Putting a price on intellectual property by Nick March

Putting a price on intellectual property and mitigating risks to the company’s most valuable asset

“IP valuation is not rocket science, it’s much more difficult”

While rocket scientists might not agree with this tongue-in-cheek statement, recent research suggests companies are still struggling to put a price… or, more accurately, a value… on their intellectual property (IP). A study by insurance specialist AON and the Ponemon Institute found that only a third of organisations have insurance in place to mitigate threats to their IP, despite 8 in 10 stating that they consider IP to be a top ten risk for their business.

The study surveyed 2300 organisations across all industries and geographies and found that only 16% of an estimated potential $1billion IP loss or infringement was insured, compared with 60% of tangible assets such as property, plant and equipment (P&PE). This is despite the fact that the average loss if intangible assets are stolen or destroyed was calculated to be 36 per cent higher than that caused by loss or damage to PP&E. Furthermore, more than a third of respondents didn’t think it necessary to disclose a material IP loss in their annual report, whereas 44% would do so in the event of loss or damage to P&PE. There is undoubtedly a disconnection between the way companies value their tangible versus intangible assets.

This is a major oversight given that, depending on your industry, intangible assets could represent as much as 80% of the value of your business. Oft-cited examples include AirBnB – the hospitality business that owns no hotels, and Uber – the taxi service that owns no taxis. Both operate in the burgeoning platform economy, which is transforming the potential of intangible ideas to become global businesses.

But you don’t have to be an Uber or an AirBnB to have significant value residing in your company’s IP. Indeed, the enormous commercial importance of IP to every business operating in today’s digital marketplace has seen it described as the “oil of the 21st century” and, just like oil in the 20th century, everyone wants to get their hands on it, by fair means or foul.

Valuing IP in a growing threat environment – identifying active and passive risks

The AON study found that 28% of organisations had experienced a material IP event in the preceding two years. This is not surprising given the value of the assets at stake and the many ways they can come under threat. The risks can be both active: driven by the actions of third parties or company insiders; and passive: caused by failures of management and process.

Active risks include:

  • Cyber attacks initiated by criminals aiming to steal trade secrets for sale on the dark web, or by nation state-sponsored actors conducting cyber-espionage.
  • Insider threat through deliberate or inadvertent actions by company employees that expose IP.
  • Counterfeiting, trademark and patent infringement by third parties. Of the IP events suffered by 28% of businesses surveyed by AON, 69% involved infringements of, or challenges to, the company’s IP.

Passive risks include:

  • Failure to register IP effectively at the outset and effectively exploit it from that point.
  • Failure to maintain protection for the company’s intellectual property portfolio. This includes activities such as monitoring for cases of infringement as well as ensuring that trademark registrations and patents are renewed on a timely basis.
  • Infringement of third-party IP rights by the organisation. This could include failure to identify competing IP rights when developing a product, resulting in the loss of investment in that product when infringement comes to light.

A matter for the Board

Given these diverse risks threaten such a high proportion of company value, IP protection should be a matter for Board-level oversight.

Directors must firstly identify the actual value that resides in the company’s IP. This can be done in a variety of ways including assessing the value of trademarks, patents and copyrights; identifying the costs to create or replace the IP; or attempting to value the past and future economic benefits of owning the IP rights. For a detailed overview of the pros and cons of these valuation methods check out this post by Kelvin King for the WIPO.

Once directors understand the actual value of IP, they must identify the risks connected to it – from cybersecurity to legal and financial, and evaluate them in the light of the organisation’s risk appetite. They should then gain assurance that sufficient measures are in place to eliminate IP risk, manage it, or transfer it via an appropriate level of insurance cover.

Achieving ROI from IP protection

The role of legal departments in mitigating the active threat of infringements, as well as preventing passive threats through comprehensive monitoring and maintenance of the company’s IP portfolio, is critically important. In fact, rather than representing purely a cost to the organisation, a well-resourced IP team can deliver significant ROI and prove that it pays to protect. Just one example might be recovering the costs of activities such as counterfeiting and preventing future incidents by taking down rogue websites and/or marketplace listings. These activities can deliver measurable results.

On top of this, research by the European Patent Office (EPO) and the EU Intellectual Property Office found that SMEs which seek IP protection are more likely to experience higher growth than competitors that don’t. It’s another compelling reason to prioritise strong IP portfolio management.

IP activity and awareness is growing

While the AON research indicates that organisations are still struggling to properly value IP, there are encouraging signs that IP awareness is growing as organisations recognise the benefits of protecting and leveraging intellectual property rights. In fact, the EU IPO recently celebrated receiving its 2 millionth trademark application while around the world intellectual property offices report record levels of filings. Similarly, the Intellectual Property Office of Singapore (IPOS) has just launched an IP insurance initiative for innovators that will cover costs in the event that innovators have to defend or enforce registered IP rights.

This increased activity in registering and defending IP rights will ideally lead to greater appreciation of the business value of the asset and more effective management of the risks associated with intellectual property.

To learn how WebTMS can help you to manage your trademark portfolio and protect company IP, click here.

 

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