◊ VRP Law-The Intellectual Property and Employment Law Blog.
Provided by Vihar R. Patel and Sponsored by Enterprise Law Group, LLPArchive for Patent Law Updates
Buying and Selling a business (Mergers and Acquisitions)
Properly negotiating and structuring a purchase or sale of a business can be a challenging endeavor. Having a good team of accountants, legal advisers, valuation experts, tax advisers, lenders or investors is crucial to successfully buying or selling a business. There are a variety of considerations in buying or selling a business, but there are two major ways to structure a deal: an asset purchase or a stock purchase.
An advantage of an asset purchase is that it allows the buyer to be selective in terms of the assets that it wants to acquire from the target company. Also, the buyer is generally not liable for the seller’s liabilities, unless the asset purchase agreement has such language. Some disadvantages of an asset purchase are that the bill of sale must be comprehensive enough to ensure that no key assets are overlooked and third party consents will likely be required.
Some advantages of a stock purchase are that the business identity, licenses, permits can be preserved, and continuity of the business may be maintained. However, the buyer may be liable for unknown or contingent liabilities, and may be forced to contend with the seller’s minority shareholders.
Also, there are variety of employment and intellectual property law considerations that go into structuring a proper purchase or sale of a business. Such as the following:
a) negotiating key employee agreements and non-competition restrictions;
b) contending with collective bargaining agreements;
c) resolving anticipated or outstanding claims by employees;
d) acquiring the desired intellectual property (business name or marks, copyrights, patents or trade secrets);
e) restricting the other party from using the intellectual property (business name or marks, copyrights, patents or trade secrets); and
f) recording assignments or transfers of intellectual property (business name or marks, copyrights, patents or trade secrets).
Properly, structuring a purchase or sale of a business can often mean the success or failure of the venture. If you have any concerns or questions regarding the purchase or sale of a business, then please feel free to contact us.
Failure to contest arbitration properly, can waive access to courts!
Plaintiff was acquired by a new company and sued the defendant on a breach of contract theory in an American Arbitration Association (“AAA”) Complaint. The AAA Complaint alleged breach of a written agreement; however, Defendant counterclaimed requesting reformation or rescission of the contract from the arbitrator. The Defendant asserted a mutual mistake of fact as the basis for seeking a reformation remedy, and alternatively sought rescission of the contract.
In the arbitration proceeding, the Plaintiff asserted that reformation was not necessary as there was no mutual mistake of fact and no scrivener’s error. However, Plaintiff did not argue that an arbitrator could not reform a contract. Subsequently, Plaintiff filed a motion with the trial court to vacate the arbitration award asserting that the arbitrator lacked the authority to reform the 2004 written contract.
The trial court held that Plaintiff’s failure to assert at arbitration that the Arbitrator lacked the authority to reform the contract was a waiver of the argument. The trial court held that to object to arbitration, a party must object to the arbitration proceeding in a timely manner. The appellate court affirmed and stated that there is a mandate by the Illinois Supreme Court that arbitration awards should be construed as to uphold their validity whenever possible.
The presumption is that an arbitrator did not exceed his or her authority, and grant a petition to vacate an arbitration award only in extraordinary circumstances. Judicial review of an arbitration award is extremely limited. Consequently, litigators must be more cognizant and advise their clients of the need to assert all claims and arguments in arbitration proceedings.
See: First Health Group v. Ruddick, N0 1-083236; 2009 WL 1940702 (1st Dist). First Health Group Corp_Arbitration.
Pooled Patent Licenses, Patent Misuse and Price Fixing
Recently, the Federal Circuit agreed to hear the Princo v. Phillips case en banc to decide whether or not Sony, Phillips, Taiyo Yuden and Ricoh’s agreement to pool patents and jointly license technology relating to the “Orange Book” standard for making CD-Rs and CD-RWs was a form of Patent Misuse and price fixing amounting to an Antitrust violation? Phillips provided the joint licenses to this technology to Princo, but Princo stopped paying the fees for the license and claimed Patent Misuse.
Patent Misuse is not a new defense, but an old equitable defense. The idea behind Patent Misuse is to prevent business practices that do not violate any law, but drew anticompetitive strength from the patent right and thus were deemed contrary to public policy. Phillips I, 424 F.3d at 1134 (quoting Maillinckrodt, Inc., v. Medipart Inc., 976 F.2d 700, 704 (Fed. Cir. 1992). Typically, in a Misuse analysis, courts will focus on determining whether or not the patentee has imposed conditions or restraints that derive their force from the patent, and increase the scope of the patent with anticompetitive effect. Phillips I, 424 F.3d at 1134 (quoting C.R. Bard Inc. v. M3 Sys., Inc., 157 F.3d 1340, 1372 (Fed. Cir. 1998).
In Princo v. Phillips, the court recently held that there was Patent Misuse, because the Lagadec Patent was a non-essential patent that was pooled into the licensing agreement. In other words, the court held that the pooling of a patent that was not essential to the “Orange Book” standard was an expansion of the scope of the other patents. The Court also emphasized and seemed to find that there was an agreement by Sony and Phillips to combine and pool their individual (digital and analog) solutions to the wobble signal that is used to control the recording speed in creating CD-Rs/RWs.
The court focused on the fact that only one of these two solutions is needed and found that the Lagadec Patent (digital) solution was non-essential. The court stated that since Sony and Phillips ultimately chose to define the Orange Book standard with the analog solution, the Lagadec Patent was non-essential. The Federal Circuit has agreed to hear a motion for a rehearing en banc, and may make some important changes to the patent licensing, misuse and antitrust standards.
For a review of the Petition for Rehearing from the ITC, please see attached: Princo-Petition for Rehearing en banc – ITC
The Antitrust side of IP Litigation
Antitrust counterclaims are once again viable options for defendants involved in Intellectual Property (IP) litigation. Often a Plaintiff is utilizing a patent infringement suit as a method of interfering with the business relationship of a competitor.
However, if the patent was obtained by knowing and willful fraud or the lawsuit is a sham for interfering with competitors’ business relationships, then the patent may be invalid and subject the Plaintiff to an antitrust violation. Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., 382 U.S. 172, 177 (1975); In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322, 1326 (Fed. Cir. 2000); and Hazelquist v. Guchi Moochie Tackle Co., 2004 U.S. Dist. Lexis 13991 (W.D. Wash. May 12, 2004).
The risk of an antitrust violation and counterclaim is not limited to sham patent litigation. Plaintiffs attempting to utilize trademark infringement suits to maintain a monopoly (price control) or restrict competition face a similar risk of an antitrust violation. In Marketing Displays, Inc. v. TrafFix Devices, Inc., 200 F.3d 929, (6th Cir. 1999), the court permitted an antitrust counterclaim against a plaintiff asserting trade dress infringement after the expiration of patent.
If the litigation is objectively baseless in the sense that no reasonable litigant could expect success on the merits, then it may be the basis for a antitrust violation. Professional Real Estate Investments, Inc. , v. Columbia Pictures Industries, Inc. , 508 U.S. 49, 60 (1993). However, this does not mean that a product’s different qualities cannot be protected simultaneously, or successively by more than one statutory means for protection of intellectual property. Kohler Co. v. Moen, Inc. , 12 F.2d 632, 638-39, (7th Cir. 1993).
Understanding the nuances of the scope of intellectual property protection that can be obtained for a product is crucial to your ability to protect your market and your investments.
Tricky Settlement Agreements in Seventh Circuit…
If you are a litigator in Illinois, the Seventh Circuit decisions in Lynch, Shapo, and Blue Cross have just made your job a lot more difficult. Especially, if your practice involves business, employment or intellectual property matters, where settlement agreements often contain a payment plan for royalties, profits, backpay or future earnings.
It used to be that based on Kokkonen you could simply enter a dismissal order with prejudice that allowed the court to retain jurisdiction to enforce the settlement agreement. However, based on the 7th Circuit’s recent rulings in Lynch, Shapo, and Blue Cross entering such an order will deprive the court of jurisdiction to enforce the settlement agreement.
In which case, your client may be standing outside the courtroom trying to find a way back in by filing a new lawsuit for a breach of contract. The other common alternative is to enter a dismissal order without prejudice to allow the court to retain jurisdiction to enforce the settlement agreement.
Unfortunately, entering such an order may deprive your client of the res judicata effect of a dismissal order that is with prejudice. In this scenario, your client will be back in the courtroom defending against claims that it believed were resolved, and may have helped fund its opponent’s lawsuit.
Understanding how the drafting of settlement agreements has changed in light of the US Supreme Court’s decision in Kokkonen and the Seventh Circuit’s decisions in Lynch, Shapo, and Blue Cross is crucial to properly representing your client’s interests.
Displaying Products at Trade Shows-Basis for Personal Jurisdiction!
Imagine you are a foreign company selling a product in Brazil. Your company does not sell or distribute products in the United States (“US”). You learn of a trade show or convention relating to your products. It’s an international trade show or convention located at a site in the US. You decide to send a company representative to the US with a demo of your product.
Little did you know that now, you will be subjecting yourself to a lawsuit in the US. This is very close to the facts that led the Federal Circuit to find personal jurisdiction for Synthes (U.S.A) to sue GMReis. GMReis’ CEO and an employee attended international trade show of the American Association of Orthopedic Surgeons (AAOS) in San Diego and displayed five interlocking bone plates at a booth. At the trade show, GMReis was served with a complaint for patent infringement.
Synthes an assignee of a US patent directed at “a bone plating system and method for fracture fixation of bone” sued GMReis, a Brazilian company for patent infringement in the US. The Federal Circuit held that under FRCP 4 (k) (2), although the court did not have general jurisdiction over GMReis, there was sufficient contact for specific jurisdiction relating to patent infringement.
The court’s holding was based on the following activities by GMReis: 1) attending seven (7) trade shows in the US demonstrating its products; 2) selling one (1) product to a veterinary company in the US; 3) purchasing parts and a manufacturing machine for use in Brazil; 4) meeting with two American companies regarding purchase and development of non accused products; and 5) two inquiries by US entities regarding FDA approval of its interlocking bone plating products and potential clinical trials.
The Federal Circuit’s analysis of minimum contacts and whether or not it would be reasonable and fair to sue a foreign company in the US; opens the door to patent infringement claims against foreign entities. Only, time will tell how far this door will open, but it’s another tool for a patent holder to protect its interest.
Proposed Local Rules for Patent Cases in the Northern District Court of Illinois!
On March 19, 2009 the full court met and approved local rules for patent infringement cases for the Northern District Court of Illinois. These local rules are designed to stream line the patent litigation process to help reduce costs, fees and the time it takes to get to a jury trial.
Currently, the average time to get to a jury trial is about 4.7 years. However, the proposed local rules hope to cut this time down to about 2 years. The local rules require an Answer to a Complaint within 7 weeks and build in a one time extension of 28 days to Answer or otherwise plead. The local rules require initial disclosures similar to 26.1 (a) (1), but are particularized for patent litigation.
The rules set a deadline to get to final contentions regarding infringement, non-infringement, and invalidity. In addition, the rules provide a schedule for claim construction or markman briefs and hearing. After the court’s claim construction or markman ruling, the rules permit an additional 42 days to conduct fact discovery.
Upon completion of fact discovery the rules set deadlines for expert discovery, dispositive motions and the trial is supposed to take place within 23 months from the date the Complaint was filed. (See rules below for specific deadlines or time periods). The proposed rules were a collaborative effort by the local bar and judges to make the practice of patent litigation more efficient.
Through the hard work of many lawyers and judges these rules do not seem to favor either Plaintiffs or Defendants. This is not the rocket docket, but a balancing of interests to provide an efficient litigation process. However, it remains to be seen how the local rules will be adopted or modified for counter-claim or third party practice.
Attached is a copy of the local rules for patent infringement claims in the Northern District of Illinois for your consideration: Proposed Local Rules for Patent Cases
Stem Cell Research and Government Funding
Recently, President Obama signed new legislation that will mean that government funds may be used for private stem cell research efforts. Bio-tech researchers, patent law practitioners and bio-ethicists fall on different sides of the myriad of issues involving stem cell research.
Stem cells are thought to hold potential cures for many of humankind’s ailments. However, the use of stem cells for research raises many concerns such as selling embryos and killing potential human beings. Without commenting on any of these issues, here is what the new legislation requires to enable use of government funds for private research efforts.
The Act requires the following to use stem cells in research: 1) the stem cells must be obtained from in vitro clinics and have to be in excess of the stems cells need for in vitro; 2) after consultation with the individual seeking fertility treatment it was determined that the stem cells would not be implanted and would otherwise be discarded; and 3) the individual donating the stem cells must have provided written informed consent to use the excess stems cells in research without receiving financial inducements.
The National Institute of Heath (NIH) is supposed to enact guidelines to carry out the Act and the Secretary of Health and Human Services is supposed to prepare annual reports describing the activities carried out under this Act.
Design Patents: Rejection of Point of Novelty Test and Adoption of a Uniform Hypothetical Ordinary Observer Test!
The Federal Circuit made an important ruling in Egyptian Goddess Inc. v. ADI Torkiya, for determining infringement in design patent cases. The Court rejected and abolished the Point of Novelty Test as a second or additional test for determining whether an accused device infringes the claimed design.
The Court stated that the test is the same as the Supreme Court’s formulation in Gorham: whether or not a hypothetical ordinary observer would find or be deceived into believing that the accused device is the same or substantially the same as the Patentee’s claimed design, in light of, the prior art within the Patentee’s field? Id. This test accounts for greater protection in areas where the Patentee’s field is less crowded and less protection in areas where the Patentee’s field is more crowded.
The Court went on to state that the Patentee retains the burden of proof with respect to demonstrating substantial similarity for design patent infringement. However, the Accused Infringer bears the burden of production for providing prior art references that it wants to be considered by the trier of fact. Id.
This is an important ruling clarifying the often confusing area of design patent infringement and proper application of the Ordinary Observer Test should lead to better results for both Patentees and Accused Infringers.
Attached is a copy of the decision for your consideration: egyptian-goddess
The PRO-IP Act: What is it and what does it mean for US business?
The PRO-IP Act, is a bill President Bush signed into law in October of 2008. Its actual name is the Prioritizing Resources and Organization for Intellectual Property Act of 2008 (the PRO-IP Act). The PRO-IP Act provides for increased enforcement of IP laws domestically and internationally.
The PRO-IP Act’s Trademark arm provides for increased statutory penalties ($1000 to $200,000) on both the importation and exportation of goods with counterfeit marks. It also increases the maximum penalty for willful infringement from $1,000,000 to $2,000,000. Finally, the trademark arm provides for treble damages where counterfeit marks are intentionally used or where goods or services are provided for the purpose of counterfeiting. The Court is granted discretion to waive the trebling of damages only upon proof of extenuating circumstances.
The Pro-IP Act’s Copyright arm provides for increased impoundment and seizure, including business records pursuant to an appropriate protective order. The Copyright arm further directs the Court to ignore registration inaccuracies, unless the inaccuracy was willful, or if the Copyright Office would have refused registration based on knowledge of the inaccuracy. Finally, the Copyright arm provides a tool for musical performers to register their works with the US Customs and Border Protection to receive notice of unauthorized copies entering the US.
In general, the PRO-IP Act also increases coordination and enforcement of IP laws domestically and internationally by creating a White House Liaison (IPEC), providing stiffer criminal penalties, and providing $25 million dollars in annual funding to help state and local law governments combat IP theft and infringement crimes.
It will be interesting to see how the PRO-IP Act impacts individuals, business owners, entrepreneurs, courts and IP practitioners. However, the PRO-IP Act provides significant tools for IP owners to protect and enforce their rights. Individuals and business owners with strong IP plans and strategies are well positioned to capitalize on the benefits that the PRO-IP Act provides.
