Feature

Leganomics Of Patents

Posted on 27 January, 2010 | Tags: Intellectual Property

The very idea of the patents came to be discussed as necessary offshoot of the profit oriented industrial revolution in the eighteenth century. Had it been only a matter of honor, the patents would not have attracted as much legal attention as they have been doing presently, with increasing intensity.

The perception of Intellectual Property Rights (IPRs) has two connotations, namely economic and legal. Although the legal connotation appears to be given a priority, what is often forgotten is that there would have been no legal dimension to it in the absence of the economic dimension. In fact, the very idea of the patents came to be discussed as necessary offshoot of the profit oriented industrial revolution in the eighteenth century. Had it been only a matter of honor, the patents would not have attracted as much legal attention as they have been doing presently, with increasing intensity. With the World Trade Organization (WTO) regime posing as a possible uniform global government, it becomes necessary to analyze the ingredients of IPRs and patent-laws as well as understand the intricate interplay between the law and economics of the patent laws world over. The real significance of the Agreement on Trade Related Intellectual Property Rights  (TRIPS Agreement) of WTO will then be understood more clearly. The study has now become most relevant for the industrial sectors, especially in the developing countries like India. While proceeding to discuss the leganomics, one presumes that the readers have a preliminary conceptual knowledge base in IPR matters.
IPR Policy
Patent Policy: The fundamental premise of the patent system is that society benefits when people conceive of new inventions develop and commercialize new products incorporating those inventions (a process referred to as innovation, as distinct from invention) and publicly disclose information about their inventions, so that others may learn from and improve upon those inventions.
The question is how to maximize these social benefits or, more precisely, the surplus of social benefits over the social costs. The patent system can be thought of as one way of achieving this goal.
One of the great things about the patents information is that it is or at least tends to be, in the language of economics, both nonrival and no excludable. Most tangible things are rivalrous, meaning that an individual or a small number of people can use or consume a particular good at any one time. Similarly, most goods are excludable, in the sense that one can take precaution locks, guards, and fences to prevent other people from having access to them. But the only way to exclude others from having access to your idea for a new invention is to keep the idea to yourself. Once the idea is disclosed to someone else, there may be no way to prevent that person from using it, assuming that he has the technical skill to do so.  As a result, your ex ante incentive to invest in creating or publicizing the invention becomes lower than it otherwise would be. Inventing something new often requires a substantial investment of time, money and other resources. By contrast, to copy someone else's new invention often costs considerably less, even if we factor in the cost of reverse engineering. Thus, there may be a substantial incentive to take a free or less costly ride on someone else's investment. This potential for free riding reduces the incentive to invent something new, because the inventor may be unable to recoup the sunk costs of invention. Competition from the free riders may reduce prices such that the cost of discovery and commercialization cannot be recovered.
Moreover, to make optimal use of an invention, the inventor may need to disclose it to someone else who is better positioned to manufacture or market a tangible product that embodies the invention. Evidently, the parties could try to contract around this problem, but the potential recipient of the information may be unwilling to commit to not using the information until getting to know what it is. Nevertheless, the information could turn out to be something in the public domain. But once the recipient knows what the information is, the disclosure already will have taken place. Noble laureate Kenneth Arrow noted this information paradox in a famous essay may years ago. The inventions, thus to the economists, are like public goods. The patent system is expected to be workable on a reasonable assumption that the public will enjoy additional benefits when the government takes additional steps to encourage the creation, commercialization and disclosure of new inventions. The patent laws are therefore required to take a pragmatic note of these economic factors.

Patentability and Due Diligence
The main criteria for patentability are Novelty, Inventive step and Capable of Industrial Application as per the Indian Patents Act 1970 as amended up-to-date
In India novelty accepted is relative, ie it should not be published anywhere and not used in India. Inventive Step is a feature that makes the invention not obvious to the person skilled in the art. The Patents Act defines inventive step as a feature that makes the invention not obvious to a person skilled in the art. The term person skilled in the art has not been defined. Capable of Industrial Application means that the invention should be capable of being made or used in an industry

The following cannot Qualify as Patents 

• An invention which is frivolous or which claims anything obvious or contrary to the well-established natural law. An invention, the primary or intended use of which would be contrary to law or morality or injurious to public health.  
• A discovery, scientific theory or mathematical method.  
• A mere discovery of any new property or new use for a known substance or of the mere uses of a known process, machine or apparatus unless such known process results in a new product or employs at least one new reactant.  
• A substance obtained by a mere admixture resulting only in the aggregation of the properties of the components thereof or a process for producing such substance.  
• A mere arrangement or re-arrangement or duplication of a known device each functioning independently of one another in its own way.  
• A method or process of testing applicable during the process of manufacture for rendering the machine, apparatus or other equipment more efficient for the improvement or restoration of the existing machine, apparatus or other equipment or for the improvement or control of manufacturer.  
• A method of agriculture or horticulture.  
• A method or process for the medicinal, surgical, curative, prophylactic or other treatment of human beings or any process. for a similar treatment of animals or plants to render them free of disease or to increase their economic value or that of their products.  
• An invention relating to atomic energy falling under the Atomic Energy Act, 1962.  
• Process patent in respect of food, medicine or drug and not product patent thereof. However, in respect of substance itself intended for use or capable of being used as medicine or drug, except chemical substances, which are ordinarily used as intermediate, patent can be granted in the manner provided in the patent law.  
• In respect of substances produced by chemical process including alloys, optical glass, semi conductors and inter-metallic compounds, patents are granted only for the process of manufacture but not for the substance thereof.

Essential features in due diligence for establishing Patentability consist of what IP are actually owned by the organization; whether applications to protect the technologies/products/services have been filed in all the countries of business of interest; whether all the relevant renewal fees for the intellectual property been paid to ensure their continual ownership; what is the impact of the technology being considered on neighboring fields of technology; if any litigation involving intellectual property is eminent, pending orin progress, for example oppositions, infringements, validity proceedings and if so, what is the status; what is the position of intellectual property assets registered or unregistered of the organization vis-a vis those of the global market leaders, with special emphasis in geographical regions of business interest; what are the terms of the licenses already issued by the organizational relationship; what is the commercial value of the property, its tax implications and the differential rates of depreciation and what is the impact of legislation on the technology or area of business.

Factors Responsible for IPR Evaluation are as follows

• Will the innovation meet all the tests for IPR protection?
• If granted, will it survive opposition/revocation proceedings?
• Which are the countries where one should seek protection?
• Where should it be filed first to take priority?
• What would be the strategy for its enforcement?
• What would be the competitive advantage of seeking IPR protection for the innovation?
• Who else would be interested in this IPR and would either license it or be prepared to partner in its further development?
• Should this be assigned to another group who would progress it in their own business interests?
• Will it be possible to cross-license the IPR to gain access to some other IPR or protected technologies and intellectual assets of another group?  
• Would it be more appropriate to maintain this innovation as a trade secret rather that making a public disclosure through a patent or other forms of IPR?
• What price would this invention fetch if the organization pursued it as compared to licensing it or assigning it at this stage?
• How does it fit into the organizational IPR portfolio?
• Where would a patent fit into the product / process life cycle?
• Which are the other IPR tools that would comprehensively protect the invention in the market place?

Trading with IPR
Trading with IPR of high-tech innovations is a common phenomenon.  The most common approaches are assignments and licenses.  Non-Disclosure Agreements (NDAs) are crucial before progressing any discussions with possible partners, collaborators, joint ventures, potential licensors, third party developers, etc.
The MOUs between the parties should clearly define the terms and conditions on the IPR generated royalty structure or other benefit sharing arrangements during and beyond of the term of the agreement. In this context one should also appreciate the basic difference between an assignment and a license. Through an assignment the assignor passes on his ownership of his IPR to the assignee. In the case of patents the assignee is then fully entitled to deal with the patent or application as the owner of the patent.
 In contrast, a licensor grants the rights in the property without transferring ownership of the property to the licensee. A license is permission given by the licensor to a licensee to perform certain acts with respect to the IPR, which would otherwise not be permitted without the license. One has to exercise extreme caution while drafting licensing agreements so that they do not slip into the domain of anti trust or competition laws of the country in which the license is to be affected.
Licensing agreements support business to supplement resources of the licensee with those of the licensor, procure right to market and distribute the licensor's product, penetrate new markets both in terms of product / services and territory, generate capital and gain distribution network by linking to other firms.  For example, several small companies license their intellectual property to large companies not only to maximize the earnings of their innovations but also distribute their product to more people and also beat their competitors to market.
License at the request of a firm in a non-competing field works between the licensor who has no interest in exploiting the intellectual property.  For example, a developer of mainframe computer software with expertise only in mainframes might grant a license to developer of software for personal computers. If the licensee's market is too close to the licensor's market, undesired competition may be created.
Otherwise it would have to buy barter for technology. Cross licensing is another form of barter of technology. Cross licensing occurs when two competing firms with different research and development strengths can take advantage of each others intellectual assets.  Cross licensing creates the same sort of synergy as a joint venture without the inconvenience and delay of setting up joint operations. These are fairly common in high technology and knowledge-led fields.
When the licensor's trademark is licensed for use in the market along with the intellectual property, then the licensee's marketing efforts benefit the licensor's reputation and goodwill as long as the licensee maintains quality in product, service and sales. Licensing may allow a firm to achieve some degree of control over its own innovations and also over the direction of the industry.
In any licensing agreement one has to consider financial, jurisdictional, technical assistance, duration, sub-licensing, quality control and related issues such as what is exactly being licensed; what will the licensee get as a result of the license; also, it is important to define what the licensee will not get as part of this license. For example, will the IPR covered in the license also bring with it the corresponding know-how and other proprietary technical information; the status of the IPR being licensed. Is it granted; is it in the process of examination; has the validity been challenged; what is the vulnerability that it may become invalid if fiercely challenged; what will be the responsibility of the licensor if the IPR is challenged and further invalidated; the conditions under which the license agreement can be terminated (in part or in whole). In this regard one should clearly indicate what would happen to the sub-licenses given during the tenure of the main license agreement and issues related to product liability as to who would be held responsible for a defective product or damage caused to consumers. This would require clearly worded indemnity clauses.                                                          
Unambiguous definition of the terms used as the same term can have different meaning in different countries; eg, under the Anglo- American law the grant of an exclusive license in IPR means that even the owner of IPR himself cannot operate within the defined territory using the rights which have been licensed. In contrast, under French law, the term 'exclusive' has traditionally been understood to mean that the patentee, trademark owner, etc. will not license anyone else to operate within France.
Royalty or any other form of compensation as consequence of a licensing agreement. Though the royalty is normally a negotiated amount between the licensor and licensee, many countries around the world impose maximum royalty that is payable by a licensee to a licensor. Such limitations should be borne in mind while drafting a licensing agreement. Drafting of licenses is a tricky art. A document can be so structured to convey multiple interpretations and thereby become subjects for complex litigation. 

Sunil Bedekar is Advocate, Supreme Court of India
Director,  Lawtocon International Trade Law Consultants
Email: bedakar_sunil@yahoo.co.in