Friday, February 29, 2008
Malte points out that much of the thinking and work done on patent valuation to date has been by those with accounting backgrounds who have merely considered the economic aspects in valuing the patents - the technical and legal aspects have often been ignored. He's quite correct in pointing out that there is no such a thing as a "perfect patent" and that there is always a risk that the patent will be revoked (for reasons like prior art not discovered by the patent office, lack of enablement, lack of entitlement, etc).
One problem that he fails to mention in his article is the source of the data on which much patent valuation is based. The licence rates usually come from the information contained in company accounts filed with the US SEC or from publicised damages awards. Particularly in court cases, the validity of the patents has often been challenged and their strength upheld (even if in an amended manner). In a sense there is little or no "risk" element in the value of the royalty rate. Once the validity of the patent has been challenged once, then the chances that it will be later revoked are much smaller.
On the other hand the validity of most patents has never been challenged. There is a much higher risk that, for example, the patent office has found no relevant prior art which means that the scope of patent protection is much narrower than that granted by the patent office. The royalty rates derived from damage awards or licensing negotiations for such patents need to be discounted - the question is to what extent.
For particular interest to IP practitioners are the changes to Sec 248. Paragraph 2 currently reads that a value for intellectual property developed by a company cannot be entered onto the balance sheet. IP acquired from another entity can be placed on the balance sheet.
The new law proposes to bring the German practice closer to IFRS regulations. Paragraph 2 will be deleted completely. The memorandum attached to the draft law states that this means that due to the requirements of Sec 246 there will in future be a requirement to include a value for intellectual property in the balance sheet as long as this item of property can be separately commercialised, for example by sale or by use.
An amendment to Sec 255, Paragraph 4, states that the value assigned is that of the market value - but if none is available then generally acceptable accounting rules can be used. If no possible value can be drawn up then the value assigned will be that of the development costs for the item of intellectual property (but note that research costs are not included as these are considered to be general costs - and not linked to the development of the intellectual property). The memorandum states that it is "recht einfach" (i.e. easy) to make the distinction between research and development costs - however in practice this is likely to be much more difficult than it seems at first glance.
The rules for drawing up the balance sheet listed in Sec 266 are amended to include an item for self-created intellectual property.
Finally in order to protect creditors the new law also incorporates a provision (Sec 268 Paragraph 8) which states that a dividend can only be paid to shareholders when suffcient funds are retained by the company to cover the value of the intellectual property listed in the accounts.
The draft law is currently out for consultation. There seems to have been little debate about these provisions and they will certainly be welcomed, for example, in the venture capital industry where investments are made into innovative companies whose sole assets are intellectual property rights.
"The intellectual property Annex to UNCITRAL’s Guide is a welcome opportunity for the global intellectual property community to address any unsatisfactory, ambiguous or contradictory provisions in the Guide that would negatively impact intellectual property owners, purchasers and licensees, as well as financiers who rely on intellectual property as collateral. We believe strongly that the Annex needs to provide specific recommendations on how intellectual property issues that arise in the context of commercial financing should be treated. It will not be sufficient, and the Annex will fail of its purpose, if it serves solely as an “issue-spotting” document but fails to provide real and effective guidance to the legislatures of enacting states".If anyone would like to see this document, just email me here and I'll send it. If you have any content-related comments, contact Thilo C. Agthe (Chair, Security Interests Subcommittee, INTA).
Monday, February 25, 2008
ONLINE MARKETS AND IP TRADING EXCHANGES
Markets for IP are opaque
Remember the fundamental microeconomic principle that supply and demand determines the price?
Only, with markets for intellectual property (IP), that mechanism just does not kick in. Not that IP has features that would make it impossible for a potential buyer and seller to interact, rather buyers and sellers simply don’t know of each other; thus the difficulty of determining the price. Markets for IP currently remain opaque and underdeveloped, worldwide.
Trading exchanges for IP may be a way to overcome this challenge. Contrary to listing exchanges, trading exchanges have as the sole goal to bring willing buyers and sellers together. In the past, the most various exchanges have been created. Hollywood got its own movie exchange, insurances companies traded catastrophe options and even vegetarians looking to date other vegetarians have their own “veggiedating.com” exchanges. Just, exchanges for IP have not seen a major breakthrough, perhaps because right holders prefer to keep their IP hidden away, so to avoid attracting patent trolls or other unnecessary competitors.
A new paradigm for IP
Clearly, the prevailing paradigm of intellectual property protection has not been of help and eventually prevented to look at IP as a tradable business asset. Under the IP – Rights perspective IP is still largely viewed as a defensive right, a right to exclude. The right holder secures its market share by preventing other market participants from embracing a similar concept, idea or approach. The primary strategic IP emphasis of most businesses remains based on a defensive understanding of IP that considers IP as an effective barrier method. While these strategies may well have helped to secure a firm’s freedom to operate, they have hardly contributed to leveraging IP as a potential source of revenue and funding.
Fail it, fail it better (Samuel Beckett)
The idea of an exchange for IP is not new. During the dot.com bubble, several U.S. based companies raised Venture Capital money to build an online market place for IP. Significant amounts of money were invested to acquire the necessary technology for online trading. The basic business model of first generation exchanges was relatively clear cut. Online IP trading platforms kept a certain percentage, usually around 10 – 15% of the transaction. Slight variations existed though. While some exchanges were by invitation only, others allowed anyone in be it a university, a SME or a big corporation. By the same token, the valuation and rating methods employed varied. The idea was good, yet not good enough. Most exchanges did not meet investors’ expectations: Primarily because of insufficient leverage and because some of the exchanges charged too high entrance fees. “It was like throwing a party, where no one came.”
Another reason may be that certain IP exchanges had databases that were neither particularly user friendly, nor particularly deep and wide in scope. Also, these exchanges were listing exchanges and not trading exchanges and badly neglected their marketing. That, on top of a general market perception of IP as a legal instrument serving to protect rather than promote caused the early death of many IP based online businesses. When the bubble burst, many first generation exchanges shut down. Surprisingly, for quite some time, nobody touched the idea again, perhaps because of the collective trauma experienced by new technology entrepreneurs during the dot.com crash.
What profile for a successful IP trading exchange?
Can the new millennium marks the era for IP trading exchanges?
Probably, if certain strategic aspects are taken under consideration.
• Innovate the business model
The innovation of a trading exchange needs to be in the business model, not the technology it uses. In this sense, an IP trading exchange can be compared to a network business since it aims to move international information on IP. A functioning trading exchange can not operate in isolation, but needs to be part of a broader network of additional actors. Just like NASDAQ would not work without brokers who bring bonds and stocks closer to the end user, a broker can pro-actively approach IP owners and their representatives to engage in trading their IP trading.
• Bring small and big players together
A successful IP trading exchange helps to counterbalance asymmetries between SMEs, Small and Medium Sized Enterprises, and large corporations. It can be the exchange, where “garage girls and guys” and multinational companies can come together, meet eye on eye, create win/win deals and help overcome funding challenges.
Acknowledging that SMEs do not necessarily have the means to hire an attorney to do the legal work of the exchange, contracts and licensing agreements need to be available for download on its website. To help determine licensing fees, free online scoring tools for IP need to be equally made available.
• Provide a distinctive value added to you customer
A successful IP trading exchange needs to comprise patent information from databases from the U.S.A., the E.U., Australia and Japan and also have the means to collect developing country information. The database needs to offer consistency of form, technology, style and the patent information needs to be put in a format readable for everybody. In this sense it can offer the IP community tools for in-depth prior art search. Law firms, patent offices in developing countries and innovators aiming to get a better picture of the current state of the art should be able to do so, in an easy, comfortable and informal way. In the knowledge based economy information platforms facilitating the exchange of knowledge are crucial for business success. As such, a well structured IP trading exchange can provide a whole new pathway for innovators and their IP, both in terms of market transparency and background research.
• Empower the Intellectual Property Owners
A smart IP trading exchange helps to save users time and costs. Since it is a trading platform open to everybody, the relationship intellectual property owners have to their attorneys can be redefined. Attorneys can provide advice on structuring the licensing deal, a market based transaction generating direct revenues for the owner. Designed as a one-stop, an IP trading exchange should furthermore offer the whole set of tools users need to perform their search for a potential licensor or licensee. Helpful in understanding the competitive market structure and looking for business partners outside the traditional realm, an IP trading exchange democratizes the innovation process.
• Do your homework in marketing
Finally, a successful business strategy for an IP trading exchange needs to address the following questions: What can be done to assure the use of the exchange? Who is the target group? What are customers looking for and how can an IP exchange help them achieve their goals? How can trust and confidence be built up? If the next generation of IP exchanges does their homework well, it can provide substantial leverage, to its customers, its bottom line and society as a whole.
Taking the Next Step
An IP trading exchange stands for a disruptive Intellectual Property paradigm and offers a new perspective on the internationalization of business operations. It can be to IP, what eBay is to the retail market: simply bring buyers and sellers together!
The idea of first generation exchanges was good, but it is going to be the smart business model that makes or breaks the success for IP trading exchanges so to provide the space necessary to turn every single patent, trademark or copyright of an organization into a cash cow.
Source: Telephone Interviews conducted from September 2007 to December 2007 with A. Gibs, M.Grota, IPB Bewertungs AG, Tech EX.com, Global Intellectual Property Exchange (to be launched in the second half of 2008), Kevin Rivette, Cameron Gray of Ocean Tomo.
Friday, February 22, 2008
"Traditionally, IP assets ... and brands are valued as a whole. That is, the assets are assigned a value by calculating a net present value .... Sometimes values are calculated based on options valuation models like the Black-Scholes or binomial methods.
Nathan's trifurcation method ... breaks down the asset into three discrete components—legal entitlement; legacy brand, or know-how in the case of patents; and exploitation. Since each component is assigned it own value, IP owners are armed with more a granular valuation for asset sale negotiations and tax planning .... Further, isolating each part makes it easier for companies to determine which segment "is driving return," which is something a valuation that uses just market data and options modeling can't do ....
The trifurcation methodology was originally developed as a transfer-pricing tool, says Nathan. Transfer-pricing rules mandate that related parties—units in the same company but in different countries and tax jurisdictions—charge market rates for services they perform for one another. Instead of using the entire value of the IP to calculate the tax liability, notes Nathan, the parent company can identify which IP component its subsidiary is using, and calculate the tax bill on that portion.
... the trio of components in Nathan's model has never been divided before now, he says. The legal entitlement component gives the owner the right to sell the asset as well as protect it from infringement violations. The legacy brand component represents the royalties or licensing fees paid to the IP owner. And the exploitation segment gives the owner the right to use the IP differently from the way it is currently being used. For instance, an owner of a chewing gum brand could exploit the asset by branding a line of iced tea or dog treats using the gum's moniker.
It's still too early to tell whether the trifurcation method can stand up to an Internal Revenue Service challenge in tax court. It usually takes three years for the IRS to audit tax payers, and the new methodology has only been in circulation for two years. ...".
Tuesday, February 19, 2008
In the validation phase, the European patent must be translated into the official languages of the states in which the patent proprietor is seeking protection. According to the European Patent Office "this places a heavy financial burden on companies: for example, having a European patent fully translated into one other language costs approximately EUR 1 400".
For example, buried in the 2007 Annual Report issued by RWS Holdings is a statement concerning the impact of the London Agreement on RWS. The company estimated a reduction in profit before tax would be of the order of £1 million in the financial year ending 30 September 2008 and £2 million in a full year. Profits before tax for 2007 were over £10m - a hefty reduction - ouch!
The webpage points out that the value of the trade mark should be included in company's balance sheets under IFRS rules. Experience shows that this is rarely done - at least not systematically - and it is interesting to see that the Austrian Standards Institute expressly mentions this point.
Sunday, February 17, 2008
"I am still not sure I agree with you. If you look at the secondary strap on the front cover of IP Value 2008, it states: "Building and enforcing intellectual property value". So I reckon we do pretty much what it says on the label!Resisting the temptation to give an instant reply again, I thought I'd give the readers of IP Finance a chance to air their own opinions. If you'd like to add anything to this debate, please feel free to do so below.
On a more fundamental level, I think one of the problems that many companies and their investors have with IP is that they do not understand the fact that an IP right of itself is pretty pointless, it is the ability (and the willingness) to enforce it that really does create the value. You will find, for example, that while many high-tech start-ups boast of their patent portfolios, many make no provision for the expense of enforcing or defending them - they believe the patent rights of themselves are enough. The same attitude has been pretty prevalent among VCs, though that - I believe - is changing.
If you look at the most recent issue of IAM you will see our annual survey on patent values as reflected in US damages awards and settlements. This, I believe, demonstrates a direct link between enforcement and value, not a tangential one. In the same way, what is Intellectual Ventures if it is not a company that is based very firmly on the premise of creating IP value through the implied threat of enforcement of its rights? The same can be said for most of the intermediaries we look at in the article by Ray Milien and Ron Laurie. Meanwhile, the IAM blog, like the IP Finance blog, has been reporting on Nokia's German dust-up with IP-Com. What is IP-Com if it is not a company that specifically uses enforcement - actual or threatened - to leverage IP value?
With trade marks, the link is even closer, isn't it? Unless you are seen to enforce your marks, you lose the right to use them. Given the emergence of brands as vital corporate assets, such a scenario would be disastrous for many businesses in all kinds of ways.
So, what am I saying here? My view on IP is that you have to see it very firmly in the round - you can't compartmentalise and say this bit is for the lawyers, this bit is for the attorneys, this bit is for the accountants, this bit is for the business consultants, this bit is for the investors etc etc. You need a broad perspective, because it is only with this perspective that as an IP owner you can hope to maximise the value of what you have".
"Accompanying this issue is a 245 page supplement, IP Value 2008: Building and Enforcing Intellectual Property Value that contains an impressively wide range of contributions, many of which have only tangential relevance to IP value".IP Finance has since received an email from IAM's highly respected editor Joff Wild, who writes:
"Thanks for the write-up on the latest IAM on the IP Finance Blog and also the mention for IP Value 2008. Of course, I would disagree that many of its chapters have only a tangential relationship with the book title, as most of the articles deal with enforcing IP rights in one way or another - and if you cannot enforce an IP right there is no IP value! However, your readers might be interested to know that IP Value 2008 is available online at http://www.buildingipvalue.com/, so they can decide for themselves".In a technical, literal sense, Joff is right: if IP has value, then any chapter on any aspect of IP may be described as a chapter on 'IP Value'. But I think we've reached the stage at which the words "IP Value" have a secondary meaning and that, when we encounter them, there is an expectation that they relate to something to do with IP valuation, leveraging or the like.
Friday, February 15, 2008
Via Pam Chestek comes this item from Michael Atkins' excellent Seattle Trademark Lawyer weblog. He writes:
"The December 2007 issue of China Intellectual Property magazine had a nice write-up about the Starbucks Corp. v. Shanghai Xingbake Cafe Corp. Ltd. trademark infringement case that Shanghai’s No. 2 Intermediate People’s Court decided last year. The case ... was important because it was the first time China’s new Trademark Law had been applied to a famous trademark.
Besides the detailed summary of the case, what I found most interesting was its explanation as to how the court calculated its RMB 500,000 ($64,000) damages award. Here’s an excerpt:
“The compensation claimed by the plaintiffs totalled RMB 1,060,000 including RMB 500,000 for economic losses and RMB 560,000 for reasonable expenses and legal fees. The defendants argued that the calculation of the plaintiffs’ profits was groundless, and thus should not be admitted. The defendants had no objection to the manner of collecting the notarization fee and legal fees, but held that the defendants’ lawyers spent too much time in collecting evidence proving the trademarks were well-known.
“The court held that it was on the basis of the profits made by the defendants from the infringement that the plaintiffs claimed compensation for economic losses. The amount of profits was calculated on the basis of the notarized statistics of the defendants’ customer volume. Although some factors on the formation of the defendants’ profits were taken into account at the time of calculation, the said amount is not completely objective and reasonable. Therefore, the court did not adopt this calculation for determining the amount of profits. The claim of the plaintiffs should be upheld for the retainer, notarization fee and translation fee as well as other fees. In the present case, the defendants committed trademark infringement and unfair competition. The overlapping parts should not be calculated repeatedly in the determination of compensation. Since it was hard to determine the profits made by the two defendants from the infringement and the losses suffered by the two plaintiffs from the infringement, the compensation should be lawfully determined as RMB 500,000 in view of the specific circumstances.”
The article’s author, Lv Guoqiang, should know what he is talking about. He is vice president of the Shanghai No. 2 Intermediate People’s Court".
Thursday, February 14, 2008
The problem has been traced to a missing hyphen, which has since been reinstated. Can readers who wish to receive posts by email please re-enter their details in the appropriate box in the right-hand margin? They should then begin receiving regular updates -- and no mysterious messages in Czech.
"Finding appropriate financeThe article doesn't mention the words "collateral", "securitisation" or "intellectual property rights". Are any readers of this weblog familiar with The Film Finance Handbook? If so, can they let us know what it says about the mortgaging of IP rights as a means of financing the production-to-distribution process?
... When your project is fully developed, you will be ready to look for “production finance”.
This comes from all sorts of sources, including banks, film funds, wealthy individuals, distributors, government bodies, cast and crew deferments, product placement, film institutes and your great-uncle Quentin. With the right knowledge and advice, it is immeasurably rewarding obtaining the funds needed to put your dream on the screen.
Of course, you could skip the whole process, shoot on a minimal budget, max-out your credit cards and screen your film online to the world. If you get enough attention, who knows how long before other opportunities present themselves? The most popular YouTubers pick up agents and make thousands of pounds from adverts alone".
Tuesday, February 12, 2008
The Sunday Telegraph reports that Computer Patent Annuities (CPA), an IP renewals and patent management company, has appointed investment bank Greenhill to carry out a review in readiness for a sale or float of the business.
A price tag of upto £500m has been suggested in the article, which should make a number of Fellows of the UK Chartered Institute of Patents Attorneys (CIPA) more relaxed as retirement approaches.
The article estimates that upto 320 Members will benefit - over 15% of the UK Patent Attorney Profession. This blogger is concerned at the number of professionals who will move their practice off-shore - CIPA OGM's in Monaco perhaps...
Accompanying this issue is a 245 page supplement, IP Value 2008: Building and Enforcing Intellectual Property Value that contains an impressively wide range of contributions, many of which have only tangential relevance to IP value.
Monday, February 11, 2008
Saturday, February 9, 2008
The intriguing question is - what does this mean? It could be good new for the Korean economy as Korean industry is selling more products which means that it has to pay higher royalties. It could also mean that innovation in Korea is falling behind.
Friday, February 8, 2008
Wednesday, February 6, 2008
Submission deadline is 31 March 2008 for the first June auction. So anyone who has missed OceanTomo's latest auction and thinks that their IP might be of some value in Taiwan can have a go at auctioning directly in Taipei
As mentioned on the IPKat website, ISO is currently considering a work proposal to define an international standard on the valuation of patents and has sent out a letter to its member organisations asking for their comments on whether ISO should develop a standard.
If financial services firms can be persuaded to become involved in protecting their own IP, perhaps they will better understand the issues surrounding UNCITRAL and will start to work with IP practitioners!
Tuesday, February 5, 2008
"Leveraging Blueprint Ventures' investment focus on Corporate IP Spinouts, this partnership will allow Ocean Tomo to present its clients with an additional monetization strategy for dormant IP beyond the company's highly successful IP auction and private sale capabilities. Blueprint's corporate partners will benefit from deeper access to Ocean Tomo's IP valuation, auction and private sale services in cases where a Corporate IP Spinout is not feasible".IP Finance notes this development, but -- having digested the news, --wonders if this notion is based on a simple model that sees each item of IP as the basis of a business model of its own. The one-patent (or other right) business is highly vulnerable to challenge to that right's validity, just as a one-product company is vulnerable to sudden market shifts, government regulation and other events that lie outside its control. Arguably unutilised IP is best put to use, and its value best realised, when it is absorbed into a business in which it provides complementary support for market presence or R&D products that already exist -- though it is conceded that this cannot always be the case.
Ocean Tomo Spring auction catalogue here
Monday, February 4, 2008
Sunday, February 3, 2008
Friday, February 1, 2008
A company called IPCom purchased at the end of 2006 a number of patents from Robert Bosch GmbH relating to the GSM standard. Bosch had invested in the late 1980s and early 1990s extensively in the development of the mobile telephone standard. Bosch's efforts to commercialise their investment were unsuccessful and they withdrew from the telecommunications market after a few years.
According to an interview in Munich's serious daily newspaper, the Süddeutsche Zeitung Bosch had previously tried to negotiate a licensing deal with Nokia - without success. Under the GSM standard rules set by the European Telecommunications Standard Institute (ETSI), Bosch was obliged to offer so-called "essential patents" at Fair, Reasonable And Non-discriminatory ("FRAND") terms. Nokia apparently offered a licence fee of less than 1%.
Christoph Schoeller, the Managing Director of IPCom, states in the interview that IPCom considers the FRAND approach to be a licence fee of 5%. Based on the patented products, he states that he is looking for a return of €12 Million for the twenty year lifetime of the patents.
Not surprisingly there is no mention of the price paid to Bosch for the patents. Given that Bosch had barely exploited the patents (and that their telecommunications activities were for many years making huge losses), the sale of the patent rights was probably an unexpected income bonus. No doubt Nokia will not be the only company expected to pay IPCom a royalty for the use of the patents.
IPCom does not appear to have a website itself. It is part of the Schoeller Group based in Pullach, Germany. The German business daily Handelsblatt reports that 50% is held by a New York-based private equity fund Fortress Investments.
It is not clear which patents are currently involved. The German PTO's website records three utility models, 52 German national patents or applications and nine European patent or applications. Several of the applications are clearly divisional applications - presumably as IPCom tailors its claim language to other alleged infringers
Update 7 Feb 2008
Joff Wild of Intellectual Asset Management Magazine was kind enough to point out that the sum involved was EUR 12 Millarden (EUR 12 US Billion) and not the paltry sum of 12 Million.
Registration of the conference - which is mostly in German - can be done here.
"Recent World Customs Organization (WCO) deliberations are likely to lead to major changes in the way trade mark royalties and licence fees relating to imported goods are currently being dealt with by Customs offices around the world. The changes look set to have a serious financial impact on both brand owners and licensees.The authors then add that brand owners and trade mark licensees are well advised to keep a close watch on things. They expect the latest changes to be adopted promptly by Customs authorities, at least in Europe and suggest that, if European authorities are seen to be raising significant amounts of revenue from the imposition of additional duties, other countries will probably be quick to follow.
Although precise details of the changes are not yet available, IP owners should be aware, at least in general terms, of what is being proposed.
How trademark royalties and license fees should be dealt with by Customs authorities has been the subject of ongoing debate within the WCO for some time. The issue is both complex and contentious.
Two years ago, a sub-committee of the WCO Technical Committee on Customs Valuation was established to examine the various national authorities’ current practice. We understand that at a recent meeting, this sub-committee decided that certain royalty payments that are not currently regarded as part of the dutiable value of imported goods should in future be included in the dutiable value.
Many of the WCO’s earlier conclusions on this subject have already been taken up by the European Commission’s Valuation Committee in its Commentary No. 11, issued earlier this year, which deals specifically with royalties and licence fees paid to a third party. It is likely that the Commission will also take up the proposed further changes.
The outcome of the most recent WCO Customs Valuation sub-committee deliberations is expected to be documented in April 2008. Although the precise content of the changes being proposed will not be known until April, it is clear that many trade mark royalties and licence fees that relate to imported goods and are not currently included in the dutiable value for Customs purposes will begin to be so included".