in the United Kingdom hitherto has not been entirely consistent. Thank you.

15 Conor Medsystems Inc. v. Angiotech Pharms. Inc., [2008] UKHL 49 (House of Lords), available at http:// www.publications.parliament.uk/pa/ld200708/ldjudgmt/jd080709/conor-1.htm; Conor Medsystems Inc. v. Angiotech Pharms. Inc., IEPT 20070117, B9 3274 (Rb. Den Haag 2007) [District Court, The Hague], available at http://www. iept.nl/files/2007/IEPT20070117_Rb_Den_Haag_Conor_Medsystems_v_Angiotech_Pharmaceuticals.pdf. 16 Eli Lilly & Co. v. Human Genome Scis., Inc., [2008] EWHC 1903 (Pat), [2008] R.P.C. 29 (Kitchin, J.).

178  CHAPTER IV: PATENT LAW

A Scientist’s View of the Timing of Applications for Patents Donald Pfaff, Ph.D.* & Sandra Sherman, J.D., LLM, Ph.D.** An academic neuroscientist may have intimate familiarity with a broad range of subjects in research on how the brain controls behavior, but only a vague idea about optimizing the process of applying for a patent. Thus while one of us (D.P.) has published books on the most powerful and essential force in the vertebrate brain17 and on the capacity of the human brain for reciprocally altruistic behavior,18 he has never applied for a patent. DP’s current involvement with corporations includes Big Pharma, a company involved in equipment development for deep brain stimulation, and a small company that is developing behavioral measurement techniques. While he cannot offer conclusions about the optimal time—from a legal perspective—to apply for a patent, he will illustrate practical questions, problems and dilemmas affecting application. Some Aspects of the Scientific Discovery Process The laboratory scientist working on discoveries that might turn into inventions faces great uncertainty regarding how far he will get towards achieving that objective. The path that his work will follow as a function of time will be characterized by extreme nonlinearity. For example, there will be an apparently fast start when he has the initial idea, followed by a lot of time-consuming effort to get the first positive results. Then, in fits and starts, he will really “learn the territory,” often facing reverses. Later, perhaps, he will have a breakthrough in methodology that will allow him to get positive results every time. Finally, there comes the laborious process of replication and extension of his most important results. This entire process sometimes will be carried out in secret, even in a university laboratory, but will usually be carried out in the open, especially now with rapid digital communication. A true scientist will feel the need (psychological and professional) for elegance and perfection, which may be inconsistent with certain institutional imperatives to push towards patentability. With this characterization as background, I will give three examples of questions I am now facing. Example 1. The Problem of Emergence of Precision from a Less Definite Finding My colleague at Weill Cornell Medical School, Nicholas Schiff, MD, has used deep brain stimulation (DBS) of the human thalamus to bring a brain-injured patient in a high level vegetative state—what he calls a Minimally Conscious State—back to a state of conscious communication. However, the Food and Drug Administration allows him only to stimulate * Professor of Neurobiology and Behavior, The Rockefeller University, New York, NY ([email protected]). ** Fordham University School of Law, New York, NY. 17 Donald W. Pfaff, Brain Arousal and Information Theory (Harvard Univ. Press 2006). 18 Donald W. Pfaff, The Neuroscience of Fair Play: Why We (Usually) Obey the Golden Rule (Dana Found. Press 2007).

Part G: THE INTERFACE BETWEEN BIOTECH & IP  179

the human brain within certain fixed physical parameters. In particular, he can only use a fixed frequency (FF) of electrical pulses. I told the company that is trying to optimize his stimulating electrodes—that is, to design electrodes so that they are as effective as possible in bringing the patient into a state of consciousness while minimizing their weight and their usage of electrical power—that I had ideas, based on equations that yield non-linear dynamics, that might markedly improve the behavioral result of DBS. This company funds my work on mouse brain and behavior. So the question was whether use of DBS on mouse brains could enhance the FDA-approved Fixed Frequency Stimulation applicable to humans. To answer this question we systematically varied the temporal patterning to the electrical pulses delivered to the brain, in order to look for the best possible result measured as an increase in generalized brain arousal.19 After about eighteen months of work in my laboratory, we have proof in principle that temporal patterning of the electrical pulses delivered to the mouse makes a difference in ability of DBS to raise the CNS arousal of the animal. However, regarding our non-linear equations that are intended to determine the optimal temporal pattern of pulses, we do not yet understand why one set of mathematical parameters for dictating a series of inter-pulse-intervals yields excellent behavioral results and another is not so good. What to do? Should I or the company submit a relatively vague description of our discoveries so far, trying to proceed under a leaky umbrella, or should we wait until we really understand the non-linear dynamics of the part of the nervous system that reacts to the DBS? I prefer the latter, since, from a scientific point of view, the goal of the entire project is to test the applicability of the non-linear equations that interested me. Also, from a legal standpoint, I or the company would be better served if the disclosure in any patent application were extensive, precluding someone down the road from inventing around the disclosure. Of course, I recognize that any such approach might conflict with commercial imperatives, especially since sitting on research without seeking a patent could ultimately undermine an application. Example 2. Uncertainty About How Far We in the Laboratory Will Get With another company, I am analyzing physiological components of human emotional responses. We use data and equipment of the company’s, and test out my ideas. The goal of the project is to derive quantitative conclusions about emotional responses to films, videos, advertisements and TV dramas, using four measures of responses made on a large number of subjects. These physiological measures include a large number of parameters based on heart rate, respiration, GSR and axial muscle movement. The question: Can we invent an algorithm of human emotional engagement that is useful to TV producers, advertisers, etc? Do the physiological measures, their relations to each other and their fluctuations through time predict viewers’ reactions to the advertisements, etc., in terms of what the viewers like, will watch again or will purchase? At what point would a patent application be appropriate? Example 3. Is a Discovery Involving a Dosage of Doubtful Application Worth Patenting? Steroid hormones work through specific proteins that have “docking sites” for the hormone enabling that protein—that “hormone receptor”—to enter the nucleus of the cell and alter the rate of transcription of certain genes. During evolution, the receptor for one hormone, estradiol, the most prominent estrogenic hormone, underwent a gene-duplication event yielding two hormone receptors, Estrogen Receptor-alpha and Estrogen Receptor-beta. Based on the 19

Generalized brain arousal defined in Pfaff, supra note 16.

180  CHAPTER IV: PATENT LAW literature about animal brains and behavior, we hypothesized that we could improve the ability of mice to recognize other mice by using a synthetic compound (WAY-200710) that binds only to Estrogen Receptor-beta. We made an agreement with the large pharmaceutical company that made WAY-200710 to test our idea. Indeed, we were able to affect mouse social behavior in the predicted manner, but only at such a high dose that the practical importance of our finding is doubtful. Is the discovery worth patenting? Is this an “invention”—is it really novel—or is it merely an anomalous result in the sense that super-high dosages of many chemicals will produce unanticipated results? Relation of the Individual Scientist with his Academic Institution Consider my relation to my own school, The Rockefeller University, in New York City. It provides full-time salary and a nurturant scientific environment. I value that support tremendously, but also must consider the University’s financial interest. That is, its Technology Transfer Office (TTO) takes in a good deal of income, far beyond the University’s cost. Universities set up technology transfer offices in order to gain revenue to support university research and also to enhance economic development locally or nationally. Such offices are expensive to set up, and it may take several years for the office to stop losing money,20 but eventually, the economic impact on the university may be large. University technology transfer offices vary in size tremendously. Common wisdom suggests that about one half of U.S. offices run “in the black” after operating expenses.21 The metric commonly used to benchmark TTOs is the ratio of gross licensing income to total research dollars. Nationwide it is about 3.5% (i.e., about $3.5MM income for every $100MM of research spending). The Massachusetts Institute of Technology (MIT) has a ratio of about 5% while John Hopkins has a ratio of about 0.4%.22 New York University is off the charts, because of tremendous income due to the sale of royalties during FY07. Over time, universities have evolved in their attitudes toward patenting, and vary greatly in their institutional attitudes towards patenting. It used to be said that any finding potentially worthwhile must be patented. Now, however, a technology transfer officer must see a clear commercial use, must have a willing inventor and must be able to balance likelihood of commercial payoff versus the costs associated with patent applications. Even with a conservative approach applied by biomedical research institutions, our attempts would usually be considered “too early” by knowledgeable intellectual property experts,23 and might not stand up in court. As indicated by Richards, the optimal time for a scientist or a university to submit a patent application may vary from jurisdiction to jurisdiction.24 Attitudes in Japan will be different from attitudes in England. On the one hand, courts may worry that early patenting might squelch other useful research. On the other hand, too restrictive a judicial stance may delay the introduction of new and useful inventions. My role is to work with my institution because of their long experience and extensive success in such matters. That is, ultimately I feel the need to defer to university’s judgment, provided that I believe that a minimal amount of research has been performed to satisfy minimal standards of patentability in the U.S. I must rely on my institution’s legal counsel for advice in that regard. 20 See Lita Nelsen, “Ten Things a University Head Should Know About Setting Up an Intellectual Property Office”, in Anatole Krattinger, et al., Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best Practices 537 (MIHR 2006); Pfaff, supra note 16. 21 Am. Univ. Tech. Managers (AUTM), Licensing Survey (2007). 22 Id. 23 See John Richards, “Patent Protections for Inventions Involving Newly Found Biochemical Mechanisms”, 41 L. Tech. 1–25 (2008). 24 Id.

Part G: THE INTERFACE BETWEEN BIOTECH & IP  181

Thus regarding the question of optimal time for patent submission—are my TTO’s values and/or interests different from mine? Perhaps, in any given instance they might be, but as I have indicated, it is not my role to second-guess its judgment. Conclusion For an academic scientist qua scientist, later is better for the patent application. In saying this we note that we are writing purely from a scientist’s point of view—including a scientist’s view of the law—rather than one driven by institutional prerogatives. Most important, the more definitive research that is accomplished before the application for a patent is submitted, the more likely that the novel aspects of the invention will be solidly supported and will stand up if it is challenged during the application proceeding or in court. *** MR. RICHARDS: I am just going to pick up on that point about certainty goes up and up and up until you get scooped. Of course, when you get scooped in the patent business, that means you don’t get your protection to get your income to make your next set of investigations. That can be a problem. [Slide] What I am going to focus on in my presentation is on exactly what point in the development process which has just been described is it appropriate to file a patent application. That comes back to hit on the question of what scope you have. You start off with a broad concept. I think we all agree that the broad concept, the germ of the idea, probably is too early. To wait until you are about to be scooped is too late, because maybe you will be scooped. And so where along the way do you file, and how do the laws in various countries hinder any rational determination as to how to do this? The key questions are when to file a patent application and how broadly to claim it. As I said, those are related. [Slide] File too early and you get the situation which we had in the University of Rochester case25 or in last week’s Ariad case26 in the United States. Basically the applications there were filed at a point where the concept of how to interfere with a biochemical reaction was established but nothing which actually did it had yet been identified. The courts in the United States have decided that this was too early because you did not have possession of the invention at the time when you filed the patent application on the method of treatment using what would be revealed by applying your theory to what was available out there. We don’t have the word “possession” anywhere in 35 U.S.C., which is the U.S. statute. All we have are the words “written description.”27 The courts have basically taken the requirement for a written description and said that written description has got to show that you have possession of the invention at the time when you filed the application. [Slide] The issue of how to deal with this, as I say, has been addressed in different ways in different countries. Univ. of Rochester v. G.D. Searle & Co., 358 F.3d 916 (Fed. Cir. 2004). Ariad Pharms., Inc. v. Eli Lilly & Co., 560 F.3d 1366 (Fed. Cir. Apr. 3, 2009), vacated, 2009 WL 5874322 (Aug. 21, 2009). Subsequent to the conference, the Federal Circuit granted Ariad’s motion for a rehearing en banc, and issued its opinion in March of 2010, Ariad Pharms., Inc. v. Eli Lilly & Co., No. 2008-1248, 2010 WL 1007369 (Fed. Cir. Mar 22, 2010) (en banc), which affirmed the existence of a separate written description requirement in 35 U.S.C. § 112. 27 35 U.S.C. § 112 (“The specification shall contain a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same, and shall set forth the best mode contemplated by the inventor of carrying out his invention.”). 25 26

182  CHAPTER IV: PATENT LAW The case which sort of put the thing front and center was in Canada, in Apotex v. Wellcome,28 which was on antiretrovirals for HIV. The court of appeal basically took the view there that having set out in your specification that certain compounds would work for this purpose was enough; you did not have to show in the specification that this actually happened.29 The test in Canada is a test of whether you can make a sound prediction based on the disclosure of everything falling within the scope of the claim. This sort of sound protection test comes out of a relatively old, 1970s case, English case, Olin Mathieson v. Biorex,30 but the Canadians have developed it. The court of appeal said: As long as you have described it, no need to have data to support it, no need to explain the theory by which it would work.31 [Slide] The Supreme Court of Canada said: “No.” If you allowed that “major pharmaceutical corporations could … patent whole stables of chemical compounds for all sorts of desirable but unrealized purposes in a shot-gun approach hoping that, as in a lottery, a certain percentage of compounds will serendipitously turn out to be useful for the purposes claimed.”32 That’s a real concern. It does make it difficult, knowing how much you are supposed to put in your application. [Slide] The law in Japan and Korea basically says that for a pharmaceutical composition claim you must have data. Canada, we have the sound protection test: you must have data or explain the theory. In the EPO, it’s okay as long as you are plausible with the use that you set out. At least I think that’s the current law in the EPO. I think there is probably the same law in England at the moment. [Slide] All of this causes a lot of uncertainty when you are trying to work out a patenting strategy. One of the problems is that there is no statute law anywhere which addresses this. So we have different approaches being used in different countries to try to deal with this issue. As I said, in the United States probably written description showing possession is the optimum way to be used at the moment. But in other cases the problem has been addressed by looking at enablement. In other cases, we have gone back even to the traditional test that utility is something which has got to be described. One of the problems with the utility issue is that the case law says that you don’t necessarily have to set out proof of your utility unless somebody raises a question as to whether you are credible or not. If you are not credible, as challenged by the Patent Office, then you can bring in evidence, which means that you don’t have to have had that evidence of credibility in the patent application as filed. We are trying now, I think, to get to a point where things have got to be certain as of the filing date; written description is absolute as of the filing date. So that is another point at which we are having difficulties from the point of view of people drafting applications in this field to know exactly what to do. [Slide] In Europe we have, as has just been noted, the question of industrial applicability. We have also started to distort what was thought of, at least from the other side of the ocean, which is where I spend most of my time, as an equation between inventive step and obviousness. So we have started grafting a plausibility test onto whether something is not obvious or not, saying that is part of invention. On the language of the European Patent Convention33 I can see how we got there. 28 Apotex Inc. v. Wellcome Found. Ltd., [2002] 4 S.C.R. 153, available at http://www.ipsofactoj.com/ international/2003/Part09/int2003(9)-005.htm. 29 Apotex Inc. v. Wellcome Found. Ltd., [2001] 1 F.C. 495 (C.A.). 30 Olin Mathieson Chem. Corp. v. Biorex Labs. Ltd., [1970] R.P.C. 157. 31 See Apotex v. Wellcome, [2001] 1 F.C. 495 (C.A.), at para. 47. 32 Apotex v. Wellcome, [2002] 4 S.C.R. 153, at para. 80. 33 European Patent Convention, Oct. 5, 1973, 1065 U.N.T.S. 199 (as amended Nov. 29, 2000).

Part G: THE INTERFACE BETWEEN BIOTECH & IP  183

We are dealing with obviousness and inventive step later on this afternoon.34 But again, it causes a lack of legal certainty. [Slide] So we have these problems. We also have the problems which have just been alluded to, that there may be a difference between what is appropriate for a method-of-treatment claim or a pharmaceutical composition claim and a new chemical compound. If it is a new chemical compound, based on the law in England going back to the aspirin cases, which I cite in the long paper which you have,35 in the United States going back to the adrenaline cases,36 a newly identified compound, you get patent protection for all methods of making it and all methods of using it. Again the question has been raised to whether that is a fair reward or a fair deprivation of the rest of the public for the contribution that has been made. [Slide] All I am doing really is sort of kicking up a number of these things into the air to see where we can go with them. [Slide] The law in Japan is reasonably certain, you’ve got to have data, and at the moment that is probably the safest point to go. And then you’ve got to confine your scope of protection to that for which you have data in the application, or reasonably related to that for which you have data in the application. But that could result in protection which is, in effect, far too low, because if a number of other things are inherently predictable from your initial discovery and other ways of using your discovery are inherently predictable, then you ought, in my view, to be entitled to protection for that, and you probably need the protection for that to prevent the competition from cutting you off. [Slide] That probably is where we are. I don’t think the situation is at all satisfactory. I am hoping that we will get to a point where some thinking can lead to establishment of a more rational way to deal with this problem, because it clearly is a problem, and there is no statutory law at the moment which even tries to address it. Thank you. MR. GROOMBRIDGE: Do we have anyone on the panel who is anxious to comment at this point? Marty, the irrepressible Professor Adelman. PROF. ADELMAN: I would urge, because I think Mr. Justice Kitchin really had it all right, everybody should read the Supreme Court of Canada’s opinion on sound prediction, which was just referred to.37 It involved AZT. I think it should have been cited in the Conor case,38 because a strong argument can be made that the defense was not obviousness, but the defense was lack of a sound prediction. AZT was pure guesswork on the part of Burroughs Wellcome, totally speculative. They were just trying to really reap where they hadn’t sown. Then, however, there was a test—and the Supreme Court of Canada pointed this out—run at NIH which proved that AZT would really work. On that basis they said, “Okay, you can have a patent, not on your speculative basis that ‘Oh, it worked against some retrovirus which is totally different than HIV.’” I just wanted to push that. As far as the Lundbeck issues,39 which can’t be distinguished, the two cases are not distinguishable—I went over that with Lord Hoffmann—really he went off on the European See Chapter IV.E, “Obviousness/Inventive Step”, supra this volume. John Richards, Obviousness and Inventive Step—New Differences? (unpublished 2009), available at http:// www.fordhamipinstitute.com/ip_conference/documents/John_Richards_Obviousness_and_Inventive_Step_New_ Differences.pdf. 36 See, e.g., Parke-Davis & Co. v. H. K. Mulford & Co., 189 F. 95 (S.D.N.Y. 1911) (Hand, J., upholding a patent for isolated and purified adrenaline). 37 Apotex Inc. v. Wellcome Found. Ltd., [2002] 4 S.C.R. 153. 38 Conor Medsystems Inc. v. Angiotech Pharms. Inc., [2008] UKHL 49. 39 See Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2009] UKHL 12. 34 35

184  CHAPTER IV: PATENT LAW law. He left, but he heard these arguments. Last night at dinner he had no choice. He was across the table. The poor man was trapped. Fundamentally, he went off on the fact that European law is that if a product is obvious, everybody knows the properties of that product but nobody knows how to get there, and you invent a process, at least in the EPO, you get a patent on the product. And so does the United States. I think both are wrong. I’ll talk about that later in the panel. MR. GROOMBRIDGE: Lord Neuberger. LORD NEUBERGER: I feel I should probably come in here, particularly as Lord Hoffmann isn’t here. I was a member of the House of Lords who upheld Lord Hoffmann, sitting in the Court of Appeal.40 It wasn’t only because we wouldn’t have dared overrule Lord Hoffmann, but I am sure there are those who think that was the main reason. It certainly wasn’t an articulated reason. [Laughter] But I think, as usual, Marty has put his finger on the essential point. We were applying what we saw as (a) the law under the European Patent Convention and (b) the practice adopted by the European Patent Office. That said, you had here a product claim, a single product, a single enantiomer. It was, according to the judge, after listening to evidence, novel and not obvious. The Dutch court subsequently disagreed on different evidence on obviousness.41 But it wasn’t a disagreement of principle; it was a disagreement on different evidence. It seemed to us that once you have been the first person to isolate a non-obvious novel product, then you are entitled to a patent for it. Now, the only argument against that, as David Kitchin has said, is, in essence, a sort of fair-basis-type insufficiency. We took the view that there was nothing in the European Patent Convention that permitted such an argument. It’s fair to say that there is one provision there which could be used to support an argument that fair basis is still the law, but previous House of Lord cases have said it doesn’t have that effect, and that seems to be the view of the European Patent Office as well. We also were keen to follow the approach of the European Patent Office, which is very clear. The Enlarged Board has held that an isolated enantiomer is a separate product and is novel over the racemate. But in most cases, as the Dutch court held in its decision in Lundbeck, it is obvious. But on these facts it took seven years to isolate, and David held, quite understandably, on the expert and factual evidence before him, that it was not obvious, and the Court of Appeal upheld him on that. It is lucky if you to do seven years’ work and find something which is unexpectedly valuable, because the enantiomer was extraordinarily more patent than the racemate. But luck often comes into patent law cases at all stages. I would love to say that it is extraordinary that David took the view that Biogen42 had the effect that he held. But as I came to exactly the same conclusion in the Kirin-Amgen case at first instance some six years ago,43 in which David appeared, and which subsequently went to the House of Lords,44 I can only say that I entirely understand why he came to that conclusion. 40 See H. Lundbeck A/S v. Generics (U.K.) Ltd., [2008] R.P.C. 19, [2008] EWCA Civ 311 (Lord Hoffman sitting with the Court of Appeal). 41 See Conor Medsystems Inc. v. Angiotech Pharms. Inc., IEPT 20070117, B9 3274 (Rb. Den Haag 2007) [District Court, The Hague], available at http://www.iept.nl/files/2007/IEPT20070117_Rb_Den_Haag_Conor_Medsystems_ v_Angiotech_Pharmaceuticals.pdf. 42 Biogen Inc. v. Medeva Plc, [1997] R.P.C. 1 (H.L. 1996). 43 See Kirin-Amgen Inc. v. Hoechst Marion Roussel Ltd., [2002] EWCA Civ 1096 (David Kitchin, Q.C., appeared for the Hoechst Marion Roussel Limited). 44 See Kirin-Amgen Inc. v. Hoechst Marion Roussel Ltd., [2005] RPC 169.

Part G: THE INTERFACE BETWEEN BIOTECH & IP  185

But I think Biogen was a very special case. I described it, possibly slightly glibly, as a “process by product by process” claim. Robert Walker, another member of the House of Lords, in Lundbeck made the point that it was a claim to a large number of products as well, not a single product, and the product in question was not identified and had not been sequenced.45 It is fair to say that, in a sense, Biogen has been distinguished almost out of existence, and it is also fair to say that there is one part of Biogen that I don’t think can stand, although we didn’t say so. That is a passage towards the end of his speech in Biogen, where Lenny Hoffman basically says, “Fair basis is alive and well.”46 The effect of our decision is that it is dead and buried, I think. That is a very long, much less eloquent, answer to David. MR. GROOMBRIDGE: Tony? MR. ROLLINS: I was working in the patent department of Burroughs Wellcome when they filed the patent application on Retrovir. I feel you have misrepresented it a little bit. PROF. ADELMAN: I gave you too much credit. MR. ROLLINS: I didn’t write the patent application, I should say, but I was there at the time and I was aware of what was happening. I think it is a good example of when you should apply for a patent application. In the pharmaceutical industry, most research and development is towards specific targets and particular areas of interest. You will file a patent application when you have utility in relation to a compound or a series of compounds and you think that there is promise in that series or that specific compound. Now, in fact, that is what Burroughs Wellcome did in relation to Retrovir. They had a model that they thought was a good model for HIV and they filed a patent application on it. They didn’t have utility against HIV, because in those days there wasn’t actually a model for doing it until you went in vivo, is my understanding, which is why they had to go to the National Health Institute. I think it shows at what point can you actually file your patent application, applying the sound predictions we were talking about earlier. There has to be a balancing point. In some areas, for example in the anti-tumor area, anti-cancer area, it is quite difficult, where you have come up with a lot of compounds that appear to be active in mice, for example, but when you put them in man they have no activity whatsoever. So you have to make a decision when you are going to file. Do you file when you have actually got activity in man? I would say that is far too late. I think you have to file when you’ve got a model that shows that you have activity and you believe that that activity is going to be replicated in man at a later stage. You might be wrong, but if you are right then you should be rewarded for that. MR. GROOMBRIDGE: Marty, let me point out that they actually had the patent application written before they got the results back from NIH. So wouldn’t that suggest that there was pretty much of a sound prediction there? They had the whole thing drafted and they just filed it afterwards. PROF. ADELMAN: Absolutely not. What happened is that somebody discovered, and they didn’t, because HIV was kind of scary—you know, you didn’t really want to play in the early 1980s; they didn’t know much about this virus at all—they discovered it was a retrovirus. They went and looked up what compounds people had played around with, totally different retroviruses. See Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2009] UKHL 12, at [26], [33]. Biogen, [1997] R.P.C. 1, at [80] (“[T]he disappearance of ‘lack of fair basis’ as an express ground for revocation does not in my view mean that general principle which it expressed has been abandoned. The jurisprudence of the EPO shows that it is still in full vigour and embodied in articles 83 and 84 of the EPC, of which the equivalents in the 1977 Act are section 14(3) and (5) and section 72(l)(c).”). 45 46

186  CHAPTER IV: PATENT LAW Now, this compound, AZT, was developed in Detroit, where I lived, in fact very close to where I used to work. It was developed as an anti-cancer drug. The only problem is it had side effects. It killed people. But it was around. So it was not a patentable compound. All they were doing was speculating—go to the books and look at what has worked against some antiviral; maybe it would work against HIV. Now, meanwhile, NIH did the gutsy work of actually working with the virus and developing an assay that they would use to test compounds. It was only, according to the Supreme Court of Canada,47 when that compound was tested and actually found to be very effective, at least in this assay, that they said there was a sound prediction that you could put that in a patent application and support your application. JUDGE RADER: Can I ask a question or two of you? We are looking now at the prediction test and how reasonably predictive it is, right? PROF. ADELMAN: Right. JUDGE RADER: Why isn’t what our former Burroughs Wellcome advisor telling us “We had a model, it worked in other retroviruses, we’re going to try it on this particular retrovirus?” Why isn’t that enough to suggest a reasonable expectation of success, that they had some reason to believe that it might work in other retroviruses and, therefore, be predictive? PROF. ADELMAN: It was not their model. They hadn’t done the tests on other retroviruses. JUDGE RADER: But they know that it works on retroviruses, and so they are saying, “We have identified this is a retrovirus similar to the retrovirus we are trying to treat.” Why can’t they use that as foundation for prediction? PROF. ADELMAN: A schoolboy would know this thing was discovered—that was a major discovery—that it is not an ordinary virus but it is a retrovirus. I think they made no serious contribution except sending this to NIH. Their idea was: Well, there are a whole bunch of compounds— JUDGE RADER: But you’re not answering my question. PROF. ADELMAN: I don’t think there was an expectation. JUDGE RADER: Why isn’t that enough of a predictive model? What would you have required them to predict more to fit within the Canadian test? PROF. ADELMAN: To show some serious evidence that it would work. They just were speculating. Do you want people to file— JUDGE RADER: Can I follow up a little bit? You do have something. It has been successful in retrovirus of a similar character. Why isn’t that enough to give you some prediction? PROF. ADELMAN: You just made a very, very strong assertion, “retroviruses of a similar character.” There was no evidence of that. It was a retrovirus. There is a huge spectrum of retroviruses. They didn’t know anything about HIV. JUDGE RADER: Okay. Now you’re helping me out a little bit. So now, if they could have supplied a model that said, “This particular retrovirus is like the HIV that we are attacking,” then you would accept it? PROF. ADELMAN: Then I’d accept it, yes. JUDGE RADER: Even if they hadn’t done any tests, they sent those to NIH? PROF. ADELMAN: Yes, I would accept it. JUDGE RADER: Now let’s ask him. Is that what you had? [Laughter] MR. ROLLINS: I thought we had testing on a compound against other retroviruses, yes. JUDGE RADER: Other retroviruses. But he is requiring them to be other retroviruses of the same class so you have some reason to predict. 47

See Kirin-Amgen, [2005] RPC 169.

Part G: THE INTERFACE BETWEEN BIOTECH & IP  187 MR. ROLLINS: I don’t know at that stage whether it was known what specific class HIV

was actually in.

PROF. ADELMAN: That’s right. So it was a sheer guess and it was a speculative patent

application.

MR. ROLLINS: No, it wasn’t a sheer guess. JUDGE RADER: Let me back one more part of the question in. U.S. law specifically says you

don’t—we use this crazy word “negative”—you don’t “negative an invention by the manner in which it is made.” Now, what if they get the invention by guesswork? Don’t they get it anyway? PROF. ADELMAN: No, because the patent application has to show utility, and I don’t think that a speculative utility would pass the U.S. utility test. MR. GROOMBRIDGE: Let’s hear from some other members of the panel. This is an interesting point. Aren’t we opening up a heck of a lot of uncertainty if we allow the validity of patents to be determined based on information that is unknowable to the public? In other words, when we start looking and saying the scope of this patent and the validity of this patent is going to depend upon what they actually did, as opposed to what is written in the patent, doesn’t that take us to a bunch of places that we don’t want to go to? We have had a fair amount of activity from the far end. Is there anyone else who would like to chime in on this? JUDGE RADER: Discrimination. MR. GROOMBRIDGE: Rearing its ugly head again. DR. DeBERARDINE: Actually, I’d just like to step back a little bit in the conversation. I think a lot of it depends on the facts. If you try to look at the facts and try to make the law fit the facts, as opposed to the other way around—and there is a process here, which is obviously if you have the chemical compound, you are entitled to claim that. If anyone improves on it, they figure out things to do with it, they may have an improvement patent. Whether or not you are entitled to that may depend on the facts and what is put in your specification. So that’s one situation. Now, if the compound is already out there, someone else actually owns the compound, or the compound is public. PROF. ADELMAN: This is public information. MR. DeBERARDINE: All right. So now you’re talking about methods of use, right? There are ways of dealing with that. We have Section 112, and Section 112 has certain rules and regulations that go with it.48 By applying that, depending on the facts of the case—now, it seems like this is a close case, because there may have been facts that point toward actually having in possession enough to say “this is going to work” with some reasonable certainty, and it would be unfair to allow someone else to grab that themselves because Wellcome had already put it out there. Is it actually fair to give to them or leave it open to someone else to grab? But that’s just a factual analysis. Going back to where we started, which is this whole natural phenomenon, can you patent it—and I wanted to get to this because I wanted to pander a little bit—Judge Rader’s dissent in Bilski,49 I think is actually wonderful in its simplicity of how we should approach all these problems. You start at Section 101, which says is it new and useful.50 If you have new 48 35 U.S.C. § 112 (“The specification shall contain a written description of the invention, and of the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains, or with which it is most nearly connected, to make and use the same, and shall set forth the best mode contemplated by the inventor of carrying out his invention.”). 49 In re Bilski, 545 F.3d 943, 1011 (Fed. Cir. 2008) (Rader, J., dissenting). 50 See id. (“Whoever invents or discovers any new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof, may obtain a patent therefor, subject to the conditions and requirements of this title.” (citing 35 U.S.C. § 101)).

188  CHAPTER IV: PATENT LAW and useful, then you move on to these questions that you have, which is Section 103, is it obvious?;51 and Section 112, which is what we are talking about now, did the person have it in their possession?52 But as far as I’m concerned, I actually think if you try to over-complicate it by looking at individual facts and individual cases, the law becomes sort of muddled. I just wanted to bring it back to that conversation. Sometimes people disagree about the facts, but in this situation I think the law actually isn’t that bad. MR. GROOMBRIDGE: Let me pick up. You mentioned natural phenomenon. A question to David: Does it make a difference whether we are talking about something which is completely synthetic or whether we are talking about a purified and isolated form of a natural product? As you were talking about Biogen,53 is the analysis driven because that is a naturally occurring protein, whereas we are much more comfortable giving product claims for small molecules, which is in essence what has happened in Lundbeck?54 MR. JUSTICE KITCHIN: I don’t think there is a material difference between natural products and synthetic ones. If you are the first person to isolate a natural product and you find a use for it and finding that use for it was inventive, then it seems to me you are entitled to a monopoly to that product. There is no material difference between that case and the case where you have made a synthetic product. I think the difficulty that came in the Lundbeck case was that the product was, albeit not available before the invention, a known and entirely obvious goal. So it was a target to which everybody was aiming. There was absolutely nothing inventive about heading for that end product. The invention was the particular way that the company had found of getting there. That then raised the question: Are you in those circumstances entitled to a product, however it is made, or should you be limited to the particular way that you found of getting there? That is what brings in the notion of the technical contribution. If you have invented a product, whether a synthetic product or you have isolated a product for the first time from nature, and it is new and inventive as a product, then you are making a contribution which is that new product, and it seems to me entirely right that you should have a monopoly to that product, however it is made. But it does seem to me that that situation is a very different one to the case where the product is an obvious goal, it’s something to which everybody is aiming, and the difficulty that they face is finding a way to get there. It seems to me those two situations are different, and I would question whether or not you are entitled to the same scope of monopoly in both cases. Interestingly, the Conor case,55 which I was not involved with in the United Kingdom— JUDGE RADER: Had anyone gotten there before? MR. JUSTICE KITCHIN: No, no one had got there. No one had managed to isolate these— JUDGE RADER: Well, how can it be an obvious product if it isn’t even— MR. JUSTICE KITCHIN: The racemate was known. It was known that this racemate worked in all likelihood through one of the two enantiomers, so it was anticipated that the activity would 51 “A patent may not be obtained though the invention is not identically disclosed or described as set forth in section 102 of this title, if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains.” 35 U.S.C. § 103(a). 52 35 U.S.C. § 112. 53 Biogen Inc. v. Medeva Plc, [1997] R.P.C. 1 (H.L. 1996). 54 Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2009] UKHL 12. 55 Conor Medsystems Inc. v. Angiotech Pharms. Inc., [2008] UKHL 49, on appeal from [2007] EWCA Civ 5 (Jacob, L.J.).

Part G: THE INTERFACE BETWEEN BIOTECH & IP  189

lie exclusively or primarily in one of the enantiomers. The aim of those in the field was to try and find a way to isolate them. One person did it by one particular route, which in a matter of months was entirely superseded by a quite different route because new technology became available. That second party was in the Lundbeck case injuncted from using that entirely different technology to get to the goal which was obvious before the first invention had been made.56 The question is whether or not that second group of people using that entirely different technology should be prevented from using that technology which had nothing to do with the first team’s contribution. MR. GROOMBRIDGE: Martin. PROF. ADELMAN: Well, I have to come back. I think that Mr. Justice Kitchin is absolutely right on that. You eat what you kill, not more than you kill. That is a sound principle that shouldn’t be violated unless there are very good reasons for doing so. But what I want to get to is that the product was not obvious, it was not obvious, and his opinion said it was not obvious. Then he made technical arguments to disregard the fact that he admitted that it was not obvious as a product—forget the process. LORD NEUBERGER: David put his point extremely well, as one would expect, and it is an entirely defensible point of view in logic: nobody can say it’s wrong. Equally you can say, as Randy says, that it is a non-obvious product, it’s new, nobody has made it before. Unless you take the view, as the Germans do, that an enantiomer is not novel—I’m sorry—I may be out of date. [Laughter] AUDIENCE [Dr. Frank-Erich Hufnagel ?]: Thank you for announcing the next panel. [Laughter] LORD NEUBERGER: Unless you take the view—I won’t say if anyone does—that the isolated enantiomer is not obvious, you are sunk, because it’s new, and there you are. But as I say, you could perfectly well construct a patent system which takes David’s view, but that’s not the system we’ve got. MR. DeBERARDINE: Actually, I think they are both right because they are changing the facts, honestly. One is saying that it is already in the prior art and the process of getting there— okay, in that situation the process should be your invention. In the other situation, where they’re saying, “We can’t isolate it, it has never been in the prior art, and I’ve figured out how to do it,” then in that situation you may be entitled to the product. Again, it is a factual inquiry, but I don’t think the principles are actually being implicated here. MR. GROOMBRIDGE: I agree. Questions from the audience? QUESTION: Richard Arnold from the English High Court. My question is for David. Lord Neuberger has told us now explicitly that fair basis is dead. Is your talk really directed to the proposition that we should reintroduce lack of fair basis as an objection to patent validity? MR. JUSTICE KITCHEN: Lord Neuberger has told us that fair basis is dead. But actually, I think that the whole notion of what the inventor has actually contributed to the art permeates all kinds of other areas of patent law. We see it, for example, in the EPO in the AgrEvo case.57 What did the AgrEvo case establish? That there was a claim to a range of products which were new, they were non-obvious; but, as the EPO found, there wasn’t a technical use for all of them. So what did the EPO say? They said, “We find that the patent is obvious because the scope of the claim does not equate to the technical contribution which the patentee has actually made.”58 See Generics (U.K.) Ltd. v. H. Lundbeck A/S, [2007] EWHC 1040 (Pat), [2007] R.P.C. 32 (Kitchin, J.). Case T-0939/92, AGREVO (Sept. 12, 1995). 58 See id., at para. 2.4–2.4.2 (“[In the present case, the prior art showed] there was a particular technical problem … The specification, fairly construed, did put forward [an] answer to this problem. But that teaching had to be disentangled from so much extraneous matter that it nearly got lost.”). 56 57

190  CHAPTER IV: PATENT LAW We see it in the United Kingdom in an earlier case, called Pharmacia,59 where once again there was a chemical class claim where not all the products claimed—a good proportion of them, but not all the products claimed—in fact had the products which the specification promised. The Court of Appeal said that the patent was insufficient, and it was insufficient, once again, because the technical contribution which the patentee had actually made did not equate to the scope of the claim which he had secured. So I think that this notion of technical contribution is a familiar one, and I think it is a bit of a charade to pretend that it is not one that we actually apply in working out patent cases every day in real life. We try to determine what is the invention that the patentee has made, and then we say: Is the scope of claim which you have secured commensurate with that contribution? My suggestion is that on occasion we have lost sight of that in the United Kingdom, and I question whether or not we were right to do so. LORD NEUBERGER: I have done a lot of talking, but I think it’s fair to say that, if you want to be unkind, you can say when I said “fair basis is dead” I overstated matters. But I would rather say I said “fair basis is dead in this particular context,” because you look at the contribution, and once you have decided on the contribution, it was contributing the enantiomer, which was new, and therefore that was the end of it. I quite accept that fair basis in the wider context as David described it, has survived—but that’s only if you want to call that fair basis, a point Randy is wanting to deal with. But I do not think that, at least under the EPC, the court can indulge in the purely value judgment approach of asking “Does the patentee deserve all that he has claimed?”, and deciding that it is too much compared with what he has done. JUDGE RADER: I would observe the United States would police the scope of the claim with the enablement doctrine,60 rather than with some kind of amorphous contribution concern which is guesswork. It’s subjective what the contribution is. Enablement you’ve got proof: What can you make and use based on this disclosure? Put together a group of people of skill in the art, see what they can make and use, and you’ve got evidence. I think that’s the way to police the scope of the claim. MR. JUSTICE KITCHIN: But I don’t think it matters particularly which head you put it under. As you can see, the EPO tended to do it under obviousness. We in the United Kingdom have tended to do it under the head of insufficiency. But what I do feel is that there ought to be a way of introducing fairness into the scope of protection so that an objective assessment is made, under one head or other, as to whether or not the monopoly is fair having regard to what the patentee has actually done. That is why I teased Lord Hoffmann by citing Lord Justice Jacob during the course of my address. The particular observation which he made when he was sitting in the Court of Appeal in the Lundbeck appeal, that fairness is not part of the relevant test.61 Obviously, that is the law in the United Kingdom. Lord Justice Jacob is in the Court of Appeal and I am in the High Court. I must accept that is the law. What I would invite you to consider is whether or not that is the way we should be going. MR. RICHARDS: Do we need to go back and put fair basis as part of the statute, or something else, where there is at least one common approach to dealing with this problem, rather than attacking it as inventive step or written description or enablement or sufficiency, and perhaps sometimes getting different answers depending on which way we approach it? Pharmacia Corp. v. Merck & Co., [2001] EWCA Civ 1610 (C.A.), [2002] R.P.C. 41. See 35 U.S.C. § 112; Ariad Pharms., Inc. v. Eli Lilly & Co., No. 2008-1248, 2010 WL 1007369 (Fed. Cir. Mar 22, 2010) (en banc); see also supra notes 26–27. 61 See H. Lundbeck A/S v. Generics (U.K.) Ltd., [2008] EWCA Civ 311, at [57] (“The fact that compound claims may give a patentee ‘more than he deserves’ has not in practice proved to be much of a problem. Their certainty and pragmatic value has proved itself over the years. What matters for present purposes is that the concept ‘that the patentee should not have more than he deserves’ does not form part of the statutory test for sufficiency.”). 59 60

Part G: THE INTERFACE BETWEEN BIOTECH & IP  191 MR. GROOMBRIDGE: Tony? MR. ROLLINS: I was going to comment on an example that John gave in his paper, where

he talked about a patent on Cox-2 inhibitors, which was granted in the United States but not granted by the EPO. It is quite a short claim, so I will read it: “A method for selectively inhibiting Cox-2 activity in a human host comprising administering a nonsteroidal compound that selectively inhibits activity of the Cox‑2 gene product to the human host.”62 Now, that is an incredibly broad claim. My understanding is that there were no specific examples of compounds that actually did that. Again, I think this is a good example of where you have very broad claims with very little enablement to support them. MR. GROOMBRIDGE: I think that the proposition that David enunciated is in itself fairly non-controversial, that there should be some relationship between the scope of protection and what they actually invented. MR. JUSTICE KITCHIN: Let me quote to you again: “The concept the patentee should not have more than he deserves does not form part of the statute test for insufficiency.” That’s our Court of Appeal. MR. GROOMBRIDGE: With all due respect, though, that may be taken a little bit out of context. The U.S. cases and the claim that Tony read, which really go to that case and in Ariad,63 which was just decided two weeks ago, is people who have been too clever by half and then draw back and try to claim things that they knew they didn’t invent, but that somebody else had actually invented and brought to market, and now they’d very much like to have a patent that covered it. I doubt we would find anyone in the room who would think it is a bad idea to stop that sort of behavior and use of the patent system. The question is, though: What are the consequences? Whichever mechanism we pick, it’s not that particular case, it’s all the other mischief that it may cause. I think we have time for one or two more questions. QUESTION: Tim Roberts, Brookes Batchellor. We have had a lot of emphasis on reasonable predictability. I’d like to question that. Napoleon said that he would prefer that his marshals should be lucky rather than clever, I think was the expression. Why should we not reward fortunate accidents? If people get it right and they are sufficiently interested to file a patent on it, isn’t that as beneficial to society to give them a monopoly as to people who make reasonable scientific predictions? MR. GROOMBRIDGE: Who would like to tackle that one? MR. JUSTICE KITCHIN: I entirely agree. I think serendipity can lead to a great many extremely valuable inventions. But I think one has to be cautious, because you can have serendipity which leads to a valuable invention—it’s non-obvious, it’s new, it’s sufficient, it meets all the requirements, proves extremely valuable. But contrast that to the case where there are ten possible routes to a particular solution. Because you are a rich company, you say, “What I’m going to do is I’m going to patent all of them.” So you get your protection, and then afterwards you find out that one of them works. Should you be entitled to your patent in those circumstances? All you have done is to work methodically through a list of ten. You filed patent protection before you started. Should you be entitled to the patent for the one that worked and simply be allowed to abandon the nine that did not work? MR. DeBERARDINE: I don’t see what the problem with that is. The reason for that is simply you can hedge. If you think, “Okay, there may be sufficient argument under law for me to have U.S. Pat. No. 6048850 (method of inhibiting prostaglandin synthesis in a human host). Ariad Pharms., Inc. v. Eli Lilly & Co., 560 F.3d 1366 (Fed. Cir. Apr. 3, 2009), vacated, 2009 WL 5874322 (Aug. 21, 2009); see supra note 26. 62 63

192  CHAPTER IV: PATENT LAW a reasonable enough expectation of success that I make on all ten.” In that case, if you are wrong, you abandon it. You admit, “I’m not entitled to a patent for these nine.” But the one that hits, actually now the reason for your patent, is a little bit different, which is to say: “Hey, wait a minute. This is really unexpected, because I did ten and only one hit.” Honestly, in that situation, what it turns out is you were wrong on nine situations but you were right about one, and you end up with just one patent. You don’t end up with ten patents, you end up with just one patent. So there isn’t a problem there. It works out. The system actually works at the end of the day. When you look at the result, you end up where you are supposed to be. It bothers you because, obviously, you are a wonderful intellect. [Laughter] Maybe on an intellectual basis there may seem something fundamentally wrong. But when you look at patents as a practical application in the real world, there is actually nothing wrong with that scenario whatsoever, because you only end up with the one patent that you are actually entitled to, whether it’s serendipity in this case or whether it actually was a very excellent decision at the beginning of the process. PROF. ADELMAN: But what if he did none of those? What if you just filed the ten, which is the good IPO, and waited for somebody else to do it? And then you said, “Oh, I’ve got here now a patent application that covers this. Thank you very much for doing this work. I’ll take all the money.” MR. DeBERARDINE: That’s Judge Rader’s point on enablement in the United States. Now again, I’m not an expert on European law, but in the United States if you go through your Section 112 analysis,64 there are actually some good principles there to figure that one out. MR. GROOMBRIDGE: We have time for one more question. QUESTION: Hi. I’m Mark van Gardingen, Brinkof, Amsterdam. I think there is a difference between trying ten methods that are known but not yet tested and ten methods that are not known, that you invented, that are non-obvious but not yet tested. If there are ten known methods, you claim them, and nine of them do not work but one works, but all ten were known and obvious, then I think you cannot patent that. MR. JUSTICE KITCHIN: That’s exactly what happened in Conor.65 They filed a patent which covered all the possible coatings that could be used on a stent. They found the one that worked. The trial judge and the Court of Appeal considered that the patentee had actually done no more than what was obvious—namely, he has set about trying all of those possibilities without any particular expectation that any of them would work, and he found one that worked, and now he filed his claim, and, bingo, he was there. So he got his claim. So he got his claim. QUESTIONER [Mr. van Gardigen]: It was not just speculation in the Conor case. MR. GROOMBRIDGE: By even in positing that hypothetical maybe all you’re doing is making a very good argument for having juries. [Laughter] I think we are out of time. Unless anybody has any burning desire to say something else, would you join me in thanking the panel here?

64 65

See 35 U.S.C. § 112. Conor Medsystems Inc. v. Angiotech Pharms. Inc., [2008] UKHL 49, on appeal from [2007] EWCA Civ 5.

Chapter IV

Patent Law Part H: Injunctive Relief: A Comparative Analysis Moderator Gonzalo Ulloa y Suelves

Gómez-Acebo & Pombo (Madrid) Speakers

Ass’t Prof. John M. Golden

Edward Nodder

University of Texas School of Law (Austin)

Bristows (London)

Felix Rodiger

Bird & Bird (Düsseldorf)

Panelists George Badenoch

Kenyon & Kenyon (New York)

Hon. Mr. Justice Floyd

Patents Court, Royal Courts of Justice (London)

Marleen van den Horst

BarantsKrans (The Hague)

MR. ULLOA: Thank you. Times have already been allocated, as you know, very closely and very stiffly. So in my five minutes I will only use three minutes to tell you that in this session which I am moderating we have three speakers and three panelists. John Golden is the first speaker and has already been introduced. He is from the University of Texas School of Law. The second speaker is going to be Felix Rodiger from Bird & Bird in Düsseldorf. The third speaker is going to be Edward Nodder. We have three distinguished panelists who I will introduce afterwards. John, you have the floor, please.

194  CHAPTER IV: PATENT LAW PROF. GOLDEN: I don’t have any slides, but I was thinking maybe we should show the evacuation slide, so if the talk is going poorly, you will know what to do. I am just going to talk a little bit about the state of the law with respect to injunctions in the United States, and then, if I have time, my suggestions on how we might develop that law in a positive way, or at least how we might analyze how to develop it in a positive way. As you may know if you follow developments in the United States, the courts there, the district courts and the Federal Circuit to a somewhat lesser degree, have still been struggling to deal with application of the Supreme Court’s 2006 decision in eBay v. MercExchange.1 As I usually do when I talk about the case, I feel I need to mention I was part of the litigation team for MercExchange in that case before the Supreme Court. I am going to say some critical things about the Supreme Court’s opinion, so I feel I need to add that In eBay, the Supreme Court embraced a four-part test for whether a permanent injunction should issue.2 The Court announced the test as a traditional test, the traditional test for permanent injunctions. This has caused a number of professors who are experts in U.S. remedies law to ask, “What traditional four-factor test for injunctions? We didn’t know there was one, and it is kind of our area of study.” In fact, to some degree it doesn’t make too much sense to have a four-factor test for permanent injunctions when you have a four-factor test for preliminary injunctions, the first factor of which is the likelihood of success on the merits, which of course you have established at the time you are applying for a permanent injunction. In effect, the way the Supreme Court seemed to end up with this four-factor test was that it used two factors that seem essentially redundant. • According to the first factor, a patent holder moving for an injunction must show that irreparable harm will accrue to the patent holder if no injunction is issued.3 • According to the second factor, the patent holder must demonstrate that money damages will provide inadequate relief.4 This factor appears redundant because if money damages provide adequate relief, then it seems that there is no irreparable harm if the injunction does not issue. In fact, I think the lower courts are moving toward viewing these factors as essentially redundant, after a little initial confusion over what to do with them. That seems basically right to me. The remaining two factors from eBay can be described as follows: • According to the third factor, the patent holder must show that the balance of hardships as between the patent holder and the adjudged infringer justifies an injunction.5 • According to the fourth, the patent holder must demonstrate that the public interest does not disfavor the injunction.6 Well, the way the Supreme Court put this test, endorsement of which the Court seemed to think was a somewhat trivial holding, just following traditional law, has created additional problems beyond confusion resulting from the essentially redundant nature of the first two factors. Another question has been: Given that the Court said the patent holder “must demonstrate” these four things and seemed to emphasize the point that there was no entitlement to an injunction, did the Court effectively say that there could be no presumptions favorable to the patent holder on any of these issues? eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006). Id. at 393–94. 3 Id. at 391. 4 Id. 5 Id. 6 Id. 1 2

Part H: Injunctive Relief: A Comparative Analysis  195

Prior to eBay, the U.S. Court of Appeals for the Federal Circuit, which hears almost all patent appeals in United States courts, had held that in the preliminary injunction context, once you have shown a substantial likelihood of success on the merits, you would get a presumption of irreparable harm if the infringement were to continue during the course of the litigation.7 Implicit in the way that the Federal Circuit and the lower courts were treating the permanent injunction analysis, there was also a presumption of irreparable harm there, which in fact the district court in eBay, which denied injunctive relief, had initially invoked.8 It just found that the presumption was rebutted.9 Well, the district courts are now having to deal with the question of presumptions.10 A number of them have held that no presumptions can apply in light of the Supreme Court’s opinion in eBay.11 This has been an issue not only in patent cases but also in other cases outside of the Federal Circuit’s jurisdiction, where district courts have confronted the fact that regional circuits had held that there could be a presumption of irreparable harm, say, in copyright cases or trademark cases.12 If you were a rights holder and there was a threat of continuing infringement, there was a certain sense that you are irreparably harmed if you could not enjoin the infringer because money damages alone do not generally allow you to authorize use only on your terms. Well, I’m not going to parse the Supreme Court’s opinion to try to determine whether it should be read to prohibit presumptions. I actually suspect it should not be. The Court has, in the antitrust context, recognized burdens of proof but not found rebuttable presumptions to be intolerable or contrary to assigning a burden of proof to one particular party. But I think one question is: Does it make sense to have a presumption of irreparable harm? What kind of policy purposes could that presumption serve? I think one concern with dropping the presumption is that we have had a number of district courts then turn the irreparable harm test into one of whether there is competitive harm, thereby making injunctions much more difficult for patent holders who are not manufacturers 7 See, e.g., Pfizer, Inc. v. Teva Pharms., USA, Inc., 429 F.3d 1364, 1381 (Fed. Cir. 2005) (“We have consistently held that a district court should presume that a patent owner will be irreparably harmed when, as here, a patent owner establishes a strong showing of likely infringement of a valid and enforceable patent.”); Smith Int’l Inc. v. Hughes Tool Co., 718 F.2d 1573, 1581 (Fed. Cir. 1983). 8 Mercexchange, L.L.C. v. eBay, Inc., 275 F. Supp. 2d 695, 712 (E.D. Va. 2003) (“[T]he clear showing of validity and infringement has been met.”). 9 Id. (“In the case at bar, the evidence of the plaintiff’s willingness to license its patents, its lack of commercial activity in practicing the patents, and its comments to the media as to its intent with respect to enforcement of its patent rights, are sufficient to rebut the presumption that it will suffer irreparable harm if an injunction does not issue.”). 10 At the Fordham Conference in 2008, Judge Rakoff stated: Since eBay, according to the statistics I had—and they are already a couple of months old—there were thirtyseven instances of eBay being invoked after a finding of infringement. In twenty-seven of them, the district court continued to impose a permanent injunction; in ten of them, it did not. “Injunctive Relief in the U.S.: eBay and its Aftermamath”, 18 Fordham Intell. Prop. L. Inst., International Intellectual Property Law & Policy § V.D.1 (Hart 2010). 11 See z4 Techs., Inc. v. Microsoft Corp., 434 F. Supp. 2d 437, 440 (E.D. Tex. 2006) (“A plaintiff must demonstrate: (1) that it has suffered an irreparable injury … . Accordingly, the Court does not apply a presumption of irreparable harm.”); see also, e.g., ResQNet.com, Inc. v. Lansa, Inc. 533 F. Supp. 2d 397 (S.D.N.Y. 2008); Cygnus Telecomms. Tech., LLC v. Worldport Commc’ns Inc., Nos. C-02-00144 RMW & C-02-00142 RMW, 2008 WL 506182 (N.D. Cal., Feb. 22, 2008); Tiber Labs., LLC v. Hawthorne Pharms., Inc., 527 F. Supp. 2d 1373, 1380 (N.D. Ga. 2007); Voda v. Cordis Corp., 2006 WL 2570614 (W.D. Okla. Sept. 5, 2006); Finisar Corp. v. DirecTV Group, Inc., No. 1:05 Civ. 264, 2006 WL 2709206 (E.D. Tex. July 6, 2006); Paice LLC v. Toyota Motor Corp., No. 2:04-CV-211-DF, 2006 WL 2385139 (E.D. Tex. Aug. 16, 2006). 12 “Following the Supreme Court’s ruling in eBay v. MercExchange L.L.C., courts in the Ninth Circuit abandoned the presumption of irreparable harm upon a finding of copyright infringement in injunction requests.” Jacobsen v. Katzer, No. 06-CV-01905 JSW, 2007 WL 2358628 (N.D. Cal. Aug. 17, 2007). See Gowan Co., LLC v. Aceto Agr. Chems., No. CV-09-1124-PHX-JAT, 2009 WL 2028387, at *4 (D. Ariz. Jul. 10, 2009); Designer Skin, LLC v. S&L Vitamins, Inc., No. CV 05-3699-PHX-JAT, 2008 WL 4174882, at *4 (D. Ariz. Sept. 5, 2008); Metro-Goldwyn-Mayer Studios, Inc. v. Grokster, Ltd., 518 F. Supp. 2d 1197, 1210 (C.D. Cal. 2007); see also William F. Patry, Patry on Copyright § 22:52.

196  CHAPTER IV: PATENT LAW and not service providers to get. That results in a situation where the identity of the patent holder can have a substantial effect on the value of the patent right, an outcome that seems to favor industry incumbents over, say, technology start-ups who don’t yet have a commercial product or service that they are providing. This effect on patent value can, in turn, restrict the effective alienability, the market for sale, of patent rights because those rights are going to be more valuable as a matter of law in certain types of businesses’ hands (commonly industry incumbents’), rather than others. So I think there can be a real cost to eliminating even a mere rebuttable presumption of irreparable harm. We should acknowledge this policy concern, while also considering the legal question of what the Supreme Court’s eBay opinion means. I know we have a very short panel, so I am going to cut this off here, even though they say I can go for ten minutes, because I think if everyone takes about seven minutes we won’t have too much time for discussion. Thank you. MR. ULLOA: Thank you very much, Professor, for what you have said and for being so time-conscious. You all know, of course, even if I haven’t introduced the subject from the beginning, that there are very few things more important for patent enforcement or patent litigation than preliminary injunction. Sometimes it is really the only efficient tool that the client companies have. Sometimes not getting a preliminary injunction—that’s it, you don’t have any other shot. Other times you can spend some more shots, but sometimes you haven’t. So this is why this session I believe is so important, because it is going to show us that, on the one hand, the differences between some of the jurisdictions that we are going to examine are not so big, so some concepts as a valid title, urgency, irreparable damages, they are going to be quite common. But they are not the same, so there will be all the time in the back of our minds floating the word harmonization. Let’s go to another very important jurisdiction, which is Germany. Felix, please. MR. RODIGER: Thank you. Germany traditionally is known as the country for injunctions. I mean you don’t go to Germany if you are seeking high damages. You go there if you want a quick, reliable, wellfounded judgment for an injunction. That has to do with our split system, that validity is heard before a different court as infringement. If you want to defend yourself with validity, you cannot do that within the infringement action. You have to file a separate action. Now, the issue here, where does it come from? It comes from the United States, as John just said, from the eBay decision,13 and has to do in the overall something with how do we cope with patent trolls, what can we do. The United States then came up with that idea: Well, actually we have common law for damages and equity for the injunction, and we have to weigh that, and then they came up with the four-factor tests. But actually in Germany we are in a civil law country, so this alternative we don’t have. But let’s look at what we do have. I tell you in the end in Germany there is no alternative to the injunction, but there is ongoing discussion, so I want to make you aware of that. Our provision in law is Section 139.14 That does not allow for any discretion or any proportionality. It simply says if you are infringing then the patentee is entitled to an injunction. So all you need for the injunction is to prove the danger of a first or a repeated infringement, that’s all; then you are entitled. And really, the court has no discretion; then they have to render the injunction. 13 14

eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006). German Patent Code (Patentgesetz) § 139.

Part H: Injunctive Relief: A Comparative Analysis  197

Just to make sure, we are not talking about preliminary injunctions versus permanent injunctions. That is just an issue of procedural law. We would be in a completely different kind of proceeding if you go for a preliminary injunction. That is a limited amount of evidence, just one hearing, and all quick, and so on. So we are talking here about actions on the merit, main actions. It is all permanent. Of course, the claimant may request on his own discretion an injunction just for the duration of a fair, for instance, hoping that in weighing interests the judge would then be more willing to grant something limited. What potential issues do we have against an injunction? There is the motion to stay if you want to argue with invalidity. Or, if there is already a judgment in place, you may ask to suspend the enforceability. But to suspend the enforceability, that really has very strict requirements, exceptional cases, and normally is not granted. So that is not really an alternative to the injunction we are seeking here. Again, the court as a general rule has no discretion. But let’s look at what potentially we can do. In patent law, there are two alternatives to restrict the patent itself, but that again is not an alternative to the injunction. Section 13, for instance, would allow the Patent Office to restrict the scope of a patent because of public interest, but that is not what we are talking about here. Or a compulsory license in Section 24, never really applied, very rare cases, hardly any case law at all. In antitrust law, there is a very valid and ongoing discussion to limit the injunction. You know all the discussion about the FRAND defense.15 That is really where the antitrust issues come in. So if there is a dominant market position—and please keep in mind the patent itself does not provide automatically for a dominant market position—there is an ongoing discussion in Germany right now how really to look at it. But that is a different issue. I don’t want to go into too much detail there. So the antitrust question can really be something against the injunction. It is not decided yet by the German Supreme Court, but the decision is announced to be handed down on May 6, the question whether the FRAND defense can be used against the injunction claim.16 There is already a decision from 2004, Standard-Spundfass (Standard-Bung Barrel),17 where the Supreme Court says you can defend yourself against a damage claim. But for the injunction we have to wait just a couple more days until May 6th. So don’t worry. Limitations due to misuse. Well, again, misuse is not what the four questions in the eBay case are about,18 because misuse requires that there are really exceptional circumstances that allow a finding of misuse. It cannot be a regular issue to look at. 15 “Fair, Reasonable and Non-Discriminatory” (FRAND). Cf. e.g., Section 6.1 of the ETSI IPR rules, European Telecomm. Standards Inst., Intellectual Property Rights Policy ¶ 6.1 (2008), available at http://www.etsi.org/ WebSite/document/Legal/ETSI_IPR-Policy.pdf; Damien Gerdin & Miguel Rato, “Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-Up, Royalty Stacking and the Meaning of FRAND” (Apr. 2006) (unpublished working paper), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_ id=946792&rec=1&srcabs=1081997. 16 Case KZR 39/06, Orange-Book-Standard, Decision of the Cartel Panel (Kartellsenat) of the German Federal Supreme Court (Bundesgerichtshof), May 6, 2009, English translation of case available at http://www.boek9.nl/ www.delex-backoffice.nl/uploads/file/Boek9%20/Boek%209%20Uitspraken/Octrooirecht/EN%20Translation%20 BGH%20Orange%20Book%20Standard%20-%20eng.pdf. After the conference, the decision was handed down. The court held the antitrust defense as principally admissible, but required the defendant meet two preconditions: (1) defendant must make a binding and unconditional licence offer that comprises “usual” conditions and that cannot be rejected by the patentee without violating its antitrust obligations; (2) defendant must behave as if the licence had already been granted by filing regular royalty reports and securing the licence fees by escrowing a “sufficient amount.” 17 German Federal Supreme Court (Bundesgerichtshof), 2004 GRUR 966. 18 See eBay, 547 U.S. at 391; supra note 4–7 and accompanying text.

198  CHAPTER IV: PATENT LAW There was this “E-Klasse” case.19 When Daimler-Mercedes Benz came out with a new E Class, there was somebody who filed for trademarks in many countries and tried to stop them, or at least asked for a high amount of money. Mercedes did pay in France, but in Germany they went to court and said this should not be allowable. The Supreme Court confirmed that that was a misuse. But obviously, somebody filed for a trademark in order to block others, or at least ask for money, compensation. Can that be transferred to patent cases? Well, many say no, because there are different requirements. A trademark you have to use and a patent has a limited lifetime, so there are differences. The discussion in Germany says you cannot just transfer these cases into patents. But the one key where maybe something can be done in the ongoing discussion is proportionality. But the principle of proportionality really is not implemented in Section 139, which has no language over proportionality. We do have proportionality within the patent law, but only about rendering account or destroying infringing goods. You only have a claim for destruction if there is no less strict means to get rid of the infringing product. If you can amend it, there is no need for destruction. So there is some proportionality, but it is not in the law, and since we are a civil law country we have difficulty simply reading it in. Now, really, this might be the window where it comes in, that is over the Enforcement Directive,20 because Article 3(2) said “the measures, procedures and remedies necessary to ensure the enforcement of the intellectual property rights shall also be . . . proportionate.”21 That is the word we are looking for. But when the German legislature implemented that law into German law, they said there is no need to change Section 139, except for some other things that don’t have anything to do with this here. Actually, in the proposal of the new law, no word was mentioned about proportionality. So it is likely that the legislature thought this was already taken care of or there is no need to transfer it. That then triggers the question whether you can apply it over the Directive by interpretation of German provisions in accordance with the EU Directive. In this discussion, it is being argued that that would go against the law and, therefore, would not allow an interpretation. So the current status of the discussion in Germany is that you cannot interpret the present law on the basis of, or having in mind, Article 3 because that would go against the freshly transferred Section 139, which does not mention proportionality. So in the end, as I said, all you can do in Germany is ask for injunction. Therefore, it remains as it always was. That is why we have all the nice cases in Germany. Germany is a good place for litigation because (a) you don’t need to worry about validity, it’s a different court, and (b) you still get an injunction. Thank you. MR. ULLOA: Thank you Felix. Again we are seeing that the concepts in one of the most important jurisdictions for injunction are very similar to others. We will see now a third very important jurisdiction, which is the United Kingdom, and we will see the similarities. We will also feel and see the nuances and differences that there are. Please, Ed. 19 Classe E, OLG Frankfurt, 1998 GRUR 704, 705; see Rudolf Rayle, “The Trend Towards Enhancing Trademark Owners’ Rights—A Comparative Study of U.S. and German Trademark Law”, 7 J. Intell. Prop. L. 227, 272­–73 (2000). 20 Council Directive 2004/48/EC, Enforcement of Intellectual Property Rights, 2004 O.J. (L 195) 32–36, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:157:0045:0086:EN:PDF [hereinafter Enforcement Directive]. 21 Id. Art. 3(2) (“Those measures, procedures and remedies shall also be effective, proportionate and dissuasive and shall be applied in such a manner as to avoid the creation of barriers to legitimate trade and to provide for safeguards against their abuse.”).

Part H: Injunctive Relief: A Comparative Analysis  199 MR. NODDER: Thank you, Gonzalo. Actually, I am not going to talk much about the United Kingdom at all. I am going to talk about the comparative situation around Europe because I think it would be good for this audience to have a broader perspective. I am actually going to talk more about procedural matters than substantive law. This is all in the context of what I hope will come to pass in a few years’ time, which would be a harmonized European patent court, and the great importance of preliminary injunctions (PIs) to users of patent courts and thus the importance of PIs being well thought through and well implemented in any new European legislation we may have. To begin, the PI procedure is immensely important for IP rights holders. IP rights holders are particularly sensitive about anything that might influence their ability to obtain a PI. My personal experience is particularly rooted in the endless disputes between the pharmaceutical and generic industries. That is some of the most active patent litigation in Europe. You only have to look at the recent Commission Pharma Sector inquiry22 to see how much of that patent litigation is going on. These are particularly important users of the system on both sides. It is fair to say in my experience the majority of the cases that are brought between pharma companies and generic companies are decided commercially at the PI stage. You either get your PI and the market is preserved; or you don’t, the drug price collapses, and the market is destroyed, it’s really all over. Thus it is a binary situation: you are either enjoined or you are not. There really is no middle ground of fair use that can apply in that situation. These cases are hugely important because we are talking about millions, if not billions, of euros of corporate profits, and of course public health care funds, that are riding on the decision one way or another in these crucial PIs. It is, therefore, to my mind rather absurd that at the moment we do not deal with PIs in such matters on a pan-European basis. We deal with them on a country-by-country basis. That leads to a most extraordinary procedural muddle. My next slide is just an example of a few countries around Europe and the PI situation in those countries today looked at from the point of view of procedure. I could have picked any other countries because the point can be made many ways, but I only had room on the slide for seven. I have looked at whether or not you can get an ex parte preliminary injunction, whether or not you can get an inter partes preliminary injunction, how long it takes you to get one, and what quid pro quo you might have to provide as the party seeking a preliminary injunction in order to be allowed to have one at all. Now, take for example Austria and Germany, two countries you might think would have very similar procedural rules. In Austria you cannot, as I understand it, have an ex parte PI at all; all applications must be inter partes. Whereas in Germany ex parte PIs are often sought and granted, and of course there is a procedure whereby you can file a protective brief to try and block an ex parte PI. These are rather striking differences between neighboring countries. All countries, I think, have a provision for inter partes PIs—you’d expect that—but the differences in the time it takes to get one are quite extraordinary. In the United Kingdom, we could get there within seven days, possibly less if it is really urgent. At the other end of the 22 See Commission Decision of 15 January 2008 initiating an inquiry into the pharmaceutical sector pursuant to Article 17 of Council Regulation No. 1/2003, 2008 O.J. (C 59) 6. In a press release, Competition Commissioner Neelie Kroes stated, “Individuals and governments want a strong pharmaceuticals sector that delivers better products and value for money. But if innovative products are not being produced, and cheaper generic alternatives to existing products are being delayed, then we need to find out why and, if necessary, take action.” Press Release, European Comm’n, Antitrust: Commission Launches Sector Inquiry into Pharmaceuticals with Unannounced Inspections (Jan. 16, 2008), available at http://europa.eu/rapid/pressReleases Action.do?reference=IP/08/49. The DG COMP final report was handed down after the conference. See DG Competition, Commission Pharmaceutical Sector Inquiry, Final Report (July 8, 2009), available at http://ec.europa.eu/ competition/sectors/pharmaceuticals/inquiry/communication_en.pdf.

200  CHAPTER IV: PATENT LAW scale, in Italy it would probably take you eight-to-ten months to get a decision on a PI one way or the other, and that is, I would say, almost useless. So this is the kind of problem that faces a big pharma company trying how to respond to “at risk” generic entry across Europe. How can you have an economic and sensible approach when the procedures are so very different in the different Member States? In relation to the quid pro quo—do you have to give a cross-undertaking, do you have to put up a bond—you can see very big differences there. In Portugal, you don’t appear to have to put up anything as a quid pro quo for a PI. You are not going to be exposed in damages if it is subsequently discharged, which I find very surprising. In the United Kingdom, we have the other extreme. A cross-undertaking in damages for a PI in a patent matter can come home to haunt you, and it can come home to haunt you in a very big way—see the Servier/Apotex case last year.23 So the procedures, time scales, and risks for PIs around Europe do vary enormously, and I think harmonization is pretty desperately needed in this area. The very best way that we could do this, of course, is through the European Community Patents Court (ECPC).24 Amusingly, ECPC trips off the tongue rather easily as easy-peasy. I am one of those who believes that the ECPC is desirable. We should think of it as easy-peasy and we should go for it. There is a lot of very good preparatory work on the ECPC being done by the Commission, the Member States, the EPO, Judges, and practicing lawyers. All are well engaged and we are making progress. I think ECPC is achievable, even if we have to sort willing and less willing Member States onto fast-track and slow-track routes, as for the Euro. I can’t see a better opportunity to harmonize the European patent litigation system than the ECPC. The reward, if we can get there, is a unified patent litigation system across the whole of Europe. That is a market as big as the United States. Therefore, all European patent litigation will become just as interesting, just as important, and just as well researched and argued as U.S. cases are. I think that would be a good development. Now, coming back to the PI, PIs are absolutely vital for IP rights holders and those who seek to avoid IP rights. In all the good work that has been done on the ECPC so far I am a little bit concerned that we have not put enough emphasis on PIs. For example, there was a meeting of Patent Judges and practicing lawyers from around Europe in Venice in November 2006 where some very good work was done on practice and procedure for the ECPC.25 But I don’t think PIs got much of a look-in. Just one little comment: “There is a possibility for potential conflict between the powers of national courts to grant PIs and the powers of the ECPC to order or deny similar relief.” The point has been recognized, but I think it needs to be developed a lot more and there are still lots of unanswered questions. • What test will be applied by the new European court in granting a PI? Would it be the U.K. Cyanamid test,26 the four-fold test that is pretty universally, I think, adopted around European countries if you look at it in general terms? Or should it be something new, something else? • Will the interests of third parties be taken into account? Now, we often have discussions about this in the United Kingdom because a very crucial consequence of the grant of a preliminary injunction in a patent case against a generic pharmaceutical company is the 23 Les Laboratoires Servier v. Apotex Inc., [2008] EWHC 2347 (Ch), available at http://www.bailii.org/ew/cases/ EWHC/Ch/2008/2347.html. 24 See Commission Recommendation to Authorise the Commission to Open Negotiations for the Adoption of an Agreement creating a Unified Patent Litigation System, SEC (2009) 330 final, available at http://ec.europa.eu/ internal_market/indprop/docs/patent/recommendation_sec09-330_en.pdf. 25 See Second Venice Resolution of Judges, Nov. 4, 2006, available at http://www.ipjur.com/data/061104SECONDVENICE-RESOLUTION-001.pdf. 26 Am. Cyanamid Co. v. Ethicon Ltd., [1975] 1 All E.R. 504 (H.L.).

Part H: Injunctive Relief: A Comparative Analysis  201

National Health Service is going to have to pay a lot more for medicines for however long that period of the injunction lasts. There was a practice at one stage to invite the National Health Service to come along and make submissions to the court when a PI was applied for, but they haven’t really taken that up. I think this is an area which we ought to look at in the context of the new rules under the ECPC. • Do decisions of the ECPC override national courts? If you look at the Lugano Convention,27 preliminary measures such as PIs have been preserved in national courts as well as courts that Lugano says have jurisdiction in a matter. PIs are emergency matters, so that is understandable, but I think it is extremely important that when we develop the rules and the procedures of the ECPC we have in mind that people will forum shop if there is any possibility of doing so, and we must have a system that makes it quite clear whether the national courts or the ECPC get priority in relation to PIs. That is obviously going to have to be something that can be decided quickly at the outset of a case and needs to be well thought through. My plea at the end of this very short talk is that those charged with the responsibility for trying to bring the ECPC into action—and I know there are many of you here—please don’t forget the PI. It is a very important component of patent litigation and I think it is at the moment in slight danger of being overlooked. Thank you very much. MR. ULLOA: Thank you, Edward. That was good. That was an easy and quick comparison between the main features of preliminary injunction in some jurisdictions. You have enhanced once again the importance of preliminary injunctions, especially for some areas or some sectors, like the pharmaceutical area. Let me introduce you very quickly to our three panelists. They will speak in this order: George Badenoch; Hon. Mr. Justice Floyd, who has been already introduced; and Marleen van den Horst. George Badenoch is from Kenyon & Kenyon in New York. As I said, Justice Floyd has been already introduced several times. Marleen van den Horst is from BarantsKrans in The Hague. I would like to ask the three of you—and, George, maybe to you first—are you in agreement with this question that flows over all of our heads, which is: how important is, number 1, preliminary injunction and injunction in general; number 2, whether from your point of view as an American lawyer you believe that harmonization in the European Union for your clients, for the U.S. industry, will be as important as we see it in most of the countries in Europe? MR. BADENOCH: I think preliminary injunctions and injunctions clearly can be very important. I will say, however, that I am one of the U.S. attorneys who thinks that eBay was correctly decided. Here is the problem: When you go to get an injunction, you are fixing a value on the future use of the patent, and it needs to be a fair value. If you don’t grant an injunction, in many cases you will undervalue the patent. If you do grant an injunction, there are some cases where you will clearly inflate and overvalue the patent. I will just give you my favorite example. Imagine you have a valid patent on a little rivet or bolt that is used in a jet airplane. The patent is valid. The rivet is cheaper, it’s better, it’s easier to install, and it saves $20 per airplane if you use it—there are choices. Now, if that patent comes out and if the trial takes place before the jet airplane manufacturer selects the rivet, the value is $20. It’s a new start-up company. He is irreparably harmed. You grant an injunction. That’s fine. 27 See European Communities-European Free Trade Association: Convention on Jurisdiction and Enforcement of Judgments in Civil and Commercial Matters, Sept. 16, 1988, 1988 O.J. (L 319) 9, reprinted in 28 I.L.M. 620 (1989) [hereinafter Lugano Convention].

202  CHAPTER IV: PATENT LAW Take the very same case and the only difference is that the patent comes out five years later, after the jet airplane is already manufactured, and that is when the trial takes place. It is the same patent, it is the same invention. It ought to have the same value. Now to reconstruct the airplane costs $1 million—I am using Judge Rader’s numbers here. The effect of granting an injunction in that case is to take a $20 patent and make it worth $1 million. That is what the balance of hardships in the eBay case is about.28 You need to have that discretion. Now having said that, injunctions in the right case are terribly important, and in cases where you have urgent harm preliminary injunctions are terribly important. I will say, just to answer the easier question, because I know much less about it, I am totally persuaded by Edward here that yes, you need to have uniformity in preliminary injunctions in Europe. MR. ULLOA: Thank you. Mr. Justice, we would like to have your point of view on these two issues. MR. JUSTICE FLOYD: I agree that interim injunctions have their place. But of course, the only reason that you need a preliminary injunction is because of the law’s delay. If the law could come to an instant decision, it could decide whether you get an injunction or not based on whether the right is infringed or not. A slight concern I have about encouraging the use of preliminary injunctions in the new European patent court procedure is that every case could get bogged down with an application for a preliminary injunction and make the court’s procedures themselves more complicated than they need to be. In an ideal world, you have a very fast procedure that reaches a decision very quickly and you don’t need, except in very special cases, an interim injunction. So what I would say to Edward, I think, is that by all means incorporate this procedure into the European patent court procedure, but make sure that it is absolutely clear that it is not something that is to be applied for in every case; it is to be reserved to cases where there is real urgency or real risk of serious irreparable harm. The pharma industry is slightly a special case. The ordinary patent case, generally speaking, at least in the interim between commencement and trial, is about money, and money has a remarkable ability to place the patentee back in the position he would have been in if the infringer is taken off the market at the date of trial. Of course, if he is there forever it is a different matter. But if he is taken off the market at the date of trial and you give the patentee a good load of money on top, he is pretty much in the position that he would have been in if there had been no infringement. So subject to that, then I agree. MR. ULLOA: Thank you. Marleen? MS. VAN DEN HORST: Thank you. To address your first question, whether preliminary injunctions are possible and desirable, I think they are, because in situations of great urgency clients need to get a remedy and be able to prevent infringement. Since the Enforcement Directive29 we also know the ex parte preliminary injunction, which is a very quick remedy in very urgent cases and cases of quite clear-cut infringement. Then we have the inter partes preliminary injunction. Again, that is a very useful tool if infringement is quite clear and if you want quick relief. But we have also accelerated proceedings on the merits—and I agree with the other speakers, if you have proceedings in 28 eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006) (the “balance of hardships” is the third factor of the 4-factor test endorsed in eBay). 29 Enforcement Directive, supra note 22.

Part H: Injunctive Relief: A Comparative Analysis  203

place that go fairly quick and without delays, it could be possible not to choose the way of preliminary injunction but to go for what we call accelerated proceedings on the merits. In the Netherlands, if you follow that route, you can get an injunction on the merits, so to say, within the year. We have seen that since that proceeding is in place, it is used quite often. That brings me also to a question to the German colleague. I heard you say something like that whether it is preliminary injunctive relief or injunctive relief on the merits that it will stand until revised in a higher court. I was wondering whether you, as a consequence of TRIPs,30 do not have the problem that preliminary measures can only last if they are followed by proceedings on the merits. That development in the Netherlands caused, I think, parties to go for accelerated proceedings on the merits, because then they are done in one proceeding, without uncertainty and potential damages claims. So that is the first question, Mr. Ulloa. The second question you addressed is whether European harmonization would be favored by clients in the Netherlands or elsewhere. Personally, I would favor harmonization. I think that is beneficial for clients. But I also know situations where interests at stake are so high that sometimes the clients benefit from the fact that they lose in one jurisdiction and win in another. So in certain situations less harmonization can be beneficial for clients. MR. ULLOA: Felix? MR. RODIGER: On the preliminary injunction, we do have a rule of law that allows that the defendant may ask the claimant to file an ordinary action subsequently to the preliminary injunction. We thought that was sufficient to cope with the requirements under TRIPs. So it is not automatic, but the defendant may ask the claimant to do so. But in most cases the outcome of the preliminary injunction is accepted by the parties. There are not many cases where the claimant files on his own discretion right away action on the merits and preliminary injunction in parallel. But it is all up to him. He does not need to do so. MR. ULLOA: Please, Professor. PROF. GOLDEN: I just wanted to say, in partial response to George’s comments, that I think most people probably agree, and I would agree, that something like a balancing of hardships makes sense in the injunction context. Part of the problem with the eBay case was that strong concern with the balance of hardships wasn’t what the facts of that case suggested. The result has been a shift in attention to the irreparable harm issue, rather than the balance of hardships or undue hardship question, which could not be truly central under the facts of eBay because in that case eBay had said to the trial court that it would have cost them only about $10,000 or less to design around the patent.31 So eBay didn’t present the fact situation that George described. Indeed, the hardship from an injunction that the trial court originally found in eBay was that if an injunction were issued, the court would likely have to hold contempt proceedings to determine whether eBay’s subsequent conduct violated the injunction, and that would be too much hardship, apparently, for the court and the adjudged infringer to endure. So part of the problem with the eBay case was that, although I think George is right in terms of what the substance of the Supreme Court’s intent was—their concern really was with balance of hardships or public interest issues—part of the confusion and difficulty of eBay’s aftermath has occurred because the facts of the case did not match very well with what the Court, apparently at least somewhat as a matter of policy, was trying to accomplish. 30 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197, available at http://www.wto.org/english/tratop_e/ trips_e/t_agm0_e.htm [hereinafter TRIPs Agreement]. 31 See MercExchange, L.L.C. v. eBay, Inc., 275 F. Supp. 2d 695, 708 (E.D. Va. 2003).

204  CHAPTER IV: PATENT LAW MR. ULLOA: I want to take up a point which I think is important that has been mentioned by Justice Floyd. When we are talking about preliminary injunction, I am not sure whether in all jurisdictions it is clear whether that is an ordinary or extraordinary procedure. That goes to review whether there is an abuse in some jurisdictions of preliminary injunction. Justice Floyd was very right in saying that sometimes we go to preliminary injunction because justice is not quick enough and we cannot have a decision on the merits as quickly or as fast as we should have, so then we go to preliminary injunction. In Spain, in my country, preliminary injunction is an extraordinary procedure, and I think it is in most of the countries. That is considered like a general rule, except, as has been also mentioned here, for some areas, like the pharmaceutical industry. Of course, in many other circumstances, but the pharmaceutical industry is probably the one that, for the reasons that have been mentioned, has been considered as a special area of urgency. I would like to have the point of view of the audience and of the panelists about do you think in jurisdictions there is being an abuse of trying to have preliminary injunctions in cases which are urgent but not extraordinarily urgent because we believe that the normal court actions are slow? Is there somebody in the audience who would like to give their opinion on whether in their countries preliminary injunction is being abused, in the sense of being far too many, or panelists? MR. JUSTICE FLOYD: I don’t see much evidence of abuse of the interim injunction procedure. Interim injunctions in patent cases are quite rare nowadays because litigants recognize that— well, a number of facts—firstly, the need to prove some irreparable harm, which in most cases it is very difficult to do; and secondly, that the procedure on the merits, the substantive action on the merits, is relatively quick, so the irreparable harm is going to have to happen pretty quickly if you are to persuade the court that it needs to intervene by interim injunction. In countries where, for whatever reason, the procedure takes longer, you may have a stronger case on basically the same facts because the defendant will become far more well-established on the market by the time the trial comes along. So everything depends really on the particular set of legal and factual circumstances that the court is considering. MR. ULLOA: Felix, could we say that in Germany preliminary injunction is more often used? MR. RODIGER: Yes, it is nowadays. It was the absolute exception for decades. I really tried when I was younger several times and always lost. But in the last two years some change took place, and now it is far easier, and actually today you can really get a preliminary injunction granted. So my fear is that every claimant will say, “Well, if that remedy is available now, let’s try to do it.” The court then has to come up with certain preconditions for preliminary injunctions so they are not overloaded with all the preliminary injunctions and really do not have sufficient time. As it looks nowadays, they somehow seem able to cope with all that work. But there is certainly a certain danger that now every claimant will try the preliminary injunction, now that it is far more easily available than before. MR. ULLOA: What about in the United States, George? MR. BADENOCH: I think there are clearly cases—and you actually described one—where if you did not grant preliminary relief the result would be that, like a factory being built or something like that, the defendant would become established in the market and the chance to get the relief that the plaintiff really needed would be lost. In that situation, if he can show the standards for a preliminary injunction, he should get a preliminary injunction. As for the question of abuse, I don’t think it is that much anymore. Sometimes it is done because with a preliminary injunction motion you can put on the defendant intense litigation

Part H: Injunctive Relief: A Comparative Analysis  205

pressure and expense, because there will be a hearing, there will be urgent discovery, and all of that. So sometimes that will be abused by some plaintiffs who are trying to get a quick settlement. But I don’t think it is that common. If I can just make one other comment in response to what you said—and this is a little bit outside our room because it is a trademark point—it does happen that in the trademark area there is this sort of a presumption that if you really are being harmed by an infringing mark then you are being irreparably harmed. So you almost have to ask for a preliminary injunction in almost every case. That happens a lot. Very often the response is exactly what you say happens sometimes in Europe with patents: the court will then collapse the proceeding into an accelerated proceeding and just deal with the preliminary injunction and the final decision on the merits in one hearing. MR. ULLOA: There are two questions up there. QUESTION [Giovanni Casucci, Casucci Studio Legale, Milan]: Giovanni Casucci from Italy. My country, of course, is not very well known for the quickness of their proceedings in enforcement. Nevertheless I would like report that the election of the specialized IP section (twelve courts having IP exclusive jurisdiction in Italy) showed (in these 6 years of experience) the fact that now the IP judges in Italy prefer to deal with any IP issue through the preliminary injunction or preliminary measures. I don’t see on that any kind of abuse. I would like to see on the preliminary measure a sort of “self-defense” tool against the delay of the normal proceedings and civil procedure in Italy. So that is an advantage. But I would like to take this opportunity to comment about the risk of abuses of certain proceedings in the IP sector, much more significant in the patent field. I consider now a risk of abuse in not using specialized judges. I make reference especially about the implementation of the border seizures, when the confirmation of the seizures is not made through the civil proceeding but through a denunciation before the criminal authorities. Certain companies do not like to ask the confirmation of the seizure at the border through the civil judges but asking the intervention of public prosecutors that normally have no competence and experience about IP rights, and much less in patents. Such situation may drive to very easy and incompetent confirmations that, at the opposite, no one IP specialized Judge will never confirm. Another risk of abuse is to not allow the special proportionate tools that were talked about in the previous presentation that is even codified also in the Border Regulation of 2003.32 Article 14 offer a special exception for patent litigation in the case of seizure of allegedly infringing goods at the borders.33 In this particular case, the alleged infringer has the opportunity to pay a sort of security in order to guarantee the possible damages and collect back the products, provided that (at the moment) any judge did not issued an injunction. According to my knowledge no one Custom authority in EU ever applied such article. If the case would be reverted by the judges specializing in IP, the civil judge will be much more careful in order to assess a freezing of this kind of big seizure related to patents. A public Council Regulation 1383/2003, 2003 O.J. (L 196) 7 (EC). Id. Art. 14(1). In the case of goods suspected of infringing design rights, patents, supplementary protection certificates or plant variety rights, the declarant, owner, importer, holder or consignee of the goods shall be able to obtain the release of the goods or an end to their detention on provision of a security, provided that: (a) the customs office or department referred to in Article 9(1) has been notified, in accordance with Article 13(1), that a procedure has been initiated within the period provided for in Article 13(1) to establish whether an intellectual property right has been infringed under national law; (b) the authority empowered for this purpose has not authorised precautionary measures before the expiry of the time limit laid down in Article 13(1); (c) all customs formalities have been completed. 32 33

Id.

206  CHAPTER IV: PATENT LAW prosecutor never pays attention to that and the seizure for a patent allegedly infringed is issued with the same facility as a violation of a famous trademark in case of identical copy. So, in my opinion, this is a case that may drive to an abuse. Thank you very much. MR. ULLOA: Thank you. QUESTION: I’m Robert DeBerardine. I work for Sanofi Aventis. My question goes to the permanent injunction, not the preliminary injunction. There seems to be an overriding principle here that the panel hasn’t really discussed, which is the property right that you are granted is the remedy. So when you talk about a remedy as something separate from the property right, it really doesn’t make much sense, because the property right that you are granted is the right to exclude, which is an injunction. How does it make sense—and I throw this open to the panel—to talk about a weighing of hardship when the hardship would be taking away your property right? MR. ULLOA: We still have four minutes. Would you like to respond? MR. BADENOCH: I will start. If you take as a premise what you said, that the property right is the same as the remedy, then you are going to get to your answer. But the Supreme Court has said they are not the same,34 that you cannot assume because we define a patent right as a property right that you always automatically get the remedy of specific performance, which is in effect what the injunction is. The Court says you define a patent right as the right to exclude.35 That’s the nature of the right. If that right is violated, you are entitled to compensation and you may be entitled to equitable relief or specific performance of your property right. The problem is if you do not separate them and do that, then you have the case that I just described, where, for fortuitous reasons, because the patent came out five years after the airplane was built, you are now taking a $20 invention and you are fortuitously making it worth $1 million, for reasons having nothing to do with the invention. That is the abuse that goes the other way. QUESTIONER [Mr. DeBerardine]: But can’t you handle that situation by having the Court say: “What happened in the past you are compensated at $20 for the infringement and now you are enjoined from using that rivet in the future?” Why grant a compulsory license to that property right? MR. BADENOCH: Because if you do not you just gave that patent owner $1 million for a $20 invention. PROF. GOLDEN: I’d just like to jump in here. I think on this point George’s and my differences are more subtle than they might have seemed earlier. I think, even with real property, where the sense has been that you have a strong right to exclude, you would have your traditional cases where someone builds an entire building and it overlaps your property by one inch, or maybe a couple centimeters. It was just done inadvertently, not willfully. A court might very likely say in that case, “Well, we are not going to force the person to tear the entire building down just for this very small, incremental, and inadvertent infringement.” Doing otherwise could create the same hold-up or hold-out type of problem that George was talking about here, where you give the owner of the land, for just 34 eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388, 392 (2006) (“According to the Court of Appeals, this statutory right to exclude alone justifies its general rule in favor of permanent injunctive relief. But the creation of a right is distinct from the provision of remedies for violations of that right. Indeed, the Patent Act itself indicates that patents shall have the attributes of personal property ‘[s]ubject to the provisions of this title,’ including, presumably, the provision that injunctive relief ‘may’ issue only ‘in accordance with the principles of equity.’” (citing 35 U.S.C. § 261)). 35 Id. (“[T]he Patent Act also declares that ‘patents shall have … the right to exclude others from making, using, offering for sale, or selling the invention.’” (citing 35 U.S.C. § 154(a)(1))).

Part H: Injunctive Relief: A Comparative Analysis  207

this tiny bit of land, the ability to demand something essentially equivalent to the entire worth of the building or the cost of building a replacement. So this really is a kind of traditional equitable approach, even when you do recognize a property right. I do think where George and I may differ, although I’m not sure exactly how much on this, is I am more likely to say that, with respect to the part of the test going to whether there is a presumption of irreparable harm, the nature of the right at issue is relevant there and does for me give you some sense that a presumption of irreparable harm makes sense. But having some allowance for undue hardship or a balancing of hardships I think is just the traditional equitable approach for any kind of property right. MR. ULLOA: Just one more minute. MS. VAN DEN HORST: I like the question. I do think that the answer is different for the United States, at least compared to the Netherlands, where less strict tests and less elaborate tests exist and also equitable principles less apply. So a preliminary injunction or a final injunction can be obtained if you have a clear case of infringement on a valid right. MR. RODIGER: I do think for Europe we would have a different approach, because if you say the patent comes up five years later, as in your example, for us a patent can only be unpublished for eighteen months and from then on it is published and it is deemed that every infringer knows it. We do not have these things like you with submarine patents or continuation pod or having to send out a warning letter or for triple damages, whatever. Once the patent is published, it is deemed to be known. Therefore, we do not have this moral problem you seem to have there. Once it is published, the industry must cope with it and decide whether they want to infringe or not infringe. MR. ULLOA: Thank you. Time is up. Thank you very much to the panel.

Chapter IV

Patent Law Part I: A New “Fair Use” Doctrine for Patents? Moderator Gonzalo Ulloa y Suelves

Gómez-Acebo & Pombo (Madrid) Speaker Dan Ravicher

Executive Director, Public Patent Foundation; Lecturer in Law, Intellectual Property Law Program, Benjamin N. Cardozo School of Law (New York) Panelists Trevor Cook

Bird & Bird (London)

David Perkins

Milbank (London)

MR. ULLOA: New “Fair Use” Doctrine for Patents. We are going on for twelve minutes first, then some panel and audience discussion. One speaker, Dan Ravicher, and two panelists, Trevor Cook and David Perkins. I am going to ask David Perkins, who knows Dan, to introduce him. MR. PERKINS: Thanks so much, Gonzalo. We don’t actually know each other, but we have communicated by email and I do have some lowdown on him. This is a man who started off life at Skadden, Arps, and then he went on to Brobeck, and then Patterson, Belknap, and one day in 2003, on the road to Jericho, he saw the light and set up an organization called PUBPAT in New York, which is there to protect the public from patents that thwart rather than advance the public good.1 He has given Trevor Cook and me a great deal of homework to read. We were given an Oregon Law Review article from 2005, a Boston University School of Law article from 2000. 1 See Public Patent Found., Inc., http://www.pubpat.org/about (“The Public Patent Foundation at Benjamin N. Cardozo School of Law (“PUBPAT”) is a not-for-profit legal services organization whose mission is to protect freedom in the patent system.”).

210  CHAPTER IV: PATENT LAW I have run into serious trouble from she who shall be obeyed over the weekend by trying to read these things, which are about 150 pages. Without more, I am going to let him take over and not keep you from the Freshfields refreshments for too long. MR. RAVICHER: Yes, absolutely. Nobody wants to get to the reception more than I. With that, there will be no dissenting questions from the audience. Agreed? [Laughter] First, thank you very much, David. Thank you to Hugh, the organizers, and everyone who has worked to put on this conference. I always enjoy coming. It’s usually only a three-block commute instead of a red-eye and a train and everything else I had to do to get here. I did leave private practice, where I used to represent large electronics companies and pharmaceutical companies, brand-name pharmaceutical companies, and decided in 2003, although I loved my job and found it fulfilling, I thought there needed to be a public voice in the system. I grew up for part of my life in a county in Virginia, in the sticks of Virginia, that had one stop light and it rarely worked. In this part of the world people care about God and guns and less government. My perspective on patents is that the patent system is a form of government intervention in freedom and free markets. Every Monday night I go to bed a little sorrowful, knowing that I will wake up in the morning with 3,500 less things that I have the right to do. That is because on Tuesday mornings the Patent Office issues 3,500 patents, which I am not forbidden from treading upon because they’re now someone else’s property. I think, just like with our criminal justice system, which I believe in, we should have a public service voice to try to make sure the system works as correctly and fairly as possible. I believe in a marketplace of ideas where everybody should be heard and then through a deliberative democratized process we come to joint agreements on things. [Slide] So this is the mission of my organization. It sounds very nice, and it has helped me with fund raising. [Slide] So what do we do in actuality? If we find some patents that we think are undeserved or of questionable validity, we will undergo existing processes within the patent system to challenge them. We won’t just throw tomatoes at the patent holders. The other thing we do is advocate for what we see as the public interest in patent policy discussions. So the main event. [Slide] I cannot claim novelty on the idea of proposing a fair use for patents. If we look at both the copyright2 and trademark systems,3 we know that they already have fair use U.S. copyright law has a statutory fair use provision, 17 U.S.C. § 107. Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include: 1. the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; 2. the nature of the copyrighted work; 3. the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and 4. the effect of the use upon the potential market for or value of the copyrighted work. The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.

2

Id.

3 Descriptive use of a trademark is protected by nominative fair use. See New Kids on the Block v. News Am. Publ’g, Inc., 971 F.2d 302, 308 (9th Cir. 1992) (“Such nominative use of a mark-where the only word reasonably available to describe a particular thing is pressed into service-lies outside the strictures of trademark law.”).

PART I: A New “Fair Use” Doctrine for Patents?  211

exceptions that protect societal interests that are believed to be just slightly more important than property.4 At the same time, it is very critical to notice that a critical element of these fair use doctrines is that they are very narrowly tailored. They do not say that the asserted intellectual property right is invalid or categorically unenforceable. All we say is that some specific specified use of that intellectual property right is permissible. The IP right still stands as a valid interest of the owner to assert against other uses or other individuals. [Slide] The patent law does not have a fair use exception, at least not in the United States, per se. We do have a 271(e) exception for the creation of clinical data for submission to the Food and Drug Administration.5 The Supreme Court decision in Merck v. Integra Life Sciences expanded 271(e) to allow for some upstream innovation,6 but that is still pretty minimal and it is relegated just to pharmaceutical research. The only other fair use-type exception we have in the United States is Section 287, which says doctors cannot be sued for patent infringement for performing certain surgical operations on their patients.7 Other than that, there is very little of any type of exception in the United States patent law. [Slide] So there are some questions. The first one I ask is: Is there any type of research that would not be done by the patent holders themselves that might be of benefit to society? If we want to advance the state of the art, we would think, at least theoretically as an initial matter, as many people investing in research as possible will increase the amount of total advancement of the science. Now, there is a counter-effect, that if you allow anyone to do research on a patented thing, you will disincentivize people from making the initial investment on that patented thing because they will know there will be too many free riders on them when they do that. This is an interesting analysis. I pray frequently asking God to bring empirical analysis into the patent system. This would be a good issue for us to address. Would the net incentive increase for follow-on investment—such as by a competitor to the patent holder—be greater than the net decrease on initial investment in the patented thing itself? That’s an interesting question. I don’t purport to have an answer. 4 For example, the free speech rights protected by the First Amendment are considered important enough to limit exclusive rights to intellectual property in certain instances. U.S. Const amend. I. See, e.g., William McGeveran, “Rethinking Trademark Fair Use”, 94 Iowa L. Rev. 49, 100–03 (2008) (discussing cases applying First Amendment law as a constraint on trademark rights); William McGinty, “First Amendment Rights to Protected Expression: What Are the Traditional Contours of Copyright Law?”, 23 Berkeley Tech. L.J. 1099, 1112 (2008). But see Adrian Liu, “Copyright as Quasi-Public Property: Reinterpreting the Conflict Between Copyright and the First Amendment”, 18 Fordham Intell. Prop. Media & Ent. L.J. 383, 387 (2008) (“Copyright’s speech-limiting effects are justified by the broader and ultimately speech-enhancing purpose of encouraging the creation of copyrighted works.”). 5 35 U.S.C. § 271 (e)(1). It shall not be an act of infringement to make, use, offer to sell, or sell within the United States or import into the United States a patented invention (other than a new animal drug or veterinary biological product (as those terms are used in the Federal Food, Drug, and Cosmetic Act and the Act of March 4, 1913) which is primarily manufactured using recombinant DNA, recombinant RNA, hybridoma technology, or other processes involving site specific genetic manipulation techniques) solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs or veterinary biological products. Id. 6 Merck KGaA v. Integra Lifesciences I, Ltd., 545 U.S. 193, 207 (2005) (“Properly construed, § 271(e)(1) leaves adequate space for experimentation and failure on the road to regulatory approval … . [T]he use of a patented compound in experiments that are not themselves included in a ‘submission of information’ to the FDA does not, standing alone, render the use infringing.”). 7 35 U.S.C. § 287(c)(1) (“With respect to a medical practitioner’s performance of a [medical or surgical procedure on a body] that constitutes an infringement … this title shall not apply against the medical practitioner or against a related health care entity with respect to such medical activity.”).

212  CHAPTER IV: PATENT LAW What if we want independent analysis of safety or capabilities, or what if we want to allow people to criticize patented things? In the United States any making or using of a patented thing would be infringement.8 There is no exception for commentary or criticism or comparison data. I think this should be allowed. I personally think this should be a fair use. A patent holder should not be allowed to prevent people from criticizing their patented thing and doing whatever is required to do that. However, if you read Judge Newman’s dissent in the Federal Circuit decision in Integra v. Merck,9 you will see that she agrees with me but says there is a difference between research on a patented thing and research with a patented thing; whereas research on the patented thing should be allowed as a fair use or a common law research exception, simply using a patented thing to do research for something else—like if I am using a microscope to do research on stem cells—that shouldn’t fall within an exception for research because that is not actually trying to advance the state of the art with respect to microscopes. The other side of the coin on fair use that raises concerns for me is in civil liberties. How many people here think that it is impossible for a patent to infringe upon anyone’s civil rights? [Show of hands] Oh really? I have no convincing to do. Everyone is with me. So everyone here believes that patents can impinge on civil liberties. Okay. Having assumed that there may be some people who needed convincing, I brought some examples. [Slide] The first is a patent which I think may impede on the free speech rights of an individual. I’m not sure if you can see it on the screen. This is a patent on “a method and apparatus for delivering electronic advocacy messages.”10 I didn’t make this up, I promise. You’ll see that one of the preferred embodiments is actually a letter saying: “Dear Representative: As a constituent from your district and a strong supporter of children in public education, I urge you to vote against ___________.” This is a patentee having the express goal in mind to claim in their patent people who send advocacy messages to their representatives. That raises a potential concern to me if it was used in a way to prevent people from doing so. Let’s say this was a patent acquired by the Republican Party or the National Rifle Association and they asserted it against any party that was in support of the weapons ban or something like that. You see my point. This should not be conduct prohibited by a patent. Patents should not be used in a way to impede political advocacy. [Slide] Another civil liberty that I am concerned about is substantive due process or the right to privacy. Anyone want to hazard a guess as to what this patent covers? If you can’t read it, I would agree that’s pretty difficult. This is a patent on RU486,11 which is a commonly known and used method for a woman to exercise her right to have a pre-viability abortion. Now, whether you agree that is a civil liberty or not, our Supreme Court says it is.12 So this is a patent that if acquired by the Right-to-Life 8 See 35 U.S.C. §§ 154, 271; see also Coakwell v. United States, 372 F.2d 508, 510 (Ct. Cl. 1967) (“[A U.S. patent] is a grant of the right to exclude others from making, using, or selling patented invention for a limited period, and whoever without authority makes, uses or sells any patented invention during the term of the patent infringes it.”). 9 Integra Lifesciences I, Ltd. v. Merck KgaA, 331 F.3d 860, 872 (Fed. Cir. 2003) (Newman, J., concurring in part, dissenting in part). 10 U.S. Pat. No. 6,322,211 (issued Oct. 30, 2001). 11 U.S. Pat. No. 4,780,461 (issued Oct. 25, 1988). 12 See, e.g., Roe v. Wade, 410 U.S. 113 (1973) (recognizing the right to privacy as fundamental in context of abortion); Griswold v. Connecticut, 381 U.S. 479 (1965) (recognizing the right to privacy as fundamental in context of access to contraceptives).

PART I: A New “Fair Use” Doctrine for Patents?  213

coalition could be used to impede women from getting access to what may for them be the safest and most effective way to exercise their civil liberty. That raises concerns for me. [Slide] A third example of potential civil liberties concerns caused by the patent system is procedural due process. I don’t just mean here the fact that the little guy who gets sued for patent infringement can’t afford a lawyer to come and defend him. I mean literally direct due process. If there are any lawyers in the room who do not want to be put on notice for potential willful infringement, turn away now. The rest of you are now exposed to seeing an issued and valid patent called “Systems and Methods for Making Jury Selection Determinations.”13 You are a criminal defendant, you have been accused of a vicious crime which you did not commit. Your lawyer right before going to trial would like to use this method in preparing for your defense. But the patent is held by the United States government, or whoever, and they assert it against your defense attorney, saying, “You shall not use this method in the preparation of the defense of your client.” That raises a concern for me. [Slide] So what are some conclusions? I merely come here today to suggest the modest proposal that a concept of fair use for patent rights should be deliberated and discussed. I look forward to having a glass of wine with you and chatting about it. The second part is the fair use exception should be narrowly tailored. That is an important point. Remember I pointed that out about copyright and trademarks. It should be narrowly tailored. I am not talking about a loophole that succumbs the entire system. It should be narrowly tailored to maximize any potential social net benefits from third-party independent research. It should also be narrowly tailored to protect civil liberty interests. But at the same time it should maintain the incentives to innovate in those fields. We do not want to say that you’re not allowed to do any innovation related to abortion medication or abortion techniques, because any related patents would be allowed to be infringed ad infinitum, because then you are going to disincentivize anyone from conducting research in that area in the first place. Thirdly, the implementation of such a system would require a coherent process, one that, as I said earlier, includes voices of all affected parties, including patent holders and those against whom patents might be asserted. MR. ULLOA: Thank you very much. Trevor, I would like to have your point of view and then David’s point of view on this interesting approach. MR. COOK: Thanks very much, Dan. Yes, you have identified a number of issues which I think are a problem under U.S. law. That is a reflection of, firstly, the narrow interpretation you have of the common law experimental use defense in the States, which dates back to the Roche v. Bolar case14 and which was the impetus for your regulatory review defense. The guy who developed the common law experimental use defense in the States—Justice Story—was exactly the same guy who developed the fair use defense in relation to copyrights in the United States.15 It is a pity that the CAFC did away with it.16 U.S. Pat. No. 6,607,389 (issued Aug. 19, 2003). Roche Prods. Inc. v. Bolar Pharm. Co., 733 F.2d 858 (Fed. Cir. 1984) (common law experimental use defense). 15 See Whittemore v. Cutter, 29 F. Cas. 1120, 1121 (C.C.D. Mass. 1813). 16 In Roche v. Bolar, the Federal Circuit held that it was patent infringement to use, or sell a patented invention even the sole purpose was for developing information and conducting tests necessary to obtain regulatory approval. See Teva Pharms. USA, Inc. v. Abbott Labs., 301 F. Supp. 2d 819, 826–27 (N.D. Ill. 2004). 13 14

214  CHAPTER IV: PATENT LAW We have seen in the way in which its absence has stretched the regulatory review defense in the States into upstream research and the problems which have arisen from that. The other point, looking at your examples, is that I would characterize two of those patents as being pure business methods and not patentable in Europe. So what do we have in Europe? Well, I would say we do have a fair use defense for patents, only, in the same way as with copyright and with trademarks, we do not call what we have a fair use defense. We have a lot of specific defenses which together form a fair use defense. For patents one can exemplify the defense for use for private and noncommercial purposes. I think that would meet some of the civil liberties concerns. There is also a defense for experimental use in relation to the subject matter of the invention. There you’ve got the limitation in relation to the subject matter of the invention which provides scope to distinguish between research on, which is covered by the defense, and research using or with, which is not covered by it. We have that in just about every European country. We have also introduced a regulatory review defense, but it could be said we do not really need that. All of these things are consistent—or nobody has suggested that they are inconsistent—with TRIPs.17 TRIPs in Article 30 has a three-step test modeled on the copyright law,18 which you could characterize as permitting a fair use defense, and we avail ourselves of it in Europe. To close, the list is not necessarily closed. I have given a few examples. What I do notice from the latest draft of the Community Patent Regulation is a specific defense which is tailored to the development of interface information in connection with computer software,19 which interrelates to the Software Directive itself.20 So that is another proposal in that area. So I would say we have it sorted in Europe. MR. ULLOA: David. MR. PERKINS: I’m not sure what I can add. I seem to remember Trevor and I had lunch about two weeks ago and decided who was going to say what. He said nine-tenths of it, which is good news for all of you. I would only add one, which is compulsory licenses. Article 31 TRIPs is another check.21 17 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197, available at http://www.wto.org/english/tratop_e/ trips_e/t_agm0_e.htm [hereinafter TRIPs Agreement]. 18 See TRIPs Agreement, supra note 17, Art. 30 (“Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties.”) At the 1967 Stockholm Conference, the so-called three-step test of Berne Convention Art. 9(2) was introduced in international copyright law as a companion to the formal recognition of the general right of reproduction in Art. 9(1) of the Berne Convention. Berne Convention for the Protection of Literary and Artistic Works Art. 9.2, Sept. 9, 1886, 168 Parry’s T.S. 185, revised Nov. 13, 1908, 1 L.N.T.S. 218, revised June 2, 1928, 123 L.J.T.S. 233, revised June 26, 1948, 331 U.N.T.S. 217, revised July 14, 1967, 102 Stat. 2853, 828 U.N.T.S. 221. The three-step test reappeared in TRIPs Art. 13, and WCT Art. 10. See TRIPs Agreement, supra note 17; World Intellectual Property Organization Copyright Treaty (WCT), Dec. 20, 1996, S. Treaty Doc. No. 105-17, 36 I.L.M. 65. Under TRIPs Art. 13, member States shall confine limitations and exceptions (1) to “certain special cases,” (2) “which do not conflict with a normal exploitation of the work,” and (3) “do not unreasonably prejudice the legitimate interests of the right holder.” The three-step test has subsequently found its way, via WCT Art. 10, into Art. 5(5) of the European Copyright (Information Society) Directive of 2001, and from there into the national laws of some EU States. See Council Directive 2001/29/EC, on the harmonisation of certain aspects of copyright and related rights in the information society, June 22, 2001, O.J. (L 167) 10 (EC). 19 See European Commission, Internal Market, Industrial Property, Patents, http://ec.europa.eu/internal_market/ indprop/patent/index_en.htm (listing the draft proposals and press releases about the Community Patent Regulation). 20 Council Directive 91/250, Legal Protection of Computer Programs, 1991 O.J. (L 122) 42 (EC). 21 See TRIPs Agreement, supra note 17, Art. 31 (providing for a use without authorization from the patent right holder in certain cases, including “use by the government or third parties authorized by the government.”).

PART I: A New “Fair Use” Doctrine for Patents?  215

Yet another one is post-grant opposition at the EPO, which should weed out rubbish like those three that you showed up on the screen, if anybody can be bothered to oppose them. And then we have in the Enforcement Directive Article 12, which for innocent infringement gives the possibility of avoiding injunctions.22 Pretty difficult to find an innocent infringer, I think, as someone was saying not so long ago, with our early publication. And finally, I guess, patent pools, which offer so-called fair and reasonable and nondiscriminatory (FRAND) licenses. There are one or two people in the audience here who could probably comment on that. I am not being smug in Europe, but I do think we probably have more escape routes to protect the public interest than you do in the States. MR. ULLOA: Dan, is there anything you want to say after this? MR. RAVICHER: Does anyone have an apartment for sale in Europe? [Laughter] MR. ULLOA: Things are different from the European point of view than from the U.S. point of view on this issue, Dan. MR. RAVICHER: The Madey v. Duke case23 is the one that really pretty much gutted our common law research exception. Before that case people thought that there was a research exemption, and that case made it clear that there was not. MR. ULLOA: Any comments from the audience? We still have some time, but I realize it is late. If there are no further comments, thank you very much to the speaker and to the panelists.

22 Council Directive 2004/48, Art. 12, 2004 O.J. (L 157) 45 (EC) (providing for alternative measure if the party “acted unintentionally and without negligence, if execution of the measures in question would cause him/her disproportionate harm and if pecuniary compensation to the injured party appears reasonably satisfactory”). 23 Madey v. Duke Univ., 307 F. 3d 1351, 1362 (Fed. Cir. 2002) (“In short, regardless of whether a particular institution or entity is engaged in an endeavor for commercial gain, so long as the act is in furtherance of the alleged infringer’s legitimate business and is not solely for amusement, to satisfy idle curiosity, or for strictly philosophical inquiry, the act does not qualify for the very narrow and strictly limited experimental use defense.”).

Chapter IV

Patent Law Part J: Acquisition of Evidence & Expert Witnesses: Comparative Damages Moderator David Perkins

Milbank (London) Speakers

Hon. Mr. Justice Floyd

Hon. Robert van Peursem

Patents Court, Royal Courts of Justice (London)

Vice President, District Court, The Hague (Netherlands)

Dr. Klaus Grabinski

Eiji Katayama

Presiding Judge, District Court (Düsseldorf)

Abe, Ikubo & Katayama (Tokyo) Panelist

Prof. John M. Golden

University of Texas School of Law (Austin) MR. PERKINS: Good afternoon, everybody. We have on the program three topics: acquisition of evidence, expert witnesses, and, time permitting, damages. You have been introduced to two of our panelists before this morning, to Klaus Grabinski from Düsseldorf and Robert van Peursem from The Hague. Next to me is Christopher Floyd from the English Patents Court; Eiji Katayama, like me, a Fordham veteran and a mere practitioner; and, on the end, John Golden, who is a professor from the University of Texas School of Law, who is our panelist. Now, we are going to slightly reverse the order. We are going to let Eiji go first, because otherwise I fear he might be crowded out by the Europeans and be left with insufficient time, notwithstanding the wonderful software.

218  CHAPTER IV: PATENT LAW The Europeans, I hope, will take us through the differences, if any, which are now left in relation to acquisition of evidence after the Enforcement Directive.1 It seems to me there shouldn’t be too much difference between them, but we shall see how that turns out. So really, without holding this back anymore, I am going to hand you over to Eiji Katayama, who will lift the mysteries of Japanese patent procedure for us. MR. KATAYAMA: Thank you very much for the introduction. As I seem to be the only attorney as a speaker here, I would like to, using a concrete hypothetical case, show you how the Japanese lawyer will struggle with proof. I chose a certain telecommunication case because in these days in Japan too there are an increasing number of telecommunication patent infringement cases. Here the patent claim says “a certain signal processing method in the station for cell phone system.” Of course, you have much more details in the patent claim. But anyway, the plaintiff believes the defendant’s cell phone system infringes the plaintiff’s patent. On proof, there are two major issues under the Japanese practice: (1) In the absence of discovery in Japan, how can you prove a certain signal processing method in the station? That is the first one. (2) The second one is if, after all, you are successful in proving the infringement, what are the damages? And how can you prove the amount? In today’s telecommunication world, as you can imagine, almost all people have cell phones. So if you take the sales of monthly access fees, it will amount, even in Japan, to tens of billions of dollars. If one patent for a processing method is infringed, what is the damage for that? Here the Japanese courts very often use the concept of contribution of the patent to the damages.2 On the first issue, the proof of infringement is not the major theme of this panel, but I cannot but touch this, because it might be changing rapidly in Japan. In the past, the Japanese lawyer could play with the defendant about using a standard. The defendant says that its product is using technical standards so they must be using this patented method. But on the other hand—as I said to you, there is no discovery in Japan—there is a so-called production order of evidence, for example, in this case the production of the processing system description in the station, if it is (and probably it is) produced by a court order. But there is a certain very strong exception of this production order; that is, the defendant can reject by reason of trade secret—and there is always trade secret in patent cases. The Japanese Patent Law introduced a so-called protective order when filing the evidence to restrict, number one, people who can see it; number two, prohibit the people to disclose it or use it for other purposes. With this introduction of the protective order, can the defendant now reject the production of evidence or not? Their rejection reason was trade secret, but now trade secret is protected by the protective order. There is now yet a precedent touching this exact point, but the vast majority of the scholars say no, you cannot do that because of the introduction of the protective order. So that might change the world of the Japanese patent litigation very much. Moving to the damages, the same production order of the evidence is applicable. Here there is no opposition against production because the infringement has already been found. The 1 Council Directive 2004/48, Enforcement of Intellectual Property Rights, 2004 O.J. (L 195) 32–36 (EC), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2004:157:0045:0086:EN:PDF [hereinafter Enforcement Directive]. 2 On the contribution system for patent damages see generally Toshiko Takenaka, “Patent Infringement Damages in Japan and the United States: Will Increased Patent Infringement Damage Awards Revive the Japanese Economy?”, 2 Wash. U. J.L. & Pol’y 309 (2000).

Part J: Acquisition of Evidence & Expert Witnesses: Comparative Damages  219

Japanese system has kind of a two-phase examination of the infringement and the damages, and only after the court finds infringement do they move to the examination of the damages. The issue is how to calculate damages, especially the contribution of the patent, in this kind of cases. For example, you can imagine a case where a car with a special door, a certain invention of the car door. In this case, you cannot obtain the whole profit of the defendant or the plaintiff, so here there should be a certain ratio. Then, what kind of ratio, or what is the element of the contribution? The majority opinion in many cases says motivation to purchase. If you are motivated by the door to purchase the car, then probably the whole or substantial part of profit will be there. On the other hand, usually it is not. For example, if you are motivated by a strong engine for the car, then it might be the whole profit. That type of theory is here. Come back to the cell phone system. What is the contribution? Here you can easily imagine that the purchaser will not be aware about the processing system, so the motivation is not properly the case. Then what? The Japanese cases talked about various methods. Here is one of the cases, the nozzle case. It is putting a certain liquid into the bottle or into the container. The invention was about the nozzle. The court found about 20 percent contribution of the whole system. But the appeal court changed this rate to 10 percent. Here is the case called the massage machine case. In this case, the court found 95 percent contribution. The problem here is you have kind of a large variance of the percentage, and especially the profit in the billion-dollar case, what is a 1 percent response to this percentage? The similar thing we experienced in the remuneration of the employee invention. What is the ratio? Fifty percent, 10 percent, 5 percent, or 1 percent even? The courts and the lawyers are struggling. There is no right answer yet. I do not know whether this kind of contribution concept is right or not. You can say this kind of contribution in a negligence case, where the defendant’s negligence ratio is 50 percent, 30 percent, but if we are talking about 1 percent, 0.1 percent, then that will not work. Thank you very much. MR. PERKINS: I mentioned, I think, at the beginning that we have the Enforcement Directive in Europe of 2004, which basically has a number of provisions relating to obtaining evidence, relating to measures for preserving evidence, pretty close to the French saise,3 and the possibility of obtaining evidence of infringement from a non-party, again something fairly familiar to English lawyers.4 I have asked various members of the British court whether there is anything we have to change to implement the Directive. In true, good European style, the answer is: “Nothing. We’ve got it all already.” So now we can actually hear it from the horse’s mouth—sorry, you’re not the horse, Christopher, but you are going to give the next talk. MR. JUSTICE FLOYD: The answer is we have not changed very much in the light of the Enforcement Directive. There is a difference between countries like France, where the saisie is the way of starting a patent case, and the United Kingdom, where in the general run of case the evidence is obtained 3 “In France, it is common practice in almost every patent infringement case to obtain (additional) evidence with the help of a saisie-contrefaçon (or saisie). Even when there is already sufficient evidence, clients are often advised to obtain additional evidence in order to obtain an official statement of a court-appointed expert that can be used in court.” Jochen Bühling, “Obtaining Evidence When Preparing Patent Litigation”, Building IP Value, http://www. buildingipvalue.com/06EU/172_175.htm. 4 See Enforcement Directive, supra note 1, Arts. 6­–7.

220  CHAPTER IV: PATENT LAW as the case goes along. I am not here to argue that one way is better than the other. Both systems seem to work. I learned, for example, that in France there are over 600 saisies every year. That is the way it is done there, and it seems to work. Now, what are we in essence talking about? We are talking about how you acquire the knowledge that you do not have about the alleged infringement. So, just because it is in my hand, suppose the alleged infringement is this pen. There are certain things that you can tell by looking at it. You do not need elaborate court procedures for obtaining that information, provided you can buy one of the pens. But there is a whole range of situations where you do not have access to that knowledge. The court is there in appropriate cases to close the knowledge gap and to provide the patentee with what he needs to make out his case. The English approach, as I have said, is by documentary disclosure and to reserve more draconian remedies, such as the well-known Anton Piller order,5 for cases where there is concrete evidence that there is a risk that the material will disappear if the defendant is given notice of it. Now, the question that is always asked is: “Unless you have the evidence of all the features of your claim, how do you start the action at all?” Will the action not be struck out if you issue your claim form and serve it on the defendant without having concrete evidence of each of the features of the claim? That could be said to be the biggest criticism of an approach which says “let the evidence come out through the course of the action.” But, in their usual pragmatic approach, English courts on the whole have held that you do not need very much to be able to start your action. You need to be able to allege infringement in good faith and support your claim form by a statement of truth. But, in practical terms, striking out an action on the basis “you don’t know how my device works or how my process works or what I am doing in secret” is a very difficult application to make to the court. It runs into all kinds of difficulties. For example, the defendant can’t make an application to strike out and mislead the court as to what he is doing or what the company is doing. Merely saying “I don’t have this feature of the claim” may not be enough, because the patentee will respond, “Well, the claims are construed much more broadly than that,” and the court can’t possibly decide the correct construction of the claims at this early stage of the action. In practical terms, I find it very difficult to think of instances where a patent action has been successfully struck out on the grounds that there is no case of infringement made out at the early stage. So the action in practice gets underway as soon as the allegation of infringement is made. And then, standard disclosure follows. There are rules set out about how standard disclosure works. It all has to be very proportional, which is the catch phrase, proportionate, and there are sanctions on a defendant for failing to do disclosure properly. Disclosure works in two ways. One is it produces the material. But on the other hand, if a defendant is sitting on material that says that his pen works in this particular way, he may choose to admit that feature of the claim so that he doesn’t have to give disclosure. So it is a threat in terrorem that if he creates a whole raft of issues on infringement, the disclosure obligations will be correspondingly great and in many cases he will limit his non-admission of features down to things that really matter. 5 Anton Piller KG v. Mfg. Process Ltd., (1976) 1 All E.R. 779 (Eng. C.A. 1975). “The Anton Piller order is a pre-suit or pre-judgment discovery procedure that allows a person claiming intellectual property rights to search the premise of an alleged violator of those rights and to seize goods, materials, or documents that may later become evidence in a cause of action.” Andrea Morgan, “Comment, TRIPS to Thailand: The Act for the Establishment of and Procedure for Intellectual Property and International Trade Court”, 23 Fordham Int’l L.J. 795, 836 n.259 (2000).

Part J: Acquisition of Evidence & Expert Witnesses: Comparative Damages  221

You can in an appropriate case apply for pre-action disclosure—again, very rare in patent cases. The difficulty of it is it rather suggests that you don’t know whether the device infringes. You have to come clean and say, “We know features A, B, C, and D, but feature E we’re not really certain about.” Of course, if you fail to get your pre-action disclosure, then you may have committed yourself to a position which makes it look very clearly as if you are bringing the action speculatively, and you might have then invited the strike-out action. So very rare in patent cases. Evidence from non-parties either in the course of proceedings or by separate proceedings is possible. So why not do seizure instead? The experience with Anton Piller orders has been that the protections that have to be put in place to prevent abuse of preemptive procedures like that are so great that it makes it very expensive and sometimes less effective. The person who is independent and goes in to get the material may not know enough about the case to identify the relevant material. Again, the French experience shows that it does work. Again, I am not here to say that one is better than the other. That is topic one. Two minutes and thirty-four seconds to deal with expert evidence. The approach in England is to have party experts, not court-appointed experts, and to get them to reason why they say, for example, that the patent is not anticipated or not obvious or why they say it will be infringed. We are not so much interested in the assertion of obviousness. It’s no good an expert coming along and simply saying, “It would not have been obvious to me.” The first question that the court is interested in, the first part of his evidence the court is interested in, is why he says that. We get good experts and we get bad experts. As Hugh Laddie is in everybody’s memory at the moment, I can’t resist reminding you of the occasion when he met the really bad expert, called Mr. Goodall, in a copyright case,6 who had written an article in a journal very recently before coming along to give evidence in front of Sir Hugh Laddie.7 One of the things the article did was to set out what the expert regarded as the appropriate approach in preparing a report for use in litigation. He said in the article, which was put to him, and which he confirmed he had applied when preparing his report in the case in question: “How should the expert avoid becoming partisan in a process that makes no pretence of determining the truth”—that’s the court procedure he was talking about—“but seeks only to weigh the persuasive effect of arguments deployed by one adversary of the other? The man who works the three-card trick is not cheating, nor does he incur any moral opprobrium when he uses his sleight of hand to deceive the eye of the innocent rustic and to deny him the information he needs for a correct appraisal of what has gone on. The rustic does not have to join in, but if he chooses to he is fair game.”8 Needless to say, Mr. Justice Laddie regarded that expert as not doing his job. The experts we see in general are very good at their jobs and we rely on them heavily, and none of them, happily, that I have experienced have fallen into that category. MR. PERKINS: Thanks very much, Christopher. It just goes to show how you’ve got to prepare your expert in advance and beware of what he has written in the past. Now, there was once upon a time an advantage to bringing a patent action in England and Wales, and that was that if it was a process patent you could get documentary discovery in the course of the litigation, but in Germany that was a no-go area. But I am now reliably informed Cala Homes (South) Ltd. v. Alfred McAlpine Homes East Ltd., [1995] F.S.R. 818 (Ch.). See Kennedys, “Experts Behaving Badly”, The Key, Oct. 2008, at 6–7, available at http://www.kennedys-law. com/media/docs/TheKeyOctober2008_5122008.pdf. 8 “The Cala Homes Case and the Partisan Expert”, in Michael P. Reynolds, The Expert Witness in Construction Disputes 199­–201 (3d ed. 2002). 6 7

222  CHAPTER IV: PATENT LAW that that has changed. It changed before the Enforcement Directive. We will now be told by Klaus how incredibly up-to-date they are in Düsseldorf. JUDGE GRABINSKI: Thanks, David. My voice is not doing much better than this morning, but I hope it will work. The starting point is more or less the same like in the United Kingdom. You normally do not need acquisition of evidence because it is all on the table or on the market. You can analyze the product, you can refer to the information you get from the Internet, from product information, from whatever. So normally it boils down to very particular cases where acquisition of evidence is needed. One such situation is where a process patent is concerned and whether the process may be used by the possible infringer in a plant where the patent holder has no access to. Also, there may be the necessity to look at what the production machine looks like in order to establish whether there is infringement or now. Only in these particular situations you will get in Germany an order for the acquisition of evidence. Now, how is this done? First of all, the legal provisions. We had already in the law since 1919, but there has been restrictive case law from our Federal Supreme Court established in 1987, and during the 1990s virtually nothing happened in this regard. But there was a change at the beginning of the new millennium, in 2002, by the landmark decision, which is called the Faxkarte decision,9 and since then we already have this opportunity. Later the Enforcement Directive was implented to German law, we got a new provision in the German Patent Code, § 140c German Patent Code,10 but it did not change the case law or the practice very much. What are the requirements for a search order in Germany? • First of all, there has to be a certain likelihood of patent infringement which is based on facts. It should not be merely speculative. If it is merely speculative, an inspection order will not be issued. • Then, there are only limited requirements regarding validity. • There is proportionality, as already mentioned by Christopher, which means that there are essentially no other possibilities for the patent holder to get the evidence. • If intrusion into substance is needed, then it has to be balanced against the likelihood of the actual infringement. • And, of course, there is another requirement, the protection of confidential information in particular in the case of ex parte court orders, because you never know does the defendant infringe the patent or does he make use of secret know-how? In particular, you don’t know about this when you are in the ex parte situation. Now, what is the motion, the court order that can be received? First of all, the court will appoint an expert, normally a patent attorney. The court will order the expert to establish whether the patent claim, process claim or product claim is realized by the production machine, for example, of the defendant. But of course, if the court sends only the expert to the premises, then the defendant may deny access. So for this kind of situation there is also an order to the defendant that he opens his premises to the court-appointed expert. If the plaintiff requires this, it is also possible that plaintiff’s counsel—not the plaintiff himself, the plaintiff’s counsel—may be present at the inspection, but only under the condition that they keep all information confidential also vis-àvis the plaintiff. So this is a kind of protective order. Other orders you can get you see here on the slides. 9

German Federal Supreme Court (Bundesgerichshof), decision of May 2, 2002, 2003 IIC 331 (English translation). German Patent Code (Patentgesetz), May 5, 1936, § 140c, as amended, July 18, 1953.

10

Part J: Acquisition of Evidence & Expert Witnesses: Comparative Damages  223

After the inspection, the expert will deliver an opinion on whether there is an infringement or not. Then both sides will have the possibility to comment on the expert opinion. Then the court will decide whether the expert opinion will be made available also the plaintiff. The general rule is if the outcome is that there is a patent infringement, then it will be accessible to the plaintiff, and if the outcome is that there is no patent infringement and that the defendant has a vested interest in keeping the opinion secret, then it will be kept secret and the plaintiff’s counsel will have to keep silent for the rest of their life vis-à-vis their client. Of course, you can appeal the decision of the district court, and then it will go to the court of appeal. The decision of the court of appeal will be the final decision in inspection proceedings. No further appeal is available. Now I turn to the second subject, expert evidence. Expert evidence is taken to prove facts that are relevant for the judgment but contested between the parties. This is clear. Expert evidence in patent infringement cases is needed under two circumstances: first of all, claim construction and equivalents; and secondly, facts concerning the attacked product or process. Claim construction is how to construe the patent, how to interpret the patent, or whether there is an equivalent. And secondly, how does the attacked product look. Invalidity litigation it is the same. It is about claim construction and it is about nullity. Now, how to deal with this? Claim construction is, in principle, a question of law, so it is not open to expert evidence. But as you all know, a patent has to be interpreted from the perspective of the average person skilled in the art. So if the judge feels that he has to get more general knowledge about this kind of person, then he may take evidence in this regard, general knowledge and general experience. In the practice of the district court expert evidence in this regard is very rarely taken, but it is possible. But then, on the basis of this general knowledge, general abilities, it is for the judge to interpret the patent, not for the expert. Attacked product or process. These are the most cases where German courts take expert evidence in patent infringement cases. Take for example a chemical case where we had a patent claim and where it is provided that a certain reaction takes place. Then, first, the plaintiff has to prove that this reaction takes place by producing some reports that he made some experiments and so on. If he does so, then the defendant has to do the same experiments and also has to show reports. In this kind of situation the court may decide, “Now we have to take expert evidence and find out whether really the reaction takes place or not.” Exceptional shift of burden of proof, this sometimes works as well. If the evidence is, for example, only accessible to the plaintiff and the defendant has no access to it, the court may tell the plaintiff, “You have to produce the evidence unless we will shift the burden of proof.” I remind you of our fact, which is that at least in German proceedings parties are required to tell the truth to the court. If you do not do so, this can result in being prosecuted for fraudulent behavior. My time is up. Thank you very much for your attention. MR. PERKINS: Thanks, Klaus. Amongst the European jurisdictions, the pioneers were really Holland. They have always come up with the brightest ideas and the new wheezes. In default of a European patent litigation system, they came up with the cross-border injunction.11 It took about ten years before the Court of Justice managed to put an end to that.12 11 Courts in the Netherlands have granted cross-border injunctions based on foreign patents. See, e.g., Lincoln v. Interlas, Judgment of Nov. 24, 1989, HR, 1992 NJ 404 (Neth. S. Ct.); Applied Research Systems v. Organon, IER 1994, 57 (Hague Ct. of App. Feb. 1994); Philips v. Hemolgram, 1992 BIE, No. 80 (Hague Dist. Ct. Dec. 1991). 12 See Case C-4/03, GAT v. LuK, 2006 E.C.R. I-06509; Case C-593/03, Roche Nederland v. Primus, 2006 E.C.R. I-06535; see also Annette Kur, “A Farewell to Cross-Border Injunctions? The ECJ Decisions GAT v. LuK and Roche Nederland v. Primus and Goldenberg”, 37 Int’l Rev. Intell. Prop. & Competition L. 844, 849 (2006).

224  CHAPTER IV: PATENT LAW I am going to hand over to Robert now, who is going to give us something new, I think. JUDGE VAN PEURSEM: Thank you. Well, in this field we are not pioneering at all. We had to implement the Enforcement Directive. What I am going to talk about in the limited amount of time is two things. I leave damages for the Q&A time. I am going to talk about evidence and experts. After the implementation of the Enforcement Directive—and this is different from, for instance, the United Kingdom, Germany, and France—this is our way of dealing with it now: we have a two-stage evidence-collection proceeding. The first stage follows, in essence, Article 7 of the Enforcement Directive,13 which is the preservation stage; the evidence is put into custody. The second part is a request to get access to it, which follows Article 6 of the Enforcement Directive.14 The reason this was done like this by the Dutch Legislature is because the Enforcement Directive follows Part III of TRIPs, Articles 43–50 of the TRIPs Agreement.15 If we go to the first stage, the preservation stage or the description order, like in Germany, you have to submit reasonable available evidence of infringement. It is not a goal to get an expert opinion, like in the German system—or I should say Düsseldorf system because it was invented in Klaus’s court before the Enforcement Directive was even there. The test is then whether there is a sufficient likelihood of infringement or threat of infringement. That is relatively not too high a threshold to get such a court order. But I should say really France is beating us here still, because the success of the French saisie-contrefaçon by no means can tip on what you can achieve in Holland.16 So, I suppose, usually the route still will be to get a saisie in France and try to export that evidence. You need to satisfy the court. Mere speculation of infringement leads to rejection. It is ex parte, of course. You have to specify exactly what you are looking for. Fishing expeditions are discouraged. The requirements are more or less the same as in Germany. There is proportionality and subsidiarity. Can you manage without the order? Can you buy it or inspect it because it is on the market, which is usually the case? The court seeks to minimize the effects on the business of the defendant. The courts have full discretional power to implement these orders as properly as possible. Usually, everybody involved is placed under confidentiality orders. If the protection of confidential information is not safeguarded, the law says that you should reject. Of course, this is one of the discussion points in Holland. What I should say is sometimes when you expect problems you set a return date, like in England, where the parties can come up with all the problems they have encountered. There is a duty to cooperate. There is no contempt of court action possible in Holland, but the defendant must allow the bailiff access to all places, and the bailiff can enforce a court order with police assistance if required. He also can ultimately have people jailed by special court order if they keep obstructing. This has never been necessary so far. The legal practice in Holland is very much in development here. When you come to the second stage, the access to the evidence, that is a different proceeding. You are entitled to access only if you have legitimate interest, the law says, and establishing infringement for technical information constitutes legitimate interest. Basically this is in See Enforcement Directive, supra note 1, Art. 6­(measures for preserving evidence). See Enforcement Directive, supra note 1, Art. 5­(presentation of evidence, generally). 15 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197, available at http://www.wto.org/english/tratop_e/ trips_e/t_agm0_e.htm [hereinafter TRIPs Agreement]. 16 See supra note 5. 13 14

Part J: Acquisition of Evidence & Expert Witnesses: Comparative Damages  225

separate proceedings, possibly summary proceedings (kort geding) in Holland, but you can also do it as an interim claim in the main proceedings. If you are merely trying to get evidence for calculating damages and there is no infringement established, then you don’t get access. That was just last month one of the rulings of our court.17 So you have a distinction between types of information, you could say. If you need technical information to establish or to support infringement or nullity, access during or prior to the proceedings is more likely granted. When it is just commercial or accounting information that you are after, then you should wait until there is a ruling on validity by the court. There is a review possibility, of course. The defendant will initiate summary proceedings to have the order lifted. There is a risk of damages if in the end this is found to be unnecessary. A few minutes on experts. At patent proceedings—because we hardly ever need experts in other IP cases, but in patent proceedings we sometimes do—in Holland you can say you have two main forms of expert evidence: court-appointed experts, hardly ever used; and party expert witnesses, nearly always used. Last year at the Biannual Conference of Patent Judges in Bordeaux, I gave a talk why we use hardly ever Court-appointed experts. This talk will be published in a the Judges Conference Special Edition of the Official Journal of the EPO.18 You can read there what I’ll be summarising now. I will just go quickly through the reasons why we do not use courtappointed experts that often. The first thing is that we have specialized patent court judges in The Hague who do all the patent cases of the country and we have a highly regarded specialized patent bar. Second, in the majority of cases, it is just a very narrowly defined technical problem that is at issue. You are taught by the parties, who often provide technical primers. More importantly, I think, the judicial attitude is to try to fully understand the technology at hand, not leave it to technical experts. The judges want to understand. Very often, the party experts are at the hearing. We don’t bother with translation. We just ask them questions in English and they answer in English. The parties import all the evidence that is already available, for instance, from parallel proceedings abroad in English, or if they have an English expert you can just file English documents without translation facilities. That helps, I think. We also have a prosecution history file doctrine, so we inspect the file. We read all the technical discussions in the prosecution file, which can also help to understand the issues that are at hand. Of course, quite often there is parallel litigation at hand in Europe, alas, because we still do not have a proper European patent court. The last two points I already told you. We see frequently—I have seen so in the last month in a couple of cases—a “traveling circuit of party experts” so to speak “performing” in parallel proceedings, which is a disgrace I think. It is cost-enhancing. The parties use the system—and why not? I have been in private practice for ten years. I would encourage them to do so if it would be in the interest of the clients. But it is actually a shame. Let’s hope this will be put to an end by adopting a European patent court. Thank you very much. MR. PERKINS: Thank you much, Robert. Abbott Labs. v. Medtronic Inc., 2009 IEPT 0311 (District Court The Hague, Mar. 11, 2009). See Robert van Peursem, “The Role of the Expert in Patent Infringement and Revocation Proceedings in the Netherlands”, in 14th European Patent Judges’ Symposium, O.J. EPO Special Ed. 1/2009, at 102, available at http:// archive.epo.org/epo/pubs/oj009/05_09/special_edition_1_judges_symposium.pdf. 17 18

226  CHAPTER IV: PATENT LAW Now we have a panelist from the Lone Star State. I remember being on a panel once, and it was called “the international panel.” That was with Klaus. We had a judge from Houston. He said, “I am from the Lone Star State.” John, what lessons can we mere mortals in Europe and in Japan learn from U.S. patent practice? I’ve got three questions I would like to suggest that you might think about. Number 1, anything like the European saisie to obtain evidence of infringement? Number 2 is whether you ever use court-appointed experts, which I’d like to come back to. Number 3, the use of prosecution file estoppel, which we have just heard from Robert is used by the Dutch court, is not used by the English court—and I’d like to know from Klaus whether it is ever used in Düsseldorf—he is shaking his head “no.” JUDGE GRABINSKI: We follow the English courts. MR. PERKINS: Oh dear. Right. Okay. Over to you, John, if you could address those, and any other points which you think would be useful. MR. GOLDEN: My first reaction to being on this panel is to think back to my days in practice, and this all reminds me of why the sense was if you had a European client who was being subjected to the U.S. litigation process for the first time, their reaction was generally shock and horror at the way the U.S. discovery process for assembling evidence works. The processes here seem much more streamlined. I wonder whether this is partly because, as Judge Grabinski suggested, the information that is really relevant to European patent litigation is ordinarily public and doesn’t require something like U.S. discovery. If so, this might suggest that there is a threshold issue with the United States’ substantive legal rules, which can make a substantial amount of non-public information crucial to a case’s outcome. For example, whether patent applicants disclosed the best known mode for practicing their invention is relevant to whether a patent’s claims are valid, and there is a subjective aspect to whether the applicants disclosed the best mode known to them. Inequitable conduct, of course, is frequently a major issue in U.S. patent litigation,19 and also will involve an inquiry into the state of mind and the relevant knowledge of the inventors, and even the attorneys involved in the process of prosecuting the patent application. A first-to-invent approach to determining priority also involves inventor-specific factors. If you have a first-to-invent system rather than a first-to-file system, you might need to do a real historical inquiry to determine what the time of invention is, going through all the laboratory notebooks of those involved in that process.20 And further, if willfulness is going to be an issue with respect to damages, then you have to inquire into the infringer’s state of mind, which can involve looking through private documents to determine when the infringer became aware of the patent, and if the infringer was aware of the patent, whether the infringer held a credible belief that it was not infringing. So what the prior discussion indicated to me is that not only are there different procedural aspects to the way the systems work, but perhaps underlying substantive questions that U.S. litigation tends to raise also contribute to a discovery process that can cost parties several hundred thousand dollars even if, say, less than $1 million is at issue, a situation that from a cost-effectiveness perspective is kind of crazy. 19 See Mark A. Lemley, “Rational Ignorance at the Patent Office”, 95 Nw. U. L. Rev. 1495, 1502 (2001) (“Virtually every patent infringement lawsuit includes a claim that the patent is either invalid or unenforceable due to inequitable conduct (or commonly both).”). 20 See, e.g., Mark A. Lemley & Colleen V. Chien, “Are the U.S. Patent Priority Rules Really Necessary?”, 54 Hastings L.J. 1299 (2003) (discussing the merits of “first to file” systems, such as the one in the U.S., in contrast to “first to invent” systems found in Europe).

Part J: Acquisition of Evidence & Expert Witnesses: Comparative Damages  227

In any event, with regard to prosecution history estoppel, that has become a major tool by which courts in the United States control application of what is called the doctrine of equivalents.21 You construe the claims, which will determine whether there is literal infringement. Then there is a question of whether you can go beyond that. Part of the emphasis, I tend to think, on prosecution history estoppel has come about because of the emergence and rise of the jury in U.S. litigation. Before the 1970s, jury trials accounted for less than 10 percent, perhaps significantly less than 10 percent, of the cases that went to trial in the United States. Now they account for a substantial majority of cases that actually go to trial. I think the judges have reacted to this development in a number of ways that operate to limit or to channel the role of the jury. Prosecution history estoppel is one of those because it can eliminate the ability to invoke the doctrine of equivalents, which is generally a jury issue, whereas literal infringement is often going to be determined by a judge on summary judgment. Finally, regarding court-appointed experts, my sense is that in the United States they are very rare, which seems to be common throughout many jurisdictions. There was a recent Federal Circuit opinion, I think written by Judge Rader, who was here earlier today, where the Federal Circuit upheld the use of a court-appointed expert in the Northern District of California.22 Part of the objection by the party that lost after the court appointed the expert was that the expert’s involvement infringed the party’s right to a jury trial; indeed, before appointing the expert, the district court judge appeared to have suggested that how the expert came out would likely influence significantly how the jury would come out. What apparently helped the Federal Circuit to uphold or to decline to follow the argument that the jury trial right was infringed was the fact that the jury didn’t follow the expert across the board. They found claims obvious that the expert hadn’t said were obvious. They had certain differences on what claims were infringed according to the doctrine of equivalents.23 In any event, I think that court-appointed experts tend to be very rare. There is particular concern, I think, about a court-appointed expert being excessively influential when you have a jury, as was the case in the Northern District of California trial, that is told by the judge that the court-appointed expert is an “independent” expert, as opposed, apparently, to the “dependent” experts otherwise put forth by the parties.24 But court-appointed experts remain possible within the district court judge’s discretion. MR. PERKINS: Thank you. I must say in my limited experience of experts in the United Kingdom the concern is with the discussions that go on behind closed doors the parties are not part of. In one case I was involved in many years ago, one of the experts who was cross-examined in his evidence was not shaken under cross-examination, but in the judgment of the court of appeal the judge said, “Like the burglar’s alibi, Professor X’s evidence just didn’t ring true.” There was nothing he could base it on. It’s clearly what the two experts had said behind closed doors, “That’s bunk,” which I think is something of concern. But you don’t have that in Germany because you have the report. What is the criterion for appointing a court expert? Is it complexity of subject matter, Klaus, or what? 21 See Michael J. Meurer & Craig Allen Nard, “Invention, Refinement and Patent Claim Scope: A New Perspective on the Doctrine of Equivalents”, 93 Geo. L.J. 1947, 1950 (2005); see also Tate Access Floors, Inc. v. Interface Architectural Res., Inc., 279 F.3d 1357, 1367 (Fed. Cir. 2002) (“The doctrine of equivalents expands the reach of claims beyond their literal language.”). 22 See Monolithic Power Sys., Inc. v. O2 Micro Int’l Ltd., 558 F.3d 1341 (Fed. Cir. 2009). 23 See id. at 1348. 24 Monolithic Power Sys., Inc. v. O2 Micro Int’l Ltd., Nos. C 04-2000 CW & C 06-2929 CW, 2007 WL 3231709 (N.D. Cal., Oct. 30, 2007).

228  CHAPTER IV: PATENT LAW JUDGE GRABINSKI: Generally we appoint experts with regard to facts. As I mentioned in my example, we require the parties first to bring all the facts that are available to them. If on this basis we cannot decide the case, then we will appoint an expert. But there is nothing secret in it. We appoint an expert. We ask both parties to make suggestions, and normally we follow the suggestion of the party that has the burden of proof. But of course this expert has to be a neutral expert. He has to have no relationship whatsoever with both of the parties. Normally, it is a university professor. Then the expert gives his opinion. This opinion is sent to the parties. Both parties have the possibility to comment by written statements. If they want it, or the court feels that this is necessary, then there is a hearing with the expert, and then there is an examination. In the hearing the expert is first examined by the judges, normally by the presiding judge, and then both parties get the occasion to also ask questions, interrogate the expert. This is also a kind of cross-examination, if you like. Of course, also the party that may lose the case according to the written opinion of the expert has the possibility to ask all the questions they like with regard to the expert. On this basis the court then decides the case. And it is all out in the open, completely open, nothing behind the curtains. MR. JUSTICE FLOYD: It’s true to say that in England the use of court-appointed experts has been mainly in the appellate courts: the Court of Appeal and the House of Lords. The reason for appointing them, I think, on the whole has been to help the court to understand the technology of the case. For example, in one of the biotech appeals that went to the House of Lords, the House of Lords had a teach-in with an independent professor for several days before the case started. I do understand that people are concerned about what goes on behind closed doors, and it is very important that transparency is maintained. But short of inviting the parties to come along to the teach-in and sit there whilst the judges are taught, there is not really any way around that if you want judges to take at the appellate level to take technically correct decisions. You do, in fact, have to trust your judges to get it right and not to be influenced by external factors over the entirety of the issues that they have to decide. This is really just one more aspect of that. In the cases in which experts have been employed, the courts have said that they found them very helpful and they found the cases lasted less long and have been easier to understand as a result. I do understand the concerns. Lord Hoffmann, when faced with that exact question about whether it was fair to have this teach-in, said that he was perfectly happy for the parties to come along as long as they shut up. MR. PERKINS: Thank you. I’ve got one quick question and then we’ll open it up in the remaining few minutes. QUESTION [Edward Nodder, Bristows, London]: Can I just comment on that topic, because one way of overcoming the concern about what goes on behind closed doors is to say yes to the teach-in, do the teach-in by way of a primer or a document or something that everybody can see and everybody can read. Would you like to comment on that, Christopher, as to whether that would be useful? MR. JUSTICE FLOYD: Primers would probably have been prepared for the trial at first instance and they are available. But there is a level above that, which is the interactive learning process, when you can actually ask questions of an independent person. Of course, the Court of Appeal and the House of Lords do not have that opportunity in court to sort things out, which the trial judge does. That is the reason for giving them a bit more slack.

Part J: Acquisition of Evidence & Expert Witnesses: Comparative Damages  229 MR. PERKINS: I have one question for you, and it is for the European Judges, something that exercises me. Now we have harmonized measures for acquisition of evidence, for obtaining evidence, how about issue estoppel, issues that one court, let’s say, finds common general knowledge at the priority date is A, B, C, evidence of whether a prior use took place, evidence of the construction of the accused product or how the accused process works? Would any of the three of you like to say a few words? Do you adopt findings of fact from the court which has tried the case first, or do you investigate the facts de novo yourselves? JUDGE VAN PEURSEM: I’m afraid that’s not possible within our system. It concerns in fact different cases from country to country. They concern the same European Patent that was granted in Munich, but that’s about it. It’s illusive to think that you can because the cases are very often not completely parallel. We call them parallel cases, but the evidence on the table is different in practice. MR. PERKINS: But a prior use is a prior use, isn’t it? JUDGE VAN PEURSEM: We handed down a judgment overturning, so to speak, a judgment made by the English courts, and we explained why, because the evidence we had was completely different. What can you do? It’s a different proceeding. JUDGE GRABINSKI: I would agree with Robert. But I can imagine cases where evidence from other countries complements evidence that was given in Germany, for example. Or, as I mentioned before, for getting an inspection order the facts that you submit to the court should not be merely speculative. One way to have the facts be not merely speculative is to say, for example, “Well, the attacked embodiment in France looks like this, and so it is quite probably that it looks the same in Germany.” This may get the evidence a bit further down the road, or at least triggers an inspection order in Germany so that we find out what is the case in Germany. It is no longer merely speculative. MR. PERKINS: Thanks. Four minutes to go. Any questions from the floor? QUESTION: Thank you. Justin Watts of Freshfields. Now that we have infringement discovery effectively available throughout Europe, is there any reason to maintain a rule that says that disclosure given in one jurisdiction should only be used for that litigation, or should we open that up? And, having opened it up for infringement, out of interests of fairness to litigants, shouldn’t we do the same on validity disclosure as well? MR. PERKINS: Good question. MR. JUSTICE FLOYD: Perhaps I could have a go at that. There is no absolute rule so far as England is concerned that disclosure obtained for one case cannot be used in another. The court has discretion over the documents that are disclosed and in an appropriate case can release them for other uses. The Halcon v. Shell case25 in the 1979 was the case of an application to use documents that had been disclosed under the English disclosure procedures for the purposes of proceedings in Holland. The reason that application was refused was because there are no corresponding procedures in Holland, and therefore it would give litigants in that country an unfair advantage to receive those documents when otherwise it would not. Once you have a more harmonized approach to the obtaining of evidence, objections of that kind would disappear. But I would be reluctant to see the rule disappear altogether, because the court would want to keep control over the use of its procedures for purposes which are collateral to the primary purpose for which the documents are disclosed. MR. PERKINS: Thank you, Christopher. Any others? We have two minutes. 25

Halcon Int’l, Inc. v. Shell Transport & Trading Co., [1979] R.P.C. 97.

230  CHAPTER IV: PATENT LAW In the remaining two minutes, I would like to ask Klaus to explain to me what he was telling me just outside, about there is the Regulation that courts of Member States within the European Union should give assistance to each other in the obtaining of evidence. He was telling me the story of a request from an Italian court that was not received terribly well in the United Kingdom. JUDGE GRABINSKI: You are referring to the evidence regulation? MR. PERKINS: Yes. JUDGE GRABINSKI: This was a quite interesting case that concerned the descrizione.26 It is an Italian saisie one can say. They simply send out the bailiff in order to establish whether a certain product infringes a patent or not. They did so in the “Tedesco case”27 to which I am refering now. It was a judge from Genova. They could not establish an infringement in the Italian descrizione proceedings. But the plaintiff suggested that they might gain evidence from a company affiliated with the Italian company in the United Kingdom. Therefore, the Italian judge issued a request for getting evidence assistance from the U.K. judicial authority. MR. PERKINS: To perform a descrizione in England? JUDGE GRABINSKI: To perform a descrizione in England, yes. But the English authority was quite restrictive to this request and they rejected this. The Italian judge was not very much impressed and he went to the ECJ. At the ECJ the general advocate, which was a German lady in this case, supported the position of the Italian judge, saying that the judicial authority of one state has to assist the authority of another state if such a request under this European law gets in, have to assist, and if they do not know something like the descrizione, then they have to apply what they know, which goes as narrow as possible. What is also quite interesting is they also touched upon the question of whether it would have been possible in order to gain evidence for an Italian patent infringement proceeding to go directly to the U.K. court. In this regard, the advocate general said this would not have been possible under the jurisdiction of the ECJ referring to the decision of the ECJ in St. Paul Dairy Industries.28 If you want to give evidence with regard to the infringement in one country and the evidence is situated in a different country, you have to start your proceeding in the country where the infringement has taken place. MR. PERKINS: Very good. It just goes to show what everybody always thought, that the United Kingdom is technically not part of the European Union. Gentlemen, thank you very much indeed.

Descrizione, Legge Brevetti, Italian Patent Act § 81. Case C-175/06, Alessandro Tedesco v. Tomasoni Fittings SrL. RWO Marine Equipment Ltd., 2006 O.J. (C 154) 17. 28 Case C-104/03, St. Paul Dairy Indus. NV v. Unibel Exser BVBA, available at http://curia.europa.eu/common/ recdoc/convention/gemdoc2005/pdf/06-z-en-05.pdf. 26 27

Chapter IV

Patent Law Part K: Monetization of Patent and Other IP Rights Moderator David S. Bloch

Winston & Strawn LLP (San Francisco) Speakers David S. Bloch

Joel Lutzker

Winston & Strawn LLP (San Francisco)

Ocean Tomo LLC (Greenwich, CT) James G. McEwen

Stein McEwen LLP (Washington, D.C.) Panelist Dr. Roya Ghafele

Oxford University

MR. BLOCH: Ladies and gentlemen, it is a little bit after 7:30, Hugh having decided that we were going to do these breakfast roundtables—which actually look very much like lecture halls to me—and also having decided to start at 7:30, which required four or five cups of coffee before arriving this morning. My name is Dave Bloch. I’m a partner at Winston & Strawn. We are going to be talking today about the monetization of patent and other IP rights. I’d like to introduce my fellow panelists first, then I will try to set the stage here. Directly to my left is Joel Lutzker. He is the General Counsel of Ocean Tomo. He will be telling you more about Ocean Tomo. He is also the Patent and Enforcement Counsel for Ocean Tomo’s new subsidiary, The IP Exchange, which is one of the more interesting new ventures that Ocean Tomo is doing in the field of monetization. To Joe’s left is James McEwen, a partner at Stein McEwen specializing in patent prosecution. And then, at the end of table is Roya Ghafele, who is a lecturer at Oxford University.

232  CHAPTER IV: PATENT LAW I’d like to spend a couple minutes setting the stage here. Historically, patents were aligned with other forms of intellectual property, in that they were basically a vehicle to protect something that was intended to be practiced. In the patent system as it existed for most of the history of patent law, an inventor would invent something in order that that thing be used.1 So a company would try to come up with some new invention and it would actually practice that invention. That was the whole idea. Indeed, the whole IP bargain was you invent something, you disclose how you made it, and in exchange you get a patent on it and some limited form of monopoly power. That aligned patents in important ways with other forms of intellectual property. There’s no such thing as a copyright troll, right? You don’t write a screenplay, stick it in a drawer, and hope somebody else writes the same screenplay ten years later so you can sue them. By definition, access is part of the infringement analysis. You need to be able to show that somebody saw your screenplay before you can sue him over it. Independent creation is an absolute defense in copyright law. So you need to publish your work, not merely write it down, stick it in a drawer, and hope somebody else practices it later. And similarly, trademarks, by definition, must be used. Even in places where it is registration rather than use, that determines priority, it’s a sine qua non that you still need to be actually using your trademark. You can’t register something and stick it in your back pocket. In the early years of the Internet, of course, there were cybersquatters who would register domain names, say, “Aha, now I own this,” and then try to hold up companies that actually used the trademarks. But now it is pretty clear that cybersquatting is a trademark use2 and you can compulsorily transfer a domain name from the cybersquatter to the actual trademark owner.3 So there is really no such thing as a trademark troll either, although I think to a certain extent the cybersquatters would qualify. There has, however, been a sea change in the field of patents in particular. I date this to the creation of the Federal Circuit,4 because at that point you do see a substantial rise in the number of patents and in the value of patent judgments. Both of those are basically proxies for the idea that patents became more fungible, and therefore more valuable, which created business models that did not rely upon Ford patenting a new windshield wiper and then making the new windshield wiper, or for that matter an independent inventor coming up with a new windshield wiper and going to Ford and trying to get them to practice the invention. So you do see at least the beginnings, after 1982, of companies that start holding patents for their own sake, the way IBM did or RAND did or, especially in the case of semiconductor 1 John R. Allison & Mark A. Lemley, “The Growing Complexity of the United States Patent System”, 82 B.U. L. Rev. 77, 93 tbl.1 (2002) (historically, mechanical inventions made up the vast majority of U.S. patents). The Supreme Court established the lack of a working requirement in the 1908 decision Continental Paper Bag v. Eastern Paper Bag Co., 210 U.S. 405, 429 (1908) (holding patents covering goods not in production were valid), which then opened the door to defensive patenting. See Allison & Lemley, supra, at 93; David C. Mowery & Nathan Rosenberg, Paths of Innovation: Technological Change in 20th-Century America 17 (Cambridge Univ. Press 1998). 2 See J. Thomas McCarthy, McCarthy on Trademarks, § 25:77 (1998) (describing how the meaning of “trademark use” was manipulated in early cybersquatting cases, to broaden it enough to “reach the reprehensible actions of a cybersquatter”); Jennifer Golinveaux, “What’s in a Domain Name: Is ‘Cybersquatting’ Trademark Dilution?”, 33 U.S.F. L. Rev. 641, 652 (1999) (noting that it is commonplace for a cybersquatter to retain a domain name without ever using it commercially, and therefore avoiding a situation whereby consumers are confused as to the source of goods and services or sponsorship by the actual trademark owner). 3 If the court establishes bad-faith on the part of the cybersquatter who registered the name, it can also forfeit, cancel, or transfer the domain name to the owner of the mark. See 15 U.S.C. § 1125(d)(1)(C) (2000); see also Anticybersquatting Consumer Protection Act, Pub. L. No. 106-113, §§ 3002–03, 13 Stat. 1501, 1537 (1999) (codified at 15 U.S.C. § 1051 et seq.); S. Rep. No. 106-140, at 7 (1999) (“[ACPA provides] clarity in the law for trademark owners by prohibiting the bad-faith and abusive registration of distinctive marks as Internet domain names with the intent to profit from the goodwill associated with such marks.”). 4 The Federal Circuit was created in 1982 with the legislative intent to make patent law and its enforcement uniform and consistent. See H.R. REP. NO. 97-312, at 20–21 (1981), reprinted in 1982 U.S.C.C.A.N. 11, 30–31.

Part K: Monetization of Patent and Other IP Rights  233

companies, coming up with IP that they intend solely to license. Rambus is a classic company in that respect, but there are a number of others. There are four related phenomena that arise out of this.5 First, post-1982 you saw the rise of patent brokerage houses. These are companies that are basically playing market maker. They are saying: “Okay, you’ve got a patent that you want to monetize, that you want to sell. We will go out, act as sort of investment bankers, try to find potential investors, potential buyers. We’ll come up with a portfolio and a book and we’ll actually try to make the market for you.” The problem with that is that it is highly human-capital–intensive. It requires you to personally go out—you’re an investment banker, you’re a broker—and try to find potential buyers and sell those potential buyers on this particular patent. It’s not a transparent market by any stretch, and it’s a highly personal market, which limits the number of people that can really participate. You have to have patents with a fairly high threshold of value, with fairly well-defined potential users and potential buyers. So there is an organic limit to what you can do with the brokerage model. From the brokerage models come the auction and securitization companies. I’m not going to spend a lot of time on those because we have the premier patent auction company in the world directly to my left and we are going to hear a fair amount about what Ocean Tomo is doing both with the auctions, which have met with mixed success,6 but also the creation of other forms of secured IP assets. Joel will be talking about the IP Exchange, which is essentially a vehicle for securitization of patents, the creation of new financial vehicles with patents at their core. A very, very interesting idea.7 Third, you have seen the rise of patent aggregators. Now, the patent aggregators are basically reactions to the patent troll phenomenon. These are entities that are going and buying up patents for defensive purposes.8 They pursue defensive purposes in two distinct but related ways. First, they are simply taking patents off the market that might otherwise be asserted against members. RPX, the Rational Patent Exchange, has basically been going around to forums like Ocean Tomo, has been going to organizations like IPotential,9 like these patent brokerages, finding patents in spaces where their members, their investors, are also working—you know, telecoms, semiconductors, things like this—and buying up the patents themselves so they cannot be asserted against members. 5 See Allen W. Wang, “Rise of the Patent Intermediaries”, 25 Berkeley Tech. L.J. 159, 166 (2010) (categorizing IP intermediaries in three broad groups: “(1) brokers, who play a bridging or market-making role for producers and consumers of intellectual property; (2) defensive aggregators, who acquire patents to provide their subscribers with freedom of operation and safety from litigation; and (3) offensive aggregators, who develop and acquire patents to realize revenue through licensing or asserting their portfolios.”). 6 See Joe Mullin, “Bummer Before the Summer: Ocean Tomo Auction a Bust”, Law.com: IP Law & Business, Mar. 29, 2009, http://www.law.com/jsp/article.jsp?id=1202429504127. 7 Patents are traditionally thought of as a right to exclude others from practicing the patent, but may also be described as a right to a potential future series of cash flows, enabling a securitization. See Alexander K. Arrow, “Managing IP Financial Assets: Principles From the Securities Market”, in From Ideas To Assets: Investing Wisely in Intellectual Property 111, 117 (Bruce Berman ed., John Wiley & Sons, Inc. 2002). Patent securitization is not as common as trademark securitization, possibly because patents contain intrinsic risks that trademarks do not, and that while copyright securitization is feasible, it would require due diligence which would increase securitization costs. See Ariel Glasner, “Making Something Out of ‘Nothing’ The Trend Towards Securitizing Intellectual Property and the Legal Obstacles That Remain”, 3 J. Legal Tech. Risk Mgmt. 27, 28, 48, 63 (2008). Some commentators have suggested that the economic crash (brought on in the U.S. in part due to mortgage-backed securities) has ruined whatever potential market existed beforehand for patent royalty-backed securities. See Aleksandar Nikolic, “Securitization of Patents and its Continued Viability in Light of the Current Economic Conditions”, 19 Alb. L.J. Sci. & Tech. 393, 405–08 (2009). 8 See Wang, supra note 5, at 171­–77 (describing defensive aggregators). 9 iPotential, http://www.ipotential.com. Three main services are offered: IP strategic consulting, a patent brokerage, and licensing. “iPotential consults on how to use intellectual property assets offensively as well as how to respond to asserted patents, including acquiring patents through the brokerage service for defensive purposes.” Wang, supra note 5, at 170.

234  CHAPTER IV: PATENT LAW They have an odd business model, where they are pricing access to this large portfolio that they are developing. But they are pricing access not for the same defensive purposes that companies historically bought patents. There was a time when you would have this huge portfolio of your own so you could assert it against your competitors and act as something of a porcupine, so they couldn’t sue you because you could turn around and sue them—“You sue me for patent infringement, I’ve got four patents I will assert against you.” So, of course, everyone puts the gun down at that point. Now, the patent trolls, of course, do not have that problem. They don’t actually make anything or do anything. They are pure monetizers. The second role of the patent aggregator, which is to create this defensive portfolio that you can use against your enemies, doesn’t really have any applicability to patent trolls. But the idea that you are absorbing patents, taking them off the market, still applies. RPX10 is doing reasonably well because companies see the value in taking some of these patents off the market, and doing so in a pooled fashion rather than individually. If you have ten companies in the telecom space getting together, each put in $1 million, you can buy a decent number of patents that would otherwise be asserted against the industry with that kind of money, and it is probably cheaper than settling these ten times. Finally, there are patent holding companies. They are a little bit mysterious. Intellectual Ventures is incredibly well funded and has an enormous portfolio of patents.11 It is not at all clear what they are going to do with them. They say, and I quote: “At Intellectual Ventures we are empowering the next generation of Bells and Einsteins by highlighting the business of invention and providing a means for inventors to be fairly compensated for their work.”12 At the moment, that “fair compensation for their work” consists of some guy who’s got a bunch of Microsoft stock paying them. They haven’t started suing people, so they are not acting as trolls. They haven’t started spinning out companies with IP as a core asset, so they’re not actually starting start-up ventures that are well-capitalized with IP. All they are doing right now is collecting patents. At some point, they are going to have to do something with those patents, or else it’s the world’s dumbest business model—“I’m going to get a bunch of patents and stick them in this drawer. This is fabulous.” There’s got to be something in their minds. But they have been pretty cagey about what exactly they are doing with what is now an IBM-sized portfolio of high-quality patents. And they actually employ researchers too. There are people up in Seattle at Intellectual Ventures coming up with magic shoes and stuff like this and patenting them, but not actually doing anything with them yet. So they are an example of an entity that is clearly interested in the monetization space but hasn’t yet come out of the shadows and started executing its business plan. We’ll talk a little bit about non-practicing entities as the talk goes on because they are highly relevant to what Ocean Tomo and IPX do. Fourth, the other important phenomenon that we are seeing now in connection with monetization is that patent prosecution has changed. Mr. McEwen is going to talk about the ways it has changed. You are now patenting things differently because there are ways to monetize patents that did not exist twenty years ago. We are in the situation where you 10 RPX Corp., http://www.rpxcorp.com. The Rational Patent Exchange (RPX) obtains bundles of patent rights— either licenses or patents themselves—and then licenses its membership for an annual fee. See Wang, supra note 5, at 176. 11 Intellectual Ventures Management, LLC, http://www.intellectualventures.com/. As of June 2009, Intellectual Ventures held nearly 27,000 patents and has begun seeking profitable licenses by targeting technology companies. See Zusha Elinson, “Intuit Taxed $120 Million by Intellectual Ventures”, Law.com: IP Law & Business, June 24, 2009, http://www.law.com/jsp/iplawandbusiness/PubArticleIPLB.jsp?id=1202431731346. 12 Intellectual Ventures Management, LLC, Inventors, http://intellectualventures.com/Inventors.aspx.

Part K: Monetization of Patent and Other IP Rights  235

needn’t be patenting something that you intend to practice, which creates an incentive to write a broader patent, and also an incentive to stretch out the prosecution process. I am going to turn it over to Joel in mere moments to talk about the specific forms of monetization that Ocean Tomo is engaged in. But that at least should give you some overview of the way prosecution and IP in general has changed with the rise of non-practicing entities in these new business models. I thank you. MR. LUTZKER: Good morning. I want to thank everybody for getting up at this ungodly hour. We heard a lot of comments yesterday to the effect that the IP pendulum is moving from an extreme of heightened protection to a more balanced approach. This swing towards the center is in part based on a perception that the IP market is closed and not transparent, does not provide a level playing field, in part based upon a reaction to trolls.13 We prefer not to characterize those companies as trolls.14 We like to call them “PLECs” [patent licensing and enforcement companies] or “patent licensing companies” or “non-practicing entities”—or “customers.” Our customers include the PLECs, include the aggregators, include operating companies who are acquiring patents for strategic purposes, defensive purposes. We really do try to be a leveler and provide an open and transparent marketplace where anyone who is looking to engage in an IP transaction can come and participate in a fair way. We have developed a number of platforms to do that; to increase the transparency and openness and efficiency of the IP market. As David indicated, we are probably most well known for our patent auctions, which we have conducted in the United States as well as in Europe over the last three years. But this morning, given the short amount of time that I have, I really want to talk about the newest concept that we are introducing for intellectual property transactions. That is something we are going to be making available to the IP and business communities later this year. That is something that we call the Unit License Right (ULR). We will be offering Unit License Rights through the Intellectual Property Exchange International.15 ULRs provides a mechanism to fairly and openly license patents, as well as potentially other forms of IP, using a model similar to an initial public offering and a secondary market. I’m going to skip through a number of my slides and get to the slide that discusses the Unit License Right.

13 See Wang, supra note 5, at 178 (“[Trolls] take advantage of imbalanced bargaining to create an industry populated with inefficient transactions.”). 14 See Comments by Federal Circuit Judge Randall Rader, Chapter II, The Judiciary & IP Law, supra this Volume, at n.8 and associated text (“Every patent owner probably in the nation and in the world is a non-practicing entity. Every corporation has vast numbers of patents that it does not practice. Every university, of course, cannot practice. None of those are trolls as we consider them. They are non-practicing entities.”). As evidenced by Rader’s comments, the effort to delineate a more consistent characterization of a “patent troll” as distinguished from other, more benign, forms of non-practicing entities, has stirred debate. Cf. James F. McDonough III, “The Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy”, 56 Emory L.J. 189, 199 (2006) (“[U]nder Detkin’s definition, the U.S. government and government-funded research universities become trolls … .”); Mark Lemley suggests that “[a]sking what distinguishes universities from trolls can actually help us figure out what concerns us about trolls.” He points to “hiding the ball”—deception—and “demanding a disproportionate share of royalties” after waiting for a competitor to make irreversible investments—hold-up—as two likely characteristics of a “troll.” Mark A. Lemley, “Are Universities Patent Trolls?”, 18 Fordham Intell. Prop. Media & Ent. L.J. 611, 629 (2008); see also Mark A. Lemley & Carl Shapiro, “Patent Holdup and Royalty Stacking”, 85 Tex. L. Rev. 2163, 2172–73 (2007) (discussing the hold-up problem). 15 “ULR contracts allow patent owners to license select technology in a non-discriminatory manner via standard form licenses on publicly disclosed terms.” Intellectual Property Exch. Int’l, Inc., Unit License Right (ULR) Contracts, http://www.ipxi.com/products/ulr. 

236  CHAPTER IV: PATENT LAW

IPXI Product: Unit License Rights™ CORE DESCRIPTION OF ILLUSTRATIVE ULR TRADE ULR(s): U137A, B & C Valve Seat Insert PATENT: X,XXX,137 and continuations, continuations-in-part and foreign counterparts. LICENSED FIELD OF USE: All RESTRICTIONS: All secondary sales through IPX ISSUER RIGHT TO USE: Yes UNIT BASIS: One ULR covers one automotive or light truck engine TOTAL OFFERED QUANTITY: 5 million license units offered in 50 unit lots OFFERING TERM: 3 years TERM OF LICENSE: Until consumed TRANCHES U137A: 1 million ULR’s at an initial offering price of $0.50 per unit (eg unit 1) U137B: 1 million ULR’s at an initial offering price of $0.75 per unit (eg unit 1,000,001) U137C: 3 million ULR’s at an initial offering price of $1 per unit (eg unit 2,000,001)

14

As the name suggests, the Unit License Right is a non-exclusive paid-up license to practice a patent, typically to make and sell a set number of products—for example, to make and sell 100 patented widgets. As the ULRs are consumed by the manufacture and sale of the covered products, they are cancelled. A manufacturer can buy sufficient ULRs to satisfy its anticipated commercial needs over some time horizon. If they have underestimated, they can purchase additional ULRs either in the primary market or in the secondary market. If they overestimate, they can seek to resell unused ULRs in the secondary market. This slide just gives you an example how this might work. The example is a patent for an improved valve seat insert, which is something that is used in an automobile engine. Typically, the ULR would include a patent as well as any continuations, CIPs, foreign counterparts. The program permits field-of-use licenses. So in this example we say that there is no field-ofuse restriction, but you could, for example, have a ULR that was directed to automobile engines and another ULR, a different series, that would be restricted to boat engines, etc. So you could have the same basic patent portfolio and offer ULRs with different field of use restrictions. And then, typically, we would offer the ULRs in a series of tranches, where you would offer an initial lot at a particular price and then, as the market demanded, would roll out additional tranches at prices that were justified by the market. The ULRs will be traded on the Intellectual Property Exchange International, which is located in Chicago.16 We are also under discussions to form a European exchange. In addition to the ULRs, the Exchange will be offering other IP-focused products, for example, indices which track particular technologies or the technologies of a particular 16 As of the time this Volume went to print, IPXI has still not yet opened for business, but The Economist magazine noted that the company has published its “governing rulebook” and is expected to open within the year. “Marketplace of Ideas”, Economist, May 12, 2012, Business, available at http://www.economist.com/node/21554540 (noting also that the exchange was founded by IP-specialist merchant bank Ocean Tomo). “The Intellectual Property Exchange International, Inc. (IPXI) is the world’s first financial exchange that facilitates non-exclusive licensing and trading of intellectual property (IP) rights with market-based pricing and standardized terms.” See Intellectual Property Exch. Int’l, Inc., IPXI® Fact Sheet, http://www.ipxi.com/system/files/IPXI_mediakit_6152012_1pger.pdf; see also Raymond Millien & Ron Laurie, “A Survey of Established & Emerging IP Business Models”, 9 Sedona Conf. J. 77, 84 (2008).

Part K: Monetization of Patent and Other IP Rights  237

company, industry, or country. So it is a way for traders to more directly place a bet on some technology space.

Original Issue – 144A

15

This slide illustrates some of the mechanics of how the ULR will operate. In the upper left-hand corner you can see the IP owner. Typically, what will happen is the IP owner in conjunction with the Exchange will establish a special-purpose vehicle, which will be the issuer of the ULR. The IP owner will either grant an exclusive license or will assign the underlying IP to the special-purpose vehicle. There can be an underwriter that is involved that will take down some quantity of the ULRs as part of the initial offering, much as an underwriter would do in an IPO. There also can be an IP advisor involved in the process to really assist the issuer as well as the underwriter in understanding and presenting the IP to the community.

238  CHAPTER IV: PATENT LAW

Original Issue – Regulation D

16

When the initial offering is made public, we expect that there will be an offering memorandum, similar to what you would see in an IPO, which would lay out the business, technical, and legal case for the purchase of the ULR. The issuer would enter into a management agreement with the Exchange. IPXI under the management agreement will have responsibility for monitoring the usage of the ULRs as well as overseeing enforcement activities. So the auditing of the usage of the ULRs as well as enforcement of the ULRs against suspected infringers is handled by the issuer through the management agreement with the Exchange.

Secondary Market – 144A

17

Part K: Monetization of Patent and Other IP Rights  239

This slide illustrates the way the secondary market would work. The circle on the left, the QIB, a qualified institutional buyer,17 would engage a brokerdealer and would indicate that ULRs are available at an ask price in the secondary market and then, working through the Exchange and an appropriate portal, would be matched with a purchaser who would, much as occurs in the stock market, put out a bid price. Through that transparent bid/ask process a settling price would be established. I have very little time left, but one thing I did want to touch on is one of the unique aspects of the enforcement-and-settlement process. Of course, we are talking about non-exclusive licenses. A non-exclusive license, as the Federal Circuit told us a week or two ago—to some people’s surprise, I guess—is nothing more than a covenant not to sue.18 So enforcement is an important aspect of this process. We plan to have an independent enforcement committee which will provide advice to the Exchange as to whether or not enforcement activity should be commenced. This is a method to try to move away from some of the disparaging aspects of the troll model and have a more open process. The only way to settle an enforcement claim will be through the purchase of ULRs either in the secondary market or in the primary market. If the case goes to judgment and we get a monetary reward, then the plan would be that we would actually use that money and purchase ULRs in the market. So the enforcement activity is very much tied to the market and supports the open market. Thank you. MR. BLOCH: Thank you. Mr. McEwen. MR. McEWEN: In the interest of brevity, I wrote a paper going into a great more detail about how patent prosecution has been affected by the idea of creating asset classes out of intellectual property, specifically patents. A copy of the paper, entitled The Impact of Monetization of Patent Rights on Patent Prosecution, includes greater detail on the subject.19 A lot of industries had initially already embraced the idea of intellectual property as an asset, most notably something like pharmaceuticals, where the expiration of a patent actually will cause massive devaluation of their stock. There is already talk about the “patent cliff” coming up, where a great number of patents are going to expire, causing companies such as Pfizer to lose real world wealth.20 17 See Rule 144A of the Securities Act of 1933 (Securities Act), 17 C.F.R. § 230.144A, available at http://www.sec. gov/about/laws/sa33.pdf. Rule 144A equity offerings are often more attractive to companies looking to raise capital than a traditional IPO, with its stringent registration and reporting requirements. Registration requirements under Section 5 of the Securities Act, 15 U.S.C. § 77e, makes it unlawful for any person to offer and sell a security unless the transaction is registered with the Securities and Exchange Commission (SEC), while the Securities Exchange Act of 1934 (Exchange Act), 15 U.S.C. §§78a-78n, imposes reporting obligations after the offering. “Rule 144A was adopted in 1990 to facilitate ‘a more liquid and efficient institutional resale market for unregistered securities.’ The Rule provides a nonexclusive safe harbor from the registration requirements of the Securities Act for resales of ‘nonfungible’ restricted securities to ‘qualified institutional buyers’ (QIBs).” William K. Sjostrom, Jr., “The Birth of Rule 144A Equity Offerings”, 56 UCLA L. Rev. 409, 422 (2008) (citing Resale of Restricted Securities; Changes to Method of Determining Holding Period of Restricted Securities Under Rules 144 and 145, Securities Act Release No. 6862, 55 Fed. Reg. 17,933, 17,935–36 (Apr. 23, 1990)). 18 See TransCore, L.P. v. Elec. Transaction Consultants Corp., 563 F.3d 1271, 1275–76 (Fed. Cir. 2009) (holding that a covenant not to sue was equivalent to a non-exclusive patent license, as they are “are properly viewed as authorizations.” and the patentee’s rights were exhausted by the license); Intell. Prop. Dev., Inc. v. TCI Cablevision, 248 F.3d 1333, 1345 (Fed. Cir. 2001) (describing a nonexclusive license as nothing more than a “covenant not to sue”); see also Donald W. Rupert & Daniel H. Shulman, “Clarifying, Confusing, or Changing the Legal Landscape: A Sampling of Recent Cases from the Federal Circuit”, 19 Fed. Cir. B.J. 521 (2010). 19 See Appendix B, infra this chapter. 20 See Vijay Vaitheeswaran, “Generically Challenged”, Economist, Nov. 21, 2009, at 130 (discussing the patent cliff facing the pharmaceutical industry in 2011). The “patent cliff” is the short, impending timeframe in which key patents covering top-selling brand name drugs will expire, so sales will plummet as generic drug competitors take

240  CHAPTER IV: PATENT LAW Other industries have not been as quick to embrace that sort of change. They always looked at these essentially as litigation defensive mechanisms. Usually, that is dreamed up by litigators because litigators have very little use for patents, except when they are asserting them, and so therefore defensive uses tend to be, “You have one, I have one.” That doesn’t tend to work with non-practicing entities or people who don’t practice what you have patents in. If you move into a new technology space and you don’t have patents in the relevant technology, you can be sued and you can’t counter-sue. It’s the same basic problem. But the defensive rationalization for having patents tends to falter as a reason for acquiring patents in the same way that you don’t buy a house in order to sue your neighbor; you buy a house in order to live in it. Patents have a purpose as an asset class, and that is what is really becoming more in the forefront with these sorts of IP exchanges and other sorts of monetization efforts. In order to talk about how this is really causing a change in my personal profession, which is patent prosecution, I wanted to highlight some quick points. I go into greater detail in the paper. At the patent preparation stage, every single patent is essentially the same. Nobody actually comes into your office with a completed device saying, “Patent it.” They come into your office essentially with a piece of paper much smaller than this and say, “This is what I think I can do.” It’s not as simple as sometimes you think. If you’re a practicing entity, you are time barred from getting a patent. This isn’t like copyright where you can get the rights after the fact,21 or trademarks where the use actually creates the right.22 In patents, you have to actually apply for the patent before it gets used.23 Due to this need to file the application prior to substantive use, the large company coming in or the individual inventor both believe that their intellectual property is of the same wealth potential. They are going to be expending somewhere between $30,000 to $100,000 to get a patent. You don’t do that just for fun, but due to a belief that each invention has merit. However, because of the idea of monetization (i.e., that you may be able to spin off and create alternative industries or licenses) has become more in the forefront, one of the things that you have to be careful of when you are writing a specification, one of the changes that you do see, is you have to have multiple examples. That didn’t used to always be the case. When I would draft applications for a company like the Navy, when I was working in the Navy, you would basically be given a piece of paper saying, “This is what our target is; meet that target.” You didn’t want to disclose more than you had to, either for national security or trade secret reasons or because you just don’t want to tip your hand too much as to what was going on. over the market. See Ben Hirschler, “Drugmakers Face $ 140 Bln Patent ‘Cliff’”, Reuters, May 1, 2007, http://www. reuters.com/article/idUSL0112153120070502. Pfizer, when faced with the challenge of losing the patent for “the world’s best-selling drug”—Lipitor—in November 2011, prepared by altering its sales model for the medication, focusing development efforts on other drugs, and partnered with pharmacy benefit managers (PBMs). See Elizabeth Magill, “How Big of a Deal is a Patent Expiration? Just Ask Pfizer”, Motley Fool, Nov. 11, 2011, http://beta.fool.com/ summertime2/2011/11/27/how-big-deal-patent-expiration-just-ask-pfizer/24/. 21 For works created after January 1, 1978, an author receives copyright protection even though he or she has not registered the work with the Copyright Office. The moment that an original work of authorship is “fixed in a tangible medium of expression” it will enjoy copyright protection. 17 U.S.C. § 102(a); see 2 Melville B. Nimmer & David Nimmer, Nimmer on Copyright § 7.16[A][1], at 7-148 (1997).  22 “Trademark rights traditionally have been defined by a party’s use. One acquires rights in a mark through use of the mark in connection with particular goods or services, and priority as between competing users is determined by first use.” Mark P. McKenna, “Trademark Use and the Problem of Source”, 2009 U. Ill. L. Rev. 773, 779; see 1 J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 2:9 (4th ed. 2008). 23 See 1-3 Chisum on Patents § 3.05 (“Knowledge, use, or invention of the product or process in question in this country prior to the applicant’s date of invention bars issuance of a valid patent.”).

Part K: Monetization of Patent and Other IP Rights  241

Under the newer emphasis on creating broader assets to cover multiple technologies, and especially in light of some recent Federal Circuit cases,24 if you only have one example in your specification, you are not going to get anything broader than that. As such, no matter how broadly you draft your patent claim, due to the lack of multiple examples, you basically have a picture claim when the claim is actually litigated. You thus have to come up with multiple ways that something can be used, which makes it more interesting from the application drafting point of view, because you sit there and you kind of daydream about what you can actually use a piece of technology for. However, other than that, the basic change does not occur until the prosecution stage. What happens when you file the application, at least in the United States, is that the application is not acted on (i.e., it sits there). The application in essence goes into a drawer for about two to three years. When it comes out of the drawer and is being acted upon by an Examiner, it is at that point where usually you as the patent owner actually are practicing the invention, or you have abandoned it. How this delay in examination affects things is that at the time of examination, you are conscious of what is in the market space that you are in, and of who is doing what you are doing. You become conscious at that point of whether your invention now reads on a standard since, during the time between filing and examination, standards become standardized. You had filed your application, and now during examination, a finalized standard pops up that you are well aware of, but it occurs after the filing. If you’ve got a good enough date for when you filed the application, you can now try to capture a portion of that standard. This is really largely caused by the backlog problem that the Patent Office has.25 “Backlog problem” is a misnomer. It’s their failure to issue notices of allowances or issue patents which is the problem, not necessarily the fact there is a backlog. They just actually won’t grant patents anymore, at least in the United States. At that point, the value of the actual application is not really what the original claims were. That is a difference also from historical practice. The value of the patent at this stage is what you wrote in the specification. So the fact that you started with multiple examples is really the value of what you can get out of it. So if you are trying to create new targets, new licensing opportunities, if you didn’t put enough care into the specification, if you went lowest bidder to draft the specification (you know, “How cheap can I go?”) you are not going to be able to successfully monetize what you have or could have had where more care was taken when drafting the specification. Looking to the specification, if you can actually have the magic words in there to acquire new targets, to read on to standards, then you are able to essentially increased the value of the patent itself. At the stage where you have a target that is acquired—you are no longer trying to patent what you actually do or did at the time of filing; you are trying to patent what somebody else does—at that point, you start crafting claims based on what they actually have. So if you have a system with a server on a computer and you want to go after the server manufacturer, you draft claims so that it is just the server. It will have an exchange of signals going back and forth, but you’re going from the server’s point of view. That is different from how you would otherwise claim such an invention in a classical approach, which is that you claim the whole system, because it’s just easier to describe to an examiner. 24 See, e.g., Chiron Corp. v. Genentech, Inc., 363 F.3d 1247 (Fed. Cir. 2004); Liebel-Flarsheim Co. v. Medrad, Inc., 481 F.3d 1371 (Fed. Cir. 2007); Auto. Techs. Int’l, Inc. v. BMW of N. Am., Inc., 501 F.3d 1274, 1285 (Fed. Cir. 2007). 25 See generally Eugene R. Quinn, Jr., “Obama Administration Tackling Patent Backlog”, IPWatchdog, May 18, 2009, http://www.ipwatchdog.com/2009/05/18/obama-administration-tackling-patent-backlog/id=3531/.

242  CHAPTER IV: PATENT LAW Another distinction that comes up is that inequitable conduct is a massive problem in the United States.26 Basically, if you do or do not do something, you are going to be brought up for inequitable conduct. If you do submit prior art or you make an argument, you could be brought up for inequitable conduct for misleading the examiner. If you don’t bring up an argument or submit prior art, you can be brought up for inequitable conduct. It really doesn’t matter what you do. You are going to be brought up on it. However, this mainly becomes a concern when you are going into litigation. If you are not going into litigation, this is an academic concern. When you are going into litigation—in other words, you are trying to create an asset with your licensing—it is a guarantee that you are going into litigation. What that concern does is it increases the prosecution cost. You have to have now more presentable people as your prosecuting attorneys because that person is going to be on the stand for you. So while you can’t choose your inventor, because that’s the person who actually invented the thing, you can choose your prosecuting attorney. That has become a difference that you didn’t really have. Prosecuting attorneys tended to be strange people in the back room who made jokes and their ties didn’t match. This is no longer really something you can maintain, because that person is going to be important if you are trying to monetize the patent as an asset—you’re banking all of your ability to enforce, and therefore monetize, your intellectual property on this person. Especially in the United States, where continuation practice is very prevalent, another feature of this attempt to monetize your intellectual property is continuations. You can really tell when people are trying to read onto standards or go after multiple licensees if there are a number of continuation applications. Continuations are basically you take a first application and you say, “I want another one just like it,” and you change the claims, allow the first application to issue. What this creates is whole families of intellectual property which attack different portions of a target, what you are trying to get at. There are a couple of reasons for this. One is if you do know what you are trying to go after, you can create essentially different patents which cover different aspects and you can license them separately. I can license one patent to a server, I can license a second patent to a software provider, and never the two shall meet. Another reason for it is that if you are trying to license, you need to make sure that your claims actually read on the licensee. People don’t pay for licenses because it’s fun. They pay because they have to. Now, if there are incorrect words in your claims, words you thought were harmless but actually turns out to be harmful later—or because of a Federal Circuit decision, such as the SuperGuide case in the United States,27 which caused everybody to go back and rewrite their claims—you have to change the wording. 26 Inequitable conduct emerged in the U.S. as a common law doctrine, beginning with a trio of Supreme Court cases in the first half of the 20th century, holding that the unclean hands of the patentees rendered their patents unenforceable. See Keystone Driller Co. v. Gen. Excavator Co., 290 U.S. 240 (1933); Hazel-Atlas Glass Co. v. Hartford-Empire Co., 322 U.S. 238 (1944); Precision Instr. Mfg., Co. v. Automotive Maintenance Mach. Co., 324 U.S. 806 (1945). See generally Robert J. Goldman, “Evolution of the Inequitable Conduct Defense in Patent Litigation”, 7 Harv. J.L. & Tech. 37, 85–86 (1993). Currently, a finding of inequitable conduct is based on a two-step test: (1) whether the applicant misrepresented or did not provide the PTO with material information, and (2) whether the applicant did so with intent to deceive the PTO. See J. P. Stevens & Co. v. Lex Tex Ltd., 747 F.2d 1553, 1559 (Fed. Cir. 1984). “The habit of charging inequitable conduct in almost every major patent case has become an absolute plague. Reputable lawyers seem to feel compelled to make the charge against other reputable lawyers on the slenderest grounds, to represent their client’s interests adequately, perhaps. They get anywhere with the accusation in but a small percentage of the cases, but such charges are not inconsequential on that account.” Burlington Indus., Inc. v. Dayco Corp., 849 F.2d 1418, 1422 (Fed. Cir. 1988); see also Christian E. Mammen, “Controlling the ‘Plague’: Reforming the Doctrine of Inequitable Conduct”, 24 Berkeley Tech. L.J. 1329, 1331–32 (2009) (noting that the inequitable conduct defense has continued to expand in recent years and arguing for more clarifications and restrictions to reduce the use of the tactic). 27 SuperGuide Corp. v. DirecTV Enters., Inc., 211 F. Supp. 2d 725 (W.D.N.C. 2002), aff’d in part, rev’d in part and remanded by 358 F.3d 870, 69 U.S.P.Q.2d 1865 (Fed. Cir. Feb 12, 2004).

Part K: Monetization of Patent and Other IP Rights  243

Now, you can in the United States correct patents through reissue, but it is somewhat of a hassle. So the gold standard for these sorts of patents is to keep a continuation application alive. If you don’t have a continuation application alive, you cannot change your claims to read on potential targets or cure later-discovered defects. There are some other points that I try to make in the paper, but in the interest of time I want to end right here and turn the discussion over to the panel for questions. MR. BLOCH: Thanks very much. I guess the coffee has probably largely kicked in by now, so we are glad to take any questions. But before we take questions from the floor, I did have a question for Roya, who is in fact probably the only non-lawyer in the audience, is instead an economist, so actually knows something about the actual real world. At the Haas School at Berkeley she wrote a paper, which I have read. In that paper you conclude: “It is going to be the smart business model that makes or breaks the success for IP trading exchanges. If the business is driven by smart business strategy, rather than an admiration for technology, it can provide the space necessary to turn every single patent, trademark, or copyright of an organization into a cash cow.”28 I would actually like to focus on two parts of that comment. First, you have had a chance to listen to Joel talk a little bit about the IP Exchange and Ocean Tomo, which are at least two IP trading exchange type vehicles. What strategy should Ocean Tomo in your view be following? What is he missing? What is he doing right? What is he doing wrong? Then, second—and this is actually a question for the other two panelists as well—you are talking about IP exchanges, where you’re talking about monetizing patents, trademarks, and copyrights in exchange-traded vehicles. But really, what these two gentlemen were talking about largely was patent exchanges. When we talk about IP exchanges, it does seem that we end up talking about patent exchanges instead. Is there a meaningful market space or niche for trade exchanges in non-patent IP? Could we have exchange-traded trademarks, exchangetraded copyrights, as well, or really are we talking about patents only? Over to you. DR. GHAFELE: Many thanks. I think there is definitely a market for exchanges for trademarks, copyrights, design rights. But they haven’t really taken off yet, nor have the exchanges for patents really taken off. During the dot-com bubble, we saw in the United Sates a couple of IP exchanges that emerged and that climbed as well again, with quite substantial venture capital funding. But exchanges, like yet2come,29 are yet to come really. So I think within that context it is going to be interesting to see whether Ocean Tomo’s IP Exchange is going to succeed. I personally do not think that it is a question of the business model or a question that the idea isn’t good enough. I think the problem is that the market isn’t there yet. When I listened to the talks yesterday, what really surprised me was that the type of logic that people had towards IP is very much driven by, “I sue you and I avoid that you sue me,” and by trying to create value for the clients through litigation, which I guess is lawyers’ business. But that’s really just one business strategy towards intellectual property. 28 See Roya Ghafele, “Giving the World’s IP a Marketplace: The New Role of Trading Exchanges for Intellectual Property”, IPR Helpdesk Bull. (No 37 & No 38, Jan.–Mar. 2008), available at http://ipfinance.blogspot.com/2008/02/ online-markets-and-ip-trading-exchanges.html. 29 Yet2.com is a Massachusetts-based business-to-business, intellectual property marketplace. It has exclusive, searchable listings for undeveloped or idle technologies from, among others, Dow Chemical, 3M, DuPont, Toyota, and Honeywell. See F. Russell Denton & Paul J. Heald, “Random Walks, Non-Cooperative Games, and the Complex Mathematics of Patent Pricing”, 55 Rutgers L. Rev. 1175, 1250 (2003); Chris Reidy, “Yet2.com’s Tech Licenses on the Upswing”, Boston Globe, Feb. 7, 2008, available at http://www.boston.com/business/ticker/2008/02/yet2coms_ tech_l.html.

244  CHAPTER IV: PATENT LAW If you look at intellectual property as proprietary knowledge, as a property right over an intangible asset, if you redefine the primary definition, the primary understanding, of what you can make with these property rights over knowledge, really, then a whole new paradigm opens up towards strategic management of these assets, which in my view has not yet been fully leveraged. I think there is substantial scope in the market to advise clients, not only with respect to litigation questions, but really with respect to how can you make money with your intellectual property. How much this paradigm has not yet taken off can be best illustrated by the title of this session, which is “Monetization of Patent and Other IP Rights.” The whole conference should be about monetization of intellectual property. But we have like a niche, where like, “Oh, but these are the guys who are actually interested in how to make money with IP.” As a lawyer, you act in the interest of your client. Yes, you are going to sell that person’s patent, trademark, or design right protection. But that is just the first step. The second step is going to be that you have to look at how does that fit in the overall strategy of the client, how can the client generate value with that. I just wanted to give this overarching paradigm message because I felt that didn’t come very clearly across, to me at least, yesterday. MR. LUTZKER: The mechanics of the ULR trading platform is complicated in part because the product is designed to fit into the securities world model in the United States, and therefore there are “bells and whistles” that need to be included to comply with the securities laws that really are not, I think, necessary to the efficient operation of the Exchange, but something that the law required us to do. DR. GHAFELE: My understanding was that the whole point about IP exchanges is to simply bring the buyer and the seller together and to create a market. But I understand that there are some more technical issues. I was also surprised that there was a product, the special-purpose vehicle, that is really used for securitizations. I was surprised to see that move into the IP Exchange. So I think it is about bringing the buyer and the seller together. In many other areas we see active online markets—the dating online market, eBay, places where you have just simply brought people together so that they can exchange what they need. Last week I spoke to the CEO of a major multinational company active in the area of health care and well-being. That company is very active and interested in licensing. I tried to talk to him about securitization of IP. He said, “No way. We are interested in commercializing through licensing. Why would I go through securitization if can license the IP?” I said, “So what do you think about IP exchanges?” He said, “Yes, it is one way really to find people, but it is really just one way. There are a lot of places where you just have to really speak to other people.” He also said to me that what he experienced in that company was that the trick was much more about—he was thinking mainly in terms of patents—you have a technology problem and you ask actually what is the technology problem and you see how you can resolve that problem, rather than say, “I have all these patents out there; is anyone interested in that?” That has something to do with how patents are drafted. Even though they are basically aiming to increase transparency in the market, they are many times drafted in a way that it is not so easy to understand what they are about. He said the point is much more to try to resolve a technology problem and ask that question, rather than saying, “We have all these patents; who wants them?” Another challenge that we see with IP exchanges is that people are very cautious. Even so, on all of the databases you can see what the content of the patent is. Nobody really wants to tell

Part K: Monetization of Patent and Other IP Rights  245

who owns which patent. So that is something companies are really exceedingly cautious about, who has sold what to whom. That is confidential information. That is another challenge that IP exchanges will have to overcome, that companies are quite cautious in that respect. With that, I would definitely like to invite you to the next panel, in which I am going to speak about branding intellectual property.30 That has something to do with market perceptions of intellectual property. For some dubious reasons, people tend to equate intellectual property with patents, and not automatically with patents, trademarks, copyrights, designs—the whole range of potential ways of protecting creativity. As long as we have this misperception that IP equals patents, I think it is going to be a major challenge to actually think that IP also equals trademark exchanges, etc. That is really for me a perception challenge. It is a social question, sort of like who are the people behind it who are doing that. So this is mainly a perception question, shifting that. There is no inherent reason or rationale why a trademark could not be on an exchange, or a design right, really. The last point that I wanted to make is that I think that IP exchanges fulfill a major role in the market in: • First of all, creating transparency a little bit more; • Secondly, generating revenues, creating more strategic choices for companies; • Thirdly, the issue of valuation becomes a much less hypothetical, abstract undertaking. It is not that the IP valuation is something where you say, “Here we have this hypothetical model and here is the hypothetical price.” Because you bring the buyer and the seller together, you actually generate a price for the IP. The IP is worth as much as someone is ready to pay for it, so here you have your value. So you are actually creating the market. From the public policy perspective, that has important implications. So I think that they have an important role, not only for the players in the market, but any government that wishes to foster the knowledge-based economy should definitely support these types of undertakings because they advance the stage of innovation. In that respect, even though other panelists were laughing and we had controversial talks about it, I think that there is a corporate social responsibility aspect to this. MR. LUTZKER: One thing I just wanted to say about the issues on trading trademarks on an exchange, at least in the United States, as I’m sure most of you know, there are prohibitions on assignments in gross31 in trademarks or naked licensing32 in trademarks. There always has to be an association between a trademark and the goodwill that it represents.33 That does create challenges in the free trading of trademarks. We have in the auction auctioned off lots of trademark rights and copyrights as well. But I do think it is, certainly in the trademark area, more difficult because of some of the legal doctrines that underlie trademarks in the United States. MR. McEWEN: I think also you could say that essentially copyrights and trade secrets already have a monetization mechanism. You know, there is a whole bunch of book sellers downstairs. That is a market for copyrights. If you want to buy a song, you can either buy a legal copy or you can get a free copy somewhere, preferably legal also. But there is a market See Chapter VII.B, “Enforcement & Counterfeiting”, infra this volume. See, e.g., Pepsico v. Grapette Co., 416 F.2d 285, 289–90 (8th Cir. 1969) (trademark assigned in gross was invalidated); see also 2 J. Thomas McCarthy, Trademark and Unfair Competition § 18.01 (discussion of the “assignment in gross” rule). 32 Unsupervised licensing of a trademark is “naked licensing” and may invalidate the mark. See, e.g., Stanfield v. Osborne Indus., 52 F.3d 867, 871­–72 (10th Cir. 1995); Dawn Donut Co. v. Hart’s Food Stores, 267 F.2d 358, 366 (2d Cir. 1959). 33 See Lanham Act, 15 U.S.C. § 1060 (providing that the trademark holder is permitted to assign a trademark that is also accompanied by that mark’s goodwill); 30 31

246  CHAPTER IV: PATENT LAW for it. It is already well established. If I want to get a trade secret, usually people don’t want other people’s trade secrets because it is a very narrow thing. However, at the same time, when I go out and buy a software license, I go to Microsoft, that’s got a whole bunch of algorithms in the back, there’s a market for that. I can go get that readily. Trademarks has a problem. But at the same time, if somebody wanted to use the “Budweiser” name, you buy the company. That’s how you get a trademark license, you buy the entire product line. So there are already exchanges essentially. It’s just that you don’t think of them separately. Patents have always been a strange vehicle, because the instant I talk to you about a patent that you might want to buy, I risk, at least in the United States, after MedImmune34 especially, being dragged right into court. There is a need for somebody to be in between to prevent that from happening in order to monetize a patent, in my opinion. MR. BLOCH: We have a question from the audience. QUESTION: My name is Sandra Sherman. I’m the Assistant Director of the IP Institute at Fordham. I’m fascinated by what Roya has to say about creating this infinite market. However, one of the problems that we have today is that somebody thought maybe we could just create this infinite market out of mortgages. My question is, therefore, the further we get from practicing IP and the more we go towards securitization, creating these vehicles—as you pointed out, not everybody understands them—putting things into these vehicles that haven’t been practice, we don’t really know what they are worth, is this creating yet another opportunity for a kind of falling off a cliff, maybe not as fantastic as we just had, but nevertheless creating vehicles that could produce a certain financial downturn or collapse even within a certain market that could otherwise be avoided if we stayed within more traditional bounds of practicing IP? MR. LUTZKER: Obviously, it is very difficult to roll out new tradable products in this environment, exactly because of those kinds of concerns. We want to stay as far away from the CDO model as possible. But I don’t think we are really talking about derivatives in that same way. Our plan, at least initially, is that the ULRs will only be offered to companies that represent that they are purchasing for their own use. So it is not going to be, at least initially a market for speculators. We may roll out something that would be open to speculators down the line, but not initially. That may address some of your concerns as well. MR. BLOCH: The other observation is that we have already seen something of a patent litigation bubble. I think in the last four or five years in places like east Texas and east Virginia you saw precisely that. You saw a tremendous amount of speculation, with the idea that you go to one of these very plaintiff-friendly jurisdictions and you sue everybody and his monkey, and everybody settles because they know that in east Texas they hate defendants. It required the intervention of the Federal Circuit, as Judge Rader talked about yesterday,35 to start to rein that problem in. You now have a bunch of contingent-fee plaintiffs’ law firms in Texas who have invested pretty heavily in patents and in creating these fake LLCs in Marshall, Texas, that are now no longer paying their costs. So I think that the phenomenon of IP bubbles is real and is happening. The question I have is whether or not a rational, more transparent exchange mechanism will lessen that problem. I do think there is a difference between the true patent trolls and non-practicing entities. I’m not offended by CSIRO,36 for example. This is an Australian research institution. They MedImmune, Inc. v. Genentech, Inc., 549 U.S. 118 (2007). See Comments by Federal Circuit Judge Randall Rader, Chapter II, “The Judiciary & IP Law”, supra this Volume (referring to the serious problem of forum shopping which the Federal Circuit was aimed to correct). 36 See, e.g., CSIRO v. Buffalo Tech., Inc., 492 F. Supp. 2d 600 (E.D. Tex. 2007). 34 35

Part K: Monetization of Patent and Other IP Rights  247

don’t make anything, but they sit around thinking. They’re a real organization. The Australian government pays them. Without speaking to the merits of their patents, the fact that they are suing on IP rights strikes me as perfectly appropriate. I feel less sanguine about LPL Licensing, LLC, which is suing everybody in the world on these ridiculous direct marketing patents.37 I do think that a more transparent and efficient market, especially one that is geared toward practicing entities, the way the IPXI is going to be (at least as initially designed), ought to have the effect of allowing inventors to monetize their intellectual property without gumming up the wheels of commerce the way the trolls have with these ridiculous patent lawsuits. I think we have run out of time. We started a little bit late. We thank you all for your time. We are obviously glad to answer any questions offline.

APPENDIX A Monetization of Patent and Other IP Rights: An Introduction David S. Bloch* Intellectual property law rests on the fundamental assumption that strong property rights encourage maximum exploitation of resources. “Lease a man a garden, and in time he will leave you a patch of sand. Make a man a full owner of a patch of sand and he will grow there a garden on the sand.”38 The concept of limited exclusivity as a spur to invention has long historical precedents. The Greek colony of Sybaris granted exclusive rights to inventions as early as 500 B.C.39 Trademarks to distinguish goods existed in China during the Tang Dynasty (618–907 A.D.). At least as early as the Ming Dynasty (1368–1644 A.D.), China required stamps or other markings to indicate the source of pottery—both to ensure quality and properly 37 LPL Licensing, L.L.C. (“LPL”), as the exclusive patent licensee of Phoenix Licensing, L.L.C. (“Phoenix”), has been aggressively enforcing its portfolio of automated direct-marketing technology patents against defendants in financial services industries—some of whom include Aetna Inc.; Commerce Bank, N.A.; HSBC Bank USA, N.A.; MetLife, Inc.; Sovereign Bank; UnitedHealth Group, Inc.; and others. See, e.g., Complaint, Phoenix Licensing, L.L.C. & LPL Licensing L.L.C. v. Aetna Inc., et al., No. 2:2011cv00285 (E.D. Tex., filed Jun. 13, 2011); Phoenix Licensing, L.L.C. v. Allstate Corp., No. 2:09-CV-255-TJW, 2011 U.S. Dist. LEXIS 29088 (E.D. Tex., Mar. 10, 2011); In re Phoenix Licensing LLC, No. 08-1910-MHM, 2009 U.S. Dist. LEXIS 17525, 2009 WL 464993 (D. Ariz., Feb. 24, 2009); see also Ben James, “Phoenix Targets Banks, Insurers Over Marketing IP”, Law360, Jun. 15, 2011, http://www. law360.com/articles/251519/phoenix-targets-banks-insurers-over-marketing-ip-. Because they are non-practicing entities, LPL and Phoenix were recently denied a motion to stay an infringement case by a district court judge who noted that “LPL’s only business is licensing and enforcing the patents-in-suit” and “LPL does not make, sell, or otherwise deal in any products or services,”—essentially calling it a “troll” while concluding that the plaintiff would not be prejudiced by a motion to stay the case to allow a reexamination of the patents. In re Phoenix, 2009 U.S. Dist. LEXIS 17525, 2009 WL 464993, at *16. * David Bloch, Partner, Winston & Strawn LLP, San Francisco, California. B.A., Reed College; J.D. with honors, M.P.H., The George Washington University; Fellow in International Trade Law, University Institute of European Studies; admitted in California and the District of Columbia. He concentrates his practice on complex intellectual property litigation, including commercial disputes involving patents, copyrights, trademarks, and trade secrets. He has a particular focus on design patents. Mr. Bloch’s experience also includes intellectual property matters that involve aspects of antitrust law and government contracts. His clients have a strong presence in technical and medical fields such as biotechnology, semiconductors, consumer products, and computer hardware and software. 38 George Glider, The Spirit of Enterprise 26 (1984). 39 Herbert F. Schwartz, Pat. Law & Pract. 1 (3d ed. 1996); Edward C. Walterschild, “The Early Evolution of the United States Patent Law: Antecedents (pt. 1)”, 76 J. Pat. & Trademark Off. Soc’y 697 (1994).

248  CHAPTER IV: PATENT LAW direct complaints. Trade names and artists’ “moral rights” also enjoyed protection.40 A 1474 law provided for patent rights in Republican Venice.41 The Founding Fathers granted Congress the power “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries,”42 and implemented this authority with the original Patent Act in 1790.43 In the historical model, businesses obtained patents and other “industrial” intellectual property in order to practice it. This “transactional” school assumed an explicit bargain: limited exclusivity in exchange for, eventually, the unfettered right of the public to practice the invention. Now, however, we are experiencing a sea change. IP owners, while commercially exploiting their IP, do not necessarily use it in the traditional sense of the word. Inventors have an everwider array of options for converting intellectual property into cash. This is driven by two interrelated phenomena: an increasingly transparent and efficient market for IP rights, and an increasingly savvy legal system that offers multiple means of enforcement. And it in turn triggers differences in the way intellectual property is claimed in the first instance. What this means is that, at a macro level, the differences in how patents can be exchanged and exploited is leading to differences in the ways patents are drafted—a systematic change in the nature of the patent right itself. 1. The Rise of an Efficient IP Market Prices are a signal of value. Rational pricing (and thus rational allocation of resources) relies upon efficient markets. That is not to say that markets must be perfect, of course; no human institution is. But if there is no market, it is nearly impossible to determine an asset’s true value.44 We are now beginning to see the emergence of institutions aimed at creating an efficient market for intellectual property rights. These institutions take a number of different forms. This paper will survey a few of the many new organizations trying to create an efficient IP market, but does not purport to fully describe them, or hazard a guess as which (if any) will emerge as the standard over the coming years. Brokerage Houses The “oldest” IP market makers are patent brokerages. These entities act as middlemen, attempting to connect buyers and sellers of IP assets. Depending on the quality of the underlying patents or other intellectual property, such efforts can be quite successful. IP brokerage houses are not in and of themselves a new phenomenon. But the sophistication of the modern brokerage houses distinguishes them in kind, rather than merely in degree, from their predecessors. For example, patent brokerage IPotential claims that over 95% of its transactions close successfully. The below chart describes IPotential’s system for brokering patents:45

40 David Johnson, “Trademarks: A History”, available online at http://www.infoplease.com/spot/trademarks1.html (visited 1/15/08); Joseph Needham, “Science and China’s Influence on the World”, in Raymond Dawson, ed., The Legacy of China 234 (1971). 41 Guilio Mandich, “Venetian Origins of Inventors’ Rights”, 42 J. Pat. Off. Soc’y 378 (1960). 42 U.S. Const. Art. I, § 8, ¶ 8. 43 Act of Apr. 10, 1790, ch. 7, 1 stat. 109. 44 See, e.g., Friedrich A. Hayek, The Road To Serfdom (1946). 45 Taken from http://www.ipotential.com/brokerage/index.htm (last visited 3/14/09).

Part K: Monetization of Patent and Other IP Rights  249

IPotential’s Five Step Process for Selling Technology Patents Evaluate Patents • Determine the quality of the patent(s) • review relevance of patent to current and future products and markets • Determine amount of impacted revenue • Review encumbrances and other potential issues

Identify Build Interest Assist Potential with Multiple Facilitate Buyers Buyers Negotiate • Utilize contacts and market knowledge • Determine to whom is the patent relevant • Identify known and other prospective buyers

• Package and position patent to attract multiple buyers • Translate clearly what the patent is and why it is valuable

• Keep the patent holder from getting bullied • Hold fact based discussions between buyer and seller • Negotiate on your behalf without conflict of interest • Find mutually acceptable terms

Successful Closing

• Get the best possible price and terms • Complete postsale requirements

This system, while effective at the micro level, is cost- and resource-intensive, and has not resulted the monetization or commoditization of IP rights on a broad scale. Auctions and Securitization Several companies are trying to monetize intellectual property by creating more liquid IP assets—thus expanding and depersonalizing the services historically performed by brokerages. Increasing IP asset liquidity is, in essence, an attempt to create a forum for impersonal, armslength exchange. Several companies are operating in this space. But—at least as far as this author is concerned—by far the most innovative and sophisticated is Ocean Tomo. Ocean Tomo LLC bills itself as “the leading Intellectual Capital Merchant Banc.” It offers a wide variety of financial products and services regarding intellectual property, including expert testimony, valuation, investments, risk management and transactions. Ocean Tomo offers two (possibly complementary) ways of monetizing IP: either via public auction or using the new IP Stock Exchange, which “securitizes” IP assets. This paper is accompanied by a presentation, drafted by Ocean Tomo General Counsel Joel Lutzker, that describes the Ocean Tomo auction and IPX systems. Patent Aggregators The pressure of litigation has created a separate class or organization, whose purpose is to acquire rights defensively. This is a difficult problem in an era of non-practicing entities, because merely obtaining “blocking” patents is not enough. A patent troll’s only business is IP monetization—it cannot be deterred by the threat of IP countersuit, and it has no patents to threaten with a broad portfolio. So defendants now are banding together in coalitions or patent aggregation companies, which acquire IP rights that might otherwise be asserted against subscribers. For example, the Rational Patent Exchange (RPX) obtains bundles of patent rights—either licenses or patents themselves—and then licenses its membership for an annual fee. The patents also are available for countersuit, though that mechanism is unclear, as is the question of whether subscribers are affirmatively allowed to practice inventions embodied

250  CHAPTER IV: PATENT LAW in RPX-owned or –licensed patents. In any event, the purpose is to decrease the supply of assertable patents available to non-practicing entities by identifying and acquiring or licensing patents that might otherwise be used against member companies. RPX’s basic pricing structure is depicted in the below chart from the company’s website:46

Jan 2009

Jan 2010

Portfolio 1 $3M

Portfolio 4 $6M

Portfolio 2 $3M Portfolio 3 $3M

Jan 2011 If Portfolio 1-3 are all relevant • Terminate and buy perpetual for no more than $4.5M OR • Pay $4.5M fee to vest into perpetual and continue to receive licenses

Jan 2012 Portfolio 1 $3M Portfolio 2 $3M

Jan 2013 If only Portfolio 4 is relevant • Eminate and buy perpetual for $3M OR

Portfolio 3 $3M

• Pay $4.5M fee to vest into perpetual and ocntinue to receive licenses

• $4.5M membership fee • Patents vest into perpetual license after owned for 3 years • After 2 years, right to buy perpetual for no more than 50% of purchase price

Patent holding companies. Lastly, a new breed of companies is seeking to acquire IP rights without—at this point—clearly signaling what it intends to do with them. Most prominent of these is Intellectual Ventures, a start-up founded by several high-level Microsoft alumni. Intellectual Ventures has built up a substantial patent portfolio, both via in-house research and by using brokerage and auction services. It explains that “At Intellectual Ventures, we are empowering the next generation of Bells and Einsteins by highlighting the business of invention and providing a means for inventors to be fairly compensated for their work.” But what it intends to do with this corpus of assets—how it intends to “empower[] the next generation of Bells and Einsteins”—is unclear. At this point, the company is “not focused on marketing or distributing [its] portfolio.” It intends eventually to “market” its portfolio “on a broad and non-exclusive basis.” The form of this “marketing” is unclear; the company states only that “[l]ike any product, it is likely that our portfolio will be segmented according to customer needs and offered through a variety of channels, which could include spin-out companies, marketplace exchanges, etc.”47 2. Enforcement by Non-Practicing Entities Of course, the efficient market for patents and other IP only works if there are available mechanisms to enforce IP rights once acquired. After all, pricing in intellectual property is set by a combination of negotiation (licensing) and litigation. Fortunately, the United States has a robust litigation system that allows IP entrepreneurs to monetize their assets. Indeed, non-practicing entities—investors, defunct companies, non-profits, or “patent trolls”—have become a major part of the litigation landscape in the United States. In these cases, the plaintiff typically does not have a product that it sells; rather, it exists to monetize 46 47

Taken from http://www.rpxcorp.com/svc_howitworks.html (last visited 3/14/09). Quotes from http://www.intellectualventures.com/about.aspx (last visited 3/14/09).

Part K: Monetization of Patent and Other IP Rights  251

a particular body of IP. This means that it is essentially invulnerable to IP countersuit. It also usually implies that the plaintiff is litigating on a contingent-fee basis, though this is not necessarily true in cases where the plaintiff is well-funded or has prevailed in earlier litigation. Non-practicing entities typically look for patents that they can construe to read on entire industries (usually by accusing an industry standard) or else apply across industries (as in the case with many Internet “business-method” patents). Strategically, there are a number of good reasons for this approach: Proof of the infringement case is simpler; it is harder for the defendants to distinguish themselves before a judge or jury; and the patent’s innovative stature is enhanced by association with a commonplace technology or standard. This means non-practicing plaintiffs want to avoid (or settle with) defendants that are different in some way. Defendants who are different require special proof and stick out in front of a jury. They undermine the notion that the non-practicing entity owns a patent on something fundamental or inherent in the technology that the industry practices. It also means that, in general, non-practicing entities make their money by settling cases, not trying them. If the patent is being read broadly to capture an entire industry or market segment, even modest settlements will add up in the long term. A trial loss can destroy not only the case in hand, but the entire licensing campaign. And following eBay v. MercExchange,48 the nonpracticing entity is unlikely to obtain additional settlement leverage by winning a permanent injunction (as occurred in NTP v. Research In Motion49). Non-profit litigants like universities and research foundations appear to be an exception to this rule.50 So as a general matter, a non-practicing entity’s valuation of its case against any particular defendant is driven by its impact on the pattern of settlements it wants to impose on the target industries as a whole. This means that a rational non-practicing entity would rather settle for a larger percentage of a smaller revenue base, and also that it would prefer to settle with potentially troublesome defendants rather than weak or vulnerable ones. As markets continue to improve and patent prosecution changes to meet the new uses to which patents are put, it is likely that the strength, validity, and enforceability of nonpracticing entity patents will increase. But at the moment, trolls usually have lousy patents. Asserted business-method patents are often hopelessly overbroad or are being tendentiously misconstrued by the plaintiff. And typically, the underlying patent’s technology lost out in competition with the technology that actually emerged as the industry standard—which, naturally, is why the company that originally owned the patent is now out of business. This creates a real problem for the plaintiff’s lawyer: In order to make his case that the entire industry infringes a non-practicing entity’s patent, the plaintiff must press for a claim construction that read on applications that, in all likelihood, the inventor simply did not invent. But that increases the risk that the patent will be invalidated. And the more the plaintiff attempts to carve out a claim construction that solves its invalidity problems, the harder its infringement and damages case becomes. 3. Closing The Feedback Loop: Changes in How Inventions are Claimed Lastly, it is useful to consider the effect of these market and litigation dynamics on the process of applying for patents. The accompanying article from Stein McEwen’s James McEwen describes in detail how patent prosecution has changed in light of the new patent markets. 547 U.S. 388 (2006). NTP, Inc. v. Research In Motion, Ltd., 392 F.3d 1336 (Fed. Cir. 2004), opinion withdrawn and superceded by 418 F.3d 1282 (2005). 50 See, e.g., CSIRO v. Buffalo Tech., Inc., 492 F. Supp. 2d 600 (E.D. Tex. 2007). 48 49

252  CHAPTER IV: PATENT LAW

APPENDIX B The Impact of Monetization of Patent Rights on Patent Prosecution James G. McEwen51 Background Under existing practice, the procurement of intellectual property, and in particular, patents, is a complex process involving a number of strategic decisions reflecting desired scope and territorial reach. Adding to the complexity is the need to ensure that the patent properly describes and supports the invention at the time of filing, and that the key elements of the invention are protected while accounting for the technology then in existence in order to arrive at a final product: protectable property. However, as intellectual property has increasingly played a prominent role in commerce, the patent itself is increasingly being used as a form of equity as opposed to merely being a mechanism for countersuit. Such change is driven by economics and the reality that patents are increasingly being viewed as assets as opposed to bargaining chips vis-a-vie competitors.52 While some industries have embraced this change, most notably the pharmaceutical and agricultural industries, other industries have resisted the change and still utilize patents largely for defensive purposes. For these industries, their defensive strategy is predicated on patents only being held by practicing entities (i.e., competitors) against whom a countersuit is viable when a patent is asserted. However, this strategy breaks down where the patent holder cannot be threatened with a countersuit as there is no mechanism by which a practicing entity can respond to the patent holder save through settlement or lawsuit. For purposes of definition in this paper, such a patent holder is referred to as a non-practicing entity (NPE) since it is not in competition with the practicing entity. These industries often refer to NPEs as patent trolls and accuse NPEs of inhibiting innovation as opposed to furthering the purpose of the patent system in promoting innovation.53 Such charges ignore the reality of the purpose of the patent system, which is to reward inventors,54 and also appears to devalue their own patent portfolio thereby decreasing the overall value of their company by devaluing their own assets. Whatever the merits of such charges and countercharges, during the acquisition stage, there are special considerations which need to be accounted for when acquiring a patent being used as an asset or for use by an NPE which affect the way a practitioner will behave during prosecution in order to ensure that the most value equity is produced. These considerations 51 James McEwen is a partner in the intellectual property law firm of Stein McEwen LLP in Washington, D.C. Mr. McEwen received a Bachelor of Science degree in Aerospace Engineering from the University of Texas and a J.D. with honors from George Washington University National Law Center. The opinions expressed in this article do not represent the official positions of Stein McEwen LLP. The author wishes to thank Kathryn McEwen for her invaluable editorial and Bluebooking aid. 52 E.g., Associated Press, “Moody’s Cuts Pfizer Rating, Citing Lipitor Patent”, Forbes.com, Mar. 12, 2009 (discussing Pfizer’s credit rating being downgraded due to expiration of patent in 2011); M&A Insights: Spotlight on Intellectual Property Rights Survey (2008) (52% of survey respondents believe IP will become more important to overall M&A activity in the next five years). 53 Testimony of Mallun Yen, Vice President, “WW Intellectual Property, Cisco Systems Inc., The Evolving IP Marketplace” (Dec. 5, 2008), available at http://www.ftc.gov/bc/workshops/ipmarketplace/dec5/081205transcript.pdf. 54 See Presentation of Peter N. Detkin, Founder & Vice Chairman, Intellectual Ventures, Inc., “The Evolving IP Marketplace, To Promote the Progress … of Useful Arts: Investing in Invention” (Dec. 5, 2008), available at http:// www.ftc.gov/bc/workshops/ipmarketplace/dec5/docs/pdetkin.pdf.

Part K: Monetization of Patent and Other IP Rights  253

will be highlighted below and contrasted with regular prosecution practice in order to help understand the significance that monetization has during the acquisition phase of patents. Patent Preparation Stage During the initial preparation stage, the distinctions caused by how a patent is to be used and by whom are not apparent. In essence, at the time of invention, all inventors and clients are NPEs since, at best, a prototype has been built as a proof of concept. Indeed, unless some exception applies such as 35 U.S.C. §102(b), it is not possible to patent items being practiced in a competitive and public environment. Thus, from the perspective of the patent practitioner, there is little distinction between applications being prepared for practicing entities and for NPEs, as there are no real competitors for the invention itself. Instead, in both cases, the emphasis is on acquiring the maximum value for the inventor through broad descriptions and claims, while maintaining sufficient description to allow clarifying claim amendments in response to prior art. However, there are circumstances where a company may recognize that an invention is of particular interest from a licensing standpoint. Where there is a possibility of assertion either by a practicing entity or an NPE, particular care should be taken to ensure damaging admissions are removed from the specification and multiple embodiments and variations on the invention are added. Courts often cite to statements in the specification as evidence of disclaimed coverage or note that a claim term is necessarily narrowed if only a single example is consistently used.55 Patent Prosecution Stage After filing, there is usually sufficient pendency to allow a change in circumstances which may affect how an invention is used by the filing entity. Specifically, under the current workloads, a first office action is not expected for an average of 25.6 months from filing, and the average pendency is 32.2 months.56 During this time, the commercial significance of an invention may be realized. Besides cases where the inventor is an individual inventor or a University who filed the application in hopes of licensing, even where the inventor was a practicing entity at the time of the invention, a change in company focus, the competitive landscape or bankruptcy can force a change in how the patent application is perceived. Indeed, where it is later determined that the patent is relevant to a standard, the practicing entity will also attempt to monetize the patent application through inclusion in the standard. It is at this time that, for purposes of valuation or otherwise realizing an underused company asset, inventors or companies may approach an NPE to determine the value of the invention as an asset, or will attempt to license and assert the patent on its own such as through participation in a standard.57 Of special interest in this situation is less the scope of the pending claims, as filed, as these will likely be amended. Instead, the value is the original scope of the specification and 55 Thus, particular care needs to be given to the specification (as opposed to the claims) since, once filed, the potential value resulting from the patent as an asset for an NPE will be entirely driven by what has been described at this stage. See, e.g., Netcraft Corp. v. eBay, 549 F.3d 1394 (Fed. Cir. 2008) (specification’s consistent single use of “providing a communications link” limited feature in claim); Mangosoft, Inc. v. Oracle Corp., 525 F.3d 1327 (Fed. Cir. 2008) (statements in specification limited scope of “local”); SafeTCare Mfg. Inc. v. Tele-Made Inc., 497 F.3d 1262 (Fed. Cir. 2007) (background of the invention disclaimed scope). 56 U.S Pat. & Trademark Off., Performance and Accountability Report Fiscal Year 2008, at 4 (Nov. 2008) available at http://www.uspto.gov/web/offices/com/annual/2008/2008annualreport.pdf. 57 Indeed, it is arguable that such a use is almost required to the extent that public companies are required to efficiently utilize company assets under Sarbanes Oxley, 17 U.S.C. § 7241. See James G. McEwen, David S. Bloch & Richard M. Gray, Intellectual Property in Government Contracts 5, n.17 (Oxford University Press 2009).

254  CHAPTER IV: PATENT LAW whether the specification supports variations that extend well beyond the actual intended use of the device when invented. Where the specification is sufficiently broad to cover a range of devices, the application becomes especially valuable as it can be used to cover a variety of targets selected by the NPE. The target may be a product by a practicing entity or a standard used by practicing entities. Once the target or targets are identified, the existing claim set is scrubbed to use language consistent with that used by the target in order to allow for easier claim comparison. Moreover, non-essential words are changed and non-essential limitations are removed in order to ensure that the claim reads clearly on the target. Such non-essential words and limitations may well have been needed to describe the original prototype at the time of filing, but often obscure or prevent coverage of the desired target. A well-written specification will allow such changes directly. However, where the specification is not well written, the patent practitioner needs to be creative in interpreting the existing disclosure and recognize that, while obvious support is preferred, under U.S. law, there is no in haec verba requirement for support in the original specification.58 Thus, with a proper explanation to an examiner as to how a specification necessarily supports a new word in a claim, the patent practitioner can revise the claims to read on a target while still remaining within the literal scope of the filed specification. This amendment process is generally not needed for applications prosecuted by a practicing entity, in which case the claims on filing already read on the invention as practiced by the practicing entity and no adjustment is required except as needed to overcome the prior art. An additional step is to recognize that the target may have multiple related targets, each of which may be separately licensable. For instance, for an apparatus having multiple subsystems, each subsystem might be separately licensable and the manufacturer might be separately licensable from a user or distributor. As such, as the NPE begins to define the related targets, the claims will be revised to reflect each target. Looking back to the example of the apparatus having multiple subsystems, a claim would be drafted solely to each subsystem as well as a claim to the system. Further, where software is involved, a claim might be drafted to the software performing the operations of the subsystem or the apparatus controller. Moreover, a claim might be drafted to the use of the subsystem, and possibly to the method of assembly in order to capture use by an end user and/or manufacturing and testing of the subsystem by the subsystem manufacturer. The emphasis in each claim is less on ensuring all patentable features are included, but on ensuring at least one patentable feature is included while ensuring that the claim reads on its assigned target. This requirement to claim multiple targets tends to lead to an explosion in the number of claims in the typical application which is well in excess of the number of claims normally associated with applications being pursued by practicing entities.59 Also, where an NPE gets involved, the prosecution will likely be affected by litigation factors beyond mere claim scope. Specifically, since the claims are likely going to be contested, the patent prosecutor will be charged with inequitable conduct, deposed, and called as a witness during trial. This inevitability is due to the reflexive use of inequitable conduct as a defense by defendants, and due to the inconsistency with which courts have interpreted which behavior is sufficiently culpable to warrant rendering the resulting patent unenforceable.60 For instance, 58 Purdue Pharma L.P. v. Faulding Inc., 230 F.3d 1320 (Fed. Cir. 2000); Lockwood v. Am. Airlines, Inc., 107 F.3d 1565 (Fed. Cir. 1997); In re Hayes Microcomputer Prods., Inc. Patent Litig., 982 F.2d 1527 (Fed. Cir. 1992); In re Oda, 443 F.2d 1200 (C.C.P.A. 1971); Manual of Patent Examining Procedure § 2163.02 (8th Ed. Rev. 7, July 2008); Robert L. Harmon, Patents and the Federal Circuit § 5.4(c) (8th ed., BNA 2007). 59 An alternative strategy is to divide the claims into applications organized by a desired target, as will be discussed below. 60 E.g., Praxair, Inc. v. ATMI, Inc., 543 F.3d 1306; 88 U.S.P.Q.2d 1705 (Fed. Cir. 2008) (inequitable conduct found where applicants made arguments about prior art which was very well known which could not have been made had the examiner been aware of the prior art, despite its being very well known); Aventis Pharma S.A. v. Amphastar

Part K: Monetization of Patent and Other IP Rights  255

the duty of disclosure requires applicants and patent prosecutors to continually disclose material prior art. The failure to disclose prior art can lead to unenforceability, but only if the resulting patent is enforced. However, the over disclosure of such information is regularly cited as an irritant to the examiner, and the United States Patent and Trademark Office has recently attempted to reduce the number of submissions in order to reduce the examiner’s workload.61 Moreover, any failure to disclose needs to be contemporaneously documented in order to provide a reason for nondisclosure. This evidence is needed to provide evidence of a reason for nondisclosure that negates whether there was an intent to deceive the examiner.62 Where the invention is made by a practicing entity and the risk of enforcement is low, these are largely academic concerns. However, as the invention owned by an NPE is likely to be enforced, it is important in United States practice to be even more forthcoming in submitting prior art as compared to regular prosecution. While practicing entities are often more tempted to skimp on prosecution and information disclosure during prosecution in order to reduce costs, this is not an option for NPEs due to the reflexive use of inequitable conduct defense. Thus, as compared to regular prosecution and while such additional material is generally not helpful to the examiner for purposes of evaluating the claims, prosecuting patent applications for an NPE will require an extra level of diligence in ensuring that anything of potential materiality is disclosed. Lastly, given the complexity of prosecution and the likelihood of being called to testify, NPEs take (or should take) greater care in who handles the case. Since the prosecuting attorney will be called for deposition or testimony, the chosen attorney needs to be an experienced attorney who is presentable and articulate. This is in contrast to regular prosecution for practicing entities, where cost alone may drive the choice of attorney since there is a low likelihood that such a person would ever be called to testify. While such a choice may drive up the cost of prosecution, the cost of choosing the wrong prosecuting attorney will be higher during any subsequent enforcement proceeding. Continuation/Divisional Stage Under United States practice, it is not unusual to have continuations and divisional applications. However, where NPEs are involved, there is an additional incentive to ensure multiple continuation or divisional applications are filed. First, instead of including all claims for all targets in a single application, it can be more convenient to have separate claim sets in separate applications corresponding to different targets. An example would be to use the parent application for a distributor or manufacturer of an assembled system, and a divisional or continuation application for a supplier of a subsystem used in the assembled system. Such a strategy results in large families of co-pending applications. A downside to such a strategy is that the use of continuations greatly complicates the need for information disclosure since courts have held that even where examiners are aware of related applications, the mere failure to repeat arguments from related cases can be grounds for inequitable conduct.63 Thus, the use Pharms, Inc., 525 F.3d 1334; 87 U.S.P.Q.2d 1110 (Fed. Cir. 2008) (statements in declaration found to be highly material and thus grounds for inequitable conduct despite lack of evidence as to actual intent to deceive); Nilssen v. Osram Sylvania, Inc., 504 F.3d 1223, 84 U.S.P.Q.2d 1811 (Fed. Cir. 2007) (family of patents held unenforceable due to the filing of a misleading declaration for improperly claiming small entity status when paying maintenance fees, for falsely claiming priority, for failing to report litigation in related cases, and for failing to submit relevant prior art). 61 Changes to Information Disclosure Statement Requirements and Other Related Matters, 71 Fed. Reg. 38808 (July 10, 2006). 62 Praxair, Inc., 543 F.3d 1306 (intent inferred where material prior art not disclosed despite fact material prior art was duplicative since counsel failed to contest materiality of prior art at trial on grounds that it was duplicative). 63 McKesson Information Solutions v. Bridge Med., Inc., 487 F.3d 897 (Fed. Cir. 2007).

256  CHAPTER IV: PATENT LAW of large families of co-pending applications has risks complicating practice when prosecuting applications for an NPE. Another distinction is that, for a practicing entity, when an application is in condition for allowance as a patent, the application is allowed to issue since the desired coverage has been achieved. However, for an NPE, there is a continuing search for targets and there is also the recognition that, despite all efforts, it may become apparent that the claims in an issued patent are incorrectly worded and will not read on an existing target. While a reissue application (and to a lesser extent reexamination) can remedy this situation, the easiest solution is to merely file a new continuation application.64 As such, even where only one application is being prosecuted with all the desired claims and is ready for issue, it is usually required that at least one continuation application is filed and kept pending. The NPE can then use this pending application to add or revise to ensure that any defects in the existing claims of issued patents can be remedied easily and quickly, and new targets can be acquired. Conclusion While there are many commonalities between preparing and prosecuting patents for practicing entities and NPEs, the emphasis of the NPE on acquiring new targets for licensing and enforcement presents special problems during prosecution of a patent application. As outlined above, these differences occur mainly during the actual prosecution stage. Specifically, as compared to where a patent application is directed to a known product as is the case with a practicing entity, the desired coverage for an NPE is in a state of continuing flux. Thus, while deceptively similar in many ways, the monetization of patent rights and the use and assertion of patents as an asset does have a very real effect on prosecution strategy.

64 The problem with reissue applications and reexamination is their complexity in filing. For instance, both reexamination and reissue require the showing of an error affecting patentability under 35 U.S.C. §§ 251, 302, and 311. There are limits on the types of amendments that can be made during reissue and reexamination due to 35 U.S.C. §§ 251 and 305. Procedurally, at the time of filing, reissue applications also require a new declaration and consent from the patent owner, which can be problematic where the inventor is no longer with the patent holder. 37 C.F.R. § 1.172. In contrast, such problems are avoided by a continuation application, which merely requires a copy of the original declaration unless there is a change in inventorship. 37 C.F.R. § 1.63(d).

Chapter V

Copyright Law Part A: Infringement & Remedies (ISP Participation; Temporary Reproduction (Cablevision case), Making Available Right, Data Privacy) Moderator Dr. Michael S. Shapiro

Senior Counsel, Office of Intellectual Property and Enforcement, U.S. Patent and Trademark Office (Alexandria, VA) Speakers Prof. Justin Hughes

Allen Dixon

Benjamin N. Cardozo School of Law (New York, N.Y.)

International Intellectual Property and Technology Consultant (London)

Shira Perlmutter

Dr. Stanley Lai

Executive Vice President Global Legal Policy, IFPI (London) Carey R. Ramos

Paul, Weiss, Rifkind, Wharton & Garrison LLP (New York, N.Y.)

Allen & Gledhill (Singapore) David Carson

General Counsel, U.S. Copyright Office (Washington, D.C.)

Dr. Nils Bortloff

Vice President Legal & Business Affairs (Germany, Austria, Switzerland), Universal Music Entertainment GmbH (Berlin) Panelists Prof. Jerome H. Reichman

Duke University School of Law (Durham, N.C.)

Andrew Bridges

Winston & Strawn (San Francisco, CA)

258  CHAPTER V: COPYRIGHT LAW DR. SHAPIRO: I think we better get started. Good afternoon.

My name is Michael Shapiro and I am the moderator for this session. My job, I take it, as moderator is to occasionally say some moderate things and encourage other interventions to be moderate as well, which we all know is increasingly difficult in this age of highly polarized debate over copyright law. We have a terrific panel here, a true set of stars. We are going to take our excellent speakers in an order slightly different from that in the most recent revised agenda. The order will be as follows: Shira Perlmutter will lead off, Dr. Nils Bortloff will be second, Dr. Stanley Lai next, and then we will turn to Professor Justin Hughes for a more theoretical perspective. We will then move to Mr. Carey Ramos, followed by Mr. David Carson, before Mr. Dixon rounds out the panel presentation. My plan is to cover panel presentations in a little over an hour, leaving about a half-hour for discussion. In addition, panelists will be picking up points. We then will invite the audience to interact with the panelists. Shira Perlmutter is Executive Vice President Global Legal Policy, IFPI. Shira, would you like to get us started? MS. PERLMUTTER: We have been told we each have nine minutes, so I will talk very fast, and I will be very straightforward and try to condense what is normally about a forty-fiveminute presentation into nine minutes by leaving out all the detail. Hopefully we can talk about some of it during the discussion period. I am going to talk about the current trend in looking at greater ISP cooperation. I would start by saying that around the world there is not much question that the basic concept that ISPs should play a bigger role in helping to deal with online infringement is gaining traction. This is especially important in dealing with unauthorized peer-to-peer services. That today represents, certainly for music, and I think for content in general, about 80 percent of all online infringement. So it is still a huge percentage of the problem. It is an area that was left virtually untouched by the solution of the 1998 DMCA,1 which was then picked up and reflected in the eCommerce Directive.2 A lot has changed in markets and technology since 1998, obviously. So the role of ISPs—they have a critical part to play in all of this, partly because of their pure technical ability to control the flow of content through their pipes, and partly because they are the ones that have a relationship with subscribers. They have a connection to them, they know who they are, and they can communicate with them. It is also in the long-term interest of ISPs to try to do something about peer-to-peer infringement, because they are increasingly partnering with content companies to offer new services, and the success of those services will depend on being able to limit unfair competition from illegal services. Also, the fact is that major peer-to-peer uploaders are by far the greatest hogs of valuable bandwidth. So there are a number of reasons why ISPs in many countries are increasingly interested in playing a bigger role. The goal here, the way to achieve a useful outcome, is to focus on partnership and collaboration so that legal markets can start to develop to their full potential. None of what I am going to talk about requires reopening the DMCA or the eCommerce Directive; it is a question of helpful and responsible behavior rather than liability for infringement. The overall goal, from the content industry perspective and I think from policymakers’ perspectives, is to find an effective solution that makes sense. These solutions are beginning Pub. L. No. 105-304, 112 Stat. 2860, 2877 (codified at 17 U.S.C. § 512) (1998). Council Directive 2000/31, Certain Legal Aspects of Information Society Services, in Particular Electronic Commerce, in the Internal Market, 2000 O.J. (L 178) 1 (EC) [hereinafter E-Commerce Directive]. 1 2

Part A: Infringement & Remedies  259

to emerge in the United States largely in private negotiations, but also through government efforts in Europe and Asia and increasingly in Latin America. The primary approach that has been adopted, certainly outside the United States, has been what is sometimes called “graduated response.”3 At one point it was called the “three strikes approach,”4 but that terminology has been discarded, largely because many people outside the United States do not understand that “three strikes and you’re out” refers to baseball and not violence. The general concept is straightforward. The idea is that right holders will take the responsibility of finding accounts that are being used to upload infringing content. They will then notify the ISP that is responsible for that account. The ISP then sends a notice to the account holder informing them, and if it happens again, the ISP will send a stronger notice. Finally, at some point, after several notices, if the subscriber still refuses to stop infringing, there will be some meaningful consequences. The consequences that are most common so far under discussion, under consideration, or being adopted deal with the suspension of the account for at least some period of time. It is important to understand that this concept originated out of discussions with ISPs in France.5 It was not just a unilateral wish list from right holders. In some countries, notably the United States, private deals are emerging between individual ISPs and companies that include some form of graduated response.6 In most countries, however, the approach has involved cross-industry negotiations with government involvement and pressure, subject to a threat of some sort of legislative backup. If that does not happen, often it has been impossible to see any developments, either because the ISPs are not yet at a stage where they see their self-interest in agreeing or because they are worried about finding themselves at a competitive disadvantage if they adopt a policy like this and their competitors do not. So government involvement of some sort is the way to ensure a level playing field among ISPs. Now, I want to say a few words about the benefits of a graduated response approach before describing what is happening in different countries. • First of all, it is a way to respect privacy because there is no need for the ISP to turn over the subscriber’s identity to the right holders. • Second, it essentially enforces existing terms of service in ISP contracts. They virtually all say “you are provided this service on the condition that you do not violate the law, including copyright, and if you do you risk losing your service.” • Third—and this is probably most important and was the genesis of the whole concept—it avoids the need to bring lawsuits against individual infringers, which is better for the individuals and also more effective from the perspective of enforcement. • And finally, it gives users the opportunity to stop violating the law before there are any consequences. A number of studies and experiences have shown that more than 70 3 See William F. Patry, Moral Panics and the Copyright Wars 12–14 (2009); Ben Sheffner, “ISPs, RIAA, the DMCA, ‘Graduated Response,’ and ‘Three Strikes’: The Real Story”, Copyrights & Campaigns, Mar. 29, 2009, http://copyrightsandcampaigns.blogspot.com/2009/03/isps-riaa-dmca-graduated-response-and.html. 4 See Patry, supra note 3, at 12–13; see also Sheffner, supra note 3. 5 John Ozimek, “French Pass ‘Three Strikes’ File-sharing Law”, Register (U.K.), Apr. 3, 2009, http://www. theregister.co.uk/2009/04/03/french_three_strikes; Danny O’ Brien, “Three Strikes, Three Countries: France, Japan and Sweden”, Elec. Frontier Found., Mar. 18, 2008, http://www.eff.org/deeplinks/2008/03/three-strikes-three-countries; Karl Bode, “French Senate Passes ‘Three Strikes’ Piracy Law”, DSL Rep., Nov. 3, 2008, http://www.dslreports.com/ shownews/French-Senate-Passes-Three-Strikes-Piracy-Law-98851; “France May Penalize Internet Pirates”, United Press Int’l, Nov. 1, 2008, http://www.upi.com/Top_News/2008/11/01/France_may_penalize_Internet_pirates/UPI99811225519011; Danny O’ Brien, “The Struggles of France’s Three Strikes Law”, Elec. Frontier Found., May 9, 2008, http://www.eff.org/deeplinks/2008/05/struggles-frances-three-strikes-law. 6 David Kravets, “Verizon Terminating Copyright Infringers’ Internet Access”, Wired, Jan. 20, 2010, http://www. wired.com/threatlevel/tag/graduated-response/; Jacqui Cheng, “ISP, UMG Agree on Unlimited Music Plan, Graduted Response”, Ars Technica, June 15, 2009, http://arstechnica.com/media/news/2009/06/isp-umg-agree-on-unlimitedmusic-plan-graduated-response.ars.

260  CHAPTER V: COPYRIGHT LAW percent of users would stop after receiving the first warning and probably something in the vicinity of 90 percent would stop after a second.7 But of course, these warnings will only continue to work if there are ultimate deterrent consequences to ignoring them. I also want to make the point that one of the other advantages is that it is possible to allow the subscriber to challenge the accuracy of notices. That is being built into some of the systems under discussion. So this concept is beginning to spread around the world. I will list some places where it is happening in legislation, or in negotiations with government involvement, and also where the courts are stepping in and ordering this type of response. To start with legislation: In France we have the very-well-publicized Creation and Internet Law,8 which empowers an administrative agency to send up to two notices, and then, if these notices have been ignored, to order a suspension of anywhere from one to twelve months of the service. That bill passed the Senate and the National Assembly, but a reconciled or compromise version was defeated over the Easter weekend in a vote where there were very few members present.9 That seems to be a specialty in France, these holiday votes where hardly anyone is there. But the Sarkozy government has made clear that they will be reintroducing the bill and are confident that it will pass.10 In Korea a law passed a couple of weeks ago with graduated sanctions that leads to the possible suspension of accounts for up to six months.11 That will come into force three months after it is signed by the president and the government. In New Zealand there was a termination of repeat infringers law passed by the last government, which has been suspended by the current government before it went into force.12 ISPs and right holders were discussing a code of practice that would have set up a graduated response system but couldn’t agree on the final terms. So the government said, “We are going to hold back on the law at this point.” But they have expressed the intent to legislate in more detail to address the concerns that have been raised. And then, of course, in the United States there is a termination of repeat infringers provision in the DMCA,13 although there it is a condition for the enjoyment of safe harbors rather than a freestanding obligation for ISPs. Areas where there are discussions going on with government involvement: In the European Union the Parliament and the Commission are both talking about this issue, and there have been various initiatives and reports going in different directions, but nothing binding yet.14 7 Press Release, Wiggin LLP, 2008 Digital Entertainment Survey (Mar. 3, 2008), available at http://www.wiggin. co.uk/upldfiles/Press%20release%20-%20EMR.pdf. 8 Creation and Internet Law is commonly referred to as the HADOPI law. Loi Favorisant la Diffusion et la Protection de la Création sur Internet (“Law Favoring the Diffusion and Protection of Creation on Internet”), Law No. 2009-669 of June 12, 2009, Journal Officiel de la République Française [J.O.] [Official Gazette of France], June 13, 2009, p. 9666. 9 The French Parliament rejected the bill, 21-15, on April 9, 2009. See Eric Pfanner, “France Rejects Plan to Curb Internet Piracy”, N.Y. Times, Apr. 9, 2009, http://www.nytimes.com/2009/04/10/technology/internet/10net.html?ref= technology; Richard Wray, “French Anti-Filesharing Law Overturned”, Guardian (U.K.), June 10, 2009, http://www. guardian.co.uk/technology/2009/jun/10/france-hadopi-law-filesharing. 10 Eric Pfanner, “France Approves Crackdown on Internet Piracy”, N.Y. Times, May 12, 2009, http://www.nytimes. com/2009/05/13/technology/internet/13net.html. 11 Kim Tong-hyung, “New Copyright Law Causes Uproar Among Bloggers, Internet Companies”, Korea Times, http://www.koreatimes.co.kr/www/news/tech/2009/04/133_42594.html. 12 The New Zealand legislature attempted to introduce Section 92A as an amendment to their Copyright Act of 1994. See Copyright (New Technologies) Amendment Act 2008, 2008 Pub. Act. No. 27 (N.Z.), available at http:// www.legislation.govt.nz/act/public/2008/0027/latest/DLM1122643.html. 13 17 U.S.C. § 512(i). 14 See Int’l Federation of the Phonographic Industry (IFPI), IFPI Digital Music Report 2009, at 24, available at http://www.ifpi.org/content/library/DMR2009-real.pdf.

Part A: Infringement & Remedies  261

There are also consultations and negotiations with government involvement going on in the United Kingdom,15 where there is likely to be some legislation,16 as well as some sort of digital rights agency set up to follow up on it. In Japan and in Hong Kong there are proposed codes or agreements under discussion with government involvement.17 Similar discussions are taking place in other countries in Europe (Finland, Spain, Italy, and the Netherlands) and outside of Europe (Australia and Brazil).18 And then, finally, court decisions: In the European Union you have courts applying Member States’ implementations of Article 8(3) of the Copyright Directive,19 which makes injunctions available against ISPs to prevent infringement. In Belgium a court has ordered an ISP to make peer-to-peer infringement impossible and has found filtering to be an effective and feasible measure.20 In Ireland there was a recent settlement of a case by record companies against the largest ISP in Ireland, in which the ISP agreed to implement a graduated response leading to termination.21 There have been similar decisions in Finland and also in Argentina, where an ISP was ordered to block access to peer-to-peer services to an infringer.22 So you can see there is a lot already going on around the world. DR. SHAPIRO: Shira, thank you for getting the conversation started. We turn next to Dr. Nils Bortloff, who is Vice-President, Legal and Business Affairs, for Universal Music Entertainment. DR. BORTLOFF: Thank you. Ladies and gentlemen, this is a front-line report because Universal Music Germany was very much involved, together with BASCAP, in lobbying our government for the implementation of such a graduated response model. I’d like to start my presentation with two quotations: “We will hear the outcry of the French consumers from Paris here in Berlin once they are disconnected from the Internet.” That is a quote from our Minister of Justice.23 This is another person: “This is certainly not about the future of U2, the band I have managed for thirty years, but it is about the future of a new generation of artists who aspire to be the next U2 and about the whole environment in which that aspiration can be made possible. There are clearly people who oppose the new French law, but I have not heard of any viable economic alternative to the system now being introduced, committing ISPs to 15 Digital Britain Final Report (2009), available at http://www.culture.gov.uk/images/publications/digitalbritainfinalreport-jun09.pdf. 16 Currently the Digital Economy Bill is being debated in the House of Lords. Digital Economy Bill, [HL] 2009-10, http://services.parliament.uk/bills/2009-10/digitaleconomy.html. 17 Duncan Riley, “Japanese ISPs to Ban File Sharers”, TechCrunch, Mar. 15, 2008, http://techcrunch. com/2008/03/15/japanese-isps-to-ban-file-sharers; George Ou, “Japan’s ISPs Agree to Ban P2P Pirates”, ZDnet, Mar. 16, 2008, http://blogs.zdnet.com/Ou/?p=1063. 18 See IFPI, Digital Music Report 2009, supra note 14, at 25. 19 Council Directive, 2001/29, Art. 8(3), Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (L 167) 1 (EC) [hereinafter Copyright Directive]. 20 See SABAM v. S.A. Tiscali (Scarlet), No. 04/8975/A (D.Ct. Brussels, June 29, 2007), translation available at 25 Cardozo Arts & Ent. L.J. 1279 (2008). 21 John Collins & Mary Carolan, “Internet Users Face Shutdown Over Illegal Music Downloads”, Irish Times, Jan. 29, 2009, at A1; “Ireland’s Biggest ISP Agrees to Three-Strikes Disconnection”, Out-Law News, Feb. 3, 2009, http:// www.out-law.com/page-9761. 22 See Press Release, IFPI, Governments Address ISP Cooperation in Tackling Online Piracy Around the World (May 2009), available at http://www.ifpi.org/content/library/ISP_progress_May_2009.pdf (In Finland, leading ISP TeliaSonera was required to block access to an infringing customer in August 2008). 23 Statement of Brigitte Zypries, Secretary of Justice, Germany. See Posting by Janko Roettgers to P2P Blog, It’s Official: No Three Strikes In Germany (Update) (Feb. 2, 2009, 04:44 AM), http://www.p2p-blog.com/item-966.html (translating a quote first made on the German blog Spreeblick).

262  CHAPTER V: COPYRIGHT LAW helping protect copyright.”24 That is a quote from the manager of our U2, which is contracted by Universal Music. [Slide] This is the scenario. Basically, what we all know is that music fans have subscription agreement with their local ISPs in order to benefit from high-speed access to music via their DSL connections. The option is only to either legally download files from legal sources—you see a list of around thirty legal portals in Germany that are offering more than 8 million files— or to get music illegally by downloading going, for example, from BitTorrent. You see one green arrow and eight red arrows. The ratio between illegal and legal downloading in Germany is 1:8. We are quite happy about this because in other countries it is 1:20; for one file legally downloaded there are twenty downloaded from illegal sources. If you talk to politicians these days, they usually say, “Well, you’ve got a problem. You need to address your consumers in a different way.” We are actually doing this by rolling out various models, as you can see there. Now, illegal use is eating up bandwidth of ISPs up to 70 percent. So also the ISPs have a problem, because what they usually want to do is to use their broadband connection to make money, not only based on subscription fees but also to roll out pay services. [Slide] Now, what are rightowners doing? First of all, we are exposed to an unpredictable demand for buying content. We do not know whether our customers will actually buy or steal our music. That leads to an increased production risk for a record company. What are we doing? We are enforcing our rights in Germany, unfortunately, in a very limited way, because public prosecutors refuse to cooperate due to minor infringements, as they say, so they start acting from 3,000 tracks put online on. You can imagine that this is obviously a big problem for us. Civil claims for disclosure against ISPs to then contact their customers—it works more or less. Based on the Enforcement Directive,25 we have a similar claim against an ISP for disclosure of the infringer’s identity. But unfortunately—and that is not prescribed by the Enforcement Directive—civil claims are only possible against those people who are acting “on a commercial scale.”26 Now, file-sharing users, are they acting on a commercial scale? Please tell me the secret and we will contract these guys. Commercial scale, making money out of file-sharing services—perfect. Some German courts held that at least offering pre-release recordings or chart repertoire constituted “acting on a commercial scale.” Litigation against our fans leads to criminalization of fans, costly and long litigation and prosecution, and overburdened administration of justice. That is the reason why the public prosecutors said in Germany, “We are not acting if there are less than 3,000 tracks put online.” [Slide] The consequence is the ISP customer protection program or graduated response system we are lobbying for. It works like this: the ISP starts the program by informing and educating their subscribers: “Make sure that you know who is actually using a PC in your household, has P2P software installed,” and so on. If we find an infringer the ISP will send him a first warning. As Shira said, 70 percent of users will refrain from offering files illegally anymore.27 That is their reaction. That is not a surprise, because most users obviously know that peer-to-peer file sharing is illegal. 24 See Paul McGuinness, “Why France Has the Solution to Online Piracy”, Guardian (U.K.), Apr. 7, 2009, http:// www.guardian.co.uk/music/musicblog/2009/apr/07/france-solution-online-piracy. 25 Council Directive, 2004/48, Directive on the Enforcement of Intellectual Property Rights, 2004 O.J. (L 157) 1 (EC), available at http://eur-lex.europa.eu/pri/en/oj/dat/2004/l_195/l_19520040602en00160025.pdf [hereinafter Enforcement Directive]. 26 Id. at para. 14. 27 See supra note 7 and accompanying text.

Part A: Infringement & Remedies  263

Upon receipt of the second warning, 90 percent will stop their illegal activities.28 Repeated infringers will be subject to sanctions—a combination of technical sanctions such as suspension of Internet connection, but also filtering, peer-to-peer blocking, and BitTorrent URL blocking, and so on. For the time being German ISPs have a great excuse for not putting such graduated response models in place: In Germany, even the storage of IP addresses and the matching of an IP address with the individual customer detail is illegal.29 We have the strictest data protection law in Europe. Such matching may only take place for accounting purposes, for fixing technical defects, and for any other purpose if there is a legal basis for this. Currently there is none according to our Ministry of Justice. So that is the status of our law currently. We cannot do anything. That is basically something all the providers are hiding behind. [Slide] Coming from Berlin I brought this picture from the Berlin Wall. We are feeling that we are running against the Berlin Wall. That is actually our office there, where the arrow is located. I wrote on the Berlin Wall our demands for governmental action: We need to have governmental support, we need real sanctions, and we need balance between protection of our property and data protection. [Slide] What does the latter mean? Data protection—governments, and also ISPs and the infringers, are hiding behind data protection, because they say, “These are my personal data, you cannot use them, you cannot even store them to find out who is the repeated infringer.” But there is also the notion of protection of our property. So we need to find a reasonable balance between these two fundamental rights We are counting on two European Court of Justice decisions, the Promusicae v. Teléfonica case30 of January 2008 and the LSG/Tele 2 case31 of February 2009. There the Court held that the freedom of Member States to balance is limited because the implementation and interpretation of the EU Directives is governed by EU fundamental laws, and courts and authorities have to consider such laws and apply the principle of reasonableness. This is very helpful. The decisions do not oblige member states to protect us directly but each member state should take this principle into consideration. It is the right step into the right direction. [Slide] Let’s assume we introduce such a model. It has to have deterrent sanctions enshrined in it, because otherwise it will lose its effect. When you receive a warning without a sanction attached to it, you are likely not to take it serious. Regarding sanctions, I am presenting you here some interesting figures taken from a consumer survey of 2009 in Germany. For whatever reason—I don’t know—Germans prefer to be fined rather than to be temporarily suspended from the Internet. If you reverse it, you see that a temporary suspension would be the ideal sanction, because people hate it. [Slide] Then the following question was asked: There are considerations as to send warnings to individuals posting protected recordings prior to taking legal steps; how do you think these individuals would react? As you can see, the majority, 70 percent, would say, “We’ll stop after receipt of the 2nd warning.”32 That is what we want. We don’t want to litigate against these people anymore. [Slide] Also in Spain most consumers do not wish to be “disturbed” in their illegal file sharing as only 3 percent think that more legal enforcement would be required. Id. Bundesdatenschutzgesetz [BDSG] [Federal Data Protection Act], Jan. 14, 2003 BGBL I. (F.R.G.). 30 Case C-275/06, Promusicae v. Teléfonica de España S.A.U., [2008] E.C.R. I-00271. 31 Case C-557/07, LSG-Gesellschaft zur Wahrnehmung von Leistungsschutzrechten GmbH v. Tele2 Telecomm. GmbH, [2009] E.C.R. I-1227 (Order of the Court (Eighth Chamber), Feb. 19, 2009), available at http://eur-lex.europa. eu/LexUriServ/LexUriServ.do?uri=CELEX:62007O0557:EN:NOT. 32 See IFPI, Digital Music Report 2009, supra note 14, at 25. 28 29

264  CHAPTER V: COPYRIGHT LAW Some of these slides, by the way, are translated versions of slides I have used in our lobbying sessions in front of the government. [Slide] This is the last slide, where you see the win-win situation for all. We think that the fans are steered on the legal path and want to avoid dealing with prosecutors and judges. No cease-and-desist letters are sent to them anymore. They do not have to pay lawyers’ fees. Parents and customers know where they stand. For the ISPs, illegal bandwidth use is reduced which leaves more space for their pay services. No threats by courts or prosecutors. Finally, for the right owners: highly efficient after the first warning—I showed you the figures—and there is a better chance for legal exploitation. And finally, also the citizens are not exposed to risks anymore, and less burden for prosecutors and courts. The German government has now invited various rights owners and interest groups for talks about the online environment (topics are technology, education, etc.). I finished seven seconds earlier than I thought. Thank you very much. DR. SHAPIRO: Thank you, Nils. Turning from Europe to Asia, we are pleased to have Dr. Stanley Lai of the firm of Allen & Gledhill in Singapore to bring us a report on the latest on developments in that region. DR. LAI: Thank you, Dr. Shapiro, and thank you, ladies and gentlemen, and the organizers of the Fordham Conference for this very kind invitation. [Slide] If you look at the title of my talk, had I known that I had this time to speak, I probably would have restricted the title of the talk, which I probably have anyway. [Slide] As far as safe harbors are concerned, we have had over ten years of safe harbors introduced in various forms. Asian countries with safe harbors include Singapore, China, Hong Kong, and Taiwan. Something to be said about Hong Kong: They are contemplating a Code of Practice where, by some industry agreement, hopefully there will be an arrangement where people agree to takedowns and so on. The International Intellectual Property Alliance has basically recommended in its report that Hong Kong be monitored by the USTR, amongst other things, to see whether heightened compliance should be required, hopefully by legislation. Malaysia has also presented a strange hybrid in the form of self-regulation. ISPs have apparently signed up to a complaint-and-takedown procedure under this content code orchestrated by the Multimedia and Content Forum of Malaysia.33 [Slide] In terms of graduated response laws, which Shira alluded to earlier, they have been controversial, and I think it will be a challenge, for reasons which I will outline, to implement them uniformly across Asia. The New Zealand Section 92A34 did not really follow through because it was passed by an outgoing administration. The incoming administration has decided that perhaps they have to go back to the drawing board. South Korea, as Shira said, passed a bill on 1 April 2009.35 We haven’t really seen the detailed text yet, but indications are that the Ministry of Culture will suspend for up to six months and they are talking about fines up to 30 million yuan, which translates to about US$23,000. [Slide] Compounding the problem of securing ISP cooperation in enforcement in Asia are the different standards of secondary liability imposed. So we look, for example, in Singapore we talk about infringing authorizations, and we have applied the narrow approach mandated in See Copyright (New Technologies) Amendment Act 2008, supra note 12. See Kim Tong-Hyung, “Upload a Song, Lose Your Internet Connection”, Korea Times, Apr. 5, 2009, http://www. koreatimes.co.kr/www/news/tech/2009/04/133_42594.html. 35 See supra note 11. 33 34

Part A: Infringement & Remedies  265

CBS and Amstrad [phonetic]. That was done by the Singapore Court of Appeal in Ong Seow Pheng v. Lotus Development Corporation.36 The Malaysians talk about “causing any other person to do,” the doing of which is controlled by copyright, which may speculatively be a slightly broader test and may extend to facilitation. There is also Section 86 of the Thai Penal Code,37 where the police can give ISPs notice of illegal activities. Under Article 22(3) of China’s latest Regulations on the Protection of Information Network Dissemination,38 Shira successfully brought litigation against Yahoo.cn,39 which I think, following this new regulation, has set the landscape for litigation in China to come. A contrast would be the Baidu decision,40 which I will make reference to. [Slide] In terms of pre-action remedies in Singapore, I wish to make particular reference to the Odex decision,41 which is an instance that went to the High Court. It was actually a pre-action discovery order where the producers of Japanese Anime successfully obtained the disclosure of subscriber details. Odex acted against Pacific Internet. [Slide] But the problem with this litigation was that Odex was actually an agent of the copyright owner, and not the copyright owner. What was stated very clearly in this case was that as an agent Odex had no loco standi to apply for successful pre-action discovery.42 So henceforth only the copyright owner or the exclusive licensee will have that right to apply for pre-action discover under Order 24, Rule 6 of Singapore’s Rules of Court. There were other actions brought by Odex against other service providers, one of whom I represented. But essentially the question we will ask, of course, is whether in future judicial scrutiny will be brought to bear upon tracking solutions, because technological reports will be submitted that make reference to tracking solutions. The question then is: Does the URL which is disclosed by the tracking solution really point to the perpetrator? You can have a situation, especially in close cluster housing, for someone to actually make use of the URL of a neighbor, what we refer to as ‘mooching.’ The other significant point about the Odex decision was that the ISP is not entitled to raise subscriber confidentiality as a reason for withholding disclosure/pre-action discovery. So that has been made clear under Singapore law. [Slide] The Jeyel case43 was one case where the content aggregator basically had to take down a Web site and take down photographs which were the subject of copyright protection. It was held that safe harbor provisions did not apply.

[1997] 3 SLR 137. Thai Penal Code § 86. 38 Regulations on the Protection of Information Network Dissemination Art. 22(3), available at http://www. chinaitlaw.org/?p1=print&p2=060717003346 (“Under the following circumstances, a network service provider that provides information storage space to a service object or provides works, performances, or audio-visual recordings to the public through the information network, shall not be liable for compensation: … Having not known and having no justified reason to know that the works, performances, or audio-visual recordings provided by the service object have infringed upon an other’s right;”). 39 IFPI v. Yahoo! China (Beijing No.2 Interm. People’s Court, Apr. 24, 2007); see IFPI, Statement from John Kennedy, Chairman and Chief Executive of IFPI, on Today’s Yahoo! China Ruling (Apr. 24, 2007), available at http:// www.ifpi.org/content/section_news/20070424a.html. 40 EMI Group (H.K.) Ltd. v. Beijing Baidu Network Tech. Co. Ltd. (2007) (Beijing District No. 1 Interm. People’s Court). [Editor’s note: Subsequent to the conference, on Jan. 27, 2009, Baidu won in a second suit brought by record labels in the Beijing 1st Intermediate Court. See Kathrin Hille & Justine Lau, “Ruling on Baidu a Blow to Record Groups”, Fin. Times, Jan. 27, 2010, http://www.ft.com/cms/s/0/123c3dca-0af0-11df-8a26-00144feabdc0.html. 41 Odex Pte Ltd. v. Pacific Internet Ltd., [2008] SGHC 35 (High Court), appeal from [2007] SGDC 248 (District Court). 42 Odex, [2008] SGHC 35, at para. [18]. 43 Jeyel Techs. v. Perspective Models (Singapore 2005). 36 37

266  CHAPTER V: COPYRIGHT LAW [Slide] As for developments in China, you would be aware of the Baidu case,44 where Baidu actually was held not liable for copyright infringement. As a search engine, it was not able to control contents on a third party website. This was a decision of the Intermediate People’s Court in 2007. I think it was also something that was decided before the latest Internet regulations came into force. [Slide] What is really happening now is if you look at the number of record industry takedowns and the number of notices issued, there has been a surge between 2007 and 2008 to about 10,000 notices, averaging a takedown rate of about 62 percent. This is taken from the IIPA 2009 Special 301 Report.45 [Slide] If one is to look at the right column, you will see all the grievances that the IIPA has expressed towards China and the challenges they would bring for copyright enforcement. On the left column, I think what was also observed was that a number of the sites that were taken down actually come and get resurrected and appear in a different guise with a different repertoire of content. But mention should be specifically made, as I have been instructed by Shira to do, that the Yahoo! litigation46 resulted in the takedown of 229 tracks, with fines imposed for each of them as well. That is where Yahoo! was actually sued not as a search engine, but as a provider of music service. [Slide] Some general comments about effective ISP enforcement in Asia. We wonder and question whether safe harbors are the way to go in future. Safe harbors do not necessarily discriminate between the different forms of intermediary. So I think we need to talk about the fact that a lot of Asian ISPs are also content aggregators and also content providers. So there must be another way of doing it. Now, is the way to do it the three-strike law? I am not sure whether the three-strike rule in its current form will necessarily attract the results desired. [Slide] You have, of course, the ‘Googles’ of the world that always will make certain statements, like the fact that claims for copyright infringement are very extravagantly made, and a lot of people may decide to take down third party content rather than face a fight. [Slide] There could possibly be a surge in the ISP deployment of digital filters, and that we should view this development favourably, provided that they are not used as reasons to avoid compliance with copyright demands. [Slide] As far as the three-strike rule is concerned, I would just say this by way of conclusion. I think what people will be concerned about is the over-reliance of the evidence and allegations made by one party, the right owner. Is there provision made for judicial oversight? The content community needs to be convinced. That assurance should be forthcoming from the owners. ISPs, I think, need indemnification as well, because I think of pre-action discovery applications, in which you will have instances where the person bringing the application would undertake not to take proceedings against the ISP. I think similar assurances would help you achieve this graduated response. I think, ultimately, something which I didn’t hear this morning was the idea of uniform implementation in Asia can only work if the bilateral agenda is made clear by the United States. In other words, you would get countries like Malaysia and Indonesia on-board if you actually engage and want to bring about the uniformity. Otherwise we are going to be in the situation where there will be a wide range and variety of different approaches. 44 EMI Group (H.K.) Ltd. v. Beijing Baidu Network Tech. Co. Ltd. (2007) (Beijing District No. 1 Interm. People’s Court). 45 Int’l Intellectual Property Alliance (IIPA), 2009 Special 301 Report, available at http://www.iipa.com/ 2009_SPEC301_TOC.htm. 46 IFPI v. Yahoo! China (Beijing No. 2 Interm. People’s Court, Apr. 24, 2007).

Part A: Infringement & Remedies  267

Thank you very much.

DR. SHAPIRO: Thank you, Stanley.

I think we are making good progress. Shira Perlmutter has given us a broad overview of emerging patterns and themes in ISP participation. Nils Bortloff reported on developments in Europe and Stanley Lai on recent events in Asia. This might be a good time to stand back a bit and begin to draw some lessons in this broad field over a longer period of time. To help us out on that, we are very fortunate to have on the panel Professor Justin Hughes from the Benjamin Cardozo School of Law. PROF. HUGHES: First, thanks to Hugh for organizing this, because his efforts in organizing this at long distance were tremendous. I have been very interested in this subject of Internet service provider liability since the DMCA. The reason I am particularly interested now is five years ago I wrote an article where I said, like many professors at the time, these issues are all settled.47 One of the nicest things is to find out when you are totally wrong. I think I am totally wrong on this. These issues definitely were not settled. Now, Shira, being the diplomat she is, had this beautiful phrase. You heard her say, “We are looking for helpful behavior rather than liability for infringement.” I thought that was great. But I am going to give you, I think, what is a better sound bite, that the period now is asking ISPs to take responsibility, not liability. It is a period of increased responsibility, not increased liability, for ISPs. ISPs were always, as Shira said, susceptible, or they had a variety of different responsibilities, in order to qualify for the liability limitation system of the DMCA48 or the Electronic Commerce Directive49 or Japan’s Provider Liability Limitation Act.50 All these laws envisioned some responsibility being undertaken by the ISP in order to limit or sculpt the financial liability they faced. Now, why are we in a period of reassessing the responsibility? We are in a period of reassessing the responsibility mainly because of technological changes and business model changes. I want you to think about it as a quadrant system of technological changes, business model changes, and then think of two very different types of ISPs. Think about transmission ISPs, which is what we have been discussing a lot here, and also think about hosting ISPs. So let’s talk about technological change. This interests me a lot because those of you who have been party to the copyright and technology discussions of the last ten years, a decade, know that there is a large camp of people who have been kind of what we might call technological determinists. Their position has been “technology will make it impossible to enforce copyright, so don’t even try.” Well, I am not a technological determinist, but I think if you live by the sword, you die by the sword. If the technology is making enforcement easy, then you also have to raise the question: Well, technology is making enforcement easy, so does that then make it inevitable? As to the technological difference that has happened—let’s talk about transmission ISPs—is if you look back at the Electronic Commerce Directive51 and you look back at the DMCA,52 there was no thinking a decade ago that transmission ISPs could detect what was happening See Justin Hughes, “The Internet and the Persistence of Law”, 44 Boston College L. Rev. 359, 383–87 (2003). Online Copyright Infringement Liability Limitation Act, Title II of the DMCA. Pub. L. No. 105-304, 112 Stat. 2860, 2877 (codified at 17 U.S.C. § 512) (1998). 49 E-Commerce Directive, supra note 2. 50 Act on the Limitation of Liability for Damages of Specified Telecommunications Service Providers and the Right to Demand Disclosure of Identification Information of the Senders (Act No. 137 of Nov. 30, 2001), translation available at http://www.soumu.go.jp/main_sosiki/joho_tsusin/eng/Resources/laws/pdf/H13HO137.pdf. 51 E-Commerce Directive, supra note 2. 52 Pub. L. No. 105-304, 112 Stat. 2860, 2877 (codified at 17 U.S.C. § 512) (1998). 47 48

268  CHAPTER V: COPYRIGHT LAW in wire time. There was no thought that they would have definitive knowledge of what was actually going through the system as it was happening. So the knowledge standards that they are crafting for hosting ISPs are completely different from the standards of knowledge—they are nonexistent—for transmission ISPs. That reflects a technological moment, law responding to technology in a way. Since then, technologically, we have heard a lot about packet inspection, deep packet inspection, and traffic pattern management on the Internet.53 The technology has evolved to a point now where we can know in wire time, we can know while it is happening, what is being transmitted. Now, many of you have heard debates or discussions, disputes, arguments, impassioned arguments, about deep packet inspection and packet inspection. I’d be happy to talk to anyone after this session or during the conference about that. Some of the filtering technologies that are being proposed—for example, in the Belgian SABAM case54—it remains open to be seen whether the filtering technology would require merely packet inspection, which is looking at the header of each packet going through the Internet, or deep packet inspection, which would require some examination of the contents of the payload. But there is one thing I want you to leave here understanding technologically. You have probably heard a lot about the disputes about BitTorrent being throttled by Internet service providers already. In the United States, in Canada, in Singapore, in Australia—I don’t know about European jurisdictions—there is no question that Internet service providers are already throttling BitTorrent activity. They are throttling it for the reasons Stanley said, for the reasons Shira said. It’s a question of consumption of their bandwidth. But you need to know that the capacity to do that does not depend on deep packet inspection. It is usually a matter of detecting traffic patterns. That is why people think even encrypting BitTorrent will not prevent its effective throttling by ISPs that want to do it. So the technology has changed massively. The business models have changed massively. We have already said many times that the problem for the ISPs now is they suddenly find in a subtle way their business interests aligned with copyright holders. In particular, their business interests are aligned with the audio-visual product owners, because it is the downloading of the audio-visual products that consumes huge amounts of their bandwidth. They are charging everyone a flat rate and they have 5 percent of their customers using 85 percent of their bandwidth. Now, what has not been explained to you is that is a tremendous problem for them in the United States. In the United States in 1995 the ISP AOL—and we will soon have a generation of people working on this who don’t know what that was—moved from metered charging of the Internet to the buffet, “one price, all you can eat.” When they did that, all ISPs followed them, and that is the business model now. Now, the problem for the ISPs is: can they move back to metering? The answer is no, because under existing U.S. doctrines of vicarious liability, if they moved back to metering they might open themselves up to vicarious liability for all the downloading that is happening in the system. So they are stuck. They need to reach private agreements in order to start throttling the BitTorrent activity. Now let me talk about hosting a little bit. 53 See generally Rob Frieden, “Internet Packet Sniffing and Its Impact on the Network Neutrality Debate and the Balance of Power Between Intellectual Property Creators and Consumers”, 18 Fordham Intell. Prop. Media & Ent. L.J. 633 (2008). 54 See SABAM v. S.A. Tiscali (Scarlet), No. 04/8975/A (D.Ct. Brussels, June 29, 2007), translation available at 25 Cardozo Arts & Ent. L.J. 1279 (2008).

Part A: Infringement & Remedies  269

In hosting, in the past five years we have seen this amazing shift again in the technology, in the capacity of filtering technology, from the days when hosting sites said they could not find anything to nowadays when on Hulu or YouTube—YouTube has extremely sophisticated I.D. capacity in terms of I.D.ing where an audio-visual work comes from, whether that copyright owner wants it taken off the system or wants to be paid for it.55 Most of them want to monetize that. So what we have had, interestingly, in the debate—this is what I want to leave you with on the technology shift in Web-hosting ISPs—is ten years ago the policy argument that ISPs made was that copyright infringement was like defamation: you could never be sure about it, and because you could never be sure about it, you didn’t want the ISP to act as a private censor. You wouldn’t want him to do censoring for defamation; you shouldn’t want him to do it for copyright infringement. This was a kind of policy equation that was used in all the discussions. What has happened in the past few years is that has broken and the new policy equation, which the ISPs do not want to talk about, is copyright infringement looks like porn: you can filter it, you are filtering porn; why don’t you filter the copyright materials? That is a question not of being able to detect all of the copyright infringement on the planet, but being able to detect everything that exists in a database. So the shift in the filtering technology capacity has really changed the ground on which the ISPs can make arguments. Finally, let me say on the business models that, obviously, what has also happened in the past three-to-five years is it has become very clear which Web-hosting sites are copyrightinfringement-based business models, that is business models that are not user-generated content but other people’s content. To the degree that a business Web-hosting ISP is clearly that, increasingly in my opinion, courts are finding them and shutting them down. Stanley talked about the Baidu case.56 But what is more interesting is after the Baidu case in Japan—I think Professor Wang from Shanghai is here—the Chinese have been enforcing massively in a series of four cases in Shanghai and Beijing, shutting down these types of Webhosting sites. DR. SHAPIRO: Thank you, Justin. The interaction between content owners and ISPs of course has real-world consequences, from crafting the scope of an injunction to issues of investor liability. To provide insights on these and other leading-edge issues, we are fortunate to have Carey Ramos from the firm of Paul, Weiss, Rifkind, Wharton & Garrison, who has been involved in a number of the most important Internet-related copyright infringement cases. MR. RAMOS: Over the last decade, I have represented songwriters and music publishers in lawsuits in the United States to deal with the problem of free peer-to-peer services that allow individuals to “share” music over the Internet, beginning with the Napster lawsuit,57 then Aimster,58 then Grokster.59 As I’m sure you all know the headline—it is now almost four years ago—in June 2005 the Supreme Court unanimously held that Grokster and the other defendant in that case, a company called Streamcast, could be held liable on an inducement theory.60 It appeared we had a wonderful decision, end of story, we could declare victory, drink glasses of champagne, and we were done. 55 YouTube Copyright Policy: Video Identification Tool, http://www.google.com/support/youtube/bin/answer.py? hl=en&answer=83766. 56 EMI Group (H.K.) Ltd. v. Beijing Baidu Network Tech. Co. Ltd. (2007) (Beijing District No. 1 Interm. People’s Court). 57 A&M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (9th Cir. 2001). 58 In re Aimster Copyright Litig., 334 F.3d 643 (7th Cir. 2003). 59 Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913 (2005). 60 Id. at 931.

270  CHAPTER V: COPYRIGHT LAW Not so easy. I have spent the last nearly four years since then continuing to litigate these issues. I want to talk a little bit about what I would call “the devil in the details” that we found after we won our victory in Grokster. A little bit of history. Napster, as you may recall, was a centralized P2P service. It maintained a list of all the songs that were available. So it was easy to establish that they had knowledge of the songs that were available on the service. Grokster and Streamcast had decentralized services that relied on lists that were maintained on third-party sites. So they took the position, “We don’t know what is being offered in our services, we don’t know what the users of our services are trading using our software, and therefore we shouldn’t be held liable.” We sued them in October 2001, had a lot of discovery, then we moved for summary judgment before the trial court judge. Streamcast and Grokster counter-moved for summary judgment. The judge granted summary judgment to the defendants.61 The judge reasoned that, under the Sony Betamax case,62 which Andrew referred to earlier this morning, which I am hoping at this point I can dig down a little bit farther in the details— in Sony Betamax the Supreme Court said that you cannot bring a claim with regard to the distribution of a device on the theory that the distributor knows, the manufacturer in that case of the Betamax, that it can be used for infringing purposes. Even if you present statistical evidence showing that the majority of users are using it for infringing purposes, that is not enough because it has substantial noninfringing users.63 Therefore, the Court said you had to demonstrate actual knowledge by the manufacturer of specific instances of infringement by users of the product, which Sony could not establish it had. Similarly, in Grokster the trial court judge said Grokster doesn’t have knowledge, Streamcast doesn’t have actual knowledge, of infringement by its users at a time that it could stop them from infringing.64 That was the standard that we were held to, which we thought was virtually impossible. We thought on that standard we would never be able to prevail in one of these cases. The Ninth Circuit affirmed 3–0.65 We took the case to the Supreme Court, which, as I said, unanimously reversed and said: “Forget Sony Betamax. There is another theory here that the plaintiffs can pursue, and this was inducement, that they were actively promoting the use of their software for infringement.”66 We had lots of evidence of how they were doing this on their Web sites, where they had tutorials and were urging people to use their software to share songs that were copyrighted. As I said, we opened the bottles of champagne. But the Court sent us back to the district court to actually have the ribbon tied around the boxes, to finally put these services out of business. So we went back. We moved for summary judgment, which we got from the district court.67 We then moved for an injunction. We did not seek damages because these services had virtually no money and we had no expectation that they would be able to pay substantial damages. So we sought a permanent injunction against Streamcast.68 Streamcast was meanwhile continuing to operate, continuing to distribute their software. As I said, we filed a motion. Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 259 F. Supp. 2d 1029, 1046 (C.D. Cal. 2003). Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417 (1984). 63 Id. at 498. 64 Grokster, 259 F. Supp. 2d at 1037–38. 65 Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 380 F.3d 1154 (9th Cir. 2004). 66 Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 931 (2005). 67 Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 454 F. Supp. 2d 966, 999 (C.D. Cal. 2006). 68 Id. at 1033. 61 62

Part A: Infringement & Remedies  271

The court holds initially that a motion for injunctive relief is subject to the eBay standard from patent law,69 because in Grokster the Supreme Court had used the inducement standard from patent law by analogy,70 applying it to copyright law, which opened the door to applying the eBay case in a copyright situation. The court said nevertheless that we had satisfied the eBay standard primarily because we had no expectation of being able to get damages from these defendants,71 precisely the reason we had moved for injunctive relief. Now we turn around to what is the nature of the injunction. We asked for an injunction that would have prohibited Streamcast from assisting, contributing, enabling its users in copyright infringement. The court said: “No, no, no. You are only entitled to an injunction against inducement, against actively promoting the use of the software for infringement.”72 The problem we had at this point is the service has been operating for six years, all of the users know how it can be used, they no longer have to be educated as to how to use it for the purposes of infringement, and essentially what the court was doing was taking away the victory we had won in the Supreme Court. The court said that we would have to establish, as it had ruled originally, that with regard to contribution or assistance in any way to infringement that the service had actual knowledge that the users were engaged in infringement. The court also appointed a Special Master to consider possible filtering systems that could be used to filter out infringing files. We then proceeded through a series of six months with a Special Master, until finally Streamcast filed in bankruptcy73—not because of our lawsuit, but because of another claim that had been filed against them by another party completely unrelated to copyright infringement. The end of the story: the service was put out of business, which was wonderful for my clients. But we are left with a state of law, if somebody goes back and looks at all these cases, that is not terrific from the point of view of the copyright owner. Again, the devil is in the details. I want to talk very briefly about damages where you can prove damages. I brought a lawsuit on behalf of the same clients, the songwriters and music publishers, against Bertelsmann for having invested in Napster,74 a case that we were successful in settling for $130 million, again a wonderful result. But in the course of that case Bertelsmann raised a defense that to prove damages we would have to show that the songs were actually distributed. It would not be enough to prove that the songs were on people’s hard drives and were on these third-party lists, but that they had actually been distributed. Judge Patel, fortunately, ruled that we would be able to prove that by circumstantial evidence, statistical evidence, and other things, in order to establish damages.75 But meanwhile the record labels proceeded to bring lawsuits against individual users. In those cases, in situations where judges were faced with the prospect of massive damages against individuals, the courts said that it was not sufficient to be able to show that the files were being made available, that the Copyright Act required actual distribution.76 eBay Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). Grokster, 545 U.S. 913, at 931. 71 Grokster, 454 F. Supp. 2d at 997. 72 Id. 73 Jon Healey, “Streamcast’s Undoing”, L.A. Times, May 5, 2008, http://opinion.latimes.com/bitplayer/2008/05/ streamcasts-und.html. 74 In re Napster, Inc. Copyright Litig., 377 F. Supp. 2d 796 (N.D. Cal. 2005); see also Sandeep Junnarkar, “Lawsuit Targets Bertelsmann Over Napster”, CNet News, Feb. 20, 2003, http://news.cnet.com/Lawsuit-targets-Bertelsmannover-Napster/2100-1027_3-985285.html?tag=mncol;txt. 75 In re Napster, 377 F. Supp. 2d at 805–06. 76 See Robert Kasunic, “Making Circumstantial Proof of Distrubtion Available”, 18 Fordham Intell. Prop. Media & Ent. L. J. 1145, 1154 n.35 (2008). 69 70

272  CHAPTER V: COPYRIGHT LAW Now, I think the answer here is the answer that Judge Patel gave—this is not really a rights issue, it is really an evidentiary issue—Can you show through circumstantial evidence that the songs were actually being distributed? I think the answer is, in dealing with P2P services, big services, you can probably prove that through statistical evidence and circumstantial evidence of infringement. With regard to an individual, it may be much tougher to prove that. I will wrap up at this point. Thank you very much. DR. SHAPIRO: Thank you, Carey. Up to this point in the panel, the underlying law that has informed any number of these presentations has been the law of third-party liability, whether secondary contributory infringement, or vicarious liability, or even the U.S.-style inducement theory. We now shift legal gears slightly. My colleague David Carson, General Counsel of the U.S. Copyright Office, will address an important direct liability case, the Cablevision case.77 David, it’s all yours. MR. CARSON: Thank you, Michael. [Slide] You can see the question I have posed.78 I don’t propose to answer the question, but perhaps it will become apparent to some of you and perhaps we can get into it during the discussion. Hugh wanted us to have a discussion of the Cablevision case, probably for a couple of reasons. First of all, it is probably fair to say it is a fairly controversial decision, whether you like it or not. Second, the U.S. Supreme Court is now seriously considering whether to review that case.79 [Slide] The Court doesn’t take copyright cases all that often. If you look at the last ten years, depending on how you count, it has taken anywhere from three to five copyright cases. I would say it is really three because the first of those was a case that was summarily disposed of without even full briefing, and the fourth of those cases, the Dastar case,80 while it said a lot about copyright, wasn’t a copyright case. So, in fact, the copyright cases reviewed by the Court are few and far between. The last one was the Grokster case in 2005.81 For many of us that’s just fine, because whenever the Court agrees to take a case we all sort of cringe and wonder, “Oh my God, what are they going to do with it now?” [Slide] Before we get on to Cablevision, I will just mention that the Court has within the last month or so agreed to take another copyright case, the Reed Elsevier case,82 known up until now as In re Literary Works in Electronic Databases Copyright Litigation.83 That was a decision from the United States Court of Appeals for the Second Circuit on an issue that for most of you who do not practice U.S. copyright law probably is not at all interesting. The question is whether 17 United States Code Section 411(a) restricts the subject matter jurisdiction of the federal courts over copyright infringement actions. [Slide] Section 411(a) is the provision that says that for a United States work you may not file a suit for copyright infringement unless you have first registered the work.84 Cartoon Network LP, LLLP v. CSC Holdings, Inc., 536 F.3d 121 (2d Cir. 2008). The slide reads: “The Cartoon Network (Cablevision) Decision: Copyright Cataclysm or Tempest in a Teapot?” 79 Subsequent to the conference, the U.S. Supreme court denied cert. in Cartoon Network. See 77 U.S.L.W. 3704 (U.S. June 29, 2009) (No. 08-448). 80 Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23 (2003). 81 Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913 (2005). 82 Reed Elsevier, Inc. v. Muchnick, 509 F.3d 116 (2d Cir. 2007), cert. granted, 77 U.S.L.W. 3483 (U.S. Mar. 2, 2009) (No. 08-103). 83 509 F.3d 116 (2d Cir. 2007). 84 See 17 U.S.C. § 411(a) (“[N]o civil action for infringement of the copyright in any United States work shall be instituted until preregistration or registration of the copyright claim has been made in accordance with this title.”). 77 78

Part A: Infringement & Remedies  273

The case is perhaps more interesting because of what the underlying case was all about. This was a post-Tasini85 class action lawsuit, which was settled and which permitted all the databases which in the Tasini cases were found not to have the right to include articles by free-lance authors whose publishers had licensed the rights (apparently without permission, as it turned out), but the settlement would have allowed those articles to remain in those online databases, something that everyone thought was a good thing, but would have allowed the authors to be paid, which everyone also agreed was a good thing. The problem was that the vast majority of those articles had never had their copyrights registered, and the United States Court of Appeals for the Second Circuit set aside the settlement, saying, “We have no jurisdiction to approve this settlement when most of the works were not registered.”86 That, in turn, has had implications for the Google Book settlement,87 which my colleague Maria Pallante will be talking about later today,88 a settlement in which unregistered works were carved out. [Slide] But let’s move on to the main event, the Cable News Network case.89 It is typically known as the Cablevision case because that is what it was called in the district court, but every time it has gone to a new court it has had a new name, and it is now the Cable News Network case. In January the Supreme Court invited the Solicitor General in our Department of Justice to file a brief expressing the views of the United States as to whether or not the Court should review the case.90 Jim Toupin this morning explained the process when something like that happens. The Department of Justice canvasses the interested agencies, which express their views. We at the Copyright Office have certainly weighed in with our views. Other agencies have as well. The Solicitor General will ultimately make the call. They have not yet made that call. I don’t know what position they are going to take. In light of that, and in light of the place we are at in that process—and as I explained to Hugh when I said I was willing to talk about the Cablevision case—I am going to do my utmost to express absolutely no views about the merits of the case, but simply to relate to you what the case is about and what the court ruled as well as I can in the remaining time. It would be bad form, to say the least, for me to express a point of view when that is still being considered within the United States government. [Slide] Now, this may or may not help you understand what it is all about. This is actually a slide that I got from counsel for the plaintiffs in the case. You probably all know what a digital video recorder is, a DVR. It is the modern-day equivalent of the videocassette recorder that was the subject of the Betamax case.91 You have it in your home sitting on top of your television set. It digitally records programming for you to watch at a later time. What Cablevision did was to decide it was more efficient to move that digital video recorder to its own servers back at its own facilities. N.Y. Times Co. v. Tasini, 533 U.S. 483 (2001). Reed Elsevier, 509 F.3d at 125 (“[W]e conclude that section 411(a)’s registration requirement is a jurisdictional prerequisite to a copyright infringement suit.”). 87 Increasing Access to Books, The Google Books Settlement, https://sites.google.com/a/pressatgoogle.com/ googlebookssettlement/home. 88 See Chapter V.C, “Rethinking Exceptions & Limitations”, infra this volume. 89 Cartoon Network LP, LLLP v. CSC Holdings, Inc., 536 F.3d 121 (2d Cir. 2008). 90 Todd Spangler & John Eggerton, “DOJ Recommends Supreme Court Not Take RS-DVR Case”, Multichannel News, May 30, 2009, http://www.multichannel.com/article/277478-DOJ_Recommends_Supreme_Court_Not_Take_ RS_DVR_Case.php. 91 Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417 (1984). 85 86

274  CHAPTER V: COPYRIGHT LAW To the consumer, the experience is exactly the same: you have the remote control, you press the “Record” button, and that directs Cablevision’s servers to record the program, and then at some subsequent time you can hit the “Play” button when you want to play that program back, and Cablevision’s servers direct the program to you. One thing that happens in the course of that is that the stream of the initial broadcast, as you will see, is split, so that part of it goes out in real time to subscribers and part of it goes into a buffer, where for no more than 1.2 seconds little tiny bits of that program exist in the buffer. If, and only if, a subscriber has asked that the program be recorded, then those bits are streamed onto a server where an entire copy of the program is made. What this case is about is a number of things. It is about whether those buffer copies are in fact copies, and ultimately infringing copies under our Copyright Law.92 It is about who makes the server copies, the copies of the entire programs; who is responsible for that; and then, once you figure that out, are they liable? And finally, is that playback of the performance to the subscriber at some subsequent time a “public performance” under our law,93 because, as you probably know, we chose to implement the communication-to-the public and makingavailable rights simply by using our existing provisions of the law, in this case the public performance right? The question is whether we actually managed to accomplish that. So, as I said, those are the three issues. So let’s move on. [Slide] First of all, with respect to buffer copies, our statute says you have an exclusive right to reproduce the copyrighted work in copies or phonorecords.94 Copies, in turn, are defined as being “fixed in a tangible medium of expression.”95 To be fixed in a tangible medium of expression, the statute says, “the copy must be sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.”96 The question, quite simply, as far as the court of appeals was concerned, is: Was that buffer copy that existed for no more than 1.2 seconds fixed; did it exist for a period of more than transitory duration?97 Although I have simplified my explanation—I am looking at the clock—I am going to have to simplify it even more. [Slide] The court basically said there are two requirements here. • One is embodiment, and there was an embodiment. In fact, there was an embodiment.98 Even though it was in a serial form, even though you had a 1.2-second snippet at any given time, cumulatively they did add up to the entire work. So that satisfied the embodiment requirement. • However, because it existed for only 1.2 seconds at a time, it did not meet the duration requirement; it was not more than a transitory duration.99 So in the view of the Second Circuit a buffer copy, or at least a buffer copy of 1.2 seconds, is not in fact a copy. But the court did allow that, looking at other case law,100 an embodiment that exists for at least several minutes would qualify as a copy. [Slide] Leaving us to wonder: “All right, some buffer copies are copies, some are not. How long is enough?” The court gave us absolutely no guidance. [Slide] With respect to server copies, the court concluded: “Well, it wasn’t Cablevision that made those server copies. Yes, they were made on Cablevision’s facilities; yes, Cablevision 17 U.S.C. § 106(1) (exclusive right to make copies of a work). 17 U.S.C. § 106(4) (exclusive right to perform a work publicly). 94 17 U.S.C. § 106(1). 95 17 U.S.C. § 102(a). 96 17 U.S.C. § 101. 97 Cartoon Network LP, LLLP v. CSC Holdings, Inc., 536 F.3d 121, 129–30 (2d Cir. 2008). 98 Id. 99 Id. 100 Id. (citing MAI Sys. Corp. v. Peak Computer, Inc. 991 F.2d 511 (9th Cir. 1993)). 92 93

Part A: Infringement & Remedies  275

provided the entire system whereby those copies were made; but it was the subscriber in each case who pressed the “Record” button and caused the copy to be made. It is nothing different than someone who has a photocopy machine on their facilities and allows customers to come and use the photocopier to make photocopies. It is the customer, not the provider of the service, who is responsible.101 The court, drawing from the Netcom case,102 a pretty well-respected case but from a district court, concluded there had to be some element of volition in order to be directly liable, and Cablevision had no such volition; it simply set up an automated system that did whatever the subscriber told it to do.103 So if anyone was responsible it was not Cablevision, it was the subscriber. [Slide] And finally, with respect to public performance—with nine seconds left, I am not going to be able to do that justice—our definition of “public performance” is split into two parts. The part that relates to communication to the public is really the second part, which talks about transmitting a performance or display of the work to the public, whether the members of the public capable of receiving the performance or display receive it in the same place or in separate places and at the same time or at different times104—somewhat reminiscent of what you find in Article 8 of the WIPO Copyright Treaty,105 which talks about communicating to the public, making available in such a way that members of the public may access works from a place and at a time individually chosen by them. [Slide] Well, the court tried to construe the statutory text and looked at the language and focused on the fact that it defined the performance as “transmitting a performance.” The court concluded that in order to have a public performance you had to look at the particular transmission in each case and determine who the potential audience for that transmission was.106 Well, if you think about how the remote DVR works, the playback is to one person at a time. I choose to look at an episode that was broadcast last week at a particular time—perhaps tonight at 7:30 p.m. I will press the “Play” button. That transmission is coming to me, and to me alone. The court concluded that is not a public performance because I am the only potential audience for it, it is a private performance; therefore, no liability for infringement of the public performance right.107 That is really it in a nutshell, and the nutshell doesn’t begin to do justice to the court’s reasoning, I have to say, but it is the best I could do in the allotted time. It is a pretty complex decision, based very much on construction of the statute, but certainly you can imagine all of the policy ramifications behind it that had to be driving the court. While this is not, strictly speaking, a case about the Internet, it’s a case about good oldfashioned cable television, when you think about it, it is precisely about the Internet because these issues are issues that pervade all the cases we are looking at relating to the Internet today and cases to come. Thanks. Id. at 133. Religious Tech. Ctr. v. Netcom On-Line Commc’n Servs., Inc., 907 F. Supp. 1361 (N.D. Cal. 1995). 103 Cartoon Network, 536 F.3d at 130–33. 104 17 U.S.C. § 101 (definition of “public”). 105 World Intellectual Property Organization (WIPO) Copyright Treaty Art. 8, Apr. 12, 1997, S. Treaty Doc. No. 105-17, 2186 U.N.T.S. 152, 36 I.L.M. 65 (Geneva, 1997) (entered into force Mar. 6, 2002) (“Right of Communication to the Public”) [hereinafter WIPO Copyright Treaty], available at http://www.wipo.int/treaties/en/ip/wct/pdf/trtdocs_ wo033.pdf. 106 Cartoon Network, 536 F.3d at 137–38. 107 Id. at 139. 101 102

276  CHAPTER V: COPYRIGHT LAW DR. SHAPIRO: Thank you, David. I knew you would bring that around to the theme of the panel. That’s terrific. Privacy issues have already been briefly mentioned in Stanley Lai’s presentation, but he didn’t have time to give this important topic the justice it deserves. We are very glad to have Allen Dixon, an international intellectual property and technology consultant, who will now dive a little more deeply into this issue. MR. DIXON: Thanks very much. [Slide] We are going to talk a bit about trying to enforce intellectual property rights in light of data protection rules, particularly in the European Union. I wanted to start with something very practical for those of you that do not live in a country that drives on the left side of the road like we do in England. Let me give you a little tip here, which is slightly relevant to my talk but a bit funny. If you do what I did when I first moved to England many years ago, if you walk out in the road and look to your left for the cars coming your way that might run you over, you might get hit by a car coming from the right. This happens fairly often to people who come here from countries that drive on the right side. So here’s the tip for you—there are three things that you do here in England if this happens. The first is you write down the number of the license plate of the car that hit you. The second is you ring the police. The third is you call your lawyer. On the Internet, though, this process sometimes works quite differently, at least in some parts of Europe. If you go on the Internet and get “hit by a car” of some virtual variety and get damaged, you might have a data protection officer standing over you saying, “Don’t write down that license number. That’s personal data.” You could call the police, but in fact they might not prosecute someone that “runs people over” on the Internet in certain ways—unless, as I heard Nils say, the suspect has hit people 3,000 times. Then the police might come. Third, you might not need to bother calling your lawyer, because you may not be able to get the information on who has “hit you” on the internet that you would need to bring a civil proceeding. This is the situation we face in a lot of countries in Europe today with respect to data privacy and the Internet. [Slide] Very relevant to this issue, the European Charter for Fundamental Rights.108 There is a lot of talk about rights to have access and do anything you like on the Internet. You don’t hear much about the fundamental European rights that protect people who get “run over” on the Internet, though. In our Charter in Europe there are fundamental rights on both sides of this issue. We have fundamental rights to protection of our personal data and to the privacy of our personal lives.109 These rights actually work pretty well in many cases. We don’t get a lot of junk mail through the letter box, for example (although we still get spam online). There is quite a strong tradition and strong legislation protecting personal rights and personal privacy. The rights you do not hear much about in this debate are the fundamental rights in Europe to property, including specifically intellectual property, and to have effective judicial protection of your property. There is truly a balance and a way forward to be achieved and reconciled between what are called fundamental rights on both sides of the issue. 108 Charter of Fundamental Rights of the European Union, 2000 O.J. (C 364) 1, available at http://www.europarl. europa.eu/charter/pdf/text_en.pdf [hereinafter EU Fundamental Rights Charter]. 109 Id. Arts. 7–8.

Part A: Infringement & Remedies  277

[Slide] The data privacy debate surrounding IPR enforcement often focuses on “IP addresses”. How many of you all know what an IP packet header is? [Show of hands] We’ve got a few smart Internet people here. Basically, every bit of information on the Internet has an IP address in it. Every file that is sent over the Internet is sliced and diced like hamburger into “packets”, and every little packet has the IP address of the computer that is sending the data and the computer that is receiving the data listed in the “header” of that information “packet”. These look a bit like what you see here. That number—83.140.65.11— is the IP address today for thepiratebay.org. We are all waiting to see what the court decision on that site is.110 This other IP address you see here is the IP address of the computer in my office as of two days ago. So if anybody sends me anything over the Internet from anywhere in the world, the packets containing that data would have my IP address in them and would come to my machine and reassemble themselves into whatever you have sent me. It is very important to understand this because there is a lot of mythology around the topic of IP addresses. This is how the Internet works. This is how things are sent. There are several basic points I wanted to make about this. ISPs assign these IP addresses to us. Each packet contains these IP numbers, which are a designation of the computers—not the people, but the computers—that are sending it and receiving it. The information as to who actually is sitting at the end of that IP address is often unknown to everyone except the internet service provider who assigned the number. If you went on the Internet and saw my Internet IP address, you would not find anywhere that that it had been assigned to me. Only my ISP knows who I am. Now there are public sites that can be tied to their particular IP address, like The Pirate Bay, but that is because they identify themselves online. [Slide] Data protection rules, very generally, cover identified or “identifiable” individuals. There is a lot of debate about IP addresses being personal data, and the basic question is: Does the IP address relate to an identifiable person? In the case of The Pirate Bay, it probably does. In the case of me, none of you in this room could identify me by my IP address without going to court or the police. There are restrictions on processing of data that is deemed personal data. You have to have a legitimate use.111 I will come back to that. There are additional restrictions that apply to the ISP. If I am a telecoms provider, I actually know who my customers are, so I have additional restrictions on what I can do with this kind of IP address information. [Slide] So how are right owners enforcing their rights against online infringements in light of data protection rules? For simple notice-and-takedown,112 this is fairly easy. For notice-andtakedown, you actually do not need to know who the person is. That’s not your intention. You just want to get pirate material off the internet. So data privacy issues, I would say, do not come up very often in notice-and-takedown. But when you are doing evidence collection along the lines of being “hit by a car” on the Internet—when you want to bring criminal or civil proceedings to get redress—this is where the IP addresses are unavoidably necessary. You need an IP address to find out who 110 Subsequent to the conference, the operators of The Pirate Bay were found guilty of copyright infringement by a Swedish court. See Case No. B 13301-06, In re Neij, [Stockholm District Court (Tingsrätt), Division 5, Unit 52], Apr. 17, 2009 (Swed.); see also “Four Found Guilty in Landmark Pirate Bay Case”, CNN.com, Apr. 18, 2009, http://www. cnn.com/2009/TECH/04/17/sweden.piracy.jail/index.html. 111 EU Fundamental Rights Charter, supra note 108, art 8. 112 The European Union has instituted several directives aimed at protecting privacy of data and electronic communications. See Council Directive 95/46, Data Protection Directive, 1995 O.J. (L 281) 31 (EC); Council Directive 2002/58, Directive on Privacy and Electronic Communications, 2002 O.J. (L 201) 37 (EC).

278  CHAPTER V: COPYRIGHT LAW the infringer’s ISP is. You ultimately need the IP address to find out who has hit you on the Internet. To do that, the data protection rules in different countries produce different results. In principle, protecting one’s own “legitimate interests” is actually a permitted basis for collecting personal data and securing disclosure of an infringer’s identity under the EU data protection directive.113 In some countries, however, this rule has been implemented in ways that make this very difficult or impossible to do in practice. In some countries, if you go along with your cap in your hand and say, “I’d like to actually look up who hit me on the Internet. Can I do this, Mr. Data Protection Czar?” the authority will give you an imprimatur and say, “Yes, go do this,” and then you can collect the evidence. Sometimes it is necessary to go to court to get approval for such evidence collection. Some of the right holders—SACEM—in France had to go to court when the Data Protection Commissioner said, “No, no, you can’t collect this kind of data at all.” The court overturned this decision and said that they could.114 The situation we are at in some countries now—Germany and Spain, for example—is that you pretty well cannot get disclosure of internet infringers’ identification at all for civil proceedings. The Promusicae case115 that went to the ECJ basically found—and I almost thought about putting a flashing waffle up here because the decision was such a waffle—“Yes, you have to respect the rights, the property rights, the fundamental rights, of IP owners, and you have to respect the privacy rights of individuals. But EU Directives do not actually force the Member States to do this in any particular way, so you all go home and figure it out.” And the Spanish courts then found that Spanish data protection law had not been implemented in such a way as to allow identification of an individual behind an IP address in a civil lawsuit, even by court order.116 Right now we are in a situation where there is a real patchwork of the ways that Internet enforcement of civil and criminal rights is dealt with under data protection law, and in some cases it actually does not work. [Slide] So really, the question is—and I will end with this: Is a fix needed? Perhaps a code of practice would help. I saw Margot Fröhlinger from the Commission here, who has negotiations going on between various stakeholders on how to cooperate better in the area of internet IP enforcement. Sensible ISPs and rights holders could sit down and work out between themselves how exactly this type of evidence could be collected and used, when it would be necessary to go to court, and when ISPs would disclose evidence pursuant to a court order, for example. Perhaps a legislative fix is needed? If anybody is here from the U.K. Intellectual Property Office, I saw in the Financial Times today that the country is being bashed by Brussels for not having strong enough data protection rules.117 When the data protection law gets fixed here, it would be helpful also to include a decent provision saying that people who “get hit on the Internet” can actually collect the evidence and get disclosure of the offender for both criminal and civil proceedings. This would be a good vehicle for trying out such a provision. And perhaps WTO pressure is needed? I saw a couple of our WTO experts in the room. At some point, if it does turn out to be the case in Germany, in Spain or in other countries, that no civil enforcement against IP violations on the internet is available at all because of data privacy rules, and no criminal enforcement is effectively available either because you have to be “hit” 3,000 times before the authorities will prosecute an offender, perhaps a TRIPs case is in order. See Data Protection Directive, supra note 112 at Art. 7. See SACEM v. Cyrille Saminadin (Cour de Cassation, chambre criminelle, Jan. 13, 2009). 115 Case C-275/06, Promusicae v. Teléfonica de España S.A.U., Case C-275/06, Promusicae v. Teléfonica de España S.A.U., [2008] E.C.R. I-00271. 116 Id. 117 Stanley Pignal & Maija Palmer, “Brussels Calls for Review of Data Privacy”, Fin. Times (London), Apr. 15, 2009. 113 114

Part A: Infringement & Remedies  279 DR. SHAPIRO: Thank you, Allen.

In addition to having a distinguished roster of speakers, we also are fortunate to have two distinguished panelists, Professor Jerry Reichman from Duke University School or Law and Andrew Bridges from the firm of Winston & Strawn. Jerry, would you like to pose the first questions? PROF. REICHMAN: Thank you, Mr. Chairman. I have a question for the people who want government help for the graduated response cooperation and one question for David Carson. I can understand why you want all this government help against massive infringements. But my question is: What are you prepared to give in return? Are you willing to put up your repertoires for very cheap purchases, as there has been some success in doing in the United States? And, more importantly, are you willing to unlock your digital locks for bona fide privileged uses, fair use or research use, private use, teaching, and so on? Are you willing to have a reverse-notice-and-takedown in which people can come and get what they want without waiving their rights? Otherwise you are trading massive inducement for infringement—you want government help for that—but you are kind of organizing a massive lock-out of legitimate uses under copyright law. My question for David is this. I wasn’t very much alarmed by—I liked actually—the first two prongs of the Second Circuit’s opinion. I’m sure that is a minority view. But even I was alarmed by the third prong, because it does fly in the face of what we decided in Geneva. I don’t see how we can have enforcement of the making-available provision without some legislation. Is there corrective legislation pending? Can it be done? DR. SHAPIRO: I see the first signal from Shira. MS. PERLMUTTER: In response to Jerry’s question about what we are willing to do, we’re happy to deal with this whole issue of getting ISP cooperation without any government help. The problem is we have tried for years to get there and haven’t been able to. So now we have said to governments, “Can you please help us?” What we are asking them to do is to help us enforce existing law. So I personally don’t see that that means something has to be given in return. We’re saying: “We’ve got these rights; there is massive infringement going on that is causing harm and we need to find creative solutions to deal with it.” But apart from that, on the specific issues that Jerry raised, certainly we are willing to make information available on the Internet legally and we are willing to do it at low prices. That has in fact been happening over the last two years in the music area at least. Digital rights management is used less and less, certainly on download services.118 So there has been a lot happening, mostly in response to consumer demand. DR. SHAPIRO: Would others like to respond to Jerry’s first point before we turn to David on the second point? Or are we going to leave that response to Shira? You gave a good response, Shira. David? MR. CARSON: Well, I am not aware, Jerry, of any proposals thus far to amend the law. I think probably people are going to wait to see if the Supreme Court takes the case and, if it does take the case, if the Supreme Court alters that interpretation of the public performance right. I think it is fair to say that to the extent people are alarmed by the case—and, clearly, many people are and many people are not—the public performance part of the analysis is the one that probably has caught most people’s attention.119 118 119

Mike Musgrove, “iTunes to Sell Songs Without Restrictions”, Wash. Post, Jan. 7, 2009, at D1. Cartoon Network LP, LLLP v. CSC Holdings, Inc., 536 F.3d 121, 134–39 (2d Cir. 2008).

280  CHAPTER V: COPYRIGHT LAW It is probably safe to say that it would be easy to fix it legislatively as a matter of drafting. However, anyone who knows how copyright legislation is accomplished, or attempted to be accomplished, in the United States would know that, whatever the merits of such an amendment might be, the opportunity to actually get it enacted is unclear at best. DR. SHAPIRO: Thank you. Andrew, did you have some points that you wanted to add at this point? MR. BRIDGES: Sure. First, I think I’m a little bit of a footnote on what seems to be primarily an industry panel. I don’t hear much debate so far among the panelists, so I will contribute some topics to debate here. I would like to talk about three or four areas that I think are controversial and troublesome from the standpoint of technology companies, e-commerce companies, people who are traditional defendants, investors, innovators and creators who happen to be in a different industry from the industries that are here. I am just going to pull out three or four problems I see in the law right now. Number one, we have talked about secondary liability theories here. Earlier today we talked about specialized courts versus non-specialized courts.120 I wanted to tie the two together in this fashion. Copyright lawyers have a way of talking about secondary liability, principles of contributory infringement and vicarious liability, as though these concepts exist isolated in a copyright cocoon, without tying them to broad principles of secondary liability. When the Supreme Court recognized contributory infringement in the Sony/Betamax case,121 it justified it on the grounds general principles of secondary liability. Even though a contributory infringement provision was in the patent statute but not in the copyright statute, the Supreme Court said, “We can apply secondary liability in the copyright context because it is a general concept pervasive in the law.” The courts have mashed together contributory infringement and vicarious liability without being clear what their purposes are, what their principles are, and how they differ; and this has created a great deal of confusion. I think that Justin was saying earlier that ISPs could not take certain actions because they might incur a risk of vicarious liability. The concept of vicarious liability is very unfocused right now in copyright law. But the Supreme Court in a case in the early 2000s, Meyer v. Holley,122 noted that, as far as vicarious liability is concerned, when one considers a federal statutory tort—in that case it was the Fair Housing Act123—vicarious liability should not extend past the very narrow traditional grounds where courts had applied the doctrine at common law. That was largely in employeremployee, principal-agent, and parent-child contexts. I can’t expound this more here, but I just want to say there is an unreality in the discussion of secondary liability in copyright law because we are not taking into account these principles in other areas of the law. I just wanted to make that point and move on to a couple others. Second, we have talked about the concept of “making available” and how it fits in the copyright law. The phrase is not in the Copyright Act. It is in some treaties.124 The question is: To what extent has the concept of “making available” come into the Copyright Act? See Chapter II, “The Judiciary & IP Policy”, infra this volume. Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417 (1984). 122 537 U.S. 280 (2003). 123 Pub. L. No. 90-284, 82 Stat. 81 (codified at 42 U.S.C. § 3601–3619) (1968). 124 WIPO Copyright Treaty, supra note 105, Art. 8; WIPO Performances and Phonograms Treaty Arts. 10 & 14, Dec. 20, 1996, S. Treaty Doc. No. 105-17, 2186 U.N.T.S. 245, 36 I.L.M. 76 (Geneva, 1997) (entered into force May 20, 2002) (Art 10: “Right of Making Available of Fixed Performances”; Art 12: “Right of Making Available of Phonograms”) [hereinafter WPPT], available at http://www.wipo.int/treaties/en/ip/wct/pdf/trtdocs_wo034.pdf. 120 121

Part A: Infringement & Remedies  281

One area I am concerned about is the so-called “distribution” right in Section 106(3) of the U.S. Copyright Act.125 I want to say something that is a little stark and sounds crazy, but I ask all of you to go and read the Act. That is that the distribution right under that Section in the United States does not apply to the Internet at all. People say, “It does apply to the Internet because the distribution right includes ‘making available,’ and the Internet allows persons to make works available to others.” That is not the case. Courts have not yet fully analyzed the issue. The question that Mr. Ramos discussed earlier was whether a transmission is necessary for an uploader to violate the distribution right under Section 106(3). That is what courts have focused on so far. But a more fundamental problem exists than whether a transmission has occurred. The statute itself says that a copyright holder has the exclusive right to do or to authorize the distribution “to the public of copies or phonorecords of the copyrighted work by sale or other transfer of ownership or by rental, lease, or lending.”126 That’s it. It is not distribution per se. It is “distribution of copies or phonorecords of the copyrighted work to the public by sale or other transfer of ownership or by rental, lease, or lending.” Now, the first question is whether a Napster uploader, for example, is selling, transferring ownership, renting, leasing, or lending anything by uploading music. I don’t think so. But more importantly, the distribution must be of “copies” or “phonorecords,” which Section 101 of the Copyright Act defines as “material objects.”127 Now, some people say, “No, wait a second. That can’t be the case. We’ve got this ‘making available’ right. One violates the ‘making available’ right if one has a file in one’s shared file folder on one’s own hard drive. One doesn’t have to transmit it to anybody to violate that right. The treaties require us to enforce a ‘making available’ right.128 Let’s not have this restrictive distribution right.” Well, what I find interesting is that in Article 6 of the WIPO Treaty, which concerns distribution, it is clear that that right of making available applies only to “originals or copies,” defined as “material objects,” and limits it to “sale or transfer of ownership.”129 This is an area that has just not been explored and I think is out there and is important. There are a couple of others, but I just wanted to throw this in the mix and we can circle back to other things later. MR. CARSON: Does it bother you, Andrew, that in Tasini,130 and I believe Grokster,131 the Supreme Court described those very transactions as exercises of the distribution right? MR. BRIDGES: I have a couple points in response. Number one, in Tasini this issue was never raised or specifically addressed by the Supreme Court. It was merely assumed. MR. CARSON: By the Court. MR. BRIDGES: By the Court. But it was assumed without any deliberation. I think it is fair to say when nobody brings something to the Court’s attention and the Court doesn’t give a justification for it, then it is pretty safely dictum. 17 U.S.C. § 106(3). Id. 127 17 U.S.C. § 101. 128 WIPO Copyright Treaty, supra note 105, Art. 8 (“[A]uthors of literary and artistic works shall enjoy the exclusive right of authorizing any communication to the public of their works, by wire or wireless means, including the making available to the public of their works in such a way that members of the public may access these works from a place and at a time individually chosen by them.”). 129 Id. 130 533 U.S. 483 (2001). 131 545 U.S. 913 (2005). 125 126

282  CHAPTER V: COPYRIGHT LAW In the Grokster case, the Grokster Court went through this elaborate analysis of what might be a “deemed distribution,”132 but it never, ever analyzed the words “copies or phonorecords” or “sale or other transfer or ownership” or “rental, lease, or lending,” which are statutory prerequisites. So the fact that the Court never addressed that is significant. DR. SHAPIRO: Thank you. I see two signals from the panel, but I am also aware of the need to to open the discussion to the larger group. Shira and Justin, do you have some quick responses, before we broaden the discussion? MS. PERLMUTTER: Just a factual clarification about the WIPO Treaties. The definition of the distribution right in the WIPO Treaties was specifically and deliberately intended not to be coextensive with the distribution right in U.S. law, and that was clearly discussed and understood by the negotiators at the time. PROF. HUGHES: I just want to say I agree with Andrew that there is a mess there, but I disagree with you when you say something is dictum. If the entire decision depends on an assumption, that is not dictum, at least not as law professors teach what dictum is. So that is not dictum in a case if it is a necessary assumption to the final result. MR. BRIDGES: In which case are you saying it was necessary? PROF. HUGHES: Grokster. It’s necessary. So I agree with you that that’s a mess. But the other thing is when you say vicarious liability is in its own cocoon in the copyright world, I agree if you will agree judges are there also. Judges have done it. It is not the copyright bar, it is not the industries. Judges have taken vicarious in copyright and put it in its own cocoon. I will agree with you on that. But I will not agree with you that it is the bar doing it or something. MR. BRIDGES: I’m not sure that I have ever seen in any copyright case I have litigated a non-copyright case cited in a vicarious liability argument that I didn’t cite. Period. PROF. HUGHES: You are an archangel in this. [Laughter] DR. SHAPIRO: All right. With that comment, I think the time has come to open it up to comments from the audience. QUESTION: Many thanks. Roya Ghafele. I am an academic with the University of Oxford. First of all, many thanks to DR. SHAPIRO for moderating the session. I see many of the transferable skills of acting as a delegate to WIPO have been shown here. DR. SHAPIRO: Thank you. QUESTIONER [Dr. Ghafele]: I really wish to not have my question misread as taking a position in favor or against a certain ideology or view, but rather being driven by mere academic curiosity and by the fundamental belief that a panel should not advance a certain ideology but the state of knowledge. If I look at the underlying discourse of your talk, I understand that there is a clear understanding of all of the presenters that more copyright protection is good, that further enforcement is something positive. I have even heard that we should seriously consider in the European Union context whether intellectual property rights should not prevail over fundamental human rights. Again, I am not in the position to judge such statements, and I clearly do not want to question whether this is okay or not. But I would still like to raise the question of what some of the critiques have said on further enforcement of copyrights, such as the restriction of freedom of expression, restriction of creative expression, of artistic expression, the issue of equitable access to knowledge, the issue 132

Id. at 929–35.

Part A: Infringement & Remedies  283

of how we can bring developing countries into a system, further seeking to close gaps rather than increase them. I believe that a panel that seeks to advance the state of the knowledge, the state of understanding, should address these issues. I would be curious to at least get some of these very rough general public policy questions in the area of copyright enforcement addressed by the speakers. Thank you. DR. SHAPIRO: I would like to take the prerogative of the moderator. Thank you for your question because it does introduce any number of important themes. I would invite your attention, however, to the entire agenda of the conference because I think there has been space opened up throughout the conference for some of the questions you raise. I don’t think any particular element of the program should be taken in isolation. MR. BORTLOFF: Thank you for your question. It is really an interesting one because it is so general. Sorry if I respond by asking you a question with regard to a very concrete situation from our industry. Let’s assume we go that path and say, “We don’t need more copyright protection.” And let’s assume I am in negotiations with an artist about an artist’s licensing agreement. As I told you, we have a ratio of 1:8 in Germany, which means for one recording sold there are eight recordings illegally downloaded. Now, I would have to tell the artist, “I can only pay you one-eighth of the usual advance I would have paid to you in order to make a living. And as far as your royalties are concerned, you might only get one-eighth of the 20 or 25 percent per recording sold. Because we have no copyright protection anymore, your recordings are basically freely available. We are not enforcing our rights anymore because we might have a different attitude with regard to copyright on the Internet.” This shows very clearly what that means for the industry and also for creative people if we are giving this up. DR. SHAPIRO: Any other quick responses from the panel? Please be brief. MR. RAMOS: Just briefly. The questions you asked come up frequently in discussions that I have with a variety of people with regard to whether copyright has become too strong. The case I described, our experience on this injunction, was an instance, I think, of a judge actually trying to curtail copyright. What I would say—and I think this is really, after having litigated these cases for ten years, the lesson that I take away from this. In the last ten years, the record labels have been seriously economically injured by piracy on the Internet. We are the losers. We are the losers because of all the acts that didn’t get signed, the artists who didn’t have the opportunity to record music, because the record labels have had to dramatically cut back on the number of artists that they are signing. With regard to freedom of expression, there is no doubt in my mind that we would have had much more expression in the last decade if people had been paying for copyrighted songs, whether it is paying services on the Internet, whether it is paying for CDs, whatever the technology may be, if artists were being compensated. If artists are not being compensated, they cannot afford to make a living performing. They might be able to perform on a weekend in their garage, but they are not going to be producing the sort of music that we have heard in the last fifty years. DR. SHAPIRO: Yes? MR. DIXON: I just wanted to say something about the fundamental rights. I hear this a lot. Actually, the European Charter says that the right to property including the right to intellectual

284  CHAPTER V: COPYRIGHT LAW property is also a fundamental right in Europe.133 That sometimes gets totally lost in this discussion. I didn’t hear anybody actually on the panel saying that we should have more copyright or more enforcement or any of this stuff. We are talking about how this should work practically. The issue of data privacy I was talking about actually affects a lot of things. We are talking about libel. We are talking about any kind of Internet wrong that is committed by somebody else on the Internet. The data privacy rules affect that. The question we are really talking about is not whether your fundamental right is better than mine or which is a fundamental right and which isn’t, but how do we practically reconcile these things when somebody effectively gets run over on the Internet, whether it’s copyright or any other civil or criminal wrong. This is where the balance has to be struck and where we need some very practical solutions to make this work. DR. SHAPIRO: Yes? QUESTION: Hi. I’m Danvers Baillieu from Winston & Strawn. I just have to take issue with Mr. Ramos. Have you been on the Internet lately? Have you seen how many bands there are out there? Go on MySpace, go on YouTube. Have you seen how much free expression there is on there? It has nothing to do with copyright protection. The idea that in ten years we’ve had less expression is just ridiculous. I’m sorry. I’ve got to take issue with that. In my line of work, I do a lot of work with Internet start-ups and so on. A lot of them are people who are in their twenties and so on. They are doing a lot of stuff on the Internet. Not one of them I know is prepared to pay for music, at least. They might be prepared to pay for some other downloads. They are fanatical about things like Spotify and Last.fm, services that are giving them free content. Just in relation to this idea that getting a letter from your ISP telling you to stop downloading is going to have any effect, it assumes you care about your connection, that you are not going to Starbucks and doing it or you are doing it in your university library, or in fact you are on a university network where you are all doing it internally anyway, which I understand a lot of people do these days—obviously not up here, but at other less reputable universities. But it does sound a bit like the letters that our TV licensing authority in the United Kingdom sends people that tell them to go and buy a TV license. I’ve got to say they are getting a really, really bad rap for doing that at the moment because they keep threatening people who don’t own a TV. It is majorly backfiring on them. I mean it’s a nice idea, but I just don’t really see it working out in practice. DR. SHAPIRO: We’ll go to Shira for one response, then I do want to pick up a final question, and then we will probably have to draw to a close. Shira, and perhaps there might be another response or two. MS. PERLMUTTER: I would just say the last few questions raise a lot of issues, and there are a lot of issues to discuss. But as Allen said, what we are trying to do here is say how do we find some practical and pragmatic solutions. Again, the whole idea of graduated response is not to increase rights, not to strengthen enforcement, but to find a fair and proportionate way of dealing with a massive problem that does not involve litigation and is better for all parties concerned. DR. SHAPIRO: Thank you, Shira. Others on the panel that wanted to weigh in on that? Can we take that final question? I am happy to stay here all afternoon. Yes, sir? QUESTION: Steven Wan from City University of Hong Kong. 133

EU Fundamental Rights Charter, supra note 108, Art. 17.

Part A: Infringement & Remedies  285

This question is for Professor Hughes. You talked about the ISPs probably should take more responsibility to monitor the Internet. I wonder whether we can move one step further and just go ahead and impose tort-based liability on the ISPs. Why not have a negligence standard? That is the first question. The second question is about the cost of filtering. Should ISPs or copyright owners bear the cost of filtering? Can we ask that the copyright owners pay for the filters and the ISPS merely cooperate with the copyright owners? That is the second question. The third one is about fair use concerns. Should we let the parties, the copyright owners and ISPs, negotiate about it, or should the government play some role in designing the filters? Thank you. PROF. HUGHES: Okay. I will try to answer one and two together. What you are touching upon is really—let me take a theme from Andrew. We should not think of copyright law in a vacuum, but we should think of copyright law in relationship to other laws that are relevant. The most relevant area of law here is tort law. A standard theory of tort law, at least in North American jurisprudence, is the least cost avoider, that the danger of the private harm that is conducted, which is generally understood as there being a social harm—the cost of stopping the harm should be imposed upon that party which is the most efficient, most effective cost avoider.134 Now, it may be that it is not just the ISP here. It may be some combination of the ISP and the content owner, because certainly it can’t just be the ISP by itself. There has to be cooperation from the content owners in building the databases that make the filters happen. So I guess my answer would be I am in favor of some cheapest cost avoider approach. Now, one problem is you could say cheapest cost avoider theory in tort law does not generally involve free expression issues. So you may want to have some balance and some thinking about how you tweak your least cost avoider theory to compensate for the fact that we are talking about the transmission of expression here. Now, I don’t think it is the same type, but whatever standard you apply to your position on spam filters is the same thing you should apply to your position on ISP filters for copyright materials, because spam is just as, or more likely to be, political speech or free expression as the transfer of a Madonna file. So I guess that is my answer to your first two. The third one—there is a big issue there, that the filters have to be sufficiently robust to serve the needs of the copyright owners but sufficiently lenient to permit people to do the kind of reasonable fair uses, the kind of reasonable recombining of works. That is an issue where we need more transparency to what is happening in the private discussions between the two sides. I don’t say I would advocate government regulation there, but certainly that is a place where you need the right balance between leniency and robustness. DR. SHAPIRO: Andrew has a final comment. Howard, I think we are going to have to pick up your comment in a different session because you came in a little after the list was closed. Andrew, you get the last word. MR. BRIDGES: Sure. I think the question was a very appropriate one, because I think in the United States many judges and commentators are beginning to think in negligence terms when looking at secondary liability. Judge Posner’s decision in Aimster135 comes straight out of Learned Hand’s BPL 134 See, e.g., William M. Landes & Richard A. Posner, The Economic Structure of Tort Law (Harvard Univ. Press 1987); Guido Calabresi, “Concerning Cause and the Law of Torts: An Essay for Harry Kalven”, Jr., 43 U. Chi. L. Rev. 69, 85 (1975) (the “but-for” test is used as a way to identify costs and allocate them to the least cost avoider). 135 In re Aimster Copyright Litigation, 334 F.3d 643 (7th Cir. 2003). Judge Posner, noting “the impracticability or futility of a copyright owner’s suing a multitude of individual infringers,” decided that a reliance on direct liability was

286  CHAPTER V: COPYRIGHT LAW formula from United States v. Carroll Towing.136 It’s fine to go that way. But for a negligence regime we do not need a statute. And if we are going to go to a negligence regime, we can go whole hog towards a negligence regime including two important tort common law principles, which are: (1) equity does not enjoin negligence and (2) the doctrine of contributory negligence might bar a claim. So it seems to me we can go all the way there or we can retain a statutory framework. But allowing the most favorable aspects of each for industry is the wrong combination to go with. DR. SHAPIRO: All right. I want to thank the panelists, the presenters, and the audience. I think we had a good airing of the issues. I look forward to continuing the discussion during the coffee break.

an inefficient solution in the peer-to-peer file sharing case, and proceeded to apply a law-and-economics approach, analyzing the costs and benefits of imposing indirect liability on Aimster. Id. at 645. Posner ultimately held Aimster indirectly liable for the copyright infringement of its users, rationalizing that Aimster was in the best position to minimize infringement at a reasonable cost. See Daryl J. Levinson, “Aimster and Optimal Targeting”, Harv. L. Rev. 1148, 1149–52 (2007) (explaining Posner’s economic approach to the Aimster decision) (“What unites all of these cases—formally fault-based and faultless liability alike—is the potential efficiency of motivating a well-situated third party to police and prevent wrongdoing.”). 136 159 F.2d 169, 173–74 (2d Cir. 1947). Learned Hand’s “BPL” test, is a classic example of the economic approach to determining negligence in tort law. The formula is “B < PL”, where: “B” is the burden or cost of the precaution that the injurer in the case failed to take; “P” is the ex ante probability of that particular type of loss occurring; “L” is the loss itself, such that PL is the reduction in expected harm that would have occurred had the injurer invested ex ante in B. Thus, under the Learned Hand test, the injurer will be deemed negligent (or will be found to have taken less than due care) when “B < PL”. Kyle D. Logue, “Coordinating Sanctions in Tort”, 31 Cardozo L. Rev. 2323 n.22 (2010); see also Richard A. Posner, Economic Analysis of Law 167 (Aspen Publishers 2007).

Chapter V

Copyright Law Part B: Information Society Directive, Secondary Liability, DRM, Private Copy Levies & Copyright Territoriality Moderator Tilman Lüder

Head of Unit, Copyright Knowledge-based Economy, DG Internal Market and Services, European Commission (Brussels) Speakers Sarah Faulder

Scott M. Martin

Public Affairs Director, PRS for Music (London)

Executive Vice President, Intellectual Property, Paramount Pictures Viacom (Los Angeles)

Prof. F. Willem Grosheide

Trevor Callaghan

Molengraaff Institute/Center for Intellectual Property Law, University Utrecht Timo Ruikka

Strategy Adviser, IPR Intellectual Property, Nokia Corporation (Helsinki)

European Senior Product Counsel, Google (London) Ted Shapiro

Senior Vice President, General Counsel and Managing Director, EMEA, Motion Picture Association (Brussels)

Panelists David Carson

General Counsel, U.S. Copyright Office (Washington, D.C.)

Sebastien J. Evrard

Jones Day (Brussels)

MR. LüDER: Thank you, dear co-panelists, for being on time. This panel is going to be probably the most painful one of the whole Conference. The issues are arcane, the issues of DRM, private copy levies, secondary liability, and territoriality. They all seem disparate when you look at first glance. I think what the aim of this panel should be is to bring some order into these disparate themes.

288  CHAPTER V: COPYRIGHT LAW I have decided, as a rough guidance, to start out with a few general issues that then the panel will address. Obviously, the big issue is: Are levies the way of the future? Have DRMs failed conceptually, intellectually, or as a business model, and are we moving towards a system of generalized remuneration schemes, levies being one precursor to such remuneration schemes? Secondary liability, is that really an old hat? Don’t we have “three strikes and you’re out” nowadays? That’s very simple. You don’t need a complicated liability system. Three strikes and you’re out, and if you want to be back in, possibly you will have to pay an access fee. That is a sort of alternative form of levies. And possibly, if you have levies and if you have access fees, what is the whole fuss about territoriality? You just pay wherever you consume and you pay a little extra. Now, those are kind of the overarching themes here—how to best remunerate, how to best incentivize creation on the Internet. We have a distinguished panel of speakers. Sarah Faulder, Public Affairs Director of PRS for Music, will kick off. Then we will have Scott Martin, the Executive Vice President of Paramount Pictures. Both of you get nine minutes. Then I have been instructed by Hugh to pause for five minutes so that you can ask so-called clarifying questions. Hugh said, “A clarifying question is a question like, ‘Have I understood correctly that …’ or, ‘Is it true that …?’” Literally, he gave me a list of clarifying questions that you may ask. A tightly controlled ship here. Then we will move on to the other speakers. We have Professor Willem Grosheide of the Molengraaff Institute, who will talk about secondary liability; and Trevor Callaghan, Senior Product Counsel of Google in London. Then, again, there will be five minutes for so-called clarifying questions. Then, finally, we have Timo Ruikka from Nokia, whose main distinction in life is that he is a member of the Dialogue Forum on Private Copying Levies, the dullest forum that exists in town; it is painful. Then we have Ted Shapiro, who needs no introduction. He is the man who obviously will say that the DRM-based business model has a bright future, so he said in his preparatory email. Possibly, Ted, you might surprise us all and totally change your mind. Having said that and having introduced the panelists, Sarah, the floor is yours. You have, it says here, “up to nine minutes.” Obviously, you don’t have to fully use it, but you may not exceed it. MS. FAULDER: Thank you, Tilman, for your very clear instructions and some characteristically provocative questions to open this very disparate range of issues that we are being asked to address. I am going to approach it from quite a practical point of view and then take a brief look at what is being considered in the United Kingdom. The question for us is: Can IP be traded on the Internet? I am very encouraged to hear Tilman talk about levies but for no other reason than that it assumes the concept of payment. There also seems to be an assumption—and no one has provided any alternative—that copyright will underpin any new model. I am not going to dwell on DRMs because the music industry has tended to move away from them from the point of view of controlling access to their content. Now, that may yet change in the future. I am not talking about rights management information here (which will always have relevance), but copy protection. So let’s see what we are up against. Basically, there has been a seismic shift from a world in which IP is owned, regulated, and managed on a national basis, the simple world we heard

Part B: Disparate topics  289

about pre the CISAC case,1 to one where it needs to be treated on a global basis. It is a very much more complex world. The other thing that we are up against is that we are competing with free, and that is a huge issue. We’ve got to the point where, arguably, the only models that are going to work are possibly those that feel like free with some business-to-business licensing solutions in the background underpinning them. But in fact, research in the United Kingdom suggests that consumers are still willing after all to pay directly for their music.2 Last year British Music Rights and the University of Hertfordshire carried out the largest U.K. academic survey of its kind into the music experience and behavior in young people aged between fourteen and twenty-four. What it revealed, of course, is that we have a generation made up of real music fans. They are not just faceless consumers or users. They love their music and they value it more than any other form of entertainment. And yet, 95 percent of them copy music in some way or other—downloading, sharing it with their friends, copying onto their iPods.3 But, encouragingly, the survey showed that 80 percent of current peer-to-peer users surveyed would be interested in paying for a legal file-sharing service, and that some of them would also continue to buy CDs, 60 percent of them.4 I tested out this research to see whether the results still stand today with my eighteen-yearold son over the weekend. He actually volunteered that he would be willing to pay for music (although I’m not sure whose credit card he was planning to use!). What we need is to find a way of satisfying these users’ many expectations. We need compelling and sustainable business models that give people what they actually want in an attractively priced, simple, easily navigable, and more appealing form than music is currently available through the illegal services, but ensuring all the time that the supply end of the content chain, the creators, are getting paid. What is clear from the research is that users want to use music in a different way. They want to be able to test it, experiment with it, share it with their friends, be part of a community where music is being shared all the time; they want to be able to copy it into multiple formats. All these things need to be accommodated. This is why, a personal view, I think a levy or a global license is not the solution at this stage of the game, at least for now. What we are seeing is that online revenues—even though the money we collect from online is very marginal, accounting for less than 4 percent of our turnover—is growing at a very rapid rate. It has grown by twenty times over the last five years. In the face of this growth pattern it is too early, I suggest, to propose a “one size fits all” solution, a levy model. We need to find ways to encourage all the new and diverse services and business models that are emerging all the time. We recently saw Spotify come on stream, which is clearly incredibly popular.5 Whether that model will survive remains to be seen. It’s somewhat ironic that, as we heard only yesterday, at a time when the new music services are actually increasingly reliant on ad revenues the newspaper industry, which has survived on ad revenues until now, is suffering hugely.6 As more and more advertising goes online, 1 Commission Decision, COMP/C2/38698, CISAC (July 16, 2008), available at http://ec.europa.eu/competition/ antitrust/cases/dec_docs/38698/38698_4567_1.pdf. 2 David Bahanovich & Dennis Collopy, Univ. of Hertfordshire, Music Experience and Behaviour in Young People (2009), available at http://www.ukmusic.org/component/content/article/25-research/153-uk-music-researchhighlights-the-complexity-of-consuming-copying-and-sharing-of-music-between-14-24-year-olds. 3 Id. 4 Id. 5 Spotify, http://www.spotify.com; see Daniel Ek, “Daniel Ek of Spotify: We Can Save Music Biz”, Times (London), Oct. 8, 2009, http://technology.timesonline.co.uk/tol/news/tech_and_web/article6866411.ece (describing Spotify’s business model as one that is ad-supported as well as a paid subscription service site for streaming and downloading music). 6 See Chapter III, “IP & Corporations”, supra this volume.

290  CHAPTER V: COPYRIGHT LAW newspapers are obviously struggling. So there is an interesting dichotomy there between the two industries. But I do think any creative enterprise needs to be incentivized to experiment and innovate and develop new and more compelling services. We heard from Louise Pentland of Nokia in the last panel that she wants to be able to develop and be creative in the services provided.7 A levy system would not allow room for that sort of innovation and creativity. Just a quick look at what is happening in the United Kingdom. Many of you will be aware that we are calling ourselves “Digital Britain.” There is a government report being finalized and finessed at the moment, which is intended to make recommendations on making the United Kingdom a more effective place to do business online and to address the peer-to-peer file-sharing issues.8 Although it is trying to deal with the online environment, the Government appears to be proposing a uniquely U.K.-focused solution at this stage, which I suggest is one of its shortcomings. Firstly, it is proposing to set up a digital rights agency to facilitate rights clearance9 (we already have collecting societies whose business this is) and to provide a mechanism for dealing with disputes (we have a Copyright Tribunal,10 but the Government seems to feel there is a need for something else). It is proposed that the digital rights agency would provide a forum for establishing codes of practice for dealing with infringements (we actually have a memorandum of understanding being implemented at this moment between industry and ISPs,11 and Ofcom is overseeing that). What we need is more pressure on everyone to come to the table and talk, and I’m not sure that just setting up a digital rights agency provides that pressure. And finally, it would try and encourage everyone to work together to educate consumers about copyright. But do you need a body to do that? Secondly, the Government is proposing legislation to support right holders when they want to sue infringers. The legislation would oblige ISPs to inform their customers when they are behaving illegally and to collect data on those customers, so that when a rights holder comes along with a court order to enforce, they can do so more effectively.12 There are clearly drawbacks from what I’ve said in the digital rights agency proposal. It is possibly a missed opportunity just to bring more pressure to bear on the parties to collaborate. I think imposing obligations is not the way to go. It is more a question of collaboration between right holders and ISPs, in my view. 7 See Chapter V.D, “Music Distribution, Collecting Societies; DG Comp CISAC Inquiry”, infra this volume (“[I]f a private copy levy model becomes a revenue generator and dominates, then it puts the types of innovative new legal services and business models that I am talking about here [e.g., Nokia’s ‘Comes With Music’] in my view seriously at risk.”). 8 Dep’t for Culture Media & Sport, “Digital Britain Final Report” (2009), available at http://www.culture.gov.uk/ what_we_do/broadcasting/6216.aspx. 9 Dep’t for Culture Media & Sport, “Copyright in a Digital World: What Role for a Digital Rights Agency?” (2009), available at http://www.ipo.gov.uk/digitalbritain.pdf. 10 The Copyright Tribunal is an independent entity in the U.K. established under the Copyright, Designs and Patents Act of 1988. The tribunal has the authority to adjudicate different types of copyright disputes, especially collective copyright licensing disputes. About The Copyright Tribunal, http://www.ipo.gov.uk/ctribunal/ctribunalabout.htm (last visited Mar. 15, 2010). 11 British Recorded Music Indus., “MOU Between ISPs and Rights Holders” (2008), available at http://www. bpi.co.uk/our-work/protecting-uk-music/article/joint-memorandum-of-understanding-on-an-approach-to-reduceunlawful-file-sharing.aspx. 12 The U.K.’s proposed “three strikes rule” is included in the Digital Economy Bill, which is currently being debated by the Parliament. The three strikes rule would legally require ISPs to warn users who are suspected of illegal file sharing and terminate Internet access for users who have been warned three times. Bobbie Johnson, “Lords Angered Over Three Strikes Rule for Filesharers”, Guardian (London), Mar. 2, 2010, http://www.guardian.co.uk/technology/2010/mar/02/ digital-economy-puttnam; Francis Eliott, “Internet Users Could Be Banned Over Illegal Downloads”, Times (London), Feb. 12, 2008.

Part B: Disparate topics  291 MR. LüDER: Thank you, Sarah. I want to ask you a clarifying question. You said it was too early for “one size fits all.” When do you think the time is ripe? MS. FAULDER: We are going through a massive change. These solutions are not going to emerge overnight. We’ve got to give time for the kids in this world and everyone— MR. LüDER: Next year? MS. FAULDER: We will be closer by then, a lot closer. MR. LüDER: That brings us to Scott. I don’t really know what Scott is going to say, because all he ever told me was he agreed with my way of arranging the panel. But I would say, working for Paramount Pictures, Scott would also take the approach that the creativity is actually in how the service is delivered, that we need creative business models. MR. MARTIN: I think you just saved me nine minutes. When we talk about DRMs and levies and collective management, I think what we are really talking about are business models. When we talk about business models, we often do so in the abstract, I think focusing more on models than on business. What I would like to do is briefly explore what I see as three business myths, myths that tend to take the business out of business model. The first myth is that feature films are more or less immune from the type of piracy that has ravaged the music business. I think that has been true. There is tremendous piracy with films, but it hasn’t had the impact on films that it has had on music for two reasons: quality and convenience. Both of those are changing. With music, when you download a copy, you get the perfect digital copy, the same thing you get from iTunes. With movies, 99 percent of movies that are pirated prior to the DVD release are camcorded. Until recently, a camcorded copy was pretty crappy quality. Now you can buy a very inexpensive home video recorder that is a digital recorder, has image stabilization. People in theaters take the sound track off the hearing-for-the-impaired system, the wireless system in the theater, so they get a perfect stereo separation audio track with no crowd noise. So it is still a camcorded copy, but if you are watching it on a computer screen or something smaller the quality is perfectly acceptable. And then, with ease of viewing, it used to be you had to spend hours and hours downloading. Now, with fast Internet connections, with streaming sites, it is easy to find the pirated copy and it is almost as convenient to view.13 So I think the myth that our business has been immune from the impact is changing rapidly. The second myth is that the business of music and the business of movies are the same business, and therefore one solution fits all, that if levies work for one, they work for the other; if DRM is wrong for one, it’s wrong for the other. I think there are four key differences to keep in mind that I see between music and movies: • The first is the problem that we have in the film industry with pre-release material. This isn’t to make light of the problem the music industry has with tracks getting out during recorded sessions. There is a huge impact on us if a film does get out prior to theatrical release. It just happened to Fox with Wolverine.14 We have a major Star Trek movie coming out in May. That movie has been in the can, it has been completed since December. What gets me over jet lag is that I haven’t slept through a night since December worrying that that film is somehow going to leak out. 13 See Jason J. Lunardi, Note, “Guerilla Video: Potential Copyright Liability for Websites That Index Links to Unauthorized Streaming Content”, 19 Fordham Intell. Prop. Media & Ent. L.J. 1077 (2009) (discussing sites that facilitate the location of pirated movie content in streaming video format). 14 Alan Duke, “‘X-Men Origins: Wolverine’ Leaked to Web”, CNN, Apr. 3, 2009, http://www.cnn.com/2009/ SHOWBIZ/Movies/04/02/xmen.piracy/index.html.

292  CHAPTER V: COPYRIGHT LAW • The second difference is that we rely on staggered release dates. Music generally is made available in all territories at the same time. With film we cannot necessarily do that. We might want to open a film on a certain date, but in France, if there’s a major French film opening that day, that might not be a good day for us to open. Holidays are different. In the United States, Thanksgiving is a nearly universal four-day weekend. It’s a great time to open films. Thanksgiving is not a holiday in Europe, so that’s not a good weekend for films. This past weekend was a bank holiday in the United Kingdom, not a holiday in the United States. When you talk Southern Hemisphere, like Australia, their summer vacation is the flip of ours. So while with a huge film like Star Trek we will open pretty close to the same day around the world, although not exactly, with a lot of films that just isn’t the best way to distribute. • A third difference is distribution windows. Because of the extraordinary cost of producing and marketing and distributing a film, which for something like Star Trek is well in excess of $100 million, we need multiple windows of distribution. We need the theatrical and then home entertainment. Those windows have been compacting and will continue to compact, but there will never be just one window. • The fourth difference is pricing. We have heard with music that there is an 8:1 ratio in many countries, of eight pirate copies for every legitimate copy sold. As you’ve heard multiple times, it is very hard to compete with free. If ninety-nine cents for music can’t compete with free, $5.00 for a recently released film isn’t going to compete with free. The model solution we often hear is to make films available in theaters and online on the same day around the world at a price to compete with free. If we were to do that, there would be no more films like Star Trek, like Indiana Jones, like The Curious Case of Benjamin Button, because no one is going to make the investment if there isn’t a business model to recoup it. So what is the solution? There are obviously enforcement solutions, like site blocking, like graduated response. But those aren’t things that we are focusing on in this session. We are really, I think, focusing here on business solutions—which takes me to the third myth, the myth that DRMs are anti-consumer or consumer-unfriendly technologies. I think one that’s important to keep in mind is the difference between DRMs and TPMs. DRMs are digital rights management. TPMs are technological protection measures. The movie industry has technological protection measures basically forever. The earliest VHS and Betas had technological protection measures. They had Macrovision, other technologies, to prevent copying. But those weren’t digital rights management. Digital rights management give consumers different choices of pricing and timing. So, for example, if you fly to Los Angeles, where there is no public transportation, you have to get to a meeting, you could buy a car, you could rent a car, you could take a taxi. All three of them are using a car. They are all priced accordingly. If you are just going to the hotel, the taxi is the cheapest. If you are going to be driving all around L.A. to meetings, renting a car is probably cheaper. But you have those different types of options. With DRMs we have the ability to say to consumers: “For one price you can watch it once, for another price you can watch it an unlimited number of times during a certain number of days; at another price point you can download to own it; you can certainly purchase the DVD.” It also allows us more flexibility with releasing windows. So we might say that two months after the theatrical release, which is prior to the DVD/online release date, it will be available for limited-time streaming at a very high price, and then that price drops over time. So our view is that DRMs are effective. They have the possibility of offering consumers additional choices. Without DRMs, without effective TPMs, and without enforcement like site blocking and graduated response, the business is not going to survive with the capability of making major movies.

Part B: Disparate topics  293

We heard yesterday that bands will still make music for YouTube.15 Leaving aside whether that is a credible model for a popular music industry, no one is going to be making a specialeffects film or a film with famous talent for a YouTube market where there is little or no revenue. Thank you. MR. LüDER: Thank you very much, Scott. The time has come for the first session of so-called clarifying questions. I am under instructions to give you the floor to ask questions of the style, “What do you mean by that?” So, for instance, just as a model question that Hugh gave me here in my instructions, to tailor it to Scott’s presentation, what do you mean by TPM? Now, he has already said it. But that is the kind of question. Debate is at the end. This is just to clarify concepts or notions which might not be familiar to you. Do we have any clarifying questions at this stage? [No response] This cannot be. Well, I will ask a clarifying question. Scott, what do you mean by this analogy that you did with car rental in L.A.? This is a leading question. It’s pretty difficult to ask a “what do you mean by” question. Why do you wish to explain the panoply of options that the innovative DRM-based business models would facilitate by using an example from the non-digital analog world of car rental? MR. MARTIN: That’s because I’m from L.A. where we’re car obsessed. We currently have this model where you have certain pricing at a theater. Even within theaters, after a movie has been in release for several months, the price drops, at least in the United States, at theaters. With DVDs you see a price drop in DVDs over time. We think that is the model for online, that you have a higher price very early in the release, and then over time, when the commodity is not as new, when maybe you have seen it once and you are going back to see it for a second time, or if it’s a Paramount film a third or fourth time, the price drops accordingly. MR. LüDER: Scott, I understand that. But that’s so outdated. That’s so brick-and-mortar type. That’s the kind of reasoning of the Stone Age. This is digital, this is online, this is about sharing, this is about the creative commons, this is about having access. Now you are saying it has to be staggered. What do you mean by staggered release dates in the digital environment? It is available globally on the same date once it’s out there. How can you stagger release dates on the Internet? MR. MARTIN: What I’m talking about with DRMs isn’t staggering the release date. It is having multiple price choices, which allows higher prices than the high fixed price. You’re right, it’s a problem if you are talking about piracy. That’s a huge problem. Every film gets camcorded somewhere in the world—i.e., Russia—opening weekend. The initial quality is very poor, and then over time better quality camcords appear. But we are battling against every film being online opening weekend. We consider it a huge triumph if we make it to opening day without a film being leaked. It has been now five years—knock on wood—since Paramount has had a film get our prerelease. But I think that is a separate discussion. We have to deal with that because if they are there and they are free, there is no model that competes with that. MR. LüDER: Let me give that question to the audience. Do you believe that there should be staggered release dates? Oh, there is another question, a spontaneous question. Even better. 15

See Chapter V.C, “Rethinking Exceptions & Limitations”, infra this volume.

294  CHAPTER V: COPYRIGHT LAW QUESTION: Thank you. Andrew Bridges from Winston and Strawn.

Scott, your presentation was very helpful. I would like to ask you about a couple of ways in which I do think that movies and music are different, which I think are beneficial for you, and make me think that there is less of a problem for movies. I’d like for you to tell me, please, if they are trivial, if I’m wrong, or if maybe there is something there. Number one is that people are accustomed to paying for the experience of an uninterrupted full-length motion picture. They are accustomed to paying a lot of money for that at the movie theaters. They are accustomed to buying DVDs. Most people’s experience with recorded music, on the other hand, is hearing uninterrupted complete works, songs, on the radio for free. So there is a different background economic relationship for the two different products. Second, the movies are much bigger productions, they are much longer, and people may attribute a higher value to them than two-to-three-minute works. Third, we all like a lot of the music we like not because of the music, but because we were listening to it on that first date, or it was in the background when we were doing something else, and we weren’t really paying attention to the music. On the other hand, when we go to a movie or watch it on DVD we generally pay attention to it, which I think gives movies higher value. MR. LüDER: Now we have to stop. One sentence for a response. QUESTIONER [Mr. Bridges]: Are those unimportant differences, or are they important differences? So does it account for what may be a different consumer response in terms of infringement? MR. MARTIN: I think it is a very important point. As I say, movies are different from music. Not all movies are the same. If you have an event movie, like Star Trek, where you want to see it on the big screen, you want to see it with friends, you want Dolby surround sound, that kind of movie, even if it gets pirated—I think Fox saw this with Wolverine—will do very well at the theater, because people still want to go. It’s something that parents let teen-agers do unsupervised. That’s not true for a small romantic comedy, a Merchant Ivory­type film, where the experience is more or less the same in your living room as it is in the theater. We are seeing in Russia, which is close to 100 percent piracy market for home video, there is a growing theatrical market because people want to go to the theaters. The business problem is we can’t survive on theatrical revenue alone, even for the theatrical event movies. More than half our revenue comes from the ancillary markets, the non-theatrical. So I think that is a very important distinction. But that alone is not enough for us. MR. LüDER: We can do the rest in the debate. I have to move on now to Professor Willem Grosheide. He is going to talk about secondary liability. Professor Grosheide, can you give us the answer whether we still need secondary liability once we have “three strikes and you’re out”? PROF. GROSHEIDE: Our moderator told us at the beginning of this session that this is maybe the most painful session of the whole Conference. In a way I agree, since I happened to find out that all what I have to say about secondary liability of ISPs under EU Regulation—and that was the supposed theme that I agreed upon with Hugh Hansen—has already been said in the Session 2 yesterday, very eloquently and very scholarly, by Justin Hughes and by Shira Perlmutter.16 So what I will say is rather repetitious, so I can be brief. If you want to take a rest to prepare yourself for what follows in this session, you of course can do that. I will take my time for fulfilling my obligation. Having said that, I come to speak about my theme. 16

See Chapter V.A, “Copyright Infringement & Remedies”, supra this volume.

Part B: Disparate topics  295

I would like to start by referring to what our moderator said in his introduction. ISP liability, secondary liability, is old hat. In our email correspondence he added to that it is “another intellectual failure.” He didn’t explain what the others were, but this indeed, he said, is an intellectual failure. Indeed, I agree, the old-hat assumption is right and we have to look to replace this hat with one that is more fitting to the needs of today. I hope to say something about that. Again, an intellectual failure is what we have in front of us if we—and this is my assumption— take as that failure what we find in the E-Commerce Directive17—remember, I speak about EU regulation—where was given immunity to the ISPs.18 You remember the approach, excepting the caching and the hosting and mere conduit from any liability. And indeed, there are reasons to say that in retrospect—I wouldn’t say this in the days we were introducing this E-Commerce Directive it was so clear we can say that this “three in a row” distinction was not very well chosen. As the case law has proved, there are overlapping situations and so on. So that is the first reason why we should adjust this system. But there are two other good reasons. Justin Hughes gave them very clearly yesterday.19 First, technology has given us the possibility to bring ISPs in a position to really monitor and to really act on behalf of the right owners in a way that was not there when we introduced the E-Commerce Directive. The second reason why we should adjust the system is that there are new business models, also mentioned by Justin Hughes, introduced in trade that illustrate how the interests of the ISPs have been paralleled with the interests of the right holders. So it is time for a change, for another hat or a replacement hat. What are the options to do? I see at least four possible options. The first option, which was mentioned in another context by Lionel Bentley yesterday, is do nothing.20 I don’t think that in this respect doing nothing is helpful. I am tending to go to some sort of adjustment of EC law, which needs legislative activity and which needs further harmonization. So doing nothing is not an option to me. The second option, mentioned by Shira Perlmutter yesterday, is looking at codes of conduct or agreements between the parties concerned and try to do it without any interference of the legislator, be it a national legislator or the EU legislator.21 Well, that may be indeed an option, but there are some minor points here. For instance, what if there is no living up to the code of conduct? There is no enforcement mechanism. The same is true if there is living up to the agreements made by the parties. You need sort of an enforcement system, and that is lacking here. So then—that is my third option—what could be done is the introduction of a special liability for Internet service providers. You can say they are the best placed, in the best position to monitor and technically filter out infringements made by their subscribers, and they can do that at relatively low cost, which can be charged to their clients. Indeed, that can be done. However, this could prove to be counterproductive in my view to the availability of a free and unrestricted access to and communication through the Internet, leaving outside the picture all censorship aspects. Finally, there is a fourth option that can be taken into account, also mentioned in the session by Justin Hughes and Shira Perlmutter, and that is notice and takedown procedures.22 In my Council Directive 2000/31, O.J. (L 178) 1 (EC). ISPs are exempt from liability under the E-commerce Directive when it serves as a “mere conduit” in Article 12 or offers “temporary caching” under Article. 13. Id. Arts. 12, 13. 19 See Chapter V.E, “Creativity & The Internet”, infra this volume. 20 See Chapter V.C, “Copyright Exceptions & Limitations”, infra this volume. 21 See Chapter V.E, “Creativity & The Internet”, infra this volume. 22 See id. 17 18

296  CHAPTER V: COPYRIGHT LAW view, that should be instigated by a claimant against intermediaries, such as ISPs, for claims of breach of contract. There should be a warranty given by the claimants on behalf of the ISPs. The claimant, in my view, should be under the obligation to start a procedure on the merits within a certain period of time after having given the notice. Of course, this approach requires legislative activity of some sort, as has been taken already by some countries in the world. France is one of the countries that was mentioned yesterday and, as we know, there will be a second reading in parliament of that legislative activity.23 However, here there are also some things that should be taken into account. These legislative activities look for a so-called graduated approach. In the French variant of this, for instance, it is suggested that there will be disconnection of the Internet of the infringing subscribers.24 I have a problem here. That problem arises from the human rights approach. I think a connection to the Internet can really be brought under the human rights protection, for instance Article 10 of the European Convention of Human Rights.25 Disconnecting a subscriber who is repeatedly doing infringing things is, in my view, not the best solution. What other sanctions can you think of? That is not very easy. I have thought of maybe doing something as the banks have all over the world, I think, a sort of reporting system of those people who come for credit and have been bad debtors before. They are blacklisted, and banks can go to those lists and look in the register. Maybe such a system could be done. Those who have been infringing before would be blacklisted, and you could go for the report in a sort of register. That is my view on ISP liability for today. Thank you. MR. LüDER: Thank you very much. Those were four pretty hefty options. I would like to add a fifth option that I had in the beginning, the so-called Internet readmission fee, also know as IRF. That means you are not out, so there are no Human Rights Convention issues, but you will have to pay to be readmitted to the Internet community. You will have to pay a small fee. That is distributed to the right holders community. Now, Trevor, you are saying that you will set out arguments for and against the retirement of existing or the creation of new intermediary liability regimes applicable to copyright. Okay. The floor is yours. MR. CALLAGHAN: For those of you who can’t read, that says, “The turkey votes for Christmas.” [Slide] This slide should help to calibrate us on what I am about to talk about. This quote came to mind in the context of this debate. It was quoted to me almost as an act of violence in a small legal seminar that I attended a while ago, in which I argued that lawyers were probably not the best people to deal with the issue of licensing open source software. 23 The French Parliament rejected the bill, 21-15, on April 9, 2009. Eric Pfanner, “France Rejects Plan to Curb Internet Piracy”, N.Y. Times, Apr. 9, 2009, http://www.nytimes.com/2009/04/10/technology/internet/10net.html?ref=technology. On May 12, 2009 the French National Assembly approved the legislation against illegal file sharing. Eric Pfanner, “France Approves Crackdown on Internet Piracy”, N.Y. Times, May 12, 2009, http://www.nytimes.com/2009/05/13/ technology/internet/13net.html. But, on June 10, 2009 the French Judiciary overturned the Hadopi Law. Richard Wray, “French Anti-Filesharing Law Overturned”, Guardian (London), June 10, 2009. 24 The law creates a procedure whereby a suspected infringer would be served two warning letters: The first letter would arrive by e-mail, warning them of the suspected infringement and suggesting they secure their wireless access point in case someone had been “piggybacking” on their Internet access. A second warning letter would be sent by certified mail upon a second suspicion of infringement within six months of the first. If illegal downloading occurs once more within twelve months of the second letter, then HADOPI (the authority created by the law to implement the procedure) may decide to suspend Internet access for a period between one month and one year. See John Ozimek, “French Pass ‘Three Strikes’ File-sharing Law”, Register (U.K.), Apr. 3, 2009, available at http://www.theregister. co.uk/2009/04/03/french_three_strikes. 25 Convention for the Protection of Human Rights and Fundamental Freedoms, Art. 10, Nov. 4 1950, 213 U.N.T.S. 221.

Part B: Disparate topics  297

This came to mind in the current debate because I think that we need to be careful not to fall into this trap when we are talking about ISP liability. There is, perhaps, sometimes a tendency to look at the issue as a way of increasing financial interest for furthering corporate goals. This interpretation might actually be entirely inconsistent with what Adam Smith intended,26 but he’s not here to argue with me, so that’s the way I’m reading it. [Slide] We have heard a lot about balance over the past two days. Balance is a great cliché in copyright. I am going to ask for your tolerance and indulgence while I talk about balance for at least two slides. Balance in copyright in a way which creates a commercially sustainable and creatively rich online environment seems neither to go against the public interest, and nor it is contrived to further financial interests. I’d suggest that this balance should be the leading consideration in any conversation about the rights and responsibilities of online intermediaries. A note on the terms I am using: by “intermediaries” I’m referring to information society service providers, using the EU term from the directive;27 by “ISP” I mean the similar definition under safe harbor laws; and by “intermediate liability” I mean something like the safe harbor provisions of the DMCA28 or Articles 12–14 of the E-Commerce Directive,29 which Professor Grosheide outlined earlier. [Slide] Moving on to my first issue, practical aspects, there is a lot to discuss here, but I think fundamentally you can look at it this way. Practical aspects in terms of intermediary liability usually come down to: How long is the infringing content, or the alleged infringing content, available for? Have you removed it already? Do they need to even tell you to remove it? Are you going to remove it; and, if so, when? These are fairly simple questions, but they actually generate a huge amount of controversy. Speaking from the perspective of an organization involved in the sort of sausage-making process of trying to figure this out, we spend an enormous amount of time trying to get this right. So the practical aspects are difficult. If I were being more controversial I’d say they’re a nightmare. We argue about this a lot. Parties engaged in the process frequently accuse each other of abusing it. Worse still, it seems that parties engaged in the process do actually abuse it. There are some examples of this. Some of you in the audience may be familiar with the Stephanie Lenz case,30 which was well publicized in the United States. The video in question, in case you didn’t know, was thirty seconds of a toddler dancing to Prince’s “Let’s Go Crazy” in the background, which was removed on the basis of copyright infringement. The video in question has actually been reposted and is still up, so I’m not sure whether that is actually a happy ending or not. But the actual practicalities of dealing with that process were incredibly complex. [Slide] You can add into the mix international concerns, and things become even more complicated. Which system are you dealing with? When you have cross-border removals it becomes exponentially harder. There is still an amount of debate as to which process you should follow in those cases. [Slide] Filtering and monitoring technologies, where they are available, again increase the practical difficulties. They make the process more complicated. See generally Adam Smith, The Wealth of Nations (Edwin Cannan ed., Bantam Classics 2003) (1776). “[T]his definition covers any service normally provided for remuneration, at a distance, by means of electronic equipment for the processing (including digital compression) and storage of data, and at the individual request of a recipient of a service.” Council Directive 2000/31, recital 17, 2000 O.J. (L 178) 1 (EC) (citing Council Directive 98/34, Art. 1, 1998 O.J. (L. 204) 37 (EC); Council Directive 98/84, Art. 2, 1998 O.J. (L 320) 54 (EC)). 28 Digital Millennium Copyright Act § 202, 17 U.S.C. § 512(a)–(e) (2006). 29 Council Directive 2000/31, Arts. 12–14, 2000 O.J. (L 178) 1 (EC). 30 Lenz v. Universal Music Corp., 572 F. Supp. 2d 1150 (2008). 26 27

298  CHAPTER V: COPYRIGHT LAW Intermediaries often find themselves in a position where you might want to develop something which will help identification of potentially infringing material, but because of the emergence of—and we heard about this yesterday—negligence-based theories of liability,31 you often find yourself in a situation where you are sort of damned if you do and damned if you don’t. The delivery of monitoring or filtering technology could conceivably raise the bar on a dutyof-care argument, therefore compelling intermediaries to actually deploy that technology in all cases, whether or not they have the wherewithal to do so. That is quite tricky. [Slide] So what could we do with these formalities? Well, we could get rid of them. We could change the law. It’s not impossible. It might take six years, but you could do it. Why would we do that? Well, we would probably save some time administering this stuff, and we might save some money—“we” being not just Google, by the way, “we” being the rights holders, everybody. Why might we keep them? We might keep them to ensure transparency in the process and we might keep them to make sure that we create feedback and a check and a balance on removals. That is basically what they do. Those are my questions on that—why would we get rid of them and why might we keep them?—and those are my suggestions for why we might do either. [Slide] Briefly coming on to justifications for it, again Justin Hughes talked about this at some length yesterday and I won’t repeat what he said.32 There is an argument which has a sort of viral quality. The justification for the safe harbor was a deal struck at a point in time when the Internet was being born and you had people who needed to deploy infrastructure and actually create real things in the real world which will enable the delivery of the technology that we now rely on a day-to-day basis.33 In order to do so, this group of interests made the point that: “Hey, wouldn’t we end up being liable for lots of stuff, and wouldn’t that crush our business, and isn’t that a bit bad, and shouldn’t we do something about that?” As a result, you got this kind of deal. So the deal got struck a long time ago, and we are still living with the deal now. I think one way to look at this question is: Do we need to revisit that deal? Does it effectively have a “best before” date on it and we are now past the point in time when the original considerations are no longer valid? Why might we dispense with the justifications that were put in place previously? Well, we might say the facts pertaining to the original “deal” are no longer the same, so the circumstances are different, and we need to reopen the conversation on that basis. Or we might say that the larger investment in the infrastructure required has actually been made already, and intermediaries can now quite happily carry the burden of this additional liability and we can all get on with our lives. I’m not saying either of those is a good idea, but those are reasons that you could put forward. [Slide] Why might we choose to retain it? Well, the alternate argument is supported by theories of secondary or vicarious liability, and it is actually a natural extension of existing law. There is one way to look at the DMCA,34 which is that it is nothing more than a codification of existing U.S. law on the matter prior to its enactment. Eventually, we have a series of cases or a series of behaviors which lead you to the point where it becomes necessary to basically say, “Hey, we should create a law about this, and that will just make it clearer for everyone.” So that might be a reason to retain the justification. See Chapter V.A, “Copyright Infringement & Remedies”, supra this volume. See id. 33 See generally David Nimmer, “Appreciating Legislative History the Sweet and Sour Spots of the DMCA’s Commentary”, 23 Cardozo L. Rev. 909 (2002). 34 Digital Millennium Copyright Act, Pub.L. No. 105-304, 112 Stat. 2860 (1998) (codified as amended in scattered sections of 17 U.S.C.). 31 32

Part B: Disparate topics  299

[Slide] Very briefly on this one, for any U.S.-qualified lawyers in the room, or in fact U.S. citizens, I apologize. I am about to crucify freedom of speech. I am not trained in this area, but it does seem to me to be obvious that restrictions on freedom of speech are a risk in any intermediary liability regime. It is often argued that overbroad rights to have allegedly infringing material removed on the Internet operates to limit freedom of expression in an unacceptable way. Some of you may be aware of the site called chillingeffects. org. Chilling Effects monitors takedowns that happen.35 The only point on this that I really want to make is that if we dispense with intermediate liability, your “chilling effect” may rapidly become an ice age. If intermediaries are charged with the responsibility of deciding what should come up and what should come down, corporate interests will rapidly lead you to a conclusion that people will avoid risk and remove material in the maximal way that they can get by with. So that may not be a good thing. [Slide] So we may dispense with it on the basis that existing processes are frequently abused or new rights are being infringed, and we might keep it because it would be better for freedom of expression, less material would be removed, and it should provide us with greater transparency. Thank you. MR. LüDER: That was impeccable timing. It is this time of the Conference again where you are kindly invited to ask the “what do you mean by” questions. MR. EVRARD: I have a question for you actually, Tilman. What do you mean by your Internet readmission fee? Do you actually mean some kind of global license? MR. LüDER: No. I mean that in order to avoid what Professor Grosheide referred to as the risk of stifling access to the Internet as a fundamental right, that instead of throwing people off the Internet and saying, “Now you’re out, three strikes; you had two chances, now you’re out, and you’re out for a while, or you’re blacklisted,” you can actually buy yourself in for a reasonable fee, and that fee is compensation to the right holder community whose interests you have prejudiced. MR. EVRARD: Sounds like global license to me. MR. LüDER: Does it sound like global license to anybody else? VOICE: How high is the fee? VOICE: It sounds like a good plan. MR. LüDER: No, it’s not a global license. VOICE: Did he say it sounds good? VOICE: A global license sounds good. MR. EVRARD: It depends. If the only penalty on the user is just a readmission fee, then it is a global license, because it means that he can just copy and pay from time to time. When he gets caught, he just pays the fee. But now, if on top of the readmission fee he can be sued before the courts and have to pay damages to the rights holders, then maybe it is not totally a global license. MR. LüDER: It’s a hybrid solution. VOICE: It’s some way of making sure that many poor people will say “human rights.” MR. LüDER: Why would you say that? VOICE: If you’re charging a fee, those who can afford to pay will continue with impunity, whereas those who can’t afford to pay lose the right. 35 Chilling Effects Clearinghouse, About, http://www.chillingeffects.org/about (“The Chilling Effects Clearinghouse collects and analyzes legal complaints about online activity, helping Internet users to know their rights and understand the law… . Chilling Effects aims to support lawful online activity against the chill of unwarranted legal threats… . [C] ease and desist letters often silence Internet users, whether or not their claims have legal merit.”).

300  CHAPTER V: COPYRIGHT LAW MR. LüDER: Yes. QUESTION: Could I ask Professor Grosheide, does he consider the situation where an ISP

disconnects a subscriber for nonpayment of their bill a breach of their human rights? PROF. GROSHEIDE: Absolutely, yes. I think that could be brought very well into the domain of human rights protection. You can compare this to rentals: In the case of not paying rents, put them out without procedure, cut them off from facilities like water and electricity and things like that. Yes, I think that human rights can not, without any good reason—for instance, a court decision that is backing you up—be taken off from someone. Yes, it’s similar. MR. LüDER: Another question. QUESTION: Mihály Ficsor from Hungary. MR. LüDER: Is that your affiliation? QUESTIONER [Dr. Ficsor]: Let’s say that I am the President of the Hungarian Copyright Council. I want to put a question to Professor Grosheide. I would like to know how far human rights are applied. For example, cutting electricity if you don’t pay, is it against human rights? Is it also a human right to be able to use your car to commute between your house, let’s say, twenty kilometers from the center, and your working place? If you once drink alcohol before driving, then you may be warned. Second or third time when you do so again, your license may be suspended or withdrawn. Is that also against a human right? Is not there some similarity with the proposed graduated response that for the third time you have to accept that you should use public transportation, the metro or bus? In the case of the Internet, the consequence of the graduated response would be that you would have to go to an Internet café, you would not have a separate Internet connection I can see a lot of similarity. You still can have Internet connection, but not your own, for six months, let’s say, the same period during which your driving license may also be suspended. I think it is a more serious consequence that a driving license is suspended than your Internet connection. PROF. GROSHEIDE: It is easy to add many more examples, into absurdity, of course. But maybe we have a more lenient approach to these kind of things in the Netherlands. I will give you another example that comes close to your car-taking example, which is squatting. In Holland, under certain circumstances squatting is allowed. There is this property, there is this owner of the property, but nonetheless, under certain circumstances, if he is making misuse of his property, it can be allowed under Dutch law to squat. However, this is very well monitored by the authorities on the basis of some customary rules. In the end, the owner can go to court and ask whether or not the squatting is according to these customary rules. I think that is the answer to your question. MR. LüDER: We have two more questions. While you are preparing the question, I will give you the answer to your question. Mihály mentioned it. It is the same argument that “Yes, of course, if you suspend driving licenses, if I am a rich guy I get a chauffeur; if I am a poor guy I will take the Metro.” That is a kind of “kill all” argument. Obviously, if you infringe you have to pay a fee, and that fee will be given to the party whose right you have infringed. Whether you are poor or rich is not really the core issue. Now your question? QUESTION: These are still investigating questions of the type you mentioned? MR. LüDER: Yes. QUESTION: Hogarth Andall from PlayStation. I have a question for Trevor Callaghan. I am hoping it is a clarifying question. I just wanted to know, for your theory and for the purposes of your talk, how would you define an intermediary?

Part B: Disparate topics  301 MR. CALLAGHAN: I am using the definition in the E-Commerce Directive for an Information Society service provider.36 If you want to ask me what I think that definition means, then I am going to tell you I don’t know. If anyone in the room knows, I would love to know the answer. MR. LüDER: I think that is a tongue breaker, Information Society service provider. Try to say that quickly. One more question. QUESTION: Danvers Baillieu from Winston & Strawn. Just a quick question on the ISP liability. I just wondered if it can be extended to cloud services and, in particular, storage of personal backup or whatever, whether anybody on the panel has considered the implications of people putting pirated material in the cloud and whether they are going to go after Amazon and the other people who provide these services, kind of in the same way as you might use an ISP to get at the ultimate pirate? PROF. GROSHEIDE: I haven’t given that any thought so far. It brings back the distinction between hosting, caching, and all that, which doesn’t work. I would in the first instance say that we should look at what ISPs really do, what they offer to their clients, what they invest themselves in the activities, and so on. It can well be that certain caching activities also fall within this notice-and-takedown situation. MR. LüDER: Thank you very much. Now we will move on to Timo Ruikka, Strategy Adviser on IPR Intellectual Property, Nokia. Timo is going to bring us back into the good old days of levies and equipment levies and whether he is convinced that this is really fair compensation within the terms of the Information Society Directive.37 MR. RUIKKA: Thank you, Tilman. I am talking about private copying levies and I am talking about some of the more important controversies in my perception that are related to levies. Levies are hugely controversial, but there is no way I could convey all of those points, so I will limit myself to a couple of points. The Copyright Directive provides that if a Member State provides a private-copy exception in favor of consumers, it also must provide some form of fair compensation to rights holders on account of those private copies being made.38 Twenty EU Member States have done so through the form of levies as fair compensation. The controversies I am going to touch on are the question of which copies are private copies, and I am also going to touch on the question of the value of private copies, at least to some extent. Let’s take a look through practical examples of what I am talking about. If you go to the Web and buy legal content from these Web stores, what happens? You download it to a computer. But it doesn’t stop there. Most users transfer the content onwards to their portable devices, many of them iPods, some of them even phones. Although we know from our research there are much smaller quantities of copies for phones than for MP3 players, but still some of that ends up there. And it may end up here, in an external hard drive. It may be burned to discs too. Now, the questions we need to answer. First of all, this first instance is not controversial. The first downloaded copy to the PC is a licensed copy. But there is a big controversy over the status of this next copy. Is this a licensed copy or is it a private copy? So this is the legal download case. 36 Council Directive 2000/31, recital 17, 2000 O.J. (L 178) 1 (EC) (citing Council Directive 98/34, Art. 1, 1998 O.J. (L. 204) 37 (EC); Council Directive 98/84, Art. 2, 1998 O.J. (L 320) 54 (EC)). 37 See Council Directive 2001/29, recitals 35–38, Art. 2, 2001 O.J. (L 167) 10 (EC). 38 Id. at recitals 35–38, Arts. 2, 5.

302  CHAPTER V: COPYRIGHT LAW I move on to the illegal download case. The same user, for better or worse, may download stuff from peer-to-peer services or from some other unauthorized sources. It again ends up in the PC and it again ends up in all of these other devices. There may be even some issue, at least under some national laws, of: Is this first copy downloaded to the PC, the primary copy, is that an illegal copy or a private copy? But let’s assume for the sake of argument here that it is an illegal copy. Then we have the next question: What is the status of this next copy, the one transferred to a portable device or burned to a disc? Is this an illegal copy or is this now a legal private copy? What significance does this have? Are all secondary copies, regardless of how they were acquired, legitimate private copies under the exceptions? Does it matter? Of course, it makes a huge difference in the scope of legal compensation. But I would argue that it also has a huge impact on the value proposition of digital services. I will come back to that in a moment. In the case of the licensed download, one of the legal questions that is begging to be answered is: Is the exception stronger than contract? Is it even possible to license those secondary copies? I know that iTunes has been licensing them for quite some time, but legally is that correct? Or are all secondary copies a monopoly for the collecting societies? In the case of the unauthorized download, a legal question is: Does the exception whitewash the copy as you move it onwards within your devices? If the initial download might be illegal, is every subsequent copy then illegal or a legal private copy? We need to take a broader view on these questions and ask: What does this mean for the consumer? Because if the consumer pays compensation for nearly all of the copies on his or her various devices through levies, what is he prepared to pay for a legitimate download? It actually becomes the question: Is the music business funded through transactions or is the music business funded through societies? This question will also have an impact on the price of music in legal services. The answer to this question will impact the consumers’ respect for the suggestion that he should not download from unauthorized sources. Moving on to value, there are lots of copies. Here we have the user, her computer, her MP3, her second MP3, her phone, her hard drive, her disc, her USB device, her memory card, her media center PC, her home theater, her car, her summer home, and even her Net server where she parks her stuff. My point is here not to convey that there is lots of stuff all over the place. My point is to convey that it is the same stuff for the same user all over the place at the same time in the digital environment. It is not being consumed at the same time. Does this have any significance for the valuation of these individual copies? There is a real controversy about that. The opposing position from mine suggests that all copies are created equal. The question is: Should levy collections rise in linear proportion with the gross count of copies? What is the value theory for private copy? The EU Directive says that “account should be taken of the particular circumstances of each case” when setting private copying levies.39 Is the existence of lots of copies for the same user a circumstance that should be taken into account? There is a standard economic theory on marginal value of goods, particularly when you procure the same goods many times over. Does that have any significance? The Directive talks about economic prejudice to rights holders on account of these copies.40 Does that have any relevance? These are important questions. All of these questions are in serious dispute. 39 40

Id. at recital 38. Council Directive 2001/29, recital 38, Art. 5, 2001 O.J. (L 167) 10 (EC).

Part B: Disparate topics  303

Is there a right answer? If there is a right answer, then some of the implementations of levy schemes clearly must be wrong, because they are all different. Not all of them can be right. If there is no right answer, where does that leave us, the stakeholders? It is no wonder that not a single product is subject to the same levy in any two EU countries. They all are different for every product that is levied anywhere. What does that mean for the respect and sense of justice in this system? But more importantly, what is the impact if we go and interpret that all the secondary copies are relevant for private copying levies? If we make no difference on the valuation of all those copies occurring in the digital environment, what is the impact of those conclusions on the consumer behavior? Do we want music businesses to thrive in every one of the various models that have been discussed here today and yesterday, or do we go for a society-based compensation model? Obviously, the differences in the EU Member States on how they have implemented levybased fair compensation pose significant issues to the single market, which is one of the cornerstones of the European Union. Of course, from the industry point of view, the questions we are asking: Where does that leave us in terms of predictability, legal certainty, and, let’s say, the correctness of levy tariffs? Thank you. MR. LüDER: Thank you, Timo. There was some real anguish here at the end, some genuine anger. That reflects most of the 350 sessions of the stakeholder group on private copying levies. That gives you a flavor of the atmosphere of that particular exercise. Now, as the conclusion of the speakers we have Ted Shapiro, who will talk about his most recent favorite case, Premier League,41 and he will tell you why he believes that everything that happens in the decoder box is highly copyright relevant. Ted, the floor is yours. MR. SHAPIRO: Thank you, Tilman. Good afternoon, everybody. I will do my best to keep you awake in these waning moments of the Fordham Conference by telling you a little bit about a very interesting case that arises from this sceptered isle and relates to one of your most hallowed traditions, Premier League football. For the Americans in the audience, that’s soccer. The case arises from a legal action actually brought by the Premier League against suppliers of foreign decoder cards, so one of those old, clunky TPMs, conditional access, that has been around for about thirty or more years, even in the analog environment, as well as against pub owners that were buying these cards. Now, these middlemen were acquiring these cards using false addresses in Greece. The Premier League has TV rights, rights to football matches. English football sells a lot abroad. It’s obviously much, much more popular here, but they have managed to sell it across the European Union, and indeed around the world. When they do they sell it on an exclusive basis to platforms, they give them territorial rights and they require them not to sell their smart cards to people outside of that territory. Of course, the Premier League finding out that these pubs in the United Kingdom were getting these smart cards at a price much, much lower than the price that Sky, one of the exclusive licensees—that sounds strange to say—in the United Kingdom there are various packages sold to platforms, so that is why there are different exclusive licenses; Sentanta, which is another platform, has a couple of these packages—was quite concerned about this undermining of exclusivity and brought a case against the middlemen and the pubs. The judge seemed to have a little bit of trouble. This action was based on the U.K. implementation of the Conditional Access Directive.42 It is actually a pretty clear case. There 41 42

Football Ass’n Premier League v. QC Leisure, [2008] EWHC (Ch) 1411. Council Directive 98/84, 1998 O.J. (L 320) 54 (EC).

304  CHAPTER V: COPYRIGHT LAW was unauthorized access to protected services. The terms of the Directive are pretty clear in this regard. But the judge was thinking: “Wait a minute. These cards were legal in Greece. They passed a Community border into the United Kingdom and somehow they became illegal. How could that be? There must be something wrong here. It’s a European question. I’d better refer ten questions to the European Court of Justice.” He didn’t just pose the Conditional Access Directive questions. He decided to also ask questions relating to the reproduction right, communication to the public right, free movement, as well as competition law questions, asking whether the Coditel decision(s)43—people were referring to it in the last panel44—is still good law. Because this case sounded so scary to the member companies of the MPA, because, lo and behold, our members also have a model of licensing their content on a territorial basis, not only for satellite platforms but increasingly on the Internet—Scott was referring to some of the new business models that they are doing—video-on-demand and electronic sell-through services across Europe are being licensed on a territorial basis—because of that concern and because of the many copyright questions that were being posed, we decided to see if we could join this party, as did Setanta, Canal Plus, BSkyB, and Uefa. We petitioned the High Court to be joined to the proceedings for the purposes of making representations to the European Court of Justice. On the 28th of November the judge did that.45 Now, one of the reasons why we wanted to join is because we are more “copyright,” we’re better copyright, than these sports guys. So we thought we could tell a lot better story. The film industry has a very good story to tell. As somebody pointed out the other day, that’s actually our business. Scott explained a little bit about the differences between film and music. One thing I would add to that, of course, is that copyright law regulates film in a very different manner. Particularly in the European Union, collective management is less of a factor. It arises more with respect to certain remuneration rights. These platforms do not need licenses from collecting societies to do their business because the exploitation rights, at least, are centralized in the producer. In that regard, and because of the direct licensing that takes place in the film industry, and flowing from ECJ case law, copyright is more than a mere right to get paid. It’s about how we license, distribute, and market our films. Of course, Scott mentioned how much all of this costs. Scott is talking on behalf of one of the major studios. Another thing to consider here also is independent film makers who actually quite often finance the making of their films by selling territorial rights in advance. So the model is very much based on territorial licensing, and indeed, the windows that Scott mentioned, etc. So now a little bit about what Tilman was referring to, the issue of what goes on in a decoder box. I’m running out of time and I haven’t even said much. Just quickly, because the judge thought that the Cable and Satellite Directive46 probably applied to this situation, which it doesn’t, he then wanted to see if a relevant copyright event had taken place in another country (of reception), and so he wanted to see if the reproduction right had been infringed. So he asked the ECJ whether or not these temporary copies that happen in the decoder box and the television screen were within the scope of the reproduction right.47 Well, of course, the answer is very easy: they are. Case 262/81, Coditel v. Cine Vog Films SA (2), [1983] 1 C.M.L.R. 49. See Chapter V.D, “Music Distribution, Collecting Societies; DG Comp CISAC Inquiry”, infra this volume. 45 See Football Ass’n Premier League v. QC Leisure, [2008] EWHC (Ch) 2897. 46 Council Directive 93/83, 1993 O.J. (L 248) 15 (EEC). 47 Case C-403/08, Football Ass’n Premier League v. QC Leisure, 2008 O.J. (C 301) 19, 20 (Reference for a Preliminary Ruling from High Court of Justice). 43 44

Part B: Disparate topics  305

The question, of course, then arises whether or not Article 5(1)48 applies; i.e., the exception for temporary copies. Of course, it doesn’t in this case. Even if we dispute whether or not these copies have an independent economic significance under the terms of Article 5(1), in the first place, before we get to that, we have to see if they were made pursuant to a lawful use. They were not made pursuant to a lawful use because communication to the public right was infringed. And indeed, this followed an unauthorized access to the service that is protected by the Conditional Access Directive.49 With that said, perhaps I would pass on a little bit to the question of why the Cable and Satellite Directive doesn’t apply. Of course, it doesn’t apply because what took place was a communication to the public in the bar after the transmission had been received. Even if you do dispute—and there is a very broad interpretation of this under the Spanish Hotels case50 from the ECJ—whether or not this would be a communication to the public under the terms of the Directive, it would still be a public performance subject to the Berne Convention.51 Yeah, it’s pretty old, but there it is; it is still in place for the moment. So the Cable and Satellite Directive does not apply. Finally, with respect to the competition law question—I’ll skip the free movement; the arguments are similar—the defendants, of course, finally turned to competition law to try and say, “The fact that they are dividing up all these markets like this, the fact that they are colluding with all the different platforms, must be a violation of Article 81.” The answer there, of course, is: Well, maybe it is, but in any event Coditel52 applies and there are justifications about what is going on there. For the film industry, of course, there is an even better story to tell, because in fact Coditel was about a decision relating to the film industry. Coditel is still very good law. Now, it’s an old case, although we counted in our research and found that it had been cited some forty times by the highest level courts, and indeed just as recently as a few years ago.53 So a very interesting case. Take a look at the questions. They are published on the ECJ’s Web site. A lot of meaty questions on there. I have only touched the surface, and I did it really fast. Maybe it will come up a little bit more in the discussion. Thank you. Id. at 21. Council Directive 98/84, Art. 1, 1998 O.J. (L 320) 54 (EC). 50 Case C-306/05, SGAE v. Rafael Hoteles, 2006 E.C.R. I-11519. 51 Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, 168 Parry’s T.S. 185, revised Nov. 13, 1908, 1 L.N.T.S. 218, revised June 2, 1928, 123 L.J.T.S. 233, revised June 26, 1948, 331 U.N.T.S. 217, revised July 114, 1967, 102 Stat. 2853, 828 U.N.T.S. 221. 52 Case 262/81, Coditel v. Cine Vog Films SA (2), [1983] 1 C.M.L.R. 49. 53 See, e.g., Case C-169/05, Uradex SCRL v. Union Professionnelle de la Radio et de la Teledistribution (RTD), 2006 E.C.R. I-4973; Case C-344/98, Masterfoods Ltd. (t/a Mars Ireland) v. HB Ice Cream Ltd, 2000 E.C.R. I-11369; Case C-61/97, Foreningen af Danske Videogramdistributorer v. Laserdisken, 1998 E.C.R. I-5171; Case C-241/91 P, Radio Telefis Eireann v. Commission of the European Communities, 1995 E.C.R. I-743; Case C-17/92, Federacion de Distribuidores Cinematograficos v. Spain, 1993 E.C.R. I-2239; Case C-186/87, Case Cowan v. Tresor Public, 1989 E.C.R. 195; Case C-341/87, EMI Electrola GmbH v. Patricia Im- und Export Verwaltungsgesellschaft mbH, 1989 E.C.R. 79; Case C-352/85, Bond van Adverteerders v. Netherlands, 1988 E.C.R. 2085; Case C-158/86, Warner Brothers Inc. v. Christiansen, 1988 E.C.R. 2605; Case C-161/84, Pronuptia de Paris GmbH v. Prounptia de Paris Irmgard Schillgalis, 1986 E.C.R. 353; Case T-119/02, Royal Philips Electronics NV v. Commission of the European Communities, 2003 E.C.R. II-1433; Case T-114/02, Babyliss SA v. Commission of the European Communities, 2003 E.C.R. II-1279; Case T-185/00, Metropole Television SA (M6) v. Comm’n, 2002 E.C.R. II-3805; Case T-112/99, Metropole Television (M6) v. Comm’n, 2001 E.C.R. II-2459; Case T-504/93, Tierce Ladbroke SA v. Comm’n, 1997 E.C.R. II-923; Case T-70/89, BBC v. Comm’n, 1991 E.C.R. II-535; Case T-69/89, Radio Telefis Eireann v. Comm’n, 1991 E.C.R. II-485; Case T-76/89, Indep. Television Publ’ns Ltd. v. Comm’n, 1991 E.C.R. II-575; Football Ass’n Premier League Ltd. v. QC Leisure, [2008] EWHC (Ch) 1411; Football Ass’n Premier League Ltd. v. QC Leisure, [2008] EWHC (Ch) 44; Football Ass’n Premier League Ltd. v. QC Leisure, [2008] EWHC (Ch) 2897; Murphy v. Media Protection Services Ltd., [2008] EWHC (Admin) 1666; Murphy v. Media Protection Services Ltd., [2007] EWHC (Admin) 3091; Unipart Group Ltd. v. O2 (UK) Ltd (formerly BT Cellnet Ltd), [2004] EWCA (Civ) 1034; Unipart Group Ltd. v. O2 (UK) Ltd., [2002] EWHC (Ch) 2459; Philips Elecs. NV v. Ingman Ltd., [1998] 2 C.M.L.R. 839. 48 49

306  CHAPTER V: COPYRIGHT LAW MR. LüDER: Thank you, Ted. Now we do have two panelists who, as Hugh points out, do not get time of their own; they get a first shot at asking any question on what was mentioned. The two panelists are David Carson, General Counsel of the U.S. Copyright Office. He used to be the Associate General Register, which basically what that means is that he goes to WIPO. He couldn’t take it anymore and now is back as General Counsel. And then there is Sebastien Evrard, who is working in Jones Day in Brussels. We don’t need to introduce him because he already introduced himself by trying to ask me a tricky questions. The two panelists have a first shot. Is there anything you want to ask the rest of the speakers? MR. CARSON: I don’t have a question. When the appropriate time comes I may have a comment. MR. LüDER: Okay, a comment. MR. CARSON: First of all, I always learn something new here. One thing I learned today was that Internet access is a human right. That wasn’t something I understood before. That leads me to wonder—I assume if it is a human right, it must be something you are entitled to get for free; otherwise it’s not a very human right, is it? I guess we’re not nearly as advanced in the United States because I don’t think we recognize that yet. But one thing we do recognize, as Mr. Callaghan pointed out, is that freedom of speech is a very important right in the United States, perhaps the most important right. He mentioned the case involving “Let’s Go Crazy.”54 I just wanted to offer a little different point of view on whether that really is an example of how the notice-and-takedown regime in the United States represents an impingement of freedom of speech, because I don’t see that at all. First of all, as a technical matter, it wouldn’t be a violation of freedom of speech because our First Amendment relates only to government impingements on speech,55 and if a private actor chooses not to republish their speech that is perfectly fine. If I write a libelous letter to the editor to a newspaper and the editor chooses not to publish it because he will be liable as a republisher of a libel, then I don’t think my freedom of speech has been violated. But the one thing that it’s understandable why someone here might overlook it—but it’s not understandable why people in the United States overlook it, yet they always do when they complain about our Internet safe harbor56—is that while Ms. Lenz in this case was to some degree, I suppose, vindicated—she went to court, and the court at least allowed that she might ultimately be able to get compensation if it is proved that she was actually damaged by having this taken down,57 and I think her ability to prove any actual damage might be difficult—she actually does have a very easy means to get her speech put back up, because we do have something, not only notice and takedown, but counter-notification and putback. When the takedown notice has been received by the Internet service provider and when the service provider has taken it down, the person whose speech has been removed simply needs to file a notice saying: “Wait a minute. That shouldn’t have been removed. I am willing to take the hit in a copyright infringement suit if the person who wanted it taken down is willing to sue me.” Then that service provider will as a general proposition put it back up. There are incentives in the law to put it back up. So the violation of freedom of speech is a violation of perhaps a few days, at most, with respect to anyone who really wants their speech to be up there on the Internet. I would say in Ms. Lenz’s case, had she done that and had her video not been up there for a few days, I’m not Lenz v. Universal Music Corp., 572 F. Supp. 2d 1150 (2008). U.S. Const. amend. I (“Congress shall make no law … abridging the freedom of speech, or of the press[.]” (emphasis added)). 56 Digital Millennium Copyright Act § 202, 17 U.S.C. § 512(a)–(e) (2006). 57 See Lenz v. Universal Music Corp., No. C 07-3783 JF, 2010 WL 702466, at *7–12 (N.D. Cal. Feb. 25, 2010). 54 55

Part B: Disparate topics  307

sure she would have been harmed a whole lot, if at all. And let’s face it, it’s hard to imagine how she would have been harmed. So I actually think the regime we have in the United States is not a bad one, and it actually is very respectful of the speech interests of people who are accused of copyright infringement. That’s not to say there aren’t abuses of the notice-and-takedown provision; there certainly are. Copyright owners are not unknown to often over-claim and to make claims of infringement when none should have been made. But that’s part of the process. MR. LüDER: Was that a question? MR. CARSON: I said it was a comment. MR. LüDER: Trevor, would you like to respond to that? MR. CALLAGHAN: Yes. I would just like to say I’m grateful for that clarification. I don’t disagree with that point at all. I think in the speed through the material I may have misrepresented my point really, which was not so much the status quo, where we are under the DMCA, with the counter-notice,58 which is something from a Google perspective we are very fond of, to the extent that we’ve extended it all over Europe, even though it’s just a policy issue for us and not supported by the legislation. My point perhaps was more that in any attempt to reform intermediary safe harbors we need to be careful to retain that check and balance on potential abuse. But I certainly agree with you on the Lenz case.59 I would say that’s a completely fair representation. MR. LüDER: Sebastien, do you want to comment? MR. EVRARD: I have a comment, not a question. I would like to come back on the Hadopi French law.60 I am sorry if I repeat stuff that has been said yesterday, but I wasn’t at the session. The point I want to make is that to me the Hadopi law is a monster. The French are good at having big, broad ideas but creating a monster in implementing them. To me it is a monster for two reasons. The first one is that it is driven by political consideration and it does not take into account technical considerations. There are, I think, three technical considerations that they did not take into account. The first one is the possibility, which is very easy, to falsify your IP address. The second technical element is that it is not always possible for telecom operators to shut down or to cut out someone, especially in some of the areas where the local loop has been unbundled. There is also a problem with combined Internet and telephone and TV offers. The third technical consideration that they didn’t take into account, which was repeated in the SABAM v. Tiscali decision61 we had in Belgium, is that filtering technologies are not really what the rights holders really want to have; i.e., something which is really watertight and bulletproof. Technologies are moving really fast, so that it is very difficult to fix by decree the technology that ISPs should use. The second reason why I think that it is a monster—and it is probably shocking for a lawyer to say that—is that it is based on an administrative authority, which means that you need to respect 58 Digital Millennium Copyright Act, Pub. L. No. 105-304, §202(a), 112 Stat. 2860, 2883 (1998) (current version at 17 U.S.C. § 512(g)(2)(C) (2006)). 59 Lenz v. Universal Music Corp., 572 F. Supp. 2d 1150 (2008). 60 See Assemblee Nationale, Propriete Intellectuelle: Creation sur Internet (2008), available at http://www. assemblee-nationale.fr/13/dossiers/internet.asp. 61 SABAM v. S.A. Scarlet, District Court of Brussels, No. 04/8975/A, Decision of 29 June 2007, published in CAELJ Translation Series #001 (Mady, Bourrouilhou, & Hughes, trans.), 25 Cardozo Arts & Ent. L. J. 1279 (2008), http://www.cardozoaelj.net/issues/08/case001.pdf.

308  CHAPTER V: COPYRIGHT LAW the rights of defense, which means that somehow the procedure needs to be contradictory, and you need to have an appeal, which would likely be before the Court of Appeal. When you see that, according to the government, they would send 10,000 first letters a day, 3,000 recommendations a day, and 1,000 decisions a day, that is a lot of procedures. It is probably fantastic for lawyers, but I don’t know how they would be able to manage such a system. So I think the conclusion is that certainly the solution must be based on an understanding between the telecom industry and the content industry, but it must be based on sound technology and certainly not based on the creation of an administrative authority, which will really create a mess. MR. LüDER: So basically that is Professor Grosheide’s option two, codes of conduct. MR. SHAPIRO: May I respond to that? MR. LüDER: Yes, Ted. MR. SHAPIRO: I think that most of your points were taken into account, from what I understand of the French debate. First of all, why did they decide to select this administrative authority, as opposed to just letting the parties cut a deal? It was because of concerns about data protection. Very, very strict interpretation of data protection rules in France, where the matching up of a notice to an individual subscriber was considered to be an unauthorized processing on the part of the ISP. And also for the rights of trial that you mentioned. So the French decided the only solution was to create this Hadopi,62 which you accuse of being a usine à gaz. It may well be. I didn’t understand the point about filtering. There is no specific technology chosen in the French law. There is an expansive interpretation of Article 8(3) of the Copyright Directive,63 which allows you to get an injunction against a sort of undefined class, and filtering could be in order. In the SABAM case,64 which is on appeal, no specific technology was selected there either. The court pointed to a number of them, including Audible Magic, but did not mandate any of them. What I know of the case, which I know quite well because we have intervened through the Belgian Video Federation, Scarlet did absolutely everything possible to frustrate the working of the technology because they simply don’t want to do it. I guess you could say you don’t blame them. But they lost their proceedings. They went back to the lower court and tried to get an impossibility ruling. They went back to the same judge for a “did you really mean it” ruling. The judge said, “I did really mean it. Now get on with it.” MR. LüDER: Do you want to respond? MR. EVRARD: Yes. I think you are right to say that there is no provision in the law which would oblige people to use certain technologies. But there is the ability to provide a list of technologies by virtue of a decree. The implementing decree would set out a list of technologies that would be considered as good filtering technologies. But we can discuss that with the law in front of us and a beer, maybe. MR. SHAPIRO: Very well. 62 HADOPI, which stands for Haute Autorité pour la Diffusion des Œuvres et la Protection des Droits sur Internet (High Authority of Diffusion of the Art Works and Protection of the (Copy)Rights on Internet), is the government agency created by the French law which would locate and warn alleged copyright infringers according to a “threestrikes” model. See “French HADOPI Law, Now Complete, Can Brandish Its Weapons”, IP Watch, Oct. 23, 2009, http://www.ip-watch.org/weblog/2009/10/23/french-hadopi-law-now-complete-can-brandish-its-weapons. 63 Council Directive 2001/29, Art. 8(3), 2001 O.J. (L 167) 10 (EC). 64 “On 28 January 2010, the Brussels Court of Appeal … decided to submit a request for a preliminary ruling on several qeustions to the European Court of Justice … and refrained from ruling on the merits of the case.” Phillippe Peters & Charles Gielen, A New Chapter in the Battle Between IP Right Holders and ISPs, Mar. 19, 2010, http://www. lexology.com/library/detail.aspx?g=80a31eb6-0cfb-4b4e-91b5-506a8416b883 (last visited Apr. 6, 2010); see Societe Belge des Auteurs, Compositeurs et Editeurs (SABAM) v. SA Scarlet Extended Ltd. (formerly Tiscali), Unreported Jan. 28, 2010 (App. (B)).

Part B: Disparate topics  309 MR. LüDER: Who in the audience is in favor of “three strikes and you’re out”? [Show of hands] Who thinks that such an approach would be detrimental to the freedom of expression or the human right of Internet access? [Show of hands] Why do most people not have an opinion? MR. SHAPIRO: They are outside counsel. [Laughter] MR. LüDER: Most people have a conflict of interest. Okay. Any other questions on this topic? I still really don’t know why we need all this ISP liability or the rethinking, if after three strikes the user is just out. I still didn’t fully understand why possibly a bit more generalized remuneration system is going to be the end of the motion picture industry, why release windows need to be transposed literally from the brick-and-mortar world into the online environment. Does somebody in the audience have any ideas on this? PARTICIPANT: Globally there is a ton of Web site piracy which still requires a secondary liability notice-and-takedown system. “Three strikes and you’re out” is great. It’s applicable in the P2P environment. But if you go to Asia, you go to Latin America, it’s still the old-timey, regular old Web site environment. MR. SHAPIRO: Eric, you don’t need to go there. You can go to Europe, you can go to SurfTheChannel, RapidShare, Firstload. There’s a whole range. Someone was referring to cloud computing. There are all these cyber-lockers and all these streaming sites that aren’t covered.65 My understanding of the graduated response is that it is meant just to deal with education for end-users. You can dispute what the final step should be with respect to after you have received a number of warning notices, and that is where the fight is, this notion of whether there should be disconnection or not. But that is meant to be more of an educational thing. The reason that we talk about secondary liability is all these sites that I just mentioned, all these cyber-lockers, RapidShare, The Pirate Bay, they are all hiding in these safe harbors. That is why it is so difficult to draw them correctly, to make sure that real bad actors don’t get included in them. MR. LüDER: So, Ted, these people are like the tapeworm in the intestines of the Internet,66 right? MR. SHAPIRO: I would never say a thing like that. MR. MARTIN: I would like to ask a question of those who are concerned about the human rights element. One of the other remedies, aside from suspension, that has been discussed is what is sometimes called extreme throttling. So you would keep our Internet access, but it would go down to sub-dial-up levels, with the idea that you can’t stream video, you can’t 65 See Jason J. Lunardi, Note, “Guerilla Video: Potential Copyright Liability for Websites That Index Links to Unauthorized Streaming Content”, 19 Fordham Intell. Prop. Media & Ent. L.J. 1077, 1080 (2009) (discussing sites that link to and stream TV and movie content without authorization). 66 Referring to the quote from Wall Street Journal editor Robert Thomson, who was echoing a sentiment previously expressed by Rupert Murdoch (whose company, News Corp., now owns the Journal), that earlier had been mentioned at this Conference by Robin Jacob. See Chapter III, “IP & Corporations”, supra this volume (“Companies that aggregate mainstream media content without paying a fee are the parasites or tech tapeworms in the intestines of the Internet and will soon be challenged.”); see also Jane Schulze, “Google Dubbed Internet Parasite by WSJ Editor”, Australian, Apr. 6, 2009, http://www.theaustralian.com.au/business/media/google-dubbed-internet-parasite/storye6frg996-1225696931547; Dawn C. Chmielewski, “News Corp. Pushing to Create an Online News Consortium”, L.A. Times, Aug. 21, 2009, http://articles.latimes.com/2009/aug/21/business/fi-ct-newscorp21; Jason Kirby & Katie Engelhart, “Rupert Murdoch vs. The Internet”, Macleans (Canada), Jan. 8, 2010, http://www2.macleans. ca/2010/01/08/rupert-murdoch-vs-the-internet/.

310  CHAPTER V: COPYRIGHT LAW download a movie file. That is not real satisfactory to the music industry because the files are so small. But I’m curious to hear whether the human right is to broadband or something else. PROF. GROSHEIDE: That is a really tricky question. MR. LüDER: We did have this session—I don’t know if any of you attended—this afternoon about the war of words.67 I have to say that “extreme throttling” does raise sort of criminal activity. I don’t know. Is extreme throttling the way forward, as opposed to “three strikes and you’re out”? Okay, we’ll take another vote. If you had a choice between “three strikes and you’re out” or possibly long-term extreme throttling, what would you prefer? VOICE: You have to ask for a show of hands how we vote. MR. LüDER: Who would like just after three strikes know that he’s out? [Show of hands] That’s it. Internet is over. Go back to books. And who would like possibly to infringe a bit and then be subject to the Chinese water torture called extreme throttling? [Show of hands] You’re on to something with extreme throttling. That definitely got the majority. Yes, Timo? MR. RUIKKA: May I just comment on this topic a little bit? I was also somewhat surprised to hear this expressed in human rights terms. But there is a big body of law and regulation in the area of telecom that is concerned with universal access and public service obligations. Those considerations are significant societal considerations, and they need to be taken into account when determining what is appropriate and what is balanced and what is proportionate to what we are trying to address here. That dialogue has not been quite as well represented in this room as might be desirable. MR. LüDER: Maybe to bring— MR. SHAPIRO: I just want to stress again that extreme throttling, while that might be a solution for movies, is no solution at all for music. So it is not a universal solution, just because music files are so small that even in the old dial-up era you could get a song in acceptable time. MR. LüDER: Yes, exactly. That brings us maybe to what Timo was saying about equipment levies and this indirect form of remuneration. If you could avoid extreme throttling, would you be willing to pay a levy on some of the equipment that you use to access the Internet? Is that an alternative? QUESTION: Justin Watts, Freshfields. May I make an observation on that, please? MR. LüDER: Yes. QUESTIONER [Mr. Watts]: One of the things about copyright levies at the moment is that the people for whose benefit they are being paid on the whole have no idea that they are being paid or how much they are paying, or indeed what rights they are getting as a result of them being paid. The system at the moment is effectively a private one run between the manufacturers and the collecting societies. A question that arises out of that is: Wouldn’t it be a good idea to make sure that the public know, first of all, how much they are paying on each piece of equipment, to whom they are paying it, and what rights they are getting as a result of that payment? MR. LüDER: Is that a good idea, to have a visible levy, a visible fee? MR. RUIKKA: Absolutely, it’s a good idea to have a visible fee. When you then push that question, if people become aware that they are already paying for all of that, then that 67 See Chapter III, “IP & Corporations”, supra this volume (discussing the future viability of the traditional newspaper business in a digital world of “aggregators” like Google).

Part B: Disparate topics  311

begs the question of what does that do to the distribution models that would be transactionbased. MR. LüDER: What do you think? What will that do to distribution models that are transactionbased? If you know when you buy the equipment it will be part of the invoice―“this is the price of the equipment, this is the copyright levy which is for all the right holders whose works and other subject matter you are going to copy”—are you then going to pay additional subscription fees for additional innovative services? PARTICIPANT: Mihály Ficsor, Hungary. It’s a possibility. Then at the Fordham conferences, we can get rid of one of the parallel sessions. There will be no copyright session, since there will be no copyright anymore. MR. LüDER: Is that another form of extreme throttling? [Laughter] But seriously, this would be the end of copyright. PARTICIPANT [Dr. Ficsor]: This would be a kind of cultural tax. And, in that case, this cultural tax would be handled by politicians as any other tax is. If there is a tax reform, it may be just deleted from the list. MR. MARTIN: And I think it’s a very good business model for collecting societies, but it’s not a very good business model for content creators. MR. LüDER: Is that true? Can we have a show of hands again. Is that true? [Show of hands] Is it wrong? [Show of hands] No, you can’t vote twice. [Laughter] PARTICIPANT: That’s different. I thought the question was, Is our copyright wrong? MR. LüDER: So actually what you’re saying, where there is a sort of overwhelming majority, is that levies kill the innovative rights-based business models. VOICE: Yes. MR. LüDER: We are in the United Kingdom, you know. If I asked the same question in France or in Germany, I would get a different answer. Is there anybody from France or Germany? So you think that is really a danger for online business models. And what about the consumer? PARTICIPANT: Once the consumers knows what they are paying for, why should they pay again? And if you don’t tell them what they are paying for, the system is dishonest. MR. LüDER: What about collecting societies? You said it was a good business model for collecting societies but not for corporations. So what do we do with collecting societies? You said it is a good business model for collecting societies, but maybe not for you, for Paramount Pictures. Okay, so we will get rid of levies. What do we do with the collecting societies then? MR. MARTIN: I’m not saying collecting societies serve no purpose. I am talking about using levies to replace transactional business. MR. LüDER: Sarah, what is the view of collecting societies? MS. FAULDER: We are a collecting society that does not have a levy system in our country. We manage quite well with transactional licensing, and that is what we would prefer. MR. LüDER: Sarah, what do we do about your continental counterparts on the other side of the Channel? MS. FAULDER: Well, we have some examples to set, I’d like to think, from here. MR. LüDER: Let me ask another question. What are we going to do with cultural promotion

312  CHAPTER V: COPYRIGHT LAW schemes? If there are no more levies, if everything is transactionally transacted, there are no more funds available for cultural promotion schemes. So what do we do with the funding of young talent? MR. RUIKKA: May I suggest something? Fair compensation doesn’t mean levies necessarily. We have, granted not an EU country, Norway. There is a state budget. Most countries have a state budget. You can support culture from the state budget. MR. SHAPIRO: Under the Cultural Diversity Treaty,68 countries have a lot of leeway to maintain different subsidy systems.69 Norway has the advantage, of course, of being able to pay for this out of the oil. So it’s another matter. But even if there was a reduction in the levy moneys that we are collecting, there are other forms of funding culture. One of the ways that the windows system works to fund national film industries in Europe is that the different platforms in those windows have to make contributions to a central fund that helps to produce up to about half of the funding that is needed for most French films, for example. The difficulty is, of course, that they need money for the other half, which is why they sell territorial rights in advance, which is why, as I was trying to make the point earlier, copyright territoriality is so important to the film sector. See how I just turned that all around back to my presentation? MR. LüDER: That was extremely elegant. On the one hand, he is liberalizing the levies. Then, by the back door, he is reintroducing territoriality through the decoder box. What do you actually think of Ted’s argument about reintroducing territoriality by saying that the decoder box is producing non-transient copies? Do you think that’s a good approach? MR. SHAPIRO: They want to think about it. MR. LüDER: We will take votes again. Who thinks that actually what is happening in the decoder box goes beyond transient copying, and therefore it should be cleared in the territory where the decoder box is installed? [Show of hands] That’s one vote. Who thinks that is a load of rubbish? [Show of hands] Okay, that’s a majority. That’s three votes. [Laughter] A lot of people don’t have an opinion. So I am going to ask you a question. You are the European Commission. You are confronted with the stakeholder community that you have seen and they want you to reform levies, and you are not just responsible for the United Kingdom, where it is a piece of cake. What do you do? I’ll give you three options again. I’ll tell you what the three options are. The first option is do nothing. The system is just fine. Cultural diversity prevails. Everybody can have his own levies, his own tariffs, and select freely whatever equipment he feels is fit to do so. So do nothing. PARTICIPANT: Can you tie levies to any type of work that you choose, such as software? MR. LüDER: If you think that the illegal copies cause “prejudice or harm,” as it says in the Directive,70 to the right holder—i.e., the writer—you could do so. MR. CALLAGHAN: Tilman, are you talking about illegal copies or private copies? PARTICIPANT [Hogarth Andall]: Illegal private copies. 68 U.N. Educ., Scientific & Cultural Org. (UNESCO), Convention on the Protection and Promotion of the Diversity of Cultural Expressions, Oct. 20, 2005, available at http://unesdoc.unesco.org/images/0014/001429/142919e.pdf. 69 See id. Art. 6(2)(g) (when protecting and promoting the diversity of cultural expressions, member states “may [adopt] measures aimed at nurturing and supporting artists and others involved in the creation of cultural expressions”). 70 See Council Directive 2001/29, 2001 O.J. (L 167) 10 (EC).

Part B: Disparate topics  313 MR. LüDER: That’s another issue where I’ll take a vote. MR. SHAPIRO: Don’t go there, Hogarth. MR. LüDER: I’ll take a vote on that in a minute. But let’s just assume we are talking about

private copies of any works where there is prejudice because the subsequent copying somehow causes harm, lost sales or whatever. Now, the Member States at the moment are free to select any kind of equipment they want to levy and to select the tariff. That is cultural diversity. So that is option 1, leave the system as it is. Option 2 is to harmonize the tariff. Option 3 is to abolish the system and replace it with state budget. Option 4 would be to have common rules on which equipment is levied, give common catalogues on equipment that is levied, but give the Member States discretion on how to fix the tariff. So who is for Option 1, total freedom of states to do whatever they want to as long as fair compensation is at the end of the equation? So it’s fair compensation. Member States are free. [Show of hands] Do nothing is seven. Option 2 was to harmonize the tariffs, so at least there is no distortion of trade because there are gray markets and avoidance and these kind of matters. So harmonize the applicable tariffs? [No response] I’m surprised you don’t have a vote. So there is nobody for that. That’s excellent. Option 3 was to abolish it. [Show of hands] About fifteen. Option 4 was that complicated thing, a compromise solution: give some freedom in tariff but harmonize a bit the equipment that is subject to the levies? [Show of hands] We have decided to abolish levies in this vote. Now I want to take another vote on something which Timo mentioned. Do you think that all of this is relevant, his entire scheme there with the illegal source copies that are later, as he put it, whitewashed through the private copying exemption?71 That’s difficult. That’s why he put it up there. Should we compensate all copies that are made, Option 1? Option 2 is should we only compensate legal copies that are not illegally downloaded and then subsequently copied? Option 3 is should we make this sophisticated distinction that Timo was hinting at, saying, “Well, the subsequent copy is a different copy because it is made under the statutory exception; so even if it is illegally sourced we should compensate for that one”? So Option 1, compensate all copies, pirates, whatever. Who is for that? In this audience it is difficult. [Show of hand] Okay, one person. Compensate only for legal copies under the statutory exceptions which are allowed. [Show of hands] That’s a pretty good majority, or at least that’s like fifteen I’d say. The other option was compensate all copies. Is the whitewash theory applicable, that if the copy becomes legal, even if it is illegally sourced, it becomes legal by virtue of the private copy statutory exception? So at least we copy all the so-called subsequent copies. Anyone for that option? [Show of hand] 71

Id. at recitals 35–38, Arts. 2, 5.

314  CHAPTER V: COPYRIGHT LAW One vote.

PARTICIPANT: That might not actually be an option, depending on the law. MR. LüDER: Why? Explain. PARTICIPANT: Because it just depends on what exactly you mean by a “private copy.” You

would just be reading the Directive to try to find out what it means. That’s what we propose. MR. LüDER: You are absolutely right. The Directive does not actually specify what a private copy is. It could be any copy made by a private person, even an illegal one, or it could only be a copy that has a legal source, as specified by some of the implementing legislation. Some of the implementing legislation says compensation is only due if there is not a manifestly illegal source. MR. SHAPIRO: And some court decisions as well. MR. LüDER: And some court decisions as well. MR. SHAPIRO: I was just going to say in explanation of that the notion of whether or not there has to be a legal source existed in some national laws before. Many included it in their implementation. And there has been some case law. If the scope of the private copy exemption extends to all copies, then guess what? It flunks the three-step test in its current form, which is good. MR. LüDER: Time is up. Before you leave, how old was Adam Smith when he died? PARTICIPANT: Sixty-seven. MR. LüDER: According to my calculation he was seventy-seven. PARTICIPANT: We have to vote. [Laughter] MR. LüDER: Okay. But some of you looked on the slide and saw that he lived from 1723 until 1790. That makes him sixty-seven. So somebody paid attention. Thank you very much.

Chapter V

Copyright Law Part C: Rethinking Exceptions and Limitations To What Extent Is Re-evaluation Warranted? Permitted Under Treaties? Realistic? What Effect, If Any, Will the Google Book Settlement Have on Present Norms for Exceptions and Limitations? Moderator Prof. Mary Wong

Franklin Pierce Law Center (Concord, N.H.) Speakers Prof. Dr. Reto Hilty

Prof. Jerome H. Reichman

Director, Max Planck Institute for Intellectual Prop., Competition & Tax Law (Munich)

Duke University School of Law (Durham)

Antoine Albert

Maria Pallante

European Copyright Policy Manager, Google Associate Register for Policy and (Brussels) International Affairs, U.S. Copyright Office (Washington, D.C.) Panelists Tilman Lüder

Head of Unit, Copyright and KnowledgeBased Economy, DG Internal Market & Services, European Comm’n (Brussels)

Prof. Lionel Bently

Cambridge University

PROF. WONG: Good afternoon, everybody. Thank you for your stamina. Thank you for coming back. What I can promise you is a blockbuster of a panel because we have a panel that is very deep in talent and in expertise, and we also have, if you have seen the program, a very wide range of topics to cover in ninety minutes.

316  CHAPTER V: COPYRIGHT LAW It is actually three and a half lines of topics. Essentially, though, if you look at all of these topics, our speakers are going to attempt to cover them all in dialogue with one another, and we will also, by dint of that disciplinarian known as the “time bomb” over there, hopefully leave enough time for questions and answers as well. When we talk about limitations and exceptions, those of you who were at the last panel will probably have heard inklings and allusions and the beginnings of remarks about things like fair use, about things like the role of users, and expression, and how shall we deal with the balance in copyright law. This panel will at least address one specific, and pretty major with respect to that, and that is the role of limitations and exceptions in copyright law, something that a lot of us have known about for a long time, that has existed in the law both in national legislation and under international treaties and norms for a long time. But as many of you in the room also know, there have been movements afoot to do a number of things with these limitations and exceptions. These range from a recent discussion that has just been launched at WIPO as to how to deal with limitations and exceptions, whether a new treaty might be advisable, and the SCCR has started discussions on that. There are also a couple of interesting developments or proposals, including a Declaration1 that one of our speakers will talk about, as to the proper interpretation of the three-step test under the Berne Convention2 and under TRIPs.3 We have a variety of expert speakers, like I said, who will address each of these general topics as well as within their own capacities and expertise some of the specific items listed here. I have been instructed by Hugh that I am not to read their bios but to point you to the binder, which lists all of them and their experiences. I will let you know that we are going to go in the order in which they are seated. As they speak, it will become quite evident, I hope, as to why we have agreed to this order. Each speaker will have up to ten minutes, and then we will have two panelists who will contribute remarks, possibly ask questions, at which point I will also invite questions from the audience. Our first speaker will be Professor Reto Hilty, the Director of the Max Planck Institute in Munich. I believe he will address the question of how best can we approach limitations and exceptions in the digital age, including possibly through a new interpretation—or perhaps what he would term the appropriate interpretation—of the three-step test. PROF. HILTY: It was only this morning when I learned that my task is not so much to explain something to you but to defend it, because I saw in the paper of Dr. Ficsor that he completely disagrees with the Declaration I wanted to talk about. This is quite a challenging task, because only the explanation of the Declaration takes more than ten minutes, and if I should also defend it, it takes even more. I trust in your interest and in your ability to read the Declaration yourself, to build your own opinion, to decide whether you agree or you disagree. If you do agree, you may sign it. If you do not agree, you must of course not sign it. 1 Max Planck Inst. for Intellectual Property, Competition & Tax Law, Declaration, A Balanced Interpretation of the “Three-Step Test” in Copyright Law (2008), available at http://www.ip.mpg.de/ww/en/pub/news/declaration_on_ the_three_step_.cfm [hereinafter Declaration on the Three-Step Test]. 2 Berne Convention for the Protection of Literary and Artistic Works, Sept. 9, 1886, 168 Parry’s T.S. 185, revised Nov. 13, 1908, 1 L.N.T.S. 218, revised June 2, 1928, 123 L.J.T.S. 233, revised June 26, 1948, 331 U.N.T.S. 217, revised July 14, 1967, 102 Stat. 2853, 828 U.N.T.S. 221 [hereinafter Berne Convention]. 3 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197 (1994) [hereinafter TRIPs Agreement], available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm.

Part C: Rethinking Exceptions and Limitations  317

If you read the Declaration,4 you will see that there is a fundamental misunderstanding, because there was never the idea that we would like to change something in the international law or in the European law, in particular not change the three-step test.5 It is only a matter of interpretation: how do we have to understand the three-step test—how should it be applied. But let’s start at the very beginning with what is the starting point. We all believe in the positive impacts of copyright law, but I think we all could agree that copyright law only has positive impacts if we have the right protection. Right protection means that we have to have enough protection but not too much protection. This is not so easy, because the requirements for protection are not very precise. The requirements are in the national laws. We are talking of individuality or originality or creations or things like that. This is so unclear that basically we can say everything is protected and we probably go beyond what we should protect, we go beyond what is required. This is a certain risk, because this is probably not what we think is a balance of interests. We have a lot of interests involved. We have different parties. We have right holders, but we have not only one category of right holders. We have original right holders, those who create the works. We have so-called derivative right holders or subsequent right holders, those who produce something for markets, the copyright industries. And we have a number of users, users with different facts, like mere consumptive users, those who want to listen to music for instance; we have transformative use; we have creative use, etc., etc. If we want to balance all these different interests, we obviously need some limitations to protection. We need the already mentioned limitations and exceptions. These limitations and exceptions are crucial leverage to achieve a more or less balanced system. I think we heard it in very expressive words already from Michael Keplinger this morning.6 The problem is, however, that these limitations obviously should be limited as such via the so-called three-step test. Indeed—and this is quite interesting—the three-step test in copyright law is different from a similar instrument also called the three-step test in industrial property rights7—patent law, design, trademark. The three-step test in copyright law has some weak points. I do not want to address all of them, but I think we should at least realize that the three-step test in copyright law seems to focus on the interests of right holders only. But limitations are in the interests of third parties, so obviously we have to consider the interests of third parties as well, as it is written in the three-step test for patent law, for instance. And it is unclear who is the right holder, because the right holder can be, as I said, the creator, the original right holder, or it can be the subsequent right holder. Quite often they do not have concurrent interests, so whose interests prevail? In other words, the three-step test risks being applied in a way to kind of neutralize the positive impacts of limitations and ultimately risks an imbalance of the copyright system. Declaration on the Three-Step Test, supra note 1. Berne Convention, supra note 2, Art. 9(2) (Three-part test: “The reproduction of literary and artistic works protected by copyright can be authorized in certain specific cases provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author.”). 6 See Statements by Michael Keplinger, Chapter VII.A, “Multilateral and Bilateral Relations”, infra this volume (“It’s something that the developing countries have been pushing for. There is a great deal of concern—and certainly the evidence from our studies show it—that while most developed countries have in their laws well developed sets of limitations and exceptions to deal with issues like copying by libraries, copying for educational purposes, limitations and exceptions dealing with technological measures of protection that are applied, in developing countries these are largely absent.”). 7 TRIPs Agreement, supra note 3, Arts. 17, 26(2), 30. 4 5

318  CHAPTER V: COPYRIGHT LAW Against that background you should understand this Declaration we are talking about. It is called Declaration on a Balanced Interpretation of the Three-Step Test in Copyright Law.8 I think really you should read it to understand it. I do not want to explain every point. But I think one point of the Declaration is really crucial. It focuses in some respects on issues of competition. I know that the impact of copyright law is of course, at least to some extent, anticompetitive.9 We do even want that because from this economic situation we have incentives to create, incentives to invest.10 But in certain constellations, in certain situations, this turns out to be a problem, which means we cannot deal in any situation with the same rules. This is the problem of the question of “one size fits all,” and we already heard it from Louise Pentland, who said one size does not fit all.11 How can we help the situation? I think there are two reactions which are possible. On the one hand, we should design limitations in a way that they are able to differentiate different market situations, different products. Music is not the same as newspapers. Newspapers are not the same as scientific information. We should differentiate with regard to market participants. There are different kinds of use. The consumptive use is not the same as creative use. We should also be able to differentiate different market situations, like the question: Is a product substitutable or is it not; or how much exclusivity is in a market; or are there technical protection measures applied? On the other hand, we should probably not limit our focus on the traditional limitations. Limitations mostly are addressing problems on the level of the end-users. They hardly provide a kind of free space for competitors of subsequent right holders, free space within the copyright industry. If we face insufficient competition, mostly because of too much exclusivity or lack of substitutability, that results in uncertain pricing, like we know it from scientific publishing, in the area of the so-called STM publishers,12 the natural sciences and so on. If we face insufficient competition, we should do more than just introduce limitations being free space for end-users only. We should rather introduce kinds of compulsory licensing, compulsory licensing in the sense that a competitor is allowed some specific uses of works, of course against remuneration that can be negotiated. This is well in line with the three-step test if the three-step test is properly interpreted. It is not a new invention. As you might know, it was more than 100 years ago that the instrument of compulsory licensing has been introduced in the international copyright law, in the Berne Convention.13 It has been introduced in the United States around the same time.14 And we know it very broadly from patent law. In patent law we have a number of compulsory licensing, and a number of these compulsory licensing have been introduced because of the fear of anticompetitive situations.15 Declaration on the Three-Step Test, supra note 1. See Sara K. Stadler, “Copyright as Trade Regulation”, 155 U. Pa. L. Rev. 899, 926 (2007) (“[T]he public interest is served by granting creators the right to prevent others from making at least some uses of their works, so as to provide those creators with the level of exclusivity necessary to induce creation.”); see also, e.g., Dastar Corp. v. Twentieth Century Fox Film Corp., 539 U.S. 23, 33–34 (2003) (discussing the “copyright monopoly”). 10 “Information resources face the well-known supply-side problem, common to public goods: the inability to (cheaply) exclude competitors and nonpaying consumers (free riders) presents a risk to investors perceived ex ante (prior to production of the good), and this risk may lead to undersupply.” Brett Frischmann, “The Pull of Patents”, 77 Fordham L. Rev. 2143, 2156 (2009). 11 See Chapter III, “IP & Corporations”, supra this volume. 12 “STM” stands for “Scientific, Technical & Medical” publishers. 13 Berne Convention, supra note 2. 14 The concept of “compulsory licensing” was first established in the U.S. under the Copyright Act of 1909 which provided that whenever the owner of a musical copyright has used, permitted, or knowingly acquiesced in the mechanical reproduction of the copyrighted work, any other person could make similar use of the copyrighted work upon the payment to the copyright proprietor of a specified royalty. 18 Am. Jur. 2d Copyright and Literary Property § 93. 15 Paris Convention for the Protection of Industrial Property, Art. 5, Mar. 20, 1883, as revised at Brussels on Dec. 14, 1900, at Washington on Jun. 2, 1911, at The Hague on Nov. 6, 1925, at London on Jun. 2, 1934, at Lisbon on 8 9

Part C: Rethinking Exceptions and Limitations  319

In copyright law compulsory licensing are a little bit out of fashion today because we have a huge system of collecting societies. But collecting societies cannot solve all the problems. They can solve the problems on the level of the allowance of the end-use, but they are not able to solve anticompetitive situations. I would like to refer to the paper that you have in the outline.16 I hope you have found it. It is a bit difficult to find because there are no page numbers. But if you try to seek it you can find it. It looks like this. On the bottom you have, on the one hand, the links to the Declaration.17 You have on the other hand a link to the comments of the Max Planck Institute on the Green Paper18 that has already been mentioned, the Green Paper on Copyright Law in the Knowledge Economy,19 which explains precisely these instruments of compulsory licensing. Thank you very much for your attention. PROF. WONG: That was great, and with thirty seconds to go. So that kicked us off on the right note. PROF. HILTY: It says “up to ten minutes.” PROF. WONG: That’s right. The instructions were like the three-step test; it depends on how you interpret them. They say “up to ten minutes” for each. From an impassioned argument for a balanced interpretation of the three-step test, pointing out perhaps some difficulties with it and pointing to one direction forward, we move to our second speaker, who is well known to many of us. In the program he is listed as “Dr. Mihály Ficsor, Director of CITP, Budapest,” but he is known to many of us at the wearer of many hats, including for present purposes a past Assistant Director General of WIPO and fairly instrumental, if I may describe it that way, in the negotiations for the 1996 WIPO Internet Treaties.20 Dr. Ficsor will speak to us about the three-step test and about why perhaps the threestep test is not as narrow or restrictive as some others might think it is. Dr. Ficsor. DR. FICSOR: Thank you. My presentation will consist of two parts: first, a very brief introduction; and then immediately conclusions. Actually, I have to rephrase it: my presentation will consist of some points of a sketch of an outline of the summary of the conclusions of my paper. If somebody would like to know my views more in detail, I am also working on a paper. If somebody is interested in that very short paper, which is now about forty-fifty pages, I am ready to send it to him as soon as it is ready. It may be very useful for those who have some problems with sleeping, insomnia and so on. I would like to speak about the Munich Declaration21 because it has become quite wellknown. When I was ten days ago in China, it was mentioned there too. Oct. 31, 1958, and at Stockholm on Jul. 14, 1967, and as amended on Sept. 28, 1979; TRIPs Agreement, supra note 3, Art. 31. 16 Prof. Hilty’s outline is available in the conference archives at http://fordhamipconference.com/wp-content/ uploads/2010/08/RetoHilty_Web2.0_and_Exceptions_Limitations.pdf. 17 Declaration on the Three-Step Test, supra note 1. 18 Comments by the Max Planck Inst. for Intellectual Property, Competition & Tax Law, European Commission, Green Paper, Copyright in the Knowledge Economy (2008), available at http://www.ip.mpg.de/shared/data/pdf/ comments_on_the_green_paper2.pdf. 19 European Commission, Green Paper, Copyright in the Knowledge Economy, at 3, COM (2008) 466 final (July 16, 2008). 20 The “WIPO Internet Treaties” refers to the two treaties concluded in December 1996, at the World Intellectual Property Organization, intended to modernize copyright with regard to digital technology: WIPO Copyright Treaty (WCT), Dec. 20, 1996, S. Treaty Doc. No. 105-17, 36 I.L.M. 65; WIPO Performances and Phonograms Treaty (WPPT), Dec. 20, 1996, S. Treaty Doc. No. 105-17, 2186 U.N.T.S. 245, 36 I.L.M. 76. 21 Declaration on the Three-Step Test, supra note 1.

320  CHAPTER V: COPYRIGHT LAW Mr. Hilty has told you that I completely disagree with the Munich Declaration. That is not the case. I do agree with a lot of things in the Munich Declaration. I do agree with all the preamble-type statements about the need for balancing of interests, about the need for not going beyond what is justified. Also, I do agree that exceptions and limitations should be applied in different manners in different situations. But there are certain aspects with which I do not agree. First, I would like to address what seems to be one of the key points, if not the key point, of the Munich Declaration. I quote this part: “When correctly applied, the Three-Step Test requires a comprehensive overall assessment, rather than the step-by-step application that its usual, but misleading, description implies. No single step is to be prioritized.”22 It is added in the Declaration that this kind of new “judicious” interpretation is indispensable for balancing of interests. Furthermore, it is stated: “The present formulation of the Three-Step Test does not preclude this understanding.”23 That is, according to the Declaration, it is possible not to apply the three-step test in three steps, but rather in another way; namely, in one big step where the three conditions are assessed together in an unstructured way, without any priority between them. I do agree that, as a result of the application of the three-step test, an overall assessment of a proposed exception or limitation emerges, of course. But if the test is correctly applied, this assessment is supposed to be the result of the application of the test, as its name indicates, in three steps, and in a prioritized order. If the exception or limitation fails at a certain step, there is no need and possibility to proceed to the next one. This inevitably follows from the structure of the provisions on the three-step test in Article 9(2) of the Berne Convention,24 in Article 13 of the TRIPs Agreement,25 and on its variants concerning patent and the industrial design rights in Article 26(2) and 30 of the Agreement,26 and also in Article 10 of the WCT and Article 16(2) of the WPPT.27 Furthermore, it is a consistently applied principle of interpretation of international treaties that “[a]lso uncontested interpretations given at a conference, e.g., by a chairman of a drafting committee, may constitute an ‘agreement’ forming part of the ‘context’. However, interpretative or explanatory statements by members of a drafting committee in their personal capacity should be considered, if at all, simply as part of the preparatory works.”28 Such an uncontested interpretation is a kind of agreed statement—as provided in Article 31(1) and (2)(a) of the Vienna Convention on the Law of Treaties;29 or, at least, should be regarded as part of the “context” of a given provision of a treaty in a way similar to a declaration that is presented explicitly as an “agreed statement.” At the Stockholm Revision Conference, Professor Ulmer did make such an uncontested statement as the Chairman of the Id. at 2. Id. 24 Berne Convention, supra note 2, Art. 9(2) (Three-part test: “The reproduction of literary and artistic works protected by copyright can be authorized in certain specific cases provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author.”). 25 “Members shall confine limitations or exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the right holder.” TRIPs Agreement, supra note 3, Art. 13. 26 See id. 27 For a detailed analysis of the prioritized three-step structure of the test, see Martin Senftleben, “Copyright, Limitations and the Three-step Test”, Kluwer L. Int’l, 2004, subchapter 4.3, at 125–33. 28 Panel report, WT/DS160/R., para. 6.46. 29 “(1) A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given the terms of the treaty in their context and in the light of its object and purpose . . . (2) The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes: (a) any agreement relating to the treaty which was made between all of the parties in connection with the conclusion of the treaty,” Int’l Law Comm’n, Vienna Convention on the Law of Treaties, Art. 31(1), May 23, 1969, 1155 U.N.T.S. 331 [hereinafter Vienna Convention]. 22 23

Part C: Rethinking Exceptions and Limitations  321

Main Committee I. What he stated was not just his view. What he stated, as follows, was a decision of Main Committee I: The Committee also adopted a proposal by the Drafting Committee30 that the second condition should be placed before the first,31 as this would afford a more logical order for the interpretation of the rule. If it is considered that reproduction conflicts with the normal exploitation of the work, reproduction is not permitted at all. If it is considered that reproduction does not conflict with the normal exploitation of the work, the next step would be to consider whether it does not unreasonably prejudice the legitimate interests of the author. Only if such is not the case would it be possible in certain special cases to introduce a compulsory license, or to provide for use without payment.32

Now, this cannot be disregarded. You may complain, with Mephisto in Goethe’s Faust: “Es erben sich Gesetz und Rechte wie eine ewige Krankheit fort.” That is: “We inherit laws and rights as an eternal disease.”33 You may complain that this is the situation; that there are these provisions of the relevant treaties and that there is this agreed statement which is an obligatory source of interpretation on the basis of the Vienna Convention. You may regret that Professor Ulmer made this crystal-clear clarification about the decision of Main Committee I, but he did so. Therefore, what is expressed in this respect in the Munich Declaration is not a de lege lata statement about how, on the basis of the present text and the negotiation history, the three-step test may be interpreted and applied. It is only a de lege ferenda suggestion how the situation should change. This is my view about the structure, which is the same in the various treaty provisions on the test. However, my main point is that you do not need to revise the three-step test, neither the text nor the traditional structure of interpretation. It is not broken, and you know the saying about whether it is advisable to try to fix something that is not broken. 30 The Committee of Governmental Experts, convened by the Director of BIRPI in 1965, pointed out the crucial role of an appropriate regulation of exceptions in case the revision conference wanted to explicitly recognize a reproduction right. It stated as follows: “While admitting that it was illogical that the Convention should not mention the recognition of the right of reproduction, the Committee was of the opinion that the main difficulty was to find a formula which would allow of exceptions, bearing in mind the exceptions already existing in many domestic laws.” See Records of the 1967 Stockholm Revision Conference, at 112–13 [hereinafter “Records”]. The Committee established a Working Group to solve this problem, and then accepted the suggestion of that Group to propose draft provisions that would explicitly recognize the reproduction right, and allowing limitations or exceptions for: “(a) private use; (b) for judicial or administrative purposes;” and “(c) in certain particular cases where the reproduction is not contrary to the legitimate interests of the author and does not conflict with a normal exploitation of the work.” See Records, supra at 113. This proposal reflected that the Committee had accepted the position of the Study Group that a supposedly lengthy exhaustive list of exceptions would not be appropriate, but also that the Committee, nevertheless wanted to identify what it believed the most important specific exceptions. The proposal of the Committee had been included into the program of the conference. During the debate in Main Committee I of the Stockholm conference, a number of amendments to the abovementioned draft text were submitted. Some of them were aimed at narrowing the permissible while others sought to extend the scope of such exceptions. Finally the proposal of the United Kingdom helped the Main Committee to cut the more and more complex Gordian knot of conflicting amendments. It consisted of covering all permissible exceptions in a single provision, leaving out draft provisions (a) and (b) from the program (concerning private copying and reproduction for judicial or administrative purposes). According to the proposal, it would have been allowed to provide for limitations and exceptions “in certain special cases where the reproduction does not unreasonably prejudice the legitimate interests of the author and does not conflict with a normal exploitation of the work.” See Records, supra at 687. The U.K. proposal was agreed upon in substance by Main Committee I, and then the Committee approved the final text of Article 9(2) prepared by a Working Group on the basis of this agreement but reversing the order of the two conditions originally included in point (c) of the draft presented by the Working Group. 31 Meaning that the condition that exceptions or limitations must not conflict with a normal exploitation of works should be placed before the condition that they must not unreasonably prejudice the legitimate interest of authors. 32 Report of Main Committee I, p. 1145, para. 85. 33 See Marcel Dellebeke, Int’l Literary & Artistic Ass’n, Copyright in Cyberspace: Copyright and the Global Information Infrastructure 32 (Cramwinkel, 1997).

322  CHAPTER V: COPYRIGHT LAW Contrary to what the Munich Declaration alleges in a footnote, I believe that the two WTO dispute settlement panels—the first one in the Canada-Patents case,34 and the second one in the USA-Copyright case,35 as well as the French Supreme Court (Cour de Cassation), in its decision adopted on February 28, 2006 in the Mulholland Drive case36 have applied the threestep test correctly.37 It is possible to improve certain shades of arguments, but the interpretation adopted in those decisions is basically appropriate. I have to add that, of course, I am personally concerned because I was a member of the first WTO panel which interpreted the three-step test, and I was involved also in the Mulholland Drive case by submitting expert opinions in two stages of the procedure. I am not sure that I have time now to indicate in which way and with what kind of different shades I do agree with the interpretation of the two WTO panels and the French Supreme Court; I should say rather: I am sure I do not have time for this. Therefore, what I can only do is to refer to the second page of my outline, where I indicate what is my position regarding a correct interpretation of the three “steps.” As you can see there, I add a little bit more emphasis on the normative aspects of the three conditions. [The relevant part of the outline reads as follows]: (1) First step: “in certain special cases.” It is a both quantitative and qualitative-normative condition. No exception or limitation is allowed that is not limited in scope and is not based on a sound legal-political justification. The special cases should be determined in a way that this condition is fulfilled; this may be achieved also on the basis of the “fair use” and “fair dealing” doctrines with a due combination of statutory provisions and well-established case law. (2) Second step: “[no] conflict with a normal exploitation.” It is a both descriptive and normative condition. No exception or limitation is allowed that would conflict with any form of employing a right for extracting economic value from it likely to acquire considerable importance and that, as a result, would enter into economic competition with the employment of the right (to the extent of undermining its application in the market). It may also be regarded a normative condition in a narrower sense, according to which the employment of the right must be in accordance with the basic objectives of protection of copyright (and should not take the form of misusing copyright, e.g., by locking up information indispensable for public security or unfairly eliminating competition). (3) Third step: “[no] unreasonable prejudice to the legitimate interests of authors/owners of copyright.” The term “legitimate interest” has a legal positivist basis, but it has also a normative connotation. Although a word by word grammatical interpretation is also justified in its case, the condition of no prejudice to legitimate interest of authors/owners of copyright may only be duly interpreted if it is considered as a unique complex concept where the reasonableness and the legitimacy aspects have an inseparable interrelationship. It is this third step where a balance between the public interest to protect copyright as an indispensable incentive for creativity, on the one hand, and other public interests, on the other hand, along with the related legitimate interests of authors, other owners of copyright, users and the general public may and should be duly established.” See Panel Report, Canada—Patent Protection for Pharmaceutical Products, WT/DS114/R (Mar. 17, 2000). See Panel Report, United States—Section 110(5) of U.S. Copyright Act, WT/DS160/R (June 15, 2000). 36 Cass. 1e civ., Bull. civ. I, No. 05-15824 (Feb. 28, 2006). 37 Soon after the Conference, the European Court of Justice referred to the three-step test in Case C-5/08, Infopaq International/Danske Dagblades Forening, para. 58, [2009] E.C.R. I-6569 (ECJ, July 16, 2009). 34 35

Part C: Rethinking Exceptions and Limitations  323

As far as the issue of compulsory licensing is concerned, yes I do agree it is possible. The Berne Convention provides for such a possibility in Article 11bis(2),38 in Article 13,39 and for developing countries, in the Appendix.40 But there is the age-old and consistently applied a contrario principle of interpretation of legal norms. Therefore, the conclusion is inevitable that since the Convention only provides for such a possibility in certain cases and not in other cases, it is not applicable in other cases. I conclude with a kind of summary of my summary. The three-step test is sufficiently flexible without being vague. It offers broad latitude for national legislatures, but at the same time it also sets limits and conditions of the application of exceptions and limitations. If its potential is appropriately taken into account and exploited, it may be duly applied also in the digital environment. Thank you. PROF. WONG: Thanks, Mihály. On the theory that some suspense always makes for a better ending to a movie, or in our case day one of today’s proceedings, I am hoping the two speakers next to me will promise not to get aggressive before the discussion and the Q&A at the end. There are other developments in the limitations and exceptions arena, other responses, as well as more specific questions that some of our other panelists will attempt to address. Our next speaker is Professor Jerome Reichman of Duke University. He is also a well-known expert, particularly in the area where IP intersects with international trade and development. What he is going to do is talk a little bit about one of the other developments I alluded to, which is the recent European Commission Green Paper on Copyright in the Knowledge Economy.41 We have Tilman sitting near the end, and he will have a chance to respond later. But first we will hear from Professor Reichman as to the needs of science and his response to the Green Paper. PROF. REICHMAN: Thank you, Madame Chairman. I will speak very quickly. The title we have for our topic is really “Sustaining Scientific Research and Dissemination in the Digital Environment: The Crucial Role of Copyright Law’s Limitations and Exceptions.” It is based on a paper42 we were commissioned to send to the European Commission in response to the Green Paper. We are now revising that paper for publication. It deals primarily with science and some of the points that Professor Hilty made. Let me say at the outset that we are very sympathetic to the Munich Declaration and the views that Professor Hilty has expressed. In a number of articles on science we build on them. In the article we start by pointing out the unlimited scientific opportunities in the digital environment, using automated knowledge tools and digitally linked information repositories, search engines, and virtual data investigation techniques. This is the future of science. Unfortunately, this future is surrounded by an increasingly hostile legal environment that seems bent on frustrating the use of these very tools, particularly in Europe. I will just mention a couple of sub-topics, which I cannot go into: global trends to restrict access to and use of Berne Convention, supra note 2, Art. 11bis(2). Id., Art. 13. 40 Id., app’x. 41 European Commission Green Paper of 16 July 2008 on Copyright in the Knowledge Economy, (not published in Official Journal), available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:52008DC0466:E N:NOT. 42 Jerome H. Reichman & Ruth L. Okediji, “Empowering Digitally Integrated Scientific Research: The Pivotal Role of Copyright Law’s Limitations and Exceptions”, in The Econ. of Intell. Prop. Rts and Innovation, Knowledge, and Tech. Transfer (Joseph E. Stiglitz ed.) (forthcoming), draft available at http://www.law.nyu.edu/ecm_dlv3/ groups/public/@nyu_law_website__engelberg_center_on_innovation_law_and_policy/documents/documents/ecm_ pro_061986.pdf. 38 39

324  CHAPTER V: COPYRIGHT LAW scientific information and data; the shrinking realm of users’ rights in domestic laws; abuse of technical protection measures; tightening the electronic fences with restrictive contracts, unscientific articles, and data. Part III of our revised version then deals with proposals to reform the legal structure to support the production and diffusion of scientific information and data under modern conditions. Here we agree with the Max Planck Institute43 that analytically you must distinguish between scientific investigators as authors from publishing intermediaries, what Professor Hilty calls “information brokers,” who today add little value to government-funded research results and charge scientists exorbitant prices to buy published versions of their own work. Here we think, first of all, that government funders can limit the damage by imposing contractual obligations on grantees that would help to regulate access, use, and reuse of scientific articles. We then talk about the need to accommodate limitations and exceptions in domestic copyright laws to the needs of science. We distinguish between print media and the online environment. In the print media, publishers stand in the shoes of authors and we can find virtually no justification for requiring payments to publishers for downstream uses or reuses of published scientific research results other than what they extract from the first sale in hard copy. We think the limitations of copyright law should support that. Now, in the online environment we see publishing intermediaries as providers of digital services—no more, no less. They are like the Red Hat Company, which provides services to users of Linux but does not control rights in Linux as such.44 Publishers should be able to charge reasonable fees for their services, but this should be done under an ex ante liability rule, a “take and pay” rule. No distinction should be made between commercial and noncommercial science because this is way too far upstream, except that in the implementation there should be tiered pricing, of course, for the end-users. They should not be entitled to exclusive rights in the published scientific results, which must be freely available for reuse. We would add that all government-funded research results should also be made available in open access repositories so those scientists who do not want the convenience of the service should be able to go to the repository and do it for themselves. With specific regard to limitations and exceptions for scientific works as works of authorship, these are woefully inadequate as they stand under both U.S. and EU law. We need a very broad research exception. It is badly needed. The Max Planck Institute proposes an exception to legitimize storage, archiving, data extraction, linking, and the like.45 This is a pretty good start. More may be needed because a scientist must be free to subject any scientific article made publicly available online to datamining procedures, data manipulation by automated knowledge tools, including virtual scientific experimentation, without any constraints other than attribution under the norms of science. What is the goal? The goal is a broad upstream digital commons in which published scientific research results may be freely manipulated for any valid scientific purpose without compromising downstream commercial applications. Also, the European Union very badly needs to codify the idea/expression dichotomy in the Information Society Directive.46 I cannot understand why it is not there. 43 See Max Planck Institute for Intellectual Property, “Competition and Tax Law, Declaration: A Balanced Interpretation of the ‘Three-Step Test’ in Copyright Law” (2008), available at http://www.ip.mpg.de/shared/data/pdf/ extranet/declaration_three_step_test_final_english.pdf. 44 See License Agreement, Red Hat® Enterprise Linux® and Red Hat® Applications at § 1, available at http:// www.redhat.com/licenses/rhel_rha_eula.html. 45 See Declaration on the Three-Step Test, supra note 1, at 2. 46 Council Directive, 2001/29, Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, 2001 O.J. (L 167) 1 (EC) [hereinafter “Information Society Directive”]. Although absent from

Part C: Rethinking Exceptions and Limitations  325

Because there are so many issues to discuss, I am going to focus on two of them: First, I really think that it is not possible to continue to proceed on the basis of this enumerated list of exceptions that was created 100 years ago and can never be updated. We have to have some kind of variation of fair use that can deal with case-by-case situations. We need a synthesis between the three-step test as refined by the Max Planck Declaration and U.S.-style fair use.47 Now, what is wrong with the three-step test is that it is normatively blind as a bat and it requires normative wisdom to guide it. Now, one of the strengths of U.S. fair use law is that it is normatively pretty well informed. It identifies education, research, teaching, news reports, criticism, and now other so-called transformative uses. These are prime candidates for fair use on specific facts. Moreover, as Professor Samuelson’s recent research has shown, fair use is not as terribly unpredictable as many would have you believe.48 What is the weakness with fair use? The weakness is that in close cases the decision must be “all or nothing,” either it is a free use or it is a negotiated use. That leads to confusion and unclear decisions. Here the three-step test does provide useful guidance as interpreted by the WTO Panel. As I read the excerpt from the original committee in the WTO Panel, which was not exactly the one that was cited but close to it, the panel seemed to be saying a little taking is okay, a lot is not okay, but something in the middle may become okay with equitable compensation. Now, the United States could adopt this approach in close cases with the help of the eBay v. MercExchange decision49 that you heard about earlier.50 The eBay decision allows courts to deny injunctions on public-interest grounds, and it would enable U.S. courts to use their equitable powers to this end. the Information Society Directive, the Software Directive, 91/250/EEC, Art. 1(2), explicitly provides for an idea/ expression dichotomy. “Protection in accordance with this Directive shall apply to the expression in any form of a computer program. Ideas and principles which underlie any element of a computer program, including those which underlie its interfaces, are not protected by copyright under this Directive.” Directive 91/250, Software Directive, O.J. (L 122) 42 (EEC). 47 See 17 U.S.C. § 107. Section 107 does not define “fair use,” but enumerates four broadly worded (and nonexclusive) factors that courts shall consider in determining whether a use is “fair” and thus uninfringing: Notwithstanding the provisions of sections 106 [Exclusive rights in copyrighted works] and 106A [Rights of certain authors to attribution and integrity], the fair use of a copyrighted work, including such use by reproduction in copies or phono records or by any other means specified by that section, for the purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include— (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use on the potential market for or value of the copyrighted work. The fact that a work is published shall not itself bar a finding of fair use if such a finding is made upon consideration of all the above factors. Id. 48 Compare Pamela Samuelson, “Unbundling Fair Uses”, 77 Fordham L. Rev. 2537, 2621 (2009) (“This Article recommends that judges and commentators should stop wringing their hands about how troublesome fair use law is and look instead for common patterns in the fair use caselaw upon which to build a more predictable body of fair use law.”); with Joseph P. Liu, “Copyright and Breathing Space”, 30 Colum. J.L. & Arts 429, 433 & n.19 (2007) (quoting Dellar v. Samuel Goldwyn, Inc., 104 F.2d 661, 662 (2d Cir. 1939) (characterizing fair use as “the most troublesome [issue] in the whole law of copyright”)), and David Nimmer, “A Modest Proposal to Streamline Fair Use Determinations”, 24 Cardozo Arts & Ent. L.J. 11, 280–83 (2006) (lamenting the unpredictability of fair use caselaw). 49 eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388, 391 (2006). 50 See Chapter II.B, “The Judiciary & IP Law, United States”, supra this volume.

326  CHAPTER V: COPYRIGHT LAW The second major problem, of course, is the TPMs, the technical protection measures, electronic fences and electronic contracts. These cannot be allowed to prevent scientists from accessing, using, and reusing scientific information and data once they are made publicly available. Now, how can we achieve this quickly before we kill science? I urge you to consider the reverse-notice-and-takedown regime that was devised by Reichman, Dinwoodie, and Samuelson.51 It would enable the would-be user to hurl a flaming arrow over the electronic fence without going through the electronic fence, without waiving his rights, and say, “Show cause why you should not give me the following information for the following specified legitimate uses.” You would have fourteen days to provide that; otherwise you go to an expedited declaratory judgment and decide. But if the publisher gives the material, then he can also monitor that the materials are being put to their proper use. Of course, such a reverse-notice-and-takedown regime must be backed up by a misuse doctrine. Professor Burk’s anti-circumvention misuse doctrine is important because we cannot allow overrides of the exceptions for science.52 And of course, as the Max Planck Institute points out, database protection laws of the European Union must be aligned with limitations and exceptions in copyright law; otherwise all scientific data flowing through the system would be like goods flowing down the Rhine River in the Middle Ages, in which every castle has its hand out for tribute.53 Would any of this occur? Dr. Fiscor says, “Well, not likely, it’s too speculative.” So we do face the possibility that we sacrifice the future of science to the purity of classical copyright law. But, taking a pessimistic view, perhaps there is a bottom-up solution. So let me end with this. We really think that science must manage and control its own basic knowledge assets with a view to creating broad upstream research commons for each community without compromising downstream commercial applications. In this vision the reliance on external intermediaries is now misplaced. We will need to reintegrate the scientific journals back into the universities as part of digital knowledge hubs, where libraries can help in the editing, where computer science departments can help in the automated knowledge tools, where the science departments themselves can edit the journals with the help of students, as we do with law journals. A blueprint of how to digitally link materials, scientific information, and data into such a digitally integrated commons is described in a book that we are writing. I am one of the coauthors. The other co-author is Paul Uhlir, head of the Data Board at the National Academy of Sciences. The third author is Professor Tom Dedeyrwaerdere, Professor of Law at Louvainla-Neuve in Belgium. It is called Designing the Microbial Research Commons: Strategies for Accessing, Managing, and Using Essential Public Knowledge Assets.54 It will be unveiled at a conference at the National Academy of Sciences next October. If you are interested, I hope you will tune in. Thank you for your attention. PROF. WONG: Going from a broad exception to protect the needs of scientists and researchers to the woes and issues faced by libraries, archives, and museums, our next presenter is Emily 51 Pamela Samuelson, Jerome H. Reichman & Graeme Dinwoodie, “A Reverse Notice and Takedown Regime to Enable Fair Uses of Technically Protected Copyrighted Works”, 22 Berkeley Tech. L.J. 981 (2007). 52 Dan L. Burk, “Anticircumvention Misuse”, 50 USC L. Rev. 1095 (2003). 53 See, e.g., J.H. Reichman, “A Contractually Reconstructed Research Commons For Scientific Data In A Highly Protectionist Intellectual Property Environment”, L. & Contemp. Probs. 416 (Winter/Spring 2003). 54 J.H. Reichman, Tom Dedeurwaerdere, Paul F. Uhlir, Designing the Microbial Research Commons: Strategies for Accessing, Managing, and Using Essential Public Knowledge Assets (forthcoming).

Part C: Rethinking Exceptions and Limitations  327

Hudson, who is a doctoral candidate at the University of Melbourne. She is going to tell you a little bit about a very interesting comparative research project she is engaged in relating to libraries, archives, and museums, and relating to fair use and fair dealing. MS. HUDSON: The brief comments that I will make today are drawn from fieldwork I conducted in 2007 and 2008 in leading museums, archives, libraries, and galleries in the United States and Canada. With my colleague Andrew Kenyon, I conducted similar research in institutions in Australia in 2004 and 2005. In all three countries, the interviews were with institution staff and were geared towards getting an understanding of how copyright impacts on activities undertaken by institutions, in particular in relation to their use of digital technologies. Exceptions were one example of the key areas I wanted to interrogate. So, in particular, how is fair use relied upon amongst U.S. institutions, given the limited operation of the Section 108 libraries and archives provisions?55 And then, up in Canada, following the landmark Supreme Court decision in CCH v. Law Society of Upper Canada,56 do institutional understandings of fair dealing: (1) differ from their Australian colleagues, who also have a fair dealing exception; and (2) show some common ground with those in the United States, who have an open-ended fair use exception? There was a degree of common practice between the three countries. So for instance, despite differences in the drafting of relevant exceptions, it was commonly reported that for administrative activities, such as the creation of collection management databases, copyright had little impact on decision-making in relation to those sorts of practices. So here it appears that staff either: do not consider copyright at all; believe that if copyright law says that this sort of conduct is not permitted, then the Act is simply wrong; or they apply some intuitive understanding of what the Copyright Act says, though they are not able to actually put their fingers on the specific provisions allowing them to undertake these sorts of activities. In Canada and Australia, exceptions directed to collection management were introduced into their Copyright Acts in 1997 and 2000, respectively.57 But there doesn’t appear to have been any meaningful change in practices over the course of that time. That is, what appears to have happened is that a very strong industry norm has developed, from what interviewees said, because of a notion that cultural institutions have missions of collecting and preserving material, and they will therefore do what is necessary to achieve those goals regardless of the precise wording of the Copyright Act. In the case of public activities, though, there was quite a divergence when one compared the U.S. experience, where there were numerous institutions adopting a fairly proactive approach to fair use, with the experience in Australia and Canada, where typically what interviewees said was exceptions have no or very limited relevance to public activities. Thus, while institutions in all three countries show a preference towards using public domain materials, because there is an attraction to avoiding copyright issues in their entirety, the position is very different when you consider activities involving in-copyright works. For instance, numerous U.S. institutions reported that they make reproductions of collection items available online using a fair use analysis that is influenced by the reasoning in cases like Campbell v. Acuff-Rose Music,58 Kelly v. Arriba Soft Corporation,59 and Bill Graham Archives v. Dorling Kindersley.60 So an example of this is making a collection database available online, 17 U.S.C. § 108. (2004) 236 D.L.R. (4th) 395. 57 Respectively: An Act to Amend the Copyright Act § 30, Copyright Ac, R.S.C., ch. C-42(30) (Can.); Copyright Amendment (Digital Agenda) Act, 2000, c. 75 (Austl.). 58 510 U.S. 569 (1994). 59 336 F.3d 811 (9th Cir. 2003). 60 448 F.3d 605 (2d Cir. 2006). 55 56

328  CHAPTER V: COPYRIGHT LAW where you have small, low-resolution images of artworks or objects accompanying each record. In Australia and Canada, it appears routine that these sorts of uses would be cleared through a permissions mechanism. It also appears that orphan works are less of a problem in the United States because a fair use analysis allows at least some uses of these materials. So I spoke with a number of institutions that had archival or social history collections. They said that if they were unable to locate copyright owners, they were quite confident that they could at least, for instance, make those works available online, perhaps at low resolution, perhaps with some limitations on accessibility, or only in extract form, but they could at least achieve something. I am not suggesting that orphan works are not a problem in the United States—because they clearly are—but that compared to their friends in Canada and Australia, U.S. institutions are in a somewhat stronger position to provide some public access to orphaned collections. So is the upshot of this research that other countries should look at flexible exceptions in the style of fair use to fix issues with accessibility of digital collections, or use of orphan works? Well, here the experiences of Canada might be instructive. In 2004 the Supreme Court handed down its decision in CCH v. Law Society of Upper Canada,61 which related to photocopying activities at the Great Library at Osgoode Hall. In finding in favor of the Law Society, the Supreme Court accepted a fair dealing defense in relation to allegations of direct copyright infringement. That is, the library had a photocopying service where a user could request to be supplied with copies of things, and the library would fulfill those requests. The Supreme Court said that was a fair dealing, and in doing so, held that exceptions like fair dealing are “users’ rights”, and that this means that a term like “research” should be given a large and liberal interpretation, so it includes the research process that the library was engaged in. Amongst academics, CCH has been accepted quite widely to be a landmark case. For instance, Drassinower, in his chapter in Geist’s In the Public Interest: The Future of Canadian Copyright Law, has said that the case “is rightly and widely regarded as bringing forth a truly fundamental shift in the way Canadian copyright law is to be understood and practiced.”62 We also see the impact of CCH in the Copyright Board’s Tariff 22A decision,63 the relevant part of which related to previewing of music. This is when consumers go to an online music site and stream, say, twenty or thirty seconds of a track to determine whether they want to purchase or download it. The Copyright Board said that fair dealing applied in that case. So it took CCH from the analog world of library photocopying into the online world of consumer search activity. However, when I asked institutions about their understandings of fair dealing and CCH, it appeared that CCH has had an incredibly muted reception in Canada. The main shift was in academic libraries, some of whom have moved to digital delivery for their user-request services. That is, instead of turning up at the library to collect a hard copy of your requested material, you can somehow access it electronically; it is either E-mailed to you or you go onto a Web site and can print it out. A handful of universities have also referred to fair dealing in their E-reserves policies. But that is about the extent of the reported shifts, and certainly activities for mass digitization or online projects typically have remained in the permissions model for those institutions. There are a variety of factors influencing the behavior of Canadian institutions. For instance, a lot of people didn’t seem to know a lot about fair dealing, let alone CCH, particularly amongst the interviewees from museums and galleries. For interviewees who did know about CCH Canadian Ltd. v. Law Soc’y of Upper Canada, [2004] 1 S.C.R. 339. Drassinower, in Michael Geist, In the Public Interest: The Future of Canadian Copyright Law (2005). 63 Soc’y of Composers, Authors & Music Publishers of Canada v. Canadian Ass’n of Internet Providers, 2004 SCC 45, (Can.) (“Tariff 22A decision”). 61 62

Part C: Rethinking Exceptions and Limitations  329

CCH, there was a commonly expressed lack of confidence that the decision would endure. There were also risk-management issues that were referred to. That is, people seemed very uncomfortable with the uncertainty inherent in the CCH judgment. So what can we take from this? One of the arguments I am developing proposes that many debates about exceptions have perhaps focused too much on drafting issues (for instance, whether exceptions are closed or open-ended, and so forth), but at the expense of other factors. I should emphasize that those doctrinal considerations are incredibly relevant, but it is dangerous when they are analyzed at the expense of other factors that are also very relevant to how exceptions operate in practice. These include other provisions in the Copyright Act, institutional factors (such as risk management and level of resourcing given to copyright), cultural factors, the legislative history within which a statutory provision finds itself, and so forth. The differences in U.S. experience under fair use were notable and demonstrate some of the advantages of an open-ended exception. However, if other countries decide to introduce openended or fair use-style exceptions, these other factors need to be identified and considered. Thank you. PROF. WONG: In case you were wondering, she had two seconds remaining. What Emily has reminded us is that this is not just an academic question, even though a bunch of us on this panel are academics, that there are a lot of players with very real interest in seeing what happens in the L&E space. Our next speaker is probably one of the best qualified to speak to the different players’ perspectives, as well as the different policy perspectives, in this particular case the United States. She is Maria Pallante, who is the Associate Register for Policy and International Affairs at the U.S. Copyright Office. She has also been in private practice, worked at authors’ organizations and at a nonprofit. I believe her remarks will address the role of some of those players, but with particular reference to the recent Google Book Search settlement. MS. PALLANTE: Thank you, Mary. From my perch in Washington and watching the Google Book settlement,64 just like everybody else is—we are not involved in my office, but we are watching it both with a level of fascination as to how it has transpired and with great interest to see where it ends—I was asked to give just a very brief overview of the settlement. As you probably know, Google, through its Library Project, not its Book Partner Project, scanned in the last several years at least 7 million books. Some people put the number much higher. Antoine is here. Maybe he can actually tell us the number. They got the books. The question is: where did they get the books? They got the books from libraries. They got them from three public libraries and two private libraries: the New York Public Library, the University of California, and the University of Michigan, and then also from Harvard and from Stanford. Some of those libraries presented to Google only books that they thought were in the public domain. Others gave them books in the public domain and books that they thought were in copyright. They did that because they, along with Google, thought that what Google was doing was fair use. So what was Google doing? Google was copying the entire book and then, depending upon whether it was in the public domain or not, either putting up the entire book online or, in 64 Settlement Agreement, Authors Guild, Inc. v. Google Inc., No. 05-CV-8136 (S.D.N.Y. Nov. 13, 2009) (proposed), available at http://www.googlebooksettlement.com/r/view_settlement_agreement. [Note: Subsequent to the conference, the Google Books settlement was rejected by Judge Chin, on March 22, 2011. See Author’s Guild v. Google Inc., No. 05-CV-8136 (S.D.N.Y. Mar. 22, 2011), available at http://www.nysd.uscourts.gov/cases/show. php?db=special&id=115].

330  CHAPTER V: COPYRIGHT LAW the case of in-copyright books, putting up a snippet. “Snippet” is the word that you will see throughout the settlement.65 It’s Google’s word. It generally means somewhere from three to fifteen lines of the book, like a preview. Sometimes it was possible for the user to get the snippet and then be directed to a place where they could actually purchase the book or obtain a lawful copy of the book. They alleged fair use based primarily on the Kelly v. Arriba Soft case in the United States,66 which was a Ninth Circuit case that held that thumbnail images used in connection with a search engine service was fair use because it was transformative and it didn’t undermine the original market of the original work. It was a different kind of use, and in some instances thumbnail search engine kinds of mechanisms point you to the actual real work. That was perceived by the court at least to be a good thing. The case was closely watched as it was plodding along in the United States, especially by advocates who were hoping to be a beneficiary of Google’s action. So all of those companies that were hoping for a decision by the court that would say “digitization, intermediate copying, where perhaps the end use is fair use, is also fair use.” But that didn’t turn out. They settled in October of 2008. The settlement involved the Authors Guild and the book publishers, both of whom sued, saying “Not fair use; even if the snippets are fair use, the process of copying the entire work to get to the fair use is not fair use.”67 The settlement covers a lot. It covers all books published prior to January 5, 2009.68 It also covers “all persons with a U.S. copyright interest.”69 That is a definition that you will want to look at in the settlement. If you have any interest in parsing through the 200 pages of the settlement, look at that. That is not just people who have books published in the United States; it is also people who live in a country that has copyright relations with the United States, for example. So quite a broad group. There is a registration requirement, which my colleague David Carson referenced in the previous panel,70 that has to do with U.S. works. It’s a very technical issue. It corresponds to another case winding its way through the courts. But it is certainly not something we should bother to go into right now. What does the settlement allow? The settlement allows Google to do quite a bit. In fact, the settlement allows Google to do more than it was actually doing before. Here is what it can do: • It has immunity from liability for the past copying, so the 7 million works that are already copied. • It can now preview up to 20 percent of the book, not just the snippet. This is for works in copyright. • It can sell access to the books to consumers online. So Google will have the largest online bookstore. • It can sell institutional subscriptions of these works, including to the libraries that gave them the works in the first place. What do publishers, authors, and libraries get? • For the past copying, without any admission of any wrongdoing—no determination on the fair use question—Google will pay $60 to all copyright owners whose works were scanned. 65 See, e.g., Settlement Agreement at 22, 46, 48, 95, Authors Guild, Inc. v. Google Inc. (S.D.N.Y. Nov. 19, 2009) (No. 05 CV 8136-DC). 66 Kelly v. Arriba Soft Corp., 336 F.3d 811 (9th Cir. 2003). 67 “Questions of law and fact common to the Class include . . . Whether Google’s copying and display of the Works on its commercial website is a ‘fair use’ of the Works.” First Amended Class Action Complaint at § 25, Authors Guild, Inc. v. Google Inc. (S.D.N.Y. Nov. 19, 2009) (No. 05 CV 8136-DC). 68 Settlement Agreement at 9, Authors Guild, Inc. v. Google Inc. (S.D.N.Y. Nov. 19, 2009) (No. 05 CV 8136-DC). 69 Id. at 3. 70 See Chapter V.A, “Infringement & Remedies”, supra this volume.

Part C: Rethinking Exceptions and Limitations  331

• It will pay $34.5 million to create a books rights registry. Half of the registry will be controlled by authors, the other half by publishers. Initially the function of the registry— we don’t have the registry yet, so it is hard to talk about what it will do—but initially it will handle the rights vis-à-vis Google. It is certainly possible that it would be broader than that in the long term, handling all kinds of rights for all kinds of prospective users. • For the commercial uses, the online consumer bookstore and the institutional subscriptions, as well as advertising revenue, Google will split that 63/37, 63 percent to the rights holder and 37 percent to Google. Because this is a class action, there is no need for anybody to do anything particular if they want to be part of it and are within the class. However, if they want to opt out and preserve their ability to challenge Google on legal grounds, they do have to opt out, and they have to opt out by May 5th. That is coming up quickly. I guess from my office’s perspective we wouldn’t be upset if the deadline was delayed, if for no other reason than that authors are confused. It’s a 200-page settlement, it’s very complex, and they are not quite sure whether it is better to be in or out. Certainly, some of the Authors Guild members would presumably think it is better to be in. Once you are in, that doesn’t mean that over the long term you can’t help to inform the licensing terms, but in terms of legal action you would have to opt out. So that is the background. Just to put this in perspective, the scope of copying and the ability to make these works available to the public is quite remarkable. Let’s not lose track of how incredible this is as a service. Richard Sarnoff, who is the President of the Association of the American Publishers, said: “This settlement is a win-win. It will provide renewed access to out-of-print books, in particular, that had been lost in the bowels of a few fantastic libraries”71—so just lost to the world, and now they are back. Nonetheless, there are some concerns. The first set of concerns I would say are anticompetitive concerns.72 Under a fair use analysis, Google would have, if it had prevailed, had some precedent that the copying of the works to present a small snippet to the public was fair use. They would have still had to do a case-bycase analysis and others who wanted to benefit from that decision would have had to do the same. But now what we have is a broad settlement that gives Google a huge headstart—7 million books already scanned and immunity for any kind of liability going backwards with respect to most of those. The things that we will be watching going forward—we, the collective we—will be the pricing schemes for consumers and libraries and the royalty rate set by the book rights registry. Libraries have certainly been vocal about the pricing schemes with respect to paying for things that they once had free access to. Whether that comes to be we will have to see. An ancillary concern is that although Google is going to be the world’s biggest bookstore, that by default it will also be the world’s biggest online library. Google is not a library, Google is a commercial entity, and certainly the long-term preservation, quality of the scan and accuracy for scholarly purposes, and the selection of the works in the first place—none of those are Google’s mandate, nor should they be, but they are all we have right from the library world. Unless something changes with respect to libraries having their own funding and their own initiatives to do their own scanning, that probably will not change any time soon. 71 See Richard Sarnoff, AAP Chairman Richard Sarnoff’s Statement Regarding Google Settlement, Oct. 28, 2008, http://www.publishers.org/main/Copyright/Google/RSarnoff.htm. 72 In fact, subsequent to the conference, the U.S. Federal Trade Commission has challenged the settlement as being uncompetitive. See Miguel Helft, “Justice Dept. Opens Antitrust Inquiry into Google Books Deal”, N.Y. Times, Apr. 28, 2009, http://www.nytimes.com/2009/04/29/technology/internet/29google.html?_r=1.

332  CHAPTER V: COPYRIGHT LAW From a public policy perspective with respect to legislation, certainly the settlement has the effect of legislation. It is like private legislation just for Google and the parties at the table. When viewed through the normal statutory prism of limitations and exceptions, it is really something. It is very hard, at least in the United States, to imagine any kind of exception being crafted that would outright accept systematic copying, even if the end-use was fair use. More remarkable than that would be legislation that envisions an exception allowing for 20 percent preview of the work without permission, a sale of the work to consumers through an online bookstore, and subscriptions to institutions, unless the copyright owner comes forward and opts out, so flipping the process that we normally have. I guess going forward one of the things we wonder about is whether legislation will be introduced—assuming this is approved by the court, and that is by no means known—whether there will be reactive legislation that might level the playing field by removing barriers for other entities to come forward and do the same kind of thing, or creating compulsory licenses, something like that. I’m not advocating those things, but they are certainly things people are talking about. We also have a concern about orphan works. Many of the works that have been scanned and that will be sold to consumers and to institutional institutions are orphan works. It will turn out that they have no owner. So what will happen, I believe, is that Google will pay the book rights registry for those, the book rights registry will keep the money for I think five years is what the settlement stipulates, and then they will either use the money to fund themselves or they will use the money to pay to the Authors Guild or to the publishers association. Some kind of representative group will take that money. In the United States we had a very long process over the past two Congresses about orphan works legislation.73 We have what we believe is a very conservative model, where on a caseby-case basis a user will go forward. They will use best practices. They will look to the industry to help them navigate how to find an owner. If they can’t find the owner, they document their search; they can go forward, but if the owner shows up they have to pay them. One of the biggest concerns we heard from small individual authors, primarily photographers but also book authors to some degree, was that it is very difficult for them to manage and license their own rights, that until they get to the point where they can manage and license their own rights, orphan works legislation is not fair. So I think one signal to end with here is that the signal that Google perhaps has sent is that the market will not wait for owners to create responsive licensing mechanisms. If the copyright owners do not do that themselves, they may find the market creating those on their own terms. Thank you very much. PROF. WONG: Now there will be a pop quiz, whether you were paying attention to the description of the Google Book Search settlement and can outline all the details back at us. But, unfortunately, we have to get to cocktails at some point, so we will move on to our next speaker, who I should say is not here to describe in detail or necessarily defend the settlement. As the European Copyright Policy Manager for Google in Brussels, Antoine Aubert obviously comes with a background to that litigation, but also, as a representative of Google in the world of Web 2.0, could probably be a good representative as to perhaps what some in the private sector might be thinking in relation to limitations and exceptions in Europe. MR. AUBERT: Thank you. First of all, I am really pleased to be able to address such an audience. I would like to say that as far as copyright is concerned we are always ready to engage in discussion and engage in debate on copyright exception. 73 See, e.g., The Public Domain Enhancement Act, H.R. 2408, 109th Cong. (2005); The Shawn Bentley Orphan Works Act of 2008, S. 2913, 110th Cong. (2008).

Part C: Rethinking Exceptions and Limitations  333

My presentation is going to focus on what I know the best, the European copyright regime, and in this case the European copyright exception regime. A lot has already been said and we have been remixing quite a bit the presentations. So I am wondering to what extent all of my remarks will necessarily be relevant. I tried to reorganize things in the process. The first thing I would like to mention when it comes to copyright exception and the debates around it—we have seen that the Commission is reopening the debate with its Green Paper,74 and we believe that is something extremely positive. That being said, it seems that when we are talking about copyright exception there is a tendency to consider exception as a cost and to see copyright protection and copyright exception as some kind of a contradictory objectives. I think we have heard it in the previous session today. People like this way of presenting, people defending protection on one side and people promoting exception on the other side, defined as working on two different sides instead of working together. I believe this vision disregards the fact that both protection and exception serve the same objective of fostering creation and dissemination. On the one side, copyright protection stimulates investment and the production of creative works. On the other side, exceptions ensure that access and reuse of content further creation and innovation. In this context, when we consider the evolution of copyright and its adaptation to the digital environment, it is crucial to look at the value of exception to support creation and innovation and not to consider or describe them as a cost. There were some remarks earlier today in one of the panels pointing at studies that have been made to assess the value of copyright exception and the value of sectors relying on copyright exception. This is definitely something that is really important and really useful. But I am surprised that, while a lot of work has been done to assess the value of protection, not that much work has been done to assess the value of exception. Since there are many academics in this room, maybe that would be an interesting subject for a study. Coming back to Web 2.0 and the reopening of the debate on exceptions, I believe this is a very timely decision since we face major changes in the way content and knowledge are created, distributed, and accessed. You can call it Web 2.0 or the participative Web. What we are effectively facing is a major change in the way content is actually accessed and distributed. These are changes are driven by user empowerment to access, create, and distribute content. The most visible change is this unprecedented wave of creativity resulting from the rise of user-created content that we are seeing. There was some reference earlier to blogs and the fact that is mainly amateur content, it may be true for many blogs that do not qualify or do not have the same quality as a newspaper. However, the level of quality of user-created content is rising more and more, and you would be amazed to see the number of subscribers to certain blogs. That can be tens of thousands. So user created content is definitely a trend that is developing at the moment. It is only going to develop further. I am referring to a study that has been done in 2007 that is demonstrating that in the United States 64 percent of teenagers are engaged in some form of online content creation.75 So seeing the new generation coming, we can see that this trend for user-created content is going to keep growing. The impact of this change on availability of content is further increased by the possibility for any piece of information ever created to be available on the global scale. 74 European Commission, Green Paper, Copyright in the Knowledge Economy, at 3, COM (2008) 466 final (July 16, 2008). 75 Amanda Lenhart et al., “Teens and Social Media”, Pew Internet & Am. Life Project, Dec. 19, 2007, http://www. pewinternet.org/Reports/2007/Teens-and-Social-Media.aspx.

334  CHAPTER V: COPYRIGHT LAW Another major change is the user involvement on content selection. We are seeing users that are not anymore only accessing content that is served to them. They are actually increasingly involved in searching for content, matching their specific needs and interests. Looking at this change, there is definitely increasing opportunity for creativity, access, knowledge, and cultural diversity. From a copyright perspective, the challenge is to make sure that the European exception regime is adapted to this new environment. What we are expecting from the European copyright exception regime is that is supports users’ fundamental rights such as freedom of expression or access to information. We are expecting an exception regime that is harmonized on a European level to allow for free movement of content and services relying on exception. And we are expecting a copyright exception regime that is flexible enough to support development of innovative services that are actually improving online accessibility to content. Coming back to one of my first points, calling for adaptation of copyright exception is not to call for exception challenging protection. As I mentioned earlier, protection and exception are part of the same equation and they should be looked at as being part of the same equation. There was a presentation on the Google Book Search class action settlement. I would like to use it as an example to illustrate how agreements can actually be used to increase access to content in a way going beyond the scope of exceptions. What was mentioned was that for in-copyright books digitized in the context of the library program Google is only displaying a snippet to users, i.e. a really short extract. What can be achieved through the class action settlement agreement, and that has been described by Ms. Pallante, is an increased access to these books by users. Ms Pallante described the different models, allowing 20 percent preview, purchase of online full view, or library subscriptions. We are pretty much seeing the agreement as a way to actually improve user access to books. I was planning to say a few words about the agreement, but since Ms Pallante presented it, I will not go into more detail. While agreements such as the Google Book Search agreement can be used to expand user access to content beyond the scope of exception, putting in place a flexible and forwardlooking exception regime in Europe is central to support innovative and creative development in the digital environment. The current situation as far as exceptions are concerned has been described by the previous speaker, the problem we face is that the existing European regime does not provide for the appropriate level of harmonization, flexibility, or legal security. Talking about the lack of harmonization of exceptions. This is definitely a concern in an environment where content and services relying on exception can be made available on a global scale, or at least at European level. The diverging application of exceptions by judges, as well as interpretation of the three-step test, add another level of complexity and create further legal uncertainty. The lack of flexibility provided by an exhaustive list of strictly defined exceptions is definitely an obstacle to provide timely adaptation to the needs and opportunities arising in a constantly changing environment. This prevents copyright exception to adapt to the needs of creators, institutions, and businesses. I have forty-five seconds left to talk on solutions. So what are the solutions to address the shortcomings of the European copyright exception regime? I think there were some really interesting solutions that were mentioned earlier today. Margot Fröehlinger and Tilman Lüder mentioned the possibility to review the 2001 Copyright Directive.76 While this would ultimately be a solution in the long term, this can only be achieved 76 Information Society Directive, 2001/29/EC, Art. 8(3); see also Chapter I, “IP Policy & The European Union”, supra this volume.

Part C: Rethinking Exceptions and Limitations  335

following a long and complicated legislative process. I think Margot pointed out the fact that revising the Copyright Directive will take something between six and ten years. Looking at the controversy surrounding any copyright debate and piece of legislation, I would say that ten years is a relatively conservative estimate. Talking about a solution and looking at the fast changes that we are facing in the way content is created, distributed, and accessed, there is a need to consider shorter-term measures to help improve copyright exception harmonization and flexibility. I am coming back to the Declaration that has been presented on a balanced interpretation of the three-step test.77 I think this is particularly interesting in that respect, as it demonstrates that a balanced interpretation of the three-step test can provide flexibility of the exception regime. One solution and possible way to improve flexibility and harmonization of the existing European exception regime was actually mentioned this morning by Tilman Lüder.78 An interpretative communication from the Commission providing guidelines on the interpretation of the three-step test, along the lines of some of the key principles established by the Declaration, may provide for an effective solution to address the shortcomings of the European exception regime and help Europe to meet the challenge of Web 2.0. I am already over, but I would like to just briefly summarize what I just said in four points. • Look at the complementarity between exception and protection. • Look at the fast-changing environment that we are facing and the need for flexibility in the European exception regime. • Look at the challenges arising in this new environment we have to address, meaning a system that does not provide for harmonization, legal security, and flexibility. • I think it is pretty obvious that there is a need to think about a solution to actually provide for flexibility in the European copyright exception regime. PROF. WONG: To kick off the last portion of this panel we have two panelists who have been waiting patiently. Obviously, by putting them on the other end, I couldn’t tell if they were fidgeting or fighting. They are both very well known to all of us. I think we have already seen Tilman today, the Head of the Copyright Unit at DG Internal Market at the EC in Brussels; Lionel Bently, a Professor here, who is not only our very gracious host for the next couple of days but also very graciously consented to be on the panel at virtually the last minute. Let me start off by going to Tilman. Not only has your name been mentioned a couple of times by a couple of the panelists, but clearly some of the remarks that some of them have made have either addressed directly the Green Paper or perhaps might call for some response on your part. Do you have any comments for us? MR. LüDER: Yes. Mary, thank you very much. I have to say that I am not an academic and I am not a particularly bright person, but I speak with a lot of people who are in my situation. As we were going through the process here, I have taken a few notes. I am going to talk very briefly, after listening to you, about what the challenges are for us as a policymaker when faced with all the arguments that you conveyed very eloquently. I am going to provide you with a few key words that I have noted. This will become a short linguistic exercise.   I have heard a lot of words which I am not sure that I fully understand, and certainly many of the people who I have to convince when embarking on a policy initiative, like members of the European Parliament or national government officials, will possibly also struggle with these words. 77 78

See Declaration on the Three-Step Test, supra note 1. See Chapter I, “IP Policy & The European Union”, supra this volume.

336  CHAPTER V: COPYRIGHT LAW We started out this panel with Professor Hilty mentioning the primary right holders and derivative right holders, or differentiating between primary markets and secondary markets, and concluding by pointing to primary right holders and subsequent right holders. Then we heard about  the first-sale doctrine in its new permutation in the Internet. There is apparently now a first sale and then there is further derivative use of the sold item. There you we go again, derivative. “Derivative” is actually a very popular word. There is a derivative right holder and there is a derivative use. There are broad-based research exceptions—okay, maybe people understand that. Data mining, data manipulation by automatic tools. Then there are the digital commons as well as the free manipulation of the digital commons. Well, the digital commons we might still understand, but if I go and talk to an MEP and say, “I think that we need to do more to promote the microbial research commons,” I will be thrown out of the office. Competitive concerns—yes. Is Google a pirate in a dominant position? We heard that. That probably is actually the language that I could talk to MEPs about. Google is a pirate in a dominant position, that’s fine. They will understand that. What are we going to do about it? I am not so sure. Now, the point I am making is that the entire set of issues at stake here are extremely esoteric, if I may say so. What we are discussing here is extremely highfalutin. Policymakers get a lot of your very good and very eloquent arguments. But if we actually propose policy we have to talk to elected representatives of the people who do not know what a derivative work is, who do not know what a derivative right holder is, if they even know what a right holder is. And then, the question arises: What do we do as a policymaker? I think the Green Paper79 has basically revealed two issues: Do we guarantee access to knowledge, or microbial research commons by means of contract, or do we do the balancing by legislation in the public interest? Now, if you choose the contract, then that allows you to specify in the contract that you are licensing the “microbial research commons” in an “open access depository”, but only the “first sale” and not the “derivative use”. If you want the legislators to take that policy decision, then it becomes a bit more difficult. I have heard a lot in the responses that some public interest exceptions should be introduced in copyright laws and that the balancing should not be left to contractual arrangements but should be left to the policymaker. But then, please, submit to the policymaker arguments which are accessible to the elected representative of the people, because ultimately the laws will be voted by the representatives of the people, and if we don’t convince them we have lost the debate. Thank you very much. PROF. WONG: On that note, I am going to move on to Lionel. We had a brief chat about the Gowers Review.80 I don’t know that I would say that there were inaccessible recommendations in there in terms of language. I don’t think there’s any mention of the microbial research commons in the Gowers Review. But as we know, certain things have moved forward with that and certain things have not. Lionel, what is the position in the United Kingdom right now? PROF. BENTLY: The Gowers Review, published in December 2006, recommended the introduction of various exceptions to modernize copyright law and introduce greater flexibility into the system.81 The Gowers Review proposed that the Government introduce 79 European Commission, Green Paper, Copyright in the Knowledge Economy (2008), available at http://www. ip.mpg.de/shared/data/pdf/comments_on_the_green_paper2.pdf. 80 H.M. Treasury, Gowers Review of Intellectual Property (HMSO 2006). 81 Id.

Part C: Rethinking Exceptions and Limitations  337

new defenses relating to format shifting and parody,82 and update the existing research, library and educational exceptions,83 so that the latter were fit for the digital learning environment (in particular “distance learning”). The Review also suggested that further be consideration be given to a transformative use defense, an idea drawn from U.S. case law on fair use, most notably Campbell v. Acuff-Rose.84 At the end of 2007, the Intellectual Property Office issued a follow-up consultation to the Gowers Review concerning implementation of these modifications,85 with the exception of the transformative use exception, which the Office said could not be implemented at a national level as it would be inconsistent with the Information Society Directive.86 Action, if any, on that front would have to be undertaken by the European Commission. Since November 2007, when the consultation process began, there has been no further action. This, I think, is for a variety of reasons. Although it has not been announced formally, I understand that the IPO has abandoned the fair dealing for parody proposal and has placed the format-shifting proposal in the “too difficult” basket. This leaves the libraries and archives and educational exceptions, and on that we are told that draft legislation is “in the pipeline.” But educational and library exceptions fall very much within the remit of what the European Commission is considering following the Green Paper on Copyright in the Knowledge Economy.87 So, in many ways, it would be unwise for the IPO to propose that the Government legislate on those matters. So currently, in the UK, nothing seems to be happening. This may seem regrettable. After all, the Copyright, Designs and Patents Act 198888 is hardly “fit for purpose” on these matters. But sometimes doing nothing can be the wisest thing. Unfortunately, whenever reform consultation documents say “here are the five options” or “here are the four options” and the first one is “do nothing,” you know that that is not really what is on the mind of the policymaker. But sometimes, I think, “do nothing” should be taken more seriously than it is. So why would “do nothing” be a good thing? Well, “do nothing” might be a good thing because changing the statutory text in some spheres actually makes very little difference to practice. Emily Hudson’s analysis of what happens in libraries and archives shows that changing the scope of exceptions in many cases actually doesn’t change library practice at all. Practices go on irrespective of the exceptions. Librarians are unaware of the change or uncertain as to whether it will be sustained. If you change the exceptions and make them more flexible, existing practices often continue without the libraries and archives taking particular advantage of the new flexibilities. So sometimes change is pointless—or exceedingly slow have any practical effect. This may suggest, at least in the libraries field, that it would be more sensible to wait for EC legislation (or at least the outcome of the consultation, should the EC decide to do nothing) than to rush into modifying the domestic regime. 82 Recommendation 8 (format shifting); Recommendation 12 (exception to copyright for the purpose of caricature, parody and pastiche). 83 Recommendation 2 (proposing reformulation of Copyright, Designs and Patents Act 1988, s.35 which relates to the recording and showing of broadcasts and s.36 which deals with copying of passages, by educational establishments); Recommendation 9 (proposing extension of the fair dealing for research exemption in s.29 so that it applies to all media); Recommendation 10 (proposing extension of CDPA, s.42 which allows libraries and archives to make copies for preservation purposes). 84 Campbell v. Acuff-Rose Music Inc., 510 U.S. 569 (1994). 85 U.K. IPO, Taking Forward the Gowers Review of Intellectual Property: Proposed Changes to Copyright Exceptions (2007) [hereinafter Taking Forward the Gowers]. 86 See id., para. 17; see also Information Society Directive, 2001/29/EC, Arts. 5(2) & (3) (providing an exhaustive list of possible exceptions). 87 European Commission, Green Paper, Copyright in the Knowledge Economy (2008), available at http://www. ip.mpg.de/shared/data/pdf/comments_on_the_green_paper2.pdf. 88 Copyright, Designs and Patents Act, 1988, c. 48 (Eng.).

338  CHAPTER V: COPYRIGHT LAW Secondly, in relation to parody, there is now good reason to think that this matter can be treated flexibly by the courts. If a parody case were to come before the courts, there is quite a lot of flexibility within the U.K. law, at least now, after Ashdown,89 the judges are willing to read it so as to be compatible with Article 10 the European Convention of Human Rights.90 Given the attitude of the U.K. judiciary at present, I am fairly confident that a parody case before a U.K. court would now be treated sensitively—i.e., a reasonable parody would be permitted. This would require a liberal reading of notions such as “criticism” and “sufficient acknowledgement”—readings which I think we could not have anticipated 20 years ago. But today I feel positive that the U.K. courts would not go down the interpretive cul-de-sac that the Canadian Federal Court did in the Michelin case in 1996.91 And consequently, “do nothing” has much to be said for it. In fact, when one looks at the sort of limitations that the IPO was considering in its Follow Up Consultation document,92 one can easily imagine that any statutory parody exception would be subject to a host of limitations and qualifications (insisted on by the most vociferous and persistent lobbyists) that would render it less flexible than the fair dealing for criticism exception that already exists. With regard to format shifting, which the IPO has admitted to placing in the “too hard” basket, once again I would say there is much to be said for doing nothing. This is because consumers are simply going to go ahead and format shift. And, indeed, the BPI has indicated that it will not sue anybody for format shifting copyright sound recordings (for example from vinyl to their iPod) for personal use. Of course, it would be better all-around if format shifting were not illegal in the first place. Honest consumers should not find that their everyday actions are unlawful.93 It brings the law—copyright law—into disrespect. But, to be honest, such consumers have very little to gain—and much to lose—when the issue is placed on the legislative agenda. Following the Consultation paper, the IPO has been subjected to a barrage of lobbying in favour of a private levy exception imposed on portable playing devices such as iPods, MP3 players and mobile phones. Of course, there is some basis for this claim in the information Society Directive,94 but there is really no good justification for imposing on consumers in this way. Doing nothing, then, seems like the preferable course. And this, indeed, seems to be the IPO’s view. Possibly it has learned from the experience of the Tory Government during the 1980s in relation to the question of blank tape levies. As some will recall, the Government flip-flopped from opposing such a levy to backing it and then Ashdown v. Telegraph Group Ltd., [2002] Ch. 149. European Convention on Human Rights, Art. 10 (Nov. 4, 1950): 1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises. 2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary. 91 Michelin v. Nat’l Automobile, Aerospace, Trans. & Gen. Workers Union of Can., (1996) 71 CPR (3d) 348. 92 See Taking Forward the Gowers, supra note 81, at 31 ff. 93 CBS v. Amstrad, [1988] A.C. 1013, 1061–62 (Lord Templeman) (“From the point of view of society the present position is lamentable. Millions of breaches of the law must be committed by home copiers every year… . A law which is treated with such contempt should be amended or repealed… . [H]ome copying cannot be prevented, is widely practised and brings the law into disrepute.”). 94 Information Society Directive, 2001/29/EC, Art. 5(2)(b) (Member States may permit reproductions “by a natural person for private use and for ends that are neither directly nor indirectly commercial, on condition that the rightholders receive fair compensation.”). 89 90

Part C: Rethinking Exceptions and Limitations  339

finally opposing it.95 There was a great deal of political controversy surrounding then, and I think the UK Government and IPO is not interested in reviving that controversy. In my view, the music rights groups, such as UK Music, which are pushing for these kinds of levies or payments, should recognize that the best thing to do in terms of improving the credibility of copyright is to legalize format shifting without insisting on some payment. But if these lobbyists insist on a levy, then the best course for Government would be to do nothing. Those are my comments. PROF. WONG: Thanks, Lionel. Before I take a couple of questions from the audience, we seem to have a broad range of policy options, from “do nothing,” to create a really broad research exception for class A, B, C, to have a slightly different balanced read of an existing test, to the existing test works just fine. Can I ask the speaker and panelists: Do you have any responses to perhaps some of the remarks made by your fellow speakers and panelists, anything that you would like to throw out? Perhaps you were misunderstood, or you just want to say something because you have to. Jerry? PROF. REICHMAN: I would say one thing about automated knowledge tools. Explaining them in nine minutes in terms that you want may be a task, but I do think that if the Commission took science as seriously as it takes the industry’s views, it would make an effort to understand the importance to its own future, since as I understand it, the whole object of the exercise is to promote innovation and creativity in the European Union. If you make it difficult for science to use these tools, you will see your innovation and creativity shrink and you will watch as all these other countries avoid this snare and expand their scientific creativity and progress. So I think the stakes are very high, and I don’t think it pays to take an anti-intellectual stand against it. I think we all have to try to understand it and realize that very, very serious issues are at stake. PROF. WONG: Thanks, Jerry. Maybe I will just take a question or two from the audience, who have been very patient so far. Please identify yourself and give you affiliation. QUESTION: My name is Teresa Hackett. I’m from Electronic Information for Libraries. I’d like to thank the panel for a very interesting and varied set of views. I wanted to ask a question about the three-step test. We found the Munich Declaration on the Three-Step Test to be a very helpful document, particularly in relation to the suggestions to differentiate exceptions and limitations between different types of material and different uses. From the library community’s perspective, that is very important. My question is we believe that the three-step test is a drafting tool, intended as a drafting tool for legislators, and once applied it should not then further appear in the national law. Yet we are seeing this increasingly. So I would like to get some comments from the panelists on your views on this and whether it is a good development or not. Thank you. PROF. WONG: Mihály and Reto perhaps? PROF. HILTY: Now you first. DR. FICSOR: First of all, I would like to emphasize that I do agree with the need for a judicious, balanced, flexible implementation of the three-step test. I also do agree that the 95 In 1977, the Whitford Committee, Report, Committee to Consider the Law on Copyright and Designs, Cmnd. 6732, had proposed such a levy, but incoming Conservative Government was not persuaded, and in 1981 issued the Green Paper, Reform of the Law Relating to Copyright, Designs and Performers’ Protection: a Consultative Document, Cmnd. 8302, calling for further public debate. An additional Green Paper issued in 1985 and in 1986 the Government declared it would, after all, push ahead with a levy, Green Paper, Intellectual Property and Innovation, Cmnd, 9712, alluding to it in the Queen’s speech, before deciding not to do so in its 1987 Bill (to much protest). There was heavy lobbying from the record industry on the one hand and the electronic industry on another, but it seems that ultimately the decision was ideological: the tape levy looked too much like a tax to be palatable to Thatcher’s cabinet.

340  CHAPTER V: COPYRIGHT LAW three-step test should be applied in different ways, in applying the same conditions in the same structure but with different results in different situations. What is the only dispute between us is the structure. But the dispute actually is not between Professor Hilty and myself, but between Professor Hilty and Professor Ulmer, and I leave it to them. Professor Ulmer used to be, and Professor Hilty actually is, the Director of the Max Planck Institute. I think we cannot vote whether or not Professor Ulmer as the Chairman of Main Committee I really did that statement reflecting the decision of Main Committee I. We can vote about that, but it is there. Otherwise, if you read the second page of my paper, you can see that I do agree that there are a lot of normative aspects in the three-step test.96 Actually, the entire three-step test is for balancing of interests. The normative aspect is there already in the first “step.” I do not agree with the second WTO Panel that it is only a quantitative criterion. In order that we may speak about a “special case,” there must be a sound legal-political justification, which is then also reflected in the reasonableness-legitimacy aspects of the third step on the basis of which the fine-tuning of a due balance may be achieved. There is also a normative element in the second step. It is not just of a descriptive nature as I have referred to it in my outline and as I discuss in my paper that I am ready to send to any of you. And finally, the third step is really just about balancing of interests. There you have to take into account all the conflicting interests. It is the case not only in Article 30 of the TRIPs Agreement about exceptions to patent rights where it is explicitly provided that when you apply the principle that there must not be unreasonable prejudice to the legitimate interests of authors or owners of rights you have to take into the legitimate interests of third parties. The requirement of taking into account the interest of third parties—including public interest—is also there in of Article 9(2) of the Berne Convention, Article 10 of WCT and Article 16 of WPPT.97 The test is completely suitable to take care of all legitimate interests—and not only such interests of the owners of right—if it is applied appropriately. There is no need to try to apply a new structure which would be in conflict with the text of the relevant treaty provisions and with the agreement stated by Professor Ulmer. As regards the question of what is the role, if any, of the test in national legislation, I refer to my outline where I express the view that “not only the legislators should be regarded as addresses of the three-step test, but—at least, as regards the second and third steps—also the courts. PROF. WONG: Reto? PROF. HILTY: I will try to be very short. A preliminary remark. You might be very curious now what the Declaration is about. I have only six copies for those of you who really want to read it tonight. To your question, I think this is the crucial point, or one of the crucial points, of the Declaration, that we say if you are within a civil law system where the legislators give the 96 Mihály Ficsor, The “Three-Step Test—De Lege Lata—De Lege Ferenda (unpublished paper delivered at the Fordham International Intellectual Property Law and Policy Conference, Cambridge U.K. 2009), summary available at http://fordhamipconference.com/wp-content/uploads/2010/08/MihalyFicsor_Three-step_Test.pdf. 97 See Berne Convention, supra note 2, Art. 9(2) (“It shall be a matter for legislation in the countries of the Union to permit the reproduction of such works in certain special cases, provided that such reproduction does not conflict with a normal exploitation of the work and does not unreasonably prejudice the legitimate interests of the author.”); WIPO Copyright Treaty, Art. 10(1), Dec. 20, 1996, 2186 U.N.T.S. 121 (“Contracting Parties may, in their national legislation, provide for limitations of or exceptions to the rights granted to authors of literary and artistic works under this Treaty in certain special cases that do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the author”); WIPO Performances and Phonograms Treaty, Art. 16(1), Dec. 20, 1996, 2186 U.N.T.S. 245 (“Contracting Parties may, in their national legislation, provide for the same kinds of limitations or exceptions with regard to the protection of performers and producers of phonograms as they provide for, in their national legislation, in connection with the protection of copyright in literary and artistic works”).

Part C: Rethinking Exceptions and Limitations  341

framework for the limitations, it is not up to the judge to further limit the limitations. Then you are in a common law system, where the judge defines the limitations. He must, of course, have certain guidelines to say “How far can I go?” Then the three-step test can or must be applied by the judge. So it depends very much on the system where you are. I would like to make a very short comment on the dispute between Dr. Ulmer and me. I think there are different kinds of interpretations of legislation. We all know that there is a historical interpretation—that is what you do—but we must understand the historical context of when something has been said. Dr. Ulmer has said it to the provision the Berne Convention, to the reproduction right only. In the meantime, the situation has changed. It has been broadened and we have different kinds of interpretation of legislation. We have contemporary interpretation; and we have also teleological interpretation, what is the aim of a certain specific regulation. We tried, rather, to move from the historical interpretation to a contemporary interpretation of the three-step test and say what is the aim of a limitation? We want to interpret the limitation in a way that it can fulfill the task of a limitation. That is the reason why a limitation cannot be interpreted narrowly. Because it is a limitation, it has to be interpreted depending on the sense of the limitation. Why do we have this limitation? DR. FICSOR: I think that a WTO panel would be in favor of applying what Professor Ulmer has said, since it would be bound by the provisions of the Vienna Convention on the Law of Treaties.98 The main point of the Munich Declaration is the suggestion that, although the order, the structure of the application of the three conditions of the test may continue prevailing in the case of exceptions to and limitations of the right of reproduction as provided in Article 9(2) of the Berne Convention and as clarified by Professor Ulmer’s statement reflecting the decision of Main Committee I, this is not the case under Article 13 of the TRIPS Agreement, Article 10 of the WCT and Article 16(2) of the WPPT. According to the Declaration, this is not the case since the latter provisions are applicable not only to the right of reproduction but also to several other exclusive rights. A WTO panel would reject this suggestion, since it would be in conflict with uncontested and consistently applied principles of interpretation of legal norms. It would imply the anachronistic suggestion that a provision that contains exactly the same terms in exactly the same order in the same Agreement, should be interpreted in a way that it has a certain structure if it is applied to one right (to the right of reproduction under Article 9.1 of the TRIPS Agreement (and, on its basis, under Article 9(2) of the Berne Convention)), but it has a completely different structure when it is applied to other rights. Such a suggestion would be based on a typical non sequitur inference which is rejected by any school and technique of interpretation of legal norms. PROF. WONG: Jerry? PROF. REICHMAN: I am not as sure as you are, for this reason. During the TRIPs negotiations, there was a sticking point on exceptions and limitations. The attempt that they made, which failed, was to have lists in these other regimes of exceptions—particularly I refer to patents, but also in trademarks—and the compromise solution was a typically diplomatic solution: adopt a patchwork solution which everyone can interpret as they will. So they extended this already opaque language which was terse, not accompanied by very much interpretation. They took it out of Article 9 and they extended it across copyright, and then they let it migrate to patents, and then they let it migrate to trademarks with a little bit different formula, and so on and so on. We have no authoritative legislative history whatsoever. The appellate body has made it very clear that it regards the negotiating history of the TRIPs Agreement with a very jaundiced eye, of very little value, unlike the negotiating history of Berne. 98

See Vienna Convention on the Law of Treaties, supra note 28.

342  CHAPTER V: COPYRIGHT LAW So I find it really a bit incredible to say, “Well, hold it.” These guys sat down and they took a makeshift but interesting but opaque solution to the reproduction right, which was already an enormous embarrassment to everyone because here you were eighty years after the Berne Convention and nobody could actually put a reproduction right into the Berne Convention because you couldn’t agree on exceptions and limitations. So they put this patchwork quilt on it, and now it is extended to all of intellectual property rights. So I find it very unconvincing to say that Professor Ulmer in his wisdom in 1960 has decided once and for all how this incredibly broad formula will now have to be interpreted, especially if you consider that the patent formula added on taking into consideration the rights of third parties, which we could write a book about. So I cannot believe that the appellate body would be as rigid as you suggest. PROF. WONG: Any of our other panelists? Mihály, would you like to respond? DR. FICSOR: You know, difference of opinions is a very good, very useful institution. It makes possible many, many things, such as Toto-Lotto or horserace betting—and also such kinds of legal debates. PROF. WONG: Other questions? QUESTION: Jamie Love. I’m with Knowledge Ecology International. I would like to hear from the panel. My question is about the relationship between the threestep test and Article 44 of the TRIPs,99 the provision that deals with injunctions. Specifically, the United States, for example, has a government use provision on all copyrighted works, including software, everything under copyright, which they can use under 28 U.S.C. § 1498, our government use provision.100 I believe that is allowed under Article 44 of the TRIPs, specifically Article 44 Paragraph 2 of the TRIPs, which says that you can forgo the granting of injunctive relief if you provide compensation.101 The United States has implemented a compulsory license on all copyrighted works for government use by and for the government, not under the three-step test but under the injunction provision. The United States has proposed, in the orphan works legislation, to also rely upon the enforcement sections, rather than the three-step test, as a way to implement the orphan works legislation.102 Some countries have implemented in the copyright field exceptions from injunctions for architectural works, like Canada and India using this provision.103 99 “Notwithstanding the other provisions of this Part and provided that the provisions of Part  II specifically addressing use by governments, or by third parties authorized by a government, without the authorization of the right holder are complied with, Members may limit the remedies available against such use to payment of remuneration in accordance with subparagraph (h) of Article 31. In other cases, the remedies under this Part shall apply or, where these remedies are inconsistent with a Member’s law, declaratory judgments and adequate compensation shall be available.,” TRIPs Agreement, supra note 3, Art. 44. 100 “Hereafter, whenever the copyright in any work protected under the copyright laws of the United States shall be infringed by the United States, by a corporation owned or controlled by the United States, or by a contractor, subcontractor, or any person, firm, or corporation acting for the Government and with the authorization or consent of the Government, the exclusive action which may be brought for such infringement shall be an action by the copyright owner against the United States in the Court of Federal Claims for the recovery of his reasonable and entire compensation as damages for such infringement,” 28 U.S.C. § 1498(b) (1998). 101 “Notwithstanding the other provisions of this Part . . . Members may limit the remedies available against such use to payment of remuneration.” TRIPs Agreement, supra note 3, Art. 44(2). 102 See U.S. Copyright Office, Report on Orphan Works (Jan. 2006), available at http://www.copyright.gov/orphan/. 103 R.S., 1985, c. C-42, s. 40 (Can.) (“Where the construction of a building or other structure that infringes … has been commenced, the owner of the copyright is not entitled to obtain an injunction in respect of the construction of that building or structure or to order its demolitions.”); The Copyright Act, § 59(1), No. 14 of 1957, India Code (1957) (“Notwithstanding anything contained in the Specific Relief Act 1963, where the construction of a building or other structure which infringes or which, if completed, would infringe the copyright in some other work has been commenced, the owner of the copyright shall not be entitled to obtain an injunction to restrain the construction of such building or structure or to order its demolition.”).

Part C: Rethinking Exceptions and Limitations  343

Sam Ricketson at the last WIPO SCCR in his presentation to WIPO said that Article 44 of the TRIPs, like Article 6 of the TRIPs, is not subject to the three-step test.104 If that is the case, isn’t it true that any country can implement a remunerative compulsory licensing scheme under the remedies section without regard whatsoever to the three-step test? PROF. WONG: Would anyone on the panel like to address that question? PROF. HILTY: We do not have Article 44 in front of us. It is difficult to know it by heart. PROF. WONG: Maybe we should have a balanced interpretation of Article 44 or a declaration thereof. DR. FICSOR: Jamie, I do not have the text in front of me; however I understand that it is a general provision in Article 44(2), which doesn’t refer to any branches of IP law, any specific provisions. It is a general provision. So my tentative answer here would be that the issue should be judged in the light of the principle lex specialis derogat legi generali.105 That is, in the relationship of a general provision and a special one, the latter prevails. There are specific provisions in TRIPS Agreement—and in the various treaties that are included also by reference in the Agreement—regarding the question of where and under what conditions such limitations as compulsory licenses may be applied. I think they prevail rather than some general provisions such as Article 44(2) of the Agreement. This is my first reaction. PROF. WONG: Jerry? PROF. REICHMAN: I wouldn’t comment on Article 44. There are some things that it seems to me are mixed in there that need to be separated. It is my view that governments signing the TRIPs Agreement inherently and absolutely reserved government use. The United States is at the moment the largest user of government use compulsory licenses. I believe every government has that power. But I don’t think that depends on Article 44 particularly. I think it is just part of Article 31 and the larger context of no government surrenders government use.106 Whether you can enlarge that use of Article 44 in the way that you want to go, that I think is a very complicated question that we cannot easily answer. PROF. WONG: We have time for at least one, maybe two, more questions. QUESTION: My name is Carlo Scollo Cavizzari, Legal Counsel to the International Association of Scientific, Technical & Medical Publishers (STM). I’ve got a question probably to all the panelists individually. In the Scandinavian countries there is something called an “extended collective license.”107 It seems that this class action in the United States has some similarities. I am not sure to what extent the three-step test applies to an extended collective license, if at all. I’d be interested in the views of the panel. Thank you. DR. FICSOR: This is the topic of a session tomorrow, collective management, mandatory collective management, extended collective management, and so on.108 104 WIPO Standing Committee on Copyright and Related Rights, Ninth Session, WIPO Study on Limitations and Exceptions of Copyright and Related Rights in the Digital Environment, prepared by Sam Ricketson (SCCR/9/7), Apr. 5, 2003, available at http://www.wipo.int/meetings/en/doc_details.jsp?doc_id=16805. 105 See generally Hannibal Travis, “Opting Out of the Internet in the United States and European Union: Copyright, Safe Harbors, and International Law”, 84 Notre Dame L. Rev. 331, 386–87 (2008) (“As the source of more specific and focused principles, copyright limitations such as the DMCA and ECD, rather than the vague language of the ‘threestep test’ set forth in the Berne Convention, GATT-TRIPs, and the Copyright Treaty should control the resolution of Internet copyright disputes.”); Int’l Law Comm’n, Report of the Study Group on the Fragmentation of International Law: Difficulties from the Diversification and Expansion of International Law, P 59, U.N. Doc. A/CN.4/L.682 (Apr. 13, 2006), available at http://untreaty.un.org/ilc/guide/1/9.htm. 106 See supra note 96. 107 See, e.g., Thomas Riis & Jens Schovsbo, “Extended Collective Licenses and the Nordic Experience—It’s a Hybrid but is It a Volvo or a Lemon?”, 33 Colum. J.L. & Arts 1, 11 (2010). 108 See Chapter V.D, “Music Distribution, Collecting Societies”, infra this volume.

344  CHAPTER V: COPYRIGHT LAW You refer to the Google settlement? QUESTIONER [Mr. Cavizzari]: Yes. DR. FICSOR: I do believe that there is a similarity in the Google settlement to extended collective management as far as out-of-print works are concerned, since there is the possibility of “opting out,” while as far as in-print publications are concerned, there is a similarity to voluntary collective management since, in that case, an “opting in” system is applied. But there are also some differences, because this is not a real collective management system, although the registry which is to be established will behave like a kind of collective management organization. So there are similarities. There is, of course, the question whether there will be a monopoly position and then how this monopoly may be handled, if there is any problem with that. PROF. WONG: Tilman, you had something? MR. LüDER: I think that Professor Hilty already responded to part of your question. He said that collecting societies cannot solve all the problems. The issue is: Has Google not just set up its own collecting society for its own service? In a sense, that is what is happening. Professor Hilty said collecting societies cannot solve all the problems. But as soon as there is a mass digitization problem, as soon as there is a problem of identifying authors who want to opt in or opt out, you ultimately have recourse to some form of collecting society. Google has decided—and maybe Antoine would like to say something about this—to basically set up its own in-house collecting society, saying, “This is a society which is exclusively dedicated to clear Google services.” That is quite handy actually, isn’t it? PROF. WONG: Antoine or Maria, do you have any comments to add to that? MR. AUBERT: Well, just very briefly on the registry, my understanding is that the registry is non-exclusive. It can license rights to Google, but it can also license rights to anybody that will come up and be willing to license the rights that have been claimed. MR. LüDER: So that means that you would use the registry also for digitization efforts of competing services? MR. AUBERT: That is where you may misunderstand what the registry is about. The registry is not Google. The registry is managed by rights holders, meaning publishers and authors, and Google has nothing to do with this registry. PROF. WONG: Maria? MS. PALLANATE: There is a most-favored nation clause, though, that pertains to the book registry.109 So they will not license to another entity any rights on terms more favorable than they will to Google, which is handy, to use your work. I would just say that I think the problem illustrates the fact that collective management and licensing, particularly of rights that are of low economic value—or perceived to be of low economic value—is just simply not a strong suit of authors, at least in the United States. Again, I think in some ways Google has kind of kicked that issue into the middle of the field and authors in one way or another are going to have to deal with it. If not through Google, they’ll have to do it on their own. And remember photographs are not a part of the settlement, and that remains to be our biggest portion of orphan works. 109 The “most-favored nation” clause was later removed from the Amended Settlement Agreement. See Settlement Agreement (proposed), Authors Guild v. Google Inc. (S.D.N.Y. Nov. 19, 2009) (No. 05 CV 8136-DC). Nevertheless, on March 22, 2011, the entire class action settlement agreement was rejected by Judge Denny Chin, for reasons that he held it would be unfair, including: (1) the mechanism for settling future claims is improper, and the issue (including orphan works) should be a matter for Congress, not the court; (2) inadequacy of class notice and representation of potential plaintiffs; and (3) antitrust concerns with giving Google a de facto monopoly over the digitized book library. See Author’s Guild v. Google Inc., No. 05-CV-8136 (S.D.N.Y. Mar. 22, 2011), available at http://www.nysd.uscourts. gov/cases/show.php?db=special&id=115.

Part C: Rethinking Exceptions and Limitations  345 PROF. WONG: On that note, unless any of the other panelists or speakers wants to have the final say, we will end. I am told by the organizers that Dr. Ficsor’s paper will be made available on the Conference Web site for those of you who are interested. We have all some homework to go home to do. We have to read the Google settlement, for one thing. Before we all proceed to the drinks that I am sure some of us feel we very badly need, will you please join me in thanking our panel for a great presentation?

Chapter V

Copyright Law Part D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry Moderator Pat Treacy

Bristows (London) Speakers

Prof. Silke von Lewinski

Frances Lowe

Max Planck Institute for Intellectual Property, Competition and Tax Law (Munich); Franklin Pierce Law Center (Concord, N.H.)

Director of Regulatory and Corporate Affairs, PRS for Music (London)

Sebastien J. Evrard

Dr. Mihály Ficsor

Dr. John Temple Lang

Louise Pentland

Jones Day (Brussels)

Director, CITP (Budapest)

Cleary Gottlieb Steen & Hamilton LLP (Brussels)

Nokia Corporation

Cecilio Madero Villarejo

Director, Directorate C, Markets and Cases II: Information, Communication and Media, Directorate General for Competition European Commission (Brussels) Panelist Thomas Heide

Berwin Leighton Paisner LLP (London)

348  CHAPTER V: COPYRIGHT LAW MS. TREACY: Ladies and gentlemen, I know that you are all still very full of lunch, so I apologize for having to start quite promptly, but I know that we have a number of speakers to get through this afternoon and I know that they’ve all got their nine minutes very full of things that they want you to hear. So I think we ought to start quite promptly. In the running order on your programs, Cecilio Madero was going to be last, but unfortunately he has to go and catch a train and then a plane this afternoon, so we are going to have the pleasure of hearing the Commission’s perspective first. Then we have a number of other speakers from across the industry who are going to speak about a variety of topics on this very difficult issue. Much of this morning I spent thinking about patents, and I thought they were difficult. Now I come to grapple with the complexities of copyright law, and I think that is even more difficult. Given the shortage of time, what I would like to do as your moderator is let the speakers have their time. And then we’ve got a couple of very good panelists. I would like to leave plenty of time for discussion and commentary from the floor. Without any further ado, I wonder if I could ask Cecilio Madero from DG Competition to open this afternoon’s proceedings. Thank you. MR. MADERO: Thank you. Sorry because, as Pat has just said, I am obliged to leave around 3:30 because I have to catch a train and then a plane. This is, I would say, a very opportune coincidence, because the reason why I have to take an early plane from Stansted is because I have tomorrow a meeting with the Spanish collecting society in my country, in my own language then, which is going to be an interesting one, because we have some differences in how we interpret the so-called CISAC decision.1 I am going to be very short and use only part of my notes. One of the reasons is because of my experience in a very interesting panel that I attended earlier this morning, where I have also shared some ideas about IPR issues and standards.2 We have probably spoken too much and did not allow participants to ask questions, put the difficult questions that from time to time are very difficult to answer. As you know, and I don’t like too much to state the obvious, in July 2008—and I am not going to talk too much about this decision because I am pretty sure that you know it—the European Commission adopted, not without difficulties and after a huge lobbying from many sources, a decision based on Article 81 of the Treaty3 prohibiting twenty-four European collecting societies from perpetuating a concerted practice which limited, and still limits I would say, their ability to offer their services to authors and commercial users outside their domestic territories, therefore restricting in a very obvious way competition.4 This concerted practice reinforced what I would call the historical local monopolies of collecting societies and impeded the emergence of multi-territorial licensing. In short, it significantly hindered, we believe, market players being able to take advantage of the potential of the internal market. I don’t understand—we do not have a good explanation—why there is no real internal market also in this particular sector. I would like to present very briefly some key issues raised by this case and, notably, our reasons for taking action against the concerted practice. I would like also to refer to the most significant elements of the CISAC decision, and to the progress that we expect in the decision implementation. As I said, I am not going to talk too much about the past, why it was necessary to take action against European collecting societies. Although, as you know, it would be probably good to recall that collecting societies have been subject to competition rules and have already in the COMP/C2/38.698, In re CISAC Agreement, [2009] 4 C.M.L.R. 12. See Chapter VIII.D, “Standard Setting”, infra this volume. 3 Treaty Establishing the European Community, Art. 81, Nov. 10, 1997, 2002 O.J. (C 325) 1, 64–85. 4 In re CISAC, [2009] 4 C.M.L.R. at [263]–[265]. 1 2

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  349

past been subject to scrutiny under EC competition law. Some of them have always pretended to escape from this control without succeeding. As you know, the Commission issued its first decision in the so-called GEMA case in 1971.5 The Court ruled in the GVL case in 1982, confirming that the behavior of collecting societies falls under EC competition law.6 From time to time it is important for courts to state the obvious. The Commission has dealt with several cases involving collecting societies since then. I would like to jump, if I may, because I promised to be short, to the reason why we have adopted the decision, and in particular I would like to tell you what the decision says and what it doesn’t say. First, the decision prohibits membership and exclusivity clauses for all modes of exploitation, offline and online.7 These clauses, in accordance with the decision, had to be removed without delay. Where we are in this process is something that we could discuss or that I will mention later. Two, the decision also prohibits the concerted practice between collecting societies which results in the segmentation of the market and the perpetration of local monopolies.8 This is what we call the domestic territorial domination. For this concerted practice the decision covers the online, satellite, and cable markets. As you certainly also know, the collecting societies have been given initially 120 days to cease what the Commission has defined as a concerted practice caught by Article 81 of the EC Treaty.9 It is important to mention that the decision does not call into question the network of reciprocal agreements under a “one-stop shop” system, and it is also legitimate to believe that the Commission should have called into question this network of reciprocal agreements. But it is something that we haven’t done. One of the reasons is because this decision is the result of a very elaborate process and is a sort of compromise. But I still believe it is a very important decision. What the decision challenges is the anticompetitive clauses contained in the reciprocal agreements and the subsequent concerted practice. Stating again the obvious, the decision does not undermine cultural diversity, as it doesn’t affect authors’ revenues, nor does it impact the ability of small collecting societies to license their local repertoire, contrary to what has been said. As you probably know, the CFI, the Court of First Instance, has recently confirmed this in the context of the interim measures appeals lodged by the collecting societies.10 By the way, we have had, I would say, as many appeals as addresses of the decision, which implies, or might imply, that either we are completely wrong or that what we are asking is something which is difficult to deliver but nevertheless indispensable. I tend to believe that the second explanation is more plausible. I would like to conclude by mentioning very quickly where we are with the implementation and what we expect to be the future. As a result of the uncontested removal of the membership clause, we believe that the decision makes it easier for an author to select which collecting society, or societies, will manage his or her public performance rights. Authors should take advantage of this. Case 45/71 R, GEMA v. Comm’n, [1971] C.M.L.R. 694. Case 7/82, GVL v. Comm’n, [1983] E.C.R. 483, [57]. 7 In re CISAC, [2009] 4 C.M.L.R. at [263]. 8 Id. 9 Id. 10 See Case T-442/08, CISAC v. Comm’n, 2009 O.J. (C 82) 25; see also Press Release, CISAC, CISAC Appeals the European Commission’s Competition Decision (Oct. 8, 2008), available at http://www.samro.org.za/files/needletime/ media/6.%20Cisac_Appeal_to_Euro.pdf. 5 6

350  CHAPTER V: COPYRIGHT LAW As a result of the also uncontested removal of the exclusivity clause, the decision allows collecting societies to license their repertoire to several collecting societies per territory. If they do it or not is another matter. By prohibiting the concerted practice regarding territorial definition, the decision certainly improves the prospects for commercial users, such as TV broadcasters and online service providers, to receive a multi-territorial license for online, satellite, and cable exploitation. This, in turn, should make it easier and quicker for them to develop new products on the market. At least this is what we believe the decision should bring. The decision, by opening up the market to more competition between collecting societies— and we believe that this is the only outcome of the implementation of the decision creates, I believe, incentives for these very same collecting societies to improve their efficiency and the quality of their services and to adapt to market demands. There are some collecting societies which believe that they are more efficient and more competitive than others, and they want to have the opportunity to represent the authors working or living in other Member States and not necessarily oblige these very same authors to go through their own national collecting society. It is about efficiency. It is about being more dynamic. As I said, we are not at all after the reduction of the authors’ revenue. We want the possibility for them to choose the most effective collecting societies in order to be represented. As you probably know, an extension had been granted until yesterday, the 15th of April, to a number of collecting societies to review bilaterally their agreements with other collecting societies and cease the concerted practice. We are currently revising these newly drafted agreements. We are reviewing to what extent they are in line with what the Commission is asking in this decision, with a view to determine whether the decision has been correctly and fully implemented or not. It is still too early, but it is not going to take a lot of time for us to have a more definitive view on compliance. I would like to mention that we are hopeful that the decision will effectively lead to more collecting societies offering their music repertoire on a pan-European basis. The reason why we are hopeful and optimistic is because my Commissioner, Neelie Kroes, is someone who, once she has decided to adopt a decision, tends, very rightly, to see this decision implemented. We have received clear instruction from her to make sure that the CISAC decision is not just a wonderful piece of paper which is implemented in a more or less formal way by collecting societies in order to leave things as they were in the past, because this is simply incompatible with competition rules. I would like to conclude by saying that there is still a window of opportunity for many of these collecting societies to implement effectively the decision. Otherwise it cannot be excluded that a follow-up decision and possible imposition of fines for lack of compliance could be the answer that the Commission might consider at some point. But we are not yet there. Many thanks for your attention. MS. TREACY: Thank you very much, Cecilio. That was a very quick and cogent explanation of the point of the CISAC decision. Now, given that Cecilio has to leave us probably in the middle of or before we get to the panel discussion, I just wondered if, first of all, there was anyone on the panel who had any quick, unscripted observations they wanted to make on the CISAC decision, or indeed if anyone in the audience had any particular observation on which they would like Cecilio’s input before we move to our next speaker. Panelists, any thoughts? I hesitate to let Cecilio get away too easily. Anyone from the audience have any observations?

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  351

[No response] Obviously, we had this morning’s grilling in the patent session,11 I think we can allow Cecilio to take a well-earned rest at this point. Obviously, copyright is much less contentious. MR. MADERO: I will stay here. MS. TREACY: Moving from our first speaker, the second speaker that we have for you this afternoon is Professor von Lewinski from the Max Planck Institute. She is going to give you her views on this issue. Thank you very much. PROF. VON LEWINSKI: Thank you very much. Good afternoon, ladies and gentlemen. Actually, I will not talk about the CISAC case, but on further reactions to the 2005 Recommendation of the Commission.12 Admittedly, when Hugh Hansen asked me on quite short notice to contribute to this panel, I first hesitated whether to do so because, unlike at the preceding Fordham conferences, there has not been any major development within the past year, except for the CISAC case, about which I did not want to talk. Nevertheless, I then decided to present you a document that may be interesting for you, all the more since it is written in German and therefore not easily accessible to many. It is interesting not because it criticizes this recommendation and its consequences, as do many documents, but because of the way in which it does so. I am speaking here of the so-called Final Report of the Inquiry Commission—we call it by the French term “Enquete” Commission—of the German Bundestag, i.e., the German Parliament. It is entitled “Culture in Germany.”13 Just as a background for you, the Bundestag is obliged to establish an Enquete Commission, if 25 percent of its members request so. This Commission was established in 2005 and rendered its report at the end of 2007. Such reports serve to prepare decisions on extensive and important issues. The report at stake here, entitled “Culture in Germany,” is indeed the most extensive and profound one in the field of culture in thirty years. It covers more than 500 pages, and among them all sorts of issues including, in particular, collective rights management. It states, first, that the EC Recommendation of 2005 has triggered a discussion on the functions to be acknowledged to CMOs in the future, namely, either to be mere collecting institutions or rights dealers, and therefore only to pursue economic interests (this would be the model of the European Commission), or to have more comprehensive functions, namely, to be institutions that discharge the state of certain functions by, in particular, fulfilling also social and cultural in addition to economic functions; this model corresponds to the German legal concept of CMOs, which, by the way, is also followed in other countries of the continental European system. Indeed, I believe that what is underlying the controversies that exist in respect of the 2005 Recommendation and its consequences is the fundamental difference between the concept of CMOs under the copyright system and that under the authors’ rights system. Under the copyright system, the economic function is usually the only one attributed to CMOs, while it is inherent in the authors’ rights system that they also have to fulfil cultural or social functions, such as the establishment of cultural or social funds, the application of cultural evaluation criteria in the framework of distribution schemes with the aim of promoting cultural diversity. The report of the Enquete Commission to the Bundestag then specifies the concept of CMOs under German law and shows how the Commission’s Recommendation conflicts with it. In particular, it contrasts tariff determination by individual right owners to the autonomous determination of tariffs by CMOs, which, inside a tariff, do not distinguish between works that See Chapter VIII.D, “Standard Setting”, infra this volume. Comm’n Recommendation 2005/737, 2005 O.J. (L 276) 54 (EC). 13 Schlussbericht der Enquete-Kommission, Kutlur in Deutschland, Deutscher Bundestag Press 16/7000 (2007), available at http://dip21.bundestag.de/dip21/btd/16/070/1607000.pdf [hereinafter Culture in Germany]. 11

12

352  CHAPTER V: COPYRIGHT LAW are more popular and those less popular on the market. Consequently, even a work that is less popular than others is available from a CMO for the same price as more popular works. Thus, the system de facto protects niche works. In addition, of course, the obligation of CMOs to conclude contracts with right owners on collective management enables those authors who have produced less popular works to be represented in the same way as those whose works are more popular. A further consideration of the report is that the model of the Commission’s Recommendation will most probably result in economically successful or popular repertoire being exploited outside CMOs (indeed, recent developments have already proven this: many major music publishers have already withdrawn their rights from the CMOs in order to administer them through separate platforms)and in only less demanded works remaining with CMOs—works that, however, may be at least equally valuable from a cultural point of view. As a further consequence, such less-demanded repertoire will yield only lower income, since the overhead costs will remain the same, and since even the previous tariffs will hardly be enforceable if users do not at the same time also obtain the popular repertoire. The lower income, and even possibly lower demand, for less-popular repertoire will have, according to the report, disastrous consequences for cultural diversity. The cultural landscape will be impoverished. Consequently, the legal justification for the de facto monopoly of CMOs will no longer exist. The report then calls for the legislature to defend the principle of collective rights management as it exists in Germany and to protect CMOs in this respect against competition. It demands that this position be rigorously taken at European level and that any action be taken so as to avoid that any decision at EC level be made in favor of Option 3; rather, the existing system of reciprocal agreements, according to Option 2, should satisfy the users’ needs for pan-European licenses. The report also calls for CMOs to be restricted to the tasks set out in the law on CMOs and not to offer services to third parties, in particular by founding affiliates that aim at profit-making and by offering collection services to right owners who would be qualified for membership in a CMO. At the end, the report expresses the following recommendations for action: • First, the Parliament and government should maintain and defend the existing system of collective management as an important tool to safeguard cultural diversity. In this context, I would like to recall that at previous Fordham conferences, this aspect of cultural diversity was mentioned, but often ridiculed. So I simply would like to stress today that this aspect is taken seriously not only by the European Parliament and many others, but also by the Parliament of one of the major EC Member States. • Secondly, the government should engage in promoting the desire that the 2005 Recommendation will no longer be pursued and should stress in this context the particular social and cultural achievements of CMOs. • Thirdly, the Parliament should prohibit CMOs by law to become active as collection agencies for commercial enterprises that would also qualify as members of CMOs. In the meantime, following these recommendations, the German government has instituted a roundtable with CMOs and users. Discussions are currently ongoing. The government will analyze the results during this summer. A decision will then be made as to whether, and if so what, action will be taken as a consequence of the recommendations of the Enquete Commission. To conclude, not only in Germany, but all over Europe, one may perceive an on-going dissatisfaction with the consequences of the Commission’s 2005 Recommendation. In particular, the issue has been brought up in the Council of Ministers for Culture of the EC and

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  353

will possibly be further pursued also there. We will see next year what will have come out of all these deliberations. What is clear now is, that the fight against the 2005 Recommendation is still on and, hopefully, something will be achieved to avoid further damage to the system of reciprocal agreements and to cultural diversity. We will know more next year. And with this, I give you my fifteen seconds left. MS. TREACY: Thank you very much. I am sure you would have made much better use of the fifteen seconds than I will. That was a really interesting insight into one of the more difficult issues that applies in this area, not so much for competition lawyers but in the broader cultural context. I’m sure that our other speakers will have something to say about that. I am fortunate to say that we have another speaker who is even more recent than Professor von Lewinski. She is not even on your program. That is Louise Pentland, who is from Nokia headquarters in Finland. She is going to give us a perspective on this topic of copyright and collecting societies from the users’ angle, I guess. I only guess because we didn’t have time to talk about it before she arrived. Louise, please. MS. PENTLAND: I think we have talked a lot about patent ambush. I guess I am ambushing the panel. Nobody knows what I am going to talk about. Hugh asked me yesterday after I had finished on the GC Roundtable, which some of you might have watched, for some reflections. One of the things that I talked about yesterday on that panel was the evolution of the IPR regime and, in particular, as we migrate from an analog to a digital world.14 Those of you who listened to the panel yesterday would have noticed there was quite extensive discussion on the content implications, but also enforcement. As a general counsel, enforcement is very important, but it is not a goal in its own right, it’s not an innovative enough business solution for me. So I was sharing with Hugh about some of the practical innovative work that Nokia has started in this area. He thought it would be good just to share that. So that is really some of the things that I am going to talk about, and then, of course, some of the implications in the current IPR regime that this creates. We do need creativity and innovation along with the evolution of the IPR framework. One example from Nokia you may have heard about is called Comes With Music. This is the model that we have launched in several countries around the world, and as we speak we are continuing to roll this out.15 So what is it? Well, Nokia created a compelling experience that delivers consumer music that they love in what we consider a very unique offering. Nokia is investing in music extensively and for the long term. We really want to help grow the business for all key stakeholders. We are driving innovation in the digital music industry with new industry models and industry cooperation. So how are we doing this? Well, if you buy a Comes With Music device, you get twelve to eighteen months of unlimited free music downloads from the Nokia Music Store for your PC or your mobile. From the consumer’s point of view they can download as much music as they like “for free.” In reality, of course, it is a paid-up license—that is all part of the innovative business model. See Chapter III, “Corporations & IP”, supra this volume. Press Release, Nokia Corp., Nokia Passes Key Milestone as Services Business Continues Strong Momentum (Feb. 15, 2010), available at http://investors.nokia.com/phoenix.zhtml?c=107224&p=irol-newsArticle&id=1390853 (last visited March 4, 2010) (stating that Nokia’s “Comes With Music” service is currently available in over 25 markets). 14 15

354  CHAPTER V: COPYRIGHT LAW So what’s the catch? Well, there really isn’t one. You don’t have to pay for your downloads. You don’t need to pay for individual singles or albums. Everything is included. And it is yours to keep. It is completely legal. You can delete it. You can download it again if you have changed your mind. Obviously, this causes some disruption to some of the existing models that already are out there. But also, I guess, it is another reflection of the evolution from an analog legacy to a digital world in the copyright environment as well. How is this model being created? Well, I won’t downplay the extensive work that has gone into negotiating with the labels, the distributors, the aggregators. We have signed up all the major labels as a consequence of this. And let’s not forget the current licensing models in this music area are on both a local and a global basis. So really, truly extensive licensing. I don’t want to downplay how much time has gone into creating this. Nevertheless, it has come to fruition. This creates, truly legal “for free” download services for the consumer. Nokia has created significant investment benefits and returns for the stakeholders in what it has generated in this model. We need to ensure that the licensing process and the regulations enable, facilitate, and accelerate bringing new business models to consumers and reward and encourage business investment and innovation in this space. Finally, a topic that I would like to leave you with, which will be covered in the later copyright sessions this afternoon,16 but I think it is pertinent here, is if a private copy levy model becomes a revenue generator and dominates, then it puts the types of innovative new legal services and business models that I am talking about here in my view seriously at risk. So we have to ask: Are we creating a model where the music industry is compensated through content-related models like [Nokia’s] “Comes With Music” or through the outdated “rough justice” of applying levies on equipment? Certainly, the consumer should not pay twice. So you really have to make your choice. I’m quite sure you know where I come out on this. I am not going to use the whole nine minutes because I am conscious that I have monopolized and ambushed this session. I want to leave some time for questions at the end. But I leave you with those thoughts. Thank you. MS. TREACY: Thank you very much, Louise. I think what you have said has certainly given rise to various questions in my mind, which I will save for the panel discussion, because I am conscious that Sebastien has found himself slipping down the running order a little bit. It is finally your turn. Now we have Sebastien Evrard from Jones Day in Brussels. Thank you. MR. EVRARD: Thank you. My presentation will focus on the online distribution of music. I will make the point that distributors of digital music are facing an increasingly difficult situation for the clearance of rights. I will suggest a few solutions for what is in fact a real mess. Let me first describe the mess. In the early days of online distribution, clearing mechanical and performance rights was relatively straightforward. All you needed to do was to go to the local collecting society and they would deliver you a license in the global repertoire, even if limited to the national territory. So if you wanted to launch in France, you only needed to go to SACEM and they would give you, in a single license, all the rights you needed. 16 See Chapter V.B, “Information Society Directive, Secondary Liability, DRM, Private Copy Levies & Copyright Territoriality”, supra this volume.

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  355

Now, in the wake of the 2005 recommendation,17 things have become slightly more complicated, to use an understatement. As we all know, the major publishers have started to remove some of their digital rights from collecting societies and are administering these rights on their own. This has really three consequences: • The first consequence is that the rights that have been withdrawn are likely to escape the regulatory regime which was applicable to collecting societies, which would enable the major publishers to increase rates over time. • The second consequence is that you need to enter into additional license agreements in order to launch your online service. Let’s use the same example. If you need to launch in France, you no longer need one license from SACEM, but you will need one license from SACEM and five licenses from the five major publishers which would have withdrawn their rights. • The third consequence is that there is a great uncertainty over who owns the rights that have been withdrawn. Some collecting societies will tell you that they are still able to license the rights in the withdrawn repertoire, while the major publishers will tell you that they are the exclusive entities able to license these rights. There is, in fact, no central database to tell you, for each individual song, who actually owns the rights. This means that if you want to have legal certainty and avoid copyright infringement, you have to enter into a license agreement with any entity who would claim with a little bit of credibility that they might still own the rights in some of the repertoire that has been withdrawn. Now, the situation could become even more complex if in the wake of the CISAC decision18 some collecting societies start to terminate their reciprocal agreements. That would, indeed, force distributors to enter into even more license agreements. Let me take again the example of France. If SACEM terminates reciprocal agreements with, let’s say, five collecting societies, you will need to go to these five collecting societies to launch your online service in France, which means that in order to launch in France you will need not one license, like in the good old days of the pre-recommendation world, not six licenses, like in the pre-CISAC world, but you will need eleven licenses, namely, SACEM, the five major publishers, and the five collecting societies which no longer have a reciprocal agreement with SACEM. So going from one to eleven is not really an improvement from the perspective of commercial users. It makes their life more difficult, and it is likely to actually deter new entrants, which runs exactly contrary to the objective of promoting pan-European online services. Now, we could speak about the reasons for getting into this mess. Still, I only have four minutes. Let me propose four sets of solutions. Each solution presents challenges of a legal, economic, and political nature, and I am sure that for each of these solutions some of you will find it totally unacceptable. Let’s start with the economic solution. Let’s merge the collecting societies. Let’s keep five collecting societies, the biggest ones, which would take over the smaller ones. That would leave only five possible license sources, plus maybe the major publishers, so you would only have a few license agreements in order to have a pan-European license. The second possibility would be a regulatory “big bang.” It would be to modify the regulatory framework. But let me focus on the third solution, which would be a competition law solution. Under Article 82,19 we could perfectly force the major publishers to license their repertoire under reasonable terms to collecting societies and to the record labels, so that each collecting society Comm’n Recommendation 2005/737, 2005 O.J. (L 276) 54 (EC). COMP/C2/38.698, In re CISAC Agreement, [2009] 4 C.M.L.R. 12. 19 Treaty Establishing the European Community, Art. 82, Nov. 10, 1997, 2002 O.J. (C 325) 1, 65. 17 18

356  CHAPTER V: COPYRIGHT LAW would again be able to function as a “one-stop shop” able to deliver a global license. Even the record labels would be able to license you the recording rights and the publishing rights, like they do in the United States. Obviously, the application of Article 82 would require a finding that they are dominant, but you could certainly make the argument that the repertoire of a major publisher is a “must have” product for a commercial distributor. A second possible application—and I must say that maybe this is going to be the outcome of the CELAS investigation of the Commission. They might consider the repertoire of EMI Publishing is a “must have” product that needs to be licensed back to the complainant in that case. A second possible application of Article 82 is what I would call a partial exhaustion of rights, which means that in the online environment once a commercial user has received the rights to operate in one country, it could operate in all the other European countries without committing copyright infringement, as long as the original rights holder is remunerated for each act of exploitation. So it is not a total exhaustion of rights, because the right owner still gets remunerated, but it is a partial exhaustion of rights because he loses the possibility to decide whether to authorize exploitation in the different countries. A fourth solution would be an industry solution, where commercial users, rights owners, and collecting societies would sit down and devise a new framework that would make everybody’s life more or less acceptable. I think that this is what Commissioner Kroes is trying to do with her roundtable on online distribution under the able leadership of Cecilio Madero.20 Let’s hope that indeed—we know that he always carries a big stick—that he is able to use this stick to convince everybody to come to a solution. To conclude, the current situation from the perspective of commercial users is a mess. But I am sure, with all the fine lawyers in this room and in Brussels, we will find a solution. MR. MADERO: I would like to say something in response. MS. TREACY: I understand that Cecilio would like to make a contribution before he, unfortunately, has to leave us. Please, Cecilio. MR. MADERO: Thank you. It is true that I am known as having some expansive views about the implementation of Article 82. But I am not sure that under 82 we would be able to do what you have just said. We will need to find collective dominance, we would have to go for a “must have” approach, and then apply 82. It is funny, if I compare what we have been discussing this morning on the standards on patents21 and what we are discussing now here, there are different views about the pertinence of applying in a very expansive or in a very restrictive way Article 82. I guess that one of the merits of working at DG Competition at the Commission is that we try to keep a sort of open mind and a pragmatic approach. Very quickly, I would like to say that this mess that you have rightly mentioned has to do with the fact that for too many years we have had wonderful local monopolies which have been preserved. In my opinion, these monopolies do not provide any service to end-users and to consumers. I think it is also obvious that something has to be done, and the Commission intends to do it through these online groups and these different tables at which we are pushing publishers, collecting societies, and many other players to move beyond what the current legal framework allows them to do precisely because we cannot stop how things are done now. 20 See Press Release, European Comm’n, Commission Kroes Welcomes Progress on Pan-European Music Licensing Following Online Commerce Roundtable (May 26, 2009), available at http://europa.eu/rapid/pressReleasesAction. do?reference=IP/09/832; see also Europa.eu, Online Commerce Roundtable Report on Opportunities and Barriers to Online Retailing, http://ec.europa.eu/competition/consultations/2009_online_commerce/roundtable_report_en.pdf. 21 See Chapter VIII.D, “Standard Setting”, infra this volume.

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  357

Online is something which is in our daily life, and we cannot use for something which is now used massively, Internet, online distribution of music, a model which is very, very old and completely outdated. This is why I said in my intervention that hopefully the implementation of the decision is going to be effective. Otherwise, probably we will have to consider follow-up decisions, but probably not as expensive and as ambitious as you have mentioned. Thank you for your attention. MS. TREACY: Thank you, Cecilio. Given what you have just said, I wonder if there is anyone on the panel who would like to take the opportunity to respond to your comments before you need to leave. Frances? MS. LOWE: I think that the debates and the roundtables are probably the only way we are going to forge solutions in this place, because there are many different interests between the different rights owners, whether they are authors or publishers, whether they are major publishers or smaller, and from different areas. So we definitely welcome debate. I think getting enough people into the room to take enough of a hold on a solution is going to be the challenge. MR. MADERO: This is not controversial. MS. LOWE: It is not controversial, but I think the Commissioner’s roundtable was a very good start, and we are clearly watching it extremely carefully. But it is a limited number of participants. MR. MADERO: You know that you are going to be invited to the next one. MS. LOWE: That’s right. MR. MADERO: Many thanks. Sorry I have to leave. MS. TREACY: Thank you very much, Cecilio. I think we might take a break from that discussion, although I suspect that certainly the expansive views that Sebastien expressed about the application of Article 82 might be something we could come back to. But for the time being, if we could perhaps move to a view from Dr. Ficsor from Budapest, who I think has some relatively strong views on how competition law and copyright interact in this particular area. Please. DR. FICSOR: I have agreed with Hugh Hansen that I will speak about an idea that is suggested more and more frequently; namely that mandatory collective management should be the solution for the problems of copyright on the Internet. The exclusive rights of authors to exploit their works or authorize (or prohibit) others to do so is a basic element of copyright, and, where recognized, such a right is also important for the beneficiaries of related rights. The exclusive nature of a right means that its owner—and its owner alone—is in a position to decide whether he authorizes or prohibits the performance of any act covered by his right; and if he does authorize such an act, under what conditions and against what kind of remuneration. An exclusive right may be enjoyed to the fullest possible extent if it is exercised individually by the owner of the right himself. In such a case, the owner maintains his control over the exploitation of his work, and he may closely monitor whether his right is duly respected. In certain cases, collective management is the most efficient way of exercising rights from the viewpoint of the interests of all the stakeholders: the owners of rights, the users and the general public. In such cases, owners of rights normally establish voluntarily collective management systems. In order that a collective management system may duly function, many elements of the management of rights are standardized—and, in fact, even “collectivized.” The same tariffs,

358  CHAPTER V: COPYRIGHT LAW the same licensing conditions and the same distribution rules apply to all works that fall into a given category. It is also frequent—or rather it is quite general—that the tariffs of collective management organizations are approved by some dispute settlement bodies or governmental authorities, and that the collective management organizations are obliged to grant license to any user who asks for authorization and is ready to pay remuneration according to the established tariffs. The owners of rights who join a collective management organization must accept all this. As long as the system is established and functions voluntarily on the basis of free decisions of owners of rights, all this is in order from the viewpoint of the international norms. Prescription of mandatory collective management is, however, another matter. In that case, owners of rights are not able to act as owners of exclusive rights; the law does not allow them to decide in which cases they authorize the use of their works and in which cases they prohibit it; and they cannot decide anymore under what conditions and against what remuneration authorization is granted either. Others decide about all this. In certain cases—but only in certain exhaustively determined cases—mandatory collective management is allowed under the international copyright norms as well as under the acqui communautaire22 which seems to be in accordance with those norms. Under the international norms, in the case of rights to remuneration—both those rights which are originally provided as such (e.g., resale right under Article 14ter of the Berne Convention23 or the performers’ and phonogram producers’ right to a “single equitable remuneration” under Article 12 of the Rome Convention24 and Article 15 of the WPPT25) and those which consist in the limitation of exclusive rights in accordance with the international norms (e.g., limitations of the exclusive right of reproduction on the basis of Article 9(2)26 in certain cases of private copying and reprographic reproduction)—mandatory collective management may be prescribed. This is so since these rights are not—or are not anymore—exclusive rights, and due to their nature, this may be the best, or even the only possible, way of exercising them. In contrast, the prescription that an exclusive right may only be exercised through a collective management organization is obviously a condition of exercising such a right (along with other conditions, such as compulsory licenses). The Berne Convention does allow the imposition of such conditions; however, only in respect of certain exhaustively identified exclusive rights; namely, in respect of the right of broadcasting and other related acts under Article 11bis(2)27 22 The acqui communautaire is a “Eurojargon” word (literally translated from French acquis meaning “that which has been agreed upon”, and communautaire meaning “of the community”) referring to the entire body of European Union laws, essentially describing the rights and obligations all EU countries share, and by which a country acceding to the EU must harmonize its state laws to “fit the body of European Community legislation, objectives and rules.” See Europa, A Plain Language Guide to Eurojargon, http://europa.eu/abc/eurojargon/index_en.htm (glossary of EU “Eurojargon” words). 23 Berne Convention for the Protection of Literary and Artistic Works Art. 14ter, Sept. 9, 1886, as last amended Sept. 28, 1979, S. Treaty Doc. No. 99-27, 1161 U.N.T.S. 3, 40, available at http://www.wipo.int/export/sites/www/treaties/en/ ip/berne/pdf/trtdocs_wo001.pdf [hereinafter Berne Convention]. 24 International Convention for the Protection of Performers, Producers of Phonograms, and Broadcasting Organizations Art. 12, Oct. 26, 1961, 496 U.N.T.S. 43, 52, available at http://www.wipo.int/export/sites/www/treaties/ en/ip/rome/pdf/trtdocs_wo024.pdf [hereinafter Rome Convention] (“If a phonogram published for commercial purposes, or a reproduction of such phonogram, is used directly for broadcasting or for any communication to the public, a single equitable remuneration shall be paid by the user to the performers, or to the producers of the phonograms, or to both.”). 25 WIPO Performances and Phonograms Treaty Art. 15, Dec. 20, 1996, 2186 U.N.T.S. 245, 251, 36 I.L.M. 76, 82 (entered into force May 20, 2002) [hereinafter WPPT], available at http://www.wipo.int/export/sites/www/treaties/ en/ip/wppt/pdf/trtdocs_wo034.pdf (“Performers and producers of phonograms shall enjoy the right to a single equitable remuneration for the direct or indirect use of phonograms published for commercial purposes for broadcasting or for any communication to the public.”). 26 Berne Convention, supra note 23, Art. 9(2), 1161 U.N.T.S. at 37. 27 Article 11bis(2) provides as follows: “It shall be a matter for legislation in the countries of the Union to determine the conditions under which the rights mentioned in the preceding paragraph may be exercised … .” (Emphasis added). Id. Art. 11 bis(2), 1161 U.N.T.S. at 38–39.

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  359

and the right of reproduction concerning recording of musical works under Article 13.28 It follows from this a contrario that the Convention does not allow the prescription of such conditions in respect of other exclusive rights. It is possible to preserve the exclusive nature of an exclusive right, but to provide for an unwaivable right to remuneration (so-called “residual right”) maintained for the original owners—typically for authors and performers—after the transfer of the exclusive right.29 Since such a “residual right” is a right to remuneration, for its exercise—in contrast with the exercise of the underlining exclusive right itself, where it is not allowed—it is possible to prescribe mandatory collective management. As regards “residual rights,” the obvious example is the “unwaivable right [of rental] to remuneration” under Article 4 of the Rental Directive.30 First, paragraph (3) of the article provides that “[t]he administration of this right to obtain an equitable remuneration may be entrusted to collecting societies representing authors or performers,”31 and then paragraph (4) deals with the question of possible prescription of mandatory collective management. Its relevant part reads as follows: “Member States may regulate whether and to what extent administration by collecting societies of the right to obtain an equitable remuneration may be imposed … .”32 This provision is relevant from the viewpoint of the issue of mandatory collective management not only because it confirms that, in the case of this “residual right,” collective management may be imposed, but also because it has an important a contrario implication. Since the Directive finds it necessary to state that, in this case, collective management may be imposed, by this itself, it indicates implicitly that, under the acqui communautaire—unless this possibility does not follow directly from the provisions of an international treaty to which the Member States are party—there is a need for such a permission. In other words: mandatory collective management of exclusive rights may only be prescribed in those cases where the international norms, and, in accordance with them, the rules of the acqui communautaire explicitly allow to do so. The Satellite and Cable Directive33 goes further. In the case of cable retransmission, it not only allows but prescribes mandatory collective management. Article 9(1) of the Directive provides as follows: “Member States shall ensure that the right of copyright owners and holders of related rights to grant or refuse authorization to a cable operator for a cable retransmission 28 Article 13(1) reads as follows: “Each country of the Union may impose for itself reservations and conditions on the exclusive right granted to the author of a musical work and to the author of any words, the recording of which together with the musical work has already been authorized by the latter, to authorize the sound recording of that musical work, together with such words, if any …” (Emphasis added). Id. Art. 13(1), 1161 U.N.T.S. at 39. 29 It is submitted, however, that—in view of existing contractual relations—such a solution may be applied mainly where a new right is introduced or an existing right is applied in a new situation. This was the case as far as the rental right was concerned. The right of (interactive) making available is not necessarily the same case, since it, depending on the nature of interactive transmissions, quite frequently may be regarded as a new incarnation of the right of communication to the public and/or the right of distribution. Three conditions seem to be necessary to be fulfilled, in the case of the making available right, for such a legislative solution. First, the exercise of the exclusive right by its actual owners (assignees, licensees) should be guaranteed. Second, the existing contractual arrangements should be taken into account in order to avoid double payment. Third, the relevant international norms do not allow the “exportation” of such a system to countries where no such statutory provisions exist. 30 Council Directive 92/100, Art. 4, Rental and Lending Rights, 1992 O.J. (L 346) 61 (EEC). Paragraph (1) of Article 4 of the Directive provides as follows: “Where an author or performer has transferred or assigned his rental right concerning a phonogram or an original or copy of a film to a phonogram or film producer, that author or performer shall retain the right to obtain an equitable remuneration for the rental.” And paragraph (2) of the same article adds that “[t]he right to obtain an equitable remuneration for rental cannot be waived by authors or performers.” Id. 31 Id. 32 Id. 33 Council Directive 93/83, Satellite Broadcasting and Cable Retransmission, 1993 O.J. (L 248) 15 (EEC) (emphasis added).

360  CHAPTER V: COPYRIGHT LAW may be exercised only through a collecting society.”34 The Directive also regulates the legal technique through which it may be achieved that all such rights of copyright owners and holders of related rights may be concentrated in the repertoire of a collective management organization (or possibly more than one organization from which holders of rights may chose one).35 This provision is in harmony with the above-stated principle—namely that, in the case of an exclusive right, mandatory collective management may only be prescribed where the relevant international norms allow it, either through permitting the prescription of conditions for the exercise of rights (the imposition of collective management being obviously a condition) or through limiting it to a right to remuneration in certain cases (in which cases, the rights concerned are not of an exclusive nature anymore). This is so since, in respect of authors’ “exclusive right of authorizing … any communication to the public by wire … of the broadcast of [their] works” granted by paragraph (1) of Article 11bis, paragraph (2) of the same article provides that “[i]t shall be a matter for legislation in the countries of the [Berne] Union to determine the conditions under which the rights mentioned in [paragraph (1)] may be exercised”36 and, since in the case of related rights, neither the provisions of the Rome Convention, the TRIPS Agreement and the WPPT nor the acqui communautaire provide for exclusive rights of authorization concerning cable retransmissions. Article 10 of the Satellite and Cable Directive provides for an exception to mandatory collective management of cable retransmission rights, namely for such rights of broadcasting organizations.37 This confirms one of the basic principles of collective management; namely that collective management, even if it might be possible from the viewpoint of the relevant international norms and the acqui communautaire, is only justified where individual exercise of rights—due to the number of owners of rights, the number of users or other circumstances of uses—is impossible or, at least, highly impracticable.38 Broadcasting organizations are relatively less numerous (in contrast with authors and owners of related rights other than the rights of broadcasting organizations); they can manage their rights individually. The Resale Right Directive39 does not prescribe mandatory collective management of collection and distribution of the remuneration due for the resale right, but allows Member States to do so. Its Article 6.2 reads as follows: “Member States may provide for compulsory or optional collective management of the royalty provided for under Article 1.”40 Id. Art. 9(1) (emphasis added). Id. Art. 9(2)–(3). Article 9(2) & (3) of the Satellite and Cable Directive provide as follows: 2. Where a rightholder has not transferred the management of his rights to a collecting society, the collecting society which manages rights of the same category shall be deemed to be mandated to manage his rights. Where more than one collecting society manages rights of that category, the rightholder shall be free to choose which of those collecting societies is deemed to be mandated to manage his rights. A rightholder referred to in this paragraph shall have the same rights and obligations resulting from the agreement between the cable operator an collecting society which is deemed to be mandated to manage his rights as the rightholders who have mandated that collecting society and he shall be able to claim those rights within a period to be fixed by the Member State concerned, which shall not be shorter than three years from the date of the cable retransmission which includes his work or other protected subject matter. 3. A Member State may provide that, when a right-holder authorizes the initial transmission within its territory of a work or other protected subject matter, he shall be deemed to have agreed not to exercise his cable retransmission rights on an individual basis but to exercise them in accordance with the provisions of this Directive. 36 Berne Convention, supra note 22, Art. 11bis(1)–(2), 1161 U.N.T.S. at 38 (emphasis added). 37 Article 10 of the Satellite and Cable Directive provides as follows: “Member States shall ensure that Article 9 [prescribing obligatory collective management] does not apply to the rights exercised by a broadcasting organization in respect of its own transmission, irrespective of whether the rights concerned are its own or have been transferred to it by other copyright owners and/or holders of related rights.” Council Directive 93/83/EEC, Art. 10, 1993 O.J. (L 248) 15. 38 See Dr. Mihály Ficsor, Collective Management of Copyright and Related Rights, WIPO publication No. 855(E), 2002, p. 157, principle (1). 39 Directive 2001/84/EC of the European Parliament and the Council of 27 September 2001 on the resale right for the benefit of the author of an original work of Art. Directive 2001/84/EC, 2001 O.J. (L 272) 32. 40 Id. Art. 6.2, at 25 (emphasis added). 34 35

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  361

As mentioned, in this case, the prescription of mandatory collective management is allowed under the international copyright norms, since it corresponds to the nature of the resale right (droit de suite) under Article 14ter of the Berne Convention; namely that it is a mere right to remuneration (and it is also only such a right under Article 1 of the Resale Right Directive). To sum up: It follows from the application of the a contrario principle that, where the international copyright norms and/or the rules of the acqui communautaire provide for an exclusive right and do not allow the prescription of conditions of its exercise (nor permit its limitation to a mere right to remuneration), it is in conflict with those norms to submit the exercise of such a right to the condition that it may only be exercised through collective management. For example, no provision on mandatory collective management is allowed under the international copyright norms (and the acqui communautaire) in the case of the right of public performance,41 the right of public recitation42 or the right of “making available to the public.”43 In addition to the voluntary and mandatory forms of collective management, there is also a third one; namely the system of so-called extended collective management applied under certain copyright laws. In the case of “extended collective management” of exclusive rights, in order to avoid its transformation into a de facto mandatory collective management, two basic conditions should be fulfilled: first, such a system may only be applied where a collective management organization originally established on a voluntary basis is adequately, broadly representative (both domestically and at the international level); and second, the possibility of “opting out” from the system should be guaranteed under reasonable conditions. The acqui communautaire recognizes the applicability of extended collective management under certain conditions. This is reflected in Article 3(2) to (4) of the Satellite and Cable Directive.44 After that, Article 2 states that “Member States shall provide an exclusive right for the author to authorize the communication to the public by satellite of copyright works”45 and Article 3(1) adds that “Member States shall ensure that the authorization referred to in Article 2 may be acquired only by agreement”46—Article 3(2) provides for an extended collective management system. It reads as follows: “A Member State may provide that a collective agreement between a collecting society and a broadcasting organization concerning a given category of works may be extended to rightholders of the same category who are not represented by the collecting society, provided that: • the communication to the public by satellite simulcasts a terrestrial broadcast by the same broadcaster, and • the unrepresented rightholder shall, at any time, have the possibility of excluding the extension of the collective agreement to his works and of exercising his rights either individually or collectively.”47

This paragraph includes an authorization (the “may” language clearly indicates this) for Member States to introduce such an extended collective licensing system. This seems to indicate the position under the acqui communautaire that such an authorization is needed, and that, where it is not granted, in the fields expressly covered by the acqui, no extended collective management is allowed.48 Berne Convention, supra note 22, Art. 11, 1161 U.N.T.S. at 38. Id. Art. 11ter, 1161 U.N.T.S. at 39. 43 World Intellectual Property Organization (WIPO) Copyright Treaty Art. 8, Apr. 12, 1997, 2186 U.N.T.S. 152, 36 I.L.M. 65, 70 (Geneva, 1997) (entered into force Mar. 6, 2002), available at http://www.wipo.int/export/sites/www/ treaties/en/ip/wct/pdf/trtdocs_wo033.pdf [hereinafter WTC]; WPPT, supra note 25, Art. 10, 16. 44 Council Directive 93/83, Art. 3(2)–(4), 1993 O.J. (L 248) 15 (EEC). 45 Id. Art. 2. 46 Id. Art. 3(1). 47 Id. Art. 3(2). 48 For example, the right of public performance of authors is not covered by the acqui communautaire. In the case of that right, for example, extended collective management may be justified (but, since it is an exclusive right, obligatory collective management obviously is not permitted by the international copyright norms). 41 42

362  CHAPTER V: COPYRIGHT LAW Article 3(3) and (4) of the Directive also indicate that even extended collective management may only be justified where it is truly indispensable, and where owners of rights usually do not intend to exercise their exclusive rights on an individual basis. Article 3(3) identifies a category of works where this is not the case; it provides that “[p]aragraph 2 shall not apply to cinematographic works, including works created by a process analogous to cinematography”, while Article 3(4) underlines the exceptional nature of extended collective management by introducing a specific notification procedure.49 There is one more directive in which mention is made of extended collective management; namely the Information Society Directive which, in recital (18) states as follows: “This Directive is without prejudice to the arrangements in the Member States concerning the management of rights such as extended collective licenses.”50 It seems obvious, however, that this may hardly be interpreted as an authorization for applying any kinds of arrangements—including extended collective management systems—in respect of any uses and any category of protected subject matter. The principles reflected in Article 3 of the Satellite and Cable Directive certainly must be duly taken into account. MS. TREACY: I very much hope you will have plenty of opportunity to add something to the panel discussion because that was a very unforeseen exposition of the issues that face us. Moving on from that, I think the next person who is going to speak is Frances Lowe. I am not sure if she is going to take quite such a counterrevolutionary perspective to the issues that face us, but maybe she will tell us how things look from the PRS. Thank you, Frances. MS. LOWE: Thank you very much. There are clearly a number of views already exposed on the complexity of issues facing collective management. I was thinking how to introduce here, because with the patents it was a very straightforward debate. There were some very strong views, a whole discussion about what is the right way forward and what the interests of the various companies are. What that highlighted to me is that they are companies with their own intellectual property and the decision how to exploit their exclusive rights or whether to license others. The thing about collecting societies is that we act for others. It is the authors and their publishers who have their exclusive rights. So whatever we do, we do in their interests, in the interests of members. That therefore conditions how we approach the various interventions in the decision, the Recommendation on collective licensing, and looking at solutions. I wanted to cover in my talk, just quickly, compliance with the CISAC decision from a collecting society perspective; secondly, touching on the interrelationship with the Recommendation; and finally, solutions, although Sebastien has been very kind to put a few in the frame for discussion later. On compliance I want to address some of the assumptions in this review of bilateral agreements and where we will go. There seem to be some assumptions that collecting societies are not in favor of multi-territory licensing. That is just not true. We have shown from our willingness to negotiate the Santiago Agreement—I know it didn’t go forward—that we wanted to look for multi-territory solutions. We negotiated with the Commission and with many societies commitments to settle the CISAC Statement of Objections51 before it ever got to decision. That was based on a multiterritory license. 49 Article 3(4) provides as follows: “Where the law of a Member State provides for the extension of a collective agreement in accordance with the provisions of paragraph 2, that Member States shall inform the Commission which broadcasting organizations are entitled to avail themselves of that law. The Commission shall publish this information in the Official Journal of the European Communities (C series).” Council Directive 93/83, Art. 3(2)–(4), 1993 O.J. (L 248) 15 (EEC). 50 Council Directive 2001/29, recital 18, Information Society Directive, 2001 O.J. (L 167) 10 (EC). 51 See Notice Published Pursuant to Article 27(4) of Council Regulation No 1/2003 in Case COMP/38698— CISAC, 2007 O.J. (C 128) 12; Proposed Commitments for Performing Rights Under Article 9 of Regulation No.

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  363

And PRS itself has been licensing rights to users on a multi-territory basis where it has the consent of its members or the consent of other societies. The second is there seems to be an assumption that we prefer the status quo. I can say that that is absolutely not true. But I do want to emphasize that when we look to change and what will influence change, we must look to the interests of our members. That will probably mean we do not license or mandate every society on a multi-territory basis. It is also why, when we looked at the recommendation, the options that were put forward in the recommendation by Internal Market on collective management for licensing music rights on online services, we have always supported competition for members between societies. Let me turn next to the extent of the decision and what it means for compliance. First of all, the decision does not prescribe how societies should amend their bilateral agreements, and clearly it cannot in this way. We simply have to amend our agreements in a way which ends the alleged concerted practice and which is, clearly, lawfully compliant with competition law. The decision itself confirms that territorial appointment is per se not anticompetitive,52 confirming the Coditel case from many years ago.53 Since July we have been through a standard commercial process with most societies to define the services we can each offer the other, including tariffs, costs, deductions. This is a very practical issue. But, like any intellectual property owner, we will be looking for the most effective, most efficient, and the most transparent way to license and mandate the rights that we have mandated by our members. We are looking now at specific service-level commitments with societies in the new agreements we have concluded. I should also say some of those agreements are not necessarily reciprocal. There is a flow of rights, but not necessarily the absolute mirror which was typical in the CISAC agreements. Finally, of course, PRS has, as any collecting society has, the ability to license those rights directly, in addition to any mandates it provides through the network of reciprocal agreements. Predicting the outcome?—I think Sebastien summarized actually the complexity of the recommendation. In addition, there will be further complexity in predicting the outcome of the CISAC decision. Quickly, different models: • 24X24 bilateral reviews will mean a mosaic of different arrangements and different licenses. Some societies will have global repertoire. Some societies will have them under certain conditions, some under others. • Second, this applies only to EEA repertoire, and clearly the blanket licenses that were valued by Nokia when they launched Comes With Music and other societies have included world repertoire, all the repertoire of all composers and songwriters worldwide. • There is a question about legal certainty. The requirement is for us to stop the alleged concerted practice. Clearly, that is not something that unilaterally any of us are able to determine. So that is a question to come back to. • Fourthly, many societies alleged the potential disruption and negative effect of the decision on cultural diversity. Quickly then to the interrelationship of the decision and the recommendation. The publishers have withdrawn their Anglo-American mechanical rights from collecting societies, either 1/2003 (Dec. 26, 2007), available at http://ec.europa.eu/competition/antitrust/cases/decisions/38698/commitments. pdf; see also Press Release, European Comm’n, Commission Market Tests Commitments from CISAC and 18 EEA Collecting Societies Concerning Reciprocal Representation Contracts (June 14, 2007), available at http://europa.eu/ rapid/pressReleasesAction.do?reference=IP/07/829. 52 53

COMP/C2/38.698, In re CISAC Agreement, [2009] 4 C.M.L.R. 12, [201], [215]. Case 262/81, Coditel v. Cine Vog Films SA (2), [1983] 1 C.M.L.R. 49, [15].

364  CHAPTER V: COPYRIGHT LAW appointing one nonexclusively or several on a nonexclusive basis. The reason they have done this is to gain greater control over pricing, greater control over the services they get. Clearly, they as rights holders can do this in a voluntary collecting society. That has impacted licensing in Europe, as we well know, as has been commented on in the feedback on the recommendation, in the feedback on the market testing of commitments, and in the input to the Commissioner’s “Online Issues” paper.54 The compliance with the CISAC decision for performing rights has to take account of those market developments. We cannot think that the recommendation which has changed licensing of mechanical rights can be seen as independent from how performing rights are licensed now. In answer to the many points that are made and potential complaints about the system, what I would say is that we are in transition. There have been very significant moves following either voluntary publisher moves or the interventions of the Commission. We have to allow time for that transition to move forward. Transition will always provide disruption, but we must look together for solutions to provide some of the licensing solutions that are needed in the market. I have very little time left. I had wanted to reinforce what is at stake for collective management as the final, third point. Collecting societies have been through many regulatory and competition assessments in history, and they have been approved for very many reasons. I don’t wish to dwell on the point about national local monopolies, but there are economic benefits to the aggregation of rights, and we should not forget that those economic reasons are still valid today. We provide a two-sided market between the users and the rights holders and widen access to rights. We also reduce administration and transaction costs through doing so, the only difference being that, unlike classic two-sided markets like clearinghouses and exchanges, we owe a duty to one side of the market. I’d signpost you to have a look at the work of an economist, Michael Heller, The Gridlock Economy,55 which is looking at fragmentation of ownership of rights, and points to copyright collectives, in his case ASCAP and BMI in the United States, as being a solution. In summary, I think we have to remember the benefits of collective licensing and to ensure that competition constraints and interventions do not actually lead to a result which is to have more rights exit the system. We need to find the carrot that brings them back into the system that works for both sides of the market. Thank you very much. MS. TREACY: Thank you very much, Frances. I think you have demonstrated very ably that the law of unintended consequences operates in this field as in many others. Our final speaker this afternoon is John Temple Lang from Cleary Gottlieb. He, I think, may even have some PowerPoint slides, which would be a novelty for this afternoon’s panel. DR. TEMPLE LANG: I was struck by what Cecilio Madero said a few minutes ago, because he said that among other things prohibited by the CISAC decision were anticompetitive clauses in reciprocal agreements. I whispered to him to confirm that I had correctly noted that. This helps to resolve the first point that I am making because, although the decision quite clearly found that the CISAC societies had conferred exclusive rights in their national territories 54 See European Comm’n, Monitoring of the 2005 Music Online Recommendation (July 2, 2008), available at http:// ec.europa.eu/internal_market/copyright/docs/management/monitoring-report_en.pdf (summarizing and analyzing the comments to Commission Recommendation 2005/737/EC); Circa.Europa.Edu, Results of the monitoring of the Commission Recommendation, http://circa.europa.eu/Public/irc/markt/markt_consultations/library?l=/copyright_ neighbouring/collective_cross-border&vm=detailed&sb=Title (listing of all 2005/737/EC comments made). 55 Michael Heller, The Gridlock Economy: How to Much Ownership Wrecks Markets, Stops Innovation, and Costs Lives (Basic Books 2008).

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  365

and that was an infringement of Article 81,56 there is apparently a good deal of disagreement about what these societies need to do in order to comply with the decision. It has been argued, notably by PRS—this is publicly known, I believe—that the decision prohibited only the CISAC model agreement and doesn’t affect the clauses in the bilateral reciprocal agreements.57 That seems to be contrary to what at least Cecilio Madero believes is the effect of the decision. [Slide] On this slide that you see on the screen there are a couple of other reasons for suggesting that Mr. Madero may be right, for other reasons altogether, in his view of the implications of the decision. I don’t want to start discussing the merits of the decision. It is on appeal. There is disagreement, apparently, not only over whether it is justified, but also over the scope of the decision. That presumably is going to have to be resolved either by the Commission or by the Community courts. So I pass to the next stage, possible future procedural developments. As Cecilio Madero already said, there may be a need in the eyes of the Commission to take action to enforce the CISAC decision. If that is indeed so, I am not, of course, in a position to say with any confidence exactly what action the Commission would take. I believe I am right in saying that the President of the Court of Justice has not yet decided whether to suspend the Commission’s CISAC decision. The President of the CFI declined to do so before the end of last year. There will be an appeal in the case between PRS and Buma.58 That appeal will be heard later this year. The court in the Netherlands may decide to refer whatever questions may be appropriate to the Court of Justice under Article 234.59 Sebastien has referred to the CELAS case. I haven’t got time to discuss that. It is not part of the CISAC saga, if that is the right word for it. The procedural possibilities are so complicated and so varied that I think it is useful now to take a step back and to say in more general terms what the Commission objectives are likely to be. • First of all, the Commission is obviously going to try to ensure that the societies comply fully with Community law. • Secondly, you may take it that what the Commission is hoping for is competition between societies in granting multi-territory and multi-repertoire licenses. There are other objectives of the Commission, which, even if the Commission isn’t able to order that they should be brought about, the Commission can, and I expect will be obliged to, say that some solutions are more compatible with competition law than others and that the objective of having multi-territory/ multi-repertoire choice of “one-stop shops” is something which it ought to be possible to preserve. • I have said that the last of the Commission’s objectives is, I’m sure, to preserve as far as possible cultural diversity, because if you have been thinking about what has been said already this afternoon, you will see that one of the arguments in favor of what is said to be cultural diversity is to have absolute monopolies in each country so that each national monopoly society can cross-subsidize the less-popular music. Not all of these objectives may be fully compatible with one another, at least in the view of some of the interests that are involved. Treaty Establishing the European Community, Art. 81, Nov. 10, 1997, 2002 O.J. (C 325) 1, 64–65. See PRS For Music, PRS FAQs in Relation to the European Commission Decision on the Collecting Administration of Rights Across Europe, http://www.prsformusic.com/creators/news/news/Documents/FAQs%20 GENERAL%20FINAL%2016%20JULY%202008.pdf. 58 Performing Rights Society Ltd. v. Vereniging BUMA, No. LJN: BE8765 (Rechtbank Haarlem, Aug. 19, 2008, 148418 / KG ZA 08-410), aff’d, Gerechtshof Amsterdam (Jan. 19, 2010, 200.016.122/01 KG). 59 Treaty Establishing the European Community, Art. 234, Nov. 10, 1997, 2002 O.J. (C 325) 1, 127. 56 57

366  CHAPTER V: COPYRIGHT LAW [Slide] Possible future substantive developments, apart from all the litigation that I have just tried to summarize. There are, I think, on the table, as the phrase goes, at least visible on the horizon, four different possibilities. These are broad possibilities, they are not spelled out here in detail, and they are not necessarily entirely mutually exclusive. • First possibility: Each of the big publishers might give different societies de facto exclusive rights. The big societies might give pan-European licenses of their own repertoires without mandating other societies. That is one possibility contemplated a moment ago by Frances Lowe, although I don’t think she distinguished sufficiently clearly between PRS’s policy and the policy of many, or some at least, of the other members of CISAC, which I understand certainly don’t agree with everything that she has just said. • Secondly, the possibility is that the big publishers might give the right to license their repertoires to all of the societies, or at least all the societies that want that right. That is another possibility which is clearly visualized by some of the big publishers. • If the societies decide to comply, or are obliged to comply, with the CISAC decision, they may, I am told, set up a central agency to allocate licensing for online use. That is a completely new idea of a central European bureaucracy. I’m not sure what chances it has of being adopted, but I thought I ought to include it as one of the possibilities that have been under discussion. • The last possibility is one that is closest to the existing reciprocal agreements: reciprocal agreements mandating each of the societies in question to grant multi-territory licenses of the repertoire of the grantor society, at least for online distribution. These are the four substantive developments. [Slide] My next couple of slides go through the pros and cons of each of these possibilities. [Slide] The first one, each big publisher giving one society the right, obviously would mean that there was no competition between the societies or between the publishers for those repertoires. There would be need for a series of online licenses. [Slide] The other consequences: • If the publishers give online rights to several societies, then the result would be a choice of sources of pan-European licenses. This would encourage the societies to compete. WarnerChappell, as I’m sure you know, has already done this. That presumably is something that may be done in the future. If all the big publishers gave licensing rights to them, then, as far as I can see, the result would be legally satisfactory. • The central agency allocating the licenses to the existing companies, an international monopoly, doesn’t seem to me to be a viable course of action from all points of view. • The last one, as I’ve said, reciprocal multi-territory licenses between the existing societies, is closer to the existing situation, or at least to the situation as it was in the good old days before the Commission’s Recommendation60 threw the situation into chaos. [Slide] The future. The situation will change when the societies comply with the CISAC decision or when the Commission does something to make them do so. It seems to me that there are only two legal possibilities that would fulfil all or most of the Commission’s objectives: what I call the Warner-Chappell solution, granting of rights to many societies; or the reciprocal mandates between the existing societies. I stress, and I’m sure that Cecilio Madero would want to stress if he was still here, the Commission is not in a position to impose solutions on the industry. All they can say is that certain possibilities, certain solutions, are illegal, if that’s what the Commission wants to say, or of doubtful legality in the case of certain others. In the meantime, the Commission will, I’m sure, but I can’t speak for the Commission, try to put as much pressure as it can on everybody to try to create a single effective regime for online distribution. 60

Comm’n Recommendation 2005/737, 2005 O.J. (L 276) 54 (EC).

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  367

It really is not very satisfactory that we should still be having arguments about issues as fundamental as some of those that have been discussed this afternoon. Thank you. MS. TREACY: Thank you very much, John. That was an interesting summary of where we think the future might be able to go legally. Now we have one panelist, as opposed to our many speakers. I wonder if this might be a time at which we could ask Thomas Heide from Berwin Leighton Paisner to perhaps give a couple of observations on the variety of issues that I think has become apparent really do face us in this area, where the complexity of ownership issues, the complexity of the mandates, and the overriding cultural and diversity issues really do make this a pretty difficult area for competition law to deal with effectively, because competition law isn’t really, as John said, in the business of mandating solutions, it’s in the business of stopping illegal conduct, and the two things really don’t go very comfortably together in an industry as complex as this one. Tom, I wonder if you have anything you’d like to give us by way of a gloss on what has been said so far this afternoon. MR. HEIDE: Absolutely. What I plan to do is make several points, and try to actually make them both from the IP perspective and also competition law perspective. I might tell you when I am changing hats, but I might just not. I think, first and foremost, when we start and look issues in this area, we need to recognize that there is value provided by collecting societies. I think that the service they provide is important, there is a lot of value there. We have heard something about the economic benefits of collecting societies. I think that is a good starting point. What we have to ask in terms of moving forward is: At core, does that have to change? I think the answer is definitely no. But do the contours of that service perhaps have to change in terms of what they provide? This is where I have a real issue with the end-of-the-world scenario being painted by various people in terms of the threat being posed to collecting societies. There has been mention of the 2005 recommendation. There is mention, of course, of the CISAC decision. I think when that sort of scenario is being painted—and it is to be expected, given the interests of all, that it will be presented—what it does is actually cloud the issues. We are at a very interesting juncture in terms of the delivery of works. In terms of the Internet, we have heard about possibilities yesterday that were raised by way of commentary but also by some of the panelists.61 We discussed different ways, different business models, and I think that is important to bear in mind. We have heard about the Google book deal. We have also heard about some of the developments being put forth to the market by Nokia. I think those must be kept in mind. I think at core we have to ask ourselves the question of whether or not the collecting society model is the only way to do this. Clearly, I don’t think anyone would seriously argue that that is actually the case. Here I am going to switch to the competition law argument. Even if it was, looking at the CISAC decision, you will appreciate, for those who are not competition lawyers, that any company has the possibility of actually putting forth justifications under 81(3) to argue their case why whatever might be restrictive actually has some justifications and is procompetitive in the end. If you look at Paragraph 230 of the decision, you will find that actually no arguments were put forth by any of the parties who received the SO to defend either the membership restrictions or the exclusivity provisions.62 Now, I find that a bit problematic if we are hearing about all 61 62

See Chapter III, “Corporations & IP”, supra this volume. COMP/C2/38.698, In re CISAC Agreement, [2009] 4 C.M.L.R. 12, [230].

368  CHAPTER V: COPYRIGHT LAW these economic benefits that the current model actually provides. Why are these justifications not being sent to the Commission, as they should be? I should say, in terms of the third leg of anticompetitive conduct that has been objected to, that of coordination, Article 81(3) justifications were presented, but they were dismissed by the Commission. I think that is important to keep in mind. I think in terms of the solutions we have heard— and here I are going to switch to the IP side—I think in terms of using Article 82 to attack the current licensing of rights, I have profound concern there, because essentially what we have heard today and has been proposed in other sectors is something that would amount to essentially taking away copyright or turning it into some sort of remuneration right. Now, that is clearly beyond the pale. It just would not work. I think we need to think about connecting the dots, in terms of the various presentations also made this morning, the impact on innovation, if that were to be the case. Another suggestion has also been made about let’s look at an exhaustion regime for the rights so that we could end up with sort of a pan-European licensing regime that way. Well, we have a couple of hurdles in that regard. First and foremost, we have the Copyright Directive, which clearly differentiates between the distribution right as applied to hard copies and says there you have exhaustion;63 however, with regard to anything on line, it is considered a service and there is no exhaustion. There is lots of ECJ case law on that.64 I see that as a very difficult, if not insurmountable, hurdle to actually get over. Where does this actually lead us? I don’t have such a profound problem with what we are going through currently. I see it as we need to go through an ugly phase in terms of shaking things up a bit so that we can actually go on and have the possibility of new business models arising. I am sure that in the end there will be, and continue to be, a very, very important role to be played by collecting societies because a lot of rights holders will find their services very valuable. That’s it for now, Pat. MS. TREACY: Thank you very much, Tom. Before I ask some of our speakers to come back either on Tom’s comments or on any of the other contributions we’ve had this afternoon, we have a very large and learned audience. Does anyone here have a question, or indeed a comment, a question to any of the speakers, a comment generally? Yes. There is a question there. QUESTION: Hello. Thank you. My name is Tobias Bednarz, University of Edinburgh. I have a couple of questions actually. The first goes to Louise. I just wanted to know how you organized your licensing deals. As I understand it, the service is rolled out in single countries successively. Did you just approach the respective national collecting society, or did you try to use those new platforms for multiterritorial licensing? Second, I would like to ask you what your opinion is on the CISAC decision and whether you think that the impact the decision will have will make life easier for commercial users such as yourself. The second person I would like to ask something of is Frances. She pointed out that collecting societies are right now in the process of reviewing their reciprocal agreements. As I understand Directive 2001/29/EC, prmbl. [28]-[29], 2001 O.J. (L 167) 10. See, e.g., Case C-479/04, Laserdisken ApS v. Kulturministeriet, [2007] 1 C.M.L.R. 6, [23] (“[C]opyright protection under that directive includes the exclusive right to control distribution of the work incorporated in a tangible article” (emphasis added)); see also Directive 2001/29/EC, prmbl. [29], 2001 O.J. (L 167) 10 (“The question of exhaustion does not arise in the case of … on-line services[.] [E]very on-line service is in fact an act which should be subject to authorization where the copyright or related right so provides.”). 63 64

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  369

the decision, there would also be the possibility to have a concerted practice which allows for some kind of price competition, albeit on a very limited scale, for example on the administrative fees. Is that the solution which is also discussed amongst collecting societies at the moment? MS. TREACY: Louise, would you like to answer first? MS. PENTLAND: Yes. Thank you. I’ll see if I can remember it all. In terms of the models, of course they are always different. You rightly point out that we are rolling this out on a country-by-country basis. We have worked directly with the global labels, we have worked with collecting societies, worked with the publishers and distributors. So there isn’t one size that fits all. We recently launched our pan-European initiative as well. It was complicated. I think I mentioned that when I was talking earlier. This was a fairly major exercise to make this happen. There are many parties involved. When it comes to commercializing these initiatives, we do have to bear that in mind based on all of the discussions. European licensing reform needs to be accelerated. We have to enable streamlined access to the full range of rights needed for an effective distribution model. To your second question, we need to make these solutions easy to implement. Nokia is a big company with lots of resources at our disposal. But not everybody is. We have to enable streamlined access to the full range of rights needed for an effective distribution model. European licensing reform needs to be accelerated. As was just said, it’s going to get ugly before it can get good. But it needs to move quite quickly because we are working at Internet speed and time waits for no man, as they say. MS. TREACY: Thank you. Mihály, do you want to say something in response to what Louise has just said before we move to Frances? DR. FICSOR: I used to be the Director General of a small Central European society— Artisjus, the Hungarian society of authors—for ten years. It was still in the last millennium, about 225 years ago I think. But I still remember the position of these small societies. In one of the presentations in this panel, there was a reference to one reason for which small societies do not like the idea presented by the EC Recommendation; namely that they cannot apply deductions for social and cultural purposes anymore in respect of big international repertoires. It may be really that it is one of the reasons. But there is a much more important and much more relevant reason why they can see a danger for them; namely that, if the international repertoire is concentrated in the hands of some big societies, then for them only national repertoire remains. They would like to maintain the same quality of services, the same level of monitoring, collection, and distribution. Then their costs will go up, because the same cost is necessary to monitor, to negotiate, to grant licenses, to collect remuneration, and so on; more or less the same. So the percentage of costs goes up, and they will not be competitive. This is the reason why they are very much in favor of maintaining a level playing field. They can see that it would be anticompetitive if the big repertoires were concentrated only in the hands of some big societies. As a minimum, they would like to get licenses or sub-licenses for managing those repertoires too. There is another reason which is not only in the countries with smaller national repertoires. If there are repertoires which are licensed by the societies of the various Member States for the entire territory of the European Union, in principle there could be twenty-seven different sources. It is also possible that in one country there are more than one society to manage the same rights, so there might be even more sources. Then all the advantages of collective management may disappear. It would be important to maintain, at least partly, the advantage that users can find a source where they can get at least quite broad licenses or a blanket license for the entire world repertoire.

370  CHAPTER V: COPYRIGHT LAW MS. TREACY: Thank you.

Frances.

MS. LOWE: Addressing the very specific question about the paragraph in the CISAC decision on competition in relation to administration fees,65 the reference there is to one of the models that the Commission has looked at, which is the IFPI simulcast agreement,66 where the collecting societies for the labels’ simulcast rights are contracting with each other for multiterritory licensing and compete on an administration fee. We are fully aware of that agreement, but we think the use of it in this context is rather theoretical. To our knowledge, those rights are, if you like, secondary exploitation after the primary rights, which are exercised by the labels themselves. So the reality of the competition it creates is perhaps rather ephemeral. We haven’t seen the report on the IFPI simulcast agreement to show what impact it has actually had on creating a different licensing regime. I think there are other issues in the decision which are worth referencing. There is an important recognition by the decision that it is actually the maintenance of the value of the royalties that is important to societies. Therefore, they reference the reliance on territory-ofdestination pricing there,67 which is incredibly important for societies’ members. I would just emphasize for their members again. I wanted to pick up on Mihály Ficsor’s comments about the cost of services provided by smaller societies. It is absolutely right that we want all societies to provide full monitoring, full processing of all sales reports, and to provide the best service possible to their own members and to the rights owners that they represent. Yet again, this is one of the contradictions of competition. If we are in a competitive environment, you reduce the opportunity for the societies to collaborate in providing the best shared resources that they can and to provide the shared standards that will lead to that being possible for all licensing societies. MS. TREACY: Thank you, Frances. We’ve got conciliation on one front anyway, so that’s good. I wonder if I might ask Professor von Lewinski to make a comment, because your presentation on the German position and the position of the German Parliament suggests that we have slightly lost sight of some of those cultural and diversity issues. Is there anything you would like to say about what we have heard this afternoon? PROF. VON LEWINSKI: Actually, I would have a thought about the European Commission’s idea of enhancing competition according to Option 3. In fact, this idea does not really work because, as experience has shown, the majors who have withdrawn their rights from societies and instead transferred them to others or to affiliates of others have chosen mainly the big collective management societies, although there have been and are certainly smaller societies that do the job at least as efficiently as the bigger ones. Thus, the kind of competition that has taken place is not primarily related to the quality of performance of collective administration by CMOs but rather to size, because there seems to be a natural drive of big enterprises towards the big CMOs. This is certainly not the kind of competition aimed at by the Commission or the kind of competition one should strive for. I also agree with what Mihály Ficsor just said before. The administration costs will get up for the smaller societies, once the rights for the popular repertoire have been withdrawn from them. Then, they cannot be competitive anymore because they are not in the same position as bigger ones. Again, in my view, the Recommendation results in a wrong way of competition. COMP/C2/38.698, In re CISAC Agreement, [2009] 4 C.M.L.R. 12, [83]. Decision 2003/300 relating to a proceeding under Art. 81 of the EC Treaty and Art. 53 of the EEA Agreement, COMP/C2/38.014, IFPI “Simulcasting”, 2003 O.J. (L107) 58. 67 Id. at [99]–[103] 65 66

PART D: Music Distribution, Collecting Societies; DG Comp CISAC Inquiry  371

I may add a remark on the cultural aspect, or repeat what I have said at several previous Fordham conferences, namely, that Article 151(4) of the EC Treaty includes a strict obligation of the Community to take into account cultural aspects in its action, in particular to respect and to promote the diversity of its cultures.68 I am not sure whether the Commission sufficiently took into account the consequences of the 2005 Recommendation for cultural diversity in Europe. This diversity is the richness that we still have in Europe, but we constantly continue to destroy it. Although it is certainly good that Mr. Lüder has announced to establish a working group on collective management, especially with small societies, not excluding others as well as authors and publishers, in order to bring everybody together and maybe to find out about possible further actions, discussion in this framework will only start after the private copy issue has been debated, and this may well be no sooner than by the end of this year. Again, time then will have lapsed and structures will have been destroyed in the meantime. You can easily and rapidly destroy something but not very easily rebuild it; rebuilding, if possible, would take much more time. So, we are currently in a very uncomfortable situation. MS. TREACY: Thank you. I have a couple of special panelists who wanted to speak. I would ask John to comment first. I know that you had some concerns, John, about whether the Commission will be able to achieve all of the goals that we would like copyright to achieve. DR. TEMPLE LANG: I think we all need to be as clear-thinking and as consistent as we possibly can in what we say. If we contemplate that small societies will lose some important part of their business because the big music publishers have taken away their important repertoires and given them only to PRS and a couple of the other major societies in Europe, that is going to produce a loss of revenue for the small societies. It is no good the big societies saying that they are in favor of protecting cultural diversity. What is being done by them with the big publishers is lessening the economic viability of the small societies. Now, I assume, but once again one needs to be extremely clear, that for the foreseeable future the small societies—and, indeed, all the societies in all the countries—will continue to handle offline business in the same way that they have always done, because the economies of scale of doing that are so large that it is inconceivable that, except for very special concerts by U2 or somebody ad hoc, you will have special arrangements for offline live performances. Of course, big interests can look after themselves. But the need to protect cultural diversity is, I think, something that we’ve got to be as clear-minded as we can about, because if we merely mean—and I think we only mean—that small societies and small publishers need cross-subsidies, then we have to accept that they are going to get a smaller cross-subsidy in the future irrespective of which of the four solutions that I put on the screen is ultimately adopted. MR. TREACY: Thank you, John. We’ve got about five minutes left, so, Mihály, if you’ve got something quick, and then we’ll see if the audience has comments. DR. FICSOR: I am the President of the Hungarian Copyright Counsel. This is an advisory body, an expert body and mediation forum also in the case of disputes between collecting societies and users. In this capacity, I represent the position that all kinds of cross-subsidies are good. For example, there is a Hungarian society to manage the rights of audiovisual creators, and until now it has had a license to also manage the rights of producers. This society to a very great extent behaved as a real collecting society. “We are a collecting society; we haven’t spoken about distribution”—that kind of approach—at least in respect of foreign owners of rights, in particular film producers. 68

Treaty Establishing the European Community, Art. 151(4), Nov. 10, 1997, 2002 O.J. (C 325) 1, 99.

372  CHAPTER V: COPYRIGHT LAW There are different possible way of applying cross-subsidy; for example, organizing the monitoring-sampling method in a way that only the programs of those televisions are taken into account—not mainstream televisions, not the televisions which are watched by the majority of people, in the case of which it is guaranteed that the domestic members of a society receive the overwhelming share of the remuneration collected. The foreign owners of rights complained that the said Hungarian society applied this method of “subsidizing” its own members. When then AGICOA raised this issue and, as a consequence, the European Commission launched an infringement procedure against Hungary,69 it turned out how important competition is, because then this society began adopting a more reasonable way of managing the rights of foreign owners. So transparency, national treatment and a correct way of managing rights are important things, an this should be also taken into account in the regulation of collective management in the European Union. MS. TREACY: Thank you. Before we wrap up, is there any other comment from the audience? QUESTION: I’m David Sweeney. I’m here from the European videogame industry, which is a growing user of music. In fact, 20 percent of all games released last year had music in them. I think it is ironic that we are here today talking about all the problems—and there have been some excellent presentations from the panelists—that arise from legitimate use of IP, whereas most of the panels we’ve heard over the past two days have been focused on problems arising from illegitimate use of IP. I just hope that the existing license systems can be reconciled and will work again as soon as possible so that more legitimate IP use can take place. Perhaps, as Frances Lowe said, the hope really is in dialogue. I am wondering if Frances would care to hazard a guess about the timescale in which things could become normal, or semi-normal, again so that users of music, such as the game industry, will be able to get the licenses they require. MS. LOWE: We have heard a lot. Louise is right, we have to act very fast because our interest is in ensuring that the vast and most diverse legal music services and audio-visual services, including music, are able to access the market. Cultural diversity for the consumers is accessing all the music they can as often as they can. It’s not about survival or, in particular, our own models for collective management. It is actually about accessing music. As far as the timescale for the discussions, I said from the podium we are in transition. Things take time. Implementation, the settlement of the recommendation—it all takes time. MS. TREACY: Thanks, Frances. Just before we wrap up, Sebastien, I am conscious of the fact that you raised some pretty interesting issues, particularly about Article 82. Is there anything else you would like to comment on before we finish? Your views on Article 82 were roundly disputed by one or two people. MR. EVARD: I do not mean that it is a clear-cut case that a refusal from a publisher to license its rights to a collecting society does amount to an abuse of dominant position. I think it is debatable. It is a very difficult case. It would be a very difficult case if a collecting society were to ever make that case. But we can always be ambitious. MS. TREACY: That would certainly be ambitious. Thank you very much. Ladies and gentlemen, thank you for your attention this afternoon. Can I ask you to thank the panelists and the speakers?

69 Case C-148/07, Comm’n v. Republic of Hungary, 2007 O.J. (C 95) 34, removed from the register, Case C-148/07, Comm’n v. Republic of Hungary, 2007 O.J. (C 297) 35.

Chapter V

Copyright Law Part E: Creativity and the Internet: Are We Building a Sustainable Ecosystem? Moderator Prof. Justin Hughes

Benjamin N. Cardozo School of Law (New York, N.Y.) Panelists Sandra Aistars

Prof. Dr. Reto Hilty

Assistant General Counsel, Intellectual Property, Time Warner Inc. (New York, N.Y.)

Director, Max Planck Institute for Intellectual Prop., Competition & Tax Law (Munich)

Shira Perlmutter

Prof. Lionel Bently

Executive Vice President, Global Legal Policy, IFPI (London) Andrew Bridges

Winston & Strawn (San Francisco) Tilman Lüder

Head of Unit, Copyright and Knowledgebased Economy, DG Internal Market and Services, European Commission (Brussels) PROF. HUGHES: Good morning, everyone.

Cambridge University

Prof. Jerome Reichman

Duke University School of Law (Durham, N.C.) Maria Pallante

Associate Register for Policy and International Affairs, U.S. Copyright Office (Washington, D.C.)

We are going to take just two minutes for one of our panelists to attend to an urgent matter, coffee. We are running late. I have received an urgent official request from the European Commission to delay this—by how many minutes, Tilman, seven? We will start in just a couple of minutes.

374  CHAPTER V: COPYRIGHT LAW I am not going to introduce our panelists ahead of time. I will just introduce them as they each have their five minutes to talk. My name is Justin Hughes. I have been asked to moderate this morning’s first session. I think this is the first time Hugh Hansen’s conference has had a 7:30 in the morning session. I’d be fine if it was the last time too, so on your evaluations you could say “great session but don’t do it again.” Myself, personally, they don’t let me teach before noontime at my university because they worry about my incoherence. I don’t think I have ever seen a classroom at 7:30 in the morning before, at least not since high school. So this is difficult. Anyway, thanks for everyone coming. Hugh gave us the topic “Creativity and the Internet: Are We Building a Sustainable Ecosystem?” There are certainly different ways to look at that. The broad way I, as the moderator, would like to ask you and ask our panelists to talk about it and think about it is to ask: In terms of the generation of content and information and knowledge, and also the dissemination of content and information and knowledge, do we have the right mix of a legal structure; what are we doing right and what are we doing wrong in terms of the legal structure, the legal infrastructure, that allows maximum creativity and the dissemination and distribution of that creativity? With that as a broad topic, I am just going to turn to our panelists and ask each of them to take five minutes and either address very broadly what they see right and wrong about the legal structure we have applied to the Internet and its impact on creativity, or very narrowly, whether their particular interest is something in the sciences or something related to particular industries, software or music. What are we doing right? What are we doing wrong? What do we need to do to have the right ecosystem, a metaphor that may have been introduced into IP discussions by Jamie Boyle of Duke, for maximum creativity and dissemination of that creativity? With that, I am going to turn it over. Sandra Aistars has the dubious honor of going first this morning, so welcome. She is the Assistant General Counsel for Intellectual Property at Time Warner, a fellow New Yorker. With that, I am turning it over to Sandra. What should we do for creativity? MS. AISTARS: I think content companies are already making great strides to accommodate and facilitate creativity on the Internet—even with historically DRM-protected works like A/V works. At Time Warner we have been working very hard over many years through our divisions and with our partners in other industries to come up with various creative models that allow people not only to receive our copyrighted works wherever, whenever, and however they wish to receive them, but also to facilitate creativity and interaction with our works. For example, with regard to optical disc distribution we went from distributing content via DVDs—which remains a very popular consumer electronics format—to distributing it in high definition using the Blu-ray format, which also allows us to offer interactive features that allow community members to record and post their own commentary about a work and share that commentary with other Blu-ray users in a social networking style. We are also facilitating interactivity and creativity by consumers of our works on the Internet with various new services. For instance, WBlender1 allows users to create mash-ups of some of our TV shows, and iReport2 allows users to contribute to news reporting by CNN. So I think we are taking the right steps to make the content available and experimenting with ways to allow the fan community to take a creative role. 1 2

http://www.thewb.com/wblender. CNN, iReport, http://www.ireport.com.

Part E: Creativity and the Internet  375

I think if we want to present consumers with a satisfying experience, the underlying question is: How much do people really want to interact with our content and comment on it and use it creatively? I know that there is a wealth of discussion on the topic. The point is often made that content owners need to facilitate derivative uses of their works. I think that is certainly an excellent goal, and we are providing more and better tools for people to do that with our content, where it makes sense. But when you look at the way that users interact with entertainment content, especially with audio-visual works, I think it is still very much a consumption-based model, and there is not as great of a demand to interact with or transform a work as some might suggest. I think if you look at how various Internet services have been evolving, you actually see a trend towards services that allow users to interact with each other while consuming a work, but place less of a creative demand on users. Where in the beginning of this trend you may have had people interested in doing mashups on YouTube, or writing their own blogs, now we have moved down to “micro-interactions” like Twittering or commenting on favorite scenes from a movie or a play list. These are all services being offered by third parties by the way—not necessarily services we are specifically promoting. So I wonder whether it is overstating it to say that we need to make major changes in copyright law to facilitate creativity, and by so doing we may actually leave out the larger user community, which seems, at least by anecdotal evidence, to be interested more in consuming the works while interacting with each other than in expending the effort and the energy needed to interact with a work creatively in a very deep way. The last thing I will say before my time expires is that we have also thought very much about what to do when people do take portions of our works for their own creative uses and then redistribute those works to others. Certainly, we are very conscious across our divisions and developing fair use and “noncommercial use” guidelines to ensure we don’t unnecessarily issue takedown requests where a portion of our work is incorporated into a fan homage or commentary, for instance. So facilitating creativity and preserving fair use on the Internet is something that is definitely on our minds, and something that our company has spent a lot of time trying to get right. I think we are doing a good job, but I’ll be interested in hearing comments from others. PROF. HUGHES: I have taken the liberty of asking that irritating voice to be disabled. Her time is up. You will not hear the software this morning. Thank you. Lionel Bently and Andrew Bridges have switched places. Do you care to go in the order of the list I have on the program or do you wish to just run down the line? Why don’t we go to Andrew? Andrew Bridges is a Partner, everyone knows, from Winston & Strawn in San Francisco and a regular at the annual Conference here. Andrew, what’s right and wrong about what we are doing in the ecosystem in terms of a legal structure for creativity and its dissemination? Or talk about coffee, if you want. MR. BRIDGES: Let me start with the title. It is not clear that we are building a sustainable ecosystem. It is not clear to what extent people want there to be a sustainable ecosystem if it is an ecosystem of balanced populations and natural forces. I was a little concerned when I saw the title. I thought that it implied some opposition between creativity and the Internet, as two things that needed to be in balance in this ecosystem. One of my laments about the Conference, frankly—although I am a huge fan of the Conference and of Hugh—is that there have been very, very few creators here or Internet people here. I don’t diminish the role of the entertainment media companies—they are responsible for sponsoring a lot of content—but they are primarily distribution and marketing companies that acquire rights from the actual creators. We haven’t had any primary creators speak at

376  CHAPTER V: COPYRIGHT LAW the Conference, to my knowledge, nor have we had anybody here who is really responsible particularly for developing new Internet technologies and the like. So I fear that they are left out of the discussion. I come from Silicon Valley, which shapes my perspective. One sees enormous creativity there at both the technological level and at the business model level. I think that creativity, both technologically and business model-wise, needs to be respected as part of the great world of creative output that we celebrate and try to find ways to encourage through the incentive system that copyright law and other IP laws provide. I do worry, however, that there is a massive structural imbalance that gives extraordinary power to incumbents to thwart start-ups. In copyright law that imbalance is most apparent with statutory damages.3 I think, as the statutory damages provision has played out, it is deleterious for creativity. We heard a lot yesterday about the extensive harms caused by intellectual property violations, piracy and counterfeiting and the like,4 and we heard several times about studies being commissioned to put a dollar value on those harms, as though those harms can be proved; and, if those harms can be proved, then they have a right to influence the agenda. But if those harms can be proved, the need for statutory damages that allow catastrophic outcomes in lawsuits against start-ups and their investors is reduced. I have defended lawsuits by Perfect 10,5 the soft-core porn magazine, in which if you took at face value what it said, its damages claims were $4.5 billion in each case. Of course those claims were against Google and Microsoft; maybe they can stand them. But start-up companies are regularly getting sued for outrageous damages in a way that absolutely chills innovation in Silicon Valley. And worse yet, these claims are now being brought against investors for massive statutory damages. When these function as penalties that can far exceed any actual damages, I think we have a system that is out of balance and is not conducive to creating an ecosystem. You couple that with expansive secondary liability schemes that allow people to aggregate claims against aggregators, and the situation really is unfortunate. I’ll stop short of my time and maybe use a little more time later. But I think that aspect of the legal regime is absolutely deleterious to the broad creativity both that comes out of Silicon Valley and that in turn helps sustain the creativity of the traditional companies as they learn to take advantage of the new media and the new business models. PROF. HUGHES: Thank you. So statutory damages and impact on innovation in the technological sense as a form of creativity that we have to take account of. Let’s turn to Lionel Bently, Professor at Cambridge University, our host. Lionel, it is now almost five minutes before 8:00. PROF. BENTLY: Yes. It’s time to feed the cat. You seem to have changed the theme of the session from an examination of copyright’s role in maintaining sustainable cultural ecosystems to what you apparently consider a more interesting question about optimal cultural ecosystems. I hope you will forgive me if I just consider the former question. The first thing to note about this title is that it is about sustainable ecosystems, not about sustaining incumbent industries. I think that is an important distinction that we should bear in mind. A cultural eco-system may bear witness to changes in business models, or to the disintegration of particular businesses, without itself being an unsustainable cultural ecosystem. 17 U.S.C. § 504(c). See, e.g., Chapter V.A, “Infringement & Remedies”, supra this volume. 5 Perfect 10, Inc. v. Google, Inc., 416 F. Supp. 2d 828 (C.D. Cal. 2006), rev’d sub nom, Perfect 10, Inc. v. Amazon, Inc., 508 F.3d 1146 (9th Cir. 2007) (finding fair use in Google’s thumbnail images of copyrighted material). 3 4

Part E: Creativity and the Internet  377

So we must be careful not to conflate evidence of declining sales of particular forms of cultural products (say sheet music in the early twentieth century, or sound recordings in the 1920s and 30s), with evidence of a cultural ecosystem which was not sustainable. When we think about the issue in terms of the Internet, there seem to be two (apparently) opposite views as how copyright regulation in the Internet sphere is going to impact on the sustainability of the cultural ecosystem. The first view sees the Internet as a serious threat to certain forms distribution and thus, indirectly, to creativity. This is the view that unauthorized Internet distribution is likely to undermine the capacity of the producers or distributors to obtain returns that they will cease investing in creation and distribution. That is seen particularly in the threat from peer-to-peer file-sharing type activities that we talked about yesterday afternoon.6 The other threat that we see in terms of copyright regulation on the Internet is the threat posed by over-regulation, by copyright having become so expansive in the analogue era, and then in recent years as a response to the WIPO Treaties, that it actually starts to threaten new forms of creativity, new activities peculiar to the Internet environment. Which of these visions of the future is right? Well, probably there is some truth in each of them. Many of the existing business models will need to be rethought given the new forms of distribution of works. Some aspects of copyright may well impede the operation of new technologies, new innovations and new forms of creation. But, probably, while both views have some basis in what is happening and is reasonably foreseeable, the truth is we really don’t know how the future will turn out. We certainly don’t know whether either vision is likely to [dominate] to such an extreme extent that the cultural ecosystem actually becomes unsustainable (rather than sub-optimal). I thought that I would see whether historical experience can offer any insights. Looking at copyright history, is there any evidence that particular emanations of copyright might render, or absence of copyright or unenforceable copyright might render, the cultural eco-system unsustainable? Well, on the side of over-regulation, I think the time when the most prominent arguments took place that copyright would be excessive was in the period of the 1770s, after the decision in Millar v. Taylor7 had recognized perpetual common-law property rights in literary works in England and Wales.8 At that period the arguments were put that perpetual rights would threaten distribution by creating monopolies effectively—all knowledge would be bound up in the hands of the Linton’s and Tonson’s,9 the publishers of the day. So that would be one example of when people have talked about copyright becoming too excessive and threatening the ecosystem. And the response was to pull back – not to continue the experiment with perpetual copyright that Millar v. Taylor had inaugurated. So, in 1774, the House of Lords decided that there was no copyright in published works at common law, so that protection was limited to a maximum period of 28 years.10 6 See, most recently, TNO Info. & Commc’n Tech., IViR & SEO Economisch Onderzoek, Economic and Cultural Effects of File-Sharing on Music, Films and Games (Delft 2009), available at http://www.seo.nl/binaries/ publicaties/rapporten/2009/2009-02a.pdf (reporting something in the region of 2 billion music downloads per year in the Netherlands, with a considerable impact on the music industry’s revenues. The Report highlights differences between the music industry, the film industry and the games industry. It speculates that the film industry has not yet felt the impact of file-sharing, but that it may do, and notes that the games industry is still a significant growth area. It notes that the business model used in relation to games may shield the industry from the impact of file-sharing). 7 4 Burrow 2303, 98 Eng. Rep. 201 (K.B., 1769). 8 See Millar v. Taylor, in Primary Sources on Copyright (1450–1900) (L. Bently & M. Kretschmer, eds.), available at http://www.copyrighthistory.org/cgi-bin/kleioc/0010/exec/ausgabe/%22uk_1769%22 [hereinafter Primary Sources on Copyright]. 9 Donaldson v. Beckett, (1774) 17 Cobb. Parl. Hist. 953, 1000 (per Lord Camden) (“All our learning will be locked up in the hands of the Tonsons and the Lintons of the age, who will set what price on it their avarice chuses [sic] to demand, till the public become as much their slaves, as their own hackney compilers are.”). 10 Donaldson, (1774) 17 Cobb. Parl. Hist. 953; see Primary Sources on Copyright, supra note 8.

378  CHAPTER V: COPYRIGHT LAW The other side of the coin is situations where the absence of copyright has threatened the sustainability of creativity and distribution.11 While the historical record contains a great deal of rhetorical material about the need for further incentives and so forth, on the whole this isn’t about sustainability. This is about improvement or maximizing or incentivising more investment. But there are a few examples where you see really quite radical shifts in the economic returns to creators or distributors, that you might think that absence of copyright might have rendered particular forms of cultural production unsustainable.12 Take, for example, the late 1850s, when were receiving very high amounts of money from engravers for the rights to publish engravings of their paintings. I am talking here about £10,000, £20,000, £30,000.13 With the advent of photography and photographic piracy of engravings, publishers started to refuse to offer artists those massive amounts of money. Artists never got those kinds of sums again.14 The lesson I take from this is that sometimes things change, and business models become unsustainable, and incentives might even be drastically reduced. But, of course, the practice of painting went on. Artists made sufficient money from selling their paintings. The failure of copyright did not render it an unsustainable system. Artists didn’t stop producing paintings, etc. History, of course, cannot tell us precisely what to do in the new environments in which we find ourselves. But it does tell us that it is unlikely that the over- or under-enforceability of copyright will render the cultural ecosystem unsustainable. Whether it will render it suboptimal is quite a different story. PROF. HUGHES: Fair enough that I definitely moved from sustainability to optimal. That is true. We might come back to that and the question about whether we can identify anything that we are worried about that makes the system genuinely unsustainable at this moment either for those who are interested in disseminating and distributing or new technologies or creators. Professor Reto Hilty from the Max Planck Institute, at 8:00 in the morning, what’s wrong with the legal ecosystem for the Internet and creativity? PROF. DR. HILTY: The question is rather what is wrong with the time. You can hear from my voice I am not able to speak in the morning. I have the same problem. I don’t have classes in the morning. I think we all know that things are still flowing enormously. We see new business models every other day. If we think back to what we knew about the Internet fifteen years ago, you certainly remember, at least those of you who are old enough, that we had to explain to the people on the street what the Internet was. Nobody knew that. In the meantime, development was enormous. The question is: What is the reasonable reaction of the legislator if he does not know what will be tomorrow or the day after tomorrow? My answer would be we should wait, we should see what the development is. I have the feeling 11 One brief period in which the absence of copyright might have rendered distribution of international so unattractive that it would not have occurred is in Australia in the period between 1871 and 1875. See Lionel Bently, “Copyright and the Victorian Internet: Telegraphic Property Laws in Colonial Australia”, 34 Loy. L.A. L. Rev. 71–176 (2000). 12 Another good example is the impact of widespread copying of sheet music in the early twentieth century. See Isabella Alexander, “Criminalising Copyright: A Story of Publishers, Pirates and Pieces of Eight”, 66 Cambridge L.J. 625-56 (2007). 13 See Lionel Bently, “Art and the Making of Modern Copyright Law”, in Daniel McClean & Karsten Schubert, Dear Images: Art, Copyright & culture (ICA/Ridinghouse 2002). 14 In recent years there have been arguments that artists should receive returns from the copyright system through droit de suite. In French, this means “the right to follow” and generally allows artists’ heirs to receive compensation when a work of art is resold. The Resale Right Directive mandates a droit de suite across Europe. Council Directive 2001/84/EC, Resale Right Directive, 2001 O.J. (L. 272) 32 (EC), available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=CELEX:32001L0084:EN:NOT.

Part E: Creativity and the Internet  379

that the answer of the legislator usually is that he tries to intervene. He tries to understand what happened yesterday and what happens today and then he intervenes, and he intervenes in a way which is not adept to solve the problems of tomorrow. Probably we should be more patient. We should look at market behavior and we should give a little pressure to the market participants that they adapt their behavior to the situation. The truth is, on the other hand, that the market participants permanently call for more protection. They want the intervention to have benefits within the system of the Internet. I think a wonderful example of that is the term extension for the neighboring rights that we are discussing at the moment in Europe.15 We had a very short presentation yesterday in the morning,16 but we have not been discussing it. It is amazing to see that there are about ten academic surveys which all come to the same result, namely that there is no need, and if there is an extension it would probably be bad for the economy.17 If we are talking of sustainability, we could consider that. A number of these surveys are economic surveys. Other surveys are legal surveys. They try to explain that the system in the United States is so different compared to the system in Europe that we cannot just compare and say we have to have the same number of years, namely ninetyfive years. I think this is a very good example. But if we intervene, I think we should bear in mind that we have different approaches of business models on the Internet. These different approaches should be able to coexist. They use the same technology, but they have a different approach. Basically, we can say there are two approaches: One approach is the open approach, where there are people who want to do something and want to give it for free. Second, we have a property approach: people who want to do something, who want to get legal protection, and want to make their benefits from what they do. I think the task of the legislators is not to decide for one approach or for the other approach. The only thing the legislator should do is to create the environment where both—or maybe more than two—approaches can coexist, can survive. In other words, if the legislator is willing to intervene—and he is permanently intervening; it started in 1996 already with the legal protection of technical protection measure18—if he is willing to intervene, he must be careful to find a certain counterbalance. So he must not only give rights, he must also limit the rights to give sustainability to the system and give a chance to the open approach. We must be aware that the property approach always benefits from the open approach— open is open for everyone—but the open approach cannot benefit from the property approach. So there must be a certain balance. In my mind we are not on the way to a sustainable system precisely because of this willingness to intervene at any time. If there is a call for protection by the lobbyists, the legislator follows. Thank you. 15 Proposal for a European Parliament and Council Directive amending Directive 2006/116/EC of the European Parliament and of the Council on the term of protection of copyright and related rights, available at http://eur-lex. europa.eu/LexUriServ.do?uri=COM:2008:0464:FIN:EN:PDF (proposing to extend the term of protection for performers and phonogram producers from fifty years to ninety-five years). 16 See Chapter I, “IP Policy & The European Union”, supra this volume. 17 See, e.g., Centre for Intellectual Property and Information Law, Review of the Economic Evidence Relating to an Extension of the Term of Copyright in Sound Recordings (2006), available at http://cipil.law.cam.ac.uk/policy_ documents/gowers_cipilreport.pdf; Gowers Review of Intellectual Property (Nov. 2006), available at http://www. hm-treasury.gov.uk/d/pbr06_gowers_report_755.pdf; Instituut voor Informatierecht, The Recasting of Copyright & Related Rights for the Knowledge Economy: Final Report (2006), available at http://www.ivir.nl/publications/other/ iViR_Recast_Final_Report_2006.pdf; Open Rights Group, Proposal to Extend the Term of Copyright Protection on Sound Recordings: Response of the Open Rights Group (2006), available at http://www.openrightsgroup.org/ uploads/080829_ukipo_ectermextension.pdf; see also Centre for Intellectual Property Policy & Management, Independent Studies on Term Extension / List of Academic Signatories (Mar. 10, 2009), http://www.cippm.org.uk/ downloads/Studies_and_Signatories.pdf. 18 Digital Millennium Copyright Act of 1998 (DMCA), Pub. L. No. 105-304, § 103, 112 Stat. 2860, 2863–72 (1998) (codified as amended at 17 U.S.C. § 1201 (1998)).

380  CHAPTER V: COPYRIGHT LAW PROF. HUGHES: Thank you.

I’d love to come back to that again and probably try to get you in the questions and answers to bear down on what you think the legislators are doing that hurts the open approach. I am going to come back to you on one point, though. I will take you to task in that the open approach does benefit from the property approach when it comes to open source software, which uses the property system to try to keep the software open. Next up is Shira Perlmutter. Shira is Executive Vice President of IFPI. Probably no industry, whether it is technology or it is content, has been more affected, its business structure, if not its creativity, by the Internet. Shira, in five minutes tell us what’s right or wrong about the legal infrastructure. MS. PERLMUTTER: Lots of food for thought already. I’d love to respond to a lot of the comments on the panel. And at least there is food for thought, even if there is not breakfast, at this breakfast roundtable. I wanted to start, speaking of rhetoric, by making one really critical point. Contrary to some of the rhetoric at this conference and elsewhere, not all right holders are large multinational corporations. I am not even talking about the individual creators; I am talking about companies that put together, invest in, polish, disseminate, and market works. IFPI’s members are actually about 1,500 companies around the world in developed and developing countries, and many of them are just mom-and-pop operations or single proprietorships. So I don’t think we can draw these sharp distinctions and suggest that everything that is good for right holders is only to the benefit of large corporations. Just a few thoughts in the amount of time I have. I wanted to focus on two things that are necessary for a sustainable ecosystem on the Internet—one is to have an appropriate and effective legal structure; the other is availability of legitimate offerings—and then to talk about the connection between the two. Today we’ve got pretty good copyright frameworks in most countries. That is, not in every aspect in every country, but by and large around the world we have a pretty good copyright system in place with the basic elements that are necessary and can be adjusted. If we are talking about a sustainable system versus an optimal system, not only do I think that what we have is a sustainable system, rather than an optimal system, but I think that is all we can ever have. There is no perfect balance. I know “balance” is one of Lionel’s favorite words in copyright. Everyone will tell you they are for balance. But there is no perfect balance even at any given point in time. And things are always changing, so the law always needs to be adjusted to try to approximate a balance in the given circumstances. So we have to always be recalibrating the law, and that is what we are doing now. The recalibration is tougher when technology and markets change more dramatically, as they have in the last ten or twenty years with the development of the Internet, but it is beginning to happen—for example, on the issue of exceptions, which the panel discussed yesterday afternoon.19 The chief barrier today to a sustainable system is the problem of making copyright protection meaningful. Unless copyrights can actually be effectively enforced on the Internet, the best legal framework in the world will make no difference. So we really need, because the challenges of how to enforce effectively are getting tougher and tougher, creative ideas for how to do it. At the moment, the most promising of those ideas is the idea of ISP cooperation, which we discussed yesterday afternoon.20 I will say one other big challenge is to figure out how to put in place efficient multi-territory licensing structures. That is an issue for collecting societies, which is going to be discussed this 19 20

See Chapter V.C, “Rethinking Exceptions and Limitations”, supra this volume. See Chapter V.A, “Infringement & Remedies”, supra this volume.

Part E: Creativity and the Internet  381

afternoon.21 In terms of the availability of legitimate offerings, this is going to be a key element to any sustainable ecosystem. It is the interrelation between the law and the marketplace. It is certainly true that the music industry has been criticized as being too slow to develop business models for the Internet. That’s a whole other issue we could get into if we had more time. But I think it is undeniable that at the moment the music industry is at the forefront of developing such models. There has been an explosion of different choices for consumers over the last five years. Digital sales now represent about 20 percent of overall sales for the industry,22 which is a figure that has been growing by leaps and bounds. When you look at the types of models that are out there, there are: • à la carte downloads—obviously, iTunes has been the most well known, but it is increasingly finding competition from services like Amazon MP3; • Subscription services of various kinds; • Ad-supported services, streaming services, where consumers can experience music for free if they are willing to be exposed to some advertising; and • The latest concept, which some call “music access services,” where music is bundled with a particular device or service, like the Nokia Comes-with-Music phone, where you pay for the device or service and as part of that payment you get access to all the music you want. So there are a lot of exciting things happening. One of the big questions, since these are all experimental services, is: What will consumers like and what will the market bear? I would like to finish by connecting the two, because none of these services are really going to get off the ground, and the 20 percent that they represent of the market today will not be enough to make up for the decline in physical sales, unless it is possible to effectively enforce rights and to make that copyright framework really mean something. So it is a circle, these things are connected, and we need both pieces of the puzzle to be working well together. PROF. HUGHES: Thank you, Shira. Tilman Lüder is head of the Copyright and Knowledge-based Economy Unit at the European Commission. Tilman, what do you see from your perspective as what needs to be done to make the system either sustainable or optimal? MR. LüDER: Thank you, Justin. I just had the pleasure to sit next to Professor Reichman. In a short crash course he told me what the digital commons was and the microbial research commons is. So that is all sorted out now. We understand this. This brings me to the following conclusions. When you talk about legal structure or the sustainable system versus the optimal system, I think increasingly what we see in submissions, especially in the context of the Green Paper,23 is a so-called bifurcation—this is to show that I also have fancy words in my vocabulary—between the entertainment industries and the science-and-research sector. It is not just the industry there; it is a wider stakeholder group. I think one principal issue is that indeed the European copyright paradigm is based on the fact that we need to protect against free riding,24 whereas in the United States the Copyright and Patent Clause in Section 8 says it is also “to promote the Progress of Science and useful See Chapter V.D, “Music Distribution, Collecting Societies”, supra this volume. IFPI, Digital Music Report (2009), at 6, available at http://www.ifpi.org/content/library/dmr2009.pdf. 23 European Comm’n, Commission Green Paper on Copyright in the Knowledge Economy, COM (2008) 466/3 (July 16, 2008), available at http://ec.europa.eu/internal_market/copyright/docs/copyright-infso/greenpaper_en.pdf [hereinafter Green Paper]. 24 See, e.g., Mark Davison, “Lessons from Europe, Congress, and the WIPO”, 57 Case W. Res. L. Rev. 829 (2007); Stylianos Malliaris, “Protecting Famous Trademarks: Comparative Analysis of US and EU Diverging Approaches”, 9 Chi.-Kent J. Intell. Prop. 45 (2010). 21 22

382  CHAPTER V: COPYRIGHT LAW Arts.”25 We don’t have a comparable clause at the EU level. It is all in the mindset of protecting against others who want to appropriate intellectual creations and it is not so much about the dissemination. So I come to the issue that probably to have an optimal legal infrastructure in reality what you are talking about, Justin, is that you want to have a set of exclusive rights that can be enforced and that can be the basis for a business model. I would call that the exclusive-rights-based business model. I think that is what Shira is referring to when she says on average copyright is pretty good in the world. We have exclusive rights, we have a good legal framework, if we want to do a commercial approach, if we want to sell things on the Internet. Talking about a sustainable ecosystem is actually more the science-and-research sector. They see this whole thing not as making money or having an optimal legal infrastructure to sustain industrial activity. What we see from the Green Paper is that the word “sustainable” is more associated with the science-and-research community, I think.26 For the science-and-research community it is important to have exceptions, it is important to have data manipulation by automatic tools, it is important to have data mining, it is important to share, it is important to build on others—“we stand on the shoulders of giants”27—all of this. That is actually sustainability in the sense that information/knowledge is not locked up in the deep vaults of business models in a sense. So “sustainable” is actually a term that I associate more with the second sector in my bifurcation analysis. I think, coming back also to what Professor Hilty said yesterday about the three-step test,28 the whole notion of the three-step test when applied to the legal infrastructure which is optimal for business (the exclusive rights-based model) is probably quite different than the three-step test applied to the exceptions-based model (the science and the arts progress model, if you like). Normal exploitation, as Professor Hilty explained, is normative and contextual. I think normal exploitation for Shira when she is trying to sustain or optimize a business model is quite different than normal exploitation of an academic journal, academic research literature. So it depends on the context. Probably the three-step test—and I come to the Declaration again29—probably this Declaration, at least when I look at it, is more in the mindset of science publishing, is more in the mindset of the sustainability. It is not so much the three-step test that U.S. Const. Art. I, § 8, cl. 8. See Green Paper, supra note 23, at 3-4 & n.1 (stating that “purpose of the Green Paper is to foster a debate on how knowledge for research, science and education can best be disseminated in the online environment” and comparing the intellectual resources of the “knowledge economy” to scarce natural resources). 27 The phrase was famously used by Sir Isaac Newton in a 1676 letter to Robert Hooke. See On the Shoulders of Giants ix (Stephen Hawking ed., Running Press 2002) (“[I]t is an apt comment on how science, and indeed the whole of civilization, is a series of incremental advances, each building on what went before.”). 28 See Chapter I, “IP Policy & The European Union”, supra this volume. At the 1967 Stockholm Conference, the so-called three-step test of BC Art. 9(2) was introduced in international copyright law as a companion to the formal recognition of the general right of reproduction in Art. 9(1) of the Berne Convention. The three-step test reappeared in TRIPs Art. 13 and WCT Art. 10. The three-step test has subsequently found its way, via WCT Art. 10, into Art. 5(5) of the European Copyright (Information Society) Directive of 2001, and from there into the national laws of some E.U. States. See Council Directive 2001/29/EC, Information Society Directive, O.J. (L 167) 10 (EC), Art. 5.5 (“The exceptions and limitations provided for in paragraphs 1, 2, 3, and 4 shall only be applied in certain special cases which do not conflict with a normal exploitation of the work or other subject-matter and do not unreasonably prejudice the legitimate interests of the rightholder.”). Under TRIPs Art. 13, member States shall confine limitations and exceptions to: (1) “certain special cases,” (2) “which do not conflict with a normal exploitation of the work,” and (3) “do not unreasonably prejudice the legitimate interests of the right holder.” Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs), Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197, available at http://www. wto.org/english/tratop_e/trips_e/t_agm0_e.htm. 29 Declaration: A Balanced Interpretation of the “Three-Step Test” in Copyright Law (2006), available at http:// www.ip-institute.org.uk/pdfs/Jonathan_Griffiths_Declaration.pdf. 25 26

Part E: Creativity and the Internet  383

somebody who is in the entertainment industry would necessarily foster for the selling and the transactional activity that he wants to deploy on the Internet. So this is a Declaration where the normal exploitation is put in the normative context and the normal exploitation in the science area might be quite different from the more business-oriented area. I think we talked yesterday about the interaction between the second limb of the three-step test and the third limb. I think that for the business people the second limb is very important, whereas if you look at normal exploitation in an sustainable knowledge ecosystem you might say the normal exploitation here is no so much the selling; it is more possibly at the end of the day that the creators get remuneration. They would say, “For me it is not normal that I make a lot of money. For me it is just normal that I get remuneration and for me it is normal that I am appropriately cited.” So I think, to conclude, this is the new bifurcation analysis. We will possibly follow up on this in the policy response to the Green Paper. PROF. HUGHES: Thank you. Professor Jerry Reichman from Duke University, it sounds like you are already queuing up your thoughts through Tilman. Tell us what you think is right and wrong about the ecosystem. PROF. REICHMAN: Well, I certainly think that there is a lot right. I have to begin by giving Tilman an A+ on his exam of our meeting yesterday. I have heard a number of speakers talk about defending Europe’s comparative advantage,30 but I think there is some skewed thinking there. We have to defend the comparative advantage, but the comparative advantage comes not only from protecting the outputs of existing creations; we have to think about the inputs which lead to tomorrow’s creations. That means we need a broad and well-functioning upstream research system. We are not going to have that if your copyright regulations to protect records and films end up obstructing access to knowledge assets that are absolutely critical to scientific production. So we have to find ways of unlocking the locks. We have a lot of exceptions and limitations already on the books.31 I think we need more. But even with respect to the ones we have—including such wonderful exceptions of another kind, subject matter exceptions, like idea expression—we cannot allow them to be locked up by TPMs so that we cannot get access to essential upstream inputs. That is true of science and it is true of user-generated creations. So we have to find a way to do that. Article 6(4) of the European Directive32 piously sets out the pious wish that we have to open the locks. Reichman, Samuelson, and Dinwoodie have proposed a reverse notice-andtakedown regime, which would quickly enable us to implement that. But every day that we don’t do something to open those locks we are actually giving comparative advantage to other countries who are just as good at science and technology as we are, if not better, given that the number of foreign patents applications at the American Patent Office last year exceeded the American patents. So we have to really give a lot more attention to the progress of science. 30 See e.g. Mark M. Baker, “No Country Left Behind: The Exporting of U.S. Legal Norms Under the Guise of Economic Integration”, 19 Emory Int’l L. Rev. 1321 (2005); Chana Rungrojtanakul, “Economic Justification for Sui Generis Databases”, 11 Ann. Surv. Int’l & Comp. L. 141 (2005). 31 E.g. 17 U.S.C. § 1201(d) (U.S. exemption for nonprofit libraries, archives, and educational institutions); Council Directive 2001/29/EC, Information Society Directive, O.J. (L167) 10, 14 (EC), Art. 5 (E.U. exceptions and limitations for temporary acts of reproduction, etc.). 32 Council Directive 2001/29/EC, Information Society Directive, O.J. (L 167) 10, 18 (EC), Art. 6.4 (“Member states shall take appropriate measures to ensure that rightholders make available to the beneficiary of an exception or limitation provided for in national law ... the means of benefitting from that exception or limitation, to the extent necessary to benefit from that exception or limitation and where that beneficiary has legal access to the protected work or subject matter concerned.”).

384  CHAPTER V: COPYRIGHT LAW I want to just spend a few minutes thinking about user-generated content, which was part of the Green Paper questions.33 We did think about it. I am not accustomed to thinking as much about user-generated content as about science, but it is an interesting question. I certainly think we need to encourage it. In America we have the fair use doctrine,34 which I hope can accommodate it. But in Europe it is interesting thinking about this user-generated content from the European perspective. You have this very old private use exception,35 which we really don’t have—we have an overlap with fair use. I think thought should be given to adapting this old private use doctrine to accommodate amateur uses in the context of a semi-private contractually constructed ambience in which amateurs share their respective contributions for pleasure, and normally without profit, not in the expectation of profit. In other words, one could see an expanded private use ambience as a kind of general noncommercial use market with social and cultural benefits that promote freedom of expression but that is bounded by contractual restrictions and limitations that defend the interests of professionals. How would we defend the interests of professionals if we allow this sort of private use to flourish? I think it can be reconciled with the three-step test that we talked about yesterday and with the Information Society Directive36 because the private use codification in the Directive already envisions the need for equitable compensation in certain circumstances. I think that this ability of European law to impose equitable compensation for private uses when needed provides a basis for dealing with unexpected commercial opportunities. Most of these user-generated creations are not done in the expectation of profit, but they may turn into profit-making opportunities that were not expected. In that case, I think we need to compensate all sides. We need to have equitable compensation for the creators, and we certainly need to have equitable compensation for the authors whose works have been used in this private regime. We can do this with a set of liability rules, and I think we ought to do it. There is absolutely no reason why either the host or the underlying original artist shouldn’t be compensated when there are royalties. On the other hand, we don’t want the need for compensation to thwart this very roiling and productive amateur activity that is going on. In order to do this we are going to have to solve the derivative work problem. I am told, without having verified it, by some researchers that Australian and British law are a little more forgiving on the derivative works side than American law. But I think, once again, the Green Paper, supra note 23, at 19-20. See 17 U.S.C. § 107. Section 107 does not define “fair use,” but enumerates four broadly worded factors that courts shall consider in determining whether a use is “fair” and thus uninfringing: Notwithstanding the provisions of sections 106 [Exclusive rights in copyrighted works] and 106A [Rights of certain authors to attribution and integrity], the fair use of a copyrighted work, including such use by reproduction in copies or phono records or by any other means specified by that section, for the purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include— (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use on the potential market for or value of the copyrighted work. The fact that a work is published shall not itself bar a finding of fair use if such a finding is made upon consideration of all the above factors. Id. 35 E.g. Council Directive 2001/29/EC, Information Society Directive, O.J. (L 167) 10, 16 (EC), Art. 5.2(b). See generally Natali Helberger & P. Bernt Hugenholtz, “No Place Like Home for Making a Copy: Private Copying in European Copyright Law and Consumer Law”, 22 Berkeley Tech. L.J. 1061 (2007). 36 Council Directive 2001/29/EC, Information Society Directive, O.J. (L 167) 10 (EC). 33 34

Part E: Creativity and the Internet  385

way around the derivative work problem is going to be a liability rule, because there is no use having a right to nothing, and if you have a right to something and you get money for it, it is found money. I will stop there and leave it open to questions. PROF. HUGHES: I certainly have questions for the panelists, but are there questions from the audience? [No response] If not, here is my question. Reto, I am going to start with you. You are appointed for one day global copyright czar. You are allowed to sign one document changing global copyright law in one way. In one minute tell me what the one document is you promulgate. No long professor answer. PROF. DR. HILTY: You could have asked me that question a little bit earlier. I think I would start with legal protection of technical protection measures. I am sure that we need legal protection for technical protection measures, but not in the way as we have it now. This protection that we have is black or white. We have the possibility to close access to something, to a database,37 or we have the possibility to open it. I think if you have a look at the international legislation, there is only a provision with an obligation for the Member States to do something to protect in a reasonable manner.38 Nobody said that we have to protect it via copyright law. We could also protect it via competition law, which means that if one single user breaks a technical protection measure it has no impact on the market, but if this one user produces machines to break and sells these machines, then they obviously have an impact on the market. I think that is one big problem related to the limitations of copyright law. PROF. HUGHES: So TPM and DRM is the area where on your one day of czar you would work. Andrew, your one day as global copyright czar. You have one document you get to sign and promulgate and everyone will follow. Is it statutory damages or something bigger? MR. BRIDGES: Bigger. PROF. HUGHES: I was afraid of that. MR. BRIDGES: I would repudiate all the copyright treaties that fossilize old ideas about copyright regulation that make it so difficult to adapt individual countries’ laws to modern needs. PROF. HUGHES: So you would just undo all binding international multilateral treaties on copyrights. MR. BRIDGES: Because we are told “Oh, we can’t do this because of the Berne Convention,”39 “We can’t do that because of the three-step test,” “We can’t do that because of ——” Let’s do what’s best. Let’s end rule utilitarianism and go to act utilitarianism. Let’s decide that a law is a good law and pass it, instead of saying, “But we just can’t do it because thirty years ago we agreed to a treaty that won’t let us do it, and we can’t change the treaty now.” And what people say is, “We especially can’t change a treaty to diminish enforcement. We can change these treaties to diminish defendants’ powers and rights, but we certainly can’t diminish rights.” That is an imbalance in the system. I think we should just do away with them. PROF. HUGHES: Shira, one day, global IP czar, one document you get to promulgate. See 17 U.S.C. § 1201 (1998). See Council Directive 96/9, Legal Protection of Databases, 1996 O.J. (L 77) 20 (EC). 39 Berne Convention for the Protection of Literary and Artistic Works, July 24, 1971, 1161 U.N.T.S. 31, 36, available at http://www.wipo.int/treaties/en/ip/berne/trtdocs_wo001.html. 37 38

386  CHAPTER V: COPYRIGHT LAW MS. PERLMUTTER: You are asking someone who is a moderate incrementalist who just said the systems are basically okay. So it’s a hard one to answer, other than I guess I would focus on enforcement, and I don’t know how much you can do in one day. PROF. HUGHES: Jerry, you get to sign one decree in your own day. I like this idea of rotating copyright czar. We could have such chaos. PROF. REICHMAN: I would sign the decree, but I would like to comment, if I may, on Andrew for just one moment as a preliminary. I certainly agree with you in spirit. We are kindred spirits. I am really appalled by the rigidity that we see in “the dead hand for control forever no matter what happens.” Laws change because we have changing circumstances. But I do not think you can blame the WIPO Copyright Treaty.40 Shira and I were there, we were negotiating. I think that all sides were heard. The National Academies got its voice heard in there, and there are many provisions in there—Professor Hilty has pointed them out—I could tell you how they got in there, but I won’t. There is a recognition of the need for balance for education and so on. There is a very strong statement about exceptions and limitations, carry-forwards and new ones under the Internet. And the article on TPM itself says it should not interfere with uses permitted by law. So I don’t think you can blame the Treaty. If I were the czar, I would enforce the uses permitted by law, that no one could use TPMs to exclude uses permitted by law under any circumstances. PROF. HUGHES: All right. So on Monday Reto wipes out the TPM provisions, on Tuesday Andrew declares all treaties null and void, on Wednesday Jerry reimposes the WCT, on Thursday Shira clamps down on enforcement, Friday—Sandra, what do you want to do on Friday? MS. AISTARS: I have to say I agree both with Shira and with Professor Reichman. I think the laws in place are adequate to deal with the issues that we face. I think it is really a question of understanding the different perspectives of creators and users of works on the Internet and understanding what the marketplace is already doing to achieve what the laws have set out before we undertake any big new revisions. PROF. HUGHES: Lionel, you get Saturday. PROF. BENTLY: I would introduce an international treaty setting copyright maxima so that we can’t extend copyright any further and we avoid the seemingly ceaseless “arms race”, in particular between Europe and the United States, that we currently seem to be engaged in. PROF. HUGHES: Wow! So Andrew having wiped out the treaties, Lionel reimposes one. Tilman, you actually have a real job making policy, unlike the professors, so on Sunday you just rest, okay. I think we are about done. You should have the last word. MR. LüDER: I have a threefold agenda. • Perpetual copyright for sound recordings. • The abolition of this longstanding animal which is phrased in a way that I never fully understood, “making available to the public at a place and time chosen by them”41—replace that with a general dissemination right online. • Third, introduce fair use in the European code book. PROF. HUGHES: Thanks, everyone, for coming so early in the morning. I think we are done. WIPO Copyright Treaty, Dec. 20, 1996, S. Treaty Doc. No. 105-17, 2186 U.N.T.S. 152. Id. Art. 8 (“[A]uthors of literary and artistic works shall enjoy the exclusive right of authorizing any communication to the public of their works, by wire or wireless means, including the making available to the public of their works in such a way that members of the public may access these works from a place and at a time individually chosen by them.”). 40 41

Chapter VI

Trademark Law Part A: EU Trademark Law Developments Moderator Phillip Johnson

Barrister, 7 New Square (London) Speakers William Robinson

Dr. Dev Gangjee

Freshfields Bruckhaus Deringer (London)

Department of Law, London School of Economics (London)

Hon. Paul Maier

President of the Boards of Appeal, OHIM (Alicante)

Hon. Mr. Justice Arnold

Patents Court, Royal Courts of Justice (London)

Panelists Dr. G.E. Evans

Queen Mary, University of London, Centre for Commercial Law Studies (London)

David Llewelyn

White & Case, Kings College London; External Director IP Academy Singapore

MR. JOHNSON: Good afternoon, everybody. Thank you for coming and thank you for choosing trademarks. Obviously, this is the first time you have a choice, so thank you for coming to the trademarks session. My name is Phillip Johnson. I’m the moderator for today. We have an excellent panel of speakers, beginning with William Robinson; then we have Mr. Justice Arnold, who is speaking thereafter; then Dr. Dev Gangjee; Paul Maier; and then we have two excellent panelists in Gail Evans and David Llewelyn. I’ll give you an introduction and their bios as each of them speaks, rather than doing it at the beginning, so you can ensure you know who is who.

388  CHAPTER VI: TRADEMARK LAW With no further ado, we will start with our first speaker, William Robinson, who spoke earlier today, and so you’ll probably be familiar with him. I’ll only briefly introduce him again. He is a Partner at Freshfields, who of course we also have to thank for sponsoring the reception this evening. He has extensive experience in general commercial, competition, and indeed intellectual property law as well as the experience he discussed this morning being a référendaire at the European Court of Justice.1 With that, we will begin with William. MR. ROBINSON: Thank you. Good afternoon. What I’d like to do is to very quickly give an overview of a few statistics from the ECJ in respect of its trademark activities in the last year, and then look at five—or I’ll treat them as four—cases, which are all ECJ cases rather than CFI cases, which I hope will give a flavor to some of the things that the ECJ has been up to substantively. [Slide] What I am not going to try and do is to try and summarize the 171 cases that the CFI has handed down in respect of appeals from OHIM. It is an enormously diverse set of cases, which, as was discussed this morning, have been dealt with very significantly on their facts. As Paul was saying, the court is treating these essentially as an appeal on the merits rather than a judicial review. So I would prefer, if I may, to look at these cases of perhaps somewhat broader application. [Slide] I mentioned the statistics this morning. It seems to me it is just worth looking very briefly at a snapshot of the statistics both from OHIM through the CFI and then the ECJ to give an idea as to the number of cases the ECJ and CFI are dealing with in the trademark area. As you can see, the ECJ cases, at twenty-five, is essentially the same as it was last year. And again, seven or eight references is about the norm on trademark matters. What is interesting is that the CFI is getting busier; it has had more cases lodged. It is getting more productive, so it has put through more cases. It is also getting quicker; over the last year it has reduced the time for OHIM appeals from twenty-four months to twenty months. And indeed, it could be argued that it is getting less appealable; of seventeen appeals last year to the ECJ, only two were successful. What that disguises, of course, is whether or not it is also becoming more consistent or more helpful. Clearly, the CFI on the statistics is performing the function of a first instance court extremely well and effectively in terms of throughput. The issues, of course, are around the substance, and perhaps Paul will deal with some of those issues later. Rather than going forward through my slides, what I would like to do is just spend a couple of minutes on these four or five cases. [Slide] The first one is O2 v. Hutchinson 3G Ltd.,2 the Bubbles case. The Bubbles case essentially concerns the interrelationship between the Comparative Advertising Directive3 and the Trademark Directive.4 The specific question is whether a trademark proprietor can prevent the use of a similar sign when not giving rise to a likelihood of confusion. So this is not a confusion case, which is a very important premise. It was the premise on which the reference was sent to the ECJ. So one could say that this case is really about the extension of the essential function of the trademark and how far it extends into reputation. See Chapter II.A, “Judiciary & IP Policy: Europe”, supra this volume. Case C-533/06, O2 Holdings Ltd. v. Hutchinson 3G (U.K.) Ltd., [2008] 3 C.M.L.R. 14. 3 Council Directive 97/55, 1997 O.J. (L 290) 18 (EC), codified at Council Directive 2006/114, 2006 O.J. (L 376) 21 (EC), amending Directive 84/450, Concerning Misleading Advertising To Include Comparative Advertising, 1989 O.J. (L 40) 1 (EEC) [hereinafter Comparative Advertising Directive]. 4 Council Directive 89/104, 1989 O.J. (L 40) 1 (EEC), codified at, Council Directive 2008/95, 2008 O.J. (L 299) 25 (EC) [hereinafter Trademark Directive]. 1 2

Part A: EU Trademark Law Developments  389

More specifically, the issue that was addressed to the Court is about the interrelationship between the Comparative Advertising Directive and the Trademark Directive: Should the ECJ follow the Advocate General and find that the Comparative Advertising Directive provides a complete system, so that you do not really need to look at the Trademark Directive; or does Article 5(1) of the Trademark Directive have a role in the interpretation of the relevant provision of the Advertising Directive?5 The Court, departing from the Advocate General, said that the Trademark Directive does apply; it should be read consistently with the relevant provision of the Advertising Directive.6 Whilst that may sound uncontroversial, there were clearly arguments being made and accepted by Advocate-General Mengozzi that that should not be the case. So the good news for trademark owners is that Article 5(1) is essentially fully read into the Comparative Advertising Directive. The second issue is: When looking at the Trademark Directive and Article 5(1), to what extent can the likelihood of confusion test apply outside simple issues of origin? The ECJ in this case essentially answered the question on the basis of the wording of Article 5(1) and the premise on which the question was given. That is to say that, on the basis of the Ansul conditions,7 there must be a need for the essential function of the trademark to be affected, and that must be by reason of a likelihood of confusion. No confusion arises in this case in respect to the comparative advertising; therefore, there is no breach; therefore, the trademark owner could not prevent on that limited head of the Comparative Advertising Directive the use of a sign similar to O2’s bubbles in the advertisement by 3G.8 What this means is that essentially there is going to have to be a pretty blatant breach in terms of likelihood of confusion for comparative advertising and the use of trademarks or signs similar to a trademark to be a breach of Article 5(1). So the good news for trademark owners was that Article 5(1) of the Directive is imported into the Comparative Advertising Directive. The bad news is that you need confusion, and in order to demonstrate confusion in a comparative advertising context, almost by definition, it is going to be an extremely high hurdle. Let me look secondly at the Adidas case.9 Adidas, who have been almost now serial litigants before the European Court, were again raising the issue of three stripes against two stripes on sports clothing. It was accepted that the three stripes both were a registered mark, had acquired distinctiveness, and were a mark with reputation. The argument being raised by Marca Mode and a series of retailers was that the requirement of availability, a principle inherent in the approach to Article 3 of the Trademark Directive concerning registration, should be an aid to interpretation of Article 5 and Article 6. The ECJ, put simply, said that the requirement of availability has no role in respect of Article 5 and Article 6;10 the principle of availability should be examined either under Article 3 or under Article 12.11 Article 5(1) requires the average consumer to be mistaken as to the origin,12 and Article 5(2) does not require confusion but unfair advantage, and that requires a link but no confusion.13 5 Id. Art. 5(1). Compare id. (Article 5(1) of the Directive provides that the owner of a registered mark is entitled to prevent the unauthorized use in commerce of an identical mark, or of a similar mark that is likely to cause consumer confusion.) with Council Directive 97/55, Art. 3(a), Comparative Advertising Directive, 1997 O.J. (L 290) 18 (EC). Article 3(a) lays out an exhaustive list of conditions in which the unauthorized use of a trademark is permitted in comparative advertising. However, under article 3(a)(1)(d), unauthorized use of a trademark in comparative advertising is prohibited if the use is likely to cause consumer confusion between the advertiser and competitor, their marks, goods, or services. 6 O2 Holdings Ltd., [2008] 3 C.M.L.R. 14, at [51]. 7 Case C-40/01, Ansul BV v. Ajax Brandbeveiliging BV, [2005] 2 C.M.L.R. 36, [35]–[37]. 8 O2 Holdings Ltd., [2008] 3 C.M.L.R. 14, at [63]. 9 Case C-102/07, Adidas AG v. Marca Mode CV, 2008 E.C.R. I-2439. 10 Id. at [40]–[43], [47]; see also Trademark Directive, supra note 4, Arts. 5–6. 11 Trademark Directive, supra note 4, Arts. 5–6. 12 Id. Art. 5(1). 13 Id. Art. 5(2).

390  CHAPTER VI: TRADEMARK LAW Similarly, looking at Article 6, which concerns descriptive characteristics of a product, the ECJ again went back to the reference and said that in this case it was clear that the stripes were being used for decorative purposes, and therefore were not giving an indication of the characteristics of the product, and therefore Article 6 does not apply.14 In essence, this indicates that the Court is quashing the embellishment defense, or at least it is very seriously thwarted, and it provides a particularly attractive ground for trademark owners in order to protect their rights. The third case, or set of cases, I would like to very quickly look at is Verein Radetzky & Orden v. BKFR15 and Silberquelle.16 I will take them together. I am going to adopt the approach from this morning, to make you all judges at the European Court and see what approach you would take to these two cases. The first went to the Grand Chamber of the European Court, which is thirteen judges. Only about 10 percent of cases get to the Grand Chamber of the Court. So the ECJ clearly thought that this was a difficult issue. It concerns genuine use, what amounts to genuine use of a trademark. The Radetzky case concerned the use by a charity of various marks in relation to military traditions. This nonprofit organization would put on remembrance services, would raise money for the needy, would provide badges that its members could wear when they were out at events, and they used these emblems on letterheads. The question is whether or not that use of marks constituted genuine use for trademark purposes.17 The key issue, of course, is whether or not the not-for-profit organization status makes any difference. Those who believe that the not-for-profit status would not make any difference? [Show of hands] Yes, correct. The ECJ found that. It doesn’t seem to me to be a Grand Chamber case. I’m not quite sure why it went to the Grand Chamber. But the ECJ found not-for-profit doesn’t make a difference. It went back to the Ansul conditions, which essentially was a case dealing with internal use against external use.18 One of the tests was whether or not there was a commercial raison d’être for using the mark in terms of creating or preserving an outlet for goods or services.19 The ECJ said here you clearly have that; the character of the organization does not matter.20 Let me contrast that with a case decided two months later, Silberquelle,21 but let me bastardize the facts and ask you the question about which way you think this case should go. Coca-Cola, as a marketing ploy whenever it sells a can of Coke, has decided to give away a T-shirt with a Coca-Cola trademark on it. Let’s just imagine for the moment that it didn’t really have a big business in that area. So the situation is you go and buy your can of Coke and you are given a free T-shirt. The question that the ECJ had to grapple with is: Is the use of the trademark on that T-shirt genuine use for the Trademark Directive? Hands up for yes. [Show of hands] Three, not many. So good consensus there that it is not genuine use. Adidas AG, 2008 E.C.R. I-2439, at [49]. Case C-442/07, Verein Radetzky-Orden v. Bundesvereinigung Kameradschaft “Feldmarschall Radetzky”, [2009] E.T.M.R. 14. 16 Case C-495/07, Silberquelle GmbH v. Maselli-Strickmode GmbH, 2009 E.C.R. I-137. 17 Verein Radetzky-Orden, [2009] E.T.M.R. 14, at [12]. 18 Case C-40/01, Ansul BV v. Ajax Brandbeveiliging BV, [2005] 2 C.M.L.R. 36. 19 Verein Radetzky-Orden, [2009] E.T.M.R. 14, at [14] (citing Case C-40/01, Ansul BV, [2005] 2 C.M.L.R. 36, [37]). 20 Verein Radetzky-Orden, [2009] E.T.M.R. 14, at [19]–[20], [24]. 21 Case C-495/07, Silberquelle GmbH v. Maselli-Strickmode GmbH, 2009 E.C.R. I-137. 14 15

Part A: EU Trademark Law Developments  391

The ECJ, indeed, found that that would not be genuine use.22 The facts were slightly different. In fact, it was reversed. All I have done is simply reverse the facts. The facts in the Silverquelle case were that Maselli was putting clothes on the market with its trademark and then was giving away free drinks with its trademark on the same thing. The question was whether or not that is a genuine use. I have a slight concern with this case as to whether or not, considering how a company decides to advertise and use free gifts, that is in fact the right approach here. The Advocate General was very, very clear and absolutely forthright. But I must say I have a slight concern that when you are looking at the commercial raison d’être for using a trademark, as it was set out in Ansul,23 and whether that creates or preserves an outlet for goods or services, whether that should be read, as the ECJ has said, to include the test that it is in the relevant market.24 That is to say, that you cannot be giving away products as part of your overall commercial strategy, but rather you actually have to enter the market for soft drinks in order to be able to have genuine use of a trademark in that area. The last case, which was referred to this morning, was Intel Corp., Inc. v. CPM United Kingdom Ltd.25 It concerns dilution. All I am going to say about this case is that it is incredibly difficult to fully get your hands around it, and I am not sure I have at all done that. But one thing I thought was interesting about the case was that the ECJ said that you require a full factual analysis taking into account all the factors in respect of whether a link is established between the two marks.26 In doing so, it has given the national courts very significant discretion. There was discussion this morning about how much it should decide on the facts, how much discretion. This is a case to my mind where it has given quite a lot of discretion to the national court. Thank you very much. MR. JOHNSON: That was a very interesting presentation. Looking at what you were saying about O2 and the requirement of confusion,27 is it going to be the case that only failed comparative adverts amount to trademark infringement—because only those will lead to confusion—if you successfully advertise of products comparatively, then nobody is going to be confused. Is that essentially what you think the Court said? MR. ROBINSON: That is essentially, I think, where the Court is coming out. What is important is that the Court was just looking at one of the seven or eight conditions for comparative advertising, of which five others have a trademark basis. And so it was a very narrow point that the Court was dealing with. I don’t think it deprives trademark owners in respect of other tests set out by the Comparative Advertising Directive,28 nor does it take away potential copyright arguments. MR. JOHNSON: As in all things, many think that using copyright gives you far better protection. MR. JUSTICE ARNOLD: Can I chip in on that? Since I was counsel for O2 in that case, I am fairly familiar with it. It is very important to bear in mind that it was an Article 5(1)(b) case.29 Silberquelle GmbH, 2009 E.C.R. I-137, at [20]–[22]. Case C-40/01, Ansul BV v. Ajax Brandbeveiliging BV, [2005] 2 C.M.L.R. 36, [37]. 24 Silberquelle GmbH, 2009 E.C.R. I-137, at [19]–[21]. 25 C-252/07, Intel Corp Inc. v. CPM United Kingdom Ltd., 2008 E.C.R. I-8823. 26 Id. at [41]–[42]. 27 Case C-533/06, O2 Holdings Ltd. v. Hutchinson 3G UK Ltd., [2008] 3 C.M.L.R. 14. 28 Comparative Advertising Directive, supra note 3. 29 Trademark Directive, supra note 4, Art. 5(1)(b). The proprietor of a registered trademark is entitled to prevent others from using without consent, in the course of trade, “any sign where, because of its identity with, or similarity to, the trade mark and the identity or similarity of the goods or services covered by the trade mark and the sign, there exists a likelihood of confusion on the part of the public, which includes the likelihood of association between the sign and the trade mark.” Id. (emphasis added). 22 23

392  CHAPTER VI: TRADEMARK LAW There was no allegation, and there could not have been an allegation, of 5(1)(a) infringement,30 because it was accepted, as it had to be accepted, that the sign and the mark were different, and therefore you cannot read across the reasoning from Article 5(1)(b) necessarily into 5(1) (a) cases. MR. JOHNSON: A very important point. Shall we move on to your presentation? Mr. Justice Arnold is, of course, a High Court judge in England and Wales, having been appointed last year. Prior to that he was a leading intellectual property Q.C. and appeared in a number of leading trademark cases, including O2. He is also quite a prolific author, having recently published the fourth edition of his book on performers’ rights and being the editor of Halsbury’s Laws on Trade Marks, as well as a number of other articles that you have probably seen in journals such as the IPR. He is talking to us today about bad faith, in particular, his decision in the Cipriani case,31 as well as the more recent Advocate General’s opinion in Lindt.32 MR. JUSTICE ARNOLD: Thank you, Phillip. I don’t have slides, but there is a handout in your papers. We are concerned with Article 51(1)(b) of the Community Trade Mark Registration Regulation,33 which provides that a Community trademark shall be declared invalid where the applicant was acting in bad faith when he filed the application for the trademark. This is a tale of two cases, the first being, as Phillip mentioned, my own decision in Hotel Cipriani Srl v. Cipriani (Grosvenor Street) Ltd.34 Guiseppe Cipriani was a creative man. He founded Harry’s Bar in Venice and subsequently he invented the Bellini cocktail and beef carpaccio. He was also one of the co-founders of Hotel Cipriani in Venice, but subsequently he parted company with the hotel, which is now owned by a multinational conglomerate. His son Arrigo and his grandson Giuseppi Cipriani continue to have interests both in running restaurants and in food in various countries in the world. They still run Harry’s Bar, for example, in Venice. The casus belli in this case was that they set up a restaurant in London that was officially supposed to be known as “Cipriani London,” but was generally referred to simply as “Cipriani.” Eventually, after a staggering delay, Hotel Cipriani sued for infringement of their Community trademark registration for Cipriani. I upheld their claim. There were two principal defenses. One was an own name defense. The other was to attack the validity of the registration on grounds of bad faith. Now, the basis for the bad faith allegation was essentially that when Hotel Cipriani had applied to register the CTM they had known that there were other providers of restaurant services in Europe using the name “Cipriani.” The two principal examples relied upon, which also have historical connections with the Cipriani family but are also likewise independent of the Cipriani family these days, are, firstly, a hotel in Asolo, Italy, north of Venice, called the Hotel Villa Cipriani; and secondly, an inn on Torcello in the Venetian lagoon called Locanda 30 Id. Art. 5(1)(a). The proprietor of a registered trademark is entitled to prevent others from using without consent, in the course of trade, “any sign which is identical with the trade mark in relation to goods or services which are identical with those for which the trade mark is registered. Id. (emphasis added). 31 Hotel Cipriani Srl v. Cipriani (Grosvenor Street) Ltd., [2008] EWCA 3032 (Ch). 32 Opinion of Advocate General Sharpston, Case C-529/07, Chocoladefabriken Lindt & Sprüngli AG v. Franz Hauswirth GmbH, 2009 E.C.R. I-4893, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX :62007C0529:EN:HTML, Judgment of the Court, Case C-529/07, Chocoladefabriken Lindt & Sprüngli AG v. Franz Hauswirth GmbH, 2009 E.C.R. I-4893, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX :62007J0529:EN:HTML. 33 Council Regulation 40/94, Art. 51(b)(1), of 20 December 1993 on the Community Trade Mark, 1994 O.J. (L 11) 1 (EC), codified at Council Regulation 207/2009, Art. 52(b)(1), of 26 February 2009 on the Community Trade Mark, 2009 O.J. (L 78) 1 (EC) [hereinafter Community Trade Mark Registration Regulation]. 34 Hotel Cipriani Srl, [2008] EWHC (Ch) 3032.

Part A: EU Trademark Law Developments  393

Cipriani. It was said that by filing the CTM, knowing of the existence of these other businesses, Hotel Cipriani had acted in bad faith. Well, I said, “No.” The reasoning is summarized in your handout. But to begin with, what I did was just to look at the existing English jurisprudence, with which no doubt you are all familiar, Gromax Plasticulture Ltd. v. Don & Low Nonwovens Ltd,35 AJIT WEEKLY Trade Mark,36 HOTPICKS Trade Mark,37 then went through the OHIM Board of Appeal decisions, and concluded that they really did not differ much in terms of the principles being applied. I then tried to look a little at the bad-faith allegation in the Community Trademark Regulation from First Principles and reasoned as follows: Firstly, the starting point is a presumption of good faith, obviously. Secondly, subject to two limitations, the CTM system operates on a first-to-file principle. The first limitation is the entitlement of third parties to oppose or invalidate on relative grounds, and those include Article 8(4) of the CTMR,38 but that is only if you are the proprietor of the earlier right and only if the earlier right is established. That means that if you cannot invoke Article 8(4) because your right only exists within a particular locality, your only remedy is to rely upon the defense under Article 107.39 That gives rise to what is sometimes called the “Emmental cheese” characteristic of the CTM; namely, it is supposed to be unitary but actually it has holes in it. The second limitation is Article 51(1)(b), bad faith.40 Now, in my view that is a narrow exception to prevent abuse of the CTM system either vis-à-vis OHIM or vis-à-vis third parties. It may apply vis-à-vis a third party where the third party cannot maintain any relative ground of objection, but I suggest it has no application to bona fide conflicts between trademark rights or perceived trademark rights of different traders. It is important to bear in mind that a CTM is not an absolute monopoly. It is qualified in various ways. Those ways include the limits built into Article 9(1) itself, Article 12, Article 13, Article 53 (acquiescence), the defence under Article 107(3) that I have already mentioned.41 These qualifications and limitations on the right are relevant to the assessment of bad faith. It follows, I suggest, that it does not constitute bad faith for a party to register a CTM merely because he knows that third parties are using the same mark in relation to identical goods or services, let alone similar marks and/or similar goods or services. For example, the applicant may believe he has a superior right or may not intend to enforce against third parties or may know they would have a defense, or he may wish to proceed on the basis provided for by Article 107. Therefore, the conclusion in that case was that Hotel Cipriani had not acted in bad faith because they used the CTM themselves for many years, had acquired a substantial and valuable reputation in it, and had a legitimate interest in protecting it by registration, albeit that there might be other traders out there with an Article 107 defense. Let’s contrast that with the second case, which is the Chocoladefabriken Lindt & Sprüngli AG v. Franz Hauswirth GmbH case42 currently proceeding before the ECJ. The facts here are quite important. Lindt, as you all know, has marketed chocolate Easter bunnies in gold foil since the 1950s. The exact presentation has varied over the years. In Gromax Plasticulture Ltd. v. Don & Low Nonwovens Ltd., [1999] R.P.C. 376. Ajit Weekly Trade Mark, [2006] R.P.C. 25. 37 Hotpicks Trade Mark, [2004] EWHC (Ch) 689, [2004] R.P.C. 42. 38 Community Trade Mark Registration Regulation, supra note 33, Art. 8(4). 39 Id. Art. 107. 40 Id. Art. 51(b)(1). 41 Id. Arts. 9(1), 12, 13, 53, 107(3). 42 Judgment of the Court, Case C-529/07, Chocoladefabriken Lindt & Sprüngli AG v. Franz Hauswirth GmbH, 2009 E.C.R. I-4893, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62007J0529:EN:HTML. 35 36

394  CHAPTER VI: TRADEMARK LAW Austria they were first marketed in 1994, and that date is important. Subsequently, Lindt got the gold foil presentation with a ribbon and a bell and “Lindt Goldhause” printed on the side registered as a 3D CTM. The defendant, Hauswirth, had marketed chocolate bunnies wrapped in gold foil since 1962, so it was thirty years before Lindt in Austria, and they had a similar gold-foil-wrapped presentation with a ribbon but not a bell. Now, their bunnies did not have the name on the side. It was on the label underneath only. For that reason, the Austrian referring court took the view that there was a likelihood of confusion. Now, the mystery in the case is why on that basis they didn’t say, “Well, there is a relative rights objection, because Hauswirth were first in Austria. If there was a likelihood of confusion, it must follow the CTM faus. But no. Instead there was a reference on the basis of an objection on bad faith. Now, there were also a number of other models of gold-foil-wrapped bunnies that had been marketed in Austria and Germany since the 1930s. So these two players were not alone. It was found that Lindt were aware of at least some of these other traders when they applied. It was also found that they had intended to create a basis for taking legal proceedings against some of these existing producers, such as Hauswirth, which indeed they subsequently did. So the issue raised was not relative grounds. The issue raised was bad faith. A reference was made to the Court of Justice. We have Advocate-General Sharpston’s opinion of 12 March.43 I have summarized her reasoning in the handout. I can’t, in view of the time constraints, give you all the details, but let me highlight a few points: • She held that an application to register a CTM in the knowledge of a conflicting earlier right would be likely to be in bad faith. I say: Well, why do you need bad faith in those circumstances? Either these are a conflicting earlier right or there isn’t. • She held that registration of a CTM with no intent to use but in order to prevent third parties from using would almost certainly be bad faith. Well, how do we square that with the line of OHIM case law that says that intention to use is not a requirement of the CTM system? It is nowhere referred to in the opinion, so we don’t know. • She talked about the mental ingredient in terms that any English reader would find quite acceptable. It is consistent with Gromax44 and AJIT WEEKLY45 in this country. She said you’ve got to take into account all the available evidence of the relevant circumstances. Well, that’s motherhood and apple pie. • Coming more specifically to the facts, she said that knowledge of use of similar marks by competitors was not enough to establish bad faith, but could be a relevant factor. • She thought it was particularly relevant that the CTM consisted of the entire shape and presentation of the product. I am inclined to agree with that. • She observed that it was pertinent to consider the degree of freedom of choice that proprietors in the field had. She therefore thought that an intention to prevent competitors from using similar marks, which they had already used, had to be assessed in the light of the surrounding circumstances; it could not be taken as an automatic indication of bad faith or otherwise. • She also thought it was relevant to take into account the protection of the presentations in question already available under national law. In Austria, that would of course be under unfair competition law. In our system, it would be passing off. 43 Opinion of Advocate General Sharpston, Case C-529/07, Chocoladefabriken Lindt & Sprüngli AG v. Franz Hauswirth GmbH, 2009 E.C.R. I-4893, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ. do?uri=CELEX:62007C0529: EN:HTML 44 Gromax Plasticulture Ltd. v. Don & Low Nonwovens Ltd., [1999] R.P.C. 376. 45 Ajit Weekly Trade Mark, [2006] R.P.C. 25.

Part A: EU Trademark Law Developments  395

What you do not see is any systematic examination of the structure of the CTM Regulation or the place of Article 51 in that Regulation.46 Nor do you find any reference to Article 107,47 which I think is quite striking. MR. JOHNSON: It seems quite clear that, whatever the outcome of the ECJ’s decision in the Lindt case,48 there is likely to be a Community meaning for bad faith. Obviously from what you are saying, you think the Court should follow the English approach. But do you think the likelihood is that, following the line of many other countries—the English have always looked at bad faith as a much serious allegation than other countries—that the threshold will be lowered in this country rather than retained at its high level? MR. JUSTICE ARNOLD: If you look at the OHIM decisions, I don’t think you see any detectable difference in terms of the threshold applied. In OHIM bad faith is treated as a serious allegation and it must be well proved, just as in England. So I don’t think you see a detectable difference there. But going back to the question of what is the likely outcome of the judgment of the ECJ, on the strength of the Advocate General’s opinion I think what we are going to get is a lot of bland generalities and little systematic examination of what bad faith means in the specific context of the Community Trademark Regulation. I fear, therefore, that it is going to be an opportunity missed. MR. JOHNSON: Thank you. In the particular case of Lindt, one of the things that you raised, which seems to be the most unusual thing about the Advocate General’s opinion, is the idea that simply being aware of earlier rights could in itself be bad faith.49 If that is the case, is it going to lead to an approach of avoiding looking for what is out there, being Nelsonian about it for the English people out there, or just closing your eyes to what might be there? Obviously, there is the objective element, so there is the requirement to be slightly reasonable. But is it suggesting not calling upon the services of the trademark searchers and so forth? MR. JUSTICE ARNOLD: I suppose you could read that into it. But as you say, there is an objective element too. More importantly, what I would think is worrying about it is that it must lead, if it is followed by the Court, to an increase in the tendency of parties attacking trademarks to rely upon bad faith as a catch-all allegation rather than properly particularizing and proving earlier rights objections. MR. JOHNSON: With that, I think we should move on to our third speaker. Dr. Dev Gangjee is a Lecturer at the London School of Economics who has particular interest in all areas of trademarks—geographical indications, domain names, and unfair competition. He is going to be talking to us about non-conventional trademarks. Community Trade Mark Registration Regulation, supra note 33, Art. 51. Id. Art. 107. 48 Judgment of the Court, Case C-529/07, Chocoladefabriken Lindt & Sprüngli AG v. Franz Hauswirth GmbH, 2009 E.C.R. I-4893, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62007J0529: EN:HTML. The Lindt court ultimately held that: [I]n order to determine whether the applicant is acting in bad faith within the meaning of Article 51(1)(b) of Regulation No 40/94, the national court must take into consideration all the relevant factors specific to the particular case which pertained at the time of filing the application for registration of the sign as a Community trade mark, in particular: the fact that the applicant knows or must know that a third party is using, in at least one Member State, an identical or similar sign for an identical or similar product capable of being confused with the sign for which registration is sought; the applicant’s intention to prevent that third party from continuing to use such a sign; and the degree of legal protection enjoyed by the third party’s sign and by the sign for which registration is sought. Id. at [53]. 49 Opinion of Advocate General Sharpston, Case C-529/07, Chocoladefabriken Lindt & Sprüngli AG v. Franz Hauswirth GmbH, 2009 E.C.R. I-4893, at [76], available at http://eur-lex.europa.eu/LexUriServ/LexUriServ. do?uri=CELEX:62007C0529: EN:HTML 46 47

396  CHAPTER VI: TRADEMARK LAW

Non-Conventional Trademarks: The Shape of Things to Come Dr. Dev Gangjee DR. GANGJEE: Thank You. Given the time constraints, I’d like to begin with a preface. There is a lot of detail on the slides. You can savor it later. You probably will savor it later because by being here you are admitting to an unhealthy interest in trademarks. However for this presentation on NonConventional Trademarks I am going to ask you to concentrate on the titles of the slides and the images of the subject matter in question, because they convey the puzzles I’m interested in more effectively than the text does. [Slide] My interest in non-conventional marks arises out of the insight that most modern intellectual property systems claim to be universal, in that they are agnostic as regards subject matter. Registration based IP regimes tend to be abstract and forward-looking, as they set out general criteria for registration. From a historical perspective, this can be viewed thematically as a movement away from special interest legislation for, say, Calico Printers or Sheffield Cutlers to today’s forward looking, “universal” systems. However this principled architecture is then subjected to stresses since in practice, universal rules are tweaked when applied to particular categories of subject matter.50 These universal rules also tend to be built around historically specific exemplars. Given its formal origins in the mid-19th century,51 a paradigmatic subject matter concept exists at the heart of trademark law—the conventional visual sign, usually words and pictures. As we depart from this model, with applications before registries for shapes, scents, tastes, textures, abstract colors, position and motion marks, I am curious about how standardized rules based on specific subject matter adapt to these new kinds of signs. Based on preliminary research, what I have observed is that the methodology of exceptional treatment involves two kinds of shifts. The difficult decision of determining whether nonconventional subject matter is appropriate is often relocated to the realm of a finding of fact, so it turns on the facts of each individual case. The second trend I have noticed is there seems to be a shift to procedure below the level of substantive law radar. Normative issues raised by whether a scent should become a trademark are resolved into pragmatic concerns about whether this kind of sign can be successfully flattened onto a registration specification, with its own informational requirements.52 These moves seek to skirt a question, which has long been avoided in European trademark law: Should any sign or subject matter potentially be registrable as a trademark? Are there any outer limits to viable subject matter? 50 Mark Lemley & Dan Burk, “Policy Levers in Patent Law”, 89 Va. L. Rev. 1575 (2003) (a detailed exploration of the subject matter specific modification of general rules in the patent law context). 51 See Lionel Bently, “The Making of Modern Trademark Law: The Construction of the Legal Concept of a Trademark”, in Lionel Bently, Jennifer Davis & Jane Ginsburg, Trademarks and Brands: An Interdisciplinary Critique (Cambridge University Press 2008). 52 In the EU, this is exemplified by the landmark decision of Case C-237/00, Ralf Sieckmann v. Deutsches Patentund Markenamt, [2003] E.T.M.R. 37.

Part A: EU Trademark Law Developments  397

[Slide] I would like to begin by looking at perhaps the most conventional of the nonconventional trademarks, three-dimensional marks covering shapes and trade dress. These constitute the leading category, having the largest number of pending applications as well as registrations in the EU.53 In recent years a considerable body of case law has developed in this area. Such marks are therefore an analytically useful sub-category through which to explore the tensions generated by claims of universal, principled treatment for all types of signs. On the one hand, when it comes to distinctiveness,54 the core criterion for successful trademark registration, a standardized legal test is also applied to 3D marks. However EU law simultaneously acknowledges that 3D marks in particular raise unique concerns and provides for policy based (“functionality”) objections for this sub-category alone. There are the two interesting trends which I wish to trace under both the “business as usual” and “special treatment” limbs. One is a trickle of decisions which affirm inherent distinctiveness for shapes. So you look at a shape or a 3D sign “cold” and it is sufficiently arbitrary or fanciful enough to immediately convey the message that it is doing the work of a trademark, which is to indicate origin. The second line of decisions concerns recent developments under the policy objections to registration. Here I consider the underpinnings for the specific policy exclusions concerning 3D signs. While certain 3D signs can over time come to do the work of indicating a product’s commercial origin, there may also be convincing reasons to keep them off the register and have them freely accessible. [Slide] Let me begin with the question of distinctiveness for 3D signs. The sole purpose of this slide is to demonstrate that proving acquired distinctiveness or secondary meaning is tricky for non-conventional trademarks, which leads to pressure on the test for inherent distinctiveness. Normally, when you have non-conventional trademark candidates—think of a triangular piece of chocolate for Toblerone—the usual route to registration proceeds via acquired distinctiveness. Factors for measuring this include market share, how intensive, widespread and longstanding the use has been, investment in promoting the sign as a trademark etc.55 But there are formidable obstacles, especially at the Community level, to proving secondary meaning for 3D signs. • For a start, the 3D sign should have acquired distinctiveness in a substantial part of the EU (for a CTM) where distinctiveness was otherwise lacking.56 This should have been completed prior to filing the application. Satisfying this requires a considerable amount of evidence across a number of countries. • The 3D sign must also stand alone, as a trademark. In practice, the 3D sign will have been used alongside word and figurative marks but the end result must be that the 3D sign can independently operate as an indication of commercial origin, without the assistance of these other signs.57 • There also needs to be a correlation between the evidence you submit and the specific mark you are claiming. If you submit general evidence of advertising expenditure, it could relate to 53 As of 4 April 2009, OHIM has received 5,286 CTM applications for 3D marks. See OHIM Statistics of Community Trade Marks, 2009 (SSC009), available at http://oami.europa.eu/ows/rw/resource/documents/OHIM/ statistics/ssc009-statistics_of_community_trade_marks_2009.pdf. 54 According to consistent EU case-law, for a trade mark to possess distinctive character, it must serve to identify the product in respect of which registration is applied for as originating from a particular undertaking, and thus to distinguish that product from those of other undertakings. See Joined Cases C-473/01 P & C-474/01 P, Procter & Gamble v. OHIM, 2004 E.C.R. I-5173, [32]. 55 Case C-108/97, Windsurfing Chiemsee GmbH v. Boots und Walter Huber, 1999 E.C.R. I-2779. 56 Case C-25/05 P, August Storck KG v. OHIM (Storck II), 2006 E.C.R. I-5719, [83]–[86] 57 Case C-353/03, Nestlé v. Mars, 2005 E.C.R. I-6135, [26] (“In regard to acquisition of distinctive character through use, the identification … of the product or service as originating from a given undertaking must be as a result of the use of the mark as a trade mark.”); Case C-24/05 P, August Storck KG v. OHIM (Storck I), 2006 E.C.R. I-5677, [61]–[62] (Where the applicant sought to register the shape of a sweet, a picture of the sweet on the external packaging was considered use to describe the contents of the packet and not use as a trademark.).

398  CHAPTER VI: TRADEMARK LAW your word mark instead of or along with your shape, and that is no good. You need to be able to disaggregate and submit evidence that relates precisely to the 3D sign applied for.58 • Finally, the manner in which you construct your relevant public in this exercise matters. It is often easier to argue that specialists in a given field will be more receptive to evidence under the acquired distinctiveness factors. However, if your product also relates to general consumers, the process becomes more difficult.59 [Slide] Since proving secondary meaning is an uphill struggle, inherent distinctiveness becomes the preferred alternative, for pragmatic reasons. One increasingly popular method is for 3D signs to be conjoined with an existing word mark or figurative mark in the application. These additional elements, alone or in combination, may “charge” the 3D sign with sufficient distinctiveness to make it registrable.60 The danger with this is that while the applicant may emphasize the “word mark + 3D sign” combination at the time of registration, subsequently the 3D sign alone may be prioritized during infringement proceedings. In effect, the successful registrant could subsequently claim a monopoly over the shape by itself despite bypassing the effort required to assert this during the registration process.61 However the more contentious aspect of inherent distinctiveness is related to the notoriously low threshold for this requirement, established in the BABY-DRY decision.62 While considering whether BABY-DRY was descriptive or inherently distinctive for diapers, the ECJ held that any “perceptible difference between the combination of words submitted for registration and the terms used in the common parlance … to designate the goods or services or their essential characteristics is apt to confer distinctive character on the word combination enabling it to be registered as a trade mark.”63 Since the European trademark regime was committed to a single standard of distinctiveness for all categories of signs, this “perceptible difference” test was in principle applicable to 3D signs. The ECJ accepted that while the same rules applied, in practice there was an important difference: “the criteria for assessing the distinctive character of three-dimensional trade marks … are no different from those applicable to other categories of trade mark. However, when those criteria are applied, account must be taken of the fact that the perception of the average consumer is not necessarily the same [as that for a conventional trademark]. Average consumers are not in the habit of making assumptions about the origin of products on the basis of their shape or the shape of their packaging in the absence of any graphic or word element, and it could therefore prove more difficult to establish distinctiveness in relation to such a three-dimensional mark than in relation to a word or figurative mark.”64 Yet inherent distinctiveness was still attainable for a sign “which departs significantly from the norm or customs of the sector and thereby fulfils its essential function of indicating origin.”65 In applying BABY-DRY standards universally, the ECJ implies that just as a fanciful or arbitrary word or image can act as a trademark without further prompting, a fanciful or arbitrary shape can do the same. However there is a difference between labels on things and the things themselves. There are several reasons for choosing arbitrary or fanciful shapes and the Case T-262/04, BIC SA v. OHIM, 2005 E.C.R. II-5959 (3D disposable lighter shape). Case T-141/06, Glaverbel v. OHIM, [2008] E.T.M.R. 37 (In an application for textured patterns of glass sheets, the opinion of both building industry professionals and general consumers needed to be considered for acquired distinctiveness.); Case C-513/07 P, AGC Flat Glass Europe (formerly Glaverbel) v. OHIM, 2008 E.C.R. I-00146 (upheld on appeal). 60 This practice has been noted with disapproval in Whirlpool v. Kenwood, [2008] EWHC 1930, [19]–[21]. 61 For a discussion of the relative importance of word mark and 3D mark during infringement proceedings in Germany, see Case I ZR 37/04, Golden Rabbit Trademark, BGH 2006, [2007] E.T.M.R. 30. 62 Case C-383/99 P, Procter & Gamble Co v. OHIM, 2001 E.C.R. I-6251; [2002] E.T.M.R. 3. 63 Id. at [40]. 64 Case C-144/06 P, Henkel v. OHIM, 2007 E.C.R. I-8109, [36]. This balance was originally achieved in Case C-136/02, Mag Instrument Inc. v. OHIM, 2004 E.C.R. I-9165. 65 Case C-173/04 P, Deutsche SiSi-Werke v. OHIM, 2006 E.C.R. I-551, [31]. 58 59

Part A: EU Trademark Law Developments  399

messages communicated by non-conformist 3D signs may have little to do with commercial origin indication. An offbeat or unusual shape does not automatically translate into a trademark, as the residual default option. I may encounter a strikingly stylish or whimsical chair and remember it, thereby setting it apart in my mind from other chairs, but this will be on aesthetic grounds. Similarly one may differentiate between products on the basis of quality, price, mode of production or product features but this is not distinctiveness in a trademark sense. The ECJ seems to be confusing distinctive as in “different from” (there are several criteria according to which we differentiate) and distinctiveness in the technical trademark sense, which is to indicate origin and thereby differentiate. Nevertheless the adherence to subject matter neutral common rules means that a 3D mark which “departs sufficiently from the norm” has a shot at registration and can bypass the acquired distinctiveness hurdles. [Slide] So how has this possible-yet-cautious equilibrium played out in practice? On the whole the ECJ has been vigilant but both the CFI and the OHIM Boards of Appeal have contributed to a steady trickle of decisions which have found the elusive ingredient of inherent distinctiveness to be present. Since determining distinctiveness is a question of fact, it is difficult to generalize but certain trends have emerged. For a number of years, applicants for 3D signs have attempted to work themselves within range of the “perceptible difference” standard and thereby lower the threshold for registration. Unsuccessful arguments include suggestions that (a) the 3D sign is simply a variant (or an aesthetically striking or attractive variant) of a common shape and therefore perceptibly different;66 (b) the distinctiveness threshold is crossed if a 3D sign is simply novel (never been done before);67 (c) if its components such as geometric shape and color, albeit individually commonplace, combine in non-obvious ways;68 (d) there are sufficient differences between the features of the sign and that of similar products, which is not attributable to a technical reason;69 (e) the relevant public are specialists and sensitive to minor differences;70 and (f) where the 3D mark is for everyday consumer products, the average consumer is not inattentive to minor differences during such purchases.71 European registries and courts have resisted such arguments and the consistent message is that “departs significantly from the norm” will not be collapsed into “perceptible difference”, since consumers are not accustomed to perceiving 3D signs as trademarks. However the question that I am more interested in is the content of “departs significantly.” Here I suggest that three kinds of interrelated arguments have been successful: (1) Sensitized consumers: In both the Jeep Grille72 and Nestlé Water Bottle73 cases, the registration succeeded because the applicants convinced the CFI that car buyers (consumers of expensive products) and purchasers of bottled water, as specially attuned consumers, were sensitive to shapes. External appearance was considered significant to consumers in each of these product categories. However it is noteworthy that chronologically, both these decisions followed closely in the aftermath of the BABY-DRY “perceptible difference” standard. One may also question whether these consumers relied on shapes merely to tell apart (“distinguish between”, in common parlance) or trusted the shapes to faithfully indicate a specific commercial Case C-136/02, Mag Instrument Inc. v. OHIM, 2004 E.C.R. I-9165, [27]–[33]. Joined Cases C-468/01 P and C-472/01 P, Procter & Gamble v. OHIM, 2004 E.C.R. I-5141. 68 Id. For the combination of features argument, see C-286/04 P, Eurocermex v. OHIM, 2005 E.C.R. I-5797. See also Joined Cases T 241/05, T 262/05 & T 264/05, T 346/05, T 347/05, T 29/06 & T 31/06, Procter & Gamble v. OHIM, 2007 E.C.R. II-1549. 69 Joined Cases C-456/01 P & C-457/01 P, Henkel v. OHIM, 2004 E.C.R. I-5089. 70 Joined Cases T-324/01 & T-110/02, Axion SA v. OHIM, 2003 E.C.R. II-1897; Case T-15/05, De Waele v. OHIM, 2006 E.C.R. II-1511; Case T-358/04, Georg Neumann GmbH v. OHIM, 2007 E.C.R. II-3329. 71 Procter & Gamble, 2007 E.C.R. II-1549. 72 Case T-128/01, DaimlerChrysler Corp. v. OHIM, 2003 E.C.R. II-701; [2003] E.T.M.R. 87. 73 Case T-305/02, Nestlé Waters France v. OHIM, 2003 E.C.R. II-5207; [2004] E.T.M.R. 41. 66 67

400  CHAPTER VI: TRADEMARK LAW origin upon viewing them for the first time ever, in these cases. The fact that goods come from a specific origin continues to be important to consumers in the realms of contract law and consumer protection law. Purchasers may not know the details of a product’s origin but they appreciate its legal significance and know it is ascertainable if required. Commercial origin still matters and a trademark must indisputably communicate this. (2) Stylized shapes: On the whole, the ECJ has not been receptive to arguments that because an investment has been made in the aesthetic features of a 3D sign, which makes it stand out as a variant,74 this necessarily translates into distinctiveness. So the involvement of a reputed designer, or the fact that the 3D sign in question is an award winning design classic, has not been dispositive in the past.75 This trend was recently bucked in the CFI’s Bang & Olufsen decision,76 concerning the registrability of stylish pencil or organ-pipe shaped loudspeakers. The court was of the view that “having regard also to the aesthetic result of the whole, [the shape] is such as to retain the attention of the public concerned and enable it to distinguish the goods covered by the trade mark application from those of another commercial origin.”77 Here stylistic virtues are sufficient to attract and retain consumer attention, which is then (questionably) translated into inherent distinctiveness. A well designed shape can endow a sign with acquired distinctiveness, through repeated exposure. Yet to suggest that any sign which captures attention, often for aesthetic reasons, is also communicating information regarding the origin of the product is going a step too far. An eye catching shape could have passed out of design protection and presently exist in the public domain, being manufactured by several producers who use price, quality and word/figurative trademarks to differentiate amongst themselves. The court here also seemed sympathetic to the argument that while “specific or original” design characteristics were not an essential precondition for inherent distinctiveness, they could certainly help.78 Are we in danger of confusing the rationale underpinning design protection with that of trademark law? (3) Sufficiently unusual 3D signs: Here successful applicants have argued that the sign applied for is sufficiently unusual. Decisions classify this departure from the norm as: not commonplace or not something which naturally comes to mind (plastic water bottle);79 “striking and easy to remember” (jeep grille);80 a “truly individual character” leading to a “particular and unusual appearance” likely to attract attention, so that “once familiar with the shape of the packaging”(!) it will indicate origin (crystalline white transparent bottle for soaps and gels).81 This line of authorities rests on the notion that consumers will remember the unusual 3D sign on the next encounter, which is clearly more relevant for acquired distinctiveness. A meal, book or play may be memorable but that does not mean it qualifies as a trademark. Nonetheless these authorities have been embraced by the OHIM Boards of Appeal in recent years.82 Taking up one of these for illustrative purposes, an igloo shaped kennel or pet shelter 74 It is considered more difficult to depart from the norm, as a variant, in a product sector where there is pre-existing variety in available shapes. For example, several varieties of torch shapes already exist on the market. 75 Mag Instrument Inc. v. OHIM, 2004 E.C.R. I-9165, [68] (“[The] fact that goods benefit from a high quality of design does not necessarily mean that a mark consisting of the three-dimensional shape of those goods enables ab initio those goods to be distinguished from those of other undertakings for the purposes of [distinctiveness].”); Case C-20/08 P, Enercon GmbH v. OHIM, 2008 E.C.R. I-00179, [14] (unsuccessful attempt to register the shape of a wind turbine designed by Norman Foster). 76 Case T-460/05, Bang & Olufsen A/S v. OHIM, 2007 E.C.R. II-4207, [2008] E.T.M.R. 46, [42]. 77 Id. at [42]. 78 Id. at [43]. 79 Case T-128/01, DaimlerChrysler Corp. v. OHIM, 2003 E.C.R. II-701; [2003] E.T.M.R. 87, [46]–[47]. 80 Case T-305/02, Nestlé Waters France v. OHIM, 2003 E.C.R. II-5207; [2004] E.T.M.R. 41, [41]. 81 Case T-393/02, Henkel KGaA v. OHIM, 2004 E.C.R. II-4115, [2005] E.T.M.R. 56, [40] 82 See, e.g., Igloo Shaped Pet Shelter (R 0724/2006-2) Nov. 2006; Coke Bottle Application (R 1206/2006-2) Dec. 2006; Heart Shaped Frozen Vegetables (R 918/2005-4) Feb. 2007; Hexagonal Pharmaceutical Product Container (R 1546/2006-2) March 2007; Yellow-Blue Packaging for Bulbs (R 1768/2007-1) Sep. 2008.

Part A: EU Trademark Law Developments  401

was compared against the backdrop of pre-existing kennels in the market, to establish what was customary in the sector. Having identified the paradigmatic dog kennel83 (and which one of us hasn’t been in the doghouse at some point) the Board reasoned that not only was this unusual when compared against that benchmark, but by being the only ones to sell such a product for a while, they had “sensitized” consumers into perceiving an unusually shaped shelter as a trademark.84 This seems like importing acquired distinctiveness reasoning into the inherent distinctiveness test (consumers across the entire sector have generally been taught that unusual shapes work as trademarks, by one single producer’s previous actions) without any need to submit any evidence (convincing proof that consumers across the EU see this particular shape as a trademark). Considered cumulatively, the existence of a single standard for inherent distinctiveness across subject matter has resulted in the theoretical and now practical possibility for 3D signs to be registered without proof of marketplace recognition as a trademark. My concern is that this shifts attention to the form of the sign rather than its function. The determination of inherent distinctiveness is a factual enquiry and for 3D signs, is now tied to an analysis of the degree of departure from the norm. Constructing this baseline or norm against which to contrasts the shape or trade dress applied for is itself a subjective exercise (what does an average pen or torch look like?). This leaves ample scope for examiners, appellate tribunals or courts to determine that when a 3D sign is viewed for the first time, sufficient design innovation or the ability to “stand out” becomes a substitute for the ability to clearly and unambiguously indicate trade origin. Products can stand out from one another for a number of reasons. Should trademark law be about granting registration to innovative, stylized, quirky or unusual 3D signs per se? [Slide] Moving beyond distinctiveness, in the limited time that remains I would like to briefly touch upon recent developments concerning the policy based “functionality” objections to registration.85 These objections specifically apply to shapes, trade dress and other 3D signs, as explicit legislative acknowledgment that non-conventional trademarks raise additional concerns. They are an exception to the otherwise uniform treatment of subject matter. Revisiting the basis for this special treatment suggests that similar concerns will be raised for other categories of non-conventional signs as well. Perhaps it is time Europe considered a broader set of functionality objections or alternative doctrinal mechanisms to substantively evaluate all categories of non-conventional trademarks. Under Art 3(e), a “sign which consist exclusively of … the shape of goods which is necessary to obtain a technical result” cannot be registered, regardless of its distinctiveness. The CFI’s recent Lego Brick decision86 has confirmed that “exclusively” and “necessary” are to be interpreted purposively, in order to give some teeth to this prohibition. Lego, in their ongoing quest for eternal life under the shelter of IP law, had applied to register the shape of their familiar toy bricks, which are constructed so as to reconcile the competing technical demands of interlocking securely whilst also being easily pulled apart by a child. In following the approach to these exclusions set out in Philips,87 “exclusively” suggested that the essential features of Igloo Shaped Pet Shelter (R 0724/2006-2) Nov. 2006, [15]–[17]. Id. at [19]. 85 These are found in Art 3(e) of Directive 2008/95/EC of 22 October 2008 to Approximate the Laws of the Member States Relating to Trade Marks. Council Directive 2008/95, 2008 O.J. (L 299) 25 (EEC); see Trademark Directive, supra note 4. This has recently replaced the original Trademark Harmonization Directive 89/104, 1989 O.J. (L 40) 1 (EC), and excludes: [S]igns which consist exclusively of: (i) the shape which results from the nature of the goods themselves; (ii) the shape of goods which is necessary to obtain a technical result; (iii) the shape which gives substantial value to the goods. 86 Case T-270/06, Lego Juris A/S v. OHIM, 2008 E.C.R. II-3117, [2009] E.T.M.R. 15. 87 Case C-299/99, Koninklijke Philips Elecs. NV v. Remington Consumer Prods. Ltd., 2002 E.C.R. I-5475; [2002] E.T.M.R. 81. 83 84

402  CHAPTER VI: TRADEMARK LAW a shape should achieve a technical result (as opposed to requiring that all of the shape must be geared towards a technical result, which is easier to work around by adding ornamental features) and “necessary” meant that there should be a causal connection between the shape chosen and the desired result (as opposed to a more acute understanding of necessity, where the excluded shape is the only one capable of producing that result). The decision is interesting for a number of reasons, including an analysis of the points of intersection between patent law and trademarks on this policy exclusion. However its precedential significance lies in the articulation of a test to identify the “essential features” of a shape, for it is these “essential features” which must fall foul of the policy exclusions. Lego proposed that such features “must be determined from the point of view of the relevant consumer and not by experts according to a purely technical analysis.”88 The CFI disagreed and adopted a more teleological approach.89 The ECJ in Philips had identified the relevant public interest behind these exclusions as follows: “The rationale of the grounds for refusal of registration laid down in Article 3(1)(e) of the Directive is to prevent trademark protection from granting its proprietor a monopoly on technical solutions or functional characteristics of a product which a user is likely to seek in the products of competitors.”90 Thus the CFI concluded that the “perception of the target consumer is not relevant to the analysis of the functionality of the essential characteristics of a shape. The target consumer may not have the technical knowledge necessary to assess the essential characteristics of a shape and therefore certain characteristics may be essential from his point of view even though they are not essential in the context of an analysis of functionality and vice versa. [These characteristics] must be determined objectively … on the basis of its graphic representation and any descriptions filed at the time of the application for the trade mark.”91 [Slide] I’m afraid time does not permit me to consider this in detail, but the other decision of interest under the policy exclusions once again concerned the Bang and Olufsen pencil shaped speakers.92 Having convinced the CFI that they possessed inherent distinctiveness, they ran up against OHIM’s subsequent objection on aesthetic functionality grounds. As the speakers added substantial value, registration as a trademark would circumvent the limited duration of design or copyright protection otherwise available for such aesthetically attractive shapes. Significantly, the Board of Appeals held that this value is added when the shape “has the potential to determine to a large extent the consumer’s behavior to buy the product … [i.e.] where the shape is the only or one of the essential selling features of the product.”93 It went on to provide criteria—the relevance given by the manufacturer to the shape as a marketing tool and whether consumers are moved to buy based on aesthetic appeal—for determining when this occurs. While these decisions are to be welcomed for the doctrinal clarity they afford, they remind us that the policy underpinnings for shape related exclusions could easily apply to other types of subject matter as well. The ECJ in Dyson94 suggested that attempts to register abstract concepts was going too far but if the trademark regime is truly open to all other kinds of subject matter without specific qualifications, then why shouldn’t an applicant be able to register an entire building or substantial parts of a piece of classical music (presently in the public domain) as a trademark? How can we justify drawing a line between permitting the first seven notes of a tune to be registered and prohibiting two minutes of the same tune? What Lego Juris v. OHIM, 2008 E.C.R. II-3117, at [52]. In doing so, they have departed from the “eye impact” approach previously adopted by the U.K. courts. See Koninklijke Philips Elecs. NV v. Remington Consumer Prods. Ltd., [2006] EWCA (Civ) 16. 90 Koninklijke Philips v. Remington, 2002 E.C.R. I-5475, at [78]. 91 Case T-270/06, Lego Juris A/S v. OHIM, 2008 E.C.R. II-3117, [2009] E.T.M.R. 15, [70]. 92 Case R 497/2005-1, Bang & Olufsen A/S v. OHIM (Unreported, Sep. 10, 2008), available at http://oami.europa.eu/ legaldocs/boa/2005/EN/R0497_2005-1.pdf. 93 Id. at [24]. 94 Case C-321/03, Dyson Ltd. v. Registrar of Trade Marks, 2007 E.C.R. I-687, [2007] E.T.M.R. 34 (concept for a transparent vacuum cleaner bin). 88 89

Part A: EU Trademark Law Developments  403

about a short film clip, such as an advertisement film? Or what about a functional color, such as fluorescent yellow? Thus far, in the EU many of these issues have been subsumed within the procedural requirement of graphical representation or by struggling to accommodate them within distinctiveness, but a frank reappraisal is long overdue. Perhaps we can begin to explore some of these issues in the question and answer session that follows. Thank you. MR. JOHNSON: One of the very interesting things that you said at the end about adding substantial value goes back to something you said earlier. You are suggesting that if there is real effort in the design of the trademark then it can be protected. But again, surely the use of real-world effort suggests again design protection. Are you suggesting that trademarks are going down the wrong route there as well? DR. GANGJEE: I think I am actually tying it into a broader (and worrying) trend in European trademark law, which has already surfaced in this morning’s trademark panels. The financial value of a sign seems to be driving protection as opposed to evaluating the sign’s ability to indicate origin. Much of dilution protection rhetoric seems to be about reward for effort, whereas the basis of European trademark law is about communication and the essential function. Similarly we’re seeing the glimmerings of reward for effort or for aesthetic creativity reasoning when it comes to shapes. While reward for creative effort is a valid rationale under copyright, designs or patents, it should not be an independent justification, distinct from the communicative function of a sign, in trademark law. MR. JOHNSON: With that, we will move on to our final speaker. Paul Maier has worked at the Commission since 1987. In the early 1990s he worked in the field of harmonization of copyright and things like the first Term Directive, related rights, private copying, various Green Papers, and the international negotiations. He joined OHIM in 1995 as the Chief Advisor to the President of the Office, and since 2006 he has been President of the Boards of Appeal. MR. MAIER: Thank you very much indeed. It’s going to be a bit of a mixed bag what I’ll be telling you now. I think I will take advantage to try to answer also some of the questions that were raised just now. I do not have PowerPoint presentation. The paper was sent in a bit late, but you will have it. It will be given to you later on. Just a few words about the functioning of the Community Trademark system to complete what was already said this morning. The Community Trademark system continues to be a great success, obviously. Now, with the lowering of the fees, despite the crisis, it will probably continue to be. This has one very important consequence, which is that it also generates an awful lot of case law of all kinds—decisions of the Office, Examiner Division decisions, Opposition Division decisions, cancellations, Boards of Appeal, CFI, and ECJ. Actually, there is one figure that William didn’t give you. We already have a body of 420plus decisions of the CFI on appeal of decisions of the Boards of Appeal. Way over 100 were handed down only last year. The Boards of Appeal have taken more than 11,000 decisions over the last thirteen years. So as you can see, there is a huge body of case law available. Basically, one very essential feature for us remains efficiency. We also attach great importance to transparency, user friendliness, and of course, if possible, reliability of the system. These are our priorities, in the Office in general and also I must say in the Boards of Appeal. This is why the Office has issued its Service Charter.95 We in the Boards of Appeal, because of our independence, have not committed to strict timeframes, but you should know that more 95 OHIM Service Charter, available at http://oami.europa.eu/ows/rw/pages/QPLUS/serviceCharter/serviceCharter. en.do.

404  CHAPTER VI: TRADEMARK LAW than half of our cases, way more than half of our cases, are decided in four months or less in inter partes cases and in five months or less in ex parte cases when the case is ready. So we are going faster and faster. And, hopefully, our decisions are getting better. It is difficult to say in front of such a body of case law and jurisprudence—last year almost 1,900 decisions of the Boards of Appeal—whether all in all, apart from the pure volume of things, the result is satisfactory. You already heard some criticism just now about some decisions of the Second Board of Appeal. The reality is that about 10.2 percent of the decisions of the Boards of Appeal are actually appealed to the CFI in Luxembourg. Given the fact that the CFI has a tendency of being quite open in its way of looking at trademarks in general and the way it should interpret the Regulation—in other words, giving chances to people—I think this is a good rate. People tend to accept the decisions of the Boards of Appeal, and we are satisfied about that. By the way, 80 percent of the cases in the CFI confirmed the Boards of Appeal. Still, what is the role of the Boards of Appeal inside the Office? We have two possibilities when we disagree with a decision of an examiner or Opposition Division: either we exercise any power within the competence of the department which was responsible for the decision in the first instance, or we simply remit the case to them. It is our philosophy, it is our “policy”, in the Boards of Appeal, to always make and give a full decision if we can. In other words, we seldom remit cases to the examiner. This is because the potential ping pong game that remittals may provoke, of course, extremely timeconsuming, frustrating for the parties, and not helpful at all for the system. Of course, in some cases, notably when the evidence of the file is particularly complex, we may prefer to refer the case back to the first instance in order to make sure that the file will have been fully suited twice. In such cases it is safer to have a first decision of the first instance and then a real review on our side, not only just one view of things. There is one curious animal though in Community Trademark law and that is the principle of economy of procedure. It is strange because it has sometimes resulted in quite curious situations. The way this principle is applied is that if an examiner, for example, considers that one ground of refusal of registration of a trademark is sufficiently convincing, he or she does not have to examine any other possible grounds of refusal of the trademark. Because of that, we have on occasions ended up in the CFI being annulled on the basis of the ground that had been raised and still considered that the CTM application should be rejected on other possible grounds. So what should the Boards of Appeal do? How should we handle these sorts of cases? I will come to the loudspeaker case we heard about before, the beautiful Bang & Olufsen loudspeakers.96 A decision was made by the examiner to refuse registration on the ground that the shape of the loudspeaker was not distinctive. It was confirmed by the Board of Appeal. It went to the CFI. The CFI said to the contrary considered the shape to be intrinsically distinctive.97 The case was referred back to the Office. When a case is referred back because the decision is annulled, the Presidium of the Boards of Appeal decides whether it should be remitted to a Board of Appeal to review the case or whether the decision of the CFI can be implemented. In other words, in this particular case, it would have meant that the loudspeakers should be registered as a CTM. In the present case the presidium decided to refer the case back to the First Board of Appeal, which then came up with the objection that you heard.98 Case T-460/05, Bang & Olufsen A/S v. OHIM, 2007 E.C.R. II-4207, [2008] E.T.M.R. 46. Id. at [45]. 98 Case R 497/2005-1, Bang & Olufsen A/S v. OHIM (Unreported, Sep. 10, 2008), available at http://oami.europa.eu/ legaldocs/boa/2005/EN/R0497_2005-1.pdf. 96 97

Part A: EU Trademark Law Developments  405

That raises two questions. One is: Can new grounds actually be raised when a decision of the Boards has been annulled on the first grounds by the CFI, yes or no? Obviously, we thought yes. Secondly, in this particular case, is this ground actually really applicable; is this a right decision? Well, we will have to wait a little bit, because to know the answer to the questions as this of course was appealed again by Bang & Olufsen and is again in front of the CFI.99 So we will see what the CFI says on these two points of law. They judgment will be very important for us, because the way we handle the principle of economy of procedure and the way we deal with cases in general will heavily depend on the answers that we get. This is where I come to what I call the CAPOL saga, in the last two and a half minutes that I am left with. There the problem gets even worse. On the 3rd of April 1996 Atlantic Richfield applied for the word mark CAPOL. This CTM application was opposed on the basis of an earlier trade mark ARCOL registered for identical products. The Opposition Division two years later decided that there was no likelihood of confusion. This decision was appealed. The Board of Appeal basically rejected the appeal because a number of new elements had been brought forward before it for the first time. This rejection triggered an important divergence of views between the Boards and the CFI. The question was to know what sort of new evidence we should accept in the Boards of Appeal. To cut a long story short, the CFI thought that the Boards should have accepted the new evidence in this case and the Office appealed the CFI decision to the Court of Justice.100 The Court of Justice gave us guidance on how we should deal with new elements. It set aside the decision of the CFI and it annulled the decision of the Boards of Appeal.101 Again, the case was brought before the Presidium to decide on what to do with the case. Obviously, the Presidium could only decide to refer the case back to a Board of Appeal. The Board of Appeal, actually one and a half years ago, simply confirmed that the original decision of the Opposition Division was correct, that there is no likelihood of confusion because there is no similarity between the two signs.102 This was, of course, appealed again to the CFI. We have received the answer by the CFI only a few weeks ago. Actually, the CFI confirmed that the Board of Appeal (in the second decision) was right to confirm the Opposition Division’s decision of the year 2000.103 This means that thirteen years after a CTM application was filed with the OHIM, it is still not ready for registration because of procedural questions. This is the thing I would like to draw your attention to: we sometimes have a situation in which the CFI, because it simply annuls the decision of the Boards of Appeal without giving any guidance as to substance or because the Office itself has only partially examined a trade mark application, a long procedural play is triggered. Then a real yo-yo game starts. We will have to see in the ARCOL case whether the case is further appealed to the ECJ! The deadline for appealing runs until the end of May. So trademark law still suffers from a number of problems. I know that a number of you are very critical about the Court of Justice and the CFI. I simply wanted to take also a bit of responsibility on our part in the Boards of Appeal. We have to be very careful indeed in how we handle cases, because what happened in these two cases is not necessarily helpful. Thank you very much. See Action brought on 24 November 2008, Case T-508/08, Bang & Olufsen v. OHIM, 2009 O.J. (C 19) 35. Case T-164/02, Kaul GmbH v. OHIM, 2004 E.C.R. II-3807; Case C-29/05, OHIM v. Kaul GmbH, 2007 E.C.R. I-2213. 101 OHIM v. Kaul GmbH, 2007 E.C.R. I-2213, at [65], [70]. 102 Case R-787/20002, Second Board of Appeal of OHIM, of 1 Aug. 2007 (Unreported). 103 Case T-402/07, Kaul GmbH v. OHIM, 2009 E.C.R. II-0753, available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=CELEX:62007A0402:EN:HTML. 99

100

406  CHAPTER VI: TRADEMARK LAW MR. JOHNSON: Our panelists have been chomping at the bit. Before I let them loose, I will briefly introduce them. David Llewelyn is a solicitor and head of the European IP practice at White & Case as well as being a professor of intellectual property law at Kings College London and External Director and Deputy Chairman of the IP Academy in Singapore. He is the joint author of Cornish and Llewelyn’s Intellectual Property, which many people will be aware of, as well as being a co‑author of Kerly’s Law of Trade Marks and Trade Names. He’ll have to tell you himself whether he has a driving license. Dr. Gail Evans is a Reader of International Trade and Intellectual Property at Queen Mary. She teaches legal problems of international trade and intellectual property trademark law and intellectual transactions. She has a number of other teaching jobs and has recently been nominated for an Award in Excellence in Teaching at Queen Mary, and she acts as a consultant to a number of governmental and nongovernmental organizations. With that, I think I will have to let them make their comments. PROF. EVANS: Thank you, Phillip, for that kind introduction. My research brief is harmonization, so I was very interested in William’s remarks on the interaction of the Trademark Directive and the Comparative Advertising Directive. You may or may not know that in the Trademark Directive we have three possible levels in Article 5 of infringement:104 • The first one, identical trademarks, identical goods and, ostensibly, on a literal reading, no need for a finding of likelihood of confusion—strict liability. • The second level, identicality or similarity and likelihood of confusion. • The third type or level—“trademark dilution” is not a phrase that is used in European trademark law. In short, the third level does not require a finding of confusion, simply that without due cause and in keeping with honest practices the distinctiveness of the mark has been brought into some disrepute or the mark has been taken unfair advantage of. Now, consider the extent of the Comparative Advertising Directive.105 First of all, policy-wise, there has been quite a deliberate decision by the legislature to make comparative advertising legitimate. To this end Recital 8 says, “comparative advertising, when it compares material, relevant, verifiable, and representative features and is not misleading, [is] a legitimate means of informing consumers.”106 Now, as consumers, how do you feel? Do you take note of what a third party says? Consider the case L’Oreal v. Bellure.107 When the defendant Bellure says, “We have cheaper smellalikes,” and then presents you with a comparison: “This is the price: you can have Trésor for £60 or you can have Stitch No. 7 for about £2”—are you convinced or do you think “puffery, sales talk”? In other words, is the Recital correct in saying, “This is legitimate, this is verifiable”? You may be surprised, if you look at the Comparative Advertising Directive, to actually see the extent of—and I refer to the codified version—Article 4.108 There are various possibilities, various conditions which a comparative advertiser has to meet. The comparative advertisement must not be misleading. It has to compare the goods meeting the same needs or intended for the same purpose. MR. JOHNSON: Gail, could you wind up? We have some questions from the floor. Maybe you can make some further comments later. Trademark Directive, supra note 4, Art. 5. Comparative Advertising Directive, supra note 3. 106 Id. at recital [8]. 107 Case C-487/07, L’Oreal SA v. Bellure NV, [2009] E.T.M.R. 55. 108 Council Directive 2006/114, Art. 4, 2006 O.J. (L 376) 21 (EC). 104 105

Part A: EU Trademark Law Developments  407 PROF. EVANS: Yes, certainly.

The main point that I wanted to make in terms of harmonization is to put the question to you, considering the decision of the ECJ in O2,109 that there is very little scope within the Trademark Directive―likelihood of confusion has to be found—so very little scope within the Trademark Directive, and, therefore, the real question is whether there is a gap, whether there is a lacuna in the law, such that there exists a comparative advertising case where the trademark proprietor can establish that the conditions of the Comparative Advertising Directive have not been satisfied, but yet has no cause of action under Article 5(2), the dilution provision of the Trademark Directive?110 So the question that I am putting to you is: in those rare cases where the trademark owner has no cause of action under the Trademark Directive and has to go to the Comparative Advertising Directive and finds that, in the United Kingdom at least, there is no private action—what then? I leave you with this question: Do we need a statutory action for unfair competition, a general statutory action, such as you find in Section 43(a) of the Lanham Act?111 MR. JOHNSON: Thank you very much. I’m sorry to cut you off. It was very, very interesting. I’m just a bit worried that David should have his five minutes and then we have some questions from the floor. The clock is ticking in front of me. With that, David, could you possibly contain your comments to about five minutes? MR. LLEWELYN: Sure. The short answer to that is “No.” I have never been behind the steering wheel of a car and I don’t have a driving license. But I do have views on what is bad driving. I think at the end of a week in which we have had a lot of discussion in the press in this country about spin, I would just like to raise a few questions. Success of the Community Trademark Office—what does that mean? When are we in our area going to move from valuing what we measure—1,900 oppositions, 400 cases, 100 cases this year before the CFI—move from where we value what we measure to where we measure what we value? What do we value? I assume we all value a market in which there is fair competition. I assume that. Sometimes I wonder, especially when I see some of the things which get onto trademark registers around Europe, and in particular in Alicante. And even more of them are going to get on the Register there, now that we will get reduced fees, and even more of them will go to the CFI. What worries me is who speaks for the people on the other side of these cases, because the vast majority do not even get to litigation. The small and medium-size enterprise gives up, moves on, wastes the money that they have spent on something which they quite legitimately could use, but they would prefer not to spend the money on defending what is probably an ill-founded action. I am increasingly concerned about this because you read in the press about things like “Juice Points” in London. The London Authority, Boris Johnson and his cohorts, are being sued for trademark infringement as a result of using “Juice Points” for electric cars around London. Npower gave a press statement saying, “We have a registered trademark for ‘Juice Points.’”112 No, they don’t. They have a registered trademark for “Npower Juice.” Now, is “Juice Points” an infringement of “Npower Juice”? Case C-533/06, O2 Holdings Ltd. v. Hutchinson 3G (U.K.) Ltd., [2008] 3 C.M.L.R. 14. Trademark Directive, supra note 4, Art. 5(2). 111 Lanham Trademark Act of 1946 § 43, 60 Stat. 427, 441 (1946) (codified as amended at 15 U.S.C. § 1125 (2006)). 112 “Npower Complains Over ‘Juice’ Use”, BBC News, Feb. 4, 2009, available at http://news.bbc.co.uk/2/hi/ uk_news/england/london/7869829.stm. 109 110

408  CHAPTER VI: TRADEMARK LAW Well, I suspect that Advocate General Sharpston, or whoever wrote her opinion, may have had the same disquiet about some of the absurdities which appear on the register. Sharpston is clearly wrong in the Lindt case,113 clearly wrong. But underlying that is a disquiet about where we are going. I think we always need to bear that in mind, because for every person threatened, for every claimant, there is at least one defendant on the other side. Constantly I hear people saying, “The system has gone nuts.” I then read on one of Dev’s slides “design which is striking and easy to remember.” And then I remember Paul in one of his previous incarnations discussing the various designs that are on the Designs Register in OHIM. They are designs, but they are also registered as trademarks now, and people are using however they can get registered protection to bully many small and medium-size enterprises. I personally do not think that is what a fair and balanced intellectual property system is all about. MR. JOHNSON: Thank you very much for keeping to time. With that driving thought in mind, any questions from the floor? If you do have a question, there is a roving microphone. Could you please identify who you are, however famous, simply for the transcriber at the back? Does anybody have any questions? No questions at all? One question maybe? MR. ROBINSON: Could I ask one of David? MR. JOHNSON: You can ask a question, of course. MR. ROBINSON: David, is there a solution? MR. LLEWELYN: Is there a solution? Well, there is always a solution. I think that there are various aspects which could be improved. I hesitate to say legislation, because my thoughts when I heard about the ECJ issues this morning were “rubbish in, rubbish out,”114 because when you see the standard of drafting of EU legislation, is it a surprise that the ECJ struggles with it? But it’s a huge debate as to how can we solve it. There are piecemeal improvements which could be made which we could all, no doubt, come up with. But I think it needs a recognition that there is a problem. MR. JOHNSON: But one of the things that you raise is the idea of bullying. In the United Kingdom we have had threats provisions for 100 years, which have caused more problems than they probably solve. From the practitioner’s point of view, you have to draft your letters around them, which makes it much more complicated. But also it doesn’t seem to actually help the SMEs because they don’t have the money to start a threat action. So how would you prevent the bullying if the cause of action itself isn’t enough? MR. LLEWELYN: Unfortunately, I think it goes back to people like Paul not allowing marks which are on the borderline on the Register. Now, I can accept entirely that he may have a problem, given the legislation, but some stuff is coming on to the Register which I find remarkable. MR. MAIER: May I respond to that, not to excuse myself! David, there are systems and there are ways in which people use them. The strong and powerful, if you want to push it to the end, will always find a way. When the Community Design was first introduced, we saw coming in a number of designs, among other things logos of world companies. We knew very well they were much more than one year old, and therefore, in principle, not valid, but we were obliged to register them because the system wants it. Fine. 113 Opinion of Advocate General Sharpston, Case C-529/07, Chocoladefabriken Lindt & Sprüngli AG v. Franz Hauswirth GmbH, 2009 E.C.R. I-4893, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri= CELEX:62007C0529:EN:HTML. 114 See Chapter II.A, “The Judiciary & IP Policy: Europe”, supra this volume.

Part A: EU Trademark Law Developments  409

I have always in my slides shown one or two of them, never pointing at them. People have to exert their own intelligence about it and notice the ones that should not be protectable. In trademarks, there is no doubt that we have gone on a huge roller coast ride, from BABYDRY,115 to DOUBLEMINT,116 back to SAT.1117 suddenly, and all the other decision that seemed to follow a different line. It is just extraordinarily difficult. What I can say for the Boards of Appeal is the following, and I think it applies even more to the Court of Justice and the CFI. As long as the launch of the rocket goes wrong—that is, the examiners do not do their job properly, with all the possible scrutiny—we will not get the rocket back to its target. We only get the cases that we get in the Boards of Appeal. It is true, I must say, that there has been a lot of criticism of the CFI, for example, on a number of decisions. One of the decisions, which is considered the worst of all, is Omega-3.118 But I can understand that the Court feels uneasy with these two trademarks, knowing that most of all they are just totally descriptive. Why do we come to such a stage of litigation for these trademarks? Of course, what solution can they find to get out? At one point, they said, “Actually, the Office would have been in a position not to accept these trademarks.” But you have to accept the fact that it was accepted. That is the problem. This is why I think, very candidly, I put this point on procedures at the end. It is not publicity for us, it’s not publicity for the system, but I think we have to be aware of that. It is, of course, unthinkable that after thirteen years an opponent still has managed to avoid the registration of a trademark, where most people would immediately say there is no likelihood of confusion, on the basis of procedural problems. In the cases that we have in front of the Boards of Appeal—I must say that I make a search, especially in ex parte cases—we almost always end up seeing similar cases accepted and/or refused. It will be formidably difficult to reduce the grey zone, which is the zone in which the level of evaluation of the examiner plays its role, because there are many, many cases where you can go in either direction. This is simply it. Now, we have an additional difficulty to national offices, which is that we have 23 languages to check. We have to first subdivide CTM applications among languages, because trying to examine word mark in a language that you do not understand is difficult if not impossible. So we tend to give them CTM applications to people who understand the language. This being said, a further specialization of examiners—you were asking for solutions—could possibly be considered. That is something the Office is thinking about now. We have actually announced a reorganization last week and said we will see whether we can do something about it. We know we are not perfect, but at least we are trying to do something about it. That includes the Boards of Appeal as well. MR. JOHNSON: Do you have a comeback on that, David? MR. LLEWELYN: No. MR. JUSTICE ARNOLD: I want to pick up the point you made in your talk, Paul, about procedural economy. What baffles me is why is procedural economy not understood? Procedural economy is very simple. What it means is you minimize the number of steps in your procedure and you minimize the number of instances. Therefore, you arrange your procedures so as to precisely avoid yo-yos between instances. That is what procedural economy means. It doesn’t mean setting things up to create yo-yos. MR. MAIER: Well, we’re not perverse to the point that we are setting out to create problems. Case C-383/99 P, Procter & Gamble Co v. OHIM, 2001 E.C.R. I-6251; [2002] E.T.M.R. 3. Case C-191/01 P, OHIM v. Wm Wrigley Jr. Co., 2003 E.C.R. I-12447, [2004] E.T.M.R. 9. 117 Case C-329/02 P, SAT.1 Satellitenfernsehen GmbH v. OHIM, 2004 E.C.R. I-8317, [2005] 1 C.M.L.R. 57. 118 Case T-28/05, Ekabe Int’l SCA v. OHIM, 2007 E.C.R. II-4307. 115 116

410  CHAPTER VI: TRADEMARK LAW MR. ROBINSON: I wonder whether, going back to the BABY-DRY case119 from an institutional

perspective, whether or not there was a slight miscue there in not giving more autonomy to the Boards of Appeal in Alicante and keeping the role of the CFI to a much higher level, judicial review, and therefore essentially minimizing the opportunities for the CFI to do a full merits review, which is essentially the role it is taking at the moment, acknowledging that actually a very small number of appeals do actually go up to the CFI. But it would, it seems to me, entrench more respect and power for the Boards to change the policy of Alicante without being subject to the constant possibility of appeal. MR. JOHNSON: Isn’t that problem the same one that was identified this morning? It is a way of having or introducing some form of leave to appeal both to the CFI and ultimately to the ECJ. With that, is there anyone how bursting to speak from the floor, or should we have some more questions from the panelists? QUESTION: Emily Hudson, Melbourne Law School. My question is directed to Dev. I didn’t get a chance to recall all of the last slide. I was wondering if you had any comments you wanted to make about the more “out there” marks. DR. GANGJEE: In fact, I would like to take this as an opportunity to ask the audience a question. If you can register a ten-second clip of music as a trademark, should you be able to register a five-minute clip of music? Why not? How do you draw a box around something that should be a trademark? We know that bits of music are registered as trademarks. How far can you go? What kind of guidance do we get to draw a box around it? PARTICIPANT: The examiner can listen to it. DR. GANGJEE: That’s a good start. MR. JOHNSON: Is anyone inclined to whistle any trademarked tunes? QUESTION: Robin Jacob, Court of Appeal, England. I’m seriously concerned with the way things have gone. The Court of Appeal is hearing a case now about a kitchen mixer which has been registered as a trademark.120 I think the world has gone completely barking mad. If a kitchen mixer can be registered as a trademark, you can register everything as a trademark. They say it is iconic. Well, I dare say it is. So are the Pyramids. Something has gone very wrong indeed. I tried to stop it a long time ago, in Philips,121 when I found all the objections. If you go back and read that I dealt with the “added value” objection—the whole point of an especially good design is its added value to the intrinsic nature of the article. That’s a bit Aristotelian, but you see what I’m talking about. Maybe it’s the CFI, but sooner or later the Court of Justice is going to wake up to the dire thing that is going on and the pendulum I spoke about this morning will pull back and a lot of these registrations will all be held invalid in one big decision. QUESTION: Harri Salmi from the Boards of Appeal in the OHIM. Just a comment to what Dev just asked about the length of these musical marks. I have been in the Office since it began. In the first year we got an application, which was a sound mark, and they sent in a tape, and it consisted of the sound “bump, bump.” That’s it. We refused it, of course. But it just goes to show that it is very difficult to try to define where would the line be. In any case, it would always depend on whether it functions as a trademark or not. You can’t give a rule that would define that the length would matter. In some cases perhaps it might work. In some cases it wouldn’t. Procter & Gamble Co v. OHIM, 2001 E.C.R. I-6251. Whirlpool Corp. v. Kenwood Ltd., [2009] EWCA (Civ) 753. 121 Philips Elecs. NV v. Remington Consumer Prods. Ltd., [1998] E.T.M.R. 124, 151–52. 119

120

Part A: EU Trademark Law Developments  411 DR. GANGJEE: I just would like to respond to that and maybe pick up on Emily’s question again. Perhaps the most “out there” non-conventional trademark I have come across is there’s a Rock ‘n Roll Museum in the United States and they wanted to register the entire building as a trademark because it performed museum services, it was an iconic building, and they just wanted to say that you can connect these two and therefore it works as a trademark.122 We’ve got this algorithm in trademark laws which says you can teach anybody that anything can do the work of a trademark. That is a very loose way of going about deciding what your subject matter is. So we all seem to implicitly claim the trademark law is a descriptive exercise, that we can recognize things as trademarks and just take them in. But it gets more tricky as you open up the subject matter. I can intuitively understand why you would be uncomfortable with anything like “boom, boom” or longer than that being registered, but where do you have the principles to draw that box? PARTICIPANT [Mr. Justice Jacob]: The Rock ‘n Roll Museum is in the shape of a pyramid. MR. JOHNSON: Isn’t one of the issues when it comes to unconventional marks the issue of infringement? It gets to the stage where your mark is so unconventional and so unique to what you do that nobody else really cares. If you have your ten-minute song, it is either being played as music and people listen to it as music, in which case it is not being used as a trademark, or alternatively nobody else is going to conceivably use it or anything sufficiently similar to it to be a risk. DR. GANGJEE: In a sense, that is where the other bits of European trademark law unhelpfully kick in. In Europe we presently have this debate about the scope of trademark infringement. An unauthorized use of a sign by a third party can be infringing even if doesn’t affect the essential function of a trademark. Use by a defendant which independently affects, say, the quality or advertising functions could be infringing and the advertising or “image” function is capable of a capacious definition. So if you say that a trademark has advertising value and that’s the function that you want to protect, if somebody else plays it as a piece of music, even though it’s not being used by them as a trademark (not affecting the essential function), it could affect advertising value—bang, you’re dead. QUESTION: Nick Gardner from Herbert Smith in London. Part of the problem, I’d venture to suggest, is that the trademark system has created rights that can be potentially lost forever. You can’t blame people trying to protect designs as trademarks and so forth, given that disparity between different forms of protection. I just wonder what the panel’s views on that are. MR. JOHNSON: I think there is always a risk as a practitioner, if you are sitting there and you are told, “We would like to protect this,” and you say, “No, you shouldn’t.” I mean you have a duty to get your client the best rights you can and you have a duty to push the Office to an extent. You can’t sit back and decide that this is inappropriate. MR. MAIER: A design can often also be protected as a trademark—both definitions have an overlap from the legal point of view. A sign is a sign. It can be registered as a trademark or as a design. I think a big part of the problem comes from the fact that we have actually imported American needs into the European trademark system. In the USA it seems to me, it is difficult to obtain 122 See Rock & Roll Hall of Fame & Museum, Inc. v. Gentile Prods., 134 F.3d 749 (6th Cir. 1998); see also Matthew English, “The Rock and Roll Hall of Fame v. Gentile Productions”, 2001 J. Contemp. Legal Issues 79 (2001) for a discussion of Rock and Roll Hall of Fame and Museum, Inc. v. Gentile as well as a discussion of The Rock and Roll Hall of Fame’s attempts to protect its building as a trademark).

412  CHAPTER VI: TRADEMARK LAW any other protection for a number of subject matter. Trademark registration is therefore the solution in the USA for various signs which a number of jurisdictions in Europe would never, ever have accepted as trade marks. I come from a jurisdiction, France, where actually we have been very liberal in the past, so we were not really shocked by that liberal approach. But if you look at the German tradition, it clearly is much more restrictive than the American one or the British one. MR. JOHNSON: Does anybody on the panel want to take thirty seconds to sum up anything they’d like to say, or is everybody happy to keep their peace now? With that, can I thank all the panelists again? Thank you very much for your presentations.

Chapter VI

Trademark Law Part B: Dilution Actions: Dying or Growth Industry? Moderator Dr. G.E. Evans

Queen Mary, University of London, Centre for Commercial Law Studies Speakers Prof. Marshall Leaffer

David Llewelyn

Indiana University (Bloomington)

White & Case, Kings College London Sven Klos

Klos Morel Vos & Schaap (Amsterdam) Panelists Dr. Dev Gangjee

Department of Law, London School of Economics

Gordon D.T. Humphreys

Member of the Second Board of Appeal, OHIM (Alicante)

Prof. Spyros Maniatis

Director, Centre for Commercial Law Studies, Queen Mary, University of London DR. EVANS: Welcome.

We have three illustrious speakers: Prof. Marshall Leaffer, Indiana University; David Llewelyn, White & Case, Kings College London; and Sven Klos, from Klos Morel Vos & Schaap, Amsterdam. We also have three illustrious panelists: Dev, Gordon, Spyros. They will speak in the order of the program.

414  CHAPTER VI: TRADEMARK LAW As you know, timing is very strict here. We have approximately ten minutes for the speakers and five for the panelists’ remarks, and then it’s over to you, the audience, and back to the panel, as necessary. Let us begin. Marshall, thank you. PROF. LEAFFER: Thank you, Madame Chairman. I will stay within the ten minutes. Is Dilution law a “Dying or Growth Industry?” I think one can come to the conclusion that it isn’t a dying industry, but its growth has been tepid. To use a metaphor from the current discourse I think that dilution law has been given a statutory stimulus in the form of the 2006 Amendments. But if you look at the actual application of dilution law in the courts, you find a moderating approach about pushing dilution to the limit. As a preliminary matter let’s take a look at the 2006 with the Trademark Dilution Revision Act1 in its major changes to the previous regime. The amendments were necessary because the 1995 statute was a lesson in bad drafting.2 The 2006 went a long way to remedying the problems. [Slide] The motivating factor for this Trademark Dilution Act of 2006 was the Moseley case, in which the Supreme Court read the language of the statute literally.3 The language of the 1995 statute required the proof of actual injury to the economic value of the mark by objective proof of actual dilution.4 This interpretation of the 1995 Act caused a lot of consternation in the trademark bar. Mark owners said, “My God, this doesn’t make a lot of sense. We’re going to have to wait until our mark is diluted before we can bring an action? This is not what the federal dilution law was designed to do.” That makes sense. But if you read the statute itself and take its terms literally, the Supreme Court’s reading of the Mosley case cannot be faulted. So INTA came to the rescue, and in three years they were able to promote the passage of comprehensive amendments to the 1995 Act. Let’s go through some of the changes. This is what you might call the growth part. Here is what the TDRA of 2006 did: 1. It replaced the actual dilution standard with “a likelihood of dilution”5 to prevent dilution in its incipiency so you don’t have to wait until your mark is diluted before you can bring an action. 2. It gave definitions to dilution by blurring and by tarnishment, and gave us specific standards by which to determine dilution by blurring.6 3. It eliminated niche fame marks. So now the trademark law, at least as far as dilution is concerned, is a national issue. We still have state dilution, of course, to deal with these niche fame marks.7 4. The act specifies that marks can become famous either by inherent distinctiveness or by acquired distinctiveness through secondary meaning.8 5. Finally legal remedies for dilution have been greatly enhanced.9 1 Trademark Dilution Revision Act of 2006, Pub. L. No. 109-312, 120 Stat. 1730 (codified as amended at 15 U.S.C. § 1125). 2 Federal Trademark Dilution Act of 1995, Pub. L. No. 104-98, 109 Stat. 985 (1996) (codified as amended at 15 U.S.C. § 1125). 3 Moseley v. V Secret Catalogue, Inc., 537 U.S. 418, 433, 123 S. Ct. 1115, 1124 (2003). 4 Id. at 433, 123 S. Ct. at 1124; Federal Trademark Dilution Act, § 3, 109 Stat. 985 (codified as amended at 15 U.S.C. § 1125(a)(3)(c)). 5 Trademark Dilution Revision Act §3 (codified as amended at 15 U.S.C. § 1064(c)(1)). 6 Id. at § 2 (codified as amended at 15 U.S.C. § 1125(c)(2)(B)–(C)). 7 Id. at § 2 (codified as amended at 15 U.S.C. § 1125(c)(2)(A)). 8 Id. at § 2 (codified as amended at 15 U.S.C. § 1125(c)(1), (2)(A)(1)). 9 Id. at § 2 (codified as amended at 15 U.S.C. § 1125(c)(1), (2)(A)(1)) (“Under the TDRA, owners of famous marks may be entitled to recover the defendant’s profits, plaintiff’s damages, costs, and attorneys fees as well as treble damages, statutory damages, and injunctive relief.).

Part B: Dilution Actions: Dying or Growth Industry?  415

6. As for defenses, the position of the 2006 Act is ambiguous. It is debatable whether the amendments expanded the defenses against an action for dilution,10 except that the doctrine of fair use has been explicitly recognized and codified.11 So that’s the inflation aspect of dilution. [Slide] Now let’s turn to what we might call the skeptical gloss that has been taken by the courts or the deflation aspect of dilution. I would like to examine three cases where the courts have cut back on the scope of dilution. The Louis Vuitton case is a prime example of this attitude.12 In Louis Vuitton, the defendant developed a line of products for dogs, chew toys and little sleeping bags and little carrying bags. The “Chewy Vuiton” items had a resemblance to the famous bag and luxury item maker. The court held that by creating plush and inexpensive chew toys, which clearly mimic the well-known handbags, defendants did so intentionally for the purpose of “irreverent satire.”13 The court applied the blurring factors that are enumerated in the Act:14 (i) The degree of similarity between the mark or trade name and the famous mark; (ii) The degree of inherent or acquired distinctiveness of the famous mark; (iii) The extent to which the owner of the famous mark is engaging in substantially exclusive use of the mark; (iv) The degree of recognition of the famous mark; (v) Whether the user of the mark or trade name intended to create an association with the famous mark; (vi) Any actual association between the mark or trade name and the famous mark.

The court found that factors (i), (v), and (vi) favored the defendant.15 Thus, there was no dilution by blurring. The principle motivation for its decision is the court’s idea of parody which it defined as “irreverent satire.” To me the case represents what I would term a “pseudo-parody”—the use of another’s trademark for humorous effect without any pretense of social criticism or comment. One might ask what function the “Chewy Vuitton” references occupy in this context. Are they making fun of Vuitton? Are they commenting on the famous company? I don’t see it. To me, Haute Diggity Dog appears to be taking a free ride on the trademark through crude humor. [Slide] The second case I would like to consider is Starbucks.16 We all know Starbucks, a global and famous mark if there ever was one. Wolfe’s Borough Coffee adopted the mark “Charbucks” in its sale of coffee. The Starbucks Company brought a dilution action against Wolfe’s Borough Coffee’s use of “Charbucks” and “Mr. Charbucks” used in the Wolf Brother’s ads in their commercial operation. What seemed to me a strong case for dilution by tarnishment and blurring, did not turn out as one might have thought. In rejecting the action for dilution, the court gave dispositive 10 Compare Marc L. Delflache et al., “Life After Moseley: The Trademark Dilution Revision Act”, 16 Tex. Intell. Prop. L.J. 125, 142 (2007) (arguing that the TDRA only appears to expand the statutory defenses and that no new have actually been added) with Scot A. Duvall, “The Trademark Dilution Revision Act of 2006: Balanced Protection for Famous Brands”, 97 Trademark Rep. 1252, 1268–71 (2007) (arguing that the TDRA expands fair use within federal dilution law further then ever before). 11 Trademark Dilution Revision Act § 2 (codified as amended at 15 U.S.C. § 1125(c)(3)(A)). 12 Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 507 F.3d 252, 84 U.S.P.Q.2d 1969, 1974 (4th Cir. 2007). 13 Id. at 261, 84 U.S.P.Q.2d at 1974. 14 Trademark Dilution Revision Act § 2 (codified as amended at 15 U.S.C. § 1125(c)(2)(B)(i)–(vi)). 15 Louis Vuitton Malletier S.A, 507 F.3d at 268. 16 Starbucks Corp. v. Wolfe Bros. Coffee, Inc., 559 F. Supp. 2d 472, 88 U.S.P.Q.2d 1268 (S.D.N.Y 2008), aff’d in part, vacated in part, Starbucks Corp. v. Wolfe Bros. Coffee, Inc., 588 F.3d 97, 92 U.S.P.Q.2d 1769 (2d Cir. 2009).

416  CHAPTER VI: TRADEMARK LAW weight to the marks’ dissimilarity. Because “Charbucks” is always used with the prefix “Mr.” the noted felt that there was no real intent to create an association.17 Again, one might ask: is the use of “Charbucks” a real parody? Or is this simply an instance where one company takes a free ride on another’s mark for humorous effect? As for my third example, let’s consider the WAL*OCAUST case,18 another instance in which parody was raised as a successful defense. The defendant sold t-shirts and other novelty merchandise comparing Wal-Mart retail chain to the Nazis and to al Qaeda. The court held that a claim of dilution applies only to purely commercial speech.19 Here Smith’s parodic work is considered non-commercial speech, not subject to dilution claims, despite the fact that Smith sold the design to the public on T‑shirts and other novelty merchandise. Unlike the other two parody cases, the Wal-Mart case is an example where the defendant targeted the plaintiff’s trademark for the purpose of comment and criticism—however crude and misplaced that comment and criticism may have been. The fascinating thing to me is that the deep-pocket plaintiffs in the three cases all used survey evidence—what one might think was very effective survey evidence. And yet, the courts in these cases gave short shrift to the survey evidence. Here, the surveys showed an association but an insufficient showing of actual confusion. In addition to rejecting dilution by blurring, they also rejected dilution by tarnishment in the examples just given. For example, in Starbucks, the court stated that tarnishment harms reputation, and is usually found in the “context of sexual activity, obscenity, or illegal activity.”20 Moreover, the survey results offered by Starbucks were unpersuasive, even though 30 percent immediately associated “Charbucks” with “Starbucks” and 62 percent had a negative impression of “Charbucks.”21 From these numbers one might conclude that there was some kind of association, one which harmed the positive values inscribed in “Starbucks.” The court, however, said the focus should be on “Starbucks,” not “Charbucks,” the negative association related to the defendant, not to the plaintiff.22 [Slide] In sum, the courts have engrafted on the statute a generalized parody defense that exceeds the literal language of the 2006 amendments. The statute does recognize the fair use of a famous mark “other than as a designation of source for the person’s own goods or services including use in connection with … identifying and parodying, criticizing or commenting on the famous mark owner or the goods or services of the famous mark owner.”23 But in these cases, at least in Louis Vuitton and Starbucks, the famous marks were used as designations of source, a use that exceeds the terms of the statute. Thank you. DR. EVANS: Thank you very much. David has subtitled his presentation today, “An English Perspective: Skepticism Rules.” MR. LLEWELYN: Actually, as I am followed by a Dutchman on this subject, as I always seem to be for some unknown reason, I have decided actually to give a Shakespearean perspective on dilution. [Slide] [“The Tempest”] I don’t need to go through what it is we are talking about in the European context. You all know that already. [Slide] [“A Comedy of Errors”] You have heard about the U.S. position. Let’s not lose sight of the fact, though, that all this has come out of that seminal article by Frank Id. at 477–78, 92 U.S.P.Q.2d at 1272–73. Smith v. Wal-Mart Stores, Inc., 475 F. Supp. 2d 1318, 1321–22 (N.D. Ga. 2007). 19 Id. at 1324. 20 Starbucks Corp., 559 F. Supp. 2d at 479, 92 U.S.P.Q.2d at 1274. 21 Id. at 480, 92 U.S.P.Q.2d at 1274. 22 Id. 23 15 U.S.C. § 1125(c)(3)(A). 17 18

Part B: Dilution Actions: Dying or Growth Industry?  417

Schechter.24 There he was saying that marks which should be protected in this extensive way really should be invented marks.25 There is no such limitation in Europe. So let’s bear that in mind. If you go back and reread the Schechter article, you will see that he had in mind cases like the German case in the 1920s involving “Odol.”26 I always think it’s very good that this whole thing comes out of a mouthwash, “Odol” being a registered trademark for mouthwash in the 1920s in Germany, which is protected against use on dissimilar goods. [Slide] [“Measure for Measure”] But I want to mention now an English case which has just been appealed. The appeal was heard last week.27 It involved mixers. I used this slide in a lecture I gave a couple of months ago because it is quite clever. I said to my secretary one day, “I’m doing a slide on a case involving mixers. Will you find me a graphic for it?” So she came up with this. Those of you who know the case will realize that she was being extremely clever, because she basically showed confusion. The case is all about food mixers. But in her graphic she is saying that it is all about confusion really. [Slide] In the Kenwood case28 this was the registered trademark. Yes, we’re back in “Alice in Wonderland.” This is a registered trademark. Registration was allowed because it had a word mark on it. That was the only reason. But actually, when you searched the Register you couldn’t see the word mark. An issue there, I would have thought, but that’s logic. Where does logic play a role any longer? These were the two products in the Kenwood case. Yes, we are still talking about registered trademarks, we are still talking about dilution arising from Schechter’s article, and invented words. [Slide] Fortunately, at first instance Geoffrey Hobbs, sitting as a deputy judge, came to the conclusion: “I think it would be excessive, in the realm of product shapes, to apply the concepts of ‘free riding’, ‘blurring’, ‘tarnishment’, or ‘dilution’ more generally so as to hold that the bodywork of the kMix was too close to the bodywork of the Artisan for the purposes of Art. 9(1)(c).”29 “I am not persuaded otherwise,” said Hobbs, “by the evidence indicating that consumers may or will be drawn into choosing the kMix by reason of its resemblance to the Artisan.”30 Despite that evidence, he said, “No infringement.”31 We have in the audience this afternoon somebody who was counsel in the appeal last week. It may be interesting to hear her views on what she thinks is going to be the result of that appeal. 24 Frank I. Schechter, “The Rational Basis of Trademark Protection”, 40 Harv. L. Rev. 813 (1927). The origins of dilution law can be traced to the 1927 Harvard Law Review article by Frank Schechter, where he proposed the idea of protection for a trademark even in the absence of consumer confusion—where the loss of trademark distinctiveness itself would make for a cause of action. See Robert G. Bone, “Schechter’s Ideas in Historical Context and Dilution’s Rocky Road”, 24 Santa Clara Computer & High Tech. L.J. 469 (2008) (discussing history of Schechter’s article); Mathias Strasser, “The Rational Basis of Trademark Protection Revisited: Putting the Dilution Doctrine into Context”, 10 Fordham Intell. Prop. Media & Ent. L.J. 375, 377–78 (2006) (discussing history of Schechter’s article). 25 Schechter supra note 24, at 819, 829 (“[T]he more distinctive the mark, the more effective is its selling power…. [Coined arbitrary and fanciful words or phrases … have, from the very beginning, been associated in the public mind with a particular product, not with a variety of products, and have created in the public consciousness an impression or symbol of the excellence of the particular product in question.”). 26 The Odol Case, Judgment of Sept. 11, 1924, Landgericht Elberfeld, 25 Juristische Wochenschrift 502, XXV Markenschutz und Wettbewerb 264; see Schechter supra note 24, at 831­–33 (discussing the German Odol case); see also Frank I. Schechter, “Trade Morals and Regulation: The American Scene”, 6 Fordham L. Rev. 190, 204 n.42 (1937) (discussing the German Odol decision while comparing dilution to impairment of a mark’s “selling-power or drawing-power”). 27 Whirlpool Corp. v. Kenwood Ltd., [2009] EWCA (Civ) 753. 28 Id. 29 Whirlpool Corp. Inc v. Kenwood Ltd., [2008] EWHC (Ch) 1930, [80]. 30 Id. 31 Id.

418  CHAPTER VI: TRADEMARK LAW But Geoffrey Hobbs clearly thought, “This is going too far. This is actually extending this whole area of dilution into areas into which it should not go.” [Slide] You all know about Intel,32 all about chips. [Slide] “What You Will,” as you know, is an alternative name for another Shakespeare play. “For detriment to be found,” said the ECJ, “the proprietor of the earlier mark must prove that there is a serious risk that [] injury [to his mark] will occur in the future.”33 Factors will include likelihood of confusion.34 But where likelihood of confusion, a link between this mark and the sign is necessarily established; but not so where the mark is unique and has a huge reputation. [Slide] [“Love’s Labour’s Lost”] But existence of a link is not enough. The proprietor must “prove actual and present injury … or a serious likelihood that such an injury will occur of it in future.”35 [Slide] [“Midsummer Night’s Dream”] And then there is this wonderful paragraph: That means that there must be “evidence [adduced by the claimant] of a change in the economic behavior of the average consumer of the goods or services for which the earlier mark was registered.”36 That is the particular provision on which there has been a lot of debate. What type of evidence is one going to able to adduce to show that? [Slide] “Back to the Future” is not the title of a Shakespeare play, just in case some of you were worried. Basically, we seem here to have gone back to a situation where with each of the different types of infringement we still need a likelihood of confusion, we still need confusion. After the Opel case, you need confusion even where there is an identical mark being used on identical goods, don’t we? We seem to now have reached a situation where unless there is some evidence of confusion or there is likelihood of confusion, we’re not going to have dilution either. [Slide] [“Merry Wives of Windsor”] And remember, drink solves it all, but make sure it is not a detergent. As you all know, this is the case37 which Dutch lawyers will trot out time and time again because Dutch lawyers drink detergent when they mean to drink gin. Thank you. DR. EVANS: So no damage to distinctive character without confusion. Well, that is to be continued. Finally, Sven, is there life after Intel? MR. KLOS: Detergent is not good for your brain, but maybe you should try it one day. It would make a nice change. I am absolutely torn between two things actually. I have heard Hugh Hansen promise all speakers who would finish under ten minutes a special place in heaven. Now, if you don’t go for the special place, at the end of your speech you get to hear the voice of Stephen Hawking, which I think is appropriate in Cambridge. I think I have just missed the voice there, so I think I am going to try to go for the special place in heaven, although it may be a long time before I actually get to collect my reward. Perhaps not too long, because I have been in this game for twenty years now last week, thank you. But I realize that I have nothing to show for it, nothing at all, knowledge-wise that is. I have no idea what trademark law is about anymore. I cannot give you the answer to the most simple questions, such as clients that ask me in a trademark case, “What actually do you compare?” I Case C-252/07, Intel Corp. v. CPM United Kingdom Ltd., 2008 E.C.R. I-8823. Id. at [38]. 34 Id. at [42]. 35 Id. at [71]. 36 Id. at [77]. 37 Claeryn/Klarein, Case A 74/1, Nederlandse Jurisprudentie 1975, No 472 (Benelux Court of Justice, Mar. 1, 1975). 32 33

Part B: Dilution Actions: Dying or Growth Industry?  419

say, “We compare the mark to … —Oh, I’m not sure what we compare it to, actually, because the courts keep moving the goalposts on me there. Sometimes they take the whole product, sometimes they take the whole catalogue, sometimes when you invoke a device mark they take the corresponding sign or the device, or they say, ‘Well, there’s a word there.’” Anyway, you have it in your own jurisdiction. It’s a nightmare. We all have to live with it. But we are having fun because we get to drink a lot of detergent afterwards. So I realized that I do not know that. But I also have no idea anymore what the scope of protection of famous marks is actually, even after litigating a lot of these cases. We are in the happy position that Adidas is one of our clients, so we get a special rate for the taxi driver to drive us to Luxembourg, which is cheaper than by plane from Amsterdam. So next time you do it, or maybe Adidas will change firms, you will know how to get to Luxembourg. But even after all these trips, we are really none the wiser. Intel38 I think is one of the best pieces of evidence that you can get for all the criticism that we have heard during this conference of the ECJ. Now, I don’t blame the ECJ for giving complicated and murky answers, if you get judges like Robin Jacob asking the questions and already dictating the answers. We have heard a reference to him at this conference as “Robin Prejudice Jacob.” Most British lawyers seem to fit that title where dilution is concerned. There were a lot of loaded questions asked in this case. If we look at Intel—and I am sure you have done so many, many times already—but if we do it together, you will understand why I still have a lot of question marks. We knew from Adidas v. Fitnessworld39 that a certain degree of similarity between a famous mark and a sign could result in a connection between the sign and the mark; if that is the case, then we have a link; and that is sufficient for infringement if you fulfill the other requirements. The Court told us explicitly that such a link obviously is not one where a likelihood of confusion results.40 When we were just litigating these cases under Adidas v. Fitnessworld, it was interesting that we had different translations. We heard a lot of Dutch lawyers in court quoting the German version. The link there was Gedanklich verknupfen, which is making a not literally mental knot. There were, of course, lots of others who said, “No, a link goes much further than that.” So the questions, of course, as far as most concepts in trademark law are concerned: Is a link a factual thing? Is it a normative concept, such as likelihood of confusing? Or is it both, such as the ECJ seems to want it as far as likelihood of confusion is concerned? You don’t hear a lot of people talking about that. If you read Puma v. Sabel,41 then you think this is a purely normative thing. Then you read Adidas v. Marca42 and you see that it has to be properly substantiated, proven. So it is basically trying to put two legs in one trouser leg, trying to make the English happy, make the Germans and the Benelux and the French lawyers happy. But you end up with something that is really quite murky and mysterious. Well, the Court already told us in Adidas v. Fitnessworld that, the same as with likelihood of confusion, it is a general assessment. You have to take all factors into account. [Slide] In Intel we get a rundown of these factors,43 such as David already touched upon. If you look at them in the framework of dilution, some of them are really mind-boggling. If you want to work with these factors in a court of fact, then you have to: • First, plead the degree of similarity between the mark and the sign. Well then, mostly, of course, if you take that as a factor, you lose out because you are pleading a case where the Case C-252/07, Intel Corp. v. CPM United Kingdom Ltd., 2008 E.C.R. I-8823. Case C-408/01, Adidas-Salomon AG v. Fitnessworld Trading Ltd., 2003 E.C.R. I-12537, [29]–[30]. 40 Id. at [31]. 41 Case C-251/95, Sabel BV v. Puma AG, 1997 E.C.R. I-6191. 42 Case C-425/98, Marca Mode CV v. Adidas AG, 2000 E.C.R. I-4861. 43 Intel v. CPM, 2008 E.C.R. I-8823, at [42]. 38 39

420  CHAPTER VI: TRADEMARK LAW similarity is already lower because you end up in the outer reaches of protection if you are invoking a famous mark. • Then, the nature of the goods, the degree of similarity of the goods, is a factor. Well, that is difficult too. Davidoff44 sort of did away with the relevance of similarity of goods, didn’t it? Anyway, we’ve got it back now. Again, it is truly quite complicated to say, “We are invoking here the kind of protection that is available to us regardless of the similarity of the goods.” But nevertheless we have to plead this issue. • Strength of reputation. • Distinctiveness. • And then, of course, likelihood of confusion. The level of the likelihood of confusion is a factor in whether or not a link is established. [Slide] That to me is quite mysterious, because the Court also says that all these people who have been saying that a link maybe is something more than a pure mental association—here is the Benelux word again—are wrong. It is a pure mental association, it is a pure mental link, and once the link is there, and you can prove that such a link is there, then you have to accept that a link within the meaning of the Court’s body of case law now is present. It’s pure calling to mind. Now, my simple question is: Isn’t that just a fact that consumers associate a sign with a mark? Isn’t it a mental process that actually happens? Isn’t this one of these rare things that you could actually prove by doing surveys, or whatever method we decide upon is the right method? It’s not the likelihood of whether there is an association, it’s not the likelihood of whether a link will be formed; a link has to be present. So here is where the Court might very well have just said, “You have to prove that, period.” But no, they give us the same approach as to the concept of likelihood of confusion, that general global assessment, with all these very, very, very confusing factors. [Slide] The good thing is that we get a definition of “dilution” which is actually usable within the European Union. It is not very surprising, but we can work with it. There seems to be a lot of emphasis on the immediacy of the association that the consumer forms between the mark and the product. If that is lessened, if you lose that, then you have a case under dilution. But then you have to prove it. [Slide] Well, I have a question, but no time. [Slide] Of course, we don’t have to demonstrate, according to judgment, that there is actual present injury. The word “foreseeable” is used. Now, that sounds good. But then, of course, that immediately is taken away because we have to prove that there is a serious risk that such an injury will occur in the future. [Slide] Let’s have a debate. How do you prove a risk? How do you prove something that actually hasn’t happened yet? [Slide] And then, of course, the final blow is that the requirement for proving that a link exists, that there is actual harm there, is that there is a change in the conduct of— Oh, I got Hawking. Immediate gratification. Wonderful. Sorry, Stephen. —is that we now have to prove actual change in economic behavior, whereas we do not know what the economic behavior that is supposed to change is. Let me tell you one thing, my final remark. It cannot possibly be the choice of product, because if that is the kind of behavior that we have to prove might change in the future, then actually what you are proving is confusion. So what we have to prove probably is a lessening of the immediacy of the identification. I have an idea for a laboratory test to prove that, but it has taken twenty lawyers about a month within my firm to come up with it, so I can’t present it in these few seconds. So ask me the question. 44

Case C-292/00, Davidoff & Cie SA v. Gofkid Ltd., 2003 E.C.R. I-389.

Part B: Dilution Actions: Dying or Growth Industry?  421 DR. EVANS: Thank you.

It’s as you say in your byline then: It’s life, but not as we know it. Now to our panelists. Our first panelist is Dev, who has some remarks to make on the nature of the harm. Thank you, Dev. DR. GANGJEE: Thanks, Gail. I would like to pick up on Sven’s observation about the ECJ finally identifying the nature of the harm in dilution by blurring in Intel.45 That’s why I find myself in the surprising position of thinking Intel is a good decision and there is actually something in there. I am going to ask you to do a thought experiment in a couple of minutes. I know it’s postlunch, so I’d recommend a couple of deep breaths. What I really want to focus on is this idea that the courts have identified a very particular relationship and said, “If this relationship gets shaken about or injured, that’s what we call ‘dilution.’” In the past, dilution has been associated with damage to uniqueness, damage to brand value or brand equity, or perhaps damage to goodwill or attractive power, and in Intel the ECJ distanced itself from these alternative or derivative characterizations and said, very specifically that dilution is detriment to distinctiveness. Distinctiveness in turn is the ability of a sign to indicate that the goods and services it stands for came from a particular proprietor. This is what we call the “essential function” in European trademark law. This interconnected chain-like relationship linking sign to commercial source, which gets shaken apart or eroded through the process of dilution, is the specific target that the European trademark regime seeks to protect by preventing blurring. So if a sign loses (or there is a real risk that it will lose) the ability to effectively invoke the goods and services from a specific source, for which it is reputed, then that is what we call dilution. I can give you an example of where this detriment takes place: genericide. You begin with a particular sign such as “Hoover” for specific goods and services from one source. Over time this generally becomes a designation for the category of vacuum cleaners, and “Hoover” loses this origin-indicating ability in a specific trademark sense. Now, here is why I think Chewy Vuiton46 is a good decision according to this particular understanding of blurring. I invite you to follow me on this thought experiment. When we hear “Chewy Vuiton” is being used as a trademark for pet toys we laugh, sigh or perhaps get exasperated, but it does remind us of the original “LV” and the goods and services that the original stands for. So in a parody situation the distinctiveness—understood in the technical trademark law sense of origin indicating ability—of “Louis Vuitton” is not damaged; if anything, it could perhaps be enhanced. This is why the clarity that Intel brings to the nature of the harm in dilution is to be welcomed. Now let me briefly consider one aspect of Intel which has generated much controversy. One of the requirements for proving harm by blurring or its likelihood, is “evidence of a change in the economic behavior of the average consumer … consequent on the use of the later mark, or a serious likelihood that such a change will occur in the future.”47 Questions have been raised as to whether this requirement mistakenly imports a ‘likelihood of confusion’ evidentiary category into the otherwise doctrinally distinct action of blurring 45 Intel v. CPM, 2008 E.C.R. I-8823, at [29] (“As regards … detriment to the distinctive character of the earlier mark, also referred to as ‘dilution’, ‘whittling away’ or ‘blurring’, such detriment is caused when that mark’s ability to identify the goods or services for which it is registered and used as coming from the proprietor of that mark is weakened, since use of the later mark leads to dispersion of the identity and hold upon the public mind of the earlier mark. That is notably the case when the earlier mark, which used to arouse immediate association with the goods and services for which it is registered, is no longer capable of doing so.”). 46 Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 507 F.3d 252, 84 U.S.P.Q.2d 1969 (4th Cir. 2007). 47 Intel v. CPM, 2008 E.C.R. I-8823, at [77].

422  CHAPTER VI: TRADEMARK LAW But what the court here seems to be suggesting is: Because you start shaking loose this originindicating message, less people start buying your product. It’s not that they are going elsewhere to a specific competitor, but less people start buying your product because the association time required for, say, Intel and microprocessors or computer equipment, begins to increase, i.e., recall slows down. In a competitive market, you’re either quick to get the consumer’s attention or you’re dead, so blurring should lead to evidence of this associative slowdown. Here we enter very difficult causal territory. You could be losing sales for a variety of reasons, not just because your trademark is losing its distinctiveness message. Alternative explanations could range from effective marketplace competition to a slow economy to a faddish change in consumer tastes. So this evidentiary requirement remains a legitimate concern for proprietors of reputed trademarks. But the one thing I am glad that the ECJ have done—and I’ll end with this observation—is I’m glad they’ve avoided endorsing the survey route, because usually surveys end up asking the wrong sorts of questions. In a survey it is relatively easy to elicit a favorable response for the following: “Here is the junior mark (e.g., “Victor’s Little Secret” in the Victoria’s Secret case).48 What does it remind you of?” In the past blurring surveys have tended to emphasize the mental association between the earlier and later marks while insinuating that harm would naturally flow from this. If—as in Chewy Vuitton—the junior mark reminds you of the senior mark, but then that also reminds you that the senior mark stands for its own distinct goods and services, a survey which merely measures a later mark reminding you of an earlier one doesn’t actually measure dilution. So I’m glad that they haven’t officially endorsed survey methods, while still leaving the door open for them. My concluding observation is that this definition of blurring really helps us to focus on the fact that referencing, alluding and mentally associating is something we do as a society. We need to be very careful about the reasons why we stop cross-referencing. We can stop crossreferencing when it confuses people. But otherwise we cross-reference to learn, to play, to compete and we should be permissive about it if there aren’t good reasons, such as verifiable injury or harm, to stop it. That’s why I’m glad for the clarity this decision has brought. DR. EVANS: Thank you, Dev. Gordon, do you have the measure of these skeptics? MR. HUMPHREYS: I’m not so convinced that the Court is keeping surveys away from us. Quite the contrary. I think, certainly in the Boards of Appeal in OHIM, where I am from, we are going to see a lot more surveys coming, despite the fact—as I am well aware—that surveys and opinion polls are very expensive and, for that reason, not engaged upon lightly. Given that the Court hasn’t really given precise guidance as to, first, how the economic behavior of consumers will be measured, and, second, how it will be assessed as having been altered, or shown that there is a serious risk that it will be altered, those uncertainties, would— in my opinion—mean that survey and opinion poll evidence was a logical route to go down. This is true, even though, certainly, in OHIM we, to use the phrase Marshall used, have a “skeptical attitude” towards such evidence as well. Nevertheless, there is not a great deal else that people will be able to do to show their case. On the other hand, there maybe some other alternatives. I was just thinking of the TDK case,49 where the CFI gave some indications of the relevant factors in assessing “unfair advantage”: namely, intensity, duration, and geographical coverage of use the earlier mark. The Court in TDK also mentioned sales figures relating to the earlier mark, but as Dev rightly pointed out, these figures are problematic, and probably far more problematic in recent times than before. 48 49

Moseley v. V Secret Catalogue, Inc., 537 U.S. 418 (2003). Case T-477/04, TDK Kabushiki Kaisha (TDK) v. OHIM, 2007 E.C.R. II-399.

Part B: Dilution Actions: Dying or Growth Industry?  423

Moreover, the amount of investment in marketing of the earlier mark is relevant. Interestingly, the marketing is not only in financial terms, but it could be assessed in terms of effort and time put into the marketing. Of course, that won’t be persuasive unless some financial implications also arise from that. The CFI also intimated in the TDK case that goodwill from sponsorship activities, going beyond the actual goods and services for which protection was granted, could be an additional element. It strikes me, picking up on what David said, that we have a serious problem—and this is one we almost face daily in the Boards of Appeal—with marks that are inherently weak but which sometimes acquire a huge reputation. I’m thinking, for example, of “Polo” for polo shirts. This is inherently a very weak mark, but undeniably it has achieved a considerable reputation. The question is: Should we treat these marks more severely than other forms of marks that are “unique,” to use the word of the Court, in their own right—i.e., they have a strong ab initio inherent distinctiveness? Do they deserve more protection, or can you compensate for an inherently weak mark by having a high degree of reputation? I think the problem that has been introduced in the Intel case50 is bringing likelihood of confusion into the equation. Arguably, if likelihood of confusion had been kept out of the equation, it wouldn’t have been such an unhappy decision. DR. EVANS: Thank you. Finally, Spyros, niche markets. PROF. MANIATIS: I have one additional point to make. It appears that there are serious health risks associated with dilution: Dutch lawyers drink detergent; David’s staff confuses chips with chips, so they don’t eat well, and mixers with mixers, so they drink a lot; and in the Chewy Vuiton51 case, one of the issues that the court had considered was whether the lovely dogs would choke if they chewed a not-good-enough chewy toy. The other point that I want to make is about niche markets. It appears that in the United States, with the new law, we don’t protect niche reputation in terms of geography and product market. You need to have a much broader reputation in order to get protection at the federal level. You can overcome that at the state level, so you can overcome that in terms of niche geography markets, but not in relation to niche product markets. In Europe it appears, following the test that the Court gave us about reputation, that the threshold for what marks we protect in terms of reputation is lower. So perhaps we do protect marks with a niche reputation in terms of geography and product. What I find interesting, if you read Intel, is that the Court tells us that in order to determine whether there is an unfair advantage you have to look at the audience of the infringer; only then you can determine whether there is an unfair advantage.52 In order to determine whether there is harm to the reputation, whether there is tarnishment, you have to look at the audience of the trademark owner.53 But in most cases you have to establish that there is some harm that results, that there is an effect on the behavior of the consumer. So perhaps this is one way that in Europe we are trying to deal with niche reputation—not at the time when we determine whether the mark deserves protection, but at the time when we determine whether the mark would get the protection, at the time of the alleged infringement. The third point that I want to make is linked with parody. I find it very interesting that the court in the Chewy Vuiton case, although it could use parody as an exception to infringement— Intel v. CPM, 2008 E.C.R. I-8823. Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 507 F.3d 252, 268-69, 84 U.S.P.Q.2d 1969, 1980 (4th Cir. 2007). 52 Intel v. CPM, 2008 E.C.R. I-8823, at [30]. 53 Id. 50 51

424  CHAPTER VI: TRADEMARK LAW says that “It is infringement, but we have the parody exception so it is outside the scope of protection”—it used parody in order to say: “This is not an infringement in the first place, you don’t have straightforward confusion, infringement, because it is a parody; you don’t have dilution because it is a parody.” The fourth point—and perhaps Marshall could clarify a little bit—is the reference in the Charbucks case, the link that they make between confusion and dilution—and there is a similar link that I think the Intel Court makes—the reference to the issue that in order to determine whether there is dilution or not you have to look at the “Starbucks” trademark, not the “Charbucks” sign or trademark.54 This links quite well, I think, with what the Court does in Intel by splitting the audiences that you have to consider in order to determine whether there is dilution or not. DR. EVANS: Thank you, Spyros. I’m sure there will be many questions on the practical implications of the Intel case. Marshall, if you could just hold that thought about Charbucks, I’d like to go to our audience. Please, audience. The microphone is at the ready. Etiquette requires that you give your identity first. Questions, please? QUESTION: Thank you. Peter Ruess. I have a question for Dev. You said we need the freedom to play around with a trademark. Evidently, as somebody who works for the trademark owners, I have some issue with that. What would you think of the argument that you say intellectual property is basically property, and if I don’t like you playing around with my property because what you do with it, like in the Chewy Vuiton case, doesn’t make it look good? I don’t see how I hamper the freedom of the society by not allowing you to call it “Chewy Vuiton.” That is picking up on something that was said earlier in this Conference. I think we are going the wrong way if we put this satirical thing too much in a First Amendment way. It is perfectly legitimate to have something like the Buttweiser cases,55 which I’m sure are familiar to the U.S. colleagues—no problem if I am actually poking fun at something. But if I am just using it to sell confusing items and thus for making money, then I am interested in learning from you why that is legitimate. DR. GANGJEE: I think my response is very simply that trademarks are a very artificial, contingent, special kind of property. They were originally given for very narrow categories of goods and services specifically applied for; hence the notion of specificity in trademark law. What you are increasingly seeing is that they are floating above them and beginning to settle across broader and broader ranges of goods and services. So they are historically conceived of a special kind of property which is granted to keep a channel of communication open and this has a broader public benefit.56 Where that channel of communication is open and there is no harm, other people should be allowed to use the sign on separate goods and services. However trademark law has not remained static. To compensate for changes in the marketplace and social expectations, we’ve had to broaden the exclusion test under the likelihood of confusion. So we have special treatment for well-known marks as well as other ways to accommodate the fact that harm (by confusion) could originate in situations where unauthorised third parties use the same sign on unrelated goods and services. That fits within the original rationale underpinning the grant of property rights; the prevention of harm. I am 54 Starbucks Corp. v. Wolfe Bros. Coffee, Inc., 559 F. Supp. 2d 472, 480, 88 U.S.P.Q.2d 1268 (S.D.N.Y 2008), aff’d in part, vacated in part, Starbucks Corp. v. Wolfe Bros. Coffee, Inc., 588 F.3d 97, 92 U.S.P.Q.2d 1769 (2d Cir. 2009). 55 Anheuser-Busch Inc. v. Andy’s Sportswear Inc., 40 U.S.P.Q.2d 1542 (N.D. Cal. 1996). 56 See Michael Adams, “The History and Evolution of Trademark Dilution”, 12 DePaul-LCA J. Art & Ent. L. & Pol’y 143 (2002) for a brief discussion of the history of trademark protection and dilution in the United States.

Part B: Dilution Actions: Dying or Growth Industry?  425

not convinced about the existence of harm in dilution by blurring or even unfair advantage cases. DR. EVANS: David? MR. LLEWELYN: I would also remind you of the South African Constitutional Court judgment in South African Breweries v. Laugh It Off Promotions,57 where Justice Albie Sachs asked the interesting question: Does the law have a sense of humor? PROF. MANIATIS: Can I add to that? I recognize that trademark rights are property rights. But this does not mean that you have absolute protection. So in the same way that you cannot built a nuclear factory if you own a piece of land, the protection you get is very clearly prescribed by the law. You have a statute that tells you why you get protection and to what extent you get protection. If you fall outside what the statute tells you, you cannot build the nuclear station. QUESTIONER [Mr. Ruess]: I am in agreement on fallout circumstances. That’s not the given facts. DR. EVANS: Do we have any more questions from the floor? QUESTION: Thank you. Andrew Bridges from Winston & Strawn. If this is a property right, it reminds me of a landowner with a parcel of land, bought and paid for, surrounded by empty parcels of land. So the government says, “Well, let’s give this landowner title over the empty parcels so that the landowner isn’t inconvenienced by having neighbors.” It’s an example of the Biblical phrase, “To everyone who has much, more will be given.”58 Is it not the case that this is a remedy in search of a theory, and that it neither protects those whom it is intended to protect nor protects against the harm that is the worst? I do believe that the harm that is the worst is when a newspaper regularly begins to use someone’s brand as a generic term, which at least under U.S. law is entirely immune from dilution liability because it is a not a commercial use of a mark in commerce by the newspaper.59 So that is the absolute worst thing that can happen. Conversely, those brand owners with very, very powerful marks, at least according to at least some studies I have seen, actually suffer least from dilution. Certainly, if you are talking about non-identical marks, the “Rolex” brand for watches is not likely to be harmed at all by “Rorex” used for a pharmaceutical product. So it has struck me as creating this additional “para-property” with no real intellectual justification, but then serves simply to make life easier for powerful companies to pay less to enforce their rights against what would otherwise be infringement. DR. EVANS: Thank you. Any response? PROF. LEAFFER: I’d like to respond to that. Andy, I enjoyed your landowner analogy and share many of views on the dilution concept. But dilution is irrevocably with us. So how can we lend some kind of rationality to the principle? The 2006 Act60 tried to do that by specifying six criteria to determine dilution by blurring but it has obviously fallen short of its goal to render dilution a more manageable cause of action. For whatever reason, I think you find a continuing resistance to dilution as represented by the three cases I have discussed whereby the courts have enlarged the parody defense beyond the terms of the statute and refused to accept the survey results of the deep-pocket plaintiffs. The Laugh It Off Promotions CC v. S. African Breweries Int’l, 2004 (4) All SA 151 (SCA). Matthew 25:29 (“For to everyone who has, more shall be given, and he will have an abundance; but from the one who does not have, even what he does have shall be taken away.”) (New American Standard). 59 15 U.S.C. § (a)(1), (c)(3)(B)–(C) (2006). 60 Trademark Dilution Revision Act of 2006, Pub. L. No. 109-312, § 2, 120 Stat. 1730, 1730-31 (codified as amended at 15 U.S.C. § 1125(c)(2)(A)(1)). 57 58

426  CHAPTER VI: TRADEMARK LAW problem is that dilution is a reality and it will take more time to see if the case law produces a consensus on its proper contours. DR. EVANS: Marshall, picking up on Spyros’s “Charbucks” and “Starbucks”? PROF. LEAFFER: That has to do with the actual survey results, which again the court found unpersuasive. These big companies, in the examples I discussed, spent a ton of money on surveys carried out by the most prestigious companies in the field but these courts gave them short shrift. I find the Starbucks case remarkable. As I have already indicated 30 percent immediately associated “Charbucks” with “Starbucks,” and 62 percent had a negative impression of “Charbucks.”61 To me, if you have this association with “Starbucks” and there is a negative attitude toward “Charbucks,” it would seem to me as a logical matter, that there is plausible case for dilution by tarnishment. DR. EVANS: Thank you. Another question there. QUESTION: Roshana Kelbrick, University of South Africa. Professor Leaffer, you referred to Schechter’s seminal article when he spoke about protecting marks. PROF. LEAFFER: I believe that David Llewelyn referred to Schechter’s article. QUESTIONER [Ms. Kelbrick]: In his article he said that that protection is for goods other than registered goods. Don’t you think that that is where dilution is going off-track, that the kind of Adidas v. Fitness case, which you referred to, was to try to obtain a form of protection which was outside normal trademark protection on same goods? Dilution protection was always intended for other goods. That is where so many of the problems have originated. You can’t manage always to prove tarnishment. You can’t prove confusion, so you’re back into tarnishment, so you are trying to allege blurring when you are dealing with same products. Dilution would be a lot easier if the original concept of use of an identical or similar mark only on other goods was reverted to. I mean I know that that’s pie in the sky. It has been held that you cannot give greater protection for dissimilar goods. But what do you think of that as being one of the causes for the problems of dilution? MR. KLOS: When I was talking about the Intel case62 I made a big jump, but nobody responded to that. That was assuming that some of these concepts will come back to haunt us, I would say, when we are talking about similar goods actually and the extent of protection for famous marks that the Court has given us in Davidoff.63 I really cannot see that some of these concepts can be interpreted by the Court in another way in the Davidoff situation. That is where they get very, very problematic. I would say they are less so in the classical dilution situations that everybody else is talking about for dissimilar goods and where all these other concepts, like the law having a sense of humor or not, come in, because that is a concept that is hardly usable if you are talking about a mark in a situation where you resist the use of a sign, for which you have to admit, okay, there is no likelihood of confusion here. But if—and this is why I had the picture up that I skipped. I am drinking a can of Red Bull here—and this is actually a pending case—were the Osborne Company for sherry wants to use its bull on an energy drink.64 61 Starbucks Corp. v. Wolfe Bros. Coffee, Inc., 559 F. Supp. 2d 472, 480, 88 U.S.P.Q.2d 1268, 1274 (S.D.N.Y 2008), aff’d in part, vacated in part, Starbucks Corp. v. Wolfe Bros. Coffee, Inc., 588 F.3d 97, 92 U.S.P.Q.2d 1769 (2d Cir. 2009). 62 Case C-252/07, Intel Corp Inc. v. CPM United Kingdom Ltd, 2008 E.C.R. I-8823. 63 Case C-292/00, Davidoff & Cie SA v. Gofkid Ltd., 2003 E.C.R. I-389, [68]. 64 Case T-165/07, Red Bull v. OHIM—Grupo Osborne (TORO), 2009 O.J. (C 90) 38 (order of the European court of first instance, O.J. stating that it has been removed from the register); see also Posting by Gino Van Roeyen to Class 46 Blog, http://www.marques.org/class46/default.asp?D_A=20090716 (July 15, 2009) (discussing the case).

Part B: Dilution Actions: Dying or Growth Industry?  427

Now, okay, people could say, “Well, they recognize the Osborne bull and they will not be confused.” But if you start allowing bulls as the main brand for a product like that, what will happen in ten or fifteen years’ time for identical products? How do you do that? DR. EVANS: David, you have a few remarks, I believe. PROF. LLEWELYN: The only point I would like to make is that Sven talks about famous marks. But I think one of the things which we must always remember is this is just a mark with a reputation. Certainly, in this country it is now standard practice to throw in an argument on dilution in the context of marks which no sensible person would say were famous, and indeed, they don’t really have very much of a reputation either. MR. KLOS: It’s a translation problem. I’m referring to the “Chevy” mark. I think there is a problem there, that the standard for the reputation is pretty low to begin with. Maybe we should just up that a little bit and be a little more liberal on the proof of actual damage. DR. EVANS: One more question? QUESTION: Chris Reid from Fordham University. Given that it seems that a lot of people can’t seem to agree on what the Intel case means going forward, I was wondering if anyone would like to comment on whether they think that the Intel case moves European law closer to American dilution law or further away, or in some cases closer and in other areas away? DR. GANGJEE: That’s a really good question. I think conceptually Intel squares the harm identified in Europe with the U.S. concept of the harm in dilution. But where I think there may be a potential for a gap to open up between the two jurisdictions is with unfair advantage. We are waiting for the L’Oreal decision65 to be handed down by the ECJ on unfair advantage. If they follow the Advocate General’s Opinion and interpret this cause of action generously, then you could see a restrictive interpretation of dilution by blurring juxtaposed with a generous interpretation of unfair advantage or free riding per se, which will then really take off as an easier alternative. So that is one possible kind of variant. PROF. MANIATIS: I think that it brings them closer in surprising ways. It will bring them much closer. If you look at what happened in Victoria’s Secret at the lower court,66 following the Supreme Court,67 the lower court said that it’s not dilution by blurring but it’s dilution by tarnishment. I think the approach would be quite similar in Europe. DR. EVANS: Any of our audience bursting with a final comment? I think our panel has worked very hard. [No response] Panelists, any final comment? [No response] We will wrap up. Thank you very much to our audience and our panel.

Case C-487/07, L’Oreal SA v. Bellure NV, 2009 E.C.R. I-5185 (the ECJ rendered its opinion on June 18, 2009). V Secret Catalogue, Inc. v. Moseley, 558 F .Supp. 2d 734 (W.D. Ky. 2008). 67 Moseley v. V Secret Catalogue, Inc., 537 U.S. 418 (2003). 65 66

Chapter VI

Trademark Law Part C: Trademarks and the Internet “Use,” E-Commerce, Ad Words, eBay, UDRP, ICANN, and new Registrars Moderator John Michael Richardson

Attorney, AAA Arbitrator (New York, N.Y.) Speakers

Prof. Souchiro Kozuka

Dr. Peter Ruess

Indiana University (Bloomington) Ron Zink

Freshfields Bruckhaus Deringer (Düsseldorf)

Chief IP Counsel, Europe, Middle East and Africa, Microsoft Corp.

Sandra Aistars

Assistant General Counsel, Intellectual Property, Time Warner Inc. (New York, N.Y.)

Panelists Trevor Cook

Bird & Bird (London)

Alain Strowel

Covington & Burling LLP (London) Prof. Robert Burrell

Visiting, Benjamin N. Cardozo School of Law, New York; TC Beirne School of Law at the University of Queensland (Australia)

430  CHAPTER VI: TRADEMARK LAW MR. RICHARDSON: Good afternoon, ladies and gentlemen. We are now going to deal with “Trademarks and the Internet: ‘Use,’ E-Commerce, Ad Words, eBay, UDRP, ICANN and New Registrars.” My name is John Richardson. My badge says “State of New York.” My only connection with the State of New York is I live there. I have no employment, no role with the state itself. I am an attorney from New York City. I was born in the United Kingdom, but I have lived in the United States for forty years. Let me introduce our distinguished panel of speakers and panelists. Speaking first will be Professor Souchiro Kozuka from Sophia University in Tokyo. He will be followed by Peter Ruess from Freshfields, a practitioner in Düsseldorf. He will be followed by Ron Zink, who is Chief IP Counsel for Microsoft in Europe, Middle East, and Africa. He will be followed by Sandra Aistars, who is Assistant General Counsel IP for Time Warner in New York. Robert Burrell will be a panelist, not a speaker today. He is from Australia, from the University of Queensland, Visiting at Benjamin Cardozo Law School in New York. We will then have as a panelist Trevor Cook from Bird & Bird in London and Alain Strowel from Covington & Burling in London. We have, as I understand it, something of a host of cases that are now in the European Court of Justice on ad words. I understand there are three referrals from France, which were argued, I think, March 17. There is a referral from Germany. And I was told yesterday there is a referral from Austria. We have a very recent decision by the Second Circuit Court of Appeals in New York, called Rescuecom,1 which sort of puts the United States back into the pot, because the court has left it open for this issue to be tried. They have not said that there is no possibility of there being use as a trademark. They have left it to the trial court to deal with that. So we will see what is going to happen there. I think Ron Zink will talk about that. Peter Ruess will talk about the European side of it, and so will Alain Strowel to some extent. Some of you will also know that ICANN is proposing a new series of top-level generic domain names. For $185,000, and I think $50,000 a year maintenance, you can get yourself a customized dot trademark sort of address on the Internet. Instead of www-and-all-that-stuff. com, it is going to be much more customized. That in itself produces all sorts of issues. Sandra will talk about that to some extent. Souchiro will talk about the economic analysis of trademark law. Robert Burrell may be able to tell us about the Australian point of view on ad words. With that, I won’t take up any more time of this panel. I will just ask Souchiro to start. PROF. KOZUKA: Thank you very much. Good afternoon. Before the break, we heard that there are so many controversies about to what extent and on what grounds a trademark should be given protection. And now, after the break, as you have just heard, we are bringing the Internet into the topic, and that will complicate the matter all the more. With these complications there are many issues that I, as an academic, would say a theoretical perspective would help to address. That is what I have been trying to do. As I apparently belong to the younger generation as compared with most of you, I go to the law and economic analyses and theories. To my surprise, there is a very limited amount of research on economic analysis of trademark law as compared to, for example, copyright or patent. So I must confess that this work of mine is still work in progress and not really concluded. I welcome your reaction and any sort of comments. 1

Rescuecom Corp. v. Google Inc., 562 F.3d 123, 90 U.S.P.Q.2d 1287 (2d Cir. 2009).

Part C: Trademarks and the Internet  431

[Slide] The basic question is: Why do we protect trademarks, or why do we need trademark law? Of course, if you look at the trademark law textbooks, various countries have more or less similar theories. Academics mention the source, then quality, and then advertisements.2 • Source is the basic function of trademarks. That’s okay. • Quality—maybe, it could be another role of trademark. • And then, when it comes to advertisements function, all trademarks have that. But that is not considered really as a matter of law. That seems to be universal. I have cited these from a treatise in Japanese, but it seems to be rather universal. [Slide] Behind that system seems to lie the concept of confusion. That seems to be a kind of crucial element of trademark law, as we learned already from the session before the break. [Slide] I mentioned there are a very limited number of analyses from the law and economics perspective. There is, however, Landes and Posner. What Landes and Posner say is that a trademark saves search cost for consumers.3 According to them, trademarks are just kind of a substitute for reading the fine print on the package. So just like this KitKat chocolate that I got from a vending machine downstairs—so when I saw “KitKat,” then I didn’t need to go check or examine what kind of chocolate it was. It is anyway not possible in a vending machine. So that is what they think the role of trademark is. Their analysis is this. A consumer takes the total price they have to pay into account. If there is a trademark and that saves search cost, then that means that consumers pay more to the producer for the margin saved by the trademark. [Slide] I will skip all these equations. [Slide] So what they say is a producer has good incentives to invest in growing trademarks because they will get more money paid by the consumers. That is okay. What Landes and Posner do not tell us is, is it good for the society as a whole? If it is a substitute of search cost, then that cost saved by the trademark will be totally exploited by the producer. So the end result is the same. [Slide] It appears that it is kind of a simple application of the Coase Theorem.4 After all, search cost is a kind of transaction cost. So the Coase Theorem tells us that who will bear the cost does not matter. If there is a trademark, then consumers do not bear such costs, but that will be exploited as kind of an additional payment by the producer. If there is no trademark or if there is no trademark protection, then consumers have to pay for the search cost rather than looking at the trademark printed on the package. But does it matter? That is a question. I am going to add some elements to the analysis of Landes and Posner. [Slide] Number one is information. When the information is imperfect, then the Coase Theorem does not hold. The simplest idea may be a trademark serves as a kind of signal. It signals that this is a good product that you can rely on. So it will work in the world of imperfect information only if there is something at stake of producers. What is at stake may be the reputation of the producer, so if the producer has other kinds of products or they expect to be engaged in repeated transactions, then that makes sense. 2 See, e.g., Raveen Obhrai, “Traditional and Contemporary Functions of Trademarks”, 12 J. Contemp. Legal Issues 16, 19 (2001) (“Trademarks … act as product identifiers, source indicators, guarantors of consistent quality, representatives of a business’s goodwill, and promoters of advertisement.” (citing Diamond, The Historical Development of Trademarks, 65 Trademark Rep. 265, 289 (1975))). 3 William M. Landes & Richard A. Posner, “Trademark Law: An Economic Perspective”, 30 J.L. & Econ. 265 (1987). Landes and Posner revised and reprinted this article as a chapter of their 2003 book. See William M. Landes & Richard A. Posner, The Economic Structure of Intellectual Property Law, 166, 173 (2003) (“[T]rademarks lower consumers’ search costs by providing them with valuable information about brands and encourage quality control rather than create social waste and consumer deception.”). 4 See generally Ronald Coase, 3 J.L. & Econ. 1 (1960), for a discussion of the Coase Theorem.

432  CHAPTER VI: TRADEMARK LAW [Slide] That seems to echo some recent thoughts about trademarks that emphasize communication—not looking at what is communicated, but at the fact that it is the medium of communication. That is the important point. So whether it is source, quality, or advertisement that is communicated, that doesn’t matter. That is a recent thought of trademark. It may be consistent with this kind of signaling approach. • The second thing that came to my mind is brand may sometimes be a traded as commodity. Like the case of fashion brand or like the case of merchandising enterprise. I will not go into those equations. So the idea is the same trademark, on the one hand, serves as an indicator of the source or quality—that’s okay. But on the other hand, they are products themselves that attract the demand of consumers. The point is that you cannot separate them. So it is what economists call complementary goods, just like coffee and sugar. Sometimes sugar is traded independently, but coffee and sugar come as a set, or complementary goods. In that way, if a producer company invests in trademark, which could be more attractive to consumers as commodity, then they will get higher price or greater demand for their product, and that will expand the production possibilities of the society, and that is a good thing. [Slide] The third idea is: What is the role of trademark registration? Under the Japanese and other similar continental systems, trademarks can be registered without any fact of use. What does it mean? One idea may be that the PTO first accepts the registration and then leaves it to the courts to make a more or less balanced decision about limiting the scope of the trademark. That may be one possibility. Another possibility, or another interpretation of registration, is that it gives the registrant an option. You can exploit this opportunity to develop your trademark and we will see what you can do. If you are successful, then you will be able to benefit from that trademark. If you cannot, then you will not be protected anymore after a certain period of time. That may be relevant in the case of, say, unconventional trademarks that seem to be raising controversies in many countries. [Slide] I am thinking that registration of such unconventional trademarks could be interpreted as giving an option to the applicants with the aim of seeing how they can develop that opportunity. Thank you for your attention. DR. RUESS: Those with good memory will recall that I have been pestering you with eBay and Google issues already in 2006 and 2007. There were no new developments in 2008, so I had to come up with a totally new presentation. Luckily, we have new developments now so I don’t have to reinvent the wheel. What I am going to do with you is we tried to look into probably the most eminent forms of online use and see how that plays out. I am just going to open issues here, try to show you one or two cases, because that’s about all you can do in the remaining nine minutes and twentyeight seconds. [Slide] Trademarks are used online in various ways—surprise, surprise. We are going to focus on auction platforms and search engines. What is happening there is that you type in a trademark, you are looking for something, and results come up that are usually either counterfeit or advertisements for a third party. We want to look into, very briefly, what is used in terms of infringement. Can we really enjoin third parties from doing this? I am looking forward to Dev going after me after this. If we find use, like on eBay, can we hold the provider liable, which is certainly the thing we lawyers want, because we don’t want to go after eBay member LittleDwarf28 who has three offers and stuff like that. We want to get the provider.

Part C: Trademarks and the Internet  433

[Slide] Let me start with the provider liability. Just a few remarks. I am basing this on a German law, which is however stemming from the European Directive on e-Commerce,5 so it is fairly harmonized. We do have here a so-called “host provider privilege.” Host provider privilege, however, defined by the Federal Supreme Court, doesn’t mean you can never touch a host provider. It basically means the host provider, he who only provides foreign content, will not be subject to damages. But this exemption does not exclude injunctive relief, which means the auctioneer has to take down the offer once put on notice and (and this is an interesting thing) also has to take down “all similar and future offers.” You will see that I am reciting here from a series of cases done for a fairly well-known watchmaker.6 This probably places the German Federal Supreme Court in a position as the court who has probably most extensively dealt with this problem by now. By “take down all similar and future offers,” what do I mean? Say you have a Rolex and it is not a Rolex and it is advertised as a replica. You can make eBay take down an offer that includes “replica.” You can go further and say, “I don’t have a yellow plastic Rolex, so please, whenever you have ‘yellow’ and ‘plastic’ together with ‘Rolex,’ take it down.” You will probably not be able to take down “yellow gold” because there are legitimate uses. I think you can figure out where the line runs here. “Provided that this is technically possible and no undue burden”—I think we all have different opinions on what is “technically possible” and very different opinions on what is “no undue burden.” To give you a hint here, if you have a color trademark, you will certainly have a harder time programming a filter. All this kind of stuff is still under discussion. [Slide] If you have a client or if you are scholarly diving into this, I think there are basically three kinds of cases that you can have with the eBay thing. I have just chosen this one because my wife likes this bag. I’ve never bought it for her, but I said I would at least use it as an example. [Slide] The first thing is trademark infringement. This says in English “very nice ladies’ watch, Gucci imitation.” You can argue, “Well, but they openly disclaimed.” I don’t think we have to go into this very long. This is the same trademark for the same product. This is in Germany as well as in the entire European Union, I think, a no-brainer that this is trademark infringement. [Slide] The second case is much more tricky. You enter “Gucci” into an eBay search, and up comes this: the shirt part is in “silky Gucci-look print.” You find this because of “Gucci,” which is where “Gucci” is marked, but it doesn’t have anything to do with Gucci. On the other hand, I give it to the free market proponents that this is obviously not saying it is made by Gucci. We’ll come to this. [Slide] The third thing, and we are seeing increasingly more of this, are people who are disclaiming the authenticity of the trademark. This is wonderful. I have taken just one part of it out. I have to read this from paper. There is a lady advertising what she calls a “Burberry-look poncho.” The text runs: “I bought this from a store in Santa Monica, California, a few months ago. It had the Burberry price tag that I removed”—wonder why. “The label that is still on the neck says ‘Burberry London 100% lambs wool.’ The salesgirl swore it was authentic, but I don’t know.” So holy oath, but you have no idea whether she is standing behind it. If you ever get this, it is very hard to get it with trademark law. You can get this taken down because it is a violation of the eBay rules to disclaim the authenticity of a trademark. Council Directive 2000/31, 2000 O.J. (L 178) 1 (EC). [Re Rolex Internet Auction] (1 ZR 304/01), Bundesgerichtshof [BGH] [Federal Court of Justice] Mar. 11, 2004, [2006] E.C.C. 9.; Bundesgerichtshof [BGH] [Federal Court of Justice] Apr. 19, 2007, Entschiedungen des Bundesgerichtshofes in Zivilsachen [BGHZ] 1149 (1159) (F.R.G.); Rolex v. eBay, OLG Dusseldorf (Feb. 24, 2009). 5 6

434  CHAPTER VI: TRADEMARK LAW So having struck out number 1 and number 3, we still need to tackle what do we do with the “like” and “look” and “look-alike” things? [Slide] We have a very insightful Frankfurt court. All these cases are usually in Frankfurt because Cartier brings them. They say, “There is not a bright-line rule as to whether a trademark is used in commerce on Internet sites.” [Slide] I am going to show you something that Cartier did. We had a seller advertising jewelry not made by Cartier with “Cartier style.” The court said—and this is precisely like our “Gucci-look print” thing—that is not trademark infringement because the trademark is not used as a source indicator here.7 I agree, that’s right. I just put for the discussion for later: Don’t we need something for the [inaudible] function? I simply found this Gucci thing because I was looking for Gucci. I had no idea about the dress, the seller, or anything else. Anyhow, save that for beating me later. However, the seller makes reference to the competitor, which constitutes comparative advertising under the ECJ Toshiba v. Katun rules.8 And comparative advertising, at least in Germany, is under certain circumstances illegal, if, only if the seller exploits the goodwill associated with the Cartier brand, which the court found here. So you can take it down for some other reason. [Slide] Summary on eBay use. • Used for non-trademarked goods is infringement—surprise. • If the trademark is used as a source indicator, and only then, auctioneers are exempted from damages by the German Telemedia Law,9 which is in fact under the e-Commerce Rule.10 So apart from the French, who have a way to circumvent this conclusion, everybody does that. • It does not apply to injunctive relief, as I said. • Do look at the eBay policies. [Slide] I have almost three minutes to take you into keyword advertising. Who’s the guy who speaks so quickly that he always gets everything in ten minutes? Graeme Dinwoodie. I can’t do that. I am trying. [Slide] The scenario is something you know. You have these Google masts, and you have on the right-hand side the sponsors link column. In this example, you type in “mobile phones” and on come mobile phone adverts. Well, that’s not a big deal. However, what you can do is you can enter a trademark. You can say “Breitling,” “Porsche,” whatever, and then you can buy a keyword that would link to this. You can actually buy the keyword “Porsche” or “Breitling.” You don’t have to be Porsche or Breitling for that. You can, as Dev said, play around with it in a way and secure your advert, which is something totally different, to be placed there. The issue was: Is this trademark infringement or not? [Slide] We have courts in Germany that say it is not trademark infringement, mainly arguing on the visibility issue. They say, “You don’t see it, it’s not visible.” I don’t know what they mean. I can see what I type into this thing. Obviously, I understand the reference. It is not openly used; it is just the secret path, so to speak, that guides you. • And we have courts that say it is trademark infringement. • Almost unilaterally, courts say that the offer can be a violation of unfair competition laws since the goodwill is exploited. We know this from the Gucci case. • And/or customers may be misled. [Slide] Just about two months ago the Federal Supreme Court decided to stay the proceedings and, as John already indicated, decided to refer a question whether use as a keyword is Bundesgerichtshof [BGH] [Federal Court of Justice] Nov. 3, 2009 (I ZR 114/06). Case C-112/99, Toshiba Europe v. Katun Germany Gmbh, 2001 E.C.R. I-7945, [60]. 9 Telemediengesetz (TMG) [Telemedia Act] Feb. 26, 2007, BGBl. I, p. 179. 10 Council Directive 2000/31, Arts. 12–15, 2000 O.J. (L 178) 1, 12–13 (EC). 7 8

Part C: Trademarks and the Internet  435

considered use as a trademark to the European Court of Justice.11 The French court proceeded likewise, as you see.12 I have missed the Austrians, who did the same.13 If the trademark is used only descriptively, no infringement. That’s the case reference of the Supreme Court decision of 22 January 2009. The court says generally there is no danger of confusion because the public is able to differentiate between these things. I am running out of time, so I am doing the following. I am skipping Google’s trademark policy and I am skipping a few cases here. [Slide] You might want to read in the materials the French cases. I have noticed that I was too late with the presentation. Shoot me an email. I will send this to you if you are interested. Interesting to note for you, the French court does not exempt host providers from liability because they say they are not host providers. And since they feel themselves eligible to adjudicate everything in English, you can even go there with a German case. I am sorry that I couldn’t do more on this. I leave the rest for the discussion. Thank you very much. MR. ZINK: I thought I would focus my remarks today on two major topics concerning online advertising and trademark law. With Peter’s presentation taking the European perspective, my comments will focus on the United States, and in particular in two cases. One was recently decided following an appeal to the Second Circuit Court of Appeals in New York.14 The other is on appeal currently at that same court.15 [Slide] The first topic is regarding the use of trademarks as keywords to trigger advertising and online search results. The second is regarding the extent of trademark liability for online sellers, in this case eBay. To frame this debate I think it is helpful to keep in mind that there are two sides of the business case here. One is online platforms, both marketplaces and advertisers. The second is brand owners, who have a legitimate interest in ensuring their trademarks are used appropriately and respected. Microsoft, as a major brand owner as well as a search provider, finds ourselves on both sides of this debate. Hopefully, we bring a level of analysis in doing that that is balanced. [Slide] In addressing the use of trademarks as keywords, some background on advertising with search engines might be helpful. We know to a search query there are two sets of results. One is the organic search result, which is based on algorithmic computations that appear in the relevance of possible results that could be set up. The other is typically referred to as “sponsored links.” Peter had shown this earlier. These designate sites or links that appear not based on the algorithmic relevance, but based on advertisers who have agreed to display the advertiser’s links based on a keyword match. The search engine is paid a fee for each of these clicks. Sponsored links really fall into two categories. One is keyword purchases, and these trigger the appearance of the ad. The second is you can have a suggestion tool which will go ahead and suggest for that particular advertiser what keywords might be helpful to them. 11 Case C-91/09, Eis.de GmbH v. BBY Vertriebsgesellschaft MbH, 2009 O.J. (C 129) 4 (reference for a preliminary ruling from the Bundesgerichtshof (Germany)). 12 Case C-236/08, Google France, Google Inc. v. Louis Vuitton Malletier, 2008 O.J. (C 209) 26 (reference for a preliminary ruling From the Cour de Cassation (France)); Opinion of Advocate General Poiares Maduro, Joined Cases C-236/08, C-237/08 & C-238/08, Google France v. Louis Vuitton Malletier, available at http://curia.europa.eu/jurisp/ cgi-bin/form.pl?lang=EN&Submit=Rechercher$docrequire=alldocs&numaff=C-236/08. 13 Case C-278/08, Die BergSpechte Outdoor Reisen und Alpinschule Edi Koblmüller GmbH v. Günter Guni and trekking at Reisen GmbH, Reference from the Austrian OGH, 2008 O.J. (C 233) 30. 14 Rescuecom Corp. v. Google Inc., 562 F.3d 123, 90 U.S.P.Q.2d 1287 (2d Cir. 2009). 15 See Notice of Appeal, Tiffany (NJ) Inc. v. eBay, Inc., 576 F. Supp. 2d 463 (S.D.N.Y. 2008), available at http:// www.counterfeitchic.com/Images/tiffany_appeal_notice_7-11-08.pdf.

436  CHAPTER VI: TRADEMARK LAW Now, you can use someone’s trademark in doing both of these. In fact, the keyword suggestion tool from Google will suggest a trademark even if you are not the owner. This does cause some concerns, and the concerns are both legal and business. From the legal perspective, you see the dichotomy between showing this trademark in the advertising results themselves, versus just using the trademark as a keyword. But also, there is a business aspect to this, in that the legitimate trademark holders are bidding against their competitors in order to either keep their competitors’ sites from being displayed or to advertise their own goods. So trademark owners have some concerns about that. [Slide] This is similar to what Peter had shown you. I was just showing you a case study of Video Professor. “Video Professor” is a registered trademark. When you type this in, you have the sponsored links at the top. You also have sponsored links on the right. Then, if you go down under the organic search results, you will see that the very first result is for Video Professor, the trademark owner’s site. [Slide] This is interesting. You look on the right and the second one down is “Save at Amazon.” So you think, “Well, if I click on that link am I going to the legitimate Video Professor type of program, which is an online packaged program to help you learn about computers?” When you click on that, you actually go to Video Professor competitors who are trying to sell you the same types of things. This is an example. This is actually a current pending case in Virginia, where Amazon has been sued by Video Professor.16 So they haven’t gone to Google for this, they have gone to Amazon. That is currently pending. [Slide] Two weeks ago, if we talked bout trademarks as keyword triggers, there was a split in jurisdictions. The Second Circuit jurisprudence, unlike the rest of the circuits in the United States, said that a trademark as a keyword is not use under the Lanham Act,17 under the U.S. trademark laws. That was based on one of their earlier decisions, called 1-800 Contacts.18 [Slide] This is the decision that just recently came down. There has been a reversal. You can see where people might have got the impression that the use of a trademark was problematic there if you look at the quoted text: “A company’s internal utilization of a trademark in a way that does not communicate it to the public is analogous to a[n] individual’s private thoughts about a trademark.”19 This is the Second Circuit saying this in 1‑800 Contacts. Now you have had a host of cases, about six or seven, in that same district at the district court level, who have consistently held that a trademark as a keyword is not use under the Lanham Act.20 [Slide] Two weeks ago, this was overturned in the Rescuecom Corp. v. Google decision.21 Some of the take-aways are listed on the bottom there. But it is definitely now across all circuits in the United States that the internal use of a keyword as a trademark is considered use under the Lanham Act. So you have to go to the next step now of saying: Is there a likelihood of confusion? This case has made the Second Circuit in agreement with the rest of the circuits,22 and now we’ll go to the next step. You don’t kick these out at the summary judgment level anymore. 16 Video Professor, Inc. v. Amazon.com, Inc., No. 1:2009cv00636 (D. Colo. filed Mar. 3, 2009). [Note: the speaker probably intended to say Colorado because there is no such Virginia Video Professor case.] 17 Lanham Trademark Act of 1946, 60 Stat. 427 (1946) (codified as amended at 15 U.S.C. § 1051 et seq. (2006)). 18 1-800 Contacts, Inc. v. WhenU.Com, Inc., 414 F.3d 400 (2d Cir.2005). 19 Id. at 409. 20 See Merck & Co., Inc. v. Mediplan Health Consulting, Inc., 431 F. Supp. 2d 425 (S.D.N.Y. 2006); Site Pro-1, Inc. v. Better Metal, LLC, 506 F. Supp. 2d 123 (E.D.N.Y. 2007); FragranceNet.com, Inc. v. FragranceX.com, Inc., 493 F. Supp. 2d 545 (E.D.N.Y. 2007); S&L Vitamins, Inc. v. Australian Gold, Inc., 521 F. Supp. 2d 188 (E.D.N.Y. 2007). 21 Rescuecom Corp. v. Google Inc., 562 F.3d 123, 90 U.S.P.Q.2d 1287 (2d Cir. 2009). 22 See, e.g., Playboy Ents., Inc. v. Netscape Commc’ns Corp., 354 F.3d 1020 (9th Cir. 2004); Hearts on Fire Company, LLC v. Blue Nile, Inc., 603 F.Supp.2d 274 (D.Mass. 2009); Buying For The Home, LLC v. Humble Abode, LLC, 459 F. Supp. 2d 310 (D.N.J. 2006).

Part C: Trademarks and the Internet  437

They distinguished the 1-800 case on its facts, so it narrowly applied it, didn’t overrule it. The court here clearly did not like the keyword suggestion tool, which is where when you’re buying keywords it is suggesting trademarks of other companies. So they didn’t like that. Maybe we will see more about that. It was also interesting that there is a nineteen-page appendix in this ruling, which is over half the document, talking about use in commerce under U.S. law, a tutorial if you will, and inviting Congress to step in and maybe make some more sense about this. So there is more room for fodder around that. The final conclusion is: Does the placement of a sponsored link result in likelihood of confusion? That was remanded to the district court. [Slide] If you think about the policies of major search providers, I have Google, Microsoft, and Yahoo! There is a bit of difference in the way we approach this. Google doesn’t have a worldwide policy, but they split the United States, Canada, U.K., and Ireland off from the rest of the world. They say if a trademark owner comes and complains about the use of their trademark, they will make sure that trademark doesn’t show up as a keyword in the advertisement itself, but they are not going to take that trademark away as a keyword and using that keyword to figure out what is displayed in the sponsored links. Microsoft and Yahoo! take a little different approach, saying: We’re asking people under our Terms of Use not to use competitors’ trademarks as keywords when they do their bidding process. [Slide] I’ll shift gears a minute and talk a little bit about the Tiffany case.23 This has a use element in the way we were talking about, in that eBay went ahead and used “Tiffany” as a keyword in Google searchings. They were bringing in revenue that way. But it is also different in that we are really talking about an online auction there. The case, I would point out, is not about who can efficiently police the trademark usage, Tiffany or eBay, who is most efficient. It really got to: Is there a trademark usage? They held that eBay wasn’t liable under nominative fair use in the United States.24 So there is a two-pronged approach: (1) Is the use necessary to distinguish where the goods come from? They said here, “Tiffany kind of makes sense.” What else are you going to say? Are you going to say “someplace Audrey Hepburn used to go for breakfast” or “an eighties pop star” or something like this? You really do need Tiffany to designate the goods; and (2) they are only using so much of the market as necessary. So they held that it was nominative fair use. Some queries in this case are: • What does it mean “to know” in the case of eBay which goods are counterfeit and which aren’t? In some of the tests that Tiffany did, they found 74 percent of the Tiffany jewelry that was for sale, the silver jewelry anyway, was counterfeit, and they found out 5 percent was genuine. You might ask: “What happened to the 22 percent?” Actually, the Tiffany people themselves couldn’t tell you whether it was genuine or counterfeit, which was interesting, I thought. • The other thing that eBay did is they have a whole host of things that are trying to help people thwart counterfeiting. One is called the VeRO Program, which is Verified Rights Owner. They found in this case that when Tiffany approached eBay and said, “There’s a problem,” they were very diligent about taking this stuff down. I think that went a long ways towards helping eBay in the result that they got. 23 Tiffany (NJ) Inc. v. eBay, Inc., 576 F. Supp. 2d 463 (S.D.N.Y. 2008). [Subsequent to the conference the Second Circuit upheld the district court’s opinion, agreeing that there was no trademark infringement. See Tiffany (NJ) Inc. v. eBay Inc., No. 08-3947-CV, 2010 WL 1236315 (2d Cir. Apr 1, 2010)]. 24 Tiffany v. eBay, 576 F. Supp. 2d at 495.

438  CHAPTER VI: TRADEMARK LAW They also didn’t like the amount of money Tiffany spent on combating counterfeiting. It turned out to be about $763,000 a year, or 1.15 man-hours per month, something like that. They said it was 0.5 percent of their net sales. They said, “Maybe you could have tried a little harder.” • The “5 or more” rule was: What did Tiffany really want from eBay? They wanted them to say, “If there are five or more, we are going to block that seller because it’s most likely to be counterfeit.” That was not something the court was going to go for. • And finally, working together. What has happened since this case is when these sites go up Tiffany’s got about a four-to-six-hour window in order to see if it is counterfeit or a seller that they are really worried about and tell eBay about that before these goods are sold. My parting theme may be this working together instead of litigating is probably a good idea for everybody. Thank you. MS. AISTARS: I have been asked to speak this afternoon about ICANN’s proposal to expand the gTLDs and what sorts of risks that might pose to consumers and to brand owners alike. Since I assume that not everybody is following ICANN activities on a daily basis, I will start with a little bit of an introduction about what the proposal actually consists of. I will also make a disclaimer. Since I am speaking to a roomful of classically trained trademark lawyers, I come at these issues more from the perspective of somebody who has advised businesses in how to launch legitimate businesses on the Internet. So I come at this with a business perspective, and also, obviously, a perspective informed by my company’s activities on the Internet, which are vast and expanding. We rely very much on a safe environment for consumers on the Internet in order to be able to provide our goods and services and to offer consumers legal ways to access our works online. For those who are unfamiliar with the Internet addressing system, TLDs are at the top of the naming hierarchy.25 They are basically the character strings that appear in domain names to the right of the right-most dot. So, for example, it’s dot-com, dot-net, dot-org, dot-edu, and so on. In June of 2008, ICANN proposed that it would be expanding the current Internet addressing system by launching a potentially unlimited number of new gTLDs and allowing people to come in and apply for basically any character string they wish to the right of the “dot.”26 I could apply for dot-timewarner if I wished. Or you could apply for any character string: dot-movie, dotsoftware, dot-game. So you can begin to imagine the sorts of issues that this might raise. To give you a sense of the risks and of the scope of change proposed here, in the 1980s only seven gTLDs existed. ICANN has added gTLDs fairly slowly over the course of time, introducing no more than a couple of new gTLDs at a time. Currently there are twenty-one. Even so, with the fairly manageable amount of gTLDs, consumers and brand owners have faced a myriad of problems as new gTLDs are rolled out. Mostly those come from domain name speculators who capitalize on the brands of others in order to either sell that domain name back to the rightful trademark owner and, perhaps worse and more dangerous to the whole Internet community, by using an infringing domain name or a typo version of an infringing domain name to lure consumers to sites where various frauds are perpetrated against them—phishing, downloading of malware, and the like. As I mentioned, this is a risk that we take very seriously because of our need to have a safe environment for consumers to be willing to consume our goods from legitimate sites online. 25 “TLDs are the two or more letters that follow the last dot in a website address and come in two types: gTLDs, such as .com and .net, and country-code top-level domains (ccTLDs), such as .uk and .cn. At this time, while there are over 250 ccTLDs, there are only 21 gTLDs.” Elizabeth Herbst Schierman, “Make Room for .Trademark: What You Should Know About the New Global Domain Names”, 53 Advocate (Idaho) 25 (Feb. 2010). 26 ICANN.org, “Biggest Expansion in gTLDs Approved for Implementation”, June 26, 2008, http://www.icann. org/en/ announcements/announcement-4-26jun08-en.htm.

Part C: Trademarks and the Internet  439

We also have had some pretty interesting examples of malicious behavior with infringing domain names using our marks over time, in particular because we also have, as you know, CNN and AOL in our portfolio, and those are particularly susceptible to these sorts of fraud. I’ll give you a couple of examples. After 9/11, a number of cybersquatters using infringing Web addresses created fake CNN Web sites. They then used those Web sites to disseminate false news reports of anthrax and smallpox outbreaks, and also stories that the U.S. had launched nuclear attacks against North Korea and Iraq and Iran. Our news-gathering services are certainly maligned by that, but the user community is also injured, and sites like this are often used to perpetrate fraud against the unsuspecting users who go to them following a hot, but fake, news story. AOL is also often the target of scams. Some examples: Similar to the CNN one, someone using an infringing address convinced consumers to follow a link to a false news report about Osama bin Laden being captured, and when the person actually went to that report, malware was downloaded to their computer, and, worse yet, the AIM Buddy List was used to perpetrate the scam further and further. Similarly, AOL is regularly the target of phishing scams, where cybersquatters use an infringing address to send a false notice to a consumer about their AOL account, or they create fake AOL Web pages using the look-and-feel of AOL’s real site, and then use those to extract personal information from consumers who unwittingly visit those sites. This is something that we maintain a very active in-house practice to police against and to combat. We also employ a lot of outside counsel to help us in this effort. Even so, it is time-consuming, it’s a never-ending battle. The ultimate result, if you pursue a UDRP27 (the dispute resolution mechanism ICANN makes available for these types of problems), at the end of the day, if you are successful, the prize is that you obtain the rights to the infringing or typo-squatting domains at issue, and the must pay for them in perpetuity in order to ensure that others don’t re‑register the domains and perpetrate the same sorts of frauds all over again. So you can see that brand owners face huge costs from all of these activities. When we think about the expansion to an unlimited number of gTLDs, and then the second-level registrations that will take place within those gTLDs, it makes our head spin. There are various things that one can do, obviously. The one that we have found ourselves having to employ in the past is defensive registration. It’s an incredibly expensive process, as you can imagine, and it is something that affects all brand owners that do business on the Internet. To give you an idea of the current scope of defensive registrations just in the TLD space that we have now, our vendor, MarkMonitor has recently done an analysis of major customer portfolios.28 They estimate that just in the dot-com space, where people have registered most of their core and unique-to-their-businesses domains, over 90 percent of their customers’ portfolios are defensive registrations rather than core business registrations that they intend to operate their main businesses from. To give you a sense of what that means for us at Time Warner in terms of numbers, we own between 40,000 and 50,000 domain names. That gives you the scope and the potential risks both to consumers and to brand owners from the proposed expansion. Why is it problematic? We fear the expansion will only exacerbate the previously existing problems. First, there has not been any proper economic need demonstrated for the additional 27

htm.

ICANN.org, Uniform Domain-name Dispute Resolution Policy, available at http://www.icann.org/en/udrp/udrp.

28 “Evaluating New Top-Level Domains: Opportunity or Threat?”, Mark Monitor, Sept. 2009, http://www. markmonitor.com/download/wp/wp-gTLD.pdf.

440  CHAPTER VI: TRADEMARK LAW domains. There are many existing domains that have very few registrations. For instance, dot-info has 5 million domain names registered in it, dot-biz has 2 million. So, while brand owners are expending huge resources on protecting their brands and on protecting consumers who might be lured to these Web sites against fraud, we are having to do so in new and largely unused TLDs, which serves no one’s interests The Internet community is really gaining little, if any, benefit from the existence of the new TLDs because, for the most part, the average Internet user is totally ignorant of the existence of these new TLDs. So what are we recommending to ICANN with regard to this launch? I will start by saying we are very much involved in the process and we are trying to be as constructive as possible in terms of giving advice and assistance to the ICANN Board and to the senior policy staff in developing appropriate approaches. Our main recommendations are: • First, go slow and do proper analysis and do proper economic studies and document the need for the gTLDs that you do roll out. • Once you have decided to roll out the gTLDs, hopefully in a much more limited fashion than is currently proposed, steps need to be taken to limit the need for defensive registrations like the ones I have described to you. We propose that the Board explore some sort of registry against which applications can be checked to flag at least the most famous of brands over which there is no dispute that only one entity has the right to register a particular character set. • We have asked for better enforcement of existing agreements to make sure that the domains that people apply for are actually used for what they claim they will be used for. • And that there be some sort of post-registration procedure beyond just the UDRP by which issues could be addressed if sites are being used for fraudulent purposes. And, of course, all of this depends on also having improved “who is” information available about domains so that you can find the owner of the fraudulent site. Thank you very much. MR. RICHARDSON: Before we move on to the panelists, I just had a footnote. Ron Zink’s discussion made me think of a couple of things. I chatted with him about it a little bit yesterday. I was fortunate enough in New York a few weeks ago to go to a program at Fordham on communications law. There was a panel on the Tiffany v. eBay case.29 The trial counsel for eBay was there, and some people who I think consulted with Tiffany were there, and it was a very interesting discussion. Since I am in the alternate dispute resolution side of the law these days, I was delighted to find out that there was a huge consensus that they really made far more progress when they were cooperating with each other. Tiffany has started to make an effort to figure out how to deal with counterfeiters, and eBay did. eBay has technology, and eBay did something about the timing of sales, it did something about the number of units that are being brought in and everything. So the fact that they could, by intelligent self-help, reduce the area of dispute I thought was really very good. There was another conference on alternate dispute resolution where the head of eBay’s dispute resolution section, Clive Rule, got up and surprised everybody by saying that they resolve millions of disputes a year, they claim, just an incredible number, and he said the future is really technology and online resolution. He said the courts and the lawsuits and everything is just ridiculous. So that gave everybody something to think about. There is another interesting development. That is that eBay now has a little bit of competition, because I think there is an outfit called Portero that is now giving a guarantee of authenticity 29 576 F. Supp. 2d 463 (S.D.N.Y. 2008); see Fordham Center for Law & Information Policy (CLIP) Symposium, Panel, “Why is Tiffany Blue? 3rd Party Liability and the eBay Cases” (Mar. 27, 2009), available at http://iplj.net/blog/ archives/235; see also posting by Jason Lunardi to Fordham IPLJ Blog, http://iplj.net/blog/archives/235 (a live-blog of the symposium discussing the Tiffany case).

Part C: Trademarks and the Internet  441

to its products, because Richemont S.A. is behind it. They used to be on eBay. Their president was there and he was discussing this. What they are doing is they are selling under auction-type conditions genuine merchandise—or they hope it is genuine—coming out of their factories and giving a certificate of authenticity. I thought that was quite interesting. With the permission of the two designated panelists, I am going to ask Professor Robert Burrell to kick off first with any comments he might have, since he was going to be a speaker. PROF. BURRELL: Thank you. Following your question earlier about ad words in Australia, I was just going to comment briefly on that and then lead into something that I think relates to the point you were just making. On the one hand, when you are thinking about liability for the sale of ad words or the use of ad words in Australia, it is important to understand that Australia recognizes initial interest confusion. That makes it, I think, much more likely that the use of a keyword is likely to amount to a trademark infringement. On the other hand, however, Australia has a fairly robust requirement of trademark use, which may mitigate against a finding of infringement. But then again, if you actually look into how trademark use operates in Australia, you find that evidence of actual confusion is often treated as strong evidence that the use must have been use as a mark. For example, if you look at Kolotex v. Sara Lee,30 which is probably the leading case, you will see that there is an assumption that if consumers are confused as to source, that must indicate that this was acting as a badge of origin. I think what that probably means, or what we can draw from that, is that it is simply not possible to talk in abstract terms about whether or not the use of a trademark as a keyword is likely to constitute infringement. I think inevitably that question can only be determined on the basis of a highly fact-specific inquiry. I think that probably puts Australian law, as I understand it, although I haven’t read the case yet, in a similar position to the Second Circuit after the Rescuecom case,31 where infringement is going to have to be determined on a case-by-case basis. Now, I know, because some academics have already written articles along these lines, that there are some people who are opposed to letting these things be determined on a case-by-case basis. They think we need a blanket solution. Specifically, commentators falling into this camp almost always argue for a blanket solution to the effect that use of a trademark as a keyword can never amount to trademark infringement. But it seems to me—and I think this goes very much to the point that you were just making, John—that one of the attractions of ending up in the position where you conduct these things on a case-by-case basis is that is going to provide a real spur, I think, for finding a private solution. I think this might well be an area where the development of private solutions, if you like, underpinned by the threat of trademark infringement, in certain types of cases at least, might be much better than the sort of blanket solution that we would end up with if we were to legislate in this space. Unlike some, I actually think that the situation where we look quite carefully at the facts of particular cases is desirable—I don’t think you can say “all ad word cases should be treated in the same way.” I think some of the slides we saw earlier very much demonstrate that. MR. RICHARDSON: Trevor, do you have any comments that you would like to make? MR. COOK: Yes. Really arising out of and expanding on Peter’s presentation. Firstly, in relation to auction site cases, we are going to, I hope, get some clarification of our own in the United Kingdom very shortly, because Mr. Justice Arnold has been hearing a case 30 31

Kolotex Glo Austl. Pty. Ltd. v. Sara Lee Personal Prods., (1993) 26 I.P.R. 1 (Austl.). Rescuecom Corp. v. Google Inc., 562 F.3d 123, 90 U.S.P.Q.2d 1287 (2d Cir. 2009).

442  CHAPTER VI: TRADEMARK LAW between L’Oreal and eBay, and a judgment is expected on that in the not-too-distant future.32 I think it raises very much the same issues as were considered by the Federal Supreme Court in the Rolex case. On keywords, as you will have heard from Ron, the United Kingdom is, in error, a part of the United States and not part of Europe, at least for the purposes of Google policy. The Google policy there I think was changed after the decision in Wilson v. Yahoo! in the United Kingdom,33 which held that keywords do not, at least in the hands of the service provider, constitute trademark use. We heard about the references to the ECJ. I am not going to try and rehearse the various arguments for and against. It is probably worth focusing, though, on the fact that the previous references to the ECJ, the three French references, were in actions brought against a service provider, Google, whereas I think the German reference is against an advertiser and the Austrian reference is against an advertiser. There is also a Dutch reference, the Portakabin case,34 which is against an advertiser. Those are trailing along behind. Who knows what Delphic utterance we will get from the European Court of Justice in the Google cases? It is perhaps a little unfortunate that this law is going to be developed in a slightly piecemeal way. One would hope for coherence in the law, which one would hope that the ECJ would take account of. When you are looking at use in an infringement context, there should be some equilibrium or some reflection of use in a trademark validation context. In that I am very much reminded of the comments made by Lord Justice Jacob in the Reed case,35 which was a metatag case a number of years ago in the United Kingdom. It was an Article 5(1)(b) case,36 so it wasn’t actually determined on this issue. But he did say: “[I]t must be remembered that use is important not only for infringement but also for saving a mark from non-use. In the latter context, it would at least be odd that a wholly invisible use could defeat a non-use attack.”37 I think if that sort of principle is not taken account of, there is a risk of a certain degree of incoherence, or even greater incoherence, introduced into trademark law than has already been done. Finally, even if the United Kingdom was brought back into Europe by any decision of the ECJ, or indeed if the rest of Europe is brought into line with the United States, we will not get harmonization in Europe. We were just talking here about the Trademark Directive.38 There are two significant areas in this whole debate where there are disparities, and there will remain disparities. We heard from Peter that there were other causes of action in some of the German cases—unfair competition, which remains completely unharmonized throughout Europe. Secondly, a point I don’t think has been addressed sufficiently but has resonance also in other areas of online liability in copyright is the whole question about very, very different approaches, given our very, very different legal systems in Europe, not to core intellectual property issues, which are harmonized, but our approach to issues such as common design, joint tortfeasance. It is something I have studied particularly in the context of copyrights. There are concepts of responsibility of other players in the context of copyright which, as an English lawyer, I just find it very hard to get my head around from other European systems. 32 L’Oreal SA v. eBay Int’l AG, [2009] EWHC (Ch) 1094; Case C-324/09, L’Oreal SA v. eBay Int’l AG, 2009 O.J. (C 267) 40 (reference for a preliminary ruling from High Court of Justice). 33 Wilson v. Yahoo! UK Ltd., [2008] EWHC (Ch) 361, [82]-[83]. 34 Case C-558/08, Portakabin Ltd. v. Primakabin BV, 2009 O.J. (C55) 10 (reference for a preliminary ruling from the Hoge Radd der Nederlanden). 35 Reed Executive Plc v. Reed Bus. Information Ltd., [2004] EWCA (Civ) 159. 36 Council Directive 89/104, art. 5(1)(b), 1989 O.J. (L 40) 1 (EEC), codified at, Council Directive 2008/95, art, 5(1) (b), 2008 O.J. (L 299) 25 (EC) [hereinafter Trademark Directive]. 37 Reed Executive Plc, [2004] EWCA (Civ) 159, [149]. 38 Trademark Directive, supra note 36.

Part C: Trademarks and the Internet  443

When you are dealing with actions brought against advertisers and sites and search providers, you get these issues of joint tortfeasance introduced. So we won’t have coherence, but I hope that in the context of the judgments which are being made it is appreciated that we will not have that sort of coherence. MR. RICHARDSON: Thank you. Alain? MR. STROWEL: I have three comments, one is general and two are more focused on keyword selling and auctioning sites based on the case law of countries like Belgium or France. A first comment: we know that today the question is no more “to be or not to be on the Internet.” The question is “to be referenced or not.” In particular, because of the position of Google, what matters is to be on the Google list of organic links, and high on the Google list. I think that this situation has created a very strong pressure for different operators to manipulate searches. Sometimes it might be legitimate. Sometimes it is definitely illegitimate. We know different ways to do that. Metatagging was already a way to divert and manipulate traffic.39 Certain forms of domain name speculation, like cybersquatting, are as well a way to attract traffic and to be seen on the Internet.40 I think we are now experiencing new forms of traffic manipulation. And the role of intermediaries is growing. We have more and more intermediaries that are playing an important role in channeling the Internet users to some content. First of all, we have the domain name registrars. Sometimes they are involved in domain name tasting.41 You have the domain name parking providers. You also have companies serving ads to domain names which are misspelled and just parked thanks to the parking providers. So we have a lot of intermediaries involved. It brings another level of complexity into trademark cases. Because of this new trend involving intermediaries, we have now a lot of issues of secondary liability for trademark infringement. That is completely new, at least for me. It brings new issues, which, by the way, have been tackled for quite some time in the field of copyright, where we have a lot of doctrines and cases on secondary liability. I will come back on that. Now a factual comment about the different ECJ referrals on the keyword cases. We have six referrals if we add the Portakabin case,42 which is an interesting one because it involves trademark exhaustion as well. That means we have more than fifteen questions which are now before the ECJ.43 39 “A … common method of diverting … attention [away] from [a competitor’s] site is by placing [the] competitor’s trademark or service mark in the metatags of one’s web site. Metatags are not visible to the searcher but are used to provide information about a web site and are often used to help categorize the web page.” Steven Behnken, “Use and Sale of Trademarks in Internet Applications: Avoiding Trademark Infringement in Keyword Advertising and Website Metatags”, 22 DuPage County Bar Ass’n Brief 26, 31 (2009). 40 Cybersquatting is defined as having a bad faith intent to profit from the trademark belonging to someone else while registering, trafficking in, or using that trademark in a domain name. See Anti-Cybersquatting Consumer Protection Act (ACPA), 15 U.S.C. § 1125(d) (2006). 41 “‘Domain name tasting’ refers to a situation where an entity registers a domain name and then tests to see if the name has sufficient traffic to provide more income than the annual registration fee (usually through pay-per-click advertising). If the name is profitable, it is kept. If not, the applicant will use the ‘add grace period’ … offered by gTLD operators, usually a five-day period, to return the domain name at no cost to the registrant.” Mark V.B. Partridge & Scott T. Lonardo, “ICANN Can or Can It? Recent Developments in Internet Governance Involving Cybersquatting, Online Infringement, and Registration Practices”, 1 No. 5 Landslide 24, 27, (2009). 42 Case C-558/08, Portakabin Ltd. v. Primakabin BV, 2009 O.J. (C55) 10 (Reference for a preliminary ruling from the Hoge Radd der Nederlanden). 43 Opinion of Advocate General Poiares Maduro, Joined Cases C-236/08, C-237/08, & C-238/08, Google France v. Louis Vuitton Malletier, available at http://eur-lex.europa.eu/LexUriServ/LexUriServ. do?uri=CELEX:62008J0236:EN:NOT; Case C-237/08, Google France v. Viaticum, Luteciel, 2008 O.J. (C 209) 27 (reference for a preliminary ruling from the Cour de Cassation); Case C-238/08, Google France v. CNRRH, 2008 O.J. (C 209) 27 (reference for a preliminary ruling from the Cour de Cassation); Case C-278/08, Die BergSpechte Outdoor Reisen und Alpinschule Edi Koblmuller GmbH v. Gunter Gu, 2008 O.J. (C 233) 30 (reference for a preliminary

444  CHAPTER VI: TRADEMARK LAW I agree with Trevor that there might be a piecemeal response from the Court. At least the three French cases, which were the first three cases to be referred to the Court, are joined.44 There was a hearing in those cases. There is an interesting hearing report in French—unfortunately for you, not for me—which presents the positions of all the parties, and as well of France and of the Commission. France has taken a position that could be expected, very much in favor of trademark owners.45 Louis Vuitton is involved in one of the cases.46 Strangely, the Commission has taken a position which is very close to Google’s position. That is quite interesting. We don’t know whether it will play a role, but there is an alignment of the Commission on Google’s view—probably the Legal Service is in charge for the Commission; maybe they haven’t consulted the other services. There are, in fact, two questions. In the French cases, the liability of the search engine is central. But one question is whether the reservation of the trademark as a keyword is use in the trademark sense. So there are two questions concerning the notion of use in the course of trade: whether selling and proposing trademarks as keywords is use in the sense of trademark law, and whether to reserve is a trademark use. Interestingly, in the French cases referred to the ECJ, questions have arisen on the interpretation of Article 14 of the E-Commerce Directive.47 This is the provision on the liability of hosting providers. Google is an intermediary and has been constantly claiming before the French courts in all those cases—and there have been a lot of keyword cases in France—: “We are just a hosting provider, so we can rely on the safe harbor of Article 14 of the E-Commerce Directive.” That question probably will have to be answered by the Court. But it is a subsidiary question, so we do not know whether we will have an answer, it will depend on the response to the other questions. A comment on the difference between the EU and the U.S. There might be a big difference in fact. If the issue of the use of trademark is solved—let’s say that the European Court considers like the Second Circuit did in Rescuecom48 that there is a use in the trademark sense—, then comes, of course, the most important issue, the issue of confusion. But, we do not necessarily have to discuss in Europe the issue of confusion. Why? Because we have Article 5(1)(a) of the Trademark Directive:49 In the case of identical marks for identical products—an hypothesis that is likely to be present in keyword cases—, there is no need to have confusion for trademark infringement. In other words, if there is a use in the sense of trademark law, courts will have to conclude that there is an infringement in the sense of Article 5(1)(a). That is not the same as in the Lanham Act,50 because the requirement to prove confusion will remain in the United States. This particular divergence might raise some issues at the international level. ruling from the Oberster Gerichtshof (Austria)); Case C-558/08, Portakabin Ltd. v. Primakabin BV, 2009 O.J. (C55) 10 (reference for a preliminary ruling from the Hoge Radd der Nederlanden); Case C-91/09, Eis.de GmbH v. BBY Vertriebsgesellschaft MbH, 2009 O.J. (C 129) 4 (reference for a preliminary ruling from the Bundesgerichtshof (Germany)); Case C-324/09, L’Oreal SA v. eBay Int’l AG, 2009 O.J. (C 267) 40 (reference for a preliminary ruling from High Court of Justice); Case C-323/09, Interflora Inc., Interflora British Unit v. Marks & Spencer plc, Flowers Direct Online Ltd., 2009 O.J. (C282) 19 (reference for a preliminary ruling form High Court of Justice); 44 Opinion of Advocate General Poiares Maduro, Google France v. Louis Vuitton Malletier, available at http://eurlex.europa.eu/LexUriServ/LexUriServ.do?uri=CELEX:62008J0236:EN:NOT. 45 See, e.g., Stefanie Olsen, “Google Loses Trademark Dispute in France”, Cnet News, Jan. 20, 2005, http://news. cnet.com/Google-loses-trademark-dispute-in-France/2100-1030_3-5543827.html. 46 Opinion of Advocate General Poiares Maduro, Google France v. Louis Vuitton Malletier. 47 Council Directive 2000/31, art. 14, 2000 O.J. (L 178) 1 (EC). 48 Rescuecom Corp. v. Google Inc., 562 F.3d 123, 90 U.S.P.Q.2d 1287 (2d Cir. 2009). 49 Trademark Directive, supra note 36, art. 5(1)(a). 50 Lanham Trademark Act of 1946, 60 Stat. 427 (1946) (codified as amended at 15 U.S.C. § 1051 et seq. (2006)).

Part C: Trademarks and the Internet  445

Now, on the auctions cases—this is my last comment as I was a bit long already—I want to add something to what Peter presented. I would say that the German position is interesting because it is a balanced one. It is a balanced one between the French position and the Belgian position. We had last year a few decisions in France. Some of them have been mentioned by Peter. The decisions in France go further, in the sense that there is not only the possibility to get an injunction, like in Germany, but there is the possibility to get damages, as you mentioned. It is also interesting to point the issue of due care of the auctioning platform. For instance, the eBay VeRO program that Ron mentioned has been considered as insufficient by one of those French courts. The requirement of due care requires the auction site to go further than the VeRO program, according to this French court.51 Maybe it goes too far. In any case, those are first instance decisions so far. The French courts consider that eBay and other auctioning sites play the role of a broker. So there is some broker liability. Because they have some form of knowledge and they can gather information, they have to do something. The basis is common law principles, and the general tort provision: Article 1382 of the French Civil Code.52 Now, the Belgian situation. There we have in fact just the extreme, because the decision in the Lancome v. eBay case of last July said that Article 14 of the E-Commerce Directive should apply.53 That means that when the intermediary is solely hosting ads—and that was the analysis of the court in this eBay case54—then Article 14 applies, so you need then a notification first. Those divergent opinions show what Trevor mentioned, that we are far from any harmonization throughout Europe. I think that the important issue will be to find a good way to reconcile the different interests. We have to take into account consumers, the trademark owners, the platform intermediaries, as well as the advertisers. And there are other issues, such as transparency issues, for the advertisers in all those cases. For instance, it would be good to shed more light on how the auctioning process is conducted. MR. RICHARDSON: Thank you very much, Alain. Before we try to get the audience to ask some questions, I have a question for the panel as a group. Any of you might want to answer it. Maybe you can just clarify for me. From what I’ve read of the French decisions involving eBay, they talk about this concept of a service provider. They talk about hébergeur. They are saying that eBay can’t be classified as an hébergeur because it is sort of playing both ends of the transaction. It is getting a commission from the seller and the buyer. Is there a difference in this spectrum of service providers that are protected from those who are just like landlords who rent space and the user can do what they want with it, and then the people like eBay, who have a particular business model where they inherently are going to be part of the sale, brokering it or something like that? Has anybody got any comment or knowledge about that? MR. COOK: I think Alain may have more to say. But one has to realize that the E-Commerce Directive is already a number of years old, five or six or whatever, and started probably rather earlier. DR. RUESS: Nine. MR. COOK: Gosh, time flies. 51 S.A. Louis Vuitton Malletier v. eBay, Inc., Tribunal de Commerce de Paris [TCP] [Commercial Court of Paris] June 20, 3008, No. 200677799. 52 Art. 1382 C. civ., available at http://www.legifrance.com/affichCodeArticle.do?cidTexte=LEGITE XT000006070721 &idArticle=LEGIARTI000006438819&dateTexte=&categorieLien=cid. 53 L’Oreal S.A. v. eBay Int’l AG, [2009] EWHC (Ch) 1094. 54 Id. at [436]–[443].

446  CHAPTER VI: TRADEMARK LAW It was put together with definitions and concepts from a completely different era. So what we are struggling with and what the European Court of Justice is going to have to struggle with is the application of current business models to those old concepts. MR. STROWEL: Yes, I agree with that. I would add the comparison with copyright again is interesting, because auctioning sites are large platforms with a lot of third parties able to bring some content. We have the same with user-generated content Web sites. There is an interesting comparison between the two liability issues. Just to add something on the French auctioning cases. The courts use the notion of brokerage liability. In fact, it is based on general contract law. There are two courts, the Troyes Court and the Paris Court. The Troyes court considered that eBay is not an editor of content, which would of course mean that it would have high liability. But on the other side, the court finds eBay is not solely a hosting provider, it plays a role somewhere in between. The term used is “editor of communication service specializing in online brokerage.” Because of this qualification, there is an obligation to ensure the site is not used for illicit activities. The opinion is based on the due care requirement. You cannot remain inactive when you are a broker. You have to act. So the general principles of due care, rather than the analogy with the landlord-tenant situation, is applied by the court. eBay is considered as participating in online marketing of counterfeit goods and not doing enough. MR. RICHARDSON: Is it sufficient that when a complaint is made the offending conduct stops or they take down the item or they stop the auction or they do something like that? eBay is very good at that, as I understand it from the United States. MR. STROWEL: Yes, but that is not enough, because eBay should be proactive according to the due care standard applied in France (and elsewhere). MR. RICHARDSON: That gets to another question. That gets to how does the trademark owner put onto other people the burden of protecting its own trademark? Does anybody in the audience have some questions? Please identify yourself and your affiliation. QUESTION: I am Dev Gangjee from the London School of Economics. I have a question for Sandra, which opens up to everybody who has spoken on keywords. Sandra, I think you expressed very legitimate concerns. I am not sure why they are expanding the domain name system either. But I was just wondering whether you have overstated the effects of what will come to pass, because the model of navigating the Internet has evolved to search. Even browsers now have a little search box near the URL line or dual functionality. Since the model has moved to search, there are two reasons to believe that apparently confusing domain names or keywords may not actually mislead: search engines have to be good at what they do in terms of delivering results that people want, and people are pretty sophisticated in terms of what they are looking for. These observations are based on an empirically informed literature which is coming out of the United States. It also refers to the traffic manipulation ‘dance’ that Alain Strowel was talking about, between people trying to optimize or game search engines and search engines responding and getting better at doing what they do. You can actually break the search process down into up to eight stages, including stages where you go back and you tweak search terms until you find what you’re looking for. Net users are not going to have infinite patience, but they are certainly willing to invest some effort in their searches. When you put these together, you actually don’t have that simplistic a search process or consumer whom we all want to protect.

Part C: Trademarks and the Internet  447

I’m just wondering how the panel would like to respond to this, because we are used to trotting out a traditional doctrinal picture of a consumer in trademark law, but in the online environment there are these two dynamics—smarter search engines and iterative search processes—which try to make things work better and prevent confusion. MS. AISTARS: Since you addressed the question to me, I will start, but I think the rest of the panel probably can address it from different perspectives. I think you raised a very good point in terms of the fact that the Internet is operating more on a search model. I would argue that that actually means that there is no need to expand the gTLD space as is being proposed, because if you’ve got a search model you can register everything in dot-com, frankly, and you don’t have to have the most ideal and catchy way of getting to the results, because the search functionality will get you where you want to go. On the issue of whether consumers are sophisticated enough or not, I think if you look at the types of scams that we are talking about, many people would be fooled, because you are using an infringing domain name that suggests that it is going to a legitimate brand site, and then you are mocking up your site to look like that to conduct your phishing campaign. So I think there is plenty of anecdotal evidence that consumers are being confused. We are certainly spending a lot of effort to ensure that our brands aren’t used in that fashion. MR. RICHARDSON: Any other questions from the audience? Justice Arnold. QUESTION: Richard Arnold from the English High Court. A question for Peter Ruess. Trevor Cook made the point that the Trademark Directive does not harmonize contributory or accessory liability for trademark infringement. I would assume—you can correct me if I am wrong—that German law wouldn’t disagree with that. But my question is: What about the Community Trademark Regulation?55 Now, does that or does it not harmonize contributory or accessory liability? What would German law say about that? DR. RUESS: Actually, that is a very good question, because a lot of people were wondering why in the last Rolex case56 the Federal Supreme Court wouldn’t have referred to the ECJ. On a panel where one of the Supreme Court Justices or judges was asked why if the subject was a Community Trademark he hadn’t referred it, he said, “This is nothing I need to refer because it may or may not be harmonized, but I can decide that on my own.” So I guess the issue on whether or not this is harmonized has been more or less circumvented, if you want, or left aside by the Federal Supreme Court as to this point. I can tell you that we might be moving to a fourth Rolex Supreme Court decision. Since Rolex III57 has clearly not taken it up to the ECJ—we weren’t unhappy with it, but a lot of people expected it—I guess that the issue of harmonization was simply left on the table, although there might be some issues. I just don’t want to commit myself to a more definite answer because we were involved in that case. QUESTIONER [Mr. Justice Arnold]: I’m not asking you to commit yourself to a personal view on it, but is there any thinking in Germany as to whether there is any harmonization or contributory or accessory liability in the Regulation? There’s no article which deals with it, but is it implicit? DR. RUESS: I think you can say that there is harmonization. The thing in Germany is that you still discuss where you base the liability. There are people who employ the tortious concept, like the Appeals Court in Hamburg, and there are those who employ the previous thing we call Störerhaftung, which is a kind of interference. That is probably something where things go a 55 Council Regulation 40/94, of 20 December 1993 on the Community Trade Mark, 1994 O.J. (L 11) 1 (EC), codified at Council Regulation 207/2009, of 26 February 2009 on the Community Trade Mark, 2009 O.J. (L 78) 1 (EC). 56 Rolex v. eBay (OLG Dusseldorf, Feb. 24, 2009). 57 Id.

448  CHAPTER VI: TRADEMARK LAW little bit apart. But in general I would say that you would have in my personal view a more or less harmonized system on that in the Community Trademark Regulation. MR. RICHARDSON: Any other questions? QUESTION: I’m Allen Dixon. I’m from IIPTC in London. A quick question on how this is working after your Rolex case in the German Supreme Court.58 I think your slide said eBay was taking down not only this but also similar and future offers. eBay’s policy, as I understood it, has always been if you send them a notice and say “There’s a fake Rolex at a certain auction,” they will take it down. Maybe I misheard, but if there is a requirement under the Supreme Court case also to take down similar and future offers, practically how is that working? Is eBay just not listing anything called “Rolex?” Are there certain ways that Rolex auctions are coming off, or are you still sending a notice every day? DR. RUESS: What happens is they do commit themselves, apart from the case, that once you send them something and say “I have seen this offer, take it down, it violates my rights,” this would be the VeRO program. The concern that trademark owners have been voicing against it is there is still the burden of having to do something, and the personnel and the cost resides with them, as they always have to find new offers. The big step in the Rolex I59 and Rolex II60 decisions, which starting with the first one, was, as you said, the commitment to take down further offers. That is what I tried to describe with the plastic example. How does it work? It is a word filter practically. This filter can be used in the Rolex, but you can do that with other filters. Let’s move away from the Rolex case. I will give you an example that is not in court so I can more freely talk about it. We did that for a client of ours who has a weight-loss program. They have CDs and they have books, but they do not have a certain product, which was their full recipes on CDs. I was talking to the lady who is the VeRO Director Europe. I said, “I am not going to look after every single offer I am finding. I want you to make sure that once I have notified you, as I have just done, that you make sure that there are no CDs with recipe books. Whenever you have ‘recipe CD’ somewhere you can take this offer down because I assure you it is infringing.” That is what they will do, because they are under the impression of the Rolex decision. They say, “Okay, we know that we have to do this anyway.” The thing is a word filter. Usually, the things you enter there are stuff like “not to be distinguished from the original,” “replica,” “copy,” and all kinds of terms. There is all sorts of stuff. You could filter “R” then a zero and “l-e-x” because they don’t want you to find Rolex. You have to update this filter from time to time. But it is a word filter that they run through the whole system. That would effectively take out all the infringing offers. As for Rolex, I didn’t see a single one on the Web the last time I looked. MR. RICHARDSON: Another question? QUESTION: [Inaudible] from Microsoft. Just as a follow-up to that, was that simply in Germany or across all eBay platforms globally, because that is one of the issues that seems to be a recurrent theme with other rights holders? The European Union has a dialogue which at its next session next week this question will be raised by several European brand holders, I’m certain. Id. In re Rolex Internet Auction (1 ZR 304/01) (“Rolex I”), Bundesgerichtshof [BGH] [Federal Court of Justice] Mar. 11, 2004, [2006] E.C.C. 9. 60 (“Rolex II”) Entschiedungen des Bundesgerichtshofes in Zivilsachen, Bundesgerichtshof [BGH] [Federal Court of Justice] Apr. 19, 2007, [BGHZ] 1149 (1159) (F.R.G.). 58 59

Part C: Trademarks and the Internet  449 DR. RUESS: This depends on what eBay is, as a conciliatory move, willing to do. What you can threaten them with is this Federal Supreme Court judgment.61 They obviously say, “Well thank you, but it doesn’t apply to eBay.com, it applies to eBay.de.” We had another thing for a producer of videogames, where they said, “Well, this might be online in Hong Kong or somewhere, but we don’t care because you don’t have anything to scare us with in this area.” So I think once you have established a precedent it will become easier. I have to say honestly I am not into eBay-bashing at the moment because they are extremely cooperative after these opinions come down. You can argue with them. They will even ask you, “Don’t you think there is a legitimate example that you could find?” We need to sincerely think about that, because I don’t want to do eBay the favor of blocking terms that the client legitimately uses. We have mixed experience with how far they go. They don’t necessarily restrict that to Germany. But of course, it is a question of what is your threat or negotiation potentially. QUESTION: Ed Vassallo from Fitzpatrick in New York. I have a question to anyone on the panel who would like to address it. How do we deal with the territorial limitation of each nation’s laws when eBay is available around the world, where something they may do or offer for sale may not be permissible in France, such as Nazi equipment, but permissible for sale in the United States? As a practical matter, does the technology permit them to comply with the law in one country and yet offer it in places where that activity is permissible? MR. STROWEL: A quick response. This is a major problem, but probably too late in the program to tackle that. To refer to the cases that have been discussed, the French Hermès v. eBay case62 involved only ebay.fr. So you see the claims are (sometimes) introduced in relation to the local Web site, and that responds to your question. In the Louis Vuitton v. Google case63 concerning keyword selling, it is worthwhile to conduct a search on the Internet. When you do search “Louis Vuitton” on the Google dot-com Web site, you get a lot of sponsored links. When you do it on google.fr you don’t have all those links because of the decisions in the Louis Vuitton case. And even if you do a search from google.fr to access the World Wide Web (not only the French pages), you don’t find the sponsored links that are at issue in the cases now before the ECJ. So obviously, it is possible to find a technical solution at least for the sponsored links. In other cases it might be very complex. MR. RICHARDSON: I’ll talk to you afterwards because there are a few things I know about this. Amazon has gotten itself into trouble because of some of the things it does, getting into trouble with sales tax because of the way it does business. eBay similarly gets itself into jurisdictional problems because of some of the things it does, paying local people to link to eBay. Thank you very much to our speakers and panelists.

Rolex v. eBay (OLG Dusseldorf, Feb. 24, 2009). Case RG 06/02604, Hermès Int’l v. Feitz (Unreported June 4, 2008). 63 Opinion of Advocate General Poiares Maduro, Joined Cases C-236/08, C-237/08, & C-238/08, Google France v. Louis Vuitton Malletier. 61 62

Chapter VI

Trademark Law Part D: Right of Publicity/Privacy: Comparative Developments Moderator Prof. Coenrad Visser

University of South Africa (Pretoria) Speakers Prof. Marshall Leaffer

David Saenz

Indiana University (Bloomington)

Greenberg Traurig (New York)

Prof. Charlotte Waelde

Edinburgh University Panelist

Dr. Prof. Fabienne Brison

Howrey (Brussels)

PROF. VISSER: Good afternoon, ladies and gentlemen and welcome. We are going to have a comparative discussion of the right to publicity/privacy. We are very fortunate to have three well-known speakers as our main speakers on this panel. They are Professor Charlotte Waelde of Edinburgh University, Professor Marshall Leaffer of Indiana University in Bloomington, and David Saenz from New York. The order in which they will speak differs slightly from the order in your program. We will start with Professor Charlotte Waelde, who will basically give a comparative talk about developments in the United Kingdom and other jurisdictions of the right to publicity or privacy during the lifetime of the person involved. Marshall Leaffer will then continue with a discussion of the post-mortem right to publicity, and it is particularly appropriate that he does that since he comes from a jurisdiction with probably the longest protection for the post-mortem right of publicity. And then David Saenz will take us into new technology in the Facebook context and talk about developments there and new challenges in that area.

452  CHAPTER VI: TRADEMARK LAW To keep us back on time, let’s start with Charlotte. PROF. WAELDE: Thank you. I am going to in my talk trace how over recent years the expansion in the right to keep certain information private in England and Wales has resulted in an ability to exercise commercial control over an image. I am going to look very briefly at some of the cases decided after the introduction of the Human Rights Act.1 I am going to ask what possible justifications there are for the development of this commercial power to control. I am going to mention very briefly some comparisons with other jurisdictions. I am going to raise the question as to whether it is inevitable that this ability to exercise commercial control results from the expansion of the right of privacy. [Slide] Let me start by looking at a number of cases. The first one, Gordon Kaye, was actually decided before the introduction of the Human Rights Act. This was Kaye v. Robertson.2 It involved the actor Gordon Kaye, who was injured badly in a road accident in a gale where a piece of wood hit his head. He was in hospital. He was visited by a journalist and a photographer who took some photographs and interviewed him. Fifteen minutes later he had no recollection of the interview. At first instance, an order was granted restraining publication on the basis of malicious falsehood. The court noted that Gordon Kaye might himself have wanted to sell his own story and the associated pictures.3 On appeal, however, publication was allowed, but no reference was to be made to the consent that Gordon Kaye had allegedly given to the interview. In addition, the court said if there was ever a good example that England and Wales needed a law of privacy, this was it.4 Then we had the introduction of the Human Rights Act and a development in the law of breach of confidence. Since then there have been a number of cases which have developed the law in this area and contributed to what I would call advisedly a right of privacy. In 2004 the press was able to publish the fact of Naomi Campbell’s drug addiction but were castigated for publishing pictures of her coming out of Narcotics Anonymous, as that was an intrusion into her privacy.5 Also in 2004 the European Court of Human Rights, in the Von Hannover case, said that public figures have a right of privacy in public spaces where there was a reasonable expectation of privacy.6 In the Douglas v. Hello! Cases involving Michael Douglas and Catherine Zeta Jones, generally it was found that a third party could be sued where a photograph has been published in breach of confidence.7 In 2008, the Court agreed with Max Moseley that in a sexual romp without more the people involved were entitled to a reasonable expectation of privacy.8 1 Human Rights Act (HRA), 1998, c. 42 (U.K.), available at http://www.opsi.gov.uk/acts/acts1998/ukpga_ 19980042_en_1. By way of the HRA, the European Convention on Human Rights (ECHR) was incorporated into U.K. law. Convention for the Protection of Human Rights and Fundamental Freedoms, Nov. 4, 1950, 213 U.N.T.S. 222. The HRA of 1998 allows judges to find statutes to be incompatible with the ECHR. However, “[s]uch a finding does not invalidate the statute; rather it imposes a political obligation on the government to introduce legislation to bring UK law into line with the European Convention.” A.E. Dick Howard, “A Traveller From an Antique Land: The Modern Renaissance of Comparative Constitutionalism”, 50 Va. J. Int’l L. 3, 22–23 (2009). 2 Kaye v. Robertson, [1991] FSR 62 (C.A.). 3 Id. at ¶ 26 (“Mr. Kaye thus has a potentially valuable right to sell the story of his accident and his recovery when he is fit enough to tell it. If the defendants are able to publish the article they proposed, or one anything like it, the value of this right would in my view be seriously lessened, and Mr. Kaye’s story thereafter be worth much less to him.”) 4 See Damian Tambini & Clare Heyward, Ruled by Recluses?: Privacy, Journalism and the Media After the Human Rights Act 41 (2002). 5 See Campbell v. MGN Ltd., [2002] EWCA Civ 1373. 6 Von Hannover v. Germany, [2004] ECHR 294. 7 Douglas v. Hello! Ltd., [2007] UKHL 21. 8 See Max Mosley v. News Group Newspapers Ltd., [2008] EWHC 1777 (QB).

Part D: Right of Publicity/Privacy: Comparative Developments  453

Interestingly, in 2009 in the European Court of Human Rights, in a case I think that has very strong close parallels with the Gordon Kaye case the European Court said that photographs of a baby in a hospital should not have been taken without permission.9 Now, needless to say, a huge amount of academic ink has been spilt discussing these cases and a number of points have come out. I think perhaps some of the important ones are: the nature of the information, the circumstances in which the information is obtained, and from my reading of the Reklos case,10 which is in French (and I apologize my French is not great), as the image is part of the personality, so the individual can control both the taking and dissemination of an image. [Slide] I wanted to illustrate my talk with some pictures of these people. I found it surprisingly difficult to get images that I felt I could lawfully use in my talk. So I have these, which are all under Creative Commons licenses. That, I hasten to add, is not Baby Reklos. [Slide] So is publicity now free-riding on these developments in privacy? We have a lack of clarity in the law. We have restricted access to individuals. We have, of course, assertion of copyright in authorized pictures. The result is, I think some would argue, the commercialization of tittle-tattle. This picture actually is one of Jade Goody. Jade Goody was a self-made reality celebrity. In 2008 she was diagnosed very publicly with cancer.11 In 2009 in the public glare she spent her last months in front of intense controlled media scrutiny as she made arrangements for the remainder of her life. Many people made many millions from this commercialization. [Slide] So what possible justifications do we have for this seemingly emergent right, or ability to control commercially, an image? The arguments, I think, show the absolutely polarized debate following Jade Goody’s death and illustrate that the arguments that underpin this area have not changed for 100 years. The arguments in favor of the development of a right of publicity or a right of commercial control: It is an incentive for individual enterprise, it rewards creativity, it is a fair distribution of resources, it follows economic realism. The Economist did an obituary of Jade Goody and pointed out that there are those who applauded her.12 She exploited to her own advantage the media. She manipulated the media. She wanted to make money for her children’s education after her death, and this she did. Those who argue against the emergence of this power point to the inalienability of personality rights, from where the control stems; as they have the same character as human rights, so they should not be reified or commoditized, and this is really a commodity too far, the images of these people should be part of the cultural commons. This was, I think, encapsulated in Michael Parkinson writing on the BBC Web site when he was saying generally that the “Jane Goody” episode is “a tawdry example of how far the media has fallen. Jade was manipulated. She was not the manipulator. Others made millions from exploiting her image.”13 [Slide] This doctrinal inconsistency and confusion is, I think, very evident when you look at patterns of exploitation. In our research center we carried out a study. We had twelve different jurisdictions. We asked people to respond to a number of case studies, asking them how their law would actually solve these case studies. See Reklos & Davourlis v.Greece, No. 1234/05, [2009] ECHR 200 (Jan 15, 2009). See id. English translation available at http://www.iept.nl/files/2009/IEPT20090115_EHRM_Reklos_en_ Davourlis_v_Griekenland.pdf. 11 See, e.g., “Jane Goody Has Cervical Cancer”, Sun (U.K.), Aug. 18, 2008, available at http://www.thesun.co.uk/ sol/homepage/news/article1575717.ece. 12 See “Obituary: Jade Goody”, Economist, Mar. 28, 2009. 13 “Parkinson: ‘Goody was exploited’”, BBC News, Apr. 8, 2009, http://news.bbc.co.uk/2/hi/entertainment/7987426. stm. 9

10

454  CHAPTER VI: TRADEMARK LAW From these case studies it is clear that patterns of exploitation are extremely varied where a right exists in other countries. The exploitation ranges from revocable consents and nonexclusive licenses to, in some circumstances, exclusive licenses, but they are very much hedged around with conditions, and sometimes they are revocable. [Slide] So we have, I think, in England and Wales the slow development of an image right. This free-rides upon privacy concerns. This we have without ever having resolved the fundamental underlying question of whether we should actually support this right in law or not. A question that particularly vexes me is when you look at this development, in fact, even if not in law, where is the line that demarcates dignitarian and commercial aspects of persona? Is it inevitable that the commercial right will develop out of the dignitarian concerns? I wrote with a colleague in 2006. We argued that the incoherence lies in the enormous wealth and international reach of the modern celebrity culture, and the law will always follow the money. The imperative force of these pressures will simply brush aside all scruples based on the view that it is inconsistent for the law to protect persons’ privacy for high reasons of human autonomy and dignity and at the same time allow a person to sell it. But now we are in 2009, and I do actually question whether money still has the same hold. Perhaps now there is a slightly less cynical view that might prevail of autonomy and dignity and a renewed desire for some sort of coherence and consistency in the law. Thank you. PROF. LEAFFER: I am going to speak about the postmortem right of publicity in the United States. What we have just heard from Charlotte is very interesting to me, because in the United States we have completely bought into publicity rights as a commercial property right. In a word, we have “propertized” fame. [Slide] The publicity is based on what one might call “the property syllogism”. The logic proceeds as follows: If the right is transferable, it must be assignable; thus, it must be property; and since it is property, it must have attribute X which is shared by all property. If we say identity is a property right, it must be subject to apportionment in divorce, and in disposition in bankruptcy proceedings. And finally—the focus of my talk— it should be descendible, like all property. The property logic inexorably leads to this conclusion. The “properiztion” of publicity has lead to some unintended and perverse consequences. There are many thorny issues we could discuss in this regard. We could spend a lot of time on the apportionment of property rights under community property in California. How do you apportion publicity in divorce? [Slide] Once you create the property right it has a tendency to expand. In the United States, it has enjoyed ever-expanding vistas. Publicity rights exist under state law and one state tries to outdo another in bolstering their publicity statutes. The courts have helped too to pushing the limits of celebrity interests in their identity. Originally publicity rights were recognized in name and image but now through both case law and statutory amendment, we have expanded publicity rights to objects (like a race car driver’s car),14 and nicknames (like “Crazy Legs”),15 catch phrases (“Here’s Johnny”),16 distinctive voice (Bette Midler,17 Tom Waits,18 and the like); and things that resemble the celebrity (a See Edmund Irvine & Tidswell Ltd. v. Talksport Ltd., [2002] EWHC 367 (Ch) (Mar. 13, 2002). See Hirsch v. S.C. Johnson & Son, Inc., 90 Wis.2d 379, 280 N.W.2d 129 (1979) (Crazy Legs shaving gel infringes Elroy Hirsch’s common law right to privacy in the use of his nickname “Crazy Legs.”). 16 See Carson v. Here’s Johnny Portable Toilets, Inc., 698 F. 2d 831, 837 (6th Cir. 1983) (use of the phrase “Here’s Johnny” is actionable under common law). 17 See Midler v. Ford Motor Co., 849 F.2d 460 (9th Cir. 1988) (an imitation of Bette Midler’s distinctive voice in a car commercial was a misappropriation). 18 See Waits v. Frito-Lay, Inc., 978 F.2d 1093 (9th Cir. 1992) (common law voice misappropriation). 14 15

Part D: Right of Publicity/Privacy: Comparative Developments  455

robot with a wheel of fire, resembling Vanna White, a TV hostess).19 Identity rights have everexpand, only limited by the imagination of lawyers. [Slide] The right of publicity is a state right. It is not a federal right. Thirty-eight states in the United States have adopted publicity rights. They have either done so by statute or by common law or a little of both. They differ as to their subject matter coverage and remedies. In particular, they vary to what extent, if any, publicity rights survive death.20 Thirteen states have post-mortem rights. But look at how they differ. My own adopted state of Indiana has 100 years post-mortem right publicity right.21 Washington State now has seventy-five year post-mortem right.22 In California, the right of publicity lasts seventy years after death of the celebrity;23 Tennessee has a ten-year right but can be extended indefinitely (or eternally) so long as the right is used commercially.24 On the other hand, some states have no post-mortem right at all, such as New York, where publicity rights end at death.25 Why this discrepancy among the states? Politics explains much. The entertainment industry supports increased protection for deceased rights and California is the capital of entertainment. Washington State is the home of the Getty Archives. Indiana is the home of CMG, Curtis Management Group, a worldwide marketing group that was able to interest an otherwise farmer oriented Indiana legislature in protecting rights of dead celebrities, 100 years after death. The publishing industry, however, has opposed the right. New York is the publishing capital, and the home of the Authors Guild, and the Association of the Bar of the City of New York. These powerful groups have opposed the descendible right of publicity. The State of New York has resisted, at least for now, the push toward a post-mortem right. [Slide] The push for post-mortem rights is understandable because post-mortem rights can be valuable to their owners. For example, it is said that Elvis makes $49 million a year on his image. As we know, Elvis lives and is sighted on many mechanizing items. Because of this crazy quilt of state statutes, complexities can arise. I want to now focus on the Marilyn Monroe litigation, which I think gives of how complex this right can be in an estate-law context when you have some states that recognize the post-mortem right and others that do not. I would like to briefly turn the Marilyn Monroe saga which illustrates some of the difficulties in applying the post-mortem right in the U.S. 1. Marilyn Monroe: Round One Interest in Marilyn Monroe did not cease after her death. Enterprising persons began selling various embodiments of her image in California and elsewhere. Marilyn Monroe’s postmortem rights were asserted by the owners of her merchandizing interests. 19 See White v. Samsung Elecs. Am., Inc., 971 F.2d 1395 (9th Cir.1992) (robot imitating Vanna White dressed in a wig and jewelry was a misappropriation). 20 See generally Peter L. Felchert & Edward L. Rubint, “The Descendibility of the Right of Publicity: Is There Commercial Life After Death?”, 89 Yale L.J. 1125, 1127 (1980). 21 See Ind. Code Ann. § 32-36-1-8(a). 22 See Rev. Code Wash. § 63.60.010 et. seq. 23 See Cal. Civ. Code § 3344.1 (“Any person who uses a deceased personality’s name, voice, signature, photograph, or likeness, in any manner, on or in products, merchandise, or goods, or for purposes of advertising or selling, or soliciting purchases of, products, merchandise, goods, or services, without prior consent from the person or persons specified in subdivision (c), shall be liable for any damages sustained by the person or persons injured as a result thereof.”). 24 See Tenn. Code Ann. § 47-25-1103(b). 25 See, e.g., N.Y. Civ. Rights L. § 50 (“A person, firm or corporation that uses for advertising purposes, or for the purposes of trade, the name, portrait or picture of any living person without having first obtained the written consent of such person, … is guilty of a misdemeanor.”).

456  CHAPTER VI: TRADEMARK LAW In a 2007 decision26 a California court held that Marilyn Monroe does not have the right to assert a claim under the California statute, which gave a quite long post-mortem right. Unfortunately, California denied post-mortem rights personality rights for those who died before 1985, the enactment date of the statute. Marilyn Monroe died in 1962 in California. Thus, her post-mortem rights were excluded under the statute. CMG, who owned Monroe’s publicity rights, was going to stop here given the stakes involved. Things happen quickly if money if involved and indeed big money was involved here. Somebody got the ear of the California Legislature which proceeded to pass legislation giving protection to the deceased rights before 1985. So Marilyn Monroe, it would appear, has now been resuscitated. 2. Marilyn Monroe: Round Two Given the passage of the California statute CMG was able to get a motion for rehearing.27 On a 2008 motion of rehearing, CMG according to the California court had standing to enforce the right. Thus, a victory for CMG. The problem for CMG, however, was that the court stated that choice analysis is needed to determine whether New York or California law applies. The defendants, or course, argued that New York, not California, law applied. If California law applies, a valuable post-mortem right is created. But if New York applies, the right of publicity expires at death. 3. Marilyn Monroe: Round Three In round three, CMG was suffered a resounding defeat in its attempt to argue that California law applied. In Shaw Family Archives,28 the district court applied the law of the domicile at death, which in this case was New York. But why did the court choose New York even given that Marilyn Monroe had houses in California and died in California. You would think that would be enough to establish California as the domicile at death. Not so. The court chose New York because New York was chosen by her executor for probating her will. Why did Monroe’s executor choose New York? At the time, he wasn’t thinking about the right of publicity. His decision was based on the fact that inheritance taxes are so much less in New York than in California. He thought he was doing a favor for the dead film star. Anyway, New York applied and Marilyn’s rights were deemed to be extinguished at death. Thus, ended the MM saga. In the future, publicity right owners may have a more success than Marilyn Monroe. As I stated above, the states try to outdo one another in their expanding publicity rights. In its 2008 amendments to its publicity statute, Washington State decided to trump all publicity law by adopting a seventy-five-year post-mortem right for celebrities and non-celebrities regardless of the domicile at death, wherever deceased. Thus, in the future, Washington State may well turn out to the jurisdiction of choice for publicity actions. Is there a way out of the publicity law chaos? I wish we could go back in time when the right of publicity did not exist. Celebrities were well protected by trademark and unfair competition law. It’s hard to justify a right of publicity under 26 Milton Greene Archives, Inc. v. CMG Worldwide, Inc., No. 05-2200 MMM(MCX), 2008 WL 1922980 (C.D. Cal. Mar. 17, 2008). 27 Milton Greene Archives, Inc. v. CMG Worldwide, Inc, 568 F. Supp. 2d 1152 (C.D. Cal. 2008). 28 Shaw Family Archives, Ltd. v. CMG Worldwide, Inc., 589 F. Supp. 2d 331 (S.D.N.Y. 2008).

Part D: Right of Publicity/Privacy: Comparative Developments  457

any theory. Alas, the U.S. it’s too late. My advice to the British, it’s not too late. Don’t go down the path we have taken in the United States. Is there a second best solution to render publicity law in the United States? Some have advocated a federal statute? Of course, that step would go a long way to harmonizing what has turned out to be an unwieldy patchwork of state law. But passing such a law would not be easy from a political standpoint because of the varied interests involved. As we have seen, the states have fundamentally different views of such issues as the post-mortem right. MR. SAENZ: I am going to address the question of Internet advertising and social networking sites and how that may potentially implicate the right of publicity in an area where traditionally we have seen the focus on right of privacy. Product marketing in the context of social networking sites really has the opportunity to expand from this nebulous aspiration based on word of mouth to something that is a lot more concrete, that can really be monetized and measured. As a result, social networking sites really have a level of value that we haven’t seen recently with other Internet Web sites. But the way in which that value is achieved implicates issues of right of publicity in terms of the question of how individual members’ preferences can be used within the networks of which they are a part. What I’d like to do is talk briefly about a couple of examples of social networking sites, Facebook and Twitter, and then compare the advertising practices that they are either engaging in now or could be moving to based on some of what we are seeing, and talk about a very recent, probably the most important recent, right of publicity decision in the United States, the CBC v. Major League Baseball decision from the Eighth Circuit,29 and to pose the question whether or not we are going to start seeing right of publicity claims being raised where we traditionally saw right of privacy claims. I’ll start with Facebook. Facebook in late 2007 launched what they called their Beacon Advertising Program.30 Essentially, what this was was an attempt to introduce advertisers into the core network or infrastructure of the site. They would allow advertisers to brand Facebook pages, to run targeted advertisements to other Facebook members who signed up to be part of those pages, or to be friends with those pages, and then, lastly, gave them access to detailed information and analytics based on the Facebook database of users, which at the time was somewhere around 50 million, and I’m sure is significantly larger today. Essentially, advertisers were able to customize their pages with content information and applications, try to get other Facebook users to sign up to those pages. When a Facebook user would sign up to a page, that would be immediately sent to all of the other friends in that particular user’s network, either via a mini-feed or a news feed, which are traditional Facebook applications that most users have accepted. Facebook would then also allow the marketers to send targeted advertisements to these people who had signed up, and to other users as well, based on information in the Facebook users’ profiles, which are generally available to anybody else on Facebook. They show anything from relationship status to a favorite TV show, a favorite movie, to groups that they are a member of, and so on and so forth. So it really was giving advertisers an avenue for marketing that they hadn’t had previously. I think one of the quotes from the original press release of the Beacon program is particularly telling. Facebook wrote in its press release: “Facebook’s ad system serves social ads that combine social actions from your friends, such as a purchase of a product or a review of a restaurant, with an advertiser’s message. This enables advertisers to deliver more tailored and C.B.C. Distrib. & Mktg., Inc. v. Major League Baseball Advanced Media, L.P., 505 F.3d 818 (8th Cir. 2007). See Juan Carlos Perez, “Facebook’s Beacon More Intrusive Than Previously Thought”, PC World, Dec. 1, 2007, http://www.pcworld.com/article/id,140182-c,onlineprivacy/article.html. 29 30

458  CHAPTER VI: TRADEMARK LAW relevant ads to Facebook users that now include information from their friends so they can make more informed decisions.”31 It is that last part that I found particularly interesting, the concept that advertisements were now going to come with some sort of implicit recommendation or endorsement from the other people in your network on a given social networking site. That is different from the traditional privacy issues that we see, wherein a site collects demographic information (gender, age, preferences, and so forth) and might sell that information to advertisers, thereby implicating privacy concerns. Here that may well still be the case, there may still be privacy concerns in how social networking sites involve advertisers in the future, but it also raises this issue of: If you are sending an advertisement to everybody in a particular network on a social networking site, suggesting that one or more members of your network like this product or were interested in it, or even something as generic as made an inquiry about it or signed up for a fan page about it, are you suggesting that there is some sort of endorsement; and, if so, is there a right of publicity issue implicated? So that’s the Facebook context. Twitter is a relatively new development, so I’ll talk very briefly for those of you who aren’t familiar with it. Twitter is essentially the very successful marriage of three things: (1) excellent branding; (2) instant messaging; and (3) social networking. Essentially, Twitter allows people to send instant messages, no more than 160 characters, to everybody who has agreed to accept instant messages from them. I don’t know about you guys, but personally the thought of everybody I know sending every thought that flashes through their mind to me at all times of the day, whenever they happen to be playing with their iPhone, is a little daunting, not necessarily so appealing. But nevertheless it has been extremely successful. Twitter recently began the process of seeking additional funding at a $250 million valuation, only several months into its business life. There were rumors that Facebook made a $500 million bid for acquisition. There are also rumors that Twitter and Google are currently engaged in acquisition talks. So whatever they are doing, they are doing it very well. What I think makes Twitter so valuable is not just the concept—it is a good concept—but is also an additional function or feature that it has, which is a sort of real-time search engine. You can go to not just twitter.com, but you can go to www.search.twitter.com and search all Twitter instant messages. As a result, you can find anything. If you happen to be an advertiser or a retail brand, you can find anything on your product, any message that anyone has sent based on that product, see the groups they are a part of, who else is part of that group, and so on and so forth. And so, similar to the Facebook example, you really are able to not just learn the demographic information that you might be able to purchase from any Internet Web site about their users, but you are able to see how people are recommending your product, who they are recommending it to, conversations or debates (tweaks as they’re called) back and forth over a particular product. This again raises this issue of when advertisers try to take advantage of that and try to manipulate that, is there a right of publicity implicated? Moving on this recent decision, the CBC v. Major League Baseball decision, that decision essentially asked the question: Is there a right of publicity violation if a Web site offering a fantasy baseball service uses the names and likenesses of professional baseball players in reporting their statistics? 31 Press Release, Facebook Inc., Facebook Unveils Facebook Ads (Nov. 6, 2007), available at http://www.facebook. com/press/releases.php?p=9176.

Part D: Right of Publicity/Privacy: Comparative Developments  459

The district court found that there was no such violation, that the statistics that were being used are in the public domain and are readily available,32 just like a newspaper would report the box score from the Yankees game the following morning, and the names and likenesses were used only to identify the players, and that was information that was needed to assemble the roster of fantasy players; it wasn’t used for endorsement purposes. There was no implication that any one of the professional Major League baseball players was endorsing this particular fantasy baseball Web site. In fact, every Major League baseball player is available on every fantasy Web site because that is the nature of the product. So the district court found that there was no right of publicity violation. On appeal, the Eighth Circuit reversed on this issue,33 even though it ultimately came to the same decision as the district court, and said that even though there was no explicit endorsement, it was still a for-profit activity. What the Eighth Circuit actually wrote was: “CBC’s use does not fit neatly into more traditional categories of commercial advantage, namely using individuals’ names for advertising and merchandising purposes in a way that states or intimates that the individuals are endorsing a product.”34 It went on to say: “Because we think it is clear that CBC uses baseball players’ identities in its fantasy baseball products for purposes of profit, we believe their identities are being used for a ‘commercial advantage.’”35 First of all, just in right of publicity law in general, that is a pretty big distinction to draw. To suggest that somebody’s intent in using a name for profit, even if it is not an endorsement, could violate a right of publicity I think is pretty different from the traditional analysis, which is the commercial advantage has to be linked to the endorsement of the likeness that is being used. Putting that aside and bringing it back to the issue we see with the social networking sites, what does that mean? What happens if somebody sends a Facebook blog saying “James signed up for J. Crew, and James apparently loves J. Crew, and we’ve got a great new sweater, and here’s everybody in James’s network; you should buy a J. Crew sweater”? In light of the standard that the CBC court offered, where there is only a requirement that the overall advertising be done for profit, which of course all advertising is, what does that mean for purposes of whether or not the advertiser has violated the right of publicity of one or more of the users in a given network? PROF. VISSER: Thank you to the three main speakers, also for sticking to the time so scrupulously. Just one question to Charlotte and Marshall. It seems to me as if we are talking about two situations. One is an uncompensated exploitation of someone else’s image, and the other situation would be an unwanted intrusion into someone’s personal life. Do you think there are different policy considerations that underlie the remedies here and that would have an effect on the width or the scope of the legal remedy being carved here? PROF. LEAFFER: Yes, indeed. The courts have recognized this. Particularly in the instance of celebrities, uses of celebrity images generally fall under commercial harm, and courts try to evaluate the extent of that harm, rejecting recoveries of emotional harm. After all, the celebrity has placed himself before the public by his activity. Of course, Celebrities’ right of privacy can be transgressed as well. But when you are talking about just exploiting an image as image, this is commercial harm. 32 C.B.C. Distrib. & Mktg., Inc. v. Major League Baseball Advanced Media, L.P., 443 F. Supp. 2d 1077, 1107 (E.D. Mo. 2006). 33 C.B.C. Distrib., 505 F.3d 818, 822–23 (8th Cir. 2007). 34 Id. at 822. 35 Id. at 822–23.

460  CHAPTER VI: TRADEMARK LAW PROF. VISSER: Thank you. Now can we have our first panelist, Professor Fabienne Brison from Brussels. Do you have some comments that you would like to add? DR. PROF. BRISON: First of all, I couldn’t choose between those two titles, so I leave it open. [Slide] I was asked to give you some ideas on the continental approach. [Slide] The first thing I want to say is that we are dealing with a very unharmonized protection in continental Europe, and also a very uncertain scope. [Slide] Now, everything starts with the legal basis, as already pointed out by Charlotte. We find the rules generally in copyright acts, but apparently it has nothing to do with copyright; it is based on a general principle of the protection of personality. Only France has the phrase “special approach,” because they deduct from their right to private life. We have lots of case law which is very atypical for the continent. [Slide] We have at the moment a patrimonial personality right, let’s put it that way. However, there are lots of discussions and we have lots of problems, because we didn’t discuss the real legal basis of it. Is it still a personality right? Is it maybe a mere commercial right, or is it maybe an intellectual property right because you are creating goodwill, with lots of consequences for contractual aspects, term of protection, damages, as was already pointed out? [Slide] For instance, term of protection. Can we speak about eternal protection? What do we do with the post-mortem exercise of these rights, as pointed out by Marshall? [Slide] Contractual aspects: Is it assignable or not? Of course, everybody accepts the idea that there can be licenses of these rights. But then we have lots of problems to know which kinds of rules we have to apply. The French Supreme Court very recently was not very courageous, and so didn’t say anything. For instance, in Belgium we have case law saying that any authorization you give on the matter is revocable, so it is very, very unpleasant in a commercial atmosphere to deal with that. [Slide] If I go back, despite the fact that we are confronted with unharmonized protection, lots of things are actually similar in all these continental countries. Now, I only looked to Belgium, Netherlands, Germany, and France so far. First of all, every natural person has the right. Which right? It is the right to prohibit the making of a portrait and the use afterwards of that portrait. It is not only about the portrait; it is also about the voice, about the name, etc. [Slide] It is about any visual representation. So not only a real portrait, but also a little doll. You might have heard about the Voodoo dolls with Sarkozy, one of those examples. The criterion is recognition: Do you recognize a person? So it is not about do you see the main characteristics of somebody’s face, but do you see something that is recognizable? The Belgium Court of Appeal just accepted some months ago that the beautiful back of that man is recognizable and is not protected by that portrait right. Also, imitation is one of these things that is covered by our portrait right, as we, for instance, see in the back of that lady in a Dutch case. [Slide] Now, despite the similarities, we also see that there are very important differences. One difference is, for instance, that in the Netherlands exercising your right is submitted to a condition. So you have to prove as a plaintiff that you have a lawful interest to ask for your portrait right. It might be a private interest or a commercial interest, as has been accepted by case law. In the other countries it is a very different approach. The other countries—France, Germany, Belgium—say everybody can always have that right of portrait, but in certain cases you can be limited in the exercise of it, limitations based on the freedom of information. We speak very generally about the absolutely or relatively public persons, those who in the

Part D: Right of Publicity/Privacy: Comparative Developments  461

normal execution of their public role can be depicted without their authorization. However, everybody agrees that that is always without any prejudice to the possible exercise of their commercial interests. [Slide] That very important case has been mentioned by Charlotte. [Slide] The European Court of Human Rights said in 2004 in the Caroline of Monaco case36 that Article 8 of the ECHR37 is indeed covering the right to a person’s picture and that you can have a legitimate expectation that people are going to respect that. [Slide] However, Article 10 of the European Convention on Human Rights38 can prevail if making available photographs can contribute to a debate of general interest. However, in this case, Caroline of Monaco is a princess, she doesn’t have any public function, it is only about details of her private life, and there is no debate of general interest. [Slide] Now, I already pointed out that in all these countries we accept and we respect the commercial interest. So then the portrait right is going to regain its importance. We don’t know what the foundation of that portrait right will be in that case. So we speak about models and sportsmen, etc., but also about normal people, you and me, who happen to have any financial interest in the commercial exploitation of your portrait. [Slide] That is the second thing that I want to mention. So we have Caroline of Monaco. Then we have Marlene Dietrich. It is all about them. Lots of interesting case law in Germany about Marlene. What are some examples of this restricted commercial use? I think this is also something we might discuss. Examples given are, for instance, if you merchandise products and it is a mass product, a T‑shirt, for example. If you use the name or a portrait of somebody, it is very obvious that you are taking advantage of them. It can also be, of course, a product that is linked to them because they have a poster or a calendar only with the pictures of David Beckham. Also, for advertisement purposes. When there was a car being launched and Lancia used the picture of Marlene, that was a problem.39 [Slide] However, it is not unlimited. So in certain cases, even if there is a commercial interest, we are still trying to seek a fair balance with the interests of others, like the freedom of information. For instance, in a case with Marlene Dietrich again, an advertisement for a German newspaper with a special edition on fifty years of Deutschland that had a fragment of a television show with an interview of Marlene Dietrich, there was a balance of interest 36 Von Hannover v. Germany, [2004] ECHR 294, at [50]–[53], available at http://cmiskp.echr.coe.int/tkp197/view. asp?action=html&documentId=699729&portal=hbkm&source=externalbydocnumber&table=F69A27FD8FB86142 BF01C1166DEA398649. 37 Convention for the Protection of Human Rights and Fundamental Freedoms, Art. 8, Nov. 4, 1950, 213 U.N.T.S. 222. (Right to respect for private and family life). 1. Everyone has the right to respect for his private and family life, his home and his correspondence. 2. There shall be no interference by a public authority with the exercise of this right except such as is in accordance with the law and is necessary in a democratic society in the interests of national security, public safety or the economic well-being of the country, for the prevention of disorder or crime, for the protection of health or morals, or for the protection of the rights and freedoms of others. 38 Id. Art. 10 (Freedom of expression). 1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises. 2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary. 39 Marlene Dietrich Case, BGH 1 ZR 49/97 (Dec. 1, 1999).

462  CHAPTER VI: TRADEMARK LAW which here was not in her favor. It was in the favor of the newspaper. They said that it cannot be considered if you take something from history that the public might think that Marlene was actually encouraging people to buy that.40 [Slide] At this moment we are challenging the scope and those limits in Belgium. There is a pending case, Ladbrokes v. Real Madrid, Ladbrokes and many others. It is about companies who allow online gaming and betting. Real Madrid, also other important football clubs and important football players, are involved. It is about, amongst other things, the use of their name, which is part of that portrait right in the continental approach. [Slide] So if, for instance, you go to the Web site of Ladbrokes and you want to bet on sports, namely on football, actually what you do is you go to that Web site, you see the listings of all the football matches, and then you can even try to bet on the name of one person as being the first scorer. [Slide] Is this “commercial” use or not? We are discussing that at the moment before the court of appeal. In the first instance, we won the case because it was considered as being a normal use, a foreseeable use, of the name completely in conformity with its normal function; namely, you use a name to identify somebody. [Slide] Other possible comparisons are these: when you read the news online and there are some mentions of football players, but also when you see some television program listings, also when you see information on stock exchanges. What do you do about this? This is really something that in the continent we are discussing at the moment: Despite all our differences, what is a commercial use? Where can we do something with it? Thank you. PROF. VISSER: Thank you. We have some thirty minutes for questions and comments. Please identify yourself and please use the microphone for the purposes of recording. Are there any questions or comments? QUESTION: Robin Jacob, Court of Appeal, England. Picking up what Marshall was saying, the general rule for intellectual property rights is that there ought to be some good economic reason for creating them. As I see it, unless there is a good reason for having them, you shouldn’t have them. It is really clear from what Marshall was saying that what has happened in the United States with the creation of the perpetual personality right is that nobody has asked that basic question, except possibly those who want the rights. I think we have a general problem in the whole of intellectual property—and we had the same in trademarks—that nobody speaks up for Joe Public and says, “I wish to be represented in these discussions.” So legislators always give way, and perhaps courts do too, to those who ask for the rights because there is nobody really to say no. Does anybody disagree with that? Or should there be some sort of public commission who are always to say “No” to any proposed intellectual property right anywhere? PROF. VISSER: Professor Dworkin? QUESTION: Gerald Dworkin, Kings College London. I hesitate to question what Robin Jacob is saying, but there is a question. Admittedly, the business community often wants far more than it is entitled to. But in practice there are many areas of business where there is an established and acceptable form of trade—I also talk of format rights—and where the level of protection, if any, is simply not there. What the business community say is this: “We are dealing with these ‘products.’ Business people happily accept them.” Others who would be possible pirates do not. If this is a legitimate method of trade, just as with trademarks—and if the business community wants it to be clearly recognized in 40 See Helmut Koziol & Alexander Warzilek, The Protection of Personality Rights Against Invasions by Mass Media in Germany (2005).

Part D: Right of Publicity/Privacy: Comparative Developments  463

law and provided it doesn’t go overboard—and there is a question of that—why aren’t their interests served? PROF. WAELDE: I think in this particular area there really is a problem, and I think it was wonderfully exemplified by Marshall’s talk and by your talk as well, about the complete incoherence of the law. When you do actually have a commercial right to exploit a personality there is no coherence, and there is no coherence because people haven’t actually thought about what the basis is. For 100 years I don’t think people have actually managed to find a reasoned basis for giving commercial rights to an individual. If somebody would tell me what they are, I think we could work around that. QUESTIONER [Prof. Dworkin]: The question is not should there or should there not be a right for the people who are trying to trade in this area, but rather should not we try to make something coherent out of it. It has developed like Topsy and it is a mess. But because it is a mess it doesn’t necessarily mean that it should all be swept away. Surely there is a case at least for reform to create a coherent and balanced law. QUESTION: John Ogier, Registrar of Intellectual Property in Guernsey. I would like to ask the panel a question: In connection with this development like Topsy, what is the difference which is there between a privacy right and the right to commercially exploit a publicity right? It seems very often the commercially exploitable publicity right has been derived from some privacy right, which may well be in a different area of the law related to human rights. I’d be interested in the panel’s views on, I think, possibly two areas of law, both of which have become muddled together in this area. PROF. LEAFFER: Publicity rights in the United States from two sources. One source was kind of an offshoot of privacy rights. The other was a common law decision by the State of New York in which the court said, “This isn’t privacy, this is property. We are going to call it property.” That is how the property syllogism came into being. Once you categorize something as property and you call the people who use this thing without permission to be pirates or free riders, then you have gone down a road which there is no stopping point, particularly if you expand the notion of identity as we have done in the U.S. If you peruse the state publicity statutes, you see very clearly that the current right of publicity has nothing to do with the right to be let alone. One other perverse aspect of the right of publicity is that creates havoc with copyright and creates havoc with trademark law, two areas of the law which have reasonably good boundaries and a long tradition. They are not perfect, but at least we have a kind of consensus about their contours. MR. SAENZ: I think your comments on fame were particularly interesting, especially coming back to the first point that was raised, the idea that intellectual property rights are typically given out in order to incentivize creation or development. I don’t know if anybody needs to incentivize the desire to become famous. People are either going to do it or they are not, but they are probably going to do it if they can for a host of other reasons. So if you don’t need an intellectual property right to incentivize people to become famous while they are alive, why extend that right, as you say, ultimately without end, simply because it has now been lumped in with this category of other intellectual property rights? I think what we are really talking about is a question of who ultimately should and can exploit it the most. We talk about piracy in most contexts as being a very bad thing, and certainly it is, but in the context of a famous person who is now dead, is it better for the estate to exploit and get $49 million a year for products bearing Elvis’s name and face, or is it better for industry as a whole to allow anybody to sell T-shirts and hats and whatever it is with Elvis’s name and face on them once he is dead and there is no even link to the question of privacy, which originally gave rise to the doctrine in the first place?

464  CHAPTER VI: TRADEMARK LAW PROF. VISSER: Another question? QUESTION: Ed Vassallo from Fitzpatrick in New York.

I would like to respectfully disagree with Justice Jacob on the concept that a commission perhaps should be established to tell the courts, or to perhaps tell the legislatures, that they made a mistake. First, I think, we are here on a special occasion. We have some of the smartest intellectual property lawyers. Naturally, we are talking about the most difficult cases, outliers perhaps. To judge the entire system upon really difficult cases that can be debated as to whether or not you have crossed the line from one form of intellectual property to another and condemn the system seems to me to be a bad idea. But more than that, who is going to assure that the commission has it right? After all, I would rather put my future in the hands of a judge, an Article 3 judge in the United States.41 If the judges get it wrong, then it is the purpose of the legislature to change the law, just as we did in the United States with respect to dilution.42 When the Supreme Court said that the dilution statute required actual dilution as opposed to a likelihood of dilution,43 Congress was lobbied and Congress changed the law—for better or worse I’ll leave to someone else. But it seems to me that intellectual property is just a part of the larger body of law, and we shouldn’t treat it differently than we do antitrust, securities law, and the like. Thank you. PROF. VISSER: One last question? QUESTION: Thank you very much. Peter Fowler from the U.S. Patent & Trademark Office. Just one quick question. While rights of publicity may cause some havoc with trademark and copyright—I wouldn’t disagree with that—how is the rationale for rights of publicity in terms of compensating estates, heirs, etc., for the creation and the effort that went into creating a character or a career any different than one of the rationales for copy term extension, which was to provide additional royalties for heirs? MR. SAENZ: I think I would start by suggesting that the creation of a persona is derivative of that person’s life work. It happens. In modern culture maybe it is slightly different. You have the Paris Hiltons of the world who really do seem to set out just to create a character. But for the most part I think, when you are talking about celebrities, the celebrity follows the effort that the people made in other areas. So again, you are not incentivizing an effort to create a character so much as you are giving an additional reward to an offshoot of what happened as you were writing your plays or making your movies or whatever it was that you were truly being incentivized to do. PROF. LEAFFER: I think that celebrities are well protected even without publicity rights. I do not subscribe the natural rights theory justifying publicity rights and I agree with David’s comments. In effect who creates fame? Is it the celebrity? Is it the public? Why should the celebrity reap all the benefits? But these are theoretical issues. The basic problem is that what we lose by creating a publicity right is not compensated by what we get from what a publicity regime. The laws we have already satisfy the interests of celebrities. I would point to the race car driver case in the U.K whose name now eludes me— PROF. WAELDE: The Irvine case.44 PROF. LEAFFER: Yes, thanks Charlotte. What we would call in the United States as an action for false sponsorship. It is a cause of action that protects many of the interests that the U.S. Const. art III. Trademark Dilution Revision Act, Pub. L. No. 109-312, 120 Stat. 1730 (2006) (amending 15 U.S.C. § 1125(c) (1946)). 43 See Moseley v. V Secret Catalogue, Inc., 537 U.S. 418 (2003). 44 Edmund Irvine & Tidswell Ltd. v. Talksport Ltd., [2002] EWHC 367 (Ch) (Mar. 13, 2002). 41 42

Part D: Right of Publicity/Privacy: Comparative Developments  465

right of publicity purports to protect and doesn’t create irreconcilable tensions with copyright law. PROF. VISSER: On your behalf, may I thank our panel of speakers and commentator for a very entertaining and very stimulating session. We are trying to grasp with really a new baby in intellectual property law. Thank you on behalf of all of you.

Chapter VI

Trademark Law Part E: Industrial Designs, Fashion, Ornamental Patents Moderator Prof. Gerald Dworkin

Kings College London (Emeritus) Speakers Harri Salmi

Edward E. Vassallo

Member, Boards of Appeal, OHIM (Alicante)

Fitzpatrick, Cella, Harper & Scinto (New York, N.Y.)

Prof. Susan Scafidi

Visiting, Fordham University School of Law (New York, N.Y.) Panelists Neil Coulson

Jones Day (London)

Daniel Ilan

Cleary Gottlieb Steen & Hamilton LLP (New York, N.Y.) Richard Wilder

Associate General Counsel, Intellectual Property Policy, Microsoft Corp. (Washington, D.C.) PROF. DWORKIN: Good afternoon, ladies and gentlemen.

My name is Gerald Dworkin. First of all, I would like to thank Sharon and her team. It may be a long day for us. It must be a particularly long day to have to sit there and try to hear all that we are saying and record it accurately. So first of all, thank you very much for doing all this.

468  CHAPTER VI: TRADEMARK LAW Secondly, can I emphasize once more if you do speak—I hope there will be some discussion—will you please indicate your name and provenance, whatever, so that they can get this down very easily? Now, interestingly, this is the last session, and the only session as far as I know, on designs, the poor intellectual property right, certainly of Europe. I was quite intrigued when we had the discussion on European developments that there was no reference whatsoever to designs. I wondered what had happened, for example, to the proposed draft directive on spare parts. Why has that gone to sleep? Well, I think we may know. But nonetheless it seems to be neglected. Now, because it is the only session on designs, I think perhaps we might possibly range more broadly over some of the matters if we have time. But initially what we are going to do is this: first to see how EU design law is operating within Europe, secondly, to look at how U.S. law is working, and to discuss whether any changes are desirable whether in the United States or elsewhere. We have three papers. The first paper is on the EU design situation and updates on developments there, which should be very interesting. Secondly, an interesting paper on fashion design in the States. The third paper will be on the Egyptian Goddess case,1 which I knew nothing about until last night, but it sounds fascinating. It is on designs, but, curiously for us in Europe, it is not a design in the European sense. We are talking about design patents, and that is quite a different situation. Without more, can I ask Harri Salmi to talk about the EU situation? MR. SALMI: Good afternoon, ladies and gentlemen. I have written quite an extensive paper on what I am going to speak about, and of course it is much longer than the ten minutes which I have been allocated, so I am going to jump over some of the slides that I have prepared. My presentation is on Community Designs, including an update on procedural matters that we have at the Office, some case law from the Boards of Appeal and what is the situation concerning the cases in the Court of First Instance. [Slide] On procedural matters, I would just like to bring your attention to something. We have had a slight change of practice in the registration procedure concerning priority documents. [Slide] Due to lack of time, I will not go into the background of what priority is—I am sure everybody knows—and what kind of priority check we actually do in the Office. [Slide] But I would like to bring to your attention the fact that the OHIM no longer checks whether the prior application and the RCD application are for the same design. [Slide] There is a practical reason for it. The consequence, in any case, is that problematic cases, for example, German design registration certificates, which usually do not include views of the designs, are now acceptable. The idea of the new practice is basically just to smooth the link between the Community design and the international registered design, as WIPO also does not carry out any kind of examination of priority documents. So the registration process, which already is rather quick, will now be even quicker. [Slide] But what is not mentioned in the OHIM note, which you will find on our Web site concerning this matter, is that this actually also has consequences for invalidity proceedings. [Slide] Even though we do not require that the image of the design is there when the design is applied for, in invalidity proceedings, it is however necessary to determine whether the claimed priority is actually valid, which of course could happen when the dispute falls into the six-month period. In that case, the owner of the Registered Community Design must provide the necessary documents so that the Invalidity Division can check whether the prior application and the RCD application are for the same design. This is, of course, if they haven’t been provided already when the registration application was sent in. 1

Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir. 2008).

Part E: Industrial Designs, Fashion, Ornamental Patents  469

[Slide] If they are not there, the Invalidity Division will request for them. If, like in the German case, the registration certificate does not show the designs, then the evidence should consist of a copy of the filing documents from the previous application certified by the authority which received it. [Slide] The main point of discussion today, or my presentation today, is to give you an update on decisions of our Boards of Appeal on declarations of invalidity. I have chosen four cases to show you from last year, all rather new ones. [Slide] The first one concerned these ‘saucepan handles.’2 Now, you must note, first of all, that the application here is actually only for the handle. The question here to be decided was lack of novelty, not individual character. Lack-of-novelty cases, in fact, are quite rare. [Slide] In this specific case, the Boards of Appeal noted that: • The actual difference in the arch of the handle is minimal and it could only be detected by measuring them or putting them one over the other. • Also that the down-turned portion of the handle was in a slightly different angle to the vertical, but even this is hardly visible without actually measuring the angles. • So in the end it was noted that the differences are just immaterial and, in accordance with our Regulation, if there are just immaterial differences, the designs are deemed to be identical, and the contested design was found not to be new. [Slide] Another case is the ‘cans’-case.3 The following cases are all about individual character. [Slide] When deciding on individual character, there are basically three things that the Board or our Cancellation Division have to look at: • The first question is: Who is the informed user of the product? • How much freedom of maneuver does the designer have? • And then, taking these into account, is there actually a difference in the overall impression or not? [Slide] In this case, for these—well, they called them ‘cans’, but what these actually are plastic bottles for lubricants—here it was found that the informed user is actually a professional in the trade sector for distributing such goods, and he would have knowledge of the market for lubricants and the various shapes of containers that are available. [Slide] When looking at the designs, the Board noted that the Community Design appears tall and slender, whereas the other design appears more short and squat; and also that the designer’s freedom of maneuver here was fairly limited because engine oil cans mostly have this kind of a shape into which you have to incorporate the handle and the neck. So the Board found that in this specific case they did give a different overall impression. [Slide] I will jump over this next case. You can read it from my paper. The following one is perhaps more interesting. [Slide] This was concerning ‘inverter generators.’4 You can see the application there from a Chinese company, if I don’t remember incorrectly, and the earlier Honda design. [Slide] Here the Board found that: • The informed users are whoever habitually purchases such an item and puts it to its intended use and has become informed on the subject by browsing through catalogues, visiting relevant stores, downloading information, etc. • He is generally not technically experienced or particularly interested in the technical design of the inverter generators. He will, therefore, not pay attention to every detail in the device. 2 Case R-196/2008-3, Imperial Int’l Ltd. v. Handi Cookware Ltd. (Sep. 2, 2008), available at http://oami.europa. eu/LegalDocs/BoA/2008/en/R0196_2008-3.pdf. 3 Case R-1516/2007-3, Normanplast (Société en nom collectif, represented by Total) v. Castrol Ltd., July 7, 2008 (unreported). 4 Case R-860/2007-3, Wuxi Kipor Power Co. Ltd. v. Honda Giken Kogyo Kabushiki Kaisha, [2009] E.C.D.R. 4.

470  CHAPTER VI: TRADEMARK LAW • There are numerous elements which displayed strong similarities. • In general, the informed user is more likely to be impressed by the overall aspect of the generator rather than the various details. • Also, the overall shape, the configuration, the general appearance of the designs was very similar, and a close examination going much further than the general comparison required by the Regulation would be needed before the informed user could distinguish between the two devices. • The overall impression was therefore the same. [Slide] In addition, it was also noted that the designer’s degree of freedom in this case was relatively wide. This is a good example of how the opponent could help his case, because they gave numerous examples showing exactly what kind of different possibilities exist in these inverter generators. Basically, they can look almost like anything. So they gave examples. In this case, it was also kind of funny, because the applicant’s own application helped to turn the case against him, because it was a multiple application, and in the other applications you could see different versions of inverter generators, which just goes to show that in fact it doesn’t have to look like this at all. I just have a minute and a half, so I will just give you an update, to show you the pictures of the cases that are pending before the Court of First Instance. We are very much waiting for these decisions because we are a little bit on thin air about what to with designs until we have some court decisions. [Slide] In this case the Board of Appeal said that there was a different overall impression.5 [Slide] In these ‘combustion engines’ it was decided that they gave the same overall impression.6 [Slide] This is an interesting case, this ‘instruments for writing,’7 because here we are comparing a trademark with a design. [Slide] In this case, ‘communication equipment,’8 they again produced the same overall impression. [Slide] Then there is the ‘bottle’ case,9 where the question is on the notion of disclosure, whether the sale of products between two professionals is enough (the Board said yes) or is it required that the products are put on the market in order that the nonprofessional public can have access to them. Thank you very much. PROF. DWORKIN: May I ask one question which displays an academic ignorance? My understanding was that the applications are examined basically for formality only. If that is true, how do you get so many appeals? Is it opposition from others? MR. SALMI: Yes. PROF. DWORKIN: So otherwise, if there is no opposition, you simply register the design, come what may? MR. SALMI: Yes. In fact, what happens is that the design is automatically registered and then this possible invalidity comes in afterwards. Other owners who are of the opinion that we have incorrectly registered this design can make an invalidity application to have it overturned. PROF. DWORKIN: Thank you. Perhaps we can talk about that later. 5 Case R-1001/2005-3, Pepsico, Inc. v. Grupo Promer Mon-Graphic, S.A., available at http://oami.europa.eu/ legaldocs/ boa/2005/en/r1001_2005-3.pdf; pending before the court of first instance, Case T-9/07, Grupo Promer Mon-Graphic v. OHIM, 2007 O.J. (C 56) 35. 6 Case T-10/08 Kwan Yang Motor v. OHIM, 2008 O.J. (C 64) 58; Case T-11/08, Kwang Yang Motor v. OHIM, 2008 O.J. (C 64) 58. 7 Case T-148/08, Beifa Group v. OHIM, 2008 O.J. (C 142) 36. 8 [Case T-15/08] 9 Case T-450/08, Coverpla v. OHIM, 2009 O.J. (C 6) 34.

Part E: Industrial Designs, Fashion, Ornamental Patents  471

Our second paper is quite different, from the States. Professor Susan Scafidi is now concerned with the current state of play with fashion designs. We look forward to that. PROF. SCAFIDI: Thank you very much. In the United States design rights get even less attention than Professor Dworkin suggested that they do here. Fashion design is certainly one of the things that falls through the cracks in the existing system. Given that this is a fashion discussion, I want to thank you all for staying so late and reward you with a very brief fashion show, starting here. [Slide] When Karl Lagerfeld designed this dress for Chanel Couture, it was immediately knocked off in the United States, and, to add insult to injury, worn by Courtney Love to Paris Hilton’s birthday party. [Slide] Then we have this, Christian Louboutin’s lovely pump, immediately knocked off by a popular American discount chain, Steve Madden, a specialist in shoes. [Slide] Then, from Canada, a charming couple who call themselves together Wildhagen created these hats, knocked off by again an even larger American chain, The Gap. [Slide] And then we have a dress that some of you may be familiar with, having seen it relatively recently. We have heard a lot about the Obama Administration today. Right now I’m concerned not with Mr. Obama but with Mrs. Obama and the gown that she wore for the Inaugural Ball. The next morning in the papers a couple of different knockoff artists announced that they would copy it.10 Indeed, the next week Allen Schwartz, one of those, produced this dress, pictures of which appeared in the newspapers. So you see a trend happening here: these constant knockoffs, which are of course completely legal in the United States, and a legal situation very different in the United States from many other places. Among the countries that are concerned with design in particular, and with intellectual property rights generally, currently negotiating ACTA11 and so forth, there are a wide range of approaches to design, and particularly to fashion design. [Slide] France, of course, has the greatest protection for fashion design, full copyright plus design rights. As many of you know, the European Union has three years of unregistered protection,12 and alternatively or in addition, five years of protection for registered designs, renewable up to twenty-five years.13 India has ten years.14 Japan has ten years.15 Australia is just about as bad as we [the U.S.] are. The United States has pretty much nothing. In other words, the United States does not have any kind of comprehensive, rationalized design law. But there is some protection stretched or dragged in from other areas of intellectual property. Let me just review those very quickly. [Slide] Under existing copyright law, surface designs can be protected. So when Anna Sui is knocked off by Forever 21, she has an action based on the copying of the fabric pattern itself. That works for designers who have large enough scale production to create their own fabrics 10 Gina Salamone, “Fashion’s Copycats are Having a Ball Knocking Off Michelle Obama’s Gown”, N.Y. Daily News, Jan. 21, 2009, available at http://www.nydailynews.com/lifestyle/fashion/2009/01/22/2009-01-22_fashions_ copycats_ are_having_a_ball_knoc.html. 11 Anti-counterfeiting Trade Agreement (“ACTA”). 12 Council Regulation 6/2002, Art. 11, 2002 O.J. (L 3) 5, amended by Council Regulation 1891/2006, 2006 O.J. (L 386) 14. 13 Id. Art. 12. 14 The Designs Act, No. 16 of 2000; India Code (2000), unofficial version available at http://www.wipo.int/clea/ en/ text_html.jsp?lang=EN&id=2398. 15 Japan Design Law, Law No. 125 of April 13, 1959, ch. 4, para. 21, no. 1, as last amended by Law No. 220 of Dec. 12, 1999, unofficial version available at http://www.wipo.int/clea/en/text_html.jsp?lang=EN&id=2653. [Note: the law actually states that protection is for 15 years, not 10 years.]

472  CHAPTER VI: TRADEMARK LAW instead of just buying them from fabric mills. So the protection is much better for established labels or large production. Items of clothing, of course, are considered useful articles with respect to their underlying designs, and thus are not protected by copyright. [Slide] Interestingly, though, jewelry is protected for the full term of copyright, the idea being that jewelry is less easily categorized as a useful article, but is instead closer to something like sculpture. So we get this kind of result: Lanvin’s tulle-wrapped pearls, very popular a few years ago. An American chain, Urban Outfitters, apparently intended to make a knockoff, but it had to have some substantial changes. Urban Outfitters wrapped its pearl beads in lace, not tulle; it also made them substantially larger. So actually that copyright protection for jewelry has indeed spurred a little bit of innovation. [Slide] Again, another area of existing law, patent law, can to an extent cover fashion designs. Now, of course, Crocs should never be knocked off under any circumstances, nor worn by anyone over about the age of six. But here they are, the original and the knockoff. Those shoes are actually protected by both a utility patent on the proprietary resin used to create them16 and also a design patent on that particular shape and design.17 Design patents, because they are relatively expensive to get, and because they take a relatively long time to issue compared to something like copyright protection, are not practical, however, for most single-season fashion designs. Moreover, most fashion designs when submitted to the Patent Office do not rise to the level or standard required for patentability. So what we see covered by the design patents in the fashion realm are things like accessories or high-tech fabrics or fasteners—Velcro,18 zippers,19 that sort of thing. [Slide] Then we come to trademark. Well, if nothing else, you can always slap a really large version of your trademark on the outside of the design. So while the underlying design cannot be protected, certainly the trademark can. This creates something of a distorting effect because the law offers an incentive to sell protected logo-laden merchandise rather than discreet but unprotectable designs—and who really wants that on their clothing? (Well, a lot of people actually, but not I.) The great inequity is that the law protects those fashion houses with established trademarks that are essentially selling their marks, and not emerging designers who are selling primarily the underlying design. [Slide] Related to that, and with a similar limitation, trade dress. If the design is famous enough to serve as a source indicator on its own without any additional label, it gets protection, as in the case of the Hermes Birkin handbag on the left. You see on the right the “Jelly Kelly,” the translucent, rubbery cheap versions that were popular maybe four or five summers ago. The Birkin enjoys trade dress protection, which enabled Hermes to obtain an injunction against sales of the copy. Again, the law benefits established designers but not the little guys we have never heard of and whose designs we’ve never seen before. [Slide] The bottom line is most fashion is unprotectable, and this is the result under U.S. law: Images of clothing can be protected, but the actual designs cannot be. Thus the photograph of a knockoff, for example, or a Sims version of the original gets more protection than the original design itself, in this case by Vera Wang worn by Keira Knightley to the Academy Awards. [Slide] There is an open question as to whether this U.S. protection (or lack thereof) for fashion designs is compliant with international treaty agreements. U.S. Patent No. 6,993,858 B2 (filed June 23, 2003). U.S. Patent No. D517788 (filed May 28, 2004); U.S. Patent No. D517789 (filed May 28, 2004); U.S. Patent No. D517790 (filed May 28, 2004). 18 U.S. Patent No. 2,717,437 (filed Oct. 15, 1952). 19 U.S. Patent No. 504,038 (filed Nov. 7, 1891). 16 17

Part E: Industrial Designs, Fashion, Ornamental Patents  473

[Slide] Given the amount of time we have or don’t have, I think I will just have to say yes, reluctantly and summarily, the United States is compliant with the letter of TRIPs, which requires that industrial designs have ten years of protection.20 Interestingly, in those two little paragraphs on industrial design in the TRIPs Agreement there is mention of exactly one sector, textile designs, which must be protected. The provision, however, does not include clothing designs created from those protected textiles. So the U.S. is sort of compliant with TRIPs because in theory you can apply for a design patent, even if as a practical matter you wouldn’t, and most likely you wouldn’t get it anyway. [Slide] Then, of course, there is the Berne Convention and the twenty-five years of protection required for applied art.21 Well, the U.S. protects surface designs and other conceptually separable elements of a design, so maybe we are okay there as well. But I still think U.S. law is compliant at best with the letter, not the spirit, of the agreements. [Slide] So the U.S. fashion industry has for over 100 years tried to work a change in the state of intellectual property law, particularly through legislation. The industry is involved currently in another round of applications to Congress for some form of protection. The most recent proposed legislation was originally introduced as H.R. 5055 in 2006.22 In the last Congress, the Design Piracy Prohibition Act, as it is called, was introduced in the House as H.R. 2033 and in the Senate as S. 1957.23 It will shortly be reintroduced in the new Congress with some substantial changes, some of which I can talk to you about, some of which I cannot. [Slide] In any case, let me give you the basics of what that protection would look like: • It takes the form of an amendment to the Copyright Act,24 to be administered by the Copyright Office. Those of you who are familiar with the Copyright Act will know that there is a somewhat odd final chapter of the Act that applies only to one category or creative medium, namely boat hulls or vessel hulls.25 There is a strange history of how that ended up there, which we don’t have time for today. However, when that section was written, it was written not as protection for vessel hulls but as protection for designs defined as vessel hulls, leaving the chapter open for addition of other areas of creativity that fall through the cracks in the intellectual property system. So the new Design Piracy Prohibition Act is an amendment to that section of the Copyright Act. • But the requested protection isn’t for the full term of copyright. It would be a limited term of protection, a three-year term—in other words, parallel to the minimum available in Europe. • The difference, though, is that under the new legislation protection would apply only to articles of apparel “as a whole.” As many of you know, in Europe designs in general, including fashion designs, are protected both as a whole and in their individual original elements. But the proposed law would apply only to an entire garment. • In addition, registration would be required. I have written “within three months” because that was what was proposed in the last two bills. It will be proposed as within six months of introduction of the garment in the next iteration of the bill. 20 Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) Art. 26(3), 15 April 1994, Marrakesh Agreement Establishing the World Trade Organization (WTO Agreement), Annex 1C, 33 I.L.M. 81, 93 (1994). 21 Berne Convention for the Protection of Literary and Artistic Works Art. 7, Sept. 9, 1886, as last amended Sept. 28, 1979, S. Treaty Doc. No. 99-27, 1161 U.N.T.S. 3, 36-37, available at http://www.wipo.int/export/sites/www/ treaties/en/ ip/berne/pdf/trtdocs_wo001.pdf. 22 H.R. 5055, 109th Cong. (2006). 23 H.R. 2033, 110th Cong. (2007); S. 1957, 110th Cong. (2007). 24 The Copyright Act of 1976, Pub. L. No. 94-553, 90 Stat. 2541 (1976) (codified as amended at 17 U.S.C § 101 et seq. (2006)). 25 17 U.S.C. § 1301.

474  CHAPTER VI: TRADEMARK LAW • Also, there will have to be notice affixed to the work. Not a circled C for copyright but a D within a circle or one of a couple of similar symbols to be used when a creator is claiming the design right. • There is a heightened standard for infringement. I spent last winter participating in the composition of a series of different versions. The current U.S. standard in copyright is “substantially similar,” as many of you know. The standard for fashion designs will probably be reintroduced as “closely and substantially similar.” But I have also written a few more complicated ones, so we will see. • Also, there will be some specific defenses to claims of infringement. A familiar one to all of us, independent creation, would be a specific defense. And then, a couple of special ones: the defense of merely following a trend, and “trend” is of course defined (in other words, “I didn’t copy the specific garment, but everybody was wearing violet dresses that season”); the final specific defense, applying to retailers a knowledge standard. Given that my time is up officially, I will not give you my prediction as to what will happen with the bill, but I will say that protection for fashion designs under U.S. law will happen at some point. To conclude by quoting a favorite art historian, Anne Hollander, “Clothing, even when omitted, cannot be ignored.”26 Thank you. PROF. DWORKIN: Thank you. Can I ask you, Susan, do you think that this approach, which essentially is asking for design protection for individual items, a sui generis law for boat hulls, for semiconductor chips, for fashion designers, is preferable to what I thought would have been more obvious, and that is to have a law of design for all articles, as one has in Europe? PROF. SCAFIDI: It would be lovely to have a Design Act that rationalized all of this. Politically, I think it is unlikely to happen because the various types of design industry have so many different interests and because it is so difficult to come together on that. So I think the answer would be that would be ideal. But there is a silver lining in this case, and that is that we can, if you will pardon the pun, narrowly tailor a sui generis act to the fashion industry and not ask for too much protection. We don’t need the ten years of vessel hulls. We certainly don’t need life of the author plus seventy years. PROF. DWORKIN: Thank you very much. We now come on to Egyptian goddesses, and that is design patents. As I have said, this is a part of the Patent Act applied to designs with, as I understand it, the same kinds of requirements not for design law but for patent law of novelty and inventive step. MR. VASSALLO: Thank you, Professor. Yes, the Egyptian Goddess case27 was a recent decision by the U.S. Court of Appeals for the Federal Circuit in which, on the subject of infringement of design patents, the court on its own reversed more than twenty years of its own jurisprudence on that subject. Prior to that decision, the Federal Circuit had made clear that in order to prove infringement of a design patent the patentee had to prove two things. First, it had to meet the Supreme Court’s test in the more-than-century-year-old Gorham v. White case.28 The patentee had to show that if to an “ordinary observer” two designs are “substantially the same … inducing him”—the case is over 100 years old—“to purchase one supposing it to be the other,” then there was infringement.29 Anne Hollander, Seeing Through Clothes 81 (University of California Press 1993) (1978). Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir. 2008). 28 Gorham Mfg. Co. v. White, 81 U.S. 511 (1871). 29 Id. at 528. 26 27

Part E: Industrial Designs, Fashion, Ornamental Patents  475

The Federal Circuit, over the period of a couple of decades, added a second requirement.30 That was its own “point of novelty” requirement. That is that not only meeting the Gorham v. White test that the overall design was substantially the same, in addition the patentee had to affirmatively show that its patented design had a “point of novelty” and that the accused design had that point of novelty as well. Both of those tests had to be met. These two requirements, however, made life difficult for design patentees in the United States. First, the patentee had the burden of focusing the jury on the overall design and convincing the jury that they were substantially the same so that the purchaser, giving the observation the ordinary amount of attention that you do for purchase of those types of articles, would buy the defendant’s product thinking it was the patented design. After doing that, as part of its infringement case, the patentee had to say, “My design has this point of novelty from the prior art”—or maybe two or three points of novelty from the prior art—focusing away from the overall design, looking at specific attributes of the design, and then saying that the accused device had those points as well. This second requirement, by the way, seems to me to be totally unlike any burden that a patentee in a utility patent case has. Remember, this obligation is not to show validity but to show infringement. In the Egyptian Goddess case, an en banc decision, a unanimous decision, the Federal Circuit threw out its own “point of novelty” test and instead seems to have merged into the “ordinary observer” test the requirement that the accused product have some attribute of the patented design that is different from the prior art.31 Now, per the Egyptian Goddess case, the “ordinary observer” is knowledgeable about the closest prior art, and therefore will, to use the language of the court, “view the differences between the patented design and the accused product in the context of the prior art.”32 Now, according to the words of the court, “the attention of the hypothetical ordinary observer will be drawn to those aspects of the claimed design that differ from the prior art.”33 Keep those words in mind against what the Supreme Court test is: You look at the overall ornamental design that has been patented and try to ascertain whether the accused product is substantially the same to that or not. The Federal Circuit, I think correctly, expressed two advantages of its “informed ordinary observer” test. One was that the “point of novelty” test at times placed exaggerated importance on what might be an insignificant feature of the patented design simply because that feature existed in the accused product. Second, the new test avoids a real debate in the United States as to what is a point of novelty. Can, for example, the accused defendant combine references so that in effect there is never a point of novelty? If the closest reference is different than the patented design, you go to a second or third or fourth piece of prior art and combine those references so that, in effect, the scope of the patent becomes narrower and narrower, because nearly everything looks like what went before if you are permitted to combine references. The long-term effect of Egyptian Goddess is yet to be determined, but I think generally it has been well received by the IP bar. The “informed ordinary observer” test is, I think, more in harmony with the Supreme Court Gorham v. White test than was the two-part test used by the Federal Circuit before. Litton Systems, Inc. v. Whirlpool Corp., 728 F.2d 1423, 1444 (Fed. Cir. 1984). Egyptian Goddess, Inc., 543 F.3d at 676–77. 32 Id. at 676. 33 Id. 30 31

476  CHAPTER VI: TRADEMARK LAW Now a design patentee is no longer required, by the Federal Circuit at least—might be by a trial judge, but not by the Federal Circuit—as part of its infringement case to identify why its design is novel. In addition to that, the Federal Circuit no longer requires a trial judge to have, in effect, a Markman hearing in which the judge describes in words with a great deal of specificity what is shown in the drawing of the patent.34 The Federal Circuit admitted that that in fact might be counter-productive and distract the jury from their task of looking at the overall design. It would have been helpful, however, if the court had told us how the hypothetical informedof-the-prior-art ordinary observer is actually supposed to do the comparison. Let me posit to you two possibilities. One would be to give the jury the patented design, the patent; you give the accused product; and then you give the jury the closest prior art. Now, is the jury supposed to first look at the patented design, compare it to the prior art, and then put the prior art aside, and with that informed knowledge now make a comparison of the patented design and the accused product to decide whether or not they are substantially the same? That is one possibility. Another possibility has been called the “sliding scale” test, where you do not put the prior art aside. You put it on the table, you put the accused product in the middle, you put the patented design on the right and the prior art on the left, and now you ask: Does the accused product look more like the prior art than it does the patented design; or, alternatively, does it look more like the patented design than it does the prior art? Now, the answer to those questions may not be dispositive of whether or not there is infringement, but if the accused design looks more like the prior art, probably no infringement; if it looks more like the patented design than what went before, probably infringement. While it does appear that the new test for determining infringement of patents is going to help design patentees prove infringement, at least some of the time, we shouldn’t forget that in that decision the actual holding by the Federal Circuit was an affirmance of a summary judgment grant of non-infringement.35 That decision was done in a context where the accused design to many of us looked more like the patented design than anything that had existed in the prior art before. So I think it remains the case that to prevail on a design patent is still a very difficult thing in the United States. Expressed differently, design patents are not given much scope. Finally, in my last thirty seconds, I think that what to me is in some respects most fascinating about the design patent cases is the way the courts treat the subject of confusion, the Supreme Court test for a design patent, versus confusion in trademark cases. They are very different analyses. In the patent law, the ordinary observer is a hypothetical entity, like the “ordinary worker” for purposes of obviousness.36 In the trademark world, it is a real-world purchaser of either the plaintiff’s goods or the defendant’s goods. Very different analyses. Thank you. PROF. DWORKIN: Thank you very much, Ed. Can I ask a couple of quick questions? First of all, for us who are not familiar with the U.S. system, when an application is made for a design patent, is there just a formal examination or is it very much like a utility patent so that you have to prove novelty and inventive step? Markman v. Westview Instruments, Inc., 517 U.S. 370 (1996). Egyptian Goddess, Inc., 543 F.3d at 668. 36 See 35 U.S.C. § 103(a) (A patent may not be obtained “if the differences between the subject matter sought to be patented and the prior art are such that the subject matter as a whole would have been obvious at the time the invention was made to a person having ordinary skill in the art to which said subject matter pertains.” (emphasis added)); see also, e.g., Armco, Inc. v. Republic Steel Corp., 707 F.2d 886, 889–90 (6th Cir. 1983) (possessing the “obviousness question” to the hypothetical “ordinary worker.”). 34 35

Part E: Industrial Designs, Fashion, Ornamental Patents  477 MR. VASSALLO: It’s the latter. It is a patent and it is examined both for procedural matters as well as for patentability over the prior art. The examiner does a search, generally will cite some prior art references, and then almost invariably will allow the application as a patent. Examiners tend to assume that even small changes from prior designs are enough to grant a patent, it’s enough for it to be patentable. I think it is partly that fact that has led the courts to give design patents such narrow scope. The patents that are issued for designs are at times extremely close to each other. At times it’s a very crowded field. As a result, no one of them generally is given broad scope. PROF. DWORKIN: The next point, then, is: How much use is made of the design patent system in the States? MR. VASSALLO: I think if you’ve got a really valuable and successful product it is used. I have used it for clients that packaged their products—hand creams, mouthwash—in a distinctive bottle. You could get a patent on the bottle. And if the packaging had been around for a long period of time, you would assert a trade dress claim, but also a design patent claim. It depends upon how close the store-brand product simulates the look of the innovator’s product as to whether you are going to succeed or not. In all of the cases in my paper there are only two cases where the plaintiff won, the Gorham case37 that is over 100 years old and then one other. In all the others the defendant wins, and often on summary judgment. PROF. DWORKIN: The other point I was trying to get at was, bearing in mind the numbers of registered designs that are taken out in Europe, relatively speaking, would I be right in saying that there are very few, just a few thousand in the whole of the United States? MR. VASSALLO: I think there is much less. If a patent issued now as a utility patent, I think we’re in the 7 million, and on the design patent side I think it’s 500,000 or 600,000, something like that. PROF. DWORKIN: The last point before we open it up is that if the United States is thinking, as I believe it is, of joining the Hague Convention,38 will it be the design patent that we refer to? MR. VASSALLO: I have no idea. MR. ILAN: Actually, the idea is to prolong the protection for the design patent from fourteen to fifteen years, because that is the minimum required under the Hague Agreement,39 as well as to make some other changes, like providing protection as of the date of application. But there is no intention to create a new sui generis right. It is going to be the design patent. PROF. DWORKIN: Thank you. We have come to our panelists now. I am not sure in which order, but I have down here first Neil Coulson from Jones Day. MR. COULSON: I simply wanted to make one point in relation to European Community design law. Picking up on Harri’s talk, a European Community Design is relatively easy to register. All you have to do is comply with the formalities and OHIM will proceed to put that design on the Register. Registration, of course, in itself gives an applicant a degree of protection. But the real question that I would like to explore is what the limits are to enforcement of a Community Registered Design. In line with some of the discussions we heard this morning and in relation to trademarks this afternoon, I think, in relation to designs, what we have in Gorham Mfg. Co. v. White, 81 U.S. 511 (1871). Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs, July 2, 1999, S. Treaty Doc. No. 109-21, 2279 U.N.T.S. 3, available at http://www.wipo.int/hague/en/legal_texts/ wo_haa_t. htm. 39 Geneva Act of the Hague Agreement Concerning the International Registration of Industrial Designs Art. 17, July 2, 1999, S. Treaty Doc. No. 109-21, 2279 U.N.T.S. 3, 168, available at http://www.wipo.int/hague/en/legal_texts/ wo_haa_t.htm. 37 38

478  CHAPTER VI: TRADEMARK LAW Europe at the moment is an appreciation of what a design actually is, and we combine that with a sensible analysis of the concept of the informed user—the design equivalent to the “average consumer” of trademark law,40 or the “skilled person” of patent law.41 The “informed user” in design law is deemed to have an interest in design, so he is interested in design as in itself. Finally, because it is a realization that a design is all about its aesthetic qualities, we have a focus on the overall impressions that that design creates on the informed user. That does mean that there is a limit to the enforcement of a Community Registered Design. What I think in actuality that means is that the level of protection you get for design is at the right level compared to what you should get. We have heard this morning about people pushing the boundaries with intellectual property rights. I think with Community Registered Designs and infringement issues the level is actually in the right place. If that means that in enforcement terms what you are limiting effectively is infringement by virtual copies of equivalent quality, then so be it, because the whole point of a design is its aesthetic quality and the overall impression that that gives on the informed user, and that is the limit of the protection that you should get. PROF. DWORKIN: Thank you very much. We will pass straight on to Daniel Ilan, who is at Cleary Gottlieb Steen & Hamilton. MR. ILAN: I wanted to go back to Susan’s presentation and agree and disagree at the same time. Susan was saying basically that fashion designs fall between the cracks. My point is that probably it is quite easy to fall there. It is not the only industry that falls between the cracks. First of all, I will quickly explain that in a different light and say why I think that a sui generis right, as opposed to a sui generis design right globally, may not be the best idea, and may be also not the easiest thing to do. First of all, for design patents, as you mentioned, there are huge issues, but principally the need to show non-obviousness as well as the need to show that the design is primarily ornamental, which makes it difficult when you want to integrate functional and ornamental aspects. Trade dress, on the one hand, seems to be a great thing in the United States that people can benefit from, but you have all those issues with trade dress.42 First of all, of course, you have to show that actually the public identifies the trade dress with a specific company. But also, the trade dress, like the design patent, cannot be functional. There the problem is that it cannot be technically functional but also not aesthetically functional. So if the trade dress basically is in some cases an important ingredient in the commercial success of the product, it becomes aesthetically functional and it cannot be protected. Other cases say something like it cannot be essential for competition. In addition, there are some defenses in trade dress law, such as the house mark defense,43 which basically says that if the infringer uses on the design a mark that is very much identified with the infringer’s line of products, they can get away with it because the public would not confuse the two. 40 See 1 Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 2:33 (4th ed. 2010) (“The consumer who is to be protected is not necessarily the sophisticated buyer who makes careful distinctions, but a hypothetical ‘average consumer.’”); see also Case T-386/07, Peek & Cloppenburg v. OHIM, [2010] E.T.M.R. 20, [16] (stating that when “consider[ing] the consumer’s perception of the marks at issue for the goods and services in question[,]” one should consider the perception of the “average consumer”). 41 See 35 U.S.C. § 103(a); Convention on the Grant of European Patents, Art. 56, Oct. 5, 1973, 1065 U.N.T.S. 255, 273, available at http://www.epo.org/patents/law/legal-texts/html/epc/2000/e/ar56.html. 42 See 1 Thomas McCarthy, McCarthy on Trademarks and Unfair Competition § 8:1 (4th ed. 2010) for a discussion of the requirements to protect trade dress in the United States. 43 See Siegrun D. Kane, “Trademark Hot Topics: Progress in Bridging the Great Divides?”, 984 PLI/Pat 905, 924 (2009) (for a discussion of the “house mark defense”).

Part E: Industrial Designs, Fashion, Ornamental Patents  479

So there are big issues with U.S. protection of designs. But then the question is: What do we do about it? One way is to go industry by industry, or just to go to fashion and maybe that will be the end of it. The problem with that, I think, is that, first of all, of course, it creates kind of a snowball effect because other industries will come and want the same protection. Already we know that spare parts are a debated issue. Ford and other companies want to enhance protection in the same way for spare parts. Secondly, in a funny way, when you focus on one industry it is actually easier to attack the proposal because you basically attack only the fashion—you say that fashion is a trade industry, copying is part of it, copying actually singles out the successful designs, it’s great, etc., etc.—whereas, perhaps, with a global sui generis design right for all the sectors it would be more difficult to attack the more specific industries. You didn’t mention the American Apparel and Footwear Association, which is a fashion association that actually was not happy with the fashion right proposal. I don’t know why they were never sued for trademark infringement by American Apparel, but maybe that is a way to fight them back. But the point is it is easier to attack a sector in the same way that it is easier to promote a right for a sector. My final point is that, interestingly, in the United States another development is the repair clause. So in the same way that in Europe there are discussions about whether “must match” spare parts should be an exemption to design law, in the United States there is a proposal to basically change design patent law and to add an exemption that says that it is allowed to make certain components when the purpose is to repair the article and to restore it to its original appearance. That is really interesting, because this exemption came from the spare parts producers. But when you look at the law, the law is not limited to spare parts of vehicles; it is just a general exemption. So what happens in the United States is that when you try to legislate the rights you look at the specific sector, and when you legislate the exemption for some reason you actually cover the whole world. I think it should be the other way around: The right should be global; the exceptions to the right should probably focus on issues like spare parts, and I think in the automobile industry only. Thank you. PROF. DWORKIN: Thank you. Do you want to come back, Susan? PROF. SCAFIDI: Just a quick point of information about the American Apparel and Footwear Association. A lot of the changes that will be introduced in the new bill, as opposed to the previous versions of the bill, come from extensive discussion between the Council of Fashion Designers of America, the primary proponent of the bill, and the American Apparel and Footwear Association, which is an organization, as you mentioned, of manufacturers and large-scale clothing creators and some retailers as well. So I sat at the table with both of those groups and listened to a lot of what they had to say. In fact, there ended up being staff-level agreement between the two organizations, just not board approval from the AAFA in time for a reintroduction. So we are listening. And they had some good critiques. As to the politics of it, I don’t think I can answer that. How difficult would it be to get many industries together and do this properly? I think that it is certain that it would take a lot longer. Whether or not it would be more successful, that would be speculation. MR. ILAN: When did it start? PROF. SCAFIDI: This particular bill?

480  CHAPTER VI: TRADEMARK LAW MR. ILAN: No. Trying to promote the bill protecting fashion designs in the United States. PROF. SCAFIDI: Well over a century ago. 1913 was the first successful such bill.44 MR. ILAN: You’re saying that it would be too difficult to do it right? PROF. SCAFIDI: It has been tried. PROF. DWORKIN: But you say in your paper, Susan, that the French put the fashion in

copyright at the time of their Revolution. PROF. SCAFIDI: Yes, at least implicitly. PROF. DWORKIN: Thank you. Richard Wilder, who is Associate General Counsel, Intellectual Property Policy in Washington. MR. WILDER: Thank you very much, Professor Dworkin. I just have a couple of things that I wanted to add to the discussion. First, you’re probably wondering why Microsoft, a company that manufactures and sells software, would be interested in design protection that typically is used by the fashion industry or physical products. We have an interest in this area because there are forms of design protection that are of importance to us. It relates to protection for some of the online elements that you might see and use when you are using software products, like icons and user interfaces. It is an area of law that has developed pretty significantly, I think, in the United States under the design patent system. We also get appropriate protection in Europe. We have seen some evolution in Japan. It is something that we are continuing to follow and continuing to promote. One of the reasons that we are interested is industrial design protection because we are seeing an evolution of the software industry as a whole. We are seeing more products that are being developed online, distributed online, sold online, and used online. For example, you probably have heard a lot about cloud computing, where users of software products get access to application programs run on remote servers. They may not necessarily be a software product that you have on your desktop or in your office, but the application runs remotely. In that context, when we develop new icons and user interfaces, we want to be sure that we have the exclusive right to control that use, we want to be sure that other people that are knocking it off, copying our icons, copying our user interfaces, are not able to use that copied product in software products that they are running remotely. So protection for that subject matter is very important. In the United States, under the design patent system, it is possible to get protection for icons. In the United States, under the design patent, an “ornamental design for an article of manufacture,” has been construed to include icons and user interfaces and Web site design.45 In the EU, the Design Regulation46 that has been discussed here today, although the protectable subject matter specifically excludes computer software as such, does extend to graphic symbols and typographic type faces. In Japan it is possible to get some limited protection for icons and user interfaces. There they draw some distinctions between icons that are displayed on screens of general-purpose computers, which generally they do not provide protection for, versus those that are on specialpurpose computers, like PDAs or standalone music players and the like. We are continuing 44 An Act providing for the free importation of articles at the Panama-Pacific international exposition, and for the protection of foreign exhibitors [The Kahn Act], Pub. L. No. 63-14, 38 Stat. 112 (1913). 45 See David Leason, “Design Patent Protection for Animated Computer-Generated Icons”, 91 J. Pat. & Trademark Off. Soc’y 580 (2009) (“The Office has determined that ‘animated icons’ constitute patentable subject matter.” (citing U.S. Application Serial No. 29/208,172, Office Action mailed Sept. 20, 2005); Guidelines for Examination of Design Patent Application for Computer-Generated Icons, 61 Fed. Reg. 11, 380 (Mar. 20, 1996). 46 Council Regulation 6/2002, Art. 11, 2002 O.J. (L 3) 5, amended by Council Regulation 1891/2006, 2006 O.J. (L 386) 14.

Part E: Industrial Designs, Fashion, Ornamental Patents  481

to work with Japan to better understand that concept and better develop the protection in that country. Korea also provides design protection for icons and user interfaces. So we are seeing this as a general trend that we are continuing to follow and continuing to help develop. The one thing I would say—and this isn’t from Microsoft’s perspective necessarily—is I do have a lot of sympathy for the notion of having a general design registration system in the United States. I have worked on design issues for a number of years and always wondered why we didn’t have in this country a design protection system based on a copyright paradigm in addition to our design patent system, which tends to be the case, the copyright paradigm being the case in a lot of other countries around the world. I think the United States is an exception, though in Japan they also have a patent-paradigm-based system for design protection. Whether it is extending the boat hull design legislation or looking to do it on an industry-byindustry basis is one approach. Having a more generalized approach I think would be better for the reasons that have been discussed here. Thank you. PROF. DWORKIN: Thank you very much. We will now open it up. Can we return to the European situation? When the new designs regime came in, in Europe, I thought this was going to revolutionize a great deal of activity in Europe. I thought there were going to be people rushing around with their registered design rights, and in particular their unregistered design rights, and it would have all sorts of implications and there would be issues as to whether it did or did not help business. But there seems to have been fairly little discussion over the last few years of the impact which the unregistered design rights and then the registered design rights are having. All that we are getting are a few cases where, as far as I can see, the issues as to whether or not there is infringement are just as complicated as you described possibly under the earlier situation. We are getting very, very complex analyses of is there or is there not infringement. And, again, the slight differences with trademarks and other intellectual property rights makes for chaos, as indeed, I suppose, does the fact that you have different tests for the actual registered design right itself. You have a new test for that. You’ve got different tests for obviousness. So we are making life complicated. What impact is it having upon business in Europe or in the world? Would anyone like to try that? MR. COULSON: As you said, Gerald, when the Design Regulation came in, as a practitioner I anticipated a lot of use of the relatively new right. I think in actuality what has happened is that very few cases have proceeded to judgment, precisely because the way in which designs are used in practice and in enforcement terms is to assert them, normally against a knock-off or potentially a counterfeit, at a very early stage, initially as an unregistered design right. In a lot of cases, that assertion, use of local trading standards, use of Customs seizure procedures, actually means that the design has served its purpose in enforcement terms because you have taken the harm out of the market at an early stage. So I think there is not as much activity as may have been predicted when they first came in, but nonetheless they actually remain a vital weapon in the armory of those in what I would call the sort of “fad” industries, particularly the fashion industry and the toy industry, where articles have a very short shelf life. They are very useful tools to assert effectively if what you are looking at is a very close knockoff, or even a counterfeit situation. PROF. DWORKIN: Is the unregistered design right often used as a weapon, or is it not used very much to threaten or to frighten off competitors?

482  CHAPTER VI: TRADEMARK LAW MR. COULSON: Yes, it is. PROF. DWORKIN: Any other comments? PROF. SCAFIDI: If I could just add to that, I have asked the same question of French and

Italian counterparts in the fashion industry specifically, and the answer is twofold: (1) it is a deterrent; and (2) there is a lot of settlement. It has become for the fashion chains, in particular, just a cost of doing business. If they stray too close to the original designs, they pay up. PROF. DWORKIN: Yes? QUESTION: Richard Arnold from the English High Court. I have a question for Harri. You presented us with two decisions of the Board of Appeal which to my eyes took a rather different approach to the identification of the informed user. Now, arising out of that I have two connected questions. Firstly, how does it come about that two Boards of Appeal have two such different notions as to who constitutes the informed user? Secondly, what is the prospect for a consensus emerging? MR. SALMI: In fact we only have one Board of Appeal for designs cases, but of course we have different persons who sit on the same board. I think we have six members nowadays. I wasn’t one of the members in the case that you refer to. I think what you are referring to perhaps is the lubricant case.47 QUESTIONER [Mr. Justice Arnold]: That was one of them. MR. SALMI: There they talked about the informed user being a professional. Then comparing it to, for example, the inverter generator, where it is the consumer. QUESTIONER [Mr. Justice Arnold]: Exactly. MR. SALMI: I must say I was thinking about the same thing myself when I took out these decisions. I thought this would be a good discussion. Thinking about it more closely, I think that the thinking behind this lubricant thing was more that when you are creating a design for a bottle the question is: Who is the informed user? Is it the company that buys the bottle to then sell their own products, or is it the consumer in the end who actually buys the lubricant? Here they took the line that it was in fact the professional, that the design is created for the lubricant companies so that they can then choose from those different designs. But I am not sure whether that is correct. It is debatable, I would think. In most of the other cases, not only the ones I mentioned here, like the inverter generators, in fact it is usually always the consumer who buys the product. MR. VASSALLO: To add the U.S. perspective on that, I think the United States generally looks to the ultimate consumer of the product. If the product is used by specialists, such as dental tools, then that ordinary observer has a higher level of expertise in distinguishing designs among closely related products. If the product is made for a consumer, then the person has a lower level of expertise. An interesting case that wrestled with that issue involved the tread on a tire.48 The patent described the product as “a tire.” The defendant’s product was “a truck tire.” The court in that case said that the right ordinary observer is a purchaser of truck tires; truck tire purchasers have a higher level of expertise than automobile tire purchasers; that person, the truck tire buyer, is more able to differentiate small differences between the patented design and the accused product—no infringement. MR. SALMI: Just to add a little bit, this is, I think, a very typical example of something where we really need something to come from the court before we actually go and try to define a clear line. As I said, this is a very good example where it is actually very debatable whether we are looking at the same situation or not. 47 Case R 1516/2007-3, Normanplast (Société en nom collectif, represented by Total) v. Castrol Ltd. (Jul. 7, 2008) (unreported). 48 Goodyear Tire & Rubber Co. v. Hercules Tire & Rubber Co., Inc., 162 F.3d 1113, 1117 (Fed. Cir. 1998), abrogated on other grounds by Egyptian Goddess, Inc. v. Swisa, Inc., 543 F.3d 665 (Fed. Cir. 2008).

Part E: Industrial Designs, Fashion, Ornamental Patents  483 QUESTION: My name is Larry Bond. I am with Trask & Britt in Salt Lake City.

Professor Scafidi, I was questioning why you are including a requirement for the entire article in your legislation. Let me just preface this. My principal client is Nike. I protect their shoewear. We have found the design system in the United States to be very effective notwithstanding. We typically do our applications based on In re Zahn,49 which I assume you are familiar with. In re Zahn permits us to go to a portion of a design. Absent that, if we go to the totality of a design, we have basically no protection. We are faced with a lot of infringement. A lot of people copycat us. What we are finding is there is a portion of the shoe that is the critical part of the shoe. What happens is the infringers will go and copy that and they will change the front of the shoe. The principal part of a shoe is right in the midsection. They will change the toe, they will change the heel, they’ll claim a totally new design. If we are limited to the total design of an article, it’s worthless to us. PROF. SCAFIDI: Which is why this wouldn’t replace what already exists in terms of design patents. QUESTIONER [Mr. Bond]: I guess the question is: Why did you go there? PROF. SCAFIDI: That was a compromise because of concern that there would be unhelpful over-protection if we started protecting every new collar, every new cuff, every new button placket, and so forth. What was really of concern to fashion designers, if they had to choose, was the garment as a whole. I’m not sure I entirely agree with that choice, but it became very clear that many members of the AAFA—were concerned about that. So it was again a compromise, the sense being that in the case of something like a sneaker, where it is going to be around for several seasons, there is always the design patent option. There were two paradigms that we discussed repeatedly of elements of an original garment. One was something like a third sleeve, and in that case protection of individual parts isn’t helpful because every sleeve looks like every other sleeve on that garment. The other amusing paradigm that kept being thrown around was that of the hypothetically original triangular patch pocket. There you’ve got an element that is novel, or at least original, that wouldn’t be protected. So if you put that triangular patch pocket on a blouse, it could be copied on a coat, it could be copied on a pair of trousers. The ultimate compromise was to go ahead and protect the interesting new configuration as a whole, but to cede the individual elements. QUESTIONER [Mr. Bond]: But are you not afraid that you are going to force, in effect, the whole fashion industry to start essentially doing what they are doing to us now in footwear: They’ll just change a little bit of it and they have avoided the protection? PROF. SCAFIDI: The thing is when you are looking at a fashion design often it is the whole thing that is important, as the gown that is knocked off or the handbag that is knocked off. The individual elements, again, if they are truly that unique, can be subject to design patents. Under the proposed legislation, designers also have the option to register an original element in several iterations at the same time, for example to register both the blouse and the coat with the triangular patch pocket. I was speaking with counsel for a well-known fashion house recently. They have a new handbag out with an interesting innovative tassel shape, and they may apply for a design patent on the tassel, the thought being that—who can guess the mind of a creative artiste?—maybe the designer will use it again in future seasons, so it might be worth the design patent. So it is that kind of thought process. It is not ideal, I agree with you, but that is where the legislative compromise is at the moment. PROF. DWORKIN: Vanessa? 49

In re Zahn, 617 F.2d 261 (C.C.P.A. 1980).

484  CHAPTER VI: TRADEMARK LAW QUESTIONER: Vanessa Marsland from Clifford Chance. I just wanted to pull together some of the strands that people have talked about and put a question to Neil, which is the question whether it is perhaps a bit early to be saying that we can be so confident that the infringement test for the European design will be a narrow one. I know, coming perhaps with a U.K. perspective, we assume that is likely to be the test, but we have registrations coming through for a wide diversity of different types of designs. We have people experimenting with over-layering, registering small parts of overall design elements, and seeing whether they can get more protection by doing that. We don’t have a pronouncement from the ECJ. Where we have had cases fighting in different jurisdictions we have had different answers. So just to test you on that, if I may. MR. COULSON: My own view is that we should have the narrow interpretation. I think there is a definite limit to this intellectual property right which is based on its aesthetic quality. Again—and I this probably picks back up on Richard’s and Harri’s discussion about the informed user—in any infringement analysis the key definition is going to be who is the informed user and what attributes are you going to give to the informed user. It may well be—I think it is highly likely—that it will differ from industry to industry, from design to design. The difficulty I foresee with defining the informed user is that it is virtually impossible to come up with a single definition that would fit every case. So my own personal view is that a narrow limit is the way forward, not entirely unconnected the fact that you have this tension on the definition of informed user. I think you are absolutely right. Whether in practice it will be the case that we see a gradual creeping extension of the scope of design protection is something we will have to look at. PROF. DWORKIN: I think that is it. May I on all our behalves thank all the speakers, and can I thank all of you for sitting through it? I think we all need a drink. Thank you.

Part E: Industrial Designs, Fashion, Ornamental Patents  485

APPENDIX A

Community Designs: Update on OHIM Procedural Matters and Case Law in the Boards of Appeal and the Court of First Instance Harri Salmi50 I. Change of Practice on Community Design Priority Documents A convention priority for a Community design may be claimed on the basis of a previous filing of a design/utility model (but not patent) filed in or for a State party to the Paris Convention or the World Trade Organization. The priority claim can be made either simultaneously with the filing of the application, or within the time limit of one month subsequently to the date of filing (declaration of priority). Exhibition priorities have also been possible as of 23/3/2005 when the 2005 World Exposition in Aichi, Japan was held. The priority check done by the Designs Department of the OHIM (Office for Harmonization in the Internal Market) consists of checking that: a) the file number of the earlier application is indicated; b) the filing date of the application for a RCD (Registered Community Design) falls within the period of six months of the claimed priority date; c) the previous application has been filed in or for a State on the Paris Convention list or the WTO list; d) the time limit to file a declaration of priority is complied with; and that e) the priority documents have been submitted.

As of February 2009 the OHIM no longer checks whether the prior application and the RCD application are for the same design. The consequence of this change of practice is that nowadays the OHIM accepts priority documents which do not include views of designs, such as German design registration certificates. This new practice smoothes the link established in January 2008 between the RCD and the International registered design, since WIPO does not carry out any examination of priority documents. It also accelerates the registration process before the OHIM. However, it is important for applicants to note that in invalidity proceedings, if it is necessary to determine whether the claimed priority is actually valid, the owner of the RCD must provide the necessary documents before the Invalidity Division for it to be able to check whether the prior application and the RCD application are for the same design. This is of course only necessary if the applicant had not already provided them when the application was filed. If the documents have not been provided, the Invalidity Division will request for them. Further, if the registration certificate does not show the designs (which would be the case, for example, of a German registration certificate), the evidence should consist of a copy of the filing documents of the previous application, stamped or otherwise certified by the authority which received it. 50

Member of the OHIM Boards of Appeal.

486  CHAPTER VI: TRADEMARK LAW II. Decisions of the OHIM Board of Appeal on declaration of invalidity In the following, four decisions made last year concerning questions of invalidity will be discussed. In order for the presentation to be clearer, not all of the views of the designs are included, but instead I have tried to choose the ones which are the most representative for each case. I will also be bringing out the details of each case which I believe to be the most important ones. The full text of each decision can be found by making a search on our website www.oami.europa.eu. a) R 196/2008-3, 2/9/2008 “saucepan handles” The first case to be presented concerns the question of novelty. The RCD was applied for with three views which looked like this:

The earlier United Kingdom design was represented with the following five views:

It should be remembered that the RCD application only concerns the handle of the saucepan. One must also take into account that the question to be decided was one of lack of novelty and the CD Regulation does not specify the reference person in these cases. It was, therefore, the Board’s task to assess the differences on the basis of the overall appearance of the designs in question and no evaluation of an ‘informed user’ was done. In its decision, the Board found that the actual difference in the arch of the handle is minimal and it can only be detected by measuring them or putting one over the other. In addition, the

Part E: Industrial Designs, Fashion, Ornamental Patents  487

down-turned portion of the handle of the contested design assumes a different angle to the vertical, however, this is hardly visible without actually measuring the angles. Further, the level at which the extremities of the handle arrive may vary according to its inclination. That level is not really a property of the handle but results from how it is secured to the saucepan. In conclusion, the Board found that the differences between the designs were immaterial, so the designs were deemed to identical and the contested design lacked novelty. The RCD was therefore invalidated. b) R 1516/2007-3, 7/7/2008 “cans” The second case to be presented concerns the question of lack of individual character. The RCD was applied for with a total of six views two of which looked like this:

The earlier design was represented with a total of eight views, six of which are shown below:

First of all, the Board noted that the contested design represents a container of the type that contains lubricants (e.g. engine oils). The informed user is a professional in the trade sector for distributing such goods. He will have knowledge of the market for lubricants and the various shapes of container available. As to the differences, the Board noted, inter alia, that the RCD appears tall and slender whereas the earlier design appears short and squat. In addition, the handle occupies a relatively small portion in the RCD whereas, in the earlier design, it has a prominent position, accounting

488  CHAPTER VI: TRADEMARK LAW for practically one quarter of the can. The handle shape is also different. The Board further took into account that the designers’ freedom of manoeuvre is fairly limited. Engine-oil cans mostly have a shape resembling that of a parallelepiped, into which the handle and the neck have to be incorporated. In conclusion, the Board found that the designs produced a different overall impression and dismissed the application for a declaration of invalidity. c) R 135/2007-3, 13/5/2008 “automatic machines for games” The third case to be presented also concerns the question of lack of individual character. The RCD was applied for with a total of six views two of which looked like this:

The earlier design had been advertised as shown below:

In its decision, the Board found that the informed user is an individual who knows this type of equipment well and not only an occasional frequenter of game arcades. The Board found various strong formal similarities concerning the cylindrical turret, two rectangular elements in which a screen may be housed, the pushbutton unit and the coin collection. It also noted that a slot machine designer enjoys great freedom, as was demonstrated by the evidence provided by the invalidity applicant concerning the output of the industry sector. In conclusion, the Board found that the RCD does not possess the necessary individual character and must be declared invalid.

Part E: Industrial Designs, Fashion, Ornamental Patents  489

d) R 860/2007-3, 17/4/2008 “inverter generators” The final case to be presented also concerns the question of lack of individual character. The RCD was applied for with a total of six views two of which looked like this:

The earlier design had been disclosed as shown below:

In this case, as to the informed user, the Board stated that the informed user is whoever habitually purchases such an item and puts it to its intended use and has become informed on the subject by browsing through catalogues of such generators, visiting the relevant stores, downloading information from the internet, etc. The informed user is generally not technically experienced or particularly interested in the technical design of inverter generators. He will therefore not pay attention to every detail of the device. Instead, he will undertake an overall view. The contested RCD and the prior design share numerous elements which display strong similarities. These include a) a cubic shape, b) two black panels on opposite sides enclosing a central portion of a lighter colour, c) rounded upper corners of the cubic form, d) a trolley mount with four wheels, e) a knob on the top side of the device, f) handle bars at the sides of the generator, g) a linear structure, in the sense that all the lines are straight, except for the rounded upper corners, h) indented sides on the top part of the device and i) the proportions of the elements comprised in relation to one another. The informed user is more likely to be impressed by the overall aspect of the generator rather than the various details that characterise mechanical devices in general. The designs of inverter generators will produce the same overall impression if they globally display the same arrangement of the various component parts of the generator and these components have similar shapes and sizes relative to each other, as was the case here. The overall shape, configuration and general appearance of the designs were found to be very similar. The differences do not significantly affect the overall impression produced by the

490  CHAPTER VI: TRADEMARK LAW devices since they are details which, although not insignificant, relate to what are essentially marginal elements of the two products. A close examination—going much further than the general comparison required by the regulation—would be needed before the informed user could distinguish the two devices. In addition, the designer’s degree of freedom in developing the design was found to be relatively wide. Certain features must be present in an inverter generator in the sense that it requires the provision of a housing, handles and access to instruments if it is to perform its function, but the Board found it difficult to see any reason why the respondent’s design needs to resemble the appearance of the earlier design to such an extent. An inverter generator could surely look significantly different but still function perfectly for what it is made for, as could also be seen from the examples produced by the respondent in the invalidity proceedings and also from the other designs included in the multiple application of the contested RCD. In conclusion, the Board found that the RCD does not possess the necessary individual character and must be declared invalid. III. Update on OHIM cases on designs pending before the CFI At the time of writing, the Court of First Instance has not yet published any decisions concerning appeals from decisions of the OHIM Board of Appeal on design cases. These decisions are eagerly waited for, but for the time being I can only give you information as to which cases are pending before the Court. The following is a list of these cases and I have also mentioned the main content of the dispute. The main representations of the designs can be seen in my Power Point presentation. – T-9/07 ‘metal rappers’ The BoA decided that the designs have a different overall impression. – T-10/08 +T-11/08 ‘internal combustion engine’ The BoA decided that the designs have a different overall impression. – T-148/08 ‘instruments for writing’ The BoA decided that a distinctive sign (German trade mark) has been used in the subsequent design – T-153/08 ‘communication equipment’ The BoA decided that the designs produce the same overall impression. – T-450/08 ‘bottle’ The notion of disclosure: is the sale of products between two professionals enough (the Board said yes) or is it required that the products are put on the market in order that the non-professional public can have access to them?

Chapter VI

Trademark Law Part F: Trademarks & Free Speech Moderator Prof. Coenrad Visser

University of South Africa (Pretoria) Speakers Gordon D.T. Humphreys

Member, Second Board of Appeal, OHIM (Alicante)

Jonathan Griffiths

Senior Lecturer, School of Law, Queen Mary, University of London

Prof. Robert Burrell

Visiting, Benjamin N. Cardozo School of Law, New York; TC Beirne School of Law at the University of Queensland (Australia) PROF. VISSER: We will begin this last session on trademarks. In a way, we will pick up themes we heard earlier in the Conference—inference of policy, interplay between intellectual property law and other areas of law, like constitutional law—in the context of trademarks and free speech. In this session you will see that free speech and trademark will play out in two contexts. The first one is that trademark as a form of speech in the context of registration, and then free speech almost as a limiting factor in the context of trademark infringement. We have three speakers this afternoon, no panelists. I think you will all be panelists. The first speaker will be Gordon Humphreys from Alicante, then Jonathan Griffiths from Queen Mary College University of London, and finally, Robert Burrell, Visiting at the moment at Benjamin Cardozo Law School but mainly attached to the University of Queensland in Australia. We will start with Gordon. MR. HUMPHREYS: Thank you very much for the introduction. My job is to keep you entertained, and awake, hopefully, with a mixture of terrorism, blasphemy, and sexual innuendoes. So here goes.

492  CHAPTER VI: TRADEMARK LAW [Slide] Of course, in Europe the Human Rights Convention recognizes freedom of speech.1 This freedom of speech has been interpreted to extend to commercial matters. However, for the proper functioning of a democratic society, the legislature has decided that freedom of speech has certain restrictions. Amongst these restrictions one of the major ones is public policy and morality. In the European Union it is referred to as “accepted principles of morality.” Marks that offend those accepted principles cannot be registered.2 [Slide] The OHIM Guidelines3 attempt to distinguish, and I’m afraid rather unsuccessfully, between what is public policy and what are accepted morals. Perhaps it doesn’t really matter. The bottom line is it is sufficient to say that both concepts involve the idea of distinguishing between wrong and right, unacceptable and acceptable notions. Unfortunately, this is, as we will see a little later, a moving target. This is particularly difficult in a Community context, where we basically have different languages, different cultural and social heritages, and different contexts. [Slide] Not everything involves moving goal posts, obviously. Some things are just clearly out. Anything that is a blasphemous, racist, or discriminatory phrase or word has no place on the Register. Likewise, anything that is a reference to or an incitement to criminal acts or terrorist organizations is similarly unregistrable. The examples you see on the right-hand side of the slide are all applications which have been rejected and haven’t reached the Boards of Appeal where I work. In other words, they were rejected by first instance examiners and not appealed. [Slide] I would draw your attention to the two cases involving bin Laden, one in Latin script4 and the other in Arabic script,5 which did come before the Boards of Appeal. The interesting issue here was that the marks in question had been filed prior to 9/11 but after the incidents in Kenya, Nairobi, and in Dar-el-Salam, Tanzania, and there had been a UN Security Council Resolution which had named bin Laden as an Islamic terrorist. The problem here was that the bin Laden family were actually quite a reputable construction firm, and indeed a mark, I believe, had even made its way onto the register in Switzerland. But the Board ruled that it was enough that the name bin Laden was associated with the leader of al-Qaeda, and in view of the UN Security Council Resolution and the two terrorist incidents that I referred to, that the two marks in question could not be registered as a matter of public policy. In other words, the issue of at what point in time you had to look at the issue of morality, whether you looked at it at the filing time or at a later time, was not addressed and arguably could still be an open question. 1 Convention for the Protection of Human Rights and Fundamental Freedoms, Art. 10, Nov. 4, 1950, 213 U.N.T.S. 222 [hereinafter ECHR]. Article 10—Freedom of Expression: 1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers. This article shall not prevent States from requiring the licensing of broadcasting, television or cinema enterprises. 2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary. Id. 2 See Council Regulation 6/2002, Art. 9, 2001 O.J. (L 3) 5 (EC). 3 See OHIM Examination Guidelines, Guideline 8.7, OHIM OJ 9/96, p. 1331, available at http://oami.europa.eu/ ows/rw/pages/CTM/legalReferences/guidelines/guidelinesExam.en.do. 4 Case R-176/2004-2, Falcon Sporting Goods v. OHIM (Sept. 29, 2004) (refusal to register mark BIN LADEN in latin script). 5 Case R-177/2004-2 (refusal to register mark BIN LADEN in arabic script).

Part F: Trademarks & Free Speech   493

[Slide] Keeping marks off the Register because of morality is not a question of bad taste. This is something that has been established quite early on in the history of the Boards of Appeal, starting with the case “Dick & Fanny,”6 where the Board said that a sexual connotation should not be regarded as offensive because “these words merely designate things but do not convey any message,” so it is not a question of opinion or excitement but rather one of bad taste. The Board went on to say that it could be just seen as an innocent reference to a couple, like “Tom and Jerry” or “Bonnie and Clyde,” and, in any case, these words are also simple diminutives of common first names. The next case, “Reva,”7 involved a word which probably nobody knows what it means here. It is apparently Helsinki slang for female “private parts.” What the Board held was that there was no intention to cause any offense. This is quite an interesting case because it brought in a somewhat subjective element, looking at the intention of the trademark applicant; although the Board admitted that some consumers might be embarrassed or uncomfortable on seeing these words, others would be amused or puzzled. Of particular influence was the fact that it was used on electric cars, and therefore the context of use was also important. [Slide] The main clarification came as regards the application of these principles in July 2006 with a decision of the Grand Board of the Boards of Appeal8—the Grand Board is basically an enlarged board that rules, amongst other circumstances, on cases which are particularly difficult or present a certain legal interest. The decision of the Grand Board, I think, brought more clarity to the test and standards to be applied. Again, it was said that manifestly profane language or obscenity that offended the sensitivities of a substantial group of the population had no place on the Register. However, for the first time, and this is important in this case, it was decided to consider the mark always in relation to the goods and services, and in particular to the consumers of those goods and services. In so doing, what was put forward was the idea that you are applying the standards of a reasonable person with normal levels of sensitivity and tolerance. So you are not looking at an absolute prude, but on the other hand you are not looking at somebody who is totally unshockable. In this particular case, one of the arguments that was put forward was that the words “Screw You” had been used on “East Enders” and “The Simpsons” on British television, and therefore it was acceptable. However, what the Board said was that this was in the context of artistic freedom and that that didn’t mean to say that it wouldn’t offend a sizable portion of ordinary citizens in the English-speaking area of the Community. What happened here was that the types of goods applied for were split up. The Grand Board decided that for ordinary goods we are looking at ordinary citizens. Therefore, for, amongst other things, alcoholic beverages, for example, the words were unregistrable. But on the other hand, for certain products offered for sale—and there were some quite racy things that were applied for (particularly, sexual toys of one sort of another, which were obviously distributed in special shops or special outlets)—it was held that the relevant consumers of those sorts of goods wouldn’t be deeply offended by this particular phrase. [Slide] Where does this leave us? Poor taste is not necessarily versus contrary to morals. This is particularly true of signs that relate to sexual organs. The ability to register signs consisting of manifestly profane language, or insults, is a matter of degree and context (especially, having regard to the relevant consumer and the particular goods and services). On the other hand, signs that incite racism, discrimination, violence, terrorism, or war can never be registered. I’ll leave it there. Thank you. Case R-111/2002-4, Dick Lexic Ltd. v. OHIM (Mar. 25, 2003) Case R-558/2006-2, Reva Elec. Car Co. (PVT) Ltd. v. OHIM (July 18, 2006). 8 Case R-495/2005-G, Application of Kenneth (trading as Screw You) v. OHIM, [2007] ETMR 7 (Grand Board, July 6, 2006). 6 7

494  CHAPTER VI: TRADEMARK LAW PROF. VISSER: Thank you, Gordon. Before we continue with Jonathan, just one question about the bin Laden case. That trademark was basically for a family name only and in relation to what goods or services? MR. HUMPHREYS: It was a wide range of goods and services. But as I understand it, it was part of the bin Laden family that was applying for it. What happened, of course, was that 9/11 occurred during the examination phase of that application. PROF. VISSER: Then we get into guilt by association basically. The family is punished. Jonathan? MR. GRIFFITHS: I also want to talk about the rather peculiar relationship between speech and trademark law that arises in the type of case that Gordon has discussed. However, I want to look at these cases from a rather different perspective. In particular, I want to look closely at the impact of Article 10 of the European Convention on Human Rights9 on trade mark protection in this context. In the SCREW YOU decision,10 the Grand Chamber concluded that decisions on the morality/public policy grounds for refusal to register a mark must always be taken within the analytical structure provided by Article 10 of the European Convention’s guarantee for freedom of expression. This is also a conclusion that has been reached in the United Kingdom.11 The adoption of a human rights-based framework in these cases is interesting because it may require us to accept a number of interesting, and perhaps unforeseen, consequences. First, it is important to note that it is accepted, either explicitly or implicitly, in SCREW YOU and the equivalent cases from the United Kingdom, that the use of a mark in association with goods or services constitutes “expression.” Thus, use of a trade mark falls within the scope of Article 10 even though the simple application of a mark to goods or services does not appear to be a particularly complex or meritorious form of expression. Secondly, it is also accepted in these cases that refusal of a mark on morality and public policy grounds interferes with such expression, even though refusal does not actually prevent the use of the mark at all. On this point, it is interesting to note that Europe and the United States are out of step. In the United States, it has been held that refusing to register a mark does not implicate the First Amendment because such a refusal does not burden speech.12 The third principle accepted in these cases—one which necessarily follows from the first and second principles described above—is that refusals to register a trade mark on the grounds of public policy or immorality will only be legitimate under Article 10(2) of the European Convention where such refusal is “necessary in a democratic society” for any of the exhaustive list of reasons permitted under that provision.13 Under the case law of the European Court at Strasbourg, restrictions on expression will only be necessary in a democratic society where they represent a proportionate response to a pressing social need.14 Thus, on the face of it, decisions to refuse registration must stand up to disciplined proportionality scrutiny with a presumption in favor of registration. This disciplining structure is notionally explicitly recognized in all of the European and United Kingdom cases that have previously been noted in this paper and, indeed, there is some ECHR, supra note 1, Art. 10. Screw You, [2007] ETMR 7. 11 See Basic Trademark SA’s Application, [2006] ETMR 24; Scranage’s Trade Mark Application, O/182/05 (June 23, 2005); French Connection Ltd’s Trade Mark Registration, [2007] ETMR 8. 12 In re McGinley, 660 F.2d 481 (C.C.P.A. 1981). 13 See ECHR, supra note 1, Art. 10(2). 14 See, e.g., Sunday Times v. United Kingdom, 2 Eur. Ct. H.R. 245 (1979); Goodwin v. United Kingdom, 22 Eur. Ct. H.R. 123 (1996). 9

10

Part F: Trademarks & Free Speech   495

evidence in the cases of a proportionality-type analysis. Thus, for example, the cases impose a significant threshold for refusals. Bad taste alone will not be sufficient. The graduated approach in SCREW YOU, in which the registration of the mark was permitted in respect of certain forms of use, but not in respect of others is also based upon a notion of proportionality. The distinction that the Strasbourg court draws between commercial speech and creative speech is also noted in a number of these cases. Nevertheless, it seems to me that the actual decisions on the facts in these cases do not apply this rigorous form of proportionality analysis or language at all. For example, in SCREW YOU, while the Grand Board went further in explaining the principles governing the relationship between Article 10 and refusals of register a mark on public policy/morality grounds than any previous Community tribunal, it eventually explained its decision substantially to uphold the refusal to register the mark without specific reference to the detailed proportionality exercise that appears to be required under the Convention. The same is true of the United Kingdom cases, where reference to the detailed demands and constraints of the Strasbourg case law is relatively scant. An observer is left with the strong impression that the adoption of a human rights framework has, in fact, had very little impact at all and the decisions have actually been taken in exactly the same way had Article 10 not been involved at all. In general, marks that are seriously offensive are refused and less distasteful marks are not. The rights framework is moulded to the norms of the existing system, rather than vice versa. In broad terms, this approach has a lot to commend it. It seems instinctively correct that tediously indecent marks should be refused without extensive soul searching, particularly as an infinite variety of less offensive marks are readily available to traders. I have previously written in support of that position, arguing that the right to freedom of expression ought to have no significant impact in such cases. There are at least two reasons for taking this position. First, even if the use of a trade mark is “expression,” it is commercial expression which is less zealously protected under the European Convention.15 Secondly, under that Convention, states are provided with a particularly wide margin of appreciation in regulating questions of morality, in acting to protect religious rights, and in preventing disorder.16 These, of course, are the reasons given most frequently by registration authorities for refusing registration of a mark on the public policy/morality ground. However, increasingly I have begun to doubt this conclusion, no matter how attractive. It seems to me open to question whether courts and other decision-making bodies can ostensibly adopt a human rights framework without that framework having any apparent impact on its decisions at all. This leads me to consider whether acceptance of Article 10 as a governing framework might not have certain consequences that have not yet been fully recognized and may need to be worked out in fully in future decisions. My purpose in the remainder of this short paper is simply to identify a small number of such possible consequences. First, under the Strasbourg case law, even in commercial expression cases, there is a basic requirement for decision makers to consider the rationality of the grounds advanced for interfering with expression.17 Of course, in general terms, in the cases considered in this article, decision-making bodies have done exactly that. However, it is probably fair to say that in these cases the evidence accepted for the likelihood of harm has often been fairly speculative. For 15 See, e.g., Demuth v. Switzerland, 38 Eur. Ct. H.R. 423 (2004); Casado Coca v. Spain, 285 Eur. Ct. H.R. (ser. A) 1 (1994); Markt Intern v. Germany, 12 Eur. Ct. H.R. 161 (1990). 16 See, e.g., Wingrove v. United Kingdom, 24 Eur. Ct. H.R. 151 (1997); Otto-Preminger Institute v. Austria, 19 Eur. Ct. H.R. 34 (1995); Choherr v. Austria, 17 Eur. Ct. H.R. 358 (1994); Müller v. Switzerland, 13 Eur. Ct. H.R. 212 (1991). 17 Casado Coca v. Spain, 18 Eur. Ct. H.R. 1 (1994).

496  CHAPTER VI: TRADEMARK LAW example, would the use of the mark JESUS as a trade mark really undermine religious belief? Closer scrutiny of the likelihood of the alleged consequences of registration may perhaps be called for in future if the Article 10 framework is to be applied wholeheartedly and rigorously. Secondly, the broad margin of appreciation accorded to states in the Strasbourg cases on commercial speech and morality may well be less significant in a purely domestic setting, for example in the U.K. Trade Mark Registry or courts or in tribunals within the Community system. The flexibility given to decision-makers under the commercial speech doctrine ought also to have less impact in the case of expression that has mixed commercial and political or creative aspects. It may be possible to think of marks which, while employed for commercial purposes to a certain extent, also have other expressive purposes and ought therefore to be considered under a stricter proportionality analysis where registration is refused. This could, for example, be the case in disputes such as that which arose in the United States over the attempted registration of DYKESXXX. The registration of such a mark has a strongly political purpose. It may also be true that the registration of certain trade marks—possibly elaborate forms of device mark—may have a creative as well as a commercial motivation. The third potential consequence of the adoption of the human rights framework that occurs to me is that different standards of review may be required in respect of different types of reason for refusing to register a mark. For example, while registration authorities may have considerable leeway in refusing to register marks on the grounds of morality and/or insults to religion under the Strasbourg jurisprudence, less flexibility may be available in other types of case. Thus, for example, a more stringent form of proportionality review may be required in a case in which an application to register a mark is refused because the mark consists of the name or image of a deceased person. Finally, there seems to me to be a fairly dramatic and rather peculiar consequence of the acceptance of the human rights framework in the cases under discussion here. If refusal to register a mark really does interfere with expression—and that is the crucial assumption in all these cases—it is important to note that any refusal to register a mark (and not only refusals to register on the public policy/morality ground) must require justification under the framework of Article 10(2). Adoption of a human rights approach would thus seem necessary not only in obvious cases concerning morality and public policy, but also in cases in which, for example, registration of a mark is refused because it is non-distinctive, or perhaps because it constitutes a function of shape. Can that be right? PROF. BURRELL: Thank you. In contrast to the previous two speakers, I would like to focus on the extent to which freedom of expression or speech might form a limiting principle in relation to trademark infringement. [Slide] The background is that over the past fifteen or so years there has been growing interest in the relationship between trademarks and freedom of expression in the infringement context. In particular, a constellation of the increased cultural importance of brands, the expansion of trademark law, the application of traditional trademark principles in the online environment, and, I think it must be said, the aggressive enforcement strategies of companies like Mattel,18 have led a sizable number of academics, particularly in the United States, to worry about the potential conflict between trademarks and freedom of expression.19 18 See, e.g., Mattel, Inc. v. MCA Records, Inc., 296 F.3d 894 (9th Cir. 2002) (the use of the trademark “Barbie” in a song by Aqua called “Barbie Girl” was found to be fair use). 19 See, e.g., William E. Ridgway, “Revitalizing the Doctrine of Trademark Misuse”, 21 Berkeley Tech. L.J. 1547 (2006); Hannibal Travis, “The Battle for Mindshare: The Emerging Consensus that the First Amendment Protects Corporate Criticism and Parody on the Internet”, 10 Va. J.L. & Tech. 3 (2005); K.J. Green, “Abusive Trademark Litigation and the Incredible Shrinking Doctrine—Trademark Abuse in the Context of Entertainment Media and Cyberspace”, 27 Harv. J.L. Pub. Pol’y 609 (2004).

Part F: Trademarks & Free Speech   497

Now, I share many of their concerns about the potential overreach of trademark law. What I want to suggest, however, is that I think we need to be careful before focusing too quickly on the narrow question of how the tension between trademarks and expressive freedom is to be mediated. In particular, I think we need to be careful of going down the path of accepting that there is a broad potential conflict between trademarks and freedom of expression and then, if you like, trying to develop a doctrinal tool, or set of tools, that will protect parodists, bloggers, comparative advertisers, and others. Specifically, I am concerned that an approach whereby we seek to carve out a “freedom of expression” defense to a trademark infringement action may, on the one hand, offer too little or may, on the other hand, concede too much In addition, although I just noted that it this approach may offer far too little, I am concerned that in a strange way it may also go too far. I will try to explain each of these concerns. [Slide] I think it is important to stop and ask: What is it that is causing the disquiet? I think if you look at the sorts of cases that are causing concern in the United States, you can see that one of the things that is widely recognized in the United States as causing a potential conflict between trademarks and freedom of expression is the presence in U.S. law of a broad dilution action.20 The scope for anti-dilution protection to impact on freedom of expression has been recognized not only by most of the commentators, but also in some of the case law. In particular, if you look at Mattel v. MCA Records,21 the Aqua “Barbie Girl” case, Judge Kozinski emphasized that First Amendment concerns apply with much more force in the dilution context, partly because dilution captures speech which in no way misleads consumers, and because dilution sweeps across broader vistas of the economy, as he described it. Similarly, the doctrine of initial interest confusion in the United States is often singled out as something that creates particular freedom-of-expression concerns. For those of you who don’t know, this is the doctrine developed in some, but not all, U.S. circuits which means that even if confusion has been dispelled by the point of sale, nevertheless an action for trademark infringement can still lie.22 So even though consumers, by the time they purchase the goods or services, are no longer confused, if they were initially confused, if they were first attracted to those goods or services because of some confusion, then an action may lie. I think also it has to be said that some of the cases that have been identified as causing particular concern in the United States are cases where in other jurisdictions it would be quite clear that there would be no use as a mark. I think the absence of any clear use-as-a-mark requirement in the Lanham Act is also something which people like, for example, Mark Lemley have singled out as creating this potential for trademark law to trample freedom of expression.23 20 See Federal Trademark Antidilution Act of 1995, Pub. L. No. 104-98, 109 Stat. 985 (Jan. 16, 1996); see also Barton Beebe, “A Defense of the New Federal Trademark Antidilution Act”, 16 Fordham Intell. Prop. Media & Ent. L.J. 1143 (2006); Kathleen B. McCabe, Note, “Dilution-by-Blurring: A Theory Caught in the Shadow of Trademark Infringement”, 68 Fordham L. Rev. 1827 (2000). 21 296 F.3d 894 (9th Cir. 2002). 22 See Brookfield Commc’ns, Inc. v. West Coast Entm’t Corp., 174 F.3d 1036 (9th Cir. 1999); Esercizio v. Roberts, 944 F.2d 1235 (6th Cir. 1991); Grotrian, Helfferich, Schulz, Th. Steinweg Nachf. v. Steinway & Sons, 523 F.2d 1331 (2d Cir. 1975); Green Prod. v. Indep. Corn By-Products Co., 992 F. Supp. 1070 (N.D. Iowa 1997); Securacomm Consulting, Inc. v. Securacom Inc., 984 F. Supp. 286, 298 (D.N.J. 1997), rev’d on other grounds, 166 F.3d 182 (3d Cir. 1999); Kompan A.S. v. Park Structures, Inc., 890 F. Supp. 1167 (N.D.N.Y. 1995); Jordache Enter. Inc. v. Levi Strauss & Co., 841 F. Supp. 506 (S.D.N.Y. 1993). But see Dr. Seuss Enter., L.P. v. Penguin Books USA, Inc., 109 F.3d 1394 (9th Cir. 1997) (noting that parody used to create initial customer interest may be a trademark infringement even though consumers were not actually confused at time of sale); Astra Pharm. Prod., Inc. v. Beckman Instruments, Inc., 718 F.2d 1201 (1st Cir. 1983) (holding that there was no showing of likelihood of confusion or actual confusion). See generally Jennifer E. Rothman, “Initial Interest Confusion: Standing at the Crossroads of Trademark Law”, 27 Cardozo L. Rev. 105 (2005). 23 See Mark A. Lemley & Stacey L. Dogan, “Grounding Trademark Law Through Trademark Use”, 92 Iowa L. Rev. 1669 (2007); Mark A. Lemley & Eugene Volokh, “Freedom of Speech and Injunctions in Intellectual Property Cases”, 48 Duke L. J. 147 (1998).

498  CHAPTER VI: TRADEMARK LAW But rather than leaping to “How then do we carve out a freedom of expression defense?” maybe we want to think again. For example, might it be the case that initial interest confusion is just a wrong turn in trademark law. I think it might well be, and I think this conclusion is fortified if we can go back and look at the two seminal U.S. cases on initial interest confusion. For example, if you look at the Steinway case,24 and if you read the evidence carefully, I think it is quite clear that there was traditional confusion; that is, some people were confused right up until the point of sale. Similarly, if you look at the Mobil Oil v. Pegasus case,25 I think that case is even more problematic, that is it is doubtful whether the marks at issue should even have been regarded as similar and that it is just a classic example of a court not liking what the defendant was doing and bending trademark law to reach a predetermined result. What about dilution? I’m certainly not suggesting that we abandon dilution. But what about demanding evidentiary rigor in dilution cases? I think both the Chewy Vuiton case in the United States,26 and also the Intel case27 are interesting in that respect and move us as considerable way in that direction. Similarly, turning to trademark use, if problems flow from the absence of a trademark use requirement, perhaps we need to rediscover such a requirement. [Slide] Second, why do I say this focus on looking to freedom of expression to providing some form of limit on trademark law may also offer too little. I think it is important to bear in mind that when U.S. commentators are writing about this they have in the background the First Amendment28 and it has to be remembered that the First Amendment has a unique place in U.S. political and legal culture and that the First Amendment serves to afford unique protection to speech interests. In other jurisdictions, a focus on speech or expression simply wouldn’t take you nearly as far. You also have the problem that in many jurisdictions you have constitutional guarantees of property. In other jurisdictions, when property rights and speech rights collide, the question of which should give way is by no means clear cut. I think also you have to bear in mind that this focus doesn’t do anything for international harmonization or the flow of goods or services across borders; that is, it must be remembered that to focus on constitution-derived defenses may produce very different outcomes from one country to the next. [Slide] Finally, then, why do I say this focus may go too far? First of all, I think you’ve got to understand what will not happen. We will not start with a really principled, detailed discussion about how freedom of expression interests collide with trademark rights, because that would just be too difficult. We have to start off by choosing between which rationale for leaving communication unfettered we want to see as underpinning our guarantee of freedom of expression. In some jurisdictions, that question is still very much open. But it would matter. So take as an example this mark that I have put up here, the “Mongols” trademark. This is a trademark seized by the U.S. government from a motorcycle gang.29 (Why a motorcycle gang owns a registered trademark remains something of a mystery). The action of the U.S. Steinway & Sons, 523 F.2d 1331 (2d Cir. 1975). Mobil Oil Corp. v. Pegasus Petroleum Corp., 818 F.2d 254 (2d Cir. 1987). 26 Louis Vuitton Malletier SA v. Haute Diggity Dog LLC, 464 F. Supp. 2d 495 (E.D. Va. 2006), aff’d, 507 F.3d 252 (4th Cir. 2007). 27 Case C-252/07, Intel Corp. v. CPM United Kingdom Ltd., [2008] WLR (D) 371. 28 U.S. Const. amend. I (“Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press; or the right of the people peaceably to assemble, and to petition the Government for a redress of grievances.”). 29 See Scott Glover, “U.S. Targets Bikers’ Identity”, L.A. Times, Oct. 22, 2008, http://articles.latimes.com/ 2008/oct/22/local/me-mongols22. 24 25

Part F: Trademarks & Free Speech   499

Government has generated free speech concerns. But the question of whether or not members of the Mongols motorcycle gang have a right to produce jackets wearing their logo might well depend on whether you think free speech rights are about personal expression and development or whether we are concerned to protect the marketplace of ideas. Secondly, in intellectual property matters generally—we can see this in copyright—we have to be wary of the myth of the closed category. We have a habit of trying to identify particular readily identifiable types of cases where intellectual property rights and freedom of expression are likely to collide. To my mind that is a myth, because every time you stop somebody from putting something on their goods or services, or every time you stop somebody from reusing part of a copyright work, there is some impact on freedom of expression. That certainly doesn’t mean that IP rights should give way in every case but we must be wary of trying to pretend that we can identify a class or sets of cases, and then proceed as it if is only in these cases where there is any freedom-of-expression interest or speech interest. [Slide] Also, it seems to me that we are missing an important part of the story, which is that in cases where you have confusion—that is, where consumers actually think that those goods or services have been produced by the trademark owner—in those cases actually the trademark owner has a speech interest, because to my mind in those cases you have something very much like compelled speech. So if you take a case like Smith v. Wal-Mart,30 which is the WAL*OCAUST case, the thing about that case is—this was a design used on the front of T-shirts amongst other things—the amazing thing was that there was quite a lot of evidence of actual consumer confusion. People really thought that Wal-Mart had made these T-shirts. Now, that may be amazing, but that’s the case. And if that is the case, then what did consumers think? Presumably that Wal-Mart was making a joke about the Holocaust. Well, maybe Wal‑Mart would like to run the line, “We don’t find the Holocaust very funny.” It seems to me to be a case where Wal-Mart does have, if that confusion analysis is right, some speech interest. [Slide] Very quickly, what is the likely response going to be? It seems to me that what we are instead going to do is we are going to create certain predetermined speech exceptions, for example, for things like parody. Then what will happen is that those parody exceptions will take on a life of their own, and you will see parodies being privileged, even though the underlying rationale, that we want to protect freedom of expression, is completely missing. I think Chewy Vuiton is a really nice example. Where really was the speech interest at stake in producing squeaky dog toys using the name “Chewy Vuiton?” That seems to me quite extraordinary. Finally, it seems to me that the other thing that we will do is we will actually force defendants to try to bring themselves into a parody exception, which will actually in some cases be completely inappropriate. If you go back and think about something like the Mr Miss World case31 or the Gay Olympics case,32 to force defendants to say “this is a parody” actually completely misses the point of that use in the first place. Thank you. PROF. VISSER: Thank you. I will open the floor for discussion. We have fifteen minutes and then we have to conclude. Just identify yourself and your affiliation. QUESTION: Ed Vassallo from Fitzpatrick in New York. Smith v. Wal-Mart Stores, Inc., 475 F. Supp. 2d 1318 (N.D. Ga. 2007). Miss World Ltd. v. Channel 4 Television Corp., [2007] EWHC 982 (Pat). 32 S.F. Arts & Athletics, Inc. v. U.S. Olympic Comm., 483 U.S. 522 (1987). 30 31

500  CHAPTER VI: TRADEMARK LAW Professor Griffiths, listening to your presentation, and in particular the example with “Jesus” for apparel, it struck me that to grant that registration would interfere with the right of expression of others, because to give one applicant the right to put “Jesus” on apparel could prevent the rest of the world from demonstrating their faith or belief in Jesus. Just the opposite of the concern worried me, that the registration would conflict with the rights of others to express their religious views. MR. GRIFFITHS: That is an arguable perspective in a sense. People will still be able to go and express their religious views. But I guess it might be argued that those views are sullied in some way or other. However, I think that often when we talk about rights and intellectual property rights, we speak in very general, philosophical terms. Here, however, I am interested in a much narrower question, which involves only freedom of expression in a justiciable sense. In that context, I think it would be very difficult for you’re your religious adherents to bring a claim that their right to practice their religion has actually been encumbered in any way. PROF. VISSER: Just to add on to that, there is probably also a question of proportionality again. The name used in respect of religious clothing, for example, would not be offensive. I also think if you come with that particular mark, you come fairly close to a term which may be required as a general descriptive term in the trade, to describe religious books or something like that. To give one person that kind of trademark monopoly, if it is under freedom of speech, then you move into a different category of non-registerable marks. Just a thought. MR. HUMPHREYS: In the European context, of course, for some Member States it is highly offensive, the idea of even having a religion as a commercial service. I remember in our Board some quite animated discussions where people from Greece, for example, saw religion as a non-trademark matter, whereas people from northern Europe saw it as, quite naturally, a commercial service. So you can enter into these sorts of perception difficulties. PROF. VISSER: This is probably particularly difficult in the European Union, where you have so many divergent groups and views. QUESTION: Alain Strowel, Covington & Burling. I am as well professor in Brussels. A question in relation to copyright and the balancing between IP and free speech: In trademark law, the issue is commonly dealt with under the infringement analysis. In copyright law, at least in Europe, a lot of countries have an exception for parody, which is basically an important form of free speech. Do you think that the balancing is more in favor of free speech when you have an exception, like in copyright, or where you don’t have it, like in trademark? It seems you would agree, because you were suggesting to include an exception within trademark law, but I wanted to have your view on that. PROF. BURRELL: My view is, of course, you can’t possibly answer that question in the abstract. You need to know how is the exception applied; when it is built into the infringement analysis, what’s the outcome. I would say that if we are talking about, for example, the United States, then I would say if we were talking about serious parodies, serious parodies get quite a lot of protection irrespective of whether you are talking about copyright or trademarks. The point that I was trying to make was that if you are talking about a trademark parody where you have confusion, you genuinely do have different speech issues on the other side, which are absent in the copyright context, I think. I mean you don’t have the same compelled speech concerns. I am a little bit wary of drawing parallels because there are different speech interests at sake.

Part F: Trademarks & Free Speech   501 MR. GRIFFITHS: I think the absence of appropriate defenses, for example, in the case of the European trademark regime,33 may force a court to step outside the regime and to say, “We have no alternative here. We have to seek an extrinsic solution here.” I think you see that happening in the European domestic cases concerning “Esso,”34 “Marlboro”35 and “Camel.”36 PROF. VISSER: There’s probably also the American trademark and copyright law, which is the main difference. In copyright law, the Supreme Court has actually said you now have fair use,37 so you are not going to get defenses based on freedom of speech. But you don’t have that yet in trademark law, so it’s a much more open field and much more scope for that. I think there is a question at the back. QUESTION: Spyros Maniatis from Queen Mary. If you have confusion, then it is not even a parody, it’s a bad parody, because you shouldn’t have confusion in parody. So the Wal-Mart case38 is really problematic if you have all the evidence of confusion. Apart from the corporate personality right, if you like, that you are suggesting, there is an issue there about the personality of Wal-Mart. If you have confusion, then it is clear infringement. QUESTION: Ed Vassallo again. I would respectfully disagree with that to the extent that in the United States 11 percent being confused is at times considered enough, 12 percent meets the minimum. So if nine out of ten people recognize it as a parody but 10 percent are confused, it would seem to me you would still be in a situation where the right of expression would trump the fact that there is some level of confusion, just as the Supreme Court has recently made it even clearer in the United States that the use of descriptive terms is permissible even if a registrant has taken that descriptive term and developed secondary meaning for it, and for its goods it designates source. So there are genuine conflicts between the two rights, I think. QUESTION: Paul Maier, President of the Boards of Appeal. I have to be prudent because I chaired the “Screw You” case39 in the Grand Board. There is one thing I would like to say. Gordon mentioned it, but maybe people did not really pay enough attention to that. We actually explicitly made the difference between accepting something to be registered and to qualify for trademark protection from free speech. We were not making a decision about allowing them to use that sign. Don’t forget that. We are not censors on the use. Freedom of expression has to be looked upon with great prudence. The second element I want to add is that you said that it is difficult in Europe to get harmonization. One of the reasons why we took this to the Grand Board is to have a large panel 33 See generally Andreas Rahmatian, “Trade Marks and Human Rights”, in P. Torremans (ed.), Intellectual Property and Human Rights 335–57 (Wolters Kluwer 2008) (Chapter 13), available at http://papers.ssrn.com/sol3/papers. cfm?abstract_id=1923803. 34 See Esso Plc. v. Greenpeace France, Case No. 04/12417, Cour d’appel (Fourth Chamber, Section A) [regional court of appeal] Paris, 4e ch., Nov. 16, 2005 (Fr.), [2006] E.T.M.R. 53 (rejecting the trademark and unfair parasitic competition claims, because the defendant’s use of the trade marks—print advertisements which read “Stop E$$O” to denounce attacks on the environment and the risks to human health caused by certain industrial activities—did not promote the marketing of products or services in competition with the claimant). 35 See Bundesgerichtshof [BGH] [Federal Court of Justice] Apr. 17, 1984 (F.G.R.), [1986] E.C.C. 1, 6–7 (holding that an anti-smoking campaign using the MARLBORO trademark was not an infringement—freedom of expression, and criticism, when materially justified and weighed against the economic interests of the mark holder, can justify a use of a mark in commerce that otherwise would be an infringement). 36 See Comité national contre les maladies respiratoires et la tuberculose v. Société JT Int’l GmbH, Case No. 1601, French Cour de Cassation (Second Civil Div., Oct. 19 , 2006), (2007) 38 IIC 357–58 (anti-smoking campaign aimed at adolescents which used the CAMEL brand’s camel cartoon character was not trademark infringement because means appropriate to the aim of public health had been used). 37 See Campbell v. Acuff-Rose Music Inc., 510 U.S. 569 (1994). 38 Smith v. Wal-Mart Stores, Inc., 475 F. Supp. 2d 1318 (N.D. Ga. 2007). 39 Case R-495/2005-G, Application of Kenneth (trading as Screw You) v. OHIM, [2007] ETMR 7 (Grand Board, July 6, 2006).

502  CHAPTER VI: TRADEMARK LAW of people looking into the case at hand. Normally, Boards of Appeal are constituted by three persons. The Rapporteur makes a draft, and if there is no agreement, there is a vote. Of course, having nine people sitting around a table—women, northern Europeans, southern Europeans, middle Europeans—that gave us more security as to where we would go. And last but not least, the U.K. Office has accepted to register exactly the same trademark for beer and T-shirts and we knew about that. What we said in the decision is “Whatever the U.K. office decided, we think this sign is a step too far and that it should not go into the CTM register.” PROF. VISSER: If there are no further comments, then on your behalf thank you to the panel for the discussion.

Part F: Trademarks & Free Speech   503

APPENDIX A

Freedom of Speech and Trademarks: Gauging Public Sensitivities or Curtailing Civil Liberties? Gordon Humphreys Alicante, 13 March 2009 Introduction Control is in the nature of registration authorities. In most trade mark systems, virtually anyone of sound mind and enjoying legal rights as a citizen of a recognised country can apply to protect any sign he or she chooses for any goods or services. But not all such applications can proceed to registration. Age-old prohibitions exist for registration of signs that are descriptive or generic for the goods or services they seek to protect or otherwise lack the requisite level of distinctiveness. Ironically, it is precisely those signs that are most attractive to the advertising industry since little investment is needed to convey a promotional message to target consumers. Much litigation centres on the dividing line between allusive or suggestive marks and those which are unregisterable. Exploring other avenues, advertising gurus have become increasingly interested in other attention seeking devices. Signs that seek to shock are particularly appealing to young people and are potentially a good source of income. But while it may, in some circumstances, “pay to be rude,” profane or distasteful for commercial purposes, legislation exists to place some limits on this practice. Basic Rights Article 10 of the European Convention for the Protection of Human Rights and Fundamental Freedoms (“ECHR”) recognizes that “everyone has the right to freedom of expression … without interference by public authority.” However, that article also acknowledges that such freedom brings with it “duties and responsibilities,” regulated by certain “formalities, conditions, restrictions or penalties” that are “necessary in a democratic society, in the interests of … the protection of … morals.” Freedom of expression exists and is enshrined in law but it is not unfettered. The freedom of expression circumscribed by the provisions of Article 10 also extends to commercial expression.40 In the specific context of Community trade mark law, that 40 See Casado Coca v. Spain, 18 Eur. Ct. H.R. 1 (1994), paragraphs 33–37, in which it was also acknowledged that such freedom should be circumscribed by certain limitations, including the prevention of disorder and the protection of morals. Considerations of morality and public order are also present in Article 53 (a) of the Munich Convention on European Patents, Convention on the Grant of European Patents, Munich, Oct. 5, 1973, reprinted in Gerald Paterson, The European Patent System 523–24 (1992); and Articles 30, 39, 46 and 58 of the EC Treaty, Treaty Establishing the European Community, Nov. 10, 1997, 1997 O.J. (C 340).

504  CHAPTER VI: TRADEMARK LAW circumscription of freedom is embodied in Article 7(1)(f) CTMR,41 which prohibits registration of signs that are “contrary to public policy or to accepted principles of morality.” In fact, the legislative need to uphold this particular public interest is not recent. This is borne out by the fact that the wording of Article 7(1)(f) CTMR mirrors that of Article 6 quinquies of the Paris Convention.42 Balancing Act While traders have a right to use the words and images of their choosing in the registration of trade marks, the Community legislature has placed a burden on OHIM43 to protect the “right of the public not to be confronted with disturbing, abusive, insulting or even threatening trade marks”44 on the Community Trade Mark register. While OHIM is master of that register, it falls to the Member States to regulate the use of both registered and unregistered marks. This may be done under the civil, administrative or criminal law of a Member State.45 Since registration is not a prerequisite for use, the legislature’s incursion into the territory of freedom of expression is somewhat relative. Nevertheless, “business may be unwilling to invest in large-scale promotional campaigns for trade marks which do not enjoy protection.”46 Thus, the practical effect of the legislative prohibition may be significant. It also follows that OHIM is called upon to act as a moral arbiter. In so acting it has a margin of discretion in determining what is contrary to accepted principles of morality.47 Since morality is seen as a fundamental interest of society, OHIM “should not positively assist people who wish to further their business aims by means of trade marks that offend against certain basic values of civilized society.”48 However, OHIM must act wisely in the way it applies such a prohibition. Too strict an approach would unduly curtail the right of freedom of expression. On the other hand, an overly liberal approach could cause outrage and moral indignation. What then is the juste milieu between these two extremes? Standards and Tests The Community trade mark regulations do not lay down any tangible test for the application of Article 7(1)(f) CTMR. Over the past few years, the OHIM’s Boards of Appeal have struggled to shed light on the notion of “accepted principles of morality.” While some marks are so distasteful that they may give offence to a broad spectrum of society, others may have double meanings or innuendos that may caste doubt on the likelihood of deep offense. It is evident that signs that depict gross obscenity or refer to a known terrorist have no place on the register. The Second Board thus had little difficulty rejecting two applications to register the sign “BIN LADIN” (in both Latin and Arabic script)49 for various goods and services in Classes 9, 12, 14, 18, 25, 28, 35 and 41. However, the complicating factor in this case was that the application to register the mark was filed four months prior to the events of 9/11. It Council Regulation (EC) No 40/94 of 20 Dec.1993 on the Community trade mark (“CTMR”), 1994 O.J. (L 11) 1. Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, revised at Stockholm July 14, 1967, 21 U.S.T. 1538, 828. U.N.T.S. 305. 43 Office for Harmonization in the Internal Market (Trade Marks and Designs). 44 Case R-495/2005-G, Screw You v. OHIM, [2007] ETMR 7, at [14]. 45 CTMR, supra note 41, Art. 106(2). 46 See Screw You, [2007] ETMR 7, at [15]. 47 Case R-176/2004-2, Falcon Sporting Goods v. OHIM (Sept. 29, 2004), at [28]. 48 See Screw You, [2007] ETMR 7, at [13]. 49 See Case R-176/2004-2, Falcon Sporting Goods v. OHIM (Sept. 29, 2004) (refusal to register mark BIN LADEN in latin script) and Case R-177/2004-2 (refusal to register mark BIN LADEN in arabic script) [hereinafter BIN LADEN]. 41 42

Part F: Trademarks & Free Speech   505

was argued that the name “BIN LADIN” was that of a reputable Saudi company that had done business in various parts of Europe over a number of years. At the date of filing, the name “BIN LADEN” was not known to the general public and would only have been recognizable to experts on Islamic terrorism. The Board found that the trade mark application was manifestly contrary to public order and morality, since acts of terrorism are absolutely contrary to the ethical and moral principles recognized in the Member States of the European Union and all civilized nations.50 The name would be known by the public as that of the leader of the Al Quaeda organization and had universally notoriety as a result of 9/11. Fundamental considerations of human dignity, liberty, equality and solidarity prevented affording legal protection to a name that is that of the leader of a terrorist group, responsible for the death of thousands of persons. There could be no doubt that society as a whole would be deeply offended and scandalized if the mark applied for were to be registered in the Community.51 Even if the name were a trade name, this would not prevent the application of Article 7(1)(f) CTMR. On slightly less firm ground, the Board stated that the sign was widely known as the name of a terrorist even before 9/11 because of the acts of terrorism perpetrated on 7 August 1998 in Nairobi (Kenya) and Dar-es-Salam (Tanzania) and resulting in a UN Security Council Resolution in 1999. Accordingly, there was no question of retrospective application of absolute grounds.52 On the other hand, the Fourth Board in its decision of 25 March 2003—DICK & FANNY, doubted that “the mere fact that the two words have, alone or in combination with each other, a sexual connotation should not be regarded as “offensive” … [because] these words merely designate things but do not transmit any message.”53 The sign simply designates anatomical parts without proclaiming an opinion, containing an incitement or conveying an insult. As such, the sign raises “a question of taste, but not one of public policy or morality.”54 Furthermore, the Board was influenced by the fact that the particular combination could reduce any sexual innuendo of informal speech and could instead allude to a couple (just as Tom & Jerry or Bonnie & Clyde in an English-language context). Picking up on the idea of “context,” in its decision of 18 July 2006—REVA,55 the Second Board noted that the meaning of the word “reva” in Finnish was not clear cut. While it could be regional slang in the Helsinki area for female genitalia, it could also have less offensive meanings. In any event, when seen in the context of a mark for an electric car, it “does not look like a form of words which is intended to insult or shock. At worst the mark might carry an element of unintentional bad taste, but nothing more.”56 Thus no one in Finland would be likely to believe that the trade mark applicant was being intentionally abusive, even if some consumers could feel “embarrassed” or “uncomfortable” and others, “amused” or “puzzled.” Although the Boards recognized quite early on that assessment of “acceptable principles of morality” involved shifting paradigms, clarity was only brought to the problem in the Grand Board’s decision—SCREW YOU.57 In that decision, the Grand Board recognized that words See id. para. 17. It is thus regrettable that names such ESCOBAR (Pablo Escobar, a Columbian drug trafficker), POT (Pol Pot, Cambodia), LENIN, CASTRO, MAO and DADA (Idi Amin Dada, Uganda) have found there way on to the Community register. 52 Both decisions were appealed to the Court of First Instance of the European Communities. However, the appeal was subsequently withdrawn. There must, none the less, be some doubt whether the name “BIN LADIN”, written in Arabic, would have been understood by ordinary Community consumers and thus have been able to give offence. 53 R-111/2002-4, at para. 9. 54 Decision in DICK & FANNY, supra para. 10. 55 R-558/2006-2, REVA. 56 Id. para. 11. 57 Decision of 6 July 2006, supra. In the BIN LADIN decision, the Second Board recognized that standards of public morality varied from country to country. That decision also had to overcome the problem of temporal considerations of morality (in that case the events of 9/11). 50 51

506  CHAPTER VI: TRADEMARK LAW that “would never have been intentionally broadcast on prime-time … television a few decades ago are now considered permissible.”58 Looking at the question of the level of vulgarity, profanity or insult of the expression for which registration was sought, the Grand Board limited its analysis to the perspective of citizens of the United Kingdom and Ireland.59 It noted that this same form of words had in more recent times been broadcast on British television in the soap “EastEnders” and the animated show “The Simpsons.” But although public swearing and cursing is undoubtedly more acceptable now than it was 20 or 30 years ago, the Grand Board believed that when used in the context of art or literature, circumscription of such use would be made with great reluctance in democratic and open societies. Accordingly, the fact of the expression at issue having been broadcast on early evening television was not conclusive. Having established, by reference to dictionaries that the sign applied for was generally recognized as a vulgar interjection, it looked more specifically at the word from the perspective of British and Irish “citizens with a normal level of tolerance and sensitivity … whose values and standards are representative of society as a whole”60 to see whether it would be viewed by them as offensive and objectionable. It concluded that for ordinary people, and in particular, adults with young children and the elderly, the words would be “offensive and objectionable, especially if they encountered them as a trade mark in ordinary shops to which children have access, or if they were advertised on television at a time when children were likely to be watching or if they were displayed prominently on clothing worn in the street or visible in shop windows.”61 The Grand Board came to the realization that, when considering questions of moral offence or shock, the identity of the “ordinary citizen” depends on the goods and services at issue. It is evident that for ordinary goods and services sold and supplied by ordinary outlets and suppliers, the ordinary person would be concerned by the mark. Accordingly, Article 7(1) (f) CTMR prevented registration of goods in Classes 9, 25, 28 and 33. On the other hand, a number of the goods for which protection was claimed under the mark were either, by their very nature, intended for consumers who would be less easily shocked, or, would be retailed in outlets frequented by people less likely to take offence at the mark in question. Applying these criteria, it was obvious that the purchasers of “sex toys,” found only in sex shops or specialist web sites, would “by definition [be] unlikely to be offended by a trade mark which contains crude, sexually charged language.”62 Similarly, although “condoms” are sold in supermarkets and even advertised on television (at times when children are not likely to be watching), the Grand Board considered that prospective purchasers would be “unlikely to be offended by a term with crude sexual connotations.”63 Somewhat more controversially, the Grand Board imposed a rewording of the specification of “breast pumps” and “artificial breasts,” rejecting registration of these items under Article 7(1)(f) CTMR in so far as they were not of a type normally sold exclusively in sex shops. The reasoning was simply that while lactating mothers and mastectomy patients would be deeply offended by the mark applied for, sex shop customers would not. Conclusion Balancing freedom of commercial expression in trade mark matters against the need to protect accepted principles of morality is a delicate operation. It is one which is imposed See id. para. 23. The existence of an absolute ground in one part of the Community is enough to prevent registration of a Community Trade Mark pursuant to Article 7(2) CTMR. 60 See Decision of 6 July 2006, supra para. 26. 61 See id. para. 26. 62 See id. para. 29. 63 See id. 58 59

Part F: Trademarks & Free Speech   507

by legislation and therefore is mandatory in nature. Considerations of reasonableness are paramount in this balancing exercise and depend on national contexts, the goods and services concerned, temporal contexts as well as, more generally the need to constantly measure and check liberalism versus conservatism. The perceived intention of the trade mark applicant can, in very specific circumstances relating to minority languages, also be a further relevant consideration.

Chapter VII

Trade Law Part A: Multilateral and Bilateral Relations Moderator Prof. Hugh C. Hansen

Fordham University School of Law (New York, N.Y.) Speakers Hannu Wager

Luc Devigne

Counsellor, Intellectual Property Division, World Trade Organization (Geneva)

Head of Intellectual Property and Public Procurement, DG Trade, European Commission (Brussels)

Michael S. Keplinger

Stanford McCoy

Deputy Director General, World Intellectual Property Organization (Geneva)

Assistant U.S. Trade Representative for Intellectual Property and Innovation, U.S.T.R. (Washington, D.C.)

Panelists Prof. Robert Burrell

Visiting, Benjamin N. Cardozo School of Law; TC Berne School of Law at the University of Queensland, Australia

James Love

Director, Knowledge Ecology International (Washington, D.C.)

Michael Shapiro

Senior Counsel, Office of Intellectual Property and Enforcement, U.S. Patent and Trademark Office (Alexandria, VA) PROF. HANSEN: We will start off the morning with our multilateral and bilateral relations panel. The speakers’ affiliations and bios are in your materials. They are also online. This is so we can save the most time for our speakers and our discussion.

510  CHAPTER VII: TRADE LAW We have excellent speakers and panelists and will start off with Hannu Wager, Counsellor in the Intellectual Property Division of the World Trade Organization. Hannu has been a major IP player in the WTO many years. MR. WAGER: Thank you. I would first like to say a few words about the challenges that the present financial and economic crisis presents to the WTO and then about the status of the Doha Round and developments in the area of dispute settlement, and finally turn more specifically to our experience and approach to regional and bilateral agreements. A recent report by WTO economists forecast that the volume of world trade is to contract this year by 9 percent.1 This is mainly driven by the falloff in demand as all regions of the world economy are slowing at once. Another important factor is the shortage of trade finance. Under these circumstances, it is particularly important that governments should avoid policies that restrict international trade. At its meeting in London earlier this month, the G20 leaders reaffirmed their commitment to refrain from new barriers to trade. Furthermore, they called on the WTO to monitor and report publicly on their adherence to this undertaking.2 This has emphasized the importance of some of the WTO’s core functions that normally get less public attention, namely transparency and monitoring functions. At its meeting in February this year, the WTO Trade Policies Review Body initiated a process of monitoring recent trade developments associated with the current global financial and economic crisis.3 The report issued under this process at the end of March notes that “[t]here is no indication of an imminent descent into high intensity protectionism.”4 The multilateral trade rules built over the past sixty years continue to provide a strong defense against that happening. The danger today is of an increasing incremental build-up of restrictions that could slowly strangle international trade. Intellectual property has not been at the center of this additional monitoring effort, but the TRIPS Council, together with all other relevant bodies, has been invited to consider ways to improve the timeliness and completeness of notifications and other information flows on trade measures falling within its area of responsibility.5 It would appear that the current economic crisis is only having a limited direct impact on the international debate on IP. This debate has its own dynamics. The role of the TRIPS Agreement6 continues to be to provide a common platform that enables and promotes trade in IP. However, it appears that in the current economic difficulties IP industries are likely to lay even more emphasis on the economic value on their IP assets in international trade. 1 See Director-General Pascal Lamy, World Trade Org. (WTO), Report to the TPRB from the Director-General on the Financial and Economic Crisis and Trade-Related Developments, JOB(09)/2, para. 1 (Mar. 26, 2009), available at http://www.wto.org/english/news_e/news09_e/trdev_dg_report_14apr09_e.doc [hereinafter WTO Economic Crisis Report]. 2 See G20 London Summit, “The Global Plan for Recovery and Reform”, ¶ 22, (Apr. 2, 2004), available at http:// www.londonsummit.gov.uk/resources/en/PDF/final-communique. 3 See Lamy, “We Must Remain Extremely Vigilant”, Feb. 9, 2009, http://www.wto.org/english/news_e/news09_e/ tpr_09feb09_e.htm (“[T]he WTO membership has a responsibility to monitor policy developments that are having an impact on international trade and on the multilateral trading system … . Switching on the radar to provide ourselves with as much information and intelligence as possible about trade-related policy developments around the world is crucial in current economic circumstances … .”). 4 WTO Economic Crisis Report, supra note 1, para. 2. 5 Id. at para. 13. 6 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M.1197 (1994), available at http://www.wto.org/english/tratop_e/ trips_e/t_agm0_e.htm [hereinafter TRIPs Agreement].

Part A: Multilateral and Bilateral Relations  511

As regards the Doha Round of trade negotiations, the G20 leaders stated that they remained committed to reaching an ambitious and balanced conclusion to the Round.7 This is expected to give impetus to the negotiations that were launched in 2001 but have not moved forward as had been hoped. The issues that are at the forefront of the Round are agricultural subsidies and tariffs and industrial tariffs. There are also some IP issues on the table, namely those related to geographical indications and the so-called disclosure proposal. However, unlike during the Uruguay Round,8 they are not at the core of the Round. As regards recent developments on these IP issues, I will develop them in some detail in a panel on trade policy and IP rights tomorrow morning. In this context, I should also underline the importance of the WTO dispute settlement system in maintaining stability in international trade relations and in ensuring that member governments respect the commitments they have made and do not revert to protectionist policies. As regards TRIPS matters, there have been two recent cases. The one that has received a fair amount of attention is the complaint by the United States concerning China’s enforcement of IP rights. The Panel’s Report was adopted without an appeal on 20 March this year.9 Since there will be a session on the case tomorrow afternoon, I do not need to go into any details. Another case that may have escaped the attention of most IP experts is the complaint by the European Commission concerning China’s measures affecting financial information services.10 Although the case was mainly about GATS—that is, the services agreement—the EC also raised concerns about the protection of trade secrets belonging to foreign suppliers of financial information services.11 This dispute was settled. In the joint notification on the settlement, dated 9 December 2008, China confirmed its intention to protect such information.12 As you know, during the Uruguay Round negotiations, the benefits flowing from TRIPS were considered as an essential part of the overall balance between all negotiation areas under the single undertaking. This same overall balance is also reflected in the dispute settlement system that, subject to a number of conditions, provides for the possibility of cross-retaliation across different agreements in case of noncompliance with rulings made. To date, there have been two cases of cross-retaliation in the area of TRIPS due to violations under GATT13 [General Agreement on Tariffs and Trade] and GATS14 [General Agreement on Trade in Services]. In 2001 Ecuador was authorized to retaliate in respect of the EC regime for the importation of bananas,15 and in 2007 an arbitrator determined that Antigua and Barbuda could request authorization in respect of U.S. measures affecting the cross-border supply of gambling services.16 However, in neither of these cases has such cross-retaliation been implemented. 7 G20 London Summit, “The Global Plan for Recovery and Reform”, ¶ 23, (April 2, 2004), available at http:// www.londonsummit.gov.uk/resources/en/PDF/final-communique. 8 TRIPs Agreement, supra note 6. 9 See Panel Report, China—Meas­ures Affecting the Protection and Enforcement of IP Rights, WT/DS362/1 (Jan. 26, 2009). 10 Request for Consultations by the European Communities, China—Measures Affecting Financial Information Services and Foreign Financial Information Suppliers, IP/D/27S/L/319WT/DS372/1 (Mar. 3, 2008). 11 Id. at para. 3. 12 Memorandum of Understanding Between the People’s Republic of China and the European Communities Regarding Measures Affecting Foreign Suppliers of Financial Information Services, para. 3, WT/DS372/4 (Dec. 9, 2008). 13 General Agreement on Tariffs and Trade, Apr. 15, 1994, 1867 U.N.T.S. 190, 33 I.L.M. 1153. 14 General Agreement on Trade in Services, Art. XIV, Apr. 15, 1994, 1869 U.N.T.S. 183, 33 I.L.M. 1167. 15 See Understanding on Bananas between the EC and the United States of 11 April 2001 and Understanding on Bananas between the EC and Ecuador of 30 April 2001, WT/DS27/58 (July 2, 2001). 16 Decision by the Arbitrator, United States—Measures Affecting the Cross-Border Supply of Gambling and Betting Services - Recourse to Arbitration by the United States under Article 22.U, WT/DS285/ARB (Dec. 21, 2007).

512  CHAPTER VII: TRADE LAW Currently, there is one case being reviewed by an arbitrator, namely Brazil’s request to cross-retaliate in respect of U.S. subsidies on cotton.17 Let me now focus more specifically on the topic of multilateral and bilateral relations. In the recent years, regional trade agreements have greatly increased in number and have become an important element in WTO members’ trade policies and development strategies. To date, 435 regional trade agreements have been notified to the GATT and WTO, 243 of which are currently in force.18 Such agreements can be seen as useful stepping stones for further liberalization at the multilateral level. However, given their recent proliferation, the balance of opinion has grown increasingly concerned about the complexity of this network of agreements, often described as a “spaghetti bowl.”19 In order to enhance transparency and improve understanding of their effects, the WTO adopted in December 2006 a new Transparency Mechanism for Regional Trade Agreements.20 The Mechanism also put in place a system of early announcements of any RTAs still under negotiation.21 Furthermore, the Secretariat has developed a database on RTAs, which is available to the public.22 Some of these RTAs contain provisions on intellectual property that are sometimes characterized in relation to the TRIPS Agreement either as clarifications or as “TRIPS-plus” provisions.23 Seen from the perspective of the TRIPS Agreement, the point of departure is Article 1.1, which allows Members to implement in their law more extensive protection than required by the Agreement provided that such protection does not contravene the provisions of the Agreement.24 This can be done either for purely domestic reasons or because they conclude international agreements in this regard, whether bilateral, regional, or multilateral. A concern sometimes expressed is that IP provisions in RTAs risk undermining the flexibilities available under the TRIPS Agreement, in particular those relating to access to medicines that were agreed in the Doha Declaration on the TRIPS Agreement and Public Health,25 as well as the use of the so-called Paragraph 6 system,26 which enables production and export of pharmaceutical products under compulsory license to meet the needs of countries with inadequate domestic manufacturing capacity. At the same time, I understand that some “developed country members participating in such [free trade agreements (FTAs)] have reconfirmed their commitment to access to medicines for all, stating that [the relevant] provisions are not meant to affect the ability of 17 Decision by the Arbitrator, United States—Subsidies on Upland Cotton - Recourse to Arbitration by the United States under Article 22.6 of the DSU and Article 4.11 of the SCM Agreement, WT/DS267/ARB/1 (Aug. 21, 2009); Decision by the Arbitrator, United States—Subsidies on Upland Cotton—Recourse to Arbitration by the United States under Article 22.6 of the DSU and Article 7.10 of the SCM Agreement, WT/DS267/ARB/2 (Aug. 31, 2009). 18 WTO, Regional Trade Agreements: Facts and Figures, http://www.wto.org/english/tratop_e/region_e/ regfac_e. htm (last visited Mar. 23, 2010). 19 Id. 20 General Council, Transparency Mechanism for Regional Trade Agreements, WT/L/671 (Dec. 14, 2006), available at http://docsonline.wto.org/imrd/directdoc.asp?DDFDocuments/t/WT/L/671.doc. 21 Id. at ¶ 1. 22 Id. at ¶ 21. 23 See David Vivas-Eugui, “Regional and Bilateral Agreements and a TRIPS-Plus World: the Free Trade Area of the Americas (FTAA)”, TRIPS Issues Papers 1, available at http://www.wto.org/english/tratop_E/region_e/sem_nov03_e/ vivas_eugui_paper_e.pdf. 24 TRIPs Agreement, supra note 6, Art. 1.1. 25 Doha Declaration on the TRIPS Agreement and Public Health, WT/MIN(01)/DEC/2 (2001), available at http:// docsonline.wto.org/imrd/directdoc.asp?DDFDocuments/t/WT/Min01/DEC2.doc. 26 See Decision of General Council, Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health, WT/L/540 & Corr. 1, at para. 2 (Aug. 30, 2003), available at http://www.wto.org/ english/tratop_e/trips_e/implem_para6_e.htm.

Part A: Multilateral and Bilateral Relations  513

parties to take measures to protect public health” consistently with the WTO instruments in question.27 While WTO members remain free to adopt higher standards of protection, the WTO has a role, as I described earlier, in serving as a forum to monitor the content of FTAs and offering platform for discussion. The final point I would like to make is that, unlike the GATT and GATS agreements, the TRIPS Agreement does not contain any general exception on FTAs. Therefore, as regards the IP provisions in such agreements, they generally have to be implemented on a most-favored nation (MFN) basis. TRIPS Article 4(d) contains one exception to this rule: members do not need to provide MFN treatment pursuant to agreements related to the protection of IP which entered into force prior to 1 January 1995 and have been notified to the TRIPS Council.28 To date, we have received forty-nine notifications of such agreements from thirty-four members. Thank you. PROF. HANSEN: Thank you, Hannu. Comprehensive and interesting. Francis Gurry, the new Director General of the WIPO was going to be here, and we were very excited about that, but at the last minute he couldn’t come. His replacement, Mike Keplinger is right now walking down the aisle very dramatically—something I approve of, by the way. Mike is our next speaker—do you want to catch your breath? Why don’t you sit down, relax? I think we’ll just go straight to Luc Devigne. He is the Head of Intellectual Property in DG Trade in the European Commission. Based in Brussels we are glad that he could join us here in Cambridge. MR. DEVIGNE: Good morning. I have to apologize, because I have a cold, and so if I sound even more Inspector Clouseau type than usually, it is not 100 percent my fault. I am very pleased and honored to have been invited to this prestigious conference, and even if to speak in nine minutes and thirty seconds on what the European Union does worldwide in terms of IP, is pretty much a challenge. PROF. HANSEN: It’s nine minutes because it’s worldwide. If it was just going to be Europe, it would have been six. [Laughter] MR. DEVIGNE: You just stole five seconds. That’s two countries less now. [Laughter] PROF. HANSEN: That will teach you to complain. MR. DEVIGNE: I didn’t know this was going to be a court trial as well. Before addressing the question of what we do, I think it is important to, in a nutshell, address the issue first of why we do it. Well, two simple reasons with which you are all familiar. First, IP is, of course, a very key component of the EU trade policy. As we know, it is basically the main, if not the only, competitive advantage of EU business. We had a saying in French in the 1970s after the oil shock, there was a campaign of “En France on n’a pas de pétrole, mais on a des idées” (“In France we don’t have oil, but we have ideas”).29 We still don’t have oil, for sure, and apart from the United Kingdom there is no one else in the European Union that has oil, and so we must have ideas. 27 WTO News, “Access to Medicines Has Been Improved”, Dec. 9, 2008, http://www.wto.org/english/news_e/ sppl_e/ sppl111_e.htm. 28 TRIPs Agreement, supra note 6, Art. 4(d). 29 Tracy Corrigan, “We Must Entrust France with our Nuclear Energy”, Aug. 12, 2008, available at http://www. telegraph.co.uk/finance/comment/tracycorrigan/2794641/We-must-entrust-France-with-our-nuclear-energy.html.

514  CHAPTER VII: TRADE LAW Secondly, the phenomenon of counterfeiting is growing and is a problem—not only an economic problem, but of course also a consumer problem, and even a political problem. I don’t give any figures except the one of 79 million counterfeit/fake goods intercepted by European Customs from the last available statistics in 2007 because this will be addressed in another session.30 So, after having said why we do something, what do we do? Since the topic is multilateral and bilateral, I will treat that in three parts, adding plurilateral. Multilateral, starting by the most important, which is the WTO TRIPs Agreement, because it is still the only agreement where we have compulsory dispute settlement.31 First of all, we lead the debate on enforcement, even if it is a difficult one, as you can imagine, with certain members refusing to have this topic being put on the agenda. And of course, we have also two very important issues in the Doha Development Agenda, which are IP-related, one regarding GIs [geographical indications],32 another one regarding CBD [Convention on Biological Diversity].33 I only mention, pro memoria, the other international forum where we are active, because it will be dealt with by other colleagues, and Margot Fröhlinger will address this afternoon,34 which are of course WIPO, with the important issues like patent reform, etc., that you all know; WHO and WCO, which of course have an important role in terms of fighting counterfeit. I come to the second part, which is the bilateral activities. Here I would like to mention three major activities that we have. First of all, we have a cooperation with what we call “like-minded countries,” or countries encountering the same kind of problems as us: the United States—Stan is here—with whom we do this cooperation; also Japan. Secondly, bilaterally we have, of course, very important activities for bilateral agreements. We have bilateral agreement negotiations ongoing with Korea, India, Central American countries, the Andean countries, the ASEAN countries, Libya, Iraq; Canada is due to start, etc.—a long list—not to mention Ukraine, which is pretty well advanced. And then, we have to renew what we call the Partnership Cooperation Agreement35 with countries like China and Russia, which are also very important. I don’t have the time, of course, to go into the details of all these agreements here. Our main philosophy is definitely not only to improve the legislative framework of these countries in terms of IP on the basis of our EU acquis, our European legislation, but also very much to focus on enforcement measures because we know this is where the matters are the more important ones. Particularly, fifteen years after the TRIPs Agreement, we can now have some experience of what works and what does not work. Third, and last of our bilateral activities: It is what we call structured dialogues with the key trading partners—that is to say with the countries which have been identified as our priority countries because of the magnitude of the problems of IP enforcement or lack of IP respect that we have. We have a number of these dialogues. “Dialogue” is the word, but it is definitely See also Chapter VII.B, “Enforcement and Counterfeiting”, infra this volume. See Ryan P. Johnson, “Steal this Note: Proactive intellectual Property Protection in the People’s Republic of China”, 38 Conn. L. Rev. 1005, 1019 (2006) (“[T]he ‘teeth’ provided by the DSU are intended to make the enforcement of IPRs compulsory, not merely discretionary.”). See generally Understanding on Rules and Procedures Governing the Settlement of Disputes (“DSU”), Marrakesh Agreement Establishing the World Trade Organization, Annex 2, Art. 22, 1869 U.N.T.S. 401, 33 I.L.M. 1226 (1994). 32 World Trade Organization, Ministerial Declaration Adopted on 14 November 2001, para. 18, WT/MIN(01)/ DEC/1 (2001), available at http://www.intracen.org/btp/dda/dda_doc/doha_english.pdf. 33 Id. at para. 19. 34 See Chapter I, “IP Policy and the European Union”, supra this volume. 35 Agreement on partnership and cooperation establishing a partnership between the European Communities and their Member States, of one part, and the Russian Federation, of the other part, 1997 O.J. (L 327) 3. 30 31

Part A: Multilateral and Bilateral Relations  515

much more an ongoing negotiation or enforcement forum. We have that with countries like China, Ukraine, Russia; some Latin American countries like Brazil, Argentina, and Chile; Mexico; and we are definitely trying to open one with Turkey. Now, these dialogues are definitely result-oriented. This is very important. For us dialogue is a means to reach an objective. The objective is to improve IP enforcement or IP legislation or both, and dialogue is not an objective per se. So we want this to be very result-oriented, which means that we need the cooperation of the private sector. We need the involvement of the right holders. We invite the right holders to most of the dialogues when the third-country governments allow it, which is the case in most countries, which I think is a good opportunity sometimes to reestablish or to establish relationships with authority with whom right holders do not always have a good relationship, and the governments can also see that the European Union is strongly backing its industry here. The last of my three topics is plurilateral activities. I would like to mention two. One is what is going on in the G8. I will just mention the Heiligendamm Process,36 which is the opening of basically G8 to the five largest emerging economies on intellectual property and innovation. Also, the statement of the leaders to fight counterfeits. The last plurilateral activity is of course the negotiation you have heard of, which is the ACTA Treaty,37 which we started with like-minded countries, but we definitely hope of course to enlarge the participants once it is signed to other countries and we hope it becomes a standard. On this ACTA Treaty you will find information also on our Web site. It revolves around better cooperation among various administrations, better legislation enforcement practices.38 So, in a nutshell and to summarize in two minutes and eleven seconds what I have just said, I would like to say three things. First, I understand very much the frustration of the industries, some of them being present in the room, with the lack of what they perceive as progress being achieved. But Rome wasn’t built in one day. We do see progress in some areas. We do see progress in concrete cases being resolved. We do see legislative changes being adopted further to our requests. We do see that. Secondly, as I have said, we need the cooperation of the right holders. I just happened to have two preparation sessions of bilateral negotiations with members of my team last week. They came back saying, “Well, we don’t have sufficient industry input concerning this country.” So at the same time one can’t complain in general terms we have problems in this country and at the same time refuse to give concrete examples, because if you ask general questions you will get general answers and you will not make any progress. I do understand, of course, issues of confidentiality for certain cases, which of course can be dealt with and can be protected. Last—and this is probably the most important message I want to deliver—IP has definitely become a very top priority of the trade policy of the European Union.39 You can see that it is raised at each and every level, including the highest one, in all forums, summits, ministerial meetings, etc., that we have. It is there to stay. It will not go away. I think it is not too much to ask from countries for whom we are very often the first trading partner and the first importer 36 See G-8, Heiligendamm Process, http://www.g-8.de/Content/EN/Artikel/__g8-summit/2007-06-08-heiligendammprozess__en.html. 37 See Elec. Frontier Found. (EFF), Anti-Counterfeiting Trade Agreement, http://www.eff.org/issues/acta (last visited Mar. 24, 2010); La Quadarature Du Net, New ACTA Leak: 01/18 Version of Consolidated Text, http://www. laquadrature.net/en/0118-version-of-acta-consolidated-text-leaks (includes a discussion of the ACTA as well as the recently leaked text of the ACTA). 38 See Electronic Frontier Found. (EFF), Anti-Counterfeiting Trade Agreement, http://www.eff.org/issues/acta. 39 See European Comm’n, Trade Topics: Intellectual Property, http://ec.europa.eu/trade/creating-opportunities/ trade-topics/intellectual-property/index_en.htm.

516  CHAPTER VII: TRADE LAW that they respect the only competitive advantage that we have. At least this is our opinion and we remain committed to it. Thank you very much. PROF. HANSEN: Thank you, Luc. Protecting IP on an international basis is not an easy task and even harder if you don’t get the support you need. And 7 million counterfeit items being seized by customs officials in one year is an amazing statistic. It’s a tough world out there for IP owners and those in government who support them. Michael Keplinger is the Deputy Director General of WIPO. He has been there for about two and a half years. With a long illustrious career at the USPTO, Mike is the senior statesman of U.S. government IP officials. He moved from Washington to D.C. to Geneva to take this position. If there is anyone who can come in and fill in for Francis Gurry here, it’s Mike. MR. KEPLINGER: Thank you very much, Hugh. It’s certainly a pleasure to be here today and to see so many friends. I apologize for my late arrival, but the weather somehow wasn’t cooperating very well this morning and what proves to be a fairly short walk from the hotel turns out to be a long taxi ride. Let me get started by talking a little bit about what the future holds for the WIPO. It certainly is a great pleasure to have a new leader at WIPO. Francis Gurry, our new Director General, has been with WIPO for many years and has directed the patent operation most recently. Francis was elected in October to take over and has immediately started on a complete overhaul of the organization.40 The restructuring of the organization, I think, is a very good thing. It will be more efficient, more goal-directed, and more accountable for its actions. It is certainly something that is long overdue for WIPO, as it is for many UN organizations. I won’t talk today about what is going on in patents because it’s not my area. My area is copyright—that’s what I’m responsible for at WIPO, and so I would like to focus on what is going on in the copyright world and what may be happening in the next few years. First, let’s think a little bit about the structure of the organization. The organization’s work right now is carried out by a group of so-called standing committees. I am responsible for the organization of the Standing Committee on Copyright41 and the Advisory Committee on Enforcement,42 which meet once to twice a year to take up various topics. Right now the emphasis in the copyright area is on limitations and exceptions. In the enforcement area, the topics have to do with improving respect for intellectual property. This is a new direction that Francis has initiated, and I think it is very, very important. Let me talk about the limitations and exceptions a bit and also a bit about what is going on in the area of what I’ll still call enforcement. In the area of limitations and exceptions, we have carried out a studies looking at limitations and exceptions in a number of areas in copyright.43 We have done these studies with the use of outside consultants, and we are just in the process of commissioning a new set of studies to focus on limitations and exceptions in the area of education, which would include exceptions for distance learning. 40 See AWAPatent, “WIPO’s Francis Gurry: ‘We Aim to Regain Our Crown’”, 4 AWA Info. 1 (2008), available at http://www.wipo.int/about-wipo/en/dgo/interviews/pdf/gurry_awa_08.pdf. 41 “The Standing Committee on Copyright and Related Rights (SCCR) was set up under the 1998-1999 biennium in order to examine matters of substantive law or of harmonization in the field of copyright and related rights.” See WIPO, Standing Committee for Copyright and Related Rights, http://www.wipo.int/copyright/en/sccr.html. 42 “The Committee focuses on the following objectives: coordinating with certain organizations and the private sector to combat counterfeiting and piracy activities; public education; assistance; coordination to undertake national and regional training programs for all relevant stakeholders and exchange of information on enforcement issues.” 43 See WIPO, Copyright and Related Rights, Limitations and Exceptions—Studies and Presentations http://www. wipo.int/copyright/en/limitations/studies.html (various studies exploring the different limitations and exceptions to copyright in many different countries, with almost half of the studies being prepared in 2009).

Part A: Multilateral and Bilateral Relations  517

At our last Standing Committee on Copyright, we had presentations by the persons who have conducted our various studies on limitations and exceptions, which were very well received.44 It’s something that the developing countries have been pushing for. There is a great deal of concern—and certainly the evidence from our studies show it—that while most developed countries have in their laws well-developed sets of limitations and exceptions to deal with issues like copying by libraries,45 copying for educational purposes,46 limitations and exceptions dealing with technological measures of protection that are applied,47 in developing countries these are largely absent. One of the areas that has surfaced as an area to which attention will be drawn are limitations and exceptions for the blind to enable various works to be prepared in editions that are usable by the blind or visually impaired persons—large-print versions, Braille versions, talking books, the like. There have also been calls in the Standing Committee on Copyright for work towards a treaty which would deal especially with limitations for the blind and physically handicapped.48 But one thing that we have become convinced of is that the problem in dealing with the needs of the visually impaired is not only a matter of limitations and exceptions. An enabling legal environment is important, but it’s also a matter of practical arrangements. It’s a matter of establishing trust relationships among publishers and among the blind, the organizations that service the needs of the blind, which would enable works to be produced in forms that are suitable for use by visually impaired persons. And limitations and exceptions are not the only answer. It’s a matter of building practical relationships, of building licensing arrangements, of establishing these principles. I imagine you may hear something a little bit different from some of the people on the panel, but in my view WIPO can play a very important role here by establishing and building on a process that we’ve started of stakeholder platforms, where we try to bring together in this instance the blind and the publishers and the technologists to try to work out practical arrangements for finding ways to bring the works in a timely manner to meet the needs of the blind. That is something that we are working on, it is work that will be accelerated—very much a “soft law” approach, not aimed towards a treaty, which would take years to negotiate and really wouldn’t in and of itself solve the problems. I’ve got a little less than three minutes left to talk about enforcement. One of the things that Francis did that I think is very important is he has re-launched our work in enforcement to focus on building respect for intellectual property. It’s something that I personally agree with very, very much. Until we can convince developing countries that there is something in it for them, all of the pressure that you can bring to bear through the TRIPs Agreement, through WTO, through whatever, will do little good until the developing world sees that there is something in it for them. Some of the work that we are doing that is under my jurisdiction is a series of economic studies that focuses on the contribution of the copyright industries to national economies.49 It 44 WIPO, Standing Committee on Copyright and Related Rights, “Informative Sessions on Limitations and Exceptions and on Audiovisual Performances”, SCCR/17/INF/3 Prov. (Nov. 3, 2008), available at http://www.wipo. int/edocs/mdocs/copyright/en/sccr_17/sccr_17_inf_3.pdf. 45 See, e.g., 17 U.S.C. § 108; Canada Copyright Act, R.S.C., 1997, c. 24, s. 18, para. 30.4. 46 See, e.g., 17 U.S.C. § 110; Canada Copyright Act, R.S.C., 1997, c. 24, s. 18, para. 29.5. 47 See, e.g., 17 U.S.C. § 110(2). 48 See WIPO, Standing Committee on Copyright and Related Rights, Eighteenth Session Draft Report, SCCR/18/7 Prov. (Oct. 1, 2009), available at http://www.wipo.int/edocs/mdocs/copyright/en/sccr_18/sccr_18_7_prov.pdf (“[A] new document was in the process of being distributed, concerning a proposal by the delegations of Brazil, Ecuador and Paraguay for a treaty on exceptions for the visually impaired.”). 49 See WIPO, National Studies on Assessing the Economic Contribution of the Copyright-Based Industries, http:// www.wipo.int/sme/en/documents/guides/copyright_industries.htm.

518  CHAPTER VII: TRADE LAW is something that has gotten the attention of the developing world, and it is something where they are finding out that there is something in it for them. Developing countries have cultural vibrant activities. They may not have a Hollywood-style motion picture industry—India does, but many others do not—but they have small cinema industries that service the needs of their own population and they have music industries. These industries are being devastated in many of these countries by piracy. The economic studies that we are carrying out look into this. I have certainly seen in the countries where they have been carried out that they often have resulted in a real turnaround in that government’s thinking about how you go about protecting intellectual property in order to help them further develop their cultural industries. So that is the trend that we are going to pursue. Another thing that is under my jurisdiction is collective management. Collective management is also very important, and it is very important for developing countries, because it is a way that they can see that their authors, their performers, can make money out of their creative activities.50 It is a way to return income to them. It is something that is very important. So we are in WIPO working hard to change the direction of the organization, to put it back on focus as an organization that is concerned not with the protection of intellectual property as an abstract idea for its own sake, but the way it can be a tool for development, the way it can be a tool for economic progress. I thank you very much for the reminder that my time is up. PROF. HANSEN: Thank you very much, Mike. It will be interesting to see what happens with exceptions and limitations initiative at WIPO and with the Development Agenda in general. Stan McCoy is the Assistant U.S. Trade Representative for Intellectual Property and Innovation at the U.S.T.R., based in Washington D.C. We are glad that Stan could join us here. MR. McCOY: Thanks, Hugh. It’s a good sign in U.S.-EU relations that a lot of the themes that I want to talk about are similar to the themes that Luc Devigne has just talked about. I will spend a few minutes with you this morning anticipating a question I expect to hear multiple times over the course of the next two days, which is: Wither IP and trade policy under the Obama Administration? How will it change; how will it stay the same? To pick up on one of the themes that Luc talked about already in the context of Europe, IP is similarly very important to the U.S. economy. I ask you to think in terms of a nation’s economy being dependent on a particular natural resource. Then suppose there were a political change at the top of that nation’s government. The economy would continue to be highly dependent on that resource, and the trade policy of the country could be expected to continue to emphasize that particular resource. Although particular points of emphasis might change, the fact of dependence on that resource would remain essential to how that nation considers its place and priorities in the world economy and the rules-based trading system. The U.S. economy is not dependent on any particular natural or geological resource extracted from the ground. But, in a different sense, The United States is resourcedependent. Our resources of innovation and creativity—the genius of the American people—are very much pillars of the U.S. economy and pillars of U.S. economic policy. One could reasonably expect that our dependence on those resources will breed consistency, and that U.S. trade policy will continue to emphasize the importance of fostering innovation and creativity. 50 See generally WIPO, Collective Management of Copyright and Related Right, http://www.wipo.int/about-ip/en/ about_collective_mngt.html (“Collective management is the exercise of copyright and related rights by organizations acting in the interest and on behalf of the owners of rights.”).

Part A: Multilateral and Bilateral Relations  519

That was very much in evidence in the confirmation hearings for Ambassador Ron Kirk, the newly confirmed U.S. Trade Representative. He was asked whether he thought intellectual property was an important part of his mission. He said: “I agree that ensuring strong IP protection must be one of our top priorities. Thanks to American innovation and creativity, IP-intensive industries are ones in which the United States enjoys a strong comparative advantage.” “In a time of economic challenges, we need these industries to continue to create jobs and excellent opportunities for economic growth, and improve the lives of Americans through the products they generate. IP-intensive industries, in turn, need commitments from our trading partners to strong and effective protections for U.S. intellectual property rights, and we will work with our trading partners to secure those commitments.”51

Those comments from the newly confirmed U.S. Trade Representative well encapsulate the importance of IP to the U.S. economy, and its continuing importance as a matter of trade policy under the Obama Administration. Much work has gone on in the short time between the 20th of January and today to carry forward the U.S. IP-trade policy agenda: We have participated, in that space of time, in a meeting of the WTO TRIPs Council where there were no major changes in evidence in the U.S. positions on key issues under discussion. We have embraced numerous opportunities for bilateral engagement by the U.S. government with our trading partners around the world. A U.S. delegation traveled to Moscow for the first meeting of the U.S.-Russia Intellectual Property Working Group since early 2008, restarting a dialogue that had not been active at the plenary level for the past year, and continuing to emphasize our goal of full compliance with the November 2006 bilateral IP agreement between the United States and Russia.52 A U.S. delegation traveled to China to talk about moving forward on our bilateral IP dialogue with China in the context of the broader economic relationship. We are looking ahead to a meeting soon of the U.S.-EU IP Working Group.53 We are also looking ahead to a meeting of the trilateral IP Working Group between the United States, Canada, and Mexico.54 We have convened the first meeting of a new U.S.-Saudi Arabia IP Working Group, and had very constructive discussions in that context.55 We have held meetings of trade and investment framework agreements with countries such as Nigeria and Thailand, and used those opportunities to talk with those trading partners about IP issues to the extent relevant to those dialogues.56 51 United States Senate Committee on Finance Hearing on Confirmation of Mr. Ronald Kirk to be United States Trade Representative, Mar. 9, 2009, questions for the record, available at http://finance.senate.gov/hearings/ testimony/2009test/ 031109QFRs%20for%20SubmissionRK.pdf. 52 U.S.-Russia Business Council, Debrief on Moscow meeting of the U.S.-Russia Intellectual Property Rights (IPR) Bilateral Working Group, Apr. 14, 2009, https://www.usrbc.org/activities/calendar/event/1838. 53 TACD IP Policy Committee, Meeting of the U.S.-EU IPR Enforcement Working Group, Sep. 9, 2003, http:// www.tacd-ip.org/blog/2009/09/23/us-eu-ipr-enforcement-working-group. 54 Security and Propensity Partnership of North America, Security and Prosperity Partnership of North America (SPP) Intellectual Property Action Strategy, available at http://www.spp.gov/pdf/spp_ip_strat_final.pdf. 55 See Off. of the U.S. Trade Representative, 2009 Special 301 Report (2009), available at http://www.ustr.gov/ sites/default/files/Full%20Version%20of%20the%202009%20SPECIAL%20301%20REPORT.pdf. 56 See, e.g., U.S. Dep’t of State, Background Note: Nigeria, http://www.state.gov/r/pa/ei/bgn/2836.htm (last visited Mar. 25, 2010) (“In March 2009, the United States and Nigeria met under the existing Trade and Investment Framework Agreement (TIFA) to advance the ongoing work program and to discuss improvements in Nigerian trade policies and market access. Among the topics discussed were cooperation in the World Trade Organization (WTO), … [and] property protection and enforcement.”).

520  CHAPTER VII: TRADE LAW We have held a meeting of our regulatory reform dialogue with Japan that provided an opportunity to discuss intellectual property, among other issues.57 On the whole, the early months of this new Administration have shown that the United States continues to have a very active bilateral agenda on intellectual property issues, reflecting that we continue to work hard to make progress on those issues. Looking ahead, also in the bilateral sphere, the Special 301 Report will come out on its statutory timetable at the end of April.58 On a plurilateral level, we’ve been very pleased to work with our partners in that effort to release a summary recently of issues under discussion in the Anti-Counterfeiting Trade Agreement negotiations, reflecting the Obama Administration’s commitment to doing business in a transparent way that is open to public input.59 As you can see, we continue to have a very active trade agenda in the area of intellectual property rights. All of that activity, just in the space of the last couple of months, points to a continuation of active engagement by the U.S. government on these issues from a trade policy perspective. I would like to close by sharing some thoughts from Ambassador Kirk in his first major public speech, which took place last week at Howard University at a Forum on Innovation, where Ambassador Kirk underlined some of the themes that will guide U.S. trade policy going forward in the area of innovation and creativity.60 Ambassador Kirk pointed out that exports were 13 percent of the U.S. Gross Domestic Product in 2008, and that 97 percent of U.S. exporters have fewer than 500 employees61— facts that highlight that exports are both essential to the U.S. economy and essential tour small businesses. I would add to that many of those small businesses rely heavily on intellectual property rights; many start-up enterprises are formed around a core of intellectual property. The IP trade agenda remains very important to the future of the U.S. economy. Ambassador Kirk emphasized that the President’s top priority right now is turning around the economy, and that innovation and creativity are cornerstones of our future economic development, and therefore very important in how we look ahead at how the American economy will grow and prosper in years to come.62 One key to our economic success, of course, is our ability to trade services, goods, and intellectual property in the context of a rulesbased system, as you heard Hannu Wager of the WTO discussing earlier. As a former mayor, Ambassador Kirk relied very much on a local infrastructure to support innovation and economic growth in the city of Dallas. What he talked about in his speech at Howard University was the U.S. Government’s mission to create and sustain an international infrastructure of rules that support creativity and innovation and can allow for American exports that rely on creativity and innovation to thrive in the global marketplace.63 That involves challenges not only of market access, but also, after goods and services cross the border, challenges of dealing with threats like counterfeiting and piracy, as well as threats like unfair standards that pick winners and losers, for example by favoring domestic over foreign competitors. 57 Press Release, Office of the United States Trade Representative, USTR Announces Regulatory Reform Initiative Results with Japan (July 29, 2009), available at http://www.ustr.gov/about-us/press-office/press-releases/2009/july/ ustr-announces-regulatory-reform-initiative-results-j. 58 See 2009 Special 301 Report supra note 52. 59 The Anti-Counterfeiting Trade Agreement—Summary of Key Elements Under Discussion, available at http:// www.ustr.gov/assets/Document_Library/Fact_Sheets/2009/asset_upload_file917_15546.pdf 60 Ambassador Ron Kirk, Remarks at Howard University, “Securing America’s Future: Innovation Jobs for the Middle Class”, (Apr. 8 2009) available at http://www.ustr.gov/about-us/press-office/speeches/transcripts/2009/april/ remarks-ambassador-ron-kirk-howard-university. 61 Id. 62 Id. 63 Id.

Part A: Multilateral and Bilateral Relations  521

Finally, Ambassador Kirk related all of this back to our current economic situation and the need to overcome the recession: “We need to preserve and grow innovative, creative industries now more than ever,” he said.64 “America’s ideas can help turn this economy around sooner rather than later. Working together, we can make sure that American workers and their families succeed in a global economy.”65 That’s what we’ll be aiming to do in the context of U.S. trade policy. Thank you. PROF. HANSEN: Thank you. We do have three panelists who will be involved soon in this: Robert Burrell, visiting this year at Cardozo and full time at the Beirne School of Law at the University of Queensland, and someone who has been at Fordham certainly before; Michael Shapiro, Senior Counsel, Office of Intellectual Property and Enforcement at the U.S. Patent and Trademark Office; Jamie Love, Director of Knowledge Ecology International in Washington, D.C., and I think one of the really serious, important players of people who represent the users in the IP world. Now, Stan, let me ask you. You were quoting Ambassador Kirk. How much of that speech did you write? MR. McCOY: [Pause.] I helped a fair amount. PROF. HANSEN: Well that makes sense, doesn’t it. The people at the top don’t really have a clue about IP, do they? You and Luc do. And knowledge/information is power. So how much do those above you two in the U.S. government and the European Commission rely upon you to say what should be done? And then whom do you rely upon to give you the facts. Luc indicated it was the IP owners but is there anybody else. Other IP stakeholders, NGOs, Jamie Love? [Laughter.] In short, how do you develop IP policy in the European Union and in the United States? MR. McCOY: There is guidance that comes organically from the Cabinet level, and you’ve seen that both from Ambassador Kirk and from Secretary Locke in the United States. Both of them have taken the initiative to identify IP as a top priority. The bureaucracy can’t do that. It takes political leadership to do that. What the bureaucracy can do is supply the technical knowledge that backs that up and channels that into initiatives that are going to work in the context of— PROF. HANSEN: When you’re in a bilateral negotiation with someone, you don’t say, “Ambassador Kirk, should we have this exception in or out,” right? So how do you determine that? MR. McCOY: Absolutely. We work with a whole range of stakeholders to try and figure out the answers to that question. One of the things that we are looking at in the context of the Obama Administration is how do we change our consultative structures, and maybe broaden them, in order to make sure that we are talking to a wide range of stakeholders. We’ve got a whole series of mechanisms, cleared advisor committees, and so on, that exist in the United States for doing that. To the extent that we can expand those structures and make them more inclusive, that is something that the Administration is very interested in doing. PROF. HANSEN: Okay. Luc, how about you? MR. DEVIGNE: Well, we don’t really start from scratch, in the sense that we have European legislation for pretty much all of these topics except criminal sanctions, which is problematic, because if you have a dichotomy of the level of enforcement of criminal sanction and criminal sanction you can have a problem there. 64 65

Id. Id.

522  CHAPTER VII: TRADE LAW But to put this important parenthesis together, what we negotiate is not something that we bureaucrats invent. Okay, formerly we draft it, but it is on the basis of existing rules, rules that other colleagues in the room make. I think of Margot Froehlinger [Director, DG Internal Market] or members of her team, like Tilman Lüder in his field, etc. So we work in cooperation with the guys who do the domestic legislation and try to export it, if I can say so. That’s one thing. The second thing is that, of course, we have the Member States whom we consult on our trade policy. And we can get input on political aspects from the Member States and from businesses and other interested parties, like civil society, etc., as well. The last thing I want to mention also is that we will receive input from other departments of the Commission, not only those who produce the IP legislation that I have mentioned, but also from geographical desks. So, you have checks and balances in that way. PROF. HANSEN: Okay. So what do you and Stan disagree about? MR. DEVIGNE: Geographical indications, I think. Stan still doesn’t admit that it is in the TRIPs Agreement, I think. PROF. HANSEN: Well, differences on GI almost goes without saying. Anything beyond geographical indications? Or is that the only thing? MR. DEVIGNE: No. There are probably a couple of issues. But it’s in the details. QUESTION [Rt. Hon. Lord Justice Jacob]: What about the U.S. attitude to the farmer— PROF. HANSEN: Hold it. This isn’t a call-in show. “Robin from Islington has a question.” [Laughter.] No, Robin. You’ll have plenty of opportunity later. Mike, what do you think about this exceptions and limitations initiative? Through TRIPS and the WIPO protection was expanded. And then there were attempts at further expansion like the audio-visual and broadcasters treaties. Those have stalled. Is this an admission of defeat? Or is this purely to serve a political end or as a demonstration of good will to developing countries? Not saying that something is wrong with that but realistically speaking do developing countries need treaty exceptions? Is there really a pressing practical need for formal exceptions for the blind in developing countries? MR. KEPLINGER: The issue of limitations and exceptions has been on that table in WIPO for years. It is an issue that the developing countries, ever since the TRIPs Agreement, have pushed on. As I indicated and as the studies that we have conducted indicate, developed countries tend to have very well-developed sets of limitations and exceptions in their laws to deal with access to the blind, access for education, copying by libraries, and that sort of thing. These provisions are just not there in many developing countries. They have the rights theoretically. Their copyright laws provide for the same spread of rights that laws of developed countries do. Part of the problem is enforcing those rights. The mechanisms often don’t exist in developing countries to effectively enforce rights; and, to the extent that they do exist, they are often very difficult to use. So one of the things that we try to do with our Enforcement Division is provide education and training for developing countries to try to improve the judicial process as it relates to intellectual property. Some of the problems in some countries consist of very basic problems about the rule of law, which just doesn’t work very well in some. PROF. HANSEN: Okay, got it. MR. KEPLINGER: Big problem. PROF. HANSEN: Thank you very much. Hannu, at the WTO how are you guys doing over there? Sounded like you were pretty occupied with projects but is anybody outside the WTO really paying attention these days? Is it lonely? MR. WAGER: I don’t feel lonely, at least personally. In fact, the current financial and economic crisis has put the WTO at the center stage in maintaining the existing open trade

Part A: Multilateral and Bilateral Relations  523

regime, which is critically important if we are to avoid a worse recession. Of course, trade has contracted a huge amount already, which is, I think, unprecedented since the 1930s, but that is mostly due to falling demand and lack of trade finance. So the focus of our activities is very much on monitoring that there will not be this type of protectionism at this time. I think that the recent G20 meeting reaffirmed that this is something that is shared by all world leaders.66 As regards IP, in particular, like I said earlier, this debate has its own dynamics. The Doha work continues on and we have these GIs on which the United States and the European Commission, as we just heard, continue to disagree. We have the CBD issue. There are disputes going on, and plenty of other work that has less high profile. So the world hasn’t forgotten us. PROF. HANSEN: How many people are doing IP at the WTP? MR. WAGER: We have about a half-dozen experts. PROF. HANSEN: You mean professionals? MR. WAGER: The Division is also responsible for government procurement and also— PROF. HANSEN: How many are doing IP? MR. WAGER: Around six, seven, I would say. PROF. HANSEN: Well, it used to be three, so you’ve increased it. MR. WAGER: We are relatively big as compared to what we used to be. But still, I think, our appearance might be bigger than the actual number of the people who focus on IP matters. Of course, when we have disputes, then we also involve people from the Legal Affairs Division to support the work of the panels. When we have trade policy reviews, then we have people from the Trade Policies Review Division who look at the IP issues as part of the reviews of Members’ trade policy. PROF. HANSEN: In a panel dispute, how much of the original opinion do you write? MR. WAGER: A panel is typically served by a legal officer from the Legal Affairs Division and a panel secretary from the policy division concerned, that is to say the IP Division, in the case that primarily concerns IP. It is the panelists that take any decisions. But the legal officer and panel secretary give support in drafting according to the instructions by the judges or panelists. PROF. HANSEN: So that’s 100 percent? They give you the decision and then you write the opinion? MR. WAGER: The initial drafting is typically done according to the instructions of the panelists, but it really depends on the panelists. There have been also cases where a panel member decides to do his own drafting. It is really in the hands of the panelists how they want to handle it. PROF. HANSEN: Jamie, how are you doing? Jamie Love I think is a fantastic person. You’ve probably run into him before. I think of the whole NGO community which is involved in the IP thing he is a star. He’s reasonable. He’s a good guy. He’s on the wrong side a lot. But still, all those things considered, I think he is a very valuable person to input into the debate. That being said, from what you have heard today, are things getting better, getting worse, the same? Don’t go into a set speech on me now as we don’t have time for that. Just answer that. MR. LOVE: There is what is going on outside this room and then there is what I just heard. My head is exploding from what I just heard. This is really an “old school” conversation, from every single panel member. I was actually quite shocked at what Keppie said, when he said that he thought that the discussion in the WIPO SCCR about limitations and exceptions for the blind and reading disabled was really not about a possible treaty, but instead a “soft law” solution. That shocked me because that’s not what we understood Francis Gurry to have been saying. I was wondering 66 G20 London Summit, “The Global Plan for Recovery and Reform”, ¶ 22, (April 2, 2004), available at http:// www.londonsummit.gov.uk/resources/en/PDF/final-communique.

524  CHAPTER VII: TRADE LAW if Michael is speaking for Francis on that and if he thinks that reflects really the views of the Member States on that issue. Certainly, in the case of ACTA, the notion that it takes decades to do something is apparently not taken seriously, because they are trying to wrap things up in very short order. When it comes to a new global norm for the enforcement of intellectual property rights, it is no big deal to just throw a trade agreement together. And, to do it in secret. The discussion on the panel about transparency is ludicrous. The draft that USTR put out about what is in the agreement leaves out so much of all the interesting details, which you can find in various leaked documents,67 that it should be embarrassing for people to even talk about transparency in these ACTA negotiations. In terms of the content, this has been old school, and it doesn’t seem to connect with what I think is happening outside the room. PROF. HANSEN: I bet you voted for Obama—I’m just guessing—right? MR. LOVE: I’m from Alaska, so I didn’t vote for Sarah Palin. [Laughter] PROF. HANSEN: You know, this is the Obama Administration which you’re accusing of lack of transparency and everything else. Are you disappointed with the Obama Administration? MR. LOVE: I think we don’t really know who the Obama Administration is yet. There’s not a single person in the Patent and Trademark Office yet. The global health people haven’t been appointed yet. I don’t think that the Obama Administration has taken a position on whether there should be a treaty for the visually impaired or not. I think that we’re optimistic they are going to support that in fact. I think that we were a little surprised that Ambassador Kirk’s first speech at Howard University was organized by a Republican lobbyist who is working closely with big corporate right owners. PROF. HANSEN: Who is that? MR. LOVE: John Stubbs organized that. We know John Stubbs. We talk to him. USTR should talk to John. But for a first outing by a new USTR, this sent a message, about who Ambassador Kirk is listening to. PROF. HANSEN: So why don’t you have better access? MR. LOVE: I think we had a conversation with Stan about that. I think Stan’s attitude was that “we don’t represent people that make things and we don’t represent anyone actually.” So I think that— PROF. HANSEN: Well, he’s got a point, doesn’t he? [Laughter] MR. LOVE: I don’t think he does have a point. If you look at (a) the parts of the economy that have really been dynamic and are doing quite well, they’re not old-school hard-line about the IP policy in the United States. That’s just crap. That’s crap in the European Union. That’s crap in the United States. The trade negotiators are not paying attention to what is driving innovation or creating value, they are basically captured by a small cadre of corporate people that have atypical interests in these issues, and often very focused interests. That’s one concern. The other thing is that when you think about people vote for politicians—I believe we’re a lot closer to mainstream opinion. Which is perhaps why there is so much secrecy and obfuscation. Okay, we’re not Microsoft or Pfizer, we don’t have thousands of employees, but it’s not as if many people don’t agree with what we are saying. PROF. HANSEN: Actually, we can’t continue this. I would really love to continue it, Jamie. What you said was very interesting and quite provocative but we have two other panelists. 67 See, e.g., La Quadarature Du Net, New ACTA Leak: 01/18 Version of Consolidated Text, http://www.laquadrature. net/en/0118-version-of-acta-consolidated-text-leaks (last visited Mar. 24, 2010).

Part A: Multilateral and Bilateral Relations  525

Michael Shapiro, let me ask you a question. Who speaks for the United States in WIPO? Is it you? Is it Stan? Who is it? MR. SHAPIRO: At WIPO, I have had the privilege of speaking for the United States at certain committees. I would like to mention what we are doing to prepare for these upcoming WIPO meetings. Is that the question? PROF. HANSEN: No. We don’t have time. The question is: Are you happy or unhappy— that’s all you’re going to be able to say—with what is going on in WIPO right now? That’s very short. MR. SHAPIRO: Consistent with the Obama Administration policy to be fully transparent and open in preparations for international meetings, the United States is preparing for the upcoming meetings of the WIPO Standing Committee on Copyright and Related Rights (SCCR) and the WIPO Committee on Development and Intellectual Property (CDIP). We feel that the agenda for each one of these committees is rich. We’ve been reviewing those documents. With respect to the SCCR, for example, we recently published a Notice of Inquiry in the Federal Register to gather facts about the operation of existing exceptions and limitations in U.S. copyright law for the benefit of blind and visually impaired persons.68 We are interested in hearing from all stakeholders on a broad range of questions, including the legal, business, and technological issues related to making copyrighted works more accessible to blind and visually impaired persons. PROF. HANSEN: That’s all we have time for here in the plenary but as you know, Michael, there are tremendous trade panels on Thursday, a whole afternoon of it.69 There’s a lot of stuff that will be pursued further there. Robert Burrell, bilateral— don’t you have a little bit of a problem with bilateral agreements? PROF. BURRELL: No, not really. I think what I have a problem with is the current form of U.S. trade agreements. I found everything that Stanford said quite depressing because, judged from an Australian perspective, I think that the key thing that I wanted to get across was that if you take the Australian example, with the exception of copyright term extension and increased rights over test data, the FTA gave the United States almost nothing in the IP field. And yet, because of the petty, patronizing form of the agreement, that left us with the impression that the USTR was playing the part of Prometheus, presenting the torch of IP to the benighted savages of the Antipodes. I think a different, shorter, less patronizing document might actually have achieved the same goals without creating the same degree of antipathy. PROF. HANSEN: So it’s heavy-handed and overkill? PROF. BURRELL: Yes. Basically what I’m suggesting—and I know this sounds shocking— is the Bush Administration managed to annoy a lot of people without achieving very much. I was hoping that the new Administration might do something different. PROF. HANSEN: Robert, was that driven by your DNA by now that you had to attack Bush at some point in this? PROF. BURRELL: Absolutely. PROF. HANSEN: All right. Time’s up, unfortunately. Thank you to all our members of this panel. A tremendously interesting group of IP players on the international scene and I truly wish we had more time.

68 Notice of Inquiry and Request for Comments on the Topic of Facilitating Access to Copyrighted Works for the Blind or Persons with Other Disabilities, 74 Fed. Reg. 13286-01 (Mar. 26, 2009). 69 See Chapters VII.B–VII.D, infra this volume.

Chapter VII

Trade Law Part B: Enforcement & Counterfeiting IP’s Drug War: Can it Be Won? What is the Enforcement Role for WIPO? ACTA: What Is it and What Should Be its Role? Moderator Giulia DiTommaso

Director, Legal Policy and International Relations Unilever (Brussels) Speakers Hon. Jed S. Rakoff

Dr. Roya Ghafele

U.S. District Court, Southern District of New York

Oxford University

Eric H. Smith

Giovanni Casucci

Greenberg, Traurig (Washington, D.C.) Peter Fowler

Casucci Studio Legale (Milan)

Senior Counsel, Office of Intellectual Property and Enforcement, U.S. Patent & Trademark Office (Alexandria)

Luc Devigne

Head of Intellectual Property and Public Procurement, DG Trade, European Commission (Brussels)

Panelists Michael Keplinger

Deputy Director General, World Intellectual Property Organization (Geneva)

Howard Knop

Macera & Jarzyna LLP (Ottawa)

MS. DiTOMMASO: Good morning, ladies and gentlemen. Welcome to our session today dedicated to the issue of counterfeiting. Counterfeiting seems to be the only flourishing and successful market economy in this time of financial crisis.

528  CHAPTER VII: TRADE LAW I am Giulia DiTommaso from Unilever. I am representing today the BASCAP community, this an industry alliance—the Business Action to Stop Counterfeiting and Piracy—a global advocacy group under the ICC umbrella, gathering together at international level both the copyright and the trademark right-holders. In case you would like to find some real fakes, it is not a difficult task. You could even order and have fake goods and shipped directly to your home. It is hard if not impossible to distinguish a counterfeits from a real product. You can hardly tell the difference until you test it. [Slide] I would like to show some evidence of the normal route of a fake product. It is normally produced and shipped (or transported inland) in the majority of the case from China (around 70%). No doubt that this is a trade of global magnitude. We have to consider that it is a very sophisticated supply chain. The normal routing a counterfeit throughout the world: from China (70 percent of the counterfeits originate in China) through the free trade zones (there are more than 600 free trade zones in the world) and distributed either through the traditional retailers, in other words the small shops that you usually find in the developing markets, (in Africa, Pakistan,) or, more and more into the modern retailer distribution, in other terms the supermarket that you would find in developed countries. I would like to introduce the panel today. We will be focusing on questions: Is Counterfeiting a matter of real war or it is just a fallacy? What are the available tools in order to address the problem? Could we move from a controversial, confrontational approach in this area into a solution-driven position, a more inclusive and win/win balanced approach? What would be the role of WIPO? We are still missing a panelist, but I am sure that Howard will find his way. I would like to ask Jed to start. JUDGE RAKOFF: I am Jed Rakoff. If you got to the right room, you obviously are people of intelligence. If you are in the wrong room, stick around anyway. The nice thing about this program is everyone is told to get right to the point. This is very hard for a judge, but I will do my best. My point is that the anti-commercial counterfeiting legislation in the United States has really not worked very well. The primary legislation in the United States dealing with commercial counterfeiting in general is the Trademark Counterfeiting Act of 1984.1 I know a little bit about that because I drafted that law. When I was in private practice, my firm was retained by the International Anti-counterfeiting Coalition, which is a very excellent group of companies that have suffered from commercial counterfeiting. We were asked back in 1982 to come up with some new legislation that would give much greater remedies for commercial counterfeiting. I was asked to draft that legislation primarily because I had a background in criminal law, and there was at that time no federal criminal felony for commercial counterfeiting in the United States. So we came up with what became the Trademark Anti-counterfeiting Act of 1984. The idea was to have a comprehensive act that would hit both the civil and the criminal side of things. Essentially, it had three primary provisions: • On the civil side, damages were tremendously increased so that for willful commercial counterfeiting, trafficking in counterfeit goods, the plaintiff received automatic mandatory treble damages, attorney’s fees; if you couldn’t prove actual damages, there were statutory damages that were in the millions of dollars, so much heavier damages than before. Also, destruction of the offending goods. 1 Trademark Counterfeiting Act of 1984, Pub. L. No. 98-473, 98 Stat. 2178 (providing criminal and civil penalties for trademark counterfeiting) (codified at 18 U.S.C. § 2320).

Part B: Enforcement & Counterfeiting  529

• On the criminal side, the Act created a new felony, which was for trafficking in goods that had a counterfeit or improper trademark. The first violation was punishable up to ten years in prison, the second violation up to twenty years in prison. There had been cases even then of counterfeit automobile parts, counterfeit aircraft parts, and the Act provided that if the counterfeit goods were such that it might create a risk of death, then you could sentence the man up to life imprisonment. So it was very heavy punishment on the criminal side. • And then, what was probably the most innovative part of the Act, there was a provision by which a private party could go into a federal court and get an order that law enforcement agencies, the U.S. Marshal or even other police agencies, would then at the instance of the court, but really at the instance of the private party, conduct a search and seizure and seize the counterfeit goods, keep them as evidence for civil or criminal prosecution, and then destroy them thereafter. So we drafted all this up in 1982, and we thought we would have a long time before Congress would pass it. But it really sailed through Congress very rapidly, partly because the counterfeiters don’t have a lobby, but partly because there was an increasing public awareness of the problem of commercial counterfeiting and how it wasn’t just the guy on the street corner, but it was a much more fundamental problem. And the courts were quite receptive to this legislation. In particular, we had been concerned that the ex parte search-and-seizure provisions would be challenged in the courts on Fourth Amendment grounds.2 This really gave to private parties a prosecutive role that had not been historically played by anyone other than the prosecution. It was in that respect very innovative. But it was accepted by the courts. The plaintiff had to meet all the requirements of the Fourth Amendment, had to describe what had to be searched and seized with particularity and things like that. But nevertheless, the Act withstood all constitutional challenges and got a very warm reception from the courts. Nevertheless, twenty-five years later, I have to say I don’t think the Act has been that effective. Why is that? Well, one reason is that the damage remedies are usually uncollectable. These are mostly judgment-proof companies. There is always a series of shell companies. It is hard to trace it all the way back. Secondly, the search-and-seizure requirements, while they are very momentarily effective— they have a real momentary deterrent effect—but they are usually directed, inevitably directed, at the last link in the chain of counterfeiting. Therefore, the person you are putting out of business is the one who is most likely to be substituted for by some other person who wants to make a quick buck. Finally, most disappointing to me, there have been very few criminal prosecutions under this Act. Every once in a while the International Anti-counterfeiting Coalition or other groups will talk to the Department of Justice and, with much hoopla, they will set up a task force to bring more of these prosecutions. But they don’t. In the thirteen years that I have been on the bench, there have been no such cases brought before me in the Southern District of New York, and to my knowledge there have only been two such cases brought by the U.S. Attorney in New York for commercial counterfeiting during that entire thirteen-year period. Why is this? Hard to say. I think a large part of it is that it is not sexy from the standpoint of what young prosecutors like to prosecute. They like murder cases, they like gang cases, they like maybe on the white-collar side big securities fraud cases. For whatever reason— 2 U.S. Const. amend. IV (“The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized.”).

530  CHAPTER VII: TRADE LAW it is in my view a failure of understanding on their part—there have been very few such prosecutions. However, the real problem with the Act is the one that was already alluded to in the map you just saw from Giulia, which is that the source of all this stuff is Southeast Asia. Even with all the prosecutions and all the seizures and all the damages in the world, this is not a problem that is going to be cured until you get cooperation from the Southeast Asian countries. It is in some ways not unlike the drug trade. Until you get some cooperation from the countries that are the source, you can’t expect to have as much effect as you would like. So that’s my somewhat pessimistic point, and I’ll end on that. MS. DiTOMMASO: Thank you, Jed. That was a very energizing start to the day. I would like to change a bit the order now and ask Luc to come in so that he can give us the hands-on ACTA perspective. MR. DEVIGNE: Do you want me to speak only about ACTA or enforcement, because there is a bit more than ACTA on enforcement? Good morning, everyone. I am sorry I still have a cold, as yesterday. How many of you were yesterday at the plenary session? So I will go fairly quickly on a couple of things which I briefly touched upon yesterday, but I concentrate on the issues of today, which is enforcement. Giulia has highlighted on the first slide the OECD study,3 which is a fairly good one and, as far as I know, the only global study to size the magnitude of the problem of counterfeiting. That is $200 billion per year. It should be highlighted two things: first, this is only concerning physical goods; and secondly, only for traded goods. So it excludes domestic consumption, and in large countries that can be fairly important. It should also be highlighted that this $200 billion of counterfeit trade per year is probably bigger than 100 countries’ GDP in the world. So we are talking about an industry that has perhaps not unlimited means but large means. Obviously, it is a problem for the business. That has already been explained. It is also a problem for the consumers. Giulia has also highlighted the seizures at European borders, 79 million goods in the last available statistics. By the way, you will have plenty of information. I really recommend you to consult the European Commission Web site if you are interested. There you have all the statistics broken down per product, per country of origin, etc. You can find that at ec.europa. eu, and then you have to go to the DG Taxation and Customs Union. But what is more worrying is that we see more and more now dangerous goods coming in. We see we have an increase of 51 percent of fake medicines, which amount to 4 million now just for Europe; a 260 percent increase for cosmetics; a 98 percent increase for toys; a 62 percent increase for foodstuffs. All these are very dangerous goods. So it is not really surprising that we need to tackle the problem seriously. Now, what do we do about it? I highlighted a few actions that we are doing yesterday. I will just concentrate on a couple of ones. First of all, since we have an agreement, that is the WTO TRIPs Agreement,4 since 1994, one should wonder why does this agreement not work, because one cannot deny that it doesn’t work sufficiently if you think of the numbers of counterfeit that I have just quoted. Of course, 3 Org. for Econ. Co-Operation & Dev., The Economic Impact of Counterfeiting and Piracy (2005); Org. for Econ. Co-Operation & Dev., Magnitude of Counterfeiting and Piracy of Tangible Products (Nov. 2009). 4 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 108 Stat. 4809, 1869 U.N.T.S. 299, 33 I.L.M. 1125 (1994), available at http://www.wto.org/english/docs_e/legal_e/27-trips.pdf [hereinafter TRIPS Agreement].

Part B: Enforcement & Counterfeiting  531

you have an increase in trade since fifteen years. We have new technical or technological means, like the Web, which facilitate certain forms of transactions. But still, it cannot explain the rise of counterfeit. So, first of all, it should be natural actually that we should address this issue in the WTO. But it is nearly impossible to have a debate on enforcement in the WTO TRIPs Council, let’s face it. Every time we mention it, I learn new words in English, which are the names that I am called by some countries’ delegates. I fail to understand why it is in the interest of any country in the world, be it the least developed or developing or emerging or transition, or whatever economies, that their population will be exposed to counterfeiting. I fail to understand why it is in the interest of development not to have enforcement, because as far as I know, except if you are a minerals-based economy, there is no economy in the world which has developed without a developed IP framework. I don’t know any examples. These are the facts, and this is the reality. So if we can’t talk about it multilaterally—and I voluntarily didn’t touch WIPO because I don’t deal with WIPO and because we have actually a distinguished speaker from WIPO who will explain what WIPO could or should or shouldn’t do about it. But I concentrate on the WTO because I lead the EU delegation there. Bilaterally, I highlighted yesterday the number of countries with whom we have engaged in dialogues, which is the second axis of action, and which is very important. We have done this on the basis of the identification of priorities, which again is on our Web site, based on a survey.5 The survey had, I think, 400 pages or something of results, sorted country by country. No need to mention, of course, that China is the biggest problem by far. First of all, it is the biggest volume, but also it is because the problems of enforcement are across the border for all types of rights, and you have them at every level—problems with legislation, problems with the judiciary, problems with access to justice in China, which is a big issue in China. I have mentioned already yesterday, not to go into details, that what is very important when we engage these countries is to have coordination with business. This is absolutely essential. If we want to make progress, we need business input. My team of eighteen people does not have the resources that the business is putting to fight these problems. We will never be able to have the same knowledge as the people who are working in the countries, even if we have developed—and that is good news—a network of IP attachés around the world, and also even if we have developed, which is another good news, very good cooperation with our American friends, exchanging information, avoiding that the countries tell us two different stories about the same problem, etc. I have also highlighted yesterday another aspect of our bilateral actions, which are the FTAs. We have many FTAs being negotiated. I am sure you are familiar with all of the countries, so I need not repeat the list. Basically, what we do with FTAs—although we don’t have an approach that “one size fits all,” but a tailor-made one, because obviously you have different countries in different stages of development and with different types of problems that our industries are facing―but basically, our line is inspired by our European model. That is to say two main pieces: (1) our Customs Regulation;6 and (2) our 2004 Enforcement Directive.7 We do have a problem there because we have no unified criminal sanctions in Europe, as you know, for IP infringement, or as a matter of fact for any type of criminal law. It is also See Chapter VII.A, “Multilateral & Bilateral Relations”, supra this volume. Commission Regulation 450/2008, Laying Down the Community Customs Code (Modernised Customs Code), 2008 O.J. (L 145). 7 Council Directive 2004/48, The Enforcement of Intellectual Property Rights, 2004 O.J. (L 157) (EC) [hereinafter IP Enforcement Directive]. 5 6

532  CHAPTER VII: TRADE LAW important, when you work bilaterally, to highlight the technical assistance that we are doing. Giovanni Casucci, with whom we have done some very good work in China on trade fairs, will speak of this as one example. It is one very concrete example of how to prevent trade fairs to be a spot where the counterfeiters can abuse rights. I now come to the multilateral and the plurilateral aspect, the ACTA,8 because I have been asked to speak on that. First of all, why ACTA? Well, I think you got a little explanation in what I have explained on the difficulty, if not the impossibility, to discuss enforcement in plurilateral fora. So countries that oppose a debate in the multilateral environment shouldn’t be surprised if a dozen countries willing to go ahead with enforcement decide to sit together to do so. Before saying what ACTA is about, I prefer to say what ACTA is not about. I have heard so many fantastic stories over the Internet that I think there are a couple of myths to be dispelled. I think the best one was to read that it was “art of the last plot of the Bush Administration to infringe on civil liberties.” I didn’t know that this was part of my job description, but apparently it is. So ACTA is not about changing important criteria like commercial scale. That will remain our main criteria. I am speaking here from the European perspective, because of course I cannot speak for the other negotiating partners. As you know, in Europe we have, for instance, in terms of Customs applications, a de minimis clause to exempt travelers from systematic checks. We have, of course, an extremely detailed protection of privacy legislation I think it is important to say it again because the opposite has been spread and rumored too many times. ACTA will concentrate on three things: first, the legislation framework, second, international cooperation parties and thirdly development of best practices. The legislation framework will be divided into border measures—and here, no surprise, we want, indeed, to go beyond the TRIPs Agreement minimum obligations9 because we think that it is not sufficient, and basically also because our own EU Customs Regulation goes beyond TRIPs. It goes beyond TRIPs minimum obligations in terms of scope of rights for which border measures can be applied and in terms of the scope of activities, so not only imports but also export and transit goods. Everything I say here, of course, is in a way provisional, in the sense that I speak for what the European Union would like in ACTA. Don’t get me wrong. This is not what ACTA will necessarily become because we have had four rounds of negotiations so far and we are waiting for the next one, basically waiting for our U.S. friends to resume the negotiations. Clearly, we will not know the final product today. I should highlight that all the parties around the table of ACTA have agreed on a disclosure of the main elements of the agreement, which has been done last week, which is again on our Web site and the Web site of USTR and presumably all twelve parties of ACTA.10 What I can just touch here is explaining details. I mentioned border measures. Also, there are two important legislative framework aspects, which are civil enforcement and criminal enforcement. Here again, this is a difficulty for the European parties since there is yet no harmonisation legislation in this field. 8 European Commission on Trade, Anti-Counterfeiting Trade Agreement (ACTA), http://ec.europa.eu/trade/ creating-opportunities/trade-topics/intellectual-property/anti-counterfeiting/ (last visited Apr. 6, 2010). 9 World Trade Organization, Overview: The TRIPs Agreement, http://www.wto.org/english/tratop_e/trips_e/ intel2_e.htm (last visited Apr. 6, 2010) (“In respect of each of the main areas of intellectual property covered by the TRIPS Agreement, the Agreement sets out the minimum standards of protection to be provided by each Member.”). 10 European Commission on Trade, Anti-Counterfeiting Trade Agreement (ACTA), http://ec.europa.eu/trade/ creating-opportunities/trade-topics/intellectual-property/anti-counterfeiting (last visited Apr. 6, 2010); Office of the United States Trade Representative, Anti-Counterfeiting Trade Agreement (ACTA), http://www.ustr.gov/acta.

Part B: Enforcement & Counterfeiting  533

An important topic which by definition was not touched in 1994 by the TRIPs Agreement is Internet distribution and the liability of Internet Service Providers. We haven’t done that so far in ACTA because we haven’t reached that stage of the negotiation. But it will be obviously an important element. In addition to the legislation framework of ACTA, I want to recall that there will also be enhanced best-practice exchange provisions, and as well as increased international cooperation enforcement. International cooperation when you are fighting counterfeiting is really essential. For instance, we had last year the first EU/U.S. joint Customs operation, highly successful, targeting integrated circuits. In three weeks, the Customs of Europe and the United States stopped 360,000 counterfeit integrated circuits, which is kind of scary. These can end up in cars, in brakes or things like that. I think I will stop here on ACTA, because really it is perhaps better to discuss the questions you might have, and just go through the various four or five pages of the disclosure document, which is the only information I could say now in one minute thirty-four, and counting. To conclude, do we have results with all these activities? Yes, we do have results. It is difficult to measure, because when a country changes legislation, is it due to your actions, is it due to the action of another country, or is it because they have “seen the light”? I don’t know. But we do have progress. This being said, it is a never-ending task fighting infringement, by definition. Which country can say, “I can now stop fighting crime because I have fought crime, so now I will move to another topic”? No, of course not. Of course, one of the problems of IP enforcement is that IP is only one part of sometimes a more global problem. I mean you can’t have IP enforcement if you have no judiciary working or if you simply have no law, which is the case in some countries. But it should also be clear that we shouldn’t be too nice with certain countries who sometimes disguise the lack of enforcement behind lack of resources, whereas actually it is a well-coordinated national policy. Here I think we have to distinguish the type of violation we are talking about. No country thinks that they will become an economic superpower by manufacturing fake Vuitton bags. But it is a different thing if they have an established policy to allow systematic copying of patented technologies. To conclude, I will say that we will have results if we have a will and if we put the means. In other aspects of trade policy we are capable of putting the means, so why not in this one? Thank you very much. MS. DiTOMMASO: Thank you very much, Luc. Eric, if you are ready, would you like to begin? Eric Smith with Greenberg & Traurig will cover ACTA and WIPO. MR. SMITH: Yesterday we covered a lot of ground.11 If you were to take a vote among all the right-holder groups that are attending this conference, I don’t think there is any question that their number one priority right now is enforcement. We have in place at the international level the WIPO treaties12 in many, many countries, many more countries have implemented the provisions of those treaties, and virtually everyone has implemented their TRIPs obligations. So we have a legal infrastructure that is already there. But what we don’t have is we don’t have effective enforcement systems globally, particularly, as we’ve learned over the last day or so, in the online environment. Luc covered a lot of the aspects of ACTA. My talk is going to be about ACTA, but I am going to focus on a couple of different things than he did. See Chapter VII.A, “Multilateral & Bilateral Relations”, supra this volume. World Intellectual Property Organization (WIPO), WIPO-Administered Treaties, http://www.wipo.int/treaties/ en (last visited Apr. 6, 2010). 11

12

534  CHAPTER VII: TRADE LAW [Slide] The TRIPs text was drafted in 1990. It is now almost twenty years old. It doesn’t deal with the Internet. Peer-to-peer file sharing wasn’t even a glimmer in anybody’s eye at that time. Nobody knew about packet inspections.13 The world has changed radically. The TRIPs Agreement enforcement provisions do govern in this day and age of the Internet, but the details aren’t there. In fact, in many ways the TRIPs enforcement text is kind of a remarkable document. This was the very first time countries got together and they actually were able to agree on a text on enforcement. This had never been done before. The challenge now is to take that TRIPs Agreement and bring it into the modern day. How are we going to do that? It is very clear that in the foreseeable future we are not going to be reopening the TRIPs enforcement text and bringing it up to date to deal with enforcement of obligations that have been set out in the WIPO Internet Treaties, for example.14 It’s just not going to happen. So is WIPO the place to do this? I know Michael Geist just did an article in William New’s IP Watch a couple of days ago saying that the ACTA will undermine the WIPO process, his point being that the ACTA excludes developing countries and, after all, we should be negotiating an agreement that includes developing countries.15 The fact of the matter is—and those of you who are in this process know this—in 2002, when WIPO started the Advisory Committee on Enforcement,16 one of the first acts of that group was to call for countries to provide their best practices at the national level. This was assembled by the Secretariat into a fabulous document, which was released in 2002, right before the General Assembly’s meeting. It was called “The Synthesis of Practices and Difficulties in the Field of Enforcement.”17 It was a terrific document. If you look at it today, it could have been written today. It has all of the elements of what is needed to have an effective enforcement system across the board, including in the Internet environment. That document lasted about three months. It was killed by many of the countries that we now know are part of the Development Agenda group, called the “Friends of Development,” and it has never again seen the light of day. It sits there. You can look at it if you go to the WIPO Web site.18 It’s a pretty good document. But it was frozen in time. I think the reason why it was frozen in time is that the developing countries at that point did not want anything that even could remotely resemble some kind of a normative enforcement agreement that might move forward to govern all of the countries around the world. So WIPO is not a place where this thing is going to happen. So what happened? The Japanese came up with an idea in 2003.19 It really started with the Japanese Delegation. They talked to the United States. They had an idea for a treaty. It later became an agreement. Other countries were invited to join. 13 For an overview of packet inspection technology, see Rob Frieden, “Internet Packet Sniffing and Its Impact on the Network Neutrality Debate and the Balance of Power Between Intellectual Property Creators and Consumers”, 18 Fordham Intell. Prop. Media & Ent. L.J. 633 (2008). 14 WIPO Copyright Treaty, Dec. 20, 1996, S. Treaty Doc. No. 105-17, 2186 U.N.T.S. 152 [hereinafter WIPO Copyright Treaty]; WIPO Performances and Phonograms Treaty, Dec. 20, 1996, S. Treaty Doc. No. 105-17, 2186 U.N.T.S. 203. 15 Michael Geist, “The ACTA Threat to the Future of WIPO”, Intell. Prop. Watch, Apr. 14, 2009, http://www.ipwatch.org/weblog/2009/04/14/the-acta-threat-to-the-future-of-wipo. 16 WIPO, Advisory Committee on Enforcement, http://www.wipo.int/enforcement/en/ace/ (last visited Apr. 6, 2010). 17 WIPO, Synthesis of Issues Concerning Difficulties and Practices in the Field of Enforcement, WIPO/CME/3 (Jul. 26, 2002), available at http://www.wipo.int/meetings/en/doc_details.jsp?doc_id=2260. 18 Id. 19 Press Release, Ministry of Foreign Affairs of Japan, Anti-Counterfeiting Trade Agreement (ACTA) Outline of the July Meeting (Aug. 1, 2008), available at http://www.mofa.go.jp/announce/announce/2008/8/1182264_1040.html (“Seeking an early realization of the ACTA, Japan will lead discussions with other countries concerned.”).

Part B: Enforcement & Counterfeiting  535

What was the philosophy behind this? We don’t have any other way of getting at this enforcement problem, so let’s try to create an agreement among like-minded countries and establish a kind of “gold standard” among those like-minded countries for what we think effective enforcement is. Political realities then were brought to bear. While we originally thought that this was going to just be the Canadas, the Australias, the New Zealands—the big developed countries—it was expanded to include a number of other countries—South Korea, Singapore, Morocco, Mexico. What’s interesting about that is that three of those four countries already had signed up to the U.S. FTA agreement, and in that FTA agreement is an enforcement text which has been developing over the last eight years.20 That text is the basis of an ACTA enforcement text— there’s no question that that text is not going to be the ACTA, but it is going to be the starting point for negotiations to develop an ACTA agreement. I just want to talk a minute, because there has been an incredible amount of controversy, not only about the transparency of the ACTA process—and that is completely understandable. I just want to make a couple of points. That text of the FTA agreements has been around for years. It is public. Every time the U.S. negotiates an FTA, there is a report that is prepared about it, identifying what are the TRIPsPlus elements,21 why this is good, or why this is bad. It’s all there. It’s all public. The kind of almost hysterical NGO and press reactions around the world about seizing iPods and things like that just struck us all as kind of: “Wait a minute. Why doesn’t he pick up the phone and call people that have been involved in this process and find out what this is all about?” It’s all there. We don’t know exactly where it is going to come out. Luc said, for example, the Commission doesn’t have clear criminal jurisdiction yet, so we don’t know how exactly how that text is going to come out. But the basic outlines of the ACTA we already know. There are two principles here at work. First—and this we know from the FTA process, this we know from negotiations at the international level, and particularly with respect to the United States—the United States is not going to agree to anything that goes beyond U.S. law. Some of the commentary that has been in the press has been this parade of horribles that go way beyond anything that the U.S. Congress would ever approve. If you go back and look at the FTAs, you will see that the text is pretty straightforward on what is required. A couple of other things about ACTA: ACTA is voluntary. A lot of people said, “This is going to be used as a device to pressure developing countries to join the ACTA.” Listen, nobody is going to have to join this agreement if it gets done. Right now there are plenty of places and pressure points on developing countries—you know the infamous Special 301,22 we have bilateral agreements; the European Union is doing free trade agreements, they are talking about enforcement. There is a lot of this going on. ACTA is going to be a free-standing agreement. If developing countries want to join it, they will be able to join it. If they don’t want to join it, they don’t have to join it. 20 The U.S. has Free Trade Agreements (FTAs) in force with Singapore, Morocco and Mexico and has signed an FTA with Korea that is not yet in force. See Office of the U.S. Trade Representative, Free Trade Agreements, http:// www.ustr.gov/trade-agreements/free-trade-agreements (last visited Apr. 6, 2010); see, e.g., Indus. Trade Advisory Comm. on Intellectual Prop. Rights, The U.S.-Korea Free Trade Agreement (FTA), The Intellectual Property Provisions Report (2007). 21 TRIPS-plus obligations go beyond those imposed by the World Trade Organisation (WTO)’s Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). 22 Office of the U.S. Trade Representative, Special 301 Report (2009), available at http://www.ustr.gov/ sites/default/files/Full%20Version%20of%20the%202009%20SPECIAL%20301%20REPORT.pdf.

536  CHAPTER VII: TRADE LAW But at least with respect to these like-minded countries we will have a way to do a couple of things—and I think Luc pointed it out. One of the key parts of this agreement is international cooperation. There have been, particularly in the copyright area, all these great cooperative arrangements—Operation Buccaneer between the Justice Department, the FBI, and the police forces of ten different countries taking down video game sites.23 There are a number of others—Operation Summer Solstice in China involved Microsoft products, I think about $100 million worth of counterfeit Microsoft product that was being traded all over Asia and into the United States.24 Let me just say something about WIPO. WIPO has a place here. Francis Gurry, I think, has some good ideas about where he wants to take enforcement. It is not going to be normative. It is going to be training and it is going to be used as a device to try to present to developing countries why it is in their interest to protect IPR on behalf of their own industries and to enforce those rights to create development in their own countries. Thank you very much. MS. DiTOMMASO: Thank you, Eric. We are looking forward to listening to the very creative thinking of Roya Ghafele. DR. GHAFELE: Thank you very much. I want to speak right now about intellectual property as a tainted brand. I will talk a little bit about the discourse of “everything is horrible and we need to fight the pirates.” I just finished a paper, which I entitled “Of War and Peace,”25 which talked about how intellectual property is currently being perceived at the international level. My main conclusion was that we have a serious problem going on because people who are in favor of intellectual property position intellectual property way too much in the context of “fighting and combating and waging a war against infringers.” On the other side, we have people who are strongly concerned about the social implications of the intellectual property system who themselves also “wage a war” against intellectual property. Now, their war is very much related to issues that have been raised in the context of the globalization movement, of questions such as global equity, distributive welfare, etc. What comes as a surprise is that all of these people who are waging their wars wage different wars. There are two issues. The first is there is no constructive discussion really of what types of institutional frameworks work in order to position intellectual property in the public interest. There is also no moving away from war language, as sort of like a constructive attempt to discuss how we can advance innovation while at the same time looking at issues such as global inclusion. That finding was the main conclusion of a study that I conducted, looking at about 500 different texts that I generated randomly through key word searches, typing in random key words really, like “patents,” “health,” “trademark,” “counterfeiting.” There was no real purpose before, like I wasn’t consciously typing in “pirates,” etc., but these were really the words that we were generating. I also researched databases looking at what has been the discourse on intellectual property in academia. So not only looking at how the press is positioning intellectual property. The underlying themes were fairly similar. 23 Press Release, U.S. Dept. of Justice, Federal Law Enforcement Targets International Internet Piracy Syndicates (Dec. 11, 2001), available at http://www.justice.gov/opa/pr/2001/December/01_crm_643.htm. 24 Press Release, U.S. Fed. Bureau of Investigation, L.A. Division, International Investigation Conducted Jointly by FBI and Law Enforcement Authorities in People’s Republic of China Results in Multiple Arrests in China and Seizures of Counterfeit Microsoft and Symantec Software (July 23, 2007), available at http://losangeles.fbi.gov/ pressrel/2007/la072307.htm. 25 Roya Ghafele, “Of War and Peace: Analyzing International Policy Discourse on Intellectual Property”, Appendix A, infra this Chapter.

Part B: Enforcement & Counterfeiting  537

In the second step of the study we tried to extract the themes that emerged in this global discourse. Some of the major themes were themes like “Patents kill,” “patents are responsible for women in developing countries not being able to feed their children,” “patents erode Christian values,” “enslaved by free trade,” “IP equals violence,” “poor nations are left swimming in spaghetti bowls of rules,” “European cows are better treated than African peasants,” “Globalization of us and for them.” These were kind of like themes, where it really shows that intellectual property is more and more intertwined with issues related to globalization. Another big theme that I identified was the issue of intellectual property and public health, where we have again very strong images, very strong metaphors, such as “Dying for Drugs,” “Global War for Public Health,” “Rights of patients over patents,” “Public Health over commercial interests,” etc.26 Now, to these types of themes the main reaction that I could find from the other camp was “Breeding a culture of respect for intellectual property.” Now, as you can see, if you are trying to breed respect for IP, if you are creating a language of counterfeiting as “the crime of the 21st century,” or “waging a war against the pirate”—we just had an example of that before, so I can say I have yet another illustration of my arguments—“The hidden hand will never work without the hidden fist”—you can see that there is a clash, there is a serious clash, that we have an emerging community that is concerned about issues such as “Patents Kill,” and our reaction to that is that we need to “Breed a culture of respect for intellectual property.” If the intellectual property doesn’t want to become as popular as arms dealers, my recommendation would be to look at the image and reputation we are giving ourselves as a community. The issue of IP as a tainted brand was actually picked up by a range of companies, such as Philips, Microsoft, Palo Alto Research Center and a couple of other players in the market. They have created a group called the IP Brand Initiative.27 What this group is going to do is still a bit open, but at least I am glad to see that there is a level of understanding that a rationale of waging a war against piracy will not resolve the wide issues that IP is currently being exposed to. I am also glad to have been able to see that the USPTO and UKIPO as well as the EPO were very positively welcoming the study. The EPO informed me that one of their problems in the past was the Oncomouse, somewhere in the 1980s, the patent that made certain NGOs close down the doors of the EPO. There were barricades. Nobody could enter anymore. So as you can see, a major public relations clash, which did not exactly act in favor of the director general of the EPO at the time. They reacted with close to total surprise, how to react to that, that people close down the doors because of a potential patent on an Oncomouse. But the question is going to remain: What are we going to do about IP as a tainted brand? One patent office picked up the study and is about to have a conference where the first day of the meeting is about “waging a war against piracy,” and the second day of the meeting is about “making it work with words.” Now, that’s not the message. It is not about “we are going to make it work with words.” The point is that if we want to reposition intellectual property, if we want to become a slightly more popular profession, there needs to be some underlying action that underpins 26 Roya Ghafele, “Perceptions of Intellectual Property: A Review”, 2008 Intell. Prop. Inst. 20, 20–22, available at http://www.ip-institute.org.uk/pub.html. 27 P.A. Leonard, “An Update from the Director on the Work of the IP Institute”, 2008 Intell. Prop. Inst. 2, available at http://www.ip-institute.org.uk/pdfs/2008%20October.pdf (“The IP Brand Development Group is an initiative of the IP Institute. Participants will be representatives of cross-industry organisations who depend on IP as part of their business model and will be from both large and small companies as well as research institutes. The Group aims to be driven largely by a marketing approach to solving the IP branding challenge.”).

538  CHAPTER VII: TRADE LAW the rhetoric and the way we communicate about intellectual property. I think in this respect initiatives such as that that were recently raised by GlaxoSmithKline of making necessary intellectual property available to developing countries should be initiatives that should see follow-up from other companies. Thank you. MS. DiTOMMASO: Thank you very much, Roya. I would like to call on my compatriot, Giovanni Casucci from Casucci Studio Legale in Milano. MR. CASUCCI: Thank you so much. A project that was anticipated by a friend, Luc Devigne: “Trade Fairs: How to secure efficient enforcement during this very peculiar context.” [Slide] The issues related to trade fair exhibitions are related to the timing and sometimes to the fact that in certain jurisdictions (Italy, for instance) it is not allowed to enforce in a full manner a case of infringement for trademarks, patents, designs, whatever. I don’t know if yesterday you participated, some of you, in the session about enforcement tools.28 In Italy we have a special evidence-collecting tool, similar to the French one—this is called “descrizione”29 in Italy—but it is the only tool available during the trade fairs because in fact our legislation prevents the possibility to act through the civil point of view during trade fairs. Only the criminal interventions can be done, in particular criminal seizures. But of course the criminal tool is only for the clear-cut cases and not for likelihood of similarity or confusion or whatever in terms of trademarks/designs, or equivalency in terms of patents. And also, the major concern is about timing. Normally, the trade fairs are including one weekend, so Saturday and Sunday. Even Germany, where they are very efficient in order to enforce their rights and with special judges appointed for these kinds of events, cannot secure the execution of the order, maybe because of the simple lack of availability of the bailiff for the execution. [Slide] In light of that, there were several solutions designed and offered by the big trade fairs, in particular Frankfürt-Messe. Also, before the Frankfürt-Messe there was a solution offered by Basel during the special event related to the annual event about watches and jewelry. You know the situation about the European Union offering now two experiences in this regard. [Slide] Frankfürt-Messe, that normally offers only an informative tool, just offering to all exhibitors a guideline informing them how to do, what kind of lawyer you may find, if you need one, and just to inform that in general the trade fair does not like to have an exhibition of fakes of something else. But of course, this is only a deterrent tool. [Slide] In Italy, due to the very significant lack of enforcement in terms of timing, at least before 2003, before the appointment of specialized IP courts, and even independently from that, in big exhibitions like “Macef” in Milano and also in Verona, the trade fairs accepted the idea to have a self-regulation for all the exhibitors. [Slide] This kind of solution, which now has eight years of experience, is quite effective. This solution is based on the experience of the BaselWorld’s Panel, the existence of several experts available during the trade fairs having full power to decide to collect evidence in one or two hours, and to decide to prevent the exhibition of alleged infringements. See Chapter IV.J, “Acquisition of Evidence & Expert Witnesses: Comparative Damages”, supra this volume. “In France, it is common practice in almost every patent infringement case to obtain (additional) evidence with the help of a saisie-contrefaçon (or saisie). Even when there is already sufficient evidence, clients are often advised to obtain additional evidence in order to obtain an official statement of a court-appointed expert that can be used in court. … The descrizione offers the patentee the right to secure evidence concerning the infringing device and the extent of the infringement.” Jochen Bühling, “Obtaining Evidence When Preparing Patent Litigation”, Building IP Value, http:// www.buildingipvalue.com/06EU/172_175.htm. 28 29

Part B: Enforcement & Counterfeiting  539

Milan is going further, because it enlarged the scope of the intervention in these kinds of cases to any field, not only in jewelry or watches, but also in any trademarks, patents, designs, and unfair competition case. So the solution is simply based on the existence of a special regulation offering: • An informative service, which is quite useful for the people who do not know what to do in the case of copies; • Evidence-collection procedures similar to the descrizione or the saisie-déscription. The very lovely thing is it can be done in two hours from the filing of the request and execution of the order. • An injunction procedure. Normally, the injunction procedure takes place only after the evidence collection and only if the alleged infringing exhibitor does not like to accept a kind invitation to remove the specific goods allegedly infringing the IP rights of the IP owner. In this case, then the IP owner may ask for the intervention of the Experts Panel in the afternoon, organizing a session, a sort of short hearing, inviting the parties to be assisted by their lawyers, and within one hour or an hour and a half, the Panel will decide if there is a likelihood of infringement and consequently order the removal of the goods from the exhibition. In the case of refusal to comply to the order to not exhibit anymore, of course the problem is how to force them legally to do that, because this body is a de facto an arbitration. How to then secure this kind of order? In Italy we solved this situation. When the alleged infringer was completely informed about the nature of infringement because that at least three IP experts think that there is infringement, if the alleged infringer continues after the order to remove, in this case he will show a mens rea, a willful intention to infringe. This evidence is the relevant issue allowing the criminal enforcement Then, the enforcement of this kind of decision is devoted to the special task of police, La Guardia di Finanza, that are sitting permanently in the expo for assisting for any things of public security, safety, and whatever. [Slide] The system works very well. It is very quick. We normally appointed several experts, having of course different level of experience. The youngest ones will be involved only for the evidence-collection tool. Older ones, having at least twenty-five years’ experience, will be selected in order to sit on the Panel. So, I must say that our panel is normally much more experienced in respect of a normal judge in a IP specialized Court in Italy. So it is even a guarantee of better attention in delivering this kind of injunction. Of course, there is a risk. If we have not any grounds, no information about maybe the declaration of the nullity of a patent or a design or trademark that was not officially reported, the risk is to enforce a right without having a full picture of the case. But the scope of protection, the scope of this kind of injunction, is only limited to the trade fairs, only for two or three days, no more. It is not having any effect after that. [Slide] Just to show you some cases that were enforced quite effectively in this kind of expo. Any kind of product you may see. Also, see a big operation in case of clear violation of all the rules. Not only one product was found allegedly infringing, but all the goods exposed were more or less infringing IPRs. Despite the allegedly infringing exhibitors accepted the invitation, three hours later they were continuing to exhibit. In this case, the trade fairs exercised the right to immediately breach the exhibition agreement for evident violation of the rules of the trade fair. So two stands were closed automatically for this kind of situation. [Slide] Very quickly, this is another case of Verona. [Slide] The very important message that Luc Devigne anticipated is: What about the internationalization of this system? Basel is already having one. The Italian is working well.

540  CHAPTER VII: TRADE LAW We published a study on that30 and realized that all the other European countries do not have this kind of service. [Slide] China is the first country in the world having a special law in 2006 obliging the trade fair to have something in order to react quite quickly in these kinds of cases.31 The action in China is to inform the public authorities, the police and whatever, the administrative police in particular, within forty-eight hours from the denunciation. But there is the same problem. If the denunciation came during the weekend, on Friday, of course forty-eight hours means that maybe late Monday or Tuesday the police will be informed, so probably at the end of the expo. This is too late. [Slide] IPR2 offered the possibility to make a study on that. We published this study.32 You may download it from the Web site, www.ipr2.org. It is very interesting. It is about the European Union experience with that. [Slide] But what will be the future? It will be the future maybe to negotiate a bilateral or a multilateral agreement through the big organizers of the expos, having just one regulation. We are based on the TRIPs Agreement,33 as you know. We, in EU, are also based on the European Union’s Enforcement Directive.34 We talk the same language. We would like to have the same tools. So this will be the future. I will do my best efforts in order to promote it. Thank you very much. MS. DiTOMMASO: Thank you, Giovanni. Last but not least, Peter Fowler, USPTO Senior Counsel, with a perspective on capacity building. MR. FOWLER: Thank you very much, Giulia. Before my slides come up, I’d just like to set the context of capacity building as being a basic tool of enforcement. Some people don’t see that very often. I think I would disagree actually with Dr. Ghafele. The use of language like “war” and “fight” is actually very appropriate. The organized criminal activity, which is globalized, is in fact heightened violence against law enforcement itself—assassination of prosecutors, blowing up judges, kidnapping their children. That is what goes on. I think that there is also this wanton disregard for human life. I don’t think intellectual property is as tainted a brand as the counterfeits that come out of some of the countries that cause illness, that kill people, etc. This type of activity by counterfeiters and pirates is not done in small shops, it is not done in people’s backyards, it is not done in their garages. This is extremely major organized criminal activity, it’s a business venture. It is global in that respect. Quite frankly, in the absence of an effective legal framework in many countries, in the absence of robust enforcement by law enforcement officials, or the ability of rights holders to take action themselves and get good results, sometimes, frankly, harsh words and horror stories are about all that’s left to either government officials or IP rights holders in trying to change public attitudes. So when we are talking about capacity building, what we are really talking about is sort of like water on stone: It’s very slow, it doesn’t happen overnight, it’s almost imperceptible, but ultimately it is indelible. 30 EU-China Project on the Protection of Intellectual Property Rights (IPR2), IP Protection at Trade Fairs in Europe (Nov. 2008), available at http://www.ipr2.org/tradefair [hereinafter IP Protection]. 31 Measure for Protection of Intellectual Property in Exhibitions (promulgated by the Ministry of Commerce, the State Administration for Industry and Commerce and the National Copyright Administration, Jan. 10, 2006, effective Mar. 1, 2006), 2006 China Law LEXIS 8160. 32 IP Protection, supra note 31. 33 TRIPs Agreement, supra note 4. 34 IP Enforcement Directive, supra note 7.

Part B: Enforcement & Counterfeiting  541

I think that the provision of capacity building is the tradeoff that the developed countries made to get developing countries and least-developed countries to sign on to TRIPs. It is a commitment to those countries that agree to their TRIPs obligations in the enforcement area, but, quite frankly, often do not have the resources, and in many cases didn’t have the legal framework in place. So technical assistance and capacity building are critical components of any type of integrated enforcement process and system. [Slide] When we are talking about, why is the United States particularly interested in this? You have heard other statistics. A few quickly: • U.S. intellectual property may be worth more than $5 trillion. At least one would hope still in this economic condition it still is worth that much. • It represents a growing share of exports, about 16 percent of our Gross National Product. • Global piracy and counterfeiting losses to just U.S. intellectual property rights holders, somewhere between $200–250 billion annually. • And, quite frankly, there is a need to improve the IP regimes of U.S. trading partners. You’ve all seen that in our free trade agreements. I think ACTA is another example of that effort by the U.S. government to encourage, and in some cases challenge, our trading partners to improve their own enforcement systems. [Slide] What are the U.S. government efforts? Three categories: • There are trade policy initiatives. I’ll leave that to my good friend Stan McCoy to talk about. • Training and technical assistance. • U.S. law enforcement actions. The focus of the capacity building itself is really on: • First, enactment of sound laws, a good legal framework in place to deal with both civil, criminal, and border measures. • Enforcement capacity and expertise so that law enforcement officials in those countries can do the job and have the resources and the technical expertise they need. • Frankly, public educational activities are crucial. While those have to be done primarily by rights holders, I think that there is a crucial component and responsibility on the part of governments themselves to organize public educational and awareness activities to change the attitudes of their own populations. [Slide] Within the U.S. government the USPTO is actually the point agency on providing international intellectual property training and technical assistance. We have a Global IP Academy that has become the primary vehicle for the delivery of IPRrelated capacity-building programs by the U.S. government.35 We have worked very closely with our comrades at the Department of Justice, at Immigration and Customs Enforcement, and other agencies, like the FDA and Agriculture, to do this. The USPTO is committed to expand its efforts to strengthen IPR protection globally. GIPA’s activities in providing IPR training and capacity-building are, quite frankly, a key component. We are often the deliverable that the Secretary of Commerce, the Secretary State, the USTR, or even the President, goes out and promises to other countries. We are the agency that is supposed to deliver that. [Slide] When we talk about the focus of our own capacity building, there is a need for sustained efforts to improve IP protection and enforcement. • You have to build knowledge, first of all. That’s the base. • You have to build the capacity, and that involves a lot of technical expertise and training and exposure to the techniques that are the best practices or effective practices in Customs, in law enforcement, in prosecutors, and in the judiciary. 35 U.S. Pat. & Trademark Off., Training and Education: The Global Intellectual Property Academy, available at http://www.uspto.gov/ip/training/index.jsp.

542  CHAPTER VII: TRADE LAW • And frankly, you have to build the will, because no country is going to be able to do the job effectively if there is not the top-down political will that is communicated to do the enforcement. All the raids in the world won’t do any good if at a political level there is no support for prosecutions and law enforcement. It sends a message to the public as well. The goals of sustained efforts: • Assist in developing economies. There is a strong economic correlation between stronger protection and enforcement and better job creation and economic growth. It is extremely hard for legitimate businesses to gain any ground in a marketplace when they can’t compete with the pirates and counterfeiters in their own yard. It is like if you have a nice yard—there of many of them in Cambridge with beautiful grass—you don’t want weeds in it. If you already have a nice yard, you have to pay some effort, at least in the United States, to mowing, to weeding, to keeping the weeds from gaining a foothold. If you already have a yard that is 100 percent weeds, it is very hard to gain any ground for the legitimate grass to grow. • Frankly, a lot of our efforts in capacity building are also directed to rule of law and transparency in decision making. Without strong rule of law, without strong transparency, you are not going to bolster the real law enforcement efforts. Much of that is why we put a lot of our effort towards educational activities for judges and prosecutors. [Slide] When did we start doing this? • We like to date it from 1886. Commissioner Takahashi—he wasn’t commissioner yet— from the Japan Bureau of Patents, later to be the Japanese Patent Office, visited the United States for several months and studied and researched at the USPTO. That’s probably the best bang for the buck we ever got. He went back, later became commissioner—in fact, he adopted the title commissioner from the United States—and Japan’s system and IP office has seen the benefit of his diligent research and perhaps our assistance in that effort ever since.36 • We have expanded it over the years. Enforcement became a major component of our efforts in about 1999. • At present we run forty-some programs at our facility in Alexandria. We do programs overseas. To date—and it’s only an estimate because actually the U.S. government isn’t good on keeping statistics in some areas—going back to 1995, we estimate that the U.S. government (State Department, Department of Justice, Customs, USPTO, Commerce, a variety of agencies) have in fact trained, if you will, or were involved in capacity-building activities of in excess of 80,000 foreign officials. What I think that does is build a cadre in governments of many officials at many levels— port officials, judges, prosecutors who maybe later will go to the bench and become judges, policymakers. Throughout government you have people who have become exposed to intellectual property, why it’s important, why there is a need for it, why enforcement is important. They may end up becoming legislators and have a direct effect on passing legislation. So again, it is the water on stone. You don’t do anything overnight. [Slide] I would just say that we work very closely with a variety of U.S. agencies in doing this, from the Copyright Office to the Department of State and closely with our Department of Justice and overseas embassies in doing it. [Slide] It is funded in many different ways. It is a major commitment. I am not even sure how much money the U.S. government has spent. But I think it is well worth it because it is an investment in all of our futures. It is not just—I often get asked, “Is it just for the rights holders?” No, it’s not. It benefits them, it benefits American business, it benefits American exports. It benefits world governments, I 36 Japanese Pat. Off., A History of Industrial Property Rights, available at http://www.jpo.go.jp/seido_e/rekishi_e/ rekisie.htm.

Part B: Enforcement & Counterfeiting  543

think, because it helps create better principles of rule of law and transparency in decision making, which is good to fight corruption, to fight crime, and it brings about better government. I’ll leave it there. Thank you very much. MS. DiTOMMASO: Thank you. I cannot resist kicking off our discussions today with a question directed to Luc. How would you respond to the criticism that we heard yesterday in the plenary about the lack of transparency in the ACTA negotiations? Do you really think that the stakeholder dialogue will be able to replace a democratic institutional procedure and related democratic control? MR. DEVIGNE: That depends on the quality of input of the stakeholders in that dialogue. I mentioned dialogue. There are no trade negotiations that I know between governments which happen in public. I don’t know of any FTA negotiations happening in public. The WTO TRIPs Council is not even public. So why should ACTA be public? That is my number one answer. But I know it is not satisfactory because everybody wants to be there. So I think in this particular case, with the first stakeholder meetings which we had where we asked, “What would you like ACTA to be?” we received fairly few answers. I don’t say that to the people in the room because many of the people with whom I work who are in the room are the ones who do provide answers. But it is not always sufficient. With the second meeting complemented with the very detailed document which is is publicly available, I think we are as transparent as can be. MS. DiTOMMASO: Howard, are you ready? How much do you like ACTA? MR. KNOPF: My apologies to everybody for being late. I wish I could say I was involved in some important negotiation or something, but my alarm simply didn’t go off. MS. DiTOMMASO: Howard, you are limited to one minute. You better speed up. MR. KNOPF: Do I like ACTA? Well, I’m not supposed to know anything about what’s in it, so how can I like it or not like it? But there have been some leaks.37 What I’ve seen I don’t like. It’s very worrisome. It is very worrisome because it would force a country like Canada to adopt ex officio measures which we don’t need. Last year at this conference, Justice Roger Hughes of Canada’s Federal Court, who is a hero by anybody’s measure in terms of intellectual property in Canada through his career as a barrister and now as a judge, said we don’t need them. He can render orders very quickly when necessary. He said, “Just roll up your sleeves, do your work, come to the Court, and you’ll get your order.” We don’t need ex officio action in Canada. If other countries want to have that, that’s their problem. But we don’t need it in Canada and we don’t want to be forced into it. We don’t want, at least some of us don’t want, Customs agents to try to figure out what is a legitimate parallel import or not. I was involved in a case in the Supreme Court of Canada,38 which badly split our Supreme Court of Canada, which is a marvelous court. They couldn’t agree on whether or not a genuine Toblerone chocolate bar should be allowed into Canada because of artwork on it. We won the case, but only by a technicality in some people’s minds. The court was seriously split. 37 At the time of this conference, Wikileaks had revealed some leaked parts of the draft agreements. See Wikileaks, http://mirror.wikileaks.info/wiki/Classified_US%2C_Japan_and_EU_ACTA_trade_agreement_drafts%2C_2009/ index.html. After the conference, the full copy of the draft ACTA agreement was revealed. See Full ACTA Leak Online, Slashdot.org, Mar. 24, 2010, http://yro.slashdot.org/story/10/03/24/1214239/full-acta-leak-online; see also Consolidated Text, Anti-Counterfeiting Trade Agreement, Jan. 18, 2010 (Informal Predecisional/Deliberative Draft), available at http://www.laquadrature.net/files/201001_acta.pdf. 38 Euro‑Excellence Inc. v. Kraft Canada Inc., [2007] 3 S.C.R. 20, 2007 SCC 37.

The U.S. Supreme Court is probably going to hear a case about whether or not genuine Omega watches should be barred from importation by Costco because of a little design on the back of the watch.39 These are really complicated questions and should not be decided by border guards on the spot. They should be decided by experienced judges, like Judge Hughes and Judge Rakoff. The whole effort is totally disingenuous when we’re talking about fake drugs as the banner issue. It’s like talking about terrorism. Nobody favors terrorism, but let’s not drag a whole bunch of other unrelated things in that have nothing to do with fake drugs. The debate is really about sound recordings and films. Follow the money. That’s where the money is. Those are the people who are behind this thing. When somebody says, “Oh, don’t worry about iPods and laptops, nobody is concerned with de minimis infringement”—well, I am sure there are some people in this room who think that even ten unpaid-for songs on an iPod is more than de minimis, and they are going to insist, “Well, at least the border guards have to check your iPod to figure out whether you have a de minimis amount or more.” MS. DiTOMMASO: Howard, if you were to be the negotiator, what system would you introduce to be able to distinguish between a true counterfeit and a genuine product? MR. KNOPF: That is a difficult question. A true counterfeit, I suppose, is something that was never made with permission from anybody that is entitled to give that permission and it’s a total fake. It may be very sophisticated, it may even be identical, or even better than the original in terms of quality, but it was never made with anybody’s permission. As soon as it is made with somebody’s permission, then things get murky, and somebody is going to want to keep it out because they want to price-discriminate and they want to block that parallel import. These are important questions. That’s why we have judges, and some of them are quite accomplished, but even they have questions. But if there is no permission ever, then it’s a counterfeit. But I don’t want border guards making those decisions. MS. DiTOMMASO: We will go back to that. I would like to ask Michael to comment on WIPO’s role. What do you think Michael, what will happen with the enforcement agenda in WIPO? Is there any way to reengage the advisory committee, making clear, for instance, there is no standard-setting exercise? What is your view on that? MR. KEPLINGER: We do have scheduled for November a further meeting of the Advisory Committee on Enforcement.40 And it is just that, it is an advisory committee. It has no normsetting role. Our role in the enforcement process is very much as Peter Fowler described the role of the USPTO. We provide capacity building, we provide training for judges and prosecutors, and do our best to try to improve the enforcement situation. As I mentioned in my opening remarks in the plenary session, we are placing the emphasis on an approach that emphasizes building respect for intellectual property. That has several components, including making sure that developing countries understand that they too have creative industries, that those industries contribute significantly to their economy, and that if they improve the intellectual property system they can contribute even more to their economy. One of the things that they have to do to improve the intellectual property system is very often simply enforce the laws that are already on their books. We, along with agencies like the USPTO, other governments, and industry, work very hard to try to provide that training. 39 See Omega S.A. v. Costco Wholesale Corp., 541 F.3d 982 (9th Cir. 2008), cert. granted, 130 S. Ct. 2089 (2010). On Dec. 13, 2010, the Supreme Court returned a 4-4 decision, affirming the 9th Circuit by an equally divided Court. 40 Colloquy, Advisory Committee on Enforcement Fifth Session, 2009 World Intell. Prop. Org. 1, available at http://www.wipo.int/edocs/mdocs/enforcement/en/wipo_ace_5/wipo_ace_5_2.pdf [hereinafter Advisory Committee].

Part B: Enforcement & Counterfeiting  545 MS. DiTOMMASO: Jed, what is your view, if ACTA were ever to be adopted would that imply the necessity to review the current U.S. legislation? JUDGE RAKOFF: I don’t know. I was very struck by what Howard just said, because I know Justice Hughes very well and he’s an excellent judge. If he has doubts about ACTA, it certainly ought to be listened to. But I think there are two different kinds of counterfeit goods that have been discussed here today. Howard seems to be concerned about gray goods, that is to say goods that are like overruns from the manufacturer that are then purchased at a discount and then imported into, let’s say, the United States and sold at a discount. There has always been a fear that anti-counterfeiting measures would be used against those, which are really not counterfeits at all and represent a form of legitimate price competition. But I think the concern that many of us have is much more the kinds of goods that Peter was referring to, things like brake parts and aircraft parts and integrated circuits and things that are counterfeits, are often inferior—sometimes superior, but usually inferior—and create tremendous dangers if allowed in. I have been waiting for someone on the panel to discuss more about China, because that seems to me to be the heart of the problem with respect to a lot of these issues. I am very familiar with the Chinese legal system. When they want to, they can be the most efficient legal system in the world. It’s a system, some of you may know, that is actually controlled by the Party. The judges are pawns of the Party. They have such modest things as the death penalty for sixty-eight different crimes, like grand theft. So they can do the job if they want to. They don’t want to do the job. I’m not sure why they don’t want to do the job in this area, but they don’t. MS. DiTOMMASO: Maybe I’ll ask Luc to comment on that because you have had hands-on experience with the Chinese. MR. DEVIGNE: On the Chinese efficiency depending on the will, I totally agree with you. Just yesterday I was reading a verdict—and I can speak about it because it is in the press— against a poor French company that has been actually copied and fined for having been copied by the Chinese and obliged to pay an indemnity. The indemnity on appeal has been reduced to 50 percent of what it was in first instance. But it is a bigger indemnity than any indemnity any Chinese copiers have had to pay. So clearly there is a national policy there. There is an industrial policy. It is public. You can read the objectives of China, which is to be number one in eight technological sectors—telecom, aerospace, advanced metallurgy, etc. I hope that to become number one, they intend to follow a TRIPs-compatible manner. But I fully agree with you on the issue of the problem of Chinese justice. One last example, the famous Silk Market, which is selling 99 percent fakes in a building which has six floors, each of them the size of a football field. This is right in the center of Beijing. I can understand a country cannot control everything, everywhere, particularly if it is big, but this is downtown Beijing. It is like one mile from Tiananmen Square. I guarantee you that if, instead of displaying fakes I display politically sensitive material, it will not take long before the police arrive. So clearly, when there is a will, there is a way. Clearly, we have seen that during the Olympics, when the Chinese wanted to prevent their own trademarks from being copied, there were absolutely no fakes of this. So I fully agree with that. Just very briefly, three points. I want to reply to Howard. One, you mentioned that what you have read on the leaks was important. Well, why do you rely on the leaks? Why don’t you read the official documents? Number two, Canada’s legislation. Well, let’s talk about it. We will talk about it with Canada when we start the FTA negotiations in May. But I suggest

546  CHAPTER VII: TRADE LAW you start by reading the report by the IP Council of the Canadian Chamber of Commerce that actually explains black on white in thrity pages how and why Canada has insufficient IP legislation.41 Canadian Customs harldy seize any IP infringing good because Canadian rules make it impossible in practice. Last but not least, Customs agents do not decide whether an object is infringing an IP right or not. That has never happened, as far as I know in the European Union. Courts decide. Customs is simply detaining temporarily, and then either there is a request by the right holder to take the matter to court and the court will decide, or otherwise the goods have to be released. If that is not the case, there can even be penalties or damages to be paid by the right holder for abusive behavior. Thank you. MS. DiTOMMASO: Eric, I know you want to say something. MR. SMITH: I just wanted to respond. I totally agree with Luc. You know, we shouldn’t let the marginal cases—Howard mentioned parallel import issues—and there are always going to be issues at the margins where it is not going to work so great. But remember, Luc said 79 million units of counterfeit product were stopped at the border. Eighty percent of the counterfeit product that comes into the United States comes from China. Look, it’s not an issue. This stuff is counterfeit. We know it. You know it when you see it. And yes, there are always going to be those issues at the margin. You have to ensure that there is fairness. But we have a huge problem globally, and it shouldn’t be driven by the problem of maybe a parallel import gets caught up. Particularly in Asia, what happened when a lot of the countries there removed parallel import protection, containers would come in. On top of the container would be all the legitimate parallel import product and underneath it would be all the pirate product. That’s going to happen. These things are going to happen, and we have to adjust for it. But the marginal cases should not be the rule. MS. DiTOMMASO: Okay, Eric. I need to ask a question to Peter. I know, Peter, you want to comment. But also, if you can address this capacity building from the international cooperation perspective, how are you guys going around the world, maybe sometimes—I’m sorry if I say so—potentially duplicating efforts, maybe training the same people at the same time the European Union is doing something? How are you going to go about that? MR. FOWLER: That’s a legitimate concern. In dealing with Southeast Asia and ASEAN, there is a regular consultation between the major donor nations—between JPO, KIPO, the European Union, the United States, IP Australia, and WIPO—to coordinate our efforts. We have reached after this many years, with so many players involved in capacity building and training, frankly, in some countries a saturation point. Many officials have been in programs in the European Union, in Tokyo, in the United States, in the region, in WIPO programs. You do begin to wonder how many programs and how much training do they need. So there is that concern. I think there are efforts, increased efforts, to coordinate our efforts. I think the economics of it, frankly, are such that we are trying to find opportunities to do programs jointly, to partner with other organizations. For example, this coming July we are co‑organizing with JPO an APEC/ASEAN/World Customs Organization/WIPO/OCEANIA Customs Organization/Pacific Island forum program in Honolulu on border enforcement.42 I think the response from rights holders is that that is “A Time for Change”, 2009 Can. Intell. Prop. Council 1, available at http://www.ipcouncil.ca/resources.cfm. APEC-ASEAN-USPTO, Workshop on Effective Practices in the Border Enforcement of Intellectual Property Rights, Honolulu, Hawaii (July 20–23, 2009). See WIPO, Enforcement News, Jan. 2010, http://www.wipo.int/ enforcement/en/news/2010/enforcement_01.html. 41 42

Part B: Enforcement & Counterfeiting  547

absolutely great, because it gets all the players in the room at the same time and it makes it worthwhile, and it doesn’t require them to travel to five or six different training programs or conferences. I think the reality is everyone has to work more together to do this. MR. SMITH: And that’s one of the objectives of the ACTA. MS. DiTOMMASO: I would like to ask Michael: Do you think that if we manage to meet again in November with the Advisory Committee that would have a broader scope and that might include also the exchange of best practices on the international level? Are you positive about that? MR. KEPLINGER: There have been several attempts in the Advisory Committee on Enforcement to turn back to this idea of best practices.43 It has been rejected by our membership, largely by the group called the Friends of Development, who see that they already have sufficient obligations in this area with respect to the way they see the TRIPs Agreement as being sufficient, and that they don’t want anything that will go beyond that.44 So I am not very hopeful that for the immediate future there is going to be any possibility in WIPO to come up with some sort of, in the mildest sense of the word, normative document on enforcement standards. However, I do think we can do a lot, as Peter said, by working with our other organizations. We currently work with the World Customs Organization and Interpol to organize every year a Global Congress on Combating Counterfeiting and Piracy. The next one will take place this June in Mexico. This is what we can do. We are trying to do everything that we can. MS. DiTOMMASO: I’d like to give the floor to Roya and also to Giovanni. I will start with Giovanni, linking to his practical experience on the ground. What do you think? You seem to be very positive on the ADR. Is it really realistic? Would you see it as a substitute for or complementary to enforcement? Do you think it is going to really work in these critical countries like China? MR. CASUCCI: My impression is that China is probably one who most prefers to accept this idea. They prefer to find a way outside from the normal judicial way in order to solve the issues. In Canton there is already existing a special service for IP enforcement having 100 guys available. The only issue is that the service offered from this kind of service is really an informative service. They just are available in order to explain to the people questioning about IP rights how to search the Internet, how to find the evidence on the existence of rights, and whatever. But they do not have any enforcement power. If there is some critical situation, this kind of service refers necessarily to the administrative police. I personally can report the impression of the people of MOFCOM who visited France, Germany, and Italy in November last year in order to see how this system was implemented in the European Union.45 They appeared very positive about the implementation of the Italian solution that must comply with two different perspectives, efficiency and specialization of the panelists, and at the same time avoid the so-called “shame” to be caught by an authority as a judgment of a judge or the police. In this way it is possibly really to obtain a clear position about to do or not to do in the small context of the expo, and then after in the normal life they Advisory Committee, supra note 40. Colloquy, Inter-sessional Intergovernmental Meeting on a Development Agenda for WIPO First Session, Proposal to Establish a Development Agenda for WIPO: An Elaboration of Issues Raised in Document WO/GA/31/11, 2005 World Intell. Prop. Org. 1, available at http://www.wipo.int/edocs/mdocs/mdocs/en/iim_1/iim_1_4.pdf. 45 Study Tour to Europe on IP Protection at Trade Fairs, 2008 EU-China Project on the Protection of Intell. Prop. Rts. 1, available at http://www.ipr2.org/index.php?option=com_content&view=article&id=764:study-tour-to-europeon-ip-protection-at-trade-fairs&catid=101:-enforcement&Itemid=84. 43 44

548  CHAPTER VII: TRADE LAW will decide to prosecute or not in the civil way, or the criminal way with a possible injunction. But normally it is a good moment to settle the case, to settle not only because of negotiation, but because somebody said, “It is infringing. I give you a clear warning. You may settle and avoid more troubles.” Then I am quite positive that, at least starting through a bilateral project—Italy is proposing some bilateral project with the major trade fairs in Shanghai and Beijing and Canton, using Milano and Verona as a sort of negotiator, just in order to have a bilateral agreement on that. So I am quite positive on that. Of course, it would be a small step, but a significant step, in order to have a seamless service in both countries. MS. DiTOMMASO: Thank you. I know, Howard, you want to say something, but I’d like to ask Roya a question. If you were to re-brand IP rights, if you were a marketing person, what do you think the IP brand should stand for? What would be the values behind that? DR. GHAFELE: My major recommendation to get out of the current perception issue is to actually protect intellectual property protection. I am quite surprised that so far we haven’t thought of issuing IP-protected IP. I would issue something like a collective trademark, where companies that adhere to certain standards and that jointly have decided to stand for certain value propositions which relate to fair trade and intellectual property are entitled to actually use that “fair trade IP” logo. Of course, this logo would have to be a cool design. Someone would have to figure out what it looks like. And it would have to have a special name or something. But this would be the idea that I have basically. If you go to a supermarket in the United Kingdom, it’s amazing. You think you are buying tea, but in fact you buy fair-traded tea from organic products with happy kids, one cent going to poverty. It is amazing. I can’t even see anymore which tea product I am buying. In the area of intellectual property that hasn’t happened yet. A good example, I think, that we could draw upon is St. Moritz in Switzerland. As you perhaps know, St. Moritz is a quite successful trademark. That was because they had someone from Nestlé actually who had quite a bit of experience in branding food products, who said, “We need to brand St. Moritz just as we brand chocolate.” The trademark had quite a bit of success. The licensing revenues that St. Moritz is generating by licensing its trademark to others, to Louis Vuitton, etc., are quite substantial. In addition to that, what has happened is the fact that they have this collective trademark has allowed St. Moritz to really manage its reputation in the market, and it has introduced a clear governance structure for the city. So I could imagine if five or six companies form up and create an alliance and start to think about “How can we position intellectual property in a way that people are not scared by it?”, then some sort of fair-trade collective trademark would be my main recommendation. That could perhaps also have some support from the Global Compact, which I understand has so far not really looked into issues of intellectual property. MS. DiTOMMASO: Thank you very much, Roya. We have a few minutes for questions from the audience. I know, Peter, you want to comment on that. QUESTION: Jamie Love with Knowledge Ecology International. I just wonder if people have done much research on the relationship between pricing and infringement, in the sense of at what price point are people more likely to voluntarily comply and not infringe? At what price point in a developing country do people just ignore copyright? MS. DiTOMMASO: Peter, do you want to answer?

Part B: Enforcement & Counterfeiting  549 MR. FOWLER: I am not sure there is a lot of research, but I know there is anecdotal evidence that the recording industry did in Thailand regarding that sort of price point difference, and also in Malaysia the Recording Association of Malaysia studied that. I think it varies depending on the sophistication of that particular economy and the level of understanding of legitimate product purchasing. I think there is a correlation between the two. I’m not an economist, so I’m not sure I could comment on that. But you often hear from many officials and others—and I hear this all the time—that if rights holders would just bring the cost down, people wouldn’t buy pirated things or counterfeit products. I don’t think it’s that simple. I think it is much more complex than that, but I think that is an element of it. MS. DiTOMMASO: We have another question here. QUESTION: Prof. Susan Scafidi, Fordham. For a counterfeiting panel I heard surprisingly little about the demand side. I wonder if you could quickly comment. I heard a little bit from Peter on public education, and implicitly from Roya because your rhetoric has an audience. But, of course, France and Italy have gone further than anyone in talking about consumer sanctions with respect to the acquisition of counterfeit physical goods, and the United States has had some enforcement online. That hasn’t gone terribly well from a public relations perspective, but how is that working out in general, and is that a relevant part of the question? MR. FOWLER: I’d love to comment on that because that is a very relevant part of the question. Comparisons or analogies to narcotics trafficking and the war on drugs and all that are apt because I think, as even Secretary Clinton recently acknowledged in the U.S. circumstance with the drug trafficking,46 you’ve got to change attitudes, you have to change consumer purchasing attitudes. The best example I can give you where that has begun to really work is in Singapore. The IP Office there, working with a variety of agencies as well as with the private sector, has launched a continuous, sustained program, what they call the “Live for Real” program,47 to change attitudes of younger people about what they buy, what they purchase, where they go, what they listen to, etc., etc. Until you change that, I don’t think you make much progress. MS. DiTOMMASO: I am afraid we have to wrap up. I will ask each of you to say one word about the future. How do you see the future of this? Let’s start with Howard. One word. MR. KNOPF: One word is WIPO. Judge Rakoff mentioned China. Where is China in the ACTA negotiations? Why are they are not present? Where are the rest of the BRIC countries? If they’re not here, there is no point. This is bad policy laundering. Our government in Canada was quite candid recently, saying it didn’t go to WIPO because of difficulties with the former Director General. Well, guess what? We have a new terrific Director General at WIPO. Things are changing there for the better. This should be back in WIPO where it belongs. We need WIPO. We wouldn’t be here, we wouldn’t have the great treaties, Paris and Berne, if it hadn’t been for WIPO and its predecessor Back to WIPO, that’s my word. MS. DiTOMMASO: Michael, one word, please? MR. KEPLINGER: Hope. MS. DiTOMMASO: Jed? JUDGE RAKOFF: Doubt. 46 See Hillary Rodham Clinton, “Remarks With Mexican Foreign Secretary Patricia Espinosa After Their Meeting”, Mar. 25, 2009 available at http://www.state.gov/secretary/rm/2009a/03/120905.htm. 47 The program name is the Human and Intellectual Property (HIP) Alliance, and the tag line is “Live for Real.” See Sing. Intell. Prop. Off., Raising IP Awareness and Capabilities, available at http://www.ipos.gov.sg/NR/ rdonlyres/D59DCAB7-9857-4ACE-837A-E26678B53793/1047/IPOS_AR_Raising_IP_Awareness_and_ Capabilities1.pdf.

550  CHAPTER VII: TRADE LAW MS. DiTOMMASO: Luc? MR. DEVIGNE: Optimism. MS. DiTOMMASO: Roya? DR. GHAFELE: Collective trademark. MR. SMITH: I think that WIPO has no ability to deal with this right now. The BRIC countries

are not interested in moving in this direction. If they were, we would gladly sit down with them. But they haven’t been interested in moving on any kind of enforcement best practices. MS. DiTOMMASO: Peter? MR. FOWLER: Sustained. You’ve got to get governments to understand this is a long-term thing that they’ve got to take on. Sustained allocation of resources, sustained allocation of funding, sustained enforcement. MS. DiTOMMASO: Roya and Giovanni, please one word, very quickly. DR. GHAFELE: Collective trademarks. MR. CASUCCI: For me, try to be creative in solving problems. MS. DiTOMMASO: We can now conclude, join me to thank the panel.

Part B: Enforcement & Counterfeiting  551

APPENDIX A

Of War and Peace: Analyzing the Policy Discourse on Intellectual Property Roya Ghafele48 Abstract This study analyzes underlying themes of the international policy discourse on Intellectual Property (IP) and in this sense raises awareness on common pitfalls currently associated with international policy making in the area of innovation. Methodologically it is situated within the domain of discourse analysis, which considers policy making as strongly embedded by a specific representative order that paves the way for framing policies in one specific way, while systematically silencing alternative positions. The baseline of the analysis forms a literature review of approximately five hundred texts that were identified through random key word search, including academic journal articles, newspaper articles, statements from international organizations and national administrations as well as statements on “you tube.” We found that the current policy discourse on IP is driven by two different camps. On one side are those who associate IP with the negative side effects of Globalization and see in IP a mechanism to erode important social and cultural values. On the other side, those wanting to advance the IP agenda hardly address how IP may promote equitable innovation, but instead repeatedly refer to counterfeiting and piracy as a major threat to industry. Overall the discourse derives much vocabulary from the domain of war, fights and battlefields. We did not find any solution driven approaches seeking to explore how IP may be used as a means to advance the knowledge economy worldwide or bridge current divides prevailing in international systems of innovation.

48 D.Phil., Department of International Development, MS.C. in Global Governance and Diplomacy, University of Oxford. Email: [email protected], Telephone: 0044 7597929193. Roya Ghafele is currently a lecturer with the University of Oxford, Department of International Development. During her lectureship she focuses primarily on the global governance of innovation and intellectual property. Prior to that she was an international research scholar at the Haas School of Business, University of California at Berkeley, where she explored the nexus of intellectual property rights and institutional dynamics surrounding national systems of innovation in developing countries. Other than that she worked for four years as an economist with the World Intellectual Property Organization, where she offered strategic advice to Governments in the Middle East and Asia on the leverage of indigenous intellectual property assets for value creation. She also worked for two years as an economist with the OECD Trade Directorate, McKinsey & Company and consulted for the Global Equity Initiative of the Kennedy School of Government, Harvard University. Until age 25 Roya Ghafele danced for various ballet companies in Europe. Roya Ghafele was trained in international affairs and economics at Johns Hopkins University, School of Advanced International Studies, the Sorbonne and Vienna University. She is fluent in German, English, French, Italian and Persian. Her Ph.D. “Globalization, Francophone Africa and the WTO—a Historical Discourse Analysis” was awarded the Theodor Körner Research Prize by the President of Austria.

552  CHAPTER VII: TRADE LAW Introduction Intellectual Property (IP) is at the same time an intangible asset and a political scapegoat. The TRIPs agreement and subsequent amendments to the treaty have turned a previously perceived “technical non-issue” into a concept that generates controversial debates. Primarily understood as a legal concept, it appears as a negatively connotated word in the international discourse on globalization, innovation and developing country challenges.49 Within the current Globalization discourse, the role and tools appear clearly defined and IP is positioned as yet another tool to protect the wealth of those who have from those who don’t. Increasingly, the concept of IP is interwoven with much broader issues of global concern and more and more positioned as a means to help multinational companies build up monopolies to the detriment of the poor, patients in need or the preservation of our climate.50 IP is furthermore perceived to drive small and medium-sized enterprises (SMEs) and local business in developing countries out of business and increase prices for consumer products, be they pharmaceuticals or software and increasingly so, means of “green” energy creation.51 The opportunity of examining IP as a tool to advance the knowledge economy, or as an unlimited resource available to leverage indigenous knowledge resources worldwide or build new bridges for a common environmentally friendly technology scheme are systematically missed because of the structure of the discourse. The damage is worsened by the reality that proponents in favor of the IP system, such as patent offices or industry associations, do not address the issues and concerns of the Globalization movement. Instead, the ever reiterating call for “strong IP rights,” the “fight against counterfeiting,” “the punishment of pirates” polarizes the debate even further and increases the gap between those who fear the loss of fundamental social, human and environmental rights and those wanting to advance the IP agenda. The concerns of civil society that IP prevents the maintenance of global public goods are clearly not met by this type of language and unsurprisingly culminate in civil society’s call for a fundamental shift of the global IP regime and significant changes of current IP governance structures. Intellectual Property and Globalization: Sketching the Discursive Field Innovation, along with trade, capital flows and the activities of multinational enterprises (MNEs), is widely recognized as a force driving “globalization,” a phenomenon often described as “Globalization” or less polemically described as international economic integration. Firms moved increasingly away from a Fordist production model with reliance on economies of scale and towards a flexible model of networks or clusters that come together in various ways and for varying lengths of time to focus on a particular market niche. Such clusters may exist across geographical areas, or firms may collaborate virtually, as in an ICT driven environment. Often, established firms and start-ups or young firms are partners in this process. New firms may be created as spin-offs from established large firms or be linked to research institutions /universities. The proliferation of international business networks and their increasing 49 This paper draws upon a draft literature review, entitled “Perceptions of Intellectual Property. A Literature Review” that was prepared for the Intellectual Property Institute, London in 2008. A selected inventory of the texts reviewed for this article is annexed to this preliminary draft review. My particular thanks to my research assistant Janine Kischl, who provided excellent support in creating an inventory of current texts related to intellectual property. Further thanks for most helpful comments, ideas and suggestions to Ian Harvey, Jeremy Philips and Paul Leonard of the IPI, Kevin Rivette from the USPTO, as well as to the UKIPO, Caroline Kamerbeek of Philipps IP & Standards, Oswald Schroeder of the EPO and Shamnad Basheer, who runs the blog Spicy IP. 50 R. Marlin-Bennett, “International Intellectual Property Rights in a Web of Social Relations”, 17 Sci. Communication 118–136 (1995). 51 “The Right to Good Ideas. Patents and the Poor”, Economist, June 23, 2001.

Part B: Enforcement & Counterfeiting  553

importance to the international economy mean that the management and development of such clusters of enterprises are critical to promote growth. Innovation policy and institutional support to leverage innovation have been lacking at both international and regional levels, and the existing Intellectual Property system often appeared insufficient to provide an adequate regulatory framework for innovation based multi-national production and distribution. Intellectual property rights are by nature territorial rights and therefore offered insufficient protection to do business across countries. The legal architecture that had evolved over centuries in Europe and North America to protect and possibly also promote innovation was slow to adapt to the new economic environment. The systematic use of ICT and new means of transportation meant less physical obstacles were in the way to leverage low labour, production costs and other forms of arbitrage at the international level. The physical infrastructure of doing international business was more or less established and gave space and time a new meaning. Trade related innovation may have become global, but was still forced to operate within a regulatory framework designed primarily for national or at most regional business activities. IP was still strongly rooted at the national level. The TRIPs Agreement in many ways overcame the gap between the territorial limitation of intellectual property and the internationalization of business operation. Yet in doing so, it transferred many of the challenges and shortcomings of the overall WTO architecture for international trade to intellectual property. While TRIPs resolved from a legal point of view some crucial questions associated with enforcement and prosecution outside a firm’s home country, it did not address important non-legal questions. Therefore, while it provided a more appropriate infrastructure for cross border innovation, it opened up a whole new universe of unresolved questions associated with sustainable development and the equitable distribution of global innovation. A borderless world became a reality for some; however the majority of the world’s population experienced further fragmentation and marginalization; the regulatory context provided for innovation through the TRIPs agreement formed no exception to that.52 The maintenance in the global innovation gap may perhaps be understood in light of the discrepancy between international economic diplomacy and international economic theory. Trade diplomacy never aimed for a perfectly integrated global economy, but for some sort of mercantilist reinterpretation of a free trade paradigm. Intellectual property-related trade diplomacy formed no exception. While international economic theory assumes a perfectly integrated global economy in which transaction costs are strongly reduced, current regulatory settings provide for a free-ER trade compromise rather than free trade. Clearly, larger markets liberated from entry barriers against foreigners have offered new business opportunities and forced incumbents to reconsider their position. The positive, dynamic effects of economies of scale and scope, the increase in product and service efficiency and competition are telling. However, there is an inherent dilemma in a half realized open-economy paradigm: growth rates are unequally distributed and income disparities, both within and between societies, tend to be widened rather than resolved. Assessing the dynamics of the Uruguay round negotiations leading to the creation of the TRIPs agreement illuminates the built-in asymmetries of this new international framework for innovation. Developing countries very likely signed away their rights for a handful of concessions related to textiles and agriculture, while very likely not grasping the impacts of the treaty on global innovation. Although the treaty ordered global innovation in a specific way; the power of IP was implicit not explicit, since many countries had yet to realize the decisive factor intellectual property plays in building and advancing knowledge based economies.53 Or, 52 P. Hirst, G. Thompson, Globalization in Question (Polity Press 1996); T. Friedman, The Lexus and the Olive Tree: Understanding Globalization (Farrar/Straus/Giroux 1999). 53 J. Stiglitz, “How to Fix the IP imbalance: Too Much IP Protection is Bad for the Economy”, 10 Managing Intell. Prop. 35–39, Oct. 28, 2004.

554  CHAPTER VII: TRADE LAW as Ryan puts it, “when the U.S. trade representatives suggested to put intellectual property on the trade agenda, very few grasped what the U.S. was in fact aiming for.”54 The dynamics provoked by the further internationalization of intellectual property not only boosted certain economies, but also exacerbated ongoing processes of marginalization. Crossborder innovation thus produced integration and disintegration, interconnection and exclusion, growth and stagnation. Paradoxically, this dynamic hampers the innovation process itself, which is nourished by a diversity of ideas and perspectives from people all over the world. The TRIPs agreement put a further distance between the center and the periphery. Unsurprisingly given these consequences, the concept of intellectual property gained a previously unknown claim to fame. Diverse groups ranging from feminists to churches to environmentalists protested against intellectual property and labeled it as a major threat to humanity. In a word, the concept of intellectual property was “globalized,” not only in the sense that it provided a more solid legal basis for international business, but also in the sense that it became a core target of the Globalization movement, which associated IP with global capitalism and a threat to decent living conditions worldwide. Intellectual Property or Intellectual Property Rights? The mainstream argument in favor of intellectual property is that it provides an incentive for innovation. The TRIPs agreement defines intellectual property rights as negative rights, as rights “to exclude,” allowing thus the owner to prevent third parties from “from making, selling or importing articles bearing or embodying copies … , provided that such acts are undertaken for commercial purposes.”55 The rationale for proprietary innovation is that publicly available innovation satisfies the criteria of non-excludability and non-rivalry in consumption, key features of public goods. Public goods may thus cause a market failure, meaning that the market does not provide socially optimal amounts of the good because market participants do not have sufficient incentives to produce the good. For the purpose of this article we call this approach towards proprietary knowledge the “intellectual property rights” paradigm, which, as we shall further illustrate, provides a reductionist view on the wide range of opportunities provided by “intellectual property” or intellectual property “assets;” understood as proprietary knowledge or property rights in an abstract object.56 Common wisdom further argues that intellectual property rewards the individual inventor/creator—but in many cases this is just not true. Take patents as an example: If anything, patents reward patent offices and patent attorneys. Patents are costly to the inventor and they provide no guarantee for the product’s success in the market. Also, the “inventor” is in most cases a company. The romantic image of the individual inventor experimenting in his/her laboratory and eventually developing a new technology is misleading and does not reflect the cumulative nature of innovation processes. Rather, patents like other forms of intellectual property provide an entry ticket to the market based economy. Intellectual property allows the creation of surplus value. They allow the selling, buying, trading or licensing of knowledge, made explicit and codified through the legal system. This is the fundamental and at the same time most contested function of the intellectual property system. 54 M. P. Ryan, Knowledge Diplomacy: Global Competition and the Politics of Intellectual Property (Brookings Institution Press 1998). 55 TRIPs, supra note 4, Arts. 26.2–26.3, available at http://www.wto.org/english/docs_e/legal_e/27-trips.pdf. 56 Mouritsen, J. & Thrane, S. 2006. Accounting, network complementarities and the development of interorganizational relations. Accounting, Organizations and Society 31: 241–75.

Part B: Enforcement & Counterfeiting  555

Intellectual property makes knowledge economically functional and managerially controllable. Viewed as property over immaterial assets, it allows market participants to associate innovation with entrepreneurship. Because IP allows tacit knowledge to be made explicit and be parceled into limited bits and pieces of clearly decoded knowledge, IP can resolve issues related to approbriability in the sense of Teece57 of a firm’s innovation capacity. Eventually, intellectual property allows the inventor to hedge against risk and provides an opportunity to turn a new idea or invention into an innovation and engage in some sort of commercial interaction. While we do not want to delve further into the history of thought on entrepreneurship and innovation, nor into the comprehensive question on how entrepreneurship and innovation promote growth, we would like to stress the point that intellectual property provides only an opportunity for innovation based business, but by no means does it in and by itself guarantee entrepreneurial success. Current research does not clearly indicate the extent to which the existence of intellectual property, which may be owned by a number of different players, may even hamper innovation, as addressed in the open source community. The issue of patents on research tools, for example, or of patent thickets, patent pools and patents essential to technical standards are dimensions that need to be studied in greater depth. In addition, research is needed into the emerging, more comprehensive understanding of IP as the currency of the knowledge based economy, rather than as a mere defensive right. With Rivette & Kline58 we argue that research into a pro-active, value driven attitude towards IP has so far been limited in scope, perhaps because the non-legal literature dealing with IP can draw upon more than a decade of academic work in the field. Hanl59 reports that the number of publications dealing with patents indexed in ECONLIT rose to (only) 251 between 1999 and 2002, compared to 39 between 1981 and 1984. We argue that the wide range of strategies available to manage intellectual property at the level of the individual firm offers some parallels for the governance of intellectual property at the international level. While compulsory licensing is clearly a legitimate means to assure global equity, particularly health equity, it is only one means to assure the public interest. A more differentiated understanding of IP and its role in global innovation processes gives way to a whole range of policy measures, treating IP not as a final product, but as an element in an evolving innovation process. To what extent one or more IP items, jointly or severally, successfully contribute to maintain or enhance global equity depends on the context in which the IP is used, the supplementary assets (including human resources) to which the IP is related to, and its fit to other overarching strategic goals set by a certain policy. A new paradigm for intellectual property, an understanding of intellectual property as an “enabling mechanism,” an “offensive right” rather than a mere prohibitive legal mechanism gives way to new questions on the role of IP in current globalization dynamics. These approaches are however not reflected in the current discourse on IP and Globalization, meaning that a reductionist and simplified understanding of intellectual property through a mere legal lens (“the intellectual property rights” paradigm) translates into a very narrow understanding of public policy choices available to manage intellectual property in the public interest. Theory of Discourse The current discourse on IP and Globalization, and in particular the systematic reference to IP as IP rights rather than as IP opportunities is a good illustration of how power dynamics determine 57 Teece, D.J. 1987. Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy. Research Policy 15: 285–305. 58 Rivette, K. G. & Kline, D., Rembrandts in the Attic. Unlocking the Hidden Value of Patents (Cambridge MA: Harvard Business School Press, 2000). 59 Hanl, P. 2006. Intellectual Property Rights Business Management Practices: A survey of the Literature. Technovation 26: 895–931.

556  CHAPTER VII: TRADE LAW the direction of a discourse. A discourse, which represents social reality in a certain way, offers specific perspectives on a given subject, while systematically silencing other attributes or features of a given subject matter. Once a certain perspective is widely recognized and woven into the overarching discursive parameters of its time, it is hard to break with established social constructions. Foucault points out that the discourse of Mendel was correct from a scientific point of view, yet it did not fit the prevailing parameters of 19th century genetics: “Le discours de Mendel était juste, mais il n’était pas dans le vrai du discours contemporain.”60 (The discourse of Mendel was correct, but it was not in the “truth” of the discourse of his time)

Foucault’s differentiation between “juste” in the sense of scientifically correct and “vrai”—“right,” a term that sketches out the overarching socially accepted truth, is the best conceptualization one can think of to describe the underlying tensions between a notion of IP as a form of an intangible asset and IP as a legally constructed defensive right. In a way it is ironic that the very concept designed to foster innovation does not escape the preserving and conservative approaches of established discursive patterns towards innovation. Discourse analysis allows reflection on social systems, on commonly accepted “truths,” the “vrai” in the sense of Foucault, and unmasking of what seem at first sight to be objective facts as socially constructed realities. The notion of a “socially represented reality” replaces the belief of an objective reality that exists independently from language, which can be seen as the collective work of a given community or society.61 Discourse analysis argues that the object/ subject dualism is nonexistent. It challenges the notion of an empirically verifiable reality or truth and instead assumes a linguistically constructed representation that serves to legitimize existing practices and cements the status quo.62 A helpful notion to differentiate between the inherent reality of the world of objects and the social world is provided by Bakshar.63 It is not questioned that some sort of “natural reality” exists of which society has no or limited or mistaken knowledge of. However, this reality must not be confused with society’s knowledge of reality. The “real” is different from the “empirical.” The “empirical” does not in any simple way mirror the “real,” but represents it in a very specific way, deciphered by Foucault as the “order of the discourse.” The “objective world” can exist independently of society’s reflection on it. However, if it is to be part of society’s overall effort to grasp meaning of the world that surrounds it, it is bound to undergo the process of linguistic representation, resulting in a specific social creation and conceptualization of the objective world.64 A discourse is not simply a reaction on a specific situation, does not simply express a given context, a discourse allows the categorization of the social world and in this sense determines what is allowed and what is not. A discourse provides categories of orders, which help to establish and maintain the coherency necessary for maintaining political power. A discourse can only be recognized as “right” if previous discursive work has resulted in a primary authorization to do so. International policy making may be considered successful (from the point of view of a specific actor) if the existence of the one, the only, the legitimate and right discourse has as consequence the alienation of an opposing discursive arrangement. In practice, these strategies often make other positions look ridiculous, censor them or redefine them through subsequent social discursive work so that in the end they fit the established Foucault, M., L’Ordre du Discours (Paris: Gallimard, 1971). Lafont, R., Sprache als Arbeit (Wien: Braumüller, 1992). 62 Mueller, M. 2006. Discourses of Postmodern Epistemology: Radical Impetus Lost? Progress in Development Studies 6: 306–320. 63 Bakshar, R., Scientific Realism and Human Emancipation (London: Verso, 1986). 64 Fairclough, N. 2005. Peripheral Vision: Discourse Analysis in Organization Studies: The Case for Critical Realism. Organization Studies 26: 915–939; Bakshar, R., Scientific Realism and Human Emancipation (London: Verso, 1986). 60 61

Part B: Enforcement & Counterfeiting  557

order, sanctioned by power. The result of the “discursive work” is to present the sanctioned discursive system as a coherent and legitimate system of absolute, discursive truth. Thus, the existence of a discourse describes the regularity of a social existence, primarily maintained through the very discursive arrangement itself. A discourse as a social practice is therefore not just another practice among various social practices. It is a fundamental formation of social existence. By entering into interaction, humans constitute contexts and realities which change over time and adept to new social realities. However, discourse changes over time; i.e., witch burning is nowadays considered unethical, so is colonialism or slavery, yet in the context of their times, these practices were considered legal and sanctioned by the discourse setting authorities of their times. The modification of discursive practice may therefore be compared to a hermeneutical spiral. Power, according to Foucault, is an overarching principle of various discursive arrangements. Yet, it is irrelevant to ask who has power and who does not, rather, power is created and maintained through a complex system and the interplay of various discourses. In this sense, power is not a tangible object, but is the structural relationship that exists between various discursive orders. By imposing an ‘order’, the discourse classifies, judges, explains and limits social behavior. Discourse provides the architecture and framework through which the world can be understood. The repetition of specific discursive arrangements through the most various discursive practices characterizes the typology of a specific discursive field. Thus, even if a discursive order is realized in the most various ways, all of these discourses remain an expression of the one, specific ultimate discourse. Discourse is never free from a specific set of values. The discourse creates the basic condition to control a given set of values and offers various means to structure human perception and in this way introduces a specific set of ethical considerations and guidelines.65 In any given societal context any given object is processed through the prevailing discourse order of its time. Discourse analysis seeks to go the opposite way and make the underlying meta narratives visible, so to expose differences beneath the discourse and illustrate that objectively presented truths (“the vrai”) are in fact manufactured artifacts.66 Collective meaning, the joint understanding of a given object in a societal context, is primarily created, maintained and guarded through language. Societal interaction cannot exist independently from language. Language is the primary means to create a specific meaning, a certain connotation associated with a given object. The production of sense, the choice of what makes sense and what does not, can be seen as a constant linguistic puzzle. “Meaning” is never definitive, but the product of an assembly of various narratives interwoven and arranged in a specific manner. What makes sense and what does not is the result of a certain social practice, rather than a reflection of any intrinsic truth deriving from the object itself.67 In its most radical sense, discourse analysis argues that there is no pre-defined objective reality, not an object + language, but that any object that takes some sort of meaning within society can not escape the linguistic practice. It is bound to language, created through language and can not move out of the linguistic domain if it is to form a societal element. Single efforts to produce sense outside the social order are forced to fail already for the mere reason of a lack of understanding with other members of society. The individual remains socially reproduced, which in many ways 65 Foucault, M., Les Mots et Les Choses, Une Archéologie des Sciences Humaines (Paris: Gallimard, 1966); Foucault, M., The Archeology of Knowledge and Discourse on Language (Barnes/Noble Books: London/New York, 1969 (new ed. 1993); Bourdieu, P., Ce que parler veut dire, l’économie des échanges linguistiques (Paris: Fayard, 1982). 66 Mueller, M., “Discourses of Postmodern Epistemology: Radical Impetus Lost?”, in: Progress in Development Studies 6: 306–320 (2006). 67 Halliday, M., “So you say pass… thank you three muchly: How conversation means—contexts and functions”, in: A. Grimshaw, A. (ed.), What’s going on here? Contemporary studies of professional talk, 175–229 (Norwood: NJ Ablex, 1994).

558  CHAPTER VII: TRADE LAW collapses the distinction between the individual and the society s/he lives in.68 The production of sense has to be a collective undertaking and the freedom of the individual speaker is significantly reduced by the need for being able to communicate with others and be understood by others. The discourse censors individual freedom through isolation. Discourse analysis shows certain parallels to political process theory,69 which conceptualizes organizational change as the outcome of conflict between competing groups, interests or value systems, yet differs from more technical theories of change in that more existential notions of what constitutes a social reality and how this reality is determined by power relationships are a core element of analysis.70 Because of the strong emphasis on language, discourse analysis also reflects certain elements of actor-network theory,71 which argues that communication is the substance of organizing in the sense that through discursive practices, members of an organization construct a complex and diverse system of meanings.72 If one analyzes the creation of a specific discursive arrangement and order, one takes the opposite view: first one can separate the representative arrangement from the object and then find in the various discourses of the current international system not the uniqueness of their character, but a systematic expression of an overarching discursive reality established at the international level and aimed to maintain that specific arrangement. Within the current discourse on Intellectual Property this discursive order is that of Globalization. Assessing the Current IP Discourse To understand what these overarching paradigms of the global IP discourse were, a wide text corpus was created by reviewing relevant databases (such as Lexis Nexis, Wall Street Journal, etc.), online databases of academic journals (such as Sage Journals Online, Science Direct, etc.) as well as websites of a set of institutions involved with IP (such as WHO, WIPO, Doctors Without Borders, etc.), NGOs, policy makers and national patent offices. Additional texts were identified through random key word searches, such as “patents & compulsory licensing” or “technology transfer.”73 Subsequently, we created an inventory of relevant texts and ordered them according to recurrent themes that seemed to systematically emerge in 68 Fairclough, N. 2005. Peripheral Vision: Discourse Analysis in Organization Studies: The Case for Critical Realism. Organization Studies 26: 915–939; Chiapello, E. & Fairclough, N. L. 2002. Understanding the new management ideology: A transdisciplinary contribution from critical discourse analysis and new sociology of capitalism. Discourse & Society. 13: 185–208. 69 McFarland, A.S. 2004. Neopluralism: The Evolution of Political Process Theory. University Press of Kansas: Kansas 70 Hellstrom, T. 2004. Innovation as Social Action. Organization 11: 631–649. 71 (Law, 1994). 72 (Mumby & Stohl 1996). 73 The review was conducted in the following working steps: • The text corpus was created by reviewing relevant databases, such as LexisNexis, Business and Industry Database, Business and Industry Report, Wall Street Journal, Business Source Premier, EconLit, CompuStat, GallupBrain, Global Market Information Database, Mintel Reports, Market Research Academic. • A keyword search included the following terms: patent & compulsory licensing, globalization, IP assets, IP and access to health, technology transfer, strong IP rights, IP litigation, IP—China, Russia, counterfeiting, innovation, have and have nots, winners and losers, TRIPs. • An author search specifically evaluated the work of authors such as James Love, Oxfam, Stiglitz, WHO, WIPO, IFPMA, Medecins sans Frontières, IIPI, IPI, Trilateral Offices or METI Japan. • The review of relevant academic publications included the Berkeley electronic press, Cambridge electronic press, Oxford University Press, Science Direct, Scirus, Proquest Direct, Wiley, Chicago University Press, Emerald, Springer, Sage Journals Online, • Furthermore relevant websites of a set of institutions, policymakers, corporations, business and consumer associations were reviewed so to identify themes associated with the term IP. Subsequently the collected material was analyzed and it was sought to understand the presentation, documentation, analysis and interpretations of the various themes, perceptions, views and connotations related to IP.

Part B: Enforcement & Counterfeiting  559

various publicly available documents. We were not intending to create any word statistics, but chose a qualitative approach, as typical for discourse analysis, looking to identify overarching patterns, recurring themes, underlying assumptions and inherent presumptions that can be found in a text corpus. Thus, this paper may by no means be read as a return to a “dégré zéro de l‘écriture” (a zero degree of writing) in the sense of Roland Barthes,74 a decontextulized paper, freed from any underlying myths and social context, but probably a contribution to yet another set of social constructions, which, however have by far not yet gained the same level of widespread recognition as those currently prevailing the discourse. The Forgotten IP Dimension When looking at the “said” as well as at the “unsaid,” the explicit as well as the implicit, silent notions with which IP remains associated within the international discourse on Globalization, it is striking to note that the term “intellectual property” remains primarily associated with “patents.” Other forms of intellectual property, such as trademarks, design rights, copyrights, trade secrets or protection against unfair competition are systematically eclipsed from the discourse. The overarching emphasis on patents occurs at the detriment of the examination of other forms of proprietary knowledge. By consequence, questions asking how collective trademarks for example can be conducive towards rural development in emerging economies are systematically eliminated.75 IP remains furthermore associated with science and technology. Other forms of innovation, such as design or brand innovation are usually not addressed when exploring the role IP plays in current globalization dynamics. Most People Don’t Really Know What IP Is The silence surrounding IP is further reinforced by a general lack of awareness on IP. Surveys conducted by Gallup Group as well as by Olswang Group found that average citizens would not know how to define intellectual property or would at best associate it as “something arrogant.”76 A survey conducted by the U.K. IPO found that 86% of SMEs in the U.K. could not answer to the most basic questions related to IP ownership.77 When it comes to counterfeiting and piracy, consumers on average do not associate it with theft or crime.78 To the contrary, buying a fake handbag, particularly when abroad, is not seen as a major wrong. The same sample of interviewees indicated however that they would consider other forms of theft, i.e., stealing a Barthes, R., Le degré zéro de l‘écriture (Paris: du Seuil, 1953). Ghafele, R., Creating the missing link: applying collective marks to create clusters, Oxford Journal on Intellectual Property Law and Practice. 1: 1–10 (2009). 76 Based on 65,000 interviews in 51 countries conducted over a period of 18 months, Gallup found that one fourth of consumers purchase counterfeit goods. These goods may be branded apparel, bags, footwear, music or movies. In another survey, conducted in the US among 1,300 adults in 2005, Gallup found that 13% of Americans bought or sold counterfeit products, but only 7% did so knowingly. In the same survey Gallup found that 60% are not familiar with the term ‘IPR.’ Olswang Group found that consumers are confused about the legality downloading and are scarcely concerned about getting caught. Only 34% of interviewees of this study believe it is wrong. See Stewart, C. October 17 2005. GALLUP Presentation given at the WIPO/OECD Expert Meeting on Measurement and Statistical Issues related to Counterfeiting and Piracy. Geneva; (Stewart, 2007); Olswang Group: IPR Consumer Survey. http:// www.olswangnews.com; see also Gallup Organization. January 31 2007. Global Consumer Awareness, Attitudes, and Opinions on Counterfeiting and Piracy, Third Global Congress Combating Counterfeiting and Piracy. WIPO: Geneva. 77 U.K. Intellectual Property Office: UK Intellectual Property Awareness Survey 2006, prepared by R. Pitkethly. Said School of Business (Oxford: Oxford University, 2006). 78 YouGov. December 21 2006. Microsoft Counterfeit Software Survey. http://www.itnews.com.au/ News/52929,dvds-most-popular-pirated-goods.aspx; http://forums.lugradio.org/viewtopic.php?f=2&t=397; MORI Social Research Institute: IP Public Attitudes (2007), available at http://www.ipsos-mori.com/understandingsociety/ pdf/srinewsletter1.pdf. 74 75

560  CHAPTER VII: TRADE LAW car, a crime.79 Participants of various consumer surveys even found that consumers do not feel comfortable with the thought of having “pirates” punished.80 The true power of IP remains thus largely ignored, with only a very few aware of the potential of IP. IP Acts as a Gatekeeper Another theme that emerges in the current discourse on IP and Globalization is the strict separation between “insiders” and “outsiders.”81 “Insiders” to the system are primarily situated within developed countries.82 “Outsiders” seem to have no choice other than to aspire for innovation through the transfer of technology.83 This line of argument seems very much derived from the mainstream international trade discourse, which argues that developing countries may aspire for technology transfer in exchange for a stronger enforcement of intellectual property.84 A significant part of academic literature has examined intellectual property within the context of foreign direct investment and an open market paradigm.85 While findings on the de facto impact of “stronger” IP regimes on increased trade and FDI provide various policy implications, it is striking that none of the authors looks at IP and asks to which extent IP has the potential to promote indigenous innovation in developing countries.86 This almost appears patronizing since this line of thought relies on some sort of inherent assumption that developing countries do not dispose of the necessary resources to leverage their own knowledge capacities. IP, Yet Another Threat to Humanity Within the current discourse on Globalization, IP is used along the same lines as other concepts generally perceived as a threat to human welfare. Downsizing jobs, outsourcing production to low income countries, the exploitation of the poor and their resources, increased pressure on labor markets in Europe and North America, the privatization of health care, the erosion of the social safety net, all of these concepts can be found to be intertwined with the term “intellectual property.”87

79 PriceWaterhouseCoopers, Managing the Risks of Counterfeit Products: The Effects of Celebrity Culture on the Luxury Goods Industry (London: PWC, 2007). Total sample size was 2,238 adults in the U.K. in 2007. Figures are weighted and are representative of all U.K. adults. 80 MORI Social Research Institute: IP Public Attitudes (2007), available at http://www.ipsos-mori.com/ understandingsociety/pdf/srinewsletter1.pdf. 81 EPO: TRIPs: A Blessing or Curse for Developing Countries? Discussions at the European Patent Forum. http:// www.epo.org/topics/patent-system/scenarios-for-the-future/forum.html. 82 Su, E., “The Winners and Losers: The Agreement on TRIPs and its effects on developing countries”, Houston Journal of International Law 169: 195–210 (2000). 83 Matthews, D., NGOs, Intellectual Property Rights and Multilateral Institutions. Report of the IP-NGOs Research Project (London: Queen Mary Intellectual Property Research Institute, 2006). 84 Marshall, P., “Guarding the Wealth of Nations. Intellectual Property, Copyright, and International Trade”, Wilson Quarterly 23: 23–59 (1997)., 85 Yeates, N., “Globalization and Social Policy: From Global Neoliberal Hegemony to Global Political Pluralism” Global Social Policy Bulletin 2: 69–91 (2002). 86 Javorcik, B.S., “The Composition of Foreign Direct Investment and Protection of Intellectual Property Rights: Evidence from Transition Economies”, European Economic Journal 48: 39–6 (2004); Lee, J.Y. & Mansfield, E., “Intellectual Property and US Foreign Direct Investment”, Review of Economics and Statistics 78: 181–186 (1996); Maskus, K.E., “The Role of Intellectual Property Rights in Encouraging Foreign Direct Investment and Technology Transfer”, Duke Journal of Comparative and International Law 9: 109–161 (1998); Maskus, K.E. & Penubarti, M., “How Trade-Related Are Intellectual Property Rights?”, The World Economy 39: 227–248 (1995); Primo Braga, C.A. & Fink, C., “The Relationship between Intellectual Property Rights and Foreign Direct Investment” Duke Journal of Comparative and International Law 9: 163–188 (1998). 87 Lu, X., “Ethical Issues in the Globalization of the Knowledge Economy”, Business Ethics, A European review. 10: 113–119 (2001).

Part B: Enforcement & Counterfeiting  561

According to Rikowski, “TRIPs is not part of trade, but instead is primarily designed to help big business, as it engenders and encourages a protectionist environment through IP for the benefit of large corporations.”88 Beyond criticism of TRIPs, it is extremely difficult to find specific critiques of issues in intellectual property law. Within the context of Globalization IP is rather associated with a whole range of global “evils,” which at first sight do not have anything to do with the IP system as such. Within this discourse IP has no social function except to preserve the wealth of those who have from those who don’t: “IP is a strategy that defends capitalists, who with the words of Marx, can no longer pretend that they are serving a social function … it allows modern capitalism to revert to a winner take all arrangement.”89

IP is considered as yet another example of gender discrimination, neo colonialism or the erosion of Christian beliefs, to name a few: “IP is an example of how the poor are being exploited by big corporations.”90 Articles entitled “playing catch up” or discussing the impact of the IP system on developing countries from the perspective of colonialism, may be well intentioned, yet they implicitly prevent developing countries from taking ownership of the IP system and leverage it for the advancement of their national innovation agendas.91 While concepts such as gender discrimination, neo colonialism92 or religious believers seem at first sight quite distinct and apart from each other, the way IP is addressed in the realm of these issues remains the same: IP is a threat.93 “TRIPs does not adequately reflect the fundamental nature and individuality of all human rights, including the right of everyone to enjoy the benefits of scientific progress and its applications, the right to health, the right to food and the right to self-determination. There are apparent conflicts between the property rights regime embodied in the TRIPs agreement and international human rights law.”94

Authors like Badawi who seek to act as advocates of the poor, name IP along with other global shortcomings such as “commercial exploitation, the monopoly of health commodities, new food hazards and the marketing of tobacco.”95 The ‘Christian Century’ offers a critique typical of religious groups; that the IP system, along with issues, such as global warming, debt relief, trade policies and a lack of corporate governance that all erode Christian values. Gender studies again sees in IP a reflection of hyper masculine values. IP fails to recognize that the technological worlds of men and women differ fundamentally. Gender studies questions the IP system from the overall perspective of female access to education and chances for women to succeed in a male dominated world. Canadian Women Studies for example publishes articles exploring the link between the ‘feminization of the third world’ and the TRIPs agreement since TRIPs not only puts developing countries in a stereotypical passive female role, but also prevents 88 Rikowski, R., “Tripping over Trips: An Assessment of the WTO’s Agreement on TRIPs, Focusing on Trade, Moral and Information Issues”, Business Information Review 20: 149–165 (2003). 89 Perlman, M., “IPR and the Commodity Form: New Dimensions in the Legislated Transfer of Surplus Value”, Review of Radical Political Economics 35: 304–320 (2003). 90 Lu, X., “Ethical Issues in the Globalization of the Knowledge Economy”, Business Ethics, A European review. 10: 113–119 (2001). 91 Hogge, B., “Playing Catch Up. Arts and Culture”, New Statesman, 11: 24–42 (2007); Engelberg, A.B., “Property Rights and Danger of a New Form of Colonialism (Asia edition of the Financial Times, 21 November 2005); “To IBM Sharing Looks Better than Hoarding; Releasing Patents is Seen as Profitable”, International Herald Tribune (April 12 2005). 92 May, C., “Capacity Building and the (Re) production of Intellectual Property Rights”, Third World Quarterly 25: 821–837 (2004). 93 “Fairness Calls for Fairer Rules. IP Represents Significant Barriers to Development”, The Toronto Star (January 17 2005). 94 UNHCR Resolution No. 2000/7. 95 Badawi, A. A., “The Social Dimension of Globalization and Health”, Perspectives on Global Development and Technology 3: 38–45 (2004).

562  CHAPTER VII: TRADE LAW female farmers in the developing world from feeding their children because the costs for IP protected seeds are too high.96 The Intellectual Property Genocide The current discourse on IP and Globalization is aggressive and uses vocabulary from the domain of war, battles and fights. IP is positioned as a major means to exercise power against developing countries.97 For example, Karen Coulter says: “Other weapons in the globalization armory are agreements on IP. Incorporated in TRIPs, foreign corporations can easily appropriate biodiversity (in developing countries) for their private economic development.”98 IP remains a tool to maintain an imbalanced world order, dominated by wealthy countries and corporations. “IP allows big corporations to transform the fabric of life into private property … making the third world pay for cumulatively collected knowledge.”99 The IP system is simply unfair: “fairness calls for fairer rules, which the IP regime does not.”100 Again, IP is being merged into overarching critiques against Globalization and within that context manifests not only an ethically questionable way to appropriate intellectual wealth, but also prevents access to knowledge developed by a set of globally well known insider: “The IP regime serves only the wealthy pharmaceutical companies … . Patents are literally robbing AIDS victims of their lives.”101 “Patents Kill” Headlines such as “The profits that kill” or “at the mercy of drug giants” provide in a snapshot the way IP is being discussed in the mainstream literature on IP and public health.102 “Patents kill,” a statement repeatedly found on T-Shirts of South African activists in their march for a compulsory license and thus for access to medication at low cost, brings the overall dichotomy between IP and public health to the point.103 The cartoon in the annex to this document further illustrates the debate. Sharks, vultures and hyenas represent the patent owners. They stand in strong contrast and on the other side of those wanting to advance the public health agenda. Their search for profits is yet again maintained by the patent system.104 The severe gap established between IP and human welfare prevailing within the overall discourse on IP and Globalization culminates here.105 The “war” against “corporate greed” is used along the same lines as the war 96 Vandana, S., “Violence of Globalization”, Canadian Woman Studies 6: 180–200 (2002); McMahon, M., “Resisting globalization. Women Organic Farmers and local Food Systems”, Canadian Woman Studies 6: 203–230 (2002). 97 Vandana, S., “Violence of Globalization”, Canadian Woman Studies 6: 180–200 (2002). 98 Coulter, K., “Earth First! Globalization: Corporations devour Biodiversity”, Tucson Daily Planet Publishing (July 31 1999). 99 May, C., “Capacity Building and the (Re) production of Intellectual Property Rights”, Third World Quarterly 25: 821–837 (2004); Ostergard, R. L., Tubin, M. & Altman, J., “Stealing from the Past: Globalization, Strategic Formation and the Use of Indigenous IP in the Biotech Industry”, Third World Quarterly 22: 643–660 (2001). 100 “Fairness Calls for Fairer Rules. IP Represents Significant Barriers to Development”, The Toronto Star (January 17 2005). 101 Picciotto, R., “Protests by Development Activists Against Injustice of the Trading System Are Fully Justified”, Letter to the editor, Financial Times (June 30 2003.). 102 Turner, N., “The pharmaceutical industry has been a powerless spectator to the carnage of HIV/AIDS in Africa. Pharma needs to keep a cool head in the face of global criticism”, Pharmaceutical Executive 20: 44–60 (2001). 103 Shulman, S., “In Africa, Patents Kill. In AIDS-stricken Africa, The Enforcement of Western Drug Patents Is a Needless Death Sentence for Millions”, http://www.technologyreview.com/Biotech/12348/. 104 EPO: Scenarios for the Future. How Might the IP regimes evolve by 2025? What global legitimacy might such regimes have? EPO: Munich 2007. 105 World Health Organization. 2006. Public Health, Innovation and intellectual property rights. Report of the Commission on Intellectual Property Rights, Innovation and Public Health. World Health Organization: Geneva; (World Health Assembly Resolution, 56.27); Correa, C., “Integrating Public Health Concerns into Patent Legislation in Developing Countries”, http://www.southcentre.org/publications/publichealth/toc.htm.

Part B: Enforcement & Counterfeiting  563

against terrorism. The IP system is considered an “unnatural act,” illustrating the supremacy of commercial interests in all spheres of life, leaving no scope for the greater public interest. Within the public health discourse IP is addressed within the context of terms such as “fear” and “threat”: “IP condemns millions of the poor to premature, preventable death and shows a near to complete lack of “corporate social responsibility.”106 In “The Profits that Kill” Osei Boateng sees in the debate a systematic campaign where the pharmaceutical industry was portrayed as an industry devoid of morality using “the patent system to squeeze low cost copies of branded medicines off the market.”107 According to Boateng newspapers such as The Guardian systematically made news with headlines such as “Millions of lives at risk—drug companies must temper their power.”108 The ethical dimension of IP is also questioned in a series of papers asking whether it is acceptable to “view medicine as luxury.”109 Perhaps for reasons like these the European Patent Office saw its entry closed with masonry by Greenpeace in 1998, a search to protest against the patenting of the “oncomouse,” which triggered, yet another forceful, passionate and aggressive debate on the role of patents in biotechnology.110 “Fight the Pirates” While the discourse on the social and ethical impact of IP is mainly driven by NGOs, consumer associations, human rights activists, as well as religious associations and feminists, the discourse on counterfeiting and piracy is primarily associated with business associations, patent offices, as well as academics wanting to be closely associated to business interests. At first sight it seems that the discourse on counterfeiting and piracy forms the anti thesis to the discourse on the social dimension of IP, yet it remains associated to the same discursive formation. Like the apparently opposing discourse it borrows from the domain of war, fights, battles and weapons.111 The photograph annexed to this article112 offers yet another illustration of how IP is being policed. Armed soldiers protect the interest of IP owners, the crowd, mainly poor people in some developing country watches with interest. It may be questioned to which extent operations like these help to foster an understanding of IP as an enabling tool for development. In their global war against counterfeiters and prosecution of pirates traditionally “pro” IP institutions have systematically missed out on addressing those issues raised by critiques of the IP system. It almost seems as if they existed in two parallel worlds bound by overarching order of war. Those aiming to “fight piracy” for the sake of the preservation of the “health” of the economy, naturally consider counterfeiting a serious “threat;”113 resulting in loss of jobs as well as revenues. Only if the “economic war” against pirates can be won is there a chance to win this war.114 Within that context TRIPs is repeatedly mentioned as an important tool to foster IPS (Latin America), Novartis in New campaign against Cheap Medicines (March 2007). O. Boateng, “The Profits That Kill”, 4 New African 22–27 (2001). 108 Id. 109 M. Goozner, “Medicine as Luxury: The West Treats Vital Pharmaceuticals as Just Another Commodity. If Poor Countries Can’t Afford Filet, Why Should They Get Cheap Drugs?”, 3 Am. Prospect 7–10 (2002). 110 Patent Auf Leben: Bricht das Europäische Patentamt (EPA) geltendes Recht? (Dec. 19, 1999), http://www.boamuenchen.org/boa-kuenstlerkooperative/diver17i.htm. 111 Chalker, L., “Declaring War on Counterfeiters and Pirates”, African Business 355: 46–48 (2007). 112 See Annex, infra this Chapter (photo taken from: EPO: Scenarios for the Future. How Might the IP Regimes Evolve by 2025? What Global Legitimacy Might Such Regimes Have? EPO: Munich 2007). 113 CISCO White Paper, Intellectual Property and Beyond: Why Protecting it is Everyone’s Business, San Jose: Cisco 11-418387-00 7/07 (2007). 114 World Industry Overview, “Counterfeit Goods Pose Real Threat; Counterfeit goods result in loss of jobs as well as revenue. But of even greater concern is the way this global black market is funding terrorist and criminal organizations”, http://goliath.ecnext.com/coms2/gi_0199-3283954/Counterfeit-Goods-Pose-Real-Threat.html; IPR 106 107

564  CHAPTER VII: TRADE LAW a “robust” IP infrastructure, based on “strong” intellectual property “rights” (as compared to soft intellectual property?). To assure TRIPs compliance, certain countries have nominated enforcement agents all over the developing world.115 Within this discourse IP is also being systematically linked to terrorism.116 The discourse on IP and counterfeiting relies strongly on the intellectual property rights paradigm. It is repeatedly stressed that IP is to be protected and infringers are to be brought to court. The policing of intellectual property needs to position counterfeiting as a crime, so to assure the legitimacy of its doing.117 To counter the risks, new initiatives such as software to detect counterfeits are needed in order to respond to the risks posed by counterfeits.118 The quantification of costs associated with piracy is used as an important element to legitimize the discourse on counterfeiting and piracy. Unsurprisingly, a great variety of business associations have provided a great diversity of estimates (!). Business Software Alliance for example estimates that in the U.S. piracy costs industry US$ 11 billion in lost revenues and estimates that 35% of all software used worldwide is counterfeit.119 The International Anti-Counterfeiting Coalition estimates that counterfeiting costs the US economy US$ 200 million in lost revenues and US$ 4 million in efforts to combat counterfeit goods. The IDC (International Data Corporation) Economic Impact Study found in 2007 that, if global software piracy was only lowered by 10% over the next four years, this change could contribute to 2.4 million new jobs and US$ 400 billion in economic growth to the global economy.120 Even higher numbers can be found in the press: “the number of counterfeit items seized at EU borders increased by 1,000% from 10 million in 1998 to over 103 million in 2004”121 and the Los Angeles Times even finds that counterfeit goods cost US companies about US$ 200 billion annually, four times the equivalent figure for a decade ago. 70% of these illegal products are from Asia and most of them are from China.122 While these are impressive numbers, they stand in strong contrast to estimates provided by the OECD, which found that counterfeit goods and services cost worldwide US$ 176 billion annually, which is about 2.4 per cent of world trade in manufacturing.123 Current research does not indicate that counterfeiting and piracy have necessarily negative effects on firm performance and the economy as a whole. It seems that the effects of Capitol Hill hearing testimony. CQ Congressional testimony, Counterfeiting and Theft of Tangible IP (Nov. 7, 2007); Capitol Hill Hearing Testimony, Federal Document Clearing House Congressional Testimony (March 23 2004); Choate, P., Hot Property. The Stealing of Ideas in an Age of Globalization (New York: Random House, 2005). 115 “Patents a Deadly Weapon in Export War: Mainland Companies Must Build IP to Guard Against Lawsuits”, South China Morning Post (Mar. 22, 2005); D.C. Stimson, “Counterfeiting in Cyberspace”, http://www.questia. com/googleScholar.qst;jsessionid=HSvW60qLGtnbhjmfcD7WTFx5DwK0fk87y8pH5THGyJJ2ctg0pBZ5!264188374?docId=5001330306. 116 “US names IP enforcement chief in Asia”, States News Serv., Jan. 5, 2006. 117 World Industry Overview, “Counterfeit Goods Pose Real Threat; Counterfeit Goods Result in Loss of Jobs as Well as Revenue. But of Even Greater Concern is the Way this Global Black Market is Funding Terrorist and Criminal Organizations”, http://goliath.ecnext.com/coms2/gi_0199-3283954/Counterfeit-Goods-Pose-Real-Threat.html; IPR Capitol Hill hearing testimony, CQ Congressional Testimony. Counterfeiting and Theft of Tangible IP, Nov. 7, 2007. 118 “Microsoft Announces New Initiative to Combat Counterfeit Software and Piracy”, PR Newswire (U.S.), Mar. 9, 2006. 119 E.H. Holder, Speech by Deputy Attorney General at the High Tech Crime Summit (1998), available at http:// www.US$oj.gov/criminal/cybercrime/dag0112.htm. 120 Bus. Software Alliance, The Economic Benefits of Lowering PC Software Piracy (2006), available at http:// www.bsa.org/sitecore/shell/Controls/Rich%20Text%20Editor/~/media/Files/idc_studies/bsa_idc_australia_final%20 pdf.ashx. 121 “CBP Supports EU-US Action Strategy for Enforcement of IP”, U.S. Fed. News, June 23, 2006. 122 D. Costello, “Getting Patents in Other Nations and Doing Your Homework Can Help”, L.A. Times, May 22, 2007. 123 J. Dryden, “Counting the Cost: The Economic Impacts of Counterfeiting and Piracy”, Presentation given at the Third Global Congress on Combating Counterfeiting and Piracy, Jan. 31 2007, available at http://www.ccapcongress. net/archives/Geneva/Files/Dryden.pdf.

Part B: Enforcement & Counterfeiting  565

counterfeiting on an economy are related to the purchasing power parity of consumers. De Castro, Balkin & Stepherd,124 and also Katz & Saphiro,125 even go a step further and argue that counterfeiting and piracy may actually benefit firms. Referring to the resource-based view of a firm, Castro et al. argue that reducing the value of one resource (through counterfeiting and piracy) can directly increase the value of another. The inimitability of an entrepreneurial firm’s IP does not necessarily diminish performance since piracy can increase the value of this resource by stimulating networks and provoking signaling and standard-setting effects. Conner and Rumelt126 have challenged the argument that software piracy harms entrepreneurial firms, arguing that piracy could increase the customer utility of a software program. Using a diffusion modeling approach on a sample of two types of software in the UK Givon et al. found that six out of seven software users used pirated copies.127 However, the pirated software generated more than 80% of new software buyers. Conclusion The TRIPs Agreement marks the cornerstone of the current discourse on IP. The further internationalization of territorial rights, the further development of a legal infrastructure for innovation at the global level, not only gave way for increased flows of international trade in innovation, but associated at the same time the intellectual property system with Globalization and its perceived negative social side effects. In a way it seems paradoxical that the IP system, which disposes of no features what so ever for a true internationalization of economic activities (no worldwide valid patent or trademark exists, nor is there any appropriate supranational body responsible for the global enforcement of IP) became the focus of Globalization critique. The gap between its pre- and its post- TRIPs perception is best illustrated at the very different awareness the public at large has of WIPO and the WTO. While WIPO, the World Intellectual Property Organization, has as its sole mandate to promote IP at the global level and thus foster proprietary innovation, it is largely unknown beyond expert circles. This may be equated to the pre-TRIPs perception of IP. The WTO to the contrary, which really just administers one single international treaty on IP, has reached a claim to fame previously unheard of in the IP arena. Undoubtedly, had the WTO experienced the same allegations of corruptions as WIPO, those would have figured at the front-page of newspapers and possibly had an interesting twist in the way IP is perceived within the context of Globalization. What comes as a surprise is the level of aggression of the international discourse on IP. IP is associated with war, fights and battles. In this sense we prove the Economist128 wrong when it depicts two driving forces behind the current discourse on IP. While the Economist makes the distinction between two camps, one which argues that IP is a cornerstone to promote innovation and another which sees in IP a major means to increase the wealth of multinational companies at the detriment of the poor. Rather, we observe one big battlefield dominating the discourse. In the global “IP war,” issues such as the relationship of IP towards innovation seem rather remote. Rather, the two camps, the pro-IP group as well as those against IP, are equally seeking 124 J. De Castro, D,B, Balkin & D.A. Stepherd, “Can Entrepreneurial Firms Benefit From Product Piracy?”, 23 J. Bus. Venturing 75–90 (2008). 125 M.L. Katz & C. Saphiro, “Network Externalities, Competition, and Compatibility”, 91 Am. Econ. Rev. 424–40 (2001). 126 K.R. Conner & R.P. Rummelt, “Software Piracy: An Analysis of Protection Strategies”, 37 Mgmt. Sci. 125–38 (1991). 127 M. Givon, V. Mahajan & E. Muller, “Software Piracy: Estimation of Lost Sales and the Impact on Software Diffusion”, 59 J. Marketing 29–37 (1995). 128 “The Right to Good Ideas. Patents and the Poor”, Economist, June 23, 2001.

566  CHAPTER VII: TRADE LAW to fight their opponents. While the discourse of those in favor of IP is mainly marked on how to “fight the pirates,” in and by itself a strange terminology that enjoys no widely accepted definition, those criticizing the IP system equally wage a war for the preservation of social values. The bridging of global gaps, the discrimination of women, the erosion of Christian values, are concepts that are increasingly used interchangeably and carry one message: Fight IP. There is no point in trying to determine who is right and who is wrong. Any exercise along these lines would contradict our understanding of social representations of reality. One may however argue that the strong emphasis on “winning and losing” on “combating,” “fighting” and “destroying” is in and by itself an illustration of how much the IP discourse is gendered and makes in this sense no exception to other business discourses. In “Lysistrata” the ancient Greek author Aristophanes (400 B.C.), who throughout his writing argues that wars are to be avoided because they harm an economy, lets the women in his play finish a long lasting war by collectively refusing physical intimacy to men. Perhaps similar drastic measures are needed to finish the ongoing metaphorical war in the context of IP. A language of war is not conducive towards solution driven approaches and clearly prevents to move from a win to win-win solution. Battles and fights only create more casualties. There has been enough metaphorical killing going on in IP. It is time to prove von Clausewitz129 wrong; war is not politics by other means. It is time to move from the battle field to the negotiation table and explore in a constructive way how IP may be managed in the public interest.

129

Clausewitz von, C., On War (Hertfordshire: Wordsworth, 1812 (new ed. 1997)).

Chapter VII

Trade Law Part C: Trade Policy and IP Rights: The Road Ahead; Development Agenda Moderator Prof. Justin Hughes

Benjamin N. Cardozo School of Law (New York, N.Y.) Panelists Jason Albert

Director, International Intellectual Property Policy, Microsoft Corporation (Redmond, WA) Michael Keplinger

Deputy Director General, World Intellectual Property Organization (Geneva) Stanford McCoy

Assistant U.S. Trade Representative for Intellectual Property and Innovation (Washington, D.C.)

Luc Devigne

Head of Intellectual Property and Public Procurement, DG Trade, European Commission (Brussels) James Love

Director, Knowledge Ecology International (Washington, D.C.) Hon. Alice Pezard

Chief Justice, Cour de Cassation, French Commercial Court (Paris)

Hannu Wager

Counsellor, Intellectual Property Division, World Trade Organization (Geneva) PROF. HUGHES: We should get started. We are starting nine minutes late, but I think everything is running late. Since we don’t have a set number of minutes for each speaker here and this is a panel discussion, we will better be able to catch up some time. My name is Justin Hughes. I have been asked to moderate this session on “Trade Policy and IP Rights: The Road Ahead; Development Agenda.” Some of our panelists already mentioned to me that the topic seemed very ambiguous. I am going to assume that the topic was intended to be a more general discussion of trade and

568  CHAPTER VII: TRADE LAW intellectual property, the linkages thereof, since we have had such a detailed discussion of enforcement issues in the prior session. I will introduce our panelists as we call upon them. Let me just try to set things up a little bit by saying we are a decade-plus past the integration of intellectual property legal norms into the trading system. For those of you who were involved in that, the 1990s were certainly an extremely heady period, with all of a sudden the intellectual property system being woven into the trading system. In a sense—I don’t know how you feel—I feel that the days can never be so heady again. Many of the concerns about trade and global trade issues are so enormous and so big that the intellectual property issues that still exist are largely going to fade. They are not going to be on the front page as often of the business pages or of political discussions. But that being said, there is still a tremendous amount of interesting stuff in terms of the linkages between trade policy and intellectual property. For this panel discussion where we don’t have set presentations, I really thought we could break it into three broad topics, get some discussion and some debate going. Those three broad topics are: • The Development Agenda at WIPO, what it has been to date and what it might become if it will go anywhere. • Another one is what is happening at WTO and the degree to which the Doha Round and beyond the Doha Round—and I’ll be honest, I am one of those people who wishes they would just declare the Doha Round dead and get on with it. I wish we’d have the funeral and start again. I’m tired of this zombie-like Doha Round. But, the Doha Round and beyond. • The third issue, of course, is bilateral agreements, with both the United States and the European Union pursing bilateral agreements that again continue this linkage between trade and intellectual property. Let me just say on that that there are a couple ways to look at—and for those of you who participated in the grand experiment of the 1990s, bringing trade and intellectual property together—there are a couple ways of looking at this. One way is that it opened up the intellectual property system to a lot more participation, a lot more activism. It made it less of a backwater specialized zone of patent lawyers and copyright lawyers. Another way to look at it, though, is that now that IP is woven into trade, there is the constant issue of tradeoffs, where a suboptimal intellectual property system exists because perhaps it was traded off for something in some other area of trade—in reduction of tariffs, in standards, in all kinds of places—where we may not get what we think would work best as an IP system precisely because the IP system is now part of the trading system. With those thoughts in mind, I would really like to start with WIPO and the Development Agenda. I am first going to ask Michael Keplinger, who everyone knows is the Deputy Director General of WIPO and was just on the previous panel, to say a few words, to just give us a basic introduction to the Development Agenda and where it has been. Then I am going to turn to James Love to provide a little color commentary—would that be fair?—on the Development Agenda. Keppie, you want to start this? MR. KEPLINGER: Sure. Thank you, Justin. After several years of debate based on the proposal put forth by a group of developing countries who call themselves The Friends of Development,1 WIPO has adopted a Development 1 WIPO, Proposal for the Establishment of a Development Agenda for WIPO: A Framework for Achieving Concrete and Practical Results in the Near and Longer Terms PCDA/1/5 (Feb. 17, 2006), available at http://www. wipo.int/meetings/en/doc_details.jsp?doc_id=56613.

Part C: Trade Policy and IP Rights: The Road Ahead; Development Agenda  569

Agenda.2 It is a program to mainstream the developmental aspects of intellectual property protection and to make it a fundamental part and a very prominent part of WIPO’s program. There are those of us who are firmly convinced that WIPO has always been concerned with the developmental aspects of intellectual property. But the new Development Agenda program does put a different emphasis on it and certainly results in direct funding for a number of projects. The Development Agenda is a series of proposals for things to be undertaken. Some are cross-cutting and look at all areas of intellectual property, some are targeted, and some are more akin to instructions to the organization to do things in certain ways. The Committee on Development and Intellectual Property (CDIP) has agreed on certain projects that will be going forward.3 Money in our budget has been allocated for their funding. We have established a new division to coordinate the Development Agenda projects. And we are, in the case of an area for which I am responsible, very much responding to the concerns of the Development Agenda and its Recommendation 45, which has to do with enforcement.4 It specifies that we have to look at enforcement in a broader context. We have to look at the socioeconomic effects of enforcement. What benefits does it bring to developing countries, if any? What are the contributions of the various parties—right owners, governments or the private sector at large? That will be the theme of our next Advisory Committee on Enforcement, looking at the contribution of the private sector to enforcement within the dimensions of Recommendation 45, which calls on us to take into account this broader concept of enforcement. That is just a little background on what the Development Agenda is and where we are going with it. PROF. HUGHES: Let me introduce James Love. He probably needs no introduction. Jamie is the Director of a Washington-based NGO, Knowledge Ecology, and probably has a different perspective on what the Development Agenda hoped to do and what it has or has not done. MR. LOVE: Do you mind if I ask a question of the audience? Is that appropriate? PROF. HUGHES: Sure. MR. LOVE: How many people by raising their hand would say that both they have heard something about the Development Agenda and it seems like a good thing for WIPO? [Show of hands—approximately 20] MR. LOVE: Okay. This is a bit more balanced audience than I thought it would be. That’s good. PROF. HUGHES: I paid them to do that. MR. LOVE: The Development Agenda is part of a bigger debate about whether WIPO itself should really be more integrated into the United Nations system and be sensitive to a lot of the social aspects of things about intellectual property. WIPO was not originally part of the UN system. WIPO was a private organization, mostly a northern-based organization, of people who dealt with industrial property. Then there was an arrangement between the United Nations in 1971 and WIPO to make it a specialized UN agency.5 At that point, in theory there was a new mandate for the agency, but in practice there wasn’t much of a change. 2 World Intellectual Property Organization, Development Agenda for WIPO, http://www.wipo.int/ip-development/ en/agenda. 3 WIPO, Comm. on Dev. & Intellectual Prop. [CDIP], Revised Draft Agenda CDIP/5/1 (Mar. 11, 2010), available at http://www.wipo.int/meetings/en/details.jsp?meeting_id=19686. 4 WIPO, Contribution of Right Holders to Enforcement and the Cost Thereof, Taking Into Consideration Recommendation No. 45 of the WIPO Development Agenda WIPO/ACE/5/9 (Sept. 28, 2009), available at http:// www.wipo.int/meetings/en/doc_details.jsp?doc_id=129729. 5 WIPO, Agreement Between the United Nations and the World Intellectual Property Organization (Dec. 17, 1974), available at http://www.wipo.int/treaties/en/agreement.

570  CHAPTER VII: TRADE LAW I think what happened in 2004 was really a decision to go back and look at the fundamental mandate of the agency and to see how it was doing. One of the issues that motivate people initially was the access-to-medicines movement. A lot of people in the embassies in Geneva had not paid much attention to the World Intellectual Property Organization—that was something that the people in the domestic patent and copyright offices did. In the debate over the price of AIDS drugs and access to medicine and the negotiations over the WTO Doha Declaration on TRIPS and Public Health,6 it became very political, and the Geneva based ambassadors became more involved. They began to see intellectual property as something that was important to them at a political level. As it became more political, then they began to focus more on issues like: What’s happening at WIPO in terms of our competitiveness? What’s happening in terms of our ability to get access to medicine, or access to copyrighted material or whatever? I think that was a big part of what happened. The actual Development Agenda itself is a set of about forty-five recommendations. In a way, it was a merger of a public interest reform agenda that a lot of northern NGOs, free software advocates and technology companies were advocating, connecting with the concerns and ideas of several southern NGOs and developing country governments that were focused on both the access and the technology transfer issues. One idea was to have WIPO become more of an evidence-based policymaking body, and to eliminate the off-putting idea that WIPO was bringing a stylized version of intellectual property to the uneducated masses in developing countries. WIPO had comic books that were distributed to extol the virtues of strong intellectual property rights, and this was not seen as appropriate in many cases. There was a movement toward: What are the facts? What actually happens when you implement intellectual property in a developing country? How does it affect economic development and what’s the impact on things? So there was an effort to bring to create an economic bureau. You are about ready to hire a new chief economist for WIPO, aren’t you? That’s an example. That is actually a new, and I think overdue, position. They have now integrated a lot of this new thinking in both the Standing Committee on Copyright and the Standing Committee on Patents. Now both the Standing Committee on Patents and the Standing Committee on Copyright have as a major item on their agenda limitations and exceptions. That is completely different than what was the case a couple years ago, when they were pushing the Broadcast Treaty7 in the Copyright Committee and they were pushing patent harmonization in the Patent Committee.8 Now you hear them talking about how you implement limitations and exceptions, or what is state practice on limitations and exceptions. They are also looking at problems of anticompetitive practices, technology transfer and other areas to make policy more relevant to the problems people face. So there is a big change in the agenda of what they talk about at WIPO. I personally think that if you believe in intellectual property protection and you believe that overall it is a good thing, you would welcome this change. What you see is people trying to get more comfortable with the intellectual property system, trying to basically see how they could 6 WTO, Declaration on the TRIPS Agreement and Public Health WT/MIN1/DEC/2 (Nov. 20, 2001), available at http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm. 7 WIPO, Standing Comm. on Copyright & Related Rights, The WIPO Treaty on the Protection of Broadcasting Organisations SCCR/17/INF/1 (Nov. 3, 2008), available at http://www.wipo.int/meetings/en/doc_details.jsp? doc_id=66992 [hereinafter WIPO Broadcast Treaty]. 8 World Intellectual Propery Organization, Substantive Patent Law Harmonization, http://www.wipo.int/patentlaw/en/harmonization.htm (last visited Apr. 1, 2010) [hereinafter WIPO Patent Harmonization].

Part C: Trade Policy and IP Rights: The Road Ahead; Development Agenda  571

live with it. The enforcement of rights would not be as terrifying for people, if they really felt they understood the system, and that it was designed for and was actually meeting their needs more. What WIPO studies have found in the area of limitations and exceptions for copyright—and Michael talked about this yesterday9—is a lot of developing countries have the rights that you find in Europe but they don’t have the exceptions that you find in Europe. A particular set of the intellectual property rules seem to propagate to the former colonies. I think that the work that people are doing on this is in the long run a very positive thing for people who think that there should be a regime of intellectual property. It is an attempt to bring some realism into it. PROF. HUGHES: One thing I want to come back to eventually, Jamie, is the Development Agenda has to some degree, and other things that were frustrations at WIPO for some of the developed countries, led to a certain amount of defection and then proceeding on their own— and this was the discussion of our prior session. That is something we should come back to, and probably come back to after we’ve talked a little bit about bilateral agreements. Let’s jump over to the WTO a little bit. Hannu Wager, do you want to tell us from your perspective at WTO, as Counsellor for the IP Division at WTO, what do you see as the current linkages in terms of discussions between trade and IP, if any? And go ahead and talk about the not-yet-dead Doha Round. MR. WAGER: You referred to the Doha Round as a zombie, but of course we should bear in mind the recent G20 Declaration from the leaders of countries representing some 85 percent of the world economy who recommitted themselves to the conclusion of the Round. So it is not completely dead. PROF. HUGHES: Well, that’s the definition of a zombie. It isn’t completely dead. It keeps getting up. MR. WAGER: As you know, the Doha Round was launched in 2001.10 It is often referred to as the Doha Development Agenda, for the very reason that it puts development issues at the core of the Round. As I already mentioned at the plenary, there are some IP issues on the table, although they might not be at the core of the Round. Perhaps I could use this opportunity to say a few words about them. The negotiations on the establishment of a registry for GIs for wines and spirits are part of the so-called single undertaking under the Round.11 We have two other TRIPs issues, so-called outstanding implementation issues, where there are some differences as to whether these form part of the agreed negotiation package for the Round. One is GI extension, that is a proposal to extend the higher level of protection currently available to wines and spirits to all product categories.12 The other relates to the relationship between the TRIPS Agreement and the Convention on Biological Diversity (CBD).13 There is a proposal that patent applicants would be required to disclose the origin of the biological resources and associated traditional knowledge they have used in their inventions. What has happened with these issues is that in July last year we had a Ministerial Meeting where we attempted to agree on modalities on agriculture and market access for industrial See Chapter V.C, “Rethinking Exceptions & Limitations”, supra this volume. World Trade Organization, The Fourth WTO Ministerial Conference, http://www.wto.org/english/thewto_e/ minist_e/min01_e/min01_e.htm (last visited Apr. 1, 2010). 11 WTO, Doha Ministerial Declaration, para. 18, WT/MIN1/DEC/1 (Nov. 20, 2001) (“[W]e agree to negotiate the establishment of a multilateral system of notification and registration of geographical indications for wines and spirits by the Fifth Session of the Ministerial Conference.”). 12 Id. 13 Id. para. 19. 9

10

572  CHAPTER VII: TRADE LAW products.14 Eventually, this Meeting was not successful. Prior to it, the proponents of these three sets of issues combined their forces and made a combined proposal on them, namely that there should be agreement to negotiate a GI registry with certain legal effects; an amendment of the TRIPs Agreement to provide for GI extension and that the register would apply to all GIs; and an amendment of the Agreement to include a mandatory disclosure requirement in patent applications. According to its co-sponsors, this proposal involved a certain amount of negotiating among the three sets of proponents and compromises between their respective ambitions. One effect of this proposal was that countries on the other side seemed to feel that it was even more difficult for them to compromise on any individual issues, given that they were being proposed as a package. So the situation is somewhat polarized. As regards the development dimension of these TRIPs issues, the proponents of this combined proposal see these issues as an essential part of the development dimension of the Round, particularly as regards the disclosure proposal. But there are developing countries also on the other side, and the issues are controversial, in particular as regards geographical indications. You were wondering what could lie beyond the Doha Round. Of course, the focus of our members is on the conclusion of the Doha Round, but there is also this broader discussion on whether at some point some other issues should be added to the WTO work program; and, if so, what would be the appropriate time. Would this be possible before the conclusion of the Doha modalities or would this be something that should be done afterwards? Among the topics that have been referred to in this connection are, say, labor and the environment. But issues concerning the WTO’s future work program are matters for its members to decide. We have two member governments represented on this panel. If they would wish to comment on that, that might be helpful. There are also issues on the agenda of the TRIPs Council that do not necessarily relate to this. The TRIPs Council is the forum where member countries are free to raise any issues. One issue that has come up occasionally is the issue of enforcement. As Luc mentioned in the previous panel, a number of countries have put this issue on the agenda a couple of times, but there have been some objections that it has not been the right time or the right place to discuss enforcement. On the other hand, at the latest TRIPs Council meeting another set of countries took up the detention by the Dutch customs of some generic pharmaceuticals.15 So, in a sense, we ended up discussing border enforcement after all, even though there were also some other issues, such as definitional matters. So the TRIPs Council is a place where one can always raise matters. Maybe I will stop now so that I don’t monopolize the time. PROF. HUGHES: Before we get to our government officials, I would actually like to ask Jason Albert and Judge Alice Pezard to give a little bit of national flavor to this, both as to what they see happening at WTO and WIPO. Jason, do you want to step back and tell us what you think, and then Judge Pezard perhaps? MR. ALBERT: Sure. Thank you so much. I’d hate to think that I am giving a purely national flavor. PROF. HUGHES: I’m sorry. MR. ALBERT: Our company has offices all over the world. I’d like to talk a little bit about the Development Agenda, because it is something that we have been doing a lot of thinking about. 14 WTO, Comm. on Agric., Revised Draft Modalities TN/AG/W/4/Rev.3 (July 10, 2008), http://www.wto.org/ english/tratop_E/agric_e/chair_texts08_e.htm 15 Int’l Ctr. for Trade and Sustainable Dev., Fight Over Generic Drug Seizure Takes Centre Stage at TRIPS Council Meeting (Mar. 11, 2009), available at http://ictsd.org/i/news/bridgesweekly/42823.

Part C: Trade Policy and IP Rights: The Road Ahead; Development Agenda  573

I think that a lot of right holders see the Development Agenda as sort of a threat, that it is going to diminish the value of IP, it’s going to lead to lots of work on exclusions, exceptions, and limitations and all the sorts of things that my friend Jamie down there loves to talk about and see happen. I prefer to take an optimistic view of the world. I really look at the Development Agenda as an opportunity and not as a threat. That is not to say that you couldn’t have bad results out of it from the right holder perspective, and I would say less even from that perspective than from a perspective of the role that intellectual property can play in development. But it offers an important opportunity, as Jamie mentioned, to have developing countries engage with IP, to see the value of IP, and to do some sort of fact-based analysis and look at some of the issues that they would like to discuss. Where I see this going is I think that one of the interesting things about the Development Agenda is that it sometimes overemphasizes the importance of IP relative to development. It seems to suggest that IP plays a sort of absolute role in preventing access to information or products or investments in research. In a way, IP is oversold as both the cause of and solution to many development issues. IP is merely one tool in the toolbox—it is a necessary but not sufficient factor for development. I think that we need to take a more sophisticated view of IP. IP really does have a role to play in benefiting developing countries, and in fact leading to foreign direct investment. There is a lot of good work that the World Bank has done in this area in its study, Intellectual Property and Development: Lessons from Economic Research, that shows a good tie between strong intellectual property protection and getting access to knowledge via foreign direct investment and the technology transfer.16 In terms of engaging with the Development Agenda, I think it is ultimately a good thing that WIPO is being responsive to its members, that it is talking about what is, frankly, a very interesting, complex issue, and that it is important for all stakeholders to engage and bring evidence to bear in these discussions. I think one example of that is Jamie and I were both at the Standing Committee on Patents meeting a couple weeks ago. The secretariat had four issues that represented a mix of issues of interest to the various countries and issued excellent, very thoughtful, very balanced reports talking about those subjects.17 If WIPO can continue to do that kind of thoughtful, scholarly, economics-based work, I think it will be to the benefit of all involved. Let me stop by saying that I never imagined I would agree so much with Jamie on this panel. PROF. HUGHES: Actually, I didn’t think you would either. Sometimes I am known to ask pointed questions. Jason, I am going to ask you: Do you think that content owners or rights owners have wised up a little bit, that they were too strident in the past, and now they are sounding a little more amenable to some of the things in the Development Agenda? In other words, do you think that there has been a significant evolution in the way rights holders and constituencies look at the Development Agenda, that they initially were negative and have become more positive? Or do you think it was always fair and balanced, to use a phrase from American newscasting? MR. ALBERT: I think that the implicit point in your question is that we— PROF. HUGHES: That you wised up. MR. ALBERT: If we took a view that the Development Agenda is an opportunity, isn’t that just sort of a marketing message? It’s there, we’ve got to deal with it, so why don’t World Bank, Intellectual Property and Development: Lessons from Recent Economic Research (2005). The four issues were Standards and Patents; Exclusions from Patentable Subject Matter and Exceptions and Limitations to the Rights; The Client-Attorney Privilege; Dissemination of Patent Information. WIPO, Standing Committee on the Law of Patents: Thirteenth Session, http://www.wipo.int/meetings/en/details.jsp?meeting_id=17448 (last visited Apr. 1, 2010). 16 17

574  CHAPTER VII: TRADE LAW we spin it the way that we want to in a “fair and balanced manner,” to quote the Fox News slogan? I think that rights holders recognize, as the previous panel discussed, that there is an issue about how IP is perceived and the value of IP and its benefits. Sort of saying that “because IP protection is good more IP protection is always better” is not an argument that will win the day. That being said, I think that also right holders and others studied these issues and also engaged in some more sophisticated thinking. So it’s not just a matter of “All right, the Development Agenda is here so we are going to spin it and say ‘We like it because we have to live with it.’” I think as we look at future business models, as we look at things like open innovation where companies trade IP, as we look at a more global marketplace and increased trade and foreign direct investment, that we take a more sophisticated and nuanced view. It would be very simplistic for me to say, “All possible IP protection you can come up with and greater IP protection is always good,” just as I think it would be overly simplistic for Jamie to say that IP protection is always bad and harms access to knowledge and the things that he cares about. I think what you have seen is as a group we take a more thoughtful, sophisticated view of these issues as we look deeper into them. So I don’t think it is just a marketing slogan. PROF. HUGHES: Okay. Judge Pezard, if I can call on you, from a European perspective, from a French perspective, how do you think the Development Agenda and what is happening at WTO are playing out, good or bad? JUDGE PEZARD: Thank you. The national judges in France have more questions about the Development Agenda than answers. We don’t know exactly because we are a little apart from your organizations. But now in the courts we have two questions to the WIPO or WTO. Two key points. The first one: How to adapt patents and copyright to new forms of exploitation? The question is, for instance, whether the access to justice must have precedence over patents. That is the first point. The second point for us: The conflict of interests between copyright rights and human rights. We look very closely to a present case, the Bayer case in India.18 Maybe it is too early to examine this case. But it is on your agenda. What is your thinking about that? PROF. HUGHES: Let me go to our EU and U.S. representatives. If you are in Geneva, you are confused all the time about whether you are paying attention to WTO or WIPO. And then, when things seem to be shifting at WIPO, there is the rise of an increasing dependence on bilateral arrangements and free trade agreements both by the United States and the European Union. In a way, some people have argued that is a kind of defection of the two largest trading entities out of the multilateral system. So there is an increasing discussion of the end of multilateralism and the rise of bilateralism and/or plurilateralism as the major trading blocs try to settle things among themselves. I am going to turn it over now to Luc Devigne from the Commission and Stanford McCoy from USTR. You may decide among you two gentlemen who goes first to address the issue of what’s the proper relationship of bilaterals and the changes they make on the trading system and the IP system in relation to the multilateral system? MR. DEVIGNE: First of all, I think that we shouldn’t wish that the DDA is dead, not only because we remain attached to multilateralism as a principle, for a number of reasons that I will not go into details on here, but more because at a time of an economic crisis and when you 18 See Jim Edwards, “Bayer Loses Nexavar Case in India; Could Open Door to Easier Generic Approvals”, BNet, Aug. 20, 2009, http://industry.bnet.com/pharma/10003818/bayer-loses-nexavar-case-in-india-could-open-door-toeasier-generic-approvals.

Part C: Trade Policy and IP Rights: The Road Ahead; Development Agenda  575

have a rise of protectionist tendencies—and this can be monitored; you can measure the rise of anti-dumping cases, you can measure a number of parameters—keeping the forums of the multilateral negotiations, even if they are difficult ones—but, let’s face it, none of the previous rounds were done in a couple of years either. This one may be a bit slower, that is true, because you have more members, and when you are in a consensus-based organization more members means slower—we are familiar with that in the European Union. But it is important, I think, to keep that. It is true that because the multilateral negotiations were a bit slower than expected, a number of countries—I think the U.S. at first and we followed—started bilateral deals because, as we say in French, La nature a horreur de vide, nature hates hollowness. PROF. HUGHES: A vacuum. MR. DEVIGNE: Yes, sorry. Therefore, if you are not able to make a bilateral deal and you come after somebody else, you may find the basket empty. This is clear. But we remain attached definitely to multilateral deals. We see bilateral deals as complementary. We are talking about IP here. IP is only one chapter of them, but of course there are a lot of other things. In the time of globalization it is important to keep this alive. Perhaps I will come back later on the Development Agenda and WTO, but just to stay on this topic. Stan, do you want to comment? MR. McCOY: A U.S. perspective I could add to that is that one of my former bosses, Ambassador Robert Zoellick, used to talk about the idea of “competitive liberalization,” and bilateral agreements and regional agreements as a tool toward competitive liberalization; encouraging countries to open up new horizons in terms of their willingness to consider openness to international trade. I know there has been some academic discussion about that term and the merits of it. But I think from the U.S. perspective it has brought a lot of value through the various free trade agreements. In terms of the way forward on these issues, of course we will be hearing more from our political leadership about what their priorities will be bilaterally in the months to come. PROF. HUGHES: Let me come back to Jamie. Jamie, how does the NGO community deal with bilateral efforts by the United States and the European Union? It makes it harder for you to work, doesn’t it? What is the NGO perspective on bilateral efforts that have linkages of trade and IP? MR. LOVE: I think one of the strategies that both Stan and Luc have worked hard to promote is to have as little transparency as possible in these bilateral negotiations. So it is very difficult for NGOs. We can’t get accredited, we can’t attend the meetings, we can’t talk to negotiators. They won’t release in the ACTA negotiations the names of the negotiators or the actual text. They continue to stonewall the release of the text. In multilateral institutions these things would be transparent. In the United States they have a system of cleared advisors. They have twentyseven advisory boards.19 The average board has somewhere between twenty and forty members. Those people are cleared. They can look at the documents that are part of the negotiations. There is, I think, one consumer group in all twenty-seven advisory groups that I’m aware of. There are maybe some environmental groups. But it is essentially a long laundry list of corporate lobbyists that are in those advisory boards. So big corporations have somebody who is informed. Every big corporation that is in this room has somebody in one of those advisory boards. 19 Office of the United States Trade Representative, Anti-Counterfeiting Trade Agreement, http://www.ustr.gov/acta. The ACTA is in secret negotiations, but there have been information leaks. Michael Geist posts the leaked information on his website. See Michael Geist, Major ACTA Leak, http://www.michaelgeist.ca/content/view/4829/125.

576  CHAPTER VII: TRADE LAW The attitude of the European Commission and the U.S. government is: “As long as these big corporations know what’s going on and we’re talking to them and going to their meetings, and as long as we know what’s going on, that’s what we want. We don’t want the general public to know. We don’t want to see it in the newspapers. We don’t want to see it in the Web. We don’t want the average person to know.” Now, that’s a democracy deficit, and it’s a democracy deficit against the people who live in the United States and against the people who live in Europe, because they are using these bilateral negotiations to create norms that influence us back home as consumers. Now, that’s sort of the northern story. In the developing countries it is really basically a form of imperialism. If you look at the FTA negotiations on copyright, U.S. Copyright Office negotiators sometimes complained to us because nobody would push back in the bilateral negotiations. They’d put negotiating positions on the table and some developing countries wouldn’t offer to make any changes in them. This is not true for every country. Chile, I think, did a pretty good job in its negotiation. But a lot of countries will just basically say, “Where do I sign?” It was almost embarrassing for some of the U.S. negotiators that we talked to in some of the negotiations, because there is just a lack of capacity. The fact that they were trading agriculture versus IP—and the U.S. Market is so large, it’s just a very unequal power relationship. So what you get are really one-sided deals the Europeans and the Americans negotiation with developing countries. The developing countries would never agree to these provisions in a multilateral context. So the United States has figured out they can keep their own consumer interests and free spirits and free software people, all those people, in the dark through the lack of transparency and they can just ram down the throat of developing countries anything they want in some regions of the world in return for what is perceived by some to be a glorified photo op with some U.S. trade official and some putative advantages and some increased trade in some areas. So I think it is just an absolute disgrace that we have moved into these bilateral agreements. It is also incredibly difficult for the Americans and the Europeans and the Australians and the Canadians and everyone else to manage all these bilateral agreements. They’ve got now a huge proliferation of bilateral agreements. They don’t even have the same terms in the agreements you sign with the Americans, you sign with the Europeans, you sign with the Canadians, or the Australians. It has really become a mess in terms of managing the process. PROF. HUGHES: Okay. Now I am going to ask you for a quick, short answer. I want you to answer this question: Isn’t it fine for a sovereign state to decide they are going to trade off agricultural access for IP? Isn’t it okay for them to say, “Tell me where to sign your copyright deal as long as I get X market access?” Isn’t that okay for them to do? MR. LOVE: I think it’s a disgrace we are going down that path. PROF. HUGHES: Not too long an answer. But it’s not okay? MR. LOVE: That’s my answer. It’s a disgrace that we are going down that path. PROF. HUGHES: Now, WTO and WIPO, you’re being left out of the game. First, how does WTO react? I don’t want to put you on the spot for an official position, but there must be certain sensitivities in Geneva in both large buildings to these bilateral arrangements. I know there is sensitivity at WIPO to the plurilateral efforts of the Patent Superhighway, which does raise some issues about the relevance of both institutions. MR. WAGER: I think I addressed that issue to some extent yesterday. WTO members have the freedom to agree on additional IP norms and higher level of standards bilaterally or regionally or in some other forums outside the WTO.

Part C: Trade Policy and IP Rights: The Road Ahead; Development Agenda  577

While some have traditionally seen this more in a positive light as kind of a stepping stone forward, there are also concerns about complexity that to which I referred. The WTO response to this is to make sure that we have sufficient transparency and that we have the forum in which to discuss these issues if there is a feeling that there are any problems. Hence, we have this new transparency mechanism that provides better transparency and more discussion of these matters, and also more information available to the public through our Web site. I have two questions from Judge Pezard. If you want, at some point I can address them. PROF. HUGHES: Okay. Keppie, how does WIPO feel? MR. KEPLINGER: I think that we share some of the views of WTO on this. Of course, Member States can always negotiate their own agreements. They are sovereign entities. WIPO is a member-driven organization. We do what our members tell us to do. We have been in a situation where it has been impossible to make some progress on some areas, notably in patent harmonization,20 and in the case of a potential treaty on broadcasters’ rights.21 We have been stymied in those efforts of trying to move forward with a positive agenda to satisfy the demands of certain of our Member States. Are we afraid of bilateral agreements? No. As Hannu mentioned, they can be a way of advancing the state of the art. I just have to make one comment, though, on something that Jamie said. In my prior life with the U.S. government I negotiated a number of those free trade agreements. I don’t know anyone who said, “Just give me the paper and we’ll sign on the dotted line,” especially with respect to copyright. It was a hard-fought negotiation every inch of the way, even with countries that normally are rather friendly to the concept of intellectual property. PROF. HUGHES: Luc and Stan, are you making a mess of things with the bilaterals? Are they too complicated? Do they produce conflicting standards that will ultimately have to be reconciled? MR. McCOY: I’ll go first. I don’t think so, Justin. I think it was interesting that Jamie actually said two contradictory things on that point. He said, first, that we sort of hand over the paper and they say “Where do I sign?” I think if we actually did it that way, then you wouldn’t see the other point that Jamie made, which is divergence in the texts of these agreements. The texts diverge because these are negotiated results and, as Mike points out, they are often very hard-fought negotiations. So it is not an easy matter at all. We do try to maintain a fundamental level of consistency in what is negotiated with all of these agreements. They all need to be consistent with and building on the foundations of the TRIPs Agreement, and they need to do that in ways that are consistent with one another. Just two other thoughts: On the transparency front, I think Jamie makes a good point, that we have room to consider possible transparency steps in the context of advisory committees. That is something that we are looking at USTR right now as part of a review of our transparency practices. One early benefit of that was the work we did with Luc and with other trading partners on the release of the ACTA summary. But I don’t think that’s the end of the steps we will be able to take. But I want to stress also that it is very important that we continue to be able to do our mission. There is such a thing as letting process overtake substance and you can create a process that is 20 WIPO Patent Harmonization, supra note 8; see also Jerome H. Reichman & Rochelle Cooper Dreyfuss, “Harmonization Without Consensus: Critical Reflections on Drafting a Substantive Patent Law Treaty”, 57 Duke L.J. 85 (2007). 21 WIPO Proposed Broadcast Treaty, supra note 7.

578  CHAPTER VII: TRADE LAW not conducive to getting to a result that achieves the objectives that the Administration wants to achieve. That is something that we have to consider as well. Finally, on the question of benefit, there has been some interesting work done academically, and I’d be interested in seeing more of it, about the benefits of improvements in IP regimes in developing countries.22 I think one interesting question would be: Where did those benefits flow? I certainly know of many instances where the U.S. government advocates improvements in IP protection that I would postulate would disproportionately benefit local producers and domestic producers in the countries that made those improvements, as opposed to the thesis that the benefits will all flow north to the United States or to Europe. I will give you one anecdotal example. In India, one of the policies we have suggested that the Indian government consider is introducing a regime of licensing and stricter control of optical disc manufacturing to get a handle on a pervasive problem of optical disc piracy— music and movie piracy—that in fact vastly disproportionately affects Indian music producers and musicians and Indian movie producers and studios, rather than the American music part of the problem, which is actually a very small fraction. I think that there are a lot of other examples. Another issue that we work on with a lot of developing countries is drug counterfeiting. There again, I think the economic benefit to the American pharmaceutical industry from fighting drug counterfeiting is dwarfed by the public benefits at a local level of protecting populations from knockoff drugs. PROF. HUGHES: I do want to open it up to questions very soon. Before I do that, Luc, did you want to say something? MR. DEVIGNE: I agree with Stan. I don’t see per se a contradiction between developing IP and the development. True, there are some critical issues, like access to medicine, which need to be corrected, but I think we have by now reached a good balance in the TRIPs Agreement. Also, like Stan, I travel around the world to discuss with many countries, who actually are also demanding more IP. If you go to Brazil, Brazilian music share in the country is something like 70 percent. So if you improve copyright protection it is 70 percent in favor of resident artists. It’s as simple as that. And I have other examples, etc., but I won’t take the time. Just one thing on the transparency issue. Jamie puts us in the same basket. I will not comment on the U.S. system of advising. But as far as Europe is concerned, it is very simple. I believe in democracy. Democracy the Western way is based on a number of rules on representativeness. I report to my Member States, which are all democratic. Also, even if I don’t have the obligation per the EU Treaty, I report to the European Parliament, which is constantly kept informed of free trade agreements, even if we don’t have to, but just because we want to add an extra layer of democracy. I don’t want to be polemic, but I would ask you who elected you and why would you be considered as more representative than people from Member States who are duly elected. Just to comment on that for the time being. I have one last point. It is a myth to believe that our office is constantly open, that any multinational company can enter and look in my computer and see what I am doing. I can tell you that there are many big companies that are frustrated—I have many examples—because I don’t tell them what we do in FTA provisions because, simply, there is a rule that negotiating positions are not debated in public places. So the multinationals also believe—you are not the 22 See, e.g., Comm’n on Intellectual Prop. Rights, Integrating Intellectual Property Rights and Development Policy (2002); British Copyright Council, Commission on Intellectual Property Rights, Department for International Development: Consultation on ‘How Intellectual Property Rights Could Work Better for Developing Countries and Poor People’ (2002); Carlos M. Correa, Intellectual Property Rights, the WTO and Developing Countries: The TRIPS Agreement and Policy Options (2000).

Part C: Trade Policy and IP Rights: The Road Ahead; Development Agenda  579

only one to believe in myths—that we are going to trade off pharma versus GIs or automobiles or that kind of thing. So it is not as simple as that. As far as our representativeness or our transparency is concerned, I think the European system is perfectly alright. PROF. HUGHES: Judge Pezard, may I impose on you with a question? From your perspective as a senior official in the French government, do you find Brussels adequately transparent as a judge? I understand you are not in the government, but as a member of the establishment in France who should be well informed about these issues, do you find Brussels adequately transparent? MR. DEVIGNE: [jokingly] You don’t have to answer. JUDGE PEZARD: I came back ten years ago. I think the Brussels Commission and the Member States have improved a lot in this area. I would like to answer the question. There is a balance between transparency and confidentiality. It is necessary, as Mr. Devigne has just now explained. In Europe, we have a good compromise. I don’t know in USA. But we have not so good success with the press and information. That is the key point. I don’t answer as a former government civil servant, but as a French citizen. I think information in the media has to be improved. Maybe the European Commission and the representatives of the Member States have to check that. That is a suggestion. But if the companies or a government ask for information, it’s okay from my point of view. PROF. HUGHES: Jamie, a quick response. MR. LOVE: Once you have distributed a copy of a text to all the members in the ACTA negotiation you can’t claim to the public that you need protection of your negotiating position because you’ve already given your negotiating position to the people you are negotiating with. At that point you are just trying to keep it away from the public. I’m not asking for any special access. I’m not asking to be in one of Stan’s special advisory boards. I am asking to be treated like any average member of the public, which is to have access to what I should have access to. We should know who is attending the negotiations. PROF. HUGHES: I don’t want to re-fight ACTA here, though. MR. LOVE: But in terms of the text, there is just no justification in these bilateral agreements and these other things for once you share text with the people you are negotiating with to pretend like it’s a negotiating position that can’t be shared with the public. MR. DEVIGNE: It’s on our Web site, so you can read it there.23 PROF. HUGHES: Let’s open it up to some questions. Let’s start in the back and we’ll come forward. Please identify yourself. QUESTION: Thomas Dillon from the Motion Picture Association. I just have a question for Stan and Luc. I understand why since the process in WIPO has been frustrated to some extent a process would develop that may produce the ACTA. I’m not quite clear what the motivation would be for other countries to join the group. I think it is a very good thing to have this discussion, but what—and this is not a point; this is a request for advice and information—what do you think would motivate other countries who, if there is an ACTA, were not in when it starts to join the ACTA? MR. McCOY: I think that’s a good question, if I can take the liberty of trying to answer, and I’ll let Luc set me straight if I get anything wrong. I think that when you’re talking about a comprehensive free trade agreement sometimes IP is seen as a tradeoff for market access for some other product or something like that. 23 European Commission Directorate-General for Trade, Anti-Counterfeiting, http://ec.europa.eu/trade/creatingopportunities/trade-topics/intellectual-property/anti-counterfeiting.

580  CHAPTER VII: TRADE LAW If you are talking about a free-standing IP enforcement agreement, then it becomes much more a proposition of looking to other governments and saying, “Just taking IP enforcement in splendid isolation, is this something that your government feels like you want to provide leadership on and be strong on, not just from the perspective of trading it off for something else, but just because this is the right thing to do from the perspective of addressing the problems of counterfeiting and piracy and their social consequences and from the perspective of providing a strong investment climate that will be attractive to right holders who want to come and do business in your market but want some assurance that there are appropriate mechanisms there to be able to enforce their rights once they get there?” From that perspective, I think ACTA ultimately would sell itself, if we have a package of appropriate measures there that do allow for countries to do that kind of thing. PROF. HUGHES: Luc, a quick comment on that? MR. DEVIGNE: Yes, very quick. Three points. First, this is a very good question. Indeed, of course, the added value of ACTA is also to bring around the table the countries which are more on the “problem side” than on the “solution side,” of course. This definitely has been on our minds since the beginning. We obviously haven’t reached that stage yet, because we haven’t finalized the agreement. But definitely all members around the table want to, and have already expressed ideas on how best to do so, approach, integrate, etc., developing countries and other countries. That is the first thing. The second thing to remember is that ACTA is not new substantive law. We are not changing duration of patents or anything like that. It is exclusively about enforcement. And who can be against enforcement? It is a question of logic. I can understand you disagree with the law, but once the law is the law why not be in favor of its enforcement, with all the consequences? We have all the arguments there why IP benefits these countries. The third and last argument is that we now have around the table something like perhaps 70 percent of the world trade (I didn’t make the calculation, but if you take the European Union, United States, and Japan it’s a pretty big share already, plus the others). You have a variety of continents. You have developing countries too, only two, but that’s important. Perhaps others will say, “Well, if this is good for them why wouldn’t it be good for me?” That’s all. But this is not a scientific answer, of course. PROF. HUGHES: Jason, did you have something you wanted to quickly add? MR. ALBERT: I will be very quick. I think you have to show it is in their economic interest. I think there are ways of doing that. One great example would be Juan Valdez. There are great brands based on developing country products, whether it’s Colombian coffee, whether it’s Ethiopian Coffee Trademarking and Licensing Initiative,24 whether it’s Jordan’s super-generic pharmaceutical industry.25 I think that if you find examples of industries and countries where they benefit from this type of protection, they are going to want to be just as aggressive in going after counterfeiters as those of us in the developed world tend to want to be. PROF. HUGHES: I’m sorry. I have to ask an obvious question. To me it is an elephant standing in the room. Isn’t it true that once ACTA is finished that becomes a required component of FTAs with the United States or the European Union? 24 WIPO, The Ethiopian Fine Coffee Designations Trade Marking & Licensing Initiative Experience WIPO/ RES/DEV/GE/09/WWW[130155] (Nov. 13, 2009), available at http://www.wipo.int/meetings/en/doc_details. jsp?doc_id=130155. 25 Jordan Economic and Commerce Bureau, Key Sectors: Pharmaceutical, http://jordanecb.org/pharmaceutical. shtm (last visited Apr. 1, 2010) (This sector specializes and excels in producing branded generics …”); Int’l Intellectual Prop. Inst., The Role of Intellectual Property in Jordanian Industry (2005), available at http://www.iipi. org/Conferences/IP_Caucus_Jordan/Background.asp.

Part C: Trade Policy and IP Rights: The Road Ahead; Development Agenda  581 MR. McCOY: From the perspective of the U.S. negotiating position, the whole ACTA transparency kerfuffle is kind of off base, because we already have that stuff. PROF. HUGHES: Separate from the transparency stuff, just as the WIPO Copyright Treaty26 becomes an element of the FTAs that the United States requires, isn’t it true that once this would be finalized this would be a natural component for the United States and the European Union to both seek in their FTAs? MR. McCOY: Yes. What I meant to convey with my answer was that it is already the case, because the kinds of measures that we would be seeking through ACTA are very much similar to what has been in past FTAs. So that wouldn’t be a change from our perspective. What ACTA adds beyond that in terms of the legal framework is also commitments on cooperation and enforcement practices that are meant to provide more of the infrastructure to do the kind of thing that Luc talked about on the earlier panel this morning, about the cooperation that has existed between the United States and the European Union and Canada, for example, on border enforcement and fighting counterfeiting of network equipment. That sort of thing is something that we would like to see expanded to a broader group of countries. PROF. HUGHES: There is a question in the middle. Yes, sir? QUESTION: Peter Siemsen, a lawyer from Rio de Janeiro. First of all, I would like to criticize the constitution of the panel, because this is an issue which involves interests of emerging and developing countries and you don’t have one representative of emerging or developing countries on this panel. Second, on the Development Agenda, the Development Agenda in effect is a development which started in the 1960s. In the 1960s IP became political, which it was not before. It started at UMCTA, when Mexico and Brazil raised the question of transfer of technology. So you see the question is not new. At that time it was proposed to create a code of ethics for transfer of technology. But that died out at UMCTA and never came to a conclusion. In the 1970s you had the battle between the developing countries and the industrialized countries in the revision of the Paris Convention,27 which also died out because there was no way of coming to a conclusion. Later on, the negotiations for the GATT Agreement28 and for the introduction of TRIPs came up. The developing countries were at the beginning totally against inclusion of TRIPs into the GATT Round discussions. Finally, nearly in the last month before the signatures, they agreed to sign, after they were promised, mostly from Europe, that Europe would reduce the subsidies in agriculture. However, the Europeans never did what they had promised at that time to get developing countries to sign the TRIPs Agreement. Later on, we came to the multilateral agreements. One which seemed to be important was also born originally due to certain misunderstandings between the United States and Europe during the GATT Round, when Bush Father proposed the Free Trade Agreement of the Americas to compensate the European Union. Out of this proposal was what was born was NAFTA.29 So only a limited regional agreement—Mexico, United States, and Canada. Only later on, at a meeting in Miami of the presidents of the various Americas countries, did the issue come up to create the Free Trade Area of the Americas.30 That issue died again because, number one, the Mercosur, which is the common market in South America, didn’t WIPO Copyright Treaty, Dec. 20, 1996, 2186 U.N.T.S. 121. Paris Convention for the Protection of Industrial Property, Mar. 20, 1883, July 14, 1967, 21 U.S.T. 1583, 828 U.N.T.S. 305 (last Revised at the Stockholm Revision Conference, 1967); Susan K. Sell, “Intellectual Property as a Trade Issue: From the Paris Convention to GATT”, 13 Legal Stud. F. 407 (1989). 28 General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat A-11, 55 U.N.T.S. 194. 29 North American Free Trade Agreement, Can.-Mex.-U.S., Dec. 17, 1992, 32 I.L.M 612 (1993). 30 Free Trade Area of the Americas, Ministerial Declaration (Nov. 20, 2003), available at http://www.ftaa-alca.org/ Ministerials/Miami/Miami_e.asp. 26 27

582  CHAPTER VII: TRADE LAW agree to discuss and negotiate trade with IP. Their position was they were ready to discuss IP at TRIPs but not within a free trade agreement. Second, the United States refused to reduce subsidies to agriculture, which is a key issue between free trade agreements between most Latin American countries and the United States. Because of the deadlock in the multilateral negotiations, then the United States moved and started their bilateral agreements, the first one having been with Chile and then with various other countries. I don’t want to go into all the details. PROF. HUGHES: Yes, please don’t. I’d like you to either wrap it up or ask a question. QUESTIONER [Mr. Siemsen]: I just wanted to give a quick picture. PROF. HUGHES: You have given more than a quick picture. Is there a response from the panel? Let me say I certainly take your first point, which was succinct and correct. There should have been people from developing countries on this panel. I agree with you 100 percent. MR. DEVIGNE: I was going to say that as a first comment. Just a correction. [jokingly] I didn’t know that the European Union had anything to do with the Free Trade Agreement of the Americas, but one learns every day. This is why it is interesting to come to these conferences. PROF. HUGHES: It’s your fault. MR. DEVIGNE: As far as I know, Mercosur negotiations have been suspended because the major problem is, as you mentioned, agriculture and not IP. Because agriculture is a big part of the DDA and WTO, of course nobody wants to pay twice, pay once in WTO and pay second in a bilateral agreement. So that is the reason why it was stopped as far as I know, but perhaps you know better. Last but not least, the Development Agenda in WTO. I think it is very important. There are three IP issues that Hannu has mentioned, two issues related to geographical indications and one to CBD, biodiversity. The European Union and 108 countries have now a common position on these three issues. So I don’t think that with these 108 countries the European Union has put a gun on everybody to join the position. So one should get away from this kind of suspicion that systematically we impose things on developing countries. PROF. HUGHES: There was a question in the front. QUESTION: Jerome Reichman, Duke Law School. On the question of the WIPO Development Agenda, I think that contextually we should remember that intellectual property has always been a mix of public and private goods, with the heavy emphasis on public goods in the upstream dimension and heavy emphasis on private goods in the downstream dimension. I think the last ten to fifteen years we have seen so much excessive concern with the downstream outputs that we have lost sight of the public good component, which is essential to a healthy intellectual property system. I think that the good prospects for the WIPO Development Agenda are to rethink this balance again, so that we can make sure that our IP laws are not constricting our overall technological capacity. Having said that, I have a question about the limitations and exceptions. Jamie and others have said repeatedly that many developing countries have rights but no limitations and exceptions. I have to make a pointed question, following Justin, about that. Why come to Geneva and whine about that instead of going home and adopting limitations and exceptions? There is enormous room for deference under the Treaty. The first WTO decision on India31 I said there is going to be a lot of deference. I was right. 31 Panel Report, India- Patent Protection for Pharmaceutical and Agricultural Chemical Products WT/DS50/R (May 5, 1997).

Part C: Trade Policy and IP Rights: The Road Ahead; Development Agenda  583

We now have the China decision.32 There is an enormous amount of deference. There is plenty of room. Furthermore, it seems to me that any position that you take in Geneva on limitations and exceptions would be much stronger if you could say, “We do this in our country and you should do it in yours,” rather than saying, “Make me do it.” I leave it there. PROF. HUGHES: All right. Jamie is going to respond. MR. LOVE: If you just look at the issue of legislation, it would be instructive to read the U.S. 301 list,33 which is basically a description of countries that are being disciplined and slapped around by the U.S. government for doing exactly what you just said. If they consider legislation to implement flexibilities, they get listed in the 301 list as being bad. If they actually exercise an issue of compulsory license, like Thailand did, for example, for cancer drugs, they get singled out on the 301 list for exercising their Doha rights. The European Union does the same thing. When the Dominican Republic tried to issue a compulsory license on products for which Sanofi was a patent owner, they got a letter from the Commission telling them not to do it, and they never issued the compulsory license. MR. DEVIGNE: That is not true. That’s not the content of the letter. I know. We drafted it. PROF. HUGHES: Well, the letter was not transparent enough, because we all didn’t receive our copies. MR. LOVE: The Dominican Republic certainly didn’t issue the compulsory license after you sent your “non-threatening” letter, I will tell you that. But the point is that there is a system of disciplining people—those letters that Luc sends out, which are hard to get, that kind of thing—and they are very effective. MR. DEVIGNE: [jokingly] That’s reassuring. It was a lot of work. PROF. HUGHES: That point is well taken. But you still haven’t answered Jerry’s point. Wouldn’t it make sense to try to get these exceptions into national laws? The Americans in the copyright world with fair use don’t have an awful lot of capacity to argue against you. MR. LOVE: Yes, it would be good if Cameroon had a law as liberal as the French law to do compulsory licensing of medicine. That would be good. QUESTIONER [Prof. Reichman]: I’m talking about copyright. MR. LOVE: In copyright that’s true. It would be great if you would see broader limitations and exceptions in copyright.34 PROF. HUGHES: Every developing country could just take the Copyright Directive35 list of twenty-some exceptions and implement them in the national legislation— QUESTIONER [Prof. Reichman]: And add fair use. PROF. HUGHES: —and add American fair use.36 Then neither the Europeans nor the Americans can get upset. MR. LOVE: If WIPO in drafting the technical laws had actually helped countries do that, or encouraged them to, or gone before their parliaments and said, “This is a good idea,” that would have happened. The reason it didn’t happen, in part, was a combination of what the embassies from the Europeans and the Americans did and what WIPO did in their technical assistance. For decades they were very hostile to this kind of activity. 32 Panel Report, China- Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products WT/DS363/R (Aug. 12, 2009); Panel Report, China-Measures Affecting the Protection and Enforcement of Intellectual Property Rights WT/DS362/R (Jan. 26, 2009). 33 Off. of the U.S. Trade Rep., 2009 Special 301 Report (2009), available at http://www.ustr.gov/about-us/pressoffice/reports-and-publications/2009/2009-special-301-report. 34 See Chapter V.C, “Rethinking Exceptions & Limitations”, supra this volume. 35 Council Directive, 2001/29, The Harmonisation of Certain Aspects of Copyright and Related Rights in the Information, O.J. (L 167) (EC). 36 17 U.S.C. § 107 (2006).

PROF. HUGHES: Keppie, you want to respond? MR. KEPLINGER: Yes. I’d like to add a little bit to that.

I think the discussion that we are having in WIPO on limitations and exceptions is very important. It is not as Jamie said. It is not something that has happened since the Development Agenda. It is something that has been going on for years, so that we can provide reasoned advice to developing countries that come to WIPO and ask for advice on drafting their legislation and what can they have for limitations and exceptions. We find the work that has been done on those studies to be very valuable to us in our provision of balanced legislative advice to developing countries. We have done that for years and we will continue to do so. PROF. HUGHES: Time for one more question. QUESTION: Jens Bammel from the International Publishers Association. I am delighted that Jamie Love is on the panel to speak on behalf of the consumers in the developing world, and equally I as the representative of the International Publishers Association would like to speak on behalf of the rights holders in the developing world. It is simply not true that the interest of the developing world is simply to have broader exceptions, etc., etc. At the moment, at the last count, in the publishing area only three percent of the world’s publishing output comes from sub-Saharan Africa, comes from the Middle East, the Arab World, and from Latin America. That is pathetic compared to the percentage of the literate population of the world in this area. Why is that the case? It’s not because we don’t have enough copyright exceptions. The reason why the literature of the African continent, of Latin America, is actually so weak is simply because if you ask the rights holders there, “What can we do? How can we develop a publishing industry?” copyright and strong copyright protection is an important part of an overall framework necessary to promote creative industries. I find it very post-colonial or colonialistic to think that copyright exceptions are good because actually that means that the knowledge that is there in the developed G8 countries can just simply seep over. Actually, the developing countries can create the content that they need themselves if they get a proper framework which includes as a part a strong copyright regime. Thank you. PROF. HUGHES: Thank you. It is so regrettable that only at the end of a trade discussion we had the word “colonial.” No one said “imperialism” yet. MR. LOVE: I did. PROF. HUGHES: Any responses? Jamie, do you want to respond to that? MR. LOVE: I think that in a sensible regime intellectual property would be a positive thing everywhere, including developing countries, including least-developed countries, including the United States, including Germany—including everywhere. I think that there are a lot of issues in how it plays out. One of the reasons why a lot of countries didn’t have limitations and exceptions, like in Latin America, was there was just a tradition of copying. Infringement was the limitation exception regime. The Europeans wouldn’t like limitations and exceptions, they’d say, “Fine, whatever. We don’t need them. We just won’t enforce the law anyhow, so what difference does it make?” You’d have whole libraries made out of copied books. Now, with all this pressure on enforcement, people are coming back to—like Chile is saying, “We actually want to move to a high-compliance regime for the copyright law, but we want to protect education and other sectors.” So I think what you’ve got now is a recognition that the old days of just ignoring copyright are passing and they have to go into a more legal regime. When you go into a more legal regime you have to deal with pricing and you have to deal with limitations and exceptions both.

Part C: Trade Policy and IP Rights: The Road Ahead; Development Agenda  585 PROF. HUGHES: With that, I think we are done, to stay on time and bring the schedule back on time. Let’s thank our panel.

Chapter VII

Trade Law Part D: United States v. China in the WTO Moderator Daryl Lim

Fellow, Stanford Law School Program in International Legal Studies (Stanford, CA) Speakers Prof. Daniel Gervais

Prof. Peter K. Yu

Vanderbilt University Law School (Nashville)

Drake University Law School (Des Moines)

Prof. Wang Qian

Eric H. Smith

IPR School, East China University of Political Science and Law (Shanghai)

Greenberg Traurig (Washington, D.C.)

Panelists Prof. Daniel Gervais

Vanderbilt University Law School (Nashville)

Prof. Wang Qian

IPR School, East China University of Political Science and Law (Shanghai)

MR. LIM: Welcome to China in the WTO panel. This is a topic of huge importance. China is a country of 1,300 million people. This is probably one of the most significant WTO decisions in recent times, and covers many important aspects. We are very privileged to have a distinguished panel with us. I would like to start with Professor Daniel Gervais from Vanderbilt University. PROF. GERVAIS: I am very happy to be here to present this dispute. Actually, that is precisely what I intend to do in the ten minutes that I have, which hopefully will then be useful for the discussion.

588  CHAPTER VII: TRADE LAW [Slide] There were three main issues that this WTO Panel dealt with based on three claims made by the United States.1 The three issues are, as you can see on the screen: • First, the denial of copyright protection linked to what I think can be properly called a censorship system. • Second, the issue of disposal, destruction, and auctioning off of seized infringing goods. • Finally, the application of criminal penalties to trademark counterfeiting and copyright piracy “on a commercial scale.” [Slide] The first claim, the copyright claim, was essentially based on Article 4 of the Chinese Copyright Act, the agreed translation of which reads: “Works the publication and/or dissemination of which are prohibited by law”—this could be any law; it obviously wouldn’t be copyright law necessarily—“shall not be protected by this law [the Copyright Act].”2 Now, at the Fordham Conference panel last year it was made very clear that there was no serious doubt that the United States would actually win its case on this particular claim.3 But it is still worth it, even though it was fairly straightforward, to look at the legal basis and the outcome. [Slide] The legal basis of this claim was Article 9 of TRIPs,4 under which the Berne Convention, most of it at least, was incorporated into TRIPs, and then Articles 5(1) and 5(2) of the Berne Convention.5 Article 5(1) reads in part: “Authors shall enjoy in respect of works which are protected under this Convention the rights which their respective laws do now or may hereafter grant to their nationals as well as rights specially granted by this Convention.” In other words, if you are an author, if you are a copyright holder, you should benefit from the rights that are granted by Berne. Article 5(2) is the famous prohibition on formalities on the enjoyment or exercise of copyright. The only issue last year at the panel was which of these two provisions would dominate the reasoning of the WTO Panel. As a reminder, Article 17 of the Berne Convention specifically allows countries to have a censorship system but it does not allow them to suspend copyright on censored works.6 [Slide] The outcome for the Panel process was that:7 • At least in some cases, due to this review (censorship) process, certain foreign works were in fact not protected. China tried to convince the Panel that they had copyright but not “copyright protection.” Fortunately, the Panel said, “I don’t think so.” 1 Request for Consultations, China—Meas­ures Affecting the Protection and Enforcement of IP Rights, WT/DS362/1 (Apr. 10, 2007), available at http://docsonline.wto.org/DDFDocuments/t/G/L/819.doc. 2 Copyright Law of the People’s Republic of China (promulgated by the Standing Comm. Nat’l People’s Cong., Sept. 7, 1990, amended Oct. 27, 2001, effective Nov. 1, 2001) (P.R.C.), Art. 4, translated in Intellectual Property Protection in China, Copyright Law of the People’s Republic of China (2001), http://english.ipr.gov.cn/laws/laws/ copyright/232720.shtml [hereinafter Chinese Copyright Law]. 3 See “United States v. China in the WTO”, 10 Fordham Intellectual Prop. L. Inst., International Intellectual Property Law & Policy, § VII.A.2 (2008). 4 Agreement on Trade-Related Aspects of Intellectual Property Rights Art. 9, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, The Legal Texts: The Results of the Uruguay Round of Trade Negotiations 391 (1999), 1869 U.N.T.S. 299, 33 I.L.M. 1197, 1201 (1994) [hereinafter TRIPs Agreement], available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm. 5 Berne Convention for the Protection of Literary and Artistic Works Art. 5(1)–(2), Sept. 9, 1886, 168 Parry’s T.S. 185, revised Nov. 13, 1908, 1 L.N.T.S. 218, revised June 2, 1928, 123 L.J.T.S. 233, revised June 26, 1948, 331 U.N.T.S. 217, revised July 114, 1967, 102 Stat. 2853, 828 U.N.T.S. 221, 231 [hereinafter Berne Convention]. 6 Id., 828 U.N.T.S. at 251. 7 Panel Report, China—Measures Affecting the Protection and Enforcement of IP Rights, WT/DS362/R (Jan. 26, 2009), available at http://docsonline.wto.org/DDFDocuments/t/WT/DS/362R-00.doc [hereinafter Panel Report, China (Jan. 26, 2009)].

Part D: United States v. China in the WTO  589

• The Panel based its finding on Article 5(1). It basically said, “We found cases where a foreign work isn’t protected under copyright law. That’s a violation of 5(1).” • Then the Panel said, “Under 5(2) maybe there was a claim, but we will use the principle of judicial economy.” [Slide] Let’s move to the other, more complicated claims. I wanted you to see, first, the Chinese regulation at issue. Without reading the whole thing, what it says is essentially that when infringing goods are confiscated there is a process to decide how they will be disposed of. The provision reads as a sequential process. In other words, the first thing would be typically that the goods would be given and used for, let’s say, social or “public welfare purposes,” as it is called here. If you read the last sentence, in fact it looks like destruction of the goods is only a last resort. However, the Panel was impressed by statistics that showed that in fact 58 percent of seized goods in China were in fact destroyed. I’ll come back to that in a second. [Slide] The legal basis for the U.S. claim was, first, Article 59 of TRIPs, which reads in part: “Competent authorities shall have the authority to order the destruction or disposal of infringing goods.”8 This Panel report is very important because it interprets this famous phrase which is all over the enforcement section “shall have the authority,” which is used in several Articles of the Enforcement Part of TRIPS.9 [Slide] The Panel first of all referred to previous drafts of the agreement to show that the phrase used was “A Member shall provide for” was replaced with “authorities shall have the authority.” From this, the Panel concluded that the obligation that competent authorities shall have the authority to make certain order was not an obligation that competent authorities exercise that authority. It really means just that they should have the power. [Slide] A second legal basis on the same Claim number 2 was Article 46. Article 46 establishes principles.10 Remember Article 59 refers to the “principles contained in Article 46”—and not to Article 46. The Panel read Article 46 and transformed it into principles, which look strangely like Article 46, except there are five paragraphs instead of four. I am not going to go through all of them. I will go through the two that actually matter most for our purposes. [Slide] In terms of the outcome, as I mentioned earlier, the Panel was impressed with the fact that the Chinese government had made an agreement with the Red Cross in which there were specific measures taken to prevent—because that’s the whole point here, to prevent— infringing goods from reentering the channels of commerce. [Slide] Turning to the two key principles then, first Principle (B), the second Principle, is that the order to dispose of goods shall be “in such a manner as to avoid any harm caused to the right holder.”11 [Slide] The Panel decided that this authority as exercised through the Red Cross was in fact sufficient. That said, China occasionally also auctions off trademarks after removing the infringing goods. [Slide] Here are the percentages of the various ways that they dispose of things. I’ve put it by shipment and by value. Essentially, more than 50 percent or close to it, if you go 8

Id.

TRIPs Agreement, supra note 4, Art. 59, 33 I.L.M. at 1219. “[C]ompetent authorities shall have the authority to order the destruction or disposal of infringing goods in accordance with the principles set out in Article 46. In regard to counterfeit trademark goods, the authorities shall not allow the re-exportation of the infringing goods in an unaltered state or subject them to a different customs procedure, other than in exceptional circumstances.” Id. Arts. 41–61, 33 I.L.M. at 1213–20. Id. Art. 46, 33 I.L.M. at 1215. 11 Panel Report, China (Jan. 26, 2009), supra note 7, ¶ 7.266. 9

10

590  CHAPTER VII: TRADE LAW by shipment, of seized goods are in fact destroyed. You see auctions represent a very low percentage whether you analyze it by shipment or value. [Slide] The fifth principle, which says “the simple removal . . . shall not be sufficient . . . to permit release of the goods”12 is also relevant. [Slide] China here argued that the right holder was given an opportunity to comment before the auction. So it’s not “simple removal”; it’s removal plus this opportunity to comment. [Slide] The Panel disagreed. It said, “Simple removal refers to what you do to the goods themselves” and basically said, “these are not exceptional cases, as Article 46 allows. This auction is a systematic process that you use regularly.” As a result, China must amend its auction system, but again it is used in very few cases. [Slide] Now I get to the really important part, but I know other panelists speak to this. [Slide] The third claim concerned the several thresholds in Chinese law to determine whether criminal prosecution of intellectual property infringement is possible.13 The criminal law itself is fairly vague. It uses terms like “if the circumstances are serious.” But the vague thresholds are in fact defined by what China calls “judicial interpretations.” They actually set monetary or quantitative thresholds below which criminal prosecution will not occur. [Slide] For example, the expression, “if the amount of gains is relatively large,” again is defined as 50,000 yuan—which would be approximately $7,000. “Serious circumstances” is defined as 500 copies or more. [Slide] The legal basis for this third U.S. claim was: Does China provide criminal procedures for piracy or counterfeiting on a commercial scale as provided in Article 61 of TRIPS?14 [Slide] The Panel here goes through a very, very complicated analysis, but very interesting.15 First of all, they say, “Article 61 imposes a positive obligation to have criminal penalties.” They used the dictionary approach, which panels have been known to do several times, to say: “‘Commercial’ means basically that one is engaged in commerce.” [Slide] Then they say, “What’s a commercial scale?” Then proceed with a quantitative/ qualitative analysis of whether given activities are in fact at commercial scale and come to the conclusion that this threshold is “higher than de minimis.”16 [Slide] I won’t have time to go through Outcome (3), but basically they are looking for something that, if you read the next-to-last paragraph, is “carried on at the magnitude or extent that is typical or usual in commercial activity.” [Slide] Basically, they set the threshold at a very reasonable level. But they also told the United States and third parties, “You did not provide evidence that the cases that fall below those thresholds are in fact quantitatively or qualitatively commercial in scale.” It doesn’t mean, therefore, that China is compliant; it means that there is no evidence that these cases are below commercial scale. So there is room to file perhaps a new complaint, but I really doubt that, against China. [Slide] The Berne case was a slam-dunk, if you’ll allow me the basketball metaphor. There was no doubt, I don’t think, that the U.S. would win this. The “commercial scale” is much more important. I think the standard was correctly defined. The split outcome may spur some bilateral discussions on IP between the United States and China. Id. at ¶ 7.268. Criminal Code of the People’s Republic of China, (promulgated by the People’s Cong., Mar. 17, 1996) Arts. 213–220, translated in Wei Luo, The 1997 Criminal Code of the People’s Republic of China: with English Translation and Introduction (William S. Hein & Co., Inc. 1998). 14 TRIPs Agreement Art. 61, supra note 4, 33 I.L.M. at 1220 (“Members shall provide for criminal procedures and penalties to be applied at least in cases of willful trademark counterfeiting or copyright piracy on a commercial scale.”). 15 Panel Report, China (Jan. 26, 2009), supra note 7, ¶¶ 7.494–590. 16 Id. at ¶¶ 7.545, 7.577. 12 13

Part D: United States v. China in the WTO  591

My more fundamental point is this: Does the Panel Report send, as many people have said, a signal that all that TRIPs requires is paper compliance? For example, is it sufficient that judicial authorities just be given certain powers they never use? This debate really focuses on the fact that the TRIPs Agreement, unlike the other WTO agreements, is not subject to nullification or impairment disputes, the so-called non-violation disputes.17 One does have to prove a violation based on the actual text. There is also potentially some need for clarification of “as such” (which these claims were) versus “as applied” claims. I stop here. Thank you very much. I’m sorry I had to rush through this. Hopefully, the rest will come out in the panel discussion. MR. LIM: Thanks, Daniel, for laying the groundwork. Now we have the privilege of getting two perspectives, one internal perspective from China and another Chinese scholar, Professor Peter Yu, later on commenting from the external perspective looking in. Can we first have Professor Wang Qian from the East China University of Political Science and Law? PROF. WANG: As Daniel said, there are three major issues in this WTO case, but I will only focus on the Article 4 issue because China lost on that issue. [Slide] Article 4 in China’s Copyright Law says that “works the application or dissemination of which are prohibited by law shall not be protected by this law.”18 On this issue the WTO Panel decided in favor of the United States, declaring that Article 4 is inconsistent with the Berne Convention and with the TRIPs Agreement, which requires automatic copyright protection for all types of works.19 I would like to argue that this decision has only very limited impact on China’s copyright system for two reasons. The first reason is the only beneficiaries of this decision are the authors of the illegal content. The second reason is most of the authors of the illegal content would not choose to enforce their copyright in China against the infringers. I will explain this later. [Slide] The first criterion is: Who is the beneficiary of the Panel’s decision on Article 4? I think this question is closely related to the scope of Article 4. What does the “prohibited works” mean? Those works which are excluded from copyright protection by Article 4 are commonly referred to as the “prohibited works.” The United States gave a very expansive reading of the scope of the prohibited works. It says that, due to China’s content review system, any work that has not yet been reviewed and authorized for publication or distribution in China is denied copyright protection.20 [Slide] In addition, it gave a list of the unprotected prohibited works, which includes works never submitted for content review and works awaiting the result of content review in China. What does this interpretation mean? Let me show you an example. [Slide] Hollywood produces hundreds of movies every year. However, according to the bilateral agreement between the U.S. and Chinese governments,21 only twenty U.S. movies are allowed to enter the Chinese market. The question is: How about the other U.S. movies; are they protected by China’s Copyright Law? The United States claimed that they are not protected since they have never been submitted for content review. 17 For a discussion of non-violation disputes, see generally Susy Frankel, “Challenging TRIPS-Plus Agreements: The Potential Utility of Non-Violation Disputes”, 12 J. Int’l Econ. L. 1023 (2009). 18 Chinese Copyright Law, supra note 2. 19 Panel Report, China (Jan. 26, 2009), supra note 7, ¶ 7.117. 20 Id. at ¶ 7.84. 21 See Summary of U.S.-China Bilateral WTO Agreement, Motion, Pictures, Videos, Sound Recordings (Feb. 2, 2000), http://www.uschina.org/public/wto/ustr/generalfacts.html.

592  CHAPTER VII: TRADE LAW In addition, the United States claimed that when twenty U.S. movies are waiting for the result of the content review, they are not protected either. I think that is a typically wrong reading of the scope of the prohibited works in Article 4. The real meaning of Article 4 is only the unconstitutional or immoral content is not protected by China’s Copyright Law. In other words, Article 4 concerns only the content, not the procedure of authorization for publication of works in China. For example, before the U.S. film Shrek 2 passed the content review and was authorized for publication and dissemination in China, the Chinese government took measures to protect its copyright and to crack down on the piracy. Why? The reason was quite simple: The content of the film Shrek 2 was lawful; therefore, it could get automatic copyright protection in China. [Slide] The WTO Panel correctly rejected the expansive reading of the prohibited works in Article 4. The Panel confirmed that only the works or portions of the works that have failed content review are not protected by China’s Copyright Law. Both the works never submitted for content review and the works awaiting the result of content review are protected by China’s Copyright Law. In other words, even if a work has not yet been reviewed and authorized for publication and distribution in China, as long as its content is lawful it can get automatic copyright protection in China. [Slide] I would like to argue that the only beneficiary of this Panel’s decision that Article 4 is inconsistent with the TRIPs Agreement and the Berne Convention is the author of the illegal content. In other words, if Article 4 is abolished, the authors of illegal content can get copyright protection. By the way, you must keep in mind that the Panel emphasized that its findings do not affect China’s right to conduct content review.22 So China still has the right to prohibit publication of illegal content entirely. In such circumstances I would like to argue that in most cases the authors of the illegal content will not choose to enforce their copyright in China. [Slide] Let me show you an example. Suppose that a guy took sex photos of female celebrities and somebody else uploaded those sex photos onto the Internet without his license. Under the current Article 4, those sex photos are not protected due to their illegal nature. But if Article 4 is abolished, the author of the sex photos can get copyright protection. But the question is: Will the author of the sex photos sue the infringer in a civil court? My guess is not. Because those sex photos are strictly prohibited by law, in most cases the author will prefer not to disclose his real identity to the public. So it is highly impossible for the author to confess that he created the sex photos and sue the infringer in the court. Even if the author is brave enough to step forward to disclose his identity and sue the infringer in the court and he wins the case, will the court order the infringer to pay damages? The answer should be negative. Since sex photos are prohibited by law, the author cannot publicly exploit the sex photos, nor can he authorize others to do so. In other words, the author of the sex photos cannot make a lawful profit from the sex photos. So it is impossible for him to suffer any economic injury because of others’ infringement of the copyrights in the sex photos. So even if the author of the sex photos wins the case against the infringer, he cannot get damages. The only possible remedy for him is to get an injunction from the court against the future infringement. However, considering the huge difference in the courts and the effectiveness between the private enforcement of a copyright against infringement and the government’s ban against the illegal publication of illegal content, I think in most cases the authors will not choose to sue the infringer in a civil court. 22

Panel Report, China (Jan. 26, 2009), supra note 7, ¶ 7.144.

Part D: United States v. China in the WTO  593

If the author chooses to sue the infringer in a court as the copyright owner, he has to pay the legal cost and attorney’s fees at first hand, and he also has to collect evidence and to debate with the accused infringer in the court. If he wins the case, he has also to apply to the court to enforce the injunction against the infringer. However, if the author just chooses to report the unlawful publication of the illegal content to the government, not as the copyright owner but as an ordinary citizen, he does not have to pay. The government will pay all the costs to initiate the investigation procedure and to collect evidence, and the government will enforce administrative measures against the distributor of the unlawful content. So if the author only wishes to stop others from exploiting the illegal content he created, the chances are he will choose to report the unlawful publication of the illegal content he created to the government, not as the copyright owner but as an ordinary citizen. [Slide] That is my conclusion about the Article 4 issue. The only beneficiaries of the Panel’s decision on Article 4 are the owners of illegal content. Those authors of the works which have not yet been reviewed and authorized for publication or distribution in China are not the beneficiaries because they have already enjoyed copyright protection. Second, even if the prohibited works could be protected by the Copyright Law, if Article 4 is abolished in accordance with the recommendation of the WTO Panel,23 most copyright owners of those illegal contents will not seek copyright enforcement against infringement. So the real impact of the WTO Panel’s decision on Article 4 on China is very, very limited. Thank you. MR. LIM: Thanks, Wang Qian. Just before the session, I spoke with Peter. He told me that he did a 200-slide presentation in twenty minutes on this topic. I understand that he is not going to be doing a 100-slide presentation in ten minutes. Peter is from Drake University. PROF. YU: Let me first of all say I agree with a lot of things Daniel has talked about with respect to outlining the decision. The slides that were mentioned earlier are on the Web site. For those of you who are curious, you can actually go there. I did a panel for UNCTAD and ICTSD a while ago in Geneva going over the cases.24 I talk about my own analysis. I want to start off with two different things. The first one is to give you the context, and that will tie into the first panel in this room. I think that the reason why I am coming over here is this is an issue I cannot talk about sitting down. My blood was boiling when I was listening to all the discussion about what is going on in China. I think there is some misconception about whether the Chinese can actually do everything if they really want to. Think about it this way. The first point is about the Olympics. In China there is a lot of fake Olympic merchandise. I think the lesson we learned from the Olympic Games is not that if Chinese consider the Olympics are important, they can stop piracy. But even if the Olympics are that important, they cannot stop piracy. And forget about the rest. So that is the lesson you get here. The other thing people always talk about is political will. One of the biggest problems in China with respect to the central government is to collect taxes. They have a tough time collecting taxes from the regional governments because of local protectionism, because of corruption. The central government was not able to get what they needed. And if taxes are that important and they still cannot deal with it, think about all the other issues. Every time I go on panels to discuss the issues about political will with some of my colleagues, and also some of those from the government and from the industry, the question Id. at ¶¶ 7.117, 7.136. International Centre for Trade and Sustainable Development, The WTO US-China Panel Report: Findings and Implications for the Future of IPRs Enforcement, Feb. 23, 2009, http://ictsd.org/i/events/dialogues/40626. 23 24

594  CHAPTER VII: TRADE LAW I love to ask—and for those of you who have been the Fordham Conference before, you probably have heard this—pick one out of three issues: nuclear nonproliferation, currency exchange, and intellectual property. Which one would you pick? The answer is always not intellectual property. I was actually told by one of the former high intellectual property officials from the U.S. government, “Peter, intellectual property is always at the top of the second list.” Okay? So if that is the perception of how important intellectual property is, imagine about whether the Chinese will be willing to consider intellectual property as that important. And also, we need to ask ourselves an honest question: Do we really have the political will to make intellectual property protection the number one item on the bilateral agenda? If we are not willing to do that, you can imagine how difficult it is. I am not saying that a lot of the piracy and counterfeiting issues in China are defensible. There are a lot of problems there, and I think a lot of the Chinese officials actually recognize that. The argument they are making is: “The system is not perfect. We are working our best to improve it. But you cannot just expect to have a change immediately.” That is why they are working hard to deal with that. The second thing I wanted to talk about before I actually get into the aftermath of the WTO decision is that I miss Hugh Laddie being here, because he always brought sanity to this debate. I remember two years ago he talked about how this complaint is absolutely absurd.25 China is already doing the best they can in trying to improve their IP protection. Yes, there are issues about resources, there are issues about capacity, and the complaint is not going to achieve a lot. Last year he was here talking about how depressing it is to listen to this panel talk about a lot of the discussion here.26 I think to some extent we can actually get a sense as to what is going on there. Two years ago I talked about why it is not a good idea to bring a WTO complaint against China with respect to IP enforcement. At that time we were focusing a lot on general enforcement as compared to specific enforcement. Last year I said that we are going to come back next year to talk about this decision, because this is an issue that will keep on going every single year.27 And, voilà, we are here again talking about this issue. What I am saying is not necessarily that I can predict what is going on, although the outcome of the decision, I said earlier in a lot of places, is that China will lose on the Berne formality issue, the United States will lose on the criminal threshold issue, and it will be a toss-up with respect to the second issue about auction. The outcome is exactly the same, except that I cannot predict what rationales the WTO Panel would come up with in trying to explain that. I think it is very important for us not to study what is the outcome, because that was kind of expected and it is not that un-expectable, but to understand what are the rationales, what you get from the Panel Decision.28 There is actually quite a lot. I want to talk about three things. The first one is in a lot of the discussions we have about the WTO case we always say, “This has to be a slam-dunk decision. A lot of the industry knows that they have to win this case.” When you read the decision, when you read a lot of the filings with respect to the questions and answers, with respect to the briefings, you are actually surprised by what is actually getting See 9 Fordham Intellectual Prop. L. Inst., International Intellectual Property Law & Policy (2007). See “IP Developments in China”, 10 Fordham Intellectual Prop. L. Inst., International Intellectual Property Law & Policy, § VII.C (2008) (“I must say I found this after-noon’s session thoroughly depressing.”). 27 See id. 28 Panel Report, China (Jan. 26, 2009), supra note 7. 25 26

Part D: United States v. China in the WTO  595

into the process. To some extent I was wondering why are they not using some of the stronger arguments that they have been using, why to some extent the case is not argued as effectively as I would like either from the side of China or from the side of the United States. What is going on there? I don’t know exactly the answer, but there are different things we can think about. First, it seems like there has been some discussion about going from the general enforcement to the specific enforcement issue because general enforcement is going to be very difficult under Article 41(5) of the TRIPs Agreement.29 Then, there is also some internal disagreement within the different litigation teams as to how they wanted to proceed. On top of that, you have problems with respect to the TRIPs Agreement. Enforcement issues are for the first time included in a multilateral agreement.30 It is not going to be perfect. If you look at the Berne Convention, that has been going on for more than 200 years,31 and the TRIPs Agreement is rather new, so the enforcement provisions are not as effective. There is also discussion about how the WTO and also some of the panelists wanted to split the baby in half so that each side would actually get something and they would not appeal the process. There are some discussions about how the United States side has underestimated the complexity of the Chinese legal system. To some extent I agree with that. Penal law and criminal law is one of the most developed areas within Chinese law. It started more than 2,000 years ago.32 If you want to make an argument saying that “This area of law is not developed,” it will not be penal law. It will be economic regulation, it will be other areas. So to some extent it is hard to understand why you are challenging a system that is so well developed, with 2,000 years of history. This is not necessarily a good strategy. Another example would be how to calculate the different thresholds. It is going to be a very difficult issue because it is very complex. The problem with China is not that there are not enough laws, but there are too many laws. That is why it makes it very difficult, because there are always regulations, judicial interpretations, laws. When you combine all of them together, there are a lot of different interpretations. And then, in defense of the U.S. side, you can also make an argument saying that “They keep on talking about the need for evidence, and yet nobody knows exactly what is the standard. How can you produce evidence?” To some extent I agree with that, because it is going to be very difficult for the U.S. team to actually produce evidence if they don’t know exactly how the words “commercial scale” are going to be defined. There is no way as a good lawyer you will be able to do that. So when you combine all of them together, you can see why it is going to be difficult. Now, what are the benefits for the different players? Let’s start with the United States. The benefits for the United States will be to understand the content review process. I think they found out a lot of information that is otherwise not provided transparently. So I think the process is very effective in that way. It is also effective in understanding how the WTO Panel is going to understand the Chinese legal system. For example, what type of regulations will have legal effect? How would the WTO Panel handle judicial interpretations? I think those are very important. 29 TRIPs Agreement, supra note 4, Art. 41(5), 33 I.L.M. at 1214. Article 41 “does not create any obligation to put in place a judicial system for the enforcement of intellectual property rights distinct from that for the enforcement of law in general, nor does it affect the capacity of Members to enforce their law in general.” Id. 30 For the TRIPs articles on enforcement, see TRIPs Agreement, supra note 4, Arts. 41–61, 33 I.L.M. at 1213–20. 31 Berne Convention, supra note 5. 32 See generally Randall Peerenboom, “Yongping Liu, Orgins of Chinese Law: Penal and Administrative Law in its Early Development”, 43 Am. J. Legal Hist. 223 (1999).

596  CHAPTER VII: TRADE LAW I think it provides a momentum for future challenges. This will be only one of the many cases within the IP area. I don’t think this will be the last case between the United States and China with respect to IP enforcement. Also, it shows the United States’ willingness to bring a case before the WTO, and it sends a strong signal to developing countries. Now, what about the benefits for China? The benefit for China is that it provides certainty and clarity of its WTO obligations. China joined the WTO in 200133 and they are still trying to figure out how they want to implement the provisions. The disagreement between China and the United States is really about how much time they can have in order for them to develop a good system. It is not really about whether the system in China is already perfect. That is not a question at all. Another thing is within China there are a lot of people who want to use the WTO regulations to put forward more reforms. So the decision will actually help in generating the internal momentum to push for more WTO-based reforms. I think that is very important. It will help China learn how to play the WTO game a little bit better. It will also help them reshape some of their negotiations with respect to the bilaterals, with respect to other negotiations, using the WTO decision as the default. What about the benefits for developing countries? The benefit for developing countries is that the WTO Panel stayed away from using the free trade agreement to define Article 61. The WTO Panel also focused a lot on minimum standards and limitations. I think that is very important. The WTO Panel was willing to look to local conditions to define what is considered “commercial scale,” and it is asking for substantive evidence, not just press articles. They are looking for something important. So when you combine all of them together, you can see there are benefits for the United Sates, there are benefits for China, and there are benefits for developing countries. Let me close on this one. Think about what if the United States had prevailed on all three claims. What things would you get? Would it be effective to provide strong intellectual property protection in China? The answer would be no, because with respect to the first one about formalities, you can still have censorship. That means you don’t have the market access you want to have. With respect to the second issue about the compulsory sequence,34 I don’t understand why the U.S. team wants to introduce more discretion within the process, because the more discretion you get, the more danger you face in terms of local protectionism, in terms of corruption. Why do you want them to have a lot of choices about what to use so they can pick and choose? The final thing with respect to criminal enforcement, suppose that China is willing to classify all those provisions within administrative enforcement into the criminal system or to introduce a criminal penalty or criminal fines. What would you achieve? You would get the same result, except that it is now not called “administrative enforcement” but called “criminal enforcement.” So I wonder how effective it is to actually have this complaint. Thank you very much. MR. LIM: Thanks, Peter. Peter mentioned Hugh Laddie. Hugh Laddie was here last year. We had a really spirited exchange. I hope we will continue the spirit of robust debate that Hugh Laddie brought to this session last year. 33 Press Release, World Trade Organization, WTO Successfully Concludes Negotiations on China’s Entry (Sep. 17, 2001), available at http://www.wto.org/english/news_e/pres01_e/pr243_e.htm. 34 Panel Report, China (Jan. 26, 2009), supra note 7, ¶¶ 3.1, 7.329.

Part D: United States v. China in the WTO  597

I will hand the floor over to Eric. Eric is from Greenberg Traurig in Washington, D.C.

MR. SMITH: Thank you very much.

Before I start, I just want to say a couple of things. Of course, I turned my paper in late and it didn’t appear in the materials. But I did a fairly detailed paper particularly on the thresholds part of this case. If you get a chance to read it in the materials, it is going to be much more complete than what I am going to talk to you about. The second is a disclaimer. Our firm, Greenberg Traurig, served as counsel to what we call the China Copyright Alliance, which is a coalition of the motion picture, recording, art reproduction, and book publishing industries. We sought the commencement of this case and we assisted the U.S. government during its prosecution. I am going to talk only about the thresholds case because I think that is the most controversial and probably the most important of the claims that the United States brought.35 But I want to respond a little bit to what Professor Wang said. I don’t disagree with anything he said in his analysis of Article 4. But I just wanted to point out that if you look literally at the language of Article 4 it says that “any work that is prohibited by law does not receive copyright protection.”36 The Panel agreed with China that the words “prohibited by law” really meant where the “content” is prohibited by law,37 because that’s the way the Chinese argued the case.38 From the U.S. point of view, from the industry point of view, it eliminated the real problem that we were afraid of, and that is that “prohibited by law” might even mean prohibited from distribution because you haven’t gone through censorship. So the interpretation of the Panel actually gave us exactly the result we wanted. We now know that the literal reading of that Article 4 is not in fact the way it is going to be read by the Chinese. If at some future point the Chinese government reads it some other way, they are going to come into conflict with the Panel because it is going to be struck down. The other thing that is important about Article 4 is that the provision must be removed from the Copyright Law. This means that, in the implementation phase of the case, the Chinese have to set about a process of amending their Copyright Law. That is something that we learned is scheduled to be finished five years out from now. Hopefully, in the implementation phase we can get some amendments to the Copyright Law before that. In fact, we have a lot of issues in the Copyright Law that we would like to see fixed. Reopening the law to deal with Article 4 will give us an earlier opportunity to do that. I just wanted to point out that, while I agree on the merits of what he said, bringing the Article 4 case and achieving the result that was achieved there is important to industry and to the United States. Let me just turn now to the thresholds case because that was the key part of the case. Daniel did a great job of listing the elements of the decision in the thresholds part of the case. I just wanted to give you some sense of what the Panel decided in this case and why it is going to be important as we move along the road to implementing the enforcement text. I think what the Panel did is going to be very, very helpful to other governments around the world as we look toward what Article 61,39 which is one of the most important parts of the TRIPs text—the criminal part—means. I think Peter said that the United States lost the thresholds case. I don’t agree with that. I don’t think we lost the case at all. We lost one small element of it. The Panel said we needed Panel Report, China (Jan. 26, 2009), supra note 7, ¶¶ 2.2, 7.396. Chinese Copyright Law, supra note 2. 37 Panel Report, China (Jan. 26, 2009), supra note 7, ¶ 7.74. 38 Id. 39 TRIPs Agreement, supra note 4, Art. 61, 33 I.L.M. at 1220. 35 36

598  CHAPTER VII: TRADE LAW to prove by introduction of facts that in fact not all commercial-scale piracy was covered by Article 217 and Article 218 in the Judicial Interpretations implementing those articles.40 Why that is important is that the Panel said very distinctly, “If there is any commercialscale piracy that falls under the thresholds, those thresholds will have to go.” It’s not “some commercial-scale piracy,”—it’s “any commercial-scale piracy.” We will go back and look at the test that the Panel set out. Then, the big question is: Had the United States introduced those facts, what would the result have been? That’s where I think it gets instructive going forward. There are a number of elements of this case that I think are critical. The first is that the Panel decided that the obligations in Article 61 are mandatory.41 Remember, there have been arguments ever since the TRIPs Agreement was drafted and adopted that in fact Article 61, because it was a criminal provision—and China argued this as hard as they could—that that was a different kind of system and deserved much more discretion for a country to be able to implement criminal provisions in light of the culture and legal system in the country. The Panel flat-out rejected that. It said, “These obligations are mandatory.” So there is no doubt about that. There has always been a debate on that issue. Interestingly enough, China did not contest that their administrative law system could not be deemed criminal. Both the U.S. position and the Chinese position was that you looked only at the criminal law and that the administrative system that the Chinese have set up, which covers everything below the thresholds, and everything above the thresholds too, that that system is not a criminal system and therefore does not fall within the ambit of Article 61. The Panel expressly did not rule on that proposition, but it is interesting that China conceded that issue. The Panel also said some important things about some of the defenses to Article 61 that have been raised by developing countries over the course of the last ten or fifteen years. Article 1.1 talks about “Members shall be free to determine the appropriate method of implementing the provisions of this Agreement.”42 The Chinese argued that that allowed them discretion to create thresholds and do other things.43 The Panel said, “No, no, no. We are not requiring particular kinds of legislation. As long as you meet your obligations, you can implement it any way you want.” That is the proper interpretation of that provision. There is another defense that a lot of developing countries have used to say that the obligations in Article 61 are conditional. I think probably the most important one is that Article 41(5) provides that there is no obligation with respect to the allocation of resources between general law enforcement and IP enforcement.44 The Panel said, “No. This is not relevant to Article 61, but in fact that provision deals with the issue of actual prosecution of crimes in China.”45 This gets to a point that I will make later, that there is a lot of language in the Panel’s decision, while they didn’t decide this as a holding, that says that the TRIPs Agreement has to be interpreted not only to cover what you put in your statutory law but that you in fact have to enforce that law in practice. 40 Criminal Code of the People’s Republic of China (promulgated by the People’s Cong., Mar. 17, 1996) Arts. 217–218, translated in Wei Luo, The 1997 Criminal Code of the People’s Republic of China: with English Translation and Introduction (William S. Hein & Co., Inc. 1998). 41 Panel Report, China (Jan. 26, 2009), supra note 7, ¶¶ 7.503–05. 42 TRIPs Agreement, supra note 4, Art. 1.1, 33 I.L.M. at 1198. 43 See Panel Report, China (Jan. 26, 2009), supra note 7, ¶ 7.511. 44 TRIPs Agreement, supra note 4, Art. 1.1, 33 I.L.M. at 1214 (“Nothing in this Part creates any obligation with respect to the distribution of resources as between enforcement of intellectual property rights and the enforcement of law in general.”). 45 Panel Report, China (Jan. 26, 2009), supra note 7, ¶¶ 7.595–96.

Part D: United States v. China in the WTO  599

That was not the theory of the U.S. case. The United States brought a case “as such”—that’s the word in WTO jurisprudence—as a “matter of law,” that the thresholds as a matter of law were too high to capture all commercial-scale piracy.46 Usually in “as such” cases you don’t introduce facts. The whole theory of the U.S. case was “We didn’t have to introduce any facts.” But the Panel moved off of that and said: “No, we can’t really decide the commercial-scale issue unless you present facts.” I’ll get to that issue in a minute. There was a lot of discussion of what “commercial scale” meant. I think our view of this case is that had the United States introduced all of the elements of price, what the retail market looked like, etc., etc., etc., we very well could have gotten a different result. But the United States wasn’t made aware that it needed to introduce those facts, and in fact didn’t introduce those facts. However, had they been introduced, in my view at least, it is very conceivable that if we had properly described what it looks like on the ground in China, that the Panel could very well have concluded that there is commercial-scale piracy that falls under the thresholds. Thank you very much. MR. LIM: In addition to the speakers, we have two distinguished panelists. We have Stan McCoy, who is the Assistant USTR, and we have Professor Justin Hughes from Cardozo School of Law. I just want to start with Stan. Just two questions: First of all, what is being done at the ground level? There is a lot of focus on the formalities—that the United States is looking at China’s compliance with TRIPs. What is being done at the ground level, assuming that those formalities are in place, in actually enforcing those obligations? Secondly, what do you see as the way forward in U.S.-Chinese relations after this decision? MR. McCOY: Thanks very much, Daryl. I want to say first that those were four outstanding presentations across the board. I really appreciate the speakers and all the thought that they have given to this subject. I learned a lot, and I’ve been up to my eyeballs in this case for years. In terms of what is being done at ground level with China, you get to a very important point. I think there is an important point to bear in mind about this case and its outcome: That is, this case was never conceived of or presented as the total solution to the very broad problems of piracy and counterfeiting in China. We have always been very careful as the U.S. Government to explain our view that there is endemic piracy and counterfeiting in China. It is a systemic problem. It is caused by many, many different things. All we were aiming to do with this piece of WTO litigation was address three discrete flaws in Chinese law that we felt contributed significantly to the underlying problems of counterfeiting and piracy. We have, I think, come a long way towards achieving a solution on each one of those flaws for reasons that the distinguished panelists have explained. I’d be happy to get more into some of my thinking on that. But I want to stick to your question, Daryl, which is what we are doing at the ground level. That is where it is really important to fit this outcome into the context of an on going dialogue with China. We are setting up at the highest level a strategic and economic dialogue with China to address some of the issues not only in our strategic relationship but also in our big-picture economic relationship. The Joint Commission on Commerce and Trade, jointly chaired by USTR and the Department of Commerce on the U.S. side, will continue. We are looking forward to possibly a plenary meeting of that in the fall, and hoping to have our IP Working Group with China meet before that. 46

Id. at ¶¶ 7.494, 7.496.

600  CHAPTER VII: TRADE LAW In the meantime we have continued our bilateral relationship on these issues. We have been to China already—not me, but my team has been there—to talk with them about the way forward in terms of our bilateral dialogue and some of the issues we are working on. As you look at the outcomes in this case, as was pointed out by some of our panelists, even where we didn’t get everything we wanted in terms of the Panel decision, in some cases the reason we didn’t get everything we wanted was because China clarified some particular point through the litigation. They are now on record saying, “This is the way it works.” As Eric pointed out, if that doesn’t turn out to be the case, we can certainly engage with them bilaterally and try to explore solutions on that. I hope that is an answer to both of your questions, Daryl. MR. LIM: Justin, do you have any thoughts on both of these questions—the implementation of the enforcement provisions and what do you see the way forward is in U.S.-Chinese relations? PROF. HUGHES: I guess I would maybe disagree with Eric on one point. That is everyone expected this to be a split decision. As you look at the history of WTO cases in IP, everyone expected it to be a split decision. I am kind of surprised at it almost being two and a half in favor of the United States instead of two for the United States. I do think that if the United States had introduced the factual evidence that the Panel decision calls for, the United States would have definitely lost. I think it is good that they didn’t introduce the factual evidence. Now, I always thought that in a sense the United States should have been bringing some other enforcement cases before this case, not necessarily against China. So maybe Eric can explain where he thinks the threshold issue would have come out. I am just looking at it as a legal realist, that the baby needed to be split, and if the Americans had forced the issue, the baby would have been split a little differently. I would like to hear a little bit more on that. MR. SMITH: That’s a really good question. Many people said going into this case that the WTO is basically a political body and we’re not going to win everything that we put forward. The Panel talks about what “commercial scale” means. I will give you an example. It was an example even raised by the United States. Where you have high-value niche software, maybe selling for $10,000 per program, and you sell two a month, and the piracy of one, or putting it up on the Internet or selling one, could very well—I think it would—meet the definition of “commercial scale.” That would be a commercial-scale act of infringement, in my judgment, based upon the Panel’s test. The Panel said very clearly that you have to cover all commercialscale piracy. I think the theory of the U.S. case was there are absolutely going to be cases where you will meet the test of commercial scale and fall under the 500-copy limit. And forgetting the politics now—the Panel could very well have ruled against us no matter what we said—but based on the legal test that is laid out there, I think that had that evidence been introduced, it would have met the test that the Panel set out. That was my point. PROF. HUGHES: Can I ask a question? MR. LIM: Yes. PROF. HUGHES: One question I do have that I’d like to hear the speakers speak to, and also Stan to address, is just because a country is on record in a WTO case as having said, “This is what our law is,” doesn’t mean there is always follow-though. In fact, I don’t want to point fingers, but I believe the European Union has at least changed its position on geographical indications following what it represented to the WTO Panel.47 Now, maybe that example is not 100 percent accurate, but I believe it is. 47 See Panel Report, EC—Trademarks and Geographical Indications, WT/DS290/R (Mar. 15, 2005), available at http://docsonline.wto.org/DDFDocuments/t/WT/DS/290R.doc.

Part D: United States v. China in the WTO  601

So just because a country represents, “This is what our law says,” to a WTO Panel, does that really help that much? That’s my question. MR. LIM: A quick response. MR. SMITH: I think what the Panel said in the Article 4 case was that the Chinese law did not cover works that were in the line for content review.48 We didn’t know that until the Chinese said it. The Panel agreed with that interpretation. They didn’t have to agree with that interpretation because the Panel is free to interpret the law as it sees fit, not necessarily how the Chinese see it. Literally, that language can be interpreted both ways. If the Chinese now try to go back on that interpretation and deny copyright protection to content awaiting review, I think they would be in violation of what the Panel said. So you are right, China could change its mind, and it might force Stan to go forward and bring another case. But I think it was so clear that I don’t think the Chinese government will do that. MR. LIM: Does anyone else on the panel have a view on this? PROF. WANG: First of all, I would like to say that the fact is, before the United States came into the WTO, many U.S. lawyers and senior officials knew clearly that the real meaning of Article 4 was that only the illegal content is excluded from copyright protection. There are hundreds of cases where the copyright owners from the United States or the associations of copyright owners complained to the copyright bureaus in China about piracy.49 In most of the cases, as long as the content of that software, movies, records, was not unlawful their copyrights were protected by the Chinese government. So I do not think it is the truth that the United States government does not know the real meaning of Article 4. Second, I would like also to respond to Eric’s opinion that had the United States introduced sufficient evidence it would have won the case on the issue of Article 61. I think the most important aspect in the Panel’s decision on the threshold issue was the declaration that commercial scale is a highly localized standard in terms of specific products in specific markets.50 In other words, the standard of commercial scale varies according to different products and different markets. So it is difficult for the United States to produce sufficient evidence to show why 400 illegal copies should be the commercial scale rather than 500 copies. MR. LIM: I want to throw this open to questions from the floor now. QUESTION: Thank you, Mr. Chairman. I am Zhang Naigen. I am at Fudan University. I have followed the case for years. It seems to me that Eric wanted to get a best interpretation of the Panel ruling. I think now the issue is the interpretation of the WTO ruling, not the best interpretation. In terms of the implementation of the WTO laws in China, I want to ask two questions, respectfully. First for Stanford: As you are in charge of the case for the implementation in China, would the United States be satisfied if China amended Article 4 Paragraph 151 and, if possible, only limited the amendment to the publication and the distribution of the illegal works only in the terms of the Berne Convention Article 17?52 That is exactly concerning the implementation of the WTO ruling, which is amending Article 4. So is the United States satisfied, because finally it is a bilateral issue, nothing for the other members of WTO? That is the question for Stanford. Would he be satisfied if China made amendment only limited to the publication and distribution of illegal works in terms of Article 17 of the Berne Convention? Secondly— Panel Report, China (Jan. 26, 2009), supra note 7, ¶ 7.118. See generally Int’l Intellectual Prop. Alliance, 2004 Special 301 Report: People’s Republic of China (2004), http://www.iipa.com/rbc/2004/2004SPEC301CHINA.pdf. 50 Panel Report, China (Jan. 26, 2009), supra note 7, ¶ 7.577. 51 Chinese Copyright Law, supra note 2, Art. 4(1). 52 Berne Convention, supra note 5, Art. 17, 828 U.N.T.S. at 251. 48 49

602  CHAPTER VII: TRADE LAW MR. LIM: Let’s just take one question at a time, please. QUESTIONER [Zhang Naigen]: No. I want to ask a question to Eric. Assuming you

continue working for the USTR, if there were a new case, what is the evidence you have to support your claim? MR. LIM: Let’s just take the first question for Stan. Please go ahead. MR. McCOY: If I understand correctly, then what I need to do first to answer is separate two things. I want to be very clear that I am here looking at these issues through the lens of their economic significance. I am not here to comment on the human rights implications of content control by the Chinese government. You can look to other parts of the U.S. Government for our views on that question. This case has never been about eliminating the content-review process in China, but merely making sure that that content-review process conforms to WTO rules and the TRIPs Agreement and the Berne Convention. As long as China comes up with a solution that conforms to WTO rules as they were clarified by this Panel, then the United States is going to be prepared to accept that solution. That does not require that China gets rid of content review altogether. In terms of the precise parameters of what kind of an amendment China might come up with, I think we would have to see whatever they were proposing in context, hold it up against what the Panel found in this decision, and, hopefully, have a good dialogue between our two governments about whether we thought it was adequate to satisfy the findings or not. MR. LIM: We have another hand. QUESTION: My name is Chris Oldney [phonetic] from Microsoft. Just taking up that point about it is always going to be a highly localized issue depending on industries and market sectors, does the panel think that really means, other than a de minimis threshold,53 any arbitrary threshold is going to be challenged? I can think of several European countries that have particular values for criminal thresholds. So it is not a purely China issue. MR. LIM: Does anybody want to take that? MR. SMITH: I would say that if you measure the thresholds in China—actually Vietnam has much the same kind of system—if you take the definition and all the examples that the Panel gives in language and implications of what they say about commercial scale—going back to this gentleman’s question, had evidence been presented about exactly what the retail video store looks like, what its inventories are, where they are, how many of them there are, what the ratio of pirate product to legitimate product is, what the pricing is of legitimate product, what the pricing is of pirate product—we had all that data. We just didn’t introduce it in the case because we didn’t think we had to. But had we introduced it, and you measure that up against what the Panel says they need to know before they can say what is commercial scale, my only point is I think there was a very good chance, at least from a legal point of view, politics aside, that we could have met that test. I can’t speak to other tests in other countries. The test that the Panel says is, “You must cover all piracy on a commercial scale.” My own judgment, and this is just my own sense, is that if you are going to have a quantitative or dollar threshold in your criminal law, it better be pretty low, because there is going to be some infringement that is going to be near that threshold that will meet the Panel’s “commercial scale” test.54 That’s really my only point. MR. LIM: There is one question in the front row. But before that, do any of the panelists have anything to say on this? [No response] 53 The legal doctrine of de minimis non curat lex can be translated as “the law does not concern itself about trifles.” See generally Max L. Veech & Charles R. Moon, “De Minimis Non Curat Lex”, 45 Mich. L. Rev. 537 (1947). 54 Panel Report, China (Jan. 26, 2009), supra note 7.

Part D: United States v. China in the WTO  603

Okay. Howard.

QUESTION: Howard Knopf from Macera & Jarzyna in Canada.

A question for either or both Stanford and Eric. The late Sir Hugh Laddie, may he rest in peace, pointed out two years ago, I believe, at this conference that you don’t have to go to China to get cheap counterfeit goods; all you have to do is walk around midtown Manhattan and they are on practically every street corner.55 So what has the United States done to stop that trade in midtown Manhattan of counterfeit goods, perhaps many of which were made in China but are freely available in midtown Manhattan? MR. SMITH: It’s a misdemeanor or it could be a felony. It is enforced. You will never stop piracy. But remember, the piracy rate in the United States for video product—and we’ve got a lot of people here from the industry—is probably in the neighborhood of 4 percent of the market. The piracy rate in China, according to every study that has ever been done, is over 90 percent. So it’s just not proportional here. QUESTIONER [Mr. Knopf]: That may be. But you have flagrantly available pirated material in midtown Manhattan, which we don’t have by the way in major Canadian cities. MR. McCOY: May I suggest that there are other problems? We can have a whole session on Canada, so let’s not go there. QUESTIONER [Mr. Knopf]: Please, make my day. MR. McCOY: Let me say, with respect to the question you asked, the best answer I can give is refer to what Judge Rakoff said in the earlier session today, when he asked, “Why doesn’t the strengthened anti-counterfeiting law in the United States work to beat counterfeiting?” He said it’s because the problem really isn’t that guy on the street corner here; a huge part of the problem is out there in China.56 Now, I can’t answer for anything about domestic enforcement, because it’s not my mission, but when I look outward to the world and the situation in China, what this case was a part of trying to do was to try and strengthen the enforcement situation that exists there in China and try to stem some of the outflow of pirated and counterfeit goods from China into markets in the rest of the world, be it Canada, be it Europe, be it the United States, and also bring some more legitimacy to the market within China in terms of their ability to deal with this problem domestically. That gets to a point that Professor Yu raised in his presentation about why we ever would have wanted to introduce more discretion into the Chinese system. What we have found over the years in talking to Chinese officials and Chinese prosecutors who really do want to tackle the problem of counterfeiting and piracy is that these thresholds were an important barrier to being able to do that. They provided a safe harbor for counterfeiting and piracy, they made it possible to evade prosecution, and they frustrated the legitimate efforts of people in China, enforcement officials in China, who really wanted to do the right thing. We are hopeful that with the result in this case, even though it was not everything that we wanted, that it will be a good step toward helping us to address that problem cooperatively with our Chinese counterparts going forward. MR. LIM: I am going to give the second-to-last word to Peter and then the last word to Daniel, because we are running late, and then we will close for lunch. PROF. YU: Let me ask Eric a follow-up question. You mentioned the piracy rate for the United States is 4 percent. Tell me the piracy rate for the United States based on the study done by the Business Software Alliance,57 and also what are the piracy rates for France and Italy? 55 See Remarks by Sir Hugh Laddie at the 2007 Fordham IP Conference, 10 Fordham Intellectual Prop. L. Inst., International Intellectual Property Law & Policy (Hart 2008). 56 See Chapter II.B, “The Judiciary & IP Policy”, supra this volume. 57 Business Software Alliance, New Study Reveals Extent of PC Software Piracy Worldwide, May 12, 2009, http:// www.bsa.org/country/News and Events/News Archives/global/05122009-idc-globalstudy.aspx (last visited Apr. 2, 2010).

604  CHAPTER VII: TRADE LAW MR. SMITH: I think the piracy rate for software—and remember software is a very different product than a DVD. PROF. YU: It is a copyrighted work. MR. SMITH: It’s a copyrighted work, but it is used differently. PROF. YU: What is the rate? MR. SMITH: The piracy rate is 22 percent. It is 80 percent in China. The lowest piracy rate for software in the world is here. PROF. YU: What about France and Italy? MR. SMITH: Higher. I’d say it’s in the high twenties. Is there anybody from BSA here? I don’t remember the numbers. But they do their study. The European countries, with the exception perhaps of Greece and Italy, which are over 40 percent, all of the other Western European countries, if my memory serves me correctly, are below 30 percent. PROF. YU: So for a country that has implemented its intellectual property system for more than two centuries, you still have like 40 or 50 percent, and you are talking about a country that has implemented its intellectual property system for less than thirty years. Which is more problematic? MR. SMITH: Let me put it this way. Taiwan and Singapore introduced copyright protection maybe a little sooner than China did,58 and the piracy for software in Taiwan and Singapore is 40 percent. So they have been able to do it with good enforcement. PROF. YU: Would you be happy if China reduced it to 40 percent? MR. SMITH: I’ll have to ask my clients about that. My guess is that if it were reduced to 40 percent they would be pretty happy. I think they would be. There’s a Microsoft guy here you can ask. MR. LIM: The last word from Daniel. PROF. GERVAIS: More a question really. It is really about the standards. The thresholds were questioned by the United States as a matter of law, as Eric pointed out, the so-called “as such” claims. The Panel didn’t engage the area. They said, “We want evidence.” So it’s not the threshold. They want evidence that the threshold is in fact inadequate and that some cases that fall below would normally be captured by a TRIPs provision. But remember, we don’t have nullification or impairment disputes in TRIPs. To go back to Justin’s point, I am not aware of a legal norm that says that, but there is political agreement, and they tend to be very respected in the WTO. It’s very interesting to see this Panel navigating between an “as such” claim, where they would say “as a matter of law this threshold is illegal,” which they didn’t say, and a Panel that would say, “We are not going to look at that; we are going to look at the actual effects,” which would be much more a nullification and impairment type Panel. They navigated somewhere in between in a very interesting way here. I think that it will be an interesting thing to observe for future enforcement panels. MR. LIM: I think that is all we have time for. Please join me in thanking the panel.

58 Taiwan’s Copyright Law was first promulgated in May 14, 1928. Andy Y. Sun, “From Pirate King to Jungle King: Transformation of Taiwan’s Intellectual Property Protection”, 9 Fordham Intell. Prop. Media & Ent. L.J. 67, 105 (1998) (citing Zheng Chengsi, Intellectual Property Law, at 143 (1991) (in Chinese)). “Before the enactment of the Copyright Act 1987, copyright law in Singapore was governed by the (U.K.) Imperial Copyright Act 1911.” Saw Cheng Lim, “Is there a Defence of Public Interest in the Law of Copyright in Singapore?”, 2003 Sing. J. Legal Stud. 519 (2003). China’s first copyright law was adopted in 1990. Gregory D. Graff, “Echoes of Bayh-Dole? A Survey of IP and Technology Transfer Policies in Emerging and Developing Economies”, Intellectual Property Management in Health and Agricultural Innovation: A Handbook of Best Practices (A. Krattiger et al. eds., PIPRA: Davis, U.S.A. 2007), available at http://www.iphandbook.org/handbook/ch03/p03.

Chapter VIII

Competition Law Part A: United States and Antitrust; FTC Agenda; Patent Misuse & Antitrust Moderator Prof. Hugh C. Hansen

Fordham University School of Law (New York, N.Y.) Speakers Hon. William E. Kovacic

Commissioner, Federal Trade Commission (Washington, D.C.)

Daryl Lim

Fellow, Stanford Law School Program in International Legal Studies (Stanford, CA)

Panelists Patricia A. Martone

Ropes & Gray (New York, N.Y.) Pat Treacy

Bristows (London)

Carey R. Ramos

Paul, Weiss, Rifkind, Wharton & Garrison LLP (New York, N.Y.) Thomas Vinje

Clifford Chance (Brussels)

PROF. HANSEN: We are going to get started now. We have an interesting panel, as always. Daryl Lim will be focusing on patent misuse and Bill Kovacic will be focusing on what to expect in antitrust/IP policy in the new administration and years to come. Our first speaker is Daryl Lim, who is a Singaporean lawyer. Daryl has left practice and is now on a path to an academic career. He is a Fellow at Stanford Law School. He has spoken at the Fordham IP Conference before. Daryl is going to address patent misuse and antitrust. He is in the process of conducting an empirical study. Of course, any suggestions or thoughts you

606  CHAPTER VIII: COMPETITION LAW have about it would be appreciated as he still has time to incorporate them. While it is a work in progress, it is largely completed. Daryl. MR. LIM: Thank you, Hugh. I want to start by thanking Hugh for the opportunity to present my findings on the empirical study I did on patent misuse and antitrust with you. [Slide] Let me walk you through the roadmap. First, I will set the stage and introduce misuse, this uniquely American doctrine, and explain why this study is important. Then I will take you into the heart of the study and attempt to unravel the complicated relationship between misuse and antitrust. Finally, I will suggest a couple of reasons for the contraction and decline of misuse and consider the future of misuse and, in particular, why the findings suggest that misuse can address some of the most pressing issues in patent litigation today. [Slide] Misuse is an equitable defense to patent infringement and it is a response to the patentee’s attempt to extend the rights of the patentee on its scope. One example of this is tying, where the patentee ties a non-patented product to the patented product. Another example is the extension of royalty payments beyond the term of the patent. Specific examples of misuse—for example, tying—can be found in patent legislation across the world. But what is unique about patent misuse is that it shields the infringer from an infringement claim by the patentee and renders the patent effectively unenforceable until the time that the misuse and the facts of the misuse have been purged. What gave me the impetus for this study? [Slide] Early cases, like the Supreme Court case of Morton Salt1 in the 1940s, based misuse essentially on patent policy. But by the 1950s commentators and courts have noted that misuse has become one of the most important, and yet unsettled, areas of patent law. The problem was that courts couldn’t decide and couldn’t agree whether misuse was based on an antitrust violation or a patent policy violation or something else. Crucially, it was difficult to say where patent misuse started and where patent misuse ended, in comparison to antitrust violations. Now, treatise writers, like Chisum, have noted that this was because of the absence of a clear general theory of patent misuse.2 By 1997, people viewed misuse essentially as a form of “antitrust lite.” The perceived sophistication of antitrust law over the years was a sign that patent misuse had really faded into the background, was now redundant, and therefore should be eliminated. [Slide] But recently misuse has enjoyed a reinvigoration in the literature. For example, in 2004, commentators noted that misuse can play a powerful role in addressing anticompetitive conduct, not based on antitrust policy, but instead based on a retro return to patent policy.3 This empirical study was aimed at getting a comprehensive picture of misuse. [Slide] Like discussions here at Fordham, it tries to get under the skin of judges and other stakeholders to figure out what is going on. The significant question is, not which view of misuse is best, but what misuse really is. The study first looked at opinions from federal judicial cases that substantively discussed and decided misuse between January 1, 1953, the effective date of the U.S. Patent Act,4 and December 31, 2008. There were 264 cases over fifty-five years. Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942). See 6-19 Donald Chisum, Chisum on Patents § 19.04 [2]. 3 See Note, “Is the Patent Misuse Doctrine Obsolete?”, 110 Harv. L. Rev. 1922, 1926 (1997) (“Although [Morton Salt] initially presented the patent misuse doctrine to be a matter of patent policy, courts soon thereafter looked chiefly to antitrust considerations to decide allegations of patent misuse.”); see also, e.g., Kathryn Judge, Note, “Rethinking Copyright Misuse”, 57 Stan. L. Rev. 901 (2004). 4 Pub. L. No. 82-593, 66 Stat. 792 (1952) (codified at 35 U.S.C.) (effective date Jan. 1, 1953). 1 2

Part A: United States and Antitrust; FTC Agenda; Patent Misuse & Antitrust  607

[Slide] The cases were coded based on twenty-eight variables. The details included: where the case was decided vertically, from the district court level to the Supreme Court level, and across the circuits; when it was decided; what industries the cases were decided based on; what categories of misuse featured; and what precedents were cited; how the case turned out in terms of wins, losses, and appeals; and whether that had any effect on the outcome of the case. The findings were discussed in interviews with federal judges, government officials, academics, and lawyers, not as a representative study as a survey might be, but as a representation of an indication of how stakeholders view misuse today. [Slide] Now, in terms of numbers, 264 opinions averages to 4.8 opinions a year. [Slide] By comparison, a parallel empirical study done by Barton Beebe on fair use gave 10.9 opinions per year, which makes misuse cases relatively low by comparison.5 As far as the categories of misuse are concerned, conventional wisdom notes that misuse is confined to a few specific categories based on anticompetitive conduct, including tying, covenants not to deal, and package licenses. [Slide] Here the study identified thirteen distinct categories, with the three that I mentioned bunched into the category of tying, which you see in green. It shows you the rich diversity of the opinions, with some, like vexatious litigation or abuse of process, clearly not falling within the ambit of anticompetitive conduct. [Slide] The graph also shows that the categories of misuse between the circuits are far from uniform, with certain circuits showing specific dominant strains of misuse. For example, you see fraud-based claims appearing dominantly in the Ninth Circuit and licensing restrictions in the Federal Circuit. It is interesting to learn why, and it is something I have flagged for further study. The overarching question for this study is whether patent misuse has vitality apart from antitrust law. [Slide] In terms of the pleadings, misuse was pled by itself in about 68 percent of the opinions, with antitrust in only about 23 percent. [Slide] In terms of policy independence, more than 22 percent of the cases were based on policy considerations independent of antitrust. That still means that four in five cases still rely on antitrust policy. This is striking when one bears in mind that patent misuse really started from patent policy. [Slide] Now, looking at the data, you can see that when courts rely on antitrust policy (the area in green in the second column) they are much more likely to find in favor of the patentee when there was no misuse than if they relied on patent policy. [Slide] Climbing further into the data, the relative level of success may surprise some. Infringers relying on misuse succeeded about 19 percent of the time, more than compared to the 14 percent enjoyed by people relying on antitrust violations. But still, compared to fair use win rates of about 30 percent from Beebe’s earlier empirical study, it is still relatively low.6 So what are the reasons for this? [Slide] I think the perception is that through the 1950s through 1970s judges have been overzealous in expanding the scope of patent misuse without due regard for the incentives of the patentees to innovate. So they did not address this, and the pressure built up, so that by the 1980s two major developments took place which all but killed patent misuse. [Slide] First, in 1982, the Federal Circuit was established and got exclusive jurisdiction over patent infringement appeals and became the dominant court for misuse cases and the dominant source of misuse precedents. 5 Barton Beebe, “An Empirical Study Of U.S. Copyright Fair Use Opinions”, 1978–2005, 156 U. Pa. L. Rev. 549, 565 (2008). 6 Id. at 575.

608  CHAPTER VIII: COMPETITION LAW Looking at the frequency of Supreme Court precedents, in particular Morton Salt,7 which was based on patent policy, you see that the number of citations for Morton Salt have gone down tremendously pre-1988 and post-1988, taken over by the Federal Circuit’s line of Windsurfing8 cases, which fused misuse to antitrust policy. This raised the standard of proof, narrowed the scope of misuse, and strengthened the patentee’s rights. [Slide] Second, the Patent Misuse Reform Act of 1988 carved out two safe harbors: first, by immunizing the unilateral unconditional refusals to license; and second, by requiring market power for tying arrangements.9 The Federal Circuit took this and ran with it and applied antitrust analysis even in misuse cases that did not either concern refusals to license or tying—one example is the case of Mallinckrodt,10 which concerned post-sale restrictions on use—thereby shrinking misuse as a whole beyond what the Patent Misuse Reform Act intended. [Slide] Commentators have noted that adding the requirement of anticompetitive effect omits the patent policy angle laid down in Morton Salt. It also ignores the fact that Congress had considered and rejected an earlier Senate bill tabled that same year which would have tested misuse under antitrust standards.11 There was a bill in the Senate, S.1200, that would have limited the patent misuse defense to cases in which an antitrust violation existed, but this was not adopted. Thus, the patent misuse doctrine should only be limited as much as Congress intended to limit it.12 The fact that later courts in the United States, particularly courts in the United States today, see misuse solely as being predicated on Federal Circuit jurisprudence shows just how influential it has been in shaping our sensibilities of misuse today. But to some the message was clear. Misuse as a whole was meant to be read in light of antitrust principles, and the Federal Circuit was only acting in a manner consistent with that policy direction. Ironically, Judge Bryson from the Federal Circuit recently noted that the amendments created only safe harbors for misuse, rather than defining misuse.13 [Slide] But, for two reasons, I think it is conceivable that judges find the Federal Circuit’s vein of jurisprudence to be attractive: first, I think for practical reasons, all patent infringement appeals end up in the Federal Circuit; and second, because the courts feel that they are doing more justice for the parties before them in relying on what is perceived to be a more sophisticated and certain vein of antitrust policy, rather than leave it to the vagaries of patent policy, which might result in unexpectedly harsh outcomes, even if the patentee committed misuse, whether or not this might really be the case. In any case, misuse today is stuck in a vicious cycle and is seen by some as a lost cause, requiring an amazing set of facts to succeed. As rational actors, many lawyers and their clients will not commit resources to make wellsubstantiated filings of misuse. [Slide] Judges at both first instance and the appellate level have confirmed that misuse is routinely thrown out because of poor pleadings, where allegations are so scant and unsubstantiated that courts often do not bother to mention, much less decide, them. Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942). Windsurfing Int’l Inc. v. AMF, Inc., 782 F.2d 995 (Fed. Cir. 1986). 9 Patent Misuse Reform Act of 1988, Pub. L. No. 100-703, 102 Stat. 4674 (codified as amended at 35 U.S.C. § 271(d) (4)–(5) (2006). 10 Mallinckrodt v. Medipart, 976 F.2d 700, 703–04 (Fed. Cir.1992). 11 See 134 Cong. Rec. S14, 434-03 (daily ed. Oct. 4, 1988) (statement of Sen. Leahy); 134 Cong. Rec. H10, 646-02 (daily ed. Oct. 20, 1988) (statement of Rep. Kastenheimer); 134 Cong. Rec. S17, 146-02 (daily ed. Oct. 21, 1988) (statement of Sen. Leahy). 12 See In re Recombinant DNA Tech. Pat. & Contract Litig., 850 F. Supp. 769, 774 (S.D. Ind. 1994). 13 U.S. Philips Corp. v. Princo Corp., 173 Fed. App’x 832, 834 (Fed. Cir. 2006). 7 8

Part A: United States and Antitrust; FTC Agenda; Patent Misuse & Antitrust  609

[Slide] Judges have also expressed an unwillingness to expand the categories of misuse with increasing frequency. Data from the last fifteen years shows this. [Slide] Now, industries dominating misuse are still in machinery and manufacturing, instead of the high-tech and pharmaceutical industries that seem to dominate most patent litigation today. [Slide] Is the solution to scrap misuse and go with antitrust law? After all, other countries do not have misuse. Europe, for example, has turned to competition law to address similar concerns. [Slide] But misuse has one last ace up its sleeve, bad faith, which seems to be the wild card in the misuse deck. Now, bad faith did not feature in many of the opinions that were studied, but where it appeared it was decisive. The courts did no policy analysis and no analysis of the patent scope, and the outcome was always in favor of the alleged infringer. This outcome should perhaps be unsurprising when you consider that the essence of misuse as an equitable defense is really there to prevent nefarious conduct. Those wanting to abolish misuse must therefore grapple with the evidence that misuse is really more nuanced and has greater potential than initially considered. Those wanting to revitalize misuse should also recognize the fact that antitrust laws have developed, at least in theory, to embrace innovation-related concerns that fall traditionally within the ambit of patent law and policy. [Slide] But in order to survive, misuse must find new avenues that are either unreached or unreachable by antitrust law. This study has identified two possible areas. • First, pharmaceutical settlements. In the United States, this form of market sharing appears to be within the scope of the patentee’s rights and appears to be unimpeachable by antitrust law, despite the fact that parties have deliberately and clearly abused the Hatch-Waxman Act process.14 • Secondly, deceptive conduct in the SSOs. We looked at this in the earlier session.15 It is unclear if antitrust law can deal successfully with this problem. In both cases, the application of misuse based on patent policy and bad faith may help to sidestep some of the tangles that antitrust law has found itself being caught up in. [Slide] To summarize, the first goal of the study was to better understand the interplay between misuse and antitrust. The fact is that in some areas the actual state of misuse is consistent with conventional wisdom, such as the declining and low frequency of misuse cases, and the dominance of the Federal Circuit. The fact is that at the same time the landscape of misuse is more rich and diverse than popularly believed. Secondly, in terms of policy, misuse now straddles the double helix of patent and antitrust policy. But the two are different. Patent policy provides incentives for the owners to compete to provide high-quality innovations in return for whatever price the market will bear. It is more concerned with dynamic efficiency. Antitrust policy protects the competitive process and is ultimately more concerned with visible competition. But ultimately, because misuse is judge-made law, unless courts and litigants take misuse seriously, despite its potential, it will remain frozen in time and fade into irrelevance unless and until, knowing these facts, they take misuse more seriously, try a little harder, and do a little better. Thank you very much. PROF. HANSEN: Thank you, Daryl, that was very interesting. Next is someone who is no stranger to you at this conference, as I think it is Bill’s third panel. 14 15

Hatch-Waxman Act of Sept. 24, 1984, Pub. L. No. 98-417, 98 Stat. 1585 (codified at 21 U.S.C. §301 (2006). See Chapter VIII.D, “Standard Setting”, infra this volume.

610  CHAPTER VIII: COMPETITION LAW MR. KOVACIC: Between three and fifteen. PROF. HANSEN: It feels like fifteen, doesn’t it? It’s an exhausting process, but hopefully a

worthwhile process. Bill, please proceed. MR. KOVACIC: Thank you very much, Hugh. When the story of the intersection of competition law and intellectual property is told years from now, it will be hard to overestimate the importance that Hugh and his colleagues at Fordham have played in providing a forum in which one understands this important development. That by itself is a remarkable contribution. As an academic, and now as someone who sees theory meet practice, I am most grateful for Hugh’s contributing to the common pool in this process and letting me participate in it. I would like to talk this morning about the role that the FTC and the U.S. federal authorities have played in attempting to balance IP and competition law, and to focus, in particular, on what I foresee for the U.S. system going ahead. This is a fairly dramatic time of transition. You noticed that we had a presidential election. The election itself is causing a great deal of discussion and consideration about what the framework of both fields ought to be going ahead. I would like to focus on three things associated with that transition. First, what is going to happen at the competition agencies themselves? Second, what is the environment in which interest in expanding the zone of what the agencies have done will take place, and what limitations and possibilities are associated with that environment? Third, what will be the non-litigation agenda of the competition agencies? The last question is important, because there is a tendency for competition agencies to be defined by whom they sue. In the case of competition law and intellectual property, we are realizing that policymaking requires a broader perspective on what competition authorities will be doing. In speaking about these things I will be speaking from my own point of view and not necessarily that of my colleagues or my agency. First, what is taking place at the Federal Trade Commission and Department of Justice? Several things are taking place that are enormously important for the development of intellectual property policy. Most striking, one should notice the extent to which new leadership and the chief leaders of units within the agencies have a deep and abiding interest in the application of competition law to intellectual property. It’s not simply our FTC Chairman, Jon Leibowitz, who is quite fond of the developments discussed earlier today in N-Data16 and is very keen on bringing more pharma cases that deal with settlement issues. It also is evident in recent appointments to the leadership of the FTC. Joe Farrell will be our new Chief Economist. Joe is coming from the economics faculty at Berkeley. Rich Feinstein will be the new head of the Bureau of Competition. Rich previously headed the bureau’s health care shop in the 1990s when the FTC developed its first pharma settlement cases. Susan DeSanti will return to lead the FTC’s principal policy shop. Susan was the main architect of the hearings that led to the formulation of the report “To Promote Innovation,” for which Susan also was the principal author.17 At the Department of Justice, Christine Varney, soon to be confirmed by our Senate as the head of the Antitrust Division, arrives with a deep interest in high technology and Internet commerce and IP-related questions, both from her time as an Federal Trade Commissioner and as a practitioner at Hogan & Hartson. Her Chief Economist will be Carl Shapiro. After 16 Decision and Order, In re Negotiated Data Solutions LLC (N-Data), FTC File No. 051-0094, available at http:// www.ftc.gov/os/caselist/0510094/080122do.pdf; see also Chapter VIII.D, “Standard Setting”, infra this volume. 17 Fed. Trade Comm’n, “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy” (Oct. 2003), available at http://www.ftc.gov/os/2003/10/innovationrpt.pdf.

Part A: United States and Antitrust; FTC Agenda; Patent Misuse & Antitrust  611

this transition is over, I’m not sure there will be anyone left on the Berkeley faculty. When you have both Carl and Joe coming to work together on these issues across the agencies, you have a deep, abiding interest in this specific element of competition policy. That predicts, I think, a great deal of effort to focus the attention of the agencies on this field. What will they be expected to do? To the extent that one might have followed the treatment of competition policy during the campaign, the new President’s depiction of competition law over the past eight years was particularly harsh. He said that enforcement in the United States may have been the weakest over the past fifty years and that the appointees of the Bush Administration—that includes me—were engaged in a program that basically diminished the significance and quality of competition law. For the most part, the heavy artillery was focused on the Department of Justice, especially in the area of abuse of dominance. The Department of Justice after January 2001 to the present has brought no abuse cases. So it is relatively easy to see a comparative lack of activity there. At the confirmation hearings for Christine Varney in our Senate, this was a persistent theme. She said on a number of instances that she was going to do more. The comments made by the Obama campaign and by Obama appointees have created an inexorable pressure to deliver on the commitment to do more. My concrete prediction would be that by the time this calendar year comes to an end, the Department of Justice will have taken action in at least one abuse case. Such action could take various forms—for example, the prosecution of a new matter based on an existing investigation, or the announcement of the opening of a new inquiry. The absence of a highly visible step to depart from past practice concerning unilateral conduct would be taken as a failure to deliver on a promise that became so prominent and so powerful during the campaign. I realize that it is always possible to walk away from words. Academics are quite good at doing that, especially when they walk too far out on a limb to back off. But there comes a point where things said long enough, loud enough, and emphatically enough become confining facts. I think that will be the inevitable course of policymaking at the Department. What about at my own agency? Earlier today the proceedings at this conference showed that the FTC’s output of activity concerning abuse of dominance has been considerably greater than zero. We have already mentioned FTC matters initiated in this decade such as Rambus,18 N‑Data,19 BMS,20 Biovail,21 and Unocal.22 From 2001 through 2008, the FTC initiated seven abuse of dominance cases.23 That is a rate of FTC activity that is not exceeded unless you go back to period from 1970–1976. Tim Muris brought abuse cases at a faster rate than Bob Pitofsky did. Many of the FTC’s abuse cases in this decade have been relatively high-stakes initiatives. As Carey Ramos pointed out in a presentation earlier today, not all of the results were successful from our point of view. Others yielded significant positive results, by any measure. Some, like Unocal, generated extraordinary outcomes for consumers. The FTC’s settlement in Unocal has been worth about $500 million per year in savings to consumers of gasoline in California.24 On Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008). In re Negotiated Data Solutions LLC (N-Data), FTC File No. 4234, 2006 WL 4407246, (F.T.C. Sept. 22, 2008). 20 In re Bristol-Myers Squibb Co., FTC File No. C-4076, 2003 WL 21008622 (F.T.C. Apr. 14, 2003) available at http://www.ftc.gov/opa/2003/03/bms.shtm (resulting in a settlement). 21 In re Biovail Corp., 134 F.T.C. 407 (2002). 22 In re Union Oil Co. of Ca. (Unocal), FTC File No. 9305, 2005 WL 2003365 (F.T.C. Aug. 2, 2005), available at http://www.ftc.gov/os/adjpro/d9305/index.shtm; see also In re Union Oil Co., FTC File No. 9305, 2004 WL 1632816 (F.T.C. July 6, 2004) (opinion of the Commission), available at http://www.ftc.gov/os/adjpro/d9305/ 040706commissionopinion.pdf 23 The other two cases are FTC v. Cephalon, Inc., 551 F. Supp. 2d 21 (D.D.C. 2008), and In re Valassis Communications, Inc., FTC File No. C-4160, 2006 WL 1367833 (F.T.C. Apr. 19, 2006). 24 William E. Kovacic, “Rating the Competition Agencies: What Constitutes Good Performance?”, 16 Geo. Mason L. Rev. 903, 906 (2009). 18 19

612  CHAPTER VIII: COMPETITION LAW the FTC’s list of greatest competition policy hits going back to 1914, that’s number one on the chart in terms of observable, measurable economic returns. Despite such outcomes, the FTC often is joined together with the Department of Justice in discussions that say the U.S. competition agencies did nothing concerning abuse of dominance during the Bush Administration. A famed commentator at the ABA Spring Meeting in Washington a month ago from another law school in Manhattan (not the great law school near Lincoln Center) emphatically and repeatedly told the assembled audience—this is one of those rooms that is so big that the curvature of the earth keeps you from seeing the people in the back of the room, a gathering of roughly 2,000 people on this occasion—that the Federal Trade Commission had done nothing, as in zero, in this area. Step back for a moment and assume that you are Jon Leibowitz, the newly appointed head of the Federal Trade Commission. Look over the list of FTC abuse of dominance cases in the past eight years—Rambus, N-Data, BMS, Biovail, Unocal, Cephalon, and Valassis—and realize that many prominent commentators are characterizing that record as being nothing. If that record is nothing, what actions might deemed adequate by these commentators and others to be considered by to be something? This creates inexorable hydraulic pressure on the new head of my agency, and probably my colleagues, to do more in some form. Will the actual future rate of FTC output exceed the rate of abuse cases from the past eight years? I suspect not. In terms of capacity and resources, it is probably not feasible. But the suggestion is that the FTC’s future output will have to be in some sense more dramatic in order to get a passing grade from those who criticize the past regime as being badly inadequate. The perceived imperative to do something that is a visible and dramatic departure from the recent past will be strongest at the Department of Justice. Over the past few years, criticism of the Antitrust Division could be likened to an artillery barrage that is intended to destroy a railroad yard. In the course of efforts to hit the Justice Department railway yard, it was inevitable that at least a few shells hit the cathedral that is the Federal Trade Commission’s competition program, only two blocks away. Consequently, new leadership at both agencies today confront the perception that more must be done. Let me turn to the environment in which the agencies are likely to attempt to do “more.” First, the new Administration will face a doctrinal environment, created by our Supreme Court, that is enormously permissive and tolerant of the behavior of dominant firms. If one had spoken with counselors who advised large enterprises decade by decade from the 1960s onward, and had asked at the end of each decade, “Are you better off now than you were as the decade began?” the answer would have been a decisive “Yes.” Are there outliers in the progression of U.S. doctrine toward more permissive standards that can snare dominant firms? Yes. Yet, with respect to product development, pricing, and marketing decisions, dominant firms decade by decade have received broader latitude to act as they wish. Cases that punctuate this Trend in the current decade include Trinko,25 Weyerhaeuser,26 and most recently, linkLine.27 The words and the music of such decisions tell firms, “You have greater freedom to maneuver.” 25 Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398 (2004) (holding that the defendant’s breach of 1996 Telecommunications Act duty to share its network with competitors did not state a claim under § 2 of the Sherman Act). 26 Weyerhaeuser Co. v. Ross-Simmons Hardwood Lumber Co., 549 U.S. 312, 325 (2007) (holding that in a predatory-bidding case, “[a] plaintiff must prove that the alleged predatory bidding led to below-cost pricing of the predator’s outputs… . A plaintiff in a predatory-bidding case must also prove that the defendant has a dangerous probability of recoup.”). 27 Pac. Bell Telephone Co. v. linkLine Commc’ns, 129 S. Ct. 1109 (2009) (holding that a “price-squeeze” claim may not be brought under §2 of the Sherman Act when the defendant has no duty to deal with rivals under antitrust laws).

Part A: United States and Antitrust; FTC Agenda; Patent Misuse & Antitrust  613

Why did this happen? Here’s the simple conventional answer. Beginning in the mid-1970s, lunatics from the Chicago School hijacked the U.S. system and haven’t let it go. In this narrative, the U.S. election results of November 2008 mean that liberation is at hand, and the U.S. competition policy system will recover by turning to an intellectually fresh, progressive post-Chicago School. In an academic classroom, if you give that answer on my antitrust examination, I would allow you to pass, but only with a “C+.” What is the “A” answer? Yes, Chicago influences have been powerful. To borrow a metaphor familiar to those at Cambridge University, the double helix of the U.S. system is a combination of intertwined ideas. One strand consists of the modern Chicago School of Robert Bork, Richard Posner, and Frank Easterbrook.28 The other is the modern Harvard School of Phil Areeda, Don Turner, and Steve Breyer.29 What gets overlooked in the conventional narrative of U.S. competition policy history is the significance of the modern Harvard School. What has the modern Harvard School contributed to the DNA of U.S. competition policy? One formative Harvard School idea is that the U.S. system of private rights of action has gone berserk. I do not ask you to believe that this proposition is correct. True or not, our courts—and especially our Supreme Court—believe it is so. You can’t read the Supreme Court’s antitrust opinions without seeing their concerns about the over-deterrence that will result from private treble-damage cases if the justices are not extremely cautious about setting liability standards. What have the U.S. courts done to deal with statutorily mandated features of the private treble-damage system? They have adjusted the variable that is directly within their control. They have raised the liability bar, and they have done it progressively over time to screen out what they fear to be private cases that will discourage benign conduct. Rambus30 would have been the first time since 1973 that our Supreme Court would have reviewed an abuse-of-dominance case in the context of a matter brought by the United States agencies. 1973 is a long time ago. Every abuse of dominance decision that the Supreme Court has taken in the subsequent years has been a private case seeking treble damages. The consequence is that in many of these cases our Court in effect has said, “The proverbial floodgates will open up if we’re not very careful, and we’re going to nail them shut.” This has injected a decided bias against intervention in U.S. substantive doctrine governing single firm conduct. You see this concern clearly in the area of competition disputes that involve IP law. If I look at my own agency just in the past decade, we have had eight trips to our courts of appeals to defend our own administrative decisions. In six of those cases we have prevailed on appeal. In two we did not. That’s a pretty good record, historically measured, for litigation success rates on appeal. The six outcomes favorable to the FTC have been fairly triumphant affirmations of our decision making, with the traditional margin of discretion for administrative action recognized. What about the two losses? These have been the IP-intensive cases, Schering31 and Rambus,32 where the deference we got from our appellate courts is roughly the deference that a parent 28 See, e.g., Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself (1978); Frank H. Easterbrook, “Predatory Strategies and Counterstrategies”, 48 U. Chi. L. Rev. 263 (1981); Richard A. Posner, Antitrust Law (2d ed. 2001); Richard A. Posner, “The Chicago School of Antitrust Analysis”, 127 U. Pa. L. Rev. 925 (1979). 29 See, e.g., Jonathan B. Baker, “A Preface to Post-Chicago Antitrust” (2002), available at http://ssrn.com/ abstract=296119; William E. Kovacic, “The Intellectual DNA of Modern U.S. Competition Law for Dominant Firm Conduct: The Chicago/Harvard Double Helix”, 2007 Colum. Bus. L. Rev. 1 (2007) (providing extensive catalogue of recent relevant economic and legal literature in addition to the U.S. case law); Herbert J. Hovenkamp, “The Harvard and Chicago Schools and the Dominant Firm” (U. Iowa Legal Studies Research Paper No. 0-19, Sept. 1, 2007), available at http://papers.ssrn.com/ sol3/papers.cfm?abstract_id=1014153. 30 See FTC v. Rambus, 129 S. Ct. 1318 (2009) (denying cert.) 31 Schering-Plough Corp. v. FTC, 402 F.3d 1056 (11th Cir. 2005). 32 Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008).

614  CHAPTER VIII: COMPETITION LAW gives a wayward child—which is to say none at all. To my eye, in the background of the adverse decisions hangs a basic skepticism about the FTC’s institutional capacity to make good choices in this arena. We have two more generic drug settlement cases in the courts today. One is an abuse case, called Cephalon.33 The other is an agreement case, called AndroGel.34 When you look again at the doctrinal environment in which we operate, those are going to be very demand matters. The general path decision making in our courts, and the attitude of some tribunals, toward what we have been doing, have not been positive. Even with an enthusiasm within the new presidential administration for doing more than we have before, the FTC will have to sit back and ask in a very careful way: Why did the adverse outcomes take place? What are the judiciary’s doubts about the approach we have taken? What does recent experience us about the wisdom of adding more of these matters to our portfolio, and which adjustments are necessary before we proceed to do so? I add that with respect to all of these litigation events, I endorsed, either as the FTC’s general counsel or as a commissioner, each one of the cases in question. I have my own quarrels with the adverse decisions that the court of appeals issued. I’m somewhat encumbered in talking about Rambus because there is a residual element of that case that still requires a decision by the Commission.35 Yet, at the same time, one can’t help but notice in both the specific doctrinal approach of the IP-intensive cases and in the larger philosophy that imbues judicial decision making in this area, we must ask ourselves what specifically is going on in the adverse decisions and what will be the judiciary’s taste over time for more matters of this if we do not respond more effectively to the concerns the courts have raised. That I see as an important constraint on the exercise of our discretion going ahead. There is a means at the FTC’s disposal to provide a means to expand the zone of liability. Early today one of the panels at this conference touched upon Section 5 of the Federal Trade Commission Act,36 which forbids, in a marvelously imprecise way, “unfair methods of competition.”37 One might ask: Is that the alternative path toward a competition policy jurisprudence that favors intervention more strongly? Several considerations suggest that it could. Perhaps most important, Section 5 could free the FTC from the treble-damage baggage that encumbers interpretations of the Sherman Act.38 Key characteristics of actions premised entirely on Section 5 include prospective application by means, in most instances, of equitable relief and the lack of collateral application of doctrinal concepts in private cases. In principal, this could be an expansion joint for the U.S. system that gets competition policy out from underneath the overhang created by the Supreme Court’s concern with the private right of action as the mechanism for enforcement. In theory that is possible and, used wisely, it would be useful to use Section 5 in this manner. Three of my colleagues feel it is not only possible and feasible, but necessary. 33 Complaint, FTC v. Cephalon, Inc., No. 1:08-cv-00244-RMC (D.D.C. filed Feb. 13, 2008), available at http:// www.ftc.gov/os/caselist/0610182/080213complaint.pdf. 34 Complaint, FTC v. Watson Pharms., Inc., No. 09-598 (C.D. Cal. filed Jan. 29, 2009) [“AndroGel Complaint”]. The case was dismissed in Feb. 2010, after the venue had been changed. In re AndroGel Antitrust Litig., 687 F. Supp. 2d 1371 (N.D. Ga. 2010). 35 The Commission has since dismissed the claim against Rambus. See In re Rambus, Inc., No. 9302 (F.T.C. filed May 12, 2009), available at http://www.ftc.gov/os/adjpro/d9302/090512orderdismisscomplaint.pdf 36 See Chapter VIII.D, “Standard Setting”, infra this volume. 37 FTC Act § 5, 15 U.S.C. § 45. 38 Sherman Antitrust Act, 26 Stat. 209, 15 U.S.C. § 1–7 (1890). The goal of the treble-damages remedy has been the subject of dispute. See Lynn H. Pasahow, Lawrence R. Fullerton, ABA Antitrust Section, Monograph No. 13, Treble-Damages Remedy 16 (1986).

Part A: United States and Antitrust; FTC Agenda; Patent Misuse & Antitrust  615

Is N-Data the path ahead?39 I offer one caution on N‑Data. N-Data was a settlement. How did the parties in N-Data begin the negotiations? They began by saying, “We surrender.” This is somewhat like an academic journal coming to a professor and saying, “We’re publishing a symposium. We’d like to have something you have in it. Do you have anything you can give us?” The instructor looks on the shelf and says, “Here are the papers I’ve not been able to get a peer reviewed journal to take, but this is an opportunity to publish it.” In uncontested settlements, there can be a temptation to reach for the shelf of enforcement theories and pull off something that could have rough going in a contested litigation matter. N-Data presented two fairly broad conceptions of what Section 5 might be. In theory those conceptions are not implausible. But those views were offered in the context of a settlement. What happens when a theory is forced to endure the gauntlet of federal appellate review? Will the FTC get special discretion because Section 5 is a more elastic tool, or will our courts push back in the way they have in a discouraging number of earlier Section 5 cases and say, “We don’t care under what guise your theories appear before us. We have fundamental concerns about the soundness of expansive, pro-intervention policymaking in this area.” And we will have to consider when was the last time that the FTC prevailed on what might be called a pure Section 5 theory before our courts of appeals? That would be in the 1960s, some number of years ago. What in principle could be a useful tool for extending the application of competition law to dominant firm conduct in practice has proven difficult for the FTC to invoke successfully. What’s the non-litigation agenda for the U.S. competition agencies looking ahead? I think it ought to include more research with respect to the interrelationship between the IP and competition policy systems; greater investments in doing studies that engage academics and others in looking at the deeper causes of the commercial and doctrinal phenomena that we observe today; external consultations to absorb knowledge from those outside of the competition agencies; and a greater emphasis on measures that bring specialists in the two disciplines together to build a common conversation about policymaking. The need for the agencies to engage in continuing efforts to build their base of knowledge stems from the dynamism of IP and technology intensive industries and from how much the sensibility of specific policies depends upon a sophisticated, current understanding of the underlying business and commercial phenomena. The real lesson for competition officials generally that it’s what you learn after you know it all that really counts. Thanks. PROF. HANSEN: Thank you. Bill is one of the most dynamic and interesting speakers I have ever seen. We are very fortunate to have him here with us. We have a lot to digest and discuss. Let’s try to focus on Daryl’s topic first, patent misuse. Does anyone on the panel have anything specifically to say about it? Pat I know is interested in this. MS. MARTONE: Yes. I think that actually patent misuse has a more limited role than Daryl says. While there was a very broad mix of cases before the Virginia Panel decision,40 I think the court there got it right when it said that really patent misuse is about using the patent as a lever. I think that, therefore, there are a number of things, while perhaps unfair and in bad faith, do not fall into that category of trying to use your patent to get some influence or action outside of the scope of your patent. One of the things that we didn’t cover today is that besides the FTC there were state causes of action for unfair competition that we haven’t addressed. For example, in California, under 39 40

In re Negotiated Data Solutions LLC (N-Data), FTC File No. 4234, 2006 WL 4407246, (F.T.C. Sept. 22, 2008). Virginia Panel Corp. v. MAC Panel Co., 133 F.3d 860 (Fed. Cir. 1997).

616  CHAPTER VIII: COMPETITION LAW the California law, if you try to tell the purchaser of a product not to buy it because the seller is infringing your patent, that could be interference with a prospective or current contractual relationships that would lead to an independent cause of action.41 So I think there is plenty of room in the American law already for dealing with unfair practices separate and apart from patent misuse. PROF. HANSEN: Okay. Daryl? MR. LIM: I agree with Pat on the current state of patent misuse. The current interpretation of patent misuse—that it is really fused with antitrust policy—is one of the issues that my study highlights. If you look back at the prior jurisprudence, the Supreme Court jurisprudence in Morton Salt42 in particular, you see a clear distinction between what the Court considers to be patent policy and then what later courts have interpreted to be antitrust policy. Weaving a patent policy together with antitrust policy is no easy task. I think you do see a fair amount of difficulty in all these competition law cases or antitrust cases that have tried to do that. None of them, really, has gone past without a huge amount of controversy. As to Pat’s point on the presence of state anti-competition laws, I think it goes back to this distinction again between what is essentially a patent remedy and what is an unfair competition remedy, which addresses, I think, the absence of best competition practices or the absence of visible competition in the market, as opposed to addressing the fundamental core of patent law and patent policy, which is really to promote the incentive to innovation. So I think the two causes of action really are aimed at addressing two different policies. PROF. HANSEN: My quick take on how patent misuse started is because of the approach of our Supreme Court and some lower courts in the 1940s, 1950s, and 1960s. The Supreme Court was strongly anti-intellectual property and particularly so with patents. This approach led to many if not most patents being declared invalid in infringement cases.43 It applied its restrictive, populist and non-economic approach to vertical restraints (per se illegal) to limit the ability to exploit patents.44 And in those instances when antitrust rules could not be applied it created the concept of patent misuse. During this period patent litigators in particular has to learn antitrust law. This changed with the adoption of a modified Chicago School approach to antitrust45 combined with leaving patent policy to the newly created Court of Appeals for the Federal Circuit in 1982.46 So the question is: Is there a need for some return to serious role for the doctrine of patent misuse? While as Daryl points out there does not appear to be a lot of sympathy for that strain right now, as Bill has indicated the new administration has put in place people in the FTC and Antitrust Division who are willing to embrace some but not all of the approaches of the Warren Court. Daryl has put a tremendous amount of work and analysis into his study which will be very valuable and I expect published somewhere where many can take advantage of it.47 41 See 40 Cal. Jur. 3d Interference with Economic Advantage § 2; see also San Jose Const., Inc. v. S.B.C.C., Inc., 155 Cal. App. 4th 1528 (6th Dist. 2007). 42 Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488 (1942). 43 See, e.g., Parker v. Flook, 437 U.S. 584 (1978). 44 See, e.g., Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100, 137-38 (1969) (package licensing of patents was per se illegal). 45 Chicago School scholars believed in “the natural tendency of firms … to be efficient.” Eleanor Fox, “The Battle for the Soul of Antitrust”, 75 Cal. L. Rev. 917, 917 (1987). Therefore, markets could correct competitive imbalances without outside antitrust regulations. See Thomas A. Piraino, Jr., “Reconciling the Harvard and Chicago Schools: A New Antitrust Approach for the 21st Century”, 82 Ind. L.J. 345 (2007) 345 (2007). 46 The 1982 Federal Courts Improvement Act, Pub. L. No. 97-164, 96 Stat. 25 (Apr. 2, 1982), merged the Court of Customs and Patent Appeals and Court of Claims into a new Article III appellate court, the Court of Appeals for the Federal Circuit. See 4-11 Donald Chisum, Chisum on Patents § 11.06. 47 Daryl Lim’s study on patent misuse was accepted for publication by Edward Elgar. Daryl Lim, Patent Misuse and Antitrust: An Empirical Study (Edward Elgar, 2011).

Part A: United States and Antitrust; FTC Agenda; Patent Misuse & Antitrust  617

Bill I get the impression that are you are quite sensitive about the changes in IP administration that the Obama administration might effectuate. MR. KOVACIC: Very sensitive. I’m a very sensitive person. PROF. HANSEN: If the IP/antitrust interface views of people the Obama Administration chooses currently do not have much traction in our courts, are these views going to have any more traction with courts just because they are held by the Chairman of the FC or the head of the Antitrust Division? I think Bill was saying—maybe I’m wrong—that they may not. But would this hold true as well for a return to a creative and expansive view of Section 5 of the FTC Act?48 How important is what Obama pledged to do or not do in the campaign? Will this matter to courts? For instance, academic have been espousing policies in Congress and the courts through testimony and amici curiae briefs but have met with little success in IP. Will what Obama pleaded in the campaign matter even to Obama? Everyone knows when politicians campaign they say things they feel they have to say to be elected. And isn’t it equally true that when they get into power they try to act rationally and do what is necessary for the public good even if this means not fulfilling campaign pledges? So, was President Obama just paying off some debts to the liberal supporters by making these appointments to the FTC and Department of Justice, or is he wedded to the position that these appointees apparently espouse? But even if the president is wedded to them, what is the likelihood the courts will change their approach in this area? What do other people think about this? Carey, why don’t you start off? MR. RAMOS: First of all, I should mention that our President was an academic before he was a politician at the University of Chicago, appropriately enough. So you may well be right that what he believes in his heart may be a little bit different from what he said during the campaign. I think that Bill put his finger correctly on the real problem here, which is that when these new officials at the FTC and the Antitrust Division go to actually bring cases, they are going to face a judiciary that includes a lot of appointments from the Bush Administration and a lot of judges who are pro business and will read these Supreme Court decisions of the last thirty years. I think we are going to get, from the point of view of somebody who is not necessarily pro more antitrust enforcement, a lot of bad decisions. To the extent that Obama genuinely wants antitrust law to be more actively enforced, it will have the opposite result. I think the only way that we are going to see significant change in the antitrust field is through legislation in the United States. There is already a proposal to reverse the Supreme Court case involving whether or not vertical price fixing is a per se violation.49 I would expect to see a lot of discussion of legislation. It is possible that what will happen is that these new enforcement officers will bring some cases, they will lose them, and then there will be a cry for legislation to address it. If that is the strategy, that may work. But I wish you good luck in trying to persuade the federal judiciary to change the law. I think that is going to be a very, very tough proposition. PROF. HANSEN: By the way, let me make it clear that I was not implicitly criticizing President Obama by indicating that he might choose to “do the right thing” after he is elected rather than being tied to political choices made during the campaign. I would view that as a good thing regardless of what he would decide is the right thing. Thomas? Federal Trade Commission Act § 5, 15 U.S.C. §§ 41–58 (2006). Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (holding that vertical price fixing is not a per se violation). 48 49

618  CHAPTER VIII: COMPETITION LAW MR. VINJE: Yes. Just following up on what Bill said about the developments in the United States over the last thirty years, clearly it is true that the courts have become more favorable towards intellectual property in cases involving the antitrust/intellectual property interface. Comparatively, in Europe I don’t think you have seen anywhere near that same sort of development. If you look at the CFI and the ECJ, although they are perhaps somewhat more favorable to IP than they were fifteen, twenty years ago, there is not such a great change. Perhaps at least part of the explanation for that lies in what Bill said. European courts simply don’t have to worry about treble damages, because there are none. They just don’t have to worry about the adverse consequences of the private litigation feeding frenzy. Indeed, in that context, Article 8250 is roughly equivalent to Section 5 of the FTC Act,51 and it is enforced in the same general way that Section 5 of the FTC Act is enforced. So I think they have just a lot more comfort accepting what the Commission does because it is not going to cause all manner of ancillary trouble. Now, that having been said, there is, as you said earlier this morning, this movement towards more national litigation, and, of course, there has been devolution to the Member State authorities and there is the possibility of enforcing Article 82 in the national courts. So the difference is not complete. But nonetheless we really just haven’t seen very much of that, and I don’t think we will see a great deal of it in the future. One other point which I think explains why there hasn’t been this movement is there really hasn’t been quite the equivalent of the Chicago School in Europe, so the judges just haven’t been affected by that sort of thinking here to the extent they have in the States. PROF. HANSEN: I know the European Commission wants to develop an antitrust culture where private actions can occur more frequently in Member States. Is it your prediction that this won’t really happen. If that is your prediction, why won’t it happen? MR. VINJE: Well, few things in life are black or white. I think it will happen to some extent and in some contexts, like follow-on civil damages. In cartel cases it most certainly really is happening. But the reason I think it will not happen to a significant extent in this context is because there really are no contingency fees—indeed, they are unlawful in most countries, if not all across Europe—there are no treble damages, and there at the moment really are no class actions, and I’m not sure there really will be any. So I think some of the main elements which cause there to be such an industry of private civil cases in the United States just do not exist, and I think really will not exist, in the same way, PROF. HANSEN: Pat? MS. TREACY: Just a couple of things really. First of all, I’m not entirely sure that Europe has traditionally been less respectful of IP than America. Leaving aside Article 81 issues,52 which are a bit odd owing to the focus on market integration that drove many of them, if you think about the first abuse case relating to intellectual property, that was not until we have Volvo v. Veng53 and Magill.54 Those are quite recent cases. In fact, I think if you look at how the law has developed in Europe, the history over the last thirty years has been actually progressively but slowly more of coming to grips with IP than was traditionally the case in the 1960s and 1970s. Treaty Establishing the European Community, Art. 82, Nov. 10, 1997, 1997 O.J. (C 340) [hereinafter EC Treaty]. Federal Trade Commission Act § 5, 15 U.S.C. §§ 41–58. 52 EC Treaty, Art. 81 (cartel prohibition). 53 Case 238/87, Volvo AB v. Erik Veng (U.K.) Ltd., 1988 E.C.R. 6211. 54 Joined Cases C-241/91 P & C-242/91 P, Radio Telefis Eirrann (RTE) & Indep. Television Publ’ns (ITP) v. Comm’n, 1995 E.C.R. 1-743 [hereinafter Magill]. 50 51

Part A: United States and Antitrust; FTC Agenda; Patent Misuse & Antitrust  619

I think what we are beginning to see in Europe is that the authorities are actually getting more confident—some would say rightly, some would say wrongly—in their ability to understand the way in which the various incentives work. I think that has led to more creativity in Europe over the last fifteen years than we’ve seen in the United States in looking at the interrelationship between IP and competition law. We don’t have a patent misuse doctrine here in Europe because that’s just not the way it operates; IP law in this instance essentially patent law and patent rights is a very different national animal, it’s not a European animal. But many elements that Daryl mentioned in his paper are quite familiar to a competition lawyer in Europe. They are just called different things, are part of the broader competition law environment, and are still very much under development so it will be interesting to see how they mutate over the next 10 years or so. If you talk about vexatious litigation, for example, as an aspect of ‘patent misuse’ in its broadest sense the Court grappled with that in ITT v. Promedia.55 If you talk about misleading or fraud on the patent office, the Commission has recently tried to deal with that in AstraZeneca56 to some extent, and we should get some guidance from the CFI before too long. So, in a sense, the systems have just developed somewhat differently, and over different time periods. It is difficult to compare them because the United States has had its Sherman Act since 1898,57 and patent misuse has been around for some time as an aspect of U.S. patent law, ebbing and flowing as Daryl describes. In Europe, at a European level, these issues and their inter-relationship are still at an early stage of evolution. But I think what is important, when considering the likely course of that evolution, is that it is true, as the Commission official said this morning, that the Commission watches very carefully the thinking that is going on at the agency level and the academic level in the United States. They do pay attention to the courts, of course they do, but they are very interested in the thinking that is going on at the agency level. I think that will have an impact in Europe if there is more of a shift away from the extreme belief in market forces that Chicago represented towards a slightly more nuanced approach. PROF. HANSEN: Well, the Chicago School approach has never been completely enforced in the courts here. MS. TREACY: No. PROF. HANSEN: It has always been a modified Chicago School approach. But the interesting thing is I think that was really the success of ideas. We had Bork write The Antitrust Paradox,58 we had a couple others, and that just—of course, then they were put on a court, which didn’t hurt. But I think a lot of people just weren’t convinced by it. There may have been overreaction in that way, and there is going to be some movement back. The question is how much, I suppose. I think one of the things about Europe and IP is actually the European Court of Justice in the early days hated IP, very much like the Warren Court in antitrust.59 So this free movement of competition, parallel imports, all of that—hidden in there was sort of a distrust, I think, of IP, but not actually saying it. But you had one advocate general in one of those cases saying that trademark law is just out there to deceive people and has no value whatsoever. It is only since the Community started having IP, through directives and regulations, that now the courts, and Case T-111/96, ITT Promedia NV v. Comm’n, 1998 E.C.R. II-02937. Comm’n Decision 2006/857, Arts. 82 & 54, 2006 O.J. (L 332) 24 (EC & EEA), available at http://ec.europa.eu/ competition/antitrust/cases/decisions/37507/en.pdf. 57 Sherman Antitrust Act, 26 Stat. 209, 15 U.S.C. § 1–7 (1890). 58 Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself 69–89 (1978). 59 See Thomas E. Kauper, “The ‘Warren Court’ and the Antitrust Laws: Of Economics, Populism and Cynicism”, 67 Mich. L. Rev. 325 (1968); see also, e.g., Brown Shoe Co. v. United States, 370 U.S. 294 (1962) (merger which accounted for only five percent of total industry output violated antitrust laws); United States v. Arnold, Schwinn & Co., 388 U.S. 365 (1967) (non-price vertical restraints were a violation of antitrust laws). 55 56

620  CHAPTER VIII: COMPETITION LAW certainly the European Court of Justice, have actually shown respect for it. I think you can see a difference in that. So I think actually both countries started out anti-IP basically and are moving. We moved much more quickly. But I think Europe is moving too. It’s interesting what’s going to happen in the future. Bill, why don’t we go back to you? I know you are in power now and you can’t speak too freely. MR. KOVACIC: Although it diminishes by the minute. In our parking garage, I’m more at the level of “Hey, you,” as opposed to “exalted Chairman.” PROF. HANSEN: Well, “Hey, you,” what do you think about—I agree with Carey on this. I don’t think that the courts are going to start changing their view because somebody comes up from the FTC or from the Antitrust Division. That is pretty much your view, isn’t it? MR. KOVACIC: Yes. I think that it is important to just keep in mind which judges have played leading roles on those courts. Yes, Frank Easterbrook is there; yes, Richard Posner is there. But the person who was a court of appeals judge and now is a Supreme Court member and who has voted as conservatively on antitrust cases as almost any other is Stephen Breyer. Yes, Justice Breyer dissented in Leegin,60 but his dissent in Leegin may have had more to do about stare decisis and future of the Court’s rulings on abortion than it was about resale price maintenance. The Breyer dissent in Leegin cited the abortion cases as often as he cited the antitrust cases. That was a shot across the bow, saying that if the Court could reverse a ninetyyear-old antitrust precedent, it might have not feel inhibited to reverse a principle set in a case decided in 1973. But on most other antitrust matters, Justice Breyer has been side by side with his conservative colleagues. To look at the reasoning of the cases in which Justice Breyer has joined the majority is to see themes that come out of the modern Harvard School that Areeda and Turner formed in the 1970s.61 The formative ideas of these decisions also track things Justice Breyer wrote as a court of appeals judge. Credit Suisse,62 one of his opinions, is a very good indication of these ideas at work. For myself, in deciding whether to vote on a case, the gating factor in a practical way is: Could I get Justice Breyer’s vote in this case? If the answer is no, I expect the case will face a very tough uphill climb. On antitrust issues Justice Breyer has been just about as cautious as Justice Scalia on antitrust matters, and the two of them have intertwined interests. So it is not just the Bush appointees who have shaped the views of the Supreme Court. On many occasions Justice Breyer and Justice Ginsburg have voted to reject liability or otherwise impose impediments before antitrust plaintiffs. Their caution about intervention is a more deeply embedded concern about the institutional framework, not just some of the theories about economic effects. PROF. HANSEN: You know, William Wordsworth, who I think was banging around here in England a couple hundred years ago or thereabouts, said, “The child is father of the man.”63 Early influences are the things that drive us. In the Supreme Court you can look at that. Breyer Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877, 908 (2007) (Breyer, J., dissenting). See, e.g., Phillip E. Areeda & Donald F. Turner, Antitrust Law: An Analysis of Antitrust Principles and Their Application (1978); 2 Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis of Antitrust Principles and Their Application (2d ed. 2000); IIA Phillip E. Areeda, Herbert Hovenkamp & John L. Solow, Antitrust Law: An Analysis of Antitrust Principles and Their Application (3d ed. 2006); Phillip Areeda & Donald F. Turner, “Predatory Pricing and Related Practices Under Section 2 of the Sherman Act”, 88 Harv. L. Rev. 697 (1975); Herbert Hovenkamp, The Antitrust Enterprise: Principle and Execution (2005). 62 Credit Suisse Sec. (USA) LLC v. Billing, 551 U.S. 264 (2007). 63 See William Wordsworth, “My Heart Leaps Up When I Behold” (1802), available at http://www.bartleby.com/145/ ww194.html. 60 61

Part A: United States and Antitrust; FTC Agenda; Patent Misuse & Antitrust  621

was a young academic, right at the time that the Chicago School was developing and was very exciting. Stevens is the product of his professional childhood as a 1950s antitrust lawyer. Then antitrust was strongly anti-IP viewing it as a largely unjustified monopoly and had along with per se rules against vertical restraints (the friend of IP owners). He has voted against the exercise of IP rights more than any other Supreme Court justice in the last 30 years. So Stevens and Breyer have been consistent with their early development. It is not the type of thing that easily changes. So in terms of the future, I think you are right. If Breyer doesn’t go along with the possible new approaches of Obama appointees, then really no one goes. And even if he does go, I’m not sure that the rest of the Court would go there as well. I think Carey raised a good point. If one of these FTC or Antitrust Division cases has a very expansive new reach—“let’s try something different”—you may have such adverse reaction in the courts that it will kill that sort of thing in the future. And so really, if you were in the Antitrust Division or FTC, you might want to do it incrementally and just move a little bit, which might go against the campaign promises and everything else. So if the new approaches are actually as extreme as Bill indicates they might, I think that, as Carey says, this could be very counter-productive. How about questions from the audience? QUESTION: A question directed to Daryl on the patent misuse issue. I think it grows out of the comments by the two Pats. I guess part of the concern with the way you want to expand patent misuse is what you’re talking about doesn’t sound necessarily like misuse of the patent. You know, if someone steals a bicycle and then they’re riding around on a bicycle, we don’t call it “bicycle misuse.” We say the problem is you actually stole a bicycle. Here, if you are concerned about pharmaceutical settlements, the concern there is that you have a collusive settlement between the potential infringer and the owner of the patent, which is essentially designed to maintain the patent holder’s dominance in the market, and essentially they are just sharing the fruits of that continued dominance. Whereas if they didn’t have the settlement, you might have the patent challenged in court and invalidated. With the deception at standards setting, again there the misuse really isn’t a misuse of the patent itself; it’s the deception. You might think that patent law has another type of doctrine to deal with that, or doctrines even, say, equitable estoppel or unclean hands, if you are trying to enforce it. Why don’t you think we should just pursue this under doctrines that seem, I think, on their face to fit more the concern? You have the point of misbehavior better. MR. LIM: Well, I am all for keeping within the bounds of expansion of patent misuse for the categories where it is absolutely necessary. I don’t think expansion should be done for expansion’s sake. I think part of the problem that courts have been grappling with with respect to patent misuse is that if you read patent policy broadly enough, it is really the other side of the competition coin, and if you read competition policy broadly enough, I think as Pat Tracy mentioned, it really covers a lot of the things that patent misuse does. So the question is: Why did I identify these two areas, patent pharmaceutical settlements and standard-setting scenarios, as possible scopes for expansion of patent misuse? I think the two are slightly different. Now, in terms of pharmaceutical settlements, I think the U.S. federal law is quite clear that these settlements are well within the scope of the patent right; therefore, unless there is anticompetitive effect—and to date I don’t think that courts have said that there is anticompetitive effect with respect to these settlements—they are fine. But the fact is they

622  CHAPTER VIII: COMPETITION LAW aren’t really fine, because you are harming innovation, you are preventing consumers from getting access to cheaper drugs. I think that means that you need a remedy, you need something to scratch that itch. Patent misuse is, I think, supple enough as a form of equitable remedy to address that. With respect to standard-setting organizations, you mentioned implied waiver and equitable estoppel. I think these were both raised in the recent Qualcomm case handed down by the Federal Circuit in December last year.64 The problem with these equitable doctrines is that really you need, first of all, reliance, and you need a certain proximity between the person who represented, be it Rambus or Qualcomm or a similar party, and the alleged infringer. The problem is late adopters of the standard do not have that reliance interest, and therefore they will not be able to rely on this equitable remedy. Patent misuse sidesteps that because you do not need that reliance interest; you just need a violation of antitrust policy or patent policy or bad faith. That has been uniformly recognized by the courts, whether in the 1940s, 1950s, or today. PROF. HANSEN: Daryl, I think you answered it. But even if you didn’t, I think we need to stop as we are out of time. Do you want to conclude? MR. LIM: Yes. PROF. HANSEN: Thank you. Thank you very much to Daryl, Bill and our distinguished panel.

64

Qualcomm Inc. v. Broadciom Corp., 548 F.3d 1004, 1012 (Fed. Cir. 2008).

Chapter VIII

Competition Law Part B: DG Comp Pharma Inquiry: The Implications for Innovation Moderator Dr. John Temple Lang

Cleary Gottlieb Steen & Hamilton (Brussels) Speakers Christopher Stothers

David Rosenberg

Milbank (London)

GlaxoSmithKline (London)

Rt. Hon. Lord Justice Jacob

Court of Appeal, Royal Courts of Justice (London)

Sir Christopher Bellamy

Senior Consultant, Linklaters (London)

Harald Mische

Case Handler, DG Competition, Directorate D, European Commission (Brussels) Panelist Hon. Mr. Justice Arnold

Patents Court, Royal Courts of Justice (London) DR. TEMPLE LANG: Ladies and gentlemen, let’s get started again. We are running a little bit behind schedule. The subject of the next session is the preliminary report of the Commission on the pharmaceutical industry.1 We have had several sector inquiries before, because the Commission 1 European Comm’n, Pharmaceutical Sector Inquiry Preliminary Report (2008), available at http://ec.europa.eu/ competition/sectors/pharmaceuticals/inquiry/index.html [hereinafter EC Pharmaceutical Preliminary Report].

624  CHAPTER VIII: COMPETITION LAW has been able to choose its own priorities in the last couple of years. This sector inquiry has looked rather different from others in several respects. First, it began with a surprise inspection, and it continued with a tone of suspicion. I think, really, there is no other word for some of the language that has been used both in the preliminary report itself and by some of the officials about it. The report was prompted by the fact that the Commission noticed that there were relatively few new pharmaceutical products coming on the market and that generic entry was apparently being delayed. But the Commission apparently assumed that it was likely that these two phenomena might be due to something that competition authorities could do something about, and were not primarily the result of regulatory defects or requirements. I have a personal suspicion that this inquiry was prompted by the FTC’s investigation of agreements between generics and originators.2 I can’t prove that, and it doesn’t really matter anyway. We have now several—I was going to say “several critics”—speakers. They are going to look at this report from various different points of view. The first is Christopher Stothers. I am not going to reintroduce these people. I think they have all been on panels already in the last couple of days. Christopher. DR. STOTHERS: Good morning. It seems a bit odd to say that, having been going since 7:30, but it is still the morning. Am I supposed to be a critic? I have been given instructions I must be balanced, and I will do my level best, although one of my co-panelists has already told me it’s impossible to be balanced about this. So we’ll see what we can do. Essentially, all I want to do is outline what has happened so far and leave it to the others to explain whether this is a good or a bad thing. I start off by asking when can the Commission launch a sector inquiry? That is quite clear: “Where circumstances suggest that competition may be restricted or distorted within the Common Market, the Commission may conduct an inquiry into a particular sector.”3 A nice broad provision for running an inquiry. [Slide] So, why do we have an inquiry in the pharmaceutical sector? Well, John has more or less explained. The two key points the Commission made were that fewer new pharmaceuticals are being brought to market, and the entry of generic pharmaceuticals sometimes is being delayed. Those are the two key conditions. The Commission also said: “Few things make more of a difference to the lives of individuals than pharmaceuticals. Medicines cost us all a lot of money. We spend around 200 billion euros each year on pharmaceuticals.”4 So that’s why we have an inquiry. [Slide] How did the Commission carry out their inquiry? Unannounced dawn raids. If you want to upset someone, unannounced dawn raids are a good way of doing it. Why were there unannounced dawn raids? “The kind of information the Commission will be examining may also be easily withheld, concealed or destroyed.” So that’s why they decided that inspections were necessary and why we had dawn raids. Again, I am just giving a balanced view and will leave others to say whether that’s right or wrong. There were extensive then questionnaires, which haven’t been made public (they are on the Commission’s website but are password protected). In turn, this led to the preliminary report in November last year, all 426 pages of it. 2 Press Release, Fed. Trade Comm’n, Pharmaceutical Agreement Notification Filing Requirements (Jan. 7, 2004), available at http://www.ftc.gov/opa/2004/01/fyi0403.shtm (Agreements between generic and brand name pharmaceutical companies must file notice with the Federal Trade Commission and the Department of Justice). 3 Council Regulation 1/2003, Art. 17 O.J. (L 4.1.2003) (EC). 4 EC Pharmaceutical Preliminary Report, supra note 1, at 5 (“The market for prescription and non-prescription medicines is worth over € 138 billion ex factory and € 214 billion at retail prices.”).

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  625

[Slide] So, what did the preliminary report say? I’ve not got long to go through 426 pages, so here are a few select quotes: “Originator companies have designed and implemented strategies, a toolbox of instruments, which may have the effect of delaying or blocking such [generic] entry.”5 An example of the toolbox: “Filing for up to 1,300 patents EU-wide in relation to a single medicine.”6 The 1,300 patents refers to all the national counterparts to a patent, so there is some element of exaggerating there, which we’ll come back to. “Engaging in disputes with generic companies, leading to nearly 700 cases of reported patent litigation, concluding settlements with generic companies, and intervening in national procedures for the approval of generic medicines.”7 These are other main components of the toolbox. [Slide] What else did the Commission say? “Generic entry in many instances occurs later than could be expected. The average time to enter after loss of exclusivity was about seven months on a weighted average basis, whereas also for the most valuable medicines it took about four months. The practices under investigation contribute to this.”8 In other words, they are not the only factors, but they contribute to it. “Savings from generic entry could have been about 3 billion more euros if generic entry had taken place without delay.”9 Now, remember, we are talking about a market of 200 billion a year for pharmaceuticals; 3 billion euros was the total cost of the delays over the period in question, which was seven years. [Slide] What else did the preliminary report say? “Originator companies develop and practise defensive patenting strategies, primarily in order to block the development of new competing products.”10 Just to prove I was here this morning, Josh Holmes talked about defensive patenting strategies and suggested that they aren’t really a competition problem. Again, I will leave my co-panelists to discuss that in more detail. The report also said that “The inquiry reveals at least 1,100 instances across EU Member States where the patents held by an originator company might overlap” with someone else’s research interest.11 [Slide] However, the focus really was on innovator v. generics, rather than on competition problems arising between innovators. [Slide] Finally, stakeholders made a significant number of comments during the course of the inquiry on perceived difficulties and shortcomings in the regulatory framework. These are systemic problems rather than problems with what people are doing which could be the subject of competition intervention. People say: “We need a single community patent unified with specialist patent judiciaries.” We have heard a lot of talk about that already at this conference.12 Also, and I think very interestingly, stakeholders highlighted problems with the approval and marketing of medicines, including pricing and reimbursement. In other words, the actual process, the regulatory framework, within which pharmaceuticals get from being a great invention to actually appearing on the market and being used by patients. Id. at 5, 401. Id. 7 Id. 8 Id. at 5–6, 402. 9 Id. at 6, 402. 5 6

10

Id.

Id. at 14, 350. 12 See Chapter I, “IP Policy & the European Union”, supra this volume; Chapter II.A, “The Judiciary & IP Policy, Europe”, supra this volume. 11

626  CHAPTER VIII: COMPETITION LAW [Slide] What did the submissions from stakeholders say after the preliminary report was published? Essentially, there were two months over the Christmas period to give submissions. Seventy-five submissions were made, of which seventy have been made public on the Commission’s Web site.13 Eight hundred and two pages in the five minutes I have left. I’m not going to say much about each of them. The stakeholders generally criticized the preliminary report, except for two groups: the people who pay for pharmaceuticals quite liked the preliminary report, as did the generics. [Slide] What did payers say? Fifty-four pages, generally supportive, but they also emphasized that regulatory improvement is very important. [Slide] Generics, 168 pages. They were a bit more interested in giving their submissions. They are generally supportive. However, they do say: “Settlement agreements are okay. If we enter a settlement agreement that’s not anticompetitive. Otherwise the preliminary report is generally good.” They also emphasize litigation and regulatory problems. [Slide] What did government say? Three submissions, twenty-four pages, and that’s mainly from Portugal.14 So they really didn’t care. Generally, they were correcting or providing further information. There is the mystery of the toned-down EPO submission. Just to explain what that is, there was an EPO submission that was circulated before the submissions were officially published by the Commission, and then a final official and slightlyed amended version which was published on the Commission’s Web site. It is more a change of spin than of substance. Some of the changes were: • The original EPO submission said that the report “needlessly and artificially inflates the number of patents.” That became “exaggerates” in the final submission. • The original also said “it is disturbing that,” which became “it is considered more appropriate.” • The original said “it is more disturbing,” which became “moreover.” So it was toned down a little, but the basic thrust was unchanged. There is a mystery as to why that happened. Maybe we will have some light shed on that today. [Slide] Individuals and academics, again not too active. They all criticized the preliminary report, some more than others. [Slide] Law firms, economists, eleven submissions, 180 pages. This is quite good. For once, the lawyers aren’t the ones who write the most, or at least not the ones submitting as law firms. They generally criticize the preliminary report. One law firm is highly supportive. However, the law firms are all pretty clear about who they act for, and the law firm that is highly supportive of the preliminary report mainly acts for the generics. [Slide] What did originators say? Way down the list we finally find what the originators say. Twenty-four submissions, 369 pages. We know who’s upset by the report. Surprise, surprise, they all criticize the preliminary report, more or less bluntly. There is some support for regulatory analysis and maybe some regulatory changes. [Slide] Other associations, eleven submissions, forty-four pages. Again, they didn’t want to spend too much time on it. They generally criticized it. [Slide] In summary, none of the submissions were really all that exciting. I was looking forward to reading them, but actually it was largely what you might have expected. There is a quite a lot of constructive criticism in there, though. A lot of spin and a lot of people pushing their own agendas, but there is some constructive criticism. 13 European Comm’n, Public Consultation on the Preliminary Findings of the Pharmaceuticals Sector Inquiry Presented in the Preliminary Report of Nov. 28, 2008, http://ec.europa.eu/competition/consultations/2009_pharma/ index.html (last visited Mar. 26, 2010) [hereinafter EC Public Consultation]. 14 The three government bodies were the Danish Medicine Agency, Portugal’s Directorate General for Economic Activities, and the European Patent Office. Id.

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  627

“Hardly any controversy on the facts,” the Commission has said. I don’t think that’s entirely true. But the criticism is focused on the report’s understanding of the sector, particularly in terms of the motivations and incentives, why people do things, rather than necessarily specific facts about what patent was granted on what date. [Slide] Now, very briefly, in my last couple of minutes, I will go off-message and talk about what I really think about the inquiry. [Slide] First, can competition law address the issues that have been highlighted in the preliminary report? To be frank, I think there is a very limited scope for competition law to do so. Most of the practices talked about are unilateral acts. They don’t require dominance. So if they are unilateral acts done by a non-dominant party, they are going to fall outside competition scrutiny anyway. Settlements are a different matter. There are agreements which could conceivably fall within the scope of Article 81.15 We have already heard that in the United States there are a lot of problems trying to work out how you deal with settlement agreements, because you want settlement agreements but you don’t know when they cross the line from good to bad from a competition or antitrust perspective. [Slide] Second, should competition law address these issues, even if it can? Well again, there should be a very limited scope. Competition law, we keep on being told, is all about economics these days. It’s not about moralizing. There is a lot of moralizing in the tone of the preliminary report—not necessarily in the conclusions, but the overall tone is quite moralizing. Competition intervention might catch a few exceptional cases at the edges. Someone who happens to be in a dominant position for a particular drug and happens to have done something silly might get caught. But if there are problems in the sector, I think the real solution is to look at the regulatory framework and the economic incentives for the market participants, rather than getting overexcited about what someone said in some internal memorandum and getting carried away with the idea that competition interventions can resolve all the problems in the sector. [Slide] With that, I will pass over to the next speaker. DR. TEMPLE LANG: Thank you very much. We will come back to some of the competition law questions that arise. The next speaker is Lord Justice Jacob. Those of you who know him can expect that he will make his views fairly clear. LORD JUSTICE JACOB: I have done that already. The Commission invited me to come to their preliminary presentation of their report. I think they thought I was their friend because a month or two earlier, or perhaps three months earlier, I had upheld a decision revoking a patent which was a disgrace. I said, “This is the kind of patent which gives the patent system a bad name. The patentee must have known that the patent he had applied for was invalid and that what he was doing was re-patenting that which he had been making for years.” But I am no friend of this report. The justification for it was two things. One, the number of new chemical entities coming onto the market seemed to be in decline. So far as I know, no part of the investigation which took place seriously inquired into why that was so. Is it that pharmaceutical research is a bit like running a gold mine and the seams are running out? Is it because regulatory requirements have gotten stricter and stricter so that more and more drugs fail on the way? I don’t know, and this report doesn’t even begin to try and answer. 15

Treaty Establishing the European Community, Art. 81, Nov. 10, 1997, 1997 O.J. (C 340) [hereinafter EC Treaty].

628  CHAPTER VIII: COMPETITION LAW There is an innuendo in the report that the drug companies are giving up. Only 1.5 percent is basic research. “Oh, naughty boys, you’re not spending as much on research as we think you should be doing,” as though the rest of the research, which is the cost of bringing a product to market, somehow is a waste of money. I think it is a very frightening document. I think the whole way they went about it was an abuse of the powers of the Commission. To say of an entire industry “Oh, you’re the kind of people who will destroy documents or hide them” is astonishing. The use of dawn raids here smacks not of civilized democratic government, but of something we know from the past. The drug companies didn’t complain. They didn’t bring an action in front of the national courts or eventually to the European Court of Human Rights. Why not? For the very reason that people are frightened of dawn raids: they are frightened of the authorities. That is my surmise. I have not been told that by any drug company. But I cannot think that it was at all appropriate to use dawn raids, and it set the tone for the whole thing. Well then, what did they find? They found that drug companies, innovative companies, use various legal procedures to try and delay generic entry. That’s a bit like finding the sky is above your head. They didn’t find any significant evidence of abusive use of legal process. We had one in our court.16 There may be a few others. They found that drug companies litigated against the authorities, saying that they hadn’t gone through the proper procedures, and didn’t always win. Well, if the only litigation which is justifiable is litigation in which you win and anything else is anticompetitive, then again the European Convention on Human Rights about access to courts looks as though it’s got something to say about it.17 What they actually found was that in the case of the drugs that really matter the delays which the drug companies managed to achieve, if it is the drug companies that have achieved it, amount to only four months. But they haven’t even proved that it is the drug companies that achieve that. To be able to bring a generic into the market you’ve got to be able to, first of all, satisfy the regulatory authorities, and they made no detailed investigation of the delays caused through those regulatory authorities in those four months. And secondly, you’ve got to agree on the price. The word on the street is that some of the delays are caused because national governments can’t get their act together to agree to the price for the generic when it comes on the market. So what they have actually managed to produce is nothing at all. Yes, they have noticed, almost as though they are surprised, that the patent litigation system in Europe is sporadic, spread about, and messy. Well, that’s a bit like finding the ground is underneath your feet. If as a result of this they give a push in the direction of the work deemed done by the other directorate, Margaret Föhlinger’s directorate, so much the better. One can’t help avoid noticing the disparity of resources. I do not know—and I believe it to be a serious question which if I was a parliamentarian I would ask, and I ask it now anyway— how many man-hours and how many people the Commission put onto this report. It was a colossal number of people. I suggest they might have been doing something a good deal more useful by way of a sector inquiry if they had paid a little attention to the banking industry. Did they not notice that that was a sector not working as well as it should? Well, I put my paper, which I gave in Brussels, here.18 The only things that I think might usefully be addressed are (1) can you do anything about, or should anything be done about, See, e.g., Case T-168/01, GlaxoSmithKline Servs. Unlimited v. European Comm’n, 2006 E.C.R. II-2969. European Convention for the Protection of Human Rights and Fundamental Freedoms, Art. 6, Nov. 4, 1950, 213 U.N.T.S. 221, E.T.S. 5 [hereinafter ECHR]. 18 See Lord Justice Robin Jacob, Patents and Pharmaceuticals—a Paper given on 29th November at the Presentation of the Directorate-General of Competition’s Preliminary Report of the Pharma-sector Inquiry, Appendix A, infra this chapter. 16 17

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  629

people who apply for patents which they know are no good; and (2) I put down a serious marker about the attacks, or potential attacks, on settlement agreements. Yes, it is possible that people might use a patent right, or any other IP right—and there’s nothing special about patents even, never mind this sector—to justify some sort of anticompetitive agreement. But you’ve got to be damn sure that that right is really a bogus right before a settlement is an unjustified settlement. I also think it is ridiculous that they have asked for consultation. They’ve got no proposals to be consulted upon. So what is supposed to happen next? Are they going to come up with proposals and say “We’ve consulted upon then?” That can’t be right. But I wouldn’t put it past them. Thank you. DR. TEMPLE LANG: The next speaker is even more impartial, David Rosenberg from GlaxoSmithKline. [Laughter]

The DG Comp PHARMA Inquiry: A View from the Research-based Industry David Rosenberg, GlaxoSmithKline Introduction The Sector Enquiry set out to examine whether, and to what extent, company practices were responsible for the fact that, in the words of Commissioner Kroes: 1. “generic manufacturers are not jumping into the markets as quickly as we would expect” and that 2. “fewer new pharmaceuticals are being brought to the market despite strong IP.”

The core findings of the Preliminary Report are that the innovative industry use a so-called “toolbox” of measures to delay or prevent generic industry: 1. acquisition of patent “clusters” and a “high number” of litigations not to protect innovation but to hinder generic competition . [In fact, although there are over 26,000 granted EP national patents relating to the 219 INNs examined, there was no litigation relating to 151 of them. Of the 700 litigations commenced over the 8 year period, only 149 went to trial. This does not seem to be a “high number” given that patents have to be litigated nationally in the EU] 2. use of settlement agreements. 3. complaints to regulators 4. introduction of improved products towards the end of the life of patents for the original formulation and marketing them instead of the older products.

It also finds that innovators use so-called “defensive” patents to hinder research. It concludes that 1. the toolbox delays generic entry for an average of 4 months for blockbusters and 6.6 months on a weighted average basis 2. this contributes to increased costs to consumers of €3 billion over 8 years 3. overlapping patents create “significant potential” for innovator companies to find their research activities blocked. [In fact, in only one case does it find that patents are alleged to have been the reason for stopping a research project.]

630  CHAPTER VIII: COMPETITION LAW Basic Requirements to Be Satisfied if the Report Is to Be Useful For the report to be useful, whether for policy formulation or otherwise, the data and the analysis must at very least be: 1. meaningful—in the sense that there should be data integrity amongst all the data collected from the numerous companies interrogated; 2. presented accurately and without mischaracterisation; 3. comprehensive—in the sense that all relevant factors affecting generic entry and any decline in entry of innovative compounds should be examined.

If the Report does not meet all these criteria, it will be of limited value and any conclusions will be suspect. Unfortunately, the Preliminary Report meets none of these criteria. It misses on each to varying degrees, and in some cases, to a very large degree. These flaws display a significantly incomplete understanding of the patent system and how it incentivises and reflects the innovation process. And perhaps worse, for a Report from a Commission service which seeks to analyse the market, the flaws display a significant misunderstanding of the economic factors which impact generic market entry and even of relevant EC law itself. Methodological Flaws It is self-evident that if companies did not interpret the questions put to them in the same way, they will not have answered them in the same way. So the data will not be consistent and in compiling the data, DG Comp will have been adding apples to oranges or bananas to pears. The data will lack integrity. In at least 2 important areas, this has happened. First, when analysing delay to generic entry, the report takes as its starting date a date for what it calls “loss of exclusivity.” That is defined as “where a product no longer benefits from an exclusive right e.g. because of expiry of patent, SPC and data exclusivity” The date on which the report relies is presumably based on the answer to the question of when was the “date when the product went off patent.” And “generic” is defined as a product “which is not (or no longer) patent protected” In an industrial sector where there are many patents relating to multiple formulations of products, that question can be answered in many different ways. Unless all companies decided to answer in the same way, which is very unlikely, the data will not be consistent; it will be flawed. Another example is the alleged distinction between “primary” and “secondary” patents. That distinction features frequently in the Preliminary Report. Companies were asked: whether the patent is the basic, primary patent protecting the originator company’s active ingredient or a so-called “secondary patent” (e.g. covering polymorphic forms, synthesis routes, indications); (primary/secondary)19

How should that be answered? What if there is no compound patent but only a salt patent. Is that primary or secondary? And for older active ingredients for which only process patents were available in some EU27 states, is the process patent, which clearly is the main source of protection, to be considered as Primary, or, as appears to be suggested by the Commission, Secondary? 19

EC Pharmaceutical Preliminary Report, supra note 1, at 51–52, 90.

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  631

Again, it is not what the Commission meant by the question that is important. It is the fact that different companies are bound to have answered in different ways. And it is important because, as the EPO has pointed out when commenting on the so-called distinction between “primary” and “secondary” patents, it displays a lack if understanding of the patent system. Inaccuracies and Mischaracterisations The report contains numerous inaccuracies and mischaracterisations as the following examples illustrate. The report characterises amendments in oppositions as being successes for the opponent whether innovator or generic. As anyone with patent knowledge knows, whether or not it is a success will depend on whether the amended claim covers the opponent’s proposed activities. The EPO in its comments on the Report calls this characterisation an “inaccuracy”; they originally called it “disturbing.” “Disturbing” is a better word as the mischaracterisation shows a lack of understanding of basic aspects of the patent system. Although that mischaracterisation of the effect of an amendment can be corrected in the final report, a correction will not alter the fact that those involved in conducting the Sector Enquiry have an inadequate knowledge of the patent system which is central to the issues being examined. The report addresses concerns of generic companies that novelty and inventive step requirement for secondary patent applications are too easily considered to be met by the EPO. It says: [T]his seems to be confirmed by the fact that in the patent litigation cases between originator and generic companies reaching a final judgment, the majority of litigated patents were revoked20

But the actual data which appear in footnotes much later in the Report shows that the position is somewhat different. 36% of so-called secondary patents were revoked and less than 30% of patents overall. So here we see a misrepresentation of the Report’s own data but one which leads the Report to comment that: A consequence flowing from filing numerous patent applications in order to create patent clusters … can also be an increase of weak patents21

The Report also looks at win/loss ratios of cases that went to trial and the Commissioner commented that innovators lose “a clear majority” of them. Let us for the moment ignore the fact that about 50 cases which the patentee won and which settled before an appeal appear not to have been included in the dataset of 149 cases and that if they had it would make a very significant difference to the win/loss ratio. What meaningful comments about litigation of pharmaceutical patents can be made without comparing the ratio to patent litigation generally and in other industrial specific sectors? None at all, but there is no comparative data. More disturbingly, the Report mischaracterises the prevailing law. It examines the period 2000–2007. It describes the regulatory framework (although it doesn’t analyse its influence) but it doesn’t do so accurately. The legal framework governing the regulatory system for pharmaceuticals was subject to significant change in 2004. Two of those changes had potentially significant impacts on the date of generic entry. First, there was no “Bolar provision” in most EC Member States.22 So in many Member Id. at 158. Id. The “Bolar Provision” is a safe harbor that allows generic manufacturers to conduct clinic trials and experimental testing of patented medicinal products and compounds without infringing the patent in order to obtain market approval 20 21 22

632  CHAPTER VIII: COMPETITION LAW States generic companies could not do the work necessary to obtain a marketing authorisation before expiry of all relevant patents. And until the new laws came into effect, generic companies could not apply for an abridged marketing authorisation until the end of the data exclusivity period. There would inevitably be a delay in processing generic applications for marketing authorisations after expiry of the data exclusivity period. This becomes a significant cause of potential delay in generic entry in cases where patents expire before or shortly after the data exclusivity period or, as was the case in many former Eastern bloc states, where there was no effective patent protection for pharmaceuticals. So potentially significantly delaying factors were inherent in the patent and regulatory laws applying at the time and had nothing to do with company behaviours. How significant are these factors? It is impossible to say because the report does not even mention them. But according to the European Generics Association (EGA), the lack of a Bolar provision “cost European patients and healthcare systems as much as €100 million per medicine per year.”23 And the EGA has stated that the fact that generics could not at the time apply for marketing authorisations until after expiry of the data exclusivity period caused a delay of “a further 1 to 3 years.” But there is not a word on any of this in the Report. It is simply not mentioned. These flaws display a lack of understanding of the market being studied after expenditure of millions of Euros and thousands of man hours in studying that market. Omissions from the Report What undermines the value of the Report even more than the flaws described above is what it doesn’t address. There are two types of omissions. First, the Report fails to address significant evidence that was before DG Comp. And no explanation is given for the failure to address that evidence. For example, the Report states that in “a conventional portfolio life cycle … secondary patents are usually filed before the first launch of a product.”24 In fact, anyone who understands the development cycle for pharmaceuticals knows that there is continuous development of medicines, particularly successful ones, after they are launched and development leads to inventions and inventions lead to patents. And the assertion is made in the face of evidence from EFPIA that “it is impossible to generalise as to the typical portfolio.”25 So one is entitled to ask what is the basis for DG Comp’s assertion and why was EFPIA’s evidence apparently ignored? Another example is that the Report mentions the “very serious effects” that a preliminary injunction has on a generic company. This is simply an assertion which is not backed up by once the patent expires. Valerie Junod, “Drug Marketing Exclusivity Under United States and European Union Law”, 59 Food & Drug L.J. 479, 510–13 (2004). The European Union has adopted a Bolar provision. Council Directive 2001/83, Art. 10(6) Community Code Relating to Medicinal Products for Human Use, 2001 O.J. (L 311) 67 (EC). 23 Press Release, European Generic Med. Assoc., EGA Board of Directors Urges Early Implementation of ‘Bolar Provision’ for Generics to Ensure the Future of European Research & Development (Mar. 25, 2004), available at http://198.170.119.137/pr-2004-03-25.htm. 24 EC Pharmaceutical Preliminary Report, supra note 1, at 145. 25 European Federation of Pharmaceutical Industries and Associations, http://www.efpia.org/Content/Default.asp (last visited Mar. 26, 2010).

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  633

quantitative or qualitative evidence. More importantly, there is no mention at all of the impact that failure to grant a preliminary injunction might have on the innovator, despite evidence on this put in by EFPIA. This type of evidence is often taken into account by Courts in Member States but it is not even deemed worthy of mention by DG Comp. A final example of the failure to address evidence is that, although it only identifies one case over 8 years, the Report expresses concern about the “significant potential” for patents to block innovation by other companies as being a reason for the alleged slowdown in launch of new products. But it makes no reference whatsoever to EFPIA’s evidence as to the number of compounds in development, the increasing speed of entry onto the market of competitive innovative products or the factors—scientific and regulatory—that are causing problems in bringing new products to market. It is not that the Report considers the evidence put in and explains why it is not persuasive. It simply makes no reference to the evidence whatsoever. Why is that? Why is it that assertions by generics without supporting evidence are often uncritically accepted whereas evidence from the innovative side is simply ignored? But it is the second category of failures to consider relevant factors that makes the flaws in the Report so serious. Second, the Report fails completely to examine causation. It simply does not examine the extent to which the alleged delays in generic entry are caused by the company behaviours described in the Report as opposed to other factors. Or put another way, it contains no counter-factuals—what would the delays have been in the absence of any or all of the behaviours which appear to concern DG Comp. The Report indicates that elements of the so-called toolbox are used more frequently in relation to blockbusters than other products. And yet generic versions of blockbusters come to the market more quickly on average than other products. This clearly suggests the significance of factors other than the toolbox on delay in generic entry. And yet there is no analysis of the significance of these other factors. Among the factors which the Report does not examine but which cause delays in entry or indeed decisions not to enter at all are: 1. until the recent legislative changes, the lack of Bolar provisions and effect of the data exclusivity law referred to above 2. manufacturing complexities 3. market size and levels of prices 4. likely speed of entry, and number, of generic competitors 5. perhaps most significantly, delays in generics receiving marketing authorisation and pricing and reimbursement decisions from Governments. The generics themselves admit that these cause delays in most Member States and the delays can be up to 14 months, substantially more than the average delays identified by DG Comp.

Nearly all commentators have picked up on the failure to analyse causation. It is extraordinary that the Preliminary Report does not do so. The effect of this failure is mentioned further below. Public Presentation of the Preliminary Report Mention must be made of the way in which the Report was launched on 28 November 2008. The Report clearly states that it:

634  CHAPTER VIII: COMPETITION LAW does not seek to identify wrongdoing by individual companies … It provides the Commission with a factual basis for deciding whether further action is needed.26

The Deputy Director of DG Comp, Dr H Ungerer said when the Report was launched with much fanfare: “We are presenting a report based on facts.” But it was much more than this and to pretend that this was merely presenting factual findings borders on the disingenuous. Seconds after saying that “we are presenting a report based on facts,” Dr Ungerer said “the facts to some extent are shocking.”27 Commissioner Kroes, in her Press Conference before launch of the Report said: [W]hen we put it on paper, what is wrong, what is absolutely to be changed, then the players in the game so to say are already changing their behaviour so I sincerely hope that our clear language is reason for the industry and certain companies to change their attitude already.28

And the headline of the Commission’s Press release was: “Preliminary report on pharmaceutical sector inquiry highlights cost of pharma companies’ delaying tactics”29 Comments like these meant the Report got the headlines that DG Comp were no doubt looking for: Drug maker delay on generics cost €3 billion EU says Bloomberg30 EU antitrust chief criticizes major pharmaceutical firms Wall St. Journal Europe31 Drug companies trigger European ire for holding back supplies of cheap medicine The Times32

This matters. It matters because the impression conveyed was that the industry as a whole systematically misuses the so-called “toolbox” and the reputation of the industry as a whole has suffered. And it matters because the Report is already being cited by lawyers in Court and by at least one EPO Examiner as evidence of alleged misuse of the patent system. So what we see is an inaccurate and incomplete Preliminary Report being used not, as was claimed, a factual basis for policy making, but as a tool used to criticise the industry as a whole. This was not simply a presentation of facts, but of unsupported comments and conclusions. To make such statements on the basis of a factually flawed report which fails to address key issues like causation was unfortunate. Will the Sector Inquiry Achieve its Objectives The Preliminary Report—almost predicting some of the criticisms that have been leveled at it says: “As it is a competition inquiry, it focuses on the behaviour of companies, rather than on EC Pharmaceutical Preliminary Report, supra note 1, at 401. European Comm’n, Presentation of the Sector Inquiry Results by DG Competition, http://ec.europa.eu/ competition/sectors/pharmaceuticals/inquiry/index.html. 28 Neelie Kroes, Comm’r, European Competition Policy, Opening Address at the Public Presentation of Preliminary Findings (Nov. 28, 2008), available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/index.html. 29 Press Release, Europa, Antitrust: Preliminary Report on Pharmaceutical Sector Inquiry Highlights Cost of Pharma Companies’ Delaying Tactics (Nov. 28, 2008), available at http://europa.eu/rapid/pressReleasesAction.do? reference=IP/08/1829. 30 Matthew Newman, “Drugmaker Delay on Generics Cost €3 Billion, EU Says”, Bloomberg, Nov. 28, 2008, http:// www.bloomberg.com/apps/news?pid=newsarchive&sid=acRoYpuVxkEA. 31 Charles Forelle & Jeanne Whalen, “EU Opens an Antitrust Probe of Servier, Generic Drug Makers”, Wall St. J., July 9, 2009, http://online.wsj.com/article/SB124704559023110825.html. 32 Catherine Boyle & Rory Watson, “Drug Companies Trigger European Ire for Holding Back Supplies of Cheap Medicine”, Times (London), Nov. 29, 2008, at 72. 26 27

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  635

the regulatory framework.”33 That does not explain or excuse its failings. The Report says: “A sector inquiry looks … into the question of whether and to what extent the behaviour of undertakings is amongst the causes for the perceived malfunctioning of the market.”34

Commissioner Kroes, when launching the Sector Inquiry said: “If innovative products are not being produced, and cheaper generic alternatives to existing products are in some cases being delayed, then we need to find out why …”35

Deputy Director Ungerer said “A puzzle only makes sense if you put all the pieces together”36 So the Final Report must show with objective and unimpeachable analysis the extent— if any—to which company behaviours cause “market malfunction”, delays in generic drug launch or are barriers to launch of innovative drugs or whether these are caused by other factors. It must analyse causation and the counter-factuals. If it does not, it will not do what Commissioner Kroes set out to do—to show “why” these features of the market (apparently) exist. If it does not—to use the analogy used by Dr Ungerer—the pieces will not be together and the puzzle will not make sense. This analysis should have been in the Preliminary Report in order to allow comment as part of the consultation. There has been no adequate explanation why it was not. And it is not clear that it will be. At the launch of the Preliminary Report, the leader of the DG Comp Task Force said that quantifying what delays are down to company behaviours and what are down to regulatory failures “is not fully our task.” But if causation is not properly analysed in the Final Report, the Enquiry will not achieve its explicitly stated objectives. Finally, reference must also be made to paragraph 6 of the Commission decision launching the Sector Enquiry: In order to establish the extent of [the commercial practices by pharmaceutical suppliers … which may cause market distortion] and to assess them fully in their proper factual and economic context, the use of formal investigative powers such as those granted to the Commission for sector inquiries is required37

If the Final Report does not correct all the factual and analytical flaws we have seen to date (and I have mentioned only a very few of them) and remedy the omissions, it will not assess the commercial practices investigated “in their proper factual and economic context.” That will mean that the use of a Sector Enquiry, one of the tools in DG Comp’s own toolbox, was not justified. And that in itself raises significant questions about the use of Sector Enquiries. Conclusion The Preliminary Report is a deeply flawed document. Its flaws are methodological, factual and analytical. These flaws show a significant lack of understanding of the market the Sector Enquiry was to assess and the regulatory framework which so heavily influences the operation of that market. EC Pharmaceutical Preliminary Report, supra note 1, at 21. Id. at 22. 35 Neelie Kroes, Comm’r, European Competition Policy, Introductory Remarks at Press Conference: Commission Launches Sector Inquiry into Pharmaceuticals (Jan. 16, 2008), available at http://europa.eu/rapid/ pressReleasesAction.do?reference=SPEECH/08/18 [hereinafter Kroes Introductory Remarks]. 36 Herbert Ungerer, Deputy Dir. General, DG Competition, Concluding Remarks at Public Presentation of Preliminary Findings (Nov. 28, 2008). 37 European Commission Decision Initiating an Inquiry into the Pharmaceutical Sector, at 4, COM (2008) 39.514 (Jan. 15, 2008). 33 34

636  CHAPTER VIII: COMPETITION LAW 2009 is the EU’s year of Creativity and Innovation.38 DG Comp arguably has the opportunity before issuing the Final Report39 to addresses the manifest flaws in the Preliminary Report. Whether it is really able or willing to acquire the far deeper understanding of the market and the regulatory framework that is necessary to make the Report useful than it has to date is open to question. But if it does not, it will stand accused of favouring not innovation but imitation. DR. TEMPLE LANG: The next comment is from Sir Christopher Bellamy, former judge in Luxembourg and in London. SIR CHRISTOPHER BELLAMY: Thank you, Chairman. Ladies and gentlemen, I’d like to address only two issues: first, some of the process aspects that have already been mentioned; and secondly, one central legal point that has tended to be obscured by the debate about process, which is: what is the role of intention in patent litigation, and in competition law more generally? First, the process aspects and how to achieve balance in an inquiry such as this. Sector inquiries under Article 1740 can be extremely useful ways of shining light into dark corners. The Commission has embarked on a very ambitious project. The pharmaceutical industry and the patent system are in general terms legitimate subjects of public interest. The Commission has done an enormous amount of work and analyzed a great deal of information in a short period. The topics are difficult and important. So let us give credit and acknowledge that this report is in itself a very considerable achievement. Yet, in my humble view, for some of the reasons that have already been mentioned, there is a real risk of this inquiry going completely wrong. Why? Every judge knows that, whether or not you are actually biased, if you give the appearance of bias you are dead in the water. The same is true for conducting public inquiries, for example, the kind of sector investigations carried out by the British Competition Commission. Anyone who has ever done such an inquiry knows that there are some very simple dos and don’ts. They are roughly as follows: (1) Treat those investigated in a fair way, because actually you will get a better result. (2) Keep in mind the big picture. At the beginning of these inquiries one is deluged with facts. It is very easy to lose one’s way and no longer see the wood for the trees. (3) Express any preliminary findings as neutrally as possible because at a preliminary stage one’s understanding is inevitably incomplete. (4) Put back specific questions on particular topics—e.g., why in your view is generic entry much quicker in some Member States than in others? (5) Expose your statistical methodology for comment. (6) Make sure all main points that have been made are identified, met, and answered. (7) Give yourself time. One can bite off more than one can chew. (8) Above all, keep an open mind for as long as possible until you are sure you have thoroughly understood all the main factors. Although these rules are common sense, it is not entirely apparent that they have been followed in this particular case. One would not suggest any actual bias; however, the problem comes when there is a perception of bias. As has already been said, this inquiry to some extent did get off on the wrong foot with the dawn raids. That was highhanded. It was even more highhanded to target the offices of general 38 Europa, European Year of Creativity and Innovation 2009, http://www.create2009.europa.eu/about_the_year. html. 39 The Final Report has since been issued. European Comm’n, Pharmaceutical Sector Inquiry Final Report (2009), available at http://ec.europa.eu/competition/sectors/pharmaceuticals/inquiry/index.html. 40 Council Regulation 1/2003, Art. 17 O.J. (L 4.1.2003) (EC).

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  637

counsel of some very well-known public companies. Perhaps the most highhanded element of all was the specific case of the company who actually asked to see a judicial warrant before it handed over a particular document and promptly received a Statement of Objections threatening a fine of 1 percent of turnover for obstructing the inquiry, for asking to see the judge’s order. So it came across at the outset as a prosecution, not an inquiry. Aspects of the preliminary report, quite apart from the comments on the 29th of November,41 have perhaps not helped. Various statistics—the 3 billion alleged cost from delayed generic entry; the famous, oftrepeated, but somewhat lonely example of the 1,300 patents clustered in a single cluster—have come under sustained attack. To my mind, in some Member States, there has been an astonishingly rapid entry of generics which has been rather understated. The use of the word “toolbox” is in itself pejorative. This kind of approach suggests a lack of balance and does not serve the Community interest. But it is, I would suggest, not too late. The final report can still salvage the Commission’s reputation by treating some of what are tendentiously called the shortcomings in a way that is much more balanced: What is the role of systems of public reimbursement and marketing authorization in the Member States; what is the role of the EPO procedures; the lack of a patent proper system in Europe; the nature of the competitive model pursued by generic companies—all these kinds of things. As has been mentioned, it is no answer to say “This is all outside the scope of the inquiry,” because the purpose of the inquiry is to ascertain to what extent the conduct of pharma companies, and originators in particular, are responsible for the perceived lack of competition. So let us get this inquiry back on the rails before it is too late. Turning to substance, the debate has obscured an extraordinarily important point: What is the relevance of intention in patent litigation? This issue is related to what I have just been saying about process because there is considerable emphasis in the report on the use of quotations from internal documents seized in the dawn raids, with a view to showing that patent rights have been exercised in one way or another with anticompetitive intent.42 That raises a fundamental issue of whether intention can ever be relevant to allegations of anticompetitive use of patents. A patent involves a lawful right granted by a public authority, capable of being challenged before a court, and the purpose of the patent is to exclude the competitor. It is hard to see how the exercise of that right to exclude a competitor becomes unlawful because of an alleged intention to exclude. That intention is inherent in the right. The internal musings of often junior executives are nothing to the point. Similarly when applying for the patent. Absent fraud or bad faith, and perhaps with some scope for debate of the rare case of “manifestly unfounded,” I would suggest that intention has no role in either competition law or IP law in the present context. That issue of intention, unfortunately, surfaces in other areas of Community competition law, as seen in Microsoft,43 for example, and in predatory pricing cases. Again, however, the competition rules require companies to compete. The whole purpose is to take business from competitors. Whether particular conduct crosses some line so as to be anticompetitive is a matter for rigorous objective analysis of consumer welfare, as the Commission’s guidance paper under Article 82 tells us.44 EC Public Consultation, supra note 13. See, e.g., EC Pharmaceutical Preliminary Report, supra note 1, at paras. 383–432. 43 Commission Decision Relating to a Proceeding Under Article 82 of the EC Treaty and Article 54 of the EEA Agreement Against Microsoft Corp. (Case COMP/C-3/37.792), COM (2004) 900 final, 2004 O.J. (L 32) 23 (Mar. 24, 2004), aff’d, Case T-201/04, Microsoft v. Comm’n, 2007 E.C.R. II-03601 (Ct. First Instance Sept. 17, 2007). 44 Communication from the Commission: Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, O.J. (C 45) 1 (Feb. 24, 2009). 41 42

638  CHAPTER VIII: COMPETITION LAW The enthusiasm with which business executives and junior staff write down what they have been asked to do in fact tells one nothing about whether consumer welfare is in fact harmed, in the form of higher prices or other detriments. This reliance by the Commission on “colorful” documents does tend to obscure, and sometimes defeat, what should be a rigorous scientific analysis. Remember also, finally, what Judge Learned Hand said in the famous Alcoa case in 1945: “The successful competitor, having been urged to compete, must not be turned upon when he wins.”45 Thank you. DR. TEMPLE LANG: We have one speaker and one panelist still to go. I think we ought to consider now whether it is useful to go on criticizing or listening to replies to criticisms of the report. I think that it might be better if we tried to raise our eyes from the mistakes, to put it no more strongly, that the Commission has made in the context of this inquiry in the last few months and to see what good might be obtained from it. We can discuss, and I hope the panel will discuss, how to get the benefit of the inquiry and to use the results, whatever they may prove to be, as constructively as possible. But let’s bear in mind the objective of trying to make something useful out of all this as we listen, first, to the next speaker, Harald Mische, and then to Mr. Justice Arnold. MR. MISCHE: Good morning, ladies and gentlemen. It is an honor to be here this morning to present my view on our subject, the impact of the pharmaceutical sector inquiry on innovation. It might not come as a surprise to you that I believe that the sector inquiry will be good for innovation. However, let me first address a couple of points raised by the previous speakers. On the why and how of the sector inquiry: In a different context Commissioner Kroes has recently stated that: “Competition policy is not only about cases. It is about putting in place conditions for competition to deliver better goods and services to consumers. Competition policy must be informed by more than individual cases.” Accordingly, for the pharmaceutical sector inquiry Commissioner Kroes stated that “If less innovative products reach the market and cheaper generic alternatives to existing products are being delayed, then we need to find out why.”46 The competition policy tool for this is enshrined in Article 17 of Regulation 1/2003: “When circumstances suggest that competition may be restricted or distorted, the Commission may conduct an inquiry into a particular sector.”47 The Commission had such indications through its monitoring of the sector as well as through specific cases it has handled. In such circumstances, the Commission may—or, rather, needs— to act. Now, it was raised the point why we didn’t carry out an inquiry into the banking sector. We have actually already done that, as well as into the insurance sector. I am not sure anybody would like to suggest that the problems that we see today in the banking sector are really due to competition. How is a sector inquiry carried out? There are two powers given by the Regulation to the Commission, which is: “To request information and to carry out inspections.”48 The Commission has been criticized for having requested extensive information from companies. We are very well aware of the burden. However, information requests still are the only direct source of information. So they are very important, not to say indispensable, to come to sound conclusions in a report. Alcoa Steamship Co. v. United States, 175 F.2d 661 (2d Cir. 1949). Kroes Introductory Remarks, supra note 35. 47 Council Regulation 1/2003, Art. 17 O.J. (L 4.1.2003) (EC). 48 Id. 45 46

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  639

The Commission has also been criticized for carrying out inspections. I would need to point out that it is our practical experience that not all documents are always handed over to us. It is for this reason that the legislator has foreseen the possibility to carry out inspections in the framework of the sector inquiry. Why did the Commission not carry out a complete investigation of the regulatory environment? The answer is simple: because Regulation 1/2003 empowers the Commission to carry out a competition inquiry. The point here is that the main purpose of the inquiry was to examine company behavior. That means practices of innovator companies that may delay generic entry, or innovator practices that may contribute to a decline in innovation. The question the inquiry examined is whether company practices contribute to delayed generic entry, or to the fact that less new medicines come to the market. Given the importance of regulation in the pharmaceutical sector, the sector inquiry report also summarizes comments on the regulatory framework. On the issue of uncertainty: I would submit that the sector inquiry has been very focused and fast. In fact, the Commission issued a preliminary report, taking only ten months to process some 6,000 submissions. Compared to any complex antitrust investigation, this is by all means fast. Second, the sector inquiry will clarify facts. Seventy-five formal submissions received during the public consultation have shown that there is hardly any controversy on the facts. Replying to David, who actually identified a typo in the report, as concerns the outcome of litigated patents, the report correctly established that the generic companies won more than 60 percent of the cases, if of course one follows the definition of “winning” that the report has given. In addition, just two little corrections on points raised this morning. As concerns the figure of 3 billion euros in savings, this figure does not relate to sales of 200 billion but to a sales value of 50 billion. As concerns the number of 1,300 patents, it is important to look at what was written in the sector inquiry report. The report spells out the methodology that was used, it is transparent. In order to enter with a generic in each of the twenty-seven Member States of the European Union, you are actually faced with up to 1,300 patents. Uncertainty appears more to exist on the question whether competition law might have to be applied to certain conduct. This issue has not been answered in the report, and it is not going to be answered, because in order to examine whether an individual conduct infringes competition law you need to carry out a full investigation. There was a reproach that the findings of the report are pejorative: I would ask: What is pejorative about quoting words that the Commission hasn’t invented? The word “toolbox” has not been invented by the Commission. It actually comes from the documents. We have found plenty of strategy documents from companies that have developed strategies to counteract generic competition. As for the different elements of these strategies described in the report, they were listed in the company documents. It is not the Commission who has invented these. Three quotes may illustrate what such strategies look like and what effect they may have. The first one concerns patent clusters to delay generic entry: “Secondary patents will not stop generic competition indefinitely but may delay generics for a number of years …”49 49

EC Pharmaceutical Preliminary Report, supra note 1, at 22.

640  CHAPTER VIII: COMPETITION LAW The second quote shows the effects of interventions before authorities: “Delayed market entry … due to requirement for more robust efficacy and safety data results … in $350 million extra sales.”50 A third quote might illustrate defensive patenting against innovator companies: “We identify options to obtain or acquire patents for the sole purpose of limiting the freedom of operation of our competitors.”51 We heard criticism that the preliminary report has not clearly proven causality of companies’ strategies, and that delay in generic entry and the decrease of new drugs would have instead to be attributed to the regulatory system. However, I would submit that it is clear that companies are rational organizations, and rational organizations invest their resources and efforts when they believe there is a return on this investment, which is to delay generic entry or to block R&D of competitors. The report does not claim that all kind of delays or decreased innovation is only due to company behavior. But it does find that company behavior might have contributed to this. I believe that the sector inquiry will be positive for innovation: With respect to competition between originator companies, the preliminary report investigated especially defensive patenting. The benefits of defensive patents to innovation are not always obvious. On the contrary, such patents may actually limit innovation. Secondly, with respect to competition between original and generic companies, the report examines strategies of originator companies designed to delay generic entry. When deciding on an investment, a company will, or should, only take into account the exclusivity period provided for by the law. A company cannot rely on strategies to extend its legally foreseen exclusivity period. So I would submit that the report, therefore, clearly takes into account innovation and incentives to innovate. I believe that innovation is actually the main concern of the sector inquiry: The sector inquiry investigates obstacles to market access both for generics and innovators. It is important to remember that obstacles typically harm innovation, rather than enhancing it. As concerns patent rights, the sector inquiry clearly recognizes the value of patents. It says that “innovation without proper patent protection is not possible.” It also recognizes the value of secondary patents for incremental innovation. Finally, it also recognizes that companies that make risky investments have to be able to get a return on their investment and earn profits as a reward. However, if patents are unclear or too broad, this might create uncertainty, which can harm innovation. As important as the patent itself is that it also expires, and this is actually when generic manufacturers enter the market. I quote a conclusion of the report: “Aware of the fact that the period during which originator companies can recoup their investments is limited in time, they are in constant search for new medicines.”52 Entry after patent expiry is important for innovation. Whereas incremental innovation and second-generation products are an important aspect of innovation, “strategies for launching follow-on products can in some cases be rather aimed at preventing generic companies entering the market than actually protecting a new innovative product.”53 Here it was found that patent clusters and divisionals seemingly serve to prevent or delay generic entry. Now let me come to the conclusions. I have three points here to make. Id. at 272. Id. at 330. 52 Id. at 39. 53 Id. at 296. 50 51

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  641

• First, I believe that the sector inquiry will bring clarity on how competition in the pharmaceutical sector works. • Secondly, I believe that the findings concerning the regulatory environment will help improve it. • Third, I hope that more clarity on the application of competition law will be given by any possible investigations. The goal is that the industry knows what it is up to and that it can focus on what it does best, which means to innovate. Thank you for your attention. DR. TEMPLE LANG: Three kinds of conclusions are possible in the light of this discussion and of the report itself. One might suppose that there might be apparently a small number of possible violations of Article 81 as a result of agreements between generics and originators. That is not said, may not be true, but it is clearly implied by the report. The second possibility is that some of the internal documents might be used as evidence of some sort of unilateral behavior that might be considered contrary to Article 82.54 That is, at least theoretically, a possibility. The enormous difficulty—well, there are several—of that second point us, first, the difficulty pointed out by Sir Christopher Bellamy, that the mere fact that you intend to use a patent to exclude a competitor is what you always do with patents. Dominant companies may legitimately obtain the first patent, the original patent, the patent that gives rise to the new medicine. That excludes competing production of that product for the duration of that patent. Everybody knows, or at least everybody ought to know, that no criticism can be made of a company, no matter now dominant, merely because it obtains a patent and it obtains the patent for the purposes of obtaining, if the economic situation allows it to do so, a monopoly of the right to produce products of that kind and competing with that kind. The third possible set of conclusions, which unfortunately, in spite of what Harald said a moment ago, does not really come out of the report, is what should be done with the regulatory regime. The report seems to imply that a lot of the delay, a significant part of the delay, is due to the behavior of the companies and not due to the regulatory regime. But in fact anyone with a sense of proportion looking at the industry would know that by far the greatest part of the delays are due to defects in the regulatory regime. Mr. Justice Arnold, will you come and tell us what conclusions, if any, you think can be drawn at this stage? MR. JUSTICE ARNOLD: Well, what I would say is that we have heard an awful lot of criticism of the report, with which I hasten to say I agree. But, to redress the balance slightly, I want to pick up a point that Lord Justice Jacob mentioned in his talk, which is that there is a genuine small problem of abuse of the patent system. He gave you the example of the Servier case, which was before the Court of Appeal in England last year.55 More recently in England we have had another example. This is a decision handed down about two months ago by His Honor Judge Fysh QC sitting in the Patents Court involving Boehringer Ingelheim and Laboratorios Almirall.56 Almirall is a Spanish pharmaceutical company. It discovered a new anti-asthma drug of promise, and its scientists presented two posters about this new drug at a conference in Seattle. According to Judge Fysh’s judgment, what then happened was that a Boehringer scientist attending the EC Treaty, supra note 15, Art. 82.  Opening of proceedings for this case available on http://ec.europa.eu/competition/antitrust/cases/index/ by_nr_79.html. 56 Laboratorios Almirall S.A. v. Boehringer Ingelheim Int’l GmbH, [2009] EWHC 102 (Pat) (U.K), available at http://www.bailii.org/ew/cases/EWHC/Patents/2009/102.html. 54 55

642  CHAPTER VIII: COMPETITION LAW conference took photographs of the two posters and sent them home to headquarters, by email I think it was. Within the space of a few weeks Boehringer had filed two patent applications for combinations of the Spanish company’s drug with other classes of anti-asthma drugs. These patent applications were entirely speculative, based on no research whatsoever, and based entirely on the photographs. The patents were, of course, held to be invalid by His Honor Judge Fysh. But it is a problem that that behavior occurred and that, not only did it occur, but the patents were duly granted by the European Patent Office. Now, I would suggest that this is not a problem of competition law. This is a problem with the patent system itself. Now, what do we do about it? The two most obvious things to do about it are: firstly, to have improved standards of examination in patent offices; the second answer, which is the one that I think Lord Justice Jacob gave in his original paper, is for invalid patents to be speedily revoked by courts, and that implies in the European context, progressing the work on the European patent litigation system. Other than that, it is actually quite difficult to see how you deal with abuse of patents. But as I say, I don’t see that it is really an issue of competition law. Thank you. DR. TEMPLE LANG: Thank you very much. Suppose that the facts show that the company that acquired a particular patent knew perfectly well that it was an invalid patent but nevertheless asserted it. Can I ask the members of the panel: In those circumstances, do you think that that is or ought to be a violation of Article 82? LORD JUSTICE JACOB: As a judge, I suppose I have to be a bit careful about this one. First of all, I would say it is a very general problem. It’s got nothing to do with the pharma industry. It’s not even limited to the patent business. In fact, the greatest number of assertions of bogus rights occur probably in trademarks or in copyright, much more than in patents. Moreover, they are often asserted against people who are much less in a position to defend themselves than generic pharma companies. So if you are looking for a solution to the general problem of assertion of a bogus intellectual property right, it should be dealt with generally and not as part of the pharma inquiry. Whether it is a breach of Article 82, I do not know. I think there must be considerable difficulties. The first problem you would have to look at is there may be no dominant position. Secondly, it is sort of circular, isn’t it, to say “it’s a dominant position; why are you dominant?— because you haven’t got the right which you asserted.” Whether there should be some sort of legal action available by somebody who was injured by the assertion of an invalid right, which is known to be invalid, I don’t know. We have fiddled around in my country for 100-odd years or so with something called a threats action. It has been extended from patents to designs to registered trademarks to copyright, but not to passing off, and it has been pretty ineffective for over 150 years. It’s just that in extending it from patents to other IP rights Parliament says, “Oh, we ought to have it also for this.” But there is no real evidence that it does any good. Whether you should have such a right or some sort of tort of wrongful assertion of IP rights—indeed whether such a tort should even be limited to IP rights—because people make bogus assertions of rights generally—is a sort of general question, but it is not a question for the competition authorities, that’s for sure. DR. TEMPLE LANG: Thank you. Other comments on the same point? DR. STOTHERS: Just to pick up on that, and also what Richard Arnold was saying, could there be an abuse of Article 82? Well, there are going to be very few cases. Maybe it could be an abuse. My personal view is that it shouldn’t be an abuse. That’s a kind of morality call, that’s bad behavior, rather than necessarily any competition problem. You can cause just as

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  643

much damage and just as much harm by such behavior when you don’t have a dominant position. It has nothing to do with market power. It’s behaving badly. The question is how that should be dealt with in the system. I think one problem with the system is that there is no real sanction in economic terms. It can be worth doing it, because even when you get found out, you will still have made more money than if you hadn’t done it. That is the general problem. I don’t think anyone has really found a decent solution to that. But to add to Richard Arnold’s potential solutions, another potential solution is to have some system where all the profit that is made where there is such bad behavior is clawed back—not just the damage to an individual (generic) company, but the damage to society as a whole is clawed back in some way. But that is not competition law. That is a more general problem, as Robin Jacob says. DR. TEMPLE LANG: One of the striking things, if you look at the pharmaceutical report in any sort of broader context, is the Commission doesn’t seem to be aware that there are many other industries where a higher proportion of the patents are statistically, in the light of litigation, found in due course to be invalid. This is much more striking in other industries, but the Commission doesn’t seem to be aware of that. Let’s assume that we had a better method of dealing with invalid patents, and let’s assume that that worked well across the whole sphere of industry, not just in the pharmaceutical industry, because there’s no reason why it should be limited to that. Would that solve the problem? What problems have been detected by this inquiry? Have any of you identified in any precise way the regulatory problem that Harald says the report called attention to? We know there are delays. We know there are delays of getting approval and we know there are delays in negotiating the cost of generics. But we knew that before the pharmaceutical inquiry ever began. May I ask the audience: Which of you believes that a particular regulatory problem has been identified by the report that you didn’t know about already? [Show of hands] Well, undoubtedly, the report has called attention, very widespread attention, to regulatory problems that were not getting the attention that they undoubtedly needed. But the difficulty is that the Commission, because it chose to use this mechanism of a sector inquiry into competition problems, had to use a tool that was inappropriate for the broader purposes that I think we are now suggesting to you are the most likely and the best results of this inquiry. Was this a good way of putting pressure on everybody to improve the patent system? LORD JUSTICE JACOB: No. It was a terrible waste. If they had put some more resources into Margot Föhlinger’s effort, the whole thing would be moving along better already. This is a disastrous distraction. DR. TEMPLE LANG: Christopher? SIR CHRISTOPHER BELLAMY: I think the disappointing thing at this stage is that nobody is really facing up to the fundamental legal problem. Leaving aside the cost in public resources, the cost to the industry of this inquiry has been enormous. But the problem is essentially this. The Commission says: “Okay, there’s a problem because you’ve got a defensive patent. You didn’t really want to use it; you just patented it to keep a competitor out. Or you’ve got a problem because your claims are unclear or too broad in an improvement patent.” So there is a possible problem there. What are you going to do about it? One’s got the various mechanisms within the patent system that have been mentioned—you’ve got revocation, you’ve got very often the possibility of a compulsory license, and all that sort of thing. Do you deal with it within the patent system,

644  CHAPTER VIII: COMPETITION LAW or do you superimpose upon the patent system a kind of third wheel that is competition law, which comes into being to solve the problem? I think there are three points that have not yet been grappled with intellectually but do need to be addressed. The first is that if you use competition law, you have inevitably got asymmetric solutions, because the only real hook you’ve got in competition law is dominance. I leave aside settlement agreements for the moment. You’ve got dominance. That means one solution for dominant companies and one solution for non-dominant companies, one solution where there is an effect on trade between Member States and another solution where there is no effect on trade between Member States. That is a very, very messy way of doing it. But, more fundamentally, you tend to undermine two very fundamental aspects. First of all, you undermine the legal right by saying, “Okay, I know you’ve got a patent, I know you are entitled to the patent, but I am going to fine you anyway because it is being used for anticompetitive purposes.” That is a pretty fundamental change of emphasis, to put it rather mildly, in the patent system. Whether that is a good thing is highly, highly debatable, or needs to be debated. One sees in this preliminary report no debate about that issue. Finally, the other point, which I think was mentioned in passing by Lord Justice Robin Jacob, is that the most fundamental right of all, which belongs to everybody in this room and every company in the Community, is the right to go to a court to assert a legal right. In the Promedia case57 and many other cases that is seen as something that is absolutely fundamental. Now, if you are going to say that it is actually an infringement of Article 82 to try to enforce a patent that was weak, or was expressed too broadly, or that you only wanted for defensive purposes, you are going to fine somebody for going to court to enforce a legal right. You have really struck at a very fundamental pillar of the European Union and civilized society as we know it. Now, there is room for a debate on some of these points. But the important thing is to face up to the debate and not to get lost at the rather low level of what particular executives or junior members of staff write in internal documents. These are very fundamental issues that require a very high-level debate. DR. TEMPLE LANG: Thank you. I thought you were going to make another point, which is also fundamental, a practical and a policy point. If there is a serious problem with delay of the introduction of generics into the market, it cannot be solved by competition law, which by definition deals with individual cases. So if there is a big problem it has to be dealt with by a general solution. It has to be a solution that covers the whole sphere of the patent system. Only such a reform will do the job that needs to be done, if it is a big job. If, on the other hand, there are one or two individual cases of the specific kinds that have been mentioned recently, abuse of patent rights, they can be dealt with. They are being dealt with, as you have just been told, by the patent courts already. I think Sir Christopher Bellamy is absolutely right to say that it is fundamental that there must be the right to get patents and to exercise the patent rights that you’ve got. And there is an even more fundamental right, mentioned in the European Convention on Human Rights, to go before a court and claim whatever rights you think, rightly or wrongly, you may have.58 So the patent inquiry, flawed though the manner of its execution has been, I’m afraid, has raised some very important but very worrying issues. Ladies and gentlemen, we have been granted leave to go on for another few minutes by Hugh Hansen. I imagine you want your lunch. 57 58

Case T-111/96, ITT Promedia NV v. Comm’n, 1998 E.C.R. II-02937. ECHR, supra note 17, Art. 6.

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  645

Any quick comments or questions—and I mean quick—from the audience?

QUESTION: Hi. Miguel Montana from Clifford Chance.

We have learned that seventy submissions have been filed. I guess the question that we all have in mind is whether or not the Commission is going to pay any attention at all in the final version of the report to these observations. MR. MISCHE: Sorry to be blunt, but I really don’t know who is saying that we are not taking into consideration these comments. Obviously, it is a preliminary report. This has been published for public consultation. All the documents submitted in this public consultation are going to be carefully read, and the final report where needed will be amended and the comments will be addressed. DR. TEMPLE LANG: Thank you. Any others? QUESTION: Cecilio Madero, DG Competition. I haven’t been associated at all with this inquiry, but I feel almost obliged, if not to say compelled, to jump into this discussion because I believe the criticism of the Commission that we have heard today in this panel is welcome. Although I don’t share most of what has been criticized, I come to the conclusion that it is very easy and cheap to [inaudible] because we are really bad at trying to defend our image when we do something wrong or right. It happens from time to time that we do things right too. It is simply unfair to believe that the Commission has I don’t know how many hundreds of people, not just a few people, who have been working days and nights, to have enough information to produce this report. I submit that now we know more about how the pharma industry is running than some of the pharma companies. You seem to have also, John, some difficulties with the instrument. Well, this type of inquiry is something that the Commission only does under very exceptional circumstances, when we come to the conclusion that there is something to be seen, examined, and then, if necessary, corrected. This is what we believe we have to do here. I am very much surprised by the fact that some people seem to have difficulties with the idea of the Commission putting the right questions about what is going on in the pharma industry and trying to deal with a key issue that I have seen absent in many of the interventions this morning. What about end-users, what about consumers; are they paying the right price of the drugs that they are supposed to continue to use? What about our social security and public security systems; are they paying too much for the drugs that they are buying? These are questions that we in the Commission are trying to respond to. This is the system or the mechanism that we have chosen. As my colleague has said, an inquiry like this one gives us the opportunity to see the situation from a global perspective. If there is something to be done under 82 or under the competition rules, this is something that we will do after a very detailed examination of the merits, or lack of merits, of individual behaviors. Let’s not forget that under 81 and 82 what you do is to examine individual behaviors. This is what we might be doing if this is what Mrs. Kroes decides. So when you criticize the Commission do it because we are public officials, we have to be open to these types of criticism, but let’s try to be fair in the way we present the work that we have done. The last thing I would like to say is that 82, yes—well, the conditions are met for 82 to be implemented, not in order to kill someone who has a valid patent, but to enforce and to assert such a patent because it would create the conditions that have been done. You don’t need to attack one of the essential principles of our market economy.

646  CHAPTER VIII: COMPETITION LAW But when there is a patent which is not valid—I am thinking about Professor Shapiro when he talks about probabilistic patents59—it is something which allows the right holder to get market power and to abuse such a market power, I don’t see why the Commission shouldn’t use Article 82. I would like to finish by saying that we will be very pleased to respond to the question from Lord Justice Jacob about how many people have been working like hell days and nights to do something in favor of European citizens. DR. TEMPLE LANG: Thank you very much. I have read all the notes of all of the speakers, of course, before this conference. I didn’t get the impression from anyone that they had any objection to the idea of a sector inquiry. I’m not sure that any of the speakers, in fact, dislike the idea of a sector inquiry into this sector. The criticisms that have been made, I think, are specific aspects of the way in which the sector inquiry has been carried out and what was felt, certainly by several of the speakers, to be undue importance attributed to immoderate or informal or low-level comments about excluding competitors, which, however disagreeable they may be to read, if that is what they are, have nothing to do with the legal merits of the strategy of the company that employed the individual concerned. Ladies and gentlemen, we have had an interesting discussion of what you can easily see is a highly controversial topic. Thank you for your attention and thank you to the speakers.

59

Mark A. Lemley & Carl Shapiro, “Probabilistic Patents”, 19 J. Econ. Persp. 75 (2005).

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  647

APPENDIX A

The European Commission Pharma Sector Inquiry A Paper by the Rt. Hon. Sir Robin Jacob For the Fordham Conference, March 2009 Sector Inquiries are investigations that the European Commission may decide to carry out. The test for launching an investigation is whether the economic sector does not seem to be working as well as it should or whenever there are indications of anti-competitive practices. Such an Inquiry is being carried out now about the pharma industry. A bystander might well say, how come the Commission picked on this industry rather than others? Was not the banking industry a better target? Did the Commission not notice that? What about the insurance industry or any other? So what material did the Commission have to justify this inquiry—for justification I suggest it really needed. After all the Commission has devoted considerable resources—I don’t know how many man-hours and it would important as well as interesting to know the answer. Moreover the Commission’s expense is only a fraction of what was involved. The industry must have spent at least 50 million euros—possibly 100 million, dealing with the host of inquiries. I also have to say that to many a human rights lawyer the way the Commission went about the inquiry was oppressive and wholly unjustified. For it commenced by unnannounced dawn raids of a number of major international research based companies. As if this were a police matter and the companies concerned were criminals who, but for a dawn raid, would be likely to destroy or hide documents. No regard was paid to due process, no regard to any documents which might be covered by privilege. I seriously question whether this was a correct approach— true it is that the companies have not complained or at least not enough to go to court. There are likely to be reasons for that—not least fear of antagonising the Commission—whose attitude throughout has been hostile to the industry. The justification offered—the face that launched dawn raids and constant succession of questionnaires of considerable complexity with demands for answers in very short order—is stated in the preliminary report thus: [T]here were signs that competition in the pharmaceutical sector might be distorted. The number of new chemical entities coming to the market seemed to be in decline. Moreover, generic manufacturers might not be able to enter the markets as quickly as one would expect. The Commission therefore concluded that the pharmaceutical sector required an in-depth investigation.60

What is there to show for all this? In my view nothing. Here is a quick, no exhaustive list. 1. Absolutely no useful insight as to why less chemical entities coming on the market. Is that because, like a gold-mine the seams of possible new medicines are running thin, or because the regulatory requirements have become so stringent that it is much harder to 60

EC Pharmaceutical Preliminary Report, supra note 1, at 22.

648  CHAPTER VIII: COMPETITION LAW

2. 3. 4.

5. 6. 7. 8. 9.

pass them, or because in the U.S. the fear of class actions by a few patients who suffer side effects has made the industry more defensive. Certainly it is wholly improbable that the industry has given up looking for new important drugs—preferably blockbusters. An indication that minor improvements should not be patentable—does that mean that patent offices should employ competition lawyers. Does the Competition Directorate think that there should be no patent incentive except for big inventions A serious revelation that the Competition Directorate does not really understand how the patent system works and has always—complaints about clusters, using patents to restrain competitors are in truth complaints about the system itself—there is nothing special about the pharma sector here. A conclusion that big pharma has tried, largely unsuccessfully, to use patents to delay generic entry. Even the 4 months for big products is not shown to be caused by pharma companies as opposed to the failure of governments to settle prices or regulatory delays. A complete failure to appreciate that all the players concerned are big and well able to look after themselves. This is not an industry which sells to the public or to small purchasers. A complete failure to understand that we are talking about a global industry—R&D is for the world, not for Europe alone. To do the job seriously the whole world position would need to be looked at. A dangerous tendency to want to interfere in the settlement of actions. Another dangerous tendency to equate a failed legal action as somehow abusive or anticompetitive—there was no attempt to identify actions which were so bad as to amount to an abuse of process.

So what positives do I get from the report. Just a few, all of which were well-known before: 1. 2. 3. 4.

The need for a single European Patent Court The need for being able to deal with bad patents quickly; The need for something to be done about the EPO opposition process; The need for tidying up the EPO application procedure—for instance by stopping or reducing voluntary divisional applications which make it harder for third parties to work out what they can do.

As many of you will know I was asked by the Commission to comment on the inquiry when the preliminary results were launched. For convenience I attach my paper (also now published). I stand by everything I said in it.

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  649

APPENDIX B

Patents and Pharmaceuticals — a Paper given on 29th November at the Presentation of the Directorate-General of Competition’s Preliminary Report of the Pharma-sector Inquiry The Rt. Hon. Sir Robin Jacob61 I begin by qualifying myself to speak. From the late 60s a significant part of my work has involved the pharmaceutical industry: first when I was a barrister and from 1993 as a Judge. I have been in, and presided over many battles about pharmaceutical patents. Those battles have not only been about validity and infringement but other, economic matters too. Thus until 1977 under the U.K. law62 allowed anyone to apply for a compulsory licence under a patent for a medicine. And until then a patentee who had not got adequate remuneration from his patent before the normal date of expiry (16 years from application) could apply to the court for an extension of term—a much more sophisticated equivalent of a supplementary protection certificate. It was more sophisticated because it involved a deep inquiry into how much money the patentee had made in capacity as a patentee. And after 1977, when the term of patent went up to 20 years, pre-1977 patents got 4 more years but subject to a licence of right. Both sorts of licence involved deep inquiries into costs and profits in order to set the royalty rate. Over the years I have seen bad behaviour by both big pharma companies and generic companies. I am neither pro nor against either of them. I am a judge. My job is decide who is right in fact and law. I begin with two quotations. The first is from the Pied Piper of Hamelin: “If I can rid your town of rats Will you give me a thousand guilders?” “One? fifty thousand!”—was the exclamation Of the astonished Mayor and Corporation.

Later, when the rats had all been drowned, the Mayor said: “So, friend, we’re not the folks to shrink From the duty of giving you something to drink, And a matter of money to put in your poke; But as for the guilders, what we spoke Of them, as you very well know, was in joke. Beside, our losses have made us thrifty. A thousand guilders! Come, take fifty!” 61 A Judge of the Court of Appeal of England and Wales, in charge of the Intellectual Property List. A judge since 1993, before that a barrister in practice at the Patent Bar from 1997. 62 The Patents Act 1977, c. 37, § 41 (Eng.).

650  CHAPTER VIII: COMPETITION LAW So it is with pharmaceuticals. Before the invention of a new drug we would willingly pay for it. After the risking and investment have produced a new medicine there is a great temptation to say the price is too high. My second quotation is from a 1947 small booklet63 by T.A, Blanco White:64 There is … a way in which a monopoly in an important invention may be kept alive after the patent has come to an end, and that is by patenting large numbers of minor improvements to the original invention… . Provided the patented improvements represent genuine development over the period during which the original patent is in force, and provided they are patented with determination and persistence, by the time the original patent expires a would-be imitator should be faced with this situation: that the article described in the original specification is too inferior to contemporary designs to be commercially saleable, while he cannot imitate the newer models without risking an action for infringement of so many of the improvement patents, that he would almost certainly lose in respect of some patent or other. Even if he were to win the action on enough of the patents to let him go on manufacturing without any fundamental change in his design, the cost of fighting and losing the action as a whole would still take much of the profit out of his venture. For this reason the existence of a mass of improvement patents is often a sufficient deterrent to would-be imitators. The original manufacturer’s position need not deteriorate with further lapse of time: he should always be some years ahead in design so far as patentable improvements are concerned, while the loner he keeps the field to himself the greater the advantage he has in manufacturing experience. His monopoly will last until some competitor comes along with the skill needed to “design round” the more dangerous patents and the courage to fight a patent action if necessary; how long this will be will depend as usual on the importance of the market covered by the monopoly, as well as on the rate at which he continues to devise new patentable improvements. In the past, such monopolies have sometimes lasted a long time.

This passage demonstrates that there is nothing new about what the Commission calls “patent clusters.” Nor that they are confined to pharma patents. On the contrary any experienced patent lawyer will tell you that clusters of improvement patents are a feature of nearly all industries. It is a bit worrying that the Commission seems to think that it has discovered something new and special to the pharma industy. I now proceed to some sure foundations, essential for understanding this industry. The following matters are really beyond any reasonable argument: 1. Most pharmaceuticals cost very little to make. All you need per dose is a very small amount (typically, say, 10 mg) of a chemical itself fairly easy to make. A kilogram of active material will be enough for 100,000 doses. Putting it in picturesque terms: drugs cost tuppence a bucket and a bucket is enough for a nation. 2. So the selling price of a patented medicine is way, way, above its manufacturing cost. Unlike for instance an engineering product, a patented medicine cannot be and simply is not priced on the basis of cost of manufacture plus a mark up. 3. Patented medicines are priced taking into account the current cost of research and development. To that is added overheads, marketing costs, the small amount of manufacturing costs and a profit. On a more sophisticated analysis one adds in the cost of capital employed. The key thing for the purposes of the present debate is this: the income produced by the sales of today’s patented medicines pays for the ongoing R&D which may lead to new and better medicines. The Commission in some places talks about “recouping” investment. That can be misunderstood. No one can or could run a research based pharmaceutical company on the basis of trying to work out how much it cost to invent and develop a drug and get a return on that. The pharma 63 64

T.A. Blanco White, Patents for Inventions and the Registration of Industrial Designs (3d ed. 1962). Later QC one of the most influential writers thinkers about IP law in the post-war era.

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  651

industry is the same as most of us: current income must pay for current research and all the other things a company does (promotion, cost of capital employed, cost of overheads, dividends, etc.). The most important figure in the Preliminary Report is that current R&D costs are 17% of turnover.65 That is much higher than most if not all other industries. I am sorry that the interim report somewhat belittles the figure by added that only 1.5% is “basic research.” I am not sure I know what is meant here, but it does not matter. It is no good finding a potential suitable molecule. Unless you spend the money and time to find out if it really works and is safe, it is no use. Assuming the figure is indeed 1.5% it would come to nothing without the remaining 155%. 4. It is the patent system, which has made the advances in medicines possible. Although economists sometimes debate whether the patent system is useful generally, no one has ever seriously challenged its place for medicines. And that is because it is so obvious that without a reliable patent monopoly there is simply no incentive to invest. The entire period of the command economy of the Soviet Union did not produce, so far as I know, any major pharmaceutical product. And in the West, even in those rare cases of an important invention being made at a University (e.g., the cephalosporin antibiotics) or by a small inventor or company (e.g., the anti-epilepsy drug sodium valproate), it has been the pharmaceutical industry which has undertaken the risk of the considerable costs of development. 5. Promotional expenditure is indeed higher than R&D at 23% of turnover. There is perhaps an innuendo that it is too high—and for the whole industry. Such an inference should be rejected. Firstly such promotion should not be thought of as analogous to promotion to the public, of a cosmetic, for instance (“Because you’re worth it”). Promotion aimed at consumers, is typically a greater proportion of turnover. But more significantly we are here concerned with promotion to the medical profession. It is essential that the benefits and side effects are well-communicated. Experience over the years shows that this is not easy. The profession is conservative and it takes a lot to persuade a doctor to prescribe a new medicine. Of course there have been glaring examples of overelaborate promotion. For instance I can remember an article in the early 1970s, by Bernard Levin in The Times attacking the promotion of a new drug called “Nobrium.” But merely stating the average figure is miles from suggesting any breach of competition law rules. It is not for the Commission to tell drug companies how to promote their products, any more than it is for the Commission to tell companies in other sectors how to do so. 6. Moreover the nature of the investment is risky. Most research leads nowhere. The few winners must pay for all the losers. And in recent years the number of really important drugs coming forward seems to be diminishing. It is in the nature of investors—human that they are—that the higher the risk the more reward is needed to persuade them to put their money up. 7. The time of true monopoly is likely to be very limited. Although the term of all patents is the same—20 years from application, in reality a new drug is unlikely to get more than 10 or 11 years even with the supplementary protection system. Personally I do not think that is enough time to encourage the risk and expense involved in seeking further medicines, but that is beside the point. The short period may help explain some of the conduct by way of “evergreening” the subject of the Commission’s inquiry, but it is more likely that it would happen whatever the period of full protection. 8. Generally speaking, in Europe, drug prices are the subject of high-level negotiation between powerful players. In my country and Spain for example it is essentially a matter between the companies and the Government. Governments have traditionally shied away from attacking patents or getting involved in disputes about validity of bad pharma patents. I do not know why, they are, after all, the customers. 65

EC Pharmaceutical Preliminary Report, supra note 1, at 35.

652  CHAPTER VIII: COMPETITION LAW 9. The generic companies have no or very limited research costs. Nor do they undertake anything like the risk involved in original research. Nor do they promote their product save to the limited extent of trying to persuade doctors to promote generically—something which is much more powerfully pressed by governments. 10. That is not to say that generic companies do not perform a useful function. On the contrary once a patent has expired these companies will enter the market and cause prices to fall. The more companies enter the market the faster the prices fall. And when a product comes off patent it is right that prices should fall. 11. Generic companies are not actually in favour of low prices. Just as in the case of the big research based companies, they are in business for a profit. The lower the prices, the less the profit. It is human nature for a generic company to want to be close to a high price. That is why, for instance, we often receive evidence from generic companies about how important it is that they should be first in the market. This can happen, for instance, where a generic company believes for one reason or another that it is ahead of all the others. If it can be first it can and very likely will set its initial price at something like 10% below the patentee’s. That will very likely take a substantial portion of the market and with a very large profit margin. Generic companies have traditionally, and not surprisingly, waved the flag of “lower prices”— the position has been so throughout my entire career. They never talk about the profits they themselves make. The Commission has not inquired into how many multi-millionaires have made their money by selling “me-too” pharmaceuticals with no corresponding research benefit. 12. There can be little doubt that a number of drug companies have sought to protect their market monopolies beyond the life of their basic patent by spurious or near spurious patents—a process generally called evergreening. And there is no doubt that, as the Canadian Supreme Court recently observed66 “Evergreening is a legitimate concern.” 13. Legal questions in the pharma industry are nearly always about the validity of patents rather than their scope. This is because there is seldom a real argument about the extent of protection. The claims are clear—normally to a class of chemical compounds or often to a particular compound. This has important consequences as regards the question of how these questions are to be resolved 14. Finally the whole subject of patents and medicines and medical treatments is fraught with emotion and, dare I say it, irrational prejudices. Some say: “how can big pharma charge the ill for medicines that are so cheap to produce? Down with these greedy companies.” We even have in the European Patent Convention a specific exclusion from patentability of methods of medical treatment which has led to a lot of convoluted quasi-nonsensical reasoning by way of trying to get round the rule as far as possible. Personally I think the rule should go. If you want better methods of medical treatment, the patent system is the way to encourage it. I turn to some of the subjects raised by the inquiry: 1. “Raising the bar.” The idea here is that patent offices should do better—that they should get closer to the ideal of granting all good patents and refusing all bad ones. How that is to be achieved given the ever-rising flood of applications and the ever-increasing importance of Chinese prior art, I have no real idea. Pharmaceutical patents are only a minor proportion of the total numbers of applications. Patent offices have limited resources: they have no mandate and should have no mandate to examine pharma patents by different standards from those for other subject matters. Here I should point out that the phenomenon of patents for trivial or non-inventions is by no means confined to those for pharmaceuticals. Far from it. Anyone with experience of other 66

Apotex Inc. v Sanofi-Synthelabo Can. Inc., [2008] 3 S.C.R. 265, 2008 SCC 61 (Can.).

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  653

fields, for instance, telecom or computer related inventions, would be familiar with abundant examples. No doubt if there were more co-operation between patent offices around the world on things like searches some savings and perhaps improvements could be made. But I think it is unrealistic to suppose that we can go back to the pre-EPC days when passing the German or Dutch Offices (and their examination procedures were very slow) was a kind of hallmark of a good patent. Moreover I am wholly unconvinced that even giving more time for an examiner to consider an application would make much a difference in the pharma field. Let me explain why by reference to a recent case in our courts. Simplifying a little, a pharma company had a patent taken out in 1980 over a basic valuable new compound. It got the product onto the market very quickly—in 1987. In 2000 it took out a new patent covering what it said was a new crystalline form said to be particularly useful for formulation. You could not tell from reading the old patent anything about the crystalline form. So you could not tell that the later patent was in fact for the old product. It is not surprising the patent was granted. The Office had no choice. In England the patent was knocked out by the High Court in fairly short order and my court, the Court of appeal, upheld the result soon after. This is important. Fiddling with the law will not make any difference to the reality: it is this that one cannot ever expect the grant of a patent by a Patent Office to be also a certificate of validity. It never has been and never will be. In truth a Patent Office is a kind of coarse filter— rejecting clearly bad cases but having to allow those which may be good. One should not feel too depressed by this major truth—particularly in the pharma industry where the legal costs of both innovating companies and generic companies are only a minor proportion of what is stake. 2. I wish to emphasise that the phenomenon of evergreening is not confined to the pharma field. Nor is it new. Far from it. Every patentee of a major invention is likely to come up with improvements and alleged improvements to his invention. By the time his main patent has expired there will be a thicket of patents intended to extend his monopoly. Some will be good, others bad. It is in the nature of the patent system itself that this should happen and it has always happened. There is nothing new about “evergreening”, only the name and the implication which flows from the word, that there is something sinister going on and that it has only recently been discovered. My quotation from Blanco White shows this.67 I would add that the particular figure of “up to 1,300” patents for a cluster needs more detail. I do not believe it to be typical. In any event one one needs to divide the figure by 27 (for the membership of the EU). But whether the patents are good or bad is not mentioned. For all we know they are for perfectly good inventions, perhaps only incremental. It has never been the law that patents are refused for incremental non-obvious improvements. Nor should it be. 3. I have mentioned that some have proposed changes to patent law. Let me examine those proposals in more detail: (a) It is suggested there should be an obligation upon the patentee to disclose all information known to it material to patentability. This has never been the law. Moreover it is impossible to see how it can work satisfactorily or at a reasonable cost. Must there be disclosure of all the patentee’s documents and legal advice? Is there to be cross-examination of the patent agent? What is the cost of the proposal— every case could involve complicated question of what the patentee knew, when he knew and what he should have known. They have some of that in the U.S.—something which contributes to the extreme cost of litigation there. 67

See supra note 63 and accompanying text.

654  CHAPTER VIII: COMPETITION LAW Nor is the proposal necessary—if there is material which is a clear knock-out it will normally emerge in the course of a proper and ordinary search. So far as pharma is concerned I know of no case where material prior art was hard to find. (b) It is suggested that better third party participation should be available at the pre-grant stage. Already third parties can submit prior art to the Office at that stage—and make observations. But, unless you beef up the whole process—in effect introduce pre-grant opposition—it just will be of little use. And a long time ago the founders of the EPC rejected—rightly in my view—pre-grant opposition. We had it in my country and the grant of patent rights would be held up for years. Moreover the proposal is unlikely to be used by generic companies. Currently they do not or seldom oppose a patent at a time where there is no product on the market protected by it. The reason is simple. You have to oppose (i.e., apply for revocation) within one year of grant. Grant, even if delayed, is likely to be within at the worst about 8 years from application. At that stage the basic product will probably not be one the market. And if it is—because the patent is a late evergreener—the generic companies (and governments) have another remedy—attack it in the courts. Of course if the evergreening patent is applied for when a financially attractive product is on the market, generic companies may oppose. If they do they have a fair point that the period of opposition is likely to be long. (c) It is suggested current opposition proceedings should be faster. With that I wholeheartedly agree. I have said so for years. But the problem is quite general, and far from being confined to pharmaceuticals. I would favour an in depth study of the practice and procedures of the EPO— along with education of the profession as to—as to how such speeding up could be achieved. (d) There is complaint that courts are willing to grant interim injunctions. So they are: I have little sympathy with the complaint for two reasons. First generic companies can attack validity earlier than they do—“clear the way” as I put it in one of judgments. There can be no interim injunction if they take that elementary course. Second I have long wondered why perhaps the most affected party—the paying ultimate customer, normally a government, does not intervene when the injunction is sought: to say it wants to be compensated if it turns out that the patent is no good and there never should have been an injunction. 5. There is a suggestion that pharma companies have used litigation against regulatory authorities in order to hold up authorisation. Again this is nothing new. Similar actions were taken in the 1970s.68 Sometimes the companies are right, even if they are more often than not, wrong. To say they should not go to court on a weak case would be a serious threat to access to justice. 6. Generally the Commission appears to take a censorious attitude to big pharma companies resorting to litigation to attempt to delay generic competition. The old French proverb comes to mind: “Ce chien et très mèchant. Quand on l’attaque, il se défend.” There is nothing new in any of this. It was suggested that the Commission has discovered conduct which is “shocking.” On the contrary it has “discovered” conduct which is normal and has been an inevitable feature of the industry for many many years. All that is new are the numbers—none of which are particularly surprising. 7. One thing is clear—and again this is by no means confined to the pharma sector—the need for a strong and fast Central Patents Court for Europe sticks out a mile. And in this connection it should be noted that proposals for “bifurcation”—for a court splitting the issue of validity and infringement in the current proposals will not help that speed. Under the proposal if a patentee starts a case in a regional court and the defendant raises invalidity the question of 68 See e.g., Hoffman-La Roche & Co. AG v. Sec’y of State for Trade and Indus. [1975] 1 A.C. 295 (a failed attempt at attacking a price control order by an interim injunction to restrain its coming into force).

PART B: DG Comp Pharma Inquiry: The Implications for Innovation  655

validity can be transferred to a central court. All that will take time. And the longer a patentee can keep uncertainty going even for a patent ultimately shown to be invalid, the worse. 8. Do Competition Authorities have a part to play where a patent is obviously invalid? Should a company be punished for applying for (or if not that at least attempting to enforce) such a patent? I do not know, and even if I did, as a judge I could not comment, but the question is worth asking. I can say this: it would be seriously dangerous to have a rule that applying for or seeking to enforce a patent of doubtful validity was a violation of competition law: most companies in the world would be guilty on that basis. Courts are the basic places for deciding on the validity of rights—to punish someone for going to court may involve conflict with Art. 6 of the European Convention on Human Rights.69 And besides the true remedy for really bad patents is their swift demise in speedy revocation proceedings brought before the patent can do any damage. 9. So therefore I suggest that what needs doing is: (a) forgetting about all changes to the law of grant; (b) a serious look at current opposition procedures within the EPO; and (c) above all the creation of a respected, fast, and reliable European Patent Court. That is as true in the pharma sector as in any other. It is particularly that last proposal which matters for European industry as a whole. Evergreening by bad patents can in the end only be dealt with by courts knocking them out swiftly. That has always been true. 10. Finally although there have been bad patents in pharma sector, it is important to keep things in perspective. As a whole patents for pharmaceuticals have greatly benefitted and continue to benefit mankind greatly. Changes to the system should be viewed with great care— on the whole it works very, very well. One should be very careful to avoid panic-driven or emotion-led changes which could damage an important and beneficial part of industry. The Commission repeatedly says that it does not want to damage the pharmaceutical industry and that it recognises how important patents are to it—it sounds to me a bit like Mark Anthony emphasising that Brutus was an honourable man. The big truth is that if you damage the income stream of research companies, you are going to imperil future research at the expense of European—indeed World-citizens. Yes, you will save money now, but at the cost of fewer future medicines.

69

ECHR, supra note 17, Art. 6.

Chapter VIII

Competition Law Part C: Policy Interplay Between IP Rights and Antitrust/Competition Law: How Do We Get It Right? Moderator Prof. Hugh C. Hansen

Fordham University School of Law (New York, N.Y.) Speaker Josh Holmes

Barrister, Monckton Chambers (London) Panelists Hon. William E. Kovacic

Prof. Valentine Korah

Commissioner, Federal Trade Commission (Washington, D.C.) Harald Mische

Case Handler, DG Competition, Directorate D, European Commission (Brussels)

University College London (Emeritus) Hon. Alice Pezard

Chief Justice, Cour de Cassation, French Commercial Court (Paris)

Thomas Vinje

Clifford Chance (Brussels) PROF. HANSEN: Good morning. Welcome to the Breakfast Seminar Roundtable. We were waiting for the people who use the software to time speakers, but rather than wait any longer we are just going to start and do it the old-fashioned way. We have a great panel today and a great speaker. I will introduce the panel later. For now, this is Josh Holmes, who you might remember from the Plenary yesterday. He is a barrister at Monckton Chambers.

658  CHAPTER VIII: COMPETITION LAW MR. HOLMES: Thank you, Hugh.

I had forgotten this peculiarly American blood sport of the breakfast seminar. I first encountered it when I did an internship with a Chicago law firm. They had a session every Friday morning entitled “Tax and Muffins.” That was the only way they could get people to attend, I think, with the muffins. We all sat there bleary-eyed. And now I find myself actually having to speak at one of these things. I don’t think I have ever discussed such an interesting and important topic this early in the morning. My topic this morning is the evolving interplay between competition/antitrust, on the one hand, and intellectual property, on the other. I have chosen as a working title for my talk “All Friends Now?” On the one hand, this is intended to reflect the widespread consensus apparent in the European Union and the United States that historical tension so between the two bodies of law are now much less pronounced than they once were; but, on the other hand, I have included the question mark to raise a doubt about the extent to which stubborn sources of tension may nonetheless persist. Clearly, if everything were sweetness and light, it would be hard to fill up half a day with discussion of antitrust and IP. But, having seen the program, there are a whole host of topics, and it is clear that the antitrust/IP interface continues to throw up a stream of difficult and controversial topics. [Slide] Before turning to the difficulties, I will just sketch out the prevailing view of the relationship in the European Union and the United States as I see it, which consists, I would suggest, of three elements. The first is that competition and antitrust, on the one hand, and intellectual property, on the other, didn’t used to get along. Competition and antitrust intervened to shape intellectual property rights, and even in extremis to limit them by requiring compulsory licensing of intellectual property rights.1 However, it has since been seen that various misunderstandings underlay these differences. The perceived conflict between intellectual property’s protection of exclusivity and competition/ antitrust’s objective of market access for competitors has been seen to be a bit of a straw man. As a result, the misunderstandings have now been largely resolved. There are a few technical questions to be tackled, but generally competition/antitrust and IP are widely seen to pursue compatible, and indeed complementary, goals. So that is a view that is quite widely voiced. [Slide] I propose to test that view by means of the following structure. Firstly, I will analyze the causes of historical conflict between competition/antitrust, on the one hand, and IP, on the other. Secondly, I will briefly examine the basis for asserting the present complementarity between the two fields. Thirdly, I will seek to identify reasons to expect continuing tensions. Particularly, European Union lawyers will be well familiar with continuing difficulties, continuing uncertainties, and it is much too early to suggest that the two fields can now be said to rub along nicely. [Slide] So, firstly then, why the conflict? [Slide] At its core, the very real antagonism in both U.S. and EU case law between antitrust principles and IP rights may, in part, come down to a matter of conflicting instincts. Antitrust enforcers have traditionally understood their role, put at its most crude, as keeping markets open. Whereas, by contrast, intellectual property lawyers have sought to carve out a right to exclude in the intellectual sphere at least partly analogous to that enjoyed by the owners of physical property.2 1 See United States v. Besser Mfg. Co., 343 U.S. 444, 447 (1952) (imposing compulsory licensing on a “fair” and nondiscriminatory basis); Joined Cases C-241/91 P & C-242/91 P, Radio Telefis Eirrann (RTE) & Indep. Television Publ’ns (ITP) v. Comm’n, 1995 E.C.R. 1-743 [hereinafter Magill] (ECJ upholding a compulsory copyright license imposed by the European Commission in favor of Magill). 2 See Andrew Beckerman-Rodau, “Patents are Property: A Fundamental But Important Concept”, 4 J. Bus. & Tech. L. 87 (2009); Peter S. Menell, “Intellectual Property and the Property Rights Movement”, Regulation, Fall 2007, at 36,

Part C: Policy Interplay Between IP Rights and Antitrust/Competition Law  659

Now, of course, this is much too crude a distinction to carry water expressed in those terms. It is doubtful whether anyone would ever have explicitly articulated and defended an opposition in such stark terms between exclusivity and access. The flaws in that opposition, to which I will turn in a moment, are all too apparent. But the visceral differences in the selfunderstanding of antitrust and IP lawyers shouldn’t be totally excluded. They may have set antitrust enforces on a trajectory of encroachment upon the efforts of IP lawyers to demarcate exclusionary rights in intellectual property. The appearance of conflict has, no doubt, been fueled by loose talk of patent and copyright monopolies,3 identifying exclusivity with monopoly, which of course is the bête noir of antitrust enforcers. [Slide] It has also been sustained by various subsidiary propositions of a more intellectual character. In particular, these have centered on the perceived inferiority of intellectual property rights. This has drawn on Arnold Plant’s insight that whereas physical property rights manage scarcity, intellectual property rights go to create scarcity.4 Intellectual property rights, immaterial goods like ideas and inventions, are subject to non-rivalrous consumption, unlike physical property. They are a partial public good with zero marginal cost of expanding consumption—the more people who use it doesn’t increase the cost of production, subject to the very minor costs of reproduction and transmission.5 Exclusion thereby entails a social cost. Necessarily, if you set a price on intellectual property, you are excluding some who would be willing to pay less for it to obtain access, but nonetheless above marginal cost. In consequence of these economic properties, exploitation of intellectual property rights very often involves price discrimination. It is rational for the holder of an IPR to seek to discriminate in terms of price, and frequently also to resort to tying and bundling, activities which raise the hackles of antitrust enforcers, or have traditionally done so.6 So that sets up the opposition. It offers a sort of historical account of why an opposition may have arisen. [Slide] Now I would like to offer two explanations for the prevailing view that that tension is misstated, is misunderstood. The first argument which is used to show that competition law and IP law are not in conflict, but rather are complementary to each other, is to point out that few intellectual property rights in fact confer market power. Copyrights and trademarks almost never and patents sometimes, but in most fields you will find good substitutes exist, so there is competition at some level of the value chain. Moreover, many patents are registered defensively.7 Many others are never licensed, or, if licensed, never produce royalties. Competition and access are therefore not meaningfully available at http://www.cato.org/pubs/regulation/regv30n3/v30n3-6.pdf. But see Richard A. Epstein, “A Response to Peter Menell: The Property Rights Movement and Intellectual Property”, Regulation, Winter 2008, at 58. 3 See Solveig Singleton, Progress & Freedom Found., “The Patent Prejudice: Intellectual Property as Monopoly”, Progress on Point, Oct. 2006, available at http://www.pff.org/issues-pubs/pops/pop13.28 intellectualpropertyasmonopoly.pdf (arguing against broadly calling copyright and patent rights “monopolies” in the sense that they hurt consumers). 4 See Arnold Plant, “The Economic Theory Concerning Patents for Inventions”, 1 Economica 30 (1934). 5 See id. 6 See Benjamin Klein & John Shepard Wiley Jr., “Competitive Price Discrimination as an Antitrust Justification for Intellectual Property Refusals to Deal”, 70 Antitrust L.J. 599 (2004) (discussing price discrimination by intellectual property rights holders and the use of tying conduct, arguing that it actually increases innovation). 7 For example, RPX Corporation holds itself out as a “defensive patent aggregator.” It’s purpose is to acquire patents to “keep them out of the hands of NPEs,” otherwise known as non-practicing entities or “patent trolls.” See Robert M. Masters & Brock S. Weber, “Intellectual Property Cases and Trends to Follow”, 21 Intell. Prop. & Tech. L.J. 14, 21 (June 2009).

660  CHAPTER VIII: COMPETITION LAW impeded by intellectual property rights, and antitrust is in most cases not engaged by intellectual property at all. [Slide] A second, and more fundamental, argument which has gone to resolve the conflict is to say that even where market power is conferred by an intellectual property right, this should not be regarded as a bad thing. This seeks to tackle head on the argument that intellectual property rights are in some way inferior from physical property rights by pointing out that the other crucial characteristic of physical property is that it serves not only to ration consumption but also to promote dynamic efficiency. Owners can invest safe in the knowledge that they may reap where they have sown, and intellectual property rights similarly generate incentives to create and innovate by means of exclusion. Without intellectual property rights, the market for intangibles would therefore suffer from the usual market failure associated with public goods, free riding and under-production.8 So, in a nutshell, it is misleading to say that intellectual property creates scarcity. Without intellectual property, there would be fewer inventions, fewer intellectual creations. So it would be more accurate to say that intellectual property creates the conditions which overcome the scarcity which would otherwise occur in the intellectual arena. To conclude the argument, competition/antitrust law should therefore recognize that exclusivity may encourage access in the long run, although it excludes price competition in the short term, and antitrust should therefore not seek to reopen the tradeoff between access and incentives already enshrined in IP law. Now, in the States I think it would be hard to find an IP or an antitrust lawyer who would really seriously contest that basic core analysis. So the notion of a head-on collision between antitrust and IP has been largely dissolved. In Europe I am not so sure. It will be interesting to hear the views of the panel on that. [Slide] The underlying force of these two arguments is derived from a trend towards a common economic analysis in both disciplines. The conflict between IP and competition is remedied by reference to shared economic rationales. The rise in an economic or efficiencybased account of both competition and antitrust, on the one hand, and IP, on the other, serves to dissolve the differences. The upshot is that intellectual property rights are generally understood as benign from an antitrust viewpoint, reducing the risk of unsympathetic antitrust incursions on exclusive rights conferred by IP. [Slide] Now, there are, I would suggest, despite this rosy picture, at least five potential causes for continuing tensions. They have been particularly notable in recent European Union case law. [Slide] The first point to make is that other objectives remain. Shared economic analysis is not the only rationale for competition/antitrust, on the one hand, or intellectual property, and there is a continuing risk of formalism in relation both to IP, with rigid, formalistic, overly broad claims to intellectual property protections, and, certainly within the field I am familiar with, within the competition/antitrust field, there is a risk of formalism, and in the European Union context there is the crucial dimension in the context of competition law that singlemarket concerns play a role alongside efficiency concerns. This has shown a very significant influence in the field, for example, of parallel trade in pharmaceuticals, as illustrated by one recent strand of case law, the Syfait9 and Sot Lélos10 cases. Apologies to any Greek speakers in the audience for my mangling of those names. 8 “Information resources face the well-known supply-side problem, common to public goods: the inability to (cheaply) exclude competitors and nonpaying consumers (free riders) presents a risk to investors perceived ex ante (prior to production of the good), and this risk may lead to undersupply.” Brett Frischmann, “The Pull of Patents”, 77 Fordham L. Rev. 2143, 2156 (2009); see also Mark A. Lemley, “Property, Intellectual Property, and Free Riding”, 83 Tex. L. Rev. 1031, 1031 (2005). 9 Case C-53/03, Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) v. GlaxoSmithKline plc, 2005 E.C.R. I-4609. 10 Case C-486/06, Sot. Lelos kai Sia EE v. GlaxoSmithKline AEVE, 2008 E.C.R. I-7139.

Part C: Policy Interplay Between IP Rights and Antitrust/Competition Law  661

Those cases concerned a claim in Greece that GlaxoSmithKline was obliged to supply limitless quantities of its patented pharmaceutical products in Greece, where low prices are imposed by law, to serve as a source of supply for parallel traders. Although, of course, that case did not involve directly the licensing of an intellectual property right, a requirement to supply a patented product will be just as effective at undermining the ability of a patent holder to exploit his invention. The European Court of Justice has now held in the Lélos case that there is only a requirement to meet “ordinary orders,” thereby rejecting the European Commission’s view that limitless quantities should be supplied. But this really seems to be a retreat from single-market concerns into exactly the kind of formalistic reasoning that I discussed previously. It is very difficult to know what “ordinary orders” means. So the problem is thrust back on the national courts to resolve. The tendency, of course, will be then to freeze the supplies made available in preceding years to pharmaceutical wholesalers, and the status quo may already involve the supply of significant volumes for parallel trade, as the facts of the Greek case appear to indicate. [Slide] A second continuing cause of tension is continuing doubts among antitrust lawyers about the value of certain intellectual property rights. Now, intellectual property lawyers may well say, “Are antitrust lawyers really well placed to assess the value of IPRs?” But nonetheless this has clearly played a role in two European cases. By way of example, in Magill11 compulsory access to copyrighted television listings was clearly regarded by the Court as an IPR of less value, if it was an IPR at all. Advocate General Jacobs in his subsequent opinion in the case of Brönner12 recognized that fact and explained Magill on that basis. In IMS,13 similarly, competition commentators questioned the value of the database rights at stake, which appeared to be protected by European Community law. [Slide] A third reason for continuing willingness by competition/antitrust lawyers to make incursions on the field of intellectual property is a willingness in individual cases to secondguess the access/incentive tradeoff. Recent European Community refusal-to-deal case law shows exactly this willingness to second-guess the access/incentive tradeoff, I’d suggest. In the European Court of Justice’s judgment in the IMS case and in the subsequent Commission decision in Microsoft14 upheld by the CFI,15 a key criterion for compulsory licensing is the requirement that a new product will thereby be facilitated. Therefore, the European courts on a broader basis than the U.S. courts, as I understand it. Basically, the Supreme Court in Trinko,16 I think, more or less rejected or was extremely skeptical about the notion of a requirement to deal in any context, and therefore by implication in the intellectual property context. In the EU context, you have a willingness to require licensing of intellectual property rights where that may facilitate further innovation. Now, you might think that this is a sensible method of promoting further innovation, but it does suggest that competition authorities and national courts, which are also empowered to enforce competition law, are able to decide when the cost of exclusion exceeds the benefits, when the costs of ex ante incentives will be overridden by the benefits in terms of requiring licensing to an innovator. [Slide] A fourth reason for continuing tension arises where there is perceived regulatory gaming of the intellectual property system. Now, this might arise with the provision of false 11 Case IV/31.851, Magill TV Guide v. ITP, BBC & RTE, 1989 O.J. (L 78) 43, aff’d, Joined Cases C-241/91 & C-242/91, Indep. Television Publ’ns Ltd. v. Comm’n, 1995 E.C.R. I-743. 12 Case C-7/97, Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs und Zeitschriftenverlag GmbH & Co. KG, 1998 E.C.R. 1-7791. 13 Case C-418/01, IMS Health v. NDC Health, 2004 E.C.R. I-5039. 14 Commission Decision relating to a Proceeding Under Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation (Case COMP/C-3/37.792), COM (2004) 900 final, 2004 O.J. (L 32) 23 (Mar. 24, 2004) [hereinafter Microsoft Commission Decision]. 15 Case T-201/04, Microsoft Corp. v. Comm’n, 2007 E.C.R. II-3601. 16 Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 407 (2004).

662  CHAPTER VIII: COMPETITION LAW and misleading information regarding intellectual property rights to regulators or standardsetting organizations. An example would be the U.S. Orange Book consent orders. I don’t pretend to understand your FDA licensing system—Horrendously complicated cases. But it is clear that at the root of some of those cases at least is a failure to abide by the requirements of the intellectual property and FDA legislation itself. In those cases, you might say really that antitrust is pursuing a complementary goal to intellectual property and FDA enforcement. I am much more cautious myself about cases where the alleged misuse of regulatory procedure involves conduct which is not itself prohibited under the intellectual property rules or under the drug authorization rules, as in the AstraZeneca case.17 [Slide] And finally, a reason for tension may be a desire to formulate administrable rules, rules that are clear and concrete and precise enough to be applied by those that lack specific expertise in the more complex economic questions which arise. The presumption of market power, which was understood prior to the Independent Ink18 case to exist in the case of patent holders, might be an example of this in the U.S. context. In the EC context, you might see the new-product criterion in the IMS19 case as a kind of proxy for a more careful balancing of innovation versus ex ante incentives. The U.S. trend, of course, is to replace per se rules with an effects-based analysis.20 In the EC, there appears to be more of a focus on per se rules. The question is, of course, whether that is at too high a price. [Slide] I have spoken for long enough. I will skip my conclusion, mediating the conflict. It is basically a set of questions which really just dress up my own prejudices: • Should antitrust/competition law give further ground? I would suggest in the European context there is room for further movement. I think single-market concerns should not prevent price discrimination in the European context, at least where the price discrimination results from differences in the regulatory framework from Member State to Member State. The result is simply ultimately to harm consumers in the lower-priced states because pharmaceutical companies will bargain a good deal harder with governments in Greece, Portugal, and so on, where prices are low. Pharmaceutical companies will therefore not be able to recoup their investments in innovation differentially by means of price discrimination. • Secondly, should competition authorities and courts reopen the balance arrived at in IP legislation? Well, I am not an expert in IP law. I am skeptical as to whether it is possible to engage, certainly within the judicial process, in the kind of balancing that would be involved. • Are competition authorities and courts well placed to regulate terms of access? Well, a key difficulty with the requirement-to-license case law is that I have yet to hear a coherent account of the terms on which licensing is to be fixed, once you accept that marginal cost is not a benchmark, that being approaching or at zero. • Should competition law penalize evergreening practices permitted under IP and associated regulatory arrangements? I would say not where there is no prohibition under those arrangements themselves. Thank you very much. PROF. HANSEN: Thank you very much, Josh. There is a lot there to think about. 17 Commission Decision 2006/857, Art. 82 & Art. 54, 2006 O.J. (L 332) 24 (EC & EEA), available at http:// ec.europa.eu/competition/antitrust/cases/decisions/37507/en.pdf. 18 Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006). 19 Case C-418/01, IMS Health v. NDC Health, 2004 E.C.R. I-5039. 20 See, e.g., Leegin Creative Leather Prods., Inc. v. PSKS, Inc., 551 U.S. 877 (2007) (abandoning the per se rule for retail price maintenance); State Oil v. Khan, 522 U.S. 3 (1997) (maximum RPM agreements not per se illegal); Cont’l T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36 (1977) (non-price vertical restraints no longer per se illegal).

Part C: Policy Interplay Between IP Rights and Antitrust/Competition Law  663

Let me introduce the panel. We have Bill Kovacic, you already know from the Plenary Session, a Federal Trade Commissioner; Professor Valentine Korah, worldwide expert on competition law and antitrust, a long friend of Fordham; Harald Mische, a case handler in DG Competition of the European Commission, Pat Martone from Ropes & Gray in New York, I guess from Fish & Neave which merged into Ropes & Gray, as well, a wonderful leading firm in patents and IP; we know Judge Alice Pezard, Chief Justice of the Cour de Cassation Commercial Division from the plenary session; and Thomas Vinje from Clifford Chance, who has been around in this field a long time and is an world recognized expert. To start, let me ask the panel is there really a difference between the United States and Europe in terms of antitrust/IP policy; and, if so, why? Anyone want to address that? Bill? MR. KOVACIC: I think there have been two differences. One, highlighted by Josh, is the long-term/short-term tradeoff. I think historically the U.S. agencies have been more confident that entry and expansion by the firms over time would cure short-term problems. But I wonder if there will be a rethink of that with capital markets being in the shape they are now. Assumptions about entry and expansion depended heavily on having strong capital markets. As I understand it, those have suffered a bit in the last year. So there might be a reconsideration of whether or not entry and expansion are as fluid. The second is that the system of private rights in the United States is uniquely powerful. In U.S. competition law, as you know, private rights include mandatory treble damages,21 relatively easy assembly of class actions,22 and jury trials.23 I think our courts have been enormously concerned that that system over-deters in private cases. The way that they have adjusted is to change liability standards to make a finding of liability more difficult to establish. That is a crude way of compensating for overreaching on treble damages. That has pushed U.S. substantive doctrine in the direction of being more and more permissive in these cases. Those are two big differences I see. PROF. HANSEN: Okay, great. Anyone else? Pat? MS. MARTONE: Yes. Well, I agree that the difference is that in the United States the law of intellectual property is much stronger and much less likely to be regulated by the courts on an antitrust basis, but more likely that the patent law, for example, itself changes over the course of time, tries to seek balance in issues over liability and damages, but rarely is constrained by the courts on antitrust or even patent misuse defense. PROF. HANSEN: So one difference is the United States internalizes competition law or antitrust issues within IP, whereas Europe depends more on the external force of competition law to provide that. Would that be a fair assessment? MS. MARTONE: I still believe that the U.S. law is more concerned with innovation than competition. I think when the courts, as expressed by the courts, begin to feel that the intellectual property rights are being misused in some way, they will clarify and correct the law. But I don’t really think that competition is internalized in the IP law. I think it is, rather, whether the law has gone too far. I guess the consequence of that is competition. MR. KOVACIC: Hugh, I just have to respond to Pat’s comment. I see in cases like eBay24 and other Supreme Court decisions a bit of a rethink about whether the rights-granting process is working as well as it should. As a consequence, a reconsideration of whether or not some of 21 See Alfred L. Parker, “The Deterrent Effect of Private Treble Damage Suits: Fact or Fantasy”, 3 N.M. L. Rev. 286 (1973). 22 See Fed. R. Civ. P. 23; see also Jean R. Sternlight, “As Mandatory Binding Arbitration Meets the Class Action, Will the Class Action Survive?”, 42 Wm. & Mary L. Rev. 1, 29–30 (2000) (“Class actions have been praised widely for a variety of attributes including efficiency, improving access to the litigation system, and serving the public interest.”). 23 See U.S. Const amend. VII (right to a jury trial). 24 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006).

664  CHAPTER VIII: COMPETITION LAW the problems that have ended up historically as being antitrust problems are really rooted in the rights-granting process itself. That is a bit of a change underway. MS. MARTONE: Yes. Although I have to say that, even after eBay, our analysis shows that in most cases between competitors injunctions are still granted in patent cases. MR. KOVACIC: Yes. PROF. HANSEN: Are you saying that there is a conflict between innovation and competition? Actually, pro-innovation usually means more people innovating and competing, doesn’t it? MS. MARTONE: It should, but not everyone views it that way. PROF. HANSEN: Okay. Wouldn’t patent misuse be an example of internalizing in patent law antitrust concerns? MS. MARTONE: Yes. But it is different because antitrust provides a remedy, whereas patent misuse is a defense, and it is a very limited defense, and it is available only when someone has, for example, tried to extend the scope of their patent by tying or other issues, which are all now judged by a rule of reason,25 with one notable exception, and that is the charging of post-patent expiration royalties.26 So it is really a very limited defense that doesn’t really apply in many of the situations that we have discussed today. MR. KOVACIC: Hugh, I see the internalization happening across the system. There is a real interdependence between what our antitrust courts do and what courts do in IP cases. Antitrust courts have had a tendency over time, when they think that the IP system in some sense is overreaching, to push back by applying antitrust doctrines in a sometimes fairly crude way. Likewise, courts in IP cases, if they think the antitrust system has gone bonkers, also use interpretations of IP law to push back at antitrust oversight. So that is the interdependence that I see. That is not the best way to equilibrate, but I see that happening in a lot of cases. PROF. HANSEN: Thomas wants to say something. MR. VINJE: Yes. I think that there are differences, at least on the margin, between the United States and Europe insofar as there is more scope for invading the province of IP via antitrust law in Europe than in the United States. I think that those differences exist mainly for the reasons that Bill and Pat have addressed. The U.S. litigation system encourages exactly, I think, what Bill suggested. There is more internalization in the United States, in part, because, especially on the continent, I think there is less flexibility for the courts to do that internalization, to modify the IP laws in ways that will address antitrust concerns. But at the same time, I think one shouldn’t exaggerate the differences. For example, in the area of refusal to license, if we look over the years at the cases, we had Volvo27 and Renault,28 where a compulsory license was refused; we had Magill,29 where one was accepted; and then we went a long time until we had IMS,30 where the Court said “yes, maybe”; and then we had Microsoft.31 So that is quite a lot of years and very few cases. So one shouldn’t exaggerate the differences here. PROF. HANSEN: Let me just throw one more thing out. Could it be that, as I think Josh indicated, or maybe Bill, in the United States we have a very litigious society. We have an antitrust law that has a thumb-down on the side of plaintiffs, with treble damages and 25 See Ill. Tool Works Inc. v. Indep. Ink, Inc., 547 U.S. 28 (2006) (patented products involved in product tying arrangements are not presumed to have market power, so therefore the rule-of-reason analysis should be used). 26 See Scheiber v. Dolby Labs., Inc., 293 F.3d 1014 (7th Cir. 2002) (post expiration royalties are per se misuse), cert. denied, 537 U.S. 1109 (2003). 27 Case 238/87, AB Volvo v. Veng, Ltd., 1988 E.C.R. 6211, 6235. 28 Case 53/87, Consorzio Italiano Della Componentistica Di Ricambio Per Autoveicoli (CICRA) v. Régie Nationale Des Usines Renault, 1988 E.C.R. 6039. 29 Case IV/31.851, Magill TV Guide v. ITP, BBC & RTE, 1989 O.J. (L 78) 43, aff’d, Joined Cases C-241/91 & C-242/91, Indep. Television Publ’ns Ltd. v. Comm’n, 1995 E.C.R. I-743. 30 Case C-418/01, IMS Health v. NDC Health, 2004 E.C.R. I-5039. 31 Case T-201/04, Microsoft Corp. v. Comm’n, 2007 E.C.R. II-3601.

Part C: Policy Interplay Between IP Rights and Antitrust/Competition Law  665

attorney’s fees.32 It was viewed that it got out of control because there wasn’t any regulatory agency central control. What the Antitrust Division or FTC did really didn’t matter, because you had all these people suing, and there was a reaction to that. Whereas in Europe there is not that same phenomenon of private competition cases. You can say, “Okay, it’s in the hands of the European Commission, and it’s safe because they are not going to do things that are really bad. So if their law is a little more intrusive, it’s okay because they are in charge of that.” But now in Europe there are Member State competition authorities which may or may not be sophisticated in competition law and policy and, in addition, the European Commission wants to see more private actions in Member States courts that have no experience with completion law. Will these developments have any modifying effect on competition law in Europe? Will this result in an application of the law in ways that are not helpful to innovation and IP? MR. VINJE: I think, generally speaking, the answer is yes. But again, one should be careful not to exaggerate. I don’t think private antitrust litigation is going to take off in Europe anything like in the United States. There will remain no treble damages. There are no contingency fees. A number of elements exist in the United States that cause there to be rather a feeding frenzy of private antitrust litigation, and most of those elements will continue not to exist in Europe. PROF. HANSEN: Alice, do you want to give us a French perspective on this? JUDGE PEZARD: I think there are three differences in the national point of view. IP protection is less strong, that is true, in the courts. We develop IP rights, but we are more balanced between competition law and IP law. But concerning competition law, it is at the first level not a question for the courts; it is a question for the agencies. That is a paradox because all IP proceedings fall under jurisdiction of the courts. We have an agency for competition law, only for companies, it is to say not for consumers. The conclusion of that is that the IP rights are not protecting the consumers; that is done through competition law. It is a little strange. We are examining the possibility of introducing the class action to protect more the consumers in regards to competition law.33 But it is not the case now. In France, it is a very sensitive issue. We are sure in the courts that if we had class actions it would be better for competition. That is the difference in the remedies. Of course, we will apply competition law and IP law. But the remedies are very developed for IP infringement but not yet for competition law. Consumers are not protected. For instance, I was involved with telecommunication antitrust. In the court of appeal and in the Supreme Court also we discussed antitrust in the telecommunication sector. It was the same, of course, in the Commission in Brussels. We developed the concept of dominant position between all our telecommunication companies. But, the consumer got nothing. The companies were heavily punished, but consumers in the end got nothing.34 In IP cases, victims received compensation. That is a paradox. But I think we can correct this problem with class actions. But we do not have theses remedies yet. PROF. HANSEN: In the United States, the law and economics approach is that a laissez faire antitrust style benefits consumers as it increase competition and maximizes consumer welfare.35 The fear is that an overly restrictive antitrust law protects competitors rather than consumers. So what results is more belief in the marketplace to maximize consumer welfare, See 15 U.S.C. §§ 16, 26. See Marc Lipskier, Bird & Bird, Class Actions in France, Jan. 1, 2008, http://www.twobirds.com/English/ NEWS/ARTICLES/Pages/Class_actions_France.aspx. 34 See, e.g., Case T-340/03, France Télécom SA v. Comm’n, 2007 E.C.R. II-107 (company was forced to pay €10.35 million for abuse of dominant position by predatory pricing). 35 See Norman S. Poser, “Why the SEC Failed: Regulators Against Regulation”, 3 Brook. J. Corp. Fin. & Com. L. 289, 308 (2009) (discussing law and economics as “laissez-faire” and “anti-regulatory”). 32 33

666  CHAPTER VIII: COMPETITION LAW a very Chicago School approach.36 Europe probably has a different approach, less faith that the marketplace will produce the right results. There is less faith in the market mechanism? Is that a fair statement? JUDGE PEZARD: Yes. PROF. HANSEN: Valentine? PROF. KORAH: There seems to me to have been a shift in the thinking of the Commission, indeed of many people. We start with the idea that everyone has a right to enter a market of his choice for the benefit of the entrant, not particularly of consumers.37 It is assumed that new entry will help consumers, but that is not investigated. I am thinking way back in the 1960s and 1970s. Then the Commission and the courts moved considerably towards an idea that competition is about protecting consumers and the proper allocation of resources. We saw this in the Commission’s vertical guidelines and group exemptions at the turn of the millennium.38 Then it seems to me that the Commission is now going a little further back towards the idea that freedom to enter the markets is what competition is about. I was reading the Notice in 2004 on Article 81(3).39 At some times it talks to the one objective and in other paragraphs it talks about the other objective. I am wondering to what extent the Commission has retained its belief in markets working and the protection of consumers. I don’t think the pendulum has gone all the way back. It has gone back some of the way. This leads to different conclusions. You are going to ask us about remedies at some point, aren’t you? PROF. HANSEN: Yes. Well, actually, we do have someone from the Commission here, so you won’t have to wonder much longer, Valentine, because Harald will tell us. MR. MISCHE: I do believe the protection of competitors is really not on our agenda. It is the protection of the competitive process. If you look at the refusal-to-supply cases—Microsoft40 for example, IMS41—you will see that the Commission applies the refusal to supply under three conditions, which are that an input is indispensable, that it is necessary for a new product, and that there is no objective justification for the refusal to supply. We are talking here about competition concerning a new product, meaning a new market. So I don’t think in such a context you could argue that we are looking at protecting competitors. It is about maintaining the competitive process, which is key for innovation and for consumer benefit. PROF. HANSEN: The Microsoft case, would you say that the Commission’s position on that is a rare position that will only happen in very extraordinary circumstances, and that in most 36 For examples of Chicago School “market efficiency” theory, see, e.g., Robert H. Bork, The Antitrust Paradox: A Policy at War with Itself 69–89 (Basic Books 1978); Frank H. Easterbrook, “Predatory Strategies and Counterstrategies”, 48 U. Chi. L. Rev. 263 (1981); Frank H. Easterbrook, “The Limits of Antitrust”, 63 Tex. L. Rev. 1 (1984). 37 “[D]uring the first three decades of the EU competition law regime, the Commission’s docket was dominated by cases involving goods-distribution restrictions and arrangements that hindered cross-border selling activities by traders.” George Stephanov Georgiev, “Contagious Efficiency: The Growing Reliance on U.S.-Style Antitrust Settlements in EU Law”, 2007 Utah L. Rev. 971, 979. 38 See European Commission, Guidelines on Vertical Restraints, COM 2000/C 291/01, O.J. (C 291) 1; Commission Regulation No. 2790/1999, of 22 December 1999 on the application of Article 81(3) of the Treaty to categories of vertical agreements and concerted practices, O.J. (L 336) 21 (EC) [hereinafter Group Exemption Regulation]; see also Press Release, European Commission, Commission Adopts Group Exemptions for State Aid (Dec. 6, 2000), available at http://europa.eu/rapid/pressReleasesAction.do?reference=IP/00/1415. 39 European Commission, Guidelines on the Application of Article 81(3) of the Treaty, O.J. (C 101) 97–118. 40 Case T-201/04, Microsoft Corp. v. Comm’n, 2007 E.C.R. II-3601 (Sept. 17, 2007) (affirming the Commission Decision that Microsoft had infringed Article 82 EC by committing abuses of a dominant position partly due to a refusal by Microsoft to supply its competitors with “interoperability information”). 41 Case C-418/01, IMS Health v. NDC Health, 2004 E.C.R. I-5039.

Part C: Policy Interplay Between IP Rights and Antitrust/Competition Law  667

situations the Commission would not act the same way it did in Microsoft, or would you say that this is just what the Commission will be doing, generally speaking, in markets? MR. MISCHE: This is very difficult to say. The Microsoft case is definitely an extreme case. I believe that if there is another case with similar conditions that the Commission would probably intervene again. This doesn’t mean that the Commission would interfere with any kind of IP right, but it shows that competition law applies also in the presence of IP rights on its own merits. Obviously, there has to be market dominance under Article 82 and other criteria such as those of a refusal to supply, which have to be met. PROF. HANSEN: To what extent do you have to figure out what the Court of First Instance or the Court of Justice are going to do? Or do you just say, “As a matter of policy we do this and we’ll fight it out in the Court of First Instance or ECJ?” To what extent are they viewed at the beginning of the process, as opposed to something that just happens at the end of your process? MR. MISCHE: Obviously, we study very carefully the case law of the European courts before we take action. But that doesn’t mean that the Commission cannot develop a new competition policy in a certain area. The Commission cannot be bound, if there is no existing case law on a specific issue. Take for example the AstraZeneca42 case. This was a novel approach. There hasn’t been any decision before where misrepresentations to a patent office have been sanctioned under Article 82,43 so obviously there is no jurisprudence on the matter either on which the Commission could rely to assess whether the courts would find that such an approach is in line with Article 82. PROF. HANSEN: Alice, let me ask you a question. Microsoft comes down. How much is that decision actually read and studied in France, just to see what the state of the law is? Or would you read that if you got a case in the area? I’m just wondering how much does a ripple effect go through Europe once it comes out, or do you just sort of deal with it if you have to when a case comes up, or whatever? JUDGE PEZARD: Of course, it depends on the merits of the case. It is impossible to answer the question exactly. We are dependent on ECJ answers. But, as I mentioned yesterday, if the European law is concerned, the national courts use the preliminary question [where the courts refers a legal question to the European Court of Justice].44 The preliminary question only is a matter of law. The Courts have to translate the merits into a matter of law. So, if we consider the case of Microsoft, for instance, or a similar case in a national court, the trial will be suspended for the interpretation of the ECJ. The national ruling will more or less depend on the European ruling. It is not possible to oppose the ECJ’s answer, even if the national judges disagree. That is the European single market. PROF. HANSEN: There is a lot of literature in the United States, a lot of economic literature, a lot of stuff on how you should approach this. Does any of that find its way over here, or would this basically be viewed as not helpful because the law, with regard to Article 81/82,45 have some significant differences? MR. MISCHE: Well, we very carefully study, obviously, the literature in the United States and also what the U.S. agencies are doing before we decide ourselves on which action to take. So, obviously, that is very much taken into consideration. 42 Commission Decision 2006/857, arts. 82 & 54, 2006 O.J. (L 332) 24 (EC & EEA), available at http://ec.europa.eu/ competition/antitrust/cases/decisions/37507/en.pdf (finding that AstraZeneca had violated Article 82 of the European Community Treaty and Article 54 of the European Economic Area (“EEA”) by practices aimed at keeping generic pharmaceutical competitors from entering the marketplace, including patent extension and regulatory marketing authorization). 43 Treaty Establishing the European Community, Art. 82, Nov. 10, 1997, 1997 O.J. (C 340) 3 [hereinafter EC Treaty] (concerning pricing, exclusion, price discrimination, and tying). 44 See Chapter II.A, “The Judiciary & IP Policy, Europe”, supra this volume. 45 EC Treaty, supra note 41, Arts. 81 & 82.

668  CHAPTER VIII: COMPETITION LAW PROF. HANSEN: Thomas? MR. VINJE: I think it is very clear from lots of experience that the Commission very closely

follows the American economic literature in this area. PROF. HANSEN: Josh, let me ask this. You have given us warnings about formalism and other things. What do you think about the Microsoft decision? MR. HOLMES: I was interested to hear the suggestion that the U.S. case law had been shaped by treble damages and its litigiousness, and has therefore perhaps been more conservative as a consequence. It seems to me that in the field of refusals to license, there at least are very sound reasons of principle for restricting very sharply the rules. I am not sure you could explain—I don’t know; I defer to my U.S. colleagues—the U.S. case law on refusals to license in those terms. Surely there the reluctance derives much more from the very sound reasons of principle not to discourage innovation and the huge difficulties of shaping any kind of administrable rules of remedy in relation to that. I am skeptical of whether the right results were reached, at least in IMS, given that this is a rule which will then be applied by national courts, not just by the Commission. The new product criterion in IMS could be quite trivially easy to meet.46 If you’ve got a court that isn’t necessarily economically steeped in learning and doesn’t have a perspective on the concerns of opening up the incentives to innovate, then you might find licenses being granted willy-nilly. The Microsoft case I think is a more finely balanced one. I wonder if there are sound economic arguments based on network effects enforcing effectively de facto standards.47 It is a very unusual and extreme case perhaps. I am not sure that the IMS case law is robust to limit to those kind of extreme situations. PROF. HANSEN: Okay, Josh, you have a client. What do you tell them? They want to know, “Can I do this, this, or this?” Is it like “Who knows?” Is it “Yes, try it?” What do you do? MR. HOLMES: It depends which forum you expect to find yourself in. If you think that the risk is that you are going to be before a U.K. court, you would tend to advise, I think, for a narrow interpretation of Microsoft and IMS. I think the European Commission would probably adopt a similarly narrow approach. If you are advising a client in another continental jurisdiction, I am not sure that the same rules would apply. PROF. HANSEN: We have time. Is there anyone who would like to ask a question? Mr. Justice Arnold. QUESTION: Richard Arnold from the English High Court. I wanted to pick up on a point that Commissioner Kovacic raised, which is the Supreme Court decision in eBay,48 which effectively amounts to a requirement to compulsory license 46 In Magill, the ECJ delineated a 4-factor test for “exceptional circumstances” that, when accompanying a refusal to license intellectual property, results in a violation of Article 82: (1) The refusal to license must prevent “the appearance of a new product” for which there is “potential consumer demand”; (2) the protected product or service must be indispensable to compete in a particular market; (3) the refusal to license must have the effect of excluding “any competition in a secondary market”; and (4) the refusal to license is not justified by “objective considerations.” Magill, 1995 E.C.R. at I-825. The ECJ, in IMS, stated explicitly that these three factors were cumulative. See Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG, 2004 E.C.R. I-5039, [38]; see also Donna M. Gitter, “Strong Medicine for Competition Ills: The Judgment of the European Court of Justice in the IMS Health Action and its Implications for Microsoft Corporation”, 15 Duke J. Comp. & Int’l L. 153, 170–77 (2004) (describing the application of the Magill test in IMS). 47 On the interaction of network effects, antitrust law, de facto standards, and Microsoft, see Mark A. Lemley & David McGowan, “Legal Implications of Network Economic Effects”, 86 Calif. L. Rev. 479, 500–07 (1998) (however, focusing only on the U.S. antitrust suits against Microsoft, United States v. Microsoft Corp., 159 F.R.D. 318 (D.D.C. 1995), rev’d. 56 F.3d 1448 (D.C. Cir. 1995); United States v. Microsoft Corp., 980 F. Supp. 537 (D.D.C. 1997)); see also generally John E. Lopatka & William H. Page, “Microsoft, Monopolization, and Network Externalities: Some Uses and Abuses of Economic Theory in Antitrust Decision Making”, 40 Antitrust Bull. 317, 320–21 (1995); Mercer H. Hartz, Comment, “Dominance and Duty in the European Union: A Look Through Microsoft Windows at the Essential Facilities Doctrine”, 11 Emory Int’l L. Rev. 189, 210–11 (1997). 48 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006).

Part C: Policy Interplay Between IP Rights and Antitrust/Competition Law  669

patents in particular circumstances. Now, it is obviously motivated by antitrust concerns, but yet it doesn’t seem to involve an antitrust analysis. Now, why is that? What would a proper antitrust analysis lead to? MR. KOVACIC: I think that it did draw upon a literature that is focused on the manner in which the rights-granting process has interpreted patentability criteria. One bit of literature that was cited in the opinion in a couple of places is a report that the FTC did, called To Promote Innovation.49 The point of that exercise was to draw connections between the two fields, to indicate that the rights-granting process ought to establish and apply standards of patentability and apply them in a strong way, and that if those are not applied in a careful way, one will generate an excessive number of what might be called improvidently granted patents, and that a failure to do that has ripples that run through the remedial process. So I think part of what the Court was relying upon was not, strictly speaking, a traditional technical antitrust analysis, but it was responding to a growing literature in the field of competition policy generally that is trying to draw relationships between these two fields and to focus more attention on how larger competition policy issues might be addressed within the context of patent law. PROF. HANSEN: And one other way of looking at that is the Court knows patent reform was stalled in Congress.50 This is a back-door method of getting patent reform on a case-by-case basis, trusting district courts to figure out what are good patents and if it’s a troll situation or not. So I think they gave up on Congress, they realized there were problems, and this was a way to give more discretion to district courts. That may be a particular U.S. way of doing things. MR. KOVACIC: The question and your comment, Hugh, do raise the larger issue of whether there is a process of equilibration and adjustment taking place in these two settings and the assumptions underlying it are not made completely transparent, is the judicial process the right place to carry out that equilibration? I think many of us perhaps feel uneasy with the way that that has played out. PROF. HANSEN: Okay. Last comments? Thomas. MR. VINJE: Yes, to your question and a comment on Josh’s. After Microsoft51 should everyone start shaking in his boots? We, like similar law firms, have lots of dominant companies in our client portfolio. After the Microsoft decision— MR. KOVACIC: Could you name some? [Laughter] MR. VINJE: No thank you, not on the other side of the Atlantic at least. MR. KOVACIC: We can talk later. MR. VINJE: Okay, we’ll do that. A number of them came and said, “Should we worry?” In each case we said, “No, Microsoft is really rather sui generis. Not that those principles cannot ever be applied in other contexts, but it really is a rather extraordinary case. Don’t worry.” Secondly, in a little bit more detail, to get back to the question of how do we get the balance right in IP/antitrust, and in the specific context of refusals to deal, there is a concern about the 49 Fed. Trade Comm’n, “To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy” (Oct. 2003), available at http://www.ftc.gov/os/2003/10/innovationrpt.pdf. 50 “Courts and Congress have been active in this area. Congress has attempted to introduce patent reform legislation in 2005, 2006, and 2007 and now just two days ago. So far none of this legislation has passed. In the meantime, courts have been extraordinarily active in this area. The Supreme Court has restated the standard of nonobviousness. The Federal Circuit has entirely changed the law on willful infringement. The Supreme Court has radically changed the law on granting injunctions in the eBay case.” Statement of Matthew Sag, Symposium, Panel on Tafas v. Dudas, Patent Rules Changes and Patent Reform, 7 Nw. J. Tech. & Intell. Prop. 280, 281 (2009). 51 Case T-201/04, Microsoft Corp. v. Comm’n, 2007 E.C.R. II-3601.

670  CHAPTER VIII: COMPETITION LAW vagueness of the new-product criterion, which some might say was broadened by the CFI in the Microsoft decision.52 I think there are legitimate concerns about how national courts in some places might define that criterion and open doors to compulsory licenses where they shouldn’t be opened. But on the other hand, too little attention has been paid to the CFI’s focus upon objective justification.53 It invited, I think, future parties to demonstrate that they really have an objective justification not to license insofar as where they forced to license. It would diminish ab initio their incentives to innovate. In that case, the court, rather caustically I must say, dismissed Microsoft’s arguments and said, “You just didn’t give us anything whatsoever to demonstrate that your incentive to innovate would have been diminished.” So future cases should focus on that point, and that is part of the way to get to the right answer here. PROF. HANSEN: Valentine, you have the last word now. PROF. KORAH: I am very worried about remedies. You mentioned the problem. In Microsoft it was required by the Commission’s order to provide enough interface information to enable its competitors to be viable.54 That seems to me to contain two unknowables: how viable have the competitors got to be if they get the information; and how much information do they need to reach that level of viability? The third problem was the FRAND prices, fair and reasonable and non-discriminatory prices.55 In the end, Microsoft pretty well gave its technology away for nothing. The Microsoft advisors have been saying in public that they several times went to the Commission and asked, “How much can we charge for this information and how much information do we have to give?” and didn’t get constructive answers. That seems to me to leave the problem as being non-justiciable and lead to great uncertainty. It is not only certainty that you need when you get to the court. You need this certainty at the time when you decide whether to give them the information. Now, if one goes back to Advocate General Jacobs’s opinion in Brönner,56 he would have been happier to require supplies if the original investment had been made at a time when the market was not competitive. Of course, that covers a lot of the Article 82 cases involving IPRs that have been coming out recently. PROF. HANSEN: Thank you very much, Valentine, for that comment. Harald, do you want to respond to what Valentine said? This will be the last word. MR. MISCHE: Maybe you can hand the microphone to Cecilio Madero. He was responsible for the Microsoft case. PROF. HANSEN: Great. PARTICIPANT [From the audience: Cecilio Madero Villarejo, Director, Directorate C, Markets and Cases II: Information, Communication and Media, Directorate general for Competition, European Commission, Brussels]: Thank you. Good morning. My name is Cecilio Madero. I guess I have some responsibility in the Microsoft decision, so I am well placed to say something about it. 52 The court, in interpreting the new product criterion, stated that a refusal to license may be abusive not only if it prevents the marketing of a new product, but also when it limits “technical development.” See id. at [647]–[649]; see also Assimakis Komninos & Katarzyna Czapracka, “IP Rights in the EU-Microsoft Saga”, Competition Law and the Enforcement of Art. 102, at 9 (Federico Etro & Ioannis Kokkoris, eds., Oxford Univ. Press 2010,). 53 Microsoft, 2007 E.C.R. II-3601 at [704]–[710]. 54 Microsoft Commission Decision, supra note 14, Art. 5 (order to make interoperability information available). 55 For an analysis see Mathias Dewatripont & Patrick Legros, “‘Essential’ Patents, FRAND Royalties and Technological Standards” (ECORE, Working Paper No. 2008/26, Apr. 9, 2008), available at http://www.ecore.be/ DPs/dp_1207816380.pdf.. 56 Case C-7/97, Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs und Zeitschriftenverlag GmbH & Co. KG, 1998 E.C.R. 1-7791.

Part C: Policy Interplay Between IP Rights and Antitrust/Competition Law  671

I must say that what I have heard from Prof. Korah does not fit with my own understanding of what we have tried to do with the Microsoft decision. The Commission cannot care less about Microsoft’s competitors. What we are ordering has nothing to do with the idea of preserving these people in the market or making them viable, because, as I said before, we do not care about this. The only thing that we ask through our set of interoperability behavioral remedies is to make sure that Microsoft shares enough information for these people, these companies, to be able to understand what Microsoft’s dominant product, Windows, the operating system running in a huge majority of PCs, asks their servers to deliver. So the only thing that we did is to ask a minimum of information for competitors to be able with their own technology to provide service to PCs running Microsoft’s Windows. It happens—or at least this is what I hear in the market—that these people were not at all interested in cloning Microsoft’s source code, among other reasons because they pretended that their own products were better. So the only thing that we asked was to provide enough information for these companies to understand how to give service to the dominant PC platform, the Windows platform. This is what, I understand, they are now painfully getting. The second point I would like to make is that I do not think that you are interested in seeing EU officials or FTC or DOJ officials deciding what should be the right price of the technology which has to be shared. We are not in the business of deciding for the industry and for all of you what should be the right price to pay. It was very funny to hear that following the adoption of the decision in 2004, Microsoft people came to see us and they never obtained clear responses about how to implement the decision. During the seven years that I have been running this case, we have been extremely clear with Microsoft in this respect. But one thing is what you say and another thing is what your interlocutors do even when they pretend to have understood you. The only thing that we did was to tell them, “If you are dominant, you have a special responsibility vis-à-vis your competitors and the end users and you cannot abuse your market power.”—Apparently the court agreed with this57—“You have to provide information. You have of course the right to price the information that you provide, but some innovation has to be there, because if there is no innovation in the information shared with your competitors the fact that you have to be paid by your competitors after having abused your dominant position is like compensating you for infringing the Treaty. I don’t think this is something that you expect us to do.” PROF. HANSEN: Okay. Thank you very much. On that note we are going to end this session. Thank you very much, Josh. Thank you to our outstanding panel.

57 See Philip Marsden, “Microsoft v Commission, With Great Power Comes Great Responsibility”, Comp. L. Insight 8, 23 Oct. 2007, http://www.biicl.org/files/3142_microsoft_v_commission.pdf.

Chapter VIII

Competition Law Part D: Standard Setting Moderator Thomas Vinje

Clifford Chance (Brussels) Speakers Prof. Anselm Kamperman Sanders

Dr. Justin Watts

Maastricht University (The Netherlands) Carey R. Ramos

Paul, Weiss, Rifkind, Wharton & Garrison LLP (New York, N.Y.) Christian Harmsen

Bird & Bird (Düsseldorf)

Freshfields Bruckhaus Deringer LLP (London) Michael D. Hartogs

Senior Vice President and Division Counsel, Technology Licensing Division, Qualcomm (San Diego) Daniel Ilan

Cleary Gottlieb Steen & Hamilton LLP (New York, N.Y.)

Cecilio Madero Villarejo

Director, Directorate C, Markets and Cases II: Information, Communication and Media, Directorate General for Competition, European Commission (Brussels) Panelist Patricia A. Martone

Ropes & Gray (New York, N.Y.)

MR. VINJE: Good morning again. We have quite a number of speakers, so I am not going to take any of your time introducing the topic. I think that everyone is familiar with the issues in this area. I will turn it right over to Professor Sanders.

674  CHAPTER VIII: COMPETITION LAW We are going to try to move quickly through the speakers. Most people have agreed to shorten their presentations down from nine minutes, or in the case of Cecilio’s allocated fifteen minutes, so that we have some more time for discussion. Take it away. PROF. KAMPERMAN SANDERS: Thank you very much. [Slide] This session almost follows seamlessly from the previous one. We will be discussing the issue of standardization. I just wanted to throw out some of the key areas here. Standardization usually involves a number of companies getting together in order to agree on an industry standard. The industry standard facilitates companies to engage in competition at the level of products, rather than at the level of standards. You have all come here to the United Kingdom. You will have notice that standards are relevant. Your plugs on your PCs, on your telephones, will have to be changed, and so on and so forth. Now, how are standards set? We are to have government interference in order to set standards. That would involve, for example, power grids or the plugs on your apparatuses. But companies usually like to engage in private negotiation in order to set standards. The reason for this is that they have freedom to negotiate on price and royalty rates. In view of the fact that these types of agreements have benefits for the economy, these agreements are typically exempted from competition concerns. However, it also means that there is an area of monitoring, where standard-setting organizations are indeed subject to monitoring by competition authorities. [Slide] What are they looking for? They are looking for the appropriate interface between the intellectual property rights that go into the standard, that form part of the standard, and the interface with competition law. So what are you then looking at? • You are looking at possible problems of excessive rent seeking, stacking of rights. • Nondisclosure. The issue was mentioned before as well that parties do not disclose that they have a patent in relation to a key area of technology that is part of the standard and they later ambush a consortia or other partners that are in the standard. • There may also be a problem of too much disclosure. Parties simply want to get in on the standard, and they throw on the table a number of patents that are perhaps not that relevant to the technology itself. That also pans out into situations where parties are failing to agree on the appropriate royalty rates. “What is a necessary piece of technology for the standard?” is then the question. • And there is the potential for standard-setting groups to license out parties that do not have necessarily the key technology to bring to the standard. This may then result in issues for refusals to license. [Slide] Now, we have discussed these issues in the previous session in the context of the role of competition authorities very much at national level. We have also seen that there may be a difference between the European Union and the United States in terms of either internalizing competition law and the application thereof in relation to standards or externalizing. There is also another dimension, and that is the dimension of international trade and market access issues. This is where the WIPO recently has become involved in looking at standards and patents in the context of the Standing Committee on the Law of Patents.1 1 WIPO appointed a Standing Committee on the Law of Patents (SCP) in 1998. See World Intellectual Property Organization, Standing Committee on the Law of Patents, http://www.wipo.int/patent-law/en/scp.htm. The SCP’s first major achievement was the negotiation of the Patent Law Treaty, which addresses patent formalities and procedures. Patent Law Treaty, June 1, 2000, 39 I.L.M. 1047, available at http://www.wipo.int/export/sites/ www/treaties/en/ip/plt/pdf/trtdocs_wo038.pdf. Thereafter the SCP began discussing a Substantive Patent Law Treaty, of which a draft was released in Sept. 2003. See, e.g., Jerome H. Reichman & Rochelle Cooper Dreyfuss,

Part D: STANDARD SETTING  675

[Slide] So how do we solve standard conflicts? Well, we either can deal with it ex post, where courts and competition authorities look at this issue and approach these problems from either a competition law angle or an IP law angle, or ex ante, where parties negotiate on the basis of what would be appropriate RAND or FRAND terms, fair, reasonable, and nondiscriminatory terms.2 That then requires disclosure, clarity of the terms that can be used, and clarity in respect of the royalty rates. [Slide] The previous session already indicated that there may be an Atlantic divide. Now, I don’t want to overstate that as a problem, but there certainly is a difference in approach. There is common ground, however, as well, and that involves more emphasis on increase of the quality of patents, patents that go into standards, so the problem of creating patent thickets must be addressed in this way. And also the identification of patents truly relevant to the standard, essential to the standard. Some of the other speakers will go into that issue. [Slide] Now, in my paper3 I also make the distinction between the internalization and externalization of IP law. The issues have been addressed, so I will quickly go over it. What do you see in the United States? Following eBay v. MercExchange,4 you see that there is a recognition in the courts that when dealing with infringement and injunction for patents it is an equitable remedy and that courts do have some leeway in order to assess problems where there is a feeling that one party is unduly using a patent to leverage results. [Slide] You also see that in the context of a number of cases stemming from the past until now addressing the so-called patent misuse doctrine. In 2008, a very nice case in relation to Qualcomm v. Broadcom,5 where it was held that there is a breach of duty to disclose patents relevant to the standard, leading to a situation where your patent right is not enforceable against not just the parties in the consortium that you have not told about this, but in relation to all products comprising the invention in relation to which you have that patent. [Slide] Externalization is what we see in Europe, where competition authorities play the leading role in establishing what are appropriate methods of engagement when it comes to setting standards. The cases have been mentioned already so I will not go into these again. [Slide] There is, however, a global impact, I feel, and that is that when parties are negotiating their standards they have to take into account these different approaches in the United States and in the European Union. They have to take into account not only the U.S. situation and the U.S. decisions in this regard, but they also have to follow closely what is happening in the European Union and how the Commission is viewing these things. That has an effect on the interpretation of the appropriate FRAND terms, because there is still quite a bit of uncertainty about this. That will also ultimately determine how the United States and the European Union interpret WTO rules and how in future the interface between the TBT Agreement,6 the agreement “Harmonization Without Consensus: Critical Reflections on Drafting a Substantive Patent Law Treaty”, 57 Duke L.J. 85 (2007). 2 Cf. e.g., Section 6.1 of the ETSI IPR rules, European Telecomm. Standards Inst., Intellectual Property Rights Policy ¶ 6.1 (2008), available at http://www.etsi.org/WebSite/document/Legal/ETSI_IPR-Policy.pdf [hereinafter ETSI IPR Policy]; Damien Gerdin & Miguel Rato, “Can Standard-Setting Lead to Exploitative Abuse? A Dissonant View on Patent Hold-Up, Royalty Stacking and the Meaning of FRAND” (Apr. 2006) (unpublished working paper), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=946792& rec=1&srcabs=1081997. 3 See Appendix A, infra this chapter. 4 eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). 5 Qualcomm Inc. v. Broadcom Corp., 548 F.3d 1004, 1012 (Fed. Cir. 2008). 6 Agreement on Technical Barriers to Trade, Art. 2.6, Apr. 15, 1994, 1867 U.N.T.S. 3 [hereinafter TBT Agreement] (“With a view to harmonizing technical regulations on as wide a basis as possible, Members shall play a full part, within the limits of their resources, in the preparation by appropriate international standardizing bodies of international standards for products for which they have either adopted, or expect to adopt, technical regulations … .”).

676  CHAPTER VIII: COMPETITION LAW in relation to standards, and the TRIPs Agreement will play out.7 There we also have the expectations to deal with of new global players, like China and India, countries that are very keen in using standards to control the way in which their own industry is capable of participating on a global level in terms of technology markets. [Slide] It is therefore also that at the level of the TRIPs Council we do see a worry, for example, of the European Union how the recently adopted Chinese anti-monopoly law is going to be applied in this respect.8 [Slide] I will not go over these cases, DS‑362 and DS-363, in detail.9 The bottom line, however, is that in relation to these cases involving China intellectual property rights and audio-visual services, to my feeling the bottom line is the question: Who will control market access when it comes to standards? What you see is that China is developing its own standards in relation to Blu-ray and a number of other IC services. [Slide] I mentioned the WIPO initiative before. That also means that there is a role to play for the WIPO and the WTO and national actors to address: first of all, the exceptions and limitations to patent law in relation to standards; how do we deal with the U.S. practice, and would that be an example to follow; the internalization of the concerns in respect of standard setting; how do we deal with competition authorities; and what do we feel is the appropriate way forward. To my mind there is a lot to be said for the U.S. model, the internalization, simply because at an international level competition law is not part of the WTO framework. So the best chances forward to my mind would be addressing the issues of exceptions and limitations to patent law in respect of standard setting. Thank you very much for your attention. MR. VINJE: I wonder if I might, before we move on to the next speaker, ask whether you might provide examples of some of the internalization that you would like to see. What precise sorts of, as you said, exceptions and limitations in patent law would you like to see adopted to address the concerns that you have raised? PROF. KAMPERMAN SANDERS: Perhaps the use of limitations and exceptions is not the right terminology in this regard, but it is the terminology that is used at the level of the WIPO at the moment. But the concept of patent misuse as applied in the United States, sort of a refusal to disclose that you have patents in relation to the standard, failures to disclose that type of information then leading to the fact that you cannot apply your right, would I think be most appropriate in those situations. In terms of the RAND and FRAND license agreements, that is a different ballgame. This is where limitations and exceptions or a patent misuse doctrine will not help. It will assist in forcing parties to be more open about what standards are relevant, but in terms of defining the exact scope and how competition law is respected in relation to the agreements themselves, we will still need the help, I think, from competition authorities. But the structural framework of patent law itself, I think we can look at these types of measures in order to get the ball rolling. 7 Agreement on Trade-Related Aspects of Intellectual Property Rights, Apr. 15, 1994, Marrakesh Agreement Establishing the World Trade Organization, Annex 1C, 108 Stat. 4809, 1869 U.N.T.S. 299, 33 I.L.M. 1125 (1994), available at http://www.wto.org/english/docs_e/legal_e/27-trips.pdf [hereinafter TRIPS Agreement]. 8 Anti-Monopoly Law (P.R.C.) (passed Aug. 30, 2007), available at http://www.fdi.gov.cn/pub/FDI_EN/Laws/ GeneralLawsandRegulations/BasicLaws/P020071012533593599575.pdf; see Dr. Yijun Tian, “The Impacts of the Chinese Anti-Monopoly Law on IP Commercialization in China & General Strategies for Technology-Driven Companies and Future Regulators”, 2010 Duke L. & Tech. Rev. 4 (2010). 9 See WTO Case DS 362, U.S. v. China (panel report Jan. 26, 2009) (on IPR enforcement), http://www.wto.org/ english/tratop_e/dispu_e/cases_e/ds362_e.htm; WTO Case DS 363, U.S. v. China (panel report Aug. 12, 2009), http:// www.wto.org/english/tratop_e/dispu_e/cases_e/ds363_e.htm (appellate body report issued Dec. 21, 2009).

Part D: STANDARD SETTING  677 MR. VINJE: I expect this question of internationalization/externalization will come up a number of times during the discussion, and I would encourage people to address that question. One thing I would have a question about, going back to the previous session, is the extent to which in Europe it is possible to internalize (in other words, to use patent law itself to address these questions) in light of the relative lack of flexibility in Europe compared to the United States. There is just in my view a lot more ability of the courts in the United States to address these questions than there is in Europe. It is hard to see the French courts doing what the Supreme Court did in eBay,10 for example. I think those things probably more likely need to be addressed through statutory changes in Europe, which is not an easy thing these days, especially with twenty-seven Member States. We will move on to Carey Ramos from Paul Weiss. I think he will address questions as to whether in all of the discussion about patent ambushes perhaps other at least equally important issues have been lost and whether the focus might shift back to those other issues. MR. RAMOS: I am going to talk about some pragmatic issues relating to standard setting, since I practice heavily in this field. My talk has two theses. The first is shameless, and that is that standard-setting organizations need better lawyers. The second thing I would like to say is that standard-setting organizations themselves need a standard-setting organization to help them write their standard-setting rules. If they were to do that, a lot of the litigation we have seen in this area I think could easily have been avoided. Let me get down to some particulars. First, the patent ambush issue. I will confess I have for years regarded this issue as a red herring. There is no law anywhere in the world I am aware of that requires participants in standard-setting organizations to disclose their patents. It depends on what the rules of the standard-setting organization are. There is a recent case I will talk about in the United States that varies that a little bit, but I will come back to that. The D.C. Circuit in the Rambus case11 finally asked the key question, which is: All right, you claim that there was an antitrust violation because Rambus did not disclose patents. What if it had disclosed its patents? What would the standard-setting organization have done? Is it your position that the standard-setting organization would then have said, “Rambus, if you have a patent, we’re not interested in your technology, go away?” I actually question whether that itself might raise some antitrust issues, but I am not going to go there because, as I said, I regard this patent ambush issue as largely a red herring. Or, second alternative: “If you had disclosed your patents, Rambus, would you have been subject to a FRAND requirement to license on fair, reasonable, and nondiscriminatory terms?” The D.C. Circuit said: If it is the latter, it is not an antitrust violation; it’s a contract issue. It is only if it is the former that it would be an antitrust issue. The court said because the FTC had not established that as a “but for” matter, that but for the failure of Rambus to disclose its patents, its standard would have been excluded, and therefore held there was no antitrust violation.12 I would have been prepared to say, if we had been having this talk in November, that in the United States Rambus had largely put this patent ambush issue to bed, but for a decision from the Federal Circuit involving Qualcomm v. Broadcom.13 Many of the cases recently have involved Qualcomm and Broadcom, and I will leave it to Michael to talk about some of the particulars here if he is prepared to do that. In the Federal Circuit case, involving a standard-setting organization which had very loose rules regarding when participants were required to disclose patents—its rules said that eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008). 12 See id. at 463. 13 Qualcomm Inc. v. Broadcom Corp., 548 F.3d 1004, 1012 (Fed. Cir. 2008). 10 11

678  CHAPTER VIII: COMPETITION LAW members were “encouraged” to disclose patents and that they should use their best efforts to disclose patents—that was extraordinarily vague, but nevertheless the Federal Circuit found that there was indeed an antitrust issue with regard to the alleged failure by Qualcomm to disclose patents in connection with a standard-setting process. Again, I don’t want to get into all the particulars. What I think is especially troublesome about this decision is the Federal Circuit didn’t stop there. It went on to say that not only might there have been a violation of this very vague obligation, but that indeed there might be a violation of the members’ “understanding” with regard to whether or not they had an obligation to disclose patents, without defining what that understanding is, what the rules are, what has to be disclosed14—do you have to disclose patent applications, do you have to disclose amendments?—all unclear. Regrettably, with this Federal Circuit decision, U.S. law I think is going to go back into a period of confusion about this whole question about patent ambush. But there is a very simple solution. The very simple solution is in a standard-setting organization you have a clear set of rules regarding a requirement to license on fair, reasonable, and nondiscriminatory terms. I have always thought that it was in the real world a little silly to think in a standard-setting body that involves major corporations that they don’t all have patents, or substantially all of them have patents, that are going to be on proposed technologies. Otherwise, why are these companies bothering to send people all over the world, to these international standard-setting bodies’ meetings, to participate in standard setting? They have an interest, obviously, in having their technology adopted. But of course they have R&D and most of these companies have patents or they have patent applications that are currently pending. I have represented for twelve years the DVD Forum, a large standard-setting organization.15 The DVD Forum has a very clear requirement that anyone who participates in standard setting is obliged to license their essential patents (that is, patents that are essential to practice the standard) on fair, reasonable, and nondiscriminatory terms. Now, Justin may talk a little bit about what constitutes “essential,” and I realize that that is a fair issue for litigation. But I think the adoption of a clear rule regarding what members are obligated to do avoids much of the controversy in this area. So if I don’t think patent ambush is the big issue for standard-setting organizations, what are the issues? Where are the antitrust issues? As I promised in the title of my talk, I thought I would just identify a few of those. I am not going to talk about them at great length because they haven’t really been developed in the law. But I think we are going to see in the next few years a number of these issues raised either in private litigation or potentially in proceedings at the antitrust/regulatory agencies. Number one is the question of the adoption of a standard that reads on members’ patents. The argument has been raised in a number of cases, and it has not been decided yet, whether companies that are engaged in standard setting may intentionally adopt a standard that reads on their patents.16 The argument is that you have a group of companies, all of which have patents. See Rambus, 522 F.3d at 469. The DVD Forum, founded in 1997, “is an international association of hardware manufacturers, software firms, content providers and other users of [DVDs].” DVD Forum, Mission, http://www.dvdforum.org/about-mission.htm. For the history of the DVD forum, see Matsushita Electric Industrial Co., Ltd. v. Cinram International, Inc., 299 F. Supp. 2d 370, 373–74 (D. Del. 2004). 16 See, e.g., In re Negotiated Data Solutions, FTC File No. 051-0094 (Jan. 23, 2008) (Majoras, J., dissenting), available at http:// www.ftc.gov/os/caselist/0510094/080122majoras.pdf (decision fails to address a standard for when to find unfair competition in standard setting); see also Robert P. Merges & Jeffrey M. Kuhn, “An Estoppel Doctrine For Patented Standards”, 97 Cal. L. Rev. 1, 11 (2009) (discussing ways a company can push for adoption of a standard which reads on its own patents). 14 15

Part D: STANDARD SETTING  679

They could choose alternative technologies, but instead they choose the technologies that read on their patents. Is that an antitrust violation? I am not going to answer the question, I’m just going to raise it. Number two, ballot stuffing. Over the last couple of years there were allegations that Microsoft had engaged in ballot manipulation or ballot stuffing in connection with its proposal that Office Open XML be adopted by ISO as a standard. Ultimately, Microsoft was successful in persuading ISO to adopt that standard.17 They actually lost in the first round of voting, but they won on the second round. Insofar as I am aware, no litigation has come out of that. I have no idea whether Microsoft engaged in ballot stuffing, but I think that is another potential area for antitrust issues. Third, FRAND licensing obligations. How do you determine what is fair, reasonable, and nondiscriminatory? Nokia and Qualcomm came very close to litigating that issue in, of all places, Delaware Chancery Court, a dispute that settled last June,18 in which they were going to finally ask a court to determine what is fair, reasonable, and nondiscriminatory. I said unfortunately that case settled, so we do not have a case that will give us guidance in that regard. Fourth, cross-licensing. If you are going to have a fair, reasonable, and nondiscriminatory requirement, how do you account for cross-licensing, and particularly royalty-free crosslicensing between the members of the standard-setting body? How do you measure the fairness of those licenses against fee-bearing licenses? A very interesting question. Next is the question: Well, what if the company that participated in standard setting then sells its patents to another company; is that company obligated to abide by the commitment that the member made when they were participating in the standard-setting organization? That issue came up in a case at the FTC involving a company called N-Data,19 which had purchased patents from National Semiconductor. That case ended in a consent decree, so we do not have any adjudication of those issues. But it raises some very interesting questions. I think one of the other panel members may be talking about that later today. I think my time is up. There are a number of related issues to each of these points that I think are fascinating. But I come back in the end to my original thesis. I think a lot of these issues could be avoided if the rules of standard-setting organizations were clearly written. I think they should get good lawyers or they should have their own standard-setting organization to write the rules for standard-setting organizations. Then we wouldn’t have a lot of the disputes that we have had in this area. Thank you. MR. VINJE: Thank you very much, Carey. I think we should move right on to Justin Watts. But perhaps I could lay a question down which other panelists could consider as they are addressing these topics, which is the extent to which antitrust obligations with respect to patent ambushes arise from the standard-setting rules and failure to disclose patents according to the standard-setting rules, or whether, even if there were no disclosure requirement in the 17 See Press Release, International Organization for Standardization (ISO), ISO/IEC DIS 29500 Receives Necessary Votes for Approval as an International Standard (Apr. 2, 2008), available at http://www.iso.org/iso/ pressrelease?refid=Ref1123. 18 See Steven Musil, Nokia, “Qualcomm Settle Patent Dispute”, CNet News, July 23, 2008, http://news.cnet. com/8301-1035_3-9998375-94.html; see also Nokia Corp. v. Qualcomm Inc., No. 06-509 JJF, 2006 WL 2521328 (D. Del. Aug. 29, 2006) (remanding the case to the Delaware Court of Chancery); Nokia Corp. v. Qualcomm Inc., No. 2330-VCS (Del. Ch.). 19 Decision & Order, In re Negotiated Data Solutions LLC (N-Data), FTC File No. 051-0094, available at http:// www.ftc.gov/os/caselist/0510094/080122do.pdf.

680  CHAPTER VIII: COMPETITION LAW standard-setting rules, there is under U.S. antitrust law or EC competition law any independent obligation to disclose patents. In other words, another way of putting it perhaps is: Assuming the standard-setting organization didn’t require disclosure—which of course is not the case, but assuming it didn’t—and there nonetheless were nondisclosure, are there any circumstances in which that nondisclosure would constitute an antitrust infringement? We are now going to turn to the question of essentiality, so I park that question for other panelists to consider, because obviously in this context of standard-setting organizations and antitrust lots of the issues actually depend upon what essentiality means. If one is obligated to license something is an essential patent, the FRAND obligation applies to essential patents, and so it definitely is a key question. Justin Watts of Freshfields is going to address that. DR. WATTS: Thank you very much. [Slide] I thought I would cover just two short points in the time available to me. The first one actually doesn’t look at essentiality but, rather, at inessentiality, because one of the questions that I think arises and raises many of the more interesting points about essentiality is whether there are incentives to make sure that you also contain within your portfolio a number of inessential patents and the advantages that that provides. The second point I wanted to look at was how one can say that an invalid patent, or a patent that at least may be or probably is invalid, is essential. I have always found it intellectually unsatisfying that the DOJ deals with this issue by saying, “Well, actually there is a presumption of validity, so let’s not worry about it.” That doesn’t seem to me to be a position that really stands up to scrutiny. So I thought I would go through a theory, which is only a theory, as to why the fact that a patent may well be possibly more or less invalid doesn’t affect its essentiality. [Slide] On the first point, many of the difficulties that we have seen thrown up—and I think it has certainly been the case with a lot of litigation in this country—have been about patentees seeking to ensure that as much of their portfolio as possible is considered to be essential. I think it is worth looking at the flip side of that. As a patentee, you have enormous advantages from making sure that some of your portfolio is considered to be inessential. • First of all, it removes whatever obligation there may have been to tell the SSO about it. • Secondly, it gives you freedom to refuse to license anybody who asks. • Thirdly, it removes the RAND restrictions to which new licenses might be subject. • Fourthly—and this is perhaps the most attractive point—if there is a license pool putting together of all the essential patents, your inessential patents are outside of it. To the extent that they more or less duplicate what the essential ones do, it gives you an opportunity to doubledip and get another load of royalties out of anybody who needs to sign up to take licenses to the patents that are available. [Slide] It is quite possible to generate inessentiality in a portfolio. There are various techniques for doing it. • The first, and perhaps the easiest, is to file divisional patents adding marginal features. We’ll come on to some marginal features in a moment. • The second deals with those SSOs that define essentiality by reference to claims, rather than to patents, because, of course, as you work down through the claim tree you are very likely to find that the dependent claims contain further features, which in practice are going to be used by most people but will not be defined in the standard, and therefore render those claims inessential although widely used. The sorts of inessential features one has in mind are parameter limits that are narrower than those set by the standard and features added to claims that are not required by the standard, because standards are typically focused on functional mainstream parameters. But by adding requirements—such as the addition of a power source (perhaps a battery), portability, a weight limit, specific technologies for screens, and so on—one can generate a set of claims that will

Part D: STANDARD SETTING  681

most likely be infringed by most users but which are inessential and which remove you from RAND obligations. I think those are interesting illustrations of what the limits on essentiality are and whether those limits are entirely adequate or whether they should be more widely defined, which brings me on in some ways to the second topic of validity. [Slide] As I say, the DOJ deals with the issue of how one can say that an invalid patent is nonetheless essential by relying on the presumption of validity. To set the background, I think it is worth thinking about what makes patents essential. Now, given that most standards turn on functional features, rather than means, defining things as broadly as they can so as to leave implementation to the users, it is unsurprising that essential patents tend to have very wide claims. There is something of a negative correlation between essentiality and validity, because the wider the claim, the less likely it is that one finds that the patent is valid. [Slide] There is a definitional way of dealing with this. Taking the second bullet point on here first, the ETSI definition of essentiality gets around any problem of worrying about validity because it concentrates purely on technical points.20 So essentiality for ETSI is defined as being impossible on technical but not commercial grounds to make equipment that isn’t infringing. For that reason, I think it is a definitional way around being concerned about validity. But that really doesn’t coincide with the competition law view of what constitutes essentiality. The flip side of essentiality is substitutability. If one looks at the TTBE Guidelines on what substitutes are defined as, an important part of that definition is “what licensees would regard as interchangeable, bearing in mind, among other things, royalties.”21 In other words, substitutability, and I would say essentiality, are in competition law economic, rather than technical, concepts. [Slide] And if they are economic, it leads you to quite an important conclusion about them. An economic concept means that we are looking at what licensees will do in practice. That means what they will regard as it being necessary to take a license in respect of. [Slide] Three bullet points arise from that: • The first one is that in order to judge whether something is essential it is possible to say, I think, that you ought to look at the behavior of a legally compliant, rational licensee. • You are talking about patents that, if they are subject to a RAND obligation, will be licensed on terms that are reasonable, and reasonableness will take account of all the circumstances, and those circumstances will, of course, include the potential that the patent is invalid. • A rational licensee looking at freedom to operate is going to take a license to a patent which it regards as important to what it is doing if the terms are reasonable, even if that patent is potentially invalid, the invalidity being priced into the royalty. That, I think, is the solution to how an invalid patent can nonetheless be an essential patent. [Slide] The solution comes down to the availability of RAND licensing. Patents which cover a standard are going to be essential, even if they are potentially or probably invalid,

Id.

20 See ETSI IPR Policy, supra note 2, at ¶ 15.6 (definition of “essential”). ESSENTIAL as applied to IPR means that it is not possible on technical (but not commercial) grounds, taking into account normal technical practice and the state of the art generally available at the time of standardization, to make, sell, lease, otherwise dispose of, repair, use or operate EQUIPMENT or METHODS which comply with a STANDARD without infringing that IPR. For the avoidance of doubt in exceptional cases where a STANDARD can only be implemented by technical solutions, all of which are infringements of IPRs, all such IPRs shall be considered ESSENTIAL.

21 Commission Notice, Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements, O.J. (C 101) 2 (2004) [hereinafter TTBE Guidelines], available at http://eur-lex.europa.eu/LexUriServ/ LexUriServ.do?uri=OJ:C:2004:101:0097:0118:EN:PDF.

682  CHAPTER VIII: COMPETITION LAW not because of a presumption of validity, but because they are covered by RAND licensing obligations. A licensee looking at them, making a rational decision, will see the potential invalidity is priced into the license on offer and regard the license as being necessary. That was all I wanted to say. Thank you very much. MR. VINJE: We may come back to those questions in the broader discussion. Can we move right on to Michael Hartogs from Qualcomm? Take it away. MR. HARTOGS: I do have some slides. We’ll wait for those. I had not intended to talk about Qualcomm v. Broadcom at all,22 but Carey brought it up. That actually is a remarkable case. I guess the most horrifying aspect is this notion that you can be subject to your co-members’ understandings or expectations despite and in contradiction to the written rules. So I would agree wholeheartedly with Carey that SSOs, to the extent that they haven’t revised or improved their rules, ought to, and ought to do it soon. In that particular case, it came down to the timing and vagueness about disclosures at the time of technical contributions. Qualcomm made its disclosures at the time of its technical contributions, as had something like 498 of the 500 technical contributions that had come in. Apparently, those other two created this different expectation. There were some other facts in that case that may have lead to a skewed result. But I am in wholehearted agreement that the clarity of SSO rules is something absolutely to be encouraged. As an FYI, we filed a petition for certiorari with the Supreme Court about two weeks ago in that case.23 There are two principal reasons. One, on the waiver issue, defies all prior law. Although the Federal Circuit did narrow the scope of the waiver, it is still without any legal underpinnings. The second has more to do with the circuit split between the D.C. Circuit in Rambus24 and the conclusions reached by the Federal Circuit in looking at the threshold question of what difference would it have made if there had been a bit more information.25 There was also an issue about sustaining and affirmative defense when the defendant won on other grounds. I don’t have high hopes for the granting of cert., but I do think these are important issues, and so we remain at least mildly hopeful. Let me quickly begin. I apologize. For some reason the program didn’t identify my topic. I am going to spend a few minutes answering a question, at least in my mind, that a lot of people have been either explicitly or at least implicitly asking, which is: What is FRAND? The debate about the importance of the ambulatory nature of FRAND commitments presupposes that they are an important thing to have and that there is, or ought to be at least, a deeper understanding about what a FRAND commitment entails. Primarily, I am speaking in the context of ETSI as a telecoms company. We are heavily involved in both ETSI, or the umbrella organization 3GPP, under which the ETSI IPR rules are a guiding principle. One or two important factors about the ETSI IPR Policy26 before I go into it. A little bit of history. In the late 1980s and early 1990s, when the first ETSI IPR Policy was being developed, there were actually some early drafts that never quite made it out of committee that imposed a compulsory licensing regime. Now, those were pretty soundly objected to by the membership in the development of the rules. Qualcomm Inc. v. Broadcom Corp., 548 F.3d 1004 (Fed. Cir. 2008). Subsequent to the conference, on May 15, 2009, the Supreme Court denied certiorari. See Qualcomm Inc. v. Broadcom Corp., 129 S. Ct. 2182 (2009). 24 Rambus Inc. v. FTC, 522 F.3d 456 (D.C. Cir. 2008). 25 See Qualcomm v. Broadcom, 548 F.3d at 1017–18 (disagreeing with Qualcomm’s characterization of the standard applied in Rambus.). 26 See ETSI IPR Policy, supra note 2. 22 23

Part D: STANDARD SETTING  683

A second version of the rule did come out and made it through the General Assembly on a passing vote, which instituted what some people have called “license by default.” It was basically a default FRAND commitment, that if you participated in the standard you were presumed to have given a FRAND commitment with respect to all of your essential patents out the door. Well, despite the General Assembly having voted in favor of that, there were a number of challenges to that. It imposed search obligations and a lot of potential downsides in manageability by the membership. So the final form of the ETSI IPR policy, which is very similar to the form in which it exists today, does one thing. It, first of all, does not mandate FRAND commitments. There is a frequent misnomer that SSOs require FRAND commitments. It asks for a FRAND commitment. That is, if the Director becomes aware of an IPR or others have identified IPRs, they are to ask for a FRAND commitment from the contributing member. If they then fail to receive one, there are mechanisms for either trying to resolve that dispute with the patent holder or, if necessary, redirect the standard away from the patented technology. But at the end of the day the FRAND commitment is a voluntary commitment. Why is this important? Well, we have actually heard a lot of discussion in the last few days about eBay.27 Despite being three years old, there is still a lot of, I would say, consternation at this notion of compulsory licensing, or at least relinquishment of the entitlement to injunctive relief, a violation of something that most of us have taken as sacred in our careers as IP lawyers.28 I am, by the way, an IP lawyer, not a competition lawyer. [Slide] The FRAND commitment, then, when given voluntarily, is not a trivial commitment. That is, it is a commitment by an owner of an essential patent to offer licenses to those patents to implementers of the standard. While that sounds somewhat simple and it has been referenced pejoratively it is much more than a mere promise to license. Those of us who work around IP know that this statement that “I am willing to license my IP to all comers and refuse licenses to no one” is a significant commitment. It is a relinquishment of the most significant right that you are conferred in receiving a patent for your technology. I will just jump ahead. I’m going to run short of time. The commitment has to be bona fide. The willingness to license and the engagement in licensing negotiations has to be with the objective of reaching a license agreement with prospective licensees. Another way to say that is your apparent negotiations cannot amount to nothing more than a constructive refusal to license by setting terms that are so high or so unreasonable as to render unviable any license to the technology. The final piece on what is FRAND is the nondiscriminatory element. The interpretation that I think is widely accepted, and it is in the guidelines of a number of IPR policies at a number of SSOs, is that similarly situated firms should not be treated dissimilarly. But it doesn’t mean that all terms for all licensees have to be identical. There is a recognition that FRAND establishes a framework under which negotiations may begin, but every party brings to the table a different set of needs and wants. Every licensor is different. Every licensee is different. The resulting agreement may be much more encompassing than just a license for essential patents. It may cover cross-licenses, for example, for essential and other patents. Frequently, eBay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006). “Since its founding, this country has recognized a patent holder’s right to exclude. By recognizing this right, the Founders sought to promote innovation, a goal desired by all.” Lily Lim & Sarah E. Craven, “Injunctions Enjoined; Remedies Restructured”, 25 Santa Clara Comp. & High Tech. L.J. 787, 788 (2009) (citing U.S. Const. Art. I, § 8, cl. 8 (“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries”)); see Mark A. Lemley & Carl Shapiro, “Frontiers of Intellectual Property: Patent Holdup and Royalty Stacking”, 85 Tex. L. Rev. 1991, 2035 (2007) (considering “the presumptive right to injunctive relief to be an important part of the patent law.”). 27 28

684  CHAPTER VIII: COMPETITION LAW companies tend to seek to have “patent peace” established between them and may cross-license entire portfolios. There may be other technologies that are transferred, know-how and the like. With the FRAND framework all of these are possible and have seen wide success over the last fifteen years since ETSI adopted its IPR Policy. [Slide] One of the things that I wanted to hit on in the remaining couple minutes I have is what FRAND is not, because there is an awful lot of noise being made these days that FRAND has certain limiting principles that were never there in the initial developments of the FRAND IPR policies. First, FRAND does not constitute a license. Those seeking to use the technology must still negotiate, and conclude licenses with the patent owner. FRAND doesn’t specify particular terms to be agreed on. It leaves open to bilateral negotiations the flexible results to be achieved by two parties negotiating in good faith at arm’s length. Importantly, FRAND does not limit the remedies available to a patent owner. There have been some who have argued that the giving of a FRAND commitment is a relinquishment of the right to seek injunctive relief or enhanced damages.29 This is somewhat contrary to common sense. If the worst-case scenario for a prospective licensee is that they could infringe, be sued, run the gamut of litigation, and at the end of the day be entitled to a compulsory license with no enhanced damages, then the negotiating field has been tipped very heavily against the licensor and in favor of the licensee to negotiate down from what was an otherwise reasonable rate. The prospective licensee failing to take a license, continuing or embarking upon an infringing campaign, ought to be subject to all of the remedies available to any patent holder who seeks to defend its rights. Finally, there has been an awful lot of discussion that there is a limiting principle to FRAND. It had been argued that that was inherent in FRAND. It is now being argued as a policy that ought to be looked at, adopting what has been euphemistically named ART and numerical proportionality.30 I won’t go into a lot of detail on that. It is a polite name for the arbitrary notions of royalty capping and division of royalties based on the number of essential patents, or revised slightly recently to value undefined for patents and allocated across licensees. [Slide] We can have more discussion on the failings of ART and proportionality. [Slide] One last piece I’d like to spend my last thirty seconds on is ex ante. It is a term of art that actually captures a whole bunch of concepts. There is a view of ex ante licensing disclosure. One of the important points there is it already happens. Companies frequently negotiate licenses prior to standardization. Some want to have licenses wrapped up prior to investment. Other companies wait. But it is left to the varying parties as to when and how they want to handle their negotiations. There has been some recent literature on the notion of ex ante auctions.31 While it is an interesting idea, the reality is most standards do not encompass a single technology for which 29 See, e.g., Geoffrey D. Oliver, “Living on the Fault Line: Counseling Clients at the Interface of Antitrust and Intellectual Property Law”, 22 Antitrust 38, 43 (Spring 2008); Maurits Dolmans, “Standards for Standards”, 26 Fordham Int’l L.J. 163, 205 (2002) (“Owners of essential IPRs for de facto or de jure standards (and especially those who have committed to FRAND licensing in order to obtain an exemption under Article 81(3)) should limit themselves to suits for damages and refrain from requesting injunctive relief against implementers.”). 30 A. Layne-Farrar, A. J. Padilla & R. Schmalensee, “Pricing Patents for Licensing in Standard-Setting Organizations: Making Sense of FRAND Commitments”, 74 Antitrust L.J. 671, 706 (2007) (describing the “numerical proportionality” characterization of FRAND royalties as the proposal that total royalties should be divided among patent-holders in proportion to the number of essential patents they hold). The term “ART” refers to an “Aggregate Royalty Rate” which “drives downstream output to zero.” Richard Schmalensee, “Standard-Setting, Innovation Specialists, and Competition Policy” (April 30, 2009), available at http://ssrn.com/abstract=1219784. 31 See Damien Geradin, Anne Layne-Farrar & A. Jorge Padilla, “Competing Away Market Power? The Ex Ante Auction Model for the Control of Market Power in Standard Setting Organizations”, 4 Eur. Competition J. 443 (2008).

Part D: STANDARD SETTING  685

a viable single auction could be the result. If you look at the ETSI-developed standards,32 they literally deal with thousands of technical contributions. Left open is the question then: Do you have thousands of auctions, and how many business people and lawyers do you need to send to these technical conferences in order to establish standards? There have been some recent papers critical of the practical implementation of these. Then finally, one of the last points on ex ante is there has been a suggestion about ex ante negotiations. This was alluded to by Carey, that you wind up with a very large set of prospective licensees; they almost always outnumber prospective licensors. The pitfalls of strong buyers or collective buyer action can further serve to diminish the value of patents to a patent holder. [Slide] My real quick conclusions: • I think current FRAND IPR policies strike a fair balance between stakeholders, both licensors and licensees. • It is a flexible framework that enables patent holders and licensees to negotiate bilaterally to reach mutually acceptable terms and conditions. • There are no prohibitions against ex ante disclosure. It does occur. Licensing often occurs, and there are incentives to do so. • Many of the claimed problems with FRAND or proposals related thereto are commercially driven and intended to meet certain other business needs. • Finally, the proposals that have been proposed have significant drawbacks that in our view would certainly do more harm than good. Thank you. MR. VINJE: Thank you very much, Michael. I think it is important that we get through the set speeches and have plenty of time for discussion. So why don’t we just move straight on to Christian Harmsen, who is going to discuss the antitrust defense in the standards context. MR. HARMSEN: A lot of difficulties. We learned already about the difficulties to set standards. We learned about the difficulties to impose the obligations to grant FRAND licenses. We learned now about the difficulties. What is FRAND at all but the poor cause? What should they do with all these difficulties? I would like to show you a little bit how the German courts try to deal with this interference between the claim of the patentee, whose patent we have to respect, and the claim of the user for a FRAND license. [Slide] It is absolutely clear that two different claims have to be reviewed by the courts in case there is a patent infringement action and the defendant claims that he is entitled to a FRAND license. There is the question of damages, and there is certainly the question what about the injunction. For the injunction—and this is also what we learned yesterday33—there are certainly some discussions possible, not in Germany but maybe on a broader scope. And what about irreparable harm and whether there should be an entitlement to an injunction as well? The damages question anyhow is something which is a little bit related to the question of “What would be FRAND?” because in any damage action later a court would anyhow have to declare what a reasonable amount of damages should be. [Slide] You may be surprised that we have a lot of case law on the so-called “FRAND defense” or “antitrust defense” in Germany. This is what I listed here for you, what we have. 32 See European Telecommunications Standards Institute (ETSI), About ETSI, http://www.etsi.org/WebSite/ AboutETSI/AboutEtsi.aspx (“[ETSI] produces globally-applicable standards for Information and Communications Technologies (ICT), including fixed, mobile, radio, converged, broadcast and internet technologies.”). 33 See Chapter IV.H, “Injunctive Relief: A Comparative Analysis”, supra this volume.

686  CHAPTER VIII: COMPETITION LAW Some of you may not know, but at least we think that we have here one of the first decisions in the whole world where actually a patent infringement action was dismissed because of the FRAND defense only. This is the case of Siemens v. Amoi.34 One of my partners had it. [Slide] We have some earlier case law on the question whether a FRAND defense is possible against damage claims. That is the decision of the Federal Supreme Court of four or five years ago.35 There, the High Regional Court of Düsseldorf had before not accepted the FRAND defense in a patent infringement action. That was overruled by the Federal Supreme Court, stating that indeed the FRAND defense is possible as a so-called “donoagate” [phonetic] defense.” This means that the patentee cannot claim something which anyhow has to get back in a logical second event after. [Slide] For the injunction claims we have in Germany a kind of twofold situation right now. The Regional Court of Düsseldorf accepted this in this mentioned Siemens v. Amoi decision, although other courts, like the court in Mannheim, do not accept it, or at least have very limited requirements for allowing that. What is also very exciting is that we expect a decision of the Federal Supreme Court on the question of a FRAND defense against injunctive claims on May 6.36 So this is only a few days to go. Maybe we will report to you next year what happened there. But this is what we expect will be the guiding decision which gives you the guidelines in future whether and how to apply the FRAND defense in a patent infringement action. [Slide] What can I tell you about what is the status right now? The infringement courts will apply so far, again before there is new case law from the Federal Supreme Court, a kind of three-stages test: • First, they take a look certainly at whether there is an obligation of the patentee to grant a FRAND license. This may be the result of ETSI rules or ISO rules or whatsoever. Or it may even come from competition law. • The second thing which is required at this stage is indeed that there is a sincere licensing request of the patentees. The question is: What is a “sincere licensing request”? We advise our clients at least that it should be a real signed license agreement which should be offered. Then, the court indeed has something on the table, something which they have to examine whether this is FRAND or whether it is not FRAND. • The third question is what the patentee does with such offer. Does he dismiss it or does he offer himself something? Then the court will take a look at whether it is FRAND or not FRAND, or approximately FRAND or approximately not FRAND. What is difficult for us—and this is what you raised earlier—is whether there is some flexibility or there is no such flexibility. There is an inclination to just take a look at what is on the table. It is difficult for the courts, at least in Germany, to come up with their own opinion and their own proposal what FRAND may be in a certain case. This may be different in the United States. Maybe we will discuss this later. [Slide] I have listed some details here. 34 Case 4a O 124/05, District Court of Düsseldorf (Feb. 13, 2007) (looking at what could have been negotiated “under the conditions of an open market” as a benchmark to examine the reasonableness of licensing terms). 35 Case KZR 40/02, Standard Tight-Head Drum (Standard-Spundfass), [2005] IIC 742, German Federal Supreme Court (Bundesgerichtshof), July 13, 2004. 36 Case KZR 39/06, Orange-Book-Standard, Decision of the Cartel Panel (Kartellsenat) of the German Federal Supreme Court (Bundesgerichtshof), May 6, 2009, English translation of case available at http://www.boek9.nl/ www.delex-backoffice.nl/uploads/file/Boek9%20/Boek%209%20Uitspraken/Octrooirecht/EN%20Translation%20 BGH%20Orange%20Book%20Standard%20-%20eng.pdf. After the conference, the decision was handed down. The court held the antitrust defense as principally admissible, but required the defendant meet two preconditions: (1) defendant must make a binding and unconditional license offer that comprises “usual” conditions and that cannot be rejected by the patentee without violating its antitrust obligations; (2) defendant must behave as if the license had already been granted by filing regular royalty reports and securing the license fees by escrowing a “sufficient amount.”

Part D: STANDARD SETTING  687

But, as the time is running out I would like to give you at least some examples of the case law we have in some more details. [Slide] In one of the cases the question was whether a true license is per se maybe not FRAND. Because there is bundling of a lot of patents, some of the patents may be essential and some of them may not be essential. So basically, it is indeed admissible, according to the case law, to have a bundled license offer. There is only a problem in a case where it is clearly a combination of nonessential patents with essential patents. [Slide] Then, in another case—it was actually the same case, among others—the question is: What about the amount of licenses, and must it always be a running royalty of a certain percentage or can it also be a per-unit license, which then may become more expensive in case the price goes down of the product and the relation of the licensee fee to the patented product goes up? For example, in the DVD business, whether the same license fee should apply no matter whether it is a DVD for the new Harry Potter movie, which sells for €17, or it is the so-called “Havermound” [phonetic], these very cheap things which are put on the top of magazines and given away for free, in the same license. So the question is how to treat this. [Slide] Then, there is another interesting case, which indeed I handled. There was a big company with sales all over the world. They were sued in Germany. The question was whether it is sufficient just to offer them a FRAND license in Germany to escape the claim of the patentee in Germany, or whether the patentee is right in dismissing such a request stating that there are other areas in the world where licenses are owned by the same company, or even by the mother company. There, the court in Düsseldorf said no, that the patentee is justified to dismiss it, to have an isolated national license instead of having a global license, particularly when products anyhow travel around the world. [Slide] Also what has been discussed earlier, the question of cross-licenses is also a consideration. Indeed, it becomes difficult whenever there is a kind of bundling of essential patents and nonessential patents and the licensee is, on the other hand, also forced to give away his patents as a cross-license in case they are not essential. [Slide] Also, there was some discussion about cap provisions in the German case law, which is also interesting, if you have a number of patents in a pool and you license only part of that. And then you certainly have to take into consideration that other patentees may come and ask for the same money. This may then add up the amount to a very high proportion of the product. [Slide] So, a lot of interesting questions. What is also interesting always is in these patent infringement actions who has the burden of proof. Actually, as you heard yesterday already, people who want something in German courts have to prove it. If a potential infringer claims to have a right for a license, he has to prove it. But this is most of the time very, very difficult, because certainly if you talk about discrimination, the third party most of the time does not know what kind of license fee system the patentee has. This is also a problem which has to be addressed. [Slide] So again, more after May 6. Thank you very much for your attention. MR. VINJE: Thank you, Christian. We’ll indeed look forward to May. I wonder if I could ask a quick question before we move on. You indicated that there might be different bases in Germany for the courts to find the existence of an obligation to grant FRAND licenses. I think you mentioned competition law as being among those. But have there actually been any cases where this defense has been admitted in Germany? Have the courts relied upon anything other than the FRAND commitment given by the patent holder in the standard-setting organization context to justify the basis of an obligation to license, or have they gone beyond that and actually relied upon competition law for the existence of that obligation?

688  CHAPTER VIII: COMPETITION LAW MR. HARMSEN: In the one decision I mentioned where this defense was successful, actually the court left it open. They said there is a basis in the standard and there may be also a basis in the EC contract. Therefore, they left it open. But they certainly apply it. My personal view is it is probably much more difficult to establish this from the EC contract than just to rely on contracts between the patentee and other parties in the standard. But this is just my personal view. MR. VINJE: It seems likely indeed. We will now move on to Daniel Ilan from Cleary Gottlieb, who will address, I believe, mainly the question of the extent to which FRAND commitments are transferred to those who originally make them to those who purchase patents or acquire patents that are subject to such commitments. I think that is the general question you will address. MR. ILAN: Just a clarification. What I am talking about is a situation where a patent owner made a FRAND commitment and then sold or transferred the patent to a subsequent owner, where the second owner is not actually a member of the standard-setting organization or SSO concerned. So we have a patent owner now that has not made a FRAND commitment and is not subject to the same IPR policies of the SSO concerned. [Slide] Why is this a timely discussion? Because transfers of patents, including essential patents, are becoming more and more common. That would not have been a problem if all transferees of patents would have had an interest in respecting FRAND terms. However, that is not always the case. In particular, non-producing entities do not have the same interest in respecting FRAND terms because they do not build a product business around that technology. They therefore do not need a cross-license or a license back from other companies for other essential patents. They are basically interested in extracting money from the patent. And they do not have the same reputation issues that other companies have. In particular, they do not have the desire to develop a reputation for reasonableness which would help them in the next competition for the next standard because non-producing entities probably would not participate in this competition. So that is not a deterrent for them to violating FRAND commitments. And they probably have less interest in keeping aggregate royalties down because they have less interest in inducing use of the products covered by the technology. The result is a potential hold-up by the owner of the patent because of the locking-in of the industry into a certain technology and the ability of the patent holder to request or demand non-FRAND terms. What I will do next, because it is important to enforce FRAND commitments on patent transferees, I will examine this issue under IP and contract law, then under antitrust law. I will point out some uncertainties and I will, hopefully, show how these uncertainties can be reduced through changes introduced to SSOs’ policies. [Slide] Under IP law generally, we know that non-exclusive licenses are generally enforceable against patent transferees. This is normally the case. In some jurisdictions, the transferee should have notice of the preexisting license. You can do that through recording the license in the patent office. If you look at the drawing at the end of the slide, if the transferor makes a FRAND commitment and that FRAND commitment is actually a non-exclusive license, then we do not care that the transferor afterwards transferred the patent to the transferee because the transferee takes the patent subject to the preexisting license. The question, however, is whether the FRAND commitment is really a license or just a promise to license.37 This might depend also on national law. There are arguments that under 37 See, e.g., Maurits Dolmans, “A Tale of Two Tragedies—A Plea for Open Standards”, 2 Int’l Free & Open Source Software L.R. 115, 134 (2010), available at http://www.ifosslr.org/ifosslr/article/view/46/72; Mark A. Lemley, “Intellectual Property Rights and Standard-Setting Organizations”, 90 Calif. L. Rev. 1889, 1904–06 (2002).

Part D: STANDARD SETTING  689

French law it might be easier to say that this is actually a license because the requirement under French law is only for some essential terms to be included in the license. But if you look at the wording in the FRAND commitments, it is not always clear that they constitute a license. The ETSI declaration, for example, says that it is an irrevocable declaration of being prepared to grant the license rather than an irrevocable grant of a license. [Slide] Now, if it is really a promise rather than a license, then things become more complicated. Normally, a promise can be enforced against the promisor, the original owner of the patent, but not necessarily against the transferee, unless the transferee, the second owner of the patent, actually agreed contractually to be bound by the promise; or the license was concluded before the transfer; or perhaps under the implied license doctrine, which is really a defense to patent infringement that means that even in the absence of a formal grant you can infer from language or from conduct that the person that owns the patent actually consents to the use of the patent by third parties. This doctrine may enable us to look at a promise as some kind of an implied license. There is at least one case in the United States, Wang Laboratories v. Mitsubishi,38 where an implied license was found to exist in the context of standard setting, but in the very particular situation of that case. We have, by contrast, the IP Com case in Germany,39 a recent first instance decision where the court said that these declarations are regarded as declarations with effect under the law of obligations but not as an absolute disposition, so basically not a license, just a promise, which does not bind the transferee. [Slide] Now let me go to antitrust law. The FRAND rationale applies to patent transferees. FRAND, like patent disclosure, ensures that the benefits of standardization outweigh the locking-out of alternatives. FRAND should not be taken away, because if it is, then the risks of lock-out increase, for example, because the transferee might be this non-producing entity, while the benefits are taken away because not everybody has access to the standard. Therefore, transfers of patents should be subject to a principle that the transferee should not refuse requests for FRAND licensing and should not be able to enforce the patent other than on FRAND terms under Articles 81 and 82 of the EC Treaty40 and under the Sherman Act.41 Also, the transferee should not be able to go to court and request an injunction against a third party that is willing to take a license under FRAND conditions. [Slide] Let me go quickly through two recent cases under antitrust law. One is the N-Data case in the United States.42 It involved a promise to IEEE to license for $1,000. The transferee, subsequent owner of the patent, rejects $1,000 license request. The FTC says under Section 5 of the FTC Act43 that this is an unfair method of competition, unfair act or practice, because the value that N-Data was able to extract from the patent was due to the opportunistic nature of their conduct (of rejecting requests for $1,000 licenses) rather than the value of the patent. The FTC required N-Data to license for the same $1,000 fee that was 103 F.3d 1571 (Fed Cir. 1997). IPCom GmbH & Co. KG v. High Tech Computer Corporation and HTC Europe, District Court of Mannheim, February 27, 2009. 40 Treaty Establishing the European Community, Arts. 81 & 82, Nov. 10, 1997, 1997 O.J. (C 340) [hereinafter EC Treaty]. Article 82 of the EC Treaty states: “Any abuse by one or more undertakings of a dominant position within the common market … shall be prohibited as incompatible with the common market insofar as it may affect trade between Member States.” Note: With effect from 1 December 2009, Articles 81 and 82 of the EC Treaty have become Articles 101 and 102, respectively, of the TFEU; the two sets of provisions are in substance identical. 41 15 U.S.C. §§ 1 & 2. Section 2 of the Sherman Act states: “Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony …” 15 U.S.C. § 2. 42 Complaint, In re Negotiated Data Solutions (N-Data), LLC, No. C-4234, (F.T.C. Jan. 23, 2008), available at http://www.ftc.gov/os/caselist/0510094/080122complaint.-pdf. 43 15 U.S.C. § 45 (prohibiting “unfair methods of competition”). 38 39

690  CHAPTER VIII: COMPETITION LAW promised by the original owner of the patent. It is interesting that the FTC looks at N-Data as the company that reneged on their commitment even though the commitment was made by a previous owner. By contrast, IP Com in Germany, a first instance case, where Bosch declared FRAND to ETSI but then Bosch transferred the patent to IP Com, a collecting company, basically a company that does not produce but just collects royalties. The court there said that there is no restriction of competition that is effected by the transfer of the patent other than that which might have been caused by the essential nature of the patent. The court ignores, however, the fact that patents, like most human beings, are not born essential, they become essential. How and why do they become essential? They become essential because of a reliance on the FRAND commitment by the owner of the patent, in this case the original owner of the patent that then transferred the patent to a second company. So you should really look at those patents as being encumbered by a FRAND commitment, even if not under IP and contract law, then under antitrust law. The patent really has a lock on it which has a code that says FRAND, and only if you type FRAND can you really open the lock and enforce the patent. It is also true that if this was not the case, then the conditions of Article 81(3) would not have been fulfilled with respect to the standard-setting agreement.44 [Slide] In the seconds that I have left, I will just say that Carey said that SSOs need better lawyers. I agree. But SSOs also need better members. That means that members should be able to come to agree on rules that, hopefully, would help reduce the uncertainties that currently exist with respect to the enforceability on transferees. One of those rules, of course, is that SSOs should require that any transfer of, or an exclusive license under, a patent would be effected only if the transferee agrees contractually to be bound by the FRAND commitment, which would avoid these issues. There are other things that perhaps we can talk about later. MR. VINJE: Thank you very much. Before moving on to Cecilio, maybe I could ask you a quick question. You mentioned a few cases here. I wonder if you could give us a picture of how significant this issue is more broadly. Is this something that is arising very commonly? Are there lots of people who are transferring patents to avoid their FRAND obligations, or is this something which is rare? MR. ILAN: I don’t know whether a lot of people are transferring patents to avoid obligations, but this is definitely an issue that starts to interest both SSOs and courts. Having negotiated both lots of patent transfer agreements and SSO policies, I know that people are really concerned about this issue. Many times sellers of patents actually want to put this in their patent transfer agreement, maybe because they are themselves worried. The problem is that the lawyers for the buyers many times say, “You, seller, don’t have an obligation under your SSO agreement to do that because most SSO agreements, like ETSI, only say something like ‘you have to employ reasonable best efforts to notify the transferee that there is a FRAND commitment.’ There is no real obligation to actually require the transferee to abide by this commitment.” So it is very difficult. I think that, because of the lack of clear rules in the SSOs’ policies, coupled with the economic downturn and more sales of patents, the answer is yes, we will see more and more of that. MR. VINJE: Thank you. 44 See European Commission, Guidelines on the Application of Article 81(3) of the Treaty, O.J. (C 101) 97–118 (Apr. 27, 2004) (The four conditions are: (1) efficiency gains; (2) fair share for consumers; (3) indispensability of the restrictions; and (4) no elimination of competition.).

Part D: STANDARD SETTING  691

I think we need to move on to Cecilio in order to allow some limited time for discussion. I apologize that this session was set up with lots of speeches and relatively little time for discussion. I don’t apologize to the speakers—they are all extremely interesting—but it would have been good to have had more time for discussion. Cecilio, I think, will address just a few points and probably not use all of his fifteen minutes of allocated time. Cecilio is the Director responsible for Information, Communication and Media in DG Competition in Brussels and has lots of experience for some years now dealing with standard-setting issues. I think he is going to address a few points about when antitrust intervention might be appropriate in the standard-setting context and perhaps provide a bit of guidance to standard-setting organizations. MR. MADERO: Thank you very much. I am the last one speaking this morning. I will try to be very short, for obvious reasons, because I think it is the debate and the question time that is more interesting than what I might say myself. I am not going to use any PowerPoint presentation, not because it is a Microsoft product but simply because I normally don’t use it. Of course, even if it is obvious, it is probably good to mention that whatever I am going to say today does not represent necessarily the position of my house, meaning my DG or the Commission, even if I have already been working there for twenty-two years, which makes me someone old. The first question I would like to mention is precisely to what extent it is possible for antitrust authorities to catch up, if I may say, with the ICT sector, which is a very fast-moving sector. There is a legitimate question, which is to what extent it is possible for antitrust authorities to be effective in our enforcement action, because it is true that there is always a risk associated with ex post enforcement, and it is obvious that the Competition Authority needs to do everything that they can in order to enforce the applicable rules only when it is appropriate, in any case when there is still time to do it. I don’t think that these concerns are necessarily well founded because if markets are really fast moving, it is likely we will see genuine innovation taking place, new market entry, and probably it is going to be difficult to see very enduring market power taking place there. But it is in the markets in which one company has a strong dominant position that makes it possible for this company to commit abuses which could affect consumer welfare, where we are supposed to intervene when the conditions are met. This morning the Microsoft case was mentioned.45 Even if I did not have the intention to say anything about this by now famous case, I cannot resist now to quote very briefly the Court of Justice, the Luxembourg Court of First Instance to be more specific and accurate, in its judgment of September 2007, saying: “Through tying and denial of interoperability, Microsoft forced customers and consumers to standardize to a large degree on Microsoft’s software, although absent Microsoft’s illegal behavior they would have opted for better thirdparty alternatives.” The Court found that Microsoft therefore stifled innovation and prevented consumer choice and found that this was not in line with Article 82 of the Treaty. Enough on this famous case. It is true that market power and pricing disputes are relatively frequent consequences of standardization work in this ICT or high-tech sector. Again, if standardization processes are open and transparent, then the standard can bring, and certainly brings, significant benefits to the consumers by ensuring compatibility between products. 45 Case T-201/04, Microsoft Corp. v. Comm’n, [2007] E.C.R. II-03601 (Judgment of the Court of First Instance (Grand Chamber) of 17 September 2007); see Chapter II.A, “The Judiciary & IP Policy, Europe”, supra this volume.

692  CHAPTER VIII: COMPETITION LAW But under certain circumstances—and the Commission is looking into two cases now— standardization can confer on a particular technology a degree of market power that it would otherwise not have had, and in that case standardization might trigger as an end result that customers and competitors are locking into technologies that in normal circumstances they would not have chosen or selected. This is the reason why many standards organizations, as you know, require both disclosure of potentially relevant IPRs and a commitment to license those IPRs on fair, reasonable, and nondiscriminatory terms. The question is: What do we mean by FRAND? These requirements, even if very obvious, do not necessarily solve all the problems. What if IPRs are not disclosed? What if one person’s FRAND terms are another person’s exploitative abuse? The problems only manifest themselves once the standard has been established, or even widely adopted, too late to start the standardization process again choosing another technology. This is why I started my intervention by saying that the question here is to make sure that we are timely in our enforcement. The Commission is now examining two cases where standards are involved.46 For obvious reasons that certainly you understand, I am not going to refer in detail to them. One of them refers to a possible patent ambush. You know that our definition of patent ambush is not very original. I would consider this is a situation where a company would go for a sort of deceptive capture of a standard through intentional nondisclosure of essential intellectual property rights during the standard-development process. This would be a generic definition of a patent ambush. Then, in such a case, the question that we have to examine is: To what extent would the company in question have been able to charge the royalties that it is charging? And, if there is a patent ambush that we can establish, the question is: What is the remuneration that this company should get for such deceptive way of getting to the standard? Probably the answer is very little. I could be more precise if there are questions in this respect. There is another case that we are examining—and I am not even mentioning the names of the companies for obvious reasons—where there are allegations that the company in question is charging non-FRAND royalties for a very specific technology and that this could lead to final consumers paying higher prices. This could also lead a slower adoption of new standards and, at the end of the day, could create problems or make slower the adoption or introduction of new technologies. So it is, I think, sensible, not to say indispensable, for a competition authority to look at ways that markets can be made to operate better and avoid, if possible, the need of ex post control by the FTC, the DOJ, or the Commission. So the question here is: Are ex ante mechanisms possible? Allow me to propose the following hypothetical scenario. At the point at which a standard is under discussion, there are four viable roughly comparable alternative technologies each competing to be selected as the essential technology for the standard. If the selection by the standardization organization is made on the basis of both the price and quality of the relevant technologies, then the price is competed down to the market level ex ante. Broadly speaking, the mechanism is similar to an auction. One potential essential technology holder declares his rights before the standard is set, and at the same time specifies the maximum royalty he would charge if he is selected for the standard. Then another potential essential technology holder may declare his rights and the associated maximum royalty that he would 46 At least one has been resolved in 2009. See, e.g., Ruben Schellingerhout & Piero Cavicchi, European Commission, “Patent Ambush in Standard-Setting: the Commission Accepts Commitments from Rambus to Lower Memory Chip Royalty Rates”, Competition Policy Newsletter (No. 1, 2010), available at http://ec.europa.eu/competition/ publications/cpn/2010_1_11.pdf.

Part D: STANDARD SETTING  693

charge, and so on. So there is a sort of virtuous cycle of competition on the basis of technology and price before the standard is selected where the price is competed down, as I said before, to the market level, at least in principle. Well, as you probably know because some of them come from you, there have been increasing calls for standardization bodies to allow and implement ex ante selection of the kind that I have described here.47 I believe that there is no reason, as some claim, to believe that this is in itself anticompetitive because it risks leading to some kind of inappropriate price collusion, at least where the standard-setting process picks one solution over others. Don’t misunderstand me. I have, hopefully, a clear understanding of the scope and the ways of implementing Article 81. But we are now completely paranoid in Brussels and we might imagine a situation where an ex ante process is launched without us trying to prove that there is price collusion or anticompetitive behavior caught by Article 81 of the Treaty. In the circumstances I have just described, it is difficult to precisely envisage what kind of collusion there might be. Of course if such ex ante schemes are merely only some kind of artificial front for illegal price fixing, then that would of course be a problem that we will be obliged to fix. But in and of themselves such schemes are not per se, by definition, anticompetitive, and indeed, as I have already outlined, have the potential to bring strong procompetitive benefits by competing the price down to the market level before the standard is set and without ex post intervention of competition authorities. In addition to ex ante arrangements such as these, potential problems could also be mitigated by—and I am now entering into a delicate area – privileging non-proprietary technologies by attempting, if possible, to chose open standard technologies when defining or setting standards. Of course, this is not always possible. As I said before, we are agnostic in this respect. I think we have to establish a clear distinction between competition policy and what a public administration could do from a procurement point of view. From a competition policy perspective, we cannot show any preference. From a public procurement perspective, one may come to the conclusion that open standards should be privileged in order to communicate with our citizens. This is something that we could discuss in more detail. On the other hand, talking again about ex ante standardization processes, there is a risk, or there might be a risk, that monopsony, meaning by that a sort of collective buyer power, would be put in place in an illegitimate way. In such a scenario, buyers would be ultimately driving down the price to such a low degree that the producers or those who have developed new technologies would have very limited incentives to innovate. This is something, of course, that we do not want to facilitate either. These are risks that must be avoided. I would like to conclude by saying that I do not believe that it is the role of a competition regulator here or on the other side of the Atlantic to prescribe actively what rules standards bodies must follow or adopt. Different rules may be appropriate for different bodies and sectors. Companies will certainly know better what works for them. However, we can give guidance as to what may or may not be problematic from an antitrust perspective to ensure that industry can make the most informed choices. This is precisely what we are trying to do with our current examination of these two ongoing cases that I have already mentioned to you. As a very final conclusion or a comment, I would like to quote my Commissioner. I normally do it on these type of occasions. I said before that we have to distinguish very clearly between procurement issues and competition matters. 47 See, e.g., David L. Meyer, Deputy Assistant Attorney General, Antitrust Division, U.S. Dept. of Justice, Speech at the ABA Section of Antitrust Spring Meeting Panel on Standards Development Organizations, “How to Address “Hold Up” in Standard Setting Without Deterring Innovation: Harness Innovation by SDOs” (Mar. 26, 2008), available at http://www.justice.gov/atr/public/speeches/234124.pdf.

694  CHAPTER VIII: COMPETITION LAW Competition policy is business model neutral. We are not in favor of open standards by definition, or we are not prohibiting or making difficult the adoption of standards which are covered by proprietary technologies. When talking about procurements, we might have another approach. When I say “we” I am talking about the Commission. I would like to quote my Commissioner, Neelie Kroes, when she said quite recently: “It is a smart business decision to deploy product based on open standards as it allows for interoperability and avoids vendor lock-in.”48 As you know, in Europe we have many small and medium-sized IT companies whose business models revolve around open source and open standard software. Probably you know that Europe is a leader in open source development. Seventy percent of the world’s open source developers are European. In a study by DG Enterprise in 2006, it was concluded that: “Given Europe’s historically lower ability to create new software businesses compared to the U.S., due to restricted venture capital and risk tolerance, the high share of European [open source solutions and] developers provides a unique opportunity to create new software businesses and reach towards the Lisbon goals of making Europe the most competitive knowledge economy by 2010.”49 I don’t think that we will be the most competitive knowledge economy by 2010, but the attempt is there. The need for the Commission to facilitate this process is also very obvious. Many thanks for your attention. MR. VINJE: Thank you very much, Cecilio. We have just one panelist, and I will pop a question on her. We don’t have very many minutes. Carey suggested that the patent ambush topic is a red herring. I guess the question I would have to Pat, if she is willing to address it, and to Carey as well, is: If it is a red herring, why has there been so much talk about it? Do those who discuss it so much have some sort of underlying nefarious purpose? If it is a red herring, why is it so much talked about? MS. MARTONE: I can’t say it’s a red herring. I have to say that it really doesn’t fit into our United States concepts of patent misuse. Patent misuse is not the context in which to discuss so-called patent ambush, because in the United States patent misuses arises out of using a patent as a lever to affect activity outside the scope of your patent. Under the Virginia Panel case in the Federal Circuit,50 patent ambush is not patent misuse. It does arise in the context of defenses of estoppel and implied license to patent infringement cases which I have been involved in. I think that what you find in these circumstances, when you actually litigate this issue of what happened during the standard-setting process, is ambush is much too simplistic to possibly tell you the enormous complexity of what happened. I have been in cases where the rules of disclosure changed and different standards participants made different commitments over the course of time under different standards obligations. So the concept that there was one rule and everyone made the same commitment is not correct. I have been in two matters where initially companies talked about exchanging royalty-free licenses and some companies made early commitments to royalty-free licenses conditioned on the rest of the standards participants doing the same. They did not. So the question is: Why 48 Neelie Kroes, European Commissioner for Competition Policy, “Being Open About Standards”, Speech at the OpenForum Europe, Breakfast Seminar, Brussels, (June 10, 2008), available at http://europa.eu/rapid/ pressReleasesAction.do?reference=SPEECH/08/317. 49 UNU-MERIT, Economic Impact of FLOSS on Innovation and Competitiveness of the Information and Communication Technologies (ICT) Sector in the EU, at 10 (final report, Nov. 20, 2006), available at http://ec.europa. eu/enterprise/sectors/ict/files/2006-11-20-flossimpact_en.pdf. 50 Virginia Panel Corp. v. MacPanel Cos., 133 F.3d 1225 (Fed. Cir. 1997).

Part D: STANDARD SETTING  695

should the first people who talked about that be bound by a royalty-free license commitment which was explicitly conditioned on everyone else agreeing to that? So I think that when you actually get into the situation of what happened during the standardsetting process, it is very complicated. But we do as a legal matter, even in the infringement context, have for that unique situation the concept of estoppel. But again, estoppel requires that the standard-setting participants all agree to the standard in the context that either you didn’t have any patents or you would give them away for free. That is very, very difficult to prove. MR. VINJE: Okay. Maybe I could throw out to the whole group another question that Carey raised, which I at least found very interesting: Might it constitute an antitrust infringement for some companies to get together and choose a standard that read on their assembled patents when they could have chosen alternative technology? Anyone want to address that question? That strikes me as an interesting one. Might that constitute an antitrust infringement; and, if so, under what circumstances? Nobody willing to take that one on, okay. Carey, you don’t want to take it on yourself? MR. RAMOS: In the absence of anyone speaking to it, I will just speak briefly about it. It is an issue that I am surprised has not been litigated, at least not in the United States. Maybe it has in Germany. I found the presentation on some of the German precedents fascinating because it is more developed perhaps than the United States. But I think it is a very fact-intensive question. In other words, let’s say that five companies get together to develop a standard. They all know what their patents say and they have an alternative technology they could choose. They choose technology A, which their patents read on—there’s a conspiracy, let’s say, to do this—and announce the standard. Well, if the alternative technology is not subject to a patent, it is free, it is very likely the alternative technology will be adopted by the marketplace because it is cheaper. You may have a conspiracy, but it is a conspiracy without any harm. Alternatively, you could have two different standard-setting bodies, a standard-setting body for standard A and a standard-setting body for standard B, and you could have competition over standards, as occurred recently with HD-DVD and Blu-ray. You had two standard-setting bodies.51 Interestingly, in that case you had companies that participated in both standard-setting development processes, but two standards emerged and you had a format war. So I think it depends on the facts of the case. MR. VINJE: Okay. That is certainly a good quick way of addressing the question. We, very unfortunately, have no further time, I believe, Hugh, we are finished. Maybe I could just leave all of you with a question to contemplate and discuss during the break if you wish, which is: If you believe there is a patent ambush problem, whether the solution to it, in part at least, might lie in some sort of combination of ex ante disclosure, potentially ex ante discussion policies, together with some sort of FRAND obligation with further meat on it? I just throw that out as a suggestion. I know that there are those who have suggested that as a potential solution to the patent ambush problem, which might or might not exist. So I throw it out for you to think about and discuss amongst yourselves. But, unfortunately, we don’t have time for this group to discuss it. Thank you very, very much to the speakers and thank you for listening. 51 For the background of the format war and a discussion of some of the antitrust issues, see Kevin L. Spark, Note, “Format War, Antitrust Casualties: The Sherman Act and the Blu-Ray—HD-DVD Format War”, 83 S. Cal. L. Rev. 173 (2009).

696  CHAPTER VIII: COMPETITION LAW

APPENDIX A

Standards Setting in the ICT Industry — IP or Competition Law? A Comparative Perspective Anselm Kamperman Sanders* Setting the scene During the past couple of years the interface between intellectual property law and competition (anti-trust for the US-trained) law has increasingly become the source for questions on the purpose of intellectual property rights and the exercise thereof on one side, and the role of competition law and competition authorities on the other for the purpose of providing incentives to innovation and access to industry standards. Intellectual Property and Trade The issue of standard setting is gaining in importance. Technical standards are introduced into the market through private standard setting (by agreement or by network effects), or through certification by a public body. When it concerns new technology the protection by means patents, copyright (on software), or database rights play an important role in the licensing and technology transfer, but also in questions over access to these standards by competitors and consumers alike. Furthermore, policy on standard setting is fast becoming an issue of international trade. At the core of the two WTO cases (DS 362, China—Measures Affecting the Protection and Enforcement of Intellectual Property Rights and DS 363, China—Measures Affecting Trading Rights and Distribution Services for Certain Publications and Audiovisual Entertainment Products) over media products is the question who will control the market access to the online distribution environment for China. Essential Facilities or Innovation in the EU and the U.S.? After the inception of the essential facilities doctrine in the United States, however, it has been the European Commission that has been most pro-active in asserting its regulatory power when it comes to ensuring access to standards and essential technologies. From the lineage of cases comprising inter alia the decisions in Magill,1 IMS Health,2 and Microsoft3 a picture is * Anselm Kamperman Sanders is Professor of International and European Intellectual Property Law at Maastricht University, The Netherlands. Anselm is the academic director of the IEEM Intellectual Property Law School and annual Intellectual Property Seminar in Macao, China. He co-edits (with Christopher Heath) the book series on International Intellectual Property associated with this annual event, which in June 2009 will celebrate its 10th year— http://www.ieem.org.mo/courses/index.html. He may be reached by email at [email protected]. 1 Joined Cases C‑241 & 242/91 P, Radio Telefis Eireann v. Comm’n, 1995 E.C.R. I-743 (ECJ). 2 Case C-418/01, IMS Health GmbH & Co. KG v. NDC Health, 4 C.M.L.R. 1543 (2004). 3 Case T-201/04, Microsoft v. Comm’n, 2007 E.C.R. II-03601.

Part D: STANDARD SETTING  697

now emerging whereby the European Court of Justice has sanctioned and developed a doctrine that deals with the abuse of a dominant position consisting of a refusal to license intellectual property, where innovation is stifled through such a refusal. Still in its infancy, the doctrine may facilitate the balancing of interests of innovators, right holders, competitors and society as a whole in assessing the justification for the intellectual property system itself in light of wider competition concerns. Meanwhile the U.S. practice shows signs of internalizing concerns over patent misuse in the IP system itself. The question is, therefore how the European and U.S. positions can be reconciled, as they both have an impact on international trade and standard-setting practice. Competition Law Not Part of WTO Law The application of such a doctrine outside of the context of the European Union, let alone in the context of the WTO is, however, not yet universally greeted with enthusiasm. State and industry stakeholders in intellectual property in particular feel uneasy about the prospect of absolute rights of property being subject to restrictions through the application of competition law, especially where intellectual property industry standards offer great network advantages to control both domestic and foreign markets. It comes as no surprise then that Competition, or Anti-trust Law is not part of WTO law. Preliminary Conclusions The preliminary conclusions of the contribution are that: • The strengthening of intellectual property laws must go hand-in-hand with tailoring competition law and technology transfer agreements to counter abuse in the exercise of intellectual property rights; • This is even more pertinent where standards are involved; • Regulators need to be more actively involved in the certification of standards, especially for the creation of appropriate licensing (FRAND) terms; • Competition rules must take into account the international trade dimension of standards and the role of intellectual property therein; • Competition authorities will have to develop a coherent policy on matching the basic tenets justifying intellectual property rights with competition law, where the long-term interest of innovation is common to both branches of law; Standards and Intellectual Property According to European Competition Commissioner Kroes standardization “encourages competition on the merits between technologies from different companies, and helps prevent lock-in.”4 Through standard-setting organisations (SSOs), participating firms can indeed choose the most effective technology and switch to superior alternatives as technology develops. This allows firms to cooperate in the setting of standards for the purpose of reducing risks in investment, while allowing for multiple innovators who adopt the standard to compete in the implementation of the standard. The benefits of standardization are reflected in the Commission’s Horizontal Guidelines on Competition,5 providing an exemption from the application of Article 81 EC Treaty, which 4 Neelie Kroes, “Being Open About Standards”, Speech at OpenForum Europe—Breakfast Seminar (June 10, 2008), available at http://europa.eu/rapid/pressReleasesAction.do?reference=SPEECH/08/317. 5 Guidelines on the applicability of Article 81 to horizontal cooperation agreements, 2001 O.J. (C 3) 2, paras. 159–78.

698  CHAPTER VIII: COMPETITION LAW prohibits agreements and concerted practices that prevent, restrict or distort competition, insofar as they may affect trade between Member States. Intellectual property rights play an important role in innovation, because such rights will cover many new technologies that may be part of a standard. The benefits of standardization lie primarily in interoperability, and the ability of the patent holders to receive royalties for their contribution to the standard. Innovators holding intellectual property wish to secure royalty flows, while reaping the benefits of an increase in demand for the use of their technology arising from participation in a standard.6 It is for this reason that holders of IP rights are moving away from formal standardization bodies, as they are often subject to public procurement regulations that often know restrictive mandatory caps on royalty payments.7 They therefore feel more comfortable using more flexible SSOs, where terms of use, the essential character of patents, and the royalty rates can be freely negotiated. At the interface between standardization and intellectual property rights there is, however, a tension between intellectual property rights and competition law. Holders of intellectual property rights over a standard may engage in excessive rent seeking, or even refuse to license or supply essential components necessary for the creation and marketing of new and innovative products. As such there are various problems: First, participants in standard setting may try to include their intellectual property and then charge royalties in excess of their true value. When multiple players are rent-seeking, this amounts to rent-stacking. Second, participants may not disclose fully their intellectual property during the setting of a standard,8 springing a surprise on unsuspecting users of the standard in a so-called patentambush. Third, participants may try to include too much intellectual property in a standard, amounting to a tsunami of disclosures, otherwise known as patent thickets,9 that obscure the true extent of essential intellectual property comprised in the standard. Fourth, several participants holding key intellectual property in a standard may engage in cross-licensing to the detriment of others, thus effectively imposing high(er) royalties on others, or even excluding them from the standard.10 In all the practices described above can be said to be detrimental to innovation, and they may also be subject to sanctions by SSOs, the application of competition law,11 or to court interference.12 Much has been made in this regard about the granting of licenses on ‘reasonable and non-discriminatory’ (RAND)13 or ‘fair, reasonable and non-discriminatory’ Mark R. Patterson, “Inventions, Industry Standards, and Intellectual Property”, 17 Berkeley Tech. L.J. 1043 (1992). See K. Blind, “The Influence of Companies’ Patenting Motives on their Standardisation Strategies”, in Aachener beiträge zur informatik (Jakobs & Söderström, eds., 2008). 8 In re Dell Computer Corp. (FTC Docket No. C-3658); Stambler v. Diebold, 11 U.S.P.Q. 2d (BNA) 1709 (E.D.N.Y. 1988); Potter Instrument Co. v. Storage Tech. Corp., 207 U.S.P.Q. (BNA) 763 (E.D. Va 1980); Wang Labs. v. Mitsubishi Elec. Am. Inc., 860 F. Supp. 1448, 30 U.S.P.Q. 2d (BNA) 1241 (C.D. Cal. 1993). But see Wang Labs. v. Mitsubishi, 103 F.3d 1571 (Fed. Cir. 1997). 9 Carl Shapiro, “Navigating the Patent Thicket: Cross Licensing, Patent Pools, and Standard Setting”, Nat’l Bureau of Econ. Research, Innovation Policy and the Economy 119–50 (Jaffe, Lerner & Stern, eds., 2001). 10 Author Tim Simcoe of the University of Toronto argues that SSOs should play a more active role in resolving conflicts over IPR. See Tim Simcoe, “Open Standards and Intellectual Property Rights”, Open Innovation: Researching a New Paradigm 161–83 (Chesbrough, Vanhaverbeke & West, eds., 2006), available at http://www.openinnovation.net/ Book/NewParadigm/Chapters/08.pdf. 11 See In re Rambus, Inc., FTC Docket No. 9302, Opinion of the Comm’n (2006). 12 For an ongoing saga on a video compression standard “H.264,” see Qualcomm Inc. v. Broadcom Corp., 2008 WL 66932 (S.D. Cal. Jan. 7, 2008), vacated in part, remanded by Qualcomm Inc. v. Broadcom Corp., 88 U.S.P.Q.2d 1169 (S.D. Cal. Mar. 5, 2008). In the latest development of Qualcomm Inc. v. Broadcom Corp., 548 F. 3d 1004 (Fed. Cir. 2008), the court held that patents relevant to the use of a standard may be unenforceable if the patent holder withheld information during the standards development process. 13 For an economic analysis on the effect of the use of RAND terms see B. Chiao, J. Lerner & J. Tirole, “The Rules of Standard Setting Organizations: An Empirical Analysis”, 38 RAND J. Econ. 905–30 (2007). 6 7

Part D: STANDARD SETTING  699

(FRAND)14 terms, that try to bring about an ex-ante disclosure of licence terms and royalties,15 but the exact scope and meaning of FRAND terms is still unclear.16 In addition, ex-ante disclosure places a burden on innovators that have to bear the cost of negotiation at a point when revenues are not yet known and the detail required for a licence are not yet clear. The policies of SSOs are therefore usually limited to a requirement of “reasonable disclosure.”17 Royalty schemes modeled on the principle of numeric proportionality, meaning that each participant brining his IP to the standard receives an equal share of the royalties, furthermore leads to strategic behaviour, prompting participants to bring non-essential patents to the standard,18 so as to ensure a stake of the royalty flow.19 The limitations of contractual licensing rules, such as RAND or FRAND, and the need for interpretation of these rules ex post,20 means that there remains a role for competition authorities to monitor SSOs and contract terms, and for competition and intellectual property law to provide a coherent framework for standard setting.21 Patent Misuse or Competition Law, an Atlantic Divide? Apart from a common understanding on the desirability of the improvement of the quality of patents granted in order to ensure that patent thickets or “patent flooding”22 is reigned in, there is an apparent Atlantic divide on the question to what extent competition authorities should intervene in cases of excessive pricing or other abuses of a dominant position involving intellectual property.23 Whereas U.S. law leaves monopoly pricing unregulated, the European regulators do intervene, because there is less faith in the ability of the market to self-regulate and limit monopoly power where “essential facilities” are concerned. This remarkable given the fact that the doctrine of “essential facilities” was developed in the U.S.,24 but not readily applied in IP cases.25 This brings about two interesting areas of tension. First, that between intellectual property rights and competition law in Europe. Second, that between solutions 14 For an analysis see Mathias Dewatripont & Patrick Legros, “‘Essential’ Patents, FRAND Royalties and Technological Standards” (ECORE, Working Paper No. 2008/26, Apr. 9, 2008), available at http://www.ecore.be/ DPs/dp_1207816380.pdf. 15 For the U.S., the generally accepted framework for calculating royalties can be found in the case of GeorgiaPacific Corp. v. U.S. Plywood Corp., 318 F. Supp. 1116 (S.D.N.Y. 1970). For the EC, all patents which are “essential” to a standard should be regarded as equally valuable and should be treated numerically proportional, since they all afford patent holders the same market power. 16 See Nokia Corp. v. Qualcomm Inc., No. 06-509, 2006 WL 2521328 (D. Del. Aug. 29, 2006). 17 Mark Lemley, “Intellectual Property Rights and Standard Setting Organizations”, 90 Cal. L.R. 1889 (2002), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=310122 18 See A. Jaffe & J. Lerner, Innovation and its Discontents (2004) (arguing that the quality of patents needs to be increased in order to remedy this problem). 19 For a effort to make sense of ex-ante pricing and a critique of numeric proportionality, see Anne Layne-Farrar, A. Jorge Padilla & Richard Schmalensee, “Pricing Patents for Licensing in Standard Setting Organizations: Making Sense of FRAND Commitments” (CEMFI Working Paper No. 0702, 2007), available at ftp://ftp.cemfi.es/wp/07/0702. pdf; see also Dewatripont & Legros, note 14 above. 20 Layne-Farrar, Padilla & Schmalensee, ibid, point to a wide variety of interpretations of FRAND that are all reasonable. 21 See, in this respect, the European Commission’s press release from December 2005 on their review of IPR rules at the European Telecommunications Standards Institute (ETSI). Press Release, European Comm’n, Competition: Commission Welcomes Changes in ETSI IPR Rules to Prevent ‘Patent Ambush’ (Dec. 12, 2005), available at http:// europa.eu/rapid/pressReleasesAction.do?reference=IP/05/1565. 22 Daniel L. Rubinfeld & Robert Maness, “The Strategic Use of Patents: Implications for Antitrust”, Antitrust, Patents and Copyright: EU and US Perspectives 85, 88 (Leveque & Shelanski, eds., 2005). 23 Michal Gal, “Monopoly Pricing as an Antitrust Offense in the U.S. and the EC: Two Systems of Belief about Monopoly?”, 49 Antitrust Bull. 343–84 (2004). 24 United States v. Terminal R.R., 224 U.S. 383 (1912). 25 Teague I. Donahey, “Terminal Railroad Revisited: Using the Essential Facilities Doctrine to Ensure Accessibility to Internet Software Standards”, 25 AIPLA Q.J. 277 (1997).

700  CHAPTER VIII: COMPETITION LAW sought in Europe and the U.S. to overcome problems associated with standards and abuses of monopoly power. As standards have a global effect, the difference in outlook has an impact on global trade. West Atlantic—Internalization In the U.S. the solution to patent abuse is sought within the patent system itself. An important guideline in this respect is the case of eBay v. MercExchange.26 The case involved online auction technology, for which MercExchange holds the patent. For some time eBay tried to buy this technology that it uses in its “Buy it Now” technology, and was sued by MercExchange when it abandoned these efforts. Although MercExchange was successful in arguing its case for infringement, it was unsuccessful in securing a permanent injunction against eBay for the use of its technology, because MercExchange itself did not work the invention, but was merely licensing it. The Court of Appeals for the Federal Circuit reversed this decision on the basis that there was a ‘general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.’ The Supreme Court held that an injunction for patent infringement should not automatically be granted, as it is an equitable remedy. Simultaneously an injunction should also not be denied, simply because a plaintiff does not work the patent. The plaintiff should rather show the following: (1) that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. The decision to grant or deny such relief is an act of equitable discretion by the district court, reviewable on appeal for abuse of discretion. …

It is interesting to note that Justice Kennedy in his opinion27 expressed further skepticism in relation to granting injunctions where patents are not essential for the product produced: In cases now arising trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees… . For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent… . When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest. In addition injunctive relief may have different consequences for the burgeoning number of patents over business methods, which were not of much economic and legal significance in earlier times. The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test.

The eBay case therefore not only stresses that injunctive relief is an equitable remedy, but also introduces a use requirement for patents via the back door, and addresses the issue of patent misuse in case “small components,” non-essential patents are used to obtain undue leverage in negotiations.28 In a standards context, the inclusion of non-essential and low-quality patents, 547 U.S. 388 (2006). With Justices Stevens, Souter, and Breyer concurring. 28 See also B. Braun Medical v. Abbott Labs., 124 F.3d 1419, 1427 (Fed. Cir. 1997): [T]he patent misuse doctrine is an extension of the equitable doctrine of unclean hands, whereby a court of equity will not lend its support to enforcement of a patent that has been misused. Patent misuse arose, as an equitable defense available to the accused infringer, from the desire to restrain practices that did not in themselves violate any law, but that drew anticompetitive strength from the patent right, and thus were deemed to be contrary to 26 27

Part D: STANDARD SETTING  701

or the failure to disclose patents relevant to the standard can be seen as abusive in this context. The case of the U.S. CAFC in Qualcomm Inc. v. Broadcom Corp.,29 addresses the issue of a breach of duty to disclose relevant patents to the H.264 standard to the ‘Joint Video Team’ SSO. The case displays the internalization in patent law of a restoration of the patent balance similar to the eBay case. In view of the offending conduct of the patent holder, the patent is declared unenforceable against all H.264-compliant products on the basis of patent misuse. Although the scope of the decision is limited geographically, not being able to enforce nondisclosed patents in the United States has serious implications for SSOs and their participants worldwide. East Atlantic—Externalization At the other side of the Atlantic, European practice does not yet show a similar development of internalization. This is because, unlike U.S. antitrust law, European Competition law focuses ultimately on distributional justice and the interests of the consumer.30 Patent abuses are actionable if they can be construed as abuses of a dominant position through bilateral or unilateral conduct, where the holder of the intellectual property right enjoys a position of dominance. Article 82 of the EC Treaty has the effect that in those circumstances in which an undertaking abuses its dominant position in the market, that undertaking may be forced not to exercise its monopoly power.31 In United Brands Co. & United Brands Continental BV v. EC Commission32 a dominant position was described as: A position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately of its consumers.

Intellectual property rights may contribute to a large extent to the dominant market position an undertaking can achieve, but it is not necessary for the undertaking to have total dominance. As long as it is strong enough in general terms to devise its own strategy as it wishes, even if there are differences in the extent to which it dominates individual sub-markets, it can be said to be dominant. According to Korah, the attitude toward IPRs in Europe after the second world war can even be described as hostile, as especially patent monopolies were not only seen as an economic power that ought not be exercised, they were also evaluated ex post in terms of their efficacy to ensure incentives to invest, leading to a situation where: “By the time an intellectual right holder exercises its rights, the investment that led to the right is water under the bridge.”33 Ex post limitations to intellectual property rights were thus not perceived as reductions to the incentive to make the investment leading up to the existence of these rights. Although this hostility is no longer present, and IPRs are seen as prerequisites to innovation, a willingness to intervene in cases of perceived monopoly abuses is still present. Over a number of years the European Court of Justice (ECJ) developed the doctrine of the “immune exercise,” meaning that an exercise of a right corresponding with the core of an intellectual public policy. When used successfully, this defense results in rendering the patent unenforceable until the misuse is purged. See supra note 12. On the differences in approach to monopoly pricing, see Gal, supra note 23. 31 For a description, see Valentine Korah, An Introductory Guide to EC Competition Law and Practice (5th ed., Sweet & Maxwell, 1994). 32 Case 27/76, United Brands v. Comm’n, 1978 E.C.R. 207. 33 Valentine Korah, “The Interface between Intellectual Property and Antitrust: The European Experience”, 69 Antitrust L. J. 801, 803 (2001). 29 30

702  CHAPTER VIII: COMPETITION LAW property right cannot in itself constitute an abuse.34 “Specific circumstances” are needed in order to make the exercise abusive. These additional ‘specific circumstances’ may be abuses of market power that are clearly separate from the existence/exercise of an intellectual property right,35 or certain exercises of rights related to intellectual property rights, such as licensing and demanding royalties, which fall within the subject matter of the right.36 In the case Commercial Solvents,37 the EJC held that a refusal to supply raw materials for the production of derivatives by a dominant company may constitute an abuse.38 In doing so, the ECJ expressed a desire to protect a small firm rather than free competition, all for the ultimate benefit of consumers. In intellectual property cases, a refusal to license or supply has since also played a role in cases involving abuses of a position of dominance over design rights over spare parts,39 copyright in TV listings,40 copyright in the ‘brick’ structure of a database,41 and patent and copyright over software interfaces.42 What has ultimately emerged is a clear willingness on the part of the ECJ to curb the exercise of an intellectual property right held by a dominant undertaking, where such behaviour would prevent the emergence of a new product in a derivative market. These are then ‘exceptional circumstances’ that warrant the curtailment of the exercise of and IPR. It has been argued convincingly43 that the definition for this abstract market is the market for innovation. This market for innovation is defined broadly, leading not only to an ex-post analysis of the incentive to innovate of the IPR holder, but also of future developments in the field of industry. In the Microsoft case this leads the European Commission in its application of the normative framework developed by the ECJ to conclude that an order forcing Microsoft to supply interoperability information to its competitors that: 34 Case 24/67, Parke Davis & Co. v. Probel, 1968 E.C.R. 55; Case 102/77, Hoffman-La Roche & Co. AG v. Centrafarm Vertriebsgesellschaft Pharmazeutischer Erzeugnisse GmbH, 1978 E.C.R. 1139; Case 53/87, Consorzio Italiano della Componentistica di Ricambio per Autoveilici (CIRCA), 1988 E.C.R. 6039; Case 237/87, Volvo AB v. Erik Veng (U.K.) Ltd., 1988 E.C.R. 6211. 35 One can think of practices such as tying, discriminatory policies, refusal to supply customers who might resell, refusals to honour guarantees, and operating secretly and unilaterally a policy of differential discounts. This was the case in Case C-53/92P, Hilti AG v. Comm’n, 1991 E.C.R. II-1439 (an appeal from Commission Decision 22 Dec. 1987), and Joined Cases 30/787 & 31/488, Eurofix-Bauco v. Hilti AG, 4 C.M.L.R. 677 (1989), where 8 distinct abuses were put forward, all of which were exercises of market power, not of patent rights, although one of the abuses consisted of the frustration or delay of legitimately available licenses under Hilti’s patent, by demanding exorbitantly high royalties. 36 That the line between existence and exercise is not always clear was pointed out by Clifford G. Miller, “Magill: Time of Abandon the ‘Specific Subject-matter’ Concept”, 16 Eur. Intell. Prop. Rev. 415 (1994). 37 Joined Cases 6 & 7/73, Istituto Chemioterapico Italiano SpA v. Comm’n, 1974 E.C.R. 223. 38 The case revolved around a refusal by Commercial Solvents to supply Zoja with the raw materials to make ethambutol, a drug used for the treatment of tuberculosis. Commercial Solvents was the only commercial player in this market possessing the knowledge to make the raw material and had been supplying Zoja in the past. When Commercial Solvents obtained half an interest in Istituto Chemioterapico, the only other producer of ethambutol, it changed its policy on supplying Zoja. 39 Case 237/87, Volvo AB v. Erik Veng (U.K.) Ltd., 1988 E.C.R. 6211. In this case the defendant/claimant imported spare parts (front wings) for the Volvo 200 series from Italy and Taiwan via Denmark into the United Kingdom, because he was refused a licence. In the U.K. he was under the Registered Designs Act 1949. In considering the exercise by Volvo of its intellectual property right, the ECJ stated that to oblige ‘the holder of a protected design to grant third parties a licence to supply products incorporating the design, even in return for reasonable fees, would result in depriving the holder of the substance of its exclusive right’, but that nevertheless Volvo’s refusal amounted to an abuse of its dominant position. This was because Volvo itself was no longer producing the parts in question and thus created market conditions that obliged the consumer to buy a new car, where the old model was still in circulation. 40 Joined Cases C-241 & 242/91, Radio Telefis Eireann v. Comm’n, [1995] E.C.R. I-743. 41 Case COMP D/338.044, NDC Health v. IMS Health (Interim Order of the Commission), 4 C.M.L.R. 111 (2002); Case T-180/01, IMS Health v. Comm’n (CFI), 4 C.M.L.R. 46 (2002); Case T-184/01, IMS Health v. Comm’n (CFI), 4 C.M.L.R. 58 (2002); Case 418/01, IMS Health v. NDC Health (ECJ), 4 C.M.L.R. 1543 (2004). On the case see Pat Treacy & Thomas Heide, “Compulsory Licenses of IP Rights: Easier to Get after the IMS Health Decision?”, 20 Comp. L. & Security Rep. 482–85 (2004). 42 Case T-201/04, Comm’n v. Microsoft, 2007 E.C.R. II-3601 (CFI). 43 S. van Loon, Licentieweigering als misbruik van machtspositie (2008).

Part D: STANDARD SETTING  703

[T]he possible negative impact of an order to supply on Microsoft’s incentives to innovate is outweighed by its positive impact on the level of the whole industry (including Microsoft). As such, the need to protect Microsoft’s incentives to innovate cannot constitute and objective justification that would offset the exceptional circumstances identified.44

Here speaks a competition authority that, on the basis of an ex-post analysis tries to reconcile a curb on the exercise of IPR with long-term innovation policy. The application of the new product criterion lies in the stimulation of research and development. Microsoft is stimulated, because it can no longer afford to rest on the laurels of its secret information, and other market players are stimulated, because the can develop new products based on a de facto standard. It is questionable whether the new product criterion, when viewed in a more narrow sense, is able to properly address the issue of standards.45 The culmination of factors and proof necessary to arrive at the conclusion that there is an abuse of a dominant position, is rather burdensome. Furthermore proceedings under Article 82 EC Treaty are time-consuming and costly. It is for this reason that also in Europe there are calls for the internalization of intellectual property misuse rules in intellectual property law itself.46 In itself this seems to make sense, but the proposals47 lead back to the ex-ante intervention and FRAND conditions for compulsory licensing of standards, albeit that they be supervised by a sector-specific regulatory authority.48 A Global Standard or a Competing (for) Standards? What is clear from the description above is that regional European and national U.S. views cannot be seen in isolation, as they both have an effect on global trade. Furthermore there is a high level of fragmentations. There are differences in interpretation of ex-ante FRAND terms and the monitoring of SSOs through sector-specific, national, or European regulatory authorities. The ex-post assessment of the enforceability of IPRs in agreed or de facto standards is either internalized in the IP system, of externalized by means of regulatory control by the EC Commission and national competition authorities in the Member States. Yet standards are fast becoming an international trade issue, as proprietary, but even semi-open national standards can be used as barriers to entry, market access to ICT sectors, or control over distribution of contents. In this respect China’s efforts to become as strong a player in standards as it is in budding ICT technology are remarkable.49 China is setting and using its own standards (in telecoms, DVD, and other ICT industries) to control access to the Chinese market, or to offer an alternative to standards dominated by multinational non-Chinese players. As with the discussion surrounding Microsoft’s standard Office Open XML (OOXML) and the competing OpenDocument (ODF) standard before it, the future development of the Chinese Uniform Office Format (UOF) will be monitored much more closely from the perspective of international trade, than from a more domestic need for the inclusion of Chinese language and character functionality. Domestic Chinese law50 recognises the possibility to act in Microsoft, § 783. Standard-Spundfass, KZR 40/02, 2004 GRUR 966 (German Supreme Court, Jul. 13, 2004), English translation at 7 Int’l R. Intell. Prop. & Comp. L. 741 (2005) (focusing not on the new product criterion, but rather on discriminating practices in licensing conditions). 46 See Kamiel J. Koelman, “An Exceptio Standardis: Do We Need and IP Exemption for Standards?”, 7 Int’l R. Intell. Prop. & Comp. L. 823–43 (2006). 47 Jaap H. Spoor, “Standardization and Exclusivity in Intellectual Property”, Information Law Towards the 21st Century 374–75 (Korthals Altes et al., eds., 1992) 48 See Koelman, supra note 46. 49 See James M. Popkin & Partha Iyengar, IT and the East: How China and India Are Altering the Future of Technology and Innovation (2007). 50 The Chinese Anti-Monopoly Law is in force since August 1, 2008. 44 45

704  CHAPTER VIII: COMPETITION LAW case of abuse of rights in Art. 55 of the Chinese Anti-Monopoly Law,51 but the concept is not yet developed. Furthermore Article 15 allows for an exemption to Art. 55 for dealings (agreements) that have the objective of improving technology, research and new products, but the appropriate interface is not yet clear.52 It is also difficult to foresee what direction may be taken, as there are three competent competition authorities53 associated with different ministries that may have different objectives. The standard-setting landscape in China is fragmented too. The Ministry of Information Industry (MII) deals directly with telecom and broadcasting issues, the Standardization Administration of China (SAC) deals with all matters involving standardization and represents China within the International Organization for Standardization (ISO), the International Electro technical Commission (IEC) and other international and regional standardization organizations. There is also the Audio and Video Coding Standard Workgroup of China (AVS), which provides a national proprietary alternative to MPEG-4 standards. There is an increasing recognition that without cooperation we are headed for a war on standards. In an effort to diffuse this situation, there is a recent initiative to find ways of cooperation in standard setting between Europe and China.54 A Role for the WTO? The WTO Technical Barriers to Trade Agreement (TBT) deals with the possibility that standards may have protectionist effects, even if they may not be intended as such. The Agreement addresses a limited class of measures,55 namely technical regulations (product characteristics or their related processes and production methods), standards (a document approved by a recognised body, that provides for common and repeated use, rules, guidelines, or characteristics for products or related processes and production methods, with which compliance is not mandatory), and conformity assessment procedures (any procedure used, directly or indirectly, to determine that relevant requirements in technical regulations or standards are fulfilled).56 Technical regulations were involved in three disputes.57 There is not yet case law on standards and conformity assessment procedures under the TBT Agreement. The TBT Agreement may in itself focus on ensuring that standards do not become barriers to trade,58 but as the two linked WTO Disputes brought by the U.S. against China, namely DS362 (China—Intellectual Property Rights) and DS363 (China—Audiovisual Services), show, nonstandards cases may also have an effect on the discussion if foreign companies feel deprived of enforcement opportunities or excluded from shaping market access frameworks. DS 362 concerns four main issues that the U.S. considered to be in breach of the TRIPS agreement: 51 “This law shall not apply to the conduct of operators to exercise their intellectual property rights in accordance with the laws and relevant administrative regulations on intellectual property rights; however, this law shall apply to the conduct of operators to eliminate or restrict market competition by abusing their intellectual property rights.” 52 October 11, 2007, the European Communities raised the following question with China during a WTO Council for TRIPS meeting: “The EC welcomes the recently adopted Chinese Anti-Monopoly Law. This new legislation refers to the concept of ‘abuse of intellectual property rights’ in particular in Article 55. Can China clarify what this concept means in practice? Can China confirm that this concept does not go beyond what the TRIPS Agreement considers as abusive practices under Article 31(k) (compulsory licensing) and Article 40 (competition)?” 53 The enforcement of the Chinese Anti-Monopoly law is split between three existing departments: the Ministry of Commerce will be responsible for control of concentrations; the State Administration for Industry & Commerce will enforce the prohibitions against monopoly agreements and abuse of dominant market position; and the National Development & Reform Commission will continue its prices oversight role. 54 See China EU Information Technology Standards Research Partnership, http://www.china-eu-standards.org. 55 See Appellate Body Report, EC-Asbestos, § 80. 56 See Annexes 1.1, 1.2, and 1.3 to the TBT Agreement for their definitions. 57 EC-Asbestos, EC-Sardines, and EC- Trademarks and Geographical Indications (Australia). For an analysis of these cases see P. van den Bossche, The Law and Policy of the World Trade Organization (2d ed., Cambridge 2008) 58 See World Trade Org., World Trade Report 2005: Exploring the links between Trade Standards and the WTO (2007).

Part D: STANDARD SETTING  705

thresholds for criminal prosecution; scope and coverage of criminal prosecution; legislation non compliant to TRIPS and Berne minimum standards, and the disposal of confiscated goods by Chinese customs authorities. The panel report has been circulated recently. In relation to the claim regarding criminal thresholds, the Panel had to define the term “commercial scale” of Article 61 of the TRIPS Agreement. It did so by defining this to be “counterfeiting or piracy carried on at the magnitude or extent of typical or usual commercial activity with respect to a given product in a given market.”59 The Panel, however, held that the US did not convincingly prove that the contested thresholds impacted the commercial marketplace.60 The claim concerning minimum standards focused on Article 4 of the Chinese Copyright Law, which denies copyright protection to works not approved for circulation on the Chinese market. The Panel upheld this complaint, as it could be construed as denying copyright to a large class of products. Hence, it was found to violate Article 5(2) of the Berne Convention, and therefore also the TRIPS Agreement.61 The second dispute, DS 363, is mainly concerned with market access for media products. The U.S.’s first main issue here concerns trading rights that confer upon only certain Chinese companies the right to import foreign films. The second contentious issue is that according to the U.S. certain measures affecting distribution services for media publications present an unfair trade barrier for American service providers wishing to enter the Chinese market. It is especially this last aspect that is of interest for the issue at hand in this paper. According to Article 4 of the current Chinese Copyright Act, foreign media not approved for circulation in China is not protected by copyright. The approval process, conducted by the State Administration for Radio, Film and Television (SARFT) not only results in frequent censorship, but is furthermore subject to a quota of 20 foreign films allowed on the market per annum. If anything is clear from these cases, it is that the underlying issue is the question who will control the access to justice where IP enforcement and to the Chinese market, where e-commerce, online distribution, and ultimately also standards are concerned. The newly announced and AVS codecs based China Blue High Definition (CBHD) standard62 can easily be seen as a powerful alternative for the state authorities’ direct control over media and will thus be subject to intense scrutiny by China’s trading partners. Conclusion The interface between intellectual property rights and competition law is a sensitive one, also where standards are concerned. The approach to resolving disputes involving standards and intellectual property differs fundamentally when comparing the U.S. and Europe. Contractual arrangements on licensing (FRAND) may be interpreted differently, and where the U.S. seeks to internalize rules on abusive behaviour in the IP system, the European Commission and Court of Justice seek solace in corrective measures based in competition law. In an international arena, SSOs will need to adapt to both approaches, as the loss of enforcement opportunities, or imposed compulsory licenses, reasonable royalties and more stringent SSO supervision can be the result of IP abuse or misuse in major jurisdictions. Standards are ultimately subject to both IP and competition law. Global trends and the emergence of other players, such as China, furthermore herald not only the increased relevance of WTO law, but also require a careful analysis of the way in which major WTO members interpret and view national implementation and practice of WTO Panel Report, China—Intellectual Property Rights, at 115. Id. at 131. 61 Id. at 134 62 CBHD is based on the AVS audio and video standard. CBHD’s developers, the Optical Memory National Engineering Research Center (OMNERC) of Tshingua University, stated that the new format should cut piracy rates as well royalty payments for foreign patents. 59 60

706  CHAPTER VIII: COMPETITION LAW obligations in emerging ICT and standard-setting markets. Joint efforts in finding appropriate global frameworks for standard-setting is therefore a sensible way forward.

INDEX Acquisition of evidence (patent law) Anton Pillar Orders, 220–1 documentary disclosure, 220–1, 229 Enforcement Directive, 218–9, 222, 224 evidence from other countries, 229–30 evidence regulation, 230 France, 219–21, 224 Germany, 221–3, 229 harmonization, 229 infringement discovery, 229 issue estoppel, 229 Japanese approach, 218–9 judicial assistance, 230 Netherlands, 224–5 prior use, 229 saisie, 219–21, 224, 226 striking out, 220–1 U.K. approach, 219–21, 229 U.S. approach, 226–7 validity disclosure, 229 Anti-Counterfeiting Trade Agreement background, 534–5 Canada, 543, 545–6, 549 China, 549 developing countries, 535 enforcement practices, 515 enforcement text, 535 EU trade policy, 515, 530, 532–3 free-standing agreement, 535 genuine products, 544 improved cooperation, 515 international cooperation, 536, 543 opposing views, 545–6 opposition, 543–4 parallel imports, 543, 546 review of national legislation, 543, 545 trade policy and intellectual property, 579–81 transparency, 535, 543 U.S. trade policy, 520, 524, 535 voluntary nature, 535 Antitrust/intellectual property interface access/incentive trade-off, 661 administrable rules, 662 antitrust influence, 658 antitrust litigation, 668 Article 81 (EC), 667 Article 82 (EC), 667, 670

class actions, 665 common economic analysis, 660 competitive process, 666 complementarity, 658–9 compulsory licensing, 658, 661–2, 664, 668–70 conflicting instincts, 658 consumer welfare, 662, 665–6 continuing tensions, 658, 660–1 EU case law Brönner, 661, 670 eBay, 663–4, 668 IMS, 661, 666, 668 influence, 660–2, 664, 666–71 Magill, 661, 658, 664 Microsoft, 661, 664, 666–70 EU/U.S. differences, 658, 662–5, 675 evergreening, 662 fair, reasonable and non-discriminatory (FRAND) licensing, 670 formalism, 660, 668 French perspective, 665–6 information sharing, 671 innovation, 661, 663–4, 666, 670 intellectual property legislation, 662 internalizing competition law, 663–4, 674 long term/short term trade-off, 663 market access, 658–60 market dominance, 667, 669, 671 market entry, 666 market power, 659–60, 662, 671 nature of intellectual property rights, 659 new product criteria, 670 parallel trade (pharmaceuticals), 660–1 patents defensive patent registrations, 659 patent misuse defence, 663–4 patent reform (US), 669 patentability criteria, 669 perceived conflict, 658 preliminary referrals (ECJ), 667 price discrimination, 659, 662 private rights (U.S.), 663 protection of exclusivity, 658–60 refusal to deal, 661, 666–7, 669 refusal to licence, 664, 668 remedies, 670–1 regulatory gaming, 661–2

708  INDEX social cost, 659 sources of tension, 658–9 standard setting, 674 see also Standard setting treble damages remedy, 663–5 value of intellectual property rights, 661 Any hardware test patent law, 140, 145, 155 Asian copyright enforcement business models, 268–9 China, 265–6 court decisions, 269–71 damages claims, 271 helpful behaviour, 258, 267 Hong Kong, 261, 264 hosting, 268–9 increased responsibility, 267 indemnification, 266 Indonesia, 266 inducement theory, 269, 271–2 infringing authorizations, 264 injunctive relief, 270–1 Japan, 261 Korea, 260, 264 Malaysia, 264–6 mooching, 265 pre-action discovery, 266 pre-action remedies, 265 safe harbours, 264–5 secondary contributory infringement, 272, 280 secondary liability, 264 see also Secondary liability Singapore, 264–5 technological change, 267 transmission ISPs, 267–8 vicarious liability, 268, 272, 280, 282 Australia copyright exceptions and limitations, 327–8 trademarks and the Internet ad words, 441 initial interest confusion, 441 trademark confusion, 441 trademark use requirement, 441 Austria preliminary injunctions, 199 Belgium right of publicity and privacy, 460, 462 see also Right of publicity and privacy “torpedo cases” (cross border patent infringement), 85–6 Biotechnology and intellectual property applications academic interests, 180 application process, 178

appropriate time, 179 breadth of claim, 181, 191 certainty, 179, 181–3 definitive research, 181 dosages of doubtful application, 179–80 emergence of precision, 178–9 less definite finding, 178–9 optimal time, 180–1, 185 practical problems, 178 scientific discovery process, 178 scientists’ views, 181 supporting data, 182 written description, 174, 181–2 avenues of research, 176 Canadian case law, 182–3, 186 certainty, 176–7, 179, 181–3 chemical compounds, 187 degree of invention, 174 development process, 181 differing techniques, 175 disclosure of use, 177 DNA products, 175 enablement, 174, 190–2 European Patent Convention, 182, 184 European Patent Office, 184, 189–90 fair-basis-type insufficiency, 184, 189, 190 fairness, 176–7 genetic engineering, 175 improvement patent, 187 inconsistency, 177 industrial application, 174, 177, 182 information unknowable to the public, 187 inhibiting research, 176 innovation, 176–7 invention by guesswork, 187 inventive step, 174 Japanese law, 183 method-of-treatment claim, 183 methods of use, 187 multiple applications, 191–2 natural products, 188 new chemical compound, 183 obviousness, 174, 176–7, 184, 188–90 patenting natural phenomena, 174, 187–8 pharmaceutical composition, 177, 183 pharmaceutical industry, 185 plausibility test, 182 policy issues, 176 practical contribution to the art, 174 process by product by process claim, 185 product as obvious goal, 188 reasonable predictability, 191 recombitant techniques, 175 retroviruses, 185–7

INDEX  709

serendipity, 191–2 scope of monopoly, 174–6 scope of protection, 174, 183, 191 sound prediction test, 182–3, 185–6 sufficiency, 174, 176–7, 184, 189–91 synthetic products, 188 technical contribution, 174, 176–7, 188–90 Technology Transfer Offices, 180–1 utility, 182, 185, 187 Canada Anti-Counterfeiting Trade Agreement, 543, 545–6, 549 biotechnology case law, 182–3, 186 copyright exceptions and limitations, 327–8 Chemical product inventions (Lundbeck) Citalopram, 161, 163, 166, 170 enablement, 166 Escitalopram, 161–4 European Patent, 161 excessive claims, 165 full product patent protection, 161, 164–7, 170 gratis effects, 162–4 Guidelines for Examination, 168 inventive step, 161, 163–5, 167 obviousness, 163–4, 166, 169–71 patentability, 168–70 prior art disclosure, 168–70 problem-solution approach, 163–4 public policy, 169–70 Selective Serotonin Reuptake Inhibitors, 161–3, 166 technical benefits, 162–3 technical contribution, 164–8 unexpected effects, 161–3, 167 U.S. approach, 164, 170 China Anti-Counterfeiting Trade Agreement, 549 copyright infringement, 265–6, 588–9, 591–3, 601 counterfeit goods, 545, 547, 549, 563–4 information service providers, 265–6 intellectual property protection, 539 standard setting, 676, 703–5 see also Standard setting trade fairs (trademark/patents/design infringements), 539 see also Trade fairs (trademark/patents/ design infringements) United States v. China see United States v. China CISAC Decision administration fees, 370 anti-competitive clauses, 364 Article 81(EC), 348–9, 365, 367–8 background, 349

bilateral agreements, 363, 365 Commission objectives, 365–6 compliance, 350, 362–6 concerted practice, 348–50, 363, 369 cultural diversity, 349, 363 domestic dominance, 349 enforcement, 365 exclusive rights, 364, 366 follow-up decisions, 350, 357 granting of rights, 366 impact, 368 implementation, 349–50 legal certainty, 363 local monopolies, 349 market segmentation, 349 membership and exclusivity clauses, 349–50 multi-territorial licences, 350, 366, 370 pan-European licences, 366, 368 procedural developments, 365 public performance rights, 349–50 reciprocal agreements, 349, 364–6 restriction on competition, 348 revision of agreements, 350 scope of decision, 365 Statement of Objectives, 362 substantive developments, 366 territory-of-destination pricing, 370 value of royalties, 370 Collecting Societies see also Collective management access to rights, 364 acting for others, 362 aggregation of rights, 364 bilateral reviews, 363 CISAC Decision see CISAC Decision Commission Recommendation, 362–4, 367, 369–70, 372 competition law issues, 367–8, 372 concerted practice, 348–50 copyright levies, 311 see also Copyright levies cross-subsidies, 371–2 cultural diversity, 370–2 economic benefits, 364, 367–8 enhancing competition, 370 level playing field, 369 local monopolies, 364 mediation forum, 371 members’ interests, 362–3 merging, 355 multi-territory licensing, 362–3, 368–9, 380 music distribution. 353–61 see also Music distribution

710  INDEX pan-European licences, 355, 366, 368 Performing Rights Society, 363–6, 371 reciprocal agreements, 363, 368 service level commitments, 363 services offered, 363 smaller societies, 355, 369–71 transaction costs, 364 transition, 364, 372 value provided, 367–8 withdrawal of rights, 363–4 Collective management see also Collecting Societies author’s exclusive rights, 357, 359, 362 basic principles, 360 benefits, 364, 369 collective management organizations, 358, 360–1 collective management organizations (Germany) cultural diversity, 352–3, 370–1 cultural valuable works, 352 functions, 351 German legal concept, 351 less popular works, 352 protection from competition, 352 restrictions, 352 services to third parties, 352 tariff determination, 351 withdrawal of rights, 352 extended collective management authorization, 361–2 conditions, 361 Information Society Directive, 362 exclusive rights, 361 justification, 362 opting out, 361 Satellite and Cable Directive, 361–2 mandatory collective management Berne Convention, 358–9, 361 cable retransmission, 359–60 copyright on the Internet, 357 exhaustively determined cases, 358 international copyright norms, 358, 361 limiting exclusive rights, 358 prescription, 358–61 Resale Right Directive, 360–1 residual rights, 359 Rome Convention, 358, 360 Satellite and Cable Directive, 359–60 regulation, 372 Rental Directive, 359 residual rights, 359 standardization, 357–8 voluntary collective management, 357–8, 361

Community Patent cost reductions, 5 creation, 4 legal security, 5 single title, 5 support, 5, 10 transactions, 5 validity, 4–5 Community Trade Mark application fees, 3 Boards of Appeal, 403–5, 409–10 borderline cases, 408 Community Trade Mark Registration Regulation, 392–3, 395, 504 criticisms, 410 efficiency consideration, 403 electronic applications, 3 EU law developments, 392–4, 403–5, 407–10 evaluation, 4 fees, 403 harmonization, 4 judicial review, 410 language issues, 409 national trademark systems, 4 new evidence, 405 procedural economy, 405, 409 registration fees, 3 registration refusals, 404–5, 410 reliability, 403 transparency, 403 Competition law abuse of dominant position, 349, 611–14, 618, 667, 669 antitrust/intellectual property interface see Antitrust/intellectual property interface Article 81 (EC), 618, 627, 641, 645, 667, 690, 693 Article 82 (EC), 618, 637, 641–2, 644–5, 667, 670, 691, 701–3 cartel prohibition, 618 class actions, 618 Collecting Societies, 367–8, 372 see also Collecting Societies copyright territoriality, 304–5 European Commission approach, 618–19 European Court of Justice approach, 619–20 intellectual property cases, 618–19 intellectual property/competition law relationship, 619 Internet creativity, 385 see also Internet creativity market integration, 618 music distribution, 355

INDEX  711

see also Music distribution parallel imports, 619 patent misuse, 619 see also Patent misuse policy interplay see Antitrust/intellectual property interface private actions, 618 standard setting see Standard setting trademarks, 394 treble damages remedy, 613–14, 618, 668 United States and anti-trust see United States and anti-trust Convention on Biodiversity Doha Round, 514, 523, 571, 582 see also Doha Round EU trade policy, 514 origin of biological resources, 571 traditional knowledge, 571 Copyright law see also Collecting Societies; Copyright levies; Copyright territoriality access to knowledge, 282 Asian copyright enforcement see Asian copyright enforcement balance in copyright, 297, 316–17, 320, 380 business myths digital rights management/anti-consumer, 292 film piracy, 291 film industry/music business similarities, 291, 294, 304 Cablevision Case buffer copies, 274 digital video recorders, 273 direct liability, 272 infringing copies, 274 playback of performance, 274 policy considerations, 275 public performance, 274–5, 279 server copies, 274–5 Supreme Court review, 272–3, 279 creative expression, 282 data privacy, 276–8, 282–3 see also Data privacy data protection, 277–8 see also Data protection developing countries, 283 distribution right, 271–2, 281–2 EU policy see EU policy (copyright) exceptions and limitations see Exceptions and limitations (copyright law)

film industry see Film industry freedom of expression, 282–4 Google Book Search Settlement see Google Book Search Settlement information service providers see Information service providers infringement (U.S.) Federal Court jurisdiction, 272 registration requirement, 272–3 U.S. Supreme Court decisions, 272 intermediate liability, 297–301 see also Intermediate liability Internet creativity see Internet creativity Internet piracy, 6, 37, 283 see also Internet; Piracy libraries, archives and museums see Libraries, archives and museums making available right, 280–1 music distribution see Music distribution privacy issues, 276 public policy, 283 remuneration best method, 289 online revenue, 289 royalty payments, 282 secondary liability, 280, 285, 294–301 see also Secondary liability three-step-test, 11–12, 14, 316–23, 325, 335 see also Three-step-test three strikes approach, 259, 288, 294, 299, 309–10 Copyright levies access fees, 288 additional subscription fees, 311 collecting societies, 311 see also Collecting societies consumer interests, 302, 311 controversial aspects, 301–2 Copyright Directive, 301–2, 312–13 cultural promotion schemes, 311–12 distribution models, 311 fair compensation, 301, 303, 312–13 future development, 288 harmonizing tariffs, 313 implementation, 303 innovative rights-based models, 311 legal certainty, 303 multi-functional devices, 3 Norway, 312 payment information, 310 private copies

712  INDEX economic prejudice, 302 exemption, 3, 6 harm caused, 313 illegal downloads, 302, 313 illegal private copies, 302, 312–13 legal downloads, 301–2 legal private copies, 302, 313 licensed copies, 301–2 meaning, 314 secondary copies, 302–3 subsequent copies, 313 value of digital services, 302 subsidy systems, 313 transactional licensing, 311 visible levy, 310 Copyright territoriality Cable and Satellite Directive, 304–5 communication to the public, 304 competition law, 304–5 Conditional Access Directive, 303–4 decoder boxes, 303–4, 312 decoder cards, 303 European Court of Justice referrals, 304–5 free movement, 304 reproduction right, 304 technological protection measures, 303 temporary copies, 304–5 unauthorized access, 303, 305 Corporations and intellectual property copyright infringement, 47 new uses, 37 piracy, 37 private copy levies, 36, 39 protection, 38, 43 economic crisis advertising revenue, 39–40 anti-counterfeit organizations, 43 consumer spending, 37 enforcement activities, 43 impact, 37–9 newspaper closures, 38–41 value in intellectual property, 37–40, 43 intellectual property system common interests, 42, 44 compensation model, 39 copyright debate, 41–2 counterfeiting, 36, 40, 44 dialogue between interests parties, 42–3 digital knowledge, 36 enforcement, 36–7, 43–4 filtering technology, 44 illegal file sharing, 36 innovation economy, 36, 38

legitimate access, 44–5 market forces, 42 media content, 38 new business models, 36, 39–40, 42, 44–5 new revenue streams, 40 new technologies, 36, 40–1, 44–5 news gathering, 38–9 newspapers, 38–40 online charging, 41 payment for content, 44 perception issues, 37, 43–4, 46–7 piracy, 37, 40, 43 property rights, 38–9 protection, 38–40, 44–5 public policy, 36–7 radio stations, 38, 41–2 security needs, 45 stakeholder interests, 42–3 television product, 38, 40 theft, 37–8, 42, 44 video-downloads, 44 video-sharing, 36 internet business opportunities, 45 distribution costs, 45 e-commerce, 45 hacking, 45–6 piracy, 37 security, 45 theft, 37–8 patents essential patents, 36 fair, reasonable and non-discriminatory terms, 36 Counterfeit goods anti-counterfeit organizations, 43 Anti-Counterfeiting Trade Agreement background, 534–5 Canada, 543, 545–6, 549 China, 549 developing countries, 535 enforcement practices, 515 enforcement text, 535 EU trade policy, 515, 530, 532–3 free-standing agreement, 535 genuine products, 544 improved cooperation, 515 international cooperation, 536, 543 opposing views, 545–6 opposition, 543–4 parallel imports, 543, 546 review of national legislation, 543, 545 transparency, 535, 543 U.S. trade policy, 520, 524, 535 voluntary nature, 535

INDEX  713



China, 545, 547, 549, 563–4 collective trademark proposal, 548, 550 corporate concerns, 36, 40, 44 demand side, 549 EU position Anti-Counterfeiting Trade Agreement, 530, 532–3 best-practice exchange provisions, 533 bilateral action, 531–2 criminal sanctions, 531 Customs Regulation, 531 enforcement, 531–3 Enforcement Directive, 531 EU initiatives, 6 Free Trade Agreements, 531 Information Service Providers, 533 Internet distribution, 533 OECD Study, 530 patented technologies, 533 physical goods, 530 traded goods, 530 TRIPS Agreement, 530–3 types of violation, 533 volume of counterfeit goods, 530 grey goods, 545 industrial designs, 481 intellectual property discourse academic discourse, 536 globalization movement, 536 institutional frameworks, 536 intellectual property as tainted brand, 536–7, 540 international perception, 536 negative images, 537, 540 public health dimension, 537 public interest considerations, 536 respect for intellectual property, 537–8 social implications, 536 underlying themes, 536–7 international dimension global enforcement systems, 533 online environment, 533 TRIPS Agreement, 533–4 WIPO enforcement, 536 WIPO treaties, 533–4 online enforcement, 549 parallel imports, 543, 546 price-point difference, 548–9 production, 528 supply chain, 528, 530 trademarks and the Internet, 437–8, 440 see also Trademarks and the Internet U.S. position Anti-Counterfeiting Trade Agreement, 535

criminal prosecutions, 529–30 criminal sanctions, 528 damages, 528 destruction of goods, 528 enforcement orders, 528 International Anti-counterfeiting Coalition, 528–9 search and seizure provisions, 529 Trademark Anti-counterfeiting Act (1984), 528–30 Cross-border infringement (patents) accountability, 90 appeals, 86 Belgian “torpedo cases”, 85–6 Community Patent Convention, 78 cross-border actions, 87–8 cross-border liability, 81–2 damages, 90 declaratory judgments, 83–6, 88–9 double territorial requirement, 79, 82–3 Enforcement Directive, 80 European Patent Convention, 78, 86 exchange of information, 85 facilitation, 79 fast-track proceedings, 85–6 first-to-file, 89 foreign defendants, 78 formulation outside EU, 78 forum non conveniens, 88 forum shopping, 88 German experience, 81–3, 87 harmonization, 78, 90 imported products, 78–81, 83–4, 90 inducement, 88 infringement common design, 78 contributory infringement, 84, 88–9 direct infringement, 78–81, 83, 86, 89 indirect infringement, 78–9, 82–4, 87, 89 joint tortfeasors, 78–81, 84 inherent territorial principle, 81 injunctions, 84, 87 invalidity defence, 87 Italian “torpedo cases”, 83–5, 88–9 judicial competence, 86 manufacturer/importer relationship, 84 marketing authorization, 80–1 minimum contacts test, 88 national proceedings, 78 Netherlands experience, 86–7 personal jurisdiction test, 88 Pharmaceutical Sector Report, 90 presence of infringing goods, 84 previous infringement proceedings, 84

714  INDEX procurement, 79 product offers, 82 recognition and enforcement of judgments Brussels Convention, 85 Brussels Regulation, 85 international jurisdiction, 85 patent litigation, 85 stay of proceedings, 85 reservation of title, 79 search orders, 84 subsidiary companies, 84 Swiss method, 87–8 third party supply, 84 U.K. Patents Act, 78–9 U.S. Federal Circuit, 88 use of language on packaging, 84 Data privacy code of practice, 278 enforcement of intellectual property rights, 277, 282 European Charter of Fundamental Rights, 276, 283 evidence collection, 277 Germany, 278 identified individuals, 277 intellectual property, 276, 283 Internet, 276, 278, 284 IP addresses, 277–8 IP packet header, 277 legislative solution, 278 notice and takedown, 277 personal data, 276–8 personal rights, 276, 278 property rights, 276, 278, 283 Spain, 278 WTO pressure, 278 Data protection identified individuals, 277 Internet enforcement, 278 Design patents application procedure, 476 confusion, 476 formal examination, 476 informed observer test, 475–6 inventive step, 474, 476 non-obviousness, 478 novelty requirement, 474, 476 numbers of design patents, 477 ordinary observer test, 474–5, 482 overall ornamental design, 475, 478, 480 point of novelty test, 474–5 prior art, 475–7 proof of infringement, 474–6 repair clause, 479

sliding scale test, 476 software products, 480–1 software protection European Union, 481 Japan, 481–2 Korea, 482 U.S. position, 481–2 term of protection, 477 Designs see Design patents; Fashion designs; Industrial designs Developing countries copyright protection, 283, 517–8, 522 counterfeit goods, 535 intellectual property discourse, 552–3, 560 trade law enforcement, 542, 549–50 see also Trade law enforcement trade policy and intellectual property, 576, 578, 581, 584 Digital rights management access to content, 288 anti-consumer technologies, 292 consumer choice, 292 effectiveness, 292 failure, 288 film industry, 292–3 see also Film industry multiple price choices, 293 pricing and timing, 292 technological protection measures distinguished, 292 Dilution actions acquired distinctiveness, 414 actual dilution, 414 actual injury, 414, 418, 420 damage to brand value, 421 damage to goodwill, 421 damage to uniqueness, 421 defences, 414 definition of dilution, 420 degree of similarity, 419–20 detriment, 418, 421 dilution by blurring, 414–16, 421–2, 425–7 dilution by tarnishment, 414–16, 426–7 dissimilar goods, 426 distinctive character, 418 distinctiveness, 420–3 economic behaviour, 420–1 free riding, 415–17, 427 immediacy of association, 420 inherent distinctiveness, 414 legal remedies, 414 likelihood of confusion, 417–21, 423–4, 426 likelihood of dilution, 414

INDEX  715



marketing investment, 423 mental association, 420 nature of the goods, 420 negative association, 416 niche fame marks, 414 niche markets, 423 objective proof, 414 parody exception, 415–16, 423–5 prevention of harm, 424–5, 427 property rights, 424–5 risk of injury, 420 scope of dilution, 415 scope of protection, 418–19 strength of reputation, 420 survey methods, 422 Trademark Dilution Revision Act (2006), 414, 425, 464 unfair advantage, 422–3, 425–7 Doha Round agricultural subsidies, 511, 571 conclusion, 571–2 Convention on Biodiversity, 514, 523, 571, 582 development issues, 571–2 disclosure proposal, 511 geographical indications, 511, 571–2, 582 implementation issues, 571 industrial tariffs, 511 intellectual property issues, 571 international commitment, 571 market access, 571–2 status, 510–11 trade policy, 568 TRIPS-related issues, 571–2 Enquete Commission (Culture in Germany) background, 351 collective management organizations cultural diversity, 352–3, 370–1 cultural valuable works, 352 functions, 351 German legal concept, 351 less popular works, 352 protection from competition, 352 restrictions, 352 services to third parties, 352 tariff determination, 351 withdrawal of rights, 352 collective rights management, 352 recommendations, 352 scope, 351 EU policy (copyright) Copyright Directive, 11–12 copyright levies, 3, 6 see also Copyright levies copyright protection

alignment with USA, 2 consultation process, 2–3 excerpts, 3 extension, 2, 14 knowledge-based economy, 2 newspaper articles, 3 orphan works, 3, 13 exceptions and limitations, 2–3, 10–12 see also Exceptions and limitations (copyright law) fair use, 10–12, 14 harmonization, 11 inter-party agreements, 13 machine copies, 14 reproduction right, 11, 13 stakeholder dialogue, 13 three-step-test, 11–12, 14 see also Three-step-test EU policy (patents) see also Judiciary and Intellectual Property (Europe) business interests, 4–5 Community Patent 4–5, 10 see also Community Patent unified litigation system consensus, 5 court system, 5–6 creation, 4–5 judicial expertise, 10 judicial practice, 10 legal doubts, 6 EU policy (trade law) Anti-Counterfeiting Trade Agreement, 515 bilateral agreements, 514 Convention on Biodiversity, 514 cooperation with rights holders, 515 counterfeiting, 514–16 see also Counterfeit goods dialogues with trading partners, 514–15 Doha Development Agenda, 514 enforcement, 514–15, 521–2 geographical indications, 514, 522 Heiligendamm Process, 515 intellectual property, 513–16 international cooperation, 514 legislative changes, 515, 522 Partnership Cooperation Agreement, 514 plurilateral activity, 515 WIPO involvement, 514 EU policy (trademarks) see also EU trademark law; Judiciary and Intellectual Property (Europe) Boards of Appeal, 9 Community Trade Mark, 3–4

716  INDEX see also Community Trade Mark consistency, 9 efficiency gains, 3, 8 judicial decisions, 9–10 problem areas, 8 EU policy initiatives competition rules, 7 cooperation agreements, 6 copyright see EU policy (copyright) DG Competition, 7 see also CISAC decision; Pharma Sector Inquiry enforcement civil measures, 6 counterfeiting, 6 Enforcement Directive, 6 legal framework, 6 piracy, 6 sanctions, 6 Intellectual Property Enforcement Coordinator, 7 Intellectual Property Rights Strategy for Europe, 7 international crime, 6 Internet sales, 6 legislative cycle, 11, 18 patents see EU policy (patents) pharmaceuticals sector, 7–8 see also Pharma Sector Inquiry soft law, 6 trademarks see EU policy (trademarks) EU trademark law see Trademark law (EU developments) European Patent Convention biotechnology and intellectual property, 184 see also Biotechnology and intellectual property intangible patents, 139–41, 145, 158 work sharing (patent law), 109 European Patent Office biotechnology and intellectual property, 182, 184, 189–90 see also Biotechnology and intellectual property Guidelines for Examination, 168 intangible patents, 139–40, 144–6 judiciary and intellectual policy, 17 medical inventions, 149 see also Medical inventions obviousness, 114–15, 120–1, 124, 126–7 see also Obviousness Pharma Sector Inquiry, 626, 631 see also Pharma Sector Inquiry

Scenarios Project, 151 work sharing, 93–4, 96, 102–3, 108, 110, 112 European patent system affinity with technology, 151–2 lack of clarity, 151 lack of consistency, 152 lack of political direction, 151 public policy, 151 uncertainty, 151 Exceptions and limitations (copyright law) access and distribution, 333 access to knowledge, 336 automatic knowledge tools, 336, 339 balance in copyright law, 316–17, 320 Berne Convention, 316, 318, 320, 323 competitive concerns, 336 compulsory licensing, 318–19, 323 content selection, 334 Copyright Directive, 11–12 data manipulation, 336 data mining, 336 database protection, 326 Declaration on Three-Step-Test, 316–23, 325, 335 derivative use, 336 different market participants, 318 different market situations, 318 different products, 318 digital commons, 336 digital environment, 323, 333–5, 337 educational exception, 337 European exception regime access and reuse, 333–4 adaptation, 333–4 contradictory objectives, 333 copyright protection, 333–5 creation and dissemination, 333 digital environment, 333–5 exception as a cost, 333 flexibility, 334–5 freedom of expression, 334 harmonization, 334–5 Knowledge Economy, 333, 335–7 legal security, 334–5 legislative reform, 334–5 fair use, 316, 322, 325, 327–9 format shifting, 337–9 Google Book Search Settlement see Google Book Search Settlement Gowers Review (2006), 336–7 harmonization, 11 Information Society Directive, 324 insufficient competition, 318 Internet creativity, 383, 386

INDEX  717

see also Internet creativity interpretation, 11 Knowledge Economy, 319, 323, 333, 335–7 libraries, archives and museums administrative activities, 327 Australia, 327–8 Canada, 327–8 collective management databases, 327 digital delivery, 328 digital technologies, 327 fair dealing, 327–8 fair use, 327–9 focus on drafting issues, 329 in-copyright works, 327 orphan works, 328 photocopying, 328 public activities, 327 public domain materials, 327 risk management issues, 329 scope of exceptions, 337 U.S. institutions, 327–9 national legislation, 12 notice and takedown regime, 326 parody, 337–8 policy issues, 336–9 research commons, 336 research exceptions, 324, 336–7, 339 right holders interests, 317, 336 scientific dimension broad upstream digital commons, 324, 326 downstream commercial applications, 324, 326 needs of science, 323–4 research exception, 324 scientific data, 323–4, 326 scientific works, 324 technological protection measures, 326 third party interests, 317 three-step-test, 11–12, 14, 316–20, 339–43 see also Three-step-test treaty interpretation, 320–1 TRIPS Agreement, 316, 320 user-created content, 333 user empowerment, 333–4 WIPO discussion, 316, 583–4 Expert witnesses (patent law) biotechnology appeals, 228 court-appointed experts, 225, 227–8 Germany, 222–3, 227–8 party witnesses, 221, 225 quality of experts, 221 transparency, 227–8 U.K. approach, 221, 227–8 U.S. approach, 227

Fair, reasonable and non-discriminatory (FRAND) licensing antitrust/intellectual property interface, 670 see also Antitrust/intellectual property interface standard setting, 675–80, 682–90, 692, 695, 697– 9, 703, 705 see also Standard setting Fair use doctrine analysis of safety capabilities, 212 assertion of rights, 211 civil liberties, 212–14 criticism of patented things, 212 Enforcement Directive, 215 European position, 214–15 experimental use, 213–14 fair, reasonable and non-discriminatory licences, 215 fair use exception, 211–13 follow-on investment, 211 invalid use, 211 net incentive increase, 211 patents of questionable validity, 210 post-grant opposition, 215 public protection, 209–11, 215 PUBPAT, 209 regulatory review defence, 214 research on patented things, 212 TRIPS provisions, 214 undeserved patents, 210 unenforceable use, 211 U.S. patent law, 211, 213 Fashion designs computer software, 480 degree of protection European Union, 471 France, 471, 480 India, 471 Japan, 471 over-protection, 483 piecemeal changes, 483 individual elements, 483 proposed legislation defences to infringement, 474 degree of protection, 471–3, 478–80, 483 entire garments, 473, 483 industry agreement, 479 legislative compromise, 483 notice requirement, 474 registration requirement, 473 standard for infringement, 474 sui generis law, 474, 478–9 term of protection, 473 unregistered design right, 482

718  INDEX U.S. position Berne Convention, 473 copyright law, 471 degree of protection, 471–3, 478–80 images of clothes, 472 international treaty agreements, 472–3 jewellery, 472 knock offs, 471–2, 483 patent law, 472 surface designs, 471–3 trade dress, 472, 478 trademark law, 472 TRIPS Agreement, 473 Film industry ancillary markets, 294 business solutions, 292 digital rights management, 292–3 see also Digital rights management distribution windows, 292 economic factors, 294 higher value, 294 music/film industry differences, 291, 294, 304 piracy, 291, 293–4 pre-release material, 291 pricing, 292 staggered release dates, 292–3 technological protection measures, 292 France acquisition of evidence (saisie) , 219–21, 224, 226 antitrust/IP interface class actions, 665 consumer protection, 665 fashion designs, 471, 480 see also Fashion designs information service providers, 259–61, 296, 307 right of publicity and privacy, 460 see also Right of publicity and privacy secondary liability, 296 trademarks and the Internet, 445–6 FRAND licensing see Fair, reasonable and non-discriminatory (FRAND) licensing Free speech see Freedom of expression; Trademarks and free speech Free Trade Agreements access to medicines, 512 counterfeit goods, 531 general exception, 513 trade policy and intellectual property rights, 578–82 see also Trade policy and intellectual property rights

WTO monitoring, 513 Freedom of expression copyright law, 282–4, 306–7, 500–1 human rights protection, 492, 494–6, 503 restrictions balance of interests, 500, 504, 506–7 blasphemy, 492 commercial expression, 492, 495–6, 503, 506 discrimination, 492 likelihood of harm, 495 margin of appreciation, 495–6, 504 necessary in a democratic society, 494 obscenity, 493 proportionate response, 494–5, 500 public policy and morality, 492–6, 503–5 racism, 492 sexual connotations, 493, 505 standards of review, 496, 504–6 terrorist activity, 492–4, 504–5 unregistrable words, 493, 505–6 Freedom of information right of publicity and privacy, 460–1 see also Right of publicity and privacy German collective management organizations cultural diversity, 352–3, 370–1 cultural valuable works, 352 functions, 351 German legal concept, 351 less popular works, 352 protection from competition, 352 restrictions, 352 services to third parties, 352 tariff determination, 351 withdrawal of rights, 352 German copyright law data privacy, 278 information service providers, 262–4 German patent system acquisition of evidence confidential information, 222 expert evidence, 222–3 inspection proceedings, 222–3, 229 intrusion into substance, 222 legal provisions, 222 likelihood of infringement, 222 product analysis, 222 proportionality, 222 search orders, 222 computer-implemented inventions, 155–6 expert witnesses attacked product or process, 223 burden of proof, 223 claim construction, 223 contested facts, 223

INDEX  719

court-appointed witnesses, 227–8 equivalents, 223 examination of witnesses, 228 neutral experts, 228 injunctive relief discretion, 196–7 fair, responsible and non-discriminatory defence, 197 four-factor test, 196 limiting the injunction, 197 misuse, 197–8 patent infringements, 196 permanent injunctions, 194, 197 preliminary injunctions, 197, 199, 204 proportionality, 196, 198 split system, 196 inventive step, 155 preliminary injunctions, 199, 204 standard setting, 685–9, 695 see also Standard setting technical contribution, 155 technical problem-technical solution, 155–6 German trademark law right of publicity and privacy, 460–1 see also Right of publicity and privacy trade fairs (trademark/patents/design infringements), 538 see also Trade fairs (trademark/patents/ design infringements) trademarks and the Internet, 445, 447 Google Book Search Settlement accuracy, 331 anti-competitive concerns, 331 Authors Guild, 330–1 books published (pre-January 2009), 330 class action, 331, 334 copying entire works, 329–30 extended collective management, 344 fair use, 329–31 in-copyright titles, 329–30, 334 increased access, 334 legislative issues, 332 Library Project, 329 long-term preservation, 331 most-favoured nation clause, 344 opting out, 331 orphan works, 332, 344 out of print books, 331 photographs, 332, 344 pricing schemes, 331 public domain, 329 public policy, 332 quality of scan, 331 registration requirement, 330, 334

royalty rate, 331 selection of works, 331 settlement terms book rights registry, 331 commercial uses payment, 331 immunity from liability, 330 institutional subscriptions, 330–1, 334 payment to copyright owners, 330 preview up to 20%, 330, 334 selling online access, 330, 334 scope of copying, 331 “Snippets”, 330–1, 334 U.S. copyright interests, 330 voluntary collective management, 344 Graduated response model copyright protection, 259–64, 266, 279, 284, 296, 300, 309 Human rights see also Freedom of speech European Convention on Human Rights, 452, 461, 492, 494–6, 503 human dignity, 454 religious beliefs, 496, 500 respect for private and family life, 461 right of privacy, 452, 454, 463 right of publicity, 453–6, 463 right to freedom of expression, 492, 494–6, 503 India fashion designs, 471 see also Fashion designs standard setting, 676 see also Standard setting Industrial designs see also Design patents; Fashion designs automatic registration, 470 Board of Appeal decisions, 486–90 Community Designs, 468–9, 477–8, 485 counterfeit goods, 481 see also Counterfeit goods declarations of invalidity, 469, 486–9 design cases pending, 490 Design Regulation, 481 enforcement, 477–8, 481 EU position, 478, 481–2, 485–90 individual character, 469, 487–9 informed users, 469–70, 478, 482, 484, 489 infringement, 481 intended use, 469 invalidity proceedings, 468–70, 485 lack of novelty, 469, 486 level of activity, 481 level of protection, 478 notion of disclosure, 470 overall impression, 469–70, 478, 486

720  INDEX

priority check, 485 priority documents, 468, 485 registered design rights, 481 registration procedure, 468–9, 477, 484 trade fairs see Trade fairs (trademark/patent/design infringement) unregistered design rights, 481–2 Inequitable conduct patent law, 28, 54–5, 58–9, 226, 242, 254–5 Information service providers access to music, 262 Asian copyright enforcement see Asian copyright enforcement Bit Torrent activity, 268 claims for disclosure, 262 copyright infringement accuracy of notices, 260 actual distribution, 271–2, 281–2 actual knowledge of infringement, 270–1 Aimster, 269 contributory infringement, 279 control of content, 258 criminalization, 262 cross-industry negotiations, 259 damages, 270–1 decentralized services, 270 deterrent sanctions, 263 effective solutions, 258–9 enforcement, 259, 262, 279 evidence, 272 filtering systems, 271 Grokster, 269–72, 281–2 inducement theory, 269–71 injunctive relief, 270–1, 283 judicial decisions, 260–1 legislative support, 259–60 Napster, 269–70, 281 negligence standard, 285–6 online infringement, 258 preventive action, 259–60, 263–4 sharing music over the internet, 269–70, 284 Streamcast, 269–71 technical sanctions, 263 third party liability, 272 tort-based liability, 285–6 unauthorized peer-to-peer services, 258, 261–2, 269–70, 272 warnings, 263–4 data protection, 263 E-Commerce Directive, 258 Enforcement Directive, 262 European Union position, 258, 260–2 fair use concerns, 285

file-sharing users, 262–3 filtering costs, 285 filtering technologies, 268–9, 271, 307–8 fundamental rights, 263 Germany, 262–4 government involvement, 260–1, 263–4, 279 illegal downloads, 262 IP addresses, 263 legal downloads, 262 liability administrative authority, 307–8 codes of conduct, 308 counterfeit goods, 533 counter notification, 306–7 extreme throttling, 310–11 France, 261, 307 filtering technologies, 268–9, 271, 307–8 freedom of speech, 306–7 graduated response model, 259–64, 266, 279, 284, 296, 300, 309 human rights considerations, 296, 200–300, 306, 309–10 IP addresses, 307 notice and takedown, 306–7 put back, 306 safe harbours, 307 sub-dial-up levels, 309 technical considerations, 307 warnings, 309 lock-out of legitimate uses, 279 New Zealand, 260, 264 packet inspection, 268 partnership and collaboration, 258 privacy, 259 private deals, 259 production risk, 262 role, 258 secondary liability, 280, 285, 294–6, 297, 301 see also Secondary liability Spain, 263 subscription agreements, 262 terms of service, 259 traffic pattern management, 268 U.K. position, 261 Injunctive relief (patent law) balance of hardships, 194, 202–3, 207 European comparisons Austrian law, 199 bonds, 200 cross-undertakings, 200 European Community Patents Court, 200–1 four-factor test, 200 German law, 199 harmonization, 199–201, 203

INDEX  721

Italian law, 200 Portuguese law, 200 preliminary injunctions, 199–202 procedural matters, 199–200 U.K. law, 199 German law discretion, 196–7 fair, responsible and non-discriminatory defence, 197 four-factor test, 196 limiting the injunction, 197 misuse, 197–8 patent infringements, 196 permanent injunctions, 194, 197 preliminary injunctions, 197, 199, 204 proportionality, 196, 198 split system, 196 interim injunctions, 202, 204 irreparable harm, 201–2, 204–5, 207 permanent injunctions, 194, 197, 206 pharmaceutical sector, 199, 202, 204 preliminary injunctions emergency matters, 201 ex parte, 199, 202 four-factor test, 200 Germany, 197, 199, 204 inter-pares, 199, 202 irreparable harm, 202 Italian law, 205–6 jurisdiction, 201 Netherlands, 203, 207 patent litigation, 199–200 pharmaceutical sector, 199 Spain, 204 subsequent ordinary actions, 203 third party interests, 200 uniformity, 202 urgent cases, 202 U.S. law, 204, 207 property right, 206 public interest issues, 194, 203 U.S. law adequate relief, 194 balance of hardships, 194 competitive harm, 195 entitlement, 194, 196 four-factor test, 194 identity of patent holder, 196 irreparable harm, 194–6 money damages, 194–5 preliminary injunctions, 194–6 presumptions, 194–6 public interest, 194 Supreme Court decision, 194–5

traditional test, 194 value of patent right, 196 value of patent, 196, 201 Italy injunctive relief, 200 preliminary injunctions, 205–6 “torpedo cases” (cross-border patent infringements), 83–5, 88–9 trade fairs (trademark/patents/design infringements) criminal seizures, 538 descrizione, 538 injunctive relief, 539 refusal to comply, 539 special regulation, 539 specialized courts, 538–9 Intangible patents absence of investment, 157–8 business methods, 137, 139, 140, 156 computer programmes, 142–3, 154–7 construing the claim, 144 contribution to the art, 144–5 Enlarged Boards of Appeal, 145–7, 152 European Patent Convention, 139–41, 145, 158 European Patent Office, 139–40, 144–6 excluded categories, 139–40, 144, 146–7 form or substance, 142 hardware/software convergences, 142 innovation, 139–40 internal consistency, 146 lack of policy, 158 mathematical methods, 140, 154, 156–7 meaning of invention, 140 mixed cases, 140–1 national courts, 145–6 obviousness, 146 see also Obviousness patentable subject matter, 156 software patents, 141, 143 Technical Boards of Appeal, 146 technical contribution, 140–1, 144, 156 technical effect, 142, 156 technical functionality, 141 telephone patents, 142, 151 U.K. approach, 140–1, 144–6 word-of-mouth teaching, 157 Intellectual property discourse (trade law) assessing current discourse discourse analysis, 559 keyword searches, 558 quantitative approach, 559 relevant databases, 558 relevant texts, 558 compulsory licensing, 555

722  INDEX counterfeit goods academic discourse, 536 globalization movement, 536 institutional frameworks, 536 intellectual property as tainted brand, 536–7, 540 international perception, 536 negative images, 537, 540 public health dimension, 537 public interest considerations, 536 respect for intellectual property, 537–8 social implications, 536 underlying themes, 536–7 developed countries, 560 developing countries, 552–3, 560 discourse analysis, 551 emphasis on patents, 559 enabling mechanism, 555 entrepreneurship, 555 equitable innovation, 551 forgotten dimension, 559 global public goods, 552 globalization discourse, 551–5, 559–60, 562, 565 human welfare, 560–2 increased prices, 552 innovation policy, 553, 565 innovation process, 554–5 intellectual property genocide, 562 intellectual property rights, 554–5 international policy, 551, 556 Knowledge Economy, 551–2 legal framework, 554 licensing of knowledge, 554 multinational enterprises, 552 negative images, 537, 540, 551, 562–3, 565–6 offensive right, 555 piracy, 551, 559, 563–5 proprietary innovation, 554 public awareness, 565 public policy, 555 rewarding individual creators, 554 small and medium sized businesses, 552 social and cultural values, 551 surplus value, 554 theory of discourse categorization of social world, 556 collective meaning, 557 discourse analysis, 556–7, 559 discursive practices, 557–8 discursive truth, 557 language and meaning, 557 power dynamics, 555–6 societal interaction, 557 transfer of technology, 560

TRIPS Agreement, 552–4, 562–5 value driven attitudes, 555 Intermediate liability definition of intermediary, 300–1 filtering technologies, 297–8 freedom of speech, 299 see also Freedom of expression international concerns, 297 justifications, 298 negligence-based theories, 298 practical aspects, 297 risk avoidance, 299 safe harbours, 297–8 vicarious liability, 298 Internet see also Information service providers; Internet Corporation for Assigned Names and Numbers advertising right of privacy, 457 right of publicity, 457–9 corporate dimension business opportunities, 45 business-to-business licensing solutions, 289 distribution costs, 45 e-commerce, 45 hacking, 45–6 security, 45 theft, 37–8 creativity see Internet creativity data privacy, 276, 278, 284 data protection, 278 downloads, 262 file-sharing, 262–3, 289–290 incentivizing creation, 288, 290 information service providers, 290, 296, 299–300, 306–10 see also Information service providers internet piracy, 6, 37, 283 liability administrative authority, 307–8 codes of conduct, 308 counter notification, 306–7 extreme throttling, 310–11 filtering technologies, 268–9, 271, 307–8 France, 261, 307 freedom of speech, 306–7 graduated response model, 259–64, 266, 279, 284, 296, 300, 309 human rights considerations, 296, 200–300, 306, 309–10 IP addresses, 307 notice and takedown, 306–7

INDEX  723

put back, 306 safe harbours, 307 sub-dial-up levels, 309 technical considerations, 307 warnings, 309 music access to music, 262 different uses, 289 downloads, 262, 290 music payments, 289 new business models, 289 online revenues, 289 trademarks see Trademarks and the Internet trading intellectual property, 288 U.K. developments digital rights agency, 290 legislative support, 290 Internet Corporation for Assigned Names and Numbers consumer interests, 438 core business registrations, 439 defensive registration, 439 domain names infringement, 439 speculators, 438 Uniform Domain Name Dispute Resolution Policy, 439–40 enforcement of existing agreements, 440 expansion of gTLDs, 438–40, 446–7 fraudulent sites, 438–40 Internet addressing system, 438 phishing, 438–9 post-registration procedure, 440 Internet creativity availability of legitimate offerings, 380–1 balance in copyright, 380 bifurcation, 381–3 business models, 376–9, 381–2 competition law, 385 consumer choice, 381 content generation/dissemination, 374 copyright exceptions and limitations, 383, 386 maxima, 386 protection, 380–1, 385 regulation, 377–8, 383 derivative works, 384–5 economic returns, 378 economic surveys, 379 Europe’s comparative advantage, 383 extension of neighbouring rights, 379 facilitating creativity, 374–5 fair use, 375, 384

Information Society Directive, 383–4 interactivity, 374–5 international multilateral treaties, 385–6 intervention, 379 Knowledge Economy, 381, 383–4 legal protection, 379 legal structure, 374–6, 380–2, 386 legislative dimension, 378–80 market behaviour, 379 maximum creativity, 374 micro-interactions, 375 multi-territorial licences, 380 music industry, 381 non-commercial use, 375 normal exploitation, 382–3 notice and takedown regime, 383 open approach, 379–80 optical disc distribution, 374 optimal cultural ecosystem, 376, 378, 380–1 over-regulation, 377 private use doctrine, 384 property approach, 379–80 science and research sector, 381–3 secondary liability schemes, 376 smaller companies, 380 start-up companies, 376 statutory damages, 376, 385 sustainable ecosystem, 375–8, 380–2 technological creativity, 376 technological protection measures, 385–6 see also Technological protection measures three-step-test, 382, 384–5 see also Three-step-test unauthorized distribution, 377 user-generated content, 384 WIPO Copyright Treaty, 386 Inventive step biochemistry, 133 bonus idea, 129 closest prior art, 122, 124–5 common general knowledge, 116–17, 126–7 computer-implemented invention subject, 123 could-would approach, 120 degree of invention, 116 design patents, 474, 476 see also Design patents effective step, 122 electronics sector, 121 inventive concept, 116 Japanese approach, 129–30 logic of the invention, 120 Netherlands approach, 130–1 non-technical effect, 123

724  INDEX normal creativity, 120 objective technical problem, 124 obviousness, 120 see also Obviousness person skilled in the art, 116, 118, 120, 124 pharmaceutical industry, 132–3 plausibility, 114–15, 117, 127 presence, 115 problems of implementation, 125 promptings, 120 state of the art, 116 technical solution/technical problem, 121, 123 TSM test, 132 U.K. position, 125–8 Japan (copyright law) information service providers, 261 Japan (patent law) see also Japanese patent system Appellate Board procedures, 72 acquisition of evidence absence of discovery, 218 contribution concept, 218–9 damages, 218–9 production of evidence, 218 proof of infringement, 218 protective orders, 218 aversion to litigation, 66 biotechnology and intellectual property, 183 see also Biotechnology and intellectual property cancellation procedures, 72 correction of claim, 67–8, 75–6 counter-allegations, 67, 69 court review period, 72 double track system, 66–7, 71, 74, 76 employee inventions, 66 exhaustion, 69 German influence, 66 high failure rates, 66, 72 infringement litigation, 71 infringement of patents, 66–7, 73–4 invalidation proceedings, 66–8, 72–3, 76 inventive step, 71, 129–30 see also Inventive step inventiveness, 70–1, 75 Japan Patent Office, 92–3, 95–6, 98–9, 102, 130 judicial decisions, 72 judicial discretion, 74 limited claims, 66 medical patents, 69–71 national policy, 72 objection proceedings, 72

obvious to try approach, 70 obviousness, 66, 129–30 see also Obviousness opposition proceedings, 66, 72 patent litigation, 72–6 pharmaceutical patents, 69–70 poor quality patents, 72 post-grant opposition, 66, 72–3 pre-grant publication, 66, 72–3 prior art, 70–2, 75–6, 129 prior use, 69 regular utility applications, 66 separate proceedings, 74 standard of patentability, 75 Supreme Court decision, 68, 75 technical application, 66 utility models, 66, 75 validity of patents, 66, 69, 70, 73, 75 volume of applications, 66 Japanese patent system administrative methods, 154 computer software, 154 definition of invention, 154 mathematical methods, 154 medical patents, 154 patentable subject matter, 154–5 technical ideas/law of nature, 154 Japanese trademark law fashion designs, 471 see also Fashion designs Judiciary and intellectual property policy (Europe) see also Judiciary and intellectual property policy (USA) constitutional issues, 17 decisions in other jurisdictions, 17 dialogue with other courts, 17 EU legislative cycle, 18 European Court of Justice ad hoc specialization, 21 caseload, 20, 23 decision-making process, 23–4 delegation of specialist cases, 20–1 docket control, 22–3 legislative interpretation, 20 number of judges, 20, 23 patent decisions, 22–3 policy considerations, 19–21 preliminary references, 20–1 quality of judgments, 20 trademark decisions, 19–21 expansion of intellectual property, 17–18 institutional reforms, 20–1 international judicial politics, 17

INDEX  725

internationalist policy, 17 judicial decision-making, 16 judicial expertise, 17–18, 21 patents ECJ role, 22–3 European Patent Convention, 16–17, 22 European Patent Office, 17 litigation, 23 national laws, 23 policy derived from statute, 16 trademarks CFI decisions, 21–2 decisions on facts, 18 ECJ jurisprudence, 19–21 judicial consistency, 21 judicial interpretation, 19–20 policy differences, 19 protection, 18 registration, 18 Judiciary and intellectual property policy (USA) see also Judiciary and intellectual property policy (Europe) administrative bodies, 32–3 copyright Federal law, 28 Supreme Court decisions, 33–4 expansion of intellectual property rights, 34 Federal Circuit jurisdiction, 28–32 Federal Trade Commission, 32–3 judicial authority, 26 judicial decision-making context, 27–8 forum shopping, 26, 29 implications for future cases, 26 policy considerations, 26–8 judicial deference, 30–4 judicial restraint, 34 legislative function, 34 patents courts of general jurisdiction, 28 Federal District Courts, 28 license fees, 27 patent trolls, 27 policy-based decisions, 27 property rights, 27 specialized courts, 28–9 Supreme Court, 29, 32 technical expertise, 30 U.S. Patent and Trademark Office, 30–1 specialized intellectual property courts, 28–30, 32–3 Supreme Court copyright decisions, 33–4 patents, 29, 32

policy considerations, 33–4 trademarks federal rights, 28 state common law, 28 technical expertise, 30 Knowledge Economy copyright exceptions and limitations, 319, 323, 333, 335–7 intellectual property discourse, 551–2 Internet creativity, 381, 383–4 see also Internet creativity Korea copyright enforcement, 260, 264 design patents, 482 see also Design patents software protection, 482 work sharing (patent law), 92–3, 96–7, 102 Libraries, archives and museums administrative activities, 327 Australia, 327–8 Canada, 327–8 collective management databases, 327 digital delivery, 328 digital technologies, 327 fair dealing, 327–8 fair use, 327–9 focus on drafting issues, 329 in-copyright works, 327 orphan works, 328 photocopying, 328 public activities, 327 public domain materials, 327 risk management issues, 329 scope of exceptions, 337 U.S. institutions, 327–9 Medical inventions allowable claims, 149 diagnostic inventions, 147–8, 150, 152–3 dosage, 150 European Patent Office, 149 excluded categories, 147–9 form and substance, 150 industrial applicability, 148–9 infringement, 149 merits of particular inventions, 149 national courts, 149 national emergencies, 148–9 problem of intuition, 150 substances for treatment, 148 therapy, surgery and diagnosis, 147, 149–50 treatment methods, 147 U.K. position, 148 U.S. approach, 152–3

726  INDEX Monetization of patents/intellectual property rights alignment of patents, 232 auction and securitization companies, 233 broader patents, 235 commercialization through licensing, 244 confidential information, 245 copyright, 243, 245 cyber-squatting, 232 defensive rationalization, 240 efficient marketplace, 248–250 expiry of patents, 239 exploitation of resources, 247 field of use licences, 236 independent creation, 232 intellectual property as an asset, 239 Intellectual Property Exchange International, 235–6 intellectual property exchanges, 243–5 invention/disclosure/monopoly power, 232 multiple means of enforcement, 248 new business models, 233–5, 243 non-practicing entities, 234–5, 240, 246, 250–1, 253–4 patent aggregators, 233–5, 249 patent applications process, 240–3, 255–6 see also Patent applications process patent auctions, 235, 249 patent-brokerage houses, 233, 248–9 patent exchanges, 243 patent holding companies, 232–4, 250 patent licensing companies, 235 patent litigation, 246 patent prosecutions, 234, 239, 240–3, 251–6 see also Patent prosecutions patent trolls, 233–5, 246, 251 priority, 232 property rights, 247–8 public policy, 245 Rational Patent Exchange, 249 revenue generation, 245 securitization, 244, 246, 249 strategic management of assets, 244 system of protection, 232 technology problems, 244 trade secrets, 245–6 trademarks, 243, 245–6 transparent market place, 235, 244–5, 248 transport exchange mechanism, 246 Unit License Right, 235–8 see also Unit License Right value of patents, 232, 245 Multilateral and bilateral relations (trade law) Doha Round agricultural subsidies, 511

Convention on Biodiversity, 514, 523 disclosure proposal, 511 geographical indications, 511 industrial tariffs, 511 status, 510–11 economic downturn, 510, 522–3 EU trade policy see EU trade policy Free Trade Agreements access to medicines, 512 counterfeit goods, 531 general exception, 513 WTO monitoring, 513 GATT violations, 511 regional and bilateral agreements development strategies, 512 intellectual property provisions, 512–3 most-favoured nation (MFN) treatment, 513 regional trade agreements, 512 trade policies, 512 transparency, 512 TRIPS-plus provisions, 512 World Trade Organisation, 510 trade finance, 510, 523 TRIPS Agreement access to medicines, 512 cross-retaliation agreements, 511–12 dispute settlement, 514 financial information services, 511 geographical indications, 522 intellectual property rights, 501–11 most-favoured nation (MFN) treatment, 513 national levels of protection, 512 pharmaceutical products, 512 trade promotion, 510 TRIPS-plus provisions, 512 Uruguay Round, 511 U.S. trade policy see U.S. trade policy World Intellectual Property Organisation see World Intellectual Property Organisation World Trade Organisation barriers to trade, 510 bilateral agreements, 510 dispute settlement system, 510–11, 523 intellectual property protection, 510, 523 monitoring trade developments, 510, 513, 523 multilateral trade rules, 510 regional agreements, 510 Trade Policies Review Body, 510 Music distribution see also Collecting Societies; Collective management

INDEX  727



additional license agreements, 355 Article 82(EC), 355–6, 372 clearance of rights, 354 collective dominance, 356 Commission Recommendation (2005), 355, 363 competition law, 355 different interests/different rights owners, 357 digital music, 353 economic solution, 355 global licences, 356 industry solution, 356 licensing system, 354 local monopolies, 356 music downloads, 353–4 online distribution, 354, 356–7 partial exhaustion of rights, 356 reciprocal agreements, 355 regulatory framework, 355 withdrawn rights, 355 Netherlands acquisition of evidence (patent law) access to evidence, 224–5 confidentiality orders, 224 duty to cooperate, 224 evidence of infringement, 224 legitimate interest, 224 preservation stage, 224 proportionality, 224 subsidiarity, 224 two-stage proceeding, 224 cross-border patent infringement, 86–7 expert witnesses court appointed witnesses, 225 parallel proceedings, 225 party witnesses, 225 prosecution history estoppel, 225–6 specialized patent judges, 225 inventive step, 130–1 preliminary injunctions, 203, 207 right of publicity and privacy, 460 see also Right of publicity and privacy Obviousness see also Inventive step assessment, 128 biochemistry, 133 bonus idea, 129 chemical sector, 118–19 common general knowledge, 116–17, 126–7 concept of disclosure, 118–20 customary knowledge, 118 English position, 115–16 European Patent Office, 114–15, 120–1, 124, 126–7 extent of research, 116

familiar elements according to known methods, 114 German courts, 118–20, 128–9 intangible patents, 146 KSR decision, 114–15, 117–18, 124, 130–3, 137–8 meaning of obvious, 114 motive, 116–18 non-obviousness, 115 obvious and bad, 114–15 obvious to try, 117–18, 120, 126–8 pharmaceutical industry, 132–3 prior art closest prior art, 114–15, 122, 124–5 disclosure, 118–20 known prior art, 122, 128 prior art document, 119 problem-solution approach, 114, 120–6, 129, 131 starting point, 118 technical advantage, 115 technical contribution, 115 technical effect, 115 TEM test, 132 Office of Harmonization for the Internal Market bad faith, 395 Boards of Appeals, 388, 393–5, 399–400, 402, 422 CTM application, 405 declarations of invalidity, 486 design cases, 490 Examination Guidelines, 492 increasing revenues, 3 intellectual property policy, 9 moral arbiter, 504 prior application, 468, 485 priority checks, 485 procedural matters, 485 registration, 408, 477, 485, 504 trademark statistics, 388 Orphan works copyright exceptions and limitations, 328, 332 EU copyright policy, 3, 13 Parallel imports competition law, 619 counterfeit goods, 543, 546 see also Counterfeit goods Patent applications process acquiring new targets, 241 backlogs, 93, 103–4, 106–8, 112, 241 continuation applications, 242–3, 255–6 delay in examination, 241 different patents/different aspects, 242 filing, 240 inequitable conduct, 242

728  INDEX multiple examples, 240–1 multiple technologies, 241 prior to substantive use, 240 prosecution cost, 242 specification, 241 wording of claims, 242 Patent law acquisition of evidence see Acquisition of evidence (patent law) any hardware test, 140, 145, 155 biotechnology and intellectual property see Biotechnology and intellectual property cross-border infringement, 78–90 see also Cross-border infringement (patents) expert witnesses see Expert witnesses (patent law) fair use doctrine see Fair use doctrine inequitable conduct, 54–5, 58–9, 226, 242, 254–5 injunctive relief see Injunctive relief (patent law) intangible patents see Intangible patents inventive step see Inventive step Japanese developments, 66–76 see Japan (patent law) medical inventions, 147–53 see also Medical inventions obviousness see Obviousness U.S. business methods arbitration on contracts, 136–8 diagnostic recovery, 138 machine element, 136–7 machine or transformation test, 52, 57, 60, 137–8, 153 patentable subject matter, 137, 139 risk management/trading commodities, 136–9, 147 U.S. Patent and Trademark Office, 137, 139 useful, concrete and tangible result test, 138 vagueness, 138 U.S. developments, 50–64 see also U.S. patent law developments work sharing, 92–112 see also Work sharing (patent law) Patent misuse abolition of misuse, 609 anticompetitive conduct, 606 anticompetitive effect, 608

anticompetitive laws, 615–16 antitrust policy, 616 antitrust violation, 606–9, 616, 622 bad faith, 609, 615, 622 categories of misuse, 607, 609 empirical study, 605–6 equitable defence, 606, 609, 622, 675, 700 expansion of doctrine, 621 extension of royalty payments, 606 Federal Circuit decisions, 607–9 federal judicial cases, 606–7 fraud-based claims, 607 misuse/antitrust relationship, 606, 609 origins of doctrine, 616 Patent Misuse Reform Act (1988), 608 patent policy violation, 606, 608–9, 616, 621–2 pharmaceutical settlements, 609 policy independence, 607 refusals to license, 608 safe harbours, 608 standard of pleadings, 608 tying, 606, 608 Patent Prosecution Highway, 92, 94–101, 103, 105, 112 Patent prosecutions asset classes, 239 background, 252–3 changes, 234 continuation applications, 242–3, 255–6 cost, 242 duty of disclosure, 255 inequitable conduct, 28, 54–5, 58–9, 226, 242, 254–5 litigation defensive mechanisms, 240 new patent markets, 251 non-practicing entities, 253–6 patent preparation stage, 240, 253 prosecution stage, 241, 253–5 prosecution strategy, 256 specification, 241, 254 Patents see also Design Patents; Office of Harmonization for the Internal Market; Patent law European patent system affinity with technology, 151–2 lack of clarity, 151 lack of consistency, 152 lack of political direction, 151 public policy, 151 uncertainty, 151 German patent system acquisition of evidence, 222–3, 229 computer-implemented inventions, 155–6

INDEX  729

expert witnesses, 222–3, 227–8 inventive step, 155 preliminary injunctions, 199, 204 technical contribution, 155 technical problem-technical solution, 155–6 Japanese patent system administrative methods, 154 computer software, 154 definition of invention, 154 mathematical methods, 154 medical patents, 154 patentable subject matter, 154–5 technical ideas/law of nature, 154 patent applications process, 240–3, 255–6 see also Patent applications process patent prosecutions, 234, 239, 240–3, 251–6 see also Patent prosecutions standard setting essentiality, 678, 680–1, 683 ex ante auctions, 684–5, 692 disclosure, 694, 701 exceptions and limitations, 676 implied licences, 689 infringement, 675, 694, 700 injunctive relief, 675, 685–6, 700 internalization/externalisation of patent law, 675–7, 700–3 invalid patents, 680–2 non-exclusive licences, 688 patent abuse, 700 patent ambush, 677–9, 692, 694 patent misuse, 675, 694, 697, 699 patent transferees, 688–90 quality of patents, 675 refusal to licence, 674, 680, 683, 689, 697 sale to another company, 679, 690 trade fairs see Trade fairs (trademark/patent/design infringement) U.S. patent system acquisition of evidence, 226–7 diagnostic methods, 152–3 expert witnesses, 227 machine or transformation test, 52, 57, 60, 137–8, 153 patentable subject matter, 153–4 policy-based decisions, 152 preliminary injunctions, 204, 207 Supreme Court decisions, 50–1, 55, 152–4 Pharma Sector Inquiry abuse of Commission powers, 628 abuse of legal process, 628, 641–3 access to law, 628, 644, 654 achievement of objectives, 634–5, 638, 641



anticompetitive use of patents, 637 appearance of bias, 636 approval and marketing of medicines, 625 Article 81 (EC), 627, 641, 645 Article 82 (EC), 637, 641–2, 644–5 background, 624 Commission inspections, 638–9 competition intervention, 627 competition law, 627, 641, 644–5 compulsory licensing, 643 constructive criticism, 626–7 consultation, 629, 639, 645 consumer welfare, 637–8, 645 Council Regulation 1/2003, 624, 638–9 dawn raids, 624, 628, 636, 647 defensive patenting strategies, 625, 639, 643–4, 648, 654, 692 delayed generic entry, 624–5, 628–9, 637–8, 640, 643–4, 647–8 disputes with generic companies, 625 distortion of competition, 624, 638, 647 due process, 647 EPO submission, 626, 631 examination of causation, 627, 633 failure to address evidence, 628, 632–3 filing of multiple patents, 625, 629, 639, 648, 653 generic companies, 652–3 grounds for inquiry, 624, 638, 647 high-handed approach, 636–7 human rights considerations, 655 improvement patents (evergreening), 650 inaccuracies and mischaracterisations, 631, 635 information requests, 638, 645 innovation, 640 invalid patents, 642–3, 646, 655 inventive step requirement, 631 investment risk, 651–2 market entry/new pharmaceuticals, 624, 627, 629, 647 marketing authorisation, 632 methodological flaws, 630–1, 635 novelty requirement, 631 omissions, 632–3 originator companies, 625, 640 patent law reforms disclosure of information, 653 European Patent Court, 654–5 interim injunctions, 655 opposition proceedings, 654–5 third-party participation, 654 patent litigation, 625, 628, 631, 636–7, 642, 654–5 patent monopoly, 651

730  INDEX patent offices performance, 652–3 patent revocation, 642–3 patent system, 650–2, 655 patent validity, 651 patented medicines research and development, 650–1 sales income, 650 selling price/manufacturing cost, 650 Preliminary Report, 624–7, 629–30, 633–7, 639–40, 647, 651 process aspects, 636–7 promotional expenditure, 651 questionnaires, 624, 647 recouping investment, 650 regulatory framework, 625, 627, 631, 635–6, 641 regulatory requirements, 627 relevance of intention, 636–7, 641 requirements to be satisfied, 630 restriction of competition, 624, 638 settlement agreements, 627, 629, 648 stakeholder submissions, 625–6, 639, 645 unilateral acts, 627, 641 use of Commission resources, 628, 643, 645–7 value of patents, 640 Piracy see also Counterfeit goods associated costs, 564 copyright piracy, 599, 601–3 corporate concerns, 37, 40, 43 economic effects, 564–5 effects on firm performance, 564–5 EU initiatives, 6 fight against piracy, 563, 566 film industry, 291, 293–4 internet piracy, 6, 37, 283 Portugal preliminary injunctions, 200 Prior art closest prior art, 114–5, 122, 124–5 design patents, 475–7 see also Design patents disclosure, 118–20, 168–70 Japanese approach, 129 prior art document, 119 Regional and bilateral agreements development strategies, 512 intellectual property provisions, 512–3 most-favoured nation (MFN) treatment, 513 regional trade agreements, 512 trade policies, 512 transparency, 512 TRIPS-plus provisions, 512 World Trade Organisation, 510

Right of publicity and privacy breach of confidence, 452 celebrity interests, 454–6, 459, 464 circumstances of obtaining information, 453 coherent and balanced law, 463 commercial harm, 459 commercial power, 452–3 compensation for creating persona, 464 dissemination of images, 453 economic realism, 453 European Convention on Human Rights, 452, 461 European position advertising purposes, 461 balance of interests, 461–2 Belgium, 460, 462 contractual aspects, 460 European Convention on Human Rights, 461 France, 460 freedom of information, 460–1 Germany, 460–1 imitation, 460 Netherlands, 460 personality rights, 460 portrait right, 460–1 post mortem rights, 460 recognition criteria, 460 respect for private and family life, 461 restricted commercial use, 461–2 term of protection, 460 unharmonized protection, 460 visual representations, 460 expectation of privacy, 452 human autonomy, 454 human dignity, 454 human rights protection, 452, 461 intellectual property rights, 462–4 Internet advertising right of privacy, 457 right of publicity, 457–9 malicious falsehood, 452 manipulation and the media, 453 nature of information, 453 patterns of exploitation, 453–4 personality rights, 453, 455, 460, 462–3 power to control, 452–3 right of privacy, 452, 454, 457, 463 right of publicity, 453–9, 463 social networking advertising practices, 457–9 Facebook, 457–8 level of value, 457 product marketing, 457 right of privacy, 457–8

INDEX  731

right of publicity, 457–9 Twitter, 457–8 unwanted intrusion, 459 U.S. position action for false sponsorship, 464 celebrity interests, 454–6, 459 personality rights, 45, 462 post mortem rights, 454–7 “propertizing” fame, 454, 463 property logic, 454, 463 publishing industry opposition, 455 right of privacy, 463 right of publicity, 454–6, 463 Secondary liability codes of conduct, 295 disconnecting subscribers, 296, 300 E-Commerce Directive, 295, 297 EU regulation, 294 France, 296 graduated response model, 296, 300 human rights protection, 296, 299–300, 306 importance, 288, 294–5 information service providers, 280, 285, 294–7, 301 intellectual failure, 295 Internet readmission fee, 296, 299 legislative adjustment, 295–6 new business models, 295 notice and takedown procedures, 295–6, 309 online intermediaries, 297 sanctions, 296 technological advances, 295 Social networking advertising practices, 457–9 Facebook, 457–8 level of value, 457 product marketing, 457 right of privacy, 457–8 right of publicity, 457–9 Twitter, 457–8 Spain data privacy, 278 information service providers, 263 preliminary injunctions, 204 Standard setting antitrust case law, 689–90, 701 antitrust/intellectual property interface, 674, 677–80, 696–7, 699, 705 see also Antitrust/intellectual property interface antitrust intervention, 691 Article 81 (EC), 690, 693, 697–8 Article 82 (EC), 691, 701–3 ballot stuffing, 679



Berne Convention, 705 China, 676, 703–5 Commission’s position, 691–4 compatibility between products, 691 competition policy, 693–4 compulsory licensing, 703 computer software, 691 consumer welfare, 691 cross licensing, 679, 683, 687–8, 698 damages actions, 685 disclosure, 674–5, 677–8, 685, 692–5, 698–9, 701 dominant position, 697, 701–2 enforcement action, 691 essential facilities doctrine, 696, 699 essential technologies, 696 ETSI IPR Policy, 681–4, 686 EU/U.S. differences, 675, 677 ex ante disclosure, 685, 695, 699 ex ante standardization processes, 675, 684–5, 692–3, 703 ex post analysis, 699, 701–3 ex post enforcement, 691–3 fair, reasonable and non-discriminatory (FRAND) licensing, 675–80, 682–90, 692, 695, 697–9, 703, 705 German perspective, 685–9, 695 global standard, 703, 705–6 government interference, 674 immune exercise doctrine, 701–2 India, 676 innovation, 691, 697–8, 701–3 international trade dimension, 674, 703 investment risk, 697 market access, 674 market power, 691–2, 702 Microsoft, 691 monitoring, 674 national standards, 703, 705 patents essentiality, 678, 680–1, 683 ex ante auctions, 684–5, 692 disclosure, 694, 701 exceptions and limitations, 676 implied licences, 689 infringement, 675, 694, 700 injunctive relief, 675, 685–6, 700 internalization/externalisation of patent law, 675–7, 700–3 invalid patents, 680–2 non-exclusive licences, 688 patent abuse, 700 patent ambush, 677–9, 692, 694 patent misuse, 675, 694, 697, 699

732  INDEX patent transferees, 688–90 quality of patents, 675 refusal to licence, 674, 680, 683, 689, 697 sale to another company, 679, 690 procurement issues, 693–4 reasonable and non-discriminatory (RAND) licensing, 675–6, 680–2, 698–9 refusal to supply, 702 rent seeking, 674, 698 royalty-free licenses, 694–5 stacking of rights, 674 standard conflicts, 675 standard reading on company’s patents, 678–9, 695 standard setting organizations, 674, 677–80, 682, 687–8, 690–2, 697, 699, 703, 705 standardization, 674, 684, 692, 697–8 standards/intellectual property, 697–9 Technical Barriers to Trade Agreement, 675, 704 technical standards, 696 trade/intellectual property, 696–7 TRIPS Agreement, 676, 704–5 WIPO initiative, 674, 676 WTO rules, 675–6, 697, 704–6 Technological protection measures copyright exceptions and limitations, 326 copyright territoriality, 303 digital rights management distinguished, 292 film industry, 292 Internet creativity, 385–6 see also Internet creativity Three-step-test application, 316–7, 320, 322, 339–41 balancing of interests, 340 Berne Convention, 340–2 certain special cases, 322 compulsory licensing, 342 conflict with normal exploitation, 322 conflicting interests, 340 continuing role, 321 Declaration on Three-Step-Test, 316–23, 325, 335, 339–41 different types of material, 339 different users, 339 digital environment, 323 drafting tool, 339 extended collective licence, 343 fair dealing, 322 fair use, 322 flexible implementation, 339 influence, 12 Internet creativity, 382, 384–5 see also Internet creativity interpretation, 14, 319, 321–2, 341–2



legitimate interests, 340 national law, 339–40 normal exploitation of work, 12 normative aspects, 325, 340 overall assessment requirement, 320 prejudice to legitimate interests, 322 reasonableness, 340 special cases, 12, 340 structure, 340 third party interests, 340 TRIPS Agreement, 340–3 unreasonably prejudicing legitimate interests, 12 U.S. alternative action, 342 WTO Dispute Settlement Panels, 322, 325, 340–1 Three strikes approach copyright infringement, 259, 288, 294, 299, 309–10 Trade fairs (trademark/patent/design infringement) alleged infringements, 538 bilateral agreements, 539, 548 China, 539 collection of evidence, 538–9 Germany, 538 intellectual property protection enforcement of rights, 538–9 enforcement procedure, 547–8 internationalization, 539 Italy criminal seizures, 538 descrizione, 538 injunctive relief, 539 refusal to comply, 539 special regulation, 539 specialized courts, 538–9 multilateral agreements, 539 Trade law EU trade policy see EU trade policy multilateral and bilateral relations see Multilateral and bilateral relations (trade law) U.S. trade policy see U.S. trade policy Trade law enforcement see also Anti-Counterfeiting Trade Agreement; TRIPS Agreement BASCAP industry alliance, 528 border enforcement, 546 BRIC countries, 549–50 capacity building benefits, 542 context, 540

INDEX  733

developing economies, 542 enforcement tool, 540–1 funding, 542 law enforcement, 541, 544 political will, 542 public educational activities, 541, 549 trade policy initiatives, 541 training, 541 transparent decision-making, 542–3 TRIPS commitment, 541 U.S. initiatives, 541–2 counterfeit goods see Counterfeit goods enforcement capacity, 541 international cooperation, 546–7 organized criminal activity, 540 piracy, 541, 563–6 see also Piracy rule of law, 542–3 technical assistance, 541 trade fairs see Trade fairs (trademark/patent/design infringement) Trade-related aspects of intellectual property see TRIPS Agreement World Intellectual Property Organization Advisory Committee on Enforcement, 544, 547 best practice, 547 enforcement agenda, 544 law enforcement, 544 respect for intellectual property, 544 Trade policy and intellectual property rights access to medicines, 578 activism and participation, 568 Anti-Counterfeiting Trade Agreement, 579–81 see also Anti-Counterfeiting Trade Agreement bilateral agreements, 568, 574–9 competitive liberalization, 575 copyright protection, 582–4 democracy deficit, 575 developing countries, 576, 578, 581, 584 Doha Round, 568, 571–2, 582 see also Doha Round Free Trade Agreements, 578–82 see also Free Trade Agreements GATT Agreement, 581 integration, 568 linkages, 568, 571 market access, 579 multilateral agreements, 574–6, 581–2 NGO perspective, 575 trade-offs, 568

transparency, 575–7, 579, 581 TRIPS Agreement, 578–581 see also TRIPS Agreement WIPO Development Agenda, 568–75, 581–2, 584 see also World Intellectual Property Organization Trademark law see also Trademarks dilution actions see Dilution actions EU developments see Trademark law (EU developments) fashion designs see Fashion designs industrial designs see Industrial designs Internet see Trademarks and the Internet right of publicity and privacy see Right of publicity and privacy Trademark law (EU developments) added value objection, 410 bad faith allegation, 392–5 Community Trade Mark, 392–4, 403–5, 407–10 see also Community Trade Mark Community Trade Mark Registration Regulation, 392–3, 395 Comparative Advertising Directive, 388–9, 391, 406–7 Court of First Instance decisions, 388 descriptive characteristics, 390 distinctiveness, 389 embellishment defence, 390 essential function, 388–9 European Court of Justice, 388–91, 395 external use, 390 fair competition, 407–8 first-to-file principle, 393 genuine use, 390–1 harmonization, 406–7 identicality, 406 internal use, 390 issues of origin, 389 likelihood of confusion, 388–9, 394, 406 mistake as to origin, 389 non-conventional trademarks adding substantial value, 403 consumer perception, 398–9 conventional visual signs, 396 distinctiveness, 397–9, 401, 403 essential features, 402 exceptional treatment, 396

734  INDEX financial value, 403 functionality objections, 397, 401–2 graphical representation, 403 longstanding use, 397 market share, 397 marketplace recognition, 401 perceptible difference, 398–9 promotion investment, 397 registration specification, 396 reward for effort, 403 sensitized consumers, 400 shape-related exclusions, 397, 401–2 shapes, 396–402 significant departure from norm, 399, 401 specific origin, 400 subject matter, 396, 410–11 sufficiently unusual signs (3D), 400–1 technical result, 401–2 three dimensional marks, 397–401 trade dress, 397, 401 universal systems, 396 Office of Harmonization for the Internal Market, 388 own name defence, 392 passing off, 394 relative rights objection, 394 reputation, 388–9, 393 requirement of availability, 389 requirement of confusion, 388–9, 391, 406 scope of infringement, 411 signs, 411–12 similar signs, 388, 394 small and medium size enterprises, 407–8 strict liability, 406 trademark dilution, 406 Trademark Directive, 388–9, 391–2, 406–7 unauthorized use, 411 unfair advantage, 389, 406 unfair competition, 394, 407 Trademarks see also Trademarks and the Internet descriptive characteristics, 390 distinctiveness, 389 embellishment defence, 390 essential function, 388–9 EU policy see EU policy (trademarks) external use, 390 first-to-file principle, 393 genuine use, 390–1 identicality, 406 likelihood of confusion, 388–9, 394, 406 mistake as to origin, 389 passing off, 394

similar signs, 388, 394 trade fairs see Trade fairs (trademark/patent/design infringement) trademark dilution, 406 unauthorized use, 411 Trademarks and free speech Boards of Appeal decisions, 492–3, 501–2 Community Trade Mark Regulation, 504 human rights protection, 492, 494–6 religious beliefs, 496, 500 restrictions balance of interests, 500, 504, 506–7 blasphemy, 492 commercial expression, 492, 495–6, 503, 506 discrimination, 492 likelihood of harm, 495 margin of appreciation, 495–6, 504 necessary in a democratic society, 494 obscenity, 493 proportionate response, 494–5, 500 public policy and morality, 492–6, 503–5 racism, 492 sexual connotations, 493, 505 standards of review, 496, 504–6 terrorist activity, 492–4, 504–5 unregistrable words, 493, 505–6 right to freedom of expression, 492, 494–6 see also Freedom of expression sensitivity and tolerance, 493, 506 trademark infringement anti-dilution protection, 497–8 closed categories, 499 consumer confusion, 499–501 enforcement strategies, 496 initial interest confusion, 497–8 limiting principle, 496, 498, 503 online environment, 496 parody exception, 499–501 potential conflicts, 497–8 predetermined speech exceptions, 499 U.S. experience, 496–8 use-as-a-mark requirement, 497–8 Trademarks and the Internet see also Internet Corporation for Assigned Names and Numbers ad words, 430, 433–4, 441 alternative dispute resolution, 440 Australian perspective ad words, 441 initial interest confusion, 441 trademark confusion, 441 trademark use requirement, 441 authenticity guarantees, 440–1

INDEX  735

brand owners, 435 concept of confusion, 431, 444 consumer perspective, 431, 447 contributory liability, 447 counterfeit goods, 437–8, 440 see also Counterfeit goods E-Commerce Directive, 444–6 economic analysis, 430–2 EU/U.S. differences, 444 European Court of Justice referrals, 443–4 French perspective, 445–6 German perspective, 445, 447 harmonization, 447–8 indicators of source and quality, 431–2 intermediaries, 443–4 joint tortfeasance, 443 jurisdictional problems, 449 liability of hosting providers, 444 medium of communication, 432 national laws, 449 online use advertising, 435–6 auction platforms, 432–3, 441–2, 445–6, 448 authenticity of trademark, 433 comparative advertising, 434 e-Bay use, 434–5, 437–8, 440, 448–9 E-Commerce Directive, 433 host provider privilege, 433 infringement, 432–3 key word advertising, 434–7, 442–3, 446 key word purchases, 435 key word suggestion tool, 435–7 online platforms, 435 provider liability, 433 search engines, 432–3, 435, 444, 446–7 taking down offers, 433, 448 unfair competition, 434, 442 visibility issue, 434 reputation, 431 sales taxes, 449 search processes, 446–7 secondary liability, 443 service providers, 445 sponsored links, 435–7, 449 traffic manipulation, 443 trademark exhaustion, 443 trademark infringement, 441–4 trademark protection, 431 trademark registration, 432 transparency issues, 445 Trade-related aspects of intellectual property see TRIPS Agreement Treble damages remedy antitrust/intellectual property interface, 663–5

competition law, 613–14, 618, 668 mandatory treble damages, 663 trade law, 528 TRIPS Agreement access to medicines, 512 copyright exceptions and limitations, 316, 320 counterfeit goods, 530–4 see also Counterfeit goods cross-retaliation agreements, 511–12 dispute settlement, 514 fair use doctrine, 214 fashion designs, 473 financial information services, 511 geographical indications, 522 intellectual property discourse, 552–4, 562–5 intellectual property rights, 501–11 most-favoured nation (MFN) treatment, 513 national levels of protection, 512 pharmaceutical products, 512 standard setting, 676, 704–5 see also Standard setting three-step-test, 340–3 trade law enforcement, 541 see also Trade law enforcement trade policy and intellectual property, 578, 581 trade promotion, 510 TRIPS-plus provisions, 512 United States v. China, 588–9, 591–2, 595, 597–9, 602, 604 see also United States v. China work sharing (patent law), 100–1 Triway Pilot Programme work sharing (patent law), 92 U.K. Intellectual Property Office work sharing (patent law), 92 U.K. patent system acquisition of evidence, 219–21, 229 biotechnology appeals, 228 expert witnesses, 221, 227–8 intangible patents, 140–1, 144–6 inventive step, 125–8 medical inventions, 148 transparency, 227–8 Unit License Right auditing, 238 core description, 236 independent enforcement committee, 239 management agreement, 238 non-exclusive paid-up licence, 236 offering memorandum, 238 operation, 237–8, 244 purchase, 236, 246 purpose, 235 secondary market, 238–9 securities law, 244

736  INDEX United States and antitrust antitrust/intellectual property policy, 605, 610 Chicago School approach, 613, 616, 618–19, 621 Department of Justice abuse of dominance, 611–13 competition law, 610–11 developments, 610 Internet commerce, 610 Federal Trade Commission abuse of dominance, 611–14 administrative decisions, 613 competition law, 610–12, 615, 617 competition policy, 612–14 equitable relief, 614 intellectual property/competition law balance, 610, 615 liability standards, 613 litigation success rates, 613 margin of discretion, 613 non-litigation agenda, 615 period of transition, 610–11 pharma settlement cases, 610, 621–2 political influences, 612, 617, 620–1 single-firm conduct, 613 treble damages cases, 613–14 zone of liability, 614 patent misuse see Patent misuse Supreme Court decisions, 619–21 unfair competition, 615–16 United States v. China administrative enforcement, 596 auctioning off trade marks, 589–90 Berne Convention, 588, 590–2, 595, 601–2 Chinese Copyright Act, 588–9, 591–3, 597, 601 Chinese legal system, 595 compulsory sequence, 596 content control, 602 content review process, 591–2, 595, 601–2 copyright protection, 588–9, 591–4, 601, 604 destruction of infringing goods, 588–90 developing countries, 596, 598 evidential requirement, 595–6, 600–1 illegal publication/illegal content, 592–3, 601 infringement commercial scale, 590, 595–6, 598–602, 604 criminal penalties, 588, 590, 596, 598 judicial interpretations, 590, 595 piracy, 588, 590, 593–4, 598–9, 601–4 political will, 593–4 threshold levels, 590, 597, 600, 602 trade mark counterfeiting, 588, 590, 594, 599, 603

intellectual property enforcement, 593–6, 598, 600, 603 judicial economy, 589 minimum standards and limitations, 596 prohibited works, 588, 591–2, 597 public welfare, 589 removal of goods, 590 TRIPS Agreement protection, 588–9, 591–2, 595, 597–9, 602, 604 U.S. anti-counterfeiting law, 602 U.S.-Chinese relations, 599–600 WTO obligations, 596, 598 WTO reforms, 596 U.S. Patent and Trademark Office (USPTO) see also U.S. patent law developments applications, 31, 93, 96 enforcement and counterfeiting, 540–2, 544 see also Counterfeit goods; Trade law enforcement fees, 110 influence, 32 intangible patents, 137, 139 international cooperation, 92 lack of deference, 31 legal interpretation, 30–1 outsourcing, 98 patent law developments, 50, 53–4, 57 Patent Prosecution Highway, 92, 94–101, 103, 105, 112 policy development, 31 public participation, 31 rule-making authority, 30–1, 54 U.S. business methods, 137, 139 work sharing, 92–8, 109–12 see also Work sharing (patent law) U.S. patent law developments Bilski, 52, 57, 60–1, 64 biosimilars, 54 biotechnology, 56, 59, 61 business method patents, 50, 52 damages aspect, 54–7 declaratory judgments, 51 disclosure requirements, 60 e.Bay, 51 expansion of subject matter, 50, 52 extraterritorial application of laws, 51 Federal Circuit decisions, 50–3, 55, 60 Federal Trade Commission, 50 financial services industry, 50 first-to-file system, 54, 62 first-to invent system, 62–3 gatekeeper function, 56 gene patents, 55–6 harmonization, 54, 57, 62

INDEX  737

high technology industries, 51, 55 inequitable conduct, 55, 58–9 injunctions, 51, 53 intellectual property as assets, 50 KSR, 51–2, 56, 58–9, 61–2 Kubin & Goodman, 53, 55–6, 60 legislative reforms, 50, 54, 56–7, 60, 62 machine or transformation test, 52, 57, 60, 137–8, 153 micro electronics industries, 55 objective criteria, 60–2 obviousness, 51, 53, 55–6, 58–61 see also Obviousness patent exhaustion, 51 patent litigation costs, 50 patent trolls, 50 patentable subject matter, 50, 52 pharmaceutical industry, 51, 55, 61 post-grant opposition proceedings, 54 presumption of validity, 58 prior art, 54–6 quality of patents, 50 re-examination proceedings, 54 reforms, 50, 53, 55, 60 secondary considerations, 60–1 strengthening and weakening, 50 Supreme Court decisions, 50–1, 55, 152–4 time to market, 51–2 unlimited continuations, 60 U.S. Patent and Trademark Office, 50, 53–4, 57 wilful infringements, 50, 52, 54, 58–9, 63–4 U.S. patent system see also U.S. patent law developments acquisition of evidence discovery process, 226 first-to-invent approach, 226 inequitable conduct, 226 prosecution history estoppel, 227 wilfulness, 226 diagnostic methods, 152–3 expert witnesses, 227 machine or transformation test, 52, 57, 60, 137–8, 153 patentable subject matter, 153–4 policy-based decisions, 152 preliminary injunctions, 204, 207 Supreme Court decisions, 50–1, 55, 152–4 U.S. trade policy Anti-Counterfeiting Trade Agreement, 520, 524 bilateral agreements, 519–20, 525 comparative advantage, 519 consultative structures, 521 developments, 518–21 economic perspective, 518–21



innovation/creativity, 518–21 intellectual property protection, 518–21, 524 international cooperation, 519–21 market access, 520 plurilateral level, 520 trade and investment framework agreements, 519 unfair standards, 520 Utilization Pilot Project work sharing (patent law), 94, 94 Work sharing (patent law) administering the patent system, 106 average value of patents, 107–8 backlog of applications, 93, 103–4, 106–8, 112 China, 92–3 collaboration, 98 common database structure, 102 confidence building, 94, 99–100 continuations, 106, 109 desktop communication, 102 different sets of claims, 105 digital applications, 102 earlier searches, 104 early publication, 108 effect on inventors, 105 European Patent Convention, 109 European Patent Office, 93–4, 96, 102–3, 108, 110, 112 fees, 109–11 final examination results, 98–9 final form of claim, 107, 109 first action allowance rate, 97 first-office action, 94, 98–9 first-to-file, 101 increasing number of grants, 105 information sharing, 105 interaction, 102 international frameworks, 100–1 international patent offices, 92–3, 95 International Search Report, 100 international searching authorities, 95 IP5 Foundation Projects, 95, 97, 100–2 IP-Plus, 103 Korean Office, 92–3, 96–7, 102 Japan Patent Office, 92–3, 95–6, 98–9, 102 JP First Program, 99 language issues, 102 number of cross-filings, 95 office of first filing, 99 office of first search, 104 office of second filing, 99 operating pressures, 101 outsourcing, 98 Paris route applications, 98, 100

738  INDEX

Patent Cooperation Treaty, 93–5, 97, 101–3 patent examiners, 101–2, 104, 106, 112 patent harmonization, 101 patent office cooperation , 92–3 Patent Prosecution Highway, 92, 94–101, 103, 105, 112 patent quality, 105 pre-claim searches, 92 public interest, 105 public policy concerns, 93–4 quality management, 98 quality of search, 112 search reports, 94, 98 second filings, 104 secret prior art, 100 soft patenting, 109 stabilization, 96 Strategic Handling of Applications for Rapid Examination, 97 supplemental searches, 92 third party observations, 100 third party participation, 98 time taken to grant, 107–8 Trilateral Cooperation, 93, 95 TRIPS Agreement, 100–1 Triway Pilot Programme, 92 U.K. Intellectual Property Office, 92 uniformity, 101, 105 U.S. Patent and Trademark Office, 92–3, 95–6, 97–8, 109–12 Utilization Pilot Project, 94 workload management, 92 World Intellectual Property Organisation, 100, 102 worldwide patent filings, 98 worldwide searches, 109 World Intellectual Property Organisation access to medicines, 570 conflicting rights, 574 copyright exceptions and limitations, 316 copyright protection collective management, 518 Copyright Treaty, 386 developing countries, 517–8 economic contribution, 517–8 educational area, 516–7 enforcement, 516–7, 571 exceptions and limitations, 516–8, 522–3, 583–4

licensing arrangements, 517 respect for intellectual property, 517 stakeholder platforms, 517 visually impaired persons, 517, 523–5 counterfeit goods, 533–4, 536 see also Counterfeit goods developing countries, 570–1, 573 Development Agenda, 568–75, 581–2, 584 economic development, 570 efficiency, 516 enforcement, 516–7, 533–4, 536 foreign direct investment, 573 human rights protection, 574 intellectual property protection, 570 mandate, 569–70 national perspective, 574 restructuring, 516 standard setting, 674, 676 see also Standard setting status, 569 technical laws, 583 trade law enforcement Advisory Committee on Enforcement, 544, 547, 569 best practice, 547 enforcement agenda, 544 law enforcement, 544 respect for intellectual property, 544 transfer of technology, 570 U.S. representation, 525 work sharing (patent law), 100, 102 World Trade Organisation see also United States v. China barriers to trade, 510 bilateral agreements, 510 developments beyond Doha Round, 572 see also Doha Round dispute settlement system, 510–11, 523 intellectual property protection, 510, 523 monitoring trade developments, 510, 513, 523 multilateral trade rules, 510 regional agreements, 510 standard setting, 675–6, 697, 704–6 see also Standard setting three-step-test (copyright protection), 322, 325, 340–1 Trade Policies Review Body, 510