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Take five

15 August 11

Is the Hargreaves report sufficient to serve, as intended, as the blueprint to change the UK IP framework to further promote entrepreneurialism, economic growth and social and commercial innovation?

by Philip Hannay

Intellectual property (IP) and innovation strategy can be broken down into five key areas: identification, protection, exploitation, management and valuation. A number of issues are noticeable within each strategic area which serve to justify the current lobby for change. A few follow.

Identification

(1) IP has a number of permutations, each with its own legislative regime. Businesses may neglect to correctly identify all IP related to a specific product or service due to a parallel existence of rights. Take a water jug for example; it is perceivable that it could be protected automatically by UK design right, Community design right and/or copyright. It could also be protected as a UK registered design, a Community registered design and/or its shape may be registrable as a UK trade mark and/or a Community trade mark. Each of these overlapping rights varies in scope, duration and nature. Each right may be assignable independently, thus having its own value. Confusion over what rights a company has affects IP value.

(2) Businesses may not be alone in suffering IP identification issues. Advisers may experience a similar affliction. Traditionally treated as an off-balance-sheet asset, internally generated IP can be ignored by accountants hence hitherto undervalued. IP can be overlooked by practitioners whose focus lies within a particular sector, e.g. property, or may be treated as subsidiary by practitioners where fee priorities are at play. Assumptions may arise in transactional work that IP, if it does require to be dealt with, can be swept up in a contract using one generic definition or clause – this is often not the case. Lack of awareness of crucial post-completion registration requirements may affect the full rights of the IP and detract from its value.

Exploitation

(1) The inter-right layers of copyright may also give rise to confusion. Copyright can often be referred to in a generic sense rather than by being broken down into the relevant protectable works. For example, a company may commission the production of a mixed media marketing poster and then claim copyright in the poster, when in actual fact literary copyright may subsist in the poster text and may belong to a copyrighter, artistic copyright may reside in any photographs and may be owned by the photographer, and further artistic copyright may have arisen and belong to other parties who created maps or new typefaces. Without pre-existing contracts with each party, the value of the copyright diminishes immensely.

(2) The complexity of the above example for one job (a poster) illustrates how easy it is to lose track of ownership rights in any commercially active business. The UK has no formal copyright register and, without such a register, links between works and owners are often severed and lost. Thus, issues arise regarding the exploitation of these orphan works. More often than not, this leads to a loss of revenue. In some cases where ownership is traceable, e.g. an orphan work which is bona vacantia, legal process can be followed to allow exploitation of the work; however, the costs in doing so may be prohibitive.

Protection

(1) Businesses and entrepreneurs may encounter IP barriers within the law itself, particularly in relation to trade marks and brands. The Trade Marks Act 1994 grants the proprietor of a trade name the exclusive right to use the name in trade throughout the UK. The Companies Act 2006 would prohibit use of said name if the proprietor sought to incorporate a company under that name where the registrar noticed another with the same or similar name on the register. The Insolvency Act 1986 would prohibit a director of a company in liquidation from using for a prescribed period after the date of liquidation, any name which the company traded under for a prescribed period prior to liquidation. This prohibition applies notwithstanding the situation where the trade name is a registered trade mark and the director acquires the rights to the mark (and the use of the name). For some of these legal conflicts there are costly legal remedies, and for others there are none – leading only to unintended unjustified enrichments.

(2) In the case of intellectual capital (which typically flows from human capital and thus any interface between people and business), where cross domain inequalities exist, the issue is not so much legislation but precedence. Knowhow, show-how, confidential information and trade secrets require contractual protection. Contracts and their enforceability may vary from legal jurisdiction to legal jurisdiction, or per the legal precedent in a particular sphere of law. For example, the enforceability of a restrictive covenant relevant to IP in an employment contract may differ from the same restriction in a business purchase agreement. This has led to strategic forum shopping – an activity which typically benefits larger companies rather than the SME.

Management

(1) The management of IP can be a very time consuming and costly task. It may also involve engaging with specialists to interpret international elements of IP or to understand its increasingly exotic terminology. For example, the common law action of reverse passing off, the packaging and sale of negative goodwill, the lobbying for protection of indigenous knowledge, and the criticism of the market-mimicking technology transfer emission credits systems of the EU Emission Trading Scheme. In addition, ongoing costs associated with renewals, monitoring, and insurance all add to a serious cost/benefits management calculation.

(2) Management of IP may also lead a business into the prospect of securitisation – an area which requires clarity. Copyright royalties, registered IP, tax credits are all examples of valuable assets which may form part of the assets secured by a lender by way of a floating charge or a fixed security. The registration of a charge at Companies House is a common law method of giving constructive notice to all those who are reasonably expected to search the register. Where the secured IP contains a mixture of registered IP, unregistered IP and future IP, questions remain unanswered as to whether constructive notice is deemed to be given for all IP or whether, particularly in the case of unregistered IP, the specific IP requires to be called out (identified) in order that constructive notice can be deemed to have been reasonably given.

Valuation

(1) The rise of the internet business has led to an acceptance of the intangible business. Investor, M&A and succession issues related to such businesses are factors which have driven the market for monetisation of intellectual capital. Industry has taken incremental steps to regulate what was once thought of as intangible financial alchemy. One such step is eXtensible Business Reporting Language (XRBL) taxonomy for intangibles. Another is the introduction of ISO 10668 on brand valuation (see www.journalonline.co.uk/Magazine/55-8/1008498.aspx). Both provide a helpful foundation upon which IP value can be appraised, assessed, audited and held to account – but complexities still remain over the multiple methodologies and multiple disciplinary inputs.

(2) Some legal changes have been helpful in extracting value from IP. These changes are more incidental than a result of direct intervention. For example, residual attachment orders under the Bankruptcy and Diligence etc (Scotland) Act 2007 have allowed the capture and realisation of goodwill in personalised number plates in insolvency situations.

Government response

The UK Government commissioned Professor Ian Hargreaves to report on matters. The Digital Opportunity report (or Hargreaves report) only goes a small way to rectify some of the issues and market failures outlined above. Suggested action includes (1) an integrated source of advice on IP and commercial implications; (2) addressing the cost of IP management; (3) encouraging larger firms with IP competence to buddy smaller ones; (4) action by the IPO to provide paid-for advice as a commercial service and/or accreditation of integrated IP business advice providers; (5) exploring devolved administrations to adjust the Government’s business support offering to meet IP needs; and (6) an overhaul of the IPO’s online engagement.

In a time of austerity, cutting costs will always make headlines. It is small wonder that it features front and centre in Hargreaves’ report. Such action will undoubtedly resonate with SMEs. Yet cutting costs does not create a vacuum that will be filled by economic growth. The IP industry has being growing organically and by self regulating. Part of IP and IA is that it requires the application of intellect to identify, protect, exploit, manage and value the property or asset at hand. To cut those associated costs may be to cut the prospect of growth itself.

Philip Hannay is a corporate & IP lawyer at Macdonald Henderson and is legal adviser to the Cultural Enterprise Office. The views expressed are his own.
 

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