By Julie Garcia

#160 #160#160 #160#160 #160#160 #160The path from original idea to market launch of a product can be a long and arduous road. There are many hurdles that must overcome prior to the launch and distribution of a product. The path usually begins in the mind of a few creative individuals or a scientist or engineer. Extracting the idea and turning it into a viable product or service upon which a company can grow to profitability is fraught with challenges, pitfalls and plenty of mountains to climb and the path generally includes: (i) determining if the idea is viable as either a product or service; (ii) determining the form of entity to be created from which business will be conducted; (iii) financing the endeavor; (iv) product development; and finally (v) market launch.

#160 #160#160 #160#160 #160#160 #160An idea can be a very powerful and important basis from which a product or service can be derived; however, initial research should be conducted to determine if the idea has already been protected by a patent or if the idea is viable from a technological standpoint. Although many ideas sound good in principle, the execution of the idea may not be feasible or even possible. In some cases, the idea has already been developed to a certain point and not marketed for a variety of reasons. Generally, an initial search through the patent office filings may provide enough information to determine whether or not the idea is worth pursuing. If the initial search is negative, further in-depth research should be conducted through more formal patent search methods. Services exist that will conduct searches that reach beyond the initial patent and trademark website search. Although the search may be costly, it may ultimately save money if the search returns positive results and further development of the product or service would ultimately be futile.

#160 #160#160 #160#160 #160#160 #160After the initial determination that the idea is feasible or at least worth pursuing, it is generally advisable to form an entity which will own or license the idea or invention and through which the product may ultimately be launched. The choice of entity is often a decision that requires some thought and consideration, particularly in light of the circumstances surrounding the founders and the future intent regarding financing for the entity. Generally, most technology companies will take the form of a corporation, either a C corporation or an S corporation or a limited liability company. There are various reasons that one entity is chosen over the other, including tax issues. Certain types of entities may not be feasible depending on the type of shareholders or members contemplated. For example, an S corporation is limited to a certain type of shareholder, which generally excludes other corporations or entities and the number of shareholders in an S corporation is limited. A consideration worth noting on the use of a limited liability company in California is the gross receipts fee. The fee due to the State of California is based on the gross receipts received by the entity for the year. In addition to the type of entity chosen, the jurisdiction of the entity may be important. Each state has adopted different rules and regulations regarding entities making some jurisdictions more company friendly than others. Case law in certain jurisdictions may make certain states more appealing than others and the filing fees may also create situations that are more favorable than others.

#160 #160#160 #160#160 #160#160 #160Generally, technology companies are not ready to launch a product or service upon formation of the entity. A significant amount of research and product development is important and requires funding. Unless the founders are independently wealthy and can manage financing the endeavor on their own, outside investors will be needed until a revenue stream is generated from the product or service. Although there are a number of investors that are looking for the next big technology, money is not as readily available as it had been at the peak of the “dot com” boom. During that time, investment money was free-flowing and available to most companies. Currently, investors are much more cautious about the companies in which they invest their money and are not as willing to fund small startup companies with unlimited funds. A significant amount of due diligence regarding the technology held by the company and the business plan are standard practice and very important. An investor will want reassurance that the technology has been protected, is owned by the company and is being developed in an efficient manner. In addition, the investors will want to see formation documents and review the business documents which show that the business has been conducted in pursuant to corporate and securities regulations.

#160 #160#160 #160#160 #160#160 #160Upon receiving funding, at least enough to move forward with the process, product development will follow. The successful launch of the product will depend on the proper market research and development of the product or service. In many cases, beta testing of the product will allow the company to test the product in a typical user setting and will provide valuable feedback from actual users of the product. Although beta testing may be useful, it is important that the company take proper steps to protect the intellectual property that will be released. Entering into a beta test agreement will assist in setting the parameters of the review and use of the product and establish expectations of both parties.

#160 #160#160 #160#160 #160#160 #160Once the product has successfully been developed and tested, market launch is the next step. Determining the most effective manner to distribute products will generally require a network of manufacturers, distributors and/or resellers. Most small technology companies will not have the internal resources available to manufacture and distribute the product and will need to look to third parties to provide such services. Establishing relationships with manufacturers, distributors and resellers will be important to the success of the company and the relationships should be properly documented.

#160 #160#160 #160#160 #160#160 #160Product development and distribution can be a time consuming process. Taking an idea from the mind of the inventor to market launch is a process that should be undertaken with great care and planning. Research regarding the viability of the product or service and proper planning will help make the process a little less traumatic.

Julie A. Garcia is an associate in Weintraub Genshlea Chediak Tobin & Tobin Sproul’s Corporate, Securities and Financial Institutions group.#160 Ms. Garcia has broad experience working with technology companies in a wide range of software and technology license transactions.#160 Her practice also focuses on private and public companies’ business planning scenarios including corporate formations, protection of intellectual property, licensing intellectual property, corporate financings, employee equity incentive plans and mergers and acquisitions.

By Scott Hervey

If a sound recording produced before 1972 falls into the public domain in a foreign nation, is that sound recording still entitled to protection in the United States?#160 Recently, in Capitol Records, Inc. v. Naxos of America, the New York Court of Appeals (the State’s highest court) issued an opinion addressing this question; a question that is substantially more complex than it first appears.#160 One reason for its complexity is that Congress, when amending the Copyright Act in 1972, provided protection for sound recordings produced after February 15, 1972, but did not extend statutory protection to recordings created before that date.

Capitol Records v. Naxos involved a dispute between two music recording companies over the right to manufacture and distribute certain sound recordings.#160 Capitol Records was the owner of the rights in several classical recordings made in the 1930s of three world-renowned artists: Yehudi Menuhin’s July 1932 performance of Edward Elgar’s “Violin Concerto in B minor, Opus 61”; Pablo Casals’ performances of J.S. Bach’s cello suites, recorded between November 1936 and June 1939; and Edwin Fischer’s performances of Bach’s “The Well Tempered Clavier, Book I,” recorded between April 1933 and August 1934, and of Bach’s “The Well Tempered Clavier, Book II,” recorded between February 1935 and June 1936.#160 The rights to these sound recordings were originally owned by The Gramophone Company Limited, which later became know as EMI Records Limited.#160 All of the above-performances were recorded by Gramophone in England. At that time, the United Kingdom provided statutory copyright protection to sound recordings for only 50 years.#160 As such, all of these recordings entered the public domain in the United Kingdom by 1990.

In 1996, EMI entered into a series of agreements with Capitol granting Capitol exclusive licenses to exploit a variety of recordings in the United States, including the Gramophone recordings.#160 Capitol remastered the original recordings, improving their audio quality, and manufactured them in CD format and distributed them to record stores.

Naxos was also in the business of remastering and re-releasing historical recordings, and, as circumstances would have it, grew very interested in the Gramophone recordings. Naxos located copies of the original 1930 recordings and undertook its own restoration and remastering process in the United Kingdom. These remastered CDs were distributed for sale in the United States beginning in 1999, competing with Capitol’s CDs.

Despite receiving cease and desist letters from Capitol, Naxos continued with the manufacture and sale in the United States of its CDs.#160 Naxos believed that because the sound recordings had entered into the public domain in England it was free to manufacture and sell in the United States its remastered versions.

Capitol sued Naxos for copyright infringement, unfair competition, misappropriation and unjust enrichment, all of which were premised on New York law.#160 Naxos moved to dismiss, arguing that the recordings had entered the public domain in the United Kingdom and, hence, the United States as well.#160 The District Court granted summary judgment to Naxos, concluding that Capitol did not have intellectual property rights in the original recordings because its copyrights had expired in the United Kingdom.#160 The Appeals Court upheld the District Court’s hearing.#160 Capitol ultimately appealed to the State’s highest court.

Before engaging in an analysis of the issues on appeal, the Court discussed the evolution of copyright protection in England and the American adaptation of copyrights.#160 The Court’s discussion is not only enlightening, but helpful in understanding and appreciating the complexity of the issues it was facing.#160 The Court noted that when examining copyright law, “a page of history is worth a volume of logic” New York Trust Co. v Eisner, 256 US 345, 349 (1921)

Modern copyright law was born in England in the 15th century, primarily as a result of the development of the printing press.#160 At that time it was printers and publishers, not the authors who initially sought to control the right to publish literary works.#160 At the same time, the Crown wanted to maintain censorship authority over the press.#160 As such, establishing a system to grant exclusive rights to reproduce printed materials served the government’s desire to control and the printers’ desire to limit competition.

In the mid 1600s, English law began to recognize an author’s natural property right to control the dissemination of a literary creation.#160 Parliament’s passage of the Statute of Anne in 1709 broadened the concept of copyright to include the ability of an author to decide whether a literary work would be published and disseminated to the public (referred to as the “right of first publication”) and, if distributed, how the work would be reproduced in the future. The Statute of Anne vested an author or publisher of a literary work with statutory copyright protection for specified time periods – new works received 14 years of copyright protection (with a 14-year term renewal) and previously published works were entitled to 21 years of protection.

As America transformed itself from British colonies into independent states and commonwealths, the law makers and the courts looked to colonial common law, derived from English law, as the basis of national law as long as it was consistent with the acts of the colonial legislatures.#160 This included English common-law copyright protection.

Eventually, new states began adopting statutory protection for copyright, using the Statute of Anne as a guideline.#160 However, as the drafting of the national Constitution was underway, the Founders decided that federal copyright protection would be more effective and desirable than leaving the matter to the states.#160 The first Congress, having been granted the constitutional power to “promote the Progress of Science and useful Arts, by securing for limited times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” enacted America’s first federal copyright statute – the Copyright Act of 1790. The Act provided the author “of any map, chart, book or books,” or the author’s assignee, the exclusive “right and liberty of printing, reprinting, publishing and vending such map, chart, book or books” for up to 28 years.

At the dawn of the 20th Century, America was facing the challenge of applying the Copyright Act to new forms of technology not anticipated in previous versions of the Act.#160 Although musical compositions were covered by the Act at that time, courts in that day were wrestling with the application of the Copyright Act to a new technology in music field – piano player rolls.#160 #160

In the early 1900’s federal copyright protection was extended only to written works that could be “seen and read.”#160 This did not bode well for the new piano player roll.#160 A Supreme Court case addressing the federal protectability of music rolls held that because they were incapable of being read by a person, federal statutory protection for “copies or publications of the copyrighted music” did not extend to music rolls.#160 Following this case, Congress passed the Copyright Act of 1909. Since the Supreme Court had declared that player piano rolls and, by implication, sound recordings could not be “published” (i.e., read by a person), Congress did not include protection for audio musical works in the new Act.#160 However, Congress acknowledged that sound recordings were eligible for state common-law protection and explicitly stated that the Act should not be construed to limit common law copyright interests.

The dual system of copyright protection resulted in court decisions that were difficult to harmonize.#160 In 1971, Congress amended the Copyright Act of 1909 to expressly include sound recordings within the classes of artistic and intellectual works entitled to federal copyright protection.#160 However, the amendment was a prospective only, so recordings created before February 15, 1972 – the effective date of the amendment – were not protected by federal law.#160 The states would have jurisdiction over pre-1972 sound recordings until February 15, 2047 – 75 years after the effective date of the 1971 amendment.

The court in Capitol, having determined that New York common law is not pre-empted by federal Copyright with respect to pre-1972 works, then turned its attention to whether the works being in the public domain in the United Kingdom would have an affect on the protectability of the works in the United States.#160 Naxos’ entire defense relied on the presumption that the expiration of the works’ copyright term in the United Kingdom terminated any copyright protection in the United States.

Naxos’ position was not without support.#160 The Berne Convention and the Universal Copyright Convention both recognize the “Rule of the Shorter Term,” which generally provides that the term of copyright in the nation where a work is first published should be applied by other nations that would grant a longer period of protection.#160 These treaties have the force and affect of federal law. However, neither treaty applies the Rule of the Shorter Term to sound recordings; sound recordings fall under the Phonograms Convention.#160 And then, this provision applies only to recordings fixed after March 10, 1974, the date this treaty became law in the United States.

The Capitol court came to the reasoned conclusion that neither federal statutory nor Constitutional law prohibits the states from providing common-law protection to artistic works that are in the public domain in the country of origin.#160 The Court found no justification under New York law for substituting the British copyright term in place of New York’s common-law protection, which would continue until federal preemption occurs in 2047.#160 As such, although the works had fallen into the public domain in the United Kingdom, Naxos sale of the recordings in the United States infringed Capitol’s copyright.

By Scott Hervey

If consumers in Ontario, Canada purchase goods from you over your website, you have until July 30, 2005 to prepare to for compliance with Ontario’s Consumer Protection Act of 2002 (CPA 2002).#160 The CPA 2002 has a very long reach, similar to California’s Data Security Law (See Business Data Management Practices – Fertile Ground For Liability).#160 The CPA 2002 applies to both companies located within Ontario and companies engaging in a transaction with a resident of Ontario.

Under the CPA 2002, U.S. companies conducting business with an Ontario resident over the Internet will have to provide its name and any other name it uses to conduct business, its address, and telephone number.#160 #160The company will also have to describe the goods in a fair and accurate manner, and provide a detailed breakdown on the price charged to the consumer (cost of goods, freight, tax, etc.) and fully explain payment terms.#160 #160

Under the CPA 2002, U.S. Companies will also have to provide the Ontario resident with a copy the agreement between the parties (e.g., a purchase agreement) within 15 days and provide the purchaser with opportunity to accept or decline and to correct any errors in the agreement.

If after July 30, a U.S. company fails to comply with the CPA 2002, the Ontario purchaser will have the right to cancel the transaction within 7 days after receiving a copy of the agreement.#160 If the Ontario purchaser never receives a copy of the agreement, the purchaser then has the right to cancel the transaction within 30 days after entering into agreement.#160

By Pamela W. Bertani

#160 #160#160 #160#160 #160 Biotechnology and pharmaceutical companies – and their counsel – should take note that on January 7, 2005, the United States Supreme Court granted a writ of certiorari to review the Federal Circuit’s decision in Integra v. Merck.#160 (Integra Lifescienxes v. Merck et al. (Fed. Cir. 2003) 331 F.3d 860.)#160 The High Court will examine the scope of 35 U.S.C. �� 271(e)(1)– the statutory exemption from patent infringement for drug development testing required to obtain regulatory approval pursuant to federal law.#160 The Court’s decision could significantly impact a drug company’s ability to identify and develop new drugs and move those drugs to market. #160 #160#160 #160

35 U.S.C. �� 271(e)(1)is the so-called FDA exemption and provides, in pertinent part,#160 that making, using, offering to sell, selling or importing a patented invention is not an act of infringement if such activities are performed “solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs or veterinary biological products.”#160 Thus, if a drug company practices another company’s patented invention in order to obtain and submit information necessary to get FDA approval on their drug, then that company is exempt from patent infringement liability.#160

#160 #160#160 #160#160 #160 The �� 271(e)(1) FDA exemption permits pre-market drug approval activity conducted for the sole purposes of sales after patent expiration.#160 The express objective of �� 271(e)(1) was to facilitate the immediate entry of safe, effective generic drugs into the marketplace upon expiration of a pioneer drug patent.#160 The House Committee that initiated this provision expressly described the pre-market approval activity as “a limited amount of testing so that generic manufacturers can establish the bioequivalency of a generic substitute.”#160 The Committee further characterized the limits of the exemption, noting that the nature of the interference with a patent owner’s rights would not be substantial, but rather de minimus, and, importantly, that “all that the generic can do is test the drug for purposes of submitting data to the FDA for approval.”#160

#160 #160#160 #160#160 #160#160 To appreciate the import of the case’s outcome, it is important to distinguish between experiments employing patented inventions to create data for FDA submission (i.e., activities that are currently exempt from infringement liability); and experiments employing patented inventions to identify potentially new drugs (i.e., activities currently not exempt from infringement liability).#160 The pre-clinical experimental drug testing in Integra was not performed to supply information for submission to the FDA, but instead was performed to identify the best drug candidate that Merck would subject to future clinical testing under FDA procedure.#160 The Federal Circuit affirmed the Southern District of California’s interpretation of the exemption to cover clinical trials – but, to exclude pre-clinical trial experiments that were performed to identify potentially new drugs.#160 The Federal Circuit held that the pre-clinical trial experiments at issue in the case were not exempt from infringement under �� 271(e)(1) because the tests were not performed for the sole purpose of providing information to the FDA – but rather for the commercial purpose of identifying potentially new drugs for Merck.

#160 #160#160 #160#160 #160#160 From both a scientific and economic standpoint, the issue of whether pre-clinical trial experiments are exempt from patent infringement liability is significant because pre-clinical trial testing often involves the use of what are known in the industry as “tool patents.”#160 Tool patents cover inventions that help companies identify potential new drug candidates.#160 Tool patents are useful primarily for two purposes – facilitating and expediting drug research to identify new candidate drugs; and facilitating downstream safety-related experiments on those potentially new drugs – both of which no doubt benefit us all.#160 The royalties that companies currently receive from issued tool patents encourages further research and development of these kinds of inventions.#160 If the Supreme Court reverses the Federal Circuit, and brings pre-clinical testing into the �� 271(e)(1) safe harbor from infringement liability, then the value of tool patents will become virtually nil, since companies could practice the patented inventions without paying corresponding royalties.#160 Conversely, if the Supreme Court affirms the Federal Circuit and excludes pre-clinical testing from the �� 271(e)(1) safe harbor, companies that wish to use another company’s tool patents for new drug development must maintain the status quo and continue paying royalty fees.#160 The United States Patent and Trademark Office has issued approximately 8,000 to 10,000 tool patents to date – the Court’s anticipated decision will determine the fate of their value.

#160 #160#160 #160#160 #160 As expected, the proponents and opponents of expanding the �� 271(e)(1) exemption are polarized.#160 On the one hand, Merck and its supporters argue that �� 271(e)(1) exempts drug development activities even before a drug is identified for potential FDA approval.#160 Obviously, this statutory construction leaves companies free to use existing tool patent inventions without paying royalties or being subject to infringement liability.#160 On the other hand, Integra and its supporters contend that such a construction of �� 271(e)(1) is contrary to Congress’ intent in passing the statute, which was to have a de minimus effect on existing patent rights while allowing competitors to complete regulatory testing, using patented technology while such patents are still in effect, which in turn would facilitate market entry upon expiration of the corresponding pioneer patent.#160

#160 #160#160 #160#160 #160#160 Several major biotechnology and pharmaceutical companies have obtained the Supreme Court’s permission to file amicus curiae briefs, including Wyeth and Eli Lilly.#160 The next article in this series will examine arguments advanced on both sides of the issue via those brief.#160 The outcome of the case – either way – will impact significantly new drug development from both a scientific and economic point of view.

Pamela W. Bertani is an associate in Weintraub Genshlea Chediak Tobin & Tobin Sproul’s Intellectual Property group.#160 Her practice includes providing advice in obtaining various forms of intellectual property protection, including patent, trademark, and copyright protection.#160 Ms. Bertani is a member of the United States Patent Bar, and her practice also includes both patent litigation and prosecution.

By Audrey Millemann

#160 #160#160 #160#160 #160#160 #160A recent decision by the Federal Circuit Court of Appeals is a victory for Microsoft Corporation and clarifies an issue of invalidating prior art.

#160 #160#160 #160#160 #160#160 #160In Eolas Technologies Inc. v. Microsoft Corporation (Fed.Cir. March 2, 2005), the University of California and its exclusive licensee, Eolas Technologies Inc., sued Mircrosoft for patent infringement.#160 The invention is a method of using a Web browser in an interactive environment.#160 The plaintiffs alleged that Microsoft’s Internet Explorer infringed the patent.

#160 #160#160 #160#160 #160#160 #160Microsoft argued that the patent was invalid as anticipated and obvious, and also unenforceable.#160 In particular, Microsoft contended that the patent was invalid under 35 U.S.C. section 102(g), that the invention was previously invented by another and not abandoned, suppressed, or concealed.#160 The previous invention was a Web browser called “Viola”, whose code had been demonstrated by its inventor to Sun Mircosystems at least seven months before the reduction to practice of the University of California’s invention.#160 Microsoft also asserted the defense of inequitable conduct based on the inventors’ failure to disclose the Viola Web browser to the Patent and Trademark Office during patent prosecution.

#160 #160#160 #160#160 #160#160 #160The district court for the Northern District of Illinois found that the Viola inventor had modified the code after disclosing it to Sun Microsystems and that the modification constituted an abandonment of the original invention.#160 Based on this finding, the district court granted judgment as a matter of law in favor of the plaintiffs on Microsoft’s defense of invalidity, and precluded Microsoft from presenting any evidence of the Viola Web browser to the jury.#160 The district court also rejected Microsoft’s inequitable conduct defense.#160 The jury found that Microsoft infringed the patent and awarded over $520 million in royalties to Eolas Technologies.#160

#160 #160#160 #160#160 #160#160 #160On appeal, the Federal Circuit vacated and remanded the district court’s decisions on invalidity and inequitable conduct.#160 The appellate court found that “abandoned, suppressed, or concealed”, within the meaning of section 102(g), exists in two situations:#160 active concealment (a deliberate withholding of the invention from the public); and conduct from which abandonment, suppression, or concealment can be inferred (such as unreasonable delay in publicly disclosing the invention).#160 The court found that the inventor of the Viola web browser did not either actively conceal, or delay in disclosing, his invention.#160 In fact, the Viola inventor did just the opposite.#160 The inventor disclosed his invention to Sun Mircosystems without a nondisclosure agreement, and, three weeks later, posted the modified code on the Internet.#160 The court held that the district court had erred in finding that the modified code was a different invention and that the original invention had been abandoned.#160

#160 #160#160 #160#160 #160#160 #160According to the court: “the law does not punish an inventor for attempting to perfect his process before he gives it to the public.#160 In fact, reasonable experimentation is frequently encouraged.”#160 (Citation omitted).#160 The court further stated that “[C]reating an improved version of an invention does not in any sense abandon the original invention….Improvements may enhance an invention prior to disclosure or patent application.#160 If improvements caused loss of the original invention under the erroneous rule adopted by the district court, the public would lose the benefit of diligent efforts to produce a more useful product.”

#160 #160#160 #160#160 #160#160 #160The court further held that the Viola inventor’s demonstration constituted a public use under section 102(b).#160 The district court had incorrectly relied on its finding of abandonment of the invention to hold that the Viola inventor’s demonstration was not a public use under section 102(b).#160 The appellate court stated that abandonment under section 102(g) is irrelevant to a determination of whether a disclosure constitutes a public use under section 102(b).

#160 #160#160 #160#160 #160#160 #160Lastly, the appellate court also held that the district court had erred in rejecting Mircrosoft’s inequitable conduct defense.#160 Based on its conclusion that the Viola Web browser was not prior art under section 103(g), the district court had found that the patent inventors were not obligated to disclose the Viola Web browser to the PTO because it was not material to patentability.#160 Because the Viola Web browser was prior art, the court remanded the case to the district court to consider the patent inventors’ conduct in failing to disclose the Viola Web browser to the PTO.

Audrey Millemann is a shareholder in Weintraub Genshlea Chediak Tobin & Tobin Sproul’s Intellectual Property and Disputes, Trials and Appeals sections. A business litigator and registered patent attorney, her practice focuses on intellectual property, unfair competition and antitrust matters.