Securing the value of your business by protecting your IP

It is important to remember that the value of your business is not determined by the years you’ve worked or how much you’ve sacrificed. Unfortunately, business is not about fairness. It is about leverage, profitability, enforceable rights, and controlling access to things of value.

Disappointing valuations

Business owners often don’t have the time to consciously think about what it is that governs the value of their business – aside from profitability, and perhaps trade secrets. Typically, this is because they have their nose firmly to the grindstone keeping it all running. So when it comes to selling their business, this tends to result in:

(1) A painful and messy due diligence process;

(2) A lower than expected valuation;

(3) The buyer requiring the seller to stay on in the business for a protracted period.

The source of the problem

Remember that the business is the network of systems (made up of processes, information, assets, legal rights, employees etc etc) that convert money and information into profit. You must be able to separate these systems from yourself, package them, and sell the right to use them to another party.

With this in mind, the above issues tend to derive from two main problems:

(1) The business owner has not fully externalised the business systems by establishing processes, training and delegating to employees, and documenting their knowledge. Instead, they are the critical element that makes the whole system work.

The purchaser will have to discount from the purchase price the cost of hiring and training employees to perform the roles of the business owner, plus the cost of keeping the former owner on for a protracted period to ensure that all the know-how is transferred.

(2) The business owner has not ensured along the way that the company actually owns, or has the enforceable right to use, all the IP upon which the business relies to operate. For example, contractors will have been used from time to time to help build the business systems (e.g. website, modified or custom IT systems, sales materials, and other documents) but ownership of the IP hasn’t been assigned in writing.

The purchaser will have to walk away, or discount the cost of either clarifying the ownership of these systems or building its own replacement systems.

Addressing these issues will increase the value of your business and finally allow you to take a holiday; not to mention that if the business systems can operate without the owner’s ever-present attention it can scale and grow, and even expand into new and interesting areas.

It is best to deal with these issues before you start negotiating with buyers as it will remove leverage that they can later use to keep changing the deal on you – something that you will be particularly vulnerable to if you agree to negotiate exclusively with one particular purchaser.

Optimising and growing the value of your business 

Separating the business systems from yourself is a matter of wearing the upfront cost in time to delegate, train, and document, in order to reap the long term benefits to your business’ growth and value. As this means sharing confidential information and know-how with employees and contractors, it will place increased emphasis on your intellectual property arrangements in order to protect the value of your business as you grow.

For starters, you will need to address:

  • Ensuring all employment and contractor agreements are in writing, and include clauses addressing:
    • Confidential information;
    • Assignment of IP;
    • IP moral rights;
    • Restraint of trade (for key employees).
  • Reviewing existing IP in your business and shoring up your rights to use it:
    • Getting previous contractors to assign the IP to you in writing;
    • For any licensed third-party IT systems,
      • Clarifying who owns the IP in any modifications you’ve made;
      • Confirming what arrangements are in place should the third-party provider cease to operate (e.g. escrow arrangements and who would have the ability to keep the service running);
      • Clarifying your alternatives should your ability to continue using the third-party systems be affected;
    • Registering business names and trademarks;
    • Ensuring the domain names are registered to the company;
  • Protecting your IP:
    • Consistently enforcing your IP rights against infringers (e.g. other businesses or individuals who are using your copyrighted works without payment or permission, or other parties using deceptively similar branding to market their products and services);
    • Clearly marking any confidential materials used in the course of your business as ‘confidential’ so that everyone involved is conscious of their obligations;
    • Having standardised ready-to-use agreements that are easily adaptable, such as:
      • Employment agreements;
      • Non-disclosure agreements;
      • Assignment of IP agreements;
    • Consider whether any new products under development should be patented.
  • Negotiating an affordable standing arrangement for legal advice and services, to:
    • Resolve disputes with IP infringers and debters early (ongoing disputes are expensive and seriously undermine your valuation);
    • Keep your business’ legal arrangements current, and allow you to take advantage of changes in the law;
    • Ensure that your agreements actually secure the benefits that make them worth signing;
    • Maximise the strength of your position before entering negotiations, and provide tactical advice throughout.

It is common for business owners to view lawyers as a cost, and some lawyers have not done much to rebut this opinion. However, partnering with the right lawyer will maximise the value of your business, reduce the stress and uncertainty involved in running it, and provide you with a trusted adviser who will fight your battles and protect your interests.

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See also:

Lawyers, how to choose them and how to use them to save you money

Employee or Contractor – What’s in a Name?

Fair Dealing – Getting Paid vs. Getting Played

Lawyers, how to choose them and how to use them to save you money

Business owners can often be apprehensive about engaging lawyers: they charge too much, they take too long, they don’t listen properly to what your priorities are, they don’t speak the language of your industry, they cause disputes to escalate rather than resolve, and signing a costs agreement can feel like writing a blank cheque. But this need not be the case.

If you know how to choose the right lawyer for you, and how to use them in the right way, they can actually save you a lot of money and help you move forward with confidence.

How to choose the right lawyer

Common experience

A great start is to look for a lawyer who has experience in your industry or situation. For example, my father, Peter Kelso, spent 13 years in foster care as a State ward. He now has a significant practice representing former State wards. Why? Because he speaks their language, he understands the challenges they face, and because he relates to them they know that he will go the extra mile for them.

Many excellent lawyers have come to the law having previously trained or worked in other industries. There are lawyers with backgrounds in medicine, psychology, engineering, building, small business, media, and the list goes on.

Lawyers love to fight for a cause, so look for a lawyer who relates to your situation and chances are they will go above and beyond for you.

Systematic methods

When you approach a lawyer about a problem they may not be able to give you a solution off the cuff. This is because legal issues usually involve too many variables – much like the ground conditions on a construction project, you can never know with certainty what you’re going to be up against until you start digging.

However, they should be able to give you an outline of how they will go about designing the strategy, executing it, and the usual milestones along the way. Lawyers who have a methodical, systematic, ‘project management’ approach to their work are far more likely to deliver on time and on budget.

Temperament

Employing the most aggressive or ‘alpha male’ lawyer in town can often work against you. The significant majority of disputes are now resolved by various forms of negotiation or mediation. These methods require a lawyer with emotional intelligence who can change gears and use a range of tactics, from the adversarial to the relational to the courteous diplomatic deal-maker. Using only aggressive tactics will put the other side on the defensive and leave them in no frame of mind to rationally consider the weaknesses of their own case.

A good indicator in choosing a lawyer is how well they engage with you when discussing the work you need them to do. Is the conversation focused on understanding your situation, your priorities, and how to achieve your objectives? If it’s all about them, or you don’t feel listened to, that’s not a good start.

How to use your lawyer

Prevention is cheaper than cure

A significant cause of the cost of engaging lawyers is that people often engage them only after things have gone pear-shaped. When you consider the losses you’ll have to wear, the disruption to your business, and the legal costs involved in litigation, there is significant money to be saved by engaging a lawyer early to help you weed out the risks and resolve disputes before they escalate. Engaging a lawyer in this way will make their fees affordable, and all the more so because you’ll be able to spend more time focused on running your business.

Mitigating the risk of disputes

The terms of the contracts you enter are a major source of disputes. If they are vague, incomplete, too ridged, impractically allocate the risks to parties who can’t control or contain them, rely on shaky assumptions, or are open to a variety of interpretations then this is fertile ground for disputes to arise.

If the contact has not yet been signed, your lawyer can negotiate amendments to mitigate these risks. If the contract has already been entered into, your lawyer can assist you to clarify the operation of the contract with the other party, and may be able to negotiate variations to head off potential issues. Your lawyer can also advise you on the systems, procedures and record-keeping needed to ensure that you are in a strong position should a dispute arise. (Being organised and following the contract procedures will also make a big difference to how much work your lawyer has to do to).

Resolving disputes before they escalate

Getting legal advice early can help see a dispute resolved in just a few emails. Your lawyer can assist you in responding to the other party in a way that leaves them uncertain about the strength of their position and far more willing to resolve the matter in a mutually suitable manner. While the standard threatening letter can cause things to escalate quickly, a skillful and persuasive response can help resolve the dispute and maintain the business relationship.

I recently had a matter where one well-worded email was able to achieve a written apology, the payment of several thousand dollars in previously disputed invoices, and an invitation to discuss further business. Disputes need not escalate to ‘lawyers at twelve paces’.

Appeals are expensive

The recent case of Shade Systems Pty Ltd v Probuild Constructions (Aust) Pty Ltd (No 2) [2016] NSWCA 379 shows just how expensive things can get when disputes escalate. In that case, Shade Systems served a progress payment claim on Probuild for construction work. Probuild served a payment schedule on Shade Systems stating that no amount was payable because the liquidated damages cancelled out the value of the work claimed. The dispute when went to an adjudicator who misinterpreted the contract and awarded about $277,000 to Shade Systems. The matter then went to the Supreme Court who quashed the adjudicator’s decision, and then to the Court of Appeal who set aside the previous order.

Now, imagine the expense that could have been saved had the parties used lawyers who could communicate and resolve the disagreement over the interpretation of the liquidated damages clause without resorting to the adjudicator; or failing that, had Probuild provided persuasive submissions to the adjudicator to guide his/her interpretation of the contract. Sometimes (and perhaps in that case), the other side is determined to litigate, or a decision-maker will inexplicably decide against you anyway. However, on average, a lawyer who can anticipate the sticking points and resolve them with clear communication will save you a lot money.

When to contact your lawyer

Running a problem by your lawyer need not be big deal or a formal occasion. The sooner your lawyer is told about an issue the better the chance they can resolve it. If you’ve picked the right lawyer, you should feel free to email or pick up the phone for a casual conversation about the issue. A good approach can be to email an outline of the issue, and schedule a follow up phone call. This will give your lawyer a chance to think about the problem first, and the conversation should be more productive.

See our services page, or contact us to find out what Australaw can do for you.

YouTube Videos and Content ID – Fair Use or Copyright Abuse?

pexels-photo-youtube

YouTube provides a user-friendly platform for uploading and sharing content on the internet to millions of potential viewers.  Individuals and corporations can utilise this medium to advertise skills and services, share opinions and advice or promote their latest products. Videos can even be monetised to earn the user ad revenue from views.

So why would YouTube block that video of your cat modelling your company’s latest range of feline fashion apparel, set to LMFAO’s ‘I’m Sexy and I Know It’?’ …Well, that’s because YouTube doesn’t want to get sued for copyright violation by Redfoo (no matter how fierce Mr Whiskers looks in that onesie).

YouTube has obligations under copyright law to remove or block content uploaded by its users which violates copyright. If YouTube fails to do this, they can end up being held directly liable. In 2007, YouTube started using Content ID – a system created by Google to automatically locate and remove infringing material on its site. The system works by inviting rightsholders to upload their original content to a database controlled by YouTube. The content is scanned and given a unique fingerprint. When a user uploads a video to YouTube, Content ID will scan this video against the database of copyrighted content. If a match is found, the rightsholder is notified and they are given the power to block, mute, monetise or track the video.

Uploading your favourite Seinfeld episode or music video to YouTube without permission is a clear violation of copyright, but the law does offer some exceptions to certain uses of copyrighted material.

There are a number of ways in which copyrighted content can be used legitimately by others – this is known as ‘Fair Use’ (or ‘Fair Dealing’ under Australian legislation). If your video falls under an exception, then you can dispute a Content ID claim and, if successful, YouTube will reverse any changes that were made to your video.

Every case has its own peculiarities- see our media page for what Australaw can do for you. Australaw can help you with a range of legal issues- contact us for more information.

Fair Dealing – Getting Paid vs. Getting Played

man-coffee-cup-pen

The growing ease with which anything can copied, shared (cross-platform), and monetised (subscriptions, affiliate advertising etc etc) is providing ever increasing opportunity for conflict between content creators and content distributors. Particularly as the lines between those roles have been greatly blurred by this age of rapid publishing facilitated by the Internet.

With budgets under pressure, the temptation is now greater than ever for people to try and assert the fair dealing (sometimes called ‘fair use’) exemptions to copyright infringement in order to avoid paying content creators. Through ignorance of the law, imbalance in bargaining power, and the financial and reputational cost of legal action, smaller operators often feel forced to accept this practice as the cost of doing business.

In the news business a typical scenario will be:

  • Content creator shoots footage
  • News service purchases license to use that footage and publishes it in the form of a TV news segment, social media posts, and online articles
  • Competitor news service copies the published footage and uses it in it’s own publications
  • Content creator sends invoice to the competitor news service for the use of its footage
  • Competitor news service claims that it has no obligation to pay the invoice due to the ‘fair dealing’ or ‘fair use’ exemption (note ‘fair use’ is the American term)

The fair dealing exemptions are contained in sections 40 – 42 of the Copyright Act 1968, and as with most legislation they are likely to be misunderstood if read without the benefit of legal training (most legislation requires an ability to ‘read between the lines’). Adding to the interpretational issue, their application is not black & white but instead a question of ‘impression’ in the circumstances.

At the outset, a good rule of thumb is to consider whether the copying of some part of the content is a referencing or a repackaging of it. Has the copy been incorporated into the new publication as a communication short cut (i.e. a means to quickly identify the topic being discussed), or has it been incorporated because the presence of it adds value in itself to the new publication? The former is more likely to be fair dealing, and the latter more likely to be copyright infringement (particularly if there is money being made), but every case falls on its own facts.

Determining these issues is two-fold. First, for there to be an infringement of the copyright in some content there has to be a copying of a ‘substantial part’ of it. This is a question of quality rather than merely the quantity of the copying. Some people might try to tell you that copying a certain amount, say 20 seconds of your video, is ‘fair use’, but that is about as valid as the ‘5 second rule’. In short, if you have copied some of the most eye-catching parts of the content then there has probably been infringement of copyright (unless an exemption applies) – So a 20 second highlight reel cut together from a content provider’s footage of a 2 hour sporting event is unlikely not to be infringement, as that highlight reel appropriates a substantial portion of the benefit that footage.

To borrow the wording of the Act, copying another party’s content is ‘dealing’ with it. So the question of whether the exemption applies will fall on whether you were dealing with it for one of the purposes stated in ss40-42:

  • Research or study
  • Criticism or review
  • Parody or satire
  • Reporting news

and whether that ‘dealing’ was ‘fair’ or ‘unfair’. Whether the dealing is unfair will depend on the particular facts of the case, but some important considerations will be:

  • Whether the use of the copy is one for which the rights holder would reasonably expect to be paid;
  • Whether a direct monetary benefit is being derived from the use of the copy (e.g. monetising the viewing of the new publication that contains the copy by use of advertising, subscription fees, or selling copies);
  • Whether allowing others in a similar position to the defendant to behave in this manner would significantly devalue the copyright in the work (considering the market that the rights holder had in mind when creating the content);
  • Whether the copy of the content, or part of it, included in the new publication is one of the key attractions bringing people to view the new publication.

Much of this revolves around the policy reason for creating ‘copyright’. That is, to encourage people to make their work available to the public. If allowing, as a general rule, the kind of copying that has occurred in the circumstances at hand would do significant damage to this aim then it is less likely the copying will fall within the ‘fair dealing’ exemption. The flip side is that Parliament seeks to avoid unduly impairing the ability of the public to communicate about events, issues and subjects that may necessitate reference to copyrights works, and this is where the fair dealing defence has a role to play.

Unfortunately, this article can only deal in general terms. Every case has its own peculiarities- see our media page for what Australaw can do for you. Australaw can help you with a range of legal issues- contact us for more information.