August Greetings, Security Interests over Patents and M&A Blog News

Splendid August to everyone!

I’m back at the office and full of energy after a relaxing summer break. As my one of the first things on the agenda, I thought it would be a good time to continue our M&A blog. We have had several interesting projects after our last posting, so these blogs have been slightly on hold and, as some of you might have heard, we, for example, represented management and investors in the acquisition of Suomivalimo from Componenta, as well as represented Patria Plc in the acquisition of a stake in Silverskin (Press release can be read from here). Also in the IT sector things are moving forward, and in addition to transactional work we are currently involved in a facility management outsourcing project for a banking sector client and another outsourcing for one of the leading Finnish companies in its field is also in the process—so a magnificent autumn is ahead of us!

Anyways, new M&A Blog is coming next week and this time we talk about disclosure letters. These documents and disclosure strategies are very critical in many respects. We start by focusing on basics and the relationship between disclosures and warranties. As we discussed in part 5 of the blog series in connection with the disclosure material, if an issue is described in the disclosure materials, then the purchaser cannot claim that there be a breach of warranty unless the parties have agreed on specific indemnity to cover a known risk. Then we go deeper into the exact interplay between different provisions, different disclosure types and discuss questions what, how and when to disclose as the seller.

Another matter is that as the European Commission has recently asked organizations to submit comments to the Commission consultation on an effective insolvency framework within the EU (“Consultation”) and as the issue is also discussed in the forthcoming AIPPI conference to be held in Milan in September, we wrote a few words on the security interests over patents under Finnish law and some modest proposals for improvement.For all of you who are interested in this topic, please read Kluwer Patent Law Blog from here!

We will continue from here next time and, in the meantime, let’s enjoy the last summer days of our beautiful country!

UPC Ratification Progresses in Finland

Greetings everyone, I just thought that I share this if someone has missed this important piece of European patent law reform and advancements in Finland!

In February this year, the Ministry of Employment and Economy of Finland set up a Working Group to make preparations for the ratification of the Unified Patent Court Agreement (“UPC Agreement”). The resulting memorandum has now been published, including a draft for a Government Proposal, which covers actions to be taken for its implementation in Finland, as well as clarification as to how national legislation would need to be changed to make it compatible with the provisions of the UPC Agreement. It was proposed in the memorandum that the Parliament would ratify the Agreement. Following this, ratification is expected to take place by the end of 2015. The below quote is from the press release published by the Ministry of Employment and Economics on the matter:

“According to the proposal — provisions of the agreement that are of legislative nature shall be brought into force by an Act of the Finnish Parliament. The working group has also drafted necessary amendments to the Finnish legislation on patents, including the necessary measures for implementing the regulations governing the European patent with unitary effect. According to the proposal a new chapter would be added to the Patents Act. This chapter would include provisions on the European patent with unitary effect.”

The Agreement contains provisions on the scope and limitations to the exclusive right conferred by a patent. The relevant provisions in the Patents Act would be amended with a view on achieving uniformity with the provisions of the  Agreement. The proposal also includes amendments to procedural legislation that clarify the division of competence between national courts and the Unified Patent Court as well as the necessary amendments to legislation on enforcement and criminal sanctions.”

The proposal of the Working Group can be found from: here, worth checking out!

Should interim injunction decisions for utility models follow patents? (MAO:434/15, 18 June 2015)?

Inspired by several Finnish companies, like many other interest groups, having expressed their concern regarding the level of renewal fees of the Unitary Patent, I thought of writing about a slightly different protection regime that provides not only fast but also low-cost protection for technical inventions, namely, utility models. First I have a question for all of you interested in IP enforcement and interim injunctions: do you think that interim injunctions in cases involving utility models should be granted on grounds and standards different to those applicable to patents? If you do not have a view on this, see what the Finnish Market Court considers and as we will see the main emphasis is on the so-called ‘claim requirement’:

http://kluwerpatentblog.com/2015/06/30/finland-should-interim-injunction-decisions-for-utility-models-follow-patents-mao43415-18-june-2015/

Hope you like it and and now until next time!

Regards,

Jan

TRUST on IP Litigation - Most Interesting IP Cases from Spring 2014

Dear All,

I am almost on vacation, but before that I though that I write a post to wrap up some interesting IP cases from this spring. I have tried to outline in the update both practical advise and some theory from IP and technology litigations which I think might be relevant for companies operating in the Nordic region. This is not an exhaustive list of cases by any means, but just some cases which caught my attention and containing all my favourite field from IT to cleantech or energy and further to pharmaceutics.

Otherwise, we have had a splendid spring at TRUST so far. I have earlier said that our focus at TRUST. is actually more on the transactional side, which is partly true, but now when we have done IT disputes, corporate disputes and now we have two patent litigations in the pipeline commencing possibly next autumn, we must reconsider whether this was a very accurate statement in the first place. As a famous Finnish politician said, “I think I was wrong but then it turned out to be an error”. At the end of the day, these are the core sectors that we are passionate about—and litigations are the best possible “legal duels” left in our modern society and so this time we focus slightly more on litigations and disputes.

So as a summary, Hi hotel –case is about copyrights and jurisdictional matters, Svensson – case is about linking, Blomqvist vs Rolex focuses on brand protection and counterfeiting in online environment, followed by two recent patent-related interim injunction cases involving Neste vs UPM and Ranbaxy vs Pfizer, and finally we talk about data protection in light of Google decision and “the right to be forgotten”. We also have a practical drafting sector and this time we talk about one relevant theme in IT agreements which I think all customers should consider in their procurement policies and of which we have heavily negotiated this spring in connection with some business-critical ERP projects. Hope you enjoy reading this!

 

IP and Technology Update May 2014

Pleasant and relaxing summer vacation to everyone!

Regards,

Jan

Will interim injunctions become unpopular in Finnish pharmaceutical patent litigations?

Dear all,

Splendid summer for everyone! While we already have enjoyed this beautiful whether full of sunshine, we still need to work hard for a couple of weeks before the well-earned holidays. This year we are heading to Mallorca with a big group of kids, so lots of fun ahead!

This time I would like to write about patent litigations and interim injunctions as a result of a recent news. Pfizer was ordered by a Finnish court to pay 16.5 MEUR plus 270.000 EUR as a compensation for legal fees to Ranbaxy, an Indian generic manufacturer, which was later acquired by Sun Pharma making the conglomerate world’s fifth largest specialty generic pharma company. But to beging with, if you are planning an interim injunction in Finland, let me first guide you through the process very briefly and then we talk about this case.

What do you need to know about Finnish interim injunctions?

In Finland preliminary injunctions may be granted in patent cases either by virtue of the Code for Judicial Procedure or the Patent Act, both before and during the main proceedings. Preliminary injunctions may also be granted provisionally on an ex parte basis. An interim injunction is a summary proceeding and commences by filing of an application to the Market Court (previously this was the district court of Helsinki). The issue is handled urgently and a preliminary injunction may be granted very quickly (typically from the minimum of two days to one month).

The following requirements must be fulfilled in order to grant a preliminary injunction and generally: i) right holder shall establish that he/she has a right enforceable against the counterparty. The evaluation of the fulfillment of the claim requirement is based on probability assessment; ii) Danger requirement: it is required that the counterparty by deed, action, or negligence, or in some other manner, hinders or undermines the realization of the right holder’s right or decreases essentially the value or significance of said right. Actual existence of danger is generally not required to be proven, a claim thereof usually suffices; and iii) Comparison of interest / undue inconvenience: the court considers the interests of both parties and assesses whether the defendant would suffer undue inconvenience in comparison to the benefit to be secured interim injunction.

Typical evidence in this interim injunction phase includes approximately the same material as in the main proceeding with the exception of oral evidence that is provided later phases. Additional documentation includes the official patent documentation, cease-and-desist letters, if any, expert evidence, technical drawings and similar, financial analysis on the harm to the patent holder (e.g., in the form of sales statistics or similar), and for example, supporting foreign judgements, if available.

No damages are awarded in the preliminary injunction phase. The cost of litigation in this interim injunction phase generally varies between 10,000 and 15,000 €. Interim injunction is a summary proceeding and commences by filing of an the application to the Market Court.

What happened in Pfizer – Ranbaxy?

We have ordered the litigation files and decision of the district court, but we have not received those yet. Therefore, our comments here are based on facts which have been written in the press (Helsingin Sanomat). Helsingin Sanomat mentions that the district court of Helsinki held that Pfizer unnecessarily sought for interim injunction and caused 25M loss to Ranbaxy’s sales, 47 percent of which were the amount of profit. The district court noted that the question was about creation of intentional damage to the counterparty which may result in significant economical losses. Pfizer had admitted during the trial that the interim injunction was unnecessary, but Pfizer held that there was no connection of causality between the events and the damage.

Conclusions and considerations?

I remember having a discussion with the late Justice Laddie once about interim injunctions and patent litigations in general, and he said that he always knew the result of a patent litigation before he filed the case and personally I have always tried to follow the same principle. This so-called "avoiding courtrooms strategy" may in many cases be a bad thing for the invoicing of law firms (if not to anyone else), but at least we have had enough work so far believing that this is the right way forward. All of the facts are not disclosed here so we will go these through in detail after we have received all the files, but in any case this case clearly creates a need for IP litigators such as us to carefully reconsider whether there are valid grounds for filing interim injunction applications and, if such grounds turn out to be non-existing, there may be consequences like in this case. Naturally if a generic company is under no pressure to pay patent and R&D costs, the profit margin is very high as indicated also in this decision. Moreover, we will discuss some open questions further in our later posts, e.g., Finnish pharmaceutical patents in general and analogical method claims which were used prior to 1995, the role of courts in case of "unnecessary interim injunctions" and the concept of "unnecessary" itself is fascinating. So we return to this shortly, but in the meantime I hope relaxing summer break for everyone!

Regards,

Jan

Four Principles for SME Financing - Additional Revenue Streams via IP Monetization?

I recently had an interesting discussion with some of my entrepreneur clients about financing. This gave me the thought that I could perhaps try to share some ideas for those engaged in early financing rounds. We were discussing a question that was rather much as follows: 

“How much funding should we seek from investors, considering that we have two alternatives: A and B. If we select A (which is a joint project with our customer), we need significantly less capital than with alternative B, and we might be in a very beneficial situation in the subsequent rounds if we are able to construct workable demonstration facility as a customer project. Alternatively, we can opt for alternative B, immediately going for our own business model where we naturally would need a larger investment. So what’s your view?”

Sound familiar? Let me shed light on some key issues to consider. Of course this is not really a question for a lawyer, but we ended up providing a recommendation that entrepreneurs should keep the funding amounts small in the early rounds when the valuations are lower and then scale up the amounts in the later rounds when it is a lot more clear how money can create value and when the valuations will be higher. These very same words were used by Fred Wilson in an excellent post on valuations vs. ownership in more detailed terms, a VC and principal of Union Square Ventures—really worth checking out.

If you choose option A, as this company did, they might still need some funding for their operations and the following points could help you:

M&A activity in Finland is relatively high and this autumn we seem to have increasing movement among the foreign investors, at least in the form of contacts towards our firm, TRUST. However, valuations have traditionally been lower in Finland, which seems to indicate that companies are sold at the development phase earlier than similar companies in, say, Sweden. To some extent, this is due to the lack of funds, problems with First North and inactive bond markets for SMEs unlike in Norway, for example. Opting for VC too early might mean that investors are not competing against each other as there might just be one VC investor. Naturally, this also influences the deal terms and how much control your are able to maintain after the first rounds. 

Even in option A, you would need funding and some issues to be considered:

First, the terms of payment in cleantech and/or mechanical/process technology deals tend to be more front-loaded nowadays — an issue which would generally make customer deals more tempting (don’t be afraid of using this option and negotiating payment milestones carefully using guarantees to provide safety to the customer). 

Second, Finnish companies should be more active in seeking patent and technology licensing arrangements to finance their operations (your foreign competitors use these tools as well — say if the process can be used for coal in addition to other substances and coal is not within your core business, you might consider licensing the coal application to China for example. Feels like making money for nothing, right?).

Third, consider industrial players as investors either from the customer or supplier side. Business angels have shorter investment cycles and they are unlikely to provide further funding or they do not have ample resources at least. Also you need to take into account that industrial players might have different business interests as they are not necessarily making their profit from the exit within the next 5 years. Also consider, e.g., conversion of your suppliers’ deliveries as contributions-in-kind; less need for funding and smaller “financing cap” between the customer payment and time when you have to pay for your supplier. The optimal solution would be to draft customer and supplier agreements back-to-back so that there would not be any financing cap, but this is not always possible in long-term industrial projects.

So to summarize our thesis, “not too much money too early”, “best to have several investors”, “consider alternative business models to support your business”, “consider alternatives for VC investors”. Hopefully this helps!

Cheers,

               Jan

Should I Use HoldCo or Directly Own my Joint Venture?

I was presented this question some time ago, i.e., when it is beneficial for the owner to use a holding company "as a middle company" in joint venture context. Just to illustrate this idea I drafted a slide on both of these structures in connection with one of my forthcoming M&A lectures and I thought that I could share this with you as well.

Those "circles" on top illustrate owners and their share ownership in the company participating in the JV. Then the key issue is whether the JV partners directly own the target or whether there is a holding company in the middle which then owns the target. Taxation is naturally one crucial driver behind these corporate structures including debt push-down considerations and similar, but from the corporate governance point of view what the main questions for a lawyer or CFO responsible for the planning of this new venture would be?

• As a starting point, one should take into account what is the relevant jurisdiction and what is the maturity of its company and contract law regime?
• How can you generally enforce the agreements, e.g., can you use specific performance?
• Is it possible to limit directors' liability?
• Is 100% foreign ownership even possible under the applicable law?
• Have you considered investment control regulations, authorizations and permits?
• Finally, can a company operating in a target's jurisdiction own foreign HoldCo?

While joint ventures are somewhat more popular nowadays, e.g., as in many cases one needs local partnerships not only to meet local legal requirements but perhaps to establish the very business case in the target's jurisdiction or to secure funding. At the same time, these structures are also becoming much more complex in many fields, e.g., due to convergence. This is also very much true in IP-rich joint venture exercises where after the deal is done the licensing matrix is typically a map full of different arrows from one direction to another with an aim to ensure for all parties their own space or freedom to operate if you want to call it that, and at the same time, providing a commercially rational scope for the JV itself. While IP rights are not the core consideration in many JV exercises, it should also be noted that if there are disagreements between the owners or one of the parties wishes to create an exit, then the discussion often turns to ownership of intellectual assets and their valuation (of which the parties may at that point have very different views).

Hopefully this helps in your JV efforts and until next time!

Tech Transfer Block Exemption - Some Comments

I know that I promised to write about M&A, but it is coming - be patient! I thought that I post this first on the above topic while my M&A blog is still "under construction" as I recently had an opportunity to participated in the panel discussion organised by the Finnish Industrial Property Association and the Finnish Competition Law Association.

Other panelist were top competition law experts in Finland and as I have been doing mainly other things like technology deals, investments and M&A, I must say that I also personally learned a lot and got some new brilliant ideas! Moreover, I must say that I was impressed by these fellow panelists including Mikko Huimala from Castrén & Snellman, Ilkka Leppihalme from Peltonen LMR and professor Petri Kuoppamäki from the University of Helsinki - they are truly in a league of their own!

According to the consultation:

"In the meaning of the EU competition rules, a technology transfer agreement is a licensing agreement where one party (the licensor) authorises another party or parties, the licensee(s), to use its technology (patent, know-how, software license) for the production of goods and services. The rules on how to assess technology transfer agreements are set out in two instruments, the technology transfer block exemption regulation ("TTBE") and accompanying Guidelines. The TTBE exempts certain categories of licensing agreements concluded between companies that have limited market power and that respect certain conditions set out in the TTBE. Such agreements are deemed to have no anticompetitive effects or, if they do, the positive effects outweigh the negative ones. The Guidelines provide guidance on the application of the TTBE as well as on the application of EU competition law to technology transfer agreements that fall outside the safe harbour of the TTBE."

So let's look at the changes from IP lawyer's perspective:

First, exclusive grant-backs (whether to severable or non-severable improvements like in the previous TTBE) are now on the "grey list". This is good issue in particular as the previous competition law-based distinction to severable and non-severable was very confusing in the first place. Remains to be seen what are the practical effects of this as it would seem to be relatively simple task to draft a license grant just a bit differently and get the same end result.

Second, market share thresholds are slightly modified, but as neither IP lawyers nor competition law lawyers, as Professor Kuoppamäki pointed out, review these in real-life licensing situations, these changes are not very relevant in practice. Still more attention should be paid to competitor and non-competitor definition in order to review the right list of clauses from the TTBE.

Third, non-challenge clauses are also now on the grey-list. Difficult issue, especially, if settlement agreements are considered. Also good point was raised in the discussion that this clause may be an issue from the "social contract law" perspective if you think, e.g., a case where an individual inventor who has just licensed his or her patent to a large international company faces with an invalidation procedure, does it sound fair?

Fourth, relationship between TTBE and other block exemptions are also clarified. However, this is still not "bullet-proof" distinction in particular when one needs to consider a distinction between licensing and R&D. In most of the ordinary technology deals in which I have been involved lately, R&D block exemption would seem to be applicable still.

Finally, technology pools and reverse payment settlements I leave outside this blog, but please tell your views on those and I promise to share my opinions.

In conclusion when thinking about Finnish industry in general, I would have hoped for more specific guidance on those contractual measures licensors can use to protect their technology (limitations to own use and R&D are hardcore between competitors and gre-listed between non-competitors). In many cases these agreements are in the grey-zone and I would argue that Finnish entities are typically more often on the licensee-side than licensor- side (some telecom manufacturers excluding) so in addition to market efficiency views typically emphasised by competition lawyers we could also consider freedom to operate view to ensure our domestic incentives to innovate. See more on the below link (unfortunately only in Finnish), and definitely this draft TTBE is worth reading: http://www.jdsupra.com/legalnews/ip-lawyers-practical-comments-on-the-dr-80086/

On Drafting and Roles of Legal Advisors

I have recently been engaged in discussions on the proper way of drafting contracts. As I personally have been engaged in patent and technology litigations, I often tend to take a dispute-oriented approach to contract drafting. For example, I consider the ramifications of the contract being argued in court, who would have the burden of proof, whether I make a legal compromise by inserting intentionally vague provisions (would it be interpreted to our benefit or not), and so forth.

However, there is also another realm, which can be qualified as a “deal-lawyer-type” of contract drafting, where the main focus is to get the deal through one way or another. Here the issue is already somewhat different: you may be limited by time or expenses or you may have an opportunity to identify only some of the issues that you consider as the greatest deal-breakers in the deal.

An excellent example of these distinctions between different drafting types can be found in patent licensing with its carrot and stick licensing approaches. In the former the licensor voluntarily grants a license and enters into a commercial relationship while, in the latter, the patent holder threatens to sue the licensee for patent infringement if the licensee does not pay for a license. It is very likely that in the latter case, the agreement would, at some point, be tested in court so you should be careful when drafting, keeping the forthcoming litigation constantly in mind.

However, when talking about handling an assignment it is not only about how we draft agreements but what is our scope and role as advisors in overall. Steven M. Davidoff, professor at the Michael E. Moritz College of Law at Ohio State University, recently posted lessons from a collapsed deal involving Goldman Sachs, which was in a legal dispute over its role as the advisor in the sale of the speech recognition company Dragon System.

http://dealbook.nytimes.com/2013/01/29/lessons-for-entrepreneurs-in-rubble-of-a-collapsed-deal/

While I fully agree with what one commentator said, that there is only one thing that is more dangerous to an M&A client than inexperienced bankers and lawyers and that is “...if the client reckons himself smarter or better at doing deals than the bankers and lawyers who are being paid to advise him/her.” It is not very often than people with legal education do have the business acumen to create also “commercial win-win deals” for their clients. That “weak spot” should perhaps be the target of the personal development of all us lawyers to make us also more solution-oriented and to make the claim “if the world were full of lawyers, there would be no deals executed” less true.

Take a couple of minutes and read this through as this outlines the importance communicating the working methods and scope clearly – to ensure that the clients’ expectations are met. And yet, in this case, it still might not have been enough…

Technology Disputes and Securities Law - When CIO or CTO Needs to Talk to CLO/GC?

 I though that I start this blog with an issue that concerns discussions between two roles CTO or CIO depending on the situation and legal department, i.e., general counsel. I wanted to start writing something about communication as this is in any case at the very heart of blogging in the first place, and also as this has been a hotly debated topic with one of my colleagues Mika Lehtimäki of Trust (http://www.thetrust.fi) - very brilliant mind in financial law and banking!

Let's take an example that we have an  IT dispute (but it could also be any other technology contract as well) in our hands. It is quite often that it is unclear when an IT dispute can have securities law consequences. For external lawyers this issue has also been on the table due to the fact that financial year has just ended in many companies and we have been filing statements for auditors (typically with qualifiers such as "not sufficiently precise" at least in case of IT audit claims). 

But when securities law is relevant for CIO or CTO (for those who are not familiar with the term, this means chief technology officer)? Two most common situations are: 

(i) as a litigation that has to be disclosed; or 

(ii) another matter that has a material impact on the company, its cash flow or prospects. 

As a rule of thumb, all circumstances and decisions that may have material impact on the value of the Company’s securities need to be disclosed without undue delay. For all those who are interested in changes between the old and new Securities Market Act, these disclosure rules have remained pretty much the same, but I will focus on differences between on-going disclosures and restrictions to use insider information perhaps later. In any case, breach of the disclosure rules may lead to, e.g., damages liability or official warning so this issue needs to be taken seriously.

The evaluation of the significance of the matter is always made beforehand. Therefore, the company needs to have a strategy or a disclosure policy how to administer disclosure e.g. in relation to IT disputes and claims. As securities law issues need to be resolved on a case-by-case-basis, let me give to you some tips how to do this:

First, the company’s disclosure policy needs to be consistent; if you have disclosed similar matters previously, you must also disclose them now.

Second, if the IT system is critical to the company’s operations, the monetary value of the dispute may not be the real concern but, instead, the disruption to the company’s on-going operations, failure to comply with applicable legislation if a system intended to perform certain taks is not taken into use as originally planned. 

Third, you should not disclose too early. A potential dispute does not normally have to be disclosed prior to actual filing of the case – in uncertain situations disclosure may create more confusion than clarify issues and in many cases these IT and technology disputes are settled before that.

Fourth, the company should note how the investors have reacted to previously disclosed information and how they will likely react considering the business that the company is in. 

Fifth, if payment liability is likely, it may affect the company’s profits and cash flow. This may require issuance of a revised profit forecast. However, this route is not often advisable, as it might be construed as admittance of the potential liability.

If the potential impact is material, and the issues are being negotiated prior to the settlement or filing of the case, the parties should ensure the confidentiality of the matter and the negotiations. Personally I would recommend to do this as a “transaction-specific insider register”. However, it should be noted that the disclosure should be made at the latest if the official procedure is commenced.

Hopefully this helps and let's all of us start formulating policies for disclosing tech disputes!