Professor Nguyen on Sovereign Patent Funds

Professor Xuan-Thao Nguyen explores government created and funded patent funds in Sovereign Patent Funds recently published in the UC Davis Law Review.  In part, Professor Nguyen reviews and analyzes the sovereign patent funds of numerous countries and investigates their role in patent enforcement.  The following is a part of her introduction of her article:

What are SPFs? How are they created and structured? What purposes do SPFs serve? Are SPFs effective initiatives for foreign governments to encourage innovation and foster competition or are they merely state-sponsored patent trolls? Are they violating international trade law, specifically the World Trade Organization (“WTO”) Agreement on Subsidies and Countervailing Measures?

This Article is the first to address the above questions. The Article proceeds as follows. Part I traces the creation of SPFs in Japan, South Korea, Taiwan, China, and France. Part I also explains when, why, and how each country provides public funding to SPFs. There are many different types of SPFs in different technology and life sciences areas, and with specific goals and mandates, although several share the same goal of aggregating patents. Open innovation and patent licensing are two common themes among the different goals and approaches employed by SPFs. Part II investigates whether SPFs have engaged in patent assertions — attempts to use acquired patents “to generate revenue by asserting them against alleged infringers.” Part II focuses on the simultaneous litigations filed by the French SPF against LG Electronics Corporation and HTC Germany GmbH in Germany and the United States. Likewise, the Asian SPFs have filed lawsuits against multinational companies. The investigation reveals surprises, including that litigation is typically an SPF’s last resort. SPFs are reluctant to embrace litigation. Part II also examines SPFs’ licensing strategies. French and Korean SPFs seem to have success in licensing out. They direct more efforts to selecting quality patents for licensing. In addition, Korean and Japanese SPFs are engaging in licensing for open innovation.

SPFs have been condemned as global patent trolls and state sponsored patent trolls. Part III addresses whether the pejorative label is warranted. Exploring the popular narrative of patent trolls and the evolving landscape of the patent market where former manufacturing companies and research institutions, along with other non-practicing enterprises (“NPEs”), are participants, Part III reveals that the SPF label does not fit SPFs’ characteristics. SPFs are both diverse and complex. Some have collaborated with universities to engage in specific research and development projects. Some share their profits with original inventors. Some facilitate open innovation. Some are doing all of the above. Condemning SPFs as patent trolls amounts to dismissing the true innovations, research, and development that have been the hallmarks of many industries and sectors in Japan, South Korea, China, and France.

SPFs have also been condemned as a trade protectionist measure in violation of international trade law. Part IV examines the heavy charges that SPFs discourage international technology transfers, depress innovation, force foreign companies to accept unfavorable license terms akin to discriminatory tax, support domestic industries at the expense of foreign firms, resurrect ailing national companies, and cause a race to the bottom. Part IV found no evidence to support these condemnations. On the contrary, what SPFs have done since their existence refutes these charges.

If SPFs are illegal subsidies in violation of international trade law, there is an appropriate mechanism to remedy the harm. Part V turns to the WTO solution, analyzing relevant provisions of the WTO Agreement on Subsidies and Countervailing Measures. Part V discusses WTO Tribunal decisions, as they illuminate and interpret legal requirements in subsidy cases. Part V further suggests that the international framework is suited to eliminate SPFs if evidence exists that a particular subsidy is causing injury to a domestic industry. Certainly, using the appropriate channel to address SPFs is preferable to dismissive and pejorative labeling.

Part VI, however, posits that an international trade solution might be unnecessary because SPFs may soon be relics of the past. SPFs can easily alter their structure to remove the government-sponsored characteristic to quiet critics and restless nation litigants in the WTO Tribunal. Moreover, the global innovation and patent market is dynamic and complex; SPFs will not be able to survive and flourish if they are under governmental control. Part VI observes that, in fact, some prominent SPFs are planning to privatize in order to compete and adapt.

Overall, by creating and infusing SPFs with public funding to aggregate patents, a government can seem to have ownership and control of the patents while simultaneously wielding authority in dispute proceedings relating to those very same patents. The government can block or rule against others from challenging the validity of patents. The same government may coerce others into accepting unfavorable patent license terms. The same government also may protect domestic firms at the expense of foreign firms. Such an arrangement seems to create many conflicts. Additionally, SPFs may be illegal subsidies under international trade law. Also, the creation of SPFs suggests a new global chaos in patents. The new chaos raises fear that SPFs would cause a race to the bottom. SPFs become sovereign patent trolls with levers more potent than private patent trolls, depressing innovation for short-term gains. The fear about SPFs, however, is exaggerated. These concerns perhaps emanate from the tendency to group all SPFs from different countries into one and characterize them within the convenient patent troll narrative. Fear not, the present and future development of different SPFs should instead prompt us to rethink patents and the very laws creating them.

The article is available, here. 

The US Falling Behind on 5G Infrastructure: Lack of Funding and Slow Unified Policy Response?

Deloitte Consulting has released an informative report titled, “5G: The Chance to Lead for aDecade.” [Report]  The Report describes how the United States is falling behind in investing in 5G “both [in] relative and absolute terms” to other countries, and specifically China.  For example, the Report states:

Since 2015, China outspent the United States by approximately $24 billion in wireless communications infrastructure and built 350,000 new sites, while the United States built fewer than 30,000. Looking forward, China’s five-year economic plan specifies $400 billion in 5G-related investment. Consequently, China and other countries may be creating a 5G tsunami, making it near impossible to catch up.

The Report also describes the importance of the number of towers and small cells needed for the 5G network to operate well.  While advocating for a “light touch policy framework,” the Report notes that,

[T]his light-touch regulatory framework does not absolve policy makers of responsibility to inspire US leadership in 5G. Policy makers at the state, local, and federal levels can help reduce the friction associated with deploying next generations of communication infrastructure. Specifically, reducing the cost and deployment cycle times for small cells will help remove a major obstacle to network densification and allow carriers to add desperately needed low-cost capacity to our nation’s wireless networks.

…

Many cities continue to use the same approval standards and processes for small cell equipment deployed at the top of an existing city lamp post as they would for deployment of a new 70-foot macro tower in the public right of way; an unsustainable solution if the United States aims to keep pace with other countries’ 5G deployment. (emphasis added).

Notably, the Report also discusses the benefits of a “light touch policy framework:”

First, the United States should consider establishing a light-touch policy framework to address 5G’s inherent externalities that limit the value created by infrastructure investment from accruing to the carriers. Other countries may consider subsidizing, nationalizing, or otherwise regulating aspects of a nation’s communications infrastructure to speed 5G deployment. However, such interventions in the United States could risk disrupting a communications and technology ecosystem that has proven symbiotic and resilient over the past decade. Policy intervention in the same ecosystem of carriers, suppliers, Internet innovators, and consumers that enabled LTE leadership could inflict unintended consequences on competition and innovation. 

Instead, carriers and their ecosystem partners can address the potential pitfalls of externalities by negotiating efficient solutions. Negotiated contracts between carriers and Internet content and applications providers more effectively attribute profits to those making infrastructure investments on behalf of the users.

We have already seen examples of such negotiated solutions with LTE. Unlimited usage of video streaming applications come with service-level conditions that help curtail network congestion. In some cases, content providers agreed to reduce video resolution and steaming speeds in return for carriers granting unlimited access to that content for their subscribers. These conditions, negotiated between commercial entities, can offer a win-win-win for carriers, content providers, and consumers. Consumers receive access to as much content as they want without overage fees. Content providers get unlimited access to their viewer base. In turn, carriers can better plan for and/or avoid traffic increases that necessitate costly upgrades.

The Trump Administration released a plan to develop and rehabilitate infrastructure throughout the United States, and the Washington Post recently published an interesting article describing a recent study concerning long term prosperity in Europe and the path of Roman roads.  What about 5G (at least for a decade and not falling behind what’s next)? 

Bloomberg Tracking Pharmaceutical Prices

One way the Trump Administration appears to attempt to control drug prices is through use of the “bully pulpit.”  Wikipedia states that the “bully pulpit”: “is a conspicuous position that provides an opportunity to speak out and be listened to. This term was coined by United States President Theodore Roosevelt, who referred to his office as a "bully pulpit", by which he meant a terrific platform from which to advocate an agenda.”  

President Trump has used strong language to apparently shame pharmaceutical companies from raising drug prices.  Indeed, two pharmaceutical companies announced they would not raise prices for their drugs.  Those two examples make great headlines for President Trump, but are drug prices as a whole getting lower in the United States.  Bloomberg seeks to answer that question and is tracking the pricing of "widely used" and "well known" drugs across several different disease categories and updating that information as time passes.  Notably, prices (excluding Pfizer's drugs, who announced it would not raise prices) appear to be moving up.  Interestingly, the price increases are mostly hovering around 9% to 10%.  Also, the prices tracked by Bloomberg do not include the rebates that are provided by pharmaceutical companies, but are the list prices.  

The Trump Administration is moving on other fronts to try to control drug prices, but many experts state that some of those attempts will not impact the cost of drugs in the United States by much.  It will be interesting to see if actions taken by the Food and Drug Administration discussed here will make a significant difference.  

The Merit of Patent Boxes

In a new paper on the merit of patent boxes, Should There Be Lower Taxes on Patent Income, Fabian Gaessler, Brownyn H. Hall and Dietmar Harhoff, examine several questions:

1. When a transfer of patent ownership occurs between countries, is the choice of target country affected by the difference in tax treatment in the two countries and the presence of a patent box? . . .

2. Is the choice of priority country influenced by that country’s treatment of patent income? We are motivated to some extent by the observation that the share of patents with a priority country that differs from the location of the invention has risen in the recent past.

3. Does patentable invention in a country increase after the introduction of a patent box? That is, does this policy instrument have the desired effect?

In addition, we hypothesize that more valuable patents (that is, patents that are more likely to generate income, via own profits or licensing) are more likely to be subject to transfer.

The abstract states the general finding of the paper:

We find that the impact on transfers is small but present, especially when the tax instrument contains a development condition and for high value patents (those most likely to have generated income), but that invention itself is not affected. This calls into question whether the patent box is an effective instrument for encouraging innovation in a country, rather than simply facilitating the shifting of corporate income to low tax jurisdictions.

The paper is available, here.  [Hat tip to Dean Paul Caron’s TaxProf Blog.]

Federal Funding for National Institutes of Health in the United States will likely Continue to Decline

The Trump Administration is seeking cuts to the budget of the National Institutes of Health (NIH) for Fiscal Year 2019.  In dollars adjusted for inflation, the decrease is from FY 2018 38.349 billion dollars to 34.767 billion dollars, as described by Judith Johnson’s Congressional Research Service NIH Funding FY1994-2019 report (CRS Report).  Trump also requested a decrease in the NIH’s budget in the FY 2018 budget; however, Congress increased the budget by 2 billion dollars.  Notably, the CRS Report outlines how in inflation adjusted dollars the budget for the NIH has decreased over the last 14 years from the 2003 budget high point of 43.198 billion inflation adjusted dollars.  From 2011 to 2018, the budget for the NIH has decreased in double-digits in inflation adjusted dollars from the 2003 high point.  The years 2013, 2014 and 2015 saw decreases from the 2003 high point of 21.7%, 21.2% and 22.4% respectively.  The Trump 2019 request would be a 19.5% decrease in inflation adjusted dollars from the 2003 high point.