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is the newsletter prepared by the bilingual attorneys of enfoque latinoSheppard Mullin’s Hispanic/Latino Business Practice.

SHEPPARD MULLIN SHEPPARD MULLIN RICHTER & HAMPTON LLP Fall 2007 Edition

Latino Mexican and the Law enfoqueNEWSLETTER By Daniella Estrella, Visiting Foreign Attorney, 1 Sheppard Mullin and César Martínez Alemán, Barrera, Siqueiros y Torres Landa, S.C.

Public Green, Private Gold: Opportunities Mexican Gambling From Climate Change Regulation in the U.S. and the Law 5 and Mexico By Daniella Estrella, Visiting Foreign By Rafael Muilenburg, Sheppard Mullin, and Gloria Attorney, Sheppard Mullin and César Park and Estuardo Anaya, Santamarina y Steta Martínez Alemán, Barrera, Siqueiros y Torres Landa, S.C. Moving Technology Across the Border: The Introduction 10 Future of Biotech for the U.S. and Mexico By Beni Surpin and Abraham Hanono, Sheppard Mexico banned gambling in 1934 Mullin and Joseph Panetta, CEO Of BIOCOM and with the new age of on-line gaming, it was expected that Mexico would amend its gaming laws and legalize Common Misconceptions Surround Electronic gambling within the country. 14 Transactions with Consumers By Ethna Piazza, Sheppard Mullin In response to the constitutional challenge filed by Mexico’s House of Representatives, the Mexican Supreme Just One Good Idea – IP Licensing Strategies Court ruled on January 22, 2007, that the for the 21st Century Regulation of the Federal Gaming and 18 By Amar Thakur and Beni Surpin, Sheppard Mullin Raffles Law (the “Regulations”) enacted in 2004 under the Vicente Fox’s

EDITOR: Douglas Farmer

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administration, did not violate the Mexican Constitution and was consistent with the existing .

With the constitutionality of the Regulations being upheld, controversial permits issued in 2005 for remote betting centers were revalidated and several locations throughout Mexico have established sport books and number draws operations.

The Supreme Court ruling has created confusion as to whether is permitted in Mexico. This article intends to provide an overview of what is and is not permitted under Mexican law.

Legal Framework

Gambling in Mexico is a federal matter regulated through the Federal Gambling and Raffles Law of 1947 (the “Gaming Law”) which was not amended or restated by the Regulations published on September 17, 2004.

The Gaming Law comprises only 17 articles regulating the prohibition of gambling and betting and its exceptions. The Regulations provide guidelines for the authorization, control and surveillance of the games authorized as betting games by the Ministry of with bets and raffles, regulates the issuance of permits, Internal Affairs (“Secretaria de Gobernación” – the the opening of gambling establishments, as well as “Ministry”) through the issuance of permits. remote betting centers, fairs, and various kinds of raffles, except for those conducted by the National As for slot machines (máquinas tragamonedas), the . Mexico’s National Lottery is a separate regime Regulations prohibit those cash or electronic payment and operates under authority of the Organizational machines which allow the user through odds or a Law of the National Lottery for Public Assistance combination of odds and skills to obtain prizes in cash enacted in 1985. or kind, except for (i) vending machines, provided that the value of the money deposited corresponds to the Authorized Gambling value of the merchandise obtained; (ii) music or video Pursuant to the Gaming Law, the general rule is machines, provided they do not allow any type of that games of chance and games with bets are betting to take place (except for free games or prizes prohibited in Mexico. Nevertheless, there are or coupons which value does not exceed the exceptions to this general rule. The Gaming Law participation cost); and (iii) betting machines used in provides that only ball games (bowling, billiard, horse races, sports or used to develop fronton or jai alai…), skill games (chess, checkers, expressly authorized activities, provided they are dominoes…), and sports competitions may be expressly indicated as such.

– 2 – organization of raffles, for a maximum term of one year.

Is On-line Gambling Permitted in Mexico?

As Internet gambling is sprouting up, Mexican authorities are struggling to keep up with gaming technology and the gaming industry.

In 2005, the government controversially authorized several permits for remote betting centers, better known as “books,” in both Spanish and English, where customers can bet on horse races and other sporting events that take place within the territory or offshore

The Supreme Court’s decision, the highest tribunal in Mexico, validated the constitutionality of the remote betting centers insofar as they are establishments that, with the use of new technologies, carry out the same betting activities in horseracing tracks, dog tracks, jai alai frontons, and all types of sport events and games permitted by the Gaming Law with the only difference that in lieu of betting in the place where the events are taking place, individuals can place their bets in remote centers.

The central argument was whether the Regulations (complementary authority) were Limitations regulating new activities (remote betting) that Pursuant to the Regulations, permits may only be were outside the scope of the Gaming Law and granted to: therefore against the basic administrative law principles set forth in the Mexican (i) Mexican companies for the establishment and Constitution. operation of betting activities in (x) horseracing tracks, dog-racing tracks, jai-alai courts, remote betting centers The Supreme Court expressly recognized the and rooms, with a maximum term of 25 years; impact of new information and communication and (y) in fairs, with a maximum term of 28 days or a technologies on the gaming industry. The Court term equivalent to the duration of the authorized not only recognized as mentioned above that the season; remote betting centers are legal insofar as such bets are made on activities authorized by the (ii) Mexican companies or Mexican individuals for (x) Gaming Law, but it also distinguished between the establishment and operation of betting capturing bets by internet, telephone or any other activities in horse-racing tracks in a temporary electronic means, which is permitted only for venue and in cock-fights (pelea de gallos), for a those gambling activities authorized by the maximum of 28 days or a term equivalent to the Gaming Law and require prior authorization of duration of the authorized season; and (y) for the the Ministry, and gambling over the internet,

– 3 – fine of $500 to $10,000 Mexican pesos ($50 to $1,000 US Dollars approx.) to “those that without the Ministry’s authorization, are in any manner involved in the sale or enfoqueLatino circulation of lottery or gambling tickets or chances that NEWSLETTER are being carried out abroad.” which is a not regulated area.1 The Future of Mexican Gaming

In addition, the Supreme Court recognized the The future of legal Mexican gaming and associated constitutionality of Bingo or numbers and symbols investment, development and recreational opportunities raffles, both during fairs and in remote betting centers. are now back in the hands of Congress, who has the authority and responsibility to bring the law into the Advertising for Gaming Services new internet age.

Propaganda and advertisement of games and raffles Changing Mexican laws to allow gambling, however, is requires a prior authorization from the Ministry. no small undertaking; various issues have yet to be Gambling advertisement on paid-television in Mexico resolved. may be conducted if a license has been obtained before the Ministry in accordance with the Regulations. Proposals and measures to legalize have languished for years in the Mexican Congress. There has The advertising of non-licensed betting services in been an ongoing debate as to whether the risk of Mexico is punishable. Pursuant to Mexican law, it would allowing casino gambling in Mexico may outweigh the not be possible to claim a prize from an online betting economic benefits (such as development and attraction service that is not licensed in Mexico. to foreign investment, creation of new jobs and increase of tourism). Opponents say casinos will be a haven for In this regard, section 12-III of the Gaming Law imposes money launderers and attract organized crime, drug a prison term of three months up to three years and a trafficking, prostitution and gambling addictions.

It is well known that a prohibition policy also has negative effects and encourages the behavior it seeks to curtail. It is no secret that large numbers of illegal gambling halls exist across the country. A far more sensible policy would be to finally legalize casino gambling, including Internet bookmakers. This would allow policies to be put in place that could limit the potential excesses of gambling and minimize the role of criminal elements.

Even as politicians continue to argue over both a comprehensive gambling law and the validity of the new licenses, it is anticipated that the growth and explosion in the gaming industry will continue and that entrepreneurs will not wait for the outcome. They will work with the law as it currently stands and will find new means to justify gaming machines by eliminating the element of “chance” so that personal skills determine and control the final result.

1 In this regard Justice José Ramón Cossio stated: “It seems to me much more reasonable to have off-site betting centers that are licensed and controlled by the Ministry than to have people betting on the Internet, which is more difficult to be controlled…”

– 4 – Public Green, Private Gold: Opportunities from Climate Change Regulation in the U.S. and Mexico By Rafael Muilenburg, Sheppard Mullin, and Gloria Park and Estuardo Anaya, Santamarina y Steta

Global climate change is a very popular topic of discussion of late, both in Mexico and the United States, and particularly in California. Driven by a widely perceived consensus among scientists that global warming is currently taking place at an accelerating rate, due in large part to man-made carbon emissions, public opinion has impelled policy makers in both countries to take action. This article will compare the different approaches that Mexico and the U.S. are taking at various levels of government to address climate change issues, particularly through regulation of greenhouse gases (“GHGs”), and will analyze the resulting obstacles and opportunities for private enterprise in both countries. recently formed U.S. Climate Action Partnership (“US- U.S. Climate Change Regulation CAP”) are also pushing for federal regulation, to avoid the “patchwork” of state regulation that now exists.3 1. Federal Level. On the U.S. side of the border, very This may lead to some further initiatives during the last little concrete legislation has yet emerged at the months of the current administration. More significant federal level. Although a recent U.S. Supreme Court change is likely under the next administration after the case1 found that the federal government has both the November 2008 election – several of the candidates authority and the duty to regulate carbon dioxide from both parties appear to support stronger action on emissions (thought to be the main contributor to climate change. climate change) under the federal Clean Air Act, the Bush administration has generally followed a “wait 2. State Level / California. Given the vacuum at the and see” approach, calling for and sponsoring further top, the most significant U.S. climate change research and study into climate change issues. (Certain regulation has been at the state level. Several states, modest steps nevertheless have been taken – for including California, Massachusetts, New York and example, the administration’s encouragement of New Jersey have enacted stringent regulatory ethanol fuels.) programs, and numerous other states are in the process of doing so; 4 over half of all U.S. states now The federal approach may be beginning to change, have “Climate Action” programs of some kind in however. President Bush has recently called for a effect. California has been in the vanguard of this conference of leaders of industrialized nations and movement under Governor Arnold Schwarzenegger larger developing nations (including Mexico) to be held and a Democratic-controlled legislature. In August in late September 2007.2 Congress has introduced several 2006, the Governor signed Assembly Bill 32 – the legislative measures for consideration in both houses, Global Warming Solutions Act (“AB-32”) into law, with no single proposal emerging as a frontrunner for committing the State to enact new regulations over passage. Certain U.S. industry groups such as the the next few years to roll back the State’s total GHG

1 Massachusetts et al. v. Environmental Protection Agency, Case No. 05-1120, April 2, 2007. 2 http://www.whitehouse.gov/news/release/2007/05/20070531-13.html. 3 See website at www.us-cap.org describing this partnership of approximately 30 major companies (GM, Ford, GE, DuPont, Shell, etc.) and several environmental groups, with its principles and recommendations for binding caps on carbon emissions. 4 See, for example, the Western Climate Initiative (WCI) that six western states have formed to collectively impose GHG reduction goals (with a market-based mechanism to be completed by August 2008), which numerous other states are considering joining.

– 5 – state authorities as “significant.”7 As such, the environmental impact reports prepared for new local planning initiatives and private developments have enfoqueLatino been required to analyze climate change impacts, and NEWSLETTER mitigation for these impacts is likely to be required in the near future. Such mitigation could consist of additional energy efficiency measures, the redesign of emissions (both public and private sector) to specified projects to reduce vehicle trips, the installation of solar levels.5 panels, the planting of trees, and the purchase of carbon credits. This trend is likely to spread to other Under this statutory mandate, the California Air states, such as Massachusetts and New York, that have Resources Board (“ARB”) is the lead regulatory agency similarly stringent environmental review empowered to enact the requirements of AB-32. Over requirements. the next four years, ARB will be promulgating and implementing a series of regulations for achievement of Most recently, California legislators have circulated GHG reductions in the State, beginning this year with initiatives to restrict new development to areas where publication of optional early action measures for GHG mass transit infrastructure already exists or is proposed emitters, and culminating in 2011 with mandatory under applicable planning documents, in an effort to reduction requirements.6 Although not published yet limit “suburban sprawl” and reduce emissions.8 Such even in draft form, mandatory GHG reduction proposals have generated significant controversy requirements are expected to include a market-based between developers and environmental interests, and “cap and trade” program or similar structure the conflict shows no sign of abating – although there establishing maximum total GHG emission limits, may be opportunities to find common ground as allowing companies the right to buy and sell emission developers begin to construct more “smart growth” credits. The new rules will likely affect all sectors of the developments that locate high-occupancy buildings in economy – ranging from energy and agriculture to urbanized areas near transit infrastructure. These transportation and residential, commercial and initiatives have also antagonized local governments, as industrial real estate development. Government land use planning has traditionally been almost purely operations are already subject to new climate-related a matter of local control. Nonetheless, consensus has standards, which will be increased in the future, and been developing that measures of this sort will be private companies also are being impacted specifically in needed to implement the AB 32 mandate. the areas discussed below. (b) Vehicle Fuel and Efficiency Standards. California has (a) Real Estate/Land Use. Real estate development and recently adopted stringent new standards to require land use have been among the first areas significantly production and sale of lower-carbon fuels for vehicles affected by climate change legislation in California. through ARB regulations. Also, California is attempting Under the California Environmental Quality Act to impose fuel efficiency standards for new vehicles that (“CEQA”), new development is required to analyze its are stricter than the federal standards – if it is successful “significant impacts to the environment” – and the in doing so despite federal opposition, many other GHG emissions resulting from increased energy use by states are expected to follow California’s lead. Such new buildings, together with the additional vehicle developments may also encourage stronger federal miles traveled by their occupants, have been viewed by regulations in the future.

5 AB 32 and related regulations will require GHG emissions to be reduced to 2000 levels by 2010; to 1990 levels by 2020; and to 80% below 1990 levels by 2050. 6 http://www.arb.ca.gov/cc/factsheets/ab32timeline.pdf. http://www.arb.ca.gov/cc/factsheets/ab32factsheet.pdf 7 This is because of CEQA’s requirement to analyze the “cumulative” impacts of all proposed new projects together, not to mention recent lawsuits by the State Attorney General. 8 See, e.g., Senate Bill 375 (Steinberg) and a new California Energy Commission report, “The Role of Land Use in Meeting California’s Energy and Climate Change Goals” (August 31, 2007).

– 6 – 3. Business Opportunities. Although increased by being “ahead of the curve” in adopting to climate regulation will cause significant increased costs and change impacts and the resulting legal requirements. other obstacles for business, there are numerous Such factors appear to have been the underpinnings for economic opportunities that will arise from the new the Schwarzenegger administration’s support for AB 32 requirements. Many industries have been encouraged and the other measures enacted so far. by new and proposed energy-related requirements, including manufacturers of solar panels, wind turbines Mexican Climate Change Regulation and other “clean” technologies. Developers of “smart growth” projects are gaining additional leverage to get 1. Applicable International Regulation. On the their projects approved, given their climate change international level, Mexico is party to the United Nations benefits. Framework Convention on Climate Change (“Convention”) and the Kyoto Protocol.9 As a Non- More generally, the expertise that California Annex I Country of the Convention, Mexico is not developers, consultants and other businesses are obligated to reduce its GHG emissions to the Kyoto gaining by dealing with the new requirements may be Protocol levels, but it is authorized to receive Clean “transportable” to other jurisdictions – such expertise Development Mechanism (CDM) projects from the will be valuable once new requirements are imposed wealthier Annex I Countries. CDM projects established elsewhere. As such, California companies may benefit in Mexico create certified emissions reduction credits to

9 The U.S. is also party to the Convention, but not to the Kyoto Protocol.

– 7 – (ii) PEMEX: Install combined heat and power plants in the national refining system; increase PEMEX’s energy efficiency by 5%; and reduce fugitive emissions of enfoqueLatino methane from gas production, transportation NEWSLETTER and distribution.

For private companies, there are no general guidelines help the Annex I countries reach their compliance for emissions reduction. Certain companies that have objectives under the Kyoto Protocol; these projects are internal environmental management policies or are further described below. recognized by the environmental authorities with Clean Industry Certificates are obliged to comply with more 2. Domestic (Federal) Regulation. Most Mexican strict parameters than those contained in the applicable regulation of climate change is indirect, through regulations. However, this is a voluntary program and existing laws regulating air quality.10 Still, various legal only the wealthiest and largest companies are part of it. instruments do establish mechanisms for determining, reporting and controlling the total volume of GHG 3. Little State Regulation. Throughout Mexican emissions generated in the country.11 The indirect history, the establishment of public policies and the regulation of climate change in Mexico also includes legislative mechanisms for creating laws and regulations regulation on sustainable forestry development has been characterized by centralism. One expression of directed to the preservation and sustainable this political practice is the preeminence of federal management of forest ecosystems.12 governmental bodies over local and municipal authorities. As such, the Mexican state governments are In order to comply with Mexico’s international not very involved in the development of regulations on commitments and generate mechanisms for controlling climate change. However, the State of Sonora has climate change, an Inter-Secretariat Commission has recently requested a technical study for measuring the been created which integrates the following federal possible consequences of climate change in the state, in government departments: Environment and Natural order to take legislative measures to minimize its effects. Resources, Agriculture, Cattle, Rural Development, Also, the State of Baja California has been actively Fishery and Food, Energy, Social Development, promoting the development of solar power and other Economy and Foreign Affairs. renewable energy sources, some of it in connection with power sales to the U.S. The two most important companies controlled by the Mexican government – the Federal Electricity 4. Development Opportunities. Mexico has become Commission (CFE) and the Mexican Oil Company an important receiver of CDM projects under the (PEMEX) have established the following goals for Convention described above – currently there are 178 emissions reduction: CDM projects with approval letters, including: management of wastes of cattle farms, methane use (i) CFE: Increase the efficiency of transmission and from landfills, management of wastewaters, etc. Partly distribution lines by 2%; increase efficiency of as a result of this success, the federal government thermoelectric plants by 2%; and conversion to headed by President Felipe Calderon has designed a natural gas of thermoelectric plants. National Strategy on Climate Change, with the purpose

10 General Law for Ecological Balance and Environmental Protection (Ley General del Equilibrio Ecológico y la Protección al Ambiente) and its Regulations on Prevention and Control of Atmospheric Pollution (), and the Mexican Official Standards NOM-043-SEMARNAT- 1993 and NOM-085-SEMARNAT-1994 which establish certain maximum emission limits for specified pollutants. 11 Regulations on Emissions and Pollutants Transfer Registry. 12 General Law for Sustainable Forestry Development and its Regulations.

– 8 – of generating GHG mitigation opportunities through different actions covering two major areas: (i) energy generation and use, and (ii) vegetation and land use.

(a) Energy Generation and Use. Actions in this area are intended to promote energy savings and efficiency; co-generation of energy along with national industries (in general, energy production is an exclusive activity for the State); energy generation with renewable energies and bio-fuel.

(b) Vegetation and Land Use. Actions in this area are directed to reduce the emission of GHGs through the conservation, capture and substitution of carbon by sustainable forestry and forest ecosystems conservation, and by such actions as reforestation and sustainable management of commercial plantations.

By virtue of the above, we can conclude that, although there are no specific legal instruments for controlling climate change in Mexico, there are authorities, public policies and government programs directed to the reduction of GHGs. Increasing interest in implementing more CDM projects from both the public and private sectors will help current operations, Mexico at least is making progress on Mexico to take advantage of the economic benefits that the issue at a national level – and hence may be in a climate change regulation may bring. better position to deal with expected climate change impacts and future measures on a comprehensive Comparison / Conclusions national basis than the U.S. Mexico’s centralized federal Review of the Mexican and U.S. approaches to GHG authority may also give it some advantage for imposing emissions leads to several interesting conclusions. First, future regulation in a uniform manner, with fewer it is clear that Mexico has taken leadership on this issue demands for “local control.” at the federal level by acknowledging the problem and committing the government to take some future action, The fact that U.S. state regulation of climate change has which puts it ahead of the U.S. in some respects. Since gone ahead of federal regulation is likely to create some a larger portion of Mexican industry is controlled by the significant problems for the U.S. Industry groups such as government than in the U.S., the reductions targeted US-CAP have noted the problems resulting from large for these industries should be easier to implement and companies being forced to comply with different have greater overall impact. Even though most of its regulations in different states and the inefficiencies that measures so far require relatively small changes to this creates – this is why some of these groups are

– 9 – and its legal system. Once an enforceable “cap and trade” system is in place, at the state or national level, the details and mechanics of the system will be enfoqueLatino implemented, enforced, worked out and tested by these NEWSLETTER institutions – and may, in the future, become a model for other countries. Also, once sufficient economic incentives exist, the demonstrated ability of the U.S. (particularly California) to create innovations in environmental and energy technology will benefit requesting that uniform federal controls be imposed. individuals and companies both domestically and However, even if new federal requirements (such as a worldwide. future national cap-and-trade program) are adopted, there will be significant interpretation issues over how In sum, climate change regulation in both the U.S. and and to what extent the federal requirements Mexico presents many obstacles and challenges for both “preempt” the state requirements in California and government bodies and private companies, but will also elsewhere, and what the results will be. Dealing with provide opportunities to those that take affirmative these issues will likely pose a continuing headache for steps to deal with the issues early on – particularly in the lawyers and their clients in numerous U.S. states for development of new strategies and technologies to years to come – a problem that Mexico will hopefully be reduce GHGs. The only real certainty is that able to avoid. developments in this field are likely to continue at a rapid rate, and will require continued close attention by The main U.S. strength, surprisingly enough, may reside companies investing and doing business on both sides of in its institutions – both governmental and non-profit – the border.

Moving Technology Across the Border: The Future of Biotech for the U.S. and Mexico By Beni Surpin and Abraham Hanono, Sheppard Mullin and Joseph Panetta, CEO of BIOCOM

Historically, the collaborative efforts between the U.S. dedicated to biotechnological research. According to and Mexico in the Biotech arena, separate from Mexico's National Science and Technology Council medical devices, have been at the educational level (CONACYT) the number of doctoral graduates in Mexico, with informal collaboration projects and student specializing in science, has increased five fold over the exchanges. One of these efforts, initiated the last decade. In addition, the number of students founding of two well known biotechnology institutes entering masters degree programs in the sciences has in Mexico. In the late 1970's, a Mexican scientist more than doubled since 1995. Unfortunately, Mexico named Francisco Bolivar participated in the lacks enough high-skilled employment opportunities to development of the first genetically engineered absorb these graduates and most graduates are forced protein and the development of the first cloning to look for temporary postdoctoral fellowships in the vectors at the University of California, San Francisco. United States, Canada, or Europe. With the He, along with Luis Herrera-Estrella, returned to opportunities in Mexico unenticing, all of the intellectual Mexico to co-found and direct the Biotechnology property assets and potentially lucrative products Institute of the National Autonomous University of discovered by Mexican scientists are being developed Mexico (UNAM) in Cuernavaca, and the Center for and commercialized outside of Mexico in collaborations Research and Advanced Studies of the National with multinational companies. This causes a vicious Polytechnic Institute (CINVESTAV) in Irapuato. circle, in that the educational institutions that produce the students and discoveries do not receive the financial Mexico, therefore, has concentrated its efforts on the benefits resulting from the the products developed, development of scientific centers and institutions while in order to sustain their growth and technological

– 10 – advantage they are forced to place their funding U.S. researchers lacked incentive to create burden upon the government. commercialized products. Following the passage of the Act in 1980, individuals and research institutions However, with the implementation of the right technology are now able to protect their ideas and have the transfer and patent policies, and with collaboration with incentive needed to pair up with for-profit companies the U.S., both countries could work together, with each and bring their discoveries into the marketplace. As a participating in R&D projects, to create a biotechnology result, the biotech industry has grown by leaps and hub between the U.S. and Mexico. Technology transfer is bounds in the U.S. after 20 years of effort by the non- the process by which results of scientific research, usually profit sector to stimulate the transfer of technology. from universities, are transferred to the commercial sector The Act gives ownership of discoveries and inventions through the development and licensing of practical to universities and other research organizations, that applications for the research. Currently, Mexico has a performed the actual research, so long as they commit relatively low number of patents issued annually; however, to the commercialization of the discovery or this doesn’t appear to be as a direct result of a lack of invention. The research institution is given the right inventiveness. Rather, it seems mostly due to the lack of to retain title to patents and create revenue by emphasis and enabling policies in place at institutions for licensing the patent or selling it entirely to a private protecting ideas for possible future commercialization, company. In addition, the individual pioneers are coupled with lack of legislation in place to incentivize given the right to compensation under the Act. The institutions to do so. private sector, in turn, is given incentive to develop the discovery or invention because they are able to In the U.S., prior to the Bayh-Dole Act (the “Act”), purchase the exclusive rights it from the research

– 11 – parties involved and creates incentives for research and development. enfoqueLatino It is for that reason that the Act has been instrumental NEWSLETTER in the development of the biotechnology and the life sciences industries. The Act strengthened intellectual property rights in the U.S., contributed to university wealth, and put taxpayer money to use in the development of products for the general public. The institution to produce commercial products. While key now, is to see to it that Mexico takes similar steps. the government loses funds from the sale of the non- Although Mexico has taken the first steps to better exclusive licenses (since governmental agencies that provide incentives to its scientific community with the used to fund institutional research previously owned passage of the AVANCE and FOCAT initiatives in 2003, resulting inventions), it gains revenue from the taxes Mexico needs to continue to fuel their biotechnology levied on the sales of products that the private sector industry and incite an entrepreneurial spirit among its sells. The Act, therefore, works positively for all skilled researchers. AVANCE (Raising Added Value in

– 12 – Companies with Knowledge and Entrepreneurs) was Although the number of maquiladoras is still strong, aimed at funding start up companies, and FOCAT and Mexico has a long future in the manufacturing (Strengthening of Technological Capacities) was aimed arena, as competition from China and other countries at slowing Mexico’s perennial brain drain by increases, Mexico will need to find other niches to fill, subsidizing the employment of successful scientists at so as to continue growth and expansion of its Mexican companies. In order to further facilitate increasing skilled labor force. technological advances in Mexico, and aid in the transfer of biotechnology across the border, it is with With some luck, Mexico has already rooted itself in the hope that Mexico reaches its fullest potential by biotechnology and life science industry by promoting instituting policies that mimic the intentions of the growth in its medical devices production. In 2003, Baja Bayh-Dole Act. With collaboration, the U.S. and California biomedical device firms employed over Mexico can become regional biotech partners and 23,700 individuals. In Baja California alone there are collectively push the biotechnology industry to new about 60 biomedical product companies, of which 40 levels. have U.S. parent companies. The Cluster de Productos Médicos de Las Californias (Medical Products Cluster of With so many research institutions, universities, and the Californias), which is made up of many of Baja biotechnology companies located in the U.S., it would California's largest medical products manufacturers, be opportune for Mexico to become a potential actively encourages suppliers to expand into Mexico. destination for these companies to collaborate in the U.S. companies have followed and as a result new development and manufacturing of their goods. employment has spurred on both sides of the border. While U.S. companies may benefit from the increased and less expensive labor force, Mexico would benefit Currently, there are about 170 manufacturing plants through the production of jobs for, and development operating in Mexico, including most of the industry's of, skilled labor. big names: Pfizer, Bristol-Myers, and Eli Lilly among them. And while there are a number of Mexican Currently, biotechnology collaboration between the pharmaceutical companies operating and performing two countries simply mirror the maquiladoras of the research, such as Probiomed (Mexico City), Biciclo (San later half of the 20th century. In 2006, trade between Luis de Potosi) and Laboratorios Silanes (Mexico City), the U.S. and Mexico in biotechnology and life sciences the potential for additional activity is exponential. goods, as reported by the U.S. Department of Commerce, had reached nearly $3 billion and has To the extent Mexico adopts policies similar to those of experienced an average annual growth of 15% the Bayh-Dole Act, both countries would move beyond between 2003 and 2006. the blueprint of the maquiladoras in which most of the R&D occurs in the in U.S. while only the manufacturing While the advent of the maquiladoras benefited both portion of the collaboration occurs in Mexico. By the U.S. and Mexico substantially in the past and Mexico giving incentives to its skilled researchers, it can continue to serve both countries today, they have been become a partner with the U.S. in biotech R&D and no doing so to a lesser capacity as international longer only focus on manufacturing of medical competition has stiffened. With maquiladoras products. In doing so, and considering that Mexico has operating under a wide range of industries spanning the largest pharmaceutical market in Latin America from chemical products, garment assembly, food with industry sales expected to reach $14 billion in production, and electronic assembly, U.S. companies 2008, Mexico will be able to fully exploit its capitalize, of course, on Mexico's skilled but less technological capabilities and accelerate the launch of expensive labor force, while creating millions of jobs in new discoveries and medications south of the border. Mexico, and assisting in some flow of technology This in turn, coupled with full collaborations between across the border. In reviewing the data, in 2003 there researchers in Mexico and the U.S., would greatly were more than 3,500 maquiladoras in Mexico, 90% of benefit the biotech industry in each of the two which were located along the U.S.-Mexico border. countries, as well as the region as a whole.

– 13 – enfoqueLatino NEWSLETTER

Common Misconceptions Surround Electronic Transactions with Consumers By Ethna Piazza, Sheppard Mullin

In the six years since the Federal Electronic Signatures in Global and National Commerce Act (E-Sign) took effect,1 online retail sales have flourished.2 Many non- retail businesses would like to “go fully electronic,” but, technology limitations, unfamiliarity with E-Sign’s requirements and fear that they may make a wrong choice in e-implementation may still be holding them back. E-Sign was designed to eliminate legal impediments to use of electronic signatures and electronic records in consumer transactions. Yet, several misconceptions exist at some companies about E-Sign’s requirements.

Consumer Disclosure and Consent. Two common misconceptions relate to the consumer disclosure requirements in E-Sign. E-Sign’s requirements for that reported this to the Department of Commerce electronic delivery of consumer protection disclosures (DOC) and the Federal Trade Commission (FTC) in 2001 have been lauded by consumer advocates as necessary when the agencies prepared their joint report to to protect consumers who “are not ready to use” Congress (mandated by § 105(b) of the E-Sign) electronic consumer disclosures. Some industry (“Report”), on the impact of the consumer consent representatives have criticized the requirements as provision of § 101(c)(1)(C)(ii). The FTC and DOC felt that problematic, burdensome, confusing, and a cause of the online disclosure procedures enhance consumer frustration to their valued customers or potential confidence and discourage deception and fraud “by customers because of the extra steps involved. those who might fail to provide consumers with Wachovia Corporation was one of several companies information the law requires that they receive.”3

1 Pub. L. No. 106-229, 114 Stat. 464 (2000) (codified at 15 U.S.C. § 7001 et seq.). 2 A 2006 Report of the U.S. Census Bureau notes that retail e-sales grew to $US71Billion in 2004, representing an annual increase of 25.2% over 2003, and marking an annual growth rate between 2000 and 2004 of 26.4%, 2006 Report of the United States Census Bureau on 2004 stats, e-stats, May 25, 2006, www.census.gov/estats. 3 Executive Summary, “Electronic Signatures In Global And National Commerce Act, The Consumer Consent Provision in Section 101(c)(1)(C)(ii),” Report of the Department of Commerce and Federal Trade Commission, June 2001, http://www.ftc.gov/os/2001/06/esign7.htm#N_1_.

– 14 – Several participants in the agencies’ information electronic delivery of the disclosure or other gathering effort said that it was just too soon after information required by the other consumer protection passage of E-Sign to determine whether the consumer law. The steps are as follows: consent provision works or whether it needs to be changed. The agencies agreed and recommended that Step 1: Provide a clear and conspicuous notice Congress not make any changes to the consumer informing the consumer of: consent provision. While in the several intervening years bank regulators have issued guidance on how to comply (1) Any right or option to receive the disclosure or with consumer consent provisions, many companies in information on paper. other industries are still wondering how to comply with (2) The consumer’s right to withdraw consent, and the consumer consent provisions of E-Sign. the procedures to follow in order to withdraw consent. Two common misconceptions surround the consumer (3) The conditions, consequences, and fees of notice and consent provisions of § 101(c) of E-Sign: When withdrawing such consent. are they required and how does a company comply? The (4) Whether the consent will apply only to the requirements for consumer disclosure and consent or particular transaction then giving rise to the electronic signature or retention requirements can consumer disclosure requirement, or whether it will sometimes confuse uneducated businesses and cause apply to identified categories of other records that them to shy away from electronic transactions, or cause may be made available during the course of the them to dive-in headfirst without fully contemplating the relationship. potential results or without putting required procedures (5) The procedures the consumer must use to update in place that they mistakenly think do not apply to them. the consumer’s electronic contact information. (6) How, after consent, the consumer can obtain a One misconception is that E-Sign requires a party to paper copy of the electronic record and whether a make online disclosures described in § 101(c) of E-Sign fee will be charged for the copy. and obtain a consumer’s consent to those disclosures (7) The hardware and software requirements to before the consumer can enter into any transaction access and retain the electronic records.5 using an electronic signature. § 101(c) requires certain online disclosures be provided and approved by the A company should be careful to not be too restrictive in consumer (1) if the electronic transaction (in interstate defining hardware requirements, while of course or foreign commerce) is of a type that another statute, remaining factually correct. For instance, E-Sign consumer regulation or law, separate and apart from E-Sign, disclosure requirements do not mandate that the requires a particular disclosure or other information consumer have access to a printer, but that the consumer about the transaction be provided to the consumer in have access to software or hardware needed to access or writing, and (2) if the company wants to deliver that retain an electronic record. Many technologies are now written disclosure or information electronically, in used to retain an electronic record other than printing a connection with the underlying transaction. An paper copy. A few examples are thumb drives, CDs, DVDs example would be if a bank wants to electronically and iPods. Mention of printing is not necessarily a bad deliver to a consumer any disclosures required by the idea. But a company should also mention other hardware Truth in Lending Act and its implementing regulations.4 and software that provide other alternatives.

Another misconception is that the § 101(c) E-Sign Step 2: The consumer must either consent electronically, disclosures can be combined in a single step with the or electronically confirm a previously delivered consent, delivery of the disclosures required by the other in a manner that reasonably demonstrates that the consumer protection law. E-Sign actually imposes consumer can access information in the electronic form additional layers of disclosure and consent before the that will be used to provide the information.6

4 15 U.S.C. 1601, et seq. 5 15 U.S.C. § 7001(c)(1)(B) 6 115 U.S.C. § 7001(c)(1)(C) – 15 – time, the company must provide the consumer with a statement (i) of the revised hardware or software requirements, and (ii) the right to withdraw consent enfoqueLatino without the imposition of any fees for such withdrawal NEWSLETTER and without the imposition of any condition or consequence that was not disclosed in the original e- disclosure given in Step 1. Because of the latter requirement, before a company implements e-disclosure procedures that will relate to future transactions, it Information can be delivered to a consumer via various must consider what will be the impact of future methods, such as a secure website, in the body of an technology developments and what consequences the email, or in an attachment to an email. What must be company anticipates it may want to impose upon demonstrated is the consumer’s ability to access the consumers that withdraw consent in the future. exact delivery method the company will use. Some best practices are developing in this area. For example, if Notably, § 101(c)(3) provides that failure to follow these the company plans to use a .pdf attachment to deliver procedures will not invalidate the underlying the other law’s consumer disclosure, the consumer must transaction under E-Sign. But, such action could expose demonstrate an ability to access .pdf documents. In the company to liability under other consumer law, for such a case, before the consumer “consents” as part of failing to deliver the required consumer disclosure or this Step 2, the company would send an email to the other information in writing, or that other consumer consumer with a .pdf attachment that contains law could provide that the underlying transaction is information necessary for the consumer to complete invalid, unenforceable or voidable due to failure to the “consent” process. Likewise, if the company plans provide the required disclosures in writing. to deliver the notice in the body of and HTML email, the company would as part of this Step 2 send an HTML Consumer advocates assert that these disclosure and email to the consumer that contains information consent requirements of E-Sign help ensure that necessary for the consumer to complete the “consent” “consumers know that they are consenting to receive process. After the consumer provides that information, future information electronically, and that those who demonstrating ability to access the information, then do consent receive it in a manner and form in which the consumer would be allowed to complete the they can use it,” as stated by The Consumer Union in its “consent” process. comments submitted to the FTC and DOC in connection with their Report. Step 3: The company would now provide the disclosure or other information required by a Recommendations Related to Consumer separate consumer protection law, in a manner that Disclosure and Consent. Any company seeking to the consumer reasonably demonstrated in Step 2 that form contracts with consumers electronically must first the consumer would be able to access in electronic determine whether any law or regulation imposes a form. requirement for providing any disclosures or other information “in writing” in connection with that Step 4: Complete the underlying transaction with the transaction. If there is such a requirement, then if the consumer. company must evaluate whether it can, and wants to, implement the E-Sign prerequisites to delivering the Step 5: If the e-disclosure in Step 1 states that the disclosure or other information electronically. It must consent will apply to future transactions with the also consider what if any consequences will apply if in consumer, then a subsequent notice will be required if the future a consumer withdraws consent to electronic changes in the hardware or software requirements disclosures as a result of changes in hardware or needed to access or retain electronic records creates a software requirements, whether due to technological material risk that the consumer will not be able to developments or the company’s migration to a different access or retain a subsequent electronic record. At that system.

– 16 – Adequacy of the Electronic Record. Some companies do not understand the impact of failing to keep a complete record of the electronic transaction once it has been completed. If the electronic record is not in a form that is capable of being retained and accurately reproduced for later reference, it may affect its enforceability. There are two separate issues to consider regarding the adequacy of the electronic record.

“Writing” Requirements. If a company seeks to use an electronic contract or electronic record to satisfy a legal requirement that the contract or record be in “writing,” § 101(e) of E-Sign provides that of § 101(d)(1) also will fulfill any requirement that a the legal effect, validity or enforceability of an contract or other record be retained in its original form, electronic contract or record may be denied if it is not and will bar consequences that would otherwise apply if in a form capable of being accurately reproduced for the contract or other record is not provided, available, later reference by all parties who are entitled to retain or retained in its original form. the contract or record. An example of such a law would be a statute of frauds that requires certain types The electronic retention requirements of § 101(d)(1) do of agreements to be in writing. not apply to any information whose sole purpose is to enable the contract or other record to be sent or Record Retention Requirements. If the company communicated, by operation of § 101(d)(2) of E-Sign. seeks to use an electronic record to fulfill a record retention requirement under other law, § 101(d)(1) of E- Recommendations Regarding Equivalency to Sign specifies that the electronic record will fulfill the “Writing” Requirements and Electronic Record retention requirement if the electronic record (i) Requirements. Any company seeking to use electronic accurately reflects the information set forth in the contracts or records to fulfill a requirement that the contract or other record, and (ii) remains accessible by contract or record be “in writing” has to ensure that it all parties who are entitled to access by statute, stores the electronic contract or record in a form that regulation or rule of law (for the time period specified) can later be accurately reproduced for later reference by in a form that is capable of being accurately reproduced all parties entitle to retain it. If the company does not for later reference, whether by transmission, printing or keep a complete record of the transaction, it may not otherwise. A company implementing electronic meet this requirement. Likewise, any company seeking retention will have to assess what parties are entitled to use an electronic record to fulfill a record retention under such laws to access the document, then analyze requirement must be sure it is accurate as to all whether the company can provide a method for such information set forth in the contract or record, and parties to access the electronic record. remains accessible by all parties entitled to access it. The access can be provided by transmission, printing or Some contracts must be retained in their original form, otherwise. and consequences may apply if the contract is not retained in its original form. Section 101(D)(3) specifies This article was previously published in the Intellectual that any electronic record that meets the requirements Property & Technology Law Journal in May 2007.

– 17 – evaluating existing IP portfolios to determine whether they can generate multiple revenue streams. Once a company realizes that it is sitting on a portfolio of enfoqueLatino valuable IP, whether these are patents, technologies or NEWSLETTER brands, that can be exploited outside of the company’s core businesses and existing initiatives, the choice to exploit is clear. Their rationale being: why waste an asset you own or have rights to, instead of extracting its full value - you owe it your shareholders to do just that. Just One Good Idea: Next we need to consider “what” can be done. Aside IP Licensing Strategies for from the use of IP for a company’s core business, the the 21st Century trend is to segment and slice the IP for maximum return. By Amar Thakur and Beni Surpin, The trick is that this analysis is company – and IP portfolio – specific. These sorts of initiatives may include: licensing Sheppard Mullin the IP to third parties for a parallel, non-competitive but restricted use (which can be then repeated with multiple “…One good idea. Just one good idea….” After uses to the extent the IP can be exploited in that way); repeated success stories, ranging from the likes of granting a limited license to a competitor outside the Google, YouTube, and even as far back as Qualcomm company’s geographic area; permitting the use of the IP and Microsoft, people often hear these words and in an area of research and development to allow for associate an innovative concept and its subsequent commercialization with a billion dollar windfall.

Companies are now applying their intellectual property portfolios with the same hope. Many are turning to their commercial and IP lawyers to extract just one more good idea. Only this time, they’re not talking about a new concept, but new ways of exploiting the company’s existing intellectual property to power efficient capital growth. As companies consider how to make the most of their existing IP assets, they go back to basics, asking “why,” “when,” “what,” and “how” to do so.

With regard to the “why” and “when,” the answer is self-evident. Companies now recognize that not only can their IP be exploited through their existing commercial channels, but also that their IP may become an independent source of commercial value outside of their core businesses. A pharmaceutical company in the life- sciences sector may realize that a blockbuster drug currently used to treat patients who suffered from a stroke may help alleviate the conditions of the Altzheimers disease. Or in the hi-tech arena, a computer networking company may realize its core patents may also apply to home network solutions providers. With the help of IP specialists, they are re-

– 18 – other uses and applications in a non-competing arena; develop the name further. This in turn may increase sales or simply licensing the IP to aftermarket service of the manufacturer’s handbags, while allowing the providers who may be catering for such things as handbag manufacturer to collect royalties from clothing service, maintenance or parts. The pharmaceutical sales. When the contrary is true, the IP strategy must company providing a drug for stroke sufferers may accommodate for the choices made in the final analysis. decide to joint venture with, or license its drug After all, a luxury watchmaker that decides to license its technology to, a life-sciences player in the Altzheimers name and trademark to a clothing line might reduce the field, to develop the drug for that specific application. exclusivity associated with the watches, rendering this The computer networking company may issue a patent type of collaboration detrimental. This understanding is license to the home networking solutions provider key in assessing which of the company’s pool of limiting it to a scope of use for that application only. technology and IP assets could offer additional value. Other initiatives are geared toward companies retaining greater involvement and making their own “How” can be implemented in different ways. Some efforts to implement their IP outside of core businesses companies with deep enough pockets may choose to by granting licenses to new ventures, collaborations, or go it alone. Large pharmaceutical companies often specially created corporate vehicles (that may later be test their existing drug technology with other spun-off). indications and for varying applications. Others may look for additional distribution channels and Before such measures are taken, there is partnering opportunities reflecting their competitors’ considerable background to do from business and growth and expansion strategies. An exclusive legal perspectives. Otherwise such initiatives are wireless phone services provider may see substantial doomed to failure. Nobody plans to fail, but it is benefits in partnering with a premium retail chain to lack of planning that leads to most failures. Thus, benefit from the latter’s existing distribution channels. prior to strategizing what non-competing applications As these options are weighed, it may become clear can be exploited, there needs to be a thorough that a key path to growth and additional exploitation understanding of the core business and IP of all those of existing IP is through the creation of business involved, both within and outside the company. In partnerships. The aim for each side is to have certain some instances, the addition of a third party licensee common bases in their objectives, strategies, risks and can accentuate your client’s core business because the rewards, yet with a fundamental understanding that third party licensee will further popularize its IP. A for the joint venture, strategic alliance or collaboration handbag manufacturer may see substantial financial to thrive, the parties must share a common set of benefit in licensing its name to an apparel company to essential success factors.

– 19 – Leverages, and therefore related negotiations, between two equals differ dramatically from scenarios where a deal is being struck between a large corporation and a enfoqueLatino small start-up. Close participation by different parties’ NEWSLETTER respective attorneys is fundamental in protecting complex rights, which vary substantially in each case. Indeed, an IP specialist who is used to facing this world of opposites often plays a critical role in maintaining common strategic objectives and motivating both sides The are many reasons for collaboration, including a to resolve difficult issues. need for infusion of different types of intellectual property or distribution rights or a shift in cost of The upside of exploiting an IP asset beyond its present development burdens. They may also involve creative use can be substantial. The strategic benefits become collaborations from different levels within the chain of more evident as each success story unfolds, whether it is manufacturing and distribution. Leading companies in for a company going it alone or a company choosing to a field may join forces for a common cause that may collaborate with another. The players develop new prove to be beneficial to all. Such common causes may markets, products and technologies, and share include “patent pools” or technology standards, such complementary methods in new ways. All these in turn as MPEG (Moving Pictures Experts Group), an ISO/ITU bring added benefits: new means and incentives to standard used for coding audio-visual information in a develop production and distribution facilities, new digital compressed format, or Bluetooth, a wireless abilities to acquire capital and funding, and new access personal area network technology for short-range to additional distribution channels, networks, and sales transmission of digital voice and data, founded by and marketing capabilities. We only need to look at large players in the field such as Ericsson, IBM, Intel, IBM’s IP licensing model, reputed to generate in excess of Nokia and Toshiba. The types of collaboration a billion dollars annually from licenses alone, to reach arrangements are numerous, ranging from co- the pragmatic conclusion that most of a company’s developments, joint distribution and/or revenues generated from IP licensing goes almost in its commercialization to cross-licenses and sub-licenses of entirety to the company’s bottom-line. different technologies. The ultimate goal is clear: to make sure that in the end, the sum of the whole That brings us back to one more good idea. Yes, just one exceeds its individual components. more good idea. Doing it right though, is fundamental to the success! An important consideration is each player’s relative size and position within their respective industries. The This article was previously published in a supplement to relative size or position of each party tends to dictate the Los Angeles and San Francisco Daily Journal on the party’s negotiation leverage during discussions. April 5, 2007

The material included in this newsletter cannot be considered as legal advice or opinion, since its content may not apply to the specific facts or conditions of a particular case, and has been prepared for information purposes only.

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