As an outsider, I have watched the growth of the idea into a solid and forward-looking business plan.  Now, I get the opportunity to help the company commence the exchange of Unit License Rights and roll out other financial products focused on intellectual property.  As many IPBC 2010 attendees heard from Gerard’s presentation, the business model has been carefully crafted with insight from industry leaders and IP professionals around the globe.  IPXI is now days away from providing the first IP marketplace with a priority of providing standards, efficiency and transparency to an otherwise opaque and arbitrarily monitored market.  For years, I have truly believed that such a marketplace can exist and benefit both owners and potential licensees, furthering innovation and other progressive initiatives by eliminating transactional costs routinely associated with entering into and negotiating IP deals. 

I hope this change in occupation will not affect IP Prospective or the content that I have regularly provided on this medium for almost two years now.  If anything, it should allow me to gain greater insight into the market and its participants, and I hope to relay these experiences here.

On to the pursuit of standards, efficiency and transparency in creating the world’s leading IP marketplace . . .

The gist of the story is that a prominent IP litigator purchased a large and alleged high-quality patent portfolio from a company known for its patent portfolio, but not for its support of NPE behavior.  The sale, of course, seems to hypocritically support such publicly decried behavior - and therein lies the fuel to the fire of questions the sale has created. 

To premise the following, as an entrepreneur at heart and proponent of the IP market in general (and risky-yet-innovative transactions involving IP), the move by Desmarais seems incredibly business-savvy.  Absent any foul play (and I’m not supposing there is any), from a purely business perspective the purchase seems to show incredible foresight. 

The story’s spotlight seems to have shifted from Desmarais to Micron because of Micron’s public position against NPE practices.  This angle is not one which I have concerned myself with as much as the non-reporting of the sale to its investors.  Reportedly, there has been no such disclosure.  Whether this raises corporate law questions is not for me to decide nor discuss in this forum.  A proper business judgment is just that - a business judgment. 

But the nondisclosure does elicit questions regarding accounting and disclosure procedures, in general, with respect to intellectual property.  Do corporate disclosure laws such as Sarbanes-Oxley reach far enough to include intangible assets in the context of proper accounting methods currently used?  An intellectual discussion of the disparities in treatment of IP in accounting was highlighted today over at the IP Finance blog.  In this respect, does “accounting” take on two meanings - one including the balance sheet figures, and one involving the corporate good citizen policy of simply “accounting” for all assets and deals appropriately for the benefit of  the market . . . or if even for the benefit of its shareholders?

Questions asked by Ralph Eckardt at 3LP Advisors and posted on the IAM Blog are right on the money; and some are more easily answered than others.  The most interesting of these, and one of the directly attributable questions to the Micron story, is what responsibility does senior management have for managing and ensuring a proper return on [IP]assets?   If the answer is “none”, then a sale of high-quality IP assets without disclosing that sale to shareholders involves no wrong-doing.  But if the answer is “a considerable amount”, which I like to think it is, then this story is something to talk about.  We must premise all discussions of the Micron story, however, with two kinds of “responsibility”.  There is the legal kind - a duty, if you will.  And then there is simply a business kind - an occupational responsibility to help a company perform well.  The latter is a sure bet.  Senior management in charge of optimal corporate performance should have a responsibility to manage and ensure a proper return on IP assets - especially those high in quality.  The former kind of responsibility - the legal kind - is one which I have touched on in my discussions of the intersection between corporate governance and IP management in recent posts, and in a recent article published in The Federal Lawyer.  Although examples of enforcement are scarce, there may well be corporate disclosure requirements by law with respect to intangible assets.  Whether any of these might be at play in this circumstance is unknown.  For the purpose of this post, it is simply prudent to reflect on this possibility, and on the importance of accurate “accounting” of and for intellectual property assets.  And this is why the Micron story is the perfect storm to bring this discussion to the table.

(pictured here is a train station in DC. Another amazing picture taken by Leslie Rodriguez Photography - my sister, of course)

Also, check the upcoming July issue of The Federal Lawyer for my article on the impact of IP insurance on the IP litigation landscape and IP market, respectively.

(pictured here is the main Gate for Churchill Downs, where the Kentucky Derby is hosted)

The European Commission stopped accepting tendered bids to perform the study last week.  I truly anticipate the results.  In its solicitation, the EC states as follows:

The objective of the service contract is to explore ways to create a European financial market for IPRs and to enhance transparency and predictability of IPRs transactions. The study will therefore assess the feasibility and the possible benefits of such market for actors like SMEs, universities, research centers or the financial community in Europe.

The study will formulate concrete proposals to address the issues at stake and propose recommendations for follow-up actions at EU level.

This is promising.  While the endeavor will take more than research and information, the potential benefits in creating a robust and transparent marketplace - and an international one even - are many.  An interesting and quite profound excerpt from the tender document was highlighted by Joff Wild over at the IAM Blog:

Traditionally, IP transactions are characterized by (i) difficult acquirer identification, (ii) long periods of negotiation and (iii) endless due diligence activities with uncertain transaction outcome. Especially in Europe there is no contract standardisation and no secondary market for IP licenses that can be transparently assessed - indications are that there is an active secondary market run under opaque practices. The propensity of different sellers not to enforce standard contractual models increases the complexity and the inefficiency of traditional modes of IP licencing.

This language spells out exactly what the market needs - standardization in both license structure and price discovery mechanisms.  Currently, none exist.  The mention of an opaque secondary market for IPR’s, however, is spot on.  There is a real need to bring that secondary market to a common marketplace using standard barriers to entry, standards units of trade, and standard price-setting measures (even if it is just a common body that determines pricing of tradeable IPR units).  The benefits from lowering these transactions costs and uncertainties currently tying the arms of many IP market participants, and especially SME’s, will at least contribute to raising the value of IP because the demand for IP will grow through open innovation processes.  After all, I do believe that one possible measure of the value of IP is the money it can derive on the market . . . but this is not a calculation of the price of a single transaction, but of the volume of total transactions it has the potential to originate multiplied by that price.  Therefore, as the market grows, so does the value of certain IPRs. 

Consider this: A product is only as valuable as the demand for it, but demand can actually be increased by creating a market which better facilitates transactions for that product.  Case in point: the market for used furniture was fairly clandestine until eBay created a robust market where sellers could find buyers and vice versa.  Now, the the lifespan of couches has lengthened, and there is actually a market value for old lamps - all because a transparent marketplace was created.

“The future winners will be those companies that used the rough times to put together intellectual property strategies that support their broader business strategies. In tough times, people have to make more focused investment decisions, which means some firms cut back on their intellectual property investments. Unfortunately, those companies that are not strategic in this process can undercut the foundation of future growth. Companies that are not paying attention to intellectual property may very well find it more difficult to raise capital than those that are paying attention to it.” - Professor Joseph Hadzima Jr., MIT Sloan School of Management, MIT News

Although the piece does not go on to discuss these concepts with the depth of coverage that you might expect from MIT, it is a nice supplement to the seminar presentation I gave to an In-House Corporate Counsel Conference two weeks ago.  In that presentation, I discussed IP monetization and introduced to many unknowing ears the ways in which IP can be turned into a commodized asset.  But it wasn’t until I mentioned the correlation between shareholder value and quality intellectual property that a few eyebrows raised and questions started to be asked.  I have discussed this correlation previously on IP Prospective HERE and HERE, among other posts.  To get the point across quickly with the kind of empirical data that company executives need to believe new concepts which may be foreign to them, one need only point to the performance history of the OT 300 Patent Index and other IP-focused investment products and indexes that have been created by Michael Freidman and his Ocean Tomo team.  The performance history speaks for itself, and more information can be found HERE.

Now, Round Rock Research, LLC, the holding company which Desmarais created to hold this patent portfolio, is the second largest owner of patents among NPE’s in the country according to PatentFreedom.  And they have a roster of free lawyers to utilize - including one of the best patent litigators in the world.  That alignment of resources is akin to creating a new NBA team with Kobe Bryant and Lebron James and bestowing ownership of the team in the National Basketball Referees Association.  If it was allowed, after crying “unfair!”, people would be left with no choice but to applaud such a business savvy move.  That choice is similar in Desmarais’ venture. 

According to the report, no litigation has been filed yet, and no licensing transactions have been executed yet.  This will be an interesting developmeng to watch.  For now, the following quote from the report can suffice as the general sentiment or conclusion drawn from an endeavor such as this:

“There is a good story about nonpracticing entities . . . and a bad story about nonpracticing entities. The good story about nonpracticing entities is that they are developing liquidity in the market for these patent rights.  On the negative side, they are given patent rights for goods or services they don’t make and can sue other companies for infringement.” - John F. Duffy, a law professor at George Washington University.

(pictured here is a bench and dogwood trees from Vanderbilt’s campus)

For royalties (patent/innovation box):
Luxembourg - the innovation box reduces tax on royalties from IP to around 6%, with some restrictions
Netherlands - similar reduction in tax on IP to Luxembourg, but rather more restricted in scope
Belgium - similar reduction in tax but on patents only
Ireland - 0% tax on royalties relating to patents where the R&D was done after 1 January 2008

Generally:
Switzerland - pick your canton carefully to reduce the tax rate, but don’t forget the federal rate of 8.25% isn’t so negotiable.
Channel Islands/other beaches and chocolate locations - 0% tax achievable but beware the lack of tax treaties. The Channel Islands have better IP protection than the tropics, in general.

But - beware withholding tax:
If you are paid royalties by (eg) a company in the US, the royalties will have tax deducted at 30% on the gross amount of the royalties paid; UK companies are required to deduct tax at 20% on royalties. This withholding is intended to ensure that the royalties are taxed somewhere and is not repayable. There needs to be a tax treaty in place between the payer and payee country to reduce the rate of withholding tax (the UK/US treaty reduces withholding to 0% in almost all cases, for example).

Tax havens (the 0% countries) don’t have tax treaties, so the full withholding will be payable - the EU countries generally have a reasonable range of tax treaties.

If you’re expecting the return on the IP to be in the form of royalties, tax treaties are probably the key thing to think about - pick a jurisdiction that has good tax treaties with the locations you are expecting to receive royalties from.

If you are not expecting the return on the IP to be by way of royalties, consider what you will do if the IP is infringed and royalties are all you can settle for - and be aware that some countries may regard any payment for IP as a royalty for tax treaty purposes, even if it’s a payment for the outright sale of the IP.

Finally, bear in mind that the tax authorities in the UK will usually scrutinise offshore IP holding structures rather closely. The arrangement will need to have substance in the offshore jurisdiction to ensure that UK tax is escaped, and that is not an inexpensive exercise.

 If anyone has more to add with specific details about the U.S., Canada, Japan, and China, I would love for you to comment.

Along the lines of tax, IP, and planning for the efficient management of the two, I have spoken with an excellent Trust and Estate Planning attorney, Carter Ruml, (who, by the way, writes a fabulous T&E blog called KYEstates) about doing a post or a series of posts regarding the most efficient treatment of intangible assets in estate planning, including the valuation of IP in this context.  Be on the lookout for this upcoming post, which should be quite interesting.

(pictured here is downtown Nashville at the height of its flood.  I attended Vanderbilt University in Nashville and the scene after the flood was quite a shock to my system.  I have never seen anything like it.  Volunteer efforts are still needed in the city)