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LICENSING EXECUTIVES SOCIETYBritain and IrelandNEWS EXCHANGE
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Taxing Issues for IP OwnersRadical changes to the regime governing the taxation of intellectual property (IP) for companies acknowledge that IP has become a major asset and that companies may exploit it in many different ways, whether or not they are directly involved in the IP business. As the new rules take effect they will influence the way companies deal with their IP, with transactions structured to minimise exposure to tax and utilise reliefs to the full. It is important that all those dealing with the exploitation of IP understand the basics of the new regime. Intangible assetsThe new rules apply to the full range of intangible assets which are defined, as for accounting purposes, as 'non financial assets that do not have a physical substance but are identifiable and are controlled by the entity through custody or legal rights'. This will therefore include intellectual property such as patents, trademarks, copyrights and designs, licences, brands, know-how and franchise rights. Goodwill is also included. Certain types of asset are excluded in whole, such as oil and gas licences and rights relating to "an interest in" or "rights over" land; or in part, such as expenditure on films, for which the royalties alone are included within the new regime. ScopeThe new tax regime applies only to companies. For unincorporated bodies, including partnerships and individuals, the existing rules remain unchanged, although the Government has committed to keeping these income tax rules under review. Since the existing rules present a complex and confused mix of ad hoc rules with numerous inconsistencies and anomalies, it is to be hoped that this period of review will be short-lived. The rules apply to expenditure on the creation, acquisition and enhancement of intangible assets as well as to expenditure on their preservation and maintenance. Expenditure on internally developed, as well as acquired, intangibles will therefore now be relieved. Payments for the use of intangibles also fall within the scope, as do royalty receipts. The existing charge on income rules for royalty payments will no longer apply. CommencementThe rules apply to intangible assets created after 1 April 2002, or acquired from an unrelated party after 1 April 2002. Assets acquired or created before this time will continue to be taxed under the old rules. Outline of new rulesEssentially the tax treatment of expenditure and receipts relating to IP has been aligned with accounting practice. Tax relief is given for the cost of intangibles based on the amounts written off through the accounts. This will include amortisation of capitalised IP, losses on realisation of IP and royalties paid for the use of third party IP. Accounting profits and losses are brought into account as income, thereby removing the need to determine whether an item of property is capital or revenue in order to establish the correct tax treatment. Disposals of intangible assets will therefore be taxed as income. Further rulesWhile gains on the disposal of intangibles will be treated as income, a new rollover relief will enable the gain to be deferred where the proceeds are reinvested in new intangible assets falling within the new regime. Reinvestment must be made within the period of "one year before to three years after" disposal. Relief is also available for reinvestment in shares of a company which owns intangible assets, so long as 75% of the company is acquired. Intangible assets already held at commencement of the new rules will also qualify for the new roll-over relief. Whilst, in general, accounting treatment will be followed for tax purposes, variations from accounting practice are permitted in some cases. For example, assets with an indefinite economic life, and not therefore written off through the accounts, would not otherwise qualify for relief. In such cases, companies may elect for a 4% annual "straight line" write off for tax purposes. ImplicationsFrom an administrative perspective the alignment of accounting and tax rules will simplify matters significantly for companies, reducing the need for complex adjustments to bring the accounting treatment into line with tax rules. The method of exploitation of IP will no longer produce markedly different tax consequences, and decisions can be driven more by commercial than tax motives. The new rules will enable much expenditure of a capital nature on IP, for which relief was previously denied, to now qualify for relief and purchasers may therefore be more inclined to buy IP assets directly rather than buying companies owning IP. But these changes to the taxation of IP have coincided with other significant changes to the corporate tax regime, such as introduction of an exemption from tax for trading companies on gains made on the disposal of substantial shareholdings in other trading companies. In group company situations, this may increase the attraction for vendors to sell companies rather than assets, enhancing the potential conflict between purchaser and vendor wishes and heightening the need for advance planning and careful negotiation between the parties. Julie Evans
Top President's Diary
As President of LES B&I, I attend the LESI International Delegates Meeting, which preceded the International Conference in OSAKA. The international delegates meet twice each year prior to the International Conference and the LES US/Canada autumn meeting, which this year will be in Chicago in September. The main emphasis of this meeting was to seek to modernise the image of LESI to promote the society as the leading world-wide organisation for licensing. Additionally, there have been substantial changes to the LESI website (LESI.org) to make it more user friendly and to offer additional searching services. Further information on this improved website will be given in future editions of News Exchange. The OSAKA conference was attended by over 500 delegates, making it an extremely successful international conference which was well organised by LES Japan. As my last duty during my term as President, I will be attending the annual conference and AGM in Cambridge on June 28th/29th. At the AGM I will be handing over the Presidency to Christi Mitchell and I am pleased to announce that Stephen Powell will be Vice President. I wish them both good luck and success. The AGM is also time for changes in Council and, sadly, Christopher Hyatt is retiring as Honorary Treasurer after 9 years. On behalf of all LES members I thank Christopher for his valued service to LES. My thanks to Raja Sengupta who has agreed to take on this responsible position and also to John Roe for continuing as Honorary Secretary and to all Council members for their support. I look forward to seeing as many of you as possible at Cambridge. Chris Goodman
Licensing Update - Recent decisions, legislative changes & news items relating to licensingRecent decisions - legislative changes - news items relating to licensing. SP International v. Professional Preparation Contractors - damages awarded for infringing machines (design copyright) on basis of royalty. In absence of trade evidence as to typical licence rates the court computed a 'notional' royalty of £40,000. Chancery Division - May.02. Microsoft gives amnesty for infringing software in Russian and Croatian cybercafes to encourage legitimate licensing, whilst USA indicates it may retaliate (by downgrading from 'watch list' status) against Vietnam if it does not curb IPR violations - April/May.02 Qinetiq (ex DERA, owned by Ministry of Defence) with more than 5000 granted and pending patents covering licensable technology is heading for privatisation - April.02 - although inventors of Qinetiq's supertwist LCD patent, said to contribute 80% of royalty income, have started action to claim a share which could be up to £50million - May 02. Bio-prospecting in New Zealand's Antarctica to be promoted as a valuable source of commercial patent licensing - April.02 The Japanese Economy,Trade and Industry Ministry has launched a web site containing a searchable database of technology to help researchers and businesses find partners: http://dnd.rieti.go.jp. At present in Japanese, an English language version is expected soon - April 02. The anti-brand book 'No Logo' (Naomi Klein) is the UK's best selling business title, but the opposite message is put by Thomas A Stewart in 'The Wealth of Knowledge' - which explains that knowledge has overtaken products as America's top export. (Sunday Times book of the week - April 02). NEC corporation, which is the largest Japanese patent holder, has set up an office aimed at increasing licensing revenue to US $375 million - still small compared with IBM's US $1.54 billion - April 02. Barry Quest
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Repackaging Pharmaceuticals - the bitter pill?On 23 April the European Court of Justice (the "ECJ") delivered detailed guidance on when it is permissible for a parallel importer to repackage trademarked products. The judgement broadly reflects existing EC case law and an earlier Advocate General's opinion by clarifying the legal basis for repackaging while confirming that the trademark owner's legitimate rights must be respected. Parallel trade arises in the pharmaceutical industry because of price differentials in medicines between EU countries primarily created as a result of controls imposed by different governments, coupled with exchange rate movements. Drugs, unlike most other products sold in Europe, have their prices agreed individually with governments, generally with poorer countries paying less and wealthier countries more. A recent survey estimated that, last year, parallel trade in pharmaceuticals in Europe reached about £2.3 billion and forecast that it would rise to about £5 billion by 2006. Such trade is encouraged by some European governments, which see the use of parallel importing as a method of tackling rising health care costs. BackgroundThe judgement covers two cases dating from 1999. The first case Boehringer and Others v Swingward and Others (case no C-143/00) was referred to the ECJ by the English High Court and relates to seven conjoined actions involving several pharmaceutical products. The claimants in the actions were Boehringer Ingelheim, Glaxo Group, SmithKline Beecham (as they then were) and Eli Lilly. The defendant parallel traders were Dowelhurst Ltd and Swingward Ltd. The second case (C-443/99) involved Merck Sharp & Dohme GmbH against Paranova Pharmazeutika Handels GmbH and related to the parallel importing of Proscar (finasteride) into Austria. In both cases, the national courts referred a number of questions to the ECJ concerning the extent to which trademark owners could rely on Article 7 (1) of the Trademarks Directive 89/104/EEC (Exhaustion of rights) to prevent the marketing of repackaged products where the repackaging is objectively unnecessary to effective marketing in the member state of import. The ECJ were asked to consider a number of repackaging issues including:
The DecisionThe Court ruled that it is possible for a trademark owner to derogate from the fundamental principle of free movement of goods and rely on its mark to prevent the repackaging of pharmaceutical products imported in parallel, unless by doing so it contributes to artificial partitioning of the market. A trademark owner's opposition to repackaging of pharmaceutical products will be regarded as contributing to artificial partitioning of the markets between member states where the repackaging is necessary in order to enable the product imported in parallel to be marketed in the importing state. The repackaging must be that reasonably required to achieve effective market access and must not be based solely on the parallel importer's attempt to secure a commercial advantage. In summary, to determine whether or not a parallel importer can legitimately import repackaged products, it is necessary to address the following:
A similar stance on repackaging was recently taken in an opinion delivered by Advocate General Jacobs in a case involving a product covered by a central marketing authorisation (that is, approved through the EC's centralised procedure by the European Agency for the Evaluation of Medicinal Products (EMEA)) and marketed by Aventis Pharma (case C-433/00). Aventis has two centralised marketing authorisations for an insulin product, as a pack of 5 cartridges for marketing in France and a pack of 10 cartridges for marketing in Germany. The parallel importer imported the 5 cartridge pack presentations from France and re-bundled them into one retail unit of two 5 cartridge packs with an oversticker for sale into the German market. Aventis argued that the authorisation for the 10 pack covered a bundled retail unit of two 5 packs with an oversticker and that creating new packaging was therefore unnecessary and infringed its trademark rights. Advocate General Jacobs, in agreement with the parallel importer, said that repackaging was necessary in this case, as each authorisation related only to the size of the pack specified and the product therefore could not be lawfully marketed in a package containing two 5 cartridge packs. Once again, the repackaging was necessary to allow the importer effective access to the market. ImpactThe judgement clearly re-affirms the requirement for the parallel importer to demonstrate necessity. However, it remains to be seen whether the balance is in the trademark owner's favour or is it a bitter pill the pharmaceutical industry must swallow? The issue of necessity will be determined in each case on the factual evidence before the national court and will be subject to how the parallel importer substantiates that repackaging is necessary in the individual jurisdiction. This will lead to increased costs for both trademark owners and parallel importers, as each party will be required to gather evidence from consumer representatives and health care professionals supporting its case. Furthermore, as with other areas of intellectual property, there will be less legal certainty, as the strength of each party's case will be heavily dependent on the nature of the evidence it has collected. Dr Hayley French
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Napster and beyond: a legal, technical and commercial viewMarly Didizian looks at the legal, technical and commercial steps that you can take to protect against online piracy and continue to derive revenue from online intellectual property rights. Intellectual property rights held in digital form can be reproduced and widely distributed on the Internet, both legally and illegally. The threat posed by piracy, particularly in relation to copyright, is unprecedented. The advent of technologies like compression and broadband which allow faster and cheaper distribution, downloading and storage of material, mean that online piracy is only likely to grow. Most of the publicity to date has centred on the music industry, in particular in relation to Napster. However, online piracy is equally relevant to film, software and publishing. Legal MeasuresWhilst Napster was successfully prosecuted in the US by the Recording Industry Association of America (RIAA) for breach of copyright, it is by no means obvious that under UK law, Napster could be successfully sued for copyright infringement. Napster's file sharing system consists of a central server containing a database of users and music titles, and a search engine. It allows a user to locate a song in mp3 format on another user's hard drive and download that song onto their own hard drive and either "burn" (or copy) it onto CD or send it to another online destination by email. Interestingly, mp3 files are neither stored on nor transmitted via Napster's servers: Napster's software is merely used to locate files. As Napster software does not store or make copies of music files, it is unlikely to be liable for "direct infringement" (under s. 16(2), Copyright Designs and Patents Act 1988 ("CDPA")) or to be considered an "article specifically designed to infringe" (under s. 24(1) CDPA). Napster also offers a range of services on its website in addition to its file swapping software, including chat rooms, and its online terms and conditions require users to use the Napster site in accordance with all applicable laws. Therefore, Napster (i) does not "authorise" users' infringements (contrary to s. 16(2) CDPA). This is consistent with the decision in CBS v. Amstrad, which held that the mere fact a product was capable of making infringing copies does not amount to "authorisation"; and (ii) is unlikely to be a "joint tortfeasor" because it does not fulfil the criteria laid out in s.16 (2) of the CDPA. You would need to establish that Napster had asked its customers to use its software in such a way that it would necessarily infringe online copyright, and that Napster participated in the copying. Also, Napster was not designed to circumvent technical anti-copying measures, and therefore does not fall foul of s. 296 CDPA, unlike the importers of the "messiah chip" in the recent Sony v. Edmunds and Sony v. Paul Owen decisions. Further, although the prosecution of Napster has significantly curtailed its popularity, it has not prevented more and more similar sites from thriving, such as Gnutella and Kazaa. Although likely to be successful, taking legal action against individual Napster users would be a logistical nightmare. Similarly, a decision to sue Internet service providers (ISPs), who are easier to identify and more likely to be solvent, is likely to falter in light of the European e-commerce and Copyright Directives, which both offer substantial protection to ISPs from liability for copyright infringement and liability for content. As a result, some commentators have suggested adopting a system of measuring and taxing bandwidth use - ISPs could introduce a metering system on their networks to trace infringing transactions. However, there is no legal framework for this and using the existing legal framework under the e-commerce Directive may prove difficult: By tracing infringements, ISPs are put on notice and cannot avail themselves of the defences under the directive. Consumers who do not illegally download infringing material but conduct bandwidth heavy online transactions would also have to pay the tax. In any event, a fail-safe metering system would be difficult to create, bearing in mind the resourcefulness of most hackers. Commentators have also suggested expansion of the use of statutory collection societies such as PPL, PRS and MCPS. At present, however, these societies are industry-specific (and usually only deal with one form of copyright). They are also not international and this is incongruous with the global nature of the Internet. There has been an attempt at a global copyright under CISAC (International Confederation of Authors and Composers), but this is still in its infancy.] Technical MeasuresRights holders are increasingly turning to technical measures to prevent unlawful reproduction and distribution of their works available online. These techniques include selling works in an encrypted format, which means that a user is obliged to pay for a decryption key (for example, a password). The problem with encryption is that once the work is decrypted, or the code has been hacked, it can be freely transmitted. Alternatively, it is possible to use a digital watermark, which allows rights holders to track copying and distribution of their works. However, watermarks can be removed and tracing in this way may lead to privacy issues. The ideal solution would be the creation of a trusted system, designed to prevent unauthorised copying of a digital work. Although a number of manufacturers are involved in the development of these types of systems:
Alternative Business ModelsIt is unlikely that legal and technical measures alone will protect against online copyright infringement and rights holders may increasingly need to look at alternative ways of deriving revenue from their works, which are not simply based on charging royalties per copyright unit. Commercial offers can be designed to ensure there is no net benefit to infringement and be sufficiently enticing so that consumers would prefer to buy the product rather than illegally copy it. Incentives may include:
Marly Didizian, Linklaters & Alliance Patents - A Wind of Change for the PCTMost organisations seeking patent protection at a relatively early stage, well upstream of commercial reality, make use of the International Patent Co-operation Treaty (PCT) so as to delay the expense of national and regional phase filings in territories of real interest. Use of the PCT is in a period of change. Eventually it will NOT be necessary to request International Preliminary Examination ("IPE") in order to gain the full 30 months from priority for making the national and regional filings. However, several major countries, for example, Japan and South Korea, have not yet brought their laws into line so as to allow for this. Therefore, for the time being, most applicants will still need to request IPE to gain the 30 months. There are repercussions in the European Patent Office (EPO). At present, to help cope with their heavy workload, when the EPO do the IPE, UNLESS you instruct them to the contrary, they will do a watered down, so-called "rationalised" IPE. In this case you will get a two-thirds refund of the IPE fee (about 1000 Euros). However, if you then follow with a European regional filing, you will no longer be entitled to the 50% fee reduction on the European examination fee. It is consequently a case of swings and roundabouts as far as saving money is concerned! Once we are through the transition, there should be benefits. One can obtain up to 30 months from priority for making the national filing decisions (at least for most industrialised countries) for reasonable expenditure on a single PCT application. This will also bring in a good international search. If it makes sense, one has the option of getting a full examination done at that stage, which, one hopes, will iron out some of the problems that could be encountered downstream in the national patent offices. Furthermore, once they are under less pressure to conduct IPEs, the EPO should have a lessened workload. Hopefully, this will lead to a speed-up in obtaining European grants. Win Eyles, Netspat Ltd. A First Class Appeal?The Court of Appeal has now given its decision in the Premier Luggage & Bags Ltd v. Premier Co (UK) Ltd case. The claimant, Premier Luggage, has supplied high quality luggage and travel goods since 1985 and registered PREMIER as a UK trademark in 1997. The defendant, an existing but previously dormant subsidiary of Premier plc (which deals in Christmas decorations and such-like), started trading in the UK in late 1996. It registered 'pcl' as a UK mark in November 1996 but also uses the full company name on its products. Its business was built primarily on contacts already established by Premier plc in the retail sector. As such, the defendant's sales representatives often introduced themselves to such contacts as being 'from Premier'. Although the trial judge had held that these acts had constituted passing off and trademark infringement, the Court of Appeal overturned this decision, save in respect of the sales staff's representations which was an infringement under section 10 (1) of the Trademarks Act 1994. The judges' reasoning was:
The Defendant had attempted to invalidate the claimant's registration for PREMIER but this was rejected by the trial judge. His decision was upheld by the Court of Appeal who affirmed that the word 'premier' was capable of distinguishing and had, in fact, become distinctive of the claimant through use. The Court pointed out that the trial judge had erred in holding that there was no relevance as to the timing of when the use had taken place. In this case the mark had become distinctive by the time of registration and, as such, the onus was on the defendant/applicant for revocation to show that it had not. If, on the other hand, the mark had only acquired its reputation after registration it would have been for the registrant to demonstrate this. The Court of Appeal's decision reasserts the need for potential claimants to demonstrate more than just a likelihood of confusion when reviewing their claim for passing off and/or trademark infringement. Proof of actual damage and association between the marks is also needed, and should merit as much attention when gathering evidence as that afforded to actual instances of confusion. Tracey Huxley, Associate IP/IT Group
Top News from the RegionsLES (Scottish Branch meeting)
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