Guest Post: Professor Denoncourt's Event Report -- Intellectual property: meeting global business and technology challenges

IP Finance is very happy to offer our readers this guest post by Nottingham Law School professor Janice Denoncourt summarizing the high points of a Montreal Council on Foreign Relations event featuring Francis Gurry, outgoing Director General of WIPO.  

On 15 September 2020 the Montreal Council on Foreign Relations (CORIM) organised a fascinating 30 minute webinar with Francis Gurry, Director General, WIPO.  The event is part of CORIM’s Business Series Online accessible for a small fee of CAD $30.  “Who will finance Innovation?”  is the strapline of WIPO’s Global Innovation Index 2020 https://www.wipo.int/global_innovation_index/en/2020/.  Canada currently ranks 17th overall behind Japan and Ireland, retaining its position from last year, but well out of the top 10 where it aspires to be.

From Geneva, Gurry discussed emerging global business and technology challenges with moderator, Lally Rementilla.  Lally is well-known in the Canadian intellectual property (IP) backed finance world.  In July 2020 she was appointed Managing Partner, IP-Backed-Finance for BDC Capital (www.bdc.ca).      

By way of background, the Business Development Bank for Canada (BDC, French: Banque de Développement du Canada) is Canada’s bank for entrepreneurs.  It is wholly owned by the Government of Canada.    Jérôme Nycz, executive vice president at BDC Capital stated, “Our goal…is to make Canada a leader in the IP space.”  BDC Capital, the bank’s investment arm, has created a new CAD $160 million intellectual property (IP) development financing fund to support IP-rich companies who seek to commercialize their IP, increase their competitiveness and expand globally.  This BDC’s IP finance initiative is a positive reflection on Canada’s comprehensive 2018 National IP Strategy https://ic.gc.ca/eic/site/108.nsf/eng/home. 

The pair discussed several broad topics and set out below are the highlights.  

Rementilla asked for Gurry’s perspective on the role of IP rights in the new world order.  Gurry noted that a number of tendencies have been accelerated by Covid-19 virus and pandemic, not to mention worrisome trade wars and cyberwarfare, resulting in further complexity in the IP world.  Nevertheless, despite the gloom and doom ‘IP is a vector for collaboration’ said Gurry.  Indeed, 2.1% of the world’s global gross domestic product (GDP) is tied to research and development.  Gurry hopes that despite the decline in foreign direct investment, international collaboration in innovation will continue.  He cited the example of innovation hotspot Silicon Valley, where the majority of inventors are foreign.  

A key geopolitical change of course is the rise of Asia and in particular the People’s Republic of China (PRC) as a patent powerhouse.  Gurry noted that the PRC is buoyed by its national focus on IP leading to it overtaking the United States in filing patents overseas.  Indeed, I would add that the PRC announced earlier this year that it is preparing the outline for its second National IP strategy for the 2021-2013 period.  According to Gurry, a successful national IP strategy involves a focus ‘from the top’ on science, technology and innovation and further that ‘success comes when there is an awareness at the very top of the importance of protecting a nation’s competition advantage’. 

Turning to finance for IP-rich tech start-ups, Gurry surmised that ‘With a start-up you are basically backing an intangible asset’.  Further, as author of Intellectual Property, Finance and Corporate Governance (2018) I was delighted to hear that Gurry supports re-thinking the gaps in traditional accounting to better support valuation intangible IP rights.  In December 2019, I had the pleasure of attending a meeting with the BDC’s C-suite in Montreal alongside Lally and other IP experts.  I shared my views and IP in the boardroom research to raise awareness of the potential of IP-backed financing, which has now come to fruition.  

Gurry acknowledges that there are changing perceptions about IP rights.  However, he cautioned that the alternative, a scenario where no one uses IP rights, could lead to a lack of transparency.  The publication of patent information is ‘the most systematic record of humanity’s technology’, he said.   

In response to Professor Isolde Gendreau’s (Université de Montreal, Faculté de Droit) question regarding the potential for supra-national enforcement of IP rights, Gurry recognized that counterfeiting and piracy are now global issues.  These behaviors affect both developed and developing countries alike and require a global response.  Thus, WIPO’s focus is on ‘building respect for IP rights, rather than putting teenagers in jail’.  WIPO will look to ‘build capacity to take action internationally’. 

The CORIM webinar, ‘Intellectual property: meeting global business and technology challenges’ may have flown under the radar for many outside Canada.  However, it is a timely reminder of Gurry’s wisdom and contribution to the global IP landscape as WIPO’s Director-General since 2008.  His term will end this month. Join me in wishing him every success in the future. 

Dr Janice Denoncourt

Associate Professor

Nottingham Law School

Nottingham Trent University

What the Index for Collaborative Innovation Partners Teaches (and What It Does Not)

The Patent Analytics Group on LinkedIn has brought to my attention a recent blog post by Alex Knapp, which appeared on the forbes.com site. Entitled “Canada, Israel and Switzerland are America’s Top Innovation Partners”, here, the article describes the findings set out in the “U.S.-Israel Innovation Index”, which is described as measuring “bilateral research and development between the U.S. and other countries, here. The study was carried out by the U.S. Israel Science & Technology Foundation. In the words of its Executive Director, Ann Liebschutz, “We picked 16 countries that were geographically diverse, had links to US and had strong innovative tech companies.”

The study examined various parameters of cooperation in R&D, most notably government-to-government connections, pool of human capital, spending on R&D and involvement of private industry. Based on these criteria for measuring which countries are the “largest” innovation partners with the U.S., Switzerland came out number one, followed by Canada and Israel. The reasons why each of these three countries is so highly ranked appear to be unique to each country. Thus what seems to drive US-Swiss innovation collaboration is the role of the pharmaceutical industry in Switzerland. Given the cost and complexity of bringing pharmaceutical products to market, collaboration seems to have become increasingly common in the mutual interest of the pharmaceutical interest in each country. The article does not explicitly address Canada, but one can surmise that the same general dynamics that integrated the US auto industry with the auto manufacturing industry in southern Ontario provided a ready platform for various other forms of collaboration in innovation as well. To all intents and purposes, this integrated region has been one large industrial ecosystem, despite the presence of an international boundary.

As for Israel, emphasis in the piece was placed on the strength of the country’s innovative human capital, fuelled in part by the wide net of military conscription for the country’s post-high school youth. While the post, quoting Ms Liebschutz, overstates this (“The technical training that every Israeli receives in the army produces a country of capable engineers”), there is truth in the observation that clusters of young talent in certain military units, especially in the Intelligence Corps, have created an environment for world class innovation after release from military service. However, set against the country’s strength in human capital are its relatively limited domestic resources for funding substantial R&D activity. In fact, it can be argued that Israel high tech only took off in the 1990s, in part due to the public-private program known as Yozma, here, which brought overseas capital and managerial know-how to the local Israel R&D market.

The centrality of the US role of providing the funding for its innovation partnerships was recognized by Ms Liebschutz herself. As she notes:

“In a time when budgets are lean, you hear a lot about cuts and priorities in terms of where the government should put its resources. International cooperation, when done correctly, is a way to leverage those resources. Israel is good at creating international cooperation for funding. We felt this bilateral innovation index serves not just [the] US-Israel relationship, but the scientific community as a whole where it shows a good ROI on international cooperation.”

One might however ask just how far the US-Israel relationship can be generalised in pointing to valuable forms of cross-border innovation partnerships. Perhaps most notably, unlike Switzerland or Canada, the Israeli hi tech model prefers an exit (as speedy as possible) by the founders and major investors of the local innovation company, usually in favour of an overseas purchaser or investor. The upshot is that the capital brought from the US side into the partnership largely redounds to the benefit of a small number of people connected with the Israel partner and far less (if at all) to the Israel overall labour market, which seems largely unaffected in the aggregate.

Perhaps the ultimate upshot of this study is that there is no “one size fits all” approach for cross-border innovation partnerships, in general, and innovation partnerships with the US, in particular. This means that there will necessarily need to be trial and error in the process as the US seeks to find successful forms of innovation partnership with various countries. Managing this process in a fiscally responsible manner, in the face of uncertain results, poses the greatest challenge for those seeking to obtain benefit from such efforts in innovation partnerships.

Canada gets US-flavoured update for IP licence/bankruptcy

I've just received an email circular from Paul Jones (Jones & Co, Toronto) which contains a succinct summary of the amendments of Canada’s (i) Bankruptcy and Insolvency Act and (ii) Company Creditors Arrangements Act. These amendments come into effect this Friday, 18 September. Writes Paul:

"One provision will have a significant and positive effect for the licensing of intellectual property.

The official version of the package is here. The amendments are based on the amendments made to the US Bankruptcy Code after the Lubrizol case in 1985. When a proposal for restructuring is made, Trustees in bankruptcy have the authority to disclaim (or terminate) ongoing contracts of the bankrupt entity. Lubrizol lost the right to work the technology that it had licensed from Richmond Metal Finishers and through no fault on its part. Afterwards Section 365 (n) was inserted to allow the licensee to affirm an intellectual property license that had been disclaimed by a bankruptcy trustee, and thus continue to use the technology and paying royalties. “Intellectual property” was defined to include “copyrights, patents, trade secrets and mask works.”

Canada has now decided to copy this provision, but with some differences. Here is the new provision Section 65.11 with respect to IP:

(7) If the debtor has granted a right to use intellectual property to a party to an agreement, the disclaimer or resiliation does not affect the party’s right to use the intellectual property — including the party’s right to enforce an exclusive use — during the term of the agreement, including any period for which the party extends the agreement as of right, as long as the party continues to perform its obligations under the agreement in relation to the use of the intellectual property.

The differences are that the term “intellectual property” is not defined in the amendments or the existing legislation. Thus it can include trade-marks, something not included under the US Bankruptcy Code. Trade-marks differ from copyrights or patents in that they are indicators of source and difficult to disconnect from the original owner, in this case the bankrupt company.

Secondly the basis for the protection of trade-secrets in the US and Canada differ. In the US 41 states have laws defining and protecting trade secrets. In Canada the are no such statutes and the protection is derived from the common law, usually based on contractual obligations. Generally in Canadian law it is not as clear that trade secrets can be considered as “property.”

Parties to license agreements for the use of intellectual property in Canada should first of all be aware of these changes when dealing potentially insolvent parties. The strategic options will be different. When drafting such license agreements the obligations of the licensee should be considered and defined more carefully as these may determine the ability of the licensee to continue to use the intellectual property in the event of the licensor becoming insolvent.

And if the license agreement includes trade secrets or know-how the parties may wish to emphasis either these as contractual obligations or property depending on their interests".

Royalties owed to bankrupt musician not "wages"

"Royalties from music publisher belonged to lender of bankrupt", published in the World Media Law Report about six weeks ago, is a note on the Ontario, Canada, decision in Re Friedman (2008), 49 C.B.R. (5th) 131 (Ont. S.C.J. in bankruptcy).

In brief, Friedman assigned his rights to royalties payable by Canadian copyright collecting society SOCAN to his music publisher, as security for loans advanced to him from the publisher. He subsequently became bankrupt, owing the publisher some $3.2 million. When the publisher sought payment to it of the royalties payable to Friedman from SOCAN, Freidman applied under the Bankruptcy and Insolvency Act, s.68(1) for a ruling that those royalties were effectively post-bankruptcy wages which, as such, could not be the subject of an attachment.

Holding for the publisher, the Court considered that the royalties in question had been earned from activities which Friedman had completed before the starting date of his bankruptcy. Accordingly s.68(1) did not apply.

Source: note by Miller Thomson LLP

Franchising into Canada

"Considerations for Franchising in Canada" is the title of an article on International Law Office by Bruno Floriani and Marvin Liebman (Lapointe Rosenstein). This article, an earlier version of which was published on Getting the Deal Through, explains the different vehicles available to foreign franchisors who wish to carry on business in Canada, in terms of their fiscal and corporate consequences. The authors say that the preferred choice of vehicle for the expansion of a foreign franchise system into Canada is the incorporation of a Canadian subsidiary, but recognise that foreign franchisors may prefer to enter the Canadian market by franchising directly from their country without setting up a permanent establishment in Canada, thus avoiding being considered by Canadian tax authorities as carrying on business in Canada. They write:

" ... a franchisor may choose to contract with its Canadian franchisees directly without having a permanent establishment in Canada. As the franchisor will be only minimally involved in the operations conducted by an arm’s-length entity, income earned in Canada by the franchisor through royalty payments and rent will be qualified as passive income and subject, in Canada, to a withholding tax only.

Second, a franchisor may opt to carry on business in Canada using a Canadian branch or division. If the franchisor actively participates in the operation of the Canadian franchise, any income derived therefrom will qualify as business income which is taxable in Canada on a net income basis. Furthermore, the income of a non-resident franchisor carrying on business through a Canadian branch will typically be subject to a branch tax which is payable at the time the earnings of the subsidiary are accrued (and not at the time the income is paid to the foreign franchisor). In light of the foregoing, few franchisors choose to establish a branch office or division for the purpose of expanding into the Canadian market.

Third, a franchisor may choose to carry on business in Canada through a federally or provincially incorporated subsidiary. This is the most frequently used vehicle by non-resident franchisors wishing to export a franchise system into Canada.The incorporation of a subsidiary presents certain advantages, including the avoidance of Canadian withholding tax on passive income. Nonetheless, the subsidiary’s income will be taxable in Canada on a net income basis and dividends paid to its parent will be subject to a withholding tax. The franchisor may also charge a reasonable fee for providing assistance to its Canadian subsidiary in the operation of its business activities, with the expectation that a reasonable portion of such fee may then be deducted from the subsidiary’s income for tax purposes".

They then warn:

"Significant business and tax consequences arise from each of the above-mentioned structures and a careful review of all relevant legislation pertaining to each is highly advised. In addition, fiscal treaties ratified by Canada may substantially derogate from the tax considerations set out above and should therefore be consulted where applicable".

What constitutes a "franchise" may be defined differently according to the law of individual provinces and, while pan-Canadian trade mark protection is available, remedies for the protection of assets such as licensed know-how may vary across the provinces too.

Obviously, while tax-efficiency and the protection of IP will be a matter of concern to any ambitious franchisor seeking to extend an existing franchise formula into uncharted territory, they are not normally matters that make or break a decision as to whether to franchise. For this reason they are sometimes starved of adequate attention until relatively late in the creation and implementation of the business plan. This in turn may force belated business plans changes, with all the uncertainty and inconvenience that such belated changes inflict. Prudent planning will factor both these issues in at the earliest convenience, since they are the twin pillars upon which every solid franchising infrastructure rests.

Rationale for copyright damages

Writing yesterday on Canada's approach to the award of damages in copyright infringement proceedings, Michael Geist states:

"Canada is one of the only countries in the world to have a statutory damages provision within its copyright legislation. It creates the prospect of massive liability - up to $20,000 per infringement - without any evidence of actual loss. This system may have been designed for commercial-scale infringement, but its primary use today is found in the U.S. where statutory damages led to the massive liability for one peer-to-peer file sharing defendant and leaves many defendants with little option but settlement. Before Canada faces similar developments, we should amend the statutory damages provision by clarifying that it only applies in cases of commercial gain".