Introduction

There is increasing awareness of intellectual property rights, both commercially (e.g. through the recognition that innovation and design can create specific demand, influence consumer preference and generate ongoing product/brand loyalty) and legally (including the ability to secure monopoly use rights for inventions or unique works, and through registration and enforcement of statutory rights).

Owners and creators of intellectual property rights will usually seek to exploit those rights for their economic benefit. This can include immediate and ongoing benefits, such as trading or license revenues, as well as ultimate benefits (trade sale, IPO or otherwise) on exit.

Steps taken in the formation and structuring of the business will often be essential to realising both immediate and ultimate benefits: the terms of intellectual property licenses granted, for example.

This paper discusses some important considerations when commercialising intellectual property.

Identify and secure the intellectual property

The first step - and it is a critical one - is to identify the IP that will (or might) 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 - whether by sale or license - for gain on exit.

Most ventures will own copyright and trade marks, ventures giving rise to inventive business solutions might well have patentable rights and specific protection is available for innovative functional designs under the Registered Designs Act.

The IP to be ‘captured' will often include valuable know-how accumulated within the venture, and proprietary information (ie. 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 the like.

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 have greatly diminished 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 lost of proprietary control over the IP will be felt when attempting to exit the venture, to form collaborative arrangements (including raising capital), or even in the defection of key employees or contractors.

Ownership structure

It is similarly important to get ownership and trading structures ‘right' from day one. For example, the costs incurred in seeking to recover/preserve key IP when post-trading disputes arise with business partners (including opportunistic profiteering) will greatly exceed the set-up costs foregone. Indeed, proper structures can prevent the motivation for such disputes arising at all.

The separation of IP ownership from trading risks is highly desirable, where possible. Tax efficiency is also an important objective, particularly in the case of registered IP rights.

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;
• Tax implications (including transfer pricing for cross-border ventures);

Depending on the particular venture, a strategic evaluation may lead to differing structures (e.g. licensing, franchising, joint venture, partnership).

In most commercial IP structures, key issues between business partners (apart from monetary commitments) will include:

(a) Exclusivity;
(b) Territory;
(c) Marketing (eg the duty to generate demand/turnover in the 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 the support provided to licensees, to ensure that there are real incentives to achieve objectives set. Having the business structure and documentation well prepared is essential, but it is also vital 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 trade blocs 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/service, and controlling the appearance of that brand to end consumers, is vital in securing the overall value of the venture's IP. Marketing strap-lines often supplement trade marks in forming part of the brand.

Contracts with business partners should impose appropriate branding obligations (eg the obligation to affix prescribed labels, or to not remove or alter labels affixed already) and in so doing can effectively broadcast ownership rights and promote the brand in all markets.

Branding/labeling can include appropriate IP notices (eg. ©, ® or TM, patent or design regn no), which 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/requirements. Various other strategic and cross border issues (commercial and legal) will be relevant also.

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.

Market Intelligence

A key part of a successful strategy to exploit IP is analysing the intended market(s), and adopting appropriate structures, product offerings and partner relationships to succeed.

The early identification of business partners capable of assisting, particularly those with complementary goods or 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 appropriate markets. For international business models, NZTE provides a range of services to accelerate market entry and international business growth, including its ‘beachhead' program (see http://www.nzte.govt.nz/).

Intellectual Property as security (owner and licensee)

The Personal Property Securities Act (PPSA) took effect in 2002 and governs "security interests" in "personal property".

Under the PPSA, arrangements that were not traditionally treated as security arrangements now become registrable security interests e.g. lessors of personal property, and sellers retaining title in goods until paid. The PPSA grants secured parties a number of rights, including the right to take possession of and sell off the collateral (goods) if there is a default, and sets out priority rules.

"Personal property" is defined in the PPSA as including chattel paper, documents of title, goods, intangibles, investment securities, money and negotiable instruments. Trade marks, copyright and patent rights fall within the definition of "intangible", so therefore can be the subject of a security interest falling under the PPSA rules. Not only can the owner of IP grant a security interest over that in relevant circumstances (which may arise in the context of capital raising, for example), but so can licensees or third party creditors.

Generally, licences are property in which a security interest can be taken. A licence right that is transferable, albeit subject to restrictions, and that has commercial value is "property" for the purposes of the PPSA.

Registration is vital to protect rights where security interests arise. The PPSA also created the Personal Property securities Register (PPSR) which is a form of electronic noticeboard, where persons can search and view information held here online and in real time.

For further information concerning the PPSA and PPSR, see the Clendons website (www.clendons.co.nz) or the PPSA website (www.ppsr.govt.nz).

Summary

With proper consideration paid (particularly at the outset of a venture), the current and future prospect for making commercial gain from IP can be greatly enhanced. Although set-up costs can sometimes represent a substantial proportion of the costs involved with establishing a business at its inception, the return on that investment can be handsomely rewarded both during trading and on exit.

Disclaimer

This Background Paper by its nature cannot be comprehensive and cannot be relied on by any client as advice.

This Background Paper is provided to assist clients to identify legal issues on which they should seek legal advice.

Please consult the professional staff of Clendons for advice specific to your situation.

James Carnie
Principal
Clendons
PO Box 1305
Auckland
New Zealand
Phone: +64 9 306 8000
DDI: +64 9 306 8002
Fax: +64 9 306 8009
Email: james.carnie@clendons.co.nz