Insight: Protecting IP rights in an economic downturn

Manufacturing businesses are experiencing turbulent times at the moment but they should not overlook protecting their brands and leveraging opportunities that intellectual property can bring. Marcus Collins, Intellectual Property partner at Irwin Mitchell, discusses some of the issues which could arise from an economic downturn. 

Recessionary times present two sides of a coin. On the one side, there is the obvious desire to save money; on the other, there is also the opportunity to maximise the assets you already have. This is certainly the case with intellectual property.

Consider an IP audit

The starting point for either of those objectives is to make sure that you know what you have in the store cupboard in terms of IP rights. An audit helps an organisation achieve this.

Following an audit, a business might decide there are some things no longer of particular interest to it, but which might be of interest to somebody else. An IP audit can therefore develop the opportunity to perhaps sell some IP rights in order to generate income for other parts of a business or for new projects.

Alternatively, an audit might reveal that an IP asset has not been exploited for a long time and no longer has the same value that it once enjoyed. For example, if a registered trade mark has not been used for a number of years (typically five years in many countries), it could be vulnerable to revocation for non-use. In the absence of the required use, deploying the registration as the basis of an infringement action could result in the proceedings being successfully defended by the alleged infringer relying on the registration’s vulnerability to revocation. The value in maintaining the asset may be brought into question. Though consideration might be given to whether there is value in maintaining such an aged asset; there may, however, be something to be said for maintaining the registration for its psychological value. In other words, even if a mark may be vulnerable to revocation, just having it on a register can sometimes deter a less robust copycat who would otherwise have to evaluate whether the registration’s owner could produce sufficient evidence of use.

Economic downturns tend to see an increase in disputes

Experience shows that economic downturns tend to lead to an increase in IP disputes.

In a recession or economic downturn, rather than spending money on acquisition, businesses tend to fortify, preserve and rely on what they already have. This in turn leads to a more defensive posture being exhibited by IP owners. This is often a factor of the tendency for some competing businesses to view simply copying or riding-on-the-band-wagon of other people’s ideas to be a perceived easy win rather than creating something of their own. The inability to resource innovation leads to imitation, which in turn leads to litigation.

Forewarned is to be forearmed

Taking a more proactive approach to litigation is one way to mitigate the risk of being infringed. The first thing to do would be certainly to watch out for instances of potential infringement. This can include briefing sales staff going out into the market to be particularly vigilant. In the instance of trade marks, having a good watching service in place for core brands is advisable to identify attempts at registering potentially conflicting marks. Similar watches can also be set up for company names, internet domain names, and adwords used to promote the ranking of hits in online searches for a particular product.

If there is a perceived threat from imported goods infringing IP rights, another suggestion is to avail yourself of the Application for Action (‘AFA’) procedure offered by HM Revenue and Customs, known colloquially as a ‘customs watch’. HM Revenue and Customs can be briefed on potential counterfeit or infringing goods coming into the country. Suspected goods would be detained by customs officials vigilant for them as a result of the AFA, and the opportunity afforded to the IP owner to take Court action on the basis of IP rights to prevent their further distribution.

Get regulators to do the work for you

When times get tough financially, the less scrupulous business may seek to make unjustifiable, or even downright false claims in advertising. They may even try unfairly to compare their goods with those of other traders. This can lead to breaches of advertising regulation and rules about fair trading and comparative advertising. The threat of reporting a competitor to the Advertising Standards Authority (‘ASA’) for false or unverifiable advertising claims may, for example, result in the claim being withdrawn or altered. Should the falsehoods persist or threat not be heeded, then regulator could be invited to take an interest in investigating and pursuing the issue without the need for further action by the reporting party.

Green credentials such as claims to carbon neutrality or claims about product sustainability are frequent and attractive to businesses. However, (often unwittingly) false or misleading claims of this sort are increasingly chastised by the ASA and the Competition and Markets Authority under the recent ‘Green Claims Code’.

Employee mobility

Often in recessionary times, employees will see an opportunity to move elsewhere or perhaps set up their own business. Regrettably, they may also face redundancy and meet a highly competitive employment market. As part of this, they might be tempted to take confidential information or proprietary know-how with them, particularly such things as customer lists and financial data.  In this context, it is a good opportunity to re-visit employee contracts to ensure that sufficient protection for confidential information is anticipated. It is also a good idea to make sure that data protection policies are not only rigorously enforced but also that staff are made fully aware of them.

A very easy tip for businesses is to seed databases and computer software code with traps. In the instance of a database, a fake contact could be created. If that contact were subsequently approached, it would suggest (and also may be excellent evidence of) the database having been taken and used without authorisation. Similarly, adding non-functional lines of code into a computer program would potentially reveal copying if it were to turn up in another business’ software – there would be no other explanation for the superfluous code being present.

Dealing with restructuring scenarios

It is important to ensure contractual arrangements foresee the prospect of one party becoming insolvent. It may be the case that a successor business which has purchased a distressed one might seek to get out of obligations that the now demised business had given to third parties. Such evasion of obligation can result because a proper transmission of undertakings clause was absent in the contract between the original parties.

In relation to licences of IP rights, for example, take careful consideration over what happens if a party becomes insolvent and whether that triggers certain termination provisions. Depending on the circumstances, a licensor may wish the licence to terminate upon a licensee’s insolvency so a substitute licensee can be installed without delay. Conversely, a licensee may find its licence novated by a new licensor acquiring an IP asset from an insolvent licensor, with the effect that the licensee may now be licensed by a new, undesired licensor.

Another IP-related issue during recessions, is that businesses can easily end up not owning what they think they do. Invariably, administrators provide no warranties over transferred assets. Purchasing distressed IP assets requires the purchaser to be especially vigilant and diligent. Historic transfers of intellectual property are frequently not recorded at the appropriate intellectual property office(s). Although legally the title has passed, sometimes the follow-up diligence is not done correctly. Proof of chain of title is important.

A party to a contract may try to get out of a bad deal. This may be attempted by alleging or engineering a material breach of contract by the counterparty. It is therefore important to ensure that an IP agreement defines with sufficient clarity what is meant by a material breach, and that any such breach is capable of remedy upon suitable notice. Parties are advised to ensure that they keep accurate records of royalty payments, records of what happens to ‘run-offs’ (over-production outside the terms of the licence), and that adherence to quality control requirements and promotional activity are met.

In a restructuring, assets are frequently moved around intra-group. Here one has to be careful of any tax implications that may arise from where the royalties are now flowing to a different entity within an organisation. Also, make sure that, if intellectual property rights are held by a particular company and then licensed within the group, the requisite intra-group licences are in existence and in writing (not merely agreed upon verbally), and suitably registered.

Final thoughts

There is a lot to consider on this topic, but it is worth noting that research studies over the years show that business focused on innovation and IP tend to have higher growth and survival rates in comparison to less IP-savvy businesses. When economies decline, traditional, tangible assets such as real estate, plant and machinery can often decline in value; whereas, IP can retain its value or even appreciate. Though not always recession-proof, IP is often a buoyant asset, maintaining its value even through tough economic times. Businesses both big and small should understand the value of IP. During difficult times, it is arguably even more important to protect and exploit it.