Cost of protecting IP
Any method to reduce the cost of IP needs to be balanced against the value of proper protection. There is a real danger that short-cutting protection measures will result in the IP not being properly protected. There are various other methods of protecting your IP but necessarily they do not rely upon the statutory methods of registration. For example, confidential information, unregistered trademarks and reliance upon fiduciary obligations, which invariably rely upon a court protecting the unregistered rights of the owner. However, these unregistered rights will always be subject to another party's registered rights.
If you are unable to justify the preliminary costs, then it's feasible that the IP has no immediate or future value to you and registration is unwarranted. This is like taking out life insurance: You hope to goodness you never have to access life insurance but it's there to provide protection in the future. A similar rationale should be applied to the protection of IP.
If the IP expenses are being paid by the licensee, some of the expenses could include improvement costs – such as labour costs, registration fees, renewal fees, legal fees and some administration allocations. The licensor will not capitalise the expenses paid by the licensee since the tax requirements is that the owner has paid for the costs, unless there is some exchange of property. The licensee would claim the expenses incurred as presumably the incurring of the costs would be consistent with the requirements under the licence agreement.
Benefits of a trademark
The real economic benefit of a trademark is that it provides a point of commercial differentiation and the enhancement of the value of goodwill that a trademark affords. A trademark can be used in a global sense to identify the organisation but also can be used to separately identify product. Whilst there is a cost associated with this degree of protection, if the trademark has followed the proper registration process the courts will generally readily provide protection for the owner of the trademark.
Accordingly, it is important that you develop a trademark strategy that justifies the cost, but in assessing the economic equation, you should evaluate what economic value the ownership of the trademark brings to the organisation.
Whilst the courts will support unregistered marks and logos, in defence against a statutory registered name or mark, you have to establish the original owner's reputation in respect of the mark. If, however, the original owner had registered the mark in the first instance, such a dispute would not have occurred. An example is where a small online clothing business, named after the daughter of the owner, was required to stop using the name Zara. This example evidences the difficulty of a small business trying to prove reputational ownership of the name in defence of a statutory owner of the same name.
To enforce rights in an unregistered trade mark, it is necessary to prove reputation, which requires evidence. Getting evidence of reputation is costly, and can be very difficult for smaller traders. Proving a reputation is not required for a registered trade mark – this is the main reason why we have a trade mark registration system.
It is important to remember that the trade marks office considers trade marks on a phonetic basis. If the trade marks are phonetically similar (for example, "Kola" vs "Cola") then the prior mark will be cited against the application. There are a number of ways to respond to an examiner's report under the Trade Marks Act, including providing evidence of your use of the trade mark, or arguing that the goods or services claimed are sufficiently different such that consumers would not be confused between the two.
Common law trade marks
The expression common law trade mark refers to a trade mark that has not been registered but which has a strong reputation in the public’s mind, such that use of the same or similar trade mark by someone else could be stopped on the ground it would mislead or deceive consumers.
Lapsed trade marks
To register a trade mark you must be first to use and first to register as a trade mark. The name cannot be geographic, descriptive, or laudatory. The mere fact that a trade mark has lapsed doesn't overcome your obligation to be the first to use it. Accordingly, a lapsed trade mark does not necessarily afford you any great advantage in the registration process, because your predecessor was the first to use it. Of course, this outcome will depend on whether in fact the previous lapsed mark is in fact confusingly similar to the mark you wish to use.
Trade marks can be renewed up to six months after expiry. If the trade mark is not renewed, it will be removed from the register. However, there is still a risk that the trade mark owner might still be using the trade mark, which could give rise to other risks such as passing off or misleading and deceptive conduct under the Australian Consumer Law.
It is wise to lodge a provisional patent application first, when a new product is developed, which will give the applicant a priority date for the invention, then to consult an IP lawyer for the drafting of a confidentiality agreement, before discussing with other parties (be it manufacturers, retailers or potential buyers). This will establish the best protection although it should be understood that a provisional patent application gives the applicant a foot in the door; full protection for the idea is not obtained until the patent has been examined by IP Australia and a grant issued. Protection will then date back to the publication of the full patent application.
A patent is a depreciating asset for the purposes of Division 40 ITAA 1997. Whereas a patent is a CGT asset, on the sale of a patent, any gain is assessed pursuant to subdivision 40-D. Accordingly, there are no CGT concessions applicable to the gain.
An unregistered innovation, on the other hand, (such as confidential information) to the extent that the taxpayer has any legal or equitable rights to protect the innovation, is a CGT asset and any gain generated by the "sale" of the innovation will be a capital gain and eligible to the relevant CGT concessions.
If the owner of a patent grants a licence in relation to the patent and receives a lump sum amount for granting the licence, the lump sum amount is assessable pursuant to Division 40. In particular, in circumstances where the taxpayer grants or assigns an interest in an item of intellectual property, for example a licence, the taxpayer is treated as having stopped holding part of the item (subsection 40-115(3)). Then, as a consequence of that, there is a balancing adjustment event (Section 40-295) and the consideration received is the amount relating to the balancing adjustment.
Given that copyright subsists in a drawing and copyright does not require registration, it can be asked why anyone would register a design for a product, why not just rely on the copyright in the design drawing of the product. The reason is that copyright law removes protection from a design drawing of a product where more than 50 of the products have been made for sale by the owner of copyright in the drawing. The protection that is removed is the right to stop others making a product that reproduces the design shown in the drawing. Once that protection is removed, others are allowed to make a product to that design. To be able to stop others making a product to the design, it is necessary to register the design. This is the reason for having a design registration system.
Regarding designs for workbooks, to the extent that your material is either text (writing) or diagrams (drawings), then it is protected by copyright without you needing to take any steps such as registration. Be aware, however, that the copyright protection stops others from using your text or diagrams without permission, but it does not stop others from using the ideas contained in the text or diagrams. If you want protection for your ideas as such, you need to consider patent protection (which may or may not be possible).
You could also reassert either your practice name or another brand as the source of this material. If you wish to protect your practice name or the other brand, you will need to consider a trade mark application. Trade marks are the highest form of name protection – and the only element of intellectual property without a defined time frame. There are rules for trade marks, and they must be the subject of an application through IP Australia. You need to check that no one else has registered your brand prior to your application, by undertaking searches.
Structures to protect IP
To achieve appropriate asset protection it is preferable to isolate the IP with different ownership to the entity conducting the business.
Given the taxation issues concerning the ownership of IP, the preferred structure both from a taxation and an asset protection purpose is to hold the IP in a standalone company, which licenses the use of that IP to a trading entity for an appropriate license fee. The arrangement should be properly documented with an appropriate termination clause, which brings to an end the licensing arrangement if the trading entity becomes financially distressed. Make sure that you have dealt with the IP ownership issues.
The difficulty of using a trust to own the IP is that you cannot sell an interest in a trust (other than interest in a unit trust). If the asset is copyright, registered designs or patents, the taxation treatment applicable to the sale of the shares will result in the share transaction as being subject to CGT with all the inherent benefits.
If the above assets are owned by a trust, Division 40 is the only tax treatment with all the financial detriment that brings.
The use of a company also allows an acquirer to acquire the share and utilise the tax consolidation regime to assign values to the IP without any detriment to the vendor of the shares. Further, if you are developing patents, the R&D concession is only available to a company, which is another reason why a company should be used.
The Google transaction structure is based around the source of income and if the foreign entity (wherever located be it in a tax haven) is owned by Australians, the Controlled Foreign Entity Regime will apply to attribute the income back to Australia. The Australian laws dealing with ownership of passive assets in foreign jurisdictions is subject to present government scrutiny and it would be most unwise to contemplate such a structure at the moment. Further, the cost of establishing a foreign passive owning structure is significant and oftentimes does not justify the ATO reviews.
IP protection globally
There are rules regarding linkages between the Australian IP system and the international IP system. Under the Paris Convention, someone who applies for a trademark in Australia has six months to lodge an international trademark application and be able to claim the Australian priority date.
The same period of time applies to a registered design and, in relation to patents, the period of time is 12 months.
Copyright entails a separate regime. Australia is party to an international convention which means that the copyright rights that are obtained in Australia also apply equally in overseas jurisdictions. Copyright is obtained automatically on the creation of the copyrighted work.
It's very important that you ensure protection of your IP in all jurisdictions where it is anticipated to be applied. This often involves a proper review of your business strategy to ensure that the IP is registered in those potential jurisdictions to provide assurances that as the business expands you are not confronted with a rogue registrant in that foreign jurisdiction.
There is no kind of patent which covers all countries. There is “European patent” that covers most European countries, but not one that covers all countries in the world. To get a patent in non-European countries you need to obtain one in each country separately. The Patent Cooperation Treaty allows you to file one application for multiple countries, but to get a patent in those countries the application has to be examined and granted in each of those countries separately.
The cost of developing a new and separate asset is of a capital nature and ordinarily such costs should be capitalised and shown as an asset in a balance sheet. However, if the entity is a reporting entity, the current accounting standards prevent the internally generated IP from being shown as an asset other than in exceptional instances. Further, the accounting standards prevent the balance sheet reflecting revaluation of such assets. In the case of a non-reporting entity, the accounting standards have minimal implications and accordingly, the asset can be revalued.
There are no registration requirements that need to be satisfied for copyright protection, simply creating the material is all that is required. However, it can be of practical benefit to put “Copyright” or “©”, and the name of the creator, on copyright material – so as to alert others that rights exist in the material.
Copyright protection is limited to reproduction of the actual text or drawings – it does not cover the ideas that the text or drawings disclose.
Computer software (that is, the computer program) is protected by copyright as if it was a literary work unless the software provides an algorithm, which can be registered as a patent. There is no need for anyone to determine if those rights exist – they just do.
It is prudent to maintain a register of IP Assets for existing IP and R&D work. Future IP Rights (for example, IP that has not yet been developed) can be assigned or licensed. There is a finite spectrum of IP for software – certainly copyright, but possibly patents and trade marks if the brand is commercially important.
If you are accessing material protected by copyright, rights under copyright do not change if the creator is located overseas. That material would still be protected in Australia under international treaties.
The transfer of IP from yourself to a trust will have various taxation implications depending upon the nature of the intellectual property. Certain items of IP (copyright, patents and registered designs or interests therein) are all treated as revenue assets for the purposes of Division 40. Transfer of these assets subject to the value of the asset will not attract CGT or any of the concessions but will be fully taxed.
Trademarks and other forms of IP not referred to above will be CGT assets and the transfer will create a CGT liability. However, if those assets are used in a business of the taxpayer, it's possible for the various CGT concessions to apply (Division 115 and Division 152).
If the client’s objectives include the sale of their business, including all the assets and Division 40 intellectual property, it is essential to ensure that what is ultimately sold is a CGT asset subject to CGT assessment.
This can be achieved if the CGT asset sold is, for example a share in a company which “houses” all of the business assets.
In accordance with the Division 152 provisions, a share will be an active asset if 80 per cent of the market value of the assets of the company are active. Even though the assets might include depreciating assets they are still active assets. Further there is a special inclusion of IP assets that are used for passive income, if the value in the asset has been developed by the taxpayer.
The value of IP is based on the future economic benefits attributable directly to the ownership of the IP. Generally, those economic benefits are capitalised and discounted back to the present value. It's important where there is a transfer between the individual and his trust to ensure that the market value is used for the transfer to minimise taxation implications.
IP is a Commonwealth statutory asset and accordingly, the transfer of statutory IP will not be subject to duty unless it is transferred in combination with the transfer of other business assets. It is important to review each state's duty legislation as there are variances in the treatment of these assets. In Queensland, for example, duty is only payable on the transfer of IP when the IP is transferred with other business assets.
Personal property securities
The Personal Property Securities Register covers intellectual property. The scope of what is covered under a PPSR Security Interest registration would be determined by the underlying security document. If intellectual property is generated by an organisation, then it can be subject to a security interest.
Registering IP to an individual
There are disadvantages in this approach, including the following:
- Asset protection: If the individual suffers some financial distress associated with a private matter and the IP is exposed.
- Asset protection: Where the IP is used in a business activity and suffers the risk of litigation associated with business transactions.
- Subject to the nature of the IP, there are significant taxation implications if the sale of the IP attracts Division 40.
- If the property wishes to be commercialised, it becomes necessary to restructure the ownership of the asset at the later time, which may cause revenue implications both tax and duty (although it's possible for rollover provisions to be used to mitigate this).
The process is not complex but does require an understanding of the steps required. It is important that someone who wants to register a logo reads the information about the process on the IP Australia website. A number of key issues include the class of goods and services that the person wants to register against.
The process of applying for a logo or any type of trademark requires someone to log on to eServices on the IP Australia website to register as a user. Then to select the online application form to go through the process of recording details of the trademark together with the correct class of goods and services.
The above information has been developed in consultation with IP Australia which is the Australian Government agency that administers intellectual property (IP) rights and legislation relating to patents, trade marks, designs and plant breeder’s rights.