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I N N O V A T I O N L A WPHILIP MENDES BRADLEY THOMAS (ASSOC)

Level 3, 380 Queen StBrisbane QLD, Australia

Ph + 61 7 3211 9033Fax + 61 7 3211 9025

Philip@innovationlaw.com.auBradley@innovationlaw.com.au

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

Shanghai15 December 2004

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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

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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

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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

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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

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Exclusivity: Sole License

Exclusive Sole

Exclusivity:

Non Exclusive

One Exploiter – the licensee

Two Exploiters – owner and the

licensee

Numerous Exploiters – owner and

numerous ‘ees

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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

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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

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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 ?

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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 ?

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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

Field of Application User

Exterior plumbing Licensee in plumbing industry

Spectables Licensee in spectacles industry

Furniture Owner - furniture moulding industry

Bottles Owner - injection moulding industry

Car parts and trim Licensee in motor vehicle industry

Boating trim Licensee in boarting industry

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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

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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

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Strategic AlliancesCombining 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

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Strategic AlliancesCombining 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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

ITL ManufacturerLicense to manufacture

Sell products back

Buyer

Sell products

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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.

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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Types of Performance Obligations

Two types of performance obligations Obligations before the first sale Obligations after the first sale

Fir

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Sal

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Dea

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End

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R &

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Pro

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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

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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

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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

Territory Period Units of Product

North America 1 year from from signing 100,0002 years from from signing 150,0003 years from from signing 200,000etc

Europe 1 year from from signing 120,0002 years from from signing 175,0003 years from from signing 250,000etc

etc 1 year from from signing etc2 years from from signing3 years from from signingetc

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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