1. 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
Fax

2. 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

3. 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

4. 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

5. 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

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

7. 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

8. 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

9. 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 ?

10. 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 ?

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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

22. Identifying the need
In 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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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.

29. 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

30. 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

31. 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

32. 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

33. 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

34. 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

35. 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

36. 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

37. 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

38. 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

39. 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

40. 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

41. 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

42. 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

43. 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

44. 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

45. 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