ALB looks at what types of work have been keeping lawyers busy in the seemingly recession-proof practice area. What challenges await them as macroeconomic conditions around the region start to improve?
Intellectual property (IP) may be the perfect microcosm of the counter-cyclical nature of legal practice. The all-too-familiar story of the commercial lawyers sweating over just where their next big deal would come from is perhaps unfamiliar to many IP lawyers. For them, the economic slowdown of the last two years has been a struggle of an entirely different nature. Many have found it difficult to keep up with Asian clients’ ever-increasing appetite for IP advice.
Asian IP in the downturn
When speaking to ALB late last year Horacio Gutierez, who is Microsoft’s corporate vice president for IP and licensing and deputy general counsel, said the challenge for decision-makers in Asia was to stick by IP – to invest time and resources in cultivating conditions conducive to the development and protection of IP – even in the face of economic difficulties. “There is a risk at a time of global downturn for companies and governments to lose sight of things that are important for the long term, as they might not be perceived as urgent in the context of all other challenges that they are facing,” he said. “IP protection is one of these things that is not only important for the long term but likely to be one of the key elements that will help economies out of the situation they are facing right now…I am convinced that innovation is going to allow us to come out of the economic crisis much stronger than we went in. The key, in my opinion, is when governments and policymakers think about this topic, they need to recognise the need to create a system of incentives for innovators in their countries, to invest and to put capital at risk to develop new technologies and products. This is a time when you want to encourage people to be creative and to invest in creating new opportunities.”
And various regimes across Asia certainly haven’t been short on encouragement. From continuing law reform in China, such as the Third Revision to the Patent Law and the consultation on digital copyright in Hong Kong, regulators and rights-holders alike, it seems, are on the same page when it comes to the importance of IP. “There are very exciting signs coming out of the Asia-Pacific region,” Gutierez said. “Real inroads have been made in terms of combating piracy and an overall evolution in terms of how people perceive IP,” he added, citing the mainland as the most salient example. “In China you see figures such as the number of patents being filed before CIPO, or the number of patent litigations being commenced there, and you can tell that we are witnessing an inflexion point. A country like China perceives itself as making the transition from being an importer and consumer of innovation and turning into an exporter of these, therefore revisiting its attitudes to IP.”
These changing attitudes have generated a fair number of fresh instructions for IP lawyers, both on the mainland and across the region. This isn’t to say though, that it has been all plain sailing for Asia’s IP lawyers during the economic downturn, especially for those who had hitherto subsisted on a strict diet of filing work. “Rights-holders have become more selective in their portfolio management and filing in countries where necessary,” said Alban Kang, a partner with ATMD Bird & Bird in Singapore. He says “ensuring adequate workflow considering the reduction in trademark and patent filings,” is one of the challenges facing IP lawyers in an economic downturn.
But clients’ apprehension to lodge patent and trademark applications with the same frequency they once had, or their willingness to enforce their rights, are not entirely novel developments in lean economic times. Something which is more unusual, however, is the cooperative approach that many Asia-based companies are adopting vis-a-vis IP.
Connie Carnabuci, partner at head of Freshfields’ IP/IT practice in Asia, explains. “Enforcement remains as important and strategic as before the financial crisis,” she said. “[But] businesses are entering into cooperation agreements with other rights owners to share the cost of developing new products or entering new markets,” she says, pointing out that “under other circumstances they would have done this on their own.”
It’s all about looking at IP under the microscope – assessing where it fits in to a company’s broader objectives. “In the current market, clients are keen to ‘sweat their assets,’ Carnabuci said. “This means businesses are carrying out audits of their IP portfolio to determine where there are gaps in relation to their business plans. They are looking to leverage under-utilised assets in licensing and collaborations, or they are deciding to make disposals to generate capital.”
New developments
While generating capital through disposal of their IP is one scenario that is popular with many Asia-based companies at the moment, it isn’t necessarily the only avenue available to companies looking to leverage IP for capital. For the last ten years, a number of companies have been unlocking their IP as a source of financing. These companies have sought to put up their IP as collateral to obtain non-recourse loans, or have bundled their IP assets to be sold off in a quasi-securitised form, sold IP to intermediaries in sale and lease-back transactions, and used it as a hook with which to lure venture capital financing (see box out for more details).
Despite the financial crisis, they have remained popular with both companies and investors. Ed Munzer, who is executive managing director of Paradox Capital Partners, a capital provider that specialises in IP-based loans, second-lien investments and mezzanine investments, has been prolific in writing on the appeal of IP in this regard. He says “Based on long experience and well-ingrained investment principles, investors will continue to invest in companies and assets associated with differentiated products that are protected by high barriers to entry from new competition, driven by the fact that these considerations indicate stronger and more reliable cash flows and profits.
It naturally follows that companies with strong IP assets and professionalised IP management, which are indicators of high levels of differentiation or of barriers to entry, will be attractive to investors – particularly as the worldwide economy becomes increasingly knowledge-based,” he says.
Paradox has worked with a number of lifestyle apparel and home-goods brands, including BCBG Max Azria, Rachel Ashwell and Betsey Johnson. But despite Munzer’s optimism about the appeal of IP to companies and investors, these types of transactions are still very rare, and in Asia virtually non-existent. “This practice is not as developed in Asia as in the US,” said Freshfields’ Carnabuci. “Theoretically it is possible to use IP as security for loans in Hong Kong and China, and in many other countries in Asia. As IP assets have become more important in modern business, there has been a shift from physical to intangible assets. IP assets can therefore be considered to be of adequate quality for a bank to use as a security.”
While it may be theoretically possible, many banks, both in the US and Asia, have been reluctant to allow IP rights, no matter how strong, to serve as the role collateral for loans. These financial institutions have preferred to err on the side of caution, arguing that it is simply too difficult to accurately value the IP being used as collateral and make a sound risk assessment. These concerns have been assuaged somewhat by the increasing number of financial services intermediaries which are providing (not only) working capital and loan guarantees but also helping to make valuations more transparent and comprehensible. There is still much ground to make up and countless more investment boards to convince.
Here, the fact that the worldwide pool of IP assets is thought to be quickly reaching US$3trn could just be the catalyst that financial institutions need. Just as this area will doubtless prove a profitable one for the companies, financial institutions and investors involved, so too will it be lucrative for IP lawyers.
The key, it seems, rests with taking a risk of one’s own and establishing an offering early on. After all, don’t a great number of the region’s IP practitioners owe much of their present-day success to taking a similar gamble just a few years ago? ALB
