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Why intellectual property is worth protecting – more than ever.
Josh Hyatt, CFO.com | US
February 25, 2010
Despite their misleading label, intangible assets are hardly abstract. A company's intellectual property (IP) — the creative knowledge that underlies its products or services - is often what drives profitability and growth. But because such knowledge-based assets don't count for much on corporate balance sheets, financial execs have traditionally focused on maximizing book-value assets, devoting their energies to, say, inventory reduction.
But it's more important than ever to pay attention to the IP at the heart of value creation, as is evident in many high-profile industries. The pirating of music and movies is now well publicized, as is the distribution of counterfeit goods. Facing tougher economic times, finance execs are searching for any hidden assets they might tap.
"A lot of companies are becoming much more sophisticated about their IP thinking," says J. Douglas Miller, founding member of Fraser Clemens Martin & Miller, an IP-focused law firm. "CEOs and CFOs are thinking strategically about what they should protect, and what patents they should file to prevent someone else from getting into the market with a competing product."
Furthermore, as companies seek to boost innovation by forging global partnerships, managers have to think about the risks of sharing IP. Contracts with suppliers and other agents (especially those based abroad) now routinely include an IP protection clause. The dangers of failing to secure IP are also heightened by the growing presence of patent aggregators, companies in the business of acquiring and defending patents.
On the plus side, the booming value of IP — compared with, say, real estate — along with its increasing liquidity has made it an increasingly attractive asset to lenders. IP-intensive companies, such as those with brand-name recognition or patents with broad licensing appeal, may be able to leverage it to get funding. Lenders will usually take temporary ownership of the IP, licensing it back to its company of origin during the life of the loan. Depending on the predictability of the IP's income flow, securitization may also be an option.
"Management now has to understand how IP and other intangibles affect their business returns," says IP strategist Jackie Hutter. "They have to look at the scope of their IP protection as part of their financial models. They may not have as sustainable a competitive advantage as they think they do."
How can you go about capturing the value of your intangible assets? Here are some concrete steps to take:
1. Document what you create. The best way to avoid being sued is not only to develop your own IP, but also to leave a paper trail as proof. That means documenting any trade secrets, copyrighting relevant written materials, and patenting the technical know-how. Make sure that any independent contractors are covered by adding a standard provision in their confidentiality agreement. "If you can show your IP is your own, you can avoid litigation problems," says Edward Black, a partner at law firm Ropes & Gray.
2. Protect what you sell. There's now a robust market for buying and selling patents through direct sales and auctions. If you are worried that a hot product your company is selling may ignite a patent-infringement suit, it's worth identifying potential competitors and obtaining patents that could, if defended, put their products in peril. The resulting stand-off should benefit both parties. If you do spot infringement, it's important to vigorously defend your IP's honor. First, send a legal letter demanding that the violator cease and desist. If that doesn't work, file a civil suit to halt the infringement.
3. Defend what you must. OK, so perhaps you have developed a better-performing rubber ball for the holiday season. The fact is that it's going to bounce in and out of the market long before you obtain a patent, which could take three years. That's about three years longer than it will take your competitors to copy it. Is it really worth spending the money to keep exclusive control? Probably not. "Sometimes, you're better off battling with your competitors on price because in some markets exclusivity does not matter," says Black. "Of course, the situation is much different if you are a pharmaceutical company that has come up with a drug. In that case, the sky is the limit."