IP OWNERSHIP pt. 1 – Company structuring, and Licensing of IP

Your intellectual property (IP) assets are not only valuable in and of themselves, but they can also assist in securing investment, establishing new revenue streams, and minimising tax.

If IP is locked inside your operating company, you could be closing your eyes to a dual company structure that enables you to capitalise on, better manage, and better protect your IP.

This article covers:

• how a dual company structure works; and
• the advantages and disadvantages of an IP Holding Company.

Dual company structure

You may have come to realise that the world’s largest corporations often structure their businesses by having an operating company and a holding company.  This is known as a dual company structure.

The operating company will typically enter into the day-to-day agreements with customers, employees and suppliers, whereas the holding company (owning 100% of the shares in the subsidiary operating company) usually controls any assets and capital, acting to limit liability.

If a customer sues you, they will need to sue the company that they have contracted with, being the operating company; and in a dual company structure, an operating company will usually hold fewer assets.

How does this work in relation to IP?

The holding company (as licensor) controls and owns the IP assets (including patents, trademarks, copyright, and designs), and licenses these IP assets to the operating company (as licensee), ensuring the IP assets are shielded from the commercial activities of the operating company.

What are the advantages of an IP holding company?

Some advantages to holding your IP assets in a separate company to that of your operating company are:

• Centralising the management of your IP, leaving little room for uncertainty in regards to IP ownership;
• Capturing all of your IP assets through performing an IP audit, giving a clearer understanding of your IP and its management;
• Limiting liability in the event of insolvency, protecting your valuable IP from third parties, customers, creditors, and suppliers;
• Financial structuring is in place so that your IP assets can be made available more easily as security, sold or spun-off;
• Alluring investment by having a well-managed and sophisticated structure in place; and
• Tax effectiveness by delegating royalties/license revenue generated from licensing IP assets.

What are the disadvantages of an IP holding company?

Aside from the recognisable benefits to having an IP Holding Company, a disadvantage to such a structure is the establishment costs and any ongoing costs of the additional company.

Also, the holding company may not be immune from liability where the operating company engages in fraud, or if the companies are not found to be under separate management in the event of liquidation.

An IP Holding Company may be presented with difficulties in pursuing patent infringers, as the only parties entitled to commence patent infringement proceedings are the patentee or their exclusive licensee, per section 120 of the Patents Act 1990 (Cth).

It is also important that the licence agreement between an IP Holding Company as the patentee and an exclusive licensee is properly drafted, otherwise the amount of damages which can be claimed for patent infringement may be reduced or nominal.  Where an exclusive licensee loses standing, its losses may not be claimed by the IP Holding Company / patentee, and this may have a significant impact if the exclusive licensee is the entity which exploits the invention on a day-to-day basis.  These issues were canvassed in the Australian Full Federal Court decision of Bristol-Myers Squibb Company v Apotex Pty Ltd [2015] FCAFC 2.  A similar position was reflected in the US Federal Circuit Court decision of Poly-America, LP v GSE Lining Technology, Inc. 383 F.3d 1303 (Fed Cir 2004).

What to consider when establishing an IP holding company?

If you are thinking about setting up an IP Holding Company, one of our lawyers can assist you in identifying the pertinent issues and the steps to be taken, including for example:

• Drafting appropriate Licence Agreements between the IP Holding Company (as licensor) and the operating company/subsidiaries (as licensee/s);
• What fees or royalties to charge to the subsidiaries for their licensed use of the IP;
• Confirming that the IP Holding Company holds no other assets; and
• Stamp duty and tax implications.

While large multinational companies have always had the resources and reach to restructure their IP assets in this manner, the rise of IP as the fundamental asset of many companies (irrespective of size and stage of development) means that such an approach to holding and exploiting IP is something that a growing number of companies can no longer afford to ignore.

To discuss setting up an IP Holding Company and preparing appropriate Licence Agreements, please do not hesitate to contact Jacob Bartels at NFP Lawyers.

Disclaimer – Reliance on Content
The material distributed is general information only. The information supplied is not and is not intended to be, legal or other professional advice, nor should it be relied upon as such. You should seek legal or professional advice in relation to your specific situation.