Don’t learn lessons the hard way

Securing ownership of intellectual property can be the difference between business success and failure, as Ajeet Minhas reports

It was encouraging to see the UK recently ranked in the top 10 per cent of the 200 most innovative nations in Bloomberg’s Global Innovation Index 2012, sharing this space with the United States, South Korea and Germany who occupy the top three places respectively.

The increasing intensity of the technology sector worldwide is testament to the incredible ingenuity of mankind. And the UK has recently witnessed an upsurge in the number of technology-based start-ups. It is useful, therefore, to consider how entrepreneurs in technology and other sectors can benefit from greater awareness of intellectual property (IP) and its staple role in supporting stronger, sustainable economic growth.

IP is essentially a strategic asset and any programme of management of this foremost driver of business value should reflect this. For any technology start-up, the significance of properly insulating core intangibles for financial wellbeing and realisation of growth ambitions cannot be understated, and should never be overlooked.

When developing an IP strategy, the first priority is to decide which items of IP require protection. Considerations include relevancy and perceived value to the company’s objectives, and how it will preserve and return value. Crucially, an IP audit can help the management of a new business identify and analyse specific risks and opportunities associated with the release of its technology.

Fewer than 10 per cent of SMEs secure patent protection, while the overwhelming majority remain vulnerable to having their ideas copied

Core IP that technology firms will typically want to legally protect before commercialisation are patents, trademarks, copyrights and designs. There are three main stages: first, identifying IP by carrying out a thorough health-check and developing an IP inventory; second, protecting significant (not necessarily all) IP legally when the intangible property is being generated or developed; and third, commercially exploiting useful IP that has been protected in order to maximise revenue generation.

To have any chance of competing effectively with their larger counterparts, start-ups and small and medium-sized enterprises (SMEs) need to protect their innovations, otherwise they will be vulnerable to competitors copying them. According to the UK Intellectual Property Office (IPO), just 14 per cent of UK-based small companies, with fewer than 50 employees, were aware that releasing details of their invention would preclude them from securing a patent, despite this monopoly right having a strategic part as a corporate asset and commercial instrument.

Legal protection adds competitive mobility and increases the survival rate of IP-centric businesses. It allows revenue to be generated from licensing agreements and offers protection against unfair competitive practices. However, many SMEs consider the relatively high cost of registering patents as a barrier. In practice, fewer than 10 per cent of SMEs secure patent protection, while the overwhelming majority remain precariously vulnerable to having their ideas copied and their business suffering losses as a consequence.

There is an urgent need to increase awareness of IP among SMEs and microbusinesses. IP, if properly pinpointed, protected and strategically positioned, can give a start-up company a fighting chance to gain a competitive edge and reap the rewards of invention, innovation and proactive asset management.

Value-generating, marketable IP can increase income flows further through licensing to enable its re-application on a different platform in another market. This can help the originator to gain a foothold in new markets. The ongoing question for IP-centric businesses should be: are we extracting as much value from our IP as we possibly can?

Continuous attention to IP can assist in ensuring the company is prepared as soon as new opportunities emerge, while keeping a firm handle on risk management. Having an IP-aware team member allows the performance of core IP to be periodically monitored while identifying redundant items that can be divested. This would allow other team members to focus on different aspects of the business to reduce distraction from progress. Where there are unsightly cavities showing in the company’s portfolio, corrective action can be efficiently taken sooner rather than later.

A solid IP portfolio can enhance a start-up’s exit value (when sold or pursuing public listing), as having a verifiable monopoly over commercially appealing innovation enables higher growth margins, as well as justifying premium pricing. The profits from premium-priced (early) sales may then reduce the amount of capital needed from external financiers. An attractive aspect for the brand behind the advancement is the prospect of establishing a reputation as an innovative leader. Tactically patent filing can help foment favourable recognition and offers the additional upshot of being able to market the inimitability of the technology.

Innovation has a value that degenerates very quickly given the rapid turnover of technological produce entering the market. Investors want robust IP portfolios with evidence of legal ownership and exclusivity to exploit. The technology must be innovative and the business scalable for it to appeal. IP that is not secured leaves all access points open for expensive, time-draining and reputation-damaging legal disputes, which could disrupt and/or end a business at an indeterminate time, or for others to copy quite legitimately without fear of reprisal.

A due diligence process, which can occur when pursuing venture capital or other funding or contemplating a merger or sale of assets, will unearth issues regarding ownership and validity of IP. Developing technology often means sourcing expertise from outside the business. As well as checking the validity of the IP, investors will want information on who has been involved in the process in terms of the nature and extent of their input.

Clearly written, carefully documented agreements that transfer ownership from independent contractors and employees, as well as joint research and development (R&D) contracts and agreements with other collaborators, add certainty and help to avoid legal wrangles.

Finally, the territorial nature of IP means that protection acquired in one geographical marketplace does not automatically extend to other countries. Taking a business to seemingly attractive foreign locales necessitates a very good understanding of, beyond other pragmatic issues of concern to the company, the scope of protection for IP owners to avoid abuse of intangible property due to prevalent risks, such as counterfeiting and piracy.

It is sensible to consult a lawyer or experienced individual with local knowledge beyond the mere theory, to gauge the level of risk of trading in that region. Emerging markets, for instance, lack adequate protective and/or enforcement measures to prevent IP theft, but that is not to say the landscape will not change with time.

CASE STUDY 1

LICENSING MODEL

ARM is a hugely profitable licensor of semiconductor IP to around 1,000 globally-sourced partner companies operating at various levels of the semiconductor supply chain. Its technology is found in more than 95 per cent of smartphones and other mobile phones worldwide, and in digital electronic goods like washing machines and TVs.

Over the years, ARM has effectively developed an extensive ecosystem, attracting market-leading brands, including IBM, Microsoft and Samsung, to join its ARM Connect Community. The constituent members of this strategic network enter into a licensing agreement to use and exploit ARM’s IP-protected rights in its technology. In return, ARM receives payment in the form of a licence fee (normally in the millions) from every licence it grants in addition to future income (royalties) as a percentage of each chip embedded in a licensee semiconductor company’s finished product that is sold to the end-consumer.

ARMS’s licensing-intensive business model is central to its success. Focusing on developing and leveraging its intangible property, by investing its resources in R&D and boosting its know-how, enables ARM to respond to commercial demands in a more agile and cost-effective manner. The burdensome cost and risks associated with design, manufacture and marketing of the end-tangible goods are borne by its licensees. Having successful licensees that operate in different parts of the world gives ARM a secure financial base and enables it to establish a foothold in disparate geographical markets, while taking advantage of new opportunities.

CASE STUDY 2

DAVID AND GOLIATH

A small, family-run company, Qual-Chem Ltd, which specialised in supplying services and materials to the steel industry, obtained a UK and Europe patent for its invention of a new process. This innovation was designed to significantly diminish a harmful substance known as “slag” during the steel-making process to protect the high quality of the metal and save money.

The company initially used its inventive process to assist its largest client, Corus (now owned by Tata Steel), but the latter dispensed with Qual-Chem’s services after learning how to apply the process at its premises in South Wales. Losing Corus’s custom put Qual-Chem at real risk of going out of business, while at the same time its IP was being used in return for no recompense.

Qual-Chem resolved to bring a claim against the steel giant for breach of its patent and won. With the help of solicitors and barristers, who agreed to work for a contingency fee, Qual-Chem sued Corus in the High Court for the infringement of its UK patent. Corus was unsuccessful on appeal.

Choosing to go to court meant that the owner of the patent, which was being used without permission, could obtain a binding decision confirming the strength and validity of the patent in addition to compensation for the harm suffered.

This case demonstrates the advantages of securing IP before it is put into use. In doing so, Qual-Chem was able to enforce its monopoly right successfully, regardless of the size of the opponent, and secure its economic interests.

CASE STUDY 3

LAW ‘CAUGHT’ TVCATCHUP

Intellectual property rights (IPR) proved to be a serious threat to UK internet TV service TVCatchup, which enables subscribers to watch BBC, ITV, Channel 4, Channel 5 and free-to-air Sky channels online. Its entrepreneur inventors had to redesign the service completely to avoid infringing copyright and remain in business.

Shortly after the website went live, TVCatchup received notifications from major broadcasters claiming breach of copyright. A high-profile court battle ensued. Fortunately, TVCatchup had attracted sufficient investment to enable it to challenge the claim.

Originally, TVCatchup worked in a similar way to BBC iPlayer, recording TV programmes from multiple channels and streaming them on demand to subscribers. However, copying and storing TV programmes requires a licence. Its inventors thought that TVCatchup would be covered by an exemption under the Copyright, Designs and Patents Act for video recording for domestic use. But, although the programmes were being watched online by private individuals, they were stored and distributed by TVCatchup.

The solution was to innovate again using different technology. Laurence Gilmore, IP partner at Hamlins LLP, advised TVCatchup on developing an alternative service that complied with copyright law. The current service streams multiple programmes as they are broadcast, but does not copy or distribute them, although it retains the name TVCatchup.

Although live streaming had been used previously for music and movies, TVCatchup was the first to apply it to live TV.