As with any form of property right, the value of a firm’s intellectual property (“IP”) rights will generally depend upon a number of different factors. For example, the value of a patent as a device for excluding others from practicing a specified process or invention will depend upon the breadth of its claims. Also, the strength, and attendant value, of a trademark varies with the type of mark and the perceptions regarding the product or service to which the mark is related that are created in the minds of consumers. Moreover, as with other property rights, there may be “clouds” on the firm’s title to a specific IP right, particularly in those cases where the underlying invention or work was created by more than one person.
Intellectual property rights can be put to a variety of uses. The rights can be sold or assigned to a third party in return for cash or other consideration or can be used as a capital contribution to a new business venture which might be formed to exploit the rights. Intellectual property rights can be pledged as security for the obligations of the owner, such as when a loan is needed to finance the machinery necessary for the owner of a patent to manufacture the products that are covered by the patent rights. Finally, and perhaps most importantly, an intellectual property right can be loaned, or “licensed” to one or more third parties, thereby, giving the third party a limited right to use the “property” for purposes determined by the owner of the rights. The potential business uses of intellectual property rights can be illustrated by the following examples:
- The owner of a patent can grant licenses to others which allow them to make, use, or sell the patented invention in specified markets. The patent owner will receive compensation, in the form of “royalties”, based on the efforts of the licensees in using the rights embodied in the patent.
- The owner of patents and trade secrets covering the products of basic research can use the intellectual property rights as an inducement to secure funding from third parties to permit further research on the basic technology in order to develop commercial products. The owner may then license the products to the funding party in return for royalties.
- Intellectual property rights can be licensed to third parties for use in the manufacture of products that can then be sold by the licensor. This strategy can be very effective when the licensee is able to produce the products at costs which are significantly lower than those that would be incurred by the licensor.
- A manufacturer can license third-party distributors in various markets to facilitate the sale of the products through the licensee’s established marketing channels. This strategy allows the manufacturer to penetrate new markets without the expense of building its own direct sales and marketing functions.
- IP rights can be assigned, sold, or licensed to a joint venture or other separate business entity for use in building a multifunctional firm that is capable of developing, producing, and distributing products embodying the technology that is covered by the rights.
In order to harvest the most value from the company’s intellectual property rights, steps must be taken to develop an overall intellectual property rights strategy and establish a compliance program that ensures that valuable technology and the associated intellectual property rights are identified, protected, maintained and enforced. Key principles that need to be understood in putting together intellectual property rights strategies and compliance programs include the following:
- Establish the “tone at the top” by having the board of directors and members of the executive team prepare, discuss and approve an overall technology and intellectual property rights strategy for the company.
- Identify the role that intellectual property rights are expected to play in the company’s overall business strategies and ensure that the priorities of the intellectual property rights strategy are aligned with that role. For example, a business strategy based on excluding competitors will generally need to be supported by a robust portfolio of patents covering the company’s products.
- Establish an intellectual property compliance committee to oversee the company’s intellectual property compliance program, make day-to-day decisions about intellectual property issues, implement the company’s intellectual property rights strategy and provide guidance to managers and employees throughout the organization.
- Identify the intellectual property that the company develops or otherwise uses in order to create and market its products and services and carefully analyze each step of the product development and commercialization process for intellectual property issues: submission and consideration of ideas, basic research and development, potential influences of technology and products owned by competitors, manufacturing processes and sales and marketing activities.
- Consider technological trends in the industries and markets in which the company competes and the intellectual property portfolios of the company’s current and projected competitors. Market and competitive factors, including product life cycles and existing intellectual property rights of competitors, will determine the investment that the company will need to make in perfecting and protecting its intellectual property rights and can also be a predictor of the likelihood of protracted and expensive intellectual property litigation.
- Conduct an intellectual property rights audit to understand how the company is already protecting its intellectual property rights and areas where there are significant shortcomings in the company’s compliance activities. Key areas include employee agreements, nondisclosure agreements with third parties, procedures for identifying and analyzing potential intellectual property rights and security procedures.
- Determine how the company intends to use its intellectual property rights to compete effectively in the marketplace. Possibilities include excluding others from the market in order to secure market share, generating a steady stream of royalty revenues from licensing arrangements and licensing, entering new markets in foreign countries and building the value of the company to attract investors or potential buyers.
- Build awareness throughout the company of the benefits of intellectual property and the dangers of not paying attention to the steps that should be taken to protect those rights. It is important to have the active support of everyone in the company for the program and this means integrating training and education into the program, beginning with the board of directors and senior executives and then going beyond to include everyone whose assistance will be needed.
- Create an intellectual property management structure, including a compliance committee overseen by a person designated as the chief compliance official, that ensures that all existing intellectual property rights are identified, all potential intellectual property rights are brought to the attention of the legal department and others in order to make decisions about how best to protect them and audits of the effectiveness of the compliance program are performed regularly.
- Set aside resources to proactively enforce their rights in the event a third party is engaged in activities that are infringing on the company’s statutory intellectual property rights (i.e., patents, copyrights or trademarks) or which involve misappropriation of the company’s trade secrets. Enforcement, which often involves litigation, can be a costly activity and procedures should be put in place to carefully weigh the benefits and costs.
- Recognize that the intellectual property compliance program is as important part of the company’s overall risk management system. One very important risk to consider is avoiding intentional or inadvertent infringement of the intellectual property rights of third parties and the program should incorporate procedures such as monitoring patent activities of competitors; carefully analyzing the elements of proposed products before substantial time is spent on development and marketing to determine if any infringement issues are likely to be encountered; and conducting a similar search for potential trademark and copyright issues before launching marketing and advertising campaigns.
- Extend the principles implemented in the intellectual property compliance program to proposed acquisitions in order to assess of the value of the intellectual property rights of the target and the risks that the target’s products or services infringe the rights of third parties (a potential liability that the company would succeed to if the transaction is completed).
Helpful tools to assist you in advising clients on IP matters and protection of IP rights have been included in this month’s update to Business Transactions Solution on WESTLAW:
- Executive summary for clients regarding intellectual property rights (§ 206:43)
- Executive summary for clients regarding intellectual property audits (§ 206:44)