Leveraging Intellectual Property: Beyond the `Right to Exclude'
by Christopher Kalanje, Consultant, SMEs Division, WIPO1
Traditionally, most enterprises that have used the intellectual property (IP) system have done so primarily to create barriers to prevent competitors from entering their market niche. For example, enterprises have viewed their patents essentially as "legal walls or barriers" to keep out potential competitors. This has been possible as the basic right of the owner of a patent is the right to exclude all others from doing a number of specified acts. Broadly speaking, the right to exclude all others is the essence of a property right, be it over tangibles or intangibles, including patents and all other types of IP. Beyond the right to exclude, this article highlights the availability of a number of other possibilities and opportunities that are available to an owner of IP assets, be they owned by enterprises, large or small. These additional choices enable a multifaceted strategic use of IP assets, beyond the limited possibilities linked to the narrow focus on use of the "concept of exclusivity" or "the right to exclude".
Simply put, the key to proper use of IP assets is to treat the tools of the IP system (in the form of trade secrets, patents, trademarks, industrial design, copyright, etc) as instruments for developing business relationships so as to cooperate and partner with other enterprises, rather than merely barring others from entering the market. Other things being equal, such strategic use of IP assets leads to generation of additional revenues/income, access to new technology/markets, access to R&D facilities, and a host of other possibilities that are potentially unlimited.
The Concept of Exclusivity
A patent, as an example of an intellectual property right, provides the holder/owner of the patent the right to exclude, for a limited time, all others from making, using, selling, distributing or importing the claimed invention. A simple use of such exclusive rights would normally result in preventing all others, who have not taken prior permission of the patent holder/owner, from taking commercial advantage of the IP asset in question. Unfortunately, even today, in most countries, most of the IP owners tend to focus almost completely on the preventive aspects of the use of IP rights i.e., the owner strives to prevent others from using his IP assets with the primary objective of creating entry barrier to a specific market.
"An evaluation of various practices employed by large companies specializing in brand name drugs indicates that intellectual property protection is not being used to promote an incentive to create and innovate. Rather intellectual property rights are being used to gain and maintain an exclusive market share for the most profitable, not necessarily the most beneficial, drug". (see http://www.cureautoimmunity.org/Barriers%20to%20Cure.htm)
With increasing globalization and the gradual dismantling of tariff barriers the owners/managers of some companies have resorted to the use of IP rights (in particular patents) as a tool to "put-a-check" on increased competition; often even small and medium-sized enterprises (SMEs) find themselves to be both "victims" and "culprits" (offenders). Some SMEs feel victimized when they are prevented from entering a specific market, due to barriers erected by the IP rights owned by others. Others are labeled as the culprits when they use their own IP assets to exclude others.
Narrow Use of the Concept of Exclusivity
Admittedly, in the business community worldwide, there is a gradually increasing awareness of the multifaceted value of IP. At the same time, it is also true that most users of the IP system, the world over, view IP mainly as a tool to exclude existing and potential competitors from the marketplace2.
In general, enterprises point to the need for recouping their investments as a justification for their use of the concept of exclusivity to prevent imitation and copying and hence justify their creating a barrier to market entry by potential competitors3. In most cases, such narrow use leads to missed opportunities and decreased potential profits. A significant consequence of pursuing this narrow approach has been the development of an erroneous belief that IP protection is a mere cost of doing business rather than an investment in leveraging knowledge. This narrow approach has, to a large extent, resulted in a situation where IP acquisition is seen as an unnecessary expenditure, which needs to be somehow tolerated.
The management and operational structures of most enterprises make leveraging of IP assets a difficult task. One of the reasons is that even those enterprises, which have legal departments/units look upon IP as the sole purview of this department/unit and, in turn, such legal department/unit considers the acquisition and enforcement of IP rights to be their primary concern. If the IP department/unit is to serve better the needs of the business concerned then it should also have the responsibility to maintain and audit the portfolio of IP assets (i.e. having a register of IP assets, follow-up of renewals, making an evaluation of creating, maintaining and/or leveraging of IP assets, etc.) apart from taking care of enforcement and litigation issues. Such activities are normally seen as expenditure and only few enterprises would view them as investment.
Most small businesses do not have adequate in-house human and financial resources, which could be deployed to establish separate legal units, let alone IP units. In most cases, such enterprises are not aware of the importance of IP or at best react to IP issues e.g. when they are accused, knowingly or unknowingly, of infringing IP rights of others. The small number of SMEs that consciously pursue a proactive IP policy and strategy do so mostly in relation to use of patents and that too with the sole purpose of keeping competitors at bay.
Getting Ready for Enhanced Opportunities
It makes business sense to look upon the concept of exclusivity in a broader perspective. Businesses should strive to take advantage of the potential partnership opportunities that may arise as a result of the legally protected right to exclude others. Rather than simply looking at the concept of exclusivity as an opportunity to exclude others from the marketplace, enterprises should view it as a springboard, which provides an opportunity to have fruitful cooperation and/or competition with others.
This calls for businesses to establish a multidisciplinary IP asset management team, that may comprise of the in-house and/or external marketing, design, R & D, manufacturing, legal, financial, accounting, taxation, human resources, security and other technical experts. If resources allow, external expert assistance should be sought on IP issues, especially if the enterprise does not have an internal IP expert. The main objective of the team should be to establish a strategy, which would enable the enterprise to reap the maximum benefit from the use of its IP assets. To achieve this goal, the team would have to formulate a strategy, which would enable it to systematically move away from traditional/narrow use of the concept of exclusivity to a broader/modern use of IP assets.
The first step of the IP management team toward strategic use of IP would be to identify which type(s) of IP assets are most suited to the type of business of the enterprise. To do this, the team has to identify existing and potential market for its products, the potential competitors and also potential businesses with which it can team up.
Understanding the Market
Apart from serendipitous inventions, most inventions are the result of conscious efforts made to solve technical problems faced in improving productivity to satisfy existing demand and/or in responding to new demands of the market. The ability to satisfy better than others such existing or new demand helps an enterprise in maintaining or gaining market share, getting a foothold in a new market, and/or improving profitability, provided imitators are kept at bay by relying on trade secrets and/or patents.
It must be noted that other forms of IP protection, such as use of trademarks, industrial designs, copyright, etc, may also contribute to such efforts, at times even more than what patents can do. In fact, relying on systematic market research for obtaining a good understanding of the overall market for a particular product will positively influence the choice of type(s) of IP rights that needs to be relied upon in a particular situation. Such knowledge would also assist the management of an enterprise in deciding which strategy should be used in making effective use of IP assets that are or may be at the disposal of the enterprise. It would be strategically useful if businesses are able to identify the type of IP assets their competitors own and/or whether there are or soon will be alternative/substitute products in the market. A good knowledge of the market will be very useful in the eventual leveraging of IP assets.
Know the Available IP Assets
Market research and analysis should be followed by an analysis of the type of IP assets owned and used by the enterprise; for example, which IP right(s) would enhance a company's short or long-term competitiveness or market share, which combination of IP tools would be most affordable and/or effective and has the potential of providing maximum return on investment at the least/affordable risks? To do this, an enterprise should undertake an IP audit i.e. a process of identifying, protecting all existing or potential IP rights/assets that are or may be used by the business and clarifying their scope and ownership status.
It is indeed not surprising for a business to discover during an IP audit that it owns a lot of IP assets when it thought none existed before and that it should consider taking necessary step to legally protect and leverage them thereafter. An IP audit would provide a launch pad for developing an IP asset management plan and strategy, which, if undertaken systematically and effectively, would result in the business deriving the maximum benefit from its portfolio of IP assets. This would lead to the broadening of the concept of exclusivity, by looking at new options in a new light.
Moving Beyond the Narrow use of the Exclusivity Concept
Left alone IP assets have no direct value to enterprises. In fact, often they end up being seen as costly to maintain and a "nuisance" by the management team, especially when the team does not have adequate knowledge or capacity to develop IP policies and strategies. However, if strategically managed, IP assets often turn out to be dependable and reliable sources of revenue for the enterprise concerned. Such revenue could be the result of sale (assignment) of IP assets or IP protected products and services or through collaborations based on one or many licensing arrangements, franchising, merchandising, joint ventures, strategic alliances, and the like. In addition, IP assets can play a significant role in influencing a business strategy. For example, it may influence future plans for new product development, diversification, acquisition plans, growth strategy.
Furthermore, a holistic approach to use of IP assets provides enterprises with many new opportunities for increasing their revenue, access to new technologies or R & D facilities or to participate in standards setting processes and thus ensuring that technology platforms or markets supports its business strategy.4
In an increasingly knowledge driven, service sector-oriented, market-led globalization, the current level of technological development has made businesses even more dependent on different types of technology than in the past. The reality and challenges of globalization have made the need for greater networking and collaboration even amongst competitors a dire necessity. And this has made savvy businesses aware of, and responsive to, the challenge of making marketing and business strategies to focus much beyond simply the creation of market entry barriers for competitors. Such strategies may include:
Licensing or Franchising: Sometimes an enterprise cannot fully satisfy the market demand for its IP protected product(s). In such a situation, an enterprise may benefit by entering into licensing or franchising arrangements with other companies, rather than trying to benefit by increasing the price of the product, a move that may lead to a decline in demand and/or demise of the business.
In addition to the use of licensing as a tool for satisfying market demand and increase profit, licensing of IP assets can be an effective tool for generating a stable flow of additional/new revenue in the form of royalty. IBM is a well-known example of such companies, which have made significant amount of revenue, (upward of US $ 10 billion since 1993 through licensing)5. IBM Corp. now offers a consulting service for patents and technology licensing. Several universities, especially in the United States of America, have earned millions of dollars by following a proactive licensing strategy6. Pliva, a company in Croatia, is another example, which has used a licensing strategy to secure a market and at the same time benefit from royalties7.
Franchising is a more sophisticated form of licensing that includes a lot more detail about how to conduct the relationship between the franchiser and the franchisee. Generally, the franchiser licenses its IP including its trade marks, trade dress, copyright, know-how, trade secrets, business concept, methodologies and, if relevant, designs and patents to the franchisee. A franchise is a unique business relationship, more than just a way to commercialize IP.
Merchandising: Another possible way to capitalize on IP is to use IP rights (typically trademarks, industrial designs and copyrights) upon corresponding goods. Examples are the printing of a painting, artwork or famous characters (such as footballers, film stars, or fictitious characters) on t-shirts, posters, coffee-mugs and other goods. Enterprises could make big business, for example, by simply marketing their brand, label, image, or any other IP right on simple, cheap goods.
Joint Ventures: Using IP rights to underpin the creation of joint ventures may be a useful strategy, especially for innovative SMEs. Ownership of patent and trade secrets may play a crucial role in attracting potential partners. Sometimes, an enterprise with patented products and/or valuable trade secrets may find it strategically beneficial to enter into a joint venture arrangement with an enterprise with a strong trademark so as to secure more sales.
Strategic Alliances: A prudent IP management team should formulate a strategy which pay close attention to what competitors are doing and seek to take advantage of its own IP assets by entering in strategic alliances in suitable circumstances. In this manner, an enterprise may benefit by getting access to R&D facilities owned by its partner or to its distribution and sales network. An enterprise may also benefit from further development of its IP protected products, as part of the strategic arrangement may also include further product development.
Defensive Publication: Sometimes, an enterprise finds itself in a situation where it does not have adequate resources to devote on patenting all its promising inventions, for example, in a rapidly evolving area of technology. In such a situation, the enterprise may resort to "defensive publication" of some of the inventions, which are carefully selected, so as to prevent its competitors, who may be also independently working on solving the same or similar technical problems, from obtaining patents on the same or similar inventions which would otherwise limit its "freedom to operate" in the market concerned. An enterprise adopting this strategy may have to depend on lead-time and continuous innovation to secure its market.
Strong Negotiation Position: A well-managed IP portfolio strengthens the bargaining position of the enterprise; for example, in cross-licensing negotiations, in dealing with potential litigants and in a broad range of business negotiations for developing new relationships and partnerships. In such a situation, the objective is to secure an existing or develop a new market rather than excluding others from the market. Often, the ability to leverage IP assets for successful business negotiations is influenced by, amongst other things, the scope of national IP laws, the effectiveness of enforcement of IP rights by the police, customs officials and/or the judiciary, the nature of product/industries, for example, if it is complex (with a number of patents owned by different entities) or it is discrete (product with few patents.)8
The exclusive right provided by the IP system has, so far, been mainly seen as an opportunity for enterprises to exclude competitors from the marketplace. The use of IP assets to create market entry barriers has been seen as the primary justification for creation and use of the IP system that seeks to prevent copying, imitation and/or free riding by others. Nelson and Cohen (2000) note in their survey that one of the prominent motives for patenting is the prevention of rivals from patenting related inventions (i.e. "patent blocking")9. However, such narrow use of the concept of exclusivity results in a lot of missed opportunities. A change of mindset and attitude is required for business to see that the exclusive right provided by IP protection provides an avenue for enterprises to enhance their ability to cooperate with others so as to enhance their competitiveness.
Licensing, franchising, merchandising, joint ventures, strategic alliances, strong negotiation position all provide opportunities for market access, enterprise growth and new/increased revenue flows and improve ultimately the bottom line of the business. All these strategies are more than simply creation of market barriers.
The acquisition of IP rights should be seen more as an investment decision. Businesses should, therefore, consider all possible options, which would result in higher returns on investment. To achieve this, an enterprise must look beyond the narrow use of the concept of exclusivity. A careful selection of members of the IP asset management team is essential and periodic IP audit is also a must. All available options must be carefully considered and the final decision on the best option should be aligned with the overall business objectives. Existence of effective IP enforcement mechanism would significantly enhance the chances of success and reduce the risks in deploying an IP strategy as part of the business strategy of the enterprise.
http://www.druid.dk/conferences/summer2002/Papers/Barros_Stoneman.pdf Patents and Pharmaceuticals in the UK: An Insight into the Patenting Process
http://www.devicelink.com/mddi/archive/98/12/003.html (Focuses more on the right to exclude potential competitors)
http://www.jrep.com/Info/10thAnniversary/1998/Article-12.html "Annu Mirabilis creators of ICQ" They sold the system to AOL for USD 287 million
http://www.iveybusinessjournal.com/view_article.asp?intArticle_ID=303 ("Leveraging the power and value of intellectual property" the article focuses on strategic publishing/disclosure of patents)
http://www.ipaustralia.gov.au/strategies/case_bishop.shtml Case study on IP licensing
http://www.ibm.com/ibm/licensing/standards/practices.shtml IBM -Intellectual Property and Standards
Arundel A., Patel P., 2003. Strategic Patenting, Background report for the Trend Chart Policy Benchmarking Workshop New Trends in IPR Policy June 3-4.
Cohen W., Goto A., Nagata A., Nelson R., Walsh J., 2002. R&D spillovers, patents and incentives to innovate in Japan and the United States, Elsevier Research Policy 31, 1349-1367
Cohen W., Nelson R., Walsh J., 2000. Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not), Working Paper 7552, National Bureau of Economic Research, February. (http://www.nber.org/papers/w7552)
Mullen M., Willigan W., 2000. How to Make the Most of Intellectual Capital, Financial Times, November 27, (http://www.gravitaspartners.co.uk/news/articles/intcapital.pdf)
Pliva Home page (http://www.pliva.com/index.php)
Slind-Flor V., 2002. The big Six: Universities That Make the Most From Licensing, April 18. (http://biotech.about.com/cs/licensing/)
Teresko J., 2003. IBM's Patent/Licensing Connection IndustryWeek.com, January 3. (http://www.industryweek.com/CurrentArticles/asp/articles.asp?ArticleID=1400)
1 Disclaimer: The views expressed in this article are solely attributable to the author and do not necessarily represent those of the International Bureau of WIPO. For comments on this article, please e-mail the author at: firstname.lastname@example.org
2 Arundel, A. and Patel, P. 2003 Strategic patenting, pg. 3
3 ibid (Arundel refers to a 1993 PACE survey, which showed that 77% of respondents use patents to prevent copying).
4 How to make the most of intellectual capital, Maggie Mullen and Walter Willigan, http://www.gravitaspartners.co.uk/news/articles/intcapital.pdf (February 11, 2004 at 16:42)
5 Teresko, J. (2003) http://www.industryweek.com/CurrentArticles/asp/articles.asp?ArticleID=1400 ((February 18, 2004)
9 Cohen, W., Nelson, R., Walsh, (2000) Protecting Their Intellectual Assets: Appropriability Conditions and Why U.S. Manufacturing Firms Patent (or Not)