Patent Litigation, the ITC, and Hardship in the Chip Industry

One of the verities of IP law and practice is "Wilkof's Law". For those of you (probably all of you) who have never heard of "Wilkof"s Law", it goes like this. Question: "How do you know when there is economic slowdown?" Answer: "There is an increase in patent litigation."

A clear example of this principle was described recently on Bloomberg.com (23cDecember 23) under the title--"Chipmakers Hire Armies of Lawyers to Boost Revenues Amid Slump." The report described the efforts of chip (of the computer and not the confectionery kind) manufacturers to make increasing use of patent litigators to try and make up for the expected severe downfall in profits for the industry during 2009. The anticipated drop in revenue for 2009 is indeed grim. According to the report, 2008 witnessed a 4.4% decline in sales, and a 16% crater-like decline in sales in forecast for 2009. Never has the industry experienced back-to-back declines in overall annual sales.

The list of current and possible patent litigation activity is broadly based in the industry. Thus it is reported that Qimonda, LSI and Spansion have all brought patent infringement actions before the ITC. Such actions tend to take much less time than a court action, and they may lead to a settlement with payment made into the patentee's coffers. Particularly notable is Spansion, which is reported to have not recorded a profit since going public in 2005. Licensing fees from defendants is one way to remedy this situation, if only in part.

When licensing fails, going forward with the suit is always a possibility. In one such high profile court filing, Spansion has recently sued Samsung for patent infringement in the area of flash memory chips. As well, Qimonda is reported to crossing patent swords with Seagate Technology, and LSI has commenced patent litigation matter with Freescale Semiconductor and Elpida Memory.

The pros and cons of bringing an ITC action with the intention of reaching a licensing arrangement were described by Robert Krupka of Kirkland & Ellis as follows. On the one hand, an ITC proceeding might actually be more expensive than a regular court proceeding (this is due to the procedural requirements of such action), with costs in the area of $5 million or more. On the other hand, for the target, settlement might be the better part of valor, especially since such an arrangement ensures the target's continuing right to sell in the U.S. market. It would seem that there is a bit of the patent-troll mind-set in all of this, although I suspect that none of the plaintiffs to such an action would so characterize themselves.

Your friendly patent trolls in action

In considering this expected flurry of chip-related patent litigation during 2009, we bring you the following comment from from the Bloomberg article. As noted, "Jerry Sanders, the founder of AMD, used to say, "Real Men own fabs", said Craig Berger.... That's kind of changed. Now it's, "Real men have huge armies of lawyers."

Or, stated otherwise, Wilkof's law is alive and well.

"Real men own fabs"--that is so yesterday ...

Tax incentives for Belgian R&D

IP Finance is pleased to host this short article by Tom Swinnen (Thompson Hine LLP, Brussels) on tax incentives for research and development in Belgium:

TAX INCENTIVES FOR R&D IN BELGIUM

Over 170 biotech companies operate in Belgium, generating more than 16% of the European turnover in the sector, making Belgium one of the most important countries for R&D in the European Union. Belgium has taken several measures to promote investments in Belgium and to create a favourable environment for R&D activities. For the 2008 tax year, a new tax incentive for patents has been introduced which leads to a maximum effective tax rate of 6.8% on patent income. The newly adopted Patent Income Deduction (PID) results in the lowest effective European tax rate on income derived from the licensing of patents or the use of patented products, making Belgium a highly favoured location for foreign investment.

The PID allows Belgian companies as well as Belgian branches of foreign companies to deduct from their Belgian taxable basis 80% of the royalties received from patents resulting from R&D activities. This is intended to encourage all R&D activities in relation to the development or improvement of patents. The main characteristics of the PID and other R&D tax incentives are as follows.

PATENT INCOME DEDUCTION

Eligible taxpayers

The PID is available to all corporate taxpayers in Belgium, in essence all Belgian resident companies and Belgian permanent establishments of non-resident companies. No tax ruling is necessary and the PID applies automatically. The compliance formalities are minor and consist of fulfilling a specific form enclosed with the tax return.

Qualifying patents

The PID only covers patents and supplementary protection certificates, but not any other intellectual property rights. The company must hold a patent right; the PID does not apply before the grant of the patent and is no longer available after the patent's expiry. The patent may be (i) self-developed or (ii) acquired and further developed.

 Self-developed: the patent is totally or partially developed in its research centre(s) in Belgium or abroad.

 Acquired and further developed: the company either acquires the patent from or is granted a licence to the patent by a third party, provided the company further develops the patent in the company's research centre(s) in Belgium or abroad. However, it is not required that the further development results in an additional patent.

The research centre that developed or improved the patent must constitute a branch of activity of the company, i.e. a division of an enterprise that constitutes an independent business unit, and can be located in Belgium or abroad.

The PID is not restricted to Belgian patents but extends to patents valid in other jurisdictions (e.g. U.S., Japanese or German patents). Also, the company does not need to be the sole and full owner of the patent rights -- it can hold a patent together with other companies and the patent can be held on the basis of other property rights, such as usufruct rights.

For the PID to apply, it is essential that the patent has not been commercialized anywhere in the world before 1 January 2007.

Qualifying income

The patent can be licensed to one or more third parties or can be used in the manufacturing process by or on behalf of the company.

 If the patent is licensed, the income consists of licence payments such as royalties, milestone payments and upfront fees. When the parties are related, the royalties must comply with the arm's length principle in order to avoid abuse. To the extent that the remuneration also relates to non-patent intellectual property, only the portion that relates to patents qualifies for the PID.

 If the patent is used in the manufacturing process by or on behalf of the company, it is important to determine how much of the turnover income can qualify for the PID. This will typically be calculated as that portion of the derived income that the company would have received for licensing the patent to an unrelated third party in an arm's-length transaction.

In order to avoid abuse and double deductions, remuneration paid to third parties on acquired patents and the deprecation on these patents must be deducted from the basis of the PID if these costs are already deducted from the taxable result in Belgium. This anti-abuse provision is not applicable to self-developed patents. The R&D expenses associated with self-developed patents should not therefore be deducted from the basis for the PID.

The Belgian PID is not capped.

OTHER TAX INCENTIVES

The PID can be claimed in addition to other already existing tax incentives, such as:

Notional interest deduction

Together with the PID, Belgian resident companies as well as permanent establishments of foreign companies paying taxes in Belgium, can benefit from the Notional Interest Deduction. The deduction equals a percentage fixed on a yearly basis (e.g. 4.307% for tax year 2009) of the equity shown in the balance sheet of the annual account.

Investment deduction and R&D tax credit

Investments in patents and fixed assets used in Belgium to promote R&D are eligible for an increased investment deduction of either 13.5% on the acquisition value or 20.5% of annual depreciations permitted for tax purposes

As an alternative to the investment deduction, a R&D tax credit is granted on qualifying R&D-related investments. The taxpayer must opt for one of the two methods (Investment deduction or R&D tax credit).

Partial payroll withholding tax exemptions

Companies active in R&D can benefit an exemption from payroll withholding tax for researchers (PhD, engineers and master degrees). Recently, the maximum exemption has been increased from 50% to 65%.

Future President Obama and Generic Drugs and Biologics

Investment analysis website Morningstar.com has an interesting article on Yahoo pointing out the effect of one of future President Obama's policies on the finances of pharmaceutical companies. Barack Obama has gone on record as wishing to encourage the use of generic drugs, including generic biologics. His advisors have gone on record as  wishing to speed up approvals of generic drug approvals with the US Food and Drugs Administration (FDA) and also to introduce a new legislative pathway for generic biologics. 

Speeding up the approvals of new generic drugs and biologics is likely to lead to substantial reduction in the value of the patents. The current lethargic FDA approval process in fact leads to effective patent term extensions as generic companies have difficulty in obtaining approval for sale of their drugs on expiry of the patent protection. The value of such patents are therefore enhanced compared to the value that would be expected if products could be put onto the market on expiry of the patent.

Currently the approval process for generic biologics is not yet established. The characteristics of biologics means that the FDA demands full testing, rather than relying on data already on file. This hurdle means that few (if any) generic biologics have been approved - and that it will be some time before generic counterparts to brand name drugs appear. The new administration will continue the work done by the previous Bush administration to put a new procedure in place during 2009. Morningstar point out that this will mean that . Israeli generics company Teva has already welcomed the initiative in a press release before christmas.

Politically the lure of cheaper drugs by increasing the supply of generics once the brand name drugs have come off patent is tempting. The other side of the coin is, however, the reduction of the return on the investment made by the pharmaceutical companies. These depend on the cash flowing in from successful drugs to fund their future research and development. Pushing for greater use of generic off-patent drugs may mean that the US government may have to increase funds for health research to counteract the reduction in R&D dollars spent by pharmaceutical companies.  

Madonna seeks giant privacy payout in UK litigation

The Guardian has reported that pop icon Madonna is claiming more than £5 million in damages from the Mail on Sunday newspaper, which admitted a breach of privacy and copyright infringement following its publication of private photographs of her wedding to film director Guy Ritchie. If Madonna succeeds, she will have created a new UK record for a pay-out in a privacy case (the current record is the £60,000 recently awarded to Formula One boss Max Mosle after revelations concerning his sex life were published in the News of the World).

The singer had accused the Mail on Sunday of breaching her privacy and copyright by publishing pictures of her wedding in the Scottish Highlands, eight years after the event, following news that her marriage to Ritchie had broken down. The wedding was said to have been "wholly private" though the photos were said to have been surreptitiously copied by an interior designer at Madonna's home in Beverly Hills.  The paper is said to have paid just £5,000 for them. A decision from Mr Justice Eady is expected in the New Year.

[Thanks, Birgit Clark, for supplying this information].

Hungary IP valuation conference: the papers

On 27 to 28 November 2008 the Hungarian Patent Office hosted its first Intellectual Property Valuation in Practice Symposium. More information concerning the event can be found here and various presentations can be downloaded too. These are:

Session 1: The demand for IP valuation
"Biotech start-up case study - spin-off company formation and IP" Dr. Imre Kacskovics, Immunogenes, Hungary
"IP valuation and management at Finnish universities" Veijo Ilmavirta, Helsinki University of Technology, Finland
"Managing IP portfolios" Ernő Duda, SOLVO Biotechnology, Hungary
"IP valuation for investors" Alois Peham, Siemens, Austria
"Introduction to IP valuation for transfer pricing" Edgar Ahrens and Eszter Sager,
PricewaterhouseCoopers, Hungary

Session 2: Practical Methodology Best Practice
IP Valuation Methods
"Introduction to IP valuation" Peter Kaldos, Hungarian Patent Office
"Valuation in life sciences: An introduction to the Risk Adjusted Net Present Value method" Ralph Villiger, Avance, Switzerland
"Technology/patents analysis and market factors" Jim Asher, Coller IP Management, United Kingdom
"Patent evaluation for (high-tech) start-ups:An introduction to the relief-from-royalty method" Thomas Schwingenschlögl, TPA Horwath, Austria
"IP Valuation and M&A" Kelvin King, Valuation Consulting Ltd.: a BNP Paribas company, United Kingdom
"IP valuation methods used for litigation and infringement" Rainer Engels, Federal Patent Court, Germany
"Licensing-fee approach for patent evaluation" Peter Pawlek, Austria Wirtschaftsservice

Session 3: IP Valuation Services
IP valuation services presently offered and in the pipeline
"Working with valuers, instructions and due diligence" Kelvin King, Valuation Consulting Ltd.: a BNP Paribas company, United Kingdom
"IP valuation at Avance Gmbh" Ralph Villiger, Avance, Switzerland
"IPSCORE" Nils Omland, PatentSight, Germany
"IP valuation at the Hungarian Patent Office" Peter Kaldos, Hungarian Patent Office
"Market based methods and IP valuation at IP Bewertungs AG" Dr. Ulrike Rehn, IP Bewertungs, Germany
"IP valuation at Coller IP Management" Jim Asher, Coller IP Management, United Kingdom

Session 4: IP Valuation for Taxation, Accounting for IP and IP Valuation standardisation
"Introduction to taxation and accounting standards for IP" Eszter Sager, PricewaterhouseCoopers, Hungary
"General principles of proper patent valuation: The forthcoming European standard" Dr. Alexander Wurzer, Steinbeis-Hochschule, Germany

Thanks, Birgit Clark, for supplying this link.

Patent term

Following Tuesday night's IP Finance seminar on patent and copyright term, I've now obtained a copy of the full set of PowerPoint slides on the financial significance of the duration of the patent term from Anna Feros (Shepherd & Wedderburn). You can peruse them at your leisure here.

Social media websites enhancing goodwill?

Initial findings of a US research study trying to find out more about the power of online word-of-mouth have recently been published.

The study, entitled “The Impact of Social Media on Purchasing Behavior”, commissioned by DEI Worldwide and conducted by OTX, reveals that consumers rely on various types of social media websites (such as blogs and chat rooms) as much as on company websites for product and brand information.

According to the study’s findings, 70% of consumers have visited social media websites in order to get information on a product; 62% of consumers find the information received from a brand representative more valuable than advertisements. The study concludes that companies using social media have a greater opportunity to not only reach more customers, but also to increase their likelihood of making a purchase. Companies should integrate “social media marketing” into their marketing mix in order to successfully engage consumers online and to influence their buying choices.

Online word-of-mouth is also an issue dealt with in a new book by Richard Owen and Dr. Laura Brooks that looks into how to increase customer loyalty. “Answering the Ultimate Question” follows up on the 2006 bestseller “The Ultimate Question” and sheds light on how to improve the overall customer experience.

Innovation and transformation are among the critical components which the metric tool “Net Promoter Score” uses in order to analyse a company’s performance through its customers’ eyes. This includes continued innovation of the customer experience to create competitive differentiation - and activating positive word-of-mouth.

Lego is mentioned as an example of a company that successfully used feedback from its online community to help creating and launching a new product.

More on this book and on “what works” here and here. More on the DEI Worldwide study here. More on word-of-mouth marketing (“buzz marketing”) earlier discussed on this blog here. For some quotes on the value of word-of-mouth click here.

Damages for observing patent injunction

From the 3rd edition of LECG's UK Newsletter comes this little insight into the deployment of a financial consultancy in intellectual property litigation, in Les Laboratoires Servier and another v Apotex Inc and others [2008] EWHC 2347 (Ch), heard on 9 October by Mr Justice Norris and briefly summarised here and here:

"... Our UK case highlights include being instructed by Taylor Wessing to calculate Apotex UK Limited’s damages as a result of an injunction they had observed. For a period of 11 months, Apotex was injuncted from selling a particular generic drug, because of claims of patent infringement brought against it by Servier, which manufactured the branded version of the drug. Apotex had always contended that the patent was invalid, and when this assertion was subsequently validated by the Court, Servier was liable for the damages suffered by Apotex as a result of the injunction.

Apotex won a substantial damages figure of £17.5M. ... The amount of interest awarded was also a matter of contention, and in a separate hearing, Norris J awarded a further £2.1M in interest. In respect of the interest calculation, Norris J deemed the Apotex parties ‘substantially right’.

Of particular interest in this case were the market dynamics, which were specific to the industry in question. The interaction between ‘branded’ drugs, ‘generic’ drugs and ‘authorised generic’ drugs (sold as generics under authorisation of the original patent holder) played a part in the formation of the ‘but-for’ scenarios. The market dynamics were important to every aspect of the case, but in particular (i) the role of potential market entrants, in the (hypothetical) absence of the injunction and (ii) the extent to which the injunction affected Apotex in perpetuity".

This looks like a great victory for LECG, but it should not be forgotten that the calculation of damages for failure to be allowed into a market still remains a largely conjectural exercise. As the judge said at para. 60:

"Recognising the imprecision inherent in the exercise but the precision of some of the assumptions used I have then stood back and compared that sum with the £74 million Servier earned during the period of the injunction to which it was found ultimately not entitled, to the £11 million which it paid to AG2 to keep it out of the market, and to the $20 million paid to G4; and I have asked myself whether in the round this sum overcompensates Apotex for the loss that it has suffered, reminding myself that the jurisdiction is compensatory not punitive. The range of figures presented for my consideration went from £400,000 (Servier) to £27 million (Apotex). I am satisfied that my figure is broadly right, though I would propose to round it down to £17.5 million to underline the fact that one can only do broad justice where there are so many significant variables. £17.5 million is accordingly the figure which I award as compensation on the enquiry".

How much is public performance of a sound recording worth?

A post on the IPKat weblog earlier today deals with the valuation of copyright in Australia. Professor David Brennan (University of Melbourne, Australia) has made available some very helpful and revealing slides that deal with two Australian Copyright Tribunal cases -- Audio-Visual Copyright Society (t/a Screenrights) v Foxtel [2006] ACopyT 2 and Re PPCA [2007] ACopyT 1 (which deals specifically with public performance rights in sound recordings). In both cases, survey evidence of consumer valuation of copyright was adduced, with wildly)varying results! You can read the slides here.

The Big 3 and green innovation

With the discussion on how to rescue General Motors, Ford and Chrysler still ongoing on Capitol Hill – although some short-term loans apparently are already secured (check out news here and here) - James E. Malackowski,
CEO of Ocean Tomo LLC, warns that top consideration should be given to the significant potential of the “Big Three” technologies for stimulating economic and job growth.

These technologies are not only vital for the automobile industry; they also influence other sectors, such as the advanced battery industry, or fuel cell production vital for military applications.

Malackowski warns that the bankruptcy of any or all of the Big Three would create a historically unique opportunity for foreign competitors to acquire a vast amount of US “crown jewel technology” for a fraction of their true value. A look at key patent portfolios of the Big Three (e.g. patents for hybrid and electric vehicles) makes this clear: Ford and GM together hold approximately a third of all green technology patents; GM alone holds 70% of the patents in the emerging technology category.
Like no other industry sector, the Big Three have the resources (and the incentives) to invest in required R&D. Losing these (green and clean air) technologies would also mean a serious setback in addressing climate change and energy efficiencies.

For Malackowski on the Big Three see here. More on the current rescue plan negotiations here and here; more on high-mileage vehicles here; and more on (Ford) green collar jobs here.

Life sciences and valuation -- a new book

Via Technology Transfer E-News comes a report that the co-founders of Avance, a life sciences valuation firm with offices in the US and Switzerland, has published a guide to life sciences valuation that contains useful information for business development and licensing professionals as well as TTOs, researchers and investors.

Boris Bogdan and Ralph Villiger, in Valuation in Life Sciences: a Practical Guide (Springer, 2008, 334 pp.), explain how to translate characteristics of drug and medical device development into valuation, also furnishing industry data. The authors emphasise the utility and realistic outcomes of proposed methods of valuation by including many practical examples, including some complex licensing and company structures. More details of the book can be viewed here.

European TM dilution and economic analysis

An email circular released today by Deloitte and authored by Elizabeth Gutteridge reviews the economic consequences of last week's European Court of Justice ruling in Intel v CPM (for details of the decision see here and here). This was the ruling in which the ECJ ruled that Intel could not automatically prevent third parties applying identical or similar trade marks to dissimilar goods (in this case INTELMARK for telemarketing services): Intel could only succeed in its trade mark dilution claim by furnishing evidence of injury or serious risk of injury to its mark. According to the court, in order to prove dilution, the mark owner must show evidence of a change, or serious likelihood of a change, in the economic behaviour of the average consumer of the goods or services for which its mark is registered. In terms of the economic implications of this ruling, the circular states (with good cause):

"As a result, clients and their legal teams will be faced with a series of potential evidentiary and analytical challenges .... Mark owners wanting to demonstrate dilution will need the support of robust financial and economic analysis. Consideration may need to be given to the following:

• Market analysis to define the competitive markets within which each party operates;

• Assessment of the hypothetical economic behaviour that would have occurred absent the third party’s use of the mark, compared with the actual position;

• Sales data analysis to understand the extent of market penetration of both marks and

• Identification and isolation of the impact of third party use on brand values".

The cost and effort that will go into this are awesome, particularly in the case of Community trade marks where the characteristics of the parties' respective markets may differ substantially between EU Member States (for example, beers and lagers in Northern/Southern Europe) and where the claimant's mark is not used alone but in combination with one or more additional trade marks (impact assessment for dilution of the Coca-Cola word mark and the distinctive curvy bottle would demand different parameters).

On the facts of INTEL/INTELMARK the assessment of the impact of changes in consumer behaviour is even more complex because Intel's mark attracts consumers on three levels: makers of computers that contain its microprocessors, retailers that choose to stock it and the purchasers of the ultimate product. There are other costs too, particularly the establishment costs of hours spent in non-profit-generating discussions with lawyers, economists, market survey consultants and business experts. Would it be too much to guess that the situations in which the cost to the trade mark owner of bringing a dilution claim will not exceed the benefit of that uncertain course of acton must be few and far between.