BASIC LICENSING

SUMMER 1999

INTELLECTUAL PROPERTY SUMMER INSTITUTE

PROFESSOR KARL F. JORDA

FINAL EXAMINATION

 

This is a two-hour (three hours for foreign students), open-book exam. You may consult any materials. Yet, your examination must be your own work. Do not discuss it with other students.

Write your answers in the blue books supplied, but please use only one side of the page and observe the margins. Please write legibly.

Grading will be anonymous; please do not put your name on anything you turn in. USE YOUR EXAMINATION NUMBER.

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PROBLEM I

A. Facts

Mestle Company (Mestle) opposed the trademark application of Mash-Finch Company (Mash) to register DELI QUIK for various delicatessen products. Mestle had prior use and a registration of the marks MESTLE QUIK and QUIK for powdered, sweetened cocoa, and related products.

Mash was a wholesale food distributor to supermarkets and grocery stores, servicing some 390 affiliated stores and, additionally, owning and operating some 90 supermarkets, grocery stores, or warehouse-type markets. Many of these affiliated and company-owned stores included delicatessen departments, from which Mash's DELI QUIK delicatessen products were sold.

Mestle asserted abandonment by Mash of its trademark as a result of Mash's failure to sufficiently control the nature and quality of the goods sold under the DELI QUIK mark, alleging, among other things, the following:

1 .Recipe books were incompletely distributed to affiliated stores and use of the recipes was not mandatory.

2. Affiliated stores were encouraged to develop their own recipes and to sell products without prior approval from Mash under the DELI Quik mark.

3. Participation in Mash's delicatessen training program was not mandatory.

4. There was no requirement that ingredients for the goods had to be purchased from Mash, nor was there an approved list of ingredient suppliers.

5 .Inspections by Mash of affiliated stores using the DELI QUIK mark were incomplete and insufficient to insure control over the quality of the products sold.

Mestle contented that this resulted in a naked license situation.

However, there was evidence which established that:

1. Mash did provide deli raining manuals and training programs for deli managers and assistant managers (which were mandatory only for company store personnel).

2. Mash also distributed recipe books for its DELI QUIK products and a sandwich program manual providing specifications in connection with a variety of the sandwiches.

3. Regular merchandising bulletins were sent to the stores.

4. Mash encouraged (although it did not require) affiliated stores to purchase all material from Mash, and over 8% of the raw materials used in DELI QUIK products were, in fact, purchased from Mash.

5. Mash's district managers did regularly inspect company and affiliated stores to observe operations and to handle problems.

6. Mash also employed a deli merchandiser Ñ an inspector Ñ who visited the delicatessen departments of the stores on a regular basis and oversaw operation of those departments.

B. Question

What should the ruling be and why? In your answer also discuss the rationale behind the quality control requirement in trademark licensing. 15 points]

PROBLEM II

A. Facts

Eyeglass lenses made of glass (not those made of plastic) have been required by the U.S. Government to be of a specified hardness (strength) so that they would not be likely to break (in normal usage) and injure the wearer. A special heat treatment (annealing) of the lenses was adequate to meet government specifications. But then new specifications were promulgated and the old heat treatment techniques were no longer adequate.

Edward Bell invented a new process for chemically treating the lenses so they could meet the new government specifications. Bell obtained a patent on his process, which was adopted immediately by the entire eyeglass lens industry.

This industry is composed of three large competitors and a large number of smaller companies. The market share of these companies is as follows:

American Opticon (AO) 30 percent

Bash and Lam Co. (B&L) 25 percent

Universal Optical Corp. 20 percent

All others (largest having

4 percent of the market) 25 percent

Bell, through his licensing expert, Elias Colt, has succeeded in licensing his process to a number of small companies, totaling about 20 percent of the

market, but has not succeeded in licensing the three major companies, partly because of some questions about the validity of Bell's patent.

 

Thomasina Edison, Universal Optical Corporation's director of licensing, has been approached by Colt to take a license. Edison has asked Universal's patent counsel, Perry Bailey, to check out the patent.

Bailey has told Edison that it is clear that Universal and the rest of the industry got their technology from Bell's work and are infringing the patent. However, because of some prior publications and prior patents, Bell's patent may not be valid. When pressed, however, Bailey states that, all things considered, he thinks there is a 60 percent chance the patent would be held to be valid by a court.

Colt tells Edison that Bell is going to file a patent infringement suit against one of the big three companies, and Colt thinks Bell might decide to file suit against Universal, the smallest of the big three, because he might have a better chance of winning, or settling, a suit against the smaller company.

Edison has negotiated the royalty rate down about as far as she thinks she can and Universal does not object in principle to taking a license at these rates. However, Universal does not want to have to pay royalties to Bell unless its two bigger competitors are paying the same royalties.

Edison believes that Bell may sue Universal first. Edison also believes, from talking to AO's and B&L's patent and licensing people, that neither AO or B&L will take a license until Bell wins a patent infringement suit against either AO or B&L. Also, Edison is afraid that if Universal is sued, and loses, Bell could obtain an injunction which would, in effect, require Universal to pay much higher royalties to Bell (before Bell would have the injunction removed) than Edison has negotiated.

Edison's objectives are, therefore:

1. Not get sued by Bell because of the years which would be spent in the litigation, the cost of the litigation, estimated as at least $1,000,000, and disruption the litigation would cause to Universal's management, its lawyers and its technical and marketing employees.

2. Not pay any royalties until AO and B&L pay.

3. Not pay any higher than AO and B&L will ultimately pay.

Bell's objectives are:

1. License all the eyeglass lens industry, including in particular AO and B&L.

2. If the only way #1. can be accomplished is by suing for patent infringement, then Bell will sue.

B. Question

What kind of business arrangement should be proposed that would meet the objectives of both Universal (Edison) and Bell?

Please discuss the major features of your proposed business arrangement. Do not draft an agreement or clauses for an agreement [30 points]

 

PROBLEM III

A. Facts

A gourmet cook who is also an amateur chemist and a tinkerer, has come up with a novel formula for flavoring tablets that can make a cup of coffee taste like you just ground the beans. She wants to sell or license her formula to a big food products company like RJR Nabisco. If a big corporation has no interest in it, she will try to sell or license it to someone regional. She plans to start contacting these companies soon. However, she is concerned that when she discloses her formula to companies, they will steal it. She is not sure it is patentable, and it might not be a trade secret, either.

B. Question

What can she do to protect herself in her dealings with any of these companies? In your answer also discuss the so-called ÒBlack Box DilemmaÓ and ways and means for resolving it. [20 points]

END OF EXAMINATION

KFJ/Ruh/7.2.99