The Importance of Intellectual Property Valuation and Protection
A recent spate of initial public offerings, high-profile mergers and acquisitions, and litigation has thrust intellectual property (IP) into an increasingly critical position in global economics. However, many organizations often fail to understand the value of and the risks to their IP, even when that IP accounts for a high percentage of the company’s value.
With limited resources and bottom -ine pressures from stakeholders, companies need a high rate of return on their intellectual property (IP) investments and appropriate protection for it. Not taking action could pose a serious threat to the success of the organization.
What Is Intellectual Property?
Intellectual property is a general term for the set of intangible assets owned and legally protected by a company from outside use or implementation without consent. Stemming from its ability to provide a firm with competitive advantages, defining IP as an asset aims to provide it the same protective rights as physical property. Obtaining such protective rights is critical as it prevents replication by potential competitors—a serious threat in a web-based environment or the mobile technology sector, for example.
An organization that owns IP can realize value from it in several ways, namely through utilizing it internally—for its own processes or provision of goods and services to customers—or sharing it externally. The latter can be achieved through legal mechanisms such as royalty rights.
There is an extensive international system for defining, protecting, and enforcing intellectual property rights, comprising both multilateral treaty schemes and international organizations. Examples of such treaties and bodies include the Trade-Related Aspects of Intellectual Property Rights (TRIPs), World Intellectual Property Organization (WIPO), World Customs Organization (WCO), United Nations Commission on International Trade Law (UNCITRAL), World Trade Organization (WTO), and European Union (EU). Nonetheless, there are variations in the respect for and enforcement of rights at a local level.
Types of Intellectual Property
IP as an asset category can be divided into four distinct types—copyrights, trademarks, patents, and trade secrets.
Copyrights
Copyrights, among the most widely used types of IP, are a form of protection granted to the authors of original works of authorship, both published and unpublished. A copyright protects a tangible form of expression (i.e. a book, work of art, or music), rather than the idea or subject matter itself. In the United States, under the original Copyright Act of 1909, publication was generally the key to obtaining a federal copyright. However, the Copyright Act of 1976 changed this requirement, and copyright protection now applies to any original work of authorship immediately from the time that it is created in a tangible form.
What does copyright protect?
Copyright confers automatic protection on an original literary
or artistic work that takes a certain form:
"literary and artistic
works"
The term "literary and artistic
works" is interpreted broadly to include, for example,
manuscripts, photographs, architectural plans, software codes,
furniture, designs, packaging and shapes of products (not only
products that represent a certain design but also technically
oriented products), meeting reports, advertisements, etc.
"original"
A work that bears the stamp of its
author's personality will be considered original, without any
particular artistic or aesthetic characteristics being required. As
far as architectural plans are concerned, for example, such plans
will be considered an original work if they result from an
intellectual effort by the author and are not dictated solely by a
technical requirement that would have led to the same result
regardless of the architect's identity. This "personal
stamp" requirement presupposes that the primary source of the
work is not a prior creation but rather the author's own
independent conception.
"that takes a certain
form"
This requirement implies that a mere
idea cannot be protected by copyright. A concept for a computer
program, for example, will not qualify for protection until it has
been set down in lines of code.
Who benefits from the protection?
As a general rule, copyright benefits the author of the work,
namely the natural person that created the work. Business leaders
should thus ensure that the company's employment contracts and
service agreements contain an IP clause, providing for the
assignment to the company of all copyright in created works, in the
broadest sense possible. In this regard, the law sets forth precise
rules which must be respected. It should be noted that there is a
significant exception for computer programs. Indeed, in the absence
of a provision to the contrary, copyright and all other
"economic rights relating to computer programs created by one
or more employees or agents in the performance of their duties or
further to the employer's instructions" are deemed
assigned to the employer.
What are the advantages of copyright over other
intellectual property rights?
This question is important because, in certain cases, a creation
can be protected by different types of rights. Thus, for example,
software is covered by copyright but can also benefit from patent
protection, provided notably that the application of the software
has a technical effect. The same holds true for slogans, logos or
product packaging which qualify for copyright protection but can
also benefit from trademark protection if they fulfil certain
conditions.
One important advantage of copyright protection is that it is
automatic. Thus, no investment is required to obtain or maintain
it. Moreover, thanks to the effect of various international
conventions, such as the Berne Convention which has been signed by
one hundred sixty-four countries, copyright protection extends to
much of the world. Conversely, both patents and trademarks require
the filing of an application with the competent national or
international registration organisations. Such filings, which are
generally handled by patent or trademark agents, can be quite
costly if protection is sought in numerous countries.
Another advantage of copyright protection is its duration:
seventy years from the author's death.
Finally, it is important to keep in mind that, given the absence
of a register of all copyright-protected works, it is not possible
to verify in advance if a work is protected or not. The best way of
avoiding the risk of reproducing a protected work is not to copy
original works.
Trademarks
Trademarks are another common type of IP. A trademark, as defined by the U.S. Patent and Trademark Office (PTO), is “any word, name, symbol, or device, or any combination, used, or intended to be used, in commerce to identify and distinguish the goods of one manufacturer or seller from goods manufactured or sold by others.” While it is not as robust as the international protection regime for copyrights, the Trademark Law Treaty Implementation Act provides some international protection for U.S.-registered trademarks.
Patents
As compared to other types of intellectual property, patents are among the most valuable, costly, and difficult to obtain. A patent is defined by the PTO as “the grant of a property right to the inventor,” providing the owner “the right to exclude others from making, using, offering for sale, selling, or importing the invention.”
Patentable items may include objects or processes such as new technology or business methods, but excludes more abstract items such as web sites or ideas. Sufficient documentation from the applicant coupled with verification of originality by the PTO is required before the grant can occur, and is then typically valid for 20 years from the date of application.
Once received, a patent owner may grant licenses to others for use of the invention or its design and may charge a fee for such usage. Patents are valid only within the United States, including territories and possessions; however, 130 countries have agreed to honor patents across borders through instruments such as the Patent Cooperation Treaty (PCT).
Any business which invests in research and development cannot afford to ignore the power that patents have in protecting that investment.
Patent protection provides a means of obtaining a monopoly in a desired country or countries for a term of up to 20 years from the date of filing for an invention, whether the invention is a product or a process.
Strategic patenting ensures that the benefits of research and development can be wrapped up, retained and protected to give you a competitive edge in the marketplace. Combined with effective policing of patent rights, a business can establish itself firmly in a particular field, and can prevent its competitors from riding on the wave of its investment.
Although patenting can be reasonably expensive, a patent has a high presumption of validity, because the claims of a patent are thoroughly searched by the Patent Office and the claims are examined in detail by a Patent Examiner. This high presumption of validity means that companies respect patent rights and do not tend to infringe patents deliberately. The cost of bringing a patent action before the courts is high, but infringements rarely come to court, with disputes usually being settled early.
A patent may protect an invention, but this does not necessarily mean that the invention is free for use by the patentee. It is possible that someone else may already have protected core features associated with the same invention. This situation can arise, for example, when a company takes a competitor’s product and improves it. Although the improvement may well be patentable in its own right, it may also be covered by the competitor’s earlier patent. In this position, patent protection of the improvement can be vital in order to negotiate, for example, a cross-licence agreement to enable the improvement to be sold.
In today’s marketplace, we believe that it is more important than ever to be IP-aware. Keep your competitors at bay with strategic IP protection and give certainty to retaining your market share.
Trade Secrets
Any idea or fact that is not disclosed by a business comprises the fourth type of intellectual property: trade secrets. A trade secret is a unique form of IP in that it does not have a defined time horizon—an issue could remain secret simply while filing for a patent, or it could remain closely guarded for the lifetime of the firm (i.e. Coca-Cola’s recipe).
A trade secret, by definition, is proprietary or business-related information that a company or individual uses or to which they possess exclusive rights. To be deemed a trade secret, the information must meet several requirements: that it is genuine and not obvious, provides the owner with competitive or economic advantage and thus has value, and is reasonably protected against disclosure. Examples of trade secrets include the aforementioned recipes, business methods, strategies, tactics, or any other piece of information that gives the business a competitive advantage.
Why Value Intellectual Property?
Changes in the global economic environment have influenced the development of business models where IP is a central element establishing value and potential growth. In addition to these systemic changes, U.S. and international accounting practices place pressure on firms to recognize and value all identifiable intangible assets of a firm as part of a transaction (in a merger or acquisition, for example).
As a result of these trends, proper valuation of IP, followed by measures to protect that value, have become a key element of the success and viability of a modern firm. Federal Reserve Chairman Ben Bernanke recently validated this notion during the “New Building Blocks for Jobs and Economic Growth” conference, where he discussed the importance of intangible capital and that its accumulation has accounted for more than half of the increase in U.S. output-per-hour during the past several decades.
Valuing Intellectual Property—Methodology
There are three methods of valuing intellectual property: cost-based, market–based, and income-based valuations.
- Cost-based valuation takes into consideration both how much it cost to create the asset historically and how much it would cost to recreate it given current rates.
- Market-based valuation looks at comparable market transactions, whether sale or purchase, of similar assets to arrive at conclusions of value.
- Income-based valuation looks at the stream of income attributable to the intellectual property based on the historical earnings and expected future earnings.
These methods can be applied concurrently in a combined approach to arrive at a final valuation.
There are several important factors to establish and take into consideration when performing an IP valuation. These include:
- Clear identification of the IP.
- Unambiguous title to the asset.
- Qualitative and quantitative characteristics of the IP.
- Earnings capacity and profitability relating to the IP.
- Market share supported by, or as a result of, the IP.
- Legal rights and restrictions, competition, barriers to entry, and risks associated with the IP.
- Product life cycles and positioning.
- Historical growth and prospects for the future.
