Ocean pours oil on troubled waters

IP auction company Ocean Tomo has sent a circular to interested parties, to calm their nerves over the US Federal Court's recent en banc decision in re Bilski (noted here on Patently-O). According to Ocean Tomo this decision

"... is unlikely to substantially change the scope of subject matter eligible for so-called business method patents or to alter the value of business method portfolios. The Court, relying on ... Supreme Court precedent, articulated a “machine or transformation test” for patentability. Under this test “an applicant may show that a process claim satisfies §101 either by showing that his claim is tied to a particular machine, or by showing that his claim transforms an article.” However, because the claim at issue in Bilski was admitted to be “not limited to operation on a computer,” or to carrying out the process by “any specific machine or apparatus,” the Court expressly declined to consider the contours of the machine implementation alternative. “[I]ssues specific to the machine implementation part of the test are not before us today. We leave to future cases the elaboration of the precise contours of machine implementation, as well as the answers to particular questions, such as whether or when recitation of a computer suffices to tie a process claim to a particular machine.” (Emphasis added).

The ... “transformation” test is broad. For example, ... a claim direct to the “transformation” of the depiction of a physical object on a visual display meets that test. ... the Court overruled the “useful, concrete and tangible result” test established in State Street, holding that it was “insufficient to determine whether a claim is patentable subject matter under §101.” But while this test is no longer the law, the new test will likely not alter the ultimate answer to the question as applied to particular business methods.

“Business method patents” commonly claim implementation by computer. Accordingly, the Court’s refusal to consider “whether or when recitation of a computer” is sufficient to render a process claim patentable means that the practical impact of Bilski should be limited. Absent development of further case law which squarely addresses this point, Bilski does not appear to materially change the business method patent landscape, or alter valuations of these patents".

There may be an element of wishful thinking or self-interest here but, to me at least, OT's position seems about right. Any comments?

UNCITRAL draft: expert group meeting ahead

I have learned from Spiros V. Bazinas, Senior Legal Officer in the International Trade Law Division of the UNCITRAL secretariat, that an expert group meeting is to be held on 11 and 12 December 2008 to discuss a revised draft of the Annex on security interests in intellectual property rights (for earlier posts on this controversial and technically complex topic see here, here, here, here and here). Discussions at the expert group meeting will be based on a draft working paper which will be sent to you at least a week before the meeting. Spiros has furnished the first draft of the Annex and the report of the session during which this draft was discussed. There are three documents in all:

* Annex to the UNCITRAL Legislative Guide on Secured Transactions dealing with security rights in intellectual property (Part 1) (32 pages, covering the Introduction; Scope of application and party autonomy; Creation of a security right in intellectual property)

* Annex to the UNCITRAL Legislative Guide on Secured Transactions dealing with security rights in intellectual property (Part 2) (33 pages, covering Effectiveness of a security right in intellectual property against third parties; The registry system; Rights and obligations of the parties to a security agreement relating to intellectual property; Rights and obligations of third-party obligors in intellectual property financing transactions; Enforcement of a security right in intellectual property; Law applicable to a security right in intellectual property; The impact of insolvency on a security right in intellectual property);

* Report of Working Group VI (Security Interests) on the work of its fourteenth session (Vienna, 20-24 October 2008).

Any reader who wishes to attend the December session should email Spiros or phone him in Vienna on +43-1-26060 4072, so that his request can be considered. More importantly, if any reader would like to study the documents listed above in order to make any constructive and informed comments upon them, they can be obtained directly from Spiros or by emailing me here.

The Echo Chamber: is it a sound idea?

Via IP Marketing E-News comes a piece in TechCrunch by Brian Solis (FutureWorks PR), "During Tough Times, The Echo Chamber Can Be Your Best Friend". IP Marketing E-News's synopsis runs:

"Exactly what is the echo chamber? It’s the first 16% on the left-hand side of the bell curve of ‘influence and adoption’ in technology marketing, ... the first 2.5% being 'innovators,’ and the next 13.5% being ‘early adopters.’ Traditionally, the term echo chamber describes a group of media outlets that tend to parrot each other's reports. In the online world, where much early marketing is done, the expression has expanded to refer to blogs that write about the views of other blogs, echoing the same information back and forth. It is this process -- resulting in highly viral marketing ....

“If you dissect the art and science of technology marketing using a car as a simple metaphor, your product serves as the chassis, your cash as the fuel, Social Media, Interactive/Web, Sales, SEO, and PR as the accelerator, marketing strategy and execution as the gears, RPMs as a market indicator for listening and responding, the speedometer to convey inertia, and you … sitting in the driver’s seat, steering and controlling the entire operation,” says Solis. “Marketing to the echo chamber ... is how you get that car rolling, starting everything in first gear.” Innovators and early adopters ... “are global citizens and do not solely reside in Silicon Valley.

Remember: reporters, bloggers and online tastemakers (aka trendsetters) who spotlight innovation can send tens of thousands of [prospects] to you almost instantly. When done right, the echo chamber can generate real world interest and support”.

This piece seems to me to highlight a major difference in attitude between US and European innovators. The former are both more adept at using the media and more inclined to respond to its use by others, while the latter are plainly less effective at setting up waves of echoed information and somewhere between cautious and downright sceptical in their responses.

Right: in Europe, Echo is associated by many with the tragic tale of Narcissus in Greek mythology

Perhaps this is one explanation of US dominance in so many areas of technology marketing and exploitation.

Not just a simple subtraction

Via Duncan Bucknell comes a link to Pat Sullivan's Blog, which summarises Pat's post as follows:

"... Pat Sullivan posted a great comment on the (ongoing) myth clung to by many in the Intellectual Asset and Intellectual Property fields - that you can calculate the value of a publicly traded firm's intangible assets by simply subtracting the value of the tangible assets from the current market capitalisation.

This is the line of thinking that generated the often quoted figure that 70% or more of a companies assets are intangibles".

Comments Duncan:

"I've always qualified that by saying here 'intangibles' must include a fudge factor for market perception - which overules everything in the publicly traded stocks. As Pat points out, the current economic crisis and the large market cap losses on stock markets underscore the proposition that the difference in value is not simply attributable to intangible assets".

The truth is that myth is so widely held that it will take generations to eradicate. Like all enduring myths, it is simple to understand, has a superficially comprehensible logic and provides a basis for decision-making without the need to engage in clear-headed thinking.

Patent stacking -- the truth at last ...

The Journal of Competition Law and Economics (JCLE), published three times a year by Oxford University Press, carries occasional articles that are of great interest to aficionados of intellectual property. This issue features an article by Harvard Professor Einer Elhauge, "Do patent holdup and royalty stacking lead to systematically excessive royalties?". According to the abstract:

"Some recent literature has concluded that patent remedies result in systematically excessive royalties because of holdup and stacking problems. This article shows that this literature is mistaken. The royalty rates predicted by the holdup models are often (plausibly most of the time) below the true optimal rate. Further, those predicted royalty rates are overstated because of incorrect assumptions about constant demand, one-shot bargaining, and informational symmetry. Although this literature concludes that overcompensation problems are exacerbated by doctrines measuring damages using past negotiated royalties, in fact such doctrines exacerbate undercompensation problems. Undercompensation problems are further increased to the extent that juries cannot measure damages with perfect accuracy, a problem that persists even if damages are just as likely to be overestimated as underestimated. Nor do the royalty rates predicted by the holdup model apply if there is competition in the downstream product market or upstream market for inventions. Royalty stacking does not lead to royalties that exceed the optimal rate, contrary to this literature, but in fact tends to produce royalties that are at or below the optimal rate".

The article is not an easy read for lawyers on account of the algebra, but the conclusions are clear enough -- and in many respects extremely encouraging.

Goodwill impairment -- a review of current reporting practice

The Financial Reporting Council in the UK has just published a Review of Goodwill Impairment Disclosures. This 13 page document is prefaced by the explanation that

"Economic conditions have deteriorated significantly since the start of the credit crisis in August 2007. Financial markets continue to be stressed and many commodities have been subject to high price volatility. These conditions are having a significant effect on a wide range of businesses with many reporting reduced sales volumes and reduced margins.

These reductions mean that for many businesses the assumptions used to estimate the value of goodwill will need to be revised. The purpose of this review is to highlight areas of reporting of goodwill that will need to be enhanced as companies cope with the current environment.

In corporate reporting terms, the consequence of these changes in economic conditions may be an immediate need to write down the value of goodwill. For others there may be a need for additional disclosures to explain that the value of goodwill has decreased closing the gap on its book value, and that the likelihood of impairment losses in future has increased".

The FRC's review team has examined the December 2007 annual reports of 32 UK entities within the top 350 UK listed companies. Companies were selected if they had reported significant amounts of goodwill in their annual financial statements. The review does not address specific IP rights, but does examine the different methodologies employed in financial reporting of goodwill impairment.

California court gives favourable ruling on tax status of bundled software

A Pillsbury Client Alert for 15 October ("Client Alert—Bundled or Embedded Applicational Software Is Not Subject to Personal Property Taxation", by Richard E. Nielsen) records that California’s Fourth District Court of Appeal has held that application software is not subject to property taxation even if it comes “bundled” with computer hardware. This decision reverses the position taken by the trial court and Orange County Assessment Appeals Board.

This ruling turned on the legal status of the Pyxis MedStation 2000 system, which Cardinal Health 301 leased to hospitals. The system is a series of stand-up medicine storage cabinets (MedStations), each with a built-in computer that serves as a medicine tracking system and is programmed with patient and medication information. The software was provided together with each MedStation as a "bundle" rather than being separately priced.

Reed numbers tumble as third-round bidders play cautious

A report in the Financial Times today states that valuations for media publisher Reed Business Information have fallen substantially and now threaten to derail a sale by Reed Elsevier. Apparently third-round bidders are considering offers below £1bn, far lower than the initial valuation of about £1.25bn. RBI's main assets are its publications, in which the company owns the goodwill in its titles as well as a quantity of material that is protected by copyright and database right. Leading titles include New Scientist, Farmers Weekly, Kellys Industrial Directories, Kompass, Travel Weekly, Totaljobs and Electronics Weekly: most titles exist in both paper and electronic formats and many carry a large volume of job-related and other advertising.

IP finance, market disruption and hedging

IP financing often relies upon steady and predictable cashflows derived from the IP assets. Efficient funding structures have been established which use hedging to enable maximum leverage. These structures rely on matching receipts and payments in what are often passive borrowing entities. The credit crunch is having an effect on the market in a way which may even impact existing loans.

The Loan Market Association has published a statement about the number of queries it is receiving from members expressing concerns about their funding costs. Lenders are concerned that the funding costs which are passed to borrowers do not adequately reflect the actual cost of funding some of their loans. This is because funding costs in loan agreements are now generally set by reference to LIBOR (determined by the British Bankers Association) but the lack of liquidity in the market means that there are variations in the real cost of funding available to lenders.

The Loan Market Association form of documents which are widely used in IP financing structures include a clause intended to ensure that a lender's cost of funds are met by the borrower. This clause, known as the market disruption clause, applies when the lender has a cost of funding which is higher than the LIBOR applying to the loan under the loan agreement. The lender may elect to use this clause to charge interest by reference to its cost of funding rather than LIBOR.

If a lender elects to exercise its rights under the market disruption clause, the interest rate will reflect the lender's cost of funding rather than LIBOR and, in practice, will be increased.
Many borrowers have hedged all or part of their loans and have therefore not been exposed to changes in LIBOR during the loan term. Particularly where catalogues of IP rights are financed as a whole by a loan on completion this is likely to be the case. If the market disruption clause is used by a lender, however, the borrower's hedging will no longer provide matched funding with the loan agreement. Under the loan agreement the borrower has the obligation to pay a variable rate; under the hedging documents the borrower has the right to receive a variable rate. In practice, these amounts match giving the economic effect of a fixed rate loan.

However, most hedging documents set the variable rate receivable by the borrower by reference to LIBOR. If the variable rate payable by the borrower in the loan agreement is calculated by reference to LIBOR the borrower will be effectively hedged. If the variable rate payable by the borrower in the loan agreement is calculated by reference to the lender's cost of funds (because of the operation of the market disruption clause) the borrower will not be effectively hedged.

Borrowers should be ready to understand the implications for them if a market disruption clause is used by a lender. Consider the additional cost of borrowing; the effect on testing of interest cover tests (i.e. comparing interest costs to proceeds of the underlying IP assets) and other lender protections.

Written by Charles Kerrigan, posted by Jeremy Phillips