Intellectual property: risk management aspects

This exclusivity in turn can be a source of competitive advantage, and clearly the greater their value to your company, and consequently the greater the level of risk you may be exposed to if IP rights are not managed effectively.

This risk might be from the external environment where competitors aim to dilute or erode your rights, or even ignore them completely. From the internal perspective, your policies and procedures need to ensure your own personnel and others such as partners, customers and suppliers do not — deliberately or inadvertently — reduce the actual or potential competitive advantage available.

The valuation of IP is complex in itself, and will not be discussed here.¹ However, among the benefits and value IP can bring to a company include establishing a proprietary market advantage, improving financial performance, enhancing competitiveness, protecting core technologies and methods, and attracting new capital and enhancing corporate value.

While there are many forms of IP, this article provides a basic overview of three key IP concepts that are registrable. A fourth — non-registrable — concept is also described. Some of the inherent risks in these IP mechanisms are identified and solutions to address these are proposed. Finally, and in addition to the specific operational approaches suggested, we conclude with some suggested IP management strategies at the broader policy and senior management level that may create enhanced awareness of the role of IP in the maintenance and future growth of the firm.

Overview of IP

For the purposes of this article, we assume that the reader has a basic understanding of IP principles. However, we will provide a brief overview of important concepts.

Patents

A patent is a monopoly right granted by the government to stop others from exploiting an invention covered by the patent for a limited period of time. During this period (typically a maximum of 20 years), competitors are not allowed to manufacture, sell, import or use the invention without permission from the patent owner. In exchange for the right, the patent applicant must file an application with the Patent Office identifying the inventor(s) and, importantly, provide a full and detailed description of the invention in a patent specification.

Apart from preventing copying and competition, a patent owner can license the invention to someone else in return for royalty payments. A patent portfolio is also a business asset that generally makes a business more attractive to potential investors and commercial partners.

Any commercially useful invention in a field of science or engineering can bepatented in Australia. The invention must be also be new and must be more than an obvious improvement or modification over existing technology.

Patents are only granted on application and most countries require the application to undergo stringent examination to ensure the invention meets the requirements of patentability. A typical first step for a patent application involves filing a provisional application to establish what is known as a priority date. An early priority date is important — anything published before this date can be used to attack the application. The application will have priority over applications filed by potential competitors after the filing date. The provisional application lasts for 12 months, a useful period to identify roadblocks before investing more time, money and effort in the patent application.

To have a patent granted, a complete application must be filed within 12 months of filing the provisional application. The complete application can be filed in Australia and/or overseas, with the country selection dependent upon where the applicant desires monopoly protection. A patent specification for a complete application is typically based on the provisional specification but includes details of any modifications, developments and improvements to the invention.

While some countries offer periods of grace, it is good policy to keep an invention secret before a patent application is filed. Early disclosure of an invention may reduce the scope of any patent eventually granted, or may lead to that patent being invalid. Invalidating disclosure may take place by the spoken word, drawings, a written description, exhibition, use or sale.

Brands and trade marks

A trade mark may be a brand, word, device, packaging get-up, product shape, combinations of these, or indeed, almost any aspect of branding that serves to differentiate your products and services from those of your competitors. A well chosen trade mark:

• distinguishes your products from others in the marketplace; and
• is a memorable symbol for the quality of your products and services.

While rights in trade marks can arise based on use, registering your trade mark with the national governments in which you trade or propose to trade is always best policy.

Even where you have no current use of a mark, the filing of a trade mark application can serve to reserve the trade mark for your proposed use while you are preparing for a product launch.

Unlike business name or domain name registrations, successfully obtaining trade mark registration through the Trade Marks Office also has the following advantages:

• It gives you the exclusive right to use the trade mark throughout Australia (and anywhere else where you apply and obtain registration) and to stop others from using it or a similar trade mark in the same field of business.
• A registration is an easily enforceable right against misuse by competitors.
• A registration is an asset and property right which may be licensed or sold.

Good trade marks are distinctive to your products and therefore inherently registrable. Equally good are trade marks which have a positive connotation or convey information about the products in a suggestive way, but do not describe the products. Weak trade marks which feature descriptive or generic words such as ‘No Frills’, ’Classic‘ or ’Lite’ are hard to register and provide limited prospect of preventing competitors using the same trade mark.

When filing a trade mark application, it is necessary to name an applicant and identify the goods and/or services for which registration is sought. If granted, a trade mark registration can remain in force indefinitely so long as it is used and the renewal fee is paid (currently payable every ten years).

Registered designs

A registered design (also known as a design patent in some countries) gives to the owner of the design a monopoly right in respect of the appearance of a product embodying that design for a limited period (currently ten years in Australia). The appearance can be defined in terms of visual features, such as shape, configuration, pattern and ornamentation.

There is a clear distinction between the protection afforded by a registered design and that by a standard patent. Design protection is given only in respect of the appearance of an article, whereas the article itself, its functionality or the manner in which it operates may be protected by a patent.

It is of course possible, and sometimes highly desirable, to have both design and patent protection for the same ‘invention’. For example, it is possible to have a registered design in respect of the appearance of a product, say a telephone, and a patent in respect of the manner in which it functions.

A design is registrable if the design is new and distinctive when compared with the prior art base. The prior art base includes:

• designs publicly used in Australia and
• designs which have been published in a document either in Australia or elsewhere, including earlier design applications.

A design is distinctive unless it is substantially similar in overall impression to a design that forms part of the prior art base.

For three-dimensional designs which are to be applied to articles, it is important to file an application for design registration before any publication or use of the design occurs. Failure to do so may prevent later registration and curtail the copyright in the design. Unlike three-dimensional designs, designs which are solely two-dimensional patterns or ornaments applied to the surface of articles, such as pictures on t-shirts, do not lose copyright protection after publication and sale of the articles. Therefore, such designs can enjoy dual copyright and registered design protection. While copyright goes a long way in providing protection, a registered design may be valuable in enforcing rights in the design. To show copyright infringement, a court has to be convinced that the alleged infringer directly or indirectly copied the design. In contrast, it is not necessary to show copying in the case of a registered design.

The registration process for a design begins with filing a design application at the Designs Office. The application must name the designer (the creator) and include at least one representation of the design. Representations take the form of drawings or photographs which clearly depict the article to which the design is applied.

Examination of a registered design for newness and distinctiveness is optional. However, a registered design is not enforceable unless it has been examined and certified. Therefore the value of an unexamined design application is limited.

Trade secrets and confidential Information

A trade secret is generally something that is only known to its owner, and gives that owner a competitive advantage over others (that is, competitors) in its business activities. While ‘technology-based’ trade secrets form the focus of our discussion, a trade secret may also be business-related information which might be in the form of customer lists, supplier lists or business plans. At the technical level, products and processes such as formulae, manufacturing methods and software code are typical examples. Unlike patents, there are no statutory definitions such as subject matter requirements for trade secrets, rather the basic requirement is that it remains a secret, and registration is not required.

Typically companies might weigh up whether to patent a technical invention or to keep it as a trade secret. A major advantage of a trade secret is that it has a potentially infinite life, provided the information remains secret. The Coca- Cola recipe is an often quoted example of a trade secret which has outlived the normal 20-year patent term many times over. Of course if the trade secret is, or can be, discovered by legitimate means or business behaviour all protection is lost. Independent discovery and ‘reverse engineering’ are examples of such legitimate means. Inadvertent disclosure by the owner, possibly through loose-lipped employees, is another mechanism where trade secret protection can be lost.

IP risks in general

Before considering specific mechanisms to protect your IP, it is prudent to look at it in a broader context. At its broadest level, an organisation should consider IP in a context of governance and culture. Are there systems, policies, and procedures in place to ensure IP is valued by the company? Are the company’s internal controls adequate to maintain, add or extract such value from the IP?

Does the organisation in fact have an IP policy? What does it cover? Who are the key stakeholders? How were the policies developed? Internally or did it use external specialists or both? How are these policies communicated through the company? Where is the policy perceived to come from: bottom up or top down? What role has the board and/or senior management played in development of the policy and what role do they play in the policy? How are employees trained to understand and implement the policy? Does the policy reflect the company’s culture? At a minimum the IP policy should reflect the company’s corporate strategy, and should clearly delineate the roles and responsibilities of the stakeholders (including external advisers) as well as their expectations.

Often a useful starting point of IP policy development is to dissect the company’s activities over the various stages of the ‘IP lifecycle’. This IP lifecycle essentially commences at the planning stage with the recognition or identification that IP might be created. Once IP is created, and depending on the nature of the IP, it will then be protected, further developed and maintained. This IP will not always involve a single company (that is, its owner), but may involve collaborators at the development stage (such as research partners) or at the commercialisation stage (for example, as licensor, licensee, joint venture partner).

In addition your IP may need to be defended against attack by others (who may claim your IP is not valid), or you may need to enforce your rights (against unauthorised users). Further, a third party may take action against your company alleging infringement of their IP rights. It is therefore critical that the IP policy recognise these phases of the IP lifecycle and ensure suitable implementation practices follow. Of course, the nature of the implementation practices will be influenced by the nature of the business and its resources, and whether external IP practitioners are engaged for this purpose. In that situation, it is paramount the external practitioner is well briefed on not only the specific issue at risk, but on the strategic role of IP to the company’s existence and growth.

If a company does not have an IP policy, it is recommended that a report (preferably using company staff and relevant external consultants) be prepared. This report should identify the major IP risks within the company, together with an assessment of how to reduce or eliminate those risks. Where a company does have an existing policy and practices, these need to be regularly reviewed, evaluated and updated.

The role of the employee

Irrespective of the type of IP under consideration, it will have been created by an individual (or group of individuals). The inventor of a patentable invention, the author of an operations manual, and the creator of a snappy ‘tagline’ are all examples of creators of IP. In the context of a company, this creator will either be (or should be) an employee or group thereof, or a consultant or contractor engaged by the organisation for a specified task. This premise is important in the analysis of IP risk in an organisation, as unless it can establish clear ownership in its IP, then any value such IP may have to the organisation may be lost, either totally or partially.

As a general rule it is understood that IP is owned by the person creating it. However, as a further generalisation, the exception to this statement has been for employees where ownership is vested in the employer. In the much publicised court case University of Western Australia v Gray [2008] FCA 498)² it was stated that under common law the employer will have no automatic rights over the inventions without an express or implied term in the contract of employment, although one exception to this is where there is an implied duty to invent.

This case has several risk management implications as it reinforces the need for employers to provide detailed position descriptions for employees, including any specific duties they might have — including any duty to invent. Further, express terms such as assignment of IP ownership by the employee needs to be included in employment agreements. Not only are these requirements critical when dealing with your own organisation’s employees, but should be closely monitored when dealing with other organisations in the development of IP — such as with a university in a research collaboration.

The general processes for obtaining IP have been discussed earlier in this article. In some situations, and in certain jurisdictions, the actual creator (for example, the inventor) must sign certain documents for submission at that IP Office to enable IP registration.

It is therefore recommended that deeds of IP assignment on specific inventions and creations etc be obtained upon creation, rather than relying solely on a broader employment agreement or even a broader policy statement by the company. The need for specific employee assignments was documented in the court case of Victoria University of Technology v Wilson [2004] VSC 33 where it was found that a university’s IP policy was never formally endorsed or brought to the attention of staff and could therefore not be relied upon in an ownership dispute. The approach of obtaining a separate executed deed might also prove invaluable where an employee departs the company on terms that are less than cordial.

Who owes a duty?

The concept of fiduciary duty is also important in determining the ownership of IP. The broad premise is that a fiduciary is expected to be loyal to whom that duty is owed (that is, the employer). The nature of employment can influence this fiduciary duty. As an example, a low-paid worker is less likely to owe such a duty to the employer, whereas an executive or high-paid employee would.

Accordingly, when considering the creation, protection and management of IP, it is not only employment contracts that need to be clear on those issues, but the company’s policies should reinforce the obligation of fiduciary duty — certainly with respect to senior staff.

Materials other than inventions

The ownership of other ‘creations’ need to be considered. Such other creations include reports, user manuals, websites, programs, photos, databases, logos, plans and designs. In each situation, it is recommended that a written employment contract address the transfer of rights to the employer.

Patented inventions

Inventorship in the case of patents is not a concept to be taken lightly. Entitlement (of an employer) to an invention is established by having an individual employee as an inventor. However, ‘lack of entitlement’ can result in an invalid patent. Therefore simply naming an employee as inventor because they were ‘part of the project team’ or ‘simply followed instructions’ can lead to questions about entitlement.

Although there is no hard and fast rule for defining inventorship, principles of where a contributor had a material influence on the invention, or whether the invention would not have occurred without a particular individual’s contribution, are guidelines that assist in answering this question. Your patent attorney will be well positioned to assist in this determination of inventorship, and this aspect should be addressed before filing an application.

Finally, in technical inventions ‘inventorship’ and ‘authorship’ should not be confused. An employee may have been involved in a development, but not necessarily an inventor. This does not stop them being named as authors on reports, journal articles etc, but does not necessarily mean the employee is an inventor.

External parties

The position with respect to external parties should be considered in the same manner as your own employees. While there may be a ‘contract of service’ between your company and the contractor or consultant, again the ownership of any IP generated from that contract should be stated explicitly. This includes ensuring that the contractor’s employees will assign any rights to your company as the client.

The position with collaboration between parties — particularly in a research context — can become more complex. Compared to the traditional contractor/ client relationship where the client pays market rates for the contractor’s services, collaborative research often involves joint contributions, resources and in- kind supply of goods. Contributions to research projects are a subject in itself, and one is often exposed to terms such as ‘background IP’, ‘foreground IP’ and ‘sideground IP’. These terms basically describe the nature and genealogy of IP created by one or more of the collaborators prior to, during, or after the project, and are often used to determine ownership and/or rights of use of IP.

Again, this is an area where specialist input is essential. There can be a tendency to consider sharing ownership (that is, co-ownership) of IP as a fair outcome. This is a situation that requires close attention, as, while this approach might ‘feel good’, co-ownership in the case of patents is treated differently in many countries. Depending on the country it might place restrictions on what the ‘co-owner’ can and cannot do — particularly when dealing with other parties. This is not to say co-ownership should never apply, but rather it needs close attention to ensure your company’s objectives will be met through co-ownership.

Past and future

While the foregoing concentrates on the current position with respect to employees, depending on the circumstances, the employee’s prior or future employment may bring risks to the organisation. In many situations, employees are recruited because of their past activities in a similar industry or field to your own. Therefore where this might be considered an issue it is prudent to obtain undertakings on what the employee can bring to your company. This has potential implications if that employee creates IP in your company, but it is later found to incorporate the prior employer’s IP. Clearly, these considerations do not apply to knowledge and skills that it would be reasonably expected any competent professional (for example, a process engineer) would possess.

The issue of departing employees has already been alluded to, and companies might address their concerns in their employment contracts with provisions relating to post- employment constraints, confidential information returns, and undertakings to assist in any IP already applied for where the employee is an inventor or creator. The specific use of a ‘departure interview’ can also provide an opportunity to ensure such issues are identified and addressed prior to the employee departing.

Ensuring registrability

Patents

A patent can only be valid if it is directed to an invention that is new and was non- obvious at the time of first filing of the patent application. Most countries require the invention to be new in light of any publication or use anywhere in the world, including self-disclosure by the applicant. As such, any IP policy concerning patents must make it clear that public disclosure of any form cannot occur until the invention has been assessed for its potential to be the subject of a patent application and a decision has been made in this regard.

A patent application must also fully describe the invention. Failure to do this is a ground of invalidity as it means that the applicant has failed to meet its side of the bargain in being granted a patent, that is full disclosure of the invention to the public. Any IP policy must require disclosure from the inventors of a full and detailed description of the invention. Such a description allows the patent attorney to better understand and describe the invention in a patent specification and ensures that there is no question that an adequate description of the invention is provided to the public by the patent application.

Any IP policy should also provide for assessment of the merits and value of an invention and in an ongoing manner any patent applications filed in relation to that invention. For example, it is appropriate that a company maintain a register of patent applications and also have in place a mechanism for regularly checking (for example, every one to five years) as to the relevance of any patent in the portfolio.

Trade marks

Before deciding to use a new trade mark it is prudent to conduct searches of the Trade Marks Office records and the marketplace to determine if the trade mark is already in use. This step is recommended well before significant costs are incurred for obtaining registration, or preparation of artwork, packaging or advertising campaigns. A search will reveal if the use is likely to infringe a prior registered trade mark, conflict with a trade mark that is in use, and indicate the prospects for obtaining registration.

As such, any IP policy on trade marks should at least ensure that the developers of new trade marks for a business are required to inform the legal team or others responsible for IP matters of their plans for new campaigns. Early disclosure in this way can ensure there is time to determine whether there is freedom to use the trade mark and also, where necessary, file trade mark applications in relevant countries.

Registered designs

In many regards, any IP policy for registered designs can closely follow what a company establishes for patentable inventions. As with patents, any IP policy concerning designs must make it clear that public disclosure of any form cannot occur until such time as the design has been assessed for its potential to be the subject of a registered design application and a decision has been made in this regard. A registered design application must also have full and clear representations of the design. Accordingly, it is important that any IP policy require disclosure from the designers of all potential designs. This will allow the patent attorney engaged to prepare the design specification to ensure the design application provides adequate protection and also provide for them to advise on whether multiple applications are necessary.

Any IP policy should also provide for assessment of the merits and value of a design and in an ongoing manner any registered design applications filed in relation to that design, whether they be in Australia or elsewhere. For example, it is appropriate that a company maintain a register of design applications and also have in place a mechanism for regularly checking (for example, once every year) as to the relevance of any registered design in the portfolio.

Trade secrets

There is no template for an effective trade secret protection program. The general steps will be dependent upon both the nature of your company’s business and the type of information (for example, technical or business) you are endeavouring to protect. As indicated previously, unlike other forms of intellectual property like patents and trade marks which are the subject of Commonwealth legislation, trade secrets protection (and the misappropriation thereof) falls under the rules of common law.

Therefore, while one clearly wishes to avoid litigation, steps to protect trade secrets should not only be practical to prevent unauthorised disclosure or misuse, they should also be capable of presenting a persuasive argument to the courts should that be necessary.

Before looking at such practical steps, the fundamental criteria that would need to be satisfied in a court need to be identified:

1. The trade secret information needs to be able to be particularised or described so that it can be distinguished from information of a more general knowledge or trade in a particular industry.
2. There needs to be some demonstration that there is economic or commercial value from not being publicly known.
3. There have to have been efforts to maintain that secrecy including, where other parties are involved, a relationship of confidence.
4. In a litigation situation it is then necessary to demonstrate that a breach of confidence has occurred.

In broad terms, a corporate trade secret protection plan should address constraints on:

• the information or trade secret itself, for example:
  • marking relevant documents or materials as confidential
  • keeping hard copies in a locked safe or cabinet
  • limiting or monitoring the number of copies
  • protection against physical access through use of security systems, escorts and visitors’ badges
  • attaching electronic sensors to trade secret documents, and
  • requiring the use of passwords
• employees of its owner, including:
  • communication and education of employees on broad principles of confidentiality as well as specifically for those with access to the trade secret
  • limiting disclosure to key employees
  • separating departments and/or employees’ access on a strict ‘need to know’ basis
  • sometimes this might mean each department or individual only has access to a ‘piece of the puzzle’
  • obtaining employment agreements, either specifically or as part of the induction or recruitment process
  • restraining ex-employees from competition (but be mindful of the ‘reasonableness’ of any restraint of trade), and
  • maintaining lists of those employees processing that information.
• external parties. For external parties, in addition to strict physical security through constraints on access to plants and/or offices, the most common form of protection is the confidential disclosure agreement (CDA). While the basic framework of such agreements is relatively standard, each disclosure situation is different and one should seek specialist advice before finalising such agreements and thereby ensuring they satisfy your specific needs.

Obviously the type of relationship with another party (for example, vendors, suppliers, potential competitors, consultants, customers, research partners) will influence the nature, obligations and contents of the agreement. At a minimum such agreements should clearly identify the information being considered secret, and specify the rights of use and disclosure, as well as return and/or disposal of the information.

Some IP management strategies to mitigate risk

In its simplest form, an organisation’s activities will involve the creation and acquisition of IP, the management of that IP, and the subsequent extraction of value from the IP. It is therefore important that its IP management strategy addresses all of these elements. Although not exhaustive, the following list identifies some key principles required in any IP management strategy:

• Develop an IP policy that fits other organisational policies and objectives, and ensure that clearly articulated IP guidelines follow clearly from those policies
• While IP guidelines should be comprehensive, they should address areas key to the company; for example, proper marking of trade marks, invention disclosure forms, confidential records management
• Maintain IP management systems including databases and IP registers (or ensure your patent attorney provides such a service for you)
• Use such management systems as an aid to meet your obligations, such as payment of annuities to maintain your IP and notification to the stock market of key milestones including grants of patents
• Develop a culture that values IP
• Provide for training and IP awareness to support and reinforce policies and guidelines
• Recognise the global nature of IP
• Establish processes for IP infringement monitoring as well as an awareness of third party IP, and
• Establish an IP auditing program recognising this is both a ’one-off’ and an ongoing exercise for review.

The field of IP is diverse in that it embraces many elements of human creativity, from technical inventions to business processes, to smart advertising slogans. It also has a lifecycle from creation through protection and registration to commercial use.

Further it involves not only your company and its employees, but interactions with many others — customers, suppliers, competitors, research partners and others. It can be used to proactively enter new markets and business opportunities or to defend an existing position.

Conversely, other parties may use their IP against your business interests. It is therefore critical to understand the nature of risks associated with IP. This article has aimed to indentify some of those risks, and to make suggestions to mitigate against those risks.

While it is not possible to address every specific scenario, we trust this article will provide a basis for an understanding of the issues, and further provide a sound basis for exploring options with staff and your external IP specialists.

John Walker can be contacted on (03) 9888 6026 or by email at john.walker@ltman.com.au. Brett Lunn can be contacted on (02) 8231 1019 or by email at blunn@fbrice.com.au.

This article originally appeared in Keeping Good Companies Magazine, December 2012.

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Notes

1. See, for example, Steinert J, 2009, ‘The increasing (and decreasing) value of intangibles — impairment questions you need to ask’, Keeping good companies, Vol 61 No 9, pp 529–531
2. See also Ecob C and Kelleher R, 2010, ‘UWA v Gray — rights to inventions of employees’, Keeping good companies, Vol 62 No 3, pp 176–179