Thursday, October 15, 2009

Ten reasons for a separate IP commercialization business unit

In the past 2 years, there has been a strong movement among corporate IP professionals to promote the office of Chief Intellectual Property Officer (or CIPO). I understand the reasons for this. I also support the move to shine the spotlight on intellectual property management and to give it a central role in firms.

However, I know it is going against the tide of my colleagues in the industry to suggest an alternative structure to centralization of the management of IP.

Especially in the area of IP commercialization, there are strong reasons why it can make sense to have an independent business unit charged with the responsibility of commercialising IP. I would go so far as suggesting that it may even make more sense to locate the business unit in another jurisdiction.

Below, I outline ten reasons for an independent IP commercialization business unit. While IP encompasses areas such as copyright and trademarks, for simplicity I will limit my illustrations to licensing of patents.

  1. Mismatch with existing skills
    Traditionally, intellectual property has been the preserve of the legal department. That is the place where patents applications, invalidation defences, infringement proceedings, contract drafting, etc. are implemented and managed.

    An effort to commercialize IP is an opportunity for the previous cost centre to become a profit centre. Of course this is an attractive proposition for the legal department.

    However, while a deep knowledge of the patent processes and the legal protections are essential, the traditional legal skills are not the same as the commercial skills required to run the business of negotiating licenses. Running an IP commercialization business like a legal department is a sub-optimal arrangement. I will deal with this issue in more depth in a future blog.
  2. Potential conflicts of interest at lower levels
    Patent protection means that the owner has the advantage of (a) protecting market share or (b) ensuring a premium price.

    The decision to commercialize will bring income directly from the IP, but it opens up the market to competitors who were previously blocked. While the IP income may be worth more to the corporation than the incremental profits that would arise from keeping the market closed, opening the market has a direct result on the sales figures of the parent company’s products. This can be strongly resisted by people whose performance is directly measured in sales of products. Locating the IP management in a separate business unit avoids this direct conflict of interest.
  3. Different cost
    As an illustration, a manufacturing company may enjoy net profit margins in the region of 10%. An IP company does not have Cost of Sales or manufacturing overhead, so the net profit can be in the region of 90%. If the 2 businesses are combined in one unit, it does not give a correct picture of either business.

    Different cost structures will require different measures of performance, staff incentives, investment decisions and styles of management.
  4. Chinese walls, Competition law
    Typically, the consumers of intellectual property will be in the same industry as the owner of the IP. Often, the royalty is based on the usage of the patent (e.g. units sold, volumes of material, etc.). This information must be reported for the purposes of royalty calculation.
    Licensees will be reluctant to give confidential information about their business activities directly to the owner of the IP, but they may give it to the licensing company if they are satisfied about the safeguards regarding confidentiality.

    A further aspect of this concerns the requirements under antitrust regulations. Competition law frowns on any relationships that would reduce uncertainty about the conduct or potential future conduct of a competitor. Safeguards can be built into the structure of the business unit.
  5. Friendly jurisdiction
    Globally registered patents may have global application. However nationalistic sentiments are a real feature of international business. Despite valid business reasons, there may be resistance by (say) a French company to do business with a German company. Similarly, a Chinese company may not like the idea of paying licensing fees to a Japanese or American patent holder. Even though it is clear to all parties that royalties will eventually go back to the original owner, it can sometimes lessen the direct “pain” to pay via a licensing company based in a “neutral” jurisdiction.
  6. Defensive barrier
    One of the defences against a patent infringement action is to countersue. When Company A tries to exert its patents against Company B, Company B exerts his own patents back against Company A. When a non-practising company sues for infringement, they cannot be sued by Company B because they do not make anything.

    Using a non-practising company to assert patents eliminates one of the defensive tools at the disposal of the alleged infringer.
  7. Focussed operation
    The activities of the business unit are focussed entirely on the activity of commercializing the intellectual property. There is interlocked activity between the technical, legal and commercial people. Each has a solid understanding of the other’s disciplines. When a potential licensee telephones one of the IP marketing specialists, the legal specialist is able to advise him immediately of the impact on other licensees.

    Everybody knows that their focus is to maximize the exploitation of the intellectual property.
  8. Business legal environment
    Some countries have legal environments that are more hospitable to IP commercialization. Their legal systems may offer more certainty and be natural homes for such activities. In recent years, several jurisdictions have introduced IP-friendly tax regimes to encourage smart-economy activities in various forms.
  9. Transparency
    As mentioned above, in many jurisdictions, IP activity is subject to different tax regimes to the mainstream business. If the IP management activity is in a self-contained entity, its activities will be fully consistent with the tax regime.
  10. Access to skill base
    IP commercialization only requires a small number of people to manage a substantial business. However, those people operate in a niche area that requires special skills. When a region develops a reputation for certain competencies, it tends to attract more people of a similar ilk. This leads to clustering of competencies in those areas.

About the Author:
Raymond Hegarty, based in Luxembourg, is CEO of IP Foundation. He has broad experience of intellectual property and global technology transfer.

3 comments:

  1. Raymond. Thanks for your message on IP Prospective. The separate IP business unit is a lucrative move for the right company, but I do believe the decision is fact-intensive, and it certainly isn't one-size-fits-all. Nevertheless, you make some great points regarding advantages in creating the separate IP business unit, especially the opportunity to avoid the counterclaim in enforcement actions. Still, there are legal roads in many jurisdictions that would allow the counterclaim to reach the parent company. The ability to allocate cost and profit among the individual enterprises is another lucrative benefit that is interconnected with certain tax advantages available under this scenario, especially in the U.S.

    Thanks for the interesting post. I will keep an eye on this blog.

    Ian David McClure, IP Prospective

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  2. I would like to add another reason to an IP commercialization organization. Our recent experience working on IP acquisition issues featured the following:. One of our colleagues was asked to evaluate a portfolio of patents that a client felt they needed to have licenses for as part of their freedom to operate effort for a suite of new products. The effort finally came down to a few key patents.

    During a briefing he told the client that one of the key patents shouldn't be a problem and they won't have any licensing issues. This led to a long protracted technical discussion on why they needed the patent. He agreed that the technology disclosed in the patent was critical but... Attempts to bust into the conversation were rebuffed.

    Finally he busted in and said didn't you guys buy XYZ Company a couple of years ago. Yes. Isn't XYZ Company the predecessor company of WWW Enterprises. Yes. Turns out the client already owned the patent they wanted to license. They bought XYZ for its technology but never bothered to take care of the IP issues. They integrated the operations, the people, the products but never got around to integrating the trade secrets and the patents.

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  3. I read this piece with great interest. We (IP DOME) are holding a 4-city Seminar on 'Monetising IP' in India and we are trying to evangelize a strategic perspective of IP (contrary to defensive perspective which characterizes many business organizations in India.
    The Tatas in India have adopted a practice where most of their IP is vested in their house company; but in most other groups IP is in the Legal Department as a 'cost-centre' rather than a proactive seeking of value-creation.
    PVS Giridhar
    Legal Advisor
    IP Dome,
    giridhar@ipdome.in

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