There is increasing awareness of the value of intellectual property rights, including recognition that innovation and design can create specific demand, influence consumer preference and generate ongoing product/brand loyalty.
Owners and creators of intellectual property rights will often seek to use those rights for their economic benefit. This can include immediate and ongoing benefits, such as trading or licence revenues, as well as future benefits (trade sale, IPO or otherwise) on exit.
Steps taken in the formation and structuring of business arrangements will often be essential to realising both immediate and future benefits: for example, the terms of intellectual property licences granted.
This article discusses some important considerations when commercialising intellectual property.
Identify and secure the intellectual property
The first step (and an important one) is to identify the IP that will arise in the course of the venture, and to assess how that IP is to be defined and protected, used for commercial gain, and then (in most cases) transferred by sale or licence for gain on exit.
Most ventures will own copyright and trademarks, and ventures giving rise to inventive business solutions might also have patentable rights. Specific protection is available for new product designs under the Designs Act. The IP will often include valuable know-how accumulated within the venture, and proprietary information (i.e. information that the venture is entitled to regard as its property, generally being secret and the product of the venture’s work effort) which can include customer lists, operating manuals and manufacturing techniques.
Future improvements to the IP can arise from a variety of sources, including licensees/franchisees, manufacturers, contractors and employees. Business contracts should, where appropriate, secure rights to own/use these improvements.
Businesses choosing not to secure their IP at the outset risk losing any possible monopoly rights through public disclosure and may have less ability to protect the IP in the event of challenge or misappropriation. Whilst this may not greatly alter the operating profits in the venture (at least initially), the loss of control over the IP will be felt when attempting to exit the venture or form collaborative arrangements (including raising capital), or if copycat competitors emerge, upon the defection of key employees or contractors.
Ownership structure
It is important to get ownership and trading structures ‘right’ from day one. For example, the costs incurred in seeking to recover/preserve key IP if disputes arise with business partners (including opportunistic profiteering) will greatly exceed the costs of protecting that IP at the outset. Indeed, proper structures can prevent the motivation for such disputes arising at all.
The separation of IP ownership from trading risks is also beneficial, where possible.
Commercial Strategy
The strategy for making commercial gain from IP will vary depending on the specific circumstances, including:
- The product/industry type.
- Market dynamics and entry/exit barriers.
- Capital requirements and sources.
- Risk appetite.
- Immediate/long term objectives, notably exit strategy.
- Revenue streams and costs.
Depending on the particular venture, a strategic evaluation may lead to differing structures, for example licensing, franchising, joint venture or partnership.
In most commercial IP arrangements – for example licences – key issues between business partners, apart from monetary commitments, will include:
(a) Exclusivity
(b) Territory
(c) Marketing and sales performance – for example the duty to generate demand/turnover in the licensed territory
(d) Financial reporting and data availability – including audit rights
(e) Duration and termination
(f) IP registration/filing/protection obligations and costs
(g) Performance obligations
(h) IP warranties and indemnities, if any
(i) Quality standards
(j) Representations to consumers
(k) Relative contributions to the business model.
Careful consideration should be given to the support provided to licensees, to ensure that there are real incentives to achieve objectives. Having the business structure and documentation well prepared is essential, to ensure that licensees are motivated and do not become disenfranchised or disinterested in the venture.
Branding
Much has been written about the success of design-led businesses, particularly in New Zealand where our geographic isolation and exclusion from dominant global markets increase the importance of product differentiation and reputation.
Branding can also play an important overall role in a successful IP strategy. The brand of a product or service, and controlling the appearance of that brand to end consumers, is vital in securing the overall value of the venture’s IP. Clever and well thought-out slogans often supplement trademarks in forming part of the brand.
Contracts with business partners should impose appropriate branding obligations to promote the brand – for example the obligation to attach prescribed trademarks or labels, or to not remove or alter trademarks or labels already attached.
Branding and labelling can include appropriate IP notices – for example ©, ® or TM, patent or design registration number – which signify ownership and indicate an intention to protect the IP using relevant laws.
International Considerations
There are important differences in the way various countries treat IP, from recognition of differing rights, to varying registration regimes or requirements. Various other strategic and cross border issues – commercial and legal – will also be relevant.
For example, when licensing products into some territories, it is unlawful to exclude all warranties in favour of the licensee. Such ‘limitations’ will be viewed as ineffective at law. There are, however, statutory minimums that can be adopted.
It is important to take advice from experts in the relevant territories. Partnering with local advisors that are members of international networks can assist.[1]
Market Intelligence
A key part of a successful strategy to successfully utilise IP is analysing the intended market(s) and adopting appropriate product offerings and business partner relationships.
The early identification of business partners capable of assisting, particularly those with established business networks or complementary goods and services, can provide valuable local assistance and contacts.
An analysis should include assessing key market players – including prospects – barriers to entry, regulatory and political risks, and demand factors.
New Zealand Trade and Enterprise can provide some valuable assistance in overseas markets. For international business models, NZTE provides a range of services to accelerate market entry and international business growth, including its ‘beachhead’ programme.
Summary
By taking appropriate IP protection and commercialisation steps, the current and future prospect for making commercial gain from IP can be greatly enhanced. Although set-up costs may need to be incurred at an early-life stage of the venture, the return on that investment can be handsomely rewarded both during trading and on exit.
Disclaimer
This background article by its nature cannot be comprehensive and cannot be relied on by any client as advice – its purpose is to help clients identify legal issues on which they should seek legal advice.
Please consult the professional staff of Lane Neave for advice specific to your situation.
[1] Lane Neave is a member of ICLA: see https://icl-alliance.com/
