Patent Squatting

Shares in Eastman Kodak have risen 10% on the news that the company has persuaded the US International Trade Commission (ITC) to reconsider its patent infringement case against smartphone manufacturers Apple and Research In Motion. According to Bloomberg Businessweek, the company thinks that it can negotiate royalties worth $1 billion or more if its patent rights are recognised.

Investors have not given the news an unequivocal welcome, however. “Even if Kodak receives the $1 billion in cash, what could it possibly use it to do?” asks InvestorGuide, suggesting that “Kodak has no other game plan except to sit on its patents and sue violators to receive licensing fees to generate capital.” “There is a clear problem with the company’s current patent-squatting strategy – it simply cannot be sustainable,” it notes.

"However, if Kodak invests wisely in research and development to strike back at its currently crippled Japanese camera rivals, such as Sony, Fujifilm, Panasonic and Canon, it could reestablish itself as a formidable camera manufacturer. Kodak has a strong brand name which has been synonymous with cameras for decades, and it wouldn’t be too late to stage a late game comeback."

Does this mark a change in investor attitudes from the early noughties when books such as "Rembrandts in the Attic" and "Edison in the Boardroom" lauded the $4 billion in royalties earned by Texas Instruments (TI) from licensing its patent portfolio? Or is it an acknowledgement that, in 2010, the lion's share of TI's operating profit came from the design and manufacture of semiconductors, with patent royalties being lumped together with "smaller semiconductor operating segments", ASICs and calculators under the heading of "Other" in the 2010 accounts?

Exchange Control and IP - Nervous Celebration

There are a number of differences between working in IP in the United Kingdom and doing the same in South Africa (RSA). One of the biggest is the frequent need to understand the concept of exchange control and how it interfaces with IP (see my earlier post here, for example).

As most readers and any foreign national to RSA who has bought and sold assets in RSA will know, the requirement to obtain exchange control approval from the RSA Treasury is likely to find itself as a condition precedent/suspensive condition to that transaction. It is also trite that IP is an asset in the broad sense with the propensity, directly or indirectly, to create royalty streams. But it can be a real brain twister trying to reconcile legislation designed to control the flow of money first promulgated in 1961, the protectionist mindset of the local Treasury, the more liberal views of those dealing with IP and the nature of IP as an asset in all its registered and unregistered forms, in 2011. The latest RSA Supreme Court of Appeal judgement (Oilwell (Pty) Ltd v Protec International Ltd) illustrates this well enough.

Oilwell had attempted to reverse a trade mark assignment for failure to obtain exchange control. The leading IP judge in RSA (with the support of a full bench) dismisses the appeal. By doing so, he effectively challenges the Treasury to find another way of restricting the flow of IP from RSA. The case, summarised with comments on Afro-IP here, is seen as a victory for those who advocate freedom of exchange and a relief to advisors who had not, as a practice, advised clients to seek exchange control for IP assignments. However, before you get on the dance floor be warned ... there is a strong feeling that the Treasury may turn down the music.

Posted by Darren Olivier to IP Finance

Waking the sleeping giant

Dr Roya Ghafele (University of Oxford), a one-time member of the IP Finance team and a respected commentator on a variety of issues involving the interface of IP legal issues with the so-called real world, writes to tell us that she has recently recently completed some analysis on the means to finance university research, "Financing University Research Waking a Sleeping Giant", which she thought might be of interest to readers of the blog.

Roya's paper discusses the "Third Way", about which she has this to say:

"The ‘Third Way’ of university research commercialization focuses on systemic change, rather than on single stakeholder intervention. It reflects a third generation of innovation policies that focuses on training, awareness raising and the leverage of cluster effects, rather than the development of physical infrastructure (i.e. science parks).

This is a unique approach that outperforms existing best practice in many ways; i.e. it focuses on the leverage of network effects among the various academic institutions, rather than repeating the traditional ‘one university – one commercialization’ approach.

The ‘Third Way’ also outperforms existing best practices by adopting latest trends in IP management , such as online trading, perceiving IP as financial asset, leveraging open innovation for improving patent quality.

Organizational values, structures & procedures of various actors (business, academia, government) are recognized and different institutional cultures are sought to be overcome through boundary spanning.

The competing demands and interests of business & academia are reflected through the introduction of ‘social responsible university research commercialization’, as currently undertaken by U.C. Berkeley".

You can view the analysis in the form of PowerPoint slides here.

Damages on a cross-undertaking -- it's payback time

Les Laboratoires Servier & Another v Apotex Inc & Others [2011] EWHC 730 (Pat) was decided today by Mr Justice Arnold in the Patents Court, England and Wales. IP Finance thanks Bristows, which acted for Servier, for the following information:

This morning, the High Court of England and Wales handed down an unprecedented judgment which will impact on the complex financial assessment that every company has to make before asking the Court to grant an interim injunction pending trial.

The judgment is the latest in an ongoing dispute which is the first case in recent times in which the Court has been asked to consider the level of damages payable under a cross undertaking given in exchange for an interim injunction in a patent case. In an unusual twist, the judgment ... found that Apotex should pay back to Servier the £17.5 million plus interest that Servier was ordered to pay to Apotex in 2008 after the hearing of the damages inquiry. Liz Cohen, Partner at Bristows comments: 

"... As a matter of public policy, a party should not be able to claim compensation for being prevented from infringing one patent on the basis that it would have infringed another patent, if the injunction had not been granted. It further reinforces the principle that there is no automatic right to compensation under a cross undertaking. This will undoubtedly impact on the complex financial assessment that every company has to undertake before launching a product at risk in the UK”

In August 2006, Servier obtained an injunction against Apotex preventing it from marketing and selling its generic perindopril in the UK pending trial. In exchange for the injunction, Servier gave Apotex a cross undertaking, agreeing to comply with any order the Court made to pay compensation to Apotex for any damage suffered as a result of the injunction. In July 2007, the patent was invalidated, the injunction was lifted and an inquiry into the level of damages suffered by Apotex was ordered. Judgment in the damages inquiry was given by the High Court in October 2008. Shortly before this judgment was handed down, Servier asked the Court for permission to amend its pleading to enable it to argue that, as matter of public policy, Apotex should not be able to recover any damages under the cross undertaking due to the fact that it would have manufactured its generic perindopril in Canada, an act which had recently been found to infringe Servier’s Canadian Patent. The judge in the High Court refused the amendment and Servier was ordered to pay Apotex £17.5 million damages plus interest.

Servier appealed this decision to the Court of Appeal. In February 2010, the Court of Appeal allowed Servier’s amendment and on 15-16 March 2011, the High Court heard the public policy issues relating to Servier’s amended pleading. The judgment handed down this morning reflects the finding of the High Court that Apotex should not be able to rely upon its own illegality to benefit from the cross undertaking given by Servier".

It's most unusual for a judge an IP proceedings of this nature to have the chance to apply the principle of ex turpi causa, and Mr Justice Arnold was swift to take the opportunity to do so.

Of access and excess: security for wizard costs

What better way to consume money?

No-one said that copyright infringement litigation in England and Wales comes cheap, but on 18 March 2011, in Allen (trustee of Adrian Jacobs) v Bloomsbury Publishing Ltd and J. K. Murray [2011] EWHC 770 (Ch) Mr Justice Kitchin had to decide what to do when considering an application for security for costs in an action brought against JK Rowling and her publisher for an alleged infringement of copyright in one of her Harry Potter books. In earlier proceedings Rowling and her publisher failed by a hairsbreadth to have the infringement claim struck out, but the judge ruled that it was suffficiently arguable to get to trial. Now, back to the security question:

"84. I must now decide what sum to award by way of security. I have before me an estimate of Bloomsbury’s costs to date and to carry these proceedings through to a conclusion in the total sum of £723,819. I have a similar estimate of Ms Murray’s costs in the total sum of £1,644,660.  The combined total of the defendants’ costs is therefore £2,368,479. By contrast, Mr Allen estimates that his costs to date, excluding the deferred element, are some £800,000 and that he will incur further costs of about £500,000 to carry the proceedings through to a conclusion.

85. In deciding what sum to award by way of security, I bear in mind that I should not make an order that will deny Mr Allen access to justice although, for the reasons I have given, I have reached the conclusion that I have inadequate information in this regard from Mr Allen, and that he has been far from full and candid in setting out the means available to him. Accordingly, this is not a factor to which I believe it is appropriate to attach great weight.

86. Other criticisms of the defendants’ costs estimates do, however, seem to me to have more substance. I recognise that Mr Allen has chosen to sue two separate defendants but I question whether they each need to be represented by leading and junior counsel. Moreover, the estimates for the fees that may be incurred in that regard do seem to be unreasonably high. Further, although I recognise the serious nature of the allegations made and the importance of the case to both defendants, the defendants’ estimates do seem to me to include costs in respect of unduly large numbers of separate fee earners, excessive communications with clients, and unwarranted time for consideration of disclosure and preparing experts’ reports. At this stage any attempt to estimate the costs that are likely to be recovered must necessarily be fairly rough and ready in light of the difficulty in assessing the extent of the work that remains to be done. But doing the best I can in all the circumstances, I have reached the conclusion that the proportion of the defendants’ cost estimates I should require Mr Allen to provide by way of security is 65 per cent".

Who says you have to be rich to litigate?

Today's proposals by the British government for protecting unsuccessful defendants in civil proceedings against crippling costs here.

Want to Finance Patent Litigation?: Try Convertible Bonds

Despite being an IP junkie, one of my idiosyncracies is that I follow headlines in the world capital markets, thanks to the "Capital Markets Daily Alert" provided by Euromoney, here. You never know what you will find there. Several weeks ago, on March 9th, a report from Dow Jones Newswires drew my attention about Tivo Inc. Tivo is the pioneer developer of advanced VCR products here.

The report stated as follows: "TiVo Inc. (TIVO) boosted the size of its planned debt offering to $150 million and said it will carry a 4% coupon as the company seeks proceeds to fund intellectual property litigation and research and development, among other purposes. The company had outlined plans Tuesday to offer $120 million in five-year, convertible senior notes. TiVo has filed a slew of patent-infringement suits over its digital-video-recorder technology. It is in the midst of a years-long legal battle with Dish Network Corp. (DISH) and EchoStar Corp. (SATS) and has accused AT&T Inc. (T) of the same patent oversteps that it claims Verizon communications Inc. (VZ) made. Meanwhile, Motorola Mobility Holdings Inc. (MMI) last month filed a suit against TiVo, claiming infringement of its patents for DVRs. Shares closed Tuesday at $8.75 and were inactive premarket. "

A convertible bond is a hybrid financial instrument that pays its holder a coupon amount but allows the option to convert the bond into company equity at a later date. As such, the holder enjoys the payment of periodic coupon amounts, more or less secure (the interest rate may be lower than a similarly based bond without the conversion feature), but the holder also has the possbility of enjoying equity appreciation, depending upon the future performance of the company.

Another report (morningstar.com, dated March 8th), provided further details about the move by TiVo to obtain $150 millon in public funding. According to this report, as part of the risk factors disclosed in its SEC filing, Microsoft filed a complaint with the U.S. International Trade Commission against the company in late January, seeking relief for alleged patent infringement of four patents dealing with on-screen user interfaces. The company stated that under the worst case scenario, should the company lose on the patent claims, its "business would be immediately and materially adversely impacted." Adverse results in the other patent cases in which the company is involved could also have a material harmful affect on the company, according to the report.

I have several thoughts about this bond offering from the IP point of view.

1. The report does not further describe whether the SEC filing offered any assessment of the likelihood of any of the patent cases succeeding, but my guess is that there were no such evaluations. When you think about bond rates for Greece hovering around 10%, the 4% coupon seems to be sending a market signal about the level of assesed risk. 

2. In any event, as a legal matter matter, when risk factors are involved, while it is a fine line, it is better to paint darker grey rather than a lighter hue, especially when some future plaintiff's attorney combs the filing at a later date looking for any grounds to sue the issuing company.

3. From the creditor's point of view, the investment is a bet on the likelihood that the company will prevail in the patent cases, and that the company will be able to take advantage to increase its bottom line, which itself will be reflected in a higher share price. That said, I am curious how an institutional investor can quantitfy both the likelihood of success in the litigation and the resulting effect on the company's future revenues, all with an eye towards deciding whether or not to loan TiVo the money.

4. The filing stated the funds obtained may also be used for financing sales and marketing expenses, increasing working capital and/or investments and acquisitions. Still, it is assumed that a substantial share of the funds received will be devoted to patent litigation. If this be true, TiVo, especially for its size, would seem to have one of the largest potential outlays for patent litigation anywhere.

5. More generally, one has to wonder if the patent system was intended for this kind of heavyweight, multiple party patent litigation. One can further ask whether a situation in which at least one of the major participants has to go to the public to fund its patent litigation activities is the optimal way for capital markets to be brought to bear in promoting innovation in the public aggregate.

IP standards and the real world: a reader writes

Marco Alexandre Saias (Director of the Brokerage Departament, IP Solutions) has taken up the challenge to write a piece for this weblog on IP and standards -- not the FRAND variety, but standards of service provided for IP owners and users, particularly with regard to IP accounting and asset management. He writes:

"ARE WE WAITING FOR IP STANDARDS? HOW IP STANDARDS IMPACT ON THE REAL WORLD

In a new, dynamic world that is wide open to discovery, intellectual property reality lacks the tools to give it the kind of following necessary for it to go beyond its potential. There is still a high level of uncertainty surrounding the IP world, a reason why common standards can and will offer the expected jump forward in IP dynamics.

When asked about what impact common standards would have, my thoughts jump directly to the concepts of safety and reliability.

A standing rule, a common rule applicable to all agents that operate in the sector, provides a cushion against the uncertainty that often operates in IP and a necessary obstacle against the arbitrary will of the individual.

One of the most dominant features in IP and its assets, is its special dynamic because IP is a culmination of the constituent parts that makes up its elements. Its assets are however, constantly changing and the question is then, how can the IP world accommodate this? This brings us to the first point: are standards necessary in the IP world?

The answer is yes. When dealing with new elements in the economy and within the economic activity of enterprises, elements such as contractual freedom achieved by the agreed price may become affected if the parties have no confidence in the real value of what they are willing to trade.

The adoption of common rules and standards might ensure shared safety and reliability by necessarily allocating the trust of both parties, thus allowing a truly free decision-making process.  However, the adoption of standards is no easy challenge and requires cautionary steps to be taken.. If they can serve as a tool that supports and ensures trust between the parties, thus creating a competitive market, it is not insignificant that the problems tend to occur when leaving the sphere of removing uncertainty and entering into an exaggerated control of reality.

Again, we return to the question of the dynamics and volatility of IP and its assets. Clear examples of this situation are those technologies for which patents have no business relevance, until that day in which that technology explodes. All the accounting standards used to value that technology become obsolete and even absurd by the new reality that now exists. Thus, what once was worthless, may suddenly turn into gold.

An additional problem associated with the standards of valuation is the lag from reality, due to an overlap which originates in the overuse of accounting concepts.What is most important in a patent? The technology within or the drawing? And in a brand? The brand itself or the associated goodwill? And if the technology within a patent has an associated brand (branded technology), does the value of the patent arise from itself or from the brand’s goodwill? And to complicate the matter just a little further, within the copyright, which aspect should be valued? The copyright itself or the different set of exploitation rights in it? There has been some tendency to consider this reality through an accounting perspective; by subtracting the dynamic and complexity from consideration.

Where does this leave us? As demonstrated above, the adoption of standards should not be taken to apply without question. What is required is caution and should be taken on board in a minimal way, that is, standards should be adopted to provide safety and confidence tools between the parties only. The standard should never be able to override the ability of free agreement between the parties.

What about standards on IP transfer (negotiation, agreements, etc.)? I have the same understanding: common rules should be contemplated in the Law, in just the necessary measure. The parties must be free to negotiate and achieve whatever they decide and this must be given priority. Going beyond this is to confine the behaviour of a free market, which is especially sensitive since in the current economic climate we are already talking of economic monopolies.

In the real world, standards are tools of confidence and security which does not imply that it is always useful or correct. It is for this reason that standards often get reviewed, revised and updated. In the current IP momentum, with the rise of the IP markets as part of the chain of value, standards are a useful solution to a main problem: coordination. The adoption of common standards will allow all parties involved in IP transactions to realize mutual gains. But such mutual gains only happen where both parties are making mutually consistent decisions.

I believe that this necessity is strongly felt as needed especially around the issues surrounding valuation of patents and copyrights.

In patents, apart from excessive accounting view in which many take refuge, there is no common principle or method, and the ones currently in existence are not commonly accepted. For example, I advocate the use of methods of assessment based purely on the market, but in the sense that a patent is worth only what the market is willing to give it at that particular moment, given all the data available. But many people do not see things like that.

As for copyright, the situation is even more confusing, especially in the European system. For example, I, the author, can license in the same territory the exploitation of my movie to three different individuals: theatres, television and DVD. Have we a unique IP asset? Or have we three assets? Personally, I am inclined to fall within the three assets view, simply because I think in terms of profitability of each operation by itself.

Standards are needed and will be well received by the IP market and professionals within it. They provide security, trust and confidence to and between the parties. However, they can never take precedence over the free will and the functioning of the market but instead help and allow it to function freely and effectively and provide balance between the parties.

Going beyond this freedom barrier will only distort the reality of IP, and inevitably pave the way for speculation and abuse of position, the result of which will damage not only the weaker parts but the entire IP market".

The IP wonders of the UK Budget

The good stuff:

• R&D tax relief increased for SMEs to 200% in 2011 and 225% in 2012 - excellent news, assuming that the EU don't demand something significant in return (because the SME relief is a State Aid)
• R&D tax credit repayment no longer restricted by PAYE/NICs - more money back to loss-making SMEs, but don't celebrate too much as the repayment is likely to be restricted with the reduction in small companies' tax rate
• R&D large company relief to include sub-contractor costs - good news, particularly for SMEs that can only claim the large company relief (eg: because they've received a State Aid grant for the R&D project)
• Minimum qualifying spend removed from R&D relief - nice idea but, if you're spending less than £10k on R&D in any one year, the costs of getting the R&D claim in order will probably be more than the relief you get!
• Patent box to have more consultation – but still 10%, still patents only, applying from 1 April 2013 - next consultation paper due May 2011
• The exemption for IP holding controlled foreign companies with minimal UK connection will be in Finance Bill 2011, as expected - no changes (yet) announced following the consultation.

The not-so-good bit:

• Vaccine research relief for SMEs reduced to 20% for 2011-12, and then scrapped from 1 April 2012 - but only 10 companies a year claim this relief, so it's not likely to have much impact

Non-IP specialist stuff, but still interesting for IP companies:

• Reductions in corporate tax rate - to 20% for small companies in 2011, to 23% for large companies by 2014 - useful to all companies
• Improvements to reliefs for investors (EIS for individuals, VCT for companies) - may make it marginally easier for companies to raise funds
• Capital allowances (tax deduction for buying equipment) for short-life assets doubled – accelerates tax deduction for assets which will be sold/scrapped within eight years of purchase (but note there are better deductions for R&D assets, and for the first £25,000 expenditure on assets in any one year)
• Enterprise Zones could be attractive - 100% reduction in business rates, some increased tax deductions for asset purchases - and there'll be one in London
• £100m on facilities for "commercialisation of research" (echoes of the need to commercialise patents for the patent box), accommodation for innovative SMEs (probably means patent-seeking) and new research capabilities (no, I don't know what that means either)
• A "new" technology and innovation centre for high value manufacturing - by "new", the Government means integrating the activities of various existing centres
• 24 new University Technical Colleges to be established

These are the UK 2011 Budget key points from an IP perspective - if you want to see the more detailed analysis of these points, and a few others, I've put a more tax-focussed analysis up on IP Tax.

Tomorrow's UK budget

Tomorrow UK tax-payers of all types will be turning their attention to the Chancellor, George Osborne, who will be presenting his 2011 Budget. This year the emphasis is likely to be on tackling the UK's not insubstantial budget deficit, not to mention tax avoidance, while simultaneously delivering on promises of stability and simplicity.

The Government is expected to confirm the outcome of several consultations on tax reform proposals -- including the review of tax reliefs and the reform of the corporation tax system. The IP Finance Blog is particularly keen to see whether there will be any announcements in relation to R&D tax credits and whether further details of the patent box will be set out following the consultation which closed last month.

This member of the IP Finance team will be following developments on Olswang LLP's Budget Blog here for the latest developments. IP buffs will also be keeping an eye on Anne Fairpo's Intellectual Property Tax blog, here.