Germany leaves the Euro?

The idea, crazy as it sounds, makes a lot of sense. The current hope -- in discussion today in Brussels -- is to consider ways for some central European finance minister to exert veto power over national budgets. That sounds to me like a recipe for disaster and ultimately real vicious conflict between European nations. Do we really want to experiment with that? As an alternative, consider a unilateral German exit from the Euro:

A better, bolder and, until now, almost inconceivable solution is for Germany to reintroduce the mark, which would cause the euro to immediately decline in value. Such a devaluation would give troubled economies, especially those of Greece, Italy and Spain, the financial flexibility they need to stabilize themselves.

Although repeated currency devaluations are not the path to prosperity, a weaker euro would give a boost in competitiveness to all members of the monetary union, including France and the Netherlands, which is why they might very well choose to remain in it even if Germany were to gradually leave. A resurgence of manufacturing would also allow the vast unemployment rolls of Spain, Portugal, Greece and other countries to begin to decline. The tremendous loss of human capital and human dignity we are witnessing would ease.

Reintroducing the mark would not solve the debt burdens of southern European countries, but it would give them needed breathing room to restructure their economies, reform labor markets, collect more taxes and reassure investors. The ability of the southern European countries to service their sovereign debt would immediately improve, helping to end the slow-burning debt and banking crises that have engulfed the Continent since 2008.

Read the whole proposal here. Sadly I suspect this is a little too bold and creative to actually be considered seriously. 

"Investor-ready" start-ups: an event today

There's a free event coming up this evening for which, IP Finance understands, there are still some spare tickets -- if you're a tech enterpreneur or service provider.  This may be of some interest to readers, either because they need the services which are show-cased here or because they already provide them and are curious to learn how others do so. Details are as follows:

Making your tech start-up "investor-ready"

Tuesday, 26 June 2012 from 18:30 to 21:00 (GMT)

London, United Kingdom

Event Details

Amoo Venture Capital Advisory presents “Amoo Booster Series”. As part of our commitment to nurturing the tech ecosystem we have set up Amoo Booster Series which is a monthly event with notable speakers from the industry, that are as passionate about startups as we are.

The aim is to deliver practical advice startups can implement right away. This is done in a friendly space with the opportunity to network with other entrepreneurs and investors; we have created a community for like-minded people to communicate, share ideas and explore ways to support each other. 

Hear from a venture capitalist, an angel, an entrepreneur, a patent attorney, a lawyer and an accountant. They will run through how you can make your start-up investment-ready.

Simon Halberstam - Lawyer and partner in the Technology team at law firm Kingsley Napley 

Mark Twum-Ampofo - Accountant and partner who specialises in the Technology sector at accountancy firm Kingston Smith

Patrick Bergel - Entrepreneur and founder of Animal Systems who has developed an amazing new technology for communicating between mobile devices using sound, and who has leveraged his intellectual property to secure funding from Imperial Innovations 

Gerard Chandrahasen - Patent Attorney and partner specialising in software patents at patent attorney firm SC Patents

Ellen van der Broek - Ellen is a director at her own company WH PH Ltd, advising private equity and corporate clients on investments, strategy and fundraising. She has worked both with venture funds as well as startups. Since October 2011 she has been working exclusively as an Advisor to DN Capital. Prior to this, she worked in the Private Equity Secondaries team of Partners Group and has also been an investment banker on private equity transactions, working in the Financial Sponsors team of ABN AMRO. She holds an MBA with distinction from INSEAD.

Sponsored by:

                       

To register, just follow this link.

Intangible assets in Brazil: separate but inseparable?

From the Brazilian law firm Di Blasi, Parente & Associados comes news that the Brazilian tax authorities have issued Conflict Resolution Decision No. 47 regulating the accounting of intangible assets. As the firm's newsletter explains:

In 2008 Brazil finally adopted international accounting standards. For this reason, the Transition Tax Regime (TTR) was instituted by the Brazilian Provisional Measure No. 449 of December 3, 2008, which was converted into Law No. 11.941 of 2009.

The Brazilian Government’s ultimate purpose of applying the TTR is to prevent the new rules causing disturbances in tax calculation.

Recently, the Brazilian Federal Revenue Office has published a guideline on the accounting standards to be applied by companies that are subjected to the TTR, and that entail research and development expenses. According to this guideline, these companies must adopt the previous accounting rules, namely, the national standards in force on December 31, 2007, both for calculating Income Tax as well as for ascertaining the Social Contribution on Net Income.

Thus, even though the international rules provide for separate accounts for intangible assets, trade marks, patents, industrial designs and non-patented technology must be accounted together with their tangible assets, such as machines and products, exactly as was the case under the previous rules.

The TTR will remain valid until a new law governing the tax effects of new accounting methods and criteria in accordance with international rules to achieve a tax harmonization eventually enters into force.

"Good" Imitation and "Bad" Imitation: Tropicalisation and the Risk to IP

One of the most vexing subjects in the area of innovation is the interrelationship between innovation and imitation, and its implications for intellectual property. More particularly, at least since 1986, when David Teece published his classic article,"Profiting from technological innovation: Implications for integration, collaboration, licensing and public policy", the question was, and is, who is more likely capture value from innovation -- the innovator, the imitator, or the downstream providers of so-called "Complementary Assets", such as manufacture, distribution and marketing? Teece focused on intellectual property under the rubric of "Appropriability Regime" and asked this question: is the innovator's appropriability regime strong or weak? If the former, and if the innovator did not need to share a material portion of the value in the complementary assets, it was more likely to reap the lion's share of the benefits.

Teece's analysis came out of a different industrial era, standing, as he was, at the cusp of the digital age. While it is not stated explicitly, his analysis rests on the notion that there are sufficient incentives for the innovator that under the right circumstances, i.e., if his IP is sufficiently robust, he will be likely to capture significant value from his inventions and creations. In such a situation, with ample potential reward for the innovator for creating valuable IP, the imitator serves his classic role, exploiting IP rights by design around in a manner that doesnot infringe existing IP rights, together with successful utilization of the complementary assets necessary to commercialise the development. In such a circumstance, IP is central to the Teece framework, both for the innovator and the imitator.

How different is the role of IP and the imitator in today's world. One need look no further than a article that appeared in the June 2nd issue of The Economist. Entitled "VC Clone home: Venture capital in emerging markets" here, the article describes the phenomenon of "tropicalisation", which is defined as "the practice of backing start-ups that take an established business model and adapt it to an emerging market." The article refers inter alia to Peixe Urbano, described as Brazilian clone of Groupon, Baidu, characterized as "Chinese interpretation of Google", and Trendyol, a Turkish version of Vente-privee.com here, tweaked for the local market. Perhaps the most interesting scalable attempt of imitation in this regard is Rocket Internet here, which reportedly operates a " 'cloning' factory" that apes successful US and European businesses and then seeks to find entrepreneurs to export these clones to the developing world.

One motivation for this phenomenon seems to be the diminishing track record of success for VCs in the developed world. The search for returns is driving them to seek returns further afield. What is interesting is that the focus of these investments seems to be less, indeed far less, in innovation of the kind described by Teece, and more in the imitation of successful business models in the social media and online commerce space. In considering the examples given in the article, one is hard-pressed to find even instance in which breakthrough technology and supporting strong IP rights is the driver of the adapted business model.

In fact, the trade mark and brand of the businesses being imitated may be the most valuable IP asset of those companies and it is the IP asset that is the least likely to be copied. Thus, it may be true, as Eric Archer of Monashees Capital states,"w]ith innovation, you have a global side, but with copycat innovation you have geographical limits." However, change the name of the local copycat and adroitly implement the business model within the requirements of the local market, and the so-described "global side" of innovation, embodied in the company's trade mark and brand, may not be enough.

Perhaps of most concern in the developments described in the article is the nature of the innovation being imitated. In comparison with the innovation contemplated by Teece, these kinds of VC-sponsored activities in the developing world appear IP-lite, resting almost entirely on successful exploitation of complementary assets in the local jurisdiction. Indeed, the closing words of the article should give pause to all those who wrestle with the challenge of engendering innovative IP in the developing world. The article concludes: "It will not be long before emerging markets spawn their own innovations that can be trotted out on a global scale. That would be closer to the spirit of venture capital, which is supposed to ferret out and fund new ideas, not imitations. Until then, however, tropicalisation is set to become an ever more popular strategy. Copy that."

While that sounds uplifting, there is nothing in the article that supports this conclusion. It is equally plausible that troplicalisation will merely beget more tropicalisation. If Teece described the conditions for "good" imitation, the circumstances that surround tropicalisation suggest the opposite: "bad" imitation with little or no prospect for innovation, at least some of which will be supported by strong and robust IP rights.

When an ICT investor litigates a loss

Decided last month by Mr Justice Hamblen in the Commercial Division of the Queens Bench, England and Wales, Brown & others v Innovatorone Plc & others [2012] EWHC 1321 (Comm) is a complex but instructive case on the question of who gets to pay when an innovation-driven project fails.

Brown and the other claimants brought this action against the defendants following the failure of a total of 19 schemes (16 of which were LLPs, the other three being regular partnerships), all of which had been promoted by the issue of an information memorandum which invited investors to become paying partners in a vehicle for the acquisition and exploitation of rights to information and communication technology (ICT).  The defendants were, respectively the managing directors and administrators of the partnerships and schemes, the architect of the schemes, a technology vendor, a firm of solicitors and the partners in that firm. The schemes promoted a tax incentive, gearing, profit incentive and a borrowing ability. The partners successfully obtained the full first year tax relief.  This resulted in substantial payment rebates being made. However, in 2003 the schemes were investigated by the Inland Revenue, which was dissatisfied with the commerciality of the schemes and considered that the technology had not been exploited. The revenue was prepared to settle the matter on the basis that the tax relief would only be available in relation to the capital contribution made by each partner, rather than the grossed up amount of the investment. That offer was accepted by most of the partners -- which meant they had to find funds to repay the revenue.

Brown and his investment-minded colleague argued contended that the schemes were established with a view to defraud as there were no technology rights and the operators had no intention to exploit the technology rights; that fraudulent or negligent misrepresentations were made in the information memorandums and other documents; that their payments of subscription money into the solicitor's client account were subject to a Quistclose -type trust, for their benefit; that the defendants had dishonestly assisted in breaches of trust; that Brown was entitled to recover, under the Financial Services and Markets Act 2000 s.26 or s.30(2), money paid under the agreements; that the defendants owed a duty of care in relation to the promotion of the schemes and that the defendants had breached their fiduciary duty.

After 60 days in court, in a 1,435 paragraph judgment Hamblen J added to the investors' woes by dismissing their action.  In his view:

• There were genuine technology rights in relation to each scheme, and the fact that there had been a failure to carry out due diligence on the technology vendors' business plans and income figures that did not mean that the technologies had no value. They were of real value, which was more than minimal. The technologies had real exploitation prospects and there was a real intention to exploit the rights. The price negotiations for the acquisition of the technology were genuine negotiations and the acquisition price was agreed as part of an arm's length transaction.
  
• There was no actionable misrepresentation of fact, since the defendants' statements on which Brown and the other claimants relied were merely statements of opinion or expectation. In their context they could not be reasonably construed as being anything else.
  
• Before Brown and the other subscribers became partners, their subscription money was subject to a Quistclose trust -- but this trust in their favour came to an end when they became subscribers.
  
• On the facts there had been no dishonesty on the defendants' apart, and no breach of trust.
  
• The schemes were collective investment schemes under s.235(1) of the Financial Services and Markets Act 2000 since they involved  activities and investments that were controlled under that Act -- and the financial promotion restrictions imposed by that Act had been breached.  However, the claimants' monetary claim under ss 26 and 30 of that Act could not be made against anyone other than the LLP.
  
• Several factors militated against the imposition of a duty of care: the schemes were commercial in nature; they were not directed at people of modest means; the claimants would have had advice from their independent financial advisors; and there were no actions for breach of statutory duty under the the Financial Services and Markets Act 2000.
  
• The  claimants' fiduciary duty argument was upside down since it was not the LLP that owed them a fiduciary duty but the partners who owed a fiduciary duty to the LLP. 

In general terms, the morals of this case can be stated quite simply.  When investing in any new technology, it's as important to do one's due diligence on your prospective partners and their business plans as it is to check out the technology in which you propose to invest; ask yourself clearly whether you are relying on statements of fact or on representations of a vaguer nature -- and think twice before seeking to recover your losses through High Court litigation.

What Should Engineers Know About IP?: A Coda

We yesterday posted our observations here about a recent talk given by Dr Kristina Johnson, a prominent figure in the world of engineering, as part of our continuing interest in the narrative that thought-leaders in the world of innovation employ with respect to the role of IP and in particular the role of patents. A reader was kind enough to share with us several additional links in connection with Dr Johnson and this important subject. We are delighted to bring these links (here, here and here) to the attention of our readers. 

We thank our reader for these links and for contributing to the discussion on this important subject.

What Should Engineers Know About IP ?

Those of you who follow me in the blogosphere know that one of my continuing interests is how thought leaders in the entrepreneurship space view the role of IP. I assume that IP practitioners are not involved in IP for its own sake (as intellectually engaging as we may find it), but rather for the services that IP may provide in enabling innovation and creativity. If that is so, the question is whether the practice of IP carries with it a certain dysfunctional tunnel vision, the far end of which yields only a narrow view that fails to take into account the broader context.

One way that I constantly try to measure the potential dysfunctionality of my professional vision is to read or listen to thought leaders in the world of entrepreneurship. While I recognize that not every entrepreneurial idea need involve the kind of innovation that requires IP protection (particularly patent and trade secrets), it is still more likely than not that most successful entrepreneurs are presumably acting in an area that one can expect to attract IP protection. To test this belief, I have become an avid podcast listener of the weekly (during school term) podcast broadcasts offered by the DFJ Entrepreneurial Thought Leaders Seminar offered under the aegis of the Stanford Technology Ventures Program.

Since this lectures series and the related entrepreneurship program are lodged within the world-famous Stanford Engineering program and its cache enables it to attract world-class figures in innovation and entrepreneurship, it has always seemed to me that the narratives set out by these lecturers should be a useful barometer in measuring how they view the role of IP. Accordingly, I was particularly eager to hear the remarks of Dr. Kristina Johnson, one of America's most distinguished engineering personalities here.

Dr Johnson has a breathtaking resume, from Stanford Ph.D. to a university professorship, to scores of registered patents, to Deanship of the Engineering School at Duke University, to Provost at Johns Hopkins University, to a stint as an Under Secretary in the Department of Energy in the Obama administration, to her current involvement in an energy-related start-up. Given her broad engagement in just about every possible aspect of innovative activity, Dr Johnson seems to be an ideal observer about where IP stands in this world.

Listening to her comments, I was struck once again by the pronounced sense of disjunction between her view of IP and that of the professional IP community. In commenting about her own professional trajectory, Dr Johnson mentioned patents only once, and that was in the context of anecdotal description of an early idea of hers (that ultimately was not patented). While she mentioned in passing her numerous registered patents, we are not given any insights into how these inventions were exploited, if it all. While the Bayh-Dole Act here is briefly referred to, we are given no indication whether its enactment affected her inventive activity and/or whether it resulted in increased commercial exploitation of her inventions.

Dr. Johnson's overall narrative was a compelling one, but IP played only a minimal role in the tale. It was the Q&A that brought out her further thoughts about IP. The first question was asked by a member of the audience who identified himself as retired from a well-known industrial (tech?) company of another era. The question was simple: how did she see the role of IP? It would seem that the question derived from the same sense that I had in listening to her comments--something seemed to be missing in her narrative.

Dr Johnson's response was, more or less, to acknowledge trade secrets and patents (in that order as I recall), with the comment that patents served mainly to provide early stage "barrier to entry." No other potential benefits of patents were mentioned. One could claim that had she been given additional time or a heads-up on this question, she might have answered differently. That is possible, but for the record, her response was that the principal purpose of patents was as a barrier to entry. She added words to the effect that, in her view, patents are often overemphasized where it is really the overall know-how of the company and the ability to execute that ultimately determines the company's success. Stated otherwise, patents offer certain tactical benefits but little more.

There is one more aspect to my tale. Stanford is the site of the National Center for Engineering Pathways to Innovation (Epicenter) here, a program funded by the National Science Foundation, whose mission to infuse entrepreneurship and innovation skills into undergraduate engineering programs. During the podcast, Dr Johnson was mentioned as an advisor to the Epicenter. Keeping in mind that the Epicenter has as its goal the inculcation of innovation and entrepreneurship skills in engineering students, here is the question: How does the Epicenter view the role of IP in carrying out its mission? Does Dr Johnson reflect the consensus, or are there other views about the role of IP? If so, what are the views? Given the centrality of Stanford and Silicon Valley to engineering education as well as entrepreneurial activity, the answer to this question will have a material affect on the role of IP among the actors in that world.

Taxation of IP transfers in Lithuania

"Key tax aspects of IP rights transfers", by Edita Ivanauskienė, Antanas Butrimas and Jurgita Randakevičiūtė (LAWIN Vilnius), provides a handy introduction to the niceties of the taxation of intellectual property right transactions in Lithuania. Published on International Law Office (here), this piece outlines the country's basic tax regime and then considers the position of tax-resident individuals, non-resident individuals, taxation of entities, Value-added tax (VAT) and the avoidance of double taxation.

Regarding VAT,

"The transfer of copyright and related rights, industrial property rights, franchise rights or know-how is considered a provision of services and is subject to value added tax at the standard rate of 21%".

It always seems strange to this blogger that an outright transfer of an intellectual property right should be regarded as the provision of a service.

The Pareto Principle and the Commercial World of Smartphone Apps

I will admit: I am Pareto's principal devotee. The basic idea that numerous phenomena can be characterized by the "notion of the vital few" will account for the lion's share of something seems to resonate with my own anecdotal and analytical experience. Often referred to as the "80/20 rule" (such as "80% of one's sales come from 20% of one's customers"), I find myself finding Pareto-like results even when I am not really looking for them.

The eponymous principle derives from an observation made by Vilfredo Pareto that 80% of land in Italy (and other countries) was owned by 20% of the population. However, the name "Pareto principle" was in fact not coined by Pareto himself, but by a fascinating U.S. engineer named Joseph Juran, who story is itself worth retelling. Suffice to say that Juran's contributions to management based on his adaptation of Pareto's findings is an often under- appreciated milestone in the field here.

I would like to use the notion of the Pareto principle to consider a question that was asked on a recent "60 Second Tech" podcast produced by Scientific American magazine: How many people download only free or spend very little (a dollar or so) for smartphone apps? Citing a study by ABI Research here, the podcast reported that 70% of all users of smartphone apps download only free or virtually free apps, This, more or less, suggests a Pareto-like division, whereby only 30% of smartphone users ever pay for any apps that are not free or virtually so.

This result resonates with a finding that I remember hearing about Twitter, whereby only 20%-30% of Twitter users account for the lion's share of Tweets. Once again, Pareto seems to be popping up all over. But the ABI Research-inspired podcast reported additional data regarding the app-buying habits of smartphone users. Having regard to the release that accompanied the report, it turns out that only 3% of app users account for nearly 20% of all expenditures for apps, where the average outlay by users who have at least once paid for an app (including this small number of hard-core users) is approximately $14.00 per month. Pushing even further on these results, it turns out that the median monthly outlay for app users is only approximately $7.50, approximately 50% less than the average monthly expenditures of $14.00.

Consistent with a Pareto-like view of the world, there is certainly nothing Gaussian about the discrepancy between the mean and median amount of the monthly outlay. In a word, app developers who hope to cash in on their creative efforts are relying a very thin layer of app users. Moreover, there appears to be a clear distinction in the type of apps that will attract "high-roller" users. Most of these apps are what is called "a utility app", most frequently for business purposes. A second category of apps that attract paying customers are "iOS games monetized through strings of in-app purchases." At the other end, apps regarding sports and the like can expect to have little or no commercial traction.

 The ABI Research report suggested two ways that app developers can somehow improve the commercial odds against enjoying even a semblance of commercial success:

 1. Try to make sure that your app either supports or is supported by a web component. 

2. Try to find a way to convince your customer that the app merits a long-term (by app standards) engagement by them. 

One way to do so is by the time-honoured practice of first giving the app away for free with the hope that you will develop a small yet highly devoted band of followers who will be willing to lay out monthly sums to ensure their continued access to the app and its updates or upgrades. I have to admit--this is all very depressing. My son is nearing the completion of a Computer Science degree and I wonder what I would advise him, should he announce one day that he has decided to work on developing smart phone apps. If not quite "blood, sweat and tears", should I counsel him on the dismal likelihood of success? Or should I simply wish him the best on his journey and assure him that he has always has a roof over his head, if all else fails?

More generally, I wonder whether the business model described above is sustainable in the longer run, whereby the promise of substantial revenues for the very few, together with the more broadly based challenge to develop an app that will be used by others, irrespective of whether such an app generates revenues, will continue.

More on the Pareto principle here.

Intellectual? Can you manage IP assets? An exciting vacancy!

OUP: a great opening
for the right candidate

Oxford University Press has a newly-created post for a good and suitably-qualified soul who will hold responsibility for setting up, managing and administering the acquisition and licensing of intellectual property rights within OUP's English Language Teaching (ELT) Division -- described as 

"a global leader in the provision of multimedia English language teaching and learning materials. Operating in over 100 countries, it reaches millions of teachers and students each year ..."

The job title is Intellectual Asset Manager.  For the record, since we're talking about a body which forms part of the great and perplexingly complex legal octopus which is Oxford University, the adjective "intellectual" applies to "asset" rather than "manager".

A "broad understanding of copyright law, including experience of publishing agreements" is among the items listed in the job specification -- but there's nothing to say that a legal qualification is required, so this might be a perfect position for a gifted and enthusiastic amateur.

For full details just click here.  Closing date for applications is 3 June 2012.

The Folly of Picking Winners in ICT

The IP Finance weblog welcomes the latest guest post from Keith Mallinson (WiseHarbor) on a subject which he has really made his own: the subtle interplay of sometimes competing and sometimes congruent private and public interest in the shaping of the dynamics of the market for the licensing of technology in the information, communication and telecom sector.  This post touches on a topic that has been the subject of all-too-little discussion in IP circles.  IP rights help to establish the existence of winners in the marketplace -- but who gets to decide who those winners should be?

The Folly of Picking Winners in ICT

Government attempts to favour and promote certain business models, companies and technologies are justifiably criticised. The UK Cabinet Office’s proposed policy to mandate the use of only pre-selected, royalty-free standards in public ICT procurement is similarly flawed. This will limit choice by foreclosing many popular open standards, numerous products which adhere to them and companies who depend on upstream licensing revenues. The Open Standards Board responsible for implementing this policy will face significant governance challenges in ensuring impartially in standards selections. In contrast, free-market processes allowing competition among a much wider array of open standards and software licensing maximises customer choice across many different government departments, fosters innovation, reduces lifecycle costs and enables obsolete or poorly performing standards to be superseded.

Mandating particular standards and discriminating against or excluding royalty-based business models in government procurement constitutes hazardous industrial policy for the UK. The government is the largest UK ICT spender on with annual expenditures of approximately £18 billion in recent years. Direct and likely indirect consequences of this large purchaser on the ICT marketplace, such as explicitly or implicitly obliging citizens, as well as government suppliers of other goods and services, to adopt the same standards, would be significant with this policy.

Dirigisme versus facilitation

Governments have a history of making bad decisions in championing particular companies, technologies and business models. For example, the Inmos semiconductor company received £211 million from the UK government in the 1970s and 1980s with its strategy to produce commodity D-RAMs and develop its “transputer”, but the company foundered, did not become profitable after many years and was sold to SGS-Thomson in 1989. The UK is effectively nonexistent in semiconductor manufacturing today. The UK’s “fabless” semiconductor companies such as ARM, Picochip (acquired by Mindspeed Technologies in 2012) and Icera (acquired by NVIDIA in 2011) rely on partners including foreign “foundries” to fabricate their designs. 

State monopoly France Telecom forced adoption of the Minitel videotext online service in the 1980s by withdrawing phone books and spending billions giving away the terminals to citizens. The associated technological standards and equipment manufacturers made minimal headway with Minitel technologies abroad and were eclipsed by the advance of the Internet in the 1990s. Minitel provided consumers with their first means of online access. However, views on long-term benefits to French consumers are mixed. Resistance to replace the entrenched home-grown standard caused France to be a laggard in Internet adoption.

In contrast, supporting entire industry sectors where a nation has strategic strength is more justifiable and attracts widespread support from various commentators. For example, clustering of complementary and competitive companies can be beneficial. In these circumstances, market forces spur competitive behaviour, including some Schumpeterian “creative destruction”, which helps eliminate the sclerosis and risks that come with monoculture. For example, Silicon Valley in California provides a fertile technical and commercial environment in which various business models and many ICT companies, standards and products have flourished while others have failed.

Better for less

A key stated objective with the proposed Cabinet Office policy is to level the “playing field” for open source and proprietary software. It is, therefore, perverse that standards based on Fair Reasonable and Non-Discriminatory (FRAND) licensing and requiring patent fees should be the principle target for elimination with this policy. The policy will automatically also exclude many proprietary offerings that are based on those standards and which cannot practically be adapted to other, royalty-free, standards. In many cases, such standards are widely implemented by many suppliers and are used by the vast majority of business customers and consumers.

The cabinet office seeks to mandate specific royalty-free standards to achieve various objectives including cost reduction and avoiding vendor lock-in, as well as making ICT solutions fully interoperable. However, a report entitled Better for Less, published in 2010 by Liam Maxwell, now Deputy Government CIO and the proposed policy’s champion, identifies that most UK government ICT spending is with systems integration companies including HP/EDS, Fujitsu Services, Capgemini and IBM. The Government's over-reliance on large contractors for its IT needs combined with a lack of in-house skills is also a "recipe for rip-offs" according to a report by the Public Administration Select Committee (PASC) in July 2011.These suppliers are typically deeply embedded with long-term contracts that government finds difficult to unravel.

Software represents only a relatively small playing field in comparison to others in ICT spending. According to Forrester Research figures, market segments where open source software competes or combines with proprietary software products represent just 12.4% of $2.5 trillion total global business and government ICT expenditures including operating system software (1.0%), non-custom-built applications (6.7%) and middleware (4.7%). In comparison, IT services (11.6%) and outsourcing (9.8%) combined represent 21.5% of spending. Computer equipment represents 13.9%. The $2.5 trillion total appears to exclude very significant costs for internal staffing.

Software licensing costs are included even in modestly-priced PCs. The PASC report also indicated it was “ridiculous that some departments spend an average of £3,500 on a desktop PC”. A 2011 Cabinet Office press release stated it would “end poor value contracts such as those where Government departments and agencies paid between £350 and £2,000 for the same laptop”. The response to a government procurement freedom of information request on this matter by fullfact.org shows that while these prices actually represent totally different PC specifications, the proprietary operating system and office document software is identical in each case, with differences relating to microprocessors, displays, wireless modems and functionality such as fingerprint recognition accounting for the very large pricing disparity.

Uncertain scope, invalid distinctions

The proposed policy states that standards selection will be limited to software interoperability, data and document formats. The scope of these terms is unclear. And, in the next few years it will become even more difficult meaningfully to separate standardisation in these from other domains. The consultation’s terms of reference make the invalid assumption that software is distinct from hardware and that telecommunication is distinct from computing. Evidence weighs against these arguments with increasing technological convergence and other changes in ICT. Smartphones and tablets are becoming the dominant computing platforms in our personal lives and at work. Similarly, PCs have overtaken mainframe computers and revolutionised ICT usage since the 1980s. Communications is intrinsic to these new mobile devices and is increasingly integrated with most desktop PCs including web, and cloud-based usage where demarcations between software, hardware and service are submerged.

Video is becoming most prevalent. According to long-standing Cisco CEO, John Chambers, in a recent Bloomberg Business Week article, “Every device, five years from now, will be video. That’s how you’ll communicate with your kids, with work.” Switching video standard is nothing like the peripheral task of simply replacing or adapting the mains plug on a TV set. Interoperability standards for video compression and encoding are highly complex algorithms that are deeply and extensively embedded in the workings of core hardware and software. Around one third of Internet traffic is streaming video and mobile video traffic already exceeds 50%.Virtually all of that conforms to FRAND-based standards requiring patent licensing, including AVC/H.264 (MPEG 4 Part 10) with most widespread adoption.

The customer is always right

Standards requirements change with technological innovations and shifting user needs. It is very difficult for any centralized government administration to anticipate or react with the dynamics of ICT supply and demand. Competition among standards is highly beneficial. Market forces precipitate occasional revolutionary changes with new standards displacing old standards (e.g. HTML substitutes for videotext standards such as that used by Minitel) and continuous, incremental improvements to existing standards (e.g., HTML5 replaces previous versions of HTML). Changes in user preference and demand can be difficult to predict. For example, within a few years of the introduction of Apple’s iOS-based iPhone in 2007 and Google’s Android in 2008, former smartphone market leaders Nokia and RIM, each with its own operating system software, were completely up-ended. The highly innovative capabilities with the new software platforms and devices have succeeded because they are very different to and much better than what they have replaced.

Different government departments have diverse needs. Whereas interoperability among UK government departments is important, so is optimising interoperability and access by end users, commercial partners and international organisations. Defence requirements can preclude the most widespread propagation of interoperability and encryption standards. Maximising functionality, security and interoperability for patient records among health authorities will be compromised by imposing standards that are chosen to accommodate requirements in education.

From a user’s perspective, functionality and interoperability with other users trumps supply-side considerations including the number of prospective ICT suppliers and lowest price.

Upstream savings, downstream costs

While seeking to eliminate licensing fees, open source software and royalty-free standards do not ensure lower overall costs. On the contrary, there is significant evidence that open source is no cheaper than proprietary solutions, including total ICT lifecycle costs with project implementation and support. In many cases, total costs may also be lower with technical efficiencies and large economies of scale that arise from the implementation of popular royalty-charging standards. It is practically impossible to create some high-performance ICT standards without infringing any patents for which royalties might be demanded.

Patent fees on popular FRAND-based standards are typically modest. Patent pool administrator MPEG LA licenses 2,339 patents it deems essential to H.264 from 29 licensors to 1,112 licensees for a maximum per unit rate of $0.20. This covers the vast majority of patents declared as essential to the standard. With around 6 billion mobile phones in service worldwide, aggregate royalties are low enough for GSM phones to be sold at price points down to less than $20. However, these fees significantly enable technology companies with upstream business models. They also allow vertically-integrated players to recoup some of their development costs from companies with downstream business models who make products but do not invest in developing the standards-based technologies. Eliminating the possibility of royalties merely forecloses upstream business models in favour of the downstream businesses, such as those that dominate government ICT spending, including hardware manufacturing, systems integration, technical support and outsourcing.

Open and competitive ICT markets allow the widest range of business models and licensing practices, including royalty free standards and open source software. There are many examples of open source software running on FRAND-based standards requiring royalty fees. For example, there are various proprietary and open source software codec implementations available for the H.264 video standard. It would be nonsense to bar this standard in favour of another standard that has only tiny adoption (the most fundamental barrier to interoperability among users), inferior or unproven performance including technical compliance and interoperability among implementations. And, in the case of video, for example, it would most likely infringe some of the very same patents used by the successful standard it would be replacing. So there is a significant possibility that patent fees would be required despite wanting to wish them away. Developing a high-quality video codec standard is a formidable task drawing upon lots of intellectual property. Designing around the best technologies to avoid royalty bearing technologies will result in inferior standards and implementations.

There is generally no conflict between open source licensing and paying patent royalties to third parties. In certain cases where there is conflict, this is the problem of the licensors’ making. The most stringent open source licenses; such as GNU GPLv3—in which “patents cannot be used to render the program non-free”—is seldom used because of such conflicts. In cases where licensing prohibits patent fees, the only legal solution is for such software to be written to ensure it does not infringe any IP that has not also been specifically declared royalty free by its owner.

Governance with selector selection

The Open Standards Board responsible for implementing the policy will face significant governance challenges in ensuring impartiality in its members and the standards selection processes they oversee. It will be difficult to recruit board members who have the required competence in ICT standards, and who as individuals, employees, or academics, are completely free of any interests in the outcome of any standards selections. Members will be affected by their other interests in specific companies, standards groups and business models.

International harmonisation and liberalisation

The European Commission’s approved guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union (TFEU) for horizontal co-operation agreements recognise the importance and value of standardization agreements.

“Standards which establish technical interoperability and compatibility often encourage competition on the merits between technologies from different companies and help prevent lock-in to one particular supplier.”

These guidelines lay out a comprehensive approach for conformity of standardisation agreements with Article 101 TFEU, creating a “safe harbour” while affording standard-setting organisations significant autonomy in setting policies for disclosure of IP and its licensing terms. FRAND licensing, with and without payment of royalties, is explicitly recognised. Licensing policies of many international ICT standards-setting organisations including IEEE, ETSI, ITU-T, CEN/CENELEC are consistent with these guidelines and the charging of patent fees on their standards. It would be a travesty to exclude their standards from government usage in the UK, even if this was only on the basis of attempting to do so for what the Cabinet Office delineates as software interoperability, data and document formats.

John Lanchester on Marx

I know very little about Karl Marx, but this beautiful essay by John Lanchester convinces me that his analysis of capitalist economics was indeed profound to the core, right, wrong, sometimes short-sighted, but penetrating and still relevant to our situation today. Very much worth 20 minutes of your time:

Consider these passages from The Communist Manifesto, which Marx wrote with Engels in 1848, after being kicked out of both France and Germany for his political writings:

Capitalism has subjected the country to the rule of the towns. It has created enormous cities. Capitalism has agglomerated population, centralised means of production, and has concentrated property in a few hands.

Capitalism has left remaining no other nexus between man and man than naked self-interest, than callous ‘cash payment’.

Capitalism has been the first to show what man’s activity can bring about. It has accomplished wonders far surpassing Egyptian pyramids, Roman aqueducts and Gothic cathedrals; it has conducted expeditions that put in the shade all former Exoduses of nations and crusades. Capitalism has created more massive and more colossal productive forces than have all preceding generations together.

Capitalism cannot exist without constantly revolutionising the instruments of production, and thereby the means of production, and with them the whole relations of society. Constant revolutionising of production, uninterrupted disturbance of all social conditions, everlasting uncertainty and agitation distinguish the capitalist epoch from all earlier ones. All old-established national industries have been destroyed or are daily being destroyed.

In place of the old wants, satisfied by the productions of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes.

Commercial crises put on trial, each time more threateningly, the existence of the entire capitalist society. In these crises a great part not only of the existing products, but also of the previously created productive forces, are periodically destroyed.

It’s hard not to conclude from these selected sentences that Marx was extraordinarily prescient. He really did have the most astonishing insight into the nature and trajectory and direction of capitalism. Three aspects which particularly stand out here are the tribute he pays to the productive capacity of capitalism, which far exceeds that of any other political-economic system we’ve ever seen; the remaking of social order which accompanies that; and capitalism’s inherent tendency for crisis, for cycles of boom and bust.

Read it all here.

IP in the economy: how many jobs does it support?

The United States Patent and Trademark Office recently issued a report, Intellectual Property and the U.S. Economy: Industries in Focus, by Peggy Garvin. According to the press release which accompanied its launch, the report:

"... finds that intellectual property (IP)-intensive industries support at least 40 million jobs and contribute more than $5 trillion dollars to, or 34.8 percent of, U.S. gross domestic product (GDP). 

While IP is used in virtually every segment of the U.S. economy, the report identifies the 75 industries that use patent, copyright, or trademark protections most extensively. These “IP-intensive industries” are the source – directly or indirectly – of 40 million jobs. That’s more than a quarter of all the jobs in this country. Some of the most IP-intensive industries include: Computer and peripheral equipment, audio and video equipment manufacturing, newspaper and book publishers, Pharmaceutical and medicines, Semiconductor and other electronic components, and the Medical equipment space".

I always have some reservations about exercises, since the are always going to be problems in measurement.  In the first place, if IP is construed in wide enough terms, there's scarcely a business of any size that isn't supported by it. Lists of customers and suppliers, licensed software, business and trading names are pretty well ubiquitous. There's also the question of causation: how many of the jobs in question are specifically related to the existence of IP, how many to the provision of a service or the supply of goods that would have generated employment even if it had been generic and devoid of IP protection?

You can access the full (62-page) report here.

Thanks are due to Chris Torrero for the link.

Technology Markets, Fact and Fiction

"The Evolution of Technology Markets: Separating Fact from Fiction" is a piece by Intan Hamdan-Livramento -- an Economic Officer, Economics and Statistics Division, WIPO -- that has just been published online in the current issue of the WIPO Magazine. You can read it in full here.

Figure 1: The potential to license out patents is far from exhausted

Share of patents licensed out as a percentage of total patents
owned by companies in selected high-income countries, 2003-2005

Based on the findings of a World Intellectual Property Report, The Changing Face of Innovation, which was published in November 2011, this article seeks to test the proposition that open innovation – where companies rely less on in-house research and development and more on external sources – is often held up as a major change in the innovation landscape. The author concludes:

"In response to these challenges, a range of new intermediaries is emerging to facilitate technology transactions. These include IP clearinghouses, exchanges, auctions and brokerages. Such new commercial entities provide a range of services including IP management support, IP trading platforms, IP portfolio building and licensing and frameworks for patent sharing, sometimes referred to as defensive patent aggregation. 

Limited analysis is available on the size and scope of the actual transactions taking place via these intermediaries. There are indications however, that activity linked to patent auctions is beginning, albeit from low initial levels. Again, more analysis is required to determine the extent to which these new collaborative intermediaries are enabling open innovation".

Physics proof of innocence

In the category of unimportant but highly amusing, I think many will enjoy this very short paper written by a physicist in California. It was apparently offered, successfully, as proof of his innocence in a traffic case in which he was accused of running a red light. Based on three simple and plausible assumptions, he demonstrates that the perceiving officer must have been deceived. As the author describes the work:

A way to fight your traffic tickets. The paper was awarded a special prize of $400 that the author did not have to pay to the state of California.

Personal property securities and IP in Australia: a new article

"The Personal Property Securities Act and IP: a simpler way?" is the title of an article by the Allens Arthur Robinson triumvirate of Tim Golder, Tom Reid and Thomas Middleton. This article has just gone live on the website of the Journal of Intellectual Property Law and Practice (JIPLP), where it may be accessed by subscribers or rented for a limited time by non-subscribers. According to the abstract:

"Australia's new Personal Property Securities Act came into operation on 30 January 2012. It regulates security interests in nearly all kinds of personal property, including IP, and contains rules governing priority between competing security interests. The Act expands the traditional concept of a security interest to include interests such as those arising under retention of title clauses.

The Act has replaced a range of registers of personal property security interests with a new, online Personal Property Securities Register, or PPSR, which will serve as an authoritative record for priority purposes. New security interests must be registered on the PPSR if the secured party is to have priority over holders of security interests in the same property, although there is a 24-month transitional period during which unregistered pre-existing security interests will remain protected.

IP practitioners should be aware of practical issues that may arise when registering or searching for security interests in unregistered IP, such as copyright. Non-Australian practitioners will also need to be mindful of the potential for the Act to apply to transactions involving Australian registered IP, even where the owner of the IP is not Australian".

The IP Finance blog has been monitoring this topic since it was first mooted back in 2008 (see earlier posts here, here and here).

"Boulevard of Broken Dreams": Late But Not Forgotten

A book review is a tricky matter. Being an author myself, I am never quite how sure what my role is as a reviewer. That is particularly so when the book that I am reviewing does not leave me with a favourable impression. To write a lukewarm review and potentially damage a fellow author's likelihood of success, or simply to decline to write a review in such circumstances. I am not sure of the correct answer.

Another circumstance for declining to review a book is the feeling that I am not really the right person for the job. That is the sense that I had when I received the book, Boulevard of Broken Dreams (Princeton University Press, here) by Professor Josh Lerner of the Harvard Business School. Lerner is that rare blend of world-class thinker with hands-on experience who has made major contributions to the way that we think about innovation and entrepreneurship. At the time that I received a copy--18 months ago, I did not think that I could do justice to the book. And so I demurred, as the book lay on my bookshelf, unread and unattended. Over the ensuing 18 months or so, however, I have found myself more and more drawn to the subject of Lerner's book, in practice, writing and teaching. Eventually I read the book itself from cover to cover and later relied on portions of the book in preparing a talk. I suddenly realized that I had been engaged by the book at multiple levels. I am now ready to write a review.

Lerner's book is really two books in one, each about 85 pages in length. The first, entitled "Can Bureaucrats Help Entrepreneurs?" is what Lerner calls the "39,000 foot" look at the public role of entrepreneurship and venture capital. The second part drills down a much more granular and local view of the subject. Three chapter headings are particularly telling: "How Governments Go Wrong, Bad Design" (chapter 6), How Governments Go Wrong, Bad Implementation" (chapter 7) and "The Special Challenges of Sovereign Funds" (chapter 8).

Despite the doom and gloom of these titles, his discussion reveals a much more mixed bag and two countries of particular interest to me--Singapore and Israel-- serve as positive (though not perfect by any means) models of the potential for government involvement in entrepreneurship. It is these latter chapter from which I drew insight and inspiration in preparing my own public talk.

So what do I make of the Lerner book? First and foremost, I could not shake the impression that each of these two parts should have been the subject of a separate book. Short of that, I would have preferred if Lerner had expanded the second part of the book and provide further discussion of developments on the ground. I relished his discussions in this regard and I had only one complaint when I came to the end of chapter 8--it is such a pity that there is not more of it. Indeed, I cannot say that the first part aided much in my understanding of Lerner's elegant and edifying exposition of the granularity of the intersection between government involvement and entrepreneurship.

Perhaps another of saying this is that I remain a skeptic about the extent to which one can draw more generalizable lessons from the examples that Lerner describes. Lerner is no deductionist, and he does not impose a top-down view of the subject, even in the first part of the book. However, even inductive conclusions from these latter chapters should be be treated with caution. It is true that Lerner addresses "Lessons and Pitfalls" in his final chapter, but I am not sure that his descriptions warrant these conclusions. There is nothing surprising here--the subject matter that Lerner addresses is inherently "messy" for any analytical treatment. In that connection, I recall the observation of the March 10, 2012 issue of The Economist in its concluding words of obituary in memory of the great Harvard social scientist James Q. Wilson:

"Problems remained, however. None was more thorny, for him, than the qualifying of evidence. Many of the social problems he pondered seemed to boil down to culture and ways of thinking. for which the data were ungathered and ungatherable. As a scientist, political or social, he needed to count and collate things to find the answers to his questions. But nothing that was really important about human beings, he [James Q. Wilson--njw] once said. could be measured in that fashion." 

Wilson may have been a bit too pessimistic about our ability to reach durable social truths about ourselves, including the world of entrepreneurship and innovation. That said, better for the reader to consider the chapters in part two of the book in depth and to draw his own conclusions, based on the reader's own experiences. This in my view is the special contribution of the Lerner book and why it is worthy of reading, more than once.

Engaging social entrepreneurship in Africa

Making money is essential and can also be fun. However, it is rarely satisfying simply for the sake of it. Making a difference, creating social change for the better is extremely rewarding and fun, but not essential to live - one has to first eat or support a family. One of the best aspects of working in Africa is that there is an abundance of opportunity to do both; make a difference and make money. Indeed firms like Discovery are so good at it as to be revolutionary. This article explains the rise of the social entrepreneur and how and why they are being "leveraged" to do business in Africa.

Structuring IP, specifically its ownership and use, in the types of business relationships envisaged by the article is not only extremely important but also requires creative thought that extends beyond typical licensing models for trade marks, copyright, patents and know-how. From an awareness of how to protect a trade mark from the damaging effects of genericism (so common to new technologies) to using and protecting IP in open source innovation environments, an understanding of IP and how it can help is not only crucial to making the model work, but a vital part of the ensuring that social change is permanent, encouraged and rewarding, in its wider sense, for both stakeholders.

The investor's role in ensuring that a fair deal is reached when "leveraging" the entrepreneur will assist in sustaining the model. Not only that, it will assist in shifting a common perception of IP in Africa as a tool of Western exploitation to a useful means of creating and enhancing value.

The USPTO issued a press release this week on what looks to be an excellent tool for increasing and teaching about IP Awareness. You can read more about it over at the Intellogist blog here.

This post has been adapted from yesterday's post by Darren on Afro-IP.

Forget Mount Everest: Try Overcoming This Patent Cliff

One of the most crucial IP-related stories to be played out over the next few years is the manner in which Pharma deals with the impending patent cliff at the edge of its patent portfolio. Simply put, with a significant number of blockbuster drugs set to come off patent protection over the next few years (if they have not already done so), and the relative paucity of a new generation of patents to support a further generation of patent-protected blockbuster products, the question is how the industry will cope with this looming threat to its current business model.

Against this backdrop, collaboration is all the rage. The most recent example of such coping behaviour, as reported by Reuters, was announced last week, whereby Amgen and AstraZeneca agreed jointly to develop and sell five new biotech products that are in various stages of development at Amgen, here. Under the agreement, Amgen, the world's largest biotech company, will receive an upfront payment of $50 million. The companies will share then share both costs and revenue for drugs in several disease categories--autoimmune, inflammatory and respiratory ailments.

There is almost a textbook-like quality to the rationale offered for the deal as described in the Reuters article.

1. "The collaboration will provide Amgen with additional resources to help advance its product portfolio and give Astra access to new medicines at a time when its own pipeline is relatively barren and it is facing competition from cheap generic versions of its big-selling antipsychotic drug Seroquel". Stated otherwise, while Amgen is hardly a small actor in the biotech space, its strength still resides in its R&D capabilities, while AstraZeneca seems almost prototypical in its need to obtain new products and technology that it can then leverage at the marketing, distribution and sales levels.  

2. " 'We have a lot of things that we want to move forward and there are financial constraints everywhere with how much you can do," Joe Miletich, Amgen's senior vice president for research and development, said in a telephone interview. ... We still have many more things that we're still moving on our own, and this actually will help free some resources so we can continue to innovate in bringing some of the programs in our earlier pipeline along in a way that might not have been possible if we were funding these all on our own,' Miletich said." Stated otherwise, while Amgen may be the proverbial 800 pound gorilla in the biotech space, even 800 pounds is not enough to support the full complement of skills and resources needed both to develop and bring to market new drugs.

So is this as close to a "win-win" collaborative arrangement as one can hope for in the inherently high risk world of drug development, whereby each party to the agreement brings its particular competency to bear? Or is this yet another example of "me-tooism" in an industry desperate to find workable models in the face of the looming patent cliff and the relentless challenge posed by generic companies to the existing product mix?

Seer-like skills are beyond my pay scale, but others seem less daunted. Particularly telling are the words of Geoffrey Porges, a biotech analyst at Sanford Bernstein. Thus Porges makes the following acerbic observations:

1. " 'It's hard to see what AstraZeneca brings to the table other than cash and the ability for Amgen to maintain their share buybacks and dividends,' Porges said, conceding that Astra does provide some global commercial reach that Amgen lacks."  

2. " 'The fact that Amgen has to partner yet another one of their strategic initiatives isn't really going to fill investors with very much confidence,' said Porges". 

 But the problem of investor confidence is not limited to the Amgen side of the equation. The article reports that AstraZeneca has notably failed in developing experimental medicines for depression, ovarian cancer and diabetes. If the collaboration is meant to allay such investor anxiety, then the critical comments from an analyst such as Porges, affiliated with a prominent financial company, augurs poorly in that regard, at least for the short term. The more troubling question is whether, if Porges is right, there is any promising model that offers a reasonable of enabling Pharma to successfully deal with its patent cliff problem. The forthcoming Facebook IPO may be the hottest discussion topic in the high tech world, but something tells me that the resolution, or lack thereof, of Pharma's patent cliff problem will have greater long term consequences for both business and societal well-being. Media -- take note.

Breakthrough IP

A European patent belonging to AIM-listed Ceres Power has been opposed.  According to Espacenet, the patent in question is the earliest of Ceres’ filings, claiming priority from an application initially filed by Imperial College London.

The risk of opposition was indirectly acknowledged in Ceres’ 2011 Annual Report, which stated that “there is always a degree of uncertainty over the ability to register certain IP rights.  IP insurance provides additional protection for agreement, pursuit and defence of IP terms and rights”.

Perhaps surprisingly given Ceres’ focus on developing fuel cell technology for use in small scale combined heat and power products for the residential sector and energy security applications, the opposition comes from the German Centre for Air- and Space-Travel (DLR).  DLR’s website indicates that they are using fuel cell technology to supply an electric motor to drive an aircraft during taxiing.

According to an article entitled "Breakthrough IP" in the UK IPO’s IP Insight newsletter, Ceres has from the start focused on applications for its fuel cell in the home.  The 2011 Annual Report also sets out a strategy of co-development and/or partnership which “enables the Group to maintain control of key intellectual property”.  It follows that the impact of the opposition - should it be successful – on the company’s value may be low.

Still here everyone...

Sorry I haven't managed to post anything now for quite some time. All the result of lots of travel to various scientific meetings -- including one fascinating event on non-equilibrium economics -- and a MAD effort to get my book done on time. Deadline is effectively NOW!!!!!

So I haven't been able to afford any time to blog. But I will be posting more soon. And I have Bloomberg pieces appearing once a month (with one due out now in the next couple of days).

Meanwhile, Satajit Das has an excellent deconstruction of a recent article in The Economist that could (may?) have been written by the financial industry itself, arguing why financial innovation is indeed such a wonderful thing, making the world more prosperous, stable, etc (have you heard that before?).

Patent trolls aren’t all they are cracked up to be

IP Finance is pleased to welcome back Keith Mallinson, whose guest posts on patents, standards and FRAND licensing in the telecom sector have been read with great appreciation.  This piece takes a look at the realities of licensing through the prism of Judge Randall Rader's "trolls and grasshoppers" analysis. Keith ends by calling for patience while existing licensing practices under the current law work things out.

"Patent trolls aren’t all they are cracked up to be 

There is a lot of pending patent litigation in mobile communications with 3G and smartphone technologies. This includes standard-essential and other patents, practicing entities that produce products and non-practising entities (NPEs) who do not. Numerous suits and countersuits in several nations between Apple and Android device producers Samsung and Motorola Mobility are particularly prominent. In addition, for example, NPE IPCom acquired a portfolio of mobile phone technology patents from defunct mobile phone manufacturer Bosch; and has vigorously pursued HTC, Nokia and others for royalties.

Smartphone ecosystem participants are jockeying for position in a new order with a rapidly changing and expanding ecosystem. This indicates an industry in rude health, not malaise. Following lacklustre mobile phone market developments beyond voice and text until the mid 2000s, the smartphone revolution began in earnest with the introduction of Apple’s iPhone in 2007. Previous smartphone market leaders Nokia and RIM have been completely up-ended by the rise and new leadership from Apple and Google’s Android including its many licensees. Meanwhile, this IP-rich industry is flourishing: innovation continues, customer choice is increasing and sales are booming for smartphones and other smart devices such as tablets. Smartphones and tablets are becoming the primary means of Internet connectivity with applications, services and usage levels that were unthinkable just a few years ago.  

Yet there are interventionist moves afoot to prevent allegedly harmful behaviour by patentees, particularly with respect to enforcing their rights in standard-essential patents (SEPs). In addition to interested parties and commentators, European and US competition authorities are also weighing-in publicly on this matter. Knee-jerk reactions by the latter that would overturn long-standing legal rights and remedies would be a grave mistake. The patent system including licensing of (F)RAND-based SEPs has worked extremely well. There is no reason to presume that current levels of smartphone IP litigation are more than a transient phenomenon, or that licensing offers prior to consummated agreements are anything abnormal in the cut-and-thrust of licensing negotiations that typically result in concessions, compromises and cross-licensing. There is no evidence of consumer harm--suspension of sales through injunctions has been minimal--or that outcomes, following the machinations of negotiation, litigation and in some cases commercial court rulings will be unfair, unreasonable or discriminatory. 

Trolls and grasshoppers 

NPEs that are solely in the business of asserting patents, typically acquired from others, are politely referred to as Patent Assertion Entities (PAEs) and disparaging as patent trolls when demands are regarded excessive and unreasonable. However, the latter are somewhat like the fantasy creatures after which they are named: they cause a lot of commotion and scare some folk, but tend not to receive what they demand and ultimately get their comeuppance. The troll in the Billy Goats Gruff tale hid under a bridge to ambush the goats and threaten to “gobble them up” as they tried to cross the stream. However, the troll met his match with the largest of the three goats who threw the troll into the stream out of harm’s way and never to be seen again.

Remarks by Court of Appeals Chief Judge Randall R. Rader in a conference speech last fall provided an astute perspective on extreme behaviours and outcomes in patent cases including trolls and their opposites the “grasshoppers”. 

“Of course, before we can control trolls and grasshoppers, we have to know who they are. And again, OF COURSE, that is the difficulty! Even some Supreme Court justices have referred to the non-practicing entity, the proverbial NPE. We also all understand that the NPE designation sweeps in some unintended “culprits” like universities and research clinics and can also extend to almost every corporation and business because they practice only a fraction of their patent portfolio. For that reason, I have always preferred an alternative definition of a “troll,” namely, any party that attempts to enforce a patent far beyond its actual value or contribution to the prior art.

Every “troll” discussion, however, needs a note of balance. Just as trolls litter the patent system with marginally meritorious lawsuits, so the system also suffers from the IP “grasshopper.” The IP grasshopper is the entity that is quick to steal the “inventor-ant’s” work and research investment because he did no work himself and the winter of competition approaches. We can recognize the grasshopper because he refuses to pay any license fee until his legs and claws are held to the proverbial litigation fire. Once again, a grasshopper is hard to define, but I can venture a description according to the same basic notion that helped us identify the troll: A grasshopper is any entity which refuses to license even the strongest patent at even the most reasonable rates.

Frankly I am not sure who causes more meritless litigation—the troll asserting patents beyond their value or the grasshopper refusing to license until litigation has finally made it impossible to avoid. I am surer, however, that both the troll and the grasshopper tend to blame and feed off of each other. Neither deserves encouragement or tolerance.”

When NPEs attempt to enforce their patents beyond their worth they typically fare poorly with court judgments. For example, in the long-running telecoms patent dispute between Nokia and IPCom, the High Court for England and Wales has recently ruled that IPCom’s European patent (UK), which related to the handover of mobile phones between different base stations (e.g., when the mobile user is on the move), was invalid as originally granted. According to Nokia, and as reported by the IPKat, this “marks the sixtieth patent invalid as granted since IPCom began its aggressive campaign against Nokia and other industry players more than four years ago”. Academic research also indicates that NPEs almost never win their cases in court. A 2010 paper by Allison, Lemley and Walker indicates that whereas product-producing entities win 40% of their cases on the merits, NPEs win only 8% of their cases. Given that out-of-court settlement figures tend not to be disclosed publicly, it is anyone’s guess how large payments are in these cases. 

Even though the above should be reassuring for product companies, the nuisance factor and costs of litigation including discovery and other legal fees can, nevertheless, be quite onerous. Judge Rader expressed a need to bring discipline to the disproportionally high US discovery expenses in patent cases. He went on to state:

“…it is difficult to control the troll or the grasshopper in advance because they cannot really be identified until their abuse is already over—the troll has lost its case of little value or gotten negligible value for a nominally winning case; the grasshopper has finally accepted a reasonable license fee after dragging the court and the patent owner through years of litigation. The troll and the grasshopper only emerge after the case is over..”

He proposes that when the case is over and the court can identify a troll or grasshopper, there should be a full reversal of attorney’s fees and costs. This would, for example, discourage plaintiffs from using discovery (costs) as a tactical weapon. Costs defending meritless claims are generally significantly less outside the US. For example, in the UK the loser typically pays the costs and US-style discovery is not possible in continental Europe. 

Extreme demands by practising and non-practising entity patent owners seeking unreasonably large sums for weak patents and extreme resistance by product-makers who refuse to pay a fair price for the IP they exploit are mostly kept in check by the courts, as indicated by Judge Rader. Large payments can grab press attention, but these are the exception and can result from tactical blunders by defendants who could have settled sooner at lower cost. RIM’s agreement to pay the NTP $612.5 million in a “full and final settlement of all claims” is the most well-known NPE settlement in mobile communications patent litigation. This dispute was not about SEPs. RIM could have avoided paying so much if it had not painted itself into a corner with the imminent prospect of having its email system shut down to the detriment of anxious customers, such as the US Department of Defense with its concerns about maintaining national security. 

Unintended consequences 

Competition authorities should have the patience to let the existing patent laws, established licensing practices with bilateral negotiations and, when necessary, commercial courts, work things out. The smartphone marketplace is in significant flux. No company or companies have anything like market dominance or the large and stable market shares observed elsewhere, such as in PC operating systems or microprocessors. There is no proof of patent “hold-up”; in fact, aggregate SEP royalties have fallen as standardisation has progressed in mobile technologies. Absent proven market failure or consumer harm, the market should be left to establish absolute values in patent licensing, or relative values for SEPs versus other patents. Alternatively, regulators would be drawn to employ simplistic analysis that overlooks the money invested and value derived from IP versus commodity costs in hardware manufacture. They would likely impose arbitrary royalty rate caps and subjective patent evaluations of great inaccuracy. Competition authority intervention could cause distortions that undermine incentives to continue making the large investments in SEPs and other IP while tilting the playing field in favour of one vested interest group or business model to the detriment of others".