Issue #20-2 | January 17, 2013

USPTO director responds to criticism of
software patents

The outgoing director of the USPTO, David Kappos, responded to critics of software patents in a recent speech. “To the commentators declaring the system is ‘broken,’ I say, ‘Give it a rest already, and give the AIA a chance to work.’ Give it a chance to even get started. But we’re not done. Not nearly,” Kappos insisted.

“Patent protection is every bit as well-deserved for software-implemented innovation as for [other technological innovations],” Kappos stated. However, he also acknowledged that software patent protection must be “properly tailored in scope, so that programmers can write code without fear of unfounded accusations of infringement.”

Mark Lemley of Stanford University offers a way to perform the “tailoring” Kappos is calling for. Lemley suggests there is a current gulf in software patents between what the invention actually is and the broad claims in patent applications. Lemley reminds us the problem is not new and was addressed by the U.S. Supreme Court and in the patent law rewrite of 1952, in which Congress allowed patent claims to use functional language to describe an element of their invention. The disconnect here is that use of functional language in a claim does “not permit the patentee to own the function itself.…”

Of course, the crack in the dam has now grown to a flood. Broader claims have been allowed, and inventors many times now claim “not only what they invented, but what it does.” Lemley’s solution:

By applying the rules of means-plus-function claims to software, we could begin to get a handle on the software patent issue. Indeed, ending functional claiming may be the only way out of the software patent morass. As long as patentees can claim to own the problem itself—not just the solution—defining better boundaries and invalidating obvious patents won’t do much to make the patent mess go away.

There is a notice in the Federal Register indicating the USPTO recognizes there is a problem with the quality of software patents. It is looking for feedback in the form of comments, and there will be two roundtable events, one in Silicon Valley and one in New York City, both in February; the first topic relates to how to improve clarity of claim boundaries that define the scope of patent protection for claims that use functional language. Our guess is Professor Lemley will have a front-row seat.

Court says the legal lives of some patents have been miscalculated

Patent law allows for a compensating adjustment in the patent term for burdensome USPTO delays and applicant-caused delays in reviewing patent applications. In Exelixis, Inc. v. Kappos, the U.S. District Court for the Eastern District of Virginia was asked whether requests for continued examination (RCEs) filed during the prosecution of a patent application creates an applicant-caused delay, subject to term penalties.

The court found that an RCE filed after the three-year imposed deadline on USPTO should have no impact on patent term adjustment. It means USPTO had been miscalculating some patent terms. The impact of this can be staggering with some giant, income-producing patents, such as those in big pharma.

USPTO may appeal this, but valuators in due diligence solving for patent terms should search for whether any RCE was filed after three years of the application file date and if that filing negatively impacted a USPTO calculation (adjustment) of the legal life of the patent.

Technology marketed with patent pending protection has limited use for valuation

Patent pending only means a provisional patent application has been filed. Provisional patent applications have their limitations, according to Richard Mark Blank, a patent attorney in New York City:

  1. Provisional patent applications are not examined on their merits; they give no indication as to the eventual patentability of the invention;
  2. Provisional patent applications may not be filed for design patents;
  3. A provisional patent application automatically expires (is deemed abandoned) after 12 months if not followed up by one of two events:
    1. “A corresponding non-provisional patent application for patent entitled to a filing date is filed that claims the benefit of the earlier filed provisional patent application”; or
    2. “A grantable petition under 37 CFR 1.53(c)(3) to convert the provisional patent application into a non-provisional patent application is filed.”

What factors affect the value of IP?

Mark Anderson at IP Draughts discusses the difficulties one encounters in valuing IP and lists the often unpredictable factors that affect that value:

  • The strength of patent claims and other IP;
  • How much of a competitive advantage the IP brings its owner;
  • The size and profitability of the markets for products that are protected by the IP (and whether those products can be brought to market);
  • How the IP will be used (e.g., to improve products, as a barrier to competitive entry, or defensively, as a cross-licensing tool); and
  • How rich and determined are other parties that may wish to challenge the IP.

Add to that how rich and determined is the IP owner to fully defend the property rights. These factors are thoroughly discussed in a valuation context in BVR’s Guide to Intellectual Property Valuation, by Mike Pellegrino.

Legal checklist for a trademark portfolio audit is important for valuation as well

An article at JD Supra recommends that if an organization’s management has not performed a trademark(s) audit for a while, it should make doing one a priority in 2013 because trademark audits identify trouble-laden gaps in registration coverage. Here are problem areas a trademark attorney will look for:

  • Ownership of trademarks not properly recorded;
  • Registrations of important marks that are lacking or not current;
  • Registrations covering fewer than all goods/services;
  • Registrations covering fewer than all countries where the trademark is needed;
  • Registrations containing unnecessary disclaimers;
  • Registrations on the Supplemental Register; and
  • Section 15 (incontestability) declarations not filed.

Valuation analysts can ask when the last trademark audit was performed, what the findings were, and if any recommendations were acted upon.

Disney wins U.S. Appeals Court ruling, retains Pooh trademarks

In December, an appeals court (in Stephen Slesinger, Inc. v. Disney Enterprises, Inc., 2011-1593, U.S. Court of Appeals for the Federal Circuit) agreed with the United States Patent and Trademark Office (USPTO) and tossed out ownership challenges to Walt Disney Co.’s trademarks covering Winnie-the-Pooh characters.

Background: This has been a decades-long conflict. A.A. Milne wrote the Pooh books and transferred merchandising rights to Stephen Slesinger in 1930. However, Disney successfully argued to a federal court in 2009 that Slesinger’s widow licensed the rights to Disney in 1961. Now, the Federal Circuit has used that 2009 ruling to uphold USPTO’s decision to bar the Slesinger company from seeking to cancel the Pooh marks.

What was at stake? According to Ira Mayer in The Licensing Letter, Disney is the number-one player in the world in character licensing, and Pooh is a billion-dollar property.

Damodaran on the ‘foolhardy versus rational’ value of goodwill

“There is no asset on a company’s balance sheet that wreaks more havoc on valuation and good sense than goodwill,” writes Prof. Aswath Damodaran (NYU Stern School of Business) in his blog. “The first problem with goodwill is that it sounds good, and when something sounds good, people feel the urge to pay for it. The second problem is that, notwithstanding claims to the contrary, it is not an asset but a plug variable that measures everything and nothing at the same time.”

Recent changes to the financial accounting standards related to valuing goodwill impairment have also created “jobs … for accountants & appraisers, since their services are now required both at the time of the acquisition (to reappraise the value of the existing assets) and each period thereafter (to assess target company values),” the professor adds. “As is the case with most accounting rules, the rules have [also] obscured the principles of what the changes were meant to accomplish: create more transparency for investors about acquisition costs and more accountability for bad acquisitions.”

A tongue-in-cheek proposal. In prior blog posts, Damodaran has noted that in about 55% of acquisitions, the stock price of the acquiring company will drop. If this price decline equals the market’s collective judgment of an overpayment, then “why not break goodwill down into two components: the market ‘correction’ can be called foolhardy goodwill and the rest can be rational goodwill,” the professor suggests. Thus, if an acquirer pays $12 billion for a company with an adjusted book value of $4 billion and sees its market cap drop by $3 billion on the announcement, then the balance sheet should show $3 billion in foolhardy goodwill and $5 billion in rational goodwill. With hindsight, both types may require impairment, but Damodaran would argue “that firms—their top managers and bankers—should be held much more accountable for failures on the former, because they chose to do the acquisition in the face of investor opposition.”

The purchase price allocation accounting for the assets in Avis’s acquisition of ZipCar should be interesting

Speaking of goodwill: according to its latest 10-Q, ZipCar had total assets of $429.6 million as of Sept. 31, 2012. Of that, $107.4 million is designated as goodwill and $3.6 million represents intangible assets remaining from various acquisitions (noncompete agreements, trade names, customer relationships, technology, etc.). Avis is paying approximately $500 million for ZipCar; there is an additional $70.4 million in homegrown intangibles and goodwill that Avis is buying. So 36% of the value of the deal will be allocated to intangibles. Presumably the transferring customer relationships are unique to Avis, as is the different business model.

Kodak accepts $527M bid for digital imaging patents

Mike Mireles at IP Finance explained the details behind the Kodak patent sale.
“After an auction with four bidders, the bankrupt Kodak accepted a bid and sold its two portfolios of [approximately 1,100] digital imaging related patents for $527 million to Intellectual Ventures Fund 83 LLC,” a fund representing interests of HTC, Google, Amazon, RIM, Huawei, Fugifilm, Shutterfly, Apple, and Samsung.

The complicated transaction included “a sale of the patent assets, a license of the patents, the assumption of patent cross license agreements with Fujifilm and the settlement of claims involving some of the patents.” Assuming approval by the bankruptcy court, Kodak will retain a license to use the digital imaging portfolio patents in its future businesses, including those that are still for sale (film and document imaging).

Round 1 of the ‘appstore’ controversy goes to Amazon (and Microsoft … and Google …)

Earlier this month, in a victory for common sense, the U.S. District Court for the Northern District of California found that Amazon’s use of the term “appstore” in conjunction with sales of non-Apple devices did not constitute false advertising.

Still pending is Apple’s assertion that Amazon’s use of “appstore” constitutes trademark infringement, false designation of origin and false description under Section 43(a) of the Lanham Act, and dilution under Section 43(c).

Also still on hold is Microsoft’s opposition hearing to Apple’s “App Store” trademark application, as the Trademark Trials and Appeals Board (TTAB) awaits all of the results of the Apple v. Amazon litigation.


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