I appreciate that. I won`t have to speed read.
Good morning, Mr. Chair, and esteemed members of this important committee.
My company is honoured that its views are being solicited on this important topic of IP in Canada. I am personally honoured to be appearing before you. Thank you for the opportunity.
My name is Diane Lank and I serve as general counsel for Desire2Learn Incorporated, based in Kitchener-Waterloo.
Our company is a remarkable success story, not only by Kitchener-Waterloo standards but by any measurable standard. Our success, however, has not been without its bumps. We were founded by John Baker in 1999, when he was a student in systems design engineering at the University of Waterloo. He incorporated the fledgling company a year later and John continues to serve as our president and CEO.
Our company provides e-learning. Today we help over eight million people in their learning endeavours. It is our goal to break down barriers and to engage, inspire, and enable people worldwide to achieve their potential.
We count among our first clients the University of Guelph, and the University of Wisconsin, both of which remain clients to this day. Now, however, we touch more than higher education. Our clients include various K-12 districts, corporations, and associations. We're still based in Kitchener-Waterloo—in fact, across the street from our original office--but we now have subsidiaries in the United States, the United Kingdom, Australia, Singapore, and the newest member of our Desire2Learn family, D2L Brazil.
I joined the company in 2005, when we had about 50 employees. At that point, John and I agreed that I'd start part-time to see how it would go. Within a month I was more than full-time. Then the fun began.
A few months after I started, we got news that our major and much larger competitor, Washington, D.C. based Blackboard Inc., had sued us for patent infringement in the U.S. District Court for the Eastern District of Texas. The news arrived on a Wednesday afternoon before our users' conference, slated to begin the following weekend in Guelph. Because our clients were largely academic institutions that valued transparency, we immediately decided to be as transparent as possible. We advised our staff on Friday and announced to our users at the beginning of the conference on Sunday that we had been sued.
Initial estimates, which later proved to be significantly underestimated, suggested that during the next two years we would be incurring legal fees of about $2 million in U.S. funds—and that was well before parity—to fight the suit. The underestimate did not include the significant non-legal costs associated with U.S. litigation: costs of video recording and transcribing dozens of depositions, oral examinations, in Canadian parlance, producing literally millions of pages of documents, having those documents reviewed so that we knew what we were providing to our main competitor.
Then there's the review of the millions of pages that Blackboard produced: motions, experts on damages and technology; travel to hearings, depositions, and meetings; legal fees and costs associated with the re-examination that we filed with the United States Patent and Trademark Office. The list goes on and on. The out-of-pocket and legal fees and related expenses don't begin to address the distraction of litigation within the company, or the dampening effect on our sales.
In February 2008, after millions of dollars had been spent, and a two-week trial in lovely Lufkin, Texas, we lost. The Lufkin jury determined that the Blackboard patents were valid and that we had infringed them. We were subject nearly immediately to an injunction preventing us from selling the version our software had been found to have been infringing.
I'll never forget the trip back from Texas after the loss. Desire2Learn's major brains trust was on the plane. As soon as the seat belt sign was turned off, John and the other leadership of the company began aisle discussions on workarounds to make sure we could quickly release a product that we believed would not infringe. By the time we landed, they had a plan. Within 30 days we had a new product that we believed avoided the patent. Remarkably, all of our U.S. clients agreed to be upgraded in the short three-month timeframe the court permitted. And, throughout the litigation, we lost not a single client.
In July 2009, nearly three years to the day after the litigation began, the court adopted our view at the U.S. Federal Court. It was a complete victory.
In the meantime, our competitor had filed additional actions against us: one in Texas, over a new patent that was issued; one in the United States International Trade Commission—which is a very interesting topic for another day—a quasi-judicial body in the U.S.; and one in the Canadian Federal Court, over a patent that the Canadian Intellectual Property Office had granted. As a result of the new suits, the overwhelming U.S. appellate win, and the undeniably smeared reputation that Blackboard had received in the marketplace, all of the litigation was favourably settled in December 2009.
Since that time, Desire2Learn has grown exponentially. Today we boast nearly 600 employees worldwide, with approximately 90% of our staff located here in Canada.
What could Canada have done to help us avoid the issues? As a practical matter, probably very little. If a competitor wants you out of business, suing you, especially in a U.S. court, is a pretty good bet.
Addressing the Canadian IP regime in a vacuum serves no useful purpose. We must accept the realities and be prepared to play under the U.S. rules. Few Canadian companies have the luxury of being exclusively Canadian. Upwards of 70% to 80% of our business is U.S.-based; even though we're expanding globally, the U.S. is still our largest market.
We've now adopted the if-you-can't-beat-them-join-them mentality; we're filing for patents. Although we use Canadian patent counsel, all of our applications are initially filed in the U.S. While we do seek Canadian protection for both trademarks and patents, protection solely in Canada would not be helpful, either offensively or defensively.
As a government initiative, it might be worthwhile to invest in educating start-ups about the importance of protecting their IP and providing some guidance about how to prepare to defend themselves if challenged. These educational initiatives may take the form of classes about IP in engineering or through organizations such as our local Communitech or, perhaps, even through a really good e-learning company I know about.
You may also wish to look at Canadian patent fees. In some areas they're quite costly. For example, Canadian patent fee maintenance may be prohibitive to new companies. The maintenance fee regime differs from the U.S, where maintenance fees do not begin until a patent is issued. Assistance in funding patent applications may also be useful. In our experience, it costs between $8,000 and $12,000, excluding filing fees and significant internal costs, to file a utility patent on either side of the border.
Educational institutions can also be of some help. Institutions of higher learning can and should, under appropriate NDAs, reach out to companies where they believe the educationally created technology might come into the best use. We're going through that right now with a U.S.-based client who sought us out.
I know this is a heady challenge, but we encourage Canada to seek more cross-border cooperation with the U.S. patent system, both the U.S. Patent and Trademark Office and the judicial system. Less than one month after we lost our jury trial in Texas, the patent office in the United States found the patent at issue to be invalid as a result of the re-examination we had requested more than two years earlier. The court refused to suspend the litigation while the PTO was engaging in its re-exam, but had the litigation been suspended during the re-exam, we would have saved millions of dollars in fees and costs. If somehow the U.S. judicial system were encouraged to work with the Patent and Trademark Office, rather than at odds with it, it would make for a more efficient system.
We'd also like the U.S. system to be more cognizant of damages that should be actually awarded in patent cases. Although the patent over which we were sued had very little relation to our overall product, the initial request by Blackboard was for a licensing fee of 45% of all of our revenue.
There must be some relationship between the value of the patented technology and the product as a whole. At some point, it would perhaps be very useful to have a discussion, especially with the United States, about the wisdom of offering patent protection for software. We believe it would be a sounder approach with copyright, like a book. Why should software or business methods be patentable? In some jurisdictions, particularly the European Union, they are not. In reality, the patent regime, at least in the U.S.A., is more related to business wars than to IP protection. In our case, our competitor simply wanted to buy us. They had tried numerous times before. We refused, and they sued.
Finally, all but the largest players are naive and ignorant about lawsuits, unless, like us, the company has had the misfortune of experiencing one. At the end of the day, Canada can't really influence litigation trends, good or bad. Education can help, but just to be aware of the risks. Canada can arm our businesses to be aware of the situation and try to mitigate risks where possible and feasible. In a perfect world, the U.S.A. would understand that qualified judges would be better prepared to hear patent cases, as is the procedure in Canada, but Canada is not going to disturb the U.S. jury system. Maybe Canada could play a role it has so successfully played in other areas: the lead in bringing various parties to the table to consider seriously the issues of intellectual property, what should be entitled to protection, and how.
I come with more questions than answers, and perhaps a good story, but more challenges than solutions, and few firm recommendations. The IP regime in Canada, if properly approached, may help others avoid our situation. Given our history, one is left to wonder what would have happened to our company had it not faced three and a half years of brutal, exceedingly costly, and time-draining litigation.
Thank you for your attention.