Environmentally Friendly Cloth: Intellectual Property Rights and the Commercialisation Process - Essay Example

?Environmentally Friendly Cloth: Intellectual Property Rights Issues and the Commercialisation Process Executive Summary The British firm that is thesubject of this report has invented a new cloth that is made from recycled clothing that can be found in a thrift store. They have debuted this cloth during the British Fashion Week, and have generated interest from designers and an online retailer. They cannot manufacture the cloth on their own. They also seek to protect their cloth as an innovative product. Their options for protecting their innovation include applying for a petty patent, which is a patent that is for incremental innovations, and is easier to obtain than a full patent. This patent is good for five to seven years. Alternatively, they could seek to protect the innovation as a trade secret. Each of these options have their drawbacks and their good points, so the company should choose between these two. Also, the company is interested in advice about the commercialization process. The recommendation is that they find funding from the government and through large companies who donate to environmentally friendly causes. Partnering with “green”companies, such as the Body Shop, is another option for cash flow issues. They should issue a licensing agreement with a manufacturer immediately, and they should also issue a licensing agreement with the designer who has already showed interest in them, and the online retailer who has shown interest, immediately. Within one year they should also line up five more major designers, and ten more lesser known designers. They should attempt to issue licensing agreements with five High Street retailers, as well as online retailers within six months. This report will detail the kinds of intellectual property rights, as well as give greater detail to the types of intellectual property rights that this firm should pursue in particular. This report will also detail the commercialization process, while giving targeted time tables for when they should be able to meet the targets. A summary, recommendation and conclusion will also be included. Table of Contents Types of Intellectual Property Rights………………………………………3 The Commercialisation Process……………………………………………9 Action Plan……………………………………………………………………12 How Can the Success of the Commercialization Process Be Measured?........14 Summary…………………………………………………………………………….14 Recommendations……………………………………………………………………15 Conclusion…………………………………………………………………………..16 Types of Intellectual Property Rights There are three basic types of intellectual property rights. A patent is one such right (Maskus, 2000). These are legal titles that are granted to the owner of the patent, and this gives the owner the right to commercialize his or her own invention. To qualify for this right, the subject of the patent must be non-obvious, new and commercially viable (O’Donoghue et al., 1998). Patents are limited by time, usually 20 years. After the patent has expired, the invention moves into the public domain, which means that others can use the invention without having to pay the owner of the patent (Guellac et al., 2008). The patent is something that many firms use, because it prevents others from copying the invention. There is also a subset of patents, known as petty patents, which is a recent European revision of the patent system. By this, it means that small, incremental innovations may be covered by these types of patents. These patents are also easier to get than other types of patents, as the criteria for getting these types of patents are less stringent. The terms of the protection are shorter than the other patents, as well, as the protection typically lasts for 7 years. There is also a type of patents that specifically cover industrial designs. They, too, are easier to get than other types of patents, and have shorter terms – about five to fifteen years. These types of patents cover shoes and cars, and other types of ornamental features of consumer goods (Haghihat, 2012). Petty patent protection is probably the best method of protecting the new fabric. Moreover, this might be considered to be a small, incremental innovation, which means that the process of obtaining the patent might be less onerous than if one is trying to obtain a full patent. The only problem with this is that there is a possibility that the patent would be for a shorter period of time than if the firm decided to file for a regular patent. While this is probably the best way to protect the fabric, there are other types of intellectual property, and these should be discussed as well. Trademarks are another type of intellectual property (Haghihat, 2012). Trademarks protect words, slogans, signs and symbols. These are used to identify goods and services. Copyrights and neighboring rights is the other type of intellectual property (Haghihat, 2012). These protect literary, artistic and scientific works. Neither one of these intellectual property rights would be applicable, however, as what is going to be covered is a different type of textile, as opposed to a trademark or copyright. Intellectual property rights are important with regards to exporting goods (Co, 2004). This is because if company export their goods to a country that has strong intellectual property rights system, there is less risk of piracy. Therefore, the product may have maximum profitability in that country (Eaton & Kortum, 1996). This improves imports to the country that has the stronger intellectual property protection. That said, there is the chance that a country may have too much intellectual property protection, or a country’s protection regime might be unbalanced or badly configured (Reichman, 2009). This stifles innovation, because it makes innovation too costly (Bessen & Meurer, 2008). Patent protection is not necessarily the only way to protect the new cloth. According to Anton (2004), other ways of protection are reliance on trade secrets, speed to market, or control of complementary assets. These are considered to be informal mechanisms of protection of a new product (Mueller et al., 2010). Hall et al. (2012) explains why a firm might decide not to get a formal patent, but may decide to protect their invention through informal means. The main reason why a firm might not decide to formally get a patent is cost. There are maintenance fees that must be paid. Moreover, according to Arora (2008), there is an issue in that, once a firm applies for a patent, there can no longer be secrecy about the invention. This is because applying for a patent requires that there be full disclosure when the patent is applied for. A third reason why patents are not necessarily as attractive as informal means is because there are costs associated with enforcement of the patent (Schneider, 2008). A patent is only valuable if the patent is enforced, and this requires that there be active monitoring of the invention, and, if the invention is infringed upon, there must be legal action. Therefore, there are costs associated with the enforcement as well (Leiponen, 2009). Moreover, it is difficult to determine the value of the patent, when the patent is applied for, as it depends upon the future earnings, and this is difficult to discern (Hall, 2011). Therefore, patents have their drawbacks, including the fact that they are limited in time, and they are expensive to maintain. Secrecy has some advantages over patents in several regards (Bound, 1984). One of the main advantages is that secrecy may protect the invention indefinitely. Also, the work may be in progress, and secrecy may protect this, whereas, in the case of patents, the work must be at a certain stage in order for the inventor to apply for protection (Henry, 2011). Secrecy also has the advantage over patents in that there is a much wider range of products which can be protected by secrecy than with patents. That said, secrecy is not without its costs as well. Like with patents, secrecy must be enforced, so there are costs associated with this, the same as with patents - legal fees, and the costs associated with discovering who might be infringing upon the secret invention (Hussinger, 2006). Also, it might be difficult to maintain the secret, as personnel tend to move around (Kultti, 2007). Other costs of implementation are the fact that firms may have to split their inventions into different components across research labs. This is because individual components are not valuable by themselves, and only the invention in full is valuable (Mann, 2007). Moreover, if the invention can be turned around in a short amount of time, then patent protection might be the best way to protect the invention, because imitation cannot be prevented by secrecy (Hall, 2012). This is especially true if it is easy to reverse engineer, because other firms might be able to figure out the secret through reverse engineering, or they might be able to reinvent the process or the product (Mansfield, 1981). In this case, the fabric seems that it would be easy to reverse engineer, which means that secrecy might not protect it. However, there is also the possibility that patent protection might not be available to the fabric. The patent process requires that the product be new, and be something that is non-obvious. It is questionable whether or not this is a new fabric, as it is a fabric that is made from old clothes donated to charity shops. Moreover, it is not necessarily non-obvious, as this is something that other firms might be able to discover how to do. In the event that a patent is not available for this fabric, then secrecy should be pursued. This would mean that confidentiality agreements must be given to all employees, and also that the process of making the materials should be spread out over different components of the manufacturing process. There is the risk that the fabric is easy to reverse engineer, but this is something that must be risked if a patent would not be available for the material. There are different standards that different countries use to determine if a certain invention is non-obvious (Reichman, 2000). In India, the product must be a technical advance or must represent economic significance (Eisenberg, 2008). In China, the standard regarding non-obviousness is that the product has features which are prominent and substantive, and that there is notable progress (Reichman, 2011). Reichman (2011) argues that countries need to adopt stringent standards regarding non-obviousness, because if countries have low standards for this, then companies would be able to accumulate patents and incremental innovations, which would mean that they could block local improvers in the countries that are developing, and this would be a stringent entry barrier. Whether or not the fabric would be considered to be non-obvious would depend upon the definition used in different countries. However, it seems that most developed countries would not consider the fabric to be non-obvious, as it does not represent a significant technical advance, or even something that is totally new - it is merely taking existing fabric and turning it into new fabric. This might be hurdle that needs to be overcome. Which is not to say that petty patent protection is not the way to protect the fabric. As noted above, the petty patent protection is available for the incremental innovations, and the requirements for getting this patent protection is less onerous than a full patent protection. What this would mean is that the company would have to make sure that they have their operation up and running, for the patent protection would only last for five to seven years before another company can use their idea. They would, by then, be the dominant seller of the fabric, if they hit their milestones and roll out their commercialization process correctly. The Commercialisation Process Denize et al. (2009) describes the commercialization process. They state that firms need to form a network, but the right network configuration is essential for success. They state that there is not much research regarding the networks that should be formed with low tech innovations, such as the fabric that is the subject of this report. Denize et al. (2009) would also consider the fabric to be an incremental innovation, because incremental innovations represent low levels of novelty. Radical innovations, which are the opposite of incremental innovations, means that there is a radical change in the existing technologies or designs. Since the fabric is made of other fabrics, this would mean that this would be considered a low level of novelty, and it is not a radical reinvention of an existing product, so this would be incremental innovation. Because this is an incremental innovation, there would be less R&D expenditures, and it will be able to get to market more easily than more radical innovations. The commercialization process outlined by Denize (2009) may be followed for the fabric producer in this report. Denize (2009) followed the case of an organization that invented a continuous fabric baby carrier that would be considered to be an incremental innovation. Denize (2009) states that the commercialization process for this firm, and commercialization in general, may be divided into three phases. One phase is the early innovation phase. During this phase, there is trial and error regarding different product variations. Just like with the fabric in this report, the firm covered by Denize (2009) decided to attempt commercialization after the firm began receiving requests from friends, asking them to make similar baby carriers for them. This led to the second cycle of development and pre-commercialization activity. The second phase taken by the firm studied by Denize (2009) was when the firm tested different fabrics, and made minor modifications to the product design. They developed their brand from there. The product launched on E-Bay, and was successful on E-Bay within one year. The demand started to outstrip the supply, so the firm formed a network of suppliers and others in the value chain. The network included a sewer and a fabric supplier. Others in the network included local and international retailers, who supplied the revenue and E-Bay, who provided online sales. The third phase that this firm took was that they designed a range of exclusive retail sales. This included product modifications that enhanced the user utility. Also, the brand was redeveloped and they also developed a brand name and a trademark. They also put effort into packaging and promoting the materials, and they spent around $25,000 on marketing the product. They eventually shifted from using E-Bay for most of their sales, to using retail for most of their sales. They did this through promotions in baby expos, and by using their website. They also had to increase their retail price during this time, as their overhead was now more, because E-Bay selling the product would have necessitated less overhead than the retailers. They eventually phased out their E-Bay sales, and they established a network of supply, manufacturing and distribution. The product that is the subject of this report could follow a similar path towards commercialization as the baby fabric carrier that was studied by Denize (2009). It is unclear at what phase the firm is in, as the facts simply indicate that they showcased their new fabric during the British Fashion Week. This would seem to indicate that they are far along in the manufacturing process, but, if they are not, they could follow a similar trajectory as Denize’s firm. That is, they could begin by selling the fabric on-line, as well as with the different partners who are interested in the material. This includes the fashion designers and the major online clothing retailer. Action Plan The textiles firm should begin by finding manufacturers, sewers, retailers and designers for their product. They already have some designers lined up, but they should find more designers to whom they may license their product. They should be able to find at least 10 different designers within six months. These designers can be prominent designers and up and coming designers, and there should be a mix of each. The prominent designers will probably demand to pay a lower price than the up and coming designers, as the prominent designers know that they can negotiate a lower price, as they are able to give better value to the fabric than a lesser known designer. This is simply because they can give the firm excellent publicity, and would also buy the fabric in more bulk than the lesser known designers. As for the market for the retailers, the firm should focus upon getting their fabrics into powerful High Street retailers. According to Owen (2003), British retailing is concentrated in the powerful High Street retailers. Moreover, the firm might be eligible for state aid. State aid is available to the manufacturing industry. They should apply for state aid immediately, and the time target regarding the retailers should be one year – in one year, the firm should have the target of being at least four of the large retailers. They could issue licensing agreements to these retailers as well. Moreover, they should pursue the online retailer who is already showing an interest in the product. They should issue a licensing agreement to them immediately, after negotiating the terms. As for the manufacturers, the firm should concentrate on partnering up with manufacturers immediately. They should be able to issue a licensing agreement with two manufacturers within two weeks time. If they do not have the cash flow to partner up immediately with a manufacturer, then they should establish a partnership whereby the manufacturer agrees to a certain percentage of the sales of the clothing that is made from the material. The firm should also line up some sponsors. There are groups that give charitable donations to companies that are environmentally friendly, and this could be another source of funding. They could partner with the Body Shop, who might agree to sponsor them, as well, as the Body Shop is known for being environmentally friendly and supports environmentally friendly causes. The sponsors should be contacted immediately, and the time frame to line up the sponsor should be one month – within one month, the firm should be able to line up at least five sponsors for their materials. How Can the Success of the Commercialization Process Be Measured? The success of the commercialization process may be measured by how many retailers and designers the firm is able to partner with in the span of one year’s time. In particular, if the firm is able to partner with at least five major designers, ten lesser known designers, and five High Street retailers within the period of one year, then this will be considered to be a success. Summary The firm should concentrate on either protecting their asset as a trade secret, or pursuing a petty patent. This is because a full patent may not be available, if the cloth is not considered to be non-obvious, and this is a concern, as the cloth is not a wholesale innovation so much as it is an incremental innovation. It is not manufacturing cloth from scratch, it is manufacturing cloth from old clothing. Therefore, the petty patent should be pursued. Alternatively, they could protect the cloth as a trade secret. There are trade-offs for this. If they apply for a patent, then they would have to reveal the secret of how they make their cloth, and the patent is only good for five years. If they keep the cloth as a trade secret, then they would not have to reveal the secret of their cloth. However, if a firm could reverse engineer the cloth, which is entirely possible, since there is not really a technological innovation involved, then the other firms would be able to manufacture their own materials that are similar to the ones manufactured by this firm. The firm should weigh the pros and cons of each of these protection processes, in order to select the protection process that would provide the most amount of protection. Either of these processes are expensive to maintain, but the patent process is a bit more expensive, as there are fees associated with getting the patent. With both processes, the major expense comes from guarding against competitors stealing the secret or the patent. There would be costs associated with monitoring, and costs associated with legalities if there is an infringement. Recommendations The firm should line up partners immediately. For funding, they should investigate the possibility of government grants for them. It might be possible to get substantial funding, because they are manufacturing an environmentally friendly cloth, so they should investigate general grants and more specific grants that might be geared towards funding for environmentally friendly manufacturing. They also should investigate the possibility that they can partner with a company that donates to environmentally friendly causes, or partner with a company that might want to be associated with them, like the Body Shop. The Body Shop is already established, and their brand is that they are environmentally friendly, so a partnership with them might be lucrative for both. Beyond this, the firm should focus upon finding designers. They should concentrate on large and small designers who are interested in their project. A mix of both would be more lucrative for the company, as larger designers might demand a larger share of the profit from the company than a smaller designer might. Perhaps they could find a designer who is known for his or her ethics and environmental causes - this could be a natural fit, as that designer would be able to give the firm publicity to his or her followers. Conclusion The company should pursue either a petty patent or seek to protect the cloth as a trade secret. These are two options, and the company should weigh the pros and cons of each in order to determine which of these options would be more cost effective and better for their brand. They also should find a manufacturer immediately, as well as partner with the online retailer immediately. They could work out licensing agreements to where the retailer and manufacturer would get a certain percentage of the profits. Or, they could pay the manufacturer up front, if their cash flow is such that they have the money for this. Within one year, the company should have the targeted licensing agreements in place with the various designers, manufacturers and retailers, and they should have their funding in place before this. Bibliography Arora, A., Ceccagnoli, M. & Cohen, W. (2008) “R&D and the patent premium,” International Journal of Industrial Organization, vol. 26, pp. 1153-1179. Bessen, U. & Raskind, L. (2005) “An introduction to the law and economics of intellectual property,” The Journal of Economic Perspectives, vol. 5, no. 1, pp. 3-27. Bessen, J. & Meurer, M. (2008) “Patent failure: How judges, bureaucrats, and lawyers put innovators at risk.” Harvard Law Review, vol. 8, no. 7, pp. 131-165. Bound, J., Griliches, B., Hall, B. & Jaffe, A. (1984) “Who does R&D and who patents?” In R&D, Patents and Productivity, Griliches, Z. (ed.) Chicago: University of Chicago Press. Co, C. (2004) “Do patent rights regimes matter?” Review of International Economics, vol. 12, no. 3, pp. 359-373. Eaton, J. & Kortum, S. (1996) “Trade in ideas: Patenting and productivity in the OECD,” Journal of International Economics, vol. 40, no. 3, pp. 79-90. Eisenberg, R. (2008) “Noncompliance, nonenforcement, nonproblem? Rethinking the anticommons in biomedical research,” Houston Law Review, vol. 45, pp. 1059-1079. Falvey, R., Foster, N. & Greenaway, D. (2009) “Trade, imitative ability and intellectual property rights,” Review of World Economics, vol. 14, no. 5, pp. 373-404. Guellec, D. (2008) The Economics of the European Patent System. Oxford: Oxford University Press. Haghihat, N. (2012) “Effects of intellectual property rights on economic growth,” Golden Research Thoughts, vol. I, no. XI, pp. 1-10. Hall, B. & Sena, V. (2011) “Innovation, IP choice, and productivity: Evidence from UK firms,” Report for the UK Intellectual Property Office. Helpman, E. (1993) “Innovation, imitation, and intellectual property rights,” Econometrics, vol. 61, no. 6, pp. 1247-1280. Henry, E. & Ponce, C. (2011) “Waiting to imitate: On the dynamic pricing of knowledge,” Journal of Political Economy, vol. 119, no. 5, pp. 959-981. Hussinger, K. (2006) “Is silence golden? Patents versus secrecy at the firm level,” Economics of Innovation and New Technology, vol. 15, no. 8, pp. 735-752. Kieff, F. & Olin, J. (2003) Perspectives on the Properties of the Human Genome Project. New York: Houghton Mifflin. Kultti, K., Takalo, T. & Toikka, J. (2007) “Secrecy versus patenting,” RAND Journal of Economics, vol. 38, no. 1, pp. 22-42. Leiponen, A. & Byma, J. (2009) “If you cannot block, you better run: Small firms, cooperative innovation, and appropriation strategies,” Research Policy, vol. 38, pp. 1478-1488. Mann, R. & Sager, T. (2007) “Patents, venture capital, and software startups,” Research Policy, vol. 36, pp. 193-208. Mansfield, E. & Schwartz, M. & Wagner, S. (1981) “Imitation costs and patents: An empirical study,” Economic Journal, vol. 91, pp. 907-918. Maskus, E. (2000) Intellectual Property Rights in the Global Economy. Washington, DC: Institute for International Economics. O’Donoghue, T., Scotchmer, S. & Thisse, F. (1998) “Patent breadth, patent life, and the pace of technological progress,” Journal of Economic Management Strategy, vol. 7, no. 1, pp. 1-32. R&D, Patents and Productivity, Griliches, Z. (ed.) Chicago: University of Chicago Press. Reichman, J. (2000) “Of green tulips and legal kutztu: Repackaging rights in subpatentable innovation,” Vanderbilt Law Review, vol. 53, pp. 1743-1785. Reichman, J. (2003) “Saving the patent law from the informal remarks concerning the systemic problems afflicting developed intellectual property regimes.” In Kieff, F. & Olin, J. (2003) Perspectives on the Properties of the Human Genome Project. New York: Houghton Mifflin. Reichman, J. (2009) “Intellectual property in the twenty-first century: Will the developing countries lead or follow?” Houston Law Review, vol. 46, no. 4, pp. 1115-1185. Schneider, C. (2008) “An empirical analysis of the effects of patents and secrecy on knowledge spillovers, Mannheim Germany,” ZEW Working Paper 06-048. Thurow, L. (1997) “Needed: A new system of intellectual property rights,” Harvard Business Review, September-October, pp. 93-103. Yu, P. (2009) “The global intellectual property order and its undetermined future.” Available at: http://ssrn.com/abstract=148285. Read More