WIPO NATIONAL SEMINAR ON ENHANCING AWARENESS AND
BUILDING CAPACITY OF SMALL AND MEDIUM-SIZED ENTERPRISES
(SMEs) TO BENEFIT FROM THE INTELLECTUAL PROPERTY (IP)
SYSTEM
Jointly Organised By
World Intellectual Property Organization (WIPO)
Intellectual Property Corporation of Malaysia (MyIPO)
Japan Patent Office (JPO)
Hotel Regent
Kuala Lumpur
7 – 8 September 2006
Leveraging IP Assets: Role of IP in Improving Enterprise Profitability
Through Direct Exploitation, Licensing, Franchising And/or
Merchandising
By
Ong Chui Koon
SIRIM Berhad
All rights Reserved 2006 SIRIM Berhad
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A.
TYPES OF INTELLECTUAL PROPERTY RIGHTS AVAILABLE TO SMEs IN
MALAYSIA
a). Name of business : Trade Name
b). Distinctive signs : Trade marks (both registered and unregistered
marks)
c). Creative designs (appearance or look of finished products) : industrial
designs
d). Innovative products and processes : Patents and/or utility innovations
e). Cultural work, artistic work, literary works (including computer
software) and compilation of data : Copyright
f). Trade secrets (customer lists, sales tactics, marketing strategies,
manufacturing processes, know-how, formulae, etc.) : confidential
information
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Of the 6 types of IP rights listed above, trade mark remains the most widely
known form of protection among the SMEs.
Second most widely known form of protection among the SMEs is
industrial designs.
Third most widely known form of protection among the SMEs is patent.
No record available on copyright protection since there is no registration
system in Malaysia (however there is a move towards voluntary
registration).
No record of Secrecy Agreements or Confidential Agreements concluded
since it is not compulsory to register such agreements.
B.
ROLE OF IP IN IMPROVING ENTERPRISE PROFITABILITY
There are many ways to profit from IP. This can be done through:
a)
b)
Direct Exploitation of the IP – Do It Yourself or Joint Venture
Allowing others to use the IP – Licensing, Franchising and/or
Merchandising
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C.
DIRECT EXPLOITATION OF THE IP
1.
Do It Yourself
a).
Patents
- Start your own manufacturing plant and produce the products cover by
the patents.
-Advantages: Have full control of the company business. In the long run,
can make a lot of money
- Disadvantages: Involves high risks, require high capital and your
resources are spread thin, require the skills of an entrepreneur, have to do
everything yourself (marketing, source for raw materials, recruitment of
staff, etc.), not making money during the first few years of operation,
cannot secure loans from banks to finance the commercialization of new
inventions, etc.
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C. DIRECT EXPLOITATION OF THE IP (Cont’d)
b). Trade Mark
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Use the trade marks on your products which you have manufactured.
- Promote your trade mark through advertising so that customers buy
your products and begin to patronize your business on a regular basis.
c). Industrial Designs
- Come out with good design so that customers are attracted to the
products that you have manufactured for sale
- Vary your designs to provide product variations to appeal the taste of
different customers
d). Trade Secret/Confidential Information
- Use them to your advantage so as to ensure that you have a competitive
edge over your rivals producing similar products.
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C. DIRECT EXPLOITATION OF THE IP (Cont’d)
2.
Joint Venture With Someone
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Start with a joint venture agreement
Use your IP as a capital input to the joint venture
Help to spread the risks of business, especially in new technology
areas
Can use the existing production line of the joint venture partner
(reduce cost – need not set up new manufacturing plant)
Joint venture partner already has a ready pool of skilled workers
(reduce cost and time in sourcing for workers)
Initial capital output can be reduced especially when one has limited
funds (joint venture partner can contribute to the initial capital layout)
Joint venture partner is already a good entrepreneur and is able to
contribute positively to the exploitation of the IP
Joint venture partner already has proven track record and hence can
secure financing more easily.
Can use the existing distribution line of joint venture partner (Speed at
which your new products can be marketed is improved)
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C. DIRECT EXPLOITATION OF THE IP (Cont’d)
3.
Sources of Funding
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CRDF (administered by MTDC under MOSTI)
TAF (administered by MTDC under MOSTI)
ITAF (administered by SIRIM under MOSTI)
SMIDEC Fund (administered by SIRIM under MOSTI)
MGS Grant scheme (administered by MDC under MOSTI)
E-Manufacturing grant (under MITI)
Market Development Grant (under MITI)
MAVCAP (Venture capital) (under MoF)
Techno-Fund (under MOSTI)
Branding Grant (administered by MARTRADE under MITI)
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D.
1.
ALLOWING OTHERS TO USE THE IP
Licensing
a). Meaning of Licence
- Licence means the permission to act or - as a verb - permit or authorize.
- For example, to licence a patent is to give permission to perform the acts
that are protected by the exclusive right of the owner of the patent.
- Trade marks, industrial designs, copyright, confidential information and
know-how, etc can all be licensed.
- Licensing commences with a contract or agreement that may take many
shapes and may be voluntary or compulsory.
- A voluntary licence agreement is entered into by two parties by free-will.
They are the licensor and the licensee consisting of physical or legal
persons (e.g. companies)
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
- A compulsory licence is the result of a regulation enforced by a state
authority or court order through which the licensee has obtained the
licence although the licensor has been opposed to the idea.
b). Types of Licensing Agreements
i). Non-Exclusive Licences
Non-exclusive licences give the licensor both the right to use the licensed
right and to let others do the same, that is to say that more than one
licensee might exist at the same time for the same object.
ii). Exclusive Licences
An exclusive licence implies that the licensor has agreed not to give a
licence to any other licensees for the same licensing object and area and
the licensor will not make use of the licensed right.
iii). Sole Licences
The sole licence is the same as the exclusive licence with the difference
that the licensor has conditioned himself to use the licensed right.
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
c). Why Licensing?
i). Extra income for a company
One further way to make profit from an invention.
ii). Risk Minimization
Share the burden of responsibility with others. Difficulties and risks
caused by being a foreign company in a foreign country disappear. Risks
of nationalisation, double taxation, special taxation of foreign-owned
companies in a foreign country disappear.
iii). Capital saving
No need to spend money to purchase production units or set up
manufacturing plants.
iv). Flexibility
Through easy adjustment to prevailing situations, the licensor and licensee
can best decide on how to use each other’s resources and capacity
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
v). Commercial boundaries are eliminated
Restrictions on currency flows, quantitative import restrictions and
customs fees that make the exchange of goods difficult among countries
can be avoided.
vi). Lower costs
A product made on licence can be put on the market cheaper than the
same product exported. These savings are a result of costs of labour,
materials, transports and less tax pressure.
vii). Means of acquiring new technology or technique
Through cross-licensing or “pooling”, your company may improve your
products by adding more patented features
viii). Means of avoiding costly and uncertain patent litigation
The burden will be on the licensee to take infringement action or to defend
an infringement proceeding.
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
ix). Easier Marketing
Less market research is needed and can easily establish contacts with the
foreign markets unknown to him. Designs and materials may be changed to
suit the actual market.
x). Broad field of contacts
Through contacts with the licensee and associates, the licensor may find a
market for some of his own products. The combination of what he acquires
through the licence and what he himself possesses of know-how in
production methods, etc., might open doors to another chain of licences with
a third party.
xi). A way of spreading or extending their existence and what they represent.
Instead of the patent holder going everywhere to exploit the patent, another
person may take over the right to exploit the patent. This person may do so
entirely or only in part and in a certain region.
xii). Competitive advantage
A means of achieving a position one step ahead of your competitors
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D.ALLOWING OTHERS TO USE THE IP (Cont’d)
d). Important Factors to Consider When Preparing a Licensing Agreement
i). Scope of Licence
ii). Territory
iii). Minimum Performance
iv). Best Endeavours
v). Transfer of Technology
vi). Access to Improvement
vii). Dealing With Infringements
viii). Protection of Trade Marks and Designs
ix). Protection of Confidential Information
x). Protection of New IP Generated during the tenure of the Licence
xi). Payment terms
xii). Sub-Licensing
xiii). Account keeping
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
d).
Important Factors to Consider When Preparing a Licensing Agreement
(Cont’d)
The preparation of a licensing agreement can be undertaken by a patent agent
who form an important link-man between the parties to a licence situation.
In arriving at a properly structured agreement, a number of stages are involved negotiation, preparation of draft agreement, agree to a situation, and a win-win
contract.
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D.
e).
ALLOWING OTHERS TO USE THE IP (Cont’d)
Malaysian SMEs Experience on Licensing
In the early 70’s and 80’s - Malaysia encouraged Foreign Direct Investment by
Multi-National Companies (MNC).
As a result, a vast majority of the SMEs in Malaysia are contract
manufacturers for MNC
SMEs manufacture parts under the vendor programme - supply parts to the
MNC under specific agreements and the parts are made according to specific
technical specifications provided by MNCs.
MNCs provide training to the SMEs and sent their engineers to work with the
SMEs to ensure that the parts made by the SMEs complied with the technical
specifications laid down by the MNCs.
Agreements signed between the MNCs and the SMEs are generally
technology licensing agreements - Agreements vetted and lodged at the
Malaysian Industrial Development Authority (MIDA). Reason: the Malaysian
Government wants to ensure that the SMEs are not short-changed when
signing the technology licensing agreements with the MNCs.
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
During the late 80s and early 90s, some of these SMEs began to design and
fabricate machinery used in the manufacture of parts and/or components. The
setting up of PROTON in 1983 and PERODUA in 1985 further encouraged the
SMEs to design and fabricate machinery used in the manufacture of
automotive parts and components.
Some of these SMEs, for example Eng Technologies and LKT Industry
become very successful and are listed on the Kuala Lumpur Stock Exchange
(now renamed as Bursa Malaysia).
During the late 90’s and the beginning of the new millennium, MNCs started to
shift their operations outside Malaysia and move to Thailand, Vietnam and
Cambodia. Accordingly some of these SMEs follow their customers and
started to set up manufacturing plants outside Malaysia.
Note: Recently MIDA has stopped the practice of registering licensing
agreements concluded between MNCs and SMEs. The reason for this is that
the Government is of the opinion that SMEs are now mature enough to handle
the licensing issue on their own.
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
The Government move during the last decade to instill IP Awareness among
the SMEs has resulted in some patent registered and owned by SMEs in
Malaysia. At this point in time no statistics is available from the SMI
Association regarding the exact or estimate number of patent applications
filed or registered by SMEs in Malaysia. However it can be assumed that the
figure is low based on the fact that the total number of local patent
applications filed at MyIPO is around 500 cases per year (based on 2005
records) and a majority of these local applications were filed by the
Universities and Government research institutions.
No record available on SMEs licensing their patent rights to third party.
However there are a few SMEs who actually exploit the patents on their own.
Examples: Carotec Sdn Bhd. (Perak); Super Vitamins Sdn Bhd.(Johore),
Fumakilla (M) Berhad (Penang),
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D.
2.
a).
ALLOWING OTHERS TO USE THE IP (Cont’d)
Franchising
What is Franchise?
A method of marketing and distributing based on a two parties relationship the franchisor (the owner and granter of right) and the franchisee (the
recipient of right).
The right granted is for the purpose of running the business by using the
trade mark or trade name based on a specific system, at specified location or
area and within a specified period of time.
Malaysia Franchise Act 1998 - aims at creating a systematic registration
system to oversee a well-managed and healthy growth of franchise business
in the country
b).
Franchise Relationship
Franchise system involves two parties: the franchisor and the franchisee. The
franchise relationship can be divided into several forms and approaches:
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D.ALLOWING OTHERS TO USE THE IP (Cont’d)
b). Franchise Relationship (Cont’d)
i). Master Franchisee
A franchisor gives the right to the master franchisee for certain territories,
states or countries.
Where the right is given in a territory, the master franchisee has the right to
set up sub-franchising - area franchisees or unit franchisees.
Franchisor: imposes conditions for sub-franchising - how many outlets to be
opened within certain period of time, preparation of supporting system for
sub-franchise programmes, criteria of selecting sub-franchisees and their
partners, etc.
Master franchisee - has the choice not to practice sub-franchising and expand
the business on his own by opening outlets that are fully owned by him in his
specific territory.
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
ii).
Area Franchisee
Given the territorial right by the franchisor or by master franchisee.
Exclusive right is to fully operate its business on its own without involving
any sub-franchise.
Area franchisee is also expected to follow the outlet development schedule as
being outlined by the franchisor.
Otherwise, the right could be transferred to other party.
iii). Unit Franchisee
An individual entrepreneur, or a small company, holding the right given by the
franchisor to operate a specific franchise business in a specific location or
premise only.
Not allowed to practice sub-franchise.
Usually allowed to own more than one outlet depending on the business
performances.
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D.
c).
ALLOWING OTHERS TO USE THE IP (Cont’d)
The Different Types of Franchising System
Three types of popular franchise system. They are
i). Trade Mark/ Trade name Franchise
Closely resembles licensing whereby the franchisor gives the franchisee the
right to manufacture products by using the brand name, trade name, trade
mark, logo, caricature and others owned by the franchisor for each area.
The approach of this type of franchise does not require a complete system,
however the franchisee needs to be supervised in order to ensure the quality
and good name of the brand is preserved.
ii). Product Distribution Franchise
The franchisor gives the franchisee the right to sell and distribute products
produced by the franchisor.
Franchisor provides guides and training to the franchisees on how to manage
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
the product distribution.
Development of its operating system is not so comprehensive.
Popular among automotive industries such as Edaran Otomobil Nasioanl
Berhad (EON) and some chains of petrol stations such as Petronas, Shell,
Mobil, etc.
iii). Business Format Franchise
Most comprehensive and popular type of franchise system.
Franchisees are given the right to use the brand name, distribute the
franchisor’s manufactured goods, and the right to duplicate the whole
business system as practiced by the franchisor.
In business format franchise, the franchisor is responsible to prepare the
franchisee beginning with the concept development and selecting the
location, up to the operation manual, training, accounting system, advertising
and promotion, and continuous business development assistance.
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D.
d.
ALLOWING OTHERS TO USE THE IP (Cont’d)
Why Franchising?
i). Increase the effectiveness of its operation management
Enjoys the economies of scale from bulk purchasing and the execution of
more aggressive centralised advertising and promotions.
ii). Penetrate a Wider Market
Immediately and effectively without involving major capital (as most of the
investments are borne by the franchisee) penetrate local and overseas
market.
iii). Bigger Marketing network
Franchisor will be able to enjoy bigger product marketing networks and
services as well as make rapid increase in production possible.
iv). Manpower requirement reduced
Avoid having to recruit big manpower and pay huge salaries. Their places are
taken over by the franchisees.
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
v). Overcome local market red tapes
Through the franchise system, the franchisor will be able to transfer parts of
its responsibility to conduct any feasibility study, selection of location, staff
training, local advertising, and other red tapes to the owner and local
entrepreneurs who are familiar with the local environment.
e). Important Factors to Consider When Preparing a Franchise Agreement
i). Scope of agreement
ii). Background of the Franchisor and Franchisee
iii). Use of Franchisor’s Trade mark or service mark
iv). Use of Franchisor’s other IP rights
v). Franchisor’s obligations
vi). Franchisee’s obligations
vii). Restrictions on sales of specific goods/services by franchisee
viii). Territory
ix). Payment terms
x). Termination
xi). Financial Statements/Account Keeping
xii). Managing conflict and dispute solution
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
f). Malaysian SMEs Experience on Franchising
The developments of franchise in Malaysia, especially those of home grown
franchise are relatively new.
There is still a lack of experience and expertise in the franchise business in
the country.
The Malaysian Franchise Act 1998 would be able to provide guidance to future
franchisors, master franchisees or franchisees on basic matters that need to
be fully understood and the requirements to be fulfilled before getting
involved in the business.
To help the franchise industry in Malaysia, the Government has organized the
Franchise Development Programme since 1992. The programme aimed at
providing basic training on franchising and to educate the entrepreneurs on
what are the do’s and don’ts in franchise business.
The Malaysian Franchise Association has also published a book entitled
“Franchising in Malaysia : A Brief Handbook” for the benefit of those who
aspire to go into this form of business.
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
Although the number of home-grown franchisor in Malaysia is small, there are
a few very successful ones.
Examples:
Marybrown - fast food
Secret recipe - a food outlet selling a variety of snacks and meals
Smart Reader - children education
Kinderland - child care and nursery
Rotiboy - selling bread, pastries, etc.
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D.
3.
ALLOWING OTHERS TO USE THE IP (Cont’d)
Merchandising
a). What IP are most often merchandised?
- Technology (patented and non-patented) and know-how
- Secret processes
- Copyright (movies, music, songs, software, etc.)
- Industrial Designs
NOTE:
Under the Malaysian Trade Marks Act 1976, trafficking of trade marks is not
allowed. This is because in trade mark, the element of use is very important.
One cannot simply register a mark and has no intention to use the mark as a
trade mark later on.
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
b). What to Consider When Merchandising IP
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Need to know the value of the IP that you are selling
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What is your selling price
- Need to know who are the potential buyers
- Need to know who are your competitors
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Is there a similar technology existing in the market?
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Negotiation with your buyer – prepare your ground work
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Conclude agreement with the buyer (put in your terms, etc)
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Upon receipt of payment (or part payment), transfer the rights of the IP
to the buyer
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
c).
Consideration For IP Valuation
- Type of IPR
- History of creation, development & Use
- Relevant product(s)
- Public recognition of the IPR
- Licensing/Character merchandising
- Audited financial statements for past 5 years
- Future plans and likelihood of improvement in revenue
- Projected future income
- Market situation of relevant business
- Stability of owner
- Risks and possibility of devaluation
- Recent Offers to purchase IPR or owner or proposal for merger
- Validity of IPR
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D.ALLOWING OTHERS TO USE THE IP (Cont’d)
d). Malaysian SMEs Experience in Merchandising IP
In Malaysia, items most mentioned in the SMEs Balance Sheet are land,
buildings, manufacturing plants, equipment, commodities, trading stocks.
Often unmentioned items in the SMEs Balance Sheet are patents, trade
marks, designs, copyright, confidential information, and other intangible
properties.
The awareness among SMEs in putting IP as an asset or as a merchandise in
their Balance Sheet is still very low.
Many are unaware that the IP can be transacted and sold like any other
merchandise for money consideration.
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D.
ALLOWING OTHERS TO USE THE IP (Cont’d)
d). Malaysian SMEs Experience in Merchandising IP (Cont’d)
In SMEs, IP is usually thought of on the expense side of the profit and loss
account. This is because:
a). Protection of IP is an expensive exercise especially where IP protection is
sought in a number of countries;
b). IP does not confer monopoly but it confers the right to exclude others hence it is not an attractive idea to the SMEs.
SMEs are very particular on their bottom-line. Unless very necessary, SMEs
will not value their IP as an asset.
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E. CONCLUSION
Licensing, franchising and merchandising of IP rights is still an infancy
among the SMEs in Malaysia.
It is important for the SMEs to focus on the profit making aspect of IP and that
IP if properly managed and used, can be a long term sustainable source of
income for the company.
SIRIM through its SMEs incubation and IP awareness programmes is making
every effort to get SMEs to be interested in this area and to influence the
SMEs to make IP as a profit centre for the company.
SIRIM will support every effort of MyIPO and the SMI Association of Malaysia
and to work closely with MyIPO to create more awareness among the SMEs
on the importance of IP Licensing, IP Franchising and IP Merchandising.
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Contact Details:
ONG CHUI KOON
Registered Patent, Trade Mark and Industrial Designs Agents
Commissioner For Oaths, High Court of Malaya
Principal Consultant and Head
Intellectual Property Services Section
SIRIM Berhad
1, Persiaran Dato’ Menteri,
Section 2,
40000 Shah Alam
Malaysia.
Tel: ++ 603 – 55446134
Fax: ++ 603 – 55446146
Email: ckong@sirim.my
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