Intellectual Property Processes

• Brief Definitions/Descriptions of Intellectual Property and Intellectual Assets
  • Patents
  • Trademarks
  • Copyrights
  • Trade Secrets
  • Confidential Information – An Intellectual Asset
• Overview of IP Processes
• Planning and Implementing
  • IP Processes Related to Strategic Planning
  • Selection Processes for Patents vs. Trade Secrets
• IP Processes for Developing and Acquiring IP
  • Invention Disclosure, IP Documentation and Innovation Management
  • Innovation Workshops to Harvest Technology Creativity
  • Using IP to Identify Opportunities – Licensing-In
  • Using IP Processes to Assess M&A Business Opportunities
  • Example Database, Analytic Outputs, Search Criteria Supporting Strategic IP Due Diligence
  • Protection of Intellectual Assets – Conversion To Protected Intellectual Property Assets
• Intellectual Property Portfolio Management Processes
  • Identifying and Organizing Intellectual Assets
  • Patent Portfolio Assessment Processes
  • Variations In The Law And Practice Of Intellectual Property Law Across A Variety Of Jurisdictions
  • Valuation of Intellectual Assets
• Extracting Value from IP
  • Avoiding Business Loss Through Intellectual Property Infringement Insurance
  • Promote IP to Maintain a Sustained Advantaged Business Position vis-à-vis Honorable Competitors
  • Enforce IP Domestically to Maintain a Sustained Advantaged Business Position vis-à-vis Dishonorable Competitors
  • Enforce IP at Borders to Maintain a Sustained Advantaged Business Position vis-à-vis Dishonorable Competitors
  • Licensing-Out
  • Sale
  • Joint Ventures
  • Strategic Alliance
  • Spin-Out
  • IP Exchanges
  • IP Donations
  • Abandonment
• Risk Management of IP Assets
• Appendix I of Chapter 13: Example Technology / Business Development Evaluation Process
• Sources, References and Selected Bibliographic Information

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Brief Definitions/Descriptions of Intellectual Property and Intellectual Assets

As an overview, conventional forms of IP protection are shown in the “IP Protection” figure. More details associated with obtaining and management of these assets now follows.

Patents

Patents are acquired by exchanging a detailed description of new knowledge for time-limited right to exclude others from its use. It is the applicant’s job to define the scope of the knowledge that is protected, in the form of brief descriptions called claims. The applicant is entitled to claim everything he can describe that is new and more than an obvious variation on what was already known. The newness is judged as of the date on which the application is filed. Thus it is always best to describe as much as possible, in an application filed as early as possible. An extension of this concept is to put photos into utility patents, so that later filed design patents can get priority from those earlier filed utility patents.

The manner in which an invention is described maybe as broad as the range of areas to which the invention brings value. Assume the breakthrough is a valuable new part that improves a widely used machine. The company’s patent application will of course to describe the part itself. But if the intention is to capture the full value of the breakthrough, claims might also address the various ways in which the part adds value to the machine as a whole, to the process that machine performs, to the way the machine is used, to the things it produces, and also to the ways of using what is produced.

What is described in the patent must also be tailored to the methods by which the invention will be strategically exploited. The “Strategic Objectives of Patents” figure lists characteristics of patents that are desirable in order to exploit the patent’s value in different ways.

Patent creation and exploitation is an evolutionary process. Over time, the recognized uses of a patent will change. To provide options for additional patent coverage, it may be desirable to keep an application pending so that its description can be enlarged and its coverage expanded as new opportunities are recognized. This strategy does not prevent the company from immediately obtaining patent protection on the subject matter that is initially described. The decision to keep an application pending derives from the foresight gained through regular reassessment of an intellectual asset strategy in light of current market indicators and overall business strategy.

A further consideration is geographic market. While patents are available nearly everywhere in the world, they will generally only be valuable in strategic markets. These markets should be identified early so that protection may be applied for within the deadlines imposed by each jurisdiction.

The right to obtain patent protection is lost if the knowledge to be patented is allowed to escape unprotected to the public. The circumstances under which knowledge becomes public vary by jurisdiction. As a general matter the US and Canada allow knowledge to be public for one year before a patent application is filed. The rest of the world generally requires the application to be filed before any public disclosure. Thus an integral part of patent strategy is maintaining control over information, through secrecy and nondisclosure agreements, so the desired rights remain available.

The ability to recover damages for patent infringement is predicated on the infringing party having had notice of the existence of the patent. This is accomplished by marking products with a notice that includes the numbers of applicable patents. Thus marking is an essential component of protection that requires attention during the life of the patent.

A brief summary of U.S. Patent Basics is below. An excellent resource for an Introduction to Patents is available from the World Intellectual Property Organization (WIPO) called “Inventing the Future”

Trademarks

An effective branding strategy includes positioning a product or service in the marketplace so that consumers automatically associate certain features and characteristics of the product with its brand name. The process includes selecting an appropriate mark to distinguish the product or service, acquiring rights in that mark, properly using the mark to preserve and expand the rights acquired, and monitoring the market to prevent others from diluting the mark or trading on the brand’s recognition by acquiring rights and similar marks.

Like patents, trademarks may be obtained through process of application approval. Obtained at the federal level, registration is the owner’s right to prevent others from engaging in activities that exploit or damage the public’s recognition of the company’s identity and reputation anywhere in the United States. However, even without registration, a firm enjoys these rights under common law whenever the firm’s use of the mark has created an association in the public’s mind between the mark and the firm. The rights exist for as long as the public continues its recognition.

As with patents, the scope of trademark protection is defined by the owner and may be vast. Names, phrases, symbols, and even colors may become the exclusive property of a firm when used in association with the product or service.

Steps in implementing a trademark strategy include assessing the market, selecting a mark that distinguishes the company’s goods and services from those of the competitors in the market, clearing the mark to assure its availability, and properly using the mark to secure trademark rights. The process of mark selection involves some important concrete steps and considerations. Business, artistic, and legal considerations all play an important role in selecting a mark that distinguishes a company’s goods and services from those of others. The nature of the goods, the market segment the brand seeks to reach, and sophistication of the typical consumer are all significant business factors in the mark selection process.

obviously, some brands engender greater predisposition to buy than do others. The attributes of a banner brand that determine its impact on buyer predisposition include (1) recognition-the level of brand awareness; (2) reputation-the confidence one has that a product bearing a particular brand will live up to the producers claims; (3) affinity-the extent to which the brand is an integral part of the customer’s sense of self; and (4) domain-the breadth of the brands potential catchment area in terms of plausible product scope. Multiplied together, recognition, reputation, affinity, and domain determine a brand share of mind as shown in the “Determinants of Share of Mind” figure.

Recognition (brand recall) and reputation (brand esteem) well known parameters of brand power, but affinity may need more explanation. Brand affinity refers to the strength of the emotional ties that connects the consumer with the brand: Is a brand an integral part of one’s lifestyle? Does it somehow encapsulate one’s aspirations? Is it intertwined with happy memories? The higher the affinity between Brand and buyer, the greater the predisposition to consider new product offerings bearing the banner brand.

Affinity is distinct from recognition and reputation. Xerox, Boeing, and Rolls-Royce jet engine score high on both recognition and reputation, but low on affinity. Harley-Davidson scores high on recognition and affinity. The affinity Harley-Davidson owners have for “hog” products pave the way for Harley’s launch of a successful line of clothing and a downtown Manhattan eatery. The affinity consumers feel for Harley-Davidson goes far beyond bike owners.

A mark selected for a premium brand will most likely differ from a mark selected for a product that aims at economy minded consumers. Similarly, high tech marks that appeal to a tech savvy portion of the market may be meaningless to the less technically educated consumers. Artistic mark selection factors include: color, sound, and commercial impression. For example, some marks can be a solid performance oriented impression (e.g., Valvoline for motor oil), while others focus on softer, more subtle aspects of a product (e.g., Snuggle for fabric softener). Legal considerations and mark selection concerns consist of: whether a mark is capable of distinguishing goods and services, the availability of a mark for exclusive use with a particular product or service, and the likelihood of confusion among ordinary consumers about the source of origin of the goods and services. Fanciful and arbitrary elements make a mark easily registrable. Elements of marks that require some showing of distinctiveness are those that are suggestive and descriptive. Marks which are typically not registrable are those that are highly descriptive or generic.

The purpose of a mark is to associate a particular goods and services with the brand. Marks run the range from meaningless, fanciful marks (e.g., Xerox, Kodak) to those which describe a product or its features. Fanciful marks have no meaning in any context other than with particular goods and services. Fanciful marks create the strongest association between the brand and the goods in the mind of the consumer because the fanciful mark has no other meaning, however one who adopts a fanciful mark faces an uphill battle to establish a connection in the minds of the consumer between the mark identifying the brand and the goods and services sold under the mark. Building up consumer awareness in such invented terms through advertising and other means is a time-consuming and often expensive task. Such marks, however, can be quite strong. When plans include a widespread advertising campaign and long-term use of the mark for specific product lines, selecting a fanciful name is a highly effective branding strategy.

Mark selection should also consider the need of other market players to use all or a portion of the selected mark. One should avoid selecting a market is merely descriptive of the goods and services. Descriptive marks failed to distinguish the brand because other players in the same market need and can use the same words and phrases to describe their products and services. Thus for example while “the fruit stand” might seem like a clever name for freestanding outlet that merchandises fresh fruit, one would not adopt the term as a trademark for fruit vending services because the term fruit stand is widely used for just such services. However, “the fruit stand” might be good trademark for some other line of goods or services such as a comic strip. The context in which the mark will be used can be key to selecting a mark.

Most merchants select a mark that falls somewhere along the spectrum between the extremes of fanciful and merely descriptive. Such marks are suggestive of the goods and services, without being merely descriptive. Coppertone for suntan oil and Chicken of the Sea for tuna fish are examples of suggestive marks.

Having identified one or more possible marks for particular product, the next step of the mark selection process is checking the marks availability for use. A screening search of federally and state registered trademarks usually makes an effective initial cut at an availability search. The purpose of the search is to determine if others are already using the same mark for similar goods and services. If the search identifies another identical mark, the next step is to determine if the registrant is still using the mark. Do not adopt a mark that is identical to mark already registered and in use by another without acquiring rights to use the mark in some other way.

When the initial screening search results indicate an absence of a registered mark corresponding to one or more of the searched candidates, then one conducts a more detailed search on one or more of the remaining candidates. The purpose of the second search is to identify other marks that are similar in sound, appearance, or commercial impression to the selected marks. Avoid adopting a mark that is similar to another mark already in use for similar goods and services, because likely confusion among ordinary consumers prevents the mark from distinguishing one’s own goods and services.

In this respect, the public is a silent third-party in trademark matters. The applicable standard to apply when considering a mark is whether an ordinary purchaser of such goods and services would likely be confused as to the source of origin of the goods and services sold under the mark. The source of origin referenced here is the brand rather than the manufacturer’s identity. Actual manufacturer the goods can be anonymous from a trademark perspective, as long as consumers purchasing goods under the mark are assured of receiving goods of consistent quality from a source authorized to use the mark. In this way, a trademark is an assurance that the brand satisfies a quality level the consumers have come to expect. The touchstone of this consumer assurance is merely that the owner the mark asserts control to assure that the quality of goods sold under the mark is consistent. Trademark law does not impose a requirement for any particular level of quality. The quality level can be whatever level the user of the mark selects, including uniformly low-quality, as is in the case of some economy goods.

When assessing the likelihood of confusion, it is important to recognize that ordinary purchasers have different characteristics depending upon the nature of the goods and services. Where the goods are quite expensive, consumers are likely to be more sophisticated about the buying decision and less likely to experience confusion among similar brand names. Similarly, where the consumer is a professional purchasing agent regularly doing business in particular types of goods and services, there is reduced likelihood of confusion among similar brands.

To avoid brand confusion, large corporations typically build a decision tree to guide product branding. The first step in step in a decision tree typically relates to COMMITMENT. The questions are: Is a product committed to the corporate standards? Is there a strategy for maintenance and growth? Is a product one a fighting or price brand? The second branch in the decision tree usually relates to MARKET. Is a product marketed to consumers or business-to-business? The next step in the decision tree for consumer products is whether it’s APPROPRIATE. The questions are: Is a product a good fit with the Corporation’s image? Is a product consistent with the Corporation’s brand attributes? The fourth step in the decision tree for business-to-business business usually relates to the RELATIONSHIPS. The question is: Does a product have a perceived relationship to the Corporation? The next step in the decision tree for both types of products has to do with EQUITY. Does a product have a strong awareness and quality reputation? The next step in the decision tree has to do with PROPRIETORSHIP. Is a product to be protected against competitors? The next step in the decision tree relates to brand SUPPORT. Is there a strategy in place to grow the product through advertising, budgets and personnel, etc? The last step in the decision tree has to do with VISUAL EQUITY. Does the product logotype having existing visual equity?

Making yes no decisions at each step in the decision tree and assigning the logo and descriptor for each final branch of the tree is a useful way to provide guidance for brand managers working in large corporations with many products and service offerings.

When considering a mark to use, after completing the searches, “implement” is the next step in the branding strategy. It is accomplished by acquiring rights in one or more marks. To obtain a registered trademark, the applicant must provide a description of the mark and the types of products and services in association with which its use is to be protected. These, plus actual use of the mark in commerce, entitle the applicant to federal registration of the trademark. Upon receipt of an application for trademark registration, a trademark examining attorney at the US patent and trademark office determines registrability of the mark. Filing an intent-to-use application has the advantage of establishing a constructive date of first use of the mark as a filing date of the application. In disputes between parties about rights in a mark, the party with the earliest date use generally prevails. Having your filing date considered as your date of first use could mean the difference between establishing rights in the mark or losing them to another party. Given the stakes it is advisable to file intent to use applications for all candidate marks as soon as they’re being seriously considered for use with a key product. Applications to obtain trademark registration for marks which will not be placed into use can then be abandoned, and all those which will be used in interstate commerce can be prosecuted for registration.

It is also possible to acquire rights in a mark by purchasing another’s rights through assignment or license. Business considerations and the willingness of the potential assignor to cooperate determine the possible courses of action.

A registration may be obtained as much as two years in advance of actually use by filing of an-intent-to-use application. However, it is ultimately the exposure the mark to the consuming public that determines the strength and scope of the asset.

In summary, unlike patents, the trademark application process is generally not burdened by the complexity of its subject matter, so it is an easier task to obtain protection of a trademark once it has been conceived. Thus the process of obtaining trademark protection is easily derived from a branding strategy. However, like patents, it is necessary to police the market throughout the life of the trademark to maintain protection. The danger is a loss of control over the uses of the mark. In the worst case, the mark may lose its specific association with the firm and become generic. More likely other companies may adopt the mark in a manner that dilutes or tarnishes its meaning. Therefore, trademark protection involves both establishment of rights through use and registration, and regular monitoring of competitors and the public at large after the assets have been established.

Copyrights

Unlike patents and trademarks, copyrights are much less complex when it comes to defining the scope of what will be protected. Copyright applies as soon as a work product is reduced to a fixed form, and so there is no risk of loss of copyrights or inadvertent disclosure or use by another party. Copyright is obtained by simply affixing a proper notice to the copyright work (although works must be registered before suit over copyright can be brought forth in court). Thus, in the overall scheme of the intellectual asset portfolio, the major challenge of copyright protection is maintaining diligent efforts to identify and mark all publishable materials and to impose restrictions on their use consistent with the company’s intellectual asset strategy.

Trade Secrets

Patents and trade secrets present somewhat opposing choices. Trade secrets derive their legal protection from their inherently secret nature. Patents, by contrast, can only be protected through public disclosure. In fact, a patent will be invalidated if the inventor refrains from describing important details. This requirement, called enablement, requires a patentee to disclose enough information for others to use the invention after the patent has expired.

Budget constraints and the costs for filing a patent force a smart evaluation of your options. When facing the choice of patenting or hiding a valuable innovation, you must first ask yourself whether the invention is patentable at all. Does is it meet the legal requirements of non-obviousness, novelty, and usefulness to be granted a patent? If not then a Trade Secret is the obvious choice. A trade secret is also a good choice if the invention be useful beyond 20 years, or if it is part of an internal manufacturing process.

A trade secret may not be the best choice if it possible for other companies to reverse engineer it, if the invention is detectable and embedded in the product itself, if the invention is likely to be independently discovered in the near future, or if the product regularly observed in public settings.

If a trade secret seems like the best approach, then to obtain and keep a trade secret three criteria must be met. The first element of the criteria is that it really is a “secret” as shown in the “Element 1 of a Trade Secret” figure. The second element is that the secret is “valuable” as shown in the “Element 2 of a Trade Secret” figure. The third element or criteria for a trade secret is that it has been protected from disclosure to others. This is described in the “Element 3 of a Trade Secret” figure.

Corporate internal procedures should also protect the company’s secret know-how. To do this internal corporate procedures must be instituted to establish a legal relationship with employees before the first day of work, during their employment, and after they leave. These generally can be categorized as prophylactic measures that are standardized and used for all employees. Another category of preventive measures aims to sure that corporations are protected against unsavory activity and inappropriate behavior. This is important in the company’s dealings with its suppliers and customers.

For companies interested in creating and maintaining sensitive information confidential in order that someday it can be formally converted into trade secrets, they should at a minimum have in place the following security measures to minimize the chance that any potential trade secret information is made public:

Premises Security: Visitors should sign in and be escorted, and leave their phone cameras behind. Access to especially sensitive areas should be controlled. Data rich computer displays and sensitive documents should be located in private spaces and locked away when not in use. Classification: Information contained in documents, including electronic files, should be designed designated where appropriate as confidential. Remember that information should be available for access only to those who need it. Process security: Robust password controls for appropriate access into parts of the system. Firewalls. Encryption on mobile devices. Contracts: Employees should sign confidentiality and invention assignment agreements. Outsiders should be allowed access to sensitive areas only under confidentiality agreements. Education: Employees, including executive should be trained on basic information security.

When it can be afforded, program should be extended with these elements:

Rules: Publish clear, simple but comprehensive rules and policies covering information security. Responsibilities: Delegate clear responsibilities and tasks below the primary manager; elevate overall management responsibility to a higher level. Preparedness: Make information security part of a specific business continuity and emergency response plan. Review: Establish and implement regular reviews of the program, to ensure that it has appropriate coverage and management.

For larger businesses, or those with higher information risk, do the above plus:

Full-blown security policies and procedures: These include social media and email use policies. Comprehensive systems for managing security: These include planning, reviewing, and improving the systems along with accountability. Confidentiality agreements (NDA): Utilize NDA’s and third party due diligence for collaboration and outsourcing management. More robust protection systems: These include stronger encryption and incursion detection tools for networks. More extensive education of the workforce.

Throughout the process, no matter this is size or resources, carefully consider:

Protection of personal identifying information: This is subject to many laws and regulations designed to protect individual privacy and security. Relation to other corporate compliance programs: Consider opportunities for management efficiency. International issues: How do your risks and available mitigation strategies vary according to the markets in which you operate? Changing Priorities: The value of information changes frequently; are you setting your priorities to focus on today’s most important data? Attitude and cooperation: Is your plan taken seriously by all areas of the business? Other silos of resistance to cooperation? Divide and allocate access to secret information: Send only lowered value data into high risk countries. Separate steps in a production process to occur in different places. Premix ingredients or prepare critical parts in secure locations. Separate teams and managers according to various parts of a process. Rotate managers.

Once confidential information is determined to be a trade secret, it is converted to a trade secret through increased security measures to protect it. Because there are so many ways trade secrets can be lost, a trade secret security audit is probably one of the best methods to ensure trade secrets are adequately protected. The audit inventories physical, computer, and written security measures being used by the company to determine how and where trade secret security is maintained.

Returning now to the topic of auditing companies systems the three forms of security, the first, physical security, the following questions are addressed: How does the company physically secure engineering drawings? What methods does a company employ to physically restrict access to proprietary information? How does a company dispose of engineering drawings and other proprietary information? How does a company select individuals to whom proprietary information is disclosed? Does a company restrict outsider access to portions of its physical premises containing proprietary information? Does a company know what information is considered proprietary?

When auditing computer security the following questions are addressed: Does a company have any policies for limiting the transmission of proprietary information over the Internet? Does a company have a secure email system? What procedures has a company implemented for preventing terminated employees from absconding with sensitive computer files? Has the company implemented firewall systems to prevent access by outsiders to confidential information?

When auditing written security measures the following questions are considered: Does the company have any written procedures or policies for protecting the flow of sensitive paperwork within the enterprise? Does a company have employment agreements addressing ownership and use of proprietary information? Does the company have written agreements with its customers and suppliers regarding the treatment of its proprietary information? Does the company have an exit interview procedure which addresses the use of confidential information? Has the company provided a security manual to its employees? To what extent does a company need to disclose confidential information to its suppliers or customers? Does a company have more than one facility and if so to what extent is confidential information to be shared among facilities? What know-how (defined his knowledge the company has on how to make, market, distribute, or sell its products) does the company have? What is the nature of the company’s know-how and how is it disseminated within the company? To what extent does a company’s confidential information disseminated by email? To what extent does a company rely on patents versus trade secrets? Does the sale of the company’s products fully disclose any trade secrets used in making the products? Does the company impose any secrecy restrictions on its sales force in selling its products? Has the company been victimized by the loss of confidential information in the past? To what extent does the company rely upon confidential information provided by third parties? To what extent does a company encourage the free exchange of ideas among the employees to further its business objectives?

Once answering the above questions the process of protecting trade secrets continues with the development of a trade secret security package. Utilizing written security agreements are the keystones to effective trade secret security. Such agreements take a variety of forms and should include employee training. The reasons for having such agreements are (1) the quantify in potentially ambiguous situations the fact that information is being disclosed, used or developed in the context of a confidential relationship, (2) the agreements clearly and quickly put the recipient on notice that security is being imposed on proprietary information, and (3) that the agreements may where appropriate provide a method for settling disputes by a selected dispute mechanism. The most frequently used security agreements are:

Employee confidentiality agreement: This agreement typically provides that it the employee may not disclose a company’s trade secrets during and after employment. Each employee likely to have access to the company’s proprietary information should execute such an agreement. These employees should be carefully cautioned as to the trade secret status of projects on which they work. This caution should be exercised not only when the employee begins working for the company, but also when (s)he changes jobs within the company, when (s)he develops any new concepts, or when (s)he works on any new trade secret projects.

Confidentiality legends: If the company needs to disclose its proprietary information to other entities, such as parts or equipment suppliers, any documentary material disclosing trade secrets should be clearly stamped with an appropriate confidentiality legend. Materials needing clear legends include plans, engineering drawings, designs, specifications, computer programs, manuals, QC standards and procedures, etc.

Third-party confidentiality relationships: Two approaches should be considered in making disclosure of the company’s proprietary information to third parties, depending upon the importance of this proprietary information to the company, its prior relationship with the supplier, and the company’s bargaining strength. First the company can simply provide the materials to the supplier with a cover letter setting forth the work to be performed within with certain provisos. Among them: that the materials being provided by the company are confidential and are being submitted to the supplier solely for use on behalf of the company in performing of this work. Such letter should seek written acknowledgment that the supplier has in fact received the materials. Sending shipments by certified mail or overnight courier service is another alternative for establishing receipt of the materials, including the cover letter. Secondly the company can insist that a supplier sign a confidentiality agreement before any trade secrets are disclosed to it.

The first approach is far more acceptable to third-party suppliers, many of whom are unwilling to supply parts or equipment where they must first sign confidentiality agreements. Although this approach does not obligate the supplier in writing to honor the company’s trade secrets, as a matter of course, most reputable suppliers will do so. Furthermore the courts may be willing to imply an obligation of confidentiality in such circumstances.

Advantages of the second approaches are that it expressly imposes upon the supplier the obligation not to improperly disclose or use a company’s trade secrets. The company might wish to use this approach where it has superior bargaining strength, where the proprietary information reduce close is particularly valuable, board has questions about supplier’s reputation for honesty and fair dealing.

License agreements: Should the company consider licensing its proprietary information to a third party, it must take all reasonable steps to ensure that the third-party will treat the information as confidential and that that party will use that information in accordance with the agreement fashioned between the parties. Thus, before disclosing any of its proprietary information, the company should have the third party execute a confidential disclosure agreement to protect the proprietary information from improper use or disclosure during the evaluation process. If the parties continue the relationship a subsequent written agreement needs to be signed protecting the company’s proprietary information both during and after the relationship.

Visitors’ confidentiality agreement: To ensure the guests on the company’s premises are aware that they are going to be given access to proprietary information and that they will not improperly use such information, signed confidentiality agreements should be required of all visitors before access to such information is provided.

Company confidentiality policy statement: It is important that employees recognize the importance of proprietary intellectual assets and protect those assets from improper use or disclosure. To this end an intellectual asset policy statement should be distributed to those employees having access to such information. This statement should inform the employees of the nature of the company’s proprietary intellectual assets and counsel them on the basic principles of intellectual asset security.

Tying these forms of intellectual property and intellectual assets to business needs and activities are shown in the “Intellectual Property Use Matrix” figure. In this figure the four main business silos of executive and strategic management, manufacturing, operations, and financial are shown along with the typical ways in which they use patents, copyrights, trademarks, and trade secrets. Note that there is a lot of overlap on both the group using and the type of intellectual property use. The pattern in this matrix clearly shows how important it is to utilize an integrated intellectual asset management system.

Confidential Information – An Intellectual Asset (not Intellectual Property)

Definition:

Confidential Information will be taken to mean (1) information that is not known to the public, but (2) does not meet the requirements of a trade secret.

Useful model for visualizing Confidential Information is shown in the Intellectual Capital figure. In this figure Confidential Information is part of the white box of (1) Intellectual Assets outside of Intellectual Property that is being considered, and (2) they are a subset of these assets that are not known outside of the entity holding them.

Business use of confidential information:

A useful model developed by a group called the Gathering is helpful to use when incorporating into strategic business plans a better utilization of the business’ Complementary Assets, Intellectual Assets or Intellectual Capital. In the “Tangible-Intangible Model of a Company” figure we see a model of a company as viewed from an intellectual property viewpoint.

Models of business entities come in many sizes and shapes. Sometimes we think that a corporation is its corporate headquarters and buildings that it owns around the world. Other times we look at a company in view of its organization chart with the CEO at the top of a tree. Other times we look at corporation through an accountant’s eyes and look at the corporation from a cash flow and balance sheet standpoint. The model of “Tangible-Intangible Model of a Company” figure is no different. It is just one other view of a corporation.

In this model we see that the structural capital comprises the generic assets of the company which are non-distinctive compared to other competitor companies. These are typically plants, property, and equipment, and access to investment that any and all companies have. It is not something that makes one company different from another. Resting on the base of structural capital we see to the right Complementary Business Assets. These are the differentiated assets that make one company and industry different from one another. It might be the quality of the sales force. It might be how the sales force was trained and the type of relationships they build. Differentiation can also be based on the distribution capabilities of a company. One company may be using direct sales, another company internet sales, and a third going through large wholesalers. Factory facilities are another common point of differentiation. One company may be opening its own plant and putting together its own processes in a unique way to deliver value to customers. Another company may be outsourcing its manufacturing entirely. Another form of differentiation has to do with the type of standards that exist within an industry. To the extent a company can influence government or industry standards, i.e. the FAA in the case U.S. airplane regulations or Underwriters Laboratories in the case of electrical components, these standards and having the standards closely aligned to a company’s product design becomes another source of differentiation and competitiveness.

The third asset class of a company, and the one that is most unique and hardest to copy, is Intellectual Capital. Sub-classes of Intellectual Capital are Human Capital and Intellectual Assets. These assets are comprised of patents, copyrights, trade secrets, trademarks, and know-how (undisclosed confidential information).  Thus Confidential Information, which although it is not legally protected as an asset itself, is an Intellectual Asset that is nonetheless unique and very difficult to transfer from one corporation to another.

From a business perspective, what’s important is that when a company is successful, it has taken the unique Intellectual Capital Assets that it has, and created a business model, or way of doing business, that takes maximum advantage of the differentiated business assets it possesses. For example, the way it employs its Human Capital matches the way in which the sales force is trained and operates. The patents that it has supports the way in which manufacturing is done. Trademarks support the branding that the sales force is known for. The Confidential Information is the glue (the work processes) which hold the business model together.  Without this largely unseen and often undocumented knowledge a corporation is rarely profitable.

Types of Confidential Information

In addition to trade secrets which are legally enforceable rights, Confidential Information is a type of information that if available to competitors could weaken a company’s business position. To make sure a company can sustain its advantaged position in the market, it must, in addition to managing intellectual properties, also manage its confidential information. As shown in the “Confidential Information Classifications” figure, there are three major classifications of such information that provide a framework for this information’s management. By classifying a company’s information in this way it makes it clear which information is not intended for public viewing, and more importantly, makes it pretty much self-explanatory what special distribution restrictions are being placed on the information so labeled. More detailed actions to take for each classification now follow.

For information labeled as COMPANY CONFIDENTIAL employees should be responsible for: (1) labeling conspicuously with classification, (2) ensure all recipients are notified and reminded of confidentiality, (3) limit disclosures based on each recipients need to know, (4) require a signed NDA before disclosing to any company outsider, (5) safeguard work areas at the company and other facilities, (6) store to avoid casual observation, (7) dispose in a secure manner in based on retention schedules, (8) control access to computing resources using approved access control software, (9) secure electronic communications with passwords, (10) obtain management authorization before publicly disclosing information that may, with other publicly available information, reveal confidential information, (11) report any suspected improper disclosure or access, and any inadequate protection, (12) apply informed good judgment to ensure protection.

For information labeled as COMPANY CONFIDENTIAL PRIVATE employees should be responsible for: (1) all protections for company confidential information and in addition, (2) disclose only with the owner’s permission, (3) access only the specific information that is needed, (4) limit disclosure, distribution, and access to only those with a specific need to know, (5) encrypt all versions that are stored in a mobile device or transmitted electronically, (6) keep it a locked secure area, (7) send hard copies or electronic media with an outer envelope marked “to be opened by addressee only”.

For information label as COMPANY CONFIDENTIAL SPECIAL HANDLING employees should be responsible for: (1) all protections for company confidential information and in addition, (2) obtain authorization from originator or responsible manager before accessing, copying or further distributing, (3) limit disclosure, distribution, and access based on a substantial business need to know, and reveal only the specific information that is needed, (4) encrypt all electronically stored and transmitted versions, (5) originator should apply rights management or document control to record and track each copy’s distribution, use, and destruction, (6) keep it in a locked secured area, (7) send hard copies or electronic media with outer envelope marked “to be opened by addressee only”.

Use of Noncompete Agreements Is a Way to Protect Confidential Information

Because Confidential Information is the glue that holds the company’s competitive advantage together, it is important to find some method to keep this valuable information exclusive to a corporation in spite of the fact it has little legal protection in its own right. One of the best ways to control dissemination of this largely tacit information is using Noncompete Agreements with employees. The below advice by Jim Pooley, as published in IP Watchdog, provides guidance in how to best use Noncompete Agreements.

Using Noncompete Agreements Sensibly

First, you should consider whether noncompete agreements are right for the culture of your company. Do you really need them to protect yourself? What might be the cost in decreased trust and increased resentment among a workforce that expects to enjoy career flexibility? Consider imposing these restrictions only on those senior employees who have access to your most sensitive information. Be prepared to consider relaxing or eliminating constraints in special situations where taking a bit of calculated risk might help establish or improve an important relationship.

Second, whatever you decide to do about noncompete agreements, don’t depend on them as the primary way to protect your trade secrets. Be sure that you have established a comprehensive information security program, including continuous training and robust enforcement. The most reliable way to reduce the risk that you might lose control of your secrets is through active management, not passive dependence on post-employment restrictions.

Third, if you do use noncompete agreements, watch out for changes in state laws that might affect you. If any meaningful reforms emerge from the federal government, you will certainly hear about them. In any event, pay attention and be ready to adjust so that you comply with any new standards.

Outrage over imposition of restrictive contracts on teenage camp counselors or sandwich makers is understandable, but it can lead to careless thinking. Not all employee restraints are unreasonable. We expect that the workplace should provide not only a job but also the opportunity for learning and advancement. In the information economy, that often leads to greater exposure to secrets. And preserving those secrets sustains competitive advantage and creates more jobs.

Considerable Territorial Variation in Protection of Confidential Information

As mentioned elsewhere in this book, it is crucial to ensure the confidentiality of undisclosed information in order to retain its commercial value.  In the connected world in which we live, this requires worldwide protection to ensure that information does not enter the public domain where it is not protectable. 

Protection can vary widely.  Whilst many territories have a good system of protection, there are some major territories where there are significant issues.  It is relatively rare to find a territory where there is no form of protection as the World Trade Organisation’s TRIPS agreement requires basic protection; it is more likely that information will escape through a loophole in protection or as a result of an inadequate enforcement regime.

Potential Issues

A good example of a loophole in protection is found in Brazil, where undisclosed information is not classified as property.  A know-how licence is therefore treated as a transaction for the sale of the underlying information and it is not generally possible to ensure that the information is either returned or protected indefinitely.  There are also rules which limit the potential payments and other terms in licences.  

Enforcement and its aftermath is the area where most potential problems are found.  It is necessary to provide similar infringement remedies to those available for other forms of intellectual property.  In this case there is the additional requirement to maintain strict confidentiality throughout the enforcement process.    

This is a field where it is vital to examine the detail or to find somebody willing to do so.  A legal regime for effective enforcement needs to provide assistance with gathering evidence, preliminary and permanent injunctions, damages and account of profits.  It will also need to protect the confidential information throughout the proceedings and in any lasting court records such as the judgment.

It should not be necessary to check that the legal systems work in practice, the legislation is fully enacted and the important parts are used regularly, but regrettably it is crucial to do so.  There are countries which have adopted legislation which is not used in practice for one reason or another.  For example, preliminary injunctions, which protect information pending a full trial, are rarely granted in China.  Similarly, it is not clear what forms of protective order are recommended or even allowed in China.  

Finally, it is worth asking how long dispute resolution takes and how much it costs.    

IP Commercialisation Laws

IP commercialisation laws can be especially harsh as regards undisclosed information.  For example, they may prevent a licensor from terminating a licence and limit the royalty or other payments to be made under the licence as well as the period for which payments may be made, which is the case in Brazil.  There may also be restrictions or conditions on the licence or transfer of rights from the jurisdiction, as is the case in South Africa. 

It is also necessary to check whether there is exchange control and/or requirements for registration of documents and, if so, what the effects will be.

Protecting a Venture   

Gathering Information

It is crucial to find out the potential problems in the areas where you will be operating or to confine the areas in which you will be operating to those with which you are familiar.  That may require internal agreement or it may need to be included in the relevant agreement if you are dealing with other organisations.

It is also necessary to review the position regularly as laws change over time and for a number of reasons.  In some countries the protection is tightened up in order to encourage investment; the OECD found a correlation between the protection available and economic performance.  However, IP commercialisation and related laws may be the result of protectionism and there have been recent instances of increased protectionism.

Potential Measures

The measures described in this section are in addition to all the good housekeeping measures which are mentioned elsewhere in this edition.  Therefore, the suggestions below are limited to those which relate to territorial issues. 

If the investigations in the section above show that there are potential issues in a territory where undisclosed information will be kept, used, transmitted or commercialised, then it may be necessary to move territory. 

Before considering drastic action it is crucial to evaluate the extent of the problems and ways in which they can be avoided.  For example, it may be possible to retain certain information and processes in territories which are considered safe and then to export partially finished products or to export what are effectively crucial materials if the information cannot be detected when they are examined.   

It is also worth examining whether a change of deal or project structure would make a difference.  For example, does the legislation only affect licensing or possibly just intra-group transactions?  In that case, it may be possible to change the structure and avoid the problem.  When changing structure, there will, of course, be other considerations such as tax, but this option may be worth considering.

Overview of IP Processes

Providing an overview of IP processes is a difficult task. This is because there are many processes falling under this heading. Part of this complexity arises because intellectual property is both a source of business information which can be used to strategic advantage, as well as a business asset which can be deployed for shareholder value.

Price Waterhouse Coopers developed the graphic shown in the “Five Elements of Managing Intellectual Property” figure that highlights the general activities associated with managing intellectual property. The first intellectual property process is that of the Strategic Alignment. High-level sub processes and competencies in this area are: (1) Establishing IP and licensing strategies, (2) Development of IP, (3) Planning for IP, (4) Integration of IP, (5) Developing business relationships based on IP, (6) Direct the development of IP, and (7) Leadership.

The second intellectual property process is that of Creating and Perfecting Potential Intellectual Property Assets. High-level sub processes and competencies in this area are: (1) Identification of IP, (2) Evaluation of IP for licensing purposes, (3) Technology fluency, (4) Due diligence, (5) Evaluate IP on technical and business criteria, (6) Map IP to market opportunities, and (7) Evaluation / determine strategic fit of IP.

The third intellectual process is that of Portfolio Management. High-level sub processes and competencies in this area are: (1) Identify, develop, and manage opportunities in IP, (2) Establishing contractual bases for licensing, (3) Developing licensing business plans, (4) Obtaining internal buy-in, and (4) solicitation of IP.

The fourth intellectual property process is that of Value Extraction. High-level sub processes and competencies in this area are: (1) Packaging technologies into salable unites, (2) Value recognition / marketing of IP, (3) Identifying prospective licensees, (4) Drafting licensing agreements, (5) International issues in IP agreements, (6) Applying regulatory issues in licensing, (7) Driving to closure, (8) Negotiation of financial and business terms in IP agreements, (9) Negotiation of licensing or IP-Related Agreements, (10) Arranging for Follow Up, (11) Maintain and support the transfer of IP, (12) Post-licensing activities including Transfer of IP, Administration of post closure deals, (13) Post license agreement relationship management, (14) IP alliance management, (15) Audit IP agreements, (16) Track IP rights.

The fifth intellectual property process is that of recognition. High-level sub processes and competencies in this area are: (1) Publicizing Negotiated IP Agreements, and (2) Marketing IP.

There are also processes which use the information element of intellectual property to develop plans and tactics as shown in the “Uses of IP Based Information” figure. These legal documents define a set of rights, exclude others from use of the identified intellectual property, are filed with government offices, and result from detailed legal procedures research and writings. The organization often perceives these legal documents as an operating cost.

Intellectual property also affects the manner in which a company grows and builds the technology upon which its business is based. This is shown in the “How Intellectual Property Influences What To Create” figure. When a company is looking for growth it either starts from a market push standpoint shown in the bottom left of the figure, or a market pull methodology shown in the upper left part of the figure. Once a concept is developed it is run through the decision tree to decide if the development strategy should be to lead, partner, or fast-follow. Utilizing intellectual property for this purpose greatly improves the productivity and return on investment of technical and business development activities.

Other processes use the business asset of intellectual property to support sole sourcing, joint ventures, mergers and acquisitions, licensing, cross-licensing, pooling intellectual property and donation. Such assets represent an investment of employees’ hours and company cash, must be aligned with business strategy to be useful, can be sold, licensed for cash, traded, and to be value must have a positive ROI. From a business perspective these assets are often perceived as an investment versus a cost.

The goal of effective and efficient IP Processes is to build shareholder value. Many authors and conferences have addressed IP Processes and their complexity. The subject was best summarized by Lex van Wijk in his paper on the subject.  He summarized how the interaction of many elements creates an effective patent asset management system. These elements were patent strategy, invention evaluation, measurement of IP performance, IP culture, alignment of strategies and business endorsement. A visual way to see this is in the “Segmentation and Interaction of IP Processes” figure. This figure also segments various elements into (1) those which IP supports analysis and (2) those that are actively embedded in business management.

From a process-flow standpoint, IP processes were arranged as a flow from a company’s vision along to a company’s products and services. This work, shown in the “Intellectual Assets Process Flow” figure, was done as part of the Gathering 1 under Patrick Sullivan’s leadership. When of the key discovering this by this group of individuals was how tightly linked using intellectual property data in competitive assessments was to creating shareholder value. It was using such information to guide product initiation and projects sourcing decisions that had huge impact. R&D organizations that utilize such processes began to outperform those that did not. For organizations that had large portfolios it was also found cost-effective to codify the intellectual asset knowledge decision on how to best use the asset. Integrating into decision-making teams the appropriate individuals from the various R&D, marketing, legal and financial also greatly increased the value that could be extracted from each asset.

Thinking about managing intellectual assets can also be done from the standpoint of three questions: What do you do? When you do it? How do you do it? The Intellectual Assets Process Flow Figure shows you can answer the “what do you do?” question from the standpoint of both external drivers and market goals. Once you have decided “what do you do”, the next question is “when you do it?” This question can be answered from the standpoint of planned reoccurring activities or opportunistic ones that present themselves sporadically. Once deciding “when you do it” the “how do you do it” question is segmented into whether or not conventional intellectual asset protection of patents, copyrights, and trademarks is sufficient, or should unconventional intellectual asset protection be advised. The cycle is completed by reassessing all elements in the cycle either periodically or event driven, such as an M&A activity.

As organizations understand the importance of utilizing intellectual property information and intellectual property assets, a debate typically ensues as to whether or not a proposed new product or service has a need for proprietary technical advantage as part of its product development and launch. Simple way to answer this question was developed by PWC, as shown in the “Proprietary Advantage” figure.

Looking at the product functions that the new product or service will possess allows marketing to determine if its sales and profit targets resemble those of a commodity or new emerging technology or product.

For projects that are absolutely in need of a proprietary technical advantage, the R&D organization must staff its project appropriately. This becomes important for the R&D organization is they look internally to create, or externally to access, the technical capability needed for project success. A matrix for facilitating this discussion is shown in the “Technology Actions” figure.

The same segmentation axes shown in “Technology Actions” figure can also be used by the intellectual property portfolio management team to set the posture for creating and managing the project’s intellectual property position. This is shown in the “IP Actions” figure. Unsurprisingly when the need to achieve a proprietary technical advantage is weak and the technical capability is available, there is little incentive for a company to invest in and maintain intellectual property as a business asset. In contrast, at the opposite upper right corner of the matrix active creation, renewal, and maintenance is critical to sustaining the product’s advantaged business position. The process of building and utilizing such frameworks is embedded in successful R&D organizations.

For R&D organizations a useful IP process is to track the creation and development of IP as part of the R&D stage/gate process.  The “Integrated Stage Gate and IP Actions / Processes” figure shows how intellectual assets and intellectual property activities are coordinated as a business/technical project moves towards commercialization.  For the purposes of this figure the stages are defined as:

Concept Stage: Conduct initial investigation of an idea to establish its potential to meet current/future market needs and assure it is aligned with the sponsoring business or corporate growth strategic plan.

Feasibility Stage: Confirm that the technical concept is doable and develop one or more business model options.

Prototype Stage: Select and demonstrate the best technical product/process option on a scale which meets all critical performance parameters and select the most compelling business option.

Development Stage: Complete technical scale up activities and finalize the product/process design.  Reconfirm the market fit, finalize offering, and update business plan.   If applicable, commercialize offering to selected customers to validate the business model under commercial conditions with X customers for at least Y months.   Finalize business plan.

Commercialization Stage: Execute Business Plan to maximize return, measure performance against plan, capture learning to feedback to CIO process.

If the Stage and Gate Tracking system is used in an R&D War Room as discussed in Chapter 12, then using a similar visual display for IP processes is appropriate.  Such a visual display used in an R&D War Room is shown in the “Invention Status Map” figure. Project ideas and research disclosures that are in the idea phase (not yet funded as a project) are placed on this matrix both vertically and horizontally. The vertical axis denotes the time that the idea has remained in this ideation state. This allows a person auditing the process to see at a glance where the delays are occurring. There are five intellectual property stages associated with capturing ideas. They range from documentation and brainstorming on the basic concept in stage 1, through to preparing a patent draft on the idea in stage 5.

Once a patent application has been filed it is moved from the Ideas Stage and Gate onto the stages and gates associated with filed patent applications as shown the “Patent Application Status Map” figure.  In this mapping filed patent applications move from left to right consistent with patent office actions received from the national patent office. Again, the vertical axis shows the time spent in each stage. Leaving a breadcrumbs trail with a fine pen for each application gives person’s auditing the process an opportunity to see where the delays are.  These can then be addressed or built into the strategic plans. Having this two-dimensional mapping allows patent committee’s an ability to see whether their applications are moving smoothly along for suffering from delays.

Associated with filing a patent application is the decision whether or not to seek coverage in foreign jurisdictions. Best way to view a patent committee’s decision process in this regard is shown in the “Foreign Application Status Map” figure. Here the five stages range from stage 1: determining if foreign protection is desirable on through stage 5: the foreign examination process and allowance. Again using all three graphics in a war room allows patent committees and strategy personnel to see at a glance how intellectual property projects are being managed. It is particularly important to view their progress vis-à-vis the project’s commercialization and launch timeline.

Although it may seem ridiculously simple it is also useful for patent committee to put this same information on a world map.  The Tier 1, 2 and 3 countries where the company seeks intellectual property coverage can be so colored.  It is been found the most management teams and project members from the technology and marketing groups can spot filing inconsistencies much more rapidly on a graphic display of the world versus a textual list of countries as shown in the “World Patent Filing Strategy Map” figure.

The relationship between these three IP processes and those of the technical and business development stage gate process is best shown by color coding the IP blocks in the above figures to match one another as well as the project block in the Stage and Gate Project Status map described in Chapter 12.  In a War Room this visual display shows instantly where project project and IP work is synergistic and where it is out of sync.

Planning and Implementing

From a planning and implementing standpoint it’s important to make a distinction between intellectual property, intellectual assets, and intellectual capital. The distinction is typically of little importance in smaller corporations but as a Corporation grows into the top Fortune 500, such large companies sometimes make intellectual asset management a separate silo in their organization’s structure. This is particularly true when there are large numbers of intellectual property and intellectual assets not contributing to operational profit of the corporation. In this case these non-core business assets are often given to a technology transfer / technology asset management unit for disposition.

For many years Dow and Neste Corporations were examples of such organizations that had strong intellectual asset management groups. For Neste the relationship between the R&D/E work and the technology transfer work is shown in the “Neste Technology Asset Management Processes” figure. The tools they used in their work processes are shown in the “Neste Technology Asset Management Tools” figure.

For comparison, the corresponding relationships between the technology, IAM, commercial, and licensing teams for Dow Corporation are shown in the “Dow Intellectual Asset Management Organization” figure, and the corresponding processes and tools these teams use are shown in the “Dow Intellectual Asset Management Processes” figure.

Because today many corporations are doing a much better job of investing only in activities that generate intellectual property and intellectual assets that directly contribute to the operating profits, the need for separate intellectual asset management groups has waned. The work processes these groups conduct are now usually given over to technical or business development parts of the organization.

IP Processes Related to Strategic Planning

For large organizations with an intellectual asset management group the purpose of writing an intellectual asset strategic plan as part of the overall corporate strategic plan is to enable the company to align its R&D efforts and intellectual asset management with its overall business objectives. An intellectual asset strategic plan may include information resulting from the following tasks:  describing the company’s overall business objectives; classifying intellectual assets into core and non-core categories; analyzing the company’s intellectual asset portfolio to identify strengths, gaps, and opportunities; determining objectives for both core and non-core intellectual assets; defining intellectual asset activities necessary to meet the intellectual asset objectives; and creating an R&D strategy consistent with the overall business objectives.

The process of developing an effective intellectual asset strategic plan includes identifying the company’s key business objectives. Once these have been identified, the following questions need to be addressed in order to develop the appropriate intellectual asset strategy:  What is the strategic intent of the company? To what extent does a company want to invest its resources into protecting existing products as opposed to expanding into new products? Does a company want to block other companies from using its technology? Does a company want to share its intellectual assets with complementary entities? Does a company want to share its intellectual assets with competitors? Does a company wish to enter into any strategic alliances? Is a company willing to aggressively protect its intellectual assets?  These questions are typically answered by interviewing individuals at the C level of the Corporation. Their answers and guidance can be audited against the corporation’s behavior over the last 3 to 5 years. Documenting the answers  to these questions allows individual intellectual property strategic plans to be quickly formulated.

The dynamics and environment of the Corporation’s industry is one the most important things to take into account when setting up an effective intellectual asset strategic plan. Best practices to manage innovation can best be segmented by time to prototype and time to commercialize. The importance of these segmentation axes was found by a collaborative research effort between Dr. Roger Miller at the Polytechnic University of Montréal and the Industrial Research Institute (now called Innovation Research Interchange). The “Types of Innovation Environments” figure shows which typical industry segments fall into the 11 different categories of theoretical R&D game type. Further research showed that management of intellectual property at the strategic level also could be best understood by using these same segmentation elements and 11 categories. The “Management of Intellectual Property by Type of Innovation Environment” figure shows attributes of IP landscapes and practices best suited for each of the 11 categories.

The rows of the “Management of Intellectual Property by Type of Innovation Environment” figure contain attributes a company would wish to find, or create for itself, in the ideal or desired IP environment in order to obtain the most value from its investment in invention and innovation. There are 15 such attributes that typically affect innovation planning, negotiation, and return on investment (ROI). Most importantly for companies wishing to engage in innovation activities, the “Management of Intellectual Property by Type of Innovation Environment” figure elements describe the ideal position a licensor can provide (”Portfolio Attribute” elements), the most advantageous IP environment a licensee can typically find (”Desired IP Landscape” elements), and the areas both parties can work together on afterwards to sustain the IP’s value (”Behavior” elements) in each sector.

The elements of a few rows of the table require some definition. The first yellow row is the overall patent density in a field. A patent desert is defined as a field in which there are tens of patent families present. A patent forest, on the other hand, is defined as a field in which many hundreds of patent families are present. Patent jungles are areas in which lots of activity has produced tens of thousands of documents. Not all fields benefit from having the same IP density. Brand new areas of scientific inquiry are ideally devoid of previous IP, allowing the first movers to capture grandfather IP positions that can be later leveraged. This is typically an area for government, university, and high-risk venture funding of R&D initiatives that are then protected by small numbers of key patents.

In the middle yellow row called “competitor citation position” the characterization of an IP predator is used to describe an entity that has over 10% of the citing art. Sharks in this context are used to describe entities that have over 30% of the citing art.

The last yellow row refers to intellectual property aggregators sometimes called trolls. Because of the ROI required for this business model to succeed there has been only one R&D game type which so far has proven to be attractive to trolls. This is in the area of Battles for Architecture found in the center of the “Management of Intellectual Property by Type of Innovation Environment” figure.

The first orange “Behavior” row characterizes IP holders’ posture versus infringers. The term aggressive in this context refers to a company’s proactive search for other entities that may offer products or services that infringe the claims of their IP. Don’t look, on the other hand, refers to a very passive approach on the intellectual property owner’s part whereby the time and expense required to look for infringers does not have a business chance of success in generating an ROI that meets the company’s hurdle rate or target internal rate of return.

Using this background information of the company’s business lines and high level strategic intellectual property guidance further detail for specific IP strategies can be created.

Six key processes to create an IP strategy have been outlined by James Malackowski of the IPC group.  They included by first performing an IP self-assessment.  By interviewing general managers across a Corporation and looking at the number of yes versus no responses to following questions creates a self-assessment that indicates the degree of training needed. Questions to be answered by each ofthe general managers are: Is intellectual property tracked by senior Corporation management? Have I developed an IP business plan? Have I mapped my intellectual property assets to the company’s strategic objectives? Do I have an accurate inventory of my patents? To have an accurate inventory of my domain names and trademarks? Do I have an accurate inventory of my business processes and software? Do I track my competitor’s intellectual property? Have I considered the tax advantages of proper intellectual property management? Does my intellectual property have a defined lifecycle strategy? Have I capitalized on recent changes in the intellectual property environment?

Visual means for performing a self-assessment of patents is shown in the “Self-Assessment of Patent Portfolio” figure.  In this figure each patent of the Corporation (or for a large corporation each business unit) is plotted along two axes.  The patent’s placement on the vertical axis corresponds to the business unit whose products or services are protected by the patent. These business units are ranked by the Corporation into three categories: those that the Corporation is banking on future growth, sustaining this year’s current growth, or providing the cash cow base for the Corporation.  Placement of the patent on the horizontal axis is done by determining whether the patent’s covered product or service is (a) commercially available, (b) will become available in the next year, (c) is in the 5 or 10 year strategic plan, or (d) none of the above and outside the Corporation’s vision.  For the Corporation’s portfolio shown in the Self-Assessment of Patent Portfolio figure, the self-assessment reveals that they have underinvested in their growth and are over investing in their core businesses’ patent estate.

Selection Processes for Patents vs. Trade Secrets

An important process of intellectual property management is to make the appropriate selection between what to patent versus what to hold as a trade secret. A recent IPO survey indicated that trade secrets are the really important intellectual assets of a company vis-à-vis patents, because patents have limits. Trade secret protection operates without delay and undo cost. This is unlike patents which are territorial and expensive to obtain and maintain. Additionally as a practical matter, licensees under patents who wish to both learn and practice the technology that do not have access to associated collateral know-how, often find themselves in a bind because patents rarely disclose the ultimate details which need to be embodied in commercial products and processes. In many cases, particularly in chemical technology, the know-how is the most important part of a technology transfer agreement as reported by Homer Blair. Peter Rosenberg went further by saying it is common practice in an industry to seek and obtain patents on that part of a technology that is amenable to patent protection, while maintaining related technical data and other information in confidence. Some regard a patent as little more than an advertisement for the sale of a company’s know-how.

In technology licensing, related patent rights are generally mentioned late in the discussion and perceived to have insignificant value relative the know-how as reported by Michael Ward who was Honeywell’s VP of licensing. Melvin Jager mentions that trade secrets are a component of almost every technology licensing deal and can increase the value of a license up to 3 to 10 times the value of the deal compared to if no trade secrets are involved.

Perhaps the best approach is to view the two as not mutually exclusive but mutually reinforcing. They dovetail and work in harmony. In many cases they are inextricably intertwined. Most R&D data and collateral know-how cannot and need not be included patent applications but rather can be held as trade secrets. Tom Arnold asserts it is flat wrong to assume that because of patent law requires a best mode requirement, patents unnecessarily disclose or preempt all the trade secrets that are useful in the practice of the invention.  All collateral know-how not disclosed, whether or not inventive, can be retained as a trade secret. All R&D data, including data pertaining to better modes, developed after filing, again whether or not inventive, can also be protected as trade secrets.

Karl Jorda also points out that the best mode requirement doesn’t preclude keeping trade secrets as the best mode requirement applies only to the knowledge of the inventor, only at the time of filing, and only to the claimed invention. Hence the best mode requirement is no impediment to trade secrets because patent applications are filed early in the R&D stage at the earliest possible filing or priority date. The specification normally describes in a few pages only rudimentary lab experiments or prototypes. The best mode for commercial manufacturing remains to be developed later after the patent is filed. As shown by case law, manufacturing process details are, even if available, not part of the statutory required best mode disclosure of a patent.

With respect to technology complex developments consisting of many patentable inventions and volumes of associated know-how, complementary patenting and secreting is tantamount to having the best of both worlds. In summary the best policy is to patent as well as to trade secret.  Further the best practical advice is to focus on patenting “chokepoint product functions” that the market will pay a premium for, and which can be well described and claimed, holding all else as trade secrets.

Deciding between a patent and a trade secret as a way to secure a sustained advantaged competitive position is not a black and white decision, but one where various shades of grey must be considered. A team of experienced cross functional personnel, typically found in a patent committee, review the invention or information with respect to a series of questions shown in the “Questions for Making a Trade Secret vs. Patent Decision” figure which have been grouped into decision-making categories.

For each question the committee provides a yes or no answer. The facilitator uses a Preferred Mode Matrix copied into an excel spreadsheet to enter a “1” in any box where a corresponding “yes” or “no” appears. The answers are then tabulated in a “Preferred Mode Matrix”.

Upon completion of the “Preferred Mode Matrix” exercise the points are totaled for each of the columns. The committee then reviews the pattern obtained. If there are any points in either blackball column, that option cannot be approved by the committee. When the pattern either strongly favors a patent or trade secret, that pathway is selected on the “Decision Tree Diagram” figure. Note that there are times when both pathways should be followed. In that case when the patent committee meets again they make their final decision based on what the legal team and trade secret team has put forth as their best efforts to obtain protection either from a patent or a trade secret.

IP Processes for Developing and Acquiring IP

These next sections deal with processes related to the development and acquisition of technology as well as human capital.

Invention Disclosure, IP Documentation and Innovation Management

Previous sections of this book have dealt with the management of the research and development / innovation processes using both traditional stage-and-gate processes as well as a lean / agile processes.   It is during those processes that IP creation and documentation occurs.

Invention Disclosure has to be conducted real time to be effective and efficient.  For ongoing research or serendipitous ideas and discoveries, most corporations require personnel to enter ideas into a notebook (electronic or hardcopy) daily.  Some also require these entries be read and understood by another technically qualified person and that this reading and understanding be documented as well.  This process is quite uniform across most organizations.  Below is an example of the process taken from the University of Texas that is found to be effective and efficient in for-profit organizations as well.

An inventor’s first step in the commercialization process is to submit an invention disclosure. This is the beginning of a relationship between a researcher and the employer. By submitting an invention disclosure, the inventor enables the employer to offer assistance and support throughout the commercialization process if the employer asserts its interest in the technology.

An invention disclosure is a confidential description of an invention submitted by the inventors to the employer to initiate the commercialization process. The invention disclosure addresses technical aspects of the technology, such as the science behind the invention, its advantages over prior art, its potential drawbacks, and its scope of use. In addition, the invention disclosure addresses legal matters (such as IP ownership and encumbrances). By submitting a disclosure, the inventor enables the employer to offer assistance and support throughout the commercialization process if the employer asserts its interest in the technology.

An invention disclosure should be completed and submitted for any inventions, discoveries, research tools, processes, know-how, or software that may solve a significant problem and/or have significant value. The invention does not have to be “market ready.” An employer’s rules often require that an inventor of intellectual property disclose any invention subject to ownership by the employer if he or she believes that there may be commercial potential.

Invention disclosure forms and instructions are available in electronic format from both employers and generic forms on the web.  Inventors should save the appropriate electronic document to their computer, complete it, and send to the employer in electronic form, followed by a hard copy with inventors’ signatures. It’s important to fill out the invention disclosure completely—especially inventor information.

It is common and best-practice to submit an invention disclosure as soon as you believe your invention is potentially patentable or may have commercial value. Many employers require inventors to submit an invention disclosure “before it is disclosed to any party outside the employer, to the public generally, or for commercial purposes, and before publishing same.” If in doubt, contact a licensing specialist at the employer to discuss the invention.  In any case, submit an invention disclosure at least 60 days before publishing or presenting the invention. Inventions that are publicly disclosed before a patent application is filed may lose patent protection outside the United States. Note that anything that is readily available to the public (a journal paper, abstract, conference presentation, poster session, publication on the Internet, non-confidential research proposal, press release, even a dissertation indexed at the library) that describes the basic ideas in enough detail that someone of ordinary skill in the field would be able to make and use the invention, will limit the IP rights available.

Showing or telling ideas to a person who is not an inventor of the technology and not bound by a non-disclosure agreement may also constitute disclosure, as does selling or offering for sale a prototype of the invention.  Be aware that public disclosure of an invention before submitting an invention disclosure may compromise patent rights.  Most foreign rights are lost upon first public disclosure or publication. In the United States, the U.S. Patent and Trademark Office allows one year from the date of first publication or public disclosure in which to file for a patent.

All contributors to the ideas leading to an invention should be listed in the disclosure—including the principal investigator, research assistants, students, staff, visiting scientists—whether or not they are not employees.

On jointly owned inventions with other research entities, if there is not already an agreement in place governing how the invention will be handled, the employer will typically enter into an “inter-institutional agreement” with the other institution that covers who will take the lead in prosecuting the patent and marketing the invention, how patent expenses will be handled and how commercialization proceeds will be shared between the entities.

Also listed in the disclosure should be:

1. The most relevant potential application of the invention. Usually a company will supply a checklist of its business units along with an option to specify uses outside the company’s current product lines.
2. A concise description of the invention. A clear description which explains the idea and how it works, without the excessive use of jargon. This description is an “Abstract” of the invention. A more complete discussion of your idea can usually be attached to the Disclosure if you think it would be helpful in explaining your invention.
3. From the above description, expand on the invention’s novel and unusual features: What makes the invention superior to the gold standard technology already in the marketplace?; What problem does the invention address and solve – i.e., what is the need?; What are other possible uses for the invention?
4. Indicate how you envision the invention will be utilized by potential commercial partners. Please provide a brief description of the end product. Please provide a sense of the size of the market affected by the unmet need. For instance, estimate of the number of patients who have a disease who would need the invention.
5. What is the unmet need and how will the invention satisfy the current unmet need?
6. Please address present disadvantages or limitations of the invention? How can they be overcome?
7. Please provide the date, place and circumstances of any actual or anticipated public disclosure of this invention, e.g. awarded grant abstract, oral presentation, poster session, meeting abstract or journal publication, conversation (e.g., have you had conversations with anyone regarding your invention at meetings, informal get-togethers, meals or other social encounters?).
8. Please provide the supporting data (in vitro, in vivo and/or clinical data) and analysis as an attachment to the Invention Disclosure and also provide the dates and locations of the supporting reports and lab records.
9. Please attach any photographs or diagrams or prototypes to the Invention Disclosure. If a prototype is available, indicate when and where it was made and who contributed to the manufacture and/or design, and any contracts/invoices for the work.
10. Please indicate the further research and funding that will be necessary for commercialization of the invention. Generally, what is the future research plan to further develop and test invention? What other “enabling” technology would be necessary for the invention to work?
11. Are there any known related patents, inventions or publications, either by any of the inventors or any other person? If so, please indicate here the names of these scientists or any patent application number, issued patent number or journal article information and attach any available information or copies.
12. Please list ALL funding used to generate data for this invention (please indicate each grant that provided funding for the invention even if the grant aims were not specifically related to the invention). Such information should include any funding from federal organizations, state organizations, foundation, non-profit organizations, commercial entities, or gift from individuals or organizations. If you did not use any funding to generate the invention, please explain why.
13. Please list ALL materials received from any third party(ies) with or without Material Transfer Agreements (MTA) that were used to generate data for this invention. Include any research reagents, chemicals, sequence information, or other proprietary information which was provided to you with a “Limited Label License” for research purposes only and used in the course of the invention or which are necessary to “make the invention work.” If you did not use any third party materials to generate the invention, please indicate “None”.
14. Please list ALL types of human samples that were used to generate data for this invention. Please provide the respective IRB control number, IRB approval letter and patient’s informed consent for each type of human samples. If you did not use any human samples to generate the invention, please indicate “None”.
15. What or who is a source of information on existing technology (e.g. reference books, colleagues, contacts in companies) to help us evaluate the advantages of the invention?
16. Have any companies or persons expressed interest in the invention? For instance, at meetings, have any companies viewed your poster(s) or enquired after a presentation(s)? If so, please provide the name of the company and/or person and contact information and state whether you have a financial interest in these companies.
17. Please provide any “key words” to conduct further technology and market research.

Once submitted, these invention disclosure documents should be catalogued and stored in a secure manner so as to preserve all potential IP rights (copyrights, trademarks, patents, trade secrets).  One way to do this is via a laboratory information management system (LIMS), sometimes referred to as a laboratory information system (LIS) or laboratory management system (LMS).  Such a software-based laboratory and information management system with features that include—but are not limited to—workflow and data tracking support, flexible architecture, and data exchange interfaces which fully support its use in regulated environments. The features and uses of a LIMS have evolved over the years from simple tracking systems to an enterprise resource planning tools that manage multiple aspects of laboratory and business development informatics.

Once an inventor fills out an invention disclosure is typically submitted to an entities’ patent committee or legal counsel for review.  The “Invention Disclosure Evaluation Process” figure shows an overview of the process.  The reviewing personnel assess the invention for its likely novelty, relative performance, relative cost to produce, and value as a choke-point consumer feature.  Pending upon the assessment in these four areas decision will be made to proceed with the patent filing or not.

The “Disclosure Decision Process” figure developed by Dow Corporation in the mid-1990s shows a much more detailed set of steps and questions to be answered.  This remains a good decision process today.

For large corporations once a decision has been made to file a patent the next issue associated is the priority of the filing so the legal department and external counsel prosecution schedules can be managed. The “Filing Priority Matrix” figure uses anchored scales to tie the time urgency of IP Filings to the R&D completion status in a way that provides recommended filing priorities in appropriate time frames.

For companies that have many projects that are more technology development than commercial development, the “Qualitative Valuation and Prioritization Matrix” figure may be used to set the priorities.  The only issue with this matrix is that project team managers often argue that all their project have high applicability and market interest.  This matrix thus works best at the corporate level comprised of many business units.  When doing so the only caution on the other side of the coin is to make sure businesses slated for growth get the IP support they need to do so.

From a patent committee standpoint there are business decisions related to the patent prosecution process that must be made in a specific timeframe. These are shown in the “Patent Processing Decisions” figure. What’s important is that the deadlines shown on the figure have to be carefully followed in order to preserve patent rights in all appropriate jurisdictions. A view of these processes from a legal department’s perspective is shown below in the “U.S. Patent Prosecution Processes” figure.

Likewise, the legal department’s perspective of obtaining patent protection world-wide is shown in the “Foreign Patent Prosecution Processes” figure.

Innovation Workshops to Harvest Technology Creativity

There are also times where an idea merits thoughtful exploration and add-on innovation. This is best done through structured work originally championed by the prolific IBM inventor John Cronin.  He and his team developed a “Virtualized Innovation” process that delivers market-relevant, forward innovation concepts in a far shorter timeframe compared to traditional R&D and product development cycles.  This process has since been adopted by others, notably Vincent & Associates and Jim O’Shaughnessy.  The goal is to take a cross-functional team of experts through a brainstorming process, followed by a selection process (based on what is new, feasible and of value to the industry).  This is shown in the “Overview of an Innovation Workshop” figure.

Utilizing such an innovation workshop creates many patentable ideas that can be used to stake out a patent position in an unfolding market. This process allows patents to be systematically created. In doing so the strategic character of a patent portfolio can be increased compared to the original idea or opportunity statement. As the IP portfolio value is increased so is the ability to obtain increased funding for the project or entities involved. A note of caution is that appropriate orientation of the patent counsel involved is necessary. This is because this process borders on the creation of paper patents. Thus to avoid problems, competent technical, marketing and legal counsel have to be employed. The benefit however is that many the patents that are granted as result of such a process move through the patent office much faster than normal and thus stakeout positions in new business areas ahead of competition.

Using IP Processes to Source Opportunities – Licensing-In

Success for an organization is driven by its ability to anticipate and satisfy its customers’ needs in an efficient, profitable manner. As rapid technological transformation of all industry continues, organizations cannot be expected to possess all the technology or intellectual property required to remain competitive.  A sound, cohesive method for identifying internal technology and/or intellectual property gaps, evaluating the providers of the “gap” technology or intellectual property, performing quantitative and qualitative analysis, and negotiating licensing-in deals could provide an organization with a significant competitive advantage. With the proper technology protected by intellectual property, an organization could strategically enter a new market, add a product to an existing product line, or add features to product it currently sells.

Intellectual property databases, in particular patent databases, possess useful information to source opportunities where internal organic company research and development is not available or appropriate. However, a distinction has to be made regarding in-licensing activities, i.e. between practicing and non-practicing entities. Entities that practice the technology they acquire is the focus of this book. Non-practicing entities can also use in-licensing to obtain some or all of their technology needs, and will utilize many of the same processes discussed below, but when it comes to valuing the amount they should pay for licensed materials the criteria will vary between practicing and non-practicing entities. The following will apply primarily to practicing entities.

There are many different methods to obtain desired technology and intellectual property that an organization needs. These methods include licensing-in, infusing capital into its own research and development programs, buying the technology or intellectual property outright from a patent owner, or acquiring the intellectual property owner’s entire business or organization. These different methods all have their own drawbacks and advantages. An organization should carefully weigh these factors in light of its overall strategy, strengths and weaknesses before deciding on an appropriate approach.

Once an organization identifies that its technology needs that cannot be satisfied in a timely fashion through in-house development, a search must be performed to identify external sources for the required technology. After the searches have been completed, target organizations are contacted, deal preparation analysis is performed, negotiations commence, and hopefully, a business deal is closed. After this occurs, an organization should regularly measure the economic value that is added by its inbound technology and intellectual property arrangements.

Compared to other options, in licensing reduces the time to market, reduces research and development costs, provides an entrance into a legally protected market, and helps build relationships with potential future strategic partners and acquisition candidates. Once licensing in strategy has been formulated, an organization would undertake the following four steps in order to implement a successful licensing in program:

Step One: Perform a Technology or Intellectual Property Gap Analysis.

The first step in performing a gap analysis is to identify desired products or features that are not currently in an organization’s products or product lines.  This can be completed with the assistance of marketing personnel or others within the organization possessing knowledge of consumer and/or market trends.

In order to ascertain whether an organization possesses the technology and intellectual property needed to fill its product or feature gaps, the organization may use a tool such as patent mapping. In this step the organization’s intellectual property and developmental R&D positions are mapped along with all patents related to the desired technology or intellectual property holdings. This step obviously requires the assistance of an organization’s technical and business development personnel to identify the appropriate technology, features, and uses to be searched.

The complete investigation process is shown in the “Evaluation Process for a New Technology” figure. The first two steps of this process will enable an organization to identify its technology and intellectual property gaps. The “gap“ is defined as a technology that the organization does not possess internally or whose internal development will not be completed in time to meet the product or feature target introduction date. At the end of step two an organization should perform a cost-benefit analysis with the assistance of technical, financial, and marketing personnel to determine which opportunities are the most economically viable.

A good mechanism to determine the most economically viable approach is to plot the relative cost versus relative performance (in consumers’ eyes) of the products or services that would be produced for each approach found from the initial screening at the end of step two. Such a plot is shown in the “Value Map” figure. In this figure, patents are placed on the grid one by one, as a pair-wise comparison.  The x-axis placement is determined by the relative cost to create and deliver the product. The y-axis placement is determined by the relative performance of the product as perceived by customers. The color of the dot shows presence of patent fences or an IP Shark. Clearly those opportunities in the upper left quadrant represent the best performance and feature content at the lowest manufactured/delivered cost. These are the best opportunities for an organization to pursue. Organizations whose branding is consistent with high-performance and above average cost may also consider options falling in the upper right hand quadrant of this matrix. Those organizations whose branding and image are associated with “value” products and services may also consider opportunities in the lower left quadrant.

Step Two: Evaluate and Contact Potential Technology and Intellectual Property Providers.

Once the top several technology or intellectual property candidates have been identified, the organization should drill down further in steps three to five of the Evaluation Process for a New Technology figure to identify and assess all the relevant technology and intellectual property licensors by performing the following tasks:  compile a list of intellectual property that can be used to fulfill requirements; list all the likely providers of the required intellectual property. Identify competitors, startups, think tanks, universities, etc.; perform research to identify patent applications and patents which appear to provide the necessary intellectual property; determine the relationship between the company and the target licensors. Are the target licensors customers? Are the target licensors competitors?

Results of studies, as outlined in the last step of the Evaluation Process for a New Technology figure, typically produce between 20 to 100 page PowerPoint decks (See Appendix I of this Chapter).  This is required background for making a sound business decision.  Because of the richness of the information all findings should be summarized in a one-page SWOT for project to project comparisons.

When the resulting list of potential technology and/or intellectual property providers includes more than one organization, the target technology/IP providers should be evaluated and prioritized. Pros and cons of licensing from each target provider should be studied. The organization should reevaluate whether licensing-in is really the optimal method to obtain the needed technology and intellectual property rights.

Step Three: Prepare Proposal Binders and Negotiate Deals.

After target licensors have been identified, the organization should prepare proposal binders customized to the technology or intellectual property to be licensed from the target license or. The proposal binders may include the following sections:  a brief description of the organization and its licensing initiative; a high-level description of technology and/or intellectual property to be licensed; a summary of the applicable market segment; information regarding the products and/or services of the target license or; marketing materials and press releases regarding the technology and/or intellectual property to be licensed; summary of executed license agreements if applicable; copies of the actual protected technology and/or intellectual property. An example of such a proposal binder’s intellectual property section is shown in Appendix 2 of this chapter.

Once a proposal binders have been assembled, the target organization should be contacted. The “Negotiation Process Flowchart” figure depicts the negotiation process.

As pointed out in the Licensing Executives Society training materials it is important to prepare, prepare, and prepare for negotiations. Effective due diligence preparation is absolutely key to a win-win successful negotiation process.

In their LES preconference workshops Paul Horan, et.al. stress the importance of some basic negotiation fundamentals. They are: (1) make sure the team thinks about all the impacts the various deal structure terms may have. There are lots of shades in gray, not just the option to go ahead or walkaway. (2) view the negotiation as just one of many steps in an ongoing process from first disclosure all the way through to contract performance. (3) make sure there’s continuity in the due diligence, negotiation and implementation teams. There’s a lot of tacit knowledge which is not reflected in the negotiation documents.  It’s important to the success of most projects.  (4) make sure that the team uses check lists but not over rely on them. It’s always important to make sure that you can see the forest through the trees.  Lastly (5) at the end of the negotiation it’s important to institutionalize the lessons learned for following negotiations.

In negotiations there is also the cultural preparation that is required. Remember that everyone is on their best behavior during the deal process so make sure that these people are ones you can work with effectively day-to-day. You also want to determine if you can set up and maintain good communications. And finally the negotiations are a test of whether you can effectively resolve differences and constructively solve problems together. If negotiations are difficult from a cultural standpoint these difficulties are likely to spill over into the implementation phase as well.

In negotiation the four things that really count are: First, what do we need? Second, what do they need? Third, what concerns us? Fourth, what concerns them? If you want to negotiation to succeed you must make sure that your issues are clear to yourself and the other side.  Secrets and miss understanding rarely create win-win results.

An outline of the negotiation starts with “the introduction”.  Elements of this step include: a letter of introduction; brochure introducing the opportunity; calling for a meeting; setting up the meeting agenda; pre-meeting reading; setting pre-meeting expectations; providing needed material; attempting to meet over lunch informally; executing a confidentiality agreement.

The next step can be characterized as “the first date meeting”.  Elements of this step include: introduction; announcement that the CDA has been signed; presentation by licensee; presentation by licensor; present expectations; agree on path forward. During this meeting a second person should be present to observe the other side’s responses and to take diligent notes. It’s also important to be realistic and not expect to sign anything at the first meeting.

The following step is usually a “internal meeting of the licensee”.  Elements of this step include: review of the introductory meeting by business, R&D and legal; Providing revised elements for the negotiating team comprising the R&D summary, development plan, intellectual property analysis (patentability, infringement analysis, additional licenses needed for commercialization), competitive analysis, market and sales forecasts, financial analysis, and deal structure.

Concurrently there is also usually an “internal meeting of the licensor”. Elements of this step include: review of the introductory meeting by business and R&D; preparation of documents needed by the negotiating team for follow-up to include a development plan, intellectual property analysis (infringement analysis, additional licenses needed to commercialize), competitive analysis, market and sales forecasts, financial analysis; identify deals completed by the licensee for comparison; identification of contact points.

The next meeting is a “due diligence meeting”.  Elements of this meeting include: scientific review of the technology; listing of milestones and costs; recitation of draft term sheet to include upfront payments, equity payments, R&D support, milestone payments, royalties, territory, and manufacturing. An example of the elements in a typical term sheet are shown in the “Sample Term Sheet” figure.

The following meeting is one to negotiate the terms presented in the term sheet. Elements of this meeting include: composition, roles, and responsibilities of the joint steering committee; manufacturing; territory; co-marketing; carve-outs; best efforts; milestones; advance against royalty; termination rights.

During the negotiation it’s an excellent time to learn about and resolve issues related to the history and general characteristics of each party.  These include: history of the capital structure of the candidate company, including original capital, current classification of shares; current capitalization table, including stock ownership; listing of shares on any public exchanges; list of outside experts engaged by the candidate company such as auditors, attorneys, patent counsel, scientific advisory board, and others; brief overall description of business, including recent developments in general plans for future; description of any critical problems facing the business, including need for additional capital, government restrictions, disputes, loss of key personnel; list of companies key officers and directors, including a general history of their business or scientific career, including whether they have been involved in any criminal, regulatory or significant business related to civil litigation or investigation.

During negotiation it is also a good time to understand the competitive environment of each party.  Elements falling into this category include: what other companies or research institutions are engaged in programs in the target area; what types of companies are involved in research or sponsoring research in the area (large, small, government); what companies, if any, have abandoned research in the area and why; what appears to be the strategy of the licensor; what is the strategy of the licensee; if the licensor is to be engaged in making pre-commercial supplies, does it have adequate manufacturing capabilities to do so.

Some financial items to consider during negotiation are: if the collaboration includes research or development activities to be undertaken by the licensee at licensors expense, document the accounting policies to be used; similarly does each company have adequate financial controls and a competent CFO or controller; share the balance sheet, income statement, funds statement, cash flow, registration documents, and current SEC reports; does licensor have arrangements for securing competitive sources of key materials and processes needed for the collaboration; describe and evaluate the laboratory manufacturing facilities are that are available to the licensor to use for the collaboration; list all key suppliers and determine if alternative sources readily exist; determine and evaluate the adequacy of insurance coverage carried by the licensor; list and evaluate any contractual disputes in which either party has been involved with suppliers, research collaborators, or other partners.

Some intellectual property issues to consider during a negotiation are: obtain full schedules of patents and applications for patents worldwide; obtain copies of any relative license agreements, paying particular attention to any restrictions on sublicensing; list and review any patents and applications that are jointly owned with third parties; obtain a statement regarding any claims or threatened claims of patent infringement; what is been the policy of each party with respect to the rights and duties of employees and outside consultants. Are they covered by written agreements with respect to patents and pending applications? Are agreements limited in any way as to the type of research covered? Have all key employees and consultants signed patent agreement assignments; have searches been made of prior art, either infringement search, validity search, or freedom to operate analysis; obtain copies of all relevant opinions of outside counsel for licensee to review; has there been any waiver of, or disputes concerning, confidential disclosure obligations between the licensor and any employee, consultant or other third party; have patent applications be filed in all important foreign markets and, if not, is there still time to make such filings.

Finally during a negotiation it’s also important to learn about any pending litigation. Areas to be ask about are: are there any charges pending against the either company by any Federal or State agency; list any litigation that is threatened or pending; evaluate any litigation that directly relates to the collaborative area of research; has licensor been involved in any significant litigation in the past five years, particularly as it relates to the intellectual property rights or the rights and obligations of third party research arrangements; list all principal contracts that are in place that relate in any way to the area or subject matter of the proposed collaborations.

During the negotiation it’s also important to pay attention to the process. First, it is important to remember that driving for the very best deal possible can be fatal. You can win the war and lose the battle. P&G found this out when they were negotiating for technologies from small entities. Because of their size they could drive a very good deal, but unfortunately one that was not profitable enough for the small entity to stay in business and transfer the technology that P&G needed.  Another element to pay attention to is to beware of the average. Most technology is unique for the intended application of that technology. Make sure when looking at deal terms and comparable royalty rates, don’t focus just on the average, but the range that is been successfully used, when considering starting points for good deal. Additionally communications are important. Within your own team make sure you know what you want.  If you really don’t know what you want you can’t expect the other side to create a deal that’s good for you.  Conversely with the other side make sure you really know what they want. Guessing always leads to bad solutions. Finally you do not want surprises during negotiations or afterwards. You want to understand the assumptions. Ask questions and probe issues.

As said before negotiations are an opportunity to learn how to work together. Negotiations are preview of how you will work together after the deal is signed. It’s important to understand and appreciate your partner’s style and culture. During a negotiation share concerns and frustrations: make it a safe environment to be candid about issues.

Successful deals capture the business needs of both parties. The form of the deal has to reflect how the parties really will function together. Remember that specific structures can mean different things to different parties. For example joint venture can mean either sharing economic risk and benefit or sharing operational control. These are quite different so it’s important to make sure both parties understand what they mean and are competent to participate in the form selected. Again remember that a business structure can take many legal forms, joint venture for example can be either a new corporate entity, partnership, or contract. These different forms require quite different competencies from the parties.

Member that at some point the deal will be done it will turn into an alliance management problem. As such make sure it’s possible to keep continuity between the negotiation and management teams. The alliance management team must understand the key performance terms.  Key are regular and frequent communications between the teams and parties. Being open, focused and sharing information on issues (both good and bad) as they arise is essential for win-win relationships. It’s important to be responsive. It’s much easier to work out problems when they arise and are still small.

Also during negotiations it’s important to contemplate what might happen if things don’t work out as planned. Most collaborations are not intended to last forever. It’s important to put in place sensible dispute resolution depending upon they culture and geographies of the parties. Consequences of termination should always be clear with respect to the intellectual property, payments, and products.

Quantitative and qualitative analysis of appropriate royalty licensing terms will be proposed and modified throughout the negotiation process. This review will require fundamental analysis such as discounted cash flow, scenario probability studies, and reviewing comparable licensing agreements. License terms should be consistent with the organization’s overall business strategy.

There are number of good commercial sources for obtaining royalty rate information (see references). It is strongly recommended they be used for any negotiation. The price for such information is modest compared to the impact it can have on facilitating a win-win negotiation.

Step Four: Measure the Value Added by the Licensing-In Arrangement.

Similar to any investment that an organization undertakes, the value of the organization’s licensing-in arrangement should be quantified to ensure that it generates the required return. Well-known metrics such as economic-value-add can assist in this analysis. The EVA or economic value added is simply the profit minus the capital charges.  Profit can be the R&D, advertising and legal protection costs avoided, plus incremental profits to do accelerated market entry, less the royalty expenses, less the costs and negotiations for the license (out-of-pocket and opportunity costs).  Capital charge is the incremental capital needed to exploit intellectual property that was licensed-in.

Other metrics organizations have used to measure the value of licensing-in activities are: total advertising and promotional costs avoided less royalties paid to license-in trademarks; total R&D costs avoided less royalty paid to license-in patents, know-how and trade secrets; ratio of royalties paid to patents licensed compared to the ratio of R&D cost of patents developed internally; ratio of the number of patents licensed-in to the number of patents developed internally; the total number of patents the firm has access to through licensing-in, cross-licensing and internal development; the number of patents licensed in annually.  Collecting and tracking such metrics is important to ensure an effective, well executed licensing-in program.

Although this section is dealt primarily with licensing-in of technology and patents, alternative strategies to obtain access to the same assets can also be done by the purchase of entire companies, joint ventures, or partnerships. Such relationships vary only in the form of the negotiations that take place between the corporations. The preparation work for such negotiations outlined in this chapter is very similar for all of them.

Using IP Processes to Assess M&A Business Opportunities

Another important business process which intellectual assets play a key role in the decision is that of a merger, acquisition, joint venture, or alliance. When considering a merger, acquisition, joint venture, or alliance, a company must examine relevant intellectual assets in the context of that company’s business objectives. Identifying proprietary assets, assessing their value in view of corporate objectives, and implementing a strategy to transfer and exploit the assets are essential steps in a successful transaction. A structured approach to such an analysis assures an accurate assessment of the intellectual assets value.

Merger, acquisition, joint venture or alliance participants seek to obtain value by acquiring assets at the lowest possible price and avoiding liability that may result from infringing others rights. For those participants that possess intellectual assets they seek to obtain the highest possible price for these assets and to avoid representations to the other party which may result in liability at a later date.

Each party recognizes that not all intellectual assets are created equal. They must evaluate the assets worth in their marketplace. To a large extent an intellectual asset’s value is a function of the company’s plans for using the asset in the future. Thus each party seeks to identify each intellectual property asset, examine its usefulness, and determinants value both in absolute terms and also relative to the other intellectual property assets of the proposed new business entity. Each entity must also convince themselves of the manufacture, use, advertising or sale of any asset does not infringe a third party’s intellectual rights.

Any party with a deliberate, long-term program designed to protect rights and intellectual assets is better able to convince the other party of that intellectual property’s value. When contributing intellectual assets to a combined entity, that party should be careful to avoid representing that the assets are suited to the other party’s or future venture’s particular purposes. Parties seek to avoid blanket warranties concerning the validity of the assets, preferring to limit themselves instead to warranting only that the asset is free of liens and encumbrances and can be freely transferred. Typically a party will warrant only that he is not knowingly engaged in any activity that could render the asset unenforceable.

In this part of the overall strategy for a transaction, each party should identify the intellectual assets involved, conduct appropriate clearance searches, and negotiate the asset’s value. All parties should recognize that the transaction risk lies disproportionally with the entity acquiring the intellectual assets. As a result, the acquiring entity must exercise due diligence in evaluating the assets.

Generally the merged entity, the acquirer, joint venture or alliance management assumes a burden for determining the intellectual property value. The sequence of steps in the level of effort expended will depend on the particulars of the transaction, the time available to conduct the analysis, the merged entity, acquirer, joint venture or alliance management’s knowledge of the contributor’s operations, and general industry knowledge.  The following 10 steps offer comprehensive approach to evaluating a transaction’s intellectual assets.

Step 1. Identify Products and Services.   As a first step, one should inventory the products and services involved in the transaction. It is important that no product or service be overlooked. For example a contributor may be well known for producing or distributing a particular product line, but may also distribute other lesser-known product lines and associated service businesses. The less well-known products and services may have previously unrecognized value or may present risks that demand the new entities management’s further consideration. A new entity’s management should prepare a comprehensive list of products, processes, services, rights under licenses from third parties, and rights to receive income under licenses issued by this contributor in order to focus attention on the specifics of the transaction. The party should also clearly identify and describe items that are not subject to the transfer under terms of the agreement.

Step 2. Identify Intellectual Property.     It is now possible to list the intellectual property associated with each asset. The product may be the subject of one or more forms of intellectual property. For example a product sold under a trademark may also be covered by one or more patents and may be manufactured by a process involving one or more trade secrets. With an inventory, the products and services as well as the associated intellectual properties, is possible to develop a matrix that contains information for each product. Matrix cells can be filled in with corresponding patent numbers, trademark registration numbers, copyright registrations, annotations can turning trade secrets, license is required, and licenses issued. In this way the intellectual property picture can be viewed at a glance. The matrix also displays gaps in the intellectual property protection for the various product lines. This process works very well for small to medium-size entities, or large entities entering into a limited alliance or joint venture.

Step 3. Prioritize Analysis Results Relative to the Future Entities Business Plans.   Depending on the size of the transaction, the amount of intellectual property may require the future entity’s management team to focus on only certain product lines or other high-priority items.  When the future entity’s management team seeks to continue deriving income from mature product line with expired patent coverage, the analysis will focus on valuing trademarks. When a patent exists and will be asserted, a detailed analysis of the protection is particularly relevant to maintain a legal monopoly or block others from producing a competing product line. Market forces may also affect the priority assigned to various types of intellectual property involved in the transaction.  For large entities that are conducting a merger or acquisition of another large entity, one realistically has to limit the number of products which are mapped in the manner of Step 2. A good rule of thumb is that 20% of the products produce 80% of a company’s revenues and profits. As a practical consideration mapping only the top 20% of the most profitable products is a realistic way to approach large acquisition and mergers.

Step 4. Industry Analysis.    The future entities’ management team should be acutely aware of industry competitors and their intellectual property portfolios. Little can be done to evaluate trade secrets of potential competitors.  However, searching assignment records at national patent and trademark offices can help identify whether potential competitor has an extensive patent or trademark portfolio for particular product line. Since US patent applications are secret, the future entities’ management team can only speculate about the emerging competition. However, a review of the foreign art may suggest concomitant activity by a competitor in the U.S.

Step 5. Determine the Existing Scope of Intellectual Asset Protection.    To complete this step the future entity’s management team must examine the scope of technical know-how, trade secrets, patents, copyrights, trademarks, and existing licenses. Each assessment requires expert opinion and is described in very general terms below:

Technical know-how. The scope of protection afforded by an intellectual property asset is a function of the procedures taken by that contributor to protect the intellectual property as it was created or exploited. The contributor or one of his employees may have intimate and valuable knowledge and insights on a new product manufacturing method or related process. To the extent possible such technical know-how should be identified by the future entities management team and information recorded in delivered to that team. Technical know-how is generally non-proprietary. However, the buyer should obtain the advantage of the skill developed over the years by the contributor or its employees as an intellectual asset.

Trade secrets. Adequately protecting trade secrets requires that a contributor employees adequate procedures to practically and legally guard that secret. The future entity’s management team should review the procedures put in place to determine if trade secret status will be afforded to an intellectual property asset. Factors that the future entity’s management team should look at include the number and identity of employees who know the trade secret information, procedures taken to keep the information secret, the existence of nondisclosure and not-to-compete agreements and other agreements with employees. The future entity’s management team should also verify that the provisions of such agreements extend to the future entity on transfer of the intellectual asset. Trade secret analysis is particularly important because once a trade secret is lost, is gone forever and cannot be recovered.

Patents. Patents offer one of the strongest forms of intellectual property for processes, machines, manufacturing, compositions of matter or improvements thereof. Determining the scope of protection offered by patent is an important step in evaluating an intellectual asset. Because of this importance this topic will be covered separately in more detail later in this chapter.

Copyrights. The copyright exists in a work at the time it is fixed in any tangible medium of expression now or later developed from which the work can be perceived, reproduced, or otherwise communicated. The future entity’s management team should review the materials that are subject matter of copyright. In evaluating the scope of copyright protection, buyer should consider that copyrights extend only to the expression for the original work of authorship.

Trademarks. The value of the trademark lies in its association in the minds of the public with particular goods and services. In order to value the Mark, the receiving entity’s management team should conduct a search to determine if any third parties use the same or similar mark for similar goods and services. If so, the mark is less valuable than it is it is distinctive in the minds of consumers. Registered trademarks are substantially more valuable than unregistered ones.  When marks are unregistered the future entity’s management team should determine that they do not infringe the marks of others.

Licenses. The future entity’s management team should determine whether licensees are required to conduct business or transferable to them. Failure to transfer a needed license effectively precludes the future entity’s management team for making, using, or selling the product. Likewise a future entity’s management team would need to invest heavily to establish an independent reputation were the same goods are marketed and sold under different mark.

Step 6. Verifying That Intellectual Assets Can Be Exploited. The value of intellectual property assets lies in the future entity’s ability to exploit the assets in the marketplace. There for the future entity must be assured that they have proper ownership of the asset, that it is valid and enforceable, is not the subject of litigation and has not been transferred in a way the precludes the future entity from using it. Elements of the verification process include ownership, validity, litigation and license history. These elements are described in very general terms below

Ownership Verification. The future entity’s management team should conduct assignment searches of patent and trademark office records for each patent and trademark to be transferred. In the case of patents, the future entity’s management team should look for a complete chain of title beginning with each and every inventor. For trademarks, buyer should determine if the mark is already used or is the subject of an intent-to-use application, and verify recording of the appropriate assignments. Buyers should review all copyright assignments as well.

Intellectual Asset Validity Assessment.  The validity of a trade secret depends on the inability of others to gain access the trade secret information. The trade secret acquirer should evaluate the product line to determine the trade secret information cannot be reverse engineered, and review procedures for maintaining the information is a trade secret. The acquirer may also wish to verify the key employees will not be competing with the acquirer, at least within reasonable time and geographic constraints.

Patent validity can be evaluated by conducting a prior art search and comparing the results of the search for the subject matter claim, especially for key patents. Patent rules place a strict responsibility on those obtaining the patent to disclose material relevant to the issue of a patent. In acquirer should obtain a complete record of maintenance fees paid to various patent offices around the world to assure that the patent did not lapse. The trademark buyer should verify that the requisite use affidavits and renewals filed with trademark offices around the world are also current.

Litigation History. In acquirer should become aware of the past and pending litigation for all intellectual assets included in the transfer. The acquirer should obtain information about threatened litigation. Acquirer should inquire if any trade secret is been the subject of litigation and, if so, the disposition of the litigation. Acquirer should also investigate whether any patents in the transaction have been found invalid or if information produced during the discovery in a patent litigation casts doubt on the validity of a patent asset. Acquirer should also ask the USPTO about administrative proceedings including re-examinations, reissue applications, or interference proceedings. Trademark asset acquirers should inquire about the litigation, administrative proceedings, oppositions to trademark applications, and cancellation proceedings for registered marks. Litigation involving copyrighted subject matter, especially software, may greatly affect the scope of protection by limiting the creative expression found in the work. Acquirers should review court decisions to determine if such limitations of been found and their effect on the value of the copyrighted work.

Licensing Activities.  Acquirers should investigate whether the contributor has conveyed exclusive licenses to intellectual assets to the acquirer’s competitors. When the acquirer’s business plan depends on the use of such an asset, an exclusive license negates its value to the acquirer. This is particularly true when the license does not generate an income stream, for example a paid-up license.

Step 7. Conducting a Non-Infringement Investigation.  Acquirers undertake non-infringement investigations to avoid exposure to unexpected expense resulting from infringing intellectual property that belongs to others.

Trade Secrets.  Acquirer should require the contributor to document that trade secret information developed by the firm or its employees is not an infringement of another’s trade secret. The main line of inquiry at this stage is whether or not an employee who developed the trade secret may have appropriated the trade secret information from his or her previous employer.

Patents. For major products and product lines, an acquirer should conduct a patent infringement search to verify products do not infringe any issued patents. Acquirer should review any product clearance opinions received by the acquisition target. The contributor of the intellectual asset will ordinarily limit its representation to such documented opinions.

Copyrights. It is often difficult to determine if a product contains material copyrighted by a third party. To the extent that particular subject matter can be identified, such as computer software and published manuals, acquirers should require that the seller warrant to material is not copied and that any licenses required to use copyrighted material have been obtained and can be transferred. For computer software, acquirers should insist on receiving a complete audit report of software used by the acquisition target as well as copies of the licenses that are needed to use the software.

Trademark.  Acquirers may contact trademark searches to verify the products being sold under a mark do not infringe the marks of third parties. One important consideration for the acquirer is the nature of plans to expand product lines into areas which raise the potential for infringement.

Step 8. Identify Warranties and Indemnities.  Acquirers seek indemnification for infringement of intellectual assets in the hands of third parties. Contributors seek to limit financial exposure and to avoid the liability for the acquirer’s actions that the contributor cannot control. To the extent that the contributor warrants non-infringement of another’s intellectual assets as well as validity of his own intellectual assets, the acquirer may pay a correspondingly higher price. A contributor can expect to negotiate a lower price when the acquirer assumes exposure for infringement and there is a chance the intellectual property assets may not be valid or enforceable.

Non-Infringement.  An acquirer should expect a contributor to warrant that the contributor has disclosed knowledge of all potential infringements.  The acquirer should require the contributor to warrant that the contributor has disclosed all letters of inquiry, threatened litigation, pass litigation or pending litigation concerning infringement of another’s intellectual assets.

Validity. Generally the contributor will not warrant that a transferred intellectual asset is valid against all potential claims. An acquirer can require that the contributor warrant the disclosure of any information relevant to the validity of an intellectual property asset. In acquirer should require the contributor to warrant that it is not engaged in any inequitable contact in any administrative proceeding that would render an intellectual asset unenforceable.

Ownership. Generally in acquirer should require the contributor to warrant that the contributor is transferring all rights, title, and interest, free of liens and encumbrances in the intellectual assets. An acquirer should require the contributors to specifically identify any limitations on the transfer such assets. Acquirers should also require the contributors to assume liability for failure to transfer such assets.

Non-Competition.  Because intellectual asset contributors hold intimate knowledge of trade secrets and other proprietary information an acquirer may seek to obtain a not-to-compete agreement from the contributor. Such covenants must be reasonable in time, geography, and subject matter in view of the circumstances.

Step 9. Review Other Considerations.  An intellectual asset acquirer may wish to review the composition and character of the relevant industry. An acquirer takes significant risks entering a particularly litigious field in which at least one competitor is particularly litigious or notorious for infringing the rights of others. An acquirer should also consider the pace of technical change in an industry and its own plans for expanding into new product lines.

Step 10. Establish a Value.  Establishing a value for intellectual assets is a difficult task and will be covered in more detail later in this chapter. A pioneering patent with broad, valid claims in a thriving industry which can be used to effectively block all competitors is significantly more valuable than a patent tractor towards a minor improvement in a manufacturing process which will be used by only the patentee. Other factors which parties consider negotiating the price for intellectual assets are as follows:

Income Streams.  The most quantitatively defined aspect of a merger, acquisition, joint venture, or alliance transaction is the income stream generated from licensing. Past and projected royalty income is generally well-defined and affects the price of the assets.

Past Experience of the Parties.  Based on the past experience acquirers and contributors can assess what price for the intellectual assets is reasonable.  Details of valuation methods for intellectual assets is discussed later in this chapter.

Industry Practices.  The extent such information is available, the parties can evaluate comparable experiences of others in the industry.

Relative Bargaining Position.  Whenever contributor requires an immediate infusion of cash, the acquirer may be in a superior negotiating position. On the other hand when acquiring a contributor’s assets is essential for an acquirer to continue participating in the market, the contributor is in the superior negotiating position. Either circumstance clearly affects the price paid for the assets.

Non-Competition Arrangements.  A contributor who agrees not to compete with the acquirers is likely to command a higher price for the intellectual assets.

Other Considerations.  Acquirers may require assurance that they are receiving rights and all pending applications to registration of various intellectual assets.

The above describes the major elements that should be assessed during the due diligence process for Mergers, Acquisitions, Joint Ventures, Alliances, etc.  How this fits in an overall three phase due diligence process was described by Jim Malackowski in a talk on Due Diligence in an Intellectual Capital Focused Investment, shown in the “Phases of Due Diligence” figure.

For ease of use, two “check-lists” are now provided. The following is a shell of an IP due diligence outline. The purpose of the shell is to identify the key areas and topics for performing IP due diligence. The summarized elements are:

I. General Company Information:  Market information; product information; geographic information; other

II. Research and Development Activities:  Technology identification; key technology areas; key inventor; R&D plans.

III. Competitive Analyses:  Product advantages; technology advantages; key inventor; IP trends.

IV. IP Confidentiality and Internal Processes: Employees; contractor/subcontractor; disclosure/IP protection procedures.

V. Information Regarding Various types of IP: Patent information; trademark information (includes trademarks, service marks, trade names and trade dress); trade secrets; copyright; other forms of IP.

VI. IP-Related Agreements:  Licensing; R&D grants; consulting agreements; joint development/joint venture; indemnification agreement; others.

VII. IP-Legal Opinions

VIII. Claims, Threats and Lawsuits

IX. Other / Miscellaneous 

The above checklist is essentially a tickle list to make sure that all high-level areas are covered during an IP due diligence process. For a much more complete guideline of the elements that should be put into a due diligence process, the below, more complete checklist is provided. It has been used by many companies as a tickle list of elements to consider putting into their due diligence process.  Those that aren’t applicable are obviously skipped.

I. Preliminary 

1. Identify and describe all products, processes, and services related to the company. (Include the territories were each product is sold.)
2. Determine the mission and financial goals of the target company.
3. Obtain copies of any internal or third-party research reports prepared during the past 12 months describing the size or expected growth of markets in which a target company’s products or services are distributed.
4. Obtain a listing and copy of advertising materials, including work in progress, video and audio tapes, printed material etc.
5. Interview product managers to obtain an understanding of the products that are sold encompassing each element of technology. (Identify industry trends and areas of product innovation related to the target company’s products and services.) (Identify and define product markets/categories/segments in which the target company competes.)
6. Ascertain if the target company hopes to penetrate any new markets/category/segments in the near future. If so with what products or services? (What IP does the company plan to utilize and penetrating these new markets?)
7. Identify plan changes in products (i.e. composition, method of manufacture, etc.) that might require IP review.
8. Identify plan changes in location or territory where products will be made, used, or sold.
9. In the case of the unit or division acquisition, are there any IP rights that may be retained by the seller? (If so, a license agreement or other arrangements may be necessary.)

II. R&D Information

1. Interview R&D employees to obtain a summary understanding of each research element carried out, including the following: a description of the technology; a description of the development process; the individuals that have worked on the R&D; status of employment for those that have worked on the element.
2. Establish what the target company believes their key technology areas to be (i.e. what markets/category/segments). (Who are the key inventors for the target company in these key technological market/category/segments?) (Who are the key inventors in the industry in these key technology market/category/segments?)
3. Identify industry trends and areas of product innovation related to the target company’s products and services from a technological perspective.
4. Identify and define technological market/category/segments in which the target company has historically concentrated its R&D efforts and investments. (Who are the key inventors for the target company by technological market/category/segment?)  (Who are the key inventors in the industry by technological market/category/segment?)
5. Identify and define technological market/category/segments in which the target company hopes to penetrate in the near future. (Which inventors, within the target company, are expected to be the lead inventors in these new markets?)  (What companies are currently competing in these markets?)
6. Determine the extent to which any of the target company’s IP is boxed in by competitor’s patents. Other third-party patents?
7. Determine the extent to which the target company has boxed in any of its competitors IP. Other third-party IP?
8. Does a company have procedures in place to ensure that its inventors/engineers are aware of the state of the art developments in the industry?
9. identify the extent of company resources devoted R&D and patenting activities? (If known, how does this compare to the target companies competition?)

III. Competitive Analysis 

1. Obtain copies of any analysis of competitors or competitive products prepared during the last 12 months.
2. Obtain copies of any internal or third-party market share data prepared in the past 12 months with respect to the target company’s products and services.
3. Obtain copies of any searches and/or analyses of competitors IP conducted by the target company.

IV. Employees 

1. Is there a list of employee confidentiality agreements in place? If no list exists, prepare one.
2. Is there a list of employment contracts in place? If no list exists, prepare one.
3. Determine how comprehensive the existing employment contracts are: (1) does a company have employment contracts in place with all employees in technical or other product development positions? (2) do the employment contracts require that all work created by the employees within the scope of their employment be signed to the company? (3) do the employment contracts require that employees sign to the company key technical properties they developed prior to the beginning of employment with the company? (This may be important in the case of a key employer or owner that has let the company use intellectual property royalty-free during the term of his/her employment but may not do so under new ownership.) (4) do the employment contracts require that employee’s keep company sensitive information confidential? (5) do the employment contracts contain non-compete clauses?
4. Does the company maintain all contracts of former employee/inventors? Have those individuals assigned all of their rights to the company?
5. Is the compensation structure of the target company strong enough to maintain their key employees?
6. Does the company have exit interviews or other procedures to collect company sensitive information and remind company employees of their duty to keep confidential company information secret?

V. Contractors / Sub-Contractors 

1. Is there a list of all contractors that will be working or may work for the company? If no list exists, prepare one.
2. Are all of the existing agreements with contractors maintained and gathered?
3. Do the contract agreements require that all of the rights in the works created as part of the contract arrangement be assigned to the company? (This is especially important in the case of software development as the transfer of the related copyrights in most contract arrangements do not automatically transfer rights to the contracting company.)
4. Does the company maintain all agreements with former contractors? Have those individuals assigned all of their rights to the company?

VI.  Disclosure / IP Protection Procedures 

1. Do company policies require that nondisclosure agreement be signed for any meetings that require the disclosure of company confidential information to outsiders?
2. Does the company have a review policy for technical papers or other disclosures of information to ensure that no proprietary or confidential information is published?
3. Does the company have a format for invention disclosures that facilitates the disclosure of inventions to the appropriate personnel?
4. Does the company have a formal procedure for determining the type of intellectual property protection (including publication) that should be sought based on the characteristics of the invention and/or commercial potential?
5. Does the company have a formal procedure in place for marking its products that are protected by either patents or trademarks?
6. Does the company require that inventors of product development personnel keep laboratory notebooks?

VII.  Patents 

1. Generate a list of all the company patents, both US and foreign and design and utility, with information describing the patent, patent life, counterpart foreign and US patents, last maintenance payment, the next scheduled maintenance payment, available extensions and dates, and origin (e.g. company developed, acquired, licensed etc.)
2. Generate a list of all patents involved in licensing transactions. Include the following information: provide copies of the agreements; are the rights transferable or assignable? are consents necessary? What are the termination dates? Are improvements included (grant backs)? Are there any restrictions or limitations? Are there any non-compete obligations? What are the revenue streams or license obligations associated with each license?
3. Generate a list of all filed patent applications with information describing the application scope and status.
4. What is a target company’s definition of owned versus controlled IP?
5. Define relationships with any related companies (i.e. owned versus controlled rights).
6. Does the company have a list relating patents to products sold by the target and vice versa?
7. Acquire copies of the target companies patent prosecution histories.
8. How has the company enforced its patents in the past?
9. Are there any prior art searches, concessions, reports, or opinions, whether internal or external, that the target company possesses concerning the validity of its patents, infringements of its patents by others, infringement of third party patents by its products, or the validity of such third-party patents?
10. Identify all litigation involving the patents and provide copies of complaints, answers, judgments, and settlement agreements.
11. Gather correspondence to or from the target company inquiring about a possible license or the status of a patent or patent application.
12. Is there a formal structure for inventorying and/or managing company patents?
13. Does the company have procedures in place to ensure that maintenance payments are made on time? (Is the company delinquent on the payment of maintenance fees for any key or important patents?)
14. What is the company strategy or policy related to the practicing of patenting (i.e. patent everything, only patent non-obvious ideas, etc.)?
15. Is documentation relating to patents accessible (e.g. date of conception, reduction to practice, date of filing, assignment of rights, etc.)?
16. For acquired patents, have all the appropriate individuals assigned their rights in the patents to the company?
17. Does the company’s product development process require a prior art search to be completed at the initiation of a development project?
18. To what extent is legal counsel, both internal and external, involved in the patenting process?
19. Has another company contested the validity of any patents? Results?
20. Have any foreign patent applications been made public even though the corresponding US patent failed to issue?
21. Are there opportunities to increase patent protection coverage through application for additional patents or by applying for patents in other countries?
22. Does or has the company sought any software patents?
23. Have there been any software patents issued recently which may affect the company’s ability to sell products?
24. Does the company have any security interest in any non-company patents? (Are all the rights and the security interest assigned to the target company? Exclusive rights?)
25. Does any other company maintain a security interest in any of the target company’s patents? (Are all rights in the security interest assigned to the target company? Exclusive rights?)
26. Are there any patents that do not provide the company with any benefits or expected benefits in the marketplace?

VIII. Trademarks (includes trademark, service marks, trade names, and trade dress) >

1. Generate a list of all the company trademarks, both US and foreign, with information describing the trademark, where it is registered, when it was first used in interstate commerce, how long is it been in use, is a currently in use? When was the last maintenance payment made, when is the next scheduled maintenance payment due, in what products are each of the trademarks used, what is the origin of each mark (company developed, acquired, license, etc.), are there counterpart foreign and US trademarks, what are the available extensions and dates, any other relevant information.
2. Identify any marks with pending application/registrations.
3. For those trademarks not in use, if any, identify those marks that are in jeopardy of challenge due to lack of use.
4. Generate a list of all trademarks that are involved in licensing transactions. Include the following information: provide copies of the agreements, are the rights transferable or assignable? Are consents necessary? What are the termination dates? How is quality controlled? Are there any restrictions or limitations? Are there any non-compete obligations? What are the revenue streams or license obligations associated with each license?
5. Define relationships with any related companies (i.e. owned versus controlled rights)
6. Develop a list relating trademarks to products sold by the target and vice versa.
7. Is there a formal structure for inventorying and/or managing company trademarks?
8. Identify the company’s procedures for selecting, clearing, using, and protecting trademarks, including the procedure for deciding whether or not to seek registrations.
9. Does the company have procedures in place to ensure the trademark maintenance payments are made on time? (Is the company delinquent on the payment of maintenance fees for any key or important trademarks?)
10. How has the company enforced its trademarks in the past? What is there trademark notice policy?
11. Are there opportunities to increase the trademark portfolio protection by seeking additional trademark protection?
12. For acquired trademarks, have all the appropriate individuals assigned their rights in the trademarks to the company?
13. Does the target company have any security interest in any non-company trademarks? (Are all rights in the security interest assigned to the target company? Exclusive rights?)
14. Does any other company maintain a security interest in any of the target company’s trademarks? (Are all rights in the security interest assigned to the target company? Exclusive rights?)
15. Has any other company contested the validity of any trademark? Results?
16. Are there any searches, conclusions, reports, or opinions, whether internal or external, that the target company possesses concerning the validity of its trademark registrations, the scope of rights, geographic limitations, expansion restrictions, infringements of its trademarks by others, or the infringement of third party trademarks by its activities?
17. Identify all litigation involving the trademarks and provide copies of complaints, answers, judgments, and settlement agreements.
18. Gather correspondence to or from the target company inquiring about a possible license or the status of a trademark registration or application.
19. Have searches of domain names been completed to determine whether the domain name containing all or part of each trademark is available?
20. For those trademarks that have not been registered, what is the likelihood of a successful registration? Consider the marks distinctiveness, similar uses of the mark, and the extent to which the mark distinguishes goods.
21. Has the company in any way caused any of its marks to lose their significance?

IX.  Trade Secrets 

1. What is the target company’s definition of a trade secret or know-how?
2. How is it protected as a trade secret or know-how?
3. List company trade secrets in as much detail as possible, including the following: computer software, customer lists, proprietary technologies, processes, others.
4. Is the trade secret or know-how tangible or intangible?
5. Generate a list of any trade secrets that are part of the licensing transaction, including the following: provide copies of the agreements, are they assignable or transferable? Are consents necessary? What are the termination dates of the licenses? Are there any other restrictions or limitations?
6. How has the company enforced its trade secrets in the past?
7. Identify all litigation involving trade secret disputes and provide copies of complaints, answers, judgments, and settlement agreements.
8. Identify the target company’s document retention policy.
9. For each type category of trade secret, describe the steps taken to preserve and protect company trade secrets (consider employment agreements, exit interviews, faculty security, etc.)
10. Identify the target company’s procedures for approving release of information in marketing materials, technical publications, at seminars, etc.
11. Does the company have policy or system in place for marking confidential or proprietary information as such
12. Is company software identified as a trade secret? If not why not?

X.  Copyrights 

1. Generate a list of all copyrights owned by the company, including the following: description of the copyright, registration status, maintenance fee status, counterpart foreign and US copyrights, available extensions and dates, origin, other.
2. Generate a list of all copyrights are involved in licensing transactions, including the following: provide copies of the agreements, are they assignable or transferable? Are consents necessary? When are the termination dates? Are there any other restrictions or limitations? Identify any revenue streams repayment obligations associated with each license.
3. Identify any agreements with copyright “blanket permission” organizations (i.e. ASCAP, BMI, CCC, etc.)
4. Define relationships with any related companies (i.e. owned versus controlled rights).
5. Generate a list relating copyrights to products sold by seller and vice versa.
6. Gather copies of all corporate policies on use of copyrights.
7. Identify the company’s procedures for identifying copyrightable material, clearing, using, and protecting copyrights, including procedures for deciding whether to mark materials and/or filing registrations.
8. Have there been any modifications of any original registered copyrighted work? Explain.
9. Develop a list of all copyrighted work that was developed in a clean room environment and gather the documentation related to the clean room effort.
10. For all copyrights generated through work for contractor was involved, has the contracted assigned their rights to the copyrights to the company (especially important in software development efforts).
11. Is all company software copyright protected? If not, why not?
12. Does the company have any security interest in any non-company copyrights? (Are all the rights in the security interest assigned to the target company? Exclusive rights?)
13. Does any other company maintain a security interest in any of the target company’s copyrights? (Are all the rights in the security interest assigned to the target company? Exclusive rights?)
14. Are there any searches, conclusions, reports, or opinions, whether internal or external that the target company possesses concerning the validity of its copyright registrations, the scope of rights, the infringement of its copyrights by others, or the infringement of third party copyrights by its activities?
15. Identify all litigation involving the copyrights and provide copies of complaints, answers, judgments, and settlement agreements.
16. Gather correspondence to her from the target company inquiring about a possible license or the status of a copyright registration or application.
17. How has a target company enforced its copyrights in the past? What is the company’s copyright notice policy?

XI. Other Forms of Intellectual Property 

1. Important in certain other industries may be mask works, genome sequences, and right of publicity.

XII. Licensing Transactions 

1. Identify any licenses that may affect key products and/or services.
2. Do any of the target company’s licenses (licensed in or cross licensed) maintain clauses that would prevent the transfer of IP rights in the case of a buyout, merger, partnership etc. (identify any agreements were rights may change or terminate as a result of sale of the business.)
3. Are agreements assignable? Freely? On notice? With consent? Not at all?
4. Are there agreements whose very existence cannot be disclosed? How to handle?
5. Are there existing payment requirements to individual inventors (existing royalties)?
6. Are their existing limits on plants, capacity, or territory?
7. Do any license out transactions allow the licensee to sublicense without restriction?
8. Obtain copies of all correspondence to or from the target company inquiring about a possible license or the status of a patent, patent application, trademark, trade secret, etc.

XIII. Other Agreements 

1. Gather copies of all agreements dealing with IP rights, such as: research university agreements (rights in inventions, secrecy), consulting agreements (rights in invention, secrecy, non-compete), joint venture agreements (rights in invention, secrecy, non-compete), joint development agreements (rights in invention, secrecy, non-compete), sales or distributor agreements (general or special warranties and/or indemnification against patent infringement), indemnification agreements, tolling agreements (technical information restrictions, and immunity), government contracts (property or data rights clauses).

XIV. Legal Opinions Obtained by the Seller  

1. Gather all IP legal opinions, both in-house and outside counsel. (Include opinions of both sellers own IP in IP rights of third parties) (opinions may include: validity, enforceability, infringement, interpretation of contract rights, or product clearance.)
2. Issue of waiver, community of interest?

XV.  Claims Threats and Suits 

1. List all matters which a claim, threat, or suit is been made by either: a third party against the target, the target against any third parties, inquire about claims and threats that are or were not in writing, include both US and foreign lawsuits, include any settlement agreements, judgments, injunctions, or other judicial determinations.
2. Is the target company currently in litigation related to any IP matters?
3. Is the target company contemplating litigation related IP matters against any other companies?
4. Is the target company aware of any other companies contemplating litigation related IP matters against them?

XVI.  Other  

1. Does the target company have IP legal function and staff currently in place? (How much experience do they have? What type of organizational structure does this department maintained? How heavy is a workload in this department? Are they knowledgeable to handle international IP disputes?)
2. Does the target company have a program in place to monitor for infringers?
3. Does the target company monitor its licenses for compliance?
4. Are there any company prospectuses or business plans available (frequently smaller high technology companies disclose information that otherwise may be confidential and/or a trade secret)?

Example Database, Analytic Outputs, and Search Criteria Supporting Strategic IP Due Diligence

The above checklists help a team engaged in due diligence make sure they have covered all their bases. Asking questions is one thing, finding a quick way to get solid answers is another. The following examples show how items described in the IP due diligence checklist can be investigated and evaluated.

Using databases and patent analytics it’s possible to visualize and evaluate the company, division or unit and post-acquisition IP issues. Key activities and questions are shown in the “Specific Activities and Questions of the Due Diligence Process” figure.

The first question on the list is ”is there technology synergy in the merger?” This can be answered by use of a radar chart of the IPC or US class codes of the proposed merged companies. This is one way to see the technology overlap and synergy that merging the entities would produce.  In the example of the “Patent Technology Coverage” figure, the patent technology coverage overlaps between the three entities shown. The joint venture between them provides a good portfolio in all three areas of interest, surgery, to: laboratory equipment, and drugs.

Another way to view the same information is to use a pie chart. Although this does not show the individual companies contributions it can show the merged company’s core technologies. When compared to the strategic intent of the merger, it identifies technologies to build upon, and which to license out to create more value for the proposed merger.  An example of this is shown in the “Technologies in a Merger’s Patent Portfolio” figure.

Yet another way to look at how technology and products are related and distributed among competitors can be shown in the “Thematic Map of the Merger’s Assignees’ Portfolios” figure.  In this figure the thematic map is used to plot patents according to the subject matter they cover.  Patents that are similar to one another are mapped together and mountains and those that are unrelated to one another are found in valleys or at the four corners of the map. By color coding the patents according to the merged assignees one can see at a glance who owns which part of the landscape. If time size slices are used one can see how the map changes over time as companies may shift their focus from its materials to processes to formulations. It also by color coding shows at a glance which assignees her strongest and materials, formulations processes, or applications.

The next question is “what is the development intensity and velocity within the acquired company”.  This question can be answered by graphing the number of patents in the merged company’s portfolio versus either years to expiration or by year, shown in the “Merged Portfolios’ Patent Velocity” figure.  In this particular figure we can see that in recent years there’s been a greatly increasing number of patents that the merger would hold. This speaks well for the development intensity and business probability that the acquisition would provide future value to the Corporation.

Another question is “is the target company increasing their technology investment versus competition?”  The answer to this question can be visualized in the “Merged Entities Investment and Portfolio Over Time” figure.  In this figure number of patents and applications filed and issued for companies of interest are plotted as a function of the publication date of the document. This patent velocity report can thus look at groups of specific assignees to see the relative patent activity.  In this case national starches continued a steady investment it’s gone up and down as a function of the business cycles. Fuller had a much smaller investment that may appear to be slightly increasing in recent years. Ashland on the other hand was really building their R&D and patenting efforts but then over the last decade pulled out. This chart is extremely informative when assessing merger and acquisition candidate’s strengths and weaknesses. In this case Ashland would not make a good partner as its key inventors and R&D capabilities clearly waned.

Is one thing for a patent portfolio to be large, it’s another for it to be current. Double check this, as shown in the “Remaining Life in Mergers Patents” figure, a plot is made to show how many years remain in the merger’s patents’ life.  This can see be seen in this example.  Most of the portfolio has many years of life left so the merger’s products and services will be covered for years to come. The graph depicts which technologies are young and bring value to the merger, and which are old and due for an audit. Removing older inappropriate art by not paying maintenance fees would be one way for the merger to save money.

Another important element for the merger team to understand is if key inventors are still with the company. An easy way to visualize this is shown in the “Key Inventors” figure.  In this figure the patent in application count for each inventor is rank ordered. As part of the due diligence process it’s necessary to check with HR to make sure that the top 10% of the inventors are still present and would be happy with employment with the merger.  These inventors may be crucial to the merger and the ability to continue to innovate and/or pass on know-how is a crucial negotiation factor.

Another IP due diligence item is to determine if there are joint ventures or partnerships which will impact the merger going forward. A way to answer this question is shown in the “Partnerships Seen Via Inventor Records” figure.  In this analytical display the patent account by assignee is tabulated. In cases where inventors are shown to have assigned their rights to multiple entities, those entities should be double checked to make sure they are not clouding the merger by way of being previous company partnerships.

Another due diligence check is to make sure that all art is at the negotiating table. As shown in the “Time Taken for Patent Prosecution” figure, by plotting the years that it takes for patent prosecution against the year the patent is issued it can be determined the amount of time that a patent application is hidden from public view. The due diligence team should check on art in prosecution and modify the negotiations accordingly, especially if they find if the R&D intensity and direction has changed.

Another quick check for IP due diligence is to determine which patents might have the most value. A good, but not perfect, patent value metric is the number of citations that a patent receives. For due diligence, looking at the patents that have received the highest number of citations is a worthwhile exercise. This is shown in the “Highly Cited Patents Likely Have The Most Value” figure.

Another way to check if the highly cited patents are of interest to potential competitors is to build patent citation trees as shown in the “Patent Citation Trees for Freedom-To-Operate” figure. In this graphic competitors can be color-coded and in so doing they stand out when they surround the merged company’s core patents. These color-coded graphics for right to practice show the uniqueness of the patent and how valuable it might be depending upon the merged company’s business interests.  If the patent is outside the scope of the new merged companies’ business plans, the patent may have an opportunity to be licensed out for royalty payments, thereby mitigating or influencing the value paid for the merger.

The use of patent citation root-trees, shown in the “Patent Citation Root-Trees” figure, can also uncover technologies which might be under exploration by competitors of the merger. Such trees also have the advantage that they show companies that might be interested in sublicensing the art who are not competitors. If this is the case these patents can generate extra cash flow and value for the merger. This information can also be uncovered by specific software search engines programed to search on the basis of citation relationships. Ambercite is one such example.

Finally, using patent to SIC or NAIC concordance codes may identify potential licensees of the proposed merger’s patents.  This can be done as shown in the Identifying “New Market Segments” figure. The concordance results show nonaffiliated business segments that use the same underlying core technologies. This is especially useful in finding potential leads that can generate revenues from assets that will not be used by the merger in its core business areas.

For a single market area it is important to understand how dominant a position a single assignee or proposed merger entity might have in a core business area.  To see this effect an Activity or Dominance Index is used.  This Activity Index = % Company patents in a technology segment within a business segment / % all technology segment patents within a business segment.  This method corrects for different overall levels of company patent activity. It also introduces a defined reference for comparison. The impact on business decision-making is shown clearly as a company’s intent to dominate a chokepoint technology in the key core market.

Another tool used to tie patent activity to business activity is an Event Horizon table.  This is shown in the “Example of an Event Horizon Table” figure.

In this figure significant business announcements are listed down the left-hand column in the order in which they were made, followed by patent filing activity during the same year by industry participants in the right columns. The right-hand columns give a good feel for the R&D and intellectual property investments each competitor is making.  This can be used to understand the significance of the business announcements. There are times when these announcements are clearly defensive in nature and other times they are offensive, where the participants hope to accelerate their position in the market. It substantiates those announcements where people are walking their talk versus those that are just puffing. Since top management teams often are aware of these competitive announcements, this help them understand which ones they should believe and focus on and those which they can safely ignore in their own strategic thinking.

IP tools used for answering due diligence questions have varied over the years and will continue to evolve.  With each iteration they become much more effective and efficient at saving time and inspiring thinking for better decision-making. Using analytical tools to create a visual display of information saves valuable time during the due diligence processes. Such pictures help quantify the unknowns in areas needing further investigation quickly. They also uncover from time to time “smoking guns” and/or lead to an alternative deal. All this said, these analytical tools are still no substitute for the human brain; an analyst must continue to think.

Good guidelines to remember when putting together intellectual property due diligence studies is that searches do not tell the whole story. Also remember that IP rights are not uniform from country to country. Before starting it’s important to develop a search strategy that builds on the strengths and weaknesses uncovered in previous due diligence work.

Through corporate name changes, mergers, acquisitions and other transactions, it is often the case that records relating to title of IP in public offices are not up-to-date.  It’s important to consider searches using the names of predecessors.  It’s also important to do enough due diligence to make sure that the rights not recorded in intellectual property offices are included in the study if they will have significant business impact.

For patents, types of searches to be conducted are: an index search; an inventor search; an index search in the names of the competitors; searches in the names of inventors who are competitors key technical personnel; searches of recorded voluntary licenses; searches of compulsory licenses, where appropriate; a state-of-the-art search; a novelty search; and infringement search; a validity search; a search for pending applications, were published; a search for pending applications that have not yet been published; a PCT index search for pending international applications that have not yet international phase; a PCT inventor search for pending international applications that of not yet entered the national phase; a search to identify grants of a security interest against patents and published applications.

The limitation of patent searches include: understanding the PCT filing regime and the limitations as to accessibility of international applications which have not yet reached the national phase; appreciate that pending patent applications may, in some circumstances, not be available for searching.

As a follow-up for patent searches consider the following activities: correlate the information obtained in patent searches with that obtained through meetings with relevant people in the target who are familiar with its key technology; consider other key inventions and proprietary information of the target that might be patented; consider major problems posed by patent or application of the competitor; determine whether the target has complied with its duty of candor to the United States patent office.

For designs the type of searches should include: an index search; an inventor search; index search and the names of competitors; searches in the names of inventors who are competitors key technical people; the search of recorded licenses; a state-of-the-art search; a novelty search; an infringement search; a validity search; a search to identify grants of security interest against applications, patents and registrations.  As a limitation to these types of searches it must be remembered that pending applications are not available for searching.

As a follow-up to design searches consider the following: correlate information obtained in design searches with that obtained through meetings with relevant people in the target who are familiar with its key products and product and packaging configurations; consider other key designs that might be patented or registered; consider relevant information as to the key designs, their creators, and the relationship of creators, whether by way of employment or consulting contract.

For trademark searches consider the following: an index search in the name of the target and all relevant predecessor and related companies; a registrability search; a search of trademark rights of other major competitors; an opposition search; a search for expungement and/or cancellation proceedings; a list of all relevant registrations and applications; a search for documentation relating to security interest recorded against trademark registrations and applications; consider additional searches of sources which may reveal common-law rights, including trade directories, telephone directories, business name registries, corporate name registries and the Internet; consider anonymous inquiries to determine whether problematic third-party marks are in use.

Searches related to get-up/trade-dress should consider: conducting trademark searches for get-up/trade-dress; understanding the different countries treat get-up/trade-dress differently; consider identifying unregistered get-up/trade-dress rights were they exist.

Searches related to domain names should consider: a search for all registered domain names of target and all top level domain registries; a search for all registered domain names incorporating or similar to key trademarks and trade names of the target; identify those registrants of relevant domain names which are actual or potential competitors; identify those registrants of relevant domain names who may be cyber squatters; identify those registrants of relevant domain names in unrelated businesses; identify those registrants of relevant domain names with websites directed to criticizing the trademarks, website, goods, services or business of the target; compare the results of trademark and domain name searches with the activities of target to identify any inconsistencies; determine what additional marks and domain names would be of value to the target; consider the manner in which the trademarks and domain names are used; prepare list of all relevant marks and domain names.

For copyrights to types of searches include: an index search; a title search; and author search; a work search. Limitations of these types of searches are that a copyright for the majority of works including computer software and related documentation is not of record in the copyright office and that applications for registration are also not available for searching.

Other rights that should be considered and searched for vary by region and country. These include moral rights, neighboring rights, database rights, semiconductor chip rights, plant breeder’s rights, personality rights, secured intellectual properties, and products / advertising and packaging.  The method of searching, its limitations, and how to utilize in a business decision for these types of searches is very case dependent. A good source to use in these cases is the “outline of issues for intellectual property and technology due diligence in business transactions” prepared by Blake, Cassels & Graydon LLP.

In conducting IP due diligence, other items related to intellectual property that must be included are: a contract review of intellectual property agreements, secrecy agreements, license agreements, assignments, franchise agreements, distribution and supply agreements, value-added reseller agreements, computer hardware and software support, maintenance agreements, packaging and manufacturing agreements, joint venture and strategic alliance agreements, research and development agreements, government agreements, sponsorship and co-promotion agreements, advertising agreements, employee and contractor agreements, settlement agreements, and information technology agreements. For each of these agreements it’s important to review them for elements the related forms of intellectual property. One needs to consider the restrictive covenants they contain and those that provide exclusivity and territorial limitations.  One must also be sensitive to the liability surrounding issues related to the use of third parties technology and rights when integrating into the recipient’s technology. Another area of sensitivity is whether they contain clauses that will result in changes as a result of a change in ownership.

Protection of Intellectual Assets – Conversion To Protected Intellectual Property Assets

Protecting intellectual assets is often accomplished by converting them into one of four types of intellectual property. The distinction is that intellectual property is an asset class whose rights are carefully defined and if violated can be litigated in a court of law. Intellectual assets on the other hand can be valuable to a Corporation but these rights may not be enforced in court.

From an examination of the corporation’s strategy and the key intellectual asset holdings of the corporation, appropriate protective rights can be identified and a plan for their acquisition and maintenance can be formulated. Among the parameters considered in the protection of intellectual assets are: the nature of the asset, the scope of its value generating capabilities, and the geographic scope of its markets. Having identified these parameters the process turns to formalization of legal rights and other affirmative actions necessary to maintain those rights. This phase of the process is ongoing and includes regular review and updating of goals and strategies, with input from the business, technical and marketing perspectives.

The protection process begins with the identification of existing and desired assets.  They should be identified through the formulation of an overall intellectual assets strategy.  For large organizations this is more typically done by identifying those assets which can protect current and future revenue streams of key products and services the company offers. Remember the 80/20 role. For large organization focusing on 20% of the assets that create 80% of the revenue and profits is a productive place to start.

The nature of the asset determines the type of IP protection:

Form of Protection

It is not unusual for a single product to encompass a variety of different assets, and hence require several forms of protection. For example, a computer software product may include patented technology, copyrighted source code and manuals, and corporate names and symbols subject to trademark protection.

Once the types of assets are identified, their strategic roles are examined and parameters of protection are designed. Tailored protection is then obtained through processes of application and registration. In addition, the firm must undertake other actions necessary to preserve its entitlement to those rights. Both the manner in which protection is obtained and the manner in which its availability may be lost depend on which of the four types of protection sought.

Intellectual Property Portfolio Management Processes

Protection Processes:  The above section addresses the processes by which intellectual assets are created. Coupled closely with their creation is the topic of protection. Since intellectual assets reside primarily in the minds of the company’s officers and employees, it is critical that they be schooled in what intellectual assets are, how valuable they are to the company, and how to protect them. All too frequently intellectual assets are lost because individuals employed by the enterprise lack knowledge of one of or more of these subjects. Several intellectual asset training techniques are available to remedy this situation: (1) employee entrance seminars in which the company’s policies for handling proprietary information or explained to new employees, (2) employee exit interviews in which the limitation on the use or disclosure of the company’s proprietary rights by former employees are detailed, (3) dissemination to employees of manuals explaining their obligations for the treatment of the company’s proprietary information, and (4) ongoing security audits to reinforce in employees their ongoing intellectual asset security obligations.  Elements is some these common protection processes include:

Intellectual Property Brochure/Manual for Employees:   Such a brochure should define all types of relevant IP: patents, trademarks, copyrights, and trade secrets. It should explain the company’s policies, objectives and procedures in relation to IP, including employment agreements, ownership of intellectual property and how employees are to handle information about the company’s trade secrets when dealing with third parties. It also includes detailing the procedures by which the company establishes its patent, trade secret, copyright, and trademark protection. Finally it should provide instructions for managing information about inventions, brands and trademarks and for filing invention disclosure forms and laboratory notebooks.

Employment Agreements:  These agreements should set out the duties and obligations of the employee and the corporation with respect intellectual property.  The agreement should oblige employees to assign to the company all inventions made during their employment which relate to the company’s business. It should additionally direct employees not to disclose to others any confidential information of the company, during and/or after employment with the company. It would also include the confidentiality and nondisclosure restrictions.

Litigation Control and Policies:  Policing unauthorized patent, trademark, copyright, and trade secret use is important because the intellectual property owner can lose the intellectual property if it is not enforced.  Procedures need to be established for the enforcement of IP, such as reporting discovered infringements, writing cease-and-desist letters, procurement and analysis of competitive products, and ultimately litigation. In-house/outside counsel must be involved at every strange. Litigation effort requires extensive commitment of executive and other professional resources within the company once litigation commences and may result in significant legal fees during the course of the case.

Patent and Other Intellectual Property Committees: Such committees are typically made up of R&D and business managers with knowledge of the business and technical areas, along with patent counsel. These committees evaluate invention disclosures and decide on the form of protection to be used (publication to preserve freedom use, trade secret or patent). They decide which invention should be filed in foreign countries and report to management on pending issues. Such committees also typically prioritize the patent applications for law Department.

Laboratory Notebooks for Researchers:  These notebooks establish a record of the inventor’s work, including dates of conception reduction to practice, as well as identification of all inventors of a particular invention. They must have signatures/dates of the inventor and typically at least one or two witnesses. The notebooks also include a reminder that the notebook and its contents are company proprietary. These notebooks are traditionally in hard copy form but today it is much more common to use electronic laboratory notebooks available from multitude of commercial providers.

Patent Invention Disclosure Form:  These forms include a short abstract/description of the invention, including what problem the invention solves, how it solves a problem, and what product or business area may use the invention. It provides the names of the inventors, including nonemployees. Supporting materials including a chronology of key dates related to the invention (included from the inventor’s laboratory notebooks, internal reports and other references).

Filing Patent Applications:  The patent application or prosecution is a formal process, and depends upon the jurisdiction for which the patent sought. Although for small companies trying to save money a patent can be filed pro se by the inventor, this is discouraged. Since patent counsel for prosecution is available globally at many price points and quality levels, it is strongly recommended the patent counsel be used to prepare and prosecute an application.

Trademark Development and Maintenance:  These processes are typically overseen by a trademark committee comprised of business and marketing personnel and trademark attorneys. It’s important to establish procedures to review and approve all new marks to be used by the Corporation. Relevant information to be captured in the intellectual property database should include the proposed mark, the services or products on which the mark will be used, and the timetable for the introduction of those products and services. The committee should also identify the jurisdictions in which trademarks will be sought. Trademark searches are then conducted in those jurisdictions, and assuming there are no potential issues with conflicting marks, the trademark application process should be commenced with an internal law department or external trademark attorney. Once a mark is been applied for and/or utilized, procedures to ensure the company uses each trademark properly (such as using the trademark notice in advertising and labeling and avoiding incorrect grammatical forms of the trademark) is imperative.

Physical Security Processes:  Reasonable physical security must also be implemented to protect proprietary intellectual property.  Among these procedures are: document storage, tracking, filing, and lockup.  Procedures normally should be implemented to protect confidential engineering drawings, specifications, and other documents. Furthermore, enforcing these procedures instills in employees the knowledge that proper protection of proprietary information essential to the company’s well-being.  The flipside of securing proprietary documents is effective document destruction. It does little good to track and control movement of proprietary documents within the company if adequate precautions are not taken when disposing of such documents. Sifting through dumpsters by industrial espionage agents should never be discounted.

Identifying and Organizing Intellectual Assets

In some organizations the effective development and use of innovation and intellectual properties are primary forces driving corporate success and shareholder value. However, many of the same organizations do not have a comprehensive base of information about the intellectual property assets they own, how these assets are being protected, and how they are creating value for the company. By contrast other companies can list their legally registered patents, trademarks and copyrights, but have no easily accessible information as to how those assets are being used in their business. Finally most companies have little information about valuable trade secrets and other confidential business information.

A comprehensive inventory of an organization’s intellectual property assets will address many of the issues listed above. An inventory should identify each intellectual property asset and cumulate relevant tracking and business-oriented information about each asset into a database. The database should also be structured to allow various intellectual property stakeholders to mine valuable intellectual property data and make informed decisions about the strategic position of the company, the organization’s future business direction, product service strategies, R&D and intellectual property development activities. All information contained within the intellectual property database system should be organized to allow intellectual property assets to be group, clustered, and analyzed to better understand the organization’s strategic advantage, comparative competitive positions in the marketplace, and future growth objectives. The resulting inventory database will also provide useful information for evaluating the success of intellectual property management activities.

An intellectual-property inventory database should use commercially available systems as its foundation. Home grown systems usually end up being more expensive and of limited utility over time.  Commercial systems are offered by many different service providers. Some are based on legally oriented intellectual-property docketing systems and others are based on patent searching and analysis software systems. As of 2017, and systems were being offered by Thompson, Questel, Anaqua, CPA, and others. A quick search on the Internet will provide a list of suppliers who solution ranges in complexity and cost. The paramount importance is to utilize a system that takes full advantage of all publicly available information as well as that which is confidential to the company. The latter includes which product lines the intellectual property protects.

Typically the process and building a robust intellectual property inventory database is to identify and catalog various forms of registered intellectual property assets (patents, trademarks, copyrights, trade secrets) contained within existing legal department documents. Cataloging should accumulate business information such as each assets non-technical description, current or intended use and stage of development. Information gathered for each asset may encompass a variety of technical, legal, and business issues, including descriptions, current and intended use, docketing/tracking information, and assessments of potential value. The intellectual property database itself should be identified and treated as confidential and proprietary to the organization.

Content characteristics of the inventory database should: readily identify patents that have value but that are not being used by the Corporation so they can be licensed; allow administrators to easily identify nonperforming assets that can be sold or abandoned; be designed so that it can dynamically reflect and accommodate the strategic direction of the company; provide users of the database with the ability to easily group patents and other assets comprising similar technologies; allow patents to be easily grouped and identified within the technology area as being fundamental versus incremental in nature; allow patents, trademarks, trade secrets to be easily grouped according to technology area, product function, potential uses; have a mechanism to allow users to group intellectual property assets that may be applied to a particular new or existing product or class a product; identify competitors and potential competitors for each intellectual property asset; be designed so that it is easily if not automatically appended with new information from a variety of sources both internal and external; be designed with access control so that only those with a need to know have access to blocks of sensitive information; allows for key patents to identify alternatives to itself for advantages versus disadvantages and the associated costs of each alternative.

It takes a significant amount of organizational time and effort to populate such a comprehensive database. Obviously it’s easiest for new companies to start the process off on the right track as they commence their business operations. For organizations that have existed for a period of time without a comprehensive intellectual property database it’s usually best to start with the list of the legal assets that the legal department has. This list is then supplemented with assets they can obtain from publicly available information. Then for art that business leaders identify as having high value to the Corporation, 80/20 rule, internal and competitive intelligence information can be added to that asset’s database fields. The database can be populated as innovation occurs and is codified into inventions and legally protected intellectual property assets. In addition, the organization’s business objectives can be tied to the intellectual property assets and encoded into the database. This will include analysis of emerging markets of interest to the Corporation, and the Corporation’s competitive position with regard to other players in the market.

Typically after the assets known to the legal department are entered into the database the major elements of completing the process are described below:

Interview managers and other people who are knowledgeable about the operations of the business unit that is the subject of the inventory process. Based on knowledge of the operations the business unit, and discussion with knowledgeable department personnel, assign individual intellectual property assets to the entity which either developed or is using that asset or may use that asset in the future. Note that this means that an individual asset may be assigned to multiple departments, products, or services. Also important is to identify potential trade secret assets by inquiring as to other processes, tools, accumulations of data, knowledge, etc. that are considered to be valuable, unknown to others outside the company and used by the company; and prepare a written description of the potential trade secret and why it is valuable.

For each intellectual property asset identified, confirm that the information is recorded in the intellectual property database including: a unique name for the asset; a non-technical description which describes the problem solved by the asset and how the asset also solves the problem; a unique internal tracking number; date of invention/reduction to practice; docketing information that will allow management to track individual assets through the registration/prosecution process; registration numbers from legally registered assets both US and foreign; patent or trademark first page information such as title, abstract, dates, inventors, etc.; dates when actions are required relative to the legal maintenance of the asset.

For each asset identified, gather and record business information including: what was the business purpose for developing the asset; text of primary patent claim or description; the business unit which is responsible for the ongoing management of the asset; intended use of the asset by product, program, research program, product or service; stage of development of the asset such as research, product development, prototype, commercial product; names of business units, products and services that incorporate or use the asset; how the asset is currently being used in products/services, under development for potential future use, defensive, license, probably will never be used; names of the portfolio or multiple portfolios that the asset should be included in for ongoing management purposes; designation as a core or non-core asset; value assessment of the asset by dollar value range, scale of 1 to 5, etc.; decisions regarding asset maintenance.

To ensure the databases remain current, develop procedures for accumulating the information described above for newly developed or acquired intellectual property assets. It’s also important to develop procedures for a periodic review of the portfolio to enable improved intellectual portfolio management. This is particularly important because individual asset’s use in the business will vary over time. As a result the portfolio should be actively reviewed and updated in business strategy reviews, R&D planning reviews, and asset maintenance reviews.

In summary Kelly Hale reported that Rockwell utilized the following criteria in picking an IP database.

• The database should readily identify patents that have value but that are not being used by the Corporation. These would be good licensing candidates.
• The database should allow its administrators to easily identify nonperforming assets so they can be sold or abandoned.
• The database should be designed such that it can dynamically reflect and accommodate the strategic direction of the company.
• The database should provide access to the costs associated with maintaining the portfolio and individual assets.
• The database should provide the users with the ability to easily group patents comprising similar technologies.
• Within a technology area, patent should be easily grouped and identified as being fundamental versus iterative in nature.
• Where a particular asset is iterative in nature, it should be easily grouped with patents that are fundamental within the same technology group.
• The database should have a mechanism to allow its users to group patents that might be applied to particular product or class of products.
• The database should identify competitors and potential competitors for each patent.
• The database should be designed so that it is easily if not automatically appended with new information from a variety of sources.
• The database must be designed with hierarchy access control, so that only those with a need to know have access to sensitive information.
• Each patent should identify alternatives to itself and the associated costs of each; advantages versus disadvantages.
• The database should be a constantly updated and interactive source of information on individual assets.
• Procuring the information required for the database with sad little or no extra burden to the inventors or to their management.

Patent Portfolio Assessment Processes

The purposes of assessing a patent portfolio is to ensure that a corporation drives full value from the technologies and intellectual properties that it owns. Extracting the optimal value from technology requires a company to know, first of all, what technology they own and how much it is worth in the market. This is a difficult thing for technology company managers to wrap their arms around sometimes. Companies may not need all the technology they have, but somebody in the world might, someone who either can pay for it by licensing it from the company, or provide a source for financial write-off.

Companies undertake a portfolio mining process to find and exploit business opportunities inherent in their intellectual property. The process of studying the intellectual property can also suggest better business practices within the company, leading to more effective utilization of R&D resources and a tighter link between the company’s technologies and future trends in the marketplace.

A portfolio assessment or portfolio mining project begins with determining the objectives of the study and ends with the specific steps required to realize value from identified opportunities. Final recommendations can include enforcement, licensing, donation, strategic partnering, termination, or a combination of these activities. As in any mining expedition, the expected revenues impossible to predict ahead of time: it could be large, modest, are not worth the trouble to pursue. Whether the opportunities turn out to be significant or scarce, managers can use their knowledge of the company’s technology strengths and weaknesses to make business decisions informed by the value of intellectual property.

Patents are the most tangible and often the first intellectual property to be recognized and evaluated by a company. But they are by no means the only enough actual property they can make money. Methodologies discussed in relation to a patent portfolio often apply as well to trademarks and know-how.

More effective internal use of patents is usually the reason a company undertakes a portfolio mining process. But in addition the company may discover opportunities to: enforce patents against infringers(companies that are using protected technologies either deliberately or unwittingly); license out technologies that have value to other companies; seek complementary technology in order to round out a group of holdings; establish a strategic partnership with another business entity better positioned to exploit a given patent or technology; define standards or contribute to the establishment of standards; donate technologies to a charitable organization; abandon patents that serve no business interests.

In the “Portfolio Mining Flowchart” figure the traditional portfolio mining process is outlined which uses a team of subject matter experts and a patent committee for its execution. This works well for small companies or those with less than 50 or so patents. For organizations with larger holdings it’s beneficial to use automated methods to organize and select patents that belong in various groupings.

In order to conduct a portfolio mining project using subject matter experts, it is best if for each patent asset it has the completed form shown in the “Patent Questionnaire” figure filled out and in the patent database. Difficulty in using such questionnaires is the need to have them constantly updated. The advantages of using automated systems is that since they utilize worldwide patent databases the relative rankings and value of each patent is updated in real time.

Using either the subject matter expert or automated methodology, the patents in the portfolio are then ranked based on their title, patent abstract, main claim, age, citations, in the context of the technology and markets. The patents are then assigned a rank of 1, 2 or 3, including a brief explanation of the ranking when done by subject matter experts. The “First Past Evaluation Criteria” figure shows how the ranks are assigned.

The “Invention Evaluation Matrix” figure shows a two-matrix scoring of a patent’s value useful for ranking patents.  The anchored scales for the matrix elements are especially well suited for summarizing subject matter expert opinions. Once this is done, all patents are plotted as shown on the “Portfolio Evaluation Matrix” figure so the team can present to others a summary of their portfolio’s strengths, weaknesses, opportunities and threats.

For entities with patent portfolios numbering between ten and a hundred, a one-page summary of each key patent can be most helpful to patent review committees and IP managers.  Such reports were championed by Harry Gwinnell.  The one-page summary is an organized visual display of a patent relationships to Raw Materials, Processes of Making Products and Uses.  It has an area devoted to Competitive/Complementary Technologies, a Technology Tree, and the Company’s Position vis-à-vis the State of the Art Position.  Thus the “Patent Evaluation Map” figure has sections for the identified set of from material categories, identified set of components categories, identified set of process step categories, and identified set of use categories. The display also contains a brief abstract of the advance the patent really represents compared to the state-of-the-art, and the legal entity owning the patent. The advantage of this display for smaller portfolios is that enables a team to get their brain around an entire technology area in minutes and enables them to understand where particular patent fits into that technology area in seconds. It’s like a technology textbook for that area of technology and is thus a tremendous timesaver. When put in electronic form it is conveniently searchable

This first pass selects patents for further review, as well as candidates for potential maintenance savings. An internal patent assessment is recommended before any patent is dropped.

Patents in technologies and make the first cut are then subjected to increasingly fine levels of review.  The “Patent Evaluation Process” figure shows how the patent process starts with hundreds of thousands of technologies and ends up identifying actionable opportunities.

The process is iterative, rather than linear. The exact steps vary depending upon the nature of the opportunity and the company’s goals. Generally during the second and subsequent passes through the portfolio, research is based on an examination of the full patent rather than just the abstract or title. The team refines the potential applications and markets for the technology and identifies additional ones. Ideas are discussed with the inventors.  The team continues to sort and clarify as needed.  The evaluation team analyzes competing products, examines cited patents, and identifies non-citing relevant patents to evaluate possible blocking technologies. A literature search provides additional background for evaluation.

A brief report on each opportunity is produced, describing this technology and identifying a potential customer for the patent. The customer could be an infringer, licensee, partner etc. Technologies are assessed from the customer’s point of view. The team tries to determine why the other business entity would offer the patent owner money for the technology, whether the technology in question offers advantages over competing methods if any, and whether the size of the effect of market justifies action. Predictions are made to determine what steps are needed to get to the point of a deal or litigation. Clearly this process works best for small patent portfolios as was mentioned earlier. For larger portfolios an automated process makes the most sense.

Yet another effective way of assessing the business and commercial value of patents is to assign each patent to a business unit that either is already using the patented technology in its products or intends to use the patents in the future. The results can be displayed as shown in the “Patent Use Map” figure.  This figure is a grid map in which the business units are grouped along the vertical axis according to their growth rate compared to a country’s GDP, and along the horizontal axis the patents are grouped according to whether they are being used in a unit’s current operating plan, in a future strategic plan, or no plan at all. Patents that are essential to a high-growth business unit are far more valuable than patents that are used merely in middle-growth units, for obvious reasons they are key to a venture that could bring in more profit. You now have basic map that broadly outlines which patents have the greatest and most direct commercial value, those which might be more suitable for licensing to generate revenues, and those which can simply be abandoned to reduce maintenance costs.

This “Patent Use Map” method in visualization is particularly good for intellectual property managers and those in R&D or engineering organizations. Some CEOs also understand the matrix but perhaps a better visual form to use with CEOs is the four quadrant matrix that is typically taught in top business schools and normally associated with “Cash Cows” and “Dogs”. The “Golden Cow Matrix” figure shows this intellectual property variant. Because it is visually close to the one most executives are familiar with, it is sometimes a better communication tool.

In this model Cash Cows represent IP with potential to protect the current commercial technology generating cash flows. As such, a cow’s potential should be quickly assessed. If several cows are protecting the same products, consideration may be given to cutting some of the weaker cows by converting them to Question Marks (especially were financial considerations dictate). Competitor’s product should be monitored to detect potential infringers. The aim is to have at least one Cash Cow per product.

Shooting Stars are IP with the potential to protect newly developed technology expected to be commercialized in the near future. Shooting stars should be seen as cash cows of the future. A “file early, file often” strategy may be followed. However, this should be combined with a “review often and abandon if necessary” strategy. In this regard new filings should have a clear business aim and timeline for assessing the continuing value of an invention. Preferably new filings should be integrated into the project management process, with go/no go decision points provided before at least a 12 month PCT filing, 18 month publication deadline, and 30 month national phase entry marks from the initial filing. The default position for Shooting Stars is to “file early and often”; “review often and abandon if need be”. Convert or abandon applications and patents if invention does not potentially protect a commercial product within 30 months.

Question Marks are IP with potential to provide strategic value, such as excluding competitors from using alternative technologies. They’re not directly linked to the protection of proposed or existing product or process. As such, the value of the Question Mark should be regularly reviewed to ensure that the costs incurred by the Question Mark are justified by its perceived strategic value. Strategic value may exist if the Question Mark acts as a deterrent while the application is still pending by creating a potential third party right against competitors. Alternatively, the Question Mark may be used prevent competitors from using cost-saving technology with a different technology platform. In either case, strategic value is likely to be maintained even if the country scope of protection is reduced. The default position is to attach a business case for each family. Review value against the business case regularly (especially when costs are to be incurred), and move forward only in a reduced number of selected jurisdictions.

Finally dogs are IP with no strategic fit within the patent portfolio (I. E., Not linked to a current or future technology with no strategic value to the company). Dogs should be disposed of with minimal cost. If the dog has a strategic fit with another business unit internally, it may be transferred. If the external disposal through sale or licensing is considered, the dog should be reclassified as a Question Mark, with a fixed time horizon for external disposal set. If transfer of the Dog is not possible, it should be abandoned. The default position is to limit the amount of resources allocated and not let the Dog distract from the main strategic focus. If in doubt get rid of it.

Within the desirable Cash Cow portion of the figure, David Lambourne argues that there are four subcategories useful for executives’ decision-making process. Those are shown in the “Subcategories of Cash Cow” figure. In this model the Paper Cows (representing what was traditionally called paper patents), Plastic Cows (which are applications that have a good chance of being issued), true Cash Cows (which are enforceable against others), and finally Golden Cows (which provide both an ability to exclude others as well as derive external licensing revenue streams). For product needing intellectual property support it’s desirable to convert paper into Plastic Cows. Further, for strategic reasons, it may be desirable for at least one of the cows to be expedited into a Cash Cow, and if possible onto Golden Cow if the claims are broad enough to cover products outside the company’s area of interest.

Another way to classify patents is based on the classifications of technologies that they protect. In the “Classification of Technologies” figure, developed by Neste, the patents are first separated by whether or not they cover existing or pre-commercial products. Then they are further divided by what the ownership arrangement is for the patent, and subsequently the stage of commercial exploitation in Neste’s business units. These segmentations allow a team of subject matter experts to more quickly categorize what form of commercial exploitation will be used through IP technology transfer.

For an automated process, the overall steps in the above methods are used except that patent portfolio and technology/market comparable patents are both used to segment the company’s patents by category based on the technology/markets they serve and the size of the company’s position in that technology/market segment.  An example is shown in the “Patent Portfolio Segmentation” figure.

To circumvent the shortcomings of the subject matter expert valuation schemes, the automated methods take into account the five different business uses of patents. This multistep, multiple viewpoint process ensures that no patent is unnecessarily maintained, licensed or discarded.

The process outline is as follows:

Segment the overall portfolio into groups appropriate for using best practices in intellectual asset management:

Software enhanced segmentation by technology subdomain is used to break-up the portfolio into groups that correspond to pure-play IP game management practices.  These groups are then further segmented into five sub-segments for fast, high-quality decisions:

1. A core technology portfolio to maintain and control internally for its ability to exclude others, protecting and sustaining the company’s advantaged commercial position in the marketplace
2. Core and supporting technology portfolios to keep and control internally for their potential use in FTO counter-suit negotiations
3. Portfolios to use for licensing-out for added revenues. Either “stranded technology” art to be licensed to anyone or “supporting technology” art to be licensed selectively.
4. Unused and unusable portfolio art to prune for cost savings
5. Emerging strategic portfolio art to be developed to protect new ventures’ and business’ ability to exclude others and to attract key development partners

For art that is segmented into areas in which the core technology portfolio is likely to be used for exclusion of the company’s competitors, the strength of that art is assessed against other art in those specific markets using patent portfolio metrics. In the “Patent Portfolio Metrics” figure areas related to technical prowess, IP prowess geographic breadth, and ability to counter attack are assessed.

The primary purpose of patents obtained and held by for-profit corporations is to ensure a sustained advantaged position for the products and services they offer in the marketplace. Honorable competitors scan one another’s patents and published applications looking for new opportunities to exploit themselves in a way that does not violate the IP rights of others.

In a company’s existing patent portfolio, core technology portfolio(s) are kept for their ability to exclude others from introducing similar products that would erode their hard-won advantaged commercial positions in the marketplace. Typically, these portfolios are being continuously re-energized with new generations of technology and incremental improvements.

Each identified core technology portfolio is evaluated according to the benchmarked management practice metrics appropriate for that core technology’s IP game type. These metrics have been developed, published and validated in hundreds of client and public studies.

Areas in which each core technology portfolio surpasses the benchmark of all entities participating in the core technology area, or falls short, are identified. This can be seen in the “Core Technologies Portfolio’s Relative Strength” figure. Actions to fill the gaps identified by this process are incorporated into the appropriate internal R&D or external licensing-in groups’ strategic and tactical plans.

Knowing the areas in which each core technology portfolio surpasses the benchmark of all entities participating in the core technology area, or falls short, allows for solid IAM planning.

Sometimes, however, if a company has been lax in its strategic planning, or underinvested in R&D or licensing-in activities, it finds itself too short of resources to catch up quickly. In these cases, it is important to focus on the value chain of the company as and assess gaps vis-à-vis entities in the immediate commercial environment first.

The automated process runs evaluations on competitors with the same placement in the value chain, as well as entities who are suppliers and customers of that value chain’s products and services. Since competitors are typically looking for share gains, suppliers for exclusive sales revenues, and customers for price concessions, a company can assess which group to target first with its R&D and IP plans depending upon the company’s own sales, purchasing, and branding strengths. The company should ensure an Integrated IAM plan incorporates all these points-of-view into its action plans.

The next segmentation of the portfolio is into core & supporting technology portfolios that will be used for freedom to operate (FTO) countersuit negotiations.  Not every business environment is filled with honorable competitors. There are times when a company, despite its best efforts, is faced with a lawsuit. The chance of this happening can be determined by looking at the litigation and opposition history is shown in the “Chance Of FTO Suits” figure.

It is important for a company to understand and plan for the possible time and expense key personnel will need to expend to address patent prosecution (such as opposition) and litigation events. As the environment surrounding a company’s core and supporting technology portfolios is continuously changing, a company should conduct quarterly assessments to keep abreast of such activities and the participants engaged in them.

When specific threats are found, preparation for FTO counter-suit negotiations should use the techniques described herein for in-licensing negotiations. The core and supporting technology portfolios are so evaluated for such a purpose, and high-value art (when viewed in this light) is kept in the company’s portfolio as a reserve for this potential purpose.

Many companies are interested in obtaining additional revenues from their patent portfolios by licensing-out their art to others. Licensing Executives Society members have found that a critical stumbling block to these activities is that internal licensing groups must first obtain permission to license from business unit’s general managers. These GMs are appropriately concerned that licensing-out any technology might jeopardize the protected advantaged revenue and profit streams they now enjoy.

To alleviate this valid concern, it is typical that only two business use types be subject to licensing-out activities. (1) Stranded technology portfolio art to be licensed to anyone, and (2) Supporting technology portfolio art to be licensed selectively.

Using the technology subdomain segmentation first conducted on the company’s portfolio, those supporting and stranded portfolios are quickly evaluated for probability that the licensing-out activities might produce a positive return to the company. Key overall factors evaluated for this purpose are shown in the “Portfolios For Licensing-Out” figure. If the portfolio possesses a sufficient number of promising patents by this analysis, a detailed licensing transaction study is performed.

Although newspaper headlines tell a different story, with litigation in the forefront, the fact remains that most IP is created with the idea of keeping competitors out of the market while the inventor or employer builds a business around the inventors’ inventions. For most corporations, patents act as a deterrent against honorable competition, not against patent trolls or non-practicing entities (NPEs). When this is the case, a high value activity when managing the company’s portfolio is to remove or prune art that does not serve the primary business need.

Pruning is important because over time technology that was originally patented as novel and unique slowly matures. As newer features are introduced by R&D or in-licensed by business development, the older patents hold less and less commercial value. A product feature or manufacturing process that the patent protects slowly moves from unique to a commodity. When this happens the need to retain patent protection diminishes. There is no need to pay fees to maintain such dead-weight art.  For an older portfolio in a non-court technology/market area the “Unused and Unsuitable Portfolios” figure shows a typical distribution of patents that could be available for pruning.

Assuming that sustaining an advantaged competitive position is the key value patents are bringing to a company, an effective and efficient way to quickly determine which patents in a portfolio that are likely dead-weight and not contributing to a corporation’s profits is the following: take the small portfolios derived from the first segmentation described above and calculate for each patent or application in this portfolio the following measures. These are shown in the “Candidates to Prune” figure and include: (1) the priority date of the patent, its family size, and percent of the patent family that is alive, (2) the number of forward citations and the average number of citations per year, (3) the presence or not of a predator or shark, (4) the generality and originality scores of the patent, (5) whether or not the patent is been validated by litigation, opposition, re-examination, (6) the number of company’s own patents that have cited the patent and or have been referenced by it, and (7) the total number of claims, and number of independent claims.

Although there are many more measures that can be used to assess value, these measures have been found from working with practitioners worldwide to be among the measures that most quickly determine which patents should likely be abandoned. By rank ordering patents (smallest scores on each measure to largest scores), the art which should be pruned is efficiently identified. The lists are fine-tuned for specific industry segments where it is known from subject matter experts that one measure is more or less relevant than the others.

Patents appearing at the top of the list, those with small families and not cited by other entities, are prime candidates to be pruned or abandoned. The logic is when a company obtains or has a patent that is a valuable asset protecting commercial products or services, the company typically files a patent portfolio in many countries and continues incremental R&D to further build out the technology. This results in many family members and many self-citations and references to other company patents.

When a company chooses not to file patents in other geographies, the family size stays small and there is no follow-on work. These are sometimes called “inventor recognition” patents, where the idea might be good technically but the commercial value of the invention is low. In such a case, the feature that a patent is protecting is not important to consumer purchasing behavior. It can also be that the relative cost of producing such a feature has been improved upon by others and the patent over time no longer protects an advantaged cost position. In either or both of these cases, the patent is not protecting the advantaged product position the company desires. Since no advantaged position is being protected, the commercial value of the asset is nil and to maintain such an asset is not a good business practice. Thus, the patents at the top of this list are the ones to stop payment of maintenance fees.

How far down the list a company should go in considering patents for abandonment often depends upon how diligent a company has been in keeping its patent portfolio current. For portfolios that have never been put through the scrutiny of a patent management process or where the process is not been rigorous for five or more years, companies have traditionally found that up to 20% of their total portfolio can be abandoned. This is hopefully the exception. Most companies are diligent in their patent management and in these cases experience has found that on the order of 5% to 10% of the patents found at the top of the listing are the only ones suitable for pruning.

Once the patents at the top of the list of have been selected for pruning, they should be reviewed for their business use by subject matter experts. Such a review corresponds to the columns shown in the first figure above. The reason this step is put off until this point in the process is that now the number of patents to be considered for pruning should be quite small.

The best group of individuals to get together for this final audit are those familiar with the technology, manufacturing, distribution, and sales of the product and service. Personnel often consist of a research fellow or “gatekeeper” from R&D, an engineer from manufacturing, and a representative from business development or marketing. Looking at the patents one by one, it has been found that a group of senior people can determine a patent’s business use in a matter of seconds. It is not uncommon for teams to agree on business uses at rates of 100 patents per hour. Since the patents are likely of low value it is relatively easy to confirm that the patent cannot be used (1) for barter or trade in a freedom to operate negotiation, (2) to exclude current competitors from an advantaged business position, or (3) for out licensing, cross-licensing or industry/government standards activities.

In mature markets, the degree of commercial advantage that a patent provides is sometimes slight. Even a group of senior managers can be uncertain of their decision. In such cases, it is important that the business development or marketing executive present knows the sales revenues and profits for each of the business lines that the patents have been assigned to. If that business line has significant revenues and/or profits, then you can be assured that competitors will be trying to fast-follow the company’s position. In this case, it is better to err on the side of keeping a patent rather than abandoning it. Such Patent/Product/Revenue data is often available in the company’s financial and business databases as shown in the “Patent/Product/Revenue” figure.

When the audit is completed, fees are no longer paid on the patents selected. For patents that might be helpful in out-licensing, cross-licensing, or other business uses, those assets are passed along to the appropriate licensing or regulatory groups. For art that is supporting profitable high-growth products, it is also key to ensure that R&D and business development groups build out appropriate patent fences and patent families.

Emerging strategic portfolios are developed to protect new ventures’ and existing business’ ability to exclude others, and sometimes to enhance the ability to attract key development partners. In this situation, it is typically too early to knowledgeably assess a patent or embryonic portfolios’ value to the company. Such patents are best quantitatively evaluated on their fit with strategic technology readiness or embryonic business venture plans. They are also qualitatively evaluated by thoughtful assessment of their likely business use and IP role. By putting invention disclosures, patent applications and granted patents on a complete company’s IAM grid, over- or under-weighting of patent investments can be visualized as seen in the “Emerging Strategic Portfolio” figure.

As strategic plans turn into capital expenditure requests and operations plans, the embryonic portfolios can then be assessed by the best-practice methods described above.

Summary:  In this section on portfolio management, the primary use of patents was assumed to be their role in sustaining an advantaged competitive position. In some industries, this is not the case.  For companies whose business model is specifically out-licensing, or when a company needs a large and active patent portfolio to influence regulatory or industry standards bodies, the need for patents to do so is different than described above.

Knowing the priority of the five business uses of intellectual property for each industry segment is important in selecting the right portfolio pruning criteria. Guidelines for the best patent family and portfolio criteria vis-a-vis industry segment can be found in the intellectual property game matrix developed by Intellectual Assets, Inc. This high level view is a good starting point in understanding which industries can best use the portfolio management techniques described above.

As mentioned before, a single patent may have value for only one of the five business uses, but more typically they have value in multiple areas. It is this complexity that makes portfolio management an exercise best done with extensive software support and professional guidance.

Variations In The Law And Practice Of Intellectual Property Law Across A Variety Of Jurisdictions

Although the practice of intellectual property is generally constant around the globe there are important differences between specific countries. An excellent guide highlighting those differences and commonalities was put together by Gordon Harris of Gowling WLG and published on the in-house lawyer website (see References for link). 20 major intellectual property jurisdictions are highlighted.  These are: China, France, Germany, Greece, India, Israel, Japan, Mexico, Philippines, Portugal, Singapore, South Africa, Spain, Sweden, Switzerland, Turkey, UAE, Ukraine, United Kingdom, and the United States.

For each of these jurisdictions answers from 32 categories of questions are provided. These 32 general areas were:

1. What different types of intellectual property rights exist in this jurisdiction to protect?
2. What is the duration of each of these intellectual property rights? What procedures exist to extend the life of registered rights in appropriate circumstances?
3. Who is the first owner of each of these intellectual property rights and is this different for rights created in the course of employment or under a commission?
4. Which of the intellectual property rights described in questions 1-3 are registered?
5. Who can apply for registration of these intellectual property rights and, briefly, what is the procedure for registration?
6. How long does the registration procedure usually take?
7. Do third parties have the right to take part in or comment on the registration process?
8. What (if any) steps can the applicant take if registration is refused?
9. What are the current application and renewal fees for each of these intellectual property rights?
10. What are the consequences of a failure to pay any renewal fees and what (if any) steps can be taken to remedy a failure to pay renewal fees?
11. What are the requirements to assign ownership of each of the intellectual property rights described in questions 1-3?
12. Is there a requirement to register an assignment of any of these intellectual property rights and, if so, what is the consequence of failing to register?
13. What are the requirements to license a third party to use each of the intellectual property rights described in questions 1-3?
14. Is there a requirement to register a license of any of these intellectual property rights and, if so, what is the consequence of failing to register?
15. Are exclusive and non-exclusive licensees given different rights in respect of the enforcement of the licensed IP, and if so, how do those rights differ?
16. Are there criminal sanctions for infringement of any intellectual property rights, and if so, what are they and how are they invoked?
17. What other enforcement options are available in your jurisdiction for each of the intellectual property rights described in questions 1-3? For example, civil court proceedings, intellectual property office proceedings, administrative proceedings, alternative dispute resolution.
18. What is the length and cost of such procedures?
19. Where court action is available, please provide details of which court(s) have jurisdiction, how to start proceedings, the basics of the procedure, the time to trial, the format of the trial, the time to judgment and award of relief and whether any appeal is available.
20. How does the court acquire any necessary information (fact or technical) and in what circumstances does it do so?
21. How is information and evidence submitted to the court scrutinized? For example, is cross-examination available and if so, how frequently is it employed in practice?
22. What customs procedures are available to stop the import and/or export of infringing goods?
23. Are any non-court enforcement options or dispute resolution mechanisms mandatory in respect of intellectual property disputes in any circumstances? If so, please provide details.
24. What options are available to settle intellectual property disputes in your jurisdiction?
25. What is required to establish infringement of each of the intellectual property rights described in questions 1-3? What evidence is necessary in this context?
26. What defenses to infringement are available?
27. Who can challenge each of the intellectual property rights described in questions 1-3?
28. When may a challenge to these intellectual property rights be made (e.g. during any registration process or at any time during the subsistence of the right)?
29. Briefly, what is the forum and the procedure for challenging each of these intellectual property rights and what are the grounds for a finding of invalidity of each of these intellectual property rights?
30. Are there any other methods to remove or limit the effect of any of the intellectual property rights described in questions 1-3, for example, declaratory relief or licenses of right?
31. What remedies (both interim and final) are available for infringement of each of the intellectual property rights described in questions 1-3?
32. What are the costs of enforcement proceedings and is any kind of costs recovery available for successful parties? Is there a procedural mechanism enabling or requiring security for costs?

As an example of the different types of intellectual property rights that exist in the China jurisdiction are:

(a) Inventions (e.g. patents, supplementary protection certificates, rights in confidential information and/or know-how); Invention patents, utility model patents, rights in confidential information and know-how as trade secrets.

(b) Brands (e.g. trademarks, cause of action in passing off, rights to prevent unfair competition, association marks, certification marks, hallmarks, designations of origin, geographical indications, traditional specialty guarantees); Trademarks and certain brand related actions pursuant to the Anti-Unfair Competition Act.

(c) Other creations, technology and proprietary interests (e.g. copyright, design patents, semiconductor topography rights, plant varieties, database rights, rights in confidential information and/or know-how). Copyright, design patents, semiconductor topography rights, plant varieties, and rights in confidential information and know-how as trade secrets.

Thus for different jurisdictions the rights available, how they may be secured, how they may be maintained, and how they may be enforced vary.  When considering securing intellectual property rights in various jurisdictions it is strongly recommended that a local resource be consulted.

of course cost is one of the most fundamental considerations in making foreign filing decisions. Failure to accurately evaluate this cost leads to two different errors: (1) underestimating the cost and committing to a strategy that is too expensive for the company to sustain, and (2) overestimating the cost and foregoing valuable protection. Either error can have devastating consequences. As with the patent cost portion of the evaluation, it is also important to consider the relevant market in assessing the value of a patent investment. A simple way to do it on a country by country basis is to use the Purchasing Power Parity adjusted by the Gross Domestic Product. This ratio is a rough estimate of the market to be accessed in a specific country. World-wide cradle-to-grave patent costs for pharmaceuticals of around $2.5 million, divided by the purchasing power provide a rough estimate of the relative value of each dollar invested in a particular country. This approach does not naturally, take specific country industries and markets into consideration, but the factor provides high-level guidance for foreign filing strategy.

Countries in the “Global Patent Strategy Matrix” figure are listed with their total cradle-to-grave patent costs in order from top to bottom (both on the matrix as a whole and within each cell) in order of increasing Market Access Score, and left to right in order of Decreasing Enforcement Probability.  Countries are ranked for patent investment value by dividing the cradle-to-grave cost of protection by PPP-GDP and separated into quartiles. Each country is listed with its cradle-to-grave budget estimate in thousands, and each cell includes a total cradle-to-grave budget for all countries in the cell. Countries are ranked for protection value according to the categories of the U.S. Made Representative’s 2005 Section 301 Report. The countries in the top-left cell have the greatest value and the greatest predictability.

Thus, according to the cradle-to-grave cost divided by the purchasing power parity adjusted gross domestic product analysis, the United States represents the best value for patent cost investment, followed by the United Kingdom, Japan, France, and so on. For a protection focused strategy, filing would be in the countries listed in the left most column. For a market focused strategy, filing would be in the countries across the top row. For the best balanced strategy of protection versus market access, filing would focus on the cells in the upper left quadrant of the matrix and avoid those in the lower right portion of the matrix.

Variations also exist in IP Law in the Major Jurisdictions.  Some examples are:

Variations in United States

Exhausting patent rights – Agreements that only release liability for past sales, but did not retroactively authorize such sales, did not exhaust patent rights, and does not protect downstream resellers from being sued for infringement.

Terminating litigation – A covenant not to sue may not terminate a litigation if the covenant does not extend to customers.

Joining a lawsuit involuntarily – A majority owner of company accused of contract breach and misappropriation must stay in a lawsuit because of his involvement in the relationship between the manufacturer and the distributor.

Waiving arbitration – A lawsuit seeking an injunction does not waive the right to arbitration provided by an earlier agreement.

Compelling arbitration – A Non-Compete Agreement—not including an arbitration clause— superseded an earlier signed Dispute Resolution Agreement—including an arbitration clause, so the court did not compel the parties to arbitrate their disputes.

Enjoining trademark licensees – A court enjoined a trademark licensee from selling frozen pizza outside the scope of the license agreement.

Violating protective orders – A court can sanction a party for violating the confidentiality provision of a protective order by preventing the party from engaging in licensing activities for thirty months.

Variations in Europe

Transferring a right of termination – An isolated transfer of a right to terminate a trademark agreement may be made without the licensee’s consent.

Enforcing claims of a secured party – A secured party who receives rights from an IP owner is typically limited by the security agreement to rights of transfer and exploitation but not a right of use or right to collect royalties from licensees.

Concluding a license agreement – Under the principle of consensus, a license agreement is only concluded if the subject matter of the agreement, the specific contracting parties, the price and in particular the type of license are already named in the offer or can at least be determined by interpretation.

Customer group restrictions – Supply contract clauses aiming to ensure only the marketing of unmodified original products or products equipped with the manufacturer’s own components are a restriction of customer groups in violation of antitrust law. Under antitrust law such interest of the manufacturer can only be recognized within the framework of the exclusive rights granted by intellectual property rights.

Variations in Japan

Obligation to practice the patent – While an exclusive licensee may have an implicit obligation to practice the patent in some instances, it is possible that failure to practice the patent may also result in no breach of obligations by an exclusive licensee.

Challenging a patent after concluding a patent settlement agreement – A non-dispute clause in a patent settlement agreement had a literal meaning and prevented a party from suing to invalidate the patent.

Preventing parallel imports – Despite having no statutory provisions for parallel imports, Japanese courts allow parallel imports if the trademarks are legally affixed, the Japanese and foreign trademark rights holders are legally or economically identical, and the Japanese trademark rights holder can control the quality of the imported goods.

Variations in China

Since China in particular has become an important and growing business and IP market it must be noted that as of 2019 major changes have been underway in China’s Patent Law. On January 4, 2019, the National People’s Congress in China published the Fourth Amendment to China’s Patent Law. As a whole, the proposed changes addressed a lot of the criticisms people had regarding the strength of IP protection in China. These changes, once implemented, have made China a much more patent-friendly jurisdiction, benefiting innovators worldwide.

Examples of notable changes include (1) a longer patent term for innovative drugs and design patents; (2) litigation reform such as significantly higher damage amounts and streamlined processes for suing infringers; (3) new ways of rewarding innovators for their contributions; and (4) creation of an open-licensing regime to encourage use of patents in China.

Since 2022 the Chinese Courts have been seeking to exercise jurisdiction over the adjudication of the global rates of standard-essential patents by issuing anti-suit multinational injunctions on litigations filed in other countries.

Valuation of Intellectual Assets

Intellectual assets in its various forms (such as patents, copyrights, trademarks, trade secrets, and know-how) can contribute greatly to a company’s bottom line. In many business circumstances, it is essential to explicitly identify and record the value of such assets. Such circumstances arise in the context of a transaction such as sale/purchase, license/cross license, merger, acquisition, or internal corporate transfer. Other times, internal reporting requirements such as equity financing, tax planning and compliance, or charitable giving, makes the precise valuation of intellectual assets necessary. The subject is covered in more detail in Chapter 25, but an introduction is provided here.

A variety of quantitative and qualitative tools are helpful in evaluating intellectual assets.  All valuation exercises should however be undertaken with the knowledge that the value of the intellectual assets emanates from excess benefits it affords the user.

Valuation depends on a sound understanding of the goals of both the owner and user of the intellectual assets. Appropriate valuation tools can approximate the true worth of the asset. In general three types of valuation tools are used to value any type of asset, including intellectual property assets.  The goal of any valuation is for the parties to find a mutually agreeable way to determine and share the enhanced benefits from the intellectual asset. The owner of the technologies entitled to compensation for the portion of the benefits of the invention that are due to the intellectual property. The purchaser is entitled to retain certain benefits derived from the other attributes of the product or process incorporating the technology at issue. The purchaser should also be compensated for assuming the business risks associated with the manufacturing, using, or selling the product embodies a particular technology

Income Approaches

Income approaches appraise the intellectual asset based on the value of the excess revenues or reduced costs that arise from use of the subject technology. Such approaches assign a price based on the level of extra or incremental benefit generated by the anticipated higher volumes, higher prices, or lower costs. Income approaches take various forms.

1. The profit split approach, i.e. the 25% rule where one assigns 25% of the licensee’s expected pretax profits to the licensor. This rule has come under fire over the years but still provides a good starting point especially for manufactured product technologies. As shown in the “Reported Royalty Rates vs. Rates from the 25% Rule” figure, the 25% rule provides guidance between the gross profit margin and EBITDA margin for almost all industries.
2. The incremental income approach compares a profit for the intellectual asset at issue with the next best alternative. The alternative is often times used for commercial products already in the market.
3. The discounted cash flow approach calculates the excess cash generated by the intellectual asset at issue, discounting future flows to the present at the projected cost of capital.

All of these three approaches must take into consideration the reliability of the projections, the owner/user benefit sharing between the parties, selection of the next best alternative to be used in the comparison, income versus cash flow modeling, and the appropriate discount rate.

Market Approaches

Market approaches examine the terms of comparable technology transfers to arrive at a fair transfer price and terms for the intellectual asset under consideration. Arm’s-length transactions between nonaffiliated entities best cover the technology under evaluation. A host of related transactions within a limited price range provide strong evidence of what the market will bear.

The best way to come up with good valuations is to draw inferences of value from information about comparable transactions in the industry, proposed transactions, public firm valuations such as market capitalizations, and stock price movements.  Considerations that add complexity and uncertainty to market valuation approaches are the nature of truly comparable technology, the extent of other bundled intellectual property in the comparables, the comparability of existing and projected market conditions, the existence of cross licensing already between the parties, the relative bargaining strength of the comparable parties, the existence or threat of litigation, and the nature of the firm ownership and owners incentives.

There are many database service providers who provide market comparables for many technologies. The example “Market Royalty Rates By Technology Segment” figure shows a variation in royalty rates by market.

Cost Approaches

Cost approaches are utilized under the premise that a prudent licensee would pay no more for the intellectual property at issue than the cost to obtain, either by purchaser by construction, an exact replica of the subject technology or an alternative that achieves the same function. Two types cost methodologies predominate:

1. Reproduction cost approaches examine the cost to construct or purchase an exact replica of the technology at issue. According to this approach, a licensee should pay no more for the intellectual property then it’s avoided economic costs from the creation of the subject technology.
2. Replacement cost approaches, which are sometimes referred to as design around approaches, examine the costs to construct or purchase an alternative technology that performs the same function as the technology at issue, but in a form or appearance that may be quite different. According to this approach, a licensee would pay no more for the intellectual property than the cost to develop an alternative technology that although different, may be substituted for the technology at issue.

Given this background of the three general methods of valuation, the process of valuation of intellectual assets thus proceeds in several steps:

Step One: Choose An Approach   Optimally, an intellectual asset valuation, just like valuation performed when selling a home, should employ each of the three approaches noted above. Data and information constraints, however, often limit the confidence level of each of the approaches. For income approaches, revenue and profit projections can be difficult to obtain, and can be unreliable at times. Projections frequently are generated by product managers and marketing personnel and intentionally show a very rosy picture in order to obtain corporate approval or outside financing. To temper that, one might benchmark against actual sales, profits, and cash flows, before and after negotiation. One could benchmark the technology at issue from a myriad of other technologies, product attributes, and marketplace factors that are impacting the product and process performance. The associated problem is that it’s very difficult to assess a reasonable profit split percentage. Is 25% fair?  Is 67% fair? And if 25% is fair, why is 20% not? Additionally, determining the project’s cost of capital can pose problems because establishing comparable investments for the technology at issue is often quite difficult because either true comparables don’t exist, or if they do, the information is frequently confidential.

For market approaches, other observed transfers often are not in fact comparable to the case at hand. Important differences may include: the nature of the underlying technology; the similarity of the precise bundle of intellectual property rights transferred (e.g., combinations of know-how, grant backs, and cross licenses); the comparability of existing and projected marketplace conditions at each point of the licensed negotiation; the relative bargaining strength of the comparable licensing parties; the existence and significance of pending or threatened litigation; and the strength of the underlying intellectual asset associated with findings of validity, enforceability, infringement. Nonetheless, a wide range of transactions in a narrow range of prices may provide a very powerful benchmark.

Cost approaches should also be used with care. Avoiding costs can represent a floor in measuring value. An examination of the direct R&D expenditures that were avoided often does not properly account for all R&D. A large portion of R&D projects ultimately bear no fruit, yet the R&D process is in part intended to identify and eliminate blind alleys. In only focusing on successful R&D, one might be ignoring the cost of many other unfruitful projects that the technology user is able to avoid. The alternative design might not provide the same utility or might result in costly development delays, both of which would need to be assessed appropriately and would suggest that the avoided costs alone may undervalue the property at issue. Nonetheless the advantage of the cost approach is that it can be reasonably easy to implement.

Step 2: Applying Approaches   Assuming the availability of adequate data, income approaches often provide the most useful measure of value. Of particular significance is incremental income approach, which compares the intellectual asset covered returns with the returns the next best alternative.  Products or services containing unique intellectual assets often generate substantial excess returns over those that do not.

Step 3: Determining Ultimate Value Though quantitative tools provide evaluation/pricing starting point, they must be used in conjunction with careful evaluation of qualitative factors to ultimately determine fair market value. Those factors are instructive as to a fair split of excess benefits between the negotiating parties. As well, and the actual budget constrained, data run world, qualitative factors often are the real drivers between value and price some of the more common qualitative factors are shown in the Qualitative Factors in IP Valuation Figure.

Thus properly valued intellectual assets can add to the bottom line in both the licensor and licensee when intellectual assets are traded between two parties. Values are driven by the use to which the asset is put. Properly valued intellectual assets also improves the performance of corporations who use their value to determine the true cost of goods sold and contribution of innovation to profits.  When patents are asserted in litigation, Certified Patent Valuation Analyst materials point out that you must make the most powerful valuation argument possible in seeking patent damages. In this scenario, the basic tenets of patent infringement must be taken into account such as: The Georgia-Pacific Factors; The 25% Rule; Entire Market Value Rule; Running Royalty vs. Upfront Payments; Milestone Payments; Cost of Designing Around; Comparable Licenses; Market Spoilage; Convoy Sales; Provisional Damages; and Design Patent Damages.

When looking at large portfolios companies participating in the Gathering 1 network found that the value of patents was log normally distributed. Such a curve is shown in the “Lognormal Distribution Of Asset Values” figure. Further work showed that a typical unmanaged IP portfolio has: 1% of its assets generating 90% of the value; 50% of its assets enable and protect the business (of these only 5-10% are protecting key business lines and half of the remainder should be licensed to competitors within five years of commercialization); 30% of its assets are available for immediate non-conflicting out-license revenue opportunities; and 15% of its assets are best abandoned.

Another way to get a sense of how much art is typically retained for offensive (litigation and dissuading honest competition), defensive (cross-licensing), licensing-out, and barter (ventures) use, as well as how much is abandoned, the following benchmarks are provided.

Benchmarking results by Thom Kobayashi show that companies tend to let roughly equal portions of their portfolios lapse at each of the payment times. Over half of the patents are left to expire before they reach full term. Companies with more resources tend to both file more and retain more of their IP portfolios, where the larger entities retain almost 16% more over the patents’ lifetime.

The “Patent Maintenance History” figure makes it easy to see the average U.S. patent portfolio activity over time. Data at year 2 and year 16 were included by Thom Kobayashi, Senior Patent Analyst at Innography to help illustrate that the population of patents was stable both before the first scheduled fee payment and after the last scheduled fee payment. This stability indicates that expiration for anything other than fee payment is small by comparison.

The blue line shows the percentage drop in the active population, while the orange line shows the corresponding rise in the expired population. This indicates the expected: a relatively stable group of
patents issued with significant portions expiries at each of the fee-payment trigger points. The red line reflects the actual timing of the triggering events, rather than the timing of the data. Note that over half (approx. 54%) of the patents are left to expire before they reach full term. It is interesting that these occurred in three, approximately equal 18% tranches, likely triggered by the three fee-payment events.

The litigated data is presented to contrast the other patent movement. It is useful to see that the scale of litigation (and invalidation due to litigation) is quite small compared to entities simply choosing not to pay fees.

With respect to litigation of patents in a portfolio, the percentage of litigated documents monotonically rises from near zero at year 0 to almost 2% by the end of patent life. Narrow product portfolios vary widely from this benchmark. The “Patent Litigation Frequency” figure shows that rather than having an expected technology “adoption lag” early in the aggregate patent life, there’s an immediate uptick in litigation (about 1%) and a plateau between years 5 and 9. One might expect that there would be a delay in acceptance for something truly new, hence the hockey-stick-shaped graph. In business schools, it is taught that it takes about seven years for something new to be adopted. The same amount of time it takes to go from first funding to IPO — and market saturation for most revolutionary products. If the average of three years prosecution time for a patent to issue is taken into account, the dotted green line drawn over the graph shows this expected seven-year behavior (three years prosecution plus four years delay). Further analysis of the litigated patents shows that almost 80% of these early-litigated patents are continuations or reissues of previously filed inventions.

When the U.S. patent data was filtered by company size, it was found that companies with over $10 billion in sales filed about 10x more than smaller entities with sales <$100 million. Also, as the “Portfolio Preservation by Company Size” figure shows, larger entities also retain more of their portfolios over time: almost 16% more. It is speculated that this might be because (1) of the higher resource level of the larger companies (smaller companies would maintain more of their portfolios if they could), and (2) larger entities have the ability to fund licensing-out activities and obtain value from tangential art that smaller companies don’t.

Extracting Value from IP

The intellectual property portfolio of a company is an excellent source of potential value. In addition to the value an organization can achieve by using intellectual property in its own products and services to generate excess profits, intellectual property can also create value opportunities outside of a company. These strategies a company can use to generate value from its intellectual property are: sale, license out, cross license, joint venture, strategic alliance, spin out, develop new business ventures, donate and take a tax deduction, satisfy offset obligations.

An important aspect of value realization is the appropriate strategy for particular set of intellectual property assets, given the broader business and intellectual property strategies of the company. In other words, can the company extract additional dollars from its intellectual property without harming its current competitive position or adversely affecting its longer term business goals?

For example, if a company concludes that a particular technology is non-core and sees no possible future use of the technology, that technology may be an ideal candidate for sale or licensing to a third party. If a technology is deemed to be a core technology of the future, and the company would benefit from additional resources to develop the technology, the situation may be ideal for joint venture. A spin-out may be a good value realization option for technology that is non-core, but would contribute substantial value as a stand-alone business venture. On the other hand, if the technology is immature, and the company is not interested in developing the technology further for strategic reasons, the technology maybe candidate for donation to a nonprofit research institution or university.

When a company is investigating extracting value from its intellectual property the most discriminating dimensions found for making such a dimension were (1) the duration of the contract, (2) its implications for risk-sharing between the parties, (3) the type of resources exchanged and (4) the associated contractual safeguards. The “Two Most Discriminating IP Transfer Dimensions” figure shows how two segmentation axes relate these four elements.  The “Five Classes of Contracts” figure shows how common contracts and intellectual property transfers map under the discriminating dimensions.  When considering which form to use for extracting value from intellectual property, a company can compare its business strategy elements with these discrimination elements to determine which type of intellectual property transfer will best serve their business needs.

The benefits of a successful value realization process for intellectual property include the following laundry list of items:

Shareholder value is created directly by generating cash or strategic value; all intellectual property assets are reviewed and value realization strategies are developed and implemented, ensuring efficient use of the portfolio; create short-term cash to fund the development of holistic intellectual property management system solutions, reducing the risk in the process; low-cost source of value, ROI on external value realization is high, large impact on bottom line; creates incremental cash which can, for example be used to fund R&D; licensing, joint ventures, donations, etc. create image of technology leadership and solidify competitive position; external value realization early in the technology lifecycle can create industry standards, resulting in tremendous value and leverage; builds internal consensus and enthusiasm regarding the value of managing intellectual property strategically; realize maximum revenues from commercialization and deployment of the intellectual property; find new or innovative ways to obtain cash from the intellectual property; retain some interest in the intellectual property in order to benefit from further development and/or commercialization.

Considerations When Undertaking A Value Realization Process For Intellectual Property

Establish initial focus of value realization efforts based on internal strategy, corporate inventory and assessment of IP; utilize a process to identify assets of high potential value; use a process to identify core versus non-core intellectual property, license only to competitors or non-core applications; timing of potential value realization (time to market, maturity of assets, dependence on third-party IP); having identifiable products, markets and partners; understand fully the potential value of the intellectual property under alternative value realization strategies; consider the ability of the intellectual property owner to get access to dependent technology; the quick value that can be obtained from intellectual property; the sustainable value that can be obtained from intellectual property; consider if value extraction harms current business or is it better to license core technology to expand market; identify strategic goals for the value realization opportunity before contacting potential acquirers; create value realization strategies and business terms to meet the company’s strategic goals; assess commercial viability of assets to be commercialized from a competitive advantage, ability to be first to market, likelihood of success, sales expectations, and potential profitability standpoint; identify and assess potential value realization partner/acquirers from the standpoint of players in product/service or technology markets, already known as interested, industries that use similar technology currently, hold related technologies but want competitive advantage, seeking to enter market, existing relationships with company, innovators are leaders in industry, in acquisition mode, proven ability to bring new products to market; conduct due diligence on possible partners by way of technology reviews, financial reviews, and competitive position in the technology space; assess acquirers reasons for investing from the standpoint of leading-edge of next-generation technology, competitive positioning, penetrate new market, acquire new technology, supplement existing R&D efforts, acquire creative talents or acquisition, expand product line, maintaining freedom to operate, and analyze common problems to overcome in evaluating alternate acquirers; lack of strategic fit; inadequate technical due diligence; clash of cultures; change of direction desired; consider approaching select identified partners individually and/or sequentially and obtain access to critical business management and R&D personnel at acquirer; pricing alternatives including valuation, perceive future value, and competitive positioning; providing informal information to potentially interested parties to enhance business related descriptions and match acquirers needs and strategic positioning; presentation to internal decision-makers with the description of the business opportunity, technical issues, and value proposition; conducting acquirers due diligence including legal opinions on ownership and right to transfer; negotiation considerations including timing, coordination with legal and other advisors, exclusivity, confidentiality, competitive interest drivers, acquirers interested in competitive positioning, maximizing alternative uses of technology, undiscovered patents with dependency issues; closure considerations including memorializing agreement and letter of intent or memorandum of understanding and drafting and executing transition documents.

Specific Considerations Associated With Each Of The Top Four Value Extraction Options:  

Option 1: Selling the Intellectual Property

The objectives of this approach are: to realize the value from the under-utilized intellectual property, maximize the value received, accelerate timing of receipt of revenue, transfer maintenance fees and other costs of ownership to buyer, minimize possible recourse to the seller, and possible license back to cover R&D or use.

The concerns of using this approach are: need to find a buyer, no gain by current intellectual property owner from future commercialization and development, evaluation of commercial viability may differ between intellectual property owner and potential acquirer, establishing value potential to potential acquirer is based on limited strategic information, and future product lines will be lost to the current intellectual property owner.

Option 2: Licensing

The objectives of this approach are: leverage intellectual property value beyond current uses, achieve maximum value through a combination of upfront and running royalty, develop minimum annual payments, maintain right to use intellectual property, control licensee’s rights to intellectual property, and benefit from improvements made by licensee.

The concerns of using this approach are: does not achieve goal of immediate funds to intellectual property owner unless up-front payment is sizable, amount of royalty may be subject to aggressive negotiation by acquirer, risk that licensee does not achieve commercial success, and rights granted to licensee may preclude intellectual property owner from some commercialization options.

Option 3: Joint Venture

The objectives of this approach are: to leverage intellectual property owners R&D, manufacturing, marketing and financial resources to facilitate new markets, possible acquirer becomes joint venture partner, nature of revenue sharing agreements may provide significant upside potential for intellectual property owner, and contribution into joint venture may be intellectual property by the intellectual property owner and cash or other assets by acquirer.

The concerns of using this approach are: sharing in future revenue/profitability may be based on contributions to the joint venture (valuing these contributions can be challenging), requires close business relationship and coordinated efforts to achieve success, increased dependency on one party for completion and commercialization, and the effects of one party leaving the joint venture.

Option 4: Donation

The objectives of this approach are: to realize value from immature, underutilized or non-core assets, transfer maintenance fees and other costs of ownership to donee, further improvements required to commercialize intellectual property are avoided, and obtain income tax deduction for fair market value of intellectual property which may exceed value that could be achieved through sale or license.

The concerns of using this approach are: must obtain fair market valuation of intellectual property, all rights to intellectual property relinquished, must find nonprofit organization to accept the donation, and the fair market valuation and the donation are subject to review by the tax authorities.

Avoiding Business Loss Through Intellectual Property Infringement Insurance

The first step in extracting value from intellectual property is to avoid business loss by infringing another’s assets. The proliferation of the Internet and the increased importance of intellectual property in the overall economy have made intellectual property risks among the most significant for many types of businesses. Intellectual property litigation has become more expensive and more prevalent. Insurers perceive that courts have stretched policy language to cover unforeseen intellectual property risks. Insurers have responded by revising the language of their policies in an effort to exclude coverage for those risks. At the same time insurers are beginning to offer new policies to address new intellectual property risks. The result is an insurance market in flux. Rapidly changing policy language and policy availability requires increased vigilance and study of available options by insureds. It is complicated by the manner in which new policy language will be interpreted and enforced by the courts. Most businesses have what is called a commercial general liability policy (CGL). A CGL insures against a wide variety of risks, many of which have nothing to do with intellectual property. The current trend is towards ever more narrow GCL leverage coverage. Businesses cannot depend on the GCL policy to address all their insurance needs for the intellectual property and e-commerce areas.

There are now a number of insurance companies that offer insurance apace costs associated with infringement of patents only, or infringement or some combination or all of patents, trademarks, trade dress, copyrights and trade secrets. These IP infringement policies vary by carrier and property covered. When considering such insurance a company must consider the overall rate of litigation in their industry and by key competitors specifically. Any policy should be examined carefully for (1) scope of coverage, (2) covered territory, (3) cost and indemnity limits, (4) special considerations. Such special considerations often include whether or not the costs of complying with an injunction, settlement, or cease-and-desist are included. They also vary by the date which reimbursement to the insured are due. Because of the limitations of these policies many companies self-insure and/or join defensive patent pools as an alternative to insurance.

Promote IP to Maintain a Sustained Advantaged Business Position vis-à-vis Honorable Competitors

Most companies focus on protecting proprietary technologies that give their products and services an advantage over those of competitors. The classic cases include Xerox, which legally monopolized the copier market for nearly 20 years, earning double-digit margins and earnings growth. When Xerox was forced to license is copier patents under terms of a federal consent decree in 1975, the company saw its market share, margins, and industry dominance quickly erode.

Another example, Dell Computer owed it’s early success in the PC business not to the technological superiority of its products, mostly made with off-the-shelf components, but rather to its innovative build-to-order direct sale business model. In other words its sales advantage was not in the computers but in its system for selling, distributing, and providing after sale support for those computers. These elements were patent protected.

In contrast Walmart owes its $100+ billion retailing success not to its products, but to the sophisticated purchasing, marketing, and distribution systems that enabled the company to operate more efficiently, maintain lower prices, and achieve higher rates of customer satisfaction than its competitors do. But notice a difference in how Walmart and Dell have attempted to sustain and leverage their respective competitive advantages. Dell secured over 40 patents on its innovative business model. The patents covered not only the customer configurable online ordering system but also the method by which the system was integrated with sales, continuous flow manufacturing, inventory, distribution, and customer service operations. No one knows how Dell might litigate to block a potential direct sales rival from copying it system too closely. However, Dell did leverage those patents to bolster its market advantage by using its patents is a collateral for a cross licensing deal with IBM that in 1999 provided it with lower cost components. This use of patents is in direct contrast to Walmart, which had no patents on its business system; it relied instead on the notoriously ineffective protection of trade secret law. As result the retailing giant couldn’t even prevent key employees from walking out the door and taking their knowledge of Walmart’s proprietary system to eventual online rivals such as Amazon.

The crucial point here is that companies must ensure that they protect with intellectual property whatever it is that has the most value to their business and whatever represents the most vital source of their competitive advantage. In doing so their intellectual property maintains their sustained advantaged business position. Said another way, when looked at from a competitor’s standpoint, the risk of losing an infringement suit has to make economic sense. It rarely does for products and services protected by high quality patents and other forms of IP. There are risk exposure analysis programs available that calculate the risk a company takes when knowing violating other’s IP. These are typically based upon decision trees with possible outcome and respective payoff branches, backed-up by litigation database information specific to the business/technology sector involved.

Enforce IP Domestically to Maintain a Sustained Advantaged Business Position vis-à-vis Dishonorable Competitors

A corporate decision to enforce intellectual assets requires careful consideration. The company’s business objectives must always be kept in mind. Typically intellectual asset enforcement because it is so highly specialized is more expensive than other types of business litigation. Anyone undertaking intellectual asset enforcement efforts should be qualified to conduct quality work and secure a positive business outcome.

At every step along the road of intellectual asset enforcement, business goals will serve as a company’s guiding light. An economic analysis of potential cost of enforcement versus the value of the intellectual asset will be a decisive factor in determining whether or not the company decides to enforce its asset. A risk assessment must be conducted before proceeding with this course of action.

The type of intellectual asset involved determines the appropriate and sometimes optional forums for enforcement efforts. Patent infringement actions must be conducted in federal court can sometimes be conducted in the United States Intellectual Trade Commission, the ITC. Patent interference actions are connected in the US patent and trademark office. Trademark enforcement efforts, depending on the circumstances, can take place in federal district court, the ITC, or the United States patent and trademark office. Trademark rights can also be enforced with the US customs service. Treat secret misappropriation or other business tort claims can be brought in either federal district court or state court, depending on the circumstances. Copyright infringement actions are brought in federal district court.

The process of enforcing IP domestically starts when an intellectual asset owner learns a potentially infringing activity.  At this time a set of initial decisions need to be made: Does your company want to sue the potential infringer or attempt to negotiate a license agreement? If your company wants to sue, what do they expect to gain from the lawsuit? Does a company desire past monetary damages? Does a company desire future revenues in the form of licensing royalties? Do they want to obtain market exclusivity? Do they want to protect the integrity of the product? Identifying the business goals is essential before investing the time, money and effort in enforcement, which can run of bills of many millions of dollars and take years to complete.

The business goals of the potentially infringing company will also provide answers to questions such as: Is the infringing company even interested in obtaining a license to make, use, or sell the product at issue? How important is the infringing product to the company, i.e., can the company take the product off the market to avoid litigation and not be to financially hurt? Is it technically and financially feasible, and market wise, to attempt to design around the protect product and provide a similar, though not exact, competitive product? Is the infringing company’s only option to keep the infringing product on the market as long as possible because the company does not have another product on the market from which they can obtain any income?

These questions are best answered after a thorough investigation of all the relevant influencing factors. This may require that a pre-enforcement investigation be conducted. The resulting economic analysis assesses the potential overall cost of enforcement versus the value of the intellectual property issue and will inform the decision of whether to sue or not.

A monetary value should be placed on several uncertain factors in this economic analysis. Trial is the most frequently underestimated cost in an intellectual asset enforcement case. Trials are hard on a company. They consume the time and energy of upper management, of the technical people directly involved with the products at issue, the attorneys both in-house and intellectual property litigation counsel, and the clerical and professional support that gets stressed out by court driven document production and preparation. Distraction upsets schedules from top to bottom. Things will take twice as long as expected and do not be surprised by a predictable cost increase.

Once a pre-enforcement investigation has been conducted and the decision taken to proceed with litigation, the next step is to assess the strength of the intellectual asset in question. You need the strongest position possible and one not open to attack and potential loss. If there any loopholes found during the assessment, these can be dealt with before you go to court. The strength of patents, for example, can be evaluated in several ways: by updating any prior art and patentability searches, by searching patent documents and other technically related publications, and by conducting a prosecution history study to be aware of the course of prosecution and ensure all the necessary procedural requirements were complied with during prosecution. Re-examination / reissue proceedings may preemptively address suspect circumstances that may surface, such as statutory bar date issues, missed procedural steps, or potential inequitable conduct challenges. The outcome of such proceedings can frequently strengthen a patent position in the courtroom and effectively blunt an alleged infringer’s defenses during litigation. Recognize, however, that reissue / re-examination proceeding can also produce unfavorable results if the claims are invalidated during these proceedings. Evidence may also be uncovered that would advise against assertion of a lawsuit.

The next step before going to court is to assess the allegedly infringing product. As much information as possible should be obtained regarding the potentially infringing product including, if possible, marketing brochures that have been publicly distributed by the alleged infringer. How much does this product really infringe the intellectual asset at issue? The patent owner may be able to obtain a sample of the product from the market or a tradeshow, or sufficient information may be obtained from technical brochures and sales literature, which are sometimes were reasonably obtainable. Internet searches can also be very effective in these types of investigations.

Other information nation needed before going to court is together as much information as possible on the potential infringer’s activities: those directly related to the infringement and more general activities as well. Because of potential infringer would most likely not hand over detailed business information, you may not want to alert to potential defendant of the impending lawsuit. This kind of information can also be obtained from mutual customers, from your own sales department, which probably follows competitors’ activities closely, and from sales literature, trade shows, and product data sheets.

The more information you gather on the potential infringer the better. For example you may discover existing intellectual assets that the potential defendant owns that could be asserted against your company. Early discovery such information allows your company to be adequately prepared to address these issues. At the same time, while gathering general information on the opposition, you may discover information indicating they would be very likely to settle if sued, which may prompt notification that you intend to sue as way to initiate settlement or negotiation discussions.

Another activity is to make sure that you interview and prepare potential witnesses such as inventors of the asset, holders of the patent at issue, and the attorney who prosecuted the relevant intellectual asset. These people should be interviewed to gather and assess both helpful and possibly adverse information to prepare for what might be expected of them during litigation.

Beyond the scope of this book are some litigation specifics to contemplate. These should be discussed with the company’s litigation team and include: (1) The specific location of the court. Frequently the patent owner will be able to choose a court location based on factors that are beneficial to it, consistent with judicial rulings on venue. (2) Who to sue. The way intellectual asset laws are written frequently allows a choice of who to sue. A plaintiff can choose a defendant, perhaps one with the deepest pockets or the one causing the most market damage. Often a plaintiff will not choose to sue distributors, retailers, and customers with whom it hopes to maintain or establish an ongoing relationship. (3) When to sue. Depending upon the facts, when you actually file the lawsuit can be a fundamental part of the strategy of enforcement. It can be brought as soon as a potentially infringing product hits the market or later after revenues and damages are higher. (4) Whether or not to utilize an Inter-Partes Review (IPR) of the art before litigation proceeds. Inter-Partes Review (IPR) is known as an effective, relatively low cost (compared to district court litigation) and quick method used by defendants as a defense strategy in district court cases to get the patent invalidated. This is done about 80 percent of the time.

The other part of the litigation strategy is whether or not to file a preliminary injunction. A preliminary injunction temporarily prevents the infringer from selling or making any more the product until after the end of the trial. The preliminary injunction is best requested shortly after filing the lawsuit, so preparation of a preliminary injunction motion should be completed before the lawsuit is filed.

Again there are a multitude of strategic and tactical decisions regarding litigation that must be considered. In any of these intellectual asset efforts, cost-effectiveness is a major concern. The principal sources of wasted litigation dollars stem from: Unfocused litigation strategy during the early stages of litigation; failure to keep the litigation perspective aligned with the company’s business objectives; and failure of litigation counsel to keep the corporate counsel informed of developments in the case in terms of both legal and financial terms.

Enforce IP at Borders to Maintain a Sustained Advantaged Business Position vis-à-vis Dishonorable Competitors

Companies doing business in foreign countries or competing with products from other countries are frequently presented with competitive situations in which their intellectual assets can be enforced at various countries borders to prevent imports of infringing/competing products. Various internationally accepted procedures provide for the protection of registered rights, the prevention of unfair trade practices, and the implementation of international agreements negotiated under the World Trade Organization (WTO). National and international forms offer recourse in protecting intellectual assets, limiting imports, and utilizing legal regimes to achieve company objectives. To navigate these forms most effectively specially qualified counsel offers the best guidance.

The decision to develop intellectual asset border enforcement efforts requires a suitable plan of offense/defense. Various strategic and tactical elements must be considered in deciding the appropriate steps to be taken. These are similar to the elements described for domestic enforcement and include: assessing the strength of the intellectual asset; deciding which intellectual asset to assert; assessing the strength of the opposing party’s case; determining if other anticompetitive/regulatory avenues are available; gathering information about the opposing parties imports and sales; reviewing internal documents for evidence; assessing the status of the product and the relevant industry; preparing company personnel for litigation; and deciding on enforcement specifics.

The appropriate countries and forms available for border enforcement efforts are determined by both the type of intellectual asset involved in the type of border enforcement mechanism suitable for the company strategic purposes. Patent, trademark, copyright, and other unfair act enforcement efforts can be conducted before the US International Trade Commission in the United States, and parallel District Court or foreign actions may be coordinated with a worldwide enforcement plan. The use of the US Customs Service for border enforcement of trademarks and copyrights in the United States and parallel customs enforcement efforts in other market areas are available. In addition enforcement of various trade laws and obligations established under the auspices of the WTO are available through the WTO dispute resolution process.

In any of these border enforcement efforts, cost-effectiveness is a major concern. The ability of special counsel to utilize enforcement dollars effectively is key the development of a successful strategy. This is accomplished by keeping the company’s business objectives in mind so that enforcement efforts are aligned with other aspects of the business.

Licensing-Out

Licensing out is a highly effective way to maximize utilization of an intellectual asset portfolio. The common business objectives associated with licensing out in order of importance to the licensor are: to collect royalties; to enter a foreign market; to exchange technology with an industrial or commercial partner; to support the selling of products or services that require the use of a specific technology; to benefit from a specific development as a user; to favor the spread of a technical standard; to settle patent infringement conflicts. Furthermore a company’s competitive arsenal should include an aggressive licensing program if when conducting a portfolio segmentation/valuation analysis a large number of high-value assets fall into the licensing-out category of disposition.

Before embarking on a licensing out program, a company should develop a licensing plan based on overall corporate business strategy, identification and evaluation of licensing opportunities, aggressive pursuit of those opportunities, and implementation of auditing procedures to ensure full compliance with license agreements. It is possible for companies to license out both technologies that supports their core business and technology that is peripheral to it.

To determine how to use licensing-out to create value, company needs to formulate a licensing strategy that is consistent with its overall business strategy. Note that not all art offered for license is sold/licensed as shown in the “Sold vs. Unsold Patents” figure. In fact some studies show as little as 1% of R&D efforts are monetized. Thus sorting through the following questions and issues begins the spadework of developing an appropriate licensing strategy: Does your company have the capabilities to develop the market through proprietary use of the technology as efficiently as a group of licensed competitors? Is it more profitable in the long term to be the dominant player in a smaller market than it is to be smaller player in a bigger market? Is a technology used in an underdeveloped market? Does a company want to create strategic alliances to minimize risks associated with penetrating underdeveloped markets? Does a company want to develop the technology as the industry standard? Could the company license technology in markets where it does not have manufacturing and marketing capabilities? Does a company plan to license core technology on lapsed basis? Are there any product lines that the company wants to protect? Are there any geographic areas the company wants to protect?

To answer these questions every company should have a written IP licensing policy. A written IP licensing policy provides a company numerous benefits in the normal business operations of the company, as well as during lawsuits the company may find itself a party to (either as a plaintiff or defendant).  Aspect aspects that could be covered in a written IP licensing policy include, but are not limited to, a company’s: (1) general licensing strategy; (2) preference for licensing over litigation to both acquire and protect IP; (3) proper contact for various stages of the licensing process; (4) list of owned IP assets it would be willing to license out; (5) list of owned IP assets it considers court to its operation and therefore would not be willing to license out; (6) this divide the assets and/or technology areas it would consider licensing and; (7) due diligence process in evaluating a licensing opportunity; (8) referred terms, conditions, and other clauses and (9) best practices for complying with any executed license agreements.

On creating a written IP licensing policy , the next question for a company is whether to publish that written IP licensing policy. A public IP licensing policy can benefit a company’s public image and goodwill. For instance, it can demonstrate that a company respects the IP of others and, in return, expects that it’s IP is similarly respected. It may also provide the perception that the company is innovative, cutting-edge and sophisticated.

Having answered the above questions and formulating a licensing strategy, the company would undertake the following four steps in order to implement a successful licensing program (They are also imbedded in the “Portfolio Mining Process for Licensing Revenue” figure):

Step 1.  Perform an intellectual asset inventory and mapping.

Ideally this should have already been done to ensure there are enough high-quality intellectual assets to make a licensing out program worthwhile.

Step 2.  Evaluate opportunities through technology and market analysis and evaluation.

Again, the preliminary work should have already been done by using the automated segmentation portfolio analysis methodology described in that section of this book.  For the high-value art identified more detailed an updated analysis should be done. The Patent Evaluation Map developed by Harry Grinnell as described in this book is a good first start for evaluating opportunities.  Another good method for evaluating opportunities is the following analysis process:

Background:

A key question facing executives when they are about to license-out an intellectual property portfolio is “What’s the true value of these assets and who should I license them to so that I further my business objectives?”

Answering this question in a timely and accurate manner is vitally important. The ability to quickly find value in an intellectual property portfolio, and successfully negotiate its sale for the benefit of a company, is a critical competency for any organization—and a significant competitive advantage.

Three key criteria are typically used when determining the commercial value of an acquired patent portfolio. The first relates to the validity and enforcement potential of the acquired patents. Once validity and enforceability of a patent portfolio have been ascertained, the second criterion is the technical strength and business utility of the portfolio.

Given that a portfolio is valid and enforceable, and has technical strength and business utility, the third criterion for establishing value is whether or not the geographic markets covered by the patents include countries that have large commercial markets in which to sell the technology at high-volume and profit.

The final key to the value of patents is how broadly applicable they are to the commercialization of products in many diverse industries, as well as whether the technology is distinct from a performance or cost standpoint in one or more specific markets. Naturally, patents with commercial potential have significant value compared to those that may have interesting scientific elements but little commercial utility.

Placing a Value on Patent Attributes

When preparing for negotiations, it is important to understand which patent attributes are likely to play a central role in the negotiations, versus other attributes that are not a point of distinction or value.

Several entities have engaged in creating patent scores, patent strength, and patent rating algorithms that apply a single value to a patent or patent portfolio asset. Although useful, such tools have been found wanting when it comes to the specifics of preparing for negotiations. This is because these tools have high correlation coefficients with respect to value, but the predictive ability of such algorithms, the R squared term, is often low.

One way to overcome this deficiency is by visually displaying the key variables of a particular patent or portfolio. This visual display does a better job of showing strengths and weaknesses in terms of each of the three criteria, as well as providing a balance between detail and complexity, thus resulting in fast and thoughtful decision-making.

Visualization is most easily done by creating a radar or spider diagram. In such a diagram, each axis is a rating score of one of many attributes important to the value of a patent. For example, the center of the diagram relates to the lowest score or value, oftentimes zero, and the outer perimeter scale refers to the maximal value found for that particular attribute. Scores of the source portfolio and the portfolios of other comparison patents (each from specific assignees) are ranked between zero and the maximal value on any one axis.

Understanding Exceptional Performance

In addition to comparing a company’s portfolio to be licensed-out to other portfolios, statistical measures of value can also be applied. The teachings of Edward Deming and the Quality movement are very helpful here. The “average plus three standard deviations” was often set as a limit to discern when a manufacturing process was statistically out of control and required immediate action.

In studying intellectual property portfolios, it has been found that the “average plus two standard deviations” is a useful commercial cutoff point for understanding when a portfolio has exceptional performance, versus being merely above average. These are the portfolio attributes that are worthy of special mention during the licensing negotiation process.

Validity and Enforceability Measures

Scores derived from the company’s portfolio and the portfolios of other comparison patents (each from specific assignees) are ranked between zero and the maximal value on any one axis of a radar diagram.

There are times when the average value is quite low compared to the maximal, and other times when it is quite high. The company’s portfolio can easily be compared to the average of all portfolios by displaying it as a dark red line with white dots, as seen in the figure.

To easily spot exceptional performance, the statistical limit for exceptional (two standard deviation) performance is shown as a light orange area. Likewise, the average value of all assignees scores is shown in the diagram by the dark orange area.

For example, the litigation frequency, re-examination frequency, and the opposition frequency of the source portfolio are truly exceptional when compared to those of other assignees. During any negotiation, these “battle-tested” elements are the points upon which a skilled negotiator could build value.

Technical Strength and Business Utility Measures

Here the individual axes rely heavily on citation counts, reference counts, and examiner codes. Looking at the pattern in this figure, there are no exceptional attributes.

However, there are over a half dozen attributes in the B+ range. This is important for negotiation. The sports analogy is that if you have one person with outstanding performance (like having Michael Jordan on your NBA team, or Lionel Messi on your soccer team) you design your whole game strategy around this person.

When you have a portfolio with one outstanding attribute, you design the whole offensive strategy around that strength. If the portfolio, or sports team, does not have a single patent or player around which to build a strategy, you can still build a successful negotiation or a successful team around solid B+ performance from a number of individuals.

Going back to Edward Deming and the Quality movement, if you have a trend line of over seven points increasing in value, even though it has not yet approached the statistical control limit, this is an indicator that something outstanding is happening. The intellectual property corollary to this is that if you find five or more single axes that are in the B+ range, you should build the licensing negotiation strategy around this pattern of B+ performance.

From the figure, we see that a key strength of the company’s portfolio is the number of sharks and predators following it. Sharks are entities that have over 35% of the follow-on citations of a patent, while predators have between 15% and 35% of the follow-on citations. Also unique in this portfolio are the number of international patent classifications, indicating a diversity of technology and uses that the patents cover. In addition, the portfolio scores a B+ for originality from both a scientific publication and a patent standpoint. Completing the picture is the above-average performance of the portfolio on the generality (cited by) scale.

In summary, this portfolio is well suited for licensing-out. There are entities following the portfolio that may want a license to the portfolio’s core grandfather art. The indication of the portfolio’s originality and suggests that it may be licensable in a variety of different industries. Taking all these elements together, this is a valuable portfolio to license.

Market Coverage Measures

To obtain a good return on patent licensing, it is helpful to be able to license the technology in the major commercial markets of the world.  In the “Market Coverage Measures” figure, we see the markets that are covered by patents in this portfolio.  In this case, there are over five B+ areas in which the portfolio is unique. The ability to license in the United States, Japan, China, Germany, France, and Australia increases the worth of this portfolio.

Identification of Licensing Opportunities

One means to identify potential licensing opportunities is to look at the total number of citations of the company’s patent portfolio by other entities. The “Identification of Licensing Opportunities” figure shows how many times other entities cited a particular company’s portfolio.  Potential licensees might thus be not only the top citing entities like Sandisk, E Ink, Siemens, Advanced Micro Devices, but also entities further down the listing as they too have demonstrated interest in this field.

Citation maps also assist in locating licensing opportunities. In addition to portfolio measures, visualization techniques based on individual patents also help identify potential licensees and illustrate their needs.  An example of a citation tree is shown to illustrate how a client’s patent is being cited by others.  Depending upon the specific pattern of citing companies, and the competitive relationship to the client, the appropriate carrot, cross-licensing or stick licensing strategy and tactics are easily identified.

Citation Relationship Maps show optimum portfolio Cross-Licensing Options. Potential licensor and licensee IP sets are mapped to show inter-relationships that help negotiation teams identify the best strategy for their business.

Ranking of Patents for Licensing Opportunities

All the above background work and analysis prepares a company for licensing out its portfolio. However a question remains as to the negotiation value of any individual patent. Is the portfolio worth more separately or all together?

To gain insight at the individual patent level, several software companies have engaged in creating patent scores, patent strength, and patent rating algorithms that apply a single value to the asset. Most negotiation teams use these scores for guidance, as they vary greatly at times.

Another approach is to list patents by their publication dates, family size, citation counts and velocities, predator presence, generality and originality, and validation measures. Sorting and binning upon these attributes allows those patents likely providing the most negotiating value to be easily identified.

These visualization techniques are constructed prior to negotiations with the licensee. The above tools and techniques along with a comprehensive business understanding of portfolio mining, licensee identification, and competitive assessment provides a company and the prospective licensee a complete picture of the technology and business uses for the IP to be negotiated.

Step 3.  Develop a Licensing Proposal Binder and Negotiate Deals.

The proposal binders may include the following sections: a brief description of the company and its licensing activity; high-level description of the intellectual assets to be licensed; summary of the applicable market segment; information regarding the products and services of the target licensee; marketing materials and press releases regarding the intellectual assets to be licensed; analysis and visualization of the portfolio to show its strengths and weaknesses; summary of the executed license agreements; and/or copies of the actual protected intellectual assets.

Careful and complete preparation has been proven to significantly reduce the time to contract signing and produce demonstrably more revenue to the license holder.  That said, no transaction process is complete without the human element. Negotiators have to fully understand how the art under consideration best fits the potential licensees’ business strategy and the licensor’s need for a sustainable revenue stream. A win-win posture and focus on rapport with all parties is key to a successful negotiation.

Thus, successful licensing of IP requires that all parties in a transaction agree on a few basic principles, assumptions and trends. At the onset of negotiation it’s useful to make sure these principles, assumptions and trends are understood by and are consistent between both parties.  These questions are: Do you understand why we are here and why we would license to you? Do you agree with the direction which we maintain the market is moving? Do you see that the products and services required to be successful in this future market are within the scope of our IP? Do you realize how our IP is a core solution from which further custom innovations and enhancements can be added? You understand how we have valued the IP? Do you recognize how you can achieve significant competitive advantage with this IP, and be at the cutting edge of this new market direction?

Once a proposal binder has been assembled that includes the aforementioned elements, the target company should be contacted. The “Negotiation Process Flowchart” figure shows the negotiation process.

As one of the last steps in the negotiation process the value of the licensing deal is determined. As mentioned previously three generalized methods are used to do this, cost, cash-flow, and market. For the case of entities not negotiating deals that involve standards essential patents, or patents that cover a component of a complex system, these methods are pretty straightforward. However, for the negotiations that involve standards essential patents, or patents that cover a component of a complex system, the royalty or license revenue achievable is more complex. A strong case can be made for using artificial intelligence classifiers for this purpose as shown by Nigel Swycher and Steve Harris. Their process is included in the Chapter 25 discussion of Valuation of IP.

Step 4. Perform deal maintenance and monitoring (e.g., royalty audits).

The execution of a license agreement is not the conclusion of the licensing strategy. After lengthy and difficult commercial negotiation many licensors and licensees don’t pay enough attention to the royalty clauses. The following 30 business terms that, when inappropriately converted in a contractual language, may give rise to creation of a fundamental gap between business expectations and business realities. It’s most important to pay attention to them. Which wording is used, and the implications of the wording, are critical. The 30 words and clauses to watch out for are: gross revenue or net revenue, price invoiced or price received, direct and indirect income, cash and non-cash or diluted income, currency royalty payments, late payment, sliced royalties, stacked royalty, royalty basis, multiple royalties, progressive royalties, taxation, audit, duration of agreement, duration of royalty payments, territorial scope, hybrid technology royalties, total sales royalty, alternative technology royalties, minimum periodical royalties, minimum product royalties, royalty revision, patent and moment, transfer business, royalties for negative know-how, royalty consideration, royalties received an royalties earned, discriminatory royalties, excessive royalties, and lump sum payments.

Some of the typical problems licensors have regarding licensees’ adherence to the executed license agreements include: licensees failed to include revenue from all relevant products and royalty calculation; licensees misinterpret royalty payment provision; licensee sell products to subsidiaries of below-market prices; licensees misclassified sales; licensees make royalty calculation errors.  Studies have shown that up to 88% of licenses have under-reported royalties and of those nearly 50% of licenses have under-reported royalties in excess of 25%. Because of these financial problems, licensors need to consider implementing going a royalty payment review process. The “Royalty Payment Process” figure illustrates the typical steps in a royalty payment review process. Utilizing experts in this field of royalty auditing is worth their contingency fee.

There are number of other benefits companies have realized through effective licensing programs in addition to the royalties they collect. These benefits include: the establishment of industry standards; the creation of strategic alliances; the obtaining of needed technology from other companies. Finally, some companies are able to utilize a licensing strategy in such a way to undermine R&D investment by a competitor and thus dictate technological developments of other companies.

Sale

Sale of intellectual property vis-a-vis licensing-out, provides a Corporation with essentially no ongoing liability or expenses.  The transfer of ownership is usually for a monetary consideration often paid upfront versus being extended over a long period of time (as is sometimes the case for licensed art). The maintenance and potential litigation expenses are now passed the purchaser. The disadvantage is that the seller no longer has control over the asset or an ability to use it in a new unforeseen application in the future. It is also tantamount to an exclusive license which precludes a Corporation from generating revenues from more than one source via the sale.

Public IP options organized by Ocean Tomo between 2006 and 2009 popularized the use of public IP options as a means to transfer intellectual property. Although this particular mode of creating value from IP assets obtained a lot of press coverage, the fact was there were very few buyers and sellers participating in the process. Less than 12% of the over 3000 assets bought were from operating companies. The rest were from essentially non-operating entities. The biggest of these was a single entity Intellectual Ventures. Because of the limited number of participants, extracting value from IP via a public auction has fallen into disuse.

The process used to find art suitable for sale is similar to that used for licensing out. The only difference comes during the negotiation phase were one has to put forth the arguments in favor of the advantages and disadvantages in the above paragraph.

Joint Ventures

Contributing IP rights to a research or business venture with another party again follows the process outlined above in the licensing-out section.  Since the other party will be contributing one or more complementary business assets in lieu of only monetary payments, these deals are more complicated to construct.  The variation from the licensing out process again occurs at the negotiation step where all elements of a new business venture must be defined.

Strategic Alliance

The strategic alliance is a business arrangement usually done in order to gain access to markets to which company would otherwise be denied. IP is often viewed as a sweetener for the deal. The process of selecting and valuing IP for such deals is again similar to that of licensing out in the negotiation step is where all elements of the new business relationship must be defined.

Spin-Out

Spin outs are usually done by corporations where the new business is not directly part of their strategic intent or plan. The reason for spending it out however is that the new idea is usually powerful enough that the Corporation might consider a change in strategy if the venture succeeds.  The corporation wants to retain some hand or role in reintegrating the spun-out venture if it is successful. Creating a spin-out from an existing company usually involves the sale of ownership shares in the new venture to outside investors. IP is often viewed as a necessary contribution for outside investors to enter into the deal. Once again the process of selecting and value IP for such deals is very similar to that of licensing out as described above.

IP Exchanges

Contributing intellectual property to IP exchanges is another way to obtain value from the assets.  Such exchanges came about nearly 2000s that have struggled to become sustainable business entities. The basic reason for this is that online exchanges, in order to thrive, have to solve transacting a company’s intellectual property better than alternate mechanisms. This is particularly difficult to execute for IP, given its heterogeneity and fuzzy edges. Another challenge for IP exchanges is they typically need a lot of transactions in order to meet their revenue and profit targets.

Some of the first exchanges were yet2.com and PL-X in the 1990’s. Others have come and gone in the intervening years.  In 2017 the variety of exchanges includes The Intellectual Property Exchange (IPXI),  IPNexus, Unified Patents, Asia IP Exchange, and Stanford University Intellectual Property Exchange.  IP exchanges aim to establish a marketplace solution for the time-consuming and prohibitively high transaction costs often involved in getting permission to use IP protected content and technology. Today, many obstacles exist in traditional mechanisms for content and technology licensing, such as the difficulty of locating and negotiating with the appropriate rights holders, which commonly result in under-utilization of content or technology piracy. IP exchanges seek to improve access to content and technology by providing an online marketplace where rights holders can link up all types of assets and negotiate licenses more efficiently with users. The system is designed to give rights holders an efficient on-line distribution channel.

There exist three specific challenges related to IP exchanges: IP valuation; transaction mechanisms tailored to IP; and the realities of a sustainable IP-based business model.  The first issue is that of IP valuation. Without a common, credible method for evaluation, negotiations are slow and fail to complete. There is a reason that no simple valuation tool has come forward to fill this gap. IP valuation is hard and no standard agreed upon method exists, as seen in the valuation section of this book. The second issue is that IP exchanges must provide supporting mechanisms and services to enable transactions that enforce and value IP rights, without allying IP contamination. Doing this is an expensive process. Provision of some features of intellectual property management such as mechanisms for dealing with counterparty risk, and exploring opportunities related to the IP while maintaining property rights exist. Solving these problems requires an enormous amount of orchestration across a wide set of service providers (technology, insurance, clearinghouses, and valuation experts), and thus takes time and money to obtain. Finally an IP exchange must operate under a sustainable IP-based business model. Such a business model would include one set of activities for large operating companies and another set of activities for companies that have non-operating IP-based business models. For both agendas IP exchanges must facilitate a repeatable fluid process, not a one-off transaction. Because of these difficulties the sustainability of IP exchanges is still in question.

IP Donations

Like any other property, patents and know-how can be donated to a charity and a tax deduction taken. Transaction costs are variable but are usually small compared to the value of the tax deduction. The process includes identification of the assets to be donated, identification of the donee (which helps to maximize the value of the deduction), execution of the agreement, and legal compliance.  This strategy is most effective for companies which have not done a good job of managing their intellectual asset management portfolio and have serendipitously acquired technically interesting art in areas of possible long-term future commercial interest.

Unutilized and underutilized patents and know-how add nothing to the capitalization or share price of the company and may have serious costs associated with them such as patent maintenance fees and security costs for know-how. By identifying these assets of low or no value to the company and donating them to a charity such as a university or research Institute to which it may have value as a licensable property, the company can send dollars directly to the bottom line equal to its marginal tax rate times the independently obtained value of the donated patents and know-how. Note that the tax laws require that the donee be a so-called 501(C)(3) charity. These are universities, research institutes and the like. The law also requires that the donated property be valued at its fair market value.

Giving the company’s patents and know-how to the correct recipient is important to the ultimate value of the donations. The best donees are universities or research Institutes with an active licensing program, good industry contacts and other patents, researchers or know-how that make the companies donated patents and know how valuable in the hands of the donee. It is also important that the donee be able to articulate its value to the independent evaluator and to the IRS if the valuation of the donation is challenged.

Abandonment

It may seem unusual to consider abandonment as a value extraction process. However many forms of intellectual property in particular patents and trademarks require continued maintenance and registration fees over their lifetimes. Abandoning this art saves payment of these expenses as well as the companies cost of internal personnel auditing and properly tracking the asset through its life.  For large patent estates abandonment can represent significant savings. In the 1990s the Dow Corporation had a very large patent portfolio and after conducting a portfolio mining exercise abandoned many of the patents that were no longer useful for the corporation’s businesses. In doing so they avoided almost $40 million in total expenses.

Risk Management of IP Assets

A property planned and effective patent awareness and risk policy is an essential component of corporate self-governance in today’s business environment. As part of the responsibility of self-governance, management must implement an effective patent risk management program and ensure that it is properly maintained over time. Periodic self-assessment is an important tool for evaluating the effectiveness of an organization’s patent awareness efforts, especially in today’s environment of intense competition for intellectual property rights. By isolating weaknesses and creating a conducive environment for detailed self-analysis, periodic self-assessments have been found to help an organization in meeting its risk assessment needs. There are six main areas to assess for IP risk assessment. They are as follows:

Area 1:  Right-To-Use and Patent Screening

Question 1A: Does your organization have an established policy of obtaining right to use opinions?

• Effect of a Yes Answer: The right to use opinion may provide valuable guidance on whether proposed new design can be manufactured, used or sold without potential liability or infringement of other issued patents. Moreover early detection of potentially relevant patents may create an opportunity design around the existing patents. Alternatively the acquisition of favorable license from the patent holder can be considered.
• Examples of Procedures:  In-house or outside patent counsel may institute a patent search to uncover patents relevant to the proposed new product. They will identify from the search results those patents that may pose a problem, and often conduct further investigation of these patents. Extensive search may be time-consuming and expensive; however, a limited search can usually decrease the risk liability for patent infringement.
• Effect of a No Answer:  Damages for patent infringement may be awarded regardless of whether the infringer had actual notice of the infringed patents. Lost profits or reasonable royalties, as well as prejudgment interest, will begin accruing once a valid patent issues and then infringing product is thereafter made, use, or sold. Additionally the patent holder can seek injunctive relief, including in joining the infringers entire production of the infringing product.

Question 1B:  Is the right use opinion updated periodically?

• Effect of a No Answer:   The US and patent trademark office maintains all patent applications in secrecy until they are issued. Therefore the longer it takes between the first right to use opinions in the actual production of the product, the more the threat that potentially relevant patents have been issued in the interim. Thus periodic updates of the original search will help identify newly issued relevant patents.

Question 1C:  Has your organization set up an internal search policy to screen potentially relevant patents?

• Effect of a Yes Answer:  Having trained personnel conduct prior art searches on a regular basis is an efficient way to monitor competition and identify relevant or potentially problematic patents with regard to both infringement by your products and possible patent applications for your inventions. Results of prior art searches should be reviewed by competent patent counsel. Moreover, updating can also be conducted prior to and after commercial production.
• Examples of Search Procedures:  (1) Searches of commercially available online database services are invaluable tools when searching for patents relevant to your organization’s technology or proposed and products; (2) searches of the records in the US patent and trademark office should be conducted on a regular basis, either by your trained personnel or by professional searchers; (3) some companies find it efficient to maintain their own collection of patents in classification categories that to relate to a particular industry or product line. This facilitates searching for relevant patents; (4) the search personnel, whether in-house or outside professionals, would notify patent counsel of patents uncovered during the search that are potentially relevant to contemplative products or patent applications.

Question 1D:  Does your organization have assigned personnel responsible for administration of patent screening functions?

• Effect of a Yes Answer:  A centralized administrative unit that acts as a clearinghouse for all right to use opinions and screening activities, and maintains all related records, will provide for an efficient patent risk management program. The unit can also act as a liaison between patent counsel another management and technical personnel. Thus whenever propose new designs are taken into serious consideration or invention is considered to be potentially patentable, patent counsel may be asked to provide right to user patentability opinions based on the results of prior searches. The unit’s other responsibilities may include: keeping track of opinions and searches that have been or need to be done; keeping track of follow-up opinions and searches as well as updating activities; making sure that all open questions are pursued to an end; keeping track of all issues, actions and results; keeping track of all resulting records and documents in generated during the searches.
• Effect of a No Answer:  Failure to organize or maintain an effective administrative unit can result in a failure to properly address a potentially problematic patent, or to address patents of which the organization is unaware, in a timely manner. Indeed, perhaps the highest risk is that certain patent studies may simply fall through the cracks. Lack of an effective administrative unit may also result in duplicative efforts by various arms of an organization, thereby substantially decreasing productivity and increasing costs. This is particularly onerous in view of the time and expense involved in procuring appropriate patent searches and preparing right to use opinions.

Area 2:  Past or Pending Claims or Actions and Willfulness

Question 2A: Does your organization maintain an established policy with respect to potential claims of infringement by other patent holders?

• Effect of a Yes Answer:  An established policy will result in a uniform and efficient approach for responding to patent holders who have accused your company’s products and services of patent infringement. Since continued infringement of a valid patent after notice can result in a finding of willful infringement and hence exposure to possible increased damages, is important that all contracts and correspondence are maintained, responded to and tracked in a deliberate and timely manner. Notice of a patent can be any knowledge of a patent, no matter how acquired. There’s no requirement for communication by the patent holder’s representative. Such a policy would normally allow for maintaining information to provide responses to the following questions (which could prove important and subsequent litigation):
• Questions relating to maintaining key records: What claims, actions or other contacts have you had in the past regarding infringement, potential infringement or licensing? Who contacted you and what was the nature of the demands?
• Questions relating to actions taken in response:  How did you respond to each claim, action or other contact? How did the other party react? Did you ask for an opinion from the patent counsel with respect to the infringement and validity of the patent claims in question? Was a decision made to redesign the accused product?
• Questions relating to the results obtained: What where the results and consequence of each claim, action or other contact? What is a current standing of the claim? For any such claim, action or contract it did not end in litigation, is there a procedure to keep all relevant materials accessible in case a claim, action or contact revives? Do you have an established time limit, after which you consider the non-litigating claim, action or contact no longer a threat?

Question 2B:  Does your organization obtain opinion letters?

• Effect of a Yes Answer:  Any actual notice of patent rights, perhaps most often acquired via a letter from the patent holder or representative, creates an affirmative duty to exercise due care in determining whether or not there is infringement. In order to show compliance with such a duty an accused infringer must show that it had a good faith belief that it no liability under the patent in question and that belief was reasonable based on objective criteria. A competent opinion of patent counsel remains the best defense against finding of willful infringement.

Area 3: Document Retention

Question 3A:  Does your organization have a written document retention policy?

• Effect of a Yes Answer:  Because there is a substantial cost associated with responding to such retention requirements, including the time spent to search for all copies of each of the documents, and so an organized record-keeping policy will often provide considerable savings. Further for certain issues, such as willfulness or copying, retained documents may go a long way in either refreshing old memories or indirectly proving just what actions or precautions did or did not take place. Thus the document retention policy must take into consideration the nature of the types of documents as well as the respective potential importance in a future lawsuit.
• Effect of a No Answer:  Rights provided under a patent extend for 20 years. In view of such a relatively long life, pertinent document should be retained for considerable period of time depending in part on the nature of the documents in the particular circumstances involved.

Area 4:  Invention Management

Question 4A:  Has your organization implemented a standard policy on submission of ideas by outsiders?

• Effect of a Yes Answer:  A  standard policy for receiving ideas from outsiders can protect your organization from unwarranted claims of misappropriation. In order to minimize the risk of such exposure a nonemployee submission contract drafted by counsel and periodically reviewed and updated should be used before entertaining any submissions by outsiders. The agreement should primarily waive any confidentiality relationship between the parties; the submitter’s rights may be limited by contract to those acquired under patent, trademark or copyright laws. Submissions might be rejected unless they are accompanied by an existing patent or proof that the patent applications are pending. Compensation may be provided if the ideas to be used. All documents and any correspondence relating to the submission should be maintained for reasonable period of time, consistent with effective document retention policies.
• Effect of a No Answer:    A submitter of an idea may recover for actual use of the idea by the receiving company if it is established that the idea was received, that it was disclosed under confidential relationship, and that there is at least the implication that the use would not be made without compensation.

Area 5:  Training

Question 5A:  Has your organization implemented a training program to alert employees of the legal implications of their actions as they relate to patent matters?

• Effect of a Yes Answer:  Due to liberal discovery processes during litigation, many documents and memoranda generated by employees are discoverable by the opposing party. Therefore care must be taken not to create a trail of documents that contain excessive puffery. Exaggerated predictions of success or the value of the product may be used by the other side in a later legal action to establish the existence of commercial success, or royalty rates that the parties would have agreed to, even if they are subsequently proved to be unrealistic. Indeed damages under some circumstances have been awarded in excess of the actual profit made by an infringer because he it is the profit that the infringer expected to make, not what he actually made, that is often the touchstone of patent damages. Similarly documents on competitive studies should contain well substantiated and thought out analyses. Unsubstantiated conclusions that a competitor’s product is better, perhaps made only in an effort to promote a change in the current line of products, might nevertheless be used to support the argument that the commercial success of the patented products was due to the patented invention when in reality it stemmed from marketing or unpatented know-how.
• Effect of a No Answer:  Exaggerated statements regarding the value or merit of an invention or patented product, or the expected commercial success of an infringing product, could come back to hurt the company in a later patent infringement action.

Area 6:  Patent Portfolio

Question 6A:  Has your organization established a policy to acquire and maintain a patent portfolio?

• Effect of a Yes Answer: Patents may be considered as the single most important type of intellectual property and industry today. For example the patents of Texas Instruments provided the company with over a billion dollars in royalties from licensing activities, more than the company made from its core operations over the same time period. In the early 1980s a big damage award was counted in terms of tens of millions of dollars. Currently damage awards have exceeded the billion-dollar mark. Maintaining a patent portfolio can also be used as a shield against infringement claims. Many times early settlement may be achieved by entering into cross-licensing agreements with other parties who asserted their patents against your organization. Many activities relevant to minimizing the risk of infringement can also be useful when acquiring and maintaining a patent portfolio. For example, the result of prior art searches can also be analyzed to render patentability opinions.

Appendix I of Chapter 13: Example Technology / Business Development Evaluation Process

Sources, References and Selected Bibliographic Information:

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• ”Profiting from intellectual capital”, by Pat Sullivan, Journal of knowledge management, volume 3, issue two, 1998.
• ”Extracting value from intellectual capital, policy and practice”, contributed chapter to “Capital for our time: the economic, management and legal challenge of intellectual capital”, by Pat Sullivan, Hoover institution press, 1999.
• ”Developing a model for managing intellectual capital”, by Leif Edmonson and Pat Sullivan, European management Journal, August 1996.
• ”Dow’s journey to a knowledge value management culture”, by Gordon Petrash, European management Journal, August 1996
• “International IP guide”, Gordon Harris, Gowling WLG, http://www.inhouselawyer.co.uk/index.php/practice-areas/intellectual-property/
• “Brinks Intellectual Asset Management Group”, corporate brochure, http://www.usebrinks.com
• “Building Shareholder Value through Effective Patent Asset Management”, Lex van Wijk, les Nouvelles, December 2005, page 176
• ”Successful Technology Licensing”, Intellectual Assets Management Series, WIPO, Sept. 2004.
• “Playing to Win”, Delphion, Corporate presentation, 2002
• “Relating IP to R&D Performance”, Price Waterhouse Coopers, Sales Presentation, 1999
• “Frontier of Intellectual Asset Management”, Conference organized by INTX, November 1999.
• “Extracting value from intellectual capital in Nestlé”, Presentation at the Gathering, November 1995.
• “Intellectual Asset Management”, Carl Lucas, Presentation at LES annual meeting, 1998.
• “Invention Disclosure Process”, http://www.baylorhealth.edu/Research/BSWRI/Dallas/TTO/FAQ/Documents/Invention%20Disclosure%20Process.pdf).
• “Invention Disclosure Process”, https://research.utexas.edu/otc/process-of-technology-commercialization/invention-disclosure-2-in-the-8-steps-of-tech-commercialization/
• “Laboratory Information management systems review”, https://en.wikipedia.org/wiki/Laboratory_information_management_system
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• “Making Science Investable”, by Paul Horan, Richard Sherman, Andrew Gorman, Pre-Conference Workshop LES Meeting 2007.
• “Calculating Damages from Patent Infringement”, Seminar by Certified Patent Valuation Analyst, October 2017
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• “IP Due Diligence in an Intellectual Capital focused Investment”, by James Malackowski, VIGIC Services, LLC., Presentation at LES Annual Meeting, September, 2000.
• “IP Tools & Analysis Useful for Due Diligence”, by Keith Walker, Kodak Corp, Presentation at LES Annual Meeting, September, 2000.
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• “Globalization of R&D: IP Management Policies and Strategies”, by Karl Jorda, presented at LES Annual Meeting, October 2004.
• “Creating the portfolio database”, by Kelly Hale, les Nouvelles, June 1998, page 81.
• “Filling the Information Gap”, by Paul DiGiammarino, Intellectual Assets Management, Jan. 2007, p. 40.
• “Creating an Intellectual Assets Strategic Plan”, by Harry Gwinnell, Conference on the “Frontier of Intellectual Asset Management”, organized by INTX, November 1999.
• “Protecting intellectual assets, announce of prevention is worth a pound of cure and then some”, by Brian McNamara, Conference on the “Frontier of Intellectual Asset Management”, organized by INTX, November 1999.
• “Discovering new value in intellectual property”, by Kevin Rivette and David Kline, Harvard business review, January 2000.
• “Extracting value from your patent portfolio”, by Tova Greenberg, Conference on the “Frontier of Intellectual Asset Management”, organized by INTX, November 1999.
• “Extracting value from intellectual assets”, by John Jarosz, Conference on the “Frontier of Intellectual Asset Management”, organized by INTX, November 1999.
• “Strategic licensing: securing value from innovation“, by John Cronin and Douglas Roth, IAM magazine, from IP to IPO, 2006.
• “Technology licensing practices in France”, by Christian Bessy and Eric Brousseau, les Nouvelles, June 2000, 66.
• “Identifying Patents of Value”, by Dooyoung Lee, presentation at LES Annual Meeting, 1998.
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• “IP Exchanges: Why they Won’t Work”, by Martha Amram and Adriana Chiocchi, presented at 3^rd Intangibles Conference, Stern School of Management, NYU, May 2000.
• “Patent risk management, a self-assessment guide”, American international companies, New York, New York, 1999.
• “Profitability and royalty rates across industries: Some preliminary evidence”, KPMG International, http://www.assets.kpmg.com/content/dam/kpmg/pdf/2015/09/gvi-profitability.pdf, 2012
• “All in the Game” by Paul Germeraad, Intellectual Asset Management Magazine, Issue 39, Jan-Feb 2010
• “Portfolio Management: Benchmarking the Industry”, by Thom Kobayashi, Senior Patent Analyst, Innography, Innography White Paper, Dec. 2017
• “Patent Basics”, Brochure by IP Strategy Group, Cupertino, CA, http://www.ipsglaw.com
• “Inventing the Future: An Introduction to Patents for Small and Medium –sized Enterprises” brochure by WIPO, Intellectual Property for Business Series #3, 2005.
• “Strong Patent Processes”, brochure by Arthur Moore, Avery Dennison Legal Department, 1997.
• “The Significance of Under-Reported Royalties”, by Debora Stewart and Judy Byrd, White Paper of Invotex Group.
• ”Patents vs. Trade Secrets – Giving Your Business the Competitive Edge”, by Shane Olafson, Special Insert, Arizona BioInsider, April 2007.
• ”IP Market Updates”, Tangible IP Newsletter, Feb. 2019.
• ”The Optimal Global Intellectual Property Strategy for the 4th Industrial Revolution” by Rob Stern, Focus2018 #3 Newsletter, Jan. 2018.
• ”The role of AI in evidence-based strategic IP decisions”, by Nigel Swycher and Steve Harris, Intellectual Asset Management, Dec. 2018.
• ”Best Practices to Manage & Exploit Your Business’ Intellectual Assets”, by Dave Tyrrell, Presentation by Vertex IP, 2008.
• ”Fishing for Trade Secrets”, by James Pooley, Pooley Newsletter, Mar. 2018.
• ”Major and Exciting Changes to China’s Patent Law on the Horizon”, by Eagle IP Limited,Eagle IP Newsletter, Feb. 2019.
• ”The Business of IP: Choosing Between Patents and Trade Secrets”, by Derek Handova, IP Watchdog Newsletter, May 2016.
• ”Trade secret versus patent protection: the advantages of trade secret Litigation”, by Stephen Scherf and Richard Gering, Intellectual Asset Management, April 2018.
• ”Trade Secrets vs Patents: Which Approach is Right for You?”, by Morningside IP, Morningside IP Blog, April 2018.
• ”IP Monetization and Licensing Analysis”, by Robert Morgan, Innography Blog, Sept. 2018.
• ”2018 overall litigation”, by Unified Patents, Unified Patents Newsletter, April 2018.
• ”Four Stages to Monetizing a Patent Portfolio”, by Martin Bijman, TechInsights white paper, Nov. 2017.
• ”Eighty Percent of IPR Filings are for Defensive Purposes”, by Patexia Data Science Team, Patexia Chart Newsletter, Nov. 2017.
• ”IP Info”, by Jeffrey Sheldon, Cislo & Thomas LLP website, https://cisloandthomas.com/ip-info/, April 2019.
• ”Trade Secrets v. Patents: The New Calculus”, by Mark Halligan, ABA Landslide, August 2010.
• ”A primer on intellectual property risk management and insurance”, by Eric Osterberg, les Nouvelles, June 2003.
• ”In search of the golden cow”, by David Lambourne, Intellectual Asset Management, Dec. 2010.
• ”The Four Classes of Patent Licensing”, by Kelce Wilson, les Nouvelles, March 2019.
• ”Value and Quality Based Patent Portfolio Management”, by Dieter Reinhardt and Alexander Wurzer, les Nouvelles, Dec. 2006.
• ”The Global Patent Value Matrix: Making Global Patent Strategy Decisions”, by William Barrett and Christopher Price, les Nouvelles, Dec. 2006.
• ”Inside the world of public auctions”, by Tom Ewing, Intellectual Asset Management, Aug. 2010.
• ”Better practices for managing intellectual assets and collaborations”, by Stewart Mehlman, Sylvia Uribe-Saucedo, Ronald Taylor, Gene Solwinski, Ed Carreras, and Chris Arena, Research Technology Management, February 2010.
• ”Drafting of Royalty clauses: 30 Ways to Head for Windfall or Pitfall”, by Erik Verbraeken, les Nouvelles, Sept. 2011.
• ”Patent infringement risk exposure analysis”, by Fadi Micaelian, Matt Huey, Richard Schank and Sanjay Prasad, les Nouvelles, December 2011.
• ”Intellectual Property Management Practices”, by Julie Katz, Craig Opperman, Mark Kaufman, Building and Enforcing Intellectual Property Value White Paper, 2012.
• ”An economic perspective on patent licensing structure and provisions“, by Thomas Varner, les Nouvelles, 2012.
• ”Financial Valuation Techniques in IP Licensing”, by Ivan Chaperot, les Nouvelles, Dec. 2007.
• ”Patent Litigation Trends in Damages Awards, Success Rates and Time to Trial”, by Aron Levko and Vincent Torres, les Nouvelles, Sept 2008.
• ”Innovation Executives”, by Douglas Graham, les Nouvelles, Sept. 2008.
• “Competing for the Future”, by Gary Hamel and C.K. Prahalad, Harvard Business School Press, 1994.
• ”The Business of Innovation”, edited by Kevin LaRoche, Christine Collard, and Walter DiCesare, Borden Ladner Gervais, 2003.
• ”Put Your Brands Together”, white paper by Avery Dennison, 2000.
• “Inventing the future”, intellectual property for business series, WIPO, 2005.
• “Innovation, intellectual properties for business development”, by Rashid Khan, Xlibris , 2008.
• “The patent wars”, by Fred Warshawsky, Wiley, 1994.
• “The entrepreneur’s guide to managing intellectual property”, by Paul Schaafsma, Oasis Press, 2001.
• “Technology licensing”, by Russell Parr and Patrick Sullivan, Wiley, 1996.
• “Changing the world”, by Rashid Khan, Xlibris , 2011.
• “License agreements”, by Jochen Pagenberg and Dietrich Beier, Shanghai scientific and technological literature publishing house, 2009.
• “Intellectual property rights”, by Prabuddha Ganguli, McGraw Hill, 2001.
• “Profiting from intellectual capital, extracting value from innovation”, by Patrick Sullivan, Wiley, 1998.
• “Patent Law Fundamentals”, by Peter Rosenberg, Clark Boardman Co., 1982.
• ”Licensing: A Strategy for Profits”, by Edward White, Licensing Executives Society, 1997.
• ”Secrets”, by James Pooley, Verus Press, 2015.
• ”Positively Confidential”, by Naomi Fine, Reasonable Measures Publishing, 2011.
• “LESI Global Licensing Report”, Vol. 1, Winter 2022.
• “Why Every Company Should Have A Written IP Licensing Policy”, by Garrett Glover and Randall R. Rader, les Nouvelles, Dec. 2021.