This article was first published on Business Matters.
Had it not have been for a forgotten tin opener, Ermal Fraze’s family picnic one Sunday in 1963 might have been entirely unremarkable.
Without his ‘Church Key’, Fraze was forced to open his cans of beer on his car’s bumper. The experience gave him an idea, out of which the ring pull was born. By 1965, Fraze had sold the invention to Alcoa and 75% of U.S. breweries were using ring pull cans. Crucially, because Fraze had negotiated a royalty deal, he quickly became a multi-millionaire.
Fiona Nicolson, President of LESI, explains that from tiny acorns, mighty oaks are grown. But without effectively licensing his intellectual property, Fraze might never had profited to this extent. This is precisely what is supposed to have happened to Sandy Fowler, who, the story goes, naively handed over his novel ‘tea bag’ to a merchant for a pittance, missing out on the opportunity to make millions had he have thought to license his property.
Fast forward to 2020, and IP has become more important than ever. In fact, in the words Mark Getty, Chairman of Getty Images, ‘IP is the oil of the 21st century’. To the modern business, intangible assets, be it brands, goodwill or IP, have now become more valuable than tangible alternatives and are vital to the sale, or floatation, of any company. Even for SMEs, IP is valuable: the Oxford Review of Economic Policy published a report, for instance, that found that the use of trademarks correlates with stronger innovation, growth and productivity.
And yet, across the world, there are murmurings amongst SMEs that IP is not worth the investment. According to the Federation of Small Businesses, almost 50% of small businesses do not believe that money spent on IP is worth the outlay, in no small part linked to reports that up to 25% of SMEs have suffered some form of IP infringement.
Monetising IP can be a challenge: many SMEs simply do not have the cash reserves to obtain patent protections and then enforce their intellectual property. But with the right strategy in place, it can be done effectively and, perhaps most importantly, profitably. In other words, SMEs should not give up on IP.
For larger businesses in particular, once a patent has been secured, one of the obvious, profitable choices is the sale of the IP. Selling patents through an auction or a direct sale can be highly lucrative: AOL, for example, made more than a £1bn selling over 800 patents to Microsoft in 2012. For smaller businesses, however, that may struggle to demonstrate the potential power or use of their inventions, selling IP at the outset might prove tricky.
Thus it is incumbent upon them to clearly demonstrate and understand the actual value of their IP and look into other ways it can be commercialised. Indeed, in late 2019, the UK Intellectual Property Office launched a series of IP valuations for SMEs to fully ascertain how to leverage this valuable IP for better financing for SMEs.
The other option, of course, is for businesses or individuals to set about commercialising their IP themselves, perhaps typified by Levi Roots’ ‘Reggae Reggae Sauce’, which, thanks to IP protection, went from the market stall to the shelves of major retailers and turned Roots into a household name. And whilst this approach does mean that businesses reap the continued profits, this often requires significant investment, particularly should a business want to expand to overseas markets. Another challenge, no less, is that businesses will be required, in the event of a suspected infringement, to enforce their IP themselves. This can be a daunting prospect; and many SMEs simply do not have the cash reserves to go after infringers.
Helpfully, however, SMEs can achieve similar outcomes without needing to take out patents. After all, filing a patent may grant a business a 20 year monopoly, but it also requires a business to share the secrets of its IP with the world, which naturally raises the risk of infringement and, latterly, costly enforcement.
As an alternative, trade secrets – typified by Coca Cola and its mysterious recipe – can keep your IP under wraps forever, without affecting your ability to monetise. At the same, in keeping IP a secret, the risk of infringement is minimised. Similarly, for smaller technology firms, software can be protected by copyright, by allows the source code to be kept confidential, again diminishing the possibility of infringement.
An alternative – used to great effect by Fraze and Alcoa – is licensing a third party to develop and sell your IP, returning a slice of the profits. For a small business, such an approach can be vital, not only allowing revenue to be generated with a smaller capital investment, but also allowing for expansion into other markets that might not otherwise have been possible. Of course, businesses must weigh these advantages against the fact the licensing requires know-how to be revealed to competitors, as well as control over IP to be ceded to a third party.
And these are not the only considerations. It is vital, for example, that businesses sign confidentiality agreements before beginning negotiations. What’s more, for SMEs with international aspirations, it is mission critical to consider different jurisdictional rules for licensing: in Germany, for instance, the right to a sub-license exists in statute (unless excluded in the agreement) whilst in the U.S. this requires the licensor’s express consent.
This last point is instructive: given almost a quarter of UK SMEs report IP infringement, it is tempting to argue that UK plc is no longer a ‘business friendly’ jurisdiction. And with China rapidly strengthening its IP enforcement system, filing almost half of the world’s patents last year, this argument seems ever stronger.
Such a view is misplaced. With an envied system of English Common Law, not to mention its Intellectual Property Office, which provides a huge number of resources for SMEs, the UK remains an IP powerhouse. It is perhaps no surprise, then, that the UK has not only ranked in the top tier of every Taylor Wessing Global IP Index, but has also achieved the number one spot more than any other country.
And with the Chancellor announcing, in the most recent Budget, £13 million ($16.3 million) in funding for a rollout of more business and IP centres across the country, it seems the UK will remain a leader for some time to come, helped by the fact that IP insurance is become cheaper and more widely available than ever.
That is not to say that there are no improvements that can be made to help businesses monetise IP. All too often, IP licenses are negotiated in secret. This shroud of silence, particularly when it comes to financial wrangling, can make it incredibly difficult for SMEs to establish a reasonable market rate for royalties. With the likes of the US Federal Trade Commission lobbying for transparent negotiations, it seems that the tides are turning, with Ericsson becoming the first business to reveal its Symantec Endpoint Protection license royalty fee price range for 5G mobile phone networks. As Michelle Lee, the past Director of United States Patent and Trademark Office said, ‘the marketplace works most effectively in an environment of transparency’.
It is telling that despite inventing a device that is used by billions across the planet every day, Fraze is not a household name. This is, in part, due to the success of his arrangements with Alcoa, who drove forward his IP whilst he enjoyed a slice of the profits. His experience is emblematic of the power of IP, and one no SME should overlook. Now, more than ever, the business world turns on IP.