LICENSING EXECUTIVES SOCIETY

Britain and Ireland

NEWS EXCHANGE
Issue 70: December 1999 - January 2000

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When the Government issued a consultation paper on the promotion of electronic commerce last July, the Society’s IT and E-Commerce Industries special interest group was swift to welcome the initiative. But, as we report in the centre pages, it was equally swift to challenge the validity of several of the arguments put forward.

The group, acting for the Society, has scored a notable success. In particular, it has helped clear the way for electronic signatures to be given explicit legal recognition by the courts for the first time. It has also secured removal of measures designed to enforce the criminal code, the argument here being that although a legitimate and significant concern they did not ‘sit well’ within the Bill.

Commenting on the situation, Minister of State for Small Business and E-Commerce Patricia Hewitt MP said the Government had been determined to get the Bill right – and to introduce it quickly. The extensive consultation had helped make significant changes that, she believed, would be widely welcomed.

Hear how that tiger roars ...

Three ladies from the LES Ireland region will be presenting a wrestling act with a tiger at the Royal-Overseas League, London on 9 December, and it would be a pity to miss what could be the turn of the 20th century.

The participants are Council member and regional chair Mary Swords and her colleagues Dr Yvonne McKeown and Emma O’Neil. They will be explaining how Ireland’s economic growth and success in the last decade has been remarkable enough to earn it the name The Celtic Tiger and, perhaps more important, what the chances are of it continuing to roar into the next millennium.

Mary is no stranger to stage spectaculars. As a specialist in media law she has acted as an advisor to such key international productions as Far and Away, Saving Private Ryan and Dancing at Lughnasa, and apart from much else has represented the Irish film industry at Eureka Audiovisual seminars in Central and Eastern Europe.

Yvonne graduated from Trinity College, Dublin, majoring in genetics, and is a European trade mark attorney and trade mark attorney. She was awarded a Ph.D. in molecular biology and has obtained postdoctoral fellowships in the field of biotechnology in Belgium and, interestingly, the department of zoology at University College, Dublin.

Emma graduated with honours in industrial microbiology and in 1996 undertook a post-graduate diploma in biomedical science; she has recently completed a diploma in legal studies.

New members for Education committee
by Stephen Powell

We were pleased to welcome new members at the Education committee meeting in London on 11 November.

They were Patrick Duxbury, a solicitor from Wragge & Co’s Birmingham office, Jason Burwell, a European patent attorney with licensing responsibilities at Cambridge Consultants Ltd., and Jennifer Pierce from London solicitors Charles Russell.

The committee discussed a number of new initiatives together with the extension of our MBA programme to Brunel and Cranfield Universities.

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President's Diary

LES provides great opportunities for international networking

Contrary to the season, autumn has been a period of great activity for the Licensing Executives Society, both at LES Britain and Ireland and International level.

In September, some 440 members from around the globe, representing most of the twenty-eight LESI national member societies, and including a good contingent from Britain and Ireland, enjoyed what was described by LESI outgoing President Platon Mandros as an outstanding Pan-European conference in Venice. He congratulated the organisers, LES Italy, on a great meeting.

Last month in San Antonio, Texas, around one thousand delegates attended the annual LES USA and Canada meeting, which was followed by the LESI Delegates meeting.

Incoming President Heinz Goddar reported on the rapid progress made this year in establishing a licensing society in Singapore, which is expected to apply for membership of LESI next year.

Support had been provided by the Singapore government, local industry, research and educational establishments, and a seminar held prior to the Melbourne conference had been heavily oversubscribed.

Other groups are being established with a view to eventual membership in Poland and India.

New faces among LESI delegates in San Antonio included members from Venezuela, the Philippines, South Africa, Italy, Hungary, Benelux, China, Australia and Jordan, the latter representing the recently elected Arab countries.

World-wide, the Society has grown this year to 9,392 members representing an increase of nearly 500 of which some 400 are located outside of North America.

Nearer home, in London, Christi Mitchell organised our October evening meeting when Dr Chikara Yoshida of the International Federation of Pharmaceutical Manufacturers Association, Geneva, addressed our members on the impact of ICH on Japanese companies. While the attendance for this highly specialised topic was smaller than expected, those members able to attend gained much from Dr Yoshida’s presentation and the ensuing discussion.

In November, Tony Hindley of Valuation Consulting attracted a large and well-affiliated audience when he gave a highly informative and entertaining overview of the valuation and taxation of intellectual property.

Elsewhere, chairs and secretaries of regional groups have been organising events allowing members the chance to meet over a meal and a glass of wine and to hear speakers on a wide range of subjects. Fellow members of Council and I were particularly pleased to welcome Michael Croft, chair of the newly formed West Midland region, to our meeting in London on 11 November and to learn of the success of the inaugural meeting, which attracted 33 members.

Most of us are now looking forward particularly to the Society’s Annual Lunch at the Cafe Royal and our Annual Conference and AGM in Oxford, when I hope to see you there. With the date for the LES International conference in Amsterdam drawing nearer, it is certainly the case that both at home and internationally, LES meetings are proving a great and growing opportunity to network!

Emphasis on education in Heinz Goddar’s Presidential year

LES International President Heinz Goddar named education as his main objective in his first Presidential address to representatives of the twenty-seven national member societies following the annual LES USA & Canada meeting in San Antonio, Texas. He also emphasised his enthusiasm for assisting other groups to become members of LESI as he and Rodney de Boos have done in Singapore, and declared that we should work together to develop a world-wide common culture for licensing and technology transfer.

I attended this meeting as President, LES Britain and Ireland, with Vice President Chris Goodman, Past President Barry Quest and Healthcare committee chair Christi Mitchell.

Much of the delegates’ time was taken up with presentation and debate on draft articles of incorporation and by-laws and amendments to the current Constitution in preparation for the eventual incorporation of LESI in the State of Delaware.

Outgoing President Platon Mandros explained that a review of LESI’s insurance cover had prompted the need to limit the liability of officers of LESI and possibly the member societies themselves, who currently could be held liable as individuals for the actions of the society.

Clyde Willian, who presented the draft documentation, reassured the meeting that although the executive committee would form the Board of Directors, the board’s powers would be defined precisely and the board would continue to act in consultation with the member societys’ delegates with whom much power would remain.

A final vote of approval for the proposals will be sought in Amsterdam in May.

Secretary James Levy reported that most of LESI’s communications were now made by e-mail and his had improved efficiency and resulted in significant cost savings.

Barry Quest, outgoing secretary of the Pan-European Group and a former President of LES Britain and Ireland, was invited to describe the benefits of the association of LES European societies which had been highlighted by the very successful conference in Venice in September.

Barry reported that the Pan-European meeting was a national activity initiated by LES Britain and Ireland some ten years ago and organised by each European society in turn in subsequent years.

He described the benefits of the European co-operation as providing a stimulus for the European societies, which are much smaller in comparison with LES USA & Canada and which need to find new ways to retain the interest of their members. The periodic commitment to organise a European meeting brought European members together, he said, and the societies benefited from the ideas that came from those meetings.

Additionally, the organisation of the European joint website had helped to cement relationships between the societies.

It was agreed that the presidents of the LES societies of the Americas and the Asian societies should get together to see if similar beneficial co-operation in their regions could be established.

Some twenty-five different committees, each responsible for promoting their special interests within the Society’s mission, met in six sessions over the one and a half days’ meeting. Many of these reported back to the final plenary session and all of their reports will eventually be available on the LESI website. (See also the LESI annual report for names of committee chairs).

There is no shortage of activity within these special interest groups, many of which reported on their plans for workshops at the next LES International conference in Amsterdam in May 2000, and members should seek out the reports of these with which their own interests concur.

Of particular note, in keeping with Heinz Goddar’s primary objective for the year, was the Communications committee’s plan to put some LESI publications for free on the members-only part of the website and compare hits on those pages with actual sales. After a trial period, the committee will come back with a publications policy for the future.

Before and between all this talking, delegates enjoyed an excellent reception and dinner, and had the opportunity to visit the Alamo after reliving that historic battle at San Antonio’s Imax theatre.
Report by Trevor Hunter

The Electronic Communications Bill, herald of the new era of electronic signatures
Government “listens” to LES submissions

In July the Government sought responses from the Society and other business concerns and organisations on a Bill intended to

• end the uncertainty over the legal admissibility of electronic signatures
• ensure that electronic communications could, wherever appropriate, be placed on an equal footing with traditional pen and paper
• promote the availability of high quality trust services to the public

The consultation exercise with LES and other interested parties has helped the Government make significant amendments to the draft Bill, which was published mid-November and is now on course for Royal Assent by April 2000, making this one of the UK’s first 21st century laws.

The Society’s submission document was put together and submitted on the Society’s behalf by the IT and E Commerce special interest group. Ben Goodger, group chair, has expressed his particular thanks to Robert Bond of Hobson Audley and Gillian Cameron of Maclay Murray & Spens for their contributions.

Below we print extracts from the LES submission, many of them echoed by other industry commentators. Beneath each extract, in italics, are the Government’s decisions on the final content of the Bill.

Commenting on the Government’s draft legislation on the promotion of electronic commerce, the Society welcomed legislation with clear guidelines that encouraged rather than discouraged technology transfer and commercialisation of intellectual property.

The Society argued: “Our members want certainty, so that they feel confident in negotiating agreements without constantly having to look over their shoulders to consider whether what they are doing may fall foul of one or more pieces of legislation. They also need a light, transparent and predictable regulatory and legislative framework”.

Regulations, it maintained, should be imposed only where required and when imposed should be introduced having regard to the laws and regulations being prepared in other countries.

The new Bill published on 19 November retains its old title as The Electronic Communications Bill but ensures that electronic signatures will be given explicit legal recognition by the courts for the first time, giving people a secure electronic alternative to paper.

It also provides for obstacles in existing laws which insist on the use of paper to be swept away wherever it makes sense to give people the electronic option.

The Society expressed the belief that in order to build consumer confidence in e-commerce, it was necessary to endorse some level of “best practice” for cryptography service providers, and that this would be best achieved through a self regulatory framework. In its view, businesses that utilised cryptography service providers would impose their own requirements for secure and trusted services and would not welcome a fully regulated regime.

The Bill heralds the establishment of a ‘kitemarked’ self-regularity approvals scheme to ensure minimum standards of quality and service. People will be able to check who has sent an electronic message, ensure it has not been tampered with and that no-one else has read it on the way.

If it is necessary to have some form of regulated regime then we believe that the use of the word “registered” and “unregistered” are suitably neutral rather than the present terms of “licensed” and “unlicensed”, the Society stated. In its view, the draft’s wording seemed to indicate or might indicate that only a licensed certification authority was authorised to carry out its activities.

In a note on the Bill, the DTI says that if the self-regulatory scheme works, there will be no need to set up a statutory scheme. Only if self-regulation fails will the Government establish a statutory scheme that would also still be voluntary. This part of the Bill will be subject to a ‘Sunset Clause’. If a statutory scheme has not been set up within five years, then the government’s power to set one up would lapse.

It adds: The Bill also includes powers to modernise procedures to modify telecommunications licences. Existing procedures were originally designed for a small number of licence-holders and have become cumbersome and unwieldy now that there are hundreds of licence-holders. The procedures will be streamlined following further consultation with the industry and such bodies as the Licensing Executives Society, making it easier to adapt licences to changing marketing conditions.

The Society argued that the Government’s interest in enforcing the criminal code, although a legitimate and significant concern, did not sit well within a Bill whose intent was to facilitate electronic commerce. It also suggested that the issue of criminal activity over electronic communications networks was more complicated than the Bill acknowledged.

‘The issues of most concern to consumers and businesses, and where they are looking for greater certainty, are not so much decryption or evidence gathering techniques, but whether the law will recognise these other fraudulent activities as crimes and whether the government will prosecute them’, it said.

Mandatory key escrow has been explicitly ruled out of the Bill. This would have required people wanting to keep their mails confidential to deposit copies of their ‘electronic keys’ with third parties to help law enforcement in case criminal activity was suspected.

Further on this issue, the Society suggested that the approach taken by the Bill to the problem of instilling trust and confidence in e-commerce services might not be entirely effective, and that it’s approach to cryptographic systems did not clearly address the problem at which it was aimed.

It argued: Even slightly sophisticated customers are likely to be aware of the rapid evolution of decryption technology. Even if a scheme for enforcing or approving cryptographic systems were able to keep abreast of rapidly improving technologies, it still might not serve its purpose of instilling confidence in internet customers. The nature of technology – that it constantly improves – undermines the authority of a bureaucratic scheme for endorsing cryptography technology. Thus, privacy concerns might be better addressed by alternative methods.

Home Office Minister Charles Clarke told News Exchange: ‘Encryption is a double-edged sword – both vital to the e-commerce revolution and at the same time a deadly weapon in the hands of criminals. Paedophiles, drug traffickers and terrorists are already using encryption to try the evade justice. This cannot be allowed to continue. As encryption becomes more ready available and easier to use, the need to modernise police powers to enable them to read the material they can already lawfully get access to becomes ever more urgent.

‘That is why the Government will provide law enforcement agencies with new powers to access decryption keys and the plain text of lawfully obtained material under properly authorised procedures containing strong safeguards.

‘We have listened and reflected on how best to update the statute book and have decided to take the measure forward this session, together with other law enforcement measure, in the Investigatory Powers Bill (instead of the Electronic Communications Bill) to be debated alongside a comprehensive updating of similar legislation.

Tony Hindley, director of the London-based company Valuation Consulting, regards valuation as an art more than a science and as an interdisciplinary study drawing upon law, economics, finance, accounting, and investment. In his view it is rash to attempt any valuation adopting so called industry/sector rules of thumb in ignorance of the fundamental theoretical framework of valuation. Here, following successful talks on the subject to LES members in Leeds, Glasgow and London, he provides a broad overview of the subject.

Valuation of intellectual property – the questions to be asked

Valuation procedure is, essentially, a bringing together of the economic concept of value and the legal concept of property. The value of any asset is a function of its ability to generate a return and the discount rate applied to that return.

For commercial valuation, it is important to remember that valuation cannot be stated in the abstract; all that can be stated is the value of a thing in a particular place, at a particular time, in particular circumstances.

The questions ‘to whom?’ and ‘for what purpose?’ must always be asked before a valuation can be carried out. This rule is particularly significant as far as the valuation of intellectual property rights are concerned.

There may well only be one or two interested parties, and the value to each of them will depend upon their circumstances. Failure to take these circumstances, and those of the owner, into account may result in a meaningless valuation.

Valuation for tax purposes is different in that usually a deemed sale between hypothetical parties is the appropriate basis – very different from the real world of the commercial valuation.

There are three main value concepts, namely owner value, market value, and fair value.

Owner value often determines the price in negotiated deals and is often led by a proprietor’s view of value if he were deprived of the property.

The basis of market value is the assumption that if comparable property has fetched a certain price, then the subject property will realise a price something near to it.

The fair value concept, in its essence, is the desire to be equitable to both parties. It recognises that the transaction is not in the open market and that vendor and purchaser have been brought together in a legally binding manner.

There are quasi-concepts of value that impinge upon each of these main areas, namely, investment value, liquidation value, and going concern value.

Acceptable methods of the valuation of identifiable intangible assets and intellectual property fall into three broad categories. They are either market based, cost based, or based on estimates of future economic benefits.

In an ideal situation, an independent expert will always prefer to determine a fair market value by reference to comparable market transactions. This is difficult enough when valuing assets such as bricks and mortar as it is rarely possible to find a transaction that is exactly comparable.

In valuing an item of intellectual property, the search for a comparable market transaction becomes even more difficult. This is not only due to lack of compatibility, but also because intellectual property is generally not developed to be sold and actual sales are usually only a small part of a larger transaction with details kept extremely confidential.

There are other impediments that limit the usefulness of this method, namely, special purchasers, different negotiating skills, and the distorting effects of the peaks and troughs of economic cycles.

Cost based methodologies, eg the cost to create or the cost to replace, assume that there is some relationship between cost and value and the approach has very little to commend itself other than ease of use. The method ignores changes in the time value of money and ignores maintenance, but can have applications in the valuation of software for example.The method of valuation flowing from an estimate of future economic benefits can be broken down to four limbs

• capitalisation of historic profits
• gross profit differential methods
• excess profits methods, and
• the relief from royalty method.

While the capitalisation process recognises some of the factors that should be considered, it has major shortcomings, mostly associated with historic earning capability.

Gross profit differential methods are often associated with trade mark and brand valuation.

The excess profits method is associated with earnings capability in order to induce investment and, while theoretically relying upon future economic benefits from the use of the asset, the method has difficulty in adjusting to alternative uses of the asset.

Relief from royalty estimates what the purchaser could afford, or would be willing to pay, for the licence. The royalty stream is then capitalised/discounted to reflect the risk and return relationship of investing in the asset.

Discounted cash flow analysis is probably the most comprehensive of appraisal techniques suitable for the valuation of IP. Potential profits and cash flows need to be assessed carefully and then restated to present value through the use of a discount rate, or rates.

It is necessary to consider the operating environment of the asset to determine the potential for market revenue growth. The projection of market revenues will be a critical step in the valuation.

The potential of the IP will need to be assessed by reference to the enduring nature of the asset, and its marketability, and this must subsume consideration of expenses together with an estimate of residual value, if any. This method recognises market conditions, likely performance and potential, and the time value of money. It demonstrates the cash flow potential of the IP and is highly regarded and widely accepted in the financial community.

Tax authorities around the world are becoming increasingly aware of IP. In the UK, and particularly with regard to the introduction of CTSA, transfer pricing in the circumstances where the IP and the manufacturing/sales occur in different jurisdictions is becoming a vital part of planning. It is essential that any documentation supporting, for example, royalty rates is put in place at the time that the structure is set up.

Lord Sainsbury, Department of Trade and Industry Minister with responsibility for science and innovation, has published a step-by-step guide to help inventors make informed choices about using invention promotion companies

A new DTI guide for inventors follows the issue of a winding up order against International Product Design Incorporated, an American invention promotion company with a branch in the UK. The DTI claims that this company misrepresented the services it offered and failed to devote the resources necessary for the successful promotion of ideas.

In issuing the guide, Lord Sainsbury said he did not want creative individuals to become unsuspecting victims of unscrupulous firms and be deprived of their limited resources in return for very little.

The new guide includes key questions inventors should ask before entering into a contract with a firm, from finding out the details of the total cost and all the steps involved in taking an idea through to production to asking for evidence of the firm’s previous success rate.

It also draws attention to other measures the Government has introduced to support inventors and points to other organisations or websites where useful or low cost information can be found.

Guidance on using invention promoters is at www.innovation.gov.uk, a website managed by the DTI Innovation Unit. The unit aims to help organisations to understand innovation, why it is important and how the best organisations manage it.

The guidance will also be available in booklet form from a variety of outlets. It complements other measures the Government has introduced to support inventors.

These include NESTA, launched earlier this year with a multi-million pound endowment from the National Lottery, and intended to help creative individuals develop their full potential, while also helping to turn creativity and ideas into products and services and to enable these to be exploited effectively. For further details and a free information pack contact NESTA on 0207 645 9500 or look up their website at http://www.nesta.org.uk .

Inventors can now also benefit from the services of Business Links which until recently were confined to small and medium sized enterprises.

Business Links can provide advice on general business practices, the marketing of a product and other related problems, such as advice about how to obtain funding for developing a product and signposting advice on local facilities. Further information can be found on http://www.businesslink.co.uk . The Business Link Helpline can be contacted on 0345 567765.

The Patent Office Central Enquiry Unit, tel 0645 500505, gives advice about patenting and other forms of intellectual property protection. There is also an extensive range of free literature available to individuals and small firms. WebSite: http://www.patent.gov.uk .

The abolition of the patent filing fee and the reduction of the Patent Office’s renewal fees on granted patents by an average of 18%, with larger reductions in the early years, are regarded as a major benefit for inventors and small firms.

Big rise in patent applications

This year was a record one for patent applications, the UK Patent Office reports. Inventors made their highest number of applications in ten years, and the number of patents granted was the highest since 1990. 28,619 patent applications were made in the last year - the highest number since 1989. The number of patents granted increased by16% to 9249.

In addition, the number of national and international applications for trade marks increased by 5%, and the registry examined 34,806 national applications with 26,870 additional classes - an increase of 7%. There was a slight reduction in the number of design applications, but encouragingly more of these came from UK residents - an increase of 7% to 3,614.

The major growth area in patents remains the telecommunications sector with 1,346 patent applications published and 888 granted - up 41 per cent compared with the previous period. Other important areas of patent activity included machine elements, civil engineering and building.

The scientific area was the busiest sector for trade marks, with 4856 classes published. Other important areas included miscellaneous services, paper and stationery supplies, clothing and education and entertainment.

Greatest activity in designs applications remained in packaging with 916 applications. Others making widespread use of design registration included the recording, communication and information retrieval sector, furnishing and games, and toys and sports goods industries.

The Patent Office Annual Report and Accounts 1998-99 is available, priced £17.20, from the Sales Office of the Patent Office, Concept House, Cardiff Road, Newport, South Wales NP10 8QQ or from the Patent Office, Harmsworth House, 13-15 Bouverie Street, London EC4Y 8DP and from HMSO bookshops. It is also available on the Patent Office website at www.patent.gov.uk.

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NEWS Exchange is circulated as a service to members of the Society. Editorial contributions and advertising/insert enquiries are welcome and should be addressed in the first instance to the editor.

Editor: Reg Peplow, Business News and Features, 16 High Street, Buckden, Cambs, PE18 9XA. Fax 01480 812221 email: regpeplow@intecc.co.uk

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