New Jersey Life Science Cluster - Where International Biotech Innovations Are Brought To Market - Part III

Wednesday, February 1, 2006 - 00:00

Other Considerations - Venture Capital

Another consideration of a foreign innovative enterprise collaborating with a U.S. enterprise is that the foreign enterprise will then have more effective access to the better developed U.S. venture capital ("VC") industry. To be able to attract venture capital, the innovative enterprise must demonstrate that its innovation can be transformed into a product or service that can be profitably marketed in a sustainable manner over a long term from which the VC's investment and a substantial return can be liquidated. In these post-technology bubble years, successful initial public offerings ("IPOs") are less likely. Accordingly, VCs must more realistically assess whether the innovation can be sold or licensed at valuations sufficient to enable the VC to recover its investment and return without reliance upon the public markets as a prospective buyer.

Early stage innovations facing long development and regulatory approval cycles are difficult for VCs to value and thus often viewed as unlikely investment candidates on a stand-alone basis. However, when a collaborative partner familiar with the innovative technology is willing to license and fund that innovation's development, this leap of faith is often viewed by the VC at least as a validation of the technical approach of the innovation and can attract VC bridge and follow-on rounds of funding.

Transfer Pricing

Where goods or services are sold by the foreign innovator to a United States operating company as to which it may be affiliated by an equity ownership, transfer pricing can become an important issue. This transfer price is the price at which the goods or services are bought or sold by the foreign affiliate to the United States operating company. The taxing authorities of the United States, as well as the foreign country, have an interest in the transfer price between affiliated entities because it affects the manner in which overall income on the goods or services is allocated between the United States and other countries. Counsel can seek to contact the U.S. Internal Revenue Service to negotiate an advance pricing agreement or simply document for the file the basis for the client's intercompany pricing to support any subsequent audit of this pricing.

E-Commerce Privacy Safe Harbor; Identity Theft

If the innovative enterprise and the collaborative licensee are expected to utilize a common platform e-commerce infrastructure such as common data bases, email, or customer lists, counsel may recommend that the client's U.S. based operations consider adopting the U.S. Safe Harbor Privacy Principles so as to maintain compliance with EU Directive 95/46/EC [i.e., data protection law] that would be imposed upon the European Union based operations. In turn, foreign based enterprises commencing operations in the United States should be aware that a number of individual U.S. states have enacted identity theft statutes to seek to safeguard consumers' personal data. New Jersey's state law, The Identity Theft Protection Act (P.L. 2005, C.226), became effective January 1, 2006 and governs an enterprise's record handling procedures that contain individuals' names along with any identifying account numbers that involve access to the individual's finances, such as employment records or developmental clinical trials. For example, enterprises (i) may not publicly post or disseminate (i.e., put into the mail or place on ID cards) any individual's social security number (or 4 or more consecutive digits of those numbers); (ii) cannot require job applicants to email such numbers unless the connection is encrypted; (iii) must take reasonable measures to dispose of internal records that would prevent their interception (i.e., shredding or destroying electronic media); (iv) promptly disclose, in writing, any breach of security to any person whose data may have been accessed by an unauthorized person; and (v) report security breaches to the state police. Of important note, the statute creates an individual cause of action against violators with potential awards of treble damages and attorneys fees if enterprises willfully or negligently fail to comply. The U.S. federal government is considering its own identity theft protection law (S.1408) which, if enacted, would be expected to overturn the existing patchwork of state statutes and perhaps eliminate New Jersey's provision providing for an individual cause of action.

Trademarks

General. In the United States, a registered trademark for goods or services can be obtained for as little as $1,500 to $2,000 on average for a single class application. Marks may be registered in multiple classes and as either block letter marks or marks which include design elements and usually the only additional expense is the filing fee for each new class. For example, a trademark, whether a design or word mark, registered in Class 5 for stem cells would cover cells for medical use for regeneration of human tissue but not research and development efforts in the field of stem cells which falls into Class 42 for scientific and technological services, including research, design and development services. Thus, such a mark must be registered in both classes to cover the use of the mark both as a product and as a service.

Since 1989, all original and renewal trademark registration terms commenced after November 16, 1989 are for 10 years and are renewable for new 10-year terms indefinitely as long as the mark remains in use. Counsel often advise their clients that it can take an average of 14 to 18 months for a trademark in use in the United States to be registered once the application is filed, but the rights it grants upon issuance relate back to the date of filing and are rigorously enforced. Under the Paris Treaty, of which many countries around the world are signatories, for U.S. applications made within 6 months of an EU (and many other foreign nations) trademark application filing, the effective U.S. date of filing will carry back to the initial foreign filing date. The converse is also true where a trademark filed in the U.S. will be given priority in Paris Treaty signatories as to its U.S. filing date as long as it is subsequently filed within the subsequent 6 months in the signatory country.

Infringing Use. It is important to insure that goods being brought into the United States do not infringe existing marks as infringers can be subjected to treble damages and may be required to pay the registered holder's attorneys fees and other costs of litigation. Further, the trademark owner can record its registered mark with U.S. Customs, which is permitted to interdict the entry of goods infringing the mark, seize the infringing goods at the U.S. border and destroy them as contraband. Because of the foregoing, counsel often recommend that new entrants to the U.S. markets initiate trademark filings for their products as soon as possible.

Foreign businesses do not have to be qualified to do business in North America to register a trademark in North America. All that is required is actual use of the mark by any party in the course of North American commerce. Further, in advance of introducing one's products into U.S. commerce, one can apply for an approval of a mark only being considered and not yet used merely on an "intention to use" basis. Such applications usually require 17 months for examination on average, and once approved allow a total of three full years from approval date to begin and prove actual use so that the mark will register. The three years is obtained in six-month increments by requesting extensions of time before the current six-month period has expired. The first of the six-month periods comes with the approval. The remaining five require separate timely requests.

Any subsequent license of the mark to third parties must include substantive, continuous and effective quality control measures to assure a consistent level of quality of the goods or service bearing the mark. Failure to provide for quality control can result in abandonment of the registration. Counsel typically reviews the collaborative licensing arrangements to ensure such quality control measures are included and are effectively administered.

Conclusion

Whether our clients are acting as innovators or collaboration licensees, when they sit across the table to structure a transaction to develop a life science innovation, we should be ready to assist them in laying a strong foundation upon which their joint development efforts can securely rest.

Stanley U. North, III is a Member of Sills Cummis Epstein & Gross P.C., which has offices in Newark, New Jersey and New York City. He was recently appointed First Chair of the International Trade and Investment Committee of the International Law Section of the New Jersey State Bar Association.

Please email the author at snorth@sillscummis.com with questions about this article.