If You can’t Beat Em’ Join Em’--Strategic Alliances, Joint Ventures, and other Forms of Business Dating

With the news boasting stories of joint ventures daily it's easy to mix terms (joint venture, strategic alliance, partnerships) like jellybeans in a bowl. Generally speaking, strategic alliances are accords between companies to secure and achieve common interests through cooperation and specialty business entities. Key to this broad array of arrangements is the ability of the participating companies to retain autonomy and remain in competition. Strategic alliances include franchising and licensing, preferred supplier relationships, and R&D joint ventures. Typically, strategic alliances are more long-term in nature and may involve equity participation.

Traditionally, “joint ventures” (a subset of strategic alliances) involved two companies with different or complimentary skill sets creating a third entity for a single purpose. A classic joint venture are those for oil exploration. It has found favor in other industries and joint ventures are the flavor of the day for technology R&D departments (for example the cell joint venture between Toshiba, Sony, and IBM) . If a partnership is a marriage, then the joint venture is like "having kids." Joint ventures are like partnerships but involve less fundamental and inextricable commitment in each other. This is due to the structure of joint ventures which often involves the formation a third entity, thereby leaving the original two companies separate. Joint ventures stem from agreements that facilitate the formation of a special function third party entity. For example, a joint venture may be limited to oil exploration only, exclusive of refining or distribution. It is unusual for a joint venture to track the participating companies’ complete catalogue of functions, services, or products. The participating companies can hold equity stakes in the new entity with a variety of possible splits from 50/50 to 49/51, depending on the underlying risks, control, and exit strategy.

Joint ventures have a long and venerable history dating back at least as far back as the early 20 century. For example, direct entry into a variety of Eastern European markets was impossible during the cold war, so joint ventures were used to facilitate western company penetration in Eastern European markets. In recent times, cheap labor pools in these regions have spawned joint ventures whereby tech heavy western European partners produce parts and completed goods in those countries, while investing in their technology and manufacturing infrastructure.

Joint ventures represent one subset of strategic alliances and in many instances a third entity and/or equity stakes are not part of the strategic alliance process. With an expansive view of alliances in mind, they can be any arrangement in which each participant company leverages its strengths, minimizes risk, and minimizes inherent weaknesses. Each wants to augment its own capabilities with allies that provide balance. Alliances are often driven by the form follows function approach, each one generally catering to a specific goal or purpose. The following provides some broad categories of joint ventures:

LICENSING. Companies can enhance each other’s capability through licensing arrangements. Licenses are agreements on an exclusive or non-exclusive basis that provides rights and access to a variety of goods, services, and infrastructure, ranging from technology and manufacturing facilities to distribution. Licenses are typically royalty and/or flat fee driven and impose term, sunset, and termination provisions. Companies can “multiply” their presence by using licensing to project themselves into geographically distant markets, or to offset the absence of in house manufacturing. Risks include ceding critical know technology or brand power to the licensee, which can result in unintended consequences. Worse still is a license that cedes complete control over a business asset to a licensee for a burdensome period of time. Some choose cross licensing as a means to best leverage competitor advantage. In other words, a company may secure the benefits of a complimentary technology, brand, expertise, or other item by swapping their own with the licensee, in turn becoming a licensee itself.

PRODUCTION. Many a startup and mature businesses without a significant manufacturing presence often engage in alliances to leverage the economies of scale of a partner.

RESEARCH AND DEVELOPMENT. Alliances can take the form of collaboration agreements with a technological goal in mind. Once the research phase is complete the parties usually part ways and utilize their own production, distribution, and branding to market the product in competition. In a world of parallel product development it is much more likely for large and small companies alike to offset risks, cost, shorter product life cycles (have you just bought a 2 gig SD memory card to replace the 1 gig card?) and development time with such alliances. Such alliances also prevent costly investment n developmental infrastructure and personnel, without sacrificing market turnaround time.

DISTRIBUTION. Distribution alliances are quite common and have a good deal of geographic diversity. Companies often partner with each other to compliment their products and services and/or extend their reach. Distribution Alliances are often paired with other kinds of Alliances. A classic example of this approach is where one company offers distribution while the other provides spare production capacity.

Kaiser Wahab

Securities Fraud Cases Just got that Much Harder--Dura Pharmaceuticals

The Supreme Court’s recent Dura Pharmaceuticals v. Broudo, 544 U.S. ___ (2005), decision raises the bar on plaintiffs in securities fraud actions, making it significantly more difficult to demonstrate the loss causation standard. The basic elements of a private securities fraud action include pleading and proving loss causation, a standard first articulated in 1974 by the Supreme Court, as a “showing that the defendants misrepresentations caused economic harm.” This standard was codified by Congress in the mid 90’s in the Securities Litigation Reform Act which provided that the “plaintiff shall have the burden of proving that the act or omission of the defendant… caused the loss for which the plaintiff seeks recovery of damages.”

Prior to Dura¸ the majority of Circuits considering the issue had found that to establish a “loss causation” the plaintiff would have to establish a causal connection between the alleged fraud and the investments subsequent decline in value. The Supreme Court validated this line of reasoning over-ruling the Ninth Circuit whose loss causation standard only required the plaintiff to establish the stock’s value at the time of the purchase was artificially inflated as a result of the defendant’s alleged misrepresentation; no showing of a subsequent decline in the price associated with the “artificial inflation” was necessary. Essentially, the Court held that in fraud on the market cases an “inflated purchase price will not by itself constitute or proximately cause the relevant loss” necessary to establish “loss causation.”

Simon Riveles

Copyright Act Gives a New Hope To Families Worried About DVD’S And Strikes Back at Theater Piracy

The much ballyhooed Family Entertainment and Copyright Act of 2005, S.167 (109th Cong., 1st Sess. 2005), has become a reality. A new set of Copyright Act Amendments that will transform its character and operation in a world of digital confusion. Among these is the green light for DVD sanitizing technology, criminalization of camcording piracy, and theater authority to detain suspected camcorder pirates.

THE FAMILY MOVIE ACT OF 2005

In a world of family entertainment and increasing reliance on home entertainment technologies, several players have merged to further enhance parental censorship for their children. Two major technologies ClearPlay and Clean Flicks both offer to automatically “sanitize” graphically sexual and violent portions of DVD’s that may not suitable for younger viewers. Not since covering the eyes of your child has a technology had such a profound impact on the child’s movie going experience. However, several major litigations arose over the Copyright implications that these technologies pose. Congress responded with this Act. It gave the nod of approval of ClearPlay’s technology, which is little more than an automated version of the age old technique of fast forwarding through the naughty parts. It operates as a software layer in compliant DVD players that orders the DVD player to fast forward through sensitive content. Hence, it does not actually alter the original DVD, simply the manner in which it is played. However, Congress did not extend the same safe harbor to ClearPlay's competitor, Clean Flicks, whose product creates an edited version of the original movie.

ClearPlay like technologies are permitted under the Act based on the Act’s express assertion that copyright infringement is absent when "limited portions of audio or video content of a motion picture" are made "imperceptible," provided no "no fixed copy of the altered version" is created. In other words, fast forwarding through the naughty parts is ok. Covering the bases, Congress also created a trademark safe harbor, provided viewers are adequately put on notice that they are viewing a sanitized version of the film.

However, no such safe harbor was extended to the Clean Flicks variant technology.

THE ARTISTS' RIGHTS AND THEFT PREVENTION ACT OF 2005 (a.k.a. “ART ACT”)

In an entirely predictable move, Congress has federally criminalized the camcording of first run feature films. The now ubiquitous practice of sneaking a small digital camcorder into theaters has resulted in a robust DVD bootleg market, accounting for a significant portion of $4 billion worth of annual piracy, which noticeably undercuts Hollywood’s bottom line. These camcords routinely become shared files on the full gamut of file sharing technologies from Kazaa to Bittorrents. The new Act was careful to note that its provisions do not preempt state laws, but rather act as additional legal authority. A significant power bestowed upon theater operators is the authority to detain and question individuals whom they reasonably believe are camcording a movie.

Pre-Registration Rights

Especially troubling to the film and music industries is the threat of infringement prior to actual public release of product. Increasingly both industries are vulnerable to “leaks” of high value products onto the Internet prior to the release. Copyright registration provides copyright holders significant benefits including statutory damages, attorney’s fees, and other measures to protect their work in court. However such registration must occur prior to the infringement. This is a paradox that did not go unnoticed. Congress expressly extended a grant of pre-registration rights. In particular pre-registration rights qualified works shall have the benefit of asserting statutory damages if infringed prior to actual registration.

Kaiser Wahab

A Hair Away from Lying--Gillette Found to Have Engaged in False Advertising Campaign

Today Judge Janet C. Hall of the Connecticut District Court ruled that Gillette engaged in a false advertising campaign in promoting its immensely popular M3Power line of razors. The main claim reiterated in nearly all promotional materials is that the razor raises hair up and away from the skin. In its ruling the judge maintained in clear and direct language that such claims are "unsubstantiated and inaccurate." Moreover, the Judge ordered a preliminary injunction in favor of Schick, Gillette’s top competitor, requiring Gillette to pull ads, packaging and other materials that make that allegedly false claim. This is a huge victory and a rare display of force on such a large scale.

This is the see-saw of the century as Schick recently lost on patent defense regarding its Quattro line of razors after winning in the lower court. That was as spectacular an upset as the false advertising case in that the appeals court held that Gillette’s patent, though only drafted to encompass a three blade design, nonetheless extends to Schick’s four bladed Quattro. Schick ultimately was blocked from further sales on that line due to allegedly infringing Gillette’s patent. So now one wonders after the two fighters have exchanged blows, what is the knock out?

Kaiser Wahab

Who are the People in Your Neighborhood? Porn Gets Own Top Level Domain Address

As the web becomes more sophisticated and we move beyond the “dot-com” daze into a more systematic allocation of Top Level Domains (TLD’s—the letters after the dot, e.g., “.com”), it is only fitting that the industry possibly solely responsible for the broadband boom (though Google would rather take credit) gets its own TLD.

The Internet Corporation for Assigned Names and Numbers, the oversight body responsible for TLD’s has unveiled the “.xxx” TLD for porn sites. The new TLD has jealous ugly sisters “.job” and “.travel” joining it as part of a new wave of TLD’s. According to ICANN spokespeople, the new addresses will be ready for purchase as early as this fall or winter.

Although the new TLD is designed primarily to segregate porn as a family and child protection measure, its adoption is entirely voluntary. "It will further help to protect kids," said John Morris, staff counsel at the Washington-based Center for Democracy and Technology. However, I doubt that the notoriously lean and low budget 12 billion dollar per year industry will be willing to shed their current name recognition in favor of a $60 address anytime soon (the going rate for new domains is now around $7). It will probably be more attractive to porn start-ups (not that we represent any), but that remains to be seen.

Kaiser Wahab