IP rethink can boost supply chains

Implementing successful collaborative arrangements in practice requires bringing innovative technologies and practices together. Issues of IP need to be understood and addressed clearly well before contracts are signed.

IP risk assessment should be built into due diligence of supply chain members. Several global companies incorporate IP protection into their supplier scorecards. Doing so helps them have clearer and more consistent communications with those suppliers. Identifying where a risk may lie and agreeing an approach early on can only aid collaboration and in turn provide a healthy environment for harnessing new technologies.

This article is part of a series on the subject of supply chain resilience.

The future of supply chains in a connected world

The introduction of new technologies will provide benefits and advantages for supply chain participants. For example, the Internet of Things (IoT) has numerous applications, such as remote and real time monitoring and can enable connectivity between objects and points in the supply chain. In this way, real time monitoring of supply chain processes is possible, immediately alerting participants when an issue such as a delay arises. That data can be shared between participants enabling greater transparency and improvements to be made to the supply chain.

IoT is a combination of technologies. It includes sensors capable of sending and receiving data about changes to the environment, and wireless networks capable of connecting those sensors – such as Wi-Fi, 4G and 5G, or low-power wide-area networks (LPWAN).

Use of IoT within the supply chain is illustrative of the issues of connectivity, standardisation and data usage participants need to factor into their discussions.

Currently the trend is to license in technologies such as IoT, but supply chain participants should consider investing in their own research and development or acquiring technology themselves so as not to rely solely on third party technology. If all innovation at the heart of making a supply chain more adaptable is held by one company it can threaten the collaborative model by shifting the balance of power between the participants.

Innovation necessarily requires significant investment. Companies could do a lot simply by being more tolerant of experimentation within their business and looking at their IP strategy – specifically how it currently identifies and captures IP.

Who owns what?

It is common in joint ventures (JVs) that IP created or acquired in connection with the project will be jointly owned. Co-ownership can be a challenging arrangement if not properly managed. It may not be in a party’s interest to always retain its share of jointly owned IP. Maintaining and protecting IP can be time-consuming and expensive. It may be better to have an option for one party to acquire the IP from another by way of assignment in return for an irrevocable non-exclusive licence and agreed revenue share. Businesses need to decide how new IP will be captured and how the costs of applying for and maintaining the IP will be split. If there are multiple owners and no clear chain of responsibility, deadlines may be missed and registration jeopardised leading to breakdown in the relationship between participants.

Another important aspect of any collaborative project is a requirement to share trade secrets with other participants in the supply chain. Depending on the legal system, the legal protection of trade secrets may be based on unfair competition, or on statutes or case law concerning the protection of confidential information.

To qualify for protection as trade secrets, information must have certain characteristics, including, fundamentally, being commercially valuable because it is secret. Businesses entering into collaboration should ask themselves what they consider a trade secret, and whether it is necessary to disclose all of that information to collaboration partners. Disputes can arise around whether the disclosing party properly identified its trade secrets among the information shared during the project. It is therefore extremely important to identify trade secrets at the beginning of a project to help reduce the chances that another participant will later claim that they helped develop the trade secret or that the trade secret is not valuable or secret at all.

Standard practice

Wireless communication technologies necessary to enable IoT and transfer of data are, on the whole, standardised and their use protected by patents and other IP rights. However, just because it is standardised does not mean the technology is free to use.

Standards are developed by businesses working together in collaboration under standardisation bodies such as the European Telecommunications Standards Institute (ETSI). If a patented technology becomes part of a standard and it is mandatory to implement that feature as part of the standard, that patent is deemed a standard-essential patent (SEP).

The SEP holder can ask implementers to pay a royalty for using that technology. However, a patented technology included in the standard should be available to any potential implementer of the standard and the holder of an SEP must license on fair, reasonable and non-discriminatory (FRAND) terms. The FRAND licence rate is agreed between the parties by commercial negotiation, but often disputes arise as to what constitutes 'FRAND'. If the SEP holder and the technology implementer cannot agree on FRAND licence terms, the terms will require determination by a tribunal.

What technology implementers must pay to use standardised technologies is a hotly contested issue in the courts of many jurisdictions. Patent owners for standardised technology are likely to be on the alert for new users of their technology, and so considerations such as IP licensing and the risk of patent infringement must be considered at the start of a new project.

The story so far with SEP holders in the mobile sector has been that they target well-funded new entrants to the market and, preferably, the seller of the end product or service, as opposed to component suppliers. Supply chain participants will need to consider how the third party claims will be addressed. Who will bear the cost, who will lead the defence of such claims and how settlement discussions will be structured.

What happens at the close?

Dismantling supply chains may give rise to many uncomfortable questions of IP ownership and cost of continued use that too often only crystallise when one party seeks to exit the relationship. To avoid disappointment, it is advisable to ask these questions well in advance so as not to lose the collaborative nature of the project as it comes to an end. Some of the key questions to ask are:

• Are disputes over IP assets with then former suppliers sufficiently anticipated and managed?
• Are trade secrets actively controlled to avoid misappropriation and the creation of new unfair competitors?
• Are IP risks to the business sufficiently articulated and is the level of acceptable risk, given commercial need, properly discussed, when on-boarding new suppliers?

A mechanism is needed for allocating the IP rights between the parties. This should take account of their relative contributions to the project, fields of expertise and territorial scope, among other things. The participants could decide to simply offer the IP to the highest bidder which may be problematic. For example, where a long-term infrastructure project is concerned, business critical IP may become very expensive to acquire.

Co-ownership of IP may not always be the best option, particularly when IP contributed to the project is confidential information that is embedded in the jointly owned IP.

Opportunity for change

The temptation at times of crises is to take the path of least resistance and return to what worked in the past. However, an opportunity now presents itself for all supply chain participants to reimagine their supply chain arrangements in light of Covid-19.

From an IP perspective, questions arise around mitigation of risk and allocation of liability in the face of third party IP infringement claims. These questions should be addressed early on. There are also opportunities. There is a case to be made for innovation as an aid to collaboration. For example, how technologies such as IoT provide opportunities and benefits to supply chain participants. Now is the time for participants to look at how supply chain innovation fits within their IP strategies and, indeed, whether those IP strategies need an overhaul.