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When a Stick Becomes a Carrot: How Toyota’s Royalty-Free Patent Move Impacts The Valuation of Its IP Portfolio

Posted on April 26, 2019 6:11 pmModified on April 19, 2021 8:25 pmby Efrat Kasznik

Toyota has recently announced (April 2019) that it will grant royalty-free licenses on nearly 24,000 patents related to its hybrid electric vehicle (HEV) market. In the announcement, Toyota stated that its goals were to promote widespread adoption of electrified vehicles in an effort to help governments, automakers and society at large accomplish goals related to climate change. Toyota has further noted that it felt now is the time to cooperate with other companies, based on the high volume of inquires it received in connection with its vehicle electrification system from companies who recognize a need to popularize hybrid and other electrified vehicle technologies.

The Toyota announcement comes at the heels of a similar announcement made in January 2015, when Toyota announced at the CES conference that it is going to make its hydrogen fuel portfolio of 5,600 patents available on a royalty-free basis. Toyota’s new patent announcement raises a number of important questions related to the value of these patents and the end goal of Toyota’s move. In this blog we examine the potential motivations for Toyota’s bold move, its implications on patent valuation and brand valuation, and how Toyota’s patent move is very different from what appears to be a similar move made by Tesla.

From Hybrid Vehicle Pioneer to Market Leader

The Toyota brand is synonymous with the hybrid vehicle. Since the launch of the Prius, with its unique love-it or hate-it design, Toyota has solidified its position as a leading auto company in the pursuit of reduced vehicle emissions. The company’s eco-friendly branding efforts have paid global dividends – in 2017, Toyota surpassed the 10 million cumulative global unit sale mark, with Prius models alone accounting for about 60% of these sales. Though they may be the category leader, however, the hybrid vehicle market is fairly negligible in the total global car market, which is pegged at nearly 79 million unit sales in 2018. With an estimated 4.2 million unit sales in 2018, the hybrid market represents just 5% of the total. With such a strong brand in a minuscule category, it is only natural for Toyota to seek to aid growth in the hybrid market.

With the move to allow royalty-free access to its hybrid vehicle patent portfolio, while selling parts and consulting services on the technology, it seems that Toyota is attempting to advance the hybrid market as a whole. A J.P. Morgan analyst report noted that electric vehicles (including battery EVs, plug-in hybrids, and traditional hybrids) represented just 1% of total global vehicle sales in 2015. The same report estimates that by 2030, this will rise to nearly 60%. It is fair to assume that Toyota will be a major supplier fulfilling this increased global demand.

When a Stick Becomes a Carrot

In an article we published in March 2019, Foresight predicted the return of “Carrot licensing” as one of the trends to watch in 2019. The Toyota announcement could not have been a more timely validation of that trend. “Carrot licensing” is a term used to reference licensing activity that is driven by technology transfer, as opposed to licensing driven by enforcement (also known as “Stick” licensing). This form of licensing is more closely associated with emerging technologies, where the licensor is interested in creating markets for new products using an idea protected either by trade secrets or by patents. A Carrot licensing strategy also has economic advantages: it allows expansion into new regions without bearing the marketing, manufacturing and distribution cost associated with the complementary business assets needed to bring a new technology to market. In Toyota’s case, the company decided to grant royalty-free license agreements as a way to boost market adoption, which will in turn drive additional revenues from components and technical support.

Given Toyota’s dominance in the hybrid vehicle market, one could easily argue that the time to cooperate has long passed, as major US manufacturers currently offer their own hybrid vehicles, or have announced plans to go all electric in the coming years. With this in mind, it is unlikely that Toyota is seeking to create partnerships with major US manufacturers to expand their hybrid lineups. Instead, this seems to be Toyota’s push to become a component supplier that also provides fee-based technical support to car makers in developed or developing countries that do not have the same access to electric or hybrid vehicle technology. Through component sales and technical support, Toyota can continue to profit from the innovations protected by these patents without having to build, export and market Toyota vehicles. Since Toyota cannot possibly grow its market share much beyond it already is, it needs to expand the overall pie so others can produce hybrid vehicles, while paying Toyota for parts and knowledge. It is actually a very smart strategy from an economic and market perspective.

Toyota’s Patent Valuation: Boost or Bust?

Toyota’s announcement raises a number of questions related to the value of the 24,000 patents that were just offered royalty-free to the market. If Toyota is granting royalty-free licenses on a significant portion of its patent portfolio, does this mean that these patents hold no value? According to Toyota’s announcement, an actual license with Toyota is still required to gain access to these patents. This approach is markedly different from that of Tesla which stated they would not initiate patent lawsuits against anyone who, in good faith, wanted to use their patents. Toyota is stating that “contracts for the grants may be issued by contacting Toyota and discussing specific licensing terms and conditions.” This sounds more like Microsoft’s approach to granting access to 10,000 patents to startups to defend against lawsuits, subject to the condition that the startup must qualify based on their preceding three-month Azure spending.

We do not yet know what terms and conditions will ultimately be included in the Toyota license agreements, but the language tends to indicate that one could expect to find a tie-in with Toyota’s services and/or Toyota’s components, which could generate significant revenues for Toyota. The company will most likely still continue to maintain and grow its patent portfolio, even though the patents are offered under royalty-free licenses. Assuming this is the case, Toyota is seeking an alternative route to monetization of their patented technology that extends beyond the market which it already dominates in vehicle sales. If the patents help drive other types of revenues, then they still have significant value, which could potentially be even higher than the value calculated based on the royalty savings or royalty licensing potential to Toyota. Patents can also bring strategic value that does not translate directly into a revenue stream. Toyota holds the IP rights to the technology underlying its massive patent portfolio, and can use these IP rights in whatever way it sees fit. From an economic and legal perspective, the Toyota Board has a fiduciary duty to its shareholders to utilize corporate assets (including intangible assets, such as patents) in ways that optimize shareholders’ return. One should assume that careful consideration has been given before 24,000 patents are released royalty-free, as the Board could have left the status-quo as is and have done nothing with the patents; if these patents are indeed worthless, why do anything with them? Let alone offer them free of royalty to the market.

“Toyota Inside”? The Branding Implications for Toyota

Toyota’s gesture also differs from Tesla’s in other important ways. Tesla’s announcement was interpreted as a way to expand adoption of a relatively new market: all-electric vehicles. Tesla viewed its patent portfolio as a road block to the emergence of newcomers in the market. Toyota, on the other hand, is in a much different position: it holds the lion’s share of the market for hybrid vehicles – a market it helped create over 20 years ago with the introduction of the first Prius model in 1997. Since that time, Toyota has effectively utilized its portfolio to restrict competition and build its massive market share, and is now facing an inflection point where the market appears ready to abandon hybrid vehicles in favor of all- electric vehicles. It seems clear that Toyota believes major markets are turning away from hybrids, and it now must find a way to monetize its patent portfolio through a new business model. Time will tell whether this approach will suffer the same fate as Toyota’s fuel cell patent offering in 2015, or if the company is able to extend the economic life of these assets through service and component obligations in emerging vehicle markets.

It also seems that Toyota views itself as a key player in enabling this overall growth. The Prius brand has proven itself to be marketable and sustainable; however, no matter how strong the brand, the demand must exist in the market to realize its true value. Perhaps this is why Toyota is seeking to enable its competitors to more readily produce hybrid vehicles. With the competition now armed with the tools to produce competitive hybrids, new markets could begin to open up. Aside from market expansion in territories like the U.S., new demand in markets such as China and India, which each sold around 25 million and 4 million vehicles respectively in 2017, could mean massive revenue potential for Toyota.

Conclusion

Toyota has achieved a dominant market position in the hybrid vehicle market; a position which has awarded Prius a great competitive advantage. We see the move by Toyota to allow royalty-free access to its 24,000 patent portfolio not only as a move to grow the hybrid vehicle market, but also as a way to extract new revenues sources from its patented technology as well as enhance the value of its brand (Toyota is already boasting a brand value of over $53 billion according to brand ranking service, Interbrand). The company may have won the hybrid market battle against traditional competitors such as Ford and Honda, but now it must deal with competition from a new generation of companies that were born all-electric, namely Tesla. With this move, Toyota reminds us that they are the dominant force in hybrid technology and are eager to drive the industry towards an emissions-free future.

Trade Secret Damages Expert Blog: The Flexible Approach to Damages Calculation

Posted on April 15, 2019 4:26 pmModified on April 15, 2019 4:31 pmby Lynn Dudinsky

Trade secrets have become an increasingly important corporate asset that brings value to companies as part of their overall intellectual property (IP) strategy and portfolio. Foresight Valuation Group is an IP valuation, strategy and litigation consulting firm that specializes in assisting our clients in extracting value from their innovations, and understanding the value created by the various types of IP rights (patents, copyrights, trademarks and trade secrets). Recently, Foresight has experienced an increase in the number of clients (corporations, startups and litigation clients) looking to value their trade secrets, especially in situations where trade secret misappropriation has occurred which triggers subsequent litigation.

This is the first blog in a series on trade secrets, where we will focus on a number of cases that shed light on the methodologies involved in calculating trade secret damages and use the outcomes of those decisions to provide best practices that should be utilized in calculating trade secret misappropriation damages and to highlight, when appropriate, steps that should be taken by the trade secret owner to be in the best position to extract the most value from their trade secrets. In this first blog in the series, we review the DSC Communications v. Next Level Communications case where the entire purchase price of the misappropriating company was utilized in the determination of trade secret damages.

DSC Communications Corporation (DSC) was the Plaintiff suing two former employees, Thomas Eames and Peter Keeler, and the company that they founded, Next Level Communications (Next Level). Eames and Keeler began working at DSC in 1990 and signed a number of employment documents (including employee, patent, copyright, and proprietary information agreement) when hired, that prohibited them from disclosing proprietary information received or developed during their employment. In 1994, Eames and Keeler formed Next Level and then resigned from DSC. Next Level immediately began development of a product that would compete directly with DSC. A lawsuit was filed in 1995 alleging that Eames and Keeler misappropriated DSC’s trade secrets in the formation of Next Level and the development of its competition product.

In a typical trade secret misappropriation case, the victim of trade secret theft will seek damages that measure the actual loss attributed to the theft or the unjust enrichment generated by the trade secret thief, or both:

Actual damages typically focus on the lost sales and/or increased costs resulting in lost profits following the misappropriation of a company’s trade secrets. Actual damages can also be measured by establishing the value of the trade secret prior to misappropriation and the resulting decrease in value to the company following misappropriation. An alternative measure of actual damages includes the cost to develop and maintain the trade secret.
Unjust enrichment is focused on calculating the economic benefit that the misappropriating party realizes through the unauthorized use of the trade secret and awarding that benefit to the trade secret owner. This economic benefit is typically described as the profits derived by the misappropriating party through the use of the trade secret, but can also include other benefits such as the costs and time saved by the misappropriating party that would have otherwise been required had they developed the trade secrets independently as opposed to obtaining the trade secret through theft.
In situations where neither actual loss nor unjust enrichment are provable, reasonable royalties may be awarded by the court.

Each of these damages theories cover a variety of methodologies that can be used to calculate the appropriate damages, and this blog series will touch of various cases that provide examples of different methodologies used. With that said, it is important to note that courts have recognized that the various forms of damages in misappropriation cases necessitated what the courts consider a “flexible approach” (Bohnsack, 668 F.3d at 280) to calculating damages for claims of misappropriation of trade secrets.

The flexible approach described in Bohnsack and other cases took an especially important role in this case because Next Level was acquired by General Instrument Corporation (GI) a few months after DSC initiated the lawsuit. The acquisition of Next Level took the form of $91 million plus stock options and indemnification from future lawsuits, including the litigation with DSC. Importantly, because of the short time between the formation of Next Level and its acquisition by GI, Next Level had not produced a product ready for sale by the time it was acquired. In fact, DSC had itself not yet produced a product that was ready for sale at the time of the lawsuit.

DSC did not present damages based on their own projected lost sales or Next Level’s profits; instead, the damages DSC sought to recover were based on the acquisition price of Next Level paid by GI. The amount of damages sought by the Plaintiff included the acquisition price ($91 million), the value of stock option, and the value of the indemnity agreement (which was an important component to the overall consideration). The indemnity agreement was not only a valuable asset that was accounted for in the damages calculation; it also served as additional evidence that the Defendants were aware that they did not hold ownership of the trade secrets and felt it necessary to insure against a future misappropriation suit. The court agreed with DSC’s approach and made the following statement in response to arguments against this approach by Next Level: “since neither party has yet to produce a product that is ready for sale to customers, the purchase price of Next Level, whose assets consist almost exclusively of ideas that DSC claims were stolen, may be the least speculative method of deriving the value of the alleged trade secrets.”

This case provides a manifestation of the flexible approach to the calculation of trade secret damages, where the courts allow “the least speculative” method for damages calculations. This type of flexibility can be applied by damages experts retained on cases where unique circumstances require the expert to use the best approach to calculating damages based on the data available. The court is prioritizing the method based on the most robust set of data, and endorses the methodology based on the underlying data. It is important to remember that the flexible approach paradigm dictates that the expert must always base his or her opinion on sufficient data and facts that produce an opinion that is the product of reliable principles and methods that were applied to the facts of the case. The flexible approach does not enable the expert to avoid these requirements simply because the courts recognize the need for flexibility in trade secret cases. As we will discuss later in this series, the Waymo v. Uber case is an example where Plaintiff’s damages expert’s opinion was excluded from consideration due to failure to adhere to the principles described above, resulting in the Judge determining that the expert’s opinion and testimony was “more prejudicial than probative” and granted Uber’s motion to exclude it from the case.

Fair Use: Friend or Foe?

Posted on March 29, 2019 10:45 pmModified on April 19, 2021 8:32 pmby Sebastian Custodia

Several months back in an article discussing Brand Extendibility, I touched on a humorous exchange between In-N-Out Burger and a microbrewery regarding some obvious trademark infringement. In that case, the burger chain’s attorneys decided to approach the situation in a light hearted manner, issuing a pun-filled cease and desist notice. Earlier this month, however, the company decided to take a different approach in dealing with infringement on its coveted trademarks. German shoe maker, Puma, recently released a sneaker called the “Cali-0 Drive Thru”which prominently features the In-N-Out palm tree logo on the laces, in addition to the white, yellow, and red color scheme used by the burger company. It is possible that Puma, and shoe designer Mike Cherman of Chinatown Market, felt that use of the trademark was in the confines of fair use, particularly given the amusing promotional videos released on Puma’s Instagram page. Although a statement made by In-N-Out’s executive vice president firmly asserts otherwise:

“By using In-N-Out’s designs and trade dress, Puma and Cherman intentionally confused consumers for their own benefit and have also created the impression that our marks and unique trade dress are available for public use.”

Trademark protection allows owners to stop the use of their registered marks in order to prevent any confusion by the public regarding the source of a good or service. Under certain circumstances, however, fair useof a registered trademark is permitted. According to the International Trademark Association, there are two types of fair use: Descriptive Fair Useand Nominative Fair Use. Descriptive FairUsepermits the use of an existing trademark in order to describe your own product or service. For example, courts ruled that the WD-40 Company’suse of the word “inhibitor” was permitted to describe its product as one that inhibits long-term corrosion, even though “The Inhibitor” is a registered trademark. Another example is the use of the phrase “sweet-tart” to describe the flavors of a juice, despite SweeTart being a registered trademark of a candy company. In Puma’s case, it would seem that descriptive fair use does not apply. In fact, after reviewing the official description of the sneakers, which says that they pay homage to California’s “burger diners,” one might argue that infringement of the In-N-Out palm trees is even more blatant. Puma might be covered by descriptive fair use if it described a pair of shoes as “easy to slip in and outof,” for example, but in this case infringement seems probable.

The second type of fair use, Nominative Fair Use, permits the use of a trademark to refer to the actual good or service offered by the trademark owner. Most commonly, nominative fair use is used by the media in its reporting on certain events or products, such as the Boston Marathon, which is a registered trademark of the Boston Athletic Association. Nominative fair use is also often leaned on for parody of a brand or product. I suspect that Puma may have gambled on the Drive Thru shoes being covered by nominative fair use given the videos (mentioned earlier) that show the sneakers frolicking in a field of hamburgers. However, Puma still included the palm tree logo on its shoes and never directly mentions or gives credit to In-N-Out. Under different circumstances, Puma may have been permitted to use In-N-Out’s name in a parody promotional video for its Drive Thru shoes, although direct use of the palm trees for Puma’s own benefit without In-N-Out’s consent would likely never be permitted.

In-N-Out has a reputation for taking swift action against any party that might be threatening the integrity of its brand. After investing millions of dollars to build brand equity, most companies aim to protect their brands with the same vigor. Fair use may seem like just another legal loophole at first; however, in some cases brands might actually stand to benefit from the use of its trademark (particularly through parody and nominative fair use) by nature of increased exposure. Take Levi’s for example – a company that has been successfully working to re-build its brand equity through various means such as stadium naming rights, which I’ve covered in the past. In 2017, Saturday Night Live broadcasted a skit that parodied both pop culture and the brand itself, titled “Levi’s Wokes.” Among the SNL regulars, the skit also prominently featured movie star Ryan Gosling wearing a pair of ridiculous jeans jokingly produced by Levi’s. As of this writing, the video has over 3.3 million views on the SNL YouTube channel alone. For a company that was looking to reinvent itself and reintroduce its brand name as a pop culture icon, one can only assume that this type of publicity was welcomed with open arms.

Monitoring trademark infringement is key to any successful branding strategy. The last thing a brand manager wants is to lose control of public perception of the brand, and infringing products or services can be a catalyst for just that. In-N-Out actually sells its own pair for branded shoes on the company website and seems to command adequate public attention without Puma’s help – a quick Google search for something like “In-N-Out vs. Shake Shack” reveals just how prominent the burger chain is in pop culture. In certain instances, particularly those covered by fair use, brand managers with a keen instinct to protect their investments may have to take a back seat. In such cases, it is important, to understand and even embrace fair useof a brand, and recognize the benefits that it may bring. Just ask Levi’s who recently went public after a 30+ year hiatus from the stock exchange and has seen a roughly 30% increase over its $17 IPO price.

Fourth Estate v. Wallstreet: Application is not Registration and the Interpretation of “has been made”

Posted on March 22, 2019 6:35 pmModified on March 22, 2019 6:36 pmby Lynn Dudinsky

On March 4, 2019 the Supreme Court of the United Stated issued its decision in the Fourth Estate v. Wall-Street.com copyright infringement case. The issue before the Court related to the interpretation of title 17 U.S.C. section 411(a) which states that “no civil action for infringement of the copyright in any United States work shall be instituted until … registration of the copyright claim has been made in accordance with this title.” Specifically, the Court was interpreting what “registration has been made” meant in the context of section 411(a). The Court took this case due to decisions in various Circuits which yielded inconsistent holdings related to whether a copyright action could be initiated upon filing of the copyright application (Fifth and Ninth Circuits) or only upon registration of the copyright by the U.S. Copyright Office (Tenth and Eleventh Circuits). The inconsistent holdings between Circuits is largely due to the unique nature of copyrights where the author gains exclusive rights in the work immediately upon creation, but this holding provides clarity to copyright holders on the process that must be taken to enforce those exclusive rights.

The parties involved in this case were Fourth Estate Public Benefit Corporation (Fourth Estate), a news organization producing online journalism which is then licensed to news organizations, including Wall-Street.com LLC (Wall-Street). The infringement of Fourth Estate’s copyrights that led to the Supreme Court’s decisions originated from a license agreement between Fourth Estate and Wall-Street which required all content produced by Fourth Estate to be removed from Wall-Street’s website before termination of the license agreement. Wall-Street terminated the agreement but continued to display Fourth Estate content after termination, prompting Fourth Estate to initiate the infringement suit.

Fourth Estate’s complaint which alleged infringement by Wall-Street stated that Fourth Estate had filed applications to register the infringed works with the Register of Copyrights but at the time of the complaint, the Register had not taken any action in regard to those applications. Fourth Estate’s complaint was subsequently dismissed by the District Court and that decision was affirmed by the Eleventh Circuit. Ultimately, Fourth Estate’s applications were refused registration by the Register of Copyrights.

Justice Ruth Bader Ginsburg delivered the unanimous opinion stating that the specific context of section 411(a) permits only one sensible reading: “The phrase ‘registration . . . has been made’ refers to the Copyright Office’s act granting registration, not to the copyright claimant’s request for registration.’” The fact that this was a unanimous decision suggests that this was a fairly straightforward case to resolve inconsistent holdings in lower courts. Common sense prevailed in this case which requires registration, by the Copyright Office, before initiating an infringement action. The Court discussed nuances in the code related to preregistration and the ability to initiate a suit once preregistration has been made. This nuance was utilized by Fourth Estate to argue that application, not registration, is the trigger enabling the holder of a copyright application to initiate a lawsuit. However, the Court emphasized that even in a suit based on the infringement of a preregistered work, registration is still required after publication of the preregistered work. Therefore, even in situations where loopholes or caveats exist in the code, the requirement for registration remains and a plaintiff who fails to register the work with the Copyright Office will see their complaint dismissed.

Fourth Estate’s best argument is that the vast majority of applications are granted and thus the need to delay initiating a suit until the Register of Copyrights completes it process and registers the work is unnecessary. This delay has resulted in an increasing burden on copyright owners as the delay has increased from a few weeks in the 1950s to many months today. However, the code also describes the steps an applicant must take before initiating a lawsuit based on the infringement of a work that was refuses registration by the Register of Copyrights. This section of the code would have no purpose if Congress intended a reading of section 411(a) that enables a copyright claiming to sue immediately upon application.

The final wrinkle argued by Fourth Estate relates to the unique nature of copyrights where registration is not a condition of copyright protection. Thus, as Fourth Estate argued, since registration is not a condition of protection, registration should similarly not be a condition on enforcing. This point highlights an oddity of copyrights, the creator of a work automatically has copyright protection on that work, but that protection is effectively useless without registration because registration is a requirement to initiate an infringement action. The Court addresses this by describing how the Copyright Act protects copyright owners, irrespective of registration, by vesting with them exclusive rights upon the creation of their works and prohibiting infringement from that point forward. The Court further explained that in order to exercise those rights, the holder of these exclusive rights “must simply apply for registration and receive the Copyright Office’s decision” before instituting suit. While one could easily argue that the exclusive rights vested upon the creator are meaningless due to the registration requirement, the Court made clear that registration by the Copyright Office, not simply filing an application, is a prerequisite for initiating a copyright infringement suit in federal court.