How can litigation be used to protect IP rights? Michael Edenborough QC & Thayne Forbes explain

In brief

• Ensure you know the true value behind intangible assets, such as intellectual property, goodwill and brand value before entering into a commercial deal.
• IP’s role and prominence in business is mirrored by its role and prominence in litigation: valuation of IP is often a contentious issue. 
• When defending the business value held in IP assets the process used to assess litigation should not be any different to the process used before entering a new market, launching a new product or making an acquisition. Commercial litigation should be viewed merely as one of the many strategic tools available to a business.

The role of intellectual property has become increasingly significant both in commercial transactions and disputes. IP rights are not only highly valuable but are also complex legally which thrive on attention. Litigation is an important part of a commercial toolbox for managing IP rights to optimise their value, and there are many and varied legitimate ways in which it is used.  

Role of IP in commercial deals
Many significant commercial deals involve IP to some extent. Generally the most significant IP rights are trade marks, copyright and patents, but there are also often highly valuable trade secrets and design rights. However legal and commercial due diligence in the context of proposed transactions is patchy in practice. Sometimes it is extensive, covering a myriad of issues such as: validity of registration; non use (trade marks); prior use (patents); and infringing activities. This is a lot of information to assimilate and assess in the pressured circumstances of doing a deal, but this is far preferable to dealing with such issues afterwards. The premise here is that it is better to go forward with good information than to take a chance without it.

Business people usually think more broadly than the legal definitions of IP. They think in terms of brands and goodwill. This is often a highly significant part (say 80%) of business value and a key part of competitive advantage. It doesn’t correspond directly to IP because it is broader and more loosely defined. However it draws heavily on IP and this does give rise to pressure to stretch the application of IP law. As this is aimed primarily at competitive advantage, in the UK there is a constant legal counterweight to this from the desire for competition.

Commercial due diligence can also be neglected. This would be directed at: the fundamental properties of brands and goodwill; what they are; what profits they will drive; and how this will be done. One example of an issue on commercial due diligence we have come across is where a premium brand was purchased without the associated super premium brand in the same market. After acquisition this caused a host of commercial issues which could have been better managed and assessed at the time.

Due to its role and prominence within organisations, brands and other IP will very often be impacted in actions prompting litigation. As IP value is generally the most contentious part of a business valuation it becomes the largest and most contentious part of the case for both economic damages and non pecuniary claims. IP’s role and prominence in business mirrors its role and prominence in litigation.

Given that IP is so valuable and complex, litigation is a useful tactic to protect its value. This is not just seen in IP related litigation, such as actions for trade mark infringement, but also in commercial disputes. If a commercial dispute centres on business value then the most significant contentious element will be around the value of the brands or goodwill. Or the impact of the disputed actions on the value on brands and goodwill.

If a dispute does cover the impact on a business brand and goodwill then it is by definition likely to be significant. At this point much attention then needs to be given to the value of the brands, goodwill and therefore business, what drives that value, why that is so, supporting research and analysis and how it is impacted for the purpose of the dispute.

Managing litigation
A commercial approach is best taken towards protecting and managing a firm’s IP through litigation. The marketing profession has developed a useful acronym (SOSTAC) for managing marketing activities and it is an equally good framework for planning and managing litigation activities:

S Situation – which means analysing the current position
O Objectives – what needs to be achieved
S Strategy – top level plan of how we are going to get there
T Tactics – the day to day implementation of strategy
A Action – putting the plan to work
C Control – measurement, managing and reviewing

This basically says that the process used to assess litigation should not be any different to the process used before entering a new market, launching a new product or making an acquisition. In the same way as business cases are prepared to justify and evaluate commercial activity then they should also be prepared for litigation. There are some particular commercial risks associated with litigation, such as the break down of commercial relationships, which can be managed as part of a business case process. 

For specific trade mark-related disputes there is a wide range of unlawful or unwanted activity ranging from counterfeit to look-a-like activity, parallel importing, own-label, passing off comparative advertising along the way. Most brand owners face competition and threats all along this spectrum. Deciding which activity to target and how is highly complex both in the range of potential preventative and reactive actions and the risks of their success. Failure can have significant repercussions. It’s not always the case that taking trade mark infringement proceedings for the most obvious infringements is the best strategy.

IP litigation strategies
IP litigation is complicated per se, and by the fact that it often has its own rules of procedure that are different from normal commercial litigation. Yet, this complexity should be considered as an opportunity, rather than a hindrance, because if used correctly it can be used to one’s client’s advantage.

Commercial litigation (as opposed to criminal or administrative actions) should be viewed merely as one of the many tools available to a business – along with prudent use of other strategies such as negotiation and mediation. Very few matters indeed are fought solely as a matter of principle. The vast majority of IP cases are commenced and prosecuted as a way of establishing or maintaining a market share or presence. All such litigation should be conducted so as to place one’s client in the best possible commercial position.

There may be reasons why litigation might be commenced. For example, an infringer might be damaging the image of the brand by selling inferior products under a confusingly similar sign; or (even though the product is of an acceptable quality), significant sales are being diverted, and so damaging the potential profitability of the IP rights holder. It might be that, even though the strict legal merits are low, litigation is commenced in order to send a message to the marketplace that the IP rights will be defended against all-comers with the intention of deterring others from encroaching. A further strategy is to seek registration of some right. The uncertainty created while the registration process is being completed might deter some competitors from entering the market.

If one’s client is on the receiving end of a piece of litigation. In such cases, again, there are many possible strategies. For example, there might be a simple counterclaim on a related, or unrelated, matter; or it might be possible to challenge the validity of the right in some way – for registered rights there are usually a limited number of well defined ways in which this can be done; however, for unregistered rights the terrain is often more uncertain and so more unusual points will often have to be contemplated, e.g, challenging whether or not the claimant exists as a matter of law, and so has a locus standi to bring the proceedings. This last suggestion might seem very farfetched; but it has been used successfully on more than one occasion.

Finally, it is very important to remember that each piece of IP litigation should be hand-crafted to the particular facts of the situation. No one piece of IP litigation is ever (or rather, should ever) be the same as any other piece. All too commonly, one sees very simplistic IP litigation being commenced without any thought been given to the consequences, e.g. whether the right sued upon is valid or not; or whether by seeking clarification of the other side’s case in fact one is prompting them to formulate a more cogent and coherent case that cannot be rebutted. Failure to think strategically about the case, and in particular about the consequences of one‘s action will commonly lead to your client’s position being damaged, rather than advanced.

To conduct strategic litigation, one needs to have a thorough knowledge of the current law and practice. In particular, if one is litigating on the very edge, one must know precisely where is that edge, otherwise a false move could prove disastrous to the client’s case.

Also a comprehensive appreciation of the various areas of uncertainty in the law and practice is essential, because it allows one to use that uncertainty to your client’s advantage. In this context, apart from obvious areas of uncertainty such as (for example) where there are conflicting judgments or currently developing areas of jurisprudence, the more interesting areas are those that are assumed to be settled, but in fact have never been tested. All of sudden, the whole landscape can be changed, and one can dislocate the other side’s stance at a single sweep – once the unarguable has been properly examined, it often becomes unanswerable. Such a coup can be very much to your client’s commercial advantage.

Michael Edenborough QC, Serle Court and Thayne Forbes, Joint Managing Director, Intangible Business.