SpringBoard Atlantic Moncton, NB

November 13, 2012

Integrating IP Protection

with Open Innovation

Business Practices

• Open Innovation Business Practices:

An Overview

Bob Ford

• Protecting and Licensing IP in Open Innovation

Business Models:

John Harris

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Gowlings

One of Canada’s largest national law firms • 750 professionals across 8 Canadian offices and Moscow and

London

Cross-disciplinary: • Intellectual Property

• Advocacy

• Corporate Finance

• Licensing, Strategic Alliances and Joint Ventures

• Mergers and Acquisitions

• Regulatory, Government Relations and Product Liability services

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com·mer·cial·i·za·tion

com·mer·cial·i·za·tion

1. to manage on a business basis for profit

2. to leverage in quality for more profit

The What, How and Why of IP Commercialization

“Commercialization is a set of activities which add value to a discovery

by bridging the gap between conception and creation of a

marketable product or process, to create financial gain for inventors,

investors and their respective institutions and stakeholders.”

“Innovation is the ability to turn knowledge into new and improved goods and

services.”

(Conference Board of Canada)

What is Open Innovation

• “Open innovation is the use of purposive inflows and outflows of

knowledge to accelerate internal innovation, and expand the markets

for external use of innovation, respectively. [This paradigm] assumes

that firms can and should use external ideas as well as internal ideas,

and internal and external paths to market, as they look to advance their

technology.”

• Henry Chesbrough, Open Innovation: Researching a New Paradigm

"...Companies can no longer keep their own innovations secret unto

themselves; ... the key to success is creating, in effect, an open

platform around your innovations so your customers, your employees

and even your competitors can build upon it, because only by that

building will you create an ongoing, evolving community of users,

doers and creators."

Randall Rothenberg, editor, strategy+business (published by Booz

Allen Hamilton)

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Henry Chesbrough

• The term Open Innovation was first developed by Henry

Chesbrough in 2003, when he published Open Innovation: The

New Imperative for Creating and Profiting from Technology

(HBS Press).

• According to Mr. Chesbrough, Open Innovation is the use of

internal and other companies' ideas to develop new

businesses. He identifies five key elements in the new

innovation process, i.e.:

1. Networking

2. Collaboration involving partners, competitors, universities, and users

3. Corporate Entrepreneurship, especially through corporate venturing,

start-ups and spin-offs

4. Proactive Intellectual Property Management: to buy and sell

intellectual property and so create markets for technology

5. Research and Development (R&D): to obtain competitive advantage

on the marketplace

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Innovation Ecosystem

Success

Industry Association

Favorable Tax

Structures

University IP

Service Organizations

IP Laws

Anchor Companies

Equity Markets

Domestic &

International VC

Capital

Grants/Basic Science

Funding

Entrepreneurs

Academia &

Researchers

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Canadian IT Innovation Ecosystem

Booz & Company

The 2012 Global Innovation 1000: Introduction and Key Findings

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• Every year since 2005, Booz & Company has conducted the

Global Innovation 1000 study, which investigates the

relationship between how much companies spend on R&D and

their overall financial performance and long-term financial

success—and every year, the study reinforces the conclusion

that there is no correlation between the two. Instead, it is how

companies leverage their R&D investments in conjunction with

other resources and internal structures—such as personnel,

capabilities, and decision-making processes — that determines

their ability to execute their innovation agendas.

• For the third year running, management consulting firm Booz &

Co. has named Apple the world's most innovative company in

its annual report, Global Innovation 1000 Study: Making Ideas

Work. Booz & Co. bases its rankings on an analysis of the

"fuzzy front-end" of innovation -- the ability of a company to

turn ideas into commercial successes.

.

Booz & Company

The 2012 Global Innovation 1000: Introduction and Key Findings con’t.

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Booz & Company

The 2012 Global Innovation 1000: Introduction and Key Findings con’t.

• “….Overall, money handed out for research and development continues to

increase steadily, even in the face of widespread economic difficulties.

According to the report, 2011 represents the most money ever collectively

spent to turn ideas into commercial products and services -- a whopping 10

percent increase to $603 billion over the previous year.….

• ….Although Apple spends a sizeable amount on R&D ($2.4 billion), the

Cupertino-based company only ranked 54th in terms of annual research

spending. In fact, one of the report's key findings (and the reports before it) are

there is virtually no correlation between budget, innovation and success. Only

three of the top 20 spenders were considered top innovators…...

• ……Despite recent high-profile coverage of companies seeking innovative

ideas from social networks, “the wisdom of crowds,” and open innovation

contests, in reality, the majority of new ideas still come from traditional

sources. By far the most popular method for generating ideas is “direct

customer observation” (ranked as one of the Top 5 most used methods by 42

percent of survey respondents). Other categories that were cited by less than

15% of respondents included tools such "social media network mining", "seed

funding for exploratory research", "external idea scouting", and "cross

business unit communities/sharing"….”

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Booz & Company

The 2012 Global Innovation 1000: Introduction and Key Findings con’t.

• “……Another noteworthy survey finding is the limited use of open

innovation in idea generation. In the past decade or so, the concept of

open innovation has generated a great deal of buzz, and a small but

growing number of companies are seeking out new ideas from a

variety of sources outside their conventional domains, including

innovation contests and social networking. However, less than 15

percent of all companies ranked mining social media for ideas and

using open innovation as important. We see indications of why some

companies see value in the techniques while others are left cold.

Companies in more consumer-oriented industries, including software

and Internet, computing and electronics, consumer, telecom, and

some healthcare sectors, are twice as likely to employ social media in

their search for new ideas than are companies in sectors with more

highly engineered products and services, such as auto, industrials,

aerospace, and chemicals and energy, where these methods seem to

have less efficacy.”

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By Open, Participative Innovation there is a multiple win:

• The business get scalable solutions and faster and richer innovation cycles

• The citizens get personalized, better optimized and affordable solutions

• The services providers (for example, the public sector) can find new approaches in their service

provisions, making the service creation and personalization more affordable also for them

• Source: https://sites.google.com/site/openinnovationplatform/open-innovation

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Conference Board of Canada - Council for Innovation and

Commercialization

According to the Conference Board of Canada’s

Report Card on Innovation, Canada receives a

"D" grade and ranks 14th out of 17 OECD

countries on innovation performance. Our

economy remains a below-average performer on

its capacity to innovate ……The general

consensus is that there is a lack of progress

being made in both innovating and adequately

commercializing the intellectual property being

developed.

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OECD Economic Survey of Canada 2012

“ …Indeed, innovation is high on the

government’s agenda. While Canada has made

great strides in macroeconomic and structural

policy settings, and its academic research is

world class, the pay-off in terms of business

innovation and productivity growth has not been

large. Business R&D is particularly low, despite

significant policy support, suggesting

substantial scope for improvement…. Reforms

are needed to improve knowledge flows to

business and strengthen the process of

commercialization.”

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emerged early 1990s

emerged mid-late 1990s

ruled the 20th century

Open Source

Open Innovation

Closed Innovation

Business Models for Technology Commercialization

Closed Innovation

Research Product

development

Market

Firm's boundary

Firm's boundary

Product pipeline

Internal

research

projects

© Henry Chesbrough, 2003, “Open Innovation”

University IP

Govt R&D IP

Firm's boundary

Firm's boundary

Product pipeline

Internal

research

projects

University IP

Govt R&D IP

• mid-late 1990s – Japanese “Tiger” free-fall

• 1999-2000 – “dot.com” bubble burst

• 2000s – S. Korea & China become economic powers

Stall of Closed Innovation

• late 1980s-early 1990s – end of Reaganomics

• mid-1970s oil crisis broke NA auto monopolies

• 2008 – world-wide recession / depression

• Globalization/Flat World/R&D budget restrictions.

Companies looking for alternatives to internal R&D in

the early 1990s – more so today!

• early 90s – huge lay-offs by IBM & Xerox

= unemployed highly qualified technical expertise

• emergence of stand-alone personal computers

Open Source

• goal was to reduce dependency on IBM, Xerox &

related software vendors

• free re-distribution of software in source code form

• shared rights to use the technology

• no monetary rewards to the innovators

• fast-tracked development of (a) software applications &

(b) systems architecture/operating systems for desktops

OPEN INNOVATION is not the same as

OPEN SOURCE

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Open Innovation (How it works)

© Chesbrough et al., 2006, “Open Innovation; Researching a New Paradigm””

Other companies' IP

Other companies' IP

University IP

Govt R&D IP

University IP

Govt R&D IP

• takes advantage of others’ knowledge, successes & IP

Open Innovation (Principles)

• accelerates speed of commercialization

• based on rapid diffusion – adoption – imitation

• patents used as “currency” & “inducements” (not as barriers)

• focus on extensive licensing (non-exclusive)

• licensing-in

• licensing-out

• cross-licensing

• greatly expands value capture from protected IP

Open Innovation (Principles)

• existing patents

• developmental agreements (funding)

• staff placements

• requires brokering of knowledge & IP & collaborations

• corporate “discovery” research now includes

searching for complementary external IP

• corporate research shifting from “exploration” to

“exploitation

University IP

Govt R&D IP SME’s IP

University IP

Govt R&D IP

Start-up’s IP

Start-up’s IPSME’s IP

Cluster

Open Innovation

Open Innovation Cluster Criteria

Every successful Open Innovation

Cluster requires & depends on

three things

1. Sources of ideas

2. Sources of capacity and capability (knowers and doers)

3. Sources of funds (risk bearers)

Open Innovation Cluster Criteria

• Industry, university, government, college partners

• Multiple members for multiple years

• Large pools of resources

• Common objectives, common interests,

cooperative projects

• All IP is shared by participants in the cluster

• Must facilitate rapid transition of technology from

institutions to industry to markets

Overview:

Open Innovation

Business Expectations of Institutional

Partners in Open Innovation Clusters

1. Delivery on agreed-to promises & timelines

2. Clear understanding of project milestones & objectives

3. Close coordination of industry & institutional researchers

4. Mutual alignment of research objectives, priorities & time

horizons

5. Agreed-to criteria for measuring progress & performance

Business Expectations of Institutional Partners

in Open Innovation Clusters (cont’d)

Open Innovation

1. Up-front defined IP ownership and license rights

2. Adequate time to decide license options

3. No publishing without prior company review & approval

4. Protection of high-value IP with high-quality patent

applications

5. Company-directed patent prosecution

Open Innovation

Summary of Business Expectations

1. Long-term research partnerships that share risk

2. Access to technical expertise that delivers

3. High-quality commercially valuable IP that is shared

within the cluster

4. Input & control over development & prosecution of IP

portfolios

5. Flexibility in agreements on a case-by-case basis

Open Innovation Institutions

1: Business-friendly culture:

• Visible – accessible – approachable

• 1 entry point for technology shopping

• “Walk their walk – talk their talk”

• Opportunity focused, opportunity-capture motivated

• Focus on business needs and motivation (not the “deal”)

• Flexibility to negotiate value-added licenses

• Know how to: (i) negotiate

(ii) put a deal together

• Proactive & timely processes

InnoCentive, Inc

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Slide (Google’s) Prizes.org

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Prizes.com

“Hello everyone, we wanted to take a moment to thank our Prizes community for all of

your support and provide a product update. Over the next six months, we will be

retiring the Prizes.org product. By January 31, 2013, Prizes.org across platforms--on

the web, Android or iOS--will no longer be supported.

We’re so grateful to all of you for your participation and engagement since we

launched last year, but the product isn’t experiencing the kind of adoption we had

hoped for. We wanted to provide you with advance notice and some additional

information about timing, exporting your text-based entries and cashing out your

remaining credits:

…January 31, 2013 -- last day to cash out any remaining credits via PayPal”

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Networks Of Centres Of Excellence

Research-driven partnerships: 16 Networks of Centres of Excellence

• NCE networks are large-scale, academic-led virtual research centres that bring

together multi-disciplinary partners from academia, industry, government and

not-for-profit organizations. Networks perform R&D and “translation-

commercialization” activities, and enable Canadian researchers and students to

work with receptor communities to accelerate the creation and application of

knowledge. Examples include:

• Allergy, Genes and Environment Network – AllerGen

McMaster University, Hamilton, Ontario ($74,358,000 for 2004-19)

• Carbon Management Canada – CMC-NCE

University of Calgary, Calgary, Alberta ($25,000,000 for 2009-14)

• Graphics, Animation and New Media Canada – GRAND

University of British Columbia, Vancouver, British Columbia ($23,250,000 for 2009-14)

• Marine Environmental, Observation, Prediction and Response Network – MEOPAR

Dalhousie University ($24,997,535 for 2012-17)

• NeuroDevNet

University of British Columbia, Vancouver, British Columbia ($19,572,000 for 2009-14)

• Stem Cell Network – SCN

University of Ottawa, Ottawa, Ontario ($82,819,000 for 2001-15)

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One Example: Orthopaedic Innovation Centre Inc. (Winnipeg,

Manitoba)

Mandate

• The Orthopaedic Innovation Centre (OIC) will

evaluate, create, acquire, protect, commercialize and

license novel orthopaedic medical technologies in a

multidisciplinary environment through industry

partnerships, government grants, and strategic

collaborations. The OIC will provide technical

services to Universities and industry while educating

and training Highly Qualified Personnel in the

process.

Summary

OPEN INNOVATION:

• Accessing & capitalizing on ideas of others

• Deriving ROI benefits from your no-core IP

• Putting the “right ideas” into the “hands of the

right people” to fast-track new products /

services into markets

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Protecting and Licensing IP

in

Open Innovation Business Models

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Types of Protection

• Patent • Provides and protects a tangible asset

• Trademark • Protects the reputation of the research

• Industrial Design • Protects features of shape, configuration, pattern or ornamentation

• Copyright • Protects artistic work including drawings, compilations, manuals, etc.

• Trade Secrets • Not much opportunity for collaboration in an Open Innovation setting.

No Protection. No publication. No recourse.

IP Protection

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Patenting is not

about the technology

It’s all about

protecting the

business opportunities

created by the

technology

The Patenting Process

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Considering a Patent

1. Novelty - the invention is “new”

2. Non-obvious – the invention not a minor tweak

on what has been done before

3. Utility –invention does what it is described to do

4. Subject Matter

What is Patentable??

Requirements:

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The Patenting Process

Step 1: Decision to patent

• Invention disclosure

• Commercial value assessments

• Patentability assessment

• Potential commercialization / licensing

= Go / No go decision

Based on potential business value

& licensing opportunities

The Patenting Process

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Step 2: Patenting Decision-making

The Patenting Process

2. Product:

3. Production:

1. What is the invention?: • product / process / system / method?

• what will it look like?

• how should it be packaged?

• handling, shipping, storage issues?

• fit with customers’ needs & comprehension?

• fit with existing equipment / systems?

• requires new systems that need to be developed?

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4. Customer

5. Market size

6. Competitors

7. Market Receptivity / Pushback

8. Product / Process Development

9. Marketing Partners

The Patenting Process

Step 2: Patenting Decision-making

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Step 3: Patent preparation

The Patenting Process

1. Title

2. Brief description of the prior art

3. Summary of your invention

4. Brief description of the drawings

5. Detailed description of the invention

6. Examples

7. Claims

8. Abstract

MOST IMPORTANT (define & limit the

scope of invention)

Business Opportunity should define the

Claim Strategy

Where to file

Three-step process over 2 ½ years

Step 1: file an application with CIPO or USPTO

• priority date / priority filing

Step 2: file an international patent application (PCT)

with WIPO through CIPO

• within 12 months of priority date

• defers “where-to-file” decisions & costs for 18 months

Step 3: national-phase filings in selected countries

• with 30 months from priority date (18 months after the PCT)

• file where there are business opportunities &/OR

• where competing products may manufactured

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1) Income Generation Through Licensing to:

1) Other institutions

2) Industry

3) Government

2) Sale of IP rights to advance research

3) Collaboration to advance research - NOT to increase

market share and prevent competitors from coming to

market

What Is IP Used For In

Open Innovation Approach?

Claim Breadth

Specific research expertise

Variants

Portfolio/Niche

Claim Breadth – Open Innovation

Specific research expertise

Variants

Portfolio/Niche

Variants

Portfolio/Niche

Specific expertise

Opportunity

How to Obtain a Desirable Claim Scope

Filing of a full and complete disclosure Disclosure of all contemplations of the invention.

Recognize your niche expertise and protect it. Sound Prediction You can only get protection for what you have done and shown in the description and what you can soundly predict. Demonstration of utility through test results whenever possible. Carrying out the right tests and trials to ensure broad coverage in the patent. Selection Patents

Lack of full disclosure can lead to unduly narrow claims and possible invalidity of the patent.

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What is “Patent Value”?

• Validity

• Claim Breadth

• Scope of Protection

• Ownership

• Surviving an IP Audit

Validity

• Will the application survive the scrutiny of examination into

allowance and issue?

• Will the issued patent survive the scrutiny of litigation?

• Will the IP hold up under the microscope of an IP audit?

Mistakes that impact validity

• Prior disclosure

• Publications

• Presentations

• Collaborations without NDA

• Prosecution mistakes

• Double patenting/Voluntary divisionals

• Duty of Candor

• Claiming too Broadly

• Sound prediction

Validity

Scope of Protection

Market Analysis

• Value is increased if protection is obtained in all

relevant jurisdictions. Keep options open (PCT).

1. Where is the market for the product?

2. Where are my collaborators/partners/potential

competitors located?

3. Where is the R&D market? • 20 year term

• Growing Economies

• China

• Where is the product manufactured? • Prevent manufacture of product in strategic locations

• Import/Export Regulations

Scope of Protection

Consumer Markets • USA High Population, Disposable Income • Europe High Population, Disposable Income • Canada Disposable Income, US Trading partner, Drug plan • Japan High Population, Disposable Income • China Highest Population, Increasing Disposable Income

Manufacturing Markets • China Low cost manufacturing

Collaboration/Licensing Opportunity • USA Institutional Density, Industry, Funding • Europe Institutional Density, Industry, Funding • Canada Institutions, Tax benefits

Enforcement • China Emerging policing and government backing regarding

enforcement

U.S. Strategy

Consider continuation practice

• Obtain allowed claims to narrow scope and then file continuation patent directed to broader claim scope. Allows patentee to adjust the claims based on actions of competitors or as R&D directs product evolution.

Terminal Disclaimers/Double Patenting.

Continuation-in-Part Applications for improvements.

Scope of Protection

Canadian Strategy

• No Continuation practice.

• No Terminal Disclaimers.

• Voluntary Divisional applications for broader claims likely to invalidate divisional and even the parent on grounds of double patenting.

• Forced Divisional applications.

• 5 year delay for requesting examination.

• 2 year+ backlog at Patent Office.

• Amendment after allowance.

• Reissue – 4 year deadline.

Scope of Protection

Ownership

1. Clearly established ownership saves headaches and money

2. Establish ownership sooner rather than later

3. Grey areas:

• Employee agreements,

• Agreements to assign eventual IP,

• University policies for students

4. Roche v. Stanford

Summary – Protecting IP

• Identify your niche expertise and potential Industry and Institutional collaborator

• Avoid pitfalls that lead to invalid patents or unduly narrow claim scope

• Obtain proper claim scope that is supported or predicted

• Obtain broad patent coverage

• Keep options open

• Clearly establish ownership

• Obtain professional IP services as early as possible

Steps in Commercialisation of IP

1. Pre-patent

• Non-Disclosure Agreements

• Assignment of Rights (e.g. Joint Development Agreement)

2. Post-Patent

• Joint Ventures

• License Agreements

• Capital Raise through Equity or Debt

• Sale

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Pre-Patent: Non-disclosure Agreements

- Protect confidential information under contract law

- Can be unilateral or bilateral (two way)

- Should be entered into at the very beginning of the relationship

prior to exchange of information

Purpose:

i) protect sensitive technical or commercial information from

disclosure to others;

ii) Prevent forfeiture of valuable patent rights (loss in patent rights);

iii) define exactly what information can and cannot be disclosed;

and

iv) prevent use by recipient for anything else but the Purpose, as

defined.

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Pre-Patent: Assignment of Rights

Joint Development Agreements:

- like a prenuptial agreement and planned divorce

- written agreement that addresses important aspects of IP

rights before, during, and after the project

- identifies which inventor under the proposed patent will

ultimately own the patent post patent filing

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Post-Patent: Joint Ventures

i) Contribution: What IP will be contributed by each partner to the JV? For what field of use and on what terms (assignment v. license, royalties, exclusivity)?

ii) Ongoing obligations: Will there be any on-going obligations to contribute IP? If so, any limitations on this and how to implement those limitations?

iii) Foreground IP: Who will own “Foreground IP” (IP created by the JV either alone or in combination with the JV partners)? Any different result if the Foreground IP is an improvement on a partner’s IP?

iv) Ownership on Termination: Who owns IP on termination (buy/sell, liquidation, run-off)?

v) Background IP: On termination, who will have continued access to any “Background IP” (IP licensed by a partner to the JV)?

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Post-Patent: License Agreements

• Gives an organization (or individual) the rights to use another’s

intellectual property, typically in exchange for royalties.

Special Considerations with Licenses

1. Exclusive v. Non-exclusive

2. Field of Use: Where can JV and each partner use IP? Unlimited?

3. Geographic Territories: worldwide vs. territorial

4. Term of License: Most often the term of the JV, or the duration of

IP rights, if shorter

5. Control over IP (Prosecution/Maintenance/Enforcement)

6. Representations and Warranties: On-going as opposed to time of

contribution?

7. Assignability/Sublicensing

8. Royalties/Fees

9. Perpetual vs. timed

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Post-Patent: Capital Raise - Equity vs. Debt

• Alternative to JV or License Agreement

• Can raise capital through issuance of equity or debt financing

• Proceed to commercialization on your own

Equity

• No repayment obligations

• Potential loss of control

• Flexibility depends on type of investors (friend/family vs. VC/PE)

Debt

• Solvency issues

• Risk of default

• Difficult to obtain (issues with security)

• Maintain control

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Preserve your Rations -

Stay Lean and Focused

• Capital efficiency for leaner times – spend only on core assets and avoid infrastructure spending

• Articulate value proposition early in R&D as regulatory scrutiny, etc. causes increased delays and risk

• Focus on core technology; postpone other ideas and pull the plug early

• Make technology as marketable as possible (reduces sale effort)

• Need for increased R&D productivity – open innovation models are useful where appropriate!

montréal ottawa toronto hamilton waterloo region calgary vancouver moscow london

Thank You

John Harris

Partner, Patent Agent

Phone: (613) 786-8671

Email: john.harris@gowlings.com

Robert Ford

Partner

Phone: (613) 786-0142

Email: robert.ford@gowlings.com