Witten Law Awarded Trademark for “IP2U”

You may have not have noticed it, but in the top right side of this blog’s screen is the service mark “IP2U.”  I am happy to announce that on February 21, 2012, the IP2U mark was successfully registered with the USPTO to Witten Law, Ltd.

Posted in Intellectual Property, Prosecution, Service Mark, Trademark, USPTO | Leave a comment

Comparing Patent Litigation in the US, UK and Europe

The following table illustrates some differences in patent litigation between the US, the UK and the EU.

US UK EU
Court Federal Court England & Wales have special Patent Courts at the County and High Court level European Commission and/or as proscribed by the member state’s national court system.  For example, Germany has 4 special patent courts in Manheim, Dusseldorf, Munich and Hamburg.
Lawyers All attorneys can argue before the court Only barristers are allowed to argue.  Not solicitors. In most countries (but not for example in England or Wales), all attorneys can argue before the court in the country the attorney is licensed to practice
Claim Construction Markman hearing for claim construction in the middle of pretrial litigation. Conducted at trial as part of liability phase.  Catnic Components Ltd. v. Hill & South Ltd. (1981) FSR 60, Conducted at trial as part of liability phase.  Article 69 European Patent Convention and related Protocol.
Validity & Infringement These issues are usually heard together in the same court. These issues are usually heard together in the same court. In Germany, 2 different courts hear these.  1 hears Validity arguments, and another hears Infringement arguments.
Preliminary Injunctions on manufacture, offer for sale & sales Very difficult to get.  Cannot get if you don’t practice the patent. Less difficult to obtain in cases where generic pharmaceutical could impact patent holder. Germany: Still difficult to get, but getting a bit easier as long as equivalents are not invoked.  Often applied for during industry shows to disgrace a competitor.  France also permits.  “Saisie-contrefaçon” orders.
Freezing Injunctions Not heard of in patent cases. Also known as Mareva injunctions, assets can be frozen so that they can’t be moved or hidden.  See also Intellectual Property (Enforcement, etc.) Regulations 2006. Permitted in some countries.  EC: Article 9(2) of the Information Society Directive; France: “décret 2008-624″ of June 27, 2008.
Search Warrant Unheard of in patent cases. Can be obtained to prevent infringing goods and important documents from being hidden or destroyed.  CPR 25.1(1)(h). Germany they are permitted, and often used in conjunction with a preliminary injuction at industry shows to disgrace a competitor.
Discovery Very extensive.  Methods include: Initial disclosures; Multiple Requests for Interrogatories, Document Production, Product Inspection and Admissions that do not require application to the court; and Depositions of fact and expert witnesses Less extensive.  Discovery must be proportionate to the case.  Rule 1.1(2)(c).  Initial Disclosures meant to cover most of discovery; A party must apply to the court for further interrogatories, documents, and product inspection.  CPR 18.1 & 25 Less extensive.  Discovery must be proportionate to the case.  Initial Disclosures meant to cover most of discovery; A party must apply to the court for further interrogatories, documents, and product inspection.  Reg 2004/48/EC.
Witnesses There is no duty to disclose exactly what a witness will testify to.  It is up to the opposing party to depose the witness. Complete witness statements must be submitted to the Court.  CPR 32-34.  Witnesses cannot testify in court as to what is already in their statements. Complete witness statements must be submitted to the Court.  Witnesses cannot testify in court as to what is already in their statements.  For example, in Germany, usually only experts are cross-examined.
Doctrine of Equivalents Available to argue and often prevails. Not permitted, but the court can view the language of the patent through the perspective of one skilled in the art to see if it covers the alleged infringing activity. Available, but very difficult to prove.
Damages Lost profits or Reasonable Royalty.  Can’t have both.  Treble damages, which are arguably punitive/exemplary, are allowed in exceptional cases of infringement Mix of Lost Profits, Royalty, Increased Royalty, and Springboard, but no punitive or exemplary damages.  Capped at £500k in County Court. Mix of Lost Profits, Royalty, Increased Royalty, and Springboard, but no punitive or exemplary damages.
Attorneys’ Fees Only awarded in exceptional cases of blatant infringement Always awarded.  Capped at £50k in County Court. Always awarded.  Fees are expected to be far less than US counterparts because litigation is more limited than in the US.  For Example, in Germany, Fees should not run more than 3% of the value of the litigation.
Trial Jury available; Damages are usually not bifurcated from the liability trial No Jury; Damages are bifurcated from the liability trial No Jury; Damages are bifurcated from the liability trial
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Responding to a Lawsuit

This article focuses on what to do if you have been sued and dispute the claim and/or the amount claimed to be owed. Please note that you should contact an attorney/solicitor if you have been sued. There are numerous intracacies that you should not attempt to navigate on your own. This article will describe a few of the normal paths, but it does not catch everything.  Rather, this should give you an idea of the issues to discuss with your attorney.

First off, until you are served with the papers that start the lawsuit proceedings, generally a “summons” served along with a “complaint” (US) or “claim form” (UK), then the court does not have any power over you. However, once you have been served you must respond to the proceedings within the following time:

  • US Federal Court: 20 days
  • Most US State Courts: 30 days
  • English Courts: 14 days from receipt of “particulars of claim” (28 days if you acknowledge that you have been served)
  • The parties can stipulate to longer periods of time as long as they tell the court

How do you respond?  You file what is called an “Answer” in the US, or a “Defence” in the UK.  The Answer is governed by Federal Rule of Civil Procedure 12 in US Federal Courts, and the Defence is governed by Rule 16 of UK Civil Procedure Rules (“CPR”).  Each US State Court has its own code section for the response.  In California it is Code of Civil Procedure §431.30.

In US Federal Court and UK Court you must state whether you dispute each claim made, and you must set forth the legal concepts supporting your defenses (called “affirmative defenses”).  For example, you must deny the paragraph in the Complaint that says you infringe the patent, and you must state the related legal defense theory of “non-infringement.”  Affirmative defenses do not require the pleading of specific facts that support the theories.  You only have to tell the other side what theories you have a good faith belief apply.

In contrast, in California State Court, you only have to state a general denial of all claims of the Complaint and your affirmative defenses.  You do not have to affirm or deny each paragraph of the Complaint.

Filing your Defence/Answer is not your only option, however.  Before filing the Defence/Answer you could do the following:

  • If you do not think the court has jurisdiction over you, or the subject matter of the case (see my previous post on starting a lawsuit), then in the US, you file a Motion to Quash service.
  • If the Complaint or Particulars does not make sense, or is missing a crucial element of the alleged cause of action (again, please see my previous post on starting a lawsuit), you file a Demurrer (California State Court – Ca. Code Civ. Procedure §430.10), Motion to Dismiss (US Federal Court – Fed.R.Civ.P 12(e)), or a Request for Further Information (UK Court – CPR Rule 18.1).  Courts do not like these, but they are commonly used in the US as the first response to learn more about your opponent’s case.
  • If the Complaint contains improper material unrelated and unnecessary to the pleading, you file a Motion (“Application” in the UK) to Strike (Fed.R.Civ.P. 12(f), Ca. Code Civ. Procedure §435, or CPR 3.4).  Note that an application for summary judgment may also be made under CPR 24, but this terminates those parts of the claimant’s case that you attack and is therefore difficult to win at the outset of a case (as opposed to simply striking improper material and keeping the rest of the case going).

The foregoing are the most typical responses to a lawsuit from the defensive perspective, but if you want to sue your opponent you may also want to, or be required to, file your own pleading setting forth your grievance against them at the time you file the Answer or Defence.  This is called a Counterclaim (UK & US Federal Court) or Cross-complaint (California).  There are variations on this for suing a co-defendant (Cross-claim), or suing a third party (Third Party Complaint).  Thus, at the outset of the case, you don’t have to be relegated to being on the defensive.  You can also sue back.

In sum, at the outset of a case, you should consider what type of response is appropriate for you, and how it fits into your litigation strategy.

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How to Start a Lawsuit – The Complaint & Claim Form

So someone has wronged you. Maybe they have infringed your intellectual property, breached a licensing agreement with you, or stolen your tradesecret. You have written them, and maybe even threatened them with legal action, but they refuse to make things right. You realize that you must sue them, but how do you start?

In the US you file what is called a “Complaint.” At the Federal level, it is governed by the Federal Rules of Civil Procedure (“FRCP”) Rule 3, and at the State level, in California, it is governed by California Civil Code of Procedure (“CCP”) starting at §420. Pursuant to FRCP Rule 8 and CCP §§422.30-425.10, the Complaint alleges why the court has jurisdiction over the case and the parties, a basic description of why you are suing, and what you want from your opponent, the “Defendant” (i.e. your damages).

In the UK, first you have to follow a pre-claim protocol which is essentially writing your opponent regarding your grievance and giving them a chance to fix the problem before you sue. Once you have done that, pursuant to UK Civil Procedure Rules (“CPR”) starting with Part 7, you do basically the same thing as in the US by filing what is called a “Claim Form,” and within 14 days of that you have to file your “Particulars of Claim” which gives the same kind of details you see in a Complaint.

There are two things that must be paid very close attention to when preparing the Complaint, and its equivalent in the UK: 1) Jurisdiction over the case and the parties; and 2) The “Elements” of the “Claim” or “Cause of Action”.

Jurisdiction breaks into 2 parts – subject matter jurisdiction and personal jurisdiction. Subject matter jurisdiction has to do with the type of wrong you want addressed. For example, in the US, there are some questions of Federal law, like patent infringement, that cannot be heard in State courts. You can only file them in Federal courts. Also, in both the US and the UK, different courts hear different cases depending on the amount of money at stake. For example, in California, you have 3 different levels: “small claims” for matters with under $5,000 at stake (CCP §116.220), “Economic (or Limited) Litigation” for cases between $5,000-$25,000, and “Unlimited” for cases over $25,000. Similarly, in the UK the High Court does not hear cases under £25,000 that could otherwise be heard by County Court, and the County Court has a small claims system for cases under £5,000. See the Practice Directions to CPR Part 7. Personal jurisdiction covers whether the court you have filed in has power over the parties to the case. To put it simply, a person or company has to reside or do business in the court’s jurisdiction in order for the court to have any power over him.

Only after the court has personal and subject matter jurisdiction, will it address the “Claim” in your Complaint. Your “Claim,” can also be known as a “Cause of Action.” There are causes of action for every known wrong that may be legally addressed. Every cause of action has certain facts that must exist in order for you to prosecute it. These are called “elements.” They are like the ingredients for your lawsuit.

For example, in the US for infringement of a Federally registered Trademark under the Lanham Act there are 3 basic elements you must allege in the Complaint for the cause of action: 1) You (the “Plaintiff”) possess a mark, or are licensed to enforce a mark, that is valid and protectable under the Lanham Act; 2) The Defendant used the mark in commerce in connection with any goods or services without the consent of the Plaintiff; and 3) The Defendant’s use of the mark is likely to cause consumer confusion concerning the origin or sponsorship of the goods or services. People for the Ethical Treatment of Animals v. Doughney, 263 F.3d 359, 364 (4th Cir. 2001); Fisons Horticulture v. Vigoro Indus., 30 F.3d 466, 472 (3d Cir. 1994); Brookfield Communications v. West Coast Entertainment Corp., 174 F.3d 1036, 1051 (9th Cir. 1999).

Your cause of action should not read like a novel. It needs to be concise. While some causes of action, like fraud, have to be written with a certain degree of detail, for most causes of action, you simply state the minimum facts to support the elements. FRCP Rule 8; CPR Part 16.2&4. Using the Trademark example, for the first cause of action, it would be helpful to put the Trademark’s Federal Registration Number to show that it is enforceable under the Lanham Act.

The Complaint is the core of your initiation of your lawsuit, but it usually has to be filed with a Summons, a Civil Case Cover Sheet ticking boxes for the court clerk, and related documents. Most US and UK courts have what are called “Service Packs” available on their web sites that have all the forms you have to fill out, file and serve on the Defendant. Please be advised that these forms have to be filled out accurately, so if you’re engaged in anything more than a small claims case, it is probably worth it to seek the counsel of an attorney.

Once your Complaint and related documents are filed with the Court, then you serve them on the Defendant and start the litigation process, which usually begins with the Defendant’s response to the Complaint and the Court sending you a list of deadlines.

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Copyright – Fair Use

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New Patent Law – America Invents Act

On September 8, 2011, the US Senate voted 89-9 in favor of the America Invents Act, thus sending it to the President. President Obama has indicated that he will follow Congress’s lead and sign the legislation into law. The legislation affects patent law in the US. So what does it mean to you? Here are some of the changes I find interesting:

First-to-File

Notably, it moves more toward the international standard by changing America’s “first-to-invent” system to a “first-to-file” system. This will dramatically reduce the ability to attack and invalidate a patent with prior art. The Act only provides 2 periods for opposition with prior art: 1) during the prosecution before the USPTO; and 2) within 9 months after the patent is granted.

One of the goals, if not THE goal, of this change is reduce the amount of patent litigation by eliminating the ability of defendants to invalidate patents with prior art. But is this fair? If a patent owner is concerned about the strength of their patent, they could simply lay low until the 9 month period has expired and dodge a credible prior art attack in court.

Simultaneous Invention

An interesting revision in the Act comes at §273. It addresses the fact that sometimes, patentable innovation can come to more than one person at basically the same time, in the same way. As can happen, especially in groups like the IEEE, the same invention can be realized by more than one person simultaneously.

The Act specifically states that practicing the simultaneous invention does not constitute infringement, nor does it invalidate the patent as “obvious”. It reaches the fair conclusion that if someone simultaneously invents the same innovation as the patent holder, that both must co-exist peacefully.

Prior Art Cut-Off Date

Often times in litigation, a patent holder will try to escape prior art by claiming he thought of the invention some time prior to filing for patent – always back to a date before the prior art was published. The Act changes §102 to try to prevent this kind of “back dating” by stating that an invention is not patentable if there is prior art that occurred prior to the date the patent was applied for. While there are some exceptions to this, this is the other side of the coin on the “First-to-File” issue that is not good for the inventor.

False Marking

There has of late been a spate of lawsuits against patent holders for marking their products with inapplicable patent numbers. This was due in large part to the lucrative damages that were available, and the tendency of patent holders to error on the side of caution and mark their products if they thought their patent might apply to it. The Act’s change to §292 seeks to stop the tide of such suits. It limits who can sue for false marking to only those who have suffered a competitive injury, limited damages to adequate compensation for that injury, and prohibited recovery for marking a product with a “patent that covered that product but has expired.”

USPTO Fee Setting Authority

Finally, the USPTO has currently pending some 700,000 patent applications. This beleaguering workload is made worse by the fact that the USPTO had no say in what it could charge in fees. Section 10 of the Act changes this giving the USPTO the ability to set fees to meet its costs, while at the same time, reducing fees to small inventors. In essence, it lets the USPTO take the reigns of its solvency, while opening the doors to the little guy. This should be good, but the USPTO is going to be responsible for its own fiscal health now. Let’s hope that with this change fees don’t skyrocket so high that the small inventor is priced-out even with his 50-75% fee reduction.

Posted in Intellectual Property, Invalidity, Novelty, Obvious, Patent, Patentability, Prior Art, Reexamination, USPTO | Tagged , , , , , , , , , , , | Leave a comment

Patent Damages Update

This is to follow-up my earlier post and video about the general concepts of patent damages. In that post, the point was made that under the “Entire Market Value Rule” (EMVR) in order to get the broader royalty base of the entire price of the product, the plaintiff would have to prove that the patented feature was the basis for consumer demand in the product, and that invention was intrinsic to the product’s performance.

There is a lot of gray area in this test however. For example, in a mobile telephone, is it the phone, web, email, media function, or aesthetics that is the basis for consumer demand? Arguably it’s all of them, so the EMVR would basically never apply.

In June 2011, in a case entitled Inventio AG v. Otis Elevator Co., Case No. 06-Civ.-5377 (S.D.N.Y.), the District Court for the Southern District of New York looked at a much closer call.

In that case, the plaintiff’s damages expert stated that the patented feature was the “substantial” basis for consumer demand in the product. The court analyzed the holdings of Chief Judge of the US Federal Circuit Court of Appeals, Judge Rader, and held that for EMVR to apply, the invention must be THE basis for consumer demand – ie. the only basis. As a result, that part of the expert’s testimony regarding EMVR was barred from consideration at trial, and the plaintiff was limited to damages under the allocation theory.

This ruling provides refreshing clarity on this part of the EMVR test. However, it also raises some interesting questions. For example, a lot of demand for Apple products is driven by design aesthetics. So does that mean that Apple could never recover damages under EMVR because consumer demand for its patented feature was always tied to the aesthetic design of its product?

It will be intriguing to see if it holds-up on appeal, as it will call for Judge Rader (or his colleagues) to discuss his prior holdings on the issue.

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Patentability: Novelty & Obviousness

Have you ever thought to yourself, “I could have invented that.” Everybody does, but then the next time they think of something neat, they don’t act on it because they don’t think they can get a patent for it.

So I recently shot a video with my with colleague Chris Smits on that very issue of “Patentability”. Chris is a fellow ex-pat living in London. He is a mechanical engineer, a US attorney, and a licensed USPTO attorney.

We went to a stable near Wolverhampton (in the middle of England) to shoot the video because some folks invented a new sport called “horse boarding” that is the perfect example of the questions you have to answer about the patentability of a new idea.

There is a four-prong analysis for whether something is patentable. It is: 1) is it patentable subject matter, 2) is it novel (new), 3) is it obvious to one skilled in art (the subject matter of the invention), and 4) does it have a utilitarian, or useful value to the public?

The two prongs that everyone gets hung-up on are novelty and obviousness. When you ask the question, “Can I get a patent for the great new invention I’ve just thought up”, you need to analyze novelty and obviousness. So what are they?

When an invention is obvious to one skilled in the art, you can’t get a patent for it.

Simple example – Let’s say I invent a cool computer and get a patent for it. You can’t add a power switch to it, and say you invented the same cool computer with a power switch to turn it on and off. The cool computer obviously could be combined with a power switch. It fails the obviousness test.

This comes up in patent litigation all the time, because inventions are usually small incremental steps in innovation. It’s okay to combine things together that are not obvious and still get a patent. However, it gets really tricky because a lay person on a jury or a judge, may not see how obvious the combination would be to a person “skilled in the art” (ie. someone who is knowledgeable in the field of your invention), especially for high-tech innovation.

To illustrate, that’s where horse boarding comes in. Horse boarding is essentially chariot racing on a modified skateboard. It takes principles from chariot racing, skate boarding, and waterskiing and puts them all together.

But will it pass the novelty and obviousness tests for a patent?

If you didn’t know about these sports beforehand, you would think this is truly novel, or new. However, if you were a chariot racer or a skateboarder would you think it was new?

Skateboarders have been tying ropes to bikes and then getting pulled by the bikes for decades. I remember as a kid we called that game “whiplash” as the biker would try to snap the skateboarder off the rope with a tight turn at high speeds. And chariot racing is millennia old.

When you combine these things in horse boarding where a horse pulls a rider holding a waterski rope on a skateboard with off-road tires, have you really invented something new?

Maybe, but wouldn’t it be obvious to the kid getting pulled behind a bike to replace the bike with a horse? Or for a modern day chariot racer to replace his chariot with a skateboard?

Maybe, maybe not.

Related, a huge dilemma is, who is the person with “skill in the art”? It can be tough to decide who a person skilled in the art is, or who is an expert in the field. However, these are the people we rely to help us decide whether something is novel or obvious.

That’s the thing with innovation. Taking known devices and combining them so that they can do something new and innovative is the whole ball game when talking about obviousness.

Now compare this to the dilemma we face with high-tech innovation. In the horse boarding example, all of the sports are readily observable to the lay person. However, with high-tech, many of the things combined in innovations are invisible to the lay person, or take years of training to understand.

For example, I once worked on a case where an important independent claim in the patent was for adding a password to a SATA storage device. The patent claimed that SATA existed, but adding a password to access a document on the system was novel to prevent more than one person working on the document at a time. They tried to make it look really novel and non-obvious by making the password concept seem complicated, but it wasn’t. It was simply using an existing technology to lock-out other editors while 1 person was working on it. It was useful for document control, but it was obvious. The trouble is you had to know about these fields of engineering existed prior to the invention, and most people would not know that.

I think the problems have been sufficiently laid out, so let’s talk about some solutions.

1) For obviousness, in my experience, if you’re combining more than 3 things together, then an expert, judge or jury is not going to think that it was obvious. Especially when you’re pulling ideas from different disciplines.

2) On the other hand, if there is some publication that describes the state of the art in the technology, an article that takes you right up to the edge of the known technology, and then gives an idea about where the technology should go next, that may render the invention that makes that jump obvious, because someone has already made it clear that such a combination would be useful.

3) Finally, the distinction between US and EU patent law may help to clarify this issue. US patent law requires an invention to be non-obvious, but European patent law requires an invention to involve an inventive step. While these may seem at first to be essentially the same, there are important differences.

In Europe, the examiner determines what the differences between the invention and the prior art are. If there are none, the invention is not novel. If there are differences, the examiner determines what technical problem is solved by adding these elements to the prior art system. If no technical problem can be found, the invention does not involve an inventive step and cannot be patented. He then determines if solving the technical problem by adding those elements would be obvious.

If you are still confused, you’re not alone. In litigation, when presented with competing evidence on novelty and obviousness, it really comes down to a gut level belief in one party’s expert over the other.

There is some relief, though. On June 9, 2011, the US Supreme Court in i4i v. Microsoft, USSC Case No. 10-290, confirmed “clear and convincing evidence” as the high burden of proof necessary to invalidate a patent as obvious or not novel. That is a very high burden of proof. What this means is that for those borderline questions of obviousness, know that the patentee has been given the benefit of the doubt that it is patentable, and that it is going to be difficult to destroy that.

So the next time you think of something neat, consider the concepts of novelty and obviousness, and if you think you pass the tests, consider getting a patent for it.

Then next time, instead of thinking, “I could have invented that.” You’ll be saying, “I did invent that!”

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Background & Foreground Intellectual Property

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Background and Foreground Intellectual Property

Next week I’ll be shooting a short video on Background and Foreground Intellectual Property concepts as they arise in contracts for commercial transactions. For those who prefer to read instead of watch, this is the content of the video.

In commercial transactions, especially high-tech commercial transactions, there is usually a section of the parties’ contract devoted to what IP rights the buyer obtains in the deal. Most of the time, the rights are limited to use of the IP in the product, as the product is intended to be used. However, standard contracts from buyers are increasingly trying to expand their rights.

To begin with, the parties will come to the bargaining table with their own IP. At the very least, the manufacturer will have IP it can use, and/or has independently developed. Sometimes the buyer will have its own IP often related to implementing its product specifications. This is known as “Background Intellectual Property,” or “Background IP.”

From this starting point, the parties will negotiate what rights they have to this Background IP. Usually, neither party gives the other party any of its Background IP. The manufacturer has limited use of the buyer’s Background IP to make the buyer’s product, and the buyer has limited use of the manufacturer’s Background IP only to the extent the use is connected with the product being used as intended. That’s it.

Sometimes though, the buyer will want the right to the manufacturer’s Background IP to manufacture the product itself upon termination of the contract. This is a very rough end-run around an IP Escrow Agreement. Also, buyers may insert language into the contract giving it rights to create derivative works of the IP. Manufacturers should be vigilant to protect against giving rights such as these away. These IP rights are in addition to the intended use of the product. Generally, if a buyer wants rights to IP that are in addition to the intended use of the product, they must pay a premium for these.

Once the parties start doing business together, IP can be created. For example, 1) the manufacturer may improve the product over time, 2) the buyer may contract with the manufacturer to create something new, specifically for the buyer, and/or 3) a manufacturer may have a base product that it adapts or customizes to the buyer’s specifications. This creation of new IP after the parties begin trading is what is referred to as “Foreground Intellectual Property,” or “Foreground IP.”

Whether a buyer is entitled to use the Foreground IP outside of the intended use of the products depends on what is being purchased. It boils down to this – Is the buyer paying for the unrestricted rights to the IP? That is not often easy to answer, and that is why the contract has to clearly state these rights.

Let’s quickly look at the 3 scenarios, above. 1) The manufacturer has to really be careful about its contracts related to Foreground IP, because any manufacturer improvement to a base product during the term of the contract could fall under a broad definition of “Foreground IP.” If the manufacturer has transferred the rights to Foreground IP to its buyer, it may not be able to sell its improved base product to anyone except the buyer. Also, if more than one buyer has the same Foreground IP rights, then the manufacturer could be in breach of contract whenever it improves its base product. Accordingly, manufacturers must be very careful about the breadth of the definition of “Foreground IP,” and limit the transfer of it where appropriate.

2) In the second scenario where a custom product is designed and produced by the manufacturer for the buyer, the manufacturer will likely want to charge a premium for this work because it is likely selling unrestricted Foreground IP rights. If the buyer does not want to pay the premium, the contract needs to clearly state that the manufacturer is free to sell products that incorporate the Foreground IP to third parties.

3) Finally, the most difficult issue is where the manufacturer’s base product is specifically adapted for the buyer’s needs. If a buyer shows the manufacturer how to adapt the manufacturer’s base product to the buyer’s specifications, the buyer will not want the manufacturer using that IP in a product it sells to anyone else, especially a competitor of the buyer. As such, the buyer should own the Foreground IP. However, if the manufacturer is the party that figures out how to adapt its base product, and does not charge the buyer for the adaptation, then the manufacturer should own the Foreground IP. Conversely, if the manufacturer does charge the buyer for the adaptation, the buyer has a good argument that it has purchased the unrestricted rights to that Foreground IP.

In all three of these scenarios the conflict is whether the buyer is buying the Background IP (for which it has little grounds for unlimited title) versus the Foreground IP (for which it has better grounds for unlimited title). The manufacturer will likely think its base product, or Background IP, is what creates value. Thus, to the manufacturer no IP rights outside of the intended use of the product are transferred. Conversely, the buyer may believe that the real value is the IP used in adapting the base product to the buyer’s needs. Thus, to the buyer since the price is largely for the Foreground IP, the buyer has bought the unlimited rights to the Foreground IP.

For example, I represent a client that manufactures sturdy, high-tech equipment that can be used in the electrical components of trains, buses, city infrastructure and electrical plants. Its customers come to it with difficult computing problems. My client is one of only a handful of companies that know how to implement these solutions in a product strong enough to handle some rough conditions. Now, in my client’s mind, the real value in the product is the base product. Customization to fit the customer’s needs is just the icing on the cake. However, in the customer’s mind, it could be that it sees the real value as the customization of the base product, and wants to own that Foreground IP, outright.

As such, negotiations can hit a snag while the parties reassess their principle concepts of the deal. This must be addressed on a case-by-case basis. The business and legal teams must watch out for these issues in the fine print of the contract, and legal must confirm the business team’s intentions to make sure that the contract accurately captures the intent of the parties. Make a mistake, and an expensive IP dispute could erupt. So keep your eye on these principles during negotiation, or the next time you see them could be in litigation.

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