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28 November 2017Patents

Seeing double: the rise of patents in alcohol

Fruit juices, honey and fermented grains have been used to make alcohol for thousands of years, and ownership disputes have surely taken place over this time.

The latest brawls between alcohol producers are now being played out on the global stage, helped by social media.

Brand awareness among the public is now much more immediate, and where one company wrongfully uses another’s brand or logo, the wronged party is more likely to discover the infraction and act more quickly, leading to more legal disputes, explains Sarah Turner, partner at Hogan Lovells.

“Most of these will not reach court, but many examples are still reported in the press, which gives the impression that disputes in this area are increasing.”

A patent explosion

Alcohol is exploding (not literally, because that would be a bit of a problem). Innovation in the methods of making alcohol, and associated technology, can be shown by the steady increase in the number of patented inventions.

In 2012 there were 2,107 inventions patented; fast-forward four years and the figure was 6,199, a 194% increase.

The top filers are China, South Korea, Japan, the US and Russia, according to Bob Stembridge, IP patent analyst and customer relations manager at Clarivate Analytics.

Using the Derwent World Patents Index, Stembridge found that China led the pack with 16,499 patented inventions between 2012 and 2016. The US (779) came in fourth, behind Korea (913) and Japan (838), while Russia came fifth with 393 patented inventions.

It’s therefore unsurprising that three China-based businesses took the top three spots for filing: Harbin Shanbao Wine, Jiangnan University and Anhui Mingchuan Liquor.

What’s interesting about Harbin Shanbao Wine, with its 176 patented inventions over the four years, is that it’s mixing the old with the new—patenting tonic wines which incorporate traditional Chinese medicine ingredients.

Stembridge adds: “As in so many other areas, China plays a prominent role in developing the drinks and tonics of the future, with a large number of patents and players, including academic institutes, actively involved in research and development in this area.”

Innovation in alcoholic beverages is much broader than just fine wines and spirits and bespoke ales, he explains.

It extends to innovative equipment and techniques for brewing and fermentation, “which also has applications in fuel alcohol production from natural sources including biomass”, and also includes related beverages of fruit, rice and other natural flavourings in wine and to medicinal use in the form of tonics, Chinese remedies and treatments, 
he says.

While trade secrets have dominated the IP and alcohol field, patents are becoming increasingly popular and the industry has become “more alive to the potential of patent protection”, explains Turner.

Why? She believes that where collaborations are envisaged, patent protection may be a more attractive means of protecting developments, rather than keeping them a secret.

Turner adds that patents can be very important assets—they can be bought, sold and licensed like any other asset, bringing in valuable revenue.

“It remains to be seen how many of the patents filed will last for their full 20-year term, but even a poor patent may provide an effective deterrent to competitors who may not wish to risk being sued for patent infringement and will simply design around the problem patent or focus their efforts elsewhere,” she concludes.

Patents for brewing have almost doubled over the last year, according to Clarivate Analytics. And although this is partly driven by the increasing popularity of fermented beverages, there are plenty of other reasons for the escalation.

The increase is despite the very old process of brewing, which makes it difficult to show that you’re doing something new, according to Ashley Winkler, attorney at Finnegan, Henderson, Farabow, Garrett & Dunner.

“In the event that a patent is pursued, it’s worth recognising that it may be difficult after the fact to prove the exact process a particular brewer used, other than the general steps known in the prior art. It’s a little easier to go after brewing equipment, but the brewing process itself is hard.”

New players entering the market have disrupted the status quo, so large companies have to adapt, trying new processes and products to maintain their place in the market, adds Rachel Erdman, associate at Finnegan.

“Part of market disruption and the introduction of new players is that the processes that worked for larger companies may not be conducive to the scale produced by the market entrants. As a result, the younger brands are developing innovative ways to deal with their own production challenges,” she says.

Can you keep a secret?

Trade secrets have always been a useful tool for alcohol producers, but there is now an increased focus on them, driven by the implementation of the Defend Trade Secrets Act (DTSA) in the US and the EU trade secrets directive.

Andrew Leba, associate at Finnegan, explains that alcohol products are produced using a number of trade secrets.

“Breweries, distilleries and beyond often produce their beverages using particular recipes or mash bills with different ingredients or techniques. Even using trees cut from a particular part of the forest to build the barrels used for ageing bourbon can have a dramatic effect,” he states.

In May 2016, then US President Barack Obama signed the DTSA into law, giving trade secrets federal protection. The harmonisation of trade secrets law across the EU under the new directive is also expected to make enforcement of trade secret rights across borders easier.

“By introducing minimum standards of protection and enforcement across member states, businesses should have greater confidence in the European courts’ ability to protect their valuable trade secrets,” claims Turner.

However, it’s important that trade secrets remain just that: secret.

Leba explains: “Companies should be mindful of the value in these trade secrets and should take efforts to create systems where the trade secrets are catalogued, non-disclosure agreements are signed, and employees are taught the responsibilities of avoiding inadvertent disclosure.”

Turner adds that trade secrets have the advantage of arising automatically and being free to obtain, but that owners must be “vigilant in order to keep their secrets safe”.

Perhaps the best-known example of keeping a secret safe is the Coca-Cola recipe. The formula is known only to a few select employees, and Atlanta, Georgia, has an entire museum built around protecting the vault that stores the recipe.

When it goes wrong

Hogan Lovells has seen numerous trade secret and patent ownership disputes in the alcohol arena.

“These often arise in research and development collaborations, where it is not clear who came up with a particular idea or how it may (or may not) be used,” notes Turner.

Agreements should set out what each party is contributing to the collaboration in terms of IP and how their background IP may be used by the other parties, she explains.

“The agreement should also specify who will own any IP rights arising from the project (shared ownership is often proposed as a ‘fair’ compromise, but legally it is not ideal) and how the results can be used by the other parties.”

Trademark disputes are also very common, especially in the craft beer sector, with producers attempting to differentiate their products.

“We can expect this to continue given the explosion of new businesses in this sector. Small, local businesses are being replaced by (or sold to) more sophisticated businesses whose boards and investors expect them to defend their brands,” says Turner.

Erdman outlines Makers Mark v Jose Cuervo, a clash between two long-standing names in the whisky business.

Following an appeal to the US Court of Appeals for the Sixth Circuit, Makers Mark won and Jose Cuervo was prevented from using dripping red wax to seal its bottles.

Another dispute being watched closely is the E & J Gallo v E & B Beer case, relating to the similarity of the names of E & J Gallo, a maker of wines and spirits, and E & B Beer, a smaller beer company.

“In mid-2017, E & J sent a cease-and-desist letter to E & B arguing that similarities between the names of the two companies were too close and they were likely to be confused by customers,” says Erdman.

Winkler adds that while E & B may have used its trademark for longer, it had allowed its federal trademark registration to lapse, and its common law rights were limited to its current market footprint and natural zone of expansion.

According to Winkler, E & J offered a settlement where E & B would be permitted to use its mark in only two states, a move which could “severely stunt” its expansion into new markets.

Leba adds: “Many are watching this dispute closely to see whether social media and ‘corporate bullying’ will come into play.”

An age-old problem

Fakes are also a big problem—in 2012, the Institute of Economic Affairs reported that the UK treasury was losing as much as £1.2 billion ($1.6 billion) every year to the illegal alcohol industry.

According to Hogan Lovells partner Sahira Khwaja, it’s difficult for anyone to prevent the creation of fakes, since people will always try to counterfeit a successful product if it looks profitable.

“Fake handbags are sometimes seen as less problematic by the public than fake food and drink, where the potential health risks come more clearly to mind. All successful counterfeits depend essentially on being so convincing that someone is persuaded to buy them,” she adds.

Successful anti-counterfeiting strategies usually depend on a mixture of making it difficult for a criminal organisation to successfully and convincingly counterfeit the product, and “on having an effective and responsive enforcement strategy grounded in sound intelligence”.

An age-old phenomenon itself, counterfeiting will surely be keeping the ancient beverage busy for many more years to come.

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