Fishing For Assets: The Value of Intellectual Property
Posted in | Apr 12, 2016
Kingfisher Airlines, the now-defunct Indian airline whose parent company is United Breweries Group (UB), is putting nine of its trade marks up for auction in an attempt to repay a reported Rs 7,000 crore (approximately £748 million) owed to a number of its lenders.
By way of background, Kingfisher Airlines (KAL) was founded in 2003 by famous billionaire, Vijay Mallya, together with UB as a business venture that clearly hoped to exploit the strength of the highly successful Kingfisher beer brand. On the back of this ‘endorsement’, the company began commercial operations in 2005, from which it quickly grew to become recognised as the second largest domestic air travel operator in India. Yet, despite this fact, in not one year from 2005 to its suspension in 2012 did the company make a profit, and as it stands today it is the largest non-performing asset (NPA) in India.
At the height of its financial problems, between 2009 and 2010 the company’s debts were completely reorganised, and a reported Rs 20 billion (approximately £211 million) was converted into equity in order to secure additional loans. But loans by necessity need some sort of securitization, and with nothing of sufficient tangible value for KAL to pledge, they turned to other valuable resources, their intellectual property.
Thus, in 2010 trade marks including the newly registered ‘Kingfisher Express’ and ‘Kingfisher Airlines’ were pledged to the lenders, making them the first assets of this kind to be secured as collateral in India. In 2014, after defaulting on the loans the nine trade marks were put up for sale, but at this time there was no interest from potential buyers.
On 2 March this year, Mallya fled India—the same day that the lenders took their issue to the Debt Recovery Tribunal.
On the 30th of this month, the creditors will try once again to recover the loans as the nine trade marks go to auction.
The case is controversial, not least because it calls into question the methods through which brand value is monetised for the purpose of security. Indeed, such concerns have ensured that Grant Thornton, the consultancy firm that valued the Kingfisher brand at a reported Rs 41 billion, will be formally investigated by India’s Serious Fraud Investigation Office (SFIO).
Contentious though it may be, the case at least highlights in some way just how much worth can be attached to Intellectual Property (IP), which if exploited in a proper (and legal) manner can form a significant source of a company’s revenue.
In what follows, we outline how valuable IP can be with a particular focus on trade marks, and touch upon what businesses can do to make the most of this intangible asset.
Intellectual property, akin to physical property such as real estate, can be of great value to a business, and trade marks in particular can form an integral element of a business’s asset portfolio. In the UK, trade marks can even be audited, and since The Companies Act 2006, intangible assets can be recognised on a company’s balance sheet.
Like renting out your real estate or selling it to generate revenue, for the same purpose you can license or sell your IP. You can even, as we have seen in the above, use your IP as collateral.
IP can also be an indispensable tool in negotiations, adding extra bargaining power and/or helping to secure that much-needed investment. By registering a trade mark you are demonstrating your own investment in your brand. Indeed, a proportionate investment in your IP portfolio can be a great indication to a would-be investor that their money will be protected, and this can often be the decisive point at which negotiations succeed or fail. You don’t have to be an IP expert to know this much, just watch one episode of Dragons Den and you will see this in practice.
This is because corporate branding and trade marks are the instruments through which a company distinguishes itself from its competitors. Branding is the face of a company, the human aspect which forms a relationship with the most essential people to a company’s success, its customers. Customers come to know and trust certain brands and form associations with these brands that breeds loyalty. Just think of how much value is added to a pair of sunglasses simply because they bear two letter C’s, back-to-back and slightly overlapped (the Chanel trade mark). Similarly, it has been claimed that KAL’s association with ‘playboy’ Vijay Mallya has depreciated the brand’s value, to the extent that there are fears the trade marks will not live up to their original valuation when they go to auction later this month.
With all of this in mind, one can begin to understand (even if one doesn’t entirely sympathise with) why the introduction of plain tobacco packaging has been so controversial with tobacco companies. It is like taking away a significant part of their plants or premises without remuneration and removing the means through which their companies are distinguished.
Thus, having legal protection for those aspects that make your brand unique helps make sure competitors cannot replicate your success and helps develop your competitive advantage.
Start-ups and SMEs
We have noted above that an investment in IP should also be proportionate. This is particularly relevant for start-ups who must weigh up how their limited funds will be spent. Recent research by the Federation of Small Businesses showed that from 2010 to 2015, only 32% of small-to-medium-sized businesses actually invested in their IP, and the reasons for this were cost, limited understanding, or a feeling this wasn’t vital. However, the most successful businesses invest in their IP from day one, and this may begin by simply registering a design or a trade mark in a smaller territory, then planning a long term strategy on how this can be developed in synchrony with company growth. Companies who fail to do this are putting their businesses at risk and may be faced with the reality that they cannot prevent third parties from using their IP later down the line.
In any case, trade marks in particular are an investment, which, if developed correctly, can increase to a significant value that far outweighs their original cost. Apple is a prime example of a brand that has invested in its IP (including patents, designs and trade marks) from the beginning, and it is now recognised as one of the most lucrative brands in the world.
Choosing your trade mark
It is therefore advisable that you protect your intellectual property early on. In respect of trade marks, be sure to choose a mark that is distinctive and not merely descriptive of the product or services you provide, as a distinctive mark will make it easier for your customers to identify you against your competitors and easier to enforce. You should also make sure that your mark does not conflict with any prior rights holders, whose marks would only need to be deemed as being ‘confusingly similar’ to be able to oppose not only your registration but also your use of the mark. Further, your registration should cover all of the goods and services that you would like to use your mark in respect of, and so choosing the relevant classification(s) and detailing these broadly enough to maximise your rights, yet precisely enough to be of relevance to your business activities, is imperative.
If you would like advice on any area of your intellectual property strategy, please get in touch.