"Virgin Group has become increasingly focused on the development of the Virgin brand internationally and especially in emerging markets. To reflect this, we are considering moving our licensing entity to Switzerland in the near future to co-ordinate our international growth and brand management".This is the sort of thing that every government dreads. Taxation of corporate trade is a vital ingredient of any national budget and it's worth offering a lower rate of tax on the basis that you'll attract more taxpayers into the jurisdiction -- but this in turn invites a race to the bottom as national tax rates are forced to drop in order to retain existing corporate tax-payers. Looks a bit like competition, doesn't it?
Friday, 29 July 2011
Wednesday, 27 July 2011
The decision of the UK's Supreme Court today in Lucasfilm Ltd, Star Wars Production Ltd and Lucasfilm Entertainment Co Ltd v Ainsworth and Shepperton Design Studios Ltd (judgment here; IPKat note here; shorter note on the 1709 Blog here) has already received plenty of coverage. We all now know that a Star Wars Stormtrooper helmet is not a "sculpture" for the purposes of UK copyright law and that Lucasfilm is entitled to bring proceedings in a British court in respect of claims of infringement of US copyright law.
Arising out of this is one small aspect, not so far covered elsewhere, which is troubling me.
Presumably, when any copyright owner is deciding whether to sue for infringement and seeks damages, the cost-effectiveness of making the claim will determine whether it is worthwhile to do so. Thus an expensive action to recover a small sum makes little or no sense while the expectation of sizable compensation makes the litigation a more appealing business proposition.
What I don't know, and therefore hope readers can advise me on, is this: where a British court applies the test of infringement of copyright under US law in respect of an act committed in the US, is it also bound to apply the US scale of damages -- which appears to be vastly more generous than the sort of damages awards made in the UK for infringement of UK copyright within the UK -- or does it assess liability by reference to US law and then calculate damages on its own local principles? Can anyone point to a clear rule or judicial authority which establishes how quantum is calculated?
Tuesday, 26 July 2011
Thursday, 21 July 2011
The current scandal engulfing the News of the World raises interesting legal questions. The scandal arose from a criminal investigation into the phone-hacking activities of Glenn Mulcaire and Clive Goodman. During this investigation Mr Mulcaire admitted to hacking the phones of a small number of individuals. This led to Gordon Taylor and a number of other celebrities bringing civil actions.
The criminal and civil actions are obviously separate. However, evidence from the criminal investigation can be and has been used in the civil cases. Indeed it was arguably the momentum of the civil cases forcing disclosure from the Metropolitan Police that caused the recent collapse of the News of the World.
Why is phone-hacking illegal?
Under the Regulation of Investigatory Powers Act 2000 (“RIPA 2000”) the interception of phone calls is a criminal offence unless carried out by the police or intelligence services with a warrant and in order to prevent serious crime or to safeguard the economic wellbeing of the UK. Other offences may also be involved if national security is compromised by, for example, the hacking of the prime minister’s phone. Regardless of whether the phone belonged to a celebrity, a politician or Milly Dowler, phone-hacking without a warrant is criminal.
Criminal liability is of little use to a victim who wants compensation. This is where the civil cases arise. The RIPA 2000 may not give rise to a claim for breach of statutory duty. However, it is clear that the misappropriation of confidential or private information can give rise to a privacy claim, particularly bearing in mind that Article 8 of the European Convention on Human Rights protects an individual’s reasonable expectation of privacy. It is hard to see how a newspaper could trump this with any public interest defence - especially in cases such as that of Milly Dowler. There is also a probable claim for breach of confidence and, depending on the precise facts, there may even be a claim for harassment under the Protection from Harassment Act 1997.
Although, in view of the Max Mosley case, damages have clearly been available in previous privacy cases, it is not at all clear what measure of damages can be claimed by a victim of hacking or whether a different High Court judge would follow the decision in Mosley by refusing exemplary damages - particularly in view of the scale of the News of the World’s hacking activity and its apparent cover up in that regard. These are issues that will have to be considered in the five test cases to be heard in January 2012 – including, amongst others, those of Paul Gascoigne and Jude Law.
Gordon Taylor, Sienna Miller and Andy Gray have all been reported as settling for different sums of money. Moreover, as the terms of settlement are confidential, these cases are not necessarily indicative of what a court may award. Ultimately, the measure will have to depend on what and how much information was taken and what it was used for. In essence the damages will be for distress, hurt feelings and loss of dignity. Often, where private information with commercial elements has been taken and used, the level of damages awarded will be higher than in a case where, for example, the information taken and used is merely that a celebrity had a row with his or her partner. Even so, the damages for distress in a case such as that of Milly Dowler could well be vast.
In some cases, it might be appropriate to consider seeking an account of profits, since good front page stories do sell extra copies of newspapers.
What is Parliament doing?
David Cameron has recently announced a two phase public inquiry – to be headed by Lord Justice Leveson assisted by a panel of senior independent figures. The inquiry will look into the culture and practice of the press, its relationship with police and politicians, the failure of the current system of regulation and what would be a better system of regulation. The intention is that it will report within 12 months on the future conduct of relations between press and politicians and that it will report sometime after that regarding the extent of the unlawful conduct at the News of the World and elsewhere, the shortcomings of the original police investigation and the payments made to police officers. These inquiries are a welcome development. However, they are unlikely to lead to any change in the law in the foreseeable future and they should not impact upon the current cases.
In the meantime, it is clear that the law as it stands does allow the victims a legal route to obtain compensation. The question on every litigant’s lips will be, ‘How much?’".The IP Finance weblog thanks Nicholas for letting us reproduce this piece and welcomes comments and suggestions from readers.
The IP Finance weblog is delighted to host another guest piece by Keith Mallinson (WiseHarbor) on the issues raised by the inclusion of patented IP within industry standards. Do please let us have your comments: Keith is most willing to deal with them.
"A Great Deal for Consumers in IP
Holding out against hold-up theories
IP finance readers encouraged me to submit my first three IP Finance postings to the US Federal Trade Commission in response to its request for information and comments on “the practical and legal issues arising from incorporation of patented technologies in collaborative standards". In particular, the market facts-based analysis submitted in my compendium of articles counters FTC’s allegations of patent “hold-up” in its March 2011 report entitled The Evolving Marketplace: Aligning Patent Notice and Remedies with Competition. In this, it asserts that
... the patentee can use the threat of an injunction to obtain royalties covering not only the market value of the patented invention, but also a portion of the costs that the infringer would incur if it were enjoined and had to switch. This higher royalty based on switching costs is called the “hold-up” value of the patent. Patent hold-up can overcompensate patentees, raise prices to consumers who lose the benefits of competition among technologies, and deter innovation by manufacturers facing the risk of hold-up.A Director of Standards at one major company wrote to me after reading my first two articles stating I had “done a great job in these two posts dispelling some of the unsubstantiated myths around the use of patents in the standards context”. He went on to write that “the FTC RFI actually asks questions that are clearly and concisely answered by your two blogs (and I suspect your third blog on upstream royalties and downstream benefits will address a couple more)”. He expressed his concern that whereas many academics believe “hold up was a real problem, but those from industry maintained that hold up was a theoretical problem created by academics”.
Resurrecting ex-ante licensing auctions
As part of the FTC’s consultation, it streamed a public workshop it held on 21st June 2011. Divergent views were expressed in vigorous, balanced and exhaustive debate in three panel sessions by representatives from a wide variety of corporate interests on key matters related to the alleged hold-up including IP disclosure, RAND licensing terms and the use of injunctions.Joseph Farrell, the FTC’s Bureau of Economics Director wrapped-up the all-day event with a closing presentation that provided no opportunity for further discussion. He presented the FTC as sole representative for consumers in the debate because consumers are notably absent from the table in SSOs, in licensing discussions and at this workshop. He asserted that suppliers are somewhat indifferent to the alleged hold-up because its costs are simply being passed on in elevated consumer prices.
Significantly, he offered no evidence on the extent to which any cost savings in IP fees would actually be passed on to consumers and provided no indication of consumer harm versus the benefits that accrue to consumers from IP-owners generating a reasonable risk-adjusted return that can be reinvested in further innovation. Instead, he proposed resurrection of the much-criticized Swanson and Baumol ex-ante auctioning approach, in which technology owners would offer their essential IP for inclusion in a standard in “sealed bid” process designed to ensure (the bizarre and unreasonable objective, in my opinion) that the IP price is no more than the incremental value over the price of the next best alternative (even if the latter is priced at zero by a vertically-integrated player seeking to minimise its downstream in-licensing costs).
In addition to numerous problems with that particular method of fixing prices, the evidence is that consumers are actually doing rather well with the efficient status quo in licensing IP. With standards of great complexity and involving hundreds or thousands of patents in mobile communications each covering different portions of each standard, it would be very cumbersome to administer IP auctions and there would be all manner of undesirable consequences. Whereas standards-based technologies are selected in a collective process on the basis of technical merit by a wide assortment of companies who generally negotiate licensing terms on a separate bilateral basis, auctions would constitute collusion among purchasers and would likely unduly emphasise IP price over other important factors (such as functionality, features, performance, and even total system cost and price to consumers). This would be anticompetitive for the same reasons that have prohibited other forms of collective price setting in various SSOs. Substituting the proposed auctions for outlawed collective negotiations neither eliminates nor diminishes the spectre of “monopsony”. Technology selection is a complex process that would be impaired with the rigidities of an auction. IP is most commonly priced on a portfolio basis with essential IP and other patents licensed in a bundle covering the complete implementation of the standard.
Licensees simply do not want to license only the patents covering a small portion of the standard if the licensor owns other patents that cover other parts of the standard; they need and want the entire bundle of essential IP. The IP price is just one among many factors included in licensing negotiations. Setting standards is not a one-off event; it is an evolutionary process including a succession of numerous incremental additions within standards such as GSM with GPRS and EDGE and within WCDMA with UMTS rev 99, UMTS rev 4, UMTS rev 5 etc to include technologies such as HSPA, and most recently within LTE. Various parties prioritise these factors differently in different bilateral negotiations which enable the most efficient outcomes for all in licensing agreements. In return for cross licenses, vertically-integrated manufacturers are incentivised to under-price for inclusion of their IP in standards, versus upstream licensors, because this would minimize their costs of having to license-in from others. Even Swanson and Baumol have expressed concerns that the opportunistic exploitation of ex post market power “will be magnified if the IP owner is also a participant in the downstream market”.
My previous IP Finance posting also illustrates the battle of business models between upstream licensors and vertically-integrated manufacturers. My analysis measures the financial incentives the latter have to minimise overall IP fees at the expense of the former. Competition between business models is a positive phenomenon that should be encouraged. Regulation to the benefit of one business model over another with royalty rate caps, for example, would stifle competition and innovation.
Minimising prices is not the be all and end all – for corporates or consumers – with other factors (such as features, performance, functionality, flexibility to upgrade services, and support) also very important. One interesting observation among panellists at the workshop was that, in some cases, would-be licensees would rather sign a royalty-bearing license than commit to other onerous conditions demanded in royalty-free licensing. Whereas consumers typically avoid paying more than single digit percentages over the odds for commodities such as petrol and electricity supply, they frequently choose to pay a significant premium for the most innovative products and brands. For example, Apple’s iPhone has commanded a particularly high wholesale price of around $600 (around double average selling prices for smartphone companies RIM and HTC) and a gross profit margin approaching 60% on the strength of those factors. Typically, the price is heavily subsidised by mobile operators, but consumers pay over the life of their service contracts. Apple’s profits fuel its spectacular innovation machine that has led to entirely new product categories with its iPods, iPhones and iPads in music devices, smartphones and tablets respectively, and that has created the supporting ecosystem with iTunes, its App Store and thousands of developers. Apple’s high margins since introduction of the iPhone in 2007 have attracted plenty of competition, as illustrated in the following section, with “me too” and differentiated products at lower prices for those who are price sensitive. This also exerts downward price pressure on Apple.
The FTC’s sister agency, the Federal Communications Commission, provides plentiful evidence that consumers are served very well with diverse choice in suppliers, handset models and with innovative new offerings in smartphones.
The FCC’s fourteenth Annual Commercial Mobile Radio Service (CMRS) Competition Report, published one year ago, ‘examined, for the first time, competition across the entire mobile wireless ecosystem, including an analysis of the “upstream” and “downstream” market segments, such as spectrum, infrastructure, devices, and applications’. The fifteenth report, recently published, “follows the same analytical framework”. In this, it shows how consumer choice in handset devices has increased significantly in recent years. According the FCC’s latest report:
From 2006 to 2010, the number of mobile wireless handset manufacturers that distribute in the U.S. market increased from eight to 21 [see Exhibit 1]. As of June 2010, these 21 handset manufacturers offered a total of 302 handset models to mobile wireless service providers in the United States. Eleven of these handset manufacturers offered at least ten handset models each.
Exhibit 1 Handset Manufacturers and Handset Models Offered, U.S., 2006-2009
Source: FCC, 2011
On the important matter of innovation, the FCC goes on to state:
Over the past three years handset manufacturers have introduced a growing number of smartphones with the following features: an HTML browser that allows easy access to the Internet, an operating system that provides a standardized interface and platform for application developers, and a larger screen size than a traditional handset. In contrast to traditional handsets with applications that include voice and messaging, smartphones have more user-friendly interfaces that facilitate access to the Internet and software applications. Ten handset manufacturers offered a total of 144 smartphones in June 2010, compared to 56 in June 2009. [Exhibit 2] lists the top five smartphone and handset manufacturers, by number of models offered, that distributed in the United States in June 2010.
Exhibit 2: Smartphone Manufacturers Offering Largest
Number of Smartphone Models (U.S., June 2010)
Source: FCC, 2011
The total number of 230.7 million handsets sold in the year to Q2 2010 is quite remarkable, given a US population of 309 million. Exhibit 3 shows quarterly U.S. handset shipments by manufacturer. With subscriber penetration exceeding 100%, the vast majority of Americans already have a phone. Proven consumer desire to keep trading-up, so frequently and extensively with new and additional devices, flies in the face of arguments that IP prices are causing consumer prices to be excessive and not providing value for money with the costs of technology development.
Exhibit 3 U.S. Handset Shipments, Q2 2009 – Q2 2010
Source: FCC, 2011
What consumers want and how they are able to get it
As indicated in my previous IP Finance postings, essential IP costs are modest in comparison to the total spent by consumers on mobile communications. However, value derived by consumers from these proprietary technologies is enormous. Whereas technology developers only deserve to reap financial rewards on essential IP technologies that are actually selected and used with commercial success downstream, if and when this occurs, it is quite legitimate that financial returns on these alone should be large enough to cover risks and costs of investing in portfolios of developments. Otherwise, such investments will simply dry up because technologists cannot reliably predict the “winners.” Portfolios will include both technologies that succeed and those that fail technically, are not selected for standardization, or fall short commercially in the marketplace with poor overall demand or in face of competition from alternatives. Competitors with a variety of business models including upstream licensors and vertically-integrated manufacturers generate these returns in different ways, including licensing fees and through profits on product sales. Consumers want improving capabilities, quality and value for money in the devices they buy, and they are willing to pay a fair premium for such value".
Wednesday, 20 July 2011
Surely the most dramatic news of last week in the area of content distribution was the announcement by Netflix that it was raising its prices for DVD and streaming plans. Netflix is the U.S. company that has become a darling of business school thinking because of its successful make-over from being a pioneer in the overnight delivery of DVDs to a leading player in the content streaming business. Netflix is still US-centric, but it recently announced its plans to roll out the service in Latin America and the Caribbean (nothing yet though for Europe, Middle East or Asia).
The stir was caused by Netflix's announcement that it was raising its pricing structure from $9.99 for both a one-at-a time DVD rental and unlimited streaming of contents to $15.98 per month (i.e., each of the two services is being separately charged, $7.99 for unlimited streaming and $7.99 for a one-at-a-time DVD rental). Writing on its blog, the company explained part of the rationale for its decision thus:
"Given the long life we think DVDs by mail will have, treating DVDs as a $2 add-on to our unlimited streaming plan neither makes great financial sense nor satisfies people who just want DVDs," .... "Creating an unlimited-DVDs-by-mail plan (no streaming) at our lowest price ever, $7.99, does make sense and will ensure a long life for our DVDs-by-mail offering."Not surprisingly, consumer response was rapid and it has been nearly universally irate. For example, as reported on CNET, "On Netflix's Facebook page, just six hours after the company posted a link to the announcement that appeared on its company blog, more than 9,000 comments have been posted in response. I read a sample of about 100 comments, and only one defended the Netflix decision." Threats to migrate to a competing platform are legion. Yet Netflix does not appear to be backing down on its plan and seems confident that its new pricing will stick with consumers.
Given that the business media continues to be awash with expressions of concern about the risk of either price disinflation or outright deflation in the economy, the prospect of a company successfully upping its price by 60% for a discretionary service providing entertainment contents, for which there are presumably competitive substitutes, is remarkable. My expression of amazement is directed first and foremost at the expected behaviour of consumers to eschew price elasticity and embrace the price increase. Either Netflix has achieved significant brand loyalty and/or the quality of its service means that there are fewer substitutes than might meet the eye. In either event, if the price hike sticks, it certainly merits the attention of those interested in parsing micro-economic behaviour that goes against the grain of greater macro-economic developments.
Even if all of this is true,and Netflix can buck of the trend of current economic developments, surely there must a further back story for its decision. One edifying discussion in this vein appears on the July 19 edition of cnet.com ("What was Holywood's role in Netflix Price Rise?", writen by veteran high-tech journalist Greg Sandavol here). Sandavol makes the following points:
1. "Some of those searching for clues about why Netflix unexpectedly raised prices last week appear to be convinced that the trail leads to Hollywood, the home of the top six film studios. After Netflix announced Tuesday that prices would rise by 60 percent, a popular theory was that CEO Reed Hastings sought to build up his war chest. Acquisition costs for streaming content are soaring."
2. It is widely stated that, in Sandavol's words, "subscribers are figuring out that Netflix's streaming library leaves a lot to be desired." This potential disatisfaction will only grow as subscriptions increase. The upshot is that Netflix needs to take all the measures it can to obtain more and more quality content (read "movies") to satisfy its subscribers.
3. Content can only come from one of two sources. Either Netflix develops contents on its own and/or it gains access from content providers. While Netflix has taken some initial steps to develop original contents, no matter how successful these efforts may be, the company will continue to rely on third-party content providers for the bulk of their offerings. That means paying (more and more) for the contents necessary to keep subscribers content.
4. The numbers facing the company as it seeks to ramp up its own on-line contents are certainly daunting. According to Sandavol:
"... Netflix renewed a multiyear licensing agreement with NBC Universal for a fee of as much as $300 million a year. That's more than 10 times the $22 million a year Netflix paid for NBC content in the prior deal. Starz, the premium pay-TV channel that owns the streaming rights to movies and shows from Sony Pictures and Disney, is also looking for a bump. Starz receives $25 million to $30 million a year from the current contract, but Rich Greenfield, an analyst with BTIG Research, predicts Starz could get about $250 million this time around."5. Stated otherwise, and according to Michael Pachter, an analyst with Wedbush Securities, Netflix could see its streaming costs increase from $180 million in 2010 to almost $2 billion in 2012.
6. Neverthless, Netflix seems to be denying that the price increase is directly tied to the increased funding needs for contents. According to Reed Hastings, the company's CEO, "Films and TV shows will pay for themselves by attracting larger and larger numbers of streaming subscribers, which pumps more subscription fees into Netflix's coffers."
7. In other words, the price increase might serve more strategic considerations. Certainly the most interesting such consideration was expressed by Eric Garland of Big Champaign, a company that analyses content consumption online. Garland suggests that Netflix is engaged in "Apple-like power move on Hollywood":
"Reed is deliberately creating dissatisfaction," Garland says. "He's creating dissonance precisely because that title availability, those first-run titles, need to be more immediately and widely available as a (video on demand) or a streamed offering. So this is a leverage play. This is Reed saying (to the studios) you can't bifurcate. He's saying you're going to have to make all of your content available in a way that your customer has clearly indicated that he or she wants...that dissonance is going to demand remedy."
One can choose to believe Reed or Garland or the other commentators out there, all trying to figure out what Netflix is up to. Somehow, I don't think that this will be my last blog on the company.
More on Netflix here.
Tuesday, 19 July 2011
Oliver is SVP and Chief Legal Officer of brand licensing consultancy Beanstalk, while Richard is an attorney in private practice who works with companies that own, sell, or license IP and information technology, with experience of acting as counsel in very many bankruptcy cases. According to the abstract,
"Legal context. The article provides an overview of the main issues faced and decisions to be made by a trade mark licensor whose licensee has filed for bankruptcy in the United States.
Key points and practical significance. It covers the following four permutations (i) if the licensee seeks to assume and the licensor consents, (ii) if the licensee seeks to assume and the licensor objects, (iii) if the licensee seeks to reject and the licensor consents, and (iv) if the licensee seeks to reject and the licensor objects. The article also covers trade mark license agreement performance after a bankruptcy filing".This article is available to JIPLP's online subscribers now, and will be included in one of the forthcoming print issues. Non-subscribers to the journal can access it on a short-term pay-per-view basis by registering with JIPLP and paying the access fee.
Monday, 18 July 2011
The UK's Intellectual Property Office website has recently sprouted three new publications from its Economics, Research and Evidence team. In short, they are
* Film, Television & Radio, Books, Music and Art: UK Investment in Artistic Originals (16 pages, here; executive summary here), which reviews the definition of artistic originals and official estimates of investment in originals as recorded in the UK National Accounts. New data seeks to estimate the value of the UK stock of artistic originals. The report concludes that approximately £1.1bn more was invested in original artistic work in the UK in 2008 than had previously been estimated. Combining these data with new depreciation rates suggests an upward revision of £3.5bn to the UK stock of artistic originals in 2008.
* The Role of Intellectual Property Rights in the UK Market Sector (42 pages, here; executive summary here). This report estimates (a) the level of UK market sector investment in knowledge assets protected by Intellectual Property Rights and (b) the impact of investment in those assets via their contribution to labour productivity growth in the UK market sector.
* Trade Mark Incentives (66 pages, here; executive summary here). This report investigates potential links between trade marking and performance. The researchers document an overview of corporate trade marking activity in Britain, analyse the role of trade marks in the innovation process for firms and their impact on households, and explore possible links between trade marking and branding.These reports represent the current trend towards weighing and measuring IP in economic terms and detaching it from what is unkindly called lobbynomics. I've not yet had a chance to read any of them and will welcome a short review on this weblog from anyone who has.
This weekend's post on Afro-IP is worthy of comment on this blog because it involves a case where damages were claimed based on the misuse of a photograph containing the image of a former Miss South Africa in advertising. The facts of the case are set out in the first few paragraphs of this post.
RSA, like most former colonies, has a hybrid legal system with influences from a number of different past masters. In this case, damages (sentimental and patrimonial) were claimed for infringement of common law personality rights and constitutional rights to privacy. Although not claimed in the pleadings, there was also the possibility of damages being claimed under passing off and, in my opinion, trade mark infringement (notwithstanding the limitations of trade marks when protecting image rights).
The Judge in the case went into some detail analyzing the jurisprudence, both locally and abroad, from authors both live and centuries dead. He upheld the claim for sentimental damages (the amount not decided, though unlikely to be very high). In doing so, he re-affirmed a principle that personality rights are inextricably linked to the person and cannot be transferred. Incidentally, this month's World Trademark Review contains thought provoking piece by Bob Cumbow on what happens to personality rights when the person dies - in many territories, they too expire.
I am left with a renewed urge to persuade those with valuable image rights to try to use conventional IP rights such as trade marks (name, signature, effigy) and, where possible, copyrights to protect their image together with a licensing and enforcement program that controls and educates about the use of their image. Unlike personality rights, IP rights can be transferred, infringements can be easier to prove (for example, there is no need to show 'intent' under trade mark infringement) and the financial minded may better understand their value on the balance sheet. Again, I say this very much aware of the limitations in using trade marks to protect image rights.
- Posted by Darren
Friday, 15 July 2011
Liechtenstein introduced a tax reform at the beginning of this year (attempting to rehabilitate its international reputation) which included changes to their taxation of intellectual property, giving a local effective tax rate of 2.5%. Those changes have now been ratified by EFTA’s Surveillance Authority.
The new IP tax rules in Liechtenstein allow a business to deduct 80% of IP profits when calculating corporation tax so that, in effect, only 20% of the profits from IP are subject to tax in Liechtenstein. This gives an effective tax rate of 2.5% on IP profits, as Liechtenstein’s corporate tax rate is 12.5%.
Perhaps unsurprisingly, Liechtenstein has a relaxed definition of IP and and income from IP: it covers both created and acquired IP, and IP income includes that earned from group companies as well as third-party licensing. It does not, unlike the proposed UK patent box, cover embedded income within the income from the sale of products that include IP.
IP profits means IP income less all expenses connected with the IP (including amortization and similar deductions), regardless of when the expenses were incurred.
Thursday, 14 July 2011
This post isn't interested in the liability issue as much as in the financial dimension to the case. It has been argued by some, and assumed by others, that if GSU was found liable there would be detrimental costly repercussions for content management practices at all academic institutions. Tom rejects this and argues that most academic institutions already adhere to practices that are both copyright compliant and inexpensive -- at a price which is almost trivial in per student terms (US$3.75 per student per year for a school of GSU’s size) while at the same time being a valuable source of income to rights owners.
Friday, 8 July 2011
One of things that I like to do in my spare time is follow the various publications that are produced by an energetic local think tank devoted to international relations and strategy. If I am really lucky, I am invited to a session or two that the think tank offers from time to time on these topics, where they bring people from around the world to discuss various topics on international strategy.
A little whie ago, I suggested to the director of the think-tank that to consider a session on the role of intellectual property as a component of strategic thinking. He was not late in responding -- nor did he beat around the bush. "Look", he said, "I simply don't see IP as a strategic issue. You are invited to try and convince me otherwise, although I don't really imagine that I will change my mind." I am still working on a response.
I thought of this exchange in reading a recent article that appeared in the June 11th issue of The Economist. Entitled "Chinese Manufacturers: The End of Cheap Goods," the point of the article was that, due to a confluence of factors, the "China price" that has enabled China to be the manufacturer for the world at prices that undercut competitors was coming to an end. Faced with rapidly rising wage and commodity costs, the main drivers for 30 years of global price stablilty, we may be entering into an uncertain and unstable cost environment.
From the IP perspective though, what was really interesting about the article was its description of what were the factors that drove the first wave of the Chinese economic miracle and where the second wave of the miracle may be coming from. As for how China got there, the factors listed were the convergence in southern China of free or almost free availability to both land and labour, an efficient port and access to the nearby logistics hub of Hong Kong. Nothing mentioned about ease of imitation, at the best, or ease of outright IP misappropration, at the worst. Land, labour, transportation were the fundamental reasons for the success of Chinese manufacturing.
So is there a next stage for Chinese development? According to the article, all one needed to do is to have attended the Computex technology fair that took place in Taipai at the end of May. It was reported that many of the Chinese companies on display there come from the same areas in southern China from which the earlier wave of Chinese manufacturers emanated. This time, however, the wares were not textiles or toys, but elecronic products and the like.
And what characterized these electronic products? Their price, of course, being
described as "ultra-cheap" vesions of global hits, such as an Android-based table for $100, MacBook imitators for under $250 and E-readers that were "available for a song." Whether these products can be produced at those prices is unclear. More importantly, and this is the real clincher--"the intellectual property embedded in some devices may not, ahem, have been paid for." Still, the booths for these products were packed.
And so the question: how strategically important is IP to all of this? As for the fading low-cost present, it was not even mentioned as a factor. On an uncharitable reading, one can explain this by reasoning that, once one factors into manufacturer and production a general disregard for IP rights, the things that really matter are land, labour and transportation. When those factors become more expensive, the entire busines model is at risk. Whether the business model would have ever gotten off the ground if IP had been reasonably protected is a counterfactual question, the answer to which we will never know. With that reservation, one point in favour of the director of the think tank; IP was not ultimately a strategic factor in the current phase of Chinese economic success.
As for the future, the issue is less clear. On the one hand, from the point of view of IP, the tone of the article is, more or less, "here we go again." Then, as now, don't expect your IP to be honoured. On the other hand, however, maybe sophisticated electronics products are different from toys. Maybe, just maybe, it is one thing to exhibit a low-cost electronic product with questionable IP clearance at a trade show, but another matter to manufacture and export the product to western markets. It will be interesting to see what ultimataely happens here--export of such products as presumed low cost, with or without IP clearance, and, if so, to what countries. Maybe then we we will able to find out just how strategic IP really is.
Wednesday, 6 July 2011
The local government apparently already has seven banking partners; Nanhai district has received 29 IP-collateral finance applications this year and, to date, four companies have been granted bank loans totalling 18 million yuan ($2.7 million).
Prima facie this looks like a Chinese invention which we in the West should be able to copy, quite shamelessly and for the greater good of mankind.
Tuesday, 5 July 2011
This is the fourth in a series of features written by Keith Mallinson (WiseHarbor) for IP Finance. In this piece, Keith contrasts different structures for establishing the price paid for use of IP in the context of essential standards and concludes that, while voluntary patent pools have sometimes had beneficial results, pools should never be imposed because their imposition would eliminate significant competition from originates from outside pools; mandatory pools with royalty caps would both be anticompetitive and impede competition.
"Fixing IP Prices with Royalty Rate Caps and Patent Pools
Whereas voluntary patent pooling is common in licensing standards-essential IP for digital audio and video, attempts to impose pooling on licensing complex products, which include multiple standards and many more patents, are ill-suited and potentially anticompetitive. Some companies may voluntarily form patent pools for any particular standard, but mandatory patent pools seeking to limit licensing fees would distort competition by favouring downstream licensees at the expense of upstream licensors who depend on licensing fees to fund their R&D. IP owners, including vertically-integrated companies which combine downstream product businesses with upstream technology licensing, generally prefer bilateral agreements for IP-rich products such as mobile phones. Unlike patent pools, bilateral licenses most frequently include technologies for several standards and other IP, whereas each pool may only include essential patents for just one standard. Technology and market developments are best when competition facilitates various business models and licensing practices. And that also benefits consumers.
Licensing Cartels: From Monopoly to Monopsony
There is a long history of patent pools being used to monopolise markets, excluding competitors and controlling prices in several cases.
Adam Smith and others typically depict price fixing as conspiracy against the public to raise prices. However, there is another way to fix prices: collusion to reduce prices paid to suppliers. Forcing technology input prices lower would starve upstream technology developers of the profit margins required to sustain employment, reinvestment and their output in technology development. Ultimately this would be to the detriment of consumers who benefit from rapid and dynamic innovation in ICT and elsewhere. Reduced licensing fees do not guarantee lower consumer prices. With concentration in supply downstream, manufacturers may take the savings in profits.
Nevertheless, calls for mandatory or strongly encouraged participation in ICT patent pools are an increasing trend—typically from downstream licensees and their customers—with the self-serving objectives of limiting their input costs. Some well-intentioned policy makers also mistakenly regard patent pools as a panacea for supposed problems with complex patent landscapes and patent quality.
In-licensing requirements highest among those with most IP
Manufacturers with little or no IP and vertically-integrated companies with extensive IP are all dependent on in-licensing for most IP required in today’s ICT products, such as mobile phones. Technology ecosystems are complex webs including those who create new technologies and those who implement them in products. No handset manufacturer has declared more than a small minority of the IP required to implement 3G cellular. Technologies developed by scores of different companies are shared in implementation by hundreds of downstream manufacturers.
Exhibit 1, based on data from a 2009 study funded by Nokia, shows that leading implementers Ericsson, in radio network equipment, and Nokia, in handsets, declared IP ownership amounting to 16% and 14% respectively of the total for 3GPP mobile communications standards with WCDMA. Leading technology and chipset provider Qualcomm declared 26% ownership. (Many have claimed the study methodology is flawed. The input data is used here to demonstrate the well accepted fact that many companies have patents related to these standards).
With the need to in-license most essential IP, it is no surprise—with self-interest rather than altruism— manufacturers and their downstream customers (mobile operators who in many cases subsidise handset prices to consumers) have striven to limit aggregate licensing fees. A common proposal from several mobile operators is to limit aggregate essential-IP charges by establishing an LTE patent pool with that specific objective. For example, would-be pool administrators Via Licensing and SISVEL have promoted themselves and pooling over the last two years by scaremongering about the threat of so-called royalty stacking. In one presentation, Sisvel nonsensically projected WCDMA royalties at twice average wholesale prices. I analysed aggregate royalty levels in my last posting here and concluded that aggregate fees are modest and merited by those that invest significantly in risky R&D.
The European Commission DG Comp’s Draft Horizontal guidelines recognise that vertically integrated companies that both develop technology and sell products "have mixed incentives". Companies with a significant share of a downstream manufacturing business generally face higher costs in licensing fees for the IP they do not own than they can generate in licensing fees from the IP they do own. This explains the 2008 attempt by Alcatel-Lucent, Ericsson, NEC, NextWave Wireless, Nokia, Nokia Siemens Networks and Sony Ericsson to cap below 10% aggregate royalties for handsets implementing the 3G/4G LTE standard, as described in my previous IP Finance posting.
Proposed caps are for aggregate maximum rates to be paid for all standards-essential patents owned by all patent holders. However, in practice, net royalty payments are zero or are minimized among vertically-integrated companies who cross-licence, with or without a cap – so a proposed cap would have little or no impact on licensing costs among such companies. The latter would greatly benefit from any reduction in upstream licensors’ fees—payable by all licensees—whereas, any squeeze on their own charges would only be significant in the minority of the market where they are not cross-licensing to minimise or eliminate net payments. A manufacturer’s IP fee income is generally small compared to its product revenues.
IP licensing, before and after imposition of an aggregate royalty cap, is depicted in Exhibits 2a and 2b respectively. In this simplified yet representative model, 75% product market share (applicable for handsets sold in 2010) is supplied by vertically-integrated manufacturers who minimise royalty charges among themselves. Product markets are predominantly supplied by those who hold significant essential IP—even excluding Apple, RIM and HTC who had no essential IP until after 2006, according to the source used in Exhibit 1. Manufacturers with the largest patent holdings also tend to have the largest shares of the downstream markets for which they need to license-in most IP. Smaller manufacturers with significant IP have negotiating leverage over larger players because the latter need licensing for relatively large shares and revenues in product markets. The remaining manufacturers, without IP, who account for the other 25% of market share, instead pay fees for all IP licensing required. Upstream licensors charge fees to all manufacturers downstream to fund R&D investments. Also consistently with declared IP ownership in Exhibit 1’s source, it is assumed that manufacturers without IP to trade make one third of their out-payments to upstream licensors and the remainder to vertically-integrated players. As an example, the royalty cap modelled is an arbitrary reduction of one third to the aggregate royalty rate (as a percentage of handset prices). Total licensing fees paid, received, and reduced are proportional to the areas of the various coloured blocks on the two diagrams.
The result is that aggregate royalty rate caps save money for all downstream manufacturers at the expense of upstream licensors. Downstream manufacturers with no IP to trade save most significantly. In this model, vertically-integrated companies lose some revenue, but save significantly more in reduced expenses. For every dollar of licensing revenues they lose through any capping, they save $1.50 in licensing out-payments to upstream licensors. Licensing fees to upstream licensors from all manufacturers fall in the same proportion.
Fish too big for the pool
Several voluntary patent pools established in the last decade or so have been quite successful. They have attracted many firms to join as licensees. This collective out-licensing is efficient because the pool administrator can serve as a distribution channel for many licensors and as a one-stop-shop, subject to the pool standard’s limited scope and IP contributed, for licensees. Research reveals that recent pools for audio and video codec standards-essential patents have attracted, in most cases, the majority of the standards-essential patents for those standards, including MPEG-4 with 34% of firms that have applicable patents contributing 89% of the required patents. This research also concludes that while a number of vertically-integrated companies who manufacture products implementing the standards are most inclined to join, many vertically-integrated and upstream essential-IP owners decide to stay out. . Specific concerns include:
- The difficulty of determining how to share pool profits with thousands of patents, uncertainties around essentiality and the relative values among patents;
- Differing business models with upstream licensors and vertically-integrated manufacturers holding major proportions of essential IP;
- Asymmetries in patent ownership among these manufacturers and versus upstream licensors;
- The need to license devices for multiple standards with 2G, 3G, 4G, video, audio and for other technologies outside of the standards; meaning that bilateral deals, which can encompass all of a company’s IP, are always going to be necessary, and are more flexible;
- The need to resolve significant patent litigation with fierce competition between vertically-integrated manufacturers and other end-user product manufacturers without standards-essential IP.
This is mostly achieved through bilateral settlements which likely would be extremely difficult if the companies had agreed to, or been forced into, patent pools.Pooling IP would surrender control of this most strategic asset for several major players; and mandatory pooling would expropriate this valuable private property. For example, it could have limited Nokia’s ability to sue Apple for significant licensing fees in 2009, based upon Nokia’s standards-essential WCDMA patents, and then expediently agree to settle for cash in face of counter-suits and deteriorating Nokia finances with a profit warning most recently. In contrast, the 3G Licensing pool has never sued for patent infringement. While announcing settlement of patent infringement litigation with Apple, Nokia’s CEO, Stephen Elop, stated that Nokia’s cumulative R&D investment during the past two decades was Euro 43 billion ($60 billion). This is largely justified by sales of its own products and by minimising aggregate royalty out-payments, stated to be less than 3% gross to 2007, through bilateral licensing. Fees to be received in the cross-licensing settlement with Apple–now with revenue share close to market leading levels of Nokia and Samsung–were not disclosed. Whereas Google does not manufacture anything, HTC and Samsung are being sued by Apple for infringement, of patents that are not essential to the mobile standards, by their smartphone devices employing Google’s Android operating system. Google made a stalking-horse bid of $900 million for a portfolio of 6,000 patents, including essential IP, from bankrupt Nortel. The patents would have had great defensive value to Google, who makes its money from advertising in search on PCs and phones using its software and services, but has a limited patent portfolio. However, a consortium of Apple, Microsoft, Sony, Research In Motion, Ericsson, and EMC obtained Nortel’s patents for $4.5 billion. The consortium rules are unknown publicly, but presumably the members will be able to use the portfolio defensively in bilateral license negotiations and litigation settlement discussions.
Absent (misguided) regulatory fiat, there is no reason why an LTE pool would become any more significant than the unsubstantial and struggling WCDMA pool. Attempts in the early 2000s by the 3G Patent Platform Partnership (set up by some telecom companies as a voluntary pooling arrangement) to regulate 3G IP fees with collective licensing and a “Maximum Cumulative Royalty Rate” of 5% were unsuccessful. The WCDMA patent pool includes mainly mobile operators and Japanese manufacturers. It covers only around 10% of patents declared by the patent holders to be WCDMA standards-essential. Multimode, multi-media devices (e.g., smartphones, 3G tablets) are incorporating increasing numbers of cellular and other standards. Proposed LTE patent pools have also made little progress over the last couple of years for all of the same difficulties faced by the 3G patent pools.
Manufacturers, including the vertically integrated with significant IP, have self-serving incentives to cap aggregate royalties. Caps would reduce downstream product licensing costs significantly more than they would reduce licensing revenues for the latter. However, these companies tend not to favour patent pools for other reasons. Unfortunately, the significant shortcomings are not recognised by many policy makers who mistakenly see patent pools as a panacea to solve supposed problems with complex patent landscapes. Voluntary patent pools have been beneficial in some cases, but patent pools should never be imposed because this would eliminate significant competition that comes from outside of pools. Mandatory pools with royalty rate caps would be anti-competitive and impede innovation".
Friday, 1 July 2011
Two and a half years ago, IP Finance posted this piece by Itaru Nita on what he called "a financial prescription for neglected diseases". There has been some further development of Itaru's work, so this weblog brings his current thoughts on his continuing work in progress. Itaru writes:
"The International Fund for Innovation: innovation today for innovations tomorrow?
This summer, a crowd of patent opponents and proponents will again be descending on Geneva when international organizations in the city convene a series of meetings to explore the future global legitimacy of patents. The participants will debate a wide variety of increasing concerns, which all turn on one basic issue: do we truly need patents at all?
Although patents are widely believed to boost innovations by protecting them, their obvious drawbacks include the inaccessibility of essential patented products to impoverished nations and unsuitability for unprofitable research into products that are truly needed.
To solve this fundamental puzzle, policymakers are urged to consider an International Fund for Innovation (IFI), this being a substantial and sustainable fund both to finance unimpeded access to indispensable innovations (for example essential medicines in developing nations and renewable energy technologies) and to foster research needed to combat neglected diseases, global warming and other problems.
The IFI would have three financial sources: an international "assurance premium" from patent applicants, a premium from patentees themselves and an allocation from the revenue of patent offices. Regarding the premium, the IFI would impose a nominal fee on patent applications and small levy on patent incomes, mostly royalties and compensation for patent infringement, plus a further allocation from patent granting fees. Although the assurance premium really serves as a kind of green tax on patent applicants and owners, as a Tobin or Pigovian tax on the detrimental effects of patent protection, we prefer "patent assurance premium" to “taxation” in order to emphasise the insurance function of the premium as outlined below.
Unlike other proposed financial solutions, economic downturns would not significantly affect the availability of funds from IFI because the assurance premium is linked to the global patent system. Historical trends have shown that the volume of patent applications and patent income does not drop significantly in times of economic contraction, but remains relatively constant. In addition, the IFI would receive a not inconsiderable annual revenue of almost 10 billion USD if it collected an assurance premium of just 100 USD for every international patent application and 10% of patent incomes worldwide.
A developing country would file with the IFI a request for financial assistance when it intended to produce a patented medicine for its inhabitants, but the government could not afford to pay licensing royalties and was forced to resort to a "compulsory licence", or to agonize as to whether to infringe the patent instead. Compulsory licensing takes place when a government allows for producing a patented product without consent of the patent owner. The IFI would consider the developing country’s request through an international quasi-judicial process. Where the request is granted, that country would be subsidized, allowing its government to pay any licensing royalties and to produce the needed medicine, without the need to resort to a compulsory licence or infringement.
In addition, impoverished nations without the ability to produce medicines would also request financial assistance from the IFI, to purchase a patented medicine directly from its patentee producer by means of IFI's subsidies.
Since the availability of these funds would minimize the likelihood that developing countries would issue compulsory licences or infringe, the assurance premium would serve as insurance against the risk of damage to the patent right, resulting in more precise implementation of an international agreement on patent protection. This function would allow industries to build consensus regarding their burden of paying the extra levy. In real terms, the patent assurance premium would be negligible relative to the entire cost of obtaining a patent, including not only office fees but also professional and translation costs.
It however, remains important to ensure an opportunity for developing nations to issue compulsory licences if they prefer, it rather than approach the IFI, because the Fund is a new option in addition to the flexibilities currently recognized by global patent law.
Further, genuine researchers could submit to the IFI a request for financial assistance where they attempt to develop a new drug for neglected diseases but cannot afford to invest and there is no chance of recouping their investments because those in need of their inventions live mostly in poor countries. After reviewing the request, the IFI would finance the research and development for such diseases, which, in turn, would insure the patent regime against growing global criticism, resulting in industries' increased willingness to pay the premium.
The IFI’s scope would not be limited to medicine but could cover any innovations society needs, where existing patent law provides insufficient economic incentive, typically including green technologies.
Here in Geneva, many leading secretariats and delegates have already shown their great interest in the IFI. With their support, we toil night and day to design elaborate detailed model depicting the IFI’s structure and operation in reality, not merely on paper".
Nortel Announces the Winning Bidder of Its Patent Portfolio for a Purchase Price of US$4.5 Billion
Just a quick announcement about sale of Nortel patents