1203009 Informal Interpretation

Form Item 5
Michael Verne

  – Agree.





Tuesday, March 20, 2012 11:13 AM


Verne, B. Michael



Dear Mike,

This question concerns thetreatment of certain revenues for purposes of Item 5. In particular, I would beinterested in your thoughts on which of the licensing and service revenuesdescribed below should be considered "US operations" for purposes ofItem 5.

Company A is a U.S.corporation engaged in the business of intellectual property licensing. CompanyA owns the rights to US IP and holds bare legal title to all foreign IP.Company A has set up a foreign controlled subsidiary ("Foreign Sub")that owns all economic benefit from all foreign IP (ex-US) and manages, in total,the licensing operations. Foreign Sub has the right to license collectively allof the IP to licensees and is the entity that enters into the contractuallicenses with all licensees worldwide. Foreign Sub collects all licensingrevenues from licensees worldwide. Foreign Sub retains all revenues derivedfrom the licensing of non-US IP (which accounts for the vast majority of alllicensing revenues) and pays to Company A the revenues related to the licensingof US IP.

Foreign Sub also hasarrangements with Company A under which Company A provides legal, financial,R&D, and other services to Foreign Sub, on a cost-plus basis, in connectionwith the development and maintenance of the IP and the negotiation of licensesby Foreign Sub with licensees (Company A does not negotiate directly withlicensees, but provides, for example, legal services to Foreign Sub inconnection with contract review). In addition, to the extent that licenseesrequire post-licensing product support, Company A provides those services tolicensees in the US and is compensated for them by Foreign Sub (not by thelicensee) on a cost-plus basis. Foreign Sub has similar arrangements with othercontrolled, non-US subsidiaries of Company A for the provision of sales andproduct-support services to licensees in their respective countries.

Under these conditions, Ibelieve that Company A (which is the UPE) should report in Item 5 only therevenues derived from (a) the fees received from Foreign Sub for the licensingof US IP; and (b) the cost plus payments received from Foreign Sub forproviding post-licensing support services to US licensees.

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