For many companies, intellectual property (IP) only makes an appearance in board papers when expenditure on research and development is being reviewed, or when an allegation of IP infringement hits the risk register.
However, as brand, technology and innovation become ever-more important to companies' financial fortunes, intangible assets like IP are becoming significantly more prominent in boardroom deliberations.
In this context, the board has a vital strategic role to play in relation to IP – one aligned to its fundamental responsibility to ensure the proper structures are in place to maximise the financial success and mitigate the risk of the company it oversees.
To maximise its return on investment in IP, a board should set the following three IP-specific priorities:
- Know what IP is in the business and how integral it is to the company's market position.
- Understand the value of the IP.
- Minimise risks to key IP.
Some key considerations that underpin these priorities are set out below.
- Devise and embed your IP strategy
IP can be the result of years of intensive research and development or it can arise from an unexpected technological breakthrough. The thrill of innovation can lead to a precipitous jump to commercialisation.
An embedded IP strategy, endorsed by the board, is crucial to ensuring that key safeguards are in place to identify and protect a company's IP. Any IP strategy should cover the company's approach to:
- logging what material IP has been developed and by whom;
- assessing what rights might be available to protect the IP (patents, copyright, designs);
- checking branding and trade mark availability;
- ensuring ownership of IP; and
- confidentiality arrangements.
Key metrics from the strategy should be reported to the board. A well devised strategy not only identifies IP at an early stage, but also fosters a discipline of avoiding investment in IP that might not be viable and protecting IP that is.
The board should also seek to understand the monetary value of the company's IP assets. There have been instances of shareholder activists in the US seeking to remove board members who they believe have failed to recognise the company's IP and pursuing alternative approaches to value creation for the company (e.g. by licensing or selling the company's IP).
- Think globally
The board enjoys a perfect vantage point from which to test an organisation's growth strategy from an IP perspective and lay the groundwork necessary to realise the full potential of an international IP strategy. The following questions should be considered:
- What is the manufacturing and supply chain, and does the company have its IP rights registered in key jurisdictions? IP squatters remain rife in certain jurisdictions and pose a significant risk if not pre-emptively managed.
- What third party rights might be infringed if the products or processes are taken offshore?
- What are the biggest growth markets, and what are the costs / barriers of any regulatory compliance? This is particularly relevant to pharma, medical device and med-tech innovation.
- Who might be interested in buying the company's IP, and do you have IP protection in the key growth markets?
- What are the adjacent opportunities?
- Don't inadvertently spoil your rights
Although not all innovation is patentable, it is important to test patentability early to ensure there is not disclosure that spoils that opportunity or gives your competitors a chance to beat you to it.
In order to secure patent protection for an invention, the invention must not have been disclosed to the public before a patent application is filed. There are limited grace periods in some countries (including Australia), but not all. A patent-destroying disclosure can inadvertently occur on your website, at a conference or to potential investors or customers not bound by a non-disclosure agreement (NDA).
There is a balance to be struck between talking early to the marketplace about technology breakthroughs and ensuring protection for that technology. A communications plan that includes IP considerations minimises the risk and also facilitates optimum IP capture. At a minimum, boards should ensure:
- there is an internal communications process that reviews (and where necessary restricts) what goes into the public domain;
- patent applications are filed ahead of public disclosure; and
- discussions with third party investors, customers or collaborators are covered by confidentiality terms (a simple NDA can generally do the job).
If patent protection is not sought, consider an offensive strategy of disclosure to prevent others seeking patent protection that could shut you out of a business-essential development. The company can hold back whatever it may still seek to protect as trade secrets.
- Take care of ownership
A heightened awareness of what IP resides in a business is not enough – an understanding of the necessary chain of title that underpins its ownership is essential.
This is particularly crucial in the context of IP infringement and M&A activity. A register of IP rights and their corresponding chain of title (e.g. details on the inventors and their terms of engagement and written IP assignments) should ensure that infringement actions and IP commercialisation activities are not stymied by lack of ownership and that due diligences do not throw up nasty surprises.
The board should also review and request updates to the register regularly to ensure IP ownership is kept front of mind and in good order. IP is often assumed to be owned but this belies the complexity that can arise. Complicating factors include:
- IP developed by contractors or employees which is not necessarily owned by a company;
- the transfer of IP rights giving rise to unexpected tax consequences; and
- managing joint ownership of IP (which should be avoided where possible).
A well prepared board should have a good grasp of these issues and systems in place to address them.
- Data as an asset
Many companies are identifying the value that can be unlocked from the data they hold about their operations, tangible assets and customers. For some companies, data may be one of its most valuable assets. However, this value depends on the company fully understanding its data holding, the data sources and pathways within the company and having confidence in the quality and integrity of that data. Data governance arrangements to appropriately control and protect valuable data within the company should be in place, and the board ought to treat data as part of the potentially high value IP assets of the company.
Because the board is responsible for the overall governance, management and strategic direction of an organisation as well as its financial success, it has an integral role to play in ensuring that the company properly manages its IP assets.
Increasingly, the financial fortunes of a company are becoming intimately tied to key IP. A failure by the board to fully understand these intangible assets can compromise a company's ability to capitalise on opportunities and manage risk.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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