Christopher Niesche discovers that Australian directors need to pay far more attention to their organisations’ intellectual property and to maximising its value.
Australia’s S&P/ASX 100 companies have intellectual property (IP) worth $280 billion, according to a recent report, yet many of their directors pay scant attention to IP and protecting it. According to a 2013 report by IP consultant Griffith Hack (Twitter @GriffithHack), $250 billion of this IP value is not shown on company balance sheets – a neat illustration of the fact that IP is often overlooked in Australian companies by management and directors.
“Boards are not IP-centric and most companies have weak IP performance-tracking systems,” the report states. “Under these circumstances, it would be surprising if corporate Australia was setting appropriate levels of IP investment, picking the winners and developing value-maximising IP strategies.”
IP is an intangible asset – one with no physical form. According to the World Intellectual Property Organisation, IP refers to creations of the mind: inventions, literary and artistic works, symbols, names, images and designs used in commerce. It also encompasses confidential information – such as client lists or tender documents and secret formulas – and know-how, a body of knowledge and awareness that has been built up over time.
Companies that fail to catalogue, manage and protect their IP risk losing their exclusive rights to it and having their competitive edge eroded as others copy their products and logos.
Yet Iain Freeman, a partner in Lavan Legal’s commercial advice and litigation group, says many companies do just that. “Some organisations don’t think about it at all or they only think about very limited aspects of it,” he says.
In many organisations, it’s often unclear who is responsible for the management and protection of IP. “I think it sits in a different place in a lot of organisations,” says Freeman. “In bigger, more sophisticated organisations it may sit with the in-house counsel or a chief information officer or somebody of that sort. In other organisations, it doesn’t sit with anybody at all because nobody thinks about it.”
Freeman says the first step directors need to take in managing their company’s IP is to have management identify and catalogue the IP the organisation has and its value to the organisation. And, of course, they need to find out what steps are being taken to protect it. “That might be by registration processes. It might be ensuring all contracts with third parties are very explicit about the IP that either exists or is being created, identifying who will own what out of that process and what use may be made of it – all those kinds of fairly obvious things that quite often get ignored on the way through,” says Freeman. “The deal gets exciting and people forget about some of these things that are intrinsically valuable in themselves.”
Sometimes it is obvious what much of a company’s IP is, particularly if it is, say, a sciences company that relies heavily on research and development (R&D). But other areas of IP can be overlooked, so directors should find out if the company’s brands are protected and the trademarks are registered.
“You’ve got your staff members who are beavering away. What do their employment contracts say about the IP they are creating? Does the company own it? Well, probably, but are you relying on that assumption or are you expressly dealing with it in your contracts?” asks Freeman.
“As much as anything, it’s getting these things front of mind, because some of them can then be ascribed a value.”
Companies should also ensure they do not infringe someone else’s IP. “The great idea you think you’ve got may not be something you can exploit because as soon as you do, the real owner of that IP is going to be all over you,” says Freeman.
Inadvertent breaches of another company’s IP can be an expensive exercise, with the possibility of damages, losing work and perhaps having to rebrand if you have encroached on another’s brand.
While businesses in China are notorious for infringing other businesses’ patents, Freeman says there are no “magic bullets” for protecting IP. “It comes down to doing a proper risk/reward analysis. What are the risks you take of being in that jurisdiction? What steps are you taking to protect yourself? And what reward are you expecting to get?”
IP is becoming increasingly important to modern companies, as a paper by US economists Robert J. Shapiro and Nam D. Pham demonstrates. They found that in 1984, the book value of the top 150 US public companies — what their physical assets could be sold for on the open market — made up about 75 per cent of their stock market value. By 2005, the book value of the top 150 companies had dropped to just 36 per cent of their market value. The remaining two-thirds of value lay in their intangible assets, including IP.
In Australia, the healthcare, consumer, telecoms and IT sectors are most reliant on IP, according to a Griffith Hack report. Of the $280 billion worth of IP within the ASX 100, $120 billion is brand and $160 billion relates to technology.
Alyssa Grabb, a partner at IP firm Phillips Ormonde Fitzpatrick (Twitter @pofip), says it is sometimes only at an important point in a business’s development, such as a trade sale or an initial public offering, that its managers start to worry about their IP. “It forces them to take stock and look at their IP portfolio, if they have one, and if they do have one, to what extent is that IP portfolio in order?”
Sometimes it can be too late. Grabb is aware of significant deals that have fallen over when ownership of IP could not be established strongly enough. To avoid problems, directors should be asking management to explain how the company’s IP strategy supports the broader business strategy.
“Procuring and maintaining even a relatively modest IP portfolio costs an awful lot of money, so it’s important to ensure the IP strategy and the commercial strategy are aligned,” says Grabb.
First, directors should ask if their IP strategy protects the company’s current products and activities, and those it is planning for the future. Second, does the company have freedom to operate in its market or is there a third party whose IP rights are being infringed? Finally, there needs to be a system in place for systematically capturing new ideas and IP being created as it happens. Companies usually capture the IP when a new product is developed, but can overlook the work that goes into improving the product and scaling it up to be market ready.
“Often it’s those improvements that really add value to the product in driving the production costs down and the profitability up,” says Grabb.
Companies also need to assess whether it is worth protecting each piece of IP and whether it is worth maintaining this as it is quite costly. For example, is it technology that is redundant or no longer of any use to the company?
In the medical devices sector, collaborative R&D is on the increase, where companies with different skill sets work together, combining their technologies to solve complex problems. This can bring great rewards, but also risks around the ownership of the IP, observes Grabb.
The parties need to be clear on what they each bring into the partnership, what they aim to create together and what they want to walk away with. Discussing how the IP will be dealt with, particularly after an exit from the business, is vital to a successful collaboration. “Improvements created during the collaboration might not be useful in the targeted field, but may have potential in other fields of use. If one of the parties gains an unexpected benefit from that, issues of trust can arise, putting the collaboration in jeopardy,” says Grabb.
IP threats do not always come from the outside. “The most common aspect of IP investigations is internal. You have employees or trusted people within the company who copy or take IP from the organisation to competitors, for example,” says Mark Garnett, a partner at McGrathNicol Forensic (Twitter @mcgrathnicol).
Companies have to balance their desire to protect IP from staff theft while at the same time allowing employees to use and access it to do their jobs. An important step is education because employees often think they have an inherent right to take IP they created with them, such as client data or an IT system they have built. Also, putting limits on the use of portable memory devices and monitoring their usage is effective. This is more effective than conducting investigations and seeking court injunctions after the IP has already been stolen.
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