Good News for Crowdfunding for Start-Ups? President Obama nominates Mary Jo White to head Securities and Exchange Commission.

Late last week, President Obama nominated Mary Jo White as the head of the Securities and Exchange Commission (SEC).  Her appointment awaits confirmation by the U.S. Senate. Hopefully, this is an indication that the new SEC rules implementing the JOBS Act will become effective soon and thus, the legal landscape concerning crowdfunding for startups in the United States will be clarified.  Apparently, part of the hold-up relating to approval of the rules has revolved around concerns with inadequate investor protection in the rules and questions concerning the identity of the new member of the SEC.   A description of the issues concerning crowdfunding is provided by startup guru Yoichiro“Yokum” Taku here.   

Dutch sandwich in danger, but most of the pie remains untaxed

From Mary-Ellen Field (Chairman, Brand Finance), via Mark Colvin, comes news of "No more “Dutch Sandwich”? The Netherlands reviews its role in tax avoidance" by Cyrus Farivar, posted on Ars Technica last week (here). According to this post, in relevant part:

"In recent years, governments have become increasingly aware of the fact that lots of major corporations -- notably tech companies including Apple, Google, Yahoo, Dell, and many others -- are using shady, albeit legal, techniques to shift income in ways that drastically minimize a company's tax burden. A trick known as the “Dutch Sandwich,” in which companies move money through the Netherlands, has become one of the preferred ways of reducing a firm's financial liability. ...

Here’s how it works: as Bloomberg also reported in 2010, a company sells or licenses its foreign rights to intellectual property developed in the United States to a subsidiary in a country with lower tax rates. That means that in many cases, companies will license their own IP to one of their own foreign subsidiaries (often based in Ireland), whose profits then stop over in the Netherlands. In turn, those profits finally settle in Bermuda, a British overseas territory in the North Atlantic, and a notorious tax haven. ...".

Last Wednesday, however, a Dutch parliamentary committee met to consider the fairness of its own tax system and to re-evaluate its role as part of a legal financial chain that allows companies to reduce the amount of tax they pay. Other European countries, including the United Kingdom, Ireland and France, are also looking more closely at the tax arrangements of international IT and online businesses, which either pay little tax of any description or, when they do pay tax, they tend not to pay it in European countries in which they have been profitably trading.

 It seems to this blogger that European countries will have to sort out their priorities before they can individually get to grips with the problem of international companies which earn megabucks and pay little or no tax in the EU.  This is because real and meaningful taxation is only going to be raised when all 27 (soon to be 28) Member States have identical tax rules, while each EU Member State would like to be seen to be that bit more attractive in tax terms than its neighbours, in order to attract foreign businesses to base themselves and their IP portfolios locally.  The businesses themselves will naturally wish to exploit any tax differentials and pay where tax is at the lowest rate, thus encouraging a race to the bottom.

Double Irish Dutch Sandwich explained here

Crowdsourcing against "Bad" Patents and Patent Trolls: But Not All Black and White

The notion that there are "bad" patents, which I take to mean that the patent should never have been granted -- or that even if it was granted, the scope of the claims are too broad -- is widely expressed. There is a parallel Darth Vader patent notion, namely, the deleterious effects of the patent troll. Here, it is presumed that some little-known and, more or less, penurious patentee, is the owner of an over-broad patent, which he has transferred to the patent troll, who then seeks to terrorize multiple persons acting within the industry covered by the patent.

It is not my purpose here to focus on the correctness of the claim that there are "bad" patents and that such patents are sometimes abused by patent trolls. Rather, let's assume for purposes of this discussion that there is a basis for such views. As such, the question becomes: how can persons who perceive themselves threatened by bad patents and patent trolls combat this challenge?

One particularly interesting response was described in an article in the January 17, 2013 issue of Bloomberg BusinessWeek as "Crowdsourcing the Fight Against Tech Patent Trolls" here. Written by Olga Kharif, the article focuses on the activities of a company called Article One Partners here, which is described as "a website where more than 27,000 researchers sift through obscure public domain materials including scientific papers, Ph.D. theses, and even product manuals to poke holes in legal claims—and possibly earn thousands of dollars."

The business model seems to be as follows. The company charges prospective clients either a one-time fee (the range of which was not indicated) or an annual membership fee (the cost of which was also not indicated). Corporate client include companies such as Philips (which asked Article One in 2011 to examine 33 patents), Microsoft and Sony. The company pays an amount ranging from $3,000-$5,000 to the researchers who come up with what is described as "the best research". Since the creation of the company in 2008, it has paid $3.69 million to researchers; half of this amount was paid for studies carried out in 2012. It is reported that 8% of the approximately 27,000 researchers earn more than $50,500 per annum.

The Company uses an algorithm to winnow research submissions in order to find materials deemed most germane to the client's matter. Five members of the company's staff then further narrow the search results and the client itself is able to refine the search through tools available on the company's website. Gerard Pennekoek, CEO of a start-up called International Property Exchange International here, observed that ""crowdsourced model works better than any grouping of staff that you bring in-house" (although, to be balanced here, two of the members of the board of directors of International Property Exchange International are listed on the company's website as Ruud Peters, the chief intellectual property officer of Philips and an apparent source of the information about Philips Electronics' use of the services of Article One described below, and Marshall Phelps, formerly head of intellectual policy and strategy at Microsoft and a reported investor in Article One Partners). The article describes how Philips Electronics paid Article One approximately $100,000 to find conclusive prior art that convinced a would-be plaintiff to back down from a threat of filing an action for infringement. Philips had turned to Article One because, according to the report, its own in-house lawyers had found it difficult to come up with "a viable defense."

While all of this sounds jolly good, I have a some concern about discussions concerning this crowdsourcing-based business model have been bolted onto a form of IP morality play (who can be against rooting out "bad" patents and tempering rapacious patent trolls). In particular, the article does not bring any example of a small company, with limited resources, which has been able to deflect a claim for infringement by relying on research results from Article One. I agree that patent litigation, especially in the U.S., can be ghastly expensive. However, the real victim in the cost structure of patent litigation is not the multinational company (who may well be tomorrow's infringement plaintiff), but the small entity who cannot afford to defend, and as a result, often will seek an early, usually unfavourable settlement or engage in all-out capitulation, even when the legal basis for the case is flimsy. Until Article One and like companies can be shown to provide an effective and cost-effective service to such small entities, the morality play dimension of their activities must be taken with a proverbial grain of salt.

A New Kind of University? Merging Industry and Academia (with help from the Government) from the Ground Up (almost).

The NY Times recently discussed the admission of the first class of graduate engineering students in computer science at Cornell NYC Tech.  Cornell NYC Tech is an ambitious graduate school designed to foster entrepreneurship through innovative curriculum and a close—even intertwined—relationship with industry from the get go.  Here’s a description of its academic structure: "Research at Cornell Tech is organized around flexible and dynamic interdisciplinary application hubs instead of traditional academic departments. This model serves as a focal point for the campus, accelerating existing sectors of New York City’s economy and driving the formation of new technology businesses through close ties to customers and unique domain knowledge. The first three hubs – Connective Media, Healthier Life and Built Environment – reflect the frontier of the information economy today and where it’s going."

Physically, classes will be located amongst innovative companies.  And, employees of the companies will work hand-in-hand with students and faculty.  Fridays are apparently devoted to lectures by people from outside academia.  Students have industry advisors for their master’s project—someone from a company, from a nonprofit or who is an early stage investor.  Professors are strongly encouraged to devote time working for industry.  You may be thinking: what about all of the intellectual property disputes that are bound to happen?  Don’t worry—they’ve thought of that as well: “[I]nstead of protracted legal battles with the university over intellectual property rights to those projects, the companies that oversee them will get a contract designed to facilitate frictionless collaboration.”  And, government, industry and academia have “skin in the game” so to speak.  First, Cornell (Cornell’s academic partner is Technion -- Israel Institute of Technology) has set aside $150 million to invest in New York’s technology sector.  Second, the City has awarded $100 million and $300 million in real estate to the new school.  Third, Google has donated space at its $2 billion headquarters in NYC for the first class until the permanent campus is completed.   Other companies and nonprofits have signed on to participate as well.  To top this off, the United States Patent and Trademark office will have an onsite representative—an innovation and outreach coordinator—to help with any intellectual property issues and federal government aid. 

What does this all mean for the “traditional” university?  Will private funding for research gravitate toward this particular type of “new” school?  What about government funding?  Is this school really that different from what is already happening?  Is basic research a thing of the past?  Academic freedom, anyone? 

Times are Tough for Universities: What is the Future of University Online Education and IP

The University of California (UC) system has invested millions of dollars in marketing the offering of some of its courses online.  The courses are not only offered to current UC students, but also are offered to non-UC students.  The courses are not offered to non-UC students for free and the hope, in a relatively difficult financial time for most universities, is that the lure of UC classes will lead to extra revenue for the UC system.  Unfortunately, after spending 4 million dollars on marketing, only one student signed up for an online course who is not a current UC student.  That’s right—one student.  The San Francisco Chronicle and the Sacramento Bee both discuss the issue.  Is the future a grim one for online education--at least at most universities? 

Again, times are tough for universities and looking for outside revenue by offering courses to people who aren’t current students for a fee is one way to make money.   So, don’t expect universities to stop trying and they probably shouldn’t because making education available for more is not such a bad thing.  There is a question of how aggressive university administrators (or others) are going to get in pursuing online education—and IP has a part to play.  Generally speaking, in the United States, professors will own the copyright in their teaching materials or other published materials, usually so-called traditional scholarly works—because of university policy (but, see below).  They also likely won’t have an obligation to share royalties with the university.  However, with the advent of online education, administrators may decide they want the university to own the copyright in any materials created for use in the online course (and that course may be subsequently offered in the future without that professor but using that professor’s materials).  The administrator may also start scratching his or her head and wondering well, why don’t we just own any textbooks or other books produced by the academic--well, we should!  Yikes!  That would be a very unpopular decision for an administrator to make—at least with faculty.  What do you think?  Should faculty own the copyright in their course materials and other published materials, including traditional scholarly works?  What about academic freedom?  Should faculty own all of the materials they created for online courses?  For an excellent discussion of copyright ownership and online education, see Professor Roberta Kwall’s article. 

In a 2006 study concerning university policies and copyright ownership in the United States, the authors of the study found:

[M]ost Universities are writing intellectual property rights policies to delineate the rights of faculty to their works.  Although 93% of these policies designated that professors should have control of their traditional scholarly works; 71% of these universities specifically listed exemptions to this policy. Most universities (95%) claimed some faculty works, especially if the works required substantial use of university resources (83%). On a positive note when the university did claim rights to the intellectual property of a faculty member, 95% offer to share a percentage of the royalties.

Our research also revealed some areas of concern. Although half of the universities gave control of syllabi, tests and notes to faculty, only 31% of these institutions also included materials posted to the web and 36% of the universities claimed ownership of courseware and distance learning materials. A substantial majority of universities claim the intellectual property rights for materials that faculty are given specific assignments to produce (76%), are specifically hired to produce (76%), or are commissioned to produce (67%). Another area of concern is the increase in the number of universities that make some claims in their policies to works developed within the scope of employment or according to the Copyright Law for works-for-hire or (currently 57%).

Does anyone know of a more recent study of university policies concerning copyrighted materials in the United States?  Are there similar studies of policies in other countries?  As a side note, for a simple and helpful guide for intellectual property issues (United States) for professors offering online courses, see UC Irvine’s website. 

Venture Capital-- Future Perfect? Future?

As we enter 2013, it is worthwhile to consider the state of venture capital. A succinct summary was contained in a piece by Peter Cohan, entitled "What's Ahead in 2013 for Venture Capital", which appeared on January 3, 2013, in entrepreneur.com here. I suppose that there are many of you who were nurtured, as I was, over a decade ago, to treat the venture capital world in almost mystical terms. But the ravages of the dot.com bubble in 2001, the virtual disappearance of the IPO market since 2005, and the Great Recession of 2008 have all left their mark.

As for the venture capital world, Cohan concluded as follows:

"Simply put, VC has been underperforming the average stock index since venture returns peaked in 1999. In the decade ending in 1999, the average VC generated a whopping internal rate of return of 83.4%. By 2010, the typical VC fund was a big money-loser, generating an internal rate of return of -5.2%. But by the mid-2012, the typical VC fund had recovered to generate a positive internal rate of return of 5.3%."

While at least pointing in the right direction, these kinds of returns hardly presage any return to the glory days of the 1990s. Moreover, the expectation for investments in 2013 is not evenly divided across sectors. Business and healthcare IT are seen as most likely to enjoy increased investment, while investment in medical devices, clean-tech and biopharmaceuticals are expected to crater. There is something disheartening in the apparent fact that these areas are being viewed with disfavour as a matter of return on investment. Moreover, given that all three of these areas are frequently accompanied by active patent filing programmes, any precipitous decline in investment may well have repercussions for patent practitioners with an oversized position in these areas.

The current state of start-up funding is also characterized by what seems to be an odd, if not corrosive, situation in how funding is taking place. As stated by Cohan, certain

"wealthy investors have been pouring seed capital into start-ups at the earliest stages of development without sufficient discipline. These investors expect only one in 10 of these companies to succeed. But the availability of the seed capital is driving up the salaries of top technical talent." 

 As a result, however, there is a tendency for less funding to be available for Series A funding (investments of between $5,000,000 to $10,000,000). This means, perhaps perversely, that unless the start-up can become cash-flow positive already at the seed capital stage, it will find it difficult to attract next-stage funding. Such a state of affairs, if widespread, will make it even more difficult for enterprises in medical devices, clean-tech and biopharmaceuticals to obtain the funds needed, especially given their more lengthy time-line for product development.

Voices are increasingly heard about how the current form of venture capital is broken (see, for instance, the report by the Kauffman Foundation-- “WE HAVE MET THE ENEMY… AND HE IS US” here). How the modest positive signs seen in 2012 will affect this discourse on the present and future of venture capital bears watching. At the more modest level, as an IP practitioner, these developments bear attention as they potentially affect the nature of IP practice.

Time to put the dog down?

Nipper: fit for resuscitation
-- or ripe for a merciful release?

News that HMV was calling in administrators from Deloitte was greeted with sadness by many recorded music lovers from the vinyl era, but with little surprise. The retailer's trading difficulties have been no secret in recent times, and the continued drift of music purchasers from its 250-strong chain to the ever-accessible online music sector was not going to be reversed by tweaking the chain's High Street ethos.

According to the Guardian, restructuring company Hilco might be interested in buying the group out of administration, having previously bought HMV Canada from its UK parent in 2011, achieving target-beating Chistmas sales of $65.4m (£40.5m). At this stage there are no other strongly-fancied bidders.

Most commentators agree that the HMV brand itself has iconic status. It is indeed iconic, in that it triggers in consumers of "His Master' Voice" products a generally Proustian recall of times gone by: the flagship Oxford Street shop in which customers could sit in sound-proofed cubicles and listen to even an entire side of a long-playing record; the smell of freshly-minted vinyl; the nod to high fidelity reflected in the Nipper logo [it's difficult now, in the digital era where reproduction is uniformly perfect, that the fidelity of a retail record to the master of a original performance could ever have been an issue], the hint of luxury in a time of post-War austerity.  However, this blogger doubts that there is a meaningful one-to-one correlation between the power to trigger nostalgia and the ability to persuade a consumer to put hand to wallet and spend cash on a product. Some brands, such as Studebaker or Panhard for cars, had a better chance of cashing in on the power of nostalgia since they not only reflected style but also related to a product that people still use -- motor vehicles.  The subsequent revival of Panhard as an international brand for light tactical and military vehicles proves the point.  However, HMV's nostalgia attaches largely not only to an older market but also to products which are increasingly seen as part of recorded music's heritage rather than its future.  It would take a brave investor to resuscitate Nipper now.