Category: Intellectual Property

Can We Talk? Doing So Significantly Increases Early Allowance of Patent Applications

Posted this week at the National Law Review by James E. Bradley, Jeffrey S. Whittle, and Glenn M. Strapp of Bracewell & Giuliani LLP – a nice overview of the United States Patent Office (“Patent Office”) data which shows that by talking to a patent examiner prior to a first official action, an applicant is three (3) times more likely to get a first action allowance of a patent application.

Talking to patent examiners often helps advance the examination of a patent application.  Now United States Patent Office (“Patent Office”) data shows that by talking to a patent examiner prior to a first official action, an applicant is three (3) times more likely to get a first action allowance of a patent application. A newly expanded Patent Office program makes it easier to talk to the Examiner prior to initial examination.1 The heart of the program is an “Examiner Interview” that takes place before the examiner issues a first official action, which allows the examiner and patent applicant to discuss the application, identify allowable patent claims, and shave months or years off of the time from filing of an application to receipt of an issued patent.

The new program, officially called the Full First Action Interview Pilot Program, is not entirely new. The First Action Interview Pilot Program began in April, 2008, and this initial program transitioned into the Enhanced First Action Interview Pilot Program in October, 2009. Those programs were limited to patent applications in specific technologies, or “art units,” within the Patent Office.2  Under the new full program, patent applications in all art units are eligible, provided that the applications meet other specific requirements. Unlike the previous interview pilot programs, the full program does not limit eligibility to patent applications filed before a specific date.3 The full program, however, still is a pilot program and is scheduled to continue only until May 16, 2012.4 The one-year period will give the Patent Office time to collect more data on the benefits of the full program.

A brief summary of the patent prosecution process helps illustrate where the First Action Interview Program can reduce the patent prosecution time. In a conventional patent application cycle, the patent applicant submits an application to the Patent Office, and the application sits in a queue until the examiner evaluates the patentability of the claims. If the examiner considers one or more claims not to be patentable, the examiner issues a first official action. The applicant can respond by arguing the merits of the claims based on how the claims currently exist in the application or by amending the claims in the application to make them patentable. The examiner, in turn, can either allow the claims or issue a subsequent (non-final or final) official action. Under the best of circumstances, it can take months for the Patent Office to issue a subsequent official action, and the response from the applicant can take weeks or months. These delays associated with subsequent official actions can be reduced or eliminated by the First Action Interview Program.5

The heart of the First Action Interview Program is an interview between the applicant and the examiner in which the examiner and the applicant can talk about the application before the examiner issues the first official action. Participants in the earlier First Action Interview Programs have found the program beneficial because it gives the applicant the opportunity to resolve patentability issues one-on-one with the examiner at the beginning of the patent prosecution process.6 When the applicant and the examiner communicate, i.e., by talking one-on-one, before the first official action, much of the patent prosecution activity that would normally follow the first official action can be reduced. Statistics published by the Patent Office indicate that resolving issues before the first official action can lead to early allowance of the patent application. Indeed, under the First Action Interview Pilot Programs, approximately 34% of all applications were allowed on the merits on the first action, compared to about 11% of all applications not involved in the program.7

Existing Patent Office rules already allow an applicant to request an examiner interview before the first official action. Unfortunately, those interviews are granted at the examiner’s discretion, and the examiner may require the applicant to show why such an interview is justified. Under the First Action Interview Program, the interview is granted on a non-discretionary basis, provided the applicant follows specific procedures defined by the program. To qualify for the program, the applicant must file the request for interview before May 16, 2012 and meet each of the following requirements:

  1. The application must be a non-reissue, non-provisional utility application or an international application that has entered a national stage;
  2. The application must contain three or fewer independent claims and 20 or fewer total claims;
  3. The claims must be directed to a single invention;8
  4. The request for a first action interview must be filed electronically; and
  5. The request must be filed before a first official action on the merits.

If the application meets these requirements, the examiner will conduct the usual prior art search and issue a Pre-Interview Communication to the applicant. That communication will include citations to prior art references and an identification of any rejections of or objections to the claims. The applicant then has one month to schedule an interview with the examiner and submit any proposed amendments or remarks, or else file a request not to have the first action interview with the examiner. At the interview, the applicant and the examiner can talk about the prior art and try to identify the broadest allowable patent claims.  After the interview, the examiner will (hopefully) issue a Notice of Allowability or a First Action Interview Office Action. There is no additional fee required to participate in the First Action Interview Program. Therefore, it is a cost effective way to reduce the patent prosecution time by potentially reducing the time from the first official action to the issuance of the patent.

Because the Full First Action Interview Pilot Program is a pilot program and is scheduled to end on May 16, 2012, those interested in participating in the program should request an interview without delay.

___________________

1 “Full First Action Interview Pilot Program,” Kappos, David J., Director of the United States Patent and Trademark Office, May 6, 2011, available here(opens in a new window).
2 Art Units 1610, 1795, 2150, 2160, 2440, 2450, 2617, 2811-2815, 2818, 2822-2823, 2826, 2829, 2891-2895, 3671, 3672, 3673, 3676, 3677, 3679, 3735, 3736, 3737, 3777, 3768, 3739, 3762, 3766, and 3769. Date restrictions further limited eligible applications within these art units. Enhanced First Action Interview Pilot Program, available here.
3 The Enhanced First Action Interview Program, which ended April 1, 2011, was limited to applications filed before a specific date. The specific dates were different for each of the 19 eligible art units, and ranged from Aug. 1, 2006 and May 1, 2008. Id.
4 Applicants that apply and meet all requirements will be able to participate in the program regardless of whether the interview and first official action occur after the May 16, 2012 end-date of the program. See Frequently Asked Questions Regarding The First Action Interview (FAI) Pilot Program, available here(opens in a new window).
5 In 2010, Average First Action Pendency, the average time from filing a patent application until the first official action, was 25.7 months. The Average Total Pendency, the average time from filing until the application issued as a patent or abandoned, was 35.3 months.
http://www.uspto.gov/about/stratplan/ar/2010/mda_02_03.html
6 “Full First Action Interview Pilot Program,” Kappos, David J., Director of the United States Patent and Trademark Office, May 6, 2011, available here(opens in a new window).
7 USPTO Announces Full First Action Interview Pilot Program, May 16, 2011.
8 If the Examiner finds patent claims are directed to more than one invention and issues a restriction requirement, the Applicant must elect claims for a single invention without traverse. Failure to elect without traverse disqualifies the application from the First Action Interview Program.

© 2011 Bracewell & Giuliani LLP

Appeals Court Overturns Stem Cell Ban

Recently posted at the National Law Review  by WarrenWoessner of  Schwegman, Lundberg & Woessner, P.A.– an update in the U.S. Court of Appeals for the D.C. Circuit concerning research using human embryonic stem cells.

On April 29th, in Sherley v. Sebelius, the U.S. Court of Appeals for the D.C. Cir., overturned the injunction imposed by the district court, which had blocked the implementation of the 2009 NIH Guidelines on finding research using human embryonic stem cells. 74 Fed. Reg. 32170(2009). The Guidelines, in turn, had been formulated to implement President Obama’s executive order 13505 that lifted President Bush’s executive order banning such funding. The suit, brought by two researchers working with adult stem cells, argued that the Guidelines were in conflict with the 1996 Dickey-Wicker Act, which banned funding for both research that would create human embryos for research purposes or would destroy human embryos. For more background, see my post of Sept. 1, 2010.

The Court found that preliminary injunction was improperly granted “becauseDickey-Wicker is ambiguous and the NIH seems reasonably to have concluded that, although [D-W] bars funding for the destructive act of deriving an ESC from an embryo, it does not prohibit funding a research project in which an ESC will be used.”  In other words, if some other unfunded entity disassembles an unwanted embryo obtained with informed consent of the donor from an in vitro fertilization clinic and provides the ESCs to a researcher, the researcher can obtain federal funding to study them. Since establishing the Guidelines, the NIH has approved additional ESC lines for federal funding. While this is good news for researchers working with embryonic stem cell lines approved under the NIH Guidelines, the underlying suit will continue to threaten the administration’s more liberal view of stem cell research.

© 2011 Schwegman, Lundberg & Woessner, P.A. All Rights Reserved.

“Innocent” Criminals: Criminal Copyright Infringement, Willfulness and Fair Use

The National Law Review would like to congratulate Charles Francis Scott of  Pace University School of Law  one of our Spring 2011 Student Legal Writing Contest Winners.  Charles’ topic is the “willfullness”  prong of criminal copyright infringement:    

I. INTRODUCTION

            On November 17, 2010, Gawker Media LLC published on its popular blog, Gawker, excerpts of Sarah Palin’s unreleased book America By Heart: Reflections on Family, Faith and Flag.[1]  In response to the release, Palin tweeted, “Isn’t that illegal?”[2]  Defending itself, Gawker mockingly wrote to Palin in a post titled Sarah Palin is Mad at Us for Leaking Pages From Her Book, telling her to “take a moment to familiarize yourself with the law.  . . . Or skip the totally boring reading and call one of your lawyers.  They’ll walk you through it” and attached pages on the copyright law’s fair use doctrine.[3]  After Gawker refused to remove the excerpts from its blog, Palin’s publisher, HarperCollins, filed suit against Gawker and obtained a preliminary injunction on November 20, 2010.[4]  By November 23, 2010, Gawker agreed to keep the material off its website for good and settled the suit with HarperCollins.[5]  Ignoring the underlying political and ideological tension between Gawker and Palin,[6] this incident highlights a very important issue: the complex and commonly misunderstood fair use doctrine. 

            The fair use doctrine has been a large source of legal uncertainty and, as a result, has led many civil copyright infringement suits to settle out of court.[7]  While it might be desirable that civil suits are settled out of court for judicial efficiency, the doctrine’s uncertainty poses a problem when fair use is used as an affirmative defense against criminal charges of copyright infringement under 17 U.S.C. § 506.[8]  In order to convict an individual of criminal infringement, the individual must have willfully infringed a copyright (1) for commercial or financial gain; (2) reproducing or distributing copies with a total retail value over $1000; or (3) making an unpublished work publicly available on a computer.[9]  The fair use doctrine states that there are certain uses, subject to a four factor balance test, where an individual can use or copy a copyrighted work without infringing.[10]  The fair use defense would then argue that either (1) the use was not infringing because it was a fair use; or (2) the individual did not willfully infringe because he or she believed the use was a fair use. 

            A problem arises when an individual believes in good faith his or her copying is a fair use but does not pass the factor test and is actually infringing.  Depending on the courts interpretation of “willfully,” this good faith, but mistaken belief, can be the difference between conviction and freedom.  As illustrated in the Gawker-Palin example, even sophisticated parties, who presumptively have personal legal counsel, misinterpret the bounds of the fair use doctrine.  If sophisticated individuals find difficulty in the nuances of the doctrine, what can be expected of the unsophisticated individual?  Since the mens rea of willfully is attached to a section 506(a) charge, barring a bad faith fair use defense, will a fair use defense always absolve a defendant?

            This article will look at the fair use doctrine as an affirmative defense against the criminal charge of copyright infringement under section 506(a) and whether it serves as a suitable defense within the statute, or whether the statute needs to be revised to avoid the problems created by the fair use doctrine.  Part II will give a brief background of section 506(a) for a charge of criminal copyright infringement and analyze the case law defining “willfulness” generally and its application to the mens rea of section 506(a).  Part III will review the fair use doctrine and the issues created when fair use is used as a defense.  Part IV will briefly examine certain policy considerations in relation to criminal copyright infringement.  Finally, this article will conclude that the fair use doctrine is too vague of a doctrine to be an effective defense and may reduce section 506(a) to a “toothless” statute.[11]  As a result, the statute should be amended by increasing the monetary criminal trigger from $1,000 to at least $25,000 and the term “willfully” needs to be defined in accordance with the majority view.

II.  § 506(a) BACKGROUND AND WILLFULNESS STANDARD

            Criminal copyright infringement is codified under 17 U.S.C. § 506(a) and the punishment guidelines is under 18 U.S.C. § 2319.[12]  Under section 506(a), criminal copyright infringement is anyone who willfully infringes a copyright (1) for commercial or financial gain; (2) reproducing or distributing copies with a total retail value over $1000; or (3) making an unpublished work publicly available on a computer if that person knew the work was intended for commercial distribution.[13]  To prove willful infringement, evidence of reproduction or distribution of a copyright work will not be sufficient.[14] The government has the burden to prove all four elements which are: (1) a valid copyright; (2) infringement of that copyright; (3) willfulness; and (4) one of the qualifying violations of section 506(a)(1)(A)-(C).[15]  The first two elements are the same that must be shown in a civil infringement case.[16]  The difference between civil and criminal infringement is the addition of the third and fourth element. 

            Unlike civil infringement, which is a strict liability offense, criminal infringement requires that the government prove the individual acted willfully.    However, the definition of “willfulness” has been left up to the courts’ interpretation since Congress failed to define it.[17]  Unfortunately, “willfulness” has long been a thorn in court’s side when used in the context of criminal law.[18]  It was not untilUnited States v. Moran[19]that the court was confronted with interpreting the vague term’s meaning under section 506(a).

            In Moran, Moran was a full-time police officer and owner of a “mom and pop” video rental store.[20]  Moran made a practice of purchasing legal videos, making a single duplicate of the original, renting the copy, and keeping the original to “insure” the video from theft or damage.[21]  Moran testified that he believed his actions were legal.[22]  He argued that “the word ‘willful’ implies the kind of specific intent . . . which is to say, a voluntary, intentional violation of a known legal duty.”[23]  The government argued that willful only meant “an intent to copy and not to infringe.”[24]  In coming to its decision, the court looked to a prior Supreme Court case dealing with the term “willfully” in a criminal statute.

            In Cheek v. United States,[25] Cheek was charged with willfully failing to file federal income taxes and willfully attempting to evade his taxes.[26]  Cheek claimed that he believed the tax code was unconstitutional and therefore believed he did not have to pay taxes.[27]  The court held that while the “general rule that ignorance of the law or a mistake of law is no defense to criminal prosecution,” an exception is made when the term “willfully” is used in complex criminal statutes.[28]  Due to the complexity of the tax code, “willfulness . . . simply means a voluntary, intentional violation of a known legal duty.”[29]  The government then has the burden to prove that the defendant knew of the duty and voluntarily and intentionally violated it.[30]  Therefore, “a good faith belief that one is not violating the law negates willfulness, whether or not the claimed belief or misunderstanding is objectively reasonable.”[31]

       Using the reasoning of Cheek, the Moran court was persuaded that “willfully” carried the same meaning under 17 U.S.C. § 506(a) and was similarly exempt from the presumption that ignorance of the law or mistake of the law is no defense.[32]  Accordingly, the court held that Moran’s lack of sophistication, in addition to the totality of the circumstances, negated the willfulness requirement.[33] However, it should be noted, the lack of willfulness does not eliminate civil liability for copyright infringement.[34]

      The holding in Moran has since become the majority view, while the minority view interprets “willfully” as only the intent to copy.[35]  These two views are drastically different; from who carries the burden of proof to the consequence facing an individual who believed his use was protected by fair use.  Unlike the clear complexity of the tax code, the fair use doctrine appears straight-forward but is deceptively complex.[36]  Faced with this complexity, the statute should be amended to define “willfully” in accordance with the majority view and create consistency throughout the courts.

      The outcomes of a fair use balancing test can be unpredictable and creates uncertainty in its application.[37]  Applying the minor’s view, “innocent” infringers face the possibility of being labeled criminals.  By adopting the majority’s definition of “willfully”, prosecution will have the burden of showing that an individual has themens rea warranting criminal punishment.  Additionally, by codifying the majority’s definition, there will be minimal disruption to current law.

III.  FAIR USE

      Section 107 of the Copyright Act allows for the use of a copyrighted work for limited purposes such as “criticism, comment, news reporting, teaching . . ., scholarship, or research.”[38]  Whether that use is eligible for the fair use defense depends on the court’s evaluation of four factors set forth in section 107.[39]These four factors are: (1) the purpose and character of the use (i.e. whether such use is of a commercial nature or for nonprofit purposes); (2) the nature of the copyright (i.e. whether the work is fact based or creative); (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.[40]  While the courts have held that all the factors must be examined and weighed together, the fourth factor has been given the most weight.[41]

      This first factor of the fair use doctrine is usually split into two separate questions.  The first question asks whether the use is “transformative,” meaning, whether it “supersede[s] the objects’ of the original creation.”[42]  The second question asks whether the use is “commercial.”[43]  Since “transformative” and “commercial” are general terms and are susceptible to various interpretations, the first factor can be confusing.  In Sony Corp. of America v. Universal City Studios,[44]the court acknowledged that time-shifting[45] was an acceptable “private, noncommercial” transformative use “in the home”.[46]  However, when compared to BMG Music v. Gonzalez,[47]which held that Gonzalez’s music downloading on a try-before-you-buy basis was a commercial use, the line between commercial and noncommercial, especially for private, personal use, becomes hazy.  Both seem like private, noncommercial uses in the home for personal use, but Gonzalez’s actions supplant her actually purchasing music.[48]  This creates a fine distinction that the unsophisticated individual could misunderstand.  What exactly is commercial if personal use can be both commercial and noncommercial?  Is loading potentially infringing content on YouTube or a similar streaming website commercial if the user does not have a financial interest in the website?[49]

       If an individual posts a clip to his blog or YouTube of a scene from his favorite TV show, saying just that, he could believe he is protected by the fair use doctrine.  He believes the use is noncommercial because he’s not receiving any money from it and he is only using a small portion of the show.  He could believe that he’s making commentary on the piece by saying it is his favorite piece.  Finally, since he is not making any money from posting the video, he does not believe he has any effect on the copyrighted work’s market.  Within a 180 day period it is very possible that the video is viewed well over 100,000 times.  The $1000 or even the $2500 threshold under section 506(a) could easily be attained. 

     It is feasible that a court could find fair use under these facts or slightly different facts because of the variables of the balancing test.[50]  One commentator likened the fair use balancing test to “balancing a dinner plate on the pointy end of a nail.”[51]  Since each evaluation of fair use is fact specific, and all the factors vary in weight depending on those facts, the outcomes are sometimes unpredictable.  As such, the unpredictability of fair use seems to breed fertile ground for an individual to make a good faith mistake in evaluating his or her actions.

      Depending on the district an individual is in, and the interpretation of “willfulness” observed, this mistake can be the difference between walking away a free man or going away a felon.  If the court is within the majority, an individual can theoretically always negate “willfully,” absent evidence that the individual’s belief was not in good faith.  “If a person can claim ‘fair use’ and escape criminal penalties, then the law has no teeth since alleged infringers will invariably assert this defense.”[52]  Alternatively, if the court is within the minority, an individual will not be allowed a mistake defense and will only avoid conviction if the fair use analysis is successful.  These two outcomes are polar opposites; one is too lenient while the other is too severe. 

IV. POLICY CONSIDERATIONS

            Is the infringement of $1000 worth of copyrighted material worth labeling that individual a felon or criminal, even if he did not believe his actions were illegal?[53]  “Felon is a word that should be reserved for individuals committing crimes that damage a victim beyond repair through civil means.”[54] Civil remedies are more suitable in such a case. Incarceration for up to three years for the infringement of $2500 worth of copyrighted material[55] is excessive when civil remedies are available to recover those damages.  If the basis of enacting criminal laws are for “deterring future crimes, stigmatizing offenders, expressing community values, extracting retribution, reforming the offender, and so on,”[56]what are the “retributive function[s] . . . these statutes convey?”[57]  If the offender does not know his actions are illegal, the statute does not achieve these goals.  Furthermore, public opinion does not believe the punishment fits the crime in such low level infringement, as evidenced by the outcry over a Twilight fan’s arrest for taping a birthday party during a viewing of the film “New Moon.”[58]

            Additionally, the cost attributed to the enforcement and incarceration of such an offender is far too high.  Beyond the cost of prosecution, the costs of incarcerating the offender far exceeds the low infringing $2500 threshold.  Based on California’s 2008-2009 Annual Costs to Incarcerate an Inmate in Prison, the average cost per inmate per year is about $47,000.[59]  Theoretically, for a three year sentence, the government would be paying over $140,000 of taxpayer money to incarcerate a non-violent criminal for a $2500 infringement.  Additionally, the non-violent criminal would now be exposed to the dangers and violence inherent in prison.[60]

V. CONCLUSION

       While these low threshold cases with fair use issues are typically not prosecuted,[61]charges are still filed.[62]  The statute has the ability to make criminals out of people that do not know their actions are illegal or believe that they are legal.  By raising the threshold of section 506(a)(1)(B) to at least $25,000, the statute would be better able to avoid prosecution of “innocent” infringers.  The other subsections of 506 would still allow for punishment of individuals selling infringing materials for personal financial gain and individuals distributing unpublished material prior to commercial releases (i.e. leaking music albums, movies, or books).  With these two other options available, raising the threshold would not make prosecution any more difficult. 

      Finally, “willfully” needs to be defined in the statute in accordance with the majority view.  One action should not be more or less culpable depending on the circuit where it is committed.  By defining “willfully” in the statute, all circuits would be in conformity and there would be no discrepancies between courts. Furthermore, if the purpose of the criminal copyright infringement statute is to educate, prevent, and deter, the public needs to know what is and what is not criminal.  For that reason, the definition of “willfully” is necessary to educate and assist in deterring future criminal infringement.

[1]Maureen O’Conner, Sarah Palin’s New Book: Leaked Excerpts, Gawker, (Nov. 17, 2010, 1:50 PM), http://webcache.googleusercontent.com/search?q=cache:TxlEfXyJDUMJ:gawker….

[2]NY Judge Orders Gawker To Pull Palin Book Pages, Associated Press, (Nov. 20, 2010),http://www.google.com/hostednews/ap/article/ALeqM5giNUABDpwRGZATlokAAN5D….

[3]Id.

[4]Sarah Wheaton, Gawker Ordered to Remove Palin Book Excerpts, N.Y. Times, Nov. 20, 2010, 10:45 PM,http://mediadecoder.blogs.nytimes.com/2010/11/20/gawker-ordered-to-remov….

[5]Jeremy E. Peters & Julie Bosman, Palin’s Publisher and Gawker Settle Case, N.Y. Times, November 24, 2010,http://www.nytimes.com/2010/11/25/business/media/25gawker.html?src=busln.

[6]See generally Pareene, Palin: Scared of Asians?, Gawker, (Dec. 4, 2009, 1:39 PM), http://gawker.com/5419113/palin-scared-of-asians; Foster Kamer, Are Sarah and Todd Palin Getting A Divorce?, Gawker, (Aug. 1, 2009),http://gawker.com/5327957/are-sarah-and-todd-palin-getting-a-divorce; John Cook, Please Turn the Governor of Alaska’s Family Into A Television Program. Thank You., Gawker, (Mar. 12, 2009, 11:13 AM),http://gawker.com/5168742/please-turn-the-governor-of-alaskas-family-int….

[7]See generally Diane L. Kilpatrick-Lee, Criminal Copyright Law: Preventing A Clear Danger To The U.S. Economy Or Clearly Preventing The Original Purpose Of Copyright Law?, 14 U. Balt. Intell. Prop. L.J. 87 (2005); Anthony Falzone, Diddy Could Save Sampling, Slate, (Nov. 2, 2007, 7:16 AM),http://www.slate.com/toolbar.aspx?action=print&id=2177238.

[8]17 U.S.C. § 506 (2008).

[9]Id.

[10]17 U.S.C. § 107 (1992).

[11]See generally Ting Ting Wu, The New Criminal Copyright Sanctions: A Toothless Tiger?, 39 IDEA 527 (1999).

[12]18 U.S.C. § 2319 (2008).

[13]17 U.S.C. § 506(a)(1)-(2) (2008).

[14]Id.

[15]See Daniel Newman, Mangmang Cai & Rebecca Heugstenberg, Intellectual Property Crimes, 44 Am. Crim. L. Rev. 693, 717 (2007).

[16]See id. at 718.

[17]§ 506(a)(3).

[18]See Brian P. Heneghan, The Net Act, Fair Use, and Willfulness – Is Congress Making A Scarecrow of the Law?, 1 J. High Tech. L. 27, 34 (2002).  Judge Learned Hand stated that willfulness is “an awful word!  It is one of the most troublesome words that I know.  If I were to have the index purged, ‘willful’ [sic] would lead the rest in spite of its being at the end of the alphabet.” Id. at n64.

[19]757 F. Supp. 1046 (1991).

[20]Id. at 1047.

[21]Id. at 1047-48.

[22]Id. at 1048.

[23]Id.

[24]Id.

[25]498 U.S. 192 (1991).

[26]Id. at 194.

[27]Id. at 195-97.

[28]Id. at 199-200.

[29]Id. at 200.

[30]Id. at 201.

[31]United States v. Moran, 757 F. Supp. 1046, 1049 (1991).

[32]Id.

[33]Id. at 1052.

[34]Kilpatrick-Lee, supra note 7, at 106.

[35]Newman, supra note 14, at 721.

[36]Heneghan, supra note 17, at 35-36.

[37]See infra Part III.

[38]17 U.S.C. § 107 (2007).

[39]Id.

[40]Id. §§ 107(1)-(4).

[41]Campbell v. Acuff-Rose Music Inc., 510 U.S. 569, 578 (1994).

[42]Campbell, 510 U.S. at 584.

[43]17 U.S.C. § 107(1) (2007).  See also Harper & Row, Publishers, Inc. v. Nation Enters., 471 U.S. 539, 562 (1985) (“every commercial use of copyrighted material is presumptively an unfair exploitation of the monopoly privilege that belongs to the owner of the copyright”).

[44]See Sony Corp. of Am. v. Universal City Studios, 464 U.S. 417 (1984).

[45]Time shifting is the act of recording a TV show on a VHS tape for later private viewing.

[46]Id. at 442-43.

[47]430 F.3d 888 (7th Cir. 2005).

[48]Id. at 890.

[49]See generally Michael S. Sawyer, Copyright: Note: Filters, Fair use & Feedback: User-Generated Content Principles and the DMCA, 24 Berkeley Tech, L.J. 363 (2009); Edward Lee, Warming Up To User-Generated Content, 2008 U. Ill. L. Rev. 1459 (2008).

[50]See generally Jeremy Scott, “Leave Them Kids Alone” A Proposed Fair Use Defense For Noncommercial P2P Sharing of Copyrighted Music Files, 3 Fla. Int’l U. L. Rev. 235 (2007).

[51]See Eric Spiegelman, Sarah Palin and Gawker to Debate Freedom and the Constitution, The Awl, (Nov. 22, 2010), http://www.theawl.com/2010/11/sarah-palin-and-gawker-to-debate-freedom-a….

[52]Heneghan, supra note 17, at 36.

[53]17 U.S.C. § 506(a)(1)(B) (2008).

[54]Kilpatrick-Lee, supra note 7, at 117.

[55]18 U.S.C. § 2319(c)(2) (2008).

[56]Geraldine Scott Moohr, The Crime of Copyright Infringement: An Inquiry Based on Morality, Harm, and Criminal Theory, 83 B. U. L. Rev. 731, 748 (2003).

[57]Kilpatrick-Lee, supra note 7, at 118.

[58]The charges were dropped after holding the woman for two days.  SeeShanna Schwarze, ‘New Moon’ Taping May Put Woman In Prison, CNNEntertainment (Dec. 4, 2009, 6:28PM),http://www.cnn.com/2009/SHOWBIZ/Movies/12/04/new.moon.arrest/; Amanda Bell, Charges Against Accused ‘The Twilight Saga: New Moon’ ‘Pirate’ Dropped, examiner.com (Dec. 11, 2009, 4:36PM), http://www.examiner.com/twilight-in-national/charges-against-accused-the… Jacqueline D. Lipton, Coypright’s Twilight Zone: Digital Copyright Lessons From The Vampire Blogosphere, 70 Md. L. Rev. 1, 38-42 (2010).

[59]California’s Nonpartisan Fiscal and Policy Advisor, Legislative Analyst’s Office, California’s 2008-2009 Annual Costs to Incarcerate an Inmate in Prison(2009),http://www.lao.ca.gov/laoapp/laomenus/sections/crim_justice/6_cj_inmatec….

[60]See Heneghan, supra note 17, at 39-43.

[61]Computer Crime and Intellectual Property Section, U.S. Dep’t of Just., Prosecuting Intellectual Property Crimes Manuel 67-68 (2001).

[62]See supra note 57.

© 2011 Charles F. Scott

More Than Just An Algorithm: Reconciling The Necessity For Disaggregating The Business Method, With Bilski’s Abstract Test

The National Law Review would like to congratulate Andrew L. Schwartz of Hofstra Law School one of our Spring 2011 Student Legal Writing Contest Winners.  Andrew’s topic is the business method patent.  

INTRODUCTION

As the airplane’s utility spread to the public sector, the 1940’s witnessed the sky’s transformation into the new highway. Like any new frontier and innovation, there was a need for regulation and legal guidance. Fortunately, property law had covered the topic since the 18th century. Cuius est solum, eius est usque ad coelum et ad inferos, whoever owns the soil, it is theirs up to Heaven and down to Hell.[1]The Supreme Court however did not agree with such dated application.[2]The court reasoned that categorizing air travel with ground travel under current property law would be naive. The two categories possessed different interest and policy consideration. Unification of the two, under traditional property laws, would essentially defeat air travel’s value and purpose. Such application had “no place in the modern world”[3].  The court made it clear that new innovation required new regulation and new legal guidance. Instead of fitting innovation into the law, new laws are created to fit innovation.

To promote, and protect innovation, for years American inventors have relied on the system of intellectual property and the patent system. The patent system, a once humble and optimistic institution, has evolved far beyond its beginnings. When the last patent act was passed over a half a century ago, aspirations were high. The 1950’s saw an innovation boom that inspired some of the most integral foundations for modern technology.[4]  Proponents of the patent system promoted exposure and accessibility for innovation, while discouraging concealment and private use.[5] Assuming the excitement of the era, congress eagerly looked to protect “anything under the sun that is made by man”.[6] However with the eruption of financial and software innovation in recent years, one would be hard-pressed to find the 1950’s anything-and-everything sentiment in today’s patent office.

In the eyes of the patent office, financial and software innovation is commonly referred to as a business method.  Subject to 35 U.S.C §101 and classified under Class 705, a business method patent is “the generic class for apparatus and corresponding methods for performing data processing operations.”[7] Software is a set of logical instructions, intended for a computer, made to perform computations, comparisons and sequential steps in order to process and produce a desired output.[8]Financial innovation, centuries older than software, began as basic mathematical principles.[9] Contemporary financial innovation however, has grown to enormous complexities. Fashioned from a set of multifaceted mathematical algorithms, the innovations have become so advanced that it is near impossible to solve without the aid of a computer.[10] Essentially, in the law’s view, today’s financial innovation is software.[11]

The business method has conflated financial and software innovation under the association of complex algorithms. While under a legal lens software and financial algorithms are near inseparable, the makings and interests of their respective innovations are however quite different. For instance, a large internet corporation may attempt to patent an online shopping method for common consumers;[12] while a large financial firm may attempt to patent a system of asset pooling for large mutual funds.[13] From the components that build the algorithm, to the industries effected by the patents, it is difficult not to acknowledge the distinctions between the two scenarios. The current patent system however does not recognize such distinctions. In both scenarios the algorithms are to be evaluated as business method patents.

Because of the realistic distinctions between financial and software innovation, formulating a cohesive judicial policy for the business method would seem destitute. Patent litigation over the past forty years has been frustrated with judicial attempts to reconcile both financial and software innovations under the business method patent. The most recent efforts in the ongoing business method saga produced the Abstract test for patentability assessment. The Abstract test was created by the Supreme Court’s ruling Bilski v. Kappos.[14] While the test is still in its early stages of development, lower courts have been hard pressed to reconcile financial and software innovation under the business method using the Abstract test.[15]

History has produced an ambiguous interpretation of financial and software innovation that fails to fit the enthusiastic “anything under the sun” patent system of the 1950’s. It is clear that the development of financial and software innovation has outgrown the traditional business method classification. The business method has “no place in the modern world”[16] and needs categorical disaggregation among financial and software innovation. Disaggregation would not only better serve the time and principles that each innovation represents, but simplify the Abstract test while preserving its purpose.

This article will examine the necessity for the disaggregation of the business method.  The first section will evaluate the judicial history and evolution of the business method leading up to the Bilski decision. The second section will discuss the Bilski decision and the Abstract test. The third section will contemplate the current future of the Abstract tests. The last section of the article will discuss how the business method and the Abstract test can be clarified in disaggregating the business method into financial and software innovation.

I.  HISTORY: THE GUIDEPOSTS: 1972-2008

The history of contemporary algorithmic innovation began in the 1970’s when the Supreme Court twice considered business method patents. Both decisions held the innovations unpatenable.  The first decision, Gottschalk v. Benson, was decided in 1972.[17]The Supreme Court considered whether algorithmic based software for converting binary code was  patentable. In a six justice majority, the court held the method unpatenable, unless “in connection with a digital computer”, because it “would wholly pre-empt the mathematical formula and in practical effect would be a patent on the algorithm itself”.[18]The decision confirmed that algorithms, made akin to software by the court, standing alone, were unpatenable subject matter.  [19]

While algorithms alone were unpatenable, the question existed of whether bringing a physical component into the application would preclude a patentability.  Six years after Benson, the Supreme Court returned to the business method issue and addressed such question. InParker v. Flook, the Supreme Court considered whether an algorithmic based method for triggering an alarm system, used to signal irregular conditions in a catalytic conversion process, was patentable.[20]In a seven justice majority, the Court held the innovation unpatenable. Although the alarms inclusion meant the innovation wasn’t wholly algorithmically based, the majority realized the only novel element in Flook’s innovation was the algorithm itself.[21]  It would have appeared that the patent system’s hole had been filled. The courts would not be fooled by crafty lawyering and mirrors attempting to hide an algorithm amongst physical components. After Benson and Flook, it appeared software and algorithms, were to be treated like any other mathematical formula, unpatenable.

Hopes of patenting an algorithm under the business method reemerged only four years later in the Supreme Court case Diamond v. Diehr.[22]Once again an application was presented, part physical, part algorithm. The invention used the Arrhenius Equation to calculate the operation timing on a physical rubber press. As the rubber curing process stood well known in the industry, clearly the only new innovation in the patent application was the algorithm itself.[23]However, in a five justice majority, the application was deemed acceptable. Arguably marking the first time an application containing software was considered statutorily patentable. Although the rulings in Benson and Flook were not overruled by the Diehr decision, it appeared that the physical component ambiguities after Benson had not truly been resolved.

After Diehr, the patent system became a virtual wild west. Floods of “ridiculous and truly absurd” business method applicants were submitted to the patent office.[24]The era was epitomized with a 1994 application from the software titan IBM.[25]The invention set out a group algorithms loaded onto a physical readable storage device. The physical component that was able to pass muster under Benson and Flook, a floppy disk. The application’s approval gained such recognition that it was even endowed its own business method idiom, a Beauregard claim.[26]After dilution of the Flook’s unpatenable ruling, the despondent future of the business method patent herald through the financial and software communities.[27]

The circular timeline of judicial clarification surfaced once again in 1998 with the case of State Street v. Signature Financial Group.[28]The court found Signature Financial’s financial purposed algorithm, one that moved assets into mutual funds to take advantage of tax benefits, to be patentable.   The State Street holding marked two significant chapters in business method history. The first was the court’s explicit recognition of the business method patent.[29]The court found that such a category was no less patentable than any other subject matter under Section 101. State Street’s judicial endorsement of the business method patent, once again, propagated a flood of financial and software patent applications.[30]The second major significance of the State Street decision was in the court’s clarification of business method eligibility. The court held that the new test for eligibility was to be the Useful, Concrete and Tangible Result test.  Although the test could hardly be awarded a bright line denomination, it marked the first judicial canon to reconcile Benson, Flook and Diehr. However, despite the court’s best efforts, the test still granted several questionable patents approval, many lacking any hint of a physical component.[31]

II. CREATION OF THE ABSTRACT TEST: IN RE BILSKI & BILSKI V. KAPPOS

Ten years after the State Street decision, judicial clarification poignantly returned to the Federal Court of Appeals. Finding an opportunity to reevaluate its holding in State Street and its significances over the past ten years, the court, sitting en banc, adjudicated In Re Bilski.[32]The court’s holding not only rejected State Street’s Useful, Concrete and Tangible Result test that had reigned supreme for ten years, but went as far to replace it with a new test for business method eligibility. The new test, the Machine-or-Transformation test, held that a business method patent was patentable subject matter if it 1) was applied by use of a machine, or else 2) transforms an article from one thing or state to another. Was the court’s new test a judicial endorsement of the Beauregard claim, or was it carefully worded to avoid the question of patentability with an additional physical component?  It would have appeared that, once again, the courts had clarified one complication, while subsequently creating another.

The thematic clarification of business method decisions past came to one of its most pivotal moments in 2009 when the Supreme Court granted writ of certiorari for Bilski’s appeal.[33]From Silicon Valley to Wall Street, software and financial innovators alike held their breath awaiting the decision. Mounting rumors held that the court would possibly eliminate the business method patent altogether.[34]While some justices of the dissent agreed with the business method’s eradication, the majority felt otherwise.[35]Delivered by Justice Kennedy, the majority opined, that business methods are indeed patentable; Bilski’s application however was not.

Bilski had developed a hedging algorithm to eliminate volatility in consumer energy costs. Using the Monte Carlo method and historical weather data, energy prices would be hedged with weather futures to lock in a more stable and predictable energy bill. The algorithm’s complexities went far beyond any pen and paper, and the necessity for a computer was evident. Although there was an implied necessity for a physical component (a computer), the majority still found the algorithm unpatenable. The majority reasoned that Bilski’s innovation was an abstract idea. Reiterating established ‘precedent’, as if such a rule were ostensibly written and obvious already, the court reasoned that business method patents are limited by “laws of nature, physical phenomena, and abstract ideas”.[36]The Machine-or-Transformation test developed in In Re Bilski was no longer to be a determinative test in patentability, but rather a “useful and important clue” to the inclusive Abstract test.[37]  The court continued to disregard the continuance of  other tests that have marked business method history through the years, declaring that “nothing in today’s opinion should be read as endorsing the Federal Circuit’s past interpretations of § 101. See, e.g., State Street.”[38]And in one sentence ten years of State Street and its progeny were erased.

The Bilski Supreme Court failed to clarify a definition of their Abstract test, both in its criteria’s inclusions and omissions. The court rather left such task of interpretation to the lower courts in coming years, advising them on a case by case basis to return to the legal “guideposts”[39]of Benson, Flook, and Diehr. Justice Potter’s illustrious commentary rang ever present, “I can’t define it, but I know it when I see it”.[40] The business method was, once again, afflicted with yet another ambiguous interpretation.

III.  THE  CURRENT FUTURE OF THE BUSINESS METHOD

In patent applications to come, federal courts are left with the assignment of interpretation mandated by the powers above. Courts now sit in a post-Bilski era with the future of the business method patent in their discretion. While courts have taken time to acknowledge the inconclusiveness of the Bilski decision[41], others have used the opportunity to expand its meaning. In a recent decision by the Federal Court of Appeals, the eligibility of algorithms specifically was discussed.[42]Not surprisingly opting to use the ‘guidepost’ of Diehr, the court held that “algorithms and formulas, even though admittedly a significant part of the claimed combination, do not bring this invention even close to abstractness that would override the statutory categories and context”.[43]Even the most confident and charitable views of the Bilski decision and its progeny echo a notice of future complications, some which have already begun to surface. [44]

Verified by a circular history blemished with flaws, mistakes, and corrections, the current business method system’s stability is noticeably far from safe.  While financial and software innovation has slowly, over the years, conjoined in the eyes of the court under the business method, the culture and society of their respective subscribers is quickly diverging. Such policy considerations, which have all but been neglected in past business method decisions, must be recognized before history reprises itself.

In efforts of slowing the arbitrary attachment of physical components (Beauregard claims), the Supreme Court in Bilski retained the possibility that a purely intangible may gain patentability.[45]However, in a digital age, it is almost inherent that financial and software innovation will rely on a physical element, likely a computer. Even under the court’s pragmatic recognition of the times, Bilski’s Abstract test is still extremely comprehensive. Susceptible to a wide array of differing interpretations, in coming years the Abstract test is capable of rooting itself into case law far beyond its intended purpose, possibly precluding any software or financial innovation entirely. To better limit the scope to which the Abstract test reaches, its application should be tested to separate confines, software and financial innovation. The question ‘what is an abstract business method’ is extremely different than ‘what is abstract financial innovation’ and ‘what is abstract software innovation’. Because software and financial innovations are inherently different, from their components to the industries they affect, the Abstract test will take on different considerations when applied to each individually.

IV.  DISAGGREGATION: A SOLUTION

A.  FINANCIAL ABSTRACT TEST

The assertion that all mathematical formulas are made of components in existence, workings of nature that have yet to be discovered, is a naive assertion in light of contemporary financial innovation.[46]The quintessential example for the unpatentability of mathematical formulas is Einstein’s relativity formula.[47]Einstein did not invent the formula; he simply codified and arranged components of nature in an assignable formula. Mass, energy, and the speed of light all existed in nature eons before Einstein was even born. Although contemporary financial innovations are based in principles of mathematics, the components and interactions of the numbers in the algorithm can hardly be described as derivatives of nature.

Far from nature, financial innovations operate solely on man-made financial markets. The extent of financial innovation is limited to the markets and can only exclusively function on this man-made medium.[48]For example, Bilski’s use of weather futures in his algorithm would not have even been possible during the time of Diehr, Benson or Flook because weather futures existence has only been recognized on the market since 1996.[49]If the market or weather futures ceased to exist tomorrow, Einstein’s relativity formula would certainly still be comprehensible, Bilski’s algorithm would not.

Because market components and financial algorithms are not of nature, does not mean they cannot be natural relative to the market and its culture. Maintaining the ability to freely use the public utilities and its components has always been an essential consideration in patentability.[50]  This is where the Abstract test in financial innovation can differentiate itself from the Abstract test in software innovation. If a patent were to impede and dominate a natural market component from its intended purpose and use, then such patent would likely fail the Abstract test. The Supreme Court toiled with such reasoning but ultimately carried it in an unusual direction.

Bound to traditional business method policy considerations of both financial and software innovation, and unable to reflect financial market specifics, the Bilski court was forced to reason broadly. The court stated that Bilski sought to patent “the concept of hedging risk…hedging is a fundamental economic practice…allowing petitioners to patent risk hedging would pre-empt use of this approach in all fields, and would effectively grant a monopoly over an abstract idea”.[51]  Application of the court’s wide comprehensive view on any patent will ultimately render it an abstract idea. Can a machine for bending metal be unpatenable because bending is fundamental physical practice?[52]Instead of looking to whether patenting Bilski’s algorithm would have created a monopoly over a natural market strategy, the court should have looked to whether patenting Bilski’s algorithm would have created a monopoly over a natural market component. If Bilski’s algorithm positioned itself to inhibit the public use of weather futures, then the Abstract test would have denied patentability. If Bilski’s algorithm used weather futures in such a way that was useful, novel and non-obvious, while still allowing for its natural use in the market, then the Abstract test would have allowed patentability. Reducing any algorithm to its most basic functions will appear as attempts at privatization of a public utility and fail the Abstract test. Only when the court is given range to apply the Abstract test to the specifics at hand (i.e. financial innovation specifically) can it properly operate.

With such ambiguous decisions as Bilski, financial innovation in private industry has been strained. Over the past years financial innovation has given rise to high frequency, black box and the white box trading.[53]All three concepts revolve around the use of an algorithms operating millisecond market transactions, consistently adjusting to market reactions. While the extent of high frequency trading is generally unknown, the same cannot be said for its presence.[54]Uncertainties in the patent system’s protection have driven financial innovators into hiding. For fear of competitor plagiarism, private firms using algorithms are seldom to share their innovations with the world.[55]Because of a lack of protection, the utility and public benefit of some of these innovations may never be known. Consider the Black-Scholes model, the base for many contemporary algorithms, and arguably one of the most provocative financial innovations of the past century.[56]Once used as a secret investing tool, the algorithm’s utility now goes far beyond the financial sector (ironically one alternative use is in patent valuation[57]). Failing to provide a stronger outline to patentable criteria will only push innovators further into hiding, inhibiting any progress in financial innovation.

The Abstract test applied separately to financial innovation would help facilitate reassurance in the patent system. The Abstract test for financial innovation would be tried against the interests of the market and private industry. Like any public domain, the market invites innovation as long as it does not inhibit the public’s use.[58]A patent application attempting to corner off a common public utility would be abstract. In the private industry’s interest, any application that would potentially destroy the opportunity for progress would be abstract. Evaluating abstractness in financial innovation separately would suit the patent system and innovation in a way the traditional business method system could not.

B.  SOFTWARE ABSTRACT TEST

The struggle between anti-software patent movements and patent proponents has grown significantly as more and more innovations stem from the digital age.[59]While the Bilski decision has almost solidified software as patentable, the Abstract test may serve as an elementary compromise when applied to software innovation separately.

Unlike its financial counterpart, software algorithms do not operate on a public medium such as the market. Software is bound to the rules and procedures of a given programming language. Languages are constantly being created, evolving and improving. The Java language, currently the most popular programming language, was only released in 1995 with its most recent release February 15th 2011.[60]Because the medium on which software innovation operates is moving at an enormously high rate (significantly more so than financial innovation) the innovation itself must move just as fast.

Like its financial counterpart, software also has its own natural components. The Abstract test applied to software would evaluate a patent and its implications under the software culture. If the patent would preclude a natural software component, the Abstract test would reject patentability. However, because of the speed of software evolution, what is regarded as innovation today may easily be common industry practice tomorrow. As patents protection lasts for twenty years, the test for abstractness must possess a sense of foresight. An overly lenient application of the Abstract test in software innovation would inhibit further innovation in later years rather than facilitate it. Consider a software’s spell checker component. The spell checker is only forty years old, but an almost natural component in any contemporary software algorithm.[61]Patenting such component would certainly be abstract and inhibit further innovation. Only when the use of the natural component in software innovation is useful, novel and non-obvious, with a tremendous amount of creativity, can the Abstract test allow patentability.[62]Because of the fluid environment that software innovation operates in, the threshold for abstractness would be significantly lower than financial innovation. This consideration only further proves the need for disaggregation.

Unlike financial innovation, software innovation is not as easily kept secret. The public market acts as a blanket for financial innovations used by traders, with a petty possibility of reverse engineering. The private software industry however, serves no protection to software innovation as it is much more readily reversed engineered and plagiarized. [63] This puts software innovators at a disadvantage, as hiding their innovation is not even an option. Without secrecy as an alternative, the patent system must work more readily to incentivize innovation without slowing it down. On the same token because software innovations are plainly exposed, it pushes innovators to persistently improve so that they may claim the alpha position amongst competitors.

CONCLUSION

While Bilski’s Abstract test is far from definitive criteria, it is th  e hand that has been dealt. Application of the Abstract test to software and financial innovations separately alleviates a large amount of ambiguity. Disaggregating the business method and applying the Abstract test separately allows for different considerations and thresholds for each innovation.  Attention to the components and the industry of the individual innovations restores the patent system to its intended purpose, which the traditional business method has failed to do. With such differences, aggregating software and financial innovation under the business method is impractical. The traditional business method truly has “no place in the modern world”.[64]

[1]John G. Sprankling, Owning the Center of the Earth, 55 UCLA L. Rev. 979, 980 (2008).

[2]United States v. Causby, 328 U.S. 256, 261, 66 S. Ct. 1062, 1065, 90 L. Ed. 1206 (1946).

[3]Id. at 261.

[4]Inventions include: 1951- VTR Video Tape Recorder, 1954-Solar Cell, 1955-Fiber Optics, 1959-Microchip. Cavendish, Marshall, Inventors and Inventions 372-73 (2nd ed. 2007).

[5]Edward C. Walterscheid, Within the Limits of the Constitutional Grant: Constitutional Limitations on the Patent Power, 9 J. Intell. Prop. L. 291, 300 (2002).

[6]The Supreme Court held that Congress chose very expansive language in the patent statute, 35 U.S.C. §101, such that “anything under the sun that is made by man” is patentable subject matter. Diamond v. Chakrabarty, 447 U.S. 303, 100 S. Ct. 2204, 65 L. Ed. 2d 144 (1980).

[7]35 U.S.C.A. § 101 (2010).

[8]Chittenden Trust Co. v. King, 143 Vt. 271, 272, 465 A.2d 1100, 1100 (1983).

[9]The first financial patent was issued on March 19, 1799, for a method for “Detecting Counterfeit Notes.” State Street: Business Method Patents Can They Be A Boardwalk Address?, 688 PLI/Pat 455 , 471 (2002).

[10]William Krause, Sweeping the E-Commerce Patent Minefield: The Need for A Workable Business Method Exception, 24 Seattle U. L. Rev. 79, 101 (2000).

[11]Id.

[12]Amazon.com, Inc. v. Barnesandnoble.com, Inc., 73 F. Supp. 2d 1228 (W.D. Wash. 1999) vacated, 239 F.3d 1343 (Fed. Cir. 2001).

[13]State St. Bank & Trust Co. v. Signature Fin. Group, Inc, 149 F.3d 1368, 1373 (Fed. Cir. 1998) abrogated by In re Bilski, 545 F.3d 943 (Fed. Cir. 2008).

[14]Bilski v. Kappos, 130 S. Ct. 3218, 177 L. Ed. 2d 792 (2010).

[15]“our focus on our muddy, conflicting, and overly formulaic rules.” Arlington Indus., Inc. v. Bridgeport Fittings, Inc., 2010-1025, 2011 WL 179768 (Fed. Cir. Jan. 20, 2011).[16]Causby, supra note 2.

[17]Gottschalk v. Benson, 409 U.S. 63, 93 S. Ct. 253, 34 L. Ed. 2d 273 (1972).

[18]Id. at 72.

[19]Id.

[20]Parker v. Flook, 437 U.S. 584, 98 S. Ct. 2522, 57 L. Ed. 2d 451 (1978).

[21]“Respondent’s application simply provides a new and presumably better method for calculating alarm limit.” Id. at 595.

[22]Diamond v. Diehr, 450 U.S. 175, 101 S. Ct. 1048, 67 L. Ed. 2d 155 (1981).

[23]“There is no suggestion that there is anything novel in the instrumentation of the mold, in actuating a timer when the press is closed, or in automatically opening the press when the computed time expires.” Id. at 209.

[24]In re Bilski, 545 F.3d 943, 1004 (Fed. Cir. 2008) aff’d but criticized sub nom. Bilski v. Kappos, 130 S. Ct. 3218, 177 L. Ed. 2d 792 (U.S. 2010).

[25]In re Beauregard, 53 F.3d 1583 (Fed. Cir. 1995).

[26]Electronic and Software Patents: Crafting The Claims, 909 PLI/Pat 979, 909 PLI/Pat 979 , 1000 (2005).

[27]“it is clear after Flook that the board’s conclusion that patent protection is proscribed for all inventions “algorithmic in character” is overbroad and erroneous.” Application of Johnson, 589 F.2d 1070, 1075 (C.C.P.A. 1978).

[28]State St. Bank  supra note 13.

[29]Id.

[30]Stobbs, Gregory A., Business method patents 17,(2002).

[31]Amazon.com, Inc, supra note 12.

[32]In Re Bilski, supra note 24.

[33]Bilski, supra note 14.

[34]Ryan Paul, SCOTUS to hear Bilski case, may be huge for software patents,June 2, 2009, http://arstechnica.com/tech-policy/news/2009/06/scotus-to-hear-bilski-ma….

[35]Bilski, supra note 14.

[36]Id.  at 3321.

[37]Id.

[38]Id. at 3321.

[39]Id.

[40]Jacobellis v. State of Ohio, 378 U.S. 184, 196, 84 S. Ct. 1676, 1682, 12 L. Ed. 2d 793 (1964).

[41]Arlington Indus.,supra note 15.

[42]Research Corp. Technologies, Inc. v. Microsoft Corp., 627 F.3d 859, 864 (Fed. Cir. 2010).

[43]Id.

[44] “I come from the camp that anything is patentable if you put enough money behind it, but what you might just get at the end of the day is something that won’t hold up in court. Bilski is a great example that no one really understands where patent law should head or the basics of patent decisions.” Keyson, Lauren, NYTECH.org Ecamines Software and Financial Patents, Jan. 24, 2011, http://nyconvergence.com/2011/01/nytech-org-examines-software-and-financial-patents.html

[45]Bilski, supra note 14.

[46]Durham, Alan L., Patent Law Essentials: A Concise Guide¸24(2004).

[47] Diehr supra note 22.

[48]Smith, Mark B., A History Of The Global Stock Market: From Ancient Rome To Silicon Valley(2004).

[49]Jewson, Stephen, Brix, Anders, Weather Derivative Valuation: The Meteorological, Statistical, Financial And Mathematical Foundations(2005).

[50]“patents shall not remove knowledge from the public domain or restrict free access to knowledge already available to the public.” Efthimios Parasidis, A Uniform Framework for Patent Eligibility, 85 Tul. L. Rev. 323, 330 (2010).

[51]Bilski, supra note 14.

[52]U.S. Patent No. 4356716 (issued Nov.  2, 1982).

[53]Citadel Inv. Group, LLC v. Teza Technologies LLC, 398 Ill. App. 3d 724, 725, 924 N.E.2d 95, 97 (Ill. App. Ct. 2010) appeal denied, 236 Ill. 2d 551, 932 N.E.2d 1028 (2010).

[54]Jeremy Grant, ECB Warns of High Speed Trading Risks, Feb. 24, 2011, http://www.ft.com/cms/s/0/e23ddc24-4044-11e0-9140-00144feabdc0.html#axzz1EwJH4xaz.

[55]Goldman counsel asked to seal courtroom during disclosure of trading practices. United States v. Aleynikov, 737 F. Supp. 2d 173, 174 (S.D.N.Y. 2010).

[56]Geisst, Charles R,Encyclopedia Of American Business History (Vol. 2 2006).

[57]Berman, Bruce M., From ideas to assets: investing wisely in intellectual property 532 (2002).

[58]A Uniform Framework for Patent Eligibilitysupra note 48.

[59]Paul Krill, Red Hat, Google Challenge Software Patents, Feb. 3, 2011, http://www.networkworld.com/news/2011/020311-red-hat-google-challenge-software.html?hpg1=bn.

[60]TIOBE SOFTWARE, TIOBE Programming Community Index, Feb. 2011, http://www.tiobe.com/index.php/content/paperinfo/tpci/index.html.

[61]Reiffin v. Microsoft Corp., 158 F. Supp. 2d 1016, 1020 (N.D. Cal. 2001).

[62]McIntyre v. Double-A Music Corp., 179 F. Supp. 160, 161 (S.D. Cal. 1959).

[63]Davidson & Associates v. Jung, 422 F.3d 630, 639 (8th Cir. 2005)

[64]Causby, supra note 2.

© 2011, Andrew L. Schwartz

From Trips to ACTA: Establishing the Intent to Uphold Access to Medicine in the Face of Ambiguity

The National Law Review would like to congratulate Guadalupe A. Lopez  of the American University Washington College of Law  one of our Spring 2011 Student Legal Writing Contest Winners. Guadalupe writes about generic drugs and patents and the distribution of  pharmaceuticals  in developing countries:  

Introduction

The numbers speak for themselves. Each year, over 9.5 million people die due to infectious diseases for which there exists medication – most live in developing countries.i Currently, there are over 33 million people around the world living with HIV/AIDS,ii 70 percent of whom are in dire need of anti-retroviral medication but not receiving it.iii This has been attributed, in part, to the lack of affordable healthcare in developing countries, along with the high drug prices associated with monopolies provided by pharmaceutical patents.iv

Studies demonstrate that there is a significant change in the price of a drug once its patent expires, allowing its generic version to be legally manufactured and introduced into a given market.v The introduction of a generic drug often results in the reduction of prices anywhere between 22% and 88%, depending on the type of drug and the number of generic manufacturers producing it.vi In some instances, even the threat of introducing a generic drug into a market will be enough to significantly lower the price of its patented version.vii For this reason, it is in the best financial interest of pharmaceutical companies to acquire and maintain the highest levels of intellectual property rights (“IPR”) protection on their patents. In furtherance of that objective, pharmaceutical companies have actively engaged in campaigns, both domestically and around the world, aimed at preventing generic manufacturers from accessing global drug markets.viii Unfortunately, this comes at a high cost to patients who are in need of treatment and cannot afford the patented versions of these medicines. This paper will address this concern by explaining how the pursuit of high levels of IPR protection has exacerbated the inaccessibility of medication by keeping more affordable, generic drugs off the market.ix This has been largely possible due to a narrow application of the Trade Related Aspects of Intellectual Property Rights Agreement (“TRIPS Agreement”), as well as efforts to establish the highest possible levels of IPR protection, led mainly by industrialized nations.

The first section of this paper will provide an introduction to the TRIPS framework as well as a timeline of international events leading to the Doha Declaration on the TRIPS Agreement and Public Health (“Doha Declaration”). This was a declaration by all members of the TRIPS Agreement reaffirming their obligation to protect public health through the use of provisions referred to as “TRIPS flexibilities.” The second section explains that despite the Doha Declaration, certain TRIPS flexibilities have been undermined through the implementation of bilateral trade agreements with developing countries, and regulations within regional trading blocs providing vigorous protection of IPRs.x These trade agreements and regulations contain “TRIPS-Plus” provisions demanding higher levels of IPR protection than those required by the TRIPS Agreement itself.xi In essence, they have been seen as attempts to circumvent the obligations agreed to during the Doha Declaration, acknowledging that public health issues take precedent over IPRs. The third section of this paper introduces the Anti-Counterfeiting Trade Agreement (ACTA) recently negotiated by the world’s most industrialized nations, and presents the arguments raised in opposition to the accord. Many have argued that due to the special interests behind ACTA’s negotiating countries, this agreement will have a detrimental impact on developing countries, as they will be forced to adopt a framework of heightened IP standards to which they did not explicitly assent.xii The last section argues that despite the clear threats posed by ACTA, negotiating countries have expressed a clear intent to uphold access to medicine principles as asserted in the Doha Declaration. However, because many of the ACTA negotiations have been held behind closed doors, there is no record that reflects this intent outside of the public statements made by country representatives. The section proposes creating an unofficial drafting history for ACTA based on amendments made to various drafts of the text as well as public statements released by the parties. This drafting history will provide assistance when interpreting any ambiguity within ACTA that may be used to impede access to medicine or undermine any of the obligations made under the Doha Declaration.

I.  The implementation of TRIPS and the resulting need for the Doha Declaration on public health

A. The Development of the TRIPS Agreement

During the 1980s, a number of corporate actors mobilized together after realizing that they shared the common goal of increasing the protection of their intellectual property rights.xiii This alliance was comprised of trans-national corporations from a variety of sectors, among them agricultural chemical producers, software producers, entertainment providers, and brand-name pharmaceutical providers.xiv After successfully lobbying their interests at a domestic level, these actors began seeking a way to further expand the protection of their interests by pursuing higher levels of IPR protection outside the United States.xv They did so by creating a strategy to link IP with trade, two areas of law which until then, were vastly unrelated. In addition, this interest group also formed strong political ties within the U.S. and gained considerable support with the U.S. government, particularly the Office of the US Trade Representative.xvi Through transnational mobilization and aggressive lobbying of various governments, international organizations and private sectors, this coalition managed to include its newly formulated trade-based IP regime in the agenda for the GATT’s Uruguay Round of Multilateral Trade Negotiations (“Uruguay Round”) held in 1995.xvii

During the Uruguay Round, the United States persistently promoted the adoption of a new global intellectual property regime.xviii Some scholars have noted that many countries assented to the TRIPS Agreement in hopes that a multi-lateral rule based system would eliminate the US’ coercive economic policy.xix As a result, many developing countries were at a disadvantage during TRIPS Agreement negotiations due to the asymmetry in bargaining power vis-à-vis more industrialized countries. Furthermore, developing countries were at an additional disadvantage because their negotiators lacked the necessary training in the area of intellectual property essential to negotiating a new set of IP standards.xx Daniel Gervais explains that as a result, industrialized countries made very few concessions during the negotiations while developing countries were “forced to accept a package that they perhaps did not fully understand and yet, contained a set of foreign IP norms which they now had to implement.”xxi This Uruguay Round of negotiations resulted in what is known today as the Trade-Related Aspects of Intellectual Property Rights Agreement- adopted and put into force in 1994.xxii

The TRIPS Agreement was an effort to implement a global intellectual property rights regime and establish what industrialized countries believed should be the minimum levels of IPR protection required of all countries before acceding as members of the WTO.xxiii As a result, the TRIPS Agreement obligated developing nations to enforce levels of IPR protection similar to those adopted by highly industrialized nations, despite the lack of development in their own domestic IP laws.xxiv Included as part of the TRIPS Agreement were provisions requiring a 20-year term of protection for patented medication, which pharmaceutical companies argued were necessary to sustain innovation and fund research and development for future pharmaceutical products.xxv Along with these higher levels of protection, however, came huge impediments to the accessibility of essential medication in developing nations.

B.  Access to Medicine Consequences

The implementation of the TRIPS Agreement provided pharmaceutical companies with a legal and effective monopoly over their products due to the period of protection granted to their products before the introduction of any generic competitors.xxvi This meant that name-brand pharmaceutical companies were able to maintain high drug prices so long as they were still under the 20-year patent protecting their products. Within developing countries, however, this additional term of patent protection ultimately resulted in the overall reduction of affordable medicine.

This monopoly over medicines and prices proved to be devastating during the late 1990s when the HIV/AIDS epidemic was reaching its peak.xxvii It was at this point that developing countries realized the extent of the serious access to medicine implications that accompanied the adoption of the TRIPS Agreement. Developing countries, particularly South Africa, took initiatives to address the crisis by providing low-cost medication to its citizens and by issuing compulsory licenses for anti-retroviral HIV/AIDS medication.xxviii These efforts were met with fierce resistance from pharmaceutical companies and retaliation in the form of a lawsuit by the U.S. government.xxix The outcome was a wave of public outrage and widespread protests against the U.S. and pharmaceutical companies, largely led by developing countries, civil activists, and international organizations.xxx Due to mounting international pressure, the U.S. government eventually caved, withdrawing the lawsuit against South Africa as well as the trade sanctions previously implemented against it.xxxi At this point, it became clear that there was a much-needed reassessment of the objectives and interpretation of the TRIPS Agreement.

C. A Call for the Doha Declaration on the TRIPS Agreement and Public Health

In an effort to address the public health concerns resulting from the implementation of the TRIPS Agreement, the WTO introduced a “development round” in 2001 known as the Doha Declaration on the TRIPS Agreement and Public Health (“Doha Declaration”).xxxii During this round, members of the WTO unanimously recognized the need of developing countries to address serious public health issues such as HIV/AIDS, tuberculosis, malaria and other epidemics.xxxiii The Doha Declaration thus stands for the assertion that the TRIPS Agreement should not prevent any WTO member from taking measures to protect the health of its citizens. In doing so, the Declaration reaffirmed each member’s right to use the safeguards within the TRIPS Agreement without risking retaliation from other WTO members.xxxiv Specifically, the Doha Declaration reaffirmed a member’s right to parallel import medication under Article 6 of the TRIPS Agreement, and issue compulsory licenses under Article 31.xxxv

Parallel Imports

Article 6 of the TRIPS Agreement provides WTO members with the right to import patented drugs after they have been sold in other markets.xxxvi This provision essentially allows WTO members to import brand-name drugs from other countries where it is being sold at a lower retail price.xxxvii This means that once a brand-name drug is legally sold in one country, the patent holder “exhausts” his rights over the product, at which point the drug may be re-sold and exported to other countries.xxxviii This TRIPS flexibility thus provides developing countries the option to purchase medicine from foreign markets where it is being sold at a lower price than within its own domestic market. By taking advantage of this flexibility, developing countries with limited healthcare resources are able to import cheaper medicine, thereby increasing its affordability and overall access to its citizens.

Compulsory Licensing

Another safeguard reaffirmed during the Doha Declaration is a country’s right to issue compulsory licenses in cases of national emergencies, granted through Article 31 of the TRIPS Agreement.xxxix Article 31 allows a country to license the manufacturing of a generic drug while its brand-name version is still under patent without the express consent of the patent holder.xl Compulsory licenses have proven to be one of the most effective tools for providing life-saving drugs, such as anti-retroviral medication, to patients in developing countries, particularly within Africa.xli They have led to greater competition in the drug market by allowing generic drugs to compete with patented pharmaceutical products, driving down its overall cost.xlii This leads to more affordable prices for both citizens and governments providing healthcare services in the country where it is issued. The issuance of compulsory licenses have proved so effective in reducing drugs costs that even the mere threat of issuing one will often compel pharmaceutical companies to drastically reduce their prices in an effort to keep generic manufacturers off the market.xliii

The use of TRIPS flexibilities such as the two discussed above have been praised and strongly encouraged by non-profit organizations and civil society groups working to promote access to medicine in developing countries.xliv Despite the progress made, however, there is growing concern that these efforts have been undermined through pressure from bilateral and regional trade agreements, domestic legislation, and new forms of multilateral agreements such as ACTA.

II.  Circumventing the Doha Declaration Through TRIPS-Plus Agendas

The TRIPS Agreement succeeded in implementing a new global regime of heightened standards of intellectual property right protection. However, it also left room for countries to implement measures to protect the public health of its citizens through provisions known as “TRIPS flexibilities.”xlv Through TRIPS flexibilities, governments are free to address issues arising from the lack of innovation for diseases affecting their populations, coupled with high pharmaceutical prices and restrictions on availability.xlvi Despite these flexibilities though, recent free trade agreements (FTA) between developed and developing countries, particularly those with the US, have been criticized for restricting the adoption of these TRIPS flexibilities.xlvii By including “TRIPS-Plus” provisions into their FTAs, developed nations have narrowed the application of TRIPS flexibilities, thereby posing dangers to the production and availability of medicines in developing countries. More recently, regional trading blocs, such as the EU, have similarly begun to draw criticism due to the inclusion and strict enforcement of TRIPS-Plus measures within its borders.

A.  TRIPS-Plus Obligations in Free Trade Agreements

Since the Doha Declaration and the reinforcement of TRIPS flexibilities, several industrialized countries have continued to vigorously represent the commercial interest of pharmaceutical companies in trade negotiations with developing countries.xlviii By using access to their markets as a form of inducement, developed countries have been able to secure higher levels of IPR protection, known also as “TRIPS-Plus” measures, through trade agreements.xlix As reported by Oxfam International, some FTAs have contained TRIPS-Plus provisions providing for the following increased protection:

  • Expanded scope over pharmaceutical patents (covering new therapeutic uses of existing medicines and formulations);
  • Limitations on the grounds for issuing compulsory licenses to highly restrictive emergencies, government non-commercial use, and competition cases;
  • Barring parallel imports of patented medicines sold more cheaply elsewhere;
  • Extending patent monopolies for administrative delays by patent offices and drug regulatory authorities.l

In a report prepared for House Representative Henry Waxman in 2005, the Committee on Government Reform declared that “[C]ontrary to the Doha Declaration, U.S. trade negotiators have repeatedly used trade agreements to restrict the ability of developing nations to acquire medicines at affordable prices.”li Although Congress requires that the U.S. Trade Representative (“USTR”) comply with the Doha Declaration on Public Health, nearly every free trade agreement negotiated in the past decade by USTR has included TRIPS-Plus provisions significantly restricting the manufacturing of generic drugs.lii In addition, the USTR has previously announced its TRIPS-Plus agenda as well as a commitment to pursue levels of IPR protection in accordance with those of the pharmaceutical industry.liii Oxfam International asserts that this commitment to higher standards of IPR protection can be explained by the close relationship between the USTR and the pharmaceutical industry within the U.S.liv

Special 301 Watch List

One effective tool that the U.S. has used to enforce the TRIP-Plus provisions within its FTAs is the Special 301 Watch List (“Special 301”).lv The Special 301 is a report mandated by the U.S. Trade Act of 1974 through which the USTR assesses whether countries are complying with IPR standards contained in bilateral or multi-lateral agreements with the U.S.lvi If the USTR finds that a country is not in compliance with such standards, it sends a “warning” through the Special 301 Report threatening to impose trade sanctions pursuant to the U.S. Trade Act.lvii Oxfam International argues that the U.S. has used the Special 301 process to pressure countries into unilaterally implementing TRIPS-Plus provisions.lviii In addition, the Government Accountability Office has noted that while the overall number of countries listed on the Special 301 has decreased, the number of countries cited for pharmaceutical-related issues has increased.lix One example of this, sparking controversy among various members of Congress, was the placement of Thailand on the Special 301 Watch List for having issued a compulsory license for HIV/AIDS medication in 2006.lx

After this incident sparked international attention, however, Congress took it upon itself to adjust the USTR’s attitude on how it proceeded to negotiate bilateral trade agreements.lxi Since then, the USTR has made significant concessions by providing greater flexibility to provisions that at one point may have impeded access to medicine in developing countries.lxii These efforts have been reflected in amendments made to the US-Colombia and US-South Korea FTAs, making them more amenable to the adoption of TRIPS flexibilities.lxiii

B.  TRIPS-Plus Obligations in Regional Agreements:  The Case of EU Council Regulation 1383/2003

In addition to TRIPS-Plus obligations contained in FTAs, some industrialized nations have enacted far-reaching TRIPS-Plus measures as part of their domestic legislation. As noted by the International Centre for Trade and Sustainable Development (ICTSD), the European Union (EU) has been particularly active in vigorously enforcing “maximalistic” standards of IPRs within its own region.lxiv To illustrate, the EU implemented Council Regulation 1383/2003, which involves the searches, seizures, and destruction of goods suspected of infringing intellectual property rights by customs officials throughout its borders.lxv This regulation explicitly grants IP right holders the ability to prohibit the import or export of goods suspected of infringing patents, copyrights, and trademarks to and from the EU.lxvi Because this regulation is directed at all imports and exports, it has been greatly criticized by advocacy groups concerned with access to medicine due to its obstruction to the transit of pharmaceutical goods passing through EU territory.lxvii In doing so, EC 1383/2003 comes into conflict with Article V of the GATT, which establishes the principle of freedom of transit through the territory of each contracting party.lxviii The regulation also conflicts with the obligations to public health undertaken by all WTO members under the Doha Declaration.

In particular, the implementation of EC 1383/2003 has resulted in several detentions of shipments of generic medication that did not meet the heightened IP standards within the EU, but were otherwise legal in their importing and exporting countries.lxix This incident sparked widespread controversy as most of the shipments were traveling from India and destined to developing countries – such as Mexico, Brazil, Nigeria, Peru, Colombia and Ecuador – and only briefly traveling through the EU.lxx While most of the shipments were only temporarily seized, some of them were in fact destroyed for not complying with IPR standards within the EU, pursuant to EC 1383/2003.lxxi The EU defended its actions as an unfortunate result of the MEDI-FAKE initiative, which targets illegal counterfeit medicines entering the EU.lxxii Still, critics argue that these detentions, all involving generic medication, were neither incidental nor accidental, but were rather opportunistic acts of IPR holders in an effort to obstruct generic competition through false counterfeiting allegations.lxxiii Whichever may be the case, these incidents demonstrate EU officials generalized the use of the term “counterfeit,” thereby implicating other forms of IP infringements having nothing to do with counterfeiting (such as patent violations). The EU seizures have resulted in a great deal of debate over the consequences that EC 1383/2003 (and similar policy) has on freedom of transit principles and on the overall impeding effect it can have on access to medicine. This brings us to ACTA.

III.  The Anti-Counterfeiting Trade Agreement

The Anti-Counterfeiting Trade Agreement (“ACTA”) is a multilateral agreement currently being negotiated between the world’s most industrialized nations,lxxiv and aimed at combating counterfeit goods.lxxv It represents one of the most important attempts to negotiate a “North to North” agreement on issues of intellectual property rights protection after the TRIPS Agreement. For this reason, ACTA is seen by critics as an attempt to create a new template of TRIPS-plus protection outside any interference from developing countries, multilateral organizations, or civil society in general. Parties to these negotiations assert, however, that the objectives behind the implementation of ACTA are to “establish an international framework for participating governments to more effectively combat the proliferation of counterfeiting and piracy” and to “define effective procedures for enforcing existing intellectual property rights.”lxxvi

To many of its critics though, ACTA reflects a fairly clear intent to expand TRIPS standards and even remove some of its flexibilities.lxxvii In particular, ACTA has been criticized by civil society groups and developing countries for threatening the freedom of transit of generic medicines. India and China are some of ACTA’s most vocal opponents; they argue that such measures do not take into consideration the interests of developing countries or their commitments to the Doha Declaration on Public Health.lxxviii These countries also warn that ACTA would create trade restrictions for WTO members who are not negotiating parties of ACTA, yet who are still subjected to obligations beyond those required by the TRIPS Agreement.lxxix

The criticism over ACTA has not stopped there. Other institutions that have taken issue with ACTA have included the World Trade Organization and the World Intellectual Property Organization. These organizations argue that ACTA goes far beyond what was needed to combat counterfeiting and piracy, and in the process, is creating a new regime of IPR protection that will undermine multilateral institutions such as themselves by weakening their authority.lxxx

A.  Access to Medicine Threats Posed by ACTA

The most serious concern raised by access to medicine advocates is that like EC 1382/2003, ACTA will jeopardize shipments of affordable medicines in transit between developing countries, having a chilling effect on the trade of generic pharmaceuticals and on the TRIPS Agreement flexibilities.lxxxi This problem has been mostly raised with regard to proposed border measures granting customs officials the ability to restrict shipments being imported or exported from ACTA member countries. This measure has been highly criticized for essentially requiring customs officials to make highly specialized and technical determinations as to what amounts to patent infringements.lxxxii These complex adjudications, critics say, should follow after the presentation of highly specific facts related to patents, which may only be resolved by an appropriate panel or tribunal post hoc, not while the goods are in transit.lxxxiii

Under existing TRIPS provisions, border measures are to be taken only against suspected counterfeit, trademark, and copyright violations.lxxxiv Customs officials are allowed to take ex officio action against alleged infringers only after they have acquired prima facie evidence showing that an IP right has been infringed.lxxxv In addition, TRIPS requires those who requested the ex officio action to pay for any injury caused to suspected infringers as a result of a wrongful detention of goods.lxxxvi ACTA, on the other hand, permits such actions to be taken on the mere suspicion that the goods are infringing not only copyright and trademark, but also patent rights. Furthermore, ACTA indemnifies authorities from any injury caused by the wrongful detention of goods, which may last for up to a year under this new agreement.lxxxvii This creates incentives for right holders to abuse ACTA procedures and to initiate border investigations and seizures without having to prove, within any reasonable period of time, that the goods are in fact infringing. This leaves serious implications relating to the transit of shipments carrying generic medication.

In addition, provisions addressing penalties for ACTA violations vis-à-vis the penalties enforced under the TRIPS Agreement have similarly raised serious concerns.lxxxviii Under the TRIPS Agreement, any willful, commercial-scale counterfeiting is a criminal act sanctioned by national law enforcement.lxxxix In contrast, civil IP infringements under TRIPS, including violations of patent rights, consist of commercial disputes between legitimate entities and are compensable only through legal remedies.xc The reason for this distinction is that unlike counterfeiting, civil infringements of IPRs are not seen as attempts to defraud the public and are therefore not subject to the same criminal sanctions.xci While TRIPS has made it clear what types of infringements will result in criminal and civil liability, ACTA does not distinguish between the two.xcii This leaves the inference that because ACTA explicitly targets counterfeits, all infringements will be punishable as criminal violations.

Furthermore, various ACTA drafts have included provisions extending injunctions against third parties who have provided “intermediary services” that have facilitated the infringement involved.xciii While ACTA fails to define what an “intermediary party” is, those who would likely be affected under this provision include generic drug manufacturers, international shippers, and other key players involved in the international trade of medicines.xciv In turn, such injunctions could potentially “inhibit the supply and distribution systems and thereby deter generic entry, robust generic competition, and legitimate international trade of generic medicines of assured quality.”xcv Due to its failure to define “intermediary,” this provision may similarly jeopardize non-government organizations such as Medicins Sans Frontieres and UNITAID, who assist in funding the purchase of generic drugs destined for developing countries.xcvi

The unfortunate result of these ACTA provisions is that they have a potentially chilling effect on the production, trade, and ultimate distribution of generic drugs. Due to the risk of incurring not only civil, but criminal liability, many generic drug manufacturers and third-party carriers will potentially be deterred from producing and transporting medication because of the blurred distinctions between counterfeit and simple patent infringements.

B.  New IP Law-Making in the Process?

A number of scholars have argued that ACTA is an effort to seek an alternative forum that is more responsive to higher levels of IP protection.xcvii As part of this forum-shifting argument, Susan Sell notes that protectionists have previously shifted their agenda from the World Intellectual Property Organization (“WIPO”) to the World Trade Organization (through the TRIPS Agreement), to bilateral and regional trade agreements (such as those discussed above), and now to ACTA.xcviii Each time the chosen forum becomes more receptive to exceptions, likely due to pressure from civil society groups, the forum once again changes. Thus, ACTA is seen as the creation of an entirely new international institution for IP enforcement, establishing its own set of rules, standards, and methods of enforcement, notwithstanding those outlined in prior multilateral negotiations such as the TRIPS Agreement.

However, other scholars argue that ACTA is more than a mere effort aimed at shifting the forum of protection. Instead, they assert that such attempts reflect a broader notion of international IP law-making in the process.xcix This argument is based on the impact which bilateral trade agreements tend to have on a country’s position on IP standards during subsequent multilateral negotiations. These scholars argue that this is all part of a strategy to create an endless upward spiral of international IP obligations.c This movement, often referred to as the “global IP ratchet,” is only the first stage of a conscious effort on the part of IP interest groups to use bilateral agreements as vehicles to incorporate heightened IP standards into subsequent multilateral treaties, such as ACTA.ci Targeting countries on a one-on-one basis through bilateral agreements ensures that they are on-board with future stated agendas. Scholars argue that in the end, if enough of these bilateral agreements are negotiated, these higher IP standards will become the minimum standards from which future trade negotiations will proceed.cii As cited by Kimberlee Weatherall:

“Once a substantial portion of trading partners have agreed to observe the same standards as those enshrined in present U.S./EU legislation, there is no way back to a meaningful lessening of what appear as widely accepted rules, creating a spiral endlessly moving upwards.” ciii

That is to say, that all of this is not merely about shifting the forum away from the WTO, but rather, a part of an overall scheme to slowly, but certainly, increase global levels of protection for IP right holders. Weatherall suggests that bilateral agreements have ultimately served as the “stepping stones” for ACTA by setting minimum standards of IP protection among the parties involved, while creating leverage for certain countries at the negotiating table.civ As reflected by the leaked ACTA drafts, these higher levels of IP protection were, without a doubt, introduced during the various rounds of negotiation.cv

Along these lines, ACTA is seen as part of a larger “enforcement agenda” being pushed by special interest groups within highly industrialized nations. This enforcement agenda has been described as, “[A] continuous, wide-ranging effort by special-interest groups and lobbyists to secure favorable legislation and institutionalize practices that support their current business models, all under the claim of enforcing intellectual property rights.”cvi Ultimately, what emerges is “[A] web of numerous forums, regional, and bilateral agreements and unilateral institutions, all being captured to pursue a global TRIPS-plus agenda.”cvii The unfortunate consequence of this agenda is that because it caters to special interest groups, it fails to consider the disproportionate impact that these higher standards carry for developing countries lacking the resources and infrastructure to implement them. Nonetheless, many fear that such standards will soon become the norm as more and more countries continue to adopt them through efforts such as ACTA.cviii

IV.  ACTA’s Unofficial Drafting History: Establishing An Intent to Promote Access to Medicine

Despite the concerns stated above, recent leaked drafts of the text have indicated that ACTA has amended some of the measures that have been stirring controversy with access to medicine advocates.cix The two most significant of these are provisions on border measures and intermediary liability.cx According to the new draft, ACTA no longer requires countries to provide preemptive border measures for patents, meaning that if adopted, generic medicines will no longer be subject to border detentions for alleged patent violations.cxi In addition to this, ACTA parties have dropped the provision requiring intermediary liability for carriers of shipments of generic medication. The new draft reflects that the parties have made significant concessions in response to public health concerns, resulting in what some have referred to as “ACTA-Lite,” a watered down version of what ACTA was intended to be.cxii

Aside from demonstrating the tremendous impact that civil society groups can bring to the negotiating table, this move indicates that there is at least some commitment to preserve the safeguards and flexibilities established by the TRIPS Agreement. To demonstrate this commitment, many governments have released public statements ensuring that the passage of ACTA will not affect a country’s right to provide for the public health of its citizens.cxiii In a joint statement issued by the participating governments with respect to the potential obstruction to access to medication, the parties stated that, “ACTA will not hinder the cross-border transit of legitimate generic medicines,” while reaffirming that “patents will not be covered in the section on Border Measures.”cxiv

USTR officials released similar statements after certain members of Congress voiced concern over the ways in which ACTA would affect the availability of generic medicine. In a letter from Senator Ron Wyden to the USTR regarding ACTA’s impact, one of his main questions involved the ways in which ACTA would preserve the public health flexibilities under the TRIPS Agreement and the Doha Declaration.cxv In its response, the USTR stated that “ACTA is not intended to interfere with a signatory’s ability to respect its citizens’ fundamental rights and civil liberties, and will be consistent with the WTO TRIPS Agreement and will respect the Declaration on TRIPS and Public Health. (emphasis added).”cxvi From these comments, it would therefore appear that the overall purpose of ACTA is not to limit the transit, sale, or distribution of generic medicine. Nonetheless, while this intent has been reflected through a number of press releases, likely aimed at bolstering public support, there is no record of negotiation binding the parties to this intent.

The importance of legislative history within the context of multilateral negotiations is that it establishes the parties’ intent at the time of negotiation, giving the text meaning in light of potential ambiguity. However, in the case of ACTA, there is no such record of negotiations as these have been highly secretive and mostly held behind closed doors.cxvii As a result, the only evidence of the parties’ actual negotiating intent comes from inferences that have been drawn from the modifications made to several leaked versions of the agreement.cxviii This paper suggests that based on these modifications, there be an unofficial “drafting history” established, reflecting a principle of intent aimed at upholding access to medicine. This legislative history would be a compilation of the parties’ stated objectives to the press, civil society, members of Congress and Parliament, and other government officials regarding the purpose of ACTA. These statements should be analyzed with respect to the various proposals for modification made by each respective party, as reflected by the leaked versions of the agreement. Furthermore, such a drafting history will require close scrutiny of prior versions of the text in comparison with its final version (to be released in the following weeks) in order to determine whether the parties did in fact bind themselves to their publicly stated objectives. Such an analysis will also allow scholars to draw inferences from the various amendments proposed and those that were actually adopted, such as the changes to border measures discussed above. Functionally, this drafting history will serve to provide guidance to officials whenever there may be ambiguity in the text, by establishing a principle that such ambiguity shall be read in light of the parties’ intent to provide for the unrestricted transit of generic medication.

V. CONCLUSION

Due to legitimate concerns that ACTA may be creating a new institutional framework of IP standards, it is vital that parties clearly define the limits of this new agreement. As we have seen with the cases of EU detentions, there is a genuine fear that heightened IP standards may have serious restrictions on the transit and ultimate distribution of generic medication within developing countries. For this reason, there is a need to clearly and effectively communicate that parties do not intend for this to be the case with the implementation of ACTA. Through publicly released statements, leaked drafts, and new amendments made to the agreement, it appears that the parties to ACTA have made active efforts to communicate that they do not intend to impede the flow of generic medication. However, there is still a need to bind parties to this principle through a more formal manifestation of this commitment.

i Global Health Council, Impact of Infectious Diseases. Available from: http://www.globalhealth.org/infectious_diseases (citing World Health Organization, WHO Global Burden of Disease: 2004 Update).

ii World Health Organization, Global Summary of Aids Epidemic: 2009. Available from: http://www.who.int/hiv/data/2009_global_summary.png. 

iii Medicines Sans Frontiers, Running In Place: Too Many Patients Still in Urgent Need of HIV/AIDS Treatment, Briefing Document on HIV/AIDS. Available from: http://www.msfaccess.org/main/hiv-aids/introduction-to-hivaids/msf-and-hivaids.

iv See Generally, Bryan C. Mercurio, TRIPS, Patents, and Access to Life-Saving Drugs in the Developing World, Marquette Intellectual Property Law Review 211 (Summer 2004).

v Id.

vi Id.

vii Id.

viii Id.

ix Oxfam Briefing Paper, Patents versus Patients: Five Years after the Doha Declaration, Oxfam International (November 2006).

x Id.

xi Id.

xii See Generally, Andrew Rens, Collateral Damage: The Impact of ACTA and the Enforcement Agenda on the World’s Poorest People. PIJIP Research Paper No. 2010-08, Program on Information Justice and Intellectual Property (2010).

xiii Susan Sell, Trips and the Access to Medicine Campaign, Wisconsin International Law Journal 481, 484 (2001-2002).

xiv Id.

xv Id.

xvi Id. at 485.

xvii Id. at 487, 488.

xviii Id. at 489.

xix Id. (noting that the US often used access to its large domestic market as a means to force other countries to adopt and enforce stricter intellectual property policies).

xx Daniel Gervais, Intellectual Property, Trade & Development: The State of Play, Fordham Law Review 505, 507 (2005).

xxi Id. at 509.

xxii Trade Related Aspects of Intellectual Property Rights Agreement (1994), available at http://www.wto.org/english/tratop_e/trips_e/t_agm0_e.htm.

xxiii Bryan C. Mercurio, supra note 4, at 218.

xxiv Oxfam Briefing Paper, supra at note 9, at 5.

xxv Id.

xxvi Id.

xxvii Id.

xxviii Id. A compulsory license is a type of flexibility provided by the TRIPS Agreement, stating that countries may grant drug manufacturers the authorization to produce the generic version of a patented drug without the consent of the right holder in order to meet a public health emergency.

xxix Id.

xxx Bryan C. Mercurio, supra note 4, at 224.

xxxi Id.

xxxii Doha Declaration on the TRIPS Agreement and Public Health (2001), available at http://www.wto.org/english/thewto_e/minist_e/min01_e/mindecl_trips_e.htm.

xxxiii Id.

xxxiv Rahul Rajkumar, The Central American Free Trade Agreement: An End Run Around the Doha Declaration on TRIPS and Public Health, Albany Law Journal of Science and Technology 433, 441 (2005) (citing Doha Declaration).

xxxv Id.

xxxvi Agreement on the Trade Related Aspects of Intellectual Property Rights (1995).

xxxvii Rahul Rajkumar, supra note 35, at 444.

xxxviii Id.

xxxix Agreement on the Trade Related Aspects of Intellectual Property Rights (1995).

xl Oxfam Briefing Paper, supra note 9, at 9.

xli Id.

xlii Id. at 10.

xliii Id. (explaining the case in Brazil in 2005 after it threatened to issue a compulsory license, causing a 46% discount in the price of Kaletra, an anti-retroviral AIDS drug).

xliv See e.g., Medicine Sans Frontieres, available at http://www.msf.org.

xlv See Generally Bryan C. Mercurio, supra note 4.

xlvi Sisule F. Musung et al., The Use of Flexibilities in TRIPS by Developing Countries : Can They Promote Access to Medicine?, Study 4C, Commission on Intellectual Property Rights, Innovation and Public Health (August 2005).

xlvii Id.

xlviii Oxfam Briefing Paper, supra note 9, at 13.

xlix Id. (citing as an example, the US-Jordan free trade agreement).

l Id. at 15.

li Report of Committee on Government Reform, Trade Agreements and Access toMedicine Under the Bush Administration (June 2005).

lii Jorn Sonderholm, Intellectual Property Rights and the TRIPS Agreement: An Overview of Ethical Problems and Some Proposed Solutions, Policy Research Working Paper No. 5228, World Bank Development Research Group (March 2010).

liii Oxfam Briefing Paper, supra note 9, at 13. (USTR declaring an internal reorganization plan to “better support vital US innovation, including those of the pharmaceutical industry”).

liv Id. (noting that there are currently 20 pharmaceutical-industry representatives on USTR advisory committees).

lv 19 U.S.C. § 2411 (1974).

lvi Id.

lvii Oxfam Briefing Paper, supra note 9, 1t 14. (noting that this applies despite the fact that countries may be in compliance with minimum IPR standards required by the TRIPS Agreement).

lviii Id. at 17.

lix Government Accountability Office Report, supra note 60.

lx Id.

lxi Id.

lxii Id. at 41. (noting that several pending free trade agreements have been amended and made more responsive to provisions outlining TRIPS flexibilities).

lxiii Id.

lxiv Xavier Seuba, Free Trade of Pharmaceutical Products: The Limits of Intellectual Property Enforcement at the Border, International Centre for Trade and Sustainable Development, Issue Paper No. 27, 9 (2010).

lxv Council of Regulation (EC) No. 1383/2003 of 22 July 2003.

lxvi Id.

lxvii Xavier Seuba, supra note 65.

lxviii General Agreement on Tariffs and Trade (1947).

lxix Xavier Seuba, supra note 65, at 2.

lxx Id. at 5.

lxxi Id.

lxxii Id.

lxxiii Id.

lxxiv Negotiating countries include the US, the EU, Japan, Mexico, Switzerland, Australia, NZ, South Korea, Morocco, Singapore, and Canada

lxxv United States Trade Representative, ACTA Fact Sheet (March 2010), available at http://www.ustr.gov/acta-fact-sheet-march-2010.

lxxvi Id.

lxxvii ICTSD, Animated TRIPS Council Meeting Tackles Public Health, ACTA, Biodiversity, Intellectual Property Programme, Vol. 14:22 (June 16, 2010).

lxxviii Id.

lxxix ICTSD, ACTA Faces Criticism at WTO and in the United States, Bridges Weekly Trade News Digest, at 8, Vol. 14:38 (Nov. 3, 2010).

lxxx Id.

lxxxi Peter Mayberduk, ACTA and Public Health, PIJIP Research Paper No. 2010-09, Program on Information Justice and Intellectual Property (2010).

lxxxii Id. at 2.

lxxxiii Id.

lxxxiv Id. (citing Trade Related Aspects of Intellectual Property Rights Agreement (1994)).

lxxxv Id. (citing TRIPS Article 48).

lxxxvi Id.

lxxxvii Peter Mayberduk, supra note 82, at 3.

lxxxviii Id. at 5.

lxxxix Id.

xc Id. (These remedies include monetary damages, injunctions, and declaratory relief).

xci Id.

xcii Id.

xciii Anti-Counterfeiting Trade Agreement (August 2010).

xciv Brook K. Baker, ACTA: Risks of Intermediary Liability for Access to Medicine, Program on Information Justice and Intellectual Property, PIJIP Research Paper No. 2010-01.

xcv Id.

xcvi Id.

xcvii See Generally, Peter K. Yu, Six Secret (and Now Open) Fears of ACTA (June 14, 2010). SMU Law Review, Vol. 64, 2011.

xcviii Susan K. Sell, The Global IP Upward Ratched, Anti-Counterfeiting and Piracy Enforcement Efforts: The State of Play, IQsensato Occasional Papers No. 1 (June 2008) (stating that, “As soon as one venue becomes less responsive to a high protectionist agenda, IP protectionists shift to another In search of a more hospitable venue.”). 

xcix Kimberlee Weatherall, ACTA as a New Knd of International IP Law-Making, PIJIP Paper No. 2010-12, Program on Information Justice and Intellectual Property (2010).

c Id.

ci Id. at 6. (noting that several of the countries participating in ACTA negotiations are parties to a U.S. free trade agreement (either active or pending Congressional approval) and that the negotiating position of these countries has been influenced by their respective FTA with the US).

cii Id.

ciii Id. at 9.

civ Id. at 6.

cv Anti-Counterfeiting Trade Agreement (August 2010).

cvi Peter Mayberduk, supra note 82 (arguing that the key players behind this agenda are multinational tobacco, pharmaceutical, film and record companies, noting that these are the primary lobbying bodies behind the advancement of ACTA).

cvii Andrew Rens, supra note 12.

cviii Id.

cix ICTSD, Watered-down ACTA Approaching Conclusion, Bridges Weekly Trade News Digest, Vol. 14:30 (September 8, 2010)

cx Anti-Counterfeiting Trade Agreement (October 2010).

cxi Id.

cxii ICTSD, Watered-down ACTA Approaching Conclusion, supra note 110.

cxiii ICTSD, Officials Seek to Ease Fears of Privacy Violations under ACTA, Bridges Weekly Trade News Digest, Vol. 14: 25 (July 7th 2010).

cxiv Id.

cxv Letter from Ron Wyden to USTR, January 6, 2010, available at http://www.ustr.gov/webfm_send/1701.

cxvi Response from USTR to letter from Senator Ron Wyden, January 28, 2010, available at http://www.ustr.gov/webfm_send/1700.

cxvii See generally, Over 75 Law Profs Call for Halt of ACTA, available at http://www.wcl.american.edu/pijip/go/blog-post/academic-sign-on-letter-to-obama-on-acta (accessed November 22, 2010).

cxviii See generally, ACTA- Text and Leaked Documents, PIJIP Database, available at https://sites.google.com/site/iipenforcement/acta (accessed November 22, 2010).

Guadalupe Lopez Copyright © 2011

Apple's Expanding App Reach

Posted  yesterday by Sean S. Wooden and Karen J. Wade of Andrews Kurth LLP details of Apple’s changes to it’s purchase policy as it applies to publishers. 

On February 15, 2011, Apple unveiled its new application store subscription and content sale policy, which purports to apply to “publishers of content-based apps.” The new policy becomes effective on June 30, 2011, and, for the first time, enables iOS application (“app”) publishers to sell subscriptions through their apps (iOS is the operating system for Apple mobile devices). The new policy will apply to new and existing apps. Existing app publishers are being required to comply with the new policy by the effective date or risk having their apps removed from Apple’s application store. This new policy, consequently, presents a number of issues or problems for new and existing app publishers.

Among the many problems, the policy mandates that apps for publishers that sell content must include an in-app purchase option and may no longer contain links to external sites where content is sold. In other words, such apps must enable app purchasers to directly purchase or subscribe to the content through the app and may not direct purchasers to an external site for purchase. Moreover, publishers of such content-based apps are required to pay Apple 30% of all revenues, including subscription revenues, generated through the app. Previously, many publishers had paid this 30% only on the app download cost charged to customers (download costs were typically <$10). Now, if a purchaser signs up for a new subscription through an app, Apple will receive 30% of the revenue whether the subscription purchase is processed via a website or otherwise outside of the app. Moreover, any subscription offers made outside of the app must be no better than the subscription offers available through the in app purchase option.

Many app publishers may think that this policy does not apply to them because they do not offer “content” or subscriptions to “content” through their apps. However, the key determination to be made when evaluating whether an app is subject to the new policy is what is meant by “content” or the phrase “publisher of content-based apps.” While examples provided by Apple in connection with the release of their new policy revolved around publishers of content in a traditional sense, such as publishers of “magazines, newspapers, videos, music, etc.,” Apple has not provided a specific definition of content that is so limited. Moreover, an examination of Apple’s iOS developer agreement, which states that “apps utilizing a system other than the In-App Purchase API to purchase content, functionality or services in an app will be rejected,” indicates that the policy will not be limited to content apps in the traditional sense. Illustratively, a new app which would not have provided content per se (i.e., the Readability app, which would have provided a service enabling purchasers to remove advertisements and other elements from webpages, providing only pure-text) was rejected from the App store within days of the new policy announcement, providing a further indication that the policy may not be limited solely to content publishers.

The new policy has been met with resistance by various apps developers and publishers. A number of companies have publicly rejected the new policy and are exploring legal options in connection with fighting it. In addition, the FTC and the Justice Department are currently taking preliminary steps to investigate the new policy for possible anti-trust violations. Although, the true impact of this new policy will not be known until it actually goes into effect and Apple begins to enforce it, it is likely to affect all companies who publish or are considering publishing an app.

© 2011 Andrews Kurth LLP

Antitrust, Intellectual Property Rights, and the Online Music Industry: An Antitrust Analysis of Apple’s Combination of Services and Products

The National Law Review would like to congratulate Rui Li of the The University of Iowa College of Law one of our Spring 2011 Student Legal Writing Contest Winners.  Rui’s topic is An Antitrust Analysis of Apple’s Combination of Services and Products:       

I.  INTRODUCTION

For many music consumers, the ideal medium for music is digital. It offers many advantages over CDs, including easier distribution, decreased physical size, greater choice in the medium of sound reproduction, and the ability to include digital data such as artistic information and graphic artwork.i Online music stores offer more variety than consumers would get in a brick-and-mortar store, including reviews, recommendations, and other interactive features which increase the choices for consumers.ii The advantages of digital music, coupled with the efficiency of online purchasing, have helped online music stores such as Apple’s iTunes Store become the most prevalent form of commercial music distribution.iii However, online music piracy has been harming the music industry via lost CD sales even before commercial distribution of music over the Internet became prevalent. As online music firms attempt to tackle online music piracy, both antitrust enforcement agencies and private plaintiffs have raised concerns. Some of the solutions implemented by online music firms appear to promote competition by protecting intellectual property rights. However, others require closer scrutiny because some actions taken to protect these intellectual property rights have been, at times, abusive.

The tactics used by Apple to combat digital piracy have drawn legal scrutiny from a number of sources in recent years. In June 2006, the antitrust enforcement agencies of Norway, Sweden and Denmark filed a complaint against Apple regarding the restrictions it placed on iTunes audio downloads, an action that was later joined by Germany and France.iv On December 31, 2007, a group of plaintiffs brought an antitrust lawsuit against Apple in the United States District Court for the Northern District Court of California, charging Apple with maintaining an illegal monopoly on the digital music market.v On December 28, 2008, the court granted plaintiffs’ motion for class certification against Apple.vi On May 25, 2010, the New York Times reported that the United States Department of Justice was examining Apple’s tactics in the market for digital music.vii In light of this scrutiny, in 2009 Apple stopped selling music downloads with its proprietary digital rights management (“DRM”) restrictions, a technology that prevented audio downloads purchased through the iTunes Store from playing on portable media players other than Apple’s iPod.viii Given the dominant position of iTunes in online music distribution, the effect of Apple’s decision to remove DRM restrictions on the online music industry and the fight against online music piracy remains to be seen.ix

Apple’s digital music business has important ramifications for antitrust law that this Note explores. Part II of this Note examines Apple’s digital music business practices with particular emphasis on the manner in which Apple combines products and services. Part III engages in an antitrust analysis of four possible causes of action against Apple’s business conduct with an eye toward the market structure of the digital music industry. The Note concludes that Apple’s combination of products and services is procompetitive, and, in addition, offers a promising solution to digital music piracy.

II.  IPOD, ITUNES AND ITUNES STORE

In 2001, Apple introduced the iTunes music software application to help music consumers organize, browse, and play digital media. In 2003, Apple launched the iTunes Store which, in April 2008, became the number one music vendor in the United States.x On February 24, 2010, the Store had its 10 billionth song download and a music catalog of over 12 million songs.xi iTunes Store now accounts for seventy percent of the worldwide digital music download retail market.xii

Until January 2009, Apple restricted iTunes Store and iTunes Software to work only with its own portable media player, the iPod, a product that currently claims 70 percent of the portable media player market.xiii Apple restricted the iPod so it could only play files embedded with Apple’s own DRM downloads called “FairPlay”, and no one else’s. Likewise, files downloaded from the iTunes Store could only be played on an iPod. Apple maintained this closed system through regular updates and the threat of legal action. Most notably, in 2005, Apple forced RealNetworks to abandon its “Harmony” technology through software updates and the threat of patent infringement lawsuit.xiv Harmony allowed music downloads purchased through RealNetworks direct playback on iPod.

III.  ANTITRUST ANALYSIS WITH AN EYE TOWARD THE MARKET STRUCTURE OF THE MUSIC INDUSTRY

As a precursor to an analysis of Apple’s conduct from an antitrust perspective, an inquiry must be made into the market structure of the music industry.

A.  The Equilibrium Between Major Labels, Online Music Vendors, and Customers

The music market is highly concentrated, dominated by a small number of large firms (hereinafter “Major Labels”: Sony Music Entertainment, Universal Music Group, Warner Music Group, and EMI Music Group). Major Labels’ collective catalogs comprise about 85 percent of the distribution rights in the music industry.xv Each of these firms has exclusive control of a large and fungible catalog of intellectual property. In the past, Major Labels have taken advantage of their dominant position to extend market power into downstream distribution channels.xvi These practices have at times drawn the attention of antitrust enforcement agencies. In 2000, the Major Labels settled the Federal Trade Commission’s charge of restraining competition in the music market.xvii

The significant economies of scale achieved through the grouping of thousands of authors’ and composers’ copyrighted music products operate as a barrier for other firms to enter the music licensing market. This concentrated market structure lays the groundwork for a tacitly collusive environment in which Major Labels can achieve collusive results in the online music market through the non-collusive exercise of their power in the licensing market. Under this tacitly collusive structure, they may be able to reach a consensus about how to develop the online music market without explicitly agreeing with each other. If one of the Major Labels sets a high and relatively profitable licensing price, the rest of the Major Labels may follow the practice of the price-setting firm even though they do not formally communicate with each other.

The appearance of online music vendors poses a threat to this shared dominant market position. Scholars estimate that Major Labels would lose thirty to forty percent of their profit margins if online music vendors could freely compete with Major Labels.xviii To protect their advantage, it is in the Major Labels’ best interest to either deny market entry to online music vendors or bring them into the fold in an advantageous manner. Fortunately for the Major Labels, this is not much of a challenge because the barriers to entry are high and the products are fungible.xix In addition, copyright laws have given Major Labels influence over online music vendors.xx Major Labels can potentially use licensing practices to create prohibitive barriers to entry or to contractually bind online music vendors to the pricing structure of the CD market.xxi Because of this market structure, online music vendors stand little chance of success competing with the traditional distribution networks established by the Major Labels over the decades.xxii

A major, common priority of Major Labels is to gain control of the digital music distribution market. To achieve this goal, in descending order of preference, Major Labels have the potential strategies of: 1) attempting to terminate online music piracy through vigorous infringement suits or other form of antipiracy enforcement measures, 2) extracting shared monopoly profits from online sales at a rate higher than or equal to that from CD sales, or 3) expanding volume of online sales at lower profit levels by licensing online music at reasonable rates.xxiii An examination of the economic theories explaining the behaviors of oligopolies lends support to the prediction of strategies laid out above.xxiv The part that follows will compare the actual practices of Major labels to the behaviors predicted above.

Strategy No.1: Terminating online music piracy through vigorous infringement suits or other form of antipiracy enforcement measures. In 2003, the Recording Industry Association of America (RIAA), the representative of Major Labels, began attacking online music piracy by filing mass infringement suits. However, this approach, besides being expensive and time consuming, backfired.xxv It not only failed to win public sympathy for the music industry but also demonized the plaintiffs, the Recording Industry Association of America and the copyright holders they represented.xxvi In light of this, the RIAA announced in December 2008 that it was ending its mass infringement suits and attempting to cooperate with Internet Service Providers whereby Internet Service Providers will suspend or terminate Internet users’ service after repeated RIAA notices of alleged piracy.xxvii

Strategy No.2: Extracting shared monopoly profits from online sales at a rate higher than or equal to that from CD sales. In 2001, Major Labels pooled their catalogs into two non-overlapping online music vendors, MusicNet and Pressplay.xxviii They refused to license music for less than two dollars per song, and, in some cases, as much as three and a half dollars.xxix In addition, the music downloads are not transferable to CDs. In 2002, the Major Labels licensed Listen.com for a price of 99 cents per song, roughly the equivalent to the price of a CD.xxx Still, most of that music could not be burned to a CD.xxxi In March 2001, U.S. Department of Justice opened an investigation into alleged collusion in the online market.xxxii However, the DOJ later dropped the investigation in 2003 because “major labels licensed their music to a broader array of third-party music services that compete on price and features” and that unrelated firm Roxio’s acquisition of Pressplay diminished the possibility of collusion.xxxiii

Strategy No.3: Expanding volume of online sales at lower profit levels by licensing online music at reasonable rates. By the end of 2002, the Major Labels had licensed their catalogs to all major online music vendors which charged a nine to ten dollars per month subscription fee, plus 99 cents per burnable download.xxxiv

During this period Apple launched iTunes Store with a market model combining iTunes Store, iTunes Software, and iPod. The combination proved to be a huge success. Apple was thus able to dispense with subscription fees.xxxv In 2008, Apple became the number one music vendor.xxxvi The entrance of a radically efficient product model, the iTunes-iPod combination, coupled with the shared interest of Apple and Major Labels in eliminating online music piracy, promoted competition, lowered costs, improved services, and increased overall economic efficiency in the music industry.

The evolution of the online music market showed that even though Major Labels’ preference of options may partially be explained as legitimate attempts to eliminate online music piracy, they still had every incentive to thwart the development of the online music market despite the fact that customers preferred music downloads. Major Labels thought the rising of the online music market and the new business models for delivering music would deprive them of their control over the market. But when they realized they were not able to stop the development of online music distribution, they attempted to control the pace and the manner of development of online music.xxxvii

Apple’s business model combines pricing, ease of use, and technical prohibition in a way that significantly decreases the incentives for customers to choose pirated music. However, it remains to be seen whether the appearance of powerful market participant such as Apple will eventually create a more competitive environment, bring down the costs of online music, and terminate online music piracy. Therefore, the courts and the antitrust enforcement agencies should understand the equilibrium between the music industry’s interest in controlling mechanisms of distribution, the threat of online music piracy, online music vendors’ interest in lowering licensing costs, and the consumers’ interest in innovative and effective access to music. The courts could consider refraining from imposing direct legal action against online music vendors such as Apple. History has shown that time and market forces often provide equilibrium in balancing interests, whether the new technology is a player piano, a copier, a tape recorder, a video recorder, a personal computer, or a MP3 player.

B.  The Alleged “Tying Arrangement” of iPod, iTunes Music Store, And iTunes Software

“Tying” occurs when a seller insists that the buyer take a second, or “tied”, product as a condition of obtaining the seller’s initial “tying” product.xxxviii Tying arrangements can be condemned either as contracts in restraint of trade under section 1 of the Sherman Act, or else under the more explicit provisions of section 3 of the Clayton Act.xxxix

Prior to January 2009, Apple had created something that resembles a tying arrangement by using its FairPlay technology to require owners of iPods to purchase digital music from the iTunes Store (users could still use music ripped from CDs or downloaded from unauthorized websites).

Tying is illegal per se when the defendant ties two separate products and has market power in the tying product.xl The “leverage” theory articulated by Justice Brandeis in Caprice was the only theory articulated by the Supreme Court supporting the per se approach. The theory understood tying arrangements as inherently anticompetitive because it permitted a monopoly firm to “leverage” its market power to a product market in which it lacked market power, increasing its monopoly profits.xli The leverage theory has largely been discredited by economists who argue that when the second product is imposed as a cost of using the first monopoly product, the monopolists are not necessarily better off because the elevated price of the tied product reduces the consumers’ willingness to pay for the tying product. It is now widely accepted most tying arrangements are procompetitive and efficient.xlii While the “leverage” theory of tying has been largely debunked, the market foreclosure theory continues to have relevance. It is now understood that tying arrangements are anticompetitive only in the rare cases that tying denies rivals access to markets.xliii However, economists have argued that this “access denial” or “entry barrier” theory is only marginally more plausible than the “leverage” theory.xliv

Courts have followed the lead of economists and become skeptical of antitrust claims based on tying theories. In the Microsoft case, the D.C. Circuit Court held that integration in the software industry involving computer operating systems promised significant efficiencies and that even relatively low-tech ties typically produce significant efficiencies by enabling firms to control the quality of collateral products.xlv The D.C. Circuit Court further concluded that the rule of reason should be applied to the Windows and Internet Explorer tie because a per se rule could act as an irrational restraint on efficiency and innovation, which often consists in combining features or functions that previously were separate.xlvi The court recognized the difficulty in distinguishing anticompetitive forced package sales from those that are efficient and effective. This is exactly the reason why a “rule of reason” analysis should be applied to all tying arrangements, the court explained.

In a “rule of reason” analysis, an antitrust enforcer proceeds by asking first whether the tying arrangement unreasonably excludes rivals.xlvii If the products are widely available separately, then there is no market foreclosure because widespread availability of alternatives indicates that no rival is foreclosed by the tie.xlviii Applying this analysis to the subject of this Note, Apple’s online music business, it is clear that alternatives to iTunes Music Store and iPod are widely available. Alternatives to iTunes Music Store include: RealNetworks, Wal-Mart, Amazon, Napster and Yahoo. In the portable media player market, alternatives to the iPod include: Microsoft, Sony, Creative, and SanDisk. Therefore, no rival is foreclosed by the tying from a properly defined market.

Courts should not substitute their own product designs for those generated by the market. Nevertheless, courts are often asked to determine whether a tying bundle is unreasonably anticompetitive. iTunes Music Store, the dominant online music vendor, needs to combat online music piracy and perform additional functions besides distributing music in order to develop the online music market. iTunes Music Store now offers customer support, a platform for customer reviews, Podcasts subscriptions, music and audio book previews, and iTunes U online service at no extra cost. A price-cutting online music vendor or online music piracy service might take advantage of the fact that Apple cannot charge separately for these services. The other vendors might charge a lower markup and refuse to provide essential services such as combating online music piracy and developing the online music market, knowing that the consumer will keep enjoying the free services provided by iTunes Store. Undoubtedly, iTunes Store cannot survive by only supplying uncompensated services that benefit other dealers. One strategy Apple can employ to minimize free riding is to tie iTunes and iPod to ensure a healthy supply of consumers who have subscribed to either iPod or iTunes.

While all these practices are readily defended as procompetitive, the defense is unnecessary in the first place when there is no injury to competition. The purchasers of iPod and iTunes bundle simply want a smaller product than the one that Apple is offering. But that desire does not harm competition. Apple’s bundle is simply the equivalent of the land developer who refuses to subdivide before selling. It is not the purpose of antitrust law to regulate the size of the products that Apple chooses to sell.

C.  Refusal To License FairPlay Patent

Apple used its FairPlay digital rights management system to require owners of iPods to purchase digital music from iTunes Store. Apple refused to license its patented FairPlay technology to other portable media player manufacturers such as Microsoft and declined to support alternative digital rights management systems such as RealNetworks’ Harmony technology that circumvented Apple’s FairPlay system. Generally, the owner of an intellectual property right does not have a duty to deal with a competitor, even if the owner refusing to deal is a monopolist, as long as there are valid business reasons for refusing to deal. In CUS, L.L.C. v. Xerox Corp., the Federal Circuit held that a “patent holder may enforce the statutory right to exclude others free from liability under the antitrust laws” in the “absence of an indication of illegal tying, fraud in the Patent and Trademark Office, or sham litigation.”xlix In addition, the patent statute contains no compulsory licensing provisions and even stipulates that there is no patent “misuse” when a patentee refuses to license its patent to competitors.l The provisions of 35 U.S.C. § 271 provide that “No patent owner shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having refused to license or use any rights to the patent.”li Although in Image Technical Services, Inc. v. Eastman Kodak Co.lii, the Ninth Circuit Court of Appeals affirmed a finding of antitrust violation where Kodak refused to sell patented products to competitors, it is now widely accepted that the Ninth Circuit Court of Appeals made a significant error. In that case, Kodak refused to license its patented parts to firms that wanted to compete with Kodak in the repair of Kodak photocopiers.liii The court determined that Kodak was unlawfully creating a second monopoly in service by refusing to sell the patented parts.liv The court based its decision on the theory that under the patent laws, a patent may legally create a monopoly in only one market.lv Kodak reflects an erroneous understanding of the nature and functions of a patent. Rather than market rights, patent claims create exclusive rights in technologies.lvi A compulsory licensing of intellectual property rights is only justified where a monopolist’s refusal to license is profitable only because it tends to extend or preserve a monopoly.lvii Apple’s refusal to license its FairPlay technology to any other online music vendor and MP3 manufacturer would easily pass this test because licensing FairPlay to a rival such as Microsoft or RealNetworks would deprive Apple of both online music and iPod sales and that is always an adequate business justification. A compulsory licensing of Apple’s FairPlay technology to competitors would effectively turn Apple into a public utility and places the court in the undesirable position of price regulator.

D.  Patent Misuse

Patent misuse refers to improper acts committed by a patent or other intellectual property rights holder.lviii In 1952 and again in 1988 Congress amended the Patent Act to bring the concept of misuse more closely in line with antitrust principles.lix Congress intended to put a stop to the expansionist applications of patent misuse doctrine to reach practices which were not anticompetitive under any definition.lx For example, in Brulotte v. Thys Co., 379 U.S. 29 (1964), the Supreme Court condemned a contract under the patent misuse doctrine demanding royalty payments after the patent expired, even though there was no showing of anticompetitive practices.lxi In response to the Court’s application of the patent misuse doctrine to reach practices which are irrelevant to the concerns of antitrust law, Congress limited the use of the doctrine by providing that a patent owner is not guilty of patent misuse if it refuses to license, requires licensees to purchase goods that would work effectively only with the patent, or ties different products in the absence of showing of market power in the primary product.lxii Therefore, whether Apple’s use of FairPlay technology is a patent misuse may not have independent relevance when Congress limited its scope to antitrust violations. Thus, there is no need to make an independent inquiry as to whether Apple’s use of FairPlay technology is a patent misuse.

E.  Product Design: Strategic Creation of Incompatibility

Apple engaged in strategic creation of incompatibility by designing an exclusive combination or system of iPod, iTunes Software, and iTunes Store. Generally speaking, antitrust courts are not competent to second-guess decisions about product design.lxiii In most circumstances, the conduct that creates excessive incompatibility is also self-deterring.lxiv The market provides strong discipline for firms that produce innovations that customers reject. This suggests that truly anticompetitive product redesigns are uncommon.lxv Therefore, Apple’s regular updates to iTunes Software and iPod, which add new features as well as maintain the closed system of iPod, iTunes software, and iTunes Store are presumably procompetitive. However, Microsoft showed that a product redesign is anticompetitive if the firm has very substantial market power and the redesign is sufficient to exclude complementary products from the market.lxvi Moreover, the firm must intend the injury caused by the selection of a particular technology.lxvii In addition, the injury must greatly outweigh the benefits that the redesign produces for consumers.lxviii As explained in Part B, Apple’s redesign serves the purpose of its unique product model. It provides consumers through various updates with new features such as visual music, podcasts, playback capacities, and seamless management of music. Unlike the case in Microsoft, there is integrative benefit from combining the iTunes and iPod.

IV.  CONCLUSION

Apple’s business practices of combining services and products have raised antitrust concerns. This Note analyzed Apple’s practices with an eye toward the realities of the music market. For courts and antitrust enforcement agencies to continue to serve as competition and innovation facilitators, they need to fully understand what the structure and the landscape of the music market are and how the entrance of a new and aggressive business model such as Apple’s exclusive system alters the competitive landscape of the music market. The most serious impact of a court’s finding of antitrust violation is not the large damages awarded to the plaintiffs. Rather, it is the loss of healthy competition and the innovative and effective access to copyrighted materials. An antitrust analysis of the possible causes of action against Apple shows that Apple’s conduct may not have harmed competition after all. If balancing is required to determine whether certain restraint is anticompetitive or not, antitrust should stand aside, trusting that the market rather than the government will strike the right balance.

i Brendan M. Schulman, The Song Heard ‘Round the world’: The Copyright Implications of MP3s and the Future of Digital Music, 12 HARV. J.L. & Tech. 589, 626-27 (1999).

ii Press Release, NDP Group, Amazon Ties Wal-Mart as Second-Ranked U.S. Music Retailer, Behind Industry-Leader iTunes, May 26, 2010, available at http://www.npd.com/press/releases/press_100526.html.

iii Press Release, Apple, Inc., iTunes Store Top Music Retailer in the U.S., Apr. 3, 2008, available at http://www.apple.com/pr/library/2008/04/03itunes.html.

iv Thomas Crampton, Apple Faces Fresh Legal Attacks in Europe, New York Times, June 6, 2006, available at http://www.nytimes.com/2006/06/09/technology/08cnd-apple.html.

v In re Apple iPod iTunes Antitrust Litig., C05-00037 JW, 2009 WL 249234 (N.D. Cal. Jan. 15, 2009).

vi Id.

vii Brad Stone, Apple Is Said To Face Inquiry About Online Music, New York Times (May 25, 2010), available at http://www.businessweek.com/news/2010-05-26/justice-department-said-to-s….

viii Press Release, Apple, Inc., Changes Coming To The iTunes Store (Jan. 6, 2009), available at http://www.apple.com/pr/libarary/2009/01/06itunes.html.

ix See NDP Group Press Release, supra note 2.

x See Apple Press Release, supra note 3.

xi Press Release, Apple, Inc., iTunes Store Tops 10 Billion Songs Sold (Feb. 25, 2010), available at http://www.apple.com/pr/library/2010/02/25itunes.html.

xii See NDP Group Press Release, supra note 2.

xiii Jessica Hodgson, Leap Year Trips Zune in Black Eye for Microsoft, WALL ST. J. (Jan. 2, 2009), at A9, available at http://online.wsj.com/article/SB123074469238845927.html.

xiv Real Reveals Real Apple Legal Threat, MACWORLD(Aug. 10, 2005), available at http://www.macworld.co.uk/news/index.cfm?Rss&NewsID =12310.

xv In re Time Warner et al., F.T.C. File No.971-0070 (2000) (Statement of Chairman Robert Pitofsky and Commissioners Shelia F. Anthony, Mozelle W. Thompson, Orson Swindle, and Thomas B. Leary), available at http://www.ftc.gov/opa/2000/05/cdpres.shtm.

xvi Greg Kot, Are We Finally Buying It?: New Model Will Change the Way Musicians Approach Craft, Chicago Tribune, May 11, 2003, § 7, at 1.

xvii See FTC Press Release, supra note 15.

xviii Matthew Fagin et al., Beyond Napster: Using Antitrust Law to Advance and Enhance Online Music Distribution, 8 B.U. J. Sci. & Tech. L. 451, 457 (2002).

xix Anthony Maul, Are the Major Labels Sandbagging Online Music? An Antitrust Analysis of Strategic Licensing Practices, 7 N.Y.U. J. Legis. & Pub. Pol’y 365, 373-75 (2004).

xx Id.

xxi Id.

xxii Id.

xxiii Id. at 373-74.

xxiv Herbert Hovenkamp et al., Antitrust Law, Policy and Procedure: Cases, Materials, Problems 290-96 (6th ed., 2009).

xxv Sarah McBride & Ethan Smith, Music Industry to Abandon Mass Suits, WALL ST. J. (Dec. 19, 2008), available at http://online.wsj.com/article/SB122966038836021137.html.

xxvi Id.

xxvii Id.

xxviii See Maul, supra note 19.

xxix Id.

xxx Id.

xxxi Id.

xxxii Id.

xxxiii Statement by Assistant Attorney General R. Hewitt Pate, Regarding the Closing of the Digital Music Investigation, (Dec. 23, 2003) available at http://www.usdoj.gov/atr/public/press_releases/2003/201946.htm.

xxxiv See Maul, supra note 19.

xxxv Id.

xxxvi See NDP Group Press Release, supra note 2.

xxxvii See Maul, supra note 19.

xxxviii N. Pac. Ry. Co. v. United States, 356 U.S. 1, 5-6 (1958).

xxxix Id.

xl Id.

xli Cabrice Corp. v. American Patents Development Corp., 283 U.S. 27, 31-32 (1931).

xlii Herbert Hovenkamp, The Antitrust Enterprise: Principle and Execution 261 (1st ed., 2005).

xliii Id. at 263.

xliv Id.

xlv United States v. Microsoft Corp., 253 F.3d 34, 84-90 (D.C. Cir.), cert. denied, 534 U.S. 952 (2001).

xlvi Id.

xlvii Hovenkamp, supra note 42, at 265.

xlviii Id.

xlix CSU, L.L.C. v. Xerox Corp., 203 F.3d 1322, 1328 (Fed. Cir. 2000).

l Hovenkamp, supra note 42, at 265.

li 35 U.S.C § 271(d).

lii Eastman Kodak Co. v. Image Technical Servs., 125 F.3d 1195, 1196 (9th Cir. 1997), cert. denied, 523 U.S. 1094 (1998).

liii Id.

liv Id. at 1218-1219.

lv Id.

lvi Hovenkamp, supra note 42, at 269.

lvii Id. at 270.

lviii Id. at 272.

lix 35 U.S.C. § 271(d).

lx Hovenkamp, supra note 42, at 274.

lxi Brulotte v. Thys Co., 379 U.S. 29 (1964).

lxii 35 U.S.C. § 271(d).

lxiii Hovenkamp, supra note 4, at 274.

lxiv Id. at 275.

lxv Id.

lxvi See Microsoft, supra note 45.

lxvii Hovenkamp, supra note 42, at 276.

lxviii Id.

© Copyright 2011 Rui Li  

7th Patent Strategies Summit April 27 – 29, 2011, Four Season Hotel Silicon Valley at East Palo Alto

The National Law Review would like to remind you of the upcoming  Patent Strategies:   Summit Focusing on Optimizing your Patent Portfolio April 27-29 in East Palo Alto, CA  

Developing Innovative Strategies To Optimize Your Patent Portfolio

Companies prioritize patents as securing intellectual property rights is often the key to the foundation, growth, and ultimate survival of a company. foundation, growth, and ultimate survival of a company. Now more than ever before, patent practitioners must have up-to-the-minute strategies to effectively protect, monetize and leverage their company’s patent portfolio. The market demands companies to anticipate competitor’s movements, sustain innovation, license strategically and ultimately increase revenue. In order to do this, they must be cognizant of the shifting litigation landscape as a result of new court decisions and changing regulations.

IQPC’s 7th Patent Strategies Summit examines the latest changes in the industry and leverage your patent portfolio to extract innovation and financial gain. Corporate Patent experts will discuss:

  • Changes in patent strategy brought about by the current economic downturn
  • Best practices in Global IP Management
  • Prospects for the future in light of new regulations and potentially adverse court decisions
  • Trends in enforcement actions and litigation by NPEs
  • Tips for licensing in and licensing out intell

For More Details and to Register:

 

 

 

IQPC’s 11th eDiscovery Summit – April 27-29, 2011 San Francisco, CA – Save Big if Registered Before April 1st!

The National Law Review is a proud media partner for IQPC’s 11th eDiscovery Summit – April 27-29, 2011 San Francisco, CA

IQPC’s 11th eDiscovery Summit features hands on sessions and practical instruction to bring back to your eDiscovery teams. You will engage with IT and legal focus groups to candidly discuss anticipated push back issues, observe how different roles within your company approach imminent litigation and put bridging the gap strategies into practice.

It is no secret that you want to reduce the cost of eDiscovery, yet how do you know if you are paying a reasonable price for ESI processing and review? Do not miss this unique opportunity to learn about outside the box pricing structures and benchmark with your peers to gain a realistic picture of fair pricing for electronic information management.

Why attend the 11th eDiscovery Summit?

  • United States District Court Judges share their experiences with companies committing costly electronic discovery mistakes
  • Bridge the gap between IT and legal through a practical exercise with IT and legal focus groups
  • Learn practical steps to create a solid cross-functional eDiscovery team fostering communication and effective workflow between departments
  • Gain valuable metrics to assess the repeatability and defensibility of your eDiscovery procedures
  • Maximize the benefits of social networking and cloud computing without compromising security and increasing risk
  • Earn CLE Credits! Find out more

Registration, Location & Details…..

  • April 27 – 29, 2011 The Hyatt Regency San Francisco, CA

  • Save Big on Registration – if you sign up prior to April 1st
  • For More Information and to Register – Please Click Here:

Preparing for the Launch of New Generic Top Level Domain Names (gTLDs) in 2011

Recently posted at the National Law Review  by Monica Riva Talley of Sterne, Kessler, Goldstein & Fox P.L.L.C. – a great overview of the upcoming changes to domain names by ICANN:

On June 16, 2008 the Internet Corporation for Assigned Names and Numbers announced that it would allow an unlimited number of new gTLDs (generic top level domain names) to populate the web.  Expanding on the current limited offerings of gTDLs (such as .com, .net, .org., .info, and .mobi), these new gTLDs will be comprised of virtually any possible term — including brand names (“.BRAND”), generic names (e.g., .CAR, .HOME), and city names — opening-up the web to an infinite number of naming possibilities.

Although the process has been delayed several times, the current belief is that ICANN will begin accepting applications for these new gTLDs by July or August 2011.  However, it is likely that the start of the application process will be delayed further, as various trademark organizations have raised concerns about the award and dispute resolution process. 

Why Expanding The Number of gTLDs is a Good Idea

ICANN has stated that its aim in creating more gTLDs is to enhance competition and promote choice and innovation.  Of particular note to companies, not only will it now be possible for  them to register brand names as gTLDs, they  will also have control of second level domain names issued under potential new gTLDs, and can sell these second level domain names to third parties.  Thus, this new system could allow not only for enhanced brand promotion and visibility, but also for secure corporate and client networks (used for purposes such as facilitating the provision of services to clients via a dedicated portal) – which could prevent fraudulent practices such as offers of counterfeit products via the Internet.

And Why it Might Not Be

On the down side, increasing the number of top level domain names means more opportunities for cybersquatters, those who register, traffic in, or use domain names with bad faith intent to profit from the goodwill of a trademark belonging to someone else.  It will  also significantly increase defensive registration and dispute costs.  Many in the trademark community are concerned that this dramatic increase in the number of gTLDs will inevitably cause a considerable burden on trademark owners who will need to carefully consider online strategies.  In particular, not every country makes use of the Uniform Dispute Resolution Policy (UDRP), making it difficult to address abuses that originate abroad.  Moreover, while the variation of domain name dispute mechanisms available worldwide is considered complex today, in a world with only a handful of gTLDs, it will only get more complex as the domain name platform increases exponentially.  Finally, the high cost of obtaining one of these new domains is thought to exclude many worthwhile non-profit organizations and developing countries, for whom such domains might prove a useful resource.

Cost to Apply for a New gTL

As alluded-to above, the cost to apply for one of these new gTLDs is steep — $185,000, a price that ensures only well-financed organizations operate the domains, and involves a lengthy application process and evaluation. 

Will Someone Else be Able to Register My Trademark as a gTLD?

After the application period closes, ICANN will verify all of the applications for completeness and will then release on its website the list of strings, applicant names, and other application data.  ICANN plans to then implement an objection-based process that will enable trademark owners to demonstrate that a proposed gTLD would infringe their legal rights. In the event that the legal rights objection is successful, the application will not proceed.

At this time, ICANN is not contemplating a system that would notify a trademark owner if a third-party applies to register a trademark that does not belong to them.  ICANN is conducting global public outreach to educate the community on what their responsibilities are, as well as what the formal objection mechanism and timeline is, before the program launches.  ICANN will publish the list of all applications received after the application submission period closes, and will continue to publicize the objection process and deadlines. 

For More Information . ..

General information about ICANN can be found at its website.  A discussion from ICANN regarding the new gTLD program (the dates on this document are no longer correct, because of delays) can be found here. Parties interested in providing input or voicing concerns regarding the plan or the process can attend the next ICANN meeting, scheduled to take place in San Francisco, March 13 – 18, 2011.

© 2011 Sterne Kessler