Friday, 23 June 2017

Okay amigos, tell me how much George Clooney's favorite tequila brand is worth

Let’s start with a confession: try as he may, this blogger still finds the valuation of trademarks and brands a bit of a black box. For sure, there are some fine books that attempt to explain how this kind of valuation is done (see, here, for example, the excellent book by Gordon Smith and Susan Richey,Trademark Valuation: A Tool for Brand Management). But the sense of unease remains.

Against this backdrop, the following headline that appeared on on Thursday grabbed his attention: “Diageo to buy George Clooney’s tequila for up to $1 billion.” Diageo, despite being saddled with one of the worst rebranded company names in recent memory, has managed to become the world’s largest spirits maker. Recently, it has taken an increasing interest in the high-growth market for tequila.

Enter “Casamigos” (meaning “house of friends” in Spanish), which was established only in 2013 by actor George Clooney, entrepreneur Rande Gerber, the spouse of supermodel Cindy Crawford, and real estate developer Mike Meldman. According to the deal, the owners of the company will be paid $700 million, with an additional $300 million to kick-in over 10 years if certain performance goals are met. While one billion dollars is not an especially large sum for an acquisition into today’s business world, it is hardly an insubstantial amount for a four-year old brand selling into a market with established competitors.

Crucially, the founders, or at least some of them (surely George Clooney?), will continue to promote the brand. Within the Diageo stable of tequila offerings, it is said that Casamigos will be promoted as a “celebrity lifestyle brand”, while the existing Don Julio product will be promoted as a “heritage craft spirit’.

For someone who is trying to make sense of this transaction and the acquisition price, consider the following, as reported in the report:

1. Morgan Stanley estimates “the deal’s enterprise value was about 20 times annual turnover”. Compare this with what is described as an industry standard of enterprise value in the range of 4-6 times sales.

2. Morgan Stanley added that “If the brand sustains its growth, it could potentially be the next Patron [described as the major competitor in the tequila market]," …."But if not, it might be value destructive."

3. As for the fact that Diageo will be flogging two tequila products, however the respective brands will be positioned, analysts at Bernstein were skeptical:
"In our experience, it is difficult for sales, distributors and customers to focus on two brands in the same category at similar price points at the same time.”
4. How central to the deal is George Clooney’s promotion efforts? According to Morgan Stanley, Clooney’s continued focused involvement with the product is crucial. As suggested above, the brand positioning of the product rests on its celebrity status.

5. Whether it is reasonable to expect Clooney to promote the product for the next 10 years is anyone’s guess. If not, can one reasonably expect “Casamigos” to meet its goals and successfully position itself as a celebrity brand?

But all of this uncertainty is not simply the purview of analysts and other third-party observers. Consider the words of the president of Diageo North America, Deirdre Mahlan. A high-growth company like Casamigos (54% growth over the last two years) is "notoriously challenging to value under traditional methods".

Query whether this is simply another way of saying that the traditional methods cannot support the valuation given for the deal, which will soar or crater as a function of the ability to continue with the star-associated aura of the product. Disentangling the value of the brand from the contribution by George Clooney in continuing to promote the product strikes this blogger as a particularly challenging exercise in the valuation of intangibles.

Picture on lower left by ESA/Hubble

Tuesday, 20 June 2017

Innovation in Access to Legal Services for the Middle Class and Poor: The Great Untapped Market?

One of the pressing problems in the United States has been access to legal services, particularly to the poor and the middle class.  For sure, the wealthy have access to lawyers, but the poor and middle class apparently struggle.  Indeed, the Legal Services Corp. recently released a report titled, “The Justice Gap: Measuring the Unmet Legal Needs of Low Income Americans.”  The Legal Services Corp. teamed up with the University of Chicago to collect data concerning the gap and made some (perhaps unsurprising) findings.  The most important finding: “86% of the civil legal problems reported by low income Americans in the past year received inadequate or no legal help.”  Moreover, “71% of households with veterans or other military personnel have experienced a civil legal problem in the past year.” And, “more than 60 million Americans have family incomes 125% below the Federal Poverty Line,” including 1.7 million veterans.  In Seniors' households, “56% had at least one civil legal problem in the last year.” 

In a recent press release, the Brigham Young University Law School has announced a program to address some of these problems called, “Law X”:

LawX will tackle some of the most challenging issues facing our legal system today,” said Gordon Smith, Dean of BYU Law School. “Some gaps in legal services may not be attractive targets for innovation by small, private startups or larger profit-oriented businesses, but closing these gaps would make a tremendous difference to many people who feel priced out of the market for legal services. A legal design lab embedded within a law school is an ideal platform for addressing these issues. LawX will use design thinking to address these problems, and when appropriate, to create products to solve them.”

LawX was conceived by Dean Smith and Kimball D. Parker. Parker, who developed and founded
CO/COUNSEL, a legal education and crowdsourcing website, will teach the corresponding course, debuting in the fall for second- and third-year BYU Law students. With the ambitious goal to solve one legal challenge a semester, the course will be structured as a design-thinking process, in which students will have fast-paced deadlines and responsibilities that are much like being in a startup. The course will be an immersive, hands-on experience by law students in collaboration with students and professors in other departments at BYU.
Interestingly, Tech Transfer Central reports that a University of Michigan Law School start-up, Court Innovations, has received $1.8 million in funding to commercialize a software program.  The program lets people who are working, have to care for children or are concerned with getting in trouble with immigration enforcers to make appearances and resolve problems in court “remotely.”  [Hat tip to Professor Paul Caron’s Tax Prof blog for leads to the Legal Services Corp. report and the Law X press release.]

Friday, 16 June 2017

$430 Million Public/Private Investment in Exascale Computing in U.S.

The U.S. Department of Energy announced on June 15, 2017 the award of $258 million in research funding to six U.S. companies: Advanced Microsystems, Cray, Intel, HP, NVIDIA, and IBM.  The research funding is to support the development of the exascale supercomputer ecosystem.  An exascale computer is 50 times faster than today’s super computers.  The U.S. has five of the world’s top-ten fastest computers, but the U.S.’s fastest computer is third after the top two located in China.  The six companies will provide additional funding to make the investment close to $430 million in total.  The press release is available, here. 

SEP Injunctions and the Balance of IPRs and Competition in India

Professor V.K. Unni of the Indian Institute of Management, Calcutta has authored a short and concise opinion paper titled, Promoting Innovation: Moving Towards a Better Intellectual Property Regime, in the Financial Express.  His paper discusses the importance of finding the right balance between patent rights and competition law with respect to standard essential patents for India.  Interestingly, he observes that in India injunctive relief has been granted relatively frequently with respect to standard essential patents held by Ericsson against Indian companies, particularly when compared to pharmaceuticals.  He notes that, “the Delhi High Court [recently] held that laws dealing with protection of IPR and competition do not have any irreconcilable repugnancy or conflict, and upheld the jurisdiction of the [Competition Commission of India] to entertain complaints dealing with abuse of dominance against the patent holder.”  The article is available, here. 

The Alliance for Creativity and Entertainment: What About the Little People?

A new group of professional, large scale, content creators has formed to fight online piracy: Alliance for Creativity and Entertainment (ACE).  The new group, with around 30 members, includes Netflix, Amazon and many well-known entities such as BBC Worldwide, Paramount, HBO, Univision and Telemundo.  The press release notes that there are "480 online services worldwide available for consumers to watch films and television programs legally on demand." The press release further ties the problem of piracy to jobs and even the danger of identity theft.  The press release notes:

Films and television shows can often be found on pirate sites within days – and in many cases hours – of release. Last year, there were an estimated 5.4 billion downloads of pirated wide release films and primetime television and VOD shows using peer-to-peer protocols worldwide. There were also an estimated 21.4 billion total visits to streaming piracy sites worldwide across both desktops and mobile devices in 2016.

ACE states that it “will conduct research, work closely with law enforcement to curtail illegal pirate enterprises, file civil litigation, forge cooperative relationships with existing national content protection organizations, and pursue voluntary agreements with responsible parties across the internet ecosystem.”  It’ll be interesting to see ACE, particularly with Internet companies, Amazon and Netflix, pitted against Google/YouTube and other platforms.  Do non-professional/smaller scale content creators have a lobbying/litigation group? 

Tuesday, 13 June 2017

The Most Important Patent Case in Modern History: Oil States Energy Services and the Constitutionality of IPRs

Yesterday, June 12, 2017, the U.S. Supreme Court surprisingly granted cert to hear the Oil States Energy Services v. Green’s Energy Group’s case (Notably, a Rule 36 affirmance by the Federal Circuit which means there is not an opinion—the Federal Circuit is just affirming without giving reasons.).  The U.S. Supreme Court has limited its review to one question: “Whether inter partes review, an adversarial process used by the Patent and Trademark Office (PTO) to analyze the validity of existing patents, violates the Constitution by extinguishing private property rights through a non-Article III forum without a jury.”  Could this case completely wipe out inter partes review proceedings (IPRs)?  That is certainly the hope of some.  Notably, the U.S. Supreme Court refused cert to hear the MCM Portfolio v. HP case in 2016 which raised a very similar issue.  As stated by Judge Dyk in the below Federal Circuit opinion: “On the merits, we reject MCM’s argument that inter partes review violates Article III and the Seventh Amendment, and we affirm the Board’s decision that claims 7, 11, 19, and 21 of the ’549 patent would have been obvious over the prior art.”

Notably, that particular case was graced with several amicus briefs, including by 13 law professors, the Houston Inventors Association and the University of New Mexico.  The conservative Heritage Foundation has a piece discussing the importance of the MCM Porfolio case and a call for congressional action on IPRs after the U.S. Supreme Court denied cert in 2016.  Part of the attack on IPRs includes the argument by the University of New Mexico that it essentially devalues university patent rights.  The amicus brief by 13 law professors, led by Professor Adam Mossoff, specifically confronts the question of whether patent rights are public rights or private rights:

By resting its decision on the premise that “patent rights are public rights,” MCM Portfolio LLC, 812 F.3d at 1293, the Federal Circuit directly contradicts these numerous, longstanding, and binding decisions of this Court. Furthermore, the two primary administrative law cases relied on by the Federal Circuit, see id. at 1292–93, are inapplicable in determining whether the PTAB is respecting vested property rights secured under the separation of powers doctrine and under other substantive constitutional provisions, such as the Due Process Clause of the Fifth Amendment or the Seventh Amendment. These two modern cases address solely creatures of modern administrative statutes—procedural entitlements solely created in and adjudicated by modern regulatory regimes. See, e.g., Atlas Roofing Co. v. Occupational Safety & Health Review Comm’n, 430 U.S. 442, 455–56 (1977) (addressing procedural rights within the administrative regime created by the Occupational Safety and Health Act of 1970); Tull v. United States, 481 U.S. 412, 425–27 (1986) (addressing procedural rights within administrative regime created by the Clean Water Act of 1972). Decisions by this Court addressing modern regulatory procedural entitlements are distinct from the constitutionally protected private property rights in patents long recognized by this Court and by Circuit Courts for over two hundred years. This Court recently and repeatedly confirmed the principle that patents are private property rights that are secured under the Constitution. See, e.g., - 10 - Horne, 135 S. Ct. at 2427; Fla. Prepaid, 527 U.S. at 642. This Court also warned the Federal Circuit in Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co., 535 U.S. 722, 739 (2002), that it must respect “the legitimate expectations of inventors in their property” and not radically unseat such expectations by changing doctrines that have long existed since the nineteenth century. Moreover, Chief Justice John Roberts specifically stated in eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), that nineteenth-century patent law should be accorded significant weight in modern patent law in determining the nature of the private property rights secured to patent-owners. Id. at 393–94 (Roberts, C.J., concurring).

So, the question is why now?  Why does the U.S. Supreme Court grant cert now (especially a Rule 36 affirmance without a written opinion below) and not in 2016?  For sure, inter partes review proceedings, perhaps intended to wipe out bad software patents has been used surprisingly against biotech/pharma patents.  Could it be new Associate Justice Neil Gorsuch?  Assuming the timing works out, it takes four justices to take a case by writ of certiorari. (Gorsuch, Thomas, Alito and Roberts?)  Would Kennedy swing?  Curiously, over the years, I have heard many complain about the loss of the American jury system.  

Sunday, 11 June 2017

Report States Copyright Fair Use Contributes $2.8 Trillion to U.S. Economy

The Communications and Computer Industry Association has released a report that attempts to ascertain the value of fair use to the U.S. economy.  The 2017 report places the value added to the economy at $2.8 trillion dollars in 2014 with 18 million workers “benefiting from fair use.”  The 2017 report also states that $5.6 trillion dollars of revenue was generated by fair use industries.  Some examples of fair use industries include: “manufacturers of consumer devices that allow individual copying and recording; educational institutions; software developers; and Internet search and web hosting providers.”  In discussing fair use, the report states:

One of the benefits of the flexible fair use doctrine is its adaptability, which can cover unanticipated new uses and technologies. Whereas narrow exceptions drafted around specific technologies become outdated rapidly, the flexibility of the fair use doctrine has, at different times, enabled both consumer electronics and online services. The breathing space provided by fair use has facilitated  a thriving technology industry in the United States. New online products and services almost inevitably involve some transitory copying, if only for technological purposes. This makes the fair use doctrine a necessity, as licensing every time an image is copied into a computer’s memory, for example, would be prohibitively expensive and time-consuming.
Fair use has proven to be critical to other industries as well. For example, the varied industries that encompass the entertainment industry all rely on fair use. Fair use is also crucial in the context of education and reporting the news, which depend upon reproducing and disseminating primary sources. This reliance often becomes most apparent in litigation, as all of these industries have defended ordinary business conduct before courts by relying on the fair use doctrine.
In addition to being critical to a vast number of U.S. constituencies, fair use has also gained recognition abroad as a crucial information technology policy. While fair use is a principle of uniquely American origin, nearly 50 other countries have adopted some version of American fair use or its British counterpart, fair dealing, into their domestic copyright law.1 Perceiving the success that has resulted from the balances in the U.S. copyright system, many countries aspire to emulate the U.S. fair use model. This is the case even in countries with well-developed copyright systems. For example, in 2010, then-Prime Minister David Cameron announced an inquiry into adopting a fair use-type provision in UK law, in order to “encourage the sort of creative innovation that exists in America.”
It would be interesting to see if a similar analysis could be done for experimental use type exceptions to patent infringement in Europe.  

Cushman and Wakefield's Tech Cities Report

Cushman and Wakefield, the global commercial real estate firm, has released its first tech cities report.  The report attempts to ascertain which are the most successful “technology cities” in the United States.  The report notes that so-called tech cities outperform other cities in terms of commercial real estate value and other factors, but no one has attempted to determine exactly what is a “tech city.”  That is what Cushman and Wakefield attempts by looking at factors leading to a “tech stew”.  “Tech stew” is the term encompassing the characteristics leading to development of a tech city.  Some of those factors include: institutions of higher learning; venture capital; tech workers; knowledge workers; educated workers and growth entrepreneurship.  For example, universities of higher learning noted for San Francisco and San Jose include: UC Berkeley, Stanford, UC Davis, University of the Pacific, Santa Clara University and University of San Francisco [a notable omission is UC San Francisco].  For venture capital, the report notes San Francisco/San Mateo at the higher end for 2016 with $28.5 billion and New York City at $9.1 billion.  Growth entrepreneurship uses the Kauffman Foundation’s metrics to measure firms with a high likelihood of growth.  Notably, Washington DC, Austin, Silicon Valley, Nashville, and Boston are the top five U.S. cities for growth entrepreneurship. 

The top ten tech cities are: 1) Silicon Valley; 2) San Francisco; 3) Washington DC; 4) Boston; 5) Raleigh/Durham/Chapel Hill, North Carolina; 6) Seattle; 7) Austin; 8) Denver; 9) San Diego; and 10) Madison, Wisconsin.  This list is not too surprising; although a few notable missing cities from the top ten include: New York City (15) and Los Angeles (18).  Oakland/East Bay is also considered separate from San Francisco and Orange County is separated from Los Angeles.  From the commercial real estate perspective, the report notes that rents have increased almost 20% more since 2010 in the top 25 tech cities than in the rest of the United States.  

Wednesday, 7 June 2017

Top 100 Universities Granted US Utility Patents in 2016

The National Academy of Inventors and the Intellectual Property Owners Association has released a list of the top 100 universities granted U.S. utility patents.  The top 10 of the list includes: 1) The Regents of the University of California: 505 patents; 2) MIT: 278; 3) Stanford: 244; 4) Cal Tech: 201; 5) Tsinghua University/Graduate School at Shenzen: 181; 6) Wisconsin Alumni Research Foundation: 168; 7) John Hopkins: 167; 8) University of Texas: 162; 9) University of Michigan: 142; and 10) Columbia University: 118.  The top 10 non-US universities include: 1) Tsinghua University/Graduate School at Shenzen; 2) Korea Institute of Science and Technology; 3) King Fahd University of Petroleum and Minerals; 4) National Tsinghua University; 5) Korea Advanced Institute of Science and Technology; 6) National Taiwan University/National Taiwan University Hospital; 7) King Saud University; 8) Industry and Academic Cooperation at Yonsei University; 9) Ramot and Tel Aviv University; and 10) National Chiao Tung University.  On the overall top 100 list, National Chiao Tung University has 53 patents and is ranked 44.  Interestingly at least 31 universities (or university foundations) are non-US based.  Also, the first European institution on the list appears to be École polytechnique fédérale de Lausanne ranked at 59 with 42 patents.  Cambridge Enterprise LTD is ranked at 97 with 25 patents.  Some of the Japanese institutions include University of Tokyo ranked at 69 and Kyoto University at 72.  At least eight of the top 100 are in South Korea and only two appear to be in Europe. [Hat tip to Technology Transfer Central].  

Tuesday, 6 June 2017

Biotechnology Stock Value: Uncertainty the New Normal or Just the Same Old Deal?

In a recent article in the Wall Street Journal, What's Behind the Biotech Sector's Rebound: Biotech ETFs are Getting Hearts Pumping Again, Gerrard Cowen discusses the swings in the value of biotechnology stocks.  Last year was a relatively poor year for biotech stocks—perhaps attributed to the election campaign rhetoric about reforming drug prices.  This year biotech stocks are looking up, and why?  The article discusses several reasons provided by experts: 1) Trump was elected and he’s likely to treat the sector more favorably than Clinton despite his rhetoric; 2) merger and acquisition activity is likely to increase in the coming year because of likely Trump tax changes; 3) Trump may streamline FDA regulations; and 4) biotech companies were undervalued last year.  The article also outlines risks to the sector which mostly revolve around problems with uncertain politics and difficulty in valuation. 

Interestingly, the article notes that despite difficulty with valuation one helpful baseline, so to speak, is “patent protection.”  I can understand why the author points to the exclusivity of patents—supposedly hugely important to the industry—as a “steadying” factor especially when compared to other industries where perhaps patent protection may not protect a market as well as in biopharmaceuticals.  However, patent protection in the U.S. has been anything but stable.  Indeed, as one example, patent eligible subject matter is a mess and efforts to “clean it up” are moving through the U.S. Congress championed by American Intellectual Property Law Association and the Intellectual Property Owners Association.  If those proposals are enacted, it will be interesting to see how the U.S. Supreme Court interprets those provisions.  And, what of the future of trade agreements?  The basic point is that patent law is ever evolving and despite that change the belief in its ability to protect a market continues—and thus draws capital for hopefully socially productive uses.  The belief may align well with reality for the biopharmaceutical industry.  For more on belief and patents, see Professor Mark Lemley’s article Faith-Based Intellectual Property

And, for more on politics and patents, what about the security of patents (and trade secrets)?  Will things change substantially in the coming years?  One article I find particularly interesting is Professor Richard Epstein’s The Constitutional Protection of Trade Secrets and Patents Under the Biologics and Price Competition Act of 2009 

Monday, 5 June 2017

TC Heartland: Good for Patent Litigation?

In TC Heartland v. Kraft Food Group Brands, a recent opinion, the US Supreme Court decided to restrict the meaning of the patent venue statute.  This statute essentially provides in which judicial district a defendant may be sued for patent infringement.  The patent specific statute, 13 USC 1400(b), provides: “[a]ny civil action for patent infringement may be brought in the judicial district where the defendant resides, or where the defendant has committed acts of infringement and has a regular and established place of business.”  The US Supreme Court had to analyze whether “where the defendant resides” means “where the defendant is in incorporated” per a previous US Supreme Court case analyzing that provision, or according to subsequent amendments by Congress to the general venue statute which has a much broader definition of what “resides” means.  Ultimately, the US Supreme Court in a unanimous Associate Justice Thomas opinion (Associate Justice Gorsuch not participating) decided to adopt the more restrictive definition: “resides” means where the defendant is incorporated. 

Practically, many believe that this decision is another attempt to restrict “abusive” patent litigation or patent troll behavior by directing litigation out of the Eastern District of Texas to other districts—interestingly perhaps to districts that may be more favorable to accused patent infringers.  One concern about patent infringement generally has been the competence of judges and juries to address technical and complicated patent cases.  Notably, the Eastern District of Texas has handled a large number of patent cases for many years and arguably the judges have developed technical and legal competency in patent cases.  Indeed, this could explain why the district handles patent cases relatively quickly.  Arguably, we’ve now made a policy decision pushing cases away from a competent district to those that are not.  However, some cases presumably may now be brought in districts in California or Delaware (where a large number of corporations are incorporated), which may also have developed competency in handling patent cases.  I have been told that juries in some districts in California are quite technically sophisticated—such as in the Northern District of California where Silicon Valley is located.  Perhaps one benefit of TC Heartland may be better juries; although remember how the Apple v. Samsung jury was criticized.