Protecting innovation within the complex supply chains of the aerospace and defence sector

26 October 2017

Within the aerospace and defence industry, original equipment manufacturers (OEMs) have a well-established history of innovation. Supply chains in the sector are highly complex, with businesses from across the globe supplying materials and parts for manufacture, as well as supplying design and development services.

Over recent years, many OEMs have adopted the role as an integrator and developer of key systems, and more design and development work has shifted into the supply chain. Accordingly, valuable innovations are increasingly being made by suppliers as well as OEMs. This shift may make it harder for intellectual property (IP) owners to capture innovations, with the risk that opportunities to protect valuable IP could fall into the gap between suppliers and customers.

OEMs and upper-tier suppliers typically have well-established internal procedures for capturing innovations developed in-house and protecting them, for example by filing a patent application or maintaining a trade secret. However, it may not be so easy for a customer (e.g. an OEM or upper-tier supplier) to identify innovations developed by a lower-tier supplier, or for such a supplier to recognise that protection for their innovation would be beneficial to them or their customer.

For example, the role of an integrator can be to specify performance requirements for sub-systems and design for their integration. The integrator may not be particularly focussed on innovations in the sub-system, and can work with a specialised supplier without a detailed understanding of their technology.

Likewise, a supplier’s focus may be meeting their customer’s requirements and developing a lasting relationship with them. With the focus on delivery and integration, the question of whether to protect innovations in the sub-system, whether for the benefit of the supplier of customer, may move to the side-lines.

From the perspective of a customer in the supply chain (e.g. an OEM or an upper-tier supplier) an innovation made by a supplier in the sub-system could make a valuable contribution to the overall product, such that the customer may benefit from protection for it. Complex products can embody hundreds or thousands of different innovations, which can be individually protected by patents or registered designs to build a “thicket” of protection for the product as a whole.

On the other hand, a supplier may see opportunities for applying their innovation more broadly than a particular customer’s products or industry. Accordingly, if the supplier were able to obtain protection for the innovation, they may be able to protect new revenue streams based on the innovation.

The following examples illustrate how it can be beneficial to both the supplier and customer in a relationship to capture and identify innovations, with some implications for how to handle IP ownership.

For example, a supplier has a long-standing relationship with an airframe OEM customer for designing and manufacturing airframe components. The supplier develops a new version of a particular component which is significantly lighter, owing to a novel construction of the component made possible by 3D printing technology. The customer is not concerned with how the lighter weight has been achieved, and continues to purchase from the supplier rather than competitors making heavier versions. Both the customer and the supplier are happy, without either one being particularly motivated to consider obtaining protection for the innovation.

Without any such protection, a competing airframe manufacturer could copy the novel construction of the component (or be supplied with one), eliminating the comparative performance advantage stemming from the innovation.

In this simple example, the innovation is specific to an airframe component and hard for the supplier to exploit with other customers – so the lack of protection is likely to the detriment of the airframe OEM. It would have been beneficial for the OEM customer to own the IP for the innovation, so that they could obtain protection for it to the exclusion of competing airframe companies. Further, such ownership could enable them to dual-source the component.

For these reasons, many supply contracts specify that IP developed by a supplier in the course of design development belongs to the customer. Provided that such IP is properly identified and communicated to the customer, the customer can make a decision as to whether to pursue intellectual property rights (IPRs), such as patents and registered designs, to protect it.

In a slightly different example, the supplier develops a new material processing technique that enables the same structural performance with a lighter-weight material. The supplier sees opportunities to use the same technique for customers outside the airframe industry.

In this example, the supplier would benefit from owning the IP so that they can fully leverage the new technique. If the customer is the automatic owner of the IP via a supply contract, there is potential for a deal to transfer or licence it back to the supplier. The supplier could offer exclusivity in the airframe industry or a discounted purchase price for the component in exchange.

In both examples, the starting point to a good outcome is capturing (i.e. identifying) the innovation and avoiding the opportunity for IP protection falling in the gap between the supplier and customer.

So, how can IP be reliably captured? It will, of course, depend on the nature of the relationship and what exactly the supplier has been engaged to do.

Where a supplier has been engaged on a project to develop a new product or capability, it may be expected that new (foreground) IP will be generated. As such, it can be beneficial for project reviews throughout the supply chain to include a section on identifying innovations made during the project/development.

Sometimes a particular innovation can be readily identified by the supplier or customer as key to a project/product. Otherwise, innovations can be identified by considering what has enabled the project/product to move forward. In particular, signposts that a patentable invention may have occurred include:

  • A problem has been overcome (e.g. a performance or reliability problem);
  • A new capability has been enabled (e.g. via sensor systems or software);
  • Improved performance (e.g. strength, reliability, efficiency);
  • Reduced consumption of resources (e.g. fuel consumption, material, computational).

Once IP is captured and the position on ownership is clear, there are commercial considerations as to how and whether registered Intellectual Property Rights (IPRs, e.g. patents and registered designs) should be pursued.

Irrespective of the default ownership position, ownership of IP can be transferred by agreement if it makes commercial sense for a different party to pursue such Intellectual Property Rights (IPRs).

The principal benefits of IPR ownership are well known: exclusive rights with respect to the IP (e.g. for products embodying the IP), and the ability to license the IP to others.

However, the nature of the aerospace and defence supply chain may impact the business case for pursuing such protection. In particular, there are typically only a handful of OEMs capable of delivering a complex product of a certain type to market (e.g. an airframe, surface ship, armoured vehicle). Accordingly, many suppliers in the sector may effectively be limited to participate in the supply chain of a single OEM – whether this is by agreement, commercial sensitivities, security restrictions, location or otherwise.

Even when this is so, the commercial benefits to a supplier from protecting an innovation may include maintaining or establishing an exclusive supply arrangement with a customer, or the potential to generate licensing revenue from others in a dual-sourcing supply arrangement.

If protection for a particular innovation is not a priority for a supplier, it is worth considering whether to highlight an opportunity for IP protection to a customer nonetheless. This may benefit the relationship and there may be compensation for transferring any IP.

By owning IP generated within their supply chain, OEMs or upper-tier suppliers can protect themselves and realise the associated benefits. Further, such IP ownership may enable a dual-sourcing arrangement to be implemented.

The business case for pursuing IP protection is affected significantly by the nature of the supply chain. The different priorities and focus of parties in the supply chain can lead to the issue of IP protection falling in the gap between suppliers and customers. Suppliers and customers alike can benefit by capturing IP and understanding the position on ownership, so that they can properly consider the business case for IP protection in the light of their particular supply chain.

George Tebbutt

George Tebbutt

Senior Associate

Our Expert
George Tebbutt
George Tebbutt
Location: Bristol (UK)

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