brian wieghaus philips intellectual property & standards may 1, 2015 royalty collection, patent...

Brian WieghausPhilips Intellectual Property & Standards May 1, 2015

Royalty Collection, Patent Exhaustion, and Alternative Patent Licensing Models

2 May 1, 2015 Philips Intellectual Property & Standards

Overview

• Background• Common Licensing Model (Running Royalty)• Patent Exhaustion

– Why do we care?– Basics – Cases: Tessera; Philips CD

• Some Alternative Models– Philips Optical Licensing: Per Batch Licensing & LSCD– Philips Portable Features: A Rolling Release Model– IPXI: Unit License Rights


Background

• Philips has been active in patent licensing in the consumer electronics field for many years. Larger programs include:

– Compact Disc (“CD”) (1983)– Digital Versatile Disc (“DVD”) (1997)– Blu-ray Disc (“BD”) (September 2011)

• Programs characterized by:– Standard Essential Patents– Licensees and markets were/are World-Wide– Licensees were/are Very Diverse in Size and Respect for IP

• We licensed Philips patents under running royalty agreements with internal team & acted as licensing agent for other companies


Common Licensing Model (Running Royalty)

Common License Grant:

“Subject to the terms and conditions of this Agreement, ABC hereby grants to XYZ a license to make, have-made, use, offer to sell and sell Licensed Products…”

Agreement

With License Grant

Licensee Sells

Product in

Calendar Quarter

Licensee Reports and Pays after the Calendar Quarter


Patent Exhaustion – Why do we care?

• What happens when Licensor ABC finds that Licensee XYZ under-reported and cannot or will not pay?

– E.g. Sold 1M units, but only reported and paid for 300,000 units.

– Breach of Contract claim – yes, but collectable?

– Can the Licensor collect from customers that received the (unlicensed) product which were neither reported nor royalties paid?

• Doctrine of “patent exhaustion” precludes collection from downstream customers– as a practical matter, it usually means little to no recovery of royalties

owed from judgment-proof licensees


Patent Exhaustion - Basics

• “Patent Exhaustion” is a judicially created doctrine– Since mid 1800’s (see Bloomer v. McQuewan (1852))– a/k/a “first sale doctrine”

• At least dual purpose:– prevent “double recovery” by a patent owner – limit restrictions on use and alienation of property rights

• Generally, imposed upon:– the first sale of an article by a patent owner, or– the first unrestricted sale by another party authorized by the patent

owner


Patent Exhaustion - Basics

• Aren’t the sales restricted or not authorized with the following grant?

– “Subject to the terms and conditions of this Agreement, Licensor grants to Licensee a personal, non-exclusive license under Licensor’s great patents to make, have made, use and sell Licensed Products ...”

• What if we really mean it and add an exclusion from License? – “Exclusion From License: Licensee is licensed only to Licensed Products

for which Licensee or a third party has satisfied royalty obligations of Licensor”.

• Answered in Tessera Case(CAFC, May 2011)(Lourie, Linn and Dyk)


Patent Exhaustion - Cases: Tessera• Facts:

– In 2009, Tessera filed an ITC action against 18 importers of semiconductor chips under several of its patents. All purchased some portion from Tessera’s licensees who had not paid all the royalties due, under running royalty agreements.

• ITC’s Initial Determination contained a finding that Tessera’s patent rights were exhausted as to products purchased from Tessera’s licensees (including the products on which no royalties were paid).

• Tessera appealed to the CAFC, pointing to the “Exclusion From License” Clause– Sales are not licensed and not authorized until royalties have been paid.– Patent exhaustion is meant to prevent double recovery, but such a

holding would deprive Tessera from receiving even a single recovery.


Patent Exhaustion - Cases: Tessera• CAFC:

– Each agreement contained an “unconditional grant” to “sell and/or offer for sale”.

– “Nothing … to even remotely suggest that the existence of a condition subsequent, namely the payment of royalties operates to convert initial authorized sales into unauthorized sales for purposes of patent exhaustion”

– Tessera’s arguments on the “Exclusion from License” clause adds unnecessary complexity to a rather straightforward analysis.


Patent Exhaustion - Cases: Tessera• CAFC:

– Tessera authorizes licensees to sell the licensed products on credit and pay later.

– Tessera’s argument that the sale is initially unauthorized until it receives the royalty payment is hollow and unpersuasive.

– “That absurd result would cast a cloud of uncertainty over every sale, and every product in the possession of a customer of the licensee, and would be wholly inconsistent with the fundamental purpose of patent exhaustion – to prohibit post sale restriction on the use of a patented article.” citing Bloomer v. McQuewan (1852).

– Non-payment gives rise to a dispute between Tessera and its Licensees, not with it’s licensee’s customers.


Patent Exhaustion – Cases:U.S. Philips• U.S. Philips vs. Cinram et al (S.D.N.Y. 2013)

“1.15 ‘Licensed Product’ shall mean a CD-Audio Disc, a CD-Audio Maxi-Single, a CD-ROM Disc and/or a CD Extra Disc, as correspond with the Licensed Patents selected by Licensee pursuant to Article 1.16, manufactured and/or sold in accordance with the provisions hereof, which has been duly reported and on which the royalties due hereunder are paid in accordance with the provisions of this Agreement.

“2.01 For the term of this Agreement, Philips hereby grants to Licensee a non-exclusive, non-transferable license under the Licensed Patents selected by Licensee pursuant to Article 1.16 to manufacture Licensed Products within the Territory in accordance with the relevant CD Standard Specifications and to sell or otherwise dispose of Licensed Products so manufactured in all countries of the world.”


Patent Exhaustion – Cases:U.S. Philips• U.S. Philips vs. Cinram et al (S.D.N.Y. 2013) • S.D.N.Y ruled patents exhausted as to downstream customers on notice, but

not as to breaching licensee– Can maintain a patent infringement claim against licensees

• Important? You Bet. One of the Defendants declared bankruptcy 4 months before trial.

$$$$


Alternative Licensing Models

• Development of Licensed Status Confirmation Document (“LSCD”) and Per-Batch Licensing (“PBL”)– Developed prior to Tessera and Philips CD rulings

• A “Rolling Release Model”

• ULR – unit license rights


Alternative Licensing Models: LSCD/PBL

• Royalty Collection Experience:

– CD-R Discs around 2000-2001, decrease in reported units What to do?

– DVD Players around year 2002, Philips received permission to enter into license

agreements with manufacturers in China Approximately, 200 agreements entered into in a short time frame. After 1 year, analysis of royalty reports showed low levels of reporting

and payment for external markets Meanwhile, products were flooding into North America and Europe. What to do?


Alternative Patent Licensing Models: LSCD/PBL

First Step:

• Market Education – Message:

Buy only from licensed suppliers & Not Reported/Paid = Not Licensed

– Why: Create demand from licensees, reducing demand from unlicensed suppliers

– How: Website; mass mailings/notice letters to customers; trade shows; retailer visits; litigation

• Issue

– Customers that wanted to comply could not easily see what was reported and paid



Second Step:

• Make reporting Visible – Created License Status Confirmation Document “LSCD” System– Form of Electronic Reporting applied for each shipment– No extra cost– Could automatically be sent to the customer– Coupled with market education, Customers created “pull” for LSCD’s from

their suppliers, further increasing reporting

• Issue:– But still, even if no LSCD, or otherwise not reported, many customers

took the position that the product was still “authorized” because of “common model” license agreement.

Sample LSCD



Third Step:

• Abandon “license” agreements in favor of “Registration Agreement”• Initially implemented as “Veeza” program for CD-R discs in 2009

(1) Registrant required to electronically request a license for each shipment, before the shipment date, with specifics (brand, serial no., etc.)

(2) Discs Required to have a Veeza logo embedded therein with code for each factory

B B234

(3) Shipping Boxes required to have Serial Number label



Other Features:

(4) Licensed only for (i) country of manufacture(ii) country of final sale

(5) Derivative LSCD’s for shipments split downstream

• Veeza documents still available at www.ip.philips.com

Veeza System Guide

Veeza AgreementVeeza Logo

Guide



• Licensed Status made visible for customers and retail

• LSCD’s VERY Specific– Brand, Serial No’s, Customer, Ship Date, Country of Manufacture, Country of Sale,

Container #.



• Per Batch License was also used widely for DVD Players– Without logo & without serial number labels– Increased reporting and payment dramatically

• But only in combination with active enforcement and visibility Border seizure program in EU + supply chain control Supply control in North America

• Aided by occasional raids (e.g. Cyberhome) and product seizures by customs for trademark infringement (Las Vegas, CES)

• In 2011, PBL/LSCD concept adopted by One-Red LLC and One-Blue LLC for pre-recorded disc, recordable media and hardware with at least mandatory logo use. Serial number labels or packing lists required depending on type of product.www.one-red.com www.one-blue.com

http://www.one-red.com/


Alternative Licensing Models: LSCD/PBL Summary

AUTOMATIC PROCESS

PRE-PAYMENT (MANUAL) PROCESS

Registrant Requests

PBL/LSCD

Licensor

Grants PBL & Issues LSCD

Registrant

Ships Produc

t Covere

d by LSCD

Licensor Pays Royalties w/i 30 days

of month

end

Registrant Requests LSCD

Registrant Pays

Royalties for LSCD

Licensor

Grants PBL & Issues LSCD

Registrant Ships Product Covere

d by LSCD


Alternative Licensing Models: Rolling Release

• Year 2013: an agreement for a smaller program that preserves Philips’ right to collect from downstream customers but which is also simple to implement without special software, servers, or electronic reporting.

• Concept: Modelled as a series of “past use” releases, in which the terms for each past use release is defined by the Registration Agreement.

• Basic Elements:• “Registration Agreement” instead of “License Agreement”• Quarterly reporting and payment• Grant of a release only for products FULLY reported and paid for• Release is a simple template emailed back to Registrant after royalty

report is checked and payment confirmed.


Alternative Licensing Models: Rolling Release

• Late Payment/Wrong Payment: Philips has discretion to not issue Release until balance paid with interest due.

• Implemented in a Philips royalty collection program in Q3 2014

Registrant Sells Product

in Calenda

r Quarter

Registrant

Reports & Pays

ForEach

Scope Product Sold in

Quarter

Philips Issues

Release, only for Product reporte

d, & only after

receipt of

payment


Alternative Licensing Models: Unit License Rights

• Intellectual Property Exchange International, Inc. (“IPXI”)– Central marketplace for transacting IP licenses

Modeled on a financial market to allow some price discovery and trading

• Trading Unit is known as a “ULR” – Unit License Right– 1 ULR contract covers , for example,

4,000 chipsets five (5) square meters of total area of Emissive Display one hundred (100) issued or provided stored value cards

• Must become a “Purchasing Member” to have access to the IPXI marketplace to buy and sell ULR’s. Purchaser bound by the IPXI Rule Book.


Alternative Licensing Models: Unit License Rights

• Model is:– Purchase ULR first, via the exchange, then report consumption– License is not granted until the reporting date (monthly)– ULR purchase must be before “First Act”.

– Under-reporting, found by audit, is a violation of the Rule Book and subjects member to sanctions set by the IPXI Business Conduct Committee.

Member

Purchases ULR

Sells Produ

cts Covered by ULR

Report

Consumptio

n Under

ULR on

monthly

basis

Issuer grants license on

reported

consumptio

n

Purchase

Additional ULRs

before neede

d


Comparison Chart

Conventional RR License

PBL/LSCDAutomatic

PBL/LSCDManual

Rolling Release

IPXI“ULR”

Pre-Payment

Under-reporting ProtectionNon-Payment ProtectionDownstream Recourse Pre-TerminationVisible Licensed Status


Alternative Licensing Models:The Big Picture

• Business impacts of limited collection options:

• Licensees that cheat have a lower cost structure, and thus sell at lower prices than companies that prefer not to cheat.

• Cheaters “poach” sales from licensees that do not cheat.

• Eventually, honest companies are forced to leave the business, or begin cheating themselves to survive.

• Unchecked cheating tends to lead to more cheating in the market and lower royalty collection.


Alternative Licensing Models:The Big Picture

• Licensees want a level playing field

As the world changes, we need to continue to innovate in licensing as well!!

brian wieghaus philips intellectual property & standards may 1, 2015 royalty collection, patent...

Documents

royalty patent exhaustion

patent owner slide

philips patents

doctrine of patent exhaustion

tessera philips cd

license grant licensee

royalty common license

unit license rights