Funds for the super-rich? Sort of ...

At last, the UK Government is taking steps to help the rich -- the IP-rich, that is.  Today's media release from the Department for Business Innovation & Skills, and the Intellectual Property Office for which it is responsible, carries the promising title "Plans unveiled to support IP-rich businesses get funding".  Sadly, the reality isn't quite as generous. The media release reads as follows:

Department for Business, Innovation and Skills

 

A new report to government has highlighted the challenges small and medium-sized businesses face when trying to manage and protect their intellectual property.

Speaking at the Alliance for Intellectual Property Conference in London today [on which see IPKat reports here and here], Business Secretary Vince Cable welcomed the recommendations from the independent ‘Banking on IP?’ report commissioned by the Intellectual Property Office which examines the issue of access to finance for IP [you can find the executive summary for Banking on IP? here: it's 12 pages long, with a generous allocation of white space].

The executive report published today recommends a series of steps including:

• creating a toolkit to help SMEs, lenders and other financiers identify, understand and make more effective use of their IP
• making it easier for businesses to show what IP they have when looking for funding
• developing templates and providing advice which help banks and others understand the cash flow and business value of IP
• supporting the development of more accessible and effective IP marketplaces

[This blogger's experience suggests that even quite naive SME folk generally have a better idea of their intellectual assets than many supposedly trained and sophisticated finance providers; he wonders if separate tool-kits are needed for SMEs and lenders, since their interests and the consequences of their exposure to risk are quite different] The full report, to be published shortly, recommends ways to help businesses, particularly SMEs, seek investment from banks to protect and invest in their IP. It also recommends ways to give banks the right information and support to value IP correctly ..."

Berlin's Hi-Tech Future: High, Low, or Somewhere in Between?

This blogger had not really devoted much time to considering the start-up environment in Germany, beyond a general awareness that Berlin was a magnet for creative types from all over the globe. That all changed when his son recently informed him that he was taking his newly-minted double degree in computer science and psychology and joining a start-up in Berlin. It was good timing, then, that the October 5 issue of The Economist included an instructive article entitled “A Slow Climb: Business Creation in Germany”, here, with the sub-heading: “A vigorous start-up scene has yet to produce its first big breakthrough.” Both for this blogger and his son, the article discusses a number of key factors that distinguish the hi-tech start-up scene in Berlin from other creative hot-beds, an environment that is falling short, at least for the moment, from the carry-through from seeing a start-up being “founded every 20 hours” to the flotation and exit atmosphere that characterizes a start-up milieu such as Israel.

Let’s begin with a sobering fact: Germany does not appear to have spawned a world-beating hi-tech start-up since the founding of SAP in 1972 here. While German ingenuity, encapsulated by the industrial success of its family-owned Mittelstand, is well-recognized, here, this industrial model does not seem to have translated well into the digital world. This is so even as venture capital flows into Germany, in general, and Berlin, in particular (more such investments were reportedly made in Berlin than in London during the last quarter). The article discusses some of the possible reasons for this.

First, Germans appear to have a less enthusiastic view of entrepreneurs than do many of their neighbours. Fewer than 50% of those surveyed in Germany had a positive view about starting a business, compared with 65% in France, 68% in Poland and 79% in the Netherlands. This may be connected to another data point, namely, Germans have a higher level of fear of failure (42%), as compared with 32% in the US.

Secondly, the environment for financing start-ups in Germany has some serious deficiencies. Angel investors and venture capitalists, the life-blood of many start-ups at their formative stage, appear to be less robust than in the US. Thus, it is reported, while the average such investment in Germany is around $1 million dollars, the comparable figure is $6 million dollars (though this blogger is not quite sure what is the basis for these figures). Added to this is the fact that successful entrepreneurs in Germany are far less likely than their US counterparts to then become angel investors themselves.

Thirdly, it appears that German investors are more cautious. Instead of betting on a lot of companies, with the hope that a small number will succeed, German investors tend to invest in a smaller number of companies. In addition, German investors appear to have shorter time horizon for expecting the company to reach a break-even point. In part this can be explained perhaps by the nature of the typical start-up investor, which tends to be a large German company, such as Deutsche Telekom and the publisher, Axel Springer Verlag, here. While such a litany of corporate behemoths is impressive, it is hardly the kind of investment dynamic that one senses in the likes of Sand Hill Road in Menlo Park, California here, where a world-beating number of venture capital companies are seemingly found on every corner.

Pushing against this gloom are a number of factors that, it is argued, point to a much brighter future for German start-ups (and Berlin in particular). These include relatively low costs (from employee salaries to rents), the ever-increasing concentration of creative types, and the cutting-edge reputation of Berlin, especially for “20 (and 30)-somethings”. The German government is also committed to increasing financial support, although the relative pros and cons of government support in hi-tech endeavours continues to be debated.

The article ends with a luke-warm (as compared with the US) assessment of the likely future of the Berlin hi-tech environment, stating as follows:

“Digital Berlin is now nurturing the sorts of companies that could make pulse-quickening stockmarket debuts, if Germany had a shareholder culture vibrant enough to welcome them. As it is, many are likely to wind up in the hands of incumbents like Telekom and Springer. A few will soar on their own. Germany may not produce the next Google, but perhaps the land of Mercedes and the Mitttlestand does not need to.”

Perhaps this is too bleak an assessment. After all, how many imagined “swinging Berlin” at the outset of German reunification.
What Digital Berlin will look like a decade hence may also yield unimagined hi-tech surprises. At the least, this blogger will have an inside view of the dynamics taking place there.

California Governor Jerry Brown Vetoes California’s Biosimilars Bill

I recently wroteabout California’s Biosimilars Bill which was passed by the California Legislation.  California Governor Jerry Brown vetoed the Biosimilars Bill today.  The Sacramento Bee discusses the veto, here.  The Bill arguably made it more difficult for a pharmacist to provide a biosimilar for a prescribed biologic, thus allowing biologic companies to place a barrier on the ease of substitution of biosimilars for biologics.  The generic pharmaceutical industry as well as the California Public Employees’ Retirement System (CalPERS) opposed the legislation.  The federal Food and Drug Administration also raised concerns about the Bill.  The Bill was supported by the Biotechnology Industry Organization and Amgen.  The Governor issued the following statement concerning the Bill:

To Members of the California State Senate:

Senate Bill 598 would effect two changes to our state’s pharmacy law.  First , it would allow interchangeable “biosimilar” drugs to be substituted for biologic drugs, once these interchangeable drugs are approved by the federal Food and Drug Administration (FDA).  This is a policy I strongly support. 

Second, it requires pharmacists to send notifications back to prescribers about which drug was dispensed.  This requirement, which on its face looks reasonable, is for some reason highly controversial.  Doctors with whom I have spoken would welcome this information.  CalPERS and other large purchasers warn that the requirement itself would cast doubt on the safety and desirability of more cost effective alternatives to biologics.

The FDA, which has jurisdiction for approving all drugs, has not yet determined what standards will be required for biosimilars to meet the higher threshold of “interchangeability.”  Given this fact, to require physician notification at this point strikes me as premature.

For these reasons, I am returning SB 598 without my signature. 

Nicely done, Governor.

Should You Hire An Auditor To Ensure You Are Obtaining All of Your Royalties? Invotex Thinks You Should Hire It and Here is Why.

Invotex is an accounting, financial and economic consulting firm that provides expert services in litigation, forensic and valuation support; intellectual property services; insurance services; and restructuring and investigation services.  As part of its suite of intellectual property services, Invotex offers royalty audits and compliance services.  And, as Professor Crouch at the excellent Patently O Blog recently noted, Invotex has released its 13^th Annual Invotex Royalty Compliance Report.  The report's headline states, in part, “89% of Audited Licensees Underreport and Underpay Royalties.”  According to Invotex, there has been a trend up in underreporting and underpaying royalties since it started creating reports in 2007.  The audits included in the report appear to be of companies that Invotex was hired to audit.  It is unclear, however, how many companies were audited by Invotex for this report; although the press release notes that “hundreds of agreements” have been audited by Invotex and Invotex has recovered “$150 million in underpaid royalties.”  Invotex states that:

Underreported Royalties as a Percent of Reported Royalties
In our examinations, we found that in a high percentage of cases, licensees owed the licensor more than two times the amount paid in royalties. As a percentage of reported royalties, we found that of all licensees:

·         25% underreport the royalties they owe by more than 100% of the total amount reported

·         7% underreport the royalties they owe by 50 to 99% of the total amount reported

·         8% underreport the royalties they owe by 25 to 49%

·         11% underreport the royalties they owe by 11 - 24%

·         11% underreport the royalties they owe by 6 to 10%

·         27% underreport royalties they owe by 1 to 5%

·         11% accurately report royalties owed

Invotex also helpfully reports the reasons for underreporting.  Notably, the report states that, “56% underreport sales; [and] questionable license interpretation accounts for 44% of the total misreported dollar amount.”  Apparently, Invotex has, perhaps unsurprisingly, found that licensees will interpret certain terms such as “the definition of the product to how to calculate the sale” in ways that result in lower royalty amounts.  This interpretation issue can be the result of poor drafting and Invotex notes that, “outright fraud is a rare occurrence.”   The report states other sources of underreported royalty amounts including: Royalties from Disallowed Deductions; Math Errors; Royalty Rate Errors; Unreported Sublicenses; Transfer Prices; and Unreported Benchmarks and Milestones.  Invotex also reports that it audited a major pharmaceutical company on behalf of a research university and found that, “Based on our audit, an underpayment of more than 75% of what had originally been reported to the client was uncovered and paid to our client. This underpayment was based on the overestimation of discounts, the use of transfer prices instead of third party pricing and the misclassification of sublicensee revenue.”

In a recent article in Corporate Counsel, Invotex’s Deborah R. Stewart and Judy A. Byrd offer advice for how to maximize the opportunity to receive 100% of the royalties you are entitled.  Ms. Stewart and Ms. Byrd provide a sage “Takeaway”:

The role of in-house counsel is changing. Many corporate counsel are now evaluated not only on effectiveness and efficiency, but increasingly, on how they contribute to the company’s financial bottom line. Capturing the full value of your corporate royalties will increase your firm’s revenue. The solution may be easier than you realize.

Best practice dictates a systematic license compliance program that includes royalty audits. Audits typically generate positive results for the licensor and can turn your “cost center” into a revenue-generating resource.

IP licensing is one of the most significant and fastest-growing sources of an organization’s earnings, yet it remains one of the most poorly managed and underutilized assets. Managing a successful licensee compliance program is like managing everything else. It takes time and interest to keep it on track.

Are the experiences of readers of this blog similar in discovering underreporting of royalties? 

Ethics versus Money in University Tech Transfer

IP Finance is delighted to bring you this piece from our friend Suleman Ali (Holly IP), which touches on a sensitive topic:

Are Commercial Pressures Undermining the Ethics of University Tech Transfer Offices? 

The Bayh-Dole Act of 1980 made it possible for US universities to benefit financially from government funded research.  It allowed universities to own the patents that resulted from their research, rather than having to assign them to the government.  Since then many US universities have done well in commercialising their research.  The Association of University Technology Managers (AUTM) in the US reports that last year US universities and research institutes executed 5,130 licenses, formed 705 start-ups, filed 22,750 US patent applications and made $2.6billion from licensing income.  UK universities have also done well from commercialising research, making £61 million in licensing income in 2010/11.  Most would agree that commercialising university research is beneficial for the economy of a country, and in particular helps the increasingly important hi-tech industries. 

The hub of the system is the university tech transfer office.  Such offices are now well established in many top universities, and are finding their feet in the less prestigious universities.  However tech transfer offices have a difficult task.  They have to persuade academics to commercialise their research, educating and pushing the reluctant ones and keeping in check the powerful and pushy ones.  They have to defend the university’s interests when collaborations are set up, and are sometimes accused of being too aggressive in doing so.  Most importantly they have to decide on which research they’re going to commercialise.  That is usually based on two main factors, patentability and commercial worth.  Patentability is complex, but usually possible to decide on -- but assessing commercial worth can be close to impossible, and inevitably tech transfer offices get it wrong a lot of the time. That means many university patents are never licensed or commercialised in any way as a commercial partner is never found. 

A recent article in Nature highlights the phenomena of universities looking to Patent Assertion Entities (PAEs) to monetise their unlicensed patents.  The article quotes a figure of only 5% of patents being licensed at most universities, which means that a lot of university resources are going into filing and maintaining patent applications which are never going to give any return by the usual means of commercialisation.  PAEs are controversial because they do not develop the technologies covered by the patents they control.  Instead they make money by asserting their patents against companies using the technologies, and thus are seen by some as a burden on innovative companies.  A report in the Stanford Technology Law Review last year alleges that one of the most high profile PAEs, Intellectual Ventures, has relationships with 400 universities around the world and has signed deals with 50 of them.  It’s clear that many universities have no qualms about monetising their patent cases through PAEs.

Questions can be asked about the do’s and don’ts of commercialising publically funded research.  While it seems acceptable for tech transfer offices to license or sell patent to companies that are going to develop the relevant technology, is it equally acceptable for them to monetise their patents through PAEs?  US universities are aware of the issues raised by turning to PAEs.  A memo that resulted from a meeting of top US universities in 2006 says ‘universities would better serve the public interest by ensuring appropriate use of their technology by requiring their licensees to operate under a business model that encourages commercialization and does not rely primarily on threats of infringement litigation to generate revenue’. 

One wonders about the long term consequences on university research now that the option to license to PAEs is available.  Academics are under increasing pressure to focus their research on areas which will have commercial interest.  While it could be argued this harms blue-sky thinking it would still lead to innovative, and hopefully round-breaking, work.  However the PAE model relies on having patents that cover what is being done by companies.  That may cause academics and tech transfer offices to simply focus on producing patents that PAEs would be interested in having. 

Perhaps now is the time for broader questions to be asked about how publicly funded research should be used.  Governments seem increasingly in favour of open innovation, where the results of university research should be freely available to all, allowing as many organisations as possible to benefit from it.  Allowing PAEs to license and assert patents resulting from university research seems a backward step in that process, hurting not only the most innovative sectors of the economy, but arguably also being detrimental to university research itself. 

3D Printing: A Couple of IP Aspects You Probably Have Not Thought About

As of late, few hi-tech topics have captured as much interest as has 3D printing (aka 3D manufacturing or additive manufacturing). It is not surprising, therefore, that the IP aspects of 3D printing have attracted increased attention as well. In the main, the focus has been on copyright, design and trade mark issues with respect to the potential use of production files by end-users, and on patent rights in the 3D printing machines. However, it seems to me that there are two IP issues that have enjoyed far less coverage, despite their potential commercial importance, namely the branding of 3D printing manufacturers and IP protection of the manufacturing materials.

As for the branding issue, it is connected with the current structure of the industry. Two US-based major companies appear to dominate—3D Systems, here and Stratasys, here. Both have parlayed internal development with aggressive acquisition activity which is intended to achieve industry consolidation. Indeed, Stratasys has been particularly active of this in late, having merged with the Israeli company Objet in 2012 and in June 2013 having purchased the Brooklyn-based company MakerBot, here. There is no single technology for 3D printing, which in part explains the interest by both companies in acquiring various technologies in the field, when available and where appropriate.

But even more than that, as has been explained to me by someone close to the industry, the goal of both companies is to bring a variety of such technologies under its house brand, thereby enabling a potential customer to come to rely on the brand as indicating a one-stop shop for all of his 3D hardware manufacturing needs. As Landes and Posner argued in their oft-cited article, "Trademark Law: An Economic Perspective",Journal of Law and Economics (vol. 30, no. 2 (Oct., 1987), pp. 265-309), the major economic function of a trade mark is to reduce consumer search costs. If each of these two companies can develop a strong house brand for 3D printing products across a wide range of uses, price points, and manufacturing capabilities, customers will be more likely to eschew a detailed investigation of smaller purveyors of 3D printers in favour of simply turning to one these two companies, secure in the belief that one is likely to find whatever he is looking for.

However, it seems to be only a matter of time before one or more multinational companies (such as GE or maybe even Kodak(?)) will make concerted efforts to enter the field in a commercially meaningful way. When this happens, a particularly interesting branding struggle may well then ensue: in this corner, the entrenched market leaders in the 3D printing industry, each identified by its house brand and, in the other corner, one or more or multinationals, each of whose powerful brands covers a swathe of technology and industrial companies, but which currently have a only a limited presence in the 3D printing industry (unless, of course, a multi-national simply acquires one of the 3D printing leaders, but then allows the acquiree to continue to trade under its house mark and brands.)

The issue of IP and 3D printing materials derives from the economics of the industry. At present, the current business model of the dominant 3D manufacturers appears to be a version of the model that has characterized the 2D printing industry. Thus a 3D manufacturer can sell any given device only once but, in order for the customer to make use of the machine, he must also purchase the material that enables additive manufacture to take place. The sale of the material portion of the 3D printing process is therefore a critical source of recurring income.

As summarized in a 7 September 2013 article in The Economist ("3D printing scales up"), one of the current drags on widespread reliance on 3D printing is that the cost of the materials needed may reach a price of $80 a kilo, as compared to $2 a kilo for materials used in mass manufacturing. However, the reason for this wide disparity of price is not only the high requirements for purity and composition needed for 3D printing; it also is explained by the current way that the industry is organized. Thus, as the article explains:

"But mostly it is because 3D-printer manufacturers require users to buy materials from them and mark up the price, as with the inks for 2D inkjet manufacturers. Mr Vicari [Anthony Vicari of Lux Research] thinks this strategy is not sustainable long term as third-party suppliers enter the business. Moreover, some big manufacturers, like GE, are developing bespoke 3D-printing systems which are not dependent on a single supplier of equipment or material."

Against this backdrop, it would seem that being able to continue to reap substantial profits from 3D manufacturing materials is essential to the industry as it is currently structured. Can IP play a role here? It is my understanding that, at the moment, manufacturing materials are currently protected primarily by trade secrets. As we all know, this kind of protection is intended to prevent unauthorized disclosure, but it does nothing to prevent competitors from coming up independently with equivalent materials. If 3D printing manufacturers face waning control over sale of the materials, might not patents come to their rescue? I frankly do not know the extent to which patent protection is appropriate for 3D printing materials. But if it is, then perhaps the manufacturers might be able to prevent the possible erosion of their profit margins in the materials by being able to assert patent rights (even if merely to sign up third-party licensees). It will be interesting in this context to see if there will be enhanced acquisition of companies specializing in developing 3D printing materials and an increase in patent filings in this area.

“Onshoring” of IP Legal Work on the Upswing? A Combination of Factors or is it all about Security?

There have been an increasing number of reports of U.S. companies bringing manufacturing work back to the United States, here.  There are often a multitude of reasons for doing so, some for example are higher wages in China and India, higher productivity of workers in the United States, labor unions in the United States willing to be flexible, public relations and marketing issues in the United States, tax or other incentives, and security concerns with IP. 

Besides general manufacturing, so-called “onshoring” or some variation has been happening in the United States in the legal services market.  While not technically “onshoring,” some law firms are locating some employees in parts of the United States that have a lower cost of living.  For example, a law firm may place lawyers handling a certain type of work in a city such as Pittsburg, here.  The cost of living is less there compared to say San Francisco or New York, and that makes it easy to justify a much lower salary for their employees.  Another interesting activity that fits the definition of “onshoring” better, is a firm like Black Hills IP.  Black Hills IP started around 2011 and provides a host of IP services to law firms and corporations.  Instead of “offshoring” IP legal work to India, Black Hills IP offers its services in the U.S. from one of its two offices, the main office in Rapid City, South Dakota, and one in Minneapolis, Minnesota.  Apparently, Black Hills IP’s selling points are 1) cost effective, particularly through the use of proprietary software; 2) expertise in IP (notably their President is a former IP law professor); and 3) work is done in the United States.  The latter point is very interesting.  First, there is a practical reason for that point—if you are a firm in the United States then it is easier to reach someone at Black Hills IP during the same hours you are likely operating.  Second, you may not have to deal with export controls.  Finally, the more interesting reason is security concerning IP.  Black Hills IP’s website includes the following information about security:

Your data is kept secure and confidential through use of strong encryption, physical security and comprehensive access controls.

Our facilities are secure

• Our facilities have access control at all points of entry, 24 hours a day / 7 days a week.


• All visitors require pre-approval for access to our facilities. Identification is checked and visitors are escorted.

Our systems are secure and encrypted

• Your data is continuously backed up to a secure datacenter using 448-bit encryption.


• We can work in any IP management system.  We evaluate each system first to ensure it complies with our internal security requirements.


• Our networks are secured by industry-leading firewalls.

Your data is confidential

• Each of our teams has a segregated set of applications and access rights.  Only members of that team have access to that team’s applications and network privileges.   


• All employees undergo confidentiality training and receive semi-annual refresher training.


• We conduct comprehensive background checks on all new employees.


• All employees sign confidentiality agreements.


• All employees are US citizens based in the US.

My guess is that similar firms outside the United States make similar representations concerning security except for the last sentence, “All employees are US citizens based in the US.”  Security has been a huge issue concerning IP lately, particularly with respect to cyber-attacks on U.S. government, universities and corporations (and happening to other countries as well), see an earlier post here.  Also, I have heard reports about firms that have outsourced work and have had problems with losing IP.  But, is it much more likely a U.S. citizen based in the United States will not steal confidential information of a U.S. firm?  Is the representation that “All employees are US citizens based in the US” an effective draw for clients?  If so, why?  Is it because that is essentially the same risk that any U.S. firm takes with its own employees—that a U.S. citizen may “steal” their IP, so the upside is just lower cost?  Is there a cultural explanation?  Is there an economic explanation?  Or, is this really about export controls? 

Are there similar firms in other countries?  If so, do they advertise that a benefit of choosing their company is that their employees are all citizens of France, the U.K., Italy, Norway, China, South Korea, Philippines, Australia, or Germany, respectively?  Black Hills IP has recently announced it has obtained its 100^thcustomer.  (hat tip to Professor Henderson at the Legal Whiteboard blog).