Category: Intellectual Property

Introduction

Muslim consumers have been a major factor in the increased demands for food products and services that conform to the Islamic religious principles. These food products are considered “Halal” and that they contain ingredients that are permitted in Islam.

“Halal” Certification System  

“Halal” originates from an Arabic phrase that means allowed or permitted by Islamic law. According to JAKIM (Department of Islamic Development Malaysia),  the Malaysian authority that manages application for “Halal” certification, a “Halal” food means that:

• Does not stem from or consists of any part of or item that is forbidden to Muslims by Islamic law, or animals that have not been slaughtered according to Islamic law.
• Does not contain any substance that is considered impure in Islamic law.
• Is not prepared, processed or manufactured using equipment or utensils that are not free from impurities as defined by Islamic law.
• That, in the preparation, processing or storage stage, does not come in contact with or stored near any kind of food that does not meet the requirements of paragraph (a), (b) or (c) or any substances that are considered impure by Islamic law.

A food product manufacturer would apply to JAKIM for “Halal” certification process. Presently, the “Halal” certification is voluntary in Malaysia. Once approved, a “Halal” certificate would be issued to the successful food manufacturer. The “Halal” certificate is an assurance that a particular product or food premise (restaurant) has been thoroughly investigated and found to conform to Islamic law and therefore is suitable for use or consumed by Muslim consumers. Food products or premises certified as “Halal’ by JAKIM  utilize the registered trademark “Halal’ logo.

The Halal’ logo is usually displayed prominently on the packages of the food product or showed in the signage of a food premise.

“Halal” Certification/Logo Has Become a Valuable Customer-Related Intangible Asset   

In Malaysia, the value of the “Halal” certification/logo can be looked at from the patronage of food outlets. During the recent fasting month, most popular food outlets had fewer patrons, who were mainly non-Muslim customers. This indicates that the value of the “Halal” certification/logo intangible assets could be estimated by the additional volume of Muslim customers that could be generated if the food premises are certified “Halal”.

The value of “Halal” certification/logo would be substantial in countries such as Malaysia and Indonesia which have significant Muslim populations. Multinational food countries such as Nestle and Unilever have used their manufacturing facilities in Malaysia to produce “Halal” certified products with “Halal” logo displayed clearly on their food packages.

The Test of Intangible Asset of “Halal” Certification/Logo for Valuation 

For an intangible asset to exist from a valuation, accounting, and legal perspective, it must possess certain attributes, as defined in Reilly and Schweihs’s (1999) book, Valuing Intangible Assets. The authors define intangible assets as having the following attributes:

• It is not physical in nature;
• have specific identification and recognizable description;
• Have legal existence and legal protection;
• Is subject to private ownership and transferability;
• Have tangible evidence or manifestation of the existence of the intangible assets;
• Was created or came into existence at an identifiable time or as the result of an identifiable event; and
• Is subject to term ination of existence at an identifiable time or as a result of an identifiable event.

Reilly and Nesi (1992) extend this list and state that for an intangible asset to have a quantifiable value from an economic perspective, it must possess certain additional attributes, such as:

• Generate some measurable amount of economic benefits in the form of income or a cost decrease which may be measured in several ways , including net income, net operating income or net cash flows, etc.; and
• Enhance the value of other assets which is it is associated.

Test of Attributes of “Halal” Certification/Logo as Intangible Asset for Valuation 

The table bellows shows the test of attributes of “Halal” certification/logo:

The next article would provide an example the estimated value of the “Halal” certification/logo intangible asset of typical food outlet in Malaysia.

Reference:

Reilly, F. and Nesi, N.A. (1992). Interstate intangible asset transfer, the CPA Journal Online, Vol. 62, No.8, pp. 34-40.

Please note we offer services to help local and foreign food companies to apply the JAKIM’s  “Halal” certification in Malaysia. The JAKIM’s “Halal” logo is widely recognized as a trusted assurance for “Halal” food products. Please be free to contact Dato’ Dr Anuar at datodranuar@gmail.com or visit our website, www.bisonconsulting.net.

Introduction

When we visit the KLCC Suria in Kuala Lumpur, Malaysia, a popular shopping mall, our eyes would be dazzled by illuminations of brands, from local brands to international brands. Lighted logos of brands are prominently placed at various points of their well-designed stores.

Brand owners should like my wife, Datin Azimah: toothpaste (Colgate), washing powder (Breeze), petrol (Shell), and fizzy drink (of course, Coke).

Brands help their owners to generate enduring revenue. These brands are valuable, and they are important intangible assets for corporations.

Methodologies to Value Brands     

According to Gabriela Salinas in The International Brand Valuation Manual, there are many methods used to value brands. Many methodologies are developed by brand consulting companies, and one of the most famous methodologies is the Interbrand method.

Valuation Using Interbrand Method

Interbrand is a brand consultancy firm, specializing in areas such as brand strategy, brand analytics, and brand valuation. Its Interbrand method determines the earnings from a brand and capitalizes them by making suitable adjustments. The firm bases its brand valuation on financial analysis, role of the brand and brand strength. In order to calculate brand value, Interbrand uses a five-stage process as follows:

1. Segmentation: This stage consists of determining the main homogeneous client groups on which the financial and demand analysis are based.
2. Financial analysis: Through this analysis, the model attempts to establish “economic earnings”, also referred to as “intangible earnings”.
3. Demand analysis: In this step Interbrand establishes the “Role of Brand Index (RBI)” or the percentage of intangible earnings attributable to earnings, referred to as brand earnings.
4. Brand strength analysis: Through competitive analysis, Interbrand analyses brand strength which is in turn related to discount rate.
5. Brand value calculation: In this stage, the discount rate is applied to “brand earnings.” The sum of the present value of brand earnings represents brand value.                                                                                                                                                                                                                                                                 Stage 1: Segmentation

According to Interbrand, as consumer attitudes and behaviours towards brands vary from sector to sector depending on product type, distribution and other market factors, brand value  can only be accurately be determined through separate evaluation of the individual segments that represent a group of homogeneous consumers.

Stage 2: Financial analysis-Estimation of “Economic Earnings”

To isolate earnings specifically attributable to the brand, Interbrand determines Economic Value Added, which indicates if a company is capable of generating returns that exceeds the cost of capital employed.

Stage 3: Demand analysis or role of brand index (RBI)

RBI is a measure of how a brand influences customer demand at the point of purchase.

RBI is determined via a three-step process:

1. Firstly, Interbrand identifies the demand drivers or the factors that motivate customers to purchase a particular brand.
2. Step 2 determines the relative importance of the specific attributes in step 1.
3. Lastly, InterBbrand determines the role that the brand plays in each of these drivers. The RBI is expressed as a percentage, such that if RBI is 30%, 30% is extracted from intangible earnings.

Stage 4: Brand strength analysis-Determination of brand risk and discount rate

Brand strength represents the brand’s relative capacity to “guarantee demand” and in this way sustains future earnings. This analysis yields the brand risk which is later expressed as a discount rate. The determined discount rate is then applied to earnings attributable to brand in order to arrive at the brand value.

Stage 4.1: Brand strength analysis

In this stage, the brand strength is compared with that of its competitors for each of the seven brand strength factors. Table 1 shows how Interbrand analyses these attributes as a function of other sub-attributes or sub-criteria. For example, the “market” factor is analysed based on “industry concentration” and “market growth” criteria.

Table 1: Brand Strength Specific Attributes

Source: Interbrand

Stage 4.2: Determination of discount rate

A discount rate that adequately reflects the brand risk profile is used to calculate the present value of future brand earnings. The model assumes a relationship between brand strength and discount rate: the higher the brand strength score, the lower the discount rate. The brand strength index calculated in Stage 4.1 is translated into a discount rate using an S-curve. Thus, a brand with an average strength score will be discounted at the industry WACC, and a leading brand with a maximum brand score of 100 will be discounted at a risk-free rate. The relationship between brand strength index and discount rate in the Interbrand method is shown in Table 2.

Table 2: Relationship between Brand Strength and Discount Rates

Stage 5: Calculation of Brand Value

The present value of brand earning is inversely related to brand risk. To calculate brand value for a particular segment, future brand earnings are discounted at present value and an annuity or perpetuity is calculated as a terminal value. The sum of the value of the individual segments yields the total value of the brand.

The Interbrand method’s various components and their inter-relations can be summarised as follows:

• The financial analysis stage is used to determine intangible earnings;
• The RBI module is used to determine the ratio of brand earnings to total intangible earnings; and
• The brand strength analysis module is used to determine the discount rate required for re-expressing future brand’s earnings at present value.

Example of Brand Valuation Using Interbrand Method 

When using Interbrand method, brand value is the net present value of the forecast brand earnings, discounted by the brand discount rate. The net present value calculation comprises both the forecast period and the period beyond, reflecting the ability of brands to continue generating future earnings. An illustration of brand valuation using Interbrand model is shown in Table 3.

Table 3: Valuation Using Interbrand Method

The Interbrand method assumes that in order to arrive at earning attributable to intangible assets, a capital charge must be deducted from NOPAT.

Conclusion

Brands are valuable intangibles as they can generate continuing income for their owners. Brands can be licensed or sold to other corporations. Interbrand method is a useful tool used to calculate the value of a brand.

About the author:

We wish to inform that we have just accepted a position of Adjunct Professor at the Asia e University based in Subang Jaya, Malaysia. Asia e University is a private university approved by the Malaysian Higher Education Ministry, which offers both on-campus learning and on-line learning.

Introduction

Many businesses, including services firms, do not realize they have intellectual property rights that are valuable, such as trademarks and copyrights, and that there are means to protect them. Conversely, many businesses may think they own the intellectual property rights in work they paid for, such as custom software, when in fact they may not hold any such right at all.

Generally, there are four categories of intellectual property: trademarks, copyrights, patents and trade secrets:

• Trademarks are words, symbols or phrases that are used in connection with a good or service and identify the source of the product or service. For instance, Coke is a trademark used in connection with carbonated soft drinks and the source is The Coca Cola Company.
• Copyrights are rights created from an original work of authorship that is reduced to a tangible medium, such as books, artwork, even software programme and website content.
• Patents encompass “inventions’-novel and non-obvious utilitarian processes, matter or articles of manufacture-and can include design patents or business method patterns.
• Trade secrets are non-public information and know-how that would have a value to a competitor. Following the Coke example, the formula for Coke is considered one of the most valuable trade secrets in the world.

It is important for firms and companies to take time and efforts to review their business information to understand and grasp the value of their intellectual property and to determine what rights they actually hold and those they do not. Intellectual property lawyers assist their clients in conducting what is referred to as an “intellectual property audit” to give a business a picture of its rights.

K. S. Grimsley and P. K. Riewerts (CPA Practice Management Forum, July 2010) have suggested a list of items that such an audit might cover.

Trademarks

Does the business have trademarks? Firms and companies should determine  if they are using any trademarks in connection with their goods or services. For instance, do they use a design, word or phrase in connection with a product, such as clothing, or pharmaceutical product, or a service such as accounting services or consulting service?

The use of a mark alone establishes trademark rights in the geographic area of use, which is beneficial in preventing others from using the same or a similar mark in the same geographic area. Registration acts as notice to the world that you own a trademark in a mark for particular goods or services, which is an important deterrent to third parties using the same or similar mark.

Thus, when doing an audit, companies should review their websites and marketing materials to determine what trademarks they have and whether these are registered or should be registered.

Are the business’s marks available for use? Another important aspect in reviewing trademarks is to make sure the marks the company is using are actually available for it to use as such. If the company is using a mark that is the same or similar to another mark by a prior user, the company could find itself in threatened or actual litigation for trademark infringement.

Consistent use of marks and policing marks. Once a company has established rights in a mark, two important aspects are to use the marks consistently and to police the marks. Regarding consistent use, the company should use the marks on products or in connection with the services in the same manner and form in which they are registered or if not registered, as the company has always used the mark. Strength in mark is built up through consistent use, and modifications could potentially hinder the company’s rights and registration.In addition, the company should police the marks to make sure other third parties are not using them. If a company does not watch its marks and contest others who infringe upon its mark, it runs a risk of losing its rights in the mark.

Licensing. A final task on trademark checklist is to determine if it is allowing others to use its marks. For instance, does the company have third parties it allows to use the mark? If so, does it have a license agreements in place outlining its rights in the mark and the fact that it will exercise quality control over how the mark is used by the third party? Failure to manage the quality of goods and services sold under the company’s marks-referred to as naked licensing-can potentially lead to losing the company’s rights in a mark. Thus, to maintain all rights, the company should have license agreements in place containing quality-control language, and the company should actually review the quality of those goods and services.

Copyrights

Does the business have copyrighted materials? Companies should investigate what works of authorship they have created. This includes works created by employees in their scope of employment. Copyrights no involve just novels and artwork. If a company has created software programmes, training manuals or articles for its website, the creation of such material in some fixed medium creates copyright right in the material. To be copyright-able, the work must be fixed in  a tangible medium of expression. The idea for a software programme or advertisement is not copyright-able; however, the company can protect the expression of the idea. Therefore, the software  programme or brochure promoting the business is copyright-able. Copyright owners enjoy several  exclusive rights in their works, including the right to reproduce the work, to make derivative works (adaptations or transformations of the original work), to redistribute the work and the right to display and perform the work publicly.

Why obtain copyright registration? With copyrights, the company is protected under the Copyright Act the moment a work is created. However, a company may want to consider obtaining copyright registration in these works. Registration is usually inexpensive and offers several benefits. It constitutes public notice the work is protected, which may deter others from copying the work without permission. Registration is mandatory before bringing a copyright-infringement lawsuit. A third benefit of timely copyright registration is that it entitles the registrant to certain legal remedies against infringers that would otherwise be available, such as statutory  damages and legal fees. Otherwise, an award will be limited to actual damages and profits, which can be difficult and expensive to prove.

Employee works versus independent contractor works. To the extent that the company had work created by employees, that work is automatically deemed to be authored and owned by the employer under the work-for-hire doctrine. However, if the work is created by an independent contractor, it is likely that the rights in the work are actually owned by the independent contractor, and at most, the company may have a license to use the work, unless the contract specifically states that the company owns all intellectual property rights in the work. This issue arises frequently in situations of customized software and website development. Thus, to the extent that the company has had works of authorship created, such as software programme, website or survey manuals, the company should review the contracts to determine ownership rights. To the extent the company dose not own the rights, it should consider negotiating with the independent contractor to assign the right to the company.

Licensing. To the extent the company allows others to use its works, the company should make sure that it has licenses in place with these parties that fully explain its ownership in the works and the other party’s right to use them under terms of the license it grants. It may also want to make sure it has the right to terminate the license in the event of a breach of the license terms. Further, to the extent the company is using work that is owned by someone else, it should review the license agreement to determine its rights and obligation under the agreement.

Patents

Does the business have patents? Patents cover a variety of technology, including inventions in connection with mechanical devices, processes, scientific compound combinations, new varieties of plants, software programme and product designs. Patents can also be obtained on novel and non-obvious business methods, although these types of patents are scrutinized heavily and take much longer to issue. A patent is issued by a national government and gives the holder the right to prevent others from making, selling or importing any device or process that infringes one or more claims in the patent. In most cases, this right is limited in time to 20 years from the date it is filed with the national government authority in charge of patent registration. It is important to note that patents are negative rights-that is, they provide a right to prevent others from doing certain things; in plain English what this means is that just because you have a patent, that does not mean you can sell or make the device because doing so could still infringe a prior patent.

Processes and procedures in place. To qualify as a patentable invention, the invention must meet certain requirements. Therefore, a business should ensure it has the proper processes and procedures in place to assess an invention for patentability. Such procedures include having employees notify the proper business personnel upon development of a potential invention and evaluating the strength of such invention.

Deadlines. It is of utmost importance to consult a patent lawyer early on in the invention process regarding the scope of prior art or the possibility of infringing another’s patent. As an example, in the US, patents must be filed within one year of the date of the product or service embodying the patent is sold, offered for sale, publicly used or publicly disclosed. In most countries like Malaysia, there is no grace period and the application must be filed before any commercial use or disclosure. By consulting a patent lawyer, a business informs itself of patentability requirements, application details and filing deadlines that could prevent an inventor from securing a patent. Likewise, is a business seeks to file foreign patent applications, a patent lawyer will be able to advise on tying back foreign filing benefits to an earlier application filing date, if addressed in a timely manner.

Record-keeping. In addition, a business should retain and keep accurate records of information associated with the invention, such as research and lab notebooks and designs. These materials are essential to establish the dates of creation for the invention and will be needed if the patent application or registration is challenged.

Employee works. Furthermore, protective measures should be implemented with employees developing inventions. Unlike copyrights, there are no work-for-hire doctrine in patent law. With one narrow exception, all patent right  transfer must be in writing. Thus, a business should seek assignment agreements with its employees before the work begins to secure the rights of the business in the invention. The narrow exception exists for employees that have been “hired to invent”. Agreements allow for the smooth transition of ownership from the employee to the company. As an incentive to continue developing inventions, companies will often set up a royalty or profit sharing plan for any invention that proceeds to registration. Also, non-disclosure and confidentiality agreements should be secured with anyone developing, having access to or any knowledge of the invention, or anyone who is engaged to test the invention.

Trade Secrets

Keeping trade secrets a secret. Trade secrets consist of information that is of value to the business owner and would be damaging to the business owner if disclosed to a competitor. A classic example is the Coke formula. From time to time, businesses will enter into negotiations with other businesses or individuals to team up for a business venture. Two parties could agree to create a software programme together, work on research and development together or work together in a particular project. During these negotiations, each party may disclose information that is considered confidential and could harm the party if disclosed to third parties. This could include trade secrets and other intellectual property. To protect this information, a company should make sure that it has a non-disclosure agreement in place requiring both parties use the information they receive specifically for the purpose under the business deal, that they will not disclose the information to any third party without permission and that at the end of the discussion, they will return all confidential information to the other party who owns it.

Conclusion 

A typical company may have one or more of the four categories of intellectual property. It is important that a company lists out the inventory of the type of the intellectual property and decides the proper action plans to be implemented.

Introduction 

Recently, we attended a talk by Dr. Joon Seok Lee, President, Korean Invention Promotion Association (KITA). The talk, Employee’s Patent Compensation System (EPCS) in Korea, was organized by Malaysian Association of Research Scientists (MARS). The EPCS has been a motivating factor for engineers and scientists in Korea to discover new innovations and allow their firms to commercialize these new innovations into world-beating marketable products.

We are all aware that Korea has become an advanced manufacturing nation with world-class companies. The EPCS,which was made a law, has a main objective to motivate employees who discover inventions to inform his/her companies (employers). In return the employers must decide whether to proceed with the registration of the patent and its commercialization.

Most major Korean companies have the EPCS in their human resources policies and compete for the best innovative staff and new graduates. A firm will establish a committee, comprising representatives of the firm and key employees to recommend the types of compensations to be given to employees who had developed an innovation that can be patented. Dr. Joon noted the compensations can be:

1. Promotion
2. Holidays
3. Share of profits
4. Monetary rewards
5. Others

Other countries that estabished EPCS are Japan and Germany. In Japan, all large companies and about 80% of SMEs have EPCS as part of the companies’ human resource policies.

Impact on Innovation in Companies 

We asked Dr. Joon whether the EPCS has increased the capacity of Korean firms to innovate as employees are now more motivated to innovate. His answer was a clear Yes. In fact, many employees have received large compensations in the form of promotions and monetary rewards.

We all know that Germany, Japan and Korea have well-known manufacturing giants. These countries also have innovative SMEs with leading products in their market segments. Now we know the EPCS is one of their secret tools to motivate their scientists and engineers to develop new inventions, and, in the process, gain high rewards.

It is timely that Malaysian firms to introduce EPCS in their human resources policies. In Korea, companies that have established EPCS also enjoy government incentives in the form tax deduction.

In Malaysian universities and R&D institutions, engineers and scientists have been provided with incentives. Among the incentives include:

1. A share in the licensing fee generated from the licensing of the technologies discovered.
2. He/she is allowed to be a shareholder or director of the company formed to commercialize the technology.
3. He/she can for a grant from a government company, Malaysian Technology Development Corporation (MTDC) to commercialize the technology.
4. He/she can gain promotions.

We are not aware of incentives given by large Malaysian private companies to motivate their engineers and scientists to be more innovative besides getting promotions.

As countries such as Japan, Germany and South Korea had shown motivating their scientists and engineers to discover new innovations can strengthen their innovative capacities.