Intellectual property lies at the heart of all organisations. Domini Stuart explains why directors must ensure they understand what it is and why it needs to be carefully managed.

    The Federal Government recently announced an investment of $1 billion to kick start an innovation culture. But Karen Sinclair, principal of Watermark Intellectual Asset Management, believes that Australian courts could be discouraging innovation by restricting the scope of protection for intellectual property (IP).

    “In October last year, the High Court rejected some claims of a patent by Myriad Genetics directed to technology based on BRCA-1 and BRCA-2 genes which, when faulty, can greatly increase the chance of developing breast and ovarian cancer,” she says. “In an almost identical case in the US, the Supreme Court also ruled that naturally occurring DNA is not patentable but it did concede that DNA created in a laboratory, known as cDNA, could be patented. The Australian High Court made no such concession, and implementation of the ruling by IP Australia is causing concern.”

    Two months later, the Full Court of the Federal Court found that a computer-implemented system for assessing the prior learning of students undertaking vocational courses could not be patented because it simply implements an idea with conventional tools. “Findings like these have made it much more difficult for IP Australia to grant patents in areas such as biotechnology and information systems,” Sinclair continues. “This is particularly significant here because we have so much less jurisprudence than a country the size of the US. There, findings can be worked through case by case. In Australia, one finding could set the tone for the next 20 years.”

    Jonathon Wolfe, a director of Wrays Solutions, suggests that this uncertainty is driving innovators to get to market quickly. “Companies are trying to build momentum around their brand while continuing to innovate,” he says. Other risks are also emerging. “By creating a more fundamentally connected world, the internet of things is enabling access to new areas of the business,” Wolfe continues. “And, while the increasing availability of cost-effective 3D printing is allowing organisations to produce complex products more efficiently across a number of locations, it is opening up new avenues for counterfeiting.”

    IP tips for directors

    Dawna Wright – Boards need to feel confident that IP assets are being identified, valued and protected. They should ask management who has access to them and whether controls are in place to minimise the risk of loss or unauthorised access or distribution. People who work with or for an organisation pose the greatest risk to IP but gathering appropriate business intelligence early in the relationship can help to mitigate the risk.

    Karen Sinclair – I believe that IP protection should be considered part of overall risk management and given priority on the board agenda. I also believe that someone who reports directly to the board should have responsibility for managing IP. It’s quite common in mid-tier businesses for responsibility to lie with the company secretary or to sit in a back corner of the legal department, but this is no longer appropriate.

    Julia Adams – Protecting IP and managing the associated risks includes complying with the Privacy Act. The board must ensure that there are policies and procedures in place to protect the personal information of clients, customers and staff and that these are well-communicated and policed. Contractors and every organisation in the supply chain should be subject to the same policies and procedures.

    Shane Bell – Business continuity and crisis management are not new issues for directors and the board can leverage this. IP and cyber resilience may be evolved risks but it makes sense to connect them to established business continuity planning, disaster recovery and crisis management plans.

    These processes should be regularly tested at an enterprise level and there should be an avenue for incorporating lessons learned.

    Jonathon Wolfe – IP strategy should be a critical element of any business planning exercise. Boards should examine the return on investment associated with the purchase and maintenance of each IP asset to avoid pouring good money after bad.

    Greater protection needed

    In some cases, actual patents are being undermined. Organisations known as non-practising entities (NPEs) take advantage of the fact that many approved patents are so poorly worded or defined that their underlying technologies are open to interpretation. They acquire patents, identify companies that might be infringing them and make their money by taking legal action.

    “In the US, the RPX Corporation is helping its members adopt a defensive buying strategy by acquiring patents on their behalf,” says Dawna Wright, senior managing director and Australia leader forensic accounting and advisory at FTI Consulting.

    Over the past 40 years, technology has transformed both the way we do business and the nature of companies’ assets. Research carried out by IP merchant bank Ocean Tomo found that intangible assets held by the Standard & Poor’s top 500 companies rose from 17 per cent of total assets in 1975 to 84 per cent in 2015.

    “This is significant because intangible and electronic IP is much more susceptible to misappropriation,” says Wright. “Boards need to ensure this risk is adequately addressed in the overall risk management framework.” She also recommends that companies log their IT systems. “If a company detects unauthorised access to, or use of IP, an analysis of user activity will be invaluable to the forensic team investigating the incident,” she continues. “Emails, document-management systems and internet access should all be logged and the logs retained and backed-up. If the company is planning to outsource some or all of its IT services to a service provider, logging should be included in the negotiation. Agreements that are already in place may need to be re-negotiated.”

    A new way of accessing IP

    Employees, suppliers, joint venture partners and anyone else who has physical contact with an organisation still pose the biggest threat to IP. But cybercrime has introduced risk at a global level, and breaches of security have become so common that the director of the FBI famously claimed that there are now only two kinds of companies – those that have been hacked, and those that will be.

    Shane Bell, a director of McGrathNicol Advisory, specialises in cyber risk, digital forensics and information risk management. He encourages boards to set aside fear and accept that they have an evolved risk to manage.

    “Rather than lumping cyber and information risk in with IT and technical problems, the board should be collaborating with management to develop a strategy for ongoing cyber resilience,” he says. “The Australian Securities and Investments Commission (ASIC) defines cyber resilience as the ability to prepare for, respond to and recover from a cyber attack – and both ASIC and the Australian Prudential Regulation Authority (APRA) are vocal participants in the cyber agenda. Cyber resilience will be a key component of their surveillance and regulatory activities in 2016.”

    IP in global markets

    Expansion into overseas markets, and particularly developing markets, is now commonplace.

    “Cyber and IP risks are not roadblocks to this evolution, merely a consideration that needs to be addressed up front,” says Bell. “As an organisation’s digital ecosystem changes, the core principles of information risk management and information governance become all the more important. The board needs to know how the company’s IP and confidential information is classified and who has access to it – how and from where. Dealing with these issues upfront is much simpler than retrofitting a solution, and it’s also much more cost effective.”

    Publicising or commercialising unprotected IP could result in forfeited rights. “There are differences – sometimes subtle, sometimes stark – between different IP regimes around the world and these need to be taken into account,” says Wolfe. “For example, China is a first-to-file jurisdiction, which means that, in most cases, ownership is determined by registration rather than prior use. In negotiations, it is vital not to disclose any IP until you have applied for protection.”

    There is still what Sinclair describes as “an alarming tendency” for enthusiastic sales representatives to disclose sensitive information before a contract has been locked down or there is any real understanding of what the relationship involves. Some companies are still entering into agreements in countries like India and China on a handshake basis.

    “We have been working with two organisations that are trying to retrieve their rights from Chinese companies,” she says. “In both cases, it is as much a case of the Australians failing to take the proper precautions as it is the Chinese behaving badly.”

    Internationally, there is growing recognition of the need to protect IP. “China’s IP regime is becoming increasingly sophisticated,” Sinclair continues. “They now have more IP litigation in their court system than anywhere else in the world and a lot of that is between Chinese companies. The government is very alert to these issues within its own borders and is pressing for companies to adopt appropriate attitudes. Similar changes are bound to happen in India but I think it will take considerably longer because of the complex and convoluted bureaucracy there.”

    More broadly, Australia and 12 other countries have signed an agreement known as the Global Patent Prosecution Highway, with the aim of accelerating patent prosecution procedures. “Recently this highway has started to flow more freely and it is opening up opportunities for more cost-effective and time-efficient extension of IP rights between jurisdictions,” says Wolfe.

    New challenges for directors

    Today’s risk landscape is very different from when many directors started their careers. “Boards need to include, or have access to, people with broad and deep knowledge of IP,” says Wolfe. “Directors must be able to evaluate the risks and opportunities associated with each strategic option and understand their industry in relation to IP – where IP creates value, whether IP is influencing the structure of the industry and how to take advantage of these dynamics.”

    They also need to be confident that appropriate structures and policies are in place to protect IP. “Constant vigilance is vital because technology is changing so rapidly that protections can become out of date very quickly,” says Julia Adams, partner at Shiff & Company lawyers. “It is also vital that the policies are well-communicated and enforced.”

    No organisation should underestimate the value of investing in its people. “Employees should be held accountable, which means they must understand why protecting IP is so important,” says Bell. “If they are taken on this journey correctly, they can be a key part of a well-structured plan.”

    Exploiting the value

    Managing IP is not only about risk – the board must also understand how IP can create value. “Directors should be aware of which components, systems or processes set them apart from their competitors and drive the value of the company,” says Wright. “This will also enable them to assess the returns on investment in innovative research and development. This will, presumably, be encouraged by the current government.”

    Cognitive computing is making it possible to monitor and evaluate IP far more effectively. “The rate of information flow in scientific and technical domains has increased exponentially – the combination of scientific papers and patents output is doubling every seven or eight years,” says Wolfe. “That makes it very hard for individuals to stay abreast of advances in their field. Cognitive computing platforms make it possible to keep up with relevant developments.”

    With Australia’s IP system currently under review by the Productivity Commission, there is great potential for achievement. “We’re hoping for greater clarity and consistency and, while the Commission must be independent and not influenced by government policy, a pro-innovation perspective could be extraordinarily useful in the current environment,” says Sinclair.

    How to minimise losses in emerging markets

    Recently, FTI Consulting surveyed companies that suffered losses while doing business in an emerging market. They found that, in general, the companies that suffered least:

    • Play by the rules and are committed to protecting their reputation.
    • Make compliance a strategic priority.
    • Combine a deep understanding of culture with a determined refusal to cut corners. Develop plans for responding to potential incidents and ensure those plans are continuously updated and communicated internally and externally.

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