Monday, 29 September 2014

Eight Years in Prison for Publishing Another's Scientific Research?

On August 7, 2014, Newsweek published an article by Joe Bloc about the case of Diego Gomez who was a student at a university in Columbia.  Apparently, Mr. Gomez published a thesis concerning amphibians online at Scribd that was written by professor at a different university in Columbia.  The professor (not the university or publisher) promptly sued under Columbian law for a criminal violation of copyright law--not a civil violation.  The author of the Newsweek article quotes an expert from the Electronic Frontier Foundation (EFF) who states that the Columbian law concerning criminal copyright infringement was a "direct result" from compliance with a U.S./Columbia free trade agreement.  The Columbian law apparently does not provide a robust fair use exemption, particularly one for academic usage.  The article frames the issue as one wherein the U.S. is using the power of its market to push for higher copyright standards in other countries at the behest of the powerful content industry in the U.S.  No doubt this is likely true.  Moreover, the article points to how the U.S. has the intent and has specifically directed resources toward ensuring government funded academic research is made available to the public in the U.S.  While this is true, we know it is not the complete truth.  Universities have been pushed to privatization for some time and markets have moved into The Republic of Science.  Indeed, universities in the U.S. have been focused on solving industry problems for some time.  Additionally, the Bayh-Dole Act was the icing on the cake that ensures that the direction of the U.S. research enterprise would move closer to privatization.  Furthermore, the institutions that have grown up around the expectations that now exist around the Bayh-Dole Act as well as conditions, such as lower effective government funding for public research, make it clear that the situation will not change.  Even tenure standards are being modified to ensure patenting activity as well as commercialization practices by academics.  Some may laud these continuing developments and surely the public may benefit from some of these innovations.  And, many work to push back, for example, by having universities voluntarily agree to license their technology to citizens in under-resourced countries; however, what has been lost?  Some times those things that are difficult to measure--to quantify--are the ones that provide the greatest benefit.  We shouldn't be lulled to sleep by the seeming objectivity of numbers that may disguise changing culture and attitudes that preserve core values and the true benefit of an enterprise. 

The primary method of knowledge (technology) transfer has been through students.  This case is about a student who tried to make helpful information in his field available to more people studying in the same field.  Now he could go to jail because of a suit by an academic.  The solution here is probably a change in the law, but a realistic and complete solution should also include a greater awareness of what is happening in academia (apparently throughout the world), so that we can all make better choices. 

 The EFF and others are sponsoring a petition to support Diego:

Academic research would be free to access and available under an open license that would legally enable the kind of sharing that is so crucial for enabling scientific progress.

When research is shared freely and openly we all benefit. Sign below to express your support for open access as the default for scientific and scholarly publishing, so researchers like Diego don’t risk severe penalties for helping colleagues access the research they need.

This is a joint effort between EFF, Creative Commons, Fundación Karisma, the Internet Archive, Public Knowledge, Open Access Button, and the Right to Research Coalition. 

You can sign the petition, here.

Thursday, 25 September 2014

Nokia, BlackBerry left behind amid untold disruption of the smartphone revolution

As I was completing my previous IP Finance posting on alleged royalty stacking in smartphones, last week, it occurred to me I should also write more generally about the massive disruptions in the mobile phone industry resulting from technological changes, new business models and market entry by Apple with its iPhone and many others using the Android operating system. Former market leaders have fallen and consequently exited the market with handset division divestitures by Nokia, Ericsson and Motorola. Challengers are succeeding on the basis of highly-standardized and readily available hardware and software platforms. These are employed by all comers as if they were commodities, but are rich in IP including standard-essential and other technologies which are costly to develop. This is paid for downstream in a variety of ways including: merchant product prices for chips; patent licensing fees for standard-essential patents and the other patents needed to implement the radio communication protocols and various user features consumers expect all smartphones to have; and advertising and apps spending to Google in the case of Android. The following article on all this was first published in mobile industry trade publication FierceWireless Europe.

Nokia, BlackBerry left behind amid untold disruption of the smartphone revolution

It is remarkable how dramatically and rapidly the fortunes of so many mobile handset vendors have turned with the advance of smartphones. Their marketplace was transformed by Apple's iPhone starting in 2007 and a succession of Android-based smartphone newcomers since 2008.
This has greatly expanded the size of the handset market with global revenues doubling in the last six years, as consumers substitute more expensive smartphones for their feature phones and basic phones. Yet changes have devastated most of the leading incumbent handset vendors.
Former leaders Nokia, Ericsson and Motorola have exited by divesting their handset divisions, and BlackBerry has struggled to survive following its precipitous market share decline, as business models and competitive cost structures have changed. Samsung Electronics is the only incumbent that has really flourished, while LG Electronics has also advanced and HTC has wavered.
How the mighty have fallen

Strategic strengths became liabilities

Seemingly strong brands, product distribution, patent ownership, vertical and horizontal integration with chips, networks and manufacturing have been insufficient to ensure survival, let alone success. The market leavers once had these attributes in spades. For example, Nokia had it all with approaching 50 per cent market share in smartphones and 40 per cent in mobile phones in general up until 2007. It ranked highly in global consumer brand ratings, dominated distribution in Europe and in many other nations worldwide. A cumulative $60 billion spent on R&D funded one of the very strongest patent portfolios and it could exploit various synergies with its network equipment division and in-house baseband modem development capabilities.
Business models and the basis for success in smartphones and mobile phones in general have been revolutionized. Costly supporting and complementary operations soon become major burdens when incumbents were wrong-footed in the market and lost the cash flows required to support all that, while also needing to do things differently. Instead, low costs and much greater reliance on technologies from others are the keys to success for most of the many recent market entrants.
They are exploiting platforms which are open, widely available and cheap to adopt. Apple is something of an exception, having created much of its own ecosystem, but it is also entirely dependent on others for radio technologies and manufacturing. Samsung uniquely remains highly integrated, but also employs outside technology including Android and Qualcomm's baseband chips in many cases.

Challengers rising high
What made the smartphone revolution possible
Smartphones, or at least the precursor to what we regard as such today, have existed for more than decade with Nokia's Communicators from around the dawn of the new millennium and the first cellular BlackBerry in 2002. But these were only niche devices and network service constraints severely limited utility beyond messaging. A combination of many technological advances has made modern smartphones the enormous success they are today. These include much faster networks, as 4G LTE today is 1,000 times faster than 2G GPRS introduced around 2000; fast and yet low-powered application, graphic and digital signal processors; much improved display technology; revolutionary improvements in operating systems and user interfaces; better battery performance; and an extending ecosystem with apps stores and mobile-oriented content.
Smartphone market entry barriers are now relatively low with standardized and openly available technology platforms. Smartphone vendors can capitalize on extensive published standards, market-leading merchant (i.e. off-the-shelf) chips and reference designs provided by these suppliers, and contract manufacturing. Addressable markets have grown to include hundreds of operators and several billions of consumers. Average selling prices, at around $275 for smartphones versus $175 for handsets in general, generate substantial revenues while strong downward pricing trends are maximizing smartphone penetration growth.
Just rewards
Handsome rewards including profits are available to those market leaders that can build a sustainable edge. According to Credit Suisse, handset manufacturer operating profits since 2007 have tripled to $51 billion on $326 billion revenues in 2013. Reportedly, these are overwhelmingly shared between Apple and Samsung, with others making small profits or losses.
Much of the costly R&D and standardization work required to create the platforms smartphone manufacturers employ is still being borne by network equipment vendors like the diversified former handset leaders above. These are increasingly dependent on technology licensing to help fund ongoing R&D. Similarly, specialized technology vendors such as Qualcomm and InterDigital have business models which are largely dependent on licensing fees. Microsoft also generates income this way as well, licensing its patents to Android device makers. In addition, Google, which provides the Android smartphone platform and its Play app store, generates income from these in various other ways including advertising charges.
It is incorrectly alleged that stacked royalty costs prevent the other smartphone manufacturers from making profits and cause other harms. Evidence does not show that high royalties are paid or that royalty charges undermine profits. Manufacturers that could negotiate the lowest royalty rates through cross licensing, due to owning most standard-essential and other patents, have taken the greatest competitive pounding by Apple, Samsung and various other new entrants selling Android devices. The former lost money because they had obsolete and uncompetitive strategies. Low profits for many newcomers are a function of the open and "commoditized" nature of the business with low barriers to entry, including the standardized and merchandized platforms everybody uses. This makes product differentiation and high-margin pricing difficult to achieve.
It is not possible to determine true profitability on handsets because many manufacturers are reluctant to disclose them, and businesses are mixed with the manufacture and sale of other products and services. Some manufacturers are still benefitting from being in both the handset and network equipment markets. For example, Huawei and ZTE have reported strong profit growth recently. This is due to the boom in LTE network investments, but smartphones are important complements to these companies. Rising star Xiaomi, with a low-cost, Internet-based distribution model, does not formally disclose profits but was reported last year as making a 10 per cent margin.

Wednesday, 24 September 2014

Patents as an "asset"; patents as an "asset class"

I last week took part in a program co-sponsored by IP Finance on “Patents and Value.” A report of the program is scheduled to be published at a later date. A by-product of the event was the lively post-program discussions that took place around the bar and snack table. In particular, I recall being seriously upbraided by a colleague, actively engaged in the patent valuation field, who took me to task for intimating that patents are not an asset class. Two questions occurred to me following that discussion: (i) are patents indeed an asset class; and (ii) why does it matter so much for persons in the field that the answer is “yes”? Permit me to share my thoughts on both these questions.
Let’s begin with the definition of “asset” per Investopedia.com, namely “[a] resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. “ Investopedia.com further explains that—
“[a]ssets are bought to increase the value of a firm or benefit the firm's operations. You can think of an asset as something that can generate cash flow, regardless of whether it's a company's manufacturing equipment or an individual's rental apartment.”
By contrast, “asset class” is defined as ‘[a] group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. The three main asset classes are equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments).” Here too, Investopedia.com further explains the term, noting that--
“…in addition to the three main asset classes, some investment professionals would add real estate and commodities, and possibly other types of investments, to the asset class mix. Whatever the asset class line-up, each one is expected to reflect different risk and return investment characteristics, and will perform differently in any given market environment.”
Based on these definitions, it would seem that patents can certainly be viewed as an “asset”, albeit of a peculiar and even sui generis kind, where the connection between a patent as an asset and the value that the patent brings to the firm is difficult to explain, much less to quantify. What follows from the definition of “asset class”, however, is that not every “asset” constitutes an “asset class”. That distinction would seem to apply regarding patents. My familiarity with the notion of asset classes derives primarily from the investment literature, where the categories are used in connection with formulating a formal (or informal) investment risk strategy. Notions such as “lighten up on stocks”, “reduce the duration of your bond holdings” and “the commodity super-cycle is over”, are representative examples of the role that an asset class can play in making investment decisions. To speak of a “market for patents” in this context is simply inapt.

Even if we extend the notion to an asset class to such assets as “works of art” or, as suggested by Jeremy Phillips during the program, “postage stamps”, patents fail to meet the test. At the most, patents can be tradeable asset with its own ecosystem for helping buyers and sellers make informed decisions about the transaction. But the existence of this ecosystem has not, and cannot, turn patents into a full-fledged asset class.

As an interesting aside, CalPERS, the California Public Employees’ Retirement System, America’s largest pension fund, announced last week that it will eliminate all of its hedge fund investments, which amount to more than $4 billion in 24 hedge funds and six hedge fund-of-funds, here. I heard a podcast interview of a senior official from CalPERS, who made the comment that hedge funds are not really an asset class but a way of doing business, which CalPERS believes is too complicated and too expensive. A fortiori, if that is CalPERS' view of hedge funds as an asset class, what can possibly be said regarding patents? If the foregoing is correct, then the question remains—why the insistence on nomenclature (“patents as an asset class”)?

Truth be told, it seems that the reason is simple—it sounds good. To speak of one’s assets as members of an asset class is to admit oneself into the world of professional investment, be it a fund, investment bank or other source of substantial investment capital. The high profile disposition of patent portfolios such as Nortel, Motorola Mobility and Nokia, anomalous as they were (all having been driven by financial difficulties with the seller), only stoked the aspirations of “patents as an asset” to be recognized as “patents as an asset class”. There is a legitimate, indeed, an essential role for an ecosystem in which patents can be valued and sold. But this ecosystem is still a work very much in progress. I wish it every success-- the IP profession only stands to benefit from the value that such a robust patent transaction ecosystem can bring. But let’s not claim to be something that it is not, and cannot be.

Tuesday, 23 September 2014

Interface between Competition Law, Patents and Technical Standards

The Interface between Competition Law, Patents and Technical Standards, by David Telyas, is the second title that Wolters Kluwer has published in quick succession that addresses issues of interest and concern to the IP business community -- the other being Competition Law and Standard Essential Patents. A Transatlantic Perspective by Urska Petrovcic, previously noted on IP Finance here

This blogger has not yet received a copy of this book, which the publisher describes as follows:
This systematic analysis lucidly details the role played by competition law in ensuring that holders of SEPs do not unduly exploit their advantage. The author describes how market power, often amounting to dominance, is obtained by proprietors of SEPs, and then proceeds to set out the framework under which the legality of standardization agreements must be assessed, finally highlighting the role of competition law in preventing patent-related abuse arising after a standard is adopted.

Among the often complex issues clearly explained are the following:

  • technical standards as drivers of innovation and consumer welfare;
  • conditions governing the standard-setting process;
  • the concepts of ‘patent hold-up’ and ‘patent ambush’;
  • refusal to license;
  • establishing deception ex ante and abuse ex post; and
  • availability of injunctive relief.
This title is volume 60 in the publisher's International Competition Law Series. You can check out its contents here; there's a sample chapter here and the book's web page is here.

"Patents and Value: A Dialogue": Distinguishing Dogs from Diamonds

From our friend and occasional contributor Janice Denoncourt (Nottingham Law School) comes this report on "Patents and Value: a dialogue" -- the IP Finance/IPKat event in which lawyer and scholar Neil Wilkof discussed with Intellectual Asset Management editor Joff Wild a number of what seemed to be increasingly controversial issues, egged on by comments and questions from an almost uncomfortably knowledgeable audience of lawyers, patent attorneys, accountants, insurance folk and financial and management consultants.  The event, the second in a current sequence of blog-driven dialogues [the first being on life in the European Patent Office's Boards of Appeal, here], was kindly hosted by London-based multidisciplinary IP practice EIP.

This is how Janice saw it:
"This event, chaired by IP Finance blogmeister Jeremy, took place on 16 September when a roomful of members of the IP community was welcomed by host Gary Moss, head of EIP Legal, London. Jeremy then told us he was inspired to hold the event as a result of an exchange of blogpost comments [see links here] on the subject of IP value. This exchange took place between well-known personalities in the IP field: Jeremy simply had to bring them together for a live dialogue to share their well-informed and critical insights with the IP finance community.

Jeremy introduced the session by reminding us that, only a few decades ago, ‘IP value’ as a concept didn’t even exist. He recalled one transaction back in the 1980s in which patents were given a nominal value of £1 each, a sum that does not quite compare with values attributed to certain mega-patent transactions today.
Neil spoke first and offered his views on the effect of litigation on patent value in the United States. He presented a list [presented in PowerPoint format which you can read here or download hereof twelve key US patent cases that are said to have had a negative impact on the value of patents generally. This list, the basis for Neil's presentation and commentary, first appeared in Terry Ludlow’s article entitled “Sign of the times: trends in technology IP Licensing” IAM, July-August 2014 (here).

Neil took us through Ludlow’s list and the discussion is summarised below:
  • eBay (2006) – Reduced (virtually eliminated) probability of getting an injunction even if you win a patent litigation. Per NW, the use of a patent as a sword is blunted.
  • Sandisk (2007) Lowered the bar significantly on the grounds for filing a declaratory judgment for non-infringement. Per NW, this has made it easier for defendants.
  • KSR v Teleflex (2007) Lowered the bar for obviousness and makes it easier to invalidate patents
  • Seagate (2007) Raised the bar for wilful infringement, reduces the prospect for treble damages
  • Quanta Computer v LG (2008) Resulted in patent exhaustion for downstream products, limits options for licensing
  • Cornell University v Hewlett Packard (2009) Virtually eliminates the ‘entire market value’ (EMV) basis for damages
  • Uniloc v Microsoft (2011) Eliminates the admissibility of the 25% rule of thumb to determine damages: comparable licence agreements to determine royalty rate are now required.
  • Laser Dynamics v Quanta Computer (2012) Damage calculation based on smallest saleable patent practising unit, damages values drop with shrinking royalty base.
  • Motorola v Apple (2012) questions the sufficiency of damages expert opinion and highlights the risks and uncertainty of damages law for patent cases.
  • Motorola v Microsoft (2013) the Value of Standard Essential Patents (SEPs) drop.
  • Samsung v Apple (2013) The President exercised his veto for the first time since 1987 to deny an exclusion order based on the ‘anti-competitive’ use of Standard Essential Patents (SEPs).
  • Alice Corp v CLS Bank (2014) May reduce (or even eliminate) the value of many software related patents.
Neil then posed the question, “What part does patent litigation play in fixing the price of patents?” Based on the Ludlow table and analysis, and from the point of view of patent as a litigation weapon, the potential for individual patents to accrue value has been impaired by the decisions listed above and, as a result, US patents on the whole are probably less valuable than they were before 2006. 
At this point, Joff joined the discussion and explained that he is not a lawyer, an attorney or an engineer, but a journalist who just reports on what he sees and hears, and makes the odd observation. He commented that the cases discussed did not so much reduce patent values as make patents potentially less valuable than they might otherwise have been by making enforcing patent rights harder and, therefore, less attractive. The effects of the Alice v CLS Supreme Court decision are well worth watching, Joff stated. Further if, as some believe, the case renders hundreds of thousands of software patents granted by the USPTO unenforceable, then the market for such assets is almost certainly going to fall through the floor. Joff also noted the cases were all American and that different dynamics may exist in other parts of the world. For example, depending on how the unified patent court system develops, patents in Europe may become more valuable – he knew of a few non-practising entities and established US law firms that are presently looking to Europe as a potentially much more interesting place than may have been the case up to now. Joff then introduced a second list [presented in PowerPoint format which you can read here or here]: high value multi-million and billion dollar mega-patent transactions with which most readers will be familiar, including:

• Google’s acquisition of Motorola
• the sale of the Nortel patent portfolio to a consortium of smart phone manufacturers,
• Google’s acquisition of shares in Motorola Mobility, and
• the curious Quanlin Paper debt finance transaction that recently occurred in the People’s Republic of China, among others.
Nortel, in the good old days when
phones were phones and nobody
knew patents were an asset class ...
Joff stated that this list of patent transactions was unusual both because the deals were publicly disclosed and because of the enormous values attributed to patents. Most deals, he said, were done privately and for much lower sums. He also asserted that there was more going on besides strict patent value in all of these transactions. What’s more, he stated, it is important to remember that the vast majority of granted patents are worth very little or nothing at all. Neil elaborated by pointing out that several of the sellers were in financial distress eg Motorola was experiencing economic difficulties, Nortel was bankrupt and Kodak was nearly so, and pressure was on AOL to improve its share price. As a result, he said that many of the mega-transactions may simply have been “sales to get rid of dogs and get suckers to pay for them”. Joff did not agree – saying that the patents may not have been “dogs”; instead, the management of the companies that originally owned them may not have had the expertise or the inclination to maximise their value potential.  Neil observed the particular interest in securitizing patent rights in places such as China and Singapore.  He further noted that that it is important to put mega- transactions into context in terms of value. In 2002, there were low interest rates, lots of liquidity and lots of money looking for asset classes. Now in 2014, we are in a similar financial environment, with low interest rates, accumulation of capital searching for a yield. Joff noted that none of the deals in the list were about one party buying patents from another in order to monetize them through the courts, instead much more complex strategic issues were at play – and it was these considerations that had driven the patent valuations. 
Diamonds and dogs share
another context thanks to
Dave Bowie (or should
that be Bow-Wowie?)
 
Jeremy was quick to assert that “you can’t call a patent ‘a dog’ because it is sold by a company in insolvency proceedings”. Further, when it comes to treating patents as an asset class, it is more important to understand the patent's value story in connection with business strategy in order to assess value. Jeremy offered an illustrative analogy with postage stamp collection value. He explained that most stamps are valueless but a small percentage are worth something that makes them an asset class. There is scarcity at the top end and it is a skill “to distinguish the dogs from the diamonds”. Joff was not so sure, noting that patent value is very contextual – and depends on things such as ownership and timing. For example, he stated, if his mother owned an 1840 British Penny Black stamp it would have an intrinsically high value that she could find out and rely on; on the other hand, give her ownership of a patent and however good it might be to someone else, in her hands it would be worth absolutely nothing because she would have no idea what to do with it. 
Apart from the speakers,
the other big attraction
was the host firm's
excellent IP Ale
 
The discussion turned to Europe. Joff found it notable that to date there have been very few mega patent transactions in the EU. However in his view the position may change with the introduction of the Unified Patent Court (UPC) as the permanent injunction remedy may increase the value of good quality patents that read on popular technologies. If that turns out to be the case, he said, don’t be surprised to see more patent transactions and litigation activity in the EU in the future. He named one very well-known US law firm in which a number of senior partners have been sitting the Qualified Lawyer Transfer Test exams to qualify as solicitors in England and Wales, expressly to offer advice on English / EU patent law.


Jonathan D.C. Turner (barrister, 13 Old Square), joined the discussion and suggested that the absence of mega-patent deals in the EU may be due to the impact of strict competition (anti-trust) law and that the intervention of competition law procedures may paralyze such transactions. In his view, competition law would still be an important issue, even with the UPC in place.

Joff concluded that we needed a better understanding of the dynamics of these large patent transactions coupled with their huge patent valuations. He thought there was a danger that we might overhype patent value and that it was important to understand the patent ecosystem properly in order to extract any value at all. He added that the other thing that creates value is if many parties are bidding against each other for the patent portfolio. This drives up the price. This what happened in the Nortel sale; by contrast, in the Kodak sale companies interested in the portfolio ended up working together and the $525 million sale price was much lower than initial predictions, some of which were in the region of $2 billion to $3 billion.


Charles Till, formerly with Nortel, agreed that the dynamics of the auction process had much to do with the patent values being drawn up. He explained that Nortel was not interested in patent enforcement as it would have needed to sue its own customers. Thus the company’s strategy was to transfer the patents to its competitors, for a price, as the competitors would have no such reservations.

Jeremy clarified that, whether the asset is a postage stamp or a patent, any asset will be affected by ‘context’ and what we must be sensitive to the circumstances that tend to make patent assets more valuable.

To conclude the dialogue, Joff advised attendees to think of patent value as being about much more than monetisation. Patents are potentially valuable for any number of reasons and if you see them only as monetisable assets you will probably end up failing to make the most of what they can offer. Neil advised that, against the backdrop of the attempt to amend US patent law, it will be very important to evaluate what is currently taking place with respect to the anti-patent lobby led by a group of IP academics. It will be important for the IP community not to underestimate the power of academics and their anti-patent sentiment. As an academic myself, I think this is particularly good advice".

Monday, 22 September 2014

CIPA Congress: patent attorneys target IP commercialisation

CIPA Congress can be fun -- but there's
a thoroughly serious side to it
"The Lifecycle of Intellectual Property: Intellectual Property From Cradle to Grave" is the impressive title of this year's CIPA Congress. Since this event is run by the Chartered Institute of Patent Attorneys, one might mistakenly think that Congress is all about a load of patent attorneys getting together in order to talk shop and exchange grumbles over patent offices (particularly the European one), patent examiners, courts and clients. Fortunately nothing could be further from the truth: Congress gives the profession a chance to look beyond the daily trials and tribulations of patent practice and discuss topics that require a far greater degree of vision, commitment and understanding. An example of this can be found in Session 7, as Dominic Forsyth and Greg Corcoran explain to this blogger:
"A full and diverse panel has now been confirmed for Session 7, which addresses a range of important issues facing actors in the world of licensing and commercialisation. Experienced in-house attorney Greg Corcoran of ASML chairs the session and will coordinate talks from three very different perspectives.

* Dr Kevin Scott (Royal Philips) will share his experience and expertise from the perspective of a large, innovative multinational, discussing various ways that licensing and open innovation models can be used to achieve effective collaborations and extract value from innovations. He will provide insight on how a multinational can leverage its IP to obtain the best return on investment.

* Dr Hayley French will provide views from a dynamic young biotechnology firm, Apitope International, which has used licensing agreements to forge partnerships with investors and pharmaceutical companies worldwide. She will discuss the techniques employed by a young biotech firm to use its IP to survive in a highly competitive market.

* Dr Adam Stoten will share experience gained over 25 years by Isis Innovation, one of the UK's leading university tech transfer organisations. Having executed more than 1,000 commercial licences and supported the creation of more than 80 new companies, Isis has had the opportunity to see over the long term how agreements really stand the test of time. He will share ideas about how an established tech transfer organisation translates academic discoveries into real products and services which benefit society."
If you can get there, Congress takes place on 2 and 3 October at the Lancaster London Hotel, London W2 2TY.  For further information and registration details, click here.

Sunday, 21 September 2014

China’s Changing Copyright Attitude

At a time when attitudes towards investing in China veer from the cautious and cynical at one extreme to the ambitious and optimistic at the other, it's always good to hear from people who have some experience of current conditions in that vast and complex market.  In this guest post, we feature the view of Michael Laridan, consultant to Shanghai and Beijing-based market research company Daxue Consulting.  Michael, focusing mainly on copyright but also touching briefly on other IP rights, raises an issue of particular significance to readers of this blog --  the repatriation of IP-driven earnings from China.  Michael writes:
"China has a reputation for lax attitudes towards protecting intellectual property rights, especially those held by foreign companies. As a signatory of most international copyright standards agreements, it is obliged to investigate and pursue cases of infringement, but in the past, foreign companies have found it difficult to defend their copyright in China. The process is complicated and enforcement is often difficult. In the rare cases where a domestic court has found in favour of a foreign company, the compensation has been much lower than in international courts.

That trend is changing. Enforcement and legal groundwork have been developing quickly. In the past four years, China has consistently had the highest number of resident patent applications in the world, with the gap between it and competitors like Japan and the United States growing every year. As it moves towards a design and innovation driven economy, a robust copyright dispute settlement process will increasingly become a priority for domestic companies and therefore the legal system. This pressure will be the driving force behind China's changes in IPR legislation in the future. In 2010, Beijing courts alone handled almost 8,000 IP cases. In 2012, 2,150 patent disputes were handled by the State Intellectual Property Office, twice as many as those handled the previous year. So while there is still uncertainty in their copyright landscape, there good reason to be optimistic about the state of China's IPR enforcement laws going forward.

This should be good news for foreign companies. Companies afraid of losing their trade secrets should feel more secure about entering China in the future. However, they should also be aware that filing a patent or registering copyright or trade marks in China doesn't just protect their IP, it ensures their competitors can’t hamper their efforts through the bureaucracy. Since Chinese arbitration procedure places great emphasis on definite proofs of ownership and original documentation, Chinese companies seeking to block foreign competitors may register their copyright, creating an additional hurdle for foreign companies who have not taken this step as they then have to prove in court that they are the original owners. Although trade mark regulations have improved substantially in the past decade, trade mark squatting and piracy are still serious problems, affecting even foreign brands with a strong local presence, such as when Proview challenged Apple over the name Snow Leopard in China. Most importantly, though, is what Jack Perkowski pointed out in 2012; it's essential to defend IPR in China to stop a local competitor from developing to the point where it can challenge a foreign company's own domestic market.

Should an enterprise secure IPR within China, it still faces the issue of remittance out of the country. Royalty payment from a Chinese subsidiary for relevant IP, for example, can only be transferred after it has has passed tax clearance. Since the taxes imposed for royalties can amount to less than the taxes imposed on dividends paid directly to a parent company and don’t need the annual tax audit to be completed, some companies have expatriated funds using artificially inflated royalty payments. Consequently, the tax administration has tried to impose stricter regulations for royalty remissions. Companies are encouraged to approach the relevant tax bureau in advance, and present their case for the amount of the royalty payment. The final decision often relies on the individual judgement of the bureau and tax officials on whether the royalty fee is “reasonable.” Although variable royalty rates may be preferable, they require a new justification whenever a change occurs. Depending on the company, this could mean that charging fixed royalty rates would be preferable, as they are easier for tax authorities to investigate and ultimately authorise.

As China's entrepreneurs begin to focus increasingly on innovation, the legal system will put more emphasis on IPR protection. As IPR protection increases, it will drive the market even further towards design and innovation. It should no longer be a surprise to foreign companies that China is capable of building products that can compete on an international level; as they continue to grow, they will begin to focus on international markets. Foreign companies should be viewing IPR protection developments in China with cautious optimism, and most importantly, with a plan for dealing with the repercussions of a China with robust copyright law".
Sources and further reading here, here and here

Friday, 19 September 2014

Stacking the Deck in Analysis of Smartphone Patent Licensing Costs

Estimates of patent licensing costs for smartphone manufacturers are greatly exaggerated. Allegations of excessive fees paid and resulting harm to manufacturer profits, incentives to invest and compete are faulty and unsupported by the facts -- which show much to the contrary.
Allegations of excessive royalties
 and harm pile high in smartphones
A "working paper" entitled The Smartphone Royalty Stack: Surveying Royalty Demands for the Components Within Modern Smartphones has been published by one in-house lawyer at Intel and two outside counsel from WilmerHale. Intel Vice President and Associate General Counsel Ann Armstrong and WilmerHale's Joseph Mueller and Timothy Syrett argue that aggregate patent licensing fees including SEPs and non-SEPs are excessive at around $120 per $400 smartphone. They conclude that “few suppliers are meeting the basic goal of selling devices for more than the costs incurred in supplying them,” imply that this is due to the alleged royalty stack, and state that “those costs may be undermining industry profitability—and, in turn, diminishing incentives to invest and compete.”

The paper’s economic and empirical analyses are deficient and defective. In contradiction to its findings, evidence shows that licensing fees:
  • Are not undermining profits and are not preventing manufacturers from covering more than their costs. According to Credit Suisse, handset manufacturer operating profits since 2007 have tripled to $51 billion on $326 billion revenues in 2013.
  • Are not excessive. There is no basis for arbitrary price caps on smartphone patent fees, or limits based on chip manufacturing costs. The latter are unrelated to patented technologies and the value they generate more broadly in the entire device, its use in mobile networks, or across the broader ecosystem including services and applications. Methods of determining charges follow well established principles and benchmarks in bilateral negotiation. Patent licensing fees are analogous to licensing fees for book, music, movie or software publishers, which typically exceed greatly the cost of the physical mediums on which they are published and distributed.
  • Are nowhere near $120 in aggregate; and there is copious evidence actual payments are much lower than purported. The Paper inexplicably and erroneously disregards fundamental offsets in cross-licensing which greatly reduce or eliminate fees paid to many patent owners. This figure is also systematically biased and inflated by including rates demanded by licensors, even where there is no evidence anybody—including those who have little or nothing to cross license —actually pays such rates. And, where there is, instead, copious evidence that rates actually paid, if at all, are substantially less—orders of magnitude less in some instances. For example, court-adjudicated rates were much lower than “demanded” rates in various cases, and yet the higher figures were used in calculating the above total.
  • Are helpful, not detrimental, to the highly competitive and flourishing smartphone ecosystem. By every measure the patent system and the risk-reward balance it strikes—spurring innovation, market entry and competition while not overburdening licensees—is unmistakably working very well. 
My full and detailed analysis, in a pdf document, of this working paper by Intel and Wilmer Hale includes copious evidence countering the latter's findings.

This follows a previous my previous IP Finance posting on alleged royalty stacking entitled Theories of Harm with SEP Licensing do not stack up in which I responded to papers co-authored by Mark A. Lemley and Carl Shapiro in 2006 and 2013, and my posting entitled Absurd (F)RAND licensing-rate determinations for SEPs that analyses some U.S. court judgments which have relied on these economists in their royalty rate determinations. 


 



Patents as assets: just like bullets

Yesterday's Aistemos launch [on which see earlier blog post here] produced lots of food for thought which this blogger is still digesting. However, he couldn't resist publishing Sir Robin Jacob's point about single patents when compared with bundles of them.

In short, it is generally accepted that -- for whatever reason -- around 70 per cent of patents are invalid.  This means that, if you hold a single patent, the odds are on it being invalid and therefore incapable of enforcement and not very attractive to anyone who is contemplating an advance of funds on the security of it.  

The situation is however entirely different if you hold a portfolio of, say, 100 patents covering a single technology.  Even if each individual patent is more likely than not to be invalid, the chances are that around 30 of them will have legal force. This means that they will provide the means of controlling the market for at least part of the products and services covered by them and that they will accordingly make a more attractive prospect for a cautiously-minded lender.

It's just like bullets, Sir Robin explained.  If you just have one, it may hit the target but may also miss it. However, if you have 100, even if your aim is not very good there's a far better prospect of hitting the target -- and you only need one bullet to do the job.  So too with patents: however many of a bundle of patents turn out to be ineffective, you only need one that works properly in order to provide the requisite protection.

Thursday, 18 September 2014

The trillion dollar tipping point: a report, and a product launch

Not just "a" Westbury ...
Later today this blogger will be wandering down Mayfair to London's (The) Westbury Hotel to join the formal launch event for CIPHER, described by its creators at AISTEMOS as "the world’s first intellectual property analytics tool for the business community".  This launch coincides with the release of The trillion dollar tipping point: Exploiting the untapped value in patents, a report [edited by this blogger, who is a member of the company's Advisory Board] assessing the barriers and solutions to the monetisation of the intellectual property assets which are now said to account for up to 70% of enterprise value. 

Not all data is digestible --
nor can everyone digest it
The origins of CIPHER are quite interesting: it is the fruit of a pilot project involving over 60 organisations, which include BAE Systems, Marks & Clerk, GE, PwC and Slaughter and May. Their objective was to develop a business intelligence product that could aggregate, analyse and visualise data relating to patents and related events including litigation and licensing.  This data was already available in one form or another -- but it could be indigestible or hard to assess in the hands of people who needed it in order to take business decisions.  Using databases licensed from Thomson Reuters, Lex Machina, Patent Freedom, ktMINE, 1790 Analytics and Relecura, the CIPHER tool has the capacity to search across 30 million patent families and all the world’s patent-owning organisations in real time.

This shouldn't be the standard response
to a request for a patent-backed loan
This post does not seek to promote CIPHER: if it is any good, people who try it out and find it useful will continue to use it; it will become successful and no doubt breed competitors, as is only natural.  Rather, this post seeks to draw the attention of readers, particularly those in the financial sector, to something mentioned in The trillion dollar tipping point and which has become increasingly a matter of concern: there seems to be a disjunction between the high value of intangibles such as patents in court and in transactions, on the one hand, and their relative lack of appeal as security for loans on the other. Faced with a request for finance backed by such intangibles, banks sometimes appear to behave as though the choice before them lies between taking a bad risk and making no loan at all. This is not the result of malice or wilful blindness, but stems from the paucity of information on which banks can assess the nature of the risk they take in lending on intangible securities. CIPHER is one way in which banks can better calculate risk and make their loan decisions with confidence based on understanding, not caution based on ignorance.

If anything interesting is said at the launch, this blogger will do his best to relay it to you tomorrow.

The trillion dollar tipping point: Exploiting the untapped value in patents [which also contains a Foreword from Professor Sir Robin Jacob] can be accessed here
If you are too busy to read the whole report, there's a short summary of it here
If infographics are your scene, there's one here for you

Wednesday, 17 September 2014

A Relatively New Resource: Guide to Intangible Asset Valuation

Robert Reilly and Bob Schweihs, two managing directors of Willamette Management Associates, have authored a book titled, Guide to Intangible Asset Valuation.  The 700 page book "explores the disciplines of intangible asset valuation, economic damages, and transfer price analysis."  Some of the topics addressed include:

Identifying intangible assets and intellectual property; Structuring the intangible asset valuation, damages, or transfer price assignment; Generally accepted valuation approaches, methods, and procedures; Economic damages due diligence procedures and measurement methods; Allowable intercompany transfer price analysis methods; Intangible asset fair value accounting valuation issues; and Valuation of specific types of intangible assets (e.g., intellectual property, contract-related intangible assets, and goodwill). 

I have not read the book yet, but here is a favorable review by Neil Beaton, Certified Public Accountant.  The book is also reasonably priced at $122.50--a very nice price compared to some of its competitors.  The publication brochure (attached to the referenced review) notes that those "[w]ho would benefit from [the] book" include:

Litigation counsel involved in tort or breach of contract matters; Intellectual property counsel; International tax practitioners; Property tax practitioners; Auditors and accountants; Valuation analysts; Licensing Executives; Multinational corporation executives; Commercial bankers and investment bankers; Merger and acquisition professionals; Bankruptcy professionals; and Judges and arbitrators. 

 I look forward to reading it.

That Patent Box seminar has just popped up again

Readers may recall that, back in August, IP Finance announced an impending seminar, "Patent Box: Tips and Predictions", that was scheduled for 9 September, in the comfy setting of the Rembrandt Hotel, London. That programme focused on the institution of the Patent Box (on which see, for example, earlier IP Finance posts here, here, here, here and here), and specifically on its UK version. The organisers had this to say about it:
"The Patent Box regime has bedded in - is it working? Big companies are obtaining major savings on tax through the regime - are you? The EU has asked questions about the legal validity of the regime - where might this end? Ensure you're adopting the best practice Ensure you're future proofing your IP tax measures".
As luck would have it, this date turned out to slightly ahead of the publication of the keenly-awaited OECD report on harmful tax practices [on which see Rob Harrison's helpful earlier blog post here].  

Once it was realised that the original date was right under the cloud of the OECD report [which has fortunately given the UK Patent Box a reasonably clean bill of health], the organisers of the conference rescheduled it for 22 October, with the same cast of speakers and in the same comfy venue. You can check out the details from the Management Forum online brochure here.

Tuesday, 16 September 2014

Patent Box Regimes Globally - OECD/G20 respond

The UK's patent box regime  under which companies can get significant tax reductions for income deriving from patented products has been criticized by several countries, notably Germany (see here), as resulting in unfair competition for foreign investment. This blog noted back in July that the EU commission was looking into the issue.

Germany's Finance Minister lecturing his audience
about the evils of the patent box
The OECD in conjunction with the G20 group of major economies has now published a detailed report (available for download here) on countering harmful tax practices more effectively. It includes a number of pages devoted to the patent box regime and seems to approve generally the UK practice, which differs from other countries with similar regimes. One issue that appears to be controversial is the extent to which outsourced research and development activities can later qualify for tax relief, and both the UK and Spain entered reservations on this section of the report. The report emphasizes that marketing-related IP assets such as trademarks should not qualify for the tax benefits, which would appear to impact on schemes in some countries.

It's probably not surprising that the report is at least generally supportive of favourable tax treatment of intellectual property given that a number of countries have introduced such regimes over the years (although Ireland abandoned their tax break, as reported here). The report's main recommendation is that there needs to be a clear link between the revenues and the IP right. This will probably complicate calculations in the future, but the authors noted that taxpayers may chose this in order to exploit the opportunity to benefit from an optional tax benefit. Indeed by harmonising the reporting requirements among different jurisdictions may lead to an overall reduction in complexity.

German chancellor Angela Merkel's
X-ray eyes 
And Germany's response? Well, the news magazine Spiegel reported over the weekend that the German finance ministry was considering introducing a patent box benefit in Germany and the German Industry Group BDI welcomed this move on Monday.

Monday, 15 September 2014

Competition law and SEPs: a new book

Competition Law and Standard Essential Patents. A Transatlantic Perspective, a new title from Wolters Kluwer and written by Urska Petrovcic, has just come into this blogger's line of vision.  He hasn't yet seen it, but suspects that it may be of interest to readers of this weblog: if anyone has a copy and would like to write a short review for us, please get in touch.

According to the information provided by the publishers,
"This book, through an intensive focus on case law in the United States and the European Union, clarifies the scope of competition law in addressing SEP [ie standard essential patent] owners’ opportunistic conduct, and offers the first comprehensive analysis of the antitrust liability an SEP owner might face in each jurisdiction. The presentation thoroughly explains among others these following relevant topics and issues:

* processes through which standards are adopted and implemented by market participants;

* principal antitrust concerns that might arise in the standardization context;

* elements that competition authorities and courts should take into account in evaluating SEP owners’ market power; the role of “fair, reasonable and non-discriminatory” (FRAND) commitments;

* applicability of competition law to a SEP owner’s deceptive practices during the standardization process;

* applicability of competition law to strategic licensing by SEP owners;

* gaps competition law faces when addressing a SEP owner’s opportunistic practices".
This blogger is uncomfortable with the use of the term "opportunistic conduct", which not only gives the appearance of pre-judging the business practices of patent owners -- which can only be adjudged to be opportunistic within the context of the specific factual parameters of the technology within which FRAND licences may be offered -- but also has the appearance of cutting to the chase without taking due account of the evolution of the patent or patents at the hands of its owner before the point at which a granted patent is available to license, or indeed to infringe.  However, it would not be fair to judge this book on the strength of the marketing blurb, so it will be good to find out how the author treats the subject

This book is volume 58 in the publishers' International Competition Law Series. You can check its contents here and inspect a sample chapter here
Price: 120 euro/ US$ 162.
More information here

Friday, 12 September 2014

E-CRIME and the economic impact of cyber crime in Europe

Monica Lagazio (Associate Partner, Trilateral Research & Consulting LLP), has informed us of the commencement of a new European project, E-CRIME, which focuses  on the economic impact of cyber crime [which also touches on criminal aspects of intellectual property right protection] in Europe.  In conjunction with this, she has sent us a media release which reads, in relevant part:
"Some progress has been made in understanding and managing cyber crime as well assessing its economic impact. Yet much remains to be done. Lack of co-ordination in law enforcement and legislation, lack of common consensus on the nature of cyber crime and lack of knowledge sharing and trust are just some of the issues that both afflict cyber crime responses and cloud our understanding of cyber crime. 
The European Union is sponsoring a European project called E-CRIME in order to address these well-known problems. E-CRIME focuses on analysing the economic impact of cyber crime and developing concrete measures to manage risks and deter cyber criminals in non-ICT sectors. E-CRIME does so by adopting an inter-disciplinary and multi-level-stakeholder approach that fully integrates a wide range of stakeholders’ knowledge and insights into the project. 
First, the project will create a detailed taxonomy and inventory of cyber crime in non-ICT sectors, and analyse cyber criminal structures and economies by combining the best existing data sources with specialist new insights from key stakeholders and experts. 
Secondly, E-CRIME will assess existing counter-measures against cyber crime in non-ICT sectors in the form of current technology, best practices, policy and enforcement approaches, and awareness and trust initiatives. 
Thirdly, the project will use available information and new data to develop a multi-level model to measure the economic impact of cyber crime on non ICT-sectors. 
Fourthly, E-CRIME will integrate all its previous findings to identify and develop diverse, concrete counter-measures, combined in portfolios of inter-sector and intra-sector solutions.

... 
The consortium has now set up the E-CRIME Stakeholder Forum (ESF) comprising 24 representatives from key non-ICT sectors, ISPs and communication networks, law enforcement agencies, cyber security, legal, civil, and insurance companies, and governmental organisations from the Member States. The ESF acts as an advisory body for the consortium."
IP Finance proposes to keep an eye on this project, for which some ϵ3,749, 289 has been allocated. It will be interesting to see whether, and to what extent, the work of E-CRIME overlaps or is complementary to that of another institution, the OHIM-hosted European Observatory on Infringements of Intellectual Property Rights.

When clinical trial data is fudged; woe to the company or woe to the industry?

When I think of clinical test data, my attention is usually drawn to controversial Article 39.3 of
the TRIPS Agreement, which affords protection for confidential regulatory data in industries such as pharma and agrochemicals. Article 39.3 provides as follows:
“Members, when requiring, as a condition of approving the marketing of pharmaceutical or of agricultural chemical products which utilize new chemical entities, the submission of undisclosed test or other data, the origination of which involves a considerable effort, shall protect such data against unfair commercial use. In addition, Members shall protect such data against disclosure, except where necessary to protect the public, or unless steps are taken to ensure that the data are protected against unfair commercial use.”
However, the issue of trial data in the context of regulatory approval took on an entirely different meaning this week when it was announced, here, that a U.S. company, Hyperion Therapeutics, here, was cancelling its agreement to acquire the Israeli company Andromeda Biotech, here. Andromeda has been developing a Type1 (juvenile) diabetes drug (DiaPep 277).The value of the deal, which was announced a half-year ago, would have reached $570 million plus additional payments of royalties. As a part of the arrangement, Hyperion also undertook to fund Andromeda’s continued R&D activities. The primary beneficiary of the deal was Clal Biotechnology Industries Ltd, the controlling shareholder of the company. A first payment of $20 million dollars in cash and shares had already been made.

What was the reason for the cancellation of the transaction? As reported by Globes, a leading Israeli business newspaper, Hyperion advised that it had “uncovered evidence” that Andromeda employees had falsified certain clinical trials of the drug. More particularly, it is reported that Andromeda conspired
“with a third-party biostatistics firm in Israel to improperly receive un-blinded DIA-AID 1 trial data and to use such data in order to manipulate the analyses to obtain a favorable result.’ Hyperion further stated that ‘[a]ll of these acts were concealed from Hyperion and others. ”
Shares of both Hyperion and Clal Biotechnology nosedived in the aftermath of the disclosure.

What is both interesting and curious is that questions had already been raised about both the value of the transaction and the propriety of the company’s trial data. As for the price tag of the acquisition, Globes observed that “there were some who raised their eyebrows and wondered why the product was being sold at a relatively low price, earlier than expected, to a relatively unknown partner.” In light of recent developments, as observed by Globes,” the question arises whether other companies ran away from the deal after seeing Andromeda’s data.” Indeed, it is reported that rumors had already circulated in the past regarding what was termed “inconsistencies” between previously obtained trial results.

An interesting comment in this respect was reportedly made, here, by Mr Mori Arkin, a well-known investor, who often teams up with Clal Biotechnologies in investing in the biotech sector. Arkin is quoted as saying:
“There is no need for us to rebuke ourselves too much – neither the Israeli company nor the biomedical industry as a whole. The acquiring company, Hyperion, is not a large company. The data had these weaknesses from the beginning, and large companies probably realized it. If Hyperion overlooked weak points in the data, it’s their mistake, not that of the other side, and it’s not nice to make such unilateral accusations. It’s the court’s job to do that after a claim, and it’s not acceptable to lash out and damage the reputation of various parties.”
Arkin’s comments are particularly intriguing because they seem to place the burden for the failure to understand the problems with the trial data, at least in the context of the acquisition, on the acquiring party. In particular, it is suggested that the acquiring company (as a “small” company) did not carry out “proper” due diligence, in contrast with other, unnamed larger companies, which would likely have picked up on the “weak points of the data.” If Arkin is correct that size so matters in an acquirer’s ability to investigate a biotech target properly , especially when questionable data are at issue, this is a matter of material concern, giving new meaning to the term “caveat emptor” and raising a red flag on the ability of “smaller” biotech companies to carry out proper diligence in connection with acquisition activity.

Alternatively, however, perhaps what is taking place is an attempt by a major investor in the field to deal with a threat to the broader perception of the integrity of the entire industry, at least within the Israeli content. What better way to do confront this challenge (and presumably protect one's investments in the area) than to suggest that culpability lies not with the company and the ecosystem of the industry but with the acquiring company. The first class action suit has already been filed against Clal. Clearly, though, sorting out what really happened has only begun.