It is often said that the value of intellectual property lies in its commercialization and not in its mere creation and development. The failure to regularly assess the existing IP and finding appropriate revenue streams risks the ability to maximize the product “life cycle”. Lex Witness Bureau analyses…
While channelizing financial and other resources into innovative research and development activities (R&D) activities is significant, a valuable and often neglected aspect of managing the Intellectual Property (IP) portfolio is devising and implementing strategies to extend the “life-cycle” of the company’s products. No doubt, a robust IP portfolio enables IP owners to derive competitive advantage by creating value for the products. However, value- addition can be best achieved through marketing of the IP thereby “realizing” its commercial value. This is so because IP can attract investments into fixed and intangible assets, which would otherwise remain dormant. As in the case of tangible assets, IP (Patents, Copyrights, Trademarks, Designs, Brands etc), too can be leased, transferred, acquired, and mortgaged for limited period or on permanent basis. It is, therefore, not surprising that all over the world IP is increasingly being positioned as a powerful commercial asset that the businesses can utilize. In India, however, the commercialization or monetization of IP is yet to fully develop. At a fundamental level, the mind-set of not considering IP as a “source of revenue” needs to undergo a change in order to be able to capitalise on IP.
There are different modes or mechanisms of commercialization involving strategic and policy decisions. First and foremost, the IP owners have to decide whether they want to commercialize the IP (i) independently, if they have the resources like capital support; or (ii) in partnership; or (iii) in a combination of the two.
The monetisation of Intellectual Property (IP) has become especially important in an environment where approximately 70 per cent of the assets of corporate organizations are intangible. Monetization options available vary depending on the goals of the company, the type of IP sought to be licensed and the financial resources available to the company. Assets can broadly be classified into (a) those which bring in regular or at least predictable, cash flows, (active IP; such as licences); (b) those which are unused by a company but whose value may be determined by comparing them to similar active assets in the market place, (i.e. dormant IP; such as unused patents); and (c) those which do not directly bring in revenue but which are indirectly responsible for the generation of revenue (entity-specific IP; such as trademarks and their associated goodwill). Depending on what the goals of the company are, various options available to a company would include various forms of licensing including franchising, using IP as collateral to raise loans, entering into capital markets whether using IP as equity or by entering debt markets through the securitisation route.
It is critical for a company to have absolute clarity regarding its commercial goals while developing an IP monetisation strategy. For example, if a company does not wish to have others exploit its trademarks in any way but has the desire to expand its business despite not having the capital to do so, using its IP to raise a loan may be appropriate. On the other hand, a company willing to have others exploit its trademarks could consider entering into franchise agreements.
The IT Industry is governed by very different dynamics as compared to the Pharmaceutical Industry. The Indian IT Industry has largely been engaged in development not for Indian IT needs, but has served mainly as a “knowledge centre” for foreign clients. Thus, while IPis nevertheless being created, it has perhaps “flowed out” of India. Additionally, the legal regime would also have had a bearing, for instance, patent regimes which limit the extent of protection available to software may also have had a direct impact on the commercialization of software. The Patent Office in India, only recently, finalised its Examination Manual relating to software patent applications and prior to this the Patent Office in India seemingly followed different examination approaches. It is now suggested that, the Patent Office will now relate a uniform approach similar to the European Patent Offices’ approach when assessing software applications. The Indian IT Industry has also been services oriented which has meant that R&D was not the first priority. On the other hand, the Indian Pharmaceutical Industry’s IP strategy initially consisted of capitalising on the lack of a “Product Patent” regime leading to the rise of the Indian Generics Industry
Although the monetization of IP has, in India, been concurrent with the exploitation of IP, it is only in recent times that large number of enterprises have begun developing coherent IP monetization strategies and policies. The practice is still relatively nascent in India, and monetization has tended to focus on the generation of revenue through the licensing of IP assets. This tends to be achieved through various routes such as (a) fixed royalty agreements; (b) cross licenses; and (c) patent pools and franchises.
In my view, Intellectual Property (IP) and IP Rights creation, commercialization and protection have assumed an increasingly profound and unprecedented influence on the social, economic and technological progress of the economies across the world. Talking about South-East Asian nations, the collective transformation has resulted into an innovative and competitive region which has come to the forefront of national policy attention and regional cooperative efforts. Such a transformation is a precondition for regional economies, industries and enterprises to take full advantage of the significant opportunities, as well as to overcome the many challenges, that have emerged under a global economy which is largely knowledge-based, digitally linked and highly competitive. Nowadays, many countries have regulations and laws governing the conduct of their businesses. These can impact upon the development and launch of a new product or process. It is prudent to check what government regulations, if any, are relevant to the project. I believe that, the compliance with such laws can be time consuming and costly and must be factored into the strategy for commercialization.
While external pressure to change IP regimes has abated, India faces other challenges not just as a net user/importer but as net creator—actual and potential—of IP. In my view, India should consider creating a suitable mechanism for enforcing its market access rights. The compulsory licensing and competition policy regimes need to be expeditiously implemented as that would allow the benefits of the modern technologies to be harnessed while minimizing attendant risks. The government must now look into establishing workable domestic systems for protecting IP and resources created in India as it would serve as a basis for seeking their replication internationally.
Experts are quick to point out that the process of commercializing of IP entails a two-fold approach involving IP leveraging and IP financing. While IP leveraging involves extracting value by leveraging intellectual capital in commercial transactions (mergers & acquisitions, takeovers, joint ventures, technology transfer) as well as developing effective strategies for strategic alliance through IP licensing; IP financing refers to securitization and collateralization of IP assets in order to raise finances by way of creating a “charge” on the IP. Since, the market for buying and selling of IP is thriving, new models for monetizing IP are continuously being developed by the stakeholders. With the increasing capital and diversity entering in the IP market, different industries have developed different modes of commercializing IP. Let us take a look at some of the popular modes for commercializing IP:
Licensing of IP is an effective tool for achieving myriad business goals, like, starting a new business or expanding the business or improving quality. Licensing IP is considered a lowrisk solution for monetizing IP. A licensing agreement is in effect a partnership between an IP owner (licensor) and another who is authorized to use the IP (licensee) in exchange for an agreed payment (fee or royalty). Examples of Licensing Agreement include Technology License Agreement; Trademark License Agreement; Copyright License Agreement. The hallmark of a license is that the IP owner decides to give up the right of commercializing, but not the right of ownership. Further, an IP license can be either exclusive (for the product, or territory, or a combination thereof) or non-exclusive in nature. When companies use licensing to achieve the desired business outcomes, they need to act on certain fronts. These include adopting best practices for developing a licensing strategy; funding and launching an IP asset management program; identifying valuable IP and formulating the licensing strategy; and above all understanding the current trends in licensing and its impact on the business.
An assignment involves transfer, or selling of IP. When IP owners assign their IP, they transfer the IP ownership to the purchaser. The sale price of IP is normally determined by way of valuation of IP through experts. Pursuant to an assignment, the owner receives a lump sum payment which has a different tax treatment than royalty fees payable by a licensee. The IP owner factors into the price all the costs, direct as well as indirect, at the time of the assignment. The IP purchaser, however, may like to pay royalties instead of a lump sum amount or a combination of both. The benefits of assignment are several, including mitigation of risks, availability of capital for continued R&D and diversification of IP portfolios. There are, however, issues fromthe buyers as well as sellers perspective which need to be addressed. For instance, what sellers want and the steps they should take to execute “royalty sales”; what buyers are looking for and which IP assets are viable; how can the assignment help in mitigating risk and raising capital, amongst others.
A start-up company is any company that ‘starts up’ the commercialization of new IP and is established by the owner of the IP. It may also take the form of a company where equity capital has been injected, with the intention that the company will commercialize the IP made available to it either by way of a licence or assignment. The investment may come from the IP owner or third parties. However, the interaction between the IP, present and future, and the money invested on a speculative basis through a “closely held” private company, often raises certain structural issues. For instance, (i) dealing with the risk profile of the venture; and ensuring that the IP developed are formally assigned to the holding entity only.
In popular parlance, a joint venture (JV) is referred to an arrangement whereby an investor is given a share in the business in return for investing capital in the business. Owing to the escalating costs associated with R&D, JVs have become one of the preferred routes for commercialization of IP. In fact, JVs are considered the most appropriate investment mechanism for financing the commercialization of IP. The reason is that this model provides a mechanism to enable a large capital injection when traditional sources of equity or debt capital are unavailable for commercialization of IP. One of the significant factors to be considered in a JV arrangement is the venture capitalist’s exit strategy. The venture capitalist will invariably expect an “exit mechanism” for withdrawing from the JV within a definite time period and in a manner which capitalizes on the investment made in the JV.
Commercializing Intellectual Property (IP) is the process you undertake to get your innovation, whether it is in the form of products or services, to the market place. It is true that many great companies have emerged without a formal commercialization of IP. Having said that, my experience has been that, virtually every industry still relies on some form of commercialization of IP, even when that IP is not a patent protection. Be it the food sector e.g. Coke (trade secrets); McDonald (brand); fashion (where copyrights and brand is crucial); or even automobiles (several famous patents, brand names as well as trade secrets around production), commercializing of IP has been the successful trend. There may not be the big fights and lawsuits as it is in the software and music industries, but all of those “low IP” industries still aggressively enforce their rights. I also think that for a company that is selling itself as an innovator and a fastfollower, commercializing IP and ensuring its protection is critical. Without protection and some ability to monetize the unique value one brings, we can expect copycats. Again, not bad – it just means that the company is selling its ability to execute and not innovate.
So, I would say that market place performance still drives more revenue than the most sophisticated IP strategy, and I would also emphasize that starting a company without commercializing IP would be a fool’s errand!
Today, businesses across the world are emphasizing on delivering value not just from physical assets, but from intangible assets as well. Most enterprises are faced with the challenge of extracting the “latent value” of their IP and using it effectively in business strategy. Effective IP management entails much more than merely protecting inventions, trademarks, copyright or designs. Rather, it is the ability to commercialize inventions andbrands; license know-how; execute joint ventures, franchises and other contractual agreements involving IP. The two industries where the exploitation of IP is key to the success or failure of business are the pharmaceutical and software industries.
The pharmaceutical industry is uniquely dependent on patents and other forms of IP in order to maintain exclusivity in a highly competitive market. For these companies, patents serve to encourage development of new drugs and diagnostics for treatment and monitoring diseases in order to meet the global needs. A strong culture of financing programmes and corporate investment has undoubtedly placed the pharmaceutical companies in a commanding position as far as developing and exploiting IP is concerned. In India, the pharmaceutical companies have graduated from being mere manufacturing companies to higher-value pharmaceutical companies. This has been made possible by focusing towards R&D and innovation, the latter including both developing IP and extracting value from IP. There are critical lessons to be learnt in IP commercialization from the pharmaceutical industry, which is particularly strong on partnering and licensing IP. These companies focus on having afull-fledged IP policy in place which enables them to aggressively undertake licensing or purchasing rights to the innovative products, or IP. Studies suggest that by following their example and exploring external licensing and partnership opportunities, enterprises from all sectors can successfully capitalize on their valuable IP.
The approach should take into account the following factors:
Technology licensing, brand-extension licensing, joint ventures and strategic alliances, business format franchising, outsourcing etc., are all intellectual property leveraging strategies which when coupled with an effective intellectual property portfolio analysis prove to be very effective. There may be also opportunities in licensing, which when paired with the company’s current technology portfolio, can create new products, services and market opportunities.
Various intellectual property leveraging strategies are often precursors to capital formation transactions, such as venture investments and acquisitions. In today’s M&A scene, a strategic and legal review of your intangible assets may be an excellent way to prepare a due diligence process in order to ensure that gaps in the chain of title are filled or any potential disputes over ownership are resolved. The results of the analysis may also be necessary to support the company’s proposed valuation, if and when it is a target in an M&A transaction.
There has been limited success in capitalizing valuable intellectual property. There have been disappointing levels of discovery and development of new drugs. Even the Indian patent law does not encourage the patenting of minor improvements of known medicines. Further, the compulsory licensing regime has not spaded the required impetus to the industry and not created the desired brouhaha. Such a confused and half baked situation is the breeding ground for perfect opportunity to multinational drug companies to create a legal hegemony.
In the global software industry, patents are famously referred to as the most “tangible” form of intangible assets as a great deal of revenue can be generated from patent monetization. There are two essential models of patent monetization. These are:
Sale of Patent Assets Model
Patent Creation Model
Sale of Patent Assets Model pertains to generation of short term revenue gains through the periodic licensing or sale of patent assets. Licensing or sale of patent assets is one of the best options available for leveraging IP and generating returns. For a successful IP licensing program, it is imperative to identify the potential licensees and to develop a strong business case for the licensee. Patent Creation Model refers to ongoing revenue generation which results from invention development and protection in the form of patents, which is followed by licensing or sale. This model requires a greater resource commitment to achieve revenue generation, for instance, developing internal patent legal expertise and training the management in patent strategy development. But perhaps what is most critical in execution of this model is the need for training and commitment of the entire organization to develop an “IP Culture” focused on value creation directed invention. The common factor in both the models is the need to develop a “patent valuation and licensing” mechanism.
From the perspective of Indian software companies, the strategy of IP licensing is said to be the best way of commercialization and marketing the IP. This, however, leads us to the now recurrent debate of failure of the Indian software industry to capitalize on IP. Despite there being a patent law framework, majority are not aware of the true legal position on software patenting which more often than not creates stumbling blocks for the players in this industry. Other than the giants like Wipro and Infosys, most software companies suffer from a lack of awareness when it comes to “what to do with the patents”! The ambiguity which exists in the Indian patent law withregard to software, i.e., what is patentable and what is not, only adds to the woes.
India is at a technical disadvantage when it comes to transferring technology while commercializing IP. It would not be unfair to say that, developed nations like the USA wish to maintain their monopoly over advanced technology by imposing it on the emerging economies to implement stronger IP protection while commercializing the same. In India, the route via which the transfer of technology takes place is through foreign direct investments from multinational companies. It is no secret that this technology transfer happens because India offers cheap labour and better infrastructure. However, India has to ensure stronger IP protection so as to ensure that the technology and knowledge of these foreign players (having novel technology), do not leak into the domestic players.
A major problem with technology transfer in the software and pharmaceutical industry is that they have high development costs and low imitation costs. Commercializing IP in the aforesaid sectors is often under the threat of piracy and this may cause a company to limit the domestic players, while granting licenses to them. What follows as an observation is that, strengthening IP while commercializing the same would see an increase in foreign direct investments.
An ideal due diligence consists of determining the strength of the company’s IP rights in the open market vis-à-vis the rights of the competitors. It also involves assessing the impact of the IP on the base company’s products and other IP rights involved therein. The findings of an IP due diligence of a company often assists in the proper valuation of a deal; i.e., it either makes or breaks the deal. While conducting a due diligence, the following basic steps are to be kept in mind:
To secure IP ownership to the highest extent, one has to understand that bona fide contracts and verbal agreements are insufficient to ensure strong protection of IP. Properly drafted contracts by an experienced legal team are a sine qua non, thereby specifying the rights and liabilities of the parties with the least amount of ambiguity. Poorly drafted clauses in contracts can often lead to unnecessary hassles which may lead to an expensive litigation over a dispute. Especially, start-ups have to ensure that there are specific terms in the contracts while assigning rights to parties.
Few safeguards to secure IP ownership while commercializing it are:
Ensuring confidentiality goes a long way in protecting the rights of the assignor and the assignee. It can provide effective protection for some technologies, proprietary knowledge (knowhow), confidential information and other forms of IP. A confidentiality agreement is often used to restrict employees from revealing the proprietary knowledge of a company during and after their employment or association with a business. The information is only protected as long as it remains within the relationship of confidence such as that of an employer and an employee. In Faccenda Chicken vs. Fowler, a famous UK case, it was held that during the course of employment, there is an implied term imposing a duty of good faith or fidelity on the employee and the burden lies on the former employer to identify with precision what trade secrets (or equivalent) he seeks to protect. It all boils down to properly drafting the confidentiality clauses in an agreement.
Given our investigation of commercialization of IP, we can be critical about the lack of awareness of the same in developing economies like that of ours. However, emerging markets of Brazil, Russia, India and China (BRIC) are gaining strength as a collective voice, thereby guiding international policies such as WIPO Guidelines to ensure protection while commercializing IP. Therefore, it would be a step in the right direction to conduct a strategic review to identify the intellectual assets which are to be protected and the cost involved therein. Every industry, particularly the IT industry and the pharmaceutical industry, have to ensure that a confidentiality policy is maintained and enforced. However, how we identify the appropriate redressal forums for enforcement of IP in commercial transactions remains to be seen. It would be apt to conclude by quoting what former US Supreme Court Judge, Olliver Wendell Holmes once said: “The great thing in the world is not so much where we stand, as in what direction we are moving.”
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