Tuesday, 12 December 2017
You are invited to join OxFirst for a webinar today at 3pm - 4pm GMT for talk on IP Valuation in Early Stage Investments presented by John E. Dubiansky:
What this talk is about
The adequate valuation of patents plays a crucial element in vital markets for technology, while at the same time allowing investors to make an educated investment decision. In spite of that, investors lack adequate knowledge on how to value patents. The major challenge does not seem to be that patents cannot be valued for financial purposes, but rather that investors are quite ignorant about patents and are not well informed on their risk and reward structures. Against this background, this talk helps shed light on IP valuation and demystify a concept crucial to building markets for intellectual property.
About the Speaker
John is an attorney advisor in the Federal Trade Commission’s Office of Policy Planning. His work focuses on the intersection of intellectual property and competition law and on issues such as patent assertion entities and standard essential patents. Prior to joining the Commission, John practiced as a patent litigator at law firms in the Washington D.C. area including Howrey LLP and Kirkland & Ellis LLP. John holds a degree in mechanical engineering from Cornell University and received his J.D. from the Harvard Law School.
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You are requested to please sign up with your professional email account as they don’t accept registrations from personal email addresses.
Tuesday, 5 December 2017
The new US Department of Justice antitrust leader says antitrust enforcers are too accommodating to IP implementers when in dispute with standard-essential patent owners. Instead, patent owners should be allowed to decide how they want to exercise their property rights: “under the antitrust laws, a unilateral refusal to license a valid patent should be per se legal” – he also reminds us “the right to exclude is one of the most fundamental bargaining rights the patent owner possesses.”
New European Commission guidelines on SEP licensing respect patent owners’ rights to benefit from “fair and adequate return” from “value added of patented technology” contributions and “rewards are needed to continue to invest in R&D and standardisation activities.” Standardised technology “should be available to any potential user of the standard” and “with smooth and wide dissemination of standardised technologies,” but the guidelines do not oblige SEP owners to license to anyone who asks for a license.
In a major reversal to the stance of Renate Hesse, the former head of the DoJ’s Antitrust Division, her successor Assistant Attorney General for Antitrust Makan Delrahim really hit the nail on the head in his speech at the USC Gould School of Law's Center for Transnational Law and Business Conference in Los Angeles on 10th November 2017 by warning that:
“enforcers have strayed too far in the direction of accommodating the concerns of technology implementers who participate in standard setting bodies, and perhaps risk undermining incentives for IP creators, who are entitled to an appropriate reward for developing break-through technologies.”
He explained that:
“[t]oo often lost in the debate over the hold-up problem is recognition of a more serious risk: the hold-out problem. Standard setting typically occurs against the backdrop of negotiations between innovators, who develop technologies through private investment and own IP rights, and implementers, who hope to market and use the technology through a license and pay the IP holder a royalty. The hold-out problem arises when implementers threaten to under-invest in the implementation of a standard, or threaten not to take a license at all, until their royalty demands are met.”
Delrahim went on to opine:
“I view the collective hold-out problem as a more serious impediment to innovation. Here is why: most importantly, the hold-up and hold-out problems are not symmetric. What do I mean by that? It is important to recognize that innovators make an investment before they know whether that investment will ever pay off. If the implementers hold out, the innovator has no recourse, even if the innovation is successful. In contrast, the implementer has some buffer against the risk of hold-up because at least some of its investments occur after royalty rates for new technology could have been determined. Because this asymmetry exists, under-investment by the innovator should be of greater concern than under-investment by the implementer.”
In conclusion, he said:
“Every incremental shift in bargaining leverage toward implementers of new technologies acting in concert can undermine incentives to innovate. I therefore view policy proposals with a one-sided focus on the hold-up issue with great skepticism because they can pose a serious threat to the innovative process.”
I agree, as I have argued repeatedly. For example, in my August 2016 IP Finance posting entitled "Patent holdup" allegations encourage SEP free-riders, I wrote:
“Whereas alleged “patent holdup” supposedly results in excessive royalties, “patent holdout” is undermining licensors attempts even to achieve FRAND terms or to complete any licensing at all in many cases. Licensors are therefore losing their ability to make a fair return on their investments in SEP technologies. This discourages ongoing investments in standard-essential technologies, participation in SDOs and contribution to the standards.
Free-riders who are not paying for the IP they use are gaining an unfair advantage over other implementers who are paying FRAND royalties as well as stealing property rights from technology developers. There is significant evidence of some infringers flourishing while avoiding paying patent licensing fees on their manufactures and product sales for many years. They can, for example, typically challenge FRAND offers in lengthy litigation before paying any royalties. In some jurisdictions, even the royalties ultimately awarded can be derisorily low. In particular, various Asian OEMs accounting for a substantial proportion of global smartphone sales remain significantly unlicensed for at least some of the many SEPs they implement in the devices they manufacture or sell.”
European Commission also seeks fairer balance in its approach to SEPs
The EC has been pondering SEP licensing policy issues for at least a few years, including an extensive consultation process with workshop discussions. I pitched in a couple of times, myself, here and here. On November 29, 2017, the European Commission issued a Communication to the European Parliament “Setting out the EU approach to Standard Essential Patents.” Thankfully this strikes a rather better balance, as all the above indicates is required, than some proposals that more resemble the one-sided “clarifications” endorsed by the DoJ’s business review of IEEE’s 2015 patent policy “update,” as discussed below. The guidelines in the EC Communication significantly represent EU policy but they are non-binding.
The EC Communication addresses four areas: transparency on SEP exposure; principles for FRAND licensing terms for SEPs; enforcement of SEP rights (e.g. including injunctions); and open source.
Significantly, with respect to FRAND licensing, the EC is not seeking to prescribe how or where in the value chain SEPs should or can be licensed. In other words, licensors will not be obliged to license at the chip level, whether that might be regarded as a “smallest salable patent-practising unit” or not. The requirement is that standardised technology “should be available to any potential user of the standard” and that there is “smooth and wide dissemination of standardised technologies,” not that any implementer can insist on being licensed.
The guidance that allows “fair and adequate return” from “value added of patented technology” contributions is also consistent with standards developing organisation patent policies such as ETSI’s. It therefore recognises the need for SEP holders to be incentivised to continue to invest in R&D and their standardisation efforts.
Unsurprisingly, the Communication significantly relies on Huawei vs. ZTE jurisprudence, notably with respect to the fundamental importance of availability for injunctive relief. The Communication also recognises the problem of patent holdout. For example:
“With respect to the security to be provided by the SEP user as protection against an injunction, the amount should be fixed at a level that discourages patent hold-out strategies. Similar considerations could apply when assessing the magnitude of damages.”
Of course, there is an important distinction between the EC as a policy-maker versus the DoJ as an antitrust enforcement agency saying antitrust agencies should back off from imposing or guiding SDO policy. The EC guidance correctly notes that the Communication “does not bind the Commission as regards the application of EU rules on competition.” Such rules are relevant and their application is fact-specific. The Communication clearly establishes that European policy should strive to create fair balance between different interests (and with industry-led solutions), rather than prescribing action and imposing SEP policy through EU antitrust enforcement.
Policy guidance passé
In marked contrast to all the above, by 2012, the previous head of the DoJ’s Antitrust Division publicly beckoned SDOs to weaken patent owners’ rights with her disregard for considerations of patent holdout. In a 2012 speech entitled Six “Small” Proposals for SSOs Before Lunch she suggested that SDOs include terms in patent policies that make injunctions harder to obtain, restrict cross-licensing and “explore setting guidelines for what constitutes a F/RAND rate.” She also encouraged SDOs to overcome any concerns they might have about antitrust actions against their revised patent policies by “seek[ing] ex ante review through [DoJ’s] business review procedures.” This was presumably to reassure any SDOs that might adopt her proposals would not find adverse antitrust actions being formulated against them subsequently.
A couple of years later, IEEE-SA (responsible for the 802.11 WiFi standard among many others) changed its patent policy in line with some of these proposals; which was duly blessed by DoJ with a Business Review Letter.
The new patent policy, ratified in 2015, was touted as “clarification” and an ”update,” but it actually sets out various wholly new terms that are restrictive and harmful to patent owners. In the face of significant resistance by IEEE members who were technology contributors, and via a highly controversial and secretive process, the new patent policy significantly restricted flexibility in the RAND commitment with the following conditions, the first three of which significantly correspond with the three among Hesse’s six proposals I identify above:
- SEP holders must waive their rights to seek any injunctions until they have successfullylitigated claims against unlicensed implementers to conclusion in a court of appeals;
- Reciprocal cross-licensing cannot be required, except for patents reading on the same standard;
- Royalty charges “should” be calculated based on the “smallest saleable” implementation of any portion of the standard and comport with a reasonable aggregate royalty burden of the relevant standard; and
- Only licenses for which SEP holders have relinquished the right to seek, enforce, or even threaten, an injunction can qualify as “comparable licenses” for determining RAND royalties.
The policy “update” also obliged patent holders to be bound by the IEEE RAND commitment to license their patent to any “Compliant Implementation,” meaning that a patent holder making such a commitment cannot opt to license its patents for using the IEEE standards at only certain levels of production.
As indicated by the title of my September 2017 report on the effects of IEEE’s new patent policy, [d]evelopment of innovative new standards [is] jeopardised by [the] IEEE patent policy. Instead of creating greater clarity or transparency of licensing terms (as ‘predicted’ in the IEEE BRL), the patent policy change has actually caused confusion and uncertainty to implementers about licensing terms because nearly half of the major contributors to IEEE standards have been unwilling to pledge their IP under this new and one-sided IEEE patent policy that guts technology value. Up to nearly three quarters of ‘Letters of Assurance’ (LOA) submitted to IEEE by all companies contributing essential technology (i.e. for the 802.11 WiFi standard), are now negative LOAs, which means that the patents identified on those forms are not subject to RAND terms as defined under any patent policy. The unhappy experience of IEEE patent policy change cautions antitrust agencies to be wary of getting involved in IP policies.
Despite the DoJ being an antitrust agency, endorsing the collusive agreement among predominantly licensees to prescribe how and where SEPs are licensed always appeared to me like approving price fixing by a buyers’ cartel. This blow to patent owners’ pricing is exacerbated by the previous total disregard for the plight of licensors subject to patent holdout. Renate Hesse once told me that nobody had alleged collusive price fixing, and that holdout is not an antitrust issue. However, her successor points out that a two-sided approach is required on the issue of patent holdup versus patent holdout, and this is what he had to say about “clarifying” how rates are determined:
“SSO rules purporting to clarify the meaning of “reasonable and non-discriminatory” that skew the bargain in the direction of implementers warrant a close look to determine whether they are the product of collusive behavior within the SSO.”
This two-sided approach is supported by the Europe Court in Huawei v ZTE which established obligations on both parties, non-conformity to which could result in either the possibility of an injunction being granted or the raising of an antitrust defence to defeat a request for an injunction.
Curing and reversing
The detrimental effect of the patent policy change and supporting BRL is possibly even more severe outside of IEEE standards in some jurisdictions. The 2015 IEEE patent policy change, endorsed by a BRL from the previous DoJ antitrust head, is dangerously serving as a template for antitrust enforcers worldwide – not only with respect to IEEE standards, but also for other standards such as 3GPP’s mobile communications standards. This is like pushing at an open door in nations where antitrust enforcement is being used as an instrument of industrial or protectionist policy to support manufacturing-oriented companies who would like to pay less for the IP they are reliant upon that is developed in other nations, significantly including the US and Europe.
Contributing technology to standardisation efforts and making a FRAND commitment is voluntary. If antitrust agencies construe IEEE’s patent policy as only a “clarification,” and therefore impose it on holders of SEPs to various SDO’s standards the effects could be severe. They might bind patent holders to new conditions that they were never willing and never agreed to accept— for IEEE standards and for other standards. The latter would include standards such as 3GPP’s where some technology developers’ business models, development of standards and their success are much more dependent on payment of royalties than with IEEE standards. 3GPP standards account for much more in total royalties than IEEE standards. Delrahim rightly states that “[w]e should not transform commitments to license on FRAND terms into a compulsory licensing scheme.”
Antitrust agencies including NDRC (China), KFTC (Korea) and TFTC (Taiwan), as well as many other organisations and individuals have been swayed by or receptive to policy positions of US and European government agencies that were against or ambivalent about upholding patent rights in interoperability technology standards including those of many SDOs including IEEE, 3GPP (including regional partners such as ETSI).
Except for IEEE, SDOs have reaffirmed longstanding IP policies that uphold the rights of patent owners. For example, major European SDOs CEN and CENELEC state that SDOs should not provide guidance on, or impose compliance with, FRAND pricing, valuation, and rate-setting methodologies, and they “firmly believe that pricing should be determined by patent holders and implementers outside of SSOs in the context of bilateral negotiations.”
Notwithstanding strong signs of a reversal of policy at US DoJ antitrust from its leadership, the moderate and balanced position recently announced in the EU supported by strong statements by the European Court, and the overwhelmingly consistent pro-IP position of the SDOs themselves, it remains to be seen if other antitrust authorities can also be persuaded not to pursue policies that undermine the fundamental rights of patent holders and the incentives they have to invest in innovative new technologies that, through contributions to SDOs, can be readily accessed and exploited by all.
As China and some emerging nations are increasingly becoming SEP innovators as well as implementers, perhaps self-interest might ultimately make these nations recognise that upholding IP rights is in their interests, even in the short term, as licensors themselves, as well as it being in everybody’s long-term interests to maximise development and dissemination of innovative new technologies.
 The new trend was already being set by other actions including: (i) dissenting statements of US FTC Commissioner Maureen Ohlhausen in the matters of (a) Robert Bosch, (b) Motorola Mobility and Google and (c) Qualcomm; (ii) the CJEU’s judgement in Huawei v ZTE establishing obligations applying to both sides of an SEP-licensing agreement. The European court also stated that the FRAND commitment ‘cannot negate the substance of the rights guaranteed to the proprietors by Art. 17(2) of the European Charter of Fundamental Rights.’
Monday, 27 November 2017
That is the gist of an article by Shira Ovide, published on November 20th as a Bloomberg Gadfly column. Ovide describes an announcement made earlier of last week, according to which Uber has agreed to buy from Volvo 24,000 SUV’s, meant to serve as the foundation for a future fleet of self-driving vehicles. The value of the transaction is approximately one billion dollars, with delivery to take place between 2019-2021. To some extent, the deal complements an earlier partnership transaction between Uber and Daimler, whereby Daimler will make its own self-driving vehicles available to the Uber network.
The upshot of the Uber-Volvo transaction is that Uber goes from being a mere middleman to the owner of substantial physical assets in the form of DUV vehicles. This carries with it all the obligations that come with owning a fleet of cars, such as readying them for daily use and maintaining such necessities as tyres and the interiors, all the while that the vehicles themselves will be subject to capital depreciation. According to the report, there are few details about how Uber ultimately plans to integrate these vehicles into its business.
In effect, the overarching question is: what kind of business model will emerge? It is true that a direct result of self-driving cars, if they take hold as a preferred means of transportation, will be that human drivers will be made redundant (although this blogger suspects that the transition to self-driving vehicles will be gradual and a certain sub-group of customers will continue to insist on human drivers). As Ovide has observed, will the company then seek to—
“make money by continuing to be a middleman for drivers and riders and for other categories including restaurant orders?”Or will it simply—
“collect fees from rides, that looks more like Hertz than a traditional two-sided market place consisting of matching supply and demand?”If the purchase of the Volvo vehicles presages (or even more, mandates) that the company will sooner or later need to reformulate its business strategy, then what does this say about Uber’s brand? Even within the current shared economy model, Uber has seen its operations effectively taken over in China by Didi Chuxing, while in some Asian jurisdictions, it is playing second fiddle (or no fiddle) to local competitors, such as Grab in Singapore. As for the US, competitors such as Lyft seek to nip at Uber’s heels.
Netflix, which began in the 1990’s as a DVD sales and rental business, before soon moving on to the DVD by rental business. When that model faced obsolescence due to the rise of video streaming, the company embraced the video streaming space that is identified with it today.
During each of these remakes, the company managed to enjoy the continuity of the Netflix brand as the badge of the company to the consumer public. Based on Uber’s current high valuation (Ovide indicates it is 68 billion dollars), there is both promise and risk in maintaining the value of the Uber brand in the face of a remake of the company’s business strategy. Stay tuned.
Thursday, 23 November 2017
Tickbox TV provides a set top box, which allows users to access content on the internet. Apparently, the device can be used to access and display copyrighted content, such as movies and television shows, through the use of Kodi (an open source media player) and add ons. Many content owners, represented by Munger Tolles & Olson, have filed a complaint for inducement and contributory infringement. The case is somewhat similar to the classic Sony, Napster and Grokster type cases. Joe Mullin of Arstechnica provides a very nice description of the case, here. The Los Angeles Times recently reported on the ownership of Tickbox TV in an article titled, “How an Atlanta Power Couple’s Business Has Heightened Silicon Valley’s Piracy Anxieties.”
I can understand the anxiety of content providers and some Silicon Valley companies. As the Los Angeles Times article points out, Tickbox TV (with the software) is dangerous to some content owners (including those in Silicon Valley) because it operates similar to devices that some users may be more comfortable using—so, think of your technology adverse grandparents. It is like plugging in a VCR. This may also be a group of consumers who are paying “full price” for content and do not ordinarily illegally access material. This should make cable and satellite services companies very concerned. From the perspective of some in Silicon Valley, the case may lead to increased lobbying from content owners concerning stronger copyright protection depending on how the case turns out. It appears that Tickbox TV is now receiving some counsel and is attempting to insulate itself from liability through the use of disclaimers.
We are celebrating Thanksgiving in the United States today. Happy Thanksgiving!
Wednesday, 22 November 2017
The Association of Land Grant and Public Universities has released a November 2017 report titled, “Technology Transfer Evolution: Driving Economic Prosperity”. The report identifies numerous opportunities for technology transfer offices as the system matures. Importantly, technology transfer offices should focus on general regional economic development. In reviewing opportunities and providing examples of successful programs, the report also highlights obstacles. In particular, the report examines, “Redefining Expectations of Technology Transfer Offices,” and identifies obstacles to a successful, revisioned technology transfer office that serves to promote local and regional economic prosperity. The Report states:
• Many senior administrators, faculty, trustees, and alumni are primarily focused on the revenue generation potential of technology transfer operations and less on the societal benefits that can be reaped by moving intellectual property of all kinds into the marketplace, even those that may not result in immediate, high revenue returns.
• For many institutions, economic development and engagement as a central mission component is new and has led to confusion regarding the roles and responsibilities of individuals and units involved, including technology transfer offices and related professionals. New outreach duties often require coordination across multiple campuses, schools, departments and units, which makes collaboration and reporting a challenge. Many technology transfer offices lack the adequate staff, training, or resources necessary to meet the evolving expectations placed on them in the context of economic engagement.
• Institutions sometimes face difficulty in giving credit where credit is due, for instance, when technology transfer offices are sharing partnership development responsibilities with other units. On many campuses, technology transfer offices used to be the main externally facing office for the university in the realm of business and industry. This is often no longer the case, and the new reality requires a level of coordination that is not typical practice. Moreover, reporting lines and measures of success are not consistent across different kinds of university offices, and it becomes very difficult to execute strategic, campus-wide partnerships involving external audiences.
I’ve previously written on redefining goals of technology transfer offices, here. In redefining technology transfer offices, I would focus on their role in promoting the education of students within the university. It is important to remember that the primary method of university knowledge transfer is teacher to student--for sure, patents are important, but let's keep our eye on the ball. The technology transfer office, in collaboration with faculty, can play an important role in providing valuable experiential opportunities to students--leading to potential employment opportunities. This places technology transfer offices squarely within the "core" mission (and "business") of the university and fits them nicely with partnerships in academic units that run business clinics, for example. It may even lead to fundraising.
Tuesday, 14 November 2017
As previously discussed, China has been criticized for outright theft of trade secrets as well as requiring the disclosure of trade secrets to do business in China. Keith Zhai, Bloomberg Technology, has reported in an article, “China Says Foreign Firms won’t be Forced to Turn Over Technology,” that a senior Chinese official has stated that market access in China will not require disclosure of trade secrets. Notably, the article also states that China “pledged . . . to treat all companies equally" and the timing of the announcement came “close in time” to Trump’s exit from China. It will be interesting to see if there are meaningful changes.
Wednesday, 8 November 2017
About the Speaker
Professor Graham Richards is a pioneer of British technology transfer. The university spin out that he established -- Oxford Molecular Group, was the first university spin out after the UK introduced a regulatory change that attributed the IPR generated in a university context to the university itself. Under the leadership of Professor Richards, Oxford Molecular Plc grew from a £350,000 start-up to a £450 million public company. He is also a founding member of the Technology Transfer Office of the University of Oxford and he was a director there for over 20 years. Another flagship project is the publicly traded company IP Group Plc. Originally created out of the necessity to attract further funding for the chemistry department of the University of Oxford, it is nowadays one of the most important investors in technology generated by universities. IP Group Plc is a FTSE 250 company with a market cap of £1 billion.
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