The Bangladesh Building Collapse: the Challenge to Brands

With the horror of the collapse on 24 April 24 of the Rana Plaza building in Bangladesh still claiming more victims, now numbering over 1,000, and despite the remarkable news that one more survivor was recently found, attention has been drawn as well to the role of the various international brand holders whose products were manufactured at the site. The eight-story building housed five garment factories, at which clothing products for various well-known brands were made. A particularly interesting discussion on the issue appeared in a AP article dated 12 May ("Leaving Bangladesh: Not an Easy Choice for Brands", here). Brands mentioned in the article include Walmart, H&M, The Children's Place, Mango, J.C. Penney, Gap, Benetton, Sears, Disney and Joe Fresh.

As described in the article, the choice facing these brand holders is stark: "Stay and work to improve conditions. Or leave and face higher costs, similar or worse worker conditions in other low-wage countries and criticism for abandoning a poor nation where pre-capita gross domestic product is just $1,940 per year." As for the specific site itself, it is not clear how many brands had product being made there. It does not appear that there is a media rush by brand holders to admit publicly any manufacture at the site, given that there is supposed to be an auditing of the conditions to ensure that work and worker conditions are reasonable. There is talk of campus boycotts against certain brands (the Gap brand is mentioned) and angry postings on the Facebook pages of Joe Fresh, Mango and Benetton were reported. To this point, most of the retailers listed above do not appear to plan to leave Bangladesh. On the other hand, Disney announced that is stopping manufacture of its branded goods in Bangladesh. It is not clear whether any other owner of branded goods being manufactured in Bangladesh will follow.

Against this backdrop, it is interesting to consider the relationship how brands owners, especially those with an alleged connection with the collapsed site, might be affected by the Bangladesh tragedy. First, to this point there does not appear to be anything that would make any of the brand holders legally liable for the tragedy. Compare that with a situation in which the brand holder/manufacturer is directly connected with a faulty product bearing its mark. The J&J recall of the Tylenol product in 1982 comes to mind here. There, as well, an issue of life and death arose and the company faced a frontal attack on its fundamental goodwill and credibility, was wrapped up in the products bearing the Tylenol mark.

With respect to the Bangladesh tragedy, however, while mind-numbing in its scope, the events do not appear to be directly connected with the action of any of the brand holders. That makes the issue much more nuanced. The challenge to the integrity of the brand lies more in the sphere of morality and trust, more amorphous and less acute than the J&J/Tylenol-like situation. Further, the considerations of the branded retailer may differ from that of a product brand holder. The former may well have a much more complex supply chain in Bangladesh, making it much more difficult to complete an exit, a least in the near term. Moreover, threat of a boycott are difficult, if not possible, to maintain for very long against a retailer. There is also the issue of public memory; none of the brands, at least as of the time of this writing, has prominently been connected with the disaster. Under such circumstances, unless a particular company is subject to a board and management that places a special emphasis on issues of morality and ethics, the most likely scenario is that the matter will ultimately fade away for most companies.

Still, when the brands at issue are products rather than retail services, the risk may potentially be greater, In such a case, it may be easier for a pressure group (or even a single committed activist) to keep that specific product in the public's eye. Some companies, such as apparently Disney, may simply decide that the risk of adverse publicity is not worth it. A view was expressed in the article that, in the long run, other brands active in manufacture in Bangladesh will cut back or fully withdraw their operations over a period of time, despite the rock-bottom low labor costs in the country. It will be good to revisit in a year's time the roll call of brands actively having their products manufactured in Bangladesh to see how many have actually exited the country.

Marathon Patent Group – The Hot Bet?

Apparently since around mid-November of last year, Marathon Patent Group (MPG) evolved from American Strategic Minerals and discarded its mineral and real estate assets in favor of an IP management and enforcement services business model.  MPG has been very, very active since then and has received quite a bit of (mostly positive) press (here, here, here and here).  MPG detailed some of its activities in an April 25, 2013 report:

·         Acquired CyberFone Systems and its patent portfolio which has generated 32 settlement and license agreements for a total of $15.5 million in revenue

·         Acquired US Patent 5,331,637 from MOSAID Technologies, one of the world's leading intellectual property management companies

·         Entered into a strategic relationship with IP Navigation (IPNav), the leader in full-service patent monetization

·         Completed the acquisition of Sampo IP LLC acquiring its patent portfolio consisting of three patents and one pending patent application

·         Commenced our first licensing campaign on March 20, 2013 by filing a patent infringement lawsuit in the United States District Court for the Eastern District of Texas against Sony Computer Entertainment America LLC, Siemens Energy, Inc., CB Apex Realtors, d/b/a Coldwell Banker Apex Realtors, Blue Cross and Blue Shield Association, Juniper Networks, Inc., Winn Dixie Stores, Inc., and Dell, Inc.

·         Established a new IP Research and Services Center at the University of Arizona Science & Technology Park in Tucson, Arizona . . . .

Since April 25, 2013, MPG has also, through its subsidiaries, filed patent infringement lawsuits against Ambit Energy Holdings LLC, BMC Software Inc., HomeAway Inc., Hoover's Inc. and Ristken Software in the Eastern District of Texas; Thompson Reuters in the District of Delaware; Sprint Nextel Corporation, Juniper Networks, Cisco Systems, Bloomberg L.P., Hitachi Cable America, D-Link Corporation, Avaya, Hewlett-Packard Company, Enterasys Networks, Extreme Networks, TIBCO Software, BT Group, SAVVIS Inc., Zhone Technologies, Huawei Technologies, Allied Telesis, and Adtran in the District of Delaware;  and E*Trade Financial Corporate Services Inc., Liberty Mutual Group Inc., Aetna Inc., Avon Products Inc., Starbucks Corporation, Yum! Brands Inc., Hewlett-Packard Company, and Alcatel-Lucent USA Inc. in the Eastern District of Texas. Like I mentioned before, MPG is getting a lot of press for its activity. 

Co-blogger Neil Wilkof recently raised the question about the interest of boards in questions concerning IP—and he expressly excluded an entity such as MPG.  An entity such as MPG, of course, is primarily concerned with IP and notably, patent expert Professor Craig Nard recently joined MPG's board of directors.  I think that the importance of IP will lead companies to move toward accessing the services of companies like MPG although presently MPG seems mostly (?) involved in the enforcement of its IP.   I also think more companies will seek to draw in more IP experts on their boards—including some professors.  Does anyone have a sense of whether companies are utilizing the valuation, auditing or related services of companies similar to MPG (although MPG may be a different breed according to Forbes)?  The Forbes article indicates that some companies may be doing just that with MPG. 

Chief Judge Rader Upholds $345 million Jury Verdict for Patent Infringement

On May 1, 2013, the U.S. Court of Appeals for the Federal Circuit (CAFC) issued an opinion in Versata Software Inc. v. SAP America Inc. affirming a jury verdict of infringement and damages by SAP for $345 million.  Chief Judge Rader authored the opinion.  The award includes $260 million for lost profits and $85 million for reasonable royalties for infringement of Versata Software’s claims covering its “hierarchical pricing engine” software.  The opinion is here.

A Vote for a Massive Open Online Course for Start-Ups

Stifterverband für die Deutsche Wissenschaft and iversity are sponsoring a contest for the development of Massive Open Online Courses (MOOCs).  The ten winners will receive 25,000 Euros and support in creating their course.  Basically, the purpose of the contest is to get the word out about and increase participation in MOOCs.  The time for submittal of proposals has passed and the public voting period has begun.  (after the public voting period to help assess demand, the jury chooses the winners).  The proposals include courses covering Harry Potter to Applied Biology to Network Security. 

Professor Karl Okamoto’s (Drexel University, Earle Mack School of Law) proposal is for a MOOC for advising startups.  Here is his description:

Participants in this course will obtain an understanding of the legal issues that should be addressed by a startup venture. The course is designed for two audiences – for aspiring legal practitioners and for the entrepreneurs who will consult them. It provides an overview of the applicable business, intellectual property and tax law doctrines (with an emphasis on US law), but emphasizes the various “private ordering” solutions that transcend a particular set of legal rules. The course will also consider various theories of entrepreneurial success and examine the role of lawyers and lawyering in the creation of value in light of these theories. Participants will gain familiarity with the praxis of entrepreneurial lawyering both as a means to developing concrete solutions to real world problems and as a lens on startup culture and practice. In addition to lectures by the instructor, participants in the course will undertake numerous hands-on exercises. Experts, both lawyers and entrepreneurs, will participate in the course, providing both feedback on student performances and expert discussion.

This looks like a very useful course, and I voted for it.  Any other supporters?  [If you see any other proposals that merit a vote, please note them in the comments.]

Patents and Cumulative Innovation: what is the impact of Federal Circuit patent invalidations?

"Patents and Cumulative Innovation: Causal Evidence from the Courts" is  paper by Alberto Galasso (University of Toronto) and Mark Schankerman (London School of Economics and the Center for Economic Policy Research, CEPR).  This paper will shortly be distributed as CEPR Discussion Paper 9458, looks really interesting  The authors' concluding comments are as follows, with citations omitted:

"In this paper we estimate the causal effect of patent rights on cumulative innovation, using patent invalidation decisions of the [United States] Federal Circuit. The identification strategy exploits variation in the propensity of judges to invalidate and the fact that the three-judge panels are generated by a random computer algorithm. There are three key empirical findings. First, invalidation leads to a 50 percent increase in subsequent citations to the focal patent, on average. Second, the impact of patent invalidation is highly heterogeneous, with large variation across patents and technology fields. Third, we find that this effect only occurs between patents owned by large firms that appear to block small innovators. Thus, invalidation of large firm patents ‘democratizes’ innovation by small firms.

These findings suggest that some licensing deals are not taking place in the presence of patent protection. There are two main reasons why this might occur. First, it might be optimal for a patent owner to restrict access if licensing reduces joint profits (e.g., because it intensifies downstream competition). Second, information asymmetry and uncoordinated, multilateral bargaining can lead to licensing failures even when it would increase joint profits. It is important to distinguish between these explanations because they differ in terms of their implications for welfare and policy (even putting aside the effect on consumer surplus). Our empirical findings help to do this.

The impact of patent invalidation is concentrated on a small subset of patents which have unobservable characteristics that suggest the presence of asymmetric information that induces bargaining failure in licensing. Our results also help to pin down where the bargaining failure occurs. The effect is concentrated in fields characterized by two features: complex technology and high fragmentation of patent ownership. This reinforces the market failure interpretation, since earlier studies identify these features as key determinants of licensing breakdown ... . We find no evidence of blocking in non-complex fields such as chemicals, mechanical, and pharmaceuticals. [...]

Overall, our findings show that patent rights block cumulative innovation only in very specific environments, and this suggests that government policies to address this problem should be targeted. However, scaling back patent rights may not be the most appropriate policy. Theoretical models of cumulative innovation show that such policies have ambiguous effects on overall innovation incentives.[...] It may be preferable to design policies and institutions that facilitate more efficient licensing and thereby promote cumulative innovation ...".

This blogger simply does not have the economics background to enable him to comment on the paper. He will only confine himself to making the usual caveat that data is always a problem.  Litigated patent disputes are always going to be easier to identify and analyse because of their public nature, and patents that are the subject of disputes which are appealed to the Federal Circuit cannot even be assumed to be typical of litigated patents as a whole. It would be interesting to match research on US data with any available data from the more litigation-averse Europe, to see whether the findings here are reinforced or weakened and, if so, how and to what extent. It would also be good to know whether the authors' conclusions chime in with the expectations of the economics-friendly European Commission as to what the effect of patent invalidation decisions of the new Unified Patent Court will be.