7 minute read • published in partnership with Potter Clarkson
Insight: Protect or exploit – How should an engineering company’s strategy vary depending on their business model?
Historically almost every engineering company has relied on patent protection for their inventions. Patents enable them to preserve their competitive advantage and hold their competitors at bay while they took full competitive advantage of their assets and ideas. This could mean selling their inventions or giving other businesses permission to use them. Christopher Hartland and David Holt from Potter Clarkson look at how strategies should vary.
Today the engineering world very different and as the industry has developed, so have the business models supporting it. However, the pivotal part patents play in delivering these models successfully has not changed.
As this is a much more challenging and competitive trading environment, a range of more sophisticated business models have become prominent. The optimal choice for a company will depend on their market, area of specialisation, objectives, and the nature of services they provide.
This means, however, that the IP strategy required to deliver the chosen model is also more involved than it was when there was a straight choice between selling or leasing. In this article we’d like to look at some of the most popular business models for engineering companies and offer an overview of the IP consideration for each.
The product sales model
Arguably this is still the most prevalent business model in the engineering sector. However, it has been muddied by the increased likelihood that an engineering firm’s proprietary products will include software and other digital or technology solutions.
If you are pursuing a product sales model, patent protection will be essential. As we’ve already said, patents give exclusivity which will in turn maintain your competitive advantage and prevent other, potentially larger, players from stealing your ideas and ramping up their manufacture more quickly than you can.
However, your IP portfolio should also include designs if the aesthetics of a product are particularly valuable. While designs focus on the aesthetic presentation of a product – unlike patents which exclusively relate to technical innovation – they force a competitor to design the appearance of their product to avoid your protection. As companies like Apple have demonstrated, this need for competitors to design away from the most ‘aesthetically appealing’ version of a product can protect a substantial customer base.
And if your products are adopting more digital elements – AI is the most obvious example – trade secrets may be an avenue to pursue.
Trade secrets can protect subject matter that may not be suitable or eligible for a patent. This includes any piece of know-how (and ‘know-how’ covers formulae, algorithms, practices, and code) if it can be shown the secret in question will retain its commercial value as long as it is kept secret. Given digital assets are inextricably linked to formulae, algorithms, practices and code, it is easy to see why trade secrets are playing an ever-greater role in engineering firms’ IP armouries.
Licensing technologies or engineering solutions to other companies opens a new revenue stream as the owner of that IP can charge a fee – or ‘royalty’ – for the lifetime of the relevant IP (e.g. the patent or even know-how).
Licensing a patent can add significant value to a patent for the holder. The exact level of value will depend on several factors including the uniqueness of the patented technology, current market demand, the price the industry it serves is prepared to pay to use it, and the level of exclusivity of usage the patent and associated licence gives the licensee.
However, licencing does offer significant benefits in addition to simply being able to derive royalty payments. These include broader/faster market expansion as the patented technology is adopted geographically, potential cost sharing on R&D, reduced financial risks when bringing a new product or technology to market.
Depending on the terms of the agreement, licensing can also expedite further innovation. Licensees may be able to develop improvements to the relevant IP which can increase the value of the patent, and consequently the licence itself, over time.
However, if you are planning to pursue a licencing or licencing-based model, the return your licenses generate will be totally dependent on the terms you negotiate. This means it is vital you use a team that contains experts in both the contractual and technical sides of the deal you are seeking and can combine their perspectives to ensure you get the very best terms and maximise the commercial value of your patents.
Partnerships, joint ventures and collaborations
Collaborating with other businesses on specific projects offers significant benefits, most notably the opportunity to share resources, risks, and profits in what continues to be a hugely challenging trading environment.
However, collaboration can also present significant legal risks. These include the potential for litigation due to:
• Differences in goals, expectations, or decision-making lead to conflicts between partners Antitrust and competition law issues
• Contractual disputes regarding liability
• Regulatory compliance and confidentiality
• Breaches of non-disclosure requirements
Exit can also be a problem if the required provisions for the dissolution of the relationship (when the time comes) have not been put in place.
However, from an IP perspective the primary concern is the ownership of any IP created curing the collaboration. Contractual clarity over the ownership of any resultant rights must be established at the outset to avoid disputes later.
The fee-for-service model
Under this model, engineering firms charge their clients on a per-hour or per-project basis for delivering a fixed outcome. With a fee-for-service model it is very important to protect all the services and products that are used to provide those services.
It is also important to note that methods can also be protected with patents. Innovative methods may result from using standard equipment in new ways or in an unusual combination with another standard piece of equipment. Alternatively, if the workshop is not accessible to the public, it may be possible to keep the methods behind the services secrets with trade secrets.
It also goes without saying that any fixed term delivery model should be fully supported by specifically drafted terms of service that acknowledge the ownership, and the extent of permitted third-party use, of the IP involved. This is easier to facilitate when your advisers’ team contains attorneys and solicitors used to working together.
The subscription-based model
More and more engineering firms now offer subscription-based services where clients pay a recurring fee for access to engineering expertise, consultation, or maintenance services.
With a subscription model it is vital to maintain the relevant IP for as long as possible as, exclusivity can only last for as long as the relevant IP is alive. For example, in relation to patents, certain tactics can be used to achieve maximum term in the UK and Europe while additional steps can be taken in the U.S.A to increase patent term extension.
If you are also utilising trade secrets, maximising the duration of their protection comes down to managing them properly (including putting a proper off-boarding process in place for employees who are leaving to work elsewhere) is crucial. Once secrecy is broken, the protection is gone!
As with the fee-for-service model, it is also essential to underpin the terms of the subscription with detailed caveats regarding the ownership of and usage rights for the IP. A non-disclosure agreement or robust confidentiality terms in the main agreement is necessary to ensure those using your innovations have no room to divulge details to external parties.
The project-based model
When an engineering firm wins a tender to complete a project for a third party, there are very specific issues to address regarding who will own the IP created during the delivery of the specified output. All too often the standard for such models is that the person who commissions the work will own the IP. However, this is only the case if such provisions are included in the collaboration agreement.
That said, there is scope for a consultant to maintain ownership of specific elements of the IP developed if it falls outside of the scope of the project at hand. Again, confirming exactly what will be owned by each by each party will come down to the terms included in the agreement governing the project.
The same points should be observed if you are planning to outsource your engineering services outside of a formal procurement process. All the IP-related boundaries must be defined as carefully as the deliverables, deadlines, and fees have been.
The value-based pricing model
When you are charging based on the value delivered rather than hours spent or effort or materials expended, your agreement should always include terms that raise the value of the work performed if patentable innovations or valuable trade-secret-worthy innovations are developed during the course of the work. This clarity must also apply to the future ownership of any new IP developed.
Some firms now major on providing end-to-end solutions where they handle all aspects of a project, from design to implementation for the client.
Obviously, the protection of any existing IP used in the delivery is vital, as is establishing the ownership of any new innovation that could be created during the delivery of the project. The terms of the contract must also be watertight to protect your interests.
However, there is also your brand to consider. While the fact you offer a turnkey solution can be a substantial marketing benefit, it also presents certain threats to your brand. Can you ensure quality control? Will any dependencies on partners expose you if they don’t deliver? Do you relinquish any control over your customer experience? Are you opening yourself to any data or security issues?
As lawyers, we are naturally concerned about the potential for legal and contractual risks damaging our clients’ brands. Any contractual failure could trigger very public litigation which can easily bring negative publicity with it. A sensible way of mitigating this risk is to plan and draft your agreements well, and secure your IP carefully.