For Sale. Patents. Never Used: Gaps In the Tax Code for Patent Sales, 11 J. Marshall Rev. Intell. Prop. L. 859 (2012)
THE JOHN MARSHALL
REVIEW OF INTELLECTUAL PROPERTY LAW
FOR SALE. PATENTS. NEVER USED: GAPS IN THE TAX CODE FOR PATENT SALES
KHURRAM NAIK
ABSTRACT
Patent sales are an underappreciated means of monetizing patents. Recent blockbuster patent sales
indicate heightened demand for patent acquisitions. There is evidence that such patent sales
transfer patents to parties more skilled in patent enforcement, reducing litigation. Patent sales also
move capital to innovators, which enhance incentives to innovate. But crucially, C corporations do
not benefit from advantaged tax treatment. Efforts by other nations to encourage patent use and
sales by providing “patent box” preferential tax regimes may provide some guidance for remedying
this gap in the tax code.
Copyright © 2012 The John Marshall Law School
Cite as Khurram Naik, Comment, For Sale. Patents. Never Used: Gaps In the Tax
Code for Patent Sales, 11 J. MARSHALL REV. INTELL. PROP. L. 859 (2012).
FOR SALE. PATENTS. NEVER USED: GAPS IN THE TAX CODE FOR PATENT
SALES
KHURRAM NAIK
INTRODUCTION ................................................................................................................ 860
I. BACKGROUND .............................................................................................................. 862
A. How Does Taxation of Patents Affect Business Decisions? ............................ 862
B. Litigation, Licensing, or Sales? ........................................................................ 863
C. The Advantages of Patent Sale—For Some..................................................... 865
II. ANALYSIS .................................................................................................................... 866
A. Facilitating Patent Sales by Lowering Taxation Can Reduce Litigation. ..... 867
B. The Patent Box Movement Reflects the Importance of Taxes on Patent
Production and Use. ......................................................................................... 869
C. The Patent Box Movement Supplies Missing Incentives in Patent
Production and Use. ......................................................................................... 871
D. An Incomplete Tax Code................................................................................... 872
III. PROPOSAL ................................................................................................................. 872
A. Corporations Should be Eligible for Capital Gains Taxation on Patent
Sales. ................................................................................................................. 873
B. The United States Should Introduce Its Own Patent Box Taxation
Scheme to Provide Incentives for Innovative Uses of Patents. ..................... 874
IV. CONCLUSION ............................................................................................................. 876
859
[11:859 2012] The John Marshall Review of Intellectual Property Law
860
FOR SALE. PATENTS. NEVER USED: GAPS IN THE TAX CODE FOR PATENT
SALES
KHURRAM NAIK*
INTRODUCTION
In the summer of 2011, the so-called smartphone “patent wars” detonated an
atomic bomb.1 Anticipation had built-up over the fate of the treasure trove of patents
from a bankrupt company that once comprised a third of the value of the entire
Toronto Stock Exchange.2 The portfolio of patents included patents that claimed
cutting-edge 4G wireless technology, the next horizon for the smartphone industry.3
Google was considered the most interested bidder; its lack of a strong patent portfolio
covering smartphones was widely acknowledged as a major impediment to its mobile
ambitions.4
The ultimate victors called themselves the “Rockstar” consortium, a fair moniker
considering the consortium included such smartphone goliaths as Apple, Microsoft
and Research in Motion.5 The consortium paid a stunning $4.5 billion dollars, more
than five times Google’s “stalking horse” bid.6 It was the biggest patent auction ever.7
Weeks later, industry analysts were not completely surprised when Google agreed to
purchase Motorola Mobility for $12.5 billion dollars, Google’s largest purchase ever.8
* © Khurram Naik 2012. J.D. Candidate, May 2013, The John Marshall Law School. B.S.,
Biological Sciences, Carnegie Mellon University. Thanks to my loving wife Amber.
1 See David Drummond, When Patents Attack, GOOGLE OFFICIAL BLOG (Aug. 3, 2011, 2:37 PM),
http://googleblog.blogspot.com/2011/08/when-patents-attackandroid.htmlhttp://googleblog.blogspot.com/2011/08/when-patents-attackandroid.htmlhttp://googleblog.blogspot.com/2011/08/when-patents-attack-android.html;
see
also
Timothy Q. Delaney & Janet Pioli, Smartphone Patent Wars: It’s the Operating System, 2010
ASPATORE SPECIAL REP. 23 (2010) (“While patent suits are nothing new in technology driven
industries, the virulence in the smartphone industry stands out. In excess of twenty-five actions
were filed in this sector in the past three years.”).
2 The
Bigger
They
Come,
THE
ECONOMIST
(Jan.
15,
2009),
http://www.economist.com/node/12936533http://www.economist.com/node/12936533http://www.econ
omist.com/node/12936533.
3 Diane Bartz, U.S. to Approve Google’s Bid for Motorola: Sources, REUTERS (Feb. 9, 2012, 4:59
PM),
http://www.reuters.com/article/2012/02/09/us-antitrust-telecoms-patentsidUSTRE8182GR20120209 .
4 Robert Cyran, A Patent Fever Over Smartphones, N.Y. TIMES, Aug. 1, 2011, at B2.
5 Kit Chellel, Malev Liquidation, Nortel U.K. Unit, Danish Banks:
Bankruptcy, BUSINESS
WEEK (Feb. 14, 2012, 7:45 AM), http://www.businessweek.com/news/2012-02-14/malev-liquidationnortel-u-k-unit-danish-banks-bankruptcy.htmlhttp://www.businessweek.com/news/2012-0214/malev-liquidation-nortel-u-k-unit-danish-banks-bankruptcy.html.
6 Cyran, supra note 4 (“When the gavel came down, a group including Apple and Microsoft, as
well as Ericsson, Research in Motion and others, walked off with the portfolio for an unexpected $4.5
billion.”).
7 Chellel, supra note 5 (describing the novelty of the auction).
8 Matt Richtel & Jenna Wortham, Motorola’s Identity Crisis, N.Y. TIMES, August 22, 2011, at
B1.
[11:859 2012]
For Sale. Patents. Never Used:
Gaps In the Tax Code for Patent Sales
861
Google acknowledged what many surmised: Google was interested in the substantial
patent portfolio Motorola Mobility had amassed.9
Blockbuster patent deals continue to rock the technology world. In April,
Microsoft agreed to pay AOL more than $1 billion dollars for patents related to
smartphones, almost doubling AOL’s market capitalization overnight.10 Within two
weeks, Facebook, recently sued by Yahoo for patent infringement, announced it
would pay $550 million for some of the patents Microsoft bought.11
The smartphone industry is famous for its highly litigious members; it seems
nearly every major tech industry company is moving into the smartphone sector and
suing nearly everyone.12 The discussion over the patent wars overwhelmingly focuses
on patent litigation as t (...truncated)
