The "Patent Box": Preferential Tax on Profits From Patents
On 10 June 2011, the UK Government launched a Consultation on the "Patent Box", a preferential corporation tax regime of 10 per cent on profits arising from patents. According to HM Treasury, the consultation forms part of the Government's plans to make the United Kingdom's tax system the most competitive in the G20.
In November 2010, the UK Government published a Corporate Tax reform consultation that included a wide-ranging review of taxation of intellectual property (IP). The Patent Box consultation builds on that initial review and provides a detailed explanation of how the Government proposes to implement the Patent Box.
The idea is that from April 2013, the Patent Box will apply a 10 per cent corporation tax rate to profits attributed to patents. The Government is focusing on patents because they have a particularly strong link to high-tech research and development and manufacturing activity.
Special regimes for patent income are available in some other countries and there have been concerns that the UK system has become less competitive, leading to pressure to locate elsewhere.
The proposals reflect the Government's dual aims for the Patent Box: to cover a wide range of patent income and to minimise where possible uncertainty and risk of dispute.
All businesses within the scope of UK corporation tax will potentially be eligible to elect for the Patent Box regime to apply to their trading profits. In order to claim the Patent Box tax deduction, the business must actively hold a qualifying patent or other qualifying IP and must receive income related to that patent or IP.
The proposed model for calculating patent profits is based on the fact that valuable patents and other forms of IP will produce additional returns over companies without valuable IP. The amount of this extra profit, known as the "residual profit", is a measure of the profit created by the IP rather than though routine business activities.
The consultation questions cover five main areas:
1) The patents and associated IP types that will be eligible for the Patent Box. For example, should the Patent Box cover patents granted by any other EU national patent office, and do the current ownership laws adequately permit exclusive licensees of patents to qualify for the Patent Box?
2) The types of income that will be eligible. For example, the Government is seeking views on how the arm's-length profit attributable to patents used in processes or to provide services should be calculated.
3) How the profit attributable to patents will be calculated. For example, should there be special rules for any one-off items of income or expenditure? Further, the Government is asking for businesses' views as to how to separate effectively patent profits from those arising from other forms of IP and on how Patent Box losses should be dealt with.
4) The computational methodology and interaction with group loss relief, chargeable gains, double tax relief and transfer pricing regimes, and potential anti-avoidance rules. For example, is using a computational tax deduction method the right approach and what are businesses' views on the interaction with double tax relief rules?
5) The commencement date of the regime. The Government is asking for views on its proposal for a phase-in approach rather than a cut-off date approach as initially proposed in the November 2010 consultation.
The November 2010 document outlined a number of high level principles to guide the design process, such as: the box should have a broad scope, it should take a formulaic approach, it should apply to profits not receipts, and it should benefit active ownership and innovation. The proposals in this second stage consultation incorporate all of those principles. In addition, the consultation includes a flexible, formulaic approach for calculating patent profits in order to balance the desire for certainty and simplicity with the need for the Patent Box to be flexible enough to take into account different business models and group structures.
The consultation closes on 2 September 2011.
Documentation of the Creative Process is Key to Overcoming an Inference of Copying
In Albert Packaging Ltd and others v Nampak Cartons and Healthcare ltd  EWPCC 15, although there was an inference that the Claimants' unregistered design had been a consideration in the Defendant's creative process, the Defendant was able to produce documentation that showed the design as a work in progress.
In 2005, the second and third Claimants designed a carton for packaging tortilla wraps. In 2006 to 2008, this carton was sold, via an intermediary company, to a supermarket chain. In 2008, the intermediary undertook a re-tendering process and appointed the Defendant as its supplier of cartons in place of the Claimants. In 2009, the Defendant began producing a carton that the Claimants said infringed the unregistered design right in their 2005 product. The Claimants put forward three different approaches to the assessment of their unregistered design:
The shape of the carton in assembled form.
2) A generally rectangular box, except that the top face slopes downward from the rear face to the front face, there being a window extending fro m the sloped top face onto the front face.
3) The distance from the shoulder of the pack to the top of the back panel, along the back panel, is 35 mm, regardless of the length or width or depth of the pack.
The Defendant denied infringement and in addition said that no design right subsisted.
A Method of Construction
Following Rowlawn Ltd v Turfmech  EWHC 989 (Pat), the judge found that the exclusion of design right subsisting in a method or principle of construction operated to limit the generality of the design to be relied upon. Applying this to the three design approaches put forward by the Claimants, the judge found that the second and third approaches were too general for an unregistered design right to subsist therein.
A Commonplace Design
The Claimants contended that the relevant field was limited to packaging for wraps. The judge, however, found that the notional designer would be familiar with designing cartons for other products. As such, the field was found simply to be carton design. Due to the generality of the second and third approaches and the nature of the packaging in the design field in 2006 (the relevant year), both were excluded from protection.
The judge did, however, consider that "to say that the particular combination of all the specific features of the Albert Packaging carton in its assembled form is commonplace would deny packaging designers any design right at all." Accordingly, the judge found an unregistered design right to subsist according to the first approach.
WAS THE DESIGN COPIED?
The judge found that "from the point of view of the side and front elevations of the cartons in their erected state, the only major visual differences between the Nampak cartons and the Albert Packaging design are the shape of the window and the width". It was also found that there was opportunity for the Defendant to have had access to the Claimants' design. There was "plainly" a case to answer, and without an explanation from the Defendant, the "only inference to draw would be that the products were copied from the [Claimants'] packaging design". The judge therefore moved to address the Defendant's explanation.
The design history of the Defendant's 2009 product went in three stages. In 2005, the Defendant produced two designs as samples for a client. In 2007, a design for a "Pizzatilla box" was produced for the common intermediary. Finally, the allegedly infringing design was produced in 2009. It was said by the Defendant to be based on the Pizzatilla box and one of the 2005 designs.
Because the Defendant had replaced the Claimants as suppliers to the common intermediary, the judge considered that it was "more likely than not that the Claimants' carton was one of the sources of ideas for the Pizzatilla box". As the 2009 carton was in part based on the Pizzatilla box, the judge found that the "Claimants' design was also another source of ideas which fed into the later carton designs and in particular into the 2009 carton design alleged to infringe".
Design right was said by the judge to restrain reproduction of the design by making articles to the design. This was to mean "copying the design so as to produce articles exactly or substantially to that design".
The judge found that all that had been derived from the Claimants' design was the dimensions of the side panel. To find infringement in the overall design on this basis would have "the effect of undermining Section 213(3)(a) of the Copyright Designs and Patents Act 1988 since in truth it would give unregistered design right to something which is no more than a method or principle of construction applicable to articles with many different appearances."
The case highlights the importance for designers to ensure that they document carefully their design histories, with drawings, dates and, if possible, a narrative. If the Defendant had not been able to explain—and prove—how it had arrived at the design, it would have been possible that the court would have had no choice but to infer both copying and infringement.
Court of Appeal of England and Wales Upholds High Court's Construction of Co- Existence Agreement
The Court of Appeal of England and Wales has upheld the judgment of Mr Justice Arnold in a dispute between US company, Omega Engineering Inc (Omega USA), and Swiss watchmaker, Omega SA (Omega Swiss), over the application by Omega USA for a UK trade mark for OMEGA and the construction of a co-existence agreement.
In Omega SA v Omega...