- Design and Utility Patents
Media, copyright, and trademark laws are pivotal in protecting the IP rights of fashion designs and utility patents. The integration of scalable digital platforms driven by AI and secure blockchains is revolutionizing the fashion industry, and enhancing supply chain transparency, traceability, and sustainability. By leveraging AI, digital platforms, and blockchain technology, fashion patents can be economically assessed and protected more effectively, addressing the challenges posed by counterfeiting.
The digital age demands a multifaceted approach to fashion patent litigation. Patents protect the intellectual property (IP) rights of inventors[1], ensuring that their innovations cannot be legally copied or exploited without permission. This protection is crucial for fostering a culture of innovation within the fashion industry.
Design patents in the fashion industry[2] are legal protections granted to the ornamental design of a functional item, covering the appearance or aesthetic features of a product but not its functional aspects. The subject matter is the design and not the article itself. The visual characteristics embodied in or applied to an article come under the purview of a design patent, issued for ornamental configuration, surface decoration, or both. Patents are crucial for protecting designers’ original creations from being copied or imitated without permission. This can include everything from the shape and surface ornamentation of clothing and accessories to unique patterns and visual elements of textiles. Examples are given by zippers, Velcro, astronaut suits, Kevlar, etc. Handbags, jewelry, hair accessories, footwear, and decorative accessories are some areas where design patents can be secured. A design patent must always mention the article which carries the design.
Utility patents protect the functional aspects or inventions related to articles of fashion that have a specific utility or function. These can include new and useful processes, machines, articles of manufacture, compositions of matter, or any new and useful improvement thereof. This might encompass innovative fabric materials, novel manufacturing techniques, unique garment construction methods, or technology integrated into clothing, such as wearables with health monitoring functions[3].
Utility patents protect functional innovations that advance the industry technologically, while design patents safeguard the aesthetic and ornamental innovations that contribute to brand identity and product differentiation. Both types of patents are essential for a comprehensive intellectual property strategy in the fashion sector, offering protection for a wide range of creativity and innovation.
- Digital Scalability and Online Platforms
The scalability of digital innovations determines a patent’s value, for its immediate application and its potential to drive growth and adapt to evolving digital landscapes. As the industry undergoes digital transformation, with advancements like magic mirrors for virtual try-ons, and the rise of digital fashion initiatives like cloud-based platforms, the need for patent protection becomes crucial.
Patent value in the fashion industry is enhanced by enabling sustainable consumption, smart clothing, supply chain efficiency, and personalized shopping experiences through technologies like IoT and AI.
Innovation drives efficiency, improving digital marketing, enabling virtual experiences, and fostering convergence with the metaverse, creating new market opportunities. Digital innovations in clothing manufacturing promote co-design and mass customization, impacting patent value by enabling new models.
- Blockchains and Artificial Intelligence
Blockchain technology addresses counterfeiting and the lack of supply chain transparency. By leveraging the inherent features of blockchain – decentralization, transparency, and immutability – fashion brands combat counterfeit products. Blockchain creates tamper-proof records of a product’s lifecycle. Each product is assigned a unique digital identifier recorded on the blockchain, enabling consumers to verify the authenticity of their purchases through a transparent and secure digital ledger. This deters counterfeiters and reassures consumers about the legitimacy of their purchases.
As consumers become more conscious of the ethical and environmental implications of their purchases, fashion brands that invest in blockchain and secure patents will be well-positioned to meet these demands, elevating their market value and brand reputation.
Artificial intelligence (AI)[4] plays a significant role in:
- Patent Search and Analysis of vast databases. These tools can help firms assess the novelty and potential patentability of their designs or technologies by comparing them to existing patents.
- Predictive Analytics: AI algorithms analyze market trends, consumer behavior, and emerging technologies to predict future developments.
- Legal Research and Compliance: AI-powered legal research tools assist legal teams in staying up-to-date with evolving patent laws and regulations.
- Anti-Counterfeiting: AI-based technologies, such as image recognition and pattern-matching algorithms, detect and combat counterfeiting.
- Economic and Financial Valuation
Patents that prevent counterfeiting can increase a brand’s value by ensuring revenue protection and maintaining the brand’s reputation for authenticity. Investing in patented anti-counterfeiting technologies mitigates the risk of financial losses. This investment signals to consumers and investors alike that the brand values innovation and is proactive in protecting its products and customers.
The International Valuation Standards (IVS) 210, provides guidelines for IP asset valuation, including fashion patents:
- Market Approach, considering comparable transactions or market multiples applied to key metrics of the fashion patent, such as revenue or earnings.
- Income Approach: The Relief from Royalty approach considers the income that the patent owner would have received if the patent had been licensed to a third party. Discounted Cash Flow (DCF) Method estimates the future cash flows generated by the fashion patent and discounts them back to present value using an appropriate discount rate.
- Cost Approach: Reproduction/replacement Cost estimates the value determining the cost of reproducing or replacing it.
- Option Pricing Approach: the fashion patent is a financial option, allowing the owner to benefit from future opportunities or potential revenue streams.
- Anti-Counterfeiting
The fashion industry often grapples with the issue of counterfeit goods. Design patents serve as a legal tool to combat these knock-offs, particularly when the imitation focuses on the look rather than the function of the item. In an industry where the visual appeal of a product can drive consumer demand, design patents ensure that only the original creators or those they authorize can legally produce and sell designs that fall under the patent’s protection. This is crucial in an era where high-quality counterfeits are increasingly common, helping to maintain the integrity of the brand and ensuring that consumers are purchasing genuine products. The damaging impact is summarized in Table 1.
| Patent Owner’s income statement | Counterfeiter’s income statement |
| Lower sales (due to counterfeiting) | Bigger sales (due to counterfeiting) |
| Fixed costs not covered by the drop in revenue | Fixed costs covered by higher revenues |
| Lower contribution margin | Higher contribution margin |
| Lower variable costs (linked to lower production and sales) | Higher variable costs (linked to higher production and sales) |
| Lower EBITDA | Higher EBITDA[5] |
| Depreciation (on investments not fully covered by lower revenues) [6] | Depreciation (on investments covered by higher revenues) |
| Lower EBIT | Higher EBIT |
| Patent Owner’s Asset-liability (balance sheet) impact | Counterfeiter’s Asset-liability (balance sheet) impact |
| Less ability to make new investments | Higher ability to make new investments |
| Debasement of the patent and goodwill (and other related intangibles) in the assets | Increase of the patent and goodwill value (and other related IP) in the assets |
| Fewer collateral guarantees, worsening of capital ratios, creditworthiness, and ratings | Higher collateral guarantees, improvement of capital ratios, creditworthiness, and rating |
| Reduction of equity (and guarantees for third-party creditors). | Equity increase (and improvement of guarantees for third-party creditors) |
| Patent Owner’s Financial Impact | Counterfaiter’s Financial Impact |
| Lower cash inflows (liquidity absorption) | Higher cash inflows (liquidity creation) |
| Greater difficulties in servicing bank debt | Lower difficulties in servicing bank debt |
| Worsening of the net financial position[7] | Improvement of the net financial position |
The types of damage are summarized in Table 2.
| Type of damage | Description |
| cancellation, diversion, and hoarding
of the customer portfolio resulting from patent counterfeiting |
The customer portfolio incorporates many elements (names and personal details, tastes, and preferences, knowledge, contractual constraints…) which represent the essence and synthesis of tailor-made marketing strategies and the most relevant prerogative of the goodwill itself. Misdirection, especially if surreptitious, can also produce irreparable and irreversible damage. |
| unfair (parasitic) competition; dumping
|
Use of illicit techniques and means to gain an advantage over competitors or to cause them damage. Examples of unfair competition are the use of patents that resemble those of other companies (even to the point of counterfeiting) or the dissemination of information that discredits the activities of competitors. |
| violation of the exclusive right connected to the patented products
|
Exclusivity is a barrier to entry, typically lawful and contractually regulated, which allows the benefit of a geographic or product income that tends to be monopolistic (think of the case of exclusive agents for territory and/or product), with an immediate impact on the start-up. The violation gives rise to a breach of contract. |
| counterfeiting of patents and other related IP (know-how, etc.)
|
Patent counterfeiting naturally involves an undue diversion of the goodwill associated with them, causing direct damage (on the counterfeit product) but also indirect damage (on the reputation and “goodwill” that the company also derives from the counterfeit product). |
| loss of prestige and damage (debasement) of the image due to patent counterfeiting | Goodwill is also prestige, image, renown, notoriety, and sometimes celebrity; damage to one’s image leads to a debasement of goodwill. |
| loss of personal relationships with loyal customers | The diversion of customers even with violation of exclusivity, damage to the image, and other related and related cases leads to a weakening of the personal relationship with customers, reducing the value of the customer portfolio. |
| Loss of chances | Goodwill is intimately linked to future chances; the loss of chances is also a loss of goodwill. |
| reduction and disruption of legitimate economic expectations | Economic expectations, now essential when drawing up strategic, industrial, and financial plans, are also based on the projection of goodwill and company strategies. |
| inability to operate in profitable sectors
and with high growth potential, following the debasement of a renowned patent |
The loss of goodwill often forces the company to reposition itself on less ambitious strategic objectives, with a chain reaction that also generates an erosion of potential new goodwill, financially inhibiting access to sectors with higher margins and hindering differentiation strategies. |
| loss of market share, often difficult to recover in a highly competitive segment | Goodwill is also based on market shares, which affect sales volumes and indicate the strategic positioning of the company in the sector, in a comparative way with the competition. |
| contractual responsibility
of the other party |
The counterparty’s responsibilities (for breaches, illicit acts…) can reduce the goodwill. |
| financial difficulties resulting from failure to collect additional revenues due to declining sales | The damage from loss of goodwill unduly deprives the company of revenues and consequent cash flows, sometimes to the point of generating financial crises. |
| economic damage deriving from the failure to amortize fixed costs however incurred, referring to lost extra-revenues | With the loss of goodwill, the fixed costs – by definition, however, incurred – are spread over smaller revenues, with a proportionally higher incidence. |
| organizational and management costs to restructure the company | The loss of revenues due to loss of goodwill erodes economic margins and imposes strategies to reduce fixed costs which are not always easily achievable.
|
| loss of value and goodwill of the consolidated company over time | The erosion of consolidated goodwill leads to a loss of value of the company, with harm to shareholders (in the event of a sale, a capital increase reserved for third parties, with consequent lower premium…) and other stakeholders. |
[1] L. Bently – B. Sherman – D. Gangjee – P. Johnson, Intellectual property law, Oxford, 2022.
[2] See I. Calboli – G. Armstrong, Design Patents in the Fashion Industry: A U.S. Perspective, 2023, https://ssrn.com/abstract=4663112; Further references can be found in R. Moro-Visconti https://www.researchgate.net/publication/380096516_The_Economic_and_Financial_Valuation_of_Fashion’s_Design_and_Utility_Patents, 2023.
[3] This includes a wide range of innovations, such as Fabric Materials; Manufacturing Techniques; Garment Construction Methods; Technology Integration, and Improvements on Existing Designs.
[4] H.J. Chen – H.H. Shuai – W.H. Cheng, A survey of artificial intelligence in fashion, in IEEE Signal Processing Magazine, 40, 3, 2023, 64–73; Y. Hong – X. Zeng – P. Brunixaux – Y. Chen, Evaluation of fashion design using artificial intelligence tools, in Artificial Intelligence for Fashion Industry in the Big Data Era, 2018, 245–256;
[5] Estimating a counterfeiter’s economic gains by considering their EBITDA is a common approach in various industries, including fashion. This method allows for a calculation of the counterfeiter’s profitability and economic gains derived from infringing the patent.
[6] Once fully operational, depreciation may decrease if the company, due to lower revenues, reduces the amount of investments. Furthermore, these are non-monetary costs, which do not impact the EBITDA.
[7] Given by financial debt net of liquidity.
