© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc. 1 Intellectual Property Licensing and Commercialization Issues Presented By: J. Gordon Thomson, P.Eng., LL.B. Barrister & Solicitor - Registered Patent Agent Registered Trademark Agent With Thanks To David Tyrrell, P.Eng. Vertex Intellectual Property Strategies Inc. Toronto, Ontario

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc. 2 Intellectual Property Licensing and Commercialization Issues This presentation is only a brief overview of intellectual property law and related issues. Due to its compressed nature, it is not to be relied upon in making specific business decisions. You should consult with your legal advisor concerning specific issues. All matter presented here is protected by copyright and all unauthorized reproduction, in whole or in part, is prohibited.

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc. 3 Intellectual Property Overview

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.4 Intellectual Property 4 Patents – prevents unauthorized use of the functionality of products and processes 4 Industrial Designs – grants a monopoly to the use of aesthetic aspects of products 4 Trademarks – protects brand names of products and services from unauthorized use 4 Copyrights – protects against unauthorized copying 4 Trade Secrets – protects against unauthorized disclosure

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.5 Why Intellectual Property is Important Intellectual property often represents the most valuable asset of a modern business!

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc. 6 PATENTS

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.7 What is a Patent (Definition) 1. Statutory monopoly to a defined invention granted by statute - the Patent Act

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.8 What is a Patent (Definition) 1. Statutory monopoly to a defined invention granted by statute - the Patent Act 2. Exclusive right to to make, use, lease and sell the patented invention subject to the right of others

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.9 What is a Patent (Definition) 1. Statutory monopoly to a defined invention granted by statute - the Patent Act 2. Exclusive right to make, use, lease and sell the patented invention subject to the right of others 3. Defined within the scope of the claims of the patent

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.10 What is a Patent (Definition) 1. Statutory monopoly to a defined invention granted by statute - the Patent Act 2. Exclusive right to make, use, lease and sell the patented invention subject to the right of others 3. Defined within the scope of the claims of the patent 4. For a limited period (20 years) from the date of the application

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.11 What is a Patent (Definition) 1. Statutory monopoly to a defined invention granted by statute - the Patent Act 2. Exclusive right to make, use, lease and sell the patented invention subject to the right of others 3. Defined within the scope of the claims of the patent 4. For a limited period (20 years) from the date of the application 5. Subject to the rights of others and adjudication

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.12 What is a Patent (Definition) 1. Statutory monopoly to a defined invention granted by statute - the Patent Act 2. Exclusive right to make, use, lease and sell the patented invention subject to the right of others 3. Defined within the scope of the claims of the patent 4. For a limited period (20 years) from the date of the application 5. Subject to the rights of others and adjudication 6. It is a right to sue

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.13 Prerequisites for Patenting 1. Proper subject matter Patents apply to inventions Defined in the Patent Act as: any new and useful art, process, machine, manufacture or composition of matter, or any new and useful improvement thereto.

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.14 Prerequisites for Patenting 1. Proper subject matter 2.Novelty (Anticipation) An invention must be new, novel, never previously disclosed to the public anywhere. Always guard against prior publication or disclosure as it may affect your ability to obtain a patent.

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.15 Prerequisites for Patenting 1. Proper subject matter 2. Novelty 3. Inventive (Obviousness) The invention must be inventive! It must be a step forward in the art. It must have ingenuity. It must not be obvious to a person skilled in the art

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.16 Prerequisites for Patenting 1. Proper subject matter 2. Novelty 3. Inventive 4. Useful The invention must have a useful purpose. It must solve some practical problem. It must deliver what it promises.

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.17 Prerequisites for Patenting 1. Proper subject matter 2. Novelty 3. Inventive 4. Useful 5. Formalities The patent application must comply with the rules and regulations set out in the Patent Act.

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.18 Time Lines

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.19 Public Disclosure Date of public disclosure (Canada and USA) Filing Date 12 months Canada is a “First to File” System USA is a “First to Invent” System You have 12 months after public disclosure in Canada and the USA in which to file a patent application In Europe and most other countries there is no such grace period. Any prior public disclosure will bar the patent

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.20 International Filings (Paris Convention) Domestic Filing Date In Canada or USA “Patent Pending” International Filings Including PCT 12 months Canada is a member of the Paris Convention You have 12 months after a domestic filing to file in any other member country of the Paris Convention and claim the domestic filing date. This includes a PCT filing. Permits public disclosure after the domestic filing date in foreign countries

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.21 Converting a PPA to an RPA USPPA Filing Date “Patent Pending” Priority Date RPA Filing Date 12 months USA permits the filing of Provisional Patent Applications (PPAs). Canada permits the filing of an “incomplete” application which much be completed within 15 months of filing. The USPPA must be converted in a Regular Patent Application (RPA) within 12 months of filing. USPPA filing date may serve as Priority Date for RPA if the scope of the USPPA and the RPA are similar.

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.22 Obtaining a Filing Date in Canada 4 Indication that patent being sought. 4 Name and address of applicant (agent). 4 Description of the invention 4 Fees ($200 small entity & $400 large entity) 4 Patent must be complete within 15 months of the filing date

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.23 Prosecution Canada Filing Date “Patent Pending” 5 Years to Request Examination 18 months In Canada, the application remains a secret until 18 months after filing then it is published. The inventor has 5 years in which to request examination or the application is abandoned ($400SE/$800LE) Publication Patent Issues 2-3 years after examination begins ($150SE/$300LE)

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.24 Prosecution USA Filing Date “Patent Pending” ($US385) 18 months In USA the inventor may request that the patent application remain unpublished if there is no foreign filing. Otherwise it is published at 18 months from priority date There is no need to request examination of the patent application. Examination occurs in due course. It is possible to request “Making Special” for applications related to such things as anti-terrorism and the environment Publication “Optional” Patent Issues 2-3 years after filing ($US965) Examination in due course from filing

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.25 Patent Cooperation Treaty 4 Canada is a member of PCT as are most other nations (approximately 140 member countries, including all major countries) 4 PCT is a fee deferral mechanism: – T ranslation fees – Foreign associate fees 4 Useful when filing in more than 5 countries 4 Filing fees in the range of $3,500 4 Provides additional time to assess market potential and business need for patenting

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc. 26 Patenting Business Considerations

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.27 Consider the Business Case What Would You Do? 4 Why would you patent it? 4 Where would you patent it? 4 How would you plan to exploit the invention?

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.28 Patenting Business Considerations (1 of 3) 4 Why patent –Easy to copy –Create monopoly 4 Where to patent –Market research to assess the need and business opportunity (Projected volumes and price points) –Protection where sold, not necessarily where made 4 When –Before public disclosure –Within 1 year of public disclosure in Canada and USA

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.29 Patenting Business Considerations (2 of 3) 4 Budget Issues –Inventor’s time from the need to be allocated/budgeted –Typical patent drafting expense is $5,000 to $20,000 –Application fees are on a country by country basis –PCT approach can serve to defer expenses –Translation expenses are associated with applications in some jurisdictions –Regular maintenance fees and increase during the life of a patent

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.30 Patenting Business Considerations (3 of 3) 4 Alternatives –Trade Secret –Publication 4 Timelines –Discuss with patent agent / lawyer –Need to understand deadlines 4 Enforceability

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc. 31 Patent Ownership Issues

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.32 Ownership Issues The Law States 4 Inventor(s) is (are) first owner(s) of patent 4 All inventors must be named 4 Hired to invent –Inventions generally belong to employer. 4 Working under contract –Inventions generally belong to the inventor –Unless the contract states otherwise

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.33 Important! 4 The ownership of future inventions needs to be understood at the outset of a relationship whether the relationship is: –Employee to Employer –Business to Contractor –Business to Business –With a University

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc. 34 INDUSTRIAL DESIGN

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.35 Industrial Design 4 Definition Shapes, patterns and ornamentation applied to a useful article of manufacture 4 Examples

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.36 Registration Necessary 4 An industrial design must be registered to be protected 4 Term of registration is 10 years 4 There is an examination process 4 Gives exclusive right to import, sell, rent an object to which the design is applied 4 $400 government filing fee 4 $350 renewal fee (after five years) 4 Application includes drawings, photographs and a verbal description

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.37 Registration Prerequisites 4 Must be original –higher level of originality than copyright –some intellectual effort and creativity 4 Must be novel –1 year disclosure –not identical with another design or confusingly similar thereto 4 Must have aesthetic appeal –appealing to the eye

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.38 Benefits of Registration 4 Exclusive right to sell or rent articles using the design 4 Protects against independent creation 4 Legal remedies to infringement –3 year limitation period to commence an action 4 Marking not necessary but recommended DGord Thomson

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc. 39 Introduction to Licensing

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.40 Licensing Overview (1 of 3) 4 From a business perspective: –Licensing is a discipline that involves the sale and delivery or transfer of technology from its owner (the licensor) to the licensee, in an agreed upon fashion, with agreed upon rights, for an agreed upon consideration 4 From a legal perspective: –Licensor provides permission to do something to a licensee that would otherwise be illegal –Licensee is granted a right that without it – could be sued

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.41 Licensing Overview (2 of 3) 4 The technology / intellectual property may be in the form or combination of many aspects such as: Patents Trademarks Copyrights Registered Industrial Designs Products, Machines, Processes, Designs Trade Secrets / Know-How Business or Industry Models

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.42 Licensing Overview (3 of 3) 4 Licensing is not restricted to “high technology” 4 Know-How or business models can be licensed without an accompanying high technology component (e.g. Tim Horton’s)

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc. 43 Licensing Considerations

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.44 Business Conditions Favouring a Licensing - Out Strategy (1 of 3) 4 Provide a source of revenue and earnings in markets that are otherwise non-accessible, such as: –Territories where there is no activity, licensing can provide access to a distant or an international market without a potentially risky capital investment. –New or different applications for technology that will not create a competitor to the existing or planned business

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.45 Business Conditions Favouring a Licensing - Out Strategy (2 of 3) 4 Can provide an opportunity for growth and the development of a high margin licensing business venture without a capital investment to address the needs of a market where demand exceeds supply 4 Utilize technologies that have a poor or no fit with the current portfolio and business plan

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.46 Business Conditions Favouring a Licensing - Out Strategy (3 of 3) 4 To obtain benefits from technology grantbacks or improvements 4 Provide source for development funds and offset cost of major R&D projects 4 To improve image & meet moral or social obligations; such as providing medical or environmental technologies for wider use & avoiding legislated compulsory licensing

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.47 Business Conditions Not Favouring a Licensing-out Strategy (1 of 2) 4 If the technology is truly a leading technology and greater value can be placed on it by protecting it and retaining confidentially through: –Controlling a market niche with a highly profitable specialty product –Retaining price premiums –Maintaining a currently held major worldwide market share –Difficult barriers to entry exist

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.48 Business Conditions Not Favouring a Licensing-out Strategy (2 of 2) 4 A potential for high liability exists (e.g. as with hazardous product). 4 Difficulty in providing an effective delivery and ongoing support due to such factors as: ─Safety ─Working conditions ─Distance ─Availability of appropriate personnel

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.49 Technology Valuation Establishing the Fee (Royalty) Basis (1 of 3) 4 The royalty is the payment or fee paid by the licensee to the licensor 4 It is generally comprised of an initial lump sum payment and a running royalty (percentage of sales or $per unit) 4 A license agreement royalty rate depends of many factors and reflects: –Risk involved –Stage of development –Attractiveness of the business opportunity (size of opportunity, expected profit margins, etc.)

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.50 Technology Valuation Establishing the Fee (Royalty) Basis (2 of 3) 4 There is no such thing as a typical royalty rate 4 A rule of thumb for the division of profits or the sharing of cost saving between a licensor and a licensee is: 20% to 50% for the licensor; 50% to 80% for the licensee Royalties generally run at 2% to 10% of gross sales Lower levels generally apply to the less significant, older or softer technologies Higher levels generally apply to the newer, revolutionary or highly differentiated technologies

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.51 Technology Valuation Establishing the Fee (Royalty) Basis (3 of 3) 4 Licensors should not approach technology evaluation from a cost of investment perspective 4 Using industry license agreement experience is risky 4 The projected license revenue should be evaluated based on the present value of the initial payment and projected royalty stream

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.52 A Licensing Relationship is Similar to a Strategic Alliance 4 A Licensing Relationship like a Strategic Alliance will exhibit the same following characteristics: Two separate independent entities Working together to tackle specific objectives Sharing the risk and rewards Supplying resources on a continuous basis

© 2001/03 MMO, Developed by Vertex Intellectual Property Strategies Inc.53 Summary 1. Intellectual property assets are crucial to success. 2. Clarify ownership issues up front. 3. A Licensor / Licensee relationship is one of a business partnership focusing on WIN -WIN results. 4. Licensing strategy needs to be meshed with other business plans. 5. Continually audit technologies to understand business strengths and weaknesses and to set an IP management plan.