No Random Penguins after all

Today's news of the merger, via media publishing giants Bertelsmann and Pearson, of the Random House and Penguin publishing imprints, has raised a few eyebrows.  Penguin, it seems, is marrying Random House in order to escape the unwanted attentions of News Corp, whose predatory instincts may be somewhat thwarted by the fact that this is a done deal and the contracts have all been signed.

Random House CEO Markus Dohle has written to his imprint's literary agents to tell them what a promising deal this is.

" ...  In this new partnership with Penguin, we will be retaining the distinct identities of both companies’ imprints [this is good news for brand purists -- there will be no Random Penguins]. You and your clients will benefit from an extraordinary breadth of publishing choices, and editorial talents and experience. Our Random House imprint leadership remains endowed with tremendous autonomy and financial resources to decide which books to publish, and how to publish them. We expect this to continue in our new business.

With our backlist always a priority [ever more so, if you consider how kind the digital publishing scene can be to the long tail], Random House expects the new company to offer an even deeper catalogue, alongside our newly published titles. Our investments in enhancing the supply chain and our marketing support for physical retail will be unwavering, as we continue to transition in the digital space—to seek the most diversified retail marketplace for our titles. And we will be even better positioned to support our authors’ intellectual property and copyrights [this blogger is uncertain as to how two imprints, running effectively in competition with one another, as the next paragraph states, are better positioned to support authors' IP rights, or their own for that matter, than had no merger taken place].

The business combination is all ahead for us. Now, it is business as usual. Random House and Penguin remain competitors ...".

Patent Litigation Funding: What About the Underfunded Defendant?

One of the oft-used terms in discussing investments is "asset class". Stocks are one asset class, bonds are another.  Beyond these two obvious candidates, the challenges of today's investment climate have enhanced the discussion on such other classes as foreign currency, commodities and gold. And then there is patent litigation. As described in the introductory précis to the article by Jack Ellis, "Patent litigation as an asset class" (Intellectual Asset Management, November-December 2012), "[a]s the litigation finance industry grows in prominence, funders and their investors are increasingly turning their attention to patents".

The thrust of the article is that "many small and medium-sized enterprises (SMEs) find themselves between the devil and the deep blue sea when they believe that their patents are being infringed." Thus, if the infringer is a well-heeled competitor with past experience in patent litigation, the SME may simply threw up its hands and allow the infringement to continue to take place. Alternatively, the SME can seek to find a partner to challenge the infringer. However, the price is often that the partner demands ownership of the patent, a problematic step when the patent is central to the SME's activities.

If the patentee deems either of these two outcomes to be too high a price to pay, there is yet another option -- litigation finance. Whether the patentee's motivation is simply a shortage of cash to fund the litigation on its own, or a wish to spend free company cash on something else within the company (e.g., R&D), an increasing number of finance companies are prepared to fund the litigation. The ultimate goal is not an charitable exercise. As the article bluntly notes, "[c]learly, the main attraction of litigation investment is the possibility of big returns", apparently from 20%-50% of the damage award, if any. As well, there may also be the possibility of earning a revenue stream from the continuing payment of royalties.

Unlike funding the outright purchase of a patent, or portfolio of patents, where there may be large front-end outlays without any good sense of the litigation value of the patents, patent litigation funding allows the funder to provide sums on a rolling basis, gaining better control of the outlays in respect of actual litigation. Stated otherwise in the article, this type of funding and the potential rewards from such funding represent a new asset class, described in the article covering "a quality and calibre of IP that is unprecedented -- some of the most valuable patents there are," according to Louden Owen, the chair of i4i, which relied on such funding in its successful suit against Microsoft.

The article devotes some discussion to the question of whether such patent litigation funding is a good or bad thing for patent litigation and the patent system, especially in light of the already existing contingency fee arrangements. All of this discussion overlooks a fundamental question, however: what about the under-resourced potential patent litigation defendant? For every SME that I encounter that agonizes about where to find the necessary funds to pursue litigation, I encounter an under-resourced SME that is at the receiving end of a filed or threatened infringement action.

After all, every patent litigation case has both a plaintiff and a defendant. What about the interests of the actual or potential defendant? After all, no one seems to treat such an SME in terms of an asset class. Where does such a defendant obtain the funds to defend an action, especially where the SME is convinced that it has committed no infringement of the patent at issue? Even if no material patent litigation funding may be required by the plaintiff in such a situation, the result is still that there is a structural asymmetry between the position of the plaintiff and defendant, whereby a non-infringing defendant may still find itself unnecessarily settling the dispute, or more.

For those who live and breathe the search for the next best asset class, the defendant's funding problem is not theirs. Fair enough -- but then, whose problem is it exactly? And is the public interest in maintaining a patent system being well-served by the funding asymmetry? Or no matter -- after all, the funding of patent litigation "is such a great asset class".

Taxation of e-books: Commission takes the initiative

Our friend Magali Delhaye spotted this piece of information in today´s Europa Midday Express and thought it might be of interest-- which it certainly is, being related to an earlier IP Finance post, "European Commission looks to level the playing field -- and the "paying field"", which appeared here last week.

“Taxation: VAT on electronic books in France and Luxembourg

The European Commission is asking France and Luxembourg to amend their VAT rates on electronic books (e-books).

Since 1 January 2012, France and Luxembourg have applied a reduced rate of VAT to e-books, which is incompatible with the current rules under the VAT Directive. Under the Directive, e-books constitute electronically supplied services, and application of a reduced rate to this type of services is excluded.

This situation is creating a serious distortion of competition to the disadvantage of operators in the 25 other Member States of the Union, as e-books can be easily purchased in a Member State other than that in which the consumer is resident, and current rules provide for application of the VAT rate in the Member State of the provider rather than that of the customer. The Commission has received complaints from a number of Ministers of Finance highlighting the negative effect on book sales in their domestic markets.

The Commission is aware of the different treatment being applied to e-books and printed books and notes the importance of e-books. Under the new VAT strategy, the Commission has opened this debate with the Member States and should put forward proposals before the end of 2013 (see IP/11/1508).

In the meantime the Commission, as guardian of the treaties, requires Member States to respect the VAT rules they themselves unanimously approved.

The Commission has therefore issued reasoned opinions to the two Member States. This is the second stage in the infringement procedure following the letters of formal notice sent in July 2012 (). The two Member States have one month in which to bring their legislation into compliance with EU law. Otherwise, the Commission may refer the matter to the European Court of Justice. (References: IN/2012/2098 and IN/2012/4080). (for more information: E. Traynor - Tel. +32 229 21548 - Mobile +32 498 98 3871)”.

Innovation, competition and choice flourishing with mobile standard patents

The article below was penned by our regular guest contributor Keith Mallinson (WiseHarbor). It was originally posted on FierceWireless Europe (a web-based trade publication which, so far as this blogger can tell, does not share a huge readership with IP Finance). This piece comments on two recent events on patents in the wondersful world of standards-setting:

Innovation, competition and choice flourishing with mobile standard patents 

Theories of harm arising from recent disputes with standards-essential patents (SEPs) are poorly substantiated and contradicted by market facts and figures. Pending smartphone patent litigation including Apple, Microsoft, Samsung Electronics, Motorola Mobility (acquired by Google) and others is causing a big stir; but previous settlements to high-profile litigation in this market sector have produced reassuringly benign results. 

A press release announcing the ITU's Patent Roundtable for "talks to address rampant patent litigation" in Geneva on Oct. 10 was headlined "[i]nnovation-stifling use of intellectual property to be tackled" and it described "an unwelcome trend in today's marketplace to use standards-essential patents to block markets." This event came shortly after the a similar event held the previous week, the Symposium on Management of Intellectual Property in Standard-Setting Processes organised by the National Academies Board on Science, Technology, and Economic Policy in Washington, D.C., which I also attended, as a speaker. 

However, there was no consensus on demands for major changes at these events. These included imposing a definition of "reasonable" in fair, reasonable and non-discriminatory (FRAND) licensing terms on voluntary participants in standard-setting organisations; and the elimination or significant curtailment of companies running to get injunctions on products based upon infringement of SEPs. Proposals to improve disclosures and transfer licensing obligations with patent ownership rights were less controversial. 

Evidence shows that innovation from R&D is substantial and ongoing with many collaborators as licensors and licensees in standards-based ICT, for example, with video and audio codecs and in mobile communications. Effective competition is illustrated with major shifts in manufacturer market shares, for example, with the rise of Apple and Android-based devices at the expense of Nokia and Research In Motion since 2007. Consumers are benefiting from improved technical performance and increasing choice, and manufacturers are gaining from increasingly widespread adoption. SEP technologies in standard-setting, together with complementary and follow-on technology developments, product and service implementations in ICT are generally progressing very well, as illustrated by many highly-successful standards, including those for video "codecs" (e.g., ITU-T's H.264/MPEG-4 AVC) and in mobile communications (e.g., with 3GPP's 2G GSM, 3G UMTS and 4G LTE). 

To break it down into more detail, here are some examples of how the respective markets have developed: 

Video and audio codecs:–Widely used in DVDs, TV and radio broadcast streams, PCs and smartphones
–29 voluntary licensors and 1,000 licensees for the H.264 patent pool
–2,600 patents (including majority of the standard's patents) deemed essential by H.264 pool examiners
–Proprietary and open source software (e.g., x.264) implementations
– Aggregate patent royalties of $0.20 maximum per device for H.264 through the patent pool; $3 average including multiple video and audio standards 

Mobile Phones–6 billion subscribers in a $1 trillion market, including handsets and services, in less than 30 years
–Phone prices as low as $20 (unsubsidised)
–Vibrant smartphone market revolution with increasing product choice
–Data speeds 1,000 times faster than 56kbps for GPRS a decade ago
–Hundreds of companies contribute to and implement 3GPP and 3GPP2 standards
–124,000 patents declared essential to 3GPP standards
–10 major standards releases by 3GPP and pace of innovation is relentless–Aggregate royalty rates have declined 

The highly-successful standards-setting and technology development processes should not be undermined by meddling with the mechanisms which have successfully provided the incentives to invest in R&D, innovate and compete. Collaboration with sequential and complementary technologies in standards has worked very well. 

In some cases, litigation includes demands for substantial royalty payments, injunctions and exclusion orders that can deprive suppliers of sales and consumers of choice. However, previous high-profile litigation has resulted in settlements that appear to have been rather benign for the parties, and, in particular, for consumer interests in market competition, pricing, product choice and innovation. Examples securing patent peace in SEPs and other patents since 2008 include Nokia versus Apple, Nokia versus Qualcomm, and Broadcom versus Qualcomm. There is little or no evidence of significant actual harm, as alleged by detractors, from "patent thickets," "royalty stacking" and "hold up" to the standards processes by alleged unreasonable royalty payments being paid for SEPs in standards. Moreover, few mobile products with significant demand have been blocked from sale for very long.

European Commission looks to level the playing field -- and the "paying field"

A level playing-field for online and offline
 business? VAT rhymes with "flat" ...

Via the ever-helpful Magali Delhaye, we are informed of the following piece of news which will concern many tax-paying IP-based businesses in the European Union. Magali has spotted the Public Consultation which the European Commission has launched into current legislation on reduced VAT rates. She adds:

Point 7 of the Public Consultation is concerned with similar goods and services which should (potentially) be subject to the same VAT rate because, due to technological development, a comparable product is available both online and off-line. These products include

• On-line publications compared to paper publications (books, newspapers, magazines, etc.) and audio books, 

• Radio and television broadcasting online and off-line.

According to the Public Consultation: 

“Online publications, and online radio and television broadcasting are, for the purposes of VAT, considered as electronically supplied services which, according to Article 98(2) of the VAT Directive, are excluded from the scope of reduced VAT rates.”

Allowing for the application of a reduced VAT rate for certain electronic services would, in the view of the Commission, require a uniform approach at an EU level in the definition of the qualifying products. In that sense, the Public Consultation asks the following: 

“Q6: Do you agree that those electronic services that would qualify for the reduced rate will have to be precisely defined in a uniform way at an EU level or do you consider that a broad definition in the VAT Directive would be sufficient?”

When it comes to the definition of an e-book, which is likely to become increasingly controversial as greater functionality (music, videos, live links, etc.) becomes more prevalent, the Public Consultation asks 

“Q7: Considering the need for a uniform and future proofed approach at EU level, what should be the definition of an e-book in EU-law?”

As for newspapers and periodicals compared to online publications, Q8 asks 

“Considering the need for a uniform and future proofed approach at EU level, what should be the definition of online newspapers and online periodicals in EU-law?"

Finally, concerning radio and television broadcasting online and off-line, the Commission asks: 

“Q9: Are the definitions laid down in the Audiovisual Media Services Directive sufficiently clear were a reduced VAT rate allowed for on-line radio and television broadcasting?”

According to the media release announcing the launch of this consultation, it is 

“part of the wider work being done to fundamentally reform the EU VAT system, in order to make it simpler, more efficient and more robust. It will run until 3 January 2013. … The results of the public consultation will feed into the preparation of new proposals on VAT rates, which the Commission will present next year”.

The link to the Public Consultation is here.

AIA and IP investment: how will things change?

The IP Finance weblog is pleased to host the following piece which it commissioned from Monica Winghart (Executive Vice President and General Counsel for Article One Partners, Palo Alto, and a former Senior Corporate Counsel for The Clorox Company). 

As usual, readers' comments and responses are invited.  If features of this nature are found to be helpful, the IP Finance weblog will endeavour to commission similar pieces addressing the IP investment consequences of other major items of national legislative reform of the IP infrastructure.

Monica writes

How the AIA Will Change the IP Investment Environment: 
As Companies Adapt, Investors Can React 

The Leahy-Smith America Invents Act (AIA), arguably the biggest change in the U.S. patent system in 60 years, brings important changes in the way businesses secure patents and how IP investors vet and research patent portfolios. As businesses revamp their IP policies to retain competitive advantage in the patent space, investors will consider how these changes also affect the financial environment: 

First to Invent Becomes First to File  

What changed: Before AIA, companies could prove they were the first to invent a product by submitting internal data such as lab notebooks, prototype sketches and e-mails that show the date of an invention. Beginning next March, those who are quickest to file a patent application – not necessarily the first to invent – will become the patent holders as a result of the US shifting to a first to file (FTF) system. 

How businesses will adapt: “File often and early” is now the name of the game. Companies that can move most quickly from concept to invention disclosure to filed patent application will win; devoting years to perfecting a product before filing a patent is no longer a viable strategy.  Companies with specialized IP legal teams and larger patent budgets who can file frequently also have an innate advantage. Provisional patent application filings, which act as placeholders until a regular patent application is filed, will likely see greater use under the FTF regime and will enable companies to stay ahead of the competition. 

Information relevant to investors: Companies that use provisional filings, file patents often and early in the innovation process, and have IP legal teams who can quickly file on innovations will be well-equipped to retain a competitive advantage in the IP space. 

Patent Quality Will Increase 

What changed: Increasing the quality of patents was a significant driver behind the implementation of AIA. Recent changes increase the level of review and scrutiny that patents undergo, both during the application review process and after a patent has been granted. For example, the AIA codifies administrative review alternatives such as post grant review and inter partes review to assess patent validity.  While a patent is under administrative review with the USPTO, AIA now provides definitive guidelines to courts on when to stay any related litigation on the patents. These administrative review alternatives allow the USPTO to assess patent quality while offering ways for any litigation on the patents to be stayed by the courts.  AIA further provides for a supplemental examination procedure that enables a patent owner to present previously undisclosed information to the USPTO for consideration to correct a patent and to forestall inequitable conduct challenges that might be raised in subsequent litigation. 

How businesses will adapt:  Offering an administrative review and the staying of litigation may be disruptive to many NPE assertion models.  Allowing a patent owner to thoroughly vet patent assets with the experts of the USPTO will increase the value of the assets and the confidence of companies that their IP portfolios are of a higher quality standard. 

Information relevant to investors: Investors can gain confidence in buying assets which have been vetted and rely on administrative review techniques to modulate risk for companies which are heavily reliant on IP and often the target of NPEs.  Investors may also increase the traditional level of due diligence to include administrative reviews when IP rights are fundamental to the value of a deal. Over time, the increased level of review offered by these AIA changes will increase the level of confidence investors have in the validity of the patent assets they are purchasing. 

Expanded Definition of Prior Art  

What changed: Jurisdictional boundaries, which precluded some disclosures from being considered prior art, will disappear with AIA. The definition of prior art no longer relies on where a prior disclosure or sale may have occurred and any public knowledge or use, including foreign applications, can be considered for prior art. 

 AIA also brings U.S. patent law in line with other countries by allowing pre-grant oppositions by third parties. The timeframe for third parties to challenge a patent application, as well as the types of information contestants can use, are now extended.  

How businesses will adapt: With FTF, it becomes key to disclose all information, including global prior art, before filing. Companies can build a wall against the threat of third-party challenges by performing the most thorough possible prior art searches before filing and proactively disclosing all information to the US Patent and Trade Office (USPTO). 

 Information relevant to investors: Companies that have conducted thorough prior art searches, prepared their patent applications and disclosed the relevant art to the USPTO during prosecution are hedging against the risk of future litigation and later invalidation of key assets through third party oppositions or review proceedings. 

NPEs and Portfolio Monetization 

What changed: The new AIA rules affect both non-practicing entities (NPEs) and how companies monetize their patent portfolios. Multiple unrelated defendants can no longer be joined into a single complaint simply on the allegation that all defendants infringe the same patent. In order to permit joinder in a single case, there must be additional overlap between all of the defendants, for example in technologies or business practices. 

How businesses will adapt: NPEs, which profit almost solely by enforcing patents, now face multiple instances of litigation and trials rather than a single combined suit, increasing costs and complexity and potentially disrupting the NPE business model. 

Information relevant to investors: Companies that have strategies in place for coordinating litigation with other entities and for dealing with NPEs in general will be better equipped to effectively manage their patent infringement risks and costs. 

 Changes in IP Budget 

What changed: The USPTO has revised a number of its fees. The AIA provides for many filing fee increases across the board.  However, AIA includes pricing features that favor small players, such as a 75 percent decrease in many patent fees for micro entities including solopreneurs and small entrepreneurial ventures.  

How businesses will adapt: Companies will revisit their IP budget projections in accordance with the new fee schedule and adopt processes designed to best match desired patent prosecution techniques with budget constraints. 

Information relevant to investors: As enterprises re-tool their IP budgets, investors can take into account how these projections may impact the timing and scope of patent assets. 

 Updated Rules, Updated Portfolio  

In summary, the AIA offers a number of changes which impact the way companies execute their IP strategies. By taking measures to ensure that companies are proactively addressing these changes, investors can ensure that asset portfolios contain quality assets and are appropriately valued.

Market Mismatch?

“Sarantel has proved something of a case study in the ‘great technology, poor commercialisation’ trend familiar to UK tech investors”began an article in The Times recently.

Reading on, it would appear that there is a mismatch with market needs: whilst Sarantel’s accurate antennas have sold well into military markets, such accuracy is not essential in consumer markets.  Here, it would appear that Sarantel is having difficulty competing against cheaper, less accurate antennas.

The Times notes that “Fans of Sarantel point to Samsung’s £193 million takeover of CSR’s mobile technology business as a sign that the company is undervalued given its patents and potential.” 

The ‘Company Overview’ section of Sarantel’s website similarly notes that “Sarantel has developed an intellectual property portfolio comprising of over a dozen core patents with hundreds of international filings on the design and production of dielectrically loaded antennas.”

The Times, however, concludes that “the proof needs to be seen in the numbers before buying into stock that has not nearly lived up to that billing.”

University-generated information: Is it more public or private?

The involvement of universities in commercial activities is a complex issue. Roughly speaking, these endeavours can be divided into two categories. First there is the commercialization of publicly-funded university research and the concomitant rise of technology university transfer offers. Secondly, especially in the U.S., universities have sought to earn licence fees through the sale of various paraphernalia bearing their name or emblem. These two spheres of activity, commercializing technology through the licensing of patent and trade secret rights, on the one hand, and earning trade mark/copyright royalties, on the other hand, have largely remained separate and distinct. What happens, however, when these two functions -— technology transfer and goodwill licensing -— are brought together?

This question was raised in connection with an article that appeared in the September 22, 2012, issue of The Economist. Entitled "Artificial Dissemination", the article here focused on the differences that arise in connection with the release of financial data to the public. Government bodies take measures to provide that official data are disclosed to everyone at the same time, so no one can gain a financial advantage, even for a matter of minutes or even seconds in an age of high-speed transactions. Private purveyors, however, prefer to stagger the disclosure of information, whereby those who are willing to pay more are fed the information on a time-priority basis.

The example brought by the article is the situation involving the well-known consumer- sentiment index, compiled by the University of Michigan, which is distributed twice a month. For non-U.S. readers, the University of Michigan is one of America's great public universities. Its index is a closely watched and oft-quoted indicator of consumer sentiment, a topic of particular interest in times of economic challenge.

What is of interest is how this index is distributed. It turns out that Michigan has partnered with Thomson Reuters, the multinational publishing and information company, with the latter serving as distributor of the contents. According to the article, the terms of the dissemination agreement, at least pursuant to a 2010 agreement, provide for the staggering of the disclosure of the information in three stages:

1. Subscribers of the "ultra low-latency" fee receive the information two seconds (!) before 9:55am.

2. Desktop clients receive the feed exactly at 9:55 am.

3. The public receives the feed at 10:00 am.

These seemingly small time differences, even the two second interval for "ultra low-latency" subscribers, can have a potentially huge impact on trading profits.

In exchange for this, Thomson agreed to pay Michigan an annual co-branding/distribution fee. As well, Thomson undertook to pay what is termed a "qualifying" fee that is equal to 25% of so-called "qualifying" revenue.

While such staggering of the distribution of information is legal, it is not free from legal disputes. With respect to the Michigan-Thomson agreement, the article reports that Thomson has threatened to take legal action against certain television networks, including CNBC. The reason: such networks apparently announce the index number at 9:55am, when it reaches their desktop, rather than wait until the 10:00 am general public release.

And so to my question: does Michigan, as a public university, have any special obligation to ensure that the benefits of its branded index are available equally to all members of the public, provided only perhaps that they pay the agreed-upon fee? This is not like the granting of an exclusive licence, where such exclusivity may well be crucial to successfully commercializing the technology. Here, the more clients for the information, the better.

One might retort that staggering the information, as the arrangement with Thomson apparently does, is also intended to maximize revenues, in this case from the compilation of the index. Perhaps so, but unlike the licensing of the technology, such staggering is not essential to the development of the information. By contrast, the exclusive licence may well be the most effective way to ensure that the licensee will take the steps necessary to commercialize the technology.

Even more, given the potential for law suits, should the University be directly connected with the interests of Thomson and news broadcasters, each of which is interested in promoting its particular commercial interests? Co-branding always carries the risk of one party having its name sullied by the activities of its co-branding partner. Is this something that the name and brand of the University of Michigan should be involved in? If government agencies take steps to ensure equal access to the information in the public interest, should not a public university, such as Michigan, or even a private university seeking to commercialize information developed, even in part, from public funds, act differently?

Can ad revenue save the printed media?

Do the printed media have a future? The answer is both yes and no, according to "Industry Analysis: Print Sales Still In Decline; New Copyright Law Not A Solution", a thoughtful and informative post by Maricel Estavillo for Intellectual Property Watch, here. Maricel reviews the Global Media Trends Book -- a 300-page production resulting from cooperation between the European Publishers Council (EPC) and the research organisation World Newsmedia Network (WNMN) which draws on data and reports from 65 global research companies. An executive summary of this work can be accessed here.

Bad news is that advertising revenues for the print media are predicted to continue their inexorable fall, though a further 1% drop for newspapers and 1.3% for magazines seems quite a gentle rate of decline to this blogger, who can scarcely recall the most recent occasion on which he purchased any printed periodical.   Biggest gainers from this loss are inevitably online advertising, as well as TV, outdoor displays and billboards. Good news is that the rate of decline may be retarded by increased advertising spending on the part of the world’s developing markets, led by China, Peru and Argentina.

Maricel's piece moves on to mention the book's proposition copyright law revision is not the solution -- though readers can probably guess why for themselves. This blogger notes that it is not easy to persuade consumers to pay for content, and they are not likely to pay to access advertisements on the media which they choose to access -- although the same consumers willingly pay not inconsiderable sums for the increasingly sophisticated hardware through which they access copyright-protected content as well as for packages that enable them to gain that access.

Copies of the report may be ordered, according to the IP Watch post, and further information concerning it, may be obtained by emailing here.