Friday, 29 July 2016

Panacea or pain in the SEC? Disclosure and transparency under scrutiny

The United States Securities and Exchange Commission (SEC) has been seeking comments on whether US public companies should make more disclosures regarding their intellectual property activities. Considering what an important issue this is, it's a little surprising that the volume of response to this request for feedback has not been greater, and that so little publicity has attached to it both outside the IP community and even within it.

To help raise awareness of this issue, we thought we would draw the attention of readers to some of the thoughts and opinions that have been recently articulated on the topic.  


Seasoned IP transactions attorney Ian D. McClure has written an article for the Fordham Intellectual Property Media and Entertainment Law Journal on how bad the current situation is with regard to the reporting of IP-relevant information. In this 46-page article ("Accountability in the Patent Market Part II: Should Public Corporations Disclose More to Shareholders?") he makes a number of trenchant points regarding inadequacies and inconsistencies under the current practice. He says (with footnoted citations removed):

"The materiality of patent information and whether an investor would consider it to change the “total mix” of information it needs or has depends a lot on how important patents really are to the value of a company. A determination about information specific to certain patents only, however, would likely be a case-by-case determination that includes factors such as (a) the number of total patents held by the company and the number of patents that are relevant to the information, and (b) the importance or relevance of the patents in question to the core business operations of the company.

Under the language of Item 2.01 of Form 8-K—Completion of Acquisition or Disposition of Assets of the Company [which you can study here: the 22-page form makes no specific reference to patents, intellectual property, licensing or intangibles, though 'asset' gets 53 mentions and transactions 44]—most patent acquisitions or sales by a company as large as and with a patent portfolio the size of IBM will likely not meet the ten percent of assets threshold [the relevant provision of 2.01 reads: "4. An acquisition or disposition shall be deemed to involve a significant amount of assets: (i) if the registrant’s and its other subsidiaries’ equity in the net book value of such assets or the amount paid or received for the assets upon such acquisition or disposition exceeded 10% of the total assets of the registrant and its consolidated subsidiaries;"]. For example, even if all of IBM’s 1,899 patents in CPC G06Q were invalid, which they are not, it would not come close to equaling ten percent of its assets, or even its patent assets. However, since the value of all patents are not equal, and the value of any particular patent to a company can be critical (consider Apple’s “swipe-to-unlock” patent), such an acquisition or disposition event should not be based solely on the number of patents".
Later McClure says:
"In general, empirical studies have proven that patent information such as patent litigation events do affect shareholder value [sometimes quite irrationally, since financial analysts are generally insufficiently IP-savvy to make sense of the facts on the ground: see eg earlier Aistemos blogposts here, on Apple and Microsoft, here, on AMP v  Myriad, and here on the Nokia-Samsung arbitration].  Other studies have offered that as much as eighty percent of corporate value may be attributable to intangible assets. ... The importance of information related to the potential devaluation of a patent portfolio, however, cannot be a “one-size-fits-all” determination. For small pharmaceutical or biotech companies that rely on one or a few families of patents for exclusive rights to build market share, the devaluation of a portfolio is a significant event".
He concludes:
"The question becomes this: as it relates to patent information such as knowledge of patent infringement, where do we draw the line between a risk preventative business strategy and a conscious decision not to disclose important information to investors? Patent licensing information is not available to shareholders, and so they could never know for sure if a company has a patent infringement risk or not. Similarly, the importance of certain patents to current and future business prospects, as well as the potential for certain patents to be invalid, is information that experts inside of a company know and (not without good reason) do not disclose publicly".
A similarly positive approach towards promoting greater disclosure is struck by a group of influential academics spearheaded by Colleen V. Chien, one-time Senior Advisor, Innovation and Intellectual Property, White House Office of Science and Technology Policy ("We ... are professors and scholars of economics and law who research and write about innovation and the patent system. Several of us have also held responsible positions in the U.S. government"). In an open letter to the SEC they write:
"In contrast with information about patents and trademarks, good information about IP licensing is much less publicly available. Although IP royalties provide large in­bound trade flows to the United States ..., remarkably little is known about the economic realities of IP transactions. Not only are licensing royalties economically impactful, but building a better understanding of how markets for technology operate in a modern, innovation economy is important for the transparency of markets, and to the public and policy­makers. Relatedly, data on “comparables” tend to be thin in the industry, a situation that may offer a sub­optimal market environment for startup firms: these young entities often rely on selling intangibles, but have low bargaining power, and limited resources to invest in search and price discovery. 
More disclosure might help since often IP licensing is largely hidden from public view. Many agreements are kept confidential, and even when they are part of public proceedings like litigation, they are commonly kept under seal ... More generally, open data on innovation is currently siloed, fragmented, and unfederated across a number of repositories... raising search and discovery costs and undermining the goals of open data".
Not all players in the IP community are as positive.  The US & Canada branch of the Licensing Executives Society, in its Summary Response, cautions: 

"The greater the granularity required in IP disclosure, the greater the risk to companies’ sales and profits and potentially to the economy generally, as a result of aggregate behavior changes throughout multiple industries that may be brought on by greater disclosure requirements; such changes could have negative consequences for the economy generally.

Greater disclosure concerning IP matters could put U.S. public companies at a significant competitive disadvantage with companies in other countries that do not have similar disclosure requirements, laying bare significant strategically sensitive information that may be exploited by foreign companies and governments.

While it may be true that in some cases material information may be revealed by broader IP disclosure requirements, the important question is whether we want to experiment with our publicly traded companies’ financial health and our economy’s health for investor benefits that are speculative".
So what should be done?
"Rather than regulation, LES suggests that the SEC consider using the voluntary consensus standards process (defined by the American National Standards Institute (ANSI) in the ANSI Essential Requirements) as a way to develop an approach to IP disclosure that balances the needs of all affected parties, including public companies of all sizes from a diversity of industries, investors, and government regulators, with input from IP valuation experts, economists, accounting standards people, and legal professionals".
The debate continues. Meanwhile, Aistemos affirms its support for the principle that there should be greater transparency in corporate IP-driven transactions, not just in the United States but in every jurisdiction and every market in which investment based on knowledge and understanding is preferred to the juggling of hunches, suppositions and inferences to which resort is sometimes made. Even the voluntary disclosure of transactional information by analogy with the voluntary disclosure of patent ownership details under the ORoPO Open Register of Patent Ownership would be an improvement. 

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