The Innovation Handbook: How to Profit from Your Ideas, Intellectual Property and Market Knowledge

i 

the

Innovati c n handbook

Times may be challenging. But through innovation, businesses can gain competitive advantage, benefit from new markets and prepare for the upturn. How can the Technology Strategy Board help? By being a catalyst. By providing leadership. By connecting partners and investing in new ideas. Our vision: a world where the UK is an innovation leader and a magnet for innovative businesses. Find out more at www.innovateuk.org

www.innovateuk.org

iii 

the

Innovati c n 2nd Edition

handbook

How to profit from your ideas, intellectual property and market knowledge

Consultant editor: adam Jolly

 iv  Publisher’s note Every possible effort has been made to ensure that the information contained in this book is accurate at the time of going to press, and the publishers and authors cannot accept responsibility for any errors or omissions, however caused. No responsibility for loss or damage occasioned to any person acting, or refraining from action, as a result of the material in this publication can be accepted by the editor, the publisher or any of the authors. First published in Great Britain and the United States in 2008 by Kogan Page Limited Second edition, 2010 Apart from any fair dealing for the purposes of research or private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act 1988, this publication may only be reproduced, stored or transmitted, in any form or by any means, with the prior permission in writing of the publishers, or in the case of reprographic reproduction in accordance with the terms and licences issued by the CLA. Enquiries concerning reproduction outside these terms should be sent to the publishers at the undermentioned addresses: 120 Pentonville Road 525 South 4th Street, #241 London N1 9JN Philadelphia PA 19147 United Kingdom USA www.koganpage.com

4737/23 Ansari Road Daryaganj New Delhi 110002 India

© Kogan Page and individual contributors, 2008, 2010 The right of Kogan Page and the individual contributors to be identified as the authors of this work has been asserted by them in accordance with the Copyright, Designs and Patents Act 1988. ISBN 978 0 7494 5687 0 E-ISBN 978 0 7494 5920 8 British Library Cataloguing-in-Publication Data A CIP record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data The innovation handbook : how to profit from your ideas, intellectual property and market knowledge / [edited by] Adam Jolly. -- 2nd ed.        p. cm.   Includes bibliographical references and index.   ISBN 978-0-7494-5687-0 -- ISBN 978-0-7494-5920-8 (e-bk)  1.  Creative ability in business-Management. 2.  Technological innovations--Management. 3.  Industrial property--Management.  I. Jolly, Adam.   HD53.I564 2010   658.4'063--dc22                                                             2010002757 Typeset by Saxon Graphics Ltd, Derby Printed and bound in Great Britain by MPG Books Ltd, Bodmin, Cornwall

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100 years of Intellectual Property management From our offices in London, Cambridge, Reading, Manchester, and York we provide our clients with comprehensive Intellectual Property management including Patents, Trade Marks and Design rights throughout the UK, Europe and around the globe. Founded in 1910 we are proud to have over 100 years of experience in the protection and commercialisation of all aspects of Intellectual Property rights and we continue to lead the field with our consistent strategic insight, innovation and quality. For a free initial consultation on how we can assist you to use IP to boost profits and gain competitive advantage contact us: T: +44 (0)20 7830 000 E: [email protected] MATHYS & SQUIRE LLP, 120 Holborn, London, EC1N 2SQ, United Kingdom

+44 (0)20 7830 000 [email protected] www.mathys-squire.com

Times may be challenging. But through innovation, businesses can gain competitive advantage, benefit from new markets and prepare for the upturn. How can the Technology Strategy Board help? By being a catalyst. By providing leadership. By connecting partners and investing in new ideas. Our vision: a world where the UK is an innovation leader and a magnet for innovative businesses. Find out more at www.innovateuk.org

www.innovateuk.org

Your Full-Service IP Partner

Patents, Trademarks, Designs • IP Strategy Development • Portfolio Management • Due Diligence • IP Audits • IP Litigation

Johan de Wittlaan 7 P.O. Box 87930 2508 DH The Hague The Netherlands Telephone +31 70 416 67 11 Fax +31 70 416 67 99 [email protected] [email protected] [email protected] www.vereenigde.com

The Hague • Munich

vii 

Contents



Foreword by Robin Webb, IPO

PART 1

The innovation premium

xvii 1



1.1 How innovation drives growth Jonathan Kestenbaum, NESTA The bottom line 3; Where innovation happens 4; Measuring innovation 4; Forging links 5; Getting it right 5

3



1.2 Opening up innovation Tim Nicol, Make Innovation Happen Rationale 8; Definition 9; Benefits of OI 10; Issues 11; Consequences 12; Conclusion 12

8



1.3 Innovation support Phill Allen, Welsh Assembly Government Maximizing your intellectual property 15; Good design is good business 16; Supporting manufacturing 17; Increasing opportunities for commercial success 17; Summary 18

15



1.4 Intellectual property for innovators Miles Rees, Intellectual Property Office The national and international IP systems 20; IP rights for business 20

19

 viii Contents ________________________________________________________________________________________________



1.5 Realize what you have Ian Wilkinson, Invest Northern Ireland How should you start? 27; What can go wrong? 27; Things can go right! 28; Is IA management expensive? 28; Conclusion 29

26



1.6 How to maximize the value of your intellectual property John Pryor, CPA Global Realizing value 34; Value structures 34; Conclusion 35

31

PART 2

Move up the value chain

37



2.1 Technology as an accelerator for growth Allyson Reed, Technology Strategy Board Connections 40; Partnerships 40

39



2.2 Partnerships for innovation Clare O’Neill and Cathy Garner, Manchester: Knowledge Capital When two worlds collide 44; How universities can support business innovation 44; Examples in Manchester 45

43



2.3 The power of design Clare O’Neill and Cathy Garner, Manchester: Knowledge Capital

47



2.4 Brand innovation Peter Matthews, Nucleus Branding innovation 53; Protecting innovation 53; Funding innovation 53

52



2.5 IP as a profit centre Ben Goodger, Rouse Legal Your IP strategy as part of your overall business strategy 57; Look ahead 58; Know what you’ve got 59; Get it right from creation 59; Manage your portfolio efficiently 60; Leverage your IP to make it into a profit centre 60; Be prepared to enforce – intelligently 61; Conclusion 61

57

PART 3

Forms of innovation

63



3.1 Breakthroughs versus improvements David Fry, Agile IP LLP

65



3.2 Broad versus narrow Ilya Kazi, Mathys & Squire

69

_________________________________________________________________________________________________ Contents ix 



3.3 Hardware versus software J J Hutter, Nederlandsch Octrooibureau Software and the European Patent Convention 74; Mechanics, electronics, software 75; Conditions 76; Coverage 76; Business case 77; Conclusion 77

PART 4

Sources and types of innovation

74

79



4.1 Challenge-led David Bott and Paul Whittemore, Technology Strategy Board Building an innovation infrastructure 82; Innovation platform development 83

81



4.2 Working with universities Paul Tiltman, University of Exeter So what are the options? 85; Using higher education institutions for your research? 86; Revenue sharing 87; So what about the IP? 87; IP as a passport? 87; Non-disclosure agreements – a basic tool 88; Conclusions 88

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4.3 Business improvement Peter Ives, Business Dynamix Changing markets 91; Production and distribution 91; People 92; Open Innovation 92; Benchmarking 93

90



4.4 Customer insights Leo Rayman, DDB Becoming relevant 94; Innovative sources of customer insight 95; Traditional sources of customer insight 96; The limits of user engagement 97; In conclusion 97

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4.5 Value innovation Andrew Fennell, Pera

99

PART 5

New frontiers

5.1 Software Jane Clark, Mathys & Squire Confidential information 105; Copyright protection 106; Registered design protection 106; Patent protection 107; Trademarks 108; IP freedom-to-operate issues 108; Conclusion 109

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5.2 Life sciences Paul Rodgers, Ithaka Life Sciences Ltd What are the current commercial and technical limitations on realizing the potential? 111; What are the different models and techniques that enterprises might now consider? 113; Conclusions 116

111



5.3 Low-carbon technologies Chris Harrison, Low Carbon Innovation Centre, University of East Anglia Public funding schemes for innovation 120; Other supporting initiatives: Intellectual Property Office (IPO) 121; The role of venture capital (VC) funds and business angels 121; Opportunities in China 121; Low-carbon collaborative projects 122; Construction 123; Combined heat and power and biochar 123

120



5.4 Major public challenges David J Rhodes, Health Protection Agency Open innovation and health outcomes 127; Stimulating an open innovation culture 127; Governance of external relationships 128; Public health challenges to innovation 128; Conclusions 129

126

Profile: Adding value to early-stage IP Michael A Dalrymple, MRC Technology CTD: a new model for early-stage drug discovery 132; The current capability of CTD 133; Examples 134; In conclusion 134

131

PART 6

The creative organization

135



Leading for innovation Bettina von Stamm, Innovation Leadership Forum Part A – the argument 137; Part B – what it means to lead for innovation 138

137

6.2 Whole-company innovation Garrick Jones, Ludic Innovation is a group sport 143; Spaces for innovation 144; A physical environment 144; A virtual knowledge environment 145; Prototyping, simulation and play 145; Flexibility and communication in a value web are directly related to the quality of interpersonal relationships – establish multiple opportunities for these to develop 146

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6.1

DON’T SHACKLE YOUR QUEEN! Your most powerful board piece is your US patent. Did you know that she can move like no other, including travelling back in time to define the prior art one year earlier than possible in Europe? Yet, if you fail to file first in the US, you may needlessly be shackling your Queen. (Ignorance of her powers is a sure recipe for failure) See facing article for further information.

Contact Moetteli & Associés Sàrl, US and European Patent Experts in Europe, for your patent and trademark needs both in Europe and the US.

US- und internationale Patent- und Markenrechts-Anwälte US and European Patent and Trademark Attorneys-at-law St.Leonhardstr. 4 CH-9000 St.Gallen Switzerland Phone +41 71 230 10 00 Fax +41 71 230 10 01 www.moetteli.com

 xii Contents _________________________________________________________________________________________________



6.3 Fit for innovation Viktor Dörfler, University of Strathclyde Business School Evolution of organizations 150; Fitness of innovations 151; Achieving harmony 152

150



6.4 An innovative culture Nikolai Bisgaard, GN ReSound When is it innovation? 155; Creating an innovative environment 156; Matching market needs to technology 157; Cost–benefit analysis 157; Designing the product portfolio 158

155

PART 7

An open search for ideas

161



7.1 How to look for innovation Mark Thompson, UMIP Open innovation for large companies 163; Open innovation for smaller companies 164; Innovation-seeking tools for companies, large or small 164; Summary 168

163



7.2 Collaborative ventures Dominic Elsworth, Hargreaves Elsworth Why collaborate? 170; Considerations for potential collaborators 171; Who brings what to the collaboration? 171; How will the collaborative venture be managed? 171; Who gets what? 172; How is intellectual property resulting from the collaboration to be owned and what will be done with it? 172; People 173; Who pays? 173; What about other work? 173; The golden nugget 173; Conclusion 174

170



7.3 Freedom to produce Marco Serravalle, Serravalle sas What is a patent? 176; Patentability assessment 176; Freedomto-produce assessment 177; What to do if the freedom-toproduce assessment is negative 178

176



7.4 Watch your priorities Bart van Wezenbeek, Vereenigde The priority system 180; The priority system now 181; Is your priority valid? 181; Enablement 182; US provisional applications 182; Lessons to be learnt 182

180

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PART 8

Commercialization models

185



How to evaluate an idea Jonathan Watkins, Alta Innovations So you have an idea for making money? 187; Where do ideas come from? 187; What sorts of ideas are there? 188; What turns an idea into a business proposition? 188; What types of opportunity are there? 188; What factors need to be considered? 188; What are the most important factors? 189; How do you make the decision to proceed to the next step? 190; What next? 190

187

8.1



8.2 Making money by licensing your intellectual property Alastair Swanwick, Innovate Product Design What is licensing? 192; Why should I license? 193; How can I get a licensing agreement? 194; Conclusion 194

192



8.3 The commercial options Lynn Martin, Manchester Metropolitan University Three routes? 197; Business start-up 198; Spin-out or spinoff? 198; Licensing 199

197



8.4 Global dimensions Dominic Hickman, Rouse Legal Established multinational businesses 202; Expanding international businesses 202; Outsourcing 203; Enforcement 204; Common themes 204

201

PART 9

IP fit for purpose

207



9.1 Value-for-money IP Stephen Carter, Mewburn Ellis What are the key assets? 209; Are the key assets yours? 210; How and where? 210; A ‘Swiss cheese’ approach 211; Spreading the cost 211; International patent applications 211; Clearing the way 212

209



9.2 Managing the portfolio Adam Kenney, Thomson Reuters In the beginning 214; The ‘next great idea’ 215; Important decisions ahead 215; The ‘IP life cycle’ 216; Better decisions through collaboration 217; IP management systems 217; Summary 218

214

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9.3 Fast IP Peter Kylin, Hynell General aspects 220; Validity 221; Design registrations 221; Patent protection 221; Speed and the PCT system 222; Speed and the EPO 222; Extra speed via utility models 222; Fast enforcement of IP rights 222; Express speed in Germany 223; Concluding remarks 223

220



9.4 A bundle of rights Sangwani Nkhwazi and Rohan Patel, Mancunium IP Examples of different problems 227; What IPR is required? 227; Where is the IPR necessary? 229

225



9.5 IP for SMEs A core technology on a limited budget for IP makes you vulnerable. Marianne Holme at Holme Patent A/S looks at your options.

232



9.6 IP in the new economic powers John Moetteli, Moetteli & Associés Sàrl Understand and research the IP landscape carefully 236; The advantage of local knowledge 236; Test the IP system 237; Know your competitors 237; Use lobbying 237; Innovate 238; Make friends, many friends 238

235

Feature: Patent filing strategy to maximize portfolio value John Moetteli, Moetteli & Associés Sàrl Introduction 240; The 10 most compelling reasons for filing first in the United States 242; Exceptions 246; Conclusions 247

240

PART 10 Contract negotiation

251

10.1 How to value an idea Elizabeth McNabb and Christi Mitchell, Highbury The basic idea: balancing anticipated risks and rewards at a point in time 253; Thinking about valuation: the three ‘Cs’ and one ‘R’ 254; Context 254; Content 255; Communication 256; Royalties – the integration of all the elements 256

253

10.2 How to negotiate contracts Elizabeth McNabb and Christi Mitchell, HighburyWhat kind of transactions? 259; Approaches to negotiation 260; Planning and preparation 260; The negotiating process 261; Follow-up 262; And finally 262

259

________________________________________________________________________________________________ Contents xv 

PART 11 Funding innovation

263

11.1 How to pitch to an early-stage investor Alan Watts, Halo, the NI Business Angel Network Why pitch? 266; What’s the purpose of the first pitch? 266; When to pitch? 266; Who to pitch to? 267; How does the investor see things? 267; What’s the right valuation? 268; What must the pitch cover? 268

265

11.2 The fundamentals of IP asset valuation Peter Kaldos, Hungarian Patent Office Value your IP assets 273; Strategic exploitation of your IP assets 273; Methods 274; How do companies value their IP assets? 275; Conclusion 276

272

PART 12 When you are copied

277

12.1 How IP litigation works Larry Cohen, Latham & Watkins The first question – is there infringement? 279; The second stage – getting started 280; Rules of court and procedure 280; The pleadings stage 280; Getting ready for trial – order for directions 281; How to establish infringement in patent cases – product description 281; Discovery (disclosure) generally 281; Experts 282; Factual evidence 282; Pretrial preparation 282; The trial 282; Judgment 283

279

12.2 Low-cost litigation strategies Campbell Forsyth, Forsyth Simpson Conditional fee agreements 286; After-the-event insurance 287; Third-party funding 288; Patent County Court or the IP County Court 288; Conclusion 288

285

12.3 Special cases in IP litigation Larry Cohen, Latham & Watkin Anti-trust litigation 290; Standards litigation 291; Pharmaceutical patents 292; Trademarks – survey evidence 292; Copyright and design right 293

290

12.4 Firm-based strategies for protecting innovations Sara McGaughey, University of Strathclyde, and Stuart Macdonald, University of Sheffield Firm-based strategies for protecting intellectual property 296; Illustration: IP strategies of CDM and INCAT 296

294

 xvi Contents ________________________________________________________________________________________________

12.5 Meet the challenge of counterfeiting and piracy The Italian Patent and Trademark Office Index Index of advertisers

301 306 316

xvii 

Foreword

Globally we have experienced financially testing times in recent years. Company survival has been a primary concern for many small- and medium-size businesses and we have even seen the demise of some large familiar names. At times like these innovation becomes even more important – it is innovative companies which will lead the way to economic recovery. Innovation offers opportunities to businesses and it gives them the ability to develop and adapt not just new products, process or designs but their operations and business models. The difficulty for most organizations is not in generating ideas but in pursuing the right one at the right speed on the right scale. Alongside flashes of brilliance, innovation depends on combining strategic insight, inspired leadership, suitable funding, adept marketing, motivated teams and appropriate intellectual property in the right business model. Innovation is just as likely to lie in changing a business process or improving the experience for customers as in anything more tangible. Ideas are easily lost and decisions are delayed. For small enterprises, the risk often lies in deciding in which direction to take an innovation and in what time frame to expect a return. For example, by using their intellectual property (IP) assets, organisations can buy and sell the commercial rights in innovation, allowing them greater scope to specialize in what they know best and add on any extra improvements from outside. Attracting investment is also a key factor. Without a clear commercial application combined with an effective development and exploitation strategy a new innovation is unlikely to excite the venture capital community. Of course for any small enterprise the hope is that they will grow into a large ongoing concern, and innovation implementation can help manage this growth. This book is designed as a practical guide to the effective management of ideas and knowledge for leaders of organizations who want to move ahead of their competitors and offer new sources of value to their customers. Drawing on a wide range of experience and expertise in strategy, technology, brands, intellectual property, finance,

 xviii Foreword _____________________________________________________________________________________________

marketing and management, it discusses how best to identify winners throughout the innovation chain. It makes interesting reading for anyone who is in the business of developing and commercializing innovation. I hope you enjoy it. Robin Webb Director of Innovation, IPO

 xx 

1 

PART 1

The innovation premium

 2

3 



1.1

How innovation drives growth

Jonathan Kestenbaum, CEO of NESTA, shows how innovation leads to company growth, and why a broad understanding of innovation is needed to get your company strategy right.

Many companies now see innovation as an essential part of business strategy – a storecupboard item on a business plan. Yet there are still those that see it as a luxury that is all too easy to cut out in times of economic downturn. Our research has found that innovative firms grow almost twice as fast, both in employment and in sales, as those that do not innovate. Those high-growth companies that invest in the right kinds of innovations will be the ones driving not only their own bottom lines but the economic prosperity of the UK.

The bottom line Those companies concerned about their bottom line should be concerned about innovation. NESTA research shows that firms that introduced a product innovation in 2002–04 experienced a 10 per cent sales growth during 2004–07, almost double the rate experienced by those that failed to innovate.1 Not only is innovation driving business growth, but it has wider employment benefits. A high-growth company that sees a 10-percentage-point increase in the share of sales from new products adds almost 1.5 percentage points to its employment growth rate.

 4 The Innovation Premium _____________________________________________________________________________

Where innovation happens Research and development (R&D) is an important part of innovation, but there is much more to innovation than R&D; many types of innovation will have an impact on performance. NESTA’s work on the Innovation Gap uncovered the ‘hidden innovation’ taking place in the UK – the innovation activities that are beyond traditional indicators of innovation, such as investments in formal R&D or patents awarded.2 Hidden innovation is often the innovation that matters most to the success of a sector. To understand the dynamics of hidden innovation, NESTA conducted a detailed analysis of sectors that do not undertake much, if any, ‘traditional’ innovation, such as R&D. What it found was that ‘being innovative’ can mean many different things. An ‘innovative organization’ can play one or more of four different roles: An organization might be a generator of new ideas. zz It zz might be a developer of ideas into fully fledged innovations. It might be a fast-follower, an adopter of innovations and ideas that have been zz developed elsewhere. An organization could be a transmitter or supplier of innovations to others. zz What works best for individual companies will need consideration in the context of their wider strategy. A broader look at the aspects of innovation that have a positive economic impact is important; it will assist companies to select an innovation strategy that has high resonance and a positive impact on the bottom line. In November 2009, NESTA launched the Innovation Index pilot, a whole new way of measuring innovation. This is the first step in attempting to understand the wider benefits of hidden innovation for the UK. Measuring innovation effectively is important, for if the UK’s innovation performance is to be improved it first must be measured.

Measuring innovation The findings of NESTA’s Pilot Innovation Index have revealed the real scale of innovation investment in the UK: the private sector invested £133 billion in innovation in 2007 (the most recent year for which data are available), or around 14 per cent of private sector gross value added (GVA).3 Over three-quarters of this was in ‘hidden innovation’ – investment in areas beyond traditional R&D. This investment in innovation has made a significant contribution to the UK’s economy and may be responsible for the lion’s share of the UK’s productivity growth. Our interpretation of these results is that innovation was responsible for two-thirds of the UK’s private sector labour productivity growth between 2000 and 2007, increasing productivity by an average of 1.8 percentage points per year. A significant part of this productivity increase came from ‘non-traditional’ types of innovation, such as design, the development of innovative skills, brand equity and organizational innovation. This means companies need to be conscious of the innovation strategies they take.

__________________________________________________________________ How Innovation Drives Growth 5 

Forging links Collaboration with external partners, whether they are suppliers, customers, researchers or other businesses, is important in stimulating innovation. NESTA’s practical work has shown that cooperation between businesses is a rich source of profitable, innovative ideas. It is crucial that businesses are able to identify, assimilate and exploit this knowledge from the wider environment. Sixty-six per cent of respondents to the Community Innovation Survey (CIS) in 2007 cited ‘customers’ as a source of information for innovation. Rather than open and closed innovation being viewed as distinct entities, collaboration should be thought of in staggered degrees that need careful consideration. Businesses need to understand the opportunities and pick a strategy that will best enhance their potential for business growth.

Strengthening and exploiting relationships and linkages Successful innovation is fundamentally collaborative, with different perspectives helping make problem solving easier and the idea generation process broader and more radical. Research published by the CBI (Confederation of British Industry) found that, since the economic downturn, 76 per cent of business leaders had been shaken by concerns over their suppliers. This concern has led to 68 per cent of firms saying they want to strengthen relationships with suppliers over the coming years. Outward-facing supply chain linkages are a key source of idea generation and a vital component of the innovation mix.

Businesses can also look beyond the supply chain. NESTA’s Corporate Connections programme has worked with hundreds of organizations including numerous multinational corporations, universities, start-ups and social ventures.4 Two of the companies taking part in the Corporate Connections programme – McLaren and NATS – have begun a major new business collaboration as a result of the programme. NATS, the UK market leader in air-traffic control services, has adapted race control computing developed by Formula One race team McLaren to aid the management of aircraft on the ground. This venture into Airport Collaborative Decision Making (A-CDM) software could significantly enhance air-traffic efficiency and be marketed on a global scale. The basis of these collaborations is that open innovation provides access to new ideas, solutions and markets.

Getting it right Those companies that get it right will have a disproportionate impact on the economy as a whole. Just 6 per cent of the UK businesses with the highest growth rates generated

 6 The Innovation Premium _____________________________________________________________________________

half of the new jobs created by existing businesses between 2002 and 2008. These businesses, which came from every sector of the economy and from across the entire country, all shared one thing in common: they were far more likely to be innovative, and this innovation was a source of growth. Innovation is starting to look less and less like a luxury. It is part of a company’s growth toolkit. Innovation, be it in terms of product, service or organizational innovations, should be at the forefront of every entrepreneur and businessperson’s agenda.

Notes 1 

NESTA (2009) The Vital 6%: How high-growth innovative businesses generate prosperity and jobs, NESTA, London. 2  NESTA (2007). Hidden Innovation: How innovation happens in six ‘low innovation sectors’, NESTA, London. 3  NESTA (2009). The Innovation Index: Measuring the UK’s investment in innovation and its effects, NESTA, London. 4  For further information about NESTA’s Corporate Connections programme please see our website: http://www.nesta.org.uk/areas_of_work/economic_growth/corporate_open_innovation/corporate_ connections.

About the author Jonathan Kestenbaum is Chief Executive of NESTA, the National Endowment for Science, Technology and the Arts, a unique body with a mission to make the UK more innovative. NESTA invests in early-stage companies, informs and shapes policy, and delivers practical programmes that inspire others to solve the big challenges of the future. Further information about NESTA can be found at www.nesta.org.uk.

7 

1. Wings (Pectoral fin) 4. Caudal fin

5. Dorsal fin

3. Pelvic fin

Exocoetidae (Flying Fish)

2. Gill covers

Your innovations will fly with MIH To survive and to thrive, a fish learnt to fly. That's effective innovation and it created a very different fish. At MIH we can help you innovate faster and more effectively . Using our unique MIH Toolkit, we focus hard on fewer, better ideas. First, we identify insights into your consumers' attitudes and behaviour. Based on those insights, we GENERATE high quality concept ideas. We EVALUATE them quickly using our interactive voting system. We then DEVELOP the winning ideas into consumer concepts and DELIVER well thought-out, new product ideas to you. MIH was founded by ex-client and ex-agency marketing The MIH Toolkit professionals. We understand consumers. This understanding can help your new product ideas fly. And save you time and money. Contact Tim Nicol now for more details. T. +44 207 379 3340 M/SMS. +44 7803 050108 [email protected] www.mihcentre.co.uk ©The MIH Centre Ltd 2010 ®The MIH logo and QBlast are registered trademarks.

 8



1.2

Opening up innovation

Proudly found elsewhere. Innovation is becoming a two-way street, explains Tim Nicol at Make Innovation Happen.

Innovation itself is undergoing change. It’s opening up. New ways of identifying, developing and delivering new ideas and product developments are changing the way brands and businesses innovate. ‘Open Innovation’ is the umbrella term for this more outward-facing approach to innovation, and it covers more than just ‘seeing what’s out there’. Chances are your competitors are using or considering Open Innovation, whether they are big corporates or SMEs; they think that competitive advantage increasingly comes from the outside – do you? In this chapter we look at what Open Innovation is (and what it isn’t), what it could do for you and what some of the pitfalls might be.

Rationale The pressure to innovate has never been higher and the need to manage the process efficiently and effectively has never been so great. The mantra of ‘doing more with less’ has driven the resource and activity planning of most R&D divisions in the last 10 years, not to mention the last two. However, innovation is the key driver of growth for most businesses in most market categories, large or small. Significant innovation can drive market growth by attracting new users. In flat markets, gaining share is the only way to drive sales, and innovation that provides a better solution to a consumer need is generally preferable to cutting prices or increasing promotion spend.

______________________________________________________________________________ Opening Up Innovation 9 

P&G: Connect and Develop(sm) Procter & Gamble is not only the world’s largest packaged consumer goods company, with 23 $1-billion-plus global brands; it invented brand management and is now widely regarded as the leading exponent of Open Innovation (OI). P&G has achieved spectacular sales growth in the last 10 years in tough consumer markets and ascribes much of this growth to OI. In 2000 P&G’s then new CEO, A G Lafley, set an astounding goal for the hitherto inward-facing and secretive corporation – 50 per cent of all innovation was to be generated from outside the company. P&G’s argument was (and still is, under a new CEO) that, even with around 9,000 well-resourced and qualified research and development professionals globally, there were as many as 1.8 million similarly resourced and qualified individuals in the outside world, many of whom could help P&G to come up with game-changing innovations. P&G established the ‘Connect and Develop’ programme, and it has so far been responsible for such innovations as Olay® Regenerist, Febreze® Candles, and the Oral-B® Pulsonic® Toothbrush, among others, along with a string of alliances and collaborations that have created a ‘two-way street’ of intellectual property. P&G has, by its own admission, gone from being the inventor of ‘not invented here’ (NIH) to the main proponent of ‘proudly found elsewhere’, and now more than 35 per cent of its new products in the market have elements that originated from outside P&G, up from about 15 per cent in 2000. According to a P&G-authored article:1 Our R&D productivity has increased by nearly 60 per cent. Our innovation success rate has more than doubled, while the cost of innovation has fallen. R&D investment as a percentage of sales is down from 4.8 per cent in 2000 to 3.4 per cent today. And, in the last two years, we’ve launched more than 100 new products for which some aspect of execution came from outside the company. Five years after the company’s stock collapse in 2000, we have doubled our share price and have a portfolio of twenty-two billion-dollar brands. Little surprise then that many other FMCG companies have followed P&G’s lead, and now corporates such as Nestlé, GSK, Unilever, Kraft, Cadbury and Reckitt Benckiser have OI websites with processes and resources in place behind them to seek and evaluate ideas from outside their businesses. Technology-driven businesses and software houses have arguably been leading the curve for many years with the practice of ‘open sourcing’ and external collaborations, especially with universities, but the widespread adoption of true Open Innovation by consumer goods companies is something else.

Definition The leading writer on OI is Professor Henry Chesbrough, of the Haas School of Business at the University of California, Berkeley. He defines Open Innovation as: ‘A paradigm that assumes firms can and should use external ideas as well as internal ideas and internal and external paths to market, as firms look to advance their technology’. In

 10 The Innovation Premium ___________________________________________________________________________

his three books and many presentations on the topic he clarifies that OI is not the same as open-source development of software like Linux and Java and it’s not just appointing a university to work on a research project. Nor is it just about outsourcing R&D – P&G added to its own internal R&D capability by going outside as well as continuing to research and develop inside. OI is the collaborative development of ideas and technology with people and companies outside your own. It is working with partners not just to invent, but to innovate, that is, to bring the ideas to market all the way down the supply chain. It encompasses the seeking of ideas, the development of concepts, the production of prototypes and products and crucially also the external trading of ideas from inside to out. That is to say, any ideas or projects that for whatever reason don’t make it through the internal development funnel can be sold on outside the business and royalties or licence fees generated as a return on the R&D investment.

Benefits of OI More ideas. Most obviously, as a small or large marketing-led company, you get zz access to many more ideas and other people’s creativity. No one has a monopoly on ideas, and just by accessing a wider constituency you harness more brainpower. The web generally and Web 2.0 applications in particular have enabled this, and a phenomenon called ‘crowdsourcing’ has evolved now that individuals and corporates can communicate effectively with one another. You can see examples of this in activities that have at least a twist of PR to them – Pepsico’s Walkers Crisps inviting consumers to invent new flavours, and Unilever brand Peperami firing its long-established ad agency and instead running a crowdsourcing competition to find its next big advertising idea for a prize of $10,000. Where this becomes another category of Open Innovation called ‘Co-creation’ is a moot point, but in general this latter term refers to consumers making a major input to the design and delivery of their personal product and in so doing gaining value from the experience. Lego’s Design by Me (formerly Lego Factory) is the classic example, where consumers design new models online and Lego make them and ship them complete with custom boxes and make-up instructions. Better ideas. The chances are that bigger, better and more disruptive ideas will come zz from outside the organization. The human mind works by taking short cuts and ‘boxing off’ complexity to the extent that if you are working daily in a company your thinking will follow conventional, straight lines and you need at least some creative training and provocation to think outside the box. Collaborators don’t have to be told to think outside the box; they already live outside the box. In addition, most disruptive ideas and new consumer insights come from making connections between two previously unconnected thoughts or observations. The random nature of suggestions from a wide constituency gives an organization a much higher potential to make the kind of unique magical connection that has the potential to drive a genuinely disruptive innovation. Speed. Working with others can speed things up – at least if they are committed to zz speed themselves, and they probably are. Outside collaborators are likely to be more single-mindedly focused on an idea, and as well as representing additional resource

_____________________________________________________________________________ Opening Up Innovation 11 

for the organization that’s seeking them they are probably further advanced in a particular area of development than the client organization. An ideal collaborator is one who is just further down the path than you are. Risk reduction. By harnessing the know-how of others an organization can reduce zz the people investment needed to bring about an innovation and deploy internal resources elsewhere. Additionally, by involving more brains you reduce the risk of later discovering something you should have thought of. Chesbrough talks of using ‘smart people outside the business’ – which can give rise to the challenge of having to admit internally that not all the smart brains are inside the business. Wider networks. Networks are an asset, and not just for people, but for companies. zz Unexpected benefits come from being in contact with other people or businesses, and access to their networks in turn allows a business to benefit from the cascade effect into a broad community of valuable contacts and connections.

Issues Intellectual property. There are clear potential issues around IP. Not everyone is zz prepared to disclose ideas without some upfront agreement on the legal and commercial relationship and any consequences of development, but at the same time it is easy to tie the process up in legal agreements and stifle the creativity at its heart. Companies seeking ideas or OI collaborations will generally make their IP position clear and public via their websites. Some offer no confidentiality, some insist on pre-existing patents, some use intermediaries and some rely on a degree of trust on both sides, which is the kind of unconventional, entrepreneurial approach that makes OI such a change in corporate behaviour for many. Collaborators will in many cases need to take advice and ultimately weigh the risk and the reward. Culture and personalities. Some corporate cultures just can’t handle the idea of zz allowing outsiders to share their innermost secrets, and some inventors will never share their ideas with anyone until they are sure of a watertight agreement that guarantees them riches. Private companies and independent entrepreneurs tend to be driven by principles of ‘going solo’, and OI will be a step too far for some, although some of the historically more private corporations are at least appointing internal managers responsible for Open Innovation, which is in itself a measure of the spread of the practice. There may also be issues of individual personality clashes between corporate personality types and SME or entrepreneur types that get in the way of developing genuine mutual trust and cooperation. Internal resistance. Typically OI can be seen by internal R&D management as more zz of a threat than an opportunity. If its implementation and communication are mishandled or misdirected, people can feel threatened or the subject of implied criticism. The ‘NIH’ barrier to external ideas may extend to the process of OI itself, and it may be seen by some as just another management buzz-phrase, although the evidence points to it being something more fundamental than that.

 12 The Innovation Premium ___________________________________________________________________________

Consequences A strategic approach. From the SME or corporate ‘seeker’ point of view, an initiative zz on the scale of OI, with all the attendant implications for corporate behaviour, process and systems, risks, and resource allocation, clearly cannot be undertaken lightly. OI initiative has to come from the top, with commitment and support throughout the business. It has to be implemented in a strategic context, supported by a process and legal agreements that not only protect the seeker but offer genuine mutuality to the supplier. It is easy to make a judgement about how ‘fair’ a corporate might be by looking at its OI microsite. Changing relationships with corporates. The wider impacts of Web 2.0 and corporate zz social responsibility are driving a change in relationships between corporates and all their stakeholders. Consumers expect to have more involvement in what goes on inside businesses now, and the media feed more and more business news and comment that fuels the perception of a corporate brand. OI is part of that move towards democratization of consumer-facing businesses, and the direct communication that accompanies it can only accelerate the growing trend in corporate transparency. Role of intermediaries. An industry of intermediaries has become established to zz facilitate the relationships and transfer of IP between seekers and suppliers. Businesses like InnoCentive, NineSigma, Yet2.com and YourEncore are the corporate equivalent of dating agency, wedding planner, minister and marriage guidance counsellor rolled into one, and can provide matchmaking and IP solutions that unlock OI for many corporates. Other suppliers can facilitate the outward transfer of concepts or off-strategy IP from one corporate to another or to a venture capitalist. There is even an online auction provider for trading IP, Ocean Tomo, which styles itself as an Intellectual Capital Merchant Banc® firm. Intermediaries such as this have effectively created a global market for marketable products and concepts, and the facility for businesses to generate some return from IP that they cannot or will not commercialize themselves. At the very front end of the process, ingenious propositions like ‘Wiki Solutions’ and ‘Ideas While You Sleep’ now organize global groups of creative problem solvers to generate new product ideas or solutions to intractable problems.

Conclusion In the future we can expect further adoption of Open Innovation strategies by more consumer goods companies as well as technology players and, in time, by more SMEs as they become familiar with the concept and realize the advantages of access to an IP exchange. IP lawyers and advisers will always be kept busy protecting and monetizing IP and facilitating exchanges. And the next time you have a ‘eureka moment’, you no longer have to keep it to yourself.

Note 1 

P&G (2006) Connect and develop: inside Procter & Gamble’s new model for innovation, Harvard Business Review, 84 (3), March.

_____________________________________________________________________________ Opening Up Innovation 13 

About the author Tim Nicol is Managing Director of MIH–Make Innovation Happen. He is a ‘rounded and grounded’ marketer with an international blue-chip FMCG background and his own successful marketing services business. His corporate experience was gained over nearly 20 years at Mars, where he developed and launched the hugely successful Dolmio® brand, and he was subsequently responsible for food marketing strategy and NPD activity across 22 markets. He established MIH in 2002 as an innovation services company to help consumer goods clients all over the world deliver efficient and effective NPD and innovation. Tim is a business studies graduate and a member of the Chartered Institute of Marketing, the Market Research Society, and the Product Development and Management Association. He is a sought-after conference speaker and a Business Champion for the East Midlands, and has published articles on innovation in the trade press. Contact MIH (tel: +44 (0)20 7379 3340; e-mail: [email protected]; website: www.mihcentre.co.uk).

Business Innovation

Fresh A

Approach

to Innovation Support

Are you looking for a new profitable investment prospect? or Seeking to expand your product range?

Yes.... then we can help. Contact Us:

Tel: +44 1443 845500

www.business-support-wales.gov.uk

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1.3

Innovation support

To stay competitive, businesses must put innovation at the heart of their strategy, says Phill Allen at the Welsh Assembly Government, where he is developing new forms of innovation support.

Innovation plays a vital role in maintaining and improving the competitiveness of a business. No matter whether that business is a lone inventor or a start-up, a small business focused on the local economy or a well-established business with a significant turnover and global reach, developing new products and processes and successfully bringing them to market are the route to success. Yet innovation is not easy. In a difficult economic climate, more and more businesses are focused on the day-to-day challenges of running the business. They rarely have enough resources to do everything they want and often lack expertise in areas that are not core to the business. Support for innovation and growth, particularly in a knowledge-based economy, is essential to these businesses to ensure they are in the strongest position possible to drive their success.

Maximizing your intellectual property Every business owns some form of intellectual property (IP). However, far too few know how to protect these intellectual assets and exploit the value they bring to the business. The first step is to identify what the business has that is of value and then to put a plan in place to protect those valuable assets. One business that is proactively managing its IP is PS Inventions. Peter Brooks invented Skiweb, a special strap to carry awkward ski equipment, because he was

 16 The Innovation Premium ___________________________________________________________________________

fed up struggling to carry sets of skis and poles for all the family on skiing holidays. Peter and his partner Sian quickly discovered that inventing and developing the product was the easy part. With Business Innovation support, Peter and Sian followed a step-by-step process that took him through each stage of the development process in a structured way. This included the all-important patent application process and protection of the trademarks, enabling Peter and Sian to build the business from a single product to an extended range of successful products. Another example highlights how important protecting IP is for businesses developing products based on new technology. Solus Sensors specializes in innovative sensor solutions for the chemical, petrochemical and water industries. Solus Sensors’ director Dr John McCormack explains: Developing our own technology meant we needed to protect the intellectual property and apply for patents. This can be an expensive and complex process, which for a small company with limited resources is tough. We had assistance to apply for two IP grants – one for a UK patent and a second for a PCT patent.   We also had help to draw up a grant proposal for a feasibility study of the new technology. Having successfully completed this, we are now drawing up proposals for developing a working model of the new technology.

Good design is good business Thomas Watson, President of IBM, famously said, ‘Good design is good business.’ But what is ‘good design’ and how does it make for ‘good business’? On a functional level, good design implies a product that is ‘fit for purpose’, performs well and is reliable and cost-effective. On a deeper level, individual aspects of design such as colour, texture and shape will subconsciously influence the receiver’s assumptions and opinions. Designing attractive products that look ‘fit for purpose’ and that accurately communicate a product’s attributes gives a company competitive advantage at the point of sale. But good design must achieve much more than this. High-quality design results in more reliable products with fewer returns or less service time. It reduces production cost and time and improves profitability, whilst simultaneously building the reputation of a manufacturer and its brands. One business that sought support to consolidate good design into good business is magnetic nerve stimulator business Magstim. Magstim maintains a strong commitment to R&D and product improvement and recognized that without good design it would struggle to compete and sell products in the highly competitive global medical technology market. Everything that the company produces – its equipment, literature, website and even exhibition stands – must convey the message that the products and services are of the highest quality and reliability and are safe, whilst also being technologically superior to the competition. This cannot be left to chance, and Magstim has put a huge amount of effort and resource into getting that message right – an investment that has paid off and positioned it at the leading edge of its market.

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Supporting manufacturing The challenges facing today’s manufacturers are increasingly complex. Stiff global competition, increased uncertainty and rapidly changing markets mean innovation in products, processes and technology is essential to growth and competitiveness. For one South Wales manufacturer, specialist support has resulted in a more positive positioning for its future. This well-established manufacturer had recently centralized manufacturing, administration, sales and distribution into a new state-ofthe-art facility. At the same time, the company upgraded plant and machinery, logistics and IT capabilities. With cutbacks in the sector due to the economic climate, the business was eager to take full advantage of the new facilities. An initial diagnostic helped identify areas of the business that needed immediate attention, as well as highlighting areas where the company had clear strengths. The company then had support to develop a prioritized action plan, which covered: control of manufacturing costs, particularly energy-related costs; zz improvement in the control of the supply chain; zz further improvements in manufacturing quality and manufacturing efficiency; zz introduction of additional key performance indices; zz development of a strategic approach to the current business climate. zz With a clear focus on what action to take and when, and continued support for further funding, the company is now well positioned for a positive future.

Increasing opportunities for commercial success Developing new products and processes and successfully bringing them to market are vital if businesses are to remain competitive and continue to grow. However, research reports continually highlight the alarmingly high failure rate of new products in the majority of industries. By developing a more proactive approach and bringing investors and businesses together at a much earlier stage in the new product development process, the opportunities for commercial success of a new product are significantly increased. On one side the Business Innovation Project connects with investors, potential customers and commercial partners to find out what they are looking for and to introduce them to a range of exciting and innovative products, technologies and processes being developed by local businesses. On the other side, Business Innovation is in contact with individuals, businesses and academic institutions in Wales that are developing new products, technologies and processes, providing them with up-to-the-minute market intelligence to help them direct their new product development to more appropriately meet the needs of the market. This unique approach demonstrates a win–win position with a constant flow of innovative, cutting-edge ideas that can be developed into commercial reality more quickly, more often and with a higher potential of success.

 18 The Innovation Premium ___________________________________________________________________________

Summary To stay competitive, businesses must put innovation at the heart of their strategy. Whilst the innovation process starts with an idea and ultimately leads to a successful and profitable business, it is not a linear sequence, and business support needs to be flexible and available at different stages of the process. The results are a support environment that increases the ability of companies to innovate and develop new, cutting-edge ideas, and achieve greater success in translating those ideas into commercial reality.

About the author Business Innovation is a pioneering programme that is part of the Welsh Assembly Government’s Flexible Support for Business. It is designed to help businesses turn innovative ideas into commercial realities. The programme is highly targeted and provides support in all aspects of the business – from developing new products and managing intellectual property assets, through design issues and manufacturing, to full commercialization. A highly experienced team of specialist managers with extensive industrial experience undertake a review of the business to identify opportunities for innovation and exploitation of intellectual property. Businesses are then directed to specialist support or expert advice from the private sector or universities or colleges. Funding is also available for research and development into new products, processes and technologies. Phil Allen is Senior Programme Manager, Technology, Science and Innovation for Business at the Welsh Assembly Government and has responsibility for innovation support to businesses throughout Wales. He is a qualified electrical and electronic engineer, who worked for Siliconix for 12 years primarily in semiconductor design. In 1991 Phill joined Shanning Laser Systems (SLS) as Manufacturing Manager and was part of an MBO where he became Manufacturing Director responsible for the design and manufacture of medical and industrial laser systems. During his time at SLS Phill worked on major development contracts with United Distillers, M & S and Vauxhall and was project leader for the Eureka 113 carbon monoxide laser programme in Cambridge. Phill joined the Welsh Development Agency in 1996 as one of the first Innovation and Technology Counsellors (ITCs) for Wales and was promoted to ITC Programme Manager four years later. In 2001 Phill worked on a project with the then Welsh Office to evaluate the support for lone innovators in Wales and as a result created the Wales Innovators Network (WIN). In 2002 Phill completed a Master of Science degree. To find out more contact Flexible Support for Business (tel: +44 (0)1443 845500; website: www.business-support-wales.gov.uk/innovation).

19 



1.4

Intellectual property for innovators

Miles Rees, Business Outreach Manager at the Intellectual Property Office, describes the national and international architecture for protecting IP rights.

Businesses survive by being good at what they do, which often involves doing things in original or distinctive ways. But success inevitably leads to imitation, and most small firms need to take some steps to minimize the danger that imitation can cause harm to their business interests. The danger of a business losing control over the economic value of its assets is likely to be greater when those assets can’t be seen or felt – in other words, when they are intangible. Businesses protect their intellectual property (IP) because it offers them an edge over their competitors, excluding others from doing something that interferes with or competes against a part of their business. IP can also offer potential additional revenue sources such as licensing someone to manufacture a product, or leasing a name, logo, slogan and so on to another organization. Certain businesses, because of the way that they operate, may need to pay particular attention to IP matters: for example, those firms involved in franchising will always need strong IP protection because franchisees are expressly purchasing the right to use trademarks, copyright protected material and occasionally patent protected inventions in the course of their business.

 20 The Innovation Premium ___________________________________________________________________________

The national and international IP systems The UK intellectual property system, which is set up by legislation to operate the system of granting registered rights (patents, designs and trademarks) in the UK, offers businesses methods of protecting their ideas, brands and creative works whether they’re looking to secure their place in a local market or have global aspirations. Applying for registration of a right for the first time creates a ‘priority right’, which lasts for six months in the case of trademarks and designs and 12 months for patents. The priority right enables the owner to apply for like protection outside the UK, with the later overseas application being backdated to the original filing date. The Intellectual Property Office (IPO) (www.ipo.gov.uk) cannot grant protection outside the UK, but protection in the UK can also be obtained via international organizations – the European Patent Office in respect of patents (www.epo.org) and both the European Community Trade Marks and Designs Office in Alicante and the International Bureau of the World Intellectual Property Organization in Geneva for trademarks and designs (www.wipo.int).

IP rights for business Patents Patents protect products and/or processes that are new and inventive and that can be used in industry. They enable their owners to stop others using the process or products protected whether or not the owner is using the process or using the product, and whether or not the ‘infringer’ is a direct competitor or is simply a player in the marketplace. A patent gives its owner the right to stop others producing, using, importing or selling the specific items that fall within the definitions protected by the inventor or his or her company. It is worth noting that patent rights are territorial, so if a patent is granted in the UK the holder will have rights in the UK only. However, if protection is required in other countries, an application can be made for a patent in that country or through the European Patent Convention (www.ipo.gov.uk/p-europe) or the Patent Cooperation Treaty (www.ipo.gov.uk/types/patent/p-manage/p-abroad/p-worldwide/p-pct.htm).

Key facts The invention must not be made available to the public before an application is filed. zz Discussions held with a lawyer or attorney, or those held on the basis of a confidentiality agreement or non-disclosure agreement, don’t make the invention ‘available’, but selling, exhibiting, advertising or telling your friends in the pub about it will probably do so. UK patent filing fees at the Intellectual Property Office start at £170. zz On zz average, patents take between two and three years from filing to grant. A patent, or an application for one, can be bought, sold or licensed. zz Patents last a maximum of 20 years. Annual renewal fees are payable from the zz fifth year.

________________________________________________________ Intellectual Property for Innovators 21 

The IPO can refuse to grant patents if the application relates to certain types of zz activity, for example the performing of a mental act, playing a game or a mode of doing business; a scientific or mathematical discovery, theory or method; a medical treatment method; or a computer program.

Trademarks Any sign that is used to distinguish the goods and services of one undertaking from those of another trader, for example a word, logo, slogan, picture or combination of these functions, can be protected as a ‘trademark’. While direct imitation can sometimes be restrained by using the ‘common law’, it’s much more effective to register a formal protection. To be eligible to register, a trademark must be intrinsically capable of being distinctive in relation to the goods and/or services that are referred to in the application to register the mark. Also, they must not be the same as (or similar to) any earlier marks on the register for the same (or similar) goods or services – though if the earlier owner does not object you may still be able to secure registration. When you apply, you must specify the goods and/or services you are proposing to use the mark on, and which classes they fall into. There are 45 different classes of goods and services, ranging across chemicals in class 1, computers in class 9 and financial services in class 36. The owner of a trademark registration has the legal right to take action against anyone who uses an identical or similar mark on the same or similar goods and services to those that are set out in the registration. Trademarks can be protected in the UK using the Intellectual Property Office, throughout the EU using the Office for Harmonization in the Internal Market (OHIM) (www.oami.europa.eu) or in individual countries worldwide.

Key facts Trademarks must be distinctive for the goods and services being protected. zz UK trademark filing fees at the Intellectual Property Office start at £170 for one zz class; add £50 for each additional class. Trademark registrations can be renewed every 10 years, with no maximum life. zz Registrations will be refused by the IPO if the marks would not be distinctive, eg zz where marks purport to describe the goods or services, or any characteristic of them, or refer to the quality, quantity, purpose, value or geographical origin of the goods or services. Marks that contain offensive words or contain specially protected emblems such as the Red Cross or Olympic symbols may also be refused registration.

Designs Design relates to the physical appearance of an item or part of it, and can apply to industrial as well as handicraft items. This IP right is not concerned with how the item works but concentrates on the appearance resulting from the features of the product or the way it looks. Contributory features to a product’s appearance include lines, contours, colours, shape, texture and material.

 22 The Innovation Premium ___________________________________________________________________________

Registered community design (RCD) offers like protection in all of the EU member states. This protection can be renewed every five years up to 25 years. Applications are processed by OHIM, to which formal representations of the design and the appropriate fees should be sent. In the UK certain designs are automatically protected against copying. Threedimensional surface decoration of a product and any 2D pattern such as a wallpaper or carpet design do not qualify for protection. This so-called ‘design right’ lasts for up to 15 years from creating the design, but often expires earlier – at the end of the year in which the 10th anniversary of the first marketing of articles made to the design occurred. It is infringed only by an act of copying, ie there must be a ‘chain of copying’ between the alleged infringement and the original. In contract, simply showing the same overall visual impression is sufficient to infringe a ‘registered design’. This can last much longer (up to 25 years), but does have to be secured from the Design Registry, where you will pay a fee for registration. You are allowed up to one year from first disclosing your design publicly before you have to register it.

Key facts Registration can be refused if, when you apply, more than 12 months have passed zz since the design was first publicly disclosed. The design is dictated only by how the product it relates to works; parts of zz complicated products that cannot be seen in normal use (for example, vehicle engine spare parts or the parts inside a computer) are not registrable; neither can you register a design that is offensive or that reproduces certain national emblems or protected flags. To secure a valid registration, the design must be new, ie it must not give the same zz impression to the viewer as any design that has already been made available to the public. zzRegistered designs can be renewed every five years up to a maximum life of 25 years. UK design fees at the Intellectual Property Office start at £60 for one item. zz Community design fees at OHIM are 350 euros. zz

Copyright Copyright is an IP right that arises automatically when someone engages in the expression of an idea. The right controls copying of that expression (but not copying the idea itself). For example, anyone can write a story based on the idea of a boywizard, but text or illustrations from other books about the same subject will (unless they were published a long time ago) be protected against copying by copyright. Copyright protects a drawing from which an item might be made and the item itself, for example a sculpture, but it does not protect the process by which you make it. Copyright also protects sound recordings, films, broadcasts and original artistic, musical, dramatic and literary works, including, for example, photographs, sculptures, websites, computer programs, plays, books, videos, databases, maps and logos.

________________________________________________________ Intellectual Property for Innovators 23 

Owning a copyright enables the owner to control how the copyright is used; if you want to use someone else’s copyright material in your business, you must normally get permission either directly from the owner or from an organization that represents groups of copyright owners that offers blanket licences to users, in return for the payment of royalties.

Key facts Copyright is an automatic right that you do not need to formally apply or pay for. It zz arises as soon as the work is ‘fixed’, eg written down, recorded or stored in a computer memory. Under international copyright conventions, material created by UK nationals or zz residents is protected in many other countries. Contractors retain copyright in their works even if they are paid for the work they zz do. To acquire the copyright the business commissioning the work must secure a written assignment of the copyright. zzTo make others aware that material is protected by copyright it is best to use © followed by the name of the copyright owner and the date when it was first protected. Depending on the nature of the work that gave rise to the copyright, the protection zz given may last from 25 years from when the work was created up to 70 years after the death of the person who created it. Copyright will not protect names, designs or functions of an item. zz

IP Healthcheck tool To help businesses and their advisers identify, protect and commercially exploit their IP, the Intellectual Property Office has created an online IP diagnostic tool. The tool is designed to provide its users with a simple step-by-step approach to what can be a very confusing subject and, having completed a series of questions, users receive a report summarizing the IP they own and the action they now need to take. The IP Healthcheck online tool is free to use and will help answer these questions. It’s broken down into the four IP elements, covering patents, trademarks, designs and copyright, and includes advice on licensing intellectual property and managing confidential information. Find the tool at www.ipo.gov.uk/iphealthcheck.

 24 The Innovation Premium ___________________________________________________________________________

Licensing/valuing material Licensing of intellectual property is important to all sorts of businesses – not just those in the technology sectors. If you want to use someone else’s IP, you will need to get a licence and agree the terms with the owner, but before you consider entering into a licensing agreement you’ll need to know how much the IP is worth. There are various methods of valuing intellectual property, all of which are explained in the IPO booklet ‘Agreeing a price for intellectual property rights’, but it’s important that both parties recognize that the value of intellectual property rights depends on the circumstances at that time and place. Valuation checklist It’s important to look at: the nature of the IP rights; „„ the purpose for which they will be used; „„ the potential market for them; „„ the business of the seller and buyer; „„ their competitors; „„ all the details of the transaction between the buyer and the seller; and „„ why each wants to do the deal. „„

Lambert Collaboration Toolkit Many businesses recognize the benefits to be gained from working in collaboration with universities but are concerned that ownership of their IP will be lost and they will not be fairly compensated for their ideas. The Lambert Toolkit and model agreements were created to help industry and universities maximize innovation and better understand the issues involved in handling IP under a number of different collaborative situations. The Lambert website offers five model agreements for academic and industry partners, as well as four model consortium agreements that cater for a range of scenarios in research projects that involve several parties. Find more about the Lambert agreements at www.innovation.gov.uk/ lambertagreements.

25 

new business opportunities in sustainable energy markets As fossil fuel sources become gradually more scarce and the need to maintain competition in energy costs remains, the demand for renewable energy in all its forms is set to continue rising. And now is the time for Northern Ireland businesses to embrace and exploit the resulting commercial opportunities. The global renewable energy sector is a multibillion pound market, rising on average, 24 percent year-on-year. Governments across the world have committed to reducing greenhouse gas emissions,

with the UK government committed to reducing emissions by 80 percent below 1990 levels by 2050. Sustainable energy can give your business the competitive edge – no matter what your industry sector or how many employees you have. It is one of the fastest growing and most diverse global, commercial markets, and a driver of long-term economic prosperity. If you are interested in finding out how to get new customers; develop new products and services; achieve growth through innovative solutions; and how a focus on energy and the environment can deliver real business benefits, then you need to talk to us.

Contact our Sustainable Development Team:

T: 028 9069 8868

E: [email protected]

Project part financed by the European Regional Development Fund under the European Sustainable Competitiveness Programme for Northern Ireland.

 26



1.5

Realize what you have

You cannot touch them or feel them, but it is an eye-opener to see how much cash can be lost and how many opportunities missed by failing to pin down your intellectual assets, says Ian Wilkinson at Invest Northern Ireland.

Intellectual assets (IA) are things that a business may not even know it has. Intellectual property (IP), which we hear a lot about, is an important asset, but often it’s only part of the story. In other words, IP is often merely a subset of IA, which covers much broader, more valuable, information held throughout the company and by its employees. In this chapter I’ll use the term IP to indicate the more formal and registrable forms of protection, namely patents, trademarks and registered designs. I’ll use the term IA as a collective term for everything of value (including IP) to a company, excluding the well-defined asset classes such as property, land, plant, machinery and equipment, vehicles and cash. IA also includes many things that are intangible, such as: brands; zz websites and domain names; zz goodwill; zz licences (licensee and licensor situations); zz partnerships and business alliances (formal and informal); zz know-how (technical); zz know-who (customer lists, supplier network, stakeholders, trade association zz membership, relevant committee posts); trade secrets; zz contracts; zz

______________________________________________________________________________ Realize What You Have 27 

tenders (especially those we’re confident about); zz IP zz (patents, trademarks, designs, copyright).

How should you start? Before a company can manage its IA, it has to understand how much it has and how valuable (or not) it is. Like other economic development agencies, Invest Northern Ireland has introduced a new service to identify IA. The first step in this programme takes the form of an audit, where an IA expert sits down with a company to look at what form IA may take and the perceptions around its value. Because SMEs make up such a large chunk of Northern Ireland’s economy, we have been working mainly with them, conducting 16 audits so far. The opportunities and hard cash actually lost by some companies through failing to manage their IA were a real eye-opener. For obvious reasons I won’t be naming these companies, but I will outline some of the actual problems created by their not having addressed IA management (IAM) in a more formal way.

What can go wrong? Company A and Company B both operated in the same domestic market sector. Company A had tried to register www.companyA.co.uk but couldn’t get it. It did, however, get a not-so-good variant. It wasn’t overly worried about this until it got calls from customers who advised it that they thought they were buying Company A’s products until they arrived by post. The customers had been a bit suspicious as there was no reference to Company A on the website. What had happened was that Company B had maliciously registered www.companyA.co.uk and redirected traffic from this site to its own site. Company A stopped Company B (via Nominet, www.nominet.co. uk) from using the redirect website and successfully sued for damages. So the moral is, check all similar-type domain names for opportunists and cyber-thieves! Another company on our programme appeared very conscious of its intellectual assets – it had even capitalized on its well-established brand by purchasing personalized car number plates for senior managers that advertised the brand. A complaint on UK trademark infringement grounds, however, meant the company had to undertake an expensive rebranding. There is evidence that the initial usage of the logo by the company pre-dated the UK trademark registration, but the company did not wish to get involved in even more expensive litigation. This is a case where the basic ingredients needed to be sorted (trademark registration) before the icing was added (personalized number plates)! This brings out a very important issue about specific IP and broader IA – it tends not to dominate the thinking of a company, especially at start-up when it has many other concerns. One of the most IP-astute companies (according to the Intellectual Property Office, IPO, which audited it) didn’t get it altogether right either. The 220-strong company, a software developer with several registered trademarks, a patent and significant copyright,

 28 The Innovation Premium ___________________________________________________________________________

discovered through the IA audit that it didn’t own the copyright to its website – it hadn’t been assigned from the web designer. The company has since secured the copyright. This is a surprisingly common oversight by both small and more sophisticated companies.

Things can go right! On a more positive note, thankfully there were several cases where companies benefited greatly by linking IA to business strategy. Willis, a small enterprise, designs, manufactures and distributes the Solasyphon, a highly efficient solar panel heat exchange unit that can be easily connected to a domestic hot water cylinder. The Solasyphon, owing to its relatively low cost, ease of installation and stratification effect on hot and cold water (meaning that usable hot water, at say 60 degrees C, is available within an hour of sunshine), has been a success in the UK and Ireland. The company successfully applied for a UK patent and a Community trademark. The seasonality of the product – selling mainly from April to August in the British Isles, encouraged Willis to develop a business strategy to exploit its IP in the southern hemisphere. Patents and trademarks in Australia and New Zealand have allowed the company to set up several agencies in these countries, which see their main sales in the run-up to Christmas, smoothing out the company’s production and sales peaks. Another company pulled IA into one, easily understood package, achieving a much greater valuation than would have been achieved using only its IP (trademark and copyright). It received the investment for which it was looking, for approximately 15 per cent less than it was prepared to give up in return!

Is IA management expensive? All of the participants on our IAM programme said it was expensive not having IAM! Is a comprehensive, professional and low-cost IA audit a possibility? The 16 companies on our IAM programme believe so. Here are three ways we got audits done free of charge for companies: 1. The IPO carried out IA audits free of charge as part of a pilot. While this pilot has now finished, the IPO is extremely approachable and, even if it now charges a small fee, the audit is excellent value for money. The IPO offers totally impartial advice; for example, it recommended several companies apply for a Community trademark rather than a UK mark – taking food out of its own mouth! 2. Using patent attorneys and other IP specialists to carry out an IA audit. If they identify the need for patents, trademarks or registered designs, they are likely to be asked to file them, so gain in that way. 3. In-house – several companies we worked with had some in-house expertise and a lot of interest in IA, having been involved with, for example, filing patents or trademarks in the past. Some useful free websites to help with patent searches include: http://ep.espacenet. com; www.ipo.gov.uk; www.patentfamily.de; and www.uspto.gov/patft/index.html.

______________________________________________________________________________ Realize What You Have 29 

Another way might be to approach your Regional Development Agency – Invest Northern Ireland certainly assists in Northern Ireland (www.investni.com). Some universities, for example the University of Coventry, are getting very interested in this space and, if you’re based in Scotland, the Intellectual Assets Centre, Glasgow, does a lot of work in this area (www.ia-centre.co.uk).

Conclusion I’ve detailed a few problems above that could so easily have been avoided if only a little thought had been given to IA at the right time. Some companies have incurred actual costs because of either oversight or a lower priority being afforded IA. But added to this is the cost of lost opportunity. Don’t get caught out, but rather explore how your IA, aligned with your business strategy, can be made to work for you.

About the author Ian Wilkinson, a chartered mechanical engineer, is the Head of Invest Northern Ireland’s Technical Advisory Unit. The unit, comprising the IA Team as well as engineers and scientists, offers advice to Northern Ireland businesses on a range of technology and product or process development issues including professional, lowcost routes to compliance with legislation, eg CE Marking. Ian has a breadth of product development experience gained over 26 years working both in industry – defence and aerospace – and more recently in Regional Development Agencies.

 30

Developing a patent portfolio takes investment of time, money and effort.

Isn’t it about time you started to realise some of the value of that investment? CPA Global has over 40 years’ experience providing IP services such as Patent Portfolio Optimisation that help corporations strengthen their overall patent portfolio, identify opportunities to monetise patent assets and prune non-core patents. By using Patent Portfolio Optimisation services CPA Global clients are able to realise substantial economic benefits and dramatic returns on investment; whether this is in the form of reductions in patent maintenance costs, identification and protection of key assets or from the sale/licensing of non-core patents that may have significant value in adjacent or emerging technology domains.

www.cpaglobal.com

We help corporations answer 3 key questions: °

What do we really have in our patent portfolio?

°

Where is the real and potential value?

°

What can we do to realise patent value?

CPA Global’s unrivalled expertise in the management of patent assets combined with our network of alliances with global patent brokers and valuation consultants means we can provide expertise and services to help at every stage of the Patent Portfolio Optimisation process whether you require an end to end optimisation service or just need assistance with one specific element.

For more information contact John Pryor on +44 207 549 5501 or [email protected]

31 



1.6

How to maximize the value of your intellectual property

Cut waste? Improve returns? John Pryor at CPA Global reviews techniques for the smarter management of IP.

The Chinese premier, Wen Jiabao, has said on many occasions: ‘Future competition in the world is IP competition.’ If the UK government believes that creativity and innovation will help lead the country out of recession, then they should glance overseas. In 2008, more than 800,000 patent applications were filed with China’s State Intellectual Property Office, by far the largest number received by any patent office in the world. The same year, the US Patent and Trademark Office and the Japanese Patent Office, ranked second and third in terms of application numbers, received about 500,000 and 450,000 patent applications respectively. The European Patent Office received only about 150,000 applications. There is a very similar story for trademarks. At the time of the Great Depression of the 1930s, smokestack industries were responsible for most of the economic value, whereas today intellectual property (IP) has replaced smokestacks as the economic value driver; indeed there are already companies where IP now represents more than 80 per cent of their total worth. Industries that rely on IP, such as pharmaceuticals, IT and entertainment, employ 18 million people in the United States alone, and are expected to exceed the US national average when it comes to future job growth. US IP is valued at over $5 trillion – more than the GDP of any other country. Intellectual property also accounts for more than half of all US exports, helping drive 40 per cent of US economic growth.

 32 The Innovation Premium ___________________________________________________________________________

This growing awareness of the importance of intellectual property rights to the success of business has led to unprecedented growth in IP rights in the past two decades. There have even been some convincing attempts to draw a correlation between patent strength and stock market performance. The Ocean Tomo 300® Patent Index, for example, has outperformed the S&P® 500 by 10.02 per cent, from its inception in January 2007 to 31 October 2009. This performance hints at the importance of assessing patents owned by quoted companies as another indicator of corporate health. There is even talk of the credit rating agencies incorporating some measure of patent strength into their company analyses. In short, intellectual property will play a key role in the economic recovery and the valuation of companies going forward. For many companies, and indeed countries, future economic prosperity depends on intellectual property. However, that doesn’t mean there should be a headlong rush into patent filing. The recession has focused companies on saving costs and optimizing the value of their IP portfolios. They are realizing that the old-style volume game – ‘Patent now and wonder what to do with it later’ – will no longer work. The economic recovery will be led by companies that embrace smart IP management to build high-quality IP portfolios and generate maximum returns on their intellectual property investments. Smart IP management starts at the innovation stage, since quality IP flows from quality innovations. Yet, according to Larry Keeley, CEO of innovation consultancy Doblin Inc, ‘More than 96 per cent of innovation efforts fail to achieve satisfactory ROI by the standards of the companies that sponsor them.’ Structuring your organization so that it orientates to deliver on the market’s requirements through an integrated R&D, business and IP strategy will go some way to delivering winning innovations that are ‘pulled’ by the market rather than ‘pushed’ by the company. The economic downturn is prompting many companies to re-evaluate IP portfolios in order to manage their assets more effectively. In a November 2008 survey, 79 per cent of companies in the UK, Germany and France contacted by law firm Field Fisher Waterhouse said they thought IP was even more important than usual in a downturn; and 68 per cent said it was vital to the growth of their business. Yet 78 per cent of respondents admitted that they did not manage these potentially lucrative assets properly. Just under half the companies surveyed had audited their IP. The costs of filing and maintaining an IP portfolio can be significant and, as a result, IP portfolios increasingly require an integrated IP strategy and careful management to minimize waste and maximize returns. Several years ago Dow decided to assess and group their patent portfolio into three groups: 1) current business use; 2) future business use; and 3) no current or future business use. To their surprise, they determined that 25 per cent of their portfolio of patents had no current or future business use and, by abandoning such patents, they were able to save $40 million! Today, 97 per cent of Dow’s patents are aligned with their business strategy. Interestingly their portfolio size is still the same as it was at the start of the exercise but of much higher overall quality. The State of the IP Industry Survey 2009, commissioned by CPA Global in association with IP Review magazine, showed that, while there is increased awareness at board level of the value of IP as an asset, in-house IP professionals are concerned

________________________________________________________ How to Maximize the Value of Your IP 33 

that increased workloads and cost cutting will result in a loss of clarity and focus in their companies’ IP strategies. Companies need to ask themselves: Do we have an up-to-date and market-relevant IP strategy? Could merger and acquisition (M&A) fill a technology gap? Do crosslicensing opportunities exist that could deliver the same knowledge, but without the initial set-up? Which rights in our portfolio should be pruned? Are we paying unnecessarily high rates to license in technologies? Which patents can we sell or license for profit? Could software help us better manage our portfolio? They should also be comparing themselves to their competitors by asking: What are the innovation trends in our industry? Which are the emerging and fading organizations and inventors in our industry? How does our portfolio compare? However, these questions can’t be answered if companies don’t have a thorough understanding of the IP rights that already exist in their portfolio and their relative value to the organization. In times of growth, it is easy to understand why a busy company might choose simply to renew existing rights rather than conduct a thorough and often timeconsuming audit. Many companies have spent decades building up and protecting their patent portfolios, sometimes inheriting significant proportions of the portfolio from acquisitions. In such an environment, it can be difficult to assess what is actually of value or could be of future use. In the current economic climate, however, it is prudent to develop an IP strategy that establishes key metrics across all aspects of the IP life cycle, assesses all IP spend and identifies opportunities to cut costs, better manage risks and, increasingly, generate revenue from the IP rights the company owns. But cost-cutting and revenue-generating decisions are not to be taken lightly. Without thorough planning, they could result in the sacrifice of IP rights that are potentially of future use to the company, or missed opportunities for out-licensing or cross-licensing with related organizations. An increasing number of companies are attempting to clean and audit their portfolios in order to manage their IP assets more effectively. Their goal is to protect key products and future products, reduce the costs associated with maintaining IP rights that are of no future use, or monetize underperforming assets. That may sound a simple and clearly sensible endeavour, but the work necessary to achieve this goal is not easy to execute and proves a barrier for many companies. At CPA Global, we are helping companies split their portfolios into core and noncore rights via comprehensive IP audits. Core rights are those that are of value to the organization because they relate to current or future products or services in use. Noncore rights, on the other hand, relate to registered IP that is of little current or future use to the company. However, auditing doesn’t just result in reductions in maintenance fees for unused IP; it also strengthens IP portfolios by consolidating a company’s rights and improving its understanding of how its rights compare to those of its key competitors. It could also uncover new business opportunities, build additional revenue through core or non-core rights sales and licensing, and enhance business-wide awareness by providing a tangible link between IP and business outcomes.

 34 The Innovation Premium ___________________________________________________________________________

In the case of patent rights in particular, a portfolio audit enables clients to assess the patent rights they own and to create an effective plan of action for their enrichment. After all, only when you have a clean, relevant and well-protected portfolio will you be able to look at ways of maximizing and enriching your patent assets. Obtaining an optimized portfolio has become more important than ever. Often companies are unaware that they may be compromising or putting their high-value assets at risk. In addition, companies may be missing opportunities to generate revenue from non-essential or low-value IP assets.

Realizing value Given the global financial situation at the moment, it is critical for a company to look at all their assets to assess their financial impact. We need to work out the best ways to capitalize on them. It is important to know what you have and utilize these assets to increase revenue. (Head of corporate development, leading technology and telecommunications company) In 2007, Thomson CSF embarked on a portfolio optimization exercise. It was not an easy undertaking; it took six months to collate, clean and understand what they had in their portfolio and a further six months to score and segment the portfolio. One of the outcomes was a 15 per cent reduction in their patent numbers, but without impacting on the €500 million per annum they generate in IP licensing revenues. While licensing is the traditional route to monetizing patent assets, the market for selling patents is now growing faster at 20–30 per cent per annum. Selling patents has attractions, as it enables full realization of the value of the asset immediately and in one transaction. Furthermore, most sales transactions now include a grant-back licence to vendors to allow them to maintain their existing business stream. Successful execution of smart IP portfolio management also requires having the right support structures in place. For companies looking to realize value through patent sales, expert help can make all the difference. In 1996 John Brett had a US patent granted for technology that was able to block unwanted content and restrict the amount of time that children watched the TV. The patent grant coincided with Congressional legislation that required TVs to be manufactured with the technology to block programmes. As a result, Brett’s patent attorney proposed building a licensing or sale programme to generate revenue. Unfortunately, he was unsuccessful and, by 2004, had been able to raise only a $4,000 offer for the patent. A further attorney generated an offer of $150,000, which fell through, and it was only when Brett hired an expert patent broker that the patent sold – and for a sum of $1 million, which properly rewarded the invention.

Value structures Many companies register their IP in places like Switzerland, while enjoying the income they produce in the UK. This is seen as another way to monetize IP by reducing the effective tax rate on profits. Shire Pharmaceuticals shifted its tax domicile from the UK

________________________________________________________ How to Maximize the Value of Your IP 35 

to Ireland, where it will be subject to a corporation tax rate of 12.5 per cent compared with 28 per cent in the UK. Media group United Business Media is also moving to Ireland, and WPP, one of the world’s largest advertising companies, is reported to be examining its tax domicile. In May 2006, Sears created $1.8 billion worth of securities (bonds) based on the brand names Kenmore, Craftsman and DieHard. In essence, it transferred ownership of the brands to another entity, which it then paid for the right to use the brands. Sears is holding them in its Bermuda-based insurance subsidiary. It’s all circular: the payments net out to zero because Sears owns every piece. But that would change if Sears were to sell the bonds to outsiders. Then Sears would be holding up to $1.8 billion in cash, and investors would be holding the bonds.

Conclusion Companies should incorporate smart IP management into their established IP management strategy planning, regardless of the economic environment. We live in a rapidly changing world: companies accumulate new IP assets each year through internal R&D and acquisition; patents expire or lapse; technologies change; industries shift; and corporate strategies adjust. A regular IP strategy and portfolio review ensures that companies keep pace with change, and that their IP assets are optimized for maximum return and competitive advantage. By doing this, they will be able to employ a far more strategic approach to their IP that will yield the greatest benefit and help better position them for success, whatever the economic conditions.

About the author John Pryor is Vice President for Patent Portfolio Optimisation at CPA Global, the world’s leading provider of legal services outsourcing, including intellectual property, litigation support, document review and contract management. Established in 1969, CPA Global provides life cycle management services for intellectual property (patents, designs and trademarks), including searching, watching, renewals and portfolio strategy. Through its successful diversification strategy, CPA Global has also established itself as a leader in the growing market for broader outsourced legal services. Contact CPA Global (e-mail: [email protected]; website: www. cpaglobal.com).

37 

PART 2

Move up the value chain

 38

39 



2.1

Technology as an accelerator for growth

Use technology to grow the top line, says Allyson Reed, Director of Strategy and Communications at the Technology Strategy Board.

In a downturn, the nature of growth changes. You can no longer expect to tick up 5 per cent year after year. You have to be efficient and save money, of course, but you have the chance as well to rethink your business altogether and get the top line going. When an industry experiences change and churn, the evidence suggests, it is easier to move from being a laggard to being a leader. If you are agile, you can make a difference. That is why so many of today’s big companies were formed in the recessions of the early 1990s and 2000s. At times like these, it seems there is more scope than usual to grow at 50 per cent to 100 per cent a year. Growth at such a level comes from innovation and, in particular, technology innovation, but in a much wider sense than taking new products into the market. It is about the whole business model. Innovation is moving well beyond its origins in science and engineering. There is a fundamental shift in how you think about your business: how you market yourself and the service you offer count for as much as the product you develop. Processes and efficiencies are important, of course, but at the same time you have to reach out to customers and engage with them. Innovation infuses the business as a whole. To make it work, you are going to have to develop two particular characteristics. Make connections and form partnerships.

 40 Move Up the Value Chain __________________________________________________________________________

Connections To keep growing, you cannot expect to develop an idea in isolation. It is too expensive and too slow. You have to open up your innovation model. The pace of competition and the imperative to grow have intensified. You can no longer afford to wait for something to happen inside. In a world of fast and transparent communication, you can work with the brightest and best wherever they are. It is at the interface of what you know that the most unexpected connections are usually made. When an idea crosses from one market to another, it is usually the most lucrative source of business advantage. As an innovator, you want to look to make connections with people just outside your field. If you are making fuel cells for cars, talk to someone working in power management for PCs. If you are developing low-carbon buildings, when you introduce new materials, ask psychologists about how people feel about using them. When you make these connections, that is when real innovation starts to happen. You find new business angles and shoot off in new directions, which would otherwise have lain dormant. One entrepreneur recently remarked to me that he found the cross-disciplinary connections that he was making were as valuable as the funding he had received. It is tempting to think that your ideas are closer to market than they really are. It is never easy to give voice to what users actually want. You have to stay open to a whole range of solutions and realize you might have to bring technologies in from outside.

Partnerships To translate the potential you have jointly discovered into commercial reality depends on reaching partnerships. These can be tough to form and it can be awkward to make them work. You have to get the technical, marketing and human mix right. From the start, it is best to be clear what you are all hoping to achieve. Usually, you will find that partners are looking to grow in different ways, so you can each take separate pieces of value and fulfil complementary roles during the life cycle of the idea. You will want to reach an early agreement on how the intellectual property (IP) will work. Projects can easily go wrong if you become too defensive. Of course, you must protect yourself, but you have to find ways of using your IP flexibly. The IPO’s standard agreements for collaboration between business and universities give you a good baseline. It is worth spending time in developing these partnerships. Talk about the benefits both hard and soft. Continue your cross-fertilization of ideas. Look at the scope for moving into different markets. Of course, you will be operating on different timelines and different budgets, but we are now seeing a much broader spectrum of partnerships. Corporates are genuinely seeking to engage with smaller companies. They accept that start-ups are often better placed to conduct the disruptive thinking that can redraw how an industry operates. Equally, central government and local authorities are looking at the scope for partnerships beyond existing projects in health and defence. For big challenges, bodies

_________________________________________________ Technology as an Accelerator for Growth 41 

like the Technology Strategy Board will run short, sharp competitions in advance, which put all the parties into position to bid for much larger projects later. In the last decade, universities have learnt to become more commercial. Projects now go well beyond just IP. Sometimes they involve the exchange of knowledge, people and skills or they result in spin-outs, licences or strategic relationships. Whatever the outcome, it represents a healthier and more engaged relationship with business. In extracting value from technology, a number of players are actively involved, but the role of the entrepreneur remains vital. Who else can spot where research can be transformative? And who else can pull a funding package together from all the different sources? When the upturn comes, the rewards will disproportionately go to those who are able to learn how to bring innovative partnerships together. From previous experience, we know that 50 per cent of new jobs come from just 4 per cent of companies. Or put it another way: among all companies that are growing, it is 6 per cent that really make the difference. They are the ones that can see how a technology could work commercially in their market. It might mean wrapping a service round a product or developing a new business model. Whatever option they choose, its outcome will always depend on being able to see technology in context.

About the author The Technology Strategy Board acts as the pivot between business, government and the research base. It was established in July 2007 and launched its strategy in May 2008. It is an executive non-departmental body, operating at arm’s length from government. Its mission is to promote and support research into, and development and exploitation of, science, technology and new ideas for the benefit of business in order to increase sustainable economic growth and to improve the quality of life. Further details are available on www.innovateuk.org.

Manchester: creating a brighter future  42

Already ranked as one of the best places in Europe to do business, Manchester is well placed to become a global hub for innovation. Manchester: Knowledge Capital (M:KC) is working to support this ambition. We’re doing this through Innovation Manchester – an ever-growing network of innovators and dynamic business leaders, focused on seizing new opportunities to make Manchester a great place to live and work. We’re creating a truly supportive environment for innovation – a region where people, ideas and businesses can come together to make something that’s bigger than the sum of the parts.

Whatever your organisation or sector, innovation helps you increase efficiency, cut waste, reach new customers, increase market share, improve your competitive edge, build strength and value, and simply ‘work smarter’. Be part of the innovation conversation and see where it takes you – join us on twitter, read the blog or become part of the Innovation Manchester LinkedIn group. http://twitter.com/innovationmcr http://innovationmcr.wordpress.com www.manchesterknowledge.com 0161 237 4630

43 



2.2

Partnerships for innovation

Innovation usually happens when two sets of knowledge collide, connectivity and good working relationships are essential, say Clare O’Neill and Cathy Garner at Manchester: Knowledge Capital.

Make no mistake, the potential for innovation to add value to your business is enticingly real. The EU estimates that 40 per cent of regional variations in income per person is due to innovation.1 At its broadest definition, innovation is ‘the ability of individuals, companies and entire nations to continually create their desired future’.2 Innovation is different to creativity – it’s the whole journey, from having the creative idea all the way through development to its practical application within a market, as a new product, process, marketing approach or service that delivers real value. Innovation can be radical and disruptive, destroying old ways of working and making other products obsolete. Alternatively it can be incremental – building on existing knowledge, products and services. For most existing businesses, innovation is an incremental adaptation of their existing products through feedback from customers, reacting to different products being sold by competitors, or moving existing products into new markets. With radical or disruptive innovation, a new product or process is created for a previously unspecified market. This is most frequently associated with inventions arising from R&D, and university spin-out companies are typical of this radical space. In recent years, universities have changed how they interact with the business world. Typically they have a greater appreciation of the business value of the full range of their work, through the licensing of intellectual property, carrying out collaborative R&D with business, and providing consultancy and specialist technical services. Effective exchange of knowledge is the key. Universities are increasingly working

 44 Move Up the Value Chain __________________________________________________________________________

with businesses of all shapes and forms to embed new knowledge and understanding, making it easier for those businesses to be innovative.

When two worlds collide Innovation tends to happen ‘at the edges’ between different groups or sectors. Each group may have its own ways of looking at products or markets, and its own way of designing solutions to problems. Bringing these two sets of knowledge together allows different ways of thinking to overlap and leads to new ideas – the first and vital stage of innovation. Often, universities and businesses seem to operate in different worlds. They have different priorities and ways of working, and speak different languages. No surprise, then, that the exchange of knowledge is often difficult. This in turn means that new business opportunities can struggle to get off the ground.

How universities can support business innovation Reviewing how universities and business can work together to innovate has shown the value of knowledge exchange across many different activities, and some understanding of what works best for business is beginning to emerge:3 Universities need to offer much more than intellectual property licences and spinzz out companies to support businesses to innovate. Trust-based relationships between university and business individuals are vital to zz success. Successful knowledge exchange is just as dependent on the ability of the company to zz absorb new knowledge as it is on the ability of the universities to communicate it. It is the process of working together and the constant interchange of ideas that are zz likely to lead to successful innovation. Social interaction is key when two very different organizations are working together, and business–university interactions are no exception. Interpersonal contacts are important for successful problem solving, making priorities clear and demonstrating commitment to the other party. Companies value the trust and understanding developed in such relationships – it makes it quicker and easier to return and collaborate with the same people on another project, lowering the company’s cost of entry into new developments. And, as with so many other things in life, practice makes perfect. Repeated episodes of interaction, such as R&D collaborations, are important in the build-up of trust – they help each party to learn more about how the other works, and pave the way for a closer, high-dependency relationship to evolve. How important is all this really? The research showed that, in the companies that were studied, a history of this sort of trust-based relationship was more important for effective knowledge exchange than other types of experience the university may have in interacting with business, such as transaction-oriented sales activities or the promotion of knowledge through publications and patents.

_______________________________________________________________________________ Knowledge Exchange 45 

So how do we make this happen more? Bringing the two worlds together is the key, and the following examples show how this can work.

Examples in Manchester Manchester has a strong pedigree in partnership working. The Manchester: Knowledge Capital (M:KC) partnership was created in 2003 as a vehicle to drive the knowledgebased development of the city region. Partners include Greater Manchester universities, leading businesses and local and regional government. The partnership supports initiatives that will increase the city region’s capacity for innovation, maximize future opportunities and leverage the city’s knowledge assets to help create a prosperous city region. One of Manchester’s core strengths is the presence and active participation of its universities in the local innovation environment. Highly successful initiatives designed to make industry–university collaborations more productive include: MIMIT: a ground-breaking initiative where groups of designers and engineers from zz business are brought into the wards and surgical theatres of local hospitals to talk with clinicians and explore areas of unmet clinical need – typically, the need for medical devices that have not yet been invented. Promising ideas get further support for proof of concept. Companies get the competitive advantage of being in on the start of new product development. Omega: a truly multidisciplinary partnership focused on reducing the environmental zz impact of aviation, not just through technological development but also through improved understanding of related financial models, economics and social behaviour. University researchers from many disciplines join forces with government departments, Manchester Airport Group and leading aviation businesses, to collaborate in research projects. Design for Sustainability (D4S): construction has to change radically to reduce zz impact on climate change, and this requires effective partnerships between the construction industry, policymakers, town planners and university researchers. D4S brings together major construction companies and world-leading university expertise in the built environment to define and test new ways of working together. Networks of innovators can support the development of ‘communities of interest’ – essential to support individuals who are embracing new thinking and working to drive innovation. The Innovation Manchester Network, facilitated by M:KC, has increased the connectivity between businesses and universities across the city. Innovators from across many business sectors connect with each other in an environment that focuses on problem solving and innovation. A strong ‘ideas into action’ atmosphere encourages individual business leaders to drive forward specific collaborations that support innovation in Manchester. The convening and reconvening of people in such a network help to form trust, encouraging synergy and cooperation among local actors, which leads to knowledge

 46 Move Up the Value Chain __________________________________________________________________________

exchange, an increased and shared understanding of innovation, and breakthrough projects and collaborations.4 In short, connectivity with others is fundamental to a company’s capacity for innovation. New connections with a variety of people are vital for refreshing ways of thinking and generating new ideas, whereas trusted working relationships allow more in-depth and effective knowledge exchange to support successful innovation.

Notes 1  European Commission (2002) European Trend Chart on Innovation, European Innovation Scoreboard 2002: Technical Paper No. 3: EU Regions. 2  John Kao (2007) Innovation Nation, Department of Innovation, Universities and Skills, London. 3  P Ternouth and C Garner (2009) Valuing Knowledge Exchange, Council for Industry and Higher Education, London. 4  R Capello (2001) Spatial and sectoral characteristics of relational capital in innovation activity, Paper presented at the 41st European Regional Science Conference, Zagreb.

About the authors Dr Clare O’Neill (Deputy CEO) and Dr Cathy Garner (CEO) work at Manchester: Knowledge Capital (M:KC). M:KC’s mission is to make Greater Manchester a superb environment for innovation. Partners include the city’s universities, leading businesses, and local and regional government. M:KC acts as a strategic coordinator, facilitator and adviser, providing a test bed for new initiatives and helping partners collectively to drive up the city’s capacity for innovation. Contact M:KC (tel: +44 (0)161 237 4630; e-mail: [email protected]; website: www.manchesterknowledge.com).

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2.3

The power of design

Effective use of design has an impact on profits, says Professor Tom Inns, Chair of Design at the University of Dundee.

We are all familiar with the word ‘design’ but probably carry quite different ideas about what the role of design is in a business context. Some of us might think about the work of graphic designers in the development of identities and brands; others might reflect on the role of engineers, industrial designers and architects in creating new products, services and environments. In the context of this book all these forms of design have relevance, as they can all deliver innovation to business. Research consistently demonstrates that effective use of design can have a significant impact on business profitability and long-term competitiveness. In this chapter the role of design is explored at two levels, firstly at a tactical or project level and then at the strategic level. The reasons for engaging with design at the tactical or project level are quite easy to explain: a good designer will quickly build an understanding of what the design requirements are for a new innovation; the designer will have empathy with consumers and users of the innovation and will be able to interpret these needs into prototypes for testing and evaluation; the designer will help consider all the potential ways an innovation might manifest itself and will help establish the criteria and strategies for evaluating these ideas and developing and delivering a design solution. So the first lesson of this chapter is quite simple: if you are considering innovating, are you accessing the right design expertise for your innovation project? To answer this question you need to consider what the nature of the innovation is that you want to implement, how design expertise could make a contribution and how this might be accessed and directed. Most innovations in business require expertise from many disciplines; financial implications must be analysed; the innovation must be embodied in an appropriate

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product or service; likely market reaction must be established; supply chains and operations need to be organized; and so on. Design has a key role to play in this process; the exact form of design expertise needed depends on the type of innovation being pursued. If the innovation concerns a new form of web based delivery, it could be created by anybody with the ability to formulate a website, clearly however engagement with appropriately trained web designers will enhance the innovation, they will have expertise in making the website accessible, delivering the right level of functionality, ensuring the look and feel of the website fits in with the brand and values of the business. If the innovation is about creating a new product, again anybody might be able to create a working sketch prototype, but many different forms of design might have a valuable input to make, engineering designers could enhance functionality and efficiency, industrial designers could ensure the product fulfilled the needs and requirements of users and consumers, creating visual appeal, functional innovation based on consideration of user-product interactions and ensuring visual consistency with a business’s brand and values. If the innovation is delivered through a new service offering (for example, a new form of retailing, a new financial product, a new mode of travel) it might be assumed that everybody knows what form the service takes, but here again a specific type of design called service design could make a significant contribution. Service designers will help create service blueprints that allow the service innovators to see the role of front-line staff, back-room staff, interactions with consumers and the role and significance of physical touch points such as service information, displays, environments and so on in the particular service that is being delivered. How this expertise is sourced and accessed again depends on context. In the microbusiness and start-up organization the thought of paying fees for external design expertise might seem onerous and risky. A great deal of guidance and often financial support is available from regional enterprise agencies and national design bodies (in the UK these include the Design Council, Design Business Association and British Design Innovation, all accessible by searching the web for the relevant body). Whatever form of design you engage with, some generic success principles in using design expertise are well established: Always try to engage with design expertise early in the innovation process. It is zz tempting to think about design being a tag-on, the expertise that is bought in at the end to prepare an innovation for the marketplace. Design, however, delivers maximum leverage at the beginning of the innovation cycle, when alternative innovation strategies are being considered and concepts are being generated. A designer’s input and expertise at this stage can have a significant impact on an innovation’s cost base and its potential functionality and value in the marketplace. zzThink broadly about the design expertise that you need. Your innovation might be a technical or scientific development, but this will need to be branded, perhaps put into a product form and invariably delivered through some kind of service. All these elements need to be designed so that they are consistent in style and message and with full understanding of consumer, user and stakeholder needs. A designer can help

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innovators see the relationship between these often-complex aspects of an innovation. Designers are good at this because they are good at visualizing and prototyping ideas. Design is a process. The process starts with the exploration and investigation of zz needs and requirements. This is followed by idea generation and concept development and selection of solutions to take forward. These might then be prototyped and evaluated before final detailed design decisions are made and a solution is specified ready for production and implementation. This process is iterative and is described in different ways depending on exact circumstances, but because design is a process the design input to a project can be phased and managed against clearly predefined deliverables. If you work with design, make sure you have a clear understanding of what this process will look like for your project and what inputs and decisions need to be made at each stage. So that is design at a tactical or project level. If the right design expertise is accessed and the input of this expertise is well managed, it can have a significant impact on the profitability of a proposed innovation. Companies that are comfortable using design to help maximize value in innovation projects are increasingly seeing the benefit of a design approach at a strategic level too. To explain this role it is worth reflecting on what the drivers of innovation success actually are at a company level. Academics and consultancies have studied what makes one company good at innovation and another poor for over 50 years (if you are an innovation consultancy this knowledge is your holy grail). Although we live in a time of rapid change, interestingly the results of this research have remained fairly constant over the decades. Successful companies are the ones that: understand the needs and aspirations of customers and users and how these are zz changing; think strategically and have a good understanding of likely changes in the external zz environment with both short- and long-term plans for innovation activity; use teams of expertise to see through innovation projects, teams that operate with zz excellent communication; see innovation as a process that needs good leadership and effective management; zz use zz appropriate tools and techniques to structure thinking in the business, bringing leverage to innovation. If you are using design in your innovation projects you will obviously be looking for that design expertise to have an impact on the finished product or service that will be sold in the marketplace to generate profit. If design is used in the right way, research shows that the skills, perspective and thinking of the designer can have a significant impact on the drivers of innovation success cited above: The designer can work with customers, helping them visualize and speculate on zz their future needs and requirements. The designer can help the business build and visualize future scenarios and future zz innovation opportunities.

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The designer can help the business understand how the architecture of one innovation zz can be reused in subsequent projects. (Think about how successful car companies such as the Volkswagen Audi Group (VAG) regularly update their models and share technical platforms between their four key brands: VW, Audi, SEAT and Skoda. This requires considerable strategic planning.) The designer can play a key role in interdisciplinary teams using visualizations and zz prototypes to build a common understanding between people from different technical backgrounds. The designer thinks in process terms and can help others see and visualize zz processes. Designers come with a good understanding of tools and methods that can help zz collect and analyse insights and information and synthesize results, all valuable techniques for the innovating business. Increasingly in business circles this contribution is called design thinking. Ultimately, harnessing design’s contribution at a strategic level will have the biggest long-term impact on a business, as every project at the tactical level should have increased its likelihood of success, having been developed under appropriate organizational conditions.

About the author Tom Inns is Professor of Design at the University of Dundee and Director of the AHRC- and EPSRC-funded Designing for the 21st Century research initiative. He is a chartered engineer, member of the Institution of Mechanical Engineers and fellow of the Royal Society of Arts. He started his career with Rolls-Royce plc (Aeroengines). After completing his Master’s degree in 1990 he worked as a designer and researcher on a variety of projects in which design was used as a problem-solving process. These projects explored new architectural products, consumer goods, agricultural equipment, recycled materials and social issues such as the problem of solvent abuse. He was appointed as Director of the Design Research Centre (DRC), Brunel University in 1996. At the DRC he worked extensively with small companies through the then TCS programme and developed a series of design audit methodologies with the Design Council, Business Links and DTI. In 2000 he was appointed as Professor of Design Research at the University of Dundee. Between 2001 and 2004 he was Head of the School of Design and helped establish the University of Dundee’s pioneering new programmes in innovative product design and interactive media design. He has a strong research interest in the future of design and the way design is used as a strategic tool within business. Further details are available from [email protected].

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2.4

Brand innovation

You can create alpha value by finding new ways to engage customers and keep your promises to them, says Peter Matthews at Nucleus.

There is a very real danger that an economic ‘recovery’ based largely on cost cutting will fool politicians, CEOs, investors and the public at large into thinking our economy is on the road to being fixed. This is dangerous. Cost cutting is necessary to reduce bloat, but it won’t create growth, jobs or widespread prosperity. For this we need an economy fuelled by innovation: creating value from nothing, or reinventing business models that will achieve sustainable competitive advantage in competitive global markets. Recessions accelerate Darwinian processes, and the rapidity and sheer nastiness of this one have exposed how fat and inefficient many industries have become. Yet a quick bounce back to profitability by wielding the corporate scalpel may obscure a lack of long-term competitiveness and hold back investment in new ideas. Alert executives will already have noted if their business models are flawed, although, I suspect, many more remain in denial, hoping that a bit of downsizing will solve their problems. Milking cash flows without investment in new ideas leads to brand atrophy and increases the risk of a tipping point, after which the business becomes irrelevant to its consumer base. For innovators, 2010 should provide a once-in-a-generation opportunity to identify relevant new value propositions or invent new and simpler ways of doing the mundane things customers need to do. UK plc, instead of banking on a weaker pound to expand exports, should promote innovation as the best way to ensure our battered economy regains international competitiveness and attracts inward investment.

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Branding innovation Innovative ideas require funding and marketing. The brand should encapsulate the idea and articulate the offer. The value proposition should communicate why it is different and better than another, be it a financial service, software or a shampoo. Executed well, brands can become the business owner’s most valuable asset. Growing brand value is all about building and maintaining reputation, and you can achieve this by consistently delivering – better still exceeding – the brand’s customer promises. Successful brands know exactly ‘what they want to be famous for’ and single-mindedly pursue that goal by satisfying customers time and again with consistently great experiences. While brand reputation is difficult to build, it is really very easy to destroy, most frequently by over-promising and allowing gaps to emerge between promise and reality. In the past year we have seen brand value destruction on a titanic scale, with banks being particularly good at blowing up their good names. It will take substantial effort and investment to heal the scar tissue at RBS, Halifax, Northern Rock and Citi, let alone the ailing Irish and Icelandic banks. Some will give up the fight and decide to scupper their legacy brands and reposition under a different name. Some of course have already bitten the bitter-tasting dust with brand value vaporized: Lehman Brothers, Icesave and Bradford & Bingley, to name but three. But someone’s pain is another’s gain, and this tumultuous time in world finance is likely to throw up many opportunities. We will see the birth of new financial brands as well as resurrected names whose reputations are unsullied by the recent past. When traditional values are required, why not dust off an old but credible bank brand, such as Williams & Glyn’s? This suggests, as we at Nucleus have long believed, that there is hidden gold in dormant but trusted brand names and trademarks, which, with a wash and brush-up, can once again become relevant.

Protecting innovation Innovation is difficult, time-consuming and therefore expensive, so it’s much easier and cheaper to copy someone else, which is why protecting the value – or potential value – represented in an idea, a brand or an invention is so vital. However, during recessions, corners get cut in the management of intellectual property: advice is not sought; infringements are not pursued; trademarks lapse; patent applications get aborted. All of these things compromise brand value. Trademark attorneys HallMark IP have noticed a clear annual trend with large client organizations limiting the number of marks they renew each year and, therefore, giving up on the rights to brands that could still be of value to their owners.

Funding innovation Innovation, of course, requires funding and, given current circumstances, you might expect investors to be attracted to new ‘challenger’ or ‘game changer’ business models,

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as these are investments that could deliver alpha value in the future. In the digital age, agile new companies with good technology and the right business models can engage customers and transform markets quickly. With cash in the bank of little appeal and equities now probably facing a long, slow recovery, there has never been a stronger case for investors to back early-stage innovation. But sadly this doesn’t seem to be happening. With the venture capital industry itself in the process of restructuring, venture capitalists don’t seem to be interested in backing early-stage businesses, even in hi-tech, IT and green technologies. In their October 2009 bulletin, technology corporate finance advisers Go4Venture reported: ‘There continues to be a focus on later stage deals… leaving early stage funds to be driven by entrepreneurs.’ Sad but true. Fortunately, entrepreneurs are a determined breed, and many will get on with it anyway.

Case study: sQuid Small-value payments are still largely made in cash, with credit and debit cards dominating the payments market above £15 but unable to penetrate the smallvalue market owing to the high cost of their transactions. During 2005, while operating Transport for London’s Oystercard* website platform, Nucleus participated in the, eventually aborted, Oyster* e-money procurement, making the final shortlist. This provided the opportunity to define a fit-for-purpose payments system that would complement next-generation transit smart cards, now rolling out across the world’s transport systems. With the London programme abandoned, Nucleus decided to continue to develop its concept independently. Having defined a radical new business model and supporting technical architecture, Nucleus then created a brand, sQuid, with a striking brand identity and distinctive proposition, ‘Now you’re loaded’. This was followed by a series of internet portals for customers, merchants and administrators, plus all marketing and advertising. With the help of HallMark IP, the distinctive brand mark, ‘Q’ symbol and graduated magenta backdrop were registered as trademarks in key markets. In parallel, sQuid invested heavily in developing its next-generation payment system technology, incorporating the highest levels of security and performance, to deliver mass small-value payments for a fraction of the cost of existing schemes. Initially funded by Nucleus, the shareholder base was expanded to include a small number of private investors – venture capitalists proving too greedy for an early-stage business. sQuid uses a contactless prepaid smart card to access its internet-based network to purchase ‘the little things in life’ – a coffee, newspaper or sandwich for lunch. In some UK schools, where sQuid is rapidly growing its cashless catering solution, biometrics substitute for the card, with fingerprints becoming

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the activation for a transaction. Uniquely sQuid has a multi-purse capability and is compatible with the new transit (ITSO) standards being introduced across the UK, which means it has the potential to become a universal payments system. Results sQuid launched its open payments system and local government smart card solutions in Bolton during 2008. This was followed by Dundee, successful trials in several secondary schools and a Coffee Republic branded payment and loyalty card. During 2009 this programme was dramatically extended in Scotland and Manchester, with the first transit services launched and schools rapidly adopting the new cashless system. Significant international opportunities in Africa, the Middle East and India are also in advanced negotiation. sQuid has now raised further expansion capital, but Nucleus retains a 50 per cent stake, having created a valuable asset from nothing in four years. Further details: www.squidcard.com *Oyster is a registered trademark of Transport for London.

About the author Peter Matthews is founder and managing director of Nucleus, the world’s only integrated brand, digital and intellectual property consulting and venturing group. For 30 years Nucleus has created and protected value for its clients around the world: creating new brand names, inventing new brand propositions, designing compelling brand and digital experiences, managing complex websites and registering and defending intellectual property rights. Contact Nucleus (tel: +44 (0)20 8398 9133; e-mail: [email protected]; website: www.nucleus.co.uk).

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Patents

Trade Marks

Litigation & ADR

Domain Names

Commercialisation Copyright & IP Transactions

Designs

Strategy & Management

Own. Protect. Grow. Your IP assets. Investigation

Enforcement & Anti-counterfeiting

Email: [email protected]

Tel: +44 1865 318400

Web: www.iprights.com

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2.5

IP as a profit centre

Ben Goodger at Rouse Legal discusses how to develop an IP road map that makes the most of winners and strips out losers.

Where does the true value of a business lie? In the brand name and associated reputation? Innovations and designs? Skills and talents of employees? Clever pricing or other business techniques? These are all ‘intellectual assets’, and properly managed they keep their value even in a downturn.

Your IP strategy as part of your overall business strategy Many businesses have an IP strategy that is fairly opportunistic, eg ‘We’ve invented something – let’s patent it.’ In a fast-changing business and economic environment this is not enough. Value can be significantly created and conserved through having a properly planned IP strategy that reflects and enhances the business strategy. A well-run business decides where it wants to focus its business, develops its products and services accordingly and then ensures that it has the right IP to protect them. Below is a step plan to address this.

Step 1: knowing what you want your IP to do for you Is the business clear about its overall business strategy? zz Does the business have an IP strategy? zz If so, is it closely aligned with that overall business strategy? zz Is it understood in the key parts of the organization where it matters? zz If there is no real IP strategy, or the existing IP strategy could be improved, a review zz should be carried out, perhaps using objective outsiders to facilitate it.

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Step 2: review Assess the current and future plans for the business. zz Consider risks, by looking at: zz –– the relevant technology landscape (if applicable) to see what is current and on the horizon; –– the competition: speed of change, freedom to operate; –– dangers of IP leakage or loss through poor management or lack of awareness; –– dangers if key personnel leave. zzLook at what IP assets the business has, whether registered (patents, trademarks) or unregistered (know-how, relationships, ‘brand reputation’, methods of doing business). Consider whether those IP assets line up with the business plan – often there are zz gaps or irrelevancies.

Step 3: pulling this into a plan Based on the outcomes of Steps 1 and 2, the business can develop an IP road map. It zz is vital this is done through an interactive process with all key stakeholders. How this road map looks will depend on each case, but it is likely to cover: –– improvements to internal processes, eg invention capture and evaluation; –– regular review of IP issues at board level; –– steps to manage cost and efficiencies – are you getting the best from your service providers? –– review of IP assets accumulated from acquisitions in order to generate benefits from putting assets together, or identifying where assets can be disposed of. A key part of ensuring that the road map is a success is to get buy-in from senior zz management and key decision makers within the organization, and to ensure that recommended changes and processes are practical, realistic and ‘real’ to those who will implement them.

Step 4: regular follow-up reviews It is vital to ensure that an objective assessment is made periodically, to ensure that zz the IP strategy remains on track. It also enables adjustments to be made in the light of changing circumstances. zz Depending on the specific business objectives, these can be every three months, zz every six months or yearly. The rest of this chapter looks at some of the issues raised in the above outline in more detail.

Look ahead Enlightened IP planning involves looking ahead. Where is the marketplace going in your particular sector or sectors? What territories that could buy your products are coming on-stream or are you looking to expand into?

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Thinking several years ahead can prompt you to make sure that your IP is protected well in advance. It is a bad idea to enter a market and then think about protecting your brands and inventions. In the case of inventions it will be too late to patent them once you are on the market. There is no point in spending money on research and development if the resulting technology will be unmarketable because your competitors have blocking patents. Equally, with the threat of cheap Asian imitations of Western products, often a strong IP position in your home markets can be the only way to prevent the economic erosion of your position in the marketplace. If the Asian companies cannot sell their products in your key markets or have to pay licence fees in order to do so, this may eliminate their key price advantage. IP may be the only way to withstand the threat from cheap competitors. In the patenting context, if you have the vision to see where technology is moving and can strategically secure patents at what are called the ‘choke points’, so that all those in the future who develop technology or products in this territory will need to obtain a licence from you, you can increase the value of your business by a huge multiple.

Know what you’ve got It is surprisingly common for businesses not to be aware of the IP assets they own. Any business should have a full list of registered rights at its fingertips. If assets have to be enforced, or if they are to form part of a transaction, having well-organized assets saves valuable time. But there is far more to IP than merely registered rights: copyright, business methods, trade secrets and confidential information, and rights in domain names are also key. It is best practice to try to assess what these are and how they are unique or proprietary, and then to maintain an inventory of the most important.

Get it right from creation Just doing the same thing today that worked 10 or even two years ago exposes any business to being left on the sidelines. So, if innovation is key, managers should ensure that there are effective systems in place to capture new innovations when they are created. In the case of technical innovations these should be evaluated for patentability. Even if it is decided that an invention is not strategically worth patenting, records should be kept of the invention. This may be handy for later invalidating a competitor’s patent over functionally identical technology. Choosing a brand name is critical. However good marketing departments think descriptive names are, it is an uphill struggle to gain any kind of legal protection for them. Many companies have had to waste money on rebranding after launch because of a poor initial choice. In other areas of business, particularly where software, packaging or graphics are created, the key IP right is copyright. If creation is outsourced to third parties, businesses will not own the IP unless it is assigned to them in writing.

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Manage your portfolio efficiently Many businesses take a reactive and ‘defensive-only’ approach to their IP portfolios, often based on the assumption that IP is a required cost but not much more. The problem with this is that a ‘bare minimum’ approach can often lead to inefficiencies such as the continued maintenance of trademarks or patents that have ceased to have any commercial value and (more importantly) failure to spend the time to consider what new protection needs to be added as the business grows, develops and changes. It is essential your external service providers (eg patent and trademark agents) are in touch with your plans so that their outputs are responsive and what your business needs. Using multiple agents can be inefficient – in the current market, volume discounts are eminently on the table. If you have an extensive patent portfolio, identify which of your patents are: valuable in the marketplace and mission-critical to your business – these are your zz ‘crown jewel’ patents and should be actively defended; valuable in the marketplace but not mission-critical to your business – these are ripe zz for transacting, whether through licensing or outright sale; likely to be valuable in the marketplace in the future – these should be held and zz where necessary defended; neither valuable in the marketplace nor mission-critical to your business – no further zz money should be spent on maintaining these. It is surprising how few businesses carry out even this fairly basic assessment of priorities. Once done, this exercise should be repeated annually or biannually.

Leverage your IP to make it into a profit centre As just indicated, businesses need to be alive to potential sources of revenue from leveraging assets that they have, or can acquire, in order to make sure that, if mainstream sources of revenue decline or are threatened, they have other sources to fall back on or future avenues for growth. Thus a business that has built up a famous brand in one particular area, eg earth-moving vehicles such as Caterpillar, can very successfully open up a rich seam of alternative revenue through licensing the trademark for completely different goods, eg clothing. The beauty of licensing is that it can, at very low effort and cost to the original IP owner, generate revenue from business areas where the IP owner is simply not active. Cross-licensing is particularly valuable in the technology field. Where you are (or may be) attacked by another patent holder, the best form of defence may be to counterattack by showing that the other party itself infringes key patents that you own. You cannot make this argument unless you have built up a strategic portfolio. But, with such an armoury, a cross-licensing deal can then be negotiated that can be highly beneficial for both parties. And outright sale can be even more attractive. Many companies if they are moving out of a particular sector simply allow their registered intellectual property rights to

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lapse – or continue to maintain them even though they are redundant to the business. This is a terrible waste of a potential selling opportunity. Indeed there are specialist deal brokers who can find opportunities for the sale or disposal of IP portfolios. This results in a clean break and a lump sum all at once, rather than spread-out royalty payments. Monetization of IP along the lines suggested above can result in IP transforming itself from being a cost centre to being a profit centre, or at least cost-neutral.

Be prepared to enforce – intelligently Intellectual property rights prevent other people from doing things or copying things. The commercial value is in establishing a profitable market for yourself, blocking the progress of your competitors or getting them to pay you to grant a (limited) relaxation of those absolute restrictions, ie licences. If you are the type of business that has intellectual property rights but never enforces them, you are very likely to be eroding the value of your company over the long term. If competitors copy your valuable assets and you do not stop them copying, you will lose your uniqueness in the marketplace and your competitors will see you as a soft touch. Well-advised IP owners budget for a certain amount of intellectual property enforcement in any year. The key is to decide which matters are so mission-critical that they must be protected at all costs, which may be worth fighting and, importantly, which should be ignored. Enforcement of your IP rights sends a message to the marketplace, ‘Keep off our grass.’ This may be enough to send copyists (eg in China) over to your competitors who may be less prepared to stand up for their rights.

Conclusion A well-thought-out IP strategy to manage and extract the most from intellectual assets should be high on the agenda of any business.

About the author Ben Goodger is Global Head of Rouse’s IP Commercialisation Group and a Partner of its affiliated UK IP law firm, Rouse Legal. Rouse is a specialist intellectual property consultancy with a team of over 350 IP professionals representing many of the world’s leading IP owners. Rouse offers a comprehensive range of IP legal services: patent and trademark registration; commercial deal structuring; enforcement and litigation; and international anti-counterfeiting strategies (backed by its strong presence in China). It also offers consultancy and brokerage services designed to leverage the value of IP assets, whether through licensing, joint ventures, acquisition or disposal. Contact Rouse Legal, 1st Floor, 228–240 Banbury Road, Oxford OX2 7BY (tel: +44 (0)1865 318400; e-mail: [email protected]; website: www.iprights.com).

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PART 3

Forms of innovation

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3.1

Breakthroughs versus improvements

You may think you have a blockbuster. More likely, it is an improvement. But you can still make your fortune. David Fry at Agile IP explains.

Whenever I am out socializing (believe it or not, patent attorneys can have social lives) the job I do is much cause for conversation. I have lost count of the number of times I have been asked the question ‘What has been the best invention you have ever seen?’ The answer expected is always some fantastic breakthrough that came to an inventor one day in a eureka moment. The truth of the matter is that the vast majority of patents that have value relate to small improvements in known and well-established technology areas. For some reason the conversation often tends to fall flat when I explain the reality of the ‘inventions’ I prosecute on behalf of my clients in front of the various patent offices day to day. Improvement patents may not have the same kudos as breakthrough patents, but they are nonetheless just as, if not more, important to overall innovation. Having said that, there are many ‘breakthrough’ patents granted every year. Provided the correct advice has been sought such patents are worth their weight in gold and can push the business that owns the rights into a whole new league. Many so-called breakthroughs are no more than recognitions of new use, for example that a well-known drug for treating rabbits has, in addition, outstanding benefits for treating blood disorders in humans. Thus the internal combustion engine for powering vehicles could be said to be no more than a recognition that steam engines, used to drive shafts of pulleys and wheels in woollen mills, could be adapted, using a less voluminous powering medium – petrol instead of water – to drive a shaft

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supporting drive wheels of a vehicle. Many would argue that this recognition was a breakthrough as opposed to an improvement. I often fear that businesses quickly dismiss ideas for improvements as being unpatentable, or not being worthy of the financial (and often mental) torment of the patent process. Small improvements can often, on the face of it, appear trivial or obvious. It is an essential part of the training of all patent attorneys to dismiss arguments based on hindsight when considering whether or not an improvement is obvious. A client can often be surprised with the resulting advice. There are two basic forms of improvement patent. The first is for an ‘addition’ invention whereby the improvement builds on what has been done before. The second is for a ‘substitution’ invention whereby the improvement lends itself to being a substitute to that part of the technology that has been done before. The value of an improvement patent should not be underestimated. Small innovations can be extremely important and often build upon each other. Building a portfolio of improvement patents and patent applications is highly beneficial, if not essential, for businesses that are seeking to expand into other technology sectors. An extensive patent portfolio provides opportunities for cross-licensing patented and patent-pending technology within and across the relevant sectors. Without such ‘bargaining tools’ it is possible that any attempt to enter a new sector will be met with a brick wall in the form of an established rival’s patent portfolio. This is true, for example, in the telecommunications and software sectors where boundaries have merged over recent years. Some of the better-known telecoms companies have morphed from traditional telecommunications providers to largely software-based companies offering a diverse range of data services including alarm monitoring, supply chain management and digital television systems. Given the presence of established players in these areas, many with patent portfolios, the wiser telecoms companies will have filed patent applications directed to their own incremental developments. Whilst the resulting patents are unlikely to set the world alight, they may nevertheless prove an invaluable defensive measure in terms of cross-licensing should an established player throw a lawsuit their way. A number of aspects need to be considered when an improvement patent is being contemplated. From a commercial perspective, when considering whether an improvement patent should be sought, one must establish whether the patentable differences confer a worthwhile competitive advantage. Gillette, for example, considered that a third blade on a razor (previously all razors had one or at the most two blades) had enough potential value to them as a business to spend millions of dollars on marketing and distributing their new Mach3 razor. The value brought to Gillette from the Mach3 far outshone the significant costs associated with obtaining patent protection and then subsequently pursuing litigation. From a legal perspective, when considering whether a patent should be sought for an improvement to subject matter disclosed in an earlier patent, one must first establish whether the improvement technology is likely to be patentable over the earlier disclosure. Furthermore, if the earlier patent is owned by a third party it is also important to seek advice on whether the improvement patent could be practised without infringing

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the earlier patent. There is a common misconception that obtaining a patent gives the right to practise a patented invention. However, a patent grants the patent owner a negative right (ie the right to prevent others from making, using or selling the patented invention); it does not give the patentee the right to practise the invention. In many instances, a patented improvement cannot be made, used or sold without infringing an earlier patent. The value of an improvement patent could be significantly undermined if these rights to production are not considered. Determining whether the earlier patent is likely to be infringed is approached differently to determining the patentability of the improvement technology. For the former, it is simply a matter of determining whether or not the invention, with its improvements, falls within the claims of the earlier patent. The latter requires one to consider the complete disclosure of the earlier patent, and any other patents or patent applications that may have relevant subject matter, in order to determine whether the disclosure, or several disclosures in combination, would teach a person skilled in the art to come up with the improvements to be patented. I am frequently asked whether a patent could be obtained for a combination of known features. The answer is generally ‘yes’, provided the combination is itself novel and is not obvious. Clearly, any patent obtained is only worthwhile though, in terms of its value, if the resulting combination lends itself to an improvement in one or both of the features or, in some cases, in an entirely new area of technology. If, for example, I combined a pen with a torch, I might be able to get a patent (let’s assume it has not already been done) but it is likely that I will not make any money out of that patent at the end of the day – although I may be wrong – as such an idea does not improve a torch or a pen, and the combination does not, I imagine, lend itself particularly to an improvement in a new area. If I had, a long time ago, thought of improving a mobile telephone by the addition of a camera, however, I would be sitting on a beach somewhere writing this chapter. It is also worth noting that it is possible to obtain an improvement patent for an innovation that provides a new use for an existing invention. For example, patent claims for a skin cream have been found to be anticipated by a prior art reference showing the use of the ingredients, but claims for a new use of the cream in treating sunburn have been found to be valid and not anticipated. A portfolio of patents and patent applications, whether to improvements or otherwise, is essential to businesses that are looking to increase the value of their bottom line (and name me one that isn’t). Every patent provides value of some form or another to a business. Even if for the deterrent factor alone, patents to improved technology provide the foundations of a valuable and sustainable business. There is a compelling reason why billionaire investor Warren Buffett analyses and gauges a company’s competitive advantage as the primary factor when determining whether or not he will invest in it. The matter of achieving true competitive advantage, as the company’s core revenue growth strategy, should dominate top management’s decision making. Warren Buffett was once quoted as saying that patents should be regarded as creating an impenetrable, competitive moat around your business. The majority of individuals and SMEs that I see day to day are not au fait with the world of patents and believe intently that their new idea is going to be the next

 68 Forms of Innovation ________________________________________________________________________________

blockbuster. That may be so, but unfortunately it does not usually turn out to be the case. Years of experience have led me to be wary of new clients who approach me with an idea that is in a totally different area of technology to what they usually deal in. That is not to say that I would discourage such innovation – it just pays to do the research before engaging the services of a patent attorney. There are many published patent databases available to the public, Espacenet and Google Patents being just two examples. It is always worth spending some time searching these databases with key words to see whether the same or similar ideas have already been patented, or published in the form of a patent application (it is the latter that counts). It is often also worthwhile talking under confidentiality agreements to third parties within the technology area and gauging their reaction. When considering whether or not to seek patent protection for an invention, it is also important to ensure that you have sufficient resources available to market the predicted product. Regrettably, many very worthwhile patented inventions fail to achieve the success that they deserve simply because the owner was unable or did not have the resources to market the patented idea effectively. I suppose what I am saying is that not all patents are eureka moments that come to an inventor while sitting in a bathtub one evening. Some are, but the vast majority are not. Even the ‘some’ are usually recognized as having eureka qualities only a long time after they were conceived. Every true invention, no matter how small an improvement, comes with the possibility of making a fortune for its owner. In reality it is only over time that a breakthrough can be recognized as such, and inventions that are clear improvements, for example an improved ink-feed system in a pen, and those of a breakthrough, for example the biro, should be treated very much the same. In each case, to have the best chance of success, the invention requires good searching to establish novelty and a good patent specification that properly addresses the ‘invention’ and provides a more-than-adequate support for that invention whether it be an improvement or a breakthrough. To conclude, it is true to say that the lesser spotted eureka patent is a much rarer species than the common improvement patent but that both have merits and, from a patent point of view, should be treated with the same care and attention.

About the author David Fry is a founding Partner of Agile IP LLP, a UK and European firm of patent and trademark attorneys. Agile is happy to act for any business, big or small, to protect its inventions, trademarks, designs and other forms of intellectual property rights. Agile offers expertise in all areas of IP law. Its management team has over 70 years’ experience in the field, having worked in both private and industrial practice. All members of the team are UK and European qualified and have worked in-house for companies such as Corus (the former British Steel) and BT Group plc. Agile acts for individuals and companies from all over the UK, as well as for a number of direct overseas clients. Contact Agile (tel: +44 (0)20 8915 1010; e-mail: [email protected]; website: www.agile-ip.co.uk).

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3.2

Broad versus narrow

If you cannot look into the future, how do you determine the scope of your claim for an innovative idea? Ilya Kazi at Mathys & Squire recommends taking a commercial approach.

To determine the ideal scope of a patent one needs to take an idea, look forward 20 years to anticipate all developments in technology and determine everything a business or any of its competitors or partners might wish to do around the idea within the life of the patent. To ensure that it will be valid, one then needs to subtract all prior art available in any form anywhere on earth, factor in the varying standards in each jurisdiction regarding the assessment of obviousness and patentability, and formulate a set of claims taking into account varying requirements for unity of invention. Unfortunately, notwithstanding expansion of online searching and a wealth of technology commentators and trends reports, current technology does not permit one to look reliably into the future or to form a complete picture of available art within a finite budget. So, given constraints of imperfect knowledge and finite resources, what should one do? Having some idea of the background art, a common simplistic starting point is to start with a broad claim that is barely defensible claim over the art one is certain exists. It is academically attractive and it is not wrong, as it is generally impossible to go back and seek broader protection later. However, if insufficient thought is given to realistic defensible fallback positions, the patent application may turn into a balloon that simply bursts under pressure when the main claim is knocked out. This simplistic approach may also not prove optimal for certain commercial situations if it leads to greater costs or delays in prosecution than can be tolerated. Thus, in the author’s view, producing optimal IP protection for a growing business should be viewed as an engineering or architecture process in its own right with multiple strands. A deep understanding of the technology, from what it is to how it

 70 Forms of Innovation ________________________________________________________________________________

might evolve, is important but not enough. Knowledge of a business and its plans and potential markets is another key element, as is a view of likely competitors and threats. Some of this, such as analysing the art and the invention, is a science. Gaining a feel for a business and its likely operating environment is more of an art. However, IP strategy is neither a science nor an art but a business; it must be put together in a manner that makes commercial sense, which means the cost must be related to the potential value to the business. One should not be satisfied with not knowing enough about the business plans to take this into account when drafting claims; seeking patent protection implicitly involves a decision that the initial filing expenditure is justified, and this should be challenged and projected forward. This means that the correct approach is a function not only of the invention but of the inventor. The IP needs of a well-funded organization that is actively licensing technology, a major high-technology manufacturer with large numbers of innovations, a latecomer to a technology area, a low-technology manufacturer in a competitive lowmargin field, a technology incubator and a start-up with funding constraints all differ. After acting for all of the above, I know that, although the optimum approach to IP strategy for a given innovation varies for each type of entity, it must also be remembered that one may evolve into another over time. Despite differing needs, one thing that is common to all is that there should be at some level an analysis of the broadest possible claims that one might try. Emphasis is placed on the plural, as it is rare that an invention is so simple or its application so limited that there is only one element or revenue stream to protect. A given innovation may enable potential services, markets for derivative, disposable or recyclable products or accessories, or alternative applications in other fields. For example, an innovation in a printer head nozzle may potentially open up a market in printing alternative substrates such as T-shirts, make viable a customized web-based service, create a market for refills and have applications in medicine or drug dispensing. Such analysis intrinsically requires some knowledge of the art. Searching for prior art is an open-ended and unsatisfying task, as it can yield only negative results. The resources allocated to searching should thus be commensurate with the nature and value of a venture; where this is heavily dependent on patent protection for viability, a greater level of confidence in the likely scope of protection available may be required, and extensive searching may be justified. In many cases, however, given a basic indication that there is likely to be something worth protecting, resources are better expended on constructing fallback positions taking a general background picture and an educated guess based on judgement and experience as to what is likely to turn up. Whereas prior art searching is generally unsatisfying and freedom-to-operate searching has a different emphasis, there can be some synergies in search strategy. For an entrant to an unfamiliar market, searching to gain both competitor intelligence and a better knowledge of the art to guide future IP strategy may be valuable. When framing claims, an important issue to consider is the extent to which an idea may be applied to fields outside a core field and the amount of resource allocated to secondary claims or claims at the margins. For an active licensor, an ambitious strategy may be appropriate. For a start-up, claiming fields widely outside any realistic business may expose an application to attack from art that might not otherwise have come into

______________________________________________________________________________ Broad versus Narrow 71 

play. If an applicant has implicitly admitted that other fields are related, retrenching subsequently may leave an examiner pursuing an obviousness attack based on art outside the field. For inventions that are at the margins of patentability, particularly software innovations, patentability issues may be exacerbated by ambitious claiming. Moreover, given ever-increasing claims fees and more restrictive approaches to division and number of claims allowable, patent prosecution costs become a serious consideration. Thus, in practice, owing to procedural and financial constraints, the examination process is non-conservative; starting too broad with the plan of narrowing to a more realistic claim may not get the same end result as starting with something closer to the more realistic claim might have done. An overly ambitious or academic strategy may mean that a start-up spends more on prosecution than can be justified and may end up because of financial constraints obtaining no protection rather than more quickly and effectively obtaining protection that is practically useful. Even for a larger organization, all budgets are finite. Overzealous protection of one innovation may impact adversely on the budget available to protect another innovation, or to enforce or license protection. Thus, while one should always consider the broadest claims potentially available, it does not necessarily follow that one should always file starting with the broadest conceivable claim. In some cases, a basis for the broadest claims might be included in the form of additional statements of invention or clear statements positively teaching alternatives or in later claims. This particularly applies in software cases where a broader claim may be allowable in one jurisdiction but not another. If a tactical decision is made to run for home with the first application, the option can be retained of fighting a bigger battle another day, while the core business, protected by a quickly granted and credible patent, is generating revenue to justify and fund the fight. While the formulation of an optimal strategy requires careful professional judgement, some basic steps are set out below:   1. Identify all innovative components of an idea or solution.   2. Identify all possible revenue streams.   3. Identify all possible competitor approaches or alternative business solutions.   4. Consider application to fields outside the core business.   5. In the light of Steps 2–4 revisit the first step to see if there is further potential for protection of products or processes.   6. Estimate market geographical extent and financial value.   7. Project own business plans to capture the market.   8. Project partnering or licensing opportunities to capture a further market.   9. Project an appropriate IP budget. 10. Assess the level of knowledge of the art and competitors. 11. If appropriate, search to fill gaps in knowledge. 12. Consider patentability issues. 13. Prioritize claims and protection. To summarize, the correct approach to IP strategy requires an understanding not only of the technology but of the business environment in which the technology is likely to evolve over the coming couple of decades. Identifying broad protection that might be

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sought is one part of the challenge. Formulating a prosecution strategy taking into account costs and challenges in each jurisdiction and evolution of the business and building this into an initial application generally give a better and more cost-effective end result.

About the author Ilya Kazi is a Partner in the major UK-based IP firm Mathys & Squire, which has offices in London, Manchester, Cambridge, Reading and York and celebrates its centenary in 2010. He has represented clients in over 2,000 cases before the European Patent Office and has received personal commendations in leading directories such as the Legal 500. He acts for clients ranging from start-ups through UK SMEs to major multinationals, specializing in complex software and IT, cleantech and medical device technology and providing strategic advice on IP to growing businesses. Contact Mathys & Squire (tel: +44 (0)20 7830 0000; e-mail: [email protected]; website: www.mathys-squire.com).

73 

In an innovative, knowledge-intensive market, the value of an organisation largely depends upon intellectual property rights, such as patents, trademarks and designs. The protection of your intellectual property is a specialist process that requires a meticulous approach. Nederlandsch Octrooibureau is able to assist you in many different ways in this field. An effective patent or trademarks/designs strategy saves money and can even make you money. It is the combination of technical and legal expertise, combined with insight into the business environment in which you operate, that distinguishes the patent attorneys of Nederlandsch Octrooibureau. Specialists in the field of trademarks, designs and agreements work in our legal department. By combining our expertise, we are able to provide you with the most comprehensive advice possible. The specialists of Nederlandsch Octrooibureau also have the most up-to-date knowledge of the IP market at their disposal, which they use in order to provide optimum management for your IP portfolio. Nederlandsch Octrooibureau has offices in The Hague, Ede and Eindhoven. If you are interested in acquiring a reliable partner who has relevant business knowledge, please contact our specialists. All information relating to Nederlandsch Octrooibureau can be found at www.octrooibureau.nl. Nederlandsch Octrooibureau achieved a tier 1 rating for Dutch agencies for its management of patents and a tier 2 rating for its management of trademarks in the Benelux (Managing IP Survey 2009). The Hague Office J.W. Frisolaan 13, The Hague P.O. Box 29720 2502 LS The Hague The Netherlands Phone: +31 (0)70 3312 500 Fax: +31 (0)70 3527 528 [email protected] Ede Office Bennekomseweg 43 6717 LL Ede Phone: +31 (0)318 707 000 Fax: +31 (0)318 707 007 Eindhoven Office Kennedyplein 236 5611 ZT Eindhoven Phone: +31 (0)40 239 37 40 Fax: +31 (0)40 239 37 50

www.octrooibureau.nl

Patents, Trademarks, Designs and Licences

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3.3

Hardware versus software

Technical software applications can be protected by patents, says J J Hutter of Nederlandsch Octrooibureau

In the old days, patents could be granted for mechanical inventions, electrical devices, chemical substances, pharmaceutical products and so on, ie real tangible physical things. Apart from that, patents were granted for technical methods, like chemical production processes. Basically, every manager who is responsible for technological innovations seems to know this. However, what do we do when innovations, at least in part, comprise software? And that happens frequently. So many products like cars, aeroplanes and ships are simply unable to function properly without some software control. Most managers think that the ‘hardware’ side of such innovations can be protected by patents but the software side cannot. However, this is based on a serious misunderstanding. In technical areas, software innovations can be protected by patents, just as mechanical and chemical inventions can. Moreover, such a patent protection provides a broader scope of protection than copyright. This chapter describes the background to patent protection, as well as the conditions under which patent protection can be applied for and what a patent protection covers.

Software and the European Patent Convention From the outset of the establishment of the European Patent Convention (EPC) it was clear that Europe did not want patents to be granted for intangible, abstract things. Article 52(2) of the European Patent Convention is quite explicit on this:

______________________________________________________________________ Hardware versus Software 75 

The following in particular shall not be regarded as inventions within the meaning of paragraph 1: (a) discoveries, scientific theories and mathematical methods; (b) aesthetic creations; (c) schemes, rules and methods for performing mental acts, playing games or doing business, and programs for computers; (d) presentations of information. The EPC was established in the 1970s. Of course, in those days computers already existed, but they were not used in people’s daily lives. At best they were used in scientific institutes and business environments, eg financial departments of large companies. For instance, IBM started its computer business in 1953 with its 701 machine. By the mid-1960s, there were still no more than a few tens of thousands of IBM computers in use worldwide. There was no strong economic demand for computer programs to be protected by patents. The people who drafted the EPC, therefore, argued that a computer program was in essence no invention and, therefore, no more than an application of a mathematical method, which was also excluded from patent protection. Even at that time, however, many felt that an absolute prohibition on computer program inventions was inappropriate, because they relate to a technical field that evolves dynamically. Therefore a Swiss proposal to include in the wording of the EPC that only computer programs ‘as such’ were to be excluded from patent protection was accepted (Article 52(3)). Since then, the almost magic wording ‘as such’ in the EPC has been the basis of many decisions by boards of appeal of the European Patent Office (EPO) to define which software can be protected under the EPC and how the protection may be defined.

Mechanics, electronics, software At the beginning of the European patent system, electrical or electronic patent applications in respect of electronic circuits were filed. For the examiners of the EPO, dealing with these kinds of applications was straightforward. They related to hardware and could be assessed as to novelty and inventive step like any mechanical patent application. In the course of time, however, the content of these applications changed, ie analogue circuits changed into digital circuits where the circuits had to perform a logical function. Still, the circuits for which patents were applied remained hardware, so raised no difficulty for the examiners in assessing them. The difficulty arose when inventors realized that circuits that had to perform a logical function could equally well be implemented by a computer running a suitable computer program. However, when the first such applications were filed the examiners refused them, based on Article 52(2)(c). Some 25 years ago, in the mid-1980s, the boards of appeal of the EPO had to deal with the first appeals in which such applications had been rejected by an examiner. The

 76 Forms of Innovation ________________________________________________________________________________

first basic decision dates back to 1986 (VICOM). Here the board of appeal held that a patent application concerning a method of digitally processing images related to a technical process: ‘The Board, therefore, is of the opinion that even if the idea underlying an invention may be considered to reside in a mathematical method a claim directed to a technical process in which the method is used does not seek protection for the mathematical method as such.’ Since then, the EPO has allowed patents claiming protection for a computer (or a device or system with a processor) having a computer program installed on it that provides a technical effect or solves a technical problem, and for (technical) processes performed by such a computer program. So, since the mid-1980s the scope of protection may extend to both computers and processes performed by computer programs. However, in the late 1990s the boards of appeal decided to allow patent claims also for computer programs and for data carriers (like a DVD) storing such computer programs provided the computer programs concerned, when loaded on a computer, solved a technical problem or caused a technical effect.

Conditions Neither the EPC nor any of the boards of appeal has ever defined when an effect or a problem is ‘technical’. However, the case law of the EPO provides the following examples: Computer program inventions relating to controlling industrial processes like zz producing end-user products (eg cars, mobile telephones, medicines) or semimanufactured products are, in principle, patentable. Computer program inventions essentially solving a mathematical equation can zz be patentable provided they solve a technical problem, for instance when they relate to encryption of telecommunication messages, compression of data or signal processing. Computer program inventions relating only to non-technical areas like computer zz games, internet auctions, financial operations and business operations cannot be protected by patents in Europe.

Coverage Patents constitute legal claims. Such a claim defines the essential features of the invention. In mechanical inventions, such claims include the essential mechanical components constituting the inventive concept. In computer-related inventions, such claims are defined on the level of the functionality of the computer program running on a computer. Contrary to that, protection of a computer program based on copyright extends only to the set of computer program instructions as produced by a software developer. So patent protection is defined at a much higher level than copyright protection. It is much easier to circumvent copyright than patent protection of a competitor: when one amends the instruction set one does not violate a competitor’s copyright any more, but if the functionality remains the same one still infringes the patent.

______________________________________________________________________ Hardware versus Software 77 

Business case Having said this, one still has to consider under which circumstances patent protection may be useful from a business point of view. Obtaining patent protection costs money. One has to make a business case every time one considers applying for a patent. For example, dedicated computer programs implemented only once or a few times need no patent protection. However, the more implementations from one computer program one envisages (ie the target is a large consumer market), the more one should consider applying for a patent.

Conclusion Every manager who is responsible for technological innovations including software is recommended to remember the following: yes, technical ICT inventions can be protected by patents, and such protection may have much more value than copyright protection.

About the author Hans Hutter is a managing partner of Nederlandsch Octrooibureau in The Hague. He is a Dutch and European patent attorney. He has drafted and prosecuted patent applications in the field of semiconductor technology, smart cards, lithography machines, telecommunications, and navigation systems. He specializes in the field of patenting software-related inventions and has drafted several articles in this area. In recent years he has been involved in major complex litigation and advice cases relating to CD-R, DVD-R, MP3 and JPEG. He holds a PhD in the history of science and technology from Eindhoven University of Technology (1988). Contact Hans Hutter (tel: +31 70 331 2505; mobile: +31 62 110 5115; e-mail: [email protected]). Nederlandsch Octrooibureau is one of the leading intellectual property firms in the Netherlands. The firm was established in 1888 and now has about 40 consultants in the field of patents, trademarks, designs and licence contracts. These consultants serve major clients in countries both within and outside Europe to protect their intellectual property in Europe.

79 

PART 4

Sources and types of innovation

 80

81 



4.1

Challenge-led

The challenges facing society in the 21st century are many. From climate change to ageing populations or transport congestion, governments have to face these issues and create policy to address them. But what part does innovation play in tackling these challenges and how can business help? David Bott and Paul Whittemore at the Technology Strategy Board report.

The UK government is not alone in facing some serious challenges over the next 10 to 50 years, challenges that will require robust policy responses if quality of life is to be maintained and improved. These challenges have both local and global aspects. There are many examples. In the building sector, to meet carbon emission targets there is a UK policy requirement for all new domestic buildings to be zero carbon by 2016, with non-domestic following by 2019. At the same time the performance of the existing housing stock has to be addressed. Road transport contributes a quarter of all UK carbon dioxide output, so road vehicles will also be an essential part of the solution in reaching national commitments to reduce emissions. People are living longer – a testimony to health care and technology advances during the last 50 years – but the number who will have long-term conditions, and who as they grow old will become frail, is set to increase. At the same time, the number of economically active people who can finance health and social care is falling. Today’s care models are unsustainable. All these challenges are big enough to need concerted action. Governments are recognizing that they cannot resolve them by legislation alone and do not have the resources to take unilateral action on a grand scale. It will take everyone working

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together to make the step changes that are required – including, of course, the businesses that build a country’s infrastructure and living environment, day by day. It is also clear from the scale of these issues that it will not be enough simply to apply current technologies and solutions more effectively. New answers will have to be found; innovation is a central requirement. In fact, the central role of innovation in achieving the UK government’s ambitions for Britain’s future prosperity and wellbeing is reflected in the fact that since 2007 it has explicitly been a department’s responsibility – currently the Department for Business, Innovation and Skills.

Building an innovation infrastructure In line with this drive to build an innovation infrastructure at policy level, in 2007 the UK government established a new executive body, the Technology Strategy Board, giving it a leadership role in stimulating technology-enabled innovation for the benefit of the UK economy. At the same time as maintaining and developing the existing programmes of R&D investment that it inherited from government, and taking into its portfolio other established programmes such as Knowledge Transfer Networks and Knowledge Transfer Partnerships, the Technology Strategy Board set about thinking about its strategic focus. In this process the concept of challenge-led innovation clearly ‘floated to the top’ and has turned out to have a fundamental role in how the organization operates and its future strategy. In this context, challenge-led innovation means the process by which societal needs, market demands or economic challenges can be used to pull new products and services from basic research, through development, towards commercialization. There is a distinction between this and ‘technology-inspired’ innovation, which is driven by scientific advance or technological achievement. Britain has great strengths in many sectors, such as aerospace or pharmaceuticals. It also has a deep well of invention and enterprise, with innovation stemming from brilliant ideas and technological breakthroughs over many years. This clearly will continue to be important to the UK’s economic future. But it is in the challenge-led area – encompassing both market needs and major societal issues – that the biggest prizes lie, with need and demand as powerful mechanisms for pulling innovation through to commercial reality, so contributing to UK economic wealth. This is not a new idea; the phrase ‘Necessity is the mother of invention’ is hardly recent. But making challenge-led innovation a key strategic focus for the Technology Strategy Board has proved a powerful way to express these goals, to highlight the benefits to business of innovation and to engage others in making it happen. Addressing these challenges through innovation will require a concerted focus. In 2005, when it was still an advisory body within government, the Technology Strategy Board began to explore the concept of the innovation platform. This is an approach to innovation that focuses on one of these major challenges – an issue pressing enough for government to take action to address it, such as the ageing population or the problems of integrating transport systems. Such imperatives to act will create future markets – but for products and services that may not yet exist. An innovation platform brings government, researchers and the business community together to work on the issues, understand the future market needs

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and think about how to generate the new answers that may be required. A variety of tools are then used, depending on the circumstances, to help make this innovation happen – faster, and with greater business benefit to the UK. These may include investment in research and development, or funding for demonstration programmes to break logjams and improve markets by testing the practicality of solutions. It is also vital to bring on board key partners, such as research councils, government departments or regional development agencies, that have an interest or can help to fund solutions, creating a much greater critical mass to address the problem.

Innovation platform development In late 2005, the first innovation platforms were announced, focusing on how to develop intelligent transport systems and services and how to guarantee personal and information security in the new internet age. Further innovation platforms launched since then are focused very clearly on regulatory drives to limit carbon emissions. The Low Impact Buildings Innovation Platform was established in May 2008 and will apply funding of around £50 million over its first three years. It has identified key areas as design for future climate change, design tools and user-centred design, management and operation of buildings, innovation in the build process and better materials and components. To help business benefit from tackling road vehicle emissions the Low Carbon Vehicles Innovation Platform was established. It launched its first R&D competition in 2007, resulting in projects including Jaguar Land Rover’s Limo-Green, and a fuel cell taxi project led by Intelligent Energy. In summer 2009, a Low Carbon Vehicle Demonstrator programme was announced, the largest coordinated trial of electric and hybrid vehicles ever to take place in Europe. With £25 million of public funding matched by the equivalent amount from business, this involves trials of over 340 vehicles from a variety of manufacturers, including Ford, Nissan, Mitsubishi, MercedesBenz and BMW Group. Cars are being trialled in seven areas around the UK, to demonstrate how they perform in real-world conditions. Funders include the Department for Transport, the Engineering and Physical Sciences Research Council, One North East, Advantage West Midlands and the South East England Development Agency. In partnership with local authorities, power companies and infrastructure companies, over 500 charging points are being installed, and universities analyse the data. The challenges of an ageing population will also require innovation as part of the solution. Any 21st-century health and social care service will have to make greater use of technology, deliver care closer to, and sometimes in, the home and make increasing use of people’s capacity to ‘self-care’ by supporting them appropriately. Through the Assisted Living Innovation Platform, the Technology Strategy Board works with the Department of Health, primary care trusts, research councils, local authorities, academia, industry and third-sector organizations to develop technologies and services that will enable individuals to receive support at home. The newest innovation platforms, established in 2009, are focused on the detection and identification of infectious agents, and the challenge of sustainable agriculture and food supply.

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The innovation platform concept is relatively new and is still under development, but government is seeing great advantages in the combination of intense focus and flexibility that this approach offers. It is important to note its key strength – that it is not run by the policymakers, but instead helps business understand policy and find solutions to the problems, motivated by the future market opportunities. Other tools have emerged recently that use innovation to address government needs. One is the Small Business Research Initiative (SBRI). This is a process by which innovative companies can bid for contracts (not grants) with government departments or public bodies to research, develop and eventually supply new solutions to some of their pressing problems. Relaunched in 2008, by the end of 2009 the new SBRI scheme had already seen over 250 government contracts awarded to small businesses as a result of competitions in areas from defence to health care, resulting in a boost for many companies. Examples include competitions to find solutions to issues such as hand-transmitted infection in the health care sector, or the weight of equipment carried by soldiers. In addition, a major SBRI programme called Retrofit for the Future is working with social landlords to stimulate new solutions to the challenge of making the existing housing stock perform better in environmental terms. It is not easy to harness innovation – in itself a dynamic and creative force – to address the needs of public policy. But initiatives such as these are showing what can be done with the right approach, with business as a key player and with a high level of collaboration and shared understanding between government, research and commerce. In the UK, the proof of success will be visible in the coming years.

Innovation platforms under way include: intelligent transport systems and services; zz assisted living; zz network security; zz low-carbon vehicles; zz low-impact buildings; zz detection and identification of infectious agents; zz sustainable agriculture and food. zz

About the authors David Bott is Director of Innovation Programmes and Paul Whittemore is Head of Communications at the Technology Strategy Board. The Technology Strategy Board is a UK government-funded body that promotes and invests in technology-enabled innovation – for the benefit of business, to increase economic growth and to improve the quality of life. For more information see www.innovateuk.org.

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4.2

Working with universities

Can you maximize your investment in new ideas and minimize your risks by working with universities? Paul Tiltman, Head of IP and Commercialisation at the University of Exeter, reports.

The last couple of years have been very difficult for those trying to survive in the ‘technology business’ because of the extraordinary circumstances presented as a result of the global economic downturn. This has been particularly difficult for private businesses and is now set to hit the higher education sector over the next few years. A major issue is the protection and maintenance of current IP and, indeed, an ability to maintain and progress ideas with ever-diminishing funds. IP rights, and particularly patents, are expensive and can often be the first thing that goes when the squeeze is on. I hear all too often the familiar ‘It’s not worth patenting’ comment from small businesses, and even at Exeter University I am very mindful of keeping a dynamic patent portfolio.

So what are the options? The first step, whether to file a patent or not, should not be affected by short-term economic circumstances. Protection of your intellectual knowledge in some form is essential for the sustainability of your business – this and the service you offer as a business define who and what you are. This is more about timing. Small businesses are often guilty of seeking formal protection too early, and in these difficult times an overzealous patent agent can easily convince you to file, when maybe on reflection, with careful management, you could delay and still be all right. The use of non-disclosure agreements (NDAs) (see below) and simply keeping your mouth shut can buy you precious time.

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As to timing, it may seem obvious, but many small businesses don’t realize that by filing a patent you are effectively 18 months away from telling everybody about it. Also, having filed, the pressure is on to demonstrate the industrial application of your invention, which can lead to unnecessary expenditure. Basically, this is down to good old-fashioned common sense. The message is to plan carefully. This does not need to be complicated – a simple development schedule with key milestones set out should do. By all means work with your agent on this – many are more than happy to assist at the early stage. This brings us to the choice of patent agent – and, believe me, the quality varies considerably. The advice here is to use the best you can afford. A good-quality agent from a reputable firm will save you a great deal of expense in the long run. The key is to engage someone with specialist knowledge in your particular field – most of the larger firms have such individual specialists, who, under confidentiality, can help a great deal with your scenario planning. They will also grasp your ideas more quickly and have knowledge of other prior art in your particular field – something a generalist agent is not likely to have. Part of this process should consider where you will undertake the research and development activity necessary to demonstrate your invention. You may not be the best person to do this, and it can distract you from more pressing matters in running your business. There is a real cost to doing this work, and before you ‘press the button’ you need to think this through – realistically. You do have options.

Using higher education institutions for your research? I can already hear you saying ‘What – surely that is an expensive option?’ This may not necessarily be the case. By way of background, most higher education institutions (HEIs), whether research-intensive or enterprise-driven, are now under increasing pressure to engage with business on many fronts. For research-intensive institutions, the UK government has introduced a Research Excellence Framework (REF), which includes mandatory measures for ‘Impact’. For those institutions that tend to focus more on commercial exploitation (enterprise-driven), there is a move to allocate a greater percentage of the existing Higher Education Innovation Fund (HEIF) to these interactions. Basically, this means that the UK government wants to see a return on its investment in research. This agenda will only grow in importance over the next few years. These drivers have forced HEIs to consider effective mechanisms for collaborating with business, including licensing and assignment of their IP, as well as revenuesharing arrangements, alongside the more traditional consultancy and contractresearch methods of collaboration. Universities are a rich source of IP, including know-how, much of which has formal protection but with no clear commercial exploitation strategy. Basically, my view is simple – IP is worth only what you can get for it – it is an intangible asset and is best placed in the hands of those who can exploit it commercially. This brings us back to the costs of undertaking research and development with HEIs.

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Revenue sharing The real costs of undertaking research and development, whether with industry or with HEIs, should not be underestimated, and effective project management and budgetary control are essential. However, the major barrier to industry undertaking research with a university is reported to be the cost. This is particularly an issue when small and medium-sized enterprises (SMEs) need to access university resources. Most HEIs want to work with small businesses and most small businesses want to work with HEIs. One obvious answer is to consider a risk-sharing regime, such as revenue sharing. Many universities, including Exeter, have good evidence to show that this can be a successful mechanism – so how does it work? Basically, the university, or the business, puts in place a simple legal agreement that projects future sales of product related to the research and reflects either a future one-off royalty or a percentage return against revenue over an agreed period, in consideration of the costs and risks of the original piece of research work. Of course, although this can have many subsequent benefits such as ongoing research and consultancy work, there is a risk that no product will result from the work. Therefore, it is usual to see an element of upfront payment at the outset of the work in these agreements to mitigate the risk.

So what about the IP? Licences and assignments of university IP can easily include elements of revenue sharing as well as one-off royalty payments, in consideration for an agreed value for the IP. It really isn’t about ownership – it’s more about realization of value and the value proposition. It is interesting here to reflect on the findings reported by the Department for Business, Innovation and Skills (BIS) in 2009, which focused on the negotiation of collaborative agreements between universities and businesses.1 The report noted concerns that HEIs sometimes have unrealistic expectations about the value of IP. There can be protracted negotiations over rights to income from IP exploitation when the real prize is doing the research collaboratively. The generation of university revenue is important and a legitimate issue. However, it should probably be a consequential, secondary issue when considering the longer-term value of the research relationship.

IP as a passport? Finally, taking this concept a step further, here at Exeter we have instigated a truly dynamic aspect to our patent portfolio. Basically, we openly encourage the assignment of university IP at the earliest opportunity in return for research funding and longerterm research partnerships. By being commercially aware and ensuring that we optimize our internal IP disclosure processes, we seek early engagement with a range of external organizations or businesses, even pre-filing. This approach needs careful handling, and we proactively use non-disclosure or confidentiality agreements to

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protect information getting into the public domain, whilst at the same time using this as a way of testing the market for our ideas. Using IP as a passport to research funding in this way can be highly effective and is low-risk. This strategy transfers the ownership of the IP to industry at a stage when it can be shaped for industrial application, has minimal cost for the university and creates the critical research relationships sought by both parties.

Non-disclosure agreements – a basic tool For businesses and HEIs to operate effectively there is a need for timely and effective communication of information, including discussing your ideas and interchanging knowledge with others – often outside the security of your business. No matter who you are or what the situation, people like to talk and share their knowledge – there is a very real risk of disclosure, public or not, of your valuable intellectual property in such situations. In the main, and especially in recent years, businesses in the private sector have been very aware of this and have been proactive in the use of confidentiality or nondisclosure agreements. There is still much debate as to the effectiveness of such agreements, but the general view is that at least they provide a definitive statement of intent and clear evidence in any future disputes. Basically, it is often more the action and intent of such agreements that build trust and lead to effective relationships. A comment I frequently hear from small businesses when broaching this subject is that it is all too difficult and takes too long to put in place – in effect getting in the way of doing business! Also, many smaller businesses feel that they are confrontational and may frighten the other party off. However, from my experience, I would suggest that these agreements are very effective in enabling business to get done more quickly. Most universities can put agreements in place within hours, and at Exeter we have dedicated resources for handling the whole process including completion of signatures and informing researchers and academic staff when the agreements are in place. The response from industry has been very positive. Most now expect NDAs to be put in place and, where we have, they have led to a much more open and productive relationship. This approach is often the first step in gaining trust with an external organization. Fundamentally, when all is stripped away, it is trust that all effective relationships are built upon.

Conclusions To conclude, these are difficult times for the UK economy, and business needs to look very carefully at its costs. It is all too easy to take a short-term view and not to focus on what it is that makes you different. What does the market need? It is your knowledge, capabilities and know-how that make you different. The message is to take a longerterm, sustainable view. Intellectual assets are all-important in this review, and there are some simple but effective things that you can do to protect them. Universities can offer a viable

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mechanism for sourcing and increasing the value of your intellectual assets, while minimizing financial risks – it might just be worth considering them as you plan for the future growth of your business.

Tax incentives for innovation Hidden away in the Pre-Budget Report at the end of 2009, the government announced that it would be working with business to examine the balance of taxation on innovative activity, including IP. The government has looked at the case for a reduced rate of corporation tax applied to income from patents (a socalled ‘Patent Box’). This is being considered in time for income deriving from April 2013, to strengthen the incentives to invest in innovative industries and to ensure that the UK remains an attractive place to do business. Also, to enable innovative businesses to access more easily the R&D tax credit schemes for SMEs, the government has announced the removal of the condition that ‘any IP deriving from the research and development must be owned by the company making the claim’. This will allow companies to benefit from the UK’s generous R&D tax credit for SMEs without distorting their commercial arrangements in relation to IP, including accessing IP from universities.

Note 1 

Department for Business, Innovation and Skills (BIS) (2009) Higher Ambitions: The future of universities in a knowledge economy, BIS, London.

About the author Paul Tiltman is Head of IP and Commercialisation at the University of Exeter. Following a formal engineering apprenticeship and technical education, he has spent the past 30 years working in the R&D sector with multinational defence-related industries, small businesses and commercial exploitation of research in the university sector. He can be contacted by e-mail at [email protected].

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4.3

Business improvement

Innovation is as much about improving your business processes as it is about developing new products and services, argues Peter Ives at Business Dynamix.

Who, two years ago, would have thought that we would have experienced a financial meltdown with big names like Woolworths being consigned to history or that two of our major banks would be all but nationalized? With the exception of a few, the crisis came from ‘left field’ and knocked the markets and many businesses for six. I’m not going to try to identify the factors responsible or try to apportion blame, but would just say that, even when we think we can be sure of stability, change can happen. If we add unexpected events to the ever-accelerating change offered by new technologies (Moore’s Law, that the capacity of a processor doubles every 18 months, is in danger of being out of date) and the reduced timescales for new product development, we can see that future small and medium enterprises (SMEs) and large businesses need to be flexible and face the challenges presented. During a period of recession too many businesses are playing at being ostriches, hiding their heads in the sand and hoping that the world will be the same when they re-emerge. Innovation is typically thought of as creative ideas developing a new product or service that can sell. But my view of innovation is that it is about daring to challenge the norm. It’s about challenging the how and why: Can I do it better? zz Can I work smarter not harder? zz Is there a better way to service a market? zz Is the present business model out of date? zz

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Innovation is as much about improving your business processes as it is about developing new products and services.

Changing markets How often do you challenge the demographics that you have previously attributed to your target market? Are you really relevant to their lifestyle today? If we think about the fast-growing senior citizen market demographic, it has changed drastically over the past few years and is still changing. Fifteen years ago we would have characterized the interests of those who are 55-plus years old as being comfortable retirement around gardening, bowls and a little travel via cruises. Ten years ago we found the growth emerging of the SKI (Spend the Kids’ Inheritance) generation, who were more likely to be found bungee jumping whilst backpacking across the southern hemisphere. Today many thoughts have been refocused on the need to replace the savaged pension, with larger numbers looking for jobs or thinking of starting their own business. Professor Richard Scase in his Global Remix identified that we are now seeing the growth of marketing ‘tribes’ challenging easy marketing groupings in favour of more niche groups.1 But you just can’t grow revenue significantly unless you really excite customers. That’s not easy, particularly if all of your energy is focused on day-to-day survival. Radical innovators don’t accept the market’s norms or the ‘That’s the way we’ve always done it’ mentality. Markets can be changed, whether it’s Dell questioning the need for dealers to sell its PCs, easyJet selling budget flights via the internet and cutting out the frills or Vodafone having the nerve to take on the incumbent market giant, BT, and taking the mobile phone market from under their nose. Customers will always make room for something that is new and offers extra benefits. The market for portable and mobile games is expected to grow to $11.7 billion by 2014. The primary driver of this growth is expected to be the Apple iPhone and iPod Touch systems. By 2014, sales for games on the iPhone and iPod Touch are expected to account for about 24 per cent of total portable game software sales – not bad for a computer firm that many were writing off not long ago and proving that phones are no longer just about voice traffic. Radical innovation can change more than just buying habits; it can change customer expectations. Markets are being changed for ever, and the convergence of technologies is devastating what were thought to be safe industries. How could a telecoms provider five years ago have anticipated the threat the internet posed to its voice traffic business model through Voice over Internet Protocol (VOIP) services? When most people think about the future, they typically think of how they can improve existing products and processes, but what they should be looking at is whether customers are looking for something new.

Production and distribution We all get into our ‘comfort zones’ and continue to do repetitive processes that we’ve always done. Question what you do and ask:

 92 Sources and Types of Innovation _______________________________________________________________

Are there processes that I do on a regular basis? zz Do zz I need to do them? Can they be automated? zz Can I redevelop the process so that my customer does more of the work? zz Businesses need to concentrate on their core business, and the effective use of technology can help people to spend more time doing what is profitable. With the advent of the ‘network’ business, more and more businesses are staying small in numbers and outsourcing many of their cost-centre tasks. As a rule people get worried when they hear of innovative or creative financial solutions, fearing the worst. However, when seeking investment the majority of businesses have followed the ‘norm’ by going to the bank for finance. This means that they are often locked into short-term debt, which is likely to mean that the bank will find that it becomes overexposed through loan and overdraft facilities and will be forced to refuse further funds, leading to the cry ‘My bank doesn’t understand my business.’ Funding for innovation requires a ‘package’ of funds approach, using a ‘staged’ mix of grants, awards, debt and sometimes equity and other specialist financing tools.

People In too many companies, real business innovation seems to be the exception. Innovation is safely channelled into R&D or new-product development, where it can’t infect the rest of the business. Many organizations seem hostile to innovation; barriers seem to be everywhere. But, just as innovation is about how we can rather than why we can’t, there are usually ways to unblock the blockers. Innovation is more about a state of mind than a skill or technique. It is easy to get sucked into the inactivity of bureaucratic processes. Innovators are not inventors. They rarely have eureka moments; their focus is on business improvement rather than invention.

Open Innovation Sometimes the innovation comes from being willing to accept outside help. The recognition that knowledge is the fundamental driver of sustainable competitive and collaborative advantage has made leading businesses find new ways of accessing the knowledge they need exactly when they need it, in order to adapt to an everchanging and increasingly complex and uncertain environment. A focus on R&D and innovation is critical for growth companies, enabling them to: distinguish the company from competitors; zz create knowledge capital; zz develop new markets; zz increase existing market share; zz reduce production costs and increase productivity. zz

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Open Innovation is described as the use of ‘inflows and outflows of knowledge to accelerate internal innovation, and expand the markets for external use of innovation’.2 It sounds a complex process but actually involves only establishing networks of players who can add value to each other. Universities and other higher education institutions (HEIs) are key factors in providing access to leading thinking in most areas of business operation. Knowledge transfer programmes, provided by the Technology Strategy Board, enable SMEs to tap into these networks and to access knowledge and facilities that they could not afford to have in their own business. Remember, never be afraid to look at things in a different way – not through ‘rosecoloured spectacles’ but by daring to think perhaps there is a better way to achieve what is wanted. But do you know where you are at the moment on the innovation ladder?

Benchmarking To start any journey you need to know where you are to plan to get to where you want to be. Whilst we all have an idea of how innovative we are and how ‘leading-edge’ our processes are, how real is that viewpoint? The only way is to compare your business with the competition, and this needs a ‘baseline’ to work from. To establish such a baseline we use a benchmarking tool, developed by the EU, IMP³rove. This enables us to compare a company’s innovation management performance against that of other companies of their sector and size. This serves as a basis for a well-directed innovation management consulting follow-up and leads to solid and sustainable company development at eye level of best practice. So innovation is not the domain of ‘creative types’, It is for all of us as long as we are prepared to accept that we must constantly challenge the norm, looking for better ways of doing business. Sometimes it will be an uncomfortable ride, with challenges from others, but success brings its own rewards.

Notes 1 

Richard Scase (2007) Global Remix: The fight for competitive advantage, Kogan Page, London. Henry Chesbrough, Wim Vanhaverbeke and Joel West (eds) Open Innovation: Researching a new paradigm, Oxford University Press, Oxford. 2 

About the author Business Dynamix focuses on releasing the innovation within a business, working to develop a culture of continuous improvement designed to maximize returns from all assets both physical and intellectual. Its accreditations include the Associated Network Partner under the EU IMP³rove Innovation Benchmarking Programme, the National Business Link Consultants Register, the SBS Investigating an Innovative Idea programme and High Performance Coaching for the Academy for Chief Executives. Peter Ives is Managing Director and has spent some 15 years in supporting innovation. Contact Business Dynamix (tel: +44 (0)1707 828712; website: www.businessdynamix.co.uk).

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4.4

Customer insights

Leo Rayman, Strategy Director at DDB, explains how users can make the difference between good and bad innovation.

Is a good latte or perhaps a double americano part of your morning ritual? For many the day cannot start without one. This morning coffee ritual is a 1990s innovation brought from the United States that has really succeeded. Now contrast coffee with tea. There have been plenty of businesses that have tried to launch a new teadrinking culture but so far all have failed. What sets these two examples apart? In a word: relevance. Relevant innovation is innovation that meets a genuine need. There really wasn’t much decent coffee available on the high street 15 years ago. And there certainly wasn’t a decent ‘third place’ between the home and office, where you could simply sit down and work, or read, or have a stimulating non-alcoholic drink during the day. Starbucks spotted and filled an unmet need. It was focused on what people wanted. They wanted stimulating, cosmopolitan, aspirational coffee moments, not relaxing cups of tea. Starbucks was driven by customer insight. Perhaps the greatest recognition of the success of the Starbucks innovation is that it changed McDonald’s. McDonald’s now has comfy seats in the window, ‘specially selected Arabica’ and McCafé in the United States. McDonald’s has been Starbucked.

Becoming relevant To create relevant innovation you have to stick closely to what your target market wants and needs (or could be readily encouraged to need in future). This doesn’t have to be as hard as it sounds. Simply watching customers go about their daily business is one simple way to spot opportunities for innovation. Cosmetic businesses really do

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watch how women shower, how men shave, in order to see how their needs could be better satisfied. When this kind of observation is done professionally, it is called ethnographics: treating customers as if they were an indigenous tribe and observing their daily routines. Increasingly, ethnographic research is combined with internet technology, so inviting consumers to be part of the process. Mobile phone companies do this well. They pay customers small sums to record their product experiences over a few days, before uploading short videos and written entries to a specially developed website. There the participants can engage with each other as well as the researchers to discuss the themes emerging from all their experiences. This gives phone companies a source of ideas for new services to develop.

Innovative sources of customer insight Since our focus is on innovation, it seems sensible to start with more innovative sources of insight.

Co-creation Dell and Starbucks amongst others have employed the latest business theory in order to innovate in product and service design. Whether you call it Wikinomics, crowdsourcing or co-creation, each is very much in vogue, and all have been made possible by the advent of web technology. Dell’s Ideastorm.com and the MyStarbucksIdea website invite customers into the innovation process. Consumers can suggest new ideas (eg a universal power supply cable for every laptop so they don’t have to be replaced each time), these ideas are then voted on by the wider community and the most popular ideas make it into innovation. In principle this reduces the risk in the innovation, as concepts have already been put to public vote. The idea of involving customers as partners in innovation has been variously described by business theorists and management thinkers, but perhaps the strongest examples are the open-source Linux operating system and Wikipedia. These products of voluntary collaboration are a wonderful new resource available to all. They are not free of bugs and mistakes, but even these are ironed out as the wisdom of the crowd is brought to bear. In principle, organizations can capitalize on the same theory by engaging their most ardent and competent customers.

Data streams and data mining It is widely known that we leave streams of data in our wake. Mobile phone calls, GPS location maps, website traffic, credit card transactions and so on can all be used as sources of insight for innovation. The analysis and observation of website visitor behaviour are good examples of using data streams and can lead to important developments in the business effectiveness of web software. As an example, one of the UK’s leading car manufacturer websites, Volkswagen.co.uk, has been systematically optimized using visitor data. For example, if large numbers of visitors are repeatedly using the search function to find information on ‘finance’, it would suggest that the finance pages are not sufficiently well signposted. This then leads to a redesign of the

 96 Sources and Types of Innovation _______________________________________________________________

site navigation to make it more responsive to customers’ requirements. Small innovations such as these can lead to large incremental profit effects. Increasingly people are using freely available data, the ‘life streams’ of consumers discussing every aspect of their lives (and the brands within them) on Facebook and Twitter. These social sources of insight do not have the cost or biases associated with traditional market research and so are very attractive to those developing new products and services. Clearly there is also a lot of useless data within the life streams, so powerful new analytical tools are being developed in order to reveal the insights within them. Slightly more old-fashioned but still immensely powerful sources of insight lie in the customer databases that businesses collect over time. The insight they can yield is dependent on the information captured about customers, and this is highly variable, of course. Banks, phone companies and retailers are all major users of database mining to uncover commercial opportunities for innovation. This is principally because they collect reams of regular, transactional data on their customers’ behaviour. A large UK bank was able to use transactional data (perfectly legally) to discover that a major element of young people’s discretionary spend was on mobile phone bills. Consequently it decided to launch a current account aimed at young people with free mobile phone insurance as an intrinsic marketing perk.

Traditional sources of customer insight The focus group, though much derided, remains a central plank of insight for innovation. From businesses to public organizations to political parties, the focus group is often an important source of new ideas. Speaking to Marmite lovers about the ‘bread spreadability’ problem was one of the factors leading to the development of Marmite Squeezy. Consumers had consistently asked whether Marmite could be made easier to spread and be sold in a squeezy tube. All Unilever had to do was to listen in and Squeezy was born. It wasn’t just the development of the product that made the innovation successful. Marmite Squeezy was backed with some equally insightful brand communications. There are many variations on the focus group: in-depth interviews, paired depths, triads, etc. All are essentially based upon the idea of recruiting a random sample of your desired target audience and then stimulating a constructive discussion with them. Sometimes this stimulation could take the form of a product demonstration. Car manufacturers run car clinics where concept cars and their immediate competitors, without the logos or badges, are displayed and consumers are asked to rate them for design, desirability, perceived price and so on. These insights are then fed back into the design process. As well as speaking to customers in person, many innovators make use of quantitative research: from the simple telephone call on Saturday morning asking you about your yoghurt purchasing habits to complicated trade-off analysis where customers are asked to select the optimal variation of product features and price points. These exercises tend to be expensive, so may be more appropriate once the innovation is close to being ready for a market launch but small aspects need validation.

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The limits of user engagement Henry Ford is reported to have said ‘If I’d asked my customers what they wanted, they’d have said a faster horse.’ One criticism of more traditional sources of customer insight is that it is akin to looking in the rear-view mirror of a car – great at explaining what’s just happened but very bad as a source of ideas for the future. As Akio Morita, Sony’s late visionary leader, once pointed out, ‘Our plan is to lead the public rather than ask them what products they want. The public does not know what is possible, but we do.’ There is still room for the great innovative creative leap that comes when one or two people obsess about a problem until they come up with a brilliant new solution. There are many statues to brilliant individuals, but very few statues to committees… so far.

In conclusion Ultimately what we are saying is that putting the user or the customer at the heart of the innovation process keeps you focused on relevant rather than irrelevant innovation. If you can harness the good ideas of a collaborative endeavour you kill two birds with one stone: a wider search for ideas at a lower market research cost. However, you cannot rely on customer insight alone; you need to listen to your gut and make a good guess as to what will really fly.

About the author Leo Rayman is a Strategy Director at DDB London and Tribal DDB, the international advertising and digital marketing firm and fourth-biggest communications network in the world. DDB London and Tribal DDB represent some of the most well-known brands, including Volkswagen, Philips, the Financial Times and Unilever. Whether it be a new product development, 30-second TV ad, one-to-one communication or web experience, DDB’s aim is to build brands that get people talking. Contact DDB (tel: +44 (0)20 7258 4339; e-mail: [email protected]; website: www.ddblondon.com).

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99 



4.5

Value innovation

Andrew Fennell at Pera explains how to break out of your core market and head for the open ocean.

There is a holy grail of innovation and new product development. Every company dreams of a product or service that leads to new customers and new opportunities in a bright, sunlit upland where its product is the only one that exists to fill a profitable niche and where competitors fear to tread. This is very easy to say but for most companies very difficult to achieve, because true ‘Open Innovation’ requires companies to overcome their own corporate limitations, identify and analyse markets that they may wish to inhabit, discover the values that characterize the customers within that market, and then identify and develop the product or the service that will reach them. Companies may have to work with partners to develop and apply new technology and identify new customers and new channels of distribution. Is it any wonder that the majority of new product introductions fail? There are, however, huge potential benefits to be gained. Look at the example of the Nintendo Wii. In simple terms, Nintendo asked the very obvious question: ‘Why doesn’t everyone play console games?’ Their research came up with a number of answers: games are too complicated to learn, and gaining the expertise required to make progress is too difficult, but also, crucially, people saw console gaming as being solitary and nocturnal – in a nutshell, no fun. The competitive landscape was, and indeed is, dominated by higher- and higher-speed processing, better graphics performance, and more realistic, more complex and often more violent games primarily marketed at young men. The Wii, with its simplified graphics and intuitive controls, created a completely new market for Nintendo. Games are quickly picked up and learned and, perhaps most importantly, families and friends play on the Wii together. Nintendo identified what

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people actually valued in games, married that to the technological insight that incorporated simple, pre-existing accelerometer technology into the ‘wand’ to allow games to be controlled by gestures rather than complex button presses, and – hey presto! – it has a new class of console gaming that appeals to the whole family, brings fun back into video games and, crucially, locks out the competition. This was a true ‘value innovation’ that freed Nintendo from the need to beat something that was already well established. All businesses need to seek out new opportunities, and most will consider that they are alive to new market opportunities as they arise. But are they? Do businesses really have mechanisms that actively harness the skills of employees right across the company to ask the fundamental question: ‘What prevents people buying from us?’ Particularly in difficult economic conditions it is easy for companies to retreat into a cycle of building more and more features into existing products. Competitors do the same, and so a cycle of often fairly meaningless development can ensue, giving the illusion of progress while leading ultimately to stagnation. Other factors conspire to limit companies’ view of possible new market areas. For example, in most businesses, it is an individual’s specific and direct experience that will determine whether or not he or she is recruited to a particular role. The expertise that will be brought to bear is then focused on doing what has always been done, only better. There’s a great analogy – if you are in a well, then the deeper you go the less sky you can see. The deeper our knowledge, the more difficult it becomes to see alternatives. The more forward-thinking companies appreciate these issues, and many have strategies in place to try to address them. It is very difficult to succeed from within, however, because of structural and behavioural constraints within the business. Innovation is often delegated to staff without the authority to make significant decisions, but more important is the tendency of businesses to align along departmental lines, blunting the ability of teams to make progress. The overarching instinct of people within a business is to stick to the vertical market that they know, to stay within a comfort zone. The instinct of employees is to work to their departmental agendas. Proposals tend to become watered down, and the radical, discontinuous innovation that may lead to the development of a genuinely new market opportunity is overlooked. There is the further issue that, in most companies, members of any ‘innovations team’ have their day job to do too, and most people will usually trade the uncertainties of future success for the reality of a current crisis. There is a new approach, however, which may be termed ‘Facilitated Open Innovation’. By taking an approach that combines a clear and deep understanding of the way in which new ideas reach new markets with a cross-sector position that provides a lucid view of techniques and technology employed across a vast range of industries, an organization is uniquely positioned to provide the support and drive that energizes the whole organization to inhabit new markets, offer new products and new services and swim clear of its competitors. Many readers will be familiar with the Blue Ocean theories of Kim and Mauborgne, which were expounded in a book that sold more than two million copies worldwide. Stated simply, if a company remains within its core market, it has the choice to compete either on price or by identifying and exploiting a niche. In either case, particularly as

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time goes on, the competition becomes ever more cut-throat, and competitors thrash around in the ‘red ocean’ that results. The key to opening a new market successfully, as demonstrated in the Nintendo Wii example above, is to offer a ‘Value Innovation’, which may incorporate elements of products, technology and service but most importantly will speak eloquently to what the customers genuinely value and, by stripping out those elements that are not relevant to the customer, will raise barriers to competitors’ entry to the new market. Blue Ocean is a good starting point, and also provides a good toolbox to work from, yet it remains, at its heart, an academic theory and therefore difficult for a company to implement. What most companies need is a proper map, a framework, or a way to get from where they are to where they want to be with everything filled in: what needs to happen, what partners they will need, what the new customers want from a supplier and how the company will realign itself to inhabit the new market. They also need someone to guide them out into the open ocean. The process follows a clear course, involving business decision makers at each stage so that forward momentum can be maintained. Usually, the external team will undertake to drive the process and fill in a lot of the external blanks such as identification of partners and so on. Critical to the process is that it is all evidence based. All assumptions are tested, all costs assessed, all elements measured. The journey starts with an analysis of the current position and then the consideration and development of a variety of ideas, leading on to refinement of the most promising, and ends with the creation of the environment of partnerships and market opportunities that will lead to success. The process starts with co-visioning, the identification of the current value proposition of the business: what, in fact, do you believe that you sell? Once that is determined internally, it is tested against the customers’ perceptions of the value that they receive from the company and what is most important to them as customers. This early part of the process can be illuminating – products and services offered by companies tend to be added to as new opportunities become apparent, with little consideration of their continuing relevance. There can be substantial discrepancies between the company’s and the customers’ perceptions of the value that is being provided. The second stage, idea creation, is designed to be as divergent as possible. Through a variety of techniques, a ‘longlist’ of potential opportunities is developed. Companies are encouraged to look outside their normal comfort zone and identify markets that lie outside their normal business but have a synergy with it. Alternatively, opportunities may lie within the existing market, but tapping a different need. It is important to stress that this process is part of the facilitated Open Innovation – the consultants will be using their own cross-sector analysis to help this process and to develop it beyond a simple brainstorming exercise. In the same way, the third stage, validation and selection, also draws heavily on the external expertise. If the second phase was all about divergency, so the validation phase is all about convergence. A multi-skilled team of specialists, including sector consultants with specific knowledge of the client company’s market, rigorously analyse the opportunities identified through the idea creation phase, refining and confirming their viability. The objective is that at the end of this phase there should be a shortlist of

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well-researched business opportunities, evidence based, with due diligence. The new value propositions that will define and inform the new market development are articulated and at this point the benefits that the product or service is going to deliver are known, even if the final shape of the product to be developed is not. The final two phases are really where a framework adds the extra value. In the enablement modelling period, the ideas selected have to be wrapped around a real strategy: they have to be doable in a real business situation. During this phase, the evidence is gathered for the project, potential partners are approached, channels of distribution are selected, and the value proposition is tested. It is unusual for a project to require completely new technological development to succeed, but it may be beneficial to transfer technology from one industry to another, much as happened in the case of the Wii, and a partner organization with a wide enough view to be able to identify and introduce appropriate new ideas can be a crucial part of the enablement of the product. By the end of the enablement modelling phase, the project is almost complete and leads directly into the final part of the process, ecosystem building. Drawing together everything that has gone before, this final phase of development puts everything in place, ready for the next stage of production. The final handover includes a document that confirms every facet of the project so that the company can then take over the final delivery of the new product or service. The complete process has provided the client company with a route to a completely new, completely fresh opportunity. The corporate structure of most companies, the structure that has made them so successful in competing in their core markets, carries within it the seeds of their own downfall by blunting their ability to approach truly new markets. However, with new tools, new techniques and skilled providers, Open Innovation is driving new growth and new opportunities for companies to bring value innovations to create new markets, with new customers, and without competition.

About the author Andrew Fennell is Pera’s Business Leader for Strategic Growth and Innovation. He typically works with large organizations and governments across a diverse range of sectors – from automotive to public. Andrew sees innovation as a function of the ability to look across sectors, cultures and geographies to apply new patterns, processes and knowledge to create ideas that redefine market boundaries. His personal background is equally diverse, having held a number of positions, from operational delivery through to mergers and acquisitions and latterly innovation. The only continent he hasn’t delivered a project on to date is Antarctica (something he is keen to do, if you have a need).

About Pera Pera is one of Europe’s leading innovation and business support organizations, with a presence in eight European countries. Established in the UK over 60 years ago as an industry association owned by the companies it serves, Pera’s essential mission is dedicated to improving the competitiveness of industry. Today Pera services a broad, international client base, providing research, training, knowledge and consultancy.

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PART 5

New frontiers

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5.1

Software

Jane Clark at Mathys & Squire discusses the challenges and limitations in bringing software innovations to market.

Generating new software products and internet services requires the expenditure of intellectual capital and hard cash. Businesses that innovate to create and exploit new markets generate intellectual property, almost by definition. The law provides tools to protect innovators, but IP law as applied to software is complex and requires expert advice to avoid costly mistakes. There is perhaps a common misconception among software business managers that copyright and patents are essentially alternatives to each other. The reality is that they can be complementary and they each have their own strengths and weaknesses. Also they are not the only forms of commercial IP protection applicable to software and, although one element of protection may be weak if relied upon in isolation, if applied as part of an array of IP protection even the seemingly weak element can help safeguard important commercial rights.

Confidential information The first and most basic way to protect intellectual property is to keep it secret, and the protection of business know-how and confidential information is easily overlooked as an important element in your IP armoury. An important reason for maintaining confidentiality is to ensure that you do not jeopardize potential patent or registered design protection. Keeping information confidential can also provide you with a competitive edge, and having an appropriate non-disclosure agreement (NDA) in place can give contractual protection as well as the protection generally afforded to confidential information, which varies from country to country.

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This contractual protection has the benefit of generally being straightforward and inexpensive to obtain. However, it has limitations. The difficulties of obtaining appropriate evidence that confidence has been breached can in practice make enforcement difficult, and independent reverse engineering cannot be stopped. Worse still, legitimate use of the software may result in disclosure of information. However, commercial considerations may require a business to disclose key information. Where this is necessary, care must be taken to avoid undermining potential protection; put another way, any disclosure should only be the result of a carefully considered decision to release the information. This rule applies even when the ultimate aim may be to release a product as open-source software; although the right model for that product may be open-source, there may be ideas for premium, proprietary or other products developed along the way, and the patent or registered design protection that would have been appropriate for those ‘high-end’ products may well be compromised by the open-source release. On occasions a software application is designed in-house and destined only to be used in-house as a part of that business’s know-how. It may seem that in those circumstances reliance can be placed solely on confidentiality. This may be a viable approach but, if taken, security needs to be high, particularly with regard to access to the source code, and steps may need to be taken to ensure that any employment and outsourcing contracts provide appropriate confidentiality provisions. In most instances commercial gain is based on selling the product, and this necessarily precludes keeping the technology confidential. Even then, it is still sensible to build in encryption and licence control measures in order to make direct copying or decompiling harder, and to preserve embedded confidential information.

Copyright protection Copyright protection is acquired automatically, although for some countries, such as the United States, assertion of copyright is important. Documentary records of creation and strict version control are extremely important, as is ensuring that documentary proof exists of ownership, including where appropriate a written assignment from the authors of the software. Making use of a formal process for recording and, in some countries, particularly the United States, registration of copyright can make enforcement easier, and also help promote better housekeeping with respect to ownership formalities. Copyright provides no protection against independent creation and it is necessary to show a causal link between the copied work and the alleged infringement to prove that copying has occurred.

Registered design protection Useful protection for the visual appearance of icons and user interfaces can be obtained by way of registered designs. Although positive action has to be taken to register the designs, it can be relatively inexpensive, for example a European Community design registration covering all EU member states costs a little over £1,000 to obtain. Registered

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design protection, being concerned with appearance not functionality, does not provide protection for the underlying code, and is generally of little relevance to embedded software, but it can form a useful element of the IP protecting an application suite.

Patent protection The patenting of software is a controversial topic and is perhaps clouded by the notoriety of certain patents, particularly in the business method area. However, outside the business method area, patents are granted as a matter of everyday practice for computer-implemented inventions in fields where the modern world would be lost without that computer-implemented technology. These days, software controls the operational functionality of everyday products ranging from vehicles through DVD players and recorders to washing machines and cookers. The fact that the novel functionality is implemented in software does not render it any less patentable than if it had been implemented by electric circuitry and mechanical components. The United States, the UK, the European Patent Office (EPO), Japan, China and Australia have each developed their laws and practices along separate, sometimes diverging, paths. However, if you can demonstrate in your application that your invention provides a technical result, this should be beneficial in most jurisdictions. Thus, in practice, when preparing software patent applications, at least for UK and European jurisdictions, it is necessary to demonstrate the technical nature of your software or its use, such as a connection to the real or physical world. For example, a new algorithm for processing data in a computer might not be patentable, but the application of the same algorithm for processing images ought to be. There is no reason that a novel and inventive technical method should be excluded from patentability simply because it is implemented in a computer. If the invention has a ‘real-world’ connection such as processing geophysical data or controlling an industrial plant, the patent should include drawings of the apparatus from which the data are obtained, as well as the computing apparatus. The software should be described in terms of the functions that it performs. A software process can be thought of as a set of interrelated functional elements each subdivided into separate functional blocks; the patent application should include corresponding functional block diagrams analogous to hardware components, and the text should explain the invention as if it were implemented in specialized hardware. In general, if a hardware example of the invention is conceivable, the patent should include a drawing of it. Modern commercial practice requires patent protection for software itself, not simply machinery programmed with that software. Slowly, even the UK Patent Office is recognizing this, provided that the software achieves a technical result. Thus, despite the fine detail of the legal distinctions, there are two simple rules of thumb. Firstly, if software controls a technical process and improves the operation either of a computer system or of other hardware (eg networking, telecoms, security or embedded control software), it should be protectable in principle. Secondly, if the software is primarily designed to support a business process, it is more likely to face difficulty, especially in Europe, but by no means does that mean that it is not patentable. On the contrary, there are often efficiencies in the machine in terms of

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database or communications usage that provide evidence of a technical aspect to the software. These are not always appreciated by the developers and may come out only under questioning by a patent attorney looking from the perspective of what is protectable. We act for some leading business applications software providers and have obtained valuable patents for innovations in the software field where initial nonexpert advice was that any invention was essentially unpatentable as a business method or computer program. Particularly for business method-related inventions, protection may be available only for a narrow aspect of a new product, and advice should be sought from a patent attorney with expertise in the patent law of the country concerned as to whether, taking into consideration the business as a whole, seeking patent protection would be commercially worthwhile. It may cost almost nothing to be told frankly that there is nothing commercially worthy of protection; it may cost millions to fail to secure protection for a valuable asset. It is also worth noting that potentially a patent that is drafted now could be litigated 20 years in the future in respect of a product worth many millions. As far as possible the draftsperson needs to anticipate technological, legal and commercial developments in the major markets over the course of decades, and this requires the draftsperson to understand the business, not just the software.

Trademarks Successful software application providers become known by name and by brand, and for this reason a registered trademark can ultimately become one of a company’s most valuable assets. Whilst of little or no value at the outset of a business, the right brand chosen for its strength in recognition will increase in value as the consumer recognition of the brand develops. For this reason, taking advice at an early stage to protect the brand, ideally by means of a registered trademark, may prove invaluable if the product proves successful. It can also help avoid issues of treading on others’ toes.

IP freedom-to-operate issues The converse of the availability of protection is that a business must take care not to infringe the rights of others. Management of developers to avoid copying and introducing unwanted open-source issues is of course important. Although the availability of patent protection is not the same question as whether existing earlier patents may be infringed, assessing the likely protectable aspects of a development is a start to identifying where others might have patents. If a review is undertaken at an early stage in development, potential problems can be identified and possibly designed around before development time is wasted or they become critical to a project. Searching for patents is something that companies can often do themselves and adds to their knowledge. However, the process needs to be managed; there are risks associated with finding relevant documents and going ahead and infringing anyway. It is not a defence that a developer reached an incorrect conclusion that it was safe to proceed. A pragmatic approach to risk management, commensurate with project size, is needed.

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Conclusion When considering the challenge of bringing a software innovation to market, protection strategies must be considered in terms of an overall business plan. IP rights, particularly registered rights such as patents and in some cases trademarks, can become substantial long-term assets. In some cases licensing revenue may exceed sales. Importantly the value of IP is increasingly recognized by shareholders and potential purchasers. Notwithstanding the potential upside, the likely value of protection should be realistically evaluated. Some innovations in some countries are simply not easily protected; if the frank advice is that whatever protection can reasonably be expected can easily be worked around, large investments in protection may not be appropriate. It is thus important to develop a relationship with a patent attorney who is comfortable understanding your business as well as your technology and who can be creative in helping to secure protection where commercially justified and direct where not. Approached properly, IP protection should become a positive entry on your balance sheet, not merely a cost.

About the author Jane Clark is a Partner in the major UK-based IP firm Mathys & Squire, which has offices in London, Manchester, Cambridge, Reading and York and celebrates its centenary in 2010. She has significant experience both as an in-house patent attorney from a large multinational corporation and since 1995 as a patent attorney in private practice. She acts for clients ranging from start-ups through UK SMEs to major multinationals, specializing in optical and contact metrology, semiconductor technology, software and IT, and medical device technology. Contact Jane Clark at Mathys & Squire (tel: +44 (0)20 7830 0000; e-mail: [email protected]; website: www.mathys-squire.com).

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5.2

Life sciences

Bringing innovations in life science to market is a challenge. Paul Rodgers at Ithaka discusses how to rise to it.

The life sciences industry is rich in potential and is producing a steady stream of innovations that offer the promise of revolutionary developments in markets as diverse as medicine, agriculture, food, environment and chemicals. However, life science innovators face a number of significant challenges in bringing their products to market. These challenges can be overcome, but it requires resilience, adaptability and creativity to do so.

What are the current commercial and technical limitations on realizing the potential? Commercial limitations include the following: Funding: zz –– Finance is required to bring any innovation to market, but in life sciences the required investment can be daunting – hundreds of millions of dollars can be spent commercializing an innovation in the pharmaceuticals, medical diagnostics, crop protection and plant breeding sectors. –– Timescales also can be daunting: it can take over a decade to bring a new therapeutic drug to market. –– Attrition rates are enormous: only one out of every 10,000 novel compounds screened as drugs actually makes it to market. –– The long timescales and high levels of risk combine to make raising adequate funding for new innovations a particularly onerous challenge.

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Business model: zz –– The risks and timescales also make it extremely challenging for a start-up company to take an innovation all the way to market on its own. –– Typically, the innovator is forced to seek a partner with deep pockets to commercialize the product and provide an early financial return. –– However, this brings new challenges with regard to issues such as loss of control, poor communication and culture clashes that can cause partnerships to fall apart. Intellectual property (IP): zz –– Patent protection for new products has long been regarded by the life science industry as critical for ensuring commercial success. –– However, patents have come under sustained attack in the developing world, where it is felt that they have allowed life science companies to charge excessive prices for novel drugs and crops, thus restricting access to products that can save lives. –– In the developed world, pharmaceutical companies are threatened by approaching ‘patent cliffs’ as patents expire on blockbuster products, leading to drastically reduced revenues as generics companies bring cheaper versions to market. –– Innovators face challenges of their own as they seek routes through a minefield of competing patents in order to obtain freedom to operate. Management: zz –– The challenges and limitations outlined in this section emphasize the need for experienced management to drive innovations to market. –– Unfortunately, management with significant life sciences experience can be in short supply, especially outside the United States. Technical limitations include the following: Declining R&D productivity: zz –– This is particularly an issue in the pharmaceuticals industry, where the rate of new product approvals has declined whilst investment in R&D has continued to climb. –– One of the principal factors contributing to this problem is the complexity of the biology underlying specific diseases. The complex biology of crop interactions with pests and the environment provides a similar challenge for the plant breeding and crop protection industries. Need for partnerships: zz –– The complex biology noted above, coupled with the recent explosion in largescale biological data, has led to a realization that no individual organization has the resources to maximize the potential of molecular data to inform drug or crop development. –– Increasingly it is being found that no one technology provides all the answers, which is driving innovators to seek partnerships with other technology providers. The challenges inherent in partnerships have already been noted above. Fit for purpose: zz –– Reproducibility, consistency and safety are key issues for innovative products, particularly in the therapeutics, diagnostics and agri-food fields.

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–– Obtaining satisfactory performance levels with novel biological products (eg cell-based therapies and genetically modified crops) is a significant challenge for the innovator. Clear pathway to regulatory approval: zz –– These are highly regulated industries, and the challenges of meeting regulatory standards with increasingly complex biologically based products are not to be underestimated. –– Regulatory standards can vary enormously between regions; the contrasting regulations covering the release of genetically modified crops in the United States and the European Union are a striking example. The limitations and challenges outlined above require new approaches, and this is driving the development and implementation of new innovation models.

What are the different models and techniques that enterprises might now consider? Funding There are four developmental possibilities open to a technology start-up: 1. 2. 3. 4.

It can get its customers to finance its R&D. It can license its IP to global partners. It can seek cash from investors (VC firms). It can seek an early exit by finding a bigger company willing to acquire it.

These are not mutually exclusive options, and one of the critical success factors for emerging life science ventures is to develop and implement a strategy that aligns the funding required to commercialize its technology with the route to market. Increasingly, and particularly in the current straitened economic climate, it is difficult for young life science enterprises to source sufficient cash from investors to take their products to market (especially in the therapeutics field). Strategies that have proven successful in some cases and so might be considered by new ventures include: A mixed model whereby the company uses its proprietary technology to offer zz services (eg contract R&D), thus generating revenue that can then be invested in developing its own products. Raise a limited amount of investment funding from investors to develop a new zz product to a point where it can be licensed to a global partner for further development and marketing. This is a very common model in the therapeutics field, where partners with deep pockets are required to fund clinical trials, regulatory submissions and market entry. The emerging company receives a combination of upfront and milestone payments as the product progresses through development and then royalties on product sales.1 The revenues can then be invested in development of

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new products, or further investment funding secured on the back of a successful licensing deal that validates the company’s technology in the eyes of investors. An alternative to investment funding or licensing to a multinational partner is to zz enter into a collaboration or joint venture with another company with complementary technology. Pooling of technology can accelerate bringing a product to market, thus bringing forward revenue generation. Such partnerships can also reduce the funding that either company needs to raise, as both contribute technology. Typically, revenues are shared between the two parties, but the reduced revenues received by either party can be more than compensated for by the savings in time and money for bringing the product to market. Another alternative to conventional investment funding is venture philanthropy zz whereby medical charities invest in risky research projects that could lead to new approaches to treatment of disease. Charities that have adopted this funding model include the Prostate Cancer Foundation, the Lance Armstrong Foundation (testicular cancer) and the Michael J Fox Foundation (Parkinson’s disease). zzMedical charities such as Wellcome Trust and Cancer Research UK (CRUK) also have other funding schemes for which companies are eligible. Wellcome Trust’s Seeding Drug Discovery Initiative will fund the provision of synthetic chemistry services for companies that have a strong package of IP around a novel drug target but are lacking in-house chemistry expertise. Medical charities can also facilitate drug development by providing access to clinical trial centres as well as financial support; CRUK has even entered into joint development programmes with industry, eg the deal announced in May 2009 for CRUK to fund clinical trials of a drug owned by GlaxoSmithKline. Government and international funding initiatives (eg the Small Business Research zz Initiative in the United States and the European Union Framework R&D programme) are important sources of funding for many companies. The EU Framework programme encourages collaborations across Europe and the involvement of small companies. Public–private partnerships are an emerging strategic option in the life sciences zz sector. One example is the Innovative Medicines Initiative (IMI) between the pharmaceutical industry represented by the European Federation of Pharmaceutical Industries and Associations (EFPIA) and the European Communities represented by the European Commission (http://imi.europa.eu/index_en.html). IMI encourages collaboration between small companies and pharmaceutical companies with a goal of reinvigorating the biopharmaceutical sector in Europe. As well as funding, this initiative provides small companies with opportunities to develop commercial relationships with pharmaceutical companies, thus offering a potential route to market for new products.

Business model The traditional biotech innovation model has been for an invention to be patented by an academic researcher, licensed by that researcher’s university technology transfer office to a biotech company that then develops a technology or product through to a demonstration of proof of concept (creating further intellectual property along the way) before licensing the accumulated IP package to a large company that subsequently

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markets the product, resulting in royalties flowing back to the biotech company and the university. This is a grossly simplified summary, and there are of course many variations on this theme. However, a key aspect of this model is that biotech companies play a key role in taking an early-stage opportunity through to a point where the big companies are willing to get involved. The major problem with this model is that, currently, funding for biotech companies is in short supply, as investors are reluctant to part with their cash as they seek to ride out the financial storms raging across the global economy. This has placed an emphasis on leaner business models focused on a single technology or market opportunity. Such companies typically have small management teams, will outsource or partner many of their activities and, consequently, are very capital-efficient. Wherever possible they will supplement equity investment with funding from non-dilutive sources such as grants and public–private partnerships. Other models that the prudent innovator should consider include project funding, as opposed to setting up a company. Israel seems to be leading the way here, with a prominent example being the VC fund Giza’s Ofek Program, a milestone-based plan in which the firm will invest no more than $500,000 in seed funding for early-stage projects being developed into commercial ventures in an incubator setting. As a project matures, if it meets established milestones, then Giza will invest additional funds. If it does not, then Giza can cut its losses. The source of finance and a potential route to market can be combined by accessing corporate venture funds. Many pharmaceutical companies (eg GlaxoSmithKline, Roche and Amgen) have venture funds, but it is not limited to this sector, with other examples including Dow, Syngenta, BASF, Cargill, DuPont, Tate & Lyle and Unilever. The ultimate aim of corporate venture funds is to feed the parent company product portfolio, so they will be looking for investment that can eventually lead to licensing and even acquisition opportunities. Nor is corporate venturing limited to the big multinational companies, as the recent investment of Rules-Based Medicine in Psynova Neurotech illustrates.

IP The life science industry, and pharmaceutical and agri-food companies in particular, has been very precious about its IP, regarding it as ‘family jewels’ not to be shared with anyone. However, pressures on product prices from governments and end users, combined with a marked decline in R&D productivity, have led to an increased willingness to look at ways of sharing IP. Examples include the public–private partnerships mentioned above and ViiV Healthcare, the joint venture created in 2009 by GlaxoSmithKline and Pfizer through the merger of their HIV divisions. Andrew Witty, the CEO of GlaxoSmithKline, also announced in 2009 that they intend to put around 800 patents and patent applications into a ‘patent pool’ to stimulate research by other organizations into medicines for the treatment of 16 neglected tropical diseases. Innovators should be aware of this trend towards more sharing of IP and not be afraid of approaching companies with complementary IP to explore ways of pooling IP for mutual benefit.

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Open innovation Open-source innovation is also beginning to emerge in life sciences; examples include: Sage (http://sagebase.org): using data from Merck and seed funding from private zz sources; and two initiatives created and spun out by Lilly: InnoCentive (http://www.innocentive. zz com) and Collaborative Drug Discovery (http://www.collaborativedrug.com), harnessing the collective talent accessible through the internet. Several other drug development challenges, such as biomarker identification and validation, are increasingly being addressed at a pre-competitive level, often through public–private partnerships in which small companies can play an important role as sources of innovation. In addition to the IMI mentioned above, examples include: the Biomarkers Consortium (http://www.biomarkersconsortium.org); and zz Critical Path Institute consortia (http://www.c-path.org/consortia.cfm). zz The issue of who owns the IP arising from these partnerships has provoked much debate. The research tools that emerge from the IMI will be made available to other companies and academic groups for research purposes at a reasonable cost or free of charge, although the IP rights will belong to the members of each consortium.

Conclusions Life science innovators should focus their energies on applying lean business models that make efficient use of capital whilst managing risk effectively. There are two pertinent models that should be considered, depending on whether the business is technology- or product-focused: ‘application engines’ and single-programme-focused companies. ‘Application engines’ have the following characteristics: They are tightly focused on only the most compelling applications of their innovative zz technology. Such companies tend to have less infrastructure and a lower headcount (15–25 fullzz time employees in-house) and are more capital-efficient. They are well positioned to become a high-performing business unit supporting a zz product strategy in a larger company’s R&D organization, thus providing an exit for investors and a route to market for the technology. Single-programme-focused companies have the following characteristics: They build a portfolio of ‘shots on goal’ at a specific market opportunity. zz The programme is tightly focused, with clear milestone-driven go/no-go decisions zz that draw down capital as risk is reduced and value created. Disciplined management teams kill bad projects early and move quickly on to the zz next shot on goal.

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They are typically virtual, with a small core team driving product development, and zz are well positioned to be acquired and absorbed into the development organizations of bigger firms. Both the application engine and the project-based shots-on-goal models are greatly enabled by outsourcing to the growing universe of service providers: synthetic chemistry with offshore partners in China and India; biological models to specialist contract research organizations; mechanistic work with academic collaborators, among others.

Case study Psynova Neurotech Ltd (www.psynova.com) was founded in 2005 by Dr Sabine Bahn and Professor Chris Lowe of Cambridge University with support from the author; I have since served as chairman of the board. The company is developing novel protein biomarkers for neuropsychiatric disorders. From the outset we have operated a lean business model and used partnerships as a crucial part of the operation. Biomarker discovery is carried out in the founder’s laboratory (which is largely funded by grants from a medical charity focused on psychiatric disorders), and Psynova can access commercially promising IP through a framework agreement with the university. The close relationship with Dr Bahn’s laboratory allows access to clinical samples from her international group of clinical collaborators for biomarker identification and validation; it would take a start-up company working alone many years and a lot of expense to build up such a network of partners. Psynova successfully led an application for grant funding in 2008 from the EU Framework 7 programme to build on this network of collaborators specifically for R&D on a biomarker-based diagnostic test for schizophrenia. As it became clear that a complex panel of biomarkers would be required for the schizophrenia test, the attraction of forming a partnership with a company that had proprietary multiplex assay technology was recognized. In 2008, we entered a co-development and investment deal with Rules-Based Medicine Inc (www.rulesbasedmedicine.com) that is providing Psynova with funding, complementary technology and a route to market for the schizophrenia test. Psynova is also exploring with pharmaceutical companies the use of its proprietary biomarkers in drug discovery and development through a collaborative project funded by the IMI public–private partnership. The project started in 2009, and additional one-to-one collaborations with pharmaceutical companies are already emerging. In a four-year period Psynova has gone from start-up to the imminent launch of its first product with less than £1.5 million in traditional venture capital funding whilst making optimal use of alternative funding and partnership opportunities. Throughout this period the company has operated with no more than two full-time employees.

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Note 1 

These deals can be very lucrative for successful therapeutic products. In 2009 GlaxoSmithKline took an exclusive option on an inflammatory disease programme at Chroma Therapeutics in a deal that could be worth up to $1 billion to Chroma.

About the author Paul Rodgers is the Founder and Managing Director of Ithaka Life Sciences Ltd, the international strategic advisory firm. Ithaka acts for a wide range of emerging and global life science companies, investors, research organizations and government agencies offering technology commercialization services, including business plans, sourcing of funding, due diligence, market, intellectual property and technology assessments, and management support. He also serves on the board of directors for three young technology companies: Psynova Neurotech Ltd, Ziva Bioscience Ltd and Paramata Ltd. Contact Paul Rodgers at Ithaka (tel: +44 (0)1223 703146; e-mail: [email protected]).

New Wave

Investing in low-carbon innovation reaps rewards.

The Low Carbon Innovation Centre (LCIC) locates, supports and invests in low carbon innovation crucially helping to fill the early stage investment gap. We have been nurturing the next generation’s low carbon technologies since 2006 and are now starting to realise the benefit of these projects such as the DeltaStream, the world’s first free-standing tidal energy harnessing device. Tidal energy, unlike wind and solar, is constant and predictable and in the UK in great abundance. Payback time is estimated to be just six months. Other low-carbon projects we are backing include: Biofuels for Heating Agri-Fibre Insulation The UK’s most efficient biomass gasifier

Whether you are an inventor, investor, entrepreneur or angel contact us to find out more about LCIC's innovation funds. Low Carbon Innovation Centre University of East Anglia, Norwich NR4 7TJ Tel: +44 (0)1603 591366 Email: [email protected] www.lcic.com

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5.3

Low-carbon technologies

Chris Harrison of the Low Carbon Innovation Centre at the University of East Anglia reviews the challenges in bringing innovations to market.

The combined challenges of security of energy supply and the threats from climate change have begun to produce action by governments, public sector organizations and businesses to reduce carbon dioxide (CO2) emissions through energy demand reduction and efficiency and clean energy technology deployment. The acceleration in growth of activities in these areas has begun to create a ‘low-carbon sector’: ultimately an amalgamation of technologies, products and processes all aimed at exploiting the opportunities that a transition to a low-carbon economy presents. However, without clear definitions, and with a wide variety of approaches, technologies and IP types across a range of traditional sectors (energy, construction, transport, etc), routes to market and commercialization approaches are not straightforward. In some cases, legislation and infrastructure are lagging behind the rate of development of technology, and in others the market possibilities are tantalizingly just out of reach as we experience resistance to change and a difficult economic backdrop, which supports a ‘business as usual’ attitude by consumers, corporations and investors.

Public funding schemes for innovation Energy regulator OFGEM recently warned that an investment of the order of £200 billion must be made by 2025 to address electricity demand and UK climate change targets.1 A range of grant and investment funding schemes is emerging as the UK government seeks to capitalize on the opportunity that is presented by the future demand for low(er)-carbon goods and services. At the time of writing, the recent events in the global economy and many years of decline in manufacturing in the UK are seen

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as issues that can be addressed by a move to a knowledge-based economy built on the new, emerging technologies, particularly in energy generation and supply and transport. The UK Low Carbon Transition Plan (available at www.decc.gov.uk), for example, assumes high availability of biomass with high capacity for biomass liquids to meet energy transport demand. It also allows for higher efficiency standards for cars. Example schemes include the Carbon Trust, whose defined mission is ‘to accelerate the move to a low carbon economy, by working with organisations to reduce carbon emissions now and develop commercial low carbon technologies for the future’, and the European Regional Development Fund (ERDF), which will supply a new £8 million investment pot aimed at generating low carbon growth in small and medium-sized enterprises in the East of England and various research and development (R&D) grants. A recent study by the British Venture Capital Association (BVCA) and the National Endowment for Science, Technology and the Arts (NESTA) reports that governmentbacked venture capital schemes have had a positive impact on investee companies but that the relative impact is still small.2

Other supporting initiatives: Intellectual Property Office (IPO) In addition to funding, other initiatives are designed to stimulate low-carbon innovation and enhance their prospects as they approach the marketplace, including a scheme by the UK IPO to fast-track low-carbon patents through the ‘Green Channel’.3 This initiative has been specifically aimed to enable low-carbon (‘green’) products to achieve patent protection more quickly than would normally be the case and therefore increase their speed to market and potentially improve investment prospects for their inventors or owners.

The role of venture capital (VC) funds and business angels Activity around government-supported funds has to some extent been reflected by increased interest in the sector from private funds. However, in the UK, private investment in companies with low-carbon credentials has largely been restricted to the renewable energy sector – with most interest in wind and solar power. The relative amounts invested in alternative energy, however, are still small: a recent BVCA report showed £59 million invested in ‘alternative energy’ compared to £918 million invested in ‘oil equipment, services and distribution’. Perhaps more alarming as governments aim to encourage low-carbon entrepreneurs is the continuing trend in the decline in early-stage investment, which fell 70 per cent in 2008 to below 2003 levels. We might also lament relative spend on global renewable energy R&D, which is outstripped each year by the amount US consumers spend on pet food.

Opportunities in China China offers myriad opportunities for UK expertise in the low-carbon sector and, as China is the world’s largest emitter, there is an obvious environmental imperative in

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working with the Chinese. Given their current reliance on coal-fired power stations the obvious technologies of interest are carbon capture and storage. Moreover, there is a keen appetite for low-carbon expertise in the booming built environment sector, and a surprising level of interest in behavioural change and how to engage China’s 1.4 billion citizens in energy saving. Indeed it may be that these rather less obvious secondary areas of opportunity could in fact be the very markets where UK expertise and commerce can make the greatest progress. Certainly it is imperative that we factor behaviour change as an area for investment into any successful move to a low-carbon future. However, experience suggests that doing business in China can be fraught with difficulty, especially for the smaller businesses, which are unable to invest in lossleading projects. Finding the right Chinese business partner is key to success, as is linking to the political establishment. Realizing the merit of eco-sector jobs and the value of having indigenous secure energy sources, the Chinese government is fully behind the development of clean energy and has set a 15 per cent renewable energy target for 2015. There is already a well-established renewable energy sector in China, which, for instance, has installed more solar heating systems than all other nations put together. UK companies approaching the Chinese market must do their homework, as an understanding of how this sector works and most importantly who to approach within the sector to do business with is crucial. In short, relationship building and the development of mutual trust are even more important in China than they are in the West, especially as the business structure is not as well regulated or clearly defined as it is in the UK.

Low-carbon collaborative projects Public-funded initiatives in the UK have already brought climate change adaptation and mitigation technologies to market however. Through the Carbon Connections Programme at the University of East Anglia, 26 low-carbon projects have been launched. One of the most innovative, DeltaStream, is the world’s first free-standing tidal energy harnessing device. Tidal energy, unlike wind and solar, is constant and predictable and in the UK in great abundance. Each DeltaStream energy device has a nominal maximum 1.2 MW at 6 knots, producing roughly 6–7 million kWh over its 20-year lifespan. That it is not fixed to the seabed reduces environmental damage and also allows for speedy installation and maintenance. Payback time is estimated to be just six months. Another Carbon Connections project, Biofuels for Heating, sought the optimum biofuel blend for use in domestic and commercial heating. Carbon Connections helped establish a complete supply chain, which included the Oil Firing Technical Association (OFTEC) and Norfolk County Council, which provided commercial premises for tests. Trials with used cooking oil have taken place and, while it is unlikely that all 1.2 million UK homes and numerous commercial sites that are heated by oil-fired burners can be supplied through this medium, trials continue using agricultural waste.

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Construction Carbon Connections invested strongly in innovative construction-related projects, including agri-fibre insulation, fibre mortar (building blocks made from recycled paper) and BaleHaus (pre-fabricated straw bale panels). The Carbon Connections fund ringfenced 10 per cent of the budget for behaviour change projects. In Lingwood, Norfolk, a development of low-carbon, affordable houses was constructed embedding photovoltaic panels, ground source heat pumps and solar rooms. Carbon Connections monitored the residents’ behaviour over a 12-month period to assess how future tenants might adapt. After all, it is futile to have a temperature-controlled house if one simply opens a window when it gets warm. These construction-related projects have led to the Low Carbon Innovation Centre (LCIC) taking an advisory role in two eco-developments, at Dunsfold Park, Surrey and Rackheath, Norfolk. Other behaviour change projects include a lift-share operation to reduce commuter car journeys, a set of toys to encourage children to make energy-saving changes at home (and, it is hoped, to encourage the adults to join in) and a driving simulator to encourage fuel-efficient road use.

Combined heat and power and biochar LCIC has also contributed to the construction of a combined heat and power (CHP) biomass gasifier on the University of East Anglia campus. The plant, due to open in late 2009, will run on biomass consisting of woodchip from locally sourced, sustainable forestry and will have the benefit of reducing the university’s carbon emissions by a third (more than 8,000 tonnes) and per capita emissions by over 70 per cent on 1990 levels. It is one of the greenest, most energy-efficient power plants in the country. The plant has an electricity output of 1.4 MW generated by a large piston driving an alternator and also produces 2.0 MW of heat, which is normally wasted in conventional power stations, giving an overall efficiency rating, independently verified, of 86 per cent. Payback time is predicted to be around seven years. After this time, the plant will generate revenue as well as power for the university. The plant will also generate a by-product of 200–300 tonnes of biochar each year. Biochar is currently being discussed as a significant opportunity for carbon reduction, and the LCIC is fortunate to have, in Dr Zoe Wallage, one of the few UK authorities on the subject. Biochar is a fine-grained, highly porous charcoal that helps soil retain nutrients and water. It can be an important tool to increase food production, as well as locking carbon away in the soil, as biochar remains stable for millennia, unlike compost, which releases its carbon over the course of a few years. LCIC is soon to start agricultural trials of the material. The early-stage nurturing of low-carbon innovation is, as we can see, in evidence. What remains is for long-term investment to take emerging technologies beyond the R&D stage and towards market penetration.

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Notes 1 

http://www.environmentalinvest.com/Default.aspx?tabid=278 British Venture Capital Association (BVCA) and the National Endowment for Science, Technology and the Arts (NESTA) (2009) From Funding Gaps to Thin Markets: UK government support for early stage venture capital, NESTA, London, available from www.bvca.co.uk. 3  Details available from www.ipo.gov.uk. 2 

About the author Dr Chris Harrison is CEO of the Low Carbon Innovation Centre. Previously, he was the Director of the Carbon Connections Programme, an HEFCE- and OSI-funded initiative to develop low-carbon technologies and innovations, with a particular emphasis on transferring knowledge from the university research sector. Carbon Connections has successfully set up 26 ground-breaking projects, all on an investment basis, with a view to developing an evergreen Carbon Connections innovation fund. Some returns on investment have already been achieved in less than three years. Chris has a background in technology and knowledge transfer and has been a founding director and board member of a number of university spin-out companies, including Syrinix Limited, which won the Times Higher Business Initiative of the year in 2006, and Im-Sense Limited, which raised one of the biggest private seed investment rounds of any UK university spin-outs. The Carbon Connections Programme (www.carbon-connections.org) was established at the University of East Anglia (UEA) in October 2006. With a £5 million budget from the Higher Education Funding Council for England, Carbon Connections nurtured innovation from the UK’s higher education sector, pushing it towards market by encouraging partnerships with British industry. At the end of the programme in March 2009, there stood a portfolio of 26 innovative low-carbon projects, some of which are already producing returns for parent company the Low Carbon Innovation Centre (www.lcic.com).

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Specialist Microbiology

Assay Development & Evaluation

Diagnostics

Immunology Serological measurements

Biosafety testing High Containment Consultancy

Research, Development & Testing

www.hpa.org.uk/business [email protected] Tel +44 (0) 1980 612100 fax +44 (0) 1980 612241

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5.4

Major public challenges

How do you innovate in the heat of battle? David J Rhodes at the Health Protection Agency discusses the lessons learnt in developing innovative solutions to combating threats to public health.

Despite the headlines in our daily newspapers, in many ways life in the UK is safer than ever before. Many of the threats to health that our forebears took for granted have been brought under control by clean water, vaccines, modern food hygiene standards and safety legislation. Threats such as smallpox and plague, and daily exposure to lifethreatening substances in food and the workplace, which posed an ever-present danger to our ancestors, have largely been eliminated. The death of infants and young people, so frequently depicted in the literature of the 19th century, is now a rarity in the UK (though sadly not in many other parts of the world). However, in the process, our modern way of life has created new threats to health, in particular the ‘lifestyle diseases’ related to smoking and diet, the potential impact of terrorism, and the rapid spread of infectious disease through global travel. Since 2003, the Health Protection Agency (HPA) has been thoroughly tested in all aspects of its mission, having dealt with a range of threats to health, including SARS, polonium exposure and the impact of terrorist bombings in London, the fire at the Buncefield oil storage depot, real and suspected exposures to anthrax, summer and winter flooding, antibiotic resistance and, most recently, H1N1 ‘swine’ influenza. In addition, the Agency deals with less acute, but no less important, threats to health on a daily basis, including chronic exposure to radon, other sources of ionizing and nonionizing radiation in the community, tuberculosis, hepatitis and gastrointestinal and sexually transmitted diseases.

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Open innovation and health outcomes Across the health care sector, as in many other knowledge-intensive sectors, open innovation is increasingly recognized as a powerful source of sustainable innovation. Organizations that can develop effective external partnerships have a competitive advantage in securing cutting-edge technology or finding routes to market for their scientific innovations. In the commercial health care sector, this is particularly true of pharmaceuticals, vaccines and diagnostics, where partnerships between global companies, with access to the enormous development and marketing resources required to develop products, and small, innovative companies or academic groups are becoming the norm. In the public sector, the importance of open innovation in delivering and diffusing improvements to health care is increasingly recognized within the National Health Service (NHS). In the Health Protection Agency, we recognize that our ultimate goal is not merely to do good science but to influence health outcomes and that, in most cases, this must be achieved in partnership with others.

Stimulating an open innovation culture Operating in an open innovation culture clearly presents challenges. As in any relationship, it can be difficult to find the right partner, the partners must negotiate their way through life together, money matters can create unhappiness and, occasionally, the relationship may break down. However, given the benefits and leverage that HPA can obtain through open innovation in pursuit of its health protection goals, we have put in place a number of initiatives in order to ensure that the right partnerships are formed and that these are as fruitful and effective as possible. The key lesson that we have learnt is to raise awareness of intellectual property as widely across the organization as possible. Nobody can predict where the next big invention will come from, and inventions may well be made by individuals who, like most of us, have at best a hazy understanding of intellectual property issues. Fortune usually favours the prepared mind. A prerequisite for an open innovation strategy is that you should have a clear contribution to ‘bring to the party’. This is not as straightforward as it might appear. In most cases, our primary mission at the HPA is to provide a service, not to make inventions or to generate intellectual property. Consequently, important inventions sometimes go unrecognized and consequently fail to achieve their full potential. In these cases, the best strategy may be to collaborate with a number of similar organizations and pool scarce resources in order to bring in external experts as required. In our case, we work with partners in the food, agriculture, environment and defence sectors, funded and supported by the Department for Business, Innovation and Skills, under the heading of the InterAct Partnership, with the purpose of identifying inventions, developing these to the point of proof of concept, and providing opportunities to develop these in partnership with others. The Agency’s intellectual property group meets monthly, together with our patent attorneys, and manages a portfolio of 50 to 60 patent families at any one time, since HPA typically owns and manages the intellectual property rights arising from its research, regardless of how it

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is funded. We also have a limited number of funds and schemes available to encourage innovation and provide seed funding for innovative projects offering the potential for intellectual property and longer-term health benefits, and a scheme that shares with the inventors a small proportion of any royalties generated, after subtracting costs. Since filing and defending patents inevitably involve a certain commitment of time on the part of the inventors, whose time is usually fully occupied with existing duties, it is important that the individuals and groups involved should have a clear understanding of the benefits.

Governance of external relationships Wherever possible, we aim to ensure that internal policies relating to external relationships are clear and available to all our staff who may be involved in forming partnerships. Ultimately, organizations such as HPA are custodians of public money and reputation, and we need to be confident that any commitment that we make is justifiable and deliverable. In particular, we aim to ensure that opportunities for partnerships or external funding are recorded, that a professional financial and risk analysis is carried out, and that timely decisions are made by groups made up of the relevant operational, business and finance managers, who meet as often as necessary, often weekly. Once a contract is signed, customer satisfaction is monitored, and any arising issues are dealt with through a formal, audited process.

Public health challenges to innovation Open innovation is not achieved easily in a challenging environment such as the field of public health, which is fast-moving and inherently unpredictable. Our front-line practitioners typically arrive at work with very little idea of what challenges the day may bring. An emerging epidemic such as influenza or a substantial outbreak of food poisoning can create enormous surges of activity for our diagnostic staff and epidemiologists. Even in supporting areas such as research and GMP manufacturing, staff and facilities may need to be redeployed at short notice. In order to deal with this reality, while continuing to encourage innovation and external collaboration, a number of mechanisms have been developed, although many of these are being continuously refined as lessons are learnt from real experience in the field. Every effort is made to capture and develop innovations without disrupting the work of front-line staff unduly. Specialist business professionals are employed to minimize the impact on the front line, supported by external specialists, temporary staff and interim managers to backfill roles as required. Cross-training is provided so that managers and support staff can move into emergency response roles when necessary. A business continuity plan is maintained and constantly updated in the light of emerging situations so that HPA’s contractual commitments are met regardless of the challenges to the organization at any point in time. Wherever possible, external partnerships are structured in such a way that HPA’s skills, facilities and ability to respond to health protection challenges are enhanced, not diminished.

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Conclusions Despite the major advances in public health over the last 200 years, the challenges of health protection during the past decade have demanded new, integrated approaches to preparedness and response, which have already been tested several times in the UK. The requirement for a flexible, well-planned and responsive health protection capability is fully compatible with open innovation and good commercial practice, but has required us to develop robust systems, procedures and organizational culture.

About the author Dr David J Rhodes is Head of Business Development, Health Protection Agency, Porton Down, Salisbury SP4 0JG. In order to enhance the protection of the public in England and Wales from threats to health arising from infectious diseases, chemical exposure and radiation, the Health Protection Agency was established in 2003, bringing together a number of existing bodies and providing a new emergency preparedness and response function. Core responsibilities of the Agency include scientific and health protection advice, epidemiology, diagnostic microbiology, training and exercises, radiation consultancy and dosimetry, biological standards and toxicology. In the course of its work, the Health Protection Agency carries out research and publishes its findings. This research is not primarily fundamental or ‘blue-sky’ science, but seeks to identify solutions to health protection problems. Examples of the Agency’s research interests include toxicology, radiation detection, pathology, epidemiology and mathematical modelling, biomarkers and diagnostics, immunology and biological containment. In some cases this research is inextricably linked with a core function of the Agency (for example, the development and improvement of diagnostic techniques used in our laboratories) and is supported through the Agency’s core funding. In other cases, core funding is supplemented by a range of grants and contracts. As HPA is an independent agency, external income is essential to its existence and not only to its research functions. In 2008–09, external contracts contributed almost £118 million to the Agency’s total running costs of £290 million. Further details are available from [email protected].

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Call for drug discovery and antibody targets Find out if your research has the potential to become a small molecule drug project or create therapeutic antibodies

No matter what stage your research is at please submit your target for consideration in our small molecule drug discovery programmes or for our external therapeutic antibody development programmes. MRC Technology’s Centre for Therapeutics Discovery offers resources and expertise in drug discovery and antibody humanization including:  Provision of tool compounds and reagents/ability to raise antibodies against your target, for

further target validation and characterisation studies  In silico screening and compound design  Access to medicinal chemistry, screening technologies and ADMET  Design and development of therapeutic antibodies for the pharma/biotech industry  Working with scientists with over 20 years in successfully humanizing antibodies  Strong links to industry  Potential access to funding  Income generated from any programmes shared with your organisation  Ability to develop novel drugs/antibody based drugs in areas of serious unmet need

Please visit www.mrctechnology.org/callfortargets to submit your target or for more information

131 

Adding value to early-stage IP

Michael A Dalrymple, Director, Intellectual Property and Business Development at MRC Technology, discusses early-stage drug discovery in academia.

It has long been held that the research and development of new drugs is the domain of the pharmaceutical and biotechnology sectors. Whilst new ideas and inventions arise frequently from academic research, these ideas are usually extremely far from market and require significant additional resources to generate products. The process can take many years to run its course. Despite this, academia has always been involved in drug discovery and there is a growing acknowledgement of its contribution to the development of new medicines. However, it is clear that the majority of the effort required to create a marketed drug product lies away from the blue-sky research environment. The academic sector consists of the universities, independent research institutes and, in many countries, government-funded specialist research institutes and centres. Academic research is generally basic and curiositydriven, as opposed to the more applied, targeted research that leads to the development of new drugs. The kind of life science intellectual property (IP) (including patents) that is created in academia will often be extremely novel and inventive, but its utility may be largely speculative. Previously, the pharmaceutical industry would license such IP, albeit placing on it very little value. However, as R&D productivity in industry has appeared to drop, pharmaceutical and biotechnology companies have become more risk-averse; they are downsizing their internal commitments to earlystage research and focusing on ‘me too’ drugs, highly validated drug targets and clinical development. As a consequence, the inventions and novel

 132 New Frontiers _______________________________________________________________________________________

intellectual property arising from the academic sector become less attractive and languish unexplored as companies look to fill their pipelines with laterstage assets. It is in response to this situation that the Medical Research Council (MRC) and MRC Technology have created the Centre for Therapeutics Discovery (CTD).

CTD: a new model for early-stage drug discovery CTD is a pharma-style, early-stage drug discovery operation that is directly plugged into the outputs of academic research. The objective is to build on the early-stage IP from academia and create additional IP around the identification and development of new chemical entities and therapeutic antibody candidates. CTD, currently 30 scientists, has recruited heavily from the pharmaceutical industry. In particular, the medicinal chemistry capability is almost entirely big pharma-derived, for it is only in the pharmaceutical industry that true medicinal chemistry capability is found. The CTD seeks to take early-stage molecular targets emerging from academic research, for indications where there is a clear unmet need, and ‘derisk’ these projects by delivering potent, selective, drug-like lead compounds or antibodies with demonstrable efficacy in a relevant disease model. In de-risking a target the CTD will demonstrate to industry that: HTS format assay can be developed and transferred to robotics; zz good-quality progressable hits can be identified; zz SAR development versus the target will produce drug-like leads; zz there is the creation of new IP around composition of matter; zz it is likely that a clinical candidate can be identified; zz proof of concept in cells and/or animals can be obtained to link target to zz disease; hitting the target has no significant adverse effect; zz the target is druggable, with strong evidence for disease association. zz Academic scientists working with CTD will be able to work closely with CTD scientists with assay development, medicinal chemistry and/or antibody expertise. They will have access to specialized resources and equipment, compounds and antibodies that may be resupplied as ‘research tools’ for target validation studies, publications and an opportunity to see their target possibly make a difference to health care.

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The current capability of CTD MRCT’s CTD comprises three integrated arms: screening and hit profiling, medicinal chemistry and a group humanizing rodent antibodies for therapeutic use. The biology team, highly experienced and versatile, comprises scientists with a range of expertise in diverse therapeutic areas. The group develops assays to novel targets using a variety of assay formats amenable for HTS (biochemical- and cell-based), conducts HTS campaigns, validates hits using biochemical, biophysical and cellular readouts and supports hit-tolead chemistry. CTD has a highly experienced group of 14 medicinal chemists, mostly recruited from pharma, including two molecular modellers and two DMPK scientists. Together they have more than 150 years’ total experience in the pharmaceutical industry, have filed more than 120 patents and have generated at least 14 clinical candidates. Their key experience lies in medicinal chemistry, compound design, screening library construction, pharmacophore mapping, in silico screening and DMPK analysis. Finally, the antibody engineering group (TAG), first set up in 1988, has an experienced group of eight scientists with a 21-year track record of success in antibody humanization. Over that period they have humanized more than 40 rodent antibodies using the tried and trusted CDR grafting technique (the technology behind most of the currently available antibody-based treatments). Of these, 11 recombinant antibodies have progressed to the clinic, eight are currently in active clinical development and two TAG antibodies have secured marketing approval, Tysabri™ and Actemra™. The CTD is fully equipped with all the modern equipment required to perform early-stage drug discovery, including robotics, mass spec and NMR. CTD has created a novel compound collection, which includes a diversity set of some 50,000-plus commercial and proprietary compounds. This library contains clusters of up to 20–30 compounds per template, which can provide ‘instant’ SAR from medium throughput screens. This is complemented by further compound sets, including a kinase set of around 9,000 kinase-focused compounds, and pharmacologically active compounds and known drug sets (LOPAC, NINDS and JHCCL libraries). CTD are actively looking to build a national compound screening library.

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Examples Our best examples of success to date concern antibody humanization. However, our most advanced small molecule drug discovery project is now available for licensing and has commanded a great deal of interest from a number of companies. In early 2006, we identified a mouse monoclonal antibody that had been shown to block cell entry of an important human pathogenic virus. After several months of marketing of this asset and discussions with several potential licensees, we had not secured a deal. At the beginning of 2007, CTD humanized this antibody, and we subsequently marketed this higher-value asset at various partnering meetings and trade shows. By the end of 2007 we had successfully secured a significant licensing deal with a major US biotechnology company, which acknowledges the high value add of the humanization process. We were lucky enough to follow this with a similar humanization project in 2008 where a novel potential respiratory disease therapeutic was licensed to a major US pharmaceutical company.

In conclusion MRCT’s Centre for Therapeutics Discovery is open for business and thriving. It provides an exciting opportunity to hook basic academic biology findings into a modern drug discovery engine at a time when the pharmaceutical companies are becoming less and less likely to explore this space. Our activities are delivering higher-value assets that are recognized as such by our industry partners, and these fit nicely into their model of acquiring later-stage projects. We are not competing with pharma, rather we intend to take the risk of failure that they are trying to avoid and turn that into opportunities to deliver novel assets that can be turned into new therapies for important and debilitating diseases. Further details are available from www.mrctechnology.org.

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PART 6

The creative organization

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6.1

Leading for innovation

Actions matter more than words in inspiring innovation, says Bettina von Stamm at the Innovation Leadership Forum.

If there is one thing that can make or break the innovation culture in an organization, it is you, the organization’s senior management and leadership team. It might sound a little drastic, but this chapter is too short to mince words. My aim with this chapter is twofold: 1) to convince you that I am right (about an innovation culture hinging on the organization’s leadership); and 2) to explain what is actually meant by leading for innovation and hence what is required from you.

Part A – the argument The first time the importance of the modelling role of leadership occurred to me was in 1987 when I was working in an architects’ practice of about 30 people. I had been wondering why everyone seemed to be so much in the habit of tearing into whoever was not present in the room and that no one thought much of it – until I overheard one of the partners encouraging one of the employees to give him the low-down on the other employees: ‘So what’s the latest gossip around here?’ Telling on colleagues was pretty much requested by senior management; no wonder everyone was busy doing it! In Germany there is a saying, ‘Wie der Herr, so das Gscherr’, which means ‘Like the master, so the servants’, and I certainly believe that it is very true. Have a look around you and see whether you can observe some of it – in yourself as well as others. Do you notice yourself referencing or quoting your parents? Do you hear your children and think, ‘Gosh, that’s just what I always say’? Imitating and referencing ‘the powers that be’ starts rather early in life. Let me share another story. A few years ago I conducted a case study on a smallish creative company (c35 people). The company had its offices next to Kensington Gardens,

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and the director/owner of the company emphasized how important the location was and that he always encouraged his employees to make the most of the opportunity, taking a walk over lunch, getting a breath of fresh air and getting freshly inspired. Agreeing with the importance of having space and the benefit of fresh air and nature, I asked him how he was spending his lunchtime. He looked at me, almost in amazement, and said, ‘Of course, I am here, in the office, at my desk! I am far too busy to wander about in the park.’ When asked whether many of his employees were making use of the park, he said, ‘No, actually, they don’t… peculiar that…’. Do you think it is peculiar? Don’t you rather think it is quite natural? While the employees hear that the boss is emphasizing the benefits of clearing one’s head over lunch, they observe that he is not doing it. Most of us will follow the example set by the boss rather than ‘stick our head above the parapet’. So it is important to understand that people don’t only listen to what we say but more importantly observe what we do and draw their conclusions from that. A well-known piece of research by Professor Albert Mehrabian revealed that only 7 per cent of meaning is conveyed through words (that is less than 10 per cent!), 38 per cent through the tone of our voice and the remaining 55 per cent – over half – through our body language. This is why you can say to someone ‘You are really absolutely terrible’ with a laugh, while hugging the person, and he or she will view it as a compliment; or you can say ‘Oh, really well done’ in such a tone of voice and with such an expression on your face that it is quite clear the person has just made a big mistake. So it is our actions that matter so much more than our words. This is why sincerity and consistency are such important aspects of innovation – it is hard to fake a belief in innovation. In order to create an innovative organization you have to encourage people to experiment and acknowledge that failure is part of it. If you do not really mean this, people will sense your doubts in your tone of voice and spot it in your actions. If you say innovation is important and then shut down the longterm, speculative project in favour of rescuing next quarter’s results, the message will be heard loud and clear. If you say you want innovation and follow up by saying that it should fit in with existing operations, processes and structures, the message is loud and clear: innovation is nice but not really that important. And other people will set their own priorities accordingly. Consistency is important because creating an innovative organization is about establishing a certain set of behaviours and a certain mindset – and changing behaviours is not easy and nor does it happen quickly. So issuing the message that innovation is important one day and then changing your mind the next leads to confusion – and keeps people in the status quo. Changing behaviours takes effort and time, and if people believe that it is a passing fashion they will not even try to change but just wait and lie low until the storm is over. So, how can you demonstrate that you are serious about creating an innovative organization?

Part B – what it means to lead for innovation The first thing you need to do if you want to lead for innovation is to define where the innovation journey is supposed to go. What is the dream? What are you trying to achieve? Where is innovation supposed to get you?

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In a recent workshop with senior people working in innovation it was emphasized that it is much more powerful to provide an aspiring vision or dream (opportunity) than to use a ‘burning platform’ (threat) as starting point for innovation.

It is quite hard for people to innovate against an entirely open brief. If you ask someone ‘Do you have a good idea?’, what is the person supposed to say? Some guidance is needed to help people assess which idea is a good one and which one is not. The first question should be: does the pursuit of this idea bring us closer to our dream or not? A possible second question that only slowly moves on to organizations’ agendas might be ‘If the idea is not right for us, is there someone else for whom it might be right?’ Yes, I am talking about one aspect of Open Innovation here. Part of the guidance you provide should include a description or definition of what kind of innovation you are actually hoping for. Do you really, truly want something outside the business boundaries (and accept all the upheaval and disruption of existing knowledge and structures that go with it)? Or do you rather seek radical innovation within existing boundaries? Or do you really want only incremental changes to the existing state? What do you mean by ‘radical’ or ‘disruptive’? We all seem to have slightly differing views of what ‘radical’ actually means, and having a shared language for innovation in your organization is essential if you want to avoid confusion and frustration. Clarifying the boundaries and how much we want of each of the different types of innovation is essential in managing expectations, as well as allocating resources. People are full of ideas – we all have a desire to contribute. Taking the risk of putting an idea forward and getting it rejected is tough; but getting rejected and not understanding why is even worse. What has started as an exercise in motivation ends up being the cause for resentment and disengagement. Once you have created a shared dream you need to ensure that people know how they can contribute to achieving it. Whom do they go to with their idea? Who might be able to help them to develop the idea into a coherent concept? Where are the resources coming from? Putting a different set of processes and structures in place that facilitate this is important. The emphasis is on different. The processes and structures you have in place will work well for incremental improvements, but the very aspects that make them so efficient and suited for incremental changes are the ones that would kill off radical changes during the first stages. For radical innovation you need guidance and flexibility, not rules and bureaucracy.

One word of advice: Learning to lead for innovation is essential for the future survival and success of your organization. But do not forget that an organization needs both excellent, efficient operations and first-rate innovation. In order to make both work you need to acknowledge that those who thrive on innovation

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are generally not the best to drive efficiency and effectiveness – and vice versa. The long-term success of your organization will depend on both and on both working together well. That is perhaps an even greater challenge, because each of those people has different values and beliefs – but that is another story.

You could wait for ideas to come to you – or you can proactively seek them out and nurture them. You cannot do this by staying in your office. You have to go out and roam the corridors and offices of your organization – and beyond. When you find budding ideas, don’t even think about responding ‘We have tried this before’, ‘That will never work’, ‘Why has no one else thought of it before?’ or ‘It cannot be done!’ What you want to do instead is to check with the person who has come up with the idea how it might contribute to achieving the dream. If it fits, cut the person some slack to explore and experiment with the idea. After that you ought to take an active interest in the project’s development – go and ask how the project is doing! The ‘active interest’ includes ensuring that resources are available – which certainly does not mean giving carte blanche. (For radical innovation leading organizations tend to use staged funding.)

Allies for creating an innovative organization If you are looking for allies in your organization that can help you to shift values and behaviours in the right direction (for innovation is a frame of mind, driven by the prevailing values and behaviours in an organization) you may want to seek out your HR and organizational development people. Bring them on board to make sure that innovation is a stepping stone in people’s careers – and not an ejector seat. Make sure that behaviours leading to innovation – such as collaborating, networking and taking considered risks – are rewarded and recognized rather than punished. Please note that there is increasing evidence that money as a means of motivation and reward has to be considered with the greatest of care and can even be counterproductive, as it undermines the very behaviours that lead to innovation.

During development, check occasionally whether the project is still doing what it set out to do. If it has developed in a different direction, is this for the better or worse? Has it perhaps been curtailed so much that nothing but an incremental change remains? Smith & Nephew put the responsibility of checking the validity of projects to the project teams directly, with quite remarkable results: occasionally the teams themselves would suggest the cessation of a project because they felt it was not really the best use of company resources.

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It is your responsibility to ensure that the project is protected from the organization’s immune system and not killed in its infancy. Part of this is to take it upon yourself to communicate about the project to your colleagues and to ensure that innovation is on the leadership agenda – and not as the last item either. One final point, please don’t blow your lid when things do not go quite as planned; failure is part of the innovation game; if you never fail, what you are trying is probably not truly different or new. Embrace and understand the failure, and make sure you learn as much as possible from the failures. Many of our successes are built on learning from our failures. If you are still sure that creating an innovative organization is truly what you aspire to, then above all you need to make sure not only that you ask others in the organization to behave as described above but that you, first and foremost, are the one displaying these behaviours. Leading for innovation, by example, is your responsibility.

About the author Bettina von Stamm is hugely passionate about understanding and enabling innovation, particularly in large organizations. For this purpose she has set up her own company, the Innovation Leadership Forum (ILF), part of which is a networking group to exchange and further knowledge around innovation (current members include Akzo Nobel, Alexander Mann Solutions, BocLinde, British Gypsum, Cancer Research UK, GSK Consumer Health, HNS Institute for Innovation and Improvement, Marks & Spencer, Mars, Nestlé, Ordnance Survey, Royal Mail, RWEnpower, the Scottish Government, Smith & Nephew, Unilever and Warburtons). She also enjoys the role of a ‘catalyst’ in large organizations (for example, DSM, Hibernian, Mars, Ordnance Survey and the Financial Ombudsman Services), to speed up the creation of innovative organizations, and keeping a hand in academic research on her favourite topic. In addition she teaches innovation and design management at a number of leading universities in Germany, France and Mexico and shares her passion for innovation at conferences, workshops and other events. For more information you may want to visit the ILF website on www.innovationleadershipforum.org.

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6.2

Whole-company innovation

Garrick Jones at Ludic discusses how to gain an advantage by becoming more open, collaborative and multidisciplinary.

The collective knowledge in any commercial organization contains a wealth of contextual information – a vital source of ideas for innovation. Nobody knows more about the market, customers, issues, trends and opportunities than those who are working with these realities on a daily basis. The question is how best to get at that knowledge in a way that takes maximum advantage of the opportunities and leads to real innovation in products and services, in a timely manner. We call this the wholecompany approach to innovation. It is a multilayered, yet simple, combination of people management, design events, product research and development, and lean continuous improvement principles that lead to rich, innovative outcomes. Through careful sequencing of multidisciplinary events throughout the design process, new products and services are informed by the knowledge of those closest to the market. A model for this could be continuous cycles of learning, creating and communicating. The nature of work is rapidly changing. Most innovation and production is projectled, powered by workshops that disappear after their goals are achieved. This is becoming as true for aircraft production as it is for the development of new derivative products for banking. Another condition we face is the loss of proximity. Teams may be working on components of a solution across geographic and time boundaries. The time that teams are able to spend together is precious. How can the most be made of these interactions? One response to tapping into the contextual knowledge resources of the workforce is design workshops and lab events. No longer is innovation the domain of the specialist removed from the real world, cooking up new ideas in a distant lab. For reasons to do with the growth of the knowledge economy, innovation and competitiveness (Dougherty, 2006; Eisenhardt, 2003), organizations require new skills

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and are under pressure to be ‘porous’, using networks, strategic alliances and partnerships to achieve their aims (Kanter, 1999). Today, where the economic and competitive pressures on organizations to grow are increasing, it is the means by which organizations innovate that makes the difference. The trend is clear – those companies that are shifting toward open, collaborative and multidisciplinary practices have the advantage.

Innovation is a group sport There can be no doubt that bringing new products and services to market successfully requires the broad cooperation of many very different teams beyond just the ideas merchants. Marketers, product and service designers, programme managers, IP lawyers, distributors, advertisers, supply chain managers, producers and packagers all have to be factored in. In the most successful cases, teams are working in parallel, kicking off processes that are vital to successful implementation long before the finished product has been decided. Boeing created the 777 and had it certified on both sides of the Atlantic simultaneously. Apple got the iPod designed and out in time for Christmas. It is no longer cost-effective to allow isolated design phases and research to hand over an idea in search of a market. Today, ideas are developed and refined in conjunction with multiple stakeholders – customers, retailers, users and salespeople. Open innovation and crowdsourcing are becoming the most important sources of innovative ideas. Technology and social software allow us to connect with more people than ever before. Trust and flexibility are vital. Successful organizations create cultures of trust and enable flexible networks that promote mutual understanding, rapid learning and the ability to change course midstream. Competitive advantage can be described as the ability to learn, innovate or continuously reposition with respect to the competition. Complex programme management requires many threads to operate in parallel. Alignment between these parallel processes is enabled by interaction and communication. Successful organizations, whether formally constructed or networks of affiliated companies, need to work hard at enabling both the relationships and the communication required. The best managers actively design opportunities to do so. As we move to a networked economy the concept of the linear supply chain has transformed into that of the non-linear value web. Successful organizations are able to identify the members of their value web and create opportunities where all these resources are working in harmony and focused on a single goal – getting the products or services to market on time, on budget and desirable to the consumer. IBM, Sony and Toshiba are working together on new IT products; Sony Ericsson have had to work together to stay in the market, and been innovative as a result. The micro-projector (soon to be found in every mobile phone) is a joint production by multiple specialist technology companies. However, open innovation practices are limited not only to extending the traditional boundaries of the organization into its value web. Today, everybody within the organization who has a stake in the outcome of a project has a voice. This requires a different way of organizing projects. Very large-scale events or design labs are where the work is being done – online and in physical proximity.

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Collaboration, both formally and informally arranged, has significantly increased within organizations as a tool for strategic development, innovation, corporate education and problem-solving purposes (Wohlstetter et al, 2005). Alongside collaborative practices, action research, activity-based systems and participatory media development are being employed as organizational processes for enabling active employee engagement (Meredith, 2006). We call such approaches collaborative authored outcomes (Jones et al, 2004).

Spaces for innovation Physical and virtual environments are evolving to support these new requirements for knowledge-led innovation. Collaborative learning environments (CLE) are fully flexible workspaces equipped so that groups of different sizes may actively engage in learning-based decisionsupport processes. As group-based tools and techniques grow in sophistication, so too do the demands made on the environments in which innovation is taking place. I have illustrated some of the forms that these environments are taking elsewhere (Jones, 2007). Ranging in a typology from the informal to the highly structured, the improvised and mobile, the laboratory to the socially integrated, the physically static to the highly ephemeral, these structures are providing opportunities for the combination and recombination of ideas through generative and instrumental mechanisms. Some exist as centres of decision making; others exist only for the period in which the groups come together for a specific purpose – sometimes called ‘pop-ups’! Spaces for innovation are constructed fundamentally as learning and production environments: places where groups from across the disciplines and functions are able to get together to exchange contextually relevant information and to put it into production. The idea is to put ideas into action there and then.

A physical environment Imaginative environments for innovation full of toys, puzzles and books have been around for some time now. However, the playful interior often masks a serious infrastructure that means business. These workspaces are designed for creative work – and they often work very hard indeed. They are essentially theatres for large-group work, which also contain smaller spaces to work individually or in teams. It may be possible to draw on the walls, but more significantly there is ready access to information and focused databases, which enable rapid decision making. There may also exist a team of people who are dedicated to capturing everything you produce and placing it in an easy-to-access web tool, seconds after you have produced it. These environments contain a matrix of electrical and audio-visual subsystems in order to permit multiple configurations for group work. When large groups get together, the experience should be potent, useful and enjoyable. Where film-making has pre-production, production and post-production facilities for successful creation in a highly networked creative environment, so

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too does the innovation industry. The products may differ but the techniques are very similar.

A virtual knowledge environment The collective knowledge inherent in any commercial context contains a wealth of information. Such a database exists physically, virtually and socially, both within our heads and within groups or teams. Paying attention to the knowledge environment in which a group is innovating enables more powerful decision making. A support crew captures all the information generated by participants, in every format, documentation, video, sound, handwritten, photographic and the web. Making this generative knowledge base available to participants seconds after its creation allows it to be used as powerful reflexive resources. The capture and display of information in multiple formats provide instantaneous feedback to large groups. Through ever-increasing cycles of feedback, a group is able to navigate its way through labyrinths of information. Providing documentation and knowledge bases for large groups as they move through cycles of creativity, design and production creates a narrative of the journey of their development, as well as cataloguing both the end goal and the iterations that were needed to achieve it. Beyond a single project, these virtual records become powerful learning tools for the next set of programmes coming after. They also provide context-rich records, which enable those joining the teams later in the cycles to understand what has been going on. Online tools exist that enable asynchronous development of ideas across geographies and time boundaries. Collaborative authoring tools, participatory media, project management tools and other social software are enabling very large groups to exchange information. Online ‘jams’ are being held as events across a number of days, specifically to get vast numbers of employees to focus their ideas on a particular topic or set of prototypes. Videoconferencing allows people to exchange ideas at their desktops. However, despite the sophistication of online tools, nothing can substitute for the sequencing of events and information that leads to the successful development of an idea from conception through to the launch in the market. This is a process that will always require careful design and nurturing.

Prototyping, simulation and play When a large group is engaged in collaborative decision making, it may be useful to construct all manner of models of conceptual ideas and to test them. Simulation, the playing of games, the construction of small worlds, the testing of hypotheses, questioning, the reordering of information and scenario testing are all tools used for innovation. A collaborative learning environment provides all the resources required to do so. These may include construction materials for modelling, spreadsheets for financial modelling, large surfaces to write on and iterate ideas, surfaces for moving information around the space, screens for running simulations between groups, areas

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for role-play, breakout spaces for groups to work in parallel, and video facilities for groups to create scenarios. Networked technology enables parallel work by groups exploring the contextual field as they work through group processes of defining and refining options. Essentially, whole-company innovation is about connecting the right team with information, design resources, processes and documentation in a manner that enables deep understanding of the landscape of information, critical exploration of alternatives and the opportunity to prototype ideas – and launch them into the market.

Flexibility and communication in a value web are directly related to the quality of interpersonal relationships – establish multiple opportunities for these to develop As a system moves through the cycles from innovation, proof of concept, piloting and testing to production, marketing and distribution, the qualities and skills required of teams change. These phases have their own distinct personalities and qualities, and it takes a savvy manager to promote the context, attitude and environment that are required for each team within each phase to be successful. During innovation phases, teams function best if they are: autonomous; zz configured with the best members for the task; zz connected to customers; zz connected to your value web; zz skilled in disciplines associated with innovation; zz incentivized and measured. zz Each phase in the life cycle requires different skills to take the lead – in principle moving from the unstructured to the structured. Even self-organizing teams need to recognize that the leaders of creative phases are usually different from the leaders of piloting, testing, production and distribution phases. An important thing not to lose sight of, though, is that, as the baton changes hands, the teams are still checking in with customers and the entire value web. Rapid iterations and feedback cycles are best at all phases. Empowerment is vital – understand the acknowledged experts in the teams and let them make the decisions. Let packaging experts decide on packaging; let the logistics specialists decide on distribution; let designers make the design decisions. Flatten the hierarchies, and enable decision making.

Check in with your value web The opinions of your clients, employees, suppliers, customers and learning networks continue to be vital throughout the inexorable march to market. Encourage osmosis of ideas. In addition to generating ideas, you also begin to mobilize the users of the products, creating a buzz around the new products long before they are launched, and creating an influential user community in the process.

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Rapid iterations and feedback cycles Creating opportunities for rapid iterations and feedback increases the sophistication of the product. IDEO create project spaces and displays for their products in design that are open for conversation with anyone who is passing. The products are always visible; the teams are always in close proximity to each other. The same holds true for the design of services, process flows, video scenarios and use-case descriptions enable the communication of these ideas. Encourage teams to build formal and informal feedback cycles into their processes, throughout the life cycle of development and production.

Empowerment is vital Flattened hierarchies work only when roles are clear and everybody knows who takes responsibility for what. Making these roles visible helps. This is not to say that everybody is allowed an opinion on everything – the eureka moment may come from anywhere on a team! However, the final decision should rest with the expert on the team.

The sapiential role of leadership The role of leadership within fast-moving, complex networks is to serve the needs of the teams’ ultimate objective – through facilitation, arbitration and demonstration. Leaders are required to be sensitive to the changing moods of the network, to understand what blockages exist and to facilitate the opportunities for teams to solve the problems. Arbitration is vital when differences of opinion exist – to ensure differences are tested and to ensure that decisions are made in order to enable progress. Fundamentally leaders model the behaviours they desire to encourage within the broader context of the programme.

Acknowledge the programme phase Sensitivity to the phase of the programme enables a large group to be clear about what needs to be done and who needs to take the lead. Film production is a powerful example of this because it’s so visible. Studio time is costly, and everyone is aware of the phases of production – from filming, to editing, to screen testing and distribution. Acknowledge the programme phase and acknowledge the phase leader.

Incentives and measures Although teams need to be autonomous, it is important that members of the teams feel rewarded for the work they are doing. Most learning takes place in failure, and the design process honours failure – high-volume, low-risk failure! However, business success is also a factor of time and budget – and incentives to meet these targets are vital. Measuring the success of teams against understood criteria, established clearly at the start, provides security. Getting things to market requires clear goals and deadlines. Healthy competition between teams allows the bar to be continuously raised on quality, outcome and sophistication. Teams find a sense of flow when they are challenged and tested in an environment that provides the skills necessary to achieve. All successful innovation, at the end of the day, is about people having fun.

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The state-of-the-art collaborative learning environment represents a complex ecology of support systems, environment, tools and technical systems, production systems, learning systems, project management and process support. These represent the infrastructures required to enable a whole-company approach to innovation. To paraphrase Einstein, if we wish to get different results, we have to use different tools – and in this case it’s those tools that enable us to harness the collective knowledge of the whole company that lead to successful innovation.

About the author Garrick Jones is an academic, consultant and musician based in London. He is a partner of the Ludic Group, which produces innovation programmes, promotes the development and operation of collaborative learning environments for innovation labs and advises governments and regional authorities on enabling innovation within regions and cities. His career includes being Director of Ernst & Young’s Accelerated Solutions Environment (ASE) and Director of the Innovation Unit – Innovate:UK. His academic research is focused on large-scale group work, and he is the first 1851 Commission Fellow in Design, where his research is on the use of games for educating design thinking in business. He studied at the University of Oxford, and he is a research fellow at the London School of Economics and Political Science (LSE) and a senior tutor in industrial design and engineering at the Royal College of Art and Design (RCA) and Imperial College. Further details are available from Garrick Jones, London School of Economics and Political Science, Houghton Street, London WC2A 2AE (e-mail: [email protected]). ©2009 Garrick Jones

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6.3

Fit for innovation

Swallow? Parrot? Bear? Frog? Viktor Dörfler of the University of Strathclyde Business School discusses how innovation strategies evolve.

Skype innovated the field of communication and was acquired by eBay for nearly $4 billion in total. It profited from its innovativeness. Yet there are companies that reject any kinds of change but also seem to be doing well. How are both possible? Being innovative is often seen by default as a guarantee for business success. Usually we ask only how we can be more innovative rather than whether we should be innovative in the first place. This chapter considers the latter question by applying the idea of evolution to organizations. As will be shown, though, evolution of organizations is not exactly Darwinian.

Evolution of organizations Darwin’s original conceptualization of evolution cannot be directly applied to organizations, though it may serve as a useful starting point. According to orthodox Darwinism, individual living creatures are in a constant struggle for existence, in which natural selection prefers the fittest. The only mechanism of change in this view of the biological world is the random mutations by means of which the genome is altered. This is certainly not true in the world of organizations, one of the reasons being innovation. In accordance with the idea of the ‘extended phenotype’, the genome not only determines the features of a creature but also the effects of that creature on the environment – a bird, for example, builds a nest and thus affects its environment. We can immediately recognize this idea as relevant: we know that organizations affect their own environment. I also suggest that not only the phenotype but the genotype should be extended, meaning that the

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same genome will produce different creatures in different environments. So success in innovation depends both on the innovativeness and on the environment in which that organization operates. Biological systems evolve towards an increasingly higher complexity, although there is no agreement whether this is the direction or merely the consequence of evolution. The phenomenon of increasing complexity helps us understand why innovativeness is often regarded as obligatory and unquestionably good: constant innovations are needed in any particular field of business to maintain the ever-increasing complexity. Even so, this does not say anything about the need for innovativeness of any individual organization. It would make sense in the world of organizations to replace the survival of the fittest with the survival of the fitting. This means that it is not necessarily the most innovative organization that survives, but those organizations that can establish harmony between their fitness and the habitat (environment, which they and other organizations also affect).

Fitness of innovations Skype Technologies SA, the company that launched its Skype VoIP application in August 2003, the year the company was founded, was acquired by eBay in October 2005 for approximately $2.5 billion as ‘upfront’ consideration, plus a potential performance-based consideration of around $1.4 billion maximum. What was so attractive about it? Skype innovated telecommunications: ‘Free Internet telephony that just works’. These days the number of online users is usually 15–20 million at any time. A contrasting example could be the Digital Equipment Corporation (DEC). Although they were good at making mini-computers, especially for engineering, they failed to match the PC idea. The company was finally sold off piece by piece and was finally acquired by Compaq. In the previously outlined framework, the organizations’ innovation fitness can be classified into four categories, using animal names as metaphors. Companies such as Skype that come up with the new value first are the First Swallows and might be called valuable companies. Making profit is not their primary concern. They attempt to create value. Skype is a success story, but very few value-creating companies are as successful. For instance, very few have heard of our company Doctus.1 While the risks are high if you are a First Swallow, so are the potential rewards. Moreover, it is impossible to calculate either risks or rewards; there are no objective measures. The feasibility studies fail for these companies. Yet, if a Swallow survives, its reputation will usually be that of the grand innovator. The First Swallows are followed by the Parrots, whose speciality is repeating what others have already said. They rarely attempt to create value and they never create new knowledge. However, they are ready to replicate the innovation of a Swallow and then attempt to create profit by delivering it successfully to their markets. They do not spend much on R&D, but they have enormous budgets for advertising. These are the profitable companies. The Parrots will normally be renowned, apart from being very successful, as very customer-focused companies, because they bring the new products or services

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to the customers as soon as they are verified. That is, they will do this if there are no other speculations, eg delaying the launch of a new product when expecting to gain additional profits from the previous version. Of course, they will not advertise this. While the Parrots are fast movers, the Bear wakes up after a long hibernation and so needs a long time to catch up. Bears are late adopters. The essence of Bears is the high efficiency that is primarily achieved by low costs. How else could they endure not eating all winter? Therefore they do not have huge spending, either for innovation or for advertisement, and often not for staff. We could as well call them efficient companies. They prefer to present themselves in the light of reliability at low cost. They bring only well-established values to their customers and, as costs are kept low, offer their customers moderate prices. However, the old way may frequently be more expensive than the new way; in these cases the Bear emphasizes adherence to some sort of traditional values, such as maintaining high street branches in the era of e-banking. At their best, these companies are reliable and are perceived as such by their customers. If you think that Bears are anti-innovative, wait until you meet the Frog! Frogs are the champions of the status quo. For a Frog, the question of change does not even arise, no matter what the circumstances are. Frogs do not change themselves and they will obstruct changes if they can help it – just recall the Easy Riders! Their strength is their position. These are the most bureaucratic organizations, spending most of their effort on intriguing with other Frogs in how to maintain the status quo and prevent newcomers from entering their market. In order to do this, Frogs need to be really large. They need to be in control, just as dinosaurs were. However, we just do not seem to have them around much any more – because a Frog survives only in a habitat that does not change much; but, with a change of the habitat, the Frog fails to adapt and dies out.

Achieving harmony The four categories introduced above are pure types, and real-world organizations or even a division may be a blend of types. For instance, Apple’s iPod is based on some knowledge creation and substantial value creation, but more than anything else it is very successfully delivered to the various markets – and, as can be expected, it has been enormously profitable. So it is partly First Swallow but mostly Parrot; and it is much more profitable than the innovations of the Mac computers, which were almost pure First Swallows. As this chapter was presented, one might think that First Swallows are the best and Frogs are the worst. This apparent order is entirely untrue. In different habitats, different animals survive. Swallows cannot stay alive in the swamp of the establishment, the best habitat for the Frog. Swamps are mostly populated by Frogs, although a Parrot or a Bear may survive if they escape quickly enough. However, most habitats will have a niche for a few Swallows and many Parrots and Bears. Hence, when considering their innovativeness, organizations should consider their habitat and their innovation fitness. If the two are in harmony, fine, but it must be revisited soon after. If they are not in harmony, you must establish a new harmony by changing your type of fitness (eg giving up your First Swallow fitness and becoming a Parrot), or changing your habitat, or both. As all environments today are turbulent, all habitats change rapidly, and so you

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must re-examine your harmony frequently, even if you just changed your fitness and/or your habitat. In this way you can achieve a dynamic harmony.

Note 1 

See www.viktordorfler.com/doctus

About the author Viktor Dörfler is a Lecturer at the Management Science Department of the Strathclyde Business School. His key interest is modelling the various aspects of knowledge and knowledge increase; he is also advising on the development of the Doctus KnowledgeBased Expert System. A more detailed version of this chapter was originally prepared for the AoM 2007 in collaboration with Zoltán Baracskai and Jolán Velencei. Viktor Dörfler can be contacted at [email protected].

 154

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6.4

An innovative culture

Nikolai Bisgaard at GN ReSound discusses how to strike a balance between ‘technology push’ and ‘market pull’ to make sure that any innovation offers a genuine advance in value to the user.

‘Innovation’ is truly a buzz word. You see it everywhere as the road to salvation for almost any type of corporate challenge, and let there be no doubt that it is also an important component in any business strategy. But as usual the devil is in the detail, and converting the flaming headline to practical work patterns is a challenge for many. The way to handle innovation must depend on the context. If you are a service provider, innovation may turn the whole organization upside down. A manufacturer of products will be more likely to focus on strategies related to products and technology, although one should never ignore how innovation in delivery systems can add to competitive power. If you have your back against the wall facing serious market challenges, radical innovation may be your only option for survival through totally redefining the company. Conversely you might be in a profitable business area where your objective is to boost your competiveness to take market share. In that case innovation could and should probably be administered more cautiously.

When is it innovation? ‘Innovation’ as a label is often attached to quite ordinary activities that have happened and will continue to happen within a company. In my book, however, it is when a novel concept with a distinct advantage over the ordinary is brought to market. It is a product that breaks with established practices and provides higher market value,

 156 The Creative Organization and Innovation ________________________________________________

usually by employing new technologies developed for the purpose or adapted from other product areas. Most of us can relate to the car industry, and it can be used as a good example. Every car manufacturer must bring in new models every year to stay competitive, but it will be a stretch to say that this is innovation. Every now and then there is a breakthrough in technology that can be applied as a major improvement and then rightfully presented as innovation: fuel injection versus carburettors or the HDI diesel engine or frontwheel versus rear-wheel drive. In order to maximize your commercial benefit from innovation, patents pay a natural role, although maintaining exclusivity is not always the best way to go. Many true innovations gain widespread use only when licensed broadly. One can think of the technology behind the audio CD as an example.

Creating an innovative environment Engineers in technology-based companies are constantly trying to come up with ideas that will convert recent technology developments into advantageous product features. The challenge is to assess if such ideas are innovative in the sense that they provide substantial improvements seen from the user perspective. In order to have a great portfolio of ideas to work from, any company relying on innovation must establish a culture where idea generation is stimulated and rewarded. Some of the components that contribute to a corporate culture that spurs innovation are described below. Very few people can be creative to order, so having easy access to delivering an idea or a proposal when it emerges is very important. Fortunately, modern IT systems with intranet and e-mail provide excellent opportunities for setting up such facilities at moderate cost. Essential, though, is to secure that all suggestions are handled within a reasonable time and the individual who took the time to document the idea and send it in is informed about the fate of the idea. Nothing is as frustrating as sending in something you worked hard on and never hearing back. If the flow of ideas cannot be properly processed it is probably better not to ask for contributions. When you then hopefully get a load of ideas and proposals, the reality is most often that only a very few of them are really great ideas. Nevertheless, it is important to respond to everyone and acknowledge their efforts. Some companies have reward systems for ideas received in general and patentable ideas in particular. Rewards systems are a bit controversial: some believe strongly in the positive effect of them, and others take the opposite viewpoint, claiming that they lead to undesirable restrictions on the free exchange of ideas and jealousy between colleagues. Each company will have to choose its own way in the light of its cultural background and objectives. Another measure is to allow employees time to experiment, particularly those who have a track record for creativity and good ideas. Many R&D managers take pride in saying that every employee is stretched to maximum capacity and has detailed work plans reaching far ahead, claiming to have a highly efficient organization. This can lead to a situation where all initiative is stifled and low innovation ability results. 3M is a famous example of a company where R&D employees are urged to have

____________________________________________________________________________ An Innovative culture 157 

private projects for a considerable part of their work time. Allegedly a blockbuster product like Post-it resulted from such an activity. Keeping a high information level for all employees on the competitive situation as well as own activities is also helpful to spur creativity.

Matching market needs to technology Once a catalogue of great and possibly innovative ideas and technologies is established, the real challenge starts: how to rate ideas and understand which of them will create real advances in user benefit. Often products are equipped with technologically advanced features that from a technology angle look like a valuable improvement, but very often such technology-driven features are of little business impact because they don’t mirror a genuine user need. Understanding how current products are experienced by users is critical to selecting the right things to do. There are many ways to gain such knowledge: surveys, questionnaires, focus groups and so on. It sounds quite easy, but again the devil is in the detail. In surveys and questionnaires you only get answers as good as the questions you ask. Many industries have very dogmatic views on what the boundary conditions for their activities are. Including these trivial and often long-standing issues in your analysis will often be the best background for real innovation. Once you have a good understanding of the user situation you can start to analyse ideas. In a particular situation you may offer a product that is needed but that generally is not highly desired as such. Users will therefore – more or less consciously – perform a kind of cost–benefit analysis. Key to understanding the value of a given proposal is an understanding of which factors are major contributors to this cost– benefit analysis. A step forward in the perceived value of a product can derive from improvements in performance, but it can certainly also derive from a clear reduction in the cost factors.

Cost–benefit analysis Cost is often more than the sheer cost of product acquisition; it can be related to factors like cosmetic features, physical discomfort, cost of consumables and other practical issues – all the things that the user sees as the ‘price’ to pay for the use of the product. Such factors can be derived from well-designed surveys. Dogmatic thinking and traditional wisdom often prevent you from seeing these areas clearly, but there can be great opportunities for innovation in such areas. Similarly, overlooking such factors may lead to disappointing product launches where sales are lagging expectations in spite of advances in product features, because increases in the cost dimension were not assessed and understood. Naturally any survey should pinpoint and analyse the areas where functional aspects of the products are most important, because it is here that we often find the opportunities for increased product benefit. These areas are often believed to be better understood and are naturally the focus point for most technology developments, but this often just leads to ‘more of the same’. There are very likely certain categories of

 158 The Creative Organization and Innovation ________________________________________________

product features that are recognized as important, but where little progress has been made because of technological limitations: ‘It would be terrific to do “abc”, but as we all know it can’t be done.’ Keeping a keen eye on technological developments in related fields may eventually give you a unique opportunity to make advances in a direction that for a long time was considered impossible. Once you have identified the important areas where products can be improved to create more benefit as well as the areas where cost of use is of influence, the analysis can be performed. All of this has been very qualitative so far, and in order to carry out a more precise analysis scales have to be assigned to each of the benefit factors and each of the cost factors. Then the state of the art has to be mapped on the scales before we can start to analyse ideas in the cost–benefit model. The scales can probably be made in several ways. This writer has successfully used a scale from 0 to 1 in 10 substeps. The value assigned to benefits goes up towards 1.0 that represents perfect achievement of the benefit. The value for cost factors goes from 1 being very bad to 0 being no burden at all. Each factor is given a value on the scale. Based on these the product value can be calculated as the sum of the square of each benefit value divided by the sum of the square of each cost value. The squared values are used to increase the sensitivity to moderate changes in values. An example may illustrate the method. Let us assume that the state-of-the-art product has a set of benefit values of (0.5, 0.9, 0.3) and a set of cost values of (0.8, 0.6, 0.2). That gives a product value of 1.1. We have received two proposals for improvements of this product. In proposal 1 the benefits can be increased to (0.7, 0.9, 0.5) and that increases the product value to 1.5, which definitely is an improvement. In proposal 2 the benefit values stay as they are, but one cost value is markedly reduced to give the set (0.2, 0.6, 0.2). Then the product value comes out as 2.6, which clearly is higher than the modest improvements in the two benefit dimensions could yield. In this case it seems likely that the reduction in the cost factor is going to result in a product with higher user value even if the benefits are kept equal, a conclusion that may not be imminent unless this method is applied.

Designing the product portfolio Clearly the cost–benefit method described above cannot stand alone when decisions are being made on innovation proposals. Many other considerations have to be made involving factors such as general product portfolio maintenance, product segmentation, competitive landscape and business case calculations, taking into account the cost of realizing the innovation proposal. Product segmentation is particularly interesting. It may well be that the proposed innovation concerns only a sub-segment of the market or may define a completely new product category. In the latter case it is hard to estimate the business perspective. Asking the sales network will normally result in modest projections, owing to unfamiliarity with a new concept. In such cases there normally are two outcomes: either it fails utterly or a new star is born. Management will have to use its best judgement. If the cost–benefit analysis shows a healthy improvement in product value there should be a good chance of success.

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About the author Nikolai Bisgaard, MScEE, is Vice President IPR for GN ReSound A/S, a leading international hearing aid manufacturer. GN ReSound is headquartered in Denmark, but has manufacturing in China and sales offices all over the world. In recent years hearing aids have undergone an astounding technological development and are today based on highly sophisticated DSP processing. Innovation is important for GN ReSound for converting advances in technology into user benefits. Contact Nikolai Bisgaard at GN ReSound (tel: +45 45 75 42 50; e-mail: [email protected]).

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PART 7

An open search for ideas

 162

THE IP NET

Making technology connections

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7.1

How to look for innovation

Online, you can find technologies and ideas to make yourself more innovative. Mark Thompson of UMIP reviews the resources at your disposal.

Everyone recognizes the need for businesses of all sizes and in all sectors to innovate in order to prosper, especially if you are a technology company. But if you are a small company without the luxury of the resources of multinationals or large corporates, how do you do this effectively and where do you start?

Open innovation for large companies Since the publication of Henry Chesbrough’s book Open Innovation: Researching a new paradigm in 2003 (see www.openinnovation.net), the expression ‘open innovation’ has spread and been accepted everywhere, reflecting the flow of ideas and technologies into or out of large innovation-led companies. The reduction of reliance on internal R&D to drive product innovation and a swing to looking for ideas outside are directions in which most big companies are heading. It is a change of approach that is regarded as irreversible. Chesborough didn’t of course invent this activity, but was the first person to put it on the map, recognizing its significant growth and the drivers behind it. We now have a situation where open innovation, coupled with the increased recognition of IP protection, along with improved access to universities, creates a stimulating, dynamic and complex scene. Spurred on by the many public successes of this new way of working, many large companies are often now very well resourced and organized in how they look for

 164 An Open Search for Ideas ________________________________________________________________________

innovation, with resource dedicated to patent mapping, technology scouting, corporate venturing or publicly promoting their ‘interest’ areas. Philips, for example, employs 250 people just in its in-licensing, IP management and out-licensing department alone. However, even experienced and well-resourced large corporates frequently complain that the technology world is a frustrating jungle. In old mode, they only had to look internally for innovations, but now, if they are either seeking a technology to solve a particular problem or simply seeking ‘ideas’, those innovations could come from potentially any organization anywhere, including a choice of 9,000 universities worldwide!

Open innovation for smaller companies For the many small or medium technology (or indeed manufacturing) companies, where do they start to look for innovation? With limited resources, they have very little time to become experts in the web resources or systems available. There are of course online patent databases, but for a typical SME that is not an expert in searching them they really aren’t that easy to use, the information is frequently hard to digest and it is not in the functional language a small company needs.

Innovation-seeking tools for companies, large or small There is now a wide variety of other online tools and networks that are very suitable and easy for SMEs to use, as well as still being valuable for large companies. They allow users to: find a solution for a specific technical problem; zz find innovative technologies that could be translated into a product; zz keep track of innovation activities in specific sectors; zz monitor competitors. zz These resources are described one by one below, forming a box of complementary tools. They are not all completely free, but even with the commercial ones some value can be gained at no cost.

Google or Yahoo alerts It is surprising how many people have not heard of these. In essence these allow anyone to set up an e-mail alert notifying them when something new has come on to the web matching specific search terms that you set. You can set up as many different alerts as you wish. So, if you are in the water quality sector, you could have one alert set up for identifying new web content on ‘innovative water treatment technology’ and perhaps another for ‘Danfoss new product’. Advantages: Free, simple, flexible and doesn’t load your inbox heavily. Disadvantages: Can sometimes pick up old data depending on the site indexing cycle.

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Free search engines Academia search engine www.academiasearch.info – this simple search engine is very focused. It searches only the technology web pages of the UK’s 125 universities so is useful for looking for developments in a specific technology. Innovation Park Search Engine www.innovationparksearch.info – this searches just the content websites of 1,000 technology companies on UK science parks. Advantages: As simple to use as Google but with the rest of the web ignored, free. Disadvantages: None.

Technology portals Emerging over the last six or seven years, these sites are online databases that are either completely free or have useful free functionality. They list either new licensable technologies or technologies and innovations being sought, or both. The main portals are compared in Table 7.1.1. The last of these, IP Net, is the newest, being the first portal of this sort to allow anyone anywhere to advertise a technology offering or an innovation need free. This and the ability for users to register online and add and control their content directly make it extremely easy for SMEs in particular to use. Where sites allow users to register for e-mail alerts or updates for new technologies, key word filters can usually be set. A number also have an RSS feed, which works very well, particularly as the volume of new traffic flowing out of these systems is relatively modest.

Halfbakery The free open website www.halfbakery.com allows people to post directly their ‘halfbaked’ ideas for product or technology innovations for the good of society. Advantages: It can be quite creative and wacky, but has had some successes. Disadvantages: The ideas (or part-ideas) are all public-domain, so if you are inspired by an idea on there you can’t be sure that someone else who has seen it hasn’t also been energized into action on it!

The Knowledge Vine The website www.theknowledgevine.net is a free e-mail-based networking system consisting of 1,000 or so technology professionals from a wide variety of organizations including 200 universities internationally. It allows users to post a ‘single sentence question’ to others by e-mail, so it is ideal for locating technologies for specific purposes, eg ‘Does anyone know of a technology that…?’ Users reply just to the person asking the question if they know someone who can help.

 166 An Open Search for Ideas ________________________________________________________________________

Table 7.1.1 Technology portals Portals that list just technologies available: www.ibridgenetwork.org

Technologies from US universities only. Information in reasonable lay language although quite wordy. No fees or charges for contacting advertisers. Sliding scale of fees to list technology.

www.sparkip.com

US bias. Data almost entirely in patent text format so not easy reading. Data can be browsed freely, but registration and payment required to see full information and to allow users to contact advertisers. Fees to list technology.

www.flintbox.com

Data from Canadian universities only. Data are in a digestible lay language format. No fees of any kind. Users can contact advertisers freely. E-mail alerts facility.

www.techex.com

Data format not very structured and visually not easy on the eye browsing. Data tend to be in patent language. Free to browse part of data but registration necessary to view full text. Advertisers can be contacted only through Techex. Expensive to advertise.

www.university-technology.com

Scottish universities only. Good data format. Users can contact advertisers directly. No fees.

Portals that list just technology needs: www.innocentive.com

Technology needs are usually from large multinationals. Data usually in a good concise data format. Free to browse. Contact advertisers through InnoCentive only. Expensive to advertise on. E-mail alerts.

www.ninesigma.com

Technology needs are usually from large multinationals. Usually good concise data format. Free to browse. Contact advertisers through NineSigma only. Expensive to advertise on. E-mail alerts facility.

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Table 7.1.1 (continued) Portals that list both technologies available and technology needs: www.tynax.com

US bias. Registered users can add their data directly. Free to browse. Data heavy text format. Twenty-five per cent deal feel to anyone advertising a technology request or technology offer. Advertisers can be contacted only indirectly through Tynax. Data format quite heavyweight. E-mail alerts facility.

www.yet2.com

Centred around United States but also covers UK, and Japan to a degree. Good lay language data format. E-mail alerts facility.

www.theintellectualproperty.net (IP Net) International profile. Very concise data format and very easy to browse. No fees. Users directly upload their own technology offers or needs data. Users can contact advertisers directly. E-mail alerts facility.

Advantages: Simple, lean, needs-based, generates good peer-to-peer connections and adds very little to inbox load. Disadvantages: None.

Knowledge Transfer Networks The KTNs (www.ktnetworks.co.uk) are technology-specific networks for the UK, run by the Technology Strategy Board. There are some 19 different ones covering subject areas from fuel cells through to creative industries. They are all free to join, and run events, newsletters and so on. They give a very good means of keeping up to speed with trends, issues and opportunities in specific sectors and have a very good entrepreneurial and communal feel. Advantages: Join online and subscribe free. Good for tuning into trends and relevant government funding. Disadvantages: The style and success of them vary a little.

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Summary The above summarizes several different tools to help the innovation process. With an investment of nothing more than an hour or two of browsing, bookmarking and some selective subscribing, some useful tools or ideas may stick on your radar. Nothing ventured, nothing gained!

About the author The University of Manchester Intellectual Property Ltd (UMIP Ltd) is the University’s IP commercialization company (www.umip.com). Manchester typically generates four to five new technology start-ups each year and transfers 20 technologies per year into industry through licensing. In the last five years, businesses that have emerged from the University have attracted over £150 million in funding.

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7.2

Collaborative ventures

Keep innovating by collaborating, but watch your IP, advises Dominic Elsworth at Hargreaves Elsworth.

The world economy appears to have passed through the worst of the recession, although who knows when significant growth will return. When the upturn does arrive, those best placed to take advantage of it will be those who continued to innovate during the trying economic climate. The need to collaborate to innovate is greater now than it has ever been, whether collaboration is between two multinationals, as is often the case in the aircraft industry, or between an SME with a few employees and a design company. Organizations simply do not have the resources to do all the innovation themselves. However, many prospective collaborations fail to materialize, and those that do often do not have happy endings. The sticking point is often about who exactly owns the IP. For collaborative ventures to work smoothly this fundamental issue of ownership must be resolved. Before considering how to operate collaborative ventures it is first worth looking at some more fundamental questions, as one must know the answer to these before considering how to operate such a venture.

Why collaborate? Whilst collaboration is often talked about as a goal in itself, in fact organizations only ever collaborate for one reason: each party needs something that the other has. Research teams at different universities may have reputations in different fields, but a potential area of research may cross more than one field. To obtain a research grant it may be necessary to show that the research will be carried out by a team of people with

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experience in all the fields. Hence, the universities come together. In the more commercial world, a product may require development for a particular application. This may require knowledge of the product and the application, and such knowledge may not be held by one organization; hence the organizations in question collaborate. A collaborator may use a venture to learn about a market, be that a new geographical market or a new technical market. At a more basic level, the nature of the innovation to be embarked upon may be such that the costs are so great they cannot be borne by one party alone. This has happened in the defence sector for many years, but owing to the poor availability of finance could spread across other areas through the downturn. Collaboration is often thought about in terms of potentially competing organizations working together. However, many of the principles outlined below also apply to situations that might be described as outsourcing; for example, a vehicle manufacturer may look to a component supplier to innovate on its behalf.

Considerations for potential collaborators Any collaborator should understand both its own motivations for collaboration and the motivations of its fellow collaborators. Such understanding may be gained from open discussions prior to collaboration beginning. It may also take the form of research and investigations into the potential collaborator. Such research and investigations will pay dividends when seeking to negotiate a collaboration agreement. For example, if the investigations show that the collaborator has connections in particular markets, be they defined by geography or technology, it should then not come as a surprise if the collaborator seeks rights to exploit the outputs of the collaboration in those markets. Investigations may also uncover a potential collaborator’s real motives for collaboration. Collaborators would be wise to investigate the financial health of any collaborator. There is nothing more frustrating than being part-way through a project and one of the collaborators collapsing.

Who brings what to the collaboration? Organizations would not be collaborating unless each was bringing something to the venture. In order to avoid the possibility of disagreements down the line it is important for the collaborating parties to identify what they each bring to the venture. Of course, this will include details of the capabilities of each organization. It is also important that each party identifies what intellectual property it owns, in order that there can be no argument at a later date that a piece of technology resulted from the collaboration rather than the efforts of one of the collaborators alone.

How will the collaborative venture be managed? Collaborative ventures need to be given continual impetus, with clear targets for each collaborator.

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One very important aspect of management is how knowledge arising from the collaboration is managed. This is very much a management issue and involves the provision of resources that allow information to be stored in a manner where it can be accessed easily by all collaborators, the scheduling of regular meetings between collaborators, and the establishment of reporting structures to provide for the screening of new knowledge for patentable inventions.

Who gets what? Another vital aspect of any collaborative venture is for the parties to agree the rights of each party both during and after the venture. Is each party to have equal access to all outputs of the collaboration, or will the access depend on which collaborator came up with the particular idea? Whilst unequal access may appear fundamentally opposed to the ethos of collaboration, there is no one correct answer. For example, there may be very good reason for collaborators to have rights in different territories or technical fields.

How is intellectual property resulting from the collaboration to be owned and what will be done with it? In terms of patents, to determine ownership one must go back to the person who is the inventor and then look at how rights in the invention and to the grant of a patent may have passed from the inventor, which may occur by virtue of employment or by assignment. It is usual for the right to an invention made by an employee in the course of employment to belong to the employer, the specific details being dealt with in national law. Hence, if the collaboration is between two businesses, under normal circumstances the businesses would each enjoy rights to the inventions of their own employees. A collaborator must satisfy itself that the key personnel of its fellow collaborators are in fact employees and, if not, that other arrangements for the transfer of inventions and the right to patents have been put in place. This is a particularly difficult area for universities. Businesses collaborating with universities should seek undertakings that intellectual property rights arising from work performed by the university do belong to it. It would often appear equitable for collaborators to own jointly patents resulting from collaboration. In some cases this works, but joint ownership of patents comes with its own pitfalls, one of which is that each joint owner may work the patent for its own benefit without reference to the other joint owner. Further, in many countries licences cannot be granted without the authority of all joint owners, whereas in other countries any joint owner may grant licences without reference to other joint owners. Whilst this arrangement may work well for some collaborators, for others it may undermine the whole venture. It is often better for collaborators to set up a company in which they each own shares. The patents are then owned by a single legal entity and the questions regarding joint ownership do not arise. Collaborators must consider what will be done with the technology resulting from the venture and what the rights of each party in terms of commercialization will be, and

__________________________________________________________________________ Collaborative Ventures 173 

satisfy themselves that their fellow collaborators will not use the technology in a manner that might not be consistent with their values.

People People are often the reason for collaborating. What happens if a key member of your fellow collaborator leaves? Is there still a reason for collaborating? What happens if a key member of staff of one collaborator wishes to leave to join another collaborator (which may be the reason why the other collaborator wished to be involved in the venture)? Such questions should be considered before entering into any agreement. It is important for organizations that are proposing to cooperate, which are located in different states, to consider how they can gain the commitment of their staff. Problems can arise where the laws of nation states differ with respect to inventor remuneration. Some countries, Germany for example, have the notion of ‘inventor compensation’ written into their laws, whereas others do not. This can lead to staff on the same project receiving widely different levels of remuneration for the same work. Obviously, such a scenario can lead to disquiet and needs to be addressed by managers of collaborative ventures from an early stage.

Who pays? Collaborators should not only agree how costs associated with intellectual property rights are to be funded, but also agree who will be responsible for managing those rights and what should happen in terms of ownership in the event that one collaborator wishes to withdraw from the venture.

What about other work? Other than where two organizations merge, collaboration is usually project-specific, even if the collaboration results in a spin-out company. This means that each collaborator will have ongoing business to attend to outside the collaboration. Where this business involves the development of new technologies it is vital that the boundaries between what rightly belongs to the collaboration and what rightly belongs to the collaborators are clear to all collaborators.

The golden nugget For a collaboration to be successful for all collaborators, it must not be possible or even desirable for a collaborator who comes up with the golden nugget to attempt to keep it outside the collaboration. All these issues should be dealt with in a collaboration agreement. Furthermore, such an agreement should be in place at the outset. There is often a strong desire to get on with the work of a collaborative venture and let the negotiation of the agreement run alongside it. This is a dangerous policy, which collaborators should resist.

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Conclusion Collaborative ventures can work well, bringing benefit to all concerned, if everyone is committed, the correct management structures and resources are in place and the collaborative venture is underpinned by a clear agreement.

About the author Hargreaves Elsworth is a patent attorneys’ practice established in Newcastle-uponTyne in January 2002 by its founder, Dominic Elsworth, a registered patent agent, trademark agent, European patent attorney and European trademark attorney. The ethos of the practice is to bring to its clients a service of the highest quality, tailored to specific business requirements, at a reasonable cost. The practice provides both UK and international clients with advice and support services in all areas of intellectual property law and in particular patents, trademarks, designs and copyright, know-how and technology transfer. Further details are available from Hargreaves Elsworth, 6 Charlotte Square, Newcastle-upon-Tyne NE1 4XF (tel: +44 (0)191 211 1974; fax: +44 (0)191 247 7102; website: www.heip.co.uk).

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7.3

Freedom to produce

Maybe you can patent an idea, but have no freedom to produce it. Or you have no patent, but can produce it. Enterprises constantly face these dilemmas. Marco Serravalle explains how to unravel them.

In this chapter, I would like to clarify a few key issues that almost always come out when discussing a new invention with an inventor or a small business.

What is a patent? This question is very important, because most of the misunderstandings arise from the confusion around the meaning of patents. Many people see a patent as a positive right; in other words, by owning a patent the proprietor would be authorized to produce and commercialize the product covered by the patent. This is a big mistake. In fact, a patent has to be seen as a negative right; it means that by owning a patent we can prevent everybody else from producing and commercializing the product claimed in the patent. However, we have the right to produce only if there are no other patents covering the product or some aspects of it.

Patentability assessment In other words, patentability of an invention is different from freedom to produce the invention. When an inventor wants to know if an invention is patentable, I perform a search, which is focused on the prior art that might be cited during examination and that might lead to novelty or inventive step objections. For this purpose any prior art document has the same value, and it is irrelevant whether the document is a patent, a

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patent application or a magazine. The scope of a prior art search is to determine the starting point the examiner will use in the assessment of novelty and inventive step. To take an example, let us consider an invention directed to a new anti-inflammatory compound, for example a compound of a specific formula belonging to the class of esters. After performing a patentability search, we are aware that the compound as such is known from document D1, but the document contains no mention of its property as a drug. Another document, D2, generically discloses a class of esters as antiinflammatory compounds; our compound belongs to this class but is not specifically mentioned in D2. The examples make use of a different compound, and we can provide a comparative example showing that our compound is more active than the compound used in the examples of D2. When assessing patentability of the invention, I will conclude that, based on the documents we have retrieved, it is possible to claim the first medical use of the compound, and I can inform the client that I do not see a problem to the obtainment of a patent directed to it.

Freedom-to-produce assessment Not only does a patentability search cover patents and scientific literature, but these documents can be published in any language, in any country and without limitation of date. In technical fields like mechanics, it is possible to receive citations in the search report of the European Patent Office of documents published at the end of the 19th century or the beginning of the 20th century. A freedom-to-produce search is very different and has the aim of finding any granted patent that is still in force (all annuities paid) in the state(s) of interest for the inventor; it means those states where the inventor intends to commercialize or produce the new drug. Thus, the freedom-to-produce assessment will take into consideration only a limited number of documents. However, the search will cover not only the inventive concept of the patent but any other feature of the product that might be covered by a patent. This is an important aspect and renders the freedom-to-operate search and assessment much more complex than a patentability search. Let us go back to our example and imagine that our client is interested in commercializing the product in Germany, France and the UK. Consequently, we will consider only German, French and UK granted national patents and European patents validated in at least one of these countries. We will also have to check if annuities are all paid. For pending patent applications, the situation is more uncertain, and the only thing we can do is to make an evaluation of the type of claims that are likely to be granted, if any. Let us suppose that D1 is a European patent application, which after prosecution was granted and validated in the UK. If the granted version of D1 contains a product claim, we might be under the monopoly of D1. A product claim covers any use of the product. In our case, we might be able to have a first medical use claim, which is a product claim limited to the medical field. However, the product would be covered by the general product claim of D1. A second problem might arise from D2. Suppose that granted D2 contains a first medical use covering the general class of ester to which our compound belongs. In this case, we have a second monopoly on our product.

 178 An Open Search for Ideas ________________________________________________________________________

Another important aspect to consider and discuss with the client concerns the process used for the preparation of the compound. If the process the client uses is patented by D1, D2 or a different document D3, we have to deal also with this monopoly. Finally, the formulation of the drug might be covered by a patent, directed for example to the use of a specific ingredient of the formulation. However, this last aspect is easier to avoid by using a well-established technique and well-known eccipients. It is evident that if we perform both analyses for our client we might come to all possible different conclusions: invention patentable and free to be produced, invention not patentable but free to be produced, invention patentable and not free to be produced and invention not patentable and not free to be produced. The most difficult case is often the case we have described as an example, a patentable invention covered by other monopolies. Sometimes inventors are discouraged by this situation and tend to give up, but is it the correct choice?

What to do if the freedom-to-produce assessment is negative In my view, to abandon or even not to file a patent application only because we know it is covered by one or more other patents is a huge mistake. Let us start from the hypothesis that the invention is valuable. Those companies owning the patents (D1 and D2 in our example) are probably in a better position, and the new product invented by our client represents a possible change in the hierarchy of the market. Negotiation of a licence is an option to be considered, taking into account that in certain countries, especially for inventions of public interest (and a new drug can be such an invention), a compulsory licence can be requested. Even in the worst-case scenario that our client will not be able to produce the product, the filing of a patent application prevents competitors from doing the same. Not filing the patent application and keeping the invention secret do not exclude the possibility that somebody else might achieve the same findings in the future. If this happens, our client will have to face a situation where somebody else is selling the same anti-inflammatory compound. Furthermore, it is clear that both documents D1 and D2 are older than the new patent application of our client. Thus, there will be a period of time where our client’s patent is in force while D1 and D2 are lapsed. D1 especially, which is not directed at drugs, can last only 20 years, while, in the case of a drug-related patent, there can be an extension of up to five years with a supplementary protection certificate (SPC), which takes into account the time required to obtain the authorization to sell the drug. It is also possible that the proprietor of D2 might be willing to negotiate a crosslicence, which would allow him or her to produce the new drug of our client. It is therefore evident that only by filing a patent application can we play our hand and have a chance of winning. If, on the contrary, the client abandons the case, he or she will never obtain any advantage from the invention. From this analysis it is also clear that obtaining a patent and starting production are two separate aspects and that, when drafting the new patent application, the focus should be on the maximum protection obtainable and not the simple coverage of the new product. The better protection we build around our client’s invention, the easier it will be in the next 20 years to create a strong monopoly to help the client to be successful.

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About the author Marco Serravalle is the founder of Serravalle sas, a boutique intellectual property practice that provides a broad spectrum of activity, from priority searches to noninfringement opinions. Thanks to his experience as an EPO examiner, Marco Serravalle specializes in the prosecution of European patent applications and oppositions to European patents. Contact Marco Serravalle (tel: +39 (0)371 495771; e-mail: marco. [email protected]).

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7.4

Watch your priorities

Bart van Wezenbeek at Vereenigde examines the consequences of publication of your invention, even after filing your patent application.

Your business never stands still, and new developments come and go. Yet at some point in time you have to decide to protect your invention by filing for a patent. In most cases this will be done at an early point in time, where your invention is still under development. Often you will continue developing the invention, and in many cases new embodiments will become clear and sometimes even new inventions will be conceived.

The priority system Luckily, part of this can be accommodated by what is called the priority system. The priority system was enacted in 1883 to harmonize patent filings. At that time – and still now – patent protection was a local, national phenomenon. In every country where you needed patent protection, you had to file an application. The patentability of that application was governed by novelty and inventive step over the prior art, where the prior art was determined by your filing date: everything that is available to the public before the date of filing is considered to be prior art. However, owing to the archaic communication systems at that time – in 1880 there was a mail service, but overseas mail had to be sent by ship – the filing date (and therefore the content of the prior art) changed from country to country. This was found unacceptable, and by the 1883 Paris Convention it was decided that, if inventors had filed an application in one country, they would be allowed a time period of 12 months to file the same application in another (or even the same) country, while claiming priority from the filing date of the first application. Thus, the first filing date, also known as the priority date, fixes the content of the prior art for all related patent applications that claim this priority (also called equivalent applications or a patent family).

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The priority system now Nowadays, despite modern communication techniques, this 12-month priority period still exists, but it is mainly used for different purposes: In the priority period the applicant can check if the commercial value of the invention zz would warrant continuation of the patent process. In the priority period often (but depending on the country of filing) a novelty search zz will be issued, which gives an idea of the patentability of the invention. If needed in view of this search report, amendments can be made to the later zz application(s). The priority year can be used to test and develop the invention further, whereas zz these new data can be added when filing the later application(s). The caveat is that there is a danger in this priority system. The danger exists when new data and/or text are added to the specification that is eventually filed.

Is your priority valid? The key lies in the notion that you can validly claim priority only for the subject matter that has been disclosed by the earlier application, but that for any subject matter that is added priority cannot validly be claimed: it will then get the critical date for determination of novelty and inventive step of the filing date of the application in which it has been filed for the first time. This situation is depicted in Figure 7.5.1, where you will see that it is possible to file more than one application from which you can claim priority.

Priority 1 May 2009 subject A

1 December 2009 subject A and subject B

30 April 2010 subject A, subject B and subject C

Priority only for subject matter that has been disclosed in priority document. In this case: subject A has date of 1 May 2009 subject B has date of 1 December 2009 subject C has date of 30 April 2010 Test for valid priority (at least in Europe): novelty test

Figure 7.5.1 Priority date

 182 An Open Search for Ideas ________________________________________________________________________

Basically, this means that, for every change that is made to the later application, you should question whether this would mean a loss of priority. For instance, if you had mentioned in your first application that you could use a solution of a compound in water or ethanol and you add in the later application also a solution in benzene or toluene, then you would lack priority for these new embodiments. Any document published in between the priority date and the filing date of the later application that mentioned (one of) these embodiments would then be considered to be novelty-destroying. The major danger, however, lies in your own disclosures: if – by virtue of the (unjustified) notion that you think you are protected by having filed your priority application – you publish your invention during the first year, ie between the priority date and the filing date of the later invention, it will be taken as prior art for all parts of the later application that cannot validly claim the priority. Thus, returning to our example, if you had published the possibility of solving the compound in water or ethanol, this will be held to be prior art against the embodiments of benzene and toluene solutions. Of course, novelty in this case is not a problem, but the later embodiments may be found obvious, ie to lack inventive step, on the basis of the combination of your disclosure and, for example, the common notion that the solvents water or ethanol could be replaced by toluene or benzene.

Enablement Another requirement to validly claim priority is that your invention should have been described in an enabling manner in the priority application. This means that a person of average skill should be able to reproduce the invention. For example, if you have invented a new compound you may file a (priority) patent application on it. However, you should be aware that a compound is deemed enabled only if you also describe how to make the compound. Thus, if your priority application does not contain a description of the synthesizing process, any priority claim to the compound will be invalid.

US provisional applications US provisional patent applications are a special breed of priority applications. Unfortunately, the belief is widespread that, once you have filed a provisional patent, you will be protected. Therefore, they are often advertised as cheap and easy ways of getting protection, where cheapness and ease need to be understood as meaning you would not need a patent attorney to draft and file the application. While essentially true, in this statement the warning is forgotten that you have to draft your provisional application carefully to take care that any priority claimed from it is a valid priority. Letting a patent attorney draft your priority application (eg your US provisional application) will probably be the best way to overcome the problems encountered with having invalid priorities. And, in the end, it will appear to be the cheapest way.

Lessons to be learnt It will always be better not to publish anything during the priority year, ie before filing your definitive application. In that case you will have created no prior art in the event

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that the claim to priority fails. Further, ensure that your priority application is as complete as possible, and take care that the invention is described in an enabling manner.

About the author Bart van Wezenbeek studied biology at the University of Utrecht (1980–88), specializing in microbiology and neurophysiology. After that he studied Dutch civil law at the University of Tilburg (1988–94), specializing in intellectual property, Anglo-American law and liability law. Since 1994 he has been a Dutch and European patent attorney, and since 1997 a company lawyer. In 2001 he was also sworn in as deputy justice in the appeal court in The Hague. From 1976 to 1988 he worked on neurophysiological research with a pharmaceutical company, where he switched to patent searching and joined the patent department in 1990 as a trainee. From 1995 he was the patent attorney and company lawyer of a small biotech start-up company specializing in plant biotechnology. In January 2002 he joined the intellectual property firm of Vereenigde. For further details, e-mail [email protected] or go to www.vereenigde. com.

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185 

PART 8

Commercialization models

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IQ booster What would really give your organisation ‘the edge’? Try accessing 3000 academic brains, original thinking and a passion for making a difference. Consultancy and Research IP and licensing Spin-out businesses Research Alta Innovations Ltd is the technology transfer company established and owned by the University of Birmingham. Learn more T: +44 (0)121 414 9090 E: [email protected] W: www.alta.bham.ac.uk

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8.1

How to evaluate an idea

How do you judge whether an idea could become a business? Jonathan Watkins at Alta Innovations takes you through the process.

So you have an idea for making money? The evaluation of ideas and inventions is the first, but very important, step on the way to deciding whether or not to pursue a potential commercial opportunity. It is very easy to look at a potential opportunity and think that you can turn it into a successful business proposition, but beware: there are many pitfalls for the unwary and they are not always obvious. To help you avoid these pitfalls, please read on and learn from our experiences.

Where do ideas come from? Ideas, inventions and business propositions come from all sorts of unlikely places and not just from the R&D departments of companies or from research institutions such as universities. Whether an idea is the result of many years’ patient research and observation or out of the blue, it matters not; no idea is a bad idea. There are only those ideas that could potentially be turned into a successful business proposition and those that are likely to fail in the marketplace. It is the task of those who evaluate ideas to make decisions on which ones to take forward; there are no certainties, and only hindsight will tell you whether or not you managed to identify the right ideas to pursue.

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What sorts of ideas are there? Ideas fall into three categories: 1. Incremental – an improvement to an existing process, product or service, eg a new version of a car or mobile phone. They are often relatively quick to get to market, but the financial rewards can be limited, as they are relatively low-risk. 2. Disruptive – a better way of doing the same thing, eg petrol engine versus steam engine or digital camera versus film camera. They are usually more difficult and risky to get to market, as they normally require significant investment both by the developers and by the customers. 3. Revolutionary – something completely new, eg the wheel versus the lever, gunpowder versus bows and arrows or nuclear power versus fossil fuels. They often have a long gestation time but can be incredibly lucrative for those who perfect them.

What turns an idea into a business proposition? An idea is just that: it needs to be given shape and direction to make the leap to a good business proposition. Although obvious, don’t forget that you need to solve a problem that customers not only want solved but are prepared to pay a reasonable sum of money to get solved. There are many factors to consider, such as the risks associated with a technical development project, the barriers to entry for competitors, and customer needs. Consideration needs to be given to identifying the potential customers and where those customers fit into the supply chain and value chain.

What types of opportunity are there? Basically, there are only a few ways to make money from a business opportunity: License or sell the technology or product to someone else to develop, market and zz sell in return for a royalty or fee. Set up your own business to develop, market and then sell a product to the end user. zz Provide a service in return for a fee. zz There are of course many subtle variations or even combinations of these approaches. It should be borne in mind that some opportunities are more suited for licensing to someone else rather than setting up in business yourself, or vice versa, while others can only be implemented as a service.

What factors need to be considered? You need to consider everything from your commitment to the idea through to the strength of the competition and the market size. The following factors need to be taken into consideration:

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Inventor commitment. Are you willing to help with drafting patent applications and zz explaining the technology to potential business partners or customers? Or do you want someone else to do it for you? Scope of the invention. Is the invention a platform technology that will give rise to a zz number of different products across a number of market sectors or does it help only a small number of customers in a particular industry? Is it an incremental improvement or is it a step change? Readiness of the technology. Is it just an idea, or are there proof of concept data zz available, or is there a prototype? Market size. Basically how much is currently being spent on products in the market zz you wish to sell into? Don’t forget that if you have a process improvement, for example, the market size is that associated with the process not the market for the goods made by the process. Intensity of competition. Are there lots of big competitors out there with good zz products or are you addressing a niche market that others have overlooked? Equally, do you have to develop a market as your technology is that groundbreaking? Competitive edge. Why would someone buy your product rather than that offered zz by the competition? What features of your product give rise to benefits that customers are prepared to pay for? Route to market. Can you write down a profile of your intended customer? As part of zz any evaluation, you need to consider customer requirements or needs, ie ‘market pull’. Good technology is not enough; you need customers in order to be successful. Industry growth. Is your idea aimed at a growing or declining market? Is the market zz conservative and thus unwilling to adopt new technologies or does it jump at the chance to try new products? Development capability. Do you either have or have access to the people and zz facilities needed to develop your idea into a product? If not, can you outsource this? Patent aspects. Is there a reasonable prospect of getting a patent application covering zz your invention through to grant? If you expect to be able to get a granted patent, will you be able to enforce it? Do you need to get access to someone else’s patent in order to be able to sell your product? The business team. Do the people who would be responsible for getting the invention zz to market have the necessary skills and experience? Will you need to access specialist skills the team does not have? Does the team want to work on this idea or does it think another idea is better?

What are the most important factors? If you are an estate agent, it is location, location, location. However, for opportunities based on technology, of equal or greater importance to the technology is expertise (which usually comes hand in hand with experience) coupled with enough money to get a new product to market. Depending on the idea or invention, some factors are more important than others. In a heavily regulated industry, such as pharmaceuticals, clinical trials are necessary and extremely expensive, and thus very large amounts of money are required. However, if you already have the necessary equipment and personnel,

 190 Commercialization models ______________________________________________________________________

service provision can be inexpensive and fast to set up. No two ideas are the same, and not all of the factors above will necessarily be critical if, for example, expertise is readily available and inexpensive. So, having thought about the factors and perhaps written down your thoughts, how do you know which factors are fundamental to business success in a competitive environment? Well, firstly you need to understand that customers will pay only for: the same product but cheaper; zz a zz similar product but with better benefits for the customer; a unique product that solves a customer’s problem that he or she had previously zz been unable to solve. And if you want to create a sustainable business you need to do all this with aboveaverage returns.

How do you make the decision to proceed to the next step? If you are knowledgeable about a certain market or industry, you will know which factors are more important than others. If not, extensive market research will be extremely important – not the market research commonly encountered as you stroll down your local high street where you get asked your opinions on certain products but the market research where you find out about the markets you wish to enter in terms of customer needs, market size, barriers to entry and so on. You can then use this market research to develop a business plan that it likely to be qualitative in the first instance but will quickly become quantitative as you work out which questions need to be answered and feed the resulting data into the plan. Don’t forget that it is important to keep reevaluating your business proposition as you learn more about your product and the markets you are trying to sell into.

What next? If you decide to proceed with developing your idea or invention into a business proposition and then into a product development project, what needs to happen next? All sorts of things! This can include: market research; zz prototyping; zz customer trials or other forms of market validation; zz partnering with other organizations; zz fund-raising; zz patent and trademark applications; zz developing an exit strategy. zz Last but not least, as Warren Buffett, the ‘Sage of Omaha’, says, you may be good and have earned millions but you still need a bit of luck.

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About the author Dr Jonathan Watkins is an IP and Licensing Manager at Alta Innovations Ltd, the technology transfer company established and owned by the University of Birmingham. Alta Innovations acts on behalf of the University for all aspects and forms of intellectual property arising from the University’s research and teaching activities. Contact Alta Innovations (tel: +44 (0)121 414 9090; e-mail: [email protected]; website: www.alta.bham.ac.uk).

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8.2

Making money by licensing your intellectual property

Alastair Swanwick of Innovate Product Design reviews an option for transferring the risk and cost of your IP without relinquishing overall control.

Perhaps the best-known route to market for entrepreneurs and SMEs with a new product idea is to start up a business around it or expand an existing one into a new area. However, for many this is out of reach – it is a huge commitment in terms of both time and money. For those with little knowledge of the related industry, and few business contacts, it can become an uphill struggle. There is an alternative that removes much of the associated risk and capital outlay: by licensing the intellectual property (IP) rights of your product to a larger firm, you can successfully launch a new idea at a fraction of the cost, whilst transferring the risk to another organization.

What is licensing? Essentially, by licensing your intellectual property you are authorizing others to utilize your intellectual property rights, normally in exchange for some form of returns. Let’s say that you had invented the biro and successfully been granted a patent for it. Ordinarily, anyone else producing or selling the biro would then be infringing upon your intellectual property rights. However, you could allow an existing company to use your intellectual property rights, and produce or sell the biro, by entering into a licensing

__________________________________________________________ Making Money by Licensing Your IP 193 

agreement with it. In this situation, you would become the ‘licensor’ and the company with which you make the agreement would become the ‘licensee’. The terms and conditions of a licensing agreement do vary; there is no standard agreement. It may be that the licensee will pay the licensor a lump sum in exchange for the use of the intellectual property, or alternatively the licensee may pay royalties. In some cases, the agreement may include both. The deal could be exclusive to one organization or non-exclusive, indefinite or time-limited, or restricted to certain geographic areas or industries. Exactly what a licensing agreement entails depends very much on the requirements, expectations and bargaining power of the two parties involved. Before pursuing this route, it is important to consider whether it complements the needs of your project or business, and exactly what you wish to gain from an agreement.

Why should I license? For entrepreneurs and SMEs, the greatest benefit from licensing is the possibility of reducing the costs of taking a new product to market whilst still retaining overall control of your intellectual property. Entering into a licensing agreement means that you can transfer the costs – and therefore the risks – associated with manufacturing, marketing and selling the product on to the licensee while still receiving some form of payment in return. For many individuals, the prospect of funding the manufacture of a product can be extremely daunting. Licensing is often a great way of cutting out these costs. Some entrepreneurs may have little or no experience of the market in which their product would be sold. If they license the IP to an organization specializing in that market, the product can benefit from a greater level of expertise and an existing distribution network. These can be exploited to generate much greater revenues, resulting in higher royalty payments if they are stipulated by your original licensing agreement. Consequently, licensing can also expand the potential applications of your product. Most new products are developed with a particular market or utility in mind, but in certain situations many can also be beneficially applied to a variety of different industries for different purposes. Licensing the IP to a number of companies, across a range of industries, can therefore allow you access to a wider clientele and, once again, help to maximize revenue. However, licensing may not be the best way forward for every product idea. Some SMEs and entrepreneurs may be confident enough to commercialize their intellectual property themselves. If your budgets and capabilities allow for this, it may be better to keep the intellectual property rights ‘in-house’, so that revenue generated by your product is not being shared between numerous parties. If you do still choose to proceed with licensing, it is important to ensure that the organization to which you license the IP has the capability to generate greater revenues than you would be able to yourself. Finally, some companies may wish to gain a licence on particular IP rights simply to bury them and ensure they cannot harm their existing products or services. In such cases, the licensor may offer an exclusive licence, in exchange for royalty payments, without knowing the true intention of the potential licensee. The licensor would be unlikely to see any returns from the product at all; if the licensee is not selling the product, there will be no revenue and hence no royalties. This is certainly something of which to be aware.

 194 Commercialization models ______________________________________________________________________

How can I get a licensing agreement? The first step towards gaining a licensing agreement is to conduct a detailed market analysis to identify potential licensees. You will need to determine which companies have a market presence in the target area, or areas, for your idea. It is also worth assessing whether your product would complement, extend or compete with the product ranges of those companies identified, by taking a look at what they already have on the market. This will very much influence whether you decide to approach a company and, if so, how. Having generated a list of potential targets, the initial approach is usually best made by post. Draft a short letter, perhaps one page as a maximum, providing brief details of your product and an outline of its intellectual property protection. You may also wish to include some relevant market statistics, to highlight the benefits your idea would have for their business. If you are writing to a small organization, the letter should be addressed to the managing director; bigger organizations often have departments dedicated to looking for new product ideas, so do look out for this. Send your letter to around five companies to begin with, and wait for two or three weeks for a response. Should no one respond, give them a call or, if this is not possible, send another letter. This may not be a quick process, and some companies will take a few months to reply. During this stage, it is important to be both patient and persistent! Once a company take an interest in your product, they will most likely request that you present it to them in person. For an effective presentation, you should use a computer package, such as Microsoft PowerPoint, to communicate clearly the results of your market research, as well as more in-depth details of your idea. It is always advantageous to have a professional representation of your product, demonstrating how it could look, how it might work and how the user would interact with the product. In some cases, a product may be best represented by a working prototype. However, in my experience, the vast majority can be ably demonstrated through CAD design boards developed by professional product designers; these are usually more cost-effective. The ultimate decision on this is down to you, based on whichever method makes you feel most comfortable and accruements possible in reflection of your budget! Do bear in mind that the presentation is not simply an opportunity for the potential licensee to evaluate your idea, but also a chance for you to assess whether entering into a licensing agreement with that company would be right for you. Should the company take a further interest and wish to negotiate a licensing deal, it would be best to seek the advice of a licensing practitioner. Contract negotiations can be tricky, particularly if you are an individual in discussions with a large corporation. Licensing practitioners are lawyers experienced in drafting licensing agreements and can help to ensure that the terms and conditions of the agreement will provide you, and your IP, with sufficient protection. Licensing negotiations can take time, but once all the details are determined you can sit back and wait for your product to appear on the market.

Conclusion For many smaller businesses and entrepreneurs, there are great advantages to licensing a new product idea to a larger operation. You are likely to reduce both initial costs and

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risk, whilst benefiting from the expertise and contacts of an organization already well placed in the relevant industry. This method isn’t for everyone, however, and you may be better served by commercializing your IP yourself. If you do choose to license your intellectual property, there will still be hard work, and it will take time to reach an agreement you are happy with. The rewards, however, can be well worth the effort.

About the author Alastair Swanwick is the Managing Director of Innovate Product Design, the UK’s leading company aimed at helping individuals exploit their new product ideas. Contact Innovate Product Design (tel: +44 (0)20 7354 5640; website: www.innovate-design.co.uk).

MMU Doctoral Opportunities  196

Manchester Metropolitan University (MMU) is offering a number of funded and fees only research studentships commencing in September 2010.

Holders will register for a Research Masters/MPhil or PhD degree at one of the University’s 8 world-class research institutes. Successful applicants of funded studentships will receive a bursary of £12,000 p.a and the University will provide home tuition fees to the value of £3,500 p.a. In addition, successful applicants will enjoy access to an outstanding Research Student Development Programme and become part of a vibrant research culture. MMU undertakes excellent research in many fields, as demonstrated by the results of the 2008 Research Assessment Exercise (RAE) in which the University was described as having ‘world-leading’ research in the sciences, arts, education, social sciences, business and management.

For application details visit www.mmu.ac.uk/studentships

The University for World-Class Professionals

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8.3

The commercial options

Start-up? Spin-out? Licensing? Lynn Martin, Professor of Entrepreneurship at Manchester Metropolitan University, discusses the best ways to bring ideas to market.

Universities have always been great places for ideas. Some would say it’s why they exist at all! These days, universities are also great places to start and grow businesses. While university management is looking to maximize success in commerce as well as in more traditional activities, staff and students have the opportunity to explore their ideas and bring them to the market. Of course any entrepreneur, whether experienced or aspiring, will have many ideas, usually simultaneously and mostly equally exciting. Filtering these and getting them into a form so that they can develop into products and services are key processes, but what are the options for would-be entrepreneurs, whether members of staff or students, to grow their ideas into businesses? When looking for a route to take, most opt for one of these three ways to take their idea forward – business start-up, spin-out or licensing.

Three routes? Before exploring these three routes let’s just remember that the issue for most people is not so much the definition of these terms as how to understand what these routes mean for them. We’ll be looking at how the route you take impacts on your own need to feel in charge, on risks and on resources. If the entrepreneur has large financial resources and a high risk threshold and needs to feel totally in charge of his or her business then this will be a different situation to most people who are balancing the risks of loss of finance and perhaps low access to finance and other resources.

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Business start-up This sees the entrepreneur stating up a business, alone or with others. There is some support for the idea of team start-ups, as they often seem to grow faster and last longer than single start-ups, but it will depend on whether you know the right people to set up with and the level of trust that you have in them – and the contract you form with them. In universities, entrepreneurs often have the option of starting up their business in an ‘incubator’, where they can set up their business at a low cost and with great added benefits in terms of business support, advice and meeting with other people in the same boat. The Innospace incubator at Manchester Metropolitan University offers low-cost space of different types to suit a range of start-ups, with built-in advice on a regular basis and regular workshops and events to improve business skills. Based in an old mill active in the Industrial Revolution, it offers space and support for companies started by graduates from any university, sustaining the new knowledge revolution! This is something seen in many universities, and it offers a very practical way for students – and alumni – to find the right level of support and space to bring their idea to fruition. Business start-ups offer the highest level of control for the entrepreneur in terms of who does what with the idea, where it’s sold, how a product is made and so on. The intellectual property isn’t shared with others – although it needs to be protected in the same way as in any other sphere. Start-ups also place a higher burden for the same reason. So a business start-up needs to be embarked on with a passion that will sustain the entrepreneur through the probable ups and downs of the start-up and first trading period. Start-up entrepreneurs also need, of course, a robust plan to get things going, which will include the legal and financial framework for the company – plus the right resources. Resources may be financial, especially if large investment is needed, eg to turn high-technology research into market realities. But resources that are required may also be intellectual, emotional and social resources, all important in the development of a company. So what are the alternatives?

Spin-out or spin-off? ‘Spin-out’ and ‘spin-off’ are terms that are traditionally used when part of a company or an organization becomes an independent business. These are carried out in cooperation with the parent company. So the spin-out might receive intellectual property, technology and other assets, plus existing products and services, from the parent organization. This has benefits on both sides. The parent organization invests and may be the best customer in the spin-out, as it allows it to innovate without causing conflicts with core products, brands and services. The spin-out gains support, together with a level of autonomy and freedom to operate in different ways to those of the parent firm. From this, it all sounds like a beneficial relationship, but there may be issues around who is really in control (he who pays the piper calls the tune) and whether the spin-out can stand on its own feet. So how does this work in universities? Academics may have good ideas based on their research, but do they have business capabilities? If the university acts as a parent

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organization, how business-minded will it be and how much of the equity of the resulting spin-off will it want? These are the issues that have dogged some of the spin-out attempts in the UK. Others have worked well, although there is some evidence that spin-outs do not have the same rate of growth in the university sector as in other sectors. The difference must be in the deal – if the parent organization requires too much of the equity or too much control over its spin-out offspring then entrepreneurship is unlikely to flourish. This often centres on the issue of intellectual property. Thoughts passing through the heads of professors in work time are often assumed to be owned by the university, which then has too heavy an expectation of return in terms of its share. The result may well be that the academic creates a company outside office hours! The more successful spin-outs have been set up as partnerships, with an external entrepreneur, an academic and the university working together. The external entrepreneur brings knowledge of the marketplace and how to translate research into products and services likely to sell at the right price to enable growth. The academic and researcher bring new intellectual property, and the university brings resources appropriate to the development of the business. These again depend on the deal struck between the three parties. Fair shares and more entrepreneurial approaches on the part of the university may result in greater returns long-term than trying to grab too much of the cake. So the spin-out option may suit you if you are looking for fewer risks (as the risk is shared in terms of investment and resources). However, you also need to feel comfortable with potentially less autonomy and lower eventual returns than in a straight business start-up. It may provide a way to enter a type of market that you wouldn’t be able to alone because you don’t have the intellectual property gained from the reach that university offers. On the other hand, a different way to do this in a low-investment and potentially lower-risk way is via licensing.

Licensing Licensing is a contractual arrangement between a company and another (or others) to carry out activities that the company has rights to. So a company can license the rights to know-how, design, technology and intellectual property in return for royalties or other kinds of payment. Intellectual property is protected via patents or other devices and, before a patent is achieved, potential licensees should be asked to sign a non-disclosure agreement so that the licensee does not start production of goods and services. The licensee gains rights to manufacture goods, carry out a service or further develop a research product, for instance. Advantages for the licensing company include entry into different markets more easily. For instance, in the case of a small firm wanting to internalize, it saves them the heavy investment required to develop the right knowledge and the right contacts. Once the licensing agreement is made, the licensing company receives regular returns, while the licensee can operate as it wishes in its own markets to develop the products and service to fit local needs profitably. The lack of capital investment of the licensing company – and the speed with which returns are received – makes this very attractive, particularly in manufacturing, as has been seen in operations overseas in Europe and Asia. From the licensee’s

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perspective, it gains leading-edge know-how and technology that enables it to capture newer markets without investing in research, which it would not have been able to do otherwise. The licensee also gains a monopoly right sometimes to offer a proven service or product, which again gives advantages – it would otherwise have had to invest in developing a brand over some time before having secure market segments. So what’s the downside given the two advantages? For the licensing company it is difficult to ensure consistent quality in the products and to control how the brand and price are protected. It may also be difficult to protect the intellectual property being licensed, depending on how well the contract was designed and how well the various agreements on intellectual property worldwide are respected. Depending on the licence agreement, as a licensee you may be under the control of the licensing company in the way products and services are delivered and sometimes without new intellectual property being transferred to you to enable you to deal with changes in these markets. And there you have it: three different options that are open to you whether you are in universities or not. The choice is really about your own needs for autonomy, your attitude to risk and your resources. To explore any of these, why not have a talk with your local university to see what it can offer in terms of support for your own development as an entrepreneur – and bring your business idea to the market?

About the author Director of the Centre for Enterprise at Manchester Metropolitan University (MMU), Professor Lynn Martin, PhD, is an experienced entrepreneur working within a university whose role encompasses research links with Europe and Asia and working with companies and public sector authorities. MMU research in enterprise comprises key R&D activities linked to entrepreneurship, especially entrepreneurial culture and the SME experience, leadership, management and innovation, the effects of national policies and the role of knowledge transfer in these processes. Further details are available from Lynn Martin, PhD, Professor of Entrepreneurship, Director of the Centre for Enterprise, Manchester Metropolitan University Business School, Minshull Building, 47–49 Chorlton Street, Manchester M1 3FY (tel: +44 (0)161 247 3733).

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8.4

Global dimensions

Entering a new market or outsourcing a function? Once you start to manage innovation on a global basis, life can become complicated, says Dominic Hickman at Rouse Legal.

Coordinating and managing IP in one jurisdiction are difficult enough, but start operating in a number of countries and suddenly they become much more of a challenge. Problems with language, time zones, acceptable standards, local customs and diverse management styles can all combine to make life ‘interesting’. There are clearly great advantages to operating on a global scale, such as gaining access to a larger market, cost savings and tax advantages. A global IP portfolio doesn’t need to be a headache, as long as it is handled efficiently, effectively and consistently. Businesses that need to manage IP internationally fall into three main groups (although there are overlaps): 1. established multinationals, which operate in many jurisdictions, eg large energy companies, retailers and financial organizations; 2. businesses based in one region or country that are expanding into other countries: these have developed their home territory and want to emulate their local success elsewhere; 3. businesses based in one region or country that wish to have some functions performed overseas, whether this is manufacturing in China, software development in India, R&D in Japan or call centres in Eastern Europe. There is no simple formula for successful IP management in different countries, but there are a number of common issues to consider and pitfalls to avoid. As with managing and making the best of any asset, careful planning can make the difference between success and failure.

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Established multinational businesses Brands are often the most important IP asset for many multinational businesses. Having a unified brand (either for the business or for specific products) across many jurisdictions is often vital to success. Inevitably, this will require careful management of trademarks. Successful management of an international trademark portfolio requires both central coordination and input from local advisers in the countries of interest. The local advisers can be country or regional managers from within the business, or local agents and lawyers. Central coordination enables the business to maintain a consistent brand format and the quality of the goods or services being provided under the brand. It also means that the IP filing strategy matches the business strategy. The local advisers are responsible for filing activities and day-to-day administration of applications, as they are familiar with the requirements of the local IP registries. Local advisers also play a vital role in making sure the global brand is translated correctly, both linguistically and culturally. Nothing is more likely to undermine a marketing campaign than a brand that means something wildly different from the image the brand owner wishes to convey when it is translated into the local language, or that is actually offensive (as is not entirely unknown). In some circumstances, it will be better to have some unified brand elements that are identical in all territories (eg a single logo and colour scheme) but have local variations (eg the product name in a local language). This may be a compromise, but ensures the overall brand message is the same everywhere. The key is to consider the territories the brand is to be targeted at and then check with local advisers that the brand will be publicly acceptable and available for use in those territories before embarking on an expensive trademark filing and marketing campaign. For businesses based on technology, a multinational patent portfolio may be essential. This can act as a barrier to competitors and as a potential source of income. For example, a business might file both in its own strategic markets and in other territories where its competitors manufacture or where it wishes to license third parties to use its technology. Central coordination can be very important in ensuring the patent strategy matches the business strategy, allowing the business to maximize income and stop unwelcome competition.

Expanding international businesses Businesses expand into new territories in two main ways, by opening or acquiring new foreign operations or by franchising or licensing to overseas operators. The expansion may involve using the same brands and brand values (a unified model) or may require developing a completely different local presence, which looks separate and acts independently of the parent, to serve a different market (a devolved model). If the business operates a unified model, using third parties, it may need to lay down more elaborate quality control measures, and enforce them more robustly, to prevent the erosion of brand values and therefore business value. One particular issue that is sometimes neglected is registration of licences or franchise agreements with the

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local IP office; in some countries, this is necessary before royalties can be paid out of the country or before the licensee’s rights can be enforced. The devolved model is broadly similar to setting up a new operation in the business’s home territory. The only difference might be that the IP is controlled at a distance. With either approach, the brand management issues discussed above will be important. In both cases, the business needs to consider the ownership of IP. Some businesses require that all IP is owned by a single entity within the group. Others prefer local ownership of locally developed IP. Often, this is a tax-driven decision, but whichever approach is taken it is important that the contractual arrangements match the intention. Particular care needs to be taken where IP is generated by third parties, for example advertising agencies or design houses. There should be a clear assignment to the relevant business of all the IP in work done by contractors. Of course, these issues also arise in the business’s home territory, but there seems to be a greater tendency to neglect them when they are at a greater distance (out of sight, out of mind?).

Outsourcing IP is often given little consideration when business functions are performed by third parties overseas; a business will sometimes focus on the cost savings that can be achieved and consequently neglect the stewardship of the business IP. At its most simple, and most commonly, outsourcing merely involves having goods manufactured in another country (ie contract manufacture). Inevitably this requires a licence of designs and other technology and know-how to the manufacturer. The manufacturer may contribute to the development of those designs or to the design of tooling required for product manufacture. Ideally, the business will ensure that, in the contracts, the IP in the manufacturer’s developments and tooling is owned by the business or that other restrictions are put in place. These will help the business deal with counterfeit issues, for example where the manufacturer continues to make the products after the contract has ended and sells them on to other customers. It will also avoid the manufacturer claiming rights in the products, after they have become commercially successful, and holding those rights to ransom. Other steps that can assist in preventing or dealing with counterfeits include ensuring that, so far as is possible, technology being shared with the manufacturer is protected by patent rights, covering the country of manufacture as well as countries where sales are planned. If the manufacturer is to apply the business’s trademarks to the product or its packaging, the trademarks should be registered in the manufacturer’s territory and should be actively policed and enforced. Where it is a service that is being outsourced, for example IT support or customer service call centres, there are other IP issues to consider. Copyright in operating manuals, software and written and electronic materials should all vest in the business, not the service provider. This should all be set out in the contract. If the service is R&D, whether through contract research or collaborative development, again it is important to ensure that the business owns, or has broad

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rights to use, the outcome of the research together with any ancillary IP that arises during the project. Particular care has to be taken in all these situations to ensure that the contractual arrangements do not breach applicable competition or anti-trust law. Local advice is important here. It is also important to ensure that any potential patent applications are not jeopardized by premature disclosure of the research results.

Enforcement Another important limb of managing an IP portfolio is the enforcement of the rights. What this involves depends largely on the nature of the business. For example, a technology company needs to look out for other companies using the technology covered by its patents; a luxury goods manufacturer needs to monitor the market for counterfeit products. As with the other elements of IP portfolio management, it is important to align the enforcement strategy with the business plan. If faced with many infringements, the business can concentrate on taking action only where there is a threat to its present or future plans, rather than taking action against all infringements, however insignificant. The former approach allows for better utilization of resources (both money and time), while the latter can be an unnecessary drain on a business and distract it from its core activities. A smart enforcement strategy also takes into account the likelihood of successful actions in a particular region. This can be influenced by factors ranging from the local politics of the country in question to the speed with which action can be taken and to the likely outcome (will it actually stop the problem or be just a minor setback for the infringer?). Again, local knowledge is essential here, and a well-run central IP managing unit will seek good local advice before making strategic decisions about enforcement.

Common themes Whatever the type of business, there are some common issues to consider when coordinating an IP portfolio on a global scale. Some of these may seem trifling, but without careful planning they can cause real problems. Some apply equally to other aspects of the business, but for some reason they are often neglected when it comes to IP. Seeking local advice can save many difficulties. The advice can establish what IP may be registrable or ensure that brand manuals and standard operating procedures are consistent with local laws and practices. Local knowledge can assist in performing due diligence on a potential service provider or in stopping counterfeiting. Unless the business already has the expertise to deal with these issues, local assistance will be invaluable. An international business must be aware of local customs, laws and practices. These can be relatively straightforward, such as knowing the dates of the national holidays. For example, setting deadlines that expire around Chinese New Year can result in enormous frustration for Western businesses operating in Asia. Some local customs may be less obvious but just as important.

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Robust reporting structures are vital. If the business needs to take swift action to deal with an apparent infringement, the relevant decision maker must be informed promptly. Good reporting is also very important in maintaining quality control and consistency and for ensuring that business opportunities are not lost simply because no one in authority knew about them quickly enough. Language is an important consideration. If there are problems in communicating clear instructions or if things are translated poorly, all sorts of difficulties can arise. It is not unknown for trademark registrations to end up covering the wrong goods and services, simply because of a mix-up in translation. Perhaps the most important aspect of managing IP globally is to make sure the IP policy is truly global, not just a local policy that is being imposed worldwide, without building in the flexibility to cope with the subtle, and not-so-subtle, differences that exist in different jurisdictions. In developing the strategy, it is important to be aware of and sensitive to these differences; what works in one territory may not work in others. Coordinating and managing IP at a global level can be challenging. Careful planning and investing time in getting it right can save a lot of difficulties. A successful global IP strategy will provide for the consistent, effective and efficient use, protection, exploitation and enforcement of IP wherever the business operates.

About the author Dominic Hickman is a technology lawyer working with Rouse Legal, the associated UK law firm of leading global IP law firm and consultancy Rouse. He has extensive experience negotiating and drafting all forms of technology IP agreements and working with multinational clients on international aspects of IP. Contact Rouse Legal, 1st Floor, 228–240 Banbury Road, Oxford OX2 7BY (e-mail: [email protected]; website: www.iprights.com).

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PART 9

IP fit for purpose

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no grey matter

At Mewburn Ellis we are passionate about Intellectual Property. Whether you are looking to patent an idea, need to register a trademark, or want to protect a design, you can trust Mewburn Ellis to deliver. Which is why we are one of the premier IP firms in Europe.

www.mewburn.com +44 (0) 20 7776 5300

LONDON • MANCHESTER • BRISTOL • CAMBRIDGE

209 



9.1

Value-for-money IP

Stephen Carter at Mewburn Ellis discusses how to get the most out of your IP budget.

The tougher economic climate that businesses have faced in recent times has brought spending on patents, trademarks and other forms of intellectual property into perspective. Even large multinational companies, which in the past might have had seemingly bottomless pockets when it comes to intellectual property budgets, have been forced to reconsider their strategies, seeking value-for-money approaches to intellectual property spend. For small and medium-sized enterprises the decisions are more difficult still, but with wise planning and good knowledge of the protection options available even the smallest of businesses can adopt an intellectual property strategy that strikes a balance between protection for the key assets of the business and available budget. In hard times taking a value-for-money approach to intellectual property may be vital to succeed. Even in better times it makes good business sense.

What are the key assets? Securing intellectual property rights, especially the stronger registered rights such as patents and trademarks, is an expensive business. Without focus, expenditure on IP can rapidly spiral out of control. But where should that focus be? Ask yourself what it is that gives you the edge over the competition. Be specific in your answer. Don’t be satisfied with a general answer, for example that your products or services are higher-quality, cheaper or more advanced or your reputation is better. Drill down into the reasons for these differences. Especially in the case where you offer multiple services or a range of products, consider whether there are features common to all of the services or products that underpin their value. Put another way, what is it

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that you are doing that you need to be able to stop a competitor from replicating if you are to maintain your competitive advantage? In reaching your conclusions, be careful to take account of your (actual or potential) revenue streams. There is little point in focusing your efforts on a product or service that is only ever going to find a small market, no matter how unique or innovative it may be, if in doing so there is no budget left for seeking protection for a less ‘exciting’ product or service that nevertheless accounts for your main stream of income. By identifying these key assets that underpin your competitive advantage you can bring the necessary focus to your intellectual property strategy and avoid unnecessary spend on protecting aspects of your products and services that are less critical to the success of your business.

Are the key assets yours? Having invested the time and effort required to focus your intellectual property strategy on the key assets, it is all too easy to rush ahead with patent or trademark filings without stopping to ask perhaps the single most important question there is: are these assets yours to protect in the first place? The laws governing ownership of intellectual property rights are far from straightforward, and all too often businesses fall into the trap of assuming that if they have borne the cost of developing something they must necessarily own the outcome of that development. Whilst in many cases this will be true, especially where the people undertaking the development are employees, it does not always follow. Particular problems can arise, for example, where work is carried out by a subcontractor or consultant or where the work is a result of collaboration between different companies or institutions. In such cases, it will always be best to have agreements in place from an early stage, preferably before work commences, that deal specifically with the question of ownership of intellectual property. And it will generally be easier to sort out the chain of ownership and any possible ownership disputes at an early stage rather than leaving things until later when matters may have become much more contentious and relevant evidence may have been lost or forgotten. For any prudent patent business, therefore, there should be a careful determination of the identity of those individuals who have made significant contributions to a development, followed by careful confirmation that the necessary rights have passed from these individuals to the business.

How and where? Having decided what to protect and established your ownership of it, thought needs to be given to how best to protect it and where. In fact, this can be an iterative process, because the ‘how’ and the ‘where’ will affect the cost, so may inform to some extent the ‘what’. Often, you will choose a combination of the available rights. Patent key features but rely on trade secrets for the black box in the middle. Use design rights to protect the outward appearance of something where that has significance and trademarks to protect your name and logo.

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It is also important to understand that registered IP rights are territorial rights, ie they are limited to the specific territories in which you seek protection. The more territories you choose to cover, the more applications are needed and the higher the costs.

A ‘Swiss cheese’ approach Most businesses will adopt an approach of obtaining protection in some countries (the ‘cheese’) but not in others (the ‘holes’), with the objective of reducing cost without reducing the effectiveness of the protection. Typical strategies include seeking protection in key (large or strategically important) markets and, where they are well defined, countries where competitors operate (eg manufacture). At one extreme, a patent in a single major market may be highly effective in, say, the automobile industry, where the costs of introducing a new model are very high. Without being able to sell in that market, it becomes uneconomic for a competitor to put a potentially infringing product on the market at all. At the other extreme, if the cost of introducing a product to the market is low, it may be economic for a competitor to market a potentially infringing product in even very small ‘holes’. A Swiss cheese approach may not keep competitors off the market altogether in this situation, although by picking off the major markets a business may still be able to make healthy profits for itself whilst accepting that in other markets it must share the spoils.

Spreading the cost Especially for smaller businesses, the cost of securing protection in multiple jurisdictions early in a project can be prohibitive. Even larger businesses may be reluctant to make the necessary investment for broad geographical coverage until a new product or service has proven its value to the business. This can be at odds with the rules for securing registered IP rights, especially patents and designs, which typically require you to have filed for protection prior to there having been any public disclosure. Fortunately, systems exist that enable you to avoid the ‘big bang’ approach of seeking protection in all territories of interest at one time, allowing you to postpone the associated costs without harming the available protection. There are also some regional registrations (in particular Community registered designs and trademarks, and European patents) that provide cost-effective routes to obtaining protection in multiple countries within the region.

International patent applications Taking patents as an example, usually a business begins by filing a single patent application at its local national patent office, for example the UK Intellectual Property Office. This establishes a priority date. Further patent applications filed within one year from the priority date are treated as if they had been filed on the priority date, so their eventual grant or refusal will be judged only against what was known in the public domain prior to the filing of the first application.

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Instead of filing many individual foreign patent applications at the one-year stage, it is common to file a single ‘international’ or ‘PCT’ patent application. For a period, referred to as the ‘international phase’, this PCT application takes the place of the many individual foreign patent applications that would otherwise have been required. Afterwards, in a period referred to as the ‘national/regional phase’, the PCT application is converted into many individual foreign patent applications, one in each country where patent protection is to be sought. Taking this approach, a final decision as to which countries to seek protection in, and the potentially very high costs of pursuing such protection if a broad geographical coverage is desired, can be postponed up to two and a half years from the filing date of the single, first-filed application, by which time a project is likely to have either taken off or failed, allowing a better-informed decision about which countries to proceed in or, indeed, whether to proceed at all.

Clearing the way In all of this it must not be forgotten that your competitors may well have their own intellectual property rights. It is important to be aware of the impact that the rights of others could have: at worst, halting your activities completely. Prudent businesses will have in place strategies for dealing with this. Such strategies might include watching the IP filing activity of known competitors. This may allow a business to work around competitors’ patents or other rights and/or to consider whether it might be vulnerable to attack. Watching competitors’ IP filing activity can also provide useful intelligence for their development work. A wise business might also consider the arguably counter-intuitive possibility of publishing details of developments that they do not intend to protect themselves but that they intend to commercialize now or in the future. Such publication can prevent a competitor from later securing their own protection that might otherwise foreclose your ability to commercialize your development. And sometimes the best defence can be possession of your own portfolio of intellectual property rights.

About the author Stephen Carter is a Partner in Mewburn Ellis LLP, one of Europe’s premier IP firms, with over 60 patent and trademark attorneys and technical specialists, covering the full range of intellectual property issues: patents (in all technology areas), trademarks, designs, industrial copyright and related matters. He has a degree and MPhil in mechanical engineering from the University of Bath. He joined Mewburn Ellis in 1994 and became a chartered patent attorney and European patent attorney in 1998. He worked for a law firm from 2000 to 2004, gaining experience in IP litigation and due diligence work for corporate transactions and IPOs, before rejoining Mewburn Ellis as a Partner in 2004. His work is mainly in the engineering and software fields. Further details are available from Mewburn Ellis LLP, 33 Gutter Lane, London EC2V 8AS (tel: +44 (0)20 7776 5300; e-mail: [email protected]; website: www.mewburn.com).

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MIND OVER MATTERS. THOMSON IP MANAGER

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9.2

Managing the portfolio

To grow a business, you will face a daunting series of IP decisions. Adam Kenney at Thomson Reuters discusses how to combine the focus of a start-up with the big picture of a corporate.

Twenty years ago, when I told people I worked in intellectual property, responses usually varied from a polite ‘Oh, how interesting’ to an extended consultation on whether their idea for a new kitchen gadget might be patent-worthy. Even business executives who understood the principles of IP protection tended to view patents and trademarks in terms of their ability to open the door to manufacturing and selling products based on a single great idea. These days, the conversations are different. Business leaders speak in terms of the value of their ‘IP portfolio’ and the efficiency of their ‘innovation pipeline’. They look for a ‘big-picture’ view of their return on investment of R&D dollars. In an age when even the simplest commercial products encompass numerous complex technologies and manufacturing can occur on demand anywhere in the world, the ideas have become more valuable than the things themselves. ‘Intangibles’ like intellectual property are counted among a company’s most valuable assets. Adding to this trend is the pressure to innovate continuously in order to protect the organization’s marketplace advantage. The current climate of acquisition, cross-licensing and other open innovation models, plus the complex legal agreements that can result, requires that business leaders pay close attention to the ‘health’ of their IP portfolio.

In the beginning Many small companies start with a single great idea. Whether the idea is a possible cure for a devastating disease or a smart new kitchen gadget, the focus is on protecting and

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extracting value from that idea. As long as the company remains small, decisions are relatively easy. Stakeholders usually sit in the same room and align around a focused set of goals, such as: build a commercialization strategy around the idea, execute on the strategy and make lots of money! Even as the company gets started, there are important IP-related decisions that must be made. For example, if your exit strategy includes getting acquired by a larger business, the value of that acquisition may be strongly tied to the quality and breadth of rights you hold to your idea. The laws governing intellectual property are built around dates, such as ‘When was the idea created?’, ‘When was it first disclosed to others?’ and ‘When did you file for protection?’ To avoid unpleasant surprises later, it is important to seek qualified legal counsel regarding protection of your ideas as early as possible as a new business forms.

The ‘next great idea’ Companies with aspirations for long-term growth must begin investing in the next great idea even as the original products are just reaching the market. A prime example of this is in the pharmaceutical and biotechnology industries. As soon as a new drug is patented, the countdown begins to the day the patent will expire and generic manufacturers will siphon the profits. Leaders of these businesses focus constantly on the state of the innovation pipeline and how the ideas in the laboratory today will fill the revenue gaps of the drugs going off-patent 5, 10 and 20 years from now. In many areas of the electronics industry, the innovation pipeline must support a much faster business cycle. The pace of change in these markets means that today’s innovations will hold value only for a short time, so it is critical that leaders identify, protect and commercialize the most important new ideas quickly. As you inspire your teams to innovate, their new ideas will surely outpace your budget to file for and maintain IP rights. Your ability to focus on the most strategic innovations and make sure those ideas are adequately protected affects both your ability to manufacture your own products and your ability to derive value from your IP as an asset.

Important decisions ahead As the IP portfolio grows, decision making becomes more complex. Larger teams often mean more specialists and fewer people who fully understand how your IP strategy supports the overall goals of your business. As the leader, you must make informed choices about: where to protect ideas; zz what kind of protection is needed; zz how to ensure quality protection; zz how to conform with regulatory requirements around the globe; zz how to balance creation of new IP and maintenance of existing assets against budget zz constraints;

 216 IP Fit for Purpose ___________________________________________________________________________________

how to determine when rights are being infringed; zz when and how to protect and assert your rights. zz Along the way, you also have to determine how to leverage your IP assets to generate revenue and advance your strategic goals.

The ‘IP life cycle’ At Thomson Reuters, we refer to the IP life cycle as a holistic view of IP portfolio management. The IP life cycle as we define it is divided into five major groups of activity representing a complex web of interactions between specialists, which must be orchestrated by business leaders to produce the desired results. The IP life cycle begins with research and innovation, where scientific research, engineering and continuous improvement initiatives result in a stream of new ideas that may have commercial value. At this stage, the leader must establish the direction of research and set criteria for which ideas warrant further investment. In the application and prosecution stage, leaders must provide guidance to the legal team regarding what kinds of protection are needed and where, so that quality IP rights can be established.

Figure 9.2.1 The IP life cycle

_________________________________________________________________________ Managing the Portfolio 217 

Once these rights are established, they must be preserved. Most countries require that IP owners pay taxes to keep their rights in force, and failure to pay on time can result in large fines and even loss of rights. In the maintenance and monitoring stage, leaders must make thoughtful investment decisions to balance the retention of critical IP rights against budget constraints and the need to invest in new innovation. In the commercialization and licensing stage, business teams turn your great ideas into profitable commercial products. At the same time, your legal team can help create new revenue streams through lucrative licensing arrangements with other organizations. As you commercialize your current ideas, the creation of branding and supporting materials will lead to new IP in the form of trademarks, copyrights and domain name registrations, and these IP matters follow their own path through the IP life cycle. If yours is truly a great idea, others will probably endeavour to copy it in some form. This can lead to assertion activity in the courts, where you may seek to stop others from using your idea and/or recover financial damages caused by their infringement. While some companies derive significant profits from these actions, the process itself can be costly. In the protection and assertion stage, leaders must establish processes to identify when others are infringing upon IP rights, determine when assertion activity is appropriate and pursue legal remedies.

Better decisions through collaboration As with other areas of your growing business, the challenge is to maintain the level of collaborative focus you had as a small company even though decisions are now made across numerous boundaries. You must ensure that decisions take into account the necessary technical details, while maintaining a big-picture strategic focus. Unfortunately, it is often not until an organization grows large enough to start making big mistakes that it invests in structured processes for managing its IP assets. Leaders of growing businesses would do well to invest early in crafting IP management processes aligned with their own flavour of the IP life cycle. At least as important as a good set of current processes is a sustainable structure for evolving, enforcing and maintaining your processes as your organization continues to expand.

IP management systems Commercial tools can help you establish and enforce a reliable set of business processes across the entire IP life cycle. When searching for the right product to support your developing IP needs, consider the following: Look for comprehensive rules calculations to help ensure compliance with local zz requirements around the world and avoid missed dates. Most vendors will claim to have rules calculations, though these systems can vary significantly in their breadth of coverage and your ability to add calculations to support your own processes. The system should help you define and enforce your business processes. In addition zz to helping you comply with external legal requirements, the system should allow

 218 IP Fit for Purpose ___________________________________________________________________________________

you to design your own collaborative processes that bring stakeholders together to make the right decisions quickly. The system should be easily configurable. You will, no doubt, want to track new zz data and change the way information is provided to users as your portfolio evolves. Make sure that your new system allows you to make these adjustments with minimal technical support and that these changes remain supported as new product releases become available. If you plan to maintain a significant number of patents and trademarks, look for zz software that integrates with service providers that can help maintain your rights globally by making tax payments and trademark renewals on your behalf. Of course, creating a collaborative organizational culture involves more than just implementing the right IP management system. Putting structured processes in place often requires individuals to change the way they do things, and this can lead to resistance. It is important to communicate and celebrate the benefits of changed processes, such as improved visibility resulting in new business opportunities, or better communication resulting in less time wasted resolving misunderstandings. It is also important to provide adequate training in new processes, along with feedback mechanisms that promote continuous improvement.

Summary There are numerous daunting yet important IP decisions facing the leader of a growing business. For those with one great idea looking to be acquired in the short term, ensuring solid IP protection for that idea can make a tremendous difference to the value of the business. For those looking for long-term growth, a single great idea will not sustain you: invest early in a holistic view of your innovation and IP protection strategy, including the right tools to promote collaboration. Either way, make sure you stay focused on the big picture, as you face the daily challenges of finding the next great idea.

About the author Adam Kenney is Product Manager at Thomson IP Management Services, a Thomson Reuters business. Adam has spent the last 20 years designing solutions to the needs of the IP industry; he currently works with clients and colleagues to shape solutions across organizations’ workflow and the entire IP life cycle. Contact Adam Kenney at Thomson Reuters (tel: +1 248 352 5810; e-mail: [email protected]; website: www.thomsonipmanagement.com).

219 

Choose a Swedish Patent Agency with broad experience from the International Arena

m Hynell Patenttjänst AB, Patron Carls väg 2, SE-683 40 Uddeholm, Sweden Phone +46 563 541990 • E-mail [email protected]

www.hynell.se®

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9.3

Fast IP

What are the options for an innovation when speed matters? Peter Kylin at Hynell considers the options.

Speedy and efficient IP prosecution can make the difference between total success and total failure. Mostly a traditional patent protection via the European Patent Office (EPO) is sufficient. However, sometimes ‘fast IP’, ie early registered IP rights, may make the difference, to eliminate a ‘copycat’ or infringer, especially in fields with fastmoving products, and then normal EPO prosecution is too slow. In the following, some recommendations are outlined that may assist in obtaining quick and enforceable IP rights and showing how to use them, and cost-efficiency is also used as a parameter.

General aspects In most cases concerning innovations, the use of the EPO to obtain a European patent (EP patent) provides a sufficient means of protection, ie the relatively slow prosecution (often three to five years) is sufficient thanks to the preventive effect. However, when there is an aggressive and/or ignorant party, the traditional route may not suffice, requiring the use of alternative measures. There exists a large variety of useful means, different in different countries, that can be used to initiate, or at least to threaten to initiate, a court case. It should be remembered that most IP cases are settled. However, to have an impact (eg leading to settlement negotiations) the claim must seem valid and relate to strategic markets or countries, ie countries with an important market and an efficient court system. In the following, I focus on EP patents, utility models (UMs) and design registrations, in relation to a few countries of my choice, that provide a costefficient means for possible quick actions. I especially focus on the use of the very quick, alternative utility models (‘petty patents’).

___________________________________________________________________________________________________ Fast IP 221 

Validity Enforceability of an IP right is strongly related to its validity. For designs there are very few pitfalls, in contrast to patents. The most important factor for obtaining a valid patent (also relevant for UMs) is to file a priority application with a detailed description including different embodiments to support an effective scope of the claims. A good knowledge of relevant prior art, a competent, creative patent attorney and a dynamic drafting process are needed to achieve that. Despite these, many patents encounter problems when entering into litigation, mostly owing to the fact that new relevant prior art is found. The choice of search authority for the priority application is therefore important. The EPO has a reputation of providing high-quality searches and is therefore recommended for this aspect. However, a second opinion from another search authority may reveal that extra piece of prior art that otherwise is brought up by an attacked party. In this regard I strongly recommend filing a parallel application at the Swedish Patent Office (PRV), which is among the most well-established authorities in Europe. The search result from the PRV is provided very quickly, normally in about seven to eight months, and the cost is very low (the official fee is about €400).

Design registrations An EU design registration may be a good means, since it is fast (just a few months from application to registration), cheap (normally less than €1,000) and different. Mostly, for innovations, only patent protection is used, since a design registration does not cover functional aspects. However, in combination with patent protection it may give an unforeseen synergy effect, eg owing to the fact that interpretation of designs requires totally different considerations compared to patents. Further, the EU praxis for designs is young and evolving. Accordingly, an attack combining patents and designs will require a spectrum of competences, which might be hard and very expensive to attain. Hence a design registration might make the difference.

Patent protection Some kind of patent protection is needed if the innovation has some kind of functional aspect or conceptual idea. In this basic regard utility models are similar to traditional patents, ie they do provide such protection. Accordingly there are many different routes that may be used to obtain that kind of protection, ie via the EPO (a bundle of EP countries), the national patent route and for some countries also the UM route. A very good benefit of using PCT is that it provides you with all these options, during the PCT phase, ie from filing until 30 months from the priority date. As a consequence, a PCT application is a very good tool that has numerous options for fast IP. Moreover, there are means of speeding things up, as will be mentioned below.

 222 IP Fit for Purpose ___________________________________________________________________________________

Speed and the PCT system In most cases I recommend using the PCT system, ie filing a PCT application within the priority year to have the option of filing and obtaining patents in almost all countries in the world, at a relatively low cost (about €3,000). Moreover, the filing of a PCT application, in many cases, provides an opportunity to improve on the priority application, with knowledge of the most pertinent prior art and possibly also further development of the innovation. A PCT application provides the valuable benefit of getting (at least) another year and a half to decide in which countries to fulfil, but it also provides the possibility of branching off a filing at any time during the PCT phase, ie by the use of ‘express request’. However, it is of the utmost importance to make it formally correct, eg to state that it relates to an ‘express request’ as provided for in PCT articles 23(2) and 40(2) respectively.

Speed and the EPO In conjunction with entry at the EPO, or later, accelerated search and/or examination (a binding request is required for examination) may be requested, ie PACE, for example by submitting a specific form. The EPO will then ‘make every effort’ to speed up prosecution, but it also requires that the applicant cooperates, eg implying quick replies. However, also using PACE will require years to obtain the patent.

Extra speed via utility models A utility model (UM) is a kind of simplified form of patent, with less formal requirements and a shorter time of protection (normally 6–10 years). Only a few of the European countries have UMs, eg Germany, France, Poland and Finland. Most UMs may not be used to protect methods, but products or apparatuses. Generally, there is no substantive examination of a UM, but merely a formal examination, which implies a quick granting process (normally three–four months). Accordingly, a UM may provide a very quick means for enforcing the invention and, as already indicated above, it may quickly be branched off from a PCT if the need for fast IP arises.

Fast enforcement of IP rights Enforcement actions are very complex and costly, and procedures vary a lot from case to case and from country to country. As a consequence, only some general aspects are highlighted, which may be particularly important regarding speed. In Table 9.3.1,1 some approximate figures are indicated. In view of the combination of cost and time, it is understandable that Germany has attracted about 50 per cent of all IP litigation in Europe. However, it needs to be stressed that many countries may deliver quick proceedings if requesting an interlocutory decision. Table 9.3.1 Times and costs of enforcement

___________________________________________________________________________________________________ Fast IP 223 

Country

Time to main hearing (years)

Cost (’000 euro)

Utility model protection

Germany

1–1.5

50

Yes

Great Britain

1

150–1,500

France

2–3.5

50–200

Netherlands

2–2.5 1 year ‘kort gedink’

60–200

Yes

Express speed in Germany In Germany very speedy court proceedings may be initiated thanks to the possibility of using UM. Indeed the proceedings may even be initiated prior to the grant of the UM, implying that preparations of a complaint may be initiated in conjunction with preparation of filing a UM. To avoid a stay of proceedings it is recommended that the scope of claim 1 is limited to ‘safe’ features, concerning support and invented step. During the proceedings, specific claims may be tailored to attack chosen products or apparatuses. The costs for the proceedings are determined beforehand, case by case, based on the value of the litigation object (Streitwert).

Concluding remarks There exist many possibilities to increase the speed of obtaining IP rights in Europe. The route I recommend, if extra speed may be of the essence, is to use the option of enforcing a UM in Germany, eg by means of express filing via the PCT, and preferably also combining it with an EU design registration. It needs to be stressed that most IP litigation cases are settled, ie the more valid pressure there is at an early point of time the more likely is the achievement of an early settlement, eg eliminating the high costs of court proceedings.

Note 1 

Figures are taken from the article ‘Validation and patent processes in Sweden after the London Agreement’, by Bengt Domeij and Joakim Landzelius.

Further details at www.hynell.se.

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When the spark of genius strikes like a bolt of lightning - call Brann

INTELLECTUAL PROPERTY LAW FIRM BRANN AB [email protected] WWW.BRANN.SE PO-BOX 17192, VÄSTGÖTAGATAN 2, SE-104 62 STOCKHOLM TEL. +46 8 429 1000, FAX. +46 8 429 1070

BRANN

Before commercializing your idea, make sure you have the right patents, designs and trademarks for your innovations. Doing this creates a reliable safety net around your ideas and your precious intellectual capital. Brann can help you build it, and provide you with high quality commercial and legal agreements.

225 



9.4

A bundle of rights

Barry Franks and Ann Danared at Brann look at the options for combining registered and unregistered IP rights in different ways in the business plan.

Any successful product (or service) will attract competitors who, if they are able freely to copy the concept behind the success, will be able to compete with lower overheads as they have not had to shoulder the financial burden of bringing the concept to market. There are only two legal ways of preventing the copying of a product or service – the first is to keep secret the method of making the product (which is what Coca-Cola has successfully done over more than a century) and the second is to get a legal monopoly that prevents others from copying it. Such legal monopolies include patents, utility models, trademarks, design rights, copyright and domain names, and together are called intellectual property rights (IPR). If you are an entrepreneur then it is almost certain that you have a business plan that defines how you want the company to develop over the next three, five, 10 or more years, and IPR should be used as necessary to support this plan. In order for IPR to be a worthwhile investment the entrepreneur must answer just three questions, namely: What IPR is necessary? zz When is each piece of IPR required? zz Where is each piece of IPR necessary? zz Before answering these questions it is worth looking briefly at the types of IPR available. There is unregistered IPR (such as copyrights and unregistered designs), which the author of the IPR owns without taking any action, and there is registered IPR, which has to be applied for (such as domain names, patents, utility models,

 226 IP Fit for Purpose ___________________________________________________________________________________

registered trademarks and registered designs) and which requires the payment of official fees. Most types of intellectual property right are limited geographically, ie an application or registration has to be made for each country in which coverage is required, and to facilitate this there are international protocols and treaties (such as the Patent Cooperation Treaty (PCT) and Madrid trademark protocol) that allow one application to cover more than one country. All intellectual property rights are, as the name suggests, a form of property and, like physical property, can be sold or rented out (normally referred to as ‘licensed out’) to other parties. Unregistered rights cost nothing to obtain but can be expensive to use or defend if, for example, someone copies the object of the right or claims a better right to own the IP right. This is because the lack of an application form filed at an issuing authority means that it can be difficult to determine who the rightful owner is or who was the first to produce the contested object, or indeed if the created work is protected at all, for example if a copyright protection exists at all. Registered rights overcome this difficulty but at a cost – the costs of filing an application, dealing with the issuing authority until the right is granted or registered and then paying the fees necessary to maintain the right. Patents give protection for inventions covering products, process and uses. They have a life of up to 20 years, take two to five years to obtain and as a rule are the most expensive form of registered IPR to obtain. This is because patent applications are examined by the patent offices, and this has to be paid for by a fee and, usually, needs the services of an IPR professional to get the best scope of protection in the granted patent. A neglected cousin to patents, at least in the English-speaking countries, is the utility model. Utility models are similar to simplified patents (but usually may only cover products, not processes or uses), are available in over 50 countries (many of which, such as China, France, Germany, Japan and Mexico, are interesting from a manufacturing base or potential market viewpoint) and usually have a life of 10 years. As they are usually not examined they are much cheaper to obtain than patents, but, owing to the lack of examination before being registered, the protection they confer is uncertain. However, this uncertainty works both ways – both the owner of the utility model and a potential infringer are unable to know for sure if an unexamined utility model is valid. This can be advantageous, as the uncertainty means that neither party has a dominant position and might make it more likely for the parties to negotiate with each other on a level playing field instead of starting time-consuming examination proceedings at the patent office or expensive invalidity and/or infringement proceedings. Designs can be registered or unregistered. Unregistered designs usually give protection only against direct copies and are valid for three years in Europe (15 years in the UK). Registered design rights require payment of a fee, give increased scope of protection (they don’t cover only products identical to the registered design but also products that are similar to it) and can be kept alive for up to 25 years in some jurisdictions. Trademarks can be registered or unregistered and have unlimited lives as long as they are used properly and the renewal fee is paid, often every tenth year. Lack of use of a trademark and incorrect use of a trademark (eg allowing it to become a generic

_________________________________________________________________________________ A Bundle of Rights 227 

term – so it becomes degenerated – instead of jealously guarding its use) are the common reasons why trademarks lose their value.

Examples of different problems The IPR that you need depends on your situation, and there is no single plan that suits everyone. In order to illustrate some of the possibilities available we will invent two entrepreneurs with two completely different products and goals and suggest how they might use IPR to help achieve their goals. Miss A is an artistic student who drew cartoons for her school newsletter. One character, a cheeky spirit called Genesa in the cartoons, became a favourite of hers and she has started to draw greeting cards based around this character. Her goals are first to sell cards and then to expand into the merchandising of Genesa in the form of stationery, cartoon books, clothing, toys and jewellery based on the distinctive face and body characteristics of Genesa. She intends to retain control of the company herself but needs financing of €100,000 to launch a wide selection of cards and publish her first cartoon book. Mr and Mrs B are a pair of scientists who specialize in diagnostic methods. Together they have invented a new system for identifying viruses. In contrast to current systems that use plastic sample plates, theirs uses a biodegradable sample plate made from a new type of transparent paper-based material (which they have developed) and has innovative, specially designed channels formed in it. The paper-based material has properties that make it easier to attach diagnostic materials to the sample plate. To commercialize this system will take at least two years of research and development, and over €2 million, so the couple are actively looking for investors. Clearly Miss A and Mr and Mrs B have different IPR needs!

What IPR is required? Common needs While the two businesses have different prospects, they do have some IPR needs in common. In each case it would be prudent to start a limited liability company. If the name of the company is at all related to a potential product then the name of the company should, if possible, be registered as a trademark. The proposed names of any products should be checked in trademark registers and if possible registered. The company name and trademarks will probably be used as domain names, and these must be registered in as many registers as are considered appropriate. Appropriate countries are often countries where you intend to sell and produce, the country where your main competitor is located and finally the country where you fear that counterfeit goods will be made.

Additional individual IPR needs As an artist Miss A automatically gets copyright protection for her artistic works and unregistered design protection for her designs. However, to get a minimum of protection

 228 IP Fit for Purpose ___________________________________________________________________________________

against unscrupulous competitors she should register the word Genesa as a wordmark, at least one picture of Genesa as the main company logotype and also various designs as figurative trademarks. For the trademark applications, it is important that the scope of protection (the list of goods and services) is initially made broad, as Miss A cannot be sure how large the business will grow to be, and it is better to have too many areas covered than too few. If she can afford it, it would be useful to register the main drawings as design applications to give long-term protection against direct copies. Mr and Mrs B will need to raise capital or take on board investors who will be looking for a short- to medium-term exit strategy (eg the possibility of selling the company at a profit). In order to attract investors they will need to prevent competitors from directly copying their product and need strong IPR protection. To achieve this they should make a list of all the possible types of protection they have or could acquire and then estimate the acquisition costs, the benefits of the IPR and the acquisition times. In this case they have the potential to acquire patents on the new material, methods for making the new material, the use of the new material for a sample plate and the use of the sample plate in a diagnostic method. Patents can take three to five years to obtain, while utility models can be registered in a matter of months. If investors need hard evidence at an early stage that the concept has the potential to be protected by IPR then they should consider filing applications for utility models for the innovative sample plate. They may also be able to get design protection for the shape of the sample plate. But before investing in patents or utility models, they should make novelty searches to ensure that their ideas are patentable. If the searches show that all their inventions are already known then it will be difficult to get any IPR and it is unlikely that they will be able to attract investors – it may be wiser to drop the whole project. If at least one of the inventions is patentable then they should consider filing patent applications and/or utility model applications to cover it. Generally patent applications are preferred, as they have the potential for a longer life than utility models; this is especially so in a conservative field such as the health care industry, which may take 10 or more years to accept a new product. However, if there is the potential that a product will be obsolete after five or 10 years then a utility model may be more cost-effective. One perceived problem of utility models is that they need to be translated into the relevant language at, or shortly after, the filing date of the utility model application, while this cost can be delayed with patent applications by filing a PCT application. However, PCT applications can also lead to utility models, so it can be advantageous to file a PCT application in any case and then convert it to national patent applications and/or utility models as and when necessary. It is possible to describe more than one invention in a patent application and then at a later stage divide the application into a number of divisional applications, each of which covers one of the inventions. This helps keep the initial filing costs down but may cost more in drafting fees. Each such case needs to be looked at on its merits, preferably with the aid of a professional IPR adviser. The timing of the filings can be important. If the invention has the potential of a long life that may exceed the term of the IPR available for it, then filing the application too soon will mean that the most valuable years of income for the invention, ie the

_________________________________________________________________________________ A Bundle of Rights 229 

years after the invention is established on the market, will be relatively short. However, waiting too long before filing the application means that there is a risk that someone else will file an application for the same invention. Determining when to file a patent application is at best a qualified guess, but in general if the invention was made at or shortly after visiting a conference then it is reasonable to assume that other attendees at the conference may have been equally inspired to make the invention and that it is better to file an application sooner rather than later! Design applications should normally be filed just before the product is brought to market so that the figures in the registered design application are as similar as possible to the final product. This is because seemingly minor differences between the product and the registered design may make it difficult for a court to decide if an exact copy of the product actually infringes the registered design right.

Where is the IPR necessary? The geographic extent of protection is important. Luckily the use of the international filing systems means that the decision of which countries to obtain IPR in can often be postponed until the national phase of the system starts (30 months after the filing date for patents). However, if money is tight at the beginning then it may be better to forget about using the international systems and file just one or two national applications directly for the basic invention and hope that it will be possible to file for more IPR later as the invention evolves. Typically a limited, defensive IPR coverage will cover just one or two large markets. For example, for the health care product, IPR in the United States would cover a large purchasing market, while additional IPR in China might cover the large manufacturing zone. If money permits, further applications could be filed in, for example, Europe, Japan and India. If the original application is filed in English then additional IPR in Canada and Australia would be relatively inexpensive. A more aggressive strategy, which owing to its potentially high costs should be used only for core products or technologies, would include additional countries with a large potential for sales and/or where competitors have their manufacturing base. Finally it must be emphasized that, just like buildings and machinery, IPR is one of a company’s assets and should be treated in the same way as the others. This means that an IPR portfolio should be regularly reviewed – and expanded and pruned – to ensure that the company’s investments in IPR give a return commensurate with their costs. An annual IPR portfolio review is the minimum required, and for fast-changing or new business areas IPR should be reviewed as often as necessary, for example when a competitor launches a new product or when a project milestone is reached.

About the authors Barry Franks is a European patent attorney and senior IP adviser at Brann AB. His IP career started in 1983 as an examiner at the EPO. He left the EPO in 1993 to work in private IP practice before taking a position in 1999 as in-house IP counsel at Amersham Pharmacia Biotech, later part of General Electric Healthcare. He left industry in 2006

 230 IP Fit for Purpose ___________________________________________________________________________________

to become a Partner in Brann AB. Contact Barry Franks (tel: +46 (0)18 56 89 34; mobile: +46 070 685 20 53; e-mail: [email protected]). Ann Danared has been a trademark counsel and attorney-at-law at Brann AB since 2000. She also worked as in-house counsel in the pharmaceutical industry at Pharmacia for eight years and at another IP firm for three years. Contact Ann Danared (tel: +46 (0)18 56 89 33; mobile: +46 070 350 10 75; e-mail: [email protected]).

231 

PATENTS

|

TRADEMARKS

|

DESIGNS

|

IP STRATEGY

Holme Patent

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We work with companies and researchers within mechanical and medical engineering, electronics, IT, chemistry, biotechnology, and genetics. For safeguarding our clients’ of the most prestigio interests outside of Europe, we have established an international network with some of the most prestigious IP firms in the US, in China, and elsewhere. We are happy to arrange a nonDenmark. We are happy to arrange a non-committal meeting for discussing your situation and for

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 232



9.5

IP for SMEs

A core technology on a limited budget for IP makes you vulnerable. Marianne Holme at Holme Patent A/S looks at your options.

Modern innovation gave the world the TV, the mobile phone and the internet, and information travels faster than ever. Today’s world being global and local at the same time gives rise to new types of challenges and makes new demands and requirements on innovation. In this respect it is essential to understand the innovation process in order to identify the challenges relating to establishing innovation, as the innovator’s way to profit is full of traps and pitfalls. Some of the traps and pitfalls are easier to spot than others, and some are more crucial than others. Ideas and concepts should be assessed critically prior to selecting which route of development and choice of inventive product to stake on to make innovation happen and be a success. Does the company have capacity and resources for innovation at all? Experiments with different approaches should be carried out to confirm that the innovation is practicable within the limits and framework of the company, and evaluations need to be made if there is a profitable market for the innovation. Innovation may arise from developments in the market, a demand in the market or recognition of a problem or simply be of an accidental character. This chapter is directed in particular to small and medium-sized enterprise companies (SMEs). Many SMEs have limited budgets. They are often founded on a limited key technology, a single core concept or a few core products, which makes the SME very vulnerable to loss of market share. Once the SME has established a certain reputation and the product has become fairly popular on the market, competitors tend to appear spreading unallowable copies. The copies may even be poor copies of a low quality put on the market using nearly the same trademark as the SME uses. This will reflect negatively on the SME, as the

___________________________________________________________________________________________ IP for SMEs 233 

consumer will find the SME a provider of second-rate products. The price for the copy is much lower than for the original, because the copyist need not invest in the development process and can use profits to capture market share, and in the worst-case scenario the SME may see itself outstripped in the market. Instead of just offering a company’s innovation free for copying the innovation can be protected by patents or it can be kept as a trade secret. However, the composition and structure of the product are often easy to derive, for example just by splitting the product apart and identifying the single components, which makes it impossible to keep the technology as a trade secret. The copyist benefits from the work of the innovator, whose investments in manufacturing tools, engineering research and development become completely lost. The SME needs some kind of insurance to build a fence around its key technology to keep the copyist away. When it comes to innovation, patents and patent applications can be regarded as the best possible insurance. There are different ways of mapping innovation in a company, and some simple practical advice may be helpful to turn innovation into money. Prior to filing a patent application or starting manufacture of a new product, the SME needs to know if patents covering the product already exist. If so, the manufacturing and marketing of the new product might infringe them and it would be detrimental for the company to use lots of money and hard effort along a road mined with patents. If a lot of patents already exist in the field, there may be very little room for improvement and further development without violating existing patent rights, and it may be a better idea to pursue other inventions or to obtain a legal right to use the technology, eg by in-licensing the technology. Thus, before innovators arrive at profitable products they must cross the road mined with patents. They must step by step carefully evaluate all relevant patents in order to avoid mine patents, which inevitably will explode if stepped upon. The search for patents may reveal patents that have expired, the technology for which is free for use. The search may also disclose information motivating new innovations and can obviously be used to keep an eye on a competitor’s developments. If the search results reveal that the innovation is considered new and comprises a technical contribution to the state of the art within the respective field of technology, patents should be applied for in a geographical area where market initiatives are intended and copy productions or sales can be expected. The innovative SME needs to apply for a patent before the competitor files an application for the SME’s invention. Often two companies working within the same field of technology race in mutual competition to develop the same product. Sometimes they know a bit about each other’s developments; sometimes they don’t. But for this reason it is important to apply for a patent in time. In the event that the competitor manages to file the application first the SME may be barred from exploiting its own technology and research, resulting in lost investment and time. In such cases the SME may furthermore be forced to defend manufacturing products, which the SME rightfully invented prior to the competitor, using lawsuits and patent invalidation processes. Thus, don’t disclose the innovation to anybody. File the patent application before the competitor does, but wait until the product development has reached a stage where

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certainty has been obtained that there is a market for the product or at least a market is expected or can be created. The new product should also be realized as being a true invention that has been developed to a technical degree that can support a patent description of high quality, including the broadest possible claims and fallback positions for the patent prosecutions. It is important to find the right balance between these considerations to obtain the best possible approach to turn the innovation into value. Do not send a complete description of your invention to another company, investor or competitor without a detailed and dated log of what has been transmitted and to whom. Don’t wait patiently for a reply from the other company. It may turn out that the other company finds your documents so interesting and relevant that your own drawings and description of the innovation can be seen about 18 months later in a published patent application owned by the other company. Your truthful right to the innovation can be extremely difficult to prove later even if you have evidence of transmittal – remember, disputes need to be settled by judicial means. Some innovations attract investors and business partners; some don’t. For investors or business partners to decide to invest they need to know a lot about the innovation, but innovators are reluctant to disclose the information, being afraid that investors or business partners will run away with their big idea. The usual solution is to conclude a non-disclosure agreement or a letter of intent. None of the above solutions are optimal to any of the parties. Seen from the point of view of investors or business partners, they can in the worst case decline their right to an innovation that is already pending as part of their own research and product development. Seen from the point of view of innovators, the non-disclosure agreement needs to be sufficiently detailed to define their invention so that investors or business partners cannot subsequently come and say that it was their idea to make the invention. To avoid this dilemma it is normally recommended that the innovator file a patent application as a business insurance before the invention is disclosed. This application will also confer a means of stopping copyists. When the company is settled on the market and the product has shown itself to be valuable to the company, it may be beneficial to start further product development and apply for further patents for improvements to prolong patent protection time. Some companies may also choose to file defensive patent applications to reserve a freedom to operate and keep competitors far away. A patent is a strong competitive tool and can be used both passively, as a precautionary measure to prevent others from developing in a potentially relevant space around the company’s own technology, and actively, by enforcing the company’s patents. The combined strategy is however the most commonly used and the most frequently recommended. The nature of the patent system serves to prevent copying of patented technology and urges innovators to make new breakthrough creations for the benefit of the world. In conclusion, innovators need to watch their step when they cross the road of innovation. They must carefully look around in order to avoid being run over by a larger company. For further details please visit www.holmepatent.dk.

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9.6

IP in the new economic powers

Sangwani Nkhwazi and Rohan Patel of Mancunium IP suggest seven tips for IP-intensive companies considering trading in emerging economies.

During the infant years of the Indian pharmaceutical industry, some critics were quick to dismiss the endeavours of small local companies as being little more than novice experiments. The sight of ‘backyard laboratories’ undertaking chemicals testing and trials in a garage in Bangalore couldn’t be further away from the corporate glamour enjoyed by the Johnsons or the SmithKlines of the day. There were also genuine concerns regarding drug quality, patient safety and the health effects of such medicaments and chemicals. However, there was another more strategic aspect to it. The Guardian newspaper of 5 May 1961 (page 15) carried an article written by a correspondent concerning the vast increase of the drug industry: There are 124 major companies in the private sector manufacturing drugs either independently or in collaboration with foreign firms. Almost every well known manufacturing company in the Western countries is working in partnership with some Indian company or other. Over two thousand small scale industries are also working throughout the country. Except for a few of the most modern synthetic drugs India today is manufacturing practically everything. Fifty years on and against many odds, the domestic Indian pharmaceutical industry continues to thrive and is estimated at being worth over £2 billion. It is a staggering

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figure that is constantly rising. Given a level playing field, what market share would a UK-based company that had set up base in Bangalore or entered into a joint venture with a local manufacturer back in the 1960s have realistically hoped to control today? There are a number of important lessons that can be learnt from a careful observation of the development of the Indian pharmaceutical industry. This chapter outlines a few useful points that IP owners and creators looking for new markets for their goods or services should consider before establishing themselves in emerging economies. In this context the term ‘emerging economies’ is defined here to include both emerging markets and developing countries. Before establishing a base in a new market, we suggest that IP creators should consider the following.

Understand and research the IP landscape carefully Although some emerging markets may have few information channels, this may be an opportunity to be a bit creative with what few resources you have at your disposal. For example, if it is not immediately clear what IP your prospective competitors already own because there is not enough up-to-date information available online or in offline IP databases (on granted patents, trademarks and industrial designs) documenting their IP, then in relation to patents it may be useful to commission a patent audit reviewing hard copies of patent journals and document archives of patents in force. In addition, you may have to make use of other sources of information such as intellectual property data found in public libraries, requesting bibliographic information for patents from patent offices (some patent offices will have bibliographic data on CDs) or commission surveys targeted to the competitor(s). Once a thorough analytical assessment of the IP landscape of your field of technology or sector has been mapped and the leading players and patenting habits have been ascertained, this information may prove useful in identifying core competencies in the industry, which distinguish the prospective competitors from the other players. It may also flag up which of their technologies that appear most similar to your own inventions are ‘top performers’. Further, it could reveal critical gaps in the industry and remove the element of surprise if the existence of any potential obstacles (granted rights or pending applications) is identified.

The advantage of local knowledge Here, you may have to shop around, especially if you want to minimize your initial costs. In most cases, it may be possible for you to seek advice from a practitioner based in the UK, or even have a UK qualified in-house counsel; however, foreign practitioners may not always be up to speed with the local legal system (eg tax or import laws) and may not always have the benefit of professional legal privilege. Thus, in relation to patents, for example, what you need is a practitioner who will look at your products or offerings and give specific recommendations on the country’s requirements on issues such as priority, patentability, time limits and any exclusions. In addition, your practitioner should highlight cost-effective channels to obtaining

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protection, including what services an in-house IP specialist (or your contracts manager) may legally undertake. Also, in addition to enquiring as to what licences you may have to obtain, it is important to check the meanings (in the local language or dialects, if any) of any brands or trademarks that you intend to use before using them or affixing them to products, literature or labels.

Test the IP system IP laws are incredibly complex and vary widely from one jurisdiction to the next. A good place to start once you have an IP specialist on the ground is to file a provisional application on one of your most recent inventions and closely monitor its prosecution path. This will give you a first-hand picture of what getting your inventions protected in this jurisdiction will entail. Also, depending on the circumstances, you may find it useful to establish a satellite office to spearhead your innovation efforts. In this context a satellite office is defined as being different from a full branch in that its initial purpose is not to undertake the business dealings of the parent company but instead to begin gathering business intelligence, establish your IP base and lay down a network for possible mutual technology development or collaboration with local ventures. In most instances, the cost of running and maintaining a small satellite office with two staff members may be much less than the cost of undertaking one new employee in the UK.

Know your competitors After the competitors have been identified, the next step includes knowledge of everything from the details of their last research presentations and their most recent acquisition to their proposed public offerings. Knowing what your competitors are up to couldn’t be emphasized more. In this age of social networking, companies should employ all legal information-gathering methods to be up to speed with the leaders of their field, and if they themselves are the leaders then minimally they should be aware of the R&D initiatives of their closest rivals. This may involve frequent commissioning of IP landscapes that outline details of pioneering research or concise details of patent applications protecting products the competitor intends to bring to market in the near future. It may also involve subscribing to patent watch services or targeted market data analysis or business analysis sources.

Use lobbying While media reports on doing business in some emerging economies vary widely from sheer horror to the delightful, UK companies should utilize the power of direct dialogue with public officials (or their representatives) and trade bodies, where applicable, clearly outlining areas where change is essential and would be mutually beneficial. Here, impartial evidence is the key.

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While the channels of lobbying in some Western countries are limited or the costs thereof expensive, in many emerging economies, politicians are genuinely keen to assist their constituents and are eager to impress their administrations that they are in fact positively representing their regions in effecting development. Unfortunately, they don’t always have reliable information at their fingertips on what changes would mutually benefit investors and their constituencies. IP-intensive companies desiring to export their technologies in these markets should seek advice on the effective channels of lobbying. In doing so, concerns such as the adoption of stronger IP laws should be clearly addressed, citing how legislation that combats counterfeits and strengthens infringement laws could ultimately encourage technology transfer and increase foreign investment. Use of surveys conducted elsewhere may be useful here. Incentives such as tax or import exemptions on capital goods and the adoption of a tax system favourable to both smaller companies and multinationals should be emphasized. Generally, a balance needs to be reached, especially in relation to certain products (for example, essential medicines), where some countries may have legislation that provides for the manufacture of generics by third parties. However, such legislation could be extended to include minimally the granting of licences of right to generic companies on reasonable terms.

Innovate It is important that you monitor your innovation efforts. For example, it may sometimes not make much commercial sense to maintain certain IP rights within your portfolio. Instead, it may be a better strategy to sell (or even auction) some underperforming IP rights to other undertakings (which may have better use for them) or to an educational or research institution, so that you can focus your research on the top-performing IP rights. Alternatively, specific patents or other rights may sometimes serve a better purpose in patent pools. This may be the case when a competitor owns IP rights that would be complementary to your own technology. IP owners should commission IP audits to explore the merits of such a strategy, as it may bring synergy, leverage costs and expand your market base.

Make friends, many friends You will need them. Whether in the public sector (eg specialist research institutions and universities conducting pioneering research) or in the private sector, networking will not only provide an opportunity to learn about the local ways of doing things but also make you visible to potential customers and collaborators. Thus, whether it is offering your premises for a presentation by an academic who is conducting research in your particular field of technology, hosting a seminar or sponsoring a competition, networking will help market your name, increasing the chances of others in need of your products finding you. It is also a good way to integrate into the society, giving you a glimpse of what others in your industry are working on.

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About the authors Sangwani Nkhwazi is the founder and Patents Specialist at Mancunium IP, an intellectual property and technology outfit. Rohan Patel is a Biotechnology Specialist at the firm. The company is based in Manchester and offers bespoke and costeffective IP solutions to individuals, SMEs and other entities. Services include patents and trademarks application for registration services, technology consulting (fields of specialization include electronics and embedded systems; telecommunications and wireless systems; software and the internet; medical devices; biotechnology and agri-science), IP reviews and audits, IP landscaping, IP management and other IP support services (due diligence, renewals, legal and IP research). Contact Mancunium (tel: +44 (0)161 282 2304; e-mail: [email protected]; website: www.mancunium-ip.co.uk).

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Patent filing strategy to maximize portfolio value

There are 10 good reasons why an early-filed US patent application will put you in a strong competitive position, says John Moetteli, an international patent attorney.

Introduction Few innovators are aware that one simple choice made as part of their overall patent strategy can be fine-tuned to significantly increase the value and effectiveness of their patent portfolio as well as reduce litigation risk, namely the choice of where they start the patent application process. Where permitted under national law and where there is a potential market for the product in the United States, patent applications should be filed in the United States first. This chapter is intended to enlighten innovators so that they can avoid strategic mistakes that, in most cases, needlessly handicap them vis-à-vis their USbased competitors. Generally speaking, innovators are best advised to start their patent filings in the country of the most commercial importance to them as determined by the market in that country or by the presence of competitors or potential licensees.1 Systematically taking the correct first step can significantly increase the value of the company’s patent portfolio, which in turn reduces litigation risk. The practice of merely filing locally without justification other than tradition only haphazardly serves the innovator’s best interests. Why? Because, where the US market is important, failing to file first in the United States needlessly handicaps the innovator’s US patent rights, which may ultimately yield a lesser patent or subject the innovator to a patent infringement suit and so cause him or her commercial damage.

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Yes, for companies whose markets are local and whose inventions have little licensing value in the United States, advising the innovator to file a patent application locally is certainly legitimate. On the other hand, for global innovations that may have a significant market for their products in the United States, innovators should file in the United States first or at least concurrently with or immediately after a home-country filing. Why? If innovators do not file early in the United States, they can lose significant rights because, with each passing day that the US filing is delayed, more prior art can be cited against the innovator’s US application. If innovators fail to obtain patent rights for their products in the United States, then they have no in-kind currency that can be used to entice a partner or competitor to sign a licence agreement. Consequently, innovators may needlessly subject themselves to a patent infringement suit or the need to pay licence fees that, had they filed the patent application in the United States first, they might have been able to avoid. Besides this, filing first in the United States makes good business sense. The United States has a developed patent system (more than 200 years old) that, in many ways, has helped shape the laws of many other industrialized nations. This developed patent system helps reduce uncertainties that increase the risks of litigation. Still further, the United States remains a dominant force in international commerce and, if innovators are forced (because of budget constraints, for example) to choose one single national patent to have in their portfolio, most innovators choose a US patent.2 For these and other reasons listed below, the innovator’s US patent rights are probably the most flexible and powerful tools for monetizing an invention, particularly where a potential licensee or infringer resides in the United States. For a patent attorney to fail to communicate the advantages of early filing in the United States is the strategic equivalent of a chess instructor failing to tell a student that the queen is allowed to move in all directions as far as the way is clear. In other words, failing to communicate these advantages typically results in diminished US patent rights caused by an up-to-one-year loss in priority for the US application. Winning at the game of intellectual property is difficult enough without being handicapped by ignorance of the rules of the game. The game is global now, and innovators expect to be informed of the basic rules affecting their international patent strategy, particularly if ignorance of a simple rule subjects them to increased litigation risk and diminished patent value. The author has identified more than 20 reasons supporting a patent strategy that begins with an early US filing. Besides the case where a co-inventor is a resident of the United States (in which case filing in the United States first is obligatory), here is an ordered listing of the 10 most compelling such reasons.

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The 10 most compelling reasons for filing first in the United States 1. First and most important is to better ensure that the innovator obtains the broadest possible US patent, which if obtained increases the patent’s value, which can be used to foreclose competition or barter away litigation risks. Filing in the United States first allows the innovator-applicant to jump back in time one year in defining the prior art against which the innovator’s US patent application will be judged. In other words, filing early in the United States is necessary in order to take advantage of the one-year grace period in which prior art is defined one year prior to the filing of the innovator’s first US application, thereby excluding from the prior art the innovator’s own as well as third-party disclosures that take place during the one-year period immediately preceding the US filing. Here’s why: Title 35 USC, section 102(b), states the following: 35 USC §102 Conditions for patentability; novelty and loss of right to patent A person shall be entitled to a patent unless … (b) the invention was patented or described in a printed publication in this or a foreign country or in public use or on sale in this country, more than one year prior to the date of the application for patent in the United States…

Consequently, although the priority filing date is the date that determines prior art for a European patent (and in fact most national or regional patents), for a US patent prior art is defined one year before the earliest filing in the United States.3 Yes, although the practice of ‘swearing behind’ using the innovator’s non-US priority filing as evidence helps to a limited extent because innovators can claim inventorship at least back to their priority filing date (only available for WTO member countries), this allows innovators to go back in time only to their priority filing date, not one year earlier than their priority filing date, as they would have been able to do if they had filed first in the United States. Consequently, if innovators choose to file anywhere but the United States first, they are choosing to put themselves at a disadvantage vis-à-vis other patent filers who have 102(b) filing dates in the United States that are earlier than the innovators’ priority filing dates. In almost all cases, this would be a strategic mistake that rational innovators, if fully informed, would never expect to make were it not for their ignorance of the rules. Although it’s the duty of patent attorneys to inform their clients of current law and rules in order to help ensure that clients do not make such mistakes, unfortunately self-interest sometimes

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clouds the advice that clients receive from their advisers. Consequently, innovators must sometimes educate their own patent attorneys of the advantage of filing first in the United States and insist that this is done, unless of course their attorneys clearly explain why, in their particular case, it is not the wisest course of action.   One may fairly ask, why does early filing in the United States offer this very significant advantage when the rest of the world does not? It is because the United States is essentially the only first-to-invent country (not a firstto-file country), and US authorities consider the filing of a US application to be the best proof of date of invention. Further, by the provision of a grace period of one year, an innovator receives the benefit of the de facto assumption that it took a year to develop the invention from its date of conception, prior to filing in the United States. Consequently, if innovators file first in the United States, the US patent examiner can assert less prior art against them and, therefore, an innovator’s US patent claims are likely to be broader than elsewhere in the world. In addition, if third-party competitors wish to defeat the innovator’s US patents, the competitors must find prior art that is one year older than they would otherwise have had to find had the innovator’s first filing been a non-US filing. Alternatively (the downside), the innovator must find prior art that is one year older than a competitor’s US filing date in order to defeat that competitor’s US patent. 2. Fortunately, the European Patent Office and the patent offices of essentially all industrialized countries of the world consider a US patent filing a valid priority filing for their own purposes, thereby enabling the US priority filing to serve as a reservation of rights in these countries as of the US priority filing date. This means that, where filing in the United States is not barred on national security grounds (a very rare situation for all countries but France), a US filing provides all the priority benefits that a local filing can provide. Of course, the Paris Convention requirement that the regular filing be made within one year of the first filing still applies. In other words, a Swiss resident filing a US patent application first and later (within one year) a European patent application can claim priority to the US patent application and thereby fully preserve his or her rights in Europe, just as if the innovator had filed in Europe or the home country first. As already noted, where the applicant is a French resident, France might not consider a first US filing by such an applicant as a valid filing because of French national law requiring that residents of France file first in France for national security purposes.4 In addition, UK and German law forbids filing patent applications abroad if the invention involves military technology developed by residents.5 The United States has a similar requirement.6 Fortunately, essentially all other industrialized nations allow their residents to choose where to file first.

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3. US patent applications can be filed in any language. Only six months or perhaps a year or more after filing in the United States (within at most six months of receiving an official notice to do so), the application must be translated into English. This means that the innovator or applicant can gain the advantage of an early US filing without having to translate the patent application into English. Consequently, a non-English US provisional patent application can be filed concurrently with a homecountry filing, for a cost of an additional perhaps 500 euros over the costs of filing in the home country alone. Further, for those practitioners or innovators who wish to file a PCT application in a language other than English, filing a priority US filing (in any language) is essentially the only way for the innovator to avoid the detriment of filing a non-English PCT application with respect to the innovator’s US patent rights.7 Where the innovator chooses to file a non-English-language PCT application, the English translation of the PCT need not be filed in the United States until at least several months after the filing date of a non-English US continuation application of the PCT, perhaps 36 months after the priority date. In this way, the patent attorney may be able to justify continuing to work in a non-English language in a manner that does not potentially damage the innovator’s interests in the United States (subject of course to meeting the other requirements mentioned in, for example, point 6 below). 4. The filing fee for a US provisional application is $220, significantly lower than the filing fee in most other industrialized countries. For individuals or companies having fewer than 500 employees, the official filing costs and most future official fees are reduced by 50 per cent (so $110 for a US provisional filing). 5. Monetizing a patent is generally much easier in the United States than in other countries because the US legal system allows innovators with valuable patent rights to negotiate a contingent fee agreement with even the largest law firms, thereby enabling innovators to enforce their rights without themselves taking on any further litigation risk (ie the law firm takes on this risk). Depending on the perceived value of the patent, these firms will not charge for their time or expenses unless and until they win the case and a damage award is granted. In Europe, most countries (with the possible exception of the United Kingdom) do not allow lawyers to accept contingent fees, and so innovators must pay their lawyers by the hour in Europe no matter how strong their case is. Large companies know this and so sometimes ignore the European patent rights of others until a suit is actually filed. Because of the advantages that a US patent offers in this regard, many large European research institutions and universities often file for patent protection only in the United States for certain technologies.

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6. The United States has the most stringent filing requirements in terms of ‘best mode’, ‘enabling disclosure’ and completeness of the drawings, as well as the US ‘duty to disclose’.8 Filing first in the United States using a patent firm that is thoroughly familiar with these filing requirements ensures that the patent application filed internationally will have fewer troubles during global prosecution (ie during substantive review by examiners in national or regional patent offices). Failure to respect these requirements may result in the US part of any PCT filing being held invalid in court, thereby depriving the company of patent rights it might otherwise have been able to use to barter away an infringement suit.9 7. Because the United States represents the largest domestic market for a broad range of products and services and because the likelihood is high that, if any patent in the innovator’s portfolio is litigated, it will be litigated in the United States, the US market is arguably the most important single market for the innovator. Because of a homogeneous consumer demographic, a single department store chain includes hundreds of outlets. Consequently, there are fewer but more significant targets in the event of litigation in the United States than in Europe. This means that nationwide enforcement in the United States is typically less costly than transnational enforcement in Europe. In fact, based on anecdotal observations of the author, including discussions with Jeremy Lack, an international attorney experienced in IP mediation with Altenburger Attorneys in Zürich, the US patent can represent half, or perhaps 70 per cent, of the value of the typical innovator’s entire patent family. Further, the size of the US market and the fact that a single patent covers this market mean that, on a per capita consumer basis, the United States is by far the least expensive jurisdiction in which to obtain patent protection.10 A US patent typically costs less than half that of a European patent, for example. Further, renewal fees are due only every 3.5 years, not yearly as in Europe. This means that, if the US market is the most important one to the innovator and the innovator later decides not to file anywhere but in the United States, starting with the United States is the least costly option, one that avoids aborted non-US filings while preserving all options for the innovator. 8. English is the language of computer science, information technology, business and law, and the native language of many industrialized nations around the world, such as the United States, the United Kingdom, India, Ireland, Australia, Canada, New Zealand and Singapore. Further, nonEnglish-speaking countries such as Japan and Switzerland (to name just two) permit filing in English, subject to the submission of a translation at a later date. In addition, patent rights in Germany, Switzerland, France, the UK, the Netherlands, Denmark, Sweden, Luxembourg, Monaco,

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Slovenia, Iceland, Latvia, Liechtenstein and Croatia can be protected via a later English-language European patent application, without further translation costs, thanks to the London Agreement.11 Therefore a patent application drafted in English first can be prosecuted through grant in many important jurisdictions without translation and so, in addition to minimizing translation costs, is less likely to suffer from losses in meaning due to translation in these important regions. 9. An early US filing date means that the innovator’s application won’t be rejected by the US Patent Office under section 102(b) or (e) of the US Patent Law, when another party’s US patent application has been published during the prosecution of the innovator’s application, even though the non-US priority filing date of the other party is earlier than the innovator’s US filing date. Conversely, if the innovator’s priority filing is a US filing, then the publication of the innovator’s application creates section 102(e) prior art against competitors.12 10. Provided innovators do not file any foreign applications and request nonpublication of the US application at the time of the US non-provisional filing, their US application is kept secret and is not published by the US Patent Office until it is granted. Therefore, innovators who practise a secret process need not relinquish trade secret protection until they are convinced that the patent protection obtained in the United States will protect them more effectively than merely maintaining the secrecy of the technology. Preserving trade secret rights in this manner is simply not possible once a European, Japanese, Chinese or Korean patent application is filed.

Exceptions Despite the above-enumerated advantages of filing in the United States first, as already mentioned, for innovators whose inventions have only local markets and no real licensing value in the United States, advising innovators to file a patent application in their home country remains legitimate. Further, owing to national security laws, French residents must file in French in France first, using a French patent attorney. UK and German residents must file applications comprising military secrets in their respective countries first. In most other countries (including Switzerland, for example), innovators are free to file first wherever they choose. In addition, when publication or disclosure is imminent, and the inventor is not an English speaker, preparing an application in his or her mother tongue (say German) and filing in the most convenient location using an available home-country patent attorney in order to obtain the earliest filing date may

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mean that filing in the United States first or on the same day as the homecountry filing is not possible. Fortunately, if the US application is filed soon after the priority filing, most of the advantage of early filing in the United States can be preserved. Finally, if the innovator would like to receive a US patent quickly, the filing of a US provisional patent application (which is not reviewed substantively until a regular application is filed) can delay the ultimate issuance of the US patent. Therefore, this may be a factor in the innovator’s decision not to file a US provisional application. In this case, the innovator should file a US non-provisional application (which will result in a search conducted by the US Patent Office) as soon as possible or file a US provisional application along with a regular home-country application, paying the search fees and any fees for accelerated review in the home country, in order to get an early search report through the home-country patent office while at the same time securing an early US filing date. Note that one reason sometimes given for not filing in the United States first is that, in the United States, the named applicant is the individual inventor and not the innovator’s company and so, if the inventor later becomes uncooperative, this could place a cloud on the title to any resulting patent. Despite the fact that non-US filings are published in the name of the companyapplicant (if so requested), nothing prevents an inventor in Europe or elsewhere from filing a suit to claim ownership in the invention. In other words, the possibility of ownership issues arising with an inventor exists with all patent filings, not just US filings, and so this reasoning cannot fairly be used as an argument against filing first in the United States.13

Conclusions If innovators wish to minimize their litigation risk and maximize the potential scope of protection they can obtain for their inventions as well as maximize the licensing value of their inventions, and provided that they are not residents of France (or, if residents of Germany or the UK, the invention does not comprise sensitive military technology), then they should file patent applications in the United States first or at least concurrently with or soon after a priority home-country filing. If the patent application covers a commercially valuable and patentable technology with applications in the United States, then ignoring these advantages may lead to diminished patent value and increased litigation risk. Because many small to mid-sized European companies rely on their innovators for such strategic information, the author hopes that European innovators will do their part in educating management of these important particularities of US law. If this is done, innovators will generally

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be in a better position to avoid needless litigation and will be able to augment the value of their patent portfolio while keeping related costs to a minimum. What’s more, typical Europe-based innovators will no longer operate at a disadvantage vis-à-vis their US-based competitors.

Notes 1 

Where such a choice is permitted under national law, as discussed below. Companies and institutions that, from the public record, do this include IBM Rüschlikon, Logitech, the University of Geneva, HUG, the EPFL, and many large Swiss chemical and pharma companies, to mention just a few. 3  When it comes to issues in US patent law dealing with proof of inventorship, which is a unique characteristic of US patent law vis-à-vis other countries, the equal treatment provisions of the Paris Convention do not apply. 4  See Article L. 612-9 of the Code de la Propriété Intellectuelle français. However, this requirement is considered by many to be invalid under GATT TRIPS, an international trade agreement. 5  German law forbids filing German state secrets abroad. German state secrets are defined as facts and knowledge accessible to a limited number of people whose revelation would damage the external security of the German nation, section 93 Nr 1 Strafgesetzbuch (StGB) (Ger), translated in Joseph J Darby (1977) The Penal Code of the Federal Republic of Germany, p 118, F B Rothman, South Hackensack, NJ. Therefore, this covers almost all military-related inventions the details of which are known by only a few. As for the UK, filing applications abroad on military technology, or technologies that could harm national security or public safety, is prohibited under section 23 of the UK Patents Act. 6  Where a co-inventor is a US resident, a foreign filing licence must be obtained from the US Patent and Trademark Office (USPTO) before filing abroad. 7  See 35 USC section 102(e). 8  See Title 35 USC section 112, first and second paragraphs for requirements for support (‘best mode’) and enabling disclosure, and 37 CFR section 1.83(a) for drawing requirements (‘drawing in a nonprovisional application must show every feature of the invention specified in the claims’). The ‘best mode’ requirement is a safeguard against the desire on the part of some people to obtain patent protection without making a full disclosure as required by the statute. The requirement does not permit inventors to disclose only what they know to be their second-best embodiment, while retaining the best for themselves. In re Nelson, 280 F.2d 172, 126 USPQ 242 (CCPA 1960). The duty to disclose (‘duty of candour’) is a statutory obligation that seeks to ensure that stiff penalties may be assessed against those who wilfully withhold known prior art in hopes that the patent examiner will not find it and thus accord the innovator a broader (albeit invalid) patent. 9  PCT requirements deal primarily with formal matters. Therefore the PCT examiner is not charged with reviewing an application to determine whether it meets US standards. Consequently, the applicant is solely responsible for ensuring that such requirements are met. 10  The licensing value of a US patent is therefore probably much greater than for any other national patent. 11  See http://www.epo.org/topics/issues/london-agreement.html for further information. 2 

___________________________________ Patent Filing Strategy to Maximize Portfolio Value 249 

12 

See above. Fortunately, the risk of a struggle with an uncooperative inventor can be minimized by ensuring that the inventor has signed a contract agreeing to assign the rights in the invention to the company, and the inventor is denied access to the serial number of the priority filing until after any patent application has been officially published by a patent office (usually 18 months after the first filing). For employees, risks can be eliminated by ensuring that each employee has signed an employment agreement that clearly gives the employer exclusive rights in the employee’s inventions. Finally, country law may give ownership in inventions of an employee to the employer by statute, thereby obviating the need for employment contracts in order to secure ownership in an employee’s inventions under certain circumstances (such is the case in Switzerland). 13 

About the author John Moetteli is an international patent attorney and managing attorney of Moetteli & Associés Sàrl (www.moetteli.com), an IP firm based in Switzerland specializing in preparing and filing US and European patent applications for European clients. He is currently on the faculty of IMD in Lausanne, where he teaches intellectual property strategy to business managers from around the world. Besides his almost 20 years’ total IP experience, he has more than 12 years’ experience filing US patent applications directly from Europe. He may be contacted via e-mail at [email protected]. © 2009 John Moetteli

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PART 10

Contract negotiation

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10.1

How to value an idea

Elizabeth McNabb and Christi Mitchell at Highbury discuss how to value your idea in terms that an investor, partner or licensee will accept.

Valuation is the fulcrum of the process of commercialization. Any process of commercialization will be built around some beliefs, views or calculations about the value of the invention or idea being commercialized. The question ‘What’s it worth?’ is implicit – and should be explicit – in any process of investment, development, licensing or marketing. The important thing is to make this explicit, with shared and declared assumptions. Valuation here means prospective valuation: what might an idea or invention be worth if it’s taken forward? Traditional means of valuing and looking at cost or benchmarks (similar transactions in the past) are unlikely to be very useful, because they look backwards, and often deal in completed or developed ideas or products. Every new idea, invention or innovation is exactly that: new. There is no formulaic way to value. Each idea must be looked at on its own merits. This chapter sets out a standard way to think through valuation issues, to arrive at a sensible set of assumptions and approach to valuation. But each invention will need to be looked at in context, and good advice will almost always be needed to get a good result. This chapter should enable you to ask the right questions, and assess whether you are getting good, useful answers.

The basic idea: balancing anticipated risks and rewards at a point in time The value of any new idea at any given point in time is affected by the risks facing the invention and commercialization process (which will affect the viability of the idea and

 254 Contract Negotiation _____________________________________________________________________________

the cost of bringing it to market), balanced against the rewards that might accrue as a result of successful valuation. The valuation process involves systematically assessing and valuing these risks and rewards, in a consistent manner. A word of warning: valuing an idea or invention changes its value. This can be a surprise and even a shock. And it can be positive or negative. But it is observably true that the process of systematically setting out the risks and possible rewards will both create valuable intellectual property and change the value of the IP you already have. At early stages (when risks are big and rewards yet far off) the result might looking discouraging. But, as risks are removed and rewards draw near, the likely value of an idea can grow startlingly.

Thinking about valuation: the three ‘Cs’ and one ‘R’ You should think about the valuation process as having three components: the content, the context and the communication of the idea, all of them leading to some conclusion about possible royalties. To maximize the value of an innovation, business process or invention you need to understand each of the three Cs and how they work together.

Context We assume you know a lot about your invention or idea. But to value it you must start by asking questions about the commercial framework where it might fit – questions an investor or licensee might start from. We call this the context. You should start by being clear about the purpose of the valuation exercise: is it to attract investment, or decide licence terms, or sell the business, for example?

Content

Context

Optimized Value

Communication

Balanced Interaction

Content Context

Communication

Figure 10.1.1 How the three Cs work together

______________________________________________________________________________ How to Value an Idea 255 

Then you should ask – and be able to explain – the purpose of your invention or idea. What does it do commercially (as opposed to technically)? That means asking perhaps what problem the end user might be trying to solve, or what usefulness the end user will gain. Elegant technology is not enough – someone has to have a eureka moment as a customer or user as well as an inventor. That in turn should lead to a systematic analysis – perhaps by professional advisers – of: marketplace and market sector value, structure and trends; zz competitors and competitive products, including trends; zz regulations and legislation – current and anticipated future. zz Remember: an idea without a market may still be elegant, but it will also be worthless. Proving that there is a demand is the first step to showing possible rewards, without which the value will be close to zero.

Content You probably think you know your own invention very well. But are you sure? Can you describe exactly what you’ve developed, what comes from others and how you got to your idea? Could you do this in terms sufficiently clear to include in a licensing agreement, for example? The invention or new idea itself is the obvious bit that people rightly associate with value. This relates to the assets, both tangible and intangible. Intellectual property is an aspect of this (and an increasingly important one), but not the whole story. Valuation of an idea requires an exact description of that idea. That includes – perhaps – formal IP like patents or trademarks, as well as copyright in your website, or laboratory records, or manuals. But it also goes wider. A systematic ‘audit’ of your invention- or innovation-related assets is important in valuation. This should include: your IP – all IP, not just patents: zz –– strength and breadth of IP cover; stage of development: zz –– prototypes, working models, laboratory records, manuals, etc; stage of commercialization: zz –– funding received; –– funding required; –– time to market – how much more development is needed; existing and/or proposed agreements: zz –– degree of exclusivity; fields of use of any agreements; zz term of any agreements; zz evolutionary versus revolutionary innovations – relative risk factors. Just how new zz is your idea? Evolutionary, incremental innovation is relatively low-risk but may also offer relatively lower rewards if it pays off.

 256 Contract Negotiation _____________________________________________________________________________

You can do this yourself – and learn a lot in the process. If you have a significant pipeline of ideas it’s worth becoming expert – or hiring an expert – in this area, broadly known as licensing. But if you don’t have a pipeline of ideas you will probably find that the language of IP, in particular, can be complicated and confusing. This is an area where some professional help can pay off: it may be cheaper to hire expertise than to spend the time acquiring it. But do shop around – SMEs are often short of money as well as time and expertise, and you will want to make sure you get value for money.

Communication OK. So you know your idea and you know the market for it. You can describe exactly what you have and offer good insight into the risks and rewards it faces. Now you need to communicate all that insight to a prospective investor, buyer or licensee. The better you can do that the higher the value. The other side will always have more confidence in someone who can get the message right than in someone with a brilliant idea but no idea of how to explain it. That may not always be fair, but it’s a fact. It’s worth putting time into communication. Some of this is about explanation, setting out what your idea does and why people will want to buy it. But more than that, it fundamentally involves the ability to see the idea or invention from the perspective of the investor, buyer or licensee. You have to be able to really imagine your idea in the market and communicate that insight. Part of this can involve negotiating skills (see Chapter 10.2). But before you get to negotiations you must convince the other side that you have something worthwhile. And that worth will be from their perspective, not just yours. Be honest with yourself: if you have the skills and insight to get the communication right, great. But many people working in new technology areas find it hard to separate themselves from their invention or idea, which is something you need to do to communicate it successfully. You may benefit from some help in this area too.

Royalties – the integration of all the elements How do we integrate context, content and communication? We use royalties as a concept to integrate these components. In fact, you may not want to turn your invention into royalties through licensing. But you will need to take what you have learnt about context and content, and your communication strategy, and start to put numbers around them to create a value, or a range of values. Remember that this will reflect a balance of risks, which will be like costs, and rewards, which will reflect your assessment of the positive aspects of the context. It is also important to remember that value is not definitive or static; it is dynamic and constantly changing. As your invention develops, risks may well reduce. Equally, wider market perception will have an effect – something seen with the dramatic decrease in value of a large number of businesses during the recession. The businesses did not change overnight; however, the perception of their value did. This can happen to ideas too. Finally, remember that this is an exercise that balances an optimistic view of rewards with a pessimistic view of risks. The result will be a balance. But, whatever it

______________________________________________________________________________ How to Value an Idea 257 

is, you should be able to explain and defend your assumptions on the basis of good research and advice. The value of your idea will be maximized if you do, as will your prospects of commercial success.

About the authors Elizabeth McNabb and Christi Mitchell are directors of Highbury Ltd, the boutique consultancy with unrivalled expertise in valuing and commercializing new technologies. Highbury focuses on technologies that will make a difference, such as biotechnology and cleantech. It has the know-how and strategic vision to make a genuine, measurable and profitable impact on businesses, and provides a customized approach to meet their needs and expectations. Contact Highbury (tel: +44 (0)1462 436894; e-mail: elizabeth@ highburyltd.com, [email protected]; website: www.highburyltd.com).

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10.2

How to negotiate contracts

Negotiations to commercialize your innovation are rarely a gladiatorial contest, but should be the start of a working partnership. Elizabeth McNabb and Christi Mitchell at Highbury discuss how to get it right.

You must go into any negotiating process with a very clear idea of what you want to achieve. ‘Winning’ or ‘beating the other side’ is not likely to be a good answer to that question. Negotiation is not like sport (where winning can be a very good objective). Rather it is a process, conducted within the framework of relationships, for both parties (or all sides) to try to advance their interests. Negotiation itself should not be an emotional process, but if you feel attached to your idea or invention – and many people do, for very good reasons – you may want to get someone in to help you with those parts of the commercialization process that you find emotionally hard. This is not weakness; it is being professional. Many people have invested a huge amount of themselves in their innovations, and inevitably they find that commercialization means losing control of their ideas. That can be a painful separation, and getting good help with the process can get a better outcome and avoid later regrets.

What kind of transactions? If you are looking to commercialize your idea or invention, you will be looking for investment, or a licensing agreement, or some form of partnership. All are long-term arrangements. Negotiations before and during the relationship will be the means of ensuring that all parties get the results they need to continue to work within the relationship: mutual benefit will be the result. This sort of objective is likely to be right for just about every sort of commercialization process, and it should underpin almost all of your thinking about any negotiation process.

 260 Contract Negotiation and Reach Terms ____________________________________________________

The exception is the one-off transaction. If you are simply selling your business, or a particular package of IP, or a brand and associated goodwill and that will be the end of your involvement, then you will rightly be looking to maximize a one-off return. But even here you should be careful: you will still want, ideally, to conclude the transaction with goodwill on both sides and your reputation intact or even enhanced; unless you are actually retiring and leaving the country, you will not want to conclude even a oneoff transaction with ill-feeling or any sense that you were less than wholly ethical in your approach. After all, your reputation is itself an intangible asset that needs to be protected and invested in.

Approaches to negotiation The best-known way of thinking about negotiation is summed up in the clichéd ideas of win–win and win–lose (or lose–lose) outcomes. These concepts are often taken out of context, and they are in any case only slightly helpful in thinking about commercializing new ideas, which have the possibility of generating significant unforeseen benefits or costs – they are unlikely to be ‘zero sum’ negotiations. It is more helpful to think of innovation-related negotiations as shown in Table 10.2.1. Our key point here is that, when you think about your reputation as well as any one transaction, you should always aim for the positive, long-term relationship outcome. Nothing else will really suit your interests.

Planning and preparation Good preparation really matters. Negotiations can be seen in three phases: preparation, the negotiating process itself, and implementation or aftercare. Rushing in unprepared is an avoidable error. What does preparation mean? It means the following: Know your idea, invention or product thoroughly. This includes having a good idea zz of its value to an investor, licensee or buyer. Read Chapter 10.1 again to refresh this point. Be clear on the technical issues that are important, the status of formal IP (like patents), the know-how and other informal IP, and the sort of underpinning records and documentation. In other words, know your product. Research shows that technical competence is a real success factor in negotiations: as well as getting the content right, it conveys real authority. Table 10.2.1 Innovation-related negotiations I win

Long-term relationship

One-off transaction

Favourable

I lose

Fire sale

Unsatisfactory negotiation

Unfavourable

They win

They lose

___________________________________________________________________ How to Negotiate Contracts 261 

zzKnow what you’re looking for. If it is an investment, be clear with yourself what sort of investment you want to attract and what you’re offering in return. Get help with this if you’re not confident of your own knowledge (or if it’s your first time – be realistic about your abilities): changing your story halfway through a negotiating process will not convey competence or confidence and will affect outcomes adversely. Know what is of value to you. This will need to be a key priority during negotiations. zz If you do not know what you are looking for or its relative value then you may easily give your value away in concessions or, worse, never include items that will bring real benefits to you. For example, free research facilities may be of greater value than a maximum cash payment in the future. Think through what the ‘other side’ is likely to want, and also what they might be zz able to offer you. Remember that you should think about what you’re offering against their existing business, what the opportunities might be, what the costs might be (to them, not to you) and what they might see as the risks (including the risks inherent in their possible relationship with you!).

The negotiating process Keep it simple. Complicating issues will not convey any sense of your integrity or competence. Be clear when and where you will meet, and use an agreed agenda of topics to structure discussion. Remember that your integrity and reputation are themselves valuable assets; you should husband them carefully. And, once again, think about getting professional advice or help if you’re not confident or if you are finding the process an emotional one. There are some particular points to bear in mind when negotiating over IP: Disclosure. Telling the other side what you’re offering involves disclosure of zz commercially valuable information. Think through how you will do this, and plan to use non-disclosure agreements (NDAs) where you need to. As a general rule, it’s better to say more about what your idea does and less about how it does it. But this is not a hard-and-fast rule, and you will need to use NDAs at some point to underpin serious negotiations. Know-how. In many areas of new technology, informal IP – technical knowledge zz and know-how – is as valuable as formal patents. Technical know-how can be recorded carefully, but it also resides in the collective knowledge and experience of staff involved in development. If you’re looking to sell, or to partner with another organization, you should think about how you will retain key staff, and ensure that they maintain confidentiality if they do leave. This is not easy, and you may need careful professional advice. But for an investor or licensee, this may be a crucial issue. Territoriality. IP is specific to countries. Be clear what you are offering in zz territorial terms. There is no right answer, but you should think whether you are giving too much if you offer, say, global rights in circumstances where you might later wish you had other local partners, in other countries where local knowledge matters, for example.

 262 Contract Negotiation and Reach Terms ____________________________________________________

Follow-up You will reach the point where you have concluded your first negotiation successfully, and your new partnership is launched. That is the start of the business collaboration, and in some ways it bears a similarity to a wedding as the start of a marriage! You need to make sure you build in ways to monitor the deal you have done, to control the flow of information, to work towards improvements and to sustain and develop the trust you have started to establish. Clear agreement on reporting, information sharing, payments, auditing finances, the development of improved products and – above all – settling disagreements (before you reach for the lawyers!) is crucially important. Some people recommend developing a ‘flight manual’ for agreements involving technology and IP, setting out clearly and simply how the agreement is to be made to work. This can include simple material like phone numbers, an organization chart, and templates for reporting. It can also include a shared calendar for the relevant processes. This is separate from the agreement itself – it is the working-level complement to the formal agreement, intended to make implementation as easy as possible and of course to make it a shared task.

And finally Keep negotiations in context: they are an integral part of the process, and it’s important to avoid seeing them as a sort of gladiatorial contest. Successful negotiations end in peace and prosperity, not in blood on the carpet. If they don’t go to plan, stop. Think, and look to find ways to work with your negotiating partners to get things back on track. Good, successful partnerships can be the backbone of very successful commercialization efforts, and a lot of creative fun too. It’s worth making the effort to get them right.

About the authors Elizabeth McNabb and Christi Mitchell are directors of Highbury Ltd, the boutique consultancy with unrivalled expertise in valuing and commercializing new technologies. Highbury focuses on technologies that will make a difference, such as biotechnology and cleantech. It has the know-how and strategic vision to make a genuine, measurable and profitable impact on businesses, and provides a customized approach to meet their needs and expectations. Contact Highbury (tel: +44 (0)1462 436894; e-mail: elizabeth@ highburyltd.com, [email protected]; website: www.highburyltd.com).

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PART 11

Funding innovation

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11.1

How to pitch to an early-stage investor

Alan Watts, Director of Halo, the NI Business Angel Network based at the Northern Ireland Science Park, explains how to pitch to an earlystage investor.

So many early-stage business pitches for investment are unsuccessful – because the people pitching don’t think about it from the point of view of the investor. Imagine you are a potential angel investor – a stream of new companies pass in front of you, all laden with facts and support to show how good their company is. After a while you are so overloaded with information you can hardly remember the company names, and the coffee break comes as a blessed relief. That might be the perception of the potential investor, and yet all of the pitching companies are giving it their all. They’ve prepared at length, and this is their great opportunity. So how can companies maximize this opportunity and improve the power of their pitch? Let’s consider the following questions: Why pitch? zz What’s the purpose of the first pitch? zz When to pitch? zz Who to pitch to? zz How does the investor see things? zz What’s the right valuation? zz What must the pitch cover? zz

 266 Funding Innovation ________________________________________________________________________________

Why pitch? The obvious answer is to get money, isn’t it? It is if you haven’t got any, yet often the biggest asset a successful pitch may achieve is an excellent business partner who can open doors and provide experience. The real question potential entrepreneurs should ask themselves is what they want to achieve. After all, many small businesses can be set up with little capital and run as what is called a ‘lifestyle business’, ie one that will provide a nice income for a few people. Why go to all the trouble of expanding and taking on new markets and employees with the myriad of problems attached if you don’t need to? Knowing what it is you want to achieve is fundamental, and from there will come answers to questions such as ‘How big do I want this to be and how quickly?’ Only when these are known can you start to model the cash needs of the business.

What’s the purpose of the first pitch? Many companies think that the purpose of the first pitch is to get the money. This is almost always wrong. The purpose is to get enough interest so that there’s a second meeting. Pitching companies time after time insist on putting all of their ‘good news’ into their pitches. They totally overload their audience, who lose concentration along with the will to live. Another big mistake made concerns technology. Again, it’s the most natural mistake for a technology-based company to make, talking about their clever technology in detail and using technical terms. Investors see many pitches over a wide range of areas and so more often are not specialists in your particular technology. The answer to this problem lies in the number one rule of sales – sell benefits not features. The angels, at this early stage of engagement, will be prepared to believe that your technology works – just explain the benefits in a way that shows that people will pay for the effect of technology. The investors will bring in their own financial and technical experts to later meetings. This is when you will have the detailed technical discussion and will need to be able to prove any technical claims you’ve made.

When to pitch? The timing of the pitch should be set by one thing only: when is it right for the company? Normally, the best timing for your business is only after you’ve used up every possible alternative sources of finance. Investors like to see a young business ‘bootstrap’, ie operate as cheaply as it can, ideally until it has some sales traction. Clearly this is more difficult for some companies to do, especially ones that need large amounts of R&D, but there is no doubt that some sales traction will attract more investor interest and give a better valuation. It’s fascinating to see just how well some start-up businesses can manage to bootstrap. They use credit cards, small bank loans, government grants, European funds, sweat equity and partnerships. Sweat equity, getting people or companies to do things in return for some shares in the company, is a very powerful tool. Similarly, partnering

___________________________________________________ How to Pitch to an Early-Stage Investor 267 

with companies and organizations, again in return for ‘jam tomorrow’, can often provide access to expensive facilities, tools and equipment. Investors always look for commitment from the entrepreneurs, and one question they are sure to ask is whether the entrepreneur has put his or her own money and time into the company. If the answer is no, this is a big alarm bell.

Who to pitch to? Banks are normally comfortable funding conventional businesses with good track records. This makes new start-ups an unnatural area for them. It can be done, but they’ll often be looking for guarantees. Angel funding is generally considered to be £50,000–£500,000 and comes with some significant non-financial involvement in the company. VCs normally operate above £0.5 million and in a more businesslike and somewhat less personal way than angels. The key to selecting potential VCs is to find out two things: what areas do they invest in and where in their funding cycle are they? The first is obvious but often forgotten; the second may be less obvious. VCs normally raise a fund with a set life, often 10 years. They spend the first part of this time investing in companies, but usually leaving funds uninvested so that they can follow on with these companies. This is because growing companies often need to come back to the well a number of times, and the VCs need to have some funds left to participate in later rounds. Hence where they are in their 10-year cycle will dictate how interested they may be in investing in a new company.

How does the investor see things? In formulating any pitch it’s vital to keep your target audience in mind. Firstly, consider the ‘angel playing field’. Research from NESTA and the British Business Angels Association provides excellent statistics on what this looks like: 56 per cent of all UK angel investments lose money. The good news for the angels is that their average return on capital was the equivalent of 22 per cent a year bank interest. And that’s before the excellent tax breaks. So if angels invest in a company, statistically they’re likely to lose their money. The trick is to spread investments over a number of companies – many people say a minimum of 10. Then it’s likely that six might crash, two or three might provide some return, but perhaps one will do very well. It’s these ‘one in 10’ investments that do so well that they pay for all of the other lost investments and also provide a good return overall to the investor. So when investors look at your company, they should ask themselves one key question: could this company be that magic ‘one in 10’ investment? The statistics also show that angels do better if they invest in an area they know. This can also be affected by two other factors. Firstly, angels often invest in groups or syndicates; thus it is probably sufficient to have one or perhaps two experts in the field within a syndicate. This allows angels to invest with comfort in areas that are outside their expertise but that they feel are interesting or ‘hot’. The second point here is the people factor. Many investors will say that they invest in the people and the proposition

 268 Funding Innovation ________________________________________________________________________________

is secondary. The people factor is clearly important. There is of course no way to legislate or prepare for this factor; it just happens. Having some involvement with a company after investment also significantly improves the statistical outcome for an angel. This is clearly a win–win situation, since the right angel should bring expertise, experience and contacts to the business. Finally, angels are looking for a relationship that must end! They want to put their money in, typically aiming for five years, and then vitally must see a route to get it out again with a big gain. Odd as it often seems to start-up companies, the pitch should address the possible exit routes, eg trade sale.

What’s the right valuation? Angels should be looking for a 10-times return on capital. So how does this work about valuations, ie the percentage of your company they will wish to negotiate? Consider the example of a company looking for a £100,000 investment. The company’s pitch shows sales growth culminating in sales in year 5 of £5 million. An investor will look at this and consider what this company might be worth at that time. There are many ways to value a company based on profit, sales or other factors. However, one frequently used method is to say that the company might be sold for twice its earnings, ie twice its annual sales at the time. So in our example: Year 5 earnings Possible sale value Angel return (10 times) Angel shares required

£5 million £10 million £1 million 10 per cent

The figure of two times earnings is only a very rough guideline. In some industries, earnings multiples can be much higher – just look at the figures for the dotcom period. Clearly the pitching company would do well to show that the earnings multiple in its market is higher, as it might then be able to negotiate a lower percentage of shares to lose. This can be backed up by providing relevant examples of trade sales within the industry. The only right figure for valuations is the one the company and the investor agree on – the negotiations are key.

What must the pitch cover? The normal pitch is usually between 10 and 20 minutes. There are many different sets of standard topics to cover, but typically they include: 1. Business positioning statement. You’ve probably got about 60 seconds to catch your audience’s interest. They want to know very quickly what area you are in and how much you’re asking. The area is vital, because many will have fixed plans that they do or do not invest in certain topics, and your required investment is clearly important, as you might want more money than they are prepared to invest.

___________________________________________________ How to Pitch to an Early-Stage Investor 269 

2. The problem you solve. Don’t give your solution yet; just show there is a need and a potential benefit people will pay for. 3. Solution and core benefit. Explain what it is the customers will be buying and why they’ll be prepared to do this. 4. Competition. Who are your competitors and what protection do you have? Investors like to see patents and so on. However, sometimes no protection is possible. If so, just be honest. 5. Route to market. How will you get your solution to people who will pay for it? This is classically the weakest aspect of many technology propositions. If you haven’t got the right answers here, you are not ready to pitch! 6. Business strategy. Start with the three- to five-year goal for the business, often best stated as, for example, £10 million sales in year 5. Then set out the strategy – this might include partnering with a major company, concentrating on the UK market before expanding, or developing a ‘lite’ version of the product to be followed by a fully featured version. In some ways, the actual contents of this slide are less important than just the fact that it is there. You need to show that you have thought about strategy even though what you will probably do over the five years will turn out to be different from what you are now stating. 7. Financial projections. Don’t overload the investors with figures; they can have the full business plan and financials for the later meeting. For profit and loss it’s sufficient to show only sales and profit for five years. Sometimes it’s helpful to add units sold or cash, but keep it simple and round all numbers to make it easy to read. Some networks require a balance sheet at this stage. You should show the indebtedness of the company. Angels do not like seeing their money used to pay off existing debts, but you have to be honest. 8. Funding sought and share table. The investors need to see at a glance where the money is coming from and how the shares are currently distributed. Tables 11.1.1 and 11.1.2 illustrate how this can be shown in simple clear terms. 9. Management. This is your chance to show the team – and you do need to have a team. However, for a start-up it’s common not to have all of the team on board yet. This isn’t a problem provided you clearly show that you know where the gaps are and ideally you have good people lined up to step in. Table 11.1.1 Funding Source

Funds

State

Angels

£250k

Pitching

Grants

£100k

Negotiations

Private

£ 50k

Agreed

Total

£400k

 270 Funding Innovation ________________________________________________________________________________

Table 11.1.2 Shares Shareholder

Share

Founders

85%

Private

15%

10. Major milestones. The emphasis here is on the word ‘major’. A simple table showing perhaps six milestones with approximate dates is all that is required. The final milestone is best as the exit, eg a trade sale. 11. Exit strategy. How will the angel get his or her money out? Often this is a trade sale, and it’s helpful here to show examples of acquisitive companies in your sector. 12. Call to action. As you finish your pitch you should leave a slide up behind you that acts as a useful summary: what you do, how big you’re going to grow and how much you want. Often you’ll follow your pitch with a question-and-answer opportunity, so it’s much better to have useful reminders on the screen instead of the bland ‘Thank you and any questions?’ You will notice that the one thing apparently missing from this pitch is the percentage of your company you are offering. The reason goes back to your core purpose – to get another meeting. Why risk opening up debate at this stage when the investors don’t yet know all the good stuff you have about your company?

Mistakes to avoid Some of the most common mistakes to avoid in the pitch include the following: It is too long. zz It has too much detail. zz It includes too much technical jargon. zz The zz important financial figures are buried in a sea of figures. There is no clear route to market shown. zz The route to market is shown as the usual general stuff about websites, shows and zz salespeople. There is no sales expert in the team. zz There is no mention of being EIS-compatible (the UK tax scheme used by most zz angels). There is no mention of wishing to strengthen the board. zz The zz team slide gives details of everyone instead of the key people only. Remember, knowing what it is you want to achieve is fundamental, and it’s hoped that your answers to the above questions will help strengthen your pitch.

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About the author Alan Watts is the Director of Halo, the NI Business Angel Network based at the Northern Ireland Science Park. Halo is designed to provide the missing link between private investors and entrepreneurs by assisting in matching the two. Halo is operated by the Northern Ireland Science Park funded by InterTradeIreland and Invest Northern Ireland. Contact Alan Watts at Halo (tel: +44 (0)28 9073 7800; e-mail: alan.watts@ nisp.co.uk).

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11.2

The fundamentals of IP asset valuation

Peter Kaldos at the Hungarian Patent Office discusses how to release the ‘locked-up’ value of your organization.

By neglecting the potential income from strategically exploiting their intellectual property (IP) assets, innovation-intensive organizations are missing substantial capital resources that could be used for business development or financing new projects. An accurate valuation of IP assets provides management with key information on which to base exploitation decisions and thus can help release ‘locked-up’ value. Intellectual property protected by rights such as patents, trademarks, designs and copyrights has increasingly become the most important asset of innovation-intensive and creative enterprises. In many of these organizations, the value of IP has surpassed that of tangible assets, often to the extent that a company’s IP portfolio is its sole asset. This shift towards the dominance of IP in company value shows no sign of slowing. At the same time, within these same companies, the economic conditions have minimized resources and restricted financing, resulting in the curtailment and cancellation of growth-orientated projects. Essential development plans have been placed on the shelf to gather dust, at a time when investment in the future is at its most important. How can the value locked up in your IP asset portfolio be released to raise capital and finance much needed projects? The solution may be the strategic exploitation of your underutilized IP assets. In other words, use what you have (IP assets) and generate additional income from more effective use.

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This chapter details why IP asset valuation could be of key importance for your organization and sets out some of the fundamental methods used to value IP. For ease of use, the chapter focuses specifically on the valuation of patentable technology (suitable for a patent application or already the subject of a patent).

Value your IP assets Peter Drucker, the writer and management consultant, was absolutely right when he said ‘You can’t manage what you can’t measure.’ How can you exploit your IP assets if you do not know their value? It is no surprise that IP valuation has become a hot topic in recent years, with many professionals and organizations devoting substantial resources to its understanding, development and use. Despite this relevance, there are no commonly accepted IP asset valuation standards or methodologies.

Strategic exploitation of your IP assets The valuation of IP assets is never just for curiosity. A valuation requires considerable resources and is conducted to resolve a specific business issue. The results of the valuation are required to assist management in making optimal decisions related to the development and exploitation of the asset. Information about IP value initiates dialogue within and outside the company and reduces the complexity of decisions. This in itself is a worthy, if not arguably the most important, reason to conduct an IP asset valuation. Exploitation options for your underutilized IP assets can include: Sale, licensing and joint exploitation. An obvious way of generating income from zz an underutilized IP asset is through a straight sale, producing a one-off lump sum for your company. A more commonly used exploitation option is the licensing out of IP assets. This, depending on the terms and conditions of the licence contract, will result in periodical royalty and possibly milestone payments to your company. Specifying the exclusivity or non-exclusivity of the licence, the territory, permitted uses and the timeframe can lead to a myriad of possible licence combinations with many different partners, producing many independent income streams. Consider also entering into joint exploitation schemes such as IP pools, where partners share their IP, or cross-licensing. They may just have the technology that you need for your new project, at no extra cost. The deliverable at the end of the valuation process would enable a decision about 1) whether the transaction is worthwhile and 2) under what conditions your company would be willing to enter into such a transaction. More importantly, accurate information will be available to help your company increase the value of the IP asset in question before entering such transactions, through changing certain critical factors. Exploitation through partnerships and joint ventures. Forming partnerships or joint zz ventures with cash-rich but IP-poor partners can be an effective way to realize income from underutilized IP assets. Perhaps there are alternative uses for your IP asset. A joint venture can actively target a new market and with good management it will result in regular income for your company.

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The deliverable at the end of the valuation process would enable a decision about what contribution your IP asset has made to the assets of the joint venture and, ultimately, your share of the new venture. Accessing capital through IP asset-based loans and securitization. Presently, the zz use of IP assets as collateral for loans is rare but not unknown. Experts predict that the shift towards IP asset dominance within company value is set to change this in the future. Capital markets are likely both to utilize and to support IP assets through IP-backed loans. As with tangible assets such as real estate, loans secured by IP assets will allow innovative organizations to finance their development activity. Securitization of IP assets is rare and much more complex. It works where there is a fairly predictable flow of income related to the IP asset, such as regular licence royalties. In these cases it may be possible to issue securities backed by this income stream. In return for a lump-sum payment to your company, you will in effect sell your rights to the cash flow-generating royalty stream. The deliverable at the end of the valuation process would assist your company and the lending organization to agree on the financing conditions.

Methods Certainly there is a growing body of methodology used by industry, consultancy and investment professionals. There are many valuation methods and even more numerous variants. Two things are for certain: it is not an easy task and there is no one-size-fits-all solution. Approaches to IP asset valuation are generally divided into monetary and nonmonetary methods. Monetary methods attempt to calculate the quantitative value of the IP assets and include ‘cost’, ‘market’, ‘income’ and option pricing-based approaches. Non-monetary methods provide a value guide through the rating and scoring of IP assets based on factors that can influence their value.

Cost-based approaches Here, the cost of replicating or reproducing your IP asset is taken to be its value. You will need to calculate the costs incurred if your company were to develop a similar IP asset either in-house or externally. The principle of substitution is used as a guide; a potential licensee or purchaser for your IP asset will not pay more than the investment required to develop its own IP asset with similar functionality. This approach is a useful benchmark for value where the future uses and benefits of your IP are not yet evident. A crucial point, however, is that there is no direct correlation between cost of development and the future revenue potential of IP. Simple ideas can be the most valuable, just as expensive developments can often fail.

Market-based approaches The idea behind these approaches is that the market decides the accurate price and, therefore, the value of the IP asset. Observing the prices of similar IP assets bought and

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sold between independent parties or comparing the royalty rates of similar licensed IP assets gives a value for your IP asset. If you know of similar IP assets bought, sold or licensed and have access to relevant market data, then you are on to a winner with this method. However, as there are limited formal markets for IP and the relevant pricing information is not usually public, it could be difficult to find comparative IP transactions.

Income-based approaches The most basic definition of IP asset ‘value’ is based on the ability of your IP asset to generate future income. Approaches such as the discounted cash flow (DCF) method calculate the potential future cash flows from your IP asset and appropriately discount these. The result is the present value of your IP asset. In many respects, this method is the most relevant to help you strategically exploit your IP. You will need to estimate an income stream either from product sales or from the licensing of your IP, the duration of the IP’s useful life, and an understanding of specific risk factors for discounting future income.

Non-monetary value indicator-based approaches Non-monetary methods provide a value guide for your IP asset through the audit and scoring of different factors related to the IP. These factors or ‘value indicators’ can influence the value of the IP asset both positively and negatively. In the same way as factors such as location, number of rooms, nearby schools and so on affect the value of a house, a combination of value indicators related to your IP asset will determine its value. These indicators can include aspects related to legal and IP protection backgrounds, the technology and development level, market details, financial factors and, very importantly, the management competencies of the organization that will exploit it.

How do companies value their IP assets? Depending on the circumstances of the valuation, a specific valuation approach or a combination of approaches should be chosen. When selecting the appropriate methods to use, consider the following: What exactly is the IP asset being valued? The IP asset must be clearly identified zz and differentiated from other tangible and intangible assets. For example, it can be difficult to separate two interdependent technologies. What is the purpose of the valuation? The type of value result (non-monetary, zz monetary) required is determined by the purpose of the valuation. For example, valuation to be used to assist with management decisions may require only nonmonetary results. For whom is the valuation being done? Different valuation approaches are required zz if the target audience are management or prospective licence partners, for example.

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Conclusion IP assets, which are the result of innovation and creativity, can give your company powerful elements of competitive advantage. The value proportion of IP assets within innovative organizations is increasing rapidly. Underutilized IP assets represent ‘locked-up’ value within your innovative organization and can potentially be a source of income. The strategic exploitation of IP assets is an opportunity for your organization to grow during an economic downturn. An accurate valuation of your IP assets, using a combination of monetary and nonmonetary methods, will provide you with essential information to make decisions about exploitation and give you an insight into the financials, including a forecasted revenue stream. Examples of methods and possible options for exploitation have been described in this chapter. They are intended to raise awareness about IP valuation and how this process is key to releasing the ‘locked-up’ value of your organization.

Four steps to release ‘locked-up’ value from your IP assets 1. Identify and clearly define your IP assets. IP assets that are underutilized within your organization, or not part of your company’s core business, are ripe for strategic exploitation. Identify potential uses for your IP assets in-house and outside your company. Are there other uses for the technology, different applications or different customers? Think about your complementary know-how too. 2. Protect your IP assets. This is highly relevant, as many exploitation options (sale, licensing, joint ventures, securitization, etc) require your IP assets to be protected by an industrial property right (patents, etc). Protection could also be in the form of ‘soft IP’-related strategies such as well-defined contracts between your company and employees, partners and so on. 3. Value your IP assets. This is the key step in the process of releasing value. Remember, ‘You can’t manage what you can’t measure’. 4. Exploit your IP assets. Identified, clearly defined, protected and valued IP assets can be exploited in various ways with the end purpose of raising income for your company.

About the author Peter Kaldos is an Economist at the Hungarian Patent Office. Working closely with innovation-intensive SMEs and research institutions, his team is involved with the development and implementation of IP asset valuation and IP management-related methods and services. His main area of expertise is in the valuation of patentable technology. As the governmental office for the protection of intellectual property, the Hungarian Patent Office performs official examinations and procedures in the fields of patents, trademarks, industrial designs and copyright and participates in the preparation of IP legislation. The Office has an important role in supporting national science and innovation policies and facilitating economic growth through promoting the identification, protection and utilization of industrial property. Contact Peter Kaldos at the Hungarian Patent Office (e-mail: [email protected]; website: www.hpo.hu).

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When you are copied

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12.1

How IP litigation works

Larry Cohen, a partner at Latham & Watkins and global chair of its IP Group, gives a step-by-step account of what happens when IP goes to trial.

As an IP rights owner you believe that someone has infringed your rights. It has cost money to obtain and renew these rights, and someone has put a product on the market, or is operating a process, or is offering a service that you believe to be an infringement of these rights. In this chapter there will be an examination as to what happens next. Solicitors, barristers and usually European patent or trademark attorneys are involved in litigation, with the barristers being primarily responsible for the pleadings and advocacy, and the other members of the team for evidence preparation, disclosure and day-to-day conduct of the action.

The first question – is there infringement? The first question to be asked is whether the rights are truly infringed. There is little point in starting expensive litigation only to find that there is no infringement. If the right infringed is a patent, examine the infringement against the claims, and particularly the broadest claims (usually claim 1). If the product or process comes within the scope of at least one claim, you can proceed. In trademarks there is the same exercise, except that there is a penumbra around both the registered mark and the specification of goods, which means that the cut-off as to what infringes is broadened out and is fuzzy at the edges. Registered designs are treated in the same way. For unregistered rights, such as copyright, passing off and infringement of trade secrets, first it is necessary to establish that the right exists, and ownership, and only then is infringement considered. On the basis that the right is established, the next stage is to enforce it. For a rights owner, it is necessary to appreciate that the defendant may attack the validity of the

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right (the patent or trademark may be found to be invalid) and, for non-registered rights, whether the right subsists at all. For first-time IP litigants, this may come as a surprise.

The second stage – getting started Except in cases of exceptional urgency, which in the IP field are usually counterfeiting cases, the first warning that the defendant has as to infringement is a demand letter from the claimant’s lawyers or other IP professional. It may also come from the claimant itself. If that fails to produce a settlement of the dispute, proceedings will have to be commenced. Proceedings are commenced by the claimant issuing a claim form in the High Court in London (or to a limited extent for certain causes of action in other courts). The claim form needs to be accompanied by certain other pleadings, which are written documents setting out, in a formalistic way, the facts on which the claim is based. In patent actions, there are two pleadings that accompany the claim form: the particulars of claim, which set out the patent number and assert ownership, subsistence and infringement; and particulars of infringement, which set out the product or process alleged to be infringed, and the claims alleged to be infringed. In other IP cases there is only a single pleading: the particulars of claim, which sets out all of the factual information required to establish the claim. Supporting documents should be annexed to the claim. The claim form and the particulars of claim set out at the end the relief claimed – an injunction, assessment of damages and costs (attorney fees). The claim form, a response pack, and the particulars of claim and any supporting documents are then served on the defendant. If the defendant is outside England and Wales, special rules apply for service. In some cases the permission of the court to serve the proceedings is required.

Rules of court and procedure Detailed rules of procedure are contained in the Civil Procedure Rules (CPR), and the practice is further elaborated in the Chancery Practice Guide, both of which are available on the internet at http://www.justice.gov.uk/civil/procrules_fin/index.htm. The rules of court allow parties to apply to the courts for procedural orders pending trial. The losing party may be ordered to pay summarily the costs of such an application.

The pleadings stage Once the proceedings have been served, the defendant has to file an acknowledgement of service at court, and to state whether it intends to defend. It then has a limited time in which to serve and file a defence. That defence will usually deny infringement and set out any positive case that the defendant has, including attacking the subsistence and/or validity of the right alleged to be infringed. Any other facts, such as pleading a licence or lack of activity by the particular defendant, also need to be pleaded in the defence. In cases involving registered rights (patents, trademarks, designs), the defendant may also counterclaim, in addition to invalidity, that the right should be revoked, that is the patent, trademark or design should be removed from the register. This is usually

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pleaded in a separate document called the grounds of invalidity, which set out the basis on which invalidity is asserted, and asks the court to revoke the patent. Although the rules of court prescribe 28 days for a defence (42 days in a patent action), this is usually extended for at least a further month, sometimes longer, by agreement initially, and eventually by the permission of the court. After the defence and counterclaim (if any) have been served, the claimant is entitled to serve a reply, to answer the defence. Where a counterclaim is served, a defence to counterclaim (which forms part of the reply) must be served. It is also permitted and usual to ask for clarification of pleadings by serving a request for further information. The court will compel a response where appropriate.

Getting ready for trial – order for directions After the pleadings have been lodged at court and the pleadings are complete, the court send an allocation questionnaire to the parties. This sets out how they think the case should proceed to trial, whether experts are to be called and what disclosure (discovery of documents) is to be given, and reviews similar issues. Sometimes (and usually in IP cases) the court will ask the parties to attend to give directions and make orders to bring the case to trial, such as whether issues should be heard in a special order. In patent cases, it is almost invariably the practice that there is a directions hearing before the judge and that this substitutes for the allocation questionnaire. One issue usually considered at this time is whether the case should be mediated with a view to settlement, and the parties are permitted to take up to two months’ ‘time out’ to mediate a settlement.

How to establish infringement in patent cases – product description One difficulty that arises in patent litigation is how the product is constructed or what process is used. This is solved by the defendant being obliged to produce a product description setting out exactly how the product is constructed or the process operated by reference to the claims of the patent. It may be supplemented by discovery of documents relevant to the issue of infringement. In this way the parties and the court will be apprised as to infringement and can construe the claims against infringement. Product descriptions and similar documents are usually protected by confidentiality against dissemination.

Discovery (disclosure) generally In patent actions discovery (disclosure) is discouraged, and only documents that are needed to fill in the gaps in relation to a product description and documents relevant to cited prior art (plus or minus two years from the priority date) normally have to be disclosed. In other IP cases there is a full exchange of documents between the parties, which are all documents that can located, that each side has in its custody or control and that relate to the issues. This is subject to a requirement that the disclosure effort has to be

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proportionate to the case. In many cases e-discovery or electronic disclosure, which involves search e-mails, is required. Disclosure is effected by each side producing to the other a list of documents to be disclosed. Documents that contain legal advice do not need to be produced, as they are protected by privilege. There are limited other categories of protected documents. If the disclosure given first time is inadequate, it is possible to seek specific disclosure either voluntarily or by court order, subject to the requesting party being able to show that the documents requested are both relevant and likely to be in the possession of the party of whom the request is made.

Experts Patent cases depend on the evidence of experts, and they are often used in other cases. For example, where survey evidence is required in a trademark or passing-off case, or there is evidence of opinion required that is not a matter where the judge is likely to have had knowledge, expert evidence is used. The expert is required to be independent of the parties, and must be demonstrably so. Expert evidence is delivered in a written report, which must set out the instructions given to the expert and the assumptions made by him or her. The expert’s evidence should be confined to matters of opinion on issues of which he or she has expertise. There are usually two or sometimes three rounds of expert reports. The court encourages the experts to meet shortly before trial and to limit areas of disagreement.

Factual evidence Factual evidence is delivered by witness statement, which is a written statement of the facts to which the witness can attest. It should exhibit or cross-refer to any documents on which the witness relies. A witness statement must conclude with a statement of truth, and it is a criminal offence deliberately to lie in a witness statement. There should be only two rounds of evidence of fact, but this rule is often disobeyed.

Pretrial preparation In order to get the case ready for trial it is necessary to prepare the papers in proper order for the court, which is surprisingly time-consuming and costly. The main task is to prepare a pretrial brief, called a skeleton argument, which sets out for the judge the facts and issues of law that arise in the case. In this regard, an IP case is no different from any other case. It must be sufficiently detailed for the judge to understand all of the issues, including subsistence of the right, infringement and validity, but not so detailed as to repeat what is in the pleadings and evidence. The judge will always pre-read the skeleton arguments.

The trial The trial is a continuous event. It starts by the barrister for the claimant outlining the case. The judge often interrupts to ask questions. After the opening has concluded, the

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claimant’s witnesses of fact are called, followed by the claimant’s expert. Each witness is asked to confirm the contents of each of his or her witness statements, and may be asked a very few supplementary questions. That witness is then cross-examined by the opposing barrister. It is in the cross-examination that defects in the party’s position become apparent. There then follows a short re-examination to deal with any matters that are unclear. Re-examination should be limited, as it can do more harm than good. After the cross-examination of the last of the claimant’s witnesses and experts has finished, the defendant’s barrister has the right to make an opening speech. As the case is usually well defined by this time, that right is rarely exercised. Next the defendant’s witnesses and experts are called, and examined and cross-examined as above. After the evidence has concluded there are closing speeches, first the defendant and then the claimant. These set out all of the issues covered by the trial. It is usual for the court to adjourn a significant IP case for a few days for the final speeches to be written. After the conclusion of the final speeches, the court adjourns the case to enable the judge to write his or her judgment.

Judgment After an interval, the judge is ready to deliver the judgment. The parties are usually notified of the judgment about 48 hours ahead of delivery to enable clerical errors to be rectified and to enable the parties to seek to agree what order should be made. In this interim period, confidentiality is essential. Issues such as whether an injunction should be awarded pending appeal and what proportion of the costs should be awarded are dealt with at this time, as is permission to appeal, although permission is not refused as a matter of practice. The court may allow the winning claimant also to proceed with the assessment of damages. Once all of the above has been dealt with, the court of first instance is discharged. Subject to any appeal the same issues cannot be re-litigated, nor can a claimant have a second litigation on anything that ought to have been brought up in the first litigation.

About the author Larry Cohen is a Partner in the London office of Latham & Watkins. His practice includes patents (specifically, but not exclusively, in the pharmaceutical and electronics sectors), trademarks (both registered and unregistered), copyright and designs and confidential information. He is the Global Co-chair of the Intellectual Property, Media and Technology Practice Group at Latham & Watkins. Contact Larry Cohen at Latham & Watkins (tel: +44 (0)20 7710 4735; e-mail: [email protected]).

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We are specialists in patent litigation, dispute resolution and related IP and commercial advice. We service a diverse client base ranging from individual inventors and entrepreneurs to universities and multinational companies, operating across varied industries and markets. Our success is driven by our interest in our clients’ businesses, and our commercial, common sense approach to the role of legal advisors in facilitating business development. With a flexible and innovative approach to fee structures, including the use of conditional fee agreements and insurance, we provide affordable access to justice for developing enterprises.

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12.2

Low-cost litigation strategies

Enterprises can now use flexible cost strategies to gain access to justice and the courts, reports Campbell Forsyth at Forsyth Simpson.

Intellectual property rights (IPR) are great. They provide protection for creative concepts, designs, innovations and investment in branding. However, all too frequently in the course of business another party will stray close to or over the line into the territory protected by another’s IPR. This is all the more likely where the business is successful or the IPR is particularly innovative. Two parties may disagree on the extent of the protection of a particular IPR or even if the IPR is valid. These disputes often escalate to the point where lawyers become involved. IP lawyers, and in particular patent litigators, are highly skilled both technically and legally in the field of IPRs and dispute resolution. They are also expensive. For some, such an IPR dispute could be just disagreeable, for others perhaps damaging to a commercial enterprise or a particular investment – but frequently the dispute can be about being allowed to continue a business in its current form, or even at all. When such a dispute arises what can you do? Traditionally you would instruct an IP lawyer to represent you and, where the parties cannot come to an amicable settlement, the lawyer could take the case to trial for a resolution. However, the legal costs involved in this can be considerable. In many trademark, design rights, copyright and patent disputes these can reach hundreds of thousands of pounds just for your own side’s lawyers, with the additional risk that if you lose some or all of your case you may be liable for hundreds of thousands of pounds of legal costs incurred by the other party, as well as any damages. Patent cases are amongst the most expensive. These costs may themselves be an incentive to settle, but early settlement is not always possible.

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Until recently the choice was stark: if you could not afford to litigate you were essentially at the mercy of the richer party – be that the IPR holder or the infringer. Changes to the law and market developments, however, have now allowed law firms in England and Wales to adopt considerable flexibility in their fee arrangements with clients, and have provided opportunities for alternative funding and insurance arrangements. The three main areas of interest are set out below: conditional fee agreements (CFAs) – more commonly (and often wrongly) referred zz to as ‘no win, no fee’ agreements; after-the-event insurance (ATE) – specialist commercial products to insure against zz litigation costs after the dispute has arisen; third-party funding – in some situations commercial third-party funders can fund zz litigation in return for a share of the proceeds in the event of success. Used either separately or in combination, these products can provide a party to a dispute with access to justice and limit that party’s exposure to costs – regardless of the size of the opponent.

Conditional fee agreements CFAs provide an alternative to the traditional ‘blank chequebook’ approach to lawyers running litigation and can be used by either side in an IPR dispute. The CFA is an agreement between client and lawyer. Based on the lawyer’s view of the merits of the case, the lawyer agrees to take on some of the risk of the litigation. The CFA can take a variety of forms. The arrangement can be that the client pays none of the lawyer’s fees if unsuccessful (‘no win, no fee’) or, more often in the field of IPR disputes, a reduced proportion of the fees as agreed with the lawyer (for example, 50 per cent of the lawyer’s fee may remain payable regardless if unsuccessful). Upon success the lawyer is normally entitled to recover his or her basic fees plus an uplift of up to 100 per cent on those basic fees from the losing party. These arrangements are clearly useful for a litigant without sufficient funds to pursue a case, but are equally relevant to a sophisticated litigant wanting to take advantage of this flexible costs regime. There are now an increasing number of specialist IP lawyers willing to provide services under such arrangements. By way of example, our firm, Forsyth Simpson, has led the way with CFAs in patent litigation and has successfully employed them in both small- and large-scale patent actions, including against multinational companies such as Pfizer and Akzo Nobel. CFAs (along with ATE, discussed below) can also provide a tactical advantage for the client. Lawyers are unlikely to enter into CFAs in relation to IPR disputes – which may last over a year and take up a great deal of the lawyers’ time – unless they have a high degree of confidence in the outcome. Cases that are not likely to succeed – whether as defendant or claimant – are therefore unlikely to be conducted under a CFA. Lawyers are obliged to inform the other party that they are acting under a CFA. The other party is therefore formally made aware that the opponent’s lawyer believes his or her case has strong merits. If unsuccessful, the other party is likely to be liable for up to twice

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the legal fees incurred by the side acting on a CFA. Such factors can help lead to an early resolution of a dispute. CFAs are a fundamental change to the costs system and offer increased access to the courts for SMEs in IPR disputes that would otherwise be unable to afford such litigation. Please note that CFAs and ancillary issues relating to the general costs of IP litigation (other than legal fees) require proper explanation by a lawyer. This general introduction attempts to provide information on the potential opportunities of such flexible fee arrangements and does not deal with the details of the system.

After-the-event insurance Where a party has identified a dispute it can, normally with the assistance of its lawyer, go to the commercial insurance market to try to obtain an ATE insurance policy. Such policies can cover various costs in the envisaged litigation. Where you are unsuccessful in the litigation the policy can cover payments towards costs of the winning side, your own disbursements (expert fees, barrister costs) and your own lawyer fees. The level of cover will depend on the policy. In recent years this market has offered ATE insurance for IPR cases. In our experience in patent litigation such cover has exceeded £1 million. In order to obtain this it is necessary to provide the insurers with an assessment of the merits of the case, often including an opinion from an independent barrister. It is unlikely that any case with less than, say, a 60 per cent prospect of success would be insured. Insurers often also take comfort from a situation where the lawyers are also taking on risk on the case by working under a CFA. As the insurance covers a dispute that is already ongoing and disputes in the IPR field can incur considerable costs, the premiums are often 30–50 per cent of the total amount insured. An important development in recent years therefore is that the insurers are often willing to reinsure these premiums so that there is no or only a minimal payment to be made by the client, and payment of the main premium is contingent upon success in the claim. Where successful, the premium is normally payable by the loser. The total premium is broken down into smaller ‘staged’ amounts. These staged amounts accrue during the proceedings until the full premium becomes due shortly before any trial. Parties are obliged to inform their opponent that they have taken out an ATE policy and to notify the opponent when each staged increase in the premium becomes due. The reduction in risk to the insured party and the increased costs liability to the opponent where it loses can improve the prospects of an early settlement. Care needs to be taken that the staged elements of the premium that become due upon a successful outcome do not themselves become a barrier to settlement. For example, if halfway through proceedings the parties agree to settle the dispute and bear their own costs, the premium accrued at that time would still need to be paid to the insurer as the result of such a ‘successful’ outcome. ATE policies are complex commercial instruments that are tailored to the specific circumstances of any specific case and should always be discussed in detail with a lawyer.

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Third-party funding It is now permissible for third parties to fund certain litigation costs even where they have no interest in the litigation itself – other than a possible share of the proceeds from a successful outcome. This is purely a commercial matter. Based on the merits of a case an investor can decide to take the risk of being liable for some element of the total legal costs in the case in return for a ‘cut’ in proceeds or damages if there is a successful outcome. As with ATE premiums, because of the risks involved, third-party funders will often require high levels of payment in the event of success. This can be used in conjunction with or as an alternative to a CFA and ATE insurance. Care needs to be taken with such agreements to ensure they are legally enforceable.

Patent County Court or the IP County Court Usually IPR cases are heard at the High Court in the specialist IP division, called the Patents Court. However, for low-value IPR disputes there is an alternative in the County Court system based in London called the Patents County Court. This is currently being reorganized. It is proposed that in the future this court handle low-value IPR disputes where any financial claim is below a fixed amount (yet to be decided) and with any costs recovery by a successful party from the loser limited to, say, a figure of £50,000. This would provide access to IPR dispute resolution for many low-value cases. The difficulty may be finding specialist IP lawyers willing to conduct the work for the level of fees recoverable. It seems likely many would try to charge more than this for the work, leaving the client to make up the shortfall.

Conclusion Until recently, SMEs were left with few options if they could not afford to litigate when faced with a potentially damaging IPR dispute. The changes to the costs system have opened up access to dispute resolution and the courts to parties that might otherwise have been excluded. Using CFAs, ATE and/or third-party funding either separately or in combination provides an SME with the opportunity to resolve IPR disputes through the court system where necessary regardless of the size of the opponent. It also gives any opponent a strong incentive to reach a sensible settlement early in the dispute.

About the author Campbell Forsyth is a solicitor advocate and barrister. He has acted successfully in IP disputes for clients ranging across creative individuals, universities, SMEs and multinational companies. He has run cases in the High Court, the Court of Appeal and the House of Lords, as well as managing cases at the European Patent Office and cross-border patent disputes in IP courts in Germany, Italy, the Netherlands and Scandinavia. His law firm, Forsyth Simpson, is a specialist IPR litigation practice with considerable experience in using alternative funding arrangements including

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conditional fee agreements, after-the-event insurance and/or third-party funding. The firm has a successful track record in winning cases ranging from small-scale copyright infringement to numerous full-scale patent cases against companies including Pfizer, Akzo Nobel, GlaxoSmithKline and Merck Sharp & Dohme. Contact Forsyth Simpson (tel: +44 (0)20 7612 7615; e-mail: [email protected]; website: www. forsythsimpson.com).

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12.3

Special cases in IP litigation

Larry Cohen, a Partner at Latham & Watkins and Global Co-chair of its IP Group, highlights the additional considerations that apply in particular instances.

There are some issues in IP litigation that require special handling. These are varied but require some special additional consideration. They are important in more limited areas of IP, but arise frequently. Each of these will be examined in this chapter. They are: anti-trust litigation; standards litigation; litigation concerning pharmaceutical patents where regulatory approval is an issue; trademark litigation where survey evidence is an issue; and copyright and design right litigation where secondary infringement and copying may have to be proved.

Anti-trust litigation Patents create monopolies. There are times when these monopolies are capable of abuse, largely where patents are being used to create disproportionate leverage. In those cases, which are rare, because the general rule is that the owner of an intellectual property right is entitled to enforce it as he or she pleases, an anti-trust counterclaim can be raised. However, an anti-trust claim is not a defence to infringement, and is certainly no ground of attack on validity. Instead it may be a reason why the IP right is not enforceable. Such cases rarely arise, but when they do they need special handling. The question is whether the IP right is likely to be held valid and infringed, in which case it may be more convenient to look at the anti-trust issues first, or whether the validity or infringement of the right is challenged. In the latter case the court will usually hear the case as an ordinary IP case and deal first with infringement and validity, and only if a

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valid IP right is infringed will the court look at the anti-trust issue. One consequence of this sequencing is that, if the right is valid and infringed, any issue as to damages or the granting of an injunction may be delayed while the anti-trust issues are considered by the court.

Standards litigation As an extension of the above, most electronic consumer products are covered by international standards to ensure interoperability, that is to ensure that every product can work with standard broadcast and transmission systems. Because many companies contribute to standards, their use is usually protected by multiple patents. As a result, nothing would get made if special rules had not been introduced. The three special rules are: 1. Competition authorities will permit patentees to pool their patents and license through licensing bodies provided the licence is available to everyone and is granted on fair, reasonable and non-discriminatory terms. These are called FRAND terms. This is the normal condition of dealing with patentees involved in standards. 2. As a condition of joining a standards body, a patentee has to make his or her patent(s) available to all potential licensees on FRAND terms. 3. No injunction should be granted if the defendant undertakes to take a licence on FRAND terms. This does not prevent the defendant from challenging validity or infringement. Indeed it is often the case that a patent which covers a method set out in a standard when the standard was promulgated no longer does so years later when the patent is alleged to be infringed. The last of these has an important practical consequence. Owners of patents that cover standards rarely reverse-engineer the alleged infringement but instead rely on essentiality, that is the patent must be infringed because the standard can be operated only in the manner claimed in the patent. If that premise can be attacked, that is another way can be found or it is demonstrated to be possible to achieve the same result in a different way, the claimant’s case becomes difficult. In these cases much effort is expended around the question of essentiality. The other matter that distinguishes standards patent cases from others is the number of patents sued under. It is a numbers game. As a result, the court splits up such cases into smaller parcels and has sequential trials taking a few patents at a time. Moreover, and this applies more generally, the court may take the issues in any convenient order, for example whether the licence terms offered are FRAND. This often determines the ultimate outcome. Consequential preliminary applications as to timetabling take on a significant strategic importance. The most appropriate sequence is to allow the case to be pleaded out and, at the end of the pleadings stage, for the parties to appear before the court. The application for directions is the key determinant as to the future conduct of such actions. Hence it assumes a disproportionate significance in standards patent litigation.

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Pharmaceutical patents Much litigation in the English Patents Court concerns the battle between generic pharmaceutical companies and research-based companies. The governing issue is that the basis of the generic company’s business model is to be the first generic to market and to undercut the existing market entrant. This rapidly leads to a downwards price spiral. If the generic company is allowed on to the market, and is subsequently enjuncted from the market, there will be price depression of the product, which cannot be recovered. There is a particular interaction that arises with respect to pharmaceutical patents. As the marketing of pharmaceutical products requires regulatory approval, there is a tension between freedom to operate, that is freedom from the allegation of patent infringement, and the obtaining of regulatory approval. The courts in England have resolved that tension by stating that the default position will be that a generic pharmaceutical company will be the subject of an interim injunction for patent infringement if it does not ‘clear the undergrowth’, that is obtain freedom to operate free from patent infringement ahead of obtaining regulatory approval. This affects the timing of any action that the alleged infringer might take, requiring an early determination of the issues.

Trademarks – survey evidence One of the issues that bedevils trademark and passing-off cases is how, in the absence of consumer complaints (which are rare), you prove confusion or likelihood of confusion. There are two ways of commonly bringing this evidence. The first is that the claimant floods the case with live witnesses who say that, when they saw the defendant’s product or trademark, they thought it was a product or trademark of the claimant. There are variations on this theme, particularly as to whether the witness actually knew of the claimant’s mark beforehand, as evidence of a prior reputation (goodwill) is essential to establish passing off, and is very useful in trademark cases, as it affects the penumbra around the mark and the likelihood-of-confusion test. In addition to live evidence this evidence may also be brought by bringing a survey before the court. However, this is a fraught exercise, not least because the questions are open to attack. It is always necessary to use an independent expert in the field to design and execute on the survey and to give evidence of the survey. The main issue concerns whether the questions are leading, that is to say that they are biased towards a particular answer. If this is established the survey, which is not inexpensive, will be largely wasted as being of little probative value. The second defect in surveys tends to be in the analysis of the answers. The problem is that respondents to surveys use ordinary conversation. It is not legal language and often the answers are not clear. However, when a survey is used the raw answers have to be disclosed. They are then subject to a detailed forensic analysis to try to determine what the respondent actually meant, without the respondent actually being present. ‘No’ answers get recategorized as ‘yes’ or ‘maybe’. As a result many surveys fail, and even those that succeed in establishing the proposition being made need other evidence as reinforcement.

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A third defect is that often questions need to be tested. However, the practice of the courts is to require all surveys to be disclosed, whenever done and whatever the result. There is thus a premium on getting the survey questions right first time and in avoiding carrying out pilot surveys. This practice adds a further layer of difficulty to bringing survey evidence. In summary, while survey evidence plays a useful part in trademark and passingoff cases, there is no substitute for voluminous live evidence. The bringing of survey evidence remains a useful tool, but one to be treated with caution.

Copyright and design right Two special issues arise in copyright and design right litigation. The first concerns secondary infringement. Where the defendant is not the maker of the copy or, in the case of design right infringement, the importer, it is necessary to prove knowledge of the subsistence of the copyright or design right and the claim to infringement. In such cases, except where it is obvious the defendant must have known about the existence of the right, the best way forward is a cease-and-desist letter setting out the facts. The claimant should allow the defendant two to three weeks to given undertakings not to infringe in the future. Without the prerequisite of knowledge of the right, there will be no infringement. The other issue is proof of copying. This usually needs to be inferred, at least at the pleadings stage. It is inferred by a comparison of the original copyright document or design document against the alleged infringement, to show substantial reproduction. One of the best ways to show copying is to show that an insubstantial feature that has no obvious rationale has been copied. That feature can be considered to be like the author’s signature in the work. In this way the prima facie case of copying can be established. Disclosure (discovery) then takes over, enabling proof to be made on the balance of probabilities.

About the author Larry Cohen is a Partner in the London office of Latham & Watkins. His practice includes patents (specifically, but not exclusively, in the pharmaceutical and electronics sectors), trademarks (both registered and unregistered), copyright and designs and confidential information. He is the Global Co-chair of the Intellectual Property, Media and Technology Practice Group at Latham & Watkins. Contact Larry Cohen at Latham & Watkins (tel: +44 (0)20 7710 4735; e-mail: [email protected]).

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12.4

Firm-based strategies for protecting innovations

Protection offered by intellectual property rights is not always appropriate or effective. Sara McGaughey, University of Strathclyde, and Stuart Macdonald, University of Sheffield, describe four firm-based strategies for protecting the value of innovations, and explain why such strategies are likely to become even more relevant to many firms.

Intellectual property is not the same as intellectual property rights (IPR). IPR seeks to extend to intellectual property (knowledge and information) the protection that most governments give to other forms of property. As the value of information increases – not least for innovation – so, too, does interest in protecting this value through such IPR as patents, design rights, copyrights, trademarks and a few other very specialized rights. Inadequate IPR protection in many less developed but high-potential markets remains, however, a key challenge for executives of large and small firms alike. Even in more highly industrialized nations, challenges exist in the use of IPR. In the UK, United States and Australia, for example, software piracy rates in 2007 (ie the total number of units of pirated software deployed in 2007 as a percentage of the total units of software installed) ranged from 20 to 28 per cent.1 Despite this, there appears to be a trend of multinational enterprises taking the seemingly risky step of locating their research and development activities (and not just sales or manufacturing) in a wide range of emerging economies where laws protecting IPR are weak or ineffective.2 Innovative SMEs are also increasingly active on the world stage, sometimes with

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seemingly little regard for the use of formal IPR protection at home or abroad. Of course, practical disadvantages often deter small firms and firms in developing countries from using IPR, such as patents. SMEs often find the patent system complicated, slow and expensive. More importantly, they find that the temporary monopoly patents promise cannot be defended with the resources at their disposal. So how do such firms appropriate the value of their intellectual property, without formal protection? Consider the following two examples of innovative Australian SMEs from the marine industry.

Case 1: Computer Design Marine (CDM) This small Western Australian firm offers a variety of aluminium powerboats for domestic sale and export to Indonesia, Japan, Malaysia, Portugal, Thailand and the United Kingdom. One of the ways in which the vessels can be acquired involves the sale of software only. This software contains the cutting and marking codes for aluminium plate that is then welded together by the customer to form the selected vessel. Yet many of CDM’s target markets have flourishing piracy industries. For example, piracy rates for business software have been estimated as 78 per cent in Thailand, 59 per cent in Malaysia and 43 per cent in Portugal. How does CDM protect itself against piracy of its software and the unauthorized duplication and sale of its boats?

Case 2: INCAT INCAT is an innovative Australian designer and constructor of high speed carand passenger-carrying catamarans. It created the first high-speed car ferry, and developed the innovative wave-piercing catamaran in operation in Europe, North and South America, and Asia. In the 1990s, INCAT entered into a joint production arrangement with a former Hong Kong licensee, AFAI High Performance Ships Ltd, for the construction of its smaller catamarans in Panyu, southern China. While China was accepted as a member of the World Intellectual Property Organization in 1980 and introduced its own patent law in 1985, the law’s application continues to be viewed as favouring domestic firms. Even so, INCAT was and remains reluctant to rely on IPR to protect its intellectual assets – despite the heavy reliance on patenting by its major Australian competitor. How can INCAT’s continuing lack of interest in IPR be explained?

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Firm-based strategies for protecting intellectual property Special legislation is required to protect IP, because information is not like other forms of property; it has its own peculiar characteristics.3 Of relevance here is that information can be seized by others as soon as it is made public. In the absence of constraints, it can be passed on to others, and there is no incentive to pay for the same information a second time. Executives of innovative firms can protect their intellectual assets (knowledge and information) in four basic ways: impede identification, transmission, understanding and application. Sometimes they use formal IPR protection to achieve this, sometimes not.4 Impede identification. Secrecy is the game here – keep information within the firm. zz Some sorts of information are more easily kept secret than others. Codified knowledge, for example, is explicit and can be expressed in words, numbers and symbols that are more easily shared. Uncodified knowledge is often tacit – knowledge that is personal and context-specific. Information identification and transmission are costly and difficult even within the firm, let alone outside the firm. Impede transmission. Even if information is identified, firms may engage in zz efforts to impede the unwanted transmission or dissemination of key information through, for example, digital copying or word-of-mouth diffusion. While larger firms may use the threat of retaliation against imitators, this option is rarely available for SMEs, which are more likely to rely on in-built protection rather than market power. Impede understanding. Inventions and new ideas are not as readily imitated as is zz often supposed. Even patents disclose only part of the story. Innovations often comprise a bundle of information fitted together in a pattern. Firms may deliberately impede the understanding of potential users by modularizing their innovations. They limit the identification of some parts of the innovation by unauthorized users, while allowing the identification of other parts that are too costly to keep secret. The interdependence of the modules means that potential competitors find that some parts of the jigsaw are missing. Understanding the whole may simply not be possible for competitors, particularly if they do not have the appropriate knowledge or experience themselves to fill in the gaps. Impede application. While copying of highly codified intellectual assets (eg digitized zz plans or registered designs) may be inexpensive, unauthorized application of that information in creative processes of potential competitors is not so simple. This is especially the case where its use requires a large tacit component, where rapid cycles of innovation draw on a path-dependent accumulation of knowledge, or where the innovation needs to be married with complementary assets to exploit the information in the marketplace.

Illustration: IP strategies of CDM and INCAT The above four strategies for impeding flows of key information are not necessarily used in isolation from each other. Consider again our two Australian companies.

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Case 1: CDM CDM uses two of the above strategies, applying three mechanisms to impede the identification and transmission of information and hence protect its software in export markets. First, it impedes identification of the source code by using encryption – it keeps this knowledge within the firm. Second, it impedes unauthorized duplication through copy protection. Third, to prevent the unauthorized production of the vessels through multiple uses of the one software disk, the computer software destroys itself immediately as soon as it has guided the cutter and checked a panel for welding in boat assembly.

Case 2: INCAT INCAT uses all four strategies to protect its intellectual property, but does not try to protect everything. There is a significant amount of technical information available to its joint venture partner, and all vessels sold by INCAT in the international market also contain a complete set of plans that explain how the vessel was built. This information is thus easily identified and transmitted. The plans of INCAT’s design for any one vessel, however, convey only part of the story. Missing is a vast stock of tacit and codified knowledge used in the vessels’ creation, production, maintenance and customization for new situations and customer requirements.5 Codified information, such as the principles underlying the design features of INCAT’s vessels, is kept secret, and key modules of the vessels are manufactured at home to avoid unwanted transmission and understanding of core technological information. INCAT’s vast amount of tacit knowledge is accumulated over time through a complex combination of activities. These activities include: the tracking of each vessel over its entire life, despite changes in ownership; participation in marine advisory boards; and the generation of computer simulations to understand vessel performance in adverse conditions. Without this understanding accumulated over time, potential competitors find it impossible to make alterations to a design to accommodate requests for customization. Effective application of the information in a competitor’s own product development is thus impeded, and competitors lack the understanding that can inform complementary services, such as quick-response maintenance. Competitors do not gain the advantages of learning by doing and experimentation, and INCAT keeps one step ahead of competitors through continual investments in incremental innovation.

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So CDM and INCAT have managed to protect their intellectual property without resort to formal IPR. While CDM has automatic copyright protection for its software, it chooses not to rely on this. INCAT, unlike its major Australian competitor, holds no patents. Yet, with changes in the world of IPR in recent years, such firms may be tempted to reassess their reticent approach towards IPR. There has been a massive increase in patent scope (almost anything can now be patented), patent scale (patent applications and patents granted have increased everywhere) and patent reach (as the Trade-Related Aspects of Intellectual Property arrangements seek to harmonize national IPR systems). Together, these changes make IPR, and the patent in particular, more valuable and thus more attractive to those who are able to reap the value of IPR. These are not usually the small and weak, though: they tend to be the big and strong, able to search databases, maintain large patent portfolios and engage in sophisticated IPR strategies.6 Such strategies can be costly. In this new world, firms will have to be as creative in their strategic use of IPR as in their innovation.

Notes 1  Software piracy rates are drawn from the Fifth Annual BSA and IDC Global Software Piracy Study 2007, available at http://global.bsa.org/idcglobalstudy2007/. 2  See M Zhao (2006) Conducting R&D in countries with weak intellectual property rights protection, Management Science, 52 (8), pp 1185–99. 3  See S Macdonald (1998) Information for Innovation: Managing change from an information perspective, Oxford University Press, Oxford. 4  See S L McGaughey (2002) Strategic interventions in intellectual asset flows, Academy of Management Review, 27 (2), pp 248–74. 5  S L McGaughey, P W Liesch and D Poulson (2000) An unconventional approach to intellectual property protection: the case of an Australian firm transferring shipbuilding technologies to China, Journal of World Business, 35 (1), pp 1–20. 6  S Macdonald (2003) Bearing the burden: small firms and the patent system, Journal of Information, Law and Technology, 1; S Macdonald (2004) When means become ends: considering the impact of patent strategy on innovation, Information Economics and Policy, 16 (1), pp 135–58.

About the authors Sara McGaughey is Professor of International Management at Strathclyde Business School, University of Strathclyde. She has worked in small businesses in Japan and Mexico, and has held academic posts in Australia, Denmark and the UK. Her research is interdisciplinary, typically arising from engagement with organizations and managers and the challenges they are facing. Current research projects explore strategies for protecting and exploiting knowledge and information in multinational enterprises and SMEs, international entrepreneurship and the role of multiple business ownership in international new venturing, and ‘institutional entrepreneurship’ whereby entrepreneurs build their own goals into (and hence change or shape) European and international standards. Contact Sara McGaughey (tel: +44 (0)141 553 6122; e-mail: sara.mcgaughey@ gsb.strath.ac.uk; website: http://www.strath.ac.uk/management/staff/saramcgaughey/). Stuart Macdonald is Professor of Information and Organisation at the University of Sheffield. His research has long been concerned with the role that information plays in innovation and in change more generally. Most is strongly empirical, generally involving

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long-term investigation within organizations. An approach that makes information central to enquiry does not fit comfortably within the boundaries of a single discipline and has necessarily been pursued in several. This is reflected in publication in journals of many disciplines – economics, physics, geography, history, engineering, electronics, agriculture and management. Inevitably, the research has become interdisciplinary and multidisciplinary. Much of it has been carried out overseas, a great deal in Australia, and he currently has research collaborators in several parts of the world. Always the aim of the research is to contribute to understanding and thereby, perhaps, to corporate strategy and government policy. Contact Stuart Macdonald (tel: +44 (0)114 222 3446; e-mail: [email protected]).

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12.5

Meet the challenge of counterfeiting and piracy

The Italian Patent and Trademark Office reports on the upstream and downstream countermeasures that smaller enterprises can take against the distortion of markets and competition when they are copied.

Counterfeiting is an increasingly growing phenomenon affecting all products, which is now developing new, sophisticated distribution channels. According to an OECD estimate, counterfeited products have reached the $200 billion value, that is 7 per cent of the world trade value. And this figure is far from showing the full extent of counterfeiting, as it does not include purchases made within national boundaries in all countries or products illegally distributed via the internet. In Italy, in 2008, we reckon that counterfeiting and piracy brought in on the home market a turnover of 7.107 billion euros. The worst-hit sector is the clothing and accessory industry (€2.6 billion), followed by the CD, DVD and software industry (€1.6 billion) and the food industry (over €1.1 billion). 1 Technically, counterfeiting and piracy represent violations of intellectual and industrial property rights, which are the foundations of the remuneration mechanisms of invention and creativity. Trademarks, patents and designs accompany the products when they move through the markets, guaranteeing the ownership of the creativity and innovation that they contain or represent. The enlargement of the phenomenon jeopardizes businesses, as it nullifies their investments in innovation, quality and customer loyalty. However, governments run a higher risk of market failure, for they are called on to ensure stability and a steady-state growth to their economy over time,

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and counterfeiting and piracy represent the utmost challenge to the fulfilment of the knowledge economy. The assessment of the counterfeiting phenomenon usually considers only the directly affected businesses with no regard for those that suffer from an indirect – yet considerable – impact. It is mainly SMEs that are put on the market the same class of merchandise of products and prices of counterfeited goods and are therefore affected by the illegal competition and diversion of demand from legal to counterfeited products. Businesses can counter this phenomenon in two ways: 1) they can enhance investments in quality and innovation by fully exploiting the opportunities that industrial property rights offer to foster customers’ loyalty to the original products and make it difficult for counterfeiters to manufacture illegal goods; and 2) they can monitor the market using the new technologies allowing the traceability of those products that fluctuate within one market or among different ones. In order to face this challenge, businesses are required to timely meet with knowledge and management related costs to fill the gap as to the competence in the economic exploitation of IPRs and their protection. However, businesses are not left alone. Institutions may play a significant role by creating favourable market conditions for property rights, enabling businesses to protect themselves from counterfeiting actions. Italy boasts important achievements in this field. A group of measures concerns the certainty and enforcement of IPRs, which are aimed at strengthening IPRs upstream and ensuring a more efficient definition of judicial proceedings on IP matters downstream: Upstream. The IP law has been reviewed and rationalized, and a new IP code was zz issued in 2005. It substitutes for about 40 previous laws overlapping across the years since 1939. Among innovations provided for under the new IP code in order to raise the quality of the Italian IP system, there are three that attention should be drawn to. One concerns the introduction of searches for granting patents. Another concerns the improvement in the damage calculations for IPR holders. The third refers to the seizure of counterfeit goods. The preservation of two samples of goods infringing the law is enough for judicial uses; the others can be destroyed, with a simplified procedure within 60 days. Downstream. From 1 July 2003 in Italy 12 specialized IP sections have been zz established at the courts and courts of appeal of Bari, Bologna, Catania, Florence, Genoa, Milan, Naples, Palermo, Rome, Turin, Trieste and Venice. The specialized sections have jurisdiction in disputes regarding patent, utility model, trademark, new plant variety, design and copyright infringement or validity, as well as unfair competition affecting the protection of industrial and intellectual property. The actions are heard by a panel of three judges. In the actions related to IPR disputes the new legal provisions are aimed at ‘stabilizing’ the provisional measure making optional the case on the merits. Furthermore, thanks to a strong partnership with enterprises, some IP awareness services have been implemented: organization of roving seminars on enforcement

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aimed at SMEs set up with the support of communitarian or international IP institutions; the creation of a network of 13 IPR desks located in markets sensitive for Italian enterprises (China, Taiwan, India, Vietnam, the Republic of Korea, Turkey, the Russian Federation, Brazil and the United States). Each desk provides information on how the local IP system works (registration procedures for each IPR and enforcement procedures in the event of infringement), and there might also be special legal assistance if the solution to an infringement case represents a pilot case to open the market. Besides a new online service called FiloDiretto (Direct Line) is dedicated to assisting businesses and consumers in cases of infringements of IPRs.4 These information services are accompanied by a series of communication activities targeted at consumers, whose role remains crucial. It is of the utmost importance that civil societies learn to share the value of IPR. Only in a market where trademarks, patents, designs and copyrights are considered an advantage for all will it be possible to safeguard transactions relating to intangible property and the full accomplishment of the knowledge economy. Communication activities include IP training and awareness campaigns in primary and secondary schools, and traditional and new media campaigns against illegal downloading targeted at an age range from 15 to 35, as well as consumer-particulars initiatives enabling the damage done to consumers to be highlighted but also identifying their active role in fostering the counterfeiting phenomenon. A new law, the Development Law (Legge Sviluppo 99/2009), introduced harsher punishment for counterfeiters in Italian penal law, new investigation tools such as undercover police operations, and a penalty clampdown for knowing consumers of counterfeit goods. However, no strategy can prove successful against counterfeiting without the active support of citizens and businesses. Our experience shows the crucial role played by the cooperation between private and public sector in both creating and implementing new measures and services. Public awareness in this sector has its origins in the interest shown by private individuals reporting damage and negative repercussions not only for themselves but for the community as a whole. This dialogue is absolutely necessary. Businesses must collaborate in implementing these measures, for instance with the tool customs made available (FALSTAFF) for businesses to communicate the arrival sites of their merchandise to enable an efficient activity of targeted random sampling control. In fact, the creation in itself of stable working table between public and private institutions established by the Directorate-General for the Fight against Counterfeiting – UIBM – to support the National Council for the Fight against Counterfeiting stems from the awareness that necessary rules must be shared and studied in detail together with those who must counter it every day, as to ensure improved efficiency right in the implementation phase. But more than anything there is the need for a society able to share the value of the rules that lie at the foundation of economic growth. A successful model of partnership between private and public sector has been achieved by the pharmaceutical sector through the automated tracing system promoted by the health ministry and carried out thanks to the collaboration between Ipzs and Area SpA. This experience turned Italy into a world standard in the fight against drug

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counterfeiting and led experts to hold that, to date, it is impossible to circulate counterfeited drugs into the official distribution channels. The traceability system is based on the exploitation of an optical recognition unique identification label, enabling the monitoring of all product life cycles within a centralized database. On the basis of this positive experience, the ministry for economic development has recently signed a memorandum of understanding with CATTID (Centre for e-Learning Techniques and Television Applications of the University of Rome La Sapienza) for the development of specific innovation solutions aimed at the technological protection of IPRs and ‘Made in Italy’.2 This protocol will allow awareness initiatives targeted at smaller businesses relating to the exploitation, in the fight against counterfeiting, of technological tools such as radio frequency identification (RFID), a sort of ‘digital stamp’ to be applied to a single product to guarantee the production cycle’s transparency and safety, in terms of product traceability and availability, as well as an immediate benefit to the consumer. An international pilot project managed by the United Nations Interregional Crime and Justice Research Institute, UNICRI,3 stems from this Italian best practice. The International Permanent Observatory on Counterfeiting (IPO/c) project consists of an extensive monitoring programme to provide easily accessible and reliable data and information covering both the scope and the scale of counterfeiting. The project has two main goals: the creation of a World Trade Traceability Bank (WTTB) that will allow the origin of traded goods to be established; and the development of guidelines for law enforcement agencies on awareness raising and investigation in counterfeiting cases. Both of them will be implemented on the basis of protocols with Italian private and public institutions, the former with ARES SpA and the latter with the Italian National Anti-Mafia Bureau, the Anti-Mafia Investigative Directorate, the Italian Customs Agency, and the Italian Economic Police (Guardia di Finanza), as well as Europol.

Notes 1  The figures reported here come from a recent study on counterfeiting and piracy carried out in Italy by Censis and Area SpA in April 2009. Censis, the social investments study centre, is a socioeconomic research institute founded in 1964, while Area SpA is a company specializing in highly innovative and compatible environmental impact commodities and ecological systems’ traceability. 2  The ‘Made in Italy’ sectors include food and wines, fashion, furniture, marble, stone and ceramic tiles, metal products, machinery and domestic appliances, motorcycles, bicycles and yachts. They represent the sectors where competition is strongest. 3  UNICRI was created in 1968 to assist intergovernmental, governmental and non-governmental organizations in formulating and implementing improved policies in the field of crime prevention and criminal justice. 4  It is possible to phone the call centre (+39 (0)6 47055437), open from 8.30 to 17.30 Monday to Friday (excluding holidays), send a fax (+39 (0)6 47055390) or an e-mail (anticontraffazione@ sviluppoeconomico.gov.it) to the DGLC-UIBM. Further information is available on the DGLCUIBM website (www.uibm.gov.it) in the section Lotta alla contraffazione.

_____________________________________ Meet the Challenge of Counterfeiting and Piracy 305 

About the author This chapter was written by Daniela A R Carosi on behalf of the Italian Patent and Trademark Office (DGLC-UIBM), with the support of Claudia Panichelli for the English version. Further information is available on the DGLC-UIBM website (www. uibm.gov.it) in the section ‘Lotta alla contraffazione’, subsection ‘Assistenza alle imprese all’estero’, or by e-mail ([email protected]). The media campaigns are available on the website, www.noalfalso.it, also accessible through the DGLC-UIBM website (www.uibm.gov.it).

 306

Index

NB: page numbers in italic indicate figures or tables adding value to early-stage IP  131–34 Centre for Therapeutics Discovery (MRCT)  134 CTD model for early-stage drug discovery  132–34 current capability of CTD  133 examples  134 Airport Collaborative Decision Making (A-CDM) software  5 Apple iPhone/iPod  91, 143, 152 Bahn, S  117 benchmarking tool (EU): IMP3rove  93 Biofuels for Heating  122 brand innovation  52–55 and brand reputation  53 case study: sQuid  54–55 funding  53–54 protecting  53  breakthroughs versus improvements  see patent(s) British Venture Capital Association (BVCA)  121 broad versus narrow  see patent(s) Buffett, W  67 business improvement (and/by)  90–93 see also Open Innovation benchmarking/EU IMP3rove tool  93

challenging how and why  90 changing markets  91 concentrating on core business  92 focus on R&D and innovation  92 innovation as state of mind  92 production and distribution  91–92 Business, Innovation and Skills, Department of  82 and Interact Partnership  127 Business Innovation  17, 18 business spin-out/spin-off  198–99 business start-up  198 Carbon Connections projects  122–23 Carbon Trust  121 case studies Computer Design Marine (CDM)  295, 297–98 INCAT  295, 297–98 life sciences – Psynova Neurotech Ltd  117 CATTID (Centre for e-learning Techniques and Television Applications of the University of Rome La Sapienza)  304 challenges  81–84 see also public challenges building an innovation infrastructure  82–83

____________________________________________________________________________________________________ Index 307  of counterfeiting and piracy  see counterfeiting and piracy, countermeasures for innovation platform development  83–84 Chesbrough, H  8, 163 China (and) low carbon technologies  121–22 State Intellectual Property Office  31 synthetic chemistry  117 co-creation  95 collaborative learning environments (CLEs)  144 collaborative ventures (and)  170–74 agreement on rights  172 boundaries and rights  173 considerations for  171 funding and management of rights  173 inventor remuneration/staff departures  173 joint ownership of patents  172 management of  171–72 ownership of IP/organization capabilities  171 ownership of/rights over resulting IP  172–73 research/research grants  170–71 success of  173 commercial options  197–200 business start-up  198 spin-out or spin-off  198 licensing  199–200 Community Innovation Survey (CIS) 2007  5 complex programme management  143 contracts, negotiating  259–62 approaches to  260, 260 follow-up to  262 and form of transaction  259–60 planning and preparation for  260–61 process for  261 disclosure, know-how and territoriality  261 copying  see IP litigation copyright  22–23, 225, 272, 279 and proof of copying  293 protection  106 secondary infringement of  293 core business, concentrating on  92 Corporate Connections programme  5 McLaren and NATS collaboration  5 cost–benefit analysis  157–58

Counterfeiting, Directorate-General for the Fight against  303 Counterfeiting, The International Permanent Observatory on (IPO/c)  304 Counterfeiting, National Council for the Fight against  303 counterfeiting and piracy, countermeasures for  301–05 CATTID  304 see also main entry creation of World Trade Traceability Bank (WTTB)  304 IP awareness/information services  302–03 Development Law (Legg Sviluppo 99/2009)  303 downstream  302 FALSTAFF tool  303 guidelines for law enforcement agencies  304 in Italy  301–04 upstream  302 customer insights (and)  94–97 innovative sources of  95–96 co-creation  95 data streams/data mining  95–96 limits of user engagement  97 relevant innovation  94–95 social sources of  96 traditional sources of  96 quantitative research  96 data streams/data mining  95–96 definition(s) of business start-up  198 innovation  155–56 licensing  199–200 patent  176 spin-out/spin-off  198–99 design  21–22, 47–50, 272 expertise  48–49 and the innovation process  48 as good for business  16 as a process  49 registered community design (RCD)  22 registrations  221 design rights  221, 225, 293 and proof of copying  293 secondary infringement of  293 design organisations British Design Innovation  48

 308 Index ____________________________________________________________________________________________________ Design Business Association  48 Design Council  48 domain names  225 Drucker, P  273 early-stage investors  see pitching to an early-stage investor Economic Co-operation and Development, Organization for  301 European Commission  114 European Community/ies  114 design registration  106 Trade Marks and Designs Office  20 European Federation of Pharmaceutical Industries and Associations (EFPIA)  114 European Patent Convention (and)  20 software  74–76 European Patent Office (EPO)  20, 31, 107, 177, 220–22, 243 case law of  76 and EP patents  220– and mechanics, electronics and software  75–76 and VICOM (1986)  76 European Regional Development Fund (ERDF)  121 European Union  43 Framework R&D programme  114 and IMP3rove tool  93 regulations on genetically modified crops  113 evaluating ideas  see ideas evolution Darwin’s concept of  150 of organizations  150–51 fast IP (and)  220–23 design registrations  221 express speed in Germany  223 extra speed via utility models  222 fast enforcement of IP rights  222–23 general aspects of  220 patent protection  221 speed and the EPO  222 speed and the PCT system  222 Swedish Patent Office (PRV)  221 validity of IP rights  221 figures funding  269

inventions/patents: priority date  181 IP life cycle  216 shares  270 valuation: the three Cs  254 firm-based strategies for protecting innovation  294–99 impede application  296 impede identification  296 impede transmission  296 impede understanding  296 and IP strategies of CDM and INCAT  296–97 fit for innovation (and)  150–53 achieving harmony  152–53 evolution of organizations  150–51 fitness of innovations: bird animal analogies  151–52 freedom to produce  see definition(s) of and patents French national law and patent filing  243, 246 Germany and IP litigation  222–23, 223 global dimensions (and)  201–05 common themes  204–05 enforcement  204 established multinational businesses  202 expanding international businesses  202–03 managing IP internationally  201 outsourcing  203–04 Global Remix: The fight for competitive advantage  91, 93 growth and innovation (and)  3–6 see also NESTA and research forging links  5 impact on economy  5–6 measuring innovation/Innovation Index  4 relationships and linkages  5 research and development (R&D)  4 HallMark IP  53, 54 Harmonization in the Internal Market, Office for (OHIM)  21, 22 hardware versus software  74–77 see also patent(s) and software Health Protection Agency (HPA) (and)  126–29 governance of external relationships  128

____________________________________________________________________________________________________ Index 309  intellectual property rights from research  127–28 public health challenges to innovation  128 health sector  126–29 open innovation/health outcomes in  127 and threats to health/lifestyle diseases  126 ideas (and)  187–91 into business propositions  188 categories of – incremental, disruptive, revolutionary  188 developing  190 expertise  189–90 factors to be considered  188–90 for making money  187 origin of  187 proceeding to the next step  190 types of opportunity  188 valuing  see valuation of ideas India and synthetic chemistry  117 infringement(s)  279–80, 281 of intellectual assets  27–28 of patents  67 secondary  293 of trade secrets  279 innovation (and)  163–68 see also open innovation and Open Innovation (OI) challenging the how and why  90 cost–benefit analysis  157–58 defining  155–56 infrastructures  82–83 innovative culture  155–59 designing product portfolio  158 matching market needs to technology  157 innovative environment, creating an  see main entry leading for  see leading for innovation measuring  4 whole company approach to  see whole-company innovation Innovation Index  4 innovation platform development (and)  83–84 see also United Kingdom (UK) Assisted Living Innovation Platform  83 current innovation platforms  84

Low Carbon Vehicles Innovation Platform  83 innovation protection  see firm-based strategies for protecting innovations innovation support (and)  15–18 see also design and intellectual property (IP) commercial success  17 manufacturing  17 innovation-seeking tools  164–67 see also websites free search engines  165 Google/Yahoo alerts  164 halfbakery  165 knowledge transfer networks (KTNs)  167 Knowledge Vine, The  165 technology portals  165, 167, 166–67 innovative environment, creating an  155–57 with experimentation by employees  156–57 with reward systems  156 Innovative Medicines Initiative (IMI)  114, 116 intellectual assets (IA)  26–29 benefits of  28 costs of  28 and free websites for patent searches  28 and identifying IA by audit  27  infringements of  27–28 intellectual property (IP)  11, 31, 294 see also adding value to early-stage IP and IP assets fast  see fast IP freedom-to-operate issues  108 in Indian pharmaceutical industry  235–36 for innovators (and)  19–24 national and international IP systems  20 rights for business  see intellectual property rights and Lambert Collaboration Toolkit  24 licensing  24 life cycle  216–17, 216 in life sciences  112, 115–16 management systems  217–18 managing international  201–03 see also global dimensions maximizing  15–16 valuing/valuation checklist  24

 310 Index ____________________________________________________________________________________________________ maximizing value of  31–35 realizing value  34 value structures  34–35 needs of organization  70 ownership of  170 and pharmaceutical industry  131–32 portfolio management  see main entry as profit centre  see IP as profit centre protection of  105–09, 276 recognition of value of  109 value-for-money  see value-for-money IP  Intellectual Property Office (IPO)  20–22, 23, 28, 121, 211 IP Healthcheck (online diagnostic tool)  23 intellectual property rights (and)  20, 127–28, 209–11, 225–30, 272, 294 see also portfolio management copyright  22–23 designs  21–22 examples of needs and problems  227–29 additional individual IPR needs  227–29 common needs  227 geographical limitation/extent  226, 229 law governing ownership of  210 legal monopolies legislation for  294 licensing  see licensing your intellectual property rights non-enforceable  290 patents  20–21, 226 protection of  294–95 registered  211, 225–26 securing  209 territorial  211 trademarks  21, 226–27 unregistered  225, 226, 279 utility model  226 International Bureau of the World Intellectual Property Organization  20 IP asset valuation  272–76 considerations of methods for  275 identification of IP asset  275 purpose of valuation  275 target audience 275 exploitation options for  273–74 accessing capital through IP asset-based loans and securitization  274

sale, licensing and joint exploitation  273 through partnerships and joint ventures  273–74 methods/approaches for  274–75 cost-based  274 income-based  275 market-based  274–75 non-monetary value indicatorbased  275 and steps for releasing locked-up value  276 IP assets: exploitation, identification and protection of  276 IP in the new economic powers (and)  235–39 establishing IP base  237 identifying/knowledge of competitors  237 Indian pharmaceutical industry example  235–36 innovation  238 lobbying  237–38 networking  238 research into and understanding of IP landscape  236 use of local knowledge  236–37 IP litigation, special cases in  290–93 see also IP litigation anti-trust litigation  290–91 copyright and design right  293 and proof of copying  293 secondary infringement of  293 and English Patents Court  292 pharmaceutical patents  292 standards litigation  291 and FRAND terms  291 trademarks – survey evidence  292–93 IP litigation (and)  279–83 see also low-cost litigation strategies Chancery Practice Guide  280 Civil Procedure Rules (CPR)  280 commencement of proceedings  280 discovery (disclosure)  281–82 establishing infringement in patent cases – product description  281 experts  282 factual evidence  282 in Germany  222–23, 223

____________________________________________________________________________________________________ Index 311  infringement  279–80 judgment  283 order for directions  281 pleadings stage  280–81 pretrial preparation  282 trial  282–83 IP portfolios  272 see also portfolio management value of  272 IP as profit centre  see IP strategy IP for SMEs (and)  232–34 see also small and medium-sized enterprises (SMEs) copying by competitors  232–33 insurance for  233 investors/business partners  234 patent applications  233–34 IP strategy (and)  57–61, 70 awareness of assets  59  choice of brand name  59 copyright  59 efficient portfolio management  60 enforcement of rights  61  licensing/selling for profit  60–61 patent claims  69–72 step plan for  57–58 thinking ahead  58–59 Japanese Patent Office  31 Keeley, L  32 Knowledge Transfer Networks/ Partnerships  82 knowledge exchange  43–46 difficulties in  44 and Manchester: Knowledge Capital (M:KC)  45–46 see also main entry between universities and business  44–45 knowledge transfer programmes  93 leading for innovation  137–41 active interest and allies for  140–41 case study for  137–38 meaning of  138–39 and modelling role of leadership  137–38 and provision of guidance  139 Lego: Design by Me  10 licensing  199–200

licensing intellectual property rights (and)  192–95 benefits from/reasons for  193 definition of licensing  192–93 gaining a licensing agreement  194 terms and conditions of agreements  193 life sciences  111–18 and application engines  116 business model for  114–15 case study for  117 commercial limitations on realising potential of  111–12 business model  112 funding  111 intellectual property  112 management  112 funding for  113–14 and intellectual property (IP)  115 and open-source innovation  116 and single-programme-focused companies  116–17 technical limitations on realising potential of  112–13 clear pathway to regulatory approval  113 declining R&D productivity  112 fit for purpose  112–13 need for partnerships  112 Low Carbon Innovation Centre (LCIC)  123 and CHP biomass gasifier (UEA)  123 low-carbon technologies (and)  120–24 see also China Biofuels for Heating  122 collaborative projects: Carbon Connections  122 combined heat and power and biochar  123 construction  123 DeltaStream  122 Intellectual Property Office (IPO)  121 Low Carbon Innovation Centre (LCIC)  123 public funding schemes for innovation  120–21 role of venture capital (VC)/business angels  121 low-cost litigation strategies  285–89 after-the-event (ATE) insurance  286, 287, 288

 312 Index ____________________________________________________________________________________________________ conditional fee agreements (CFAs)  286–87, 288 Patent County Court or IP County Court  288 third-party funding  286, 288 Lowe, C  117 making money by licensing your IP  see licensing your intellectual property rights managing the portfolio  see portfolio management  Manchester: Knowledge Capital (M:KC) (and)  45–46 Design for Sustainability (D4S)  45 Innovation Manchester Network  45 MIMIT  45 Omega  45 market demographics  91 market needs: matching to technology  157 Medical Research Council (MRC)  132 and Centre for Therapeutics Discovery (CTD)  132 Medical Research Council Technology (MRCT)  132 Mehrabian, A  138 merger and acquisition (M&A)  33 National Endowment for Science, Technology and the Arts (NESTA)  3–6, 121 and the Innovation Gap  4 Innovation Index  4 research  3, 121 Nintendo Wii  99–100, 101 non-disclosure agreements (NDAs)  85, 88, 105 Nucleus  53–55 online tools/videoconferencing  145 open innovation  163–68, 166–67 see also innovation-seeking tools and websites for large companies  163–64 for smaller companies  164 Open Innovation (OI)  8–13, 92–93, 99 benefits of  10–11 more and better ideas  10 risk reduction  11 speed  10–11 wider networks  11

consequences  11 changing relationship with corporates  11 role of intermediaries  11 strategic approach  11 definition of  9–10 Facilitated  100 and FMCG companies  8 issues with  11 culture and personalities  11 intellectual property  11 internal resistance  11 in life sciences  116 rationale for  8–9 Proctor & Gamble example  9 Open Innovation: Researching a new paradigm  163 organizations  see evolution and fit for innovation outsourcing and IP  203–04 Paris Convention (1883)  180 passing off  279 Patent Cooperation Treaty  20 patent(s)  20–21, 225, 226, 272, 279–80, 295 see also IP strategy; patent filings; patent protection and software agents  86 applications, international  211–12 ‘breakthrough’  65–66, 68 broad claims for  69, 71 definition of  176 English Patents Court  292 European system of  75–77, 242 freedom to produce  176–79 assessment  177–78 negative assessment  178 improvement  66–68 legal and commercial perspectives on  66–67 value of  66 infringement of  67 marketing, resources for  68 for mechanics, electronics and software  75–76 and monopolies  290 multinational  202 as negative right  176 Ocean Tomo 300® Patent Index  32

____________________________________________________________________________________________________ Index 313  and patentability assessment  176–77 pharmaceutical  292 priority dates  211 rights  34 and portfolio audit  34 scope of claims for  69–72 and utility models (UMs)  221, 222 patent filing strategy  240–49 exceptions to filing in the United States  246–47 reasons for filing first in the United States  242–46 ability to file in any language  244 ease of monetizing  244 enforcement and litigation costs  245 low filing fee  244 minimum translation costs  245–46 non-rejection of application  246 obtaining broadest possible US patent  242–43 secrecy of application  246 stringent filing requirements  245 US priority filing and the EPO  243 in the United States  240–41 patent filings  180–83 and enablement  182 French national law on  243, 246 and lessons to be learnt  182–83 priority system for  180–81 strategy for  see patent filing strategy US provisional applications for  182 and validity of your priority  181–82, 181 patent protection  74–77, 85, 107–08 see also European Patent Office (EPO) business case for  77 conditions for  76 coverage of  76 and European Patent Convention  74–75 for mechanics, electronics and software  74–76 Pepsico  10 pharmaceutical industry  131–34 and drug counterfeiting  303–04 and intellectual property (IP)  131 and patents  292 R&D productivity  131 as risk-averse  131–32

pitching to an early-stage investor (and)  265–71 content and cover of pitch  268–70, 269, 270 investors’ view  267–68 mistakes to avoid  270 purpose of first pitch  266 reason for  266 selecting potential VCs  267 timing for  266–67 valuation  268 portfolio management (by/through)  214–18 collaboration  217 decision-making  215–16 IP life cycle  216–17, 216 IP management systems  217–18 protecting/extracting value from ideas  214–15  Proctor & Gamble  12 Connect and Develop  9, 10 product portfolio  158 product segmentation  158 public challenges  126–9 see also health sector governance of external relationships  128 and open innovation/health outcomes  127 and public health challenges to innovation  128–29 stimulating open innovation culture  127–28 Regional Development Agencies  29 research (on)  conveying of meaning  138 designer skills, thinking and perspective  49 and innovation  216 quantitative  96 relationships with suppliers (CBI)  5 UK angel investments (NESTA/British Business Angels Association)  267 research and development (R&D) (and)  4, 43, 112, 113, 163, 266 acquisition  35 and innovation  92 Magstim  10 research grants, obtaining  170–71 reverse engineering  106

 314 Index ____________________________________________________________________________________________________ rights  see intellectual property rights  Scase, R  91, 93 senior citizen market demographic  91 Shire Pharmaceuticals  34–35 small and medium-sized enterprises (SMEs) (and)  39, 163, 170, 193, 294–95 IP for  see IP for SMEs knowledge transfer programmes  93 litigation  287–88 patent system  295 tax incentives for  89 Small Business Research Initiative (SBRI)  84, 114 and Retrofit for the Future  84 social networking sites  96 Facebook  96 Twitter  96 software (and)  74–77, 105–09 confidential information  105–06 copyright protection  106 and European Patent Convention (EPC)  74–75 IP freedom-to-operate issues  108 non-disclosure agreements (NDAs)  105 patent applications  107–08 patent protection  107–08 piracy rates (2007) in UK, USA and Australia  294 pirated  294 registered design protection  106–07 trademarks  108 surveys/studies (of) Community Innovation Survey (CIS) 2007  5 government-backed venture capital schemes  121 importance of IP in business  32 State of the IP Industry Survey (2009) (CPA Global/IP Review)  32–33 tables innovation-related negotiations  260 technology portals  166–67 times and costs of enforcement  223 tax incentives for innovation  89 technology as accelerator for growth  39–41 connections  40 partnerships  40–41

Technology Strategy Board  41, 82, 83 and knowledge transfer programmes  93 technology tools FALSTAFF  303 radio frequency identification (RFID)  304 Trade-Related Aspects of Intellectual Property  298 trademarks  21, 108, 210, 225, 226–27, 272, 279–80 attorneys: HallMark IP  53 survey evidence  292–93 Unilever  10 and Marmite  96 United Kingdom (UK)  81–84 see also Intellectual Property Office (IPO) Higher Education Innovation Fund (HEIF)  86 innovation infrastructure in  82–84 Low Carbon Transition Plan  121 Low Carbon Vehicles Innovation Platform  83 Low Impact Buildings Innovation Platform  83 Research Excellence Framework (REF)  86 Technology Strategy Board  41, 82, 83, 93 United States of America (USA) copyright protection in  106 IP value of  31 Patent and Trademark Office  31 patents in  242–46 regulations on genetically modified crops  113 universities, working with  85–89 and licensing/assignment of university IP  87–88 non-disclosure agreements (NDAs)  85, 88 by revenue sharing  87 for research  86 and tax incentives for innovation  89 universities/higher education (and)  93 business start-up  198 ideas  197 licensing  199–200 spin-out/spin-off  198–99

____________________________________________________________________________________________________ Index 315  University of Manchester Intellectual Property Ltd (UMIP Ltd)  168 unregistered rights  see copyright; infringement; intellectual property rights and passing-off utility models (UMs)  221, 222, 225, 226 valuation of ideas (and)  253–57, 254 balancing anticipated risks/ rewards  253–54 communication  256 content  255–56 context  254–55 royalties  256–57 value-for-money IP (and)  209–12 how and where of protection  210–11 international patent applications  211–12 key assets  209–10 ownership of key assets  210 spreading the cost 211 strategies for  211, 212 value innovation (and)  99–102 Blue Ocean theories for (Kim and Mauborgne)  100–101 and Facilitated Open Innovation  100–101 process for  101 co-visioning  101 ecosystem building  102 enablement modelling  102 idea creation and divergence  101 validation, selection and convergence  101–02 value structures  34–35 venture capital  113, 267 see also NESTA British Venture Capital Association (BVCA)  121 and business angels  121 Giza’s Ofek Program (Israel)  115 ViiV Healthcare (GlaxoSmithKline and Pfizer)  115 Voice over Internet Protocol (VOIP)  91 Wallage, Dr Z  123 watch your priorities  see patent filings Watson, T  14, 16 websites 

Academia search engine: www.academiasearch.info  165 Dell Ideastorm.com  95 European Patent Office (EPO): www.epo.gov.uk  20 halfbakery: www.halfbakery.com  165 Innovation Park Search Engine: www.innovationparksearch.info  165 Intellectual Property Office (IPO): www.ipo.gov.uk  20 knowledge transfer networks/KTNs: www.ktnetworks.co.uk  167 Knowledge Vine: www.theknowledgevine.net  165 Lambert Toolkit/model agreements www.innovation.gov.uk/ lambertagreements  24 litigation: www.justice.gov.uk/civil/ procrules_fin/index.htm  280 Low Carbon Transition Plan: www.decc.gov.uk  121 MyStarbucksIdea  95 open innovation: www.openninnovation.net  163 for patent searches  28 and technology portals  166–67 Volkswagen co.uk  95 World Intellectual Property Organization (WIPO): www.wipo.int  20 whole company innovation (through) 142–8 collaborative learning environments (CLEs)  144 flexibility and communication in value web (by/with) 146–48 empowerment  147 incentives and measures  147 rapid iterations/feedback cycles  147 sensitivity to programme phase  147 as group sport  143–44 physical environments for creative work  144–45 prototyping, simulation and play  145–46 virtual knowledge environment  145 Wikipedia  95 Witty, A  115 Woolworths  90

 316

Index of advertisers Agile IP LLP  64 Alta Innovations Ltd  186 Brann AB  224 CPA Global  30 Forsyth Simpson  284 GN ReSound  154 Hargreaves Elsworth  169 Health Protection Agency  125 Highbury Ltd  252, 258 Holme Patent A/S  231 Hynell Patenttjänst AB  219 Invest Northern Ireland  25 Italian Patent & Trademark Office  300 Ithaka Life Sciences Ltd  110 Latham & Watkins LLP  278 Manchester: Knowledge Capital  42 Manchester Metropolitan University  196 Mathys & Squire LLP  v Mewburn Ellis LLP  208 MIH Centre Ltd  7 Moetteli & Associés Sàrl  xi MRC Technology  130 Nederlandsch Octrooibureau  73 Northern Ireland Science Park  264 Nucleus  51 Pera  98 Rouse Legal  56 R T Coopers  xix Serravalle sas  175 Strathclyde Business School  149 Technology Strategy Board  ii Thomson IP Management Services  213 University of East Anglia  119 University of Manchester  162 Vereenigde  vi Welsh Assembly Government  14

www.agile-ip.co.uk www.alta.bham.ac.uk www.brann.se www.cpaglobal.com www.forsythsimpson.com www.gnresound.com www.heip.co.uk www.hpa.org.uk www.highburyltd.com www.holmepatent.dk www.hynell.se www.investni.com www.uibm.gov.it www.ithaka.co.uk www.lw.com www.manchesterknowledge.com www.mmu.ac.uk/studentships www.mathys-squire.com www.mewburn.com www.mihcentre.co.uk www.moetteli.com www.mrctechnology.org www.octrooibureau.nl www.nisp.co.uk www.hallmark-ip.com www.pera.com www.iprights.com www.rtcoopersitlaw.com www.serravalle.eu www.strath.ac.uk/business www.innovateuk.org www.thomsonipmanagement.com www.lcic.com www.theintellectualproperty.net www.vereenigde.com www.business-support-wales.gov.uk