Gaming the System: A Scatter-Gun Approach to 5G Declarations

While it is already widely believed that “over-declaration” of standard essentiality is due to large and excessive numbers of patents being filed in patent offices and declared to Standard Setting Organizations (SSOs), my new quantitative research suggests that over-declaration is also being pursued with claims that individual patents read on multiple Technical Specifications.

Some declare patents essential to multiple Technical Specifications

Participants in technology standard standard-setting, such as in 3^rd Generation Partnership Project (3GPP) Working Groups, are obliged to declare their patents that they believe might be or might become essential to technology standards such as 5G. For example, the Intellectual Property Rights (IPR) policy of 3GPP partner ETSI requires declarations to ensure that standards are not blocked by IPR being unavailable. Declaration practices differ among participating companies, but with all of them reasonably declaring some patents that would never actually be found standard essential if tried in litigation by courts of law.

More and more patents

However, with the increasing use of patent counts as a measure of companies’ respective patent strengths, for example in determining royalties, it is widely believed that some technology developers puff up their positions with numerous declarations in excess of what is reasonably required to protect their IPR, shield them from assertions of anticompetitive behaviour such as patent ambush and provide the commitments required by IPR policies. Over-declaration is thus commonly understood to be the filing and declaring of large and increasing numbers of low quality patents that would never be found essential in litigation. Accordingly, there has been an exponential increase in patent declarations. Rapidly approaching 80,000 patent families have been declared to ETSI including various communications standards.

With over-declaration, raw patent counts and checked-essential patent counts exaggerate patent strength. There is no essentiality checking in standard setting, such as by 3GPP or ETSI. While essentiality checking is undertaken by some specialist firms, my previous research shows that this does a poor job in correcting the inflated relative positions of companies that over-declare. Systemic bias prevails because essentiality checking is far from perfectly accurate. False positive determinations (i.e. where a patent is found essential when it is not truly essential) tend to exceed false negative determinations. And, the lower the true essentiality rate (i.e. the percentage of declared patents that are truly essential), the more bias there will be.

Throw everything at the wall and see what sticks

In addition to inflating patent counts by flooding IPR databases with increasing numbers of declared patents, my new research paper—based on patent declaration and standards data collected and processed by Dolcera—indicates that some companies are also declaring individual patents to multiple different Technical Specifications. While most major declarers declare their patents to an average of no more than 2.5 Technical Specifications, some companies declare essentiality to more than twice as many, and with individual patents declared to as many as 12 or even 18 different Technical Specifications. However, essentiality is based on whether a patent reads on any Technical Specification, not on how many of the latter are referenced.

As human and automated checks have to assess each declared patent’s essentiality against every Technical Specification referenced, the more of those that are referenced the higher the probability of false positive determinations while the probability of false negative determinations cannot increase even to partially offset the above. Assessing any additional Technical Specification can, therefore, only increase the possibility that a patent is found essential. This means that the systemic bias inflating essentiality rates found in checking will be higher than if declarations for each patent were more diligently focused on only one or two Technical Specifications. Costs also increase with the expanded workload in checking more Technical Specifications.

My full new research paper analysing patent essentiality declarations to multiple Technical Specifications can be downloaded here and from SSRN.

FTC Hits Vonage with $100 million Hammer for "Dark Patterns"

On November 3, 2022, the U.S. Federal Trade Commission fined Vonage $100 million for “dark patterns” to be paid to consumers. The tricky issue has been defining what exactly is a "dark pattern."  The FTC Press Release describes the "dark patterns" as:

• Eliminating cancellation options: Despite allowing its customers to sign up for services online, over the phone, and through other venues, the complaint alleges that starting in 2017, Vonage made the decision to force customers to cancel only by speaking to a live “retention agent” on the phone. The complaint notes that this practice runs counter to Vonage’s own advice to its clients not to “frustrate customers by requiring them to contact you for support that should be available on a self-service basis” and that “[i]t should be just as easy to return your product as it is to buy it.”

• Making cancellation process difficult: In addition to forcing customers into one cancellation method, it made that method difficult. The company created significant cancellation hurdles, including by making it difficult to find the phone number on the company website, not consistently transferring customers to that number from the normal customer service number, offering reduced hours the line was available and failing to provide promised callbacks. The complaint cites one internal Vonage email saying customers were “sent in a circle when they want to downgrade or remove the service.”

• Surprising customers with expensive junk fees when they tried to cancel: In many cases, customers who are able to access the cancellation line are told they will have to pay an unexpected early termination fee that was not clearly disclosed when they signed up for Vonage service. In some cases, these fees were in the hundreds of dollars.

• Continuing to charge customers even after they canceled: Customers who managed to speak to an agent and request cancellation often found that their accounts continued to be charged. Even when they contacted Vonage to complain, they received only partial refunds of the money they were charged without authorization.

A $2 Billion Trade Secret Misappropriation Verdict

U.S. courts can be fun.  Appian received over a $2 billion trade secret judgement in Virginia state court.  In addition, Appian secured over $23 million in attorney fees.  The case involved trade secret misappropriation and the Virginia Computer Crimes Act.  Appian was represented by Patterson Belknap.  The attorneys representing Appian included:  Adeel A. Mangi, Muhammad U. Faridi and Jeffrey Ginsberg.  The Appian Press Release is here and the Patterson Belknap Press Release is here. Apparently, a company should not call someone possibly engaged in corporate espionage for them a "spy" or something like that.  That looks bad later.   

Essentiality checks might foster SEP licensing, but they won’t stop over-declarations from inflating patent counts and making them unreliable measures

 Essentiality checks could help implementers determine with whom they need patent licenses.  However, essentiality checking does a poor job in adjusting for over-declaration in patent counts and will encourage even more spurious declarations.

We await a new policy framework from the European Commission (EC) with its Impact Statement regarding the Fair Reasonable and Non-Discriminatory (FRAND) licensing of Standard Essential Patents (SEPs). The EC is considering instigating checks on patents disclosed—to Standard Setting Organization (SSO) Intellectual Property Rights (IPR) databases as being possibly standard essential— to establish whether they are actually essential to the implementation of standards such as 5G. Objectives for essentiality checking are to:

1.      enable prospective licensees to determine with whom they need to be licensed

2.      correct for over-declaration and only count patents deemed essential; and

3.      use such figures in FRAND royalty determinations.

If clutches of selected patents are independently and reliably checked to establish that prospective licensors each have at least one patent that would likely be found essential by a court, these results might be used by several or many prospective licensees to determine with whom they need to be licensed.[1] But such checks would be of limited and questionable additional use to existent court determinations. Checks have already been made on some patents for all major licensors and many others in numerous SEP litigation cases over many years. Greater legal certainty is provided in court decisions where many patents have been found standard essential, infringed and not invalid.

My full paper on this topic, which can be downloaded here, focuses on the wider use of essentiality checks and sampling in patent counting. With too many patents to check them all properly, it is hoped that thorough checking of random samples of declared patents will—by extrapolation—also enable accurate SEP counts to be derived. However, essentiality checks do not fix and can only moderate exaggerations in patent counts due to over-declaration. For example, false positive essentiality determinations will exceed correct positive essentiality determinations where true essentiality rates are less than 10% unless at least 90% of determinations are correct.[2] Inadequate checking could imbue many with a false sense of security about precision while encouraging even more over-declaration by others which would further misleadingly inflate their measured patent counts and essentiality rates.

My empirical analysis also shows that declared essential patents are too numerous, and bias in checking and random errors in sampling are too great to provide even the modest precision expected and that should be required for patent counts to determine FRAND royalties without very thorough and highly accurate checks on thousands of patents per standard.

Even ignoring residual bias after improved but imperfect checking, sample sizes of thousands of patents would be required to provide even only modest levels of precision in essential patent counts (e.g. a ±15% margin of error on the estimated patent count at the 95% confidence level) on patent portfolios and entire landscapes where essentiality rates are low (e.g. 10%) due to over-declarations.

The dangers in not recognizing the sources and extent of bias and other errors and in not designing studies with sufficient scale and precision (e.g. for a court setting a royalty rate) is that far from increasing transparency, information provided will be imprecise, distorted and unreliable. Ignoring analytical errors, and mistakenly implying or pretending otherwise is even worse.

This new paper, also available on SSRN, is a follow-on to my previous research on essentiality checking and patent counting in 2011, 2017 and 2021.

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[1] This ignores validity and actual infringement in any specific product, which also determine whether licensing is required under patent law and FRAND conditions. These are also important issues.

[2] The essentiality rate is the number of essential patents divided by the number of declared essential patents. An estimated or found essentiality rate will differ from the true essentiality rate due to inaccuracies.

Can Patents Resolve the Quest for Capital?

 

Can Patents Resolve the Quest for Capital?

Most people recognise the utility of patents to be the exclusivity, albeit temporary exclusivity, they impart on their owners to profit from an invention. Yet patents also hold real value for companies that may not even sell a product yet: they can help in the quest for capital.

At present there is often a difference in approaches to patents depending on the industry. For the chemical or biotechnology industries, patents are vital intangible assets. In others though, for example software start-ups, a patent strategy might not be so high on the list of priorities. Yet patents ought to be important to all innovative enterprises looking to bring something new to the market.

Once start-ups run out of friends and family to seek funds from, they often turn to early-stage venture capital firms as a source of funds. For example, OxFirst has helped a young innovative company in the SaaS – Software as a Service – space access further capital. The patent valuation we undertook helped the firm access over 25 Million UK Pounds in funding. The patent valuation served as a substantial instrument to communicate the value proposition of the firm to investors.  

Investors looking to assess the risk/return profile of early-stage technology often content themselves with a simple Freedom to Operate search. However, a patent valuation goes way beyond such simple question. It allows an assessment of potential revenues associated with the intellectual property while at the same time supporting senior management decisions.

As this simple example illustrates, not only venture capital firms, but also investment banks, high net worth individuals and family offices may be prepared to finance otherwise risky technology ventures, provided the patent valuation allows them to get a better understanding as to what they may be getting themselves involved in.

Patents go a long way to mitigating the risk assumed by venture capital firms, and therefore making the start-up a more appetising investment opportunity by ensuring the future product they are investing in cannot be copied by another and a return can be made on that investment. The patent valuation can again help to size markets related to patents. There are several ways a patent valuation can be undertaken. Often one turns to the market, income or cost approach. In the case of start-ups, the early-stage nature of the firm often requires further assumptions, quite simply because markets are yet to be grasped. In an IP valuation this is often reflected in the risk rate.

The same basic logic also applies to later stage venture capital funding. A business need not have a product on the market to make themselves appealing to investors, a patent can be enough.

Should a business choose to go public through an IPO later in its life, knowledge that a company’s intellectual property is adequately managed and used to maximize revenues, will be an important element in enticing investors and driving up the potential funds from entrance to the stock market. Further use cases of a patent valuation can be the support of licensing revenues, technology transfer, transfer pricing and fostering a firm’s reputation.

Some estimations put 80-90% of a firm’s value in its intangible assets, of which patents are a component. That’s potentially a lot of money in the event of a sale. In 2021 Elon Musk’s Tesla bought Springpower International, a small Canadian start-up working on battery manufacturing technologies. At the time, Springpower had patents pending on core technologies – those patents changed ownership to Tesla following the purchase. Whilst by no means the only motivator behind the purchase, Tesla acquired Springboard’s employees and their expertise too, it is obvious the intellectual property was an important driver behind Tesla’s decision.  

Patents, then, are crucial throughout the full business lifecycle: from sourcing initial intuitional funding through to selling the company. A patent valuation can help realise these opportunities and render otherwise intangible assets into tangible business opportunities. Business owners should take advantage of the opportunities it presents. 

https://oxfirst.com/insights-&-news/can-patents-resolve-the-quest-for-capital/

Damage Calculations in Patent Infringement Cases under the Unified Patent Court

 

Considering Patent Infringement Damage Calculations under the Unified Patent Court

A primary benefit for future users of the UPC is that legal proceedings in relation to a Unitary patent or a non-opt-out European patent will not need to be divided throughout Europe and can instead be heard by a single court, with judgement applied to the entire territory – potentially 24 countries. This promises to reduce costs and time associated with the litigative process and may minimize the risk of ‘Forum Shopping’ within the E.U., where parties seek to take advantage of differences in the procedures and judgements of national courts. Given the importance of the UPC, we wish to outline the important factors that must be considered by parties when it comes to damage calculations.

Determination of damages: routes

On the 8^th July 2022 the UPC’s Administrative Committee adopted the final version of the Rules of Procedure (RoP, accessible here). Those rules offer two routes for determining damages and compensation in the event patent infringement is found to have occurred. Rule 118.1 outlines that “[t]he amount of the damages or the compensation may be stated in the order or determined in separate proceedings”. A successful party can – within one year of the final decision – apply for separate proceedings for the determination of damages (Rule 126). The court may also award interim damages (Rule 119), to “cover the expected costs of the procedure for the award of damages … on the part of the successful party”.

Determination of damages: calculation factors

When seeking to understand what factors contribute to damage calculation we look to the UPC Agreement (UPCA, available here), which defines the legal basis of court activity. That makes two commitments in relation to the award of damages: (1) the court will instruct an infringer to pay the injured party damages “appropriate to the harm actually suffered … as a result of the infringement” and (2) the court will – as far as is possible – place the injured party in a position as if no infringement had taken place. Additionally, the infringer shall not benefit from the infringement and damages shall somewhat not be punitive.

Having made these commitments the Agreement then seeks to define what the court should look to when calculating damages. The court is to take account of “all appropriate aspects” such as negative economic consequences, which may include lost profits, any unfair profits made by the infringer, and non-economic factors where necessary (for example, damage to a brand’s reputation). The court can also set damages on the basis of royalties that would have been due if the infringer had sought a licence. In a case where the infringer did so not knowingly, the court can order compensation.

Determination of damages: IP valuation expertise

Whilst the UPCA suggests areas of consideration for damage calculation, there remains substantial room for the presence of expert analysis in reaching that calculation. OxFirst Director Dr Roya Ghafele has authored many scholarly articles on patent valuation methods for assessing damages in patent infringement cases before the UPC. This work illustrates three important means of valuation: the income, cost and market approaches. These approaches appear in publicly sanctioned IP guidelines and assist in portraying value in a dynamic manner. All three play a role in delivering effective valuation and OxFirst operates a proprietary valuation method which accounts for their advantages. Method selection represents a crucial consideration when embarking upon a valuation and pays particular attention to the utility of the income method as the only method that can incorporate risk as a consideration. Using the income method, patent value is presumed to be based on future returns over the course of the time it retains protection. Whilst the commonly applied method by courts and regulators, the income method requires particular attention to be paid to contextual information and so requires particular expertise for its effective application.

The UPC is well equipped to exercise judgement on patents at question themselves – the technical judges bring the specialist knowledge required for this. Yet when calculating appropriate damages, the UPC will – like other courts – require assistance from patent valuation experts. This will be particularly true when the UPC has to, inevitably, consider FRAND cases. In these cases, debate has already been established around defining a royalty base, either the smallest saleable practicing unit (SSPU) or the entire market value (EMV). The choice of royalty base is decisive in calculations of appropriate FRAND rates as, in most cases, damages are calculated by factoring a royalty base with a royalty rate to establish a valuation. Patent valuation expertise will therefore be especially valuable in such circumstances. https://oxfirst.com/insights-&-news/considering-patent-infringement-damage-calculations-under-the-unified-patent-court/

How Economic Growth is driven by Intellectual Property

 

What is economic growth? why is it so important?

According to Nobel Prize winning economist Simon Kuznets a country's economic growth may be defined as “a long-term rise in capacity to supply increasingly diverse economic goods to its population, this growing capacity based on advancing technology and the institutional and ideological adjustments that it demands.”¹

To answer the question of why economic growth is important, we need to look at it from two different perspectives -  from a developing and a developed countries perspective. According to an OECD report, economic growth is the most powerful instrument for “reducing poverty and improving the quality of life” in developing countries. ² In the case of developed countries, high economic growth leads to increased profitability for firms, enabling more spending on research and development which can lead to technological breakthroughs, and it also increases confidence and encourages firms to take risks and innovate. According to the Bank of England, “the citizens of a country with high GDP are likely to have high incomes, people are likely to be earning and spending more and businesses are likely to be hiring and investing more (heavily in R&D).”³

Explanations of economic growth have increasingly focused on the role of innovation and on the power of expected profits to motivate innovation. ⁴ Private-sector companies and industries likewise are looking for ever-more competitive ways to succeed, by developing and incorporating creative and useful innovations into products and services that we all benefit from and enjoy in virtually every area of life. Intellectual property (IP) - the copyrights, patents, trademarks and other similar rights upon which creative and innovative products and services rely upon - have an important role in growing the economies of developed and developing countries all over the world.⁵ IP protection benefits the economy, promotes innovation, helps firms monetize their innovations and grow, helps small and medium enterprises (SME), and finally it benefits consumers and society. This is the patent bargain:  the trade-off between short term monopoly and long-term social service by bringing innovation to market. The monopoly on commercialisation encourages firms to innovate and profit (and so for the purposes of this article drives the economy).

The macroeconomic effects of IP:

Sectors that rely on IP protection are contributors to the economy. For example, according to a study by the EU IPO IP-intensive industries generated 29.2% of all jobs in the EU during the period 2014-2016 with 11% being patent intensive industries. In addition, another 21 million jobs were generated in industries that supply goods and services to IP-intensive industries. Over the same period, IP-intensive industries generated almost 45% of total economic activity (GDP) in the EU, worth €6.6 trillion out of which patent intensive industries accounting for 16%. It is also interesting to note that wages in IP intensive industries are higher compared to non-IP intensive industries with this wage premium being 72% in patent intensive industries.⁶ Also, in the G8 countries, copyright-based industries and interdependent sectors alone account for approximately 4-11% of Gross Domestic Product.⁷ IP also generates substantial economic activity, employment and growth in developing and developed countries. WIPO and other organizations and economists have done several studies on the economic contribution of patent-related industries in developing countries and found that patent-related industries generate GDP contributions of between approximately 2-6% and employment contributions of between 3-11% of total employment. ⁸ A more recent study by the OECD has further quantified the benefits of IP protection for foreign direct investment, not just with respect to patent protection but also copyright and trademark. A 1% increase in the strength of patent correlates to a 2.8% increase in FDI. ⁹ Patents are an engine of economic growth, which is quite evident based on the above evidence presented.

However, it is also important to note that in some instances the analyses simply focuses on quantitative patent data without taking into account the quality of the underlying patents. For example, patents from innovative areas such as artificial intelligence should not be weighted equally to less relevant technologies. Furthermore, the only figures used in some analyses are ones regarding a country’s patent applications. Many years may pass between the patent application and the final grant. Therefore, it is a country’s active patent portfolio and not merely the number of patent applications relevant to economic analysis.

As the ‘knowledge economy’ advances, more and more of the value that firms and the overall economy achieve will come from intangible assets—including IP. IP is on the rise of becoming the currency of the knowledge based economy, helping to promote economic growth, company competitiveness and innovation world-wide.

https://oxfirst.com/insights-&-news/how-economic-growth-is-driven-by-intellectual-property/

GW Law Professor Dmitry Karshtedt

I am very sad to inform you of the tragic death of George Washington University Law School Professor Dmitry Karshtedt.  Professor Karshtedt was a bright, kind, generous and good person.  I have pasted his biography from the GW Law School website below.  Also, I have pasted information about remembrance services for him.  Our deepest condolences are extended to his family and all who knew him.  

GW Law Biography

Dmitry Karshtedt's primary research interest is in patent law. His legal scholarship has been published in the Iowa Law Review, Vanderbilt Law Review, and Harvard Journal of Law & Technology, among other outlets, and cited in three of the leading patent law casebooks, a casebook on intellectual property, and several treatises. Professor Karshtedt's academic work has won several awards, including the Samsung-Stanford Patent Prize and the scholarship grant for judicial clerks sponsored by the University of Houston Law Center Institute for Intellectual Property and Information Law.

Before going into law, Professor Karshtedt completed a PhD in chemistry from U.C. Berkeley and worked as a staff scientist for a semiconductor materials startup. He is a co-author on five scientific publications and a co-inventor on twelve U.S. patents. Professor Karshtedt received his law degree from Stanford Law School, where he served as the Senior Symposium Editor for the Stanford Law Review. Professor Karshtedt practiced in the Patent Counseling and Innovation Group at Wilson Sonsini Goodrich & Rosati and clerked for the Honorable Kimberly A. Moore on the U.S. Court of Appeals for the Federal Circuit. Immediately prior to starting his position at GW, Professor Karshtedt was a Fellow at the Center for Law and the Biosciences at Stanford Law School. In the fall of 2021, Professor Karshtedt was a Visiting Scholar at the University of Copenhagen Faculty of Law in the Centre for Advanced Studies in Biomedical Innovation Law.

Remembrance Services

This Thursday, November 3rd from 6:30-7:30 PM, there will be a Panikhida in honor of Dmitry's life at St. Mary's Orthodox Church (7223 Roosevelt Avenue Falls Church, Virginia 22042).
The GW Community gathering will take place this Friday, November 4th from 1-1:30 PM (not 12-12:30 PM) on the Stockton patio.
Additionally, there will be a visitation this Friday, November 4th from 4-6 PM at Gawler's Funeral Home in Friendship Heights, Washington, DC.
Any contributions (in lieu of flowers) should go to a GW Law scholarship just created by the family to honor Dmitry. As his parents said, Dmitry would like to help other students. 

AI Generated Inventions: Implications for Patent Valuation

Last week, Professor Adam Jaffe (Brandeis University, USA & Motu Economic and Policy Research, New Zealand) joined for a presentation assessing the implications on the patent system from the rise of inventions created by AI.

The subject is topical; we’ve previously covered Thaler -v- Comptroller, a case to be heard by the UK Supreme Court relating to an AI that generated two inventions and a dispute following the AI being listed as an inventor, and we’ve considered non-human inventions from a patent valuation perspective.

The talk was founded on a dual premise that: (1) AI systems soon will be (or already are) making inventions, and (2) the patent system as it stands is not ready for that. Whilst patent law in most jurisdictions does not make allowances for AI to be an inventor, and that position looks likely to hold, Professor Jaffe suggested it is both unavoidable and undesirable to seek to halt the rise of AI invention machines. A change in the law will likely be required.

It is theorised that AI would be capable of creating inventions at a very low marginal cost and in substantial number. Should those inventions be patentable, either because the law changes to accommodate AI as an inventor or because AI owners exploit the indistinct line between machine-assisted invention and machine-generated invention to list themselves as inventors, patent offices could be flooded with new applications. It is important, therefore, to discuss how AI inventions relate to the fundamental goals of the patent system. A predictable and fair patent system, and one that incentivises innovation are obviously desirable, yet it is on the goal of protecting investments that develop an invention to a marketable product or process that is particularly interesting.

In a previous article considering AI inventions, we speculated that AI inventors would lead to ‘invention factories’ – businesses who produce patentable inventions using their AI invention machine and sell or license those patents to others who exploit them to bring patents to market as products. We can therefore envisage a scenario with three elements: (1) AI inventors producing many more inventions each year than are currently created, (2) we assume patent offices are able to keep up, and so many more patents are granted on these inventions each year, and (3) those patent owners are unwilling or unable to exploit those patents and bring products to market. In this scenario, a substantial patent marketplace emerges.

This raises important questions for patent valuation. In any market, value is most simply determined by what someone else might pay for a product, and therefore an increase of supply (patents) into that marketplace depresses the value of each individual item given the increase in choice for buyers. Comparative IP valuation methods may need to adjust to account for this if the comparison is based on a different, non-AI generated, patent marketplace. Yet, each potential buyer of patents will have different capacities to exploit different types of patents – a chemical manufacturer has no use for a patent relating to the production of bread, for example. Increase in supply therefore, may not substantially depress value. We must also keep sight of the importance of a patent’s quality to patent valuation. A high-quality patent – by which we mean one with a long term of protection, substantial coverage and strong potential commercial gains when properly exploited – remains a valuable item whether created by a human or AI. Identifying those patents will be crucial for commercial success in an AI invention landscape.

Should a patent marketplace emerge as we have speculated, the demand for effective patent valuation to complement patent-related dealmaking will rise. Moreover, with so many patents potentially on offer, the importance of good patent valuation only grows. The problem for patent valuation therefore may be the same as for the patent offices – volume. The skills, however, remain the same. Patent valuation experts who can identify and understand market outlooks, growth implications and draw valuable insights from the comparative deal landscape to make well-founded, accurate and commercially useful judgements on these patents will be invaluable.

We are very grateful to Professor Jaffe for sharing his ongoing work with us. The question of AI inventions and how they fit into the patent system is an important and fluid issue. This talk demonstrated both the considerable interest in the area, and the need for open-minded thinking about how we might negotiate the problems and opportunities raised by AI inventions to achieve the greatest benefit from them.

The full webinar is available at: https://www.youtube.com/user/Oxfirst.

Further discussion article on non-human inventions from a patent valuation perspective: https://oxfirst.com/insights-&-news/thaler-v-comptroller-a-patent-valuation-perspective-on-non-human-inventions/

IPOs in the United States Drop

According to Ernst & Young and PwC, the number of IPOs and their value in the United States have dropped significantly from the similar time period from the prior year.  Interestingly, PwC notes that China's numbers of IPOs has remained relatively strong.  Cal Matters and others report that California's number of IPOs is very weak compared to the last year.  As pointed out by commentators, it seems to make sense to wait and see in this market--if you are able.  Notably, if IPOs as an exit strategy dry up, it makes acquisitions a much more important alternative.  It will be interesting to see the direction regulators in the United States take toward acquisitions--particularly in the tech space.  

Implications of the Updated IEEE IPR Policy for FRAND royalty rate determination

 

The Institute of Electrical and Electronic Engineers (IEEE) has announced a change to its IPR policy in relation to standards which will take effect from 1^st January 2023.

The changes relate to Standard Essential Patents (SEPs) which patentees agree to license to downstream innovators on a fair, reasonable and non-discriminatory (FRAND) basis. These changes hold relevance to FRAND royalty rate determinations. A press release from IEEE stated these changes “are intended to improve the clarity of IEEE’s standard processes relating to patented technologies, while offering more options for stakeholders”.

IEEE’s changes relate to the Reasonable Rate definition within the Bylaws (accessible here, p.2). They have implications for the choice of the royalty based in a FRAND royalty rate calculation and relate to the bigger pictures as to what is FRAND. Regardless of the extent to which IEEE ever recognised the smallest saleable practicing unit (SSPPU), these changes impart a carte blanche for FRAND royalty base determination to be derived from market value at the component level.

The Adequate Royalty Base in the FRAND Royalty rate valuation

The choice of a royalty base is decisive in the calculation of an appropriate FRAND royalty rate. The debate has focused on deciding whether the smallest saleable practicing unit (SSPPU) or the entire market value (EMV) is the most appropriate methodology.

And as in many cases, damages are calculated by factoring a royalty base with a royalty rate; the value of the royalty base is of substantial importance. In the SSPPU approach, the price of the component which houses the SEP technology is used as the calculation base.

On the other hand, if the conditions for EMV is met and the technology is concluded to be the primary driver of demand to the entire end-product and the primary contributor to the functionality, the entire market value approach is used.

The SSPPU methodology originates from a suit between Cornell v. Hewlett Packard Co. where the Plaintiff initially sought damages based on the end-product, but later had to change its claim as the court held the end-product as an inappropriate royalty base, concluding that calculation must be apportioned down to “the smallest salable infringing unit with close relation to the claimed invention.”

Shortly after, the same reasoning would be echoed in Lucent Technologies, Inc. v. Gateway, Inc where the court concluded that there was no evidence that the infringed feature in question drove the entire demand for the end-product and therefore a calculation with the end-product as the royalty base would be misplaced. In Lucent v. Gateway, as in Cornell v. Hewlett Packard, decisions did however leave the door open for the future usage of the end-product as a royalty rate while calculating damages. More specifically, in Lucent, the court concluded that there was ‘nothing inherently wrong’ with using the end-product given that the proportionate value of the infringed feature or component to the product is taken into account.

What the Changes are about and how they Affect the valuation of Patents

We think it is valuable to show these amendments in full, with the changes italicised. Where eliminations have been made, they are shown with a strikethrough:

““Reasonable Rate” shall mean appropriate compensation to the patent holder for the practice of an Essential Patent Claim excluding the value, if any, resulting from the inclusion of that Essential Patent Claim’s technology in the IEEE Standard. In addition, determination of such Reasonable Rates should include, but need not be limited to, the consideration of:

Some optional considerations for determination of Reasonable Rates are:

·       The value that the functionality of the claimed invention or inventive feature within the Essential Patent Claim contributes to the value of the relevant functionality of the smallest saleable Compliant Implementation that practices the Essential Patent Claim or to another appropriate value level of the Compliant Implementation.

·       The value that the Essential Patent Claim contributes to the smallest saleable Compliant Implementation or to another appropriate value level of the Compliant Implementation that practices that Essential Patent Claim, in light of the value contributed by all Essential Patent
Claims for the same IEEE Standard practiced in that Compliant Implementation.

·       Existing licenses covering use of the Essential Patent Claim, where such licenses were not obtained under the explicit or implicit threat of a Prohibitive Order, and where the circumstances and resulting licenses are otherwise sufficiently comparable to the circumstances of the contemplated license.”

The bylaws have also been amended in relation to licence negotiations (p.4). Again, the accepted amendments are shown by italics with eliminations shown with a strikethrough:

“The Submitter and the Applicant should engage in good faith negotiations (if sought by either party) without unreasonable delay or may litigate or, with the parties’ mutual agreement, arbitrate: over patent validity, enforceability, essentiality, or infringement; Reasonable Rates or other reasonable licensing terms and conditions; compensation for unpaid past royalties or a future royalty rate; any defenses or counterclaims; or any other related issues. The Submitter of an Accepted LOA who has committed to make available a license for one or more Essential Patent Claims agrees that it shall neither seek nor seek to
enforce a Prohibitive Order based on such Essential Patent Claim(s) in a jurisdiction unless the against an implementer who is willing to negotiate in good faith for a license. Seeking further information upon initial notice of infringement or choosing to litigate or arbitrate over any of the foregoing issues, however, does not by itself mean that a party so choosing is unwilling to negotiate in good faith. fails to participate in, or to comply with the outcome of, an adjudication, including an affirming first-level appellate review, if sought by any party within applicable deadlines, in that jurisdiction by one or more courts that have the authority to: determine Reasonable Rates and other reasonable terms and conditions; adjudicate patent validity, enforceability, essentiality, and infringement; award monetary damages; and resolve any defenses and counterclaims. In jurisdictions where the failure to request a Prohibitive Order in a pleading waives the right to seek a Prohibitive Order at a later time, a Submitter may conditionally plead the right to seek a Prohibitive Order to preserve its right to do so later, if and when this policy’s conditions for seeking, or seeking to enforce, a Prohibitive Order are met.”

There are three documents related to these changes: The IEEE Standards Association Board of Governors (IEEE SA BOG) approved proposed updates to the IEEE SA Standards Board Bylaws, approved proposed updates to the IEEE SA Letter of Assurance (LOA) form, and approved proposed updates to the patent policy FAQs. The changes detailed above appear in the Bylaws, but the changes are also reflected in the other two documents.

Take Away

These changes further illustrate IEEE’s desire to review its position on the bigger questions within the SEPs landscape, particularly ongoing debates relating to holdup vs holdout. For valuation professionals these updates are of importance as any FRAND royalty rate calculation needs to consider the IPR policy of the Standard Setting Organization as they govern the standards with which the patents are associated with. In particular the choice of the royalty base is an important decision to make in any FRAND royalty rate calculation. By updating its IPR policy the IEEE appears to offer further choices for the valuation of standard essential patents. How this will affect the practice of FRAND royalty rate calculation and IP valuation remains to be seen.

 

FTC "Dark Patterns" Privacy Report Released

The FTC has released a report concerning the perhaps poorly named “Dark Patterns.”  Dark patterns are generally deceptive, confusing or misleading systems, tactics and procedures used by website or software developers or operators which may harm consumer privacy interests.  The Press Release for the Report states:

The Federal Trade Commission released a report today showing how companies are increasingly using sophisticated design practices known as “dark patterns” that can trick or manipulate consumers into buying products or services or giving up their privacy. The dark pattern tactics detailed in the report include disguising ads to look like independent content, making it difficult for consumers to cancel subscriptions or charges, burying key terms or junk fees, and tricking consumers into sharing their data. The report highlighted the FTC’s efforts to combat the use of dark patterns in the marketplace and reiterated the agency’s commitment to taking action against tactics designed to trick and trap consumers.

“Our report shows how more and more companies are using digital dark patterns to trick people into buying products and giving away their personal information,” said Samuel Levine, Director of the FTC’s Bureau of Consumer Protection. “This report—and our cases—send a clear message that these traps will not be tolerated.”

For years, unscrupulous direct-mail and brick-and-mortar retailers have used design tricks and psychological tactics such as pre-checked boxes, hard-to-find-and read disclosures, and confusing cancellation policies, to get consumers to give up their money or data. As more commerce has moved online, dark patterns have grown in scale and sophistication, allowing companies to develop complex analytical techniques, collect more personal data, and experiment with dark patterns to exploit the most effective ones. The staff report, which stems from a workshop the FTC held in April 2021, examined how dark patterns can obscure, subvert, or impair consumer choice and decision-making and may violate the law.

The report, Bringing Dark Patterns to Light, found dark patterns used in a variety of industries and contexts, including e-commerce, cookie consent banners, children’s apps, and subscription sales. The report focuses on four common dark pattern tactics:

• Misleading Consumers and Disguising Ads: These tactics include advertisements designed to look like independent, editorial content; comparison shopping sites that claim to be neutral but really rank companies based on compensation; and countdown timers designed to make consumers believe they only have a limited time to purchase a product or service when the offer is not actually time-limited. For example, the FTC took action against the operators of a work-from-home scheme for allegedly sending unsolicited emails to consumers that included “from” lines that falsely claimed they were coming from news organizations like CNN or Fox News. The body of these emails included links that sent consumers to additional fake online news stories, and then eventually routed consumers to sales websites that pitched the company’s work-from-home schemes.

• Making it difficult to cancel subscriptions or charges: Another common dark pattern involves tricking someone into paying for goods or services without consent. For example, deceptive subscription sellers may saddle consumers with recurring payments for products and services they never intended to purchase or that they do not wish to continue purchasing. For example, in its case against ABCmouse, the FTC alleged the online learning site made it extremely difficult to cancel free trials and subscription plans despite promising “Easy Cancellation.” Consumers who wanted to cancel their subscriptions were often forced to navigate a difficult-to-find, lengthy, and confusing cancellation path on the company’s website and click through several pages of promotions and links that, when clicked, directed consumers away from the cancellation path. 
• Burying key terms and junk fees: Some dark patterns operate by hiding or obscuring material information from consumers, such as burying key limitations of the product or service in dense terms of service documents that consumers don’t see before purchase. This tactic also includes burying junk fees. Companies advertise only part of a product’s total price to lure consumers in, and do not mention other mandatory charges until late in the buying process. In its case against LendingClub, the FTC alleged that the online lender used prominent visuals to falsely promise loan applicants that they would receive a specific loan amount and pay “no hidden fees” but hid mention of fees behind tooltip buttons and in between more prominent text.

• Tricking consumers into sharing data: These dark patterns are often presented as giving consumers choices about privacy settings or sharing data but are designed to intentionally steer consumers toward the option that gives away the most personal information. The FTC alleged that smart-TV maker Vizio enabled default settings allowing the company to collect and share consumers’ viewing activity with third parties, only providing a brief notice to some consumers that could easily be missed.

As detailed in the report, the FTC has worked to keep pace with the evolving types of dark patterns used in the marketplace. The Commission has sued companies for requiring users to navigate a maze of screens in order to cancel recurring subscriptions, sneaking unwanted products into consumers’ online shopping carts without their knowledge, and experimenting with deceptive marketing designs. 

The Commission voted 5-0 at an open meeting to authorize the release of the staff report.

Top U.S. Utility Patent Grantee Universities List

The National Academy of Inventors and the Intellectual Property Owners Association has released their top 100 U.S. utility patent grantee universities list.  Topping the list is the University of California.  The top ten include:

1 University of California, The Regents of.....589 [Important to remember is that the University of California has essentially 10 campuses, 6 academic health centers and 3 National Laboratories. I think that makes MIT's numbers very impressive.]

2 Massachusetts Institute of Technology....335

3 The University of Texas .....203

4 King Abdulaziz University....187

5 Stanford University....181

6 Purdue Research Foundation / Purdue University ....169

7 Harvard college, President and Fellows...167

8 Arizona State University....153

9 California Institute of Technology ....146

9 Tsinghua university....146

Around 62 of the top 100 are U.S. based institutions.  Around 14 are based in China.  Around two in Europe.  Around 9 in South Korea and Japan.  Around 8 in the Middle East region. 

White House OSTP Memo and Report on Open Access Direction for Federal Funded Research

On August 25, 2022, the U.S. White House Office of Science and Technology Policy issued a memorandum and a report concerning open access publishing and the results and data of federally funded research.  The memorandum, in part, states:

Building on these important advances, the policy guidance laid out in the 2013 Memorandum can be improved to achieve delivery of federally funded research results and data to all of America. Years of public feedback have indicated that the primary limitation of the 2013 Memorandum is the optional 12-month embargo from public access of any publication resulting from federally funded research. This provision has limited immediate access of federally funded research results to only those able to pay for it or who have privileged access through libraries or other institutions. Financial means and privileged access must never be the pre-requisites to realizing the benefits of federally funded research that the American public deserves.

A federal public access policy consistent with our values of equal opportunity must allow for broad and expeditious sharing of federally funded research—and must allow all Americans to benefit from the returns on our research and development investments without delay. Upholding these core U.S. principles in our public access policy also strengthens our ability to be a critical leader and partner on issues of open science around the world. The U.S. is committed to the ideas that openness in science is fundamental, security is essential, and freedom and integrity are crucial. Improving public access policies across the U.S. government to promote the rapid sharing of federally funded research data with appropriate protections and accountability measures will allow for greater validity of research results and more equitable access to data resources aligned with these ideals. To promote equity and advance the work of restoring the public’s trust in Government science, and to advance American scientific leadership, now is the time to amend federal policy to deliver immediate public access to federally funded research.

The memorandum directs that:

In accordance with the provisions listed in Section 3, Federal agencies should develop new, or update existing, public access plans as soon as possible, and submit them to OSTP and the Office of Management and Budget (OMB) no later than: (1) 180 days after the date of this memorandum for federal agencies with more than $100 million in annual research and development (R&D) expenditures; and (2) 360 days after the date of this memorandum for federal agencies with $100 million or less in annual R&D expenditures. This extended deadline is designed to accommodate a longer lead time for federal agencies who were not subject to the 2013 Memorandum.

There's more in the memo and report -- the memo and report are available, here.  Hat tip to Swaraj Barooah of the Spicy IP Blog. 

CNIPA Touts Patent Commercialization and Finance Activity at Universities

On August 3, 2022, the China National Intellectual Property Administration (CNIPA) published a press release (in English also) titled, “Patent Commercialization Activities at Universities Sky Rocket in Past Decade.”  The press release points to a significant increase in grant rate of patents to Chinese universities as well as licensing activity.  Notably, the press release states that the monetary value went up from 820 million Yuan to over 8.8 billion Yuan.  The press release discusses a patent licensing program amongst Chinese universities and with SMEs that appears to mandate publishing licensing agreements.  Professor Mark Allen Cohen, a distinguished fellow, lecturer and director of the Asia IP Project at UC Berkeley Law, has an excellent post on interpreting China's patent data, here.  The press release states:

Under the circular, to promote stable implementation and efficient operation, CNIPA has convened special sessions to deploy implementation of patent open licensing and has allocated two detailed schemes to its own departments and local IP authorities respectively, with an aim to mobilize over 100 colleges to participate a pilot program and eventually involve over 1,000 patents as of the end of 2022, and endeavour to improve the efficiency of patent commercialization. Currently, 13 provinces have issued accompanying plans for the pilot program, six of which have looped in 77 universities to cull and publish open licenses for 3,375 patents that were pushed to 19,000 micro, small and medium-sized enterprises (SMEs) with matching need, leading to conclusion of 587 licensing agreements.

"Next, CNIPA will publish the recorded information of the concluded patent license agreements and formulate a suggested national standard on patent evaluation, giving instructions on pricing of open licensing and stimulate both the suppliers-universities and research institutes and the buyers -SMEs for a better chance of materializing the innovation findings," added the same principal.

The press release also discusses its commercialization program:

This commercialization program was launched jointly by the Ministry of Finance and CNIPA in March 2021, which inspires commercialization of college-developed patents, educates universities to polish their mechanisms in allocation of IP-generated profits; with support from University IP and technology transfer centers, Industrial IP operation centers intensively announces supplying information of patent related technologies; makes patent/technology connection between universities and state-owned enterprises and SMEs to improves their practical ability in patent commercialization. Furthermore, the Ministry of Finance and CNIPA would aid in building a green channel in the provinces that have implemented this program, about processing related patent transfer, licensing and pledging for SMEs. Patent transfer/licensing involving universities/research institutes happened 27,000 times in 2021, up 33% year-on-year, twice faster than the growth rate of all patent transfer/licensing activities while 24,000 times or 89% out of the 27,000 times were transactions made with SMEs.

California Enforcing the California Consumer Privacy Act: First Settlement

California Attorney General makes announcement of first settlement from enforcement of the California Consumer Privacy Act.  The Press Release states:

California Attorney General Rob Bonta today announced a settlement with Sephora, Inc. (Sephora), resolving allegations that the company violated the California Consumer Privacy Act (CCPA), California’s first-in-the-nation landmark privacy law. After conducting an enforcement sweep of online retailers, the Attorney General alleged that Sephora failed to disclose to consumers that it was selling their personal information, that it failed to process user requests to opt out of sale via user-enabled global privacy controls in violation of the CCPA, and that it did not cure these violations within the 30-day period currently allowed by the CCPA. Today's settlement is part of ongoing efforts by the Attorney General to enforce California's comprehensive consumer privacy law that allows consumers to tell businesses to stop selling their personal information to third parties, including those signaled by the Global Privacy Control (GPC). 

“Technologies like the Global Privacy Control are a game changer for consumers looking to exercise their data privacy rights. But these rights are meaningless if businesses hide how they are using their customer's data and ignore requests to opt-out of its sale,” said Attorney General Bonta. “I hope today’s settlement sends a strong message to businesses that are still failing to comply with California’s consumer privacy law. My office is watching, and we will hold you accountable. It’s been more than two years since the CCPA went into effect, and businesses’ right to avoid liability by curing their CCPA violations after they are caught is expiring. There are no more excuses. Follow the law, do right by consumers, and process opt-out requests made via user-enabled global privacy controls.”

The settlement with Sephora underscores the critical rights that consumers have under CCPA to fight commercial surveillance. Consumers are constantly tracked when they go online. Many online retailers allow third-party companies to install tracking software on their website and in their app so that third parties can monitor consumers as they shop. These third parties track all types of data – in Sephora’s case, the third parties could create profiles about consumers by tracking whether a consumer is using a MacBook or a Dell, the brand of eyeliner or the prenatal vitamins that a consumer puts in their “shopping cart,” and even a consumer's precise location. Retailers like Sephora benefit in kind from these arrangements, which allow them to more effectively target potential customers.

Sephora's arrangement with these companies constituted a sale of consumer information under the CCPA, and it triggered certain basic obligations, such as telling consumers that they are selling their information and allowing consumers to opt-out of the sale of their information. Sephora did neither.  

Today's settlement requires Sephora to pay $1.2 million in penalties and comply with important injunctive terms. Specifically, Sephora must:

• Clarify its online disclosures and privacy policy to include an affirmative representation that it sells data;
• Provide mechanisms for consumers to opt out of the sale of personal information, including via the Global Privacy Control; 
• Conform its service provider agreements to the CCPA’s requirements; and 
• Provide reports to the Attorney General relating to its sale of personal information, the status of its service provider relationships, and its efforts to honor Global Privacy Control. 

As part of his ongoing efforts to enforce CCPA, Attorney General Bonta also sent notices today to a number of businesses alleging non-compliance relating to their failure to process consumer opt-out requests made via user-enabled global privacy controls, like the GPC. A global privacy control allows consumers to opt out of all online sales in one fell swoop by broadcasting a "do not sell" signal across every website they visit, without having to click on an opt-out link each time. Under the CCPA, businesses must treat opt-out requests made by user-enabled global privacy controls the same as requests made by users who have clicked the “Do Not Sell My Personal Information” link. Businesses that received letters today have 30 days to cure the alleged violations or face enforcement action from the Attorney General. The CCPA’s notice and cure provision, which requires businesses to receive notice and opportunity to cure before they can be held accountable by the Attorney General for CCPA violations, will expire on January 1, 2023.

Attorney General Bonta is committed to the robust enforcement of California's groundbreaking data privacy law. Since July 1, 2020, the Attorney General has issued notices to a wide array of businesses alleging noncompliance with the CCPA. Notices to cure have been issued to major corporations in the tech, healthcare, retail, fitness, data brokerage, and telecom industries, among others. New examples of notices to cure are available at oag.ca.gov/ccpa and include:

• An enforcement sweep of businesses operating loyalty programs that offered financial incentives such as discounts, free items, or other rewards, in exchange for personal information without providing consumers with a notice of financial incentive;
• An online advertising business that's privacy disclosures were not understandable to the average consumer and did not include the required information; and
• A data broker whose "Do Not Sell My Personal Information" link worked only on certain browsers and directed consumers to a confusing webpage that required several additional steps to submit CCPA requests.

For more information about the CCPA, visit oag.ca.gov/ccpa. To report a violation of the CCPA to the Attorney General, consumers can submit a complaint online at oag.ca.gov/report. Consumers can also directly notify businesses of potential violations using the Consumer Privacy Tool.

A copy of the complaint is available here. A copy of the settlement is available here.

Free Webinar: "Structuring Funds and Portfolio Companies to Withstand U.S.-China Decoupling Contingencies"

The well-regarded California law firm (international), Morrison & Foerster, has an interesting webinar coming up titled, “Structuring Funds and Portfolio Companies to Withstand U.S.-China Decoupling Contingencies.”  The details are below. 

Morrison & Foerster (Wednesday, September 14: 10:00 am Hong Kong; 7-8 pm PST (minus one day)) (registration here: Webinar Registration - Zoom).

In this timely webinar, our leading corporate, intellectual property, national security, and tax partners will share their insights on how PE/VC investors and their portfolio companies can build resilient structures to withstand this current period of geopolitical instability. Our focus will be on group company structures, cross-border intellectual property development and data flows. Important considerations for planning and executing new rounds of equity financings and exit options within and outside of China will also be discussed. Speakers Thomas Chou – Partner, Co-head of Asia Private Equity Group Matthew Lau – Partner, Tax Ruomu Li – Partner, PE/M&A Chuan Sun – Partner, Technology Transactions B. Chen Zhu – Partner, National Security