Professional valuation analysts (“analysts”) are often asked to provide expert testimony and other litigation support services with regard to intellectual property (I.P.) controversies. Before such controversies arise, analysts can help their clients to develop and implement procedures that protect the client’s intellectual property. Such procedures can also be used to (1) reduce the client’s exposure to I.P. litigation risk, and (2) increase the probability of a successful outcome if I.P. litigation does occur.
Analysts who have been involved in I.P. litigation are uniquely qualified to provide these consulting services to I.P. owners. First, analysts are trusted advisors to the senior management of I.P. owner companies. Second, as a result of their varied valuation, corporate finance, and capital markets experience, analysts should have a general awareness of the types and functions of typical client I.P. Third, analysts are experienced in procedures related to the inventory, documentation, and valuation of client company assets. The same procedures that analysts perform related to tangible and intangible property can be adopted for application to client I.P. Fourth, analysts are experienced at (1) identifying internal control weaknesses related to property management, and (2) recommending corrections to those weaknesses. The procedures presented in this discussion relate specifically to the client's internal control related to I.P. Fifth, analysts are familiar with risk assessment procedures. These procedures can be adapted to (1) identify, and (2) reduce the risks related to client I.P.
The term intellectual property includes four specific intangible assets: (1) copyrights, (2) trademarks, (3) patents, and (4) trade secrets. For purposes of this discussion, the term I.P. will also encompass intangible assets directly related to I.P., such as patent applications, trade dress, engineering drawings and technical documentation, computer software, and all of the contractual rights related to I.P. exploitation. And, for purposes of this discussion, the term “I.P. owner" includes owners, developers, inventors, licensors, joint venturers, and others with a direct or indirect I.P. ownership interest.
This discussion describes practical procedures intended to protect client's I.P. Analysts should tailor these procedures to fit individual client needs. In addition to recommending I.P. control procedures, analysts should assist clients with the documentation and implementation of these procedures.
I.P. owners often become involved in controversies that may escalate into litigation, such as infringement matters, contract disputes, license disputes, breach of noncompete/confidentiality agreements, taxation claims, eminent domain/ expropriation issues, bankruptcy matters, and others. The following procedures are intended to (1) decrease the probability that I.P. controversies will result in litigation, and (2) increase the probability of I.P. owner success if litigation cannot be avoided.
Procedure Number One. The I.P. owner should document the existence of all of the organization's intellectual property. The first step is to inventory all owned I.P. This procedure should include (1) the listing of all I.P., (2) a description of each I.P. on the listing, and (3) the recording of all I.P. registration information. This registration information should include: country/agency or registration, registration number, and original/renewal/expiration registration date. Additionally, this listing should include both domestic and international I.P. registrations.
The second step in this inventory procedure is to document the historical development process for each I.P. To the extent that the data is available, this documentation should include: (1) dates of the initial development phase, (2) individuals/departments responsible for development, and (3) information regarding development expenditures (both internal and external).
The inventory procedure should document both (1) developed I.P., and (2) I.P. currently under development. This procedure should document all owned I.P. and, to the extent possible, all licensed (both inbound and outbound licensed) I.P.
Procedure Number Two. The I.P. owner should centralize both (1) the inventory, and (2) the ownership of all I.P. The first step in this procedure is to centralize all I.P. documents (i.e., registration applications, registration certificates, licenses, important correspondence, etc.) in one location. This centralized location could be the corporate accounting department or corporate legal department. This centralized location could also be a plant engineering department or the field marketing department. The issue is that all important I.P. documentation should be centralized in one place which can be any convenient location within the I.P. owner organization.
The second step is to centralize all I.P. ownership. in one country (or, at least, in a very few countries). Also, the ownership of all domestic I.P. should be centralized in one state. The I.P. owner should investigate forming a single (typically corporate) entity to hold all of the domestic I.P. Many I.P. owners form a wholly owned holding company to own and control all of its current and future I.P. This structure typically requires the creation of license agreements between (1) the holding company, and (2) the operating companies for the use of the subject I.P. While the drafting of these intercompany licenses involves some effort, this procedure actually helps to document (1) the existence of, and (2) the economic validity of the I.P.
Procedure Number Three. The I.P. owner should make one person in the organization ultimately responsible for all I.P. This person could be a senior engineer, corporate counsel, company controller, or a marketing executive. Obviously, other employees may perform the I.P. development, registration, commercialization, and licensing work. And, the responsible person does not need to be located in the same location as the above described I.P. inventory.
However, this employee should be organizationally responsible for (1) omniscience about all I.P., and (2) protection of all I.P. And, all individuals involved with I.P. activities within the organization should know exactly who this responsible person is.
Procedure Number Four. The I.P. owner should identify the person who is directly responsible for the development/maintenance of each individual I.P. For each individual I.P., the organization should identify one person who is directly responsible for technical development, physical safekeeping (of documentation, etc.), and commercial exploitation. There may be many individuals who are involved with the development/commercialization of each I.P. Of these individuals, however, the I.P. owner should select one person to be the ultimately responsible party for each I.P. And, in a large I.P. intensive organization, there may be dozens (or even hundreds) of employees designated as the "responsible person" for an I.P.
In the second step of this procedure, the I.P. owner should create and widely distribute the list of the responsible persons. And, the list should be primarily organized by I.P. (not by the name/department of responsible persons). Based on this list, the person with ultimate responsibility for all I.P. will know who the "go to" employee is for each I.P. And, more importantly, every person within the organization will know who the "go to" employee is for questions/problems/opportunities related to each I.P.
Procedure Number Five. The I.P. owner should promote the importance of the organization's I.P. in its relevant marketplace. This procedure is as important for not-for-profit organizations as for for-profit organizations. It is equally important for manufacturing companies, for service firms, and for organizations operating in virtually any industry. And, this procedure is relevant (albeit in different ways) for publicly traded companies and for closely held companies.
To implement this procedure, the organization's CEO should "talk up" the subject I.P. at shareholder meetings, security analyst meetings, press meetings, and at any other public forum. All managers/executives should "talk up" the I.P. at industry conferences, trade association meetings, employee meetings, and other public forums. And, company marketing managers/sales persons should "talk up" the I.P. at sales presentations, client/customer meetings, and the like. The purpose of this procedure is to demonstrate that the I.P. owner believes that the subject I.P. is so valuable as to be worthy of discussion/promotion in the relevant marketplace.
Procedure Number Six. The I.P. owner should promote the importance of the organization's I.P. in any written or other mass communications. This procedure encompasses both internal and external mass communications. To implement this procedure, the I.P. owner should mention the I.P. in letters and/or newsletters to employees. The I.P. owner should mention the I.P. in external communications with investors/regulators/others in stockholder letters, annual reports, and documents filed with the SEC and other regulatory agencies. The I.P. owner should also mention (1) the existence of, and (2) the importance of I.P. in print/radio/television advertisements, other promotional media, product/marketing brochures, and the like.
The purpose of this procedure is for the I.P. owner to publicly recognize the prominence and eminence of the subject I.P. It may be difficult to force others (competitors, infringers, etc.) to recognize the importance of the subject I.P. if the owner does not have a demonstrated history of recognizing the subject I.P.
Procedure Number Seven. The I.P. owner should register its I.P. in all relevant jurisdictions. This may be a time-consuming and expensive procedure if the I.P. is used in various countries and other jurisdictions. However, with consideration of the constraints of time and money, the I.P. owner should register the subject I.P. in all commercially reasonable countries/jurisdictions.
The second step in this procedure is for the I.P. owner to renew all international registrations as they expire. And, the I.P. owner should document both (1) the registration, and (2) the use of the subject I.P. in all relevant countries/jurisdictions.
Procedure Number Eight. The I.P. owner should conduct periodic appraisals of all I.P. Again, this could be a time-consuming and expensive procedure. Based on cost and staff availability considerations, the I.P. owner can use internal analysts or independent experts to conduct the appraisals. The purposes of the appraisals are several fold: (1) to document the I.P. existence, (2) to document the I.P. value, (3) to document the I.P. remaining useful life, and (4) to document a reasonable royalty rate/transfer price for the I.P.
First, these periodic appraisals should be extremely useful for management information purposes. They can help establish transfer prices for the intercompany transfer or use of I.P. And, they can help establish intangible asset values (1) to assess insurance requirements, (2) to analyze property tax assessments or exemptions, and (3) to estimate an overall organization value.
Second, the periodic appraisals are extremely useful to prove and defend economic damages claims or royalty/license claims in I.P. controversy matters.
Procedure Number Nine. The I.P. owner should respond immediately to each and every possible threat to the subject I.P. The I.P. owner should immediately respond in writing to any possible infringement, unauthorized use, contract/license dispute, and so forth. This correspondence should explain the importance of the I.P. to the subject organization. It should explain that the I.P. will be rigorously protected. Additionally, this correspondence should explain that violators of the I.P. owner's rights will be prosecuted without exception. The correspondence should also demand some action for example, a written response, the immediate cessation of the problematic action, or a payment of economic damages.
Regarding any possible threat to the organization's I.P., the I.P. owner should begin a thorough investigation immediately. And, the I.P. owner should make known its intention to defend even the most minor threats to its I.P. Obviously, the objective of this procedure is to strongly discourage any current and future threats to the subject I.P.
Procedure Number Ten. The I.P. owner should not hesitate to involve experienced legal counsel at the earliest reasonable time. At that point, the I.P. owner's legal counsel may communicate with the wrongful party. This communication will typically state counsel's demands and begin the process of negotiation of an equitable settlement. If a settlement is not forthcoming, legal counsel may decide to pursue alternative dispute resolution (ADR) procedures.
If the dispute is not resolved, the I.P. owner should be prepared to pursue the protection of its I.P. through litigation, if necessary. If the above-listed I.P. protection procedures have been implemented, the I.P. owner will be in a favorable position to realize a successful and cost effective conclusion to the litigation.
I.P. owners face periodic threats and challenges to their I.P. Accordingly, I.P. owners should document, control, and protect their I.P., just as they would any other valuable asset of the organization. I.P. owners should implement practical procedures to protect their I.P. Analysts are in a trusted position to help I.P. owners develop and implement cost effective I.P. internal control procedures.
As with any organizational procedure, the I.P. owner should analyze the relevant cost/benefit considerations with regard to any I.P. protection procedure. Not all of the procedures described above can be effectively/efficiently implemented in every I.P. organization. Nonetheless, the I.P. owner should recognize that these procedures do not just protect the organization's I.P. These procedures also help support economic damages and other claims when the subject I.P. is threatened. Furthermore, these procedures can help achieve the most favorable possible outcome if I.P. litigation cannot be avoided.
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