Understanding Technology Consortia and Their Importance to Your Business

Consider the following scenario: late one afternoon you receive a frantic call from one of your company’s engineers. He or she wants to join a new technology consortium to allow your company to align its R&D efforts with what appears to be an emerging industry standard. The problem is that the engineer needs your approval “right away” to allow the company to become a member of the consortium, because it’s having a critical technology meeting tomorrow. The engineer emails you a copy of the consortium’s membership agreement, which looks fairly straightforward, so you authorize your company’s participation as a new member. Unknowingly, you may have just compromised some of your company’s most lucrative proprietary technology.

What are Technology Consortia?
Technology consortia are generally defined as collaborative efforts among companies and other key players (such as research institutions) in a particular industry that collectively try to address and solve key technology or research challenges.

Some technology consortia, for example, are formed to create “standards,” which facilitate greater compatibility among the various technologies in that space, so that the industry can collectively develop increasingly innovative products. Other consortia may be formed to address other technology or research roadblocks, which are challenging an entire industry sector. In many of these situations, the consortium members, who are often fierce competitors, are voluntarily coming together to collaboratively solve significant obstacles, which are holding back the next generation of research and development.

Many sectors of the high technology industry have seen a rapid growth in the number of technology consortia, including the hardware, software, semiconductor, Internet, wireless, telecommunications, electronic funds transfer, and cable industry sectors. Consortia have also expanded in the life sciences industry, due in part to the increased cost of research and development.

The decision of whether your company should participate in a particular consortium can have significant implications for your company’s future. How a particular consortium functions and the specifics of its membership can have a profound effect on your company’s business and your intellectual property rights. So, before you join any consortium, you should always take a closer look at the business and legal ramifications of your participation.

Benefits of Participating in Technology Consortia
Though technology consortia are often promoted by major technology companies, membership can be a benefit for small to mid-sized companies, and even research institutions, because such participation can give you a “voice” in the research and development that might impact your industry for years to come. However, every company needs to evaluate the specific pros and cons of participating, or not participating, in any particular consortium.

Some potential benefits of participating in a particular consortium include: increased market acceptance of your technology, the ability to help create new technologies that would not exist absent broad industry collaboration (such as new standards or other technological solutions) and the ability to spread substantial research and development costs across multiple consortium members. There are, however, potential pitfalls to joining a particular consortium—or the wrong consortium—which could prove to be detrimental to your business. Generally, these pitfalls fall into two categories: business and legal risks.

Business Risks
If your company joins a consortium that promotes a “losing” technology or standard, there is a possibility that your company’s market share will decline, perhaps precipitously. Trying to play “catch up” with your own R&D (if catching up is even possible) could be prohibitively expensive. Eventually, your existing technology or products could approach obsolescence as competing technologies or standards evolve in a different technological direction.

To avoid the negative business implications of not joining the “right” consortium, it is critical to evaluate competing consortia and then analyze which collaborative initiative has the potential of winning the broadest industry acceptance. It’s also imperative that you make sure that a particular consortium’s purpose aligns with your company’s overall business plans and direction.

Moreover, it is important to examine the organizational structure of each consortium. These factors could determine the extent and nature of your company’s participation in the consortium’s governance and the obligations imposed on you as a member.

Legal Risks
One of the most significant legal risks posed by joining a consortium that your company could inadvertently relinquish some of its most crucial intellectual-property rights. Membership agreements increasingly require each consortium member to comply with all of the consortium’s “policies and procedures.” This commitment, when fully evaluated, could mean your company is obligation to: (i) disclose confidential patents and other intellectual property to the other members of the consortium (at a minimum); (ii) license certain company patents and other intellectual property, sometimes royalty-free, to other consortium members; and (iii) share, or even transfer, ownership of your company’s technology if you contributed it to the collaborative efforts of the consortium. Thus, it is essential for a company to carefully review all consortium agreements and policies to fully evaluate how membership might impact your company’s valuable intellectual property rights.

Maneuver Carefully
Technology consortia are already an essential part of research and development in many companies. Companies that are often competitors increasingly are turning to consortia to collaboratively address technology and research challenges impacting that industry sector. While consortia membership could catapult your company toward greater industry-wide success, the decision to join a particular consortium is fraught with complexity and should not be undertaken lightly. Evaluation of each consortium should be part of your larger business plan. As with every other piece of your company’s business roadmap, maneuver the path with caution, and make sure you fully understanding every avenue you pursue.

Frank X. Curci is Chair of Jennings, Strouss & Salmon's Intellectual Property & Technology Practice Group and Biotechnology & Life Sciences Industry Group. Mr. Curci represents technology and life sciences entities in domestic and international intellectual property and technology law matters in a variety of industries including high technology and life sciences companies as well as research universities and research institutions. He can be reached at 602-262-5851 or fcurci@jsslaw.com.

What Chapter 7 and 11 Bankruptcy Can and Cannot Do for Your Business

There are essentially two types of bankruptcies available for a business: Chapter 7 and Chapter 11. Chapter 7 is a straight liquidation. A trustee is immediately appointed randomly from a panel of individuals who have met the Bankruptcy Code qualifications to serve in that capacity. The trustee takes control of the debtor’s assets, sells them and distributes the proceeds to creditors. The trustee can operate the debtor’s business during the liquidation process. Trustees have full access to the debtor’s books and records. The benefit to a Chapter 7 is that there is an immediate finality.

Chapter 11 is typically a reorganization case. As in a Chapter 7, all assets become property of the “Estate,” but in a Chapter 11, there is no trustee and the debtor remains in possession of the assets. In fact, the debtor is referred to as the “debtor-in-possession” or “DIP.” Businesses typically continue to operate in a Chapter 11 with the goal of restructure debt or otherwise re-order their financial or corporate structure. Although generally referred to as a reorganization, a DIP can liquidate its assets in a Chapter 11 proceeding and may want to do so believing that the DIP can achieve a higher value than could a Chapter 7 trustee. This process may ultimately benefit an owner who also has personal obligations for the business debt.

What Bankruptcy Cannot Do

• Save money initially. Chapter 11 is an expensive process in terms of professional fees, disbursements to the United States Trustee’s Office, and uncompensated time for management to spend on bankruptcy matters.
• Allow the debtor to hide out. Chapter 11 is often referred to as a fish bowl. The financial reporting requirements are extensive and creditors are given carte blanche ability to explore the debtor’s books and records.
• Restructure a company that has no business. Bankruptcy cannot substitute for the lack of viability. There needs to be a core business to reorganize.
• Force creditors or customers to continue doing business with the company. Trade vendors, which supply on an open account, can require COD payments and are not required to extend credit terms. Customers without a contractual obligation to purchase from the debtor can simply quit the relationship.

What Bankruptcy Can Do

• Provide at least a short respite from paying creditors. The automatic stay brings all collection efforts and lawsuits to an immediate halt.
• Provide an opportunity to alter debt repayment terms.
• End troublesome contracts or leases. The debtor has a relatively unfettered ability to reject contracts or leases which it no longer believes are in its best interest.
• Allow a business owner to work with creditors for an overall solution and to preserve personal finances.

Carolyn J. Johnsen is Chair of Jennings, Strouss & Salmon’s Business Restructuring & Reorganization Section. Ms. Johnsen has extensive experience in every aspect of commercial reorganizations, representing both debtors and creditors. She can be reached at 602-262-5906 or cjjohnsen@jsslaw.com.

Google's AdWords Program Continues to Challenge Trademark Owners and The Courts

The debate over the open sale of trademarks to trigger online advertising at Google has been heating up. Google AdWords allows anyone to bid on keywords that, when searched by others, wins the owner high placement in the search results page based on a combination of factors. This means that your company can bid on the word "shoes," for example, in order to have your footwear company placed prominently among the search results.

But what if you want to use the NIKE trademark to trigger an ad for your footwear website? And what if you don't even sell NIKE shoes? In most instances Google allows any company to bid on keywords and place advertising using another company's trademark.

Courts across the United States have reached different conclusions on whether Google's use of trademarks as AdWords constitutes "trademark use in commerce," a necessary element of a successful trademark infringement lawsuit. The 9th Circuit, which includes Arizona and California, has held that the sale of trademark-protected words in the AdWords program is a "use in commerce" for purposes of federal trademark law. Courts in the 2nd Circuit, which includes New York, have held otherwise, holding that Google's actions are not a "use in commerce" under federal trademark law. The courts have largely accepted Google's contention that there is no trademark use in commerce because any use of the mark is internal only, and Google had never "used the mark" publicly by placing the trademark on any goods, containers, advertisements, or anything else visible to the public.

This split between east and west, or 2nd and 9th circuit, may be changing. Recently, the 2nd Circuit Court of Appeals for New York reversed a lower court's determination on the "use in commerce" issue. In Rescuecom v. Google, the Second Circuit found that selling trademarks as search engine advertising keywords can be a "use in commerce." "What Google is recommending and selling to its advertisers is Rescuecom's trademark," said the Court's ruling. "Google displays, offers, and sells Rescuecom's mark to Google's advertising customers when selling its advertising services."

We haven't seen the end of this issue. Other cases are pending against Google, and Google is said to be liberalizing its policy to permit use of third-party trademarks in some ads themselves. It remains to be seen whether the 2nd Circuit will distinguish a competitor's purchase of trademarks for use in keyword searches from Google's sale of trademarks.

Each case a business may face is unique and may require legal advice. Please consult an attorney about specific concerns in this area. For more information, contact Bradley P. Hartman at bhartman@jsslaw.com or 602.262.5842.

Trademark Fights Take Shape During Tough Economy

As companies fight for new business and look to keep what they already have, protection of a company's core identity is more important than ever.

Words, slogans and designs that you use to identify and distinguish your goods and services from others are eligible for federal registration with the U.S. Patent and Trademark Office (the "PTO"). A federal trademark registration gives a company presumptive ownership and the exclusive right to use the trademark in connection with the goods and services identified in the federal registration. For this reason, it is important to not only protect your brands through federal registration, but to also monitor the trademark registration activities of others.

Three recent cases show the importance of protecting your brand, and monitoring the actions of others:

1. Recently, The Laptop Company, owner of the online shopping service "BongoBing," made a preliminary filing with the PTO in opposition to Microsoft's application for federal registration of the "Bing" trademark for its new search engine. The BongoBing website provides information on products primarily in the home and garden area. The website is designed to look like a search engine, where you can search or "Bongo" for products.

Although The Laptop Company claims trademark rights to BongoBing, it has never filed an application for federal trademark registration. The company has received an extension through December 16, 2009, to formally oppose the registration of "Bing."

2. Oprah Winfrey and her production company, Harpo Productions, Inc., are trying to stake Oprah's exclusive claim to the term "Aha! Moment." Last year, the insurance company Mutual of Omaha filed an application for registration of the slogan "Official Sponsor of the Aha Moment," which became part of a national advertising campaign in February. After the Mutual of Omaha mark was approved by the PTO, it was published for opposition by third parties. When no opposition papers were filed, the PTO issued a Notice of Allowance.

On the same day the Notice of Allowance was issued, Oprah's lawyers sent a "cease and desist" letter to Mutual of Omaha, claiming that the slogan violates Oprah's rights in the "Aha Moment" and demanding that the company cease use of the mark. Not to be outdone, Mutual of Omaha filed a lawsuit in federal court days later, asking a judge to allow the company to use its slogan without interference from Oprah. The litigation is ongoing.

In the meantime, Harpo has filed its own applications for federal registration of "Aha! Moment," one of which (for magazine columns) was published for opposition on September 1, 2009.

3. When consumer electronics retailer giant Best Buy learned that a division of United Technologies known as the "Geek Patrol" was providing the same computer repair services as the Best Buy "Geek Squad," the company went straight to federal court with allegations of trademark infringement, unfair competition, and deceptive trade practices. Best Buy identified an online directory listing for the Geek Squad that stated "GEEK PATROL we can send a Squad of geeks to you" and "WE ARE THE BEST BUY." The lawsuit, filed last month, has resulted in some changes to the Geek Patrol website. Time will tell who ultimately prevails in this real life "geek drama."

Each case a business may face is unique and may require legal advice. Please consult an attorney about specific concerns in this area. For more information, contact Bradley P. Hartman at bhartman@jsslaw.com or 602.262.5842.

Client Alert: Recent Changes to Arizona Foreclosure Law Repealed

On September 4, 2009, Governor Brewer signed House Bill 2008, which repeals Senate Bill 1271 and its changes to the Arizona anti-deficiency statute. The real estate community’s efforts were successful; and the recent changes to the law sought out by the lending industry, signed by Governor Brewer on July 1, 2009, and scheduled to go into effect on September 30, 2009, have been repealed.

As a result of this repeal, property owners (including owners of second homes and investment properties) in the state of Arizona owning qualified real estate (residential property on two and one-half acres or less and utilized for either a single one-family or single two-family dwelling) will continue to receive the protections afforded by Arizona’s anti-deficiency statute.

To view the original client alert, or to recap on the details of SB 1271, view our blog post from August 4th.

If you have any questions or concerns about this change in Arizona’s foreclosure law, contact Brian N. Spector at bspector@jsslaw.com or 602.262.5977.

Tax Client Alert: Deadlines Approaching For Special NOL Carrybacks

Time is running out for many businesses wishing to take advantage of the expanded business loss carryback option included in the 2009 recovery law. Eligible calendar-year corporations have until September 15, 2009 to file the appropriate forms. Eligible individuals have until October 15, 2009 to choose this expanded carryback option.

This carryback provision offers small businesses that lost money in 2008 an excellent way to quickly obtain some much needed cash if the business was profitable in previous years. This option is only available for a limited time, so small businesses should consider it carefully and act before it is too late.

Under the American Recovery and Reinvestment Act (ARRA), enacted in February, many small businesses that had expenses exceeding their income for 2008 can choose to carry the resulting loss back for three, four or five years, instead of the usual two. This means that a business that had a net operating loss (NOL) in 2008 could carry that loss on their books as far back as tax-year 2003. Not only could this mean a special tax refund, but the refund could be larger, because the loss can be spread over as many as five tax years, rather than just two.

This option may be particularly helpful to eligible small businesses with a large loss in 2008. A small business that chooses this option can benefit by:

• Offsetting the loss against income earned in up to five prior tax years,
  
• Getting a refund of taxes paid for up to five prior years,
  
• Using all or part of the loss now, rather than waiting to claim it on future tax returns.

The option is available for an eligible small business (ESB) that has no more than an average of $15 million in gross receipts over a three-year period ending with the 2008 tax year. Unless the appropriate election is made prior to the referenced deadlines, the taxpayers will not be eligible to take advantage of the expanded carryback period.

Many taxpayers are also revisiting whether losses that arose from 2008 taxable transactions generated ordinary losses, or capital losses. Ordinary losses may be eligible for the expanded carryback treatment. Capital losses only can be carried forward to future tax year, and then only can be utilized to offset future capital gains, or, to a very limited extent, the ordinary income of the taxpayer.

Each case a business or individual may face is unique and may require legal advice. If these changes apply to you, or you have other tax related questions, please contact either Jack N. Rudel at jrudel@jsslaw.com or contact Richard C. Smith at rsmith@jsslaw.com.

Inaccurate Listing of Goods in Trademark Registration No Longer Basis For Automatic Cancellation: Federal Circuit Reverses Trademark Offices Stance

The recent Federal Circuit decision in In Re Bose Corporation (No. 2008-1448, Slip Op. August 31, 2009) has changed the prevailing standard for finding fraud on the Trademark Office where an applicant inaccurately identifies goods or services sold under the mark. The BOSE trademark registration had been canceled by the Trademark Trial and Appeal Board (TTAB) for fraud on the Trademark Office because a declaration filed in connection with renewing the registration had listed goods (audio tape recorders and players) that were no longer being made. Bose’s explanation that it thought that shipment of tape players for warranty work met the commerce requirement was rejected as unreasonable, and the TTAB applied its standard that an applicant commits fraud by making a representation that it knows or should know is false.

In reversing, the Federal Circuit held that fraud on the Trademark Office must be shown by clear and convincing evidence of a false statement of material fact made with deceptive intent: “There is no fraud if a false misrepresentation is occasioned by an honest misunderstanding or inadvertence without a willful intent to deceive.” Because direct evidence of intent to deceive is rarely available, fraud may be inferred from indirect and circumstantial evidence, but the inference must be clear and convincing, and must indicate sufficient culpability to require a finding of intent to deceive.

This ruling eliminates what had been a “quick and easy” basis for attacking a trademark registration. Under the prior line of TTAB authorities (now reversed), one slip in the identification of goods could be grounds for cancellation of the entire registration. If a listed item was not in commerce at the time of the declaration, cancellation for fraud was virtually automatic if requested by an adversary. Now the standard is much higher and there will be far fewer cancellations.

Even though the threat of Draconian consequences for an incorrect listing of goods or services in a registration has been minimized, trademark owners are still advised to review their existing registrations carefully for any inaccuracies and to correct them by amendment. In addition, scrupulous accuracy in future statements of use, whenever filed, should be the norm.

Each case a business may face is unique and may require legal advice. Please consult an attorney about specific concerns in this area. For more information, contact Joseph W. Mott at jmott@jsslaw.com or 602.262.5866.

Federal Minimum Wage Increase

Effective July 24, 2009, the federal minimum wage provisions contained in the Fair Labor Standards Act (FLSA) were increased to $7.25 per hour. Please note that many states also have minimum wage laws. In cases where an employee is subject to both state and federal minimum wage laws, the employee is entitled to the higher minimum wage. Overtime pay at a rate not less than one and one-half times the regular rate of pay is required after 40 hours of work in a workweek.

The Fair Labor Standards Act establishes minimum wage, overtime pay, recordkeeping, and youth employment standards affecting employees in the private sector and in Federal, State, and local governments.

Client Alert: An Important Change Affecting Arizona Foreclosure Law

On July 1, 2009, Governor Brewer signed into law an important change to Arizona’s anti-deficiency statute. Previously, a lender foreclosing a deed of trust on qualified real estate (i.e., residential property of two and one-half acres or less and utilized for either a single one-family or single two-family dwelling) could not bring an action to recover any difference between the amount of its claim and the amount obtained by the foreclosure sale. As a result of the change, the protection now only applies to a foreclosure sale of such residential property that is used by the borrower as a dwelling for at least six consecutive months. The borrower has the burden of proving that.

This change in the law was sought by the lending industry. It was intended to take away the protection previously afforded to those who purchased residential real estate as rental and investment property.

A number of questions already have arisen regarding this change in the law. A few of them and the possible answers are set forth below:

1. Question: To receive protection, must the borrower have used the property for the six consecutive months immediately preceding the foreclosure sale?
   
   Answer: No. The change appears intended to take away protection from borrowers who purchased residential property for speculation and investment. Accordingly, it should not apply to a borrower who, for example, initially lived in the property (for at least six months) but later turned it into a rental or for other reasons moved out. That also is consistent with a plain reading of the statute, which does not specify that the usage must occur immediately prior to the sale.
   
   
2. Question: Are the owners of second (i.e., vacation) homes protected?
   
   Answer: Given the intent behind the change -- to take away protection previously afforded to speculators and investors -- vacation home owners ought to be protected if they can demonstrate that they used the property for six consecutive months. Arguably, usage need not be as a primary residence; it also can be the more sporadic kind associated with a second home. It could be argued that if the legislature wanted to limit protection to one’s primary residence, it could have said that or used the term “resided” instead of “used.”
   
   
3. Question: Does the change apply to owners who purchased and borrowed against property in reliance upon the protection afforded under the old law?
   
   Answer: Yes. The change applies to all foreclosure sales that occur after September 30, 2009 – regardless of when the property was purchased or the loan was made – and, therefore, to sales of property owned by investors who purchased and borrowed in reliance upon the protection afforded under the old law. It remains to be seen whether such owners can successfully challenge the applicability of the change to transactions made in reliance upon the prior law.
   

According to recent newspaper reports, the Arizona Realtors Association and real estate industry lobbyists currently are working to get this change in the law repealed. Time will tell whether those efforts will be successful and/or whether the new law will be clarified to address the above questions.

If you have any questions or concerns about this change in Arizona’s foreclosure law, contact Brian N. Spector at bspector@jsslaw.com or 602.262.5977.


NOTE: On September 4, 2009, Governor Brewer signed House Bill 2008, which repeals Senate Bill 1271 and its changes to the Arizona anti-deficiency statute. Please view our updated blog post explaining these changes.

Jennings Strouss Sponsors the 5th Annual Commercializing Life Sciences Forum: The Art and Science of Valuing a Bioscience Company

Jennings Strouss, is again partnering with ASU Technopolis and other entities to co-sponsor the 5th Annual Commercializing Life Sciences Forum (“Conference”) on September 1, 2009 in Scottsdale, Arizona at ASU’s Skysong campus. This year’s Conference, entitled The Art and Science of Valuing a Bioscience Company, will focus on the challenges of valuing inventions and other key IP held by a bioscience entity from discovery to the mature commercialization stage.

• Session 1: Valuation of Intellectual PropertyPanel Discussion: Determine an appropriate valuation for a technology and its associated IP.
• Session 2: Company Valuation when Attracting InvestmentPanel Discussion: Issues surrounding the funding of an existing company, e.g., maintaining the founder's stake, down rounds, how to avoid setting a valuation that will make it harder to attract additional capital later.
• Session 3: Valuation in an M&A EnvironmentPanel Discussion: How a company is valued when it is being considered for an acquisition.

Other Conference supporters include the Arizona BioIndustry Association, the Mayo Clinic, SunHealth Research Institute, and Arizona Technology Enterprises (AzTE).

For additional information, please visit Jennings Strouss or ASU Technopolis or contact Frank X. Curci.

Save the Date postcard.