mr ong the malaysian experience

8/3/2019 Mr Ong the Malaysian Experience

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SIRIM BERHADSIRIM BERHAD YOUR PARTNER TO GLOBAL TRADEYOUR PARTNER TO GLOBAL TRADE

EC-ASEAN Intellectual Property Rights Co-operation Programme (ECAP II)-

INTELLECTUAL PROPERTY RIGHTS: POWERINGINTELLECTUAL PROPERTY RIGHTS: POWERING SMEsSMEs

Jointly Organised ByJointly Organised By

Intellectual Property Corporation Malaysia (Intellectual Property Corporation Malaysia (MyIPOMyIPO))European Union (EU)European Union (EU)

EUEU--Malaysia Chamber of CommerceMalaysia Chamber of Commerce

Renaissance HotelRenaissance Hotel

Kuala LumpurKuala Lumpur

1313 -- 14 March 200614 March 2006

Licensing, Franchising And Valuation of IP Rights:Licensing, Franchising And Valuation of IP Rights:The Malaysian ExperienceThe Malaysian Experience

ByByOng Chui KoonOng Chui Koon

Registered Patent, Trade Mark & Industrial AgentsRegistered Patent, Trade Mark & Industrial AgentsCommissioner For Oaths, High Court of MalayaCommissioner For Oaths, High Court of Malaya

Principal Consultant and HeadPrincipal Consultant and HeadIntellectual Property Services SectionIntellectual Property Services Section

SIRIMSIRIM BerhadBerhad

ShahShah AlamAlamMALAYSIAMALAYSIADirect Tel: ++ 603Direct Tel: ++ 603 -- 5544613455446134Direct Fax: ++ 603Direct Fax: ++ 603 -- 5544614655446146

Email:Email: [email protected]@sirim.my

All rights Reserved 2006 SIRIMAll rights Reserved 2006 SIRIM BerhadBerhad


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A.A. TYPES OF INTELLECTUAL PROPERTY RIGHTS AVAILABLE TOTYPES OF INTELLECTUAL PROPERTY RIGHTS AVAILABLE TO SMEsSMEs ININMALAYSIAMALAYSIA

a). Name of business : Trade Name

b). Distinctive signs : Trade marks (both registered and unregisteredmarks)

c). Creative designs (appearance or look of finished products) : industrialdesigns

d). Innovative products and processes : Patents and/or utility innovations

e). Cultural work, artistic work, literary works (including computersoftware) and compilation of data : Copyright

f). Trade secrets (customer lists, sales tactics, marketing strategies,manufacturing processes, know-how, formulae, etc.) : confidential

information


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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 isindustrial designs.

Third most widely known form of protection among the SMEs is patent.

No record available on copyright protection since there is no registrationsystem 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.


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C. LICENSING

1. Meaning of Licensing

- 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 manyshapes 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 thelicence although the licensor has been opposed to the idea.


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2. Types of Licensing Agreements

a). Non-Exclusive Licences

Non-exclusive licences give the licensor both the right to use the licensedright 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 alicence 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.


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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-ownedcompanies 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 licenseecan best decide on how to use each others resources and capacity


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e). Commercial boundaries are eliminated

Restrictions on currency flows, quantitative import restrictions andcustoms fees that make the exchange of goods difficult among countriescan 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.


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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 tosuit the actual market.

j). Broad field of contacts

Through contacts with the licensee and associates, the licensor may find amarket for some of his own products. The combination of what he acquires

through the licence and what he himself possesses of know-how inproduction methods, etc., might open doors to another chain of licences witha 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, anotherperson may take over the right to exploit the patent. This person may do soentirely or only in part and in a certain region.

l). Competitive advantage

A means of achieving a position one step ahead of your competitors


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4. Important Factors to Consider When Preparing a Licensing Agreement

a). Scope of Licenceb). Territoryc). Minimum Performance

d). Best Endeavours

e). Transfer of Technology

f). Access to Improvementg). Dealing With Infringements

h). Protection of Trade Marks and Designsi). Protection of Confidential Informationj). Protection of New IP Generated during the tenure of the Licence

k). Payment termsl). Sub-Licensing

m). Account keeping

The preparation of a licensing agreement can be undertaken by a patent agentwho 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-wincontract.


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5. Malaysian SMEs Experience on Licensing

In the early 70s and 80s - Malaysia encouraged Foreign Direct Investment byMulti-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 specifictechnical specifications provided by MNCs.

MNCs provide training to the SMEs and sent their engineers to work with theSMEs 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 generallytechnology 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 whensigning the technology licensing agreements with the MNCs.


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During the late 80s and early 90s, some of these SMEs began to design andfabricate machinery used in the manufacture of parts and/or components. The

setting up of PROTON in 1983 and PERODUA in 1985 further encouraged theSMEs to design and fabricate machinery used in the manufacture ofautomotive 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 toshift their operations outside Malaysia and move to Thailand, Vietnam and

Cambodia. Accordingly some of these SMEs follow their customers andstarted to set up manufacturing plants outside Malaysia.

Note: Recently MIDA has stopped the practice of registering licensingagreements concluded between MNCs and SMEs. The reason for this is thatthe Government is of the opinion that SMEs are now mature enough to handle

the licensing issue on their own.


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The Government move during the last decade to instill IP Awareness amongthe SMEs has resulted in some patent registered and owned by SMEs inMalaysia. 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 patentapplications filed at MyIPO is around 250 - 300 cases per year (based on 2004

records) and a majority of these local applications were filed by theUniversities 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)


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D. FRANCHISING

1. 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 thetrade 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 registrationsystem 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. Thefranchise relationship can be divided into several forms and approaches:


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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 toset up sub-franchising - area franchisees or unit franchisees.

Franchisor: imposes conditions for sub-franchising - how many outlets to beopened within certain period of time, preparation of supporting system for

sub-franchise programmes, criteria of selecting sub-franchisees and theirpartners, 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.


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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 involvingany 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 orpremise only.

Not allowed to practice sub-franchise.

Usually allowed to own more than one outlet depending on the businessperformances.


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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 theright 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 qualityand good name of the brand is preserved.

b). Product Distribution Franchise

The franchisor gives the franchisee the right to sell and distribute productsproduced by the franchisor.

Franchisor provides guides and training to the franchisees on how to manage


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the product distribution.

Development of its operating system is not so comprehensive.

Popular among automotive industries such as Edaran Otomobil NasioanlBerhad (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 thefranchisors manufactured goods, and the right to duplicate the wholebusiness system as practiced by the franchisor.

In business format franchise, the franchisor is responsible to prepare thefranchisee beginning with the concept development and selecting the

location, up to the operation manual, training, accounting system, advertisingand promotion, and continuous business development assistance.


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4. Why Franchising?

a). Increase the effectiveness of its operation management

Enjoys the economies of scale from bulk purchasing and the execution ofmore 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 overseasmarket.

c). Bigger Marketing network

Franchisor will be able to enjoy bigger product marketing networks andservices 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 aretaken over by the franchisees.


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e). Overcome local market red tapes

Through the franchise system, the franchisor will be able to transfer parts ofits responsibility to conduct any feasibility study, selection of location, staff

training, local advertising, and other red tapes to the owner and localentrepreneurs 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 markd). Use of Franchisors other IP rightse). Franchisors obligationsf). Franchisees obligations

g). Restrictions on sales of specific goods/services by franchisee

h). TerritoryI). Payment terms

j). Terminationk). Financial Statements/Account Keeping

l). Managing conflict and dispute solution


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6. Malaysian SMEs Experience on Franchising

The developments of franchise in Malaysia, especially those of home grownfranchise 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 tofuture 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 theFranchise 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 entitledFranchising in Malaysia : A Brief Handbook for the benefit of those who

aspire to go into this form of business.


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Although the number of home-grown franchisor in Malaysia is small, there area 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.


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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


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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


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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?


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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


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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 lossaccount. 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

will not value their IP as an asset.


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F. CONCLUSION

Licensing, franchising and valuation of IP Rights is still an infancy among theSMEs 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 Malaysiaand to work closely with MyIPO to create more awareness among the SMEson the importance of IP Licensing, IP Franchising and IP Valuation.


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EC-ASEAN Intellectual Property Rights Co-operation Programme (ECAP II)

mr ong the malaysian experience

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