12 September 2016

It is well known that the higher the level of development of a country’s industry and economy as a whole, the more significant the role played by companies’ intangible assets, including the intellectual property rights owned by those companies, as well as the related transfer of technology and licensing.

In the modern economy, intangible assets not only form one of the key components of a company’s value, but also become a core foundation for the creation of highly competitive products. Patents, in particular, provide reliable legal protection for innovative developments against unlawful copying, guarantee opportunities for development in certain sectors, and protect market niches from counterfeit “occupation”. Sergey Dorofeev — Russian Patent Attorney, Eurasian Patent Attorney, Partner at the law firm Gorodissky & Partners, and President of the Russian Licensing Society (LES Russia) — discusses a number of current licensing issues in this exclusive interview.

— Sergey Andreevich, in your opinion, how thoroughly is Russian law developed with regard to licensing transactions? How does Russian law in this area correlate with international law?

— Russian law on licensing is developed quite thoroughly and, moreover, in the interests of both parties. Part IV of the Civil Code of the Russian Federation contains general and special provisions and rules governing civil-law relations between parties in connection with licensing.

In addition, agreements concerning the disposal of exclusive rights to a result of intellectual activity or a means of individualisation, including licence and sublicence agreements, are subject to the general provisions on obligations (Articles 307–419 of the Civil Code of the Russian Federation) and contracts (Articles 420–453 of the Civil Code of the Russian Federation), unless otherwise provided by law or arising from the content or nature of the exclusive right (Clause 2, Article 1233 of the Civil Code of the Russian Federation).

Furthermore, following the recent reform of the system of civil contract law and the law of obligations, participants in licensing relations now have access to such legal mechanisms as negotiations on entering into a contract (Article 434.1 of the Civil Code of the Russian Federation), representations as to circumstances (Article 431.2), indemnification of property losses (Article 406.1), options (Articles 429.2 and 429.3), and other legal instruments that have been used in Western practice for many years.

Thus, Russian law in this area is developing and largely follows international legal trends. This, in turn, makes it possible to conclude that our law supports the fundamental principles of international licensing practice rather than being generally inconsistent with them. We hope that this development will continue to improve.

— Do you think a Russian company can increase its capitalisation by acquiring a licence? If so, how and to what extent?

— If we are talking about capitalisation in the classical sense, as the product of the market price of shares and the number of shares outstanding, then, as a rule, there is no direct correlation between that indicator and the number of licences held by a company.

If, however, we speak of capitalisation in a broader sense as the value of a company, including the value of its assets reflected in financial statements, then abroad this is one of the most commonly used ways to increase the goodwill of a business. In Russian practice, however, this still does not work actively enough.

The fact is that in Russia, the rights that a licensee receives from a licensor under a licence agreement are not reflected on the licensee’s balance sheet, because only exclusive rights may be included as intangible assets. Expenses for licence fees are treated under Russian law as current expenses, even if they are incurred as a large one-off payment in a particular period and allocated over all future periods during which the licence is expected to remain in force.

It is important to note that in Russia a company’s capitalisation may be increased through intellectual property only by placing exclusive rights on its balance sheet. Subject to certain restrictions and requirements of accounting legislation, such exclusive rights are recognised as intangible assets, and their value is reflected in the company’s balance sheet.

— Is the export of a Russian licence to other countries exempt from VAT? What benefits and forms of support apply to this type of export?

— In Russia, as in most European countries, VAT is levied according to the “country of destination” principle. With regard to the transfer of proprietary rights, this means that the “export” of such rights is exempt from VAT in the licensor’s country.

Russian legislation governing VAT does not place proprietary rights in a separate category, but classifies them as services for VAT purposes. Accordingly, the legislation uses the term “place of supply of services”.

With regard to the transfer of proprietary rights, Article 148 of the Tax Code of the Russian Federation determines the place of supply of services involving the transfer of rights to inventions, computer programs, means of individualisation, and similar rights by reference to the location of the purchaser, i.e. the licensee.

Accordingly, if the licensee has no branch or representative office in the Russian Federation through which the transaction was concluded, the place of supply of such services is unambiguously recognised as a foreign state, and VAT is not charged in Russia on such a transaction.

In addition, if the Russian Federation has concluded a double taxation agreement with the state in which the licensee is located — and Russia currently has such agreements with around 90 countries, including all developed countries, with the list continuing to expand — then the provisions of that agreement will apply to the transaction.

As a rule, such agreements provide either for full exemption of such income from taxation in the state from which the payment is made, or for a substantial reduction in the tax rate, usually to 5–10%, with the possibility of crediting the tax paid in the foreign state against the tax payable in the Russian Federation.

— What licensing arrangements should Russian industrial companies establish when setting up joint ventures in other countries?

— As a rule, when establishing joint ventures in other countries and/or jointly with foreign parties, industrial companies provide access to their intellectual property and technologies through a cross-licensing model.

In other words, a number of licence agreements are concluded under which the parties grant each other rights to use intellectual property for the purpose of ensuring the proper functioning of the joint venture and the effective implementation of the relevant technologies or products.

In certain cases, intellectual property is contributed in full to the charter capital of the joint venture on the basis of agreements for the assignment of exclusive rights.

Such licensing and assignment arrangements are used by participants in commercial transactions taking into account an analysis of all possible tax and financial risks and consequences.

It is also important to note that such cross-licensing or assignment of intellectual property is often subject to registration with Rospatent and, where necessary, with other patent offices.

— What are the Licensing Executives Society International (LES International) and the Russian Licensing Society (LES Russia)?

— In 1965, in Hollywood Beach, Florida, representatives of 79 American companies established the Licensing Executives Society (LES), a national association of specialists in technology licensing. The initiative to establish the Society came from Dan Stice of 3M Company and Didel Smith of Celanese Corporation.

Later, at an international conference in San Francisco in 1973, representatives of the United States, Canada, the United Kingdom, France, Finland, Norway, Sweden, Denmark, Italy and Japan announced the creation of LES International — the Licensing Executives Society International.

The national Russian Licensing Society (LES Russia) was established in Moscow in August 1994.

In October 1994, at the LES International conference held in Hawaii, USA, the Russian Licensing Society was formally admitted to LES International.

Today, the Licensing Executives Society International has become the most powerful and authoritative international organisation in the field of intellectual property protection, with more than 10,000 individual members from over 70 countries. The Society comprises 31 national and regional societies.

— Does LES International bring together lawyers?

— Not only lawyers. Today, members of the Licensing Executives Society International represent a wide range of professions and organisations, including small and medium-sized businesses — entrepreneurs, engineers, lawyers, patent attorneys, scientists, financiers, civil servants, economists, students, and others.

This is because in the modern world innovation and high technology are fundamental conditions for the successful development of any company.

Moreover, licensing now covers not only technologies, innovations and inventions, but also other intellectual property, such as trademarks, know-how, industrial designs, computer programs, and so on.

The Licensing Executives Society International helps specialists in intellectual property licensing achieve high professional standards by organising conferences, publishing materials, exchanging experience, and conducting specialised studies and surveys.

The Society informs international organisations, government bodies and the business community about the importance of licensing and about modern approaches and best practices in the field.

Every year, the Society holds international conferences in major business centres around the world — New York, London, Paris, Brussels, Rome, Munich, and others. As a rule, speakers include senior executives of major industrial corporations, senior government officials, and heads of licensing and legal departments of companies.

The Society publishes the quarterly journal les Nouvelles, a unique publication devoted entirely to licensing. The Society’s member database, available only to its members, greatly facilitates contact between members in their day-to-day professional activities.

— Could you tell us about the tasks LES Russia is addressing today?

— The national Russian Licensing Society (LES Russia) sees its main task as promoting in the Russian Federation and CIS countries the ideas, knowledge and experience associated with innovation implementation and intellectual property licensing.

Under the current conditions of development of the Russian economy, the importance of the Russian Licensing Society should increase significantly.

For example, how should we approach the task of moving a resource-based economy onto an innovation-driven path? Only intellectual property specialists with a systematic approach to analysing innovation processes can set the right priorities.

In essence, a resource-based economy should not be opposed to an innovation-based economy. What matters is how the vast natural resources available in our country are used. If the innovation component is used competently, taking into account the correct strategy for protecting and developing intellectual property, this should inevitably lead to success.

— So, first and foremost, the development of innovation processes?

— That is only one of the major tasks of the Russian Licensing Society.

Another idea that requires careful and professional analysis by intellectual property specialists is import substitution. Clearly, this is a protectionist measure adopted in the context of sanctions and aimed at limiting the use of foreign technologies and creating conditions for the development and application of domestic innovative solutions.

But let us look at it from another perspective.

Since 1991, a system for the protection of intellectual property has been consistently and successfully developed in our country, and it is well harmonised with the corresponding legal systems of developed countries.

However, because the innovation culture of most local market participants in the Russian Federation remains extremely low, this system is used more successfully by foreign companies than by Russian manufacturers and developers.

Many, if not most, areas of development of modern technologies in different technical fields may be protected by complex patent portfolios belonging to leading foreign companies in those fields.

It makes no difference whether these patents are blocking patents or are offered for use by market participants in the Russian Federation, because under the concept of import substitution we do not intend to use foreign technologies.

Thus, the current situation is such that in many cases attempts at import substitution may fail because of the risk of infringing valid Russian patents owned by foreign market participants.

— You mentioned that our innovation culture is at a relatively low level…

— In this connection, another important task of the Russian Licensing Society is to disseminate knowledge in the field of innovation.

Today, as I have already said, the culture of innovation knowledge and the use of patent and technical information is unfortunately at a very low level.

In most Russian organisations, patent and licensing departments have either disappeared or never existed at all. There are no intellectual property specialists, and there is virtually no market policy at enterprise level that takes into account the creation, acquisition and maintenance of patent portfolios and other intangible assets.

In many cases, developers do not monitor the development directions of competing companies.

Moreover, domestic technical developments are often duplicated, most frequently because inventors simply do not know that such technical solutions already exist.

Instead of a market strategy for the enterprise, which should be developed taking intellectual property into account, government authorities, especially at state-owned enterprises, require reporting on the number of applications filed and patents obtained for inventions and utility models.

This forces enterprises to obtain patents for technical solutions that have little connection with innovative products and do not protect such products in any meaningful way.

Thus, instead of creating conditions for an innovation environment, conditions are created for “absorbing” state budget resources under the banner of innovation activity, which is not the same thing at all.

In our view, the constant creation of new state innovation instruments, such as the Skolkovo Innovation Centre, Rusnano, the Agency for Technological Development and others, cannot be regarded as factors that significantly contribute to the formation of an innovation environment in the country.

What is needed instead is painstaking work to create economic conditions that strongly encourage innovation by Russian companies, including tax incentives for intangible assets and licence payments, the development of employee inventions, and so on.

Here I would like to quote the American professor Loren Graham:

“Why are Russians so good at developing scientific and technological ideas and so poor at deriving economic benefit from them? The answer does not lie in a lack of talent among Russian scientists and engineers — not at all. The answer is that Russia has failed to build a society in which the brilliant achievements of its citizens translate into the country’s economic development. All Russian leaders — from the Tsarist era to the present day — have believed that technology itself is the answer to the problems of modernisation. They believed the answer lay in technology, not in the socio-economic environment. What are the cultural elements that allow ideas to turn into commercially successful enterprises?

A free market in which investors need new technologies. Protection of intellectual property. Control over corruption and crime. A legal system in which an accused person has a chance to be acquitted and prove innocence. A culture that permits criticism and allows independence. A culture in which one can fail and try again. These are some of the ‘intangible’ characteristics of an innovative society.”

This leads to another important task of the Russian Licensing Society: trying to convey to government authorities the importance of the correct approaches to creating conditions for an innovation environment in the Russian Federation.

— And integration within LES International is very useful in this process, isn’t it?

— Absolutely.

As already mentioned, the Licensing Executives Society International brings together more than 10,000 members from over 70 countries.

Many members form its active core, which is essentially a close-knit family of licensing professionals.

Therefore, if a member of the Licensing Society needs relevant legal advice, assistance in finding business partners, searching for a particular technology, and so on, they can always contact another Society member in a particular country using the member database available to Society members.

A response will always be provided, containing information on who may be able to assist in the particular situation.

Participation in Licensing Society conferences is also invaluable.

In addition to gaining advanced knowledge in the field of licensing, it always means “a million” new contacts and “a million” potential partners and clients.

The Licensing Society has a special Education Committee and allocates a dedicated budget for educational seminars of different levels and areas.

Today, with the support of the Licensing Executives Society International, the Russian Licensing Society is ready to organise practically any seminar in the field of intellectual property and technology transfer. All that is needed is an interested audience.

Last year, the Russian Licensing Society sent letters to several major state-owned companies inviting them to hold a series of joint seminars on licensing and technology transfer.

How many replies do you think we received? Far fewer than might have been expected.

Unfortunately.

And yet Russian industry is essentially not represented in the Russian Licensing Society.

This raises the question: who in Russian companies develops licensing policy, prepares licence agreements, calculates licence payments, determines the market significance of particular technical solutions, and deals with the many other issues connected with intellectual property?

Or is all of this left to foreign partners, with the work prepared by foreign specialists simply accepted because there is insufficient domestic experience?

Russian companies that want to occupy leading market positions need specialised knowledge by default, and the best way to acquire it is through interaction within the licensing community of the Licensing Executives Society International and the Russian Licensing Society.

We hope that Russian companies will soon come to understand the importance of such interaction.

Industrial Weekly, No. 31 (619), 12–18 September 2016