Many innovators believe implicitly that they will always reap the rewards of their innovation ideas and the associated intellectual property (IP). But just because you are the inventor, it doesn’t mean others will let you take the profits of your work easily. Competitors, suppliers and the customers will try to get a share of the enabled benefits. And this may not leave you with anything.
“Although significant science and engineering competencies are needed to invent new processes and products, technological prowess that underlies process and product innovations is simply not enough to benefit from innovation. While invention is a necessary first step to innovation, it is not sufficient for commercial success” Professor David Teece.
What is Intellectual Property?
First, let’s all get on the same page what IP is. Intellectual property (IP) are creations of the intellect for which legal protection may be granted. IP laws may protect:
- trademarks and
- trade secrets (in some jurisdictions).
This list can be longer depending on the country.
IP law attempts to “strike a balance between the interests of innovators and the wider public interest, the IP system aims to foster an environment in which creativity and innovation can flourish.” (World Intellectual Property Organisation)
What are trade secrets?
Everybody has some sort of understanding of the first three items. But the most used item on the list is probably the least known one. Let have a look at what the US Patent and Trademark office says about trade secrets:
“A fourth type of intellectual property, in addition to patents, trademarks, and copyrights, is trade secrets. Trade secrets consist of information and can include:
- a formula,
- technique or
To meet the most common definition of a trade secret, it must be used in business, and give an opportunity to obtain an economic advantage over competitors who do not know or use it.”
The World Intellectual Property Organisation WIPO adds “trade secrets is usually defined in broad terms and includes
- sales methods,
- distribution methods,
- consumer profiles,
- advertising strategies,
- lists of suppliers and clients, and
- manufacturing processes.”
Trade secrets can be the most powerful protection (when done right)
Patents can protect your IP for about 20 years after which they generally expire. Trade secrets can theoretically last forever. The probably best-known trade secret is the Coca-Cola formula. It has been kept as a secret for over one hundred years.
Who knows if the Coca Cola Company would be as large if its inventor John Pemberton had decided to patent his formula. After 20 years its protection would have expired. The hype over the secrecy (and the “taste”) would not be the big selling point that it still – and amazingly – is. Irrespective of how the company would look like these days, it was a significant strategic decision.
But what if someone had stolen (or “leaked”) the formula? Would Coca-Cola have less protection than under a patent?
Well, it depends!
Trade secrets are protected (as well)
It depends how the formula would have been uncovered. If someone had reverse engineered the formula, then Coca Cola would have no legal recourse. Unlike patents, trade secrets have no legal protection against reverse engineering (that is reverse engineering in the original sense.)
Matters are different though in case of industrial espionage (e.g. through hacking or through documents provided by poached employees). Other forms of obtaining trade secrets illegally would contain breach of contract (e.g. suppliers) and breach of confidence (employees, contractors). The laws will protect your IP against these and other illegal ways of getting them divulged to your competition.
Does anyone still remember the shabby case of Ignacio Lopez, a GM “top” manager who took tons of confidential GM documents with him when he was hired by Volkswagen? In dire circumstances and with a tarnished reputation Mr. Lopez decided to settle back in Spain to avoid eviction to the US and face a court trial there…
There are massive grey areas caused by labour mobility, especially in certain industries. If your company holds discrete pieces of highly valuable IP giving you a competitive edge, you need to put strong protective measures in place. Of course you may decide to share or donate your IP and we will talk about this approach in our article next week. This can be a great strategy for many reasons. But for now we are covering the more frequent case of companies trying to protect their IP.
To be protected by law you will need to make sure you have put the right precautions in place to protect your IP. There have been court decisions that did not grant the trade secret protection in case of highly negligent behaviours by IP holders.
While we have been orienting these previous statements on the US trade secret laws, there are legal provisions against espionage, breach of confidence and so on in most other countries as well.
How powerful are patents?
Patents can be powerful … but they can also be counter productive. A significant limitation of patents is that once you file them you will reveal valuable information about the very thing you want to protect. But that’s the deal (remember: striking the balance between private and public interest)! Ironically, filing a patent can make your competitor’s job easier in trying to work around your idea without infringing it.
The patent protects you against blunt copy but allows others to imitate in ways that are not protected. It is often not easy to say where the boundaries of infringement begin and end. This is why there are so many prominent cases of litigation and counter litigation on patent infringements. Pointless to say that the lawyers win in any case.
This then leads to the question how valuable patents are. A widely recognised study by Arora 2006 published by the National Bureau of Economic Research NBER tries to answer exactly this question for various industries.
The list of industries with a negative net premium is long. Pharma and biotech are some of the few industries profiting well from patenting. This is not surprising. Anyone who wants to imitate pharmaceuticals will still need to go through the lengthy and expensive approval processes of the health authorities. Also, not very surprising to see semiconductors as one of the lowest beneficiaries of patents.
Trade secret or patent?
So, you have guessed it: one essential question for your company’s IP is whether to keep it a trade secret or patent it. Armed with the knowledge above you can start making a conscious decision. This puts you in front of many others.
Here are a few questions to ask yourself in order to assess the options (slightly modified from the IPstone):
- “What is the core of the information?
- How many players are there in the industry or field?
- Within that context, how many of those players know your “secret”?
- How many people inside your business know the information?
- What measures do you use to guard the secrecy of the information?
- What is the value of the information (commercial & future value)?
- How much time and effort did it take to develop the information (direct and other business knowledge that lead into it)?
- How ascertainable would the information be to others who try to develop it on their own?”
You may have already guessed that many companies decide to go a combined approach. Especially for larger inventions patenting certain parts retaining other parts as a trade secret can be the best approach. Seek the advice of an IP management expert in your business in determining what is a good split.
Take a breather. Hopefully, you have learned new stuff so far. But the best part is yet to come!
When does the innovator keep the profits of her idea?
You might be the inventor. But that does not mean you will be capturing the profits that made from that idea. Professor David Teece has developed a framework that is widely accepted (see figure below). It shows the circumstances under which an innovator is likely to be able to capture the profits associated with an innovation.
“Today, it is widely accepted that innovators seeking to profit from their inventions must understand the
- strength of the appropriability regime and
- the nature of the complementary assets required to commercialize their inventions.”
Ceccagnoli and Rothaermel in “Appropriating the returns from innovation” [pdf].
1. Appropriability regime
In a strong appropriability regime the innovator is able to protect the IP of her invention from others well. This can be defendable (e.g. litigable) patents, it could be a strong trade secret or other hard to imitate inventions.
E.g. Google’s search algorithm which was (and is) their key innovation has a strong appropriability regime because it is kept extremely secret. It is known how it works on a high level. But the details are even more important. And they are kept secret. Further on, the algorithms get refined on an ongoing basis.
In a strong appropriability regime the innovator has very good chances to at least capture most or all of the profits to be made by their invention. In a weak appropriability regime the innovator will enjoy either a small part of the profits or only for a short timeframe (which begs for continuous innovation).
2. Complementary assets required to commercialise
Complementary assets are necessary to scale up your idea at large and make it a commercial success. These can be manufacturing methods, marketing or distribution capabilities, process knowledge, etc.
Further on, Teece distinguishes between generic and specialised complementary assets. When specialised complementary assets are required to commercialise an invention with a strong appropriability regime, then the question is whether or not your company owns these assets. You can reap a majority of the profits enabled by your innovation if your company owns the specialised complementary assets. Should this not be the case, the rewards will be shared with the owners of those assets to a certain degree.
Should your company not own the specialised complementary assets in a weak appropriability regime, your chances to reap the rewards of your innovation are slim (but not zero). Think of Netscape. Netscape came up with the first widely successful web browser but it was under a weak appropriability regime. It was relatively easy to build another web browser. And it was Microsoft who had the specialised complementary assets, being the underlying operating system as well as marketing, distribution methods and so on.
The Netscape owners managed to get their company sold to AOL for a staggering $10b at a time where it was still the #1 browser. Microsoft used their market power to promote their own bowser to end the Netscape dominance. But they did so in ways that called the antitrust folks on the plan. In any case, this example as many others fit well into Teece’s framework.
Check out the framework also for the various other combinations and their implications.
Who reaps the rewards?
From the Teece framework.
The core of Google’s invention is their search algorithm. And it falls under a strong appropriability regime. Nobody knows the exact details of their (constantly evolving) search algorithm. Complementary assets would be the computing and communication infrastructure which Google did not own in the very beginning. But as they grew they started building their own data centres and even fibre optic cables in some geographies.
In weak appropriability regimes the inventor can capture the profits by continuously innovating and keeping ahead of the competition. But even then a lot of the profits may go to the customers. Premium airlines continuously upgrade their offerings without being able to enjoy major gains in profit margins. Often investments in incremental innovation are used to retain or marginally improve market share. Those that do not do this, fall behind over time.
By now you know more than many others about your IP management options. In this article, we have focussed the protection of your IP with the intention to exercise market power. But this is only one option.
In the next article, I will share with you more strategic options in managing your IP that involves some form of collaboration with others (e.g. licensing, joint ventures, alliances) or even releasing the IP for broader reasons, such as market development.
Take action now & boost your innovation skills
Here is a template that resembles the ideas presented in the article. I have added two examples. One is the Google search algorithm, the second one is Microsoft’s efforts to have their Office product on mobile platforms.
Download the template (and examples) and fill out the columns
- Identify 3 critical IP items within your company or department. Answer (for at least one of these) the following questions.
- How are these IP items managed? Are they protected at all (as trade secret, patent, copyright, trademark, etc)?*
- What is the appropriability regime for these IP items (see Teece framework)?
- What are relevant complementary assets for these IP items (see Teece framework)?
- Given all the above what are your tactical & strategic options to manage your IP items (consider options that involve other companies as well)?
* Remember, that to fall under trade secret there have to be some conscious precautions in place. If the IP is “floating” around, it may not even be protected by trade secrecy (trade secrets are only protected in certain jurisdictions).
On a parting thought
I hope this article has given you insights into the fundamentals of IP management. If you have read the article & completed the workbook you will know more about IP management than many leaders, including a whole bunch of senior managers. I think many people are too busy or believe that IP management is a legal discipline only. For innovators like you this is an opportunity to massively contribute to your company’s innovation endeavours. Read part 2 Strategic IP management options for your innovation (here).
This article by Murat Uenlue is licensed under a Creative Commons Attribution-ShareAlike 4.0 International License.
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