Monday, 31 May 2010
Vos J felt that the best course for Pfizer was to elect an account of profits. Since earlier disclosure orders had not been complied with, it was inappropriate for the court to make further orders of that type. Regarding the claim for an interim payment, Pfizer's 75% calculation was a fair one, which gave the defendants the benefit of the doubt. Since Pfizer belonged to a substantial international corporation -- which would be able to repay any excess should the amount eventually assessed be lower than anticipated -- any overpayment could be compensated. For these reasons, and since the defendants were the authors of their own misfortunes, the claim for payment on account of 75% of their estimated profits was fair.
Friday, 21 May 2010
In the same way that economic theory suggests that the optimal market price is to be found at the intersection of a supply curve with a demand curve, the authors suggest that the optimal IP protection budget can be found at the intersection of “Value” and “Effectiveness” curves.
According to the article, the Value curve represents “the actual economic value achieved by reducing the risk of IP loss”. The authors suggest that an IP owner should be able to identify the economic value associated with a given level of risk reduction by analysing the expected impact on profits, brand image and other business or marketing considerations. They note that the value assigned to a particular risk reduction target is the money that the IP owner would be willing to pay to achieve that target.
The Effectiveness curve corresponds to the actual costs incurred in achieving a given level of risk reduction and is determined empirically. “For example, patent applications filed for a moderate cost may be shown to deter infringement by most small competitors, but perhaps not large competitors that are willing to devote sufficient resources to attempt invalidating the patents” the authors note. “However, if a greater amount were to be spent on patent application preparation and prosecution, the resulting patents could have a higher quality that is sufficient to deter even large, well-financed competitors”.
The devil is in the data – how does one quantify, for example, the extent to which low cost applications deter small competitors? No such data is contained in the article. Nevertheless, this “Protection Valuation Tool”, as it is called, does represent another way of looking at the IP cost/benefit question that may be easier for investors and financial directors to understand.
Thursday, 20 May 2010
IP Valuation is not an exact science and the cold rationality of classical economics often fails at giving a value to items of Intellectual Property that satisfies owners and buyers equally. In the specific case of standard-essential technology for instance, it often appears that owners of patents cling on to them with iron claws and will not license it unless the benefits of the transaction largely outweigh the cost of divulging the technology. However according to Prof. Christopher J. Buccafusco (Chicago-Kent College of Law) and Prof. Christopher Jon Sprigman (University of Virginia School of Law) IP law is still largely governed by the rational choice model, which "posits that, when making decisions, people rationally weigh the utility they will derive from different choices and assign monetary values to the options based on the anticipated utility these choices will provide". The two professors decided to call this assumption into question by applying the findings of the behavioural research to the field of IP, as it was clear to them from the beginning that IP owners aren’t more rational than any other individual engaged in a transaction. Their article entitled "Valuing Intellectual Property: An Experiment" (download here) reports on the results of an interesting experiment they carried out in order to determine if IP transactions are subject to the endowment effect, which is the most important contribution of the behavioural research in the field of economics.
“A mountain of survey and experimental data have shown that people attach substantially higher value to goods if they own them then if they are considering purchasing them. People are reluctant to part with their property, and the amount that they are willing to accept (WTA) to sell it generally far exceeds the amount that others are willing to pay (WTP) for it. This WTP/WTA gap has been termed the “endowment effect,” and it has been detected for an astounding variety of forms of property."
As Buccafusco and Sprigman asserted, the endowment effect seriously eroded the “sacrosanctness” of the rational choice model and also had repercussions on many areas of law (such as tort, contract or tort, contract, property, and criminal law).They realized nevertheless that IP law has been relatively immune to this groundbreaking finding of the behavioural research and decided to set things right. Their experiment is all the more interesting so as IP goods are actually created by the owners and are non-rival (their consumption by one person does not prevent their consumption by another). Moreover their experiment – based on a market for poems – is the first one to ask subjects to actually create an object and then value it.
Not so surprising yet quite thought-provoking, the results of Buccafusco and Sprigman's experiment prove that actors engaging in an IP transaction are only "boundedly rational", much like in any other transaction environment. They surely are utility-maximisers, however the preferences on which they based their decisions are very unstable instead of being a constant, as the rational actor model assumes. Their experiment also showed that the difference between WTA and WTP is even higher than expected, even though poems are non-rival goods.
“Our findings suggest that private transactions in creative goods may face significant transaction costs arising from cognitive biases that drive the price that creators and owners of IP are likely to demand for transfers considerably higher than what buyers will, on average, be willing to pay. This does not mean, of course, that transactions in IP will not take place – we see such transactions happening out in the world every day. Our research suggests, however, that IP transactions may occur at a level that is significantly suboptimal and that the baleful effect of cognitive and affective biases is likely to be more serious for transactions in works of relatively low commercial value, or for which no well established custom or pattern helps to inform valuation.”The result of this experiment could have far-reaching implications in the field of IP transaction and calls for more research on other types of IP goods, notably in the case of patents. It could be argued for instance that due to years of R&D - which are intense and costly all of points of view - the sense of ownership of scientists and researchers toward their inventions is probably exacerbated and higher than in any other field of IP. If this hypothesis were correct, the transaction costs related the licensing of a patent would be much higher than expected and would drive down the overall level of patent transactions significantly.
Tuesday, 18 May 2010
Hollywood to the rescue?
1. Box-office figures are merely estimates and so, presumably, cannot be relied upon. Whatever the accuracy of this metric, still they must certainly be galaxies more precise than either the AAA bond ratings given in connection with subprime financial instruments or Greek fiscal data. On the other hand, one should not dismiss out of hand the impact of the uncertainty of the underlying metric in questioning the effectiveness, if not the very viability, of such an exchange. As Frank Knight taught us nearly a century ago, risk is one thing, uncertainty is quite another.
2. There is an information imbalance in the film business. A study carried out by Thomas Gruca of the University of Iowa found that there was an average error of 31% in predicting revenues. That said, there is a severe assymetry of information between the studios and other investors. As for the studios, they presumably have pre-screening insights gleaned, from contact group viewers, as well as knowledge about marketing plans and budgets and how the film will be rolled out. In the words of The Economist, "almost every trade by a studio would be an insider bet."
3. Studios would never short their own films via trades on the exchanges. The reason for this, as suggested by the article, is that Hollywood moguls can never be seen as somehow acting in a way that undercuts its own persona of success and power, much less affecting the possible commercial success of its films.
Assuming that the studios have their way and the exchanges never get off the ground. The question still remains: is there a better way for them to hedge their risk? Or is the old way also the new way for hedging risk? After all, events of the last three years have shown that one should exercise a healthy skepticism before adopting the latest offering of finanical innovation.
Monday, 17 May 2010
"I do wonder if the section on IP (section 4) shouldn't receive wider attention as these are clearly proposals that could, if implemented, impact on a lot of the IP shuffling that many businesses and their advisers will have an involvement with".The document, 35 pages in all, invited comments by 20 April. However, with the change of government, it may be that late submissions will still be seriously considered.
Under the Austrian Patent Act, employees (if not specifically employed for the purpose of making inventions) are entitled to adequate compensation if their invention -- or any right to use the invention -- is transferred to the employer. The agreed compensation can be adjusted (both in advance and retrospectively) if the compensation is rendered inadequate following a change in circumstances, so long as the employee is not required to repay any compensation received.
The Supreme Court, disagreeing with the Appeal Court's view that such agreements were null and void, said they were enforceable, but subject to adjustment by the courts. Payment of a flat rate can actually be advantageous for the employee, who immediately receives greater financial funds to dispose of and need not suffer any diminution in compensation if the invention drops in value later on. Thus, compensation for employee inventions may be effected either by periodic payment (licence fees) or by a single lump-sum payment.
Even though the claimant waived his right to claim further compensation, this waiver was invalid and did not affect a retrospective adjustment of the compensation. Adjustment of the amount of compensation is also permissible if the employee knew of the true value of the invention when concluding a flat-rate agreement or accepting a waiver, but could not provide sufficient evidence for that assumption. The amount of compensation will reflect the value of the invention and is to be computed on the basis of the economic significance and other relevant aspects of the invention. If the invention is at least of some internal economic relevance for the employer, compensation in the amount of what is proper in the individual case must be paid (cost benefit analysis).
The author of this note observes that the employer is at risk of extensively using an invention for which it has paid a flat-rate fee, only to find out later that, by way of a retroactive adjustment to the employee's benefit, the use turned out to be more expensive. Such a circumstance is particularly troubling for the employer if - as in the present case - other non-patented technical alternatives were available for use.
Sunday, 16 May 2010
"Today, 70% of corporate value is in intangibles. This is most clearly seen in mergers and acquisitions activity but is actually true for every company This value comes from knowledge that is developed by people and turbocharged by IT. But because our management systems and accounting are still based on industrial-era customs, this value remains invisible, misunderstood and unrecognized.
We have been successful in helping our clients use intangible capital tools to negotiate with merger partners, gain financing, improve performance and build the value of their companies. In early 2008, as we began writing about what we saw as the coming recession, we knew that it was time to take our IC message to a larger market. That fall, we sold our book concept to Praeger and during the dark days of the recession we worked on the manuscript, hoping to contribute to the recovery ...".
Wednesday, 12 May 2010
If readers have any suggestions, can they post them as comments below.
Tuesday, 11 May 2010
"A reader has emailed IP Finance to ask if it knows of any courses on intellectual property valuation that are (i) general, in the sense of not being specific to any one type of IP right or market sector, and (ii) general, in the sense of being at a high enough level to be understood by someone who is not an accountant or a financial whizz-kid but who needs to be able to identify the main issues and thus be equipped to follow the general thread of what accountants and whizz-children tell him.From Chris Bartlett, until recently Senior IP Valuation & Contracts Manager at Glasgow-based ITI Techmedia and currently Chair of the Education Committee of the Licensing Executives Society (Britain & Ireland), comes this response, which both poses a question and provides some information:
If you know of any such courses, please let me know. Also, if you think you could help in putting such a course together, please say so."
"I do know that there are a number of dedicated IP valuation courses available in the UK, but in my experience these can be very sector specific, typically healthcare and pharma, and also generally assume an audience sufficiently experienced in the general IP field that they now have a wish to look at valuation methodologies as a fairly detailed specialist area.If anyone wishes to contact Chris regarding his invitation, can he or she please email him here.
I am not aware of any single course which fits your criteria though I would certainly be very interested in working with others to create one - indeed building such a course fits within my present strategy for new LES courses in the UK.
In the meantime, perhaps you may like to inform your readership of the forthcoming LES Fundamentals of Intellectual Asset Management course at Cranfield in June, in which valuation at precisely the pitch your reader desires is presented within a broader context of intellectual property and asset management as a whole. Details can be found here.
I would welcome, perhaps through the medium of your blog, proposals from suitably qualified practitioners to provide both content and their presentation skills for provision of a one day course-cum-workshop targeting IP valuation for non-IP specialists, managers and IP newcomers".
The IP Finance weblog has also received details of this course from the Business Development Academy which, we learn, has been taught all over the US, UK, Europe and Israel and that over 200 representatives from Fortune 1000 businesses have attended the course.
According to Versace, investigators moved in on 72 retail stores in southern California and Arizona in 2003 and charged 110 people with selling counterfeit goods bearing brand names owned by the company. The company said the compensation was "the highest ever obtained by an Italian company in a case brought abroad in defence of their brand name".
I've received emails asking me if I know any more about this case and about the make-up of the huge cash award (which I don't). Do any readers have anything to add, since all the news items on the internet seem to be based on the same press release.
Friday, 7 May 2010
If you know of any such courses, please let me know. Also, if you think you could help in putting such a course together, please say so.
The conflict started at the end of 2006 when IPCOM, a company founded by Bernhard Frohwitter and Christoph Schoeller, acquired the patent portfolio developed by BOSCH in the late 80s and 90s for its mobile and in-car telephone systems. This portfolio comprises 160 patent families and 35 of them are said to be essential to the GSM and UMTS communication standards. The acquisition of a license from IPCOM is thus a necessity for all firms manufacturing and selling products conforming to the new technological norms. Meanwhile IPCOM must accept to license these essential patents under FRAND conditions.
The negotiations between NOKIA and IPCOM turned sour very quickly, as IPCOM asked for 5% of NOKIA’s mobile phone sales in all countries covered by its portfolio and for each year of use. This represents a cost of 600 million euros per year for NOKIA, that is to say an astronomic total of 12 billion euros over 20 years. The Finnish company stopped negotiating with IPCOM and accused the German firm of not honoring the FRAND commitment that previous patent holder BOSCH made to the ETSI (European Telecommunications Standards Institute) as well as to all companies that participated to the establishement of the 2G/3G telecommunication standards. This accusation has been vehemently rejected by IPCOM. According to Frohwitter IPCOM has always been dealing with potential licensees on FRAND terms, the amicable settlement found with Siemens AG, Motorola Inc., Philips Electronics and Alcatel-Lucent amongst others being an irrefutable proof of IPCOM's willingness to cooperate on a fair and reasonable basis. There is a wide divergence between the two firms on the meaning of FRAND and proceedings of patent infringement/invalidation are now in progress. NOKIA took an advantage as the two most contentious patents have been recently invalidated in UK (see here). Regrettably for those (like me) who were hoping for some guidance, the meaning of a FRAND commitment has not been debated in court.
The best solution to find the meaning of FRAND is to delve deep into IT and legal resources. However the literature addressing this topic is already consequent and the opinion of specialists on this “hot” topic is diverging. It is difficult for a FRAND neophyte like to discern the truth from lies. Fortunately for beginners, Roger G. Brooks and Damien Gerardin recently published an excellent piece (that you can download here) breaking all myths commonly held on this tricky subject. For some, the fact that both authors are partners have been representing chip manufacturing company Qualcomm Inc. in many FRAND-related issues in the past might call their impartiality into question. However the arguments developed in this paper are unbiased, simple and quite convincing (to a certain extent).
In a nutshell Gerardin and Brooks refute many commonly accepted statements, notably that in order to satisfy a "fair and reasonable" commitment, a patent holder "must set his royalty rate based on a mathematical proportion of all patents essential to the practice of a standard or that a patent holder is not entitled to seek injunctive relief against a standard implementer should they fail to agree on licence terms. Both statements are not supported by economic or legal evidence and are in contradiction with the actual behaviour patent owners in a standard-setting context. Numerical proportionality in the calculation of a royalty rate is not a sign of fairness, since it tends to ignore the real value of a specific patent in favour the average value of all patents used to comply with a technological standard. The statement that a FRAND commitment should be construed as a waiver of injuctive relief from the patentee is according to both authors equally as misleading, because this assertion is contradicted by hard facts found in the history of the IPR policy of many standard-setting organizations (or SSOs) such as the ETSI, as both authors demonstrate.
All things considered, the plain truth about FRAND commitments is that they are the result of a voluntary contract between essential patent holders and SSOs to negociate in good faith about the terms and conditions of a licensing agreement. As Brooks and Gerardin observe, “fair and reasonable” are on their face flexible terms the specific content of which is substantially left to the negotiation between the parties. All economic interpretations of FRAND commitment proposed till now are thus restrictive limitations, whose validity cannot be verified against the IPR policy of SSOs.
The simple definition provided by Brooks and Gerardin is very compelling and hardly refutable. However in the very specific context of the IPCOM case, which does look like an ex-post hold up to me, it does not provide the helpful guidance one could have hoped. The balance between the two actors in the licensing negotiations is skewed from the beginning because IPCOM finds itself outside the telecom market. NOKIA cannot use its own patent portfolio as a bargaining chip to negotiate the terms and conditions of a license (and above all the price of such a license), like it certainly does with other market players. Indeed NOKIA's competitors de facto need those patents in order to operate on the market, whereas IPCOM simply does not. Given this initial distortion giving much leeway to IPCOM, it is not surprising to see NOKIA withdrawing from the negotiations. This case shows the importance of the context in which the negotiations are taking place and to my mind Brooks and Gerardin's bare definition is hardly useful here, because it fails at taking this context into account.
In my opinion the concept of “FRAND terms of agreement” has been included to the SSOs' IPR policies, so as to help negotiating parties to reach an agreement satisfying them both. I agree with Brooks and Gerardin that the meaning of such a concept cannot be too specific, but if you dry up its meaning, this concept will not fulfill its primary purpose, and this would be a failure as well.
Wednesday, 5 May 2010
The seminar is priced at £50 plus VAT per person. Those lucky enough to attend will get 3 CPD points, a pleasantly tasty lunch and, if all else fails, a decent sleep in warm and protective surroundings. The seminar will take place from 11am-3pm; 10:30am registration.
You can view the full programme here. Booking arrangements here.
Tuesday, 4 May 2010
The ink is still not yet dry on the potential fall-out of these recalls, but another recall, in quite a different industry, hit the headlines late last week, namely the recall by the FDA (U.S. Food and Drug Administration) of certain Johnson & Johnson products, including children's Tylenol. One account of this recall was published by Barry Silverman under the title "Latest Tylenol Recalls Past Crisis" on the brandchannel.com site here. The recall was occasioned by certain "manufacturing deficiencies" that could result "in potency, purity or quality" problems.
Fast-backward to 1982, and to the granddaddy of all recalls, namely the Tylenol crisis of that year, when the product was found to contain cyanide, due to tampering by third parties, resulting in the death of several people. The response of J&J is considered the textbook example of how to deal with a consumer product recall, including transparency, responsiveness, and a meaningful set of actions, including the widespread recall of the product from the shelves at a cost of $100 million dollars (a lot of money at the time, remembering that this was nearly 30 years ago) and the development of the tamper-proof bottle.
It does not appear that any material harm has occured to consumers of the products subject to the current recall. Still, the current scorecard by the pundits of the J&J response reveals a more mixed assessment than the tragic recall of 1982. Let's consider several observations in this regard as reported in the "brandchannel" article.
1. "This time, it seems, Johnson & Johnson's McNeil Consumer Healthcare unit, which makes children's Tylenol, has been less responsive. 'The recall quickly became a flashpoint for some parents,' reports The New York Times. 'Some people said they felt frustrated in their efforts to obtain more information from the company. Others said they had lost confidence in the products. This is at least the fifth recall for consumers of McNeil products in less than a year because of quality control issues.' "
[How does The New York Times know that J&J has been less responsive this time? Did they have some baseline to evaluate this, or what? Also, how many consumers knew that this is the fifth recall in less than a year? What evidence did they have for this loss of consumer confidence?]
2. "Obviously, when recalls are conducted because of a quality problem on the part of the manufacturer, it can shake consumer confidence. The recent spate of highly publicized Toyota car recalls is proof enough that such actions can do a lot of damage to a brand's image."
[Actually, I heard a Bloomberg podcast late last week that suggests that Toyota vehicle sales have held up quite well recently, despite the recall. If so, how exactly has the damage to Toyota's image manifested itself?]
[This is an interesting point, if true, which certainly distinguishes the J&J situation from that of Toyota. That said, I wonder how much evidence, other than anecdotal evidence, is there to show a migration from a branded product to a generic substitute in such a situation. Is the move brand/product-specific, or can it have a more general effect on consumer preferences for drugstore products?]
Saturday, 1 May 2010
The DRAM space has been dogged over the years by a number of patent infringement suits. At issue is the fact that most of the DRAM companies require access to other company's intellectual property in order to be able to make DRAMs. The semiconductor industry has traditionally cross-licensed its patents and much of the dispute has in effect been to work out the value of the balancing payments that need to be made. Thus the main value of the patent rights to a company like Qimonda is not so much the value from licensing in the patents, but rather access to other company's technologies and relief from royalty payments. Now it might seem that if you no longer have a manufacturing company, there would be no need to have cross-licensing arrangement. However, Qimonda presumably concluded its licensing agreements on the basis that it was not going to go bankrupt and many of these agreements are still no doubt in force and might bind potential purchasers of the patent assets (although what the effect a change-of-control has on the agreement is unknown).
Added to that many of the most valuable patent rights in the Qimonda portfolio probably came from the joint development with IBM and later with Toshiba on various DRAM architectures. Many of these patent rights are (were) jointly held which meant that IBM has also presumably been able to license them to other players in the market place.
So what are we left with? Any potential purchaser will have in essence a large portfolio of patents (and patent applications) which it needs to maintain. The potential licensors would be limited, since many of the big players no doubt already have licenses to the technology. This might leave a number of smaller fish, but the revenues are likely to be limited.
There's no doubt one or two juicy bits around the place as the announcement that a licensing company was to be set up indicates. And the rest? Well probably not worth much more than the paper that they are written on - at least for a non-operational company. It's of course possible that a DRAM company wanting to acquire IP to strengthen its own position might be interested - but then many of the potential deals will have already been done by Qimonda. It's hardly surprising that no sale has been made and that the administrator is having difficulties finding a potential purchaser.