The following post comes from Wade Cribbs, a 2L at Scalia Law and a Research Assistant at CPIP.
By Wade Cribbs
Last week, Arlington Economic Development’s BizLaunch network co-hosted an online legal clinic event entitled “Mason Law Clinic @BizLaunch: Which Entity is Right for Your Startup?” with Antonin Scalia Law School’s Innovation Law Clinic, which is led by CPIP Executive Director Sean O’Connor. The virtual clinic addressed entrepreneurship and which business entities might best fit a business’s needs and attract investment. The panelists were Kenneth Silverberg, Senior Counsel at Nixon Peabody, and third-year Scalia Law students Mitch Gibson and Rebecka Haynes.
Mr. Gibson opened the discussion by describing the kinds of non-corporate pass-through business entities: sole proprietorships, partnerships, and limited liability companies (LLC). Sole proprietorships are operated by only one person, while partnerships can have as many participants as desired. Neither form of business entity requires registration with the State Corporation Commission; nevertheless, registering a business’s name or obtaining an employer identification number may be necessary. Similarly, partnership agreements are borderline necessary before beginning a partnership so that all parties agree on profit splits, decision making, and how much say each partner has in the venture.
An entrepreneur must register an LLC with the State Corporation Commission. An LLC is made of members and managers. A member of an LLC is anyone who owns a stake in the company—analogous to a shareholder—while a manager can be either a member or an outside person who handles the business decisions. Either members or a manager can run an LLC. To create an LLC, form LLC-1011 must be filed with the State Corporation Commission. If the business is for professional occupations—such as for doctors, lawyers, or architects—form LLC-1103 is needed.
Pass-through taxation is where the business itself is not taxed for the gains and losses. Pass-through taxation occurs at the ownership level, and its most significant advantage is that there is only a single level of taxation. Gains are taxed as the owners’ income and are taxed only once—instead of being taxed when made as profit by the business and then again when distributed to shareholders. Similarly, another advantage is pass-through losses. If the business loses money, the losses can be used to diminish other tax burdens. Liquidity, however, is a disadvantage of pass-through taxation. Liquidity occurs when the business has made a profit that remains within the business. When this happens, the owners are still taxed on the profits without receiving any of them. Another disadvantage is that there is a limit of $10,000 that can be deducted from state or local taxes per member or partner.
Ms. Haynes continued the discussion of pass-through taxation with how it applies to corporations. A corporation utilizes pass-through taxation by electing to be taxed as an S-Corporation, which is a corporation that chooses to be taxed under Subchapter S of the tax code. An S-Corporation is formed by incorporating in the desired state and submitting form 2553, “Election by a Small Business Corporation,” signed by all shareholders. For a business to be an S-Corporation, it must be a domestic corporation, have no more than 100 shareholders, and have only one class of stock. Furthermore, the kind of shareholder is limited to individuals, certain trusts, and estates. Certain financial institutions, insurance companies, and international sales corporations are ineligible to be S-Corporations. An S-Corporation is different from other tax-through businesses in that it allows for tax-free reorganization, provides stock options, and can easily convert to a C-Corporation.
A C-Corporation, on the other hand, is a corporation that does not elect to be taxed under Subchapter S of the tax code and by default is taxed under Subchapter C of the tax code. C-Corporations are closely or publicly held. A closely held corporation has a limited number of shareholders, whereas a publicly held corporation has a large number of shareholders with shares on the market. Some states allow for closely held C-Corporations to dispense with some of the formalities of operating a corporation. C-Corporations are taxed separately from their owners at a flat 21% tax rate. Any further profits distributed to shareholders are then taxed again, resulting in an effective tax rate of 41% on the distributions. The exception to this is that qualified small business stock that has been held for more than five years after its issuance is eligible for 100% exclusion from gain on disposition, not to exceed $10 million for any one shareholder. For a stock to be a qualified small business stock, there are three requirements: it must be issued by a C-Corporation at original issuance; the corporation must be engaged in active business that is not a service business; and the business’s gross assets cannot exceed $50 million. A C-Corporation’s benefits are that it can issue more than one class of stock and have unlimited deduction of state and local taxes.
Prof. Silverberg addressed how the various tax and business structures apply to someone who wants to start, run, and sell a business. Prof. Silverberg did this by examining the sale of a hypothetical landscaping business. Through this hypothetical example, Prof. Silverberg looked at what motivates a purchaser to buy a business and how this affects the taxation of the transaction. The buyer and seller have to agree on the purchase price and how that price is allocated to different assets. Prof. Silverberg then discussed the amount pocketed by the entrepreneur after selling the business under pass-through taxation; he also discussed the sales structure under the different possible business structures and compared it to taxation under a C-Corporation. Looking at the numbers, Prof. Silverberg highlighted the tension between the seller’s desire to sell the business as stock under a C-Corporation and the buyer’s desire to buy assets under a sole proprietorship or the like.
The event page can be found on AED’s website and on the Eventbrite page. The video of the event is available below:
CPIP expresses condolences to the family, friends, and colleagues of Richard Bates, long-time head of Disney’s Government Relations team in Washington, D.C., who died suddenly on December 31, 2020. Richard was a consummate professional and knowledgeable advocate for the interests of the creative community. His impact in the policy arena was far-reaching, and he was much respected and warmly regarded by those who had the good fortune to know and work with him over the years. CPIP is grateful for the opportunities we have enjoyed to interact with Richard and his team.
As we enter the holiday season and look ahead to 2021, we hope that you will keep CPIP in mind as you plan your end-of-year giving. Your support is critical to ensuring that CPIP can continue to bring reason and balance to the academic debate on intellectual property (IP) by engaging academics, creators, and innovators in a scholarly dialogue. Through our programs, events, network of scholars, and in-house staff, we have made great strides, but there is more work to be done. CPIP is an academic center and receives neither government funding nor funding from George Mason University, and it is only through the private support of our partners and sponsors that we can fulfill our mission.
Host conferences, roundtables, fellowship meetings, symposia and colloquia, the WIPO Summer School on Intellectual Property, and many other programs that promote an ongoing dialogue on the importance of IP rights
Continue to build and maintain a community of research scholars and innovation industry stakeholders in the U.S.
Produce and support the production of a variety of cutting-edge research, scholarly articles, and policy materials that explore the value of IP and contribute to better-informed policy
Employ an in-house staff of directors and communications specialists who work tirelessly to plan and execute CPIP programs and events
Maintain and grow an international network of scholars, lawyers, and other professionals dedicated to the scholarly analysis of IP
Looking ahead to CPIP’s ninth year of operation, we are proud to be a leading academic voice in the discussion of IP rights and the technological, commercial, and creative innovation they facilitate. We have an exciting lineup of programs and events planned for 2021 as well as research and policy work agendas that will focus on key IP issues. The generosity of our partners and supporters is essential to CPIP’s success, and we thank you in advance for your support.
The following post comes from Wade Cribbs, a 2L at Scalia Law and a Research Assistant at CPIP. This is the second of two posts (see day one recap) summarizing our two-day 5G at the Nexus of IP, Antitrust, and Technology Leadership conference that was held online from George Mason University Antonin Scalia Law School on October 7-8, 2020.
By Wade Cribbs
On October 7-8, 2020, CPIP hosted its Eighth Annual Fall Conference, 5G at the Nexus of IP, Antitrust, and Technology Leadership, online from George Mason University Antonin Scalia Law School in Arlington, Virginia. The conference featured a keynote address by the Honorable Andrei Iancu, and it was co-hosted by Scalia Law’s National Security Institute (NSI).
This conference addressed fast-emerging intellectual property (IP), antitrust, and technology leadership issues in the 5G and “Internet of Things” innovation ecosystem. Coverage included standard-essential patents (SEPs) along with established and emerging markets on a regional and global basis. Speakers were drawn from the academic, industry, and policymaking communities, with an emphasis on using objective fact-based analysis to explore points of convergence among legal, economic, and geopolitical perspectives on the IP and regulatory infrastructures that underlie these critical industries.
SESSION 3: MARKETS WORK: PRIVATE ORDERING MECHANISMS IN PATENT-INTENSIVE MARKETS
The first panel of the day consisted of academics and industry experts discussing the path moving forward for intellectual property licensing and how it relates to 5G technology. CPIP Executive Director Sean O’Conner moderated the panel, directing a conversation on the mechanisms for controlling intellectual property licensing and the conflict between antitrust policy and private-ordering initiatives. Panelists included Prof. Jonathan Barnett of the University of Southern California, Dr. Bowman Heiden of the University of California, Berkeley, David Kappos of Cravath, Swain & Moore, and Luke McLeroy of Avanci.
Prof. Barnett opened the panel with a discussion of the difference between the theoretical models of IP licensing and the actual standard-essential patent market. According to the models, the burden of many standard-essential patents involved in developing a smartphone should cripple the smartphone market. Smartphones should cost thousands of dollars due only to the cost of royalties necessary for production. However, as Prof. Barnett pointed out, smartphones are more available than ever and at every price point. The empirical evidence confirms the theoretical models’ fears are inaccurate as the aggregate royalty burden is in the single digits.
Prof. Barnett went on to illustrate how this empirical evidence is shaping the DOJ Antitrust Division’s view of IP licensing. The fear has shifted from patent holdup, large patent royalties preventing innovation and competition, to a fear of patent holdout. Prof. Barnett explained that patent holdout is becoming common place in the market where a company’s most efficient method of obtaining an IP license is through litigation as opposed to negotiating a competitive licensing fee. Prof. Barnett concluded by suggesting that patent holdout occurs where property rights are not strong and clear. Where injunctive relief is awarded readily and aggressively to license owners, in the United Kingdom and Europe, patent holdout is not a prevalent issue.
Dr. Bowman framed the issue as an interplay between the public and private spheres. For the private sphere to produce, protection of its investment in the form of patents is necessary. The conflict is the public’s access to the private sector’s production is easily frustrated by a large number of standard-essential patents in an industry. Because access to the product is in the interest of the private sphere, the private sphere has solved its own problem. Industries require an agreement from a patent owner to license its patents on terms that are fair, reasonable, and non-discriminatory (FRAND). Without a FRAND agreement, a patent cannot be a standard-essential patent.
Dr. Bowman then examined the implementation of FRANDs in the wireless communication ecosystem. He argued that the inherent vagueness of FRANDs are a necessary feature as it allows for varied and customized solutions. Additionally, the public sphere, or other members of the private sphere, can obtain an advantage through antitrust authorities. However, innovation on the private side is always preferable to antitrust regulations.
Mr. Kappos began by emphasizing the need for balance between innovators and implementers. Current innovation-based standards create enormous consumer surplus, totaling nearly four trillion dollars in the wireless communication industry. He went on to say that innovation-based standards are far superior to previous proprietary, winner-take-all standards that produced limited consumer surplus.
Mr. Kappos further developed Prof. Barnett’s point about the need for injunctive relief to protect innovators. He highlighted that preliminary injunctive relief is available in other IP hubs, such as China and Germany, but that the United States has all but given up on awarding injunctive relief to innovators. In many cases, even when injunctive remedies are available, more is needed to compensate innovators for the lost opportunity, income, and effort. He then added that there needs to be a new recognition in license negotiations. Those who delay or try to avoid paying for licenses should be forced to pay a premium once they finally comply.
Mr. McLeroy discussed the nature of his licensing company Avanci. The company streamlines licensing of cellular standard-essential patents for internet connectivity in commercial products such as cars. It simplifies licensing by compacting all standard-essential licenses, from multiple patent owners, necessary for a product and offering them to companies in the industry at a flat rate. Avanci lowers the transaction costs by removing the time needed to identify the patents necessary and evaluate what the proper fee should be. This reduction in transaction costs allows the innovator to spend money that would have been spent on searching and negotiation back into research and development.
In response to a question, Mr. McLeroy discussed the way that 5G licensing will be administered. One potential method is based on usage. He compared a water meter intermittently transmitting data with autonomous cars constantly interacting with other vehicles and intersection equipment. The licensing fee for the water meter would be much lower than for the autonomous car due to the significantly lower scale of data transfer necessary to operate it.
All panelists agreed that strong and clear property rights in innovation are necessary for a productive global licensing market. Injunctive relief is also a necessary tool that must be made available to those developing innovative standard-essential patents.
SESSION 4: TECHNOLOGY LEADERSHIP IN 5G/IOT MARKETS
The second panel of the day focused on what steps should be taken to protect American leadership in the innovative technology sectors such as 5G networks. Moderator Jamil Jaffer, Founder & Executive Director of the National Security Institute (NSI), led the discussion on how the federal government can best handle the global development of 5G standards and protect American innovation from the competitive threat of China. Panelists included Megan Brown of Wiley Rain, Dr. Jonathan Putnam of Competition Dynamics, the Hon. Randall Rader of the Federal Circuit, and Andy Keiser of Navigators Global.
Dr. Putnam opened the discussion by addressing China’s patent program. Dr. Putnam described a model he created using research and development, gross national product, population, and other national indicators of inventive behavior. He noted that China subsidizes patent applications, resulting in the largest number of patents worldwide. Dr. Putnam addressed whether China has become the world leader in innovative technology. The model shows that while Chinese patent application numbers are dramatically increasing, the quality of those patents are notably lower than the rest of the world.
Dr. Putnam proposed three methods for the United States government to protect domestic interests without following the Chinese model of subsidizing innovators. First, the U.S. should unify its fractured view of antitrust on the global market. Presenting a common understanding of antitrust principles would remove a substantive fracture in U.S. foreign policy that works to China’s advantage. Second, the U.S. should take a more aggressive stance in enforcing fair trade on the world stage. There is systemic theft of foreign patent technology that must be curtailed. Third, in the pharmaceutical industry, private companies can take advantage of basic research conducted by the National Institute for Health. Applying this model to other technological sectors would be beneficial for American innovation as basic research is the foundation for most innovation.
Judge Rader agreed with Dr. Putnam that a large quantity of inferior patents is produced by China. However, Judge Rader distinguished the average patent seeker from the Chinese mega-corporations such as Huawei that produce innovation technology. Chinese mega-corporations are like American innovation leaders such as Qualcomm. Judge Rader explained that China built its platform out of subsidies in the past, but currently individual companies like Huawei devote large percentages of their gross budget to research and development that makes China a competitive innovator. China cannot be dismissed as a competitor built on unfair advantage. Instead, he urged, China must be confronted as an innovative equal that is willing to spend and supply the technology of the future.
Mr. Keiser identified China’s unique control over its market through tariffs, credit, and market manipulation. Unlike any other economy of similar size, its unique control positions China perfectly to advance its interests in innovation. Given that China is the United States’ biggest geopolitical competitor, China poses a serious threat to national security. Mr. Keiser pushed back against Judge Rader’s equal competitor view of China. He cited cases from both the United States and Poland where Huawei was found to have committed espionage and theft of competitors’ patents. Regardless of how China arrived at its current state, he said that Chinese 5G networks are not trustworthy due to consistent exploitation of foreign patents.
Ms. Brown voiced her concerns regarding the impulse to respond to China’s action by nationalizing 5G. She suggested optimizing regulation by removing the fragmented regime currently impeding innovation. The hands-off approach of Congress has facilitated longstanding U.S. leadership in innovation, and unprecedented congressional involvement would only harm American innovators. Ms. Brown framed Mr. Keiser’s point about the trustworthiness of Chinese 5G equipment and networks as a question of government intervention. Assuming these networks cannot be trusted, she asked how much the government should intervene to address the problem. In response to Dr. Putnam’s proposal of government-subsidized basic research, Ms. Brown argued that the focus should be real-world research and development with telecommunication carriers.
Ms. Brown warned that, specifically relating to 5G standard setting, the government must be careful to expend influence in its natural spheres. The 3rd Generation Partnership Project (3GPP) is a private sector, global body that leads the development of standards in 5G technology. As a global private sector organization, the federal government, in the form of the Department of Defense, has no business influencing 3GPP policy. If any government activity is warranted, she continued, it should incentivize more private American businesses to participate in and influence private organizations like 3GPP.
All the panelists agreed that the focus should be on American policy promoting domestic innovation as opposed to overreacting to the imposing threat of China. Foremost on policy makers minds must be preserving and promoting innovation from garage inventors to Qualcomm. However, Mr. Keiser stated that the scale of theft of intellectual property by China is too large to be ignored. Congressional protection in the form of laws such as the CHIPS Act, a bill to incentivize and subsidize research into semiconductors, is necessary.
CLOSING REMARKS
CPIP Executive Director Sean O’Connor and CPIP Deputy Director Joshua Kresh closed out the two-day conference by thanking all of the moderators, panelists, and attendees for making the conference such a huge success. They also thanked CPIP staff members, including Kristina Pietro, Devlin Hartline, and Mary Clare Durel, for working behind the scenes and the generous sponsors of the conference whose financial support made it possible.
CPIP is proud to welcome Joshua Kresh to our leadership team! As Deputy Director, Joshua will report to CPIP Executive Director Sean O’Connor while managing and participating in CPIP’s day-to-day operations. Joshua will oversee CPIP’s academic research, policy, and fundraising efforts, working as well on planning and executing CPIP events such as conferences, meetings, fellowships, and roundtables. Joshua will also consult with Professor O’Connor and the other faculty directors to develop CPIP’s long-term academic and policy plans.
“We are thrilled that Joshua is joining us as we expand CPIP further into innovation and international policy. Joshua’s extensive background in IP, as well as in computer science and bioinformatics, position him ideally to strengthen our tech and patent research,” said Professor O’Connor. “We also expect to leverage his policy and outreach work with AIPLA and the Giles Rich American Inn of Court to connect with the new generation of IP lawyers,” he continued.
Before joining CPIP as Deputy Director, Joshua was an Associate with DLA Piper in Washington, D.C., where he practiced patent litigation. He received his law degree with honors from The George Washington University Law School, and he holds master’s and bachelor’s degrees in computer science from Brandeis University. Joshua is the Chair of AIPLA’s New Lawyers Committee and Co-Mentoring Chair of the Giles Rich American Inn of Court, and he is a registered patent attorney with the U.S. Patent and Trademark Office. He previously served on the Intellectual Property Committee for the U.S. Court of Federal Claims Advisory Council.
About CPIP
The Center for the Protection of Intellectual Property (CPIP) is dedicated to the scholarly analysis of intellectual property rights and the technological, commercial, and creative innovation they facilitate. CPIP explores how stable and effective property rights in innovation and creativity can foster successful and flourishing individual lives and national economies.
Through a wide array of academic and public policy programming, CPIP brings together scholars, industry leaders, inventors, creators, and policymakers to examine foundational questions and current controversies concerning patents, copyrights, and other intellectual property rights. Ultimately, CPIP seeks to promote a healthy academic discussion, grounded in rigorous scholarship, and a well-informed public policy debate about the importance of intellectual property.
For more information about CPIP, please visit our website at: https://cip2.gmu.edu
Longtime CPIP staff member Kevin Madigan is leaving the Center next week to become VP, Legal Policy and Copyright Counsel at the Copyright Alliance.
“I joined CPIP just over four years ago, and my time with the Center and Scalia Law has been rewarding on so many levels. The knowledge I’ve gained and the relationships I’ve cultivated are things that I’ll cherish for the rest of my life,” said Kevin Madigan. “I’m proud to have been a part of such a dynamic academic center, and I know CPIP will continue to thrive in my absence. I want to express my sincere gratitude to Sandra Aistars, Sean O’Connor, Adam Mossoff, Devlin Hartline, Matt Barblan, Mark Schultz, Kristina Pietro, and Mary Clare Durel,” he continued.
“We could not be happier for Kevin who has done impeccable work for us beginning as a Fellow and recently serving as Deputy Director. While we will miss him, we know that he will not be far away given our close relationship with CA,” said Sean O’Connor, Executive Director at CPIP.
As a result of Kevin’s departure, we are now seeking a new Deputy Director to join the CPIP team. This is an exciting position for an accomplished intellectual property professional seeking to advance their career at the interface of academia, industry, and public policy.
Reporting to CPIP’s faculty Executive Director, the Deputy Director manages and participates in CPIP’s day-to-day operations including academic and policy work as well as conferences, meetings, and other events. The Deputy Director also works with the Executive Director and other faculty directors to develop CPIP’s long-term academic and policy plans.
The position is designed for an individual with a J.D. degree and an interest in promoting innovation and creativity through CPIP’s academic and policy mission. The ideal candidate will have: strong experience in intellectual property law and policy; familiarity with the academic intellectual property community; and an understanding of government policy-making in Washington, D.C. and beyond. At least three years of IP law practice or IP policy experience are required.
By Wade Cribbs
By Wade Cribbs
CPIP is proud to welcome 
Longtime CPIP staff member Kevin Madigan is leaving the Center next week to become VP, Legal Policy and Copyright Counsel at the Copyright Alliance.