Optimising value in IP assets
June 2014 | COVER STORY | INTELLECTUAL PROPERTY
Financier Worldwide Magazine
Intellectual property assets such as patents, trademarks and copyrights increasingly form the core value of many organisations and transactions. IP assets can be used in a number of ways to extract value. They can be sold, licensed, mortgaged and grown through use. Optimising the value of intellectual property rights is part of good IP management within an organisation, and recent high profile battles have shown how powerful a role it can play in furthering strategic objectives. In what ways, then, can firms ensure IP is aligned with business objectives? And how can they manage risk to generate maximum value from their IP portfolio?
IP can include technological innovations, works of art, brands, concept names, symbols and logos, among many other tangible and intangible ideas. Given the breadth of the term, many businesses and individuals may not realise that they regularly create and use valuable IP assets in their workplace – assets which they need to protect and keep from being exploited or appropriated by competitors. Being aware of the critical importance of your IP assets is the first step in managing them effectively. Unfortunately, even in today’s business environment, too many firms remain ignorant of the potential value their IP can generate.
A number of companies – usually large corporates – do manage their IP effectively, aligning their portfolio with a clear, defined business and IP strategy. These firms, however, generally benefit from being well resourced, and have the necessary budget. However, this trend does not stretch across the board. “There is a wide variation in the approach to IP portfolio management as well as varying levels of understanding as to its importance and applicability from an external perspective,” says Jon Calvert, managing director at ClearViewIP. “Many more companies are not doing enough and often realise this as obstacles emerge – for example, where their business has diverged, their budget is being over-stretched or their portfolio has grown rapidly, possibly through acquisition.”
The trend also varies from sector to sector. In general, those firms whose businesses are technologically or scientifically focused do a good job of developing and managing their IP portfolio. Over time, these companies have come to appreciate the need to carefully develop and effectively manage their IP portfolio to help maintain market position. “The approach to IP management varies significantly between different technological sectors,” says Gwilym Roberts, a partner at Kilburn & Strode LLP. “In areas like telecoms it is commercial suicide not to take IP very seriously indeed. Understanding competitor IP is key to planning any product update or release. Ensuring your own IP is in as good shape as possible is the key to a strong defensive position should litigation commence.” On the flipside, firms that lack such focus are less likely to have highly organised and strategically managed portfolios, according to Robert Fischer, a partner at Fitzpatrick, Cella, Harper & Scinto. “The situation may be somewhat different in regard to concerns whose traditional emphasis has not been on technology, such as retailers and the like. While trademark rights may be very well developed and effectively managed, there can still be less than a full appreciation of the impact the patent side can have as well.”
In addition to understanding their own intellectual property, firms also need to be aware of their competitor’s IP arsenal. Whether it is to guarantee the exclusivity of your offerings, or to ensure you can control and monetise the distribution of your intellectual assets to third parties, effective identification and management of your IP is key.
In today’s marketplace, having a valuable, broad IP portfolio is not enough. Although IP assets play a central role in the business strategies of many firms, simply acquiring and owning IP does not make a company successful – firm’s must know how to manage and extract value from these assets. In addition, they must remember that there are multiple types of IP – from patents and trademarks to copyrights and confidential information. While keeping in mind the business goals, firms must consider all types of available IP protection. This is the only way to ensure they are pursuing the right type of IP strategy.
Broadly, the primary objective of most companies is to expand their market share and strengthen their brand, using their intellectual assets to gain or maintain competitive advantage. Businesses which provide strongly differentiated, cutting edge products use the IP system aggressively to ensure their competitors do not copy. Similarly, other firms use the IP system to provide a commercial edge by ensuring they have exclusivity in their product offering.
In recent years, however, companies have seen the potential for revenue generation through licensing or selling their intellectual assets. “If it’s just a naked patent portfolio,” says Richard C. Hsu, a partner at Shearman & Sterling LLP, “the strategy is usually to sell or licence the portfolio through litigation enforcement. If the portfolio is tied to a tangible asset such as a product, business or technology, the intellectual property can be used to increase the value of the tangible assets in a traditional business deal, such as a licence or technology partnering arrangement.”
Developing and maintaining an effective IP strategy is a challenging but essential step in preparing to take an innovation to market, and is often heavily dependent on the sector in which firms operate. For example, in the computer hardware sector, the big players are happy to get their technology into as many products as possible. Relying on a strong technology base, and licensing the IP and know-how they develop, means firms can ensure maximum market penetration.
A popular strategy among pharmaceutical firms is ‘evergreening’, explains Mr Roberts. “The patent system provides a 20-year term of exclusivity which can be extended for certain medicinal products to mitigate the lengthy trial periods. Once the drug enters the public domain the generics can move in and undercut on price. Big pharma looks to ‘evergreening’ strategies using the brand associated with the drug as well as further developments to effectively lengthen the IP protection period where possible.” Whichever strategy a firm follows, however, only those that actively manage their portfolios and have a better view of their non-core assets are able to fully optimise the returns on their IP.
There are many questions to consider when developing an IP strategy. What types of IP protection are available for a product? What territories provide the best enforcement mechanisms for IP related to the product? Is it possible instead to rely on trade secrets if a product cannot be reverse engineered? Businesses must manage ongoing IP costs ruthlessly – if a product is not successful or licensing opportunities do not present themselves, firms should consider investing their money in the next offering.
To understand how best to improve and streamline IP processes, a clear and sophisticated understanding of today’s patent law system is essential, stresses Mr Fischer. “With first-to-file now the law in the United States, a company must file its patent applications as quickly as possible; no longer can it wait in order to perfect the commercial offering. However, if one files too early, there are risks as to adequate disclosure, and what is adequate can vary with the subject matter. With a full understanding of these factors, it is necessary for companies to develop a process that basically reviews product development on a nearly-real time basis to be able to identify inventions virtually as they are conceived, and then prepare and file an enabling disclosure as quickly as possible.”
Though the costs of patenting are high and rising, they pale into insignificance compared with product development processes and marketing costs. Businesses are becoming reluctant to innovate purely for the sake of it and, increasingly, technology transfer and cross-licensing are becoming the preferred way of bringing technology into a product line. “Large high tech companies are increasingly leveraging third party technology from smaller companies and larger suppliers to ensure their resources are focused on the value-add or differentiation that makes the difference to the end user,” says Mr Calvert. “In some cases, though, you see a move back towards vertical integration – for example, Apple investing in LCD technology – where they wish to gain a leg up on a key technology element. Intellectual property also plays a part in this and coupling innovation capture processes with a sound filing strategy can help manage and reduce costs throughout a product’s IP lifecycle.”
IP audits are a useful tool to help firms manage and extract value from their IP assets, designed to capture and analyse information so informed decisions can be made. A thorough IP audit involves a review of a company’s IP assets, its IP-related agreements and its policies and procedures.
Firms using the process can often be surprised by the volume and value of IP assets uncovered in the audit. Further, they may be relieved when the process uncovers potential risks they had previously not considered. IP audits can help identify technical concepts that require patent protection to avoid copying, brands which should be protected by trademark registration and copyright material which is proprietary to the organisation. “An IP audit can really help a company because it can learn the strengths and weaknesses of its portfolio or lack thereof,” says Mr Hsu. “Many companies don’t really know what IP they have or what they cover and, consequently, don’t even know if they are spending too much or not enough money on IP.”
IP audits are most crucial prior to joint ventures and M&A transactions. Audits can provide a snapshot of a potential partner or target company’s IP position and form a key part of the overall IP due diligence. In the case of a target company in an M&A or joint venture situation IP audits are not merely desirable, but critical. In these situations, the audit plays a key role in determining exactly what the target company is worth. “Every innovating or creative company also needs to understand that every new offering is susceptible to third party attack,” Mr Roberts adds. “Intellectual property is blind – if a company launches a product that infringes third party IP, that product could potentially be shut down even if the company had no knowledge of infringement. In an acquisition scenario the IP risk associated with a target company could be a significant or game-changing liability. If the target company offering is susceptible to a third party IP attack it could be worthless; it would be derelict to acquire without an assessment of the IP risk.”
The time, money and resources invested in IP can all count for nothing if serious barriers to entry, such as key patents, are discovered at a late stage. It is equally damaging for firms to introduce products or services to a market only to find that they are inadequately protected and open to imitation by the competition.
Such barriers can be reduced through the use of effective strategies for monitoring competitive patent portfolios. Defensive portfolio monitoring can help identify patents that may be in process, helping to avoid infringement through effective design-around strategies, or by triggering patent challenges through the use of procedures such as initiating re-examination proceedings as soon as patent issues arise. “The defensive purpose of an IP portfolio is of paramount importance, both to protect market position and to deprive the ability of paper-patent generating entities from obtaining an IP position that can be expensive to avoid or surmount,” says Mr Fischer. “Monitoring is complementary to developing such a portfolio, and involves putting a responsible, competent yet cost-effective resource to the task of keeping watch over the patents issuing in areas of interest, and also the patent applications being published. In addition, the monitoring task must include a process both for identifying accurately third party rights of concern and for deciding what to do in response.”
Monitoring competitive patent portfolios can also help to identify areas of potential emerging technology, with a view to strengthening your own patent portfolio to anticipate such competition. This kind of offensive portfolio monitoring can help stave off competition in key product lines, and can add value to your own portfolio of patent rights. “The best advice I can give on patent protection is to make sure that you are patenting what your competitors are doing and looking outwards,” says Mr Hsu. “Most companies focus on covering their own inventions, which is good, but not as helpful if they need to use the patents in an offensive – or defensive – strategy.”
IP threats are very real and risk assessments can help prepare a company, thus enabling it to make defensive acquisitions or divestitures, ensuring it has the strongest IP position, should a threat materialise. “In terms of identifying which inventions to protect, and whether to assert these rights, it all depends on the market context and behaviour,” says Mr Calvert. “Monitoring the ‘landscape’ and competitive context is essential in nearly every instance. Enforcement, litigation and infringement of others’ IP rights can all be extremely costly, so investing in risk assessment and mitigation early on can be worthwhile.”
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