Monday, 25 January 2016

Google and taxes and the UK and ... everyone everywhere?

This isn't strictly about taxation of IP - that £130m that Google are apparently coughing up to the UK tax authorities is apparently based on their revenues from selling advertising to UK customers rather than from licensing IP (according to press reports; I'm not inclined to assume that these are a guaranteed clear explanation of anything to do with UK tax). But, of course, anything Google earns is driven by IP so I figure it's pretty fair game for this blog.

If reasonably accurate, the reports are interesting, because UK tax rules (and the tax rules in most other countries too) aren't based on revenues booked in the UK alone. Instead, they're based on the UK profits attributable to taxable activities in the UK. We have some new rules here in the UK, which came into force in April, which attempt to tax profits which have been diverted out of the UK artificially - but that's still profits, not revenues, and they still need someone to be doing something in the UK.

The implications of the press reports - and general outcry of 'too low, too low' - are interesting. And possibly not entirely thought through.

To take another example IP business sector that's been mentioned a fair bit over the past year (albeit possibly mostly in specialist tax reports): knitting pattern designers - particularly freelance pattern designers selling though etsy or ravelry etc. Now, these have been mentioned regularly because of the EU VAT changes at the beginning of 2015, which pretty much required these designers to collect VAT at the customer country rate from customers - which, in the UK causes a fair headache because most of these designers don't earn enough to be required to be VAT registered here, but aren't below threshold elsewhere - and the compliance was a mess.

But the logical extrapolation of the Google etc reports is that one should pay income tax everywhere that one books revenues. Which rather suggests that VAT is going to be the least of a freelance knitting designer's worries: the VAT side of things can be (to an extent) dealt with by using payment aggregators like PayPal and others to deal with the VAT on your behalf - and it only applies to EU customers. But having to register for income tax and deal with that tax compliance in every single country from which someone buys your knitting pattern? Good luck ...

Yes, Google has sales people etc in the UK, so it's in a slightly different position to a pattern designer selling to a country other than the one they live in, but the calls for 'more tax' aren't based on those sales people being here, just on the sales revenue Google makes. And, frankly, Google could probably get most of the same UK revenues without a single person being needed here (AdWords signups seem pretty automated to me ...)

The OECD BEPS project has been trying to deal with this - and things like the UK diverted profits tax are an outcrop of that - but there isn't a simple solution (I'm pretty sure tax authorities would have found it by now, if there was one). So, those calling for Google et al to pay more tax simply because of the revenues they make here should think about the knitting pattern designers too.

Saturday, 23 January 2016

Bye bye GE Appliances--but what about the brand?

If the measure of a brand is all of the market information embodied therein, then the GE brand has certainly attracted a lot of recent attention. The move of its corporate headquarters from suburban Connecticut to Boston
has been widely noted, including by this blogger. Of less notice, perhaps, was the report last week that GE had reached agreement with the China-based Qingdao Haier Co. Ltd., a unit of the Haier Group, for the sale of GE’s white goods appliance business, including such products as refrigerators, freezers, clothes washers and dryers. The transaction price was announced at $5.4 billion. To put this amount in perspective, GE was more or less forced to walk away in late 2015 from a $3.3 billion offer from Sweden’s Electrolux, due to opposition from the U.S. antitrust authorities. Electrolux, GE and Whirlpool are the three dominant players in this industry. Haier is reported to have merely a 5% market share, which is not expected to attract antitrust scrutiny (although the Committee on Foreign Investment in the United States may still weigh in the contrary).

What is interesting from the IP point of view are three points. First, the sale would seem to be consistent with the announced move of GE to Boston, to better enable the company to become a leading “high-tech global industrial company.” As much as white goods do not lack for high-tech features (think the “internet of things” and one’s ability at some point to activate his washer from afar), it would appear that it is not the high tech sort of activity GE seeks to engage in going forward, even at the apparent price of transferring the company’s technology in these areas to Haier.

Second is the fate of the GE trademarks that have anchored its white goods business for decades. The reports on this transaction suggest that Haier will receive rights in the relevant product marks, including MONOGRAM, CAFÉ, PROFILE and ARTISTRY, as well as the GE APPLIANCES brand. Indeed, as part of the deal, it is reported that following the acquisition, “GE Appliances will continue to market the current portfolio of GE brands for a period of 40 years (inclusive of two 10-year extensions)." This seems a different approach than that taken by Lenovo, when it acquired IBM’s PC business a decade ago. One would be hard-pressed to find anyone under 20 years of age who can recall the IBM brand in connection with the PC market. That will not be the case with respect to the GE brand in this case, which will continue to be used in connection with these white goods products for decades to come. How that will work as a branding strategy and redound to the GE brand going forward is an interesting question.

Third is the possible manner in which Haier will make use of GE’s distribution network for these products to seek and expand the company’s own product lines in this area. As one industry analyst, Johan Eliason, was reported by (see above) to have observed—

…over time I’d expect them to use GE’s excellent distribution network in the U.S. to source in more of their own Chinese low-priced products which will change the [pricing] dynamics to some extent.

If this will occur, Haier may then be relying on the same distribution network to move both higher and lower- end products, each under separate brands. How will the company juggle these potentially competing brands and support the brand equity that each enjoys? Will there be a strategy whereby the purchaser of a low-end product will be more likely to trade up as his/her financial circumstances improve, or will the brands stay separate? Could there even be a scenario whereby Haier might rely on a complementary distribution network for its lower-end products?

More generally, the effect on the GE brand, as the company seeks to reposition itself going forward, continues to bear close watch.

Wednesday, 20 January 2016

10 Patent Considerations for Startups in the Age of the Assault on Patents

Today, Oxfirst sponsored a talk by the distinguished Rt. Honorable Professor Robin Jacob defending patents.  Another commentator has also stepped forward to defend patents.  Recently, attorney John R. Harris authored an article titled, “The Patent System is Under Assault:Startups, Should You Care? Ten Things About Patents that Startups Need to Consider,” published in the 44 American Intellectual Property Law Association Quarterly Journal 27 (Winter 2015).  Mr. Harris outlines the current assault by describing one of the attacks coming from the Patent Trial and Appeal Board (affectionately known as the so-called “Death Squad” for patents) and its rate of 80% in finding patents invalid in Inter Partes Review Proceedings.  Notably, the U.S. Supreme Court has recently granted certiorari in Cuozzo Speed Techs., LLC v. Lee to determine whether the Patent Trial and Appeal Board is applying the correct standard in reviewing patents for invalidity.  The outcome of that case will be closely watched—particularly, I think, given the current gaming going on concerning shorting the stock of companies whose patents are then challenged through IPRs.

In defending patents, particularly in the context of startups, Mr. Harris states:

But most significantly for startups, that property right can represent enhanced value for investors and improve the prospects for obtaining early stage financing.  A well-crafted patent—or even better, a collection of patents in a portfolio that forms a patent “thicket”—reveals and represents the fruits of product or service development, helping form a protective barrier against theft. If that product or service requires capital to come to market, investors draw some comfort from the patents’ protection of the investment while the product is commercialized. This early protection is vital because, in this author’s experience, it often takes companies years to go from “maybe a good idea,” to a prototype, to a testing environment, to a sold product, to market acceptance, to profitability, and finally, to investment realization.

My own personal experience mirrors Mr. Harris’: it can be difficult to draw attention from venture capitalists without solid patent rights.  I haven’t practiced in a while, but my understanding is that venture capitalists still value patents in determining whether to invest in a startup.  [Interestingly, I’ve never seen the use of term “patent thicket” in a positive light.]

Moreover, in spite of the assault on patents (and their cost), Mr. Harris notes that startups should take into account these ten considerations concerning patents: 1. Enterprise Value Enhancement; 2. Signaling Quality to Investors and the Investment Community; 3. Establishing Ownership of Technology and Inventions; 4. Assertion Against Competitors; 5. Avoiding the IP of Competitors and Others; 6. Revenue Generation/Licensing/Monetization of IP; 7. Facilitating Collaborative Research; 8. If You Get the Patent, You Block the Competitors; 9. The Laws Will Change . . . Again; and 10. Although Trade Secrecy and Copyright Offer Some Protection, There Is No Viable Alternative to Patents.
Do you have any other considerations to add?  Also, what is on the cost side?

Tuesday, 12 January 2016

A not-so-odd trio: medical marijuana, fraud and patents?

Dr. Joe Wyse, a partner (and colleague of this blogger) at the Israel-based IP boutique, Dr. Eyal Bresler & Co., has provided us with an interesting way of how the
patent system may be used to prevent fraud in connection with the business of legal uses of cannabis.

One of the most dynamic new areas of patent activity has been medical uses for cannabis, as start-ups seem to be cropping up at a pace commensurate with the legal production of the plant itself. An interesting angle on the possible financial risks in entering the space was suggested by Jeffrey H. Kramer of Kroll Global Fraud Report 2015-2016, who focuses on what he claims are the particular risks of fraud in the field. Kramer writes as follows:

“The risks of fraud in the medical marijuana industry are clear and pervasive. States, banks, private equity firms, insurance companies and others could unknowingly enter into a financial relationship that could prove disastrous without thorough domestic and international due diligence investigations being completed on the dispensaries, growers and their sources of funds. Growers and dispensary owners could have significant financial or legal problems, ties to U.S. or international organized crime, or a host of other issues”.

While vigilance about the risk of fraud is always a good practice, the question remains, as a colleague asked, “Why all the fuss about fraud in the medical marijuana industry?” Is the industry being unfairly singled out? Is there a case of moral panic here? Is the Kroll company seeking to create a new business market by (over?)-stating the special risks connected with medical marijuana? To get a feel for how to properly address these questions, I ventured into cyberspace to see what experts in other industries were saying and writing about fraud. Even a modest bit of online searching throws up references to instances of serious fraud, sometimes on a massive scale, in so many established industries that one may well wonder if the marijuana business, in comparison, is as tainted as suggested in the Kroll article. What follows are some observations concerning several industries:

Food Industry According to a 2014 NSF White Paper, “a number of factors have come together to make food fraud a significant global threat for the food industry”. Indeed, "… it is estimated that it costs the world economy $49 billion annually and is growing”. The UK horsemeat scandal is just one example. Fraud is so rife in the food industry that many patented technologies are being introduced, especially in traceability and authentication, to identify the precise origins of food products.

Crowd Funding Let’s consider the world of crowdfunding, such as Kickstarter. During the last two to three years, numerous scams have been unearthed, ranging from falsifying the experience and qualifications of principals involved in order to attract investors to bogus inventions, false results data, dubious theft of images, misuse of donations, and outright lying about deliverables promised. In fact, according to Engadget web magazine, “the Federal Trade Commission now has your back when the host sites' safeguards aren't enough. The government body has taken its first action against a crowdfunding fraudster, reaching a settlement with Erik Chevalier after he cancelled a Kickstarter board game project and reneged on promised refunds”.

Biotech What about biotech? William Baine, at Rufus Scientific, has researched fraud in this area, and his report makes for sobering reading. He estimates that fully 50% of the fraud is financial, with the rest split between scientific and clinical trials misconduct, market rigging and the 'normal' corporate stories of theft, bribery and unethical business conduct.

Pharmaceuticals Pharmaceuticals provide a number of opportunities for specialized fraud, including good manufacturing practice (GMP) violations, off label marketing, best price fraud, continuing medical education fraud, Medicaid price reporting, manufactured compound drugs and various instances of kickbacks. Some examples include the three billion dollar settlement by GSK for illegal promotion and failure to report safety data, and false price reporting and Pfizer's settlements in the amount of $2.3 billion for multiple civil and criminal allegations in the largest case of pharmaceutical and health care fraud in US history.

It may be that the relatively new legal medical marijuana and cannabis industry, while subject to heightened attention and regulation, is actually relatively small in the amounts at issue. There (still?) may not be that much fraud to detect, in comparison with some of the other industries mentioned above. Still, investors in this nascent area do wish to have as much proof as possible of the bona fides, traceability and accountability of a business or individual in which they are being asked to invest. I would maintain that, apart from the usual due diligence of probity, registrable intellectual property associated with the principals can be enlisted to good effect.Note that the PTO practice in the United States requires providing it with details regarding ownership and provenance of the IP right sought to be registered, and a false declaration can trigger allegations of perjury and allied federal offences. It would make sense, therefore for any business seeking funds from outside investors in this new area, who are chary about the possibility that they may be getting involved in fraudulent activity, to be provided with the additional comfort of registering IPR’s.

Provisional patent applications may be particularly suitable for this purpose, since they must be applied for by a named individual, and then reassigned to other entities, as appropriate. The point here is that in an innovative industry, registrable IPR’s are easily created and filed, they provide an excellent paper trail, and, in cases of false identity, or improper personal information, may be readily exposed. Fraudulent abuse may lead directly to the enforcement at the federal level. Given this, perhaps potentially shady individuals seeking to enter this area may nevertheless be loath to perjure themselves in such an easily discoverable manner.

Monday, 11 January 2016

Bowie, Bonds and Bloggers

This blogger's first encounter with a patent attorney was watching, as a teenager, the sci-fi classic "The man who fell to earth" which starred the late David Bowie. For those of you who don't know the plot, Bowie plays an alien that lands on earth and proceeds to patent with the help of a patent attorney nine basic inventions. If you have not seen the film, then I won't reveal the rest of the plot. Spoilers can be found here and here

Bowie played not only role in my future career, but was also an innovator in IP finance and issued  in 1997 the first celebrity bond in which he issued a security that paid an interest rate of 7.9% guaranteed out of the royalties received by Bowie on his works. A total of US$55 million was issued in bonds, which were all purchased by an insurance company. Bowie used the money to purchase his back catalogue from a former manager. The bonds were not a great success and Moody's downgraded them to just above junk status in 2004 according to this report. Apparently the reason was the lack of commercial success of Bowie's latest album (which was, however, not part of the royalty stream securitised by the bonds).

Other musicians have gone down the same road, but the reduction in revenues has reduced interest. Litigation (see here) between former partners in the business has probably also not helped. 

Wednesday, 6 January 2016

Upcoming Oxfirst Webinar--Rt Hon. Professor Sir Robin Jacob Defending Patents

Our good friend, Dr. Roya Ghafele, has let us know that Oxfirst is offering another very exciting and timely free webinar.  The webinar is titled, “Patents Work: don’t erode the patent incentive.”  Here is a description of the talk:

In recent years the patent system has come under increasing scrutiny from a host of different scholars. These critiques have been taken up by Competition authorities and Supreme courts. Not understanding the full value proposition of the patent system, poses a danger to innovation.

The webinar is led by the distinguished Rt Hon. Professor Sir Robin Jacob, the Sir Hugh Laddie Chair at University College London and will be held on January 20, 2016 at 15.00 BST.  A brief bio for the Rt. Hon. Professor Sir Robin Jacob states:

The Rt Hon. Professor Sir Robin Jacob, was as Lord Justice Jacob a judge in the Court of Appeal of England and Wales.

He retired from the Court of Appeal in March 2011 (acknowledged in a valedictory address before a court-room packed with well-wishers) to take up his current position as the Sir Hugh Laddie Chair in intellectual property at University College London

He read Natural Sciences (physics) at Trinity College Cambridge (1960-1963) and law at the LSE (1963-1967). He was called to the Bar by Gray’s Inn in 1965 (Treasurer 2007). He was appointed a High Court Judge in 1993 and to the Court of Appeal in 2003.

He was admitted to the IP Hall of Fame in 2006.

Given the number of critiques of the patent system, see for example, here, it is very important to hear the “other side” of the coin.  While I don’t believe the patent system (and the overall global innovation system) is perfect, of course, technological innovation does seem to keep moving along—although there are important distributive justice issues.    

The hosts further note that, “Please register with your professional email account. We cannot allow attendees to sign up with private accounts (such as yahoo or gmail accounts).”

Monday, 4 January 2016

Licensing know-how to benefit from a lower VAT rate is not automatically ‘abusive’ from a VAT perspective

The ECJ decision on the WebMindLicenses case (published 17 Dec 2015) - provides guidance on points to consider when determining whether a licensing agreement amounts to VAT ‘abuse’ (and, accordingly, points to watch to make sure your licensing agreement is not abusive!) 
In this particular case, know-how had been licensed from Hungary to Madeira, an autonomous region of Portugal which has a preferential VAT rate compared to Hungary (mind you, almost everywhere has a preferential VAT rate when compared to Hungary!). The know-how was used to provide online services from Madeira to consumers worldwide, charging VAT in Madeira. Note that this sort of arrangement isn’t a lot of use now from a VAT-reduction perspective – the VAT rate charged on supplies to consumers is now the rate where the consumer is located, not the rate where the supplier is located.
The Hungarian tax authorities claimed that the know-how transfer was essentially a sham and that the know-how continued to be exploited in Hungary, so that Hungarian VAT should have been applied.
Given that there is freedom of establishment etc within the EU, it is not automatically VAT abusive to arrange a business in order to ensure that it benefits from a lower VAT rate.
Essentially, a licensing agreement will be considered VAT abusive where it is artificial and intended to disguise the fact that the relevant services are actually provided from another EU country. In considering this, the place of performance of services will be critical – taking into account the location of staff and equipment in particular, and whether the location from which services were said to be supplied had the appropriate resources to provide such services on its own behalf and at its own risk.
The place of creation of the know-how is not decisive - even in a case such as this, where the creator had significant control/influence over the business. Similarly, the location of back office functions and the location of subcontractors was not a decisive factor.

Friday, 1 January 2016

US 1978 Copyright Term Extension - the big deal

This blogger's friend, Joren de Wachter, an IP consultant based on Brussels and TEDx presenter (see IP thought crime on YouTube) has pointed me to Duke University's Centre for the Study of the Public Domain who have drawn our attention to the implications of the 1976 Copyright Act in the United States, which extended retroactively from 1978 copyright term from 56 years after creation of the works to 50 years after death of the author (extended to 70 years in 1998 in line with European law) or 75 years (later extended to 95 years) for works made for hire and pre-1978 works).

The Duke University site has a list of some of this blogger's favourite works affected by the decision , including Gunter Grass's The Tin Dum ("Blechtrommel"), Robert Heinlein's Starship Troopers or the movies North by Northwest and The Manchurian Candidate. These were all first released in 1959 and copyright protection would expire on 1 January 2016 under the previous law.

There's a clear economic case to made for copyright protection to reward creativity and to provide a financial incentive to produce the works. The publishers of the affected books have certainly benefited from the extension. Nobel Prize winner Gunter Grass only died in 2015 and his book, the tin drum, is on the reading list of anyone studying German. His literary estate and heirs will benefit from continued protection of his works and no doubt his publishers are still reaping their investment in the promotion of this work.

There are many other works, however, for which such extended copyright protection is probably too long and the current laws can lead to an uncertain situation in which the owner of the copyright cannot be located and/or innovation is impeded.

This blogger is a fan of a registration system under which copyright would be initially granted for set period, but could be later extended if fees are paid. This would give a balance between ensuring that less significant works enter the public domain earlier than currently possible but allowing copyright holders to decide themselves those works which are of significant benefit to enjoy a longer degree of protection.