Protecting your assets

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Graeme Malcolm, the chief executive of Glasgow-based M Squared Lasers, puts it best. “In an innovation-based business, intellectual property is at the heart of your value creation,” he says. And his business is certainly based on innovation: in April 2012, BGF invested £3.85m of growth capital in the company, in part to fund a research and development program that consistently produces advances in the lasers and photonic optical instruments that it manufactures.

Unfortunately, innovation can be copied by counterfeiters who may lack the imagination to generate their own ideas but certainly have the skills to rip off other people’s work. Attacks on intellectual property (IP) represent a serious threat to many growing companies, undermining their ability to generate viable returns on investment. For small companies just beginning to grow, these attacks may threaten the business model altogether.

Government figures suggest too few small companies are doing enough to protect their IP, or even to get to grips with the value it represents. Just 6 per cent of small and medium-sized enterprises (SMEs) take out patent protection for their innovations, the Intellectual Property Office says, while 96 per cent do not factor the value of IP into their business strategy or balance sheets.

Part of the problem may be that small businesses (and large ones too) do not understand that IP is a broad term – essentially it is anything that the business creates from an original idea. That includes the obvious things such as how your product functions, but also ideas that you might not immediately see as IP – your company’s logo, for example, or the wording on your marketing literature.

Different types of IP require different types of protection. A trademark, say, will protect the unique name of your company and enable you to distinguish your products and services from those of your rivals. Trademarks are important for companies attempting to establish brand value, and you can register a range of materials, from the company name to its logo – or even its advertising slogan.

A patent, meanwhile, will protect a product that your business has developed – both the processes that make it work and how it is made – by preventing others from copying, manufacturing or selling something based on your idea. It is also worth noting that the “Patent Box” tax rules introduced earlier this year enable companies to claim a reduced tax rate on revenues generated by patented innovations.

It is also possible to guard against counterfeiters who want to copy the look of your product, by registering the design – including features such as shape, colour, texture and the materials used.

Copyright, an automatic right that covers creative work, may also be a useful way to safeguard IP. You can use it to protect a wide range of written content generated by your business – everything from product literature, to advertising, to what’s on your company website.

In practice, companies that are serious about safeguarding the value of their IP use all of these protections, as well as a range of other tactics – and they also think about when trying to do so doesn’t make commercial sense.

“We work very hard to protect our IP,” says Graeme Malcolm. “We work with patent lawyers and even have someone seconded to us one day a week to work on our patent portfolio and look at our innovation process.”

In addition, M Squared has other strategies for defeating would-be imitators. “We work to build trade secrets into our products – innovations that would be very difficult for counterfeiters to reverse engineer such as a piece of software where we do not make the key coding available,” Malcolm adds.

“We also license our innovations, often to much larger companies with IP that is adjacent to ours, or to governments. We think infringers are more likely to think twice about ripping off, say, a US Government patent than one held by a small Scottish business.”

Clearly, this is battle being fought on many fronts. And similarly, Barrie Hadfield, the chief technology office of Workshare, says his company is fighting an almost continuous battle to protect its IP.

Workshare’s technologies enable businesses and other customers to securely share documents and store large amounts of sensitive information on a cloud-based platform. The business, which in September 2012 received £20m of backing in a joint investment from BGF and Scottish Equity Partners, takes its competitive advantage from its IP so safeguarding it is crucial.

All the more so since the company does so much business in the US, where IP laws, especially governing patents, are different. “The law in the US can really favour large companies that have armies of lawyers engaged full-time on nothing but IP,” Hadfield warns. “Small, growing businesses can get muscled out.”

“My advice to smaller businesses would be that it is crucial to choose your IP lawyer very carefully,” he adds. “You need someone with whom you can really build a personal relationship – I speak to our IP lawyer at least once a fortnight and I don’t have time for technical legal arguments; I want straightforward information and advice.”

It is also important to keep an eye on changing legislation. Hadfield points to the shake-up of the patents system that came into effect in the US earlier this year as an example. One problem is that the process of applying for a patent has been simplified – that may sound like a positive development, but it has enabled large companies to automate the process of applying, Hadfield warns, and as a consequence many are churning out patent applications in such quantities and at such pace that smaller businesses aren’t getting a chance.

The only defence, Hadfield adds, is constant vigilance – in every market where your IP is at stake and for every part of your business. “We do some really specific, innovative new things at Workshare and it’s always exciting and fulfilling to apply for patents for them,” he says. “But most of our patents are more mundane – they’re for ideas or processes that might seem really obvious from the outside but which will be patented by someone else if we don’t do it, potentially to our huge detriment.”

Having sought to head off threats to its IP at the pass, Workshare also accepts that there are times when it will have to take an aggressive stance – because not everyone is prepared to play by the rules. “I’ve been at Workshare since the beginning in 1999 and I think every time I’ve had to consult lawyers or go to the courts it has been because of an IP issue,” Hadfield adds. “We have sometimes felt it necessary to take legal action against people that we believe have infringed our patents.”

Not least, this is important to investors in the company, he points out – during the negotiations over funding with BGF and Scottish Equity Partners, IP protection was certainly an important topic of conversation. Potential financiers will be concerned about investing money into a business that is vulnerable in this area.

Legal action can be one way for a company to send out a message to stakeholders and rivals alike that it takes the protection of its IP very seriously – and will do whatever it takes to counter any threats. “The majority of the work we do on IP is about preventing other people exploiting our ideas in the first place,” Hadfield says. “But where that defensive work hasn’t been enough, there may be no choice but to go on the offensive.”

PR can be a powerful weapon, agrees Rob Law, the founder of Trunki, the children’s luggage company. “We believe that by building up a reputation for taking IP seriously, word gets round and hopefully that puts off imitators,” he says.

BGF invested £3.92m in Trunki in April 2013, partly to help it develop new products. But Law says he has had to make the battle against the counterfeiters a priority to protect his existing innovations.

“There are 3,000 listings of products that infringe our designs on Alibaba [the Chinese equivalent of eBay] at any one time,” he says. “We sell in 96 countries and have relationships with retailers, distributors and customers in each one. We rely on them to report potential infringements to us so that we can instruct solicitors – they then instruct local solicitors, who begin with cease and desist letters.”

Like Workshare, Trunki isn’t afraid to take further action where those warning shots don’t hit home. In August, the company won a crucial victory in the High Court against PMS International, a Hong Kong based company that had sought to sell the “Kiddee Case” into Europe. Noting the similarities between this product and Trunki’s ride-along suitcases, the Judge ruled that PMS had infringed.

Having blocked sales of the rival product in Europe, Trunki must now decide whether to sue for damages. In the meantime, it is making sure people know about the case. “Maximising the PR on that victory was very important and we even managed to get coverage of the case in the South China Morning Post,” Law says.

His advice to other small businesses is to consider potential IP protection strategies carefully – the right option depends on the product, he argues. “For example, I never filed for a patent for our ride-on suitcase because I thought it would offer very limited protection and that people would simply find a way round it,” Law says. “Instead, we registered the design in Europe, which prevents people imitating the appearance, rather than focusing on the function.”

Barrie Hadfield’s tip, meanwhile, is not to compromise on the quality of the external advice. Small businesses that are dependent on their IP can’t afford to have their future jeopardised because the issue has been neglected, he says. “That’s why we have constant representation in place on IP,” Hadfield says. “I know how important this is but if I was doing it on my own, I would just be swamped.”

At M Squared, Graeme Malcolm also argues that it is important to deploy limited resources carefully – try to play to your advantages, he adds.

“We have to be selective about which jurisdictions we focus our efforts on policing, so we concentrate on markets where we think copycats have the right skills to be capable of stealing our ideas,” he says. “However, as a small business, we do have one advantage – we’re nimble enough to be so fast with our innovations that by the time the imitators have copied us, we’ve already moved on to the next thing.”

For small businesses that may need help with IP protection, there is support available. The Intellectual Property Office offers a range of online advice, for example, and also runs regular IP workshops and training sessions that are aimed at small businesses.