Tuesday, 26 August 2014

Singapore's IP ValueLab: ambitious, but can it deliver?

Singapore's IP Week @ SG 2014 event is seeking to showcase the city state as a model base for cultivating and developing IP projects.  A media release issued from that event this morning focuses on, among other things, an extremely ambitious project, the IP ValueLab. According to the relevant extract from this release, which summarises a keynote announcement made by Mr K. Shanmugam, Minister for Foreign Affairs and Law:
IP ValueLab

5. Developed as a subsidiary of the Intellectual Property Office of Singapore (IPOS), the IP ValueLab will promote and develop IP management and strategy, IP commercialisation and monetisation, and IP valuation in Singapore [these being skills that are not normally found among technically qualified examiners and administrative staff that make up the bulk of most IP offices' labour force -- and for which IPOS will presumably have to compete with the private sector when it comes to recruitment and salaries].

6. For companies and investors, the IP ValueLab will provide them valuation advice to monetise their IP assets [this involves a bit of a shift in focus too: national IP offices are generally preoccupied with the point at which concepts are turned into rights, whereas valuation usually kicks in at a later point in time, where IP rights are protecting products and processes in the marketplace and there is more of a clue as to how the valuation can proceed]. The lab will enable companies to put IP at the core of their business strategy, providing services to help them better understand and tap on IP in their growth and expansion plans.

7. For practitioners and academics, the IP ValueLab will provide a platform for them to collaborate on research and provide thought leadership in IP valuation methodologies [and not before time!] and best practices, with a focus on generating industry-relevant and practicable insights. This will raise the level of confidence and trust in IP transactions, and support and stimulate international transactions. The lab will also deliver training and accreditation to raise competency within the industry.

8. To deliver on its goals, the IP ValueLab will partner the Singapore Accountancy Commission (SAC) to develop and promote IP valuation guidelines, methodologies and best practices, as well as to develop curriculum for the training of IP valuers. SAC will also be represented in the advisory panel of the IP ValueLab, to provide strategic guidance [given that Singapore does not operate in a vacuum but trades with the rest of the world, it will be important to ensure also that its valuation methodologies are transparent and intelligible to businesses and entrepreneurs based in its trading partners; this will no doubt require some marketing and advocacy skills]. ...
How serious is the IPOS about delivering on all of this? Pretty serious, if you take a look at some of the vacancies which it is currently seeking to fill.  IP Finance will keep an eye on how things progress.

IP ValueLab fact-sheet: read it here or download it here

Ireland supports Commission review of patent boxes

Is the patent box an unfair
way of saving on tax payments?
An article by Ciarán Hancock, which appears in The Irish Times, reverts to the vexed question of Ireland and the Patent Box. Readers of this weblog will recall that, in July, this blogger listed Ireland as a country that already had a patent box tax break, only to be told by a reader that the Emerald Isle had scrapped its patent box regime back in 2010.  Well, the topic appears to be back on the table again, this time within a wide European Union context, in the hope that some sort of consistency of approach can be achieved.  The article, in relevant part, reads as follows:
Review of patent tax regimes in EU has Irish support

Ireland supports the EU review of all patent box regimes – under which certain member states offer tax breaks for intellectual property – and has decided to take a “wait-and-see approach” on the issue until guidance is provided by the European Commission. This has emerged from briefing documents provided recently by the Department of Finance to its newly-appointed Minister of State Simon Harris.

A patent box is a special tax regime offering a rate that is lower than a country’s standard corporation tax rate. Questions have been raised as to whether it breaches state aid rules, with the UK’s scheme being closely scrutinised by the commission.

The Ecofin council of EU finance ministers recently requested that the commission carry out an assessment of all patent boxes by the end of 2014. It is examining schemes in the UK, Belgium, Cyprus, Spain, France, Hungary, Luxembourg, Malta, the Netherlands and Portugal.

The briefing note to Mr Harris states that 
“Ireland is supportive of the . . . decision to look at patent boxes. There has been a lack of clarity around the issue of patent boxes for some time, and therefore we believe there should be a thorough analysis of these measures. In particular, given the persistent calls on Ireland to introduce a patent box, it would be helpful to get guidance from the commission. Ireland can adopt a ‘wait-and-see’ approach on this issue.”
Harmful competition

The briefing note adds some EU countries consider the patent box to be a “form of harmful tax competition, with Germany’s finance minister Wolfgang Schäuble making comments to the effect that they are contrary to the European spirit”. ...
Our thanks go to Chris Torrero, for spotting this link.

Monday, 25 August 2014

A Race to the Bottom? Inter-State Competition and Tax Incentives in the Entertainment Industry

The competition between states in the U.S. for companies and jobs is very intense (and between countries).  In California, it is hard not to hear about how Texas and its governor Rick Perry are offering a great deal for companies to move from California to Texas.  And, he and Texas have been somewhat successful in getting companies to relocate although some argue that the success with respect to poaching jobs is a bit overblown.  One of the carrots that Texas uses to attract California companies is tax incentives.  California also uses tax incentives to keep companies (and work) in California (the incentives are offered by the state as well as local government such as cities). 

In the entertainment industry, particularly film and television, in California, it is not Texas that is the main competitor in the U.S.—it is New York.  According to a recent Milken Institute report titled, “A Hollywood Exit: What California Must Do to Remain Competitive in Entertainment—and Keep Jobs,” and authored by Kevin Klowden, Pricilla Hamilton, and Kristen Keough, California lost around 16,000 jobs between 2004 and 2012 in the film and television industry while New York gained around 10,000 jobs.  These are relatively high paying, middle class jobs.  The authors note how California and New York both have “high wages, regulation and high cost of doing business,” but California is losing jobs and New York is gaining them.  The authors point to the tax incentive systems of both states to shed light on the reasons for the difference. 

In describing the California tax credit system concerning films and television, the authors state:

The Credit Lottery: Unlike most states, which operate based on individual applications, California requires productions that wish to qualify for tax credits to apply at the beginning of June for a drawing at the end of the month. These incentives are in high demand: In 2012, 27 projects out of 322 applicants received credits through the lottery. In 2013, the state received 380 applications. Because the demand for credits far outstrips supply, the lottery serves to maintain fairness by not favoring any particular kind of production over another. Pinched for revenues and lacking the necessary staff, the state does not assess candidates for incentives based on potential economic benefits.

The main drawback of a lottery is its lack of predictability. Production companies will often submit multiple films in the drawing in the hope that one will wind up a winner while also making backup plans to shoot in another state. . . . Further, when films and television shows are locked into a set schedule, they often cannot wait for the results of the lottery, choosing instead to relocate.

The authors describe the New York tax incentives program:

New York offers a generous incentive that has attracted productions. With an annual cap of $420 million, the Empire State offers productions shot within New York City a 30 percent refundable tax credit and those shot outside the city a 35 percent refundable tax credit. . . . One of the biggest policy advantages in New York is its postproduction credit, which now matches the state’s production credit. In 2012, Governor Andrew Cuomo signed legislation that raised the postproduction credit from 10 percent to 30 percent in the New York City area and the surrounding commuter region (see appendix for details).  Additionally, the tax credit was raised to 35 percent for postproduction work completed in upstate New York.  

The governor went a step further in 2013 by extending the postproduction credit until 2019, lowering the threshold for visual effects and animation from 75 percent to 20 percent of the total special effects budget, or $3 million (lesser of two). This means that large films or animations can do a portion of postproduction visual effects in New York even if the state does not have the current capacity to do the full project.  New York is also allowing productions shot outside the state to qualify for the postproduction credit. In January of this year, the governor announced a $4.5 million grant to Daemen College and Empire Visual Effects to create 150 new postproduction and visual effects jobs in Buffalo, hoping to grow the state’s overall postproduction capacity.

To compete with New York, the authors make several recommendations.  Here are some of them.  The authors address uncertainty in the current California system by “Rais[ing] the total amount of available annual funds in the state’s filmed production credit to a level that allows for the elimination of the annual lottery. . ..”  The authors recommend “dedicat[ion of] a portion of the fund to hour long dramatic television.”  The authors propose including movies with budgets over $75 million to be “eligible for filmed production incentives.”  The authors also state that, “Digital visual effects and animation expenditures should be made explicitly eligible for filmed production incentives at the 20 percent rate.”

Assembly Bill 1839 has been passed by the Assembly and is before the California Senate.  If it is passed by the Senate, Governor Brown must still sign the bill--which he may choose not to do.  The bill adopts several of the recommendations of the Milken Institute in some form such as including movies with budgets over $75 million as eligible for incentives.  Notably, the bill quadruples “production tax incentives” (from $100 million to $400 million).  The bill and analysis can be found, here.  Now, what will other countries do to react to this bill if passed? 

Living dangerously? Reporting of copyright litigation risk

"Infringement Risk in Copyright-Intensive Industries" is the title of a recent article by Jonathan Band and Jonathan Gerafi of policybandwidth. According to the abstract:
We have reviewed equity research reports issued in 2013 for eight leading companies in copyright-intensive industries: two software firms (Microsoft and Adobe); two publishers (Pearson and Reed Elsevier); the owners of two major motion picture studios (Disney and Viacom, owner of Paramount); and the owners of two major record labels (Sony, owner of Sony Music Entertainment, and Vivendi, owner of Universal Music Group).

We found that the overwhelming majority of the equity research reports did not mention copyright infringement as a possible risk factor. None of the 14 reports for Reed Elsevier and 18 reports for Pearson identified copyright infringement as a risk factor. Only 13% of the 15 reports for Sony and 22% of the 23 reports for Vivendi mentioned copyright infringement as a potential risk. Just 8% of the 26 reports for Viacom and 27% of the 26 reports for Disney referred to copyright infringement as a risk factor. 26% of the 19 reports concerning Adobe and 41% of the 27 reports concerning Microsoft identified copyright infringement as a risk factor. Cumulatively, only 19% (32) of the 168 reports referred to copyright infringement as a possible risk; 81% did not.

The vast majority of the reports written by sophisticated analysts simply do not consider copyright infringement a significant enough threat to the subject companies’ financial health to merit mention to potential investors. If the analysts with expertise in these industries are not concerned about the possible impact of copyright infringement, perhaps policymakers should not be either.
This article was posted on 20 August on SSRN; you can access it here. Coincidentally, on the same date, IP Finance hosted this piece by Janice Denoncourt which mentions the question of the non-reporting of litigation risk. Presumably the nature of the risk -- and the value of disclosure in corporate reporting or in equity research reports -- will not be the same where registered rights such as patents are concerned as where unregistered rights such as copyright or confidential information are concerned, since the existence of registered rights is at least detectable, even if their immediate relevance isn't, while possibly infringed unregistered rights are an unknown unknown.

Thank you, Chris Torrero, for the link.

Damages for passing off and interfering with website: some calculations laid bare

Harman v Burge [2014] EWHC 2836 (IPEC) is a 29 July 2014 decision from Judge Richard Hacon in the Intellectual Property Enterprise Court for England and Wales that throws further light on how to set about an inquiry into damages following the successful conclusion of an action for passing off and unlawful interference in trade.

Harman sued following interference by Burge with a website, http://www.doonevalleyholidays.co.uk (since shifted to http://www.exmoorcoastholidays.co.uk/), which fronted a holiday business that he had initially bought from Burge. The court awarded Harman damages for lost profits -- but how were they to be calculated? The judge's 68-paragraph judgment reduced the sum awarded by taking into account the fact that Harman had twice relocated his business after the infringing acts and that he had also discontinued a Google AdWords campaign which had been designed to recover the profile of the website, suggesting that there was no need for the campaign after the disruption to the website had been reduced. The court however also awarded Harman the cost of mitigating the damages he suffered, including the cost of Harman's AdWords campaign and the fees which he paid to an IT consultant in order to regain control of the website.

The initial calculation relating to Harman's damages claim of £122,562, reproduced above, was compiled by Thayne Forbes (chartered accountant and director/co-founder of Intangible Business Limited), whom the judge found to be "a witness doing his best to assist the court. His evidence was a mixture of careful detail and quite significant assumptions, but [he] freely acknowledged where he had made those assumptions".

Following the court's analysis, it was whittled down to a more modest but presumably still rewarding £39,701.

On the plus side, it's good to see a junior court such as IPEC get to grips with the financial issues and deal with them so efficiently.  On the down side, it's sad that this order was made more than two years after a consent order of June 2012 disposed of the issue of liability, and that it took two days of hearings to get through the issues raised here -- a long time in relation to the tightly-timetabled court.

Friday, 22 August 2014

Is monetization a necessary part of a complete patent strategy?

How far should a company take its patent strategy? Is there some ultimate trajectory that serves as a benchmark for a company committed to making patent strategy an integral part of its activities? These questions arose in reading the highly revealing article about the patent strategy adopted by the Amsterdam-based satellite navigation system (or satnav) company, TomTom, here. Entitled “The TomTom route” and written by John van der Luit-Drummond, the piece appeared in the May-June 2014 issue of Intellectual Asset Management magazine. It makes for edifying reading. The article traces the steps taken by the company, under the guidance of savvy IP veteran Peter Spours, as the company moved from effectively no patent protection to a sizeable and effective patent portfolio. More specifically, under Spours’ careful watch, the company has sought both to use patents to protect its home-grown technology and to acquire third-party patent portfolios principally to provide a counterweight against patent challenges by both competitors and NPEs. According to Luit-Drummond’s account, Spours’ two-pronged patent strategy has enjoyed unusual success, with particular attention to the company’s ability to purchase useful third-party patents.

So far so good. But the article then goes on to describe how TomTom is contemplating a third prong to its patent strategy, which will enable it to “monetize” patents. The article explains:
“Now that TomTom has successfully safeguarded its position in the market, attention is focusing on how the company can turn its intellectual property into a meaningful revenue generator and transactional tool. ‘This is something you can only do once you become a mature company’, states Spour.’ I have started to prompt those discussions with the board, as it one of the ways in which we can grow. I don’t view IP as any different from money. The advantage in IP is that you can replicate it, but money doesn’t replicate very easily.’

One of the most obvious ways to monetize these assets would be to begin using them assertively; but this would mark a drastic shift from the exclusively defensive strategy which TomTom has espoused to date. However, Spours admits that without such a change in approach, efforts at commercialization may well be doomed to failure. ‘If we start licensing, we will have to change our strategy to at least a partially assertive one,” he says. ‘We have never been patent assertive before, but that is not because we don’t have a strong portfolio.’
The sense of these comments is that a robust and complete patent strategy by a successful and mature company requires that its patents need to be monetized—“I don’t view IP as any different from money”. Patent monetization seems to be viewed as an axiomatic element of a successful patent strategy. Certainly, after nearly two decades of being told that patents are an asset class waiting to be commercially exploited, it is understandable whence this view derives. But such an approach seems too narrow, where the challenge is how to quantify the contribution made by a successful patent portfolio to a company’s competitive position and bottom line. In this sense, “monetizing” patents is an ongoing process of assuring that the company’s R&D continues to be patent-protected and that the company has an adequate patent portfolio to fend off third party legal attack. For many companies, these activities are a full time IP occupation.

But even if a company can free up the necessary resources to enable it to seek to monetize its patents in the licensing sense, just how eager should a company be to jump on this bandwagon? As Spours himself recognizes, such monetizing will likely require a substantial change in the way that patents are viewed by the company. How many companies can assimilate and integrate the two quite different mind and skill sets—defensive versus offensive uses of patents-- and organize the resources and staff necessary to handle these diverse aspects of patent practice? How many companies are prepared for the potential managerial distraction that often accompanies an offensive litigation policy (as expressed euphemistically, becoming “patent assertive”)? How many potential licensees are actually out there, to be reached via litigation or otherwise? After all, Qualcomm, here, and its world-beating licensing program are the exception and not the role. Consider the report this week that Intellectual Ventures will be laying off 20% of its staff, here. However this move is explained, it points to the uncertain nature of relying on licensing and the like as a business model. The upshot is that whether patent monetization as part of one’s business strategy is not for everyone. Depending upon the circumstances, a successful patent strategy may, or may not, contain a licensing component itself driven by engaging in patent assertion activities.

Wednesday, 20 August 2014

Financial Reporting for IP Intangibles: protecting investors from infringement risks

It's not often that the IP Finance weblog gets the chance to post a response to a response to a response to an original post, but Efrat Kasznik's initial piece on Financial Reporting for Intangibles drew this response from Janice Denoncourt. An anonymous reader then came back this an observation that
"IP is an asset, and one can see that its value should be estimated and reported. However if you are going to 'shine a light' and in particular try to protect investors, then I wonder whether there should be responsibility to report whether a company knows it is likely to be infringing third party rights. This would be very onerous and I would be against making this mandatory. However the 'effect of IP' on value clearly works both ways, and shouldn't investors be protected from this risk too?" 
Janice now responds as follows:
"You are referring to litigation risk. The simple answer is that, as a minimum, current litigation involving the company must be disclosed if it will have a material effect on the company’s financial results. For example, litigation against a company that represents a tiny percentage of the company’s assets would probably not need to be disclosed. It is certainly more difficult to deal with the disclosure of potential litigation risks, eg the risk of being sued for IP infringement in the future. If the board determines that the risk of litigation is high, then appropriate measures should also be taken to limit or eliminate the risk eg obtain a licence. Strong disclosure of litigation risk (bad news) will tend to lower a company’s share price. If there is high risk of litigation, one would also expect the company to publish a more detailed disclosure to explain the impact. 
A company will look at using meaningful cautionary language to minimise the impact of the disclosure, yet still comply with the spirit of the law. The “generally accepted accounting principles” (GAAP) standards used by companies provide that it must set up a ‘reserve fund’ for potential estimated losses due to pending litigation or explain why it has departed from GAAP. Failure to disclose material litigation can result in civil fines, suspended share trading and possibly criminal charges. The regulator can also seek an injunction requiring the company to disclose the litigation. 
As for your second point -- the effect of IP value on the business -- I suggest that, as a starting point, one needs to ensure that the narrative disclosure aligns with the numeric intangible figure in the financial statements. If the intangible figure has increased or decreased significantly from the previous year, the company need to explain why. Basically, directors always need to explain the money".

Monday, 18 August 2014

"Patents and Value: a dialogue": a new IP Finance event

"Patents and Value: a dialogue" is the title of a chaired discussion between IP Finance and IPKat blogger, scholar and legal practitioner Neil J. Wilkof with Intellectual Asset Management (IAM) editor and respected IP commentator Joff Wild. This event, which is co-sponsored by the IPKat weblog, is kindly hosted in the Holborn, London office of patent and trade mark attorneys and litigators EIP. It takes place on Tuesday, 16 September 2014, from 5.30 pm to 6.45 pm (with registration at 5 pm), followed by the usual refreshments. 

Neil and Joff will be discussing contemporary issues involving the value of individual patents and patent portfolios, such as "how do market forces shape corporate strategy for buying, licensing or litigating patents -- and what part does patent litigation play in fixing the price of patents?"  Jeremy Phillips will be in the chair.

Join us for for some fascinating insights from two well-informed and critical contributors to the current intellectual property scene. To find the venue, just click here.  As usual, there is no charge for registration, but anyone who signs up but doesn't attend will be entered on the IPKat's Naughty Book. To register, email theipkat@gmail.com with the subject line "Neil and Joff".

Background reading:

Sunday, 17 August 2014

Financial reporting for intangibles: why IP intangibles remain invisible

Last week's guest post, by Efrat Kasznik, "Financial reporting for intangibles: The Case of the Invisible Assets", has attracted considerable interest, with some perceptive comments being posted by readers. It has also attracted the following comment from Janice Denoncourt (Senior Lecturer, Nottingham Trent University), who writes:
Your post has raised an important question. Companies don't rush into voluntarily disclosing the value of their IP. The question then is, why?” 
There are two forms of mandatory corporate disclosure regimes in play and each is designed with a different purpose in mind.
First, Anglo-American national corporate reporting regimes and corporate governance principles are aimed at ensuring that directors have complied with the requirements of the relevant company legislation in that jurisdiction. Corporate disclosure is made via the annual report or quarterly reports, which include the financial statements and a narrative directors’ report, confirmed by the auditors as providing a true and fair view of the company’s business. The purpose is to monitor the directors’ stewardship of company assets and prevent moral hazards such as a director's conflict between his or her private interests and those of the company. If the company’s intangibles assets are a significant element of the business strategy, then they should feature in the Directors’ Report.

In the UK, reporting on corporate assets should also be reflective of the value they provide to the business in the medium to long term. The sustainability of the organisation and the long term view is enshrined in section 172 of the UK’s Companies Act 2006 (CA 2006) via the concept of ‘enlightened shareholder value’ which provides that directors have a duty to promote the success of the company. Core intangible assets clearly have the potential to contribute to profitability, long term growth and ultimately the success of the business. To comply with the mandatory s.172 CA 2006 legal requirement, both private (unless exempt) and public UK companies would supplement their traditional quantitative financial statements (which provide very little relevant qualitative information about significant intangible assets resulting in information asymmetry) with narrative disclosures.

Secondly, in addition to the above, companies listed on the London Stock Exchange (LSX) for example also subscribe to mandatory disclosure via the Disclosure and Transparency Rules (DTR). The DTR are designed to promote prompt and fair disclosure of relevant information to the public investor market. According to the LSX, “This helps to encourage investor confidence and maintain Europe’s deepest pool of capital”. In this respect I agree with Ken Jarboe’s comments that 
“Investors should have information on intangibles which allow them to come to their own valuation judgements”. 
Relevant information is ‘price-sensitive’ information that would be likely to have a significant effect on the share price in the short term. This relates to Efrat's point on ‘value fluctuations’ inherent in intangible assets. While compliance with DTR is mandatory for listed companies, it is a matter for a company’s board of directors to exercise its collective judgement to determine when to disclose significant inside information, typically applying the ‘reasonable investor test’. Disclosure to the market could even be daily if necessary to comply. The DTR are aimed at preventing market abuse and, as Efrat says, 
“The fact that managers have better information than the market on the value of their IP assets gives them an advantage as they can control the extent and timing of that information disclosure.” 
It seems that while the traditional accounting system may not be coping with volatile intangible asset valuations, the DTR mandate that listed companies must cope with disclosing ‘price sensitive information’ in narrative form or risk their shares being suspended from trading. They must ‘comply or explain’.

To revert to Efrat's problem, one important reason that companies don't rush into voluntarily disclosing additional qualitative information about their intangible assets is that they will then be held accountable for that information. There are severe legal consequences for any failure to report ‘fairly’ so as not to mislead under the CA 2006 and under the DTR for failure to disclose timely price sensitive information. The ‘silence is golden’ argument is problematic. In the UK, a director is liable to compensate the company for any loss it suffers as a result of the omission of anything legislatively required to be disclosed. Directors certainly have tough decisions to make regarding intangible asset disclosures. They will also be concerned about the cost to gather and verify the information, as well as advisor fees.

In fairness to company directors, in my opinion they need more guidance to identify the type of disclosure and how, what, when, where and how much to disclose with respect to the valuable intangible assets they manage on behalf of the company. There is minimal if any bespoke guidance on corporate intangibles reporting published by the regulators. So, although mandatory legal disclosure requirements relevant to corporate intangible assets already exist, the lack of guidance and enforcement by the regulators perpetuate the gap in publicly available information. A broad understanding of an appropriate level of intangible asset reporting has not yet emerged. The ability to evaluate the quality of intangible asset disclosures and then assess whether a company has fallen below the standard, in breach of its disclosure obligations, is highly specialised and a murky area even for the regulators.

One thing is certain however, demand for relevant, accurate and timely information regarding modern companies’ intangible assets will grow. Imperfections in both financial and corporate reporting will cause imperfections in the effectiveness of corporate governance and the protection of a company’s shareholders and other stakeholders. Corporate governance practices, especially in relation to accountability for intangible assets, need additional scrutiny in the public interest. As Efrat suggests, currently companies (that are risk tolerant) may actually benefit from information asymmetry and the lack of regulatory scrutiny. Nevertheless, I am firmly of the opinion that it is always good to shine a light in a dark corner.

Friday, 15 August 2014

Microsoft v Samsung: would a pre-nup have helped?

IP Finance is pleased to welcome the following guest post from patent attorney Ilya Kazi (Mathys & Squire, London) on a royalty fee tussle between two major IP players: what can this dispute teach us? Ilya explains:
Microsoft v Samsung: why it sometimes pays to be cynical 
At the start of this month it emerged that Microsoft and Samsung are embroiled in a dispute over royalty fees relating to Android patent and here are some reflections on this [on which see, eg, The Telegraph and Ars Technica].

"Don't shoot!"
The background is that in September 2011 Microsoft and Samsung entered into a cross-licence agreement; Samsung agreed to pay Microsoft royalties on Android-based devices in return for having access to patents relating to the Android OS. Samsung paid the first royalty in 2012, but blocked a second payment for the 2013 royalty after learning of Microsoft’s deal to take over the Nokia handsets business in September 2013. Samsung did eventually pay the royalty in November 2013 but Microsoft claims that Samsung still owes it money for the interest accrued during the period of non-payment. Samsung is also refusing to pay future royalties.

Samsung claims that the Nokia acquisition breaches the terms of the agreement with Microsoft and that the contract is thus void. If this is the case, Samsung is not required to pay Microsoft the royalties agreed to in the contract and, since Microsoft will not then be entitled to use the technology underpinned by the Samsung patents, Samsung is threatening Microsoft with proceedings for patent infringement.

... but disconnecting Microsoft and Samsung?
Naturally [but disappointingly for those of us who love reading these details ...], only a redacted version of the agreement is publicly available. However, on review of the facts available, it seems Samsung’s action may have portrayed an unconvincing position as to the strength of its case: first refusing to pay the royalty, then changing its mind and paying late, then refusing to pay further royalties. Samsung has also asked the Korean competition authorities to change the private contract between the parties so that the royalty payments to Microsoft are reduced or eliminated. If the terms of an agreement have been breached, attempting to convert a US commercial contract dispute into a Korean regulatory issue seems like a surprising approach.

Looking beyond this particular element of dispute, it is not clear what the endgame will be. If Samsung wins, the agreement will be terminated; if Microsoft wins, the outcome may well be the same, as it would be surprising if Microsoft had not inserted a termination clause to cover non-payment of a royalty. In either situation, Samsung may well be faced with renegotiating terms for a new licence which are unlikely to be more favourable than the ones in the original. Alternatively, a patent battle may erupt. Either way, it seems there is plenty of ammunition to fight this out to the bitter end and, with the publicity, neither party is going to want to lose face.

This case reinforces how important it is, when negotiating a licensing deal, to bear in mind that a seemingly friendly relationship may rapidly turn sour when circumstances change: Microsoft and Samsung had a long history of collaboration. Thinking cynically and creatively about the possible ways in which the commercial situation may shift from what both parties may well have sincerely intended at the time of the agreement is helpful. Parallels with pre-nuptial agreements can be drawn. Watch this space for the next round.

Nothing New Under the Sun: “Patent Trolls” Have Been Around Forever (well, at least a couple hundred years)

In a fascinating paper titled, “Trolls and Other Patent Inventions: Economic History and the Patent Controversy in the Twenty-First Century”, Professor Zorina Khan of Bowdoin makes many interesting points.  Professor Khan, an economics professor who studies law and economics history, essentially states that non-practicing entities (NPEs) have been with us for decades—back to the nineteenth century, that there has not been an "explosion" in patent suits when the last two hundred years are considered, and explains why prizes are not preferable to patents to incentivize invention and commercialization from a historical perspective.  To get a gist of her approach in considering critiques of the patent and copyright systems, Professor Khan states: “In general, these debates and policy proposals are primarily based on rhetoric and self-interest rather than on objective assessments of empirical evidence.”  And, she was referring to debates (very similar to today’s debates) in the nineteenth century. 

In reference to the U.S. Supreme Court eBay v. MercExchange decision concerning injunctions, Professor Kahn notes that:

According to a recent Supreme Court decision, "trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for producing and selling goods but, instead, primarily for obtaining licensing fees.”  The historical evidence refutes such claims, since “non-practising entities” or patent rights-holders who do not manufacture their inventions or final goods are hardly anomalous. Rather, as Adam Smith suggested, specialization and the division of labour are endemic to efficient markets. NPEs were the norm during the nineteenth century, and technology markets provide ample evidence that patentees who licensed or assigned their rights were typically the most productive and specialized inventors. As markets in invention became more competitive, many patentees cross-licensed their patents to other inventors to avoid the potential for conflicting rights. In some cases, patent rights were allotted to companies that intended to produce the invention or associated final goods. But in many others, “speculators” invested in patents with the intention of profiting from the margins of price differentials, without participating in either inventive activity or manufacturing, much as a financial investor might trade in a share in a company in secondary and tertiary markets. These different patterns all characterized a process of securitization that proved to be as fundamental to the development of technology and product markets as it was to the mobilization of financial capital.

Professor Kahn also attacks the notion that there has been a “patent explosion” in recent years (the increase in patenting is likely the result of the introduction of a disruptive technology):

Americans from the beginning of the colonial period have always considered themselves to be exceptionally litigious, and equally hyperbolic about decrying its consequences. Litigation is a function of many factors, including changes in legal rules, uncertainty, conflicting interpretations of rights and obligations, defensive and aggressive measures, and the scale of the underlying market. One of the most straightforward explanations of the volume of patent lawsuits is related to the numbers of patents filed. Figures 1(a) and (b) support the hypothesis that the “patent litigation explosion” merely mirrors a parallel “explosion” in patenting. Patent applications and grants alike have risen sharply, from approximately 270,000 applications and 153,000 grants in 1999, to 543,000 and 253,000 respectively in 2012, with especially rapid growth between 2009 and 2010. Opinions may differ but, although it has increased over the past few years, the rate of litigation (cases as a percentage of patents), is still unexceptional. This is especially true since changes in legal rules (ironically intended to reduce litigation) have led to a nominal or administrative increase in the numbers of cases filed in the most recent years.  

However, two decades may be insufficient to assess whether patent disputes have reached a pathological level. We therefore estimate the long run patterns for patenting and litigation, between 1790 and 2012. Figure 2 shows patent grants per capita over the two centuries of the existence of the federal patent system, for total patents and patents filed by domestic residents. It suggests that the “long nineteenth century” was an extraordinarily creative period in terms of patented innovations, when the numbers of patents relative to population attained levels that have not been exceeded until the final three years. Figure 3 presents the patterns over time of reported patent cases relative to patents between 1790 to 2000.  This historical trend in litigation rates relative to patents granted clearly does not support claims that litigation in the past decade has “exploded” above the long term norm. In fact, the per patent rate of litigation was highest in the era before the Civil War and during the subsequent market expansion that started in the 1870s. Patent litigation rates were increasing toward the end of the twentieth century, but the increase comprised a return toward the long-term norm.

Technological innovations in the 21st century have undoubtedly transformed production and consumption. However, from the perspective of a world where mail was delivered by stagecoach, the advent of the telegraph was far more transformative to communications in the antebellum era than the change from a landline to a cellphone. This was not just true of “great inventions” but also of supposedly incremental discoveries such as safety pins, aspirin and manufactured soap. Every new innovation that mattered in the marketplace brought uncertainties, conflicts and consequences that were initially processed in state and federal courts, until these issues were resolved through various institutional mechanisms. Figure 4 shows new innovations like the telegraph, telephone and automobile were inevitably accompanied by an upswing in total civil litigation. . . .

Enormous profits awaited those who were able to successfully commercialize new inventions and satisfy or anticipate market demand, creating wealth for some entrepreneurs on a scale that was unprecedented then, or since. Numerous inventors were attempting to resolve similar problems, leading to multiple patent interferences, overlapping claims, and efforts to invent around existing patents. Complex combinations of hundreds of patents often covered any particular device, so it is not surprising that intense competition for these excess returns centered around these rights.  Licensing and litigation comprised a common strategy by “practicing” and “non-practicing entities” alike. Austin and Zebulon Parker of Ohio prosecuted claims for licenses against millers across the nation and engaged in countless lawsuits regarding an 1829 patent for an improved waterwheel. George Campbell Carson’s smelting patents were held to be worth an estimated $260 million in damages and royalties and he floated shares in the Carson Investment Company, which was formed to pursue potential defendants.  In the railroad industry “… a ring of patent speculators, who, with plenty of capital, brains, legal talent and impudence, have already succeeded in levying heavy sums upon every considerable railway company in the land…. This case is not an isolated one, but there were hundreds of them, and the railway company that made up its mind to insist upon its rights had to keep a large legal force, a corps of mechanical experts, and other expensive accessories, in order to secure that end.”

Her article is full of interesting examples of NPEs of the nineteenth century, and she also notes that Daniel Webster was paid $332,000 as lead attorney in a single patent case in 1852.  She also makes the argument that historically prizes failed to provide the same technological spillover benefits as patents.  Notably, she states that the only thing really different in patent practice and law today than from the nineteenth century is that legislators are actually passing many more laws to address the complaints about the enforcement and use of patents.  Apparently, there was a little more restraint on behalf of legislators in the U.S. back in the day. 

Thursday, 14 August 2014

Financial reporting for intangibles: The Case of the Invisible Assets

"Financial reporting for intangibles: The Case of the Invisible Assets" is a guest post by Stanford luminary Efrat Kasznik (President, Foresight Valuation Group, LLC, Palo Alto, CA). It's based on an earlier piece published by our friends at Intellectual Asset Management Magazine (IAM) and it is our hope that we can get some genuine discussion going on this topic -- so watch this space.  Efrat writes:
Despite some far-reaching changes in recent years, including global harmonization of financial reporting and the move towards fair value reporting, accounting standards worldwide are still largely blamed for failing to measure and report intangible assets. Is there really a serious gap in asset reporting, as many observers claim, or does this actually represent an opportunity for companies to control and manipulate the reporting of their intangibles?

Google’s sale of Motorola Mobility’s mobile phone business to Lenovo for $2.9 bn earlier this year is a case in point, as it highlighted the confusion surrounding the valuation of Motorola’s IP assets at the time of the original $12.4 bn acquisition in 2012 [on Motorola's patent portfolio, see Neil's earlier posts on this blog, "Mega-Patent Portfolio Sales: Chimera or Here to Stay?", here and "Motorola Mobility: Has there been an impairment of goodwill in Google's acquisition of its patent portfolio?", here]. Financial markets and IP experts were embroiled in speculation about what exactly did Google pay for when buying Motorola, and how central was the IP, primarily Motorola’s massive patent portfolio, in driving the acquisition price. Looking at Motorola’s balance sheet on the eve of the acquisition did not offer any clues to untangling the acquisition price: according to US Generally Accepted Accounting Principles (GAAP), internally-grown “intangible assets” (the accounting terminology used when referring to intellectual property) are not reported as assets on the balance sheet of the company that created them.

The Google-Motorola acquisition demonstrates the tension between the value of intangible assets held by operating companies, and the way such assets are reported in financial statements. Google’s post-acquisition allocation of $5.5 bn to “patents and developed technology” may have come as a surprise to many observers who attributed a higher portion of the acquisition price to the IP assets. However, lacking any disclosure of the fair value of these assets in Motorola Mobility’s books prior to the acquisition, there was no way of telling what is the fair value of these assets, hence the wide gap between the price speculations and the actual price reported by Google.

Reporting gap or value opportunity?

Financial reporting is the main channel of communication between companies, shareholders and capital markets. In general, companies disclose financial information not only to report performance, but also as a way to manage investors’ expectations and impact the return on stock prices. There are two types of disclosures: mandatory and voluntary. Generally speaking, mandatory disclosures are any information disclosures required and regulated by the Securities and Exchange Commission (SEC) in the US and other regulators. Financial statements fall under this category, and the US GAAP define the scope and content of such statements. Voluntary disclosures, as the name implies, are not regulated and are not mandatory – anything else that companies choose to share with the market, whenever they want to share it. The annual reporting of the value of internally developed intangible assets falls under that second category. Intangible assets have to be fully disclosed only when they get acquired and paid for, either in a business combination (M&A deal) or in an asset purchase, when the purchased intangibles are valued and reported on the balance sheet of the buyer at their fair value.

In that regard, companies are free to report the value of their internally grown intangible assets any day of the year. They are just not required to do so on their balance sheets as part of the SEC-regulated financial reporting. Yet companies don’t voluntarily report the fair value of their intangible assets. So the lack of mandatory reporting seems to be causing a gap in information on some of the most valuable assets held by technology companies today.

Silence is golden: are companies better off not reporting their intangibles?

It is not at all clear that companies would readily switch to a system that requires them to disclose in full the fair value of their intangibles, as they do with almost any other type of assets. There could be several reasons for that:

(1) Market efficiency: there is generally no dispute as to the high value of intangible assets. The more interesting question is, are stock markets efficient enough to reflect the full value of intangible assets in equity prices, despite the lack of value disclosure in the books of reporting companies?

Results from academic research done at the Stanford Graduate School of Business (GSB) show that the markets rely on signalling, like R&D expenses, to value intangibles, although it is more costly for companies and analyst to signal/interpret that value. Below are some of the findings highlights:
• Equity values appear to reflect information on the value and productivity of R&D investments
• Stock prices reflect value estimates of unrecognized brands and trade marks
• Firms with unrecognized intangibles spend more free cash flows on “signalling” activities (e.g., share buybacks), suggesting greater concern about equity undervaluation
• Greater analyst coverage and greater “analyst effort” are required for firms with unrecognized intangible assets.
An early case of
information asymmetry?
(2) Information asymmetry: it is well documented in academic studies that managers thrive in situations of information asymmetry, as they can leverage that to their benefit. The fact that managers have better information than the market on the value of their IP assets gives them an advantage as they can control the extent and timing of that information disclosure. For example: one academic study shows that “insider” stock gains in R&D-intensive firms are substantially larger than insider gains in firms without R&D. This suggests that R&D is a major contributor to information asymmetry, and that insiders take advantage of this information asymmetry.

(3) Value fluctuations: markets don’t do well with wide fluctuations in financial reporting. In order to smooth out these fluctuations, accounting rules create intermediary assets and liabilities that act as a “buffer” to absorb the annual changes so they don’t fully hit the income statement as they occur. This usually requires setting up an elaborate accounting system to smooth out the volatility, as is done in accounting for pensions, for example. Intangible assets will fluctuate in value if valued annually, as they are subject to high risk and uncertainty (litigation challenging validity, uncertain royalty flows). Companies may not happily embrace this type of onerous disclosure, as IP assets may just be too volatile for the accounting system to handle. 
While the financial reporting system is far from perfect, one could argue that it actually works to the benefit of corporations as they have greater control on how and when they report their intangible assets. Whether markets as a whole are better off or not, is a different question. Many stakeholders are struggling with understanding the value of intangibles, as the existing financial reporting systems do not provide a sufficient solution for that information gap.

Monday, 11 August 2014

Patent risks and markets: a forthcoming talk

"Patent Risks and Markets" is the title of a forthcoming talk which Linda Biel will be giving later this month in London. Linda is Senior Vice President, Business Development, of Allied Security Trust (AST) -- a consortium of major companies that helps diffuse patent risk by purchasing patent assets for their membership (Linda manages the AST member programme).

The talk takes place on 26 August, starting at 5.30pm.  Venue: the office of AISTEMOS, 90 Long Acre, London, WC2E 9RA.  Although Linda's talk is aimed at that company's Pilot Group on Patent Risks and Markets, it is open to anyone suitably qualified by their commercial or professional commitment to issues relating to patent risks in the marketplace.  The talk will have both physical and virtual manifestations, since the audio and slides will be available via a WebEx (sadly, drinks and refreshments are available only for those physically present.

You can register for this event here; if you'd like a bit more information about it, you can email Sue Harvey at sue.harvey@aistemos.com

Friday, 8 August 2014

IP Exchange relaunches as IP Nexus

IP Exchange has announced the relaunch of its new IP Nexus website www.ipnexus.com in beta.

Visitors to the site are invited to browse it and sign up for their free account. Adds the business:
"We would be delighted to hear your feedback and comments at info@ipnexus.com"
This business is presumably unconnected with BT Media IP Nexus.

This blogger, who has not met anyone who has used a service of this nature, wonders how effective it is -- and would love to receive users' experiences.

Thursday, 7 August 2014

Curbing Frivolous Trade Secret Claims and a $147.5 million Trade Secret Settlement to the Alleged Misappropriator

You know the stories.  Company X and Company Y decide to explore partnering together.  Company X shows Company Y its trade secrets.  Company Y decides not to partner with Company X.  A short time thereafter, Company Y releases a product apparently including/using Company X’s trade secrets.  Company X sues Company Y.  Or maybe, Company X has three employees leave to join competitor or set up shop as a competitor.  Company X sues the three employees and the competitor.  These situations happen all the time and many of the cases are meritorious.  However, we all know that sometimes trade secret suits are frivolous and are primarily motived by a desire to slow or knock a competitor out.  There is nothing like making a competitor, particularly if it is a company with less resources than your client company, eat attorney fees and expenses, and use up lots of company personnel time dealing with the suit.  And, why not try to disrupt a competitor’s relationships with third parties by sending the third parties copies of the complaint and papers concerning a preliminary injunction/temporary restraining order.  (Sure, you are just trying to help them not be misappropriators.)  You know, this also looks like a matter criminal prosecutors should look into—let’s get them involved as well.  Heck, who does not want to spend some time using discovery to snoop around a competitors business—“you took my trade secret that I just discovered that you were using.”  (of course, you shouldn't take those actions, unless . . .)  In California, we have a law designed to attempt to curb those types of suits: California Code of Civil Procedure 2019.210.  Section 2019.210 provides:

In any action alleging the misappropriation of a trade secret under the Uniform Trade Secrets Act . . ., before commencing discovery relating to the trade secret, the party alleging the misappropriation shall identify the trade secret with reasonable particularity subject to any orders that may be appropriate under Section 3426.5 of the Civil Code  

Under the Code, the party alleging trade secret misappropriation must file a 2019.210 statement before beginning discovery.  I am sure many would complain that 2019.210 does not protect companies from frivolous (anticompetitive) suits enough.  (I would be in that camp.)  And, there are many frivolous trade secret suits that proceed anyway. (Moreover, abuse of process or malicious prosecution actions in California tend not to be too helpful.)   
Corporate Counsel has recently reported about a trade secret case between Eaton and Triumph Group that has piqued my interest.  The case has facts similar to many trade secret cases—employees depart to competitor and trade secret suit is filed.  However, here, after 10 years of litigation, the party who brought the trade secret misappropriation claim is paying the defendant (alleged misappropriator) $147.5 million to settle the case.  That’s right.  The alleged misappropriator is getting $147.5 million.  Wow.  Interestingly, the trade secret action appears to have some merit—although I doubt the plaintiff knew that for certain when they filed the action—because numerous documents of plaintiff’s were found with the defendant during a later criminal investigation.  Whether the documents contained trade secrets, or merely information readily accessible, already possessed by the defendant or in the public domain is another question.  The defendant’s counterclaims included allegations that plaintiff’s trade secret claims were “exaggerated.”  Notably, plaintiff’s conduct in the litigation allegedly was very poor and perhaps would make the plaintiff look very, very bad in front of the jury.  The conduct is described by Corporate Counsel, here.  Triumph Group’s (the alleged misappropriator) press release concerning the settlement is here. Do you have any leads to other statutes or regulations designed to curb or punish frivolous trade secret law suits?  Have you heard of any other apparently egregious cases like this one? 

Monday, 4 August 2014

The Top University Business Incubators

The UBI Index, based in Stockholm, Sweden, released its University Business Incubator Rankings for 2014.  The UBI Index apparently offers several different rankings based on the nature of the relationship (or lack of one) between the university and the incubator.  What is a “university business incubator?”  A “University Business Incubator” is defined as an incubator with the following characteristics:

·         Managed (by) or affiliated to university(ies)

·         Primary objective to facilitate entrepreneurship and support early stage (new) ventures through a systematic (mid-long term) and extensive incubation process that includes services and infrastructure

·         Quality controlled intake of clients (startups) and regular time bound exits in form of graduate startup clients

The definition also includes “Business Innovation Centers” as well as “Business Accelerators.”  The main ranking, which is based on information submitted by around 300 university business incubators from 67 countries, is the “University Business Incubator Rankings.”  Here are the top 15 university business incubators:
Rice Alliance for Technology and Entrepreneurship
Rice University
United States
University of Bath, Bristol, Exeter, Southampton, Surrey
United Kingdom
SCUT National University Science Park
South China University of Technology
ATP Innovations
University of Sydney; University of Technology, Sydney; Australian National University; University of New South Wales
Digital Media Zone
Ryerson University
Pontifical Catholic University of Chile
Center of Industry Accelerator and Patent Strategy
National Chiao Tung University
Chalmers University of Technology
Instituto Genesis PUC-Rio
Pontifical Catholic University of Rio de Janeiro
TEC Edmonton
University of Alberta
INiTS Universitäres Gründerservice Wien
Vienna University of Technology, Vienna University “Alma Mater Rudolphina”
DTU Symbion Innovation
Technical University of Denmark
Melbourne Accelerator Program
University of Melbourne
Hust Science Park Development Corporation
Huazhong University of Science and Technology
Incubatore di Imprese Innovative del Politecnico di Torino (I3P)
Politecnico di Torino

 The rankings are based on an analysis of three performance categories that ultimately rest on over 60 “key performance indicators”.  The three performance categories include: “A, its contribution to the ecosystem; B, its value to the startup clients; and C, its attractiveness quotient.”  The “value to the ecosystem” examines factors such as “jobs created by the startup” and “sales revenue of client startups.”  The “value for the client” includes:

Important indicators measured such as number and activity of mentors and coaches, VC and angel funding availability, the investor network, network of sponsors & partners, the network relationships with large corporations; government; business providers and the size of the alumni network.

The “attractiveness quotient” includes: “investment in client startup” as well as “equity stake.” More information concerning the methodology used can be found here.  Besides the rankings, UBI Index also offers a best practices document for university business incubators as well as consulting services. 

Recently, I wrote on developing new metrics for measuring the success of technology transfer offices, here.  Would technology transfer offices benefit from a similar type of ranking offered by UBI Index (does one exist already)?  Could this be another helpful place to find additional metrics?  In addition, what is the relationship between a well-functioning incubator (or a poorly functioning one) and the success of a technology transfer office?