Intellectual property is often among a company’s most valuable assets. Domini Stuart explains the dangers of not managing it as well as physical assets.
Do you know the difference between a brand name, trademark, business name, domain name and logo? That commercialising an invention too soon can jeopardise your right to acquire a patent? That patents, trademarks and designs have registration systems, while copyright and confidential information don’t?
If so, you could be streets ahead of most Australian directors.
"In terms of intellectual property (IP), the first and most obvious risk many companies face is they don’t understand what it is," says Noric Dilanchian, managing partner at Dilanchian Lawyers and Consultants. "They tend to focus on the word ‘property’ and think of it as something tangible they can own with the law there to protect them. In fact, with IP there are several laws for the use, registration and protection of names and they are not always in harmony."
Shades of grey
Tina Hanson and Bo Ernfridsson started an online swimwear business and registered the trademark Absolut Beach in Australia. When Vin & Sprit, the owner of the Absolut Vodka brand, accused them of a trademark infringement, they were confident of their position. However, while swimwear and vodka are not in obvious competition, Vin & Sprit claimed they were engaging in deceptive and misleading conduct by implying a connection that didn’t exist. Many thousands of dollars later, Absolut Beach lost the case and was forced out of business.
Other companies have suffered because the name they chose was too descriptive.
"Trademark law says all traders should be able to use terms that are descriptive of the relevant type of product and to describe a feature of their product," explains Dilanchian. "So, while you might be able to register a name like ‘Crinkle’s Chips’ for potato crisps, the courts would not support an action to prevent another company from making the words ‘crinkle’ or ‘chips’ prominent on the packaging of a similar product with a different brand name."
Over the past few years, it has become easier to register "non-traditional" trademarks such as the shapes of products, sounds, scents and colour schemes.
"Cadbury and Nestlé were able to register particular colours for their packaging while the distinctive triangular shape of Toblerone chocolate has also been registered," says Philip Macken, a partner at Halfords IP. "Mr Whippy even obtained registration of the well-recognised Greensleeves tune played by its vehicles."
"It’s very important to understand that IP law rewards originality, novelty and inventiveness," adds Dilanchian. "For instance, the Federal Court recently found the distinctive shape of the Bodum Chambord coffee plunger had such a well-established reputation that a company manufacturing a copy had engaged in misleading and deceptive conduct. This case was interesting because the Bodum shape was not a registered trademark or design; the company won using trade practices law."
In Australia, copyright exists as soon as something original has been created by an author and recorded in a material form; it cannot be officially registered. When Local Directories used information from the Yellow Pages and White Pages, it was sued by Telstra and its directories unit Sensis on the grounds that the listings were covered under copyright law and could not be legally copied. Justice Michelle Gordon disagreed. She dismissed the argument on the basis that none of the works was original and that none of the people said to be authors of the works exercised "independent intellectual effort" or "sufficient effort of a literary nature" in creating the directories – a finding that could cost Telstra millions of dollars.
"People have the perception that lawyers are all about protection," says Dilanchian. "That’s treating them like the fire brigade – you call them after the fire has started. It makes more sense to have them help you prevent a fire, which means getting IP experts involved right from the start."
Australian copyright law can also leave ownership of a logo open to challenge.
"The author of an ‘artistic work’, including even the most basic logo, generally owns the copyright in that work," says Macken. "Unless there is written assignment of the copyright, the business only has an implied licence to use the logo. If it expands geographically, or in terms of the range of products or services provided, the designer could justifiably argue the implied licence only covers the business as it was when the logo was created."
There are also misconceptions about patents.
"Many people don’t realise publishing the details of an invention or making it commercially available might jeopardise their right ever to hold a patent," says Wayne Zappia, a partner in Lavan Legal’s IP team. "There is a grace period in some countries – in Australia it’s 12 months – but if you’re not aware of that you can still miss out. One company recently came to us with a great idea it wanted to protect but, because it had been commercially exploiting it for over a year, it couldn’t apply for a patent so anyone can reverse engineer it and compete with the company."
Weighing up the risk
Today’s technology makes it easier for IP breaches within an organisation itself.
"We’ve seen many cases of disgruntled employees who springboarded off their former employer’s IP to start up a competitive business," says Zappia. "Quite often, they will have emailed themselves a lot of the employer’s proprietary information – generally not recognisable IP such as a trademark, copyright or patent but information the employer had decided to keep confidential, such as client lists or a formula."
While it sounds unduly risky, there can be good reasons for keeping information confidential rather than protecting it by law.
"A classic example is the secret formula for Coca-Cola," continues Zappia. "Many decades ago, the company decided to treat that as a trade secret rather than patent it because, with a patent, you have to disclose the information to the world at large and only get a limited monopoly. Assuming we’re not talking about something that can be easily reverse engineered, without a patent you can maintain a monopoly for as long as the information remains a secret."
Unfortunately, even companies that dutifully develop and protect their IP are at risk from counterfeiting. "Most counterfeit manufacturers are located overseas, but legitimate Australian businesses often fall victim to local operators who import the counterfeit products, generally at lower prices," says Macken. "Typically, these goods are also of lower quality, which can have a negative effect on the company’s reputation."
Adrian Crooks, a partner at Phillips Ormonde Fitzpatrick Lawyers, suggests mechanisms outside the traditional means of protection.
"Accelerated product lifecycles and versioning can force copyists to continually play catch-up with an innovator," he says. "Deriving IP value from services coupled to products manufactured offshore can significantly diminish the harm caused by copying the product alone. And, finally, partnering local businesses and developing relationships with legal service providers can be important first steps in seeking to protect IP rights."
Protection of any kind is inevitably more complex when overseas jurisdictions are involved.
"Each country has laws protecting such IP and they’re generally quite strong," says Macken. "The problem often comes down to enforcement and related cultural factors. The sheer size of countries like China and the large number of factories manufacturing a vast range of products is clearly another issue. The recognition of IP rights is slowly improving, but it is likely to be a long time before there is a mindset of respect for the IP rights of others."
Where appropriate, David Stewart, a partner at Wrays, recommends developing a brand using the local alphabet or characters. "If you don’t, the consumer market is likely to adopt one of its own and this might not be flattering," he says.
A fundamental responsibility
For directors, protecting IP is a fundamental aspect of their role.
"Directors are as responsible for ensuring IP is well-managed as they are for managing physical assets," says Albert Ferraloro, director of management and strategic services at Wrays. "A situation could arise where a director is held liable for mismanagement of a company’s IP, including infringement, inadvertently or wilfully, of pre-existing third-party IP rights."
In such cases, ignorance would be no defence.
"We recently acted for a large organisation where employees had been told a licence agreement had been terminated, but some junior employees didn’t appreciate what that meant," says Zappia. "With the best of intentions, they used the software in an attempt to help a customer. These days, licensors have a whole raft of electronic security measures to alert them if their IP is being misused, so it was picked up immediately.
"Directors need to be sure there’s a proper flow of information within the organisation and that procedures are in place to ensure these kinds of things don’t happen."
If IP is to be protected, it must first be identified and, ideally, valued.
"Valuation is notoriously difficult," says Crooks. "And, because of the many types of IP and the different ways in which it can be exploited, there is no one-size-fits-all approach."
The value of IP can vary enormously from company to company.
"A small product supplier’s IP may be nothing more than a list of clients and a brand, while some technology-based companies have few assets that are not IP," says Dan Pearce, a partner at Holding Redlich. "Whatever the potential value, the first step is to create an accurate inventory of trademarks, patents, domain names, trade secrets and confidential information, along with employee know-how and original works of authorship in which copyright subsists, such as business plans and processes, software and marketing materials. If you then look at how much your company relies on each type of IP to generate revenue, it is possible to gauge an approximate value of your IP assets."
In general terms, companies that manage their IP well are likely to outperform similar companies in the market.
"Creation of monopoly rights is only one facet of what IP rights can offer," says Ferraloro. "IP assets can be harnessed to strengthen a company’s bargaining power, enable it to adopt premium pricing models, provide alternative revenue sources and help manage risk. When directors demonstrate to competitors and the industry they’re serious about protecting and enforcing their company’s IP rights it can have the added effect of boosting investor confidence and raising the value of the IP rights themselves."
Crooks suggests directors consider insurance as part of the overall IP strategy.
"IP insurance can be offensive, insuring against the cost of bringing enforcement proceedings against an infringer of the company’s IP rights, or defensive, insuring against the cost of defending a claim of infringement made by a third party," he says. "That the company has insurance and will not be deterred from protecting its legal position alone may help to resolve a dispute."
Questions to ask management about IP
Questions to ask management about IP
- Do we know how much our IP is worth?
- Do we have an IP policy?
- How do we capture IP from across the organisation?
- How do we secure our IP from external suppliers, such as graphic designers, web designers, software developers, consultants and so on?
- Do we have the right legal contracts in place to protect our IP used by employees, external providers and in joint-venture projects?
- In the event of the potential sale of our IP or business, are we ready for due diligence?
- Do our staff know what IP is, in particular what they create, purchase or use?
- Do we have HR systems in place regarding IP – at recruitment, induction, during employment and at exit?
- Do we have an IP-oriented culture that values IP, identifies it, protects it and recognises its importance to the organisation?
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