April 01, 2013

Intellectual Property SMEs

- Dipali Sarvaiya Sheth, Partner [ MDP & Partners Advocates & Solicitors ]

Dipali Sarvaiya

Licensing of IP should be a vital component of the business strategy of SMEs, especially for the innovations made in area unrelated to their current business.

Small and Medium Enterprise (SMEs) is the growing breed of the Indian economy. With the increasing foot print of these SMEs in all sectors, there is a need for creating awareness about of host of legal issues including intellectual property. Intellectual Property (IP) is different from other kinds of property in following aspects. Firstly, it is an intangible property which is created in the mind of the inventor. Secondly, IP laws have been put in place to reward and protect the inventor for his/her creation and promote the economy and technology for the betterment of the society as a whole. Further, IP though intangible, is the most significant asset of any enterprise in its growth path. Most countries with innovative local industries almost invariably have laws to foster innovation by regulating the copying of inventions, identifying symbols, and creative expressions.

These laws encompass separate and distinct types of intangible property - namely, patents, trademarks, copyrights, designs, geographical indications and trade secrets, which collectively are referred to as IP. In the broadest sense, IP is intangible personal property in creations of the mind. IP is divided mainly into two categories viz; industrial property, which includes inventions (patents), trademarks, industrial designs, and geographic indications of source; and copyright, which includes literary and artistic works such as novels, poems and plays, films, musical works, artistic works such as drawings, paintings, photographs and sculptures, and architectural designs. IP shares many of the characteristics associated with real and personal property. For example, IP is an asset, and as such it can be bought, sold, licensed, exchanged, or gratuitously given away like any other form of property. Further, the IP owner has the right to prevent the unauthorized use or sale of the property.

Trademark and Domain Name: A trade mark (popularly known as brand name) distinguishes products/services from other similar goods or services originating from a different undertaking. Trademark not only distinguishes but also certifies a consistent quality. SMEs should ensure that the trademark they adopt is not similar, whether visually or phonetically, with other known trademark as it may not assist them in creating an image or market space for itself.

Also, avoiding use of identical or similar trademarks saves one from infringement proceedings. It is advisable to undertake trademark search for conflicting marks before adopting a trademark or initiating registration process. In case of trademarks, an image is created and presence in the market is distinguished. With the increasing digitization, it is important that IP is also adequately protected in digital space.

It is advisable to seek domain name registration of the registered trademarks. Often, unscrupulous competitors may infringe the trademark by registering a domain name with similar or identical trademark. Effective IP monitoring may be essential to avoid such passing off.

Patent: A patent is a statutory right for an invention granted for a limited period of time to the patentee in lieu of full disclosure of his invention for excluding others, from making, using, selling, importing the patented product or process for producing that product for those purposes without his consent. Patent protection helps materializing innovative ideas and inventions into competitive products that significantly increase profits.

Patent or trade secret?: In general parlance, any confidential business information which provides an enterprise a competitive edge may be considered a trade secret. Trade secrets are protected in most of the countries if it can be established that such information is indeed a trade secret. However, whether information constitutes a trade secret will depend on the circumstances of each individual case. There is no registration for trade secrets. Consequently, a trade secret can be protected for an unlimited period of time.

Article 39 of the Trade Related Aspects of Intellectual Property Rights (“TRIPS”) Agreement specifies certain general condition in order to seek protection of information as a trade secret:

  • The information must not be in public domain;
  • It must have commercial value because it is not known to public at large; and
  • Adequate steps are taken by the rightful holder of the information to keep it secret (e.g., through confidentiality agreements and made available only to few people on need to know basis with specific confidentiality obligation imposed on such people).

However, some of the following factors should be considered by SMEs before considering whether any innovation should be patented or maintained as trade secret:

  • Whether the innovation is patentable? If not, then maintaining it is a trade secret may be the best option.
  • Whether such innovation can be kept as secret for considerable period i.e. beyond 20 years which is patent protection period? If not, then again it would be advisable to seek patent protection. For example: The composition of Coca-Cola is kept as trade secret as a matter of business strategy and made known to only few employees.
  • Where the secret can be determined by reverse engineering? If yes, then it should be patented. It is imperative to note that trade secret protection is generally weak in most countries and depending on the existing statutory mechanisms and case law, the establishing of the fact by the claimant that the trade secret is infringed can be a herculean task.

Copyright: Copyright is a right given by the law to creators of literary, dramatic, musical and artistic works and producers of cinematograph films and sound recordings. In India, software cannot be protected however, protection thereof can be sought as a copyright. Copyright is a bundle of rights including, inter alia, rights of reproduction, communication to the public, adaptation and translation of the work.

Designs: Industrial designs refer to a creative activity which results in the ornamental or formal appearance of a product. A design right refers to a novel or original design that is accorded to the proprietor of a validly registered design. Many a times, the product may be known in the market due to its unique appearance or shape and hence, it is important to seek protection of designs.

Geographical Indication: Geographical Indications of goods refer to a country or to a place situated therein as being the country or place of origin of that product. Typically, such a name conveys an assurance of quality and distinctiveness which is essentially attributable to the fact of its origin in that defined geographical locality, region or country. For example: Scotch whisky made in Scotland.

IP - Innovation and Protection

Every product or service is a result of big or small innovations. Such innovation enhances the functionality or aesthetics of the product. All types of IP are protected on a national basis though there is an option of filing global application for patent, trademark, designs and copyright (as explained below). Thus, the scope of protection and the requirements for obtaining protection will vary from country to country. However, there are similarities between national laws and the current global trend is harmonizing the national laws. All the countries follow one of the two general paradigms. The first paradigm is that of copyrights and patents, which gives innovators strongly exclusive rights, for limited period of time, to exploit their innovations commercially. The second general paradigm is that of trademarks, unfair competition law and trade secrets, which provide weaker rights of potentially unlimited duration.

As IP rights are territorial (unless global protection sought), before exporting to or embarking in foreign territory, it is important for SME to ascertain that its product or service is not infringing any IP in such foreign territory and also seek protection for its own IP in such foreign territory. Protecting IP in export markets is crucial to enjoy the same level of protection in a foreign country, as are enjoyed in the domestic market.

International protection of inventions (patent) is provided under the PCT system. Under PCT application by filing one international patent application, one can apply for protection of an invention in each of the member countries. Similarly, under the Madrid system, an international registration by a single application for registration of the mark for each of the countries designated by the applicant can be made. International protection of industrial designs is provided by the Hague Agreement in several countries by simply filing one application with the International Bureau of WIPO.

India is not a party to Madrid Protocol and Hague Convention which facilitates global application for trademark and industrial designs, respectively. In case of copyright, if work is first time published in a country which is a party to the Berne Convention for the Protection of Literary and Artistic Works or member of the World Trade Organization ("WTO") bound by the provisions of the TRIPS Agreement, such copyright will be automatically protected in all other countries that are party to the Berne Convention or are members of the WTO. India is signatory to TRIPS and also a party to the Berne Convention.

Each country specifies priority period from the date of filing of the first application for applying for patents in such countries. After the lapse of such priority period, it is not possible to obtain patent protection in other countries which may result in loss of exclusivity and consequently loss of business opportunity as well as profits. Similarly, for trademarks as well as designs, most countries provide priority period from the date of filing of the first application for applying for trademarks and industrial designs in such countries, respectively.

Today’s economy is knowledge-driven and hence, the IP is increasingly becoming a vital factor for all businesses globally. SMEs are substantial contributors of innovations worldwide. However, due to various factors, SMEs are not able to fully exploit its IP. Nonetheless, it is imperative to protect IP under the applicable laws because in the absence of such protection, the innovation may be exploited by the larger competitors who have deep pockets to exploit the same in economical manner and on mass scale.

Most IPs require mandatory registration (save and except trademark and copyright in India) without which it may not be possible to restrain the infringers from infringing the IP. In order to turn ideas into assets, which have market value, it is pertinent to seek protection. SMEs must bear in mind that creating a comprehensive IP portfolio may be a considerable investment. SMEs must therefore carefully assess the costs and benefits of patenting, which suit its overall business plan.

Who's Helping SMEs

To encourage SMEs, various governments have framed programmes and are providing facilitation services. The World Intellectual Property Organization ("WIPO") has established a program to assist entrepreneurs in fully utilizing their IP assets. Recently, National Institute for Micro, Small and Medium Enterprises ("NI-MSME"), Ministry of Micro, Small and Medium Enterprises, Government of India has established the Intellectual Property Facilitation Centre ("IPFC").

IPFC for Micro, Small and Medium Enterprises ("MSMEs") is equipped with IP search and IP support service facility. IPFC is established to sensitize MSMEs on IP related issues and to facilitate the MSMEs to identify, harness and protect its IP for leveraging its business in a competitive world.

At present, the services provided by IPFC include training for creating awareness, general advisory on IP, filing of IP applications, prior art search, patent drafting, prosecution of IP applications, commercialization of IP whether by itself or licensing or otherwise. In addition to the aforesaid, IPFC shall also provide financial assistance to MSMEs for filing IP applications. However, such financial assistance in provided in case of national application only after the IP right is conferred by the relevant authority.

IP and Strategy

Generally, new products or services embody different types of IP. Any entity which invests its time and resources to protecting its IP will have an edge over its competitors in several ways. Effective IP protection ensures that the product or service offered by such entity is not copied or imitated by the competitor. Further, depending on the protection, access to new markets can be enhanced without stiff competition. Even if SMEs do not have resources to exploit the IP, protected IP can be exploited by way of joint-venture, franchise, license, etc. Where the potential of IP is enormous and resources are limited, SME may also opt for financing through private equity, venture capital, angel investor network, etc.

One of the critical principles in developing IP is to ensure that the IP to be developed does not infringe third party IP rights as any such infringement may turn into expensive and time consuming litigation affair. Such unintentional infringement can to certain extent be avoided by undertaking search. SMEs constitute about 90% of all enterprises worldwide and account for more than 70% of the production of goods and services. Hence, effective use by SMEs of IP assets is a key factor in ongoing economic development.

SMEs should focus on the role of IP in its business strategy and give an emphasis on patents in product development strategy, use of trademarks as far as possible for all its products to create brand equity, designs and geographical indications as marketing tools. SMEs often do not give adequate weightage to IP. Sometimes, the value of IP is not appreciated and its potential is also underestimated. However, protected IP is a valuable asset as it may generate income by commercialization; improvise the value of SMEs for seeking finance or in case of sale, merger or acquisition.

Licensing of IP should be a vital component of the business strategy of SMEs, especially for the innovations made in area unrelated to their current business. Whilst licensing is important, SMEs should ensure that the licensing agreement contains provisions based on commercial understanding pertaining to exclusivity/non-exclusivity, territory, only for the IP specified to the exclusion of improvements and developments thereon, royalty, period, etc.

IP is also an essential marketing tool for SMEs who are forward looking and desirous of increasing their market share. IP assists distinction between the products and service of the competitors. For example, if a product is offered under a trademark, continuous use of that trademark for such product creates an association of such trademark in the minds of the customer who associate such product with certain desired qualities. The complexities associated with IP acquisition may be minimized by understanding of the IP system and formulating in-house IP strategy.

Though developing and acquiring IP protection is a crucial stepping stone, effective IP management and enforcement of the IP rights is equally crucial. A single product or service may be protected by various forms of IP rights covering different aspects of that product or service. SMEs should obtain effective IP protection to comply its business plans. A remarkable IP portfolio is an assurance for SMEs growth in today's knowledge-driven economy.

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