Wednesday, 25 September 2013

Seeing the Wood for the Trees

IP Finance received this piece from Keith Mallinson (WiseHarbor) two days ago but has only just been able to post it.
Seeing the Wood for the Trees: UK IPO Keeps Hacking away at Patent Thickets 
The UK IPO published its report entitled A Study of Patent Thickets on 30 July 2013.  In its IPO Facto blog review of the report, the IPO’s blogger draws the correct conclusion that UK firms are not negatively affected by so-called “patent thickets”, and that the “forest” is, in fact, “thicket-free”. However, the IPO’s report and the blogger’s other comments about it are not so benign; even though the report’s specific conclusions on the UK and SMEs are rather unclear, buried, lacking in the use of plain English and couched in economist-speak caveats. I wonder if the IPO might be trying to distance itself from its own report’s dubious findings through this blog? 
I analysed an October 2012 version of this report and related issues here in February 2013.  The link I provided to the former report version, subtitled “Final report prepared for the UK Intellectual Property Office”, is dead now. In my IP Finance posting I remarked that the report lends convoluted and qualified support to the notion of patent thickets and theories of resulting harm.  Its inconclusive 2011 report on the same matter also examined whether patent thickets are a “barrier to entry into patenting for UK enterprises, in particular [SMEs].” 
SMEs can, and in many cases actually do, fare pretty well for themselves in this emotively-described ICT domain where there are many complementary patents. SSOs enable SMEs and others to create standards, license SEPs on FRAND terms and develop products. UK companies and UK SMEs in particular have a lower propensity than their US or large company counterparts to patent anything. Patent thickets are not the reason for that. 
Comment on this topic is rich in (questionable) analogies, but weak in facts-based analysis. For example, evidence of problems and harm with patent thickets, using a single example from outside ICT by Bessen and Maskin (2009) that was cited by Professor Hargreaves (2011), is weak and inapplicable, as discussed in another of my IP Finance articles. 
I also submitted something very similar to the above as a “Reply” on the IPO Facto blog “awaiting moderation”, on 17 September 2013.  It was posted to the blog on 23 September.

Thursday, 19 September 2013

DG Comp Pursues Settlements on SEP Licensing with Samsung and Google’s Motorola

Here's IP Finance's latest guest post from Keith Mallinson (WiseHarbor). Here he brings us up to date on the prospects for closure in an investigation which many people feel should not have been started in the first place. Keith writes:
DG Comp Pursues Settlements on SEP Licensing with Samsung and Google’s Motorola 
According to Bloomberg press reporting, the European Union’s competition chief said he is hoping to close probes into whether Samsung Electronics and Google’s Motorola Mobility breached European antitrust rules by seeking injunctions for infringement of key mobile-phone patents in their struggle for supremacy with Apple. Competition Commissioner Joaquin Almunia has recently said that the European Commission’s approach on standard-essential patents will be “clarified” in two separate cases concerning these companies.

Allegedly, it’s a hold up!

Yet the case for competition authority intervention lacks adequate support. Key issues under consideration by DG Comp include whether these defendant companies have the possibility to “hold-up” standards if they seek, obtain or even threaten injunctions for the infringement of standard-essential patents, and are thereby able extract unreasonable royalties. As Commissioner Almunia said in 2012, 
“[B]ecause to build a modern smartphone one needs thousands of standard-essential patents, their holders often have considerable market power. Any company that holds these patents can effectively hold up the entire industry with the threat of banning the products of competitors from the market. This sort of hold-up is not acceptable”.
The qualifiers possibility and threaten are most significant here because there is so little evidence of hold-up, with abundant indications to the contrary, and because injunctions involving standard-essential patents are so rarely granted and are invariably short-lived. In the recent case with Microsoft pursuing claims of hold-up against Motorola in the Western District of Washington, even Microsoft’s experts Kevin Murphy, Timothy Simcoe, Matthew Lynde conceded under cross-examination that hold-up was not necessarily a problem. Instead they stated there was no evidence of hold-up and could not identify a single license that had been held up. Similarly, in a U.S. International Trade Commission investigation, Michael Walker who was until recently ETSI’s Chairman, testified that patent hold-up has never been a problem at ETSI and that no standards have been blocked by SEPs.

The attention of competition authorities has been drawn to the smartphone “patent wars” because the players are large, very vocal, deep-pocketed, have disparate positions with respect to SEPs and are most litigious. Those who are crying foul and seeking antitrust remedies include companies commanding some of the highest profit margins and largest cash piles in the ICT sector. Patent infringement litigation is predominantly among the above smartphone market leaders Apple, Samsung and it also includes some other industry heavyweights – most notably Microsoft and Google’s Motorola. These players are all jockeying for position in the large and severely disrupted smartphone marketplace. This is illustrated by the market entry of Apple with its highly-successful iPhone models since 2007 at the expense of Nokia and BlackBerry in particular, with their rapid demise from smartphone market leadership to fighting for survival since 2009.  

Exhibit: Stellar Market Growth, with Dramatic Rises and Falls for Smartphone Manufacturers

Even Commissioner Almunia’s spokesperson, Antoine Colombani, remarked in March of this year that 
“[t]he markets for smartphones and tablets are very dynamic, innovative and fast-growing. Samsung's growing market position and the success of Google's Android platform are good reasons to believe that competition is strong on these markets.”
Tilting the playing field

Changing rules of the game for SEP licensing would be a major step and, given the success of the mobile communications market, completely unwarranted. It would significantly affect the relative competitive positions of many market players. Business models and IP assets differ enormously between old-guard phone manufacturers owning many mobile technology SEPs, and new entrants having to build their stocks of these from scratch while already owning rich troves of other IP, in many cases. Nokia fell to only a few percent smartphone market share despite its multi-billion Euro annual R&D investments over many years building market-leading accumulations of SEPs.

Injunctions are fundamental to patent law, and are purposely not precluded in the intellectual property rights policies agreed by consensus or majority voting in standard-setting organisations such as ETSI and in SEP licensing agreements. Eliminating or restricting further the possibilities for seeking injunctions (for example under the threat of antitrust sanctions) would have major adverse consequences. For example, in the absence of being able to seek injunctive relief, a potential licensee might see little downside in simply waiting to see if a court eventually awards “reasonable royalty” damages, instead of agreeing to pay these with certainty at the outset. With no possibility of injunctions, “ reverse hold-up” could occur, with patentees unable to receive adequate compensation for their innovation investments.

The U.S. Federal Trade Commission’s Joshua Wright also counsels against competition authorities’ “attempts to influence SSOs' IPR policies." Instead he states that 
"sanctions available to address patent hold-up and related concerns under other legal regimes are more than adequate to provide optimal deterrence against patent hold-up." 
Injunctions are far from being automatic entitlements and are only ever granted, if at all, for SEPs after extensive deliberations in court. In the U.S., decisions by the courts and the International Trade Commission show that judges have the ability to determine whether or not injunctions or import Exclusion Orders are warranted. And Exclusion Orders can be vetoed by the President of the United States, as recently occurred when an import ban instigated by Samsung against Apple was overturned. In the EU there have been only a few SEP-related injunctions granted, and product bans have had little impact on the market or consumers.

Evidence indicates that competition authority interventions are unwarranted and could be very harmful. Apple, for example, has achieved rapid market share growth and stellar gross profit margins of up to 60% on the iPhone while relying overwhelmingly on others’ SEPs. It is far from certain that any antitrust intervention-induced SEP cost reductions for manufacturers would necessarily be passed on to consumers. But limiting innovators’ ability to derive licensing income and other value from SEPs would deter R&D investment, participation in SSOs and contributions to standards. Under the existing system, consumers have not been harmed, they have benefited from exceptional improvements in product performance, while the numbers of suppliers and products have expanded substantially. Quality-adjusted consumer prices have reduced significantly and continue to do so.

Time out on intervention

Time is running out for Joaquin Almunia who is coming towards the end of his term as Competition Commissioner. He is therefore eager to close the Samsung and Motorola cases before departure. Recent comments, as reported by Bloomberg; that decisions “not only depend on the Commission side” seem to indicate he is seeking a voluntary remedy with agreement from Samsung and Motorola (or a Commitment Decision under Article 9 of the EU’s antitrust regulation). With such poor evidence of hold-up or consumer harm, it is unsurprising he prefers to pressure the defendants into such a settlement than go for a full negative decision that could be appealed by these defendants. This is because a Commitment Decision is “voluntary” and does not require the EC to establish that the company has “market power”, nor that it abused such power. On the other hand, a full negative decision would require the EC to establish its theory of harm under scrutiny of the courts, which would appear appropriate given that Commissioner Almunia aims to provide “clarity”. However, despite investigating the issue of SEP licensing on the basis of Fair Reasonable and Non-Discriminatory terms for almost a decade, DG Comp has not yet had the confidence (or, some would say, the legal basis) to issue a full decision. That stance seems unlikely to change right now and there are real questions that the EC has to answer about why it is taking this aggressive position and how it believes its actions will encourage, rather than jeopardise, the great work and accomplishments of SSOs and their members.

Wednesday, 18 September 2013

Corporate tax avoidance and IP rights – The Double Irish Dutch sandwich

The financial crisis has severely dented the balance sheets of many States. Significant resources have been invested to buttress or nationalise ailing financial institutions, while GDPs have markedly contracted reducing tax income.
Regardless of whether States have elected to implement supply-side or demand-side economic interventions in their attempts to exit this economic crisis, national tax authorities have redoubled their efforts to maximise taxation income flows by aggressively pursuing cases of evasion and avoidance.
Corporate tax avoidance, in particular, is attracting increasing attention. In the recent past, several world leaders have decried corporate tax avoidance, the OECD has unveiled plans aimed at ending the “golden era” of this phenomenon, and the EU Commission has announced that it intends to investigate tax discounts and sweeteners offered by Member State to multinationals. 
Corporate tax avoidance is hardly novel; nevertheless, over the past decade it has acquired novel connotations. IP-rich multinationals, in particular, have erected complex networks of subsidiaries the sole purpose of which is to minimise, if not completely extinguish, their tax liabilities.
The Double Irish and the Double Irish Dutch sandwich
Though there are multiple variants, one of the schemes most widely adopted by companies to reduce tax liabilities is commonly referred to as the “Double Irish”.
Company A transfers its global IP portfolio to Subsidiary B. B is incorporated in Ireland, but is controlled and managed by directors based in a low corporate tax jurisdiction such as Bermuda, the Cayman Islands or Andorra; crucially, under Irish law, this characteristic renders B tax resident in these havens and therefore subject to their relevant tax legislation.
Subsequently, B grants licences to exploit the IP portfolio to Subsidiary C which is incorporated and tax resident in Ireland; it is this link between two Irish subsidiaries which yielded the name “Double Irish”. C is the actual operative unit of the Company A: it owns real estate, it employs workers, it exploits the IP portfolio, it sells advertising and collects payments, ultimately generating earnings. Nevertheless, C does not make profits, as it has to pay royalties to B for the IP licences; crucially, B pays very little corporate taxes because it is based in a tax haven. Thus this structure allows A to shift all profits emerging from its IP portfolio to a jurisdiction where they will not be subject to a significant rate of taxation.
In the Double Irish structure, however, C owes withholding taxes to Irish authorities for the royalty payments in favour of B. This liability can be avoided by adding a Dutch subsidiary in between the two Irish ones (this is commonly referred to as placing some Dutch cheese in between the Double Irish, forming a sandwich). Specifically, if B licences the IP portfolio to a Dutch Subsidiary D, which, in turn, sub-licences it to C, the withholding taxes owed by C disappear by virtue of Irish law tax exemptions regarding royalties payments towards entities based in the Netherlands.
The key ingredients of the Double Irish Dutch sandwich
At the risk of over-simplifying matters, three “ingredients” are instrumental for the viability of these corporate tax structures:
First, tax havens. Ultimately, all these structures rely on jurisdictions the law of which does not impose taxation on corporate profits and that concurrently provide a degree of anonymity. Famously, Ugland House in George Town, Cayman Islands, is the registered address for over 18,000 companies.
Secondly, inadequate tax legislation. Numerous States have tax systems which are either not tailored to competitively and effectively deal with value generated by IP rights or suffer from exploitable loopholes that allow for the realisation of corporate structures the sole purpose of which is reducing tax liabilities.
Thirdly, the intangible nature of IP rights. IP rights can be assigned, licenced and sub-licenced without impacting the business model, the provision of services or the flow of revenue streams. These transactions allow right-holders to move their IP assets under the legal regime of choice with immediacy and without incurring significant costs; similar operations are markedly more problematic when they involve tangible assets.
Future prospects and the impact on the legal regime of IP rights
It is very likely that all three of these elements will undergo changes in the coming years.
Arguably, the first element is the least likely to be affected. Though several tax havens are coming under increased international pressure to normalise their legislation, it is unlikely that they will completely disappear in the near future. Moreover, over the past fifty years, there has been a steady and consistent succession of tax havens: when a State changes its legislation new ones are swift to fill the ensuing void, as the economic benefits are alluring.
By contrast, there are already visible signs that tax regimes are being amended to better cope with IP assets. Several large States (including France, Spain, Belgium and the UK) have enacted or are in the process of introducing “invention boxes” or “patent boxes” systems. These “boxes” typically establish lower tax rates for income stemming from products or services built around a patent or another IP right (for the explanation of the UK system see here). Governments declare that these measures are aimed at promoting innovation and skilled labour, yet they also act as disincentives against transferring IP portfolios to other jurisdictions for tax purposes.  Recently, however, more drastic proposals are being advanced. The OECD is championing a plan to encourage States to reform their systems so that tax is due where the economic activity takes place. Notably, this would render void any type of tax structure based on assigning and licencing IP assets; however, such reform would be drastic and is unlikely to be imminent.
Finally, the intangible nature of IP rights cannot be changed, yet the legal regime governing the assignment, licencing and sub-licencing of these goods is coming under increased scrutiny. Throughout history, sovereign entities have often enacted legislation that limited the right to dispose of land or other strategic assets such as ships and natural resources; this was for both security reasons and wealth preservation. States have already shown that they are willing to block transactions that would result in IP transfers which are perceived as creating a security threat; more recently, tax authorities have started to investigate assignments and licences of IP rights which they suspect may impact the tax liabilities of the relevant parties. As IP rights become ever more cardinal to the security and prosperity of States, legislators appear to be inclined to compress the right to dispose of these assets. The extent to which this happens will be of vital concern to the world’s intellectual asset-driven economies. 

Tuesday, 17 September 2013

Twitter--Will the planned IPO affect its ability to innovate?

The hottest hi-tech item must certainly be the news that Twitter has taken the first steps in what is expected to be an IPO of the company's stock, here. Since the announcement, there has been a surprisingly large amount of discussion in the oral media about whether taking the company public will have a dampening effect on the company's long-term ability to innovate. An instructive written summary of the issue appeared on September 13, 2013, in bits.blogs,nytimes.com by Amy O'Leary, "5 Reasons That Innovation at Twitter Might Take a Hit", here. In this piece, O'Leary reports on an interview with Shai Bernstein, a professor at the Stanford Graduate School of Business, here. Based on Bernstein's 2012 study, "Does Going Public Affect Innovation?", here, Bernstein's conclusion was that “there is a substantial decline in the quality of innovation.” O'Leary reports that the Bernstein study used the number of patents as the proxy for the measure of innovation and the affect of an IPO on the company's innovative capabilities. Bernstein, in his interview, suggested five reasons why this is so.
1. Inventive People Cash Out The primary goal of an innovator is to have a successful exit and thereby cash out. A successful IPO is one lucrative form of exit. The result is that the company's most innovative persons leave the company.

2. Inventive People Keep Inventing, Elsewhere Here, there is also a departure of the company's most talented innovative types, but the reasons are not simply because of a big cash payday. Rather, innovative types begin to chafe at the more bottom-line driven focus of the company, especially where innovation becomes more incremental than fundamental. In the words of Bernstein, “Imagine that you have a brilliant idea.” “It’s more attractive to explore that in a private setting where you are the owner, than in a public firm, where whatever ownership you had is now heavily diluted. They do seem to remain entrepreneurial,” he said — just not at the company their innovations helped build.

3. Management Clamps Down on Risky, Creative Work The emphasis is on change to the culture of risk-taking that spawned the innovative idea that propelled the company forward. Indeed, it is reported, the origins of Twitter itself was as a side project, developed by persons were engaged in an ultimately failed audio start-up, Odeo. With the post IP-focus on quarterly reports, in the words of O'Leary, " managers at the company may be less willing to back the kinds of hobbyist passion projects that were the very genesis of the company they are managing today."

4. Why Build Innovation When You Can Buy It? Companies awash in post-IPO cash seem to have increasing preference to acquire companies rather than to continue to develop and innovate in-house. Indeed, Twitter, even pre-IPO, acquired 10 companies in 2012 alone. [I must confess I find this explanation a bit odd, since presumably acquired companies will also yield patents. In a world where collaborative innovation is all the rage, using IPO-generated funds to overcome the limitations of "non-invented here" seems a potentially good result.].

5. New Hires Arrive, with Different Priorities An IPO-generated increase in financial resources often leads to what is called "a binge" in hiring. As Bernstein observes, “[t]here is substantial employee turnaround.” As more and more of these new employees join the post-IPO company, they will be less engaged "building something big;” rather there job is maintain and perhaps incrementally advance the pioneer ideas developed by others. In addition, new employees may be less likely to be offered stock options, at least at quantities enjoyed by the founding generation.
Bernstein notes that if his basic conclusion is correct and it is likely that innovation will decrease post-IPO, the effect is not all black. A decline in innovation does not necessarily mean that the company, such as Twitter, will become less valuable. As observed by Bernstein and stated by O'Leary, "the changes that a company undergoes after a public offer may be the most efficient way for them to create more value. Public offerings are not a bad thing, he said. They are essential to the entrepreneurial ecosystem that birthed companies like Twitter." Indeed, as Bernstein cautions, “If we take out the I.P.O. market, why would venture capitalists invest in the first place?”

A few observations are in order here:

1. The report focuses on post-IPO activity but, over the past few years, most innovative companies exit by acquisition and the like rather than by going public. Indeed, there is more and more discussion that the venture capital industry is in dire straits. If we want to understand the factors that affect innovation, it seems that a complementary study focusing on other forms of exit is needed.

2. There is a danger in equating innovation with patent activity. While I understand that patent data are convenient for conducting empirical research of this kind, in so doing, the analysis may well miss substantial non-patent innovation, both pre and post-IPO. As such, in a social media-mad tech world, patents may be a particularly dicey proxy for measuring innovation.

3. Given this, perhaps the "really next big thing" in this kind of analysis is to develop robust empirical measures that can meaningfully taken into account the variegated countenance of innovation in today's hi-tech world.

Friday, 13 September 2013

Committed to His Ideas and Very Smart with Implementation: The Great Entrepreneur Robert Taylor

Serial entrepreneur Robert Taylor passed away from cancer on August 29, 2013.  The NY Times and many other news sources discuss Mr. Taylor’s life, and all of the stories I’ve read are built around Mr. Taylor’s development of SoftSoap (although he created many products/brands/businesses) (here, here and here).   His SoftSoap is ubiquitous in the U.S. (indeed, it is in my bathroom) and I think it is a great product, but until his recent death I was unaware of the story behind the product. 

Like a lot of great ideas, Mr. Taylor’s idea for liquid soap in a small bottle with a pump was conceived after being confronted with a problem: a bar of hand soap makes a mess near the sink—in a dish or not (and seems very unhygienic).  Mr. Taylor apparently tested soap formulas in his home in the bathtub and at least one obituary states that occasionally the soap would “explode.”  Eventually Mr. Taylor chose a formula for his soap, and then he decided that he needed to obtain some competitive advantage over larger businesses that could easily replicate his idea before he could build goodwill (and obtain a reasonably large market share apparently to justify his investment).  Mr. Taylor's strategy was a simple one (brilliant)—he purchased 100 million small bottles with pumps from the only two U.S. manufacturers that made them.  This move guaranteed him a one to two year advantage over his competitors which allowed him to secure sizable market share (there was also $7 million spent on advertising).  As one obituary points out, Mr. Taylor’s strategy was chosen by Inc. magazine as one of the three shrewdest business moves (ever).

The first mover advantage can be a real one and some may say that the first mover advantage may provide a pretty good incentive to invent.  Some may even say that patents may be unnecessary in many industries because the first mover advantage (which includes trademark protection) and trade secrecy, provides more than enough of an incentive to invent (and perhaps commercialize?) without the costs of a patent (the supracompetitive price, the actual cost of obtaining patents, and the costs of maintaining the system that we have).  Once you go down that road, often the next point is, well, why don’t we have a patent system that is industry specific—if a first mover advantage and trade secrecy is good enough in this particular industry then patents are not necessary.  But, the story of Mr. Taylor implicitly recognizes that him getting to the market first even with a great, useful idea and $7 million in advertising with a clever trademark was not enough (including the time necessary to reverse engineer his soap).  Mr. Taylor needed something else to give him a competitive advantage—or at least ensure that his investment in his idea was worth taking a risk on.  And, that something else was purchasing one to two years-worth of bottles from the only sources of those bottles.  The first mover advantage by itself may not have been enough to get him to invest the time and effort in bringing the “SoftSoap concept” to market—even in a relatively simple business/product such as liquid hand soap in a small bottle with a handpump.  I know that Mr. Taylor, apparently, could not have obtained other IP protection to try to secure his investment (or make it a better bet), but this story seems to show that claims of the benefits of a first mover advantage by itself may be a little overblown, perhaps.  (I suppose he could have tried to sell his idea to Proctor & Gamble).  If the liquid hand soap formula was particularly difficult to reverse engineer or suitable bottles were not easy to manufacture, there may have been more time available for Mr. Taylor to recoup his investment in creating the idea, so perhaps his idea wasn’t that great (not novel or nonobvious to patent the combination)  But, it surely is useful and if commercial success is any judge—Mr. Taylor did very well.

One other thing to think about is whether Mr. Taylor’s idea of obtaining one to two years of an advantage by purchasing one to two years inventory of packaging (although is the bottle really packaging or the product—or at least creates so much demand for the product that it is essentially the product) can be replicated effectively today.  I suppose it depends.  What do you think? 

Mr. Taylor was a great entrepreneur and his contributions will be remembered. 

Wednesday, 11 September 2013

The Nokia-Microsoft Transaction: Further Thoughts on Strategy and Valuation

Fellow blogger Mike recently discussed ("Microsoft Acquires Nokia Handset Business and Licence-Related Patents"), here, the high-profile acquisition by Microsoft of Nokia's handset business. Permit me to offer my own view of certain aspects of this blockbuster transaction. To remind readers, Microsoft paid 3.79 billion EUR for the mobile phone and smart devices business units plus certain support assets and activities (the business "itself") and an additional 1.65 billion EUR for a 10-year non-exclusive licence (subject to possible extension in perpetuity) to use certain Nokia patents. I scratched my head and did a lot of on-line digging in search of a previous example where multiple billion dollars were paid for a non-exclusive licence, but my efforts came up empty. Whether or not these licence arrangements, having regard to the sums paid, are indeed without precedent, the more interesting question still remains: what do we make of these licence arrangements, given that the previous mega-patent transactions of recent years have focused in whole, or nearly in whole, on the acquisition of patent ownership of large patent portfolios? Two reports of this transaction offer somewhat different perspectives.

First, let's consider the 3 September Reuters report by Dan Levine ("Why Nokia didn't sell its patents to Microsoft"), here. Until the transaction, it is claimed, Nokia had not widely licensed its handset-related patents, instead using its patents as a shield against competitors. That will change, said a Nokia spokesman, "[o]nce we no longer have our own mobile devices, following the close of the [Microsoft] transaction, we would be able to explore licensing of those technologies." That is well and good, but it takes two enter into a non-exclusive licence arrangement, so why did Microsoft agree to take such a licence rather than to acquire the patents?

One answer may simply be that, when compared with several of the mega-deals for patents, most notably the Google-Microsoft Mobility transaction, Nokia simply did not receive an offer for the amount that it wished to receive for sale of its patent portfolio to Microsoft. Maybe yes, maybe no, given all of the second-guessing about the amount actually paid by Google that are attributed to the patents. The better answer, as suggested in the article, is not simply a case of the licence arrangement being the best available option. Rather, the licence was part of a strategy for the exploitation of the company's patents.

In particular, it is connected with Microsoft's attack on Android manufacturers. Thus, it turns out that Microsoft has already succeeded in convincing approximately 20 Android manufacturers to pay royalties, thereby adding a further cost to the overall Android system. The argument is that, by leaving the patents in the ownership of Nokia, the company can separately sue the same Android manufacturers, with the intention of obtaining a royalty and further adding to the cost of the device. The article called this step a "pincer movement" made possible by the ownership of Nokia in the patents. If this be correct, we can expect to witness, over the next several months, multiple law suits for patent infringement and filed by Nokia.

A somewhat different approach is offered on the FOSS patents blog post of 3 September ("1.65 billion euro patent licensing portion of Microsoft-Nokia validates Nokia's portfolio"), written by the perceptive Florian Mueller, here. Of particular interest are two slides set out in the post, taken from a "strategic rationale" document furnished by Microsoft (Mike's post provides a link to the document). Most notable are the following claims by Microsoft:
1. Microsoft is taking an assignment of more than 8500 design patents;

2. The utility patent portfolio that is the subject of the Nokia licence to Microsoft consists of more than 30,000 granted patents and pending applications and is described as one of the most valuable portfolios in the wireless connectivity industry.

3. Microsoft will taken an assignment of the benefits of more than 60 third-party patent licenses.
Mueller observes that Microsoft, unlike Google, already has a strong patent position (witness its success in smart-phone litigation and convincing 20 Android device manufacturers to take a licence with recourse to litigation). Thus it had no interest in acquiring the Nokia patents, but merely in ensuring that it would be free from interference based on these patents, whoever ultimately owns them. The blog also suggests (and others have apparently discussed more directly), that Nokia now is in a position to assert its patents against other parties for the purpose of obtaining royalties (and thereby becoming a "patent assertion entity" or even a "patent troll"?).

Despite the stark differences between the Google-Motorola Mobility transaction, in which the portfolio was acquired by Google, and the Microsoft-Nokia transaction, which emphasizes the grant of licences by Nokia, there are still some common nagging questions: (i) how did Microsoft reach the 1.65 billion EURO valuation for the licences; (ii) how did Microsoft assign a value to the design patents acquired; and (iii) how did Microsoft reach the conclusion that the Nokia portfolio is a particularly strong one?

More generally, Florian states that "Google grossly overpaid for Motorola's patents", apparently based on the thin record of successful litigation resting on these patents. Maybe yes, maybe no. Perhaps Google assigned a large value to the fact that in acquiring the patents, it precluded acquisition by someone else. Perhaps Google has other metrics by which it is valuing the success of its patent acquisition. As for Microsoft, the entire acquisition may make sense only if the company can make a go of it in the smartphone industry. If Microsoft fails, then not only can it be claimed that it "overpaid" for the Nokia patents, but in doing so, it precluded these amounts from being utilized by the company to develop other product categories. Seen from this vantage, the ultimate strategic concern is not the potential benefits flowing from the grant of the licensed rights, but rather the very transaction itself. As such, the issue of the licensing is at most a matter of high level (and expensive) tactics. Without being trite—"only time will tell."

Monday, 9 September 2013

Protecting Patient Safety or Preserving Profits: California’s Biosimilars Bill

The California legislature recently passed legislation essentially regulating when pharmacists can substitute a biosimilar for a prescribed biologic.  Apparently, the Governor of California has not yet signed the legislation.  The legislation is opposed by the generic pharmaceutical industry because it arguably creates a burden on the pharmacist to substitute a biosimilar for a biologic and thus makes it more difficult or maybe less likely a pharmacist will do so.  This, in turn, may allow biologic companies to prevent the usage of biosimilars and thus maintain a supracompetitive price.  While there are concerns with safety and efficacy concerning biosimilars that are different than traditional small-molecule drugs, those concerns would have been addressed by the U.S. Federal Drug Administration (FDA) already.  There is a concern with patient disclosure, but again, the FDA should have dealt with the concerns that matter most to the patient.  Notably, the California Public Employees’ Retirement System (CalPERS) board voted to oppose the legislation and the FDA has expressed concerns about the legislation.  Amgen and the Biotechnology Industry Organization are strong supporters of the legislation. The legislative digest and (mark up) text of the legislation is available here.  Additional commentary concerning the legislation is here, here and here. The FDA Law Blog has helpful commentary as well as The Biosimilars State Legislation Scorecard, here.  Notably, California is often considered a "laboratory" or leader in creating state legislation (we certainly create a lot of it.). 

Wednesday, 4 September 2013

UK, Morocco tie the knot -- but how does this loving relationship work?

A good way\
to strengthen ties ...?
"U.K., Morocco Sign Film Co-Production Treaty" is the promising title of this item in the Hollywood Reporter.  It reads, in relevant part:
"The U.K. and Moroccan governments have signed a co-production treaty to allow the two countries to "strengthen ties within the film industry, encourage the sharing of knowledge and ideas, and drive economic growth through film production." It is expected that the treaty will be extended "in the near future" to include TV production as well, the parties said. Negotiated by the British Film Institute and Centre Cinematographique Marocain (CCM), the national cinema agency of Morocco, the treaty also provides tax incentives for productions.

Productions qualifying under the terms of the treaty will be able to access the benefits of national status in each country. In Morocco that means tax incentives, while in the UK qualifying productions will be able to acquire the British movie tax relief and apply to the BFI's film fund -- the U.K.’s largest public film fund with a current allocation of $34 million (£22 million) annually to invest in the development, production and completion of feature films.

... 
The U.K. currently has nine bilateral co-production treaties in place with countries including Australia, New Zealand, Canada, France, Israel and India".
This blogger was unaware of "the wonderful collaborative relationship that already exists between the creative industries of the U.K. and Morocco, as well as putting in place strong financial incentives to boost film production in both nations", to which the UK government culture minister Ed Vaizey alluded.  Can any reader enrich his understanding of what has been going on so far, how much benefit is being derived and what impact, if any, it may have on the offshoring and/or other strategic moves involving the IP rights that are exploited within these collaborative ventures?

Tuesday, 3 September 2013

Microsoft Acquires Nokia Handset Business and Licenses Related Patents: Microsoft's Strategic Rationale

Microsoft has acquired Nokia’s handset business for about $5 billion and has licensed related Nokia patents for about $2.18 billion (supposedly 8,500 design patents and 30,000 utility patents and applications).  Discussion about the deal can be found here, here, here and here.  Interestingly, The New York Times notes that, as partners, Microsoft and Nokia have not been very successful, but that Microsoft’s acquisition of Nokia may “make things run more smoothly.”  Why?  The New York Times states that the issue concerned slow development in the fast moving mobile market because of “friction” caused by intellectual property rights. 

According to Microsoft’s Strategic Rationale document, Microsoft is acquiring “Nokia’s Qualcomm and other key IP licenses”; “licens[ing] Nokia’s patents for use across all of Microsoft’s products”; and “licens[ing the] ability to use Nokia’s HERE broadly in its products.”  The document notes that “Nokia retains NSN, HERE, its CTO Office and its patent portfolio.”  The document also states:

IP Acquisition and License Agreements with Nokia

                Intellectual property is an important element of the smart devices business

                                Unless managed proactively patent issues can create uncertainty for smartphone shipments

                                Unless managed creatively, patent royalties can add over 10 percent to the costs of a smartphone Bill of Materials

                Microsoft is acquiring over 8,500 design patents, ownership of the Lumia & Asha brands, and a ten-year license to use the Nokia brand on feature phones.

                Microsoft is paying 1.65 billion [Euros] for a fully paid-up license to Nokia’s utility patents

                                Covers all of Nokia’s patents and patent applications as of the closing date (except NSN)

                                The total license price includes an option to convert coverage from a ten-year to a perpetual license

                                The agreement provides for a broad, five-year, two-way standstill, including NSN

                Nokia’s patent portfolio is one of the most valuable in the tech sector

                                Nokia’s portfolio has approximately 30,000 utility patents and patent applications; we consider it to be one of the two most valuable portfolios relevant to wireless connectivity

                                The license also provides significant value for Microsoft’s existing businesses, replacing after 2014 Microsoft’s existing annual license payment to Nokia

Microsoft also secures other Valuable Patent Benefits

                Nokia is assigning to Microsoft benefits under more than 60 patent licenses with third parties

                                Nokia is assigning its existing license with Qualcomm, which is the other company that ranks with Nokia at the top of having a valuable wireless patent portfolio

                                Nokia is also conveying rights under its agreements with IBM, Motorola Mobility and Motorola Solutions

                                These give Microsoft the benefit of attractive royalty arrangements Nokia negotiated

                Microsoft will combine the new Nokia license and these agreements with its existing patent agreements

                                Microsoft’s agreement with Samsung will provide coverage for these additional devices without added payments

                                Microsoft will also benefit from its prior or continuing agreements with Apple, LG, Nortel, Kodak, and others at no additional cost

                                Put all together, Microsoft will have the most cost-effective patent arrangements for smart devices

Another interesting point is that this deal may take Microsoft out of contention for the BlackBerry patent portfolio.  And, at least one commentator placed the highest value for the BlackBerry portfolio as a potential target for Microsoft for around $5 billion.  BlackBerry’s stock is up since the Microsoft and Nokia announcement. 

Monday, 2 September 2013

Book Review: "True Patent Value"

When one speaks of patent value, much of the current talk is about how much is a patent (or patent portfolio) worth. With the focus of patents as a distinct "asset class", all eyes are on when the next multi-billion dollar sale of a patent portfolio will take place. Patents, it would seem, are first and foremost (a potentially) big business. In his new book, "True Patent Value" (True Valley Press 2013), Larry M. Goldstein asks the reader to look at the value of patents from a different angle—not first and foremost how much a patent is worth, but "what is a good patent" (and the converse, "how do I know if I have a crummy lousy, worthless patent"?)

Goldstein pursues his topic by distinguishing between "good" patents and "valuable" patents. As for the former, a patent is "good' if: (i) its claims "are well written" and (ii) "[t]he claims have 'good support' in the written description." A patent is "valuable" if: (i) "there is significant infringement by outside parties of the patent's claims", and (ii) "[n]o events have happened, external to the patent, which reduce or destroy the patent's value." The rest of the book elaborates on these points, devoting separate chapters to (i) patent basics; (ii) evaluating patents; (iii) court cases with good patents; (iv) ITC cases with good patents; (v) sales of patents; (vi) "essential" patents; and (vii) seminal patents. Goldstein is well qualified to opine on these topics. A graduate of Harvard College, the University of Chicago Law School and the Kellogg School of Management at Northwestern University, he is a registered U.S. patent attorney with a specialty in information and communication technologies. Of particular interest was his involvement in establishing the patent pool for 3G W-CDMA technology.

An interesting aspect of the book is the author's declared intention that different chapters of the book are intended for different audiences. Thus Goldstein states which chapters of the book are of most interest and use for patent attorneys; engineers and entrepreneurs; corporate executives, directors and patent brokers; and investment bankers and others involved in the financial aspects of patents, respectively. In this reviewer's opinion, the first two groups will find the book of more direct interest, while the latter two groups will benefit from the insights that it provides on the question of patent quality, without necessarily delving into the fine points of patent law and practice. All would be well advised to read the book from cover to cover. Goldstein ends his book with a chapter containing 48 Q & As. While this form of summary is helpful in seeking to distill the main points of the book, it would have even more helpful to add a summary at the end of each chapter. Still, the Q&A format is a useful one.

This book is a welcome change from the ("excessive", in this reviewer's opinion) attention being paid to the financial value of patents as a new form of asset class. Before there can be a dollars and cents valuation, the patent in question must meet the test of being either objectively "good" or "bad". Once this is ascertained, all of the parties active in the patent marketplace will be a better position to better assess the financial value of the patent at issue. Goldstein's book is an easily readable and a well-thought-out explanation of how the process of determining "good" and "bad" patents should take place.

Sunday, 1 September 2013

WIPO (and others) Release Global Innovation Index—A Wealth of Interesting Information

The World Intellectual Property Organization, Cornell University and INSEAD released the 417 page Global Innovation Index (Report) recently (here).  The Report attempts to measure and evaluate innovation by country and includes discussions concerning regional hubs, innovation clusters and enterprise champions.  The Report also includes specific country data reports on innovation as well as various data rankings such as YouTube video uploads, National Feature Films Produced, Royalties and License Fee Receipts, Daily Newspaper Circulation, Venture Capital Deals, Expenditure on Education, Press Freedom, Scientific and Technical Publications and Wikipedia edits by country (and so much more).  The press release for the Report states: “Despite the economic crisis, innovation is alive and well. Research and development spending levels are surpassing 2008 levels in most countries and successful local hubs are thriving. A group of dynamic middle- and low-income countries – including China, Costa Rica, India, and Senegal - are outpacing their peers, but haven’t broken into the top of the GII 2013 leader board.”  The top ten countries are:

  1. Switzerland (Number 1 in 2012)
  2. Sweden (2)
  3. United Kingdom (5)
  4. Netherlands (6)
  5. United States of America (10)
  6. Finland (4)
  7. Hong Kong (China) (8)
  8. Singapore (3)
  9. Denmark (7)
  10. Ireland (9)

While the United States of America moved up from 10 to 5 this year compared to 2012 and Singapore dropped from 3 to 8, the Report notes that the criteria for ranking changed this year and that:

Singapore and the United States of America (USA) would have kept their 2012 rankings (3rd and 10th, respectively) had we kept the 2012 framework unchanged while updating the database; Singapore drops five spots and the USA gains five as a result of adjustments to the framework in 2013.

The changes are noted in Table 1 on page 50 with discussion on following pages. 

In discussing research and development expenditures, the press release paints an upbeat picture:

“On the research and development (R&D) front, GII 2013 brings a dose of cautious optimism: despite adversity and tightened budget policies, R&D expenditures have grown since 2010. On the business front, the R&D expenditures of top 1,000 R&D spending companies have grown between 9 and 10 % in 2010 and 2011. A similar pattern has been observed in 2012.

A most remarkable characteristic of that trend is that emerging markets have increased their R&D faster than high-income countries. Over the last five years, China, Argentina, Brazil, Poland, India, Russia, Turkey and South Africa (in that order) have been at the forefront of this phenomenon. Emerging markets, and notably China, are also largely driving the growth in patent filings worldwide.

“Growing research and development investments and the rising number of intellectual property patents filed are tangible examples of a growing commitment to innovation,” said Mr. Li Yingtao, Head of Huawei’s 2012 R&D laboratories. “In the global economy, innovation from anywhere can drive change and create new opportunities everywhere. Everyone concerned with innovation as a catalyst for economic and social development needs to remain focused on how the value of innovation is to transform industries, businesses and people’s lives, not just locally but across the world.”

In examining the BRIC countries compared to the rise of other “emerging middle-income nations”, the Report states that:

The BRICs have experienced a relative stagnation or mostly a drop in innovation ranks in 2013 as compared to 2012, repeating the experience of last year (2011 to 2012): China (35th; a decrease of one spot from 2012 and six from 2011), the Russian Federation (62nd; a decrease of 11 positions from 2012 and six from 2011), Brazil (64th; a decrease of six spots from 2012 and 17 from 2011), and India (66th; a decrease of two positions from 2012 and four from 2011). In this context, other emerging middle-income nations are increasing their innovation ranks rapidly: Mexico (63rd; an increase of 16 positions from 2012 and 18 from 2011), Indonesia (85th; an increase of 15 from 2012 and 14 from 2011), and others (the Plurinational State of Bolivia, Cambodia, Costa Rica, Ecuador, Uganda, and Uruguay) all increased their rankings by more than 15 positions this year . . . .

As a big fan of “The Land of Enchantment” (a truly special place), I was pleased to find that:

Top world R&D investing countries host top world R&D investing regions. The top region for R&D in the OECD is New Mexico (United States of America, or USA). This state devotes more than 7% of its GDP to R&D, followed by Massachusetts (USA), which invests slightly less than 7% of its GDP in R&D.

And, as a resident of California, it was nice to hear that inventors in the state are collaborative folks with strong networks:

The regions that invest the most in R&D and account for most of the world’s patent applications adopt different innovation modes. In fact, some rely more on networks than others. For instance, the propensity to carry out research with multiple inventors located in different regions varies across sectors and countries. The possibility that inventors located in one region may collaborate with others located elsewhere is shaped by several factors, including the institutional environment of the countries involved. In general, however, collaborations are increasingly important for innovation. In the telecommunication sector, the share of patents with at least two co-inventors located in two different regions increased from 7.9% in the late1970s to 16.2% in 2005–07. In this sector, California performs like a star; the share of patents applied for by residents of California with at least one co-inventor located in another region, in the USA or abroad, is around 24%, but the region has the world’s widest network in terms of the geographic location of partners.

For the patent focused folks, there are PCT patent application rankings by region within specific countries on page 95.  The top five are Southern Kanto in Japan, California in the United States, Capitol Region in South Korea, Kinki in Japan, and Guangdong in China.

The Report also notes the relationship between public policy and the growth of a technology hub by examining Huawaei’s development in depth:

 In 1980, Shenzhen was a small fishing village on the Chinese mainland close to Hong Kong (China). To fuel the growth of the city, public policies were enacted to ease the movement of talent, expertise, and investment into the area, both from across China and from over seas. International corporations were encouraged to invest and create operations in Shenzhen. Policies supported the construction of public and private infra- structure, from business parks and transportation and communication links to hotels and residential developments. The city’s population has grown from 20,000 to 15.5 mil- lion people in just over 30 years; Shenzhen is thriving as a high-technology innovation cluster and sup- porting markets around the world.3 Huawei was established in Shenzhen in 1987 as a sales company, reselling technology developed by a third party.

The Report discusses the importance of intellectual property rights to Huawei:

The idea that innovation is a fundamental input to socioeconomic development is a strong belief held within the corporate culture of any successful innovative company. Commercial companies that invest significantly in R&D do so on the basis that their innovation will have the opportunity to earn a return on those investments. Without a return on innovation, the ability to continually innovate diminishes. This ability requires that IPRs be both respected and protected. This is a key factor in establishing a culture of innovation and achieving scale.8 As an example, Huawei has entered into numerous cross-licensing agreements with industry peers since 2002 and has paid a large amount in patent licensing fees to use third-party intellectual property. In 2012 alone, Huawei paid some US$300 million in patent licensing fees. Huawei also licenses its own intel- lectual property. In fact, Huawei is one of the leading IPR holders in the ICT industry. By December 2012, Huawei had filed 41,948 patent applications in China, 12,453 inter- national Patent Cooperation Treaty patent applications, and 14,494 patent applications outside China.

Huawei attaches greater importance to the commercial value and quality of its IPRs than to their actual quantity, however. Huawei takes the lead in holding patents in such technical fields as long-term evolution, next-generation wireless communications technology, fibre- to-the-home networks, optical transport networks, and the G.711.1 audio standard on fixed broadband networks worldwide. Huawei strategically maintains its patent application level at 3,000 to 4,000 applications annually.

The Report includes other specific case studies concerning Uruguay, India, Tunisia, and Morocco.  On page 327 on the Report, there is a ranking of University and Industry Collaboration by country.  The top ten include: Switzerland, United Kingdom, United States, Finland, Singapore, Belgium, Sweden, Israel, Qatar, and the Netherlands (with Germany at 11) (in response to a survey question).  Enjoy!