MR Ong The Malaysian Experience

INTELLECTUAL PROPERTY RIGHTS: POWERING SMEs
Jointly Organised By
Intellectual Property Corporation Malaysia (MyIPO) European Union (EU) EU-Malaysia Chamber of Commerce
Renaissance Hotel Kuala Lumpur 13 - 14 March 2006 Licensing, Franchising And Valuation of IP Rights: The Malaysian Experience
By Ong Chui Koon Registered Patent, Trade Mark & Industrial Agents Commissioner For Oaths, High Court of Malaya Principal Consultant and Head Intellectual Property Services Section SIRIM Berhad Shah Alam MALAYSIA Direct Tel: ++ 603 - 55446134 Direct Fax: ++ 603 - 55446146 Email: ckong@sirim.my
All rights Reserved 2006 SIRIM Berhad
SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

EC-ASEAN Intellectual Property Rights Co-operation Programme (ECAP II)
A. TYPES OF INTELLECTUAL PROPERTY RIGHTS AVAILABLE TO SMEs IN MALAYSIA a). Name of business : Trade Name b). Distinctive signs : Trade marks (both registered and unregistered marks) c). Creative designs (appearance or look of finished products) : industrial designs d). Innovative products and processes : Patents and/or utility innovations e). Cultural work, artistic work, literary works (including computer software) and compilation of data : Copyright f). Trade secrets (customer lists, sales tactics, marketing strategies, manufacturing processes, know-how, formulae, etc.) : confidential information
Of the 6 types of IP rights listed above, trade mark remains the most widely known form of protection among the SMEs. Second most widely known form of protection among the SMEs is industrial designs. Third most widely known form of protection among the SMEs is patent. No record available on copyright protection since there is no registration system in Malaysia (however there is a move towards voluntary registration). B. USING IP RIGHTS TO POWER SMEs
Many ways to use IP rights to power SMEs Examples: Exploiting the IP on its own, allowing others to use the IP, selling the IP, etc. In this seminar, we will focus on licensing and franchising.
C.
LICENSING Meaning of Licensing
1.
- Licence means the permission to act or - as a verb - permit or authorize. - For example, to licence a patent is to give permission to perform the acts that are protected by the exclusive right of the owner of the patent. - Trade marks, industrial designs, copyright, confidential information and know-how, etc can all be licensed. - Licensing commences with a contract or agreement that may take many shapes and may be voluntary or compulsory. - A voluntary licence agreement is entered into by two parties by free-will. They are the licensor and the licensee consisting of physical or legal persons (e.g.companies) - A compulsory licence is the result of a regulation enforced by a state authority or court order through which the licensee has obtained the licence although the licensor has been opposed to the idea.
2. Types of Licensing Agreements a). Non-Exclusive Licences Non-exclusive licences give the licensor both the right to use the licensed right and to let others do the same, that is to say that more than one licensee might exist at the same time for the same object. b). Exclusive Licences An exclusive licence implies that the licensor has agreed not to give a licence to any other licensees for the same licensing object and area and the licensor will not make use of the licensed right. c). Sole Licences The sole licence is the same as the exclusive licence with the difference that the licensor has conditioned himself to use the licensed right.

3. Why Licensing?
a). Extra income for a company One further way to make profit from an invention. b). Risk Minimization Share the burden of responsibility with others. Difficulties and risks caused by being a foreign company in a foreign country disappear. Risks of nationalisation, double taxation, special taxation of foreign-owned companies in a foreign country disappear. c). Capital saving No need to spend money to purchase production units or set up manufacturing plants. d). Flexibility Through easy adjustment to prevailing situations, the licensor and licensee can best decide on how to use each others resources and capacity
e). Commercial boundaries are eliminated Restrictions on currency flows, quantitative import restrictions and customs fees that make the exchange of goods difficult among countries can be avoided. f). Lower costs A product made on licence can be put on the market cheaper than the same product exported. These savings are a result of costs of labour, materials, transports and less tax pressure. g). Means of acquiring new technology or technique Through cross-licensing or pooling, your company may improve your products by adding more patented features h). Means of avoiding costly and uncertain patent litigation The burden will be on the licensee to take infringement action or to defend an infringement proceeding.
i). Easier Marketing Less market research is needed and can easily establish contacts with the foreign markets unknown to him. Designs and materials may be changed to suit the actual market. j). Broad field of contacts Through contacts with the licensee and associates, the licensor may find a market for some of his own products. The combination of what he acquires through the licence and what he himself possesses of know-how in production methods, etc., might open doors to another chain of licences with a third party. k). A way of spreading or extending their existence and what they represent. Instead of the patent holder going everywhere to exploit the patent, another person may take over the right to exploit the patent. This person may do so entirely or only in part and in a certain region. l). Competitive advantage A means of achieving a position one step ahead of your competitors
4. Important Factors to Consider When Preparing a Licensing Agreement a). Scope of Licence b). Territory c). Minimum Performance d). Best Endeavours e). Transfer of Technology f). Access to Improvement g). Dealing With Infringements h). Protection of Trade Marks and Designs i). Protection of Confidential Information j). Protection of New IP Generated during the tenure of the Licence k). Payment terms l). Sub-Licensing m). Account keeping The preparation of a licensing agreement can be undertaken by a patent agent who form an important link-man between the parties to a licence situation In arriving at a properly structured agreement, a number of stages are involved negotiation, preparation of draft agreement, agree to a situation, and a win-win contract.
5.
Malaysian SMEs Experience on Licensing
In the early 70s and 80s - Malaysia encouraged Foreign Direct Investment by Multi-National Companies (MNC). As a result, a vast majority of the SMEs in Malaysia are contract manufacturers for MNC SMEs manufacture parts under the vendor programme - supply parts to the MNC under specific agreements and the parts are made according to specific technical specifications provided by MNCs. MNCs provide training to the SMEs and sent their engineers to work with the SMEs to ensure that the parts made by the SMEs complied with the technical specifications laid down by the MNCs. Agreements signed between the MNCs and the SMEs are generally technology licensing agreements - Agreements vetted and lodged at the Malaysian Industrial Development Authority (MIDA). Reason: the Malaysian Government wants to ensure that the SMEs are not short-changed when signing the technology licensing agreements with the MNCs.
During the late 80s and early 90s, some of these SMEs began to design and fabricate machinery used in the manufacture of parts and/or components. The setting up of PROTON in 1983 and PERODUA in 1985 further encouraged the SMEs to design and fabricate machinery used in the manufacture of automotive parts and components. Some of these SMEs, for example Eng Technologies and LKT Industry become very successful and are listed on the Kuala Lumpur Stock Exchange (now renamed as Bursa Malaysia). During the late 90s and the beginning of the new millennium, MNCs started to shift their operations outside Malaysia and move to Thailand, Vietnam and Cambodia. Accordingly some of these SMEs follow their customers and started to set up manufacturing plants outside Malaysia. Note: Recently MIDA has stopped the practice of registering licensing agreements concluded between MNCs and SMEs. The reason for this is that the Government is of the opinion that SMEs are now mature enough to handle the licensing issue on their own.

The Government move during the last decade to instill IP Awareness among the SMEs has resulted in some patent registered and owned by SMEs in Malaysia. At this point in time no statistics is available from the SMI Association regarding the exact or estimate number of patent applications filed or registered by SMEs in Malaysia. However it can be assumed that the figure is low based on the fact that the total number of local patent applications filed at MyIPO is around 250 - 300 cases per year (based on 2004 records) and a majority of these local applications were filed by the Universities and Government research institutions. No record available on SMEs licensing their patent rights to third party. However there are a few SMEs who actually exploit the patents on their own. Examples: Carotec Sdn Bhd. (Perak); Super Vitamins Sdn Bhd.(Johore), Fumakilla (M) Berhad (Penang)

D. 1.
FRANCHISING What is Franchise?
A method of marketing and distributing based on a two parties relationship the franchisor (the owner and granter of right) and the franchisee (the recipient of right). The right granted is for the purpose of running the business by using the trade mark or trade name based on a specific system, at specified location or area and within a specified period of time. Malaysia Franchise Act 1998 - aims at creating a systematic registration system to oversee a well-managed and healthy growth of franchise business in the country 2. Franchise Relationship
Franchise system involves two parties: the franchisor and the franchisee. The franchise relationship can be divided into several forms and approaches:
a).
Master Franchisee
A franchisor gives the right to the master franchisee for certain territories, states or countries. Where the right is given in a territory, the master franchisee has the right to set up sub-franchising - area franchisees or unit franchisees. Franchisor: imposes conditions for sub-franchising - how many outlets to be opened within certain period of time, preparation of supporting system for sub-franchise programmes, criteria of selecting sub-franchisees and their partners, etc. Master franchisee - has the choice not to practice sub-franchising and expand the business on his own by opening outlets that are fully owned by him in his specific territory.

b).
Area Franchisee
Given the territorial right by the franchisor or by master franchisee. Exclusive right is to fully operate its business on its own without involving any sub-franchise. Area franchisee is also expected to follow the outlet development schedule as being outlined by the franchisor. Otherwise, the right could be transferred to other party. c). Unit Franchisee
An individual entrepreneur, or a small company, holding the right given by the franchisor to operate a specific franchise business in a specific location or premise only. Not allowed to practice sub-franchise. Usually allowed to own more than one outlet depending on the business performances.
3.
The Different Types of Franchising System
Three types of popular franchise system. They are a). Trade Mark/ Trade name Franchise Closely resembles licensing whereby the franchisor gives the franchisee the right to manufacture products by using the brand name, trade name, trade mark, logo, caricature and others owned by the franchisor for each area. The approach of this type of franchise does not require a complete system, however the franchisee needs to be supervised in order to ensure the quality and good name of the brand is preserved. b). Product Distribution Franchise The franchisor gives the franchisee the right to sell and distribute products produced by the franchisor. Franchisor provides guides and training to the franchisees on how to manage
the product distribution. Development of its operating system is not so comprehensive. Popular among automotive industries such as Edaran Otomobil Nasioanl Berhad (EON) and some chains of petrol stations such as Petronas, Shell, Mobil, etc. c). Business Format Franchise Most comprehensive and popular type of franchise system. Franchisees are given the right to use the brand name, distribute the franchisors manufactured goods, and the right to duplicate the whole business system as practiced by the franchisor. In business format franchise, the franchisor is responsible to prepare the franchisee beginning with the concept development and selecting the location, up to the operation manual, training, accounting system, advertising and promotion, and continuous business development assistance.
4.
Why Franchising?
a). Increase the effectiveness of its operation management Enjoys the economies of scale from bulk purchasing and the execution of more aggressive centralised advertising and promotions. b). Penetrate a Wider Market Immediately and effectively without involving major capital (as most of the investments are borne by the franchisee) penetrate local and overseas market. c). Bigger Marketing network Franchisor will be able to enjoy bigger product marketing networks and services as well as make rapid increase in production possible. d). Manpower requirement reduced Avoid having to recruit big manpower and pay huge salaries. Their places are taken over by the franchisees.
e). Overcome local market red tapes Through the franchise system, the franchisor will be able to transfer parts of its responsibility to conduct any feasibility study, selection of location, staff training, local advertising, and other red tapes to the owner and local entrepreneurs who are familiar with the local environment. 5. Important Factors to Consider When Preparing a Franchise Agreement a). Scope of agreement b). Background of the Franchisor and Franchisee c). Use of Franchisors Trade mark or service mark d). Use of Franchisors other IP rights e). Franchisors obligations f). Franchisees obligations g). Restrictions on sales of specific goods/services by franchisee h). Territory I). Payment terms j). Termination k). Financial Statements/Account Keeping l). Managing conflict and dispute solution
6. Malaysian SMEs Experience on Franchising The developments of franchise in Malaysia, especially those of home grown franchise are relatively new. There is still a lack of experience and expertise in the franchise business in the country. The Malaysian Franchise Act 1998 would be able to provide guidance to future franchisors, master franchisees or franchisees on basic matters that need to be fully understood and the requirements to be fulfilled before getting involved in the business. To help the franchise industry in Malaysia, the Government has organized the Franchise Development Programme since 1992. The programme aimed at providing basic training on franchising and to educate the entrepreneurs on what are the dos and donts in franchise business. The Malaysian Franchise Association has also published a book entitled Franchising in Malaysia : A Brief Handbook for the benefit of those who aspire to go into this form of business.
Although the number of home-grown franchisor in Malaysia is small, there are a few very successful ones. Examples: Marybrown - fast food Secret recipe - a food outlet selling a variety of snacks and meals Smart Reader - children education Kinderland - child care and nursery Rotiboy - selling bread, pastries, etc.

E. INTELLECTUAL PROPERTY VALUATION 1. What are most often valuated? - Trade marks - Technology (patented and non-patented) and know-how - Secret processes - Copyright (movies, music, songs, software, etc.) - Franchises - Internet websites - Right to royalty payment from licensing of IPRs or receivables from IPRs

2. Purposes of IP Valuation - Financing & Obtaining Loans - Public listing - Joint ventures (contributing of IP as capital) - Company restructuring - Mergers and Acquisitions - Transfer Pricing &Tax Planning - Licensing - Damages in infringement suits

3.
Methods of IP Valuation
a). Cost Approach What were the costs involved and incurred in development of IPR? b). Market Approach What is the value in the market of a similar asset? c). Income Approach What economic benefits and future revenue can the IPR generate?

4).
Consideration For IP Valuation
- Type of IPR - History of creation, development & Use - Relevant product(s) - Public recognition of the IPR - Licensing/Character merchandising - Audited financial statements for past 5 years - Future plans and likelihood of improvement in revenue - Projected future income - Market situation of relevant business - Stability of owner - Risks and possibility of devaluation - Recent Offers to purchase IPR or owner or proposal for merger - Validity of IPR

5. Malaysian SMEs Experience on IP Valuation In Malaysia, items most mentioned in the SMEs Balance Sheet are land, buildings, Manufacturing plants, equipment, commodities, tradeing stocks. Often unmentioned items in the SMEs Balance Sheet are patents, trade marks, Designs, copyright, confidential information, and other intangible properties. The awareness among SMEs in putting IP assets as a portfolio in their Balance Sheet is still very low. In SMEs, IP is usually thought of on the expense side of the profit and loss account. This is because: a). Protection of IP is an expensive exercise especially where IP protection is sought in a number of countries; b). IP does not confer monopoly but it confers the right to exclude others hence it is not an attractive idea to the SMEs. SMEs are very particular on their bottom-line. Unless very necessary, SMEs SIRIM BERHAD their IP as an asset. will not value YOUR PARTNER TO GLOBAL TRADE
F. CONCLUSION Licensing, franchising and valuation of IP Rights is still an infancy among the SMEs in Malaysia. It is important for the SMEs to focus on the profit making aspect of IP and that IP if properly managed and used, can be a long term sustainable source of income for the company. SIRIM through its SMEs incubation and IP awareness programmes is making every effort to get SMEs to be interested in this area. SIRIM will support every effort by MyIPO and the SMI Association of Malaysia and to work closely with MyIPO to create more awareness among the SMEs on the importance of IP Licensing, IP Franchising and IP Valuation.



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INTELLECTUAL PROPERTY RIGHTS: POWERING SMEs

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

LICENSING Meaning of Licensing

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

Malaysian SMEs Experience on Licensing

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

FRANCHISING What is Franchise?

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

The Different Types of Franchising System

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

Consideration For IP Valuation

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

SIRIM BERHAD YOUR PARTNER TO GLOBAL TRADE

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