AMD' s license deal in China: the start of something big?

The potential for a single technology license to change the fate of a public company is not a usual occurrence. For sure, there are companies,

such as Qualcomm, whose business model has a major licensing component. But what about companies whose main business has been selling products? A striking instance where a technology license could make all the difference took place late last week, when it was announced that Advanced Micro Devices (AMD), the perennial also-ran to Intel in the chip world, announced that it had entered into a transaction with Tianjin Haiguang Advanced Technology Investment Company.

As reported by the Wall Street Journal (WSJ), the companies will establish a new venture company (the WSJ article describes AMD's partner as “an investment consortium under the guidance and led by the Chinese Academy of Sciences”), whereby AMD will license its x86 chip technology to develop server systems intended to be sold only in China. AMD is expected to ultimately receive $293 million dollars in licensing fees plus a royalty payment for sales on chips that are developed by the venture. Thus far, the company has received $52 million dollars from this deal and recognized $7 million on its Q1 2016 income statement. Upon making the announcement, AMD’s shares rose a whopping 23% on after-hours trading on the Nasdaq Stock Market.

One way to appreciate the multi-faceted nature of this transaction is to consider it from several different perspectives.

1.AMD-- According to AMD Chief Executive Lisa Su, “Our new licensing agreement is a great example of leveraging our strong IP portfolio to accelerate the adoption of our technologies more broadly.” That said, one presumes that companies are always looking to better monetize their IP portfolio. Here, the deal allows AMD to try and gain some traction in the server chip area at the expense of Intel and also to gain access to the China market.

2. China— For every licensor, there also needs to be a licensee. The deal will potentially enable China to develop what the WSJ describes as “chips with home grown security circuitry to ease fears that foreign spies will penetrate computers in China”. Seen more generally, it is yet another step by China to try and lessen its dependency on non-Chinese technology.

3. Intel—The WSJ notes that Intel and AMD in 2009 entered into a cross-licensing agreement that is reported to provide that neither party may transfer rights to licensed technology to third parties. Intel has yet to respond on this point while AMD, for its part, has stated that because of the structure of the deal, the 2009 agreement is not being breached.

4. Chip manufacturers—Intel, IBM and Qualcomm have all reportedly entered into their own joint venture agreements in China in the area of chip manufacture and/or development.

5. United States government—US law has in place export control restrictions that limit the transfer of technology abroad if the transfer might affect national security. AMD has stated that the transfer contemplated under the agreement meets all US export rules and regulations.

Circling back to the beginning of this blogpost, the most immediate result will be the potential upside for AMD. Will it be the precursor to additional transactions for monetizing its IP or is the deal uniquely tied to the specifics of the Chinese market and national policies? Close attention should be paid to how this ultimately works out for the company.

Can labor laws hollow-out software competencies: the case of Mercedes-Benz

The effect of legal provisions in enhancing or inhibiting innovation is often difficult to show. An interesting case where it may be able to

discern such a relationship was discussed in a piece that appeared recently on reuters.com. There, it was argued that German labor laws and rules may materially affect the economic viability of no less than the Mercedes-Benz car company (part of Daimler AG) to continue to maintain its software development capability in Germany, rather than outsourcing such software development activities abroad. That cars are increasingly aggregations of software to move people efficiently, safely and increasingly, enjoyably, is evident to all. As was noted in The Economist, citing Gabriel Seiberth of Accenture, in a piece last year--

“[a] high-end car, for instance, has the digital horsepower of 20 personal computers and generates 25 gigabytes of data per hour of driving ….”

These kind of data mean that software expertise is essential to the success of a Mercedes-Benz car, and that requires that the company engage leading software personnel to help keep its competitive advantage. The question is not whether the company will increase the number of software-related jobs, but how many of these software personnel will be German-based and, more broadly, whether the company can continue to foster such capabilities and know-how within Germany. The claim being made by the company is that local German labor laws are too restrictive in this regard. In particular, it is argued, in the name of the well-being of employees, German labor rules provide that a daily work shift cannot exceed 10 hours and there must be an 11-hour break before the employee’s next shift. Presumably, this requirement derived from a time when most of the skilled labor at the company was engaged in more of the heavy physical aspects of automobile production.

However, such labor rules, and the requirement that labor representatives must be informed about the extent of the company’s use of third-party contractors, make it “cumbersome” for the company to engage third-party software contractors. The claim by the company is that the processes that derive from this requirement “makes life too bureaucratic”. Not by accident, the company has approximately 3,500 R&D and IT staff located in Bangalore, India and another 200 or so in Silicon Valley. Indeed, Bangalore has become the company’s main digital engineering center, engaged in such activities as digital design and crash test simulation.

From the labor relations point of view, the tension rests between the interest in ensuring worker protection, on the one hand, and the need for more flexible work arrangements to meet the requirements of software R&D, on the other. Even taking into account the possibility that company management may be spinning the narrative to some extent to obtain worker concessions, the issue raised seems genuine. To what extent will continuing adherence to traditional models of industrial employment have a deleterious effect on the ability of a standard-bearer of German industry to maintain its competency in software and related 21st century innovation capabilities. Mercedes-Benz will find a way to obtain the necessary software skills; the question is to what extent this will take place within Germany.

The challenge so posed recalls the discussion in America in the wake of the decline of US manufacture. On the one hand, relying on China as the ultimate assembly factory certainly has resulted in less expensive products. On the other hand, some have claimed that this has led to a hollowing-out of the skills needed for the US to preserve a manufacturing presence, especially at the so-called high end. One wonders whether something like that might be over the horizon for companies such as Mercedes-Benz, where the declining presence of cutting-edge software within its German facilities might negatively affect the company’s design and manufacturing capabilities more generally. After all, software is not just another form of IP to be protected, but it is increasingly the foundation of the know-how that will, quite literally, “drive” the automobile industry.

Almost One Billion Dollar Verdict in U.S. Trade Secret Case

Wow!  That is quite a verdict.  A Wisconsin jury awarded $240 million in compensatory damages and $700 million in punitive damages for seven claims, including misappropriation of trade secrets and related claims.  That is a huge verdict.  The defendant is an Indian company, Tata Consultancies.  The Insurance Journal reports on the verdict, here.  Patently-O discusses the verdict, here.  Will a district in Wisconsin become the new Eastern District of Texas for trade secret claims post-Defend Trade Secrets Act?  For more information about the facts of the case, see here and here.

AIPLA 2016 U.S. Model Patent Jury Instructions Released

The American Intellectual Property Law Association (AIPLA) Patent Litigation Committee has released the AIPLA U.S. Model Patent Jury Instructions (Jury Instructions).  The Jury Instructions are up-to-date to December 2015 and are an impressive concise synthesis of patent law.  The introduction to the Jury Instructions states:

One of the fundamental goals of the Instructions is to provide a neutral set of jury instructions that would not be biased in favor of either the patent owner or the accused infringer. These Model Instructions are not intended to address every conceivable issue that might arise in patent litigation. Instead, Instructions are provided on those issues that typically arise in patent litigation and that have clear precedential support. It is incumbent upon the litigants to tailor these Instructions to the specific issues in their particular case and to simplify the tasks for the Court and the jury by not providing superfluous or confusing instructions. It is also intended that these Instructions will be used in conjunction with other instructions dealing with non-patent issues such as credibility, and that the trial court will further the jury’s understanding of these Instructions by relating the legal principles in the Instructions to the particular factual contentions of the parties.

The Jury Instructions also include helpful practice notes and substantial citation to relevant authority.  A sample practice note provides:

Practice Note: The concepts of direct infringement based on joint infringement and indirect infringement based on inducement to infringe (Instruction 3.10) are closely-related and may be confusing to the jury. Care should be taken to be clear regarding the Instructions on each issue and what findings the jury is being asked to make. Only if these theories of infringement are alleged and have been adequately supported by sufficient evidence should these Instructions be given. If both Instructions are being given, consideration should be given to instructing on joint infringement and inducement to infringe (Instruction 3.10) back-to-back and in a manner that readily allows the jury to appreciate the difference between the two theories, the evidence required to support each, and the specific findings they are being asked to make on each.

The Jury Instructions also include pre-AIA as well as post-AIA law.  The Jury Instructions are 75 pages long and a substantial contribution to patent law practice.  Kudos to Jennifer Librach Nall and Ajeet Pai, Co-Chairs, Model Patent Jury Instructions Subcommittee, Patent Litigation Committee, and all involved.  

Georgetown Conference: Taxation of Intellectual Property in the Global Economy

On Friday, March 11, Georgetown University sponsored a conference titled, “Taxation of Intellectual Property in the Global Economy.”  A description of the conference states:

The United States now lags behind its global competitors in tax incentives for research and development. In recent years, at least fourteen developed economies have adopted patent or innovation boxes, which provide a special low tax rate on business income that is derived from innovative activities. This development has sparked debate in the United States, and several recent U.S. tax reform proposals include a patent or innovation box. A discussion draft for a U.S. innovation box was released last year by Rep. Charles Boustany (R-LA) and Rep. Richard Neal (D-MA).

This conference brought together experts from a variety of backgrounds to share their perspectives on these important emerging issues in tax policy.

The panels included: “Taxation of Intellectual Property in the United States and Abroad”; “Effects of Taxation on Economic Activity: A Review of the Literature”; “New Evidence on the Impact of Patent Boxes”; and “Should the United States Implement a Patent Box.”  The following presentations are available: Paul W. Oosterhuis’, Partner, Skadden, Arps, Slate, Meagher & Flom LLP, presentation Basic U.S. Multinational Tax Planning Strategies for Intellectual Property;  Lilian V. Faulhaber’s, Associate Professor of Law, Georgetown Law, presentation Taxation of Intellectual Property in the United States and Abroad; Sebastien Bradley’s, Assistant Professor of Economics, Drexel University, LeBow College of Business, presentation Effects of IP Taxation on Economic Activity: A Review of the Literature;and Eric Ohrn’s, Assistant Professor, Grinnell College, presentation International Royalty Flows and Research and Development Responses to IP Box Regimes.  The other panelists and moderators included: Alan J. Auerbach, Robert D. Burch Professor of Economics and Law & Director, Burch Center for Tax Policy and Public Finance, University of California, Berkeley; Mihir A. Desai (Moderator) Mizuho Financial Group Professor of Finance, Harvard Business School; James R. Hines, Jr. (Moderator) L. Hart Wright Collegiate Professor of Law & Co-Director of the Law and Economics Program, University of Michigan; Rosanne Altshuler (Commentator) Professor of Economics & Chair, Department of Economics, Rutgers University; Jason Furman, Chairman, Council of Economic Advisers; Michael J. Graetz (Moderator), Columbia Alumni Professor of Tax Law, Columbia Law School; Martin A. Sullivan, Chief Economist, Tax Analysts; and Itai Grinberg, Associate Professor of Law, Georgetown Law.

The Webcast of the conference (over three hours) is available here.  

Just Who is a Patent Troll? Ask VirnetX.

This blog recently reported on an East Texas jury awarding VirnetX over $600 million against Apple.  In a recent interesting article in Corporate Counsel by the Chairman and CEO of VirnetX Kendall Larsen titled, “Are We Patent Trolls? Ask Jason Bourne,” Mr. Larsen complains about the popular press labeling his company a “troll,” and explains why his company is not a “troll.”  First, Mr. Larsen defines a troll as having the following characteristics: “Their patents cover no real invention, no true breakthrough in science or technology[;] They are led by lawyers, not scientists, engineers or technology business executives[;] They neither develop, make nor sell any real products or licensable technology[; and] They assert weak patents — and usually seek nuisance settlements.”  First, Mr. Larsen explains how the venture capital arm of the Central Intelligence Agency paid a contractor to solve a problem covered by the invention— “code named “Net Eraser,” came a simplified zero-click way to enable secure encrypted communications.”  Second, Mr. Larsen explains that his company is not led by lawyers, but scientists, engineers and technology business executives.  Third, Mr. Larsen explains how the “Gabriel Collaboration Suite, a set of integrated applications that enable secure messaging, secure voice and video calling, secure mail and secure encrypted file sharing with any other device,” is used in Google’s Play Store, Apple Apps Store and in Apple’s iMessage.  Notably, he states that, “Current licensees include Microsoft, Aastra, Mitel, NEC, Siemens and Avaya.”  Finally, he notes that his patents have been held valid four times by courts. 

Do you agree with Mr. Larsen’s definition of a troll?  On the IPKat blog, I recently asked whether myth and metaphor are the primary drivers of innovation in intellectual property law.  Co-blogger Neil Wilkof subsequently asked the question of what happened to patent trolls.  Are the trolls still around?  Or, have they been relabeled away?  Does the popular media just need to stop using the term?  What do you think? 

Oxfirst Free Webinar: Determining the Value of a Patent

Our friend at Oxfirst, Roya Ghafele, has let us know about another timely webinar sponsored by Oxfirst.  Dr. Ednaldo Silva, Founder and Managing Director of RoyaltyStat, and Dr. Roya Ghafele, Director of OxFirst will present “Determining the Value of a Patent”.  The talk will cover:

Intangible assets represent a major share of today’s businesses. The patents associated with those assets are the legal underpinning in that innovation. Yet, despite their fundamental importance, there is a lack of understanding of the economic worth of a patent. This talk seeks to overcome this gap, by discussing the when, if, how, what and why of patent valuation.  (IP Valuation Expert Group, European Commission, 2014)

Dr. Silva’s biography states: “Dr. Silva is an economist with over 20 years of experience in transfer pricing and the valuation of intangibles. Dr. Silva was the first IRS Office of Chief Counsel Sr. Economic Adviser, serving as a drafting member of the U.S. (1994) transfer pricing regulations and first economist in the APA Program. He has a Ph.D. from the University of California at Berkeley.”

Dr. Ghafele’s biography states: "Dr. Ghafele has been the Director of OxFirst, a spin out from Oxford University since 2011. In addition she has held senior academic positions with Oxford University since 2008; following stints at Harvard and U.C. Berkeley. Prior to that she worked for 5 years as an Economist with the U.N.’s World Intellectual Property Organization (WIPO) and the OECD. She started her career with McKinsey & Company."

The talk is scheduled for Friday, April 15, 2016, 1:00 PM - 2:00 PM BST.  To register please follow this link: https://attendee.gotowebinar.com/register/2134638427283858946 (Please note from Oxfirst that: “We only accept registrations undertaken with professional email addresses (i.e. we can’t accept registrations from yahoo, gmail or simiar private accounts)”)

Fawlty Towers - TV Format Licensing

This blogger has happy memories as a teenager of family TV viewing of the BBC comedy series Fawlty Towers. Even today his generation will often - generally after a few beers - recall hilarious moments and catch phrases ("I can speak English. I learn it from a book") from the show. Even his children love the show as its humour is timeless. So it's not surprising that an Australian-based dinner show Faulty Towers is, according to the Australian Sydney Morning Herald, a great hit with tickets costing up to AUD 159. A UK run in the summer will see tickets of GBP 59. John Cleese has tweeted that he is amazed about the profits being made from the show, which has been running for a number of years.

Cleese seems to be looking for a licensing deal as he's added that there is nothing wrong with the show. The question is - how strong is his licensing rights? The formats of TV shows are notoriously difficult to protect with different courts in different countries seemingly coming to different conclusions (the seminal case in the UK concerns the entertainer Hughie Green who attempts to stop TV New Zealand exploiting his "Opportunity Knocks" format - noted here). At least some courts have argued that they are "ideas" and not protected by copyright law. On the other hand some of the catch phrases at least might be protected under copyright law and certainly the names of the characters might have an element of originality. The strongest rights tend to come under trade mark law and there is - at least in this author's view - a degree of similarity between "faulty towers" and "faulty towers".  Rather surprisingly this author could find only a trade mark registration in the UK data from 1996 and a more recent 2015 international registration, which apparently only covers the Republic of Ireland. So it looks as if the case for a trade mark infringement could be weak. There's also an interesting question about whether any rights could still be asserted as  the Australian attempt to register their own trade mark in the UK dates back to 2010 when it was withdrawn because of an opposition.

So - will Mr Cleese be successful? The Australian company have responded robustly online and the IP rights situation may not be particularly favourable to any assertion of rights to license the format. The international success of the formats Idol, Got Talent, Bake Off, Master Chef, etc. show just valuable internationalisation of TV formats can be. Back in the seventies, when Fawlty Towers was first broadcast, the BBC probably only considered selling the show onto its partner public broadcasting networks in the Commonwealth. Today shows are international. And this blogger has even discussed Fawlty Towers with a Norwegian friend of his who seemed to know the plots better than he did.

The Pharmaceutical Pricing Problem: A Call to Exercise Bayh-Dole Act March-In Rights Heard?

The United States is struggling with the high cost of healthcare.  Notably, one cause of the high cost is the price of pharmaceuticals.  The importance of the issue and the pressure is exemplified by the focus of the various presidential candidates.  Not only are the Democratic candidates Bernie Sanders and Hilary Clinton concerned, but so is Republican candidate Donald Trump.  Interestingly, California, through an initiative, may directly confront pharmaceutical pricing for many Californians. 

One critique of the current system is that many pharmaceuticals were developed using government funding.  Thus, at least partially, the development costs to create a pharmaceutical may have been borne by the public.  Then, the argument goes, the public must pay again (in many cases) through the supra-competitive price set by a pharmaceutical company because of a patent. The public essentially pays twice for the pharmaceutical.  The Bayh-Dole Act essentially allows this to happen.  However, the counter argument has been that without the patent private industry would be unwilling to invest in commercializing the invention.  We would end up with the pre-Bayh-Dole Act problem—inventions languishing on the government shelf.  The government, through the Bayh-Dole Act, does retain some rights in government funded inventions.  One such right is the ability to exercise march-in rights.  March-in rights can be exercised in the following situations:

(a) With respect to any subject invention in which a small business firm or nonprofit organization has acquired title under this chapter, the Federal agency under whose funding agreement the subject invention was made shall have the right, in accordance with such procedures as are provided in regulations promulgated hereunder to require the contractor, an assignee or exclusive licensee of a subject invention to grant a nonexclusive, partially exclusive, or exclusive license in any field of use to a responsible applicant or applicants, upon terms that are reasonable under the circumstances, and if the contractor, assignee, or exclusive licensee refuses such request, to grant such a license itself, if the Federal agency determines that such-- 

(1) action is necessary because the contractor or assignee has not taken, or is not expected to take within a reasonable time, effective steps to achieve practical application of the subject invention in such field of use;

(2) action is necessary to alleviate health or safety needs which are not reasonably satisfied by the contractor, assignee, or their licensees; . . . .

Section 201 in 35 U.S.C., subsection (f) defines “[t]he term “practical application” [to] mean[] to manufacture in the case of a composition or product, to practice in the case of a process or method, or to operate in the case of a machine or system; and, in each case, under such conditions as to establish that the invention is being utilized and that its benefits are to the extent permitted by law or Government regulations available to the public on reasonable terms.”  Part of the problem is defining what are “reasonable terms.” Some scholars have rejected arguments that “march-in” rights should include concerns with pricing.  Additionally, the argument against the exercise of “march-in” rights is that the uncertainty interjected into the ordinary process of the Bayh-Dole Act would provide a disincentive for private industry to invest in the commercialization of Bayh-Dole Act funded inventions.  To date, March-in rights have never been exercised. 

Notably, over 50 congresspersons sent a letter to the Director of the National Institutes of Health [NIH] requesting that the NIH issue guidelines defining when “march-in” rights should be utilized.  The belief is apparently that the existence of guidance may provide an incentive for pharmaceutical companies to set prices “reasonably” because of fear of the actual exercise of rights.  Apparently, right now, the belief is that they will never be exercised. On March 16, in congressional hearings, BNA reported that the Director of the NIH noted that they are “open” to exercising the rights.  Will the indication of “openness” to exercise rights cause the pharmaceutical industry to pause before setting the price of a government funded pharmaceutical?  Is current pressure from presidential candidates and from a state like California enough to rethink the setting of the price of pharmaceuticals?