Protecting Your IP

Saturday, July 1, 2006 - 15:37

Intellectual property (IP) is an important aspect of modern business. IP needs protecting and nurturing. Ann-Maree Moodie reports.

Crooners from the 1950s and 1960s are getting antsy. After a lifetime of enjoying a steady income from the hits of yesteryear, these ageing stars are seeing the end of 50 golden years of copyright protection. For many, extended royalties from their top 100 hits are the only reliable income stream.

In 1998, Sonny Bono of Sonny & Cher fame saw the writing on the sheet music and applied successfully for a 20-year extension to his copyright protection, and in the process had a US law named after him: the Sonny Bono Copyright Term Extension Act. But these laws can do little to end Sir Cliff Richard's Summer Holiday - a notable casualty in the copyright drama.

In another notable development, in April The New York Times reported that Robert F. X. Sillerman, the media entrepreneur who controls the rights to Elvis Presley, American Idol and the soccer star David Beckham, has added another star to his roster: Muhammad Ali.

Sillerman, the Chief Executive of the entertainment company CKX, says that his company had paid $US50 million ($A65 million) for an 80 per cent stake in Ali's name, image and likeness. The other 20 per cent will be retained by Ali and his company.

Ali's famous boxing opponent, George Foreman, has been successful as a celebrity product endorser. According to The New York Times, George Foreman Grills were so popular that the company making them, Salton, decided to buy Foreman out for $US137.5 million rather than keep paying him royalties from sales.

The New York Times report went on to say that when CKX acquired the rights to Graceland in 2005, Sillerman unveiled grand plans for the estate a year later. He paid $US100 million for 85 per cent of the Presley estate and a 90-year lease on Graceland in Memphis. He plans eventually to demolish the Heartbreak Hotel, which stands across the street from Graceland, and put two 400-room hotels in its place. The complex is to eventually include restaurants, shops, convention space, an entertainment complex, an outdoor amphitheatre and a spa. He also plans to open a museum exhibit and Elvis theme show in Las Vegas, according to The New York Times.

Sillerman is keeping quiet on whether his plan for Ali is as sweeping as his Elvis strategy, but the parallel between them is clear, says The New York Times report.

"It is not our plan to involve him in any way personally," Sillerman says of Ali, who is suffering from Parkinson's disease.

"You don't need to introduce who he is," Sillerman says, "and you don't need to explain who he is."

Copyright is not just an issue affecting big names and businesses. A growing number of businesses today owe their success largely to good copyrights.

Managing your company's intellectual property (IP) is becoming recognised as the latest way to increase the value of your business by moving items that would normally be listed on a balance sheet as having no value, or as part of goodwill, to items that are worth something. Changes to accounting practices, which require publicly-listed companies to value IP, are also driving these trends. Today, private companies and small-to-medium enterprises (SMEs) are investigating the potential to capitalise on the hidden value of their business.

"By valuing and protecting your IP, you're building up a strong case for the price you're asking for your business, as well as putting yourself in a position to be able to defend that price," says Brad Higgs of WHK Corporate Advisory.

It's eye-opening to identify and to value your company's IP because the chances are you're sitting on a previously unidentified but valuable asset that can be leveraged, commercialised and marketed.

Even business methodologies and theories on consumer behaviour, or a product's career in the market, can be recognised by law as IP and could be eligible for protection.

Amazon's "one click" internet shopping is a good example of this type of IP.

"Another example of a company that has protected its business methodologies is computer manufacturer Dell," says Peter Karcher of Gray & Perkins Lawyers. "The value in Dell is not necessarily how much better their computers are to anyone else's, but in their particular methods of distribution and interaction with their customers, which to a large extent, they have been able to protect."

Intellectual property is anything produced by intellectual, creative or inventive endeavours and is recognised legally as property. It can be inventions, literary or artistic works, or symbols, names, images and designs.

"It differs from real property in that it cannot, or need not, be occupied or physically possessed - it's intangible," says Mathew Alderson, a partner of Gray & Perkins Lawyers. "It only knows its existence through legal proceedings. It can be bought and sold, licensed and limited to certain territories or even to periods of time."

There are many different ways to protect IP by law including patents, registrable designs, business reputation and goodwill, trademarks, confidential and proprietary information, and copyright.

Patents protect how something works, as opposed to how it looks. By comparison, a registrable design protects the overall appearance of a product, such as its shape or configuration, or its distinctive patterns or ornamentation.

Business reputation and goodwill both mean the value of association consumers hold with the company and its products and services. Goodwill can be expressed towards the brand, the area in which the business operates, and to the people in the company. Brands are particularly valuable and are usually measured using Brand Economic Value (capitalised after cashflow) to determine brand performance. Miffy, the 50-year-old beloved Dutch rabbit of preschoolers worldwide, is worth $US300 million per annum, according to The Guardian .

Trademarks distinguish goods and services from those of other traders, whereas copyright is a bundle of exclusive rights applying to certain defined subject matter, such as the right to publish or broadcast.

A good example is the long-running dispute between Apple Computer and Apple Corps, a company established in 1968 by the Beatles. The wrangle concerns Apple Computer's use of an apple icon on its iTunes Music Store. Lawyers for Paul McCartney, Ringo Starr, John Lennon's widow Yoko Ono, and the estate of George Harrison alleged Apple Computer had breached an agreement to stay out of the music business. The landmark case, before London's High Court, was dismissed in May after the judge found that no breach of the trademark agreement had been demonstrated.

It is possible to claim that the information is confidential if it's not in the public domain and that it was created in circumstances where a duty of confidence applies.

Alderson says companies should conduct an "IP audit" to identify what intangible assets they may hold and to find out how best to protect them. "Having protection in one area, such as a trademark, may not be enough to protect your products or services from being exploited by another party in some way. You should look at the full spectrum of intellectual property protection to determine what is relevant to your business."

The key questions to ask during an IP audit include: 1) What IP does our company hold? 2) How can it be protected, (or protected better)? and; 3) How can we add value to our IP?

When seeking legal protection, it's important to identify the author of the IP and also the first owner in order to ensure with whom the rights reside. Then you need to decide if written licences or assignments are required to confirm how your IP is held and whether you have appropriate restraints on competition for principals and employees in the business.

Finally, you need to ask: how do I enforce my rights? The remedies for the infringement of intellectual property rights include injunctions and damages or accounts of profits. For example, Nike has filed a patent infringement suit against adidas alleging the company has copied its technology.

Once you've identified and protected your IP, the next step is to value it. There are two main reasons to do this. Firstly, it could be an under-utilised asset that is worth more than you realise or there might be an opportunity for tax consolidation. Secondly, it might be necessary to value your IP for accounting purposes, especially if the company is involved in a merger or acquisition.

Speaking just before a presentation to an Australian Innovation luncheon in April, Bill Ferris of CHAMP Private Equity, one of Australia 's leading venture capitalists, said: "Intellectual property rich organisations, not real estate and traditional asset rich ones, are the key to Australia 's future living standards."

"The ability to innovate is already in the national DNA. Elevating it into the national psyche, into what Australians value and pursue, requires new thinking about incentives and reward structures."

Accounting statements now require listed companies and certain large non-listed companies to value IP in mergers and acquisitions and amortise that value over their assessed useful life, under new International Financial Reporting Standards (IFRS) requirements AASB 3 and AASB 138.

Brad Higgs, who identifies and values intellectual property for WHK Corporate Advisory, says many businesses have hidden value in intellectual property, which the owners believe is their business goodwill, in effect not attributing value to the specific assets that really generate the profits of the business. Subsequently, they do not take steps to protect those same IP assets.

In one case, an Australian agricultural food products business, which engaged WHK Corporate Advisory to identify and value its intellectual property, was able to attribute more than 50 per cent of its total intangible asset value as valuable intellectual property, as opposed to recording it as goodwill.

"The value was in the brands, the recipes and formulas they held, and in the exclusive distribution network in which they held agreements with customers for long periods of time," says Higgs. "The company had been around so long that everyone in the industry knew them, which indicated a level of brand loyalty. This was further indicated by the size of their market and their dominant market share.

"But interestingly, the company didn't immediately recognise their formulas as being valuable because they thought they were generic. Similar formulas were used by other companies, too. But when we asked them why the formulas weren't published on their website or in brochures, the answer was, we'd never do that because our formulas have always been modified, developed and revised and they provide us with a competitive advantage'. And for that reason alone, the formulas were valuable and needed protection."

There are four key criteria that an item of IP must pass in order to be recognised as being valuable. It must be separable, protectable, transferable (able to be sold or licenced), and enduring in nature.

The problem in small business is that many use local accounting firms that may not have the expertise to provide advice on the changes in statutory reporting and compliance requirements of IFRS, which may require the identification and valuation of intangible assets. (Further information on these changes can be obtained from the Australian Accounting Standards Board - www.aasb.com.au). Additionally they may not have the specific tax expertise to advise on tax consolidation matters and identify other tax benefits that businesses could gain in investigating their intellectual property (particularly in acquisitions)," explains Higgs.

As the musicians of yesteryear worry about their depleting royalty streams, other creators such as Complete Communications Corp Ltd are learning from those mistakes. The company is selling the worldwide intellectual property rights to the hit television quiz show Who Wants To Be A Millionaire. Media analysts say that even though the deal is "worth a lot of money", its value will be amortised in order to recognise the losses the show will incur as interest in it inevitably wanes.

No such luck for musicians who see the imminent loss of royalty streams as a loss of their "superannuation".

Six steps to identify and protect your IP

  1. Conduct an IP audit
  2. Establish ownership and legally protect your IP
  3. Value your IP and record it on your balance sheet
  4. Establish an IP asset register and update regularly
  5. Commercialise IP
  6. Enforce breaches of law