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Putting the intellect into intellectual property

Trouble at the mill with your licensee partner? If your intellectual property (IP) and other crucial elements to your business weren’t properly protected at the front end of the process, you may well be up the proverbial creek without any recourse.

Trouble at the mill with your licensee partner in Llanfair pwllgwyngyllgogerychwyrn drobwllllantysiliogogogoch? If your intellectual property (IP) and other crucial elements to your business weren’t properly protected at the front end of the process, you may well be up the proverbial creek without any recourse.

With over 20 years’ experience in helping to protect the unique and the intangible, A J Park partner Allan Bowie says most relationships do proceed harmoniously or are sorted out in good faith.

“It’s when they start to unwind that your preparedness, or lack thereof, becomes a problem,” he says. Written documentation is like an insurance policy and becomes invaluable when the IP foundation of your company or business is exposed or in danger.

“The No 8 wire tradition in New Zealand is great for invention,” says Bowie. “If you’ve created something, you analyse it to see if it is useful, novel or cool. That then is the time to look at the patentability of what you are offering. However, the minute you disclose any information to anyone about this and don’t have a watertight confidentiality clause in place, or start working on a deal— that has killed your patent position.”

Human nature is such that people like to share in the excitement of the moment, but in the world of patents this is the end of the road. One of the areas where this causes real problems is in academic circles.

“In a eureka moment, and to advance their stature and kudos, many academics publish their findings or share their work with colleagues. Doing this immediately destroys their university’s ability to patent that invention.”

Part of the problem is that many people don’t actually know what IP is. “People might hold up a widget and say, ‘This is my IP,’ but it’s not. It’s a widget. The IP is the intangible rights that might exist in the widget, such as patent rights, design rights or copyrights. With some new widgets there may not be any IP at all.”

IP is a property right that can enable you to stop others using what rightfully belongs to your business. It is the umbrella term for patents, design rights, copyrights and trade marks. Ideas alone are not necessarily IP, which though intangible can be one of your company’s most valuable assets.

Get strategic

When people talk about having an IP strategy, there are essentially three interlinking steps that need to be addressed.

  1. Identifying and protecting your IP. This is a process of capturing and identifying those elements in your offer that relate to IP—what is interesting or different about it, what you are dealing with and what you need for protection.
  2. Structuring and commercialising your IP. This is the process of structuring the commercial aspects to get the most out of what you have developed, particularly from a tax, profit and protection viewpoint. Sometimes this is done around the creation of an IP holding company that doesn’t trade. A trading company is set up that then enters into contracts with outside parties and essentially acts as the buffer to where the core assets are contained. So if anything amiss happens, it is the trading company not the holding company that attracts the attention.
  3. Enforcing your IP. The world has changed dramatically and despite what you might think, IP can be enforced.

Depending on whether you are a traditional commodity or product exporter or a pure IPist, the IP management issues do vary.

When selling products offshore, be aware of:

  • Freedom to operate. Are you infringing anyone’s trademark or patent in this market? This question can be examined either briefly or thoroughly and the extent of the search is really based on the size of the opportunity. It’s a cost/benefit decision.

In some cases, says Bowie, you may decide, let’s just do it, but that’s on the basis that an infringement will only attract a cease and desist letter, which you can comply with and gracefully exit. It could however be worse than that—you may get hit with a large damages claim.

  • Protection. Once you’ve decided you’re clear to operate without infringement (or you’re prepared to risk it), you need to be sure you can protect your product by looking at patents and trade mark protection. It is dangerous to go it alone.
  • Food and health regulations. Every country has its own food laws, and these are made especially complex with the demand for product labelling. It is a very technical area and often involves not just the science but also the language and legal requirements. Competitors will try to pop you using this complexity. Unfortunately there is not a lot of global harmonisation on label laws with the exception of Australia and New Zealand under CER and other agreements.
  • Import laws. There is a huge variety of customs and import laws that you’ll require expert help with. Importing and distribution agents are especially helpful for this.
  • Liability. Every country has its own consumer law, and again, knowing what to be aware of is an expert’s job. There are thousands of little things that can trip up a Kiwi operator. For example, insurance for damage is essential, especially in the USA where litigation is a way of life.
  • Sanctions. Some countries, and definitely some companies, are off limits in terms of legitimate trade. It’s important to know who you’re dealing with and that they’re not a front for a local al Qaeda operative.

Exporting pure IP is a different proposition. Dump any ‘she’ll be right’ inclinations—they’ll get you into grief in ways you can only imagine.

Licence to deal

Bowie says the nature of most SMEs in New Zealand means they don’t initially have the capital or other resources to set up manufacturing in a foreign country. By default the most common form of engagement is via a licence agreement.

“It is a low-cost, low-risk strategy where there are not the financial pressures in securing plant and equipment. The downside is you lose control of your technology and know-how and you will earn lower profits. It is a cheap way to earn foreign revenue but the well could run dry if you’re not protected. Frankly, if you don’t have a patent or registered design, you don’t have a chance.”

A licence creates a business relationship between two parties. To avoid selecting the wrong business partner, gather as much information as you can about the other party. Are they financially stable? What is their reputation in the market and the relevant industry? If they are the party taking the licence, do they have sufficient manufacturing and distribution capabilities in the relevant markets to exploit the IP successfully? Do they have a business and marketing plan? Make sure you know what the other person wants to get from the deal.

Negotiating a licence inevitably involves an exchange of proprietary information between the parties. You may find out during negotiations that the other party is less reliable than you thought. Make sure that party signs a confidentiality agreement early on to protect the secrecy of your information.

If you end up doing a licensing deal, make sure your licence agreement includes comprehensive confidentiality provisions. Failing to protect your confidential information can in some cases destroy your IP assets. It can also arm a potential rival with the knowledge it needs to compete with you.

Keep your lawyers involved: handshakes alone don’t cut deals any more. If you decide to document the deal on the back of an envelope, you may have trouble working out what the deal was if things don’t turn out how you intended. If you don’t know who is responsible for doing what, you risk ending up in dispute with the other party, which could easily turn into litigation. Spend time getting the deal documented properly. It may save you a lot of money.

And while it may seem obvious that the IP licence needs to state clearly what rights are being licensed, licence agreements often fail to clarify what rights are being granted to the licensee.

Common mistakes in licences include:

  • Failing to state clearly which of the IP owner’s IP assets are being licensed.
  • Failing to state whether the licence is exclusive or nonexclusive.
  • Failing to state clearly which territory or field of use the licence is being granted for.
  • Being silent on what rights, if any, the licensee has to grant sublicences, or to transfer its rights to others.

If you’re the IP owner, don’t leave your reputation completely in the hands of your licensee. Impose quality control obligations on your licensee. These will help to establish what your expectations are. Make sure your licensee is required to provide samples and the right to inspect its operations. If you give the licensee the right to use your brand, make sure you have the right to approve the way that brand is used. If you’re granting an exclusive licence, it’s also a good idea to impose minimum performance targets on your licensee. A common performance target is a minimum sales or royalty obligation.

“In a eureka moment, and to advance their stature and kudos, many academics publish their findings or share their work with colleagues. Doing this immediately destroys their university’s ability to patent that invention”

—Allan Bowie

It can be difficult to determine what to charge someone for your IP. Most licences provide for upfront fees, rolling royalties or a combination. Be careful how the royalty is calculated. And don’t agree to take a percentage of the licensee’s profits. Profits can be manipulated, but it is harder for a licensee to manipulate its sales figures. In most cases the royalty should be a price per unit, or a percentage of the licensee’s net sales.

Royalty provisions need to be drafted carefully, to avoid the temptation for the licensee to rort the IP owner. A common scam is for the licensee to sell the licensed products to a related party for less than their true market price. A well-drafted licence can avoid these loopholes.

Though not a psychologist, Bowie has seen much of the human condition at work during the development and implementation of IP commercialisation strategies.

“You get a sixth sense dealing with CEOs as to who will be a successful exporter and who won’t. Those who are meticulous planners and detail people, who are happy to seek expert advice, and who are thorough in the process will certainly have a much less bumpy ride.”

Those that rush through the contract negotiations are the ones flirting with disaster.

“The whole process of two sides negotiating a contract can be a positive experience and a dry run for ironing out any potential problems. You generally have two willing parties who will horse-trade points but it gives everyone the chance to think about what might go wrong and then negotiate around that. Licence agreements are very complex and are designed to last for the 20-year life of a patent. Because you are giving away control it is all the more important that you’re protecting everything that is able to be protected.”

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