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A Thinking Business publication

A company’s intellectual property is often tricky to value and easy to overlook as businesses in growth mode focus on other priorities. But the perils of failing to adequately protect and document IP ownership – whether through trade marks, copyright, patents or other measures – are significant, and getting this right requires early consideration and close attention.

There are many war stories of businesses that have slipped up on IP protection and ended up with significant challenges down the line. For example, Trowers & Hamlins advised one company that had outsourced the development of a new product to a third party. The parties agreed at the outset that the client would own the IP in the product, a contract was produced, signed, and the product was developed.

When the client later wanted to commercialise the product internationally, believing they owned the rights, they went back to the developer only for it to transpire that they did not own the IP and, furthermore, that the scope of their rights under licence was uncertain, meaning that there was no clear right to commercialise internationally because the contractual terms were unclear. 

To make matters worse, when they tried to "put things right" and confirm the assignment/ownership of such IP rights, the ship had unfortunately sailed. By this point, it was too late as the developer had since entered into exclusive licensing arrangements with other third parties in a number of overseas territories, which meant that solving the problem was far more complicated than simply transferring the IP ownership to the client.

Alice Stripe, Senior Associate in the IP team at Trowers, says: “The lesson here is being clear on the IP ownership position at the outset, carefully reading contracts and thinking through what all of that means for your business now and in the future is critical. While they had agreed something about the IP at a high, informal level, it had never been fully thought through how that arrangement would work once the product was (successfully) developed, the different jurisdictions and the parties' business interests.”

Trowers partner Caroline Hayward adds: “Often people assume these issues can be fixed later, but sometimes it is not possible. Plus of course the commercial impetus changes: at the outset, the developer is looking to win the development work and may be more willing to agree to less beneficial terms. Once the product has been made and proved successful, the negotiating position is very different and the bargaining power falls.”

In another case, a group of companies operating in a sector where bespoke software was business-critical had all entered into agreements with software developers. All of the businesses believed they owned the copyright in the software, when in fact the actual position was that some of the contracts said that was the case, others said it wasn’t, and a number were unclear. Each business needed to use the software and further develop it but the result of the contracts was that it was not clear who owned the software and who was allowed to do what with it. 

“All of this came out when the business was going to be sold, because the software was key to both the operation and value of the business” says Hayward. “The work involved in trying to unpick these issues was absolutely huge and a large number of contracts were needed to solve the problem as far as it could be solved. All they needed was clarity over the software ownership and, to the extent that it was licensed rather than owned, clarity over what they were permitted to do, but they were not able to establish that from the contracts they had in place."

While copyright in the context of software is an area which companies tend to gloss over at their peril, another issue that companies need to pay close attention to is brands and marketing. The firm acted for a large multinational business that had commissioned a "brand refresh" meaning an existing brand was updated and relaunched. In order to do this, an external brand agency was used by the business and a new logo was created based in large part on the one that was already in place. Years later, in a dispute context, the company needed to prove that it owned the copyright in the logo but was unable to do so based on the existing contract which had been signed when the work was commissioned. The brand agency was able to argue that it still owned the copyright and seized the obvious commercial opportunity which this lack of clarity gave it.

“Many years later, our client found themselves in a situation where they needed to spend money buying rights which they thought they already had, because, by then, they had been successfully trading under that new logo for a long time,” says Stripe. “The brand agency could now demand a high price; it was a valuable lesson in making sure contracts are clear and unequivocal when it comes to all IP rights in house brands. In a worst case scenario, a company could even have to rebrand, which is costly and can be a reputationally damaging position to be in.”

Similar issues can also arise in relation to trade marks. Trade mark portfolios are living and breathing assets that require a consistent level of oversight and management, not just in terms of renewals but also where third parties "trespass" onto owner’s rights or when owners need to expand their footprint into new product lines or markets. Again, this means trade mark ownership needs to be thought through early.

An example of what can go wrong is a case where a long-established business was split into separate ownership, divided according to what seemed to be clearly separate service offerings. They decided to share the trade mark portfolio, which was transferred into a special purpose vehicle that would look after it, and each of the two trading businesses had a trade mark licence. 

The SPV did not make money and the licences it had granted to the trading companies were royalty-free. The upshot was that the SPV was out of pocket in managing the trade mark portfolio and the trading companies contributed to the cost under what was, in effect, no more than a gentleman’s agreement. Tensions began to emerge between the SPV and one of the trading businesses. The SPV, which had very strong bargaining power as owner of the trade marks, started to agitate, alleging breach of licence and a right to terminate at every opportunity, in an attempt to force the trading business to renegotiate the licence on better terms for the SPV. Meanwhile, the prosperous trading business, which was a market leader and well-known under the trade mark name, was consistently threatened and had much to protect.

The result was an intense cold war that lasted for over 10 years, with huge amounts of money spent by the trading company in dealing with the defence of different allegations. “Because IP is so technical, it is not uncommon for it to be used as a bargaining chip or a stick to beat people with,” says Hayward.

It is often when the prospect of international expansion arises that companies identify weaknesses in their IP rights. A business can be sitting pretty from a trade mark point of view in one jurisdiction only to find that someone else holds registered trade mark protection over the same trade mark in a country they wish to move into. A tiny company trading under a similar brand in another market or country can not look like a problem until you want to step into their market or country and a costly battle for IP rights may become necessary.

Licensing arrangements too, can also present cross-border issues if two licence holders operating on different sides of the world start expanding and treading on each other’s toes in the same jurisdiction or market. This is not always the case but it can cause issues if one party holds the exclusive rights to such territory. "Exclusive" does not necessarily mean worldwide exclusivity and is often limited to certain territories only.

Finally, issues often arise in relation to marketing agencies when companies outsource things like websites, loyalty schemes and newsletters to external providers. Such arrangements can work really well until the two sides decide to part company and it becomes apparent that the agency actually owns everything, including domain names and email addresses, meaning that they can hold companies over a barrel as to the price they demand for full ownership of such IP.

What is clear is that companies need to give these issues careful and thorough consideration from day one, to put the right terms in place.  Of course, businesses will often have competing priorities and limited resources, but IP ownership and the protection of IP should be prioritised more than it often is until it is too late. Hayward says: “The most difficult decision for a young business in particular is how to prioritise resources. A growing company will not have the budget for everything and they don’t want to spend money on IP rights. But if the entire business model depends on something, then you really need to protect it, whether that is your brand, your software or your product.”

Stripe says: “The key thing is for a company to work out what is absolutely essential and what the business cannot function without, and then make sure the proper IP protections and contractual arrangements are in place to protect that. Prioritise, ensure you have the protections that you think you have, and then think ahead on how your business might evolve and what that might mean for your IP in the future.”

There is much that can go wrong, but addressing IP rights early can put a business in good stead to avoid horror stories down the road.