Innovation management: don’t forget about legal watch!

Michaël Haddad / Chairman, X Open Innovation, Applied Optics & Algorithmics Pole Manager, L'Oréal Recherche & Innovation / 2016-03-02

Legal and regulatory aspects are rarely mentioned when discussing innovation management. But they do play a major role, and the analysis of the legal environment is a crucial issue. It allows smart organizations to implement original strategies… even though there are a number of pitfalls.

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In a previous article I mentioned three drivers of innovation: technology, uses and societal challenges. Firms will focus their strategy on one of these three drivers. But managing innovation also requires keeping an eye on the whole picture. This includes vast, complex and often neglected legal and regulatory aspects. A properly handled legal watch will make the difference between a defensive and offensive position.

Mechanisms of intellectual property are a key issue in innovation management.

First of all, the ability to display entry barriers in order to amortize the necessary investments is crucial for innovation. Patents can prove very effective weapons to discourage copycats, especially when handled by major industrial groups that are able to submit litigation and infringements to courts. For instance, the dynamic industry of mobiles phones is a battlefield between several giants such as Apple, Samsung or Google, who seize key patents to ban competing products on their markets. For startups that were able to protect efficiently an indispensable technology, it’s a great opportunity to monetize their research.

From the protection of intellectual property to regulatory innovation
But the expiry of a patent is also a crucial moment. 3D printing is an exemplary case. Its basic principle was already known 25 years ago but it wasn’t until the expiry of a strategic patent by a firm called Stratasys concerning plastic extrusion in 2009 (“Apparatus and method for creating three-dimensional objects,” US 5121329) and the subsequent Open Source movement (with projects such as the RepRap prototyping software) that paved the way to DIY printers for under 500 USD. Before that, world leaders such as 3D Systems and Stratasys kept their technology for exclusive use by professionals, with prohibitive prices for the general public. The quick dissemination of this technology opened markets that attracted players with a quick ability to adapt, watchful of the excitement that followed the expiry of the Stratasys patent. Legal watch on the expiry of some patents, combined with a focus on low-level signals from innovating communities, allows firms to reposition technologies that fall into the public domain on an emerging market.

Standards are also an effective way of creating a market for an invention. This is especially true in the field of sustainable growth. For instance, energy generation based on renewable resources is almost never competitive compared with fossil or nuclear sources. The hope of seeing green technologies emerge can only be achieved through the intervention of public authorities. This intervention can take several forms: funding through subsidies, penalties to polluters or regulatory obligations at several scales: that of a sector, with technical standards (e.g. catalytic converter in the automotive industry) or that of an economic system, for instance, the creation of a CO₂ market in Europe.

Industrial companies can take advantage of these legal evolutions. Continental was able to establish its new NOx sensor in the automotive sector; Corning developed a new material, cordierite, for catalytic converters and California’s advantageous tax system for hybrid or electrical vehicles allowed Toyota to find its first market for the Prius car.

Accurately identifying the evolution of standards and knowing how to anticipate legal evolutions are key competencies that can allow a firm to take positions on niche markets, which are called upon to extend. The pioneering position is not without risks and, as pointed out by Oded Shenkar: followers are sometimes the most successful. But it can also be very rewarding for a pioneer to defend its vantage points.

Some firms went even further, by developing strategies that combine careful management of intellectual property, close monitoring of legal regulations and work along with public authorities to activate these evolutions.

DuPont de Nemours in the 1980s offers a textbook case. This important chemical manufacturer successfully handled the ozone hole crisis linked to chlorofluorocarbons (CFCs) such Freon, used as refrigerant gas, of which they were one of the main producers. By investing alongside with public authorities in research, they developed a substitute technology, hydrochlorofluorocarbons, less harmful for the environment but also, above all, protected by new patents. The remarkable timing of this operation is no coincidence: DuPont de Nemours successfully managed to have CFCs banned at the very moment its key patent on this technology entered the public domain (“Process for Fluorinating Halohydrocarbons,” US3258500), pulling the rug under the feet of manufacturers who thought they could use it to compete. This widely reported case was a genuine strategic achievement in terms of legal innovation.

Low-level signals of legal watch: the scientific literature
The environmental implications of a technology are at the source of a public intervention to ban it or mitigate its impact. By challenging the established rules, this intervention will often create conditions for the emergence of an innovation that uses substitute technology, as was the case for CFCs. To detect ongoing movements, legal watch must be based on a close monitoring of scientific literature.

This new regulation is often based on an extensive scientific literature. For instance, the ban of bisphenol A in baby’s bottles in France in 2010 was preceded by toxicological studies carried between 2003 and 2008 to determine its dangerousness. Currently, after the dissemination of particle filters on diesel engines, public agencies in charge of environmental protection focus on particles emitted by vehicles apart from the powertrain, more specifically the particles emitted during the wear of certain parts (tires, brakes, clutch). In the United States, several cases of contamination by copper brake pads have been reported. In France, official environmental agencies such as Ademe started to discuss this issue. These initiatives are perceptible and, to a certain extent, predictable, if we analyze the exponential growth of scientific publications on the subject. These studies focus, on the one hand, on the toxicity of this new class of particles and on the other hand, on the implementation of measuring protocols on the side of the road and in-situ. Expensive solutions to capture brake particles have been developed. They will find a market only if their toxicity is scientifically proven and governments act through regulation. In this field, scientific watch is therefore a very useful component of legal watch and allows for the anticipation of developments that can disrupt markets.

Shortcuts
Even though legal research can prove useful to manage innovation, on certain markets, regulation is a factor of immobility. To find a way out, innovation will take shortcuts. The mobility of actors and their ability to step back makes all the difference. Two examples illustrate this fact: one success and one failure.

Recent failures in the tobacco industry show that giving too much attention to legal aspects can sometimes blind both players and observers.

The law sometimes sets rules that give an almost hegemonic position to historic players, leaving almost no chance to new entrants. In the field of wines and spirits, the ban on advertising impedes any new company to make itself known and reinforces the privileged position of large, well-established groups. The same applies to the tobacco industry that never needed to renew itself before the emergence of a ground-breaking innovation, offering a substitute product, less harmful, combining electronics and agro-food: the e-cigarette. Tobacco manufacturers overlooked this product and very few analysts predicted the revolution that would shake the entire market. Tobacco manufacturers are used to legal watch: it is actually a key competence in an industry strongly impacted by sanitary standards and public policies for tobacco prevention, thatare currently being completely renewed. But with a routine watch, one can overlook events that happen outside the scope of one’s monitoring, while still having some significance. Manufacturers have tried to fight back by funding studies on the harmfulness of e-cigarettes and by trying to ban it. But the battle was already lost because they started way too late.

Conversely, a firm’s agility and its ability to look ahead allow it to take advantage of a very strict legal environment… especially if it isn’t its own! Regulatory asymmetries between industrial sectors can offer splendid opportunities for firms that are sufficiently agile, as shown by a last example from the famous NBIC (Nanotechnology, Biotechnology, Information technology, Cognitive science).

Tissue engineering and 3D impression of living tissues is a promising technology in human health that solves many problems linked with skin grafting and organ transplants. However, the sector of health is highly constrained and protected by many barriers before a medical device or a new molecule is granted a market authorization. Pioneering start-ups in this field, such as Organovo in the United States or Poietis in France, quickly identified cosmetics as a first and more easily accessible market. In effect, this industry is under a prohibition of animal experimentation and actively searches for substitutes. 3D printing of skin is a viable solution to achieve this. L’Oréal, the industry leader and very concerned by the societal impact of its products, had invested since 1997 in tissue engineering technology and acquired Episkin and Skinethic in 2006. This allowed to stop all experimentation of its finished products on animals and to get ahead of the standard to become the world leader of a new, promising market:  tissue engineering of human skin.

These few examples show a variety of strategies that can result from a well-led legal watch, integrating standards and legal aspects in innovation management. From the close management of a patent’s expiry (DuPont) to the development of a new activity (L’Oréal), through the assessment of future constraints and of emerging activities, it appears that standards and other legal constraints are not simply technical parameters but also strategic elements. An intelligent consideration given to these aspects, as well as to sanitary or environmental preoccupations and scientific literature, can help outmaneuver competitors. The case of the tobacco industry calls for caution because legal watch can also lead to a form of myopia. But in the management process involved in an innovation project, an accurate analysis of the legal framework is, at the same level as technology watch, a major asset.