Monday, 27 March 2017

Trump Proposes to Cut Government Funding for Research


CNN recently reported on President Trump’s proposed budget and noted serious cuts to government funding for research.  Specifically, the article states:

The National Institutes of Health budget would be cut by $5.8 billion, meaning it would lose about 20%. The Environmental Protection Agency would face $2.6 billion in cuts, that's 31% of the agency's budget. The Department of Energy would lose $900 million, or about 20% of its budget. Health and Human Services would see a $15.1 billion or 18% budget cut; as part of that, it shifts costs to industry from the Food and Drug Administration budget. The National Oceanic and Atmospheric Administration would face an 18% budget cut.

As the article describes, a number of groups have criticized the proposed budget.  A recent Denver Post opinion piece by Noah Smith, a Bloomberg commentator, notes that the U.S. innovation system works well because we actually have a “pipeline” of new discoveries running to commercialized inventions.  Smith states that Trump is cutting off the new discoveries and essentially putting the U.S. at a disadvantage.  As this blog has noted, the Obama Administration basically kept funding for research almost level, but the budget was decreasing in terms of real dollars.  This was considered bad.  If we actually cut at the levels Trump wants to cut, we will be in a much worse position.  As Smith notes, the rust belt has somewhat been revitalized by biotech and cutting the NIH budget will retard the growth of one of the United States’ most promising industries. 

Importantly, Congress must pass the budget.  And, if my memory serves me correctly, President George W. Bush also proposed to cut government funding for research at the outset of his presidency and later retracted that proposal.  I imagine that someone explained to the Bush Administration how important government funding for research is for industry and the U.S. economy—hopefully that will happen for the Trump Administration. 

Thursday, 16 March 2017

FRAND licensing: A call for greater transparency


No topic in technology licensing is more vexing than standard-setting organizations (SSO’s), standard essential patent (SEP) owners and FRAND terms. Anders Møller, a recent graduate of Oxford engaged as an independent economist, describes some interesting research that shows how much transparent FRAND licensing negotiations still need to be in order to achieve their expressed goals.

With the IEEE having updated its patent policy in 2015, some standard essential patent (SEP) owners raised concerns about the economic effectiveness of its move. While it is still too early to tell what economic impact their updated patent policy will have, it is worth paying attention to an econometric analysis of the patent policy introduced by VITA (VMEbus International Trade Association ) in 2007, undertaken by the now Chief Economist of the EPO, Professor Yann Ménière, and François Lévêque, Professor at CERNA, MINES ParisTech.

SSOs generally require firms to license their patents for a given piece of technology to users on a Fair, Reasonable and Non-Discriminatory basis, or FRAND. The FRAND principle is adopted to avoid the moral hazard of license holders ex post (after negotiations) using their intellectual property to extract supra-normal rents from licensees, once technologies have become indispensable to a given manufacturing process. This is commonly referred to as patent holdup. As Lévêque and Ménière point out--
“the mainstream view is that the rationale for [F]RAND is to mitigate holdup and that the R in RAND stands for the level of royalty resulting from competition in advance of standard selection (pp. 5-6).”
In turn, this promotes the broader adoption of new standards and, hence, higher royalty earnings for licensors. However, there is no common definition of what constitutes a “reasonable” royalty, which creates vagueness and thus greater uncertainty in licensing negotiations.

Lévêque and Ménière argue that the FRAND principle has worked surprisingly well up until recently, given that both licensors and licensees have an incentive to abide by it (i.e. licensors gain an increase in uptake of their IP while licensees mitigate holdup risk). However, a few cases have been highly publicized involving antitrust litigations over IP holdup. In the words of Lévêque and Ménière, this has “instilled doubts for standard users about [F]RAND as an effective safeguard against holdup (p. 16).”

This creates a social welfare loss because both licensors and licensees are disincentivized to negotiate and license new technology standards. According to the authors--
“the threat of being held up results in allocative and productive inefficiencies that are detrimental to society, especially to consumers for whom standard-compliment products are produced in lower quantities, later and at a higher cost (p. 21).”
So, what can SSOs do about this? Lévêque and Ménière Leveque model two policy approaches. The first is based on the January 2007 updated patent policy of VITA, which states that members “must declare the maximum royalty rate for all patent claims... that may become essential to implement the Draft VSO Specification.” Furthermore, this declaration is “irrevocable,” and subsequent declarations covering the same "may only supersede the prior Declaration if the subsequent Declaration is less restrictive."

This is quite a departure from the practice of simply relying on FRAND in principle and negotiating without disclosures, which Lévêque and Ménière show to be a helpful tactic for SSOs to deal with the with the growing uncertainty associated with what ‘reasonable’ means in the FRAND regime.

Based on a mathematical model, the authors find that licensing commitments before manufacturers sink fixed costs into new product standards “induce lower prices for standard compliant products (p. 41).” This is because the expected costs are always lower when manufacturers are guaranteed a maximum royalty rate than with no assurance at all. Although the licensor accepts a certain amount of risk by committing to charging lower royalties ex ante before demand is realized, this is offset by the promotion of higher technology uptake (as lower risk encourages market entry of more manufacturers). There is therefore a convergence of interests between licensors and consumers as doing otherwise would reduce the consumption of tariff compliant products.

The second policy approach is to make declarations optional, whether of a specific royalty or a ceiling. Lévêque and Ménière’s model shows that – assuming rational action – licensors will always choose either a royalty ceiling or an exact royalty rate, as a high maximum rate is always better than having no assurance in place at all. Moreover, such a flexible policy approach allows licensors to choose the option which maximizes expected profits, thus leading to more innovation which is a significant positive externality.

The authors therefore conclude that “although the VITA IP policy is an attractive one, the policy of IEEE-SA is even preferable”, because it maximises both licensor and consumer benefits. The implications are simple yet profound for policy makers. With the European Commission as well as the Joint Research Council having issued several studies on the topic , and the European Union considering guidelines on SSO policies by early summer of this year, such insights are invaluable.

The study from Professor Lévêque and Professor Ménière clearly shows that there is a need for more transparency in FRAND licensing negotiations and that SSOs need to assume their responsibility so to further clarify what FRAND means. This is needed so to restore confidence in the FRAND regime. A VITA-like policy requiring a specific or maximum royalty rate declared up front is essential to maximize social welfare from standards and the respective patents that read on them.

The challenge for other SSOs, like ETSI or CEN/CENELEC, now lies not only in adopting policies that include flexible disclosure regimes, but also in how to institutionalize the practice by all negotiating parties in order to avoid any one licensor attempting to gain a first-mover advantage. The success of this approach will increase innovation, which is ultimately the goal of a prudent IP framework.

Wednesday, 8 March 2017

Commercialization Activities as Part of the Tenure Process for Academics

Rachel Abbey McCafferty has published an article in Crain's Cleveland Business titled, State is Pushing Universities to Bring Research to Market, on March 5, 2017.  The article outlines how the proposed Ohio state budget includes provisions concerning making commercialization activities by academics part of the tenure process.  The article notes how the purpose of the proposal is to direct academics to engage in research that may have a potential market.  This, of course, is one of the criticisms of the Bayh-Dole Act--that indeed the Act would push researchers toward directing research efforts to "real world" problems as opposed to "blue sky" research, which could have broad uses.  Some universities have unilaterally made the move to requiring commercialization activities for academics for tenure, but this is one of the first state "top down" directives for research institutions to require it.  Notably, the state is apparently striking a nice balance by stating that commercialization activities are just one route to be considered in the tenure process--it is not the only way to obtain tenure.  This nicely preserves flexibility for each researcher to make their own choices.  There is still the question of whether requiring commercialization efforts for tenure is necessary given the substantial market incentives available to researchers. 

The article also discusses a new institute to be formed in Ohio, which will direct commercialization activities in state institutions.  I am not very familiar with the technology transfer processes in Ohio, but this sounds like a good idea to coordinate commercialization efforts and provide accountability and stewardship for public research funding.  Notably, Governor Kasich, the recent presidential candidate, is reportedly a big fan of technology transfer, and its potential to create jobs and benefit the public.  (Hat tip to Technology Transfer Tactics for the lead to the article.)

Tuesday, 7 March 2017

President Trump's 2017 Trade Policy Agenda Released

The United States Trade Representative has released the President’s 2017 Trade Policy Agenda document (Agenda) on March 1, 2017.  The Agenda sets forth its purpose as well as its top priorities.  Interestingly, the purpose points to the voters as the impetus for the focus of the Agenda:

In 2016, voters in both major parties [?] called for a fundamental change in direction of U.S. trade policy.  The American people grew frustrated with our prior trade policy not because they have ceased to believe in free trade and open markets, but because they did not all see clear benefits from international trade agreements.  President Trump has called for a new approach, and the Trump Administration will deliver on that promise.

The overarching purpose of our trade policy – the guiding principle behind all of our actions in this key area – will be to expand trade in a way that is freer and fairer for all Americans.  Every action we take with respect to trade will be designed to increase our economic growth, promote job creation in the United States, promote reciprocity with our trading partners, strengthen our manufacturing base and our ability to defend ourselves, and expand our agricultural and services industry exports.  As a general matter, we believe that these goals can be best accomplished by focusing on bilateral negotiations rather than multilateral negotiations – and by renegotiating and revising trade agreements when our goals are not being met.  Finally, we reject the notion that the United States should, for putative geopolitical advantage, turn a blind eye to unfair trade practices that disadvantage American workers, farmers, ranchers, and businesses in global markets.   [emphasis added]

One of the specific key objectives noted by the Agenda includes “Ensuring that U.S. owners of intellectual property (IP) have a full and fair opportunity to use and profit from their IP.”  The Agenda further lays out its top priorities as: “(1) defend U.S. national sovereignty over trade policy; (2) strictly enforce U.S. trade laws; (3) use all possible sources of leverage to encourage other countries to open their markets to U.S. exports of goods and services, and provide adequate and effective protection and enforcement of U.S. intellectual property rights; and (4) negotiate new and better trade deals with countries in key markets around the world.” [emphasis added].

In discussing the first priority and the WTO Dispute Settlement Understanding, the Agenda states: “[E]ven if a WTO dispute settlement panel – or the WTO Appellate Body – rules against the United States, such a ruling does not automatically lead to a change in U.S. law or practice.   Consistent with these important protections and applicable U.S. law, the Trump Administration will aggressively defend American sovereignty over matters of trade policy.”  On strictly enforcing U.S. trade laws, the Agenda states: “We strongly support true market based competition – and we welcome the partnership of any country that agrees with us.  Unfortunately, however, large portions of the global economy do not reflect market forces.  Important sectors of the global economy, and significant markets around the world, have been at times distorted by foreign government subsidies, theft of intellectual property, currency manipulation, unfair competitive behavior by state-owned enterprises, violations of labor laws, use of forced labor, and numerous other unfair practices.”

On using leverage to open markets, the Agenda asserts that: “Other countries have looked to harm U.S. companies by blocking or unreasonably restricting the flow of digital data and services, or through theft of trade secrets.  In still others, foreign countries can use technical barriers – such as unnecessary regulations on particular items – to limit competition, including in the services sector.  Concerns have also been raised over currency practices and their impact on the competitiveness of U.S. goods and services.  These are only a few examples of the tactics that can be used to block or impede the competitiveness of U.S. exporters.”  The Agenda notes that transparency in implementing regulations of WTO rules and trade agreements would be helpful. 

On the section on negotiating new and better trade deals, the Agenda notes the following issues:  

1. In 2000, the U.S. trade deficit in manufactured goods was $317 billion.  Last year, it was $648 billion – an increase of 100 percent.

2. Our trade deficit in goods and services with China soared from $81.9 billion in 2000 to almost $334 billion in 2015 (the last year for which such data are available), an increase of more than 300 percent.

3. Of course, a rising trade deficit may be consistent with a stronger economy.  However, that has not been the experience of the typical American household.  In 2000, U.S. real median household income (in 2015 dollars) was $57,790.  In 2015 (the most recent year for which data are available), it was $56,516.  In fact, despite the recovery since the financial crisis, real median household income in the United States remains lower today than it was 16 years ago.

4. In January 2000, there were 17,284,000 manufacturing jobs in the United States – a figure roughly in line with the total number of U.S. manufacturing jobs going back to the early 1980s.   In January 2017, there were only 12,341,000 manufacturing jobs in the United States – a loss of almost 5 million jobs.

5. In the 16 years before China joined the WTO – from 1984 to 2000 – U.S. industrial production grew by almost 71 percent.  In the period from 2000 to 2016, U.S. industrial production grew by less than 9 percent.

The Agenda also notes that the most important trade deal under the Obama Administration—with South Korea—resulted in a massive trade deficit.  It will be interesting to see how intellectual property policy works out in coming negotiations.  

Wednesday, 1 March 2017

John Huntsman and the Commission on the Theft of American IP's New Update

In an interesting development, John Huntsman, Jr. is being considered by the Trump Administration for the position of ambassador to Russia.  Mr. Huntsman was the previous U.S. ambassador to China (Obama Administration) and Singapore (G.H. Bush Administration), and was a credible candidate for the U.S. Presidency in 2012.  Importantly, Mr. Huntsman is also the co-chair for the Commission on the Theft of American Intellectual Property.  In 2013, the Commission released its first Report on the Theft of American Intellectual Property.  Recently, on February 27, 2017, the Commission released an Update to the IP Commission Report of 2013.  The new Update states:

Since 2013, at the release of the IP Commission Report, U.S. policy mechanisms have been markedly enhanced but gone largely unused. We estimate that the annual cost to the U.S. economy continues to exceed $225 billion in counterfeit goods, pirated software, and theft of trade secrets and could be as high as $600 billion.1 It is important to note that both the low- and high-end figures do not incorporate the full cost of patent infringement—an area sorely in need of greater research. We have found no evidence that casts doubt on the estimate provided by the Office of the Director of National Intelligence in November 2015 that economic espionage through hacking costs $400 billion per year.2 At this rate, the United States has suffered over $1.2 trillion in economic damage since the publication of the original IP Commission Report more than three years ago.

The Update notes that since the publication of the first Report that several recommendations were adopted by Congress and the Obama Administration including enactment of the Defend Trade Secrets Act, the 2015 National Defense Authorization Act , The National Cybersecurity Protection Act of 2014, The Federal Information Security Modernization Act of 2014, The Cybersecurity Workforce Assessment Act of 2014, and The Cybersecurity Enhancement Act of 2014. The Update continues to focus on China as a source of trade secret theft, but notes that cyberattacks from China have decreased.  The Update does hedge and note that this may be hard to measure.  In discussing China’s efforts to protect intellectual property, the Update also states:

To realize those reforms, China’s State Council issued a new action plan in 2016. Building on a 2015 policy document outlining goals to develop a stricter IPR regime, the action plan, titled “Opinion of the State Council on Accelerating the Construction of Intellectual Property Powers for China as an Intellectual Property Strong Country under the New Situation—Division of Tasks,” duplicates standing policy but also lists several priorities for reform of the IPR regime.50 According to analysis by Mark Cohen, a long-standing expert on China’s IP environment, the document suggests that China is making a greater effort to raise the damages a victim can sue for in Chinese courts.51 The action plan also stresses international cooperation and the placement of more IP officials overseas to protect Chinese companies. It goes on to encourage the study of China’s IP-intensive industries and the use of fiscal policy to promote their development.52 Taken as a whole, the plan appears to be more geared toward fostering stronger IP-intensive industries at home than developing the rule of law.

The Update notes that the recent United States Trade Representative’s 301 Report on China states that there are several areas of concern in China’s protection of intellectual property that require attention according to industry, such as the participation of foreign firms in standard setting in China.  Curiously, the Update then points to some potential fields in which it is alleged that state owned enterprises in China may be engaging in theft.  The Update provides two examples of possible issues; however, they both are not concretely closely tied to theft of trade secrets.  More information would be helpful.  The Update also points to state subsidization of industry and underbidding as two potential problems that help Chinese industry to the detriment of U.S. companies.  The Update concludes with a call to the Trump Administration to tackle the theft of intellectual property early in the Administration, and provides a list of recommendations that have not been adopted by the U.S. government.  For additional discussion of IP enforcement in China, please see here, here and here

Lexology Publishes Patent Damages Rules in 16 Jurisdictions

Lexology has recently published an article titled, "The Calculation of Patent Infringement Damages Awards in 15+ Jurisdictions." The article answers two questions for each jurisdiction: "How are damages calculated" and "Are punitive damages available?"  The jurisdictions include: the United Kingdom, Pakistan, China, Denmark, Ecuador, Finland, France, Greece, India, Israel, Italy, Japan, Malaysia, Netherlands, Romania and Turkey.  Notably, the answers for each jurisdiction appear to have been prepared by firms from each respective jurisdiction.  Interestingly, in Greece and Romania, one can obtain "moral damages." And, most jurisdictions do not allow for "punitive damages" for patent infringement.  It would be interesting to learn if there are any criminal penalties for patent infringement in the various jurisdictions--or a movement toward adding criminal penalties.