Newsletter Issue 23 - January 2011
In this issue:
Patent Infringement 'R' Us
To Hold or Not to Hold - IP holding companies
PTO Green Technologies Program Extended
Patent Reform Redux
Patent Infringement "R" Us - A New Business Model Condoned by the Federal Circuit
The past several years have seen a concerted
attack on the patent system, waged by a curious coalition of
interests from the information technology industry and foreign
governments and corporations. This attack, waged in
law journals, in
the Congress, and in the courts, has whittled away at the value of
patents, making it more difficult for patent owners to obtain
injunctions against infringers, making it easier for infringers to
start declaratory judgment law suits in their own home courts,
reducing the chances that a case will be found to be exceptional,
and thus to obtain treble damages, and making it easier to
invalidate patents. The latest move by the Court of Appeals for the
Federal Circuit has opened the door to infringement of method
patents by court-approved conspiracy.
In the recent case of Akamai Technologies, Inc. v. Limelight Networks, Inc., No. 19-1372, __ F.3d __ (Fed. Cir. Dec. 20, 2010), the Court put the final nail in the coffin of so-called "divided infringement", where two or more parties carry out different steps of a claimed method, acting together to carry out the patented invention. The Court determined that holding these parties liable for infringement now requires the patent owner to prove that one of the accused infringers directs or controls the other in an agency relationship (that is, one party has the legal right to require the other to carry out the patent steps, and to control when, how, and where this is done.) In the Akamai case, customers of the accused infringer, Limelight Networks, were told how to carry out Akamai's patented method steps using Limelight's software. According to the Federal Circuit, since customers were not obligated to carry out the steps, there was no agency relationship between Limelight and its customers, and thus, even though Akamai's patented method was used, nobody could be held liable for infringement.
In effect, the Court has now condoned the selling of patent infringement kits with instructions that say, "There is a method patent that claims steps A, B and C. We've done step A for you. Buy this kit, and if you want to achieve the patented method's results (but remember, you're not required to,) do steps B and C..."
One may well imagine that we will now see a rash of "arm's length" contracts between companies that recite the legal niceties of the independent contractor relationship, and merely allow for the voluntary cooperation between them in carrying out patent infringement. "The Acme Company, having carried out step A of the Smith Patent, agrees, that should the Zeta Company, in its independent and sole discretion, decide to carry out the remaining steps of that patent in any manner, at any place and at any time of its choice, then Acme and Zeta shall share in revenues as follows..."
Thus, by restricting joint infringement to the narrow confines of agency, the Federal Circuit has created a business opportunity for those wishing to infringe method patents. The newly pronounced standard is a clear warning to inventors of processes such as computer systems that claims must now be drawn narrowly, and often in an artificial manner that seeks to prevent operation of the claimed method across networks. This requirement is directly counter to the clear trends in the information technology field that will put more information and processing "in the cloud" and marks yet another departure from the real world of high technology by the courts.
To Hold or Not to Hold
A popular method for protecting and managing intellectual
property ("IP") assets -- high valued assets, in particular -- is to
transfer them to a special company created for the purpose of
creating, protecting, licensing, and monitoring, IP. Typically, a
corporation may create a subsidiary to hold its IP, which it may
license back to the parent and, perhaps, to third-party licensees.
Assuming that the holding company's relationship with its parent is arms' length and that it obeys all the appropriate corporate formalities, isolating the intellectual property protects the holding company from lawsuits against the parent, claims of the parent's creditors, and the parent's insolvency. It might also protect the IP from hostile takeovers of the parent company. Placing IP in a separate holding company may also provide an objective measure of its value, uncluttered by the operations of the parent. This may be of particular importance for obtaining financing and eventually selling the IP to a third party. From the income tax perspective, the Parent may deduct the royalties it pays to license the IP. Relieving itself of IP ownership may also reduce tax consequences based upon the parent's net worth such as franchise taxes. Of equal importance is that the holding company subsidiary may not be liable for state income tax solely because it is a holding company. At the same time, the holding company is available to offer services to the parent as well as make loans and pay dividends.
Sound too good to be true? You may be right. States generally have an aversion to IP holding companies because they perform services but do not generate taxable income. Some states aggressively audit IP holding companies, hoping to "pierce the corporate veil" by proving that the holding company is the alter ego of its parent. Should the state require combined reporting for parent and sub as a result of an audit, it would eliminate the tax benefits of the arrangement altogether. North Carolina and some other states have enacted anti-passive investment company laws designed to eliminate the tax benefits of the intangible holding company. In recent years, IP holding companies have been challenged in Connecticut, Maryland, Massachusetts and New York. State legislative bodies in Connecticut, New York, Alabama, Mississippi, New Jersey, North Carolina, and Ohio have enacted so-called "Add Back" statutes. The Model Add Back statute provides that:
For purposes of computing its net income under this chapter, a taxpayer shall add back otherwise deductible intangible expense directly or indirectly paid, accrued or incurred in connection with one or more direct or indirect transactions with one or more related members.
The bottom line is that if you believe that creating an IP holding
company may be of benefit to your organization, you should be wary
of the tax consequences, and plan to operate the holding company in
accordance with state statutes to gain the expected benefits. Be
sure to contact your tax professional as well as your lawyer to
determine if having an IP holding company is right for your
situation. Let us know if Lipton, Weinberger & Husick can help.
PTO "Green Technology" Program Extended
In December, 2009, the PTO implemented a
program to accelerate review of patent applications relating to
several green technologies, including:
• development of renewable energy resources,
• energy conservation,
• greenhouse gas emission reduction and
• environmental quality.
One of our clients with a green invention opted for accelerated review under the program and received very quick action from the PTO. The PTO issued a first office action on the client's patent application, with claims allowed, within weeks of filing the 'green technology' petition.
The program originally applied only to patent applications filed before December 8, 2009. The program is extended and applications filed after December 8, 2009 now can qualify. If your invention relates to a green technology, we strongly recommend that you consider this program and not delay. Once 3000 petitions are granted, the program terminates.
Patent Reform Redux
Every congress for the last six years has seen one or more bills introduced to address patent "reform." The new 112th Congress is no exception. Senators Leahy (D), Hatch (R), and Grassly (R) have introduced yet another patent reform bill. The bill takes up where the 111th Congress left off.
In the past, patent reform generally has been supported by companies
that are frequent defendants in patent infringement litigation,
mostly in the information technology industries, and
by those who believe that a patent gives the patent owner too much
power. Patent reform generally has been opposed by independent
inventors, patent owners and companies, such as pharmaceutical
companies, that depend on a strong patent system for their
existence. We can expect discussion and debate before action on the
bill. The drumbeat of propaganda has begun. Stay tuned.