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Earlier this month, we reported on the Full Court’s decision in Generic Health v Bayer [2018] FCAFC 183, in which the Full Court clarified that when estimating or valuing a lost opportunity or assessing a hypothetical counterfactual for any scenario short of certainty, some discount must be made to reflect that less than certain position.  In doing so, the Full Court accepted that the trial judge, Justice Jagot, fell into error by not allowing for any such discount at first instance and proceeded to reduce the damages award by 2%.

It is interesting therefore to now read, in a decision published a little less than a month after the Full Court’s Bayer decision, that Justice Jagot has allowed a generic pharmaceutical company a 30% reduction to account for risks associated with the past hypothetical cash-flows which underlie the assessment of damages in the case.  The decision is H Lundbeck A/S v Sandoz Pty Ltd [2018] FCA 1797 and is the culmination of many years’ litigation concerning Lundbeck’s patent for the antidepressant escitalopram.

Justice Jagot found that Sandoz had infringed the patent and was liable to pay damages to H Lundbeck A/S (Lundbeck) and its Australian subsidiaries.  While Justice Jagot’s decision canvasses a number of other interesting and important issues, this post will only deal with the damages aspects of the decision.  In awarding damages, her Honour grapples with a number of interesting issues including the level of generic substitution and necessary discount to be applied, transfer pricing arrangements between the patentee and its Australian subsidiaries, and the treatment of overheads.

Procedural history

The procedural history of the dispute will be familiar to many readers.  Briefly, after Lundbeck’s patent was found to have been invalidly extended, Lundbeck applied for a second extension of term on an alternative basis, and an extension of time in which to make that application.  Lundbeck made its applications on 12 June 2009, the day prior to the expiry of the standard term of the patent, at a time when Sandoz and other generic companies were preparing to and did, after expiry of the standard term of the patent, launch their own generic escitalopram products in competition with Lundbeck.

Lundbeck’s applications for an extension of time and second extension of term were subsequently granted, over the opposition of the generic companies, in 2012 and 2014.  This allowed Lundbeck and its Australian subsidiary, Lundbeck Australia Pty Ltd, to commence proceedings in 2014 for patent infringement against four generic pharmaceutical companies in connection with their launches and subsequent sale of generic escitalopram products for a period of approximately three and a half years (from the expiry of the standard term of the patent on 13 June 2009 to the end of its extended term on 9 December 2012).

For the damages claim, it is important to note that during the relevant period of infringement:

  • Lundbeck Australia, a subsidiary of Lundbeck, marketed and sold Lexapro, a branded escitalopram product.
  • CNS Pharma, a subsidiary of Lundbeck Australia, marketed and sold Esipram, another escitalopram product sold at a discount to Lexapro.
  • Her Honour found that Lundbeck Australia was the exclusive licensee of Lundbeck Denmark, and that Lundbeck Australia had authorised CNS Pharma to exploit the patent in Australia. (These matters were contested and are dealt with in another part of the decision, not discussed in this post.)
Lundbeck’s claim for damages

Lundbeck and Lundbeck Australia sought, and were awarded, damages for patent infringement.  The Lundbeck parties’ losses included:

  • losses associated with Lundbeck Australia charging lower prices for sales of Lexapro;
  • losses associated with CNS Pharma charging lower prices for sales of Esipram;
  • lost sales of Esipram to CNS Pharma;
  • loss of gross margin on sales by Lundbeck Denmark to CNS Pharma of Esipram and a lower year-end transfer of funds from Lundbeck AU as a result of lower gross margins earned by Lundbeck AU and CNS Pharma.

These losses occurred during both an ‘initial period’ (being the period of infringement prior to the expiry of the extended term of the patent) and a ‘springboard period’ (being a period after expiry of the patent during which time it is alleged that Sandoz had an established position in the market that it would not have otherwise had).

On the issue of generic substitution, the assessment proceeded from a starting point of one-for-one lost sales: every sale of a generic escitalopram product represented a lost a sale of Esipram.  However, her Honour was prepared to make a material discount to account for the probability that some Sandoz sales would have been sales of other generics’ escitalopram products rather than Esipram.  Her Honour reached this conclusion on the evidence that the market for escitalopram was crowded, with multiple generic products and that some sales of Sandoz’s products must represent lost sales of other generic products, and not Esipram (or Lexapro).

As to the materiality of the discount, her Honour noted that there was little evidence to assist in resolving this issue.  Her Honour accepted evidence from Sandoz that generic substitution rates were increasing over time and concluded that a deduction of 25% was appropriate to account for the fact that it is likely that some sales of Sandoz’s escitalopram products must represent lost sales not of Lundbeck ’s escitalopram products but of other generics’ escitalopram products.

Other important aspects of this decision concern her Honour’s findings that Lundbeck could recover losses associated with lower year-end transfer pricing adjustments from Lundbeck Australia to Lundbeck (because of lower gross margins earned by Lundbeck Australia and CNS Pharma) and the treatment of overheads.

The crux of the issue of concerning year-end transfer pricing adjustments centred around how Lundbeck framed its case on infringement.  Lundbeck’s claim for damages was based on the profit it would have received from CNS Pharma under inter-company transfer pricing arrangements but for Sandoz’s infringements.  These transfer pricing arrangements during the relevant period were put in place to ensure that subsidiaries of Lundbeck earnt an approximate 3% return on sales.

The Court found that Lundbeck was entitled to claim damages in this manner.  In reaching this conclusion, Justice Jagot rejected Sandoz’s argument that Lundbeck could not recover damages because Lundbeck Australia was the exclusive licensee and in granting it this licence, Lundbeck had effectively excluded itself from remuneration as the patentee in Australia, her Honour commenting that:

“…it is simply inaccurate to say that Lundbeck A/S had excluded itself from remuneration as patentee in Australia.  It had excluded itself from being able to exploit the invention in Australia, but that is a different matter from excluding itself from remuneration.  It obtained remuneration from Lundbeck AU and CNS Pharma in the form of gross margins on sales and the annual adjustments to ensure that those companies retained a return on sales of approximately 3%.”

Her Honour went on to explain that:

“…the rights which Lundbeck A/S yielded to Lundbeck AU were all rights in Australia to exploit the invention claimed in the 144 patent including the right to authorise others to exploit the invention.  The yielding up of these rights does not mean that Lundbeck A/S was no longer the patentee.  It may be accepted that the arrangements between Lundbeck A/S and Lundbeck AU did not include payment of a royalty either in respect of Lundbeck AU’s own exploitation of the invention or in respect of it authorising another entity to do so (which it did in the case of CNS Pharma).  The reality is obvious.  Lundbeck A/S did not need to require payment of a royalty because all three corporations were bound by the transfer pricing policy arrangements between them which had to be (and were in fact) consistently applied so the subsidiaries retained a rate of return on all sales of approximately 3%.  This policy was continuously and consistently implemented throughout and on a year-by-year basis.”

Her Honour also found that loss flowing from such arrangements was reasonably foreseeable, later commenting, “the circumstances are analogous to an arrangement for the payment of an annual royalty for the right to be exclusive licensee, despite not taking that form.”

Another issue between the parties concerned the treatment of overheads in the assessment of loss.  Ultimately, based on the evidence before her Honour and how the trial was conducted, Justice Jagot accepted the evidence of Lundbeck’s expert.

Further damages-related matters

In addition to its claim for damages, the Lundbeck parties also made a claim for additional damages.  The Court refused to award such additional damages finding that although Sandoz had made a calculated commercial decision, “the circumstances in which Sandoz’s infringements occurred are unusual, perhaps even unprecedented” and importantly, that there was no particular conduct of Sandoz to justify an award of additional damages.

Sandoz also argued that no damages should be awarded against it because it was an innocent infringer.  The Court rejected this argument.  As noted, her Honour found that Sandoz made a calculated commercial decision to launch its products at risk.  This was the factor to be given determinative weight, regardless of the unusual circumstances of the dispute and any arguments available to Sandoz concerning whether it might have been licensed under an earlier settlement agreement with Lundbeck.

Finally, while discussing what her Honour describes as some “non-issues”, Justice Jagot commented that the approach taken in the case to calculating damages meant that it was far easier for Lundbeck (and Lundbeck Australia) to prove the value of their loss than it was, by way of comparison, for the generic claimants to prove the value of their losses on a claim on an undertaking as to damages in Sigma Pharmaceuticals (Australia) Pty Ltd v Wyeth [2018] FCA 1556.  This presents both originators and generics in pharmaceutical patent disputes with a difficult choice.  Justice Jagot’s comments – and indeed now, her Honour’s experiences in both cases – are at odds with what had been the accepted position, namely, that calculating damages for infringement would be far more difficult that calculating damages for being held out of a market due to the grant of an interlocutory injunction.  It will be interesting to see if this comment is picked up and given any traction in subsequent interlocutory injunction disputes, particularly in relation to patents in the pharmaceutical field.

The post Generic supplier obtains substantial reduction in damages awarded against it appeared first on IP Whiteboard | King & Wood Mallesons.

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Whether inventions relating to the use of a computer are patentable according to the ‘manner of manufacture’ test has for many years been unclear in Australia.  This uncertainty, together with inconsistencies in how the law has been applied by the courts and the Australian Patent Office (APO), were just some of the contentious issues recently considered by a full bench of five judges from the Federal Court in Encompass Corporation Pty Ltd v InfoTrack Pty Ltd (NSD 734/2018). Such was the significance of this hearing that the Commissioner of Patents and the Institute of Patent and Trademark Attorneys of Australia (IPTA) both applied to intervene and sought leave to be represented and make submissions at the hearing.

Decision at first instance

Central to the dispute between the parties are Encompass’ two innovation patents, both entitled “Information displaying method and apparatus” (Patents). The Patents relate to methods for an electronic processing device to access information from different databases (such as Land Titles Office, ASIC and a motor vehicle registry) in a seamless manner. Users are required to pay for reports obtained from the searches conducted of the various databases.  Encompass claimed that InfoTrack infringed the Patents by making available a computer platform entitled ‘Reveal’.

InfoTrack admitted infringement of the Patents, but asserted that the Patents were invalid on a number of grounds, including that the invention claimed in each of the Patents was not a manner of manufacture.

At first instance, Justice Perram found that the invention claimed in each of the Patents was novel and involved an innovative step, but was not a manner of manufacture. With respect to the ‘manner of manufacture’ requirement, Justice Perram adopted the two-limb test established by the High Court in National Research Development Corporation v Commissioner of Patents [1959] HCA 67; (1959) 102 CLR 252 (NRDC), which involves asking whether the invention consists of an artificially created state of affairs and whether it could be said to have economic significance.  The inventions according to the Patents were said by Justice Perram to pass both limbs of the NRDC test.

Nonetheless, Justice Perram noted that the two-limb test is not sufficient to establish a manner of manufacture, as emphasised in Research Affiliates LLC v Commissioner of Patents [2014] FCAFC 150; (2014) 227 FCR 378 (Research Affiliates).  It was found by the court in Research Affiliates that the invention must result in “an improvement in the computer” for it to be a manner of manufacture. Justice Perram also referred to Commissioner of Patents v RPL Central Pty Ltd [2015] FCAFC 177; (2015) 238 FCR 27, in determining that a computer implemented method would not be for a manner of manufacture if it “merely requires generic computer implementation”.

Justice Perram therefore concluded that the inventions of the Patents did not involve any improvement in the functionality of the computer nor the computer itself.  As a result, the inventions were not for a manner of manufacture.  Justice Perram acknowledged that the Patents described a method that resulted in the computer being used to do something it had not been used to do before – by using a network representation and querying remote data sources – and that requiring the users to purchase the search results provided an innovative step.  These also enhanced the experience for the user of the computer.  However, these matters did not improve the functionality of the computer because, after the consideration of the prior art, the methods, individually, were not new and were well-known.

Full Court Appeal

Encompass sought to appeal against Justice Perram’s decision, and the appeal was heard by a full 5 member bench of the Full Federal Court on 8 – 9 November 2018.  It is likely that the outcome of that hearing will be known by mid-2019.

One of the key questions for determination by the Full Court is whether the approach taken by Justice Perram sets an unreasonably high threshold for computer-implemented inventions, by requiring the inventions to make improvements to the computer for the inventions to be patentable.

Australian Patent Office decisions

Since 2016, there has been an increase in hearings before the APO resulting from objections raised during examination against applications for computer or software-related inventions that were deemed not to be directed to patent-eligible subject matter.  Over the course of 2018, there were 17 such hearings. 16 of these matters resulted in the patent applications being rejected on the basis that the invention claimed was not for a manner of manufacture.  Notably, as with the inventions of the Encompass Patents, many of those inventions were found to be novel and involved an inventive step. However, the inventions involved the combined use of well-known computing mechanisms, and therefore were said to be not patentable.

Which inventions passed the ‘manner of manufacture’ test in 2018?
Case Invention claimed Manner of manufacture?
1                    Patent Investment & Licensing Company [2018] APO 1 (3 January 2018) Networked gaming machines – an apparatus and method for communicating information about networked gaming machines to players and prospective players.  The information provided to the player is based on data collected from the networked gaming machine. No.
2                    Google LLC [2018] APO 13 (21 February 2018) A method for discounting costs for conversions to advertisement purchasers based on a level at which the advertisement purchasers would have received the same advertising distribution results associated with the conversions. No.
3                    Eris Innovations, LLC [2018] APO 17 (8 March 2018) Financial instruments and the electronic clearing and settling of financial instruments – a computer-based system designed to offer tools to trade futures electronically. No.
4                    Bio-Rad Laboratories, Inc. [2018] APO 24 (28 March 2018) System and method for optimising a testing regime for testing of diagnostic devices for immediate release results. Yes.
5                    BGC Partners, Inc [2018] APO 27 (23 April 2018) A system for automatically distributing a trading order over a range of prices.  The method allows a trader (such as a market maker or other trader) to efficiently populate a trading system with bids and offers in a risk efficient manner. No.
6                    AirService Digital Pty Ltd [2018] APO 39 (19 June 2018) An ordering system and method for a retail establishment such as those which sell food and drink. No.
7                    Mine RP Holdings (Pty) Limited [2018] APO 41 (27 June 2018) A method of translating depletable natural resources and reserves, such as mineral deposits, into inventory and stock items. These items, once translated are then manageable within an inventory management system. No.
8                    Repipe Pty Ltd [2018] APO 42 (28 June 2018) A method and systems for providing and receiving information for risk management from field workers. No.
9                    Google LLC [2018] APO 44 (4 July 2018) A system for managing contactless transactions. No.
10                 Aristocrat Technologies Australia Pty Limited [2018] APO 45 (5 July 2018) A system and method for providing a “feature game”. No.
11                 Academisch Ziekenhuis Leiden and Biomarin Technologies B.V. [2018] APO 49 (31 July 2018) Method for efficient exon skipping in Duchenne Muscular Dystrophy and associated means. Yes.
12                 Volbroker.com Limited [2018] APO 53 (20 August 2018) System and method for trading options (Credit Filters and Two Stage Updating). No.
13                 Apple Inc. [2018] APO 54 (20 August 2018) Computer user interfaces, and more specifically to context specific user interfaces for indicating time that allow users of portable multifunction devices to access information through a single user interface and allowing the user to customise the user interface and the types of information provided through the user interface. No.
14                 Amplero, Inc. [2018] APO 5 (5 September 2018) Automated marketing offer decisioning – method allows decisions to be made as to when marketing messages are offered to customers. No.
15                 Lempco Industries, Inc. [2018] APO 61 (12 September 2018) Computer implemented method and apparatus for establishing and executing a dynamic equity instrument. No.
16                 HRB Innovations, Inc. [2018] APO 63 (14 September 2018) System for simplified tax interview – accurately predicting the information that is necessary and relevant for the purpose of determining the relevant questions for a tax interview. No.
17                 Joy Global Surface Mining Inc [2018] APO 68 (5 October 2018) Methods and systems for training operators of industrial machines – computer-based training simulators. No.

This article was prepared by Veg Tran and Esme Wong.

The post Manner of manufacture and software-based inventions: What does it mean for an invention to involve “an improvement in the computer”? appeared first on IP Whiteboard | King & Wood Mallesons.

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Last year, Bayer was awarded more than $25 million (plus interest and indemnity costs) against Generic Health in the first Federal Court award of damages for pharmaceutical patent infringement.  In the appeal by Generic Health, the Full Court of the Federal Court allowed Generic Health a 2% discount to the $25 million damages originally awarded. What made the FCFCA give Generic Health such a modest discount?

Procedural history Patent infringement

In 2013, the Federal Court found that Generic Health had infringed Bayer’s patent for a pharmaceutical combination of ethinylestradiol and drospirenone for use as an oral contraceptive (OC).  The Bayer product for this combination is known as ‘Yasmin’.  Yasmin had been sold in Australia since August 2002 and is a third generation OC. It has never been listed on the Australian PBS Schedule and was priced at a premium to first and second generation OCs listed on the PBS, at a cost to the patient of $71 to $84 for a three month supply (compared with $19 to $24 for a fourth month supply of a PBS-listed prescription OC).

In January 2012, Generic Health manufactured and supplied an OC under the name, ‘Isabelle’, which was bioequivalent to Yasmin (and was registered on the Australian Register of Therapeutic Goods (ARTG) as such).  Before Isabelle entered the market in January 2012, Yasmin had been the only product of its kind registered on the ARTG.  At the relevant time, Isabelle was priced at around $60 to $61 for a three month supply.

Generic Health’s appeal was dismissed and as a consequence, it was required to withdraw Isabelle from the Australian market on 19 June 2014.  Bayer launched a generic version of Yasmin, called ‘Petibelle’, the following week.  Petibelle was priced at around $66 for a three month supply, which was cheaper than Yasmin.

Damages

Bayer’s damages case proceeded on the basis that every sale of Yasmin was a lost sale of Isabelle and Petibelle.

Generic Health argued that any damages should be lowered or discounted because:

  1. Bayer’s patent was amended during the infringement proceedings and after Isabelle’s market launch and when assessing damages, that period should not encompass the period prior to the amendments to the patent; and
  2. It is not certain that every sale of Isabelle or Petibelle was a lost sale of Yasmin.

In 2017, the Federal Court awarded Bayer more than $25 million (plus interest and indemnity costs).

In relation to whether the damages should be assessed prior to the amendments to the patent, the Court found that Bayer had established that the unamended specification had been framed in good faith and with reasonable skill and knowledge and that damages were therefore available for pre-amendment infringement under section 115(1) of the Patents Act 1990 (Cth).  The evidence established that Bayer had taken an opportunity to amend the claims because their validity had been challenged in other jurisdictions and they had consequently been amended in those jurisdictions.

In relation to whether every sale of Isabelle or Petibelle was a lost sale of Yasmin, the Court accepted the “one for one” basis of lost sales advanced by Bayer.  The Court found that the OC market was not one of consumer choice and substitutability because OC products could only be obtained on prescription.  Bayer provided evidence that doctors prescribed on the basis of the originator brand, and therefore continued to prescribe Yasmin after Isabelle was introduced.  A pharmacist could then sell the customer Isabelle, if the prescription for Yasmin did not exclude brand substitution.  Accordingly, a woman could only purchase Isabelle if she held a prescription for Yasmin or the pharmaceutical by name.

The Court also found that no discount should be made to Bayer’s  damages in order to allow for the possibility that some women who bought Isabelle would not have bought Yasmin if Isabelle had not been on the market.  The Court accepted evidence that this class of women was likely to be very small, to the point of immateriality, given that women who were purchasing third generation OC’s were likely to be the least price sensitive consumers in the OC market.  The Court also gave weight to the principle that the assessment of damages ought to be liberal and that any doubts in this regard ought to be resolved in favour of Bayer.  Similarly, the Court accepted evidence that, but for the launch of Isabelle and its subsequent withdrawal after the finding of infringement, Bayer would not have introduced Petibelle.  Bayer launched Petibelle to mitigate any reputational damage that may have resulted from Isabelle’s entry into the market, where women who had paid a discounted price for Isabelle but would later have felt aggrieved by having to pay the full price for Yasmin again.  The Court found that it was a reasonable response to redress the effects of the infringement, and that the claimed period of damages for two years after the withdrawal of Isabelle and consequent introduction of Petibelle was reasonable.

Appeal

Generic Health appealed the Court’s decision and argued that the damages to Bayer should be lower because (among other things):

  1. the trial judge was wrong in concluding that Bayer had discharged its onus of proof under section 115(1)(a) of the Act by demonstrating that the original specification had been framed with reasonable skill and knowledge; and
  2. the trial judge was wrong in concluding that every sale of Isabelle was a loss of a sale of Yasmin and Petibelle.
Amended specification: good faith

Generic Health argued that the pre-amendment specification was not framed in good faith and with reasonable skill and knowledge in relation to the dosage range of drospirenone.  The pre-amendment specification disclosed a dosage range of 2 mg to 4 mg of drospirenone.  The amendment restricted the dosage to 3 mg. In determining the dosage range, Generic Health argued that Bayer did not prove that a report that found the appropriate maximum dose to be 4 mg (9274 Report) was actually before its patent attorneys that drafted the specification.

The Full Court rejected Generic Health’s argument and held that when assessing whether reasonable skill was exercised, section 115(1)(a) of the Act allows the assessment to proceed on reasonable knowledge, which is not limited to documents actually before the drafter of the specification.  The Full Court further observed that Generic Health did not allege at any time that the patent was obtained by fraud, false suggestion or misrepresentation, or that there was no proper scientific support for the selection of a dosage range of 2 mg to 4 mg of drospirenone.

Lost sales of Yasmin

Generic Health argued that the trial judge ought to have applied a discount to the damages awarded to Bayer to account for the “completely speculative” “mere possibility” that “a very, very small” and / or “immaterial” number of women who purchased Isabelle and would not have purchased Yasmin if Isabelle had not been available.

The Full Court accepted Generic Health’s argument and held that some very small and modest discount should have been made to reflect the uncertainty.  In the Full Court view, it was not in doubt that on the balance of probabilities, for all sales of Isabelle there was a loss of an opportunity to make a sale of Yasmin.  The question was what the value of the lost opportunity was.  Although the Full Court found that the trial judge was entitled to fix damages on a liberal scale, when a court is valuing a loss of opportunity, there still needs to be a discount if the relevant probabilities or possibilities reflect doubt concerning the relevant counterfactual.  The Full Court also noted that the purpose of the award of damages for patent infringement was compensatory, not punitive.  When assessing the evidence that was before the FC, the Full Court held that it was apparent that there would have been a small number of women who, if Isabelle had not been available, would have purchased another OC other than Yasmin or would not have purchased an OC at all.

Generic Health sought a 10% to 15% discount but the Full Court held that there was no evidence to justify a discount at this level.  The Full Court looked at the number of women likely not to purchase Yasmin if Isabelle had not been available and determined that the number was likely within a range of one to three women in a hundred (1% to 3%).  Accordingly, the Full Court found that the appropriate discount was 2%.

Lost sales of Petibelle

Generic Health argued that it was not reasonably foreseeable for Bayer to respond to the infringement by introducing a generic version of Yasmin, especially after Isabelle had been removed from the market.  The Full Court rejected this argument and found that it was open for the trial judge to find that it was reasonably foreseeable.  The Full Court agreed with the findings of the FC, that “the introduction of Petibelle to rectify the damage, to the extent it could be rectified, was a reasonable response to the difficult commercial position in which Generic Health’s infringing conduct had placed Bayer”.

Generic Health also argued that the trial judge was wrong to calculate the loss caused by the continued presence of Petibelle on the market for two years, as opposed to three months, being the maximum multicycle purchase.  The Full Court rejected this argument and found that the trial judge was entitled to award Bayer the amount they would have earned in the two-year period immediately following Isabelle’s withdrawal, as if every sale of Petibelle during that period would otherwise have been a sale of Yasmin, subject to a 2% discount (for the same reasons as above).

Interest and indemnity costs

In a short passage, the Full Court also dismissed Generic Health’s challenges to the trial judge’s decision to calculate pre-judgment interest on a pre-tax loss, and to award indemnity costs.  As to the question of calculating interest on a pre-tax as opposed to post-tax loss basis, the Full Court referred to earlier decisions (to the effect that interest should be approached in a broad and practical way) and noted the limited ability of a court to estimate tax liability, as reasons for rejecting Generic Health’s appeal on this issue.

All in all, Generic Health had a very modest win.  Although 2% may seem very small, Generic Health still managed to reduce the amount of damages payable by more than $500,000!

The post A very modest win: Generic Health gets 2% cut to Bayer’s $25 million damages appeared first on IP Whiteboard | King & Wood Mallesons.

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Remember Naruto, the monkey that took a selfie?  Courts in the United States determined that human authorship was a requirement for copyright protection.  So, if we can’t award monkey copyright, what about AI?

We have already seen AI produce all different types of content: photos, music, articles, poetry and novels.  And just last month, Christie’s auctioned off a piece of art created by AI (pictured below).

Image © Obvious

The “Portrait of Edmond Belamy” looks like something out of the 18th or 19th century, perhaps a Manet or a Renoir. The slightly blurred features of Mr Belamy are a signature element of the impressionists.

What gives away the fact that this painting was not created by a human is the signature in the bottom right of the painting (pictured below).  The signature is a reference to the core component of the algorithm that produced the work.

Image © Obvious

The painting sold for USD$432,500, 45 times higher than its estimated value of USD$7,000 – USD$10,000.[1]

How was the painting created?

The AI was programmed by Obvious, a ‘Paris-based collective of artists, Machine Learning researchers and friends interested in AI for Art’.  The method used by Obvious is known as Generative Adversarial Networks, aka GAN for short.

GAN is a machine learning algorithm that is comprised of two parts, the Generator and the Discriminator.  To create the images, Obvious fed over 15,000 paintings from the 14th to 20th century into the algorithm.  A new image is then created by the Generator and shown to the Discriminator.  The Discriminator tests the image to see if it can tell if the painting was made by a human or by a machine.  If the Discriminator cannot tell that the painting was made by a machine, the painting passes the test.  The two parts of the algorithm compete, essentially training each other.

The algorithm learns from data fed into it by humans, generating new content by making independent creative decisions.  The question then is who created the painting?

If the creator is the one who produces the art, then the algorithm is the painter and has appropriately signed the painting.  Or does the inspiration come from the person who created the algorithm and fed it the data, making this person the true artist? Some may argue that the algorithm is simply the tool the artist used to create the work.  But does this argument hold when these systems are capable of making independent decisions about the artwork without human intervention?

So who owns the intellectual property?

If we accept that the creator of the work is the AI then this poses a problem when establishing intellectual property in the painting.  Most jurisdictions around the world require a human author to warrant copyright protection (remember the monkey selfie).

In the US, the Copyright Office has declared that it will “register an original work of authorship, provided that the work was created by a human being.”[2]  The same position has been taken in Europe by the Court of Justice of the European Union.[3]

The UK has taken a different approach. Section 9(3) of the Copyright, Designs and Patents Act 1998 (UK) states that “[i]n the case of a literary, dramatic, musical or artistic work which is computer-generated, the author shall be taken to be the person by whom the arrangements necessary for the creation of the work are undertaken.”  This wording opens the door for copyright protection to be extended to works created by AI.

In Australia, section 32 of the Copyright Act 1968 (Australia) (Act) states that copyright subsists in original works of which the author was “a qualified person at the time when the work was made” or “if the work extended over a period – was a qualified person for a substantial part of that period”.  Section 32(4) of the Act clarifies that a “qualified person” means an Australian citizen or person resident in Australia.

This concept has been expanded on through case law in which the courts held that the exertion of independent intellectual effort by a human was necessary for copyright to subsist in work.[4]  In Acohs Pty Ltd v Ucorp Pty Ltd[5] the Full Federal Court of Australia declared that copyright did not subsist in HTML source code of material safety data sheets generated by a computer because the work had no human author.

If the Portrait of Edmond Belamy was created in Australia, no copyright would subsist in the painting.  This fact exposes the gap in the copyright laws of Australia and many other jurisdiction in relation to AI-generated content.

AI and machine learning will only continue to develop and improve, promising great benefits in creative fields, science and technology.  These issues around ownership and protection of copyright need to be resolved soon – so that clever people and cutting edge organisations are incentivised to invest in the creation of AI.

[1] https://www.christies.com/features/A-collaboration-between-two-artists-one-human-one-a-machine-9332-1.aspx?sc_lang=en.

[2] The latest edition of the Compendium of U.S. Copyright Office Practices, Third Edition. https://copyright.gov/comp3/chap300/ch300-copyrightable-authorship.pdf

[3] Infopaq International A/S v Danske Dagblades Forening C-5/08.

[4] Telstra Corporation Limited v Phone Directories Company Pty Ltd [2010] FCAFC 149.

[5] [2012] FCAFC 16.

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Last week, a plenary session of the European Parliament has voted to adopt changes to the Directive on Copyright in the Digital Single Market (or the Copyright Directive for short), that was first introduced by the European Parliament Committee on Legal Affairs on 20 June 2018.

The Copyright Directive contains a number of sections that have been extremely polarising – critics argue that the Copyright Directive will encourage a form of censorship while supporters argue that the Copyright Directive will protect the works of artists and creators. One of the most contentious parts of the Copyright Directive is Article 13.

Article 13 arguably makes “online content sharing service providers”, which are platforms that store and give access to materials uploaded by users, liable for copyright infringement committed by the users. Examples may include Google, YouTube and Facebook. The effect of Article 13 is unknown, but it has been speculated by critics that this would mean that the platforms will introduce an “upload filter”, where intermediaries will scan every piece of content uploaded by users and then check it against a database of protected material. If the content is found to have infringed copyright, then the content will be removed from the platform.

The Australian content industry has praised the reforms.  For example, the Australian Independent Records Association has told trade press website The Industry Observer that “the moves bring balance to the industry”, stating:

It’s quite simple: Article 13 rebalances the licensing framework in Europe and creates a fair and equitable environment for creators who rely on the European economy to sustain their careers and businesses moving forwards,” said Maria Amato, CEO at AIR. “We applaud the work of our colleagues at IMPALA for their sustained efforts on this very important issue.

The Australian reports that French President Emmanuel Macron said the vote was a “great advance for Europe”, and also reports that the Federation of European Film Directors, the Federation of Screenwriters in Europe and the Society of Audiovisual Authors also welcomed Wednesday’s vote.

So why be concerned? 13 reasons!

User-rights blind:  Regardless of whether you sit on the “fair use” or “fair dealing” side of copyright law, an automated system is going to struggle – if not be incapable – of making subjective decisions about the nature of use.  This could affect educational use, media commentary and criticism, political commentary, and other uses.  In this way, the proposal has been described as “user-rights blind” in that it may disregard a person’s legitimate means of using copyright material in favour of resolving the dispute between rights holders and large technology companies.

Remixes, mash-ups, sampling:  A fraught area of controversy in music law is the issue of sampling and remixes – particularly in transformative works.  How will such an automated system determine whether a remix, mash-up or sample has been legitimately deployed in a sound recording?  For recording artists like The Avalanches or Girltalk, who rely predominantly on an incredible array of sampled sound records and musical works, will a system be able to differentiate between what is licensed, what is not a substantial part, what is a fair use or fair dealing, and what is not?

User-generated content:  Won’t somebody think of the memes?  Australian copyright law, as does the European Union’s copyright law, protects the use of copyright material for parody and satire.  Again, it seems unlikely that the automated system will be able to differentiate between unlawful use of copyright material and satirical use or use as/in parody.

Unintended consequences for aggregators:  Many service providers store and aggregate user-generated content.  As software code repository, GitHub, has argued:

False positives (and negatives) are especially likely for software code because code often has many contributors and layers, often with different licensing for different components.  Requiring code-hosting platforms to scan and automatically remove content could drastically impact software developers when their dependencies are removed due to false positives.

Disproportionate technology burden:  The requirement to implement a system capable of analysing user-uploaded content disproportionately affects different service providers.  Small and medium sized enterprises, including start-ups, are unlikely to be able to develop or implement technology with the scale required to proactively analyse the data they hold.  As such, they are likely to require a third party to perform this function for them.

Surveillance:  As Julia Reda argues, given the disproportionate technology burden described above:

The proposal requires the installation of what amounts to surveillance technology. Due to high development costs, content monitoring technology will likely end up being outsourced to a few large US-based providers, strengthening their market position even further and giving them direct access to the behavior of all EU users of internet platforms.

Even with the GDPR amendments, many would be uncomfortable with the aggregated analysis of user-uploaded content in this manner.

Independent creators:  Julia Read also argues that “platforms will receive instructions as to what content to automatically remove” by the larger commercial rights-holders. This may disproportionately affect not only smaller platforms, but smaller independent creators, who will have less resources to effectively challenge automatic removal of their content – particularly where they will have relied on a fair dealing or fair use, have a licence or authorisation not recognised by the filter – or just simply do not infringe.

Deferral to “best practices”:  To address some of these concerns, particularly around smaller operators, the amended draft proposes that stakeholders draft best practices:

When defining best practices, special account shall be taken of fundamental rights, the use of exceptions and limitations as well as ensuring that the burden on SMEs remain appropriate and that automated blocking of content is avoided.

If the Australian experience is anything to judge by, asking rights holders and intermediaries to negotiate these kinds of industry wide agreements tends to be, well, pained.  Whatever did happen to the Copyright Notice Scheme?

Transparency:  There are no obligations on the online platforms to inform the users on how a particular filtering system works or what rights users have. The complexity of copyright law generally means that users may not have the necessary information to allow them to defend themselves when automated filters or content recognition identifies their content as (potentially) unlawful.

Court-facilitated dispute resolution:  Paragraph 2(b) of the amended proposal requires Member States to implement a judicial mechanism for review:

Member States shall also ensure that users have access to an independent body for the resolution of disputes as well as to court or other relevant judicial authority to assert the use of an exception or limitation to copyright rules.

Unfortunately, as both lawyers and their clients know – litigation can be expensive and time-consuming, and a review of individual decisions may be beyond reach for many.

Licence to kill:  Apart from the pressure that could be placed on content sharing providers to err on the side of caution, and implement content recognition technologies at the point of upload, the Directive may also pressure some providers to seek a broad licence from rights holders to offset risk.

Compatibility with current EU law:  Whistle-blower website Statewatch published a leaked EU Council document, in which a number of European countries are strongly questioning its compatibility with European fundamental rights, and requiring platforms to monitor content could potentially contradict the intermediary liability protections (or, safe harbours) in European law.

Freedom of expression:  Human rights lawyers have also expressed overarching concerns about a filter-system’s potential to impinge on freedom of expression.  For example, the United Nations Special Rapporteur, David Kaye, sent a lengthy letter to the European Commission outlining his concerns about Article 13, arguing:

I am very seriously concerned that the proposed Directive would establish a regime of active monitoring and prior censorship of user-generated content that is inconsistent with Article 19(3) of the ICCPR.

This has followed previous warnings by the UN Special Rapporteur that proposals to address digital piracy through website blocking and content filtering may result in restrictions that are not compatible with the right to freedom of expression and the right to science and culture.

…and the rest!

Advocacy group Communa also has expressed other concerns with the Copyright Directive as a whole:

  • Under Article 11, press publishers will obtain a new right allowing them to control how end-users access and reference press publications.
  • Under Article 3, rights-holders may have the right to prevent anyone other than scientific researchers from using computers to analyse information contained in otherwise legally accessible works.
  • Under the new Article 12(a), sports events organizers would become copyright holders allowing them to prohibit anyone from sharing photos or other recordings of sports events.
  • Finally under the new Article 13(b), extracted below, image search engines would need to obtain licenses for even the smallest preview images that they display as search results.

Communa’s interpretation would be contested – but the arguments are worth considering.

What’s next?

The Copyright Directive and the agreed amendments will now enter the stage of “trilogue negotiations” with the EU Council and Commission.

The result of these private discussions will determine the final text the European Parliament will have to vote on early next year. In most cases, the result of the trilogue negotiations is confirmed, but when that’s not the case the entire process of changes, negotiations, and a vote, starts over.

If the Copyright Directive is eventually adopted by the EU Parliament, the individual Member States will have to implement it into local law, which (naturally) is another hurdle that has to be passed.

The final view?  I’m undecided – watch this space.  If you watch anything else, just make sure it’s a legitimate streaming platform!

The amended Article 13
Article 13 – title  
Text proposed by the Commission Amendment
Use of protected content by information society service providers storing and giving access to large amounts of works and other subject-matter uploaded by their users Use of protected content by online content sharing service providers storing and giving access to large amounts of works and other subject-matter uploaded by their users
Article 13 – paragraph 1  
Text proposed by the Commission Amendment
Information society service providers that store and provide to the public access to large amounts of works or other subject- matter uploaded by their users shall, in cooperation with rightholders, take measures to ensure the functioning of agreements concluded with rightholders for the use of their works or other subject-matter or to prevent the availability on their services of works or other subject-matter identified by rightholders through the cooperation with the service providers. Those measures, such as the use of effective content recognition technologies, shall be appropriate and proportionate. The service providers shall provide rightholders with adequate information on the functioning and the deployment of the measures, as well as, when relevant, adequate reporting on the recognition and use of the works and other subject-matter. Without prejudice to Article 3(1) and (2) of Directive 2001/29/EC, online content sharing service providers perform an act of communication to the public. They shall therefore conclude fair and appropriate licensing agreements with right holders.
Article 13 – paragraph 2  
Text proposed by the Commission Amendment
Member States shall ensure that the service providers referred to in paragraph 1 put in place complaints and redress mechanisms that are available to users in case of disputes over the application of the measures referred to in paragraph 1. Licensing agreements which are concluded by online content sharing service providers with right holders for the acts of communication referred to in paragraph 1, shall cover the liability for works uploaded by the users of such online content sharing services in line with the terms and conditions set out in the licensing agreement, provided that such users do not act for commercial purposes.
Article 13 – paragraph 2(a)  
Text proposed by the Commission Amendment
New paragraph Member States shall provide that where right holders do not wish to conclude licensing agreements, online content sharing service providers and right holders shall cooperate in good faith in order to ensure that unauthorised protected works or other subject matter are not available on their services. Cooperation between online content service providers and right holders shall not lead to preventing the availability of non- infringing works or other protected subject matter, including those covered by an exception or limitation to copyright.
Article 13 – paragraph 2(b)  
Text proposed by the Commission Amendment
New paragraph Members States shall ensure that online content sharing service providers referred to in paragraph 1 put in place effective and expeditious complaints and redress mechanisms that are available to users in case the cooperation referred to in paragraph 2a lead to unjustified removals of their content. Any complaint filed under such mechanism shall be processed without undue delay and be subject to human review. Right holders shall reasonably justify their decisions to avoid arbitrary dismissal of complaints. Moreover, in accordance with Directive 95/46/EC, Directive 200/58/EC and the General Data Protection Regulation, the cooperation should not lead to any identification of individual users nor the processing of their personal data. Member States shall also ensure that users have access to an independent body for the resolution of disputes as well as to court or other relevant judicial authority to assert the use of an exception or limitation to copyright rules.

 

Article 13 – paragraph 3  
Text proposed by the Commission Amendment
Member States shall facilitate, where appropriate, the cooperation between the information society service providers and rightholders through stakeholder dialogues to define best practices, such as appropriate and proportionate content recognition technologies, taking into account, among others, the nature of the services, the availability of the technologies and their effectiveness in light of technological developments. As of [date of entry into force of this directive], the Commission and the Members States shall organise dialogues between stakeholders to harmonise and to define best practices and issue guidance to ensure the functioning of licensing agreements and on cooperation between online content sharing service providers and right holders for the use of their works or other subject matter within the meaning of this Directive. When defining best practices, special account shall betaken of fundamental rights, the use of exceptions and limitations as well as ensuring that the burden on SMEs remain appropriate and that automated blocking of content is avoided.

The post “13 Reasons Why” to watch Article 13 – Copyright reform in the European Union appeared first on IP Whiteboard | King & Wood Mallesons.

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