IPR Transfer, SEP Licensing & Blockchain Technology
The recent surge of public interest for the establishing cryptographic technology called blockchain is driven by the emergence of bitcoin as a new investment class. During the fourth quarters of 2017, many private investors were quick to stumble into this new field of investment placing large amounts of money in crypto exchanges on bitcoin and a large range of altcoins — far too many who made this move without assessing the technology they are investing in. Q1 and Q2 2018 grounded these expectations for the time being and in the current consolidation step, people seem to slowly become aware of the way blockchain technology works and the benefits this powerful technology can generate. As in March 2000, when the dotcom bubble crashed and ate away large investments but gave the world a powerful new economic tool — the internet — this current consolidation step will strengthen the crypto market and provide the funding for business models based on or operating with blockchain technology. Blockchain technology will continue to revolutionize the way we transfer assets across the world.
This post points to two promising fields of application in the IP world:
I. Field of Application I: Transfer of IPR
Intellectual property rights (IPR) are a very promising field of application as the transfer of IPR is to this very day basically executed like it was done already in the 1910s — by transfer contracts (substantive law) and publication of the transfer in the register, e.g. the patent register.
Public registers create a fundamental structure in many areas of law and enjoy an outstanding reputation from the law’s point of view — and thus also of lawyers. Public registers stand for the completeness and correctness of the information contained therein and therefore have strong legal effects such as suppositions, fictions and facilitation of evidence.
Deep Sleep: 100 years of Stagnation
The law behind most public registers has, however, remained untouched for over 100 years or to put it the other way ‘round: the development of the registers has been stagnating for over 100 years. Registers are maintained by people and the legal framework protects against human errors in register work. Yes, the current system has proven to be reliable. But it has also proved slow and incomplete. Even in the best case, a transfer process currently still takes about two weeks to be published in the register. Most transfers take (much) longer.
IPR are granted by the State as an act of sovereignty and are awarded to the person or company that has applied for it if the prerequisites for a grant are fulfilled. Because of this structural background, IPR are by their very nature formalized assets. The slow and inconvenient framework around the patent register has led to a situation in practice in which the formal register ownership and the ownership under substantive law often fall apart, meaning that the registered owner is not necessarily the factual legal owner of the IPR. As patent transfers registrations are costly, inter alia because patent attorneys must be involved for each transferred patent, and time-consuming, it is common practice to not register every single transfer of a patent, especially if they occur within a group of companies and in certain jurisdictions that are deemed less critical.
German Courts’ Approach
The courts have to deal with this situation and are helping themselves, like e.g. the German Federal Court of Justice which constructed a “strong indication” that the patent register displayed the situation under substantive law correctly (dec. of 7 May 2013, docket no. X ZR 69/11 — Fräsverfahren). This case-law is intended to support the plaintiff in view of the disadvantages of the current patent registration system. But if the defendant can provide information that the register is not correct, e.g. unregistered transfers, the plaintiff is obliged to actively prove the ownership. Thus, the sloppy register practice described above can have significant downsides in the assertion proceedings if the plaintiff has to disclose confidential transfer agreements to the public and to the defendant — who is often a competitor. The same impact is present in many financings where accurate title is important. At the same time, the relaxed handling of the procedural rules of register law is an annoying side aspect in M&A deals or patent portfolio purchases as the ownership must be tracked in due diligence document review processes — again: costly and time-consuming. We would anticipate at some point the accountants involved in annual audits may require better evidence of title — particularly where a large percentage of the company’s assets are represented by IPR.
Birth of an Asset Class
These drawbacks do not just affect the enforceability, financing and saleability of IPR in individual cases but have led to the general assumption that IPR are not a readily traded asset class, as they can only be passed on in a very tedious procedure. Despite the movement in the patent sector and the significant developments since the 1980s with regard to pooling and assertion strategies, the patent does not play a role as an individual asset because of this legal and structural background.
This is about to be changed by the blockchain-powered patent platform IPwe as the transfer system drawn up by IPwe can provide full proof of the ownership of a patent at very low transaction costs. The verification is guaranteed by the blockchain principle behind the system as each patent grant and any subsequent transfer is displayed in the blockchain. Initially this will be accomplished by cooperation with the various patent offices and verification by artificial intelligence methods and, when available, owner verification.
II. Field of Application II: Standard Essential Patent Licensing
The field of standard essential patent (SEP) licensing is currently moving as the assertion hurdles are increasingly raised. While SEP assertion was mostly unregulated for the last twenty-five years, antitrust authorities all over the world are monitoring the developments and influence the requirements for SEP assertion. The Court of Justice of the European Union has raised the bar in the decision in the case Huawei v. ZTE (dec. of. 16.07.2015, C-170/13), effectively turning the burden of proof around and imposing restrictions on the SEP proprietor, e.g. to substantiate that the offered license is “non-discriminatory” in the (F)RAND context. Other courts in different parts of the world are in line with this development, e.g. the Central District of California in TCL v. Ericsson (Case №8:14-CV-00341 JVS-DFMx) or the Shenzhen High Court in Huawei v. Samsung.
SEP Assertion — Latest Development in Germany
The German patent infringement courts are currently trying to align their requirements with respect to the confidentiality of license agreements provided by the SEP proprietor during assertion with the intent to justify the offered royalty rate as FRAND. As the German court files are public (not to the public at large but to the parties) and the law does not accept “confidentiality clubs”, “attorneys’-eyes-only” or protective orders, the courts have taken a “transparency-approach”.
In April 2018 the Higher Regional Court of Düsseldorf (dec. of 25.04.2018, court docket no.: I-2 W 8/18) has continued its elaborated case-law in this respect and deepened its transparency-approach. The Senate opined that there are hardly any protect-worthy business secrets in SEP license agreements as these must be transparent by their very nature — meaning that they will be disclosed during the proceedings to the defendant and can be accessed by any interveners to the proceedings irrespective of confidentiality measures.
As proof of concept the Court pointed to the MPEG licensing approach — requesting the same rates from any licensee and posting the license agreements in the internet for public access. The plaintiffs in SEP infringement proceedings will have a difficult time in trying to escape this rather strict regime if they adhere to their current licensing approach, i.e. by negotiating confidential agreements with their respective licensees for an SEP portfolio.
Transparency-approach can be Implemented Via Blockchain Technology
The approach suggested by the Higher Regional Court of Düsseldorf can be implemented in a very easy way by using blockchain technology and including smart contracts in the blockchain protocol. As the terms and royalty rates are supposed to be applied uniformly for all licensees, there is no necessity to negotiate a license. The license grant can be executed upon respective request by a license seeker via the blockchain — allowing the license seeker immediate access to and use of the licensed portfolio patents. The time of the license grant is retained unalterably in the blockchain. The same applies for license contract management. The royalty base rate can be amended to reflect the current intrinsic value of the portfolio, e.g. the average lifetime and the quantity of the licensed patents or appreciation and depreciation of the licensed technology. Individual components of the royalty rate can automatically reflect exhaustion within distribution chains, the territorial coverage of the portfolio and production/sales activities of the licensee and/or the inclusion of specific implementation features.
It will take some time to scale the blockchain technology to this level and to plant the seed of its potential into the people’s minds. But the general framework has already been established and the current consolidation phase of cryptocurrency development should be seen as a consequent step towards a healthy growth of the technology.
IPwe will have a significant impact in reshaping the IP landscape.
