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If an organisation wishes to build a profitable business on it’s IP it is essential that the organisation develops in it’s directors and employees a knowledge of, and an understanding for, IP. If the people doing the development of your innovative ideas have no understanding of what may be protectable, or the value of such protection to the organisation, it is very likely that valuable IP will be allowed to pass into the public domain and thus be available to the organisation’s competitors.
Whether your IP is registrable, i.e. it is patentable, is registrable as an industrial design or as a trade mark, or is unregistrable know how, its value to the organisation lies in the ability of the organisation to enjoy what economists call "a monopolist’s profit" from the commercialisation of that IP. If your organisation has developed or acquired knowledge that your competitor does not have, or is not legally allowed to use, and which preferentially attracts customers, then it is likely that you can
In any one of these cases you are able to return a higher profit that you would if that knowledge were freely available to the world at large.
It has to be understood that the Courts have consistently held that information may be legitimately copied by a competitor unless there is a law specifically precluding that copying (see, for instance, Parkdale Custom Furniture Pty Ltd v. Puxu Pty Ltd (1982) 149 CLR 191). In the capitalist system copying is an essential part of competition. The laws that inhibit copying are the Patents Act, the Trade Marks Act, the Designs Act, the Copyright Act, the Plant Breeders Rights Act, the Circuit Layout Act and the Trade Practices Act. The common law prevents misuse of confidential information. If you do not enjoy protection from copying under one or more of these heads then you cannot stop your competitors from taking freely the benefits of your research and development without incurring the expenditure that you have. In this case rather that enjoying additional profit from your efforts you will be at a cost disadvantage relative to your competitors.
A corollary to what has been said in the last paragraph is that it is easy by lack of care to render ones IP invalid or to preclude the organisation from obtaining any IP at all. Let me quickly provide some examples :-
On the other hand some fairly simple attention to detail can substantially improve the value of your IP and make it easier to protect. Let me come back to, and emphasise, my original point. If your organisation engenders a culture of knowledge of, and understanding for, IP the organisation can maximise the benefit that the laws provide in stifling competition.
The culture to which I refer can be gained in a wide variety of ways, these include, for instance:-
The second issue that is important is to have in place a well defined mechanism for identifying protectable IP and assessing whether it is in fact worth protecting. The researchers or someone close to then needs to have responsibility for the identification of IP and responsibility for overseeing it’s protection. As with any other responsibility if management gives it lip service, but does not truly believe in it, it will not happen. IP protection will not happen in an appropriate way unless top management gives it the importance it deserves in an innovative business. I have attached to the back of this paper an Invention Report that may be useful if you want to start a system of encouraging the reporting of inventions to management so that they can be properly progressed.
A third issue is the question of ownership of IP. Any innovative organisation should have in place suitable agreements regarding ownership with its staff (including directors), and consultants. In some cases it may also be necessary to have such agreements with others such as suppliers and customers. This is certainly the case where those other parties were involved in the innovation process going on within the organisation.
Regular reviews should be held to identify new IP that has been created in the organisation and to plan for it’s protection. Fundamental issues are whether the idea is new and whether it is of a character that allows it to be protected in some way. These reviews should also consider whether the IP is valuable and how it fits into the commercialisation path of the technology; this is the fourth issue to consider. The valuation should start with the question:
"Would it hurt us if our competitors copied this idea?".
If the answer is "no" then there is no further issue to be considered. If the answer is "yes" then one must ask:
"Will the quantum of damage exceed the cost of protecting the idea?".
It is only if this question is answered positively that it is necessary to seek appropriate protection for the idea.
The fifth issue is to be then addressed is what sort of protection is appropriate for that particular idea. If the idea is to be used in-house and if it’s commercialisation will not reveal the idea to the public then it may be better to protect it by confidentiality. If this is to be done, however, it is necessary to put in place serious barriers to prevent your competitor from obtaining the information. The information in written form should be marked as confidential, it should be stored in a secure place, access to the information should be restricted and employees having access should be made aware of the confidentiality of the information. If the IP is embodied in a manufacturing process then it is important that un-authorised people be precluded from having access to that part of the plant. Access to plants is often given to students and industry groups, If such groups are free to cruise through a part of the plant that is supposedly "secret" it is difficult to argue afterwards that the information is truly confidential!
If the IP is registrable then there are the usual question of how to do it, where to do it, and the like. These are questions that I will not deal with here but are fundamental to the development of a good IP policy.
It must continuously be reinforced that IP is a commercial tool. The protection of the IP should be integrated with the progress of other activities in the business plan. One example of this is the timing of the filing of a patent application on some new idea. Typically this is done as soon as possible and no thought is given to whether there is any benefit in delaying filing. As the initial filing sets a deadline for the filing of international and overseas applications (at great cost) it can be appreciated that a delay in the original filing may in some circumstances be desirable. One must always be aware of the risk inherent in delaying filing, of course, but commercially there may be advantages in such a delay. Similarly there may be significant cash flow benefits in filing a single initial patent application covering a number of inventions and then dividing that application up at a later stage. Other filing issues include decisions on where to file. Typically it is only worth while filing in those countries that represent a market for the IP. The fact that the product could be made in a particular country does not necessarily predicate the filing of a patent application there unless that country also represents a market for the product.
Even after deciding that the organisation has IP worthy of protection is not the end of the story. One must decide what it is that you are actually need to protect to maximise your profit. Let me give you an example. A manufacturer patented his new slurry pump. The pumps were sold at a profit but the real money came from selling replacement membranes that are a component part of the pump and wear out frequently. The membranes could have been the subject of design protection but were not. This deficiency meant that his competitors were able to move in on what had been intended to be the real money spinner in the project.
The question of the date of filing of patent applications is closely tied in with the issue of publication of research results. The organisation should have a policy on publication and tie this firmly in with the overall commercialisation program. The filing of a patent application just before the revelation of research results at an international conference, for instance, may maximise the patent life while tying in with the marketing effort implicit in the publication.
It is important to regularly review the IP portfolio to ensure that the patents, trade marks and designs in it remain relevant to the commercial aims of the organisation. Unfortunately I am frequently confronted by clients saying "Oh, we can’t let that patent lapse, it cost us $20,000 to get!". The emphasis should be on the return that will be forthcoming from the next dollar of expenditure that will be incurred not on the sunk cost of the project. If there is no foreseeable prospect of making any money from a particular item in the portfolio and if it has no defensive value, in the sense of keeping a competitor from doing something that will negatively affect the organisation, then there can be no reason to expend further money on it.
The corollary of regularly looking at your own IP portfolio is to look at what your competitors are doing. You might want to run regular searches to see what new patent applications the major players in the field have filed, new applications published in the field and whether any blocking patents of which you are aware have been allowed to lapse or have expired. As an aside I would mention that ICI Australia used to file all patent applications under the title "Product and Process" to avoid their competitors from even knowing what are they were patenting in until the patent application was published 18 months later.
In the case of an organisation that is seeking to license their IP as an essential element in their business plan, or if the raising of venture capital is important, then a structured process of raising the profile of your IP has much to recommend it. Potential investors or licensees are much more likely to give you a favourable hearing if they have previously received favourable reports of your technology from another source. I am inclined to say that this applies even if the source is quite unreliable, such as a daily newspaper.
The raising of the profile of the IP has to be done in a way that is most likely to generate favourable mention. Papers delivered by the inventors at conferences, publicity from your own press releases and well conducted trials for the benefit of the press or other opinion leaders are all very persuasive and are likely to generate favourable outcomes.
In carrying out the development of your IP it is desirable to identify the negative issues that opinion leaders are likely to raise when the technology is first presented to them. The development program should first focus on overcoming the biggest potential negative, and then the next and so on. This may involve the conduct of trials to prove that possible negative outcomes wont happen or that the new product out-performs the existing market leader or establishing that your process can be carried out economically.
The intent of all of this activity is to reduce the perception of risk in the mind of your potential investor, licensee or customer. Change is a frightening prospect. It is necessary for the innovator to convince those with whom they are dealing that the risk inherent in the change that the innovator is proposing is within acceptable bounds. Proof of performance and peer review are two prime ways of achieving this.
It is axiomatic that in any business deal there is a finite limit to the profit that can come from the deal. For a deal to be acceptable to both parties each must perceive, at the time of entering the deal at least, that they are going to get a fair share of that profit. This is the "chocolate cake" model of negotiation! The negotiation is really about dividing up the potential profit between the parties in a way that gives each of them an incentive to work the deal to completion. Obviously in the situation of a once off sale these considerations are less important, however in a licensing or investment situation they are of vital importance as the deal may go on for many years. In my following comments I will concentrate on negotiations in the licensing field.
The first issue in seeking a licensee is to examine the flow of goods or services in the area of your innovation from the supplier to the end customer. This analysis needs to include an examination of who is the real decision maker in that process. When this analysis has been conducted it is then possible to consider the best type of partner for you to negotiate with. I am a director of a company commercialising an innovative building product. We thought initially that the supply of the product to the market through fit-out companies would be the way to go. In hindsight we now realise that the product we are selling has to be specified by the architect at the time of design of the building and therefore we need a licensee or distributor that has access to architects. The actual decision maker however is the building developer and/or the occupier as they are the people who will actually financially benefit from the use of our product. This realisation has lead us to licensees and distributors who are already involved with these three groups and who have high technical credibility with all three of them. This realisation has yielded benefits to the company.
This is another way of saying that your partner needs complimentary strengths. If your organisation has high technical strengths and low marketing abilities then obviously your licensee needs to have the marketing skills that you lack. I believe that in seeking a licensee the essential requisite that you should look for is marketing skill and an established market. It is usual that you can get a contract manufacturer if required but the ability to put the products into the hands of the consumer in an efficient way is essential.
When selling a licence I have found it very useful to insist on the licensee producing a business plan and making this available to the licensor. This serves to focus the potential licensee on what they will actually do when the licence commences. If the potential licensee is reluctant to do this work in advance of signing the licence there is a real chance that they will not do it expeditiously after the agreement gets going. Preparation of a business plan by the licensee forces them to reveal their thinking about the market potential. They will not want to be too bullish about the market so as not to push the price up too far but by the same token they cannot be too bearish as this might cause the potential licensor to look elsewhere. The compromise between these positions may well bring a sense of reality to the deal which is a good thing. If the expectations of the parties are truly shared this will make their subsequent dealings much easier.
It is highly desirable to get at least one decision maker in the other organisation emotionally committed to the project. The business plan I have mentioned is one way of doing this, as is the profile raising that I have mentioned earlier. Once an executive has worked with you for some months on a deal he or she will hopefully have a commitment to the project that will carry you through the testing times of the final negotiations. This person will hopefully be an ongoing product champion throughout the life of the project, or at least until it is profitable and smooth running. It is worth putting a lot of effort in getting that relationship into order from a very early stage in the process. Obviously one needs to be confident that the person that you form this relationship with is really in a position to help push the project forward. If they are about to get retrenched they are not going to of much help!
This observation leads on to the general observation that in preparing for the negotiation it is important to gather as much information as possible about the party that you are dealing with, about the market, about the competitors and so forth. A very useful indication as to how a person or a company will behave is to look at how they have behaved in the past. Try and talk to people that have dealt with the other side before, what type of deals have they done, how have they approached the negotiations, have they lived up to their promises?
I am a believer in the old adage that it is desirable to write the agreement. If you cannot then at least try and get the person who will actually put pen to paper to be present at the negotiation. There is nothing worse than to spend days negotiating and then have the document written by someone who has no feel for the nuance of the negotiations. It will inevitably require days of further negotiations to get it back into order. These days with lap-top computers I have found that a very efficient way to proceed is to have a negotiating session and to then have the people responsible for the document stay on in the room and document the agreement so far. This has worked very harmoniously for me in a number of negotiations.
It must be stressed that the signing of the agreement, in investment or licensing, is only the start of the relationship and a great deal of time and effort needs to be spent on maintaining and nurturing that relationship.
I would now like to provide an example of a licensing program with which I have been involved that exemplifies some of the issues that I have already discussed.
A group of surgeons approached me in connection with patenting a medical prosthetic device. They had conducted animal studies and were confident that their device would work in humans, they were in the fortunate position that they were able to make the device themselves by hand. After the initial patent application, which covered a number of inventive features, was filed they obtained ethics committee approval in Australia to place the device in high risk patients who could not be treated in any other way. These placements were extremely successful. The surgeons were then able to present papers at a couple of very high profile international conferences and the results they were able to present showed that they were getting better results that any other group in the field world-wide.
As a result of these presentations the surgeons were approached by a couple of US-based companies and after a series of negotiations they signed what was called an option agreement, but was in fact not a true binding option. Rather it was an undertaking not to talk to others for a period and a right of first refusal. In those initial discussions the US company offered to pay, in consideration for the option, a consultancy fee to the surgeons, a disclosure fee and to fund some more work both in-house and by the surgeons. They also offered to pay a defined sum upon the exercise of the so called option. We declined to accept this last offer reasoning that it was better to leave a determination of the value of the technology until the full negotiation of the licence took place. Needless to say the decision at this stage to decline proffered money caused the surgeons some angst!
During the period of the preliminary agreement the surgeons placed about 50 devices in patients with outstanding results. Other competitive projects were at the same time running into problems due to lack of performance of the alternative devices in patients. A series of international presentations were made to conferences during this period and there was a lot of peer comment among surgeons around the world. The US company was also doing a lot of market and other studies during this period.
The US company advised towards the end of the option period that they wanted to enter into discussions about a licence. We asked for a business plan and also did a bit of digging around to find as much information as we could about the market size. The business plan that was presented to us was quite comprehensive but there were a lot of unsupported assumptions in it. At our first negotiating meeting the US company was asked to comment on some of these assumptions. One related to the demographic of the target population. We had data to show that in the US it was expected that this target population would grow by 73% during the life of the licence. This growth was not reflected in the business plan and this gave us a considerable advantage in the further negotiations as the Americans did not know what other information we had.
The next major issue was that their business plan showed that the net present value of our putative royalty stream represented about 5% of the net present value of their putative profit stream. We argued that the 25% rule should apply. This was vigorously resisted on the grounds that "We have never paid 25% of profit for a medical prosthetic and it never happens in this industry". We then collected a bunch of factual material showing that this was not correct and submitted it to the US company.
Our next meeting lasted 6 days and resulted in a deal that saw us obtain significant up-front monies and royalties that together have a net present value over a range of scenarios that sits around the 23% mark relative to the net present value of their projected profit.