Leveraging IP Assets: Role of IP in Improving

Enterprise Profitability through Direct Exploitation,

Licensing, Franchising, and / or Merchandising, and
Developing Other Types of Strategic Business
Relationships: Case Studies
Shanghai
15 December 2004
INNOVATION LAW
PHILIP MENDES BRADLEY THOMAS (ASSOC)
Level 3, 380 Queen St
Brisbane QLD, Australia
Ph + 61 7 3211 9033
Fax + 61 7 3211 9025
[email protected]
[email protected] 1
 Leveraging IP Assets
to improve profitability
 What does leveraging IP assets mean ?
 use IP Assets,
 to build business relationships and opportunities
 in that way achieving more with an IP Asset than if you didn’t have the
relationship
 and in turn, to improve a business’ profitability

 Outline:
 Looking closer at an IP Asset’s owner right to exclude others
 Looking at ways for sharing IP Assets and how taking an inclusive approach
can improve profitability
 Emphasis on Case Studies: some of the imaginative ways that IP Assets have
been leveraged to create new business relationships and increased
profitability 2
 Patent:
right to exclude
 Patent confers upon its owner the right to exclude others from exploiting
the invention the subject of the patent

 The perspective of a patent owner, consistent with that idea, is that a

patent has to be closely guarded, with the owner being alert to others who
may be infringing it, and who must be prevented from doing so

 That is a very simple use of the rights conferred by a patent

 Patent owners often focus on their patent

 As barriers to entry, as tools to exclude others
 Rather than as tools for strategic alliances and increased profitability
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 Patent:
right to exclude  proactive inclusion
 Patent owner sees the right to exclude as a means of recouping what may have
been years of speculative investment
 A patent owner has that right to exclude
 But it is a right which sometimes may result in a patent’s economic benefits
not being maximised
 A patent may be used to exclude others, but it can also be used as a tool to form
strategic alliances, take advantage of new opportunities, and in that way maximise
profitability
 Recouping the speculative investment on the patent may in fact be slowed down
by the right to exclude. It might be recouped faster through using IP assets as tools
for new opportunities

 An IP asset can be leveraged

 to partner with other businesses in a strategic way
 to create new business opportunities 4
 Licensing and concurrent IP rights

 Licensing IP is a tool
 An owner of an IP asset may grant to another person rights to use the
owner’s IP
 An owner of IP may do so consistently with retaining their own
exploitation rights

 How?
 By the use of tools that permit concurrent exercise of IP rights
 Sole Licenses – a shade of exclusivity
 Field of Application restrictions
 Territory restrictions
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 Exclusivity: Sole License

Exclusivity:

Exclusive Sole Non Exclusive

One Exploiter – Two Exploiters – Numerous

the licensee owner and the Exploiters –
licensee owner and
numerous ‘ees
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 Exclusivity: Sole License

 A mechanism for concurrent rights to a patent

 Owner may exploit rights, and at the same time grant exploitation
rights to a licensee: a sole license
 Two persons in the market exploiting the same patent – as competitors

 Why would a patent owner with the right to exclude others grant a license
to a person that would be its competitor ?
 Surely that will decrease profitability, not increase it !
 Doesn’t that defeat the purpose of having the right to exclude others
granted by a patent ?
 Yes, but not necessarily always
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 Exclusivity: Case study in increasing
profitability by granting a sole license
 Technology developed by testing laboratory – Company A in Australia
 Company A had clients globally
 But its global clients amounted to less than 1% of the global market place
 Did not have a global marketing network – and did not want to – preferring to
remain “boutique”
 Company B in Europe
 A competitor to Company A
 But a significantly larger company, with a significantly larger share of the
global market place
 Had the resources to market widely, globally, and maximise the use of the
technology
 Choices:
 Exclude all others from the technology – and make minimal financial returns
 License a competitor with greater capability and maximise financial returns
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 Fields of Application

 Some technologies lend themselves to different uses.

 These are called fields.
 field of science
 particular application
 industry by industry
 Some licensees have expertise / marketing networks in some fields but not all.

 Would you exclude others from exploiting your patent in all fields, even those
fields, applications, industries outside your own capability to service ?

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 Fields of Application
 New formulation for scratch  Would you keep all fields to
resistant plastic yourself and exclude others,
 Possible fields: even if you had no capability
 Exterior pipes – plumbing other than in one field only ?
industry
 Spectacles – optics industry  No, you would license out
 Furniture – moulding remaining fields
industry
 Bottles for consumer  Would you license optics
products – injection industry applications to a
moulding industry plumbing manufacturer ?
 Car parts and trim – motor  Would you license motor
vehicle industry vehicle applications to an optics
 Boat trim – boating industry manufacturer ?
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 Fields of Application

 Retain rights you want to exclude others from

 And leverage your IP by licensing out other fields of application to others, in that
way maximising your own profitability
Field of Application User

Exterior plumbing Licensee in plumbing industry

Spectables Licensee in spectacles industry
Furniture Owner - furniture moulding industry
Bottles Owner - injection moulding industry
Car parts and trim Licensee in motor vehicle industry
Boating trim Licensee in boarting industry
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 Territory

 The most familiar way to leverage an IP Asset

 Patent owner
 keeps a territory that it sells its products in
 licenses patent to licensees to sell in other territories that the owner cannot
service

 Could be
 country by country
 states or other geographically distinct areas within a country

 Rather than excluding others from the IP Asset

 It is made available to strategic partners that exploit it, and pay a royalty
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 Leveraging IP Asset in a
Strategic Alliance
 A strategic alliance occurs where two or more companies align
themselves to each other
 They may be competitors
 They might also be in entirely different industries

 But they combine their efforts or their resources for their mutual
benefit
 They may even make their IP Assets available to each other
 Usually more than just a license – a closer more intimate relationship
than just a license
 They leverage their own IP Assets to form a partnership with another
person that contributes its IP Assets, with a common objective of both
benefiting from each other’s IP 13
 Strategic Alliances
Combining IP Assets to create new IP
 Company A is conducting R&D on a new formulation for a scratch
resistant plastic for making plastic furniture
 Company B is be conducting R&D on a new formulation for a scratch
resistant plastic for making motor vehicle trim
 Both
 have valuable IP in the area
 have patents
 They decide that
 collaborating together
 combining their resources
 combining the inventiveness of their staff
may lead to developing a formulation that would suit them both
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 Strategic Alliances
Combining IP Assets to create new IP
 They enter into a Collaboration and license agreement
 To collaborate and create New IP hat will be jointly owned
 Company A grants to Company B a license
 Of Company A’s patents
 Of Company A’s interest in the New joint IP
 In the field of motor vehicle trim and accessories
 Company B grants to Company A a license
 Of Company B’s patents
 Of Company B’s interest in the New joint IP
 In the field of furniture
 Both have leveraged their own IP assets
 To create New IP
 To obtain access to the IP of the other, and the new IP, in their own field of
interest 15
 Strategic Business relationships that can be
formed by leveraging

 Licenses are at the heart of almost all strategic relationships where this
leveraging of an IP Asset occurs

 License of
 a patent
 a trade mark
 A registered design

 Special types of licenses

 Franchising
 Merchandising 16
 Franchising

 A special type of license

 A bundle of IP rights and contractual rights
 Trade mark
 A business system or process (know how)
 Group purchasing power
 Group advertising power

 The bundled IP and contractual rights are licensed, or franchised, to a

licensee, or franchisee

 The originator of the IP rights leverages those rights by creating business

relationships with franchisees that pay franchise17 fees, or royalties
 Merchandising

 Another special form of license

 Licensing
 Designs
 Characters (movies, cartoons)
 Copyright works (art, photograph etc)
 And allowing licensee to reproduce onto products, from clothes to
children’s lunch boxes, back packs, and food containers
 Another form of leveraging an IP Asset by extracting maximum value
by sharing its use with others

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 Case Study:
ITL Corporation Pty Limited

 An Australian Company
 Commenced operations in 1994
 Seen it grow
 from the two founders with no other staff, to over 170 staff in four
countries
 from no IP assets to
 12 patent families
 Over 100 granted patents worldwide
 11 Trademarks registered in over 25 countries
 From a company with no capital, to a company listed on a stock
exchange in late 2003
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 Company’s name and business

 ITL stands for

 Innovation
 Technology
 Licensing

 ITL’s name itself indicates that IP Assets are a major focus of its
attention
 Its name suggests that licensing was its intended business model

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 Company beginnings

 Joint Managing Directors

 Bill Mobbs (computer consultant)
 Jag Dillon (research scientist and then TGA (FDA) official)
 Both decided to undertake a Masters of Business Administration and
met at University
 At the time were aged in early 30s
 They both decided that the business that the wanted to form needed to
be
 niche
 global
 innovative
 protectable
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 Identifying the need

 In 1993 - 1994 the risk of AIDS infection was receiving global

attention, as was Hepatitis C infection
 Healthcare professionals (doctors, nurses, etc) were particularly
concerned about the risk of accidental infection, given that they daily
dealt with patient’s blood
 At about this time a retractable syringe entered the market
 The blood collection agencies (Red Cross and others) were particularly
concerned about accidental needle stick injury to their staff
 ITL identified the need for a product into which blood collection
needles could safely be contained, upon exit from the blood donor, in
that way minimising the risk of needle stick injury
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 First product

 They designed a vessel into which blood collection needles would

retract

 In 1994 ITL applied for a utility patent or petty patent (in Australia
now called an innovation patent) over their first product, the
DonorCare
 Later converted to a standard patent
 Has a unique design
 Needle retracts into the vessel, protecting
health care staff from the risk
of needle stick injury
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 First trade mark

 DonorCare was also the first trade mark

DonorCare

 Trade Mark was sought at an early time

 ITL identified the need to achieve product recognition at an early date
 It needed its potential customers to be aware of its product, and to recognise
ITL’s products, over any competing product

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 Licensing option

 ITL considered for some years that its strategy would be to license out
the patent
 Licensing held many attractions

 ITL could be a passive licensor

 Collect royalties
 apply its resources to developing new products

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 License manufacturing
and sell products

 But greater profitability was to be realised by selling product instead of

licensing

 ITL decided to leverage its IP assets to

 Develop an alliance with an OEM manufacturer that manufactured
product and sold only to ITL
 Develop an alliance with global purchasers of its products

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 License manufacturing
and sell products
 ITL accordingly decided to leverage its IP Assets by moving away
from licensing, and instead licensing a contract manufacturer, and
selling products

License to manufacture
ITL Manufacturer
Sell products back

Sell products

Buyer 27
 License manufacturing
and sell products
 By doing so

 Leveraged its IP Asset to build a capability it did not have

 Created a strategic relationship with a licensee – who was licensed to
manufacture only, and to exclusively supply all product to ITL, and to
no one else
 Leveraged in a way that achieved more with the IP Asset, and more
with that strategic relationship, than if that leveraging had not taken
place, and there had been only a simple license.

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 Other products

 Platypus
 Similar to DonorCare, but designed specifically for AV Fistula
Needle sets
 Also designed to prevent needle stick injury
 Key to its success has also been
 Patent protection
 (Niche, global, innovative, Protectable)
 Trade Mark
 Market recognition and loyalty

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 Other Products

 Blade Guard
 Stitch cutter, reducing risk of injury
 Flipper Stripper
 Strips blood tubing
 Samplock
 Vacuum tube for blood collection

 Adopted the same strategy

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 Evolution to
Licensing in
 Having established own manufacturing facility, it has licensed in other
people’s technology to add to its product range
 That is, has licensed in other people’s unique patents or designs to produce
and sell
 Leuko Cart
 A portable cart for blood bags
 Baby Leuko Cart
 A smaller version

 Adopted the same strategy

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 One IP Asset leveraging another

 What does it mean to leverage one IP Asset with another ?

 You have one IP Asset

 You have a second IP Asset

 You leverage one IP Asset with another, and maximise the financial
return, than if you had not done so

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 Patent and Trade Mark same product

 Patent term will expire after 20 years from application date

 Trade mark will continue indefinitely, while registration fees are paid

 If directly exploiting a patent rely on patent to exclude others that may reverse
engineer
 But in the meantime promote the trade mark for that product
 Generate customer loyalty for the product

 The patent may expire, but sales may continue, enjoying the competitive edge
brought about by the continued trade mark and customer loyalty

 Leverage the patent to add value to the trade mark and improve profitability
beyond the patent term
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 License Patent and Trade Mark
together
 The challenge:
 To do the same when licensing a patent
 Persuade licensee to also take a license of a trade mark, and require
only that trade mark to be employed in the exploitation of the patented
product
 Have two royalty rates: one in the patent license, the second royalty
rate in the trade mark license
 Collect two royalties for the life of the patent
 After the patent expires continue to receive royalties pursuant to the
trade mark license

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 License Patent and Trade Mark
together
 Most patent licensors do not leverage the value of their Patent IP Asset
in this way
 A licensee will seek to persuade the licensor that the goodwill
generated from the sale of the product should belong to the licensee
 Often that argument will succeed
 But a licensor that succeeds in leveraging one asset against the other in
this way will earn royalties for a period well after the expiration of a
patent
 It will be easier for a licensor to do so when licensing on a Territory by
Territory basis. It will be easier in that case to require uniformity in
trade marks across all Territories
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 Case study: leveraging one IP Asset with
another: Trade Secret and Trade Mark
 Company A had a formulation for an nutrient additive to chicken feed that
resulted in chickens producing eggs enriched with Omega 3
 Omega 3
 a fatty acid that helps prevent heart disease
 found in oily fish such as sardines etc
 found in relatively few foods
 Ironic that you eat a fatty product like an egg (10g of fat in the yolk) to be
able to more readily access the Omega 3 fatty acid
 Challenge:
 The formulation was not patented, but was protected only by trade
secrecy. It had been commercially used, so could not be patented
 Financial return sought on a long term basis, by reference to the price
premium that would be charged by egg producers for Omega 3 eggs
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 Case study: leveraging one IP Asset with
another: Trade Secret and Trade Mark

 Challenge:
 If a know how license was entered into, requiring royalty payments, its
term would cease, and royalties would cease, as soon as the
formulation entered the public domain
 As there were to be number of licensees of a know how license, by
Territory, there was an increased possibility of the formulation entering
the public domain, and even an incentive for the formulation to leak
 It was sought to get a reach through royalty based not on the quantity
of nutrient added to feed, but based instead on the premium price for
sales of Omega 3 enriched eggs

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 Case study: leveraging one IP Asset with
another: Trade Secret and Trade Mark
 Strategy
 Grant a license to a feed producer to make nutrient and sell it to egg
farmers – but only those egg farmers that had entered into a trade mark
license
 Grant trade mark licenses to egg farmers, in that way permitting them to
buy the feed additive
 Farmers must use trade mark to promote any Omega 3 eggs, those eggs
must meet certain specifications, and farmers must pay a royalty on
Omega 3 eggs sold pursuant to the trade mark license for the agreed term,
and its renewal
 Discourages possible leakage of the formulation
 Ensures royalties are connected to the trade mark license, which is likely to
have a longer life than a know how license of a formulation
 Success in leveraging one IP Asset against another
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 Leveraging occurs by grant of rights,
not excluding
 Leveraging IP assets as described occurs by licensing in all of forms
 Using an IP Asset, and instead of excluding others from its use,
proactively going out and finding other users who will want to use that
IP Asset

 But a word of caution:

 Leveraging by licensing occurs because a licensee does actually exploit
the licensed rights
 If a license is exclusive, and the licensee does not actually exploit the
licensed rights, no leveraging takes place at all
 A licensee may seek a license to in turn exclude others
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 Importance of performance
obligations in a license
 So often licenses are granted without consideration to performance
obligations
 In the urge to do the deal, and in the desire not to put the relationship
with the licensee under stress, performance obligations are ignored, or
inadequately provided for

 What are performance obligations?

 Things the licensee must do in order to retain the license
 Things which if not done, can lead to the licensor being able to
terminate the license, and find another licensee instead with which
to more profitably leverage the IP Asset
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 Types of Performance Obligations

 Two types of performance obligations

 Obligations before the first sale
 Obligations after the first sale

Product in Market
R&D
Signed
Deal

Term
First
Sale

End
of
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 Obligations before the first sale

 Licensor wants to know that the licensee

 Will continue R & D (if applicable)
 Will complete R & D (if applicable)
 Will expeditiously start and travel the regulatory pathway (if applicable)
 Not “shelve” the IP
 Commercialisation Milestones
 Milestones that a Licensee must achieve to continue to be licensed
 Not achieve milestone – license is terminated

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 Commercialisation Milestones
 Examples:
 If more research is needed to bring products to a market ready
state, the completion of that research
 Produce a prototype
 Conduct a trial
 Complete construction of Pilot Plant
 Complete construction of Production Plant
 Obtain any regulatory approval
 Employ a person with particular expertise
 Grant a sub license to a partner in Key Market
 First sale anywhere in the world
 Dates by which these must be achieved
 Mechanisms for extension of time
 Termination if not achieved in any extended time
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 Obligations after the first sale

 Usually require minimum sales

revenue / units sold
Territory Period Units of Product
 Expressed as worldwide / or
markets North America 1 year from from signing 100,000
 If failure in a market 2 years from from signing 150,000
3 years from from signing 200,000
 Exclusivity converts to non etc
exclusivity Europe 1 year from from signing 120,000
2 years from from signing 175,000
 Or termination
3 years from from signing 250,000
 In the market concerned, etc
without affecting other marketsetc 1 year from from signing etc
2 years from from signing
 Pharmas and biotech - none of that 3 years from from signing
is acceptable etc
 Will be prepared to make
minimum annual payments
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 Conclusion

 Identify IP Assets that lend themselves to leveraging for greater

profitability
 Think of IP Assets as tools
 They are tools not necessarily to exclude others from
 They may be tools to share with others, and in that way maximising the
profitability of the IP Asset

 Leveraging in this way is accomplished by licensing in all its forms

 But don’t forget to include performance obligations in the license

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