Heavily Taxing Billionaires to Promote Innovation

An important issue confronting the world concerns the high concentration of wealth and redistribution of that wealth through the tax system. Part of the problem is what to do with the wealth gained from additional taxation of billionaires (and what is a politically defensible use of that additional revenue). Democratic presidential candidates are starting to create a "dream list" of things to do with billionaires' money.  Well, why not use that money to invest in research and development which may lead to more jobs, innovation (even life saving innovation), and additional tax revenue.  

Professor Michael Simkovic from University of Southern California Gould School of Law takes on general claims that taxing billionaires may lead to less innovation in a short five page article titled, “Taxes, Spending and Innovation.”  Professor Simkovic points to studies concerning patents and Nobel Prize winners.  Professor Simkovic states:

Public policy can be used to promote innovation by raising taxes and extensively funding high quality science, math, and engineering education, or by encouraging immigration of people with those skills.

There has been a general decline in the amount of federal funding in terms of real dollars for some time for the National Institutes of Health.  Well, billionaires give to universities and other charities, right?  We don't need to heavily tax them as they choose to give their wealth to charitable organizations that innovate.  Professor Simkovic notes that voluntary gifts to charity, including to universities, is relatively small at “2% of GDP”—for gifts from all donors.  He concludes we should look to peer-reviewed empirical work to test claims and that, “Claims that we can drive more innovation and growth through a higher concentration of resources in the hands of a small number of billionaires—while providing fewer resources to middle and upper middle--‐class knowledge workers—are not empirically supported.”  [Hat Tip to Professor Paul Caron’s Tax Prof Blog]. 

Noncompetition Agreements as Tax Evasion?

Professor Rebecca Morrow at Wake Forest University Law School has authored an interesting article, titled "Noncompetition Agreements as Tax Evasion," concerning the ubiquity of noncompetition agreements and potentially attacking those agreements through treatment of them as tax evasion.  Here is the abstract:

Al Capone famously boasted of his criminal empire: “Some call it bootlegging. Some call it racketeering. I call it a business.” Treasury Agent Frank Wilson and Prosecutor George Johnson put Capone behind bars not by disputing his characterization and pursuing murder or assault or RICO charges, but by accepting it and enforcing its tax implications. Irrespective of their legality, Capone’s businesses were profitable, and Capone had not reported their profits for tax purposes. A simple application of bedrock tax law achieved what other legal routes failed to achieve and sent Capone to Alcatraz. The trick was to see the tax argument.

Policymakers should use a similar approach to curtail the excessive, exploitative, and anticompetitive use of employment noncompete agreements. Currently, nearly one in five (or thirty million) American workers is bound by an employment noncompete. Employers claim that they adequately compensate employees for noncompete restrictions with higher wages, bigger raises, and/or more generous bonuses. Policymakers scoff at this claim and use contract law to attack them. Unfortunately, employment noncompetes are like Al Capone in that they have flourished despite the law’s efforts to restrain them. Recently, the largest study of noncompetes in U.S. history paradoxically found that their prevalence is unaffected by their enforceability. In states like California that refuse to enforce employment noncompetes, they are as common as in states that uphold them. Contract law has proved ill-equipped to respond to the pervasive, expanding, and damaging use of noncompetes.

This Article is the first to shift the focus and to argue that employment noncompetes, as employers currently use them, constitute tax evasion and should be attacked as such. If employers pay employees for noncompetes through compensation, then by employers’ own account, this compensation is not purely an expense associated with immediate benefits; rather, it is an expenditure associated with future benefits — benefits that the employer will enjoy years after payment. Thus, the IRS should stop allowing employers to fully immediately deduct the compensation they pay to employees subject to noncompetes and instead should require that an adequate portion of total compensation be allocated to the noncompete and amortized over the restricted period, beginning when employment ends.

The article is available, here.  [Hat tip to Professor Paul Caron's TaxProf Blog.]

Mayer Brown Cybersecurity and Data Privacy Report

The law firm of Mayer Brown has published its 2019 Outlook: Cybersecurity and Data Privacy Report.  The 20 page Report warns that cybersecurity breaches are likely to increase in 2019.  Helpfully, the Report provides an overview of numerous new and potentially forthcoming regulatory changes in the United States and other countries.  For example, the Report covers U.S. Department of Transportation and Federal Drug Administration regulation.  The Report also raises the National Association of Insurance Commissioners model data security law that was adopted by the state of South Carolina, Ohio and Michigan.  The Report also covers some potential differences in law across countries such as maintaining privilege and preserving documents in anticipation of litigation.  On trade secrets, the Report notes:

Trade Secret Theft. Companies should expect the current Administration to remain focused on the threat to American economic prosperity and national security posed by economic espionage in 2019. In 2015, China and the United States publicly committed to not engage in the cyber-enabled theft of intellectual property for commercial gain. Recent statements from senior administration officials and high-profile indictments brought by the Department of Justice indicate the view of some leading government officials that China has failed to adhere to that commitment. For example, the Department of Justice indicted two Chinese nationals associated with the Chinese Ministry of State Security of numerous hacking offensives associated with a global campaign to steal sensitive business information. Congress is also likely to consider legislative responses to trade secret theft and economic espionage. These actions suggest that 2019 is likely to see further disputes with China over cyber theft of trade secrets. Companies—especially those in industries that have previously been targeted by espionage campaigns— are likely to benefit from tracking developments in this space.

President Trump noted that he is continuing to push China on cybersecurity issues concerning trade secret theft in his recent State of the Union address:

We are now making it clear to China that after years of targeting our industries, and stealing our intellectual property, the theft of American jobs and wealth has come to an end.

Therefore, we recently imposed tariffs on $250 billion of Chinese goods -- and now our Treasury is receiving billions of dollars a month from a country that never gave us a dime. But I don't blame China for taking advantage of us -- I blame our leaders and representatives for allowing this travesty to happen. I have great respect for President Xi, and we are now working on a new trade deal with China. But it must include real, structural change to end unfair trade practices, reduce our chronic trade deficit, and protect American jobs.

Mayer Brown has also issued a discussion of the European Union Agency for Network and Information Security ("ENISA") 2018 Threat Landscape Report. 

U.S. State Wants to Adopt "Netflix" Model for Paying for Pharmaceuticals

The state of Louisiana is attempting to adopt the Netflix model of paying for pharmaceuticals as a way to tackle the high cost of pharmaceuticals and public health issues.  The Netflix model was proposed in a recent article.  Basically, the state pays a set price for an unlimited number of drugs for its citizens.  This has the benefit of providing certainty as to price as well as opens up access to the drugs to more people than previously treated.  The Washington Post discusses Louisiana and the Netflix model, here.  The abstract of the article titled, Alternative State-Level Financing for Hepatitis C Treatment—The “Netflix Model”, authored by Mark R. Trusheim, MS; William M. Cassidy, MD; Peter B. Bach, MD is in the November issue of the Journal of the American Medical Association states:

Drug prices in the United States remain the highest in the world. New payment approaches are needed, a point illustrated by the new treatments for hepatitis C virus (HCV) infection that are highly effective but also very expensive, at least from the view of many payers, physicians, and patients. Five years after the introduction of these drugs, and due in many cases to budgetary constraints of state Medicaid programs and prisons, only 15% of the estimated population of more than 3 million individuals with HCV infection in the United States have been treated. Yet the optimal way to treat HCV is at the population level, that is, by treating every patient possible, with as much speed as is possible. Doing so would reduce the health consequences for those infected, generate the most future savings from improved health, and help decrease future transmission of HCV from person to person.

The Median Salaries of Bay Area Technology Companies

Have you ever wondered what are the median salaries at Silicon Valley/Bay Area technology companies?  It must be very high given the astronomical cost of living there, right?  The Silicon Valley Business Journal has collected the median salaries of the following companies:

Advanced Micro Devices, Inc.; Apple Inc. Arista Networks, Inc.; Autodesk, Inc.; BioMarin Pharmaceutical Inc.; Bio-Rad Laboratories, Inc.; Cadence Design Systems, Inc.; Cisco Systems, Inc.; Citrix Systems, Inc.; Dell Technologies; Dolby Laboratories Inc.; eBay Inc.; Equinix, Inc.; Electronic Arts Inc.; Facebook, Inc.; FireEye, Inc.; Fortinet, Inc.; GoPro, Inc.; Guidewire Software, Inc.; Illumina, Inc.; Intel Corporation; Intuit Inc.; Intuitive Surgical, Inc.; Marvell Technology Group Ltd.; Micron Technology, Inc.; Microsoft Corporation; Nektar Therapeutics; NetApp, Inc.; Netgear, Inc.; Nvidia Corporation; Oracle Corporation; Palo Alto Networks, Inc.; PayPal Holdings, Inc.; Raytheon Co.; Salesforce.com; ServiceNow, Inc.; Square, Inc.; Splunk, Inc; Symantec Corporation; Tesla Inc.; Twitter, Inc.; Varian Medical Systems, Inc.; Veeva Systems Inc.; Visa, Inc.; VMware, Inc.; Xilinx, Inc.; Yelp Inc.; Zynga Inc.

Here is a link.  Enjoy! 

Patent Eligible Subject Matter: Bait and Switch Works Well?

The United States Patent and Trademark Office (USPTO) has released guidelines on patent eligible subject matter as well as section 112 issues concerning computer implemented inventions.  Once again, some believe there’s arguably a shift on the treatment of patent eligible subject matter at the USPTO.  It’s hard to imagine that patents may draw investment if there is a lack of certainty and stability with respect to patent rights.  On the other hand, the biotechnology industry arguably developed around many patents that were eventually invalidated—it doesn’t get much more uncertain than arguably changing the rules of the game later.  Does that mean we should look toward broader subject matter or narrow subject matter—both of which could be more certain and stable?  On the broad side, I suppose we can always dump patents later—the U.S. Supreme Court has nicely rejected reliance arguments.  If we experience problems with patents and innovation in the future, then we invalidate the patents.  As long as the capital is drawn forth for productive use based in part from the original patents, then from society’s perspective maybe all is good and the problem is avoided—as long as the industry develops and some investors receive some return (at least enough to keep playing).  Who knows what is lost from broad subject matter--particularly with new, developing technology.  Here is an excerpt from the press release:  

“These guidance documents aim to improve the clarity, consistency, and predictability of actions across the USPTO,” said Under Secretary of Commerce for Intellectual Property and Director of the USPTO Andrei Iancu. “The USPTO will provide training to examiners and administrative patent judges on both documents to ensure that guidance is being properly administered.”

The “2019 Revised Patent Subject Matter Eligibility Guidance” makes two primary changes to how patent examiners apply the first step of the U.S. Supreme Court’s Alice/Mayo test, which determines whether a claim is “directed to” a judicial exception.

• First, in accordance with judicial precedent and in an effort to improve certainty and reliability, the revised guidance extracts and synthesizes key concepts identified by the courts as abstract ideas to explain that the abstract idea exception includes certain groupings of subject matter: mathematical concepts, certain methods of organizing human activity, and mental processes.
   
• Second, the revised guidance includes a two-prong inquiry for whether a claim is “directed to” a judicial exception. In the first prong, examiners will evaluate whether the claim recites a judicial exception and if so, proceed to the second prong. In the second prong, examiners evaluate whether the claim recites additional elements that integrate the identified judicial exception into a practical application. If a claim both recites a judicial exception and fails to integrate that exception into a practical application, then the claim is “directed to” a judicial exception. In such a case, further analysis pursuant to the second step of the Alice/Mayo test is required.

The “Examining Computer-Implemented Functional Claim Limitations for Compliance with 35 U.S.C. § 112” guidance emphasizes various issues with regard to § 112 analysis, specifically as it relates to computer-implemented inventions. The guidance describes proper application of means-plus-function principles under § 112(f), definiteness under § 112(b), and written description and enablement under § 112(a).

These guidance documents have been issued concurrently to ensure consistent, predictable, and correct application of these principles across the agency. 

The USPTO is seeking public comments on the new guidance. 

Banking Issues for the Marijuana Industry in California: Unlikely to be Solved Any Time Soon

The state legalization of marijuana in many states, including California, has spurred the development of a relatively new multi-billion dollar business sector.  One of the issues arguably holding back the speed of development of the market is the illegality of marijuana sale, distribution and possession at the federal level.  And, one of the problems arising from that illegality is the lack of the availability of banking services for many marijuana businesses.  Because many banks will not deal with marijuana businesses, it remains a mostly cash business.  Former California Treasurer John Chiang created a working group to analyze and propose potential solutions to the banking issue and also commissioned an external expert report.  The expert report was recently released and basically recommends that California not adopt a state-backed bank for marijuana businesses.  The risk of either federal prosecution or the federal government making marijuana sale, distribution and possession (including aiding and abetting) legal and regulatory issues, in part, makes it unlikely to be successful and financially feasible.  The expert report states:

For each of the three options the state can expect to spend $35 million on start-up costs incurred over a six year start-up period.  There is a high probability that federal regulators will not issue a master account to the bank, which is necessary for the bank to open and conduct basic banking functions such as wiring funds. In that eventuality any start-up funds expended to that point and during the subsequent wind-down would be wasted. If approved to open, the bank will then require just under $1 billion in capital, will lose money for 12 years before the bank is able to pay dividends sufficient to fully provide a return on the invested capital and begin repaying that capital, and the state of California will not begin receiving net dividends until 25 to 30 years after the bank opens, or sometime between 2050 and 2055.  If federal regulations change during this time and cannabis banking becomes legal, the bank would most likely be closed at that point due to a decreased business demand for the bank and thereby incur a significant loss. If federal regulators begin to aggressively enforce federal laws the bank would be closed and deposits subject to confiscation. Under this scenario the losses would be substantial and liabilities impossible to determine. Even if federal regulators maintain the current ambiguous situation, commercial banks will offer competing services to the industry by the time a public bank could open. Our conclusion is that no option for a public bank focused on the cannabis industry is feasible.

Other solutions examined include a public credit union, the state purchase of an existing private bank, and various FinTech (financial technology) solutions that attempt to solve the problem using payment technology such as cryptocurrency. Each of these options is ultimately dependent on access to national banking and payment processing networks, so each encounters the same difficulties overcoming the federal laws that are holding back access to banking now. We conclude that none of these alternate solutions is feasible. 

The expert report does propose that a state agency take up continued work on a strategy to address the issues related to marijuana banking.  BNA has a nice overview of problems with IP and marijuana business in the United States, here.  
Happy New Year!