On the agenda: More IP talk in the boardroom

14 January 2020

On the agenda: More IP talk in the boardroom

Boards of directors and senior management should sit up and take notice.

New technologies continue to emerge while existing ones continue to evolve. We’ve got smartphones, smart cars, 5G, e-commerce, artificial intelligence, blockchain, social media and a slew of other innovations. They help people be more connected, disrupt lifestyles, spur companies to digitally transform and shake industries. On the wayside, manufacturers and inventors get to develop more revolutionary products and innovations.

These developments should prompt businesses to pay more attention to their intellectual property. To do this, some lawyers believe that companies should have an IP strategy. They also agree that IP talk should move from the cozy cubicles and meeting rooms of IP departments to the august walls of the boardroom.

In the article “Intellectual property in the boardroom: risks and opportunities,” published in the November 2019 issue of State of the Art by Australian law firm Corrs Chambers Westgarth, IP head Kate Hay, corporate head Sandy Mak and partner Frances Wheelahan write, “For many companies, intellectual property (IP) only makes an appearance in board papers when expenditure on research and development is being reviewed or when an allegation of IP infringement hits the risk register. However, as brands, technology and innovation become ever more important to companies’ financial fortunes, intangible assets like IP are becoming significantly more prominent in boardroom deliberations. In this context, the board has a vital strategic role to play in relation to IP – one aligned to its fundamental responsibility to ensure the proper structures are in place to maximize the financial success and mitigate the risk of the company it oversees.”

The article further states that corporate boards should understand the monetary value of their IPs and think globally for the company to achieve the potentials of an international IP strategy.

According to Benjamin Cheong, a partner at Rajah & Tann in Singapore, companies should indeed develop a comprehensive IP strategy. Not only will this protect their IP assets, it will also promote their competitive edge and business growth.

“This IP strategy should be properly communicated and implemented within the company because all employees, from senior management all the way to the administrative staff, are responsible for protecting the IP of the company. Employees who are responsible for R&D should be made aware of how to document their discoveries, inform the company of any potential patentable inventions and assist with patent applications. Employees who are in charge of IT should be made aware of the importance of putting in place adequate firewalls to protect the company’s IT systems from being hacked, etc. Each employee has a part to play,” says Cheong.

 

Nina Fitzgerald, a partner at Ashurst in Sydney, says that R&D companies should also have strict confidentiality for their research until a patent application is made.

Meanwhile, companies supplying products to consumers should have a trademark strategy. “This trademark strategy should also involve early consideration of the availability of each brand – to avoid infringement claims – as well as the potential importance of each brand or variations thereof and their potential uses, to secure them in a cost effective manner,” says Fitzgerald.

“There are many stages of an IP life cycle, from creation/acquisition, registration, exploitation to enforcement,” explains Cheong. “Each stage of the IP life cycle should be properly managed by the company so that the company can enjoy the full benefit of its valuable IP. By the time the company discovers there is an infringement, it would often be too late as some types of IP, such as trade secrets, would have already lost their value and correspondingly, the company’s competitive edge,” he says.

A case in point is IP that is infringed by a company’s competitors and infringers via production and selling of counterfeit goods. Unwilling to shell out bigger sums for the original products, consumers lap up these cheaper imitation goods in the market. This leads to loss of sales for the company and even price decreases for their products. Worse, consumers may lose confidence in the brand and stop supporting it altogether, explains Cheong.

As to losing the value of some IP assets, Cheong says, “The company will be unaware of the IP it has created and owns, resulting in the undervaluation of the company. I have handled quite a few M&A and investment deals where the startup company could have attracted a higher valuation if the management was aware of what IP the company actually holds and how much buyers or investors actually value such IP.”

IP is usually one of the company’s most valuable, if not the most valuable, asset, says Fitzgerald.

“A board should consider IP issues and concerns on a regular basis rather than wait until an enforcement issue arises, as there is a real risk that IP a company thinks is protected, or protectable, is not,” she says. “Further, a company is very likely to incur substantial costs in trying to stop any infringement which might otherwise have been avoided.”

 

“For example, if a company rebrands to a trademark that is identical or confusingly similar to a trademark used by another company for similar goods or services, the company may receive a cease and desist letter demanding that it immediately cease use of the new brand. This will result in legal fees, expensive rebranding and potentially, confusion and backlash amongst consumers. It is clearly preferable for an early availability search to be conducted for any new brand to identify potential problems such that an alternative available mark is selected at the outset and before any infringement issue arises.”

Fitzgerald also mentions the recent Hells Angels v. Redbubble case.

“An inability to identify the author of a copyrighted work and secure the transfer of those rights to the company can mean that copyright cannot be enforced,” she explains. “A logo for Hells Angels was created by an individual who was not an employee and did not assign the copyright to Hells Angels in writing. When Hells Angels discovered that their logo was being reproduced and sold on T-shirts on the Redbubble website without their consent, Hells Angels was not able to establish that it owned the copyright to the logo and therefore could not prevent the reproduction of the logo on that basis.”

“Evidence of creation is essential to enforcement of copyright in Australia, so it’s vital that companies have a system for retaining copyrighted works, evidence of their creation and information as to authorship and ownership, including appropriate assignment documents where necessary,” Fitzgerald says.

Gary Kuo, a partner at Winkler Partners in Taipei, says a company’s IP strategy should also be tied closely to its business plan and the market it aims to develop.

“A thorough and extensive consideration for the company’s IP strategy may not only prevent possible infringement claims from third parties but also can be used as a tool to prevent a third party from unlawfully snatching your market share. Sometimes, the company’s IP assets themselves can be the source of a company’s profits by licensing those assets. If a company does not properly register its IP assets with the competent authorities in applicable jurisdictions, it will not have any weapons to take legal actions against an infringer which pirates its IP assets. All of the above may affect the company’s business and erode its profits,” says Kuo.

Taiwanese optoelectronic solutions manufacturer AU Optronics Corporation (AUO) puts a lot of focus on its IP portfolio.

 

The company, the second-largest patent filer among companies in Taiwan for the first half of 2019, specializes in display panels. Among its products are the 17.3-inch OLED panels created through inkjet printing technology, 5.9-inch AMOLED panel with inside and outside folding capabilities, 12.1-inch full-color active Micro LED vehicle panel and the optical under-screen fingerprint identification technology which is the first of its kind in the world.

Asked how much importance is accorded to their IP by the company’s board of directors, IP division director Spencer Yu says, “It’s always a topic of concern in board meetings, including some IP issues being raised for discussion and follow-ups. Some of the issues do come from market need or competence. We link IP with corporate’s R&D evaluation and promotion system, and coordinate all IP works and activities.”

For the first half of 2019, the company filed 318 invention patents, a 30% increase from a year earlier. To date, it has over 19,000 approved global patents in its portfolio.

Scanteak, the furniture brand founded in Singapore in 1974 with additional stores in Taiwan and Japan, also takes good care of its IP assets. Scanteak is the name behind Prologue, the best-selling and multi-awarded designer furniture range offering thin teak wood pieces characterized by curved edges and sleek lines.

According to regional marketing director Jamie Lim, Scanteak does not have a formal board. Instead, senior management handles IP issues.

“The executive director/co-founder is the one who takes care of IP, and she pays very careful attention to making sure our IP is well-covered both locally and regionally,” she says. “We find it very important because it is part of the business strategy.”

Lim adds that Scanteak patented some of the designs for Prologue, and trademarks its brand and domain name in countries which it plans to penetrate.

“Nowadays, most technology-oriented companies succeed in large part because they handle their IP assets properly and convert such assets into sustainable competitive advantage over competitors,” says Bessie Ye, a partner at King & Wood Mallesons in Shanghai. “IP strategies shall not just be a set of rules or regulations merely from the legal perspective, but rather, shall support and align with the company’s overall business plan. Good IP strategies can not only protect a company’s technologies from being exploited by competitors but also inspire developments of new technologies, which can drive the company’s profits and expand its market shares.”

 

For Kuo, not only is having an IP strategy important, but the company should also announce or make known this strategy periodically to attract the attention of consumers and investors alike. As such, the company’s IP strategy should also be embedded in its communication plan.

“If a company’s IP strategy does not figure in its communication plan, investors may not notice this company or may undervalue the company’s value of assets,” says Kuo. “Consumers may also have no interest in the company’s products or services because they cannot learn from the IP strategy regarding how those products or services will make their life different.”

Scanteak seems to bear this in mind, as their company presentations always mention a very important information: the brand has a trademark in over 30 countries and patents its iconic furniture designs.

According to Fitzgerald, including an IP strategy in the company’s communication plan allows employees and consultants to clearly understand how they can protect their company’s IP and ensure its transfer to the company when necessary.

But it is also important to educate the employees about their company’s IP assets. This may help bring potential issues to the attention of the higher ups early on, she says.

“For instance, due to the lack of systematic IP protection mechanisms, many companies suffered irreparable losses from its employees or ex-employees’ misappropriation of the companies’ trade secrets. Some IP ownership lawsuits exploded due to the blurred agreements between the companies and inventors. Moreover, some complex transactions failed to be closed successfully due to the improper IP safeguarding and handling,” says Ye.

As written in the State of the Art article, “a communications plan that includes IP considerations minimizes the risk and also facilitates optimum IP capture. At a minimum, boards should ensure: there is an internal communications process that reviews (and where necessary restricts) what goes into the public domain, patent applications are filed ahead of public disclosure, and discussions with third party investors, customers or collaborators are covered by confidentiality terms (a simple NDA can generally do the job).”

“I would like to share a positive case and a negative case here,” says Ye.

“I have recently advised a client in setting up a wholly foreign-owned enterprise (WFOE) in China. The top management of the company attaches great importance to and works closely with us in establishing the WFOE’s IP strategies and polices. At the start-up stage, this client has put in place a comprehensive plan to develop their IP portfolio, filing strategies, trade secret protection policies, employment handbooks, and other IP related measures. Our team assisted the client in building up an overall internal policies and procedures to prevent IP leakage at both strategic and practical levels, including but not limited to internal policy establishment, contractual scheme (e.g. NDAs, non-compete agreements, etc.), physical, network and electronic access control, computer information system management, internal monitoring system.”

 

She continues: “Also recently, I have represented another client in a trade secret infringement lawsuit arising out of its ex-employee’s misappropriation of its trade secrets. Due to the lack of internal protection strategy and management and control system, the ex-employee could easily ‘take away’ and ‘misappropriate’ its employer’s trade secrets, which brought irreparable harm to the employer,” says Ye, adding that some of their clients ignore the significance of IP in their companies’ day to day operations and approach them only when there are disputes.

Based on Ashurst’s experience with its clients, Fitzgerald says that different businesses give varying levels of importance to their IP assets. Large businesses usually have an IP strategy and understand IP’s role to their company’s success and market position.

Smaller ones though, often do not, according to Cheong. “Traditional family-owned companies, SMEs and start-ups may sometimes be behind in this respect. This is because these companies are usually more focused on going to market, increasing sales, marketing and promotion rather than IP protection,” says Cheong. “Also, these companies may not have the funds to apply for patents and trademarks. Therefore, they may not have a comprehensive IP strategy or are not aware of the importance of IP to their business. Some of these companies may not even know that software is protected by copyright or that data and trade secrets are part of their IP.”

He shares that he handled an M&A deal involving a client who wanted to buy a software company including its proprietary software and engineers. The latter was the main supplier of software products to the client.

“When we were preparing the transaction documents, the owner of the software company refused to sign a software assignment agreement because he was under the belief that the company did not own any IP and that there was nothing to assign. He simply thought he was selling the company,” says Cheong. “In the end, the deal almost fell through because the client felt that they would not be getting the valuable proprietary software in the course of the sale. It took many weeks to convince the software company and their lawyers that their software was their valuable IP and it was necessary to sign a software assignment agreement in order to transfer the ownership of the software to the client.”

As for Winkler Partners, Kuo says that as most of their clients belong to the league of 100 biggest brands in the world, they put a high premium on their IP.

“In the brand naming process, they conduct thorough trademark clearance searches to make sure their candidate brands are available for use/registration and are enforceable against similar third party marks. The clients then register their marks to secure rights and protection and maintain the validity of their portfolio of marks in all jurisdictions. They monitor the registry and the market and take action against any third party marks that are confusingly similar to their marks. They also record their trademarks with customs and cooperate with customs and the police to stop importation, distribution and sale of counterfeit products. Furthermore, they proactively hold and sponsor various activities to promote and build the fame of their brand which leads to licensing opportunities and even stronger protection against infringement. By agreeing to license their marks, they not only earn profits but they also extend the fame of their brand to other fields,” says Kuo.

 

Overall, the IP landscape looks good and promising as far as the awareness of businesses are concerned, according to Ye. “The trend is that an increasing number of companies have realized the significance of IP, continuously reinforced their IP protection, and have made great strides in this regard over the years,” she says.

Kuo also mentions big data as being useful to the development of new products and services.

“As big data includes lots of information which can be further analyzed and utilized to create and develop products and services based on target consumers’ needs, these clients also treasure this data as their valued IP,” he says.

Scanteak and AUO Optronics look at data the same way. Lim says it is a valuable source of information for decision making. Yu on the other hand, says that data plays a key role in applying AI to many functions in their company.

While Fitzgerald agrees that companies are now more aware of what data can do for a business, she also says that data may not fall within the required framework for IP protection. “Therefore, alternative mechanisms should be employed to ensure that the company owns the data and can use it as required – for example, obtaining appropriate consent and contractual terms to secure ownership,” she explains.

Hay, Mak and Wheelahan further write: “Data governance arrangements to appropriately control and protect valuable data within the company should be in place, and the board ought to treat data as part of the potentially high value IP assets of the company.”

Indeed, technology has evolved so rapidly and to a scale never before seen in the past century it seems. With these, IP has earned its place on the table and rightly so. It is therefore imperative that IP should leave its place in the backseat of business deliberations to which it was previously relegated and instead move to the forefront of major company decisions. Boardroom agenda should now read: IP, IP and more IP!


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