Trading in IP

Thanks to Geoff Cooper (Fortis Private Investment Management) this blog is alerted to a recent article in the Financial Times entitled Intellectual property trade stirs up interest:

"...signs of renewed interest in the bespoke deals could be the latest signal that the wider market is waking up once more [to deals backed by intellectual property]."

The article seems to have been spurred by the Vertex deal which involved the planned sale of rights rights to future milestone payments. Joff Wild's IAM blogpost is cynical:

"This is one area in which fortune really could favour the brave. I will be watching with interest. Just as long as none of my pension pot goes anywhere near any deal."

The blogger, disappointed with the apparent distressed sale of Ocean Tomo's IP auction business (see link here) because he saw the organisation as promoting confidence in IP (and future royalties) as a stand alone asset capable of being bought and sold, hopes there is truth to the FT article. His own experience, is that bad economic times force companies to look harder at ways of using and explaining their IP and the actual/potential revenue that can come from the IP. If those risks and rewards can be be better understood (eg though educational blogs like these and the [now forced] attention of owners of that IP) and better explained, perhaps more deals will come to fruition.

More on Licensing in the Mobile Telecommunications Space

Eric Stasik of Avvika in Stockholm was kind enough to follow up my recent blog entry of licensing rates in the mobile telecommunications sector with the following additional comments:


On the matter of telecom royalty rates, even more interesting than the announcement by Nortel is the recent revelation by Qualcomm:

"Qualcomm COO, Len Lauer revealed on the occasion of a Merrill Lynch Global Technology Conference on June 03 that the company normally charges 4%-5 % as royalty for 3G shipments. The COO further revealed that the company had put royalty rate at 3.25 % when it was asked by European standards group to submit a rate for LTE."

(http://www.telecomtiger.com/Corporate_fullstory.aspx?storyid=6478&flag=1&passfrom=topstory&section=S162)

The European standards group referred to is NGMN presently under the auspices of ITU.

In addition to Nortel's 1% we have Ericsson (http://www.ericsson.com/technology/licensing_programs/index.shtml) who earlier announced an LTE royalty rate of 1,5%.

If you take 3,25% + 1% +1,5% you're already at 5,75%.

Now add to this Nokia + Motorola + InterDigital + another score (or more) of essential patent holders and you arrive at a number much larger than the "single digit royalty" which Ericsson and Nokia are talking about with regard to LTE. I would be surprised - indeed stunnned - if any ex ante exercise on 4G/LTE produced a number less than 20-25%. A "single digit royalty" is simply not credible.

Patent Trolls: Public Business Enemy No. 1?

One of the most distinctive and well-regarded parts of The Economist magazine is its periodic surveys. For those of you who do not read The Economist, a Survey is an in-depth analysis of 15-20 pages in length on a specific topic. I eagerly look forward to reading them. Given that build-up, and the anticipation that awaits tackling each new Survey that is published, I was extraordinarily disappointed by a paragraph that appeared in the May 30th issue entitled "Business in America.' Under the section entitled "Red Tape and Scissors," in which the Survey discussed some of the difficulties posed for business by "crazy rules, convoluted taxes and rampant lawyers, " the following paragraph appeared:

"" 'Patent trolls' pose another problem. These are firms that buy up patents, not to turn them into products but solely to sue firms that may have infringed them. Since the United States Patent Office grants patents freely and courts enforce them zealously, every inventive company lies in fear of trolls. If one cannot convince a court that a billion-dollar product incorporating hundreds of patents infringes only one of his, he can an injunction to stop it being sold. The victim typically settles. Michale Heller, author of "The Gridlock Economy", argues that vaguely defined property rights stifle innovation and cost lives."

Let me see if I have this right. Within the heart of the most thicket of the most regulatory issues facing American business, e.g., the tax system, products liability, the drug approval process, byzantine financial regulation, lies the patent troll. It is true that patent trolls were apparently viewed as a significant enough issue to warrant a decision several years ago by the U.S. Supreme Court in the eBay case, here. But in that judgment, the Supreme Court significantly cut back on the ability of a so-called patent troll to obtain an injunction.

Contrary to what is asserted in the Survey, a party that sues on a patent that he purchased and of which it does not make any commercial will now have a difficult time if it seeks to obtain an injunction. Moreover, in the post-eBay world, courts are reluctant to grant an injunction if the patent in question covers only a small portion of the overall product. In a word, the account in The Economist does not reflect the current legal position regrading patent trolls, and patent trolls do not constant a systemic threat to the well-being of US business.

Moreover, it is unclear what the reference to the Heller book has to do with patent trolls. mystery. In particular, it is not clear "what vaguely defined" rights are intended in the Survey, and how this relates to patent trolls. There is no evidence that the patents owned by patent trolls are less clearly defined that other patents. Heller's concern is in another direction, namely the threat posed by what he has called "the tragedy of the anticommons", where the transaction costs to reconcile multiple property rights becomes prohibitively expensive. But that, as noted, is a different issue from the claims made against patent trolls. Someone seems to have conflated the two issues, with the result that neither of them is properly dealt with in the Survey.

Find the patent troll

Trade marks in corporate management structure: a further view

Last week, in "Trademarks and the Company Organizational Chart", Neil Wilkof raised some sharp issues regarding the management of IP, and particularly trade marks, within the wider context of corporate management strategy. This is a subject that Ron Laurie (right, Chairman, Inflexion Point Group; Managing Director, Inflexion Point Strategy, LLC; CIPO, Inflexion Point Analytics, LLC) has himself written on in Bruce Berman's latest book, From Assets to Profits [reviewed on IP Finance here]. The Perspective which prefaces Ron Laurie's chapter, "The Evolving Role of IP in M & A: From Deal-Breaker to Deal-Maker", reads as follows:

"Over the past several years, patents have come to be recognized by the financial community not just as a bundle of legal rights, but as an independent commercial asset class, like real estate and corporate securities. Innovative new models for monetizing patents have emerged based on the creative adaptation of existing models used with more traditional asset classes such as asset-backed securities and more traditional strategic models.

“This shift in perception about the uses and the value of patents,” says Ron Laurie, an IP investment banker and former patent attorney who focuses on transactions, “has spawned a proliferation of market makers, intermediaries, and service providers, including patent aggregators, enforcers, investors, financiers, brokers, exchanges, and auction houses. “New business models are emerging every day. More recently, institutional investors, in the form of private equity firms and hedge funds, have come to see investing in patents, or in patent litigation, or trading public company shares based on patent-related information, as a natural expansion of their existing business.”

Laurie contends that the shift in perception regarding IP assets has until now had little, if any, impact, on corporate mergers and acquisitions. The reasons are both structural and environmental, and derive in large part from the problem of corporate valuation, especially when it involves intangible assets. IP was traditionally viewed in M&A transactions as a possible “deal-breaker,” effectively an afterthought that IP
lawyers attended to. When it came to consummating a transaction, these professionals were much more likely to regard all news as bad news.

Today, IP in M&A is starting to be seen as an important deal facilitator that the bankers, private equity capital providers, and others need to understand from the start".

You can read the chapter in full here.
And here’s a link to Ron's half-hour video interview on the subject of IP-driven M&A.

Royalties for decades to come

“Plans for Michael Jackson burial remain elusive day after funeral” reported the Guardian today, after the memorial services for the king of pop held yesterday. There is no question though that his music will keep him living on: Billboard reported that last week, Michael Jackson had a record eight albums out of the top 10 on the Top Pop Catalog Albums chart, and that this week, the entire top 10 is “all-Jackson, all the time. He alone has albums at Nos. 1-6 and Nos. 8-10 while a Jackson 5 title ("The Ultimate Collection") resides at No. 7.”

Jackson was also the most popular artist on Nokia's Comes With Music service last week: seven of the top ten downloaded songs were by Jackson, with the popularity rate going up from 21st most popular the week before.

This of course has also an effect on the royalty income streams which will now benefit the (debt-laden) estate. Melbourne’s The Age reports on the king’s most valuable assets:

Jackson's most valuable asset is his 50 per cent share in the Sony-ATV Music Publishing catalogue, which people with knowledge of the partnership value at between $US1.5 billion and $US2 billion. The partnership has about $US600 million in debt, one person said. In what is recognised as the shrewdest business move of his career, the singer bought the catalogue in 1985 for $US47.5 million. In the early 2000s, he borrowed $US300 million against it. That makes the value of Jackson's share, accounting for the debt, worth between $US150 million and $US400 million.

The so-called "Beatles catalogue" is famed for music written by John Lennon and Paul McCartney. It administers nearly all of the Beatles' greatest hits. Sony-ATV also oversees the publishing of performers as varied as Elvis Presley, Eminem and Bjork and is reportedly the fourth-largest music publisher in the world.

The catalogue generated between $US13 million and $US20 million for Jackson annually, said people close to the singer.

A second catalogue, Mijac Music Publishing, includes Jackson's music as a solo artist as well as songs by other acts, including Sly & The Family Stone, Curtis Mayfield and Ray Charles. People close to Jackson estimated its worth at $US100 million, but it is difficult to place a current value on it because of the tremendous sales of Jackson's music since he died.

It is reported that the superstar used to over-record for every album he produced throughout his remarkable career – so fans can live in hope that there will be many more records, books and movies coming out. Long live the king.

Burning the ships

If you're looking for a book that's light enough in terms of tone and content to read on a long flight, yet rich enough in insights for you not to feeel guilty about leaving all that pressing work untouched while you finish it, then Marshall Phelps and David Kline's Burning the Ships: Intellectual Property and the Transformation of Microsoft is probably the book you're looking for. It never verges on the dull or the irrelevant, but nor does it give away any secrets: the main message is that, so far as designing and executing models for the successful exploitation of intellectual property rights is concerned, (i) attitude is more important than policy; (ii) there is a disjunction between the past -- where we acquire our experience -- and the future, where we deploy it; (iii) sharing and caring can produce better all-round benefits than erecting 'keep-off-the-grass' signs around one's own IP; and (iv) if you have already succeeded on the big stage, your boss is more likely to trust you to gamble the crown jewels than if you haven't.

That seems to this review to be that the wily authors say. but what does the Wiley publisher say?

"At the start of this decade, Microsoft was on the defensive—beset on all sides by anti-trust suits and costly litigation, and viewed by many in the technology industry as a monopolist and market bully. How was it going to survive and succeed in the emerging new era of "open innovation," where collaboration and cooperation between firms, rather than market conquest, would be the keystones of success?
This was the challenge facing Microsoft founder and Chairman Bill Gates. But "like Cortez burning his ships at the shores of the New World," Gates decided to embrace the change that was needed. He recruited Marshall Phelps—the legendary "godfather" of intellectual property who had turned IBM’s IP portfolio into a $2 billion-a-year gold mine—out of retirement and into the cauldron of controversy that was Microsoft. Only this time Phelps’ mission was infinitely more challenging than simply making money from IP. It was to help reform Microsoft’s "man the barricades" culture, encourage the company to abandon its fortress mentality around its technology and share it with others for mutual benefit, and use intellectual property not as a weapon of competitive warfare but as a bridge to collaboration with other firms instead.

Here, for the first time (and 500 collaboration deals later), is the inside story of what one analyst has called "the biggest change Microsoft has undergone since it became a multinational company."

In this book, authors Marshall Phelps and David Kline take the reader inside the dramatic struggle within Microsoft to find a new direction. They offer an extraordinary behind-the-scenes view of the high-level deliberations of the company’s senior-most executives, the internal debates and conflicts among executives and rank-and-file employees alike over the company’s new collaborative direction, and the company’s controversial top-secret partnership building efforts with major open source companies and others around the world. Nothing was held back from this book save for information specifically prohibited from disclosure by confidentiality agreements that Microsoft signed with other companies. Indeed, the degree of access to Microsoft’s inner workings granted to the authors—and the honest self-criticism offered by Microsoft leaders and employees alike—was unprecedented in the company’s 34-year history.

There are lessons in this book for executives in every industry—most especially on the role that intellectual property can play in liberating previously untapped value in a company and opening up powerful new business opportunities in today’s era of "open innovation." Here is a powerful inside account of the dawn of a new era at what is arguably the most powerful technology company on earth".

This web-blurb is probably a good reflection of the style of the book as well as its content. It is unashamedly didactic and justifiably proud, but with the occasional leavening of humility and self-deprecation to prevent the reader loathing Phelps for his success. It is carefully crafted to deliver a persistently upbeat note, leading the reader to recognise that he or she too can succeed in turning around a company the size of Microsoft by tugging at the reins of its IP. I enjoyed it enough to devour it all at a single sitting, but doubt I shall either want or need to repeat the process.

Bibliographic detail: hardback, xxii (I can't imagine that the Latin numbered pages at the beginning were the authors' choice) + 186 pages. ISBN 978-0-470-43215-0. Price £19.99/€25. Book's webpage here.

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

Insolvency, Registered and Unregistered Design Rights

There are two types of design rights (“DRs”): registered design rights (“RDRs”), which are principally governed in the UK by the Registered Design Act 1949 (“RDA 1949”) and unregistered design rights (“UDRs”) introduced by the Copyright, Designs and Patents Act 1988 (“CDPA 1988”). There are rules on qualification for protection by both citizenship of the designer and place of design. Qualifying countries in addition to the UK include the European Economic Area and British overseas territories. Since RDRs afford greater protection for designs than UDRs, the value of the right is likely to be affected accordingly, making it essential to establish what kind of DRs the insolvent company may have.

UDRs
UDRs are saleable assets but do not subsist in designs made before the commencement of the CDPA 1988. UDRs are similar to copyright in that they exist automatically when a new design is created. However, unlike copyright, the length of protection is much more limited. The right lasts for 10 years after the date that an item made to the design is first marketed, or up to a limit of 15 years from the creation of the design and is only exclusive for the first five years. A licence of right to make and sell articles copying the design is available during the last five years of the UDR's life (s. 237 CDPA 1988).

UDRs differ from RDRs in that they do not give a total right of design ownership; instead giving a simpler form of protection against copying. This makes the subject of maintaining licences very important for an insolvent company who has an interest in UDRs. Further information regarding copyright and insolvency can be found at my earlier post accessed from this link.

RDRs
Once a design is registered the RDA 1949 makes clear that RDRs shall vest by operation of law in the same way as any other personal property. Therefore RDRs owned by a company subject to a winding up order will belong to the company in liquidation. By registering a design the owner of the right will have exclusive use of a design in the territory in which it is registered. In the UK and EU this period is 25 years and design registrations are renewable every 5 years. Any disposition of RDR’s must be made in writing and signed by all parties to the transaction. The UK IPO has a database of RDRs which can be accessed here.

RDRs may also be subject to a secured loan by way of a mortgage and enquiries should be made to establish whether there are any licensees or mortgagees of the right in order that they can be informed of the making of the Insolvency Order and asked to note the Official Receiver’s interest. Instead of contacting the Land Registry the way you would to check if land was subject to a mortgage, the Official Receiver should contact the UK IPO. Information may also be found in the insolvent company’s accounting records and/or by searching at the UK IPO.

Exceptions to RDRs
There are many exceptions to protection offered by RDRs, which include, but are not limited to: parts of a design necessary to connect to another article (“must fit” designs), to methods and principles of construction or to those parts of a design which are dependent on the appearance of another article, or where that article and the article that the design right applies to is an integral part of the second article (“must match” designs) and to surface decoration. RDRs also don’t apply if a design is not original, and a design is essentially defined as not being original if the object so designed is already commonplace. If a right is not covered by RDRs, it may be still be subject to other forms of IP protection such as copyright and UDRs.

Ownership of DRs
S.215 CDPA 1988 stipulates that the first owner of a UDR is the designer, except in the circumstances that the design is created under a commission or in the course of employment, in which case the commissioner or employer is the first owner. In the case that the owner of a UDR is also the owner of a RDR, it is assumed that any assignment of the UDR also includes an assignment of the RDR, unless a contrary intention is shown.

The Official Receiver should establish ownership of any RDRs from the insolvent’s records and/or by carrying out a search of the information held at the UK IPO (whose database can be found here). Where RDRs vest in the company in liquidation they may be sold with the assignment being signed by the liquidator as assignor. In such a case the UK IPO should be informed of the change in ownership (s.19 RDA 1949).

Does more than one person own the RDRs?
Joint entitlement to ownership of RDRs will usually arise in two situations; either where there are co-designers or if a share of the design is sold. Where a design is registered to two or more persons they are entitled, unless there is agreement to the contrary, to equal undivided shares. The interest of each would survive his death as part of his estate. Importantly, joint owners may not sell their interest to a third party without the consent of the co-owners. Therefore if the Official Receiver is able to establish any RDRs, they should also be aware of other interested parties and ensure that they do not breach their rights by attempting to sell or license the design.

Royalties
In addition to the sale of the rights themselves, royalties may be paid by a third party to the owner of RDRs in exchange for exploiting that right. The royalties may be payable under the terms of a licence, with the owner retaining the RDRs. Where a winding up order is made against the owner of a registered design, the Official Receiver should contact the third party paying the royalties and ask it to pay any royalties due to the liquidator.

If the company in liquidation holds any licences, those licences are also saleable property and any assignment of such a licence should be in writing and signed by the parties. In such an instance the UK IPO should be informed of the transfer.

It may be the case that a liquidated company is in receipt of royalties as a condition of the sale of RDRs. In this case the royalties cannot be claimed as an asset as the right does not vest in the company in liquidation. Instead, the royalties should be treated as income and can be claimed under an income payments agreement or an income payments order.

How to Protect RDRs
If an insolvent company owns RDRs, the UK IPO should be informed of the winding up order and asked to note the Official Receiver’s interest in the design. The UK IPO should also be asked to provide details of the remaining “life” of the registration as this could materially affect the value and details of any renewal fees outstanding.

Enquiries should always be made to establish whether there are any licensees or mortgages of the right in order that they can be informed of the making of the insolvency order and asked to note the Official Receiver’s interest.

European Community RDRs
The rules governing the procedures, processes and requirements for European Community (EC) design registration are largely the same as those relating to the UK registration process. The guidance above can be followed in respect of an insolvent that owns any EC design registration, with the exception that the relevant authority will not be the UK IPO. It will instead be the Office for the Harmonisation of the Internal Market (OHIM), which maintains a searchable online register which can be accessed here.

Valuation of DRs
The valuation of intellectual property is a complicated and sometimes controversial area and the value will very much depend on the circumstances. It is unlikely that the Official Receiver will have experience in this field and should exercise discretion as to whether to employ specialist advice such as forensic accountants. A specialist in designs may be contacted through The Chartered Institute of Patent Attorneys.

Meeting: "Phonewords and Finance"

Next Tuesday [not Wednesday, as previously erroneously stated], 14 July, Australian practitioner Julian Gyngell will be providing us with a great chance for a get-together when he speaks in London on "Phonewords and Finance". Says Julian,

"Organisations pay handsomely (sometimes millions of dollars) for phonewords because they believe that the phoneword will help increase telephone communications with their business (and hence increase sales and their goodwill with customers). However, the rights of use conferred by the issuing authority in the country in question are limited to the specific underlying telephone number itself and the purchaser’s proprietary rights in the phoneword (if any) will depend on the phoneword in question and, in particular, whether

a. the purchaser owns a trade mark (registered or unregistered) which corresponds to the phoneword (or the key word in the phoneword) or

b. conversely, another organisation owns a trade mark (registered or unregistered) that corresponds to the phoneword (or the key word in the phoneword).

I plan to review a number of recent cases, including some very recent WIPO domain name decisions involving phonewords, and advise that a purchaser of a telephone number that is a phoneword needs to be acutely aware of a number of important factors if it is to maximise the potential return on its investment, namely

a. the scope of the rights of use that it has acquired (and those that it hasn’t acquired);

b. the rights of third parties that might conflict with its use of the phoneword and

c. the steps that it should take to further protect its investment".

McDermott Will & Emery have kindly agreed to provide us with a venue in their City office at 7 Bishopsgate (here). If you're coming, please email me here and let me know so I'll have a rough idea of how many bodies will be putting in an appearance.