Ventures are often financed in several stages. Stage financing provides a real option valuable when facing external uncertainty. However, stage financing may also induce investor opportunism, if the property rights on an invention are not sufficiently protected. We look at the case where the incumbent investor demands a greater share on the venture's return before financing the next stage. If the entrepreneur does not agree, the investor might use the idea for his own purposes. This threat may force the entrepreneur to continue under less favorable financial terms. As a consequence, however, she might choose aneffort level that is too low (underinvestment).
Investor opportunism is less likely to occur, if investor's residual cash-flow-rights are contingent on verifiable 'milestones' in the previous stage. Such provisions are quite common.
The impact of patent law is important. So far, it has primarily been seen as an instrument balancing the trade-off between setting incentives to innovate and limiting the monopoly power of patent holders. I argue there is an additional goal of patent law: Namely, mitigating conflicts of interest in the venture financing process, thereby making innovations more likely."
The European Directive on software patents was voted through last night by the slimmest of margins. Crucially, Germany switched its position at the last moment and voted to support the directive, despite its previous vehement opposition.
In the expanded EU, 37 votes (up from 26) must be recorded against an item for it to be blocked. At the meeting in Brussels yesterday, 30 votes were counted against the bill. Germany, with ten votes at its disposal, effectively had the final say. Newsletter
So what was behind the sudden change? Germany had very specific objections to the wording of the text, as it emerged from the Council of Minsters meeting last week. It wanted clarification on what should, and should not count as technical.
The article in question, article 2b, reads as follows: 2b. A technical contribution means a contribution to the state of the art in a field of technology which is not obvious to a person skilled in the art. The technical contribution shall be assessed by consideration of the difference between the state of the art and the scope of the patent claim considered as a whole, which must comprise technical features, irrespective of whether these are accompanied by non-technical features.
Germany wanted to strengthen this definition to exclude patents on the mere handling, processing and presentation of information, and to require technical features to predominate. However, once the text was amended to say that the contribution be new, as well as not obvious, Germany dropped its opposition and voted to pass the directive.
Changes were also made to Article 4, which deals with conditions for patentability, and what consitutes an inventive step.
Spain voted against the directive and Belgium, Italy, Denmark and Austria all refused to support it. In previous negationations, Poland, Austria, Latvia and Germany had all expressed reservations. There were even indications that France might oppose it, but its final position was that the current situation was too uncertain to continue, and that some legislation would be better than none. [...]"
So, the various reports were indeed true saying that the German Government had intended to support some of the interests of the clientele of the FFII.
Not quite surprisingly, the EU Commission welcomed the Council agreement on Directive on computer-implemented inventions:
"[...] The European Commission has welcomed the Competitiveness Council's political agreement on a 'common position' on the proposed Directive on computer-implemented inventions. The proposed Directive aims to boost innovation by ensuring that those who invest in developing genuinely new products that depend on computer implemented technology can, like those who develop other products, get a fair reward. It would achieve this without sealing off the software market to new initiatives and new inventions. The Commission supports the text adopted by Council, which it believes restores the overall balance between the interests of the rights holders and other parties (competitors and consumers) struck by the original Commission proposal presented in February 2002 (see IP/02/277, MEMO/02/32). However, there are still differences between the positions of the Council and European Parliament and, under the procedure known as 'co-decision', both institutions must agree before the measure can become EU law. Once the Council has formally adopted the 'common position' without discussion at a forthcoming meeting, the text will be transmitted to the Parliament to begin its second reading after it has reconvened in September following the June 2004 elections.
Internal Market Commissioner Frits Bolkestein said: "The Council's agreement is a big step towards getting this Directive adopted in a form which will provide a major contribution to European competitiveness and assist the proper functioning of the Internal Market. We must reward investment in innovation if a real knowledge-based economy is to flourish in Europe. It is nothing more than basic common sense to make sure that inventions are not excluded from patent protection simply because they use computer software. But the Commission has always been committed to making sure that patents in this field, as in any other, cannot be used to squeeze out legitimate competition or to prevent others getting fair access to technology and ideas. This text achieves that balance and I very much hope the new European Parliament will be able to adopt it swiftly."
The proposed Directive seeks to harmonise the way in which national patent laws deal with computer-implemented inventions. Such inventions can already be patented by applying to either the European Patent Office (EPO) or the national patent offices of the Member States. However enforcement of patents is dealt with by national courts and, as the law may differ between Member States, the level of protection may, in practice, vary. This can represent a significant barrier to trade in patented products within the Internal Market.
The balance of the Commission's original proposal is maintained in the text adopted by the Council. This is to provide legal clarity while avoiding any drift towards patents for business methods or computer programs which do not provide any technical contribution to the state of the art.
The text adopted by Council includes twenty one amendments proposed by the European Parliament at its first reading but there remain some important differences between the two institutions' positions. These differences mainly relate to exceptions from patentability for computer-implemented inventions. The Parliament wanted wide exclusions covering the use of patented technology for interoperability and data handling. However, the Commission and Council felt that these went beyond what was required to set the right balance between rewarding inventors for their efforts and allowing competitors to build on these inventions, and could ultimately harm EU competitiveness. [...]"
We'll wait and see in order to watch the coming moves of all the stakeholders in view of the position of the European Parliament ...
The dice is cast. The EU Competitiveness Council today has reached a compromise on the criteria for the patentability of computer-implemented inventions and has also once more failed to agree on the EU Community Patent. From Document 9081/04 (Presse 140):
"[...]The Council reached political agreement by qualified majority with the Austrian, Italian and Belgian delegations abstaining and Spain voting against, on a common position concerning the proposal for a Directive on the patentability of computer-implemented inventions. Once this text has been formally adopted by the Council, it will be submitted to the European Parliament for second reading. The agreed text concerns:
- provisions, in accordance with the practice developed within the European Patent Organisation, with regard to exclusions from patentability:
1. a computer program as such can not constitute a patentable invention.
2. a computer-implemented invention shall not be regarded as making a technical contribution merely because it involves the use of a computer, network or other programmable apparatus. Accordingly, inventions involving computer programs, whether expressed as source code, object code or any other form, which implement business, mathematical or other methods and do not produce any technical effects beyond the normal physical interactions between a program and the computer, network or other programmable apparatus in which it is run shall not be patentable.
- a definition of technical contribution :
1. 'technical contribution' means a contribution to the state of the art in a field of technology which is new and not obvious to a person skilled in the art. The technical contribution shall be assessed by consideration of the difference between the state of the art and the scope of the patent claim considered as a whole, which must comprise technical features, irrespective of whether or not these are accompanied by nontechnical features.
[...]
The Council noted that the necessary unanimity could not be found in support of the Presidency's compromise proposal for a Council Regulation on the Community patent. In these circumstances, the Presidency stated its intention of referring this matter to the President of the European Council. [...]"
From BBC on-line in view of the failure of the talks on the EU Community Patent:
"EU patent plan hits the buffers
Plans for a European Union-wide patent - a key part of the EU's strategy for making businesses more competitive - have been shelved indefinitely.
The proposal was put on the back burner on Tuesday after officials from the 25 EU countries failed to patch up their differences over the issue.
Unless fresh proposals are drafted, the plan is now likely to be abandoned.
The patent would have allowed firms to protect their inventions across the whole EU with a single application.
Language barrier
The European Commission, which proposed the measure, claimed it would halve the average cost of protecting intellectual property throughout Europe.
The patent proposal was a central plank of a strategy, set out four years ago at a summit of European leaders in Lisbon, to transform the EU into the world's most competitive economy by 2010.
The EU's failure to get the patent off the ground marks a setback to the so-called Lisbon Agenda, already tarnished by Europe's recent sluggish growth record.
The proposal came unstuck after EU officials were unable to reach final agreement on how many languages patent applications should be translated into.
The European Commission said it had not yet decided whether to re-draft the proposal in an effort to get around the remaining obstacles."
So, I'm not really unhappy about this because of the pending proposal was insufficient. In particular, some mediterranien EU Member Sates were not prepared to abandon the requirement of providing a translation of the full set of claims into their respective national languages.
Hence, it is a bit unclear to me whether or not the heads of Governments of the EU Member States will deal with the EU Community Matter on their next summit.
Anyway, it is a real achievement that the anti-patent activists from FFII e.V. did not win this time. However, the second reading in the European Parliament is to be scheduled after the European general elections probably in autumn or winter later this year, and it is to be expected that the then new-elected MEPs will face the heaviest lobbying from the FFII they have ever seen.
"[...] Proposal for a Directive on the Patentability of Computer Implemented Inventions (JT)
The Council is expected to adopt without discussion, on the basis of an Irish Presidency compromise text supported by the Commission, a political agreement on the proposed Directive on the Patentability of Computer Implemented Inventions. The compromise text includes 21 amendments proposed by the European Parliament at its first reading in September 2003 but restores the overall balance between the interests of the rights holders and other parties (competitors and consumers) struck by the original Commission proposal presented in February 2002 (see IP/02/277 and MEMO/02/32).
The proposed Directive aims to boost innovation by ensuring that those who invest in developing genuinely new products that depend on computer implemented technology could, like those who develop other products, get a fair reward. Such computer-implemented inventions account for about 15 % of new patent applications.
The proposal would achieve its aim without stifling competition or sealing off the software market to new initiatives and new inventions. It would prevent patents being granted for computer programs or business methods as such in the current situation of legal uncertainty that the proposal seeks to remedy, there is a need to eliminate the possibility that such patents could be granted.
Proposed Community Patent Regulation (JT)
The Presidency will seek to achieve political agreement on the Regulation to establish a Community Patent and, if that is reached, approval of the proposal to revise the European Patent Convention in line with the Regulation.
An agreement on the broad outlines of the Regulation was reached in March 2003 (see MEMO/03/47) and further progress was made towards overall agreement at the November 2003 Council. However, a small number of points remain outstanding, in particular on requirements for the translation of patents and on how infringements of patents which might arise as a result of mistranslations should be treated. These could not be resolved at the March 2004 Council (see MEMO/04/58) and the Presidency will now make another attempt.
Mr Bolkestein will again thank the Presidency for its unstinting efforts. He will remind Ministers that it is no good adopting Resolutions expressing the urgent need to boost EU competitiveness if they are not prepared to go the extra mile to achieve compromises that can achieve that in practice. European industry urgently needs more affordable patents covering the whole Union, if it is to compete better with the US and Japan.
Recent calculations show that the Community Patent will cost no more than a European patent covering five countries. That would represent a cost saving to around two-thirds (68 %) of all applicants for European patents, at least 30 000 granted patents a year. For full EU coverage the Community patent would cost only 50% of a European patent for the 25 individual member states a saving of at least €30 000 per patent over 10 years.[...]"
Concerning the proposal for a Directive on the patentability of computer implemented inventions, it is quite unclear to me how this corresponds to recent indications made by Mr. Hucko on behalf of the German Government.
U-Turn in the German Position on Patentability of Computer-Implemented Inventions?
There is a report [in German, sorry] saying that yesterday Mr. Hucko, a senior Official in the German Federal Ministry of Justice, has publicly indicated a U-turn of the policy of the German Government with regard to the patentability of computer-implemented inventions. According to this report, Germany would, contrary to the COREPER agreement, vote in the next session of the Competitiveness Council to be held on coming Monday May 17, 2004 against the pending proposal of the Irish EU Presidency. I currently do not have any confirmation of the report.
"Warning: what the German justice ministry promised and what not
Hucko did say that Germany would oppose the Council's rush for an undiscussed decision. This is good news, given that German opposition seemed to have been withdrawn before. However it does not mean that the German government is against program claims or against any other of the scandalous provisions of the Council document. Nor does it mean that the German government will spend great efforts to pull other governments on its side. It means only that there are now more chances to have the Council decision postponed, not more and not less."
EPO: No Right to claim Priority on the Basis of WTO/TRIPS Membership alone.
The Enlarged Board of Appeal (EBE) has written in a Decision dated April 26, 2004 on cases G 0002/02 and G 0003/02:
"The TRIPs Agreement does not entitle the applicant for a European patent application to claim priority from a first filing in a State which was not at the relevant dates a member of the Paris Convention but was a member of the WTO/TRIPs Agreement."
The EBE argues that the European Patent Organisation as an international organisation having an internal legal system of its own, the EPC. The boards of appeal of the EPO have the task of ensuring compliance with the autonomous legal system established by the EPC and are bound by the provisions of the EPC alone (Article 23(3) EPC). In this task, however, the boards also refer to legal sources outside the EPC, including, for example, the VCLT 1969 and the TRIPs Agreement. Thus, while the boards of appeal may be guided in their decisions by the provisions of other international instruments, they have no obligation to apply them directly.
Nipper's Patent Law Blog pointed me to a very interesting paper: The JP-PTO, the AIPLA, the JIPA (Japan Intelletual Property Association) and the UNICE (European industry group) have issued a joint resolution recommending reducing patent law harmonization issues to: (1) a first-to-file system of priority, (2) an international grace period, (3) a definition of prior art having no geographic limitations, and (4) a definition of how and when pending, published patent applications are to be used as prior art. The chances for all further ambitions of harmonisation of the substantive patent law seem to be dim.
The Commission Regulation (EC) No 874/2004 of 28 April 2004 laying down public policy rules concerning the implementation and functions of the .eu Top Level Domain and the principles governing registration has been published.
The Accession of Ten new EU Members is accomplished. And Now?
So, the first day of May 2004 has passed and the accession of ten new EU Member States is accomplished. Surely there will be a lot of impact on business in general as well as on Intellectual Property Law in particular. In this context and for obtaining further insights into the prospects of business in Europe, I can recommend a very illuminative video clip on Building a Europe for Business which can be viewed via the web site of the World Economic Forum held in Warsaw on April 30, 2004. (Link thanks to Juian Bond and to the Blog of Loic Le Meur)
OHIM in Trouble: Are six Minutes of Examination Time enough for each CTM Application?
According to a report by IPKat, the entire OHIM Staff Committee has resigned on April 26, 2004. The former Staff Committee has issued a press release, blaming its decision on the failure of OHIM management to consult with the Committee, particularly on employment policy. The Committee has also voiced its concern at what it sees as a decline in the quality of granted Community trade marks (CTMs). According to the IPKat Blog, the main accusation is that OHIM is putting time targets before quality. In 2004, the target for examining each trade mark was cut from 11 minutes to just six minutes. In such a short period of time, errors are common. They claim that “The actual, legal quality of our work, the legal value of our product simply does not matter anymore.” Guidelines are not being updated and there is no harmonised practice in OHIM between the different services and the different Boards of Appeal. Moreover, staff are being forced to carry out tasks they were not hired or trained to do and the resultant decisions are unsatisfactory. Additionally, quality control is unsatisfactory and difficult files are being left aside in favour of easier files which are quicker to deal with. As a result, reports IPKat, according to the Staff Committee marks are not being properly examined, leaving them more vulnerable to cancellation.
If these reports should indeed turn out to be based on true facts, then it seems to be high time that the involved circles of the public step in into a more critical debate over the current practise at the OHIM. By launching appropriate reforms, it must be avoided that in addition to the quarrels over the quality of the patent examination procedures done by the various Patent Offices also another line of obvious weakness concerning the quality of the trade mark examination procedures comes up. See also my earlier posting.
By a first question, the Regional Court of Frankfurt/Main had asked, essentially, whether the refusal to grant a licence to use a brick structure for the presentation of regional sales data by an undertaking in a dominant position which owns the copyright to another undertaking which also wishes to provide such data in the same Member State, but which, because potential users are unfavourable to it, cannot develop an alternative brick structure for the presentation of the data that it proposes to offer, constitutes an abuse of a dominant position within the meaning of Article 82 EC.
By a second question, the Frankfurt Regional Court questions the effect that the degree of participation by users may have on the development of a brick structure, protected by copyright and owned by a dominant undertaking, on the determination of whether the refusal by that undertaking to grant a licence to use that structure, is abusive. By its third question, the national court is uncertain, in the same context and for the purposes of the same assessment, as to the effect of the outlay, particularly in terms of cost, that potential users have to provide in order to be able to purchase market studies presented on the basis of a structure other than that protected by copyright.
Now, the ECJ has determined that:
"[...] For the purposes of examining whether the refusal by an undertaking in a dominant position to grant a licence for a brick structure protected by copyright which it owns is abusive, the degree of participation by users in the development of that structure and the outlay, particularly in terms of cost, on the part of potential users in order to purchase studies on regional sales of pharmaceutical products presented on the basis of an alternative structure are factors which must be taken into consideration in order to determine whether the protected structure is indispensable to the marketing of studies of that kind.
2) The refusal by an undertaking which holds a dominant position and owns a copyright of a brick structure indispensable to the presentation of regional sales data on pharmaceutical products in a Member State to grant a licence to use that structure to another undertaking which also wishes to provide such data in the same Member State, constitutes an abuse of a dominant position within the meaning of Article 82 EC where the following conditions are fulfilled:
- the undertaking which requested the licence intends to offer, on the market for the supply of the data in question, new products or services not offered by the copyright owner and for which there is a potential consumer demand;
- the refusal is not justified by objective considerations;
- the refusal is such as to reserve to the copyright owner the market for the supply of data on sales of pharmaceutical products in the Member State concerned by eliminating all competition on that market. [...]"
In particular, the very last statement sounds somewhat strange: "[An abuse of a dominant position is given only if] the refusal is such as to reserve to the copyright owner the market for the supply of data on sales of pharmaceutical products in the Member State concerned by eliminating all competition on that market." "All competition on that market"? What can this phrase mean? Can, under such case law, compulsory licensing as a potential countermeasure against the abuse of a dominant position ever be enforced? How should this "elimination of all competition" ever be measured reliably?
Of course, it should be kept in mind that this case will most likely be exploited by companies like Microsoft. And, perhaps the gist thereof might one day even be applied by the courts in patent cases. Will the practical impact of the EU competition law diminish so far?
[UPDATE: See e.g. Reuters via News.Com: "An intellectual property case at the EU's highest court on Thursday sparked a fresh clash between Microsoft and the European Commission over whether the ruling would strengthen the EU executive's case. [...]"]
Pursuant to Article 81(3) of the Treaty and subject to the provisions of this Regulation, it is hereby declared that Article 81(1) of the Treaty shall not apply to technology transfer agreements entered into between two undertakings permitting the production of contract products.
This exemption shall apply to the extent that such agreements contain restrictions of competition falling within the scope of Article 81(1). The exemption shall apply for as long as the intellectual property right in the licensed technology has not expired, lapsed or been declared invalid or, in the case of know-how, for as long as the know-how remains secret, except in the event where the know-how becomes publicly known as a result of action by the licensee, in which case the exemption shall apply for the duration of the agreement."
In the Articles 3 to 7of the new Regulation, a number of exceptions from the general rule given with Article 2 is defined, concerning e.g. market-share thresholds, certain hardcore restrictions like the restriction of a party's ability to determine its prices when selling products to third parties or the limitation of output, except limitations on the output of contract products imposed on the licensee in a non-reciprocal agreement or imposed on only one of the licensees in a reciprocal agreement, and certain excluded restricting clauses as any direct or indirect obligation on the licensee to grant an exclusive licence to the licensor or to a third party designated by the licensor in respect of its own severable improvements to or its own new applications of the licensed technology, any direct or indirect obligation on the licensee to assign, in whole or in part, to the licensor or to a third party designated by the licensor, rights to its own severable improvements to or its own new applications of the licensed technology and any direct or indirect obligation on the licensee not to challenge the validity of intellectual property rights which the licensor holds in the common market, without prejudice to the possibility of providing for termination of the technology transfer agreement in the event that the licensee challenges the validity of one or more of the licensed intellectual property rights. The Commission may withdraw the benefit of this Regulation on a case-by-case basis where it finds in any particular case that a technology transfer agreement to which the exemption provided for in Article 2 applies nevertheless has effects which are incompatible with Article 81(3) of the Treaty. However, there is no longer any provision comparable with that of Article 4 of the former and now expired Regulation 240/96 according to which the exemption provided could also apply to agreements containing obligations restrictive of competition which are not covered by the exemption Articles on condition that the agreements in question are notified to the Commission and that the Commission does not oppose such exemption within a period of four months.
There is a transitional period for certain prior agreements; the prohibition laid down in Article 81(1) of the Treaty shall not apply during the period from 1 May 2004 to 31 March 2006 in respect of agreements already in force on 30 April 2004 which do not satisfy the conditions for exemption provided for in this Regulation but which, on 30 April 2004, satisfied the conditions for exemption provided for in Regulation (EC) No 240/96.
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Dipl.-Phys. Axel H Horns is Patentanwalt (German Patent Attorney),
European Patent Attorney as well as European Trade Mark Attorney. In particular, he is Member of: