Statistics: make of them what you will - UK patent box vs R&D reliefs

The UK tax authority has recently released statistics for take up of the patent box in 2013-14 (the first year of the relief); on the same day, it released the latest statistics on use of the UK’s R&D tax reliefs for the same tax year. The reports make for some interesting compare and contrast points:

Total claims in 2013-14
- patent box: 700
- R&D tax reliefs: 22,415

Total value of claims in 2013-14
- patent box: £342.9m
- R&D reliefs: £2.45bn

SME claims in 2013-14
- patent box: 475 (68%)
- R&D reliefs: 19,990 (95%)

Value of SME claims in 2013-14
- patent box: £15.7m (5%)
- R&D reliefs: £1.165bn (48%)

The largest claimant sector (for both patent box and R&D) is, unsurprisingly, manufacturing (63% of patent box claims; 30% of R&D claims). The second largest for R&D is Professional, Scientific & Technical, with about 20% of claims - but this sector only made 6.3% of patent box claims. This might relate to the nature of the patent box, and particularly the extra hurdle for claiming on services income. The other sectors are somewhat more difficult to analyse as numbers of patent box claims are so low that sectors have been combined to prevent commercial information being disclosed.

The R&D relief requires a company to be undertaking a project which seeks an advance in the global state of knowledge in an area of science or technology, it would seem logical that a successful R&D-relief qualifying project would often lead to something capable of being patented – and, in the 14 years for which we have R&D statistics, 141,000 claims for relief have been made. Fair enough, R&D relief claims can be made for unsuccessful projects, but out of 141,000 R&D relief claims, it seems pretty likely that there are more than 700 companies within the scope of the patent box … the report doesn’t speculate upon why the take up is so low in terms of numbers (and for comparison, the impact note when the patent box was introduced estimated the first year cost to the Treasury at £500m).

Self-interested bias of committee members amending IEEE’s patent policy devalues SEPs

According to research published by J. Gregory Sidak of Criterion Economics, the process by which the Institute of Electrical and Electronics Engineers (IEEE) amended its patent policy was significantly biased in favour of implementers and against standard-essential patent (SEP) owners.

He finds that large SEP holders that are net patent licensors and were opposed or neutral to the proposed changes had their comments on policy drafts rejected at a substantially higher rate than companies that are predominantly implementers and net payers of licensing fees. The bias favoured patent policy revisions designed to devalue SEPs. IEEE is the standards development organisation (SDO) responsible for developing the 802.11 WiFi standard, among many others.

Sidak provides a succinct description of the patent policy amendments and finds that these limit the ability of SEP owners to generate patent licensing royalties.

“In 2015, the IEEE ratified amendments to its patent policy to mandate that a reasonable and nondiscriminatory (RAND) royalty for a standard-essential patent (SEP)—more precisely, an Essential Patent Claim for an IEEE standard—exclude any value attributable to the standard, and to deny an SEP holder the right to seek an injunction against an unlicensed implementer until appellate review is exhausted. The amendments further say that the determination of a RAND royalty “should,” without limitation, (1) be derived from the value of the smallest salable compliant implementation of an IEEE standard that practices an SEP; (2) comport with a reasonable aggregate royalty burden of the relevant standard; and (3) disregard comparable license agreements obtained under the implicit or explicit threat of an injunction. Because the revisions place strict limitations on an SEP holder’s ability to enforce its patent rights against infringers, they truncate the upper range of the distribution of bilaterally negotiated RAND royalties and thus unambiguously reduce the compensation that the SEP holder may obtain for its technological contributions to the IEEE standards. The IEEE’s patent-policy revisions became effective in March 2015.

The IEEE’s 2015 bylaw amendments are highly significant because each unambiguously reduces the compensation that an SEP holder can obtain for its technological contributions to the IEEE’s standards. Throughout the development of those bylaw amendments, sixteen companies submitted 680 comments on four drafts of the proposed amendments and two drafts of a supporting informational document that an ad hoc drafting committee of the IEEE released for public comment. The ad hoc committee responded to the suggested revisions in each comment, either accepting them and implementing them into the next draft, accepting them in principle, or rejecting them. I find a strong negative correlation between the comment submitter’s status as a firm initially opposed to the revisions (a group primarily consisting of net SEP licensors) and the ad hoc committee’s incorporation of the submitter’s proposed revision in the subsequently revised draft. The treatment of the comments by the ad hoc committee exhibits a statistically significant bias against the firms that opposed the bylaw amendments—primarily large SEP holders—and in favor of revisions designed to devalue SEPs.”

He finds disregard for important principles and safeguards that IEEE upholds in standard setting. He notes that various members complained that the process by which the IEEE amended its patent policy did not comply with the principles of openness, consensus, balance, due process, and right to appeal that are consistent with the IEEE’s standard-setting process, and that the ad hoc drafting committee responsible for the patent policy revisions did not conciliate this dissent. 

“The IEEE patent policy, contained within the IEEE Standards Board bylaws, specifies the conditions under which an SEP holder voluntarily commits to license its SEPs on RAND terms. The bylaws serve as the Standards Board’s constitution and establish the consensus-driven process of developing and promulgating technical standards, including the popular 802.11 Wi-Fi standard. Embedded in the bylaws, as well as in other IEEE governance documents, are comprehensive safeguards that discourage opportunistic, anticompetitive conduct within the IEEE.”

Also according to Sidak:

“[t]he 2015 bylaw amendments deviated from the safe­guards that the IEEE had guaranteed its members in both the foundational documents of the IEEE and its history of consensus-driven policymaking.”

Although amending an SDO’s patent policy is a different process to selecting a technology to incorporate in a standard, it defies logic or probity that an SDO espousing these principles in standard setting should abandon them in amending patent policy – something that is so fundamental to an SDO’s standing and workings.

Sidak identifies self-interest as the reason the ad hoc committee did this. “To those large implementers, it is now expedient to renege on the bargain of interpret­ing the RAND commitment in a manner that is neutral to both net licensors and net licensees.”  The bias he found in the committee’s decision making aligns with the company affiliations and employment of committee voting members and the objectives of those companies:

“the bias suggests that decision making at the IEEE was controlled by parties that seek to devalue SEPs. The process for amending the IEEE’s bylaws did not protect the interests of SEP holders that were disproportionately responsible for the technologies that the IEEE had incorporated into its standards.”

I wrote, here, prior to its adoption, that the amended IEEE patent policy was bad policy. I opined it would undermine the free and fair market for licensing of SEPs and that imposed licensing terms would make IEEE an unattractive venue for patent owners. Most recently, I have also written, here, about how interested parties are also unjustifiably and harmfully trying to foist similar changes on patent licensing practices more widely.

Sidak’s paper can be accessed via the Criterion Economics web site here.

Free and Fair Trade in IP would be Crushed by Compulsory Chip-based SEP Licensing

The Fair Standards Alliance  makes various demands in its “position paper.” Among these it states that a standard-essential patent license “should be available at any point in the value chain where the standard is implemented and that a fair, reasonable and non-discriminatory royalty should in most cases “be based on the smallest device that implements those patents, and additionally it should take into account the overall royalty that could be reasonably charged for all patents that are essential to that standard.”  Some of the FSA’s demands echo changes adopted last year by the IEEE in its revised patent policy. 

Such dramatic disruption to the basis of SEP licensing would most troublingly affect trade between commercial parties with highly unpredictable outcomes on the amounts actually paid. Whereas technology developers and others can still choose whether or not to participate in IEEE standards setting and can declare with a “negative Letter of Assurance” if they are unwilling to license on the basis of IEEE’s new patent policy, it is not clear how the FSA seeks prosecution of its demands. Compulsory licensing would undermine legal rights enshrined in patent law, eschew the consensus-based and voluntarily agreed patent policies of other standards development organizations while also overriding well-established and prevailing licensing practices.

FSA members including major technology companies Google, HP and Intel hold many patents and collectively spend billions of dollars on R&D, but would like lower charges for licensing SEPs because these tend to be owned by other companies. In a press release this summer, the FSA claims to be “the ‘voice of reason’ whereby we seek the right for all businesses to use standard essential patents under fair and transparent licensing terms.” The FSA’s Chairman Robert Pocknell added that “[w]e cannot and will not accept that Europe’s future economic growth is held hostage by a number of companies bent on endless litigation as a means to reap profit at everyone else’s expense.”

These are strong words but the FSA presents no evidence of harm to economic growth or of excessive payments and profits to patent owners. To the contrary, profits have significantly declined for the major SEP owners in the last year while royalty income has remained flat as a percentage of devices sales revenues.

Total Revenues and Operating Income Declined Substantially for Major SEP Licensors* in 2015

	2014		2015
millions	Revenue	Operating Income	Revenue	Operating Income
Alcatel-Lucent	$18,039	$208	$15,962	$798
Ericsson	$34,083	$2,513	$29,923	$2,642
InterDigital	$416	$169	$441	$209
Nokia	$16,101	$1,933	$13,976	$1,888
Qualcomm	$26,487	$7,375	$25,281	$5,593
Total	$95,126	$12,197	$85,584	$11,130
Annual growth in total			-10.0%	-8.8%

*These companies’ licensing revenues account for the majority of SEP licensing fees paid.

Licensing Revenue Rose In-Line with Increasing Mobile Phone Sales Revenues in 2015

	2014		2015
$ figures in millions	Licensing	Yield	Licensing	Yield
Alcatel-Lucent	$75	0.02%	$63	0.01%
Ericsson	$1,480	0.36%	$1,745	0.40%
InterDigital	$416	0.10%	$441	0.10%
Nokia	$791	0.19%	$1,145	0.26%
Qualcomm	$7,862	1.91%	$8,202	1.87%
Total	$10,625	2.58%	$11,596	2.64%
Annual growth in total			9.1%	0.06%

Yield = licensing revenues divided by total mobile phone industry revenues.

Total licensing fees paid are dwarfed by device revenues and profits. Industry analysts’ estimates for total mobile phone revenues include IDC’s of $438 billion for 2015. Total industry operating profits for smartphones have continued to grow by 17.6 percent from $53.4 billion in 2014 to $62.8 billion in 2015, according to Strategy Analytics.

With clarification of the European Commission’s position on SEP licensing in its settlements with Motorola and Samsung and with the CJEU Judgment on seeking SEP injunctions in Huawei versus ZTE,  the Commission’s competition agency is now focusing on other smartphone industry matters with its assessment that Apple failed to pay €13bn ($14.6 billion) in taxes on its European profits. Apple’s iPhone operating profits were $55.3 billion and the company’s total operating income was $71.2 billion globally in 2015.

Extended litigation, in various cases, is resulting from “efficient infringement” and the “patent holdout” tactics of free-riding implementers, not from profiteering patent owners.

The rest of my article, in full here, is based on some of my previously published analysis and focused on explaining why existing free-market licensing practices are fair, reasonable, non-discriminatory and well established. The royalty base and royalty rates are agreed bilaterally, not by regulatory fiat or based on silicon foundry costs. Existing licensing agreements reflect the fact that patent claims and corresponding value created relate to entire devices and beyond in communications systems. Forcing change to licensing terms would cause unpredictable disruption to arrangements that have worked very well and enabled new entrants such as Apple, numerous Asian OEMs and others to enter the SEP-intensive markets for smartphones and other devices and then grow to command significant market shares while owning little or nothing in SEPs themselves. 

After Dieselgate comes a multi-million Euro claim for inventor compensation

One of the more esoteric aspects of IP finance is the need to pay extra compensation for inventors in many countries. Whereas some countries consider that an inventor is adequately compensated by his salary when she or he makes an invention, others, like the UK, adopt a position that extra compensation is payable if the invention is somehow (see sections 40 and 41 of the 1977 UK Patent Act).

Germany’s body of law is probably the most comprehensive anywhere. Every inventor is entitled to some level of compensation depending on the use made of the invention. There’s a seperate Act of the Bundestag devoted to claiming rights to the invention, the requirement to keep the inventors involved in the prosecution of the application as well as on compensating the inventors. The Ministry of Labour has also issued a series of Guidlines on how to calculate the level of compensation.

Many inventors dream of fortunes to be made. And earlier in his career, this blogger used to regularly deal with inventors who came to his office expecting a massive salary boost. Several hours of calucation later, they were often politely informed that the amount due was a couple of hundred D-Marks.

Occasionaly some inventors struck it big and Reuters has a great story about a former Volkswagen manager Wolfgang Schreiber (former Bentley/Bugatti head) who is now looking for EUR 20 Million in compensation for use of his invention of the dual clutch gear box. Rumours abound from time to time about large claims being made. Few ever come to court as employees are required to use the arbitration service of the German Patent and Trade Mark Office initially. It’s not clear whether he will get the claimed level of compensation. It’s going to probably depend on the value of the invention actually incorporated into millions of Volkswagen cars. Given that most inventions build on existing ideas and that cars incorporate ideas from hundreds of patents, Volkswagen will probably have a different idea of the value than the inventor.