Monthly Archives: August 2011

What do you need for a successful business: business skills, a good product, strong IP, investment?

As an investor in new businesses, what are your criteria for accepting investment proposals?  Do you need to see a skilled management team, a product that people are starting to buy, and good IP protection?  Ideally, should the IP protection include patents, designs and trade marks?  Is it important for the business to have a catchy name that has been secured as both a company name and a domain name?  Would it help your decision if a high-profile investor has already agreed to invest in the company?

At first sight, if these criteria are met, the investment decision should be easy.  But when you look at the product, do you really want to invest in it?  Consider a real-life case, which apparently secured investment from Theo Paphitis on the TV programme, Dragon’s Den, shown on British TV last night.  The name of the product is BoginaBag.  It consists of a folding, camping stool (no wordplay intended) with a circular hole in it.  A plastic bag is inserted into the hole.  The user sits on the stool and does their business.

Some of the investors on Dragons Den dismissed this scornfully as investing in a bin liner.  Yet the company founder managed to secure offers from three of the Dragons, and accepted an offer from one of them, Theo Paphitis.  It is not clear from the company’s website whether this verbal offer has yet translated into hard cash.  We understand that not all investments agreed on the programme result in an actual investment, following due diligence, negotiation of a shareholders agreement, etc.

Turning to the IP position of the company, the following information appears as a footer on the company’s website:

“BoginaBag is a trademark of BoginaBag Ltd. …Pat. Pend. 0921898.3 RCD 001588096-0001 UDR Castle 2008″

Kate Castle is the name of the founder of the business.  RCD presumably stands for registered community design, and UDR for unregistered design right.  An Espacenet search reveals this patent application by Kate Castle.  A search of the above RCD number on the community designs register here revealed the relevant design.  We are curious as to readers’ views on the status or condition of this IP.

Although not stated in this website footer, it appears that trade marks have been registered with the UK IPO for both the name and a logo.

It appears from elsewhere on the website that Kate involved a company called Innovate Product Design Limited in the design of the product.

Innovate Product Design Limited also seems to offer IP services to inventors.  To quote from their website:

“We have a patent drafter on site who can draft a patent application for you, allowing you to self-file the application with the UK Intellectual Property Office. By doing this, you are avoiding the expense of using a patent attorney who acts as your agent and therefore, incurs further, steeper costs. Alternatively, should your application be particularly technical, or you need the services of a legal body acting as your agent, for example if your permanent address is overseas, we have a patent attorney with whom we are affiliated who offers preferential rates to all our clients.”

This company appears to be just the kind of company that might consider complying with British Standard BS8538 Specification for the provision of services relating to the commercialization of intellectual property rights, which was sponsored by the IPO.  See a discussion of the standard on the IPO’s website here.  From a brief look, we failed to see any claim of compliance with the British Standard on the company’s website.  We are curious as to the company’s reasons for not following this route, if that is the case; perhaps they felt, like us, that compliance would require jumping through some fairly pointless hoops.

Returning to the BoginaBag IP, it seems that the BoginaBag company has taken some advice on IP protection (but whether entirely from IP professionals is not clear) and has obtained and applied for some registered rights.  But how well can one protect a commode with a liner?

This real-life case example raises all kinds of interesting questions about investment, product selection, IP protection and use of advisers.  If you had been a Dragon on Dragon’s Den, would you have invested in this company?

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Whats so bad about … indirect loss?

I spent a good part of last week helping a client “reach a compromise solution with” their customer over whether or not the contract should exclude  responsibility for indirect loss.  Being a risk averse lawyer, I was against removing indirect loss from the list of excluded liabilities (ie risking indirect loss suffered by the customer being treated as a recoverable loss that my client, the supplier, would have to bear).  We refined the terms of the exclusion clause,  got the client’s insurer to agree to the position and the contract was signed.

But in the process, I was forced to consider what is so bad about indirect loss and whether it was actually vital to exclude it. This took me back to

College

College and I found myself re-reading a number of cases that haunted my undergraduate days.  The detail is quite involved and I have posted a more complete update note here.  For those who don’t want to get bogged down in detail, the highlights are:

Damages for loss arising from a breach of contract can be recovered if either: (1) the loss can fairly and reasonably be considered to arise naturally (“according to the usual course of things”) from the breach; or, (2) the loss can reasonably be supposed to have been in the contemplation of both parties at the time at which the contract was made.

A loss “flows naturally” if a reasonable man would have realised that the loss was a “not unlikely” consequence of the breach.  “Not unlikely” means a less than even chance but something that is not unusual and is easily foreseeable.  Indirect loss falls within the second part of this test. Contracting parties generally try to exclude it for two reasons:

First, indirect losses are too remote and too speculative to be laid at the defendant’s door.  This is often true but do not forget that before the claimant can win their claim in court, the claimant has to show that the other party is in breach, that the breach has caused the relevant loss, that the loss is not too remote and can be accurately quantified, that the loss is not the claimant’s own fault and that the claimant has taken steps to mitigate the loss suffered. Seen in that context, indirect loss is still a Bad Thing but it is not inevitable that the defendant will be responsible.  The claimant will have to work hard to prove that the other party should pay up.

Second, the loss only arises because of a set of special circumstances and these were not factored into the price of the original agreement.  So, if the defendant is held liable, the defendant is made to bear a disproportionate degree of the risk.  This is a fair point where the customer is buying a standard product or service and paying a  standard fee – a situation where the unusual has not been allowed for in the pricing.  But it is a much weaker argument where the parties are negotiating a bespoke deal and therefore have ample opportunity to allocate the risk between themselves as they see fit.

I drew several conclusions from this.

The least risky course for potential defendants must always be to exclude indirect loss, if only on the basis that the more responsibility for loss the defendant can exclude, the better their position will be.

A risky course

But, it is not the end of the world if indirect loss cannot be excluded.  If there are specific concerns then it may be appropriate to allocate the risk by adjusting the price or by consulting an insurer.  Bear in mind that any claimant has significant obstacles to overcome before their claim for indirect loss will succeed.  In that context, accepting liability for indirect loss becomes a calculated risk.

Ultimately, the best course is to comply with the terms of the contract.  If there is no breach, responsibility for indirect loss is an academic question.

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Disputes between shareholders: why are they so messy and expensive?

Owning shares in a small, private company is like having a legal interest in a marriage.  The parties come together with the best of commercial intentions, seeing an opportunity for profitable business that is greater than the opportunity if they operate separately.  Their shareholders’ agreement should be like a matrimonial pre-nup, addressing what will happen if the relationship goes sour.  If the parties are inexperienced, or let their hearts rule their heads, the agreement may skirt over the possibility of a future break-up.  Oh, these terms are far too dry and theoretical, cries the client.  We need to focus on the positive aspects of the relationship, not the negative!

As long as the parties have a good relationship, they are unlikely to care what the contract says.  Once they start fighting with one another, they start looking at the contract terms.  At this point, the wise solution may be to recognise that there is no point in the parties trying to work together any more, and to seek an amicable divorce.  But they may have too much invested in the company to simply walk away.

The terms of shareholders’ agreements give plenty of opportunities for the parties to prick one another with sharp needles, hurting but rarely causing permanent damage.  On a few (thankfully rare) occasions, we have had clients who have pored over every clause of the agreement, seeking ways to get their way, or get their revenge.  We have been bombarded with questions from such clients on the finer points of company law.  Can I call a meeting and vote to expel the other party from the Board?  Can I appoint another director, to outvote the other party?  Is this resolution valid, when the other party has a conflict of interest that he hasn’t declared?  Can I …?  Can I …?  Can he …?

Sometimes, these strategies work, because one party or the other is careless about company procedures.    More often, they just create aggravation.   For the lawyer, answering detailed questions about company law can be a thankless task, as it is easy to make a mistake in this area, so considerable care is required.  By the time you have worked out the answer to one hypothetical question, the client has thought of another.  And anyway, the client doesn’t really care about the legal answer, they just want you to find a way of gaining a legal advantage over the other party.  Doing this via the medium of company law procedures is usually misguided.  Of course, you tell the client this, and keep a good file note.  But parties who find themselves caught up in a shareholder dispute don’t always listen to wise counsel.

In summary, shareholder disputes can be very messy and can waste money on legal fees.  Parties should be cautious about getting locked into a business relationship with other shareholders, and clear-eyed about how they will extricate themselves if it goes wrong.  This will involve spending time on getting the terms of the shareholders’ agreement right.  But good contract terms are not a complete answer.   Sometimes, during negotiations, your instincts may tell you that this party is not right for you, in which case it may be best to avoid closing the deal.  If necessary, jilt them at the altar!  If you do consummate the transaction, the agreement should probably be thought of as a shield against the other party in a dispute, and not as an aggressive weapon.

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Intellectual property policies in universities

IP Draughts has been reading with great interest Intellectual asset management for universities, a report recently issued by the UK Intellectual Property Office.  The foreword describes the document as a “guide to IP strategy for senior Higher Education decision makers”.

Although issued by the IPO, the report is really the work of a committee of representatives of the leading, non-commercial bodies involved in UK research and knowledge transfer, including AURIL, HEFCE, PraxisUnico, Research Councils UK and Universities UK.  The report identifies the main points that university senior management should consider when devising and implementing their IP policies.

The report contains many nuggets of wisdom.  Statements that IP Draughts identified with include the following, fairly random, selection:

  • Universities should consider their IPR strategies as part of their research strategy rather than their earned income strategy.
  • Effective IP management is …concerned with seeking to maximise the likelihood that unexpected high returns might happen, not with setting targets for financial returns and judging performance against these targets.
  • Clear rationales that cover when to sell, license or create a spin-out company should be in place…
  • Aspects of internal performance in IP managements to consider measuring include …the number of iterations required to complete contracts and the time taken on these iterations.

The report makes some interesting points about students and IP.  In our experience universities have – in the immortal words of Cheryl Cole – been on a journey.  A generation ago, most of them didn’t think about IP created by students.  Then they woke up and realised that there was IP leakage when students were involved in IP-generating research projects.  Some universities overreacted and claimed ownership of all IP generated by their students, building such terms into the financial regulations of the university and making students agree to those regulations as a condition of admission to their courses.   IP Draughts vividly recalls reading a web discussion forum some years ago, when Australian pre-undergraduates were comparing notes on the IP policies of Australian universities when deciding which university to choose.  A typical concern was that the university would claim ownership of their computer games.  At the time, we wondered how many Vice Chancellors realised that their IP policies might be putting off bright students from applying to their universities.

More recently, some universities have been taking a more measured approach, and only claiming IP generated by the student when working on a university research project.  This may be effected by asking the student to sign an assignment before being admitted to a research project.    A more tailored policy of this kind has the disadvantage that it has to be implemented, usually at departmental level, on a case-by-case basis, and academics are not always diligent about such matters.  By contrast, a blanket policy, although it may sometimes be arbitrary and unfair in its effects, has the advantage that it is easier to administer.

A repeated theme of the report is that each university must devise its own IP strategy based on its own circumstances and priorities – a “one size fits all” approach should be avoided.  While we have some sympathy with this view, we felt the document could have given more guidance on some of the decision-points, eg whether the university or the individual creator should own (a) inventions, (b) copyright in lectures and books, (c) designs (eg in a school of architecture or creative arts).

There is much sound advice in the report.  At times, however, we felt the document needed editing and pruning to make its points more concisely.  How many Vice Chancellors will wade through a 45-page document of this kind?  For example, some of the detail around contract terms read more like a teaching guide for contracts managers and seemed out of place in a report for senior decision-makers. We were left wondering whether the document was addressed to multiple readers – eg Vice Chancellor, Deputy Vice Chancellor for Industry Engagement (or similar), Finance Director and Head of Technology Tranfer – and whether it would have been better to focus on one or two of these consituencies.

We strongly agree with the report’s comments on the need to spend time in communicating and explaining the university’s IP policies both internally and externally.  In our view, all students and academics should receive some basic IP training as part of their induction to the university.

We continue to be uncertain of the role of the IPO in IP management at UK universities.  We understand that the IPO will be undertaking other initiatives in this area, and we feel these might be better left to people who work in the university sector, such as PraxisUnico, which runs excellent courses for knowledge transfer managers.

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