Structuring your R&D for maximum IP capture

A number of drivers require that IP benefit from investment in R&D be maximised.   These include the growth of the knowledge economy, a mobile workforce, the high degree of competitiveness in the markets, and the business value of a proprietary position.  Today, capital markets and investment analysts are increasingly focusing on IP assets, which themselves are becoming tradable assets.     

Introduction

A number of drivers require that IP benefit from investment in R&D be maximised.   These include the growth of the knowledge economy, a mobile workforce, the high degree of competitiveness in the markets, and the business value of a proprietary position.  Today, capital markets and investment analysts are increasingly focusing on IP assets, which themselves are becoming tradable assets.     

Although some high tech companies have created huge wealth through IP, the securing and the use of IP rights are not a panacea; whereas IP rights provide an opportunity to enhance market success, they are not a guarantee to wealth.  Today's businesses are increasingly seeing a greater degree of patent litigation.  Therefore, there is a need to tread wisely and cautiously in this space.

Why is IP capture is important?

Good IP capture can be foundational to the security of a company and can become its primary advantage for attracting financial investment.  IP rights can also secure a company's business, secure its future products and technology, and enable competitive edge to be developed and retained in the market.

IP ownership also brings greater choice.  A company may choose to benefit from its IP rights directly by commercialising its invention.  Alternatively, it may choose to license its technology and gain royalties as a benefit, or to sell its IP.

Part I General considerations in IP capture

A number of factors have to be considered as part of the IP capture strategy.  Key amongst these is an understanding of how the business plans to use its IP rights.
 
The R&D context and the business purpose determine what', why' and how' IP will be captured.  For business success, the IP capture strategy and the commercialisation strategy must be aligned.  The business purpose(s) served by the IP portfolio depends upon the nature of the company and its business goals.

Very large corporations have the capability of working at both ends of the innovation-commercialisation' spectrum: they can do blue sky research and are able to convert science discovery into commercial products.  They have marketing and distribution outlets and good R&D budgets.  Some choose to capture IP but not to commercialise.  They can grow an IP portfolio solely to create a positive image in the market place.  The portfolio may be used to demonstrate that a company has high quality expertise, creative skills and/or specialist technology capability.  As a marketing tool, the portfolio can be used to bring confidence to (a) potential partners for joint venture work, (b) shareholders for investing in the company, and/or (c) customers (help associate positive images with the company or its products).
 
Smaller companies may have to decide in which part of the innovation-commercialisation spectrum to work.  If they do not have the capability to manufacture and/or market the products of their innovation, they may need to determine at what point they will engage with partners, to define critically what is to be delivered and how, and to identify who they will engage with to commercialise outcomes.  IP capture and innovation development, from very early on, have to be aligned to where and how the products will be used.  The business plan will need to align the R&D, IP, and partnering and commercialisation strategies.

Companies engaged in blue sky R&D have the potential to deliver blockbuster products from research.  If R&D groups are not linked to commercially focused teams, they may not be able to see how to convert research outputs to new product development.  Blue sky work will not be picked up for commercialisation unless there is good communication between researchers and the commercialisation team, and IP protection becomes a part of the commercialisation strategy.
 
Market knowledge allows a small R&D company to make its research commercialisable.  This can be built from knowing who would use the innovation and building relationships with them in the target market.  Some companies can undertake contract research in the market to build trust, which allows easier commercialisation in that market.
    
Risks in IP capture

A number of risks attend IP capture.  These include developing a product that has no market, insufficient funds to capture IP rights core to the business, lack of knowledge of how the market or industry or technology is changing as the product is being innovated, and an absence of business strategy to guide IP capture.

Types of IP that can be captured

A number of modes secure IP from R&D effort.  The mode that best serves the purposes of the business will differ from setting to setting.  The four main instruments by which IP can be captured include the following.

•   Patents

Patents arise from ideas that have been converted into innovative products or services.  Patents that enable competitive products to be marketed can significantly increase the profit margins for the business.

Patents can be gained for a number of innovations: these include new or improved devices, some (packaging) designs, new processes for the manufacture of products, new methods of use of existing products, the useful or functional aspects of an innovative technology (e.g. product compositions, methods of manufacturing), and, where allowed, methods of medical treatment or doing business.  Design patents are used to protect the ornamental (not functional) aspects of a commercially useful article.  Examples are the body shape of the Apple Ipod, Nokia cell phone or Sony MP3 player.  Patents commonly have a life of between 17 and 20 years.

For patenting, the invention must be: (a) novel, (b) not obvious to a person ordinarily skilled in the art' at the time the invention was made, and (c) commercially useful.  Patenting is costly and it can take between 3 and 5 years to grant a patent. 

•   Trademarks

Trademarks are a common form of protection for slogans, logos and/or product names (trademarks are discussed in another presentation).

•   Copyrights

Copyrights, commonly used in the music industry, protect songs, graphics or styles of text (copyright is discussed in another presentation).

•   Trade secrets

Trade secrets are useful in a number of situations.  These include when: (a) secrecy can be maintained for a long time, (b) the IP is not patentable or the IP is not of great value as a patent, (c) the IP relates to a manufacturing process rather than a product (products are more easily reverse engineered), and (d) interim protection is required, e.g. post filing and pre granting of a patent application.
Trade secrets can cover product formulae, patterns, software compilations, software programs, manufacturing and/or business processes, market research results, business pricing policies, and customer lists.

Mixandmatch approaches to suit business purpose 

Most companies use a combination of IP instruments to capture and protect their IP.  Software companies, for example, sometimes use a combination of copyright, trade secret and patenting to meet their business purpose. 

Offensive' or defensive' business tools?

IP rights can be used as an offensive' business tool or a defensive' business tool.  Consideration should be given to how the IP will eventually be used.  Is the IP portfolio to enhance the prestige of the business?  Will it be used to create some business advantage?
 
In an offensive' strategy, the business attempts to control who uses its innovation and what it will charge for it in the market place.  This requires the business to have competitive edge in its innovation product. 

Properly founded rights in a defensive' portfolio help to insulate the business from competitor patent infringement, provided the portfolio has all the technology IP necessary for its business operation. 

A small business may not have sufficient clout to control the market.  To develop its position in the market, it can use its IP rights combined with marketing tools (advertising, sales promotion activities to its target market) to differentiate its products from the competition and to make its products more easily recognisable; success here may be crucial to creating a market and a clientele. 

The easiest option for a small business to commercialise its innovation is to sell or license its IP.  It can choose to sell its IP to its competitors, either for a fee or in exchange for some competitor rights to access desired technology. 

Part II Practical strategies for developing an IP portfolio a two tier approach

To gain a strong IP portfolio, it is best to collect IP on the core technologies that will offer the greatest performance advantage over rival companies and their products. 

An aggressive IP strategy can block competitors and protect the company's present and future potential.  Ideally, IP should also be captured around technology of interest to both competing and noncompeting companies to allow the company to develop an advantageous position (e.g. for bargaining purposes later).

Because of limited resources, small companies can adopt a twotier approach to securing their IP rights:

1.    use freeofcharge protection rights trade secrets and copyright;

2.    patent when cost benefit analysis shows that trademark or patent protection is the best way forward.

Practical strategies first tier

Legal advice should be sought early on the issues that exist around the protection of your IP.  The most appropriate and best way to progress matters important to the business needs to be decided before any practical action is taken.

When R&D or commercialisation requires input from different organisations, some consideration has to be given to the rights of those involved.  In joint research or development, there has to be sufficient clarity around who will own what' in IP.  Table 1 gives a summary of some of the practical considerations here. 
 

      Table 1.  Practical considerations IP ownership matters


Ownership considerations
•   Have founders, employees, consultants and third parties signed agreements to assign all current and future IP rights to the company?

Rights of universities
•   If IP has been developed through a university research capability, check the agreement to ensure who can exert what rights in the company's IP.
•   If a university was involved in setting up the company, what rights might it have as an inventor or collaborator?

Rights of the government
•   A company funded by government sponsorship may retain rights in a patented or unpatented invention.  Check to see who is and who is not allowed to practise the invention.  Are there compensation clauses?  Are there unique reporting requirements that may compromise rights?

Rights of coinventors
•   When no assignment agreements are in place, each coinventor retains the right to practise the invention without compensating the other co inventors. IP assignments, if not rigorously enforced, can result in an inventor who has not assigned rights selling or assigning their rights to another company, a risk that can be to the detriment of the company.



Additional considerations may apply with particular modes of protection.  For trade secrets, the considerations in Table 2 may become important.  Similar considerations apply to confidential information at a prepatent stage, or to the nonpatentable IP important to the business operation.

Table 2.  Trade secrecy some practical considerations

•   Mark all of the company's confidential documents and materials as such.
•   Require employees and contractors to sign to restrictions on disclosure of sensitive information (prohibit misappropriation, prevent disclosure).
•   Have applicants sign a confirmation that they will not bring in confidential information from previous jobs expect the same from them when they exit.
•   Conduct exit interviews, reminding departing employees of their confidentiality obligations.

 

Practical strategies second tier

Security is dependent upon having one's key technologies and core products protected.  A defensive strategy can be considered if financial resources are limited, and when competitors are seen as unlikely to want to copy the company's products.  Future security may depend on protecting improvements that prevent competitors from blocking the company from using its own core technologies.

If a company owns its IP in patents, then it may become unable to commercialise its products if it infringes someone else's patent.  Freedom to operate (FTO) opinions should be sought to ensure that one retains ability to function in the market place in view of the patent rights of others.

An offensive strategy should be considered if significant resources are available to lock up new technology space, so as to create a wall of patents to protect key and differentiating features that can be built around a new product area.  Key methods and processes that are essential to the building, marketing and selling of the product may also need to be patented. 

Picket fences' can be developed to protect commercially available improvements or small incremental innovations around the core technology of a competitor.  This serves as a barrier to the competitor's core technology.  The owner of the picket fence can force a cross licence of patents to acquire the competitor's core technology for its own use.
 
To protect against the picket fence approach, it is important to be aware of the way in which technology develops.  An ability to predict changes and their impacts can ensure that viability and key IP continue to be protected for the business.

Finally, it is important to be vigilant with respect to competitors and what they are doing, to be aware of existing and new IP and developing technologies, and to monitor the market place to identify infringing products and services.


Structuring R&D to maximise IP capture

A commercial strategy usually defines where the business has opportunity for growth, what the market expectations are for the products it wants to develop, and what actual opportunities exist in the market.  It generally also provides an analysis of what the competitors are doing.  The science and IP strategies derive from the business plan.

The science strategy describes the new areas of science in which to work, the processes for developing the capability, and the methods for maximising success from that endeavour.  This requires proper scoping of science projects in the planning phase, including development of an IP strategy.

The IP strategy ensures that the science is able to deliver a competitive advantage to the business operation, ensuring that there is freedom to operate and security around the IP rights.  Thus, it is important that the R&D plan supports the IP strategy.

It is important to regularly review the progress of R&D work and to evaluate the impact of this on the IP strategy, and, where necessary, to limit or rechannel R&D effort such that its scope fits to the commercial purpose.

Part III IP capture processes in LactoPharma

LactoPharma is a government/industryfunded joint venture research consortium.  It is funded by Fonterra as the New Zealand industry partner and by the New Zealand Government through the Foundation for Research, Science and Technology.  The rules of the consortium funding require that industry and university work together to develop innovation to grow New Zealand's biotechnology capability.  LactoPharma is currently 4 years of age, and is funded to the tune of $4.5 million per annum for 7 years. 

LactoPharma's vision is to become a world leader in the discovery and commercialisation of new bioactives from milk.  It hopes to deliver new uses of milk bioactives in food, health and wellness products, including Pharma applications. 

LactoPharma focuses R&D in three major areas milk component discovery, bone health applications and immune health applications.  It has access to resources from AUL, Otago University and Fonterra.  This includes: (a) state of the art biotechnology expertise for the discovery of milk components, (b) medical expertise in bone and immune health, (c) internationally reputable biomedical researchers based at university medical schools, and (d) Fonterra's science, technology and market knowledge.   

The strategy, processes and practices that LactoPharma uses and the infrastructure that it has built for IP capture will be presented.

Summary

IP capture secures rights over innovations delivered from R&D; it protects the future viability and competitiveness of the business. 

Most companies use more than one tool to capture their IP, mixing and matching the tools to suit their business purpose.  Understanding the purpose that IP serves for the business is important: this can range from image creation to securing core technology and securing future viability of the company.  IP rights can be used as offensive' or defensive' business tools.  Build awareness re risks (FTO, robustness of IP).

For a small company undertaking R&D, it is important to understand on which parts of the innovation-commercialisation' spectrum its activities will focus.  Market knowledge and IP management are keys that enable research to be commercialisable.  For commercialisation success, IP capture and science strategy must be aligned to business strategy.