Protecting potential

Intellectual property (IP) might be tough to get to grips with, but you must nail it down if you want long-term success in international markets.

By Kevin Kevany

How often have your fellow business owners told you that bothering about securing the intellectual property (IP) in your business is “expensive and a waste of time, because no one in the new markets gives a damn about it?”

But you also know about your competitor, who thought his luck was in when a big US corporate showed interest in buying him “for millions” – until their due diligence revealed he’d only ever registered the company with the Companies Office in New Zealand.

“It is generally accepted IP can account for over 80 percent of a business’s value,” says Richard Watts, Simpson Grierson partner and an acknowledged expert in copyright law, particularly in relation to IT and new technologies. “Despite this, SMEs in New Zealand have a history of underinvesting in IP or investing unwisely. It is primarily for these reasons that SMEs are often singled out by overseas investors as bad risks because of their limited IP portfolios and lack of IP strategy.

“Intellectual property law can be complex but the simple fact remains that it is property and therefore an asset,” he adds, “protecting market-share and encapsulating goodwill.”

Hamilton-based Ceri Wells, a partner at James & Wells, with 30 years’ experience in the industry, gives short-shrift to those who believe “getting in first, flooding the market, selling and getting out is a realistic strategy”.

“I have a very simple response,” he says. “Name one New Zealand SME which has ever achieved that. Local companies, particularly SMEs, are simply too small and under-resourced to be able to flood any international market, let alone do so before bigger and better-resourced competition has taken advantage of the opportunity.
“And if a product was so good it was possible to ‘tear a ring out of the market’, then that would be precisely the sort of product which should have been patented, so that such market domination and sales could be enjoyed exclusively, and for much longer.”

John Hackett, senior partner at leading IP practice AJ Park, with 40 years of experience to draw on while he heads-up the firm’s expansion in China, says IP protection is like insurance. “You don’t know how it is working for you. But it acts as a deterrent, and a lot of the time ensures your competition look elsewhere for more accessible, low-hanging fruit.

“Those who claim it is ‘so expensive to protect IP’ are usually the companies which haven’t invested in it from the start.

“Here’s why the moment you have even the seed of an idea’ you want to go into a particular market, you register [your IP]. Lewis Road Creamery was a victim of its own success locally, if you think about it.

“As many will know, a year ago they got into chocolate-flavoured milk. The story of the queues in supermarkets went viral. Some guy sitting in an office in Hong Kong picked it up and applied to register ‘Lewis Road Creamery’ in China. It is legal to do that in China.

$50K later – and it could have been twice that – the company is registered. Done upfront, that would have cost just $2,000.”

Value lies in the potential
“One of the most common mistakes we see by SMEs, perhaps driven by New Zealand businesses’ obsession with ‘freedom to operate’, is to focus too much on what the business currently does,” says Richard Watts. “While what you currently do is important, the value of an IP portfolio comes predominantly from potential.

“By way of crude example, take a hypothetical, successful, local yoghurt-maker looking to register its brand. The trademark strategy should have nothing to do with yoghurt, or New Zealand. Rather, the questions should be posed from the point-of-view of a hypothetical investor:

What other goods might the business diversify into? What about services, throughout the supply chain?

What opportunities are there for international expansion? Which countries are potential target markets?

“It is in these areas that IP delivers real value and de-risks the business,” he says.

A regularly heard ‘reason’ local SMEs are said to be deterred from even attempting to own and register their IP, is out of fear the IP rights they might obtain could not protect them against a much larger corporation, determined to exploit their new product, process or service.

Here, Ceri Wells has largely good news: “The risks of this happening vary from country to country, but let’s look at two important jurisdictions.

“In the US, a company which wilfully infringes a patent is subjected to treble damages. That means, any money the infringing company makes out of the infringement could be trebled and payable as damages. Consequently, US corporates are very nervous about knowingly infringing patents, especially in an environment where there are businesses making millions out of funding litigation for others. And there are lawyers who readily take patent infringement cases on a contingency basis.

“It is true that IP litigation in that market is ridiculously expensive. However, it is expensive even for US companies, and many now carry insurance against patent infringement actions. Because of the high cost of litigation and the risk of high damages, insurance companies have an overwhelming motivation to settle, rather than pay millions to lawyers and risk a large award of damages.

“In China, currently the third-largest filer of patent applications internationally, and likely to become number two within the next couple of years, the IP landscape is rapidly changing.

“In the top-tier, east coast provinces, in which most New Zealand companies trade, specialist IP Courts have been set up, and competent legal decisions are often reached faster and cheaper than could be expected if similar legal action was brought in our courts.

“Many Chinese provinces also have local government enforcement agencies which can make resolving infringement issues quick and cheap,” Wells says.

Approaching IP protection
So how should the owner manager of a SME approach the complex issue of getting the correct IP protection without going overboard financially, or ending up with half-baked cover?

AJ Park’s Hackett takes up the challenge. “The first thing I ask a new client is: ‘Are you thinking of exporting?’ Followed by: ‘Have you started negotiations with anyone in that market?’

“If the answer is ‘yes’, there are some factors on your side, say with trademarks. If you have registered in New Zealand, you have six months to register elsewhere and you can back-date to your local registration.

“The Swiss-based Madrid Protocol now allows you to file an international trademark registration and gives you access to 90 member countries. This allows you to choose which you want protection in and delivers a 40 percent saving on the costs prior to this development – largely through eliminating the need for local agents in each jurisdiction.

“We won’t register rights anywhere for you, unless we believe you are going to get a decent bang for your buck. A patent gives you 20 years protection. But depending on the type of product you have and the markets, we might just get you interim protection and, say, copyright cover, or register a brand name. We give you as much possible cover, but only as much as you actually need.

“When you talk patents and trade secrets, it’s not a question of ‘one size fits all’,” explains Hackett. “The whole process can be cumbersome and time-consuming, and expensive. “Whereas, what you need if you’ve got something like an app in the volatile technology market, is a strategy to maximise your marketing. By the time you’d get a patent for that, the market would be long-gone.

“Where you do need a patent is when you have something which will dominate a market for 20 years and you’ll still have something to sell,” he says.

“I like to use this example: You build a house out on a hill. First you put a lock on the door and add a picket fence, unlocked. Next you add a two-metre fence and a locking gate. Later you add barbed wire. Further down the line, you build a moat around it, and after some time, add crocodiles and a drawbridge.

“We know and understand what’s in our client’s best interests in this regard. We can help them be ‘street smart’ as well as obtaining the best, appropriate IP protection and being strategically smart at the same time.

“And, as experienced IP advisers, we are looking strategically at the best and most cost-effective way of protecting one’s IP,” Hackett says.

Simpson Grierson associate James Maxwell points out that when cost is at issue, timing is everything.

“IP must be a driver in strategy, and it needs to be considered first, not last or even second.

“There is a far too common chain of development adopted by SMEs, which goes roughly as follows: Have an idea. Develop the idea. Market the idea/sell product.
Uncover the potential value of the idea. Seek IP advice.

“This means IP advice is sought when a product or service is in the market, under a brand, in full view of competitors.

“This approach usually leads to one of two results: Total failure of the offering, or excessive cost while the lawyers try to mitigate risks and obtain protection, after-the-fact. It’s a bit like building a house and then calling a structural engineer afterwards.”

Maxwell emphasises IP should be ‘front of mind’ during the creation stage, where an IP strategy document is created to outline the business’s IP direction.

“What is more, from our experience in dealing with investors, we know that IP strategies are seldom seen but highly regarded! At a basic level, an IP strategy will consider and evaluate the scope of IP owned by a business, as well as its current level of protection, and the extent of recommended protection.”

Equity is spelt with an IP
According to Hackett the whole essence of being in business is about selecting a niche area or market; developing it from a start-up; and then building up equity in that business. “This can only be done by increasing and developing IP – trademarks, patents, trade secrets, copyright, registered designs, the whole bundle – in the distinctive aspect of that business.

“When it comes to selling that business, nine times out of ten, you’re selling the IP – that which you have exclusively protected. It is hardly ever people or bricks and mortar. It’s the exclusivity you have in terms of your IP.”

Wells agrees: “I recently had the pleasure of talking to Zhuo Fu Ming, who has been Forbes Magazine’s ‘Chinese Entrepreneur of the Year’ for the past six years. He likes to invest in technologies which can be commercialised in China, provided there are Chinese patents in place so as to minimise the risk to his investment. Zhuo’s regard for patents and IP protection is representative of most investors in countries which value innovation.

“The harsh reality is that without IP protection, the prospects of a Kiwi SME finding investment or partners to commercialise one of its ideas, in markets where real revenue can be generated, are very slim indeed.”

Wells also has a positive view of trade agreements, including the TTP, which is shared by Hackett.

“As for people being scared to pursue IP protection because of possible changes to IP laws under TPP, or because of upheavals in society caused by terrorism or global warming, etc, these are merely excuses for inaction,” says Wells.

“For so long as the current veneer of civilisation in our world is retained, business will continue to drive our economies and our lives. Business needs strong IP laws to survive.

“Consequently, any changes to IP laws arising out of international agreements and treaties will only serve to facilitate the ownership and control of knowledge by business and therefore strengthen IP rights, not diminish them,” adds Wells.

Richard Watts delivers a final challenge: “While it is still early enough to make New Year’s resolutions, business owners should ask:

• What is our IP strategy? Is it written down? Because if it isn’t, the truth is you probably don’t really have one.
• When do we consider our IP position? Is it early enough in the decision-making process?

“If you have a positive answer to each of those questions, the outlook for 2016 is looking good. If not, it’s not too late … yet.”