The topic of intellectual property has never been so pronounced as it is at the moment. This is thanks to more and more mergers, acquisitions, and public offerings. Despite this trend, it’s surprising just how many companies don’t appreciate both the risks and the value of intellectual property, especially for those where intellectual property makes up a large part of their business. Considering just how much stakeholders suffer from bottom-line pressure or limited resource, it has never been more important to ensure intellectual property is adequately protected and generates a reasonable return rate. Subsequently, doing nothing can seriously hamper the success of such organizations.
What is Intellectual Property?
It describes theoretical assets that are legally protected and owned by a specific company meaning others cannot legally use them outside the company. The biggest positive of intellectual property is that it provides companies with a competitive advantage. This is because any theoretical assets are protected to the same level as actual physical items. So, why is this important? First, competitors won’t be able to replicate what you are doing, which is particularly important for web or mobile-based companies. Secondly, it provides value for the owning organization because it can be used as part of customers’ goods and services. The organization may opt to allow external bodies to use the property; however, royalty rights or other legal restrictions place the right protection on this. There are a couple of different systems used to define, protect, and enforce intellectual property rights. These include multilateral treaty schemes or internal systems within the organization.
Do Different Types of Intellectual Property Exist?
Yes. There are four different types. These include copyrights, trademarks, patents, and trade secrets. Here’s a little more about each one.
Copyrights. In terms of intellectual property, copyright is one of the most commonly used. In it’s simplest form, it protects authors’ published or unpublished work from being copied. It doesn’t apply to subject matter or ideas. Instead, physical work such as music, a book, or a piece of art. In America, federal copyright was often granted once a book had been published, thanks to the 1909 Original Copyright Act. The Copyright Act was then brought in in 1976, which covered works from their time of creation.
Trademarks are another form of intellectual property. They refer to things like symbols, names, or words used by organizations to distinguish or identify goods sold there. While not being as robust as copyright protection, decent protection is provided for trademarks made in the US thanks to the Trademark Law Treaty Implementation Act.
Patents. While patents are highly valuable to obtain, they tend to cost more than other forms of intellectual property and can sometimes be challenging to get in the first place. They are used by inventors to protect their work so that other people cannot copy, manufacture, or sell it. Patents can cover physical objects and technology, but things like websites or abstract ideas aren’t covered. If someone decides to patent their idea, they will need first to verify their product, then complete the right documentation. Once it has been granted, the patent usually remains valid for 20 years. Just because a product owner has a patent on their product doesn’t mean they can’t still allow someone to use it. In fact, they can offer licenses to others who can make use of their design and invention. However, this usually comes at a fee. While patents are only valid in the US at the moment, 130 other countries agreed to honor them thanks to things such as The Patent Cooperation Treaty.
Trade Secrets. In the simplest form, these are facts or ideas that have not yet been released by an organization in which they retain the full rights for. The organization may choose to keep such secrets confidential for a lifetime, just like Coca Cola did with their sacred recipe. Or, just stay secretive as the patent is being created. However, any old thing cannot be deemed a ‘trade secret.’ Instead, specific requirements must be met. Such as being able to provide a competitive or economic advantage for the owner. Many things can come under the umbrella of ‘trade secrets,’ such as business methods or strategies, or even a recipe or tactic.
Why is Intellectual Property so Important?
As already mentioned, intellectual property is vital for business growth and improved value. Many accounting practices in the US and other countries place pressure on organizations to classify all intangible assets. After all, protecting value has become more and more important for the up to date firm. This has been something recognized by Ben Bernanke, a well known US economist who recently spoke at an economic growth conference. Specifically, the importance of intangible capital has been a driving force for many US organizations.
How is Intellectual Property Valued?
There are three techniques used to value intellectual property. Cost-based, market-based, or income-based valuation. Here is a brief overview of each.
Cost-Based Valuation. The cost to create the work in the past compared to the present day.
Market-Based Valuation. The cost of sale or purchase and how much something similar would sell for, to determine value.
Income-Based Valuation. An income stream that results from the intellectual property based on past or predicted earnings.
The methods are interchangeable when coming to the final valuation.
Other things also need to be considered when intellectual property is being evaluated.
Intellectual property must be clearly identified with a clear title, and all characteristics of it defined. Capacity, profitability, and earnings also need to be calculated if possible, and market share that could result from or be supported by the intellectual property. Legal rights and restrictions and competition, entry barriers, and risk linked to intellectual property should also be considered, and the life cycle and product positioning. Future prospects, as well as historical growth, are other things that need to be looked into.
In Terms of Intellectual Property, what Needs Evaluating?
Different types of intellectual property aren’t all treated in the same way. In fact, they must be treated differently so that their real value can be maximized. Impairment testing is also critical in case something happened, resulting in the asset being destroyed. Think along the lines of an earthquake. While such events can dramatically affect a company’s financial performance, other consequences can include losing essential customers or suppliers and other critical assets within a business, like receivables, inventory, or investment. Valuing intellectual property can be complicated, making it vital to hire an independent and qualified valuer. Auditors themselves cannot perform the valuation for audit clients, resulting in a conflict of interest.
Intellectual Property and the Transfer of Risk
When it comes to transferring risk with intellectual property, there are four widely accepted policies available.
Intellectual Property Infringement Coverage
This policy defends ownership rights if a patent infringement claim is filed. Insurance is provided, protecting distributors or customers from allegations of violation. Rights are maintained, and damage cost is covered if it turns out the party is liable for infringement. It’s the most common type of coverage when customers request liability insurance for intellectual property. Historically, insurers experienced a significant loss with this coverage as customers who use it tend to be under more frequent litigation.
Intellectual Property Enforcement Coverage
An insurer provides funds, then takes the legal expenses from the insured. This enables intellectual property rights to be protected from infringement. The owners of intellectual property have access to funds that pay for expenses during the process. However, counterclaims or losses are not covered. This type of coverage can be extended to include other disputes, like non-payment from a third party or another party breaching their agreement. If there are grounds for pursuit, this type of coverage can also include investigation costs.
Intellectual Property Representation and Warranties
Primarily used for acquisitions and mergers or purchase agreements, this is one of the less frequently used and known types of intellectual property coverage. Its purpose is to ensure that the intellectual property within a transaction is valid and can be compared to title insurance’s role when buying a home. If an organization has suffered liability from misappropriation or infringement, this type of coverage reimburses losses and defense expenses. Furthermore, it is aimed explicitly towards intangible assets and warranties or representations connected to them, such as a corporate merger or sale, portfolio, or single asset.
Intellectual Property Value Insurance
Rather than being a cover for defense, this is more of a cover for direct loss. In other words, if a legal claim has been made against intellectual property that resulted in revenue loss due to incorrect claims or findings against patents within a portfolio that was insured. Other things that can be covered as part of this include products that could generate high revenue in the future due to intellectual property, royalty receipts and license revenues, patent portfolios, research and development expenditure, and various other financial arrangements.
Risk Management for Intellectual Property
Aside from intellectual property, valuations, and protection, it’s also essential to consider mitigation and management of risks associated with it. There are things that organizations can do, starting with finding out which accounts are most risky, then working out all of the current and emerging threats. Risk resources must then be allocated appropriately so that all legal and regulatory compliance is maintained.
It’s true to say that in the area of intellectual property and risk management, things are changing. Once, intellectual property was seen as a 100% legal matter. It is now moving to a more strategic and business problem. Organizations are keener than ever to release their intellectual property’s true value by releasing new patents and even starting up joint ventures.
A collective relationship model for risk management is also growing, meaning firms need to rethink their existing risk strategies somewhat. Technological growth means that maturity is occurring more quickly. Specifically, ‘the cloud’ allows wider sharing of intellectual property while firms are generally trying to improve their efficiency. Of course, this has raised new questions surrounding risk management, such as how assets will remain secure when in electronic form and being shared.
For some, intellectual property can be a difficult topic. However, this doesn’t need to be the case using the right kind of risk management strategy. As long as organizations have the basics covered, they can then use the proper mitigation methods, ensure everything is aligned to strategic goals and that the right standards and policies are in place. Providing the right network architecture exists and that staff are educated and trained in intellectual property and risk are other things organizations need to implement.