PHILIP MENDES BRADLEY THOMAS (ASSOC) Brisbane QLD, Australia 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 I N N O V A T I O N L A W PHILIP MENDES BRADLEY THOMAS (ASSOC) Level 3, 380 Queen St Brisbane QLD, Australia Ph + 61 7 3211 9033 Fax + 61 7 3211 9025 Philip@innovationlaw.com.au Bradley@innovationlaw.com.au

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

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

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

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

Exclusivity: Sole License Exclusive Sole Non Exclusive One Exploiter – the licensee Two Exploiters – owner and the licensee Numerous Exploiters – owner and numerous ‘ees

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

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

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 ?

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

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

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

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

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

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

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

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 franchise 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

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

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

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

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

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

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

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

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

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

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.

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

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

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

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

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

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

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

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

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

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

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

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

Types of Performance Obligations Two types of performance obligations Obligations before the first sale Obligations after the first sale Deal Signed R & D First Sale End of Term Product in Market

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

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

Obligations after the first sale Usually require minimum sales revenue / units sold Expressed as worldwide / or markets If failure in a market Exclusivity converts to non exclusivity Or termination In the market concerned, without affecting other markets Pharmas and biotech - none of that is acceptable Will be prepared to make minimum annual payments

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