Intellectual Property Directions

“I am about to partner with an engineer to manufacture and sell his product. I am looking for the designer to “own” the design liability and my company will “own” the manufacturing liability. How do I do that?”

It was a short question but there was something about the wording that made me think a long answer was needed. I felt I needed to clear up this matter of “design liability” and “manufacturing” liability. Here’s my response:
___________________________________________________________________________________________

Dear (xxxx),

You suggest that there is a difference between “design liability” and “manufacturing liability” and that the difference affects who will be the target in an infringement suit. That’s not really the case.

Keeping in mind that I’m not an attorney and don’t give legal advice (my lawyer makes me say this), infringement is the act of making, using, selling, etc. a patented device without permission. Technically I don’t believe designing a device, per se, is infringement.

Of course, very few people design a device and stop there. Once a designer of an infringing device lets someone make one, the designer may be liable for contributory infringement or perhaps inducing infringement while the builder is liable for direct infringment.

Now, let’s get to the business end. The patent law doesn’t really care about licensing (i.e., renting IP). Typically, in your situation, somewhere in your license agreement (which is just a contract between two parties) there will be an explanation of how any IP issues will be handled. It is important to have it there since when the Sxxx hits the fan nobody wants to own the problem.

In situations like yours, the designer usually starts off “owning” the liability since he should have checked out the IP territory before doing the design. By collecting money from you for use of his design he is selling something and should be willing to stand behind his work – you expect General Motors to warantee your car, right. The mechanism to get him to own the liability is a term in the license contract saying he will indemnify you for any infringement suit.

Of course, in many cases there is the up front recognition that the designer can’t shoulder all the liability, particularly since he is not garnering all the profits. Share the profits = share the liability. Again, how that cost is shared is to be included in the licensing agreement.

In other cases, where a small design house does work for a large, manufacturing partner, the larger partner may totally indemnify the small design house based on the financial realities AND the fact that the design house was only doing the design in the first place as an outsourced R&D function for the large partner.

So, bottom line, whether you pay for the use of the design on a flat fee basis (a license in your terminology) or on a per part built basis (royalty in your terminology) has zero bearing on who’s going to get sued. You will be sued for making and selling, the designer will be suited for contributory infringement, you both may be sued for inducing infringement in your customers, and, at least in theory, your customers can be sued for using. This last bit is typically only mentioned in large OEM sales, not in consumer sales, for all the obvious reasons.

What you need to care about is how you and the designer are going to split up the costs, and that split can be anything you two decide. Since damages are calculated on lost profits or a reasonable royalty basis, I expect you were thinking something along the lines of you “owning” the part of the damages that scales with the number of units made and your partner basically having a fixed liability. That is certainly reasonable if you are not paying him a per part royalty.

Good luck…and consult with an attorney to draw up the licensing agreement!

I don’t usually comment on licenses (I care more about technology issues than business deals) and I’m even less interested in the software licenses in shrink-wrapped retail software. But last week I came across a software license that is so egregious in its terms, that so exceeds any logical relationship with its customers, that it almost begs you to violate its terms. Mind you, I’m not advocating ripping anyone off – in fact I’m suggesting that the software company is doing the ripping off and should mend its ways.

I understand and agree with the rational for licensing, rather than selling, software. Licenses are easier to enforce than copyrights, and software is just so easy to copy. And the analogy of “only one person can read a book at any time” certainly applies to software- only one person should be able to use the software at any time, where “at any time” fairly means a work session, not a computer clock cycle! Yet, the one of the first paragraphs of Acronis’s True Image Home 2009‘s license says:

You may reassign a Software License if you retire the licensed PC due to permanent PC failure. If you reassign a Software License, the PC to which you reassign the license becomes the new licensed PC for that particular Software License.

 What !!! My computer has to die before I can move this software to another machine!! If I pass the computer to my daughter I can’t move the software to my new machine!! No way.

Another section of the license says:

The Software is a trade secret of LICENSOR and is proprietary to LICENSOR. LICENSEE shall maintain Software in confidence and prevent disclosure of Software using at least the same degree of care it uses for its own similar proprietary information, but in no event less than a reasonable degree of care. [...] The obligations under this paragraph shall survive any termination of the Agreement.

Gee, I’m sure a lot of home PC owners maintain their own “similar proprietary information”. And this software is a trade secret? If it was, it ain’t no longer. You can’t spread your trade secrets around to anyone with $40 in their pocket and still call them trade secrets.

And when it comes to kicking you when you’re down…

This Agreement and the license may be terminated without fee reduction [...] on notice by either party hereto if the other party ceases to do business in the normal course, becomes insolvent, or becomes subject to any bankruptcy, insolvency, or equivalent proceedings. Upon termination for any reason, LICENSEE shall immediately return Software and all copies to LICENSOR and delete all Software and all copies from the Hardware.

which says that if you go bankrupt they can terminate your license and demand the software back!

Needless to say the license also includes the more or less standard clause that says you’re out of luck if the software is so buggy as to be unusable, etc etc.

Finally, to show how valuable they think their $40 software is, the serial code that you have to enter to load the software is made up of 8 blocks of 8 alphanumerics each - more than enough to give everyone in the universe their unique number. Those hackers aren’t going to bust our code is the thinking, I guess.

Last week, Medical Device Daily National Editor Don Long presented his idea of an improved patent system in The Age of Entrepreneurship vs. the entrenched patent ‘windmill”. From his perspective, the basic concept of the patent system – the ability to exclude others from practicing your invention – is outmoded and prevents important [medical devices] from reaching the patients who could benefit from their innovation. While I agree with his basic tenet, I think his cure would be worse than the affliction. His suggestion for changing the patent system is intriguing, but as with most fundamental changes it comes along with its own set of issues.

Boiling down the idea to its core, the suggestion is to enforce mandatory licensing of patents with the license fee intentionally kept low. I believe this is the system used in music copyrights; if you want to record a cover of someone’s hit you know up front that all you have to do is pay a predetermined license fee. This works in the music space because people don’t buy CDs based on the lyrics/notes per se but rather because they like the specific performance – thus the copyright owner is not really licensing his or her competitors.

I see the patent system  as contract between inventors and society, with each side giving something in exchange for getting a benefit. Mr. Long’s basic argument is that the scales have tipped too far toward the inventor – having monopoly control for 17 years or so is just too long in this fast moving world. The expected benefit to society – that the inventor has taught us all about his invention and stimulates other inventors – doesn’t happen fast enough. And surely his idea would solve that problem.

But as with any idea, there is a down side. One problem is what happens to the small company. A large medical device company, for example, has all the marketing, manufacturing and engineering resources to crush the small company in the marketplace so the suggestion of mandatory patent licensing turns the small company into a (poorly paid, involuntary) R&D department for the large company. Generally the small company will not be able to survive (or if they can survive they probably can’t grow) on the(intentionally low) license fees alone, so they’re toast.

Also, contrary to Mr. Long’s claim that investors would flock to the inventors, I have yet to meet a VC who would invest in a (small and/or startup) company that cannot use IP to protect its market or at least garner >large< license fees for letting others exploit the market.