In this post, which follows our earlier discussion of legal strategy, we’ll offer examples of companies situated within each of the five pathways. As Robert and I mentioned in our article, most companies follow the compliance pathway. Such companies insource legal compliance through their in-house legal department, or they may choose to partner with an external compliance verification service. A firm such as ISN, for example, has built a business handling compliance issues for corporations and their subcontractors. According to the Society of Compliance and Corporate Ethics, compliance is a thriving industry due to the increased legal penalties and regulations that companies face in today’s heightened legal environment.
The avoidance pathway is less frequent, given the high stakes and liability attached to this type of strategy. General Motors may have engaged in avoidance if it misled regulators about its faulty ignition switches. Avoidance issues tend to be costly to deal with, given the loss of trust and enhanced penalties that arise from this behavior.
The more interesting and rare pathways involve prevention, value, and transformation. An interesting and controversial prevention legal strategy involves trademark policing, which, in its most egregious form, devolves into the unethical and legally dubious practice of trademark bullying. For example, Chik-fil-A employs an aggressive strategy that targets large and small companies alike and uses the threat of trademark litigation to prevent anyone from encroaching upon its trademarked brands and brand equity. Setting aside the overreaching and legally dubious aspects of this approach, some companies legitimately use a preventive legal strategy that involves cease and desist letters, litigation, and U.S. Patent and Trademark Office administrative oppositions to protect the value of their brands and advertising. The Chik-fil-A case serves as a useful reminder, however, that aggressive legal strategies may push the boundaries of ethical behavior, sound legal argument, and public opinion.
Two recent examples illustrate how employing a legal strategy in the value pathway can generate positive and tangible financial returns. The first instance involves hedge funds investing in a corporate acquisition target and then filing suit in Delaware to challenge the valuation and seek an appraisal from the court. This legal strategy is referred to as appraisal arbitrage. Many of these cases either settle or result in substantially higher prices for the party seeking the appraisal.
Another value strategy that has been in the headlines recently involves tax inversions. Burger King’s recent decision to acquire Canada’s Tim Horton’s will yield business synergies, but it also exploits a legal maneuver allowed under current tax law permitting a company acquiring a foreign entity to reincorporate in the foreign jurisdiction. By reincorporating in Canada, Burger King will effectively lower its tax rate from 35% to 15%.
The last and rarest of legal strategies is transformation. This occurs when the top executives in a corporation integrate law as a core aspect of the firm’s business model to achieve sustainable competitive advantage. Few companies are able to achieve this strategic pathway, and it’s certainly not for everyone. One company that notoriously used law to achieve abnormally large market share and margins in the ticket processing industry was Ticketmaster. The ticket service provider used venue ticket licensing contracts that included several key provisions such as long term renewable exclusivity terms (up to 5 years), and more infamously, fee sharing provisions. Ticketmaster’s business model was, essentially, to take the bad rap for charging exorbitant convenience fees and sharing those fees with the venue, thus contractually locking them into a highly profitable and exclusive business system. It didn’t hurt that Ticketmaster’s pioneering CEO Fred Rosen was a Wall Street attorney turned impresario.
Another company that is showing signs of attempting to pursue a transformative legal strategy is Tesla Motors. Tesla’s recent announcement to offer open licensing terms for its battery and charging station patents illustrates a pioneering mentality that seeks to build a business ecosystem with other auto manufacturers. By doing so, Tesla has made a major legal bet that giving up patent exclusivity rights in the short term will yield long-term competitive advantage by helping to diffuse electric battery and recharging technology. The other legal strategy Tesla has pursued relates to its pioneering distribution model of direct sales to the consumer, bypassing the traditional dealership model established for conventional automobiles. To achieve this direct-to-customer model, Tesla has engaged state regulators to achieve exemptions from state dealership franchise laws. Tesla is clearly strategizing and innovating along many fronts that involve business, technology and law. It remains to be seen, however, whether these legal strategies will offer Tesla a long-term sustainable competitive advantage.
In our next and last post, we’ll discuss our experience teaching the five pathways of legal strategy to business students and how it has been a valuable resource in the classroom.
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For this last guest post, I decided to eschew IP (well, to some degree, see below) and focus on a recent article of mine and Leandra Lederman—Enforcement as Substance in Tax Compliance—that (in my biased opinion) deserves more press. (Though, to be certain, Leandra would strongly disagree with my catchy title—see more on that below.)
In the article, we argue that the failure of the tax authorities to perfectly enforce the tax laws in effect can alter the substance of the tax laws, at least to the extent that taxpayers know the penalties for non-compliance and can reasonably predict how often the tax authorities conduct audits for certain classes of taxpayers.
This claim is quite different from the one that audit rates merely affect the propensity of taxpayers to “cheat.” Rather, the effective tax rate can be intentionally adjusted downward (and not just to zero) by the taxing authorities from the nominal tax rate, in effect, yielding an entirely new substantive law.
For instance, suppose there is a sales tax of 5% and that given current audit strategies, the effective tax rate is 4% in all industries, because 20% of the taxes go unpaid in each industry. Based upon the elasticity characteristics of the products in a given industry—in other words, the propensity of purchasers to continue buying as the price of a good increases—under certain circumstances, the tax authority can adjust its audit rates in one industry relative to another to change the compliance by taxpayers in each industry. This adjustment, in turn, can change the effective tax rates paid by a given industry. For instance, the tax authority might audit more heavily in an industry selling luxury cars than in one selling textbooks, yielding effective tax rates of 4.5% in the luxury car industry and 3.5% in the textbook industry.
The ability of the tax authority to generate different effective tax rates from the same nominal tax rate is an example of what we call “enforcement as substance,” namely the ability of differential enforcement strategies to effectively change the substantive law. A broader (and much less studied) question is whether “enforcement as substance” can be intentionally harnessed to improve social welfare.
Drawing upon work of mine in IP and others that shows that imperfect enforcement can decrease deadweight losses stemming from the issuance of patent rights, we show in our article that a “measured enforcement” policy (i.e., a conscious strategy to differentiate enforcement among different legal actors) can improve social welfare. In the tax context, measured enforcement can similarly be used to decrease deadweight losses caused by taxation, specifically by placing more of an onus on those industries with lower elasticities. Additionally, tax authorities can implement a quasi-Pigouvian tax on activities otherwise imposing negative externalities by upping enforcement of taxes on those activities.
Importantly, we show that under a variety of conditions, measured enforcement can yield welfare benefits while maintaining or even increasing the government’s total tax revenue. Some of these conditions are that the taxpayers be sophisticated and informed and respond rationally to incentives provided by the tax authority’s publicizing of its enforcement strategy. Generally, we believe large, sophisticated corporations—at least as an initial matter—would fit this bill.
Additionally, contrary to the title of this post—such a system should not be billed as one promoting “cheating.” Rather, like prosecutorial discretion in the criminal law context, here the tax authority would use its on-the-ground enforcement discretion to achieve optimal deterrence—namely, the use of its resources in those areas that most need it not solely to increase the public fisc, but to improve overall social welfare. Such allocation of resources of course is not tantamount to promoting cheating in the conventional sense (hence, the quotes around “cheat” in the title of this post).
One potential concern with such an approach is the possibility of abuse on the part of the taxing authority—adjusting enforcement not to benefit society, but as a means of political reward and punishment. Yet, our proposal yields no more room for abuse than under the current system. Indeed, under our framework, the taxing authority would publish its audit rates (otherwise, how could taxpayers adjust their behavior?), making its audit scheme much more transparent than it is now.
Of course, other potential concerns arise in such a scheme, such as separation of powers and horizontal equity (“treating like taxpayers alike”). We address these and other potential issues in detail in the article, concluding (of course) that none are fatal.
On a final note, thanks again to Gordon Smith to letting me guest blog the last few weeks—now, it’s back to the run-of-the-mill life as a law professor in the summer: writing law review articles (most of the time spent on the footnotes), lamenting the decline in law school enrollment, and enjoying the World Cup, Wimbledon, and the occasional barbeque.
Last week, Elon Musk—CEO of Tesla Motors—announced on the company’s blog “All Our Patent Are Belong To You” (apparently an homage to a late 90s, ungrammatical internet meme--thx Brian Gividen for pointing this out). Musk claims to adopt an “open source” policy for Tesla’s patents. He elaborates, “Yesterday, there was a wall of Tesla patents in the lobby of our Palo Alto headquarters. That is no longer the case. They have been removed, in the spirit of the open source movement, for the advancement of electric vehicle technology.”
Musk’s move has been hailed widely in the blogosphere as an act of altruism (e.g., here & here). Most of this sentiment has been fairly unreflective. (However, for a certain-to-be prescient analysis that focuses more on the business implications of Musk’s move, see my colleague Orly Lobel’s comments over at Prawfsblawg and Harvard Business Review blog. While I’m quite sympathetic to most of Orly’s observations, as I explain below, I’m quite skeptical of her view that the move will be “good for faster industry innovation.”)
However, like most patent “give-aways,” legal loopholes usually spoil the party. Specifically, Musk stated that “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology” (emphasis added). Of course, “good faith” is a legal term of art large enough to drive a diesel-spewing, 18-wheeler through, much less a zero-emissions Tesla (and this loophole has been roundly noted by a few observant journalists).
Most importantly, is Musk (or his lawyers) expecting that others that use Tesla’s patented technology also make their patents available to Tesla? In more narrow terms, is the result similar to Twitter’s supposed “give-away” that reserved to Twitter the right to sue a competitor if the competitor sued Twitter? Probably so.
Thus, like Twitter, Tesla’s giveaway appears ultimately to boil down to a generalized offer to cross-license with competitors, including potential entrants. As such, Musk’s “give away” is not terribly radical, because cross-licensing in the high-tech and auto industries is fairly commonplace (veritable “keiretsus” in Scott Kieff’s words).
In this regard, as Michael Schallop, an IP attorney recognized, Tesla “wants to encourage others to develop on a common platform, and to the extent that they’re doing so, Tesla is not going to stop that by using its patents offensively.” Indeed, as I have described elsewhere, forcing smaller competitors and potential entrants to cross-license typically provides the incumbent (here, Tesla) a strong advantage, because the incumbent often controls “complementary assets” that provide competitive advantages aside from IP, like robust sales & marketing channels, access to capital, and the like. So, at worst blush, Tesla’s putative altruism could actually keep small, innovative entrants out of the commercial marketplace by effectively forcing them to license their patents to Tesla.
Furthermore, as others have noted, much of the Tesla patent portfolio does not seem particularly strong, nor does it appear to include much of its fundamental technology (which appears to be kept largely as trade secrets). Like IBM’s giveaways of several years ago, one wonders if Tesla found that giving away its patents would yield more revenue by seeding its technology widely—benefiting not only from potential infrastructure effects, but also from the consulting and joint venture dollars that go along with actually explaining to licensees how to implement the technology (specifically by using Tesla’s trade secrets and know-how, which Musk is not divulging). So perhaps Tesla is “patent washing” to offer the proverbial “Trojan horse” (sorry, last cliché) to the larger auto manufacturers (and even lure gullible “anti-patent” engineers to Tesla—see Orly Lobel’s points on these issues).
Or maybe Musk truly thinks he’s being altruistic. Unfortunately, contrary to Musk’s proclamation, “giving away” patents (even putting aside the “good faith” loophole) usually doesn’t mean “open source.” The reality is that Musk’s act is likely to redound much more to his self-interest than society’s.
If Musk were truly concerned about society being able to use Telsa’s technology, he’d specifically agree to the following terms: a royalty-free license to all Tesla current and future patents to any comer in writing with the single exception of maintaining an enforcement right against incumbents or large entrants (but not startups or small entrants) who sue Tesla for infringement. Additionally, Tesla would disclose all of its trade secrets under similar terms and use vigorous efforts codify Tesla’s know-how in so doing.
Of course, Tesla’s “give-away” is quite a ways from this much more thoroughly “open source” approach. As such, I’m not particularly optimistic that Tesla’s current policy will ultimately promote faster innovation or the more rapid adoption of electric vehicles. Perhaps even more unfortunate is the general inability of the press even to spot these issues, much less analyze their ramifications.
Thanks to Gordon Smith for inviting me to guest blog—and kudos to Gordon for inviting Michael Burstein, who penned several insightful guest blogs here a few weeks ago—to generate some buzz about the intersection of IP and business law. In my posts over the next two weeks, I’ll follow on Michael’s outstanding foray into the overlap—and as I’ll describe, the “gap”—between IP and business law.
As Michael explained, IP and business law often intersects in three key areas: (1) Law & Entrepreneurship; (2) Markets for Technology; and (3) Innovation and Corporate Performance. Each of these areas has been growing at tremendous rates both in terms of academic study and real-world deals.
As an IP law professor and former founder of a .com-era software company, it’s greatly refreshing to see this newfound interest in IP & business law in the legal academy and practice. Yet, both domains still often suffer from what I term the IP transaction “gap”—namely, the lack of a deep understanding on the part of academics and lawyers of both the “IP of Business” and the “Business of IP.”
In simple terms, business lawyers often fail to appreciate the important details of IP and IP lawyers often fail to understand the business of their clients. As a client, my difficulties stemmed in finding business-savvy lawyers who had a sufficient grasp of IP—particularly the business aspects of IP—to ink the kinds of nuanced licensing, assignment, and acquisition agreements that would suitably account for the structure and risks unique to IP deals. The same sorts of “gaps” between IP and business law pervade law review articles that attempt to tackle this thorny intersection.
Of course, there are notable exceptions among scholars and practitioners alike. For instance—in addition to Michael Burstein—Ashish Arora, Stuart Graham, Richard Gruner, Bronwyn Hall, Jay Kesan, Josh Lerner, and David Teece represent an abbreviated list of some of the scholars with deep knowledge in both fields. Similarly, there are well-known (and lesser-known) attorneys with the same sort of cross-disciplinary aptitude. How do scholars—and practitioners and students—acquire this kind of knowledge? I have a few suggestions.
First, law schools should offer more cross-over courses in IP and business law. For example, at the University of San Diego School of Law, David McGowan and I have focused on expanding our cross-disciplinary IP offerings, which now include IP & Business, IP Strategies, Technology Transfer, and a Technology Entrepreneurship Law Clinic. Based on a survey of IP courses performed by William Mitchell Law School, fewer than 20 law schools offer any IP transactional courses other than IP licensing. Relatedly, law schools should provide certificates or concentrations in IP Transactional Law, as well as more opportunities for joint MBA/JD programs, with a special emphasis on technology-focused business and law.
Second, legal academics writing in IP & business should more frequently read and cite literature from outside the law review canon. In my view, often the best law review articles in IP draw upon scholarly works from business, economics, management, marketing, and related journals. One excellent way to quickly learn about the latest thinking in these fields is to attend conferences in these disciplines, such as the Academy of Management or American Economic Association annual meetings.
In this vein, academics and practitioners alike should cease the frequent practice of pigeon-holing certain issues as “legal” and others as “business,” relegating the latter to the expertise of non-lawyers. At my software company, we eventually fired every lawyer who made such hidebound distinctions. In their place, we hired transactional lawyers who understood our business well—not only our goals in a specific deal, but also overall—and who thus could provide integrated business and legal advice. In order to have this deep level of knowledge, transactional lawyers—especially those who practice in the tech space—need to immerse themselves in the business of their clients. In many situations, this might mean self-educating by reading a client’s business plan and fundraising slides, as well as general business magazines, books, blogs, and journals.
Last, and perhaps most importantly, we in legal academia—in addition to training students to “think like lawyers”—should give today’s transactional law students a head-start on “thinking like businesspeople.” By doing so we can help ensure clients receive the kinds of lawyering they increasingly demand (and need).
Thanks so much to Gordon Smith and the rest of The Glom for inviting me to guest blog for a couple of weeks. As Gordon mentioned in his very kind introduction, I’m a professor at the Cardozo School of Law in New York City, where I teach Patent Law, Corporations, and Property. My writing focuses on the intersections between and among these fields. My view is that the relationships between IP and business law are numerous, complex, and rich. But in our somewhat specialized sub-disciplines, IP and corporate law scholars don’t often talk to each other. (There are exceptions, of course, and I’m thrilled to be part of a group that is working to change this – more on that below.) In my posts over the next two weeks, I’d like to try to jumpstart some new conversations. I think we have a lot to learn from each other.
In this first post, I thought I would describe a few themes that bring IP and business law together, as a way of framing the more specific problems that I’ll discuss later in the week. So to get things started, consider the following:
- Law and entrepreneurship. Gordon and others (Brian Broughman, Sean O’Connor, Usha Rodrigues, to name but a few) have done tremendous work over the last several years to explain the particular roles that law plays in shaping the environment for new ventures (and to build an interdisciplinary Law and Entrepreneurship Association of scholars interested in these issues). In today’s economy, where many such ventures are based on intellectual assets, IP laws have a tremendous impact on the shape and success of those businesses. To take just a sampling of issues: Ted Sichelman and his collaborators find, in the Berkeley Patent Survey, that entrepreneurs seek often seek patents for reasons unrelated to the classic rationale of preventing misappropriation, such as to better attract venture finance; Colleen Chien reports that the costs of patent “trolling” are disproportionately borne by startups; and federal technology transfer policies determine how innovative ideas move from the laboratory to the marketplace.
- Markets for technology. The classic economic model of innovation is simple and usually involves a lone genius inventing in a garage. But bringing an innovative product to market requires much more. It requires linking the idea with capital and development resources for commercialization. Forging those links requires players to overcome a range of bargaining challenges. I’ve argued that IP may play a smaller role in overcoming those challenges than we think (so too has Peter Lee, who focuses on tacit knowledge), and continue to explore how transactions in information take place. But at the same time, we are seeing the rise of robust secondary markets for patents and copyrights, which raise a host of concerns with which corporate scholars are already familiar. If patents are to be treated as financial assets (as, for example, Michael Risch suggests), what disclosure regime should we apply? Would a patent market function like a capital market? Would that be socially desirable?
- Innovation and corporate performance. The popular business press is obsessed with innovation. And rightly so – innovation is a critical driver of corporate performance. But the organizational drivers of innovative behavior often depend on law. Dan Burk & Brett McDonnell, and several others, for example, draw on the theory of the firm to explain how the strength and breadth of IP affects firms’ make-or-buy decisions with respect to technology. Other innovation incentives – prizes, grants, R&D tax credits – have similar impacts on firm behavior, as Lisa Ouellette and Brett Frischmann have begun to describe. Later in the week, I’ll write about work that I’m doing with Fiona Murray – a management professor at MIT Sloan – about the governance of innovation prizes, a problem that we think has much in common with the governance of innovation process in other institutional settings such as corporations.
I’m really excited to engage with the community here on these and other topics. I look forward to hearing your thoughts, and to a fun couple of weeks!
The course I teach at Wharton has an IP component, which in turn has a patent component, which in turn has me trying to explain to skeptical would-be entrepreneurs why one would possibly want to have a world in which people can invent something, not file for patents, and still defeat patent holders in litigation based on the first-to-invent doctrine. Next week, Congress will be voting on whether to change the US's first-to-invent rule to match the rest of the world's first-to-file rule, and my colleagues on the other side of the unversity, David Abrams and Polk Wagner, have done a study on whether the change would be a good idea. As Polk observed over on Patently-O, "the results do reveal that, contrary to the conventional wisdom, a change to first-to-file ... is likely to result in reduced patenting behavior by individual inventors."
That's quite a policy-relevant take away, on quite a big potential change in patent law. Congress may find it quite interesting - although it could be that they feel constrained by international harmonization impulses to change to first to file anyway. At any rate, the paper's up on SSRN, here's the abstract:
Even as as we stand on the cusp of the broadest set of changes to the US Patent Law in two generations, virtually no empirical analysis has been conducted on the impact of the primary components of the proposed reforms. Until now. In this paper we investigate the expected effects on patenting behavior of the major change in the America Invents Act of 2011: a shift in the patent priority rules from the US’s traditional “first-to-invent” system to the dominant “first-to-file” system. This is a deeply controversial change: Opponents argue that first-to-file disadvantages small inventors and leads to lower quality patents. Those in favor emphasize administrative simplicity and the cost savings of first-to-file. While there has been some theoretical work on this topic, we use the Canadian experience with the same change the US is considering as a natural experiment to shed the first empirical light on the question.
Our analysis uses a difference-in-difference framework to estimate the impact of the Canadian law change on small inventors. Using data on all patents granted by the Canadian Intellectual Property Office and the US Patent and Trademark Office, we find a significant drop in the fraction of patents granted to small inventors in Canada coincident with the implementation of first-to-file. We also find no measurable changes in patent quality. The results are robust to several different specification checks. While the net welfare impact that can be expected from a shift to first-to-file is unclear, our results do reveal that, contrary to the conventional wisdom, the rule change is not free — it is likely to result in reduced patenting behavior by individual inventors.
(posted by Shubha Ghosh)
In the past few posts, I have discussed various aspects of IP3.0, the current focus within intellectual property law on transactional practice and uses of IP, the recognition of IP as a business asset. Today, I examine the implications of IP 3.0 for IP policy.
My appreciation of IP 3.0 arose from the need for IP reform. Like other law professors and practitioners, I have watched the ongoing debates over the past fifteen years or so (roughly when I formally entered into the area of IP with coursework in law school) and the debate over ownership and access and the role of each in promoting innovation. I have watched as these issues were worked out at the statutory and constitutional levels. My continuing concern, however, has been with IP practice in its many ways, in other words, how do the policies of IP become reflected in practice. Of course, practice means different things to different constituencies. For the IP bar, it often means how to ensure that one's patent is granted and not challenged (even seemingly at the expense of whether the patent covers a valuable invention or at the expense of future inventors or users). The IP bar, for obvious reasons, is concerned with strong IP protection even if such protection is not conducive from a broader perspective for innovation. Users and follow-on inventors, creative and inventive people of many stripes, are often ignored in the balance. One needs to recognize IP practice pretty broadly, especially the way in which it is used by and affects wide sets of constituencies, not just ones represented within the IP bar.
The response in these IP debates has been one of balance, which often means find some utilitarian, highly principled way to define legal rights to reach the correct policy result. I have actually become skeptical of this notion of balance, not just in the area of IP, but perhaps more broadly. Focusing on IP policy here, I want to suggest that reaching the right result is not a matter of balance in the abstract, but in recognizing the practices affected by a legal rule and coming up with an approach that attempts to be the least disruptive to the broad set of practices that arguably tend to promote innovation. I want to suggest that recent Supreme Court decisions in the field of intellectual property pursue this goal by implicitly recognizing what I have called IP 3.0 and has been largely successful, especially when compared to reforms pursued by Congress and the USPTO. I want to emphasize this last point: my argument is about relative institutional success as opposed to absolute success. The latter is rarely possible in a world with a large set of often irreconcilable interests. From the perspective of incremental change and relative competence, Supreme Court patent reform has done a good job.
I will touch on three cases in which the Court has implicitly recognized IP 3.0, the role of IP as a business asset, and make the point for the success of the decision. In eBay v. MercExchange, a 2006 decision, the Court ruled that patent injunctions were discretionary. The Court split three ways on how this discretion was to be exercised, with one group of three supporting traditional equitable principles, another group of three supporting principles based upon patent policies, and a third group supporting principles based on the business effects of the injunction on the defendant. In KSR v. Teleflex, a 2007 decision, the Court attempted to raise the standard for nonobviousness in patent law, in response to concerns over low-quality patents issued by the USPTO that potentially affected the integrity and reputation of the patent system. Finally, in Quanta v LG Electronics, a 2008 decision, the Supreme Court applied the principle of patent exhaustion, specifically the first sale doctrine, to strike down certain licensing practices that allowed the patent owner to control use and distribution by downstream users of the patented technology. Each of these decisions, as well as others I could have mentioned, were shaped by the business use of patent law and potentially its disruptive effect on markets and competition. These cases are examples of IP 3.0 in action.
Today, I will discuss how to integrate a transactionally oriented IP course into the law school curriculum. Some of the ideas here are based on my experiences writing and teaching a co-authored casebook on this subject, Intellectual Property in Business Organizations: Cases and Materials (Lexis-Nexis 2006).
For more reading and a different perspective, I highly recommend, Sean M. O' Connor, Teaching IP From an Entrepreneurial Counseling and Transactional Perspective, 52 Saint Louis U. L. J. 877-90 (2008). I know many schools have implemented a transactional IP course, and I apologize for not mentioning these efforts in more detail. But I hope people will chime in with their own experiences in this area.
Let me first address the issue for the law school with the lean curriculum where faculty and administrators may view a transactionally oriented IP course as too exotic or impractical to offer. There are ways to integrate a transactional IP component to lean curricula, beyond hiring an upper level adjunct to teach a specialized course to a handful of students. First, transactional concepts can be introduced into a basic IP course with some attention to licensing and employment issues. Second, IP issues can be integrated into a business organizations course, especially one that discusses start-ups. IP issues may also be raised in a discussion of securities and due diligence, to the extent that these topics are addressed in the business curriculum. Such inclusion can enrich the discussion of these fields and introduce contemporary topics.
For a school with a slighter bigger curriculum, there is of course more room to integrate transactional IP courses into the set of electives available for students. A third year capstone course on transactional intellectual property would be a desirable way to introduce business students to intellectual property and intellectual property students to business. Ideally, a survey IP course or a basic Business Organizations course could be prerequisites for the course, or you could require one of these two as a prerequisite. The course could be open to business school students, permitting classroom assignments allowing business and law schools to work together. As a third year capstone course, the focus would be on integrating skills learned during the previous two years of law school and for laying a foundation for future practice. Such a capstone course would complement courses on law and entrepreneurship like the ones taught and developed by Gordon Smith, Darian Ibrahim, and others. Furthermore, for law schools that are associated with universities with technology transfer offices, such a course might benefit students employed by these offices or might serve as a basis for a clinical IP component in the curriculum, very likely connected to a technology transfer office.
Thinking more globally, a transactional IP course might alter how IP and business transactions are taught. In most schools, IP is introduced through a survey course. There is some ongoing controversy over whether an IP course is necessary, but my sense is that the debate is over with most serious schools offering a survey IP course that presents the four big areas of IP (trade secrets, copyright, patent, and trademark) in an integrated and comprehensive way. The idea behind such a course is to lay a foundation for more advanced courses. While this survey course has traditionally been doctrinally focused with an eye towards litigation practice as the norm, there is no reason why the basic survey course could not be taught as a transactions-oriented course. The two principle themes of the course would be identifying IP assets (that is, identify what can be the basis for trade secret, copyright, patent, or trademark protection), learning how to secure rights in these assets (use of NDA's and non-competes, the basics of patent and trademark prosecution, an introduction to work-for-hire and other employment issues), and learning how to realize value through licensing practice. Personally, I have not taught the survey course primarily in this way when I have taught it. I do touch on some of the business issues raised by IP, but my course has been fairly traditional. There is no reason, however, why the survey course could not taught with a transactional slant as opposed to the traditional litigation or constitutional policy slant. I should point out here that my co-authors Richard Gruner and Jay Kesan have an IP survey casebook with Thomson-West (on which Robert Reis is also a co-author), and we have tried to integrate transactional concepts into that book, partly to lay a foundation for our IP and Business Organizations course and casebook (previously mentioned).
In addition, transactional IP might alter how we think of the traditional business organizations course. Intellectual property is an important tool for business organizations, a mechanism for codifying knowledge within a firm and for defining its boundaries. Scholarship by Paul Heald, Dan Burk and Brett McDonnell (as well as myself) have explored this issue. In terms of teaching, the links between IP and the firm would shift the focus of the traditional business course to start-ups, employment, and licensing issues. For those who cover business taxation, the intersection of IP and tax could also be introduced. Some reading this may view my suggestion as just adding more to an already bulging course. My suggestion, however, is not to add to the set of materials out there, but to propose an alternative way of teaching transactional skills that recognizes how intellectual property issues inform current practice and shape the legal regulation of business activity.
Tomorrow, I turn to this last point, legal regulation, and show how IP 3.0 reflects and shapes how IP policy has evolved over the past few years, especially as seen in Supreme Court decisions.
In the previous post, I talked about IP 3.0, the latest version of IP teaching and scholarship that focuses on transactional issues in intellectual property. Today, I want to talk about why IP provides an excellent vehicle for conveying transactional skills and thinking in law schools.
The main reason, and this is more serious than it appears, is that intellectual property can often make the bitter pills of law school go down more smoothly. That is not a slam on transactional courses or on law school. I am just amazed how raising intellectual property issues into the law school classroom can turn a student's attention away from Facebook, Bejewelled, Expedia, or whatever web page may be up on his laptop at the moment. Want to teach about dreary subjects like common law process or tort damages? Let me pass on some cites to right of publicity cases to you. If your experience is like mine with these cases, classroom discussion will exponentiate with previously inert hands rising to attention and undifferentiated faces suddenly become attached to a voice. The concept of a contract not getting through? Let me suggest a couple of IP cases involving licenses and transfer of copyrighted works or trademarks. Constitutional decision making unusually opaque today? Try talking about Eldred to show deference to Congress and the bending of constitutional language in action. Analogously, some of the inert concepts of transactional practice can be better appreciated when seen through the lens of intellectual property.
There is something more than window dressing going on here. After all, legal doctrine can be spiced up in other ways. There are many substantive points where IP overlaps with the goals of a transactional law curriculum.
There are five areas where intellectual property and transactional legal skills overlap: (1) formation of a business, (2) licensing, (3) employment, (4) identifying sources of transactional value, and (5) securities disclosure and due diligence. Transactional skills are most critical at the formation stage of a business. The formation stage also raises numerous intellectual property issues: trademark registration and protection, patenting, the identification and clearance of IP rights. Businesses, at various stages, have to decide between making or buying, a decision which affects the negotiation and drafting of licenses. The internal organization of a business also hinges on employment decisions, the choices of whether to use independent contractors or employees and the terms on which these parties are hired. The choice of type of worker and terms may be shaped by the intellectual property strategies of the firm. Finally, intellectual property is a source of transactional value within a firm, and the identification of IP sources of value would affect disclosure requirements and the due diligence of a seller and purchaser of a firm's securities and other assets.
These five practical areas of overlap translate into a distinct set of transactional skills that can be effectively conveyed through the teaching of intellectual property. The first is identifying business assets. Understanding intellectual property law and institutions is critical in identifying the sources of value for a business and the types of business assets which can be the basis for realizing value. Identifying what is a patent, copyright, and trademark as well as what can be protected by patent, copyright, or trademark is foundational for recognizing and valuing business assets. The second skill is understanding how background common and statutory law serve as defaults for contractual negotiation in some instances and as immutable rules in others. In other words, law shapes the contours of a business asset and affects its value. The final skill is negotiating rights over intellectual property in order to realize and transfer these sources of value and to avoid litigation over these assets. Intellectual property provides a basis for teaching business planning and organization skills.
Today's post highlights the overlap between intellectual property and the transactional curriculum in law. Tomorrow, I discuss how this overlap can be implemented in the curriculum.
Then, something changed in the 1990’s. The field received a lot more attention at the domestic and international levels, perhaps out of greater concern with the need to promote innovation and economic growth, perhaps out of industry pressures as certain high technology industries expanded economically and then politically, or perhaps out of the move to privatize and liberalize legal systems, whether the shift from the New Deal paradigm in the United States or the shift towards more liberal political and economic regimes in certain developing countries. Intellectual property became hot, all schools starting expanding in this area (albeit at different rates) and much academic inquiry focused on intellectual property law and policy. The field obtained constitutional valence both through an increased focus on constitutional law and norms in intellectual property and through a recognition that intellectual property law may perhaps be constitutive of (i.e. the foundation for) the law and the economy more broadly. This expansion seemed to reach a plateau with some big Supreme Court defeats for the academy (Eldred v Ashcroft, Universal Studios v Grokster) and increased legislative efforts which took intellectual property out of the realm of academic theory and back into the dealings of the Beltway world. Intellectual property has become normalized with many voices formulating arguments within an established academic frame of ownership, on the one hand, and access, on the other.
Now, we are talking about IP 3.0, and my sense is that this recent stage of intellectual property is about recognizing and developing the transactional practice of intellectual property, as opposed to defining the rights structure of intellectual property within a set of constitutional norms. At one level, IP 3.0 is about ordinary practice: IP is a business asset, a source of value, and we need to understand how this set of rights called intellectual property is transferred and restructured through transactions within and between firms. What is relevant in IP study is how these rights are licensed, acquired, and transformed into value. In some ways, this progression is the logical one from constitutional IP: once foundational rights are established, the next step is to see how they are practically administered and used. At another level, IP 3.0 reflects some dissatisfaction with IP 2.0. The constitutionalization of IP failed. Eldred was a disappointing decision with the Court’s seeming to conclude that Congress can pretty much do what it wants as far as copyright (and patent) legislation. If Congress pulls the strings, then IP constituencies would have to learn how to play Beltway politics to move the game in their favor. Grokster, perhaps, solidified this sense of failure (at least symbolically; the case really may not be much of a watershed practically) by revealing that Sony, the keystone of copyright fair use, may not be that protective or limiting on copyright after all. If the cathedral fails to stand, then we are left to play with the individual stones.
The latter scenario is overly pessimistic. The shift to considering IP as a business asset, the core of IP 3.0, may be an acknowledgement that true IP reform can best occur through better IP practice. If we want to promote greater use and dissemination of protected works, then creating legal rules of protection may be wholly inadequate, especially if rights protective of users and employees can readily be transacted away. Focus instead on the transactions themselves: develop a richer set of licensing terms, understand how these terms can be disseminated and then enforced by the courts, consider doctrines that shape transactional practice (such as the first sale doctrine in the recent Supreme Court decision in Quanta v LG Electronics), think about the life of intellectual property in the world of commerce, and see how the wheels of commerce can shape the scope of intellectual property rights.
Hence the transactional turn in intellectual property which I am seeing in current intellectual property study. This vision is not myopia on my part since I am the co-author of a casebook on Intellectual Property in Business Organizations. I see this turn in the scholarship of many IP colleagues, in the conferences on entrepreneurship, in the curriculum of some law schools, and in the development of case law, particularly the big Supreme Court IP decisions since 2005 (eBay, Independent Ink, KSR, Quanta). I will discuss the implications of this transactional turn for IP policy towards the end of this series of posts. But I would first like to explore what this transactional turn entails, looking at the important overlap between intellectual property and transactional practice tomorrow and then at the details of a transactional intellectual property course the next day.
Thanks to Gordon for the invitation to guestblog this week. Actually, I am not sure if he offered or I volunteered earlier on this year, but in any case here I am, quite ready and excited to share my thoughts with the world (or our small part of it).
I plan to post on the specific topic of integrating intellectual property issues in a transactional law school curriculum.
Everyone has some sense of what intellectual property is about (the set of rules and institutions designed to promote innovation and creativity in society), but the term transactional law may be less clear. The term covers, at the least, traditional business law courses such as Business Enterprise (or Bus Orgs or Business Associations, or some similar term), Securities, Mergers & Acquisitions, and related doctrinal areas. More broadly, the transactional law curriculum would also include skills-focused courses such as negotiation, contract drafting, and deal-making. So described, what I am calling the transactional law curriculum includes clinical and doctrinal courses that are geared towards developing transactional skill sets, both through learning the details of transactional practice and through understanding legal relationships as transactional (as opposed to adversarial).
Over the next few days I will be making the case for the importance of intellectual property in a transactional law curriculum and for thinking of intellectual property in transactional terms. I will make these points through the following series of posts: (1) the transactional turn in intellectual property, (2) the intersection of intellectual property and transactional law, (3) what a transactional intellectual property law course would look like and (4) the policy and conceptual implications of the transactional turn.
The next few blogs can be viewed as a preview of a presentation by me and my two co-authors (Richard Gruner and Jay Kesan) at the 2009 AALS Midyear Business Association to be held next June. (Of course, all ideas here are my own and do not represent the opinions of my co-authors.)
The W$J has an interesting story today about the Allied Security Trust. A response to the recent explosion in patent litigation, the AST will "buy up key intellectual property before it falls into the hands of parties that could use it against them." More detail:
The new Allied Security Trust aims to buy patents that others might use to bring infringement claims against its members. Companies will pay roughly $250,000 to join the group and will each put about $5 million into escrow with the organization, to go toward future patent purchases....
TMC.net points out the irony of Verizon as a founding member of the AST, when Verizon sued Vonage (and others, it turns out) for patent infringement. Verizon won that lawsuit, by the way, and Vonage ultimately agree to pay Verizon $120 million. Obviously, Verizon would argue that the AST is designed to prevent unmeritorious litigation, and that seems fair. Still ...
UPDATE: In an unrelated story, GigaOM spots more irony, this time from AT&T.
Google is the assignee of this patent, filed last week:
At a client, a video is received. The video includes one or more advertisement slots. The video is played back to a user. During the playback of the video, an impending advertisement slot is detected. One or more advertisements are requested for placement in the advertisement slot. The one or more advertisements are received and placed in the advertisement slot.
Is this the future of YouTube? From a quick browse, I can't tell how this would differ from the television playbacks, which are now routine.
[UPDATED] In our continuing effort to keep you apprised of developments on the frontiers of law and cheese, I note today's decision of the European Court of Justice holding that ["Parmesan" is not a generic product name.] "Parmigiano Reggiano" is a protected designation of origin [and only authentic "Parmigiano Reggiano" can be sold under the name "Parmesan."] According to the BBC story, authentic Parmesan is "made by fewer than 450 cheese-makers close to the Po River in northern Italy." In honor of the decision, take a look at this promotional video with a catchy jingle ...