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Volume 11 | Number 1

You may download and read the Full Edition, or click on a citation below for the individual articles. Journal content dating from 2005 is available on the Lexis-Nexis database. Content dating from 2006 is available on the HeinOnline database. Journal content, starting with Volume 8, is now available on the Westlaw database. (subscriptions required).

INEQUITABLE CONDUCT: A FLAWED DOCTRINE WORTH SAVING
Lisa A. Dolak
11 Wake Forest J. Bus. & Intell. Prop. L. 1

A growing chorus of voices is calling for reform or even elimination of the doctrine of inequitable conduct. Critics argue that innocent or even irrelevant prosecution mistakes can be met with the ultimate penalty: unenforceability of the entire patent.

There is no question the doctrine is in need of repair. Patent owners are subject to different materiality standards in both the U.S. Patent and Trademark Office and in the courts. Inequitable conduct charges can be based on information completely immaterial to patentability. Findings of deceptive intent are increasingly based on inference and not evidence. And the one-size-fits-all remedy of total unenforceability deprives the courts of the ability to tailor the “punishment” to the offense.

But abrogation of the defense would be a mistake, particularly as concerns about patent quality echo in the USPTO, the Congress, the courts, and the media.

This paper argues that retaining the defense is essential for maintaining the integrity of, and continuing public confidence in, the U.S. patent system. It sets forth specific recommendations for much-needed modifications designed to better serve the doctrine’s essential purposes, and to ameliorate the key problems with its current application. Although these changes can be implemented by the courts, legislative action would be more appropriate, because the recommended modifications affect virtually every aspect of the doctrine, and it is unlikely that a given case or series of cases will present appropriate facts for judicial resolution in the near future.

THE ROLE OF MARKET INCENTIVES IN KSR’S OBVIOUSNESS INQUIRY
Timothy J. Le Duc
11 Wake Forest J. Bus. & Intell. Prop. L. 33

KSR was a game changer in the realm of patent law. The decision heightened the standard for patentability by introducing several “common sense”-based obviousness rationales. Under KSR’s flexible approach, invalidating patents based upon the concepts of “obvious to try,” “predictable variation,” and just plain common sense have received the bulk of the limelight. However, developing in the background is the jurisprudence espousing KSR’s “design trends or market pressure” rationale. The Court may have intended for the role of market incentives to be rather limited, such as confined to instances in which the patent-in-suit can fairly be characterized as a straightforward combination patent. However, since KSR, litigants have expanded the influence of marketplace demands via various successful obviousness arguments.

This article analyzes decisions ruling claims obvious based upon KSR’s design trends or market pressure, and the interplay between market incentives and secondary considerations. As discussed in detail below, there has been a wide spectrum of factual scenarios in which claims have been invalidated as obvious using market incentives. The post-KSR decisions discussed herein further reveal that during litigation, patentees should now be mindful that secondary indicia of non-obviousness may also support a market-incentive obviousness theory. Specifically, courts have discounted evidence of actual commercial success—or even turned the tables on the patentee, using commercial success as an implicit admission that the claimed invention is an obvious solution to a consumer demand. Similarly, evidence indicating that the claimed subject matter remedies a long-felt need or received praise by the industry has been readily dismissed.

IT IS TIME FOR THE FEDERAL TRADE COMMISSION TO REQUIRE FINANCIAL PERFORMANCE REPRESENTATIONS TO PROSPECTIVE FRANCHISEES
Marvin E. Rooks
11 Wake Forest J. Bus. & Intell. Prop. L. 55

As our country moves beyond the recent years of financial and investment abuses fueled by greed and corruption—such as the Enron accounting scandal, Bernie Madoff and other Ponzi schemes, and the subprime mortgage housing crisis—the need for greater regulation and effective enforcement, as well as transparency in the financial community, have become vital issues. Burned by huge financial losses, the public clamors for reforms that will eliminate or at least mitigate similar calamities in the future. Although the country and Congress have their eyes glued on the banking industry and the investment sector, another popular and very pervasive business system begs reexamination in terms of appropriate governmental regulation. This is the ever-growing arena of franchising.

Notwithstanding the significance this business system has on the U.S. economy and on the lives of U.S. citizens, there continue to be serious gaps in the regulation of the sale of franchises to prospective franchisees by the Federal Trade Commission. These gaps have created opportunities for serious financial abuse, have helped perpetuate ongoing fraudulent schemes, bad investments and hidden agendas, and have fostered serious misrepresentations about the viability of new franchised businesses, thereby causing significant injury to investors purchasing start-up franchises.

Although the FTC’s Franchise Rule requires pre-sale disclosure by franchisors to prospective franchisees of certain material information to assist the prospect in making an informed investment decision, surprisingly, the FTC fails to require the person selling the franchise (“franchisor”) to answer the most pertinent question that any prospective buyer of the franchise (“franchisee”) should ask, that is: “How much money can I reasonably expect to make operating the franchise, based on the experiences of the existing franchisees?”

Although such a disclosure is of paramount interest to a prospective franchisee, the FTC, through Item 19 of the Franchise Disclosure Document (“FDD”), does not mandate such disclosure but rather merely makes disclosure of this information optional. For the improved health of the franchise industry—by rewarding profitable franchise concepts and weeding out the unprofitable ones—as well as the financial well-being of franchisees, it is imperative that the FTC correct this problem by making Financial Performance Representations (“FPRs”) a mandatory pre-sale disclosure requirement.

EXECUTIVE COMPENSATION: THE LAW AND INCENTIVES
Stas Getmanenko
11 Wake Forest J. Bus. & Intell. Prop. L. 81

Excessive executive compensation frequently breeds resentment, undermines consumer faith in the financial system, and overly stigmatizes otherwise common business failures. Frequently, the opponents of lavish pay packages compare executive compensation to the compensation of rank-and-file workers. Such criticism reflects perfectly appropriate societal concerns over pay equity and distribution of wealth within a society. An entirely separate source of friction is the shareholders’ right to benefit from the corporation’s wealth. Shareholders’ dividends are directly reduced by the company’s expenses, one of which is executive compensation. For most of today’s public companies, the executive compensation expense is often negligible when considered in light of mammoth balance sheets. However, these amounts are still large and lucrative for their individual recipients. More than once, the incentives of executives have conflicted with the long-term interests of shareholders. In the most unfortunate scenario, executives’ personal interests can tumble a corporation and send ripples of pain elsewhere. To prevent such a result, independent compensation committees have been charged with creating appropriate incentives for executives. And recently, when these committees have proved to be imperfect, additional legislative efforts have been introduced. As it unfolds, this paper attempts to answer the following three questions.

First, how meritorious is the claim that misaligned incentives on executive pay can trigger worldwide financial turmoil?

Second, how consistent is Business Roundtable’s guiding principle for executive compensation—that executive compensation should be closely aligned with long-term shareholder interests—with the reality of executive compensation in today’s corporate America?

Third, what would be the scope and the efficacy of any proposed legislative check on executive compensation?

COMMENT: DVD COPY PROTECTION RULES VIOLATE THE SHERMAN ACT
Matthew W. Turetzky
11 Wake Forest J. Bus. & Intell. Prop. L. 103

The majority of DVDs sold in the United States are protected by the Content Scramble System (“CSS”). Any firm wishing to use it, either to encrypt their content or to decrypt encrypted content, must first obtain a license from the DVD Copy Control Association (“DVD-CCA”). Because of CSS’s prevalence, the DVD-CCA has an extraordinary amount of market power.

Copyright based challenges to the DVD-CCA’s practices have been largely unsuccessful despite CSS’s well known ineffectiveness at stopping individuals with little technical sophistication from ripping CSS-encrypted DVDs. Indeed, programs that can circumvent CSS, like DeCSS, are widely available on the internet. With its impotence shrouded in the color of law, CSS remains the prevailing form of encryption of DVD content.

These practices should be challenged under the Sherman Act, the cornerstone of federal antitrust law. Such challenges, like the recent one made in RealNetworks, Inc. v. DVD Copy Control Association, have been unsuccessful. Given the prevalence of DVDs, it is surprising that the association’s CSS license agreement has escaped a full-scale rule of reason review. This is especially concerning in light of the agreement’s effect on the market for devices like video servers, digital video recorders, and backup programs like RealDVD. This comment concludes that DVD-CCA’s implementation of CSS, the prevailing method of DVD copy protection in the United States, is an anticompetitive restraint of trade in violation of section 1 of the Sherman Act.