Large differences in FRAND rates and royalty payments are legitimate and pro-competitive

Cellular technology companies with substantial device businesses — including Huawei and Samsung today, and Nokia until it sold its handset business in 2014 — generate no more than modest net licensing revenues, despite the significant Standard-Essential Patent (SEP) portfolio sizes they have declared. Crucially, they must also cross license their manufactures against infringement of other companies’ patents.  Companies without significant device businesses, including Qualcomm and InterDigital, have no such overriding need to barter their intellectual property. Instead, their businesses are focused on licensing cellular and smartphone patents for cash, upon which their technology developments crucially depend.

Many licensing deals are largely barter,with reduced or no cash payments

SEP licensors do the costly technology developments that make new generations of standards including 3G, 4G and 5G openly available to all OEMs: however, since 2011, if not earlier, none of the former has received, in licensing revenues, even as much as an average of $4.50 per phone or a few percent of global wholesale handset sales revenues, for example, totalling $398 billion in 2018. Aggregate royalties paid to all licensors have averaged less than five percent. In contrast, Apple has taken up to 43 percent revenue share with its iPhone sales and other smartphone leaders Samsung and Huawei are also currently in double digits.

Leaders' technology licensing and OEMs' total handset sales revenues in cellular

FRAND rates and net payments in cash

Some licensors legitimately generate rather more licensing income than others. Net royalty rates charged, and cash payments received, by the same licensor may vary substantially from licensee to licensee without violating Fair Reasonable and Non-Discriminatory (FRAND) licensing obligations.

The question of what levels of royalty rates should be deemed FRAND for licensing SEPs in cellular technologies has loomed large in commentary on the recent US Federal Trade Commission (FTC) v. Qualcomm antitrust trial in the Northern District of California. Witness Huawei claimed 80% to 90% of its SEP royalty payments are made to Qualcomm. Apple previously claimed Qualcomm charged it at least five times more in payments than all other cellular patent licensors combined. That was until Apple unilaterally withheld all such payments a couple of years ago. Notwithstanding the April 2019 settlement of all litigation between Qualcomm and Apple and with resumption of licensing payments to Qualcomm, including a one-off payment of between $4.5 billion to $4.7 Billion, the court’s decision in the above case is imminent.

It should be expected that some companies net much higher licensing rates and generate much more licensing income than most others. It should not be considered untoward or a violation of FRAND or antitrust requirements. FRAND rates negotiated bilaterally or multilaterally, let alone licensing payments made after netting off parties’ charges, may vary substantially from case to case due to different business models, patent holdings cross-licensed, payment timing and disparate trade flows of products licensed, manufactured and sold among SEP licensees. Substantial differences in net rates and payments can therefore be quite legitimate due to various quid pro quos, as well as differences in patent portfolio sizes and strengths.

Major OEMs would rather limit rates to minimize out-payments than maximize royalties received

Companies with predominantly downstream business models as device OEMs, that implement numerous SEP technologies, tend to benefit from generally low royalty rates, even if they have substantial patent holdings themselves. Many device OEMs have, accordingly, tended to advocate licensing regimes that cram down royalty charges by capping aggregate royalty rates. As I have explained in my publications for more than a decade, SEP owners with large device businesses prefer to limit rates, even though that limits them to generating only modest licensing fees, because low rates also minimise their royalty out-payments on those devices.

Market leaders in cellular handsets, including Nokia 12 years ago, Apple, Huawei and Samsung today, invariably have much larger market shares in featurephone or smartphone sales than they have shares of SEPs reading on the cellular standards. They are therefore far more financially exposed as licensees than they stand to gain as licensors — particularly in negotiating licensing agreements with other SEP owners that have no downstream device business in need of licensing. Even though some of the above companies are also major patent owners, their royalty incomes were or are modest in comparison to licensors without downstream operations producing or selling devices.

Patent pools

Patent pools provide notable evidence of this downstream effect with their rates tending to be much lower than bilaterally negotiated rates. Patent pools are typically dominated by leading implementers of the applicable standard and that may also own many SEPs reading on that standard. For example, MPEG LA lists Apple, HP, Panasonic, Samsung, Sharp, Sony, Toshiba and ZTE among its many licensors for the very popular AVC/H.264 video standard employed in smartphones and TVs. Its maximum rate is around $0.20 per unit sold including smartphones, PCs and TVs.

Royalty-free joint licensing, very similar to pooling in many ways but without the need to check patent essentiality or collect and distribute royalties, is an extreme case of this downstream effect. The Bluetooth Special Interest Group allows its members royalty-free implementation of this popular standard so long as they also commit to license their patents on that basis.

Some joint licensing arrangements, also very similar to pools, are not dominated by the applicable standard’s implementers. Major SEP licensors in Avanci are companies that do not manufacture automotive products including Ericsson, InterDigital, Nokia and Qualcomm. It was telling, and quite self-serving, that the Huawei speaker at the recent TILEC recent conference on patent pools asserted that Avanci’s cellular-SEP licensing charges [of $3 to $15 per car] are too high.

Patent pool benchmarks were, at first, presented by TCL in its FRAND licensing rate litigation versus Ericsson in the Central District of California. But the dynamics of patent pools were totally inapplicable to this dispute about bilateral rates. Patent pool licensing rates were never even considered by the Court because these, following my expert rebuttal report, did not even make it into direct testimony at trial.

Proportional allocations

SEP owners with major downstream operations commonly also contrive for apportionment so that, for example, owners of only few SEPs can command no more than very low rates. This action was, among other reasons, to counter some OEMs with small patent portfolios punching way above their weight in cross-licensing negotiations with large SEP holders who were also seeking freedom to operate with low patent infringement risk as major device OEMs. For example, Nokia had a $50 billion handset business in its heyday approaching and including 2008. The threat of litigation from small patent holders against such a large amount of trade made it impossible to achieve anywhere near Qualcomm’s rates when Nokia sought to license them for use of Nokia’s SEP technology. In contrast, Qualcomm exited the handset business many years earlier around the turn of the millennium.

If it ain’t broke don’t price fix it

Antitrust authorities, including the FTC, should not be price setters. Instead of adjusting established royalty rates—underpinned by hundreds of licenses and billions of dollars in payments over many years—applicable questions for these organizations are: is the market competitive, efficient and maximizing consumer welfare? Copious evidence shows that it is: with relentless market entry and disruption to incumbents, ever-improving quality and declining prices. The unintended consequences of price regulation would harmfully disincentivise new-technology investments in standard-essential technologies that could be exploited by the entire ecosystem of suppliers and consumers at very low incremental costs in comparison to product and service prices.

FRAND rates and payments differ with variations in other licensing terms and trading volumes 

FRAND licensing must accommodate a wide variety of factors. Rates and payments can vary substantially among different pairs of licensors and licensees – even for the same patent portfolios — because other contractual terms and trade flows for licensing vary so much (i.e. how many handsets manufactured and at what prices sold by each party). But that does not mean that anything goes. The words fair, reasonable and non-discriminatory still have meaning— it is just that the detail with various offsets and other factors is devilish and can account for major differences in apparent royalty rates and actual payments – particularly between licensors that are predominantly that, and those that are largely major implementors and patent licensees as device OEMs.

A very similar article to the above was first published for the cellular industry in RCR Wireless. The full version of my above analysis is available here.

Guest Post by Dr. Janice Denoncourt: Enriching Reporting on Intangibles: UK Financial Reporting Council's Consultation

Dr. Janice Denoncourt, a Senior Lecturer at Nottingham Law School, has

authored the following guest post concerning updating accounting standards for intangibles.  Notably, her comments tie together contributions from her recently published book [Intellectual Property, Finance and Corporate Governance (2018)  is available from Routledge as part of the Research in IP Series here], which was discussed in her previous IP Finance post, here, and the recent UK Financial Reporting Council's consultation on Business Reporting of Intangibles: Realistic proposals.  

         ‘The difficulty lies not so much in developing new ideas as in escaping from old ones.’

                                                             John Maynard Keynes (1883-1946)

Accounting sanctions particular distributions of wealth and legitimises commercial relationships.  How the accounting international financial reporting standards (IFRS) and international accounting standards (IAS) treat intangibles, a wide category which includes IP rights, is an important corporate governance concern, especially for large and listed IP-centric companies.   Accounting and financial statements, such as the balance sheet and profit and loss account, act as a kind of internal control for investors, shareholders, financiers, suppliers and other stakeholders who engage with the company.  While the evolution of the credit and debit matching system has been indispensable to the efficiency and material prosperity of the modern economy, accounting for intangibles needs to be updated and advanced – particularly for internally generated corporate IP assets.  The problem is that IP is largely invisible in traditional financial accounts as they are ‘off balance’ sheet when IAS 38 Intangibles is applied.   Many knowledge-based intangibles do not meet the accounting definition of an ‘asset, nor the recognition criteria set out in the prevailing accounting standards.  The UK FRC recognise that this important corporate governance challenge – namely, the inadequacy of traditional accounting methodology to deal with the future value creation potential of intangibles and monopolistic IP rights.  However, an understanding of the deeply ingrained accounting principles is needed to better understand the accounting and reporting issues at the heart of the consultation.

A lesson from the Merchants of Venice on the history of accounting

In Chapter Four of my research monograph Intellectual Property, Finance and Corporate Governance (2018) I examined the deeper reasons rooted in the history of double entry book keeping why accounting for intangibles and IP is so difficult.  Briefly, the ideas that revolutionised the way Europeans counted and accounted for their assets were introduced by the Italian Renaissance mathematician, Leonardo of Fibonacci in his ground breaking book Liber Abaci, ‘The Book of Calculations’ published in 1202.  

Fibonacci introduced the concept of present value (the discounted value today of a future revenue stream). Historically, the double-entry book keeping system, which forms the basis for modern accounting principles and is globally accepted, was simply a tool to track and document the exchange of tangible items and prevent embezzlement.  In other words, it is an ‘error detection tool’ making it a record of historical transactions.  In the case of error, each debit and credit can be traced back to a journal and transaction source document, thus preserving the audit trail.  The double entry book keeping system was originally designed to prevent fraud and misappropriation by employees of the Renaissance merchants of Venice.  The root of the problem with the modern accounting for IP rights developed by a company internally (rather than acquired from someone else) is that these assets do not fit the socio-historic evolution of accounting as there is no historical transaction to record.  For example, when a patent is applied for it becomes a property asset of the company and thus a form of currency.  At this point, there will be no historical market transaction to record in the accounts if the patent was developed internally, as opposed to acquired from a third party at arm’s length (no purchase price of the asset to record).  However, the expenditure to internally develop the innovation to the patent filing stage IS usually recorded.  Thus from an accounting point of view, part of the equation is missing in the balance sheet.  Arguably, there is also a basic question as to the integrity of the accounts.  The entry is a debit expense, with no equivalent asset (credit) recognised due to the uncertain future value of the patented invention.   

Modern accrual accounting and the GAAP

The next significant step in the history of accounting was the ‘accrual’ method which essentially relies on six key principles: (1) revenue principle; expense principle; matching principle; cost principle, objectivity principle and the prudence principle.  The ‘matching principle’ correlates the revenue and the expense principles. The nature of R&D, innovation, filing patent applications (which may be granted several years later) does not map well onto the accrual method of recording historical transactions at arm’s length either.  These assumptions and principles have become known as the Generally Accepted Accounting Practice (GAAP).  The GAAP shape a perception of the quantitative value of intangibles and monopolistic IP rights.  Arguably, the GAAP accounting principles shackle the fullest use of corporate IP assets as their value is simply not captured and reported publicly. In summary, the internationally harmonised accounting principles have traditionally relied on two inherent assumptions. First that tangibles rather than intangibles contribute to business performance and second, that business depends largely on an arm’s length transaction between a willing buyer and a seller (in contrast to in-house development). 

Calls for reform to business reporting of intangibles

Fortunately, over the past decades, there have been frequent calls to reform the accounting (quantitative) and narrative reporting (qualitative) of intangible assets.  This has been largely in response to the move to a knowledge-based economy and the greater store of corporate value which resides in intangibles.  Accounting, narrative reports (annual reports, directors strategic reports) and actual events support ‘triangulation’, a powerful technique that facilitates validation of data through cross verification from three or more sources applying several methodologies to the same phenomenon. 

The UK FRC’s Consultation

On 6 February 2019, the UK Financial Reporting Council took the bold step of launching a consultation on Business Reporting of Intangibles: Realistic proposals.  Possible improvements to the reporting of factors important to a business’ generation of value are set out in the Discussion Paper prepared by FRC staff.  The FRC’s paper considers the case for radical change to the accounting for intangible assets and the likelihood of such change being made in the near future. It suggests that:

(1)   relevant and useful information could be provided without the need to recognise more intangible assets in companies’ balance sheets;

(2)   such information could cover a range of factors, broader than the definition of intangible assets in accounting standards, that are relevant to the generation of value;

(3)    improvements could be made on a voluntary basis within current reporting frameworks (such as the strategic report); and

(4)   participants in the reporting supply chain could collaborate to bring about improvements.

The FRC’s Executive Director for Corporate Governance and Reporting, Paul George states:

“It is unrealistic to expect the value of a business to be fully represented in its balance sheet; there is always likely to be a gap between the balance sheet total and the market capitalisation of a company. The paper suggests several ideas for expanding the information provided, both quantitative and qualitative, to improve users’ assessment of corporate value.”

The research in my book and derived from my PhD thesis (2015) underpins the detailed response I made to the FRC consultation, which closed on 30 April 2019, and is published, here.    

In summary, everyone essentially agrees that existing accounting standards should be advanced, updated and modernised to take greater account of intangibles and IP assets.  The question is how and to what extent.  To this end, I made several practical suggestions that could be implemented with relative ease including the greater use of notes to the accounts as well as the use of the well-established technology readiness level (TRL) system to facilitate investment in technologies.

Technology Readiness Levels

The TRL system, for those not familiar with it, is a well-established method of estimating the maturity of critical technology elements on a scale of one to nine, with nine being the most mature technology.  The TRL system was originally developed by the US National Aeronautics and Space Agency (NASA) in the 1980s to assist with the allocation of public funding and is now widely used in public finance.  

The use of TRLs enables consistent uniform discussions of technical maturity across different types of technology.  It is also an entrenched measurement tool to support the assessment of investment and funding risks in publicly finance technology, but in my view could be more widely used in private finance and corporate reporting.  The TRL system facilitates cross-sector communication regarding technology and could help to improve transparency and disclosure of intangibles in business reporting. 

My further recommendations include the need to keep accessible accounting records for intangibles and IP assets, even if they are consider  ‘off-balance sheet items’ under accounting standards to ensure the integrity and traceability of the accounts in the future e.g. when the business and/or IP is sold. 

I also firmly hold the view that there is a need for a minimum level of intangibles and IP business reporting by large of listed companies who own substantial IP portfolios.  An annual IP audit and formally reporting who is responsible for managing and control of corporate intangibles and IP assets would be good practice and may give rise to a greater role for IP professionals in corporate reporting and governance.  In my view, adopting the above would expressly increase the level of transparency and disclosure of corporate intangibles in the public interest.  

However, there are a variety of views on the subject and some areas of disagreement.  The FRC Discussion Paper and all 18 responses (CPA Ireland, UKSA Office, CPA Australia, Grant Thornton UK LLP, Ernst &Young, SEAG, The 100 Group, WCI, Wellcome Trust, Christopher de Nahlik, ACC, EAA, RICS, QCA, IR Society, Mazars and ICAS) are published, here.     

No doubt the range of submissions, reflections and ideas submitted will influence the international debate and the International Accounting Standards Board (IASB) on the matter.  However, the discussion paper does not cover the reporting of goodwill and its subsequent impairment which may be a future project.

Issues in Patent Renewals: A Workable Solution?

The patent renewal business is apparently undergoing some change.  Please see the press release below concerning a business attempting to address that change and provide a workable solution. 

Patentrenewal.com makes patent renewals profitable (again) for law firms  Over the past decade, there has been a race to the bottom from IP service providers to deliver the cheapest patent renewals. Falling profit margins combined with the complexity and risk of handling patent renewals globally has resulted in many IP law firms exiting the renewals industry. In an effort to reverse this trend, patentrenewal.com promises to make IP law firms’ patent renewals business profitable again.

Patentrenewal.com is a white-label web-based platform that gives IP law firms the ability to onboard their clients and sell the renewals service as if it were their own. Once a client’s patent portfolio is uploaded onto the platform, the renewal payments are automatically processed based on the client’s renewal instructions and can be viewed in real-time. Invoicing, emails and payment transfers are handled by the system, removing another administrative burden. The crucial selling-point for IP law firms is the ability to quickly scale up and onboard new clients without worrying about their administrative capacity or compromising their brand. “It’s an interesting case for automation because, contrary to the scepticism and fear surrounding technology in the legal industry, our product actually makes firms’ renewals business viable again” - Mads Jørgensen, CTO.

The strategy goes against the common trend in the IP space, but Jesper Jensen, the company’s CEO, remains bullish on the decision to integrate with firms as opposed to being another service provider: “Originally our plan was to build an automated renewals service exclusively towards IP law firms’ clients. But we soon realised that patent renewals is an important strategic touch point for clients and firms, and the connection between client and law firm was something that was being eroded by the service providers, who only focus on making payments.”

There were other reasons too, for the Copenhagen-based company to enter the market. Scepticism and paranoia have spread in the renewals market, as an entire industry has cropped up with the sole purpose of prosecuting renewal providers for malpractice after several investigations have uncovered fraudulent overcharging practices by some of the big renewals providers. In an effort to reinstate trust, the team at patentrenewal.com has focused on price transparency from the start.  All charges, down to insignificant postal fees, are shown throughout the platform and foreign exchange rates are openly advertised. “Working closely with the firms and focusing on transparency has allowed our young company to become a trusted partner and gain traction in a very short period of time.” - Frederik Wagner, CPO.

The company’s direction and focus has paid off, and after only being in the market with their product for a year, the company is responsible for more than 6000 patent renewals in 60+ countries for IP law firms in Northern Europe and has a growing waiting list of law firms. “We know that we’re up against some big forces, and we have to work hard to reestablish trust in the industry as a whole, as well as proving that our youth isn’t a disadvantage” - Nicki Friis, COO. The company continues to grow and has raised two rounds of funding (in 2017 and 2018) from private and institutional investors to quadruple their annual renewals in 2019.

For more information, visit patentrenewal.com or contact Nicki Friis at nfw@patentrenewal.com.

Regulate Early or Later: Open Banking, Fintech and Innovation

At a relatively recent international conference, I discussed how the United States generally tends to take a hands off approach to regulating new technologies which create new markets at the outset of the development of the technology.  For the most part, we allow the market to sort out the best way for the technology to develop and be deployed to consumers.  The downside with this approach concerns public choice issues.  Once the industry develops and matures—along with obvious problems, such as privacy, consumer safety and competition concerns—there tend to be issues associated with regulating that industry and the problems created.  The relatively more mature industry may attempt to capture agencies and exercise considerable influence over our politicians and other parts of government.  This is tricky because we avoid overregulating early and dampening the development of new markets and technology, but we also tend to under-regulate and pay later.  However, from the big picture perspective, it is likely better to have the industry than not have it at all.  Interestingly, we do seem to be pretty good at allowing new technologies to overrun existing markets (apparently with players who are too slow to react to changing technology and are not well-organized).  As an example, think of taxi drivers and that industry. 

Stanley V. Ragalevsky, Judith E. Rinearson and Linda C. Odom of K&L Gates in the United Kingdom have authored an article titled, “Is Open Banking Coming to the United States?”  In the article, the authors essentially describe how the EU and UK have adopted an open approach – which allows consumers to require banks to share their information with third party providers which may enable faster innovation in the Fintech industry.  The United States is apparently taking a much more cautious approach and not mandating that banks must share based on consumer request apparently amidst concerns with privacy—slightly ironic given the differences in approach to privacy between the United States and Europe. 

The United States may have a new general consumer privacy law soon.  One interesting issue is whether it will preempt all state law privacy laws.  A unified approach may reduce costs associated with compliance and potentially lead to more innovation.  Stay tuned!

The U.S. National Institute of Standards and Technology Green Paper on Improving Technology Transfer

The U.S. National Institutes of Standards and Technology has released its Final Green Paper on its Return on Investment: Unleashing American Innovation Project.  Essentially, the ROI project is intended to ensure that the United States receives an improved return on investment with respect to public funding for research and development.  The Green Paper includes stakeholder data identifying potential issues as well as proposals to improve the technology transfer process.  For example, the Green Paper on stakeholder data states:

Return on Investment Initiative – Summary of NIST’s Findings Based on Input from Stakeholders

Strategy 1 Identify regulatory impediments and administrative improvements in  Federal technology transfer policies and practices

Government Use License: According to stakeholders, the scope of the “government use license” is not well defined

March-In Rights: According to stakeholders, the circumstances under which the government may appropriately exercise march-in rights to license further development of an invention to achieve practical application are not clear

Preference for U.S. Manufacturing: According to stakeholders, existing statute supports the preference for U.S. manufacturing but the process to obtain a waiver is confusing 

Copyright of Software: According to stakeholders, the “Government Works” exception to copyright protection for software products of Federal R&D at Government-Owned, Government-Operated Laboratories constrains commercialization

Proprietary Information: According to stakeholders, an expanded protection period for proprietary information under a Cooperative R&D Agreement would encourage greater collaboration with Federal Laboratories Strengthen Technology Transfer at Federal Laboratories: According to stakeholders, updates to policies and practices under the Stevenson-Wydler Act could be simplified

Presumption of Government Rights to Employee Inventions: According to stakeholders, the process to determine a present assignment of invention rights by Federal employees to the Federal Government is overly burdensome

Strategy 2  Increase engagement with private sector technology development experts and investors

Streamlined Partnership Mechanisms: According to stakeholders, improved clarity and use of best practices government wide would streamline agreements and ensure greater transparency for R&D partners 

Expanded Partnership Mechanisms: According to stakeholders, private sector investment for translational R&D and technology maturation could be increased through expanded partnership agreements and nonprofit foundations

Technology Commercialization Incentives: According to stakeholders, recipients of Federal funding could benefit from a limited use of R&D funding awards to enable intellectual property protection 

Strategy 3 Build a more entrepreneurial R&D workforce

Technology Entrepreneurship Programs: According to stakeholders, expanding technology entrepreneurship programs at Federal R&D agencies government-wide will help build a more entrepreneurial workforce

Managing Conflicts of Interest: According to stakeholders, current requirements for managing conflicts of interest pose challenges to build a more entrepreneurial R&D workforce Strategy

Strategy 4 Support innovative tools and services for technology transfer

Federal IP Data Reporting System(s): According to stakeholders, a secure, modern platform is not available for reporting data on intellectual property resulting from Federal R&D

Access to Federal Technologies, Knowledge, and Capabilities: According to stakeholders, a federated data portal is not available to easily access, use, and analyze information on federally funded technologies, knowledge, and capabilities that are available to the public

Strategy 5 Improve understanding of global science and technology trends and benchmarks

Benchmarking and Metrics: According to stakeholders, current metrics to capture, assess, and improve broad technology transfer outcomes and impacts based on federally funded R&D and underpinning operational processes are inadequate

The Green Paper contains discussion and findings on all of the strategies and subpoints.  For example, on the government manufacturing clause:

NIST Finding 1.  According to stakeholders, the scope of the “government use license” is not well defined. Market uncertainty is created by the lack of a clear definition of “government use” that is limited to use directly by the government—or a government contractor in the performance of an agreement with the government—for a government purpose only, including continued use in research and development by the government. The scope of the government use license should not extend to goods and services made, sold, or otherwise distributed by third parties if the government—or a government contractor in the performance of an agreement with the government—does not directly use, provide, or consume those goods and services.

On using “march in rights” as a form of price control, the Green Paper notes:

Stakeholders pointed to potential consequences from using march-in rights as a price control. These reasons include impeding the creation of new drugs and discouraging university and medical school licensees from making the substantial additional investments necessary to develop and commercialize new drug discoveries. A 2019 report from the Information Technology and Innovation Foundation drew similar conclusions, noting that “[m]isusing the “march-in right” provision of the Bayh-Dole Act could negatively impact U.S. life-sciences innovation and result in fewer new drugs.”67 Other responses focused on ensuring that new drugs reach the people that helped fund work through Federal basic research.

The finding on “march in rights” states:

NIST Finding 2. According to stakeholders, the circumstances under which the government may exercise march-in rights are not well-defined. Market uncertainty is created by the lack of a clear definition of the use of march-in rights that is consistent with statute, rather than as a regulatory mechanism for the Federal Government to control the market price of goods and services.  

The Green Paper also notes that stakeholders are very concerned about the inconsistent and poor approach by the Federal Government to the protection of trade secrets, which puts a damper on collaboration between the public and private sectors.  On page 121-125, there is a summary chart of strategies and findings, including an indication whether the solution should be legislation, regulation or both.  The Green Paper is available, here. 

The Subcommittee on IP in U.S. Senate Reinstated; First Action is Patent Eligible Subject Matter Reform

Recently, several members of Congress have reinstituted the Subcommittee on Intellectual Property in the U.S. Senate.  This, in and of itself, is relatively big news.  We can expect a good amount of proposed legislation moving out of this subcommittee concerning intellectual property in the near future.  

The first document to issue from the subcommittee (and includes support from members of the House of Representatives as well as the Senate) is essentially a framework for Section 101 patent eligible subject matter reform.  Patent eligible subject matter has been a controversial topic in the United States for years, and attempts to cabin the U.S. Supreme Court Alice v. CLS Bank/Mayo v. Prometheus decisions by the United States Patent and Trademark Office and some judges of the U.S. Court of Appeals for the Federal Circuit has led to a relatively messy and some may argue contradictory set of guidelines, rules and precedent.  This may be unhelpful to promote investment and innovation. 

A Press Release from Senator Christopher Coons from Delaware sets forth the outline of the framework:

·         Keep existing statutory categories of process, machine, manufacture, or composition of matter, or any useful improvement thereof.

·         Eliminate, within the eligibility requirement, that any invention or discovery be both “new and useful.” Instead, simply require that the invention meet existing statutory utility requirements. 

·         Define, in a closed list, exclusive categories of statutory subject matter which alone should not be eligible for patent protection. The sole list of exclusions might include the following categories, for example: 

·         Fundamental scientific principles;

·         Products that exist solely and exclusively in nature;

·         Pure mathematical formulas;

·         Economic or commercial principles;

·         Mental activities. 

·         Create a “practical application” test to ensure that the statutorily ineligible subject matter is construed narrowly.

·         Ensure that simply reciting generic technical language or generic functional language does not salvage an otherwise ineligible claim.

·         Statutorily abrogate judicially created exceptions to patent eligible subject matter in favor of exclusive statutory categories of ineligible subject matter.

·         Make clear that eligibility is determined by considering each and every element of the claim as a whole and without regard to considerations properly addressed by 102, 103 and 112. 

While this list appears to serve as a list of the broad strokes of the new legislation, it clearly appears to roll back the Alice/Mayo test.  Some of the parts of the framework appear to be concessions to some groups who might be opposed to broad subject matter eligibility, such as some technology companies.  For an IP legislative wish list by the AIPLA, please see, here.  A Congressional Research Service report on patent eligibility reform by Professor Jay Thomas is available, here.  The CRS report predates some of the more recent U.S. Court of Appeals for the Federal Circuit and USPTO decisions concerning eligibility, and includes a discussion of patent eligibility reform proposals from major IP trade associations.  If patent eligibility legislation is passed along the lines of the framework, it nicely sets up the question of how we should reform nonboviousness law, which will have increased importance as the major policy lever policing patentability. 

Here are some of the statements of Congressmen supporting patent eligibility reform:

“Today, U.S. patent law discourages innovation in some of the most critical areas of technology, including artificial intelligence, medical diagnostics, and personalized medicine,” said Senator Coons. “That’s why Senator Tillis and I launched this effort to improve U.S. patent law based on input from those impacted most. I am grateful for the engagement of all stakeholders participating in our roundtables, as well as the bipartisan and collaborative efforts of colleagues in both the Senate and the House. I look forward to continuing to receive feedback as we craft a legislative solution that encourages innovation.”

“Senator Coons and I requested to re-instate the Senate Judiciary Subcommittee on IP because we saw a need to reform our nation’s complicated patent process, starting with section 101,” said Senator Tillis. “The release of this framework comes after multiple roundtables and extensive discussions with stakeholders who would be affected by reforming Section 101. Senator Coons and I look forward to receiving feedback from the release of this framework and encourage anyone who might potentially be affected to contact our office and offer us input.”

 “Upgrading the patent eligibility test is critical if we want American innovation to continue to lead worldwide,” said Rep. Collins. “Encouraging innovation in Georgia and throughout our country means restoring confidence for inventors and investors that their patent rights will be upheld in court.”

“I’m pleased to participate in this important and relevant roundtable. Many have voiced concerns about uncertainties in in this area of patent law jurisprudence, and I’m interested in hearing from all stakeholders as we continue to work towards a consensus solution,” said Congressman Hank Johnson, who serves as Chairman of the Judiciary Subcommittee on Courts, IP and the Internet. “I particularly look forward to—and welcome—feedback on the outline proposal we’re considering here today.”

“In my home state of Ohio, leaders in the fields of biologics research and diagnostics will deliver the cures of tomorrow. This is only possible if we can protect those innovations with the patent protection that rewards the risks and investment necessary to discover the next great idea,” said Rep. Stivers. “We have the opportunity to advance our society in so many exciting and unknown ways, and we need to ensure we have a patent system that encourages that kind of game-changing innovation, instead of stifling it.”

South Africa's Acute IP Information Gap

I have been busy this past month researching and speaking on the important relationship between IP, governance, business finance and accounting in the context of the collapse of Steinhoff involving irregularities in reporting on IP, the dramatic sale of EOH shares following the termination of Microsoft reseller license, the ongoing Makate drama involving the value of a payment for IP successfully taken to market by Vodacom and the reputational elements of allegations of copying by Woolworths. These examples exist against an international backdrop created by the dramatic Theranos demise, following revelations that its patented technology did not work.

The research included a collaboration with the CEOs of governance group FluidRock - Ronelle Kleyn and Adv Annamarie Van Der Merwe, time spent with the helpful Institute of Directors in Southern Africa's new CEO - Parmi Natesan, a great read of the new book by Janice Denoncourt "Intellectual Property, Finance & Corporate Governance", an analysis of Brand Finance's Global Intangible Asset Tracker 2018, various discussions with local financial guru and Managing Partner of Cartesian Capital - Anthea Gardner, assistance from Adams & Adams' Mark Beckman and progressive associate Nicholas Rosslee.

In summary, there exists an increasingly important IP information gap in financial disclosures in South Africa that is severely hampering business growth, cultural preservation and opportunity. The IP information gap exists across the business spectrum; large, medium and small businesses are affected. Whilst this is a global challenge, it is particularly acute in South Africa especially in the area of patents. South Africa's patent economy is woeful and stands in stark contrast to its capacity to innovate. It is extremely important to address this gap which starts with a concerted drive on IP education, self audits and the cultivation of an economy that understands the benefit of investing in IP to stimulate growth and further innovation, and also how to draft, use and interrogate an IP narrative in financial accounts effectively.

The slide deck for the seminar co-hosted with FluidRock at the Johannesburg Stock Exchange that attracted over 200 people can be found: here, the article published in Business Day: here, the PowerTalk interview with the award winning journalist Iman Rappetti: here, and the talented 702 Morning Show presenter Relebogile Mabotja: here.

This is an ongoing conversation that traverses a number of different disciplines. I am hoping that this is start of more on the subject for a richer understanding of how innovation and stakeholder interest can be made more transparent, open and effective through the use of IP.