Friday, 30 April 2010

Pre and Pixi smartphones to go to HP

Another challenge seems to come up for Microsoft with the news this week that Hewlett-Packard intends to acquire Palm for US$1.2 billion - a decision for Palm's operating system WebOS as the basis for new generation consumer smartphones and against Microsoft’s Windows.

The deal is expected to provide a lifeline to struggling Palm - their share price went down over 53% this year - and gives HP the chance to concentrate on the smartphone consumer market owning the end product.

According to the New York Times, Palm has 452 patents and another 406 applications on file. Research firm MDB Capital was reported to value Palm’s portfolio of patents at approximately US$1.4 billion; they believe the value of Palm’s IP alone is worth between US$8 and US$9 per share.

More information can be found here and here.

What Should We Do With Brand Rankings?

How qauntifiable are brands? I sometimes hear from MBA students the lament that, after courses in finance, operations research, micro-economics and the like, their branding course can seem a bit too touchy-feely, more art than (psuedo-) science. Numbers and data speak for themselves. If that is the perceived sense, then what better than to find better and more elaborate ways to express branding in quantifiable terms.

The most recent exposition of this approach is set out as part of the special report on "Global Brands" that was published in the April 28 issue of the Financial Times. As part of the special report, the FT set out the "Global Top 100", relying on the 2010 BrandZ Top 100 report.

According to the report, the top 10 brands by value are: (i) Google; (ii) IBM; (iii) Apple: (iv) Microsoft: (v) McDonald's; (vii) Marlboro; (viii) China Mobile: (ix) GE and (x) Vodafone.

Sliced differently, at the sector level, the leaders in year-on-year growth are: financial institutions (12%); beer (10%) and technology (6%). The three sectors with the greatest decline are: coffee (-6%); insurance (-7%) and cars (-15%). Newcomers to the list (in order of their ranking on the general top 100 list) are BP; ExxonMobil; Shell; ICICI; PetroChina; Telcel; Petrobas and USBank. See more generally the FT report here. How exactly does the BrandZ report do about its work? Permit me to quote from the article:
"The BrandZ Top 100 is the only ranking based on a brand valuation methodology that is grounded in quantitative customer research and in-depth financial analysis....

Insights into customer behavior and brand strength come from WPP's unique BrandZ database -- the world's largest repository of brand equity data. Covering thousands of brands and based on more than a million interviews, it provides a detailed, quantified understanding of customer decision-making the world over. Financial data are sourced from Bloomberg.com, analyst reports, Datamonitor regulatory bodies, Millward Brown Optimor's consultants then prepare financial models for each brand that link brand perceptions to company revenues, earnings, and ultimately shareholder and brand value.

The valuation methodology is similar to that employed by analysts and accoutants. Brand value (BV) is derived from each brand's ability to generate demand. The dollar value of each brand in the ranking is the sum of its predicted future earnings, discounted to a present day value. An important element of the overall calculation is brand contribution (BC), the portion of earnings that can be considered to be driven by brand equity, which is presented as an index from 1 to 5 (5 is the highest); an additional metric is brand momentum (BM), which indicatews each brand's short-term growth potential. This is presented as an indexed figure that ranges from 1 to 10 (10 is the highest)."
Whatever you want to say, "touchy-feely" this isn't. And yet----

1. There seems to be a real "black box" aspect in the creation of the ranking. I cannot but think of all of those AAA bond ratings that helped percipitate the subprime securtization crisis. I am not suggesting that BrandZ is subject to any potential conflict of interest such as that which hovers over bond rating agencies (who apparently are paid to rate the bonds of their clients for use by third parties). I also fully appreciate that it might want to keep some of its methodology and data confidential. Still, there is this lingering concern that, without the ability to reasonably evaluate the process of fact-gathering and the empirical robustness of the valuation models, there is a threat that the ultimate branding metrics may have a bit of misplaced quantitative certitude about them.

2. As a result, I would like to see more reporting and comparison of ranking methods in addition to a discussion of the end results. The FT is not alone in relying on a single report to base its report. I believe that Business Week, which has also published a yearly review on brands and brand values, also relies on a single source. The time for such reports to give equal billing to a more critical appraisal of not only the "what", but also the "how", of brand rankings.

3. Since BrandZ claims to carry out more than 1,000,000 interviews about brand decision- making, it would be most instructive to summarize the process of such decision-making. Who makes the decisions and does the process differ across sectors?

4. Further, how is brand information used and transmitted within a company? Are the BV, BC and BM metrics used within the company to make branding decisions; if so, how? Or are they merely snapshots of where the company has been, brand-wise, over the last year?

5. Circling back to my initial obervations about training brand professionals, the ultimate question is how answers to all of the above will make us better able to train individuals to carry out the corporate brand function.

More on black boxes here and here.
More on touchy-feely here.

Thursday, 29 April 2010

Fair use generated $4.7 trillion in 2007, says "imprecise" CCIA study

Thank you Jeanine Rizzo (Fenech & Fenech Advocates) for drawing our attention to an Ars Technica article, "Fair use" generates trillions in the US alone", which discusses the quantification in dollar-and-cent terms of the value of the fair use exception to copyright infringement to the US economy. According to this article,

"... Fair use and other limitations on copyright themselves generate significant economic activity—$4.7 trillion in 2007.

The Computer and Communications Industry Association (CCIA), which counts Google and Microsoft among its members, today rolled out a report (PDF) on the value of fair use, one that tries to answer the question: "What contribution is made to our economy by industries that depend on the limitations to copyright protection when engaged in commerce?"

The method is similar to that used in several prominent piracy studies; in this case, the "fair use" industries are divided into "core" and "non-core" companies, depending on how important fair use is to their very existence. Economic activity and payroll numbers can then be crunched from this data, offering a rebuttal to any view of fair use that sees it as a mere afterthought in copyright law, one good for protecting YouTube parodies but not much more.

The CCIA report's numbers are staggering. The "fair use economy" accounted for 23 percent of all US real economic growth between 2002 and 2007. Fair use industries (core and non-core combined) generated $4.7 trillion in 2007. And "about one out of every eight workers in the United States is employed in an industry that benefits from the protection afforded by fair use. ..."
While it is conceded that analyses of this nature are "notoriously imprecise, in some cases amounting to little more than guesswork", the article suggests that the evidence-based approach offers a "useful corrective to simplistic views" on strengthening IP law.

Wednesday, 28 April 2010

Revenue from internal TM licensing to swell GKN pension pot -- or will it?

From today's Times Online, courtesy of Lee Curtis (Harrison Goddard Foote), comes this article entitled "GKN’s trademark transformed into revenue stream for pension scheme". According to the article,

"GKN returned to profit in the year’s first quarter with its best performance since the start of the recession. The engineer reported a 50 per cent increase in automotive sales to £852 million and a trading profit of £51 million, compared with a trading loss of £47 million in the first quarter of last year.

The company, which has cut three dividend payments and made 7,000 staff redundant since the start of the downturn, also said that it would address its £510 million pension fund deficit through a radical plan to direct licensing income from its own name into the defined-benefit scheme. ...

The next triennial review will be completed by the end of the year, but the latest gross deficit figure for the scheme is £510 million. To try to close that gap, GKN has agreed with the pension fund trustees to create an asset-backed cash payment scheme that will put £30 million a year into the pension fund for 20 years.

Cash currently payed by GKN businesses around the world to use the GKN trademark — in effect, an internal licensing fee — will be channelled into the pension scheme. This will be supplemented by rental income from five of the company’s UK properties. The asset-backed cash payment scheme has been valued at £331 million.
...".
The idea seems ingenious but I have this nagging doubt in the back of my mind that there's a fatal flaw somewhere along the way. Can any of IP Finance's tax-savvy readers help?

Digesting Zim's Indigenisation Policy

Zimbabwe, once the bread basket of Africa, has been treated with trepidation when it comes to investment due to reasons that have been well documented over the last decade. There is evidence though that some investors are now seeing the country as an exceptional investment opportunity but is this new gained status ephemeral? Recent news reports about the Indigenous and Economic Empowerment Act & Regulations are likely to force optimistic investors to reconsider, or adopt a licensing model to achieve their objective. An analysis of how and why investors will need to use IP to adapt is contained on the Afro-IP blog here.

Tuesday, 27 April 2010

A big thank-you!

Following the success of yesterday's seminar on "Brands and the Cost of Corporate Conscience", the IP Finance weblog team -- several of whose members were in attendance -- would like to offer their thanks to Marjolijn Vencken (Trouble in Paradise Sustained Solutions) for her outstanding and, as ever, controversial presentation.

Right: Marjolijn Vencken has a chuckle while Amanda Michaels, in the chair, keeps a straight face (photo: Filemot)

Starting with the question of how much money (if any) brewers should pay towards preventing or remedying the damage done through binge-drinking by a non-target audience of minors, she then examined means by which brand-owners invest in showing their green credentials in order to excuse, hide or even reduce the environmental damage done by their products. Instructive case studies involving Land Rover, Heineken, Philips and Liberty Mutual were analysed and the role played by corporate social responsibility (CSR) was examined. Both during and after Marjolijn's presentation there was some lively questioning and discussion, befitting the blend of divergent interests of the rapt audience. It was a lovely way to celebrate World Intellectual Property Day.

The IP Finance weblog would like to thank both Marjolijn and her chairman Amanda Michaels for their input. Thanks are also due to London-based IP specialists Olswang LLP for providing its excellent hospitality, in conjunction with sponsors Hogarth Chambers.

Footnote: a fresh fourth edition of A Practical Approach to Trade Mark Law, written by Amanda with her colleague Andrew Norris, was launched earlier this month by leading publishers Oxford University Press. You can get details of its contents and even order it from its home page here.

Monday, 26 April 2010

Ambush Marketing: those companies thumbing their noses at trade mark laws…

Recently I came across an excellent article written by Mike Du Toit of South African law firm Edward Nathan Sonnenberg on “Ambush Marketing”. As the World Cup in his home country approaches, the moment is indeed well-chosen to focus on this topic, which raises many interesting economic and legal issues.


Briefly, “ambush marketing” refers to all strategies used by companies to promote their brand during large-scale events (usually sporting events) without paying an expensive fee (the 2006 FIFA World Cup fifteen official Partners paid around €40 million each according to the Daily Telegraph) for the status of “official sponsor” and for the bundle of rights and commercial privileges that goes with it. Perhaps the most interesting feature of “Ambush Marketing”, and certainly the most frustrating one for official sponsors and for the organizational committees in charge, is that such marketing stratagems have been conceived to have a strong impact in the media while remaining fully compliant with all applicable legislation. Nike holds the reputation of ambush marketing mastermind, because its marketing teams always find original ways to fully profit from the popularity of a major event while pushing its rivals back into the shadows (Puma knows a little bit about ambush marketing too ... Ask Lindford Christie!).

Right: Lindford Christie ...

In their quest for sponsors, event-organising committees or sports federations such as the ICO or the FIFA are faced with the so-called free-rider problem. It is not possible to prevent companies from advertising during the event on the basis that they are not officially affiliated with it, unless what they do is against the law. Moreover there are many other ways to advertise a company rather than paying the requested sponsorship fee. By being the official sponsor of a popular sportsman for example, a company can also enjoy a high level of visibility nonetheless. To overcome this free-rider problem, committees must make sure that they use all the legal means at their disposal to prevent ambush marketing, while offering a maximum of visibility to officially affiliated partners.

As Du Toit suggests, the legal means to prevent ambush marketing are relatively limited notably in the area of trademark law, as the measures taken for the forthcoming World Cup demonstrate. The World Cup has been designated as a “protected event” in terms of section 15A of the Merchandise Marks Act 1941.

In a notice published on 17 November 2005 in Government Gazette no 28243). The FIFA prohibited “the use of 2010 or Twenty Ten used with the words soccer, football, South Africa, RSA, SA, World Cup or with soccer or FIFA World Cup imagery under the terms of Trade Marks Act No. 194 of 1993, because its use implies an association with the World Cup. Likewise the expression World Cup cannot be used with the words “soccer”, “football”, South Africa, RSA, SA or soccer imagery ”. However the use of general football terms and imagery for the promotion of a company cannot be prohibited. Moreover the FIFA publishes guidelines to illustrate instances of unauthorized commercial association with the forthcoming world cup, whose deterrent effect is questionable, since it informs potential ambushers more than it probably should. Given this thin layer of protection, which is probably one of the most comprehensive ever awarded to official sponsors of an international sporting event, it is quite remarkable that so few large-scale ambush marketing campaigns have taken place in the past.

Below: ... and what can you see in his eye!

Nevertheless committees and federations have been learning from their previous mistakes. Therefore in order to face this lack of legal protection that could compromise the stability of this fragile sponsorship system and avoid successful ambush marketing, they created a safety net protecting the interest of official sponsors through a systematic use of contractual means. To that extent once being awarded the 2012 Olympic Games, London has been immediately required to sign the “Host City Contract”, which oblige them to respect all commitments made in the bidding process including the protection for the official sponsors. As a result the London Olympic and Paralympic Games Act 2006 entered into force with specific chapters concerning advertising and trading. Likewise for the World Cup, every host city has been required to sign similar “host city agreements” with the FIFA.

It is probably too soon to say if such measures will be sufficient to thwart the underhand ambushing plans of renowned “rogue” companies like Nike, Pepsi or Mastercard during the immanent World Cup and the next Olympic games. Let’s be patient and, to quote Du Toit, let the games begin.

Sunday, 25 April 2010

Experiences of IP and VCs

Next Thursday 29th April in London, Jon Calvert of ClearView IP will be sharing his experience of investors and their views on intellectual property in an evening presentation for the Licensing Executives Society.

According to Jon, the likely programme will include:
- IP in early stage companies
- The management team's knowledge of IP
- Divergence between the IP and the product/service being sold
- The patent landscape
- Variations in due diligence with the amount to be invested

The meeting is open to non-members as well as members of LES. More information is available here.

Cloud Computing: Winners and Losers

I continue to ponder various points about cloud computing that were raised in a session on the subject in which I participated earlier this week. I paid particular attention to the presentation of a senior technical person, with extensive experience in cloud computing at a research lab operated by one of the world's leading high tech companies. His words got me to thinking about who might the winners and losers in a cloud computing-dominated world.

By way of quick summary, let us characterize cloud computing as the provision of various computer-related services where the user makes use of services accessible from a remote site instead of from the user's own IT resources. The underlying idea is that such sevices should be provided as a ultility analagous to electricity and water. While the concept was first floated in the 1960s, it entered the mainstream only in the last decade due to a series of hardware, communication, software and financial considerations. Two aspects are particularly noteworthy.

First, the user need no longer take software licences for which he pays regardless of whether the the software is actually is being used. Instead, under the SaaS model ("software as a service"), the user in principle need only pay for the software services that it actually uses (in actuality, it appears that this is not precisely the case, but the "software on demand" model is close enough for our purposes.) Second, the remote cloud computer centres serve to replace the need to maintain full-scale IT centres on-site. This is done by maintaining immensely large computer centres manned by the most skilled IT personnel, thus enabling the user to tap into these computer centres for a variety of their data services (so-called "platform as a service" and "infrastructure as a service").

Against this backdrop, who might win and who might lose? Permit me to propose the following list.

The Winners

1. Manufacturers of hardware and communications equipment--They will be called upon to provide the computer centres with the necessary equipment to support and expand these facilities.

2. Manufacturers of various hand-held devices--One of the claimed reasons for the recent attractiveness of cloud computing is the explosion of hand-held devices, which in principle permit connectivity anytime, anywhere. The popularity of these devices will be enhanced by the ability of their users to acess usable applications on the fly. The ability of the computer cloud to provide these contents will be a major determinent in how successful this hand-held revolution will actually be.

3. Users--There has long a been a feeling that users of computer software pay for software that in effect rests unused most of the time. When licensing models were based on payment per CPU, or user, or computer station, there was no ready way for users to free themselves from this model. When software is longer stored within one's local IT system, then the possibility is created for users to pay only for the software that they actually use.

4. Owers of the computer centres--It is Amazon.com that is widely attributed with first seeing the commercial possibility of making use of excess capacity in its computer centres to provide storage and access capablities. Whether true or not, it appears that a number of computer-related entities--e.g,, Amazon.com, Google, Microsoft and IBM--will come to dominate the infrastructure for cloud computing.

The Losers

1. Current software licensing models--Pureyors of software licensing may be challenged to find the kind of metric for charging users for the use of their software that will be as lucrative as the current model.

2. In-house IT departments--One of the claims is that local IT departments are both expensive to maintain and too often do not attract the calibre of person required to provide the necessary support. Whether that is true or not, the expansion of cloud computing may lead to a reduction of in-house IT positions.

3. Open source software--By some accounts, cloud-computing will only strengthen the hand of proprietary software, protected by copyright and patent, at the expense of software development under the open source model. Thus, while cloud computing may encourage cooperation at the user level, it does nothing to undermine, and may even strengthen, the hand of the proprietary software industry.

I am certain that there will be additional potential winners and losers in the cloud-computing world. In any event, it will be interesting to see how cloud computing plays out in the years to come.

More on winners and losers here

Friday, 23 April 2010

International: Malta announces tax exemption for patent royalties

The Maltese Government approved a number of changes to their tax laws on 16th April 2010 – of particular interest on IP is the news that, with immediate effect, royalty and similar income derived from qualifying patents in respect of inventions will be exempt from Malta income tax (subject to conditions still to be announced, including a cap on the maximum amount that may be exempted – and the EU may well have some comments on the matter).

Malta has been reasonably tax-efficient for IP income, but this will put the country on a par with Ireland for patents, depending on the level of the cap. Under EU pressure, Ireland extended its exemption on patent royalty income to include royalties received in respect of non-Irish patents granted after 1 January 2008. A similar cut-off date for the Maltese exemption would seem to be likely, if only to appease the EU.

Restasis royalty dispute finally settles

In August 2008 ("Grit in the eye for Allergan? The Restasis licence refuses to go quietly") IP Finance reported on the dispute between Renee L. Kaswan and the University of Georgia over the terms -- and particularly the financial package -- under which Restasis eye drops were to be commercially exploited by Allergan, enabling the latter to make an up-front payment that enabled it to reduce substantially its subsequent commitment to paying royalties. At the time, IP Finance commented:

"The whole episode makes depressing reading. The easy bit is that universities want a fair and reasonable return on their IP; commercial risk-takers like Allergan want the chance to milk the market when they have a winner on their hands, to compensate them for the investment cash wasted on failures; academics want recognition and reward; university administrators want a quiet and stable routine -- and everyone who is part of any decision-making process is entitled to make its decisions on the basis of the best information available both to it and to the other parties at the time negotiations take place.

While it is difficult not to feel sympathy for Dr Kaswan's position, it is equally hard to dismiss entirely the notion that the best market analysis is that which has been enriched by hindsight. We are hardly likely to reach that nirvana in which royalty rates are computed on the basis of a full exchange of all market intelligence between the parties, or fixed and varied by a third party 'wise man'. The best we can do at the moment is either to provide a mechanism for the variation of royalties that is less likely to confer a one-sided advantage than Allergan's pay-off clause, or which enables the rates to be revisited and revised on the occurrence of specified acts or events".
The seven-year dispute has at last been settled by the payment of US$20.2 million, leaving Renee Kaswan free to concentrate on promoting her non-profit organisation IP Advocate. According to her organisation's press release,
"The original licensing deal Dr Kaswan structured for the University of Georgia with Allergan would have netted the university more than $300 million. But Allergan secretly persuaded UGARF to negotiate a buy-down deal behind closed doors, excluding Dr. Kaswan from renegotiations of her patents’ license. UGARF agreed to accept a severely undervalued monetization of its future royalties, drastically affecting the revenue flow to the university, the inventor and the taxpayers of Georgia. In the end, UGARF received $76 million from Allergan in total, while Allergan projects several billion in Restasis revenues.
“What should have been a moment of triumph, for me and for UGA, immediately turned into a legal morass involving frivolous and costly litigation, distracting me from my life’s work,” said Dr. Kaswan. “I want to help create a system in which inventors are protected from this kind of behavior in the future, so they can focus on the research and discoveries that will cure diseases and improve lives.”

Sunday, 18 April 2010

Monetizing On-Line Sports Contents: What's the Score?

There is no more discussed subject in the online content world than that of the "business model." By now, we are all familiar with the problem. Online contents tend to be available for free. However, advertising, or some other form of third-party sponsorship for the contents, has proved to be an elusive foundation to support a viable business model. The promise of ever-more eyeballs on the internet does not seem to have translated into the kind of advertising revenues that can adequately replace the lost income from existing types of content distribution.

As a result, the flavour of the month (actually, the last 12-24 months) has been to (re)migrate to a subscription fee model. Getting people to pay for their use and access of online contents, so the argument goes, will provide a more reliable and substantial basis to garner profits from such online activities. However, the move from advertising to a fee-based model has proved elusive. As Craig Moffett, a media guru at Sanford Bernstein, said in a recent interview, content owners tend to talk a good name when it comes to charging users, but the actual evidence about how widespread the implementation of this change of approach has been is extremely spotty. It is not so easy to convince someone to pay for something that it has previously received for free.

The sports world, however, may be a bit different in this regard. An interesting discussion on this appeared on a HarvardBusiness.org posting on April 9, written by Scott Anthony and entitled "Major League Baseball's Good Enough Gamble Paid Off." (I am aware that baseball is that most American of sporting games, so those of you who are not American, please bear with me.) Indeed, the fact that baseball provides for discrete, rather than continuous action, being more like cricket than football or basketball, may make it especially suited for online uses. Still, Anythony's observations merit general attention.

According to Anthony, a decade ago Major League Baseball (MLB) took the step of creating a free-standing entity called Major League Baseball Advanced Media (MLBAM), to which all 30 teams signed over control of their digital assets. Each of the teams then forked over to MLBAM a million dollars a year, for several consecutive years, to fund MLBAM's activies. The purpose of MLBAM was then to find ways to monetize the baseball experience in the digitial context.

What followed was a variety of different efforts to make money online from the use of the sporting contents, starting from audio feeds, moving on to streaming visual feeds, expanding the platform from the computer screen to the iPhone, providing condensed forms of the game, giving mobile alerts, and supplying virtual play-by-play coverage. All the while, the business model focused on extracting subscription fees from baseball fans as the primary means to fund these various forms of provision of on-line contents.

So how well has MLBAM done? No published figures are available, but an amount of $500 million has been suggested by analysts. Anthony claims that MLBAM is ahead of other sports leagues in successfully monetizing its online contents. Assuming that this $500 million figure is gross revenue, the actual profit from these activities will be less (how much less is not clear). As well, given that there are 30 major league teams, the per team profit that is distributed after the net amount is divided equally among them is a far smaller amount.

And so the question: Just how central can the MLBAM model be for generating sports revenues from providing online content? Stated most generally, will online content for sports events replace or complement income from other sources? Fans will continue to pay for tickets to see the live event; television and cable will continue to broadcast the sporting event to a much wider circle of supporters; and club paraphanelia will be merchandised, at least for the most prominent clubs. It does not seem to me that the various online MLBAM content products will replace these sources of income.

If this observation is right, then the business model for online sports contents is fundamentally different from that of online news and online movies. Regarding online news, there is a "life and death" tone to whether news contents can be monetized; regarding movies, the tone is less severe (after all, there is still the movie theatre), but there is still concern how to monetize movie contents in an age of declining video sales. That said, the continuing attempts by the sports business to find ways to monetize their product in the online world bears continuing watch.

Friday, 16 April 2010

Biotech and pharma insolvency in the UK: a new article

Volume 10, issue 5 of the Bio-Science Law Review, published six times a year by Lawtext Publishing, carries a ten-page article, "Implications of Licensor becoming Insolvent: An English Law Perspective" by Sangeeta Puran and Sarah Nagel (Mayer Brown, London). Though the title suggests a general review of the subject, the authors are pointing it in the direction of a biotech and pharma readership. According to the abstract,

"While many in the biotech and pharmaceutical sectors see outright acquisitions gaining preference with cash-strapped biotech companies, the out-licensing of development programmes remains a popular option for cash-rich rights owners confident of the value in their programmes. Nevertheless, in the context of the current climate, it is imperative that a licensee understands the implications of their licensor becoming insolvent and is aware of the practical steps that can be taken to protect its licence.
This article explores the consequences for a licensee of a licensor becoming insolvent under English law. Issues considered include the possible disclaimer of a licence by a liquidator and the ability of a licensee to enforce its rights in the event of a possible disposal by a liquidator or an administrator of the intellectual property assets licensed to the licensee.
The article then goes on to advise on the viability of the different ways a licensee can protect its licence and ways of mitigating risks. These options include assignment of ownership of the intellectual property in question, entering into co-ownership arrangements and taking security over the licence.
The article references several legislative provisions, case law authorities and academic authority to give a broad view of the risks and options for a licensee on the insolvency of the licensor".

Thursday, 15 April 2010

VAT and EMI's CD samples for pluggers: the Advocate General speaks

The Opinion of Advocate General Jääskinen was delivered today in Case C‑581/08 EMI Group Ltd v The Commissioners for Her Majesty’s Revenue & Customs, on a reference to the Court of Justice of the European Union for a preliminary ruling from the London VAT and Duties Tribunal on Article 5(6) of the Sixth VAT Directive. This provides:

"The application by a taxable person of goods forming part of his business assets for his private use or that of his staff, or the disposal thereof free of charge or more generally their application for purposes other than those of his business, where the value added tax on the goods in question or the component parts thereof was wholly or partly deductible, shall be treated as supplies made for consideration. However, applications for the giving of samples or the making of gifts of small value for the purposes of the taxable person’s business shall not be so treated".
In brief EMI, a company engaged in music publishing and in the production and sale of recorded music, distributed free copies of music recordings on vinyl records, cassette tape and compact discs to various persons in order to promote newly released music. EMI maintained that such distribution was necessary for its business, since it enabled the company to assess the commercial quality of a recording as well as its viability in the marketplace. Part of its promotion strategy was to distribute CDs to individuals who were in a position to influence consumer behaviour (such as individuals working in the press, radio stations, television programmes, advertising agencies, retail outlets and cinemas), and to 'pluggers' -- music promoters who distribute CDs to their own contacts. EMI hired both internal pluggers and external pluggers on the basis of their expertise or success in promoting recordings.

For those purposes, EMI supplies recorded music in different forms: ‘watermarked’ compact disc recordables (‘CDRs’) bearing the name of the recipient and allowing any copies made to be traced back to the recipient; un‑watermarked CDRs supplied in a white cardboard sleeve; ‘sampler’ CDs supplied in a cardboard sleeve bearing the same artwork as on the finished album; or ‘finished stock’ CDs in their definitive form ready for sale to the public. The latter bore a sticker stating ‘Promotional Copy Not For Resale’; the others stated that ownership and title remained vested in Virgin Records Limited, a subsidiary recording label of EMI. The ‘finished stock’ was given to artists, their management and publishers, agents and any other media contacts whom EMI felt it necessary to have the finished product. Around 90% of promotional CDs were sent to named individuals, with some recordings also being sent individually to more than one person working for a single organisation. For any given single release, around 2,500 free copies were distributed (3,000 to 3,750 for albums). A single plugger might receive up to 600 free recordings for onward distribution. These figures are trivial, given that a top-selling CD album may sell millions of copies.

From April 1987 until early 2003 EMI accounted for VAT on these recordings. Thereafter, taking the view that the national legislation was incompatible with Article 5(6) of the Sixth Directive and that, as a consequence, no VAT was payable, EMI requested the Commissioners for Her Majesty’s Revenue and Customs to pay it all back. The Commissioners said "no", so EMI sued them. The Commissioners then asked EMI to pay the VAT it refused to pay from 2003. The London VAT and Duties Tribunal then referred to the Court of Justice the following questions for a preliminary ruling:
‘(a) How is the last sentence of Article 5(6) of the Sixth Directive to be interpreted in the context of the circumstances of the present case?

(b) In particular, what are the essential characteristics of a “sample” within the meaning of the last sentence of Article 5(6) of the Sixth Directive?

(c) Is a Member State permitted to limit the interpretation of “sample” in the last sentence of Article 5.6 of the Sixth Directive to

(i) an industrial sample in a form not ordinarily available for sale to the public given to an actual or potential customer of the business (until 1993),

(ii) only one, or only the first of a number of samples given by the same person to the same recipient where those samples are identical or do not differ in any material respect from each other (from 1993)?

(d) Is a Member State permitted to limit the interpretation of “gifts of small value” in the last sentence of Article 5.6 of the Sixth Directive in such a way as to exclude

(i) a gift of goods forming part of a series or succession of gifts made to the same person from time to time (to October 2003),

(ii) any business gifts made to the same person in any [twelve] month period where the total cost exceeds £50 (October 2003 onwards)?

(e) If the answer to question (c)(ii) above or any part of question (d) above is “yes”, where a taxable person gives a similar or identical gift of recorded music to two or more different individuals because of their personal qualities in being able to influence the level of exposure the artist in question receives, is the Member State permitted to treat those items as given to the same person solely because those individuals are employed by the same person?

(f) Would the answers to questions (a) to (e) above be affected by the recipient being, or being employed by, a fully taxable person, who would be (or would have been) able to deduct any input tax payable on the provision of the goods consisting of the sample?’
The Advocate General's Opinion advises the Court to rule as follows:
"'Applications for the giving of samples’ in the second sentence of Article 5(6) of Sixth Council Directive 77/388 ... means:

– any supply by a taxable person;

– for the purpose of promoting future sales of a product (being goods for VAT purposes);

– to an actual or potential customer or a person who, owing to his particular position, is able to influence the exposure to market of that product;

– of one or several items of goods that serve as examples of that product by retaining all the essential properties of the product as to its quality and characteristics, and thus enabling the recipient, his customers, or others receiving communications from the recipient to assess or test the nature, properties, and quality of the product.

(2) Member States may fix a ceiling for the monetary value of a ‘gift of small value’ referred to in the second sentence of Article 5(6) of Sixth Council Directive 77/388, taking into account the general price and income level and other economic circumstances of that Member State, provided that the ceiling is not so low as to make Article 5(6) meaningless or inapplicable, or so high as to deviate from what ‘small value’ might be understood to mean in common language, and if individual exceptions to the ceiling may be allowed in circumstances where that is justified by objective reasons. Applications for the making of gifts of small value in that provision means individual supplies by a taxable person. The Member States may not apply the ceilings referred to above cumulatively to several gifts made during a defined period of time.

(3) It is for the national court to determine who the recipient of an application within the meaning of the second sentence of Article 5(6) of the Sixth Council Directive 77/388 is, having regard to all the circumstances of the specific case. With regard to the VAT treatment of an application under the second sentence of Article 5(6) of this directive it is irrelevant whether or not the recipient of the application is entitled to deduct input tax".
The Advocate General seems to have taken a fairly sympathetic view of the use of samples as a means of promoting a business -- a practice which is common in many other areas of IP exploitation. He said:
"98. While the prevention of tax evasion is an objective recognised and encouraged by the Sixth VAT Directive, and while Member States have legitimate interests in taking steps to prevent possible tax evasion, the United Kingdom has not provided any evidence to suggest that there is a real risk of tax evasion here.

99. For my part, I do not think that such a risk seriously arises in relation to ‘applications for the making of gifts of small value’ for business purposes, unlike the obvious risk of tax evasion in situations covered by the first sentence of Article 5(6) of the Sixth VAT Directive.

100. In the context of cumulative gifts in progressive inheritance taxation or progressive stamp duties applicable to transfers of real property, for example, it is important to take into account all transactions during a defined period, since there is an incentive to circumvent the progressive effect of tax by dividing a large transaction into a series of smaller ones. In the VAT context, however, such a cumulative approach has no support in the text of the second sentence of Article 5(6) of the Sixth VAT Directive. It would also make the VAT status of an application dependent on other earlier or later applications as, for example, the VAT status of a gift under the set limit would change afterwards if the recipient received another gift from the same taxable person, raising the combined value of the two gifts over this threshold. This would be contrary to the idea that each VAT transaction should be treated on its own merits and not altered by earlier or subsequent events.

101. I do not see any danger of taxable persons making gifts in unjustified amounts if they genuinely act for business purposes. The general rules and principles concerning fiscal control, abuse of law and tax evasion are sufficient to overcome attempts to circumvent the requirement of ‘small value’ for VAT exempt gifts.

102. A literal application of cumulative ceilings would require that taxable persons keep records of who they give gifts to. In my view, this goes beyond the invoicing and accounting requirements set out in the Sixth VAT Directive. In addition, it would be too burdensome if taxable persons were required to remember the person to whom they gave calendars, pens with logos, or other similar gifts".

UNITAID approves patent pool budget for 2010

There's a good little piece yesterday by Kaitlin Mara on Intellectual Property Watch: "UNITAID Patent Pool Budget Approved; Implementation To Begin". Kaitlin explains how the board members of international drug purchasing mechanism UNITAID has approved a budget of around US$3.9 m for this year for its pioneering patent pool initiative.

The patent pool is intended to facilitate the creation of lower-cost generic drugs in developing countries, and to facilitate innovation in needed areas, such as AIDS medicines suitable for children. It does this by creating a “one-stop shop” for the licensing of needed technology, which reduces the costs of searching for patent holders and drawing up agreements with several different owners.

It is not immediately apparent what the long-term impact of the pool will be upon the proprietary and generic sectors of the pharma industry. Clearly the reduction of transaction costs should benefit everyone. UNITAID's mission is

"to contribute to scaling up access to treatment for HIV/AIDS, malaria and tuberculosis, primarily for people in low-income countries, by leveraging price reductions for quality diagnostics and medicines and accelerating the pace at which these are made available".

Wednesday, 14 April 2010

Transparency Black List: will brands suffer collateral damage?

"Will "Black List" Damage Brand Image Of Companies?" This is the question posed by Barry Silverstein in this piece for brandchannel. Silverstein assumes that, if companies benefit from inclusion in Corporate Responsibility magazine's "100 Best Corporate Citizens" feature, a listing in the forthcoming "BLACK LIST: The Russell 1000's Least Transparent Companies", is likely to inflict some harm upon them.

The Black List, which goes public on 24 April, scores companies from the Russell 1000index of large-capitalization stocks in areas such as financial, governance and human rights. Abercrombie & Fitch, Lorillard, and Weight Watchers are mentioned as being among those mentioned. Silverstein adds:

"Interestingly, the magazine claims that the best corporate citizens had a three-year return on shareholder value of 2.37, whereas the 30 black listed companies had a negative return of 7.38 percent – proving that it literally pays to be a good guy".
This is by no means certain: is it causation or correlation and, if causation, in what way? Perhaps good share performance breeds greater transparency as a response to increased inquiries and the demands of compliance with due diligence. Silverstein then asks whether inclusion in the Black List will give any of the companies a black eye in terms of their brand image:
"Companies tout their appearance on positive lists and highlight accolades received for customer service or product quality. Quality awards given out by J.D. Power and Associates, for example, are often used in product promotion. So will companies on The Black List launch a PR effort to combat the negative effect on their brand image – or will they just shrug it off and ignore it?

The companies on The Black List may have already answered that question: ... none of them responded when the magazine contacted them for comment".
I think that there is little risk of brands such as Abercrombie & Fitch being affected: the power of the brand lies in its link between a company's products and its customers. The A&F marketing pitch and advertising strategy are aimed at a very different -- and very much larger -- readership than the 20,000 corporately aware subscribers to Corporate Responsibility magazine.

Monday, 12 April 2010

New seminar: Intellectual Property & Tax

Hardwicke, in association with Gray’s Inn Tax Chambers, is running a half-day seminar on IP and tax on Wednesday 12 May, the venue being Hardwicke Building, New Square, Lincoln’s Inn (London). Speakers include Mark Engelman (Barrister, Hardwicke); Laurent Sykes (Barrister, Gray's Inn Tax Chambers) and Edward Morris (Director, Deloitte LLP). In the chair is IP Finance blog team member Jeremy Phillips (IP Consultant, Olswang).

The seminar is priced at £50 plus VAT per person. Those lucky enough to attend will get 3 CPD points, a pleasantly tasty lunch and, if all else fails, a decent sleep in warm and protective surroundings. The seminar will take place from 11am-3pm; 10:30am registration.

You can view the full programme here. Booking arrangements here.

Thursday, 8 April 2010

Banish the Trolls Back Home


Certainly the most famous Nordic mythological creature ever to enter the lexicon of IP is the so-called "patent troll." Since Peter Detkin, formerly of Intel, popularly used the term in 2001 to describe parties that sought to extract payment for patents that they have no intention to ever use or practice, the debate about whether the "troll" is a positive or negative factor in the patent world.

My goal in this post is not to revisit generally the argument pro and con, but to consider how the issue was recently addressed by the wide-circulation business weekly, Bloomberg Business Week, in article entitled, "The 'Troll' That Tocks Off Techies", which was published on February 15 under the byline of Rachel King. More specifically, in an effort to bring the pro and con of "patent tolls" within the scope of an apparently self-imposed one-page limit, the article brings snippets and quotes that are apparently intended to give a flavor of the various positions on patent trolls. That said, the article contains several hard-to-understand comments that reflect the mushy boundaries that have been emerged in connection with the patent troll debate.

1. "Critics say trolls try to apply patents that are too broadly defined or that cover ideas that existed before the patent was granted. Many say the entire U.S. patent system needs reform. But for inventors who alone can't take tech companies to court over meaningful innovations, the Acacias [company that acquires patents and then seeks to obtain fees for their use--NJW] of the world play a vital role."

COMMENT: Nothing in this paragraph relates strictly to patent trolls. Regarding the first sentence, the claim is one that a defendant in a patent infringement action will often raise in its defense. One can replace the word "troll" with "plaintiff" without any change of the underlying meaning of the sentence. As for the second sentence, the meaningless of the target reminds me of Joseph Conrad's comment in The Heart of Darkness about the frigate more or less "shooting into a continent."Enough said. As for the third sentence, here as well, there is nothing special about so-called trolls, unless one wants to impose a use requirement for patents. Just because a law suit is filed by a nonpracticing entity does not make the plaintiff a troll.

2. "At the same time, nonpracticing entities help bring transparency to a market in which the price for patents is shrouded in nondisclosure agreements, says James Malackowski, CEO of Ocean Tomo, an intellectual-property consulting firm."

COMMENT: I guess I need some help here. What exactly is the "market" for patents here? Why do "nonpracticing entities" (i..e.,"patent trolls") solve the "transparency" problem resulting from nondisclosure agreements? What indeed is the "transparency" problem? Why should I care that the "transparency" problem is solved?

3. "[A partner at one venture capital firm] says one-third of is firm's portfolio is targeted by patent trolls. 'We're on the very front end of an explosion of frivolous litigation that's going to put a damper on innovation,' he says."

COMMENT: It's a bit hard for me to follow this claim. If this VC went into these investments without being aware of the likelihood of possible third-party patent suits, they have a due diligence problem. If this VC was aware of the risk of possible suit, then one would assume that this risk was priced into the terms of the acquisitions. Further, if the lasuit is "frivolous", the patentee also has to weigh the risk of pursuing a suit against the possibility that it may lose the case.

Nearly a decade after the moniker "patent troll' was coined, the term seems to still elude a commonly agreed meaning. Maybe the time has come to stop using the term and banish the troll back to the frozen Nordic north. In that regard, consider the following suggestion set out recently in Allison, Lemley & Walker,"Extreme Value or Trolls on Top? The Characteristics of the Most-Litigated Patents", University of Pennsylvania Law Review, December 2009.
"... [W]e should not focus so much attention on labeling particular plaintiffs as trolls or not, but instead on making sure that the patent rules provide patentees of all types fair compensation but not opportunities for hold-up."
How the business journalists will react to this sugestion is an open question.

Sunday, 4 April 2010

Ownership and Control of IP Rights: forthcoming event

"Ownership and Control of IP Rights: guidance on the complicated issues which arise with these increasingly important assets" is the title of a one-day conference, organised by CLT Conferences and held in Central London on Monday 10 May 2010.

Topic covered are

* Ownership and Control of IP: What are the Key Issues?
* Ownership and Control of IP in Joint Ventures and Collaborations
* IP and Abuse of Control
* Commissioned Works and the Special Position of the Independent Contractor
* Inventions and Innovations Created by Employees: who Owns, who Controls?
* Extra Remuneration for Employee Inventors: When is An Employee Inventor Entitled to Additional Remuneration?
* Ownership and Control of IP: Practical Guidance for Acquisitions
The full brochure and speaker details can be seen here. There's even a "Compose an Anthem" competition (here), for which the prize is complimentary admission. IP Finance team member Jeremy is in the chair. See you there?

Thursday, 1 April 2010

Frost and Sullivan on Entrepreneurship, Innovation and IP

Market research and business consulting company Frost and Sullivan have recently presented their Entrepreneurial Company of the Year award to green automotive company EVO Electric Ltd.

"EVO Electric's effort to bring axial flux technology motors from a lab to the market highlights the company's entrepreneurial spirit," says Frost & Sullivan Research Analyst Bharath Kumar Srinivasan. "By developing a large network of partners in industry and in the financial community, EVO Electric has succeeded in commercialising its unique technology and pioneering the use of large axial flux machines in the automotive industry."

EVO is a spin-out from Imperial College London. Espacenet and the UKIPO online journal suggest several published and unpublished PCT patent applications filed initially by Imperial and latterly by EVO itself. However, no mention of these patent applications is made in the press release, which instead highlights innovation in business processes aimed at increasing the value of the product and company:

Engineers are involved in any brain-storming session to put forward ideas and improvements on existing products” it notes. “Based on the ease of implementation and resource requirements, the best ideas resulting from the session are short-listed and implemented either immediately or after strategic analysis. This process adds value to the product at no additional cost to the customer or EVO Electric, while keeping the employees motivated and highly involved.

Other success factors identified by Frost and Sullivan include:

- The higher power/torque density of EVO Electric's motor/generator, which enables a customer to reduce the overall weight for a given power rating, thereby increasing the efficiency and/or range;

- Focus on technology applications with near-term potential, such as commercial vehicles (taxis, delivery vans, buses, trucks) and military power generators;

- Focus on planned areas, for example R&D and business development, so that the various tasks do not spread its financial and human resources too thinly;

- Partnerships with Tier 1 automotive suppliers to improve market presence and enable the technology from EVO Electric to be manufactured based on the expertise of Tier 1 suppliers;

- Targeting niche markets that are relatively cost insensitive.

Are accountants really so dumb?

"Protect your intangible assets: global accountants and Intellectual Property Office produce guide" is the title of a press release from the UK's Intellectual Property Office which reads as follows:

"Accountants and finance professionals must understand Intellectual Property (IP) issues to help their business clients, says ACCA [the Association of Certified Chartered Accountants] and the Intellectual Property Office (IPO) ... in a new guide produced jointly by the two organisations.

Called "Intellectual Property and the Practising Accountant", the report is a guide for finance professionals to help them get to grips with the nuances of IP, from trade marks to patents. It also includes a quiz at the end of the report, so readers can test their understanding of the issues.

The report says that for most businesses, intangible assets represent well over half of corporate value. Yet according to IPO research, over 96% SMEs have never tried to assess what their IP is worth.

Robin Webb, Innovation Director at the Intellectual Property Office says: "Intellectual property is often a hidden or under exploited asset, as many companies struggle to identify, manage and protect it. I believe that accountants who have a basic familiarity with IP will advantage both themselves and their clients by reading this report."

"For many accountants, the ability to recognise that a firm should think about its IP management and signpost the IPO website as a resource to start at, will itself be a useful service."

John Davies, head of business law at ACCA, says: "Businesses survive by being good at what they do, and doing those things in original ways. But success inevitably leads to imitation, and at some point most small firms will need to take steps to safeguard their intellectual property. As accountants are the most frequently used source of business advice for small firms, they are uniquely placed to help their clients protect and exploit their intangible assets."

"As well as giving firms an edge over their competitors, protecting IP can also prove an additional source of revenue - for example, leasing a name or a logo to another organisation", adds John Davies. "And businesses should be aware that they are entitled to take legal action if another corporate body adopts the same, or a misleadingly similar name."

For firms, factoring IP into their business plan means understanding complex issues. For example, are UK trademarks valid in Europe? If a website is designed by a contractor, who owns the copyright? Neither is there any hard and fast way of quantifying IP; should it be the set-up cost of intangible assets, their market value, or their future worth which is costed?

"SMEs will likely have all sorts of questions," concludes IPO's Robin Webb.

"To gauge the full value of their IP and protect it accordingly, it is critical that their most trusted advisers are well-equipped to answer these queries."
Though described on its face as a Technical Paper, the document-- which you can download here -- is just 12 sides long. Discount pages 11 and 12, which are devoid of information, and the front cover; that leaves 9. Discount page 2, since it is the Foreword, and page 10 which contains the quiz. That leaves 7. Let's not mention the substantial white space on pages 3, 4, 5, 6, 7 and 9. All in all, there's precious little information concerning IP and, while it's better than nothing at all, it stands in stark contrast to the sort of material which accountants are expected by their own professional organisations to comprehend in the discharge of their professional duties.

Sample information contained in the document: Under Key Facts the following is stated:
"* In many sectors the average royalty rate turns out to be 5% of net sales" [It's difficult to imagine how this gem might be deployed].

"* Patents expire after 20 years, so as they end their life their value will fall" [But most patents have expired or been allowed to lapse long before that period. The fact that a patent is kept in force to the bitter end suggests that it's generating real income or commercial advantage ...].
Please draw your own conclusions.