Wednesday, 30 July 2014

IP Evolution: a chance to talk

This morning, in The Andaz Studio (a rather smart and revamped meeting room in what used at one time to be a station hotel next to London's Liverpool Street Station), a group of IP enthusiasts, administrators, owners, practitioners and monetisers came together at the invitation of AISTEMOS (on which, see earlier post here) to discuss the evolution of strategy for dealing with IP as an asset class while eating a sumptuous buffet breakfast.

With AISTEMOS CEO Nigel Swycher in the chair, Sir Robin Jacob (head of IBIL, UCL) opened the discussion by asking whether IP monetisation and its treatment as an asset class is actually such a new topic, adding some critical comments concerning the "toxic mixture" of factors that make not just patent litigation (a major driver of IP monetisation) but all litigation such big business in the United States. These comments triggered a variety of responses. Larry Cohen (Latham & Watkins) thought it easier now to raise money on the strength of ideas, though it's still true that those who need the money don't know where to go for it while those who have the money have too little idea as to how to evaluate the worth of an idea-based loan. This lack of knowledge of IP on the part of lenders, if excusable since the banking community has more to deal with than merely IP, was emphasised.

Tony Clayton (Chief Economist, UK Intellectual Property Office, which published its Banking on IP report last November) then spoke of the problem he had identified, which is not one of starting up new innovation-based businesses but one of scaling them up. In the Far East we've seen state-sponsored capital being made available, but the preference of the UK was for private sector finance. Topics raised here included the presentation of information at the point at which a loan was sought, the difference between one-patent-per-product industries and those which are more complex. The use of Big Data to unravel these complexities was advocated -- bearing in mind that machines can deal with data, but they can't understand it. Should people who make decision on the basis of data analytics be fired? That's an overstatement, but those self-same analytics can take away jobs by doing the unintelligent tasks and leaving only the intelligent tasks to IP decision-makers.

Following a short break for the purpose of replenishing empty plates and then not-so-empty stomachs, the discussion resumed, opened  again by Sir Robin.

Could we ever imagine a free market for IP, just like art, precious commodities or pork bellies? Businesses like Ocean Tomo were founded on the assumption that there could be, but the occasional auction sale or publicised transaction hasn't yet been scaled up?

Tony Clayton pointed out that this is already being done for the copyright industries with the Digital Copyright Exchange: so far, things have gone slowly [this blogger wonders whether there should be some reference to the Copyright Hub here], but the trick is to persuade people who own the copyright that there is a market for their copyright properties. By taking a non-transparent, short-term position, they are hampering the growth of the market.  Roger Burt added that there are two very different types of market for IP: one is for IP that people want to use, like essential technologies governed by FRAND terms, and one is for IP that people don't apparently want to use.

Risk: a game for some, but a matter
of life or death for an IP-owning business
The discussion then turned to the strategic use of patents in litigation, and the vulnerability of single-patent and one-patent-per-product businesses to legal threats to the validity of their registered right. The role of insurance was raised here, with some actual figures being bandied around in place of the usual generalisations about how cheap or expensive IP insurance is.  The insurance industry hasn't been reacting too well to IP, largely because of the lack of reliable data: when any IP insurance premium is calculated, much effort goes into enumerating and evaluating the many risk factors; added to this is the cost of running a due diligence exercise on an insurable prospect. With better data, insurance companies can offer better value in their policies.

Is there any catalyst that might spark a sudden IP revolution in terms of valuation and funding decisions? No, said Tony Clayton, the process will be evolutionary, as demonstrated examples of successful IP-backed loans and ventures will encourage more lenders to commit their funds.  Robert Sumroy (Slaughter and May) added that one of the problems is that we love complexity: our law is not unlike the Babylonian Talmud in its complexity, and it's enjoyable to discuss and analyse that complexity -- but that's something that has to be overcome when selling the notion of IP to those who need to know about it but do not practise it.

Tony Clayton next observed that banks are more interested in getting money back after they have lent it than in gaining a security which they can dispose of if the loan is not repaid. The quality of the patent and an understanding of it are not much use in this regard. Roger Burt supported this: the borrower's business plan is key and (as Larry Cohen observed) it's not merely the quality of the business plan but the quality of its execution that counts.

Sir Robin closed the breakfast by saying he'd never participated in a meeting quite like this. Neither had we, and a good time was had by all.

Sunday, 27 July 2014

Death of a Travelling Patent Box

Map of irelandBlogger Jeremy's recent report on the first birthday of the UK patent box system lead to one commentator noting that the Irish had given up their system. This blogger was intrigued by the report, since he knew that at least one patent aggregation entity had set up in Ireland and assumed that this was because of the favourable tax regime. Setting up in the UK was probably not an option since the UK's scheme contains a development condition and an active ownership condition that were designed to stop PAEs from exploiting the British system.

The abolition of the Irish patent royalty relief scheme was one of the conclusions of the Irish Commission on Taxation set up in 2008 to review the appropriateness of the Irish taxation system. The committee was tasked to consider how the Irish tax system can best support economic activity and promote employment and prosperity in the country. It seems therefore strange that the UK government is promoting the patent box as a means of promoting economic activity.

The Irish scheme was a great deal simpler than the UK scheme. Basically any royalty income derived from a "qualifying patent" was exempt from income tax and corporation tax. A qualifying patent was a patent made on an invention for which the R&D work was carried out in a country in the European Economic Area.

An individual was only entitled to the royalty income if he or she were an inventor or a co-inventor. An annual limit of EUR 5 million was placed on the relief.

Dividends paid by a company our of patent income were also tax exempt. The commission concluded that the relief had not resulted in any increase in R&D activity - although they provide no data to back up their statement. It was also noted some companies were using the scheme as a taxi avoidance device to remunerate employees.

Intriguingly the commission concluded that the patent income exemption is a "windfall gain" after a successful invention, and not an incentive to encourage research and development. This is definitely an interesting claim and it would be highly useful to have some statistics to back it up. It would also seem to contradict the view of the British government that the tax savings would put more money into the innovation ecosystem. The Commission did conclude that R&D tax credit incentivises research and development activity more directly than the patent royalty scheme.RIP

So how much did the Irish government actually save by eliminating the tax exemption for patent royalties? A mere EUR 84 million per annum in 2006. Certainly nothing like the millions that the UK scheme is supposed to release for R&D. On the other hand the Irish corporation tax rate for trading income is 12.5%, which is not significantly higher than the 10% headline rate that patent box is supposed to bring - and in practice is higher because of the need to deduct marketing assets and routine returns.

So do the Irish regret scrapping their scheme? Maybe - a discussion recently featured in the pages of the Irish Times.

Friday, 25 July 2014

Consumer electronics and IP: it's about management, stupid

It remains the great unknown: to what extent does IP contribute to the success or failure of a
company (or even an entire industry)? In truth, the possible answer to the question will depend upon the circumstances—pharma will certainly yield a different analysis to that of a media company. Even recognizing the diversity of the context, however, this blogger has had the long-felt sense that we are still far away from generalizable analytical structures that will allow us to reach reasonable conclusions across multiple settings. Against this background, I read with great interest an article that recently appeared (July 12th) in The Economist. Entitled “Eclipsed by Apple”, here, the article sought to explain the fall of the Japanese consumer electronics industry. Wherever one turns, decline in this industry is noticeable, whether it be Sony, Hitachi, Panasonic, Sharp, or lesser-known Japanese companies, with the likes of Apple and Samsung taking their place. This fall from commercial grace is particularly puzzling if one considers the various IP assets that these companies appear to possess.

Let’s begin with the power of the strong brand. I remember having lunch with a senior official of a major international IP organization who said categorically, “at the end of the day, it is not about patents or copyright. The only really valuable IP asset is brands and the goodwill that is embodied in one’s marks.” So what about the role of branding in the consumer electronics business? The Economist observes: “A strong brand is no longer enough to justify a sharply higher price” (pointing to Samsung’s recent decline in operating profits). The article attributes this in part to the fact that the consumer electronic business “is an impossible business for nearly everyone.” But that proves too much. In a cut-throat market, one might reason that a strong brand can help one stand out, even if the brand does not have the power to command as premium a price as might be desired. But that does not seem to be the case. As strong a brand as Sony once was (think of the Sony Walkman or Triniton TV), the brand seems to have been (and is) only as formidable as its latest product. A strong brand can perhaps continue to command a premium price for a while, but ultimately it is coming up with new products that matter. (Apple and Samsung, are you listening?)

If a powerful brand does not provide a sure-fire, long-term anchor for success, what about the products themselves? On this, the article had this to say:
“If their chief executives were visionary leaders willing to take risks, Japanese electronics firms could do much to regain their lost lustre, says Roderick Lappin, who heads the Japanese operations of China’s fast-rising Lenovo. Their unrivalled engineering, though often in excess of customers’ needs, is still an advantage, he says. They sit on a trove of intellectual property in the form of patents. Much of this could prove invaluable in the field of “wearable” technology or the much-hyped “‘internet of things’ …“.
It would appear that these companies have great engineering know-how and a lot of patents, particularly in a couple of emerging fields. That sounds like a great double-dose of valuable IP. But the engineering know-how seems to be detached from customer wants. As for the patents, they appear to own a lot of patents for wearables and the internet of things. But we are not really told why this “trove of patents” will make a difference for these companies in these emerging industries. Moreover, to the best of my understanding, some of these companies possessed patent troves for past and present technologies, without these patent portfolios necessarily being translated into oversized commercial success. Why will the current patent trove be any different? Or will the value of these troves be measured only if the companies do not enjoy significant success in the field of wearables and the internet of things? If so, this will be redolent of, e.g., Nortel and Kodak, both of which sold their patent portfolios because they had no other choice.

At the end of the day, perhaps the most encouraging thing said in the article about the industry was in connection with Sony, where its smartphones and tablets are enjoying some success due to “one simple, customer-centered innovation—making them waterproof.” But this does not seem to be the stuff of high-level engineering or massive patenting, but simply a shrewd management decision to give the client what it wants (or needs). If so, neither the woes nor the possible solutions to the crisis of Japanese consumer electronics rest primarily with IP. While IP and what it embodies are not unimportant, ultimately what matters is enlightened management, including, but in no way limited to, the effective creation and utilization of IP. But our understanding of how IP fits into the broader picture of successful management still has a long way to go.

Open innovation and overpropertization: a new article

"Open innovation's answer to the challenges of patent overpropertization" is an article by W. Wesley Hill, who has recently completed an LLM in Information Technology and Intellectual Property at the University of East Anglia. This article is now available online, to e-subscribers of Oxford University Press's Journal of Intellectual Property Law & Practice (the print version will be published in due course; JIPLP's website is here). According to the abstract:
In 2003, Henry Chesbrough introduced the concept of open innovation to the study of research and development (R&D). Open innovation teaches that technology advancement is best fostered through inbound and outbound R&D investment and the exchange of innovative knowledge. Patents, often the subject of technology transfer, are characterized as a bargain between the inventor and the State. Without propertization through the patent bargain, it is argued, market failure occurs.

Despite their close ties, the relationship between open innovation strategies and the patent bargain is best described as both friendly and adversarial at the same time. Propertization of innovative knowledge through the patent bargain has, paradoxically, had the effect of blocking future innovation. Due to overpropertization, patent trolls and patent thickets have arisen that threaten to stifle advancement in new technologies.

This article discusses open innovation strategies that offer answers to the challenges of overpropertization. Where rent-seeking behaviours threaten future technologies, defensive pooling manages risk; where innovation-blocking thickets arise, private sharing regimes cross-license patents; and where innovative knowledge is best protected as confidential information, trusted intermediaries can facilitate exchange. In each case, open innovation is at work.
If any readers of this blog happen also to get hold of this article, it will be good to know what they think, particularly with regard to the author's conclusion:
Open innovation emphasizes the character of the IPR as a tradable good, rather than a mere exclusionary right. As Chesbrough documents in his open innovation theory, a shift toward openness in inflows and outflows of knowledge is occurring. Perhaps the closed innovation paradigm has given way to market behaviours that are best viewed through the lens of open innovation: where rent-seeking behaviours threaten future technologies, defensive pooling manages risk; where innovation-blocking thickets arise, private sharing regimes cross-license patents; and where innovative knowledge is best protected as confidential information, trusted intermediaries can facilitate exchange. In each case, open innovation is at work, enabling technology transfer and responding to the challenges of overpropertization.

Wednesday, 23 July 2014

Global Innovation

Last Friday saw the Australian launch of the Global Innovation Index in Sydney. The massive 400+ page tome is co-publshed by WIPO in association with INSEAD and Cornell University. It's packed with metrics about the innovation process, ranging from R&D spend and other inputs to outputs such as the number of patents. The data is divided into country sections and it's a useful tool to identify best practices.Tree with frame 2014 No doubt the headline data will relate to the overall index and the placing of individual countries. The headline ranking index shows tiny Switzerland out in the lead, followed closely by the United Kingdom, Sweden and Finland. The US occupies sixth place (just in front of Singapore) and German is back in 13th place. Togo and Sudan are bottom of the list (at places 142 and 143 - not all countries are covered). Whilst Switzerland has remained global leader for a number of years. the rise in the UK position (from 10 in 2011 to second position in 2014) is fascinating. This is partly due to the country's improving economy but also due to the open markets in the UK which enable access by non-agricultural products. Research ChemistsThe report also looks at total R&D spend. Spending has rebounded back in most countries since the global financial crisis, but the amount of public (as opposed to private) R&D spend has begun to fall off. There are still countries in which the spend is lower than before the financial criss, but the message is that spending on innovation is still increasing. Hong Kong and Singapore are the only two countries in the top ten and their relative positions have changed. Singapore has overtaken Hong Kong (which has been slipping continuously over the past few years). Reports like this represent only a snapshot of economic activity and compare current performance only. A more detailed review will show that in most cases, countries improve their performance from year to year. Robert SolowThis probably shows the main value of the reports - to highlight best practice and to encourage countries to learn from each other. The overall rankings depend, of course, on the weightings given to the various factors that make up the global index and need to be treated with some degree of scepticism, but the message is clear. Innovation leads to economic growth - as economist Robert Solow showed - and that leads to increased GDP. How that wealth is shared is then a matter of controversy, as Thomas Pitketty illustrated in his recent work, Capital in the 21st Century.