US Treasury Department CFIUS Proposed Regulations Released

The U.S. Treasury Department has recently issued new regulations for review concerning the Committee on Foreign Investment in the United States (CFIUS).  CFIUS reviews transactions implicating national security concerns.  The Fact Sheet concerning the new proposed regulations from the U.S. Treasury Department states: 

FIRRMA Provisions on Non-Controlling Investments

FIRRMA expands CFIUS’s jurisdiction beyond transactions that could result in foreign control of a U.S. business to also include a non-controlling investment, direct or indirect, by a foreign person that affords the foreign person: 

access to any material nonpublic technical information in the possession of the U.S. business;  membership or observer rights on the board of directors or equivalent governing body of the U.S. business or the right to nominate an individual to a position on the board of directors or equivalent governing body; or any involvement, other than through voting of shares, in substantive decisionmaking of the U.S. business regarding— the use, development, acquisition, safekeeping, or release of sensitive personal data of U.S. citizens maintained or collected by the U.S. business; the use, development, acquisition, or release of critical technologies; or the management, operation, manufacture, or supply of critical infrastructure.  

This new authority only applies to a non-controlling investment in a U.S. business that:  produces, designs, tests, manufactures, fabricates, or develops one or more critical technologies;   owns, operates, manufactures, supplies, or services critical infrastructure; or maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.

FIRRMA also requires that CFIUS prescribe regulations that further define the term “foreign person” in the context of non-controlling investments by specifying criteria to limit its applicability over certain categories of foreign persons.

Key Aspects of the Proposed Regulations Regarding “Covered Investments”

Types of investments covered:  Non-controlling investments that afford a foreign person certain access, rights, or involvement in certain U.S. businesses (referred to as “covered investments”).

Largely a voluntary process:  Process remains largely voluntary, where parties may file a notice or submit a short-form declaration notifying CFIUS of a covered investment in order to receive a potential “safe harbor” letter (after which CFIUS does not initiate a review of a transaction except in certain limited circumstances).  In some circumstances, filing a declaration for a transaction is mandatory.  In particular, FIRRMA creates a mandatory declaration requirement for specified covered transactions where a foreign government has a “substantial interest”.  Additionally, FIRRMA authorizes CFIUS to mandate declarations for covered transactions involving certain U.S. businesses that produce, design, test, manufacture, fabricate, or develop one or more critical technologies.  

U.S. businesses covered:  The new provisions on covered investments only apply to investments in U.S. businesses involved in specified ways with critical technologies, critical infrastructure, or sensitive personal data—referred to as “TID U.S. businesses” for technology, infrastructure, and data.  

 Critical technologies:  CFIUS may review transactions related to U.S. businesses that design, test, manufacture, fabricate, or develop one or more critical technologies.  “Critical technologies” is defined to include certain items subject to export controls and other existing regulatory schemes, as well as emerging and foundational technologies controlled pursuant to the Export Control Reform Act of 2018.  

 Critical infrastructure:  CFIUS may review transactions related to U.S. businesses that perform specified functions—owning, operating, manufacturing, supplying, or servicing—with respect to critical infrastructure across subsectors such as telecommunications, utilities, energy, and transportation, each as identified in an appendix to the proposed regulations.  

 Sensitive personal data:  CFIUS may review transactions related to U.S. businesses that maintain or collect sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security. “Sensitive personal data” is defined to include ten categories of data maintained or collected by U.S. businesses that (i) target or tailor products or services to sensitive populations, including U.S. military members and employees of federal agencies involved in national security, (ii) collect or maintain such data on at least one million individuals, or (iii) have a demonstrated business objective to maintain or collect such data on greater than one million individuals and such data is an integrated part of the U.S. business’s primary products or services.  The categories of data include types of financial, geolocation, and health data, among others.  Genetic information is also included in the definition regardless of whether it meets (i), (ii), or (iii).  

 Foreign person and excepted investor:  The regulations create an exception from “covered investments” for certain foreign persons defined as “excepted investors” based on their ties to certain countries identified as “excepted foreign states,” and their compliance with certain laws, orders, and regulations.  The regulations do not except these persons from control transactions previously subject to CFIUS jurisdiction; investments from all foreign persons remain subject to CFIUS’s jurisdiction over transactions that could result in foreign control of a U.S. business.

FIRRMA Provisions on Real Estate Transactions

In FIRRMA, Congress authorized CFIUS to review “the purchase or lease by, or a concession to, a foreign person of private or public real estate that”

“is, is located within, or will function as part of, an air or maritime port…” 

“is in close proximity to a United States military installation or another facility or property of the United States Government that is sensitive for reasons relating to national security;”

 “could reasonably provide the foreign person the ability to collect intelligence on activities being conducted at such an installation, facility, or property; or”

 “could otherwise expose national security activities at such an installation, facility, or property to the risk of foreign surveillance.”

 Pursuant to FIRRMA, this authority does not extend to “a single ‘housing unit.’”  This authority also does not apply to “real estate in ‘urbanized areas’ . . . except as otherwise prescribed by [CFIUS] in regulations in consultation with the Secretary of Defense.” (emphasis added)

 FIRRMA directs CFIUS to “prescribe regulations to ensure that the term “close proximity” refers only to a distance or distances within which the purchase, lease, or concession of real estate could pose a national security risk.”

 FIRRMA also requires that CFIUS prescribe regulations that further define the term “foreign person” for real estate transactions by specifying criteria to limit its applicability over certain categories of foreign persons.

The full text of the regulations is available, here. 

U.S. House of Representatives Passes Marijuana Banking Law

Congress is one step closer to resolving one of the very thorny issues concerning the legal marijuana business in the United States—access to banking because of its illegal status at the Federal level.  The SAFE Banking Act of 2019 has reportedly passed the U.S. House of Representatives and must then be passed by the Senate.  Of course, the bill will still have to be signed by President Trump, which may not be a sure thing.  He seems to change his mind on this issue frequently, and we are approaching an election year. There is also speculation that because of the current impeachment controversy in the Congress concerning President Trump that very little will be accomplished from a legislative perspective—that could also impact passage of patent eligible subject matter reform and drug pricing legislation.  A summary of the Safe Banking Act of 2019 states: 

This bill generally prohibits a federal banking regulator from penalizing a depository institution for providing banking services to a legitimate marijuana-related business. Specifically, the bill prohibits a federal banking regulator from (1) terminating or limiting the deposit insurance or share insurance of a depository institution solely because the institution provides financial services to a legitimate marijuana-related business; (2) prohibiting or otherwise discouraging a depository institution from offering financial services to such a business; (3) recommending, incentivizing, or encouraging a depository institution not to offer financial services to an account holder solely because the account holder is affiliated with such a business; (4) taking any adverse or corrective supervisory action on a loan made to a person solely because the person either owns such a business or owns real estate or equipment leased or sold to such a business; or (5) penalizing a depository institution for processing or collecting payments for such a business.

As specified by the bill, a depository institution shall not, under federal law, be liable or subject to forfeiture for providing a loan or other financial services to a legitimate marijuana-related business.

The bill is available, here.  I’ve previously written on this issue, here. 

Oxfirst Webinar: Balance Requirements for Standard Development Organizations

Our friends at Oxfirst have another exciting webinar scheduled for October 2, 2019 at 1600 to 1700 (British Standard Time) titled, “’Balance’ Requirements for Standards Development Organizations: A Debate between Professor Contreras and Professor Larouche.”  

Here is a description of the webinar:

“Antitrust and Balance of Interests in Standards Development - Lessons from NSS Labs v. Symantec”

The recent decision of the District Court of the Northern District of California, in NSS Labs. v. Symantec sheds light on the requirement that Standard Development Organizations (SDO) achieve a balance of interests in their procedures. Whilst the court ultimately did not rule on this point, the U.S. Department of Justice (DOJ) intervened in the case to insist – correctly in our view – that SDOs must meet that requirement in order to benefit from protection against antitrust liability under the Standard Development Organization Advancement Act (SDOAA).

Here are brief bios of the speakers: 

Professor Jorge Contreras

Jorge Contreras is a Presidential Scholar and Professor of law at the University of Utah in Salt Lake City, Utah, USA.  He holds a JD from Harvard Law School, all conferred with honors.  Prior to entering academia, Prof. Contreras was a partner in the Boston, London and Washington DC offices of the international law firm Wilmer Cutler Pickering Hale and Dorr. His current research focuses on intellectual property transactions, standard setting and science policy. He has edited six books and published more than 100 scholarly articles on these topics, and has received numerous awards for his scholarship and teaching. His latest books include the 2-volume edited series, The Cambridge Handbook of Technical Standardization Law (2018, 2019). He has been quoted in the NY Times, Wall Street Journal, Economist, Washington Post, and Korea Times, has been a guest on NPR, BBC and various televised broadcasts, and his work has been cited favorably by the U.S. Federal Trade Commission, European Commission and courts in the U.S. and Europe. 

Professor Pierre Larouche

Pierre Larouche (1968) is Professor of Law and Innovation at Université de Montréal, where he is in charge of the new PhD Programme on Innovation, Science, Technology and Law. Until 2017, he was Professor of Competition Law at Tilburg University (Netherlands), where he founded and directed the Tilburg Law and Economics Center (TILEC) and created the Bachelor Global Law. Prof. Larouche has also taught at the College of Europe (Bruges) (2004-2016), and he has been a guest professor or scholar at McGill University (2002), National University of Singapore (2004, 2006, 2008, 2011, 2013), Northwestern University (2009-2010, 2016-2017), Sciences Po (2012), the University of Pennsylvania (2015) and the Inter-Disciplinary Center (IDC, 2016). His research centers around economic governance, and in particular how law and regulation struggle to deal with complex phenomena such as innovation. He follows a meta-comparative and inter-disciplinary method. He currently teaches competition law, economic regulation, tort law as well as patents and trademarks.

Registration is free and available here:  https://attendee.gotowebinar.com/register/5539834762562087947

And, here is some "fine print" from Oxfirst concerning registration:

"After registering, you will receive a confirmation email containing information about joining the webinar.

Attention, please sign up with your professional email account. We don’t accept registrations from personal email addresses. Participation is limited at 100 participants. We reserve the right to eliminate participants. By joining the OxFirst webinar you agree to our Privacy Policy (found here) and to receive forthcoming information on our webinars, newsletters and events."

Going After FAANG in the United States: States Attorneys General Begin Investigation into Google

An interesting question is when do you regulate a new technology.  Do you regulate it early, potentially impeding its development?  Or, do you give it time to develop and the industry around it?  One issue with respect to waiting to regulate concerns the difficulty in doing so because of public choice issues.  The industry becomes too powerful to regulate effectively, or essentially captures the agency regulating it.  Some may argue that the United States, through the federal government, has failed to effectively regulate the FAANG companies—Facebook, Amazon, Apple, Netflix and Google.  However, another set of potential regulators exist in the United States—State Attorneys General.  Indeed, state attorneys general have led lawsuits against many industries, including tobacco and more recently the pharmaceutical industry.  Those attorneys general may be subject to similar public choice issues; however, sometimes they still act.  And, now, 50 attorneys general are going after Google.  Here is the press release: 

Attorney General Ken Paxton today announced that Texas is leading 50 attorneys general in a multistate, bipartisan investigation of tech giant Google’s business practices in accordance with state and federal antitrust laws.

The bipartisan coalition announced plans to investigate Google’s overarching control of online advertising markets and search traffic that may have led to anticompetitive behavior that harms consumers. Legal experts from each state will work in cooperation with Federal authorities to assess competitive conditions for online services and ensure that Americans have access to free digital markets.

“Now, more than ever, information is power, and the most important source of information in Americans’ day-to-day lives is the internet. When most Americans think of the internet, they no doubt think of Google,” said Attorney General Paxton. “There is nothing wrong with a business becoming the biggest game in town if it does so through free market competition, but we have seen evidence that Google’s business practices may have undermined consumer choice, stifled innovation, violated users’ privacy, and put Google in control of the flow and dissemination of online information. We intend to closely follow the facts we discover in this case and proceed as necessary.”  

Past investigations of Google uncovered violations ranging from advertising illegal drugs in the United States to now three antitrust actions brought by the European Commission. None of these previous investigations, however, fully address the source of Google’s sustained market power and the ability to engage in serial and repeated business practices with the intention to protect and maintain that power.

IP Valuation for Investment Purposes -- Part 1

Here is the second post by Dr. Roya Ghafele.  It is the first part of a two part series on the importance of IP Valuation.  

IP valuation for Investment Purposes – Part 1

By Roya Ghafele, OxFirst Ltd. www.oxfirst.com

With the European Central Bank’s interest rate decision continuing to be at 0%, investors are forced to put their funds to work in different ways.  Can patents, the underlying rights to an invention, offer such an alternative? 

Any type of investment decision is hinged on an adequate appraisal of risk and return rates of an investment. Ideally, an investment yields high returns, while risk rates are kept as low as possible. The investment in intellectual property forms no exception to that.

The adequate valuation of intellectual property can hence play an important role in the promotion of technology markets. It is through this instrument that investors can make an educated placement of their funds. In spite of the instrumental role that IP valuation could assume, it is often ignored in the financial community. 

The problem does not seem to be that it is not possible to value IP for investment purposes or that IP has any intrinsic features that would prevent its valuation. The problem is a lack of awareness of the many opportunities provided by IP valuation. If investors have IP on their radar screen at all, then they tend to contend themselves with counting patents (apparently, the more, the better seems to be the premise) or to check if the company is involved in any legal proceedings. As to early stage technology companies, investors will at best consult a patent attorney who can undertake a freedom to operate analysis of the underlying patents of a technology. While such an assessment can provide helpful legal insights, it does not allow to understand how IP relates to potential business performance.

IP managers in technology companies on the other hand side do often also not know how to best communicate the value of patents to financial analysts, angel, VC or Private Equity Investors. Current accounting standards that allow to only partially reflect the value of patents do not make things easier.[1]  This leads to market inefficiencies, where valuable technology sits gathering dust, while investors are not able to scope potentially attractive financial opportunities. Already in 2014, the European Commission called for an enhanced usage of IP valuation as a means to better link those in search for funding with those eager to put their money to work.[2] Equally, the UK Intellectual Property Office launched an initiative inviting the City of London to ‘Bank on Intellectual Property.’ [3] Those initiatives have so far shown little results and the best practice for leveraging IP in financial transactions still seems to stem out of Silicon Valley, where some financial institutions have been reported to use IP valuation for investment purposes. [4]  Yet, institutions like these are the worthy exception, rather than the norm. 

So, with a lot to gain from overcoming the little understanding that prevails on IP valuation, the question arises what technology entrepreneurs can do to attract investors to their business.

I turn to this question in the part 2 of this comment, where I will seek to offer some practical tips that may help to better link IP to cash flows.

---

[1]  GHAFELE, R. ‘Accounting for Intellectual Property?’ Oxford Journal on Intellectual Property Law & Practice, Nr. 5/7 2010, at 37

[2] EUROPEAN COMMISSION, Report of the Export Group on Intellectual Property Valuation. http://ec.europa.eu/research/innovation-union/pdf/Expert_Group_Report_on_Intellectual_Property_Valuation_IP_web_2.pdf  (2014) at 7, 22-23, 57, 91,

[3] UKIPO ‘Banking on Intellectual Property? The role of intellectual property and intangible assets in facilitating business finance’ available at: http://www.ipo.gov.uk/ipresearch-bankingip.pdf (2014) at 221

[4] See About Silicon Valley Bank, http://www.svb.com/about-silicon-valley-bank/ (disclosing that Silicon Valley Bank’s clients include 50% “of all venture capital-backed tech and life science companies in the US” and that Silicon Valley Bank was established in 1983).

Welcoming Dr. Roya Ghafele to the IP Finance Blog!

IP Finance is delighted to announced that Dr. Roya Ghafele, the Director of OxFirst, will join our permanent team of bloggers.  I’ve pasted a short bio of Dr. Ghafele below.  Dr. Ghafele is planning to author a series of posts on IP valuation and management.  Please find her first post on IP valuation below.  We are very excited to have her join us!  


Here is her bio:

Dr Ghafele has been the Director of OxFirst, an award winning IP law and economics consultancy, since 2011. In addition, she has held academic positions in International Political Economy and Business with Oxford University since 2008 and was also a tenured Lecturer (Assistant Professor) in IP Law with Edinburgh University. Prior to that she had post-doctoral assignments at Harvard and U.C. Berkeley. From 2002-2007 she worked as an Economist with the U.N.’s World Intellectual Property Organization (WIPO) and the OECD. She started her career with McKinsey in corporate finance.

Her Ph.D. was awarded the Theodor Koerner Research Prize by the President of the Republic of Austria. Dr. Ghafele was trained at Johns Hopkins University, School of Advanced International Studies, the Sorbonne and Vienna University. During the course of her studies she was fully funded by the Austrian Government because her academic merits were continuously of outstanding quality. She is native in German and fluent in English, French and Italian.

Specialties: IP valuation, FRAND Royalty Rate Determination, IP and Competition Economics

Here is her first post: 


IP valuation – Why it Matters

The major challenge does not seem to be that patents or other forms of intellectual property cannot be valued or that IP disposes of any intrinsic features that would prevent its valuation. The challenge is that many IP managers are still rather ignorant when it comes to the valuation of intellectual property.  This can have a series of adverse effects. On the one hand, intellectual property may be inadequately managed. On the other hand, others in the company may in all honesty wonder what the bottom-line contribution of IP is to business. Without an adequate understanding of the value of intellectual property, much IP risks gathering dust and not being put to work in the most effective manner.

This raises the question how intellectual property can be valued. While there are many different methods that allow to value intellectual property, there currently exist three overarching principles that allow to value IP assets. These principles are in no way different from the valuation of any other assets, be they tangible or intangible in nature. These are the income, market and cost approach. Each of these methods offers different insights. Hence, depending on the situation, they can complement each other. The income method, measures value in terms of future revenues that can be generated from the asset. It looks at upcoming revenue streams and seeks to determine the current value of these assets. As the method is hinged on an outlook of what the future may hold, it is crucial to determine the discount rate, which reflects risks and probabilities associated with such potential future income. This method can be quite helpful if one is keen on enhancing the management of a patent portfolio. It gives the manager an insight as to how much the IP could potentially generate. This can help formulate a forward-looking IP strategy. The market method again looks at comparable rates that kind of similar IP could fetch in somewhat similar market transactions. As such the insight gained is what a typical rate could be for the IP. Such a method can give a helpful first insight when one is for example seeking to sell or license IP. It can allow to understand if one’s asking price is somewhat in the range of what others have wanted. That being said, it can be challenging to find such information and the method says nothing about the specific worth the patent has in a specific business context. The cost method again can help determine costs associated with IP creation. This can be useful when seeking to minimize costs in an IP Department.  

Each of these paradigmatic approaches have their strengths and weaknesses. They also vary in terms of the effort needed to find relevant information. But overall, they can help optimize expected results from intellectual property. Important to know is that any IP valuation is an off-book valuation and this makes it harder to systematically make use of data which has undergone the scrutiny of controlling. To the keen IP manager this is however nothing but a small stumbling block that should not prevent her to systematically manage IP for value generation.

Tax Credit System for Video Games not Working Well in the United Kingdom?

The United Kingdom’s Tax Watch has an interesting report on the alleged abuse of the tax credit system in the United Kingdom by video game maker, Rockstar North, Take-Two Interactive and related companies.  Rockstar North and Take-Two Interactive are two of the related companies responsible for the hugely popular video game Grand Theft Auto.  Despite making 6 billion US dollars, Rockstar North has apparently not paid any corporate tax in the United Kingdom and has claimed 42 million UK pounds in tax credits.  The Report states: 

Video Games Tax Relief was introduced by the UK government in 2014 to provide targeted support for games that were “culturally British”, with a particular focus on support for small and medium sized businesses.

Our analysis shows that the amount claimed by Rockstar North is the equivalent of 19% of the total relief paid to the entire video games industry in the UK since the programme came into effect. This raises serious questions as to whether the relief is being properly targeted, at a time when the industry is lobbying for the relief to be expanded and made more generous.

This report also raises questions as to whether an appropriate amount of profit has been allocated to the UK companies involved in the game’s development. Seven active companies based in the UK, using the Take-Two and Rockstar names, declared a total profit before tax of £47.3m in the UK between 2013 and 2018. However, over the same period we estimated the operating profit of games published by Rockstar to be in the region of $5bn.

Despite the minimal allocation of profits to the UK, Take Two interactive placed a substantial amount of value on the work of Rockstar employees, including those based in the UK. These key employees were given the rights to substantial amounts of the profit generated by the company in relation to games released under the Rockstar label.

It is our opinion that a more appropriate allocation of profit between the US and UK would have resulted in substantially more profit being allocated to the UK. This would have meant that Rockstar North would not be eligible for a payable tax credit. Instead, Take-Two and the Rockstar companies should have had a substantial tax liability in the UK.

It would be interesting to see data on the supposed overall economic benefit of having the development of Grand Theft Auto in the United Kingdom; although I take that type of data with a “grain of salt.”  Part of the conclusion of the Report states: 

Take-Two appears to believe that it is reasonable that close to 100% of the profit should flow to their US based parent companies and senior management, whilst almost no profit flows back to the UK companies involved in either making or selling the game. We do not believe that this division of profits can be justified under the so-called “arm’s length” standard found in international tax law.

There is no evidence that HMRC have challenged this set-up or that Take-Two or any of the individuals named in this report has acted illegally. However, it is open for HMRC to challenge the allocation of profit under the transfer pricing system and we urge them to investigate this case urgently.

My understanding is that some prominent video game makers suffered a stock price drop soon after President Trump's criticism of violent video games.  The full Report is available, here.  (Hat tip to George Turner)

The World of Concentration and the Absence of Competition Harming Workers/Consumers and Innovation

Jonathan Tepper and Denise Hearn recently published in 2019, “The Myth of Capitalism,” which is around 290 pages with endnotes.  Jonathan Tepper is a former hedge fund analyst and trader, and founded Variant Perception, a consultancy.  Denise Hearn is Head of Business Development for Variant Perception.  In “The Myth of Capitalism,” the authors provide a very ambitious analysis and diagnosis of U.S. economic problems—they start with the question: “Who killed your paycheck?,” and provide many policy proposals.  They critique the Chicago/Harvard School approach to antitrust and point to how investors such as Warren Buffet specifically seek out investing in firms in markets with significant concentration.  They point to the significant increase in merger approvals.  The authors point to the technology companies as problematic, but also point to many other industries which are relatively highly concentrated.  They discuss the problem of “tacit cooperation” between firms in markets with relatively high concentration—smart people do not need to have a meeting to get something done like price fixing.  They further discuss how concentration has led to a monopsony in labor markets—there is only one buyer of labor (or just a few).  This is part of the basis of their argument for why we have for the most part been stuck with relatively stagnant wages.  One of their policy prescriptions is renewed, vigorous antitrust enforcement.  They also discuss intellectual property in various sections of the book and raise some of the well-known critiques of the system.  The authors generally seem to believe that because intellectual property resembles a monopoly (although not always is) then it is problematic.  There is not too much of the book discussing the benefits of intellectual property to start-ups—new entrants to the market and how this may ultimately lead to fewer highly concentrated markets.  However, they do discuss the literature concerning a lower number of startups.  Similarly to Professor Timothy Wu's new book, they also raise issues with respect to political freedom and market concentration. This book is available here for around $18.  

I am also in the process of reading Harvard Business School Professor Emerita Shoshana Zuboff's book, "The Age of Surveillance Capitalism: The Fight for A Human Future At the New Frontier of Power," almost 700 pages with endnotes.  So far, she does not seem to think that rigorous antitrust review will make a difference at all--the problem is more centered around the new markets of selling our personal information and habits by technology companies, and then framing and controlling our behavior through software we interact with.  The number of technology companies does not matter.  She believes there is a need to redefine what is happening in this new surveillance age without trying to refer to preexisting structures--we're dealing with something very new with great danger.  This is a very ambitious book.  This book is available here for around $23.  It is interesting to read the two books close in time.  

Professor Shamnad Basheer

As IPKat and IP Finance blogger Neil Wilkof recently reported Professor Shamnad Basheer passed away.  Neil wrote a very beautiful tribute on the IPKat blog, here.  I encourage you to read it and particularly note his work with children and youth (also here).  About ten years ago, Shamnad and I were both in Munich teaching.  I became very sick, and Shamnad stepped in and kindly gave a presentation at a conference for me.  That was Shamnad to me.  He was always willing to help and such a very kind soul.  We were able to spend some time together getting to know each other in Munich and over the years exchanged emails.  He was always the same—kind, thoughtful and willing to help.  I know there are so many other stories of Shamnad’s kindness.  Thank you for being you, Shamnad.  You are missed.