Managing intellectual assets, including intellectual property (IP) effectively is vital to business success and, unfortunately, the threat of IP crime needs to be taken seriously. Counterfeiting and piracy has increased hugely over the years, and is no longer confined to cheap, low-cost counterfeit goods but has spread to large-scale manufacturing plants that can produce, for example, cheap and realistic – and sometimes therefore dangerous - copies of drugs, mechanical parts and electrical appliances.
A report in 2011 produced by consultancy Detica in partnership with the Office of Cyber Security and Information Assurance in the Cabinet Office1 estimated that the economic cost of cybercrime to UK businesses is £21bn per annum of which £9.2bn per annum is from IP theft. The report also said that IP theft has the greatest economic impact of any type of cyber crime considered in the study, and is likely to have the largest impact on companies that create significant quantities of IP or those whose IP is relatively easy to exploit.
A marked change in multinational business models, with local business giving way to regional and global supply chain models, and with decisions increasingly being made at international level to facilitate accepted tax structures, all has an impact on the need to protect IP. With increasing complexity in the supply chain, together with more and more pressure to get products delivered faster, the need for a collaborative business model becomes greater. This does however present challenges - which may not always be obvious - to intellectual property, and therefore to the business.
So how should businesses go about making their intangible assets work for them? There are three key aspects to consider in many supply chain IP strategies: where the value lies (valuation); where the value remains (protection); and where the value is added (efficient routes to commercialisation).
The first step in compiling the strategy is to undertake a thorough audit. Determining exactly who owns what within the supply chain and what needs to be protected is important before collaboration is formalised. A company's real value is far more than simply filing patents, and perhaps registering trademarks and designs. It also resides in its wider intangible assets, which include so-called 'know-how' as well as branding, skills, policies, creative works and processes. Identification of all the valuable intangible assets in a company can be done internally or by calling in outside specialists to undertake an audit and landscaping exercise. It is only by knowing where its value lies that it can gain most from playing its part in the value chain.
The second step is to ensure that protection is as watertight as possible. An organisation needs to be able to retain its assets of value within the supply chain. In addition to having the right patents and trademarks in place an organisation needs to ensure, for example, that its employees can't take ideas to a competitor or another part of the external supply chain. If IP is not protected — or not protected thoroughly enough, for example in each significant country where it may be at risk — there is a real possibility that trading and product names can be stolen as well as its ideas and inventions. Sometimes this could come about because an organisation in the supply chain discloses, possibly inadvertently, a product before it has been given patent protection, which could lead to competitors gaining a valuable edge. In some countries, trade secrets are protected by an expressed or implied contract. That in effect means that because they are not specifically protected by law, they may not be protected at all, or inadequately. As professional counterfeiters look to develop their businesses and intercept supply, it becomes ever more important to address the issue of the security of IP in the supply chain.
Intellectual property comprises many elements with legal protection. It includes:
- Trademarks
- Patents
- Copyright
- Registered design right
- Unregistered design right
- Database rights
- Trade Secrets
Protecting IP in a supply chain particularly when trading across borders, can seem quite a daunting process, because each country has different procedures and there can be pitfalls in obtaining IP in each country. If an organisation has decided to trade in a particular country, it needs to ensure its intellectual assets are protected, particularly for its goods, as soon as possible in that country through one of the rights indicated above – an IP advisor will recommend the best route according to the nature of what is to be protected.
Attitudes to IP vary widely from country to country. Although
the situation is improving, in some countries such as China and
India for example, some foreign companies have got into
difficulties in the past when trying to prevent others using their
IP, largely because reproduction of goods and designs historically
has been how business is done in those countries, and employees of
a company may sometimes not
even be aware that such reproduction is forbidden. The first step,
before entering into or expanding a supply chain arrangement, is to
determine the extent to which local law protects your IP. Any
agreement needs to ensure, for example, that a supplier abides by
such laws as do exist; define the IP that needs protecting in the
clearest possible terms; and be very clear about
confidentiality.
We recommend that wherever commercially appropriate a company
should register the rights to its inventions, trademarks or
designs. Filing an application establishes a
record of when rights came into being. Overseas rights that are not
registered are very difficult, if not impossible to protect. As
with most things, preparation is vital, and when it comes to the
supply chain, careful attention to the nature of contracts is very
important as is having a good process in place for dispute
resolution from the outset. Contracts with suppliers, for example,
should ensure that subcontractors of the company they are dealing
with are not allowed to use patents, designs, trademark (or other
IP that needs to be protected) without a specific license from you
to do so.
Where aspects of product development have been outsourced in the supply chain, it is important to understand exactly how far such a contract will protect you. For example, will it stop the subcontractor selling a similar – although not identical - design to another company? Or a perhaps a component of the design they have produced for the contractor?
Planning early about how your rights will be used is vital. One way of ensuring that the owner of the IP retains control over their rights is through licensing, in which case you will need licensing agreements, and will need to be clear about the way your rights will be used by the licensee. It is also important to consider aspects such as how products and packaging are designed and protected so they cannot be easily counterfeited in the supply chain.
Another area to consider regarding IP in the supply chain, is that transfers of IP assets to different entities or across borders, or adding IP value can have tax implications. There can be complex monetary flows and there is a need to understand how the IP has been created and used in the business so tax implications can be managed, especially where there might be shared brand value. Consideration can be given, for example, to moving IP ownership into an entity in a chosen tax jurisdiction and creating licensing and royalty structures to manage monetary flows. Tax, IP and transfer pricing all need to be understood in these circumstances and experts are required provide their combined expertise to the business decision-makers.
When developing your supply chain strategy and ensuring that your intellectual assets are fully protected in the supply chain, especially when trading across borders, we recommend taking IP advice, preferably at an early stage to ensure pitfalls are avoided, opportunities are maximised and costs are kept to a minimum. It can be time-consuming and costly to sort out errors later. In addition, IP protection, including contracts, needs to be reviewed on a regular basis to ensure that, as organisations and legislation change, full protection remains in place and the intellectual assets continue to contribute optimally to the business. By taking care to ensure that intangible assets and rights are as protected and managed as efficiently as possible throughout the supply chain, companies can trade and remain competitive in an increasingly global world.
Footnote
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
