Patents and Cumulative Innovation: what is the impact of Federal Circuit patent invalidations?

"Patents and Cumulative Innovation: Causal Evidence from the Courts" is  paper by Alberto Galasso (University of Toronto) and Mark Schankerman (London School of Economics and the Center for Economic Policy Research, CEPR).  This paper will shortly be distributed as CEPR Discussion Paper 9458, looks really interesting  The authors' concluding comments are as follows, with citations omitted:

"In this paper we estimate the causal effect of patent rights on cumulative innovation, using patent invalidation decisions of the [United States] Federal Circuit. The identification strategy exploits variation in the propensity of judges to invalidate and the fact that the three-judge panels are generated by a random computer algorithm. There are three key empirical findings. First, invalidation leads to a 50 percent increase in subsequent citations to the focal patent, on average. Second, the impact of patent invalidation is highly heterogeneous, with large variation across patents and technology fields. Third, we find that this effect only occurs between patents owned by large firms that appear to block small innovators. Thus, invalidation of large firm patents ‘democratizes’ innovation by small firms.

These findings suggest that some licensing deals are not taking place in the presence of patent protection. There are two main reasons why this might occur. First, it might be optimal for a patent owner to restrict access if licensing reduces joint profits (e.g., because it intensifies downstream competition). Second, information asymmetry and uncoordinated, multilateral bargaining can lead to licensing failures even when it would increase joint profits. It is important to distinguish between these explanations because they differ in terms of their implications for welfare and policy (even putting aside the effect on consumer surplus). Our empirical findings help to do this.

The impact of patent invalidation is concentrated on a small subset of patents which have unobservable characteristics that suggest the presence of asymmetric information that induces bargaining failure in licensing. Our results also help to pin down where the bargaining failure occurs. The effect is concentrated in fields characterized by two features: complex technology and high fragmentation of patent ownership. This reinforces the market failure interpretation, since earlier studies identify these features as key determinants of licensing breakdown ... . We find no evidence of blocking in non-complex fields such as chemicals, mechanical, and pharmaceuticals. [...]

Overall, our findings show that patent rights block cumulative innovation only in very specific environments, and this suggests that government policies to address this problem should be targeted. However, scaling back patent rights may not be the most appropriate policy. Theoretical models of cumulative innovation show that such policies have ambiguous effects on overall innovation incentives.[...] It may be preferable to design policies and institutions that facilitate more efficient licensing and thereby promote cumulative innovation ...".

This blogger simply does not have the economics background to enable him to comment on the paper. He will only confine himself to making the usual caveat that data is always a problem.  Litigated patent disputes are always going to be easier to identify and analyse because of their public nature, and patents that are the subject of disputes which are appealed to the Federal Circuit cannot even be assumed to be typical of litigated patents as a whole. It would be interesting to match research on US data with any available data from the more litigation-averse Europe, to see whether the findings here are reinforced or weakened and, if so, how and to what extent. It would also be good to know whether the authors' conclusions chime in with the expectations of the economics-friendly European Commission as to what the effect of patent invalidation decisions of the new Unified Patent Court will be.

CIPA defends UK patent box

From Treasury to Treasure? Tax-
efficiency from the Patent Box*

The United Kingdom's Chartered Institute of Patent Attorneys has been quick to defend the increasingly-repeated assertion that the British "patent box" tax scheme [frequently discussed on IP Finance since it was originally proposed: see pieces listed here] is simply a tax avoidance device, rather than a mechanism for encouraging investment.  In to a media release last week, CIPA's President Chris Mercer nails the myth firmly.  The media release reads as follows:

‘Patent box’ designed  to encourage innovation, not avoid tax, says patent attorneys’ president 

“Headlines in today’s media linking the ‘patent box’ to tax avoidance measures are missing the point,” says Chris Mercer, President of the Chartered Institute of Patent Attorneys. 

“Fiscal measures are one of the few tools government can use to influence corporate behaviour,” he says. “The Patent Box has only just come into effect, but there are already signs that it is having a positive effect. Companies – especially mid-size, technology-based enterprises – are starting to incorporate IP into their strategic plans. Patent attorneys are being invited to talk to main boards, not just to the R&D department [Both of these are 'attitude-changers' rather than anything else, but attitude-changing is vital if we expect there to be a change in investment behaviour too]. This is good example of how a government initiative is actually achieving the desired effect – encouraging businesses to innovate and add value by protecting their IP. 

“The idea that anyone would start inventing things and patenting them as a way of avoiding tax is nonsensical,” he added. 

There has also been an increase in patent applications at the Intellectual Property Office. ”This increase is a welcome and much-needed,” said the CIPA President. “UK companies have been falling behind their foreign competitors in terms of patent filings. The Patent Box and other government  measures to encourage innovation may have helped reverse the trend.

This blogger doubts that there is any correlation between the availability of patent box tax breaks and the number of patents filed.  In his view, given the cost and the sheer effort that attends the filing of most patents, and the negative return that most of them can realistically expected to deliver, anything that encourages investors to commit to new products and processes rather than concentrate on old, tried-and-tested ones, should be warmly welcomed.

* The illustration is of a Merck family Treasure Chest Christmas Ornament, available here for US$ 18.99.

Three Stories About China: Yum Brands, the Venture Capital Market in China and More, and Hollywood

Several years ago, Yum Brands, the company that owns KFC (Kentucky Fried Chicken), Taco Bell and Pizza Hut, was lauded as the company that had figured out how to succeed in China.  Indeed, a substantial portion of its profits were based on its sales in China—specifically KFC (4,200 restaurants in China) and to a lesser extent Pizza Hut (almost 800 restaurants in China).  When asked about the cause of its success, a representative from Yum Brands said “a first mover advantage.”  And, a big part of that first mover advantage was a very strong brand.  Unfortunately for Yum Brands and its investors, times have been very tough for Yum—a strain of bird flu plus regulatory challenges based on claims of “excessive antibiotics and hormones” have led to empty restaurants.  Consumer confidence is dropping and the value of the brand with it.  How should Yum Brands rehabilitate its brand in China?  Any suggestions?

Stanford business school professor Steve Blank recently visited China on a book tour concerning startups and has many, many interesting observations concerning venture capital and startups in China in his five blog posts titled “China -- The Sleeper Awakens.”  Blog posts three and four are very interesting; although I believe they are all worth reading.  Here are his lessons learned from his fourth post titled “Zhongguancun in Beijing – China’sSilicon Valley”:

• China has the biggest Venture Capital industry outside the U.S
• For software, the action is in Beijing
• China has closed its search, media and social network software market to foreign companies
• Beijing’s VC’s primarily invest in the Technology, Media and Telecommunications segment
• Liquidity is via IPO’s not buy outs

Finally, the New York Timesrecently reported on how Hollywood’s latest releases are not doing as well as expected in China.  The reason given is something between Hollywood’s blockbusters have no depth and are just bunch of explosions, and China’s moviegoers are more interested in domestic films.  Interestingly, several of the Hollywood movies discussed in the article concern films arguably with a “built in” fan base that loved an earlier work the movie is based upon.  I wonder if they will move to capturing the power of nostalgia by reworking more Chinese tales.  What do you think? 

Is the Apple brand getting a bit of a free-pass?

The hottest topic in the high tech world must certainly be the recent developments surrounding Apple. In particular, we refer to the drop in the share price from over US$ 700 per share to just under (for a moment) US $400 per share, the slowing profitably in the iPhone and other products, leading to the first quarterly decline in year-over-year net revenue in years here, and suggestion of the impending payment of a dividend (suggesting that the company may not have any better use for these sums). Truth be told, the hagiography surrounding the late Steve Jobs and the unprecedented success of the company over the last decade was probably unsustainable, such that this spate of less than unequivocally flattering news for Apple cannot be said to be a complete surprise. To expect the company to continue to come up with world-beating new product categories, blending design and functionality, together with a unique supporting ecosystem of contents and users, requires a certain faith more appropriate for more spiritual lines of business. Perhaps all the company's recent challenges mean is that Apple may no longer be a completely unique success story, but it is still among the world's most successful and admired companies.

Nevertheless, in listening over the last few weeds to the punditry and podcast chatter about the company, one wonders whether the company is getting a bit of a free-pass on the strength of its goodwill and reputation. We have previously suggested here that Apple's ultimate asset may well be its goodwill and reputation, which at the business level enables it to enjoy higher profit margins, even as its technological/design uniqueness may be diminishing in certain areas. But the halo effect of the company's goodwill and reputation may also color the way that commentators relate to the company. I thought of this in particular in listening to a recent Bloomberg podcast interview with Ken Segall, the Apple advertising executive who created the name “iMac” and who had a lead role in the company's famous iconic "Think Different" campaign ad campaign here. Segall is also the author of Insanely Simple here, a widely discussed book about the mind-set of Steve Jobs that fueled the company's unimaginable growth.

Two points in Segall's interview particularly stick out. The first relates to the claim that Apple, and especially the various models of the iPhone, are merely incremental rather than revolutionary, and it is "revolutionary" that has characterized the Apple story since the launch of the iPad. Segall seemed to find the very claim odd—of course the various models of the iPhone are incremental, you can only have one revolution per product (what he called the "dark side" of innovation). Nevertheless, he went to speak in rapture about his own experience with the iPhone 5, expressing the kind of personal attachment to the device and ecosystem that lies at the heart of the product's continuing success. At that moment, one of the presenters jumped in and observed that she was actually a bit disappointed with the iPhone 5, since in her view the model did not really add a whole of functionality and features to the previous model. Segall simply ignored her comment, perhaps to suggest that the presenter did not really "get it" with respect to what makes the iPhone special.

In that context, the interview went on to mention that the Galaxy s4, Samsung's about-to-be launched competitor to the iPhone 5, has received tepid reviews from pundits ranging from the Wall Street Journal here to the New York Times here. The sense one gets of this tepidness is that the Galaxy s4 is "merely" an incremental improvement of the Galaxy s3 and it lacks the "class" of the iPhone 5. To a listener such as me, I had a tough time trying to figure out why the commentary about iPhone 5 and the Galaxy s4, respectively, seem to be coloured with different rhetorical brushes, despite what seems to be a common theme. (Full disclosure, I own a Galaxy s2 device, for the simple reason that the price was right and it does what I want it to do. However, common wisdom holds that the majority of people of my generation own an iPhone. Common wisdom also holds that, at least until now, the iPhone is clearly the preferred device as a matter of status. If you want to make a social statement, you do so with the iPhone.)

It seems to me that part of the answer is that Apple may be enjoying a bit of a free-pass based on the continuing strength of its goodwill, even at the price of a bit of some cognitive dissonance between the strength of its reputation and questions about its continued superiority in product development. Don't get me wrong, there is nothing wrong with this free pass, it being one of the reasons that a company so covets creating a strong brand. More power to Apple on that account. Nevertheless, even the world's most powerful brand may not be able to enjoy such a free pass forever. At some point, the aphorism—"what have you done for me lately?"—will kick on and the answer to the question may have decisive impact on the continuing strength and staying power of the Apple brand as a major component in its phenomenal success story.

If it's creative and it's culture, there may be tax relief ahead

According to "Tax reliefs for the creative sector", a Department for Culture, Media & Sport Policy Paper (here), the UK government has published revised draft Regulations -- the Cultural Test (Programmes and Video Games) Draft Regulations 2013 (here; explanatory memorandum here)-- setting out the cultural test which a company must pass if it wishes to qualify for relief under the Corporation Tax Act 2009 in respect of high-end television production, animation production and video game development.

An earlier draft of these Regulations was published four months ago with the draft Finance Bill 2013; the current, revised draft Regulations have been amended so as to reflect the results of the government's consultation exercise -- and also to address the concerns of the European Commission, which has approved the relief for TV programmes but is to investigate the relief for video games. As well as amendments to terminology (including the personnel involved in video games development), the changes include an amended method of awarding points and more restrictive rules on the way points must be distributed. Publication of the draft Regulations gives those who are potentially eligible for relief a chance to size up their chances of getting it.

IP valuation and the emergence of a tradable asset class

Here's a piece from IP Finance's friend and supporter Jackie Maguire (Coller IP), giving a bit more context to the sudden emergence of officially-sponsored and commissioned studies into IP valuation and the role of IP assets in funding business activity and in stimulating growth. Explains Jackie:  

"Many Governments have now adopted an innovation-led growth strategy and are promoting the importance of IP in underpinning their aspirations for economic growth.  The race to prove the perfect model for growth persists and there appears to be a growing desire to remove all the obstacles for failure in technology transfer.  

Within the Europe Commission, the Innovation Union strategy seeks to create a true innovation system in Europe where scientific excellence, a broad and strong knowledge base and the ability to bring results to the market and innovate are all included.   The Innovation Union includes over 30 action points to ensure that innovative ideas can be turned into products and services that create growth and jobs.

 This drive for success in taking new ideas to market is leading to much Government debate about the role that IP plays, exactly how valuable a company’s IP is -- and also the different approaches used to place a figure on this value.  The mechanisms for unlocking this value, via asset-based lending, litigation or otherwise, are seen to be challenging for those smaller businesses that make up a significant proportion of the growth economy, those very companies that have to convince others that their IP is worthy of finance.

There are now three parallel studies ongoing that are seeking to inform policy surrounding these issues  (did all the officials attend the same summit?...).  One, funded by Scottish Enterprise (noted here), one commissioned by the UKIPO (noted here) and another funded by the European Commission.  Each seeks to understand how IP is valued and could be used to secure the investment often required in the early stages of growth.

Jackie Maguire of Coller IP in the UK together with Danny Ryan and representatives of 10 other countries (including Germany, Sweden, Poland, Italy, Denmark, Belgium, Spain and Portugal ) are involved in the third study and have been appointed as IP valuation experts.

The experts were appointed by the European Commission at the beginning of 2013 to undertake a project during the course of 2013.  The work of this Expert Group will help implement the Innovation Union by looking at the very specific issue of the valuation of IP, the various purposes for which it is required and how new tools and mechanisms might open up the trading of IP assets.

Some policy officials consider that the accurate valuation of IP remains a major obstacle to the emergence as a tradable asset class and that the introduction of more transparency and standardization in IP valuation procedures may render the trading of IP rights significantly more efficient and profitable.  Many of us realise that it is a lot more complicated than that, but we have to start somewhere!

IP valuation mechanisms in the context of litigation, accounting and financial transactions are being currently researched and best practice examples are being compiled to show what can be achieved at a national and European level.  This includes how IP is valued with respect to awarding damages and how financial institutions are lending against IP assets.  The group will report at the end of the year and aims to recommend measures which will be implemented at a European level to unlock IP value.

Jackie hopes that with all of the results of all of these studies and calls for information that useful, coherence and consistent policy will be implemented and that the vision that she and Coller IP have always held, for IP to recognised as a tradable asset, will be achieved".

IP assets and the facilitation of business funding: a new project

A media release from Valuation Consulting's Kelvin King spreads the word that, together with Inngot, his company will be seeking to generate some of the evidence upon which the UK's fabled commitment to evidence-based intellectual property policy will be based.  According to Kelvin:

"Work for the UK Intellectual Property Office (IPO) and the Department for Business, Innovation & Skills (BIS) has established that the majority of UK business investment, and business value, now lies in intangible rather than fixed, tangible assets.  Now, the IPO has commissioned Valuation Consulting Co and Inngot to investigate the role of intellectual property (IP) in facilitating business finance and economic growth.

IP-backed finance is gathering pace on the international stage, and the EU is working to encourage IP ‘valorisation’. However, the area is not without its challenges, including asset identification, due diligence procedures [these being practical issues that crop up regularly even outside the context of valorisation], valuation and value realisation [these lying, in this blogger's opinion, at the heart of this project since they seem to be characterised by so much uncertainty and lack of consistency, at least when viewed from a lay standpoint]. This new IPO project has been initiated to examine the current role of IP in facilitating business finance and economic growth within the UK, and investigate the barriers to the broader use of IPRs and related business intangible assets for debt and equity fundraising.

The qualitative study complements wider Government initiatives to encourage business investment in innovation. It is particularly directed at understanding how value-producing intangibles can be harnessed more effectively to meet the funding requirements of knowledge-based small and medium enterprises seeking to innovate and grow. The results, drawing on markets where IPRs are used for funding, will be used to develop methods to enable wider application where lenders and IP-rich enterprises could both benefit".

IP Finance wishes Kelvin and his colleagues the best of luck. We all look forward to seeing not only the conclusions that are reached but the data and the assumptions on which they are based.

Business Innovation and the Law: a new book

Business Innovation and the Law: Perspectives from Intellectual Property, Labour, Competition and Corporate Law, edited by Marilyn Pittard , Ann L. Monotti and John Duns (Faculty of Law, Monash University, Australia), is a curiously restless book. While the concept of business innovation is a fixed target, the authors of the various chapters approach it from a large number of different perspective: different academic disciplines, different jurisdictions -- even different periods in time.  If its function is to probe the complacent mind and force the reader to ask questions, it works well. However, this approach arguably makes it less able to answer the questions it asks, perhaps also because the laws are relatively easy to identify and explain but, in contrast, the reality of business innovation occurs in so many different industrial and commercial contexts.  There is also the danger of projecting the impact of the law, particularly case law, into business innovation. Much case law, especially at appellate level, is pathological, reflecting an individual conflict that requires judicial resolution, while similar conflicts are often resolved without recourse to the law because they are perceived as commercial issues rather than legal ones.

But what does the publisher say about this work?

"Business Innovation and the Law analyses the topical issue of protecting and promoting business research and development. It does so by examining business innovation through the lens of different legal disciplines – intellectual property, labour and employment laws, competition and corporate laws.

Evaluating the impact of each of these areas using discipline-specific and industry perspectives, the book also explores questions about whether a more harmonized approach is necessary to provide appropriate protection. Approaches of the common law and civil jurisdictions, particularly the European Union, inform and provide guidance to the analysis of emerging issues in this field. This book provides insights into various approaches taken by both common law and civil law jurisdictions regarding the increasingly blurred line of ownership rights in innovative industries. It traverses various disciplines of law as well as jurisdictions.

Using interdisciplinary perspectives to business innovation and inter-jurisdictional comparisons and analysis, this book will appeal to university administrators responsible for intellectual property policy, managers of technology transfer offices in universities, intellectual property lawyers, labour and employment lawyers and competition lawyers".

This seems on the whole an accurate and helpful description, and many of the chapters are very well equipped to deliver on the book's promise, being acknowledged experts in their fields. Sadly the book cannot remedy the obvious but inevitable fact that business innovation races ahead of both the law that governs it, the applications of economics that measure it and the principles of industrial relations that certainly used to govern it in the days of Big Employment -- and which in some sectors still do. Most of the law is designed for the days of one-inventor-one-invention-one-product, but look at the technology inside the hand-held device of your choice and you will see that this is now generally a myth.

Bibliographic data: published March 2013. xvi + 497 pages. Hardback ISBN 978 1 78100 161 5 ebook ISBN 978 1 78100 162 2. Hardback £100 (online from the publisher £90). Book's web page here.

Rich relation, poor relation, correlation

Having not-quite-so-recently received my copy of the March/April issue of The Patent Lawyer, I rediscovered a piece which I had written for it on patent statistics and what, if anything, they mean, having been slightly inspired by a playful piece of writing by Swiss IP lawyer Mark Schweizer that was hosted on the IPKat, here.  Looking over it, I though I may as well share it with readers of the IP Finance weblog too, since it will surely interest, amuse or irritate some of them.  Here it is:

Rich relation, poor relation, correlation 

Perhaps because he had nothing better to do, or possibly because he suspected something, multi-talented Swiss lawyer and judge Mark Schweizer played around with some official statistics to see what conclusions they might yield when he matched them against each other.  First he took the per-capita rate at which patent applications were filed in 19 developed countries (18 European Patent Organisation members plus the United States). He then plotted the patent filing rate against the ratio of public debt to gross domestic product (GDP ) in each of those countries.  The result? While there were a couple of outliers, of which the most significant was patent-rich, low-debt Switzerland, the general pattern was clear: countries in which public debt represented a lower proportion of GDP were also those in which the number of patents filed per capita was higher. 

Now, one might seek to explain these figures in some rational manner, as some commentators have done so; one might deny the validity of this exercise by sticking to the point that these figures represent correlation, not causation: one may as well argue that a low level of public debt is caused by a high level of patent filing activity as the other way round.  In any event, no-one disagrees that Schweizer’s figures are a snapshot, a view which is based on two sets of available figures, and that we cannot without further ado establish that we are staring at a universal truth or even a short-term trend, rather than a one-off coincidence. 

Schweizer’s exercise, which was never intended as anything other than a good-natured and playful prod at the patent community, is however important.  Within other areas of intellectual property law, notably copyright, arguments in favour of reform have increasingly been subjected to the requirement that they be “evidence-based” .  The standard of proof is not that of the courts but that of a cross-disciplinary mix of economics, social psychology, anthropology and business studies (but not moral philosophy).  However, the burden of proof lies with he who would reform the existing system. 

In contrast, while there are studies a-plenty on the operation of the patent system and its impact in different industrial sectors, economies and time-frames, the momentum towards reform in the US, Europe and even China appears to have been the result of a political push.  There may be little or no harm in this, but every patent system ultimately stands or falls on the basis of its performance.  This need to appraise a patent system’s performance is something that we are often poor at recognising, since for so many of us the existence of a patent system is axiomatic and its form is so closely prescribed by international law. We are also ill-equipped to carry out the sort of appraisal the patent system needs since, with differing economic, social, and cultural goals, we cannot easily agree the criteria by which we must assess it. 

This is where the Schweizers of this world come in. They encourage us through their example to take publicly available data and use it as a way of reflecting how the patent system performs relative to other known data. Pegging patent applications to public debt may be no more meaningful than correlating them to the speed at which patents are granted, the cost of litigation, the availability of investment funds or credit, the navigability of corporate red-tape, access to technical data and assistance, sightings of unidentified flying objects  or the national consumption of beer. However, patent applications, grants, renewals and expiries are all more meaningful when pegged to something, preferably repeating the exercise at regular intervals in order to build up a set of impressions that have some trajectory through time as well as space.
Once we have our data, our correlations, our causations and an image of the patent system which is historical, current and, to the extent that it can be projected, future-facing, we can either use it in order to make better decisions as to how the patent system works or, if the mood takes us, we can continue to run the system by taking decisions that are essentially political in nature but have a better idea as to what might happen if we do.

How Much Does the C-Suite or a Board Really Care About IP?

Let me lay out my cards on the proverbial table. My primary involvement in IP is as an IP lawyer, inclined to dealing principally with non-contentious matters. In so doing, I usually engage with middle level managers, engineers and other technology types. On occasion, I have dealt with the CEO, ranging from small start-ups to publicly-traded companies. I have reported to a number of boards on IP-specific questions, but I have never been physically present a board meeting. I am IP-centric, but hardly IP myopic. I know my way around a balance sheet and a board resolution.

Against this backdrop, my question is simple—just how frequently is IP an agenda item for a company board or a policy matter for the CEO? Stated otherwise, how many CEOs have ever actually been fired because they mishandled their company's IP? I am not talking about the small number of mega-patent portfolio transactions of the last year or so, such as the sale of Motorola Mobility or Kodak patent portfolios. I would assume that when hundreds of millions, even billions of dollars, are at stake, senior management and the company board are involved in the relevant decisions. But while such high profile transactions have grabbed outsized media attention, they are extreme aberrations in the patent firmament. Almost 100% of companies will never deal with a patent transaction of this scope.

Nor am I talking about companies, such Intellectual Ventures, whose primary asset is patent-related rights. If patents are not the central focus of the attention of a company such as this, one would imagine that management and board meetings would be the corporate version of a vow of silence. Nor am I talking about a company that is the recipient of a legal claim for IP infringement (or even the decision to initiate such an action). These are one-off events, sometimes proactive, more typically reactive, but seldom part of a company's broader business strategy. No, my question refers to the overwhelming number of companies, from the publicly traded to the privately held and to the start-up minnows hoping to enjoy the next big exit. We are told and read about how IP (or its conceptual cousins, such as "intellectual capital" or "intangible assets") is more and more "a", and perhaps "the", central part of the activities of many companies. Reading business-oriented magazines and the business section of leading newspapers, I encounter discussions of IP issues almost on a daily basis.

But I also know that IP-related topics form only a minor, usually elective part, of most management education programs. When this occurs, the usual orientation is to treat IP as simply another asset of the company (or, with the increasing involvement of the financial community with IP rights, as an "asset class"). And while most management education programs know, in their heart of hearts, that they are principally instructing present and future middle managers, such programs strive to maintain the persona that they are directed to training the next generation of inhabitants of the C-suite. Based on this ideal, and the relative lack of IP content in the curriculum, the reasonable conclusion is that most managers do not receive systematic training regarding IP issues. And when they do receive attention, the treatment focuses on IP as another form of company asset, incorporeal and imperfectly understood at best.

As such, and circling back to the questions above, inquiry is made once again. Just how much has IP entered the boardroom and the corner office on a regular basis? Unless the answer is--"a great deal", then there is a material disconnect between what goes on in a company as a matter of IP at mid-level and the IP policy issues that guide a company at the senior managerial level. If any readers are aware of publications that discuss this question, or themselves have insights, anecdotal or otherwise, that can shed light on this question, we would be grateful.

Katnote: the documents mentioned by Len Ruggiero (LaMarch Capital) in the comment posted below can be accessed here and here.

A chance for IP Finance readers to excel? The 2013 JIPLP competition

The Journal of Intellectual Property Law & Practice, otherwise known as JIPLP (pronounced "jip-lip" -- not that that matters) holds an annual competition to amuse its readers, and indeed anyone else who has a genuine love of IP.  This year, the Oxford University Press-published journal focuses on the financial side of IPRs, as the competition rubric explains.  That's why this year's winner is likely to appeal to readers of the IP Finance weblog.  If you fancy it, go for it!

THE JIPLP COMPETITION 2013

The $1 billion question

Enter our JIPLP competition for 2013 and you could win a year’s free subscription to JIPLP. All you have to do is send us your account of which 5 intellectual properties you would invest $1 billion in and why.

This should be a short piece of writing (between 500-600 words). It should explain who you are (contributor, board member, subscriber etc) and what 5 intellectual properties (or fewer) you would invest in if you were given $1 billion. Entries will be judged by the JIPLP team and prizes will be awarded for those entries demonstrating good financial acumen, for being creatively written, with style and panache and also for how humorous the piece is. The winning entries will be published on the JIPLP blog.

The winning entries will be decided upon by JIPLP editor Jeremy Phillips and the JIPLP Team at OUP. Entries should be between 500-600 words, and be submitted by 31st October 2013. The winning entries will be announced on 6th January 2014. Entries to be submitted to Christopher.wogan@oup.com

What prizes are available:
Financial Acumen - £500 of OUP books and a year's free personal sub to JIPLP
Creativity and Style - £250 of OUP books and a year's free personal sub to JIPLP
Humour - £250 of OUP books and a year's free personal sub to JIPLP
The winning pieces will be published on the JIPLP blog.

Who decides it
JIPLP editor Jeremy Phillips and the JIPLP Team at OUP

Date of award
6th January 2014

Closing date for entries
31st October 2013

Format of entries
Entries to be between 500-600 words

Criteria for judging
Entries will be judged by the JIPLP team and prizes awarded for demonstrating good financial acumen, for being creatively written, with style and panache, and also for how humourous the piece is.

New LinkedIn Group for IP-Backed Finance Research

IP Finance blogger Jeremy has learned that his friend Stephen Robertson of Metis Partners has created an IP-Backed Finance Research LinkedIn group, the details of which can be seen below:

IP-Backed Finance Research

• Share group

• Discussions
• Promotions
• Jobs
• Search
• More...

Metis Partners are delighted to have won the opportunity to work with Scottish Enterprise on a very important initiative focused on Intellectual Property Rights and how they can be used to unlock finance for SMEs . Our research and analysis will be focused on: 

• IP security – what different methods are used in the market,
• IPR type – the different types of IPR’s being used in transactions, which are most suitable and why
• IP valuation – the various different methods, what works, what doesn’t and why
• IP diligence – what diligence techniques provide comfort to lenders and why
• Any structural, legal and regulatory frameworks surrounding the topic that should be considered

We will update this group with our thoughts and initial findings from our research, from which we welcome input, experiences and debate.

All feedback is important and we welcome thoughts and opinions. Please suggest this group to people who would be interested.

3-D Printing Fun or Massive IP Infringement

Recently, co-blogger Neil Wilkof wrote about 3-D printing.  The promise of 3-D printing is astounding and could be the next technology that changes the game in many different industries/fields—from biotech to ordinary manufacturing.  And, as with any new technology, there are a ton of IP issues.  I spent some time browsing this website the other day: www.thingiverse.com.  I strongly recommend you check it out.  Here is the description of Thingiverse:

Thingiverse is a place for you to share your digital designs with the world. We believe that just as computing shifted away from the mainframe into the personal computer that you use today, digital fabrication will share the same path. In fact, it is already happening: laser cutters, cnc machines, 3D printers, and even automated paper cutters are all getting cheaper by the day. These machines are useful for a huge variety of things, but you need to supply them with a digital design in order to get anything useful out of them. We're hoping that together we can create a community of people who create and share designs freely, so that all can benefit from them.

Click on the “Explore” “button” at the top of the home page and spend some time browsing (You will enjoy it—I promise).  Here is a link to their IP policy and here is one to the terms of use.  Enjoy!  (Is it really time to rework (rethink) copyright (IP) law or do we stay the course?!?!  I think either way--the lawyers will win!!!). 

Fordham conference discusses patent monetarisation

This year's Fordham IP Conference dedicated a "sunrise seminar" session to extracting value from patents, moderated by Michael G. Lubitz (GTT Group).. First to speak was David Anderson (VP Corporate Development, RPX, right), who addressed the massive inefficiency of monetarisation of patents by non-practising entities (NPEs), given the cost of litigation: it costs around $52 million to extract a profit of $8 million, he said. Last year some 2,500 companies were sued by NPEs in the US. We can expect to see some of the inherent inefficiencies whittled away, he added.

Peter Holden (IP Value) spoke next. IP valuation really started some thirty years ago, with securitisation, but has now become a large driver of value in IP transactions, he noted.  What we see now is the rise of risk capital as a force in driving patent value, as corporate and private investors invest in bets worth hundreds of millions of dollars on the outcome of IP litigation. This correlates to an increased level of focus on IP value at board level. Most funds are not captured by IP per se but are project-based, the projects being based on such factors as a need to sell for liquidity or acquisition for risk distribution.

Daniel Ilan (Cleary Gottlieb) then addressed some of the pitfalls of buying patents from a bankrupt seller, as well as the importance of conducting proper due diligence wherever time permits.  Following bankruptcy, people and documents tend to disappear, along with engineering data, and it can be difficult to obtain statements from inventors. Claims against the bankrupt business can spring out of the  woodwork, since the bankruptcy process encourages them to come forward. There can however be advantages: a court can give good, clean title -- and encumbrances such as existing licences can be rejected or removed. If a licensee exercises its right to reject the licence following a licensor's bankrupcty, that can be good too.  However, it is not clear how far the US provisions apply to non-US parties.

Jose Esteves (Skadden) considered the legal dimension of government involvement or interference in IP monetarisation deals, particularly where state-backed or important national businesses are at stake, as well as legislative and enforcement issues such as the proposed SHIELD Act in the US and the US ban on the import of Chinese telecoms goods while allowing thousands of Chinese patent applications in the same sector. Said Jose, government involvement can result in greater complexity in an area where more simplicity is required.

This session continued with talks by Owen Byrd (Lex Machina) and Selvyn Seidel (Fulbrook Capital Management), which this blogger had to miss on account of his participation in another conference session.

Registration of security interests: amendment of UK rules

A recent piece of subordinate legislation in the United Kingdom, the Companies Act 2006 (Amendment of Part 25) Regulations 2013 (SI 2013/600), is not the sort of reading matter that IP enthusiasts would instantly search out for a bit of instant gratification -- but it's worth taking a look at if you are involved in registration of security interests.

 These Regulations deal with the registration at Companies House of security interests (mortgages, charges etc) created on or after the beginning of the new tax year, 6 April 2013. Governing the registration of security interests by companies registered in the United Kingdom, these Regulations apply to the registration of security interests in land, ships, aircraft and intellectual property (defined for these purposes as including

(a) any patent, trade mark, registered design, copyright or design right;
(b) any licence under or in respect of any such right.

Asian Subsidiaries Royalty Rising

The London Financial Times has an interesting story today about rises in the royalty rates that Asian subsidiaries are expected to pay to their parent companies. Apparently a number of investment funds have been gaining exposure in Asian markets by buying shares in a locally listed subsidiary of a multinational company, such as Unilever or Nestlé. The investors are concerned by the recent rises in the rates of royalties paid by these local subsidiaries for the use of "shared services" such as research and development, marketing, branding etc. This author's experience with several such agreements suggests that rates between 5% and 8% are generally paid to recognise not just the goodwill in the company name but also, for industries in which innovation plays a key role, the use of patents and know-how. Thus Unilever's rise to a royalty rate 8% of sales from 3.5% does not seem unreasonable in this context. On the other hand, it is not surprising that that investors in Unliver's Indonesian subsidiary - who have happily collected dividends - are not happy. Uniliver justifies its rise by stating that the rise is about cost recovery and that the royalties are apparently subject to the same level of tax both at home as abroad.

One issue not pointed out in the article is that the rise in royalties paid to a UK company seems to coincide with the introduction of the UK's patent box regime under which revenue attributed to patented products is taxed at a lower rate. It is almost certain that a substantial proportion of the royalties from the Indonesian (and other foreign subsidiaries) will be based on patented products and thus the royalties will be taxed at an effective rate of 10% rather than the usual rate of 23% of coloration tax. This probably makes it rather interesting for a company like Unilever to repatriate as much as its revenue from overseas subsidiaries in the form of royalties on patented products. There is clearly tension here between the interests of investors in separately quoted companies that are interested in getting a maximum level of profits from the local companies and the interests of the parent company in repatriating its profits in a tax-efficient manner Such locally quoted subsidiaries have traditionally enjoyed a premium on their share price because they are regarded as being well-governed. It's clear also in many cases that they have benefited from an undervaluation of the use of the groups intellectual property. The Swiss company Holcim has only paid 1.5% to date - which is substantially under market value despite Holcim's technological innovation and the rise to 5% will still put it at the lower end of the going rates for royalties.

The article concludes that the authorities in the local regions should wake up to what is happening and ask whether the trend is welcome. From their point of view the grand is probably not welcome as it will reduce taxable profits locally. However, the rates being talked about are well in line for going rates negotiated at an arms length basis for the use of technology - and this point is not make in the arcticle.

Piracy a Good Thing for Value? The Game of Thrones.

George RR Martin’s Game of Thrones is a wildly popular fantasy tale.  The HBO television series Game of Thrones has even eclipsed the popularity of Martin’s books and is apparently the most pirated television show ever.  I’ve only read part of the first book, but based on that reading the television series is an excellent retelling of the book (and at least for the part that I read the television series may be even better than the book).  In the United States, the first episode of the second season premiered on HBO last Sunday night.  Apparently after the airing of the episode and within a day, TorrentFreak reports that there were a million downloads of the show.  This is apparently a record.  TorrentFreak explains that one of the reasons for the number of downloads (besides popularity and avoiding paying to view it by subscription) is that there is a delay in releasing the show to markets outside the US.  This explanation seems to be bolstered by the fact that the leading downloading country is Australia and the leading downloading city is London.  Does the access by BitTorrent hurt HBO’s bottom line or not?  The Washington Post, the Public Broadcasting Service and CNN explore the issues.  According to some, the piracy may “generate a buzz” about the product—this may help promote the product and generate sales such as DVDs if it doesn’t generate subscriptions to HBO.  Some producers may be willing to pay handsomely for such buzz amongst their fans although not by allowing piracy (but see end user license agreements by Microsoft and Blizzard that allow some machinima and discussion about them here and here).  Suing your fans seems like a bad idea to me.  There is also a point, raised by someone at HBO, that piracy didn’t impact DVD sales.  And, of course, just because someone views something illegally doesn’t mean that they’d buy the real deal instead (but they may buy a real deal like the DVD or go see the eventual Game of Thrones movies—maybe those movies will be crowdfunded (doubtful)?).  And, Mike Rugnetta at the Public Broadcasting Service (remember Big Bird’s channel and Romney’s non-friend) has an interesting video about piracy helping the Game of Thrones here.  

Someone important recently said something about copyright owners not having the right under the US Constitution to divide markets to maximize profit—is that a sign of the law catching up to the disruptive change of reality?  Access (Creation) is important, but an important question is who gets access and when (can we all be insiders at the same time?).  How much is the game changing?  Is winter coming?  Or must we pay the iron price?  Must we always pay our debts?  Maybe all of the above?  What do you think?

Protecting Trade Secrets: How Many Shades of Gray Do You Need To Count?

Study after study shows the claimed widespread reliance on trade secrets in protecting a company's intellectual property. In that regard, a management course addressing the creation, exploitation and protection of a company's intangible assets/intellectual property will usually seek to place these assets in juxtaposition to patents and to highlight the characteristics that distinguish one from the other. Much less considered, if at all, is the dynamics by trade secrets are treated in the actual swirl of the commercial marketplace. Indeed, academic colleagues with a particular interest in the topic repeatedly lament the difficulty in getting beyond high-level research findings, usually based on statistical analytics, in order to "find out what is really going on."

Against that background, I noticed an article that Reuters published several days ago that show just how uncertain the treatment of trade secrets can be. The March 27 article—"China eyes $3.5 billion Russian arms deal despite ire over Sukhoi copy" here, describes the cat-and-mouse game that Russia has been playing with China as it confronts the dilemma that faces many concerns who wish to do business with China—how can I balance my commercial (and in this case, perhaps also geostrategic) interests against the risk of having valuable trade secrets uncovered by my business partner. Beyond all of the talk about NDAs and the patent/trade secrets trade off, the dynamics between Russia and China provide an illuminating window are instructive about "the 50 shades of grey" that characterize the treatment of trade secrets in the marketplace.

The Reuters report focuses on China's efforts to receive renewed deliveries of certain advance weaponry from Russia to the tune of $3.5 billion, mainly fighter planes and submarines, this despite the lingering memory among Russian officials about alleged previous purloining of Russian military technology by their Chinese customers. It appears that the Chinese are particularly eager to obtain this advanced technology to fill in gaps in their domestic military technology, especially in the area of jet engine technology. As well, with the changing of the guard in China, new President XI Jinping apparently sees the transaction as having both substantive as well as reputational value.

All of this is understandable enough for China, even at the price of $3.5 billion. But what about Russia? Certainly $3.5 billion is a respectable sum of money, especially when one considers how eager they are to earn hard currency for something other than the sale of natural resources. However, from the point of view of protecting valuable military trade secrets, is it worth these sums? Starting in the 1990s, Russia transferred to China Russia weaponry and technology in the amount of $26 billion, enabling the Chinese to close its military technology gap with the West.

But at the same time, the Russians noted that while they had delivered 280 fighters of the Su-27 family to China, China also managed to produce 160 units of its J-11 fighter which, in the view of the Russians, is simply "the reverse engineered version" of the Su-27. Apparently, the copying was so blatant that it angered the Russian defence industry, who viewed it as out and out "intellectual property theft" of some of its most valuable military technology. The thought of one day having to encounter a reverse-engineered version of the Su-27 somewhere along the 2,600 mile-long China-Russia border also gave them pause for thought.

So here is the problem for the Russians. Can they take any material steps to prevent a repeat of what happened the last time they transferred valuable trade secrets to the Chinese. Three steps are suggested in the article:

1. As noted by a Russian-based analyst, " [i]t is understood that the Chinese will try to steal or copy any system they are given access to. But the amount of time they will need to do that [apparently in this case—NJW] might be very significant." In other words, managerial consideration no. 1 is simply a version of "first mover advantage", although the application is this tactic to the development of military hardware seems a bit problematic.

2. Russia sees itself as being better placed this time to limit Chinese access to the trade secrets. The previous time, it seems, the Chinese were able to make use of know-how found among experts located in Belarus and Ukraine, which were no longer part of Russia after the collapse of the Soviet Union. This time, it is noted, "[t]he new Russian systems cannot be found in the Ukraine or Belarus." This sounds like a version of what I used to hear about technology transfer by Japan to China—either hold-back key technology or make sure that it stays "between the ears" of the transferring party, with no documentary access available. Maybe yes, maybe no, depending upon how "first mover advantage" plays out.

3. The parties will be entering into contracts that will presumably protect Russian interests in this regard and provide steep penalties for breach. The problem with this is, as a lawyer, I am familiar with the limitations of contractual protection with respect to trade secrets. It is what we tell students is a "second-best" line of protection at most. Whatever the amount of any court judgment for breach, the trade secret smoke is out of the bottle and not even Aladdin will be able to retrieve it.

All of this seems to underscore the difficulty of ensuring reasonable protection of one's trade secrets when there is a concern that the counter-party may be less than forthcoming in its commitment. It also points to the need for management education to develop better tools to teach students how to weigh the trade off between revenues and other benefits and the loss of control of one's trade secret assets.

More on the Sukhoi fighter here.