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Idealog—in the ideas business

A formula for secrets

If every factory in the world building Apple gadgets burned down tonight it wasn’t me—I was busy writing this—and it wouldn’t kill the company. It would recover and soon be profitable, based on its patents, trademarks and confidential information.

This is the holy grail of intellectual property, but if your idea is going to make it that far, you have to ensure nobody nicks it before you build the sort of legal muscle that Apple can now flex.

Wayne Hudson of technology and IP lawyers Hudson Gavin Martin points out the main pitfalls: “At startup level, most businesses don’t have the very best form of contract management,” he says. “Where this becomes apparent is when you engage with third parties: people writing advertising copy for you, or computer code. It’s in areas like this that you can get intellectual property leakage. If you don’t have the contract management, you can find yourself in a discussion over control of something you thought you already owned.”

In business, if you are relying on trust, it’s because you haven’t done the right paperwork. Mark Robotham’s experience as general manager of New Zealand Trade and Enterprise’s Escalator Service has taught him that careless talk can cost profits. “People talk about trade secrets, then I ask them how many of their staff and customers know about it. It’s then they realise it is actually common knowledge.”

Unfortunately a lot of Kiwi entrepreneurs close the stable door after their thoroughbred horse has been cloned in China. Unless you have gained legal protection over there, the best you can do is stop them at the border where you do have protection and prevent them selling in your target markets.

“Very seldom do we see people coming in to us to draft what they need beforehand,” says Hudson. “It is perceived to be expensive, so most startups are going to prefer to focus on sales and clients. It’s like insurance, and 99 percent of the time they get away with not having any.”

The risks are high. Investors will walk if they don’t think this is nailed down, and every time your idea gets copied you lose a big chunk of a market. But the truth is you can’t ever completely stop the imitators. There’s nothing that new in the world, and if patent protection were too broad it would be almost impossible to start new businesses in the first place and we’d still be in the age of steam.

The game is to hold up the competition long enough to get a head start. Normally you’ve got about six months from when your product first goes public to when it gets copied. And that’s with all the IP protection in the world. The time you buy is your window of opportunity to make money from your idea, innovate on the base product and stay ahead.

Industrial Research Limited is a Crown Research Institute specialising in developing and prototyping new technologies. Shaun Coffey, CEO, says this is the reality of the innovation marketplace. “Over the years, battles between rival products have usually been won by the product that best meets consumer needs. A good example is the videotape war between VHS and Betamax. Despite VHS entering the market two years after Betamax, the longer playing time of VHS tapes enabled that format to quickly become dominant.”

Here today, Taiwan tomorrow?

There are particular risks associated with moving production, distribution or even marketing elements overseas. So it’s a good idea to talk to an IP lawyer before your business gets airborne. Reading the terms and conditions of trade of whoever you are dealing with and getting a non-competition clause in the contract are your basic belt and braces. They should not be overlooked if you don’t want to be caught with your pants down.

Hudson says, “The only way to stop people copying what you are doing is a contract with a no-competition clause in it. Otherwise they will buy a couple of products, re-engineer them, get their tech people on it and begin selling. At that point, even if you do have a contract, you have to be prepared to sue them.”

His colleague Jason Rudkin-Binks believes that when it comes to the worst offenders, you don’t have much choice but to take action if you want to stay in business.

People talk about trade secrets, then I ask them how many of their staff and customers know about it. It’s then they realise it is actually common knowledge

—Mark Robotham

“You have got to stop absolute copies and those cases where people think they are buying your product but they aren’t,” he says. “And you have to act on blatant patent infringements—otherwise, what’s the point of obtaining a legal monopoly in the first place?”

Other than that, what you do depends on the strength of the opposition, how much money you have, how much time you wish to spend in law courts and what your global growth strategy looks like.

It’s perfectly acceptable to abandon whole areas of the globe in terms of your intellectual property rights to focus on your key markets. That way you can fund continued advancements in your product that hopefully the counterfeiters can’t match, always leaving them a step behind you in terms of quality, reliability and features. Yours remains the premium product, and you can get on with honing your distribution network. Meanwhile they act as free advertising for the basic idea and can even test markets for you to exploit later.

DNA’s Grenville Main cites another example where resorting to law may not be the way to go. “When Napster arrived, the industry response tended to be that it was infringing their market,” he says. “But when you look at the numbers, they have gone from millions of people being a potential market to tens of millions, without having to pay for the advertising. It just requires a new way to cash in.”

Trademark infringements are easy to identify almost anywhere in the world as long as their logo looks like yours and you registered it first. But for a small startup, a full-blown patent battle is best avoided. There are fairly uniform legal structures on patents around the world but unless you are up against a very feeble opponent, the process will draw in so much time, money and energy that it’s rarely going to be worth it.

If you have a patent, the first thing your opponent will tend to do is claim your patent is not valid. The opposition will try to prove ‘prior art’: that somebody prior to you had already made the same thing in your country. If they find it, you have no patent and no protection. Patent offices themselves are not able to do full checks of everything out there before issuing their patents, so this can come as a nasty shock.

There’s plenty of sabre-rattling, but what it usually comes down to is doing a deal. Whoever has the strongest claim or the scariest legal team may offer to license the other to continue trading with the disputed intellectual property.

This is especially common when the victorious company has no intention of exploiting the market its victim is in anyway. Many large corporate patent owners will often consider their market share and position, and then license their disputed rights to each other to ensure that both entities continue to profit.

“As competition you may be able to reach customers or markets they can’t,” says Hudson, “but they will want a share in that.”

All this means you had better have done your originality checks thoroughly, patent or no patent. The best way to avoid the possibility of losing big chunks of your business plan is to do your homework in the first place. A really thorough check to see if your idea is new from the outset is crucial. You are planning to base your life on that knowledge for the next few years and you will be betting all your money on it.

One of the easiest things to overlook is that ‘competition’ does not necessarily mean someone producing the same product as you, points out Jonathan Kirkpatrick, chief executive of AUT incubator Business Innovation Centre. “‘Competition’ is the people going after the same dollar that you are.”

When Henry Ford started pumping out motor cars, he didn’t say, ‘Well, virtually nobody has a car yet, so there’s no competition.’ There was competition—from trains, horses, or even saving the money and not going anywhere. It is especially easy to underestimate the power of this last form of competition. If your value proposition isn’t strong, and your product is not needed, it may be irrelevant how clever it is, because nobody will want it.

Hudson says, “The first thing everybody should do is see if it has been done before. If it failed the first time you can go on and do something else. If someone else already has the technology, maybe you save yourself time and money by buying into it. If we can get people doing more forward-planning and checking, it will avoid the process of reinvention. You will enhance the payback by not closing your eyes and hoping for the best.”

IP help on the cheap

A thorough search of the following websites may tell you if you have just reinvented the axle-based circular locomotion device.

When doing your searches, you will need to think laterally: how might someone describe what you are doing in another language or in another time? And don’t mistake your quick search for the advice of an expert; consider it, at best, a sanity check.

If you are producing software, the New Zealand Software Association has basic contracts available for $300.

Originally published in Idealog #26, page 46

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