Quick grant patents impress investors?

"The green channel patent system adopted by the UK Intellectual Property Office has, from the start, been central to our company patent strategy, allowing us to obtain patents on our innovative green technology within a year of initial conception. This has been of significant importance both in attracting investment and allowing us to demonstrate our leading edge electric vehicle technology to potential customers."

So said Chris Harrison, IP Manager for Protean Electric Ltd, in a piece for the UK IPO's 'IP Insight' newsletter in June 2011.

The company has now announced that it is to receive $84 million in new funding from GSR Ventures, New Times Group, Oak Investment Partners and the city of Liyang, Jiangsu Province, China. According to the press release, "This capital will be used to bring Protean's breakthrough electric drive technology to production by establishing manufacturing facilities in Liyang. … We will have the capability to directly supply our motors at lower volume levels, while providing licenses to our higher volume customers and partners."

The press release also notes that "Protean has been awarded 21 patents for its unique technology and design, and more than 70 additional patent applications have been filed internationally and with specific countries in North America, Europe and Asia."

Mega-Patent Portfolio Sales: Chimera or Here to Stay?

I do not usually use this blog platform to offer my counterpoint to a post by one of my IP Finance colleagues. However, I will make an exception this time in connection with Rob Harrison's interesting post of yesterday--"AOL posts profit based on Microsoft patent sale" here. Rob focused on the connection between the $1.056 billion dollar sale by AOL to Microsoft for a large chunk of its patent portfolio (Microsoft then turned around and sold a large portion of these former AOL patents to Facebook) and the rise of AOL's share price to a level not seen in years.

Rob concluded as follows:

"The whole deal has been presented as beefing up Microsoft's patent portfolio in the search business and helping Facebook's patent dispute with Yahoo. Certainly the volume of patents probably means that both companies have probably a better arsenal to defend themselves in this and future patent suits. AOL's shareholders can comfort themselves in having realised value from a substantial IP portfolio built up over the past fifteen years."

I have recently questioned elsewhere ("Of Medieval Marauders, Tulips and and the Sale of Patent Portfolios", here) whether the sale of these mega-patent portfolios, starting with the $12.5 billion sale by Motorola Mobility to Google, is the most graphic example of the potential value to be extracted from a properly developed patent portfolio, or the result of a number of idiosyncratic circumstances that have created a distorted market for patents, bordering on being a full-fledged patent bubble (interestingly, an item this week suggests that, contrary to previous accounts, patents may not have been the sole driver for the Motorola Mobility purchase. As reported by Washingtonpost.com on July 25th, "A report from VentureBeat highlights that Google’s acquisition of Motorola Mobility was only partially fueled by patent acquisitions, which many suspected was the main drive behind the deal. The report says that only $5.5 billion of the $12.5 billion deal went to patent acquisition. Google hasn’t provided much information on its strategy for Motorola, saying only that everyone should expect “some changes” at the hardware maker.").

Circling back to the AOL-Microsoft transaction, I would make the following comments in response to Rob Harrison's observations, to try and get a better understand the nature of the $1 billion plus payment received from Microsoft.

1. How much did AOL expend over the years to register, maintain and enforce these patents over the 15-year period?

2. To what extent did AOL receive licensing fees from third parties with respect to these patents?

3. What portion of salaries and other company resources can be attributed to the invention and registration of these patents?

4. To what extent did expenditures in the patent portfolio constitute forgone investment in other AOL activities?

5. Can we determine a rate of return with respect to these patents? How does it compare with the rate of return on other AOL assets?

6. As a matter of policy, to what extent should patents primarily serve the shareholder's interests in boosting share price by a one-off enhancement of revenue within the company?

7. Is the sale of the patents in the name of shareholder value another way of saying that management did not make effective internal commercial use of its patents?

8. Is it any coincidence that sale of these mega- patent portfolios has occurred about the same time as investment banks have made a push to introject themselves into this market (and earn substantial fees as a result), see "Investment Banks Seek Business in Patent Deals as M&A Work Slows", Bloomberg.com, June 25th here?

It appears that the sale of mega-portfolios of patents is not going away, especially in these difficult economic times and, with it, increasing questions about what is going on.

AOL posts profit based on Microsoft patent sale

The share price of that old dinosaur of the Internet, AOL, has recently reached levels which haven't been seen for a number of years. The sale of a large proportion of its patent portfolio to Microsoft earlier in the year lead to a major increase in its share price as can be seen by its share price. AOL reported its second quarter earnings a few days ago and the brightest spot was the USD 1.056 billion (milliard) transaction with Microsoft for the sale of the patents (and licence for the rest of the portfolio). This is being returned to AOL's long-suffering shareholders in the form of a Dutch tender in which they will be invited sell their shares back to the company. Intriguingly Microsoft then sold a large proportion of the portfolio onto Facebook. This was not entirely surprising since Microsoft and Facebook have been friendly for a number of years - including allowing Microsoft's Bing search engine to mine into Facebook data. The whole deal has been presented as beefing up Microsoft's patent portfolio in the search business and help Facebook's patent dispute with Yahoo. Certainly the volume of patents probably means that both companies have probably a better arsenal to defend themselves in this and future patent suits. AOL's shareholders can comfort themselves in hang realised value from a substantial IP portfolio built up over the past fifteen years.

Cyprus offers 2% -- can you do better?

A couple of years ago, IP Finance posted a question: "Intellectual property tax havens: where's best?"  This question didn't receive many responses at the time, but IP Finance's readership has grown greatly since May 2010 and the same question, posted today, might attract far more answers.

This slightly historical musing has been prompted by the news, from Stefan Nolte of Shanda Consult, Cyprus, that 2% is the effective tax rate on income from IP in Cyprus. Stefan writes:

"A recent amendment to the tax law, in force since 06 July 2012, provides 80 % tax exemption on income from IP. The remaining 20 % of the income from IP are taxed at ordinary 10 % corporation tax, which results in an effective tax rate of 2 % on the income from Intellectual Property. 

Intellectual Property includes: patents, brand names, software development, copyrights on music, visual productions (film, TV etc), book etc. 

Income from IP: income from the sales of IP or from license fees received for granting the right to use IP. 

Depreciation of IP development costs or IP purchase costs is 20 % annually".

Can readers from other jurisdictions improve on this? And can they also warn of possible downsides that low-tax seekers might not appreciate if locating their IP portfolios in tax havens?

German sublicensees enjoy protection even after termination of main licence

The German Federal Court BGH issued two decisions today aimed at protecting investors in intellectual property licences. Both decisions concerned copyright issues in which the copyright owner licensed the copyright to a licensee, but later terminated the license. The licensee had in the meantime sub-licensed the rights to others. The question in both cases was whether the sub-licensees still had a right to use the intellectual property. The court decided yes - the investments made by the sub-licensees justified the continuation of the licence. The court made it clear that its decision also applied to other IP rights, such as patents, trade marks and design rights.

The first decision concerned a software licence. The owner of the copyright had given a company its exclusive rights to a software program. The licensee in turn sub-licensed a further company to use the software. The main licence was cancelled due to non-payment of licence fees. The copyright owner sued for copyright infringement due to continued use of the software. The court decided that the termination of the main licence did not lead to a resultant termination of the sub-licence agreement. The sub-licensee had a continuing right to use the software.

The second decision concerned the rights to the jazz piece “Take Five” from Paul Desmond. The copyright owner assigned the European rights to a music publishing house, which in turn licensed these rights for Germany and Austria to a sub-licensee. The original licence was terminated in 1986 and the court was asked to rule on whether the sub-licensee still had the rights to the music in Germany and Austria. The court agreed that the rights were still in existence, despite the termination of the main licence.

The court came to its decisions by reviewing German Intellectual Property Laws relating not only to copyright, but also to trade marks, design rights and patents. It concluded that there was a principle under German law according to which licences remained in existence, even if the underlying IP right was assigned to another owner. The sub-licensee would have invested on the basis of the existence of the licence. It could normally neither influence nor foresee the termination of the main licence. It might suffer great economic damage or even be threatened in existence if the continued existence was in doubt.

The owner of the copyright (in this case) would not be adversely affected since it could usually require its former licensee to assign the proceeds from the sub-licence to the copyright owner.

Paywalls set to tumble for publicly-funded research results

The UK's Department of Business, Innovation and Skills (BIS) has just put out a media release this morning which is has something to do with the results of investing money in research rather than with the investment process itself:

Government to open up publicly funded research  

Down come the walls ...!

Academics, businesses and the public will get easier access to publicly funded research, Universities and Science Minister David Willetts will announce today. The Government will widely accept the recommendations in a report on open access by Dame Janet Finch, a move which is likely to see a major increase in the number of taxpayer funded research papers freely available to the public.

Currently most formally published research is only available behind restricted paywalls. Reforms will see publications opened up to a greater audience, providing more opportunities for research and development across a range of sectors. They will also support the commercial exploitation of research, contributing to the Government’s economic growth agenda. Universities and Science Minister David Willetts said:

“Removing paywalls that surround taxpayer funded research will have real economic and social benefits. It will allow academics and businesses to develop and commercialise their research more easily and herald a new era of academic discovery. This development will provide exciting new opportunities and keep the UK at the forefront of global research to drive innovation and growth [Unless the removal of the paywalls is UK-only, presumably this will keep everyone else at the forefront of global research, whatever that is, too]”.

Among the recommendations that have been accepted by the Government are: 

• Moving to deliver open access through a ‘gold’ model, where article processing charges are paid upfront to cover the cost of publication [this has already begun to happen where pay-to-publish has been recognised as having substantial attractions for those who thrive on the citation of their papers]. 

• Introducing walk-in rights for the general public, so they can have free access to global research publications owned by members of the UK Publishers’ Association via public libraries. 

• Extending the licensing of access enjoyed by universities to high technology businesses for a modest charge.

The recommendations have also been welcomed by Research Councils UK (RCUK) and Funding Councils who have also set out their plans for open access. ...

This blogger hopes that the demands of easier access to research results will not be seen as an indirect form of pressure to disclose technical research results before their potential for patentability has been fully explored.

IP = weakness?

An article in Tuesday’s ‘The Times’ regarding the Apple v Samsung design litigation in the High Court concluded with the statement:

“Commentators have suggested Apple’s decision to pursue its rivals in court could be a sign of weakness.”

Is the article simply confusing the act of enforcement with the strength of the IP being enforced (the article indicates that Apple were unsuccessful both in the High Court and in patent litigation against Samsung in the US)?

Or is the suggestion that Apple must be losing significant market share if the company is willing to go to the expense of litigation in multiple territories?

Could this simply be a public relations issue for Apple, to be contrasted with the triumphant pictures of James Dyson outside the High Court following his victory over Hoover in 2000?

Or is there some other logic according to which an enforceable IP right is seen as a weakness rather than a strength?

Film finance not "trade", rules FTT

Decisions of the UK's First-Tier Tax Tribunal don't often get a mention on this blog, but Eclipse Film Partners No 35 LLP v Revenue & Customs [2012] UKFTT 270 (TC)  looked quite interesting, this being a lengthy decision of Judges Edward Sadler and John Walters QC of 20 April.


Eclipse, an investment partnership, was incorporated in October 2006 and comprised 289 members. According to its partnership deed, its business was the production, distribution, financing and exploitation of films. Eclipse struck a complex licensing agreement with Disney under which each member made substantial contributions of capital to pay the licence fee, stumping up some £50 million of their own cash and borrowing another £790 million under a 20-year facility. At the same time, the film rights were sub-licensed to a distributor, which agreed to pay annual specified sums over a 20-year period. Eclipse then entered into a marketing services agreement as a means of supervising the implementation of the distributor's release plans for the films, as well as a consultancy agreement relating to the future selection, acquisition and exploitation of films and film rights. 


In its first partnership return, Eclipse said it was carrying on a commercial trade of acquiring and exploiting film rights, although no profits had yet accrued. In reliance on the Income and Corporation Taxes Act 1988 sections 353 and 362, its members claimed tax relief in respect of the interest paid on their borrowings. 


The Commissioners for Customs and Revenue considered that there was no entitlement to tax relief because Eclipse was basically just a vehicle for speculative investment rather than a trade. Were they right?.

Dismissing Eclipse's appeal, the FTT explained that the burden was on Eclipse to establish that it was carrying on a trade, not for the Commissioners to disprove it.  The transactions and arrangements entered into by Eclipse were not a sham; indeed, they had legal effect according to their terms, and the fact that they were set up as a tax avoidance scheme did not automatically mean that they could not be trade.  The killer punch here, though, was that the way Eclipse's members financed their capital contributions and the extent to which they did so was extraneous to Eclipse's actual activities.


On these facts, said the FTT, the interdependent and coterminous licensing and distribution transactions entered into by Eclipse did not have the speculative aspect that could be expected of trading transactions. True, the sub-licence produced profit -- but the bulk of that profit was predetermined and could not be regarded as the speculative profit of a trading venture. Any additional profits which might materialise were clearly viewed as a bonus rather than a profit reasonably to be expected. In commercial terms, Eclipse did not have a "customer" but had merely been given the opportunity by Disney of participating in its licensing arrangements.

Calculating the worth of a copyright claim: "Dappa Dred"

Sullivan v Bristol Film Studios Ltd [2012] EWCA Civ 570 is a decision of the Court of Appeal, England and Wales (Lords Justices Ward, Etherton and Lewison), dating back to 3 May 2012 and on which I had intended to post a note at the time, but then got overtaken by events.

The substantive issue involved a copyright infringement claim by "Dappa Dred" (right), a hip hop artist and rap musician, in respect of a video which had been posted on YouTube for five days and which, it was calculated, would have been seen by the defendant film company's staff plus a maximum of 50 people. Sullivan sought damages of £800,000 for "breach of statutory duty, infringement of copyright and ... loss of a chance". The claim was transferred to the Chancery Division, where its value was assessed at just £50.  The defendant applied successfully to have the claim struck out on the basis that a claim for such a small sum was a disproportionate use of the court's time and resources.

What is interesting is the calculation leading to the conclusion that the claim was worth just £50 rather than the £800,000 initially sought.  The Court of Appeal explained it in detail:

13. The judge then turned to consider the question of damages. He considered the evidence about what had happened during the short period that the video had been viewable on You Tube. There was evidence before him that showed that during the period that the video had been posted on You Tube it had been viewed nearly 100 times. That is not to say that it had been viewed by 100 different people, because You Tube only records "hits" which may be multiple hits by the same person. But the judge concluded that apart from BFS' own personnel a maximum of some 50 people had seen the video. He assumed, in Mr Soloman's favour, that the video in its unfinished state was "derogatory" treatment within the meaning of the CPDA. He reasoned as follows. There were three possible consequences of 50 persons having seen the video. First, having seen its poor quality, they would decide not to buy the record when it eventually came out. On the basis of figures given to him by Mr Soloman the judge decided that Mr Soloman stood to make a maximum of £1.20 for each record sold. The judge was prepared to assume in Mr Soloman's favour that of the 50 people who saw the video, 40 would have bought the record once it had been released but for the poor quality of the video. This would produce for him a recovery of approximately £50. Second it was possible that those 40 people would themselves disparage or bad mouth the video. The judge was not prepared to make that assumption in Mr Soloman's favour since there was no evidence that anyone had done that. Nor is there now. Third, the 50 people might have liked the video so much that they bootlegged it. Again the judge was not prepared to make this assumption in Mr Soloman's favour in the absence of any evidence that this had in fact happened. Again there is no evidence now of any bootlegging. I might also add that there would in any event be a considerable overlap between this way of putting the claim and the first way, because the lost sales attributable to bootlegging would have been to some extent the mirror image of the lost sales due to people not buying the record at all.

14. The judge also said that he was not satisfied that Mr Soloman had put forward any real claim to loss of market potential. 

15. Thus he assessed the maximum possible recovery by Mr Soloman at £50.

Thanks go to Saskia (Consumer Focus) for her observation that this really was a claim that should have gone to a small claims court (the fee of bringing a small claim is about £50), reminding us that the small claims track in the Patents County Court is expected to go operational end of this year.

Ocean Tomo, Metis team up

If you've been wondering what Chicago-based Ocean Tomo has been doing since the heady days of its patent auctions, IP Finance can tell you.  The company has struck a strategic relationship with Metis Partners from Glasgow.  A media release explains that their agreement seeks to bring a new generation of corporate recovery and restructuring services to the European market, giving European companies access to the most robust intellectual asset development solutions currently available. According to Metis's CEO Stephen Robertson: 

"Our partnership will bring a new generation of corporate recovery and restructuring services to the European market as we demonstrate to companies, their bankers and investors, the real but hidden value in IP assets and how they can attract new funding using IP assets as security. Naturally, technology companies as well as IP and patent-rich businesses will be our prime targets, but any company with valuable IP, such as a well-established brand or trade secrets or know-how, could benefit from our services".

IP Finance wishes the partnership the best of luck. Anyone who can get money out of the banks these days will surely need it.

RSA Govt has turned down the music - Excon Approval

 Protecting the pot at end

The South African government has reacted to last year's Oilwell decision which had the effective of declaring that IP transfers did not require exchange control approval. In that case an attempt to void a trade mark assignment for lack of exchange control went all the way to the Supreme Court of Appeal - this blog carries the news here together with comment that celebration, for those who advocate a less restrictive environment, ought to have been nervous. And correct that turned out to be.

The government, without any consultative process, has unilaterally amended the exchange control regulations to include "intellectual property" within the definition of "capital" which has the effect of requiring all IP transfers to seek exchange control approval from the government. See Afro-IP report here.

The difficulty is that IP has not been defined and drafted to specifically include both registered and unregistered IP. This widens the scope of the regulations to possibly include amoebic concepts such as reputation, know-how and personality rights. This could mean, for instance, that a local talented footballer would need exchange control to move to join Manchester United because image rights are being "exported". There is also the question of whether IP can in fact be transferred in the sense of being moved from one country to another in the same way that other "capital" envisaged by the regulations ie money, can. The Oilwell judgement considered this at length.

The upshot is that this latest move is unlikely to be the end of the tussle. For those doing deals or creating IP in RSA, if you need to get IP out of the country, this requires the extra step of getting excon approval which, by the way, will be granted if the government is satisfied that value for value has been exchanged ie the price is fair.

A light at the end of the tunnel? An artist's view of business models in the internet era

The Pied Piper: happier times, when people
trifled with artists' business models at their peril

While lawyers, economists, policy-makers and others talk comfortably in the abstract about the need to find new business models in the music industry in the internet era, there is no-one closer to the issues raised by the need to make money than the artists themselves. In this context, the following reflections are a sobering antidote:

"The direct financial losses and effects of internet piracy to the individual musician and the record industry has been one debated over since the emergence of the internet and its usage as a medium to copy and distribute such material. In his article discussing an open letter to one student by David Lowery, Paul Resnikoff weighed in on how the industry has been impacted, utilizing David’s letter as an example of both direct and indirect effects.

Paul explains that artists cannot simply tour in order to make up for the shortages resulting from low record sales. Only the top tier of artists, often backed by major labels in the process, will make any profit from this even during dwindling record sales. The sheer costs incurred in traveling around the world, or even round a mere continent, will often not get covered during the tour, let alone generate profit on top of the costs. Touring was seen as secondary and as mere coverage for losses sustained as a result of low record sales. With constantly falling figures in sales today this alone would clearly not be enough. This is a direct result of the fall of the medium in which music is distributed; people are not buying physical media, but rather switching to digital formats, using either legal or illegal means to acquire it. This produces a challenge which the record industry has failed to address, and as pointed out in the article, digital services such as Spotify will not provide an adequate remedy to the situation as things stand in terms of the average musician. Other ways of funding have emerged, such as crowd funding services, like Kickstarter, which provide means for artists to raise funds to record music and distribute it. However such services will only provide funding to a lucky few and would not answer this issue on its own. This might not be in terms of funding alone, but due to the influx of content and the resulting lack of visibility.

Paul attributes this to the attitudes of both consumers and companies. The younger generations born slightly before or during the rise of the internet are used to free access to material and thus buy less music, both in digital and physical formats. One can say the generations with this opportunity see it as a moral right to which they are entitled. One cannot simply pin this on younger people, however, as the sale of media has also dropped among older generations. Both tend to enjoy their media via other means, such as Spotify. Companies like Google and other aggregators do pose problems for individual musicians and the industry at large. A large company is purely interested in profits, not the personal plight of the artist trying to earn his bread through his work – they provide content which is paid for, morals have no place in business.

The sphere in which musicians compete has also changed. TV shows such as X-Factor, which pump out act after act, year after year, under a humongous marketing machine are overtaking the market from the average artist. How can an individual compete with such a Goliath? Odds are they cannot.

Albeit increasingly bleak, and no matter how negatively Paul portrays the prospects of anyone trying to make it in the music industry being, this writer still sees light at the end of the tunnel. Consumers will adapt, and above all, distributers and musicians have to find new ways to benefit from the ease of access and various digital formats in which media can be handled. Once affordable and accessible ways to consume media emerge, consumers will flow towards them and amounts of media pirated should fall, although cannot be fully avoided. Cassettes did not kill the music industry as then was feared, and neither will the internet in the age of the CD".

This note has been prepared by Jani Ihalainen, a Finnish native and recent law graduate of the University of Derby. Jani, who has a keen interest in copyright law, is happy to deal directly with questions. You can email him here.