Wednesday, 1 October 2014

More Resources to the U.S. Patent and Trademark Office--Require Maintenance Fees for Design Patents

The U.S. Patent and Trademark Office (PTO) has been criticized for some time for issuing relatively poor quality patents.  Indeed, some may argue that the patent troll problem is an issue because of poor quality patents.  For some technical areas, the PTO has struggled with obtaining relevant prior art; however, there is also a question of adequate resources available to the PTO to hire and train more examiners.  While the PTO has hired many new examiners in the last five to ten years and has opened a couple of new offices, I believe the PTO could use more resources.  One source of additional resources for the PTO includes maintenance fees. 

The PTO requires that maintenance fees are paid for utility patents during the life of the patent.  If the fees are not paid, the patent may fall into the public domain.  Basically, maintenance fees without a surcharge must be paid:

  • Three to three and a half years after the date of issue for the first payment;

  • Seven to seven and a half years after the date of issue for the second payment; and

  • 11 to 11 ½ years after the date of issue for the third and final payment.

  • Not only do maintenance fees provide additional resources for the PTO, they also provide the benefit of allowing some patented inventions to lapse into the public domain available for all to use.  Notably, Professor Crouch states that 50% of all granted utility patents fall into the public domain because of a failure to pay maintenance fees.  Interestingly, two types of patents do not require maintenance fees: design patents and plant patents.  37 C.F.R. section 1.362 provides: "(b) Maintenance fees are not required for any plant patents or for any design patents." 

    In a recent article by Sarah S. Brooks and Salil Bali titled, "Design Patents--Taking a Closer Look at These Valuable Assets," published in the New Matter magazine in Fall 2014, the authors point to the increase in acquisition and litigation of design patents as well as the benefit of obtaining, "the total profits of the infringer [of a design patent] rather than the reasonable royalty or lost profits for a utility patent infringement."  Notably, the authors state that the number of design patents applications filed in 2006 were 25,853 and have steadily increased every year (except 2009) to 35,077 in 2013.  The number of design patents granted has increased from 19,072 in 2006 a year to 22,453 in 2013.  The number of design patents applied for and granted does pale in comparison to utility patents.  The number of utility patent applications applied for and granted in 2013 was 563,853 and 265,979, respectively. 

    The recognition of the importance and value of design patents may explain the increase in filings.  While design patents are only available for 14 years, a scheme similar to the one for utility patents could be created for design patents.  That could result in additional revenue for the PTO.  Moreover, a maintenance fee scheme for design patents would have the potential benefit of having some designs fall into the public domain.  What do you think?

    Monday, 29 September 2014

    Eight Years in Prison for Publishing Another's Scientific Research?

    On August 7, 2014, Newsweek published an article by Joe Bloc about the case of Diego Gomez who was a student at a university in Columbia.  Apparently, Mr. Gomez published a thesis concerning amphibians online at Scribd that was written by professor at a different university in Columbia.  The professor (not the university or publisher) promptly sued under Columbian law for a criminal violation of copyright law--not a civil violation.  The author of the Newsweek article quotes an expert from the Electronic Frontier Foundation (EFF) who states that the Columbian law concerning criminal copyright infringement was a "direct result" from compliance with a U.S./Columbia free trade agreement.  The Columbian law apparently does not provide a robust fair use exemption, particularly one for academic usage.  The article frames the issue as one wherein the U.S. is using the power of its market to push for higher copyright standards in other countries at the behest of the powerful content industry in the U.S.  No doubt this is likely true.  Moreover, the article points to how the U.S. has the intent and has specifically directed resources toward ensuring government funded academic research is made available to the public in the U.S.  While this is true, we know it is not the complete truth.  Universities have been pushed to privatization for some time and markets have moved into The Republic of Science.  Indeed, universities in the U.S. have been focused on solving industry problems for some time.  Additionally, the Bayh-Dole Act was the icing on the cake that ensures that the direction of the U.S. research enterprise would move closer to privatization.  Furthermore, the institutions that have grown up around the expectations that now exist around the Bayh-Dole Act as well as conditions, such as lower effective government funding for public research, make it clear that the situation will not change.  Even tenure standards are being modified to ensure patenting activity as well as commercialization practices by academics.  Some may laud these continuing developments and surely the public may benefit from some of these innovations.  And, many work to push back, for example, by having universities voluntarily agree to license their technology to citizens in under-resourced countries; however, what has been lost?  Some times those things that are difficult to measure--to quantify--are the ones that provide the greatest benefit.  We shouldn't be lulled to sleep by the seeming objectivity of numbers that may disguise changing culture and attitudes that preserve core values and the true benefit of an enterprise. 

    The primary method of knowledge (technology) transfer has been through students.  This case is about a student who tried to make helpful information in his field available to more people studying in the same field.  Now he could go to jail because of a suit by an academic.  The solution here is probably a change in the law, but a realistic and complete solution should also include a greater awareness of what is happening in academia (apparently throughout the world), so that we can all make better choices. 

     The EFF and others are sponsoring a petition to support Diego:

    Academic research would be free to access and available under an open license that would legally enable the kind of sharing that is so crucial for enabling scientific progress.

    When research is shared freely and openly we all benefit. Sign below to express your support for open access as the default for scientific and scholarly publishing, so researchers like Diego don’t risk severe penalties for helping colleagues access the research they need.

    This is a joint effort between EFF, Creative Commons, FundaciĆ³n Karisma, the Internet Archive, Public Knowledge, Open Access Button, and the Right to Research Coalition. 

    You can sign the petition, here.

    Thursday, 25 September 2014

    Nokia, BlackBerry left behind amid untold disruption of the smartphone revolution

    As I was completing my previous IP Finance posting on alleged royalty stacking in smartphones, last week, it occurred to me I should also write more generally about the massive disruptions in the mobile phone industry resulting from technological changes, new business models and market entry by Apple with its iPhone and many others using the Android operating system. Former market leaders have fallen and consequently exited the market with handset division divestitures by Nokia, Ericsson and Motorola. Challengers are succeeding on the basis of highly-standardized and readily available hardware and software platforms. These are employed by all comers as if they were commodities, but are rich in IP including standard-essential and other technologies which are costly to develop. This is paid for downstream in a variety of ways including: merchant product prices for chips; patent licensing fees for standard-essential patents and the other patents needed to implement the radio communication protocols and various user features consumers expect all smartphones to have; and advertising and apps spending to Google in the case of Android. The following article on all this was first published in mobile industry trade publication FierceWireless Europe.

    Nokia, BlackBerry left behind amid untold disruption of the smartphone revolution

    It is remarkable how dramatically and rapidly the fortunes of so many mobile handset vendors have turned with the advance of smartphones. Their marketplace was transformed by Apple's iPhone starting in 2007 and a succession of Android-based smartphone newcomers since 2008.
    This has greatly expanded the size of the handset market with global revenues doubling in the last six years, as consumers substitute more expensive smartphones for their feature phones and basic phones. Yet changes have devastated most of the leading incumbent handset vendors.
    Former leaders Nokia, Ericsson and Motorola have exited by divesting their handset divisions, and BlackBerry has struggled to survive following its precipitous market share decline, as business models and competitive cost structures have changed. Samsung Electronics is the only incumbent that has really flourished, while LG Electronics has also advanced and HTC has wavered.
    How the mighty have fallen

    Strategic strengths became liabilities

    Seemingly strong brands, product distribution, patent ownership, vertical and horizontal integration with chips, networks and manufacturing have been insufficient to ensure survival, let alone success. The market leavers once had these attributes in spades. For example, Nokia had it all with approaching 50 per cent market share in smartphones and 40 per cent in mobile phones in general up until 2007. It ranked highly in global consumer brand ratings, dominated distribution in Europe and in many other nations worldwide. A cumulative $60 billion spent on R&D funded one of the very strongest patent portfolios and it could exploit various synergies with its network equipment division and in-house baseband modem development capabilities.
    Business models and the basis for success in smartphones and mobile phones in general have been revolutionized. Costly supporting and complementary operations soon become major burdens when incumbents were wrong-footed in the market and lost the cash flows required to support all that, while also needing to do things differently. Instead, low costs and much greater reliance on technologies from others are the keys to success for most of the many recent market entrants.
    They are exploiting platforms which are open, widely available and cheap to adopt. Apple is something of an exception, having created much of its own ecosystem, but it is also entirely dependent on others for radio technologies and manufacturing. Samsung uniquely remains highly integrated, but also employs outside technology including Android and Qualcomm's baseband chips in many cases.

    Challengers rising high
    What made the smartphone revolution possible
    Smartphones, or at least the precursor to what we regard as such today, have existed for more than decade with Nokia's Communicators from around the dawn of the new millennium and the first cellular BlackBerry in 2002. But these were only niche devices and network service constraints severely limited utility beyond messaging. A combination of many technological advances has made modern smartphones the enormous success they are today. These include much faster networks, as 4G LTE today is 1,000 times faster than 2G GPRS introduced around 2000; fast and yet low-powered application, graphic and digital signal processors; much improved display technology; revolutionary improvements in operating systems and user interfaces; better battery performance; and an extending ecosystem with apps stores and mobile-oriented content.
    Smartphone market entry barriers are now relatively low with standardized and openly available technology platforms. Smartphone vendors can capitalize on extensive published standards, market-leading merchant (i.e. off-the-shelf) chips and reference designs provided by these suppliers, and contract manufacturing. Addressable markets have grown to include hundreds of operators and several billions of consumers. Average selling prices, at around $275 for smartphones versus $175 for handsets in general, generate substantial revenues while strong downward pricing trends are maximizing smartphone penetration growth.
    Just rewards
    Handsome rewards including profits are available to those market leaders that can build a sustainable edge. According to Credit Suisse, handset manufacturer operating profits since 2007 have tripled to $51 billion on $326 billion revenues in 2013. Reportedly, these are overwhelmingly shared between Apple and Samsung, with others making small profits or losses.
    Much of the costly R&D and standardization work required to create the platforms smartphone manufacturers employ is still being borne by network equipment vendors like the diversified former handset leaders above. These are increasingly dependent on technology licensing to help fund ongoing R&D. Similarly, specialized technology vendors such as Qualcomm and InterDigital have business models which are largely dependent on licensing fees. Microsoft also generates income this way as well, licensing its patents to Android device makers. In addition, Google, which provides the Android smartphone platform and its Play app store, generates income from these in various other ways including advertising charges.
    It is incorrectly alleged that stacked royalty costs prevent the other smartphone manufacturers from making profits and cause other harms. Evidence does not show that high royalties are paid or that royalty charges undermine profits. Manufacturers that could negotiate the lowest royalty rates through cross licensing, due to owning most standard-essential and other patents, have taken the greatest competitive pounding by Apple, Samsung and various other new entrants selling Android devices. The former lost money because they had obsolete and uncompetitive strategies. Low profits for many newcomers are a function of the open and "commoditized" nature of the business with low barriers to entry, including the standardized and merchandized platforms everybody uses. This makes product differentiation and high-margin pricing difficult to achieve.
    It is not possible to determine true profitability on handsets because many manufacturers are reluctant to disclose them, and businesses are mixed with the manufacture and sale of other products and services. Some manufacturers are still benefitting from being in both the handset and network equipment markets. For example, Huawei and ZTE have reported strong profit growth recently. This is due to the boom in LTE network investments, but smartphones are important complements to these companies. Rising star Xiaomi, with a low-cost, Internet-based distribution model, does not formally disclose profits but was reported last year as making a 10 per cent margin.

    Wednesday, 24 September 2014

    Patents as an "asset"; patents as an "asset class"

    I last week took part in a program co-sponsored by IP Finance on “Patents and Value.” A report of the program is scheduled to be published at a later date. A by-product of the event was the lively post-program discussions that took place around the bar and snack table. In particular, I recall being seriously upbraided by a colleague, actively engaged in the patent valuation field, who took me to task for intimating that patents are not an asset class. Two questions occurred to me following that discussion: (i) are patents indeed an asset class; and (ii) why does it matter so much for persons in the field that the answer is “yes”? Permit me to share my thoughts on both these questions.
    Let’s begin with the definition of “asset” per Investopedia.com, namely “[a] resource with economic value that an individual, corporation or country owns or controls with the expectation that it will provide future benefit. “ Investopedia.com further explains that—
    “[a]ssets are bought to increase the value of a firm or benefit the firm's operations. You can think of an asset as something that can generate cash flow, regardless of whether it's a company's manufacturing equipment or an individual's rental apartment.”
    By contrast, “asset class” is defined as ‘[a] group of securities that exhibit similar characteristics, behave similarly in the marketplace, and are subject to the same laws and regulations. The three main asset classes are equities (stocks), fixed-income (bonds) and cash equivalents (money market instruments).” Here too, Investopedia.com further explains the term, noting that--
    “…in addition to the three main asset classes, some investment professionals would add real estate and commodities, and possibly other types of investments, to the asset class mix. Whatever the asset class line-up, each one is expected to reflect different risk and return investment characteristics, and will perform differently in any given market environment.”
    Based on these definitions, it would seem that patents can certainly be viewed as an “asset”, albeit of a peculiar and even sui generis kind, where the connection between a patent as an asset and the value that the patent brings to the firm is difficult to explain, much less to quantify. What follows from the definition of “asset class”, however, is that not every “asset” constitutes an “asset class”. That distinction would seem to apply regarding patents. My familiarity with the notion of asset classes derives primarily from the investment literature, where the categories are used in connection with formulating a formal (or informal) investment risk strategy. Notions such as “lighten up on stocks”, “reduce the duration of your bond holdings” and “the commodity super-cycle is over”, are representative examples of the role that an asset class can play in making investment decisions. To speak of a “market for patents” in this context is simply inapt.

    Even if we extend the notion to an asset class to such assets as “works of art” or, as suggested by Jeremy Phillips during the program, “postage stamps”, patents fail to meet the test. At the most, patents can be tradeable asset with its own ecosystem for helping buyers and sellers make informed decisions about the transaction. But the existence of this ecosystem has not, and cannot, turn patents into a full-fledged asset class.

    As an interesting aside, CalPERS, the California Public Employees’ Retirement System, America’s largest pension fund, announced last week that it will eliminate all of its hedge fund investments, which amount to more than $4 billion in 24 hedge funds and six hedge fund-of-funds, here. I heard a podcast interview of a senior official from CalPERS, who made the comment that hedge funds are not really an asset class but a way of doing business, which CalPERS believes is too complicated and too expensive. A fortiori, if that is CalPERS' view of hedge funds as an asset class, what can possibly be said regarding patents? If the foregoing is correct, then the question remains—why the insistence on nomenclature (“patents as an asset class”)?

    Truth be told, it seems that the reason is simple—it sounds good. To speak of one’s assets as members of an asset class is to admit oneself into the world of professional investment, be it a fund, investment bank or other source of substantial investment capital. The high profile disposition of patent portfolios such as Nortel, Motorola Mobility and Nokia, anomalous as they were (all having been driven by financial difficulties with the seller), only stoked the aspirations of “patents as an asset” to be recognized as “patents as an asset class”. There is a legitimate, indeed, an essential role for an ecosystem in which patents can be valued and sold. But this ecosystem is still a work very much in progress. I wish it every success-- the IP profession only stands to benefit from the value that such a robust patent transaction ecosystem can bring. But let’s not claim to be something that it is not, and cannot be.

    Tuesday, 23 September 2014

    Interface between Competition Law, Patents and Technical Standards

    The Interface between Competition Law, Patents and Technical Standards, by David Telyas, is the second title that Wolters Kluwer has published in quick succession that addresses issues of interest and concern to the IP business community -- the other being Competition Law and Standard Essential Patents. A Transatlantic Perspective by Urska Petrovcic, previously noted on IP Finance here

    This blogger has not yet received a copy of this book, which the publisher describes as follows:
    This systematic analysis lucidly details the role played by competition law in ensuring that holders of SEPs do not unduly exploit their advantage. The author describes how market power, often amounting to dominance, is obtained by proprietors of SEPs, and then proceeds to set out the framework under which the legality of standardization agreements must be assessed, finally highlighting the role of competition law in preventing patent-related abuse arising after a standard is adopted.

    Among the often complex issues clearly explained are the following:

    • technical standards as drivers of innovation and consumer welfare;
    • conditions governing the standard-setting process;
    • the concepts of ‘patent hold-up’ and ‘patent ambush’;
    • refusal to license;
    • establishing deception ex ante and abuse ex post; and
    • availability of injunctive relief.
    This title is volume 60 in the publisher's International Competition Law Series. You can check out its contents here; there's a sample chapter here and the book's web page is here.