A cost ruling and a tax question

This cost ruling highlights a tax issue where it seems to be unclear whether charges for legal work performed on behalf of a foreign entity concerning an issued patent (or trademark) in Israel incur VAT. It also highlights the problems that can occur where firms split and one professional leaves taking clients and on-going issues with him. What is required is professionalism and good between the management of the original firm and the new representatives to deal with costs incurred by the original constellation. Unfortunately, sometimes this good will is lacking.

alkermesAlkermes Pharma Ireland LTD has an exclusive license from Novartis to manufacture a drug in accordance with IL 142896 and its divisional patent no. IL 179379 entitled “Multiparticulate Modified Release Composition”. The active ingredient is Methylphenidate and is commonly known as Retalin. It is used for the treatment of attention deficit hyperactivity disorder (ADHD) and narcolepsy.

MediceMedice Arneimittel GmbH filed a request to cancel the relevant patents and the claim scope was narrowed in a preliminary action by Alkermes, but the cancellation actions were unsuccessful. Now Alkerermes has requested costs of $1,029,561.95 which comes to 3,626,118.18 Shekels costs.

History and Timeline

IL 179379 is a Divisional Application of IL 142896. The allowed patents published for opposition purposes on 8 March 2007 and 31 March 2011 respectively. Since no oppositions were filed, they issued on 9 June 2007 and on 1 July 2011. On 6 August 2012, an exclusive license for manufacturing was issued in the name of Alkermes.

On 14 November 2012, Medice Arneimittel GmbH applied to cancel the patent. The application was supported by a technical opinion provided by Professor Golomb.

On 7th February 2014, before a counter-claim and evidence were submitted, the patentee requested to amend the specification under Sections 65 and 66 of the Israel Patent Law 1967 which allows the scope of a challenged patent to be restricted by the patentee within the scope of the monopoly originally allowed.

On 6 March 2013, the Medice Arneimittel responded and on 14 March 2013 Notartis answered and on 17 March 2013 Medice Arneimittel GmbH requested permission to respond to the answer. On 5 May 2013, then Commissioner Kling scheduled a date for a hearing to discuss the amendment. In the hearing which was held on 4 June 2013, the Commissioner ruled that he case be conducted under Section 102(vi) as if the amendment was accepted, and after the cancellation proceedings be ruled, on the amendment would publish for opposition purposes.

In light of this ruling, Medice Arneimittel submitted an amended cancellation proceeding together with a further affidavit from Professor Golomb.

On 4 March 2014, Novartis/ Alkerermes submitted their counter claims submitted with an expert opinion from Professor Mark A Stein and Professor Joseph Cost.

On 2 June 2014, Medice Arneimittel submitted their counter-evidence including a further affidavit from Professor Golomb together with a request to submit a further three prior art publications. On 18 June 2014, the Commissioner allowed this extra prior art to be submitted, and allowed Novartis/Alkerermes to relate to the publications in their counter submission.. Consequently, on 21 September 2014, Novartis submitted additional opinions by Professors Stein and Cost that related to these additional publications.

After the statement of cases of and the evidence were submitted, there were two days of hearings, on 23 and 24 December 2014. On 18 June 2014 Medice Arneimittel submitted their summary, on 15 October 2015, Novartis/Alkerermes submitted their summary, and on 15 November 2015, Medice Arneimittel submitted their response.

In the ruling by the Commissioner on the main case, the cancellation request was rejected but the correction to the specification was allowed and the parties were invited to file submissions costs.

Thus on 5 July 2017, Novartis/Alkerermes requested costs for having to defend their patent in the cancellation proceedings. It will be noted that Novartis/Alkerermes was represented by Shlomo Cohen Law Offices, and then, when he split off, by Liat Whatstein Law Offices. An Affidavit from Adv. Amira Mangelus with 37 appendices was submitted to support the costs requested. On 1 October 2017, Medice Arneimittel responded with an affidavit from Chaim Dorsman, Account, and Adv. Amira Mangelus responded to this with a second Affidavit on 19 December 2017.

Licensee’s claims for costs

claimNovartis/Alkerermes claims that the patents that were under attack are based on complicated science and relate to pharmacy and psychiatry. Consequently, they were required to submit two expert opinions. The two cancellation proceedings (that originally filed, and the corrected version) were extraordinarily long and complex.

Novartis/Alkerermes ‘ request to correct the specification was routine and straightforward, but Medice Arneimittel created an issue out of this, that dragged out the opposition and required additional measures.

Medice Arneimittel submitted an unnecessarily long and involved statement of case that resulted in Alkerermes having to incur a lot of expenses. To support this claim, Alkerermes referred to the ruling of 21 October 2013 which they claimed illustrated the amount of unnecessary work involved.

Alkerermes accused Medice Arneimittel of hlding back evidence which was eventually submitted in a response to Alkerermes’ evidence instead of in the original submission. This submission also resulted in additional resources to respond to these publications.

Alkerermes accused Medice Arneimittel of filing multiple submissions to correct the protocol after the hearing and to reconsider the ruling. Medice Arneimittel exceeded the allowed number of pages for their summation. This resulted in the Commissioner awarding 10,000 Shekels costs to Alkerermes,  which Alkerermes claimed in no way covered the actual costs incurred an so should be revised. The Commissioner was not prepared to have the case dropped merely because Adv Baazam, representing Medice Arneimittel was verbose and long-winded.

Alkerermes argued that since the patents were valuable, they had to respond to various irrelevant claims and allegations and to analyze irrelevant prior art.

Novartis/Alkerermes claimed that all the costs were borne by Alkermes Pharma Ireland LTD, and are reasonable, were essential and proportional for the proceeding, and are not excessive compared to cost rulings in similar cases.

Medice Arneimittel’s Claims

inflatting costsMedice Arneimittel alleges that the costs are inflated and exaggerated, and that they should not have to pay costs incurred by the wasteful way that Novartis/Alkerermes handled the opposition.

Medice Arneimittel argued that the difference between the costs that they incurred and those that Novaris and Alkermes claimed is indicative of the unreasonableness of the claim made by Novaris and Alkermes.

vatMedice Arneimittel alleged that the costs that Novaris and Alkermes requested do not stand up to accounting scrutiny. They based this conclusion on the accounting conducted on their behalf by Accountant Chaim Dorsman, and requested that the calculations submitted by Adv. Amirah Mangelus be thrown out, or at least that Adv. Amirah Mangelus be subjected to cross-examination. For example, the alleged costs included VAT, but since the patentee is a foreign entity, they do not incur VAT. The original calculation of time spent was not submitted, and it was not proven that Alkermes actually paid this amount. There was no indication that Professors Stein and Cost had received the sums stated, it was not clear why the attorneys of record had needed to study the corresponding cancellation attempt in Europe, and so on.

Medice Arneimittel alleged that the cost submission does not show that the costs were reasonable, proportional or necessary for the proceeding.

Medice Arneimittel argued that since Novartis/Alkermes chose to cancel claims, this indicates that the cancellation request was legitimate.

However, Medice Arneimittel considers that some of the costs were unreasonable, such as requests for time extensions, review of product development costs and regulations without detailing why it was necessary to study these, such as Appendix (ii) from 13-16 January 2013 and Appendix (vi) from 20 June 2013, various translation related costs, e.g. Appendix (viii), the costs of examining the protocol (e.g. . Appendix (xxii) if 5 April 2015, and costs incurred by working opposite the patent office (e.g. Appendix (xiiii), and costs related to publications that were not included in the evidence, e.g Appendix (ii) of 22 January 2013.

Medice Arneimittel argued that Novartis/Alkermes did not produce a payment agreement between themselves and the legal counsel, and so the cost request is lacks sufficient detail, and it is impossible to consider whether the costs were reasonable.

Medice Arneimittel argued that one should take into account that Novartis/Alkermes used material required for the corresponding European case, so the costs should be discounted, and they further argued that Novartis/Alkermes acted improperly before the Israel Patent Office, and incurred unnecessary costs.

Medice Arneimittel alleged that the actual costs are only one consideration when ruling costs. The Patent Office should consider whether exorbitant costs would adversely influence parties not to challenge patents, and one should anyway assume that the costs were not fully covered and that Novartis/Alkermes received some sort of discount.

Medice Arneimittel argued that minimal costs only were appropriate since this would encourage challenges to patents which is in the public interest, so that unreasonable patents do not serve as an impediment to trade. In this regard, it was claimed that without the proceedings that Medice Arneimittel had initiated, the patent would have remained on the register with overly wide claims. Should the Commissioner rule high costs, this would serve as a chilling effect that would deter parties from challenging registered patents and would prevent their access to the courts. To support this argument, Medice Arneimittel submitted details of the policy followed by the EPO and the USPTO.

Novartis/Alkermes Response

Novartis/Alkermes consider real costs are in order, and they thus submitted examples of allegedly similar cases where real costs were awarded.

Novartis/Alkermes consider that since the patent survived the cancellation proceeding, they should be considered as having prevailed and were thus entitled to have their expenses refunded.

Novartis/Alkermes consider that their cost submission is adequately detailed and that VAT is indeed incurred in such circumstances.

Novartis/Alkermes note that some of the details in the appendices submitted were blacked out, which identify personnel employed by Alkermes. In other instances, actions performed by Liat Whatstein Law Offices for the client that were not related to this proceeding were blacked out, and a clean copy was submitted for the record.

As to the cost of amending the specification, this was a minor matter compared to the costs incurred in the proceeding as a whole which Medice Arneimittel should be responsible for paying for. As to the regulations and the development documentation, Medice Arneimittel was well aware of their relevance to the proceedings.

EPOAs to the need to study the corresponding European proceeding, Medice Arneimittel themselves related to the Decision of the Opposition Division which accepted the Opposition. It was only after this Decision was reversed on Appeal, that Medice Arneimittel considered it no longer relevant.

Novartis/Alkermes consider the hourly rates charged by Whatstein as reasonable. They submitted a further Affidavit from Adv. Mangelus to the effect that the costs listed were settled in full without any discounts, and objected to having Adv. Mangelus cross-examined as an unnecessary expense.

Discussion and Ruling

The Commissioner has the authority to award costs under Section 162b of the Patent Law:

The commissioner can award reasonable costs and can decide which party should pay those costs and how they should be paid.

In Merck and Merck Sharp Co Inc & Dohme Corp vs. Unipharm and Teva LTD, 28 March 2014, the Supreme Court ruled that the Commissioner should award necessary costs under Section 162b and effectively forbade the Patent Office from awarding costs that it considered unreasonable.

The starting point for cost calculation is Section 162b of the Patent Law under which the Commissioner can decide which party should pay those costs and how they should be paid. The stress I on the reasonableness of the costs. Indeed, one could say that the Commissioner is not allowed to rule unreasonable costs.

The case-law establishes that the winning party is entitled to costs actually incurred See Bagatz 891/05 Tnuva vs. the import-Export Authority et al. p.d. 70(1) 600, 605 from 30 June 2005.

However, the court should consider the specific details and judicial policy, and is not obliged to rule actual costs – see paragraph 19 of 6793/08 Loar ltd vs. Meshulam Levinstein Engineering and Contracting ltd, 28 June 2009.

It was ruled by the Supreme Court in Bagatz 9891/05 Tnuva vs. The Authority for Imports pd. 60(1) 600, 615 30 June 2005, the costs award considers circumstances, the amount of work performed, particularly in submissions and preparing evidence, complexity, stage reached, equitable behavior of the parties, and so on.

Furthermore, to the extent that costs appear extraordinary, the amount of details required to substantiate the claim for costs that is required is more. See Opposition to IL 153109 Unipharm vs. Mercke Sharp & Dohme Corp., 29 March 2011.

The case-law in re Tnuva stated that the onus is on the party requesting costs to prove that they are reasonable, proportional and necessary. This is:

To prevent a case where the costs would be so high as to deter parties from seeking justice and would create inequality and make going to court so expensive that it would damage accessibility.

With regards to reasonableness, in re Tnuva it was stated that there is no closed list of considerations but one should consider the behaviour of the parties and the way the case was handled. Costs are not intended to be refund of all expenses laid out, so that, for the winning party, it would be as if they never laid out money. Sometimes a party does NOT receive full costs: See IL 13433 Smithkline Beecham Corporation (SKB) vs. Teva Pharmaceuticals ltd, 30 May 2005.

There should be some proportionality between the requested sanction and the costs incurred, but other considerations include the complexity of the case, the time invested, whether the case required a high level of expertise, the importance of the case to the parties, the importance of the case and the public interest.

As to court policy, it has been ruled that the patent office cannot detach itself from its task as representing the public interest. In this regard, when considering cost requests one has to balancing the need to encourage parties to file patents to protect their intellectual property and to encourage technological advance and innovation with the need to encourage third parties to challenge invalid patents so that only reasonable patents issue. See Opposition to IL 113433 Smithkline Beecham vs. Teva, 30 May 2005, BV DSM IP Assets vs. PMS Defence Factories ltd, 10 March 2016. The Supreme Court specifically endorsed this conclusion in the previously referenced Unipharm ruling. Consequently, awarding very high costs to the applicant or the Opposer, can create a disincentive that upsets the balance between the competing considerations discussed earlier.

From the General to the Spectific…

general to specificIn this instance, the patentee, Novartis/Alkermes, won the case, and are thus entitled to costs. Indeed, Medice Arneimittel accept this in principle, but disagree with the sum. From the material before the adjudicator it is clear that the patentee had to invest many resources to defend their patent from this attack. Since the issues were complicated, clearly they had to invest significant work and effort into this proceeding.

However, in the circumstances it is not appropriate to award the full costs requested. The costs incurred is merely the starting point of the costs ruling, but it is not the bottom line (see re Tnuva paragraph 19) as will be explained.

Firstly, the Adjudicator relates to Medice Arneimittel’s allegation that the contract of the legal counsel was not produced, and nor was it proven that the sums were actually paid, and to Novartis/Alkermes’s response that they had supplied sufficient information to prove actual costs by way of the signed Affidavit of Adv. Mangelus who is a partner of the firm.

  1. Appendices (ii) – (xix) are printouts of the electronic billing system of the attorneys that related to the period that charges were entered on behalf of Shlomo Cohen Law Offices which appear to represent pro forma invoices.
  2. Appendices (xx) to (xxvii) are pro forma invoices issued by Liat Whatstein Law Offices who currently represent Alkermes, and there are receipts for the payments made as well.

As stated in re Tnuva, the party is entitled to costs actually incurred or obliged to incur. As far as evidence is concerned, it is reasonable to differentiate between the first set of invoices (Shlomo Cohen) and the second set (Liat Whatstein).

evidentiary weightThe purpose of Adv. Mangelus’ affidavit is to testify that the sums requested were fully paid, but the Adjudicator does not consider this sufficient. Adv. Whatstein asserts that until 30 November 2014 the payments made by Alkermes were made to Dr Shlomo Cohen Law Offices (where Adv. Whatstein was a partner), and, since then, Adv. Whatstein’s office issued invoices and receipts for payments made, both lawyer’s fees and out-of-pocket expenses. Adv. Whatstein stated that he was unable to obtain proof from the previous firm regarding payments made due to the circumstances of his leaving. This was the reason for submitting the e-billing charges. On these e-billing charges, the identity of the persons authorizing the billing was blacked out. The Adjudicator considers this as an unsatisfactory substitute for an Affidavit in a cost-request. She cannot give this evidentiary weight since Alkermes could have evidenced that the payments were made.

As to Appendices (ii) – (xix), no-one denies that these are printouts of a billing system and they cannot be considered as equivalent to receipts for actual payments. They are not even pro-forma invoices of charges made to the client, but merely data supplied to the Alkermes (the licensee) regarding billable work performed by Dr Shlomo Cohen Law Offices. Thus Medice Arneimittel are correct that one cannot rely on this as evidence of actual payments. Some of these charges include a VAT charge which the client, as a foreign entity is not liable to pay. Furthermore, some of the printouts include VAT and some do not. No reasonable explanation was forthcoming. Alkermes claim that they were not interested in receiving a refund of the VAT payment does not help, since if these printouts are evidence, there is a flaw in them.

In light of the exceptional sum requested (3.6 million Shekels) and the so-called trouble that Whatstein had in obtaining data from the previous firm, it would at least be fitting that with regards to Appendices (ii) – (xix), that an agreement regarding compensation for legal counsel be submitted, or proof of payments by the licensee Alkermes to Dr Shlomo Cohen Law Firm, which, in absence of contrary indications, one must assume are available to Alkermes. Alternatively, Alkermes could submit an Affidavit from their accountant or from someone in their accounts department with supporting evidence of bank transfers that show actual payments made. This was not done and no satisfactory indication was given for it not being done.

In conclusion, as to Appendices (ii) – (xix), one cannot conclude that these were actually paid by Alkermes or that Novartis or Alkermes were even contractually obliged to pay these sums. This is not the case regarding Appendices (xx) to (xxvii).

In light of this, Ms Shoshani Caspi cannot see a reason to cross-examine Adv. Mangelus as per Medice Arneimittel’s request, since she cannot testify regarding the relevancy of Appendices (ii) to (ixx) in that she did not know what was actually charged to the client and what the client actually paid so cross-examining her will not clarify the issue. See 2508/98 Matan Y. Communication and Location Systems ltd vs Mitaltel Communications ltd 22/8/2006, which limits the right of a party to cross-examination opposing witnesses.

Even were Whatstein and Alkermes able to prove that these appendices relate to fees that should have been paid, they still would not be able to claim them back in their entirety. With respect to all the costs (ii) to (xxvii), the Adjudicator cannot be sure that they were sufficiently detailed in this instance. Nor could she rule that they were reasonable, proportional or necessary for conducting the proceedings.

The Adjudicator does not think that per Medice Arneimittel should bear the costs of various extensions that Alkermes required. Nor should they have to bear costs for opposing counsel requesting to work opposite the patent office digitally instead of on paper, telephone calls and meetings between client and legal counsel.

As to legal actions performed as indicated by Alkermes in the various appendices:

  • double dipAppendices (ii) to (xiii) list 1037.95 attorney hours for analyzing the prior art, consulting with experts, analyzing and studying Medice Arneimittel’s allegations, requesting to amend the specification, wide-ranging help to the expert witnesses in preparing drafts of their expert witness statements and preparing a counter-statement of case to the cancellation proceeding.
  • It is noted that Appendix (xiv) was submitted despite merely summarizing the previous appendices.
  • The Adjudicator notes that she is well aware of the ruling of 21 October 2013 wherein the Commissioner related to the amended statement of case and an additional piece of evidence, and to the request of 21 August 2013 to delete the appended statement of case and the additional evidence,. And noted that “it is doubtful if Medice Arneimittel had done enough to keep the front of attack reasonable” and that at the end of the proceedings “the behaviour of the Requester for Cancellation (Medice Arneimittel) will be considered when ruling costs”. Furthermore, the Commissioner noted that a review of the amount of material submitted by the Requester for Cancellation (Medice Arneimittel) testifies of the effort required to relate to the material.
  • However, Appendices (ii) to (xiii) include expenses relating to internal memos, reviewing development documentation and regulations and the like. There was a lot of work performed to produce evidence in one language and then to write the evidence up in another (such as help with drafting the Expert Opinions in the period 14-24 October 2013, without any supporting evidence that this was necessary for conducting the proceedings.
  • 1000_hr_in_dThere also appears to be actions conducted by counsel (Dr Shlomo Cohen Law Offices) that are not detailed and explained. Thus there is a lack of a detailed explanation that can satisfy the need for over a thousand hours work at this stage of the proceeding
  • Finally, the Adjudicator does not consider it reasonable to roll over the patentee/licensee costs incurred for correcting the specification and claims, since this was performed in direct response to the Request for Cancellation being filed, and one can assume that these actions were necessary for the patent to subsequently survive the challenge.
  • translationWith regards to Appendices (xvi) and (xvii), 211.9 attorney hours was required to review the counter-response submitted by Medice Arneimittel, to study the prior art and to provide help to Professor Stein and Professor Cost with their additional expert opinions. Here again one wonders whether Medice Arneimittel should bear costs for the legal counsel working in one language and then translating into another?
  • That said, at this stage, Alkermes and their counsel had to relate to the prior art that Medice Arneimittel submitted on 16 June 2014. On 18 June 2014, the Commissioner gave an interim ruling that the additional evidence should be limited, and that the costs incurred would be taken into account in the main ruling.
  • flight costAppendices (xviii) – (xx) show that 350.8 attorney hours were required for preparing for the hearing and for cross-examining the witnesses. Alkermes and their counsel did not explain why so much time was required to prepare for the proceedings. There was no explanation why they had to fly to Munich to the European Patent Office on 30 October 2014, since the electronic file of the EPO proceeding is available on the Internet.
  • grandmaAppendices (xxi) and (xxii) show that a further 107.2 attorney hours were required to analyze and correct the protocols of the hearing and to respond to the comments and objections of the other side with respect to correcting the protocol. Since the analysis of the protocol was simply to identify any typos or recording errors, there does not seem any justification to roll these costs over to Medice Arneimittel. Essentially both parties acted together to correct the protocol. This is clear from the Commissioner’s ruling of 26 July 2015. So it does not seem reasonable to award costs for this stage of the proceedings.
  • Appendices (xxiii) – (xxvi) relate to 346 attorney hours for analyzing Medice Arneimittel’s summation and to relate to various issues raised and to submit their own summation. There was no reasonable explanation for such an exorbitant amount of time being required for this stage of the proceeding. Anyway, the Commissioner ruled 10,000 Shekels for this stage due to the amount of pages being exceeded, and this has to be deducted. This is not the place to relate to that decision and the reasonableness of that award.
  • quote-my-favourite-subject-at-school-was-avoiding-unnecessary-work-prince-philip-104-66-18Appendix (xxvii) shows that 23.6 attorney hours was required to analyze Medice Arneimittel’s statement in response. Alkermes and their counsel provided no explanation why 23.6 atorney hours was needed at that stage of the proceedings, since they were not required to respond and did not respond to the Patent Office.

Thus one cannot rely on the appendices as they are not sufficiently detailed to ascertain that the charges were reasonable, necessary and essential, and so the Adjudicator is forced to estimate appropriate costs (see Appeal 4164/1 Alon Tovim vs. Abraham Kiykev, 11 Sept. 2016).

In estimating appropriate costs, the various considerations discussed above were considered. It is noted that neither party acted inequitably with respect to the Patent Office or with respect to each other which would justify awarding costs on the high end of the scale [MF counsel’s behaviour with respect to their own clients is not something that the Adjudicator addresses]. Both parties acted fairly to protect their economic-legal rights. Alkermes/Novartis acted to protect their patent, and Medice Arneimittel fairly attempted to have that patent cancelled to enable themselves to enter the market. In light of the above, the Adjudicator rules as follows:

Attorney fees awarded

Regarding attorney fees for the period covered by appendices (ii) to (ixx) (the period where the file was handled by Dr Shlomo Cohen Law Offices), Medice Arneimittel will pay 700,000 Shekels. For the second period covered by appendices (xx) to (xxvii) to the end of the case, (where the file was handled by Adv. Liat Whatstein’s offices) Medice Arneimittel will pay a further 300,000 Shekels.

Expert Witness costs

The evidence submitted was insufficient to determine actual costs. There was not a single receipt from Professor Cost to indicate that he was actually paid at all. There is no basis to determine what costs, if any are owed. It seems that the costs incurred were for consulting and this has to be reasonable. It seems that Professor Cost was required to do 277.5 hours of consulting. Appendix (xxviii) which relates to this is a two-sided document that lists dates and times. This is insufficient to determine that the time spent was necessary, proportional or reasonable. The Adjudicator decided that 100,000 Shekels was appropriate, and added a further 3456 Shekels for the travel costs to attend the hearing.
Professor Stein claimed 123 hours consulting and this was supported by appendices (xxx) to (xxxvi), which shows the payments made and minimal explanation regarding the work done for those payments. Nor was any hourly rate given. This is insufficient to justify the costs requested. The costs incurred by the trip to Israel to give testimony are refundable, but there is no reason why the losing party should pay for travel in business class, for staying in one of the most expensive hotels in Israel, for laundry and for eating in posh restaurants and coffee shops. Based on Estimation, it was decided that Professor Stein was entitled to 50,000 Shekels for consulting and 6000 Shekels for out-of-pocket expenses.

Conclusion

Medice Arneimittel should pay 1,159,456 Shekels costs without VAT, since Medice Arneimittel is not an Israeli company. This sum should be paid to Alkermes within 20 days, or interest will be incurred.

Ruling by Yaara Shoshani Caspi regarding Costs in Cancellation Action against IL 142896 and IL 179379 to Novartis, 28 March 2018.

COMMENT

Partnerships break up and employees leave firms and set up by themselves taking clients with them. The Israel Labour Courts considers this legitimate. Whatever the original firm considers, there is nothing criminal in firms breaking up in this matter, and there is a basic pseudo-constitutional right of Freedom of Occupation. There are, however, always loose ends. It is necessary for the parties concerned to tidy up these loose ends.

Many law firms expect their attorneys to enter hours spent on an action, and to ‘bill’ so many hours a day. The managing partner decides whether the entered hours are passed on to the client or are discounted in some way.

Ms Shoshani Caspi is correct that in this instance there is no way to tell whether the time sheet reflected the actual number of hours billed, nor whether the client settled their bills with Dr Shlomo Cohen Law Offices or not. It is not inconceivable that Adv. Whatstein’s firm offered to continue representation without any regard to whether outstanting bills to the previous firm were settled or not. not be billed.

I have some experience with a partnership breaking up, and have managed to stay on talking terms with my previous partner. It is possible to keep things relatively neat if both sides make an effort. It seems from this ruling (and indeed from rumours in the industry) that Adv. Whatstein’s leaving Dr Shlomo Cohen’s establishment was less than congenial.

As to the VAT, to my understanding, an issued patent is an Asset in Israel and there is VAT on services regarding issued patents. I therefore charge VAT for renewals and assignments of issued patents and trademarks and for enforcement issues. Other firms where I have worked charged VAT as well.

From the print-outs are not clear whether Dr Shlomo Cohen Law Offices charged VAT or not. It is certainly possible that attorneys there can enter hours with or without VAT, but IP Attorneys may not be experts in tax law, and the managing partner or accounts department would be expected to adjust the bills and to add VAT where appropriate or not to charge where it should not be charged.

It seems that Webb, their accountant and the Adjudicator consider that VAT is not incurred with respect to actions performed on assets. The last time I attended a discussion on the topic by managing partners of patent attorneys firms, I understood from Michal Hackmey, (former head of the IPAA) that the issue had come up in connection with one of the firms but was never clearly resolved. I have spoken to a number of colleagues in different firms, and it seems that to this day, different firms act differently.
This cost ruling came to 1,000,000 Shekels. The VAT on this is 170,000 Shekels. It appears that the legal fees paid by the client could have been three times this sum and may or may not have been charged with VAT.

If law firms have not charged their clients VAT where they should have, they may owe 14% (17% of 117%) of their billing to the tax authorities.

This VAT issue comes up most often with regard to renewals. If a renewal company is off-shore, it may be VAT except on their services to their clients. Does it make sense that local Israel firms should be forced to charge 17% more for the same service, and thus perhaps unable to compete? What happens where the client is local but is incorporated in Delaware? If one works for, say, Microsoft or Intel and bills head office in dollars, should it matter if the R&D on which the patent application was based, was performed in Israel? From a limited survey I have conducted, it seems that different firms act differently in such matters. Clearly this is inappropriate and makes services that are provided by firms that do bill more expensive; possibly unnecessarily so. Then again, those that don’t bill could be audited and find themselves having to pay 14% of their revenue from abroad in taxes.

There is no reason why the Adjudicator of IP should be an expert in tax law. When I asked them what they do, some of my colleagues responded that they would ask their accountant. One of them thought for a moment, and then noted that his accountant still has a problem understanding why he does not charge VAT on USPTO official fees. I am not sure whether tax consultants and accountants necessarily have the expertise to advise clients on appropriate behaviour, and it is clear that different firms act differently with regards to whether or not to charge VAT in the same scenario. this is a unhealhy state of affairs. I would like to see the professional organizations such as IPAA and AIPPI organize seminars that address this issue.

I am therefore wondering if, on the basis of this ruling, I should change my practice?

2 Responses to A cost ruling and a tax question

  1. David says:

    can you post decisions you refer to in the original form
    thank you

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